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Stock options workshop = *headdesk*

June 11th, 2015 at 06:22 am

I went to a stock options workshop at work. Now that the stock price has risen such that my vested options are worth a whopping $344K at fair market value (rising to $500K by year's end when more shares vest, assuming the price holds steady), I figured that it's finally time to learn how to deal with them.

I went into the workshop all happy and excited. I left decidedly less so, because I realized that I dun goofed pretty badly when it comes to tax planning.

My original plan was to buy out all of my ISOs with about $50K in cash in September, after the remaining shares vest, and hold them for long-term capital gains. I was also going to start selling off my NQs up to the Roth IRA AGI limit each year and move the money into more diversified investment vehicles.

Now that I've learned all about the AMT, I've realized that I can't do that.

I want to preface what's coming next by first saying that (my earlier

Text is marriage penalty and Link is http://amberfocus.savingadvice.com/2015/03/26/the-marriage-penalty-is-brutal_196769/
marriage penalty post aside, which was more intended to be an analysis than actual griping) I almost NEVER complain about taxes. Furthermore, I HATE people -- especially rich people -- who complain about taxes. Yeah, I get that they're a pain, and it's not like I don't try to minimize/optimize my own tax bill (mostly because I try to minimize/optimize everything), but at the end of the day, taxes are the price you pay to live in a civilized society, as well as a "problem" that you only have if you've MADE MONEY. Making LESS money is still way better than making NO money.

But the phantom tax on ISO spreads? OMG, that's TOTAL BULLSHIT.

I know, I know, cry me a river -- but I am relatively certain that after I buy out my ISOs, I cannot afford the AMT that gets triggered on the $330K spread. I am FINE with paying taxes if I've actually made money, but I'd like to buy and hold in this case, which means that not only have I not made a dime, I've sunk in my own capital, and not even a nutjob like me has the kind of liquidity to afford the tax bill under the AMT. Not to mention the fact that triggering the AMT effectively negates all that is nice about ISOs relative to NQs.

I'm immensely frustrated right now, because I should've learned about all this way earlier. I should've been buying out my ISOs two years ago when the spread was much lower. I let the ball drop on this, and I'm kicking myself. As it stands, I'm gonna be spending the weekend plugging numbers into the AMT worksheet and seeing if there's any way to make this situation suck less.

I got all excited when I saw the stock price shoot up earlier this year. I thought that I could shave a few years off my FIRE date. I thought that if the market doesn't tank, maybe I could FIRE as early as 2017. Now I will probably have to throttle my ISO buyout to stay under the AMT threshold, and at the rate the stock (and my salary) is rising, I have no clue how long that's going to take.

I'm really trying to keep some perspective on all this. Yes, I got blindsided by the AMT with regards to exercising my ISOs, but even in the absolute worst-case scenario, in which I assume that half of my options are lost to taxes, my projections still have me reaching my FIRE goal of $1 million in three years, which is still two years ahead of how long it would take without any options at all.

I'll re-evaluate everything once I've worked out the AMT numbers. It is what it is and I'm still a lucky bastard no matter what. Once this is all sorted and I have a plan, I hope to not complain about taxes again for a long, long time.

Me vs. Insurance Agents

May 20th, 2015 at 09:38 pm

It tools weeks of wrangling, but multiple calls and e-mails to multiple insurance companies have paid off.

Last year, my homeowner's and auto insurance premiums were:

- home: $1031
- car #1: $1233 (comprehensive)
- car #2: $630 (liability)
- total: $2894

Now, after raising deductibles and lots of relentless haggling back and forth, I've gotten them reduced to:

- home: $676
- car #1: $620 (still comprehensive!)
- car #2: $267
- total: $1563

So I just saved $1,331 per year. Not bad at all. Between this and the $2715 savings in health insurance premiums when the SO and I both switched to high-deductible health plans, and this is a good year for insurance. Probably should have done this sooner, in retrospect, but from now on, I'm gonna keep a much closer eye on the insurance bill -- because jousting with insurance agents could be way worse.

Is this the real life? Is this just fantasy?

May 18th, 2015 at 03:34 pm

Employer stock price went crazy and hit record highs today, and look at what happened in Mint --



I fully expect it to dip back below, but it sure was exciting to see assets hit seven figures for the first time. Maybe by this time next year, net worth will also be seven figures. One can dream. Smile

Fun with Spreadsheets and Pivot Tables

April 12th, 2015 at 06:33 pm

I just spent the majority of this weekend working on a comprehensive financial spreadsheet tracking every single investment transaction I've made in 2015.

(I know, I know, I have NO life.)

I'm using GoogleFinance functions that dynamically update share price and market values, and I am having a blast using pivot tables to break out the data in a variety of ways. Behold the plots I've done so far --

Asset Allocation pie chart (excluding stock options) --



Asset Location bar chart showing asset classes in various tax buckets --



Which accounts and funds my investments have gone --



Cumulative timeline of this year's 401(k), IRA, and brokerage contributions --



And now I know that I'm $24,869.60 short on my target allocation for international equities. And I can also recall random Vanguard fund tickers with disturbing familiarity, heh.

1Q 2015 Checkup

April 10th, 2015 at 01:51 am

Quick snapshot of the financial situation as of close of business 9-Apr-15:

Cash: $16,297.63

Home: $169,378 minus ($129,766.66) mortgage = $39,611.34 equity

Car: $13,900

Investments: $749,901.40

- 401(k): $113,746.98
- Roth IRA: $115,696.03
- Rollover IRA: $65,449.31
- Rollover IRA Brokerage: $9818.84
- HSA: $1132.78 (currently in cash; need $2500 minimum balance to invest)
- Taxable: $149,983.61
- Stock Options: $294,073.85 vested (out of $504,931.90 total)

Net Worth: $819,710.37

In recent weeks/months, I've made the following adjustments to my portfolio:

- Swapped 20% of my 401(k) from Vanguard Institutional Index (VINIX) to Vanguard Extended Market Index (VEXAX) to approximate the Vanguard Total Stock Market Index (VTSAX, which I can't get directly in my 401(k)), and balanced my future contributions to be an 80/20 split.

- Seeded $11K from money market into a taxable VTSAX holding, and will henceforth be using that instead of my S&P500 holding, which I'm retiring.

- Increased my taxable investments from $400/week to $500/week -- because I got a raise and bonus at the end of last year, and what else am I gonna do with it? :P

- Killed my (brand-new Frown) traditional IRA. I apparently make too much money to take the deduction now.

- I want my domestic to international equities ratio to be 2:1, but I'm at 2.76:1 right now, so I'm aggressively rebalancing my AA more towards international without triggering taxes. All of my Roth IRA and 80% of my taxable contributions are going towards Vanguard Total International (VTIAX). If this approach is taking too long (e.g. if by next quarter that ratio has barely shifted), I might buy/sell within my Roth space, or rebalance my 401(k) contributions.

I set a goal in Mint where I called reaching $1M in assets (excluding home/car equity and HSA) "FIRE", and the projected completion date is sometime in 2017 (April 27 at the moment, but it jumps around a lot). I love the fact that market appreciation is actually dwarfing my (fairly substantial) monthly contributions. Go Go Gadget Compound Interest!

The Marriage Penalty is BRUTAL

March 26th, 2015 at 10:15 pm

The SO and I have finished our tax returns for 2014. Just for funsies, we ran the numbers to see what our taxes would look like if we were to get married.

The results were NOT pretty. Essentially, my income would push him into a higher tax bracket that would nix his traditional IRA deduction, and his standard deduction would nix my itemized [mortgage interest] deduction... and we'd wind up paying an extra $2822 in federal taxes every year. It does not matter if we file jointly or separately -- the two are within six dollars of each other.

Even taking into account the savings of putting him on my employer health plan, marriage would still be a major net loss financially (and I'm not sure if spouses get their own HSA match). We don't have (nor do we ever want) kids, so that issue would does not apply, and other quantifiable benefits (like the spousal estate tax deduction) only apply if one of us dies. And in the case of my untimely early demise, I'd much rather leave my assets (with the exception of the house) to my parents anyway, since they need and deserve it way more.

Social Security is another consideration, but that won't be relevant for a while. And you only need to be married for one year to get spousal benefits, so there's no rush unless someone is actually dying (and I suspect if we're still together three decades from now that we'll be married by then anyway).

So what would it take for the marriage penalty to go away? Paying off the house would get rid of the itemized mortgage interest deduction for me, and the SO could get enough salary increases to phase out of the traditional IRA range all by his lonesome. We might hit the Roth IRA phase-out range faster if married, but I think that possibility is a more remote one due to how high that threshold is.

Joint high(er) incomes don't scale favorably regardless, but if I quit my job (due to achieving FIRE) and my earned income drops, then marriage could turn beneficial if we live off his income alone... but we'd have to run the numbers if I want to employ tax strategies like Roth conversion ladders. If we both FIRE on combined assets, then income would be too low trigger the penalty.

But in the current situation, I can only come to the conclusion that it makes NO sense to get married. I really want to at the very least break even. I realize that this is horribly unromantic, but this is just the way my mind works. I'm relentlessly rational, and the SO is similar, so we fit. Smile

The next time my father nags me about not being married, maybe I'll just ask him to pay me three grand a year. That'll probably shut him up! Wink

FIRE and the ACA

March 24th, 2015 at 09:25 pm

I've been taking steps in recent months to get my health care finances in order. During open enrollment at the end of last year, I switched to a high-deductible, HSA-eligible insurance plan, which dropped my annual premiums from $1690 down to $1144. Add in the $1000 HSA match that my employer kicks in, and I'm effectively paying only $144 per year for my health insurance. Even accounting for the new, higher $1500 deductible, I still come out on top.

And the out-of-pocket max of $3000 is definitely affordable in case I blow through the deductible due to a catastrophic circumstance.

Plus, I get a shiny new tax-advantaged investment vehicle to play with, which can be used to pay Medicare premiums or even function as a 401(k) when the time comes. Awesome. So I'm all set for the near-term.

Health insurance coverage and costs in early retirement might be more tricky -- or so I thought. One possibility is to go on the SO's employer plan -- that is, if he decides to continue working, and we actually get married. Currently, that would cost $1344 per year after adjusting for the $500 HSA match. Okay, so not nearly as good as my current employer plan, but is certainly tolerable.

But what if going on his plan is not an option? I certainly don't want him to keep working a job just for the health insurance if he doesn't want to!

We live in CT, so I went on our state health exchange to do research. I put in my expected FIRE income (which I guestimated at $10,000 if solo)... and kept getting bumped to the login page because, "Based on the income information you entered your household may be eligible for HUSKY D/Low Income Medicaid."

Erm... huh? I was so, so confused. I was expecting to look at subsidized private plans, not Medicaid. I mean, we may be freaks of nature, but we're certainly not poor, not if we're FIRE'd. Surely this can't be right?

But, as it turns out, with expanded CT Medicaid under the ACA, the

Text is annual income limit and Link is http://www.huskyhealth.com/hh/lib/hh/pdf/HUSKYAnnualIncomeChart.pdf
annual income limit for a single-person household is $16,243, and for a two-person household, it's $21,984. There are
Text is no asset tests and Link is http://www.ct.gov/hh/cwp/view.asp?a=3573&q=421548
no asset tests for eligibility. No matter how you slice it, whether solo or married, we are going to come in under these limits post-FIRE, especially since these figures are for MAGI (modified adjusted gross income), and thus easy to manipulate using deductions and Roth distributions.

I
Text is looked further and Link is http://www.favor-ct.org/CT_Medical_Home_Initiative/HUSKYManualFeb2014.pdf
looked further into CT's implementation of the ACA, and Medicaid in particular. Apparently, ACA subsidies operate along a linear income scale. Above 400% FPL, there are no subsidies. Between 250% and 400% of FPL, one tier of subsidy kicks in (tax credits). Between 138% and 250% of FPL, a second tier of subsidy kicks in (cost-sharing).

Below 138% FPL, you are supposedly considered too poor to afford health insurance, and the subsidy is essentially 100%. And that means getting covered by Medicaid, where the government pays for all your health care costs.

There is no way to change what tier of subsidy you qualify for because it is predetermined by income. Furthermore, the subsidy is all-or-nothing -- you either take what's offered, or you turn down all subsidies. In my case, the choice is to either go on Medicaid, or pay full price for a private health plan. I don't have the option of getting a partially subsidized private plan.

And the cheapest private plan on the state exchange costs $2400 per year for a $6000 deductible, and goes quickly downhill from there. Yuck. And ouch?

I am honestly feeling seriously conflicted right now. On the one hand... it looks like health insurance will literally be completely free in FIRE (I actually spent quite a while trying to google "Medicaid premiums" before I finally realized how the program worked and that premiums don't exist). This is amazing and totally unexpected, since I've just been assuming that health insurance was going to be a major unknown expense in my projections. CT Medicaid
Text is even covers dental and Link is https://www.ctdhp.com/default.asp
even covers dental!

On the other hand... I feel so guilty (not to mention shocked) about potentially going on Medicaid. It is just strange to be mooching off a program intended for the socioeconomically disadvantaged. I mean, I am both willing and capable of paying a reasonable amount for health insurance. It's just that it genuinely looks like the program is working exactly as intended, and full price of a private plan is... kind of outrageous. How do you expect a rational decision-maker to turn down free given the alternative (or lack thereof)?

What does make me feel slightly better is the knowledge that on Medicaid, I would only cost the government money if I incur health care costs -- compared with an otherwise constant stream of private insurance premium subsidies. So the government might actually come out ahead, considering that I never go to the doctor (last time I went was in... 2007?) -- at least while I'm still young and healthy.

I think I'd budget $3K per year for health insurance anyway, just in case, but Medicaid being the preferred route is going to take some getting used to.

The Asset Allocation Training Wheels Are Coming Off

November 2nd, 2014 at 12:11 am

I have made the executive decision to no longer use a Target Retirement fund to manage my retirement asset allocation. That's right, the training wheels are finally coming off. It's time to learn to balance my investments on my own!

I have decided to make this change for a few reasons. The first is that the Vanguard Target Retirement funds charge fees based on the investor share class, and due to my portfolio size, I will save hundreds of dollars per year by moving over to the equivalent admiral share class. That's a good enough reason as any to make the switch, even if I wanted to keep the Target Retirement fund's pre-determined asset allocation. For a few hundred extra bucks per year, I am willing to deal with the so-called "inconvenience" of having to manually rebalance my investments.

Another reason to leave the Target Retirement fund is that I want the flexibility to change my asset allocation. Right now, the 2050 fund allocates 10% to bonds. I do hold bonds, but I'd rather hold them in my taxable accounts, and save the tax-advantaged space for equities with higher growth potential.

As an aside, I've heard the argument for holding less tax-efficient funds such as bonds and dividend-yielding stocks in the tax-advantaged space. My gut feeling, however, is that protecting equity growth and capital gains (especially in the Roth space, which not only grows but is also distributed tax-free) beats out protecting bond interest and dividends (which are designed to be lower), although I am totally willing to be convinced otherwise using math. Right now, though, I'm also using bond holdings specifically as a short- and intermediate-term savings vehicle, so I want them to be easily accessible in a non-retirement account.

I also realized that I am likely going to retire sooner than 2050 and may need to deviate from their glide path anyway, so I might as well cut the cord now.

As for how I'm handling the asset allocation... I have decided to hold a 70/30 split of Vanguard's Total Stock Market Index Fund and their Total International Stock Market Index Fund. This mirrors the Target Retirement 2050's exact ratio of these same two funds (at 63% and 27%) but without the bonds. In reality, this is slightly complicated by the fact that my active 401(k) is held in a separate account with different fund choices, but I'll get as close to this breakdown as I can. The larger goal is to force myself to start actively managing and rebalancing my asset allocation.