Why Financial Planning Is Crucial to Women?

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Financial planning is a pathway to independence and empowerment for women. Having control over one’s finances enables autonomy, the ability to make informed decisions, and a sense of security irrespective of life’s changes or unforeseen circumstances.

Historically, women have faced unique challenges in the financial realm, making strategic planning and preparation all the more crucial.

Challenges Women Facing Today

  • Longevity and Retirement

Women typically live longer than men, which means their retirement savings must stretch further. Yet, due to earning disparities and career breaks for care-giving roles, many women have smaller pensions or retirement funds. Therefore, robust financial planning becomes essential to ensure financial security during retirement years.

  • Career Interruptions and Flexibility

Women often encounter interruptions in their careers due to family obligations or care-giving responsibilities. These interruptions can impact income and savings, making it vital for women to plan and manage finances to navigate these transitions effectively. Creating financial strategies that accommodate career breaks and flexible work arrangements becomes imperative.

  • Healthcare Costs and Long-Term Care

Women generally have higher healthcare expenses, including longer life expectancies and potential long-term care needs. Financial planning must account for these factors, ensuring sufficient savings and insurance coverage to address healthcare costs effectively.

Steps Towards Financial Empowerment

1. Education and Awareness

Promoting financial literacy through education and workshops tailored for women can foster confidence and informed decision-making.

2. Long-Term Financial Planning

Developing comprehensive financial plans that account for diverse career trajectories, family dynamics, and potential life changes is key.

3. Support Networks and Resources

Encouraging supportive networks and access to financial expertise/resources can provide guidance and mentorship crucial for women navigating financial complexities.

4. Encouraging Investment

Promoting investment education and showcasing the benefits of long-term investment strategies can empower women to grow their wealth effectively.

Financial planning is not just a matter of numbers; it’s a catalyst for empowerment and independence, especially for women. And that is why financial planning holds particular significance for women in today’s world.

ISO vs. NSO – Employee Stock Options Basics

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ISO and NSO, what do these terms mean? These terms stand for incentive stock options (ISOs) and non-qualified stock options (NSOs or NQSOs) respectively. They are mostly common among companies which use their company stocks as part of the employee’s compensation and/or retirement benefit packages.

NSO or NQSO are options to buy shares of company stock at a stated price and can be exercised over a specific period, i.e. over 10 years. The exercise price is normally 100% of fair market value on the date the option is granted, but it can be set lower.

ISO is an option to buy shares of company stock at a set price on the date of grant and can be exercised over a period of up to 10 years. Like NSO, the exercise price of ISO is normally set at the fair market value on the date the option is granted.

After reading the above definitions of ISO and NSO you are probably wondering: what are the differences of these two options? The differences mostly lie in the employer tax deductions and income tax treatment of exercising ISO and NSO options to the employees.

With most NSOs, if the employee opts to exercise the options to hold the shares of company stock, then the employee must recognize as ordinary income the amount of difference between the option grant (exercise) price and the fair market value of the underlying stock at the time of exercise. This income is subject to social security (FICA) and federal unemployment (FUTA) taxes. Subsequently, the employee will recognize either capital gains or losses on any appreciation or depreciation in the stock value from the day of exercise until the day the employee sells the stock. Alternatively, the employee can opt to exercise to sell, and then the employee will pay income and social security taxes on the amount realized on the sale of the stock minus the option price.

Unlike NSO, where the employee has to pay ordinary income taxes when he or she exercises the options to hold the stock, an employee who receives ISOs does not have to pay regular income tax at the time of exercise. If, after the exercise the shares are held for at least one year from the date of exercise and two years from the date of grant of the options (1year/2year holding period requirements), the sale of the shares will result in long-term capital gain from the date of the option grant to the date of sale of the stock. If, the 1year/2year holding periods are not met, then the sale becomes a disqualifying disposition and the ISO is treated like a NSO, where the difference between the option price and the fair market value at the time of exercise will be taxed as ordinary income.  

The difference between the taxation of a disqualifying disposition of an ISO and that of an NSO is that the recognized ordinary income from the disqualifying ISO is not subject to social security and federal unemployment taxes.

Here are two examples explaining how ISO and NSO work:

  • Adam received 100 shares of NSOs from his employer ABC Industry, Inc. on February 8, 2017. The option exercise price is $5 per share. On the date of grant, there is no taxation to Adam. On March 15, 2018, when the fair market value of the ABC’s stock is $10 per share, Adam exercised his options. Adam would recognize $500 ($10-$5=$5 times 100 shares) as ordinary income. On March 20, 2019 when the ABC’s stock price rises to $20, Adam sells all of his 100 shares of ABC stock. Adam would recognize $1,000 as long-term capital gain and would pay capital gain taxes because he has held the stocks for more than 12 months after he exercise his NSOs. If, instead of exercising the NSOs on March 15, 2018, Adam waited until March 20, 2019 to exercise the option and simultaneously sell the underlying stock, then, Adam would recognize all proceeds from the sale, $20 stock price/share – $5 option price times 100 shares = $1,500, as ordinary income and would pay regular income tax and social security taxes on this $1,500.

  • Eve received 100 ISOs from XYZ Industry Inc. on January 28, 2017. The option exercise price is $5 per share. If Eve exercised her ISOs on January 31, 2018 when the fair market value of the stock was $10 per share, she would recognize no income for regular tax purposes. If subsequently, Eve sells the stocks when its price rises to $20 on February 9, 2019, she would be able to recognize the entire gain of $ 1,500 as long-term capital gain because she has met the 1year(from exercise)/2 year(from grant) holding period requirements. If,  Eve sells the stocks on December 31, 2018, then she has not met the 1year/2year holding period requirements. In this case, the $500 from the exercise of the options on January 31, 2018 would be treated as ordinary income and the subsequent gain of $1,000 from sale of the stocks on December 31, 2018 would be recognized as short-term capital gains.

With NSO, the employer can take a deduction in the amount of income that is taxed to the employee. With ISO, however, if the employee complies with the 1year/2year holding period requirements, the employer gets no tax deduction from it.

If an employee is given stock options, he or she needs to be clear what kind of options they are. There is an employment requirement for employees who receive ISOs. That is, the employee who receives ISOs must remain employed with the same employer from the time of the grant of the options until at least 3 months before the exercise.

Another difference between these two employee stock options is that ISOs are not transferable except at death, while NSOs are transferable during the employee’s lifetime.

Your 2021 Essential Financial To-do List

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2020 is finally behind us. What is your plan for year 2021? Here I outlined some financial tips for you to put on your early 2021 to-do list to jump start the year to be a successful and prosperous one for you and your loved ones. Below are some of the essential personal financial information you will want to save and keep in handy as your reference guide throughout the year.

  • Adjust your retirement plan contributions for 2021

2021 retirement plan contribution limits

Plan Maximum
Deferral
Age 50
and Over
Catch-up
Contribution
401(k)/403(b) $19,500 $6,500  

Deductible IRA
$6,000 $1,000
Non-Deductible IRA $6,000 $1,000  
Roth IRA $6,000 $1,000

The individual IRA contribution deadline for 2020 is April 15, 2021.

Phase out range for deductible IRA is $105,000-$125,000 for joint filing if covered by a workplace retirement plan; Phase out range for Roth IRA is modified AGI from $198,000-208,000 for joint filers.

Health Savings Account Contribution Limit for 2021:

  Self-only Family Coverage
Contribution Limit $3600 $7200
Contribution Limit over age 55 $4600 $8200
High-deductible health plan
minimum deductible  
$1400 $2800
High-deductible health plan
out-of-pocket maximum  
$7000 $14,000
  • Keep in mind these important income tax facts for 2021:

2021 Income Tax Brackets and Rates:

Tax
Bracket
Single Filer
Income Range
Married File Jointly
Income Range
10% $9,950 or less $19,900 or less
12% $9,951- $40,525 $19,901 – $81,050
22% $40,526 and $86,375 $81,051 and $172,750
24% $86,376 and $164,925 $172,751 and $329,850
32% $164,926 and $209,425 $329,851 and $418,850
35% $209,426 and $523,600 $418,851 and $628,300
37% $523,601 or more $628,301 or more

The standard deduction is $12,550 for individuals and $25,100 for married couples filing jointly.

2021 Alternative Minimum Tax (AMT) Exemption Amounts:

  Single or
Head of
Household
Married File Jointly
or
Qualified Widow
Married File
Separately
Maximum
Exemption
$ 73,600 $ 114,600 $ 57,300
25% reduction
if over:
523,600 1,047,200 523,600          
Exemption
Eliminated
818,000 1,505,600 752,800

2021 Qualified Dividend and Long-term Capital Gain Tax Rate:

Income Range:
Single filer
Income Range:
Married file jointly
Capital Gain Tax Rate
$0-$40,400 $0-$80,800 0%
$40,401-$445,850 $80,801-$501,600 15%
Over $445,850 Over $501,600 20%

Net Investment Income Tax:

Individuals will owe the tax if they have Net Investment Income and also have modified adjusted gross income over the following thresholds:

Filing Status Threshold Amount
Married filing jointly $250,000
Married filing separately $125,000
Head of household (with qualifying person) $200,000
Qualifying widow(er) with dependent child $250,000
Single $200,000

The Net Investment Income Tax (NIIT) applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.

  • Annual Exclusion for Estates and Gifts

In 2021, the first $15,000 of gifts to any person is excluded from tax.

Since 2018, the Tax Cuts and Jobs Act temporarily increased the basic exclusion amount for estate and gift taxes for tax years 2018 through 2025, with both dollar amounts adjusted for inflation. For 2021 the exclusion amount is $11,700,000 per individual, and $23,400,000 for a couple.

  • Review your Insurance policies

If your situation has changed during 2020, such as change of job, birth of a new child, or purchases of new car, house, etc., you need to review your insurance coverage or talk to your financial adviser to help you come up with proper coverage amount for your current insurance needs.

Don’t forget the deadline for individual tax filing is Thursday April 15, 2021.

Gather and organize all your paperwork such as W-2 forms, bank statements, mortgage payment statements, property tax receipt, business expenses, investment statements from your broker-dealers, charity donation receipts, etc. for your 2020 tax filing.

  • A couple of events that you might want to keep an eye on:
    • House Ways and Means Committee Chairman Richard Neal plans to reintroduce in the new Congress the Securing a Strong Retirement Act of 2020, which would boost the required minimum distribution age from 72 to 75. In 2019, the Secure Act passed by congress has pushed the age that retirement plan participants need to take the required minimum distributions (RMD) from 701/2 to 72. If this new bill passes, it would create more favorable financial planning opportunities to people contributing to various retirement plans.
    • Another thing to watch for is for families with kids applying for college in the fall 2021. The dates and places of taking the SAT/ACT had been changed a couple of times last year by the institutions which offer these tests due to the pandemic. Since the pandemic is still going on parents need to make sure their high school kids know the exact dates and places of taking these tests. Parents and students can go to www.collegeboard.org to check out the latest updates on SAT test or www.act.org for ACT tests.

The Secure Act and Your Early 2020 Financial To-do List

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What are your financial moves in year 2020? First, I think you need to start by checking out a legislation called the Setting Every Community Up for Retirement Enhancement (Secure) Act of 2019, which is effective on January 1, 2020. In this article, I will outline some of the key changes in the Act and how these changes may impact a person’s retirement, college and/or estate planning.

The following are some positive changes coming out of the Secure Act:

  • The Act allows families to pay for up to $10,000 in student loans tax free using the money in their 529 college savings plans.
  • The Act has pushed back the age that retirement plan participants need to take the required minimum distributions (RMD) from 701/2 to 72.
  • The Act encourages retirement plan sponsors to include annuity as an option in their plans by reducing plan sponsor’s liability if the insurer which sells annuity fails to meet its financial obligations.
  • The Act states that any employer who creates a 401(K) or SIMPLE IRA plan with automatic enrollment will get a maximum tax credit of $500 per year.
  • The Act also makes it easier for small businesses to set up 401(K) plans.

Now, on to some of the negative changes brought by the Secure Act:

  • The Act mandates that inherited IRAs for non-spouse beneficiaries must be distributed over 10 years.
  • The changes for the age that requires RMD from 701/2 to 72 creates confusions among individuals who attain age 701/2 in 2019 or 2020.

In order to minimize the confusion, the IRS issued Notice 2020-6 saying that the Secure Act did not change the required beginning date for IRA owners who attained age 701/2 prior to January 1, 2020. Given its significance, the first thing I suggest you to do is to learn more of this Secure Act and plan accordingly based on your individual situations.

Second, you need to know updated retirement and Health Savings Account contribution limits for 2020 and adjust your own contributions accordingly. According to the Internal Revenue Service the contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $19,000 to $19,500. The catch-up contribution limit for employees aged 50 and over who participate in these plans is increased from $6,000 to $6,500. The limitation regarding SIMPLE retirement accounts for 2020 is increased to $13,500.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or his or her spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor his or her spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase-out ranges for 2020: 

  • For single taxpayers covered by a workplace retirement plan, the phase-out range is $65,000 to $75,000.
  • For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $104,000 to $124,000.
  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $196,000 and $206,000.
  • For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over remains at $1,000. The income phase-out range for taxpayers making contributions to a Roth IRA is $124,000 to $139,000 for singles and heads of household. For married couples filing jointly, the income phase-out range is $196,000 to $206,000.

The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $65,000 for married couples filing jointly; $48,750 for heads of household; and $32,500 for singles and married individuals filing separately.

Annual HSA contributions for 2020 for individuals with family coverage are increased from $7000 to $7100. Account holders ages 55 or older can contribute an additional $1,000. However, in order to qualify for the contribution, a person must be enrolled in one of employer sponsored HSA-qualified high deductible high premium health insurance plans.

In 2020, the annual exclusion for gift tax is still the first $15,000 of gifts to any individual.

(Sources: IRS publications)