Actions to Take in a Market Downturn

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Market downturns are an expected part of investing, but they can be painful and nerve-racking nonetheless. Investors often want to take action or make changes during these times. Predicting which way the market will move in the short term is nearly impossible; short-term changes usually work against us. Below you will find some actions that you can take during a market pullback that will often yield positive results.  

Here are some potential actions to take during a market downturn:  

  • Continue to invest. Market downturns may provide an opportunity to buy into the market at a lower entry point. Consider increasing your savings and investing rate during this time.  
  • Tax loss harvesting. Loss harvesting is a way to turn lemons into lemonade. Loss harvesting allows investors to take advantage of their portfolio losses by realizing the losses and using them to reduce taxable income.  
  • Hold off on large withdrawals. Wait until the market recovers to make larger-than-usual portfolio withdrawals.  
  • Overall financial planning check-up. Now is a good time to take care of any financial planning items that have been lingering on your to-do list. Check your beneficiaries, review your estate documents, and review your insurance coverage. The market is not in your control, so take a minute to review and manage anything that is in your control.  
  • Check your 401(k) allocation and contributions. Make sure you are on track to receive any company matching contributions.  
  • Roth conversions. Roth conversions are case-by-case specific, but generally speaking periods of market volatility may create opportunities for Roth conversions. The idea is to convert funds from a Regular to a Roth IRA while your account value is low, decreasing the amount of tax generated from the conversion. Assuming the market eventually recovers, your newly converted Roth dollars will appreciate tax free (assuming you meet all the other criteria necessary for Roth tax treatment). This scenario works best when you are in a low tax bracket and have the cash to pay tax on the conversion.
  • Rebalance your portfolio. Rebalancing your portfolio often forces you to sell high and buy low, even during periods of market downturn. By rebalancing during volatility, you are selling the funds that have held up better (typically bonds and other diversifiers), and reinvesting into the areas that have pulled back. This forces you to “buy the dip.” If/when the weaker parts of your portfolio recover, you participate more fully.  
  • Reevaluate your risk level. Market corrections provide an opportunity to increase your risk level (i.e., your stock exposure) and to take advantage of lower stock prices.  Typically these periods are not a good time to lower risk by selling stocks unless your goals and/or investment time horizon has changed.  

Usually the best action is no action. If you’re not in a position to save more, sticking to your long-term allocation and plan is likely the best way to weather market turbulence. Market corrections will continue to happen over the course of your investing life. While overall the long term trend tends to be upward, corrections will typically happen every few years.  During turbulent times, emotional decision-making often works against us.

The chart below illustrates how the S&P 500 has performed after a variety of global events and conflicts since 1950.  You can see that in most cases, the market has had strong performance in the years following a crisis.  

Please feel free to reach out to us if you have any questions. If you would like to speak with one of our advisors for complimentary portfolio review, you can schedule a consultation here. 

Emily Balmages, CFP®, CRTP

Director of Financial Planning, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Series I Bonds: Are They Right For You?

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Series I bonds offer a low-risk, interest-earning addition to your portfolio. As part of a well-diversified portfolio strategy, now may be a good time to put some additional cash into I bonds and take advantage of an attractive interest rate.

What is a Series I bond?

A Series I bond is issued by the US Treasury. The bond accrues interest monthly until it reaches 30 years or you cash it, whichever comes first.

An I bond has two interest rates – the fixed rate and the inflation rate. These two rates combine to determine a bond owner’s actual rate of return, called the composite rate. A new rate will be set every six months based on the fixed rate and on inflation.

The US Treasury limits the composite rate to no less than 0%, meaning the rate of return on I bonds will never be negative.

What’s the benefit?

The composite rate on Series I bonds is currently 9.62% (annualized). Though the interest rate is variable and will change over time, purchasing I bonds now guarantees that you will earn this interest rate until October 2022 when the new rate is set for the next 6 months.

Are there risks?

An I bond is considered an extremely low risk investment. However, the ultimate rate of return is variable and not guaranteed beyond the current 6-month rate. The current interest rate is high because inflation is higher than usual – if Federal Reserve policy reduces inflation the inflation rate for I bonds will also decrease.

Note that an I bond cannot be redeemed for at least one year after purchase, and any redemption between years 1 and 3 does not receive the interest from the three months prior to redemption.

How do I buy a Series I bond?

Visit treasurydirect.gov to purchase electronic I bonds. An I bond must be purchased directly by the investor; it is not something your advisor can add to your portfolio for you. Series I bonds purchased electronically come in any amount to the penny for $25 or more. Paper I bonds can be purchased using your federal income tax refund. The amount of a bond purchased is limited to $10,000 per person per year.

Are I bonds right for me?

Determining what investments are the best fit for you depends on several factors: your age, the timeline for when you need to withdraw from investments, your comfort with risk, and your overall financial health. If you have some cash that is not part of your basic emergency fund and you do not need it in the next 1-3 years, I bonds may be a good choice. However, as with all investing decisions, we recommend consulting with your financial advisor to determine if I bonds are the best fit for your unique situation.

Kirsten C. Cadden, CFP®

Associate Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Perks of a California Retirement

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Having a comfortable retirement doesn’t necessarily mean leaving The Golden State behind.

In our California-based advising firm we often see clients who would like to move out of the state at retirement (or sooner). There are plenty of reasons to re-settle, and if your only reason is “I want to” then that is good enough for us. But the retirement of your dreams doesn’t necessarily mean you need to pack up and move. Call us biased…but we love The Golden State! 

The State Tax Problem

A major concern for Californians is taxes. Our top state tax bracket is the highest in the nation. However, a retiree’s taxable income is not often in the highest bracket. The tax rates for most middle (and even upper-middle) class taxpayers are comparable to, and sometimes lower than, those in several other states.

To illustrate: in 2021 a single California taxpayer’s taxable income between $61,215 and $375,221 will be taxed at 9.3%. Compare that to a nice midwestern state like Minnesota. Their very top tax bracket is 9.85%, but it starts at taxable income over $166,041. So if your taxable income is between $166,041 and $375,221, you will pay similar state taxes whether you are in California or Minnesota.

Let’s look at a more realistic retirement income. Taxable income in retirement for an average married couple might be around $85,000. In California, their effective state tax rate for 2021 would be about 2.40%. If the couple decided to move to Arizona (a low tax state) in retirement, their effective state tax rate would be about 1.87%. That’s a difference of just $450 per year. Uprooting and moving states to save $450 in a year may not really be worth it!

It is true that state taxes are much lower in many other states. There are even states with no state income tax. But these states offset their lack of income tax with sales tax, property taxes, and other local taxes. The bottom line is: no state is going to let you put down roots for free. While California certainly is not the most taxpayer friendly state, for a large portion of residents the higher tax brackets are not going to be a factor.

Quality of Life in California

Two major considerations for quality of life are staying physically active and staying socially engaged. We know that a sedentary, perpetually isolated lifestyle is bad for your health. The mild-to-warm weather in California means your favorite activities can usually continue year-round, keeping you moving and socializing consistently throughout your life.

California has something for everyone. Do you prefer vibrant evenings out in the city or quiet mountain escapes? Yoga on the beach? Pickleball in the suburbs? Hiking in the desert? It’s all here.

Why Warren Street Loves CA

Why else does our team love California? When asked “What are some reasons a person might want to retire in California?” here is what we had to say:

  • “Many job prospects for those who want to have a part-time retirement living.”
  • “On the tax note, Prop 13 and Prop 19 can keep CA property taxes low.”
  • “Good access to medical care and good doctors in most of CA.”  
  • “Diverse population and diverse cultures in CA.”  
  • “California is a great hub for entertainment and tourism.” 
  • “Home to multiple beaches, national parks, etc.” 
  • “CA is the largest municipal bond market by issuance.” 
  • “In-N-Out.”

Every state has something great to offer. Above all, we love to see our clients happy and living their best life – before and after retirement.

Do you want to continue your California dream after you retire? Or do you want to try somewhere new? Whatever your goals, Warren Street is here to help you make them reality.

Kirsten C. Cadden, CFP®

Associate Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

References:

https://www.thebalance.com/state-income-tax-rates-3193320

https://www.nerdwallet.com/article/taxes/california-state-tax

https://smartasset.com/taxes/california-tax-calculator

5 Early Retirement Health insurance Options Before Medicare

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An important aspect of early retirement is planning for medical insurance coverage.  Here is a list of options for securing coverage if you plan to retire before age 65. 

  1. COBRA: Check with your Benefits Department to see if COBRA coverage is available. These benefits typically need to be activated within 60 days from your loss of coverage date.  COBRA benefits allow individuals who would otherwise lose coverage to maintain it for a period of time, typically at a higher, unsubsidized cost.  COBRA may be an option, but it may not be the least expensive option.  
  1. Exchange Plans: The public Exchange plans are part of the Affordable Care Act.  Attempts to repeal this have fallen flat and it is likely to stick around even if the administration changes, especially in California.  
  1. Private Marketplace:  You can secure coverage through private placement. You will face little risk of changes in the law, but you will not receive any tax credits or subsidies.
  1. Retiree Medical Benefits: Check with your Benefits Department to see if your employer offers medical benefits in retirement.  You may be eligible for employer-provided subsidies based on years of service, although this is becoming rare.  
  1. Part-Time Work: Certain large employers are now offering medical benefits to part-time, hourly employees. (Starbucks is an example.)  

You can sign up for Medicare 3 months before the month you turn 65. We highly recommend you consult a Medicare specialist before signing up. A consultant will advise on Medicare Part A, Part B, Part C, and Part D, plus dental and vision coverage depending on your situation.  Please reach out to us if you would like a referral.  

If you plan on an early retirement and you would like to further discuss your options for medical insurance coverage, reach out to the Warren Street team.

Emily Balmages, CFP®, CRTP

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Healing What Hurts: The Essential Role of a Financial Therapist

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As financial advisors, we help people attain financial independence. Usually our personalized planning conversations are enough to help them establish a healthy, happy relationship with their money. But sometimes we uncover bigger pain points we need to address before we can move forward.

There is no shame in that! Almost all of us have picked up at least some emotional baggage related to money. When standard financial advice isn’t enough, we may recommend engaging a financial therapist to assist. In the right circumstances, they can be an invaluable addition to your wealth management team.

When Can a Financial Therapist Help?

When is financial therapy warranted? As financial advisor Rick Kahler said in a 2019 article, “A person can benefit from financial therapy when their behaviors are not in line with their values.” Put another way, if it feels as if no amount of financial planning will resolve a greater discontent, this can be a sign that deeper forces are at work, such as one or more of the following:

  • You often spend to excess or are frugal beyond the point of reason, but you’re still unhappy, feeling as if there is an emotional hole you can never quite fill.
  • You tell yourself and others half-truths or outright lies about your money management. For example, your spouse doesn’t know about that extra account you’ve stashed at another bank, or you hide just how deep in debt you’ve become. You convince yourself your secrets won’t hurt anyone and that it will all just work itself out somehow.
  • Whether as a recipient or a provider, you’re trapped in a financial exchange with little joy in the giving or gratitude in the receiving. You long to get out from under the relationship but you feel helpless to change it.
  •  You have important financial issues to discuss with your aging parents, with your adult children, or as a couple. But you’re so used to not talking about money, you don’t know how to break the silence.
  • Your financial interests are in disarray, with important changes you’d like to make. But even with an advisor to assist, you can’t bring yourself to take action. You remain mired in indecision.
  •  You yearn to have a sensible strategy guiding your financial journey, but you find yourself continually overhauling your investments, your advisors, and your overall approach. Nothing ever seems right for very long.
  •  You reach a point where you feel there is no point. You stop even opening incoming bills. You shut out those offering to assist. Rather than bringing you any happiness, your money has become a source of misery and shame.

How Does a Financial Therapist Help?

Following are a few of the types of issues a financial therapist can help you reconcile: 

  • As a child: Was money a taboo subject when you were growing up? Even once you’re an adult, these early influences can weigh on your financial autonomy, and make it difficult to engage with your aging parents about their own challenges.
  • As a parent: You may have justifiably developed a strong sense of financial duty to your children. This can leave you struggling to establish practical boundaries once your beloved babies become adults.
  • As a couple: You and your spouse may each come into your relationship with very different saving, spending, investing, and borrowing behaviors. If entrenched differences go unaddressed, they can wreak havoc on an otherwise loving relationship.
  • As an individual: You may feel anxious and ill-prepared to take care of your own or your family’s financial logistics. Or, on the flip side, you might believe you—and only you—must manage your entire household wealth. Either extreme can detract from reaching a healthy balance between your emotional confidence and your financial well-being.

Working With a Financial Therapist

Financial management can be difficult for anyone, and struggling at times does not necessarily mean you have a chronic issue in your relationship with money. But if your financial behaviors feel like they are crippling your financial future or causing you consistent distress, it may be time to bring in a financial therapist to help you move past the pain.

Some individuals or families also find it meaningful to consult with a financial therapist as an “ounce of prevention”.. This approach to financial therapy can be particularly empowering for major life transitions such as changing family structure, during a business succession, as you prepare for retirement, or when a wealth transfer occurs.  

How do you get started? As one financial therapist said: “For your money, you want a fiduciary. … For your emotional health, you want a licensed psychologist or therapist who knows how to treat the diagnoses you have and respects confidentiality.” Ideal matches also may depend on a therapist’s areas of expertise (such as family conflict, childhood trauma, or grief and anger management), and/or occupational niches (such as business owners, academics, or attorneys).

Here at Warren Street, we can make appropriate introductions for our clients. You can also use the Financial Therapy Association’s “Find a Financial Therapist” to search for qualified professionals in your region. However, note that financial therapy is a relatively new profession. With its roots dating back to 2009, the Financial Therapy Association was the first group to offer financial therapist certification in 2019. As such, it’s worth ensuring your would-be therapist possesses a solid tripod of professional credentials, academic qualifications, and seasoned experience before you entrust yourself to their care.

As financial professionals, we pride ourselves on helping individuals and families maximize their financial and emotional independence through a well-managed relationship with their wealth. That said, we don’t pretend we can be all things to everyone. When it’s time to focus on the nexus between mental health and household wealth, a qualified financial therapist can be an integral part of your Warren Street team. Ask us today how we can help.

Kirsten C. Cadden, CFP®

Associate Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

What Is Custom Indexing, and Is It Right for Me?

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If you’ve ever felt that mutual funds and ETFs don’t give you enough control over the individual stocks you want to invest in — or don’t want to invest in — you’re not alone.

Clients over the years have shared with us that they want to own individual stocks. However, one of the hidden benefits of owning individual stocks are the after-tax returns generated through tax-loss harvesting. You may ask, “why are we hearing about this now?” Well, the reality is the technology did not exist.

The Freedom of Custom Indexing

We have good news: with the addition of Warren Street’s new custom indexing platform, you now have the ability to “custom index” — in other words, set the parameters on the exact types of stocks you’d like to invest your money.

Unlike ETFs and mutual funds that only offer pre-packaged asset mixes, custom indexing lets you personalize your investments to your individual values, preferences, and goals. Custom indexes are implemented through separately managed accounts (SMA), which allow you to directly own a mix of individual securities rather than indirectly owning positions through shares of funds and ETFs.

This can be an especially helpful option for individuals who may want to:

  • Reduce concentrated stock risk (e.g., employer stock)
  • Custom-build a portfolio to support ESG stocks
  • Offset embedded gains with cash or tradable securities
  • Invest in an individual stock portfolio with factor tilt

If custom indexing is a good fit for you, your advisor will discuss your goals, preferences, risk tolerance, and tax positioning. Then, he or she will help you design your custom portfolio from scratch, based on considerations such as asset allocation, factors, tax-loss harvesting, and values-based screens.

Ideal Clients for Custom Indexing

While custom indexing offers you some great advantages in selecting individual stocks, it only really benefits clients that meet certain account levels and qualifications, due to tax and expense considerations.

Ideal clients for custom indexing generally include those with:

  • At least $500,000 in a taxable, non-retirement account
  • Recurring cash contributions
  • A high-income tax bracket (Fed/State)
  • Preferred individual stock exposure over funds

Through direct indexing, custom indexing can replicate broad market exposure by investing in the underlying positions of an index fund or ETF. This helps us efficiently manage your taxes (if you meet the above qualifications) and gives you virtually infinite portfolio customization capabilities.

Interested in learning more? For a full deep-dive into our custom indexing platform, check out the attachment linked below. And feel free to reach out to your lead advisor if you think you might be a good fit!

Custom Indexing Tear Sheet

Blake Street, CFA, CFP®

Founding Partner and Chief Investment Officer, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Six Financial Best Practices for Year-End 2021

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Believe it or not, another year has rounded third base, and is dashing toward home plate. That said, there’s still time to make a few good plays in 2021, while positioning yourself to score more in the year ahead. Here are six financial best practices for the record books.

1. Keep Your Eye on the Ball. While there are always distracting trading temptations, it seems as if 2021 has had more than its fair share of them. Remember the January excitement over GameStop and its ilk? That frenzy was soon followed by “SPAC-Man” Chamath Palihapitiya, tweeting out “Shooters shoot” to his disciples, as SPACs started flying every which way. Tradeable memes and non-fungible tokens (NFTs) became a thing around then too, followed by the pursuit of fluffy little dogecoins.

Our Best-Practice Advice: Instead of swinging at fast fads, we encourage you to lean into the returns our resilient global markets are expected to deliver over time. As always, this means looking past the wild throws and building a low-cost, globally diversified portfolio, tailored for your personal financial goals and risk tolerances. Isn’t that your aim to begin with?

2. Revisit Your Saving and Spending. COVID changed a lot of things, including our saving and spending patterns. Stimulus and unemployment checks offered cash flow relief for many families. Business owners received generous loans. Moratoriums on paying off college debt or being penalized for dipping into retirement savings helped as well. Retirees were permitted to skip taking Required Minimum Distributions (which is NOT the case in 2021).

Our Best-Practice Advice: As these and similar relief programs wind down, now is an excellent time to recalibrate your own financial plans. If you borrowed from your future self by withdrawing from or not adding to your retirement reserves, please establish a disciplined schedule for paying yourself back. If you became accustomed to spending less on items you used to think you couldn’t live without, try directing those former expenditures to restoring your retirement and rainy-day funds. Work with a financial planner to assess other ways your budgeting may benefit from a fresh take. Every little bit counts!

3. Watch for Fund Distributions. Even as we’ve continued to weather the pandemic storm, our forward-looking, global markets have been delivering relatively strong returns year-to-date for many foreign/U.S. stock funds. That’s good news, but it also means mutual funds’ capital gain distributions may be on the high side this year. Capital gain distributions typically occur in early December, based on the fund’s underlying year-to-date trading activities through October. For funds in your tax-sheltered accounts, the distributions aren’t taxable in the year incurred, but they are for funds held in your taxable accounts.

Our Best-Practice Advice: Taxable distributions aside, staying put to earn all potential market returns is the more important determinant in our buy-and-hold approach. With that said, in your taxable accounts only, if you don’t have compelling reasons to buy into a fund just before its distribution date, you may want to wait until afterward. On the flip side, if you are planning to sell a fund anyway—or you were planning to donate a highly appreciated fund to charity—doing so prior to its distribution date might spare you some taxable gains.

4. Consider Tax Gain Harvesting. Along with relatively strong year-to-date market performance, many Americans are also benefiting from historically lower capital gain and income tax rates that may or may not last. Often, taxpayers view each tax season in isolation, seeking to minimize taxes owed that year. We prefer to view tax planning as a way to reduce your lifetime tax bill. Of course, we can’t know what your future taxes will be. But it can sometimes make good, big-picture sense to intentionally generate taxable income in years when tax rates seem favorable.

Our Best-Practice Advice: If you have “room” to take some taxable capital gains this year—and if it actually makes sense for you to take them—you may want to consider working with your tax planning team to do so. 

5. Seize the Day on Your Charitable Giving. Unlike many other pandemic-inspired tax breaks, several charitable-giving incentives still apply for 2021, but may not moving forward. This includes the ability for single/joint filers to deduct up to $300/$600 in cash contributions to qualified charities, even if they’re already taking the standard deduction on their tax return. If you’re so inclined, you also can still donate up to 100% of your AGI to qualified charities.

Our Best-Practice Advice: Charitable giving remains another timeless tactic for offsetting taxable capital gains you may want or need to report, as well as any other extra taxable income you may be incurring. And charitable organizations need our contributions as sorely as ever. So, if you’re charitably inclined, you may as well make the most of your generosity by pairing it with your 2021 tax planning.

6. Plan Ahead for Estate Planning. Holiday shoppers may not be the only ones facing supply chain shortages this year. Estate planning attorneys, CPAs, and similar planning professionals may also be in shorter supply toward year-end and beyond. In addition to the usual year-end crunch, many such service providers have been extra busy responding to a “COVID estate planning boom,” as well as to the fast-paced action in Washington.

Our Best-Practice Advice: If you’ve been thinking about revisiting your estate or tax planning activities, know that the process may take longer than usual. Especially if you’re planning for changes that are up against a hard deadline (such as year-end or April 15th), you’ll benefit yourself by giving your attorney, accountant, and others the time they need to do their best work for you. High-end estate planning in particular is best approached as a months-long, if not years-long process.

How else can we help you wrap 2021 and position yourself and your wealth for the year ahead? As always, we stand ready to assist!

Cary Facer

Founder and Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Charitable Giving

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Maximize Your Giving and Minimize Your Taxes

The end of the year is quickly approaching, which may prompt a review of any final tax planning strategies to employ before December 31. The fall and winter holiday season also turns our minds to gratitude and giving. Perhaps surprisingly, these year-end considerations are not mutually exclusive.

To promote charitable giving, the IRS offers tax deductions for certain charitable donations. The most straightforward tax benefit is an itemized deduction of the amount of any cash donations to a qualifying charitable organization, up to 60% of the taxpayer’s Adjusted Gross Income for the year (with a five-year carryover allowed). If you itemize deductions, this is an easy deduction to claim and one you are probably already aware of.

But tax-aware charitable giving strategies don’t end there. For example, a special above-the-line deduction (for non-itemizers) was created just for 2020-21 for any taxpayer to deduct cash donations up to $300 for single filers or $600 for married filing jointly.

Let’s look at three additional options to maximize your giving while minimizing your taxes.

1. Qualified Charitable Distributions 

A qualified charitable distribution (QCD) is a direct transfer from your IRA (traditional, rollover, inherited, SEP, or SIMPLE) to a qualified charity. Several attractive benefits come with a QCD:

  • First, a QCD counts toward your annual required minimum distribution (RMD).
  • Second, the amount of a QCD is excluded from your taxable income. So, rather than taking a withdrawal from your IRA, having taxes withheld, and then writing a check to your favorite charity, consider making a direct transfer from your IRA to the charity. You can send the full amount to charity without having taxes withheld on the distribution.
  • Third, the tax-exemption of a QCD doesn’t require that you itemize your deductions. Normally, to get a tax deduction for charitable giving, you need to itemize your tax deductions rather than use the standard deduction. But a QCD is tax-exempt whether or not you itemize – allowing you to take the higher deduction (whether that is the standard or itemized) and get a tax benefit for your charitable contributions either way.

To be eligible for a QCD, you must be 70 ½ or older and SEP or SIMPLE IRAs must be inactive. QCDs are limited to $100,000 per year per person and may be further limited if you are still contributing to the IRA. To count toward the current year’s RMD, the funds must be transferred from the IRA by the RMD deadline (usually December 31). 

2. Donor-Advised Funds
A Donor-Advised Fund (DAF) is a fund you establish to set aside cash and other assets for charitable giving. You receive a tax deduction for the amount given to the fund in the year contributed, and the assets are available for you to donate to specific charitable organizations at any time. 

Donations of appreciated assets, such as stock or real estate, can be given to the DAF without paying capital gains taxes. Any further growth of assets in the DAF is not taxable to you since it is already irrevocably reserved for charitable gifts.

A DAF can be used in a “batching” strategy, where the tax-deductible contribution to the fund happens in one year and then donations to your chosen charities subsequently happen on whatever timeline you wish. You can fund a batch of charitable gifts in one single tax-deductible contribution. This is a great tax-mitigating tool for a particularly high-income year and a useful ongoing strategy to maximize the tax benefits of your charitable giving. 

3. Charitable Remainder Trusts

Charitable Remainder Trusts allow you to make partially tax-deductible contributions to the trust while achieving a two-fold goal: providing an income stream to yourself or another beneficiary and giving to a charitable organization.

There are two types of Charitable Remainder Trusts: a Charitable Remainder Annuity Trust (CRAT) and a Charitable Remainder Unitrust (CRUT).

  • A CRAT distributes a fixed amount to the chosen beneficiary (yourself or someone else) each year. At the end of the trust term (no more than 20 years), the remainder of the trust goes to your chosen charitable organization(s). Additional contributions cannot be made once the CRAT is established.
  • A CRUT distributes a fixed percentage of the trust assets to the beneficiary, with the remainder going to your chosen charitable organization(s). Additional contributions can be made over the life of a CRUT.

The tax deduction of contributions to a Charitable Remainder Trust is based on the type of trust, the term of the trust, the projected income payments, and the IRS interest rate assumptions. You can combine a Charitable Remainder Trust with a Donor-Advised Fund to offer more flexibility. 

CARES Act Enhancements

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) added some additional tax incentives for charitable giving in tax years 2020 and 2021. The maximum allowed deduction for cash contributions increased to 100% of AGI, with a five-year carryover allowed. The deduction allowed for corporations increased to 25% of taxable income. As mentioned previously, a special above-the-line deduction (for non-itemizers) was also created for any taxpayer to deduct cash donations up to $300 for single filers or $600 for married filing jointly.

Family, corporate, and private non-operating foundations are excluded from these enhanced benefits, along with supporting organizations under Section 509(a)(3) and donor-advised funds. These enhancements only apply to cash contributions. Contributions of appreciated assets (like stock or real estate) are subject to the same prior limit of 30% of AGI.

Conclusion

Immediate action items we recommend:

  • If you gave to charity in 2021, make sure you take the special above-the-line deduction (up to $300 for single filers and $600 for married filing jointly).
  • If you are over age 70 ½ and donating to charity, talk with your advisor about making Qualified Charitable Deductions from your IRA.
  • If you had unusually high income this year and/or if you are consistently giving large amounts to charity, talk with your advisor about setting up a Donor-Advised Fund.

Charitable giving is a fulfilling practice and an important piece of many financial plans. Current tax law incentivizes charitable gifts, and thus, skilled tax planning can help you maximize what you can give. Talk to your advisor or tax professional to see if any of these charitable giving strategies could help you achieve your financial goals.

Kirsten C. Cadden, CFP®

Associate Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

5 Bare Essentials to Consider When Retiring from SCE

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Retirement can seem like the most exciting thing in the world — and the most overwhelming. On one hand, you finally get to spend your time on your terms. Maybe that’s traveling the world. Maybe it’s spending more time with your grandkids. Or maybe it’s just spending quiet evenings at home. 

Still, there’s that lingering question: “How does this all work?” So much goes into planning for retirement, as well as managing your money appropriately once you get to that point. It can be unnerving to consider how you’ll manage the nuances of your retirement plan, navigate Social Security benefits, and ensure you have the money you need to support your lifestyle in retirement. 

At Warren Street Wealth Advisors, we hear these concerns from clients often. In response, we’ve developed a specialty focus on retirement planning for Southern California Edison employees. After helping hundreds of SCE retirees navigate this crucial time, we know your retirement packages and employee benefits programs inside and out. Below are the top five bare essentials you need to know to retire from SCE.

1. Take your final distribution when you want.

It’s a common misconception that you are forced to take your final distribution at retirement, but that’s not the case. You can wait until Jan. 1, request your final distribution, and then take a direct payment to avoid penalties using the “55 Rule” if you are 55 years or older. This will also allow you to defer the income tax due until the following year’s tax return.

2. Understand that it’s possible to retire penalty-free between age 55 and 59 ½.

Here’s a scenario we see all the time: you’re 57. You want to retire. You don’t want to wait until 59 ½ to do it. But you know that there’s a 10% federal tax penalty and a 2.5% California state tax penalty if you take the money out of your IRA before 59 ½. So are you stuck? Nope.

There are a lot of moving parts to this process, but we can take advantage of IRS rules like 72(t) distributions or the previously mentioned “55 Rule” to ensure our clients do everything possible to avoid paying penalties.

3. Take advantage of your medical subsidy.

Did you know that you are eligible for a retiree medical subsidy? The most common subsidies are 50% and 85%. When you retire, Edison will pay either 50% or 85% of your current medical insurance premium as a “continuation benefit” in retirement. Simply put, what you pay today is what you’ll pay in retirement. Of course, this is as long as you reach your required benefit milestone. (Unsure what your benefit is? Call EIX Benefits at 866-693-4947 to ask what benefit you have and at what age you’ll receive it.)

4. Weigh your Social Security options.

There is all kinds of information out there about what to do with your Social Security. Let us boil it all down: you don’t have to take it at 62! When we build a financial plan for a client, we calculate all options for optimizing Social Security. It’s ultimately your decision, but we suggest weighing your options before committing to collecting the 25-30% reduced benefit at age 62.

5. Use your 401(k) efficiently.

Your 401(k) can be an immensely powerful tool if you understand how to max it out and diversify your investments. In most cases, this is the point at which you’ll want to hire a professional team to help. One tool that can help you is the Charles Schwab Personal Choice Retirement Account (PCRA) option included in your 401(k) plan. The PCRA option lets you purchase investments on your own or hire a professional advisor to do it for you. This is made available through your Tier 3 option. 

These are just a few of the tips and resources we offer SCE employees. For a deeper dive into strategies you can take to help you maximize your money in retirement, download our full SCE Retirement Handbook here.

Want to chat further? Feel free to reach out. We’ve worked with hundreds of employees with your exact plan and are glad to point you in the right direction.

Cary Facer

Founder and Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.