If you are planning on receiving a restricted stock unit plan, there are three strategies to help reduce how much you need to pay in taxes. Mark Whitaker goes over the three strategies including maxing out your 401k contributions, funding a 529 education account for your children, and pre-paying multiple years of charitable donations.
An old friend of mine works for a technology company in Utah. The company was recently acquired, and he will receive $1,000,000 from the company’s Restricted Stock Unit Plan. He is already in a high tax bracket from his regular income and his RSU payout will only compound his tax problems. He stands to lose between 40-45% of his RSU payment to taxes!
So how does one deal with the RSU payment tax bomb?
A little bit of proactive tax planning can go a long way to help you keep more of your RSU benefit now and help you secure your future.
3 strategies for reducing the tax hit from your RSU payment:
1. Max out your 401k contributions. This idea is simple, so simple in fact that many people will probably overlook it. For 2019 you can contribute $19,000 on a pre-tax basis, and an extra $6,000 on top of that if you are over age 50. If you are not on track to max out your 401k, talk with your HR department to make the switch. In the year you receive your RSU payment, you will want to make sure that your 401k contributions are happening on a pre-tax basis. Roth 401k contributions may have made sense in past years, but it will not be your best option in the year of an RSU payment.
2. Fund a 529 education account for each of your children. Utah offers a 5% tax credit for contributions up to $4,000 per qualified beneficiary. This means you can get a $200 tax credit for each child. With a 529 account, you are not only reducing your taxes this year, but all the growth is also tax free and will be tax free when it is taken out to pay for college down the road.
3. Pre-pay multiple years of charitable donations. This is the most powerful tax reduction strategy available through the use of a Donor Advised Fund. A donor advised fund, or DAF for short, is like a charitable investment account that holds your charitable dollars until you ultimately decide where you want those charitable dollars to go. The value of the DAF is that you will receive a tax deduction in the year when you need it most and the money you donate to the DAF can then be parsed out in future years to pay church donations or to support other charitable causes in the community. The funds can even be used to pay for the missions of your children and even grandchildren! Another unique benefit of a donor advised fund is that the money that is placed in the fund can be invested. This means your initial contribution to the DAF can potentially grow to enhance the future value of your contribution to your charities.
One last piece of advice: buying a product is not the solution, having a plan is. There are plenty of salesman who are eager to earn a commission by selling you a product, but what you really need is a plan. At Peterson Wealth Advisors we have been helping successful professionals and retirees with complex financial planning decisions since 1986. Click here to learn more and schedule a complimentary consultation to review your situation with one of our experienced advisors!
Mark Whitaker holds a bachelor’s degree from Utah Valley University in Personal Financial Planning and a master’s degree from the College for Financial Planning in Personal Financial Planning.