Listen to the podcast below to hear Jill talk about
- Schwab TD Ameritrade Conversions
- Donor Advised Fund (DAF)
- Jill’s Good News Segment
I wanted to give you a quick update on the TD Ameritrade Schwab activity. It is being referred to as SchwabiTrade. Beginning next summer, clients will start receiving information about the merging of systems from Schwab. For instance, Schwab uses a different account number sequence. Their account numbers are 1234-5678. The Schwab and TD Ameritrade systems will run in parallel during the summer. Over Labor Day weekend, the TD Ameritrade client and advisor system will cease to operate and all activity will be on Schwab only.
I want to move onto a discussion about charitable giving. We’re getting more questions about using donor advised funds or DAF for short. As a result, we’ve been reviewing the various options. First, let’s talk about the mechanics.
An asset is donated into a DAF. In return, the donation may be deductible from your income tax if you itemize. The money does not have to be donated to a qualified charity immediately, but rather can be invested to grow over time and you can make donations to a charity at your convenience.
Another selling point for DAFs is you, personally, don’t have to worry about sending a check to the charity. Rather, the custodian of the DAF handles the transaction.
Before making a donation, coordination with your tax professional is a must. Usually, donating appreciated assets is the most frequent method, as opposed to cash.
For example, I bought 150 shares of Berkshire Hathaway stock in 2003 for $7,218. The current value of the shares is $40,052. If I sell the 150 shares, I would have a capital gain of $32,834. Depending upon my tax situation, the $32,000 might require a tax payment, federal and state of over $10,000.
Alternatively, if I donated those 150 shares to a DAF, my taxable income might be reduced by the fair market value of $40,052. Again, you must check with your tax professional to work on the math. This also assumes you want to make a charitable contribution.
Once the shares are in my DAF, I can sell them. No tax consequences; donate some of the money to a qualified charity and invest the rest for another year. With the standard tax deduction being so high, one of the tax strategies is to bunch your donations into a calendar year so you can itemize and take advantage of the donation on your tax return.
To give you a flavor of their popularity, Schwab Charitable in the first six months of 2022, granted $2.1 billion to charities, a 16% increase over the same timeframe in 2021.
If you decide to donate to a DAF after talking to your tax professional, the next question is which DAF. We reviewed Fidelity, Vanguard, Schwab and American Endowment Fund or AEF. TD Ameritrade uses AEF as does Schwab. For those clients already with AEF, it will transfer to Schwab as is when the conversion takes place next Labor Day.
Schwab and Fidelity have two flavors of donor advised funds – core and professional, For the core there is no minimum to open a DAF account. Grants to charities have to be a minimum of $50. Schwab and Fidelity have what is called pre-approved investment pools that you use to establish a portfolio. While not all the approved funds are their own funds, most are.
For Schwab and Fidelity if your DAF account is over $250,000, you can customize the portfolio without being required to use the pre-approved investment pools.
Vanguard and AEF have a $25,000 minimum.
Vanguard requires contributions to be $5,000 minimums and a grant must be at least $500. Vanguard also has pre-approved investment pools but a more limited number than Schwab or Fidelity.
AEF is a bit different because they are not a custodian. They manage no funds so don’t earn money on the fund expenses as Schwab, Fidelity and Vanguard do. AEF allows the financial advisor to invest in any fund. They require $25,000 to open a DAF and a minimum ongoing balance of $10,000. AEF requires at least $250 for a grant.
This is a high-level review of each company. They do have other differences when you get into the details. Each company has an annual admin cost and funds have expense ratios.
If you would like to discuss opening a DAF in 2023, please don’t hesitate to discuss it with us.
I wanted to spend a few minutes discussing the potential recession. I recently read an article by Vitaliy Katsenelson. His website is ContrarianEdge.com. While I don’t know if his thoughts about an impending recession are right or wrong, I really liked his analogy which I’d like to share.
He wrote: “Recessions are like forest fires – small ones are healthy for the forest. However, the longer you suppress fire, the more dead material the forest accumulates. Eventually, when it does pay a visit, it is more devastating and its effects are more long-lasting. “
He believes we will have a steep recession while many others believe it will be modest. Recessions are a normal part of the business cycle and can sometimes be beneficial as some excesses in the economy may be corrected.
However, they are certainly stressful. We’ll have to wait and see. If you’d like to discuss your portfolio, please don’t hesitate to contact us.
Now for some good news.
Rolls-Royce and EasyJet formed a partnership in response to the UN initiative – Race to Zero with the goal of zero emissions for operations by the end of the century. Rolls-Royce and EasyJet are working on green hydrogen fuel for jet engines. They had a successful ground test on an early concept engine made from wind and tidal power reflecting zero emissions.
For those of you who are ketchup lovers, you’ll be glad to know Heinz spent 185,000 hours or 8 years at a cost of $1.2 million to develop a bottle cap that can be completely recycled. The current one only partially recycles. It took 45 iterations to get it so the well-known spout valve works as well as the current one.
Over 1 billion tops end in landfills. Heinz said the new top could be used on other products. They plan to share the design with other companies. No rollout date was announced.
The staff at Financial Connections hope you and yours have an enjoyable holiday season. We are all looking towards a prosperous 2023.