With the S&P 500 index up more than 300 percent and the Nasdaq more than 400 percent since the March 2009 low, one of your bigger investment risks may be complacency.
"It is surprising the number of people who haven't taken money off the table and rebalanced," said Anthony LoCascio, a Clinton, New Jersey, certified financial planner with serious tax chops. (He's also an enrolled agent.)
That's easy enough to pull off in a 401(k) plan or IRA where there's no tax hit for rejiggering, but if you're sitting on fat profits in a taxable account, the specter of having to pay capital gains tax when you sell can be a deterrent to basic portfolio maintenance.
A smart solution is to just give it away.
Donating stock, fund shares — or just about any appreciated asset — wipes out any capital gains tax bill assuming you owned the asset for at least one year. You can also claim the value of the donation as a charitable deduction in the year you make the move.
"If you're charitably inclined, instead of making cash donations, giving an appreciated asset is always smart, and especially now given market valuations," LoCascio said.
Donor-Advised Funds: Works for Sheryl Sandberg … and you?
If you know the charity you want to donate to, and it has the infrastructure to accept a security, you can always make a direct donation. But you might also want to check out one of the fastest growing tools in the giving world: a personal Donor-Advised Fund.
You can always fund it with cash, but appreciated stocks, fund shares, private-company stock, LLP shares, IRAs, real estate and private equity stakes are just a short list of accepted assets that can also be used to fund your DAF.
Last year, the DAF arm of Fidelity — Fidelity Charitable — took in $7 million in donated bitcoin. Appreciated assets are sold at the time of the donation and your DAF account is credited with the market value of the sale proceeds. And to repeat the good news: No capital gains tax is due.
Sheryl Sandberg recently donated $100 million worth of Facebook stock to a family DAF, but deep pockets are far from required. Fidelity Charitable and Schwab Charitable, both accept new DAF accounts starting with $5,000. Vanguard Charitable requires $25,000 to get going. Once your DAF is funded at one of these outfits, making a grant at any time is just a few mouse clicks away.
Money that lands in your DAF must be used to make a charitable grant. No mulligans allowed. But there's no gifting rush. You can start granting out immediately, or you can wait months, or years. While your money remains in your DAF, you choose how it is invested. Typical options include cash accounts and a variety of funds. The all-in cost of the DAF and the underlying funds can run around 0.80 percent to 1 percent or so, depending on where you hold your DAF, and the investments you choose.
That's not nothing. But there are some serious tax-planning gains you can pocket by using a DAF, in addition to avoiding capital gains on appreciated assets.
Offset a killer bonus or windfall
The problem with scoring a big payout is that it likely pushes you into a higher income tax bracket.
"Front-loading a donor-advised fund can be a great way to offset income," said Alexander Gross, a certified financial accountant and certified financial planner at Daintree Advisors in Boston.
You can donate a big chunk of money into a DAF, grab the deduction this year, and take your time making grants out to charities. For example, if you typically donate $10,000 a year to charity, you could put $50,000 into a DAF this year, grab the tax deduction right now and then make $10,000 in grants over each of the next five years.
(A bit of IRS housekeeping: When you donate an appreciated asset, your deduction is limited to 30 percent of your adjusted gross income for that year. There's a five-year "carry forward" rule that allows you to keep writing off the donation in subsequent tax years.)
Minimize tax bracket creep on a Roth conversion
"Once we know the extra taxable income a client will have on the Roth conversion we will often recommend using a DAF contribution to manage the tax bill," says Gross.
Get a tax break today on future estate planning
If you are in the cross hairs of any federal or state estate tax, moving money to a DAF reduces the value of your taxable estate, entitles you to the charitable contribution deduction today, yet you can keep the money growing, if you want. When you die, the proceeds can be paid out to charities you've designated, or the DAF can live on, managed by your named successor(s).
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