Life doesn’t end after retirement. That is why having a solid plan set up is vital to spending your retirement in comfort. 

Standard retirement plans like a 401(k) aren’t the only way to save money for your post-employment life, and so many people choose to invest their money in stocks and other financial assets. With that said, we’ve found that many people miss out on smart financial moves, either because their advisor doesn’t know how to make them or because they themselves aren’t aware that such options exist.

In this article, we will be taking a look at how deferred compensation plans, restricted stock units, and stock purchase plans can affect your retirement and whether or not these options are worth discussing with your financial advisor. 

What is a Deferred Compensation Plan?

A deferred compensation plan allows an employer to delay your compensation until a specific future date, typically after your retirement. A deferred compensation plan may consist of a retirement plan, employee stock options, or a pension. These types of retirement plans are normally offered to a select group of employees, typically high earners, like executives, as a way to allow them to receive a part of their compensation with earnings at a later date. 

How Does a Deferred Compensation Plan Compare to a 401(k)? 

Similar to a 401(k) or a traditional IRA, the money that’s put in a deferred compensation plan grows in a tax-deferred way. However, unlike a traditional IRA or a 401(k), there’s no limit to the contribution you can make to a deferred compensation plan. For example, last year, the contribution limits for a 401(k) were $19,500 or $26,000 if you’re above the age of 50 – with deferred compensation plans, these limits do not exist; you have the option to defer up to all your annual bonus and set it aside for your retirement. 

Another big difference is how funds are distributed. With an IRA or a 401(k), you have to be at least 59 and a half years old to make withdrawals without facing penalties. With deferred compensation plans, you can time the payment to come whenever you feel like you would need them – at retirement or, for example, when your children are going off to college. 

Advantages and Disadvantages of Deferred Compensation Plans

Deferred compensation plans are a lot more flexible compared to the other, more widespread retirement plans. You won’t face a lot of the limitations and penalties that are a part of IRAs and 401(k) plans. However, a deferred compensation plan carries some risk, as the funds belong to your employer until they’re distributed. 

There’s also not a lot of flexibility in investing the money, as it’s typically placed in company stock – that means that if the company goes bankrupt, your balance will also get lost. That’s one of the main reasons why these types of plans are often offered to executives and C-level management positions, as these people are much less likely to quit their job and are also a lot more invested in the future of the company they work for. 

What Are Restricted Stock Units?

Restricted stock units are a form of compensation issued to an employee in the form of company shares. Restricted stock units (RSUs) are issued to workers through a vesting plan and distribution schedule after they’ve stayed in the company for a particular length of time or have reached a specific milestone. 

Normally, RSUs represent company stock with no tangible value until the vesting is complete. When they vest, RSUs get assigned a fair market value. Once vested, they’re considered income, and a portion of them is withheld to pay income taxes. After that, the employee will receive the remaining shares and can choose to keep or sell them. 

Here you have to keep in mind that the vesting period may last several years, and during that time, you have no way of selling the stocks. With that said, unlike stock options or warrants, restricted stock units will always have some value that’s based on the underlying shares.

What’s an Employee Stock Purchase Plan? 

An employee stock purchase plan is a term that refers to a company-run program in which employees can purchase stock of the company for a discounted price. Employees contribute to the plan through payroll deductions, which accumulate between the offering date and the purchase date. Once the purchase date arrives, the company uses those build-up funds to buy stock on behalf of the participating employee.

Qualified vs. Non-qualified Plans 

Typically, these types of company-run programs are categorized in two ways: qualified and non-qualified. If the plan is qualified, it will require the approval of the shareholders before getting implemented, all of the participants are entitled to equal rights. Here, the offering period cannot be longer than three years, and there are restrictions on the maximum discount allowable. On the other hand, non-qualified plans have a lot fewer restrictions than qualified ones. However, they do not offer the same tax advantages that qualified plans do. 

Important Dates

Participation in a company program like ESPP may only start after the offering period has begun. This period starts on the offering date, which typically is the same as the grant date for the stock option plans. The purchase date is typically a mark for the end of the payroll deduction period. Some offerings, however, tend to have multiple purchase dates in which you may purchase stock. 

Eligibility

In most cases, people who own more than 5% of company stock aren’t allowed to participate in ESPPs. Restrictions are also placed on employees who haven’t been in the organization for a specific period of time – typically one year. Besides those two limitations, all other employees have the right to participate in the plan if they want to.

Limitations and Taxation Rules 

When applying for the program, employees are required to state the amount of money that they want to be deducted from their pay and contributed to the plan. Here, there might be a percentage limit. Additionally, the Internal Revenue Service restricts the total amount to $25,000 per year. 

When it comes to taxes, things are a bit complicated. Generally, qualifying dispositions are taxed during the same year when the stock was sold. Any discount offered on the original stock price is taxed like income, while the remaining gain is a long-term capital gain. On the other hand, unqualified dispositions can lead to the entire gain being taxed at ordinary income tax rates.

How Can You Maximize the Benefits of Such Programs?

At Alpha Wealth Funds, we’ve gathered quite a lot of experience in managing investment portfolios. If you choose to participate in the programs listed above, we can give you many options in alignment with your end goals so that you can get the maximum benefit possible. For example, if you want to keep the company stock you’ve invested in, we can use options like covered calls to make a passive income on the stock. On the other hand, when you finally decide to sell the stock, options contracts will help you get more profit when used in the right market conditions. 

Remember, your retirement plans should not begin and end with a simple IRA or 401(k) plan. Instead, they should include multiple financial programs that will help you maximize the amount of money you can have at hand when you’re already retired. At Alpha Wealth Funds, we have the experience and knowledge necessary to manage the programs described in this article. Our financial advisors are able to help you get the most benefits so that you don’t have to wonder how to do it correctly or stress about whether you’re making the right moves. 

Please feel free to reach out to me on this or any of your investment needs or questions. I may not always have the answers at my fingertips, but I promise I will get them for you. Chase Thomas

Founded in 2010, our services include boutique hedge funds, separately managed accounts, financial planning, estate & trust services, private placements, and in-house concierge services for high net worth individuals, families, and businesses.

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