Investing 101

Reasons for investing and a look at some of the investment vehicles
that can help achieve your goals

Why Invest?

There are many answers to this question but three of the most important reasons to invest are to prepare for your retirement and your children’s education, and to benefit from available tax savings. Many people also wish to support the charities of their choice and are better able to do so with the right investment plan.

Because everyone’s financial situation is unique, ShariaPortfolio offers a number of different account types and investment strategies that can be tailored to meet individual goals, timelines and risk tolerances. To achieve the most out of your investment plan, it is important to begin as early in life as possible. The growth of your assets over time can then position you to meet the future with greater confidence.

Types of Investing

Retirement

Investments that can help you build a more secure future should be an important element in any retirement plan, especially given the uncertainties now surrounding Social Security. 

Save for retirement with ShariaPortfolio and get access to our broad range of halal investment options, including:

Rollover IRA

A rollover IRA is an account that allows you to move funds from your old employer-sponsored retirement plan or 401(k) into an IRA. With a rollover IRA, you can preserve the tax-deferred status of your retirement assets, without paying current taxes or early withdrawal penalties at the time of transfer. ShariaPortfolio can manage your current Rollover IRA for you.

Traditional IRA

A traditional IRA is a way to save for retirement that gives you tax advantages. Contributions you make to a traditional IRA may be fully or partially tax deductible, depending on your circumstances. Generally, amounts in your traditional IRA (including earnings and gains) are not taxed until distributed.

Roth IRA

A Roth IRA is a special retirement account that you fund with post-tax income (This means you can’t deduct your contributions on your income taxes). Once you have done this, all future withdrawals that follow Roth IRA regulations are tax free. Roth IRAs have income eligibility limits, so if you make too much money, you can’t contribute to a Roth IRA.

SEP IRA

A SEP IRA is a type of traditional IRA for self-employed individuals or small business owners. Any business owner with one or more employees, or anyone with freelance income, can open a SEP IRA. Contributions are tax-deductible. One of the key advantages of a SEP IRA over a traditional or Roth IRA is the elevated contribution limit.

401(k)

A little-known option in many 401(k) plans is self-directed investing. A self-directed 401(k) offers participants more investment options than a standard 401(k). If your current employer offers this flexibility, then ShariaPortfolio can manage your current 401(k) for you.

Tax Savings

Don’t pay more than you have to! You may be overlooking a number of tax-deferred or tax-advantaged investment options that can help your assets build in value.

Many people are surprised to learn that you can save a lot of money in taxes through your investments. Some retirement accounts allow you to defer taxes for many years and offer you immediate tax deductions. You can also utilize strategic buying and selling strategies for individual stocks to better control your tax exposure.

Tax-deferred accounts

You’re probably familiar with a 401(k) account, which is the most common tax-deferred account, but there are other account types that offer a great tax benefit. If, for example, you put $5,000 into a traditional IRA, you get a tax deduction of the same amount. Open a second IRA account for your spouse and you double your savings. If you are a self-employed individual such as a small business owner, you might qualify for a SEP IRA plan. This type of account allows you to invest up to $49,000 per year, permitting a much larger tax deduction.

While you still have to pay taxes later on most retirement accounts, when you retire your tax rate may be much lower than it was during your peak earning years. You can also compound the growth of your portfolio, using the cash that you would have otherwise paid to the IRS.

Strategic buying and selling

When you invest in individual stocks or ETFs (exchange traded funds), you get more control over your profits and losses, which will impact your tax situation. For example, if you were to sell Stock ABC in your portfolio that has a gain of $1,000, you could also sell Stock XYZ that has a loss of $600. This would reduce your total taxable gain to $400.

Education Funding

You want the best for your children and grandchildren. Now is the time to learn about the options available to help you prepare for the rising costs of education.

College funding takes discipline, effort, and planning. There are many other daily expenses competing for your monthly income so carving out any money for college savings isn’t easy for anyone. Therefore, it is important to start saving for college early so that you can accumulate more.

Let’s compare two hypothetical examples. The Abads and the Safars both want to send their child to a state university whose four-year tuition cost is approximately $40,000. The Abads start saving as soon as their daughter is born, putting away $100 per month in an account that earns 8 percent per year. By the time their child is ready for college, they will have saved $48,749 – more than enough to cover the cost of tuition, plus account for inflation.

The Safars, however, wait until their son is 10 years old before starting to save. Even though they can put away $250 per month in an account that earns 8 percent per year, when he  is ready for college eight years later, they have only saved $34,163 – they’ll have to make up the shortfall out of pocket.

These hypothetical examples are for illustration purposes only and do not represent the return of any specific investment; taxes, fees, and other costs are also not considered. But the message is clear: The earlier you start, the less you’ll need to save each month and the more you’ll have put away by the time you send your child off to college.

5 Tips for Funding College Costs

Here are some ideas for how to maximize your college savings.

  1. Assess your needs. To determine how much to save, you need to estimate the future cost of tuition at public and private institutions. There are a number of handy calculators online that can help you determine this; here is one from the College Board.
  2. Save early and often. The sooner you begin to set aside funds for college, the less you will have to save on a monthly basis. Allow your investments to grow along with your child.
  3. Set up a systematic savings plan with automatic paycheck deductions. Try to save on a consistent monthly or quarterly basis. (Please note, such a period savings or investment plan does not assure a profit and does not protect against loss in declining markets.)
  4. Keep a separate account for college savings. One popular option is a custodial account. These accounts ease the tax burden by allowing parents to shift some of their assets to the child at the child’s lower tax rate.
  5. Create an incentive program with your child. Offer to match any money the child contributes to their college account. Teach him or her to the importance of saving for the future – they will value their education even more.
Charitable Giving

Most of our clients have a keen interest in charitable giving. With a donor-advised fund, you may be able to align your charitable giving goals and your tax needs.

A donor-advised fund is a vehicle by which you are able to deposit charitable donations throughout the year and get a tax deduction in the year of each deposit. Your deposits can meanwhile grow in the fund until you are ready to make a contribution to the charities of your choice. You can also donate stocks from your standard portfolio to the fund without having to realize capital gains, while getting the full benefit of the donation at market value. You may choose to remain anonymous or use a name of your choice (ie. The Ahmed Family Charitable Fund).

Making charitable contributions through a donor-advised fund may allow you to:

  • Claim an immediate tax deduction
  • Avoid capital gains
  • Invest in the most flexible investment options
  • Recommend an investment advisor to manage the assets in the fund
  • Involve children and other heirs in charitable giving
  • Build an endowment
  • Recommend grants to qualified charities

Here are three examples provided by the Renaissance Charitable Foundation for donor-advised fund strategies. Keep in mind that these examples are hypothetical and for educational use only:

  1. A married couple with an adjusted gross income of $200,000 and a total net worth near $2 million wish to lower their tax burden while benefiting their favorite charities. Establishing a donor-advised fund (DAF) with $50,000 of appreciated securities allows them to take a $50,000 income tax deduction and avoid state and federal capital gain taxes when the DAF sells the securities. They are now able to recommend grants to charities from the newly-formed DAF while benefiting from a tax savings of over $20,000.
  2. A retired teacher wishes to create and fund a college scholarship program to assist students at the high school where she taught. After consulting with the school, she creates a scholarship fund with a DAF by contributing the first of a series of $10,000 annual gifts to the fund. Each following year, after selecting the scholarship recipient(s), she recommends that the foundation make a grant from the scholarship fund. She now receives an income tax deduction for each gift to the fund and, because the scholarship fund carries her name, ensures her legacy as an educator.
  3. A married couple with an adjusted gross income of $85,000 and a net worth of $1 million, including a highly-appreciated $150,000 rental home, wish to sell the rental home and benefit local children’s museum. By transferring the real estate, along with a $10,000 mutual fund to cover anticipated holding costs and expenses, to a DAF and allowing it to sell the property tax-free, the net sale proceeds can be used to create a $150,000 donor-advised fund from which they can now make quarterly grant recommendations to the children’s museum. The couple thereby completely avoids capital gains taxes, receives an income tax deduction for transferring the property to the DAF, and will able to benefit the children’s museum in perpetuity.
Account Types

STANDARD ACCOUNT TYPES

Through TD Ameritrade, we offer a wide variety of standard, retirement and specialty account types to help you grow your assets, minimize your tax exposure and achieve your life goals.

Individual

An individual account is a standard brokerage account with only one owner. The account owner can assign a beneficiary and upon death all assets in the brokerage account are passed to the beneficiary.

Joint Tenants with Rights of Survivorship (JTWROS)

A JTWROS account has two or more account owners, with each person having an undivided interest in the entire property. Upon the death of one account owner, remaining account holder(s) the rights to the entire account.

Tenants in Common

A Tenants in Common account has two or more account owners with each person owning a specified percentage of the entire property. Upon the death of one of the account owners, that person’s estate holds the right to their percentage of the account. Non-resident aliens are not eligible for this account type.

Community Property

A Community Property account is owned by two married people who acquire property during the marriage (with exceptions). Community Property is based on the theory that each spouse has equal interest in the property acquired by the efforts of either of them during the marriage. Upon divorce or death, the property is treated as belonging half to each spouse. Nine states allow Community Property accounts; ask your professional investment advisor for more information.

Tenants by the Entireties

A little-known option in many 401(k) plans is self-directed investing. A Tenants by the Entireties account is owned by two married people. This account type is different from Community Property in that upon the death of one account holder, the other retains the right to the whole account. However, property cannot be sold to satisfy the debts of one owner. Only certain states allow this account type, ask your professional investment advisor for more information.

Guardianship or Conservatorship

An account in which the account holder’s assets – usually a minor or a person who can no longer manage his or her own property or financial matters – are managed by a guardian or conservator in which investment decisions are made solely by the court-appointed guardian or conservator.

EDUCATION ACCOUNTS

Coverdell Education Savings Account

The Coverdell ESA is a savings plan created for the purpose of paying a student’s qualified educational expenses. These can include, but are limited to, tuition, books and uniforms. Like a 529, your money is tax-deferred, allowing your fund to grow faster. Contributions to Coverdell ESA are not tax-deductible. In additional, contributions are allowed for individuals under the age of 18. Distributions from a Coverdell ESA may be tax-free, but they must be used to pay for qualified educational expenses. The maximum contribution per year is $2,000.

Custodial Uniform Gifts to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) Accounts

With these type of custodial accounts, a minor can own cash or securities that are controlled by a custodian until he or she meets the age of majority in the state the account was set up. All deposits into these accounts are irrevocable gifts to the minor recipient. The Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA) make it simple to transfer property to a minor without a formal trust and without the restrictions applicable to the guardianship of a minor’s property. Assets in the account become an irrevocable gift to the minor under the UGMA or UTMA. Custodial accounts are not tax deferred. Taxation of earnings will be dependent on the minor’s tax rate.

SPECIALTY ACCOUNTS

Trust

A Trust account allows the account owner to transfer assets to one or more recipients, called trustees, who hold legal title to the transferred assets and manage the assets for the benefit of the owner or other named beneficiaries.

Limited Partnership

A Limited Partnership (LP) account is established by two or more individuals who carry on a business for profit. At least one partner bears unlimited liability and additional partners are liable only to the extent of their investment. TD Ameritrade offers accounts for legally established limited partnerships. Partnership – A Partnership account is established by an association of two or more persons who have an established partnership agreement to carry on, as co-owners, a business for profit. The accounts are not subject to taxation. Instead, the taxes flow through to the individual partners and are reported on their personal income tax returns.

Investment Club

An Investment Club account is established by a group of people who meet regularly and pool their funds to invest in securities. Since most investment clubs are formed as partnerships, their dividends are realized capital gains and losses are passed through for tax reporting by the individual members.

Limited Liability

A Limited Liability account offers some of the most popular benefits of partnership and corporate accounts. It offers the pass through tax status of the partnerships and the limited personal liability of corporations. The liability of the company and its owners is limited to their investment. States that require two or more members are MA, SD and WY. TD Ameritrade offers accounts for legally established LLC’s.

Sole Proprietorship

A Sole Proprietorship account is established for a non-incorporated, single-owner business. With this type of account, the owner and the owner’s company are considered a single entity for tax and liability purposes.

Corporate (profit or non-profit)

A Corporate account is established by a legal entity, authorized by a state, ordinarily consisting of an association of numerous individuals. A corporation can acquire assets, enter into contracts, sue or be sued, and pay taxes in its own name.

Non-Incorporated

A Non-Incorporated account is established by non-incorporated, non-profit organizations. These are not chartered as corporations, therefore lacking the powers and immunities of a corporate enterprise.

Pension or Profit Plan

Pension or Profit Plan accounts are tax-exempt trusts that can be set-up by a company or self-employed individual for the purpose of retirement.

Small Business Plans

Accounts designed specifically for small businesses, these accounts make it possible for growing companies to attract and retain valuable employees by helping owners provide for their financial future.

Retirement Account Types

Traditional IRA

A Traditional IRA may give you an immediate tax benefit because contributions are often tax deductible. With a Traditional IRA, up to $6,000 of tax-deferred earned income in a tax year and $6,500 of tax deferred income in subsequent tax years may be placed in the IRA until the account owner reaches 70½ years of age. Account owners may also contribute an additional $6,000 a year of earned income in a tax year and $6,500 of tax earned income in subsequent tax years to a separate IRA for a non-income-earning spouse. Account owners who are age 50 or over are allowed to contribute an additional $1,000. Taxable distributions from an IRA can be taken without penalty starting at age 59½ and must be started by April 1st of the year following the year the account owner reaches 72.

Basic eligibility requirements

  • You must be under age 72 by the end of the calendar year
  • You must have earned income or a spouse with qualified earned income
  • No income limits

Roth IRA

A Roth IRA’s tax advantages differ from the Traditional IRA. If eligible for this account, your annual contribution limits are the same but are not tax deductible. However, since annual contributions have already been taxed, these contributions will never be taxed again and earnings can grow tax free. Finally, the contributed funds can be withdrawn any time you wish and there are no required minimum distributions after age 70½. Withdrawals of your contributions to a Roth IRA are tax-free anytime. However, withdrawals of earnings are only free from federal income tax, provided they meet the following requirements:

  • You are purchasing your first home ($10,000 lifetime maximum)
  • The Roth IRA has been in existence for at least five years
  • You are age 59½ or older
  • You become disabled or have passed away

You can convert a Traditional IRA to a Roth IRA at any time. You must note that when you convert to a Roth IRA, you must pay income tax on the otherwise taxable amount of the transfer. To maximize the benefits of conversion, the money to pay those taxes should come from a source outside the Traditional IRA you are converting. You may convert your Traditional IRA over several years to manage the tax consequences.

Rollover IRA

Consolidate your retirement savings by rolling your old 401(k) over into one convenient, easy-to-monitor account. This can help you better manage your portfolio and can provide access to a broad range of investments, while maintaining the tax-deferred status of your retirement assets. A Rollover IRA is designed as a holding account for funds distributed from an employer’s qualified retirement plan such as a 401(k) or 403(b). Moving funds into a Rollover IRA may allow the account owner to return the funds to another employer’s qualified retirement plan in the future. To initiate a direct rollover from a qualified retirement plan, please contact your plan administrator. Rolling over your old 401(k) into a TD Ameritrade IRA, managed by ShariaPortfolio, is free and there are no setup or maintenance fees. You’ll also avoid costly cash distribution penalties and taxes if you were planning to cash out your accounts.

SEP IRA

A SEP (Simplified Employee Pension Plan) IRA is a retirement plan for self-employed individuals and small business owners and employees. SEP IRAs may not only be attractive to your employees, they can also be quick and easy to set up and administer for your small business. Consider a SEP if your business is new or has variable profits.

Benefits of SEP IRAs

  • Simple administration
  • No employer tax filing
  • No specific annual funding requirements
  • Flexible contributions

Employees must be age 21 or older, have earned at least $600 during the year and have worked three out of the five previous years. Employers may adopt less restrictive eligibility requirements so as not to exclude themselves from participating in the plan. A SEP IRA must be established and funded prior to the employer’s tax return due date, plus extension. Contributions can vary by year. All contributions are reported in the tax year received on tax form 5498. In the  first tax year, contributions can be 25% of employee’s compensation or $61,000, whichever is less. In subsequent tax years, contributions can be 25% of employee’s compensation or $66,000, whichever is less.

Solo 401(k) (for small businesses)

A Solo 401(k) retirement plan offers the maximum retirement contribution (limits or levels) for self-employed individuals. This retirement plan has high contribution limits and flexible investment options. The Solo 401(k) allows owners to make both employer and employee contributions, providing owners the ability to maximize their personal retirement contributions and their business deductions. Since there are no employees, there are no compliance testing requirements. This is why a Solo 401(k) is most suitable for self-employed individuals or a business owner with no additional employees other than a spouse or a child. Consider this type of plan if your business has irregular profit patterns. Eligible businesses include sole proprietorships, partnerships and incorporated businesses.

Benefits of Solo 401(k) Plans

  • Discretionary funding
  • Higher contribution limits
  • Greater control over withdrawal timing
  • Low administrative expenses

A Solo 401(k) must be established by the end of the employer’s tax year and funded by the employer’s tax return due date, plus extension. Contributions can vary by year.

SIMPLE IRA

A SIMPLE (Savings Incentive Match Plan for Employees) IRAs is a retirement program that is easy– administer and salary deferred. It is for employees with an employer match option. Consider a SIMPLE IRA if your business has steady income and your employees want to make contributions to a retirement plan. Employers with 100 or fewer eligible employees who did not maintain another retirement plan are eligible to establish a SIMPLE IRA. Each eligible employee can decide whether or not to participate and how much to contribute. Employer contributions are mandatory. Employee contributions are optional. Employees may contribute up to 100% of compensation or a maximum of $14,000 for a tax year and $16,000 for subsequent tax years. Participants age 50 and over may contribute up to $17,000 for a tax year and $17,500 for subsequent tax years.

The employer matches employee salary contributions dollar-for-dollar up of up to 3% of compensation (this can be reduced to 1% in any two out of five years), or a makes non-elective contribution of 2% of compensation for all eligible employees (including those who decide not to contribute for themselves). The compensation cap for determining the employer non-elective contribution amount is $275,000 for the a tax year and $280,000 for subsequent tax years.

Funds cannot be removed from the SIMPLE IRA until it has been established for at least two years. Withdrawals from a SIMPLE IRA after two years are still subject to federal income tax and/or a tax penalty.

Benefits of SIMPLE IRAs:

  • Simple administration and low administrative costs. No maintenance or account fees
  • No employer tax filings
  • No IRS contribution testing
  • Employees can make contributions
  • Does not limit eligibility or employee access to funds

This plan is generally suitable for businesses with 100 employees or fewer. It’s usually available when other tax-favored plans are not permitted. A SIMPLE IRA must be established prior to October 1. The employer contribution (match or non-elective) must be made by the employer’s tax return due date, plus extension.

Investment Strategies

We offer three distinct Sharia-compliant investment strategies to provide our clients with options to meet different financial goals, timelines and preferences.

These strategies give our clients a starting point in the construction of their portfolios. Each client portfolio can then be further customized based on the client’s specific needs.

Strategy: AGGRESSIVE

Asset Allocation:

80% – 95% Equity

0% – 20% Fixed Income

0% – 20% Cash

Objective: Long-term capital growth

Description: The ShariaPortfolio Aggressive investment strategy focuses on individual Sharia-compliant common stocks primarily using a value-based approach to selection. Sharia-compliant mutual funds are also utilized for greater diversification and added exposure to international investments. This strategy is suitable for investors with a time horizon greater than five years.

Strategy: MODERATE

Asset Allocation:

70% – 85% Equity

10% – 30% Fixed Income

0% – 20% Cash

Objective: Growth and income

Description: The ShariaPortfolio Moderate investment strategy focuses on dividend-paying Sharia-compliant stocks and mutual funds. Stocks are selected using a value-based approach. Sharia-compliant mutual funds are also utilized for greater diversification and added exposure to international investments. This strategy is suitable for investors that have a three- to five-year investment time horizon.

Strategy: INCOME

Asset Allocation:

40% – 65% Equity

25% – 50% Fixed Income

0% – 20% Cash

Objective: Income and capital preservation

Description: The ShariaPortfolio Income investment strategy focuses on dividend-paying Sharia-compliant stocks and mutual funds. Stocks are selected using a value-based approach with an emphasis on stability and high yield. This strategy is suitable for short-term investors and those seeking regular income.

Omars Sulessiman has joined ShariaPortfolio as an Ethical Advisor. Read More >