That’s not a typo in the headline; this blog is directed toward intrapreneurs — folks who hold manager, VP and director positions at public companies. These ambitious leaders often self-select as, but since they work within large organizations, they have wealth-building opportunities that are nuanced and unique compared to sole proprietors and entrepreneurs.
As a financial advisor, it’s my job to help clients realize their full potential by looking at all aspects of building wealth. Here are four things intrapreneurs should be investigating as part of their wealth-building toolkits.
High-Deductible Health Plans
High-deductible health plans are unique in that they offer a Health Savings Account (HSA). While high-deductible plans don’t make sense for everyone, they can significantly benefit those who elect to have them because of the HSA feature. For 2019, the HSA contribution limits for singles and families are $3,500 and $7,000, respectively. It’s a good idea to max out your HSA every year because you can defer what isn’t spent on healthcare expenses year-to-year.
From a tax perspective, an HSA is similar to a Roth IRA in the sense that your growth and eventual distributions are tax-free. But unlike the Roth IRA, the HSA allows for your contributions to be pre-tax, making this one of the most unique accounts available to corporate employees. From an investment perspective, the money inside your HSA can be invested in various ways, although you should be sure to keep your individual needs and risk tolerance in mind. If you really want to get fancy, consider paying for any health expenses you incur throughout the year from your cash emergency fund, thereby leaving all the money in your HSA to be invested, growing tax-free for the future
Employee Stock Purchase Plans (ESPPs)
The most common equity participation option, ESPPs allow you to designate a portion of your salary to buying company stock at a discount, often 15 percent. Similar to your 401(k), ESPPs have a yearly maximum, which currently is $25,000/year from your salary. The price is determined by establishing an offering period, usually a six-month window, and comparing the closing price of the stock at its beginning and end. For instance, if the offering period is January 1 to June 30, and the stock was $100/share on January 1 and $110 on June 30 — you would be able to buy the shares at $85/share, a 15 percent discount off the January price.
ESPPs are beneficial because they’re another option for automatic, forced savings and can potentially appreciate over time. And, unlike your 401(k), there is more flexibility to use an ESPP for large expenses in the future or just to diversify. ESPPs have varying holding period requirements and associated tax implications. Be sure to check your company plan rules and coordinate with your tax advisor.
Restricted Stock Units (RSUs)
Unlike ESPPs, to which you designate a portion of your salary, RSU compensation is above and beyond your salary; shares can periodically be granted based on your overall compensation package. RSU grants often occur yearly, for example, 5,000 shares on February 1. Vesting schedules can vary, but often the timeframe is four years, with one-quarter of the initial grant vesting each year. In our example, 1,250 of the original 5,000-share grant would start vesting each year in the subsequent four years. At the time the 1,250 shares vest, you’re obligated to pay ordinary income taxes. Once shares vest, you’ll have the option to hold or sell the shares, depending on your individual situation.
RSUs are extremely valuable since they allow your net worth to increase beyond typical savings programs like a 401(k) or ESPP. If you’re receiving RSUs, make sure you have a game plan of how to incorporate this extra compensation into your short- and long-term financial goals, such as paying off debts, buying a home or diversifying your portfolio.
A key thing to consider for managers, VPs and directors is what I call RSU stacking. Let’s say for three consecutive years you receive grants of 5,000 shares. Over time, you’ll have a portion of each year’s grants start to vest, thereby stacking on top of each other. The reason this is important is twofold: you’ll need to be vigilant about knowing how concentrated you are in company stock over time, and your tax bracket may be significantly higher than years past, so you’ll need to coordinate with your tax advisor.
While most investors are familiar with Roth IRAs, few corporate employees know about Roth 401(k) contributions. Roth 401(k)s were introduced in 2001, but custodians have been slow to incorporate them into company plans. Even today, each plan is different, so I encourage you to check with your company to see if it’s available and if so, consider participating.
The most unique aspect of the Roth 401(k) is that you aren’t limited to contribute based on your income. For example, for singles who make more than $122,000 and families that make more than $193,000, you’re unable to contribute to a Roth IRA because you make too much. But, a Roth 401(k) contribution doesn’t have an income limit, so effectively you could make $500,000 a year and still be able to contribute. The only threshold you have to abide by is the 402(g) limit, or the yearly maximum — which in 2019 is $19,000 for those under age 50 and $25,000 for those over age 50.
Something to consider is deferring percentages of your salary to both your pre-tax 401(k) and Roth 401(k). Why would you do this? We don’t know what tax rates will be in the future, and I’m of the opinion that it’s best to give yourself options once you’re retired; this is a great way to diversify your savings buckets.
Of course, everyone’s financial situation is unique, so you should work with your tax professional and financial advisor to determine whether these non-traditional ways of building wealth are appropriate for you. It’s all about having options to ensure you’re able to enjoy the retirement you’ve dreamed about. I work with lots of intrapreneurs, so if you fit into that category and are intrigued by what you’ve read, let’s talk.
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