Donating Appreciated Shares, Double Benefit of Small Changes, Don’t Buy Mutual Funds at Other Brokerages plus Community Wins
Donating Appreciated Shares to Charity
Last week in the newsletter I included Cody Garrett’s 24 most common mistakes he sees DIY investors make.
Jenny was curious for more info about this bullet-point from Cody:
“They give cash to charity rather than appreciated securities, whether they can itemize deductions or not.”
When you donate securities (stocks, bonds, mutual funds, and ETFs) to charity that have an ‘unrealized gain,’ you can donate the shares and not have to sell them.
[Note: ‘unrealized gain’ is the technical term for a simple concept: You bought it for less than it is currently worth, so when you sell it normally, you would report a capital gain on your tax return]
By donating appreciated shares, this helps you permanently eliminate the tax liability you would have had if you sold the shares.
Example:
You want to donate $1,000 to your favorite charity. You have shares of a stock that you bought years ago for $100 (your basis) that are now worth $1,000. You have an unrealized Long-Term Capital Gain of $900 in these shares (market value – basis)
Three logical options on what you could do to donate $1,000:
You can donate the shares and the charity gets $1,000 in shares that they can then sell for the cash value. You don’t have to pay tax ever on the $900 of unrealized gain. You would get a tax deduction for the full $1,000 charitable contribution if you itemize your deductions.
You can sell the shares and donate $1,000 to the charity. You would (in most cases) pay a 15% federal LTCG tax on the $900 of realized gains, so you’d have to pay $135 extra tax on your tax return. This $1,000 contribution really costs you at least $1,135. You also would get a tax deduction for the full $1,000 charitable contribution if you itemize your deductions.
You can donate $1,000 cash out of your bank account and not sell the shares. You would still have an unrealized LTCG of $900 on those unsold shares. You would get a tax deduction for the full $1,000 charitable contribution if you itemize your deductions.
In all cases the charity receives $1,000 in contributions, but in #2, you’d pay an additional $135 in Federal tax (plus state tax) on this sub-optimal choice and in #3 you’d still have a future tax liability when you sold those shares.
Two useful resources for more in-depth info:
ChooseFI Episode 483: Effective Giving for the FI Community
Fidelity Charitable’s article on Donating Stock to Charity
Small Actions, Big Results
Scott & Dinah wrote in:
“We embarked on a review of all of our expenses based on all awesome info we get from FI weekly.
We started with streaming services and chose Netflix, Hulu and Prime. We eliminated everything else.
Then we moved on to a review of all of our subscriptions (news, video games) and eliminated all of them.
Lastly, we reviewed our home and auto insurance. We switched providers and upped our deductibles.
Grand total of $437.25 positive cash flow monthly. All of it was low hanging fruit with no impact on our lives!”
Double benefit of this monthly savings:
Lowering spending each month by $437.25 means they need $131,175 less in total net worth to reach FI!
[Calculation: $437.25 multiplied by 12 months = $5,247 annual expenses they removed. Multiply by 25 to get the total number they would have needed in their FI net worth to cover $5,247 of annual expenses and that total is $131,175.]
Then if they take that $437 each month and invest it and get an 8% annual return for 30 years, that saved money is now worth over $650,000.
Always consider the double benefit of cutting expenses!
Don't Buy VTSAX at Another Brokerage
Two weeks ago, I included Tricia’s incredible “365 Days Better” email in the newsletter.
Some eagle-eyed readers wanted to make 100% sure that Tricia was not buying VTSAX at Fidelity, as she’d get hit with a $75 fee each time she purchased.
Thankfully she was not – her email just omitted that she setup the VTSAX purchase at Vanguard, but this is the perfect time to remind you:
Please do not buy another company’s mutual fund at a different brokerage. You almost always will get hit with a needless fee.
In today’s world, you should nearly always purchase an ETF instead of a mutual fund, as the major brokerages (Vanguard, Fidelity, Schwab) charge $0 in fees and commissions on the purchase of ETFs.
If you’re adamant about buying Vanguard, just buy their ETFs ‘VTI’ or ‘VOO’ and you can do that fee and commission-free at these other brokerages.
ChooseFI Community Taking Action This Week
Our 1% better this week was that my partner fixed the condenser that powers our mini split heat pumps for a $175 part and 40 minutes of his time vs. the $1600 we were quoted by the company that originally installed it (and they said this was about 50/50 parts & labor).
- Sue
My 1% better is that I just moved between states and used the transition as an opportunity to join a CrossFit gym - largely after hearing you talk about it on the podcast a few years ago. Thank you for the positive impact you have had on my life and those of our FI community.
- Adam
I just wanted to thank you and offer my (maybe) 10% better? I was introduced to your podcast by my 9-year-old (at the time) goddaughter, Analise. You had her on an episode about young entrepreneurs with her Creative Card designs business that she built after attending a kids' camp to start your own business. Well of course I listened to that episode and then left the podcast in my library and went back to listening to my True Crime podcasts. I was in a tough spot financially, but things would only get worse before they got better...
I happen to work in education under a teacher's contract though I'm a school psychologist, so according to the government I am a teacher. I'm a 48 year-old (nearly 49) single mother to a 29 yo (independent thankfully) and 14 yo daughters. In the past year things got really bad when my younger daughter's father stopped giving me any child support. Anyway some time about 6 months ago or so I started listening to your podcast mostly to the college hacking ones since 14 yo is a freshman in high school and I know I need to prepare myself early.
Long story short, I opened a 457b (which I didn't know existed for the last 21 years I've been in education) and put it in Fidelity FSKAX. There's not a lot going into it right now, but I'm about to embark on the Ultimate HOUSE HACK and will be maxing out both the 403b and 457b and Roth IRA beginning September if all goes to plan (including catch up as I turn 50 in 2025).
This will hopefully accomplish 3 goals: 1) lower my AGI for the FAFSA's two-year look back which will be 2025 in my daughter's case, 2) pad my retirement accounts which currently sit at about $130k (which is way below what it should be at my age), and 3) spend down the cash I receive from house hacking in lieu of my paycheck which will be going entirely into retirement accounts so that when I complete the FAFSA in 2027, we will likely qualify for aid somewhere. My daughter is also an extremely high-achieving student so there may be merit options as well. I've also had a conversation with her about choosing trade school or other options in lieu of college should she choose that.
I did take Parent Plus loans for my older daughter 10 years ago which I started to pay back in 2018. I could not afford the payments required to participate in PSLF until now. I missed the recount of OCT.22 because of that. But they are currently doing one last recount so I applied for PSLF and consolidated to the type of loan that can get forgiveness. I am hoping when the recount is over in July that I will find out I only owe 4 years of payment and the rest can be forgiven. It's about $47k total, so not horrendous and if the recount doesn't work for me, my house hack may offer me the opportunity to just pay it off in lump sum this year anyway.
I also started to talk to my daughters a bit about FI. I've made my older daughter promise that if I teach her nothing else that the magic of compound interest should be the one lesson she learns.
Sorry for writing so much, but I think right now I'm 10% better and hopefully by September I'll be 50% better and it only goes up from there. Oh! I can't believe I forgot! I also started yoga and swimming which have added value and improved my mental and physical health. My plan when I leave education is to slow travel Europe for a year so I need my health!!
- Amy
My 1%+ better this past week was that I got a shocking 37% increase in my salary, effective next week!! Apparently, my current employer wanted to retain me that bad after I got an offer elsewhere for a lot more than what I was making… My new salary will be over 100k for the first time!!
I'm only 26, and thanks in part to ChooseFI and other's in the FI space, I've prioritized maxing out my 401k and IRA since the start of 2021. I opened and funded a brokerage account with Vanguard 2 weeks ago and plan to invest the extra income I'll start earning in there. (100% VTSAX of course!)
- Javier
My 1% better this week is meal prepping! I have been dragging my feet for YEARS on this process, but after doing this for a few months I feel healthier, we have saved money, and we have so much more time to just relax and spend time together in the evenings rather than scrambling to find food for the next day.
- Jessie
My 1% better this week was saving money on my morning coffee. I'm a huge fan of Cameron's coffee and at my local grocery stores, the ground coffee is usually $8-10 per 10 oz bag. I felt this was too high for a week's worth of coffee, so I decided to check out the Cameron's coffee website, and lo and behold, they sell directly to the customer and sell it for half the price, $4.50/10 oz bag. With free shipping for $75 orders, I got 3 months' worth of coffee for half the price it normally would have been if I hadn't shopped around to find a better deal.
- Jena