tithing doubled, tithing fund for DIK, should I use a 529 if I pay tithing? as well as a really good place to park your emergency fund, life insurance tips (laddering), etc. Sorry this is long, but lots to cover...
I am getting a lot of board mails and repeat questions in posts, which is OK, but I am hopeful that I can make a single post that has most of the info on it that I can send people to and not have to keep typing. If you read this and have questions, post them here, no matter how old it gets - that way, I can answer those questions in this thread and everyone will have access to it. If you prefer to ask privately, send me a board mail and I will answer by adding another post to this thread, so all of the info is here. This is about helping people. Hopefully it helps you. Read it all the way through as there are links on how to do various things, many more basic than the first few paragraphs here. Here it goes...
Essentially you invest. Ignore tithing and Donation in Kind (DIK). Instead think savings in equities. Mutual funds, ETF's, Stocks, whatever you want. Something that appreciates obviously, and tax efficiency is also a plus (some mutual funds have so much turnover that they distribute cap gains and dividends, so you have taxable income every year instead of growing tax free - I can explain more if that doesn't make sense, but generally you are OK with index funds). Generally, I don't reinvest distributions (it resets the basis and why would anyone want a bunch of tranches/lots to track?). Instead, I let the distributions flow out, and then make purchases with them in blocks (e.g., $500 multiples). (EDIT - some confusion I created here - every lot doesn't reset, but the position as a whole resets - if you have reinvested dividends, sometimes you have to parse it out if everything isn't a gain, and sometimes everything isn't 12 months. For example, if you bought something a long time ago and haven't made new investments. Market is high, you want to exit the position. You go to exit it, and instead of saying, "ALL SHARES", you have to click lots, select them, and also maybe be left over with 0.57 shares. It isn't that you can't reinvest dividends, I just don't because I have found it leads to more work. Besides, who would want to have a bunch of $3.52 lots - donating those lots takes time - easier to have bigger lots).
When I started my "fund", I started with $50 a month and grew it from there. You could also start investing with a small amount per month (Schwab is really good with this - Vanguard tends to want $3K minimum most of the time - I am sure there are others that make it easy too. Don't forget as you decide what brokerage to use that comprehensive service is good when you get to the end game, the DIK). When I think of where I started 25 years ago, and where I am now, it really is mind boggling, and the same thing will happen for you with discipline. This whole process is more about disciplined money management (aka saving) versus genius investing.
Depending on you sophistication, you may not need this, but just in case it helps, here is an idea of how to start:
So, you are now saving in equities for various things - your kid's mission, your kid's college, buying a vacation home in 10 years, whatever. Dream big or small, practical or impractical. The key is that you are investing money that you can afford to lose (let's not forget risk) versus investing money that you need to pay tithing next year. A one year time frame is WAY TOO SHORT. In fact, unless you are OK with 4-5 years waiting, you are probably better off in something safe. Quick returns might happen, but you can't count on it. So hopefully everyone is now thinking about INVESTING rather than creating some one year tithing fund.
So, over time, you create a brokerage account and/or a mutual fund account where you have appreciated equities. You want to "sell" or take profits - because you can, or because you have a need for cash. This is where the DIK comes in. You make a donation in kind to the church for tithing and other offerings with appreciated equities that are at least 12 months old (all lots have to be 12 months. This is why I don't reinvest dividends - each lot resets the clock for a piece of that equity holding). You take the cash you would have spent on tithing, and use it for your need (e.g., tuition, car, vacation, whatever), or if you are simply doing tax management, you take the cash you were going to spend on tithing, and reinvest it in equities, continuing to build your "fund".
By donating DIK, you get the write off of the market value for taxes, but you don't pay any capital gains. Simple example:
Buy a mutual fund in 2010 for $1,000.
In 2015, it is now worth $1,700.
If you sell it to use it, you have a $700 taxable gain. You have to pay taxes on it.
If you donate it, you get to write off $1,700 on your taxes (subject to deductibility eligibility), but you never have to claim the $700 capital gains income. This is the key to all of this and where the benefit lies.
You can do donations in kind at the beginning of the year, at the end of the year, in the middle of the year, some in the beginning, some at the end. Whatever works for you.
There are two ways to do a donation in kind. Directly with the church:
I have used this process for Schwab, Vanguard and Edward Jones. I stopped using Vanguard because it was a lot more time consuming than Schwab. You can use any of the larger brokerage houses. Decision who to use is on personal preference, especially now since pretty much everyone has competitive index funds.
Alternatively, you can use a donor advised fund (DAF). With a DAF, it is essentially a "charity" where you donate, get the tax writeoff when you donate, and then "direct" the DAF to send money to your charity of choice. In order for a DAF to be a charity, they cannot guarantee that your funds will go where you want them to, but if they don't follow investors instructions, they will quickly be out of business. If you read their small print, they will make it very clear that you have no control. However, my DAF is listed on my account summary when I go online, so effectively they treat it as if it is your money (but it isn't).
The advantages of a DAF are two fold:
1. Easy. I use Schwab and it literally takes me seconds to do my DIK's. It is easy when your brokerage is at the same place as your DAF. To pay your tithing (and FO), you simply log into your account, type in the amount, and select the church from the pulldown menu of preapproved charities. You can also use your DAF for other charities that you donate to, including getting new ones approved with your DAF. I am confident that every big brokerage house has a DAF. Probably best to set up your DAF where your brokerage account is.
2. Timing. You can donate any month of the year with your DIK (or cash) and pay the charity whenever you want. This is particularly useful if you want to double or triple pay your tithing. For example, if you think the market is really high and want to take profits, why not take the biggest gainers and "donate" them to your DAF, and then pay tithing over the next two or three years from there.
Don't get distracted by a DAF - you don't need it. The benefit is convenience, so if it is the thing that holds you back, ignore it. Note - I have not attempted to use a DAF for mission funds, only a direct donation to the church. I do not know if it is easy or not. It may be a matter of calling the church and telling them the money from your DAF needs to go to missionary XXX in ward XXX. I am confident that there is facilitation for this type of thing by using the church's DAF:
That link is also for the naysayers that imply some type of dishonesty. The church promotes it. I am sure with the recent tax laws, business is booming there...
2nd Note: If the DAF thing is too confusing, ignore it. The convenience really comes from when you donate long in advance, for example paying two years of tithing and a big chunk of it is advance. If you don't do that, ignore the whole DAF thing, but it is a little bit easier for tithing with a DIK. It is great if you want to "bunch" a lot of charity donations for tax purposes in a single year. Here is my initial experience both DIKing to the DAF, then making my first tithing payment the following January:
529's? If I had to do it over again, I wouldn't use a 529. Here are some thoughts on why instead I would just use my "fund":
The subject of double paying tithing? A better generic description is "bunching Donations". Many benefits under current tax law. Here are a couple of posts:
Life Insurance Laddering - I will post a link. Something good to consider. Be careful buying life insurance at work. My guess is most people if they change jobs don't remember to take it with them, so there could be periods in between jobs where you are woefully under insured. Here is the link to a brief post I made about laddering and other points about why you might not buy life insurance at work (if you have already, shop it - might be an opportunity to ladder what you have either way). Here you go:
Emergency Funds - over the last 25 years, one of the best (consistently) interest rates on a short term, fully liquid account is the Vanguard Prime Money Market Fund. Some people get nervous about FDIC insurance (Prime isn't FDIC but extraordinarily safe) and if so, check out Vanguard's Federal Money Market Fund. While it isn't FDIC insured, it purchases securities backed by the full backing of the Federal Government...practically the same as FDIC. Personally, my opinion of not using the Prime because of FDIC is not valid. The day Prime doesn't maintain their $1 fixed share price is probably the same day the FDIC is bankrupt.
At the time of this writing, they require a minimum $3K to open (but you can go lower if you need the cash). I know people love internet banks, and there may be times where those rates are a little better, but in my experience these guys are consistently at the top, so you can put it there and not worry about it. You may say so what about a few tenths of a percent? I would say simple lifetime habits like getting the best return for almost no effort are a no brainer. Here are the two funds' links (SEC yield is the current interest rate):
I wish I could compute how much I have saved all of you because of my many soap boxes. One of my goals in life is to make others around me wealthier. I have a bad back, so I can't help move people, but I feel like I have contributed in this regard and we all have ways we can contribute to help others. If you appreciate this, or I have helped you, pay it forward. #powerofthequorum