The Challenge:

An executive who spent his entire career working in the corporate world was informed his department was being outsourced. Given his experience in the field and skillset, he started his own consulting firm, receiving a major contract with his former employer. With a significant portion of the client’s wealth in stock options with low basis, the client losing the ability to participate in the company’s 401(k) plan, and new tax implications to consider being self-employed, the family needed to take action and change their game plan. The client’s primary goal was to maximize retirement savings opportunities and divest of the concentrated stock position in the most tax-efficient manner.

The Analysis:

In reviewing the client’s cash flow needs and new income, we recognized the client’s ability to maximize their retirement savings by implementing a defined benefit pension plan and solo 401(k) profit sharing plan. This would allow the client to significantly reduce their taxable income, which would enable them to efficiently recognize additional income through the liquidation of employer stock. This strategy maintains their income to support their lifestyle and provides a consistent level of taxable income—meaning no surprise tax bills!

The Recommendation:

In presenting the recommendation to the client, it was illustrated that over $150,000 of income would be sheltered and deferred into the newly established defined benefit pension plan and solo 401(k) profit sharing plan. In addition, the five-year stock liquidation strategy would provide the client additional liquidity to either save into their diversified investment portfolio, use for tax payments, or spend a portion to support lifestyle. This recommendation provided the client the ability to achieve their goals while providing for flexibility in their ongoing financial plan.