Executive Benefits – Ballast Advisors

Pension Payout Options

When you think of retirement, you probably envision the enjoyable ways you will spend your free time. But, you may also want to give some thought to receiving your funds while in retirement. If you participate in a company pension plan, you will have to decide how you want to receive your pension proceeds. Consider … Read more

Restrictive Covenants in Employment and Related Contracts

It’s common for businesses to court talented executives with a variety of perks, including signing bonuses, stock options, and nonqualified deferred compensation plans to supplement regular pensions and retirement savings. While it may be understandable that companies would like to “lock-in” valuable executives with “one-way” employment agreements (sometimes referred to as “golden handcuffs”), many top … Read more

Help Wanted: Why Can’t Businesses Find Enough Workers?

The headline U.S. unemployment rate fell from 6.7% at the end of December 2020 to 3.9% in December 2021, marking the biggest one-year improvement in history.1 While many workers took advantage of this strong rebound in the job market, companies large and small have been struggling with labor shortages. A conspicuous lack of workers has snarled … Read more

Five Financial Mistakes You Should Avoid

These simple steps might save you a great deal of money and heartache

We all make mistakes, and through them, we learn. But when it comes to finances, it is best not to take the trial-and-error approach.

Maybe you’re making some simple mistakes that can be fixed with a little bit of effort. Your financial advisor can help.

Five Financial Mistakes to Avoid

Avoiding some of the following financial mistakes might save you a great deal of money and heartache.

1. Cashing out a retirement account to pay off loans. Substantial income tax penalties can hit you if you tap into retirement accounts before a certain age. Even if there are no penalties, cashing out an entire account at once potentially puts you in a higher tax bracket.

The amounts you withdraw before you reach 59½ are called early or premature distributions. They may be subject to an additional 10% tax. (As always, there are some exceptions to this rule, so consult with a qualified financial advisor or the Internal Revenue Service.)

The COVID-19 pandemic forced many people to tap into retirement accounts to pay mounting bills and loans. This was a measure of last resort, but the moral of this story is: If you have to take a distribution, you should at least understand the tax implications up front and mitigate the impact.

2. Missing retirement account rollover dates. You can move your wealth around by receiving a check from a qualified retirement account and deposit that money into another retirement account within 60 calendar days.

If you miss the deadline, the IRS treats the amount as a taxable distribution. Further, your 401(k) plan provider withholds 20% for federal income taxes. You have to add funds from other sources equal to the gross distribution to avoid possible tax penalties.

The lesson here? Rollover your accounts using a trustee-to-trustee transfer whenever possible. Having your custodian send your funds to another directly may be a better way to do a rollover.

3. Failing to update beneficiaries. Forgetting to remove a former spouse’s name as the beneficiary on retirement accounts or insurance policies happens. This could result in failing to provide for your children, a new spouse or other loved ones. Check your beneficiary designations annually and when a major life transition, such as a marriage, divorce or birth, occurs.

4. No will. If you do not have a will, when you die, the laws of intestacy determine who receives your assets. Drafting a will helps you maintain control of these important matters. Speak with an attorney to discuss preparing a will that documents where you want your money to go when you’re gone. Once you draft the Copyright © 2021 FMeX. All rights reserved. Distributed by Financial Media Exchange. will and name the beneficiaries or guardians, review it every few years and when things in your life change.

5. No power of attorney. A power of attorney (or POA) is an important document that allows you to select a point person (often a spouse or trusted family member) to make decisions on your behalf. This person can access your finances and help with bills, medical expenses and sign tax returns.

If you do not have a POA in place, and you become incapacitated, your family has to petition the courts for a conservatorship. This process often takes months, costs thousands of dollars and thus compounds the financial pressure.

The lesson here is to speak with an attorney to help select a POA, and while you’re at it, discuss a healthcare proxy, your agent would make medical decisions on your behalf, should you be unable to convey your wishes.

Your Financial Advisor

Ensuring your financial house is in order presents some complicated issues that require expert advice.

Find a financial advisor who knows how to deal with these types of issues. Find a financial advisor who knows the ins and outs of various retirement accounts. Find a financial advisor who accounts for unexpected cashflow crunches. Find a financial advisor who understands how emotions can interfere with your investing plans. Find a financial advisor who understands your goals.

Then make a smart decision and have your financial advisor build you a custom–tailored financial plan. So you can sleep better at night.

To learn more about Ballast Advisors Financial Advisors in Woodbury, Arden Hills, and Punta Gorda, click here.

_{The opinions expressed herein are those of Ballast Advisors, LLC and are subject to change without notice. The third-party material presented is derived from sources Ballast Advisors consider to be reliable, but the accuracy and completeness cannot be guaranteed. Ballast Advisors, LLC (“Ballast” or the “Firm”) is a federally registered investment adviser with offices in Minnesota and Florida. Registration does not imply a certain level of skill or training. More information about the firm, including its services, strategies, and fees can be found in our ADV Part 2, which is available without charge upon request.}

Open Enrollment Season is Around the Corner

Reviewing your benefit choices to maximize what your employer offers

Open enrollment for employee benefits kicks off on November 1st. Before you plan your Thanksgiving menu, you should make the time to review your benefit choices. Employee benefit experts expect benefits to change next year like few years before – given the rising costs of health care and the impact of COVID-19 on businesses this year. Even if little changed in your life in 2020 – and that’s probably unlikely – you should aim to maximize what your employer offers. Here are a few pointers.

Medical

Even if you carry the same plan as in many past years, spend a few minutes evaluating which one is best for you and your family when you choose – especially High-Deductible Health Plans and traditional plans.

Switching from the traditional plan to a high- deductible option might save money if you don’t visit the doctor much. Perhaps too your spouse’s company now offers a better plan and you can switch the family coverage to the better alternative. Improved employer plan descriptions lay out plans’ differences and costs and do that much better this year. Take advantage of their free help, online or in person.

Dental

Often you receive only one choice for dental coverage, but you might be surprised at how many people decline to pay the relatively small premium for this coverage. Even if young and cavity-free, you take care of your teeth now to potentially prevent large dental bills in retirement.

If nothing else, dental insurance provides a teeth- cleaning twice a year.

Vision

This benefit works great if you wear glasses or contacts and need regular eye exams. Those with perfect vision may opt out of this coverage.
Life Insurance Most employers offer some basic life insurance, the coverage usually a multiple of your salary. If you are married, own a home or have kids, this basic coverage usually falls short. Consider paying extra if possible, to increase life coverage through your employer. If that’s not an
option, consider supplementing this minimal coverage with a term policy from an independent provider. These policies come with set duration limits on coverage and you decide whether to renew once the policy expires.

Remember that whatever life coverage your employer pays for vanishes if you leave that company.

Long-Term Disability

Standard coverage in this category usually pays 60% to 66% of your compensation if you become disabled and unable to work. As this coverage often comes with a cap, if you are highly compensated, this insurance might also fall short to sustain your standard of living. Estimate your
minimum to live on if you become unable to work and, if that number scares you, consider purchasing a supplemental policy.

Long-Term Care Insurance

This pays for assisted living, a nursing home or in- home care late in your life. Even as our lifespans increase, long-term care premiums escalate. If your employer offers any coverage at a relatively inexpensive group rate, consider locking in some protection. Financial advisors normally recommend LTCI when you turn age 50 – getting it while you are young and healthy under an employer plan may still make sense.

See Related Post:

Flexible Spending Account

This savings account reduces your taxable income and funds medical co-pays, orthodontist appointments and prescription drug orders, among other expenses. Figure your out-of-pocket medical costs and sign up to set aside that amount, up to $3,550, pre-tax in an FSA and $7,100 for families. Remember that if you participate in an HDHP, you maintain a related health savings account and can only take advantage of a
limited FSA. Either way, pay for the most of out-of-pocket medical costs with pre-tax dollars.

Dependent Care Flexible Spending Account

If you pay for day care, after-school programs or summer day camps for children under age 13 or for elder care for a dependent parent, DCAs help you offset that cost with pre-tax dollars. Again, a working couple can set aside up to $5,000 from paychecks.

Life Planning Resources

This wide-ranging employee benefit is being offered more and more, from simple mental-health hotlines to complete menus of services. For instance, if you lack a will, many companies now offer reduced-rate or even complimentary legal services to establish your basic estate planning
documents. Others offer financial planning and weight-loss programs – sometimes even gym memberships.

Your Financial Advisor

Finally, while your employer will offer resources to help you navigate the menu of employee benefits, your financial advisor is well versed in ensuring your benefits are consistent with your overall financial plan and is a great resource too.

The opinions expressed herein are those of Ballast Advisors, LLC and are subject to change without notice. The third-party material presented is derived from sources Ballast Advisors consider to be reliable, but the accuracy and completeness cannot be guaranteed. Ballast Advisors, LLC is a registered investment advisor under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about the firm, including its services, strategies, and fees can be found in our ADV Part 2, which is available without charge upon request.

The Bull Is Back… Will It Keep Charging?

On August 18, 2020, the S&P 500 set a record high for the first time since COVID-19 ushered in a bear market on February 19. The cycle from peak to peak was just 126 trading days, the fastest recovery in the history of the index, erasing losses from an equally historic plunge of almost 34% in February and March.1

Based on the traditional definition of market cycles, the new record confirms that a bull market began on March 23 when the index closed at its official low point. This also confirms that the February-March bear market was the shortest on record, lasting just 33 days.2

Although the strong comeback is good news for investors, there is a striking disconnect between the buoyant market and an economy still struggling with high unemployment and a public health crisis. The market is not the economy, but the economy certainly affects the market. So it may seem puzzling that the market could reach a record high not long after the largest quarterly decline in gross domestic product

(GDP) in U.S. history.3

Optimism vs. exuberance

Whereas GDP measures current economic activity, the stock market is forward looking. The rapid bounceback suggests that investors believe the pandemic will be controlled in the not-too-distant future and that business activity will return to normal. Whether this optimism is warranted remains to be seen. The current economic situation remains tenuous, but there are hopeful signs. A vaccine could be available in early 2021, later than anticipated but offering light at the end of the tunnel.4 In the meantime, the virus continues to suppress business activity. The 10.2% July unemployment rate represented a big improvement over the previous three months, but it was still higher than at any time during the Great Recession.5 Recent projections of corporate earnings suggest they will not contract as much as expected, but they will still contract.6 GDP is projected to make up ground in the third and fourth quarters but remain negative for the year.7 The extreme of market optimism is irrational exuberance, and there may be some of that at work in the current situation. The proliferation of low-cost trading apps has encouraged less-experienced investors to trade aggressively, which might be driving some of the market surge.8

Economic stimulus

The single, most important factor behind the market recovery is the deep commitment from the Federal Reserve to provide unlimited support through low interest rates and bondbuying programs. For some investors, the fact that the economy is still struggling has a strangely positive effect in guaranteeing that the Fed will keep the money flowing.₉

Further support from the federal government is more uncertain, but the strong market suggests that investors may be counting on a second stimulus package.₁₀

Nowhere else to go

Low interest rates make it easier for businesses and individuals to borrow, but they have reduced bond yields to the point that many investors are willing to take on greater risk in equities in order to generate income. Money that might normally be invested in the bond market has poured into stocks, driving prices higher. This situation has its own acronym: TINA, There Is No Alternative to Stocks.₁₁

Big tech at the wheel

While the S&P 500 is generally considered representative of the U.S. stock market as a whole, the recovery has centered around technology companies, which have helped provide goods and services throughout the pandemic. The Big Six tech stocks — Apple, Facebook, Amazon, Netflix, Microsoft, and Alphabet (Google’s parent) — were up collectively by more than 43% for the year through August 18. By contrast, the rest of the companies in the S&P 500 were down collectively by about 4%. The Big Six tech companies now represent more than one-fourth of the total market capitalization of the S&P 500 and thus have an outsized effect on index performance.12 One question facing investors is whether to chase the winners or look to stocks and sectors that still lag their previous highs and may have greater growth potential. Chasing performance is seldom a good idea, but there are solid reasons why certain stocks have been so successful in the current environment.

Are stocks overvalued?

The most common measure of stock value is price/earnings (P/E) ratio, which represents the stock price divided by corporate earnings over the previous 12 months or by projected earnings over the next 12 months. The projected P/E ratio for the S&P 500 on August 18 was 22.6, the highest since March 2000 at the peak of the dot-com bubble. Big tech stocks were even higher, trading at 26 times their projected earnings, and the Big Six were higher still at more than 40 times projected earnings._13-14

A different measure of stock value compares the total market capitalization of all U.S. stocks with GDP. By this measure, the market was 77.6% overvalued on August 18, by far the highest valuation ever recorded. The previous highs were 49.3% in January 2018 and 49.0% in March 2000. This extreme ratio illustrates the current disconnect between the stock market and GDP, but a significant GDP increase during the third quarter could bring it down.₁₅

In considering these valuations, keep in mind that these are extraordinary times, and traditional expectations and measures of value may not tell the whole story. If nothing else, the extreme volatility and rapid market cycles of 2020 have illustrated the importance of maintaining a diversified all-weather portfolio and the danger of overreacting to market movements. While new records are exciting, they are only signposts along the road to achieving your long-term goals. The return and principal value of stocks and bonds fluctuate with changes in market conditions. Shares, when sold, and bonds redeemed prior to maturity may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk. Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.

_{The performance of an unmanaged index such as the S&P 500 is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is not a guarantee of future results. Actual results will vary.}

_{1, 3, 6, 8, 11, 13) The Wall Street Journal, August 18, 2020}

_{2) CNBC, August 18, 2020}

_{4, 9) The New York Times, August 18, 2020}

_{5) U.S. Bureau of Labor Statistics, 2020}

_{7) The Wall Street Journal Economic Forecasting Survey, August 2020}

_{10) CNBC, August 14, 2020}

_{12, 14) The Washington Post, August 20, 2020}

_{15) Forbes, August 18, 2020}

IMPORTANT DISCLOSURES The opinions expressed herein are those of Ballast Advisors, LLC and are subject to change without notice. The third-party material presented is derived from sources Ballast Advisors consider to be reliable, but the accuracy and completeness cannot be guaranteed. Past performance is not indicative of future results. Nothing contained herein is an offer to purchase or sell any product. This material is for informational purposes only and should not be considered investment advice. Ballast Advisors reserve the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. Ballast Advisors, LLC is a registered investment advisor under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about the firm, including its services, strategies, and fees can be found in our ADV Part 2, which is available without charge upon request.

Financial Resolutions for 2020

It’s a new year, a new decade, and the perfect time to renew healthy habits, including those in your financial life. Like any good habit, setting intentions and priorities is important. At Ballast Advisors, we know that our clients who are intentional and diligent about their financial goals have more success.

You may have already set your big financial goals, like saving for retirement, planning for your child’s education or buying your dream home (And if you haven’t started that process, call us).

But here are some tips for smaller resolutions you can consider trying in 2020 to improve your discipline around your personal financial planning and retirement goals.

Create (and Stick) to a Budget Goal

Okay, this is low hanging fruit, but consider setting a new and unique goal with your budget. “It’s easy for a client to say I want to save more money or trim expenses, but getting specific is key. Pick an expense or determine where you are going to save money,” says Scott Peterson, wealth advisor at Ballast Advisors.

If you’re someone who generally spends first then tries to save what they can at the end of each month you should consider paying yourself first. Set a simple savings goal for each paycheck and get that out of the way before paying any bills. “Maybe you start at $10 a paycheck, maybe it’s $500…everybody is different,“ suggests Richard Juckel, financial planner at Ballast Advisors. “A general rule of thumb is to try and save 15-20% of your pre-tax income. If you have a steep hill to climb to reach your savings goals, start small and work your way up.”

Save to the Max

Are you making the most of your executive benefits package? At a minimum if your company offers a retirement savings plan with a match you could be leaving money on the table if you’re not contributing to the plan. Consider saving at least the amount your employer is willing to match. Saving the matching amount alone is rarely enough to meet most people’s retirement plans, but it’s a great place to start!

BONUS TIP: Save your raise. If you’re fortunate enough to receive a raise throughout the year, consider using the increased income to step up your savings plan. These incremental savings increases could really add up over time.

Audit Your Autopayments

Set time aside to review anything that is on auto-payment. $5.99 here and $14.99 there add up quickly over time. Do you still need that music subscription or meditation app you forgot you subscribed to last year?

This is also a great time to evaluate your rates for things like insurance and other monthly services and fees. Are you getting the best rate?

Go to the Pros

There is a load of free content out there to help you improve your financial acumen. Commit to reading a finance blog weekly, or find a podcast. Make it a routine to listen to your podcast during your workout, or on your commute from work.

“On the Ballast Advisors website, we offer free financial tools, calculators and financial education,” says Paul Parnell, wealth advisor at Ballast Advisors. “Or if you’re not using a financial planner, consider a free consultation.”

The process of having a professional review your employer sponsored retirement plan in addition to other investments and savings, can help you determine if you are on track.

“A great oldie but really good book on paying for yourself first and saving is The Millionaire Next Door: The Surprising Secrets of America’s Wealthy by Thomas J. Stanley and William D. Danko,” Parnell adds.

Embrace a New Technology

Maybe this is the year you try a new app. There are many great technology services to help you track your spending better. Consider an app like Mint, where you can track income and expenses. This article on Investopedia lists the top personal finance apps in 2019.

Or check with your financial planner. Ballast Advisors clients have a customized portal to review their portfolio online.

Schedule a monthly reminder in your phone to review your app or portal.

Again, it’s easy to say you want to save more money or trim expenses in 2020, but making intentional and specific steps is key.

For more information on how Ballast Advisors helps clients with personal financial planning, executive benefits, and saving for retirement, and see www.ballastadvisors.com/. Our financial advisors serving the Twin Cities and Southwestern Florida can help you reach your retirement and financial goals. Our offices are located in Woodbury, MN, Arden Hills, MN and Punta Gorda, FL.

IMPORTANT DISCLOSURES

The opinions expressed are those of Ballast Advisors, LLC. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. These opinions contain references to material provided by third-party sources believed to be reliable but cannot be guaranteed for accuracy.

Ballast Advisors, LLC is a registered investment advisor under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about the firm, including its services, strategies, and fees can be found in our ADV Part 2, which is available without charge upon request. The opinions expressed herein are those of Ballast Advisors, LLC and are subject to change without notice.

10 Tips To Help You Save More in 2021

It’s a new year (thank goodness) and the perfect time to renew healthy habits, including those in your financial life. If 2020 taught us anything, it’s the importance of planning ahead. You may have already been working toward your big financial goals, like saving for retirement or planning for your child’s education. However, how you approach these goals may have had to change, depending on how the Pandemic impacted your individual financial plan.

As financial planners and advisors, we are passionate about helping you set intentions and priorities around personal finance goals. A general rule of thumb is to try and save 15-20% of your pre-tax income. We know that our clients who are intentional and diligent about their financial goals have more success.

Here are 10 money saving tips you can consider implementing in 2021 to improve your discipline around your personal financial planning and retirement goals.

Savings Tip #1 – Set a simple savings goal for each paycheck and get that out of the way before paying any bills. Set it to transfer automatically, so you get used to having less money to spend.

Savings Tip #2 – Evaluate your retirement plan. Once you set your budget, work toward taking that first 15% and invest in your 401K, IRA or retirement account. This habit will go a long way toward building your retirement savings.

Savings Tip #3 – If you’re lucky enough to still see a raise or bonus this year, consider using the increased income to step up your savings plan. These incremental savings increases could really add up over time.

Savings Tip #4 – If your company offers a retirement savings plan with a match, you could be leaving money on the table if you’re not contributing to the plan. Consider saving at least the amount your employer is willing to match. Saving the matching amount alone is rarely enough to meet most people’s retirement plans, but it’s a great place to start!

Savings Tip #5 – If you brown bag your lunch vs. eating out, you can save an average of $100 a month. If you invested that money into retirement you could have as much as $103,000 when you retire. (assuming 25 years to retirement, 2.5% inflation rate, and an average of 7% rate of return).

Savings Tip #6 – While you’re cleaning out those closets, consider selling stuff you haven’t used in a year and use the proceeds toward any credit card debt. Don’t forget to check your credit reports once a year for free at annualcreditreport.com.

Savings Tip #7 – Set time aside to review anything that is on auto-payment. $5.99 here and $14.99 there add up quickly over time. Do you still need that music subscription or meditation app you forgot you subscribed to last year?

Savings Tip #8 – This is also a great time to evaluate your rates for things like insurance and other monthly services and fees. Are you getting the best rate?

Savings Tip #9 – If you’re not using a financial planner, consider a free consultation. The process of having a professional review your employer sponsored retirement plan in addition to other investments and savings, can help you determine if you are on track.

Savings Tip #10 – There is a load of free content out there to help you improve your financial acumen. Commit to reading a finance blog weekly, or find a podcast. Make it a routine to listen to your podcast during your workout, or on your commute from work.

Again, it’s easy to say you want to save more money or trim expenses in 2021, but making intentional is key.

IMPORTANT DISCLOSURES

Changing Jobs? Know Your 401(k) Options

If you’ve lost your job, or are changing jobs, you may be wondering what to do with your 401(k) plan account. It’s important to understand your options.

Originally Published on: Jul 1, 2019

What will I be entitled to?

If you leave your job (voluntarily or involuntarily), you’ll be entitled to a distribution of your vested balance. Your vested balance always includes your own contributions (pre-tax, after-tax, and Roth) and typically any investment earnings on those amounts. It also includes employer contributions (and earnings) that have satisfied your plan’s vesting schedule.

In general, you must be 100% vested in your employer’s contributions after 3 years of service (“cliff vesting”), or you must vest gradually, 20% per year until you’re fully vested after 6 years (“graded vesting”). Plans can have faster vesting schedules, and some even have 100% immediate vesting. You’ll also be 100% vested once you’ve reached your plan’s normal retirement age.

It’s important for you to understand how your particular plan’s vesting schedule works, because you’ll forfeit any employer contributions that haven’t vested by the time you leave your job. Your summary plan description (SPD) will spell out how the vesting schedule for your particular plan works. If you don’t have one, ask your plan administrator for it. If you’re on the cusp of vesting, it may make sense to wait a bit before leaving, if you have that luxury.

Don’t spend it

While this pool of dollars may look attractive, don’t spend it unless you absolutely need to. If you take a distribution you’ll be taxed, at ordinary income tax rates, on the entire value of your account except for any after-tax or Roth 401(k) contributions you’ve made. And, if you’re not yet age 55, an additional 10% penalty may apply to the taxable portion of your payout. (Special rules may apply if you receive a lump-sum distribution and you were born before 1936, or if the lump-sum includes employer stock.)

If your vested balance is more than $5,000, you can leave your money in your employer’s plan at least until you reach the plan’s normal retirement age (typically age 65). But your employer must also allow you to make a direct rollover to an IRA or to another employer’s 401(k) plan. As the name suggests, in a direct rollover the money passes directly from your 401(k) plan account to the IRA or other plan. This is preferable to a “60-day rollover,” where you get the check and then roll the money over yourself, because your employer has to withhold 20% of the taxable portion of a 60-day rollover. You can still roll over the entire amount of your distribution, but you’ll need to come up with the 20% that’s been withheld until you recapture that amount when you file your income tax return.

Should I roll over to my new employer’s 401(k) plan or to an IRA?

Assuming both options are available to you, there’s no right or wrong answer to this question. There are strong arguments to be made on both sides. You need to weigh all of the factors, and make a decision based on your own needs and priorities. It’s best to have a professional assist you with this, since the decision you make may have significant consequences — both now and in the future.

Reasons to consider rolling over to an IRA:

You generally have more investment choices with an IRA than with an employer’s 401(k) plan. You typically may freely move your money around to the various investments offered by your IRA trustee, and you may divide up your balance among as many of those investments as you want. By contrast, employer-sponsored plans generally offer a limited menu of investments (usually mutual funds) from which to choose.

You can freely allocate your IRA dollars among different IRA trustees/custodians. There’s no limit on how many direct, trustee-to-trustee IRA transfers you can do in a year. This gives you flexibility to change trustees often if you are dissatisfied with investment performance or customer service. It can also allow you to have IRA accounts with more than one institution for added diversification. With an employer’s plan, you can’t move the funds to a different trustee unless you leave your job and roll over the funds

An IRA may give you more flexibility with distributions. Your distribution options in a 401(k) plan depend on the terms of that particular plan, and your options may be limited. However, with an IRA, the timing and amount of distributions is generally at your discretion (until you reach age 70½ and must start taking required minimum distributions in the case of a traditional IRA).

You can roll over (essentially “convert”) your 401(k) plan distribution to a Roth IRA. You’ll generally have to pay taxes on the amount you roll over (minus any after-tax contributions you’ve made), but any qualified distributions from the Roth IRA in the future will be tax free.

Reasons to consider rolling over to your new employer’s 401(k) plan (or stay in your current plan):

Many employer-sponsored plans have loan provisions. If you roll over your retirement funds to a new employer’s plan that permits loans, you may be able to borrow up to 50% of the amount you roll over if you need the money. You can’t borrow from an IRA — you can only access the money in an IRA by taking a distribution, which may be subject to income tax and penalties. (You can give yourself a short-term loan from an IRA by taking a distribution, and then rolling the dollars back to an IRA within 60 days; however, this move is permitted only once in any 12-month time period.)

Employer retirement plans generally provide greater creditor protection than IRAs. Most 401(k) plans receive unlimited protection from your creditors under federal law. Your creditors (with certain exceptions) cannot attach your plan funds to satisfy any of your debts and obligations, regardless of whether you’ve declared bankruptcy. In contrast, any amounts you roll over to a traditional or Roth IRA are generally protected under federal law only if you declare bankruptcy. Any creditor protection your IRA may receive in cases outside of bankruptcy will generally depend on the laws of your particular state. If you are concerned about asset protection, be sure to seek the assistance of a qualified professional.

You may be able to postpone required minimum distributions. For traditional IRAs, these distributions must begin by April 1 following the year you reach age 70½. However, if you work past that age and are still participating in your employer’s 401(k) plan, you can delay your first distribution from that plan until April 1 following the year of your retirement. (You also must own no more than 5% of the company.)

If your distribution includes Roth 401(k) contributions and earnings, you can roll those amounts over to either a Roth IRA or your new employer’s Roth 401(k) plan (if it accepts rollovers). If you roll the funds over to a Roth IRA, the Roth IRA holding period will determine when you can begin receiving tax-free qualified distributions from the IRA. So if you’re establishing a Roth IRA for the first time, your Roth 401(k) dollars will be subject to a brand new five-year holding period. On the other hand, if you roll the dollars over to your new employer’s Roth 401 (k) plan, your existing five-year holding period will carry over to the new plan. This may enable you to receive tax-free qualified distributions sooner.

When evaluating whether to initiate a rollover always be sure to (1) ask about possible surrender charges that may be imposed by your employer plan, or new surrender charges that your IRA may impose, (2) compare investment fees and expenses charged by your IRA (and investment funds) with those charged by your employer plan (if any), and (3) understand any accumulated rights or guarantees that you may be giving up by transferring funds out of your employer plan.

What about outstanding plan loans?

In general, if you have an outstanding plan loan, you’ll need to pay it back, or the outstanding balance will be taxed as if it had been distributed to you in cash. If you can’t pay the loan back before you leave, you’ll still have 60 days to roll over the amount that’s been treated as a distribution to your IRA. Of course, you’ll need to come up with the dollars from other sources.

IMPORTANT DISCLOSURES Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice

If you’re interested in receiving additional financial advice, contact Ballast Advisors for a complimentary consultation at a location near you:

Ballast Advisors – Woodbury

683 Bielenberg Dr., Suite 208
Woodbury, MN 55125-1705
Tel: 651.478.4644

Ballast Advisors – Arden Hills

3820 Cleveland Ave. N, Ste. 500
Arden Hills, MN 55112-3298
Tel: 651.200.3100

Ballast Advisors – Punta Gorda

223 Taylor St., Suite 1214
Punta Gorda, FL 33950-3901
Tel: 941.621.4015

Concentrated Stock Positions: Considerations and Strategies

Investing and stock market concept gain and profits with faded candlestick charts.

Time counts

When dealing with a large stock holding, think about your time frame. Some strategies, such as hedging, might be most suitable in the short term or if you are restricted from selling. Others, such as donating to a trust, may be more cost effective over a longer time period, though your charitable intentions obviously play a role as well.

Close up a man working about financial with calculator at his office to calculate expenses

Make sure your collar’s not too tight

Transaction costs in multiple leg options strategies, such as a collar, can be significant and should be considered as these strategies involve multiple commissions, fees, and charges. Also, the prices set for a collar must not violate the rules against a so-called constructive sale. A strategy that eliminates all risk is effectively a sale and thus subject to capital gains taxes. The strike prices of a collar should not be too close to your stock’s market price.

Options involve risk and are not suitable for all investors, and investors may lose the entire amount of invested principal in a relatively short period of time. Prior to buying or selling an option, a person must receive a copy of “Characteristics and Risks of Standardized Options.” Copies of this document may be obtained from your financial professional and are also available at http://www.theocc.com.

Whether you inherited a large holding, exercised options to buy your company’s stock, sold a private business, hold restricted stock, or have benefitted from repeated stock splits over the years, having a large position in a single stock carries unique challenges. Even if the stock has done well, you may want more diversification, or have new financial goals that require a shift in strategy.

When a single stock dominates your portfolio, however, selling the stock may be complicated by more than just the associated tax consequences. There also may be legal constraints on your ability to sell, contractual obligations such as lock-up agreements, or practical considerations, such as the possibility that a large sale could overwhelm the market for a thinly traded stock. The choices appropriate for you are complex and will depend on your own situation and tax considerations, but here is a brief overview of some of your options.

Sell your shares

Selling obviously frees up funds that can be used to diversify a portfolio. However, if you have a low cost basis, you may be concerned about capital gains taxes. Or you may want to avoid any perception of market manipulation or insider trading. You might consider selling shares over time, which can help you manage the tax bite in any one year, yet allow you to participate in any future growth.

You’ll need to consider the tax consequences of any sale. Long-term capital gains are generally taxed at special capital gains tax rates of 0%, 15%, and 20% depending on your taxable income. By contrast, because short-term capital gains are taxed as ordinary income, the top short-term capital gains tax rate can be 37%. Higher-income taxpayers should be aware that they may be subject to an additional 3.8% Medicare unearned income tax on net investment income (unearned income includes capital gains) if their adjusted gross income exceeds $200,000 (single filers) or $250,000 (married joint filers).

If you hold restricted shares, you might set up a 10b5-1 plan, which spells out a predetermined schedule for selling shares over time. Such written plans specify in advance the dates, prices and amounts of each sale, and comply with SEC Rule 144, which governs the sale of restricted stock and was designed to prevent insider trading. A 10b5-1 plan demonstrates that your selling decisions were made prior to your having any insider knowledge that could influence specific transactions. (However, terminating the plan early or selling too much too quickly could raise questions about the plan’s legitimacy.)

You might also be able to avoid some of the restrictions on how much and when you can sell by selling shares privately rather than on the public market. However, you would likely have to sell at less than the market. However, you would likely have to sell at less than the market value, and would still face capital gains taxes.

Hedge your position

You may want to try to protect yourself in the short term against the risk of a substantial drop in price. There are multiple ways to try to manage that risk by using options. However, bear in mind that the use of options is not appropriate for all investors.

Buying a protective put essentially puts a floor under the value of your shares by giving you the right to sell your shares at a predetermined price. Buying put options that can be exercised at a price below your stock’s current market value can help limit potential losses on the underlying equity while allowing you to continue to participate in any potential appreciation. However, you also would lose money on the option itself if the stock’s price remains above the put’s strike price.

Selling covered calls with a strike price above the market price can provide additional income from your holdings that could help offset potential losses if the stock’s price drops. However, the call limits the extent to which you can benefit from any price appreciation. And if the share price reaches the call’s strike price, you would have to be prepared to meet that call.

Monetize the position

If you want immediate liquidity, you might be able to use a prepaid variable forward (PVF) agreement. With a PVF, you contract to sell your shares later at a minimum specified price. You receive most of the payment for those shares — typically 80% to 90% of their value — when the agreement is signed. However, you are not obligated to turn over the shares or pay taxes on the sale until the PVF’s maturity date, which might be years in the future. When that date is reached, you must either settle the agreement by making a cash payment, or turn over the appropriate number of shares, which will vary depending on the stock’s price at that time. In the meantime, your stock is held as collateral, and you can use the upfront payment to buy other securities that can diversify your portfolio. In addition, a PVF still allows you to benefit to some extent from any price appreciation during that time, though there may be a cap on that amount.

Caution: PVF agreements are complicated, and the IRS warns that care must be taken when using them. Consult a tax professional before using this strategy.

Borrow to diversify

If you want to keep your stock but need money to build a more diversified portfolio, you could use your stock as collateral to buy other securities on margin. However, trading securities in a margin account involves risks. You can lose more funds than you deposit in the margin account. Consider speaking with a financial professional before considering this strategy.

Exchange your shares

Another possibility is to trade some of your stock for shares in an exchange fund (a private placement limited partnership that pools your shares with those contributed by other investors who also may have concentrated stock positions). After a set period, generally seven years, each of the exchange fund’s shareholders is entitled to a prorated portion of its portfolio. Taxes are postponed until you sell those shares; you pay taxes on the difference between the value of the stock you contributed and the price received for your exchange fund shares. Though it provides no liquidity, an exchange fund may help minimize taxes while providing greater diversification (though diversification alone does not guarantee a profit or ensure against a loss). Be sure to check on the costs involved with an exchange fund as well as what other securities it holds. At least 20% must be in nonpublicly traded assets or real estate, and the more overlap between your shares and those already in the fund, the less diversification you achieve.

Donate shares to a trust If you want income rather than growth from your stock, you might transfer shares to a trust. If you have highly appreciated stock, consider donating it to a charitable remainder trust (CRT). You receive a tax deduction when you make the contribution. Typically, the trust can sell the stock without paying capital gains taxes, and reinvest the proceeds to provide an income stream for you as the donor. When the trust is terminated, the charity retains the remaining assets. You can set a payout rate that meets both your financial objectives and your philanthropic goals; however, the donation is irrevocable.

Another option is a charitable lead trust (CLT), which in many ways is a mirror image of a CRT. With a typical CLT, the charity receives the income stream for a specified time; the rest goes to your beneficiaries. There are costs associated with creating and maintaining trusts. You receive no tax deduction for transferring assets unless you name yourself the trust’s owner, in which case you will pay taxes on the annual income. Other philanthropic options include donating directly to a charity or private foundation and taking a tax deduction.

Managing a concentrated stock position is a complex task that may involve investment, tax, and legal issues. Consult professionals who can help you navigate the maze.

IMPORTANT DISCLOSURES Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.