If you are already charitably inclined there are two gifting strategies that you should be aware of, Qualified Charitable Distributions (QCDs) and gifting appreciated stock. To realize tax benefits for 2023, both need to be done before the end of the year.
Qualified Charitable Distributions:
If you are an IRA owner and are age 70.5 or older, you are eligible to make QCDs. Most people take the standard deduction since the Tax Cuts and Jobs Act increased it, and if you’re not itemizing you lose the ability to deduct charitable contributions. QCDs are gifts to charities made directly from your IRA. Normally, money that you take out of an IRA is taxable income, but QCDs are excluded. So, you are getting money out of your IRA tax-free to give to charity.
Once you’re subject to RMDs (currently at age 73), QCDs are even more beneficial because they count towards satisfying your RMD. If you’re between 70.5 and 73 there is still an extra advantage in that the QCD decreases your IRA balance, which may reduce required minimum distributions in future years.
Let’s say that you are 71 years old, are already gifting to charities every year, and have an IRA. You have social security income which you supplement with money from your investment accounts, all of which is taxed before it hits your checking account. You’re writing checks to charities throughout the year – giving away money that you have already been taxed on. Making QCDs allows you to fulfill your charitable goals with money that you are not taxed on. And because you are reducing the balance of your IRA with these gifts, your RMDs will be lower than they otherwise would have (all else equal) when you turn 73.
There are a few things to note about QCDs, such as annual limits and which charities can accept QCDs. Determining charitable giving strategies is one way that we partner with clients. We can help you determine if QCDs are right for your situation.
In Strategies for Charitable Giving – Part 2, we discuss the strategy of gifting appreciated stock.
Call us to review your investment approach (404) 941-2800.
Changes to the FAFSA form and the formula for determining a family’s need for aid are changing, effective for the 2024-2025 school year. While all the changes are beyond the scope of this post, here we highlight two from a financial planning perspective.
Parent Income:
Contributions (pre-tax salary deferrals) to employer retirement accounts are no longer added back to parent income. This could be an additional incentive for parents with employer plans to max out contributions in years that the FAFSA looks at income. The FAFSA looks at the year two years prior to the beginning of the school year. For example, the 2024-2025 school year looks at 2022 income. Note that this change only applies to contributions that come straight from a salary reduction. Contributions to IRAs that are deductible on the tax return are still added back to parent income.
Grandparent Contributions: Up until now, while grandparent (or other non-parent) owned 529 accounts did not count towards a parent or student’s assets, withdrawals from said account counted as income to the student which had to be reported on the FAFSA. This could reduce the student’s aid eligibility. With the changes, withdrawals from a third-party owned 529 account will no longer count as student income. Grandparents can now maintain a 529 account for their grandchildren and distribute funds without impacting aid eligibility.
Because of these changes, the 2024-2025 form will not be available until December this year. You can stay up to date on announcements at https://studentaid.gov/, or through college financial aid office websites.
Call us to review your investment approach (404) 941-2800.
Bullish sentiment ran out of steam during Q3 2023. In a previous blog we discussed the primary culprit for that. All that said, we are now in the final quarter of the year. Investors entered October in a pessimistic mood and with lots of cash riding out the storm in money market accounts (earning close to 5%). Historically, the last quarter usually sees the strongest market performance. On the back of some pessimism, we think the stage could be set for a significant catch-up.
We recently increased client stock exposure in anticipation of a rebound. We focused on small and mid-cap companies that have not followed the market-moving “Magnificent 7” (the new FAANG stocks). We are much more comfortable with the potential downside when buying at 14-15 times earnings vs. 35-40 times for the largest tech companies.
We have also recently increased safety within our shortest time horizon “Liquid Assets Strategy” by selling our high-yield bond fund position. We think a credit crunch has begun and choose to hold risk-free cash earning 5% rather than accept the risk of BBB-rated bonds earning 6%.
Economic growth is slowing. Businesses are faced with refinancing debt at much higher interest rates, and rates may remain high for many months. Corporate earnings should stay positive but are still vulnerable. The Consumer is still strong, as are home prices and employment. But leading economic indicators continue to weaken. Investors are having a difficult time forecasting the future. It’s a toss-up as to whether the Fed can engineer the magical “soft landing” markets were certain of just a few short months ago. Market sentiment is terrible, and we view this as an opportunity.
The war in the Middle East is heartbreaking, and we keep the civilians at the forefront of our prayers. The cold calculus of markets and economics is that unless the conflict broadens into a regional affair there should be little impact on financial markets. Should it widen to include Iran in particular, that calculus will change.
There have always been geopolitical events and market uncertainties. Our time horizon strategies coupled with detailed financial planning reduces the impact of market risks on our clients’ ability to live the lives they choose. When investment risk is pushed to long time horizons, growth strategies are allowed to perform their best. Over more than a decade, Integras Partners has successfully navigated tumultuous periods without having to give up exposure to the long-term growth needed in almost every portfolio.
Our structural portfolio design provides the comfort to enjoy life today, recognizing that while markets are inconsistent, freedom to live life isn’t.
Call us to review your investment approach (404) 941-2800.
August, September, and October are historically the worst three months for market performance and 2023 was no different. Everything but cash, oil and short-term treasuries had negative 3rd quarter returns. The S&P 500 lost 3.25%, small caps fell 5%, international markets dropped 3.5%, and long-term treasuries lost an astounding 8%.
The culprit was interest rates. Not just the shortest-term rate that the Federal Reserve controls but also long-term rates, which are determined by bond traders. There were two main reasons that long-term rates went up sharply. First, the Fed made it clear that it intends to hold interest rates high far longer than the bond market expected. Second, with the US fiscal deficit climbing, the Treasury must issue and sell more bonds. Simple supply/demand dynamics resulted in lower bond prices, which pushes interest rates higher. The 10-year US Treasury note began the quarter with a rate of 3.85%. At the end of September, it had risen to 4.8%. Rising rates are bad enough but when they rise at such a fast pace, long-term assets with a yield – dividend stocks, bonds, real estate, etc. – lose value quickly. For example, defensive stocks such as utilities lost almost 10% during the quarter. And since the beginning of 2021, the 20-year US Treasury bond has lost a staggering 50% of its value. All due to interest rates.
Today we are at an interesting crossroads. The Fed may be done (or close to being done) raising short-term rates as inflation is cooling off. But we are not out of the woods yet. We have outlined the signs of potential recession in several past commentaries, and they continue to become more apparent. What’s sustaining our economy is the robust consumer and very low unemployment. Consumers are showing some signs of slowing down, and employers are less eager to hire than just a few months ago. It’s natural that the economy will continue slowing as rate increases keep working through the economy. It will be a close call as to whether inflation can slow to the Fed’s stated goal of 2% before economic growth becomes economic slowdown. It may be several more months before the answers play out.
However, we see some opportunities today. Entering the 4th quarter we updated our positioning into areas where we see that opportunity. Read More . . .
Call us to review your investment approach (404) 941-2800.
Is your 401(k) allocated to help achieve your retirement goals?
Most 401(k) and other retirement plans now offer Target Date Funds (TDFs), which are intended to align investment risk with your anticipated retirement date. They have become increasingly popular for a few good reasons but are rarely the best solution once your accounts achieve some size.
Let’s look at how they work and whether they are the most efficient choice for you.
TDFs are a great choice for beginners, or when you join a new employer plan. There is typically a lineup of 10 or more funds in a plan targeting every five years for the next 30 or 40 years. Often, they are funds run by the plan sponsor and are an envelope “funds of funds”. So, this diversifies each payroll contribution to maybe a dozen funds selected to complement each other. The main difference between choices is the percentage of stock funds vs. bond funds, as they all get increasingly conservative as their target date approaches.
Newer plans may even automatically enroll new employees. This helps both the employee and the plan sponsor. Most companies match half of the first 6% of salary you defer into their 401(k), providing extra retirement savings and reducing fees by growing the total plan balance. So, TDFs are the default investment election for participants based on age, which is a big advantage over holding the money in cash.
So, why are TDFs not the greatest thing since sliced bread?
To start, all of your money is invested with one fund family, instead of getting different approaches and methodologies. These funds are also allocated evenly across asset classes and industries instead of tactically selecting investments suited to the current economic environment. They also evenly spread bond exposure instead of actively selecting appropriate issuer qualities and maturities.
The biggest challenge with TDFs is that you don’t want all your investments too conservative as you enter retirement! Yes, you want to make sure that you have some conservative assets to draw on during rough patches, but you need growth because you still have a long-term timeframe for some of the money and you want your income to keep pace with inflation.
Here are a few things to consider:
How do you make your investment decisions? Is it by looking at last year’s performance?
Do you actively rebalance your accounts?
Do you compare what you own against what’s available?
If you have money in an old employer plan, have you thought about the advantages of an IRA?
Are you familiar with the concept of layering investment risks to match your goal timeframes?
You should review your 401(k) often as it will fluctuate along with the markets.
Call us to review your investment approach (404) 941-2800.
Here is a summary of your four options for this money:
1. Leave the money in the old employer’s plan.
401(k)s [and 403(b) plans for nonprofits] almost always have limited investment choices and often both investment and advisor expenses. You can access the fee disclosures, but most never do. If your old plan is under an insurance company, those fees are likely to be higher, as employers typically don’t subsidize fees under these providers.
If you reached age 55 in your last year with the company, you’re eligible to access funds without early withdrawal penalties. Consider leaving an amount you might need to withdraw before age 59 ½, which is the penalty-free age for IRA’s.
2. Move the balance to a current employer plan.
This is usually not the most beneficial move, as you are likely to still have double fees and limited investment choices. However, it could enable you to take a loan from the new plan. If this is something that you want to consider, ask your employer for the details.
3. Take a taxable distribution.
This option may only net you about 55% after taxes and penalties. Remember that retirement plan distributions are taxed as ordinary income, which means it is treated the same as payroll earnings for that year. Unless you need all of it, you’re much better off moving it to an IRA, with the goals of growing it for retirement and the ability to take distributions gradually over years.
4. “Rollover” the money to an Individual Retirement Account (IRA)
This is usually your best option. It’s not a taxable event; you’re likely to have much broader investment flexibility, and you could have lower overall fees. Like most discount brokerage firms, look for IRA account “custodians” without annual fees or trading commissions. Plus, if you have multiple former employer plans, you can consolidate them into one or more Rollover IRAs.
Remember, if you’re between 55 & 59 ½, to leave an amount you might use, as penalties on IRA’s are incurred prior to 59 ½.
