December 2024 Questions
By Kevin Estes
Q&A Session
T-Mobile employees asked many good questions recently!
How can T-Mobile employees make the most of their paycheck and resources in ways non-T-Mobile employees cannot?
What will happen to the RSUs that haven’t vested when I retire?
Can I have an HSA if I’m on Medicare?
How do you reduce exposure to T-Mobile stock without a huge tax impact?
What is recommended to put into a 401(k) before retirement age?
How much is too much to contribute to a pre-tax 401(k)?
What are some good apps for individual investing?
What are stable options to invest in long-term growth?
What are some things to consider when inheriting a Roth IRA?
What are your thoughts on investing in crypto?
Below are some quick thoughts. None of them include any financial, tax, or legal advice.
1. How can T-Mobile employees make the most of their paycheck and resources in ways non-T-Mobile employees cannot?
T-Mobile employees have many compelling benefits!
Restricted Stock Units
It’s rare for a company to grant Restricted Stock Units (RSUs) to every full-time employee in the company. I believe T-Mobile was the first!
RSUs help align incentives. Employees think like owners because they are owners!
Starting February 2024, T-Mobile began granting Restricted Stock Units which vest every six months instead of once a year. That’s better!
The August Restricted Stock Unit vests will slowly grow over time.
In theory, the February RSU vests would fall. However, they might not because of the:
recent increase in the stock price and
increase in the dollar value of RSU grants.
Bonuses
Salaried employees typically receive an annual bonus for the Short-Term Incentive Plan (STIP) in late February.
Hourly employees often receive monthly bonuses from comissions (Retail) or monthly cash incentives (Care).
There’s an opportunity for employees to contribute different percentages of their pay to a 401(k) based on whether it’s:
regular pay or
bonus.
Contributing a higher percentage of bonuses may be a way to save without restricting cash flow.
Employee Stock Purchase Plan
T-Mobile’s ESPP is generous. It offers employees the chance to buy at a a 15% discount off the lower price at the:
beginning and
end of each six-month period.
If the price rises over the six months, the discount is bigger than 15%.
Even if the price falls or stays the same, the expected gain is about 18%. That’s because the discount lowers the purchase price.
For example:
$100 stock price
less 15% discount
equals $85 purchase price.
$15 / $85 is about an 18% gain every six months. It could be more if the stock price rises. It may be less if the price falls after purchase.
Health Benefits
T-Mobile’s health benefits are generally good.
It’s a way the company has chosen to compensate employees. It’s also because Retail and Care employees skew the average age younger than many other companies.
A High Deductible Health Plan (HDHP) could be right for an employee. If so, it’s worth considering a Health Savings Account (HSA).
Insurance
Life and disability insurance is relatively inexpensive for T-Mobile employees for many of the same reasons.
As we age, we trade:
human capital (time) for
financial capital (money).
Life and disability insurance can be especially important for young families.
After-Tax 401(k)
This option was added a few years ago. The after-tax 401(k) plan allows in-plan distributions, which opened up the Mega Roth.
After-tax has a much higher contribution limit than the combined pre-tax/Roth 401(k). The 2024 limits are below.
Pre-tax/Roth: $23,000 combined
After-tax: $69,000 - employee contributions - employer contributions
The after-tax 401(k) offers supersavers a chance to save even more for retirement.
Legal Assistance Plan
The legal assistance plan can be especially helpful for T-Mobile employees who haven’t yet completed their estate documents.
The cost is reasonable and signing up provides some accountability to create these important documents.
2. What will happen to the RSUs that haven’t vested when I retire?
Unvested Restricted Stock Units (RSUs) are usually forfeited upon leaving T-Mobile.
That’s part of why I waited until April 1st to leave. I noticed much of my compensation was in the first three months each year:
Restricted Stock Unit (RSU) vests,
annual bonus (Short Term Incentive Plan), and
the larger of the two Employee Stock Purchase Plan (ESPP) buys.
It’s become a little less lumpy with T-Mobile’s new RSU grants vesting every six months instead of once a year.
If an employee is laid off, some additional units may vest as part of the severance package. That’s part of why it almost always makes sense to accept RSU grants.
3. Can I have an HSA if I’m on Medicare?
Yes. An employee who’s on Medicare can have and spend a Health Savings Account (HSA).
However, they can no longer contribute to an HSA.
Health Savings Account funds can be used for a variety of expenses, including:
preventative care,
insurance premiums, and
ongoing expenses.
4. How do you reduce exposure to T-Mobile stock without a huge tax impact?
Whether to sell a stock depends on someone’s specific situation. However, diversifying out of a concentrated position may raise taxes less that they think.
Restricted Stock Units
Usually, some shares of stock are withheld for taxes when Restricted Stock Units vest. Their employer can advise how much to withhold.
The remaining shares are treated as if the employee purchased them the day the units vested:
If they sell right away at the price when the units vested, they won’t own additional taxes.
If they sell the shares within a year, they’ll realize a short-term gain or loss.
If they hold the shares over a year and then sell, they’ll have a long-term capital gain or loss.
Employee Stock Purchase Plan (ESPP)
The taxation is a bit different for shares purchased at a discount through the Employee Stock Purchase Plan.
For the long-term capital tax treatment to apply, shares must:
be held longer than a year from purchase and
held more than two years from the start of the ESPP offer period.
T-Mobile’s ESPP offer periods are six months. Someone would need to hold the shares over a year and a half after purchase for part of a gain to be treated as long-term.
The discount of at least 15% is generally taxed as ordinary income. However, the gain above the fair market value on the date of purchase may be a long-term capital gain.
Current Taxes
T-Mobile’s stock has done well in recent years! Many employees have unrealized gains.
The federal government encourages long-term investing. That’s why long-term capital gains are taxed at a lower rate than ordinary income.
There are essentially three long-term capital gain tax rates:
0% for low income,
15% for moderate income, and
20% for high income.
Many of us are taxed at the 15% long-term capital gains rate. For instance, the 15% rate applied to 2023 taxable incomes of:
$44,626 to $492,300 for single filers
$89,250 to $553,850 for married, filing jointly.
Short-term capital gains are usually taxed at someone’s ordinary marginal tax rate.
Future Taxes
There’s really no telling where tax rates will go from here. Given the result of the recent election, my hunch is that taxes may remain lower for the next four years.
However, we’re going to have to pay for the heavy pandemic spending at some point. My guess is that tax rates will rise in the coming decades.
Net Investment Income Tax (NIIT)
The Net Investment Income Tax was introduced at the start of 2013. That extra 3.8% tax applies to investment income above certain limits.
It’s also known as the unearned income Medicare contribution tax because it helps fund Medicare.
The Modified Adjusted Gross Income (MAGI) thresholds are:
$250,000 for married, filing jointly and
$200,000 for single filers.
One strategy is to sell enough stock to stay below these income limits. However, other considerations like diversification and cash flow might cause someone to take a different approach.
5. What is recommended to put into a 401(k) before retirement age?
How much to contribute depends on someone’s situation.
Minimize Lifetime Taxes
Many people think of taxes as an annual event: their tax return. It’s an annual ritual to minimize their tax bill.
Taking a longer view can help minimize lifetime taxes.
For instance, it may make sense to:
lower income during high-income years and
raise it during low-income years.
Paying no tax often isn’t ideal because it could miss out on the:
standard deduction and
low tax brackets (10%, 12%).
Minimizing taxes in a low-income year could cause someone to pay a higher tax rate later!
Base Case
Let’s assume someone makes good money, saves diligently, and already has a large pre-tax retirement balance. Their high income while working forces them to pay a lot of tax.
They plan to retire early at age 58. They may have very little income and pay almost no tax the following 17 years.
At age 75, they’ll likely be subject to Required Minimum Distributions (RMDs). Those are amounts the federal government requires someone take out of their pre-tax retirement accounts each year. It’s based on a percentage, which grows with age.
Uncle Sam essentially get impatient. It allowed:
contributions to lower taxable income when contributed and
then grow tax-deferred for decades.
Now, the government wants the taxes!
However, the process is challenging. Americans in their mid-70’s are expected to calculate how much to withdraw from each account every year based on a changing percentage.
Lower Income While Working
It may make sense to lower taxable income when working.
Someone may contribute to:
a pre-tax 401(k),
or some other tax advantaged account.
It might also make sense to:
defer compensation,
delay the sale of appreciated stock,
give more to charity, and more.
Raise Income in Early Retirement
The opposite may hold once someone retires.
They might:
distribute funds from a pre-tax retirement account,
convert balances from pre-tax to Roth,
sell appreciated assets, and more.
Doing so could lock in lower tax rates using the:
standard or itemized deductions and
lower tax brackets.
Taking action early in retirement may reduce or even eliminate Required Minimum Distributions.
Lower Income Later in Life
It may make sense to pivot back to income reduction once someone’s in their mid-70’s.
Required Minimum Distributions really only matter if someone must withdraw more than they want from their pre-tax retirement accounts.
Large pre-tax distributions could be taxed at high rates. The highest marginal federal tax rates are currently 32%, 35%, and 37%.
Other opportunities could include:
using a Health Savings Account (HSA) instead of pre-tax retirement funds to pay for qualified medical expenses,
donating to charity - especially through Qualified Charitable Distributions (QCDs), and
giving income-producing assets to loved ones.
The right steps at each age depend on someone’s specific situation.
6. How much is too much to contribute to a pre-tax 401(k)?
It’s possible to oversave to a 401(k)!
Negative Cash Flow
The first sign someone may be investing too much is negative cash flow.
If someone’s racking up credit card or other high-interest debt, it may make sense to pull back on contributions.
However, it depends. Debt isn’t always bad.
Low Current Tax Rate
Someone who makes less income may be better off contributing to an after-tax account.
That’s especially true for the lowest tax brackets: 0%, 10%, or 12%. Young and part-time workers often pay these low rates.
High School
For instance, a high schooler may not need the funds they earn from a summer job. They also might not pay much - if any - federal income tax!
It may make sense for them to open and fund a Roth IRA.
Recent Grad
A recent college graduate may be in a similar position their first year. Their income from a partial year may put them in a low tax bracket.
Roth or After-Tax contributions may grow tax-free for decades. The lifetime savings could exceed the benefit of pre-tax contributions.
Career Break
The same could apply to someone who’s not working as much as they normally would.
A year spent helping a family member or finding a new position after a layoff may be a good one to:
contribute to an after-tax account or
convert funds from pre-tax to after-tax.
Lower income is also less likely to exceed the Roth IRA income limits.
If someone’s tax rate is lower than it will be later in life, it may make sense to contribute to after-tax instead of pre-tax!
Run Out Before 59.5
Funds taken out of a pre-tax retirement plan before age 59.5 may be:
taxed and
charged a 10% penalty.
While there are exceptions, there are drawbacks to each.
One sign someone may be contributing too much to their pre-tax 401(k) is if they won’t have enough in taxable accounts to fund their living expenses until age 59.5. That’s a major risk for early retirees.
Having an emergency/opportunity fund may be the first step.
I typically suggest someone keep at least three to six months’ of living expenses handy. I may extend that to one or two years if someone’s nearing retirement.
An emergency/opportunity fund can delay selling when the market dips. It also provides peace of mind.
Miss Opportunities
Contributing too much to a pre-tax 401(k) can cause someone to miss out on bigger opportunities.
It helps to explore many options, including:
debt reduction,
reliable transportation,
higher insurance deductibles,
pay in advance discounts,
Employee Stock Purchase Plan,
real estate repairs,
continuing education, and more!
Required Minimum Distributions
A fourth sign someone may be contributing too much to their pre-tax 401(k) is if they’ll be subject to Required Minimum Distributions (RMDs).
Someone’s real estate investments, Social Security, pension, or other income might fund their expenses later in life! That’s especially likely if they can delay Social Security benefits past their full retirement age.
It’s worth considering how much:
they have now,
they plan to save, and
their investments could grow.
The “rule” of 72 estimates how long it takes an investment to double.
An investment with a 7.2% annual return is expected to double about every decade (72 / 7.2).
$200,000 at age 30 could grow to over $13 million by age 90.
Estate Tax
Not to get too literal but the final step somoene may be saving too much into their pre-tax 401(k) is if doing so impacts their estate plan.
It matters where their assets will go after they pass.
Charity
A large pre-tax 401(k) account may not be a problem if they plan to leave it to charity. Nonprofits generally don’t pay income taxes!
Getting a tax saving and then leaving the money to charity could avoid income tax altogether.
Higher Tax Rate
A large pre-tax retirement account could also incur a big tax bill.
All funds may need to be withdrawn within 10 years. Those distributions would likely be taxed as ordinary income. The heir pays the taxes the deceased didn’t!
Worse, the beneficiary may be in their peak earning years. Adding to their already high income could force them to pay a higher tax rate than the original owner would have!
Estate Tax
Pre-tax accounts are often larger than their after-tax counterparts. The difference is the income taxes to convert the funds from pre-tax to after-tax.
It matters if their estate would be taxed.
Although the federal estate tax exemption is currently high:
it’s scheduled to fall to about $7 million by 2026 and
many states have a much lower exemption.
For instance, Oregon taxes estates above $1 million. Washington’s estate tax starts at $2.193 million.
It may make sense for someone whose estate will be taxed to convert funds from pre-tax to after-tax.
Doing so could lower the combined taxes:
owner’s lifetime taxes,
estate taxes, and
heir’s lifetime taxes.
7. What are some good apps for individual investing?
I don’t have a lot of passion about investing apps. There are pros and cons to using them.
Pros
Access
A good app can make investing easier. That can be helpful for someone who might otherwise not invest!
Improved access is a big benefit.
Aggregation
Several apps pull information from multiple custodians. The combined view can help someone see and adjust their portfolio allocation.
Visibility
An app can also help someone keep track of old accounts.
That feature may be especially helpful if someone were to become disabled or die. An app listing the custodian, account, and balance can help a loved one find lost accounts!
Tracking
It’s also handy to track spending and net worth over time.
Transaction detail can help someone identify which expenses aren’t worth it and possible even catch fraud! A net worth graph can be empowering.
Cons
Better Investments
The thing I like least about investment apps is that they might cause someone to overlook better investments.
An app is unlikely to offer:
an employer match on retirement contributions,
a discount through an Employee Stock Purchase Plan,
favorable insurance premiums,
rental investment opportunities,
pofessional development, and more!
What’s easy may not be what’s important.
More Trading
Ease can also cause someone to trade too frequently.
Often, the worst thing someone can do in a down market is panic sell. An app which flashes red and trades with a click can make it all too easy to bail out of the market.
Overhead
It takes work to keep the connections live. Links seem to break even when passwords don’t change.
Complexity
Technology has given rise to unnecessary complexity.
It’s possible to maintain dozens of accounts and hundreds of investments. However, that’s poor financial hygiene.
Simplicity is the ultimate sophistication.
Security
Each access point adds risk to personal security and privacy. Fewer accounts with strong passwords and dual factor authentication is better than many accounts with less security.
8. What are stable options to invest in long-term growth?
Stability and long-term growth tend to oppose each other.
A savings account offers stable returns at or near inflation.
Bonds tend to have more risk and higher expected returns.
Stocks tend to have still more risk and even higher expected returns.
Long-term investments may be invested more aggressively. The hope is higher returns offset larger short-term declines.
The opposite is true for funds needed soon. A short-term drop matters less on a multi-decade investment than on this week’s grocery money!
9. What are some things to consider when inheriting a Roth IRA?
Thank you for sharing. I’m sorry for your loss.
No Rush
There likely isn’t a hurry to do anything with the Roth IRA. That money can be emotional so it’s important to give everyone grace.
It sounds like you may be a designated beneficiary - not a:
spousal or
eligible designated beneficiary.
You may be subject to the 10-year rule. Here’s the IRS description:
Empty the entire account by the end of the 10th year following the year of the account owner's (or eligible designated beneficiary's) death.
No Income Tax
Good news! Since it’s a Roth IRA, distributions likely won’t increase taxable income.
Your tax bill probably won’t rise due to the inheritance - at least initially.
Steps Depend on Use
When to withdraw funds and how to invest them is more than I can share without knowing someone’s situation and goals.
Consider a couple examples:
buy a home and
invest long-term.
Buy a Home
Let’s say someone has dreamed of buying a home. They’ve been planning and saving for years.
The inheritance may help fund the downpayment. In that case, it might make sense to distribute the funds quickly.
Buying a home is more of a lifestyle decision than an investment.
Invest Long-Term
On the other hand, someone may already own a home and save aggressively. They may not need the inheritance anytime soon!
In that case, it might make sense to leave the funds invested in the Roth IRA as long as possible.
The funds may be invested aggressively to hopefully benefit from years of tax-free growth. Of course, other investments might need to be invested more conservatively to reach a desired total allocation.
It just depends.
10. What are your thoughts on investing in crypto?
It’s cool technology!
Investment
However, we saw in the early 2000’s that cool technology is one thing and a good investment is another.
Amazon had layoffs when the internet stock bubble burst. Many .com companies went out of business.
To me, there are two important questions to answer before investing in any technology:
What is the incremental value to society?
How much of that incremental value can be monetized?
Value Add to Society
The U.S. dollar is already digital. We use money around the world without touching it.
The pandemic showed we can survive with very little physical cash. Some countries are even considering going cashless!
What are the incremental benefits to society?
Yes, cryptocurrencies aren’t as subject to central bank influences. The value may not drop a few percent a year due to inflation.
However, is that good for society? Is there value in dollars becoming worth less over time to encourage:
heirs to work instead of live off their inheritance and
companies to invest for long-term growth?
Yes, cryptocurrencies may be harder to track. That adds some privacy.
Again, is that good for society? It can also make it easier to launder money, deal drugs, evade taxes, and other illegal activities.
Yes, cryptocurrencies could make some governments less powerful.
Is that all good? Does North Korean access to international funds benefit the world?
Some crypto “benefits” might actually harm society.
Monetization
Let’s assume some of the issues above are resolved and a cryptocurrency’s net benefit to society is positive.
How would that benefit be monetized? What could a cryptocurrency charge for its services?
Not Like Other Investments
Cryptocurrency isn’t like other investments:
government bonds pay interest,
real estate earns rent, and
businesses generate profits.
Crypto is a currency.
Its value is based on supply and demand. The intrinsic value is almost impossible to estimate because it lacks ongoing cash flow.
For these reasons, I’m unable to distinguish cryptocurrency from bubbles like:
I hope this helps!
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Disclaimer
In addition to the usual disclaimers, neither this post nor these images include any financial, tax, or legal advice.
