Bang For Your Buck: Tax Advantaged Investment Strategies
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Bang For Your Buck: Tax Advantaged Investment Strategies
Owaiz Dadabhoy: Thank you all for joining our presentation today. What I’m going to do, like I do every time, is I have a top list of items that I’d like to share with you before we get into the presentation. This will be about two or three minutes, and this allows other people to continue to join. Let me go ahead and do some of that. Since we’re in the midst of tax time I’ll give you a top 8 list of overlooked tax deductions and tax credits. So, we’ll start with number 8 and of course not all of these are going to work for you. Some of them might work; some of them might not. You might be taking advantage of all of them or maybe you can’t. But number 8 is refinancing mortgage points. So, if you refinanced a mortgage or, you know, Islamically principled, or however you did it, and they charge you points up front. So, they might have charged you 1% or 2% up front to lower your rate or some other reason. You can deduct how much you paid, and you can deduct it over 30 years. So, if you paid $3,000, you’d be able to deduct $300. What would that be? About a hundred dollars every year, right? For thirty years. So, it just depends on how much you paid in points. It might have been a lot more than that. So, keep that one in mind. It’s neglected because it’s over 30 years, so they forget that they even did it. Number 7 is the state tax that you paid on last year’s tax return. If you ended up paying more tax at the end, you may be able to deduct that, so check on that one. Number 6 is the earned income tax credit, and the IRS mentions that 25% of taxpayers who are eligible are not taking this tax credit. So, hopefully you’re not one out of the four and you’ve been taking that if you qualify for it. Number 5 is the child and dependent care tax credit. This one is easy to overlook. If you pay your childcare bills through a reimbursement account at work. So, the law allows you to run up to $5,000 of these kinds of expenses through a tax favored, reimbursement account at work. So, if you’re having your kids go, your young children, go to some type of day care, check in with work to see if they have this kind of account for you. Number 4 is moving expenses to take your first job. But it’s only for the first job. If you’re moving for your second or third job or any other job, you can’t deduct those, but you can if you’re moving for the first time. And then, number 3 is student loan interest paid by the student. You can deduct up to $2,500 worth of interest. And hopefully we don’t have that, but if that’s the case then you can take a tax deduction on that. Number 2 is out of pocket charitable contributions and also, something that is overlooked by many people, is the miles driven for charity. So, if you’re going to a food pantry distribution every month and it’s twenty miles away so you have 40 miles that you’ve done this. Or if you’re going to board meetings that you’re a part of. Or any other kind of... you’re going to a beach cleanup. That’s charitable activity. You get to deduct 14 cents per mile. So, you can, you know, keep track of that or estimate it down the road. Number 1 is state sales tax. So, this write-off is going to make sense if you’re one of those people that lives in a state that does not have income tax. There are only a few of those states: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. So, you must choose between deducting state and local income taxes or state and local sales tax. So, for most citizens of income-taxing states, the state and local income tax deduction is usually the better deal. Not all items, as I mentioned, that are part of my list, apply to your specific situation, but what you will clearly see is that if you don’t know about any of these or if you feel like you’re overlooking these, definitely check in with a professional to get your taxes done. Well, welcome to our monthly webinar. This time we are focusing on the topic of taxed advantaged investment strategies. Today we are going to explore specific account types which will allow you to invest and save for your financial goals while doing so in a more tax-efficient manner. Why should we pay more in taxes than we need to? We all pay our fair share, but the goal is to not pay a dollar over what we need to pay. I’m sure we can find plenty of other uses for our money. Some of you may already be taking advantage of these types of accounts that we will be talking about... the strategies that we’ll talk about. We will talk about... you know, I think there’s probably six or seven different strategies we will dig into today. But if you’re already taking advantage of them, it might be time to reassess because you might have started an IRA account or a 401(k) account, putting in $2,000 a year five years ago but your income has doubled or gone up significantly and you might be able to put in double or triple that now. Or maybe you started up an education savings account with $50 per month but now you’re able to double or triple that. One of the great advantaged accounts that we will talk about today is the Health Savings Account. So, there is triple tax advantage on that one and you’re definitely going to want to hear that. Joining me today is Muhi Khwaja, who is the Executive Director and Co-Founder of the American Muslim Community Foundation. Muhi will talk about tax advantages related to charitable donations, employing a donor-advised fund. He will be talking later in the session. I will go ahead and start. Some of what we will talk about will include numbers, right? Like, an assumption about return on investment. But, before you consider any type of investment, whatever you’re trying to invest in, always take a look at what type of risk you have, the objectives, the charges, expenses, all of that, before investing. And particularly for mutual funds like ours, check out our prospectus on our website: AmanaFunds.com. Or you can call that number that you can see there. For any of our presentation today, if you want to take a screenshot, please go ahead and do so. If you want to take a look at our past presentations, we’ve done some on living trusts and about zakat and about retirement, specifically. If you want to take a look at any of those, the easy way to do it is to go to AmanaFunds.com, try to find it there. Or you can Google “Amana Mutual Fund webinars” and we also have a Halal Money Matters podcast that you can find on Apple and Android devices. If you want to go to our website to find it, you can google it by going to “Amana Mutual Funds” and adding in “Halal Money Matters.” And it will take you directly to the link on our website. What I’m going to talk about, and then hand it off to Muhi, will be traditional and Roth IRAs, 401(k)s, and even SEPs and Simple IRAs for businesses, Health Savings Accounts and then Education Savings Account, which is one of the most asked-about questions that I get. When I do these webinars, I can be doing the webinar on any subject, and I’ll get questions about education savings accounts. So, the first account that we’ll talk about is a traditional IRA. IRA means Individual Retirement Account. These were established many years and the first one that was established was the traditional IRA. The Roth IRA was introduced later. You’re allowed to put in up to $6,000 and get a tax break if you have certain income... it’s based on a certain income limit which I’m going to get to in a second. If you’re over 50, the IRS will allow you to put in an additional thousand dollars because they assume that you have not saved up enough for retirement. So, what are the income limits for the traditional IRA. If you have a 401(k) already... so, if you have a 401(k) at work, and you know, your income is less than $65,000 per year, then you can deduct the traditional IRA contribution. But, if you make more than that, then you may not be able to deduct it. So, you probably want to go with your 401(k) if you’re making, you know, more income. If you’re married with your own 401(k), it’s less than $105,000. Married, and your spouse has a 401(k), less than $198,000. As you can see, it can get tricky which means you need to check it out before you try to deduct a traditional IRA. If you do not have a 401(k) at work, it’s not offered to you, then you can... if you’re single, you can deduct the 5 or 6 thousand dollars per year less whatever you put into it at any income amount. If you are married and filing jointly then you have to be making less than $196,000 to get the tax deduction. A tax deduction here means that if you put in $6,000, you claim that on your taxes. The beauty of this account is you get the tax deduction and by the way, you can do it until April 15 of this year. So, if you did not put money in 2020 and now, you’re looking at your taxes and saying, “Wow, I’m going to have to pay some money. How do I get a tax break?” You can put the money in for 2020 by April 15. The IRS just allowed us to file a little bit later. So, the deadline great from April 15 to May 17 but they have not given guidance on whether you can extend the contributions for 2020 until May 17. They may do that. But at this time, it’s still April 15. So, one of the benefits is the deduction. Another benefit is if you buy something and you sell it within the IRA account or in a 401(k), you will not pay any tax on the capital gains. Also, if you’re receiving dividends or other kinds of mutual fund capital gains, you don’t pay any tax on that. So, there’s, you know, definitely a few different benefits to this. Another benefit that I would say, which is not a tax benefit, is if you have a retirement account, you know exactly how much you have for retirement, whereas if you keep all of your money in one bucket, all of the things that happen in life are going to come first, before retirement. So, you end up not knowing how much you have. If you have your IRA at a different institution than ours, you can ask them for a brokerage account and through that brokerage account, you can buy our funds. A Roth IRA has the same contribution limits, $6,000 per year or $1,000 extra if you’re 50 or above. You know, the question that we get is, “Can I open up a traditional and a Roth IRA if I qualify?” The answer is yes but the maximum limit will be $6,000 total. So, if you want to do $3,000 in each, that’s fine, or $2,000 and $4,000. You get my point. You will not get a tax deduction on this money, but you will get a tax break where if you’re receiving dividends or capital gains, you don’t pay any of that. And as I’ll show you later, if you do a good job of saving... you know, investing and saving for the future, you might have a large balance that you might be willing to pull out money from, you know, when you’re 59 and a half or 70 or whenever you need to pull money out. In a Roth IRA you are going to pull out that money without any tax at that time because you didn’t take a tax break today, so you get the tax free later by pulling out any amount that you want without a penalty. This one is also more flexible than the traditional IRA. And the reason it’s more flexible is that if you want to pull out money before 59 and a half, you can do so without tax and penalty for the amount you put in. But, you know, the idea here is to save for retirement. It’s not to save for two or three years down the road. Although if you have a 401(k) at work and you want to add some money outside of it in a Roth IRA, you could use that for education expenses or whatever you needed to. It’s very flexible. Alright. Now, if you have an employer plan like a 401(k) or a 403(b) or, you know, any of the others... like 457 plans, perhaps, the employer is paying for that plan so you can participate in it. And sometimes they are also matching what you put in. So, they might match 1, 2, 3, 6%. The employers are going to set what that amount is but the beauty of this is that you can put up to $19,500 into it every year and every year, they increase that as well. So, last year was $19,000. This year is $19,500. There’s a catch-up provision where you can put in thousands more dollars if you’re 50 or above. There are two different kinds. There’s a traditional 401(k) where you won’t pay tax on the money you put in now. So, let’s say you have $100,000 income and you put in $19,500 in 2021, that means your income will really show now as $80,500, so you did not pay tax on $19,500. So, you know, you save probably four, five, six thousand dollars in taxes today and down the road, when you pull out the money, you’ll pay tax on it at that time as regular income. The other thing you can do is you can put money into a Roth 401(k) which doesn’t have any income limits on a 401(k). You could be making half a million dollars or two million dollars a year and you still qualify for a Roth 401(k) whereas a Roth IRA you have income limits. If you make more than a certain amount of money, then you’re not eligible for a Roth IRA. But you are eligible for a Roth 401(k). On a Roth 401(k), you’re not going to get a tax break today. Meaning that if you made $100,000 and you put in $19,500 into your Roth 401(k), you will be taxed on your full $100,000 today. But down the road when you’re starting to pull out the money, at 59 and a half or later, you won’t pay taxes on what you put in or what the growth is. So, if you’re not getting hammered by taxes right now, state and federal and any other taxes that you’re seeing on your payroll, then the Roth 401(k) might be for you. One of the questions that comes up over and over again is, “I have a 401(k) at work. They only offer me a set of ten different funds or twenty different funds and none of them are based on my faith principles like you know, Islamic investing for example. So, what do I do?” More than half of the companies that have a 401(k) offer what’s called a brokerage option or self-directed option. You can ask your employer if they can, you know, open up that account for you, which is still within the 401(k), then you can buy the Amana Mutual Funds through that instead of buying whatever funds that they were offering you. What we have seen is that when employees ask their employer to add the brokerage option, in many cases, they do. Sometimes it takes a month. Sometimes it takes two years. So, for businesses, if you’re looking to start up a 401(k), because we offer these services, right? So, if you wanted to, you could open up a 401(k), a solo 401(k) if you’re just a one-person business. You could open up a Simple IRA or a SEP. A Simple IRA does not cost anything to set up for your employees. You are going to match a certain amount each year. You’re going to put in 2% of each eligible employee’s compensation regardless of if they put anything in. So, you know, it’s easy, there’s no checking in on it at the end of the year, no specific discrimination testing at the end of the year. There’s no annual cost to it. But you are limited. You’re not able to put in the full amount of $19,500 that you would in a 401(k). You’re limited to $13,500 a year. It might be an option. There are a few businesses that prefer this but the 401(k) has many other benefits that the Simple IRA doesn’t. If you’re a small business owner and you want to put in a large amount for yourself, you can open up a SEP IRA which is called a Simplified Employee Pension IRA, shortened to SEP, and you can put in up to 25% of your compensation into it. So, let’s say you make $200,000 a year; you can put in 25% of that which is $50,000. Right? So, you can put in $50,000. The maximum in 2021 is $58,000 and this is a deduction as a business expense. So, what you can do here is you can set this up for yourself but if you do, just keep in mind, if you have employees that are also eligible, you have to put in the same percentage of their income. So, if you’re putting in 25% of your income, you’re going to put in 25% of their income. If you’re putting in 5% of your income, you’re going to put in 5% of their income. So, eventually what ends up happening is, people open these up, their small business. They grow a little bit and then they graduate to a Simple IRA or into a 401(k). The Health Savings Account, which, you know, unfortunately is not talked about too often, this one has a triple tax advantage, which most of the other accounts we talked about do not have. You can contribute pre-tax dollars through your employer, or you can open one up with us and put in up to $7,200 if you’re a family or if you’re an individual you can put into is $3,600 per year. And the beauty is you get that tax deduction up front. Okay so, let’s say you open up an account with us. It wasn’t through your employer, so you open it up with us. You put in $5,000, as an example. When you’re doing your taxes in April or this year, May, they’re going to ask you, “How much did you put in a Health Savings Account?” You tell them $5,000. It’s a tax deduction. Along the way, as you’re getting capital gains and dividends and things that normally would be taxed, in the Health Savings Account you will not be taxed. So, there will be no tax on any of that. That’s the second tax advantage. The third tax advantage is when you pull out the money for any kind of, you know, qualified medical expense, whether you know, you had surgery and you had to pay for it, or you had a copay or you had to buy medication or perhaps, you know, your child needs braces, or you need braces, or you know, vision, right? You had to have some corrective vision taken care of. For any of those things, you can pull out the money tax-free. So, let’s say you put in $5,000 and somehow it grew to $6,000. You can pull out all $6,000 without any tax. In fact, the benefit here is you took a tax deduction and then at the end, you didn’t pay tax. In a traditional IRA, you took a tax deduction, but you paid tax at the end. In a Roth IRA, you didn’t get a tax deduction, and then you got a tax benefit later. Once you turn 65, this can act as an IRA account, as a traditional IRA. So, not only were you able to use it for all of these medical expenses and take advantage of the tax deductions, at 65 you can start pulling money out for any other reason. You don’t even have to give a reason. And you can pull out the money without any penalty. No 10% penalty. But you will pay tax on what you pull out, right? Because you’ve never been taxed on that. But if you just use it as a Health Savings Account, and you use it for medical costs, as long as you have those receipts you won’t pay tax on it. So, hopefully there are some questions which we will take a little bit. But first we are going to go to the Education Savings Account and then we will go to Muhi. So, the Education Savings Account is a great option for people who want to save up on a monthly basis. They want to put in some money. You’re allowed to put in $2,000 per year which is $166 a month. If you start when your child is, let’s say, when they’re just born and you’re putting in the $166 a month into it, you’ll get to $2,000 a year. By the time your child turns 18, you would have put in $36,000. Now if you had a 7% assumed rate of return—not a guarantee—but just a number I’m putting out there in the calculations that we’ve done, you’ll end up with around $69,000. So, you put in $36,000. By the time your child is 18, you’ll have $69,000 at a 7% assumed average annual rate of return. Not too bad, right? You have almost doubled your money during that time, and you’ve done it in an easy fashion. It’s just a monthly automatic contribution. The issue with this particular account, though, is it’s limiting due to income. So, if you make less than $190,000, you will not be able to put in that full $2,000. If you make more than $190,000, up to $220,000, you can put in some money but it’s so complicated that you may want to just not do it. And the reason you may want to not do it is... what if you think you’re going to make $200,000 and somehow at the end of the year, ta-da, you received a nice bonus and now you’re at $210,000 and you overcontributed to your Education Savings Account. So, another option here, if you don’t qualify for this, is you can open up a minor account and you can do this online with us. You can go in and open up a minor account. Just like you would at your bank. But if you open it with us, you can invest the money. And on this one, if you’re a married couple, you can put up to $30,000 per year and the tax benefit is not as great but there is a tax benefit and the tax benefit, you know, look into this a little bit with your CPA of course, but there’s something called a kiddie tax. So, if your child makes less than a thousand and fifty, I think, for 2020, you don’t pay tax on that. So, if they receive dividends and capital gains that’s less than that amount, you wouldn’t pay tax on that. But if it’s more than that, you would pay on that additional amount. When the child turns 18, the account is theirs. Anything they withdraw would be under their tax rate. So, it’s a good way to save money and put in more. In fact, you know, you might have an Education Savings Account if you qualify for it. You could also have a minor account to put in additional money because you’re limited to $2,000. Why do people open up this account instead of a 529 plan? In a 529 plan, I believe you can put in up to I believe $380,000 during the life of your child up to age 18, I believe. So, you know, this one you can only put in $36,000, right? So, why would you want to do this one versus the 529 plan? The 529 plan doesn’t have the halal options. You have to buy whatever the company is selling you in terms of their funds and they are going to be age based and are going to have bond options and even stock mutual funds, but those stock mutual funds are going to have everything under the sun within them. If you’re saving for retirement, you know, this quick graph here will show you, it’s better to start early. The compounding returns will help tremendously, you know, if you start earlier. So, if you’re 25 years of age and you put in roughly $230 from each payroll into this and you have 24 payrolls in a year, you would have put in roughly $5,500 in a year. And if you have that 7% assumed rate of return which is not a guarantee of course, as I mentioned, then you will have put in $55,000 every ten years which is $220,000 by the time you turn 65. You put in $220,000 but you reached over $1.2 million. But if you wait ten years and you miss out on $55,000 worth of contributions over those ten years, you’re going to end up with half of that money. It’s because the first dollars that you put in have the greatest opportunity to receive those compounding returns. Now, what’s the beauty of getting to a million dollars? The average social security recipient these days is receiving $1,508 in social security income. Forty million retirees are receiving social security income and the average check is $1,508 dollars. You can do the math for yourself. Renting an apartment, you know, is going to cost you that much or more. So, you wouldn’t have enough money for anything else. So, you’re going to have to do your own savings. So, let’s take a look at this. Let’s say you reached a million dollars in retirement savings and let’s assume you’re still receiving a 7% average rate of return, which mean some years you’re receiving less, some years you’re receiving more but the average is 7%. So, let’s say you pull out 7% per year. That million dollars will continue to be there. You could be 120 years old, and it should be roughly the same because you’re just taking out the return. So, on a million dollars, 7% is $70,000. Add that to your $18,000 worth of social security. And now you went from $18,000 in social security to $88,000 worth of usable money every year in retirement. And you can pull out money starting at age 59 and a half. One last one that I’ll show you here, just to drill the point home. Let’s say you were 25 years of age and you started putting money in. A thousand dollars a year for ten years. So, you put the money in from age 25 to 35. A thousand dollars a year. You put in $10,000. But your friend decided not to put in money at age 25. They decided to put in money at age 35. So they went from 35 to 65 and ended up putting in $30,000, but they end up at a 7% assumed rate of return. We just like to keep it consistent. They end up with a little bit less than you, even though they put in only $10,000. Again, it’s because of the compounding and the dollars you put in early are much more valuable than the dollars you’re going to put in later on when you get closer to your goal. These are the kinds of accounts that we offer. On the Amana Mutual Funds, there are four funds now. Amana Income, which was started in 1986. Growth, Developing World, and then the Participation Fund which is our fixed-income type fund. And this one invests in sukuk and not bonds so it is asset backed instead of debt backed. So, all of our mutual funds do not charge sales charge up front. Or on the back end. You can open up a Roth or a traditional IRA online with us or you can start up a 401(k) plan for your business. Or, if you have a 401(k) through work, you can open up a brokerage account and buy our funds there. You can open up a Health Savings Account with us, or an Education Savings Account. The UGMA means the Uniform Gift to Minor Account. Let’s just call it a minor account. You can open up a brokerage account for yourself or for your non-profit or business. You can, you know, have some financial planning. We have a couple of advisors that can offer that: Sameer Sarmast and Haitham Al-Sayed. We have investment advisory as well. If you have money that you want individually managed. And then we also can be a trustee on your trust. With that, I’m going to turn it over to Muhi Khwaja, again, the Executive Director and Co-Founder of American Muslim Community Foundation, he will give us some strategies that can help you with taxes using a Donor Advised Fund.
Muhi Khwaja: Owaiz, thank you very much. On behalf of AMCF, we really appreciate the opportunity to learn with you and, you know, every time I hear you present, I always pick up something new, so I’m really excited to continue to learn and save and just be a part of the conversation. Really great to see so many familiar names joining us today so thank you for chiming in. At AMCF, we’re here to help families distribute their Sadaqa and zakat in a more streamlined manner. And we help non-profit organizations become more sustainable, so we do that through a variety of ways, and you can learn more about AMCF on our website and we will share that information as well. So, I want to jump into Donor Advised Funds. You can go to any financial institution up and down the street: whether it’s Chase, Fidelity, Vanguard, Schwab. They all have Donor Advised Funds. However, none of them on the market are catered to the Muslim community and that’s why AMCF is so important. We partner with institutions like Saturna, and we are able to invest with Saturna Capital and a Donor Advised Fund is essentially a charitable account that you hold with AMCF. When you contribute to your DAF, you get the immediate tax benefit, because we’re a non-profit organization. So, you get to claim that deduction. You get the invest the balance for future growth. And then you can choose what charities you want to give to afterwards, on your own timetable. So, the great thing is maybe you have a high-income year one year and you want to take advantage of some tax advantageous solutions. You can put money into the Donor Advised Fund, get the deduction at that point. So, if you look at the graphic here, you know, you’re the family with the heart and you will start going clockwise. So, you provide some funds, whether it’s cash, appreciated assets, real estate, stocks, to AMCF and we will give you that tax receipt back to you. Then, again, we can invest it over time, allow it to grow, and then you can distribute more money to all of the non-profit organizations you want to support. And the benefit here is that you get one receipt... imagine right now, you’re chasing down five, ten twenty different non-profit organizations to collect your receipts to file your taxes. This gets you one tax receipt, even though you’re still supporting all of those fantastic organizations. And let’s face it, at the end of the day, you want to make impact, you want to help nonprofit organizations grow, and what better way to do than maybe even investing your charitable giving and allowing you to give more at the end of the day. So, you know, you still get updates from the non-profit organizations that you support. The non-profits still see that the funds came from you, whether it was for zakat, a specific project, all of those details are transferred to the non-profit organization on your behalf. So, there are a lot of benefits in using a Donor Advised Fund. Again, you can put money in now but then you can distribute it five years from now, ten years from now, you can pass it on to your family to make decisions on what charities to support at a later time. So, you get the full deduction of fair-market value when it comes to assets or cash. And you get the immediate tax benefit. You get to select halal investments for you to grow your charitable giving with whereas if you went to one of our competitors like Fidelity or Schwab, you don’t know what they’re investing in. They’re doing it for you. And then, again, you get to decide when to support the causes that you want. You can still fulfill your pledges that you’ve made. We get to keep track of all of your zakat and Sadaqa in one place. You can have historical access of who you gave to and make sure you give to those same charities or add new ones and we vet all of the non-profit organizations in our directory. On our website, you can take a look at our non-profit directory. You can see that we’ve done podcast interviews with other charities so you can learn more about their programs and services and we are very transparent in where the funding goes. We work with over 105 families across the country currently and they have given out $3.25 million and more since 2017. So, we’d love to add your family to that list to showcase the impact and we want you to think about your long-term, lifelong charitable goals. And keeping AMCF as part of that. You get to name the Donor Advised Fund after your family, or you can also name it anonymously. That way, when you support organizations... you can still inform them that the gift is from you, but maybe they won’t know that it came specifically from you. So, you can have that anonymity as well. So, let’s talk specifically about donating appreciated assets. Many of you guys have investment accounts, brokerage accounts, with Amana. So, the idea here is that if you were to donate your appreciated assets, that you’ve held onto for longer than a year, you will be avoiding a capital gains tax. So, you get the full fair market value of what the fund is worth when you make the transfer to AMCF. And the benefit there is, you know, you maybe purchased it when it was 40 dollars, 50 dollars and now it’s worth 55 dollars. So, the idea there is you will get the value of 55 dollars even though the cost to you was at 40 or 50. So, you get to avoid the capital gains tax and it’s better than giving cash because your cash is only going to have the same value as you earned it, whereas this money has been invested, it’s been growing, and then you get the fair market value. So, you get to reduce your future capital gains tax by then using your cash to purchase current market value of stocks or funds. So, here’s a simple user case and I see a few questions coming in the chat and we will definitely address them momentarily. So, you know, currently, right now, you might be giving $500 to ten different causes and spending $5,000 collecting those tax receipts, making multiple transactions, going to different websites or finding out information and now you’re struggling to collect those tax receipts for filing your taxes and sometimes those organizations don’t follow up with you. That’s the current state of a lot of people’s donating experience. However, if you’re able to give a combination of stocks and cash, maybe you’re able to give more. And again, we talked about avoiding a capital gains tax. You get to invest that balance over time. You get one consolidated tax receipt for all of your charitable giving and AMCF helps you come up with your charitable giving plans for your life and keeping track of your zakat. So, you give the funds to AMCF, AMCF then turns over and gives an ACH transfer to those non-profit organizations and gives the non-profit a report saying who the funds came from and what it is for. So, we do have more information on the cost and the reporting, so I will share that the minimum to open a Donor Advised Fund is $2,500. We ask for a five-year commitment and the minimum distribution to a charity should be $100 or more. So, maybe you have monthly gifts to charities at $50 a month or $25 a month. We would simply consolidate that and give an annual sum to the charity, but you can still give monthly to your Donor Advised Fund if you prefer that. And the fees that we charge are for the first $20,000 that you put into your Donor Advised Fund it is $125. If you exceed giving over $20,000, then for the first half of a million dollars, it is .65%, so .65% or $125 a year, whichever is greater. So, sometimes, you know, we only fund the organizations that are in our directory, so we will ask charities to fill out a form on our website, review them, and then add them to our directory. And the benefit there is multifold. Not only are they going to get access to funding. They are going to get access to our best practice webinars. They will be invited to our podcast so they can share more about the organization. And they get to then network with other charities and donors in our network. So, there are multiple benefits to a non-profit organization filling out our eligibility form on our website. So, hopefully that answers some of the questions that were in the chat and I’m happy to answer more specific questions. So, there’s another question on the receipts. You get the receipt for the amount you put into your Donor Advised Fund. So, let’s say you are putting in $10,000 into your Donor Advised Fund and only distributing $5,000 this year. You will still get to deduct the $10,000 because you gave it to your Donor Advised Fund. And then you get to decide how you want to distribute that and when you want to distribute that. And 100% of the donations go to the charity because you, as a Donor Advised Fund holder, you’re paying your administrative fee to AMCF on an annual basis. So, we will still give the entire amount to the charity of your choice.
Owaiz Dadabhoy: Yeah. So many great reasons to, you know, put money into a Donor Advised Fund. One of the things I see, I know people that make contributions to forty, fifty different organizations each year. Some people do twenty, some people only do one or two. But for the folks that are waiting, now, right? Because tax time is here and they are waiting for those receipts to start coming in, they have to do that every year. And they have to, you know, every time somebody comes to them to ask them for a contribution for the, you know, the organization that they are representing, they have to make a decision, right? They have to answer back to them. But you know, when you have a Donor Advised Fund, a couple of things happen. You get that one receipt and it’s for the full amount, whether it’s all used or not that year or the next year or whenever it’s used. And then the second thing is, if an organization comes to you, you can take it a little bit slower and say, look, I’m going to go to my Donor Advised Fund and talk it through with them and see if, you know, your charity is listed, and then I’ll make a decision on it. So, another thing is, you know, if you have more money to put aside and you want to grow your charitable dollars, as Muhi was talking about, you can do that. So, if you know that you’re paying $10,000 a year in zakat, but you have an account that has $50,000 somewhere, just a checking or savings account. You can put that into a Donor Advised Fund, take the tax deduction, and then, you know, over time, as your money is hopefully growing, you can start to pay that out on a regular basis. So, we will take more questions a little bit later on. I wanted to wrap up the presentation here and then go to your questions. You know, one of the most often asked questions is, “Alright, I just opened up a traditional IRA or a SEP IRA or what have you. I did it in a rush because I had to get it in before tax time. I just put it all into this one fund. Which fund am I supposed to select?” Well, you can go to AmanaFunds.com and on that main page you will find what’s called the Amana Fund Selector. You answer a few questions and then based on your answers, it will give you a suggested, you know, way to allocate your money. But you can also use this if you’ve been investing for a long time. Maybe you started in the 80s or 90s or early 2000s and you put it all into the funds that existed at that time. Income and Growth. And you never consider the other ones. Go take the quiz and you can, at that point, re-allocate your money, especially if it’s in a qualified account where you’re not going to get taxed for selling something. So, qualified accounts are the ones we talked about, right? The ones that have tax benefits. IRA, ESA, HSA, 401(k). So, do take a look at that and if you have questions, please contact any of us. You have our email addresses here and you also have our extension numbers. This is our team of people that can assist you. You know, of course, also call the 800 number that’s listed—800-728-8762—and speak to someone there or visit our website. Now, I want to get to our questions. I actually couldn’t see any of them because I was the one presenting.
Muhi Khwaja: So, there’s a question about matching gifts from companies to a Donor Advised Fund. Many of them have policies that they want to make sure that the end recipient receives the matching and not necessarily be invested long-term because the corporate giving, they want to make sure they are getting the funds out to the charities of your choice. So, we make sure that, you know, if we do receive matching funds, that those are funds that go out the door and are not invested. So, we try to make it as easy as possible for the employee instead of them having to fill out five, ten different requests, we can still honor that but with the understanding that it is money that will go out the door that year and not be invested so that we are abiding by their policies.
Owaiz Dadabhoy: Thank you for that one, for answering that. Some of these may have been answered already but I’ll give you very quick answers. So, what’s the difference between a 529 and an Education Savings Account? The 529 doesn’t have halal choices. You have to select from the menu of funds they give you. It does allow you to put in a lot more money and it doesn’t have income limits, so you can be making a million dollars a year and put money into a 529 plan, whereas an Education Savings Account, if you make less than $190,000 adjusted gross income as a couple filing jointly, then you’d be able to put in the full $2,000 a year, so it is limiting, but allows you to buy the funds that you’d like. Does Amana or Saturna provide a Roth 401(k) account? We offer Roth IRAs directly on our website. If you’re a business owner and want to start up a 401(k) with us, you can offer the traditional and Roth 401(k) through your employer. And is there a cost for a Health Savings Account? We don’t charge any annual fees or monthly fees or anything like that or transaction costs. If you want to buy a Health Savings Account directly with us, you can open up the account and you just buy the Funds directly and pay the expense ratio, which, you know, if you’ve been an investor, you already know how that works. I have a direct message here. “I have a 401(k) at work and a traditional IRA with Amana that I transferred my previous 401(k) into. The IRA has been growing steadily. Should I be contributing more into the IRA? I do have a Roth IRA I contribute to but wondering about the traditional IRA because it seems I will not be getting as much of a tax break other than the tax deferred growth.” So, if you already have a 401(k) at work and you’re maximizing that and if you qualify for a Roth IRA, that might be a good idea because of the flexibility of the Roth IRA, right? So, you know, if you’re maximizing the 401(k). You have plenty going into that. You can save in a tax-efficient manner in the Roth IRA, but if you need the money, you can take it out for any purpose, so that’s a good idea. Now, if you’re going to be limited by income... you already have a 401(k) at work and you’re trying to figure out if you get a traditional IRA tax deduction... if you don’t qualify, you know, you may or may not want to contribute at that point. You’ll still get the tax deferral, but you won’t get the tax deduction. Alright, so, if anyone else has any questions please feel free to ask them here. It says, “Owaiz, what are your thoughts on Roth conversions for retirees?” Well, you’re already retired so you’re paying money on it every time you withdraw, right? So, if you have a traditional IRA, every time you withdraw money, you’re paying that year. So, it might be a point where you may be too late. Would you rather pay on the full amount now or would you like to pay on the amount that you pull out on a yearly basis? If you have a million-dollar retirement account, if you convert it to Roth, you’re going to pay tax on a million dollars today. But if you’re 60 years old, you might say, “Well, I’m going to let this money grow until it becomes two or three million and then I’m going to get it tax-free at that time.” You’re going to have to run the numbers. I would call in and speak with Haitham Al-Sayed or Sameer Sarmast and they can take you through that. It says, “Owaiz, what is your recommendation between pre-tax 401(k) and Roth? How will current tax bracket and retirement tax bracket factor in the decision making?” It really is a choice of whether you want to be taxed now or later. If you’re getting taxed heavily now... let’s say your state and federal tax is 35% or 40%... so, if you’re not paying tax on that today, on $10,000 you might be saving, let’s say, $4,000. If that’s the case, think about that money, the $4,000 that you didn’t pay in tax, is also growing all of these years. But down the road when you have a nice bucket of money, you’re going to be taxed on all of it. So, one thing you can do—this is a practical step—is when you’re younger and your income is not as, you know, as great as when you’re a little bit older and you have more experience in your field, select a Roth 401(k) as the option for you. And then, eventually, when taxes become a real burden and you can see that you are paying enormous sums through your payroll, you can switch to a traditional 401(k). Now, what that’s going to do is when you get to retirement... Let’s say you are 65 and you need to pull out $100,000 a year because you’ve done a good job of saving. And you say, “Look, this year at 65, I don’t have any income at all, so if I pull out $100,00 and get taxed on it and it’s not going to be too bad.” When you’re 66 and you have some other income come in, you still want to pull out $100,000 and you say, “Wow that other income is putting me into a higher tax bracket when I pull out the $100,000, so let me pull it out of the Roth 401(k) instead.” It’s going to give you this option of pulling money out from either account. So, I would say you can do that. Some employers will allow you to put money into both so you can have two different buckets. The money that you put into a traditional 401(k) will save you on taxes now. The money that you put into a Roth will help you on taxes later. Somebody is saying, “Can we start an ESA through Amana?” Absolutely. AmanaFunds.com. “For inheritance purposes, I thought the Roth IRAs are better?” Potentially, right? Tax-wise, that could be the case. But you know, you also have to look at whether you’re getting taxed a lot at the moment. So, it’s not just about what you pass along down the road. It’s also about how you’re experiencing that while you’re here.
Attendee: Yes, so can we convert our current 401(k) to your portfolio?
Owaiz Dadabhoy: So, if you have an old 401(k) that you left behind at a previous employer, you can open up a rollover IRA with us and then you can have that money transferred to us. If you have an old, you know, IRA account somewhere else, or multiple ones, if you want to consolidate those, you can open up a rollover IRA with us and transfer that money from the other institutions. If you’re currently working with the company that you’re wanting to move this money from, some companies will allow that, but once you do it, you will not be able to put more money into your current 401(k) plan. So, it’s best to do it for 401(k)s that are old, 401(k)s from previous employers. Thanks for your question.
Attendee: A question I have regarding Donor Advised Funds, when making the donation... a person makes the donation, say $1,000, but when does it get distributed to the charities? Is it at the discretion of the advisory board or at the donor’s?
Muhi Khwaja: Yeah, that’s a great question. Thank you for asking. So, any family who has a Donor Advised Fund, they make their contribution to the DAF and then on a monthly basis, we distribute to charities. So, as long as they fulfill our distribution form, let us know they want to send the funds to the charity, we will fulfill that gift on a monthly basis. On Ramadan, we do two distributions: one in the beginning, one in the last 10 nights. In December, we do two distributions just because that’s another time that a lot of donations go through. So, we will fulfill all of those gifts. Our primary method is an ACH bank transfer to the charities, especially with COVID-19, you know, checks aren’t getting picked up in the mail and things like that. So, we try to make it as efficient as possible for the charities to receive the funds.
Attendee: The follow-up would be... can we say that, “Okay distribute my donations in month of Ramadan only?” Can that be done?
Muhi Khwaja: Yeah, of course. You get to decide when the distributions are made, and we will fulfill it based on your timeline. So, you can put in the funds December 31 of this year and get the tax deduction for 2021 but then you can say, “Make all of these distributions in Ramadan,” and in the meantime, in those three to four months, you can have it invested. You can have... you know, so many different benefits to consolidating your giving and then distributing them to the charities of your choice.
Owaiz Dadabhoy: Alright, do we have any other questions that somebody would like to unmute and ask?
Muhi Khwaja: In the chat... “What if the charity is not on your list for distribution?” We ask all non-profit organizations that are not listed in our directory to fill out an eligibility form and when they do, we will then send the funds to that charity.
Owaiz Dadabhoy: So, the Participation Fund. The question is, “Is that only for people that are older?” Now, the reason why you might think it’s for people that are older is because as you get closer to your goal of retirement and you’re starting to pull out money, you don’t want to have all of your money in the stock market, right? Because let’s say you have $500,000 in your retirement account and you’re pulling out $50,000 a year, but let’s say there’s a dip in the market, like when the pandemic hit in March of last year, the markets were down and then they recovered later. If you’re pulling out money in March, you’re going to be upset that your investment has gone down in value. So, the better thing to do is to have some money in the Participation Fund which doesn’t move as much, historically speaking. And so, it has a different type of risk scenario with it. But it’s not only for older people, it’s also, let’s say your child is getting closer to college education, right? They’re actually going to be starting college and so you’ve been saving all of these years and now you want to take some of it out of the stock funds and put it into the Participation Fund, so that money, you can withdraw in the next year. And the year after, you can move more money into the Participation Fund so it will be available for you when you need to withdraw it at that point. With that, if you have any further questions, please reach out to us directly. We can also go through the performance page and, you know, show you a little bit more about that, or any other questions that you might have. Contact Muhi on the numbers that he had shown you and shared with you in chat group as well. Or, of course, you can contact any of us at Saturna. 800-728-8762. We will look forward to seeing you next month. It will be during the month of Ramadan so we hope that you will join us. And early Ramadan Mubarak to all of you.
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