January 2025 Questions
By Kevin Estes
Q&A Session
T-Mobile employees asked some great questions recently!
How do I reduce the tax on stock grants?
What should I do with the money after I divest from a single stock?
What investments are there besides the S&P 500?
Should I contributed to a 529 plan?
Below are some quick thoughts. None of them include any financial, tax, or legal advice.
1. How do I reduce the tax on stock grants?
Units are almost always withheld when Restricted Stock Unit grants vest. As the units turn into shares, some are sold to pay taxes.
An employee could then sell their shares right away at the price when the units vested and pay no additional tax.
Example
Let’s say a stock price did extremely well and rose:
from $100 when RSUs were granted
to $200 when they vested.
Ten (10) shares vest and four (4) of them are withheld to pay taxes. The percent withheld may be based on the employer’s estimated tax rate for the employee sent to the custodian (such as Fidelity) for state and federal taxes.
The four (4) shares withheld are sold, with the proceeds sent to the government(s) for taxes. The remaining six (6) shares are deposted into the employee’s taxable account.
Example:
10 units vest
4 units withheld for taxes
6 shares deposited to the employee’s account
The employee could then sell those six (6) shares for $200 each without incurring any additional taxes!
Holding onto the stock is like an employee taking cash out of their checking account to buy more company stock.
Is that what they want to do?
Cash for Taxes
Depending on the stock plan, it may be possible for an employee to:
move money to their account and
direct the custodian to use those funds to pay the taxes due on the RSU vest.
Then, all the vesting stock shares might be deposited into the empoloyee’s account
However, I’ve never seen anyone do that.
2. What should I do with the money after I divest from a single stock?
it depends.
Single Stock Exposure
Employees often accumulate a bunch of company stock through:
Restricted Stock Units (ESPP),
Employee Stock Purchase Plans (ESPPs),
Incentive Stock Options (ISOs), and the like.
We love and believe in our company. That’s why we work there!
Unfortunately, people who work at other companies often feel the same way. On average, employers are average. They have an average total return.
A single action can take down a company:
a poor strategic decision by an executive,
fraud or a significant Accounting error,
the entry of a major competitor…
One stock is generally riskier than a portfolio of stocks.
An average expected return with an above average risk is suboptimal (though the investment might outperform despite the math).
Also, employees already had a lot riding on their employer. That’s especiall true if they live near a major office:
much of their income,
the value of their home,
their spouse’s income, etc.
It’s often prudent to diversify. Getting rich and staying wealthy are two different things.
ESPP
It could make more sense to contribute to an Employee Stock Purchase Plan (ESPP) than hold employer stock.
For instance, an ESPP may provide a 15% discount off the lower of the price at the beginning and end of six months.
10% Increase
Assume the stock price rises from $100 to $110 over the six months.
The ESPP purchase price would be $85: 15% off $100. The employee would purchase shares for $85 worth $110.
If they sold at $110, they would realize a 29% gain for participating. Someone who held company stock would have only had a 10% gain.
10% Decrease
Let’s say the stock fell from $100 to $90 over the six months.
The ESPP purchase price would be $76.50: 15% off $90. The employee would purchase shares for $76.50 worth $90.
If they sold at $90, they would realize an 18% gain for participating. Someone who held company stock would have had a 10% loss.
Health Savings Account
Contributing to a Health Savings Account (HSA) may be another opportunity to consider.
Limits
It’s possible for someone on a qualified High Deductible Health Plan to contribute to a Health Savings Account (HSA).
The contribution limit in 2025 for those under age 55 is $4,300. Employer contributions reduce how much the employee can contribute.
There’s a $1,000 catch-up for those age 55 and wiser. However, someone cannot contribute to a Health Savings Account once they go on Medicare.
Triple Tax Advantage
Health Savings Account contributions are unique in that they can:
lower taxable income the year contributed,
grow tax-free, and
be withdrawn tax-free for qualified medical expenses.
Usually, a certain balance (often $2,000) must be held in cash. Anything above that can be invested for long-term growth.
Uses
Health Savings Account funds can be used for many expenses like:
hearing aids,
Medicare premiums, and
the medical portion of long-term care.
Withdrawing funds from a Health Savings Account is a bit like taking money out of a Roth IRA. Those funds might not be taxed again!
It might even make sense to pay medical expenses out of pocket and save the receipts. If HSA funds are needed later, the account holder can submit old receipts for reimbursement.
Pre-Tax 401(k)
The big benefit of contributing to a 401(k) is the employer match.
Match
Many companies (including T-Mobile) match:
100% of the first 3% and
50% of the next 2% an employee contributes.
That is, a company may match 4% of the first 5% an employee contributes to their 401(k). That’s like an 80% gain.
Tax Savings
Pre-tax 401(k) contributions often lower taxable income. This can be especially important if the employee anticipates they’ll earn less in future years than they do today.
Early retirement is a good example. Somoene may have years or even decades with little earned income.
The tax system is progressive. The more you make, the more they take.
It may be possible to minimize lifetime taxes by:
lowering taxable income in high-income years and
raising it in low-income years.
Let’s say that without planning someone would pay a:
32% marginal tax rate in their peak earning years and
10% in early retirement.
Contributing to a pre-tax 401(k) when working and then distributing the funds in retirement might lower their lifetime tax bill. Even if the distributions bump them into the 12% tax bracket in retirement, they might still save 20% on income taxes!
Contribution Limit
The maximum 401(k) contribution for someone under age 50 in 2025 is $23,500. Someone who maxes out their pre-tax contribution might lower their lifetime taxes $4,700 ($23,500 * 20%).
Investment gains may extend the benefit.
After-Tax 401(k)
Employers sometimes have three options for 401(k) contributions:
pre-tax,
Roth, and
after-tax.
Pre-Tax
The U.S. government allows pre-tax contributions to:
lower taxable income the year contributed,
grow tax-deferred, and
be taxed when they’re withdrawn.
However, the government gets impatient. It wants people to pay taxes and requires them to take out a minimum amount each year once they reach a certain age.
These Required Minimum Distributions (RMDs) currently start at age 73 and last until the pre-tax account balance is exhausted. Fortunately, the RMD starting age is scheduled to rise to age 75.
RMDs could spike taxable income, causing someone to pay higher taxes. Withdrawing more than someone needs may not be ideal.
Think of it like a fruit tree. With pre-tax 401(k) contributions, the federal government doesn’t tax the seed but does tax the harvest.
Roth
Roth 401(k) contributions work the other way. These contributions are made with money that’s already been taxed. The Roth 401(k) gets what otherwise would have hit their checking account.
The contributions:
are taxed in the year they’re made,
grow tax-free, and
can be withdrawn tax-free if certain conditions are met.
For Roth accounts, the federal government generally taxes the seed but not the fruit.
Combined Pre-Tax and Roth Contribution Limit
As with pre-tax accounts, Roth 401(k) contributions can be matched by the employer.
However, the $23,500 employee contribution limit is for both the pre-tax and Roth 401(k).
If someone:
contributes $10,000 to their pre-tax 401(k),
they can only contribute $13,500 to their Roth 401(k).
Additional After-Tax Contributions
There’s a newer 401(k) option called after-tax.
It works like a Roth 401(k) with three major differences:
after-tax 401(k) contributions generally don’t receive employer matching,
the after-tax 401(k) has a different contribution limit, and
the investment growth of an after-tax 401(k) may be taxed.
The after-tax limit for 2025 is $70,000 less the employee and employer contributions for the year.
Say an unmarried 35-year-old earns $200,000 between salary and bonus. They contribute the maximum $23,500 to their pre-tax 401(k). Their employer matches $8,000 of their contribution.
The employee could contribute $38,500 in 2025 to their after-tax 401(k):
$70,000 - employee contribution - employer contribution = after-tax max
$70,000 - $23,500 - $8,000 = $38,500
That’s more than they can otherwise contribute to retirement accounts!
In fact, they wouldn’t have been able to contribute directly to a Roth IRA. Their $200,000 income exceeds the 2025 limit of $165,000.
Mega Roth
The after-tax plan may allow an employee to withdraw funds while still working for the employer. Those are called in-service distributions.
The in-service feature may let them move contributions to a Roth 401(k) or IRA. The benefit of that additional move is to avoid tax on growth.
Investment growth in an after-tax 401(k) is taxable. Therefore, it may be best to quickly move those contributions to a Roth account.
Some custodians will automatically sweep after-tax contributions at the employee’s request if in-service distributions are allowed. Setting that up may take a phone call to the custodian.
This process is called a few things, including Mega:
Roth,
Backdoor Roth, and
Two-Step Roth.
This process is a legal way to save even more for retirement. The funds might never be taxed again!
Roth accounts are especially helpful for heirs. If they inherit a pre-tax 401(k), the withdrawals would be subject to income taxes. Withdrawals from a Roth account generally aren’t!
An employee may already have reached the limits on their:
Employee Stock Purchase Plan (ESPP),
Health Savings Account (HSA), and
pre-tax 401(k).
Contributing to an after-tax account could make sense. However, it depends on many factors.
3. What investments are there besides the S&P 500?
Ah, the S&P 500. It sounds like a NASCAR race!
However, it’s a stock index that includes stocks from about 500 companies. S&P stands for Standard & Poor’s.
It isn’t especially diversified. The index includes the largest 500 publicy traded companies in the United States.
It’s currently weighted toward technology companies. As of December 31, 2024, “Information Technology” accounted for 32.5% of the S&P 500.
Seattle area employees often own employer stock. Investing in the S&P 500 could buy even more of their company stock!
Other Stocks
There are other stock investments like:
mid-cap, and
international.
Investing in these could put eggs in different baskets and help lower risk. It’s possible to buy essentially every public company with a single index.
Of course, investment costs matter. It’s also important to consider whether it’s right for someone’s portfolio.
Bonds
Another option is to invest in bonds or bond funds.
A bond is usually debt issued by companies and government entities. The interest rates for the U.S. government are typically lower than those of companies because of the lower perceived risk.
Investing in bonds can add stability to a portfolio. It’s a different type of investment altogether. Bond values generally depend more on market interest rates than the overall economy.
Other Investments
Other potential investments include:
private businesses,
real estate, and
alternative investments.
Each of these has its own costs, benefits, limitations, and time commitments.
Insurance
It can help to take a broader view of opportunities.
People are often underinsured. Their income and net worth may have risen faster than their coverage!
Coverage
We often think of auto insurance for vehicle damage. However, injuries can be much more expensive.
I like to see coverage limits like $100,000, $250,000, $500,000, or more.
Without enough coverage, one bad accident could wipe someone out financially.
Umbrella
Umbrella insurance rests on top of other insurance such as auto and home insurance. It helps pay for expenses above other limits.
Let’s say someone causes an accident which knocks a trailer carrying luxury vechicles off the road. The bill could easily exceed $500,000!
Umbrella insurance might pay the extra.
It may make sense to have at least as much umbrella coverage as net worth. That way, an accident (hopefully) wouldn’t take everything!
For instance, someone with a $2 million net worth may benefit from a $2 million umbrella insurance policy. However, it depends on their situation.
Umbrella insurance is surprisingly inexpensive. It requires minimum coverage limits on other insurance policies like home and auto.
Deductibles
In addition to being underinsured, people often have low deductibles.
The good news with low deductibles is that many expenses would be covered if there was an issue. The bad news is the premiums may be very high.
Insurance is for what someone can’t afford to replace. Those are major losses - not regular expenses.
It’s possible someone could both increase their coverage and pay less by raising their deductibles! Of course, a higher deductible requires enough cash to pay expenses.
Prepayment
Insurers sometimes offer massive discounts for paying six months or a year in advance.
Our family’s auto insurer offers a 26% discount for us to pay six months upfront. Other insurance companies offer discounts for paying a year in advance.
If someone has the cash, it may make sense to prepay insurance premiums. They may also save a lot by shopping insurance.
Replace Services with Products
Software companies have had success turning products into services and charging monthly. The opposite might help an individual!
A few examples include:
buying a router instead of renting it from the cable company,
buying a pressure cooker to simplify meal prep, and
buying a lawn mower to replace a lawn care service.
4. Should I contribute to a 529 plan?
A 529 plan is an option to save for future education expenses.
Features
Funds can be used for vocational, community college, and graduate school - not just for four-year degrees.
Technology has made it easier to contribute, invest funds, and change beneficiaries.
Over time, the laws have also been relaxed to include more options:
Since 2017, families can use up to $10,000 a year for K-12 private school tuition.
As of 2019, up to $10,000 can be applied to qualified student loans.
A change effective last year (2024) enables families who saved more than they needed to roll up to $35,000 into a Roth IRA.
Funding
A contribution to a 529 plan is treated like a gift.
However, there’s a special 529 funding rule. Someone can contribute up to five years at once and avoid gift and estate tax impacts. This “superfunding” is based on the annual gift tax exclusion limit, which is currently $19,000.
That is, someone could contribute $95,000 to a 529 plan:
5 years * $19,000 annual exclusion
However, they may not be able to give additional gifts to the 529 plan beneficiary for the next five years without impacting the combined gift and estate tax. They would also need to complete IRS Form 709.
A married couple could double that contribution amount to $190,000 to a single 529 plan in 2025!
Matching
One potential way to supercharge 529 saving is to offer to match relatives’ contributions.
We did this for our daughter and have matched contributions from both sets of grandparents and a couple uncles.
Sending them a link to the 529 makes it easier to give. Matching all contributions also guarantees we contribute more than anyone else.
Caution
However, there may be better opportunities. Funds in a 529 plan are included in financial aid calculations… at a low percent of assets.
Also, it’s a gift. There aren’t scholarships for retirement like for college.
Think of it like when an airplane cabin depressurizes. Take care of yourself before assisting those around you!
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.