Tools for Investing and Potential Tax Benefits
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Monem Salam: I wanted to welcome everybody. Thank you very much for joining this webinar. I hope and pray that Allah, subhanahu wa ta’aala [Glory be to the most high], is protecting all of you during these unprecedented times that we’re living in and bless you and hope you’re enjoying the summer. When things were more normal, many of our sales guys—Owaiz, Amjad Quadri in Chicago, Sameer Sarmast in New Jersey and also Haitham Al-Sayed from LA—used to come out to the communities and give this type of seminars. But since that’s not happening, we thought we’d tape these online and be able to do them on webinars. So, with that, as you probably know getting started, the IRS, back in March, had announced they were gonna delay the tax deadline for filing. But at the same time, what they also did was they delayed, also, the contribution for 2019, which was last year, for all of the different qualified accounts like IRAs and ESAs. That deadline was also extended to July 15th. And so, last month, we had a webinar on specifically about the CARES Act. But this time we decided to do it on qualified accounts and if you still don’t... if you hadn’t done it for 2019 so far, there’s still time for you to do it. You actually, you can open up an account and be able to send the money by July 15th it will still count for 2019. So, with that, inshallah, I’ll turn it over to Owaiz, and bismillah [in the name of God].
Owaiz Dadabhoy: Alright, thank you Monem. We appreciate everyone being on the call. And we are looking forward to doing these every month and we’ve already had a couple and they’ve been fun to do. Had some good responses on them, as well. I’m not gonna spend too much time on each section in the interest of time. It is the middle of the day. For some of you it’s 3 pm already. So, what I wanted to say, though, right at the top is... whatever I talk about today, please do consult with a tax professional if you need more details. It is a useful thing to do. It may cost you some money sometimes, but sometimes you can also get somebody... one of your friends... to give you some information. And of course, we always have the search engines that we can go to. We would like to present to your community if you think an educational talk like this would be useful. You’ll see that, basically, in this presentation, it’s just an educational presentation, not trying to really sell you anything. We’re trying to present to you ideas and concepts... most of you already are purchasers of Amana Mutual Funds. And so, the more that people know about these guidelines and the way we run the funds, the better it is. You know, Amana Mutual Funds have been around since 1986 and now we have four funds, three of which are stock funds, and one is based on sukuk investments. So, we have a good allocation and a good mix of different funds.
Owaiz Dadabhoy: So, some of what I will be talking about today, which is on the next slide here, will involve numbers. So, we’re gonna talk about, for example, some assumed rate of returns. Monem may come back at some point and talk to you about some actual returns. Just know that anything that we talk about with percentage returns are not guarantees. These are historical pieces of information that will help you to understand what has happened in the past. And the next slide talks about the S&P 500, which is the largest or most widely-held 500 companies in the United States and you know, some of the benchmarks that we have against our stock funds... one of the benchmarks is the S&P 500, which started way back in the early 1900’s. Now, what we will discuss today... This is what I would tell you if we were coming out to your community or we’re doing a Zoom presentation for the community. We would talk about investing according to Islamic principles, which can be used for people of any faith, because... you know, many of the faiths, you know, do have some of the same principles. We just have made them stricter... we are very tight, and we make sure to adhere to. Investing for college, investing for retirement and the Amana Mutual Funds, although I’m not going to talk about the funds too much today, maybe Monem will come back at the end to talk about that. But I’m gonna talk about some other kinds of reasons to save as well. So, why save? Buying a home. Hajj, because it costs so much. And if you’re not of the Muslim faith, instead of Hajj you can just say, you know, your big trip that you want to take somewhere that’s gonna cost you $8-$10,000. You gotta save for that. That may not come out of your regular paycheck. So, you have to really be deliberate about that. Children’s education... I’m gonna get really deep into that one, and retirement as well. And of course, health savings. Health Savings Accounts, that the US government introduced a few years ago, are the only triple tax-advantaged accounts that I know of. So with a Health Savings Account, you can one: get a tax deduction. Okay, so if you have a couple or a family, you can put around $7,000 per year. That’s the maximum. You can put in less if you want to. But this money is gonna be used for health costs or regular medical visits, for surgeries, for vision and also for dental care. So, one reason to save in this is you’re gonna get the immediate tax benefit that year. Another reason is you receive dividends and capital gains. You might sell something within your Health Savings Account and then buy something else. You aren’t going to experience any tax along the way. So that’s the second tax benefit. And the third tax benefit is any time you make a withdrawal on this, because of any of the costs you have, you save the receipts for that, you won’t pay any tax on the gain or what you put in. So, it’s triple tax-advantage. Very different than most other types of accounts that the government has set up. The next section that we’re gonna talk about, or the first main section, is investing for college. The numbers, you know, are inching up every year. So, this is becoming a real burden on people and we can plan for that. You know, I mentioned grandparents might want to save for their grandchildren’s college education. There was a study done many years ago and they asked grandparents if the parent of the child asked you to save or asked you to contribute to the education of your grandchild, would you do it? And 71% of the people said they would. Now, what will happen though, most likely, is that the parents of the children are not going to ask their grandparents, so if you want to do something for them, this is a great way to give a gift and say, “I’m giving this gift, which is larger this year, but I want you to start up an education savings account for little Johnny or little Ahmed. There is different ways to save for college. There’s an education savings account which is what we offer here because a 529 plan exists but there’s no way to do it according to the principles that we are familiar with. So, the education savings account does limit you a little bit, but for most people, they’re not saving for education anyway, so this is a step up from you know, from the non-savings that most people are doing. You can put in $2,000 per child per year. And you must distribute it by age 30. The beauty of the education savings account is you can use the invoices for schooling before college as well. So, if you’ve saved up years of invoices and now you have your child, who is 18, they get a scholarship and they don’t need any of the money you saved for them, you can actually pull out the money tax-free using invoices from private school from before they were 18, which is different than what a 529 offers. Another drawback here, unfortunately, because they haven’t updated this for at least a decade... the government hasn’t updated education savings accounts, is that if your income... if your adjusted gross income for your family is more than $190,000 you’re going to be phased out. So, what I like to tell people is if you have an income that’s close to $190,000, avoid this altogether because then you’ll have to face some consequences. If you put in money, you’ll actually be taxed on that and it takes away the advantage. If you’re below that, you can definitely consider that. Once you get to this level, then you want to think of other ways, and one of the ways, which is the next slide, talks about the minor accounts. If you go into your local bank and you want to open up an account for your child or your grandchild, that’s going to be a minor account and you can have the same thing on an investment account. So, instead of having a savings account for your son or your child or your grandchild, you can have an investment account and you can put in up to $30,000 per child per year. Now, one of the tax benefits, cause that’s one of the things we want to talk about is tax benefits today... We talked about it for education savings account and Health Savings Account... For minor accounts, if you have unearned income of less than approximately $1,000 per year, you will not pay tax on that. So, if your child has a minor account earning, you know, $300 of dividends a year, you’re not going to get taxed on that money. Now, if it was under your name, you would get taxed under it. So, it goes up to I think $1,050 or $1,100 in 2019 and 2020. This is, again, something that you wanna consult with your tax person or look up yourself and confirm the information for your specific situation. This is on unearned income. This is not on earned income. Then, there’s some other rules that come into play, but you still get the break on what’s called the “kiddie tax.” So, it’s another good way to save. Now, if you have an education savings account and you maxed out the $2,000 per year, you can open up a minor account for them as well, and when you do that, this minor account will help you to use the money for anything. You don’t have to just use it for education. So, if you want to use it for their wedding or to buy them their first car or to set them up after they graduate from school, they have their own account which basically this turns into their account when they’re 18. Now they’re gonna have a strong footing when they go into the real world and they’re working for themselves. They’ll already have a nice investment account to get started. Now, on college savings, look how easy it is to save money for this. If your child is just born and you already have their social security number and you’re able to open up an account for them... let’s say you do that in the first month. Let’s say the social security number comes really fast and you put in $83 a month. What’s the significance of $83? That happens to be $1,000 a year. Now, I had mentioned that you can put in $2,000 per year into the education savings account, but this rule applies whether you’re opening up an education savings account, a minor account... the numbers are the same. So, $83 a month... after three years, you would have put in $3,000. A thousand dollars a year. We’re going to assume a 7% rate of return. That’s my assumption for this particular slide. So, you will have earned $194 extra on top of the $3,000. That is not too big of a deal. You’re not going to be extremely about that, but look what happens after 18 years. After 18 years, you have put in $18,000 into this account, and now your total value will be approximately $34,000, almost doubling how much you put in. Now, if you would have put in $166 a month, you would get to closer to $70,000. You can go online and look up college planning or education savings calculator and what that will allow you to do, if you find a good one. There’s many of them out there. Most of them will work just fine. If you say, “My child is 5 and at 18 they’re going to go to college. I have $1,000 saved for them. How much do I need to put in to get to X amount of money?” It’ll help you with that. Now, we mentioned HSA. We mentioned minor account and we mentioned the education savings account. Why is it important to have more than one account? Consider this. I used to be at a financial services company before I joined Saturna in 2008 and we used to have people come in and they would tell us they have all their money in their checking or savings account. $75,000. $100,000. $150,000. It’s all sitting in their checking or savings account combined. Now, what kind of things happen first? Does retirement happen first? Does an emergency happen first? Does college education cost happen first? What are the things that happen first, right? Does a health cost come in first? So, many of these things are gonna happen and by the time you get to retirement you don’t even know how much money you have left because you haven’t segregated your money. Number two, if you keep it all in your checking and savings account, you’re not having the benefit of these tax benefits. Health Savings Account: huge triple tax deduction. College education: you’re not paying any tax on the dividends and on the capital gains and anything else that’s going on during the time that the money is in the account. And then when you withdraw the money, as long as you have receipts to substantiate the cost, you will not pay a dime in taxes. So, you would want to isolate your money into these different places. What I did with my children. I said, “Look I have these accounts for you. And I want you to take a look at what they are because when you get to college this is going to be your money that you can use, so get into the best college you can.” And so, in some ways you can also inspire and motivate your children if you do this. And if you have a separate retirement account, obviously you’ll know that you’ll be able to retire properly and it’s not all jumbled up with the rest of your money. So, if your child is 5 or 10 years old now, you may be able to put in more than if you were young and you had your first child. Now, your children are a little bit older. Your income has gone higher as well. You can do, on top of the education savings account, you can put money into a minor account. So, I wanted to make sure to tell you about that. There are some useful resources I wanna mention to you. At isna.net, at islamicscholarshipfund.org, you can apply for scholarships, different kinds of scholarships. Our company actually sponsors one each there at both of those organizations. And the last one on the list here is acceducate.org which is acontinuouscharity.org and they allow children or, you know, students, to withdraw money without any interest and so when you’ll pay this back once you get out of school. So, it’s an interest-free way to save money. So, if you wanna take a screenshot of that, your children are getting to that age, you can look up these different opportunities. The next slide talks about Amana Mutual Funds... what we have to offer. And Saturna Capital. When we started the company back in 1986, it was started by the community and the community decided, “We wanna do this to be able to have more people enjoy prosperity down the road.” And so, there were no sales charges on any of the funds and we still hold that today. What that means is if you go to another financial services company, you know, they could charge you an upfront sales charge when you’re buying the fund or they might charge you at the end when you’re withdrawing the money if it hasn’t been seven years yet. We eliminated all of that very purposefully and deliberately. And so, all four of the Amana Funds are no-load funds. We offer IRA accounts here, which I’m gonna talk to you about next. 401(k)s for your businesses that you might own. Health Savings Accounts, education savings accounts, the minor account, also brokerage account if you’d like to have everything in one place and if you want to do a rollover from your previous employer, you can do all of that with us. We also will consult with you on trust services. So, I wanna talk to you now about investing for retirement. We’re trying to get through this in a speedy way, so you get a little bit of information. Maybe you’re taking a screenshot of some of what I’m talking about today. And then you can look into this more. You can call us afterward or email us and we’ll be happy to help you. So, investing for retirement. There’s three different things that you need to look at. One is that in the past, many people had pension plans where the company paid for it altogether. These days, very few people have a pension plan where the company is paying for it. You’ll have firemen and policemen and policewomen and congressmen, and you know, you might have executives at large companies. They will have a company-paid retirement account. But, most people do not have that anymore because of the cost to the company. So, you’ve taken away one leg of the retirement stool. The second one is Social Security. Now, Social Security is given out to 40 million Americans every month. 40 million Americans. And the average check is just over $1,500 with many people getting less than a thousand dollars a month. So, that doesn’t cover the cost of your life during retirement. Financial advisers will tell you, we’ll tell you, that you know, when you’re retiring, your last income, let’s say you’re age 64 and your income was $100,000 a year, you’re going to need 70-80% of that money when you retire. So, you’re going to need $70 to $80,000 in that situation and what you might only get through Social Security is $16,000 or $18,000 a year. It’s not going to be enough to cover all your expenses and to live the life that you had thought you’d be able to live. So, the third part of the retirement stool. The third leg of the stool is your own money. And so, let’s talk about how we can save for ourselves because that’s how life has headed in America. You have to do it on our own. So, the next slide talks about saving for the long term and if you’re 25 years of age and you started putting in $1,000 a year. That’s $83 a month. Very minimal amount. That’s $40+ per paycheck. If you did this until you’re 65, you would have put in $40,000 at a 7% rate of return... just an assumption, again, not a guarantee... that $40,000 over time would grow to $218,000. And in my top 15 list I mentioned the power of compounding. So, the money that you put in early is going to grow in a much more significant way than the money that you put in at the end before you retire. So, the way to remember this is if you put in $1,000 when you’re 25 and you had a 7% return, next year you’re going to have $1,070. And the next year after that, you’re going to multiply that 7% return if you got that exact return again. Multiply that times $1,070 and not $1,000. So, this is a great way to save for retirement is through the retirement accounts that the government has structured for us. Within your 401(k), within your IRA account, and we’re gonna get to those in a second, but if you would have waited just ten years and started putting in when you’re 35, you end up with half of the money even though you just put in $10,000 less than a 25 year old. And you can see what happens to the 45-year-old. The good news is that if you’re already 35 or 45 or 55, your income is much more significant than when you were 25 so you can put in much more. And I’m gonna talk to you about how much you can put in this year. Now, the next slide talks to you about how much you would save if you just increased it from $1,000 to $5,500 a year. At a, still, 7% rate of return. Now, if you get a 9% rate of return, your end result is going to significantly change. We’re gonna use a relatively moderate return here of 7%. The 25-year-old, if they put in $235 a payroll... okay? About $468 a month. They’ll end up with $1.2 million in this example. But the person that waits ten years will end up with half. The beauty of getting to a million dollars is once you retire and you want to use some of this money... Let’s say you take out 7% per year. If you’re getting a 7% average return still, you may or may not, depending on your allocation at that time. But if you’re still getting a 7% return and you have a million dollars, you could pull out $77,000 per year, right? To augment your Social Security income, which is not going to be that great. So, you’re coupling the Social Security with $77,000 and your million dollars should stay in that same range all the way up until our passing. Alright? And then you can leave this as a legacy. You can leave it for your spouse, your children, etc. Even give some of it away to your favorite charities. Now, if you only have $230,000 or $238,000 as we have in one of these examples here, if you pull out $50,000 or $70,000 a year because you need it, how long is that money gonna last? It’s not enough. 7% on $200,000 is only $14,000 per year. It’s not going to give you the benefits that you need. This is not a get rich quick scheme. I’m telling you, you know, this is 40 years of savings, right? It’s being really deliberate. But again, if you are older, you’re making a lot more than when you were younger so how much can you put in to do this? Instead of $55,000? These days, for last year and this year, you can put in $6,000 into a traditional IRA. If you are 50 or greater you can put in an additional $1,000 per year. Again, this is because you may not have saved enough so the government wants to give you a chance to save more money so you can put up to $7,000 into this account. What is the benefit of a traditional IRA? You may be able to get a tax deduction. You know. That’s based on what your income is and whether you have access to a 401(k). Something you need to look at, but if you put in $6,000 or $7,000 into this, you get that tax deduction. Along the way you’re not going to pay a dime in taxed on capital gains, on dividends, etc. Once you retire... Let’s say you have that $1.2 million saved up. You pull out $70,000. That will show as $70,000 worth of income. $70,000 worth of income. So, uh, then you’ll be taxed at that time. So, what you could do instead, which is the next slide, is Roth IRA. You can put in the same amount. The limits are the same. But you’re not going to get the tax deduction now. You will still get the benefit of not being taxed on any of the dividends or capital gains. But if you save that $1.2 million dollars, or any amount that you save up, let’s say you pull out $70,000, that’s going to be tax free. For many of us, this is going to be a better choice. There are some limits here, though. If your income is too great, you will not be able to partake of a Roth IRA, but you can do a Roth 401(k). Your company should be able to offer that. So, that’s what we’re going to talk about next are employer plans. So, you have... If you own a business, you can start a 401(k). It’s very easy to do. We help with that. We manage, I think, 220 or 230 of them now. Many of the non-profits and clinics in the community are customers of ours and we’re happy to help them with that. The costs are pretty low. You can match or not match. But the idea here is to get started sooner rather than later, because of the compounding returns. 401(k)s for your businesses also help to attract the best employees and retain the best employees. Now, with the SECURES Act, which started in January of 2020 of this year, there’s some significant tax credits for businesses up to $500 per employee which will max out at $5,000 per year for the cost of a plan. But, the plan that we offer, does not cost that much, so you might be able to wipe away most of that through a tax credit. Something we can talk to you about. The next slide talks about 401(k) and 403(b) plans. You might have a 401(k) through your employer already or a 403(b) if you’re in a school plan or maybe a hospital plan or something. $19,000 is what you’re able to put in, in 2019 and the $6,000 catchup is for folks that are over 50. This year, in 2020, it’s $19,500 and $6,500 catch up provision. And you can choose, you know, the tax-free or excuse me the one that is basically like a traditional 401(k), where you get the tax benefit now. So, let’s say you put in $19,500 in this year, 2020. The benefit of this is that money is not going to be taxed, so if you made $100,000, you can subtract $19,500 and so $80,500 is going to be where you’re gonna get taxed. But you’ll be taxed when you pull it out, so it’s a decision you have to make. In a Roth 401(k), you can put this money in. $19,500 this year and you will have already paid tax on it. Well, once you get to your end result and you’re pulling money out, you will not be taxed on any of that money. So, even if your income is $800,000, if you have a company 401(k), you can have the Roth 401(k), but you cannot have the Roth IRA. So, something that we can help you with and answer more questions. Do seek diversification and know that if you want to roll over your IRA, we can do that for you as well. That’s something we can do. And there are other plans. The next slide talks about SEP IRAs. So, if you’re a business that doesn’t have that many employees and you’re willing to match for those employees that you do have, the same percent match for yourself, you can open up a SEP IRA which is another option. You know, these are the kind of questions you can ask us based on the type of business you have and we can give you some of our thoughts on it, and you can also definitely consult with your tax adviser and they’ll tell you which one might be better for yourself. But, in both cases, you’ll be able to save a lot of money for your business if you’re a business owner. Okay, we’re gonna wrap up just here in just a few minutes and take your questions. So, we wanna talk to you about the fact that I haven’t really mentioned the Funds yet. Amana Income... Amana Income started in 1986. Amana Growth Fund started in 1994. The Developing World in 2009. Those are all stock funds. The Participation Fund started in 2015. It’s $125 million fund already. It’s the fastest growing from inception... you know, just in four or five years, has grown to $125 million. It shows the need for diversification, asset allocation, and that’s why this one has done really well within the community. So, there’s risk on each of these, in some cases there’s foreign, political, and economic instability. Adverse movements in exchange rates. Currency devaluation. Foreign government nationalization taxation and confiscation. We just want you to be aware that, of course, in any investment there’s going to be risk. The next slide about risk, you can see some specific information here about the Funds. And the final page on disclosure of, you know, risk is we’ll just say invest with caution and definitely pull our prospectus from our website, amanafunds.com, or Saturna.com, and there you can find a plethora of information, also our annual report is there as well. We do have no-load funds and so that’s one of the things that I mentioned early on. You can consult our professional assistance. If you’re already working with a financial adviser, you can definitely talk to them about our funds as well. In most cases they should be able to offer those to you and that way, you can make your entire life be the way that you want to in spirituality because if you’re already doing all of the other things for your religious benefit, you can also do this with your money. So, with that, we will now move into Q&A and we’ll throw it back to Monem in case he has any other thoughts and ideas. And then we’ll take questions as well. Thank you very much for your time.
Monem Salam: Thank you, Owaiz, for that presentation. I think you did a good summary of all the different types of plans and how we can not only save for the future but inshallah save some taxes along the way as well. Just one thing I did want to mention. The samples that were given about how much money you save and how much it grows to. We’re assuming a rate of return of 7%. Now, we don’t know what’s going to happen in the future, right? It could be 7, it could be higher, it could be lower. But just to give you an idea, you know, the 10-Year return on the Amana Growth Fund, for the past ten years has been about 14.12%. So, again, this gives you an idea that if you would have started ten years ago, you probably would have had more savings than even what the charts are showing, just because of Hamdullah (all praise is due to Allah) the performance that we’ve had. But it’s never... I mean, you know, a lot of times, even our shareholders, will look at, you know, where should they be putting their money? And they say, “Well, the Amana Growth Fund, let me just put everything over there.” But I think diversification, as Owaiz mentioned, is a very good idea, and on our website you can actually an Amana Selector and it’ll basically ask you a few questions and based on the answers to those, based on risk, time horizon, those type of things, will actually give you an allocation between all of our Funds. Between the Amana Growth Fund, Amana Income Fund, Developing World Fund, and the sukuk fund. And so, do please keep that in mind. Now, there are some questions, Owaiz, for you. So, I’ll start reading them and maybe you can answer them as I’m doing that.
Owaiz Dadabhoy: Sure.
Monem Salam: Do UGMA contributions have to come from your parents? Because the limit is doubled for parents, and Rebecca is wondering, and if the parents are no longer married, does the double limit still apply?
Owaiz Dadabhoy: Hmmm. Okay, now that is a good, tricky question, actually. Tricky because I don’t have all of the details for you. But the parent would open up the minor account and the grandparent can help to fund it. And in can be up to that maximum. That’s what I know of this, so check into it. Or, I can actually do that offline for you, as well.
Monem Salam: Let me jump in, if you don’t mind.
Owaiz Dadabhoy: Please.
Monem Salam: So, a UGMA is such that if you basically... it’s a gift that you’re giving to somebody. In this particular instance, a child. So, really anybody can give the gift. So, it can be one of your parents, and that’s $15,000, both of your parents $30,000. Each of your grandparents, another $30,000. You know, I can give gifts... I mean, anybody can give the gift. As long as you remember that if you give above what the gift tax amount is, which is, I think for this year is roughly around $15,000, then you do owe gift taxes, and the gift taxes are paid by the giver not the receiver. So just, keep that in mind. So, anybody can give. If you’re no longer married, still the mother and the father can still put money into the account. You don’t even have to do it into the same account because obviously there’s gonna be one guardian. So, the mother can open up on for her child and the father can open up one for their own children as well.
Owaiz Dadabhoy: That’s right. So, in that case, the beneficiary would be the child, but the parent would be the one that is handling the account.
Monem Salam: Correct. So, on the same topic. Assuming UGMA is post-tax contribution?
Owaiz Dadabhoy: Yeah, so you’ve already been taxed on that money. That’s what post-tax means. So, you’ve been taxed. It’s coming from your checking account. So, you’re not going to be able to deduct it on your taxes. The benefit is going to come from not being charged on dividends and capital gains along the way, and then eventually when the child, you know, maybe after 18, they may use it when they’re 25. It’s gonna be on their taxes at that time, but there is that tax benefit as well. The other thing that’s beautiful about this is that you’re not lumping all of your money into one place as we talked about. In case somebody joined late. If you keep all of your money in one place you have no idea how much is targeted for your child, for yourself, for retirement, etc.
Monem Salam: So, sticking on this UGMA for a little bit. Seems to be very popular. Does opening a UGMA account affect the kid’s prospects for scholarships?
Owaiz Dadabhoy: It potentially can. The details are... What I would ask you to do is... I don’t like to give a lot of guidance on this one because things do change and if they’ve changed and my knowledge is not there, I don’t want to give information that, you know, would be incorrect. Plus, you know... if the child is 5 years old... and by the time they turn 18, we don’t know what the tax changes are going to be at that time or, excuse me, the scholarship are going to be at that time, but usually there’s some percentage that would be used. Now, when the child turns 18, all of that money basically is under their Social Security number. So, this is something that you should look into a little bit more deeply and I will not fully answer it here.
Monem Salam: I think, Owaiz, you’re always, you know, one step ahead a little bit. So, the next question also has to do with something very similar to what you just asked. My parents had a UGMA for me. Now that it is reached maturity, can I transfer it to my IRA?
Owaiz Dadabhoy: Okay, so remember you have to keep in mind that retirement accounts have specific maximums, right? So, what you didn’t put in here, and rightfully so, is how much you have in that minor account which is now your account. So, if you had $50,000 in it, you would not be able to put that money to your retirement account but you could put in $6,000 per year, so you’re going to withdraw that money and you’re going to put the money into your IRA account. You can’t do a transfer at that point.
Monem Salam: Okay, thank you. And then, very quickly, someone is asking, “Do y’all...” must be from Texas. “Do y’all assist with wills as well?” Asking because of the mention of trusts that I associate those things together.
Owaiz Dadabhoy: Well, Monem if you want to answer that one.
Monem Salam: Sure. So, we actually... the process for the wills and trusts is that we are not allowed to help you set it up. You have to do that... if you’re doing a will or a trust you have to do that with a lawyer. But after that point, what we can actually do is assist you not only with the investment of that will, but also administrative... you can name us as a trustee on the account. On the will. On the trust. And we could manage that for you. So, those are the things that we can do. The next one is would you fraction your sukuk for investors with low balances. So, that’s an interesting question. So, our participation fund does have a, I think Owaiz you can correct me, a $5,000 minimum to open up the account, but once you’ve done that, there’s no minimum after that point. So, you don’t fraction a sukuk, but we do offer mutual fund shares that actually invest in a diversified portfolio of sukuk. So, hopefully that helps there as well. Owaiz, so back to the 401(k)s. There’s a bunch of questions on those, Owaiz. Number 1: I have a 401(k) from my employer. Can I open a 401(k) with Saturna?
Owaiz Dadabhoy: So, if you are a business owner then you can start up a 401(k) with us. If you are working for someone, you’d have to go through your employer plan. You have a 401(k) with your employer. You can still start up an IRA account with us. That’s how you would do that.
Monem Salam: Okay, great. At the age of 59 and a half, is there any benefit to convert a 401(k) over to a Roth IRA and what are the general limitations?
Owaiz Dadabhoy: Okay, so a 401(k)... that means that you don’t have access to it until 59 and a half, so the question is... let’s say that you have that million dollars, okay? As an example. Hopefully, inshallah, you get there. So, you have a million dollars and you say, I did not put into a Roth 401(k). I had a traditional 401(k), so I’m going to be taxed on all of this. Well, the government definitely wants to have you pay taxes at that point. So, if you’re going to converting it, you’re going to convert all million dollars into a Roth and you’re going to pay as if you took out a million dollars that year. So, instead, what you should do now, is if you’re already thinking in that way. If you haven’t gotten to that point yet, is start to money into your Roth 401(k) through your employer and what you can do then is you can have two buckets of money, right? You have the bucket of money which is already in the traditional 401(k) and when you withdraw that, it’s gonna be taxed. The other bucket is Roth 401(k). When you withdraw that money there is no tax. So, now, imagine you’re in retirement. You’re in your 78th year of your life and you need to pull out $25,000. You can say, “You know what? I didn’t have any income this year, at all. Or I had very little Social Security income. I didn’t have much of anything else. So, I’m not gonna be taxed, let me pull it out from my traditional 401(k).” When you’re 66 years old, you might say, “I had a lot of income come from rental properties this year, whatever thing happened that year. I don’t want to be taxed on this money because it’s gonna put me in a higher tax bracket. So, I’m gonna pull out money from my Roth 401(k).” It gives you great flexibility. Most of us have done the traditional 401(k) so definitely look at the Roth 401(k). You will not get the immediate tax benefit now, but you will get the benefit later on. You’ll be very happy if you have two buckets of money.
Monem Salam: Okay, thank you. One other question was if parents have a UGMA for their children, can they use that money for an emergency?
Owaiz Dadabhoy: Okay, now... you can use the money because you have access to it. But the rule states that it is the child’s money. So, you know, you should put that money back in. You should consider it a loan and put it back. Now, if you’re using it for their benefit, then of course you can do that. But the rule is that you’ve given the money... it’s a gift to the minor and so that’s why you have some of these tax benefits. The kiddie tax rule, etc. So, definitely pay that money back to the child.
Monem Salam: Okay. The other one... this is a little bit detailed so I’ll try to slow it down a little bit just so you can answer it. Okay, I have a 401(k), a 401(k) Roth, and a defined pension from my employer. Then, I have a brokerage account, a Roth IRA, a standard IRA at Fidelity. Should I open another IRA just to roll over? Is the pension taxed at the same rate when I withdraw?
Owaiz Dadabhoy: Okay wow, good questions. So, this is like... This is maybe somebody we should have a conversation with and break it down but generally speaking, if you do have any kind of retirement account through your employer, if you have an IRA account already set up, if that money is the same, so for example, if it’s a Roth 401(k) and you have a Roth IRA, there’s no harm in putting it into the same account because it’s the same tax consequences or lack of, right? Now, if you have a Roth 401(k) and you have a traditional IRA, you would not want to comingle because as soon as you do that, you’re going to change the rules of the game for yourself. And that’s gonna be detrimental to yourself. If you have a pension, you know, you’re either going to get paid over your lifetime or through your lifetime and your spouse’s lifetime, or you can take a one-time benefit and if they give you that one-time benefit... So, let’s say they tell you that you can get $2,800 a month until you pass, or we’ll give you $642,000, which one would you like? So, you take the $642,000 and you can put it into a rollover IRA so you would not be taxed. Because if you cash that check you’re gonna be taxed on the whole amount. We can talk to you about that.
Monem Salam: And also the other thing I was gonna say, the other thing about pensions is when you’re rolling them over, if you’re going from somewhere where you don’t control the assets, which you don’t know if it’s halal or not, to somewhere you do control the assets, so you can make it halal also. So, that’s another benefit to rolling over a pension into an IRA. Another question that was here and some of it is for me, some is for you, so I’ll let you answer first. It says with the market being where it is right now, is it advisable to sell current mutual fund holdings in another institution (quite high), pay the taxes, and then buy into AMAGX, which is also trading very high. Any advantages, and this is the question, any advantages or disadvantages of the timing of this transfer?
Owaiz Dadabhoy: Right. So, this question comes up when people wanna do a rollover or a transfer. We’re gonna assume here because you said taxes, that this is not a qualified account, meaning it’s not an IRA, 401(k), ESA, Health Savings Account. You can just transfer those over and not pay any tax. But um, yes, so one of the answers to this is that when you’re, you know, selling from one place to another, as long as the timing is around the same, there’s not gonna be much of a disturbance there. So, let’s just use the Dow Jones because that number everyone typically knows. If the Dow Jones is at 26,000 and then you say, “I wanna make that transfer.” As long as there hasn’t been some massive volatility where you have a huge drop in a week or so when that transfer is taking place, you should be okay. Right? It’s not gonna come over exactly, but there’s not much risk there because it happens pretty quickly.
Monem Salam: Thanks, Owaiz. I think I definitely agree with you in regard to that, so I won’t go on from there.
Owaiz Dadabhoy: One more thing, Monem. If you’re doing this, and you mentioned the tax piece of it... let’s say you have a gain and you’re gonna have to pay tax on it, look for something else that you have a loss in, right? So, if you have a loss in some individual stock that you bought which you should have never bought because somebody told you at a dinner party and you bought it and now it’s crumbled. Everyone’s experienced something like that in the past. Well, you can sell that in the same year and offset the gain that you had.
Monem Salam: The next question is how are the funds managed in the Amana Funds in case of short-term stock market volatility as we have seen in recent times. Basically, how are my investments protected by the Amana team? So, thank you for the question. Generally, what I would tell you is when we make investments in the Funds, we’re doing this on a long-term basis. Okay? What that means is that we’re looking at what the prospects of each individual company in our portfolio is over a complete market cycle that includes, you know, highs, lows, peaks, troughs, those type of things. So, and the past six months has been a classic example of that, where the market really on February 9th, I think it was, hit a high, went all the way down by March 29th and actually began to rally again. So, in this particular period of time, we really didn’t market time. And that’s not our expertise. Our expertise is not in knowing when the markets and we need to sell and when markets are low, we need to buy. Again, what we’re looking for is fundamentally really strong companies in strong industries with strong management that we can hold over a complete cycle. So, in this particular period of time, if you look at any of our funds, we might have had some sells here and there, but in general, we were doing it for other reasons rather than saying, “Oh the market is too high, we need to sell. Or the market is too low, we need to buy.” They were more done for fundamental reasons. So now, in this market environment, if we held companies that possibly were going to have a secular shift in the market, so that they most likely would not recover based on demographic trends, those type of things? Yes, we probably would have ended up selling something. But generally speaking, we like to hold things for the long-term and in the long run, also, you know, there might be some suffering in the short-term performance, but the long-term performances actually does turn out to be better. Again, another questions that came up was for you, Owaiz. Is a lump sum pension rollover taxed as a regular IRA or should it be in its own bucket?
Owaiz Dadabhoy: So, if you get a lump sum, my experience is that you can... as long as you can find out about the transfer of it, you can actually transfer it instead of taking the entire amount. That is potentially the case. You have to look at... Monem, do you have more details on that? Because the ones I’ve dealt with, you can actually transfer it and not have the tax consequence.
Monem Salam: Yeah, I would say if it’s a large enough pension, you definitely don’t wanna take it as cash because you’re gonna immediately be hit with the tax bill. For that, whatever the amount is, that becomes your income for that year. Many of the ones that have come up have been very similar and you have also... have the opportunity to put it into a rollover IRA. So, once you do that, then you can take out the money, take out your money based on your own projected needs rather than the actual thing. So, all will be rolled over, yes.
Owaiz Dadabhoy: Like, the forms that I’ve seen from people that we have assisted, they have multiple options. So, one of them is the monthly and another one is to roll it over and another one is to take not only take the lump sum but cash it out. So, last one, you don’t wanna do unless you’re willing to pay the tax that year.
Monem Salam: We have like one minute, actually we’re out of time now, so I wanted to kind of conclude. First of all, thank you, Owaiz, for coming on and making a very informative presentation. I did want to mention a few things. One of them is that all of the information that’s been mentioned here is available on our website, including, you know, the returns of our funds, how they’ve done in the short-term, the long-term, all those things are there. I do want to recommend, if you don’t mind, please do suggest to us future topics that we can talk about. So, you can do that. I’d also like to mention Halal Money Matters, which is our podcast. I also wanted to mention that a lot of the growth that we’ve had in the funds have been coming from people like you, who act as our ambassadors out there in the community, right? We have a lot of people, including yourselves, who really talk up the Amana Funds, how we’ve done for you, and how we can do for other people. Please do keep that up. Let people know about our webinars. Let people know about our podcast. Let people know about our funds and what they can use to be able to make investments in the long-term in a halal way. And the last thing that I wanted to mention is please do spread the word to your Imams in your community that there is a scholarship fund available for their children to help them to go to college. So, please do spread the word on that. We really appreciate your time, spending an hour with us from your busy life, busy day, and inshallah we look forward to seeing you at our next Amana webinar. Thank you very much.
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