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How to Maximize Employer Benefits such as After-Tax 401k and ESPP


Summary

On today’s show, Meg Bartelt, CFP®, MSFP joins me to talk about how you should think differently about your total compensation in order to take advantage of your employer benefits.

Meg is the founder of Flow Financial Planning, LLC, a fee-only, virtual financial planning firm dedicated to women in their early-to-mid career in tech. She specializes in equity compensation and not making people feel bad about their finances.

Many employees of large tech companies are not taking full advantage of their employee benefits and leaving significant money on the table. If your employer offers after-tax 401k contributions and/or an Employee Stock Purchase Plan (ESPP), you need to understand those benefits. Do not let inertia or unease make you overlook these opportunities: actively choose to participate or not.

But what if you cannot afford to save more from your paycheck because you are already just barely covering your living expenses plus vacations, home improvements, etc? Take another look by understanding your total compensation and account balances. Do you get an annual bonus? Do you receive RSUs?  

You have to think a little differently: your total compensation is available to spend on living expenses, not just your bi-monthly paycheck. Maximizing your after-tax 401k contributions may reduce your paycheck, but you can make that up using your quarterly RSUs. Sell the stock and transfer the cash to your everyday checking account to fund monthly expenses.

Your future self is going to thank you.


Photo by Brett Jordan on Unsplash

Transcript

Mike: [00:00:00] welcome to financial planning for tech professionals and entrepreneurs. I'm your host, Mike Morton, charter financial counselor and financial advisor. And today I'm super happy to welcome Meg Bartelt to the show. Meg. Welcome. 

Megan: [00:00:18] Thank you and thank you for pronouncing my name right.

Mike: [00:00:22] Well,  Try our best here on the show.  I'm going to read a brief bio of Meg to introduce her. And then I'm going to introduce today's topic. Meg Bartelt is the founder of flow financial planning, a fee only virtual planning firm, dedicated to women in their early to mid careers in tech. She specializes in equity compensation and not making people feel bad about their finances. Meg receive the bachelor's  of economics from Wellesley college and a master's of financial planning from golden gate university. She's a certified financial planner, CFP, a registered life planner, and a member of the FPA and X Y planet network. She's calling in from Bellingham, Washington, where she lives with her family and dog, Julia. 

Megan: [00:01:08] Yup. Thanks for getting Julia in there.

Mike: [00:01:11] Absolutely. Can't leave out the dog. I am really excited about today's topic Meg, because we are going to be talking about ways of taking advantage of all the tax planning, tax opportunities and saving opportunities that tech professionals have. Now, as we know in the United States, right?   You're planning for retirement is now put on the individual, maybe in the past, we were in a situation where you'd worked for one company for your career, and they would help you with the pension and things like that.

So you'd have to think about it, but now we have all these tools. The government has provided in terms of tax planning, but has been put on the individual. So we have things like 401ks and individual retirement accounts. We have health savings accounts and other tax planning opportunities, tax advantage accounts for saving for the future.

And so it becomes a complicated landscape, of people trying to pick and choose amongst these things while also, so running their career and raising a family or what have you. Meg. Is that something that you run across working in the tech industries, especially with women and families around, being overwhelmed by these number of accounts and types of accounts. 

Megan: [00:02:18] Absolutely. The tech industry to its credit provides an amazing number of these opportunities to its employees. On the other hand, it's overwhelming. And as you said these women are already trying to do their jobs. And if you are a data analyst or a, a UX engineer, that's your knowledge set?

That's your wheelhouse, not how after tax 401ks work. So that is. Big part of what we do with clients is that we just read through all of the employee benefits and all of the 401k options that our clients, employers offer them and then direct our clients in how to take advantage of all of them.

So they don't have to spend time and stress trying to suss it all out for themselves.

Mike: [00:03:06] that's right. They're an expert in their field. And that's what they spend their time and energy doing. And then trying to figure out, wait, what is all this other stuff? And especially wrapping your mind around 10, 20, 30 years into the future and how that's going to work. It becomes very complicated.

So today's topic is figuring out. That you know where to save. And we've had some episodes on the different types of accounts and how to prioritize them. But specifically for this one is this concept Meg, where I've seen this as well, that individuals are working hard and maybe making a pretty good income. But they spend a lot of it. They're in, high cost area or raising a family and spending a lot of it. And you don't have opportunities to save more. So they come in and say, Hey, I'm doing what I can to my 401k, but I, can't max that out or I can't take advantage of maybe these other after-tax 401k contributions, but these people also might have RSUs or bonuses or other things, that are part of their income. And so that's what we want to talk about today. How can we max out? How can we think a little bit differently about your total financial picture? Maybe it's some savings you already. Or income that's bonuses or RSUs or stock option plans that you can take full advantage of all these different accounts. 

Megan: [00:04:20] Yeah. And in general, if you work in tech and you have both a salary and other sort of what I call lumpy income, bonuses or RSUs that vest, if you work for a public company or even stock options that you can actually exercise and turn into money. If you work for a public company I ideally you should live on your salary.

And use that lumpy income to save or to leapfrog towards a specific goal you have, or indulge in a one-time thing that you want, like a vacation or car or something like that, but not use it to permanently elevate your lifestyle. Because what if that stock compensation goes up? So that is, the theory.

And for some people that actually works in practice the challenge I'm finding with a lot of our clients who work at companies like Amazon or Google or Facebook or Airbnb, where the employer provides so many of these tax advantaged opportunities to the  employee, to our clients.

But the money for that has to come from the employee's . Paycheck. Any money you put into your 401k pre-tax or after tax has to come from your paycheck, any money you put into your HSA has to come from your paycheck. If you're participating in ESP, that money has to come from your paycheck. Your regular salary paycheck, which normally might be quite nice.

The amount of money you take home. All of a sudden you're taking home like $14 every two weeks because you've subtracted them. All of these really great savings opportunities. The downside is your take home is now poultry and not enough to actually cover your ongoing expenses. So this is definitely I've led several clients through this and one of them actually emailed me once and said, I pursue Meg every time I look at my bank account because her bank account was just dwindling because her salary.

With her take home salary was so tiny. So CUNY. And so this is a situation in which it does not make sense to try to live on your salary because the only way to take advantage of all these amazing opportunities is through your salary. So you have to find other money to live on. And for pretty much all of these clients, they do have this other lumpy income.

Usually it's in the form of RSU. So every quarter, every six months, They're getting this huge, you know, five or six figure value of RSU shares, vesting. And people tend to think of that as a very separate thing, but money is money, it's fungible. It doesn't matter whether you call it salary or RSU income, you can buy groceries with it.

So what these clients can do, these people can do is just use some of that RSU income to replace the salary that they're no longer taking them. I jokingly referred to this as laundering your RSU income through your paycheck, into these, all these great opportunities like ESPs and 401ks. It's just a shell game.

It's just using money from a different bucket, but it's still all money. It's still all part of your total comp package.

Mike: [00:07:34] Yeah.

So that's great. Meg, a great explanation to start us off. And it does sound like some money, new Jiu Jitsu or money laundry, I could take from bucket a and put it in bucket b, but like you said, it's all money. So  let's create a concrete example here. Okay.

I'm working one of these companies making pretty good income.

And saving, the maximum I can to my 401k. So 19,500 this year, and Meg I come in, I can't really save anymore. I know I might have I've heard of this thing after. 401k contributions. But I'm spending everything that the rest of my paycheck, it look, I'm setting aside almost 20,000 out of my salary and everything else, pretty much going to go into my living expenses for my kids and my family.

And you notice though, I also do have some RSUs. They come in quarterly, maybe,  10,000 a quarter or something like that in terms of how much they're worth. But it's not part of my income. So walk me through the example there. How do we take advantage? Or how do I think about taking advantage of that?

After-tax 401k. I know it's part of my benefits. But I just don't have the income, off of my paycheck. Everything else is for my living expenses. 

Megan: [00:08:37] Yeah. I think I would S I usually have to start by explaining why the after-tax 401k. Is so amazing.  People who have access to this in tech should be so thankful that they do. Because this money all gets funneled into a Roth account in your 401k and outside of this opportunity. Most people know about Roth IRAs and there is an income cap.

If you make more than that. I don't remember the specifics, but as a single person, if you make more than $140,000 a year, or thereabouts, you cannot, you may not contribute to the Roth IRA. But contributing to a Roth IRA is really beneficial because any money you put in there is forever more tax-free  I mean, amazing.

But if you work in tech, you're pretty likely to have income over that threshold. Here comes your employer. Who pays you between salary and RSUs $300,000 a year, and basically says, we don't give a crap about that income threshold. You can make this effectively, this Roth contribution above and beyond your 19,500.

And basically trust me your future. You is going to love now you, if you do this for yourself,

Mike: [00:09:51] That's exactly right. So we'll pause on that for one sec. Just explain it really well, the after-tax contributions. I think we've had an episode on this. Unbelievable. You could put 20, $30,000 maybe and roll it directly to a Roth. So now, like meg said, not only do you not have the income limits, but your Roth IRA is limited to six or 7,000, which you could put 20 or 30,000 may potentially into an after-tax 401k immediately roll it to the Roth side of that 401k and tax-free forever.

And you absolutely want to take advantage of this. I will reiterate what makes said. That's exactly right. You want to do that? So I will, I'll put that in as a call to action here, right? In the middle of this podcast, if you have part of your employee benefits, package the words after tax 401k contribution.

You want to maximize that as much as possible. Okay. So now we're going to get back to that as much as possible part. Again, Megan I'm spending all of my income, my paycheck, that's direct deposited after all my taxes and deductions and for in my regular 401k I'm spending that amount of money. So I can't contribute to that after tax from my pay. 

Megan: [00:10:58] Yep. So I would say first, if you did not have this additional source of income, like these quarterly RSUs that you were talking. Then it is what it is. You can't save more. You can save more by spending less and maybe that's reasonable and maybe it's not. So this is not just a monolithic piece of advice that you should always put more than 19,500.

But let's say that between your salary and your RSU. If you just do arithmetic and you put those together, you have more take-home income, then you need to spend. So you've got this excess, it's just not obvious from your take home paycheck. Then what I would propose you do is when your RSUs vest you've got that you gave the example of $10,000 of RSUs vesting every quarter.

Let's say you have a total 30% tax rate on that. What you take home is $7,000 after paying the full tax liability. Just put that $7,000 into your checking account, wherever your paycheck is deposited. Put that $7,000 there. If it's not already there and leave it there and live on that , this involves selling your RSUs.

You can not just let your RSU shares accumulate. A lot of people do either through optimism about their company stock, or honestly just out of sheer sort of ignoring it. They either forget about inertia or like they're too scared to do it. They don't know what to do. But this technique involves, it requires selling at least some of your company's stock and moving that cash money into the bank account that you live in.

And so now you've got this big, like ballast of just cash in your living expenses, checking account. And so then your puny salary take home adds a little bit on top of it by itself. It wouldn't be enough, but added to this balance that you got from your RSU income, that's enough to get you through the next quarter.

So now you've been able to do after tax 401k and. The STP or whatever because you are living in part on the RSU income, you get a recorder

Mike: [00:13:07] okay. So I could take my RSUs, like you said, they get deposited into the account. I need to sell them to create cash if I'm going to live off that cash so I could sell them right away. And then move them to my everyday checking account and notice that I have a good. So therefore that puny paycheck that I can make those after tax contributions, elect that in the HR portal, say, oh yeah.

I'll start contributing to that.

So my paycheck is now getting reduced, but I've put, got 7,000 extra as balanced in my everyday checking account. Perfect. Now, and that seems pretty easy to run side by side, like a little spreadsheet, right? Oh, here's one. Out of my paycheck, here's the deductions. Here's what they currently are.

I'm just doing my 401k contributions and taxes. So here's the deductions. Oh, in this new scheme, I'm also gonna do basically 7,000 a quarter into the after tax contributions. If I can do that amount to cause that equalizes the 7,000, I'm basically getting from the RSU. 

Megan: [00:14:05] Yeah. The way we do it for our clients is we actually take a pay stub and we just record in a spreadsheet. Okay. Here's your gross income, your gross salary for this pay stub. And then we just subtract off of that. All of the things that their pay stub says they're paying for and by paying for, I just mean contributions to our 401k taxes group, life insurance, any of those benefits Just to illustrate how much money they have coming home.

And then if you want it to, yes, you could put in a line item for this new after tax 401k contribution you want to make. If you want to make a $12,000 contribution per year to your after tax, you would just put in an extra thousand dollars per month. And you subtract that off of your current take home and see, oh, how much am I going to be taking home?

I'm going to be taking them $3,000 a month. And I have calculated that my monthly expenses are 5,000. It's like a $2,000 shortfall every month over the course of a quarter. That means $6,000 shortfall. Oh, I need to move at least $6,000 from my quarterly RSU income into my checking account every quarter.

Mike: [00:15:14] Yeah.

Got it. So you can look at these opportunities and we've just mentioned the after tax 401k, we'll mention a few others. You've already mentioned that ESP we'll get into a couple of those, but you could. Oh, here's things that I do have access to I've liked to do. They have to come from my income so you could add some new line items there and then figure out what that quarterly or annual difference is going to be and make it up from somewhere.

Now we've mentioned making up from RSU. 

I assume also you could make it up from savings that you just have in a brokerage or checking account. If you have some extra savings to take advantage of this. Right.

Megan: [00:15:49] Absolutely. This simplest example of, for that is if you have too much cash lying around. 

Mike: [00:15:56] Nice problem to 

Megan: [00:15:57] too much is underlined and bolded. Having sufficient cash is one of the, foundational blocks of good personal financial planning. But a lot of people come to our firm also with, hi, I have several hundred thousand dollars of cash and I know I should be doing something with it, but I'm afraid to do anything with it.

For fear of it being more. That is for most people too much. There is  an appropriate level of cash of anything above that you could use that cash to live on. So you'd effectively be living on your cash savings in order to take advantage of these paycheck opportunities. Or yes, if you have taxable investments, right?

You've got a brokerage account at Robin hood or E-Trade or Vanguard or Schwab. It is reasonable to actually live on that.  So that you can take advantage of these better opportunities through your paycheck. A  taxable investment account is great. And if you need the money before retirement, that's preferable, but in retirement, a Roth account is going to be better.

Mike: [00:16:59] yup. I always want to reiterate exactly what you just said, meg. Cause that was fantastic. And that's where the money laundering, comes in, right. that we're moving the way to think about this is what you said, moving money from your taxable brokerage account, spending that and saving in this other tax deferred or tax free. 

Megan: [00:17:22] Yeah.

Mike: [00:17:22] So you can think of literally moving that money, but it has to come from your paycheck. And so you got to spend from one save and the other, but at the end of the year, it's as if that $10,000 got moved from one account into another and taking advantage of these tax deferred tax-free accounts is unbelievable for your future self, with the big caveat that you also mentioned.

If you need the money, the taxable account is a nice one to have. 

Megan: [00:17:49] Yeah. And another, we keep on talking about the after-tax 401k, just because that's the. Usually widens people's eyes the most, and it does make for a so convenient symmetry of just taking it from one kind of investment account and put it into another kind of investment account. But another huge sort of bite into your paycheck is participating in employee stock purchase plans, ESPP's which in of itself is not a savings account of any sort.

It is just an opportunity to buy your company's stock.  They are allowed to offer up to a 15% discount. And I think all of the big tech companies that we work with, clients that offer that full 15% discount. So that is quote unquote free money. I'd probably remove the quotes if I weren't subject to like regulation.

But ESPPs can be almost a very straightforward way of just getting free money because you are automatically given this 15% discount if you participate in it, but that can be $20,000 a year. So that's a big cut out of your take home pay. But then you get these shares at a discount. If you sold them immediately, you just, you'd get cash.

You'd end up with more money.

Mike: [00:19:02] Yeah. ESPP is another one, right? So now we mentioned the after-tax 401k, and I wanted to ask you about other opportunities. So now we've talked about the employee stock purchase plan, and I'm not going to go into details on that plan. Now, maybe we'll do a future episode on that because we haven't covered that topic, but like you just said, the whole idea is you get to purchase stock at a discount.

Then you own the stock. You can immediately sell it or hold on to it. But you have. Purchased it at a discount. So therefore you end up with that, like you said, quote, unquote, free money and these need to come from your income. correct. You can't just purchase them from your savings account. 

Megan: [00:19:36] Yeah. You have to, has to be debit and out of your paycheck.

Mike: [00:19:38] And so there's another second opportunity. Are there other opportunities Meg after tax 401k? So we'd. The ESP P if you have access to that, we definitely want to take a look and see if there's an opportunity for getting some of that quote, unquote, free money.

Are there other account types or opportunities that we should look at from an employee benefits package? 

Megan: [00:19:58] Yeah. The remaining two that come to mind are way smaller in scale. After tax 401k and ESPP, we're talking five figures of money to fully participate in those, the other two that come to mind. HSA health savings accounts. And for an individual, the cap there is I think $3,600 a year and per family, it's 7,200.

And I think you can actually fund it outside of your paycheck, but if it comes through your paycheck, then you, I think you get to avoid FICA taxes  and you don't, if you just fund it with a check. But now that I'm saying that I would want someone to absolutely double check that with Google.

Mike: [00:20:36] we'll double check that and look it up in the show notes. Yeah, it's a good question. I hadn't run across that before Meg, so I'm pretty curious about it too. So we'll do a Google check on that one. 

Megan: [00:20:44] All right. And then the the last one I can think of is some tech companies, not most of them, unfortunately, some tech companies allow you to pay for long-term disability insurance with after tax. Instead of having the employer pay for it. And this is really taking a left turn in the conversation.

But the high level is if you pay for your long-term disability insurance with your own after tax money, if you ever lay claim to that, if you ever get benefits, the benefits are tax-free. Whereas if your is paying the premiums, any benefits you get will be subject to income tax. And that can be tens of thousands of dollars in taxes that you could avoid if you pay your premium, if you're allowed to pay your premium with after-tax dollars.

Mike: [00:21:31] got you. Right. Because we're going to pay taxes once. So it's either paid now in terms of the premium, or you're going to owe it later in terms of the what comes into you. 

Megan: [00:21:40] Yeah. So that's a more minor opportunity that I don't often see, but I do see it. I can't think of the companies. Some of the tech companies we work with our clients.

Mike: [00:21:50] Yeah. Yeah. Okay. So  the big take home message. If you have after tax 401k contributions in your benefits package, if you have ESPP, those are the two big ones that stand out. And if you are not taking full advantage of those. Definitely look into it, look into, you know,  how to do that, or can you do that?

No, there are some caveats, of course everyone's situation is unique as we like to say. But you really want to make sure , let's say it this way, make a proactive decision to not participate in those opportunities. 

Megan: [00:22:21] Yeah. Yep. Yeah. I would say if you get this lumpy income, usually it's RSUs. Make sure you were thinking about your income as a whole. You don't have this sort of artificial divide in your brain between salary and RSU income. It's all money. It was all taxable money that can end up in your checking account.

It just comes a sort of indifferent, initial form and on a different schedule, but it's all money. You can do the exact same stuff with that money. 

Mike: [00:22:52] Yup. And I'll throw in the bonus. A lot of people have had reliable bonuses, they come in, pretty regularly tier it's a one-time kind of thing. So again, and we're not saying, like you said right off the top of the show don't treat your bonuses permanently, increasing your lifestyle.

Cause you might want a different job or a different opportunity or whatever it is, but do treat it as income that you can use. If you're pretty assured this year, then maybe we can take advantage of these tax opportunities, knowing that we're going to have that sort of thing. 

Megan: [00:23:28] Yep.

Mike: [00:23:29] I do. You mentioned too, I've run across this. I don't know if you have Meg also in the public sector. So we talked a lot about tech companies, but in the public sector, we've got 4 0 3 BS and four 50 sevens, and you can contribute tens of thousands of dollars to both of these types of accounts. And I've run across this as well, where clients are not fully taking advantage of again, these opportunities.

Because I just don't have the income, but when you look at, like you said, oh, I've got a extra savings. What should I do with it? You should take advantage, use your income to fund these and live off of those extra savings. So it's not only a tech industry. I've also run across this, in the public sector. 

Megan: [00:24:09] Yeah. And, I just want to give a nod to the fact that we're talking about this as if it's easy peasy, simple, straightforward. Why didn't you think of this? This is not, this is rejiggering your entire sort of cashflow framework and how you think about your income and your savings. And it is a real mindset shift and shifting your mindset.

It was one of the hardest things in the world. So I just want to acknowledge that this isn't just a flip you switch and then it's.

Mike: [00:24:39] Yeah, absolutely. Look Megan steeped in this right. And runs across it all the time. So it's easy to just rattle off numbers and stuff. But it is, like you said, thanks for bringing that up because it's not easy. And we started off with. You're put in, everybody's put in this situation where you have to read your benefits packages, which are now 20, 30 pages long, and try to understand what's in there.

And you're just trying to do your job and live your life. And so there's a lot of complicated stuff and that's where meg comes in and her firm comes in to try to help sort through those kinds of things. Meg, is there anything else we haven't touched on in terms of this topic? 

Megan: [00:25:13] I don't think so. We covered all the main points. We covered all the points that we talk about with our clients. Yeah, the transition from living on my take-home salary to living on my take home total comp, including RSUs and bonus, it's gonna take a period or two to get comfortable with it.

If you have artists who is coming in quarterly, then that first quarter or two is just going to be a little clunky. So I wouldn't try to cut it too close to the bone. If you calculate that you have. A $2,000 monthly shortfall don't move over just 6,000 for a quarter, move over 10,000. Just to get the flywheel going and with a minimum of stress.

Mike: [00:25:54] Fantastic. Another great point. Thanks meg, thanks for all your insights on this.  And you run across as probably all the time that there's these opportunities, and we're just trying to highlight the taking advantage of this when you have opportunities it's not easy, but once you realize with these few things and getting used to it and over that first months and year, Hey, this is great.

And now we're really getting a lot of tax savings and future self is definitely going to thank you. 

Megan: [00:26:19] Yes. 

Mike: [00:26:21] Meg, where can people reach and find you? 

Megan: [00:26:24] Yeah. The easiest thing is probably just the, my firm's website, which is flow FP flow. As in water flow. F P as in financial planning flowfp.com. 

Mike: [00:26:34] Thank you so much for coming on the show. This has been fantastic information.

 thanks for joining us on financial planning for entrepreneurs. If you like, what you heard, please subscribe to and rate the podcast on Apple iTunes, Google play Spotify, or wherever you get your podcasts. You can connect with me on linkedin or mortonfinancialadvice.com. I'd love to get your feedback. If you have a comment or question, please email me at financialplanningpod@gmail.com. Until next time thanks for tuning in.