Patent royalties killing me

[ScientistPhysician]

My wife is a derm resident, I'm a non-practicing MD academic researcher. Combined income about $180k. This year we just got issued about $30k in stock equity in start-up companies from our former university based on our inventions that were out-licensed. They are actually holding the shares hostage until we pay the state taxes. We'll have to pay about $11k in federal taxes in april next year.  So this is a double whammy, we're losing cash, but our income is going up and now we're outside of the Roth contribution limit.

I doubt we'll be able to max my 403(b) and certainly won't be able to do a back-door Roth this year.  I wonder if you guys have any advice on how to allocate 403(b) contributions in light of this info, pre-tax or post-tax. My inclination is to switch to post-tax since we can't Roth this year and wife's income will go up about 5 fold once she starts as an attending.

Thanks

[Peds]

I dont understand why you can't max 403 and rIRA with 180K?

[VagabondMD]

ScientistPhysician wrote:

My wife is a derm resident, I’m a non-practicing MD academic researcher. Combined income about $180k. This year we just got issued about $30k in stock equity in start-up companies from our former university based on our inventions that were out-licensed. They are actually holding the shares hostage until we pay the state taxes. We’ll have to pay about $11 in federal taxes in march.  So this is a double whammy, we’re losing cash, but our income is going up and now we’re outside of the Roth contribution limit.

I doubt we’ll be able to max my 403(b) and certainly won’t be able to do a back-door Roth this year.  I wonder if you guys have any advice on how to allocate 403(b) contributions in light of this info, pre-tax or post-tax. My inclination is to switch to post-tax since we can’t Roth this year and wife’s income will go up about 5 fold once she starts as an attending.

Thanks

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This sounds distressing right now, but in the long run, it does not matter match, either way. Whatever you choose to do now will be dwarfed by future contributions and decisions.

Congrats on the patent and start-up stake.

[ScientistPhysician]

Rent is high where we live, we're trying paying off my wife's student loans quickly ($18k/year), we now have to come up with about $13k in cash to pay the taxes on our shares. I might be able to get close on the 403, but I don't see us having the cash for rIRA.

[adventure]

Make hay when the sun shines.

Get the shares today, sow the retirement/loan fields afterwards?

 

Edit: I had a second thought. You're being taxed at a rate that is likely higher than what you'll actually owe next April. Thus, you could calculate the impact on your taxes now, and adjust your withholding accordingly now. This would improve cashflow throughout this year during each pay period. Just remember to adjust as necessary for any future changes. (I also check in December to ensure I don't own and risk those underpayment penalties). Excel, a financial planner or TurboTax could be used to model various scenarios.

[Donnie]

It is probably too late, but there are ways to structure equity grants like the one you mentioned without triggering taxes, e.g. phantom shares, stock appreciation rights, etc.  Taxes are paid when you actually receive cash.

[Zaphod]

Cant you put the shares into the IRA? I thought people did this all the time in Silicon Valley. Dump shares of FB in at .00001 cents to your IRA, wait ten years, voila! Billionaire with perpetual tax free income.

[Hank]

Yep, I'm a little surprised this wasn't structured as warrants, options, or some other way to buy a substantial stake, but within your IRA instead of outside of it.

[adventure]

Hank wrote:

Yep, I’m a little surprised this wasn’t structured as warrants, options, or some other way to buy a substantial stake, but within your IRA instead of outside of it.

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Yeah,... @ScientistPhysician, could you buy more of said company now, instead of later? (cashflow issues aside) Just curious.

[ScientistPhysician]

adventure wrote:

Hank wrote:

Yep, I’m a little surprised this wasn’t structured as warrants, options, or some other way to buy a substantial stake, but within your IRA instead of outside of it.

Click to expand…

Yeah,… @ScientistPhysician, could you buy more of said company now, instead of later? (cashflow issues aside) Just curious.

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No, it's a little complicated because I am getting shares 2 ways: first as a company founder and second as an academic inventor. As a company founder, I was able to file an 83(b) and buy my shares for a pittance and avoid the income tax. But the current patent royalties come from the university as part of my inventorship agreement. Since the University did not disburse the shares until after the company was financed the share value went from $0.0005/share to $0.26 per share.

[q-school]

I know it's the last thing you need but 1) this is a good problem to have and b) in a few years you won't remember why you were so stressed. A few years after that, if you are like most on his board you will be retired.

Good luck.

[Donnie]

I don't think it's necessarily a good problem to have. Likely this could have been structured to avoid taxes, which is annoying. Phantom income sucks, and this could definitely be a case where you never recover the tax bill. Unfortunately it looks like your only options are to pay the taxes or decline buying the shares. Since you are effectively buying the shares at 34 cents on the dollar assuming the $30k is based on fair market value, it's probably a good idea to pay the taxes and get the shares.

I would consider funding the retirement accounts over repaying the debt if the interest rate is reasonable.

[q-school]

Donnie wrote:

I don’t think it’s necessarily a good problem to have. Likely this could have been structured to avoid taxes, which is annoying. Phantom income sucks, and this could definitely be a case where you never recover the tax bill. Unfortunately it looks like your only options are to pay the taxes or decline buying the shares. Since you are effectively buying the shares at 34 cents on the dollar assuming the $30k is based on fair market value, it’s probably a good idea to pay the taxes and get the shares.

I would consider funding the retirement accounts over repaying the debt if the interest rate is reasonable.

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well yes if we could go back in time and change things, then it's not a good problem to have.

given that constraint, i think having more net worth, even with tax consequences, is better than less net worth?

 

[Donnie]

q-school wrote:

Donnie wrote:

I don’t think it’s necessarily a good problem to have. Likely this could have been structured to avoid taxes, which is annoying. Phantom income sucks, and this could definitely be a case where you never recover the tax bill. Unfortunately it looks like your only options are to pay the taxes or decline buying the shares. Since you are effectively buying the shares at 34 cents on the dollar assuming the $30k is based on fair market value, it’s probably a good idea to pay the taxes and get the shares.

I would consider funding the retirement accounts over repaying the debt if the interest rate is reasonable.

Click to expand…

well yes if we could go back in time and change things, then it’s not a good problem to have.

given that constraint, i think having more net worth, even with tax consequences, is better than less net worth?

 

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Without more information, there's no way to know whether this is a net worth positive move.  I suspect this is a very speculative investment that will just as likely result in a complete loss of capital compared to a liquidity event resulting in cash to OP in excess of the taxes paid.

[ScientistPhysician]

Donnie wrote:

q-school wrote:

Donnie wrote:

I don’t think it’s necessarily a good problem to have. Likely this could have been structured to avoid taxes, which is annoying. Phantom income sucks, and this could definitely be a case where you never recover the tax bill. Unfortunately it looks like your only options are to pay the taxes or decline buying the shares. Since you are effectively buying the shares at 34 cents on the dollar assuming the $30k is based on fair market value, it’s probably a good idea to pay the taxes and get the shares.

I would consider funding the retirement accounts over repaying the debt if the interest rate is reasonable.

Click to expand…

well yes if we could go back in time and change things, then it’s not a good problem to have.

given that constraint, i think having more net worth, even with tax consequences, is better than less net worth?

 

Click to expand…

Without more information, there’s no way to know whether this is a net worth positive move.  I suspect this is a very speculative investment that will just as likely result in a complete loss of capital compared to a liquidity event resulting in cash to OP in excess of the taxes paid.

Click to expand...

Yes, this is a high-risk investment, Donnie. I'm getting 1/5th the shares I got as a founder and paying about 30 times as much on the taxes as I did in the 83(b) election.  You're right, I do have the option of surrendering the shares. The $30k is actually an under-valuation, it only takes into account the cash in the company and the value of the hard assets, not on the probability that the drug candidate is a success and the de-risking that has already occurred (it's cleared IND and Phase Ia, now entering into Phase Ib). In any case, even if we could go back in time, it wouldn't matter because I didn't negotiate this deal, the university did.

 

I am going to pay the taxes on the shares to get them, the question is whether to do Roth or Pre-tax in my 403(b). I decided to go for Roth since we are still far from peak-income and have another 35 years of career left.