DAFs – A Tech Surveillance System or a Nifty Giving Strategy

With the recent continuation of the markets’ irrational exuberance, many of us have some horse-choking gains in our non-IRA accounts so how can we make the best of a taxing situation? First, let’s acknowledge that paying capital gains, even at the highest rate of 20¢ on a dollar, means we’re still walking away with 80¢ we didn’t have before so, to be perfectly honest, we are moaning just a bit about being fortunate. That notwithstanding, is there a way we can avoid that 20¢ or perhaps even spin a little gold from the straw we’re being given? Of course there is (otherwise I’d be writing about something else this week) – donating some of those appreciated holdings.

As we touched on a few months back, there are a several ways to make donations – you can write a check or give a group cash, you can donate the appreciated position directly to the charity (which assumes they are set up to receive something like this), or you can donate the position into a Donor Advised Funds (DAFs). Think of DAFs as a soup tureen you can pour a whole bunch of appreciated stock(s) into all at once, taking the charitable deduction for that year, then gradually spoon out just what you want to donate over the subsequent years. Furthermore, while you are deciding what you’d like to support, your donation continues to appreciate (or depreciate – this is an investment after all), you can rebalance the position into other investments (without the capital gains), and if you get hit by a bus, you can have a charities designated as beneficiaries, which is a lot less complicated than having them as the beneficiaries in your will or on your account.

Let’s walk through an example. Say you normally give $100/mos to your local spiritual organization, which means that over 4 years you would have given $4,800. Now, perhaps you have a stock or mutual fund you inherited from your granddad that’s been sitting in an account, ignored for most of your adult life and that account has accumulated boatloads of capital gains over the years (meaning, to touch it is to tax it). You could open a Donor Advised Fund and donate a portion ($4,800) of that account to the DAF. For the year you move grandpa’s stock into the account, you can add a charitable contribution to your itemized deduction, which will, with a little planning, make your deductions more valuable than the standard deduction. Then, over the following years, you can donate $1,200/yr. to the organization of your choice.  Four years later, you can repeat the process. Now you are getting a little tax benefit for something you were already thinking of doing, not to mention perhaps cleaning up your portfolio a little.

What if you’re not sure that you want to do something like this now, while you are young(ish) and may spend all your money to die broke? You can make a DAF part of your estate planning by naming the Donor-Advised Fund you set up (but didn’t fund) as a beneficiary of your will or your retirement account. That way, if you get hit by that bus before you’ve spent all your money (responsibly or irresponsibly – this is a no judgement zone), the remainder will flow into the DAF and the dollars can be distributed based on your intentions. You can even dictate a schedule for the DAF to use the dollars.

Where might you find these little charitable curiosities? Many of the bigger investment firms now have them (Fidelity, Schwab, Vanguard) or you could work with a local community foundation to help you establish one. One advantage of the local community route is that they often fund smaller organizations that you won’t see (or don’t qualify) for the bigger firm’s lists. Some DAFs provide little checkbooks so you can write out a donation if you’re at an event and many have a fairly sophisticated electronic donating system where you use a few dropdown boxes then click a few buttons and you’re finished in time to grab that mojito before dinner.

So, if you are charitably inclined, consider checking out a Donor Advised Fund for your giving strategy.  Using one might just save you a few tax dollars and almost certainly will make donating anything other than the $20 in your pocket easier.

Health Savings Accounts: Both Scary and Useful

Now that tax season is behind us, we can take a little breather and think about actions we can take to help with next year’s taxes as well as better support our retirement prospects. Most companies’ open enrollment season starts in the Fall so this gives you plenty of time to evaluate whether or not a Health Savings Account (HSA) might work for you.

What is an HSA? Not only is it a tax-deductible account you can use to save money to cover medical expenses tax-free; it’s also a tax-deductible account you can save money into for retirement. In a nutshell, you can contribute money into one and take a tax deduction for that tax year, you can invest those dollars and let them build tax-deferred, and then, in retirement, you can draw them out tax-free. There really isn’t another type of account like it.
For the here and now—if you are a somewhat heavy user of medical services, and you have the nice low and consistent co-pays, it’s unlikely that you will pay enough in co-pays to be able to take advantage of the medical tax deduction because of the high threshold that deduction uses (7.5% of your AGI). By switching to a High Deductible Health Plan and using an HSA, you can fund the HSA with tax-deductible dollars then pay for those services from that account tax-free. Once you’ve met your insurance deductible, your insurance kicks in and pays for any additional services you might need throughout the year. Is it really that simple? Of course not, but very often it does make much more financial sense than the co-pay process. A little more work at first—yup.  A little more money in your pocket overall—more than likely. You can even complete a once-in-a-lifetime rollover from your IRA into your HSA to frontload your account.
For the big upcoming medical events—another strategy is to use an HSA in anticipation of big medical events. Let’s say you are a young healthy person but you know you’re going to want to start a family (we’ve already talked about Baby Talk and how expensive giving birth is and you can count on spending many times more than that that if you need help to get pregnant), or perhaps you’ve been having a hip / knee / shoulder / reproductive / nasal / digestive / etc. issue that you know you’ll need to deal with at some point. These are big-ticket medical expenses where most insurance policies require a significant contribution from the participant. You could fund an HSA every year, with the contributions rolling from one year to the next and building along the way because you’ve invested them in a conservative allocation. Then, when your planned for event finally happens, you use the balance in one fell swoop when the bills come in.
For retirement—want to get the most out of this type of account? Fully fund an HSA and let the dollars roll until you need them for those hearing aids and dental care in retirement (which aren’t usually covered by Medicare). Sure you could contribute to your company retirement plan or an IRA and take the tax deduction now but then you’ll pay taxes when you take the money out, something you won’t do with an HSA. You could also use a Roth IRA but you won’t get a tax deduction now like you do with an HSA. This strategy requires a little more budgetary attention since you’ll want to cover your current medical expenses out of pocket to make the most of the strategy but that’s not out of the realm of possibility with a little prep work.

Want to make the most out of this strategy? Fund your company retirement plan up to the maximum you need to get the match, fully fund your HSA, and then throw additional dollars into your Roth or post-tax investment account—three legs of your retirement stool all set and ready to help you later in life.
Of course, there is a catch to all of this. In order to use a Health Savings Account, your health care plan must be a high-deductible one, not one of those co-pay plans, and that’s not always the right type of an account for everyone, which is why I bring this up now. In order to do our taxes for 2020, many of us had to at least take a peek at what we spent on medical costs for last year. Take an hour one day and do the math so you are ready for your next open enrollment. Which is better for you—using a High Deductible Health Plan and an HSA or using a co-pay based plan? While there are pros and cons to each, make sure that you are making the decision based on the numbers and not the emotions. Some people find the idea of a high deductible plan to be a little scary and I get it. Tackle those fears by looking at the numbers and building a plan. There is no insurance fairy godparent looking out for you so it’s up to all of us to make a well-informed choice.

First Comes Love, Then Comes Marriage

May makes me think of June and June makes me think of weddings. This week, let’s chat about getting hitched…tying the knot…plighting one’s troth (there’s one for the literary crowd out there). 
For the majority of human history, weddings were small, family and/or village-based affairs more along the lines of church potluck events. Only a small percentage had a wedding reception, as we currently think of them, and they were usually the wealthiest of the local community. The upper upper echelon in the largest of cities held grand affairs and they were primarily for political reasons. Over the last couple of centuries, as the middle class developed, these larger ceremonies crossed economic layers and became more common for more people. That being said, they were still fairly modest because there was no such thing as credit cards, retirement accounts, or home equity lines of credits (heck, there were barely banks as we know them).
It wasn’t until after World War II that big weddings became more popular across the board and the idea of overspending on the event rose in alignment with the phrase “Keeping up with the Jones.”  In 2019, the average wedding cost was over $28,000. That’s essentially $60 of necessary expense (the marriage license) and $27,940+ of discretionary expenses—and we all know how Kitty feels about discretionary expenses. In an interesting economic turn, prior to this point, the biggest expense of a wedding was often the groom’s suit, which was traditionally the first for the young man (and sometimes the only, just like his beloved – LOL!). I find it interesting that purchasing something practical for the family was the focal point of the wedding expenses, which certainly isn’t the case now. Now, tuxes are rented and expensive wedding gowns are rarely (if ever) worn again. 
How about the engagement ring? Throughout history, exchanging jewelry (usually but not always a ring) has been a part of the ceremony as a symbol of the contract being agreed to (bridal parties willing or not). It wasn’t until the Edwardian Age that engagement rings were exchanged. Even then, it wasn’t until the Roaring 20’s that anyone other than the “one percenter’s” exchanged rings that even remotely compared to what is routinely exchanged today. Of course, that lasted for about a decade before the Great Depression meant we once again exchanged simple bands. Then, along came De Beers who launched their “a diamond is forever” marketing campaign in 1948, and, suddenly, diamonds became part of the wedding culture. Once again, like Hallmark holidays or owning versus renting a home, our traditions were created by marketing teams.
Of course, a wedding is something to celebrate—a joining of souls who managed to find each other in this crazy madcap world is a wonderful thing. Both my parent’s and my own wedding pictures are part of my screen saver so I’m not a total Ice Queen. The question I pose is: are the events of one day really something to go into debt for? Raise your hand if, looking back through the years, you might think twice about spending so much money on the wedding (yours or your child’s) when you could have put some of it down on a new home, or paid rent for a year(+), or paid off school loans, or done a family VRBO, or, or, or. I would also suggest that dipping into your own savings to cover the costs of your child’s wedding should be done only after a thorough examination of your own long-term financial stability.
Let’s start a new tradition…have a simple pre-WWII wedding and throw a full-blown 10-year anniversary celebration. Since the average American marriage lasts ~8½ yrs., you do the math….