This year marks Sensible Financial’s 20th anniversary. We put our heads together and came up with financial tips to share. Because of the volume of clever ideas, I divided the material into three articles. The tips fall into 8 categories: saving, retirement, charitable giving, investing, debt management, insurance, estate planning, and security. In the first, I covered saving and debt management. The second article was full of financial tips related to retirement, estate planning, insurance, and security. This one deals with investing and charitable giving.
Investing
- Buy I Bonds as inflation-protected savings.
—Rick Miller, Founder and CEO- iBond interest rates adjust every 6 months to match inflation. From November of last year through April of this year, interest rates were over 7%!
- Go to Treasurydirect.gov to open an account. Link the account to the bank account you will use as a fund source.
- Use money that you don’t need right away – you must leave the funds invested for at least a year. Also, withdrawals before 5 years incur a 3-month interest penalty.
- Don’t hold employer stock (in your 401(k) or almost anywhere else).
—Rick Miller, Founder and CEO- Holding stock in your employer is the opposite of diversifying. First, it’s an individual stock, not a mutual fund. Second, your income and employment prospects correlate highly to your employer’s stock performance. When the company does well, the stock will go up, and you’ll likely get a raise. If it doesn’t, the stock will go down, and you might lose your job.
- If your employer contributes shares to your 401(k) convert them to a diversified investment as soon as you can. Do you receive employer stock as compensation? Sell it as soon as possible.
- You may use an ESPP (Employee Stock Purchase Plan) to get a discount on your company’s stock, but don’t hold the stock any longer than you must.
- Academic research supports the idea that investing in passively managed funds will likely provide greater long-term investment returns than actively managed funds.
—Edward Samp, Trader and Associate Portfolio Manager- It is extremely difficult to consistently identify underpriced stocks. The efficient market hypothesis states that security prices reflect all available information. Consistently outperforming the market is very hard.
- Invest in low-cost index mutual funds and Exchange Traded Funds (ETs).
- Index mutual funds and ETFs tend to be tax efficient. ETFs have a slight edge.
- Tax-loss harvesting can (1) offset short term and/or long-term capital gains and (2) potentially reduce taxable income.
—Edward Samp, Trader and Associate Portfolio Manager- Long-term capital gains (gains from sale proceeds of securities held for one year or longer) are taxed at 0%, 15% or 20% at the federal level. Short-term capital gains (gains from sale proceeds of securities held less than one year) are treated as ordinary income. Harvesting short-term and long-term losses can offset portfolio income. If the net of short-term and long-term losses is negative, it can offset up to $3k of ordinary income per year, and any additional amount can be carried forward to future years. State short-term and long-term gains taxes vary between state.
- You can sell securities in your portfolio with losses and replace them with a very similar security. (The IRS does not allow you to replace the security with one that tracks the same benchmark and has the same underlying holdings and claim a loss for tax purposes). After holding this new security for 30 days, you can decide whether to swap back into the original security. (If there were now a gain in the new security, you may decide to continue holding it.)
- The end of the year is a good time to consider tax-loss harvesting in your portfolio.
Charitable Giving
- If you are 70½ or older, a Qualified Charitable Distribution (QCD) is a tax efficient way to donate to charity.
—Aimée Plouffe, Associate Financial Advisor- A QCD is a direct transfer of funds from your IRA to a qualified charity. QCDs count towards your annual required minimum distributions (RMDs) and are excluded from taxable income. In other words, while you would ordinarily pay tax on pre-tax IRA withdrawals, distributions that are sent directly to charity are not taxed!
- To make a QCD, contact your IRA’s custodian (where your IRA is held) to request a QCD. Specify the dollar amount and request that the check be made payable to the charity of your choice. Ask the charity to mail the check to you. Then, forward it to the charity and request a receipt for your records. The custodian will not issue a supporting document.
- QCDs cannot be made to certain charities such as private charities and Donor-Advised Funds.
- Consider using a Donor Advised Fund to “bunch” your charitable donations if you are taking the standard deduction.
—Marie St. Clare, Associate Financial Advisor- If you are taking the standard deduction, your donations are likely not reducing your tax bill. Contributing multiple years’ worth of gifts to your Donor Advised Fund in one year may allow you to itemize and receive a tax benefit.
- You can open a Donor Advised Fund at Fidelity, Schwab, or Vanguard among others. If you work with an advisor, contact them for help opening an account.
- Donating appreciated securities instead of cash to your Donor Advised Fund provides an additional tax benefit – you avoid paying tax on any embedded gains. Please ask your advisor about other important considerations specific to your personal situation.
The more information you have, the better the decisions you make. If you have questions about these financial tips, please contact your financial advisor.
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