The Best Ways to Protect Your Wealth at Every Stage

When you’re young and entering the workforce for the first time, you don’t have a lot to lose. After all, you don’t need to worry about shielding wealth when you live paycheck-to-paycheck, you don’t own a home, and you have only begun contributing to a retirement plan.

But this dynamic tends to change over the years, and that’s especially true if you’re a good steward of your income. If you save and invest instead of burning through every dollar you earn, you’ll eventually begin to build up a stash of assets that you’ll likely want to preserve. And the more your income, your savings, and your net worth grow, the more concerned you’ll become. 

The Best Ways to Protect Yourself As You Grow Wealth

The thing is, the strategies you’ll use to protect your assets can vary a lot depending on where you are in your journey. You may care about entirely different issues when you reach a net worth of $500,000 than you do when your wealth grows to $1 million or more.

Fortunately, there are a variety of products, habits and techniques you can use to preserve and protect your wealth at every stage. Let’s take a look at the steps you should consider as you work toward the financial future and retirement you really want. 

Net Worth of $500,000+

When you achieve a net worth of $500,000, you have plenty to celebrate — and plenty to protect. Your retirement savings are likely beginning to grow right along with your income at this point, and you may even own a home. But, how do you ensure you can maintain the wealth you have managed to grow so far?

First off, you should make sure you have basic homeowners insurance (or renters insurance) and auto insurance coverage with high liability limits. If you own a home with a mortgage or have children in the family, you’ll also want to buy basic term life insurance coverage worth at least 10x your household income. 

Note that, when it comes to the money you have in a savings account, each depositor has protection from the Federal Deposit Insurance Corporation (FDIC) up to mandated imits. Specifically, the FDIC offers insurance for checking accounts, savings accounts, money market accounts and more with limits of up to $250,000 per depositor and per insured institution. 

Net Worth of $1 Million+

Once you have built up a net worth of $1 million or more, you have the potential to grow wealth even faster due to the power of compounding. You’ve probably heard that “the first million is the hardest,” and it’s true, yet the path to wealth gets easier from here. 

Once you reach this threshold, you’ll want to preserve and protect your wealth with an umbrella insurance policy as a starting point. With excess liability coverage from an umbrella policy, you’ll have protection if someone decides to sue you. This coverage provides more protection above the limits of your homeowners or auto insurance policies.

In terms of savings, you may want to move some money. That’s because, as I mentioned already, you get $250,000 in FDIC insurance per depositor, per institution. If you have $500,000 in savings, for example, you could open another high-yield savings account and have the full amount insured. The downside is that it’s a hassle to manage money at multiple institutions.

At this point in your journey, you should also note that employer-sponsored retirement accounts like 401(k)s and pension plans have some protection due to the Employee Retirement Income Security Act of 1974, or ERISA. Thanks to ERISA, these types of plans have unlimited protection in the event of legal liability or even bankruptcy, as do 403(b) plans and 457 plans in most cases. 

On the other hand, IRA accounts (including traditional IRAs and Roth IRAs) are also protected through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Thanks to the BAPCPA, these accounts are protected from bankruptcy up to $1,362,800 through the three-year period that ends on April 1, 2022. 

Net Worth of $2.5 Million+

Once your net worth is $2.5 million or more, you can rest assured that you’ve done quite a few things right. Your investment accounts are likely growing at a steady pace, and you’re building equity in your home and other assets you own. 

At this point, you may want to consider starting a business and transferring assets accordingly. The reality is that, like it or not, most experts believe that you cannot become truly “wealthy” if you’re only working for someone else. With your own business, you have the potential to build more wealth and grow your assets while you sleep, and of course to take advantage of various benefits in the tax code for business owners. 

Other moves you can make when you reach this level of wealth include buying more liability coverage in an umbrella insurance policy, and potentially more life insurance to protect your family in the event of your untimely death. Whole life insurance can even make sense at this point in your journey since this type of coverage allows you to build cash value you can borrow against, and to score dividends that are not taxable. Whole life insurance can also be used to pass on wealth to your beneficiaries on a tax-free basis. 

Net Worth of $5 Million+

Once your assets have grown to the $5 million + range, you have “made it” in a financial sense. But now is not the time to be complacent. If you truly want to protect your wealth, you’ll want to be diligent about using the legal processes available to you.

For example, setting up a trust can help you shield assets for your protection, and for potential tax savings. There are two main types of trusts to consider —revocable and irrevocable. An irrevocable trust is typically set up for estate and tax reasons, and to seamlessly transfer wealth to the next generation. However, you give up ownership of assets with this type of trust, which can be problematic in some cases.

With a revocable trust, on the other hand, you do not give up ownership of your assets. This type of trust is also more commonly used to transfer assets to beneficiaries while the grantor (in this case, you) are still alive.

If you’re curious about the type of trust you should set up, as well as other financial moves you should make with a net worth of $5 million or more, it can be helpful to work with a lawyer or an estate attorney.

Final Thoughts

The path to long-term wealth can be bumpy at times, and it will probably be decades long. However, you can take steps to protect what you have so you don’t have to move backwards all along the way.

No matter what you do, you should make sure to diversify your assets so all your eggs are never in a single basket. Diversify across multiple sectors of the economy, stocks and bonds, real estate, and international markets so your net worth is poised to rebound nicely regardless of which economic crisis comes next.

Photo by Morgan Housel on Unsplash

Want to donate your entire salary? 2020 is the year to do it.

Not many people want to donate their salary for the year, but if you do: 2020 is the year to do it.  The CARES Act has a provision in 2020 that allows a deduction for 100% of your income.  This means that you can entirely avoid taxes in 2020 if you want!  Oh yes, there are some details – and some strategies you’ll want to take advantage of – so let’s check them out.

What are the donation limits for 2020?

Charities will accept all sorts of assets including cash, stocks + bonds, art, collectibles, cars, clothing – depending on the charity. There are so many ways to give and help. Most individuals donate cash or appreciated stocks/bonds to get a tax deductions – and that’s a good strategy. The higher standard tax deduction along with lower SALT itemized deduction limits the usefulness of your charitable contributions unless you give away quite a lot. In that case, giving away appreciated stock has a nice double-whammy of a charitable deduction along with avoiding capital gains tax (not selling the stock first).

The IRS has rules about how much you can deduct from your salary based on the type of asset that you give away. Typically the deduction for donating cash is capped at 60% of your salary, stocks/bonds at 50%, and other assets at a lower amount (as you can imagine with the IRS, it can get quite complicated). For this discussion it’s enough to know that you can typically deduct cash up to 60% of your AGI and appreciated stocks/bonds up to 50% of your AGI.  If you donate more than that in a given year, you can carry-forward the donation and deduct it in future years.

However with the CARES Act in 2020 if you donate cash, you can take a deduction of 100% of your adjusted gross income.  For example, if you have income of $180,000 in 2020, you could donate $180,000 (cash) and deduct the entire amount, leaving you with $0 taxable income in 2020.

The other limitation is that the money must go to a recognized charity directly – it cannot be given to your Donor Advised Fund (DAF). The IRS is worried about charitable donations in 2020 and therefore increased the limit with the caveat that the money gets to the charities this year.

Of course, you don’t have to actually donate your income – you can sell some of your portfolio and give away that money all at once and take a deduction on your 2020 tax return for the entire amount.

Strategies when you have no income

If you take a deduction for your entire salary and have no income in 2020, that’s a big win: no taxes!  Since you probably had taxes taken out of your paycheck throughout the year, you’ll end up with a big refund.  Another win.  However, since you have no taxable income in 2020, here are some additional strategies to consider:

  • Roth Conversion : If you have any Traditional IRA balances, or your 401(k) has a Roth option and in-plan conversions – you can use your low tax year in 2020 to convert a large chunk of money from Traditional to Roth and pay the tax on the conversion amount.  Since you have almost no income, you could convert up to the 15% or 22% bracket (up to $170,000 MFJ) and pay a lot less in tax than you would in the future.
    • Don’t have a Traditional IRA?  Many 401(k) plans have a Roth option and will allow for in-plan conversions.
  • Tax Gain Harvesting : Do you have a lot of winners in your taxable portfolio with built-in capital gains?  This would be a great time to sell those allocations and pay 0% capital gains (up to $80,000 MFJ).  You can re-purchase the shares after 31 days to avoid wash-sale rules, or purchase a similar stock/ETF right away. 
    • For high-income earners, you’ll also avoid the additional 3.8% Medicare tax (applied on capital gains if you earn over $250,000 MFJ)
  • Portfolio Re-Allocation : Now is a great time to rebalance your portfolio since you’ll avoid any capital gains on selling / buying.  In addition, if you have been thinking about changes in your portfolio allocation – making it simpler by reducing the number of holdings into some low-cost ETFs, or allocating it more towards ESG / SRI priorities – now is the right time to have a lot of buy/sells and avoid capital gains.
    • Considering investing in socially responsible funds?  Now is a great time to re-allocate funds.

Take Advantage

2020 is a great year to reduce your tax burden with a massive charitable donation. Of course many people do not have the additional funds to donate a year’s salary!  But for those that do and are interested in helping your favorite cause, 2020 is a great year to take advantage.

Can I avoid Capital Gains Tax when I sell my Home?

The answer is typically yes, you can avoid paying capital gains tax when you sell your primary home, up to $250,000 for singles and $500,000 for married couples. In the Taxpayer Relief Act of 1997, Congress allowed those amounts to be exempt from taxation, but there are a couple of details to be aware of.

What is Capital Gains?

The government likes their cut of your income and the money that you make on money (interest, dividends or gains) is also taxed. Capital Gains is the increase in money that you make when you invest in something and then sell it later on. If you bought $100 of Tesla stock in 2019 and sell it for $2,000 in 2020 – then you made $1,900 of gain and that is taxable. The same is true of your house: you bought it in 2005 for $300,000 and now you sell if for $550,000, then you have a gain of $250,000 which is taxable.

How is your home exempt from capital gains tax?

The IRS has ruled that you can entirely avoid the capital gains tax on the first $250,000 (single) or $500,000 (married) of gains from the sale of your primary home. This is fantastic: avoiding taxes is one of the best ways to grow your wealth (it’s not what you make, it’s what you get to keep!).  Keep in mind the following rules:

  1. You must have lived in this home as your primary residence for two of the past five years. So, you can’t purchase a home and flip it a year later and avoid the tax. However, you can live in your home for 2 years, rent it out for the next 2 years and then sell it and still avoid taxes. Make sure that you have documentation that you actually lived there. 
  2. You may only take advantage of this tax-free gain once every two years. So don’t sell two different houses in the same 24-month period.

But I made Home Improvements!

Any home improvements get added to the amount that you paid for your home. This is known as basis. For instance if you purchased a fixer-upper for $200,000 and then completely renovated it for $150,000, you have put a total of $350,000 into your home, which is your basis. When you sell it 3 years later for $500,000 you have a gain of $150,000 ($500k – $350k). Make sure to save documentation on the costs of your improvements.

IRS Rules

As with all things tax related, it’s important that you meet the eligibility requirements of the IRS. Be sure to check the fine print on the official IRS website for more details.

How to Avoid LifeStyle Creep after a Big Payday

Lifestyle Creep – Don’t Let it Happen to You

What happens when you come into money? Whether it’s an inheritance, work bonus, or a sizeable raise, what’s your first instinct?

You want to go out and spend it, right? You feel it’s your right or you just want to celebrate. It may feel good at the moment, but it won’t last long. The after-effects aren’t pretty because they lead to a stage called lifestyle creep.

Creep makes it sound like a slow process, right? It happens faster than you think. Before you know it you’re in the poor house or constantly chasing your own tail trying to get ahead. 

Spoiler alert – you won’t win. 

Understanding Lifestyle Creep

I’m not denying the joy of that big payday and I think you should celebrate it, but not by overspending. 

When you overspend, here’s what happens. Let’s say you decide your large inheritance gives reason to buy a fancier car than you could ever afford. Sure, it helps with you with the down payment or maybe it even pays for the car outright, great. 

What happens after that, though? You must keep up with the car’s maintenance and repairs. They likely cost a lot more than your less expensive car. Now you’ve just increased your regular expenses without the means to do so.

It doesn’t stop there. Now you drive this fancy car, so you feel like you need to keep up with the lifestyle. Before you know it, you’re buying fancier clothing, going out for fancier dinners, and living a lifestyle way outside your means.

It has a domino effect – one nice thing in your life makes everything else seem ‘not good enough,’ so you’ll constantly spend more to feel better.

What Should you do Instead?

I’m not saying don’t spend money. Everyone deserves to spend here and there, but rather than running out and splurging on something you think you need, give it some thought. How do you want to spend your limited resources: money, time and energy? What would mean the most to you long-term, not just a ‘quick win’ like the feeling of getting a new car? Sure, you’re on cloud 9 every time you get in and whiff that new car smell, but that only lasts for a week or so – then what?

Figure out where spending your money may add value. Stop trying to keep up with the Joneses’. That only leaves you feeling ‘less than’ and constantly chasing dreams that honestly don’t belong to you.

Before you spend, sit down and think about your goals. What have you always wanted in life that maybe now you can achieve? What will splurging on one item do for you long-term emotionally and financially? If you can’t come up with anything good, it’s not worth it. Instead, work towards your life goals.

Ask yourself this: what is most important to you? Focus your time, energy, and money there. Look at the big picture, not the instant gratification that coming into money creates. When you take your time, you’ll make smarter choices and get out of the rat race of life.

How to stay rich: Protect your money by diversifying

Do you dream of getting rich? For many of us, the pursuit of becoming financially independent is our overall life aim. Yet while striking it rich is undoubtedly a challenge, a far bigger challenge is learning how to stay rich. 

A 2016 study by Cornell University found that over half of all Americans will find themselves in the top 10% of earners at least once in their life, while 11% will find themselves in the top 1%. However, very few can remain there, and the turnover in these categories is huge, with 72% of the top 400 earners retaining their position for just one year between 1992 and 2013. 

So why are so many people struggling to stay wealthy? It’s because getting rich, and staying rich, are two very different skills which require a completely different way of thinking. 

How to get rich

There are many different methods that people use to get rich. The traditional way of working hard in your career, saving your money, and enjoying a comfortable retirement is a clear goal for many Americans. However, it is not always the most effective method for building wealth quickly. That is why there are many different ways to strike it rich, with some of the most common including:

  • Be an Entrepreneur / Start your own business: Working hard, building a successful business, and selling it (or going public) is a fantastic way to make yourself a lot of money. 
  • Investing: Whether you are looking to build an impressive portfolio of stocks and shares or purchasing and developing property, investing is a great way to get your money working for you. 
  • Work hard and save harder: Focusing on your job and working your way up the career ladder, coupled with frugal living and high savings rate, can help you build up a significant pot of money.
  • Real Estate: Start small with a rental property, rehab it, put in some sweat equity and slowly build to another property and bigger properties. Build your fortune with a real estate empire!

How to stay rich

Earning your riches requires some big risks; however, once you have achieved it, staying rich is a different type of challenge. It is only natural that as we become successful at something, the more convinced we are that it is the route to success, meaning we double down on following that same path. 

However, this is not the best solution in this case because the narrowing of focus and doubling-down to build wealth is exactly the opposite approach to keeping that wealth. It becomes easy to get complacent when we are successful, which can have devastating consequences when something unexpected sideswipes your business. The COVID-19 pandemic is a prime example; however, throughout history, there have been many downturns that have seen countless people lose their wealth. 

That is why in order to stay rich, you need to adopt an almost opposite approach to your business decisions. Instead of the high-risk strategy, you need to start taking fewer risks, and the most important thing to do is to start diversifying your portfolio across a variety of types of assets so that no one “thing” can bring you down.

By spreading your wealth, you will be able to insure yourself against any downturn that might come in sideways and wipe your wealth out. Diversifying does not mean you should stop focusing on your skillset and expert domain, instead, it means taking a portion of your wealth off the table and investing it into a different area. 

This could be anything, from investing public and private companies to entering the real estate market. Helping to diversify will spread your savings and ensure that you will not lose your lifestyle no matter what happens. 

If the current global crisis has shown us anything, it is the need to recognize that whatever “got you here” is not necessarily what will “keep you here”, so now is the time to take a different approach and retain your hard-earned wealth.

Tracking Net Worth is Important and Easy

What is Net Worth?

The formal definition of net worth is the combined value of everythingn you own (Assets) minus the value of everything you owe (Liabilities).  In other words, if you total up your financial life: sell everything that you own and pay off all of your debts, what do you have left over?  

Net Worth = Assets – Liabilities

What I love about net worth is how easy it is to understand and how easy it is to calculate.

Assets are things that you own that have monetary value such as: cash, checking/savings accounts, retirement accounts, houses, cars, personal property, etc.

Liabilities are cash (or value) that you owe to other people or institutions such as: mortgage balance, student loans, car loans, credit card loans or personal loans.

What does Net Worth really tell you?

If you have a positive net worth, that means that you own more stuff than you owe and that’s great!  A negative net worth on the other hands means that you owe more than you have. This is typical when you are young and starting out: you might borrow aggressively in order to fund your future growth. Things like an education (student loans) and a mortgage (to buy a home) might lead to larger debt than you have assets.

When calculating Net Worth periodically (quarterly or yearly), it can be viewed as a financial report card that allows you to easily evaluate your financial health at a glance.  Is it moving in the correct direction (more positively)? And if not, what are the causes?

Like the stock market, your net worth will fluctuate. However, also like the stock market, it is the overall trend that is important. Ideally, your net worth continues to grow as you age: as you pay down debt, build equity in your home, acquire more assets, and so forth. At some point, it is normal for your net worth to fall, as you begin to tap into your savings and investments for retirement income.

Why is Net Worth Important?

A few reasons that I like tracking Net Worth include:

  • Track your financial progress. It’s quick and easy to calculate your Net Worth each quarter or year. This allows you to measure your progress over time and compare it to previous time periods. You want to see a growing net worth; a decline in net worth means you have more work to do.
  • Look beyond Income. How to grow your income is often a financial focus. But honestly that’s really less than half the equation. The important parts are: how much are you saving (adding to net worth), how much are you investing responsibly (growing net worth) and how much are paying off debt (reducing liabilites = adding to net worth). Even if your income is growing, if your net worth is flat or declining, your financial situation may not be improving at all.
  • Avoid focus on Asset Value. Many people focus on the value of their assets as a measure of their personal financial health. But if you take on a lot of debt to fund many purchases, you’re no better off. Look beyond the positives of assets (the fun stuff!) and make sure to include all of your debts. The good news is that for many debts, the balances are shrinking with those monthly payments and therefore you get positivie reinforcement when including debts along with assets (valuing both equally).
  • Keeps debt level in perspective. It’s natural to get overwhelmed with large debt obligations like a mortgage. But knowing that you have an evern larger asset offsetting that debt can help keep things in perspective.

When you see financial trends in black and white on your net worth statements, you are forced to confront the realities of where you stand financially. Reviewing your net worth statements over time can help you determine where you are, and how to get where you want to be. This can give you encouragement when you are heading in the right direction (i.e. reducing debt while increasing assets) and provide a wake-up call if you are not on track.

Ways to Grow your Net Worth.

So how do you effect your Net Worth in a positive direction over time? Recall the equation:

Net Worth = Assets – Liabilities

There are two parts that both effect your net worth in a positive direction:

  1. Increasing asset values
  2. Decreasing liabilities

Take advantage of both of those in order to grow your Net Worth.  Here are some examples

  • Pay down debt. The great news is that those monthly payments are adding to your net worth by paying down the principal balance. Some of the payment is going towards interest (not helping!) but with low-interest loans, much of each payment is going towards the principal. Using your cash flow to pay down debt is one of the best ways to increase your net worth because it focuses you from spending that income on fleeting items that don’t add to your financial life.
  • Be Responsible with Purchases. When you are considering things to buy, are they adding tremedous value to your life? Focus on the items and experiences that add significant value or even add to your net worth (using income to add assets!)
  • Pay Attention to Assets and Liabilities. Make sure to understand both parts of the equation. By watching out for the opposite of net worth (decreasing assets and increasing debt!) – you’ll become more financially aware of your actions.
  • Make a Habit of Tracking. Check your net worth every so often (month, quarter or year). When you pay attention to a number, and the component parts, you will automatically make smarter choices. You are a product of your environment: use it to your advantage! Remind your conscious brain of what’s important and the subconscious will play along.

Photo by Juliane Liebermann on Unsplash

Backdoor Roth: A great option for high income earners

In this video and article I explain how I personally use a backdoor Roth option to save significant money each and every year. 

The quick nuts and bolts

Let’s get to the point and I’ll explain what I do each year:

  • My wife and I each have both a traditional IRA and a Roth IRA at our brokerage.
  • Each year we each contribute the maximum amount to our traditional IRA accounts (currently $6,000)
    • We cannot deduct this contribution on next year tax returns. It’s after-tax money.
  • A few days later once the transfer is complete, I transfer 100% of the money from our traditional IRA to our Roth IRA.
  • I then invest that money per our investment policy (into stocks, bonds, etc)

That’s it. It now grows tax free over the coming years (hopefully!) and it’s 100% all our money (no taxes owed).

It can’t be that easy?

It’s true, I’ve skipped a lot of details in the setup of the above. However, yes it’s that easy each year now. The big caveat and what you’ll find with some online research, is that doing a backdoor Roth requires to take into account all your existing traditional IRA, SEP IRA and Simple IRA accounts. Any money that is in those accounts tax-deferred (you took a tax deduction or it’s had growth) is taken into account during the backdoor conversion to see if you owe current taxes. So, you have to do a big conversion first, partial conversions or some other transfer – and that’s definitely got a lot more tax implications.

If you have no money in a traditional IRA, SEP IRA or Simple IRA – then it’s super easy: you can perform the steps I mention at the outset.

How much is it worth?

Here’s the fun part: you can save a lot of money over the years because a Roth account is 100% your money, you don’t owe any taxes. Let’s make some basic assumptions: 7% growth rate and 24% tax bracket in retirement. By the end of 20 years that $6k has grown to just over $23k. In a traditional IRA, you owe taxes of over $4k, but owe none if that’s in a Roth IRA. That’s the power of doing the backdoor conversion and getting that investment into a Roth IRA. And, if you and your spouse both contribute, that’s double savings!

Best Financial Advice

Have you ever wanted simple, actionable financial advice that will make a difference in your life? This page contains such advice from a variety of financial advisers. Each adviser provides something unique that you can build from to create a successful financial future.

“Just Get Started”

Justin Green – Four Ponds Financial Planning

How often do you feel not ready yet, that you don’t have time or necessary knowledge? Maye you’ll get to it next week. And time goes by, and then another year goes by. The power of time is extremely important in investing and financial planning: the more you have, the greater position you are in. So, just get going! Start today with some education, some planning, some savings, some investing. Take tiny steps forward and soon you’ll find the momentum to succeed.

“Understand Your Investments”

Tom Fisher – Fisher Financial Strategies

However you decide to invest your money and what investment products and vehicles make sense for you and your family: make sure that you understand them! There are some many nuanced products out there and each one has a variety of details, fees, and disclaimers. Make sure you do some research and understand what you are getting involved in, what the expectations are and why it makes sense for you.

“Take Prudent Risks”

David McPherson – Four Ponds Financial Planning

We all need to take some risks in life, not just in our financial lives. When you embark on an adventure, whether out on the trails or buying an investment product, make sure that you understand the risks involved. Are you willing to lose some money? How much money? What are the potential downsides and expected upsides to your strategy and individual investments? To get where we want to go, we need to take risks: just make sure they are prudent for you.

“Spend less than you make”

Chuck Levin – Levin Financial Planning

You won’t get far in your financial life if you can’t manage to spend less money than you bring home. If you run a deficit at home, you can’t just issue more money like the government! In order to get anywhere, you have to first save some money. Only then can you enter the wonderful world of investments, strategies and building a financial future.


http://www.youtube.com/embed/Kl9uT_n9-wE?wmode=opaque

“It’s all in the Doing.”

Mike Morton – Morton Financial Advice

Having a financial plan is all well and good, but it doesn’t get you anywhere if you don’t actually do something! You have to put the knowledge into motion to create power. Take your plan, and start putting it into action.

Make More Money: Maximize Your Retirement Accounts

If you have already maxed out your retirement accounts for 2018, congratulations! Give yourself a pat on the back. If you haven’t yet, watch the video or read on to see how much you can save. 

I’m not suggesting that you try to pinch pennies, save more or don’t buy those holiday gifts. If you have money in taxable accounts or maybe an extra balance in your checking/savings account that you’ve carried all year – you can spend $1,000 from that account and put a corresponding $1,000 into your retirement account [employer 401(k) or personal IRA]. It makes a big difference over time.

What’s the big deal?

It’s just a little tax, right? Remember, it’s not what you have (or earn), it’s what you get to keep. Let’s crunch the numbers. Scale the following up (or down) based on your situation, but here’s a very simple example. Let’s start with the assumptions: 5% return / year (3% growth and 2% dividend), $1,000 initial investment, 24% marginal tax bracket, 20 year time-frame, re-investing the qualified-dividends (taxed at 15%) each year. Your experience may vary (significantly) from this simple example, so scale up or down.

$1,000 grows to almost $2,800 by the end of 20 years (start of the 21st year). That’s awesome. But wait, depending on how it grows, you might owe the government some of that money – remember they want their cut too!

So, let’s assume we have this growing in a taxable account, as an investment in a mutual fund, or ETF. During those 20 years, you have both growth (3%) and dividends (2%). The qualified-dividends are taxed at capital gains rate (15%) each year and the growth is also taxed at 15% when you sell. 

From the example, instead of the $2,800 that we enjoyed, we only get to keep $2,468 when this money grows in taxable account. That’s too bad. Is there a way we can keep the whole thing? Enter: Roth. Both Roth 401(k) accounts and Roth IRA accounts allow you to put in after-tax dollars (the same as those in your taxable brokerage account), grow it tax-free and take it out tax-free at the end! How cool is that? So in a Roth account that same $1,000 grows to the $2,800 and when we spend it 20 years later, we get the whole $2,800. 

What this means?

If you have yet to max out your retirement accounts for 2018, and you have a brokerage account, or some “extra” balance in a checking/savings account that you’ve had all year, you can do the following:

  1. Spend $1,000 from your brokerage / checking / savings account
  2. Put a corresponding $1,000 from your paycheck into your retirement account by
    1. Calling up your benefits department and having them take it from your paycheck
    2. Logging into your personal IRA and adding it to your account (in this case, don’t actually spend it in step 1 above!)

For the 15 minutes of work this month, you’ll gain over $300 in the future. Not bad.

How about a Traditional 401(k) or Traditional IRA?

The same math (essentially) works in a traditional 401(k) or IRA. The difference is:

  1. You call your employer (or click in your IRA) and put in $1,300 instead of the $1,000.
    1. You get to deduct this on your taxes and so save $300 in taxes (24% marginal rate) making it equivalent to spending that $1,000 from your brokerage account
  2. The $1,300 grows tax-free over 20 years, leading over $3,600 in funds! But wait, you owe taxes now.
  3. When you take it out, it’s taxed at your current rate. Let’s assume 24% marginal, but it might well be less in retirement.
  4. You get the same amount: $2,800. See table below.

Get it Done

So go ahead and call your benefit department or do those few clicks online to maximize your retirement accounts. Your future self will thank you (big time!)

Notes on the Assumptions

  • 5% return may be high or low, I have no idea. History says stocks grow at more like 10% / year, but we may be in an environment where the future looks more bleak than that.
  • 2% dividend is about where the S&P 500 is right now.
  • I used 20 years. Longer time and/or higher returns add up to even more savings!

Tax Strategy: Bunching Charitable Donations

I’m saving over $1,500 by utilizing this tax strategy for 2018. Find out more in the video below, or read on!

The new tax laws for 2018 make itemizing tax deductions less likely to be effective. The new standard deductions has doubled (to $24,000 for married couples) and we lost some of the highest deductions possible (SALT). However, I still find myself right on the border of itemizing versus not, and there is a simple strategy that can save a few thousand dollars: bunching charitable giving.

I’m going to keep this article short and sweet with just the bullet points. If you’re interested, research mode details via Google. The bottom line is that if:

  1. You give to charities each year and 
  2. You are close but not over the $24,000 that make itemizing deductions worthwhile then

You can “bunch” a few years worth of charitable giving (via a donor advised fund) this year (and itemize deductions) and then take the standard deductions over the next couple of years.

Are you over $24,000?

In brief form, count up your deductions from the following that are (the biggest items) available to itemize:

  1. Medical Expenses (in excess of 7.5% AGI or 10% AGI). This is a tough one because of the AGI limit, but if you have a lot of medical expenses, they can be deductible.
  2. State and Local Taxes (SALT). This is now limited to $10,000.
  3. Mortgage Interest. This is also somewhat limited, but only for mortgages over $750,000.
  4. Charitable Giving.

Let’s add up an example (mine!) and see how it works for real.

  1. Medical Expenses: $0. I don’t have nearly enough to surpass the AGI limits.  
  2. SALT: $10,000. I live in Taxachussets, so I hit the maximum in property taxes here.
  3. Mortgage Interest: $8,500. I still have a pretty large mortgage, so I get quite a bit here.
  4. Charitable Giving: $3,000. My wife and I give to our alma maters each year and then quite a few smaller donations throughout the year.

Total for 2018: $21,500. Oh so close, but the standard deduction is higher.

However, if I pre-give 3 years worth of alma mater donations to my donor-advised fund (and then actually give them out each year), I get to take another $9,000 in deductions this year, which brings me to $30,500. In this case, I’ll get to itemize those deductions this year and then the next few years, will take the standard deduction of $24,000 each year.

Let’s keep it simple and assume I’m in the 24% tax bracket, this calculator shows that I’d have a tax savings of $1,560. It’s not going to change the world, but it’s real money.

Here at the end of the year, this is a good strategy to double check for yourself. Me? I’m going to do it and save some $$. (Better yet, I’ll donate appreciated stock to get yet another tax-savings for my charitable giving!)