Author: Akram Hassan

Tax Benefits and Community Impact of Donating

Written by Akram Hassan on January 11, 2024. Posted in Financial Planning, Wealth Management.

Introduction:

In the spirit of generosity and community support, gifting and donating to local nonprofits brings joy to those in need and offers financial perks for the giver. In this post, we’ll explore the dual benefits of contributing to your community and some of the tax advantages of charitable giving.

What Do Local Nonprofits Do:

Local nonprofit organizations play a fundamental role in supporting thriving communities by delivering essential economic stability and mobility services. Additionally, they enhance communities in various ways. Often, leaders of nonprofits act as the voice of the individuals they serve by advocating and bringing forward awareness. They provide a platform for collective efforts toward the common good, translating shared beliefs and aspirations into tangible action. These organizations give substance to our most ambitious dreams, ideals, and noblest causes.

Currently, an estimated 1.3 million charitable nonprofits in the United States are engaged in activities that span feeding, sheltering, educating, healing, enlightening, inspiring, and nurturing individuals across all age groups, genders, races, and socioeconomic statuses. Their impacts are felt throughout the country. These nonprofits actively promote civic engagement and leadership, stimulating economic growth and helping our communities thrive daily.

The Tax Advantages of Gifting and Donating

Understanding Charitable Deductions:

A charitable donation is a gift of money or goods to a tax-exempt organization as defined by the IRS Section 501(c)(3) that can reduce your taxable income. To claim a deduction for charitable donations on your taxes, you should have donated to an IRS-recognized charity and received nothing in return for your gift.

Tax-Advantages For Giving:

You can generally deduct up to 60% of your adjusted gross income via charitable donations. However, the limit may vary depending on the type of contribution and the organization. The deduction limit applies to all donations made throughout the year, with excess contributions eligible for deduction over the next five years through a carryover process. Make sure to consult your tax professional, as there are variables that may affect your specific strategy, and they will ensure up-to-date IRS rules.

Year-End Planning:

Strategic giving at year-end is crucial for maximizing tax benefits. This is commonly seen with seniors donating their required minimum distributions at the end of the year. Instead of scrambling at year’s end, you can contribute to your preferred local community nonprofits throughout the year with proper future planning.

Documenting Your Charitable Contributions

Keeping Detailed Records:

Maintain records of all tax-deductible donations, including bank or credit card statements and receipts from the charity. For automatic deductions through employers, keep W-2s or pay stubs indicating the amount and date of your donation. IRS rules may not allow a deduction for the value of your time, but expenses related to volunteering can be counted as tax-deductible donations. Keep track of expenses directly connected to volunteer work, such as mileage to charitable events, and retain receipts for potential audits. Consult your tax professional for the most accurate advice regarding your unique financial plan.

Additional Documentation:

Obtain a written acknowledgment from the charity for cash or property donations exceeding $250. If deducting at least $500 in noncash donations, complete Form 8283 and attach an appraisal for items exceeding $5,000 in total value.

Conclusion:

In conclusion, donating provides a powerful avenue for individuals to impact their local community and taxes positively. By understanding the tax advantages of charitable giving and recognizing local nonprofits’ significant role in community development, individuals can experience the joy of giving while contributing to the well-being of those around them. Remember, this article is meant to inspire curiosity, so consult with a tax professional for personalized advice based on your specific financial situation.

How I Became Obsessed with Financial Markets

Written by Akram Hassan on December 7, 2023. Posted in Investment Management, Wealth Management.

This journey traces back to when I was about 13, circa 2002, working at my parents’ restaurant and reading newspaper stock reports. During this time, satellite radio was a relatively new concept. I did a little research on it, contemplating how we lose radio signals while driving between cities on family vacations. We were road warriors, often going to Orlando or Miami from Clearwater, having to find new music stations or endure static for an already scary drive through Alligator Alley.

With satellite radio, the connection loss wouldn’t be a significant issue. Though many cars lack the necessary capabilities, I believe that as technology evolves, it will become more widespread. XM Radio became the first publicly traded company I followed. When I asked my parents about investing and how to buy shares, I received no guidance. This wasn’t Their fault; they were regular, middle-class American immigrants without exposure to capital market investing.

At that time, I thought eventually, every car would come equipped with satellite radio, and traditional FM signals would be obsolete. As a 13-year-old, I was about 50% right. Not bad, huh? I spent days reading the stock and business section of the newspaper, building a watchlist in my journal while tracking gains and losses, and essentially engaging in paper money trading. However, my interest quickly faded when the FIFA World Cup started, diverting my focus to typical teenage pursuits.

Fast forward a few years to when I started earning a livable wage and had to manage things such as buying groceries. As a private first class in the army deployed to Afghanistan, I had no “real” bills. Like any good soldier pursuing peak physical condition, my budget allocation revolved around vitamins, diet, protein, and pre-workout supplements.

In 2012, with cash in the bank earning minimal interest and CDs offering little, I contemplated buying property in Brazil, anticipating an increase in GDP and economic stimulation during the years leading up to the 2014 FIFA World Cup. Having lived through the 2008 financial crisis in Florida, I was aware of property price fluctuations. I remembered the market recovery and thought it was an excellent opportunity.

However, after researching how to buy property in Brazil, I realized it was impractical with the funds I had. Property prices in Brazil were higher than expected, and lending was impractical. Add on the logistical nightmare it would have been to manage. Exploring alternative options, my research eventually led me to the stock market, where I discovered ETFs (Exchange Traded Funds). Buying a basket of assets invested in the Brazilian economy seemed brilliant.

It was easy to open a USAA or Fidelity investment account and invest in a Brazilian ETF’ focused on real estate and utilities supporting residential middle-class living. My optimism took a negative hit when the FIFA World Cup passed, and Brazil’s leadership faced major investigations, resulting in government officials being jailed for corruption. The government and oil companies were accused of stealing from the people, leading to soaring unemployment and poverty levels.

Consequently, my Brazilian investments dissolved, teaching me a valuable lesson about the necessity of an exit strategy and how geopolitical climate can influence market performance. This experience hooked me into the financial markets. Alongside my Brazil investment thesis, I bought Amazon shares at less than $226 per share. Still a rookie self-learning investor, I was learning to differentiate short-term swing trading strategies versus long-term buy and hold.

Hien’s sight is always 20/20. If I had known then what I know now, precisely, long-term investment strategy following the Warren Buffett approach, I would still be holding Amazon stocks today. After an est. 80% return. I thought it was enough and didn’t want to get greedy, so I sold my stocks, taking profits. I also divested from a few other investments to balance the portfolio. As an aside, I can say I did learn about tax loss harvesting early on!

At this point, I started to share my knowledge and teach my fellow soldiers budgeting, investing, and the importance of contributing to the TSP (Thrift Savings Plan, the government’s 401k equivalent). I hoped they, too, would leverage compounding interest over their military careers. This reignited an old interest, prompting me to return to school to pursue a finance degree. Today, I proudly share that I’ve turned a childhood interest into a company that assists individuals and companies with financial planning, investing, and making sound financial decisions.

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Student Loans – A Tailored Approach to Student Loan Repayment

Written by Akram Hassan on October 1, 2023. Posted in Financial Planning.

A world with student loan repayment can bring out many emotions, from the excitement of starting a career, to the anxiety of facing it with debt. This journey is pivotal to your financial future. Taking a proactive approach by creating a plan will empower you to manage your student debt and help you avoid common financial missteps. We’ll explore some essential tips to help you navigate the road ahead with student debt.

Choosing The Right Repayment Plan

It all depends on the long-term objective and what’s best for your budget, lifestyle, and goals. Every repayment option has its pros and cons. Some can be very advantageous depending on your goals and where your career path is taking you. The important note to make is to sketch out a current budget, know the pros and cons of the different repayment options that are available to you. Make sure to spend some time researching the various options.

Balancing Debt and Investing

It depends on your career path, and tradeoffs. Think interest rate arbitrage. Something to think about is what are the alternative investment options available to you and calculating what your total net worth will be on both options of paying off the loan early or using the budget surplus to invest in other opportunities.

Key Consideration During Repayment Process

As you are repaying the loan, have a conversation with your tax preparer and make sure you are taking advantage of any tax deductions.

Ensure you are aware of employer benefits. During your search for an employer ask about student loan repayment benefits, and make sure to use that information in your total compensation calculation.

The biggest mistake I’ve seen people make throughout my career as a financial advisor, is people not asking for help from professionals and just not understanding how many of the repayment programs work. Ensure to consult financial professional’s such as CPA and financial planners. Building a plan early will allow you pivot as life changes.

In Summary

Make sure to seek help, you are not alone in this journey. Investing in a financial plan early on will help you avoid common mistakes previous generations have made. Spend some time and do the research on all the options available to you. Everyone is different, and so should be your financial plan. The information is out there, and the options are endless so make sure to develop a tailored financial plan that is unique to your goals. Student loans are only a steppingstone to financial success that has helped you grow your net worth over time.

Have a 401k? Ask these questions!

Written by Akram Hassan on September 9, 2023. Posted in Employer Retirement Plans, Retirement Planning.

Back in our grandparents’ days, many people would work for the same company for about 25-35 years. Retiring from such companies came with the assurance of a pension plan, providing retirees with a predictable monthly income based on their years of service. Nowadays we’ve shifted to the modern evolution of the traditional pension plan that we commonly know as the 401(k) plan. This modern approach grants employees more control over their retirement savings and is more cost-effective for the employers. However, let’s skip the history of the 401(k)s and concentrate on the essential questions you should be asking if you currently have one or are planning to start one.

The questions vary depending on various factors including your financial plan, goals, and life cycle stage. Therefore, consider this as a simplified guide based on the three common life cycle stages. It is crucial to consult a financial professional before making any changes in decisions to your financial and investment strategies.

While some questions overlap across the stages, they offer unique insights from different angles. For instance, understanding costs and comprehending the matching contribution policy are crucial in all phases. Let’s explore each stage separately, beginning with the fundamentals.

The fundamentals, aka the basics:

Ensure beneficiary information in the plan is current and accurate. It’s good habit to check these on a yearly basis, as life does change. This ensures that your assets go to the intended recipients.

Understand the costs associated with your plan. This will help you compare and evaluate future alternatives. If you have older 401(k) accounts or IRA’s, use cost analysis in your consideration to make financially sound decisions of consolidating assets in your current 401(k) plan.

Find out if there is a Roth option. We will discuss its significance in each life stage.

Explore the possibility of taking a loan against your 401(k) and familiarize yourself with the terms. This can enhance liquidity needs of your financial plan and gives greater access to your net worth.

Understand what is the company matching policy or revenue sharing plan if any. This can impact how much you contribute to the 401(k).

Learn about the vesting schedule; many companies use this to retain talent. If you plan to switch jobs and your company’s profit sharing takes time to vest, consider when those assets will become yours. Leaving before vesting means forfeiting those assets.

Understand your investment options and how to adjust them. Some plans offer advised and managed strategies, which may or may not be worth the additional cost. Your risk tolerance may change over time, so periodically review, and adjust your investment strategy according to your up-to-date goals.

The Accumulation stage:

In this stage you may be just starting your career or have more than 20 years to retirement. This stage is also known as the high growth stage. The more you know now the more suited you will be to manage and make decision on your 401K through growth within your profession and career.

Know the basics! Begin with the fundamentals mentioned earlier.

Having a Roth option in the 401(k) can help you accumulate tax free distribution in the future. Making Roth contributions could make sense early on if you are starting your career. As your tax brackets will most likely increase as your income grows. Dollars invested today at a lower tax bracket will grow tax free and be distributed tax free including the gains. So, your total tax cost per dollar today may be a cheaper cost in this method. Again, entirely dependent on your individual long term tax strategy.

Knowing the terms of taking a loan against your 401(k) can provide financial flexibility and give you options when making strategic investment moves. Say you need an additional 10K to qualify for a needed loan, or to get access to an investment that is time sensitive. You can access the funds through the 401k and then repay them on your next bonus or through future payments into the plan.

Understanding the investment option and how active management strategies work versus passive strategies that track the index. In the early stages of accumulation, you have time on your side. Understanding how the cost of these various investments affects your returns over a longer period can save or even add a little more than a few bucks. It’s important that the investments in the 401k match your financial planning goals.

Preservation Stage:

This stage typically applies to mid to late-career individuals. You have accumulated assets, and maybe even in a higher tax bracket than when you were a few years ago. The thought of retirement is becoming more real, and the 401(k) is one of your primary sources.

Know the basics! Begin with the fundamentals mentioned earlier.

Strategic Roth Conversions is the most under-utilized strategy that I have seen in my experience. Consider the strategic use of Roth conversions of part of your long-term tax planning strategy especially during market downturns. This is a great time to engage both your financial planner and CPA. Understanding conversion triggers and building those into your plan will give you a proactive approach to paying Uncle Sam a little less of your hard-earned income.

Understanding how to take a loan again your 401(k) or access the funds inside the 401(k) can help you plan for emergencies in times of unexpected financial needs.

Risk tolerance and investment allocation. Preservation at this stage shouldn’t be overlooked. Although some of the portfolio should still have growth exposure but balance and investment towards a goal should be key. Make sure to align your risk strategy with your current plan objectives.

You might be in one of the highest income brackets of your life at this stage. With a holistic long-term tax strategy, a 401(k) plan can be pivotal to lowering tax exposure. Another great time to ensure your Financial Planner and CPA are working homogenously.

Transfer or Retirement stage:

If your plan offers an annuitization option, conduct a cost-benefit analysis to determine its suitability for your retirement goals.

Adjusting the investment strategy to meet distribution requirements while ensuring longevity of the assets.

Building and developing a comprehensive distribution strategy to minimize tax penalties. Particularly in relation to Medicare costs. Strategic Roth conversion strategies could be implemented in this area as well to manage long term retirement tax planning.

401(k) or IRA, evaluating whether it makes sense to leave your funds in the 401(k) or roll over into a self-managed Individual Retirement Account (IRA).

Preparing for required minimum distributions (RMDs), which are mandatory withdrawals from retirement accounts after a certain age.

Consider your estate strategy, including how assets will be distributed to heirs, whether through direct beneficiaries or strategic trusts. Understand the tax implications of inheriting a 401(k).

In summary, managing your 401(k) effectively is crucial for securing your financial future. Whether you’re just starting out or approaching retirement, asking the right questions, and making informed decisions about your plan can have a significant impact on your financial health. Collaborating with various financial professionals is essential at every stage to optimize your retirement strategy. By staying proactive and informed, you can maximize the benefits of your 401(k) and ensure a comfortable and secure retirement.

Divorce & Financial Risk: Risk Tolerance Takes an Unexpected Turn

Written by Akram Hassan on August 8, 2023. Posted in Divorce Financial Planning.

Divorce is a life-altering event that has many effects on lifestyle including emotional well-being and financial stability. There is a significant threatening trend observed after divorce that is the paradoxical change in financial risk tolerance among both men and women. Despite facing a significant change in standard of living, individuals tend to engage in riskier behavior financially, socially, and with lifestyle choices. This article dives into some of the reasons people engage in riskier financial behavior and the importance of understanding and managing risk tolerance post-divorce.

Post-divorce standard of living change

Following a divorce, statistics reveal that women, on average, face a 30% decrease in their standard of living. For women above the age of 60, this percentage rises even higher to 45%. On the other hand, men experience a 10% reduction in their standard of living after divorce, with the percentage increasing to 21% for men above 60. While at the same time on average credit card spending and debt is driven higher, while budgets get stretched. In addition, investment accounts tend to take on higher risk with the idea of chasing returns when in fact the risk level should be lower to account for the change in lifestyle. These significant changes in financial standards cause major stress points, leading to the question of why risk tolerance increases amongst those who get divorced instead of decreasing.

Understanding the underlying risk drivers

The viewpoint of newfound freedom and “being free to do what I want, when I want” often develops after a divorce. This mental shift fuels a willingness to take greater risks, leading to riskier financial decisions, increased spending, and indulgence in social and lifestyle behaviors. Behavioral finance and social studies theories have shown that individuals tend to exhibit a higher risk tolerance after divorce, contrary to what might be expected given the reduced means of a single-income household.

When we look back, marriage is often viewed as a safety net when it comes to financial risk. Dual incomes provide stability and a buffer against unforeseen financial setbacks. The ability to combine resources enables couples to take on more investment, and lifestyle risks confidently. However, in the aftermath of divorce, the safety net disappears, leaving individuals vulnerable to financial uncertainties and the need to reassess their risk tolerance.

Furthermore, the act of divorce itself is recognized as risky behavior, with the outcome being unknown and potentially life-changing, compared to staying in the marriage continuing the status que. Engaging in one risky behavior can trigger a domino effect, making individuals more tolerant of risk in other aspects of life. Additionally, the emotional toll of divorce may lead to coping mechanisms that involve impulsive decision-making, further contributing to accepting and seeking a higher risk tolerance. This higher acceptance of risk levels is also translated to investment accounts, when in fact it should be the opposite.

Adjusting the risk to compliment lifestyle

Understanding the paradoxical shift in risk tolerance after divorce is crucial for financial planning and management. Divorced individuals should take the initiative to reassess their risk tolerance levels, align them with their new financial reality, and set appropriate financial goals. Seeking guidance from financial advisors can aid in making informed decisions and creating strategies to manage risk effectively. Notably when it comes to investment and portfolio allocation. Investments, such as 401’k, IRA’s, and brokerage investment accounts should have an appropriate risk allocation that matches the financial goals, and compliments lifestyle.

If the lifestyle is engaged in “risker” behavior, then the portfolio should take on more of a conservative stance. While if the lifestyle is conservative then that allows for increased risk in the investment accounts. The ability to endure volatility is safer in the short run with a stable and less “risker” lifestyle. While many unforeseen hardships may happen in a “riskier” lifestyle, thus the investments need more predictability, also known as a lower standard deviation.

Always in control

Divorce brings on significant financial challenges, and understanding the changes in risk tolerance that follows is essential for long-term stability. Despite facing a reduced standard of living, individuals tend to adopt riskier financial behavior, which can exacerbate financial hardships. By recognizing this paradox and actively managing risk tolerance, divorced individuals can make sound financial decisions, safeguard their assets, and embark on a path to regain financial security and independence. Seeking professional advice and building a solid financial plan are essential steps towards navigating the uncertainties that lie ahead after divorce.