Wow—2020 was a year unlike any that we have ever experienced. In addition to a global pandemic, events throughout the year exposed many causes that need great support. At Merriman, we are about much more than just the numbers. We aim to have a deep understanding of our clients in order to help them incorporate their values in all aspects of their lives. This led to us having conversations with families about climate change, social issues dealing with race and gender, how to help neighbors and struggling communities, and how to make individual voices heard by large corporations and governments, amongst many other important topics. During the year, did you feel sad, confused, shocked, or overwhelmed by any of these? I know that I sure did, so you are not alone. There is hope, and you can take action in ways that you may not have previously considered. It doesn’t take a large financial or time commitment. You can incorporate your values and support causes through sustainable, responsible, and impact (SRI) investing. Equally important, you can implement an SRI strategy without having a negative impact on your investment returns or retirement goals. It may even lead to the opportunity for outperformance. I want to use this article to break down the barriers to sustainable investing.
It is helpful to first look at some data. In September 2019, Morgan Stanley conducted a study with 1,000 individual investors that they surveyed in two-year increments starting in 2015. Then they published the white paper Sustainable Signals: Individual Investor Interest Driven by Impact, Conviction and Choice. I want to take a moment to highlight two graphs from that white paper:
Chart 1: Interest in Sustainable Investing
Source: Morgan Stanley, Sustainable Signals white paper, 2019.
Chart 2: Perceived Barriers to Adoption
Source: Morgan Stanley, Sustainable Signals white paper, 2019.
The first chart shows that there is a significant interest in sustainable investing, and that interest continues to grow. The second chart shows the perceived roadblocks that prevent investors from choosing sustainable funds. This explains why currently the actual implementation and use of sustainable funds is much lower than the interest levels show. Below are the reasons why those perceived barriers shouldn’t stop you.
I’d like to share a story to address the investment performance roadblock. In 2007, I went to Costa Rica as part of a school group called The Eco-Explorer’s Club. Our mission for the trip was to protect sea turtles from poachers and predators during the turtle’s nesting season. The trip was a success, and it was one of the greatest things I have ever been a part of. I remember being filled with so much joy that we had made a positive impact for the wildlife there and also for the wonderful people of Costa Rica. Tourism intended to support conservation efforts is a large part of their economy and provides many jobs. That is when I first made the connection that it is possible to simultaneously support planet and profit. The best of both worlds. Investment funds are able to achieve this as well, as companies increase their revenue by adopting sustainable practices, cutting costs, and listening to client demands.
The next roadblock is thought to be lack of investment products. That was true at one point in time, but it is no longer the case. There are hundreds of publicly traded mutual funds and ETFs available that thoroughly integrate environmental, social, and governance factors into their investment processes and/or pursue sustainability-related investment themes and/or seek measurable sustainable impact alongside financial returns. We are big fans of the DFA Sustainability Funds.
The third and fourth roadblocks go hand in hand. It is true that it requires time to understand sustainable investments and to stay current. That is why there are professionals such as us to help. You don’t need to do this alone. We are here and available to help you get the best plan in place. You can schedule a conversation directly on my calendar by clicking HERE.
After reading this article, I encourage you to click the link above for a virtual coffee chat or to forward this article to a friend who may be interested. Thank you.
Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.
The Tax Cut and Jobs Act (TCJA) passed at the end of 2017, and the Setting Every Community Up for Retirement Enhancement Act (SECURE) passed at the end of 2019. These both made significant changes to annual tax-planning strategies.
The COVID-19 pandemic and the CARES Act relief package that followed created a new layer of complexity. Unfortunately, many taxpayers miss opportunities for significant tax savings.
Here are six moves to consider making before the end of the year to potentially lower your taxes both this year and in years to come.
Take the Standard Deduction Later. The new tax rules nearly doubled the standard deduction and eliminated many write-offs, limiting the benefit of itemizing deductions for most taxpayers. However, you can optimize your deductions by “bunching” itemized deductions in a single year to get over the standard deduction threshold and then by taking the standard deduction in the following year.
Example: Instead of giving $10,000 to charity annually (which will likely leave you with the standard deduction anyway), gift $50,000 every 5 years. This will give you a greater tax benefit in the first year while still claiming the standard deduction in the other years to maximize tax savings.
Pre-Pay Your Medical Expenses. Have major medical-related expenses coming up? You can potentially maximize the tax deduction by paying out-of-pocket medical expenses in a single calendar year—either by pushing payments out to the next year or pulling later expenses into this year.
A surprising number of medical expenses qualify, including unreimbursed doctor fees, long-term-care premiums, certain Medicare plans, and some home modifications.
Note: Medical expenses are an itemized deduction, so this strategy may be best used with the “bunching” strategy described above, including possibly paying medical expenses in a year you maximize charitable donations.
Give Money to Your Favorite Charity Right Now from Your IRA. If you’re over 70 ½, you can make up to $100,000 of annual Qualified Charitable Distributions (QCDs) directly from your IRA to a qualifying charity. Even better, for retirees who don’t need to take their Required Minimum Distribution (RMD) each year, these qualified charitable distributions count toward the RMD but don’t appear in taxable income.
Even though the CARES Act allowed RMDs to be skipped in 2020, you can still make a QCD this year.
Note: QCDs must be made by December 31 to count for this tax year.
Take Advantage of Years in a Lower Tax Bracket with a Roth Conversion. A Roth conversion can permanently lower your taxable income in retirement by converting tax-deferred assets (IRA / 401k) into tax-free assets in a Roth account. It is best to do this in years where you are in a lower tax bracket than you expect to be in the future.
Example: If a taxpayer at age 63 is in the 12% tax bracket, then moving $10,000 from an IRA to a Roth account will owe an additional $1,200 in taxes. That same taxpayer at age 73 may be in the 24% tax bracket due to Social Security, pension, and RMD income they didn’t have at 62. Taking that same $10,000 from an IRA will now result an in additional $2,400 in taxes.
Optimize Your Investment Portfolio to Improve Expected After-Tax Return. Prior to the TCJA, you could write off some fees you pay for investment management. The TCJA did away with that deduction. There are still ways to pay fees with pre-tax dollars that may make sense depending on the types of accounts used.
Likewise, some investments will be more tax efficient, and other investments will be less tax efficient. Where possible, move the most tax-efficient investments into a taxable investment account and the least tax-efficient investments into a tax-advantaged retirement account. The goal is to determine an ideal overall allocation, even if each individual account has a slightly different allocation.
Both strategies above can potentially help maximize the after-tax return on investments.
Optimize Your Retirement Contributions. The most important step you can take right now to reduce your taxes this year may be to review how and where you’re making retirement contributions. You may be missing out on critical tax savings (and investment growth) if you’re not optimizing your contributions.
Potential retirement account strategies people often miss include Solo 401k for self-employed individuals, backdoor Roth contributions, or “mega” backdoor Roth contributions at certain large employers.
Everyone’s situation is different, and today’s retirement environment is complex. Working with a financial professional who coordinates with your CPA can help ensure you’re not missing any opportunities to optimize your portfolio and pay less in taxes.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in late 2019, creating significant retirement and tax reforms with the goal of making retirement savings accessible to more Americans. We wrote a blog article detailing the major changes from this piece of legislation.
Now we’re going to dive deeper into some of the questions we’ve been receiving from our clients to shed more light on topics raised by the new legislation. We have divided these questions into six major themes; charitable giving, estate planning, Roth conversions, taxes, stretching IRA distributions, and trusts as beneficiaries. Here is our first of six installments on charitable giving.
In my estate plan, I’m planning to leave some of my assets to charity. What should I be mindful of with the passage of the SECURE Act?
Perhaps the largest consideration is which assets the charitable donation should be made from. While IRAs and other traditional retirement accounts have always been a good choice, the SECURE Act increases the value of using these accounts for charitable giving.
For an individual with traditional retirement accounts, Roth accounts, and taxable assets outside a retirement account wanting to give to charity from their estate, the preference would be:
Traditional IRA: Make charitable donations from here. Even if only part of the account is gifted to charity, the decreased remaining balance will reduce the taxable income the beneficiary realizes each year.
Roth IRA: Leave these to individuals instead of charities. Even though Roth IRAs still have annual RMD, the income removed from a Roth account will not be taxable for the beneficiary.
Taxable Accounts: Individuals should be preferred over charities. There is no requirement to take income in a given year, and the beneficiary likely received a step-up in cost basis, minimizing the tax impact when used.
If your goal is to both leave money to charity and create an annual stream of income for a beneficiary that lasts longer than the 10-year rule for new inherited IRAs, a charitable remainder trust may accomplish these goals.
As with all new legislation, we will continue to track the changes as they unfold and notify you of any pertinent developments that may affect your financial plan. If you have further questions, please reach out to us.
Disclosure: The material provided is current as of the date presented, and is for informational purposes only, and does not intend to address the financial objectives, situation, or specific needs of any individual investor. Any information is for illustrative purposes only, and is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Investors should consult with a financial professional to discuss the appropriateness of the strategies discussed.
By reporting QCD’s correctly on your tax return, you rightfully receive the benefit of income exclusion.
Form 1099-R is issued around tax time to report distributions you withdrew during the previous year from a retirement account. A few of the things this form tells you and the IRS are: how much was withdrawn in total, how much of the distribution was taxable and whether there were any withholdings for federal and state income taxes.
If you gave part or all of your required minimum distribution directly to charity through making a QCD (qualified charitable distribution), this amount is still included in the taxable portion of your total distribution on form 1099-R. As you’ll see, the QCD is included in your gross distribution (box 1) and taxable amount (box 2a). However, the box for “taxable amount not determined” (box 2b) will be checked. Whether you work with a professional tax preparer, use software like TurboTax or prepare your own taxes by hand, it can be easy to forget that the QCD portion of your distribution should not be included on your tax return as taxable income. It’s important to keep a record of every QCD made during the year, and hold on to any correspondence that you receive from the charities that confirms the receipt of funds.
Below is a blank version of the 1099-R available on the IRS website.
This is a copy of a 1099-R issued by TD Ameritrade.
In this first example, the individual had a $70,000.00 gross (line 1) and taxable distribution (line 2a). The box next to “taxable amount not determined” (line 2b) is checked. Federal income tax of $8,000.00 was withheld (line 4). The distribution was considered a “normal distribution” because the distribution code 7 was used (line 7). What this 1099-R doesn’t tell you is that $20,000 of this individual’s RMD was a QCD, while the remaining $50,000 of the withdrawal was taxable.
As shown below, you should put the information from the 1099-R on the first page of your tax return (Form 1040) on line 4a and 4b. Here the individual had a total IRA distribution of $70,000. Of this distribution, $20,000 was a QCD. This means that the QCD won’t be included in the taxable income. If there is the option to do so, write “QCD” to the left of box 4b on your tax return. Here you would need to add the $8,000 federal income tax withheld from this IRA distribution to any other federal withholdings from W-2s and/or 1099s for the year on line 17 (page 2) of your tax return.
Remember to file IRS Form 8606 Nondeductible IRAs if you had basis (after-tax contributions) in the Traditional IRA from which you made the QCD, and took a regular distribution. You must also file this form if you made a QCD from your Roth IRA. However, we would not suggest making a QCD from a Roth IRA since the account is after-tax versus pre-tax.
The material provided is current as of the date presented, and is for informational purposes only, and does not intend to address the financial objectives, situation, or specific needs of any individual investor. The specific example provided is for illustrative purposes only, and is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Investors should consult with a tax professional to ensure all their tax paperwork is accurately filed.
I recently heard a TED Radio Hour story on NPR about Lux Narayan, an entrepreneur and data analyst. His organization spent two years analyzing the obituaries in The New York Times, looking for threads of commonality between the people who were featured. Then, his team created a word cloud of the text to show which words turned up most often.
One word showed up in large, bold type is help, because these people made a positive impact on the lives of others. They helped. (more…)
As football season is fully underway, many of us get swept up in the weekly excitement of watching our favorite teams take on their rivals. Maybe you’re closely watching the ups and downs of your Fantasy Football team and strategizing about who to start each week and what the most beneficial trades may be. It’s an exciting time of year for many fans. Let’s take this opportunity to highlight the work one football player is doing off the field. (more…)