Tag: Lockheed Martin

Imagine someone told you there was a tool that allows you to make contributions that reduce your taxable income, accumulate tax-free earnings, and make tax-free distributions if they are used for qualified health expenses. Sounds pretty good, doesn’t it? The triple tax benefits of a health savings account (HSA) should not be easily overlooked during your next benefit enrollment window.

It is important to note that to qualify for an HSA you must participate in a high deductible health plan (HDHP). This is one drawback that must be carefully considered before you elect to participate. With a HDHP you will have a lower premium but higher deductible that will need to be covered out of pocket when medical expenses are incurred. So, if you decide to participate in a HDHP you will need to adjust your emergency fund savings accordingly to prepare for this potential expense. You also cannot be claimed as a dependent or be covered by any other health plans, including Medicare. 

HSA Contributions

The maximum contribution amount will depend on if you are participating in a single or family plan. In 2024 the contribution limit is $4,150 for a single insured person and $8,300 for family plans. At age 55, you are eligible to make an additional $1,000 catch-up contribution to your HSA annually. Like we mentioned earlier, the contribution made into a health savings account reduces the employee’s taxable income. It is important to keep track of money contributed to the plan throughout the year and stay within the contribution limits. Excess contributions to your HSA would not be tax deductible and would also incur a 6% penalty. 

Both employers and employees can contribute to the health savings account. Any contributions you make directly from your paycheck are pre-tax, meaning they reduce the amount of taxable income you have for the year. Any employer contributions, regardless of whether it is a flat contribution or match, are immediately vested but do count towards your annual contribution limit.  

From the employer’s perspective, offering and contributing to an employee HSA as part of a comprehensive benefits strategy can be useful to attract quality talent in a competitive market. Additionally, the contribution or match made to the employee’s HSA is a deductible business expense to the company.  

If you are enrolled in a high deductible health care plan but your employer does not give you direct access to a Health Savings Account, you can still open one. Numerous companies, such as HSA Bank and Optum Bank, will allow you to open an individual HSA without being attached to a group benefits plan. In these cases, you would not have HSA contributions directly withheld from your paycheck – you would simply transfer money from your bank account to your new HSA account. Similarly, your employer may not necessarily make any contributions to your HSA at all. At the end of the year, you would claim your HSA contributions as a deduction when you file your income tax return. 

Using Your HSA

HSA funds can be used to pay for medical supplies, drugs, and services that the IRS (Internal Revenue Service) deems as “qualified.”  There are plenty of expenses that are considered qualified HSA expenses such as medical treatments, dental treatments, vision, some medical costs incurred during travel, some pre- and post-partum care, certain insurance premiums like long-term care, COBRA and more. To find out if the distribution will qualify as an HSA medical expense we recommend checking IRS publication 502 or with your HSA bank 

HSA accounts come with a debit card, and you can choose to pay for drugs or services with that card or pay out-of-pocket and then get reimbursed with funds from your HSA account. Any distributions made for non-qualified medical expenses will be taxable and you could possibly have a 20% penalty if under age 65. Once you reach age 65, a non-qualified distribution would no longer have the penalty but would still be taxable. 

There is no time limit on when you must spend the funds in an HSA. They are your funds and can be accessed at any time. Any unused funds at the end of the year will roll over indefinitely.  

One strategy to consider is maximizing your HSA especially in the years leading up to retirement. Not only are these typically some of your highest earning years, but you are heading into the retirement phase of life where healthcare costs can average approximately $6,000 annually. The ideal option for many HSA owners is to contribute as much as possible annually, but not spend any of those saved dollars on medical expenses during the year, choosing to wait to spend those dollars in many years or decades in the future. This allows for a greater period of tax-free growth.  This strategy is not always possible, of course. If you do spend the money saved within the HSA in the same year you make contributions, you have still used pre-tax dollars instead of after-tax dollars, so there is a tangible benefit – it’s just not as large. 

Another point to keep in mind is that inflation for healthcare typically runs higher than normal expenses at 5-6% a year. Not only is an HSA beneficial during the contribution period by reducing your tax bill, but utilizing an HSA to help prepare and mitigate some of the anticipated healthcare costs during retirement can be extremely beneficial as well. As a retiree, sometimes there is a coverage gap between your retirement date and Medicare enrollment. Not only can HSA funds be used to help with large one-off medical expenses, but you could also use them to help cover certain insurance premiums like COBRA or some medical plan deductibles, which can help you bridge the coverage gap.  

Once you enroll in Medicare, typically at age 65, you are no longer eligible to make additional contributions to your health savings account. However, the funds in your HSA are still available to be used for medical expenses – including paying Medicare premiums! This option is very nice if you sign up for Medicare but choose to defer starting your Social Security benefit. 

Another tool available is the ability to invest contributions within your Health Savings Account. Similar to employer retirement plans like a 401k, there will be a list of available investment options to choose from with your HSA provider. Investing the funds in your HSA provides the possibility of generating more capital appreciation on the funds rather than just leaving them in cash. We recommend discussing the investment options with your financial planner to determine which vehicles and risk level are best for you.  

One final option to mention is that you can make a once-in-a-lifetime contribution to your health savings account from your Individual Retirement Account (IRA)? Even though you are pulling from an IRA, these funds are not taxable as ordinary income and avoid the 10% early withdrawal penalty. The amount you can add into your HSA from the IRA is still limited to the annual contribution caps. This one-time option can be a helpful resource to maximize HSA savings for medical expenses without having to tap into other retirement savings that could incur taxes and potentially penalties as well. 

Health Savings Account Highlights

• Must have a high deductible health plan in order to participate in an HSA. 
• Triple tax benefits – contributions reduce taxable income, earnings are tax-free, distributions for qualified medical expenses are tax-free.
• Non-qualified distributions are taxable and may have a 20% penalty. 
• Eligible for an additional $1,000 catch up contribution at age 55. 
• Cannot make additional contributions once enrolled in Medicare. 
• You can select investment options in your HSA to help further capital appreciation. 
• No time limit to utilize funds in an HSA. 

A Health Savings Account can be a powerful tool for saving and preparing for future healthcare expenses. With its triple tax benefits and flexible options for contributions and distributions, an HSA offers individuals the opportunity to lower their taxable income while building a savings fund specifically designated for medical costs. It is important to carefully consider your eligibility, contribution limits, and investment options when utilizing an HSA, as well as the potential consequences of non-qualified distributions. However, with proper planning and strategic use, an HSA can be a valuable asset in both the present and future for managing healthcare expenses. Collaborate with your financial planner to determine if an HSA is right for you and how to best incorporate it into your overall financial plan.

Statistics tell us the only 1 in 6 retirees have a retirement income plan. On average, many Americans approach retirement without a clear understanding of their financial readiness. This uncertainty often leads to a lack of confidence that their savings will last throughout retirement.

Our job as advisors is to help build a plan to provide both confidence and peace of mind as you enter this next chapter of your life.

Retirement Income Plan

The key to doing this is building an income plan that will take care of your needs today as well as your future needs – potentially decades in the future.  At a bare minimum, we need to consider things like your lifestyle spending and the financial and family goals that you have for this stage of your life. Once you have a clear idea of what this looks like, we can then evaluate your existing assets to determine if you have what it takes to have a successful retirement. Then, we will begin building out your retirement income plan.

The beautiful thing about a retirement income plan with BentOak Capital is that it is designed to be dynamic, acknowledging that life is unpredictable, and your needs may evolve over time. No matter the change of plans, our strategies are built to adapt. This flexibility ensures that your retirement income plan remains aligned with your goals, providing peace of mind and the confidence that you can navigate through various phases of life with a strategy that supports your financial well-being.

Data gathering is a key step to helping us develop your income plan. During the data gathering process, you’ll want to do your best to provide us with the most accurate information regarding your financial situation. The more data that we have the better plan we can put together. For example, we will typically ask for tax returns, investment statements, retirement accounts, estimated monthly expenses, life insurance policy information, social security statements, etc. These are important bits of information that will be needed to make progress on your income plan.

Once we have gathered the necessary information, we can begin building out your plan and start a projection of your cashflows during retirement. One really informative thing that we provide is a visual of what this plan could look like. See below:

 

This is an example of an income plan that is generated with Social Security income, pension income, and planned distributions from the portfolio. This visual also does a great job of matching up the income and expenses that are being projected.

We also have the ability to project out the income and expenses to determine if we can expect the income to pay for expenses now and in the future. Considering both the short-run as well as the long-run it is critical to determining whether or not you have the ability to retire with confidence.

This again emphasizes these important of the details within the data that you provide.

If you are interested in building out your retirement income plan, give us a call today and speak with one of our retirement income experts!

The obscure acronym NUA, which stands for “Net Unrealized Appreciation”, is one that Lockheed Martin employees holding shares of company stock in their 401k plans might have heard. The Lockheed plan allows for the company’s stock to be an investment option in the plan, along with other more diversified selections such as mutual funds. This is a great way to allow employees to incrementally purchase shares to have a stake in the company, an incentive for them to perform well so in turn the company does as well.

NUA Rules

It is critical for Lockheed retirees to know about three important rules that must be met, to have the option of distributing the appreciated Lockheed shares and receiving more favorable tax treatment when those shares are ultimately sold. When considering whether this strategy makes sense, a multitude of factors including the income tax bracket, appreciation in the stock, expenses, and income must be considered to see if this is an attractive option to pursue.

As mentioned above, there are three important rules that must be met in order to qualify for this favorable tax treatment.

1. The assets in your Lockheed 401k must be completely withdrawn within a single calendar year.  You cannot make a partial withdrawal or rollover.  100% of the 401k must be distributed.
2. The appreciated company stock that you wish to utilize the favorable NUA treatment on must be moved to a taxable account. You do not have to move 100% of the company stock to a taxable account, only the amount that would be most beneficial for your specific scenario.
3. This distribution strategy can only take place after any of these triggering events:
   • Reaching 59 1/2
   • Separation of service (i.e. retirement, job change, etc.)
   • Death or total disability of the employee

You will pay normal income tax on only a specific portion of the LMT stock, allowing you to keep the majority of the stock and hold it until you are ready to sell. At that time, you will pay tax at much more favorable capital gains rates, so long as the stock is held outside the 401k for at least one year.

One important side point about holding company stock in your 401k: it is good practice to review the investment lineup in your 401k annually to make sure that one position is not creating a concentrated or overweight position in the account. If there is one position that is creating a larger weighting, it would be prudent to review this with your financial advisor before making any changes.

Through the creation of a financial plan and working to determine the timing of various income sources or expenses, an advisor can assist in structuring a potentially more tax efficient plan. A common application of this strategy is to distribute a portion of the appreciated company stock to meet shorter-term expense goals, instead of taking a distribution from a qualified account.

NUA Example

Jim, age 62, has worked for Lockheed for most of his career and is contemplating retirement next year.  He has purchased company stock in his 401(k) throughout his tenure there. The cumulative cost basis in the Lockheed stock is $200,000, but because the company has performed well the overall position is worth $400,000 resulting in $200,000 of growth.

Jim estimates his living expenses are approximately $100,000 per year. After an in-depth analysis it is determined that the optimal scenario is for Jim to take distributions from his retirement savings for 2 years, then begin his pension at age 65, and defer taking Social Security until age 70.

If Jim draws his living expenses from his 401k (or rolls the 401k into an IRA and draws from there), 100% of his withdrawals are taxed at Jim’s ordinary income tax rate.

Alternatively, if Jim utilizes the NUA option and then makes his withdrawals using just Lockheed Martin stock, his monthly distributions would be taxed at more favorable rates.

The example above provides a relatively simplistic scenario but does paint a picture of some of the different variables that must be accounted for. There may also be scenarios where a smaller amount is needed for an upcoming expense or goal and some, but not all, of the appreciated stock could be utilized for this purpose. This is not a strategy where it is either “all or none”, but one that requires a reviewing of the different options through a comprehensive financial plan.

Here at BentOak Capital we take a holistic approach to planning and factor in numerous scenarios to create an efficient plan to help meet your needs and goals. If you are interested in having a more in-depth conversation on this topic, please contact us at 817-550-6750 to coordinate a call or meeting with one of our advisors.

Retirement income for Lockheed Martin retirees is a highly important factor to consider when creating a financial plan. When beginning to explore retirement, individuals with a Lockheed pension plan must thoroughly explore their options. To pick just one example, if one elects to receive a monthly payout, is related to the various payout options for survivor benefits. Several examples of payout options include Life Only, 75% Joint and Survivor with a 5-year pop-up, or a Level Income Reduced at Age 65. Deciding between these options requires consideration of multiple factors and assumptions about the future, and this decision should not be made lightly.

For some retirees, an alternative to the various monthly payout options is a lump sum. This selection must also be made at retirement but provides flexibility since the calculated amount can be transferred to a tax-advantaged retirement account. By choosing this route, there is the option for additional growth on the funds versus the steady monthly income of a pension payment. Keep in mind that retirees whose pension payment is over $5000 per month are not allowed to choose a lump sum payout under current Lockheed Martin rules.  Individuals who have the choice to take their pension as a lump sum should carefully consider the advantages and disadvantages of both before making a decision based on individual needs, desires, and life expectancies.

Social Security is a vital part of many retirees’ retirement incomes and having the right plan in place can make all the difference. The decision to claim Social Security benefits in any year between ages 62 and 70 is an essential step in maximizing Social Security benefits. Depending on your personal situation, it may be more beneficial to accrue Social Security’s guaranteed 8% annual adjustment by deferring benefits until after Full Retirement Age.  For others, claiming Social Security at or even before Full Retirement Age might prevent drawing from retirement assets too soon and too quickly. Spousal benefits should also be taken into account when making decisions about Social Security to ensure the most efficient use of this critical aspect of retirement income. No matter which route you choose, it’s important to research and explore all possible options – and there are lots of possible options – so you can develop an optimal Social Security strategy that works best for you.  Advisors at BentOak Capital have extensive knowledge and optimization software that can help you make this decision.

Rolling over a 401k into an Individual Retirement Account can be a useful tool for retirees, allowing them to make the most of their 401k savings. When planning, it’s critical to determine what portion of 401k contributions are pre-tax and what part, if any, is after-tax, and then roll them into the respective retirement accounts. One potential benefit of having retirement funds in an IRA as opposed to a 401k is the opportunity to make Roth conversions. This process involves distributing funds from a pre-tax IRA and depositing the proceeds in an after-tax Roth IRA. This distribution forces income taxes to be paid, but the goal is to pay those taxes at a lower tax rate than might be in force in later years.  One additional benefit courtesy of the recently passed Secure Act 2.0 allows retirees to delay Required Minimum Distributions from their IRAs for a few more years. People born between 1951-1959 must begin taking RMDs at 73. People born after 1960 have RMDs that begin at 75. As 401ks are converted into IRAs and Roth’s later in life, this adjustment allows for a longer period of time to take advantage of bracketing (converting a portion of pre-tax dollars, without jumping into a new tax bracket) based on income tax brackets. Ongoing comprehensive planning, with a focus on tax planning, has the potential of also being a tremendous estate planning tool since Roth IRAs can grow tax-free and be distributed tax-free to future beneficiaries.

Additional items that some Lockheed Martin employees and retirees need to carefully navigate include the salaried savings plan, LMT stock options, employee stock ownership plans, various military benefits, and employee benefits from previous employers. Each of these, in addition to those previously addressed, are all items that we frequently incorporate in a comprehensive plan to optimize how needs are met today and create a roadmap to meet future goals. BentOak Capital advisors would be happy to visit with you about any of these topics at your convenience. We are available on Fridays if that is your preferred day to meet. Call us at 817-550-6750 to discuss further.