At Novel Wealth we work with a ton of tech workers. We call these clients, HENRYs (High Earner, Not Rich Yet). Generally speaking, HENRY’s are so laser-focused on maximizing their earning potential (rightfully so), that they neglect eight important financial planning best practices without realizing it. Here are the eight financial planning errors we see over and over again from tech workers.
1. Not Participating in Your Company’s Employee Stock Purchase Plan: It always surprises us when we run into someone that isn’t participating in their company’s employee stock purchase plan.
Tech employers provide employees with an incentive to accumulate shares in the company, by way of a discount (usually between 10-20%), or matching contributions. This discount represents an opportunity to add ‘free liquidity’ to your plan. Whether you diversify out of your company’s shares or not after you’ve purchased them is up to you (financial planning principles would suggest diversifying is the prudent thing to do), but you’re leaving money on the table by not participating.
At the very least, you should contribute the minimum amount required to get the maximum discount or matching benefit your employer is offering.
2. Paying Sloppy Tax: Holding your company shares in a Non-Registered account? Not the best move. Assets held in a Non-Registered account are fully taxable. Why pay tax when you don’t have to?
As a tech worker, you’re likely in a high-income tax bracket. The highest tax rate is 53.53% (in Ontario). When you hold stock in a company that pays a foreign dividend, it’s going to get taxed at the highest rate. If you’re in a growth stock that doesn’t pay dividends, you’ll have to pay 26.76% tax on your profits when you sell. All of this is avoidable, move your shares into a Registered account (TFSA, RRSP, or RESP) as soon as they vest.
3. Not Diversifying Your Portfolio: We get it, your company stock is on a roll. But don’t let recency bias cloud your judgement. Your company's stock might be on fire now, but its expected return is likely similar to the broader S&P 500. By being over concentrated in your company’s stock, you’re increasing your portfolio’s volatility and probability of larger losses, not your expectation of profits. Remember, the stock market is forward looking. Your company's good news is already priced in.
4. Accepting taxes and increased volatility: If you have company stock and you’ve maxed out your Registered accounts, you’ll have no choice but to hold your company stock in a Non-Registered account. There’s a smart way to do it, though.
In Canada, there’s a little known and seldom used tax maneuver called a Section 85 Rollover that allows you to exchange assets (like company shares) for shares of an eligible Canadian corporation. If you can find a corporation holding a mix of stocks (similar to an index fund), you can exchange your single stock for many stocks, without triggering taxes. This move lets you spread risk and diversify without facing immediate Capital Gains taxes.
5. Not Reporting Foreign-Owned Assets in Excess of $100K: Most tech workers don’t realize that the company shares they hold in a non-registered account are considered foreign property. Anyone who owns foreign property with a cost base of more than $100K CAD is required to file a T1135 with the Canada Revenue Agency (CRA). Period. Full stop.
Filling out this form does not mean you need to pay more tax, the CRA just wants to be aware of what you have. The bad news is that if you don’t file, there’s a $25/day penalty, with a max of 100 days for each year, with potential for additional penalties to be added at the CRA’s discretion (plus interest).
6. Missing RRSP Opportunities: Similar to our first point but equally surprising, many tech workers delay enrolling in their group RRSP. By doing this, you’re leaving free matching dollars from your employer on the table. Enroll right away and ensure you're contributing the amount necessary to max out your employer matching.
The second mistake? Contributing an amount that falls short of the full employer match.
7. You’re not using the Spousal RRSP strategy: There’s a good chance you’re the higher income earner in your family. As the higher earner, you may want to think twice about loading up your RRSP. Explore income-splitting opportunities via a Spousal RRSP. It's a strategic move to optimize your tax situation and build a stronger financial foundation for your family.
8. Not Protecting Your Income: If you had an ATM in your home that spat out thousands of dollars every month, would you pay a bit of insurance each month to make sure it kept printing money even if the power went out forever? Of course, you would.
As a HENRY (High Earner, Not Rich Yet), your #1 asset is your ability to earn the massive income that you do. It creates most, if not all, the positive financial knock-on effects in your life. But what if you lost your ability to earn that income?
