In advance of our fifth client story, I wanted to respond to one of the most common investment concerns I’ve heard. How can someone structure their portfolio to at least keep up with inflation? Challenging investment environments like this one will always create opportunities. In this case, one of these opportunities can be for conservative and aggressive investors alike.
The opportunity does not necessarily rest with I-bonds, which have garnered a lot of press as a government-backed investment whose returns can match changes in the consumer price index. I-bonds are perfectly reasonable investments although the amount an individual can invest will be limited.
In my opinion, the opportunity rests with shorter term treasury inflation protected securities (TIPS for short). I would call TIPS a close cousin of the I-bond. The return from TIPS comes from a combination of a base coupon rate in addition to changes in the consumer price index. Currently, the base rate of a 5-year TIP is roughly 1.5%. Therefore, purchasing a 5-year TIP (as it is currently priced) and holding it to maturity is a government-backed method to outperform inflation. Its average annual return will equate to 1.5% plus the average annual change in the consumer price index.
The base rate on TIPs will not always be 1.5%. It has varied over time and has often been negative. TIPS haven’t always provided an opportunity to outperform inflation.
However, for those that purchase them as currently priced, it could be argued that it would satisfy a useful part of an asset allocation that would help ease the inflation concern. Perhaps the best news here is that the US government will let you have as many TIPS as you want. You can also purchase TIPS directly from the US government, in a brokerage account, within an exchange traded fund (ETF), and within a mutual fund.
Our fifth client story is about how we have worked with many of our clients to optimize their tax benefit from charitable contributions. While you can currently deduct a small level of direct cash contributions, larger charitable contributions represent an itemizable deduction and unfortunately most of us are not able to itemize our deductions. Therefore, many of us may not realize that we cannot deduct our charitable contributions.
Below are strategies that we have used to ensure that our client’s charitable intent also ends up being a tax benefit:
- For those taking required minimum distributions (RMDs) from either their traditional IRA or an inherited IRA, they can redirect up to 100% of this distribution to a charity or non-profit of their choice. This directly reduces reported income on their tax return. It represents a direct tax deduction and is often a much better alternative than using after-tax funds to make these contributions.
- Others have maintained the level of their charitable contributions but have lumped together two years of contributions into one, making these larger contributions every other year. This increases the likelihood that you will be able to itemize your deductions and thus benefit taxwise from the charitable contributions.
- Others have gone a step further, setting up a donor-advised fund. Donor-advised funds are maintained and operated by a section 501(c)(3) organization. They can allow you to contribute multiple years of charitable contributions in a single year, taking the deduction immediately, while allowing you to disburse these monies to multiple charities or a non-profits over a much more extended period.
- I’ve also seen cases where the issue is reversed. The charitable contributions are such a large portion of your income that the IRS will not allow you to deduct the full amount in a single year. In this case, many have taken the opportunity to convert a portion of the traditional IRA to a Roth IRA. Doing so will allow more of your charitable contribution to be deducted while also allowing for more of your retirement nest egg to be growing tax free versus tax deferred.
Our motto is “we can help you with that.” We will collaborate with you on any financial decision you make, engaging other subject matter experts when necessary. We will not stop until we get things right.
We encourage you to reach out to us for assistance in making important financial decisions and we always appreciate you recommending us to others.
Take Care
Gary
1-05343184
- Gary Alpert Financial Strategies and LPL Financial do not provide tax advice or services.
- Any examples given are for illustrative purposes only and not meant to provide specific advice or recommendations for any individual. We strongly recommend you consult a qualified professional regarding your specific situation.
- Series I Bonds are guaranteed by the US government as to the timely payment of principal and interest and offer a fixed rate of return and fixed principal value. Minimum term of ownership applies. Early redemption penalties may apply.
- Treasury Inflation-Protected Securities, or TIPS, are subject to market risk and significant interest rate risk as their longer duration makes them more sensitive to price declines associated with higher interest rates.