Healthcare Costs Threatening Your Retirement?
Healthcare expenses are a critical and often unpredictable component of any financial plan. As a successful professional, you can't afford to let surprise medical bills compromise your long-term goals for asset growth and legacy preservation. Our strategic framework outlines eight actionable steps to help you move from reactive expense management to proactive financial control. We'll show you how to leverage tax-advantaged accounts, optimize your insurance coverage, and integrate long-term care planning to safeguard your wealth against the rising cost of health.
Plan Now to Protect Your Wealth (And Sanity)
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For successful professionals and thriving business owners, achieving financial freedom is a journey mapped with investments, tax optimization, and legacy planning. You're not in retirement yet, but you're wisely looking ahead. However, a less-talked-about, yet potentially devastating, financial drain often lurks in the shadows, with the power to unravel even the best-laid plans: how healthcare costs impact retirement. These expenses, vital for ensuring the longevity to enjoy your carefully crafted financial plan, can be both unpredictable and substantial, presenting a unique challenge to your long-term financial goals and overall peace of mind.
You've dedicated years to building your wealth with diligence and foresight. Our objective now is to ensure that medical expenses, whether anticipated or a sudden surprise, never compromise your ability to grow assets or secure your family's future when you do reach retirement. With proactive planning for healthcare costs in retirement, these potential drains can be effectively managed, becoming a predictable component of your comprehensive financial picture rather than an unexpected and sanity-gutting threat to your future.
As a financial advisor specializing in integrating healthcare cost planning into broader financial strategies for clients like you, who are actively planning for retirement, I've compiled eight practical approaches. This guide will help you confidently manage these potential expenses now, keeping your financial progress steady and your future wealth secure.
Key Takeaways From This Article:
● Understand your current medical spending
● Plan ahead for expenses when possible
● Make sure your health plan works for you
● Take full advantage of your health benefits
● Comparison shop for medical services
● Maximize HSAs and FSAs
● Consider medical expense tax deductions
● Explore long-term care insurance
Understanding Your Current Medical Spending: A Baseline for Future Planning
Effective management of future healthcare needs begins with clear data. Take stock of your current healthcare expenditures to identify where your money is going. Reviewing past bills, bank statements, or patient portals can provide a comprehensive overview of your medical spending habits. This baseline is critical when you're planning for healthcare costs in retirement. Some key data to collect are items such as:
● Monthly health insurance premiums
● Copays and Coinsurance
● Prescription costs
● Vision and dental expenses
● OTC drugs and medical devices
Proactive Planning for Anticipated Medical Expenses: Don't Get Caught Off Guard
While medical emergencies are unforeseen, many healthcare costs can be planned for well in advance. Treating these expenses as a predictable part of your financial landscape allows for strategic preparation, safeguarding your retirement savings from medical costs. Some to consider are:
● Ongoing treatments for chronic conditions
● Maternity expenses or costs related to family expansion
● Elective procedures
● Genetic/hereditary conditions that will need to be addressed
Considering your family's health needs with a long-term perspective can help determine appropriate coverage and potential savings. Establishing a dedicated fund; such as an HSA, FSA, or even a cash reserve can ensure you're prepared without impacting your long-term strategy or incurring debt as you save for healthcare in retirement.
Optimize Your Health Plan: Is Your Coverage Aligned with Your Future Needs?
It's a common misconception that more extensive health coverage automatically equates to the best value, especially when planning for healthcare costs in retirement. Periodically assessing your health plan is crucial to ensure it aligns with your actual usage and your long-term financial objectives. Are you paying for benefits you rarely utilize, or are out-of-pocket costs becoming a burden?
● Low-Deductible Health Plans (LDHPs): These plans typically feature higher monthly premiums but lower out-of-pocket costs for medical services. They may be suitable for individuals with chronic health conditions or regular medical needs, providing immediate financial predictability.
● High-Deductible Health Plans (HDHPs): Characterized by lower monthly premiums and higher deductibles, these plans often offer eligibility for a Health Savings Account (HSA), which offers significant tax advantages for saving for future medical expenses. HDHPs can be an effective choice for healthy individuals with fewer anticipated medical expenses, particularly those focused on building substantial HSA for retirement planning.
Andrew's Insight: For many of my clients, an HDHP combined with an HSA proves to be a fiscally sound strategy. The blend of lower premiums and a tax-advantaged savings vehicle for future medical costs offers both immediate and long-term benefits, helping you fortify your retirement planning against medical costs.
Maximize Available Health Benefits: Don't Overlook Valuable Resources for Future Wellness
Your health plan often includes more than just coverage for illness or injury. Utilizing preventive care and wellness programs now can lead to both health improvements and financial savings by addressing issues before they become more complex or expensive, thereby reducing medical expenses in retirement.
● Annual physicals and routine screenings: These are an investment in your long-term health, helping to prevent more significant health issues down the road.
● Mental health services, fitness discounts, and wellness initiatives: Many plans offer these, contributing to overall well-being and potentially reducing your future healthcare needs.
Andrew's Insight: If a claim is denied, investigate. Errors occur, and a simple inquiry can often resolve coverage issues, saving you from unnecessary expenses. It’s a small effort now that can yield tangible financial returns later, protecting your retirement savings from medical costs.
Comparison Shop for Medical Services and Prescriptions: Smart Spending for Today and Tomorrow
When you can plan ahead for medical expenses, use the time to shop around for better pricing. Collaborate with your healthcare provider and insurer to obtain accurate cost estimates. Compare costs for prescriptions, procedures, and medical appointments (without sacrificing quality, of course). Generic medications, for instance, are often a cost-effective alternative to brand-name drugs, helping you stretch your healthcare budget as you plan for healthcare costs in retirement.
Leverage HSAs and FSAs: Powerful Tools for Saving for Healthcare in Retirement
If eligible through an HDHP, a Health Savings Account (HSA) is an invaluable tool for saving for healthcare in retirement. Similarly, Flexible Spending Accounts (FSAs), if offered by your employer, can provide significant tax advantages for common medical expenses such as copays, dental work, prescriptions, and vision care. These accounts are crucial for optimally planning for medical expenses in retirement.
Be aware, however, that there is a variation in utility between HSAs and FSAs, especially regarding their long-term potential for retirement planning:
● HSAs: These accounts offer a triple tax advantage: pre-tax contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. This translates into substantial tax efficiency for your healthcare spending. These accounts can accumulate value year after year and are portable, meaning they are not tied to a specific employer, making them ideal for long-term medical expenses retirement savings.
● FSAs: Funded with pre-tax dollars, these accounts typically operate on a "use it or lose it" basis within the plan year, though some employers offer limited grace periods. This account is employer-sponsored, meaning if you are to leave your employer, any funds in the account are forfeited. While useful for current expenses, they lack the long-term retirement savings benefits of an HSA.
Andrew's Insight: Beyond immediate expenses, an HSA can serve as a potent long-term savings vehicle. Funds roll over annually and can be invested, growing tax-free. Consider covering future medical needs in retirement with an account that has compounded tax-free for decades. This is a powerful component of comprehensive financial planning for healthcare and a key strategy to mitigate how healthcare costs impact retirement.
Consider the Medical Expense Tax Deduction for Significant Costs: A Potential Relief Valve
For years with unusually high medical expenditures, you may be eligible for a tax deduction. If your qualified unreimbursed medical expenses exceed 7.5% of your Adjusted Gross Income (AGI) and you itemize deductions, this can provide notable tax relief, helping to alleviate the burden of significant medical expenses on your retirement savings.
Eligible expenses can include:
● Fees for doctors, specialists, and mental health professionals
● Inpatient hospital care
● Prescription medications
The IRS has a complete list of medical expenses which are eligible for deducting.
Long-Term Care Insurance: Safeguarding Your Legacy
While Medicare provides crucial support once you reach retirement, its coverage for long-term care needs, such as in-home care, assisted living, or nursing facilities, is limited. Long-term care insurance fills this critical gap, helping to protect your accumulated assets and ensuring that future care costs do not erode your legacy plans or retirement savings.
Exploring this option earlier can lead to more favorable premiums. For example, acquiring a policy in your 40s when in good health typically results in lower costs than waiting until later in life when health issues may arise. This proactive step is a key part of planning for healthcare costs in retirement and securing your financial future.
Ready to Integrate Healthcare Planning into Your Financial Strategy?
Managing healthcare costs doesn't have to be a source of stress as you plan for retirement. As part of your holistic financial plan, we can help you strategically address these expenses. Our objective is to ensure that medical costs are a managed component of your financial journey, allowing you to focus on achieving financial freedom and securing the legacy you envision for your family.
Questions we can solve together:
● How can I plan for the costs of a future medical procedure?
● I don't have access to an HSA; where should I save money for future medical expenses that might arise?
● How much should I contribute to my HSA to maximize its benefits for my financial future and retirement planning?
● What are the best strategies for saving for healthcare in retirement given my specific financial situation?
● How can long-term care insurance fit into my overall retirement plan?
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Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
Fiduciary Financial Advisors does not give legal or tax advice. The information contained does not constitute a solicitation or offer to buy or sell any security and does not purport to be a complete statement of all material facts relating to the strategies and services mentioned.
"All-Time-High" Anxiety? Relax.
We’ve all felt the anxiety when the market hits a new all-time high. But what if that feeling is based on a media narratives and emotion, rather than logic? We'll use data to explain why the market isn't defying anything, it's just doing its job; and why staying the course on a well-defined plan is more important than timing the market.
The Market Isn't Defying Gravity. It's Just Doing Its Job.
Read Andrew’s Story
Key Takeaways
Market highs are not a red flag. The fear that an up market "must come down" is a myth. All-time highs are a sign that the system is working exactly as it should and are a normal and expected part of a market with a positive expected return.
Market prices aren't arbitrary numbers. A stock is a "perpetual claim ticket" on a company's future earnings and dividends. Its value isn't fighting a force of nature but is based on the collective judgment of its future profitability.
Patience beats panic. Data shows that investing at a market high has generated similar returns to investing after a sharp decline over the subsequent one, three, and five years. Your efforts to improve results by trying to time the market is more likely to penalize them.
Your mind is your biggest opponent. The real challenge isn't the market itself, but managing the emotional responses it triggers. A disciplined strategy is more important than trying to time the market
Time, October 15, 1990 (High Anxiety); Money, August 1997 (Don’t Just Sit There… Sell Stock Now!)
There's a persistent myth in financial news, especially when the market is climbing: that stocks are "defying gravity" and are due for a painful fall. You see the headlines; the ones that talk about the market "heading back to Earth". It's a great story, but it's a terrible metaphor for how markets actually work.
Your investments aren't heavy objects being kept aloft by some mysterious effort. They're not a hot air balloon that must eventually descend. They are, in a far less poetic but more accurate sense, perpetual claim tickets on companies' future earnings and dividends. The value of a stock isn't fighting a force of nature; it's simply a reflection of the market's collective judgment on a company's future profitability. In other words, when stocks hit a new high, it's not a sign that the system is broken; it's a sign that it's working as expected.
Think about it: every day, thousands of businesses are working to innovate, grow, and generate profits. Their success, over time, is what drives market values higher. To put it bluntly, it would be difficult to imagine a scenario where investors freely put money into stocks with the expectation of losing money.
The Data Doesn't Lie.
The idea that you should avoid buying at market highs is a powerful emotional signal, but the data tells a different story. In fact, reaching new record highs is a normal and expected outcome if stocks have a positive expected return. Over the 94-year period ending in 2020, the S&P 500 Index produced a new high in more than 30% of those monthly observations.
But here’s the the real take: a study from Dimensional Fund Advisors shows that purchasing shares at all-time records has, on average, generated similar returns over subsequent one-, three-, and five-year periods to those of a strategy that purchases stocks following a sharp decline:
The numbers don't show a clear advantage to waiting for a drop. All they show is that staying invested pays off over time.
The Real Job of a Financial Advisor
Your biggest opponent isn’t the market; it's your own mind. Our human brains are conditioned to think that after a rise, a fall must follow, tempting us to "fiddle" with our portfolios. But as the data shows, these signals only exist in our imagination, and trying to act on them can hurt your long-term results.
That's where I come in. My job isn’t to predict the market, it’s to help you navigate your emotions and stick to the plan we've built together. It's about ensuring your portfolio is structured to handle the market's ups and downs so you can focus on what really matters: your business, your family, and your legacy.
We’re not fighting the laws of physics. We're embracing the power of a disciplined strategy.
Let's Talk About Your Strategy
If you're a business owner or a successful professional, you've already built your wealth on a foundation of discipline and long-term vision. Let’s make sure your financial plan is built with the same strategy.
Frequently Asked Questions (FAQ)
Q: What is "all-time-high anxiety"?
A: This is the common feeling of apprehension or hesitation that investors experience when stock prices reach a new record high. This feeling is often fueled by the belief that "what goes up must come down" and that a market downturn is imminent.
Q: Should I wait for the market to drop before investing more?
A: The data suggests that trying to time the market in this way is not an effective strategy. A study showed that purchasing stocks at all-time records has, on average, generated similar returns over subsequent one-, three-, and five-year periods to a strategy that purchases stocks following a sharp decline.
Q: How does a financial advisor help with this type of anxiety?
A: A financial advisor helps by providing a disciplined, long-term strategy. My role is to help you navigate your emotions and biases so you can stick to your plan, allowing you to focus on your personal and professional life while your wealth works for you.
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Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
Fiduciary Financial Advisors does not give legal or tax advice. The information contained does not constitute a solicitation or offer to buy or sell any security and does not purport to be a complete statement of all material facts relating to the strategies and services mentioned.
Your Business May be Your Rocket Ship. But Where is Your Mission Command?
Your business is a rocket ship; an unparalleled engine for wealth creation. But relying on it for 100% of your net worth creates a dangerous concentration risk and is one of the biggest financial mistakes an owner can make. The single most important move for your family's long-term security is to consistently and strategically move money out of your business. This video is not about being less committed to your company; it’s about building a financial fortress around it. We break down the four critical strategies for building your family's "Mission Command": a structure of outside assets that protects your wealth, funds your life, diversifies your tax strategy, and secures your legacy for generations to come. Are you the CEO of your business, or the CEO of your family's future?
Why the smartest thing a successful business owner may do is systematically build wealth outside their company.
Read Andrew’s Story
Key Takeaways
Diversify Your Wealth: Relying solely on your business for wealth creates dangerous concentration risk. Building outside assets provides critical diversification.
Fund Your Life Separately: Use outside wealth to fund personal milestones like retirement and education, decoupling them from your business's performance.
Embrace Tax Diversification: Complement your business's pre-tax retirement plans with post-tax Roth accounts and taxable brokerage accounts to hedge against future tax changes.
Build a Complete Estate Plan: A true legacy plan goes beyond a will and includes trusts, powers of attorney, and strategies for liquidity and gifting to protect your family and assets.
In our last discussion, we broke down why comparing a dynamic business like the Lakers to a passive S&P 500 fund was like comparing a rocket ship to a passenger train. The business, with its leverage, cash flow, and tax advantages, is an unparalleled engine for wealth creation.
And I stand by that. Your business is likely the cornerstone upon which your family's greatest financial assets will be built.
So, what I'm about to say might feel a little hypocritical: The single most important financial move a successful business owner may make in their career is to consistently and strategically move money out of their business.
This isn't about being less committed to your company. It’s about being more committed to your family's long-term security. You’ve already built the empire; now it's time to build the fortress around it.
What is Concentration Risk for a Business Owner?
Being the owner is exhilarating. You control your destiny. The flip side? All of your financial destiny is tied to a single asset. We love to talk about diversification when it comes to a stock portfolio, but we often ignore the fact that for most owners, their business represents the least diversified portfolio imaginable.
It’s like being a Michelin-star chef who only eats his own cooking. The food is brilliant, but you’re crippling future growth by not expanding your, or your family’s, horizons.
Market shifts, industry disruption, a key employee leaving, or your own health can put the entire enterprise at risk. This is concentration risk. You've spent years building your golden goose; a savvy financial plan ensures you have a stockpile of golden eggs held safely in a completely different basket.
Why Fund Your Personal Goals Outside the Business?
Your company's balance sheet is not your personal balance sheet. The business needs to retain capital for growth, but your life has its own capital requirements. Systematically building wealth outside the business allows you to firewall your personal goals from your business's performance.
Retirement on Your Terms:
You may plan to sell the business for your retirement, but what if the perfect buyer doesn't show up the month you want to hit the golf course? What if the market is in a downturn and valuations are compressed? A separate, liquid nest egg gives you the power of choice. It means you can retire when you want to, not when you have to.
Funding Life’s Big Moments:
Your daughter's wedding, your son's college tuition, that vacation home you've been dreaming of; these things shouldn't be dependent on your company's Q3 revenue. Funding these goals with assets completely decoupled from your business removes immense pressure from both you and the company.
What is Tax Diversification and Why Does It Matter?
In the last article, we’ve established the incredible tax advantages of running a business; from deducting vehicles to super-charging retirement accounts. Plans like a 401(k) or a Cash Balance Plan allow for massive pre-tax contributions that lower your income today. But true tax strategy, like investment strategy, benefits from tax diversification.
Building wealth outside the business opens up a new set of tools:
The Roth Bucket:
Business retirement plans are fantastic for those massive pre-tax contributions, but you're creating a future tax liability. By funding Roth IRAs (or executing Roth conversions), you use post-tax dollars to build a bucket of money that is 100% tax-free in retirement. This is a critical hedge against the uncertainty of the future tax landscape
The Taxable Brokerage Account:
It sounds simple, but having a standard brokerage account, funded with after-tax money, is a cornerstone of liquid wealth. It's not locked up in a retirement plan, and when you sell assets held for more than a year, you benefit from lower long-term capital gains tax rates. It’s your financial multi-tool: liquid, flexible, and tax-efficient.
What Does a Complete Estate Plan Look Like?
For many business owners, an "estate plan" often means having a will and a buy-sell agreement. While essential, that’s like a master builder commissioning the quarrying of a mountain of exquisite marble but only drafting a blueprint for the front steps of the actual building he’s constructing. A true estate plan is the full architectural design for the entire multi-generational estate your business has given you the power to build.
The goal is to construct a legacy that protects your family from taxes, probate, and internal conflict. This requires several key structural elements:
Powers of Attorney and Medical Directives:
These are the most crucial, yet often overlooked, documents. Who makes financial decisions for your business and personal life if you're incapacitated? Who makes healthcare decisions on your behalf? Without these directives, your family could face a costly and agonizing court process to gain control, leaving your business and assets in limbo when they need stability most.
Trusts:
A Revocable Living Trust is the foundational drawing for your entire estate. It dictates how your non-business assets are structured and distributed, ensuring they pass to your heirs without the costly, time-consuming, and public process of probate. It provides the framework for the entire structure, giving you control over the final design
Strategic Liquidity:
This is where the challenge of fairness comes in, especially when some children are in the business and others aren't. How do you ensure equity without having to dismantle the main structure? This is where life insurance can become a critical utility. Often held within a specialized trust (like an ILIT), a policy can provide a tax-free, liquid infusion of capital to provide a cash inheritance to non-participating children or give the estate the cash needed to pay hefty estate taxes.
Strategic Gifting:
The tax code allows you to give to your heirs' by gifting significant amounts to them each year (as well as over your lifetime) tax-free. A strategic gifting program, specifically one where the gifts are given with a specific intended goal, methodically reduces the future size of your taxable estate while allowing you to see your family enjoy the security and comfort you’ve worked so hard to create.
Are You a Business Owner or a CEO of Your Family's Future?
Loving your business and protecting your family's future are not mutually exclusive goals. In fact, the latter requires you to look beyond the former.
Building a fortress of outside assets; liquid investments, tax-diversified accounts, and legacy-protecting trusts: is what separates a successful business owner from the founder of a financial dynasty. It’s the difference between merely launching a rocket and establishing a Mission Command that directs the entire operation.
Your business may be your powerhouse for creating wealth. A plan that strategically moves that wealth into your family's Mission Command is the blueprint for ensuring your mission succeeds for generations to come.
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Frequently Asked Questions (FAQ)
Q: Why should a business owner build wealth outside of their company?
A: Business owners should build wealth outside their company to diversify away from the concentration risk of having all their assets tied to one entity. This strategy provides liquidity for personal goals, creates retirement options not dependent on a business sale, and enhances family legacy planning.
Q: What is tax diversification for an entrepreneur?
A: Tax diversification is the strategy of holding wealth in different types of accounts to minimize future tax burdens. It involves balancing pre-tax retirement accounts (like a 401(k)) with post-tax accounts (like a Roth IRA) and taxable brokerage accounts, providing flexibility against a changing tax landscape.
Q: What are the most important parts of an estate plan besides a will?
A: For a business owner, a complete estate plan should also include: 1) Powers of Attorney and Medical Directives for incapacitation, 2) a Revocable Living Trust to avoid probate, and 3) strategies for liquidity (often using life insurance) and gifting to manage estate taxes and ensure fairness among heirs.
Q: How can a business owner ensure fairness when leaving the business to only some of their children?
A: A common strategy is to use life insurance, often held in a trust, to provide a tax-free cash payout equal to the business's value to the
Recent Publications Featuring Andrew:
Podcasts Featuring Andrew:
Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
Fiduciary Financial Advisors does not give legal or tax advice. The information contained does not constitute a solicitation or offer to buy or sell any security and does not purport to be a complete statement of all material facts relating to the strategies and services mentioned.
Business Ownership vs. Index Investing: A Deeper Look at the Buss/Lakers Debate
A popular stat suggests indexing the S&P 500 would have been a better investment than Jerry Buss's purchase of the Lakers. This article dismantles that myth, revealing how the real math of leverage, cash flow, and tax efficiency tells a much different, and more profitable, story about building true wealth through ownership.
Why the viral stat about the Lakers' sale misses the point on how real wealth is built.
Read Andrew’s Story
There's a fascinating piece of financial trivia that often circulates among investors and sports fans alike. It lays out a simple, and seemingly mind-blowing, comparison:
At first glance, the takeaway seems simple: even owning a storied franchise like the Los Angeles Lakers couldn't beat a simple index fund. But for savvy owners, advisors, and executives, this comparison immediately raises red flags. It represents a fundamental misunderstanding of how strategic wealth is built, and it overlooks the immense financial and personal advantages of business ownership.
This article is for anyone who suspects there's more to the story. We’re going to go beyond the surface-level analysis and break down what the one-dimensional math ignores, from the real financial returns to the priceless advantages that ownership provides.
Key Takeaways:
IRR vs. ROI: When accounting for leverage and annual cash flow, the Lakers investment likely produced an Internal Rate of Return (IRR) more than double that of the S&P 500.
Tax Efficiency: Business owners can use before-tax dollars and deductions (like Section 179 and QBI) to significantly increase their financial efficiency compared to passive investors.
Priceless Returns: The true value of ownership includes non-financial returns like legacy, hands-on experience, and networking opportunities that an index fund cannot provide.
The Problem with the $13 Billion Number
Let me be clear: the S&P 500 is a fantastic investment tool, and its long-term performance is a powerful force for passive wealth creation. The problem isn’t with the index; it's with using it as a simplistic benchmark against a complex, multi-faceted asset like a business. The headline comparison falls apart under the weight of two realities that every business owner understands intuitively: Leverage and Cash Flow.
The Initial Investment Wasn't $67.5 Million in Cash
The first flaw in the comparison is the initial figure. Jerry Buss was a master of the deal. The $67.5 million transaction was for a portfolio of assets that included the Lakers (NBA), the Los Angeles Kings (NHL), The Forum arena, and a 13,000-acre ranch. More importantly, the deal was incredibly complex and highly leveraged. It involved multiple escrows, property swaps (including a transaction involving the Chrysler Building), and the efforts of over 50 lawyers. While the exact cash out of his pocket is not public, reports from the time estimated that Buss’s actual cash invested in the entire transaction may have been as low as $125,000, not including closing costs. Another analysis suggests his down payment was closer to $16 million. Let's be conservative and use the higher figure. If a $16 million investment grows into a stake worth billions, the return multiple is astronomical; far exceeding the S&P 500. This is the power of using leverage to control an asset, a tool unavailable to a typical index fund investor.
The Final Sale Price Ignores 45 Years of Income
The second, and arguably bigger, flaw is that the $10B valuation only represents the asset's value at the end. It completely ignores the decades of annual income the Lakers generated for the Buss family. The Lakers are a financial powerhouse. Even going back a decade, Forbes estimated the team's operating income for 2015 was $133 million. For the 2022-2023 season, their revenue was $516 million with an operating income of $159 million. This doesn't even account for the team's league-leading local TV deal with Spectrum SportsNet, worth hundreds of millions per year. While precise distributions are private, the publicly available data shows that the team generated billions in both revenue and profit over the Buss family's ownership tenure. That profit is money that could be enjoyed, reinvested in other ventures, or used to more quickly service the very debt that bought the team in the first place. This is why, for complex assets, a simple return multiple is the wrong tool. The only way to properly measure a deal like this is with a metric that accounts for all the cash flows (in and out) over the entire life of the investment: the Internal Rate of Return (IRR).
A Tale of Two IRRs: The Headline vs. Reality
The table below models the two approaches. The first column details the 'headline' scenario, which assumes an unlevered $67.5 million investment in the S&P 500. The second column models the more realistic 'reality' scenario of a leveraged $16 million investment in the Lakers, including estimated annual distributions.
The key takeaway is staggering. The Lakers ownership deal generated nearly an identical total net profit, but did so using less than a quarter of the initial capital and produced an IRR that was more than double that of the S&P 500.
The Money You Don’t See (Cash Flow & Perks)
The fundamental error in the "S&P is better" argument is its failure to recognize that a business is not a static number on a screen; it’s a living, breathing engine designed to generate income. The final sale price of an asset like the Lakers ignores the decades of cash flow produced along the way. This ongoing financial benefit generally comes in two forms: direct compensation and integrated perks.
The Annual Paycheck: Salary & Distributions
Unlike a passive stock holding, a profitable business pays its owner. For an active owner, this typically begins with a reasonable salary for the work they perform in the company. This is the reward for the day-to-day effort of running the enterprise. But the more significant reward comes from the profits. After all expenses are paid, including that salary, the remaining profit (the "net income") belongs to the owner and can be taken as a distribution (or dividend). This is the direct return on investment an owner receives for their capital and risk. This ability to generate cash without selling the underlying asset is a cornerstone of an owner's financial freedom
The "Lifestyle Asset": An Apples-to-Apples Look at Your Dollars
Beyond direct pay, the ability to run legitimate expenses through a business creates a massive financial advantage through the power of paying with before-tax dollars versus after-tax dollars. To show the real-world impact, let's create a clear, apples-to-apples comparison using only the 2025 federal income tax brackets for simplicity. Imagine two individuals: one is a high-income salaried employee, and the other is a business owner. Both need a new $80,000 vehicle. For an employee at this income level, their earnings for that purchase alone would place them in the 24% federal marginal tax bracket if they were to purchase the vehicle outright. This means the last dollars they earn, the ones they'd use for a large purchase, could be taxed at an even higher rate.
The Salaried Employee:
To have $80,000 in cash to buy the car, they must first earn that money and pay federal income tax on it. To get $80,000 of take-home pay, they would need to earn approximately $105,263. After paying 24% in federal taxes on those earnings (about $25,263), they are left with the $80,000 they need.
$105,263(Gross Pay)−$25,263(24%Federal Tax Owed)=$80,000(Net Pay)
The Business Owner:
The owner also needs an $80,000 vehicle, which will be used solely for legitimate business purposes. The business can purchase the vehicle directly. That $80,000 is a business expense. Thanks to tax provisions like Section 179 or bonus depreciation, the business may be able to deduct the full purchase price from its income in the first year. This deduction reduces the business's taxable income by $80,000, saving the company (and by extension, the owner) $19,200 in federal taxes (24% of $80,000).
The Bottom-Line Impact
To afford the exact same vehicle, the employee had to use $105,263 of their gross earning power. The business owner, by using their company as the purchaser of the vehicle, effectively only used $60,800 of their earning power ($80,000 cost - $19,200 tax savings). This isn't a loophole; it's a fundamental principle of the tax code designed to encourage business investment.
A Masterclass in Tax Efficiency
If cash flow is the engine of day-to-day wealth, then tax strategy is the high-performance oil that keeps that engine running at maximum efficiency. It's not about 'finding loopholes'; it's about strategically using a rulebook that is specifically designed to reward business investment and growth. For a business owner, the U.S. Tax Code provides a rich and dynamic playbook for legally minimizing tax liability. This advantage is built on three pillars: choosing the right foundation, understanding the full universe of deductions, and leveraging industry-specific opportunities.
The Foundation: Why Your Entity Structure is Your Financial Blueprint
Before a single dollar is earned, the most critical decision a business owner makes is choosing their entity structure. This choice dictates how profits are taxed, what deductions are available, and how the owner is compensated.
LLC (Limited Liability Company):
A popular starting point, the LLC is a legal entity (not a tax entity) that offers liability protection. Many sole proprietors will elect to have this treated as a "disregarded entity" for tax purposes, making filing simpler as it can all be done on their personal return: the 1040. As income increases, the next step is to choose how the entity is taxed.
S-Corporation (S-Corp):
For many profitable small businesses, the S-Corp is the gold standard of tax efficiency. It allows the owner to pay themselves a reasonable salary (subject to payroll taxes) and then take any additional profits as distributions. These distributions are not subject to self-employment taxes, which can result in thousands of dollars in annual tax savings compared to taking all compensation as salary.
C-Corporation (C-Corp):
The structure of major enterprises like the Lakers, a C-Corp is a separate tax-paying entity. While its profits are subject to corporate income tax, potentially leading to double taxation, it offers maximum flexibility for growth, raising capital, and providing more extensive, and deductible, employee benefits; many of which can also be additional forms of compensation for the owner.
The Universe of Deductions: Lowering Taxable Income Year After Year
Once the structure is set, owners can leverage a vast array of legitimate business expenses to lower their taxable income. We saw the power of this with the vehicle example, but it extends much further into building personal wealth.
A Deeper Dive: Super-Charging Retirement Savings
This is where your choice of entity becomes incredibly powerful. A primary example is in retirement savings. While a traditional employee might be limited to their company's 401(k), a business owner can establish plans with dramatically higher contribution limits. Let's look at the popular Solo 401(k) for an owner with no employees. For 2025, the savings potential is split into two parts:
The Employee Contribution: The owner acts as their own "employee" and can defer up to 100% of their salary, up to a maximum of $23,500 for 2025.
The Employer Contribution: The business then acts as the "employer" and can contribute up to 25% of the owner's compensation. The power is in combining them. The total contributions from both sources cannot exceed $70,000 for 2025. This allows a business owner to save nearly three times more in a tax-advantaged account than a typical employee, drastically reducing their current taxable income while accelerating their retirement goals. A SEP IRA is another strong option, consisting solely of employer contributions up to 25% of compensation.
This entire strategy is made possible by the salary and compensation structure you can create with the right business entity.
For owners looking to save even more aggressively, a Cash Balance Plan can be a powerful tool. This is a type of "private pension" that allows for massive, age-dependent, tax-deductible contributions that can often exceed six figures annually. These plans can also be used in addition to a 401(k), allowing for a stacked approach that can drastically reduce a high-income owner's tax bill while rapidly building wealth.
Other High-Impact Deductions
Beyond retirement, an owner has a toolkit of other powerful deductions to enhance financial efficiency:
The Qualified Business Income (QBI) Deduction: Also known as Section 199A, this is one of the most significant deductions available to owners of pass-through businesses (S-Corps, partnerships, sole proprietorships). It allows for a deduction of up to 20% of qualified business income directly from your taxable income. It's a complex deduction with limitations based on income level and business type, but for those who qualify, it's an incredibly powerful tax-saving tool.
Health Insurance Premiums: For self-employed individuals and S-Corp owners, the cost of health insurance premiums is often 100% deductible, turning a major personal expense into a significant tax deduction. For businesses electing to file as a C-Corp, the premiums for all employees are deductible to the business.
Asset Depreciation: This is a game-changer. When a business buys a significant asset: be it manufacturing equipment, computer hardware, or even a sports stadium; it can deduct the cost over time. Provisions like Section 179 and bonus depreciation often allow an owner to deduct the entire cost of an asset in the year it was purchased, creating a massive, immediate reduction in taxable income.
Industry-Specific Opportunities: It's Not Just for Sports Teams
Different industries also benefit from tailored tax incentives designed to encourage specific economic activities. This proves that tax advantages aren't just for billion-dollar franchises. Some examples are as follows:
Real Estate Investors: Beyond standard deductions, real estate professionals can use depreciation as a powerful tool to create losses that can offset other income. Advanced strategies like cost segregation studies can accelerate this depreciation, maximizing tax savings in the early years of owning a property.
Tech & Manufacturing: These industries can benefit from the R&D Tax Credit, a significant dollar-for-dollar credit for expenses related to innovation and improving products or processes.
Professional Services (Doctors, Lawyers, Consultants): For these owners, the primary advantage often lies in optimizing the S-Corp structure for salary and distributions and maximizing contributions to sophisticated retirement plans, like a defined benefit or cash balance plan, which allow for even larger, six-figure deductions.
The Priceless Premiums: Legacy, Experience, and Opportunity
If we stopped after the financial analysis, we would still be missing the most important part of the story: the elements of ownership that don't appear on a balance sheet but represent what is often the deepest forms of wealth. An index fund can give you a return. A business can give you a life. This "builder's premium" is a powerful form of return that manifests in three key areas:
The Legacy Asset: Building for the Next Generation
You cannot teach executive-level life skills by showing your children a brokerage statement. An entrepreneur creates an environment where the next generation can gain hands-on experience. When Jerry Buss passed away, he didn't just leave his children stock; he left them an empire. This is the ultimate goal for many entrepreneurs: creating a generational asset that provides purpose and opportunity not only for them, but those they most care about.
The Experiential Return: The 'Fun' Factor
A purely numerical comparison misses a simple, undeniable fact: the journey of building a business is often its own reward. The passion, the challenges, and the victories create a psychological income that can be more valuable than any financial return. The word "wealth" itself is derived from an Old English term for a state of being happy and healthy, not the financial riches that we often equate it with in modern times.
The Opportunity Network: Doors Opened and Deals Done
Owning a significant business creates a universe of opportunities that passive investing cannot. It puts you in rooms with other high-level operators, investors, and centers of influence. This network is, in itself, an asset that can lead to new ventures and strategic partnerships far beyond the scope of the original business.
Are You Building a Nest Egg or an Empire?
So, where does this leave our comparison? We've seen that the initial headline stat withers under scrutiny when you account for leverage, cash flow, and tax efficiency. The financial return on an asset like the Lakers is in a different universe than that of a passive index. But the analysis runs deeper. We've explored the benefits that can't be quantified: legacy, experience, and other opportunities.
The S&P 500 is an exceptional tool for building wealth passively. But it is just that: a tool. It is not an engine for creating a family legacy or a tax-efficient cash flow machine. To compare it to owning and building a business isn't just comparing apples to oranges; it's comparing a passenger train to a rocket ship. Both can move you forward, but they operate in entirely different dimensional planes with vastly different purposes.
Ultimately, your financial strategy must reflect what you are trying to build. If your goal is simply a number, a passive approach may be sufficient. But if you are building an engine for your family, for your life, for your future; you need a financial partner who understands that your business may be your most powerful asset. You need a plan that enhances its growth, not one that fights it.
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Frequently Asked Questions (FAQ)
Q: Is owning a business a better investment than the S&P 500? A: While the S&P 500 is an excellent passive tool, this analysis shows that a well-run business, utilizing leverage, cash flow, and tax advantages, can offer a significantly higher Internal Rate of Return and provides non-financial benefits like legacy and experience.
Q: What is the biggest tax advantage of an S-Corp? A: A primary advantage is the ability to pay yourself a "reasonable salary" and take remaining profits as distributions, which are not subject to self-employment taxes.
Q: What is the IRR? A: The Internal Rate of Return (IRR) is a financial metric that calculates an investment's profitability by accounting for all cash inflows and outflows over its entire lifetime, making it more accurate for complex assets than a simple return on investment.
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Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
Fiduciary Financial Advisors does not give legal or tax advice. The information contained does not constitute a solicitation or offer to buy or sell any security and does not purport to be a complete statement of all material facts relating to the strategies and services mentioned.
How to Choose Your Business Structure: A Guide to Minimizing Taxes & Liability
Compare business structures like LLC, S-Corp, C-Corp, & more. Learn how each impacts your taxes, personal liability, and growth.
When you're building a business, the structure you choose isn't just paperwork: it has real consequences for how you're taxed, how much risk you take on personally, and how your business can grow. Whether you're just starting out or thinking about restructuring, it's worth understanding the core differences between the main types of business entities.
This guide will walk you through the most common business entity types: Sole Proprietorships, General Partnerships, LLCs, S-Corps, and C-Corps, explaining their key differences in liability, taxation, complexity, and suitability for various business stages. Our aim is to provide clear, actionable information to help you make an informed decision.
Sole Proprietorship
The sole proprietorship is the simplest and most common way to operate a business. If you’re running things solo and haven’t formally registered a business entity with your state, chances are you're already a sole proprietor by default.
Best for: Freelancers, individual consultants, or entrepreneurs testing a new, low-risk business idea who prioritize simplicity and minimal administrative burden.
The main upside here is simplicity in setup and taxes. There’s no need for formal registration beyond local licenses, and profits or losses are reported directly on your personal tax return, making tax filing relatively straightforward.
However, this simplicity has a significant drawback: unlimited personal liability. Because there's no legal separation between you and the business, your personal assets (savings, car, home…) are at risk if the business incurs debt or is sued. On the tax side, you’ll also pay self-employment tax (Social Security and Medicare) on the totality of your net income. There’s no legal way to split your income to reduce your payroll tax burden.
In short, sole proprietorships are fine for testing an idea or running a low-risk side hustle, but they can become a liability, literally, as soon as you grow.
General Partnership
If you’re going into business with someone else and don’t form an LLC or corporation, you’re likely operating as a general partnership by default. Like sole proprietorships, partnerships are pass-through entities, meaning the business doesn’t pay its own taxes. Instead, profits and losses flow through to the partners’ individual returns.
Best for: Two or more individuals starting a business together who prefer a simple operational structure and have a high degree of trust, while understanding the implications of shared and personal liability.
A partnership is easy to form, often just a handshake and an agreement will suffice, but that lack of formality can be dangerous. A critical vulnerability is operating without a clear, written partnership agreement. This document should explicitly detail ownership percentages, profit/loss distribution, responsibilities, and crucial procedures for dispute resolution, partner departure, or dissolution. Without it, disagreements over finances or business direction can quickly escalate into costly legal battles."
The biggest concern? Liability. In a general partnership, each partner is personally liable for the actions of the business, and for the actions of the other partners. One bad decision by your partner could financially wreck you. On the tax side, you’re also on the hook for self-employment taxes on your share of the profits.
Partnerships can work well when trust is strong and risk is low, but without a formal structure and legal safeguards, you may have unnecessary exposure.
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Single-Member LLC (Disregarded Entity)
For solo business owners who want simplicity and liability protection, the single-member LLC is a powerful option. Legally, an LLC (Limited Liability Company) is a separate entity from you as an individual, meaning your personal assets are protected if the business faces a lawsuit or debt collection as long as you follow basic corporate formalities. This includes keeping business and personal finances separate (e.g., separate bank accounts), and, depending on your state, may involve things like holding regular meetings or filing annual reports.
Best for: Solo entrepreneurs seeking robust personal asset protection combined with the simplicity of pass-through taxation and greater operational flexibility than a sole proprietorship.
From a tax perspective, the IRS treats a single-member LLC as a "disregarded entity" by default. That means the business doesn’t pay its own taxes; all profits flow through to your personal return just like a sole proprietorship. You still pay income tax and self-employment tax on all profits, but you gain legal protection, which is a major upgrade.
One of the best features of an LLC is its flexibility. As your business grows, you can choose to have the LLC taxed as an S Corporation or even a C Corporation, giving you more options for managing taxes. And since LLCs are recognized in all 50 states, they offer a good balance of legal protection and ease of use.
If you're serious about your business but not yet ready to take on the complexity of a corporation, a single-member LLC is often the smart move.
S Corporation (S-Corp)
Once your business is generating consistent profits, it might make sense to elect S-Corp status. The S Corporation (S-Corp) is not a distinct business entity itself, but rather a special tax election that an eligible LLC or C-Corp can make. Its primary attraction for profitable businesses is the potential for significant savings on self-employment taxes. As an S-Corp owner actively working in the business, you must pay yourself a 'reasonable salary,' which is subject to payroll taxes (Social Security and Medicare). However, any remaining profits can be taken as distributions, which are generally not subject to self-employment taxes.
Best for: Profitable LLCs whose owners wish to reduce their self-employment tax burden... and eligible C-Corporations seeking to switch to pass-through taxation to avoid double taxation on profits, provided they meet S-Corp ownership and operational requirements.
In an S-Corp, you pay yourself a reasonable salary, which is subject to payroll tax, and take the rest of the profits as distributions, which are not subject to self-employment tax. That can lead to significant tax savings once your profits justify the extra paperwork. Determining and documenting a 'reasonable salary' is crucial and should reflect what similar businesses would pay for comparable services. The IRS scrutinizes this, so it’s wise to research industry benchmarks or consult a tax professional.
You also get liability protection as long as you keep your business and personal finances separate and follow corporate formalities. But S-Corps come with rules: you're limited to a maximum of100 shareholders, all of whom must be U.S. citizens or residents, and you can only issue one class of stock. You’ll need to run payroll, file quarterly reports, and submit a separate tax return for the business.
If you’re earning more than you’d reasonably pay yourself in salary, and you want to protect your assets while legally reducing your tax bill, the S-Corp structure can be a great fit.
C Corporation (C-Corp)
Best for: Startups and larger businesses aiming to raise significant capital from external investors (like venture capitalists), offer stock options to employees, or plan for an eventual public offering, and that require maximum flexibility in ownership structure.
C-Corps are the go-to structure for startups that plan to raise money, issue stock, or scale aggressively. They offer the most robust liability protection, the most flexibility in ownership (no limits on the number or type of shareholders), and can retain earnings within the business for future investment.
The primary tradeoff for this flexibility and protection is potential double taxation. First, the C-Corp pays corporate income tax on its profits (currently a flat 21% federal rate). Then, if those profits are distributed to shareholders as dividends, the shareholders pay personal income tax on those dividends. While strategies exist to mitigate this, it’s a key consideration.
C-Corps also come with more complexity. You’ll need a board of directors, formal bylaws, annual meetings, and detailed records. You’re also more likely to need legal and accounting help on an ongoing basis.
For many small business owners, the C-Corp structure is overkill. But if you’re aiming to raise venture capital, issue employee stock options, or eventually go public, it’s the right vehicle.
There’s no one-size-fits-all answer when it comes to business structures. What works for a freelancer just starting out is very different from what makes sense for a tech startup looking to raise capital. For many solo entrepreneurs, starting as a single-member LLC and later electing S-Corp status provides a good balance of simplicity, protection, and tax savings. Partnerships need strong agreements and careful planning, and C-Corps should be reserved for businesses with big growth ambitions and complex funding plans.
The key is to choose a structure that aligns with your business's current stage, financial situation, and future ambitions. As your business evolves, your needs may change, and restructuring might become beneficial. I recommend reviewing your business structure periodically with legal and financial professionals to ensure it continues to serve your best interests.
Frequently Asked Questions (FAQ)
What is the cheapest business structure to set up?
Generally, a sole proprietorship is the cheapest and simplest, often requiring no formal state filing beyond local business licenses. LLCs typically have state filing fees but offer liability protection.
Can I change my business structure later?
Yes, you can change your business structure as your business grows or your needs change (e.g., converting an LLC to an S-Corp for tax purposes, or a sole proprietorship to an LLC for liability protection). This usually involves specific legal and tax procedures, and certain changes may have specific IRS rules or waiting periods before further changes can be made.
Do I need an EIN for my business structure?
You'll likely need an Employer Identification Number (EIN) if you operate as a partnership, LLC (in most cases), corporation, or if you plan to hire employees or open a business bank account, regardless of structure. But regardless on requirement, it is always advisable to operate your business with an EIN.
Which business structure offers the best tax benefits?
It depends on your profits and specific situation. Pass-through entities like sole proprietorships, partnerships, and standard LLCs avoid corporate-level tax. S-Corps can offer self-employment tax savings for profitable businesses but can be more expensive to file taxes and keep up with accounting. C-Corps have different tax implications and benefits, especially if reinvesting profits heavily.
How does liability protection work with an LLC or Corporation?
An LLC or corporation creates a separate legal entity from its owners. This means that, generally, the personal assets of the owners are protected from business debts and lawsuits, provided corporate formalities (like separate finances) are maintained. This is often referred to as the 'corporate veil.’
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Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
Fiduciary Financial Advisors does not give legal or tax advice. The information contained does not constitute a solicitation or offer to buy or sell any security and does not purport to be a complete statement of all material facts relating to the strategies and services mentioned.
Equity Compensation: Strategies for Business Owners and Executives
Discover strategies to maximize owner compensation, attract and retain key employees, and foster long-term business success with tailored incentives, equity-based rewards, and retention-focused programs.
Equity compensation: whether it’s stock options, restricted stock units, deferred compensation plans, or other incentives can be powerful for both wealth-building and as a tool to retain and grow top talent. For business owners and executives, it offers an opportunity to align your financial success with the growth of your company. But without a strategy, these rewards can quickly become a source of unnecessary complexity and risk.
Here we’ll explore key considerations for managing equity compensation effectively while highlighting strategies to minimize tax burdens and maximize long-term benefits.
Understanding Equity Compensation: A Quick Overview
Equity-based compensation comes in several forms, and each has its own rules and opportunities. Here are the most common:
Incentive Stock Options (ISOs)
Offer favorable tax treatment if you meet holding period requirements.
If sold too early, gains are taxed as ordinary income instead of capital gains.
Nonqualified Stock Options (NSOs)
Taxed as ordinary income at exercise, based on the difference between the exercise price and market value.
Any subsequent growth is subject to capital gains tax when sold.
Restricted Stock Units (RSUs)
Taxable as income upon vesting, with the stock’s market value determining the tax hit.
Holding shares after vesting exposes future gains to capital gains taxes.
Deferred Compensation Plans
Allow you to defer taxable income to a future date, ideally when your income—and tax rate—are lower.
Planning payout timing is critical to avoid high tax bills.
Net Unrealized Appreciation (NUA)
This is a strategy for 401(k) holders with company stock, where you can reduce taxes on the growth of your stock by shifting it from ordinary income to long-term capital gains.
Each of these compensation forms has the potential to have a lasting, positive effect on your wealth; but only if you navigate the accompanying tax and financial complexities strategically.
The Tax Factor: What You Need to Know
Taxes are the single biggest factor to consider when managing equity compensation. Poor timing can mean losing a significant portion of your rewards to tax liabilities. Here’s a simplified breakdown:
ISOs and AMT
Incentive Stock Options are a tax-friendly tool, but exercising too many in one year can trigger the Alternative Minimum Tax (AMT). Proper planning, like spreading exercises across multiple years, can help mitigate this.
RSU Vesting and Taxes
When RSUs vest, you’re hit with ordinary income tax on their full value. Depending on how frequently you’re issued RSUs and if your company stock is performing well, you may be tempted to hold onto those shares. But this could leave you overexposed to a single stock.
Deferred Compensation Risks
Deferred compensation allows you to kick taxes down the road, but you’ll need to carefully coordinate distributions with your broader income to avoid bumping into higher tax brackets. Additionally, depending on how the agreement is written, there may be additional risks such as if the company goes bankrupt, is sold, or employment separation isn’t in alignment with the terms of the agreement.
NUA Benefits
If you hold company stock in a 401(k), rolling it into a brokerage account under NUA rules lets you pay long-term capital gains rates on its growth instead of ordinary income tax rates often cutting your tax liability nearly in half.
Giving thoughtful consideration to your tax strategy ensures you’re making the most of what you’ve earned while keeping more in your pocket.
Strategies to Maximize Equity Compensation
Managing equity compensation isn’t just about taxes—it’s about using these assets to meet your broader financial goals. Here are three strategies to get you started:
Diversify to Manage Risk
As passionate as you may be about the outlook of your company, holding too much company stock ties your financial future to one asset, leaving you vulnerable even if the only risk couldn’t have otherwise been planned for. As soon as RSUs vest or you exercise stock options, consider selling to diversify your portfolio into other investments. This spreads risk while still allowing you to benefit from your company’s success.
Plan the Timing of Exercises and Sales
For ISOs and NSOs, timing is everything. Aim to exercise stock options in years when your taxable income is lower to minimize the impact. Similarly, holding shares long enough to qualify for long-term capital gains can significantly reduce the taxes you pay on appreciation.
Leverage Tax-Advantaged Strategies
Tools like deferred compensation and NUA are underutilized opportunities to save on taxes. Deferred comp payouts scheduled during retirement years, when your income is typically lower, can make a huge difference. Likewise, using NUA rules for company stock in your 401(k) can transform a steep tax bill into manageable long-term capital gains.
The Bigger Picture
Equity compensation is about more than just growing wealth. It’s about aligning your decisions with your long-term financial goals. Whether you’re a business owner structuring a succession plan or an executive navigating your compensation package, the right strategy can help you turn potential into reality.
That said, equity compensation is rarely one-size-fits-all. Your strategy should account for your risk tolerance, income level, and long-term goals. A financial advisor can be a valuable partner in navigating these complexities, helping you optimize your decisions at every step.
If you’re ready to take the next step in managing your equity compensation, start by evaluating your current position and identifying opportunities to optimize. And remember thoughtful planning today lays the foundation for tomorrow’s success.
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Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
Fiduciary Financial Advisors does not give legal or tax advice. The information contained does not constitute a solicitation or offer to buy or sell any security and does not purport to be a complete statement of all material facts relating to the strategies and services mentioned.
Healthcare expenses are a critical and often unpredictable component of any financial plan. As a successful professional, you can't afford to let surprise medical bills compromise your long-term goals for asset growth and legacy preservation. Our strategic framework outlines eight actionable steps to help you move from reactive expense management to proactive financial control. We'll show you how to leverage tax-advantaged accounts, optimize your insurance coverage, and integrate long-term care planning to safeguard your wealth against the rising cost of health.