Wealth Client Case Study
Brian & Lindsey
Marital Status: Married
State of Residence: CA
Clients: Lindsey (36) is Senior Director at Salesforce & Brian (34) is Senior Leader at Gusto
Background:
Lindsey has been at Salesforce for 6 years and was recently promoted to Senior Director. With her promotion, she received a large RSU grant & she also participates in the Salesforce Employee Stock Purchase Plan. She is seeking guidance on how to manage her company stock exposure & understanding the tax implications of each form of equity.
Brian is Chief of Staff at a late-stage, VC-backed company. Over the past 3.5 years, he has been granted a combination of Incentive Stock Options (ISOs) and double-trigger RSUs.He is seeking guidance on creating an exercise plan for his ISOs to minimize his tax exposure ahead of potential IPO & position himself to retain more upside by starting the long-term holding period on his shares.
As their income has risen over the past few years, so has the amount of taxes they are paying. They had a surprise tax bill when they filed their return last year, so they want to prevent unpleasant surprise tax bills in the future, as well as proactively plan for how they can lower their tax exposure going forward.
They have been married for two years and desire to start their family and purchase their first home within the next 2-3 years. Outside of work, they love to travel together, including recent trips to Hawaii & London.
Advisor Recommendations,
Actions Taken:
- Switched 401k contributions from Roth to Pre-Tax - Now that they are both making higher incomes and are in the 35% Federal tax bracket, we discussed how deferring taxes in high-income years can help to lower the taxes they pay throughout their lifetime.
- Increased Tax Withholding to 37% on Lindsey’s CRM RSUs - I educated her that the IRS deems RSUs as “supplemental income”, therefore, the default federal tax withholding is 22%. Since they are currently in the 35% tax bracket, the under-withholding on her RSUs last year is likely the culprit for their surprise tax bill.
- Established Mega Backdoor Roth Contributions - We reviewed the benefits offered through Salesforce & discussed the tax-advantages of making After-Tax 401k contributions & converting these into her Roth 401k account. We elected for 15% of her annual bonus to be directed to her After-Tax 401k and we set-up automatic, in-plan Roth conversions together on the Fidelity 401k platform.
- Implemented a Savings Strategy to Balance Long - Term Investment Growth & Stability for Near-Term Goals - Since their joint income increased faster than their expenses, they had accumulated a significant cash balance in their checking accounts. We discussed the benefits of keeping a healthy cash reserve in an interest-bearing savings account. We then redeployed their excess cash into two investment strategies: 1) An aggressive, primarily diversified stock-based portfolio for long-term growth and 2) A stable, short-duration bond portfolio for stability.
- Built a multi-year exercise plan for Brian’s ISOs - While he is optimistic on his company’s future, he wants guidance on how much money is responsible to invest into a single company & how to plan around Alternative Minimum Tax (AMT). We ran a tax projection and modeled three exercise scenarios, where he exercises ISOs this year to stay below the AMT-threshold and exercise additional ISOs in January ahead of his company’s planned 409a revaluation.