Week 13 - Roth vs Trad Equity Comp

Question 1

What are the two methods discussed in class on how to get out of debt?

Answer 1

Snowball and avalanche

Question 2

(T/F): While your credit report is frozen, you are not building credit

Answer 2

False

Question 3

(T/F) Roth is superior to Traditional when you’re young, because you have more years to benefit from compound interest

Answer 3

False

Question 4

What is a Roth IRA?

Answer 4

An investment account for retirement money. You must have earned income to open.

It has contribution and income limits and there are amazing tax advantages

Question 5

What is the 3-Step Process to opening a Roth IRA?

Answer 5

1. Open a Roth IRA
   need earned income, fund the earliest year first
2. Fund the Roth IRA by moving cash into the account
   Transfer from checking / savings
3. Select investments in your Roth IRA
   Target date funds, total market funds, keep your expenses low

Question 6

(T/F) With a Roth IRA you can always take out contributions (anytime, any reason). No taxes, no penalties.

Answer 6

True

Question 7

What is the income threshold for the Backdoor Roth IRA

Answer 7

MFG - <= $230,000 MAGI
Single - <= $146,000 MAGI

Question 8

Does the Backdoor Roth IRA work if you have existing Trad IRAs?

Answer 8

No

Question 9

Roth vs. Traditional

Answer 9

Roth - pay tax now, earnings and withdrawals are tax-free. Contributions are “post-tax” (made with “after-tax” income)

Traditional - receive tax break (deduction) now, earnings and withdrawals are taxed. Contributions are “pre-tax” .

FOCUS ON YOUR SAVINGS RATE

if you think you are going to make more money as your career progresses, choose Roth now. If you are at the peak of your earnings and expect to earn less later in life, choose traditional now

Question 10

When might Traditional be better?

Answer 10

• You are certain you are going to retire to a no-tax state and not work
• You firmly believe tax rates are going to decrease

Question 11

How should you ensure that you get a tax deduction?

Answer 11

Itemize!

Question 12

What are the types of equity compensation?

Answer 12

1. ISO - incentive stock option
2. NQSO - non-qualified stock option

Question 13

Why is equity compensation used?

Answer 13

• attract talent
• reduce salary cost
• create ownership / buy-in

Question 14

If working for a start-up you should…

Answer 14

• consider how important equity is to you
• ask if you can negotiate your equity / salary split
• ask about the vesting schedule
• ask you are allowed to “early-exercise”

Question 15

What are RSU’s?

Answer 15

Restricted Stock Units which typically vest over time. They are taxed when they vest as ordinary income.

Question 16

(T/F) You shouldn’t sell your RSU’s as soon as they vest

Answer 16

False, you should sell. You would be over-exposing yourself to that company, taking on more risk than necessary.