The Brooklyn FI Blog - Brooklyn Fi (2024)

By AJ Ayers, CFP®

So we get this question a lot: Should I invest in my friend’s business?

It goes like this: You've got some money, you've done well for yourself, and you're kind of bored with your investment portfolio. I always like to say, “You can't throw a party in your diversified portfolio.”

So you’re a little bored with making money the old-fashioned, traditional way of stocks and bonds (btw it works pretty well) and want something a little sexier. Maybe it’s a friend’s bar, maybe it’s a cool boutique hotel in that cool town in Portugal you went to last summer, or an exciting new start-up idea from a business school friend. Whatever the ask is, it’s usually something awesome that you’re actually excited about. And it probably comes with a fancy, well-designed presentation with lots of very convincing financial data that says you’ll make your money back quickly and even make have some upside!

So how does a financial advisor react when our clients ask us to review these types of investments? Well, I usually say NO, don’t invest, and then I’m ignored and they make the investment anyway. But that’s life!

So why is it almost always a no? Because the type of investors who have available cash to invest in these types of EXTREMELY RISKY ventures are already financially independent. So they have already taken into account the risk and assume that they will never ever recoup their money - but it won’t be but a tiny dent in their portfolio. While many of our clients ARE financially independent, it’s often not so secure that one large failed investment COULD actually disrupt their financial security.

So to me, the decision-making process is fairly simple.

Should I invest in my friend's business?

Am I financially independent?

Do I have enough money to take care of myself and my family now and in the future without changing my lifestyle?

If the answer is NO to that question, unfortunately, you can't really afford to drop off an extra $5,000 or $25,000 or $100,000 into an investment that is pretty risky.

But how risky? The stats are a little shaky but we expect about 60% of restaurants to fail in the first five years. Generally, one in four busineses will fail. So just to reiterate, there is a 25-60% chance you will lose all of your money and never see a penny of it ever again.

You want to support your friends but, at the end of the day the simple answer is sorry, I have to take care of myself first before I can afford to make this investment.

I hate to be the queen of darkness, negative Nancy, whatever you want to call me, but I'm willing to take on that role (literally a role I have degrees in), but it's almost always a no from me.

But there are exceptions to every rule, of course! Let’s look at when it might be a YES.

1. Your friend or family member really needs the money, and you love them and want to support them. Tread carefully but sometimes love conquers all, even your financial security.

2. It’s not a LOT of money and you get some intangible benefit to this investment. For example: investing in a new bar down the block that offers $500 monthly tabs to investors is a pretty sweet deal. If you live on the other side of town or in another state and can’t benefit from this, don’t do it!

And just remember, the moment you complicate your financial life, you also complicate your taxes. Investing in businesses usually results in you waiting around until September 15th for the business to issue you a K-1. Any accountant can help you report the income with no problem, it’s the waiting that sucks.

So let’s dive into it.

Weighing the Risks: Investing in Friend's Business

Understanding the High Risks of Personal Investments

Investing in a friend's business can be more than just a financial decision; it often involves personal relationships, which can complicate matters. The high risks associated with these investments stem from several factors. Firstly, startups have a high failure rate, with statistics showing that a significant percentage don't survive past the first few years. This means that the likelihood of losing your investment is considerable. Secondly, personal investments often lack the rigorous due diligence that professional venture capitalists undertake before investing. Without this critical analysis, you may overlook potential red flags or challenges the business could face. Lastly, mixing friendship with finances can strain relationships, especially if the business doesn't perform as expected. It's essential to recognize these risks and evaluate whether the potential rewards justify taking the chance on your friend's business venture.

Evaluating Your Financial Independence

Financial independence is the cornerstone of making sound investment decisions, especially when it comes to personal ventures. Before considering an investment in a friend's business, assess your financial health. Do you have a robust emergency fund, are your retirement savings on track, and is your debt under control? If an investment went south, would it compromise your lifestyle or financial goals? It's crucial to ensure that you're not putting essential financial milestones at risk, such as funding a child’s college plan or securing your retirement. An investment should not jeopardize your ability to maintain financial stability. Remember, investing in a friend's business should come after your financial needs and responsibilities are met. If this isn't the case, it might be wise to decline the investment opportunity and instead focus on building a buffer that secures your financial independence.

The Emotional Cost: Supporting Friends vs. Financial Security

When Friendship Interferes with Investment Decision

The emotional ties in a friendship can cloud judgment and lead to investment decisions that are not financially prudent. When a friend pitches a business idea, the desire to help can override critical thinking about the viability of the venture. It's important to approach such proposals with the same scrutiny as any other investment. Ask for a business plan, understand the market analysis, and consider the competitive landscape. If the business doesn't seem sustainable or the plan lacks substance, it's okay to say no. It's also helpful to set clear boundaries from the start, clarifying that your financial decisions will be based on the same strategic considerations you apply to all investments. By doing so, you can maintain both your financial security and your friendships without allowing one to unduly influence the other.

Practicality Over Sentimentality: Saying ‘No’ to Friends

Saying no to a friend's investment proposal requires a delicate balance between preserving the relationship and protecting your financial interests. It's essential to approach these situations with practicality over sentimentality. Always communicate your decision with respect and transparency, explaining that your investment strategy must align with your financial goals and risk tolerance. It's helpful to offer support in other ways, perhaps by providing feedback on the business plan or making introductions to potential investors whose investment strategies are more suited to such ventures. Remember, true friends will understand and respect your decision to prioritize your financial security. By choosing practicality over sentimentality, you ensure that your friendships can endure regardless of business outcomes, and you safeguard your financial future against decisions driven by emotion rather than sound investment principles.

The Opportunity Cost: Other Ways to Utilize Your Money

The Power of a 529 College Plan

Investing in a friend's business might seem enticing, but considering the opportunity cost is crucial. One powerful alternative is a 529 college savings plan. This investment vehicle is designed specifically for education savings and offers tax advantages that can significantly enhance the growth of your contributions over time. By directing funds that you might have invested in a friend's business into a 529 plan, you're investing in your child's future and the promise of higher education. Unlike the uncertain outcome of a startup, a 529 plan provides a structured path to achieving a specific, impactful goal: covering college expenses. Additionally, the benefits of a 529 plan often include state tax deductions, tax-free withdrawals for qualified education expenses, and high contribution limits. Hence, when evaluating where to allocate your resources, the long-term rewards of a 529 college plan can outweigh the immediate appeal of a personal investment with a higher risk profile.

Smart Money Moves for Future Security

When you're faced with the decision of investing in a friend's business, consider other smart money moves that can bolster your future security. Building a diversified investment portfolio, contributing to retirement accounts, and paying down high-interest debt are all examples of financial strategies that often yield more predictable and stable returns than a risky business investment. Prioritizing these moves can help you achieve financial independence, providing peace of mind and a solid foundation for your financial future. It's also wise to consider establishing an emergency fund that covers several months of living expenses, which can protect you against unforeseen financial hardships. By focusing on these smart money moves, you are taking proactive steps to ensure that you and your family are well-prepared for whatever the future may hold, without the added risk of uncertain business ventures.

By John Owens CFP®, EA, ECA, CPWA® + The BKFi Planning Team

There are two really amazing parts of my role here at Brooklyn Fi - one being that I get to work alongside some incredibly talented folks who have some amazing perspective to share, and the other that we all get to interact routinely with amazing clients and prospective clients.

We’ve all, over the course of our careers, interacted with hundreds, if not thousands of folks to learn more about their financial planning and investing goals; dissected their current strategies, and helped them optimize their strategy going forward.

So I decided to gather up the BKFi planning brain trust and pose this question: what are the most common investing mistakes you’ve run into during your professional career?

James McDougal,CFP®

My Precious Portfolio: Why Letting Go Is Harder Than You Think

Imagine your investment portfolio as a dragon's hoard of gold, with you as the fiery beast perched atop, basking in the glow of your amassed wealth. But there’s a twist: among your glittering treasure lies a collection of beanie babies from the '90s, their once-promised value now akin to the worth of the soggy cardboard box they lie in. Yet, here you are, claws sunk deep, refusing to part with them. This, dear readers, is the endowment effect in its most flamboyant display. We humans, much like dragons or someone who insists their garage full of outdated gadgets will be worth a fortune someday, tend to overvalue what we own simply because it's ours. "But this stock was my first buy!" you protest as it plummets faster than your resolve to exercise in the New Year. Or perhaps, "This bond and I have been through so much together," ignoring the fact that, unlike your dog, it doesn't love you back. Our portfolios become less a tool for financial growth and more a bizarre museum of sentimental investments, showcasing our reluctance to let go and optimize.

Navigating the Bermuda Triangle of Reporting Errors

Then, there's the thrilling adventure of investment-related tax reporting; a journey that could rival the Bermuda Triangle for its ability to make your sense of confidence and direction vanish without a trace. Picture yourself assembling a piece of IKEA furniture, but the instructions are in hieroglyphics, and your "helpful" friend keeps handing you the wrong pieces. That's what delving into the world of cost basis calculations, capital loss carryforwards, the mystical realm of Backdoor Roth IRAs, and so many other topics feel like for the uninitiated. It's akin to baking your first soufflé with salt instead of sugar because, well, both are white powders, right? The key to avoiding these fiscal faux pas lies in attention to detail and not being too proud to ask for directions before you're hopelessly lost (hello, that’s where we come in!). Think of it as a treasure map where X marks the spot to tax efficiency and the avoidance of an audit.

Eduard Zolotarev, CPA, MST, CFP®

Being a new-ish parent, most of my prose now occurs in the form of storytelling, so here is a finance story.

There once was a princess who lived in a tall tower and loved to read Reddit and trade stocks on Robinhood. She was lucky enough to participate in some of the MEME STOCK mania and make a few thousand dollars in the process. Encouraged by this stroke of luck/genius, the princess proceeded to follow more Reddit advice on “buying the dip.” She bought and sold the same stock on a daily basis to take advantage of the price volatility, to the point where, for the calendar year, she traded over $1M back and forth while having a steady full-time remote job.

Unfortunately for her Reddit gurus did not provide great advice on the IRS ”Wash Sale” rules, which prevent the deduction of a loss on an investment if that same or substantially similar investment is repurchased within a 30-day window.

Consequently, her “buying the dip” and daily trading strategies resulted in a significant cash loss for that year, of which NONE was deductible on her personal Income tax return. The princess became apoplectic when her Tax prep software showed a LARGE RED AMOUNT DUE. She begged and pleaded with the Tax software’s customer support to fix the issue with the software.

She called Robinhood’s customer service line to report an issue with the Consolidated 1099 tax form, but it was useless. Neither the Consolidated 1099 Tax form nor the tax prep software was wrong! The princess vehemently scoured the internet for answers, but the loopholes available to resolve this issue were unavailable since day trading was not her full-time profession. It was a brutal way to learn about the wash sale rules, but she does live in a castle, so she was able to take a loan from her trust fund to pay the tax bill.

Melanie Taylor, CFP®

Harmonizing your Investments - The Benefits of Coordinated Investment Accounts

In many ways, your investment portfolio is similar to conducting an orchestra. Each individual instrument (investment) plays an important part, but the most beautiful music happens when they synchronize and work together. By coordinating the investments you hold, you can better assess your overall risk exposure to certain asset classes and improve diversification. Without a cohesive asset allocation strategy, you might unintentionally expose yourself to more risk than is necessary to achieve your financial goals. You are able to better balance your portfolio when you incorporate assets that have different risk/reward characteristics. When you are not considering your investment portfolio as a whole, it can be easy to accidentally overconcentrate in a specific asset class when choosing your investment holdings. This could lead to significant missed investment opportunities if an asset class that you do not hold in your accounts performs exceptionally well. Similarly, if the asset class that you are overconcentrated inexperiences losses, holding other asset classes in may help to offset overall portoflio losses. A coordinated approach can help you make sure your investment decisions are working together to achieve a beautiful symphony!

Kurtis Rohlf, CFP®, ECA

The Passive Income Myth - How Dividends and Interest can Hamper your Portfolio Choices

To be clear, I am not recommending you avoid investments that provide dividends or cut out bonds from your portfolio. Both of those things are an important piece of being appropriately diversified. This myth revolves around those who preach the vast benefits of ONLY holding bonds and dividend-producing investments is a safe and lucrative way to provide passive income.

One issue we see is taxation, and unless you have specific holdings, you will be paying either short or long-term capital gains on all of the income produced. This reduces the earned percentage by 20-50%. For example, a 5% bond pays out $50 each year, but you will owe between $10 and $25 in taxes, significantly reducing the net income you receive. This is the same situation with dividends; an added risk is that a company may stop paying them because they aren’t guaranteed. Another issue is overall portfolio growth. When a dividend is paid, it impacts the stock's price, which means a 3% dividend reduces the price by 3%, forcing the stock to appreciate 6% to return to the previous price.

Since a diversified portfolio is expected to have upper single-digit annual returns, on average, over the long run, a passive income portfolio grows much slower. When considering financial independence, we want to look at the big picture and consider the benefits of a more traditional diversified portfolio focused on total return (dividends plus capital appreciation) to allow us to reach our goals.

Caitlin Fastiggi, CFP®, CPWA®, ECA

Personal finances are commonly an emotional pain point for people. Which when mixed with investing, can cause us to make some poor decisions. We invest hoping that the money we put into the market will grow, but at times, market volatility causes us to see red, literally. This, in turn, can cause investing mistakes.

First, we kick ourselves and think about what we could have done better. While the media will make us believe that events that occurred were obvious. In reality, hindsight is 20/20, and market events are not predictable. This often causes people to anchor themselves to the price of the past, believing that the stock will recover to the prior price. While that may be true, it also may never recover or may recover at a slower rate than the rest of the market.

Anchoring ourselves to an event of the past can cause us to miss out on gains in the future. The impact of this is amplified by what is called the disposition effect. When an investment is up, we are more likely to want to sell it, but when it is down, we hesitate. It doesn’t feel good to see our investment decline so

we continue to hold. By doing this, we are missing out on the opportunity to harvest that loss and offset gains elsewhere or $3,000 of ordinary income each year. Many people also fear that selling that investment will later lead to regret if it does recover. We need to remind ourselves that we are investing for our future and can’t let the events of the past impede our decisions today. It's best if we learn from those decisions and move forward.

Kody Sherlund, CFP®

So, you’ve bought into the idea that diversification is paramount to financial independence. You’re saving a lot, you’re selling your concentrated positions of company stock, and you’re wondering what to do next. Naturally, you’ve stumbled upon a Brooklyn Fi blog post! I could drone on and on about how to build a balanced portfolio, but you already agree. Instead, let’s talk about two methods of diversification that don’t necessarily achieve the ends we’re looking for: simply buying an S&P 500 index fund, and investing in a rental property.

First up, the S&P 500! You already know it’s a fool’s errand to pick out a handful of stocks, and you like the idea of buying and holding a large basket of them instead. The most common nomenclature that often gets confused for the whole “market” is the Standard and Poor’s 500, which is just a group of the 500 largest publicly traded companies in the United States. While you’re diversifying your investments across 500 companies by buying a fund that tracks this index, you’re only buying one asset class: US large cap stocks. However, there are THOUSANDS of stocks, both domestic and international. A well balanced portfolio taps into these other asset classes like small cap stocks, international and emerging market stocks, US bonds, etc.

John Owens, CFP®, EA, ECA, CPWA®

I find that there are two common investing mistakes I’ve seen folks make in my experience, one being focused on cost rather than value; and the other being distracted by “sexy” investment opportunities that take your eyes off the ball.

In today’s investing world, especially in the fee-only planning space, cost is very clear. If you’re not sure what your advisor is getting paid - that’s a red flag. But the challenge is that that cost is more quantifiable and identifiable than value to folks. Our fee of 0.90% on the first $1M comes up often in my calls with prospective clients. And while that fee is tangible - you can see it on your account statement and in our portfolio reporting software; the value piece is less tangible. But investment management is an investment in and of itself. So unless you have a process in place to do due diligence on securities, build a diversified allocation of low cost index funds, build a bench of alternative securities for tax-loss harvesting, be able to tax-loss harvest any day the market is open in an efficient manner, understand asset location strategies to crank up after-tax returns, a refined tax-optimize rebalancing process that’s coordinated with your cash flows, and can stay the course on that strategy day-in and day-out during

market chaos and euphoria - then you’re probably missing out on optimization. That optimization, monitored consistently, as part of an overall financial plan can often provide value above and beyond 0.90% to the bottom line; it’s just that that value does not show up on the account statements as clearly as the fees do. So while cost is incredibly important, it’s important to assess it relative to the value.

I also think that it’s very easy to get distracted by what I’ll call “sexy” investments that may not fit into your portfolio. From oversold direct-indexing strategies for folks who have minimal capital gains exposure, to expensive, illiquid alternative investments, to the latest excitement around Bitcoin ETFs. The data shows that over the long run, a portfolio composed of stocks, bonds, and real estate, both domestic and foreign, in developed and emerging economies, can provide vast diversification, at an incredibly low cost, and significant value if coordinated with your financial plan and tax situation.

Conclusion

As you probably can tell, there’s no, one, single investing mistake we see - there’s a variety that we’ve seen folks make - often unintentionally - that hurt their bottom line and financial plan. Our team helps folks navigate these every day, and implement a portfolio strategy - with a process behind it - that can mitigate these mistakes and optimize your bottom line.

By: AJ Ayers, CFP®

Japan is in BKFi’s DNA quite literally. Once upon a time, Shane and I met on a podcast to discuss freelance taxes and discovered we both had a love for all things Japanese (me mostly food and literature, Shane mostly anime and literature). Shane was planning a trip later that fall, and I had been a few times, so I suggested we meet up to share travel tips and maybe chat more about taxes. Even though I had my Lonely Planet guide in tow, it sat there on the bench of that bar in Greenpoint unread because we ended up talking for more than two hours about everything wrong with financial services and how we were going to change it.

Anyways, that was the night Brooklyn Fi was born. But Shane eventually made it to Japan, and I returned shortly after. It’s a special place and has a very special place in our firm’s history. With so many of our clients scratching the travel itch after a long pandemic, I’ve found myself dashing off lists of hotel recommendations and can’t-miss restaurants. I thought I’d take a break from my RSU tax advice posts and just share my Japan favorites. I spent about 65,788 hours planning my fifth trip to the Empire of the Sun so hopefully, this guide is helpful to you :)

I don’t claim to be all-knowing and there are certainly better guidebooks out there written by people who actually know what they are talking about. None of these places are hidden gems I have stumbled upon; they were all found through recommendations and other people’s very good lists. But if you like great hotels, great food, music, and walking…I think you’ll enjoy my picks.

My first trip to Japan was in October 2011. I worked as an editorial assistant at an academic publisher and had very little free cash flow. I had saved diligently and after the plane ticket, my budget was $2,000 for a ten-day trip. I went by myself, and if you recall, in August 2011 Japan suffered one of the worst nuclear disasters in history when the f*ckushima reactor melted down. The country was in a weird place, but for a white girl traveling alone, it was sobering. There was devastating destruction from the tsunami and contamination from the f*ckushima reactor spill. I did not encounter many tourists on that trip and most of the Japanese people I encountered on that trip were gracious and happy to see me. It was isolating, especially outside the larger cities where English is rarely spoken. I don’t speak Japanese and was certainly intimidated by certain restaurants without English menus. I wish I had been a bit more bold on that first trip.

On another trip, I traveled with a friend’s band to some of the smaller cities and stayed mostly in AirBnbs which could sleep eight people.

Japan is perfect for solo travelers. Just read Patti Smith’s M Train, and you’ll see what I mean.

My last trip to Japan before the pandemic was my honeymoon with a very different budget. So in this guide, you’ll find a nice mix of “High” and “Low.” Highs are bougie experiences that are pricey, and lows are generally less expensive.

I’ve been five times over 13 years and have still barely scratched the surface. There’s just so much to see and do.

I don’t know if he actually said this but I’ve seen this quote attributed to Anthony Bourdain and I love it.

"Eat at a local restaurant tonight. Get the cream sauce. Have a cold pint at 4 o’clock in a mostly empty bar. Go somewhere you’ve never been. Listen to someone you think may have nothing in common with you. Order the steak rare. Eat an oyster. Have a Negroni. Have two. Be open to a world where you may not understand or agree with the person next to you, but have a drink with them anyways. Eat slowly. Tip your server. Check in on your friends. Check in on yourself. Enjoy the ride."

How to Narrow it Down

Travel research can be overwhelming. Japan is not necessarily a large country but there is so much to see.

In my opinion, the best time to go is October. Fall in Japan with all the orange and red maple trees is breathtaking. I’ve also been in August (nice but HOT), December (beautiful and festive, but cold), and April (my second favorite time to visit). Skip Cherry Blossom season, it’s way too crowded and expensive everywhere.

If it’s your first time, keep it simple and stick to a few cities. These are some sample itineraries based on a few of my trips. TRUST me there is plenty to see.

First Timer, Japan Highlights in 10 Days

There’s so much to do in this country and so much to see. You could easily spend ten days in Tokyo and not see the half of it. Tokyo is amazing but it is overwhelming. This perfect little trip gets the wonders of Tokyo, a bit of Japanese hospitality in the mountains of Hakone, and a visit to my favorite city in the world: Kyoto. You could totally squeeze in Nara or Osaka for a day or night from Kyoto if you really want to.

Day 1 - Arrive Tokyo, and recover from Jetlag

Day 2 - Tokyo

Day 3 - Tokyo

Day 4 - Tokyo - Depart for Hakone evening

Day 5 - Hakone

Day 6 - Take train from Hakone to Kyoto

Day 7 - Kyoto

Day 8 - Kyoto

Day 9 - Kyoto

Day 10 - Fly home (you can either take the bullet train back to Tokyo or just take a domestic flight from Kyoto to Tokyo to catch your international flight)

If you have more time: Japan in 12 Days

Here’s a wild ITIN from my most recent April, 2023 trip. The one below is a little more sane.

Day 1 - Arrive Tokyo, and recover from Jetlag

Day 2 - Tokyo

Day 3 - Tokyo

Day 4 - Tokyo - Depart for Kyoto evening + stay in Ryokan

Day 5 - Kyoto

Day 6 - Kyoto

Day 7 - Kyoto - Ghibli Theme Park

Day 8 - Depart for Naoshima

Day 9 - Naoshima

Day 10 - Train to Osaka

Day 11 - Osaka

Day 12 - Osaka + Fly home (you can either take the bullet train back to Tokyo or just take a domestic flight from Osaka to Tokyo to catch your international flight)

I HIGHLY recommend you spend at least one night in a traditional Japanese bed and breakfast, a Ryokan. This is where you’ll be issued fancy pajamas, a robe and slippers and likely will take lots of hot spring baths and enjoy the serene architecture and zen gardens. Insane 7-10 course meals are usually served either in your room or in a private dining room (you wear your pajamas to dinner). Don’t plan on leaving the property. Grab a Murakami book and enjoy the serenity. There are amazing Ryokans in Hakone, easily accessible from Tokyo. There are even better ones in the hills of Kyoto. But the real mega amazing ones are further afield (check out Zaborin below).

Before You Go

As a foreigner trying to book things in Japan, you may be frustrated with outdated forms and reservation applications. Have patience! Use Google Translate. Many of the best hotels and Ryokans outside the bigger cities are not on any foreign booking sites like Hotels.com.

• Get a pocket wifi - $5-$10 a day, no brainer. Pick it up and return it at the airport

• If it’s a national holiday, book your train tickets ahead of time (I almost ruined our honeymoon LOL)

• Shinkansen tickets: there’s this ONE website for foreigners to book ahead of time. It looks scammy, but it’s legit: https://smart-ex.jp/en/lp/app/

• Jetlag is a bitch, stay in a nice comfortable hotel your first night and plan to sleep a lot. You’ll likely land in Tokyo, so staying near the fish market can be fun when you wake up at 4am.

• Book ahead of time: all the Ghibli stuff will sell out. Book museum and theme park tickets ahead of time. Also the Imperial Palace and other popular sacred sites will require advanced tickets. The Ghibli museum is near Tokyo and the theme park is near Kyoto.

• If the journey looks too far/hard by train between destinations, just spring for a private car arranged by your hotel. It can be pricey ($100-$500) but totally worth it. For example: on Hokkaido, I needed to get from the east to west side of the island - by train it was 6 hours with three transfers. My hotel arranged for a private driver to take me for $200 - worth every penny for the 90 minute trip.

• Yes, Japan is expensive, but you can also have an amazing trip on a budget. There are plenty of lovely hotels to stay in for less than $250 a night. If your budget is larger, you will not find better luxury hotels in the world. I’ve listed a few of my favorites.

• Good website for Ryokan booking: https://www.japaneseguesthouses.com

Before you go: read a few Murakami novels (I like Kafka on the Shore) and Patti Smith’s M Train. Watch Lost in Translation and listen to Ryuichi Sakamoto.

Beyond Tokyo and Kyoto

This is a mishmash of places I’ve been that I truly loved and can be tacked on to most itineraries.

Osaka

Honestly, I just ate and drank my way through Osaka. Go if you have time. I don’t have a ton to add to what you can easily find online. Trust the guidebooks - drink beer and wander the city.

We stayed here, which was lovely and not terribly expensive. It actually had one of the most incredible hot springs on the roof (have you noticed I like hot springs)

Shimanami Kaido

Closest major city: Hiroshima

Time needed: you could do it in 1 day without staying over if timed right.

If you like to bike or even like to Peloton, this is a must-do. It’s a series of six-ish suspension bridges across a few islands in the Seto Sea.

Hiroshima

The ghosts of the atomic bomb are everywhere and you can still see one bombed-out building. Hiroshima is generally a very hip and chill city, but it’s absolutely worth a visit to the memorial and museum if you’re a history freak like me.

Koyasan

If you truly need a break from the hustle of the big city, head to Mount Koya or Koyasan. It’s a Zen retreat town with lots of temples and hikes. Absolutely stunning and weird. Great for a solo traveler. I stayed at one of the temples.

Naoshima Island

Naoshima had always been on my bucket list and my husband and I finally made it in April, 2023. It was well worth the wait. I’m never one to pass up a fabulous hotel so we actually spent one night in each of the island’s top tier hotels.

Book your museum tickets in ADVANCE! We almost got turned away but our hotel came through at the last minute. You can walk the island or take some of the public buses if you plan correctly.

Stay right on the beach by the Kusama pumpkin at Benesse House. Loved the ‘90s decor. Food was pretty mid. You need to book these hotels FAR in advance.

Ryokan Roka is a newer hotel on the island. I love the private hot springs in the room. It’s in a beautiful area to explore.

Hokkaido

The northernmost island of Japan is referred to as “wild” in many of the guidebooks. I’m not a skier, but I’m told it has some of the best snow on earth. I went for the snow crabs instead. The seafood in Hokkaido is truly INSANE. I ate bowls of the freshest sea urchin and crab and never spent more than $40 USD on breakfast or lunch. Many people spend time in the northeast of the island for the parks and skiing. I was mostly on the Western/South side.

Sapporo

You’ll probably end up in Sapporo at the start or end of your Hokkaido stay. There are tons of domestic flights from Sapporo to Tokyo, Kyoto and elsewhere every day. I started my most recent two-week trip in Sapporo and stayed at a lovely little Onsen hotel across from the Botanical Garden. Again, I highly recommend staying in one of your nicest hotels when you land (preferably one with an outdoor soaking tub) because you will feel crazy from Jetlag. Go to the fish markets in Sapporo. If you need a starting point, check out Kitano Gourmet, it’s foreign-friendly but still very good. There’s a great little natural wine bar called Bird Watching that I loved. Take a 20 minute bus ride to Moerenuma Park for some outdoor sculpture. You’ve probably heard of Noguchi’s coffee table, here is an entire park of his genius.

Zaborin

Zaborin has been haunting me for years and I finally make the trek out there. It's a luxury Ryokan on the western side of Hokkaido. If you like hot springs and luxury, this is the place for you. Nearby Mount Yotei is (IMHO) even more breathtaking than Mount Fuji.

Noboribetsu Onsen and Hell Valley

It’s a bit Mordor-like with sulfur vents and demon culture. Noboribetsu Onsen was such a cool little weird town. Walking through “Hell Valley” with its terrifying landscape and turquoise mineral pools was a highlight.

Mount Fuji

It’s iconic. Go if you can. Stay in the “glamping” themed hotel run by the Hoshinoya people who really know what they are doing.

Iya Onsen

It’s not easy to get to, but it’s well worth it. The Iya valley is breathtaking anytime of the year and this little hotel has a cable car that takes you down to a private Onsen in the river that flows through the gorge. It’s quite isolated so I recommend bringing a car or hiring a driver to take you to some hikes.

Matsuyama

If Spirited Away was as important to your adolescence as it was to mine, do not sleep on Matsuyama, and more specifically, Dogo Onsen. This is the centuries old bathhouse that supposedly Miyazaki based spirited away on. It’s a cute little city with plenty to see. Not many foreign tourists get here but I absolutely LOVED Matsuyama. There’s an amazing castle you can hike up to - if you like history, it’s a must.

Tokyo

Hotels in Tokyo: K5 for that Japanese hipster luxury or Hoshinoya for traditional excellence (with a hot spring on the roof - two stories of sheet metal with a window to the sky). You really can’t go wrong in Tokyo.

Stuff to do

Kitchen Street is really fun for housewares and souvenir dishes. In my former life I was a food and travel writer and wrote about it here.

Cafe Lion is a must. Sit and listen to classical music on the most insane speakers and sip bad coffee while watching the regulars. Just go, trust me.

If you’re sick of Japanese food, check out Locale, a tiny and wonderful restaurant serving some of the best eggs I’ve had in my life.

Kyoto

I can’t explain why I love Kyoto so much. Maybe because I grew up in a hilly part of Los Angeles and the tree-lined pathways remind me of my childhood? Anyways, it’s a beautiful city that’s sexy and complex. It’s a mixture of old versus new. Kyoto is a much more conservative and traditional city than, say, Tokyo, but it also has a seedy underbelly glimpsed in the tiny alleyways near the river. Go to the Golden Pavillion and a few of the temples, but don’t overdo it.

Two hotels I love are Genji Kyoto and Shiki Juraku.

There’s also a brand new Ace Hotel. I haven’t stayed there yet but the building and restaurant are 10/10. An excellent low-cost option for those on a budget is Piece Hotel.

Rent a bike and explore the city. Don’t miss the bamboo groves of Arashiyama.

Random: Do not sleep on this Kyoto-based cosmetic brand Yojia. Go to their flagship store on the Philosopher's Path and have a cute green tea shaved ice in the beautiful garden. And if you end up finding my guide helpful, please, for the love of god, please bring me back my favorite conditioner from Yojia (I’m out!). Also, great shopping: Ichizawa Shinzaburo Hanpu sailing cloth bags.

Make sure you wander around all the little alleyways and if you don’t find them in Tokyo, check out a listening bar. Beatlemomo is a good one.

Eating in Kyoto often requires reservations ahead of time. DEFINITELY eat in one of the traditional Kaiseki places on the river, I can’t remember which one I liked so just ask your hotel or Eater. There are two spots that are not Japanese that I love. Shokudo Ruins is a french wine bar with amazing French food. It’s very low key, but you will definitely need a reservation, ask your hotel to make it for you. Also, Ki is a weird little Lebanese breakfast and lunch spot. Wait two hours for Udon so good you’ll swear it’s worth it. Nishiki Market is worth a wander.

That’s all for now - this should get you started.

By: AJ Ayers, CFP®

Identity theft is no joke. But fear not! We've got your back with some practical tips to keep your credit frozen and your finances secure.

Let's start with freezing your credit. It makes it nearly impossible for identity thieves to open new accounts in your name without your permission.

Freezing and locking your credit are both effective tools for preventing unauthorized access to your credit file, but there are some differences between the two:

Freezing Your Credit:

When you freeze your credit, you essentially restrict access to your credit report. This means that lenders and creditors cannot view your credit report or credit score unless you specifically lift or remove the freeze.

Freezing your credit is typically free and offers strong protection against identity theft because it prevents new accounts from being opened in your name without your knowledge.

You can freeze and unfreeze your credit as needed, allowing you to apply for new credit when necessary by temporarily lifting the freeze.

Locking Your Credit:

Locking your credit works similarly to freezing, but it may be offered as a service by credit monitoring companies or credit bureaus. This service often comes with a fee or subscription.

Unlike a freeze, which is governed by federal law and requires contacting each credit bureau individually to enact, locking your credit may be done more conveniently through an online portal or mobile app provided by the credit monitoring company.

Locking your credit may offer faster and more convenient control over access to your credit report, as you can typically lock and unlock it with the click of a button.

Here's how to do it:

Contact the Credit Bureaus:

Get in touch with Equifax, Experian, and TransUnion – the three major credit bureaus. You can freeze your credit online, by phone, or by mail. Make sure to keep a record of your freeze PINs in a secure place.

Freeze Your Credit:

Once you've contacted the credit bureaus, they'll freeze your credit file, adding an extra layer of protection against unauthorized access.

Stay Vigilant:

Regularly check your credit reports for any suspicious activity. You're entitled to a free credit report from each bureau every 12 months through AnnualCreditReport.com.

Damage Control

Now, let's talk damage control. If you suspect your personal information has been compromised, here's what to do:
Act Quickly: Don't waste time – contact the credit bureaus and place a fraud alert on your credit reports. This alerts creditors to verify your identity before opening new accounts.

File a Report

Report the identity theft to the Federal Trade Commission (FTC) at IdentityTheft.gov. This helps authorities track down the perpetrators and protect others from falling victim.

Monitor Your Accounts

Keep a close eye on your bank and credit card statements for any signs of fraudulent activity. Notify your financial institutions immediately if you spot anything suspicious.

If you think you are at risk, you may want to consider a paid credit monitoring service which goes beyond alerts from the three bureaus. One you’ve probably heard of if you watch daytime television is Lifelock. Other name brands are IDShield and Identity Force. We haven’t tested these ourselves but this article has a nice rundown of the features of each service.

Alert your Financial Planner

Your planner is an important line of defense against fraudulent money movement. Telling your planner so they can leave critical notes and alerts on your account can help stop someone who has your information and is trying to access your funds.

Protecting yourself from identity theft is essential when so much of our information is ALREADY fairly readily accessible by criminals. By taking proactive steps to freeze your credit and staying vigilant, you can safeguard your financial future and keep those pesky thieves at bay. So, don't wait until it's too late – take control of your credit and protect what's yours.

By John Owens CFP®, EA, ECA, CPWA®

While we’ve started to see inflation tame in the past 12 months, one area that’s been ripe for price increases is automotive insurance, which has spiked over 20% in the last year - the latest inflationary bite to car ownership that saw used car prices spike during the pandemic, and gas prices to pop in 2022 amid Russia’s invasion of Ukraine.

So, you may be asking yourself what steps you can take to bring those car insurance premiums down. We have a few in mind:

1. SHOP! Loyalty is rewarded in many places in life - commodities like automotive insurance is not one of those places. Most automotive policies are for 6-12 months and if you want to keep this cost low, shop every time it’s up for renewal. I recently switched policies during a renewal to save over 20% on my premiums - helping offset the inflationary push in premiums.

2. Bundle, bundle, bundle - no, I’m not talking about what you need to do to survive this winter cold in the northeast; I’m talking about your various insurances. Bundling renters' or homeowners' insurance, with auto, umbrella, and other property and casualty insurance you have, can translate to meaningful savings.

3. Pay in a lump sum - many insurance companies give you a better price if you pay the full premium upfront - rather than monthly and assess a fee for monthly processing. Paying your semi-annual premium upfront can translate to cost savings.

4. Check your payment method - credit card processing fees often result in price discrepancies based on payment methods. You may be able to save a few dollars each month or unlock an additional discount by paying via ACH.

5. Double-check your discounts - you may be eligible for discounts for a good credit score or car safety features. Calling up your insurance company and having them give your discounts a second look can save you money.

6. Review your coverage - full coverage on your brand-new Tesla or Subaru Forester is key. However, if you’re driving a 2003 Volkswagen that your friends have nicknamed Garbage Car, you might be able to reduce your coverage while still protecting your assets if there’s an accident.

   See Also

   MyCredit Guide FICO® Score & Experian® Credit Report for FREE | Amex US

7. Consider a monitoring “telematics” program - many insurance companies offer discounts if they can track and monitor your driving.

8. Look somewhere NEW for insurance - Are you a Costco Member? How about USAA? Or AAA? Many associations and memberships offer discounted car insurance rates to members. I recently got the best deal from none other than Costco’s affiliated car insurance company.

9. Most Importantly: Drive Safe - having an accident-free driving record is the most important factor in ensuring your premiums don’t spike even further.

How to shop for car insurance:

If you’re new to shopping around, here are some tips for actually hopping insurance options:

• Pull up your current coverage with your provider as a reference point. Many companies offer lower-cost coverage for crappy coverage - you want to compare apples-to-apples.

• Start by requesting quotes from a few other providers - there are lots of big-name providers out there; here are the 15 largest providers as of April 2023 (keep in mind that not all insurance companies operate in all states)

• State Farm: The largest auto insurer in the U.S., known for its customer service and extensive agent network.

• GEICO: A direct-to-consumer insurance company known for its low rates and memorable advertising campaigns.

• Progressive: Offers a wide range of insurance products and is known for its usage-based insurance options.

• Allstate: Provides a broad array of insurance products and services with a large network of agents.

• USAA: Serves members of the U.S. military, veterans, and their families, known for its excellent customer service.

• Liberty Mutual: Offers a wide variety of insurance products and is known for its responsibility and personal protection plans.

• Farmers Insurance: Provides extensive coverage options and has a large network of agents.

• Nationwide: Offers a range of insurance and financial services, known for its On Your Side review.

• American Family Insurance: Known for its customizable policies and loyalty discount programs.

• Travelers: Offers insurance products for personal and commercial use, known for its financial strength.

• Erie Insurance: Provides auto, home, commercial, and life insurance, known for its superior customer service.

• Auto-Owners Insurance: Offers a wide range of insurance products, known for its independent agent network.

• The Hartford: Specializes in insurance for drivers over 50, offering special benefits through the AARP Auto Insurance Program.

• Mercury Insurance: Known for its affordable insurance options and customer service.

• MetLife: Offers a variety of insurance products, including auto insurance through group plans and individual policies.

• Get a feel for how well your current plan compares price-wise, and include your home/renter's policy in the comparison for bundling purposes.

• Consider if you need to search further - I usually check with 3-4 companies for a good price, and typically one stands out as the best deal. The goal is to save money, not turn this into a part-time job.

• Some tools will shop a variety of companies at once, like Policygenius. I personally have found it easier to shop a few companies on my own, but it is a tool you may want to consider.

Ultimately, we want to make sure we have ample coverage for your vehicle and to protect you (and your assets) in the event you’re getting sued after an accident in the most economical way possible. So shop, compare, and (hopefully) save amid this pop in premiums.

Alrighty, folks, in this webinar, we went deep into the art of negotiating your job package like a pro. It's not just about knowing how to haggle; it's about figuring out what really matters to you. We broke down all the goodies in a job offer, from the obvious stuff like salary to the sneaky perks like remote work flexibility and vacation policies. TL;DR: it’s not just about the money.

We chatted about how to weigh up these goodies based on your own situation. For instance, while salary is king, maybe you're eyeing that remote work life or dreaming of trapsing through Tokyo during your generous vacation time. It's all about knowing what MATTERS TO YOU and aligning it with your long-term goals.

The bottom line? We want you to feel empowered, especially you young tech wizards, to make savvy decisions about your job offers. By understanding what truly matters to you and seeing through the myths, you'll be cruising towards financial success in no time.

Watch this timeless webinar now.

Here’s our agenda:

1. How to understand your equity compensation offer

2. The different types of equity: ISOs, NQOs, RSUs⁠

3. Adjusting how we think about equity compensation during highs and lows

4. How to negotiate for more equity and the items that matter

5. Deciding which benefits are most valuable to you and why

6. How to approach negotiating for more compensation for a new role⁠ AND an existing role

By John Owens CFP®, EA, ECA, CPWA®

Our team is already getting many questions about what the 2024 election could mean for markets. From concerns about the stability of our institutions, to how a change in control of the White House could impact tech regulation and impact FANMAG stocks - there’s a lot of uncertainty looking to next year.

It’s important to note that the market hates uncertainty, creating a headwind for 2024. Historically, increased volatility has characterized election years as investors react to the changing political environment. Leading up to the election is typically marked by caution and uncertainty as the market digests the potential policy changes that could come with a shift in administration.

What’s unique about 2024 is that the current most likely matchup is an incumbent president against a former president - something we last experienced in 1912 when Teddy Roosevelt attempted a comeback as a Bull Moose. From a policy perspective, this may make it easier for the market (and voters, for that matter) to digest the alternatives.

As the election draws closer, market movements historically have become more pronounced, with investors closely watching candidate policies, debates, and polls. Volatility tends to peak around election day, as the outcome becomes clearer. Markets have typically shown a degree of resilience in the aftermath of elections, regardless of the winner. Once the uncertainty of the political transition diminishes, investors often gain confidence, and the markets may experience a post-election rally.

The performance of the stock markets during US presidential election years is not solely dependent on the election results. Economic fundamentals, global events, and monetary policy also play significant roles - the 2020 election saw massive uncertainty but market returns that year were driven by the pandemic, stimulus, and a late-year IPO surge that drove markets upwards into 2021.

All of this to say is that we don’t have a crystal ball, but the odds are that dysfunctional government is likely here to stay, and as long-term investors, we ought not to get caught up in the short-term political - or market - volatility and rather focus on if our portfolio is aligned with our goals and long-term financial plan.

By John Owens CFP®, EA, ECA, CPWA®

I hope you buckled up because 2023 provided a bumpy ride to higher ground in the stock market inflation rates dipped, interest rates plateaued, and the much-anticipated recession most prognosticators called for never came to pass.

With 2023 now in the books, it’s always helpful to reflect on the year that was. Did I achieve my resolutions? Am I in a better place than I was at the start? And what is on the horizon?

For me, I set several resolutions to start the year - as I often do - but there’s one big one I accomplished - running 1,000 miles. This wasn’t easy; I didn’t move as quickly as I would have liked, and my progress throughout the year was spotty to say the least (sound familiar?!). From that long vacation in June that knocked me out of routine with only about 50 miles logged to that bout of COVID that took me off my feet for a week unexpectedly - the resolution didn’t exactly go as planned. But in the end, by staying the course and remaining dedicated to the goal, I was able to hit my 1,000th mile just under the buzzer.

This feels rather analogous to the markets this year. Many of you likely saw my note a couple of months back on Red October. Had you gone to sleep on New Year's Eve with a diversified portfolio and woke up on Halloween, your portfolio would have been close to flat on the year.

Two months later, most diversified portfolios that remained invested throughout the entire calendar year saw returns creeping into double digits - thanks to a late-year market rally that rewarded patience and staying the course amid scary headlines and, at times, gut-wrenching volatility. Furthermore, those portfolios that weathered the storm often benefited from the volatility through tax-loss harvesting during some of the darkest days of October. And while we don’t encourage folks to log in and check on portfolios daily, we’re constantly monitoring them.

Looking back to the start of 2023, many of us are in a better place than we were then. There are a variety of reasons for that across the economic and investment landscape:

• Unemployment - remains incredibly low at 3.7%

• GDP growth - Q3 saw year-over-year economic growth of 2.9%, showing an economy that’s still expanding despite the drag of inflation and drop off of COVID stimulus.

• Inflation - the Headline CPI for November was 3.1% year-over-year, down from nearly 9% at its most recent peak.

• Wages - to complement the drop in inflation, wages still rose nearly 4.3% year-over-year, showing real wage growth for earners this past year.

• S&P 500 is near its all-time high from early 2022, despite trading at 19.5x earnings, rather than 21.4x earnings as it was then - a better price for the market high point.

• Yields on cash savings spiked - now at nearly 5% for some HY Savings accounts - along with inflation drooping, meaning for the first time in nearly 15 years, you can earn a real yield on cash after inflation.

Looking at asset class returns, we can see that Large US Stocks led the way up 26%; followed by Developed International Stocks and Small US Stocks, both up in the high teens. Real Estate rallied from a crushing start of the year to finish up 11.4%.

Emerging Markets, Bonds, and Cash all put up single-digit returns last year, while commodities - which led the way in 2022 with 16.1% gains took a hit - dropping 8%.

These positive returns for most asset classes and strong economic indicators did not mean everyone fared well in 2023.

The first few months of the year saw large banks like First Republic, Silicon Valley, and Signature go under for poorly managing their liabilities in a rising interest rate environment. Part of this led to more consolidation in banking - with JP Morgan Chase gobbling up First Republic.

While the crypto market saw some gains throughout the year, there was also continued cause for concern in the evolving space. We saw Sam Bankman-Fried stand trial and get convicted for fraud and Binance pay a $4B fine for engaging in money laundering, among other charges while its CEO stepped down.

Overall, 2023 saw markets rally back from a dismal 2022, inflation rates subside, and the Fed achieved its once-considered impossible ‘soft landing’ without a recession. Investors who stayed the course throughout the year were rewarded well - especially in late Q4 - when the market posted most of its gains.

Benchmark Returns

It’s easy to get caught up in the headlines of S&P 500 returns in 2023, but as you can see, the average diversified portfolio ended the year up about 14% - not 26%. The beautiful thing about being diversified is that your portfolio never does as poorly as the worst asset class - which was down 8%; nor as great as the best, up 26%. True diversification means that the various components of your portfolio don’t all move together at once.

In 2023, US equities - Large and Small companies - helped power returns, as did Large International Companies - all above the average portfolio. Real Estate, Small International Stock, and Emerging Markets all came in near the low double-digits. Most fixed-income and cash investments put up single-digit returns.

This is a contrast from 2022, when all three of the top-performing asset classes from this year lagged beyond a diversified portfolio - with Small Companies down 20%; Large Companies down 18%, and Large International Companies down 14%; all trailing the Asset Allocaiton portfolio that was down 13.9% - buoyed at the time by fixed income, cash, and commodities.

Chart of the year:

One of the many reasons we advocate for index funds is the ability to capture market returns, at a low cost, without trying to be a stock picker. And being a stock picker would have been tough in 2023 as 72% of the stocks in the S&P 500 underperformed the overall return of the index.

By John Owens CFP®, EA, ECA, CPWA®

I moved to Lancaster, PA almost 2-years ago - much in the heart of Philadelphia Phillies fan territory. And if you’ve followed their playoff runs the last couple of years - you may have heard the term Red October - a callback to the Tom Clancy Soviet submarine spy drama of the 1980s that eventually became a movie. But the real Red October this year came from the market’s latest dose of volatility.

The month saw most major asset classes decline substantially, with US Small Cap stocks declining nearly 8%, and REITs dropping almost 5%, and International stocks giving up over 4% of its year-to-date gains. Aside from cash, every major asset class dropped during October, bringing down the year-to-date returns for many diversified portfolios to flat or rather modest 2023 gains.

Looking longer-term - most major asset classes have struggled not just in red October, but for the better part of the last 2+ years.

Looking at the MSCI ACWI - a benchmark for the global stock market - the past 24- months has produced a near 15% decline.

Fear not, right? Surely if stocks were down during those 2 years, bonds must have done well, right? Nope, the Bloomberg US Aggregate Bond Market Index dropped over 15% in that same time period.

And Bitcoin? Down 43% in the past 2-years.

How about real estate - REITs? Down 31%.

What about those booming IPOs of 2020 and 2021? The Renaissance Capital IPO index - dropped 57%.

Not the most cheerful blog post, eh? Red October will do that to you.

But it begs the question - is TODAY a good day to be invested in the market? If you’re a long-term investor, the answer is a rather resounding yes - if history is any indication. Let’s explore why that might be the case.

Valuations

Now, nobody goes to the grocery store, sees their favorite snack on sale, and says, “I don’t know if I want that.” But we feel a bit different regarding our portfolio - that’s part of the psychology of risk aversion.

This chart, courtesy of the JP Morgan Guide to the Markets, takes a look at major asset classes and how they’re valued relative to both the most recent market peak around year-end 2021 and their 25-year average.

The first consolation is that every asset class is cheaper - some significantly so than what it was at that market peak. This is typically a good sign for forward-looking returns. But it doesn’t necessarily indicate a ‘sale’. If we used to buy gas for $2.50/gallon and saw it hit $5/gallon, we can be happy that it dropped back to $4.50 and still yearn for the more affordable days gone by.

But the valuations tell us something else - they tell us that several major asset classes are not only at a discount to their 2021 peaks - which isn’t surprising - but also to their long-term average.

(Nerd alert: quick refresher for those who didn’t tutor stats in college - a Z-score is essentially the number of standard deviations an asset class is from that 25-year average valuation. So a z-score of -1 indicates an asset class is one total standard deviation from that long-term average).

So, looking at these valuation metrics - we see that 7 of 10 major asset classes are trading at a valuation discount relative to their long-term average, that US large cap stocks are trading nearly in-line with their long-term average valuation, and that US growth stocks are trading about a half standard deviation above their long-term average.

What does this mean? Coming out of Red October, it’s historically translated to a green flag in forward-looking returns for long-term investors because valuations are often better indicators of long-term performance than short-term.

Yields

One of the other tantrums the market had in recent months - especially in red October - was a freak-out about yields. 10-year treasury yields topped 5% at one point and ended the month at 4.92%. This means you can lend money “risk-free” for almost 5% interest over 10 years (risk-free is in quotes because every investment has SOME sort of risk - the risk-free nature of treasuries is that the full faith and credit of the US government backs them). A higher risk-free rate drives down future expected returns in the stock market - and increases the premiums we want from equity investments.

But higher yields on bond investments are NOT necessarily a bad thing - contrary to recent market tantrums. They mean that your cash and short-term investments can earn interest above inflation and generate real returns - something we haven’t seen lately.

And it also means that should the economy slip into recession - the Fed has tools in its monetary toolbox to cut rates and stimulate the economy. In the current political environment - where it takes 3-weeks to decide who can hold the gavel in Congress - a Federal Reserve with dry powder helps me sleep at night because we can’t count on stimulus if the sh*t hits the fan.

Healthy Economic Data

I will beat this drum until the cows come home - which, again, isn’t an unreasonable expectation from the guy here in Lancaster. But despite the headlines - our economy overall is not in a terrible place. Let’s highlight a few reasons why:

• GDP data for Q3 came in higher than expected at 4.9% - showing the economy continues to grow despite COVID stimulus wearing off.

• The unemployment rate remains incredibly low at 3.8%.

• Wage growth is sitting at 4.3%, despite falling inflation, helping workers translate pay bumps into real growth in income.

• And the headline Consumer Price Index was at 3.7% in September - above the Fed’s target of 2% inflation - but below 50-year average of 3.9% - showing that inflation continues to get under control.

Again, these are green flags when you filter out the noise of red October.

So, we’re all good, nothing to worry about?

No. Probably not. Definitely not. There are still factors that can throw the market - and our global economy for a loop. There’s a continued war in Ukraine and a new war in the Middle East. There are threats of aggression from China into Taiwan; and fear that world powers may be drawn into conflict in the Middle East - not only a tragedy and economic drag - but something that could also cause a shock to oil markets.

There is what I’d generously describe as a dysfunctional and divided government in the United States that still needs to figure out how to fund itself and pass a budget - in a mere few weeks.

And when you look out on the horizon, there’s a US election that is increasingly looking like a rematch between two politicians whose age makes them more likely to be running for the Condo board at Del Boca Vista in a Seinfeld episode than to be the leader of the free world.

That said, all is not lost.

It’s important to remember that there have ALWAYS been scary headlines on the horizon. The devastating fighting in Israel and Gaza has sadly been a story played out now for generations. The hyperbolic divisiveness of our political system has been amplified by social media and our 24-hour news cycle - but it is not new. World superpowers have and always will angle for more might, influence, and scale - with the bad actors doing so in ways that infringe on the sovereignty of others.

So, the question I set out to answer in this post is whether TODAY is a good day to invest in the market. After Red October. Amid volatility. With geopolitical dangers both near and far. And when we filter out the noise and look at the data - valuations, yields, and the economy overall - a long-term investor ought to feel good about being invested today. There is a sale going on in the markets. There is, what has been seemingly rare, a yield and upside in the bond markets. And there are positive economic indicators that could be the sunshine that helps drive storm clouds of heavy headlines away.

As we say good riddance to Red October, let’s keep our eye on the prize - the long-term, the upside that’s out there, and how we control what we can - and try not to overreact to the rest.

By: AJ Ayers, CFP®

Summary:

Private company tender offers, where companies buy back shares from existing shareholders, are an attractive liquidity option, especially in today's fluctuating economy. Participation depends on personal financial situations and requires understanding the tender offer's terms, including pricing and potential legal and tax consequences. These offers differ from public company offers in regulatory oversight and transparency, and involve considerations like shareholder communication and valuation challenges.

With the fluctuating economy causing ripples across financial markets, private companies increasingly seek liquidity events to provide exits for their shareholders. One such event that has steadily gained traction is the private company tender offer. In 2022, tender offers accounted for 7% of total GP-led secondary transaction volume, representing around $43 billion in market activity.

What does that really mean?

It means that companies are staying private longer and in order to retain top talent, they need to provide some liquidity to employees so they don’t leave for more compensation at publically traded companies.

Private company tender offers present a compelling opportunity for shareholders seeking liquidity. With private valuations declining from lofty pandemic highs, tender offers allow sellers to access a pool of motivated buyers and potentially higher bids compared to other transaction types. As an interested shareholder, understanding the latest tender offer landscape is key to making an informed participation decision.

So, should you participate in a private company tender offer? The answer depends on your personal financial situation.

Here at Brooklyn Fi, we do this type of analysis with all of our clients.

What to consider if your company is going through a tender offer:

• How much CAN you sell? Often the decision is already made for you and employees can sell 15-20% of their total holdings

• What are your personal financial goals? Could this tender offer exit be a downpayment on your forever home?

• Will I be at this company forever?

• Is this a good opportunity to get some liquidity (you know, MONEY) out? (the answer is more often than not, YES)

• What will my tax liability be? (this is a big one, it’s an important one, don’t let this stop you from participating)

Understanding Private Company Tender Offers

Private company tender offers are a method used by companies to buy back their own shares from existing shareholders.

It happens when a company offers to purchase a specific number of shares at a set price, allowing shareholders the opportunity to sell their shares back to the company.

We'll explore the meaning of tender offers in the context of private companies.

A tender offer can be an attractive proposition for shareholders, as it often comes with a premium, which means the selling price is above the current market value of the shares. The primary motive for launching a tender offer could be to reorganize the company's capital structure, reduce the number of shares outstanding, or prevent a hostile takeover.

It's essential to distinguish private company tender offers from those involving public companies.

Public companies experience more regulatory oversight, and their tender offer process is more standardized.

On the other hand, private companies have more flexibility in defining the terms of their tender offers, making the process less transparent at times.

In a private company tender offer, there are some key factors to consider:

• Shareholder communication: Private companies may lack a formal investor relations department, so communication between the company management and shareholders might be less structured. It's important to ensure that all shareholders receive the relevant information in a timely manner to make an informed decision about participating in the tender offer.

• Valuation: Unlike public companies, private company shares are not openly traded on a stock exchange, making it more challenging to determine their fair market value. An independent valuation might be necessary to establish a reasonable purchase price for the tender offer.

• Legal and tax consequences: Tender offers involve multiple legal and tax implications for both the company and shareholders.

When it comes to private company tender offers, not everyone has the opportunity to participate. In general, participation is limited to existing shareholders and investors who hold an ownership interest in the company.

So, let's explore who can participate in a tender offer and how the process works for different entities.

First off, any shareholder of the company can take part in the tender offer. Shareholders own a portion of the company, either through having invested in it previously or by receiving stock options as part of their compensation. When a tender offer is made, these individuals have the option to tender their shares for a specific price. This can be an attractive opportunity for shareholders looking to cash out their investment or make a profit if the tender offer price is higher than the current market value of the shares.

Investors play a similar role in the process.

They are individuals or entities that have poured money into the company, believing in its potential for growth and profitability. When a tender offer is announced, investors have the chance to sell their shares and possibly realize gains on their investment.

Now, what does it mean to tender shares?

Tendering shares essentially means offering the shares for sale at the price specified by the tender offer. Shareholders who decide to tender their shares are agreeing to sell them to the party making the tender offer, usually another company or a large investor. It's important to note that participating in a tender offer is voluntary. Shareholders and investors are not obligated to sell their shares if they prefer not to.

The Initiation Phase

In the initiation phase of a private company tender offer, the first step involves announcing the intention to make an offer to purchase a certain number of shares. This announcement typically includes the price being offered and other relevant details.

The process is regulated by the Securities and Exchange Commission (SEC), and the offer must be in compliance with the Exchange Act of 1934.

During this phase, we must be clear, concise, and informative in our communication to target shareholders.

As the offeror, our goal is to create transparency and encourage shareholder participation. The initiation phase is crucial as it sets the stage for the entire tender offer process.

The Consideration Phase

The consideration phase is when target shareholders evaluate the offer to make an informed decision. During this time, shareholders must assess whether the offered price is fair and accurately reflects the value of their shares.

The SEC is involved in this phase as well, ensuring that the process complies with all necessary regulations.

It's essential for us to provide shareholders with the information they need to make a well-informed decision. This includes offering documentation, financial statements, and other relevant data to promote transparency.

Throughout the entire tender offer process, our primary goal is to ensure that our clients are well informed and that their needs are met with professionalism and efficiency. Our expertise in navigating the complex world of tender offers translates into value-added guidance for shareholders during these critical transactions.

Types of Tender Offers

• There are two main categories of tender offers: public and private. Public tender offers involve a company making an offer to buy shares from the existing shareholders of a publicly traded company. This method is often used during a takeover bid when the acquiring company wants to gain a controlling interest in the target company. In contrast, private tender offers are when a company seeks to buy shares from the shareholders of a privately held company.

  Public tender offers are typically more visible, as they involve publicly traded companies, whereas private tender offers may be less well-known due to the nature of private ownership.

• Tender offers can also be characterized by the method of payment involved in the transaction.

  Cash tender offers are straightforward: the acquiring company offers to buy shares from existing shareholders at a specified price, usually higher than the current market price of the shares. This premium can be an incentive for shareholders to sell their shares to the acquiring company.

  On the other hand, in exchange offers, the acquiring company offers existing shareholders a specific number of its own shares in exchange for the target company's shares. This method can preserve cash for the acquiring company, but it may also require the target company's shareholders to assess the value and potential growth of the acquiring company's shares.

• Lastly, we can classify tender offers as voluntary or mandatory. Voluntary tender offers are initiated at the discretion of the acquiring company and are usually made to achieve a strategic acquisition or increase share ownership in the target company. Shareholders of the target company are under no obligation to accept the offer, and the acquiring company may not reach its desired ownership level if too few shareholders are willing to sell.

  In contrast, mandatory tender offers are required in certain jurisdictions when an acquiring company crosses a specific ownership threshold. In these cases, the acquiring company is compelled to make a tender offer to all remaining shareholders, often with regulatory conditions to protect the interests of minority shareholders.

Understanding the Pricing in Tender Offers

The first step in pricing a tender offer is determining the price per share, which is the amount an acquirer is willing to pay for each outstanding share of the target company. This price is typically based on the current market price of the shares, with consideration given to factors such as recent financial performance, growth prospects, and industry trends.

Once the market price has been established, the next step is to determine the premium to be paid on top of this value. A tender offer is usually made at a premium over the current market price to entice shareholders to accept the offer. This premium reflects the acquirer's belief in the target company's future potential and their willingness to pay a specific price for control.

In setting the offer price, considerations such as the company's financial health, growth prospects, and market position come into play. A higher premium may be warranted for companies exhibiting strong growth, a dominant market position, or a unique product offering. Conversely, a lower premium might be more suitable for companies facing headwinds or in a competitive industry.

There are various factors that can influence the offer price, including:

• The target company's financial performance and growth potential

• Competitive dynamics within the industry

• Market sentiment and macroeconomic factors

• The acquirer's strategic objectives

• The availability and cost of financing

Ultimately, the offer price in a tender offer is a delicate balance of several considerations. It needs to be attractive enough to entice shareholders to sell their shares, while also reflecting the true value of the company and its future prospects. By carefully evaluating all of these factors, the acquirer can develop an offer that best meets their objectives, while also providing shareholders with a fair return on their investment.

Legal Aspects of a Tender Offer

The foundation for tender offers in private companies is rooted in the regulatory framework established by the Securities and Exchange Commission (SEC). Even though private companies are generally exempt from certain public company reporting requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934, they still need to abide by specific rules and regulations when it comes to tender offers.

One crucial regulatory structure is Rule 13e-4, which governs the solicitation of tender offers from companies listed on a national securities exchange, as well as certain private companies that have assets exceeding $5 million and a class of equity securities held by 500 or more persons. Rule 13e-4 outlines the necessary disclosures, filing requirements, and prohibitions on fraudulent practices for issuers seeking to engage in tender offers. Compliance with this rule is essential to avoid unwanted scrutiny by the regulatory authorities.

Another important set of regulations is found in SEC Rule 14d, which deals with tender offers initiated by third parties rather than the target company. This rule contains similar disclosure and filing requirements to those in Rule 13e-4, ensuring that investors have access to critical information before entering into a tender transaction.

Apart from the federal securities laws, private companies must also be mindful of the state laws that may apply to their tender offers. State securities laws, known as blue-sky laws, aim to protect investors from fraudulent activities and require compliance with various regulatory provisions. These laws vary from state to state but typically encompass registration, antifraud, and reporting requirements.

In addition to regulatory compliance, contractual obligations should not be overlooked. Existing shareholders' agreements or other contracts may contain provisions that restrict tender offers, such as rights of first refusal or tag-along rights. Private companies must carefully review these contractual rights and obligations to avoid potential disputes or challenges from shareholders who feel their rights have been infringed upon.

By: AJ Ayers, CFP®

Summary:

"Stock offset" on a paystub represents the tax paid on stock compensation like RSUs, helping avoid double taxation and ensuring IRS compliance. It's crucial for understanding the tax implications of stock-based employee compensation on income.

If you work for a company that offers stock options or grants, you may have noticed a line item on your paystub called “stock offset”. But what does it mean and how does it affect your earnings?

Stock offset can be confusing and complicated, especially if you have multiple types of stock awards or different vesting schedules. That’s why we created this quick guide to help you decode your earnings and understand how stock offset works.

Offsetting RSU Tax

RSUs are a form of employee compensation that grants you the right to shares of stock in your company once they vest. When these shares vest, they become part of your taxable income. Normally, your employer will withhold some shares to cover the tax bill, and you'll receive the remaining shares. This is where the concept of RSU offset comes in.

Offsetting RSU tax involves selling a portion of your vested shares to cover the tax withholdings. Keep in mind, however, that the tax rate will depend on various factors, including your tax bracket and the period you held the shares.

We understand that reading your pay stub can be overwhelming, especially when it comes to stock offsets. In this section, we break down the essential elements of your pay stub, focusing on stock offsets and the various relevant line items.

Dsq Disp

Dsq Disp, or disqualified disposition, refers to the tax treatment of employee stock options when they are sold before meeting a specific holding period. If you come across this term on your paystub, it means you've sold your stock earlier than the required time period to receive more favorable long-term capital gains treatment, and will be taxed at ordinary income rates instead.

NQ Stk Options

Non-Qualified (NQ) Stock Options are a common form of stock compensation provided by your employer. The income derived from exercising or selling these options is typically taxed as income at your regular tax rate. This amount will be added to your federal income tax withheld and is also subject to Medicare taxes and state income tax.

RSU Stock Income

Restricted Stock Units (RSUs) are given to employees by their company as part of their compensation package. The income generated from RSU vesting is taxed as ordinary income. On your pay stub, this will contribute to the amount of income tax withheld, and the value of your shares will impact your overall tax bill.

NQ Offset, ESPP Offset, ISO Offset or RSU Offset

These offsets refer to various forms of stock compensation offered by companies and are displayed on your pay stub as a separate line item. The purpose of these offsets is to ensure that the appropriate taxes are paid for each type of stock. The specific offsets are:

• NQ Offset: Non-Qualified Stock Options offset

• ESPP Offset: Employee Stock Purchase Plan offset

• ISO Offset: Incentive Stock Options offset

• RSU Offset: Restricted Stock Units offset

Each stock offset represents the taxes paid on the stock income, which helps avoid double taxation. It's essential to consult with a tax professional to grasp these items' tax implications fully. In addition, keep an eye on your brokerage account when the shares are deposited to ensure the correct taxes were paid.

IRS Reporting Requirements

When it comes to stock offset on paystubs, it's important for us to be aware of the IRS reporting requirements.

Stock offset often comes into play in the context of Restricted Stock Units (RSUs). RSUs represent a commitment from an employer to grant an employee company stock at a future vesting date. On this date, the employee becomes subject to income tax on the fair market value of the shares.

To make sure that the IRS receives accurate information about RSU income, the employer is required to report it on Form W-2. In Box 1, the employer includes the employee's total taxable wages, including the value of RSUs. The employer should also report the value of RSUs in Box 12, using the code "V." This ensures that both the employee and the IRS understand the source of the additional taxable income.

As we prepare tax returns for our clients, we make sure that RSU income is reported correctly. On Form 1040, we include the total taxable wages from Box 1 of Form W-2 on Line 1, and the value of RSUs from Box 12, Code "V" on Line 7a. This ensures that our clients' taxable income is accurately calculated, and they are in compliance with IRS regulations.

By: AJ Ayers, CFP®

Summary:

When selling RSUs at a loss, it's crucial to consider the IRS's wash sale rule, which prevents tax deductions if the same security is repurchased within 30 days, and understand the tax implications, as RSUs are taxed as income upon vesting with subsequent sales affecting capital gains or losses.

Seeing your RSU shares lose value can be excruciating. You waited months or even years for those stocks to vest, only to watch their price plummet shortly after. According to recent statistics, the chance of selling RSUs at a loss if you hold the shares past vesting is 27%. For those unlucky employees, the average loss amounts to a staggering -15% share price drop.

Before you panic and sell all your underwater shares immediately, take a deep breath. You can minimize losses and even come out ahead with the right strategies.

The Basics of Wash Sale

When it comes to selling RSUs at a loss, understanding the wash sale rule is essential.

A wash sale occurs when an investor sells a security at a loss and then repurchases the same security within 30 days before or after the sale.

The IRS implemented the wash sale rule to prevent taxpayers from claiming artificial losses on their taxes. It's important for us to use our trusted technical expertise to inform our readers about the implications of violating the wash sale rule.

As the rule states, if you sell an asset like an RSU at a loss and repurchase it within a 30-day window, the wash sale rule applies.

In this scenario, you can't claim the loss on your taxes, and the amount of the disallowed loss is added to the cost basis of the new shares.

For example, say you sell RSUs for $5,000 and then buy them back within 30 days for $4,000. The $1,000 loss is not deductible on your taxes due to the wash sale rule.

Instead, the cost basis of the repurchased RSUs is adjusted by the disallowed loss, making it $5,000 instead of $4,000. Understanding this rule is crucial if you're considering making use of wash sales.

Keep in mind that the wash sale rule is not limited to stocks – it also applies to options, warrants, and other securities.

Therefore, always be mindful of the 30-day window when selling and repurchasing assets in the pursuit of financial optimization and wellness.

Selling RSUs and Taxes

When it comes to selling RSUs at a loss, it's essential to understand how taxes come into play. Generally, RSUs (restricted stock units) are considered income once they vest and are taxable at ordinary income rates.

That said, any gains or losses experienced after vesting can be considered capital gains or losses.

Let's dive into the details of how to handle vested RSUs when you decide to sell them.

The first step involves calculating your cost basis, which is generally the fair market value of the RSUs on the vest date. This cost basis will be used to determine whether you have a capital gain or a capital loss when you sell the RSUs.

In a scenario where the value of the RSUs has decreased, selling them could result in a capital loss. This loss can be utilized for tax loss harvesting, which may help reduce your overall tax bill.

Typically, capital losses can be used to offset capital gains or up to $3,000 of ordinary income in a tax year.

However, it's important to be aware of the wash sale rule when selling RSUs. A wash sale occurs when you sell an asset at a loss and buy the same or a substantially similar asset within 30 days before or after the sale.

If this happens, the loss will be disallowed, and you won't be able to claim it on your tax return.

While it might be tempting to sell your RSUs right away if you think the value will decrease, it's always wise to consult with a financial advisor or tax professional before making any decisions.

A proactive approach to financial planning could involve considering different forms of equity compensation, such as an ESPP (employee stock purchase plan).

These plans can provide additional flexibility and tax benefits compared to RSUs.

But, as always, it's crucial to understand the specific tax rules and regulations that apply to your situation.

Avoiding Wash Sales

To avoid a wash sale when selling RSUs at a loss, pay attention to the timing of your transactions. Ensure that you do not buy the same or substantially similar securities within the 30-day window surrounding your sale date. If you are considering selling RSUs at a loss, we would advise you to be cautious about your company's subsequent stock purchases or grants within that timeframe.

If you find yourself in a situation where a wash sale has occurred, don't panic. There are still ways to navigate this scenario. One option is to increase the holding period of the newly acquired stock, which will allow the disallowed loss to be added to the basis of the new security. This may lessen the tax impact when you eventually sell the new shares.

Other Considerations

RSUs are one of multiple forms of equity compensation, which can also include stock options or other incentives tied to company performance. A common rule of thumb for these investments is not to sell them at a loss, as this can lead to a loss of principal. However, each individual's financial situation is unique, and you may find yourself in a position where selling your company's stock at a loss becomes necessary.

If you do decide to sell, it's crucial to understand the tax implications and consult with a tax professional to ensure you're making the best decision for your financial situation. Selling stock at a loss may affect your tax brackets, and you don't want to be caught off guard by an unexpected tax bill.

Additionally, it's essential to consider your other equity compensation options. For example, if you have stock options in addition to RSUs, it may be more strategic to sell one type of equity over the other, depending on your individual tax situation and the performance of each asset.

First, it's important to identify the reasons why you might be contemplating selling your RSUs at a loss. Are you facing a cash crunch or looking to diversify your investments? Understanding your motivation can help guide your decision-making process.

Now, let's consider the potential risks. According to Nasdaq, there's a 27% chance of selling at a loss if shares are held past vesting. The average loss incurred from late selling is typically around a 15% share price drop. These statistics may sound intimidating, but remember that every situation is unique and requires a tailored approach.

One option to mitigate potential losses is to employ hedging strategies to protect against price drops after vesting. This may involve utilizing options contracts or other financial instruments (for our sophisticated investor friends) to minimize risks associated with your RSUs.

Ultimately, deciding whether to sell RSUs at a loss depends on your personal circ*mstances, financial goals, and risk tolerance. It's always a smart move to consult with trusted financial professionals, like the experts at BKFi, who can provide tailored advice and help you navigate complex financial matters. Remember, we're not just number crunchers; we're here to be your thinking partner and guide to achieving your financial aspirations.

By: AJ Ayers, CFP®

In this article, we'll discuss one of the most popular yet often misunderstood tax withholding methods for RSUs—the sell-to-cover strategy.

So, you've landed that dream job at a public company, and part of your shiny new compensation package includes Restricted Stock Units (RSUs). Congratulations! But before you start daydreaming about cashing in those shares for a new car or a dream vacation, there's a crucial aspect you need to understand—taxes. Yes, the dreaded 'T' word that can turn your financial dreams into a complicated puzzle.

Sell-to-Cover Strategy

When it comes to RSUs, one popular tax withholding method is the sell-to-cover strategy. This approach involves the employer selling just enough of your vested RSUs to cover the tax burden and distributing the remaining shares to you. Let's discuss this method and compare it to alternatives like "same-day sale" and "cash transfer" in terms of tax efficiency.

Here's a custom scenario to illustrate the sell-to-cover RSU strategy in action:

Employee: Emily, a Product Manager
Company: InnovateTech, a public tech company
RSU Vesting Schedule: 4 years
Tax Withholding Rate: 25%
Share Price at Vesting: $20
Number of RSUs: 200

Scenario
Emily has been with InnovateTech for 4 years, and her 200 RSUs have fully vested. The current share price is $20, making the total value of her vested RSUs $4,000.

Sell-to-Cover Method in Action

Tax Obligation: With a 25% tax withholding rate, Emily owes $1,000 in taxes.
Shares Sold: To cover this tax, InnovateTech sells 50 shares on her behalf (50 shares x $20/share = $1,000).
Remaining Shares: Emily is left with 150 shares (200 original shares - 50 shares sold for tax).

Future Implications

Capital Gains: If the share price increases to $30 in a year, Emily's remaining 150 shares would be worth $4,500. If she sells, she would have a capital gain of $1,500 ($4,500 - $3,000). Assuming a capital gains tax rate of 15%, she would owe $225 in taxes.
Capital Loss: If the share price drops to $10, her 150 shares would be worth $1,500. Selling them would result in a capital loss of $1,500 ($1,500 - $3,000), which she could use to offset other income for tax purposes.

By using the sell-to-cover method, Emily efficiently covers her immediate tax obligations while retaining a significant portion of her RSUs, allowing her to benefit from future stock price movements. When it comes to managing RSU-related taxes, it's essential for employees to know their options and carefully consider factors like potential capital gains and losses before making a decision.

Tax and Diversification Considerations for RSUs

Withholding tax rates for RSUs will vary depending on the employee's tax bracket. It's critical to understand that this withheld amount MIGHT NOT cover your entire tax liability. For example, if you’re in the 37% marginal tax bracket and your RSUs are only sold to cover 22% federally, you’d have to plan accrordingly.

Based on your overall finances, you may need to make estimated tax payments or adjust your withholdings on your W-4 throughout the year to avoid underpayment penalties. State income taxes may apply, so it is essential to understand the rules in your state.

Incentive stock options (ISOs) and non-qualified stock options (NQOs) are two other popular types of stock options. While they have similarities with RSUs, tax treatments for these options differ, so it's important to know which type you're dealing with and understand the tax implications.

Keep in mind that tax rules are complex and can change. It's always a good idea to consult a tax professional or financial advisor with experience in equity compensation to ensure you understand the tax implications and strategically plan your RSU transactions.

Diversification is another important consideration, especially for those with a significant portion of their wealth tied to a single company’s performance.

By selling RSUs and investing the proceeds in other assets, you can better protect yourself from potential loss of principal due to fluctuations in your employer's stock.

By: AJ Ayers, CFP®

In this blog post, we'll unpack the meteoric rise of double-trigger RSUs and why they now eclipse other equity awards like stock options. You'll learn how the clear vesting schedules, favorable tax treatment, and flexibility of RSUs provide advantages for both employers and employees.

Equity compensation has become essential for attracting and retaining top talent, especially in competitive industries like technology. As companies grant more equity, understanding the nuances between different types of awards is critical. Restricted stock units (RSUs) have emerged as the most popular form of equity compensation in the last decade, especially double-trigger RSUs. But why have double-trigger RSUs become so dominant?

Understanding RSUs

RSUs are company stock given to employees as part of their compensation package, typically with the aim of aligning the employee's interests with those of the company and promoting long-term commitment.

They are granted with specific conditions, such as vesting schedules, which must be met before the RSUs can be converted into actual shares of the company stock.

This vesting of RSUs adds an element of delayed gratification, encouraging employees to remain committed to the company's success.

The RSU structure often includes a time-based vesting schedule, where RSUs become available to the employee after they have worked at the company for a certain period.

Alternatively, performance-based goals can be set, requiring the employee to meet specific targets before the RSUs are granted.

It's important for RSU holders to stay informed about the particular vesting schedule and any conditions associated with their RSUs in order to maximize their potential financial gains.

Equity compensation like RSUs can be a boon for professionals working at startups or established companies. For a company in its early stages, offering RSUs is a way to attract and retain talent without straining its financial resources.

As an RSU holder, participating in an RSU program allows you to financially benefit from the company's growth, which can lead to a significant wealth increase if the company fares well in the market.

Double-trigger Restricted Stock Units (RSUs) are a form of equity compensation that requires two specific events to occur in order for the RSUs to vest.

The two events (or triggers) that typically occur when dealing with double-trigger RSUs are a change of control event (such as a company merger or acquisition) and an involuntary termination or loss of employment (i.e., being laid off).

The thinking behind this double-trigger RSU design is to provide additional protection to employees who may experience job loss.

Let's delve into how double-trigger RSUs work.

• The first trigger event is typically the change of control event. This event, which could include a company being acquired or going public, causes the RSU to become eligible for vesting.

• The second trigger event, the involuntary termination of employment, is necessary for the double-trigger RSU to fully vest. Until both triggers occur, the RSUs remain in a state of potential vesting.

So, what are the benefits of double-trigger RSUs? Well, for one, they align the interests of employees and shareholders by motivating employees to work towards favorable corporate events.

This incentive can boost morale and encourage employee retention.

On the other hand, double-trigger RSUs provide protection to employees who might lose their jobs due to circ*mstances beyond their control.

Tax Implications of Double Trigger RSUs

When it comes to Double Trigger RSUs, taxation comes into play upon vesting. Keep in mind that vesting is contingent on two conditions being met, hence the "Double Trigger" name.

Generally, these conditions involve a specific performance milestone and a change in control event.

Upon vesting, the RSUs are taxed as ordinary income.

The amount taxable will be based on the market value of the shares at the time of vesting.

An important aspect we need to address regarding the income tax liability on Double Trigger RSUs is the tax withholding method. Employers often withhold an appropriate amount of shares to cover the tax obligation or allow the employee to pay the taxes separately.

After the vesting event, the RSUs turn into actual shares which might be subject to capital gains tax if the employee holds onto them and they appreciate in value.

The calculation of capital gains tax depends on the length of time the shares are held and the difference between their market value when sold and the value at the time of vesting.

Vesting and Trigger Scenarios for Double Trigger RSUs

Double trigger RSUs require two conditions to be met before they can vest.

The first is often a service-based or time-based vesting schedule. This means employees need to remain with the company for a certain duration, typically three or four years, before their RSUs begin to vest.

The second vesting condition is the occurrence of a liquidity event, such as a change in control (CIC) or the company going public. In a double trigger RSU scenario, the vesting event occurs when both the service-based vesting condition and the liquidity event coincide.

For example, if an employee has a four-year vesting schedule and a CIC occurs three years after their start date, only 75% of the RSUs will vest.

It's crucial to understand that RSUs may also be subject to performance-based vesting conditions, linked to company or individual performance goals.

Here are two scenarios illustrating how double-trigger RSUs work:

Scenario 1: Startup Acquisition

Scenario 2: Going Public

Employee: Jane, a Software Engineer
Company: TechStart, a growing startup
Service-based Vesting Schedule: 4 years
Liquidity Event: Acquisition by a larger tech company

Timeline:

• Year 1: Jane joins TechStart and is granted RSUs with a 4-year vesting schedule.

• Year 3: TechStart is acquired by a larger tech company. This triggers the liquidity event condition.

Outcome:

• Jane has been with the company for 3 years, so 75% of her RSUs have met the service-based vesting condition.

• The acquisition triggers the liquidity event condition.

• Both conditions are met, so 75% of Jane's RSUs vest immediately upon the acquisition.

Employee: Mark, a Data Scientist
Company: DataCorp, a tech company specializing in big data
Service-based Vesting Schedule: 4 years
Performance-based Vesting: Company must reach a revenue milestone
Liquidity Event: Company goes public (IPO)

Timeline:

• Year 1: Mark joins DataCorp and is granted RSUs with a 4-year vesting schedule and a performance-based condition tied to company revenue.

• Year 2: DataCorp reaches the revenue milestone, fulfilling the performance-based condition for Mark.

• Year 4: DataCorp goes public, triggering the liquidity event condition.

Outcome:

• Mark has been with the company for 4 years, so 100% of his RSUs have met the service-based vesting condition.

• The performance-based condition was met in Year 2.

• The IPO triggers the liquidity event condition.

• All conditions are met, so 100% of Mark's RSUs vest immediately upon the IPO.

Double Trigger RSUs vs. Single Trigger RSUs

Let's dive into the somewhat fraught question of single-trigger RSUs versus double-trigger RSUs.

Single-trigger RSUs typically vest over a predetermined period, such as 4 years, and the recipient becomes entitled to the shares once the vesting conditions are met.

On the other hand, RSUs with double-trigger vesting require the fulfillment of two separate conditions or "triggers" for the shares to be granted. The first trigger in double-trigger RSUs is often the same as that of single-trigger RSUs – continued employment with the company.

However, the second trigger is typically tied to a significant event, such as a company sale or achieving specific performance milestones.

In terms of advantages, double-trigger RSUs can provide a more direct alignment of employee interests with the company's long-term success.

On the flip side, employees may feel more uncertainty due to the additional trigger condition, and the shares might not ever vest if the company doesn't reach the required milestone.

Single-trigger RSUs provide a straightforward vesting schedule with more predictability for employees. However, they might not offer the same level of motivation to achieve performance targets as double-trigger RSUs do.

Conclusion

Understanding the intricacies of RSUs, especially double-trigger RSUs, can be a complex endeavor. These financial instruments offer a unique blend of incentives and protections for employees, aligning their interests closely with the company's long-term goals. However, the tax implications and vesting conditions can be challenging to navigate without expert advice.

If you're grappling with the complexities of RSUs and how they fit into your financial planning, don't go it alone. At BKFis, we specialize in helping both individuals and companies make the most of their equity compensation packages. Contact us today for a consultation, and let us help you unlock the full potential of your RSUs.

By: AJ Ayers, CFP®

Summary:
The moment has arrived: Your RSUs have vested, and you're contemplating whether to sell them off right away. It's not a decision to take lightly: should you sell now and enjoy the windfall, or hold off for potentially greater gains? Let’s dive in!

RSUs, or Restricted Stock Units, are an increasingly popular way for companies, especially tech companies, to compensate their employees.

Simply put, an RSU is a grant given by an employer to an employee, promising to give them company shares at a future date, which is referred to as the vesting date. As RSUs vest, the full value of the vested shares is added to an employee's income and taxed accordingly. When the RSUs vest, the shares become available to the employee, and they can decide whether to sell or hold onto them.

Factors to consider in your decision include the company's stock price, potential future growth, and the employee's personal financial situation. It's ESSENTIAL to be aware of the tax implications of holding or selling RSUs. When the restricted stock units vest, they are taxed as ordinary income based on the fair market value of the shares at the time of vesting. Typically, a percentage of your shares can be sold at vesting to cover tax withholding, but often not quite enough for high earners. That’s another conversation for another day.

An additional wrinkle is if the employee decides to sell the shares after vesting: capital gains tax may apply if the eventual sale price is higher than the price when the shares vested.

There isn't a one-size-fits-all approach to handling RSUs, and the best strategy will depend on your financial goals and risk tolerance.

Factors to Consider

When deciding whether to sell your RSUs immediately or hold onto them, there are several factors to consider.

Evaluating the Stock

Take a moment to assess the underlying company's stock and its prospects for future growth. If you believe the stock price will continue to rise, holding onto your shares may be an ideal choice. Conversely, if you anticipate the stock prices to fall, selling your RSUs immediately could save you from potential losses.

Your Financial Goals

Consider your personal financial objectives and how selling or holding onto your RSUs aligns with these goals. Are you aiming for concentrated long-term capital appreciation in one company’s stock? Are you aiming for more diversified long term growth? Or do you need the cash from the sale of your shares for more immediate needs? Reflecting on your priorities will help you make a more educated decision.

Tax Implications

RSUs are typically taxed as ordinary income, which means that when your shares vest, the value of the stock at the time is considered part of your annual earnings. Consequently, you'll have to pay taxes based on your ordinary income tax rate. This tax event will happen REGARDLESS if you decide to sell your shares immediately. If you hold onto them after vesting, you may also need to pay capital gains tax on any additional gains above the market value of the shares at the time they vested if you sell them more than one year later. Any shorter, and the growth is still only short-term. If the shares fall in price after vesting, you still pay ordinary income tax on the price when they vested!

Timing of Selling RSUs

Selling RSUs immediately upon vesting is a common approach for many individuals. The reason behind this strategy is to avoid any potential decline in the company's stock value. By selling right away, you can lock in the value of your shares and mitigate potential risks tied to stock market fluctuations. You’re also locking in your tax burden on those shares.

If you believe in the company's growth prospects and future performance, holding onto your RSUs could result in a higher return on investment. However, this requires carefully weighing the risks against potential rewards and considering your overall financial goals and risk tolerance.

In addition, if your employer has recently gone public and the stock is subject to a lock-up period, you might not be able to sell your RSUs until the lock-up period expires.

During the lock-up period, insiders and employees are prohibited from selling shares to prevent market flooding and volatility. This is an important factor to keep in mind as selling cannot happen immediately as desired.

Ultimately, the decision to sell RSUs should be based on a thorough evaluation of your personal financial situation, goals, and the potential tax implications.

Alternative Strategies

Not all RSU situations are created equally! Here are some alternative strategies and scenarios that may apply.

Hold Your RSUs

One approach is to simply hold onto your RSUs and defer selling them. This could allow you to potentially benefit from future stock price appreciation. However, holding your RSUs also exposes you to the risk of stock price declines, and keeps you more heavily concentrated in your company’s stock.

Double-Trigger RSUs

With private company RSUs, we often see what are called double-trigger RSUs. These require two events to occur before they vest, such as both a time-based and performance-based condition. Often, the second requirement is a liquidity event, like an acquisition or an IPO. These RSUs aren’t actually a taxable event until both conditions are met, which presents another double edged sword: you don’t have to pay taxes on illiquid RSUs if they haven’t vested, but when they do, the timing can be hard to predict.

Sell RSUs Gradually

Another option is to sell your RSUs gradually over time, instead of selling them all at once. This approach can help spread the risk of potential market fluctuations and avoid turning all of your vested stock into cash at once.

Weighing the pros and cons of immediate selling is critical to optimizing our financial situation. On one hand, selling RSUs immediately allows us to diversify our investments, reduce risk associated with holding too much company stock, and make use of the proceeds for other essential purposes. On the other hand, holding onto RSUs allows potential capital appreciation if the company performs well in the long run.

Ultimately, the decision to sell or hold RSUs depends on our individual financial goals, risk tolerance, and the assessment of the company's future prospects. It's essential to consider tax implications, investment portfolio balance, and how quickly we can reinvest the assets into something more aligned with our financial objectives.

If you're still unsure about the best course of action for your RSUs, consider seeking the advice of a trusted financial advisor. Our team specializes in helping professionals navigate complex financial decisions, ensuring that you make the best choice for your future.

By: AJ Ayers, CFP®

Summary:

RSUs are taxed as ordinary income at vesting and as capital gains when sold, with cost basis being the fair market value at vesting, and strategic planning with a financial advisor can optimize taxation and investment decisions.

Imagine you're a new grad software engineer, and you've just been offered a jaw-dropping median RSU value of $300,000 over 4 years at a top tech company.

Sounds like a dream, right? But do you know how to calculate the cost basis of these RSUs? Or that the median estimated tax withholding rate on RSU vesting events is around 40%?

If these numbers are making your head spin, don't worry. In this article, we'll break down these complex terms to help you make the most of your equity compensation.

RSUs, or Restricted Stock Units, are a form of equity compensation that companies grant to employees. They represent the promise of company stock at a future date based on meeting certain conditions, such as remaining employed for a set period or achieving specific performance goals.

Understanding the taxation of RSUs is essential for employees who receive this type of compensation. RSUs are subject to tax when they vest, meaning the employee has earned the right to receive the shares. At this time, the market value of the RSU shares is considered ordinary income and will be taxed at the employee's ordinary income tax rate.

It's important to note that the market value becomes the cost basis for the shares going forward.

For example, let's say you're granted 100 RSUs with a vesting schedule of 25% a year over four years. In year one, when 25 RSUs vest, the market value of those shares is $50 each. The taxable income on those shares is $1,250 (25 * $50), and you'll pay taxes based on your ordinary income tax rate.

Working with a financial advisor can help you make the most of your RSU compensation. They can help you determine when to sell the shares and manage any potential long-term capital gains.

If you hold the shares for more than a year after vesting, the gain from the sale will be taxed at long-term capital gains rates, which are typically lower than ordinary income tax rates.

Cost basis, in simple terms, is the original value of an asset for tax purposes. For RSUs, this would be the value of the stock on the date it vests. The cost basis is important because it's used to determine the capital gain or loss when you sell your shares, which impacts your tax obligations.

Several factors can affect the cost basis of your RSUs:

• Stock price: The price of the stock on the vesting date directly impacts your cost basis.

• Number of shares: The more shares you receive, the higher your cost basis will be.

• Value of the stock: This is the total value of the stock based on the number of shares and stock price on the vesting date.

To calculate the cost basis for your RSUs, follow these steps:

1. At the time your RSUs vest, note the stock price and number of shares. Keep in mind that your employer might withhold a portion of your shares for tax purposes, so the accurate number of shares might be adjusted after taxes.

2. Multiply the number of shares by the stock price on the vesting date. This will give you the value of the stock.

3. Because RSUs are considered income, the value of the stock on the vesting date is usually included in your taxable income. Your adjusted cost basis will be the value of the stock minus any tax withholding.

For example, let's say you receive 100 RSUs and the stock price on the vesting date is $50. You have a total stock value of $5,000. If your employer withholds 30% for taxes ($1,500), your adjusted cost basis would be $3,500.

Planning for RSU Taxation

RSUs are awarded by tech companies and other corporations as part of their compensation packages, and understanding how to handle the taxes associated with them can save you a significant amount of money come tax season.

First and foremost, it's essential to recognize that RSUs are generally taxed as ordinary income.

This means that as your RSUs vest, the value of the shares at the time of vesting will be considered part of your income and will be subject to the applicable income tax rates. To avoid any surprises when filing your tax return, you'll want to proactively estimate the potential tax liability on the vested shares and set aside funds to cover it.

One strategy to consider when managing RSUs taxation is to work with a trusted financial advisor who can help optimize your tax situation. Financial advisors can guide you through the complexities of incorporating RSUs into your overall tax planning and help you make informed decisions about when to sell the shares.

Long-term and short-term capital gains tax rates also come into play when discussing RSUs.

If you decide to hold onto your vested shares and sell them at a later date, any appreciation in the stock's value from the time of vesting to the sale will be subject to capital gains tax. If you hold the shares for more than a year, you will be subject to the more favorable long-term capital gains tax rates.

On the other hand, if you sell the shares within a year, the profit will be considered short-term capital gains and will be taxed at the higher ordinary income tax rates.

Remember that as RSUs vest, you may also have the option to make use of tax withholding to cover your income tax liability on the shares.

Handling RSU Vesting and Tax Reporting

When it comes to RSUs (Restricted Stock Units), understanding the vesting schedule and tax implications is crucial. We're here to help break it down for you and guide you through the process.

As RSUs vest, they are converted to actual shares of stock, which you own outright. The time of vesting varies depending on your company's policies and your employment agreement, but it's common to see vesting schedules that span over a few years, with a portion of RSUs vesting each year or quarter.

Once your RSUs vest, it's time to talk taxes. The value of your vested RSUs is considered taxable income and will be reported on your W-2 form.

The amount included in your income is based on the fair market value of the shares at the time of vesting. Keep in mind that your employer is required to withhold taxes upon vesting, typically at your federal tax bracket's rate.

But wait, there's more.

When you eventually sell your shares, you may need to report any capital gains or losses on your tax return. You can obtain this information from the Form 1099-B provided by your brokerage. The cost basis for these shares should be the fair market value at the time of vesting, as reported on your W-2.

It's important to stay on top of your RSU vesting schedule and be prepared for the tax implications that come with it.

Missing a vesting date or not handling the tax reporting correctly can lead to costly mistakes.

Maximizing RSU Benefits

Receiving RSUs can be an exciting and lucrative element of an employee's compensation package. To make the most of this opportunity, it's essential to understand how these stock grants work and employ an RSU strategy that maximizes their benefits. We'll discuss some essential considerations to help sophisticated professionals optimize their RSU investments.

One essential aspect of RSUs is their vesting schedule. A typical vesting schedule might permit an employee to gain access to a portion of their granted stock each month or year. Employees should understand their vesting schedule to accurately time when they can sell the shares acquired. The market price of the stock at the grant date has a significant impact on the value of these shares to the employee.

By staying informed about the company's stock price and potential market movements, employees can make better decisions regarding when to sell their shares. In this situation, seeking the advice of a trusted financial advisor could be beneficial.

Employees receiving RSUs should recognize that the value of these shares is directly tied to the success of the company. This implies that a diversified investment portfolio is crucial. When RSUs vest, it's crucial to consider the overall composition of one's investment holdings and make decisions accordingly.

Finally, it's essential to know the tax implications of RSUs. When the stock vests, the employee may have to pay income taxes based on the stock price at the time.

Again, working with a knowledgeable financial advisor can go a long way in making the right decisions for each individual's unique financial situation.

By: AJ Ayers, CFP®

Summary:

Restricted stock units (RSUs) have exploded in popularity as a form of equity compensation, but do the perks outweigh the quirks? As more companies offer RSUs, it's essential that employers and employees understand the incentives and tradeoffs.

Understanding RSUs

Restricted Stock Units (RSUs) are a form of company stock that employees may receive as part of their equity compensation package.

RSUs differ from stock options, which give employees the right to purchase shares at a predetermined price. Instead, they represent a promise by the employer to award a certain number of shares of common stock to the employee at a future vesting date.

When a company grants RSUs to an employee, the shares are not immediately available. The employee receives the shares when they meet certain conditions, such as working for the company for a specified period, reaching specific performance milestones, or other goals the company sets. When the RSUs vest, the employee receives the shares and can either hold on to them or sell them on the open market.

RSUs offer several benefits to both employees and employers.

For employees, RSUs provide a way to share in the company's success, acting as a motivating factor for their continued dedication to the company. The vesting requirements also help retain top talent and align employee interests with those of the company's shareholders. RSUs may also provide some tax advantages, as the employee is typically only taxed when the shares are received, not when the RSUs are granted.

For employers, RSUs can be a more cost-effective form of compensation than stock options. The company is not required to sell shares at a lower price, and they can easily control the number of shares issued through RSU grants, making it easier to manage their equity structure.

Key Differences between RSUs and Stock Options

Pros of RSUs

Firstly, RSUs align the interests of employees with those of the company's shareholders, motivating employees to work towards the company's long-term success. Naturally, when employees receive shares in the company, they become invested in the organization's performance, incentivizing them to ensure its growth and prosperity.

Retention and long-term focus are other advantages of RSUs. Typically, RSUs come with a vesting schedule, requiring employees to stay with the company for a specified duration before their shares vest. This structure reduces turnover and promotes a focus on the company's sustained success.

Cons of RSUs

First on our list, despite posing aforementioned advantages, is the long vesting periods that often accompany RSUs. These lengthy timelines may not provide enough incentive for employees to stay on board if they receive more alluring offers from rival companies.

Now let's discuss taxes – not exactly a thrilling topic, but an important one nonetheless. When RSUs vest, they become subject to taxation, and employees have little to no control over the timing of these tax payments.

How RSUs are Taxed

Let us break down each stage in the RSU lifecycle and its corresponding tax scenario.

At the grant stage, the employee is not subjected to any tax liability. We are in the clear during this phase, as an RSU grant is considered a promise, not a tangible asset quite yet.

As the RSUs vest, they then become taxable as ordinary income. The amount taxable is based on the stock's fair market value at the vesting date. At this stage, an employer needs to withhold federal, state, and local taxes along with employment taxes, such as Social Security and Medicare taxes.

Now, to cover these tax withholdings efficiently, the employer might withhold shares or offer a cash payment option.

Do keep in mind, though, that depending on your income, the withheld amount may not cover your entire tax obligation, so it's crucial to plan accordingly.

As for the final step, when you sell the shares obtained from RSUs, the difference between the sale price and the fair market value at vesting is subject to either short-term or long-term capital gains tax.

Bear in mind that long-term capital gains tax rates are generally lower than ordinary income tax rates, so if you can hold onto those shares for a longer period, you might save some money on taxes if they increase in value after vesting.

Clearly, dealing with RSUs and the various tax scenarios can be complex, which is where we come in to help. If you find yourself feeling overwhelmed, do consider seeking guidance from an accounting professional.

Strategies for Maximizing RSU Benefits

To help you make the most of your RSUs, we've put together some key strategies to ensure you're maximizing their value.

Firstly, it's essential to understand the details of your compensation package. Make sure you know the number of shares being offered, the grant date, and the graded vesting schedule. The value of the shares will likely fluctuate over time, so it's essential to keep yourself informed about the company's performance and any changes in the stock's value.

Managing your vested shares is another crucial aspect of maximizing RSU benefits.

Keep track of when your shares vest and develop a plan for what to do with them once they're no longer restricted. This could involve selling some shares to cover the tax withholding or holding onto them in hopes of future growth.

Diversifying your investments is always a wise move, and this applies to your RSUs as well. When your job offer includes equity compensation, it's easy to become overly focused on your company's stock.

However, maintaining a diversified portfolio will help protect you from potential downturns in the company's performance and ensure your financial stability.

Finally, don't underestimate the importance of staying informed. Keep up with company news, financial reports, and market trends to better understand your company's growth trajectory.

Navigating the world of RSUs can be a complex endeavor, filled with tax implications, vesting schedules, and strategic decisions about when to sell or hold your shares. While RSUs offer a compelling way to participate in your company's growth and secure your financial future, they also come with their own set of challenges and considerations.

If you're grappling with how to make the most of your RSUs, or if you're an employer looking to implement an effective equity-based compensation plan, professional guidance can make all the difference. Don't leave your financial future to chance. Contact a financial advisor at BKFi to help you unravel the complexities of RSUs and develop a strategy tailored to your unique needs.

By: AJ Ayers, CFP®

401(k) plans often wait years to fully own employer contributions, with vested stock options serving as complex but potentially lucrative benefits that encourage long-term employment and align employee and company interests. Let’s talk about what vested stock options are and explore the different types of vesting schedules and its impact.

How long are you willing to wait to fully own your retirement savings? The answer for American workers enrolled in 401(k) plans could be up to 6 years.

New data reveals that only 30% of 401(k) plans offer immediate vesting of employer matching contributions. The remainder spread employer matches over vesting schedules - with some taking as long as 5-6 years to fully vest.

In today's competitive job market, employee benefits like stock options can be the golden handcuffs that tether talent to a company. But how many of us truly understand the intricacies of vested stock options and their corresponding vesting schedules?

In this article, we'll delve deep into what vested stock options are, explore the different types of vesting schedules, and examine their impact on both employees and employers.

Vested stock options are a popular form of employee compensation. They provide employees the opportunity to purchase company shares at a predetermined price after meeting specific criteria.

Let's break this concept down further for a clearer understanding.

In the context of employee compensation, vesting refers to the process through which an employee earns the right to exercise (buy) a certain number of company stock options granted to them as part of their compensation package.

The vesting process is governed by the terms of the employee stock option agreement.

Stock options can be subject to various vesting schedules, but one common structure is the graded vesting schedule.

In graded vesting, a percentage of options vest each year over a specified period.

For example, an employee might be granted 1,000 stock options, with 25% of them vesting on each anniversary of the grant date for four years.

Restricted Stock Units (RSUs) and Employee Stock Purchase Plans (ESPPs) are two other popular types of equity-based compensation subject to vesting. RSUs represent a promise of shares to be delivered at a later date, usually upon vesting, while ESPPs allow employees to purchase company shares at a discounted price through payroll deductions.

Once the vesting period is complete and an employee can exercise their stock options, they can choose to buy the company's stock at the exercise price specified in the stock options agreement.

This price is typically the market price of the stock on the date of the option grant.

The decision to exercise the options is often based on the current stock price and the potential for future growth in the value of the company shares.

It's important to note that vesting stock options provide the employee the right, but not the obligation, to buy the company's stock.

If the stock price falls below the exercise price, employees may decide not to exercise their options.

This is because they could simply buy the shares at a lower price on the open market.

What Is the Purpose Behind Companies Offering Vested Stock Options?

There are several reasons why a company might decide to offer these types of incentives, with some key objectives being to attract top talent, retain employees, and align employee interests with those of shareholders.

One crucial aspect of a successful employee equity compensation plan is incentivizing employees to stay and strive for the organization's long-term success.

Vested stock options serve this purpose well: generally, the longer an employee remains at a company, the more stock options they gain the ability to exercise.

Another reason companies use vested stock options as a form of employee compensation is their potential for significant financial gains.

As an employee's stock options become more valuable over time, it motivates them to work harder and contribute to the company's overall success.

Offering vested stock options also allows a company to conserve cash.

Instead of paying out more significant cash salaries, companies can use stock options to compensate employees, thus freeing up cash resources for other business purposes.

Furthermore, offering vested stock options can help companies recruit top talent in competitive industries.

A prospective employee might be enticed by the potential rewards from equity compensation, leading them to choose the job offer that includes such incentives over others without.

What Happens When Stock Options Vest?

When an employee is granted stock options, they often come with a vesting schedule. This means that over a period of time, the employee gains ownership of their stock options.

Once stock options vest, it means that the employee has the right to exercise their options and buy shares of the company stock at a predetermined price, known as the strike price.

Vesting schedules can vary depending on the company and the specifics of the stock option grant, but a common example is a four-year vesting period with a one-year cliff.

In this scenario, if an employee leaves the company within the first year, they would not have vested any of their stock options.

However, after the one-year cliff, 25% of their options would vest, and then typically, the remaining options would gradually vest on a monthly basis over the next three years.

If an employee leaves the company after some of their options have vested, they typically have a limited window to exercise their options and obtain company shares.

This window can vary but is often around 90 days.

If they choose, they can exercise the vested options and convert them into company shares, which they can hold onto or sell, depending on their financial strategy.

Exercising stock options can have tax implications as well, so it's essential for employees to be aware of this and plan accordingly.

Types of Vesting Schedules

When it comes to vested stock options, there are several types of vesting schedules that can be implemented. In this section, we will discuss three main types of vesting schedules: Time-Based Vesting, Milestone-Based Vesting, and Hybrid Vesting. Understanding these different schedules will help you make informed decisions when it comes to your stock options and financial planning.

Time-Based Vesting

Time-based vesting is the most common form of vesting schedule. In this case, a portion of your stock options will vest over a specified period, typically over a four-year vesting schedule. For example, a typical vesting schedule might have a four-year vesting term with a one-year cliff, meaning that 25% of your options will vest after the first year, and then the remaining options will vest monthly or quarterly over the next three years.

This type of vesting is often used by companies to encourage employee retention and loyalty, as the longer an employee stays with the company, the more options they stand to gain.

Milestone-Based Vesting

Milestone-based vesting, as the name suggests, involves options vesting upon the achievement of specific goals or milestones. These milestones can be company-related, such as reaching a specific revenue threshold, or personal, such as the completion of a crucial project.

This type of vesting is designed to incentivize employees to work hard and achieve significant objectives, while aligning the interests of employees and shareholders. It is important for both parties to agree on the milestones and the associated vesting to prevent misunderstandings and disputes.

Hybrid Vesting

Hybrid vesting is a combination of the two previous methods: time-based and milestone-based vesting. As such, a portion of the options will vest according to a time-based schedule, while other portions will vest upon the achievement of specific milestones.

For instance, a company could implement a hybrid vesting schedule with a four-year time-based term for 50% of the options, and the remaining 50% tied to specific milestones. This approach balances the benefits of both vesting methods, enabling the company to reward employees for their tenure while also incentivizing the achievement of crucial goals.

Difference between Cliff, Graded, and Accelerated Vesting

When it comes to employee stock options, understanding the vesting schedules is crucial. In this section, we will briefly discuss the three main types of vesting schedules: cliff, graded, and accelerated vesting.

Cliff Vesting is an all-or-nothing approach to vesting stock options. In this scenario, employees must wait a predetermined period (usually one to four years) before they are fully vested. If employees leave the company before reaching this point, they do not receive any stock options.

However, once the cliff vesting period is over, employees become fully vested and can exercise all their options.

Graded Vesting is a more gradual approach to vesting stock options. Under this schedule, an employee becomes incrementally vested over time until they are fully vested.

For example, an employee may become 20% vested after one year, 40% after two years, and so on. At each vesting milestone, employees can exercise a portion of their stock options assuming the stock market price is meeting their expectations.

Accelerated Vesting is a special circ*mstance where employees become fully vested at an earlier date than their original vesting schedule. Accelerated vesting can occur due to performance milestones, change in company ownership, or in some cases, upon the discretion of the company's board of directors.

The advantage of accelerated vesting is that it allows employees to access their stock options sooner, potentially locking in profits before market fluctuations affect the value of the stock. However, it's essential to consider the income tax implications, as exercising stock options can trigger tax liabilities.

Vested Stock Option Scenarios

Vesting Terms of the Employee Stock Options

• Grant Date: July 1, 2021

• Number of Shares: 12,000

• Vesting Schedule:

• Five-year vesting schedule

• Six-month cliff

• 1/54 of the remaining shares vest monthly thereafter

Vesting Stock Scenarios

Employee leaves after 3 months

In this scenario, if an employee leaves after just three months, they would not have vested any shares. This is because of the 'six-month cliff', which means the employee must stay for at least six months to be entitled to any of the option shares.

Employee leaves after 6 months

In this case, the employee would have earned 1,200 shares. This is because the six-month period is 10% of the five-year vesting schedule (6 months / 60 months = 1/10), thus earning 10% of the 12,000 option shares.

Employee leaves after 20 months

In this situation, 3,600 shares would have vested. Here's the breakdown:

• 1,200 shares would have vested after the initial six-month cliff.

• There are 54 months remaining in the vesting schedule after the six-month cliff, and the employee stays for an additional 14 months.

• 1/54 of the remaining 10,800 shares (12,000 - 1,200 = 10,800) would vest monthly.

• 14 months would mean 14/54 of the remaining 10,800 shares, which is 2,400 shares.

• 1,200 (from the cliff) + 2,400 (from the additional 14 months) = 3,600 shares vested.

Employee leaves after 40 months

In this case, 7,200 shares would have vested.

• 1,200 shares after the six-month cliff.

• 34 additional months (40 months - 6 months = 34 months)

• 34/54 of the remaining 10,800 shares would be 6,000 shares.

• 1,200 (from the cliff) + 6,000 (from the additional 34 months) = 7,200 shares vested.

Employee stays forever

In this ultimate scenario, the employee would have had the full 12,000 shares vest.

By: AJ Ayers, CFP®

Summary: The IRS announced higher contribution limits for 2024 for IRAs and 401(k)s.

Christmas came early this year for us Certified Financial Planners!

That’s right; the IRS just announced the new contribution limits for IRAs and 401(k)s and things are looking UP!

This update affords opportunities for those looking to boost their retirement savings while enjoying valuable tax benefits.

Key Highlights:

1. 401(k) Plans: The annual contribution limit for 401(k) plans will rise to $23,000 in 2024, up from the previous limit of $22,500. This means that you can contribute an extra $500 pre-tax dollars towards your retirement nest egg.

2. Traditional and Roth IRAs: For those utilizing Individual Retirement Accounts (IRAs), the contribution limit will increase to $7,000 in 2024, up from $6,500. This allows you to save an additional $500 in a tax-advantaged IRA.

3. Catch-Up Contributions: If you're aged 50 or older, there's more good news. The catch-up contribution limit for 401(k) plans and IRAs will also increase. For 401(k)s, you can contribute and extra $7,500, bringing the total to $30,500. The Catch-up for IRAs remains the same at an extra $1,000.

4. More Roths for the people. If you make too much money, you won’t be able to contribute directly to a Roth IRA, but the adjusted gross income phaseout range is going up. It’s $146,000 and $161,000 for single individuals and heads of households, up from between $138,000 and $153,000 in 2023. And for married folks filing jointly, the phaseout range is $230,000 and $240,000 in 2024, up from between $218,000 and $228,000 in 2023.

Tax Benefits: These increases provide you with the opportunity to save more for retirement while reducing your taxable income. Maximize these tax benefits by taking full advantage of the new contribution limits. While many BKFi clients make too much money to contribute to a Roth IRA , our ace team helps them legally go in “through the back door.”

In conclusion, the IRS's announcement of higher retirement contribution limits for 2024 is excellent news for anyone planning for a secure retirement. With these increases, you have the chance to save more and enjoy valuable tax advantages. That extra $500 in your 401(k) will compound over decades and can buy you a few more Mojitos in retirement.

Author: AJ Ayers

Summary: Lets’s talk about the importance of understanding the tax implications of RSUs and paychecks in a financial world obsessed with trends like crypto and AI.

In a world where financial chaos reigns supreme and trends like crypto, NFTs, and AI are the the talk of Twitter (or X or whatever we’re calling it these days) the boring stuff gets left in the dust. I’m talking of course about your RSUs and your paycheck.

With IPOs popping up like mushrooms after a rainstorm and many employees receiving company stock for the first time, RSUs are so hot right now. But while they might seem straight-forward, there are tax traps to watch out for.

Picture this: you've got RSUs with a typical four-year vesting period and a sly 25% tax withholding rate lurking in the shadows. Are you prepared to take on this financial adventure? Fear not, intrepid reader, for we've got your back!

Understanding the tax implications of your RSUs or other equity-based compensation is essential. With median RSU vesting periods of 4 years and estimated 25% tax withholding rates, you need to be prepared.

When it comes to RSUs (Restricted Stock Units), it's essential to understand the tax implications. Let's discuss how RSUs are taxed at the two major stages - vesting and when you sell them.

At the time of vesting, RSUs are generally taxed as ordinary income. That means when the shares are received, the fair market value of those shares serves as the taxable income. Since taxes are calculated at vesting, the tax withholding rate comes into play. While your salary is taxed at regular income tax rates, RSUs are seem as supplemental income and taxed at entirely different rates. That’s confusing AF. Typically RSUs are taxed at the rate of 22% for those with under ONE MILLION DOLLARS of income and at 37% for those with more than ONE MILLION DOLLARS OF INCOME. Wacky. So if you fall somewhere in between, you’re likely withholding the wrong amount of tax and there’s not much you can do about it. Well, except work with equity comp pros like us here at BKFi.

Also, RSUs are subjected to the same mandatory and discretionary payroll taxes as Medicare and Social Security. Remember that this tax treatment applies to both Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NQOs).

Now, let's review the tax implications when you sell the shares received from your RSUs.

If you decide to hold onto the shares after the vesting period, the subsequent sale of those shares could be subject to capital gains tax. The holding period for this tax calculation starts from the vesting date. The difference between the sale price and the price at vesting will determine your capital gain or loss.

Depending on how long you hold the shares, these gains will be taxed as either short-term (less than a year) or long-term (over a year) capital gains.

Long-term capital gains are often taxed at a lower rate compared to short-term gains.

Understanding the tax treatment of RSUs is crucial for optimizing your equity compensation strategy.

Why Your RSU Tax Withholding Might Make Your Total Withholding Too Low

When it comes to Restricted Stock Units (RSUs) and income tax, there is often confusion about the appropriate tax withholding rate.

First, it's essential to understand that RSUs are considered supplemental income. This means they are taxed separately from your regular income.

In most cases, the tax withholding rate for RSUs might be at the minimum required rate set by the IRS, which currently is 22%.

However, if your overall income tax rate is higher than this minimum, the withholding on your RSUs might not be sufficient, causing you to be underwithheld.

The vesting period plays a vital role in how your RSUs are taxed. Once your RSUs vest, they are considered income and are subject to income tax rates.

Another factor to consider is the timing of when your company stock vests.

Companies tend to grant RSUs in different schedules, and your overall income in the year the company stock vests may affect your tax rate.

If you experience a high-income year due to other factors such as a bonus or promotion, your tax liability may increase, and the RSU tax withholding might not be enough to cover your total tax obligations.

In some cases for employees who also have Incentive Stock Options, employees may have alternative minimum tax (AMT) considerations which can impact the amount of taxes owed.

The AMT is designed to ensure high-income earners pay their fair share of taxes and can result in an increased tax liability, making the RSU tax withholding rate insufficient to cover the entire tax bill.

Ultimately, it's crucial to evaluate your personal tax situation and consider all sources of income to determine whether your RSU tax withholding might lead to underwithholding.

It's always wise to consult with tax experts and plan accordingly, so you can avoid any unpleasant surprises come tax season.

How Does Termination or Leaving a Job Affect RSAs and RSUs?

When an employee leaves a company, their remaining Restricted Stock Awards (RSAs) and Restricted Stock Units (RSUs) can be affected. The way these stocks are treated depends on the specific vesting schedule laid out in the employee's stock agreement.

There are several types of vesting schedules, such as cliff vesting and graduated vesting. In cliff vesting, an employee must work a certain number of years before they are fully vested. In other situations, vesting may occur on a more gradual basis, occurring in increments over the vesting period.

RSAs and RSUs are designed to encourage employees to stay with a company for a longer period. A typical vesting schedule might include a four-year vesting period with a one-year cliff, meaning that after one year, 25% of the employee's RSAs or RSUs will vest. The remainder would then vest gradually over the following three years.

If an employee leaves before the end of the vesting period, they may lose any unvested equity. For instance, if the employee leaves after two years, they may only be able to keep 50% of their RSAs or RSUs, while the remaining 50% returns to the company.

In some cases, employees may also have a limited amount of time to exercise stock options once they leave a company. This exercise period can be highlighted in the employee's stock options agreement. If the employee does not exercise their options within this time frame, they may forfeit their right to these options.

Companies may offer various types of employee equity compensation, including RSAs, RSUs, and employee stock purchase plans (ESPPs). Each type of plan may have its own specific rules and provisions surrounding how the equity is treated when an employee leaves the company.

In summary, leaving a company can have significant implications on an employee's equity compensation. It's essential for employees to understand their stock agreements' terms and conditions and any deadlines they need to meet, such as exercising stock options.

Tax Liability for Restricted Stock Units

An an owner of company stock, it's important to understand how tax liabilities on restricted stock units (RSUs) are calculated. In this section, we'll discuss RSU tax withholding and RSU tax rates.

RSU Tax Withholding

When it comes to tax withholding on RSUs, the moment they vest, the income tax liability kicks in. This means that the vested RSUs are considered taxable income at the time they vest based on their fair market value. Employers typically handle income tax withholding by selling a portion of the vested RSUs to cover the employee's tax liability.

Keep in mind that RSUs are subject to ordinary income tax rates, not the more favorable capital gains tax rates applicable to stock options. However, if you hold the shares after the vesting period and sell them later, the difference between the stock price at vesting and the increased value when sold can be subject to the capital gains tax rates.

RSU Tax Calculation – Here's How to Check

When it comes to RSU tax withholding, it's essential to understand how the calculations work. In this section, we'll provide you with a brief guide on how to check RSU tax calculations using two approaches: the back-of-the-napkin estimated calculation and the in-depth estimated calculation.

The Back-of-the-napkin RSU Estimated Tax Calculation

For a quick, rough estimate of your RSU taxes, you can use this simple method. First, multiply the fair market value of the vested shares by the number of shares. This gives you the taxable income. Then, multiply this amount by your marginal tax rate to find the estimated taxes owed. In summary:

1. Taxable Income = Fair Market Value x Number of Shares

2. Estimated Taxes = Taxable Income x Marginal Tax Rate

Keep in mind that this approach provides a rough estimate and isn't all-inclusive, as it doesn't account for factors such as Social Security, Medicare, and state taxes.

The In-depth RSU Estimated Tax Calculation

For a more accurate calculation, start by determining the taxable income, using the same formula as explained in the back-of-the-napkin approach. Next, calculate federal income tax, Social Security, and Medicare taxes for this income.

1. Federal Income Tax = Taxable Income x Marginal Tax Rate

2. Social Security Tax = Taxable Income x Social Security Tax Rate (up to the annual cap)

3. Medicare Tax = Taxable Income x Medicare Tax Rate

Then, calculate your state and local taxes, if applicable. It's important to look up your state's tax rates for precise numbers.

1. State Income Tax = Taxable Income x State Tax Rate

2. Local Income Tax = Taxable Income x Local Tax Rate

Finally, add up all calculated taxes to find the total taxes owed on your RSUs.

1. Total Taxes = Federal Income Tax + Social Security Tax + Medicare Tax + State Income Tax + Local Income Tax

Remember, these calculations are still an estimation, and your actual tax liability may vary. Consult a tax professional or use tax preparation software for a more accurate assessment.

By following these simple steps and understanding how RSU tax calculations work, you are better equipped to manage your equity compensation and make informed financial decisions. Trust us at BKFi to guide you through the process, and feel free to reach out with any questions or concerns.

Conclusion

As we've discussed, RSU tax withholding rates can be essential to managing compensation. We understand the importance of keeping up-to-date with tax regulations and their impact on your financial situation. At BKFi, our financial advisors focus is on providing sophisticated, trustworthy, and intelligent advice tailored to the needs of our clients.

We don't just help with the technical aspects of financial planning; we take the time to understand each individual's unique goals and aspirations. In doing so, we create lasting relationships built on trust and mutual respect, leading to better financial outcomes for our clients.

Join us at BKFi, and together, we'll focus on your financial well-being, unlocking doors to a life of abundance and peace of mind.