It’s the Perfect Time to Help Your Community

The Coronavirus crisis has decimated lives and livelihoods across the globe.  Charities are struggling to help the most vulnerable and are having a hard time keeping up, while many not-for-profits across the company are in precarious financial situations.   For example, there are now more than 36 million Americans unemployed; many of them without enough money for food or shelter.  The Food Bank network is distributing 100 times more food than normal, yet is currently receiving 50% less food from manufacturers.

Scores of charities across the country are sounding the alarm that they could go under if they cannot find alternative funding. Nonprofits large and small have shut down temporarily, cancelled essential fundraising events and watched helplessly as funds have dried up from both individual and corporate donors.  The reality is that many people who would normally donate are now in the need of help themselves.

Furthermore, even before the COVID-19 pandemic, donations to charity were declining.  20 million fewer households donated to charity in 2016 than did in 2000.  In the United States, the charity sector makes up for some 10% of the workforce; making it the third largest industry behind retail and manufacturing according to John Hopkins research.  Even as the economy starts to open up again and reports of potential vaccines are front page news, there’s deep concern that the contraction in giving to charity may last for years.

Fortunately, you readers of the DWM blog are generally in a financial position to make charitable donations and we expect that most of you do, particularly during fundraisers, giving days and at year-end.  We would like to encourage you to consider providing donations and/or your skills to a charity now.

The CARES Act signed into law on March 27th, provides incentives for giving.  Since 90% of taxpayers use the standard deduction, the CARES act provides a specific tax deduction in 2020 for up to $300 in cash contributions.  Furthermore, in 2020, you can deduct all of your contributions up to 100% of your adjusted gross income (normally 60% is the limit). Also, the CARES act eliminated Required Minimum Distributions (RMDs) for IRAs for 2020. However, if you are 70 ½ or older, you can take money from your IRA and make a Qualified Charitable Distribution (QCD) and, therefore, help the charity and not have to claim any income on the distribution.  Lastly, the CARES Act provided a $1,200 economic stimulus to taxpayers with incomes below certain levels. Some recipients of those funds, who don’t need it, are using that money for charity.

Another tax efficient way of giving are Donor-Advised Funds (DAFs), which we have spoken about before.  You fund DAFs and get tax deductions in one year and then “grant” the money to charities in future years.  This allows you to “bunch” your donations and to reduce income taxes in years when you are in high tax brackets. Furthermore, you can use cash for funding or appreciated securities and therefore eliminate the capital gains tax on the donated securities. Funds in a DAF can be invested and grow and there are no minimum distribution requirements.  DAFs are a great planning tool for both income tax and estate taxes.

DAFs have been stepping up grants during the pandemic.  Grants given in March 2020 from DAFs were 36% higher than March 2019.  Donor advised funds are really a sustaining factor at times like this because people have already irrevocably set this money aside for charity so at a time, like now, it can be used.

Here are a few other comments and ideas on how you might be able to help your community:

  • Support the arts. Across the U.S., institutions have closed their doors and many have had to lay off staff. The American Alliance for Museums estimates that museums are losing some $33 million a day and it predicts 30% of them will never reopen without help.
  • Don’t forget animals. Many animal shelters are facing reduced staff and volunteer support.
  • Donate blood. 13,000 blood drives were canceled in the first three months of 2020 resulting in 375,000 fewer blood donations.
  • Put your skills to work. Your organization may be putting together programs to help American families who are struggling. The Foundation for Financial Planning, for example, is raising $1 million and will be providing pro bono financial planning and advice to low-income workers and other groups. I’ve participated in that pro bono work and it is very fulfilling.
  • For those SC taxpayers, consider a donation to help “exceptional needs” students with dyslexia, autism, ADHD or physical and emotional needs. There are 90,000 exceptional students in SC, one out of 12 children. And donations to the ExceptionalSC.org, a 501(c)(3), provides a tax credit to SC taxpayers, up to 60% of their tax liability. As such, this amount is currently considered taxes for your federal tax return.

It’s the perfect time to help your community with your money and/or your skills.  Each of us have our favorite organizations and causes.  Please consider doing something now! In a time of significant need like now, it will definitely be appreciated.

https://dwmgmt.com/

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional vs. Roth 401(k): Where Should I Be Putting my Money?

Recently, we have had quite a few conversations reviewing the age-old debate of whether Roth 401(k)s or Traditional 401(k)s are better. Well perhaps not age-old considering Roth 401(k)s came out in 2006, but still a common question with no quick answer. To start, let’s clarify exactly what a 401(k) is and how a Roth 401(k) compares and contrasts to a Traditional version.

Starting in 1980, the first 401(k) program was established through Johnson Companies. This retirement program provides employees the ability to shift their income straight from payroll into an investment account just for them. In a Traditional 401(k) plan, this shift comes in the form of deferred payment. Previously being reliant on company-set pension schedules, 401(k) plans transfers the legwork and adoptability of retirement savings away from company management and into the hands of workers themselves. Through this vehicle, employees can take a portion of their pay on a regular schedule that would normally be included in their check and instead deposit it into a corporate-structured, employee-managed investment account. These plans quickly became a company favorite, with over 50% of current companies either already providing these plans or considering it today.

Additionally, 401(k)s provide employees with an additional benefit: Tax-deferral for contributions. While contribution amounts to this account are capped annually ($19,500 for 2020 without catch-up), all amounts transferred are considered tax-deferred, i.e., employees can directly reduce their taxable income in the year contributed by their total contribution amount for that year. For example, if you were paid $100,000 in 2020 and deferred $19,000 into your 401(k), your total taxable income for 2020 would be $81,000.

For years, Traditional 401(k)s (and by proxy extremely similar accounts such as 403bs or 457s), dominated the market of employer retirement plans as they were one of the only real players in the game. However, in 2006, Roth 401(k)s (which are modeled after Roth IRAs created in 1997) shook all of that up. Why? Because these Roth plans offer up no current year tax deduction, but once contributed, the principal is never taxed again and the earnings are never taxed. Not to mention that since the contributions are already taxed, if rolled into a Roth IRA upon retirement, there are no required minimum distributions (“RMD”s) during the account owners lifetime, and beneficiaries are not taxed as well which provides some extra incentive for individuals who look to provide significant inheritances to their loved ones.

The addition of this designation to retirement plans opened up a lot of questions that we’ve seen over the past few years as more and more employers begin to offer the option. The most prevalent one being the titular “How much should I be investing in my Roth 401(k) vs my Traditional 401(k)?”. And the answer may not be as simple as it seems at first glance.

The taxability of the contributions to each is the driving factor behind deciding which form of retirement plan works the best for each client. The long term understanding of tax rates can help clear up this picture. Take the situation below for example:


Chart 1: Value of Roth vs. Traditional 401(k)

As stated in the blurb above the figures given in Chart 1, the calculations hinge based on tax rates over time. In theory, both accounts end up holding the same net value. However, the idea that tax rates over time will remain the same is highly unlikely. The 2017 Tax Act cut rates initially but they gradually ascend back to the former, higher rates. Further, with trillions of dollars of U.S. debt hanging over our heads, tax rates look to go up in the coming years. The result of this expected increase in tax rate indicates that the tax on the Traditional (also known as “regular”) 401(k) column shown in Chart 1 should be bumped up to something like 32% or higher, resulting in 4% less overall value of Traditional 401(k) assets than that of the Roth 401(k). While that may be only $1,200 dollars less in the example above, the larger the 401(k) value at retirement age the more significant this difference will be. Then again, this example assumes you stay at the same income now and in the future which may not be realistic. For many retirement will likely drop them into a lower tax bracket. As such, the Traditional 401(k) may make more sense. For a fun analysis to play around with this idea, try using this calculator.

One additional consideration not shown in the above chart is that additional taxable income in retirement years can also cause Traditional 401(k)s to have less appeal than Roth 401(k)s. If you expect to get a sizeable pension, annuity payout, or other income stream during retirement, the tax-deferral of the Traditional 401(k) contributions works less in your favor as you’ll likely be taxed at a similar or (in rare circumstances) higher rate than that of when you were working.

Further, the younger an individual is, the more likely that they will be in a lower tax bracket than when they look to retire. For this reason, we generally hope to see young individuals contributing at least 50% of their 401(k) contributions towards their Roth 401(k).

Here’s a different situation in which Traditional 401(k)s may be a better option. For example, if your current year income totals slightly above the current year tax bracket, it would likely be more beneficial to contribute more to a Traditional 401(k) in order to drop down a bracket and have all your income taxed at a lower current year rate.

At the end of the day, there are many variables to consider when choosing between a Traditional or Roth 401(k). One needs to make assumptions about one’s current and future financial situation. Frankly, those can be tough assumptions to make, but fortunately the argument over Roth vs Traditional is not an exclusive debate! In actuality, a significant number of workers will find that a mix of these savings, for example 50% of 401(k) contributions being allocated to Traditional and 50% to a Roth 401(k) can work out to receive the benefits of both sides, slightly lower taxes now as well as slightly lower taxes in the future!

Here at DWM we work with our clients to ensure that proper analysis through financial planning and tax planning provides us insight into the benefits that each type of 401(k) plan can offer on a case-by-case basis. If you would like to review this information and how it may apply to you in more detail, please feel free to reach out!

https://dwmgmt.com/

Are Offices Becoming Extinct?

Berkshire Hathaway held their annual meeting on Saturday- via live stream from an empty arena.  For the event, Warren Buffet put on a tie for the first time in seven weeks. During the four hours of the presentation, Mr. Buffet questioned the need for office space and predicted a significant change in the supply and demand.

This week, the Economist’s Catherine Nixey put it more bluntly in her article titled “Death of the Office.”  Even before the coronavirus hit, office space use was changing.  A combination of the digital revolution, increasing rents and increased demand for more flexibility had resulted in over half of the U.S. workforce working remotely, at least some of the time.  Across the globe, working from home (“WFH”) has been increasing as well.  Now, COVID-19 has dramatically accelerated the trend.

Ms. Nixey believes the first large push into offices was started by the East India Company (founded in 1600 and dissolved in 1874).  Their offices, inside of buildings featuring Palladian pillars and marble steps, were not simply to get work done, but also to demonstrate East India’s profitability, strength and efficiency.  Large organizations, like East India and governments, required a lot of “paper to be pushed” and managing proved easiest when all the workers were in one spot.  The Industrial Revolution (1760-1830) produced an explosion in business and a huge increase in demand for office workers.  New steam team trains brought needed office workers into the city to sit behind desks to fill the growing needs of the developing professions of finance, law and retail.

Mary Beard, professor classics at Cambridge, believes that the amount of time our generations have spent in offices would have been unheard of in earlier societies.  Today, most of us spend more time working than at leisure.  For the Romans, it was the opposite- primarily leisure and only sometimes business.  Romans didn’t need to go to an office. Their tablets and styluses were very portable and the Romans were able to spend much of their time outside and never behind a desk.

Fred Taylor, who pioneered time-and-motion studies in the 1890s, determined that workers performed best when seated at lines of desks with flat tops.  He is considered the father of the “open-plan office.”  Fast forward 130 years, and current time-and-motion studies have found that office work not only takes up the bulk of our time, but the best part of it; when we are most alert.  Furthermore, most managers have been spending at least 20 hours per week in meetings.

It’s no surprise that writers including Balzac, Dickens, Flaubert, Melville and Kafka have satirized the office and office workers.  T. S. Eliot, who once worked in a bank, saw of the crowds of commuters crossing London Bridge similar to Dante’s vision of hell: “I had not thought death had undone so many.”  Walt Whitman sneered of clerks as men “of minute leg, chalky face and hollow chest.”

In the last few decades, to make the experience of an office worker more palatable, changes have been made.  There are many different new designs-office buildings shaped like beehives, baskets, rocket ships, and fish.  Inside there may be ping pong tables and other amenities; many of them brightly colored.  Some companies provide free food.  Designer Thomas Heatherwick suggests that the office building needs to be an inspiring “temple in which to toil, places of beauty that we can admire, even love.”

Love may be going a little far, but there are some key advantages of going to the office.

Lucy Kellaway, who wrote a newspaper column about the “absurdities” of office life, has written about the “great artificiality” we embrace when we step into an office.  We become professionals.  That’s not exactly how it feels at home; particularly if the children are there, you are unshaven in sweat clothes and living in chaos. Ms. Kellaway says that “putting on our business clothes and going to the office allows us to become a different person.”

The escape to the office has been out of reach for many for almost two months.  Online encounters are fine and save driving time.  But, it’s not the same as being together in the office. The relationships and collaborations we have in person, whether with family, team members and clients, are different than those by phone or online.  Yes, humans need offices.  Certainly, there will be changes in how companies use offices, but working from home, for many, is not feeling quite as great as they thought it might be.

The situation reminds us of Mark Twain.  When asked by a reporter about his obituary which was mistakenly reported in a newspaper, Mr. Twain quipped: “The reports of my death are greatly exaggerated.”  No one can predict the future, yet it seems that while office space and use will continue to change, offices will not become extinct any time soon.

https://dwmgmt.com/