After years of hard work, you have finally received the executive promotion you deserve. You may now be entitled to an expanded suite of benefits including options to help secure your retirement.
As you enter the realm of high-income earners, a forward-looking financial strategy can help ensure you accumulate, grow, and protect your wealth wisely. Here are some things you can expect to be included in your new executive compensation package, and some tips for how to make the most of them.
Your promotion may have come with a significant salary increase. Resist the urge to habitually pick up the bill for friends and family and instead consider investing some or all of the increase in a long-term investment vehicle such as a mutual fund or a bond mutual fund.
If you expect to make a major purchase soon, consider parking some money in a high-yield savings account while rates are attractively high. Be mindful of FDIC insurance limits that currently protect up to $250,000 per depositor1.
You may simply want to pay down an existing loan or mortgage to eliminate debt faster. Something to consider is the interest rate on your loan. Due to the Fed’s precipitous raising of rates over the last year, your loan may carry a lower rate than what a savings account can earn today. If that’s the case, it may not make sense to expedite the repayment of your loan just yet.
As an executive, you may be entitled to fringe benefits such as use of a company car, box seats at a ball game, company-sponsored club memberships, or other perks. You may also receive sizable annual bonuses or other larger, less frequent cash incentives.
Consider how to use these periodic windfalls. Should you make a large contribution to an existing retirement account or possibly open a new one? Would you want to use the money as a down payment on a new property? Have you thought about funding an annuity to help guarantee2 retirement cash flow down the road? It’s important to consult with your tax advisor to determine the tax implications of your choices.
Many executive comp packages include ownership interest in the company through stock or equity. You may be able to purchase stock options at discounted prices and be required to hold them through a vesting period.
Bear in mind you’ll have to pay capital gains tax on the difference between the purchase and sale prices of the stock. If you sell before holding for a year, the gain will be taxed according to your ordinary income tax bracket. If you hold the stock for more than a year, the profit will be considered a long-term capital gain and be taxed at preferential tax rates that are generally lower than ordinary income tax rates. The exact rate you pay depends on your taxable income, filing status, and current federal tax laws. For specific guidance about your situation, you should consult a qualified tax professional.
Executives often enjoy expanded retirement benefits including an option to participate in a non-qualified deferred compensation plan (NQDC). These plans permit executives to defer some of their annual earnings into an account that holds the money until a later date such as retirement or other exit from the company.
Using NQDC plans helps executives defer taxation on their pay until a future time when they expect to be in a lower tax bracket. These plans do not typically have caps on contributions and are not subject to required minimum distributions the way qualified plans are. Work with a qualified financial professional and tax/legal advisors to evaluate NQDC plan advantages and decide if it’s the most tax-efficient option for future income.
As you grow accustomed to your role and compensation as an executive, you’ll want to make strategic choices to ensure your financial strategy remains on point. The additional income, benefits, and perks can have a big impact on your current and future lifestyles as well as your tax exposure. A New York Life financial professional can help you assess your situation, chart a course, and feel confident you’re using all available financial options to save, protect, and distribute your wealth according to your goals.
1https://www.fdic.gov/resources/deposit-insurance/brochures/deposits-at-a-glance/
2Guarantees are backed by the claims-paying ability of the issuer.
This article is provided for general informational purposes only. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.
SMRU #6006231 exp. 10/30/2028