The CARES Act’s New $300 Charitable Contribution Deduction for 2020

The holidays are a great time to give back to people in need, especially if you are in a position to do so. If you are thinking about giving back this holiday season, you’re in luck, you can now get a tax deduction for it. 

The CARES Act, which was signed into law this spring, included a “partial above the line deduction for charitable contributions. This allows people who take the standard deduction — which is $12,400 for single filers and $24,800 for married-filing-jointly in 2020 — to claim a deduction of up to $300 in donations. You’d claim this tax break when you file your 2020 return next spring”, according to the IRS. 

Accordingly, fewer people also claimed a tax break for donations: 14.8 million returns claimed a charitable deduction in 2018, down from 37.9 million in 2017.

So what do you do once you donate? If you expect to take a write-off for the cash you’re giving to your favorite charity, make sure to keep the receipts for your records. According to the IRS website, You typically can write off a donation of $250 or more  if you have a written receipt or email of proof. 

At Sherman Wealth, we are very passionate about giving back to the community and supporting our local charities, especially around the holidays when we are appreciating all we are thankful for. We encourage those who are in a position to give back to find local charities to support and do as much as they can. If you have any questions about charitable contribution deductions or your portfolio, please contact us at info@shermanwealth.com or set up a free 30-minute consultation here. 

Below are some local charities we are passionate about: 

Nourish Now, No Kid Hungry, Manna Food Center, Jewish Federation of Greater Washington, So What Else, Montgomery County Coalition for the Homeless, JCC, and A Wider Circle 

 

Attention Robinhood Power Users: Most Day Traders Lose Money

It’s easy to get swept up in the rush of day trading and the ability to trade money at the tip of your fingers. And over the course of the last few months, we’ve seen “TikTok” investing and day trading increase in popularity, especially amongst young investors. But according to a CNBC article, despite what some might think, in reality day traders often have terrible track records. While we think investments and long term ownership is a great way to build wealth, we want to raise light to be careful when day trading and understand the tax implications and risk tolerance there. 

“I don’t confuse day traders with serious investors,” Princeton professor Burton Malkiel, author of “A Random Walk Down Wall Street.”  “Serious investing involves broad diversification, rebalancing, active tax management, avoiding market timing, staying the course, and the use of investment instruments such as ETFs, with rock bottom fees.  Don’t be misled with false claims of easy profits from day trading.” He also added, “Large increases in Robinhood users are often accompanied by large price spikes and are followed by reliably negative returns.” 

Why did that happen? The authors noted that most Robinhood investors are inexperienced, so they tend to chase performance. The layout of the app, which draws attention to the most active stocks, also causes traders to buy stocks “more aggressively than other retail investors.”

As young and inexperienced individuals begin day trading more and more, it’s important to spread the message about behavioral and investment biases that are present in investment management and financial planning, and oftentimes persuade one’s decisions about when and what to purchase and sell. Day trading may or may not have a piece in your portfolio, but if it does make sure to understand the whole picture and take your risk tolerance into consideration. Long term stock ownership and appreciation is a great way to build wealth but it’s important to be aware of the biases that are hidden within day trading. In our previous blog, we discussed ways to identify these biases and use that knowledge to make the best decisions on behalf of your investments. If you would like to discuss this day trading trend or behavioral biases that pertain to your portfolio, please reach out to us at info@shermanwealth.com and schedule a free 30-minute consultation here. 

 

Sitting on Cash? Here’s What To Do with It:

In our previous blog, we wrote about how a great deal of American’s households ‘ finances are in surprisingly good shape eight months into the pandemic. While this certainly is not the case for all households, we wanted to discuss options for those who may be sitting on an abundance of cash or have too much money in their checking accounts. 

It’s important to note that if you have more than you need to pay your bills in your checking account, you should consider putting away some of the cash in taxable investment accounts or savings accounts that accrue compounding interest. When choosing a savings account, consider banks that have higher interest rates than your standard bank, which currently have interest rates close to zero. Utilize FDIC-insured accounts such as Max My Interest or Capital One 360. With these record-low interest rates, it’s crucial to get your money into accounts that are maximizing and compounding your dollars overtime. 

Additionally, as the end of the year is just around the corner, think about checking off your financial planning to-do list, which may consist of funding your HSA and/or maxing out your 401(k) and IRA’s for the year. As mentioned earlier, if you have additional cash laying around, make sure to direct those funds into a taxable account.  If you are saving for your children or grandchildren’s college tuition, make sure to contribute to your 529 plans and inquire about all of your options there. Also, if you are considering end of the year charitable giving, make sure to contribute those funds as well. If you have any questions about your financial portfolio or end of the year planning, please contact us at info@shermanwealth.com and we are happy to set up a free 30-minute consultation with you. Lastly, check out our other blogs for more resources.  

 

The American Consumer Is Flush With Cash After Paying Down Debt

Almost a year into the pandemic, and we’re seeing American’s in pretty good shape financially. This may seem like a surprising statement given the current climate and widespread of lockdowns earlier in the year, but it’s true statistically. We know this doesn’t apply to all families in the same way, but it shows how strong the US economy is recovering from such a year year.  

During this time we saw very low mortgage rates, that may have had something to do with the Fed policy, but we also saw that more and more Americans are holding onto extra cash, which is something we wouldn’t think to be true. 

“Despite the surge in Covid-19 cases, economists project a 4% annualized rate of U.S. economic growth this quarter, though down from the prior period’s record gain”, according to a Bloomberg survey. The survey also showed that the pandemic has been financially challenging for working class families more than wealth ones, but they all seem to have been stockpiling cash. One reason savings and cash has remained flush could contribute to the fact that due to the pandemic, many people have not been spending on activities such as dining, leisure, and travel.

In all, it seems as though many American’s may have entered the pandemic in a strong financial position, which has helped them get through it. It’s surprising and great to see how after all this turmoil,  households are still remaining strong. It’s important to take advantage of situations listed above, especially refinancing, to help lower payments and in turn pile up your cash account. If you have any questions or want to discuss your portfolio or finances, please reach out to us at info@shermanwealth.com or schedule a complimentary 30-minute meeting here.

Americans Were Given the Coronavirus Option to Raid Their 401(k). Most Didn’t.

Despite the financial toll of the coronavirus pandemic, few American households have raided their 401(k) retirement accounts to make ends meet. Faced with the prospect of surging unemployment and a declining economy, Congress in March passed a law that temporarily allows Americans to use their retirement money today. However, unlike expectations, so far, there hasn’t been a rush of funds out of accounts. 

Research reported by the Wall Street Journal revealed that of those eligible to take money out of their accounts, many did not proceed to pull funds from their 401(k)s for various reasons. The withdrawal rates were much lower than anticipated back in April which raises an interesting topic regarding the state of the market over the last few months. 

Given the wild ride we’ve had the last 6 months with the coronavirus pandemic, the election, and now positive vaccine news, the markets have seen a great deal of volatility. It’s been interesting to see how these events have either helped or hurt people as they’ve been trying to gauge the market and in turn buy or sell off parts of their portfolio. While the coronavirus began to surge as the election played out, many may have panicked and sold off a great deal of their stocks even though after-the-fact stocks are the highest they’ve been following a presidential election in many years.   

Although this new law passed by Congress has allowed for the potential to pull funds from 401(k)’s, it’s been interesting to see the result and the fact that many have refrained, which could mean that some have had sufficient emergency funds to help them navigate these bumpy waters. It’s important to note that building an emergency fund is very crucial and comes in handy during unprecedented times. As explained above, it’s also incredibly difficult to measure the projection of the markets, which is why it’s important to stay calm and see your investments through the long term. If you have any questions regarding your 401(k) or other concerns about your finances, please reach out to us at info@shermanwealth.com or schedule a free 30-minute consultation here.

Brad Sherman Named to Investopedia Most Influential Advisors

One of the core reasons I started the company was because financial literacy and empowerment was lacking in the US education system and big firms made you believe unless you had a lot of investable assets, finding conflict-free financial advice was impossible. Investopedia is a fantastic website full of educational resources and we are honored to be included in their top 100 list of financial advisors who are breaking barriers and pushing the ball forward in terms of financial literacy and empowerment of financial education. Honored to be on the list among other great advisors, peers, and friends.

The Investopedia 100 celebrates financial advisors who are making significant contributions to critical conversations about financial literacy, investing strategies, life-stage planning and wealth management. With more than 100,000 independent financial advisors in the U.S., the Investopedia 100 spotlights the country’s most engaged, influential, and educational advisors. Brad Sherman has been named to this list for the third year in a row.

About Investopedia

Investopedia is the world’s leading source of financial content on the web. They help investors understand financial concepts, improve investing skills, and learn how to manage their money.

Disclaimers

Investopedia’s proprietary methodology focuses on awarding financial advisors who have demonstrated a top-of-the-industry ability to reach the largest and most diverse financial and investing audience. That reach is measured by the impact and quality of the advisor’s published work, public appearances, online following, and commitment to financial literacy across diverse communities. The 2020 Investopedia 100 also heavily weighed peer-to-peer nominations, highlighting the most influential advisors who were recommended by their peers. We receive no compensation from placing advisors on our list, nor does an advisor’s appearance on our list constitute an individual endorsement by Investopedia of such advisor. 

Awards, third-party rankings and other recognitions are not indicative of future performance. Awards and other recognitions should not be interpreted as a guarantee or suggestion that a client or prospective client will experience a certain level of results if our firm is engaged, or continues to be engaged, to provide investment advisory services, or as an endorsement of our firm by any past or present client. Neither Investopedia nor any of its associates are affiliated with Plancorp, none of the awards or other recognitions are based on client evaluations of our firm, and we have not made any payments for or in anticipation of any award or other recognition. 

Why Now May Be a Good Time to Consider a Roth IRA Conversion

The coronavirus pandemic and the upcoming election has created a great deal of uncertainty for investors. Income tax, furloughs, and job loss are lingering over the heads of many. As people are navigating these unprecedented times, they are becoming more and more unsure about where to and how much to invest. But it’s important to keep in mind that regardless of uncertainty in the market, it’s always a good time to invest for your future. 

The recent stock market meltdown may have dented Americans’ retirement savings, but there’s a silver lining: The downturn made one common retirement strategy less costly for investors.

The strategy, known as a Roth IRA conversion, involves changing a traditional, pre-tax retirement account — such as a 401(k) plan or a qualified individual retirement account — to an after-tax Roth fund. This strategy has some unique benefits when compared with its traditional cousin.

To do the conversion, savers would opt to pay income tax now, while markets are down and tax rates are lower under the Tax Cuts and Jobs Act. Investors who own traditional accounts defer income tax on their savings until withdrawing the money in retirement. Roth savers pay tax up front and don’t pay later. Having at least some Roth funds is beneficial for a few reasons, according to financial advisors. Retirees don’t have to take mandatory withdrawals from Roth accounts, unlike traditional IRA investors, who have to beginning at age 72. Taking Roth distributions could also decrease Social Security taxes and Medicare premiums, which are pegged to one’s taxable income.

In addition, there’s the benefit of tax diversification. Like the concept of investment diversification, tax diversification is important because it reduces the risk associated with unknown future tax rates, advisors said. Data suggest investors aren’t greatly diversifying their retirement accounts from a tax standpoint.

Traditional IRAs held around $7.5 trillion at the end of 2018 — almost 10 times as much as Roth accounts, which had $800 billion, according to the Investment Company Institute. Ultimately, investors should peg a conversion primarily to tax rates — if savers believe their tax rate is lower now than it will be in retirement, a conversion makes sense because it will cost less in the long run, according to tax experts. And, contrary to popular opinion, one’s tax rate doesn’t always fall in retirement, they said.

Tax rates are currently low by historical standards and are likely to increase (rather than fall further) in the future, experts said, given the eventual need to raise federal revenue to reduce the U.S. budget deficit, which is larger as a share of its economy than most other developed countries.

If you are considering a Roth IRA Conversion, please consult with your financial advisor  and your EA/CPA or tax preparer to ensure that this decision is the best for your financial situation. If you would like to discuss the potential of a Roth Conversion, please reach out to us and schedule a free 30-minute consultation.