In this segment from the Rule Breaker Investing podcast, David Gardner brings in a special guest Joe Perna, financial planner at Motley Fool Wealth Management, to tackle a pair of questions. First, in this most giving time of year, how does one go about donating shares of stock to charity? Second -- and more complicated -- what are the best vehicles for investing if you intend to retire before you hit 59 1/2 -- the age where most retirement accounts end their early withdrawal penalties?
A full transcript follows the video.
This video was recorded on Nov. 29, 2017.
David Gardner: Mailbag Item No. 4: Mailbag Item No. 4 and Joe, I'm going to combine this into a couple of questions. My next guest, Joe Perna. You, sir, are who at The Motley Fool?
Joe Perna : Thanks again, for having me, David. I'm one of the financial planners at Motley Fool Wealth Management. We're down on the second floor. We help people with our Separately Managed Accounts that Motley Fool Wealth Management offers, as well as providing financial planning guidance to our clients.
Gardner: And you're also kind enough occasionally -- you, or Megan, or another member of the team -- to come on this podcast and help me tackle a question that I'm not as good at tackling, but that I feel is relevant. That I bet some other listeners have. Joe, you're here today with two answers for us.
Before we start that, where did you come from before The Motley Fool? Give us the 30-second your life story.
Perna: In college I started interning at Smith Barney. I got a job there. After college I started at Smith Barney. Then I moved to Morgan Stanley soon after. Worked there for about four years. Then Northwestern Mutual. I got a little taste of the insurance side of the business as well as the investment and financial planning side. And then came to The Motley Fool just over three years ago. I just had my three-year Fooliversary.
Gardner: And what motivated you to do that, Joe? Why the Fool? Do the Fool thing after such impressive previous firms?
Perna: It has to be partly the unbiased financial guidance that we're able to provide at Motley Fool Wealth Management, where we're not incentivized to sell certain products. It's really trying to give the best advice to clients for their current situation. So there's no pull to push annuities, or insurance, or the certain strategies that we use in our Separately Managed Account platform. So, that unbiased look at things. Also, Morgan Housel was such a fantastic writer that I grew a huge appreciation for and really put The Fool on the map for me.
Gardner: That is awesome. So Joe, talking about answering questions, that's what you're here to do today. Joel Riddell had one for us. He said, "In an upcoming Mailbag, could you go through the mechanics of donating shares to charity." Now this is a good time of year to talk to this...
Gardner: ... because we're in the giving time of year and near the tax end of the year, Joe.
Perna: That's right.
Gardner: He mentions, maybe, also mentioning the tax benefits, of course. Pointing to any guides if they already exist. Joe, give us a little bit on donating shares to charity. Best practices.
Perna: This is a pretty straightforward thing that I would say is low-hanging fruit in the financial planning world. A lot of people will donate cash to either their local charities, religious organizations, or what have you. They do it just from their checking or savings accounts. They just write a check. Make the cash deposit.
But it's very easy to do a deposit of appreciated stock. When you look at highly appreciated positions -- maybe concentrated positions of stock that you want to offload -- you can choose to do that. From a tax benefit standpoint, the gains, instead of being taxed at either long-term capital gains or short-term capital gains on those shares; it ends up just going directly to the charity, so you get the benefit of the total market value that's donated at the time of the donation. Any appreciation from the original investment or the basis ends up -- instead of paying taxes like you would just with the cash that you have -- going directly to the charity, which is just a fantastic benefit.
Gardner: It really is, and that's how I've given, as I've given year by year...
Perna: Oh, really?
Gardner: ...for the last 20 years or so. Especially if you can find some long-term winners, that's a great place to give the most generously that you can in the most tax-efficient way. Are there any pitfalls or things to be watching out for?
Perna: There are limitations. For a highly appreciated stock, if you're giving to public charities, you can only donate up to 30% of your adjusted gross income, and for private charities it's 20%. You don't want to do more than that, but even if you do end up giving too much or over that mark of 30% or 20%, there is a carry-over that the charitable contributions could do to following years.
If you're trying to be specific with the year because you have the higher income this year than you expect to have next year, you want to make sure you just go up to those limitations and talk with your accountant, your CPA to make sure that you know that limitation and you're not doing more than you would want to.
Gardner: Awesome. And you want to call your organization you're giving to ahead of time. Usually you need to find out what bank account you'll be transferring the shares. There's a little bit of rigmarole, there, but in my experience, Joel Riddell, it is worth it. It's a great way to give to max out your giving and get rid of capital gains taxes you otherwise would have paid.
Perna: Yes, and these days you can find a lot of that information online and find out contact information for the person at that organization that handles those types of requests. In my experience, when I've helped clients and actually reached out to those organizations directly, they've been so quick. Obviously, they would like to have those donations, and so they'll quickly respond to you to make sure that it gets taken care of seamlessly.
Gardner: Great! All right, Joe. Now, the second question, and we need to keep it moving here. I think I'm slowing us down with silly questions. This one's a little more technical, so I realize it's a higher degree of difficulty to nail this. I know you can do it, but if we can't do it all, maybe you can give a little bit more information about how to reach you.
Gardner: All right, Joe. So this is a question from Jeremy Nichols. I'm going to start off with what to me is the most fun part of this email. The whole thing's fun, but this is the most fun. "David and team, I wanted to offer you my heartfelt thanks and congratulations for your recommendations and podcasts. Thanks to many of your picks, so far this year my portfolio is up 50%." By the way, I think that means Jeremy is outperforming me. Good job, Jeremy! "Due to great companies like Align Technologies, NVIDIA, Universal Display, Match Group, The Trade Desk, Shopify, and Activision Blizzard." Wow, those are some dynamite companies. And let's keep pinching ourselves and recognizing there will be a few years like this one. It's been just a tremendous year, so...
Gardner: ... so good feelings all around. Here's the question that Jeremy has, Joe. "My question for you today is what is the best vehicle for additional savings to facilitate a potential retirement earlier than would be permitted by an IRA account where penalties seem to accrue to withdrawal before the age of 59 1/2?"
This is a guy who's 37 years old. He's maxed out what he can do within normal retirement investing. He's saying, "Do you personally expect this withdrawal age to increase over time?" How should Jeremy think about these things?
Perna: He's doing a fantastic job at saving into those tax-advantaged vehicles, the IRAs and Roth IRAs. The simple way to do it would be in individual accounts or a joint account if he's married. That would be a really fantastic way to have an account that's invested.
If you are buy and hold, like we preach, here, at The Motley Fool and Motley Fool Wealth Management, you're buying and holding quality businesses for the long run. When you end up selling them -- let's say you get to that early retirement, like your goal is -- you sell, and you have long-term capital gains. Depending on your income, that's likely going to be something like 15%. If you're in the highest tax bracket, maybe something like a little over 23%, but that's a much more favorable rate than short-term capital gains or IRA distributions once you turn 59 1/2, which will be your ordinary income levels.
You have preferential tax treatment on the capital gains, but those funds won't have any penalties, so if you invest, buy and hold, into high-growth businesses that, let's say, don't pay dividends, the only time that you have to pay taxes on the earnings, there, are when you end up selling them in order to create some income for yourself in retirement.
Also, there's some alternatives. For IRA accounts before you're 59 1/2, you can take 72(t) distributions. There's an IRS calculation that gets done to see a certain percentage of the IRA accounts that you're allowed to withdraw without penalty, which is nice. You'll have to pay taxes at ordinary income rates, but you at least don't have that penalty.
Also with Roth IRAs, it's something that we typically wouldn't recommend, but it's something to just keep in the back of your mind. The basis that you contribute to a Roth IRA can also be withdrawn without penalty. Earnings would be taxed and penalized on a Roth IRA before 59 1/2, but what you put into the Roth IRA can actually be taken out without penalty.
That's something to just keep in mind at those times. If you end up contributing over your lifetime -- your Roth IRA $100,000 -- you can actually withdraw that in those early parts of retirement without penalty. That's something to just keep in mind again for the long run.
Gardner: So now you'll know, Jeremy and Joel, why I have Joe on the show, because I'm not going to being doing 72(t) calculations or even quite knowing what those are without his help. Joe Perna, thank you very much for joining us on this episode of Rule Breaker Investing .
Perna: Thank you for having me.
Gardner: And Joe, with your dulcet tones, I just enjoyed hearing you talk. If I wanted to reach out for more from Motley Fool Wealth Management, how would I get in touch with the Joe Pernas of this world?
Perna: We have a team. We're available from 9:00 a.m. to 5:00 p.m. Eastern at (844) 408-4390. You can give us a call and ask questions about our financial planning and also our personal portfolios where we do help clients invest. Where we invest on the client's behalf.
Gardner: Thank you!