Wednesday, March 12, 2014

How to pay tithing with stocks (and why you should)

We've paid tithing with stocks for the past several years. It's awesome. I'll never go back to the traditional way of doing it. I thought I'd share how we do it, along with some general thoughts on investing.

Here's how I'd prioritize my investments over the course of the year:
  • Contribute up to 401(k) matching limit
    • My former employer matched 75% of my contributions on the first 8% of my contributions, so I'd have to be an idiot to turn down free money (like I did when I was a lowly intern....I was an idiot!)
  • Then max out your Roth IRA for both spouses (currently $5.5k/year per person, or $11k per couple)
    • If you have a high marginal tax rate, it might make sense to do a traditional IRA instead, but I really love the flexibility of the Roth; particularly the ability to touch the principal without penalty.
  • If you're in a high tax rate, max out the 401(k) (current contribution limits are $17,500 / year)
  • Think about funding a 529 account, which is structured similarly to a Roth, but it's for education purposes.
  • Invest the rest in taxable accounts
    • If the market goes up, pay tithing with the stocks. Don't realize the gain (meaning sell the stock). Simply transfer the stock to the church. Instructions on how to transfer the stocks are found here: http://www.ldsphilanthropies.org/planned-giving/ways-i-can-give/assets/donating-stock.html
      • If you don't itemize your taxes, it's still a sweet gig. However, if you do itemize, this is a really sweet gig. Not only do you avoid the taxes on the investment gain, but you actually get a tax break on the investment gains as you donate. For every $1 in gains you donate, you get a $1 tax deduction, and hence pay $1*(your marginal tax rate) less in taxes if you itemize.
    • If the market goes down, sell the stocks to realize the capital loss. This loss is deductible from your taxable income (http://www.irs.gov/uac/IRS-Reminds-Taxpayers-They-Can-Use-Stock-Losses-to-Reduce-Taxes), so the loss only costs you LOSS*(1-marginal tax rate). Of course you still lose money in a down market, but it's less painful than realizing the full amount. Once you realize the loss (i.e. sell a stock which has gone down in price), you can do what you want with the money. Pay tithing with the cash or reinvest the money by purchasing shares again (at a lower cost basis.....or the purchase price which is used when computing the tax liability........

      taxes owed = investing tax rate * number of shares * (price when selling - price when purchased)

      number of shares * (price when selling - price when purchased) is referred to as the capital gain. ). 
    • Besides the tax benefits of this approach, you save brokerage commission fees, which is nice. But if you invest in no-load mutual funds, like I do at Vanguard, these trade commission free anyway, so I guess it's a moot point.
      • Oh yeah....if you donate stocks and have to realize any capital gains (or losses), then filing taxes is simpler. Turbotax requires you to pay more money to deal with capital gains/losses. However, TaxAct does not....it's included in the basic (free) TaxAct version. I think this is sufficient to push me to TaxAct from here on out. (Though as a student I qualify for turbotaxes low income edition (https://turbotax.intuit.com/taxfreedom/) which handles this nicely without any fees).
So that's my two cents on paying tithing with stocks. It's easy.

[So what should you be investing in? Vanguard's 2040 Target Retirement Fund (or equivalent from competing brokerage). That's it. Select the year of the retirement fund to match your projected retirement year. If you want to retire in 2030, chose the Target Retirement 2030 fund..]

So the simple mathematics of regular saving, tax planning, minimizing investing costs, investing in a well-diversified and low-cost portfolio (achieved by the single fund mentioned above), and compound interest will make these modest annual contributions balloon into a fortune over time.

And how do you produce these elusive savings? Contrary to popular belief, the above strategies are not only attainable to those making over $100k/year. I apply these principals while on a lowly grad school stipend, and we pack it away. We simply chose to live differently than 99% of the US by spending money strategically (frugally). Think I'm pulling your tail? here's the thoughts of a dude who retired at 30 by applying the same simple math: http://www.mrmoneymustache.com/2013/02/22/getting-rich-from-zero-to-hero-in-one-blog-post/

1 comment:

beanland said...

+1 to pretty much all of the above. We're hooked on handling charitable contributions this way. It ends up being simple and a huge tax savings for us.