7 min read

Tik, Tok, Tax Time

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Happy Thursday!

If you’ve been waiting for March vibes to turn from lion to lamb, it didn’t happen this week. Between banking turmoil, stark new climate warnings, and a massive blob of seaweed upending spring break plans, the month is still roaring along. Here’s what we’ve been watching:

  • Interest rates: The Federal Reserve raised rates by another quarter of a point. That brings the benchmark federal funds rate to a range of 4.75% to 5% (that’s what banks charge each other for overnight lending, and it trickles down to mortgages, car loans, credit cards, etc.). Even if rates have reached their peak, experts don’t expect them to drop to rock-bottom levels anytime soon, so we have a quiz today to test your knowledge on investing in a high-inflation, high-interest-rate environment — keep scrolling for the link ⬇!
  • Bank failure fallout: The banking crisis continues to unfold, with Swiss giant Credit Suisse becoming the biggest bank to fail in the last two weeks. If you don’t bank with any of the institutions that have collapsed, you might be wondering — what does all this mean for me? We think you might find last week’s FWIW of interest, and this Wall Street Journal story is helpful in understanding some of the ripple effects.
  • Climate warning bell: A new report from the UN International Panel on Climate Change warns that climate change is already transforming the planet and that we must act swiftly to stop it. Reports of early starts to spring are just one example of how we are seeing global warming play out, and the report made it clear that the younger you are, the greater the impact these changes will have on your life. If the headlines have you thinking about how to support sustainability through your investments, our Guide to Cleantech Investing might be helpful.
  • ESG investing in political crosshairs: President Biden exercised his veto power for the first time on Monday, protecting the rights of retirement fund managers to consider environmental, social, and governance (ESG) principles in their investment decisions.

Also, it might be hard to believe, but Tax Day is just 26 sleeps away. Whether you’ll be rushing to file at the last minute or you’re already thinking ahead to next year, we’ve got some tips for you below.

News you can use

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  • You can feel good about your next Target run, as the retailer just earned a perfect score on a racial and gender pay scorecard. Target earned an A+ for reporting 100% racial and gender pay equity across its entire employee population. Other leaders include Starbucks, Mastercard, Microsoft, Pfizer, BNYMellon, Citigroup, Adobe, American Express, Visa, Lowe’s, Best Buy, and Home Depot.
  • Assets in US gender equity funds have doubled over the last three years to $1.3 billion, according to Morningstar. Unfortunately, those funds still represent less than 0.01% of total equity fund assets in the US. If you want to learn more about gender lens investing, we’ve got you covered.
  • Starbucks’ new CEO Laxman Narasimhan is having quite a first week (and may need something stronger than coffee). Ahead of his first annual shareholder meeting, workers at over 100 stores went on strike, demanding an end to alleged union busting. Today, shareholders will vote on a proposal for a review of the company’s labor practices, which Morningstar called “a bellwether” of how Wall Street’s feeling. Read more about how shareholders weigh in on issues.

Asking for a friend….

We know there is a lot to think about these days, and it can sometimes be a bit overwhelming. To help with those nagging questions and so you have useful resources at your fingertips, here are few links to resources and past stories relevant in these turbulent times:

Get in-quiz-itive

As we look back on the first few months of 2023, we have to say that there was more news about ESG pushback, banks, and interest rates than we expected. We’ve been sharing the latest resources, news, and trends to help you stay on top of the world and align your investing with your values, and we’ve covered a lot of areas — from faith-based investing and where to invest your savings to how to invest while trying to prepare for a potential economic downturn.

Whether you’ve been reading for two weeks or 52, take this short, no-judgment quiz to see how much intel you’ve absorbed through our newsletter.

And if you miss a few answers? No sweat. You will see links to relevant content, so you can catch up on any stories you missed.

Good luck!

Strategically shield your savings

Graphic of tax documents and a calendar

Before we can truly stop and smell the springtime roses, we first have to deal with tax season. The IRS, the federal agency most likely to make Americans scowl (no, really, there was a survey), will process more than 168 million individual income tax returns this year. If you’re new to investing and still not sure how your stocks are taxed, here’s our quick explainer from last year that should answer any basic questions you have.

It’s also wise to use investing strategies to minimize what you owe each year as you build a nest egg for retirement. Since returns are compounded over time, all the money you can save in reducing taxes now will also have a big impact many years from now. There isn’t much you can do for 2022 on this front, but here are a few ways to make your portfolio more tax-efficient for the future.

Choose tax shelters for long-term savings

When saving for long-term goals, experts say it’s best to put as much money as you can in tax-advantaged accounts like a 401(k), IRA, Roth 401(k), and Roth IRA. If there is an employer match, please take advantage of it. Other tax-advantaged accounts include the 529 plans many parents use to save for college and Health Savings Accounts (HSAs).

As the experts at TIAA have explained: “The main difference between a Roth IRA and traditional IRA is the way they are taxed. Your Roth IRA contributions are not tax deductible, but your qualified withdrawals in retirement will be tax-free.” With Roth IRA accounts, all your contributions and earnings are tax-free to withdraw at age 59.5 in most cases. With traditional accounts, your present tax bill is lowered and contributions and earnings are only taxed when they are withdrawn. A Roth IRA offers more flexibility and liquidity that some financial advisors say may be appealing to young adults who fear they may need to access their contributions before retirement, but please check with your advisor or do your research, as everyone's circumstances are different. (BTW, Roth isn’t another boring acronym.)

Limit your trading and time your sales

As any online investing message board will show, the prospect of buying and then selling investment assets to turn a quick profit is incredibly exciting to most people. But there are tax implications to consider that can have a significant impact on the actual profit you make from selling an investment.

If you hold an asset for less than a year before selling, the profit (a.k.a. short-term capital gains) will generally be taxed at a higher rate than if you held it longer. Short-term capital gains are taxed at your ordinary income tax rate (up to 37% in 2022) instead of the long-term capital gains tax rate, which is 15% for most people and a maximum of 20%. For a good breakdown on what tax rates likely apply to you in all of these scenarios, check out this Wall Street Journal article. In short, buying and then holding your shares generally leads to lower tax bills when you sell those shares.

Buying and holding is also beneficial for dividend-paying stocks. While ordinary dividends are taxed as ordinary income, “qualified” dividends are taxed at the favorable long-term capital gains tax rate we described above. Experts say most dividends fall into the “qualified” status, and all of this is reported on your Form 1099-DIV.

Allocate your assets to the right account

Your main choices to house your investments are traditional retirement accounts, Roths, and if you’ve maxed out those, taxable brokerage accounts. Since some asset types are taxed at higher rates than others and require more protection, it’s important to make the right choice. For example, index funds are usually more tax efficient than actively managed funds, and ETFs are usually more tax efficient than mutual funds.

The experts at Charles Schwab say tax-advantaged accounts are ideal for individual stocks you plan to hold one year or less. They also say this applies to actively managed funds that may generate significant short-term capital gains, like taxable bond funds, zero-coupon bonds, inflation-protected bonds, high-yield bond funds, and REITs. Taxable brokerage accounts are ideal for individual stocks you plan to hold for more than one year, like index funds, exchange-traded funds (ETFs), stock or mutual funds that pay qualified dividends, and I bonds.

NerdWallet advises putting high-growth-potential, high-income, and low-tax-efficiency assets (like actively managed funds) in Roth accounts so none of the earnings that arise from them in the future will be taxed.

Asset managers claim tax-managed funds can reduce taxes, but Vanguard warns these are more expensive and “probably make sense for you only if you're in a higher tax bracket.”

FWIW readers know that we often talk about the importance of factoring in fees and taxes when making financial decisions. Hopefully, this dive into tax implications on your investments helps you avoid unexpected surprises as you file your taxes this year… and for many years to come.

Before you go -

Yet again, Finland is ranked as the happiest country in the world, finishing just ahead of Denmark and Iceland. We are proud of FWIW readers worldwide, but we know we probably have more readers from the countries ranked #13 and #15 than those in the top three. Here’s hoping that a little of what you learn by reading FWIW weekly leads to a tiny bit more happiness down the road.

** FWIW team members own shares of Citigroup and Microsoft.

Want to learn a bit more about the writers behind FWIW? Have an idea you would like us to cover in the future?