Financial Planning

3 Creative Ways to Use a Roth IRA in 2025 to Strengthen Your Financial Future

By David C. D’Albero II

If you’re like many successful executives today, you know that real wealth management isn’t about following the crowd — it’s about finding smart, strategic moves that set you apart. One of the most overlooked opportunities? The Roth IRA.

Even if you’re a high earner and have phased out of making direct Roth contributions, there are still creative ways to take advantage of what may be the most powerful tool in long-term, tax-free wealth building.

At Strata Capital, we believe in pulling back the curtain on strategies that most traditional advisors don’t talk about — and in creating a higher standard for how wealth should be managed. Here are three Roth strategies worth paying attention to as we head into 2025.

Using After-Tax Contributions From Your 401(k)

Most people think once they hit the regular 401(k) limit — $23,500 if you’re under 50 or $31,000 if you’re over 50 — they’re done. But for those with the right kind of 401(k) plan, that’s just the beginning.

If your company’s 401(k) allows after-tax contributions, you can go above and beyond the standard limits. Even better, those after-tax dollars can often be rolled into a Roth IRA, sometimes immediately. Think of it as a turbocharged Roth contribution — significantly more powerful than the standard route.

For example, let’s say you max out your pretax 401(k) contributions and your plan allows an additional $20,000 in after-tax contributions. Rather than leaving that money inside the 401(k), where future withdrawals might be taxed, you could roll it into a Roth IRA each year, setting yourself up for decades of tax-free growth.

Not every plan offers this feature, so it’s important to review your 401(k) options carefully. Done properly, this strategy can create a major boost in future tax-free income.

The Backdoor Roth Contribution

For high-income earners, direct Roth contributions are often off the table. But the Backdoor Roth strategy offers a smart, perfectly legal workaround.

The process is simple. First, you make a non-deductible contribution to a traditional IRA — up to $7,000 if you’re under 50 or $8,000 if you’re over 50. Then, you immediately convert those funds into a Roth IRA.

If you don’t already have a large balance in traditional IRAs, this process can be relatively seamless. However, if you do have significant pretax dollars sitting in traditional IRAs, you’ll need to watch out for the pro-rata rule, which can create a partial tax bill when converting. This is where planning ahead — and potentially consolidating accounts or making strategic moves — can make a big difference.

The beauty of the Backdoor Roth is that it allows high earners to continue building Roth assets even when income limits would otherwise stand in the way. Over time, having a tax-free pool of assets to draw from in retirement can give you enormous flexibility — especially if tax rates rise in the future.

Opening a Roth IRA for Your Child

When people think about Roth IRAs, they often think about retirement planning for themselves. But opening a Roth IRA for your child is one of the most powerful legacy-building moves you can make.

The rules are straightforward: if your child has earned income from a job — mowing lawns, babysitting, tutoring, or part-time work — they’re eligible to contribute to a Roth IRA. The contribution limit is the lesser of their earned income or the standard IRA contribution limit.

Imagine your teenager earns $2,000 over the summer. You can help them contribute that $2,000 into a Roth IRA. Left untouched, that one contribution could potentially grow into over $100,000 by the time they reach retirement age, assuming a modest average annual return. And if they contribute for a few more years during high school or college? The compounding potential is enormous.

Besides the financial benefit, this strategy plants the seeds of smart financial behavior early. It teaches the value of saving, investing, and thinking long-term — skills that will serve them for a lifetime.

Why Timing Matters

All of these strategies are available today, but they may not be available forever. Tax laws change. Political priorities shift. Windows of opportunity close.

Taking action now can position you — and your family — to capture the full benefits of tax-free growth while it’s still possible. These moves aren’t about taking risks. They’re about using the rules strategically to strengthen your long-term financial foundation.

Of course, no one’s financial situation is exactly the same. That’s why at Strata Capital, we don’t believe in one-size-fits-all advice. We work with each client to design a plan that fits their career stage, their wealth goals, and their vision for the future — coordinating retirement planning, investment strategy, tax planning, and legacy building into one seamless, personalized experience.

If you’d like to explore how these Roth strategies could fit into your overall plan, we’re here to help.

Strata Capital is a wealth management firm serving corporate executives, professionals, and entrepreneurs in the New York Tri-State Area, focusing on corporate benefits and executive compensation. Co-founded by David D’Albero and Carmine Coppola, the firm specializes in making the complex simple to ensure clients feel confident in their financial decisions. They can be reached by phone at (212) 367-2855, via email at carmine@stratacapital.co, or by visiting their website at stratacapital.co.

Cornerstone Planning Group, Inc., (“CSPG”) is an SEC registered investment advisory firm. The information contained herein should not be construed as personalized investment advice and should not be considered as a solicitation for investment advisory service. The information (e.g., tax ) provided is believed to be accurate however CSPG does not guarantee or otherwise warrant such information. For more information regarding CSPG you can refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov) and review our Form ADV Brochure and other disclosures.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

How to Avoid a Costly Tax Mistake When Selling Your Home

By Carmine Coppola

Selling your home can be one of the most rewarding financial moves you make — but it can also lead to an unexpected tax bill if you’re not prepared.

For many New Jersey homeowners, the surge in property values over the past several years has created significant equity. According to the New Jersey Association of Realtors, the median sales price of a single-family home in New Jersey reached $525,000 as of March 2025, up nearly 22% since early 2022 (NJAR Housing Statistics, March 2025).

That’s great news if you’re selling — but it also means capital gains tax could become a very real, very expensive issue.

Fortunately, with proper planning, you can potentially avoid or minimize capital gains taxes and keep more of your hard-earned profit.

Understanding Capital Gains Tax on Home Sales

When you sell your home for more than you paid for it (plus improvements), the difference is a capital gain. The IRS taxes these gains based on how long you held the property:

Short-term capital gains (ownership less than one year) are taxed at your ordinary income tax rate — up to 37% for high earners (IRS Topic No. 409).
Long-term capital gains (ownership greater than one year) are taxed at reduced rates: typically 15% or 20% depending on your taxable income (IRS Capital Gains Tax Rates, 2025).

Owning your property for at least one year before selling can make a significant difference in your after-tax profits.

The $250,000/$500,000 Capital Gains Exclusion

If you are selling your primary residence, you may qualify to exclude part of your gain from taxes:

$250,000 of gain for single filers
$500,000 of gain for married couples filing jointly

This exclusion applies if you:

Owned the home for at least two of the last five years,
Lived in the home as your primary residence for at least two of those years,
Haven’t excluded gain from another home sale within the last two years.

These conditions are outlined clearly in IRS Topic No. 701.

In a market like New Jersey, where property values have appreciated sharply in high-demand areas such as Bergen County, Monmouth County, and Essex County, this exclusion is more important than ever.

Real-World New Jersey Scenarios

Scenario 1: The Commuter Condo Owner
Amelia bought a Jersey City condo in 2017 for $400,000. She lived there for three years before renting it out. In 2025, she sells it for $700,000. Because she met the ownership and use test, she qualifies for the $250,000 exclusion, shielding most of her $300,000 gain from taxes.

Scenario 2: Long-Term Owners in Short Hills
Frank and Elena have owned their Short Hills home since 1980, purchased at $180,000. They now sell for $2 million. Thanks to the $500,000 exclusion, and careful planning to adjust their cost basis through documented home improvements, they significantly reduce their taxable gain.

Scenario 3: The Short Sale Mistake
Anthony and Lisa bought a second home at the Jersey Shore in 2024 and sold it in 2025 for a gain. Because they didn’t meet the two-year ownership requirement, their gain was fully taxable as short-term capital gains at ordinary income tax rates.

How to Reduce Capital Gains Taxes in New Jersey

Increase Your Cost Basis
Add the value of eligible home improvements to your original purchase price — this reduces the taxable portion of your gain. Improvements include renovations like new roofs, kitchens, and HVAC systems (IRS Publication 523).
Consider a 1031 Exchange (For Investment Properties)
If you sell a New Jersey investment property, you can defer capital gains taxes by purchasing another like-kind investment property within the IRS timelines (IRS Like-Kind Exchanges).
Plan Smart Estate Transfers
New Jersey no longer has an estate tax, but it does still impose an inheritance tax depending on the beneficiary relationship (State of New Jersey – Inheritance Tax).
Passing property through an estate plan with a stepped-up basis can eliminate years of taxable gains.

Why Local Expertise Matters

New Jersey’s housing market is unique. High property values in suburban NYC commuter towns like Montclair, Summit, and Ridgewood mean that even modest homes can trigger six-figure gains.

And New Jersey’s layered tax system — including property taxes (the highest median property tax bill in the U.S. per WalletHub 2025) — makes strategic planning essential.

Selling a home without understanding these nuances could mean an unexpected tax bill that easily eats away your hard-earned equity.

The Bottom Line

Selling your home — whether in New Jersey’s bustling suburbs or along the Shore — is a major financial event. With the right guidance, you can preserve more of your wealth, minimize taxes, and ensure you keep what you’ve built.

At Strata Capital, we specialize in helping high-income professionals and executives navigate complex financial situations with clarity and confidence.
If you’re considering a sale in the next 12–24 months, let’s have a conversation about how to protect your profits.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Not knowing these 529 college savings plan rules can cost you! Here’s how to make sure you aren’t leaving tax deductions on the table.

By David C. D’Albero II

When planning for your children’s education, a 529 college savings plan is one of the most powerful tools at your disposal. But a common question we hear is: Are contributions to a 529 plan tax-deductible?

The short answer? Not on your federal income taxes. However, depending on your state of residence, you may be eligible for valuable tax benefits. In this article, we’ll break down the key considerations when contributing to a 529 plan, highlight potential tax advantages, and provide guidance on integrating college savings into your broader financial strategy.

Understanding the 529 Plan: Tax Treatment and Growth Benefits

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. While federal tax law does not allow deductions for contributions, the real benefit lies in how the money grows and is ultimately used.

Tax-Free Growth – Any investment earnings within a 529 plan grow tax-free, as long as the funds are used for qualified educational expenses.

Tax-Free Withdrawals – Distributions used for tuition, books, room and board, and other eligible education costs are completely tax-free at the federal level.

State Tax Benefits – Many states offer deductions or credits on contributions, reducing your overall tax burden.

Even though you can’t deduct contributions on your federal taxes, the combination of tax-free growth, tax-free withdrawals, and possible state tax benefits makes a 529 an effective way to save for education.

State Tax Deductions: Do You Qualify?

Every state has different rules regarding tax deductions or credits for 529 contributions. Here’s what you need to know:

Some states offer tax deductions or credits Over 30 states provide some level of tax deduction or credit for 529 contributions. Deduction limits vary, often ranging from $1,000 to $10,000 per year per taxpayer.

You may have to use your home state’s plan Some states require you to contribute to their specific 529 plan to qualify for tax benefits. Others allow tax benefits regardless of which state’s plan you use.

Several states offer tax deductions or credits for contributions made to any state’s 529 plan, rather than restricting benefits to their own plans. This flexibility, known as “tax parity,” allows residents to select the 529 plan that best fits their needs without losing out on state tax advantages.

The states that allow this include: Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio, Pennsylvania

For instance, Pennsylvania permits residents to deduct contributions to any 529 plan from their state taxable income, while Arizona also provides a state tax deduction for contributions to out-of-state plans. Because tax benefits and contribution limits vary by state, it’s best to review your state’s tax policies or consult a tax professional for specific details.

Non-residents may not receive benefits If you contribute to a 529 plan from a state where you don’t reside, you may not be eligible for tax deductions. In many states, contributors to a 529 plan can qualify for a tax break, regardless of account ownership. However, some states limit these benefits to the account owner, preventing grandparents, aunts, uncles, and other contributors from deducting their contributions or claiming tax credits.

Before contributing, check your state’s 529 plan rules. A simple search on your state’s department of taxation website or a conversation with a financial advisor can clarify the benefits available to you.

Maximizing Your 529 Contributions for Long-Term Growth

To get the most out of your 529 plan, consider these strategic steps:

Contribute Early and Often The earlier you start contributing, the more time your investments have to compound tax-free. Even modest contributions in the early years can grow significantly over time.

Example: Growth of a $10,000 Annual Contribution to a 529 Plan

Scenario:

A parent starts contributing $10,000 per year to a 529 plan when their child is 1 year old. They continue these contributions every year until the child turns 18 and is ready for college.

Assumptions:

Annual Contribution: $10,000
Investment Growth Rate: 7% per year (a typical long-term return for a balanced 529 portfolio)
Contribution Period: 17 years (from age 1 to 18)
Compounded Annually: Earnings reinvested
No Withdrawals or Fees Considered

Final Outcome:

By the time the child turns 18, the 529 plan will have grown to approximately $350,311. This includes a total contribution of $170,000 ($10,000 x 17 years) and earnings of about $180,311 from investment growth.

Key Takeaways:

The power of compounding plays a crucial role in growing college savings over time.
Starting early provides a significant advantage, allowing investments to grow over nearly two decades.
A 7% return assumption is based on historical market performance for a diversified investment portfolio. Actual returns may vary.
Many states offer tax benefits for 529 contributions, which can further enhance savings.

Example: Funding a 529 Plan for Only the First 10 Years

Scenario:

A parent contributes $10,000 per year to a 529 plan for 10 years (until the child is 10 years old) and then stops making contributions. The money remains invested and continues to grow until the child turns 18 and is ready for college.

Assumptions:

Annual Contribution: $10,000 (for 10 years only)
Investment Growth Rate: 7% per year
Total Contribution Period: 10 years
Total Growth Period: 18 years (money continues compounding even after contributions stop)
Compounded Annually: Earnings reinvested
No Withdrawals or Fees Considered

Final Outcome:

By stopping contributions after 10 years but allowing the investments to grow, the 529 plan reaches $253,814 by the time the child turns 18.

Total Contributions: $100,000 ($10,000 x 10 years)
Total Growth: $153,814 from investment returns

Key Takeaways:

Even if you stop contributing after 10 years, the power of compounding allows the investment to keep growing.
Contributing early and letting investments grow can still provide a significant college fund without needing to contribute for 17+ years.
Planning early means you don’t have to save as aggressively later.

Example: One-Time Lump Sum Contribution of $95,000 Using 5-Year Superfunding

Scenario:

A parent (or grandparent) contributes $95,000 to a 529 plan in a single year, using the 5-year gift tax exclusion to maximize tax-free contributions. The investment remains untouched and continues to grow until the child turns 18 and is ready for college.

Assumptions:

Initial Lump Sum Contribution: $95,000
Investment Growth Rate: 7% per year
Compounded Annually: Earnings reinvested
Total Growth Period: 17 years (until child turns 18)
No Additional Contributions or Withdrawals

Final Outcome:

By the time the child turns 18, the one-time $95,000 contribution grows to approximately $321,097, with no additional deposits.

Total Contributions: $95,000
Total Growth: $226,097 from investment returns

Key Takeaways:

Front-loading a 529 plan with a large contribution allows for maximum compounding over time.
Compared to spreading out $10,000 contributions over 17 years (which resulted in $350,311), this method requires less total contribution while still producing a substantial college fund.
This strategy is ideal for parents or grandparents with the financial ability to make a lump sum investment while taking full advantage of the 5-year gift tax exemption.
If the funds remain unused, they can continue growing tax-free for future educational expenses or be transferred to another family member.

Take Advantage of State Tax Breaks If your state offers tax benefits, make sure you contribute enough each year to maximize your deduction or credit. If your state has a cap (e.g., $5,000 per taxpayer), structure contributions to take full advantage of this.

Choose a High-Quality 529 Plan Not all 529 plans are created equal. Consider investment options, fees, and plan flexibility. Plans with diversified portfolios can optimize growth, lower fees mean more of your money is working for you, and some plans allow broader use of funds, including K-12 education and apprenticeships.

Optimize Contributions for Estate Planning A unique feature of 529 plans is their estate planning benefit. You can contribute up to $19,000 per year per child (or $38,000 for married couples) without triggering gift taxes.

For those looking to make a larger contribution, the IRS allows “superfunding,” which enables you to contribute up to $95,000 ($190,000 for married couples) in one year and treat it as if it were spread over five years for tax purposes.

Ensure Proper Withdrawals To maintain tax-free status, withdrawals must be used for qualified education expenses. Non-qualified withdrawals are subject to income tax and a 10 percent penalty on earnings.

How to Claim Your 529 Tax Benefits

If your state provides a tax deduction or credit, claiming it typically involves the following steps:

Verify Your Eligibility – Confirm that your contributions qualify under your state’s tax laws.

Track Your Contributions – Keep records of all 529 deposits throughout the year.

Report Contributions on Your State Tax Return – Include your eligible contributions when filing.

Consult a Tax Professional – If you’re unsure about deductions, a CPA can ensure you’re maximizing benefits.

How 529 Plans Fit Into Your Broader Financial Strategy

529 plans are just one piece of the puzzle when it comes to financial planning. Here’s how they integrate with a larger wealth strategy:

Balancing Retirement and Education Savings While saving for your child’s education is important, funding your retirement should remain the top priority. You can take loans for college, but not for retirement.

Considering Other Savings Vehicles If your child may not need a full 529 plan, other accounts like Roth IRAs (for education and retirement) or a taxable investment account might offer more flexibility.

Using 529 Plans for More Than Just College Recent tax law changes now allow up to $10,000 per year to be used for K-12 tuition at private or religious schools. Additionally, up to $10,000 lifetime per beneficiary can be used to pay off student loans.

Final Thoughts: Smart 529 Contributions Can Lower Costs and Grow Wealth

A well-structured 529 plan strategy can make a significant impact on your family’s long-term financial well-being. Here’s a recap of the key takeaways:

529 contributions are not deductible on federal taxes, but many states offer tax benefits.

Check your state’s rules to see if you qualify for deductions or credits.

Start contributing early to maximize tax-free growth.

Use tax-smart strategies like contribution caps and estate planning benefits.

Ensure withdrawals are for qualified expenses to avoid penalties.

529 plans provide an efficient, tax-advantaged way to save for education while integrating into a high-net-worth financial strategy. By being proactive and informed, you can make every dollar count toward your child’s future.

If you have further questions about 529 plans or how to integrate them into your broader wealth management plan, reach out today. We specialize in strategic wealth solutions for corporate executives, ensuring your money works as hard as you do.

Watch the video above for more information. And remember to subscribe for financial tips.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Ignoring These Legal Documents Could Cost You Everything

By David C. D’Albero II

No matter where you are on your financial journey—whether just beginning to build wealth or firmly established—having the right legal documents in place is critical. These foundational tools not only protect your assets but also ensure your loved ones are cared for, no matter what life throws your way.

Here’s a breakdown of the five essential legal documents that every adult should have to safeguard their legacy and avoid unnecessary stress for their families.

A Will: Your Plan for the Future

A will is often the first legal document that comes to mind in estate planning—and for good reason. It outlines your wishes for how your assets will be distributed after your passing. But its importance goes beyond just dividing wealth.

Protect Minor Children: A will allows you to designate guardians for your minor children, ensuring they are cared for by someone you trust.
Avoid Probate Chaos: Without a will, the state determines how your assets are distributed, which can lead to disputes and lengthy court proceedings.

Don’t assume a will is only for the wealthy. Even modest estates benefit from having a clear, legally binding plan in place.

Durable Power of Attorney: Financial Protection When You Need It Most

A durable power of attorney allows you to name someone to manage your finances if you become incapacitated. This trusted individual can handle bills, investments, and other financial matters on your behalf.

Without this document, your family might need court approval to manage even basic financial responsibilities, adding unnecessary delays and stress. A durable power of attorney serves as a financial safety net, ensuring your affairs run smoothly even in challenging times.

Healthcare Proxy: Giving a Voice to Your Medical Choices

Who will make medical decisions for you if you’re unable to? A healthcare proxy gives someone you trust the legal authority to ensure your wishes are followed.

Reduce Stress for Loved Ones: This document spares your family from having to guess your preferences in critical moments.
Align with Your Wishes: It ensures decisions about treatments, surgeries, or other medical care align with what you would have wanted.

Living Will: Your Voice When You Can’t Speak

A living will works hand-in-hand with your healthcare proxy by specifying your preferences for medical treatment if you’re unable to communicate. This document addresses sensitive issues like:

Resuscitation
Life support
Organ donation

By having a living will, you ensure that your values are honored while easing the emotional burden on loved ones who might otherwise have to make difficult choices on your behalf.

Revocable Trust: Flexibility and Privacy

Often overlooked, a revocable trust is a powerful tool for managing your assets both during your lifetime and after.

Avoid Probate: Assets in a revocable trust transfer to beneficiaries without going through probate, saving time and money.
Maintain Privacy: Unlike a will, trust details don’t become public record, offering a layer of confidentiality.
Simplify Multistate Property Management: A revocable trust is particularly beneficial for those with property or investments in multiple states.

This flexible, secure document can make estate planning far more efficient for families, ensuring your wishes are carried out seamlessly.

The Bottom Line: Protect Your Legacy Today

These five legal documents form the foundation of a sound financial and legal plan. Having them in place gives you confidence that your assets will be protected, your wishes honored, and your loved ones supported.

Don’t wait for a crisis to begin planning. If you need help getting started, Strata Capital is here to guide you every step of the way. Our personalized approach ensures your plan fits your unique circumstances, offering peace of mind for today and tomorrow.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The DIY Financial Planner’s Roadmap: Strategies for Long-Term Planning

By David C. D’Albero II

I often talk with people who believe they have a financial plan, but their “plan” is based more on assumptions and general ideas about their future than a structured strategy. Some people even use elaborate Excel spreadsheets to attempt to forecast what their assets will be worth and what their approximate expenses will be when they retire. These efforts, though commendable, do not equate to a comprehensive financial plan. While it’s true that most people have some form of planning in mind, a true financial plan that effectively prepares for the future involves a deeper, more structured approach.

What Is a Financial Plan?

A personal financial plan is a detailed guide that captures your financial goals, the strategies to pursue them, and the steps required along the way. This plan typically includes projections of your assets, liabilities, cash flow, and taxes to provide guidelines on how and where to save and invest.

In essence, a financial plan acts as a roadmap for managing your finances, helping you aim for stability and growth over the years. But to understand the true value of a professionally developed financial plan, it’s helpful to know exactly what it entails.

Key Components of a Personal Financial Plan

Financial Goals

Short-term goals: Objectives achievable within a year, such as establishing an emergency fund or paying off credit card debt.
Medium-term goals: Targets for the next 1-5 years, like saving for a house down payment or purchasing a car.
Long-term goals: Plans extending beyond five years, including retirement savings and funding for children’s education

Overview of Your Current Financial Situation

Income: A summary of all income streams, including salary, bonuses, and investment returns.
Expenses: Itemized expenses categorized into fixed (such as rent or mortgage and utilities) and variable (like entertainment and dining out) using the needs, wants, and wishes classification system.
Assets: An inventory of all assets, including cash, investments, and property.
Liabilities: A comprehensive list of debts and financial obligations, such as loans, credit card balances, and mortgages.

Budgeting Strategies

Budget Creation: Developing a detailed budget to monitor income versus expenses.
Financial Optimization: Identify opportunities to cut costs and boost savings.

Managing Debt

Debt Reduction: Implement strategies to accelerate the repayment of existing debts. This can include consolidating debt to a lower interest rate personal loan and paying the same amount to accelerate payoff or utilizing an introductory 0% card if you have the means to pay the debt off before the rate period expires.
Debt Prevention: Establish practices to prevent or minimize new debt accumulation. Be careful with store credit cards, as they tend to have the highest interest rates. We generally recommend finding one credit card with the perks you like and using it for monthly expenses. This will make it much easier to track your monthly spending and avoid racking up debt.

Savings & Investment Strategies

Emergency Fund: Establish a robust emergency fund to cover unforeseen expenses. The financial planning industry typically recommends saving around six months’ worth of expenses. However, there is no one-size-fits-all answer. Some people prefer to save a year’s worth of expenses, which is fine as long as it doesn’t compromise other financial goals.
Goal-Specific Savings: Create dedicated savings accounts for specific objectives, such as retirement, children’s education, or purchasing a vacation home.
Investment Planning: Develop investment strategies aligned with your timeline for utilizing the funds. For short-term goals, invest conservatively to avoid potential losses. Nothing would be more disheartening than finding the perfect home and then not being able to put in an offer because the stock market is down. For long-term goals, such as saving for your child’s college fund, take advantage of compounding interest and consider a more aggressive strategy initially, adjusting to conservative investments as you near your goal. This approach helps ensure your funds are available when needed while balancing the risk of short-term losses and the opportunity for long-term growth.
Wealth Growth: To support wealth accumulation, construct a diverse investment portfolio that includes stocks, bonds, mutual funds, alternative investments like private equity and private credit, and rental real estate.

Maximizing Employee Benefits

Retirement Plan Contributions: Maximize the company retirement plan match. Educate yourself on the matching program and understand how you can maximize what you receive. Some plans even match non-qualified savings plans.
Deferred Compensation Usage: Leverage deferred compensation plans for tax efficiency and future savings.
Stock Compensation Strategy: Develop strategies to optimize the benefits from stock compensation, aligning with overall financial goals. You can even utilize your deferred compensation to offset stock compensation if you have done good cashflow planning.

Insurance and Risk Management

Risk Contingency Planning: Strategize for potential risks and uncertainties to safeguard financial stability. Examples of risks like this include premature death of yourself or your spouse, an illness or injury that prevents you from working, or even a layoff that results in an extended lapse in employment.
Evaluation of Insurance Coverages: Evaluate the types of insurance your employer offers through the group benefits program and make sure to compare to options that can be purchased outside of your employer or accessed through your spouse’s benefits.
Policy Acquisition: Obtain essential insurance coverage, including health, life, disability, property, and long-term care. You can use resources like lifehappens.org to help you figure the appropriate amount of coverage.
Pro Tip – Keep Beneficiary Designations Up to Date: Beneficiary designations supersede a will in most cases, so make sure to review all of your beneficiaries to make sure they are still in line with your wishes.

Retirement Planning

Goals: Define retirement objectives such as where will you live, what will you do, and what type of lifestyle you want, and determine how much it will cost on an annual basis.
Accounts: Assess what types of accounts you have access to and whether they will be suitable for your savings plan. Some retirement accounts have limited access to investment choices. This can be especially dangerous for those nearing retirement who have accounts that have limited access to more conservative or income producing investment options. Make sure to evaluate accounts based on their contribution limits as well as their fees and investment choices.
Contributions: Calculate necessary contributions to meet retirement objectives, then determine necessary savings amounts and locations.

Tax Optimization

Tax Liability Assessment: Assess your current tax liabilities and identify which income sources generate the most taxes. Remember, not all income is taxed at the same rate.
Tax Reduction Strategies: Implement strategies to reduce taxes through deductions, credits, and tax-advantaged accounts. Evaluate the tools available to lower your tax liability, such as pre-tax 401(k) contributions, IRA savings (if you qualify), and deferred compensation. Also, review non-retirement investments to avoid unnecessary taxes. Properly managing funds can help minimize or even largely eliminate interest and capital gains taxes without sacrificing returns.

Estate Management

Will and Trusts: Create or revise wills and establish trusts to manage and transfer assets effectively and efficiently,aiming to minimize complications for beneficiaries. Consult with an attorney who understands the rules in your state of residence.
Tax and Legal Planning: Plan for potential estate taxes and understand legal considerations to ensure smooth asset transfer.

The Value of Professional Financial Planning

If it seems like a lot of plates to spin, it is. Attempting to DIY your financial plan with financial models in Excel is not only time-consuming but also risky. This is especially true when planning for retirement when there are no second chances.

Professional financial planners use sophisticated software to create projections and make recommendations, enhancing your chances of achieving your financial goals. They can also simulate various risks you could face down the line, providing a significant advantage by allowing you to prepare and adjust today, thus preventing potential financial crises in the future.

When it comes to DIY financial planning versus working with an experienced financial planner, I often put it this way, “I could represent myself in court, but I stand a better chance of winning if I bring an experienced attorney with me.”

Adapting and Refining Your Financial Plan

A mentor once told me, “Every financial plan ever written is wrong.” This wasn’t a critique of financial planning but a recognition that life is dynamic—goals shift, incomes fluctuate, liabilities change, and financial regulations like contribution limits and tax brackets are updated. This makes financial planning a continual process, not a one-time event.

The initial financial plan is crucial for setting your trajectory, but true financial optimization requires regular adjustments. If you’re working with a financial planner, it’s advisable to meet at least twice a year to review and refine your strategy.

When choosing a financial planner, selecting someone whose expertise aligns with your specific needs and specializes in working with people of similar background and net worth is important. Just as you wouldn’t hire a traffic court attorney to handle a real estate closing or consult a foot surgeon about heart issues, choosing a financial planner experienced in managing scenarios similar to yours can make a significant difference in effectively managing your wealth.

Are You Ready to Work with a Financial Advisor?

If you’re just starting out, you might be able to handle your own financial planning for now. There are plenty of great resources online if you know where to look (hint: check out www.stratacapital.co).

If you’re managing your own financial planning, here are two key pieces of advice:

Don’t blindly follow what your friends are doing just because you don’t know what to do. It’s common to see young professionals investing in the same funds as their older coworkers without fully understanding the implications.
Don’t hesitate to admit when you don’t understand something, and seek professional advice. There are many trustworthy and knowledgeable financial planners who can guide you in the right direction.

If you think it might be time to work with a professional financial advisor to begin your comprehensive financial planning process, contact us for a consultation.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The Ultimate Guide to Cash Balance Pensions After Leaving Your Job

Wondering what to do with that retirement account from your previous employer? If you’ve worked in Corporate America, there’s a good chance this account is a cash balance pension plan. Unlike traditional pensions, these plans often provide more options when you leave a company.

What is a Cash Balance Pension Plan?

A cash balance pension plan is a retirement plan where the company contributes on behalf of its employees. Unlike a 401(k), employees do not contribute to these plans. Think of it as an additional 401(k) match from your employer. The company deposits funds into the plan based on your compensation, and rather than being invested, the balance typically grows at a crediting rate based on interest rates.

When you leave the company, your plan balance usually continues to earn interest credits, but the company stops making contributions.

What to Do with Your Plan After Leaving the Company

If you’ve left your job and are wondering what to do with your old cash balance pension plan, the answer will depend on your unique situation. Generally, these plans offer four different options, which can vary based on your former employer.

Option 1: Annuitize the cash balance pension, turning it into a monthly income stream. This works similarly to creating your own “traditional pension.”

Option 2: Roll the balance over into an IRA. This will allow you to continue investing the funds how you’d like.

Option 3: Leave the money in the plan. Some companies allow this, and some do not. Most companies have an age at which you MUST initiate another option, usually 65.

Option 4: Take a lump sum distribution. It’s important to note the entire balance would be taxed as ordinary income.

Taking a lump sum distribution is rarely the best choice unless your plan balance is relatively small. Therefore, we’ll focus only on the other options for the rest of this article.

We’ll walk you through each option and the scenarios in which it might make sense. This will give you a complete understanding to help guide your decision-making process. Finally, we’ll provide a list of steps to determine which option may be most favorable for your situation.

Option 1: Annuitizing the Plan to Create an Income Stream

Think of this option as trading in the balance of your cash balance plan for a “traditional pension.” Company plans typically offer multiple payout options, such as single or joint life.

If your goal is to create additional income in retirement, this may be the right option for you, especially if you are retiring now and need the income immediately. However, this option is not ideal if you prefer flexibility, liquidity, and control of your assets. It may also be less appealing if you are still working and are far from retirement.

What are the advantages of annuitizing my cash balance pension?

It allows you to generate an income stream to supplement your other retirement income sources.
The joint payout option ensures the income stream lasts for both your and your spouse’s lives, hedging against longevity and premature death risks.
The investment risk is transferred to the company, meaning you do not have to manage the assets; you just receive the income.

What are the disadvantages of annuitizing my cash balance pension?

You’re trading an asset for an income stream. You lose liquidity, so if you need the cash sooner, you can’t access it.
The income stream ends with you (or your spouse if they outlive you and you’ve chosen the joint option). It will not be passed along to your heirs or be part of your estate.
There is the potential opportunity cost of not being able to invest the balance elsewhere.

Important Note: If you determine that you want more guaranteed income and are planning on annuitizing your cash balance pension, it’s always advisable to price out other income-producing investments (such as outside annuities) to compare income amounts. You might find a higher income rate at another insurance company.

Option 2: Rolling Over Your Cash Balance Pension to an IRA

Just like you can roll over your 401(k), you can also roll over your cash balance pension into an IRA. You can transfer it to an existing IRA or set up a new one.

What are the advantages of rolling over my cash balance pension?

You have complete control over how funds are invested, allowing you to align your investment strategy with your overall financial plan.
You maintain the asset, which can now be passed down to your heirs and your estate.
If you decide you prefer a guaranteed income stream later, you can always purchase an annuity in the future.
Distributions are easier. Most cash balance plans do not permit partial distributions, but rolling over to an IRA gives you full control over distributions, making it easier to receive your money (e.g., direct deposit vs. a mailed check).
This option offers the most flexibility.

What are the disadvantages of rolling over my cash balance pension?

You bear the investment risk, so if the investment decreases in value, so does your asset.
You no longer receive the interest credit you would have if you left the money in the plan.
You can no longer annuitize through your company’s plan (see Option 1). However, you still have the option to annuitize through another insurance company at a later date if you choose to do so.

Option 3: Leave the Money in the Cash Balance Plan

Most companies allow you to leave the money inside the cash balance plan even after you’ve left the firm. However, there is usually an age limit by which you must choose another option, typically age 65.

If you leave the money in the plan, you will continue to earn interest credits. The crediting rate is usually based on a treasury or corporate bond rate published by the IRS. Be sure to check your plan’s Summary Plan Description for more details.

What are the advantages of leaving money inside my cash balance pension plan?

Ideal for conservative investors who do not need additional income right now.
Beneficial if you are satisfied with the interest rate it’s paying, especially if it’s higher than what you could get elsewhere.
If you’re close to retirement, it keeps the annuitized income option available for later use.

What are the disadvantages of leaving my money inside my cash balance pension plan?

Potential opportunity cost for aggressive investors or those far from retirement who might benefit from investing in riskier assets.
There is a time limit on how long you can keep the funds in the plan.
Facing limited liquidity compared to other investments, making it harder to access funds quickly.
Many plans do not allow for partial distributions.

Steps to Evaluate What Cash Balance Pension Option is Best for You

This decision should not be made in isolation. It’s crucial to assess how your choice integrates with your overall financial plan. Since the decision is permanent, be thorough in your evaluation. Here are the steps you can take to start the process:

Step 1: Determine Your Retirement Status

The first step is to consider whether you are retiring soon or planning to continue working. If you’re retiring, you’ll need immediate income; if you’re still working, you have more time before requiring retirement income. This distinction will also impact the Internal Rate of Return (IRR) calculations in later steps.

Step 2: Assess Your Guaranteed Income Sources

Identify your sources of guaranteed income in retirement, such as Social Security, pensions, and annuities.

Step 3: Estimate Your Retirement Expenses

Calculate your anticipated expenses in retirement. Focus on essential needs like housing and food before considering discretionary spending like vacations and entertainment.

Step 4: Identify Any Income Gaps

Compare your estimated expenses with your guaranteed income sources to identify any shortfalls. If there is a gap, consider whether annuitizing the cash balance pension can fill it. If there isn’t a gap, annuitizing might not be necessary.

Step 5: Calculate the Internal Rate of Return (IRR)

Use the IRR formula in Excel or have your financial advisor run the analysis for you. The IRR will give you a number to compare against alternative investment strategies. (Tip: If your advisor can’t run this analysis, it might be time to find a new one!)

Step 6: Compare IRR to Investment Strategies

Always compare your cash balance pension annuitization IRR with other investment options. Annuitizing the pension might provide a steady income stream, but it’s essential to evaluate whether it’s the best choice compared to other investment strategies.

Step 7: Run Financial Forecasts for Each Option

This step is crucial. Run separate financial forecasts for each option to see how they affect your long-term financial future. Compare these scenarios to understand the impact on your overall financial health and legacy planning.

By following these steps, you’ll gain a better understanding of which option makes the most sense for your unique situation. Always run scenarios against your overarching financial plan to ensure you make the best decision for your financial future.

Final Thoughts on Managing Your Cash Balance Pension

Deciding what to do with your old cash balance pension plan is a significant choice that can impact your financial future. It’s essential to consider how each option fits into your overall financial strategy and long-term goals. Whether you choose to annuitize, roll over into an IRA, or leave the funds in the plan, understanding the advantages and disadvantages of each option is crucial.

By thoroughly evaluating your situation and running detailed forecasts, you can make an informed decision that aligns with your retirement goals and financial needs. Remember, this decision is permanent, so take the time to explore all your options carefully.

If you’d like assistance exploring the best option for your old cash balance pension plan, we’re here to help. Schedule a free consultation with us today. Together, we’ll analyze your unique situation and guide you toward making an informed decision tailored to your needs.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.