Extend Your Savings Tax-Smart Strategies for Keeping More of Your Money

CHARLES SCHWABCHARLES ONWARD

INSIGHTS SPRING 2020 FOR CLIENTS INVESTED IN THEIR FINANCIAL FUTURES

A better approach to rebalancing Page 9

To refi or not to refi? Page 13

Learning from your EXTEND YOUREXTEND SAVINGS losses Page 23

Extend Your Savings Tax-smart strategies for keeping more of your money. Pages 6, 15 & 26 SPRING 2020 Dear Client,

As you accumulate wealth, making tax-smart investment decisions becomes increasingly important—especially for those in the highest income tax brackets. To that end, we’ve rounded up some timely tax-related topics, including what to know about income payouts from ETFs (page 6), why municipal bonds may be the new darlings of high-income earners (page 15), and how making tax-smart withdrawals in retirement can help extend the life of your savings (page 26).

Elsewhere in this issue, you can find insights on a variety of other subjects, including how the newly passed SECURE Act could affect you (page 20), how to decide if you should manage your own finances or bring in a professional (page 30), and what to know about buying, renting, and selling a second home (page 38).

If you have questions about how these topics apply to your own finances, I encourage you to reach out to us at 877-297-1126. We welcome every opportunity to help you achieve your goals.

Sincerely,

Joseph Vietri Senior Vice President, Investor Services

See page 46 for important information. ◆ Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. ◆ Investing involves risk, including loss of principal. (0220-92J3) Spring 2020 CONTENTS

5 13 30 34

DEPARTMENTS ON THE COVER

2 SCHWAB ORIGINALS PERSPECTIVES EXTEND YOUR SAVINGS Listen, read, and learn. 13 To refi or not to refi? 6 Tax-efficient ETFs. By Rob Williams 15 Municipal bonds’ tax-free income. 3 CEO’s NOTE 17 Drowning in debt. Tackling retirees’ biggest challenge. By Liz Ann Sonders 26 How smart tax planning can help By Walt Bettinger extend the life of your savings.

20 THE BIG PICTURE THE BOTTOM LINE 7 SECURE Act takeaways. 5 Does your fund’s age matter? FEATURES

7 States that tax Social Security. 23 TRADING Learning from your losses. 30 DIY vs. Pro 8 Dividend-paying stocks. By Joanna Payne When to take financial matters into your own hands—and when 9 A better approach to rebalancing. to ask for help. 42 SPOTLIGHT Schwab Live | Schwab Bank Visa® 34 Worth Their Weight 11 FAMILY MATTERS debit card | 1099 Dashboard. Alternatives to ubiquitous Why giving unequal inheritances capitalization-weighted index funds can sometimes make sense. can help diversify your portfolio. 48 ON YOUR SIDE A helping hand. 38 Home Sweet Homes By Charles R. Schwab Your guide to buying, renting, and selling a second home.

Onward (ISSN 2330-3514) is published quarterly. This publication is mailed at Standard A postal rates. ◆ If you prefer not to receive Onward, please call 877-908-0065. ◆ POSTMASTER: Send address changes to Onward, Charles Schwab & Co., Inc., P.O. Box 982600, El Paso, TX 79998-2600. Onward does not assume any liability resulting from actions taken based on the information included in this magazine. Mention of a company or security does not constitute endorsement. Some contributors to Onward may have active positions in securities or companies discussed in this issue. NWS73437Q120-00

ON THE COVER: ILLUSTRATION BY CHRIS BUZELLI SPRING 2020 | ONWARD | 1 SCHWAB ORIGINALS

Listen Read

Mark Riepe and Financial Decoder™ return for Season 4 Tax season is upon us. Find tips for lowering with new episodes about the cognitive and emotional your tax bill, maximizing deductions, and effectively biases that can influence your financial decisions. Listen managing your taxes throughout the year at and subscribe at schwab.com/financialdecoder. schwab.com/taxstrategies.

Learn Follow

Do you know someone who’s just getting interested in Fixed income @kathyjones investing? At schwab.com/how-to-invest, they can find International @jeffreykleintop a primer on key concepts, as well as tips on how to start Markets and economy @lizannsonders and where to turn for guidance. Personal finance @carrieschwab Research @schwabresearch Trading @randyafrederick Washington @miketownsendcs

(0220-9J5A)

Joe Carberry Mark W. Riepe, CFA® Sara Smith Senior Vice President, Senior Vice President, Editor in Chief Communications & Schwab Center for Owned-Channel Marketing Financial Research Jeremy Hartley and Community Managing Editor Tamar Dorsey Helen Loh Vice President, Stacia Miller Senior Vice President, Brand Journalism Associate Managing Retail Client & Editor

Owned-Channel Marketing BAITINGER MAX BY ILLUSTRATIONS

2 | CHARLES SCHWAB | SPRING 2020 CEO’s NOTE

A t Schwab, we’ve never been required minimum distributions to Tackling afraid to come up with bold generating a predictable monthly solutions to tough problems. That’s paycheck from your investments. Retirees’ why we set out to tackle one of the When you activate the Schwab biggest challenges retirees face: finding Intelligent Income feature on your Biggest a smart, predictable way to pay them- Schwab Intelligent Portfolios account, selves from their retirement savings. you’ll receive an estimate of your Challenge Schwab Intelligent Income™ answers monthly income, tools to help you that challenge by pairing the technol- see how far your savings could go, We’ve made it easier ogy of Schwab Intelligent Portfolios® notifications if you veer off course, and to generate tax-smart with a tax-smart withdrawal strategy tips for getting back on track. Best of withdrawals from your that considers all aspects of your all, you pay no additional fee and can portfolio. income needs—from prioritizing start, adjust, or stop the feature at any time—because we understand how important it is to maintain flexibility in retirement. After years of diligently working toward retirement, you want to ensure you’re making the most of your savings. We’re here to help. To learn more about Schwab Intelligent Income, visit schwab.com/intelligentincome.

Sincerely,

Walt Bettinger President & CEO

See page 46 for important information. ◆ Please read the Schwab Intelligent Portfolios Solutions™ disclosure brochures at schwab.com/ intelligentdisclosurebrochure for important information, pricing, and disclosures related to the Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium programs. ◆ Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ are made available through Charles Schwab & Co. Inc. (“Schwab”), a dually registered investment advisor and broker dealer. Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. (“CSIA”). Schwab and CSIA are subsidiaries of The Charles Schwab Corporation. ◆ Schwab Intelligent Income™ is an optional feature for clients to receive recurring automated withdrawals from their accounts. Schwab does not guarantee the amount or duration of Schwab Intelligent Income withdrawals nor does it guarantee any specific tax results such as meeting required minimum distributions. (0220-9CV4)

SPRING 2020 | ONWARD | 3 Enjoy the beneﬁ ts of American Express with rewards tailored for Schwab investors.

Visit schwab.com/cards or call 866-912-8258 to learn more about the Charles Schwab Cards from American Express.

The Charles Schwab Cards from American Express are only available to clients who maintain an eligible Schwab account.*

Brokerage Products: Not FDIC Insured • No Bank Guarantee • May Lose Value

The Cards under this program are issued by American Express National Bank and not Charles Schwab & Co., Inc. (“Schwab”). Schwab is the broker dealer subsidiary of The Charles Schwab Corporation. Brokerage products, including the Schwab One® brokerage account, are offered by Schwab, Member SIPC.

*The Platinum Card® from American Express exclusively for Charles Schwab and the Charles Schwab Investor Credit Card® from American Express are only available to you if you maintain an eligible account at Schwab (an “eligible account”). An eligible account means (1) a Schwab One® or Schwab General Brokerage Account held in your name or in the name of a revocable living trust where you are the grantor and trustee or (2) a Schwab Traditional, Roth, or Rollover IRA that is not managed by an independent investment advisor pursuant to a direct contractual relationship between you and such independent advisor. Eligibility is subject to change. American Express may cancel your Card Account and participation in this program if you do not maintain an eligible account.

Charles Schwab & Co. Inc., 211 Main Street, San Francisco, CA 94105 ©2020 Charles Schwab & Co., Inc., All rights reserved. Member SIPC. ADP94411Q319-00 (0619-9UU9) (6/19) 00230449 CONTENTS ACTIVELY MANAGED FUNDS | ETF INCOME | TAXING SOCIAL SECURITY | AND MORE

W hen comparing actively man- predict, this advantage dissipates over Showing aged mutual funds for your time as new funds enter the fray.1 portfolio, how much attention should On the other hand, it’s very difficult Their Age you pay to a fund’s age? to assess whether a new fund will go On the one hand, research has the distance. “Investing in a brand-new When it comes to actively shown that, on average, younger funds active strategy is pretty risky, because managed funds, is age just a outperform older funds, perhaps you’re basing your entire investment number? because advances in technology give on the promise of strong returns with- new fund managers an advantage out a track record to back it up,” says

ILLUSTRATION BY MATT BLEASE MATT BY ILLUSTRATION over existing managers. As one might Michael Iachini, vice president and

SPRING 2020 | ONWARD | 5 THE BOTTOM LINE

head of manager research for Charles their strategies have staying power or generally doesn’t carry as much risk as Schwab Investment Advisory. are just flashes in the pan.” investing in a new actively managed That’s why, when selecting funds for When it comes to index funds, fund, so long as it’s from a reputable inclusion on Schwab’s Mutual Fund however, age isn’t really a factor. source using an established approach.” OneSource Select List®, Michael and “These funds are passively managed, his team exclude those with less than meaning their entire strategy is to three years of performance history. replicate a market benchmark rather 1L’uboš Pástor, Robert F. Stambaugh, and “We’re looking for funds with consis- than outperform it,” Michael says. “As Lucian A. Taylor, “Scale and Skill in Active Management,” Journal of Financial Economics, tently strong performance relative to a result, investing in a new index fund 2015. their peers,” Michael says. “Otherwise, NEXT we have no way of knowing whether See page 46 for important information. ◆ Investors should consider carefully information STEPS contained in the prospectus, including investment objectives, risks, charges, and expenses. You can request a prospectus by calling 800-435-4000. Please read the prospectus carefully before investing. ◆ Charles Schwab & Co., Inc., Member SIPC, receives remuneration from fund companies View Schwab’s lists of funds prescreened by participating in the Mutual Fund OneSource service for recordkeeping and shareholder services and other administrative services. Schwab also may receive remuneration from transaction fee fund the experts at Charles Schwab Investment companies for certain administrative services. ◆ Charles Schwab Investment Advisory, Inc. (“CSIA”) Advisory at schwab.com/selectlist. is an affiliate of Charles Schwab & Co., Inc. (“Schwab”). (0220-925Y)

B ecause ETFs are structured and dividends will be subject to ordinary How Tax- traded differently than mutual income tax rates.2 funds, ETFs typically realize fewer Interest payouts from taxable bond Efficient Is capital gains, making them one of the ETFs, on the other hand, are always more tax-efficient investments you taxed as ordinary income, irrespective Your ETF? can own. of how long you’ve held the fund. So, If you invest in ETFs that generate if generating tax-efficient income is Income from exchange-traded significant income from payouts, how- one of your goals, you might instead funds plays by different rules. ever, taxes might be of greater concern. want to consider municipal bond “Dividends and interest are treated ETFs, which are tax-free at the federal differently and should therefore be a level (and sometimes at the state level, factor when selecting funds for your depending on where you reside). portfolio,” says Emily Doak, CFA and Of course, taxes are only one con- managing director of ETF research at sideration among many when select- Charles Schwab Investment Advisory. ing investments for your portfolio. For example, most dividends from Regardless of how their payouts are ETFs holding U.S. stocks are considered taxed, funds also need to support your “qualified” for federal tax purposes, investment goals or income needs. meaning they’re taxed at the long- Fortunately, ETFs remain one of the term capital gains rate of 0%, 15%, or most tax-efficient ways to reach your 20%, depending on your income.1 (By long-term objectives. contrast, nonqualified dividends are treated as ordinary income, meaning 1An additional 3.8% surtax may apply for they could be taxed as much as 37% high-income earners with significant invest- 2 for high-income earners.) But to ment income. | Payments from securities- lending revenue and income from options qualify for the long-term capital gains strategies are not eligible for qualified tax treat- NEXT rate, you must meet certain holding ment. For more details, see IRS Publication 550, “Investment Income and Expenses,” at irs.gov/ STEPS period requirements; if you don’t, your pub/irs-pdf/p550.pdf.

Keep tabs on your income payouts with the new Investment Income function on schwab.com. See page 46 for important information. ◆ Investment returns will fluctuate and are subject to Log in today to view year-to-date and estimated market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Shares of ETFs are not individually redeemable directly with the future income payouts for each of your Schwab ETF. Shares are bought and sold at market price, which may be higher or lower than the net

accounts. asset value (NAV). All ETFs are subject to management fees and expenses. (0220-9Z9L) BLEASE MATT BY ILLUSTRATION

6 | CHARLES SCHWAB | SPRING 2020 tax-free interest, and half your Social Social (In)Security Security benefit (or benefits, if you’re married)—up to 85% of your benefits Here’s when—and where—the tax man could take a bite out could be taxable as ordinary income,” of your benefits. Hayden says. If you’re worried your Social C ontrary to popular belief, some confusing to figure out what you Security payouts will increase your Social Security recipients may owe.” (You can check your state’s rules tax bill—or perhaps even push you owe taxes on their benefits—at the using the directory at taxadmin.org/ into a higher tax bracket—a bit of state and federal levels. state-tax-agencies.) tax management can go a long way, “The majority of states won’t take Even if you live in a state that doesn’t Hayden says. “Taxes can often be off- a piece of your Social Security check,” take a bite out of your Social Security set by, say, strategically selling assets says Hayden Adams, CPA, CFP®, and benefits, the federal government still from various accounts or making director of tax and financial planning might: More than 40% of current charitable donations, so reach out to at the Schwab Center for Financial beneficiaries pay income taxes on a your tax advisor to talk through all the Research. “But some do, and they portion of their benefits.1 “Depending available options.”

vary in their methods for determin- on your combined income—which is 1Summary: Actuarial Status of the Social Security ing taxability, making it all the more the sum of your adjusted gross income, Trust Funds, ssa.gov, 04/2019.

Unlucky 13 If you live in one of these states, your Social Security benefit could be taxed.

Vermont

Minnesota Connecticut Montana North Dakota

Rhode Nebraska Island

Utah Colorado West Kansas Missouri Virginia

New Mexico

See page 46 for important information. ◆ This information is not intended to be a substitute for LEARN For more tax-related insights, specific individualized tax, legal, or investment planning advice. Where specific advice is necessary MORE visit schwab.com/taxes. or appropriate, you should consult with a qualified tax advisor, CPA, financial planner, or investment manager. (0220-94EK)

SPRING 2020 | ONWARD | 7 THE BOTTOM LINE

S tocks That Pay Investing in dividend-paying stocks via an exchange-traded fund or a Adding dividend-paying stocks to your portfolio can help mutual fund can help manage this boost returns over time. risk. “Fund managers have the time and expertise to research businesses W ith bond yields hovering near capital or meet other obligations. that seem poised not only to sustain historical lows, stocks that offer And when a company cuts its divi- their current payouts but also to grow quarterly payouts may have renewed dends, its stock price often declines, their dividends in the future,” Bill says. allure for income-seeking investors. potentially compounding the impact Nearly half (48.8%) of the stocks in on your portfolio. 1Schwab Center for Financial Research. the S&P 500® Index offered a dividend yield of at least 1.90%,1 as of December 16, 2019. Meanwhile, 10-year U.S. The dividend dividend Treasuries offered a yield of 1.87% on The stocks of companies that grew their dividends over time that same day—though of course pay- have historically outperformed all other stocks. outs from Treasuries are guaranteed while those from dividend-paying Historical total returns, 1980–2019 stocks can be reduced or eliminated at any time and without notice. Dividend-paying stocks can be especially important to retirees. “As 13.8% health care costs continue to rise and bonds offer nominal yields, retirees need a way to help offset 11.1% inflation and rising expenses,” says Bill McMahon, a senior vice president at 8.7% Charles Schwab Investment Advisory. 7.9% “Dividend-paying stocks can help.” That said, dividend-paying stocks aren’t only about the dividends. “In addition to helping boost portfolio income, companies that increase their dividends send a positive signal about the business’s health,” Bill says. Indeed, over the past four Stocks that Stocks Stocks Stocks decades, equities with strong and grew or with no that cut or that did rising dividends have significantly initiated change in eliminated not pay outperformed their low- and non- dividends dividends dividends dividends dividend-paying counterparts in terms of total returns, which include Source: Compustat, Ned Davis Research, S&P Capital IQ, and S&P Dow Jones Indices. ©2020 Ned price appreciation (see “The dividend Davis Research, Inc. Further distribution prohibited without prior permission. All rights reserved. See additional explanatory notes and disclosures at ndr.com/copyright.html. For data vendor dividend,” right). disclaimers, refer to ndr.com/vendorinfo. Past performance is no guarantee of future results. By the same token, companies facing economic hardship may slash their dividends to help preserve See page 46 for important information. ◆ Investing involves risk, including loss of principal. ◆ The information provided here is for general informational purposes only and should not be NEXT considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review STEPS an investment strategy for his or her own particular situation before making any investment decision. ◆ Dividend-focused funds may underperform funds that do not limit their investment to ® dividend-paying stocks. Stocks held by the fund may reduce or stop paying dividends, affecting ThomasPartners Strategies’ dividend-focused the fund’s ability to generate income. ◆ Portfolio management for the ThomasPartners Strategies approach aims to provide monthly income, is provided by ThomasPartners Investment Management (“ThomasPartners”), a division of income growth, and competitive total returns Charles Schwab Investment Advisory, Inc. (“CSIA”). CSIA is a registered investment adviser and an affiliate of Charles Schwab & Co., Inc. (“Schwab”). Both CSIA and Schwab are separate entities over time. Call your Schwab financial consultant and subsidiaries of The Charles Schwab Corporation. ◆ Please refer to the ThomasPartners

to learn more. Strategies Disclosure Brochure for additional information. (0220-9ZH2) BLEASE MATT BY ILLUSTRATIONS

8 | CHARLES SCHWAB | SPRING 2020 Rebalance, Rebalance, Rebalance How regularly rebalancing your portfolio can help reduce risk.

W hat if there were a way to con- sistently buy low and sell high? As it happens, there is—if you take a disciplined approach to rebalancing your portfolio. Because some of your holdings will invariably do better than others as the market rises and falls, your portfolio can drift away from its target asset allocation over time. If you commit to regularly selling assets that have become overweighted in your portfolio and buying those that have become underweighted, you’ll effectively be buying low and selling high. Unfortunately, many people do the opposite. “When you have new money to invest or are making changes to your portfolio, the common urge is to put more money into the stocks or funds that have been doing the best recently,” says Mark Riepe, head of the Schwab Center for Financial Research. “Instituting a disciplined rebalancing strategy can help remove those emotions from the decision-making process.” Practically speaking, you can approach rebalancing in a number in any one area of your target allo- with your target allocation, log in to of ways. Some people like to follow a cation as a prompt to rebalance,” schwab.com/portfoliocheckup.) strict schedule, realigning their port- he says. For example, if your target However you choose to approach folio to their target asset allocation allocation calls for 60% stocks, you rebalancing, the important thing is to monthly or quarterly. Others—includ- might choose to rebalance when have a reasonable rule—and to stick ing Mark—find it more useful to set a that allocation rises to 65% or falls to to it, regardless of what the market threshold past which it’s time to act. 55%. (To see if your portfolio is in line is doing. “One approach would be to use a five-percentage-point departure See page 46 for important information. ◆ Please read the Schwab Intelligent Portfolios Solutions™ disclosure brochures at schwab.com/intelligentdisclosurebrochure for important information, pricing, and disclosures related to the Schwab Intelligent Portfolios and Schwab NEXT Intelligent Portfolios Premium programs. Schwab Intelligent Portfolios® and Schwab Intelligent STEPS Portfolios Premium™ are made available through Charles Schwab & Co. Inc. (“Schwab”), a dually registered investment advisor and broker dealer. ◆ Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ are designed to monitor portfolios on a daily basis and will also When you invest with Schwab Intelligent automatically rebalance as needed to keep the portfolio consistent with the client’s selected Portfolios®, your portfolio is rebalanced risk profile. Trading may not take place daily. ◆ Diversification and rebalancing a portfolio cannot ensure a profit or protect against a loss in any given market environment. Rebalancing may cause automatically. Get started at schwab.com/ investors to incur transaction costs and, when rebalancing a non-retirement account, taxable intelligent. events may be created that may affect your tax liability. (0220-94JM)

SPRING 2020 | ONWARD | 9 Filter out the noise. Focus on the facts. Of 8,000 funds reviewed by Morningstar for its “Terrific 28” list, less than 1% were chosen. Six are American Funds.*

Now available at Schwab. Find us at schwab.com/americanfunds

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value. Investors should carefully consider investment objectives, risk, charges, and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies. This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice. American Funds Distributors, Inc., member FINRA. * Source: Morningstar, “FundInvestor: The Terrific 28,” by Russel Kinnel, May 2019. Morningstar’s criteria for the “Terrific” list include: expense ratio in the cheapest quintile, manager investment of more than $1 million in the fund, Morningstar Risk rating below the High level, Morningstar Analyst Rating of Bronze or higher, Parent rating of Positive, returns above the fund’s benchmark over the manager’s tenure for a minimum of five years, must be a share class accessible to individual investors, and no funds of funds. Each fund’s results were evaluated based on share classes that were accessible to individual investors. Morningstar evaluated American Funds’ Class A shares because they are most widely held by individual investors. According to Kinnel’s report, American Funds’ “institutional and clean share classes would have gotten more funds through the tests.” The list’s criteria have changed over the years.

2019_Q2_OO_PIFilterNoise-112019.indd 1 12/6/19 6:27 AM ILLUSTRATION BY MARTINA PAUKOVA heirs can make sometimes heirs sense. Why dividingyour unequallyamongyour estate To Each Own Their By thesametoken, children who’ve borrowed who were freetopursue theircareersunencumbered. earn less—and thereforereceive more—than siblings because, well, fairdoesn’talways mean equal.” “But unequaldistributions areincreasingly common, wealth strategist with Schwab Private ClientinDenver. of fairness,” says Marianne Hayes, a CPA and senior caregiver totheiragingparentsmightconceivably “ For example, childrenwho serve astheprimary “Most familiesdistribute assets equally inthename proverb, andthesamecanbetrueofyour heirs. The five fingers arenotallequal,”goesa Persian SPRING 2020 | ONWARD |11 FAMILY MATTERS

money from their parents or taken families will wholeheartedly endorse an advance on their inheritance—for, a disproportionate amount of an estate say, the down payment on a home or going toward the care of a special-needs ICON TK to help start a business—might receive child,” Marianne says. “But when that’s proportionately less once their parents not the preferred approach, a life insur- pass on. (See “Fair play,” right.) ance policy can help support that care A couple Marianne worked with had while still allowing for an equitable one child who was a successful attorney distribution of assets.” Fair play and another who did charity work in When bequeathing assets for the Five factors to consider when divvying up assets among your heirs. Africa. “My clients initially wanted care of special-needs heirs, make sure to create a trust whose distributions you understand that such gifts may would be commensurate with each affect federal or state benefits. In such 1. Age child’s income, in order to perpetuate cases, many also consider incorpo- Heirs at different life stages can have their respective lifestyles,” Marianne rating a special-needs trust, which radically different financial needs. Older adult children, for example, says. “However, after thinking through can be used to pay housing, qualified may be looking to finance a first the consequences of that approach— education, equipment, insurance, and home, while younger kids might with the child who will likely need medical expenses not covered by gov- need help with college or graduate more help in retirement receiving the ernment benefits without reducing or school costs. smaller inheritance—they reversed eliminating eligibility. course to reach what they felt was a 2. Family business more equitable solution.” Don’t go it alone If the family business goes to the Whatever approach you take to the dis- child or relative responsible for running it, bequests of similar Special circumstances tribution of your estate, a good first step value—such as the contents of a Blended families can require a similarly is to partner with a seasoned financial savings account or the proceeds nuanced approach, particularly when planner or wealth strategist—many of from a life insurance policy—might it comes to offspring from multiple whom have already been down this make sense for your remaining heirs. marriages. For example, the children road with other clients. of a first marriage may have careers That can help avoid what Marianne 3. Income level and families of their own, while those says is a common challenge for those Heirs with hefty incomes may need from a second marriage may still be struggling to establish an equitable less help securing their financial futures than, say, an adult child facing college—and all the costs higher estate plan: avoiding the issue alto- caring for an aging parent. education entails. In each case, the gether and thus leaving the distribution inheritance’s structure and even its size of your estate to others. “If you don’t 4. Number of can be substantially different. have a will, the state in which you grandchildren That also may be true when a family reside will settle your estate for you— The number of children each of your business is involved. If one child is and it may not distribute your assets in children has can also influence the effectively running the business, for the way or to the people you’d prefer,” distribution of assets. “There’s an example, he or she might receive Marianne says. argument to be made for this ownership upon the parents’ passing. In all instances, it’s critical that you approach,” Marianne says. “The important thing is to share your In such cases, some parents might be up front with your heirs in advance. thinking beforehand to help head off consider taking out life insurance “When someone passes away, it’s often any hurt feelings.” policies equal to the value of the busi- not the dollar value of an inheritance ness, naming the children outside the that matters, it’s the emotional value 5. Special circumstances business as beneficiaries. For example, that’s attached to it—which is why From a child with a disability to an if the business is valued at $1 million, it’s so important to communicate heir who’s taken an advance against the life insurance policy per child might your intentions while you’re still her or his inheritance, your bequests also be valued at $1 million. in good health,” Marianne says. “After need not be equal to be equitable. Life insurance also can be useful in all, the last thing you want is for your covering the costs of caring for a child generous bequest to be seen as a with disabilities. “Of course, many bad thing.” n LET’S See page 46 for important information.◆ TALK This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where Your Schwab financial consultant can help you think through the details of your specific advice is necessary or appropriate, you should consult with a qualified tax estate plan and connect you with other Schwab specialists who can help implement it. advisor, CPA, financial planner, or investment Call today to schedule an appointment. manager. (0220-94VV)

12 | CHARLES SCHWAB | SPRING 2020 CONTENTS MORTGAGE REFINANCING | MUNICIPAL BONDS | DROWNING IN DEBT

To Refi or Not to Refi

Locking in a lower interest rate often makes sense—but not always. By Rob Williams

W hen the Federal Reserve began However, locking in a lower rate commit to paying off the loan far more cutting interest rates in July 2019, may not be enough, especially if you quickly than required. homeowners jumped at the chance to plan to move in the next few years. If refinance their mortgages, with such you can’t make back what you paid in Reason 2: Replace an adjustable- activity reaching a three-year high in closing costs and other expenses by the rate mortgage August.1 time you sell, refinancing probably isn’t Today’s rates don’t have much room to But locking in a lower interest rate worth it. go lower, but they have plenty of room won’t always save you money in the Even if you plan to remain in your to rise. Although we don’t expect rates long run. Here are four common reasons home, you need to think about how to increase significantly anytime soon, to refinance—and what to consider far along you are in your current loan. the benchmark 30-year fixed-rate about each. For example, if you’re 10 years into mortgage did rise in mid-December a 30-year loan and you refinance to 3.93% from 3.90%, according to Reason 1: Cut your interest rate with another 30-year loan, you’re Bankrate’s weekly survey of large In September 2019, more than half of potentially adding 10 years to the time lenders. And it was 5.04% only a year all borrowers with 30-year fixed-rate it will take to pay off your home. To earlier.3 mortgages could have saved at least justify that extra decade, you’d have Hence, refinancing might make three-quarters of a percentage point to save a significant amount of money the most sense for borrowers with an on their interest rate by refinancing, on your monthly mortgage payments adjustable-rate mortgage (ARM), which according to mortgage-analytics firm (see “Loan vs. loan” on the following is susceptible to rate hikes once the 2 ILLUSTRATION BY KLAUS KREMMERZ KLAUS BY ILLUSTRATION Black Knight. page). Either that or you’d need to loan’s initial fixed-rate period expires.

SPRING 2020 | ONWARD | 13 14 | schwab.com/refinance. Bank homeloanprovided by QuickenLoans at See howmuchyoumaysavewith aSchwab STEPS NEXT CHARLES SCHWAB to keep your high-rate debt under provided you’re disciplinedenough high-rate debtmay beasmartstrategy, value ofyour home. you toborrow extra fundsagainst the considering acash-outrefi, which allows of high-interest debt,you mightbe If you’re carrying significantamounts debt Reason Pay 4: offmore expensive value. reaches 78% of your home’s original terminate once your principalbalance your PMI payments will automatically bank forareappraisal. Andinany case, you tohave PMI, you canalsoaskyour your equitystake nolongerrequires your homehasrisentothepointwhere in “Loan vs. loan,”above. with your current loan,asdemonstrated rate—it may make moresensetostick substantially lower thanyour current if your potentialnew rate isn’t in your home for much longer—or expense by refinancing. may bepossible toeliminate that a down payment ofless than20%—it you have aconventional loanandmake (PMI)—which is usually requiredwhen If you pay for private mortgage insurance insurance mortgage Reason ofprivate 3:Getrid rates rise. afford a higher payment if adjustable loan, as well as whether you could in a fixed payment for the life of your peace ofmindthat comes fromlocking future rate cuts orincreasesagainst the the end,weigh your expectations about monthly payment, at least initially. In than ARMs,which may meanahigher typically come with higher interest rates borrowers sidestep futurerate increases. with a fixed-rate mortgage canhelp such Locking intoday’s relatively low rates PERSPECTIVES |MORTGAGE REFINANCING Using low-rate funds to pay off Of course, ifyou believe thevalue of Be that asitmay, fixed-rate mortgages However, ifyou don’tplanonstaying | SPRING 2020 Source: Bankrate.com. Thisexample ishypothetical andprovided forillustrative purposesonly. it over the life of your new 30-year loan. Even a 0.75 percentage point cut to your current loan wouldn’t be worth vs.loan Loan lower monthly payment may be your that can help you run the numbers.) A available at bankrate.com/calculators, mortgage calculators, such as the one trigger. (Thereareanumberofonline cost-benefit analysis beforepullingthe a refi,make sure you doathorough Whatever your reason for considering Compare andcontrast unmanageable. risk shouldthepayments become potentially putting your homeat your monthly mortgage payments, saying that acash-outrefi will increase control inthefuture. But itgoeswithout paying moreinthelongrun. goal, butit’spossible you could endup Total interest paid over life ofloan Total interest due Interest paidto date Years remaining Monthly payment Financial Research. the Schwab Center for retirement income at financial planningand is vice president of Rob Williams,CFP n $308,671 $308,671 $153,926 20 years $2,272 30-year term $400,000 @4.25% CURRENT LOAN ® , Mortgage recasting Mortgage 3 1 (FHA) loanstypically are not eligible. and Federal Housing Administration applicable fees. Veterans(VA) Affairs hand to cover thelump sum andany requires borrowers to have cash on the life oftheloan,but generally flow rightaway without extending of theloan. monthly payments for theremainder principal balance, thereby reducing schedule based onthesmaller lender setsupanew amortization term remain thesame, but the owed. Theloan’s interest rate and a lump sum against theprincipal “recast” by theirmortgages paying Some lendersallow borrowers to Another way to reduce payments. 08/21/2019. | ity hitsthree-year high:MBA,”reuters.com, bankrate.com, 10/24/2019. “Mortgage rates edgeupashomeprices surge,” Richard Leong, “U.S. homerefinancingactiv This strategy can increase cash due onrefinanced loan) current loanplus total interest (interest paidto date on $350,046 $196,120 $0 30 years $1,680 30-year term $317,886 @3.50% paidtoprincipal date) (original loanminus REFINANCED LOAN 2 Mortgage Monitor,09/09/2019.|

ILLUSTRATION BY KLAUS KREMMERZ Lender. MemberFDICandEqualHousingBank, products are offered byCharlesSchwab Deposit andotherlendingSchwab Bank. Charles Schwab&Co., Inc.orCharles with TheCharlesSchwabCorporation, information. See page46forimportant Inc. QuickenLoans Inc.,isnotaffiliated is offered andprovided byQuickenLoans, a licensedmortgage lender. Homelending is neitheralicensedmortgage broker nor originate anymortgage loanproducts and offer,not solicit, endorse,negotiate or invested. CharlesSchwab&Co., Inc.does including thepossiblelossofprincipal and are subjecttoinvestmentrisk, or obligationsofCharlesSchwabBank, not insured bytheFDIC, are notdeposits Schwab &Co., Inc.(MemberSIPC)are Brokerage products offered byCharles of TheCharlesSchwabCorporation. affiliated companiesandsubsidiaries Schwab &Co., Inc.are separatebut Charles SchwabBankand reserved. Member SIPC. (0220-90J7) ©2020 CharlesSchwab &Co., Inc.Allrights Inc., usedunderlicense. Loans” isaregistered servicemarkofIntuit subsidiary ofRockHoldingsInc.“Quicken services provided byQuickenLoans Inc.,a CL-3030. Conditionsmayapply. WA: ConsumerLoan CompanyLicense – License#21430;RI:LicensedLender; 1387; PA: ofBanking LicensedbytheDept. OH:MB850076;OR:License#ML-Dept.; Licensed Mortgage Banker–NYS Banking Department ofBankingandInsurance.;NY: (888) 474-0404,LicensedbytheN.J. 1050 Woodward MI48226, Ave.,Detroit, #626; NJ:NewJersey–QuickenLoans Inc., #6743MB;NV: LicenseNH BankingDept., Consumer Finance;NH:Licensedbythe of Bankingand Licensed bytheMSDept. MS:an offerforaratelockagreement; ME: SupervisedLender License;MN:Not MA: Mortgage Lender License#ML3030; Licensed Mortgage CompanyMC.0025309; Financial andProfessional Regulation;KS: of Mortgage Licensee#4127–Dept. Mortgage Licensee#11704;IL:Residential the DivisionofRealEstate;GA:Residential Finance Lenders Law;CO: Regulatedby CA ResidentialMortgage Lendingand Act underthe ofBusinessOversight, Dept. License #BK-0902939; CA:Licensedby Phoenix, AZ85004,Mortgage Banker 0404; AZ:1N.CentralAve.,Ste.2000, MI48226-1906,(888)474- Ave., Detroit, No. TX:1050Woodward 100152352.AR, states. ALLicenseNo. MC20979,Control Equal HousingLender. Licensedin50 #3030; www.NMLSConsumerAccess.org. all 50states.QuickenLoans Inc.;NMLS u QuickenLoans islicensedin u Lending u

municipal bonds’ tax-free income 2017, some investors worried that how you can navigate the changes. what’s shapingthemunilandscape and more forthem. looking toaddmunishave beenpaying income asaresult ofthenew taxlaw. other ways toreduce theirtaxable more attractive to those looking for it alsomadetheirtaxbenefits even preserve munis’federal tax-free status, was at risk. But not only did the TCJA By Cooper Howard restricting supply. been greater—substantially bonds hasrarely demandforThe municipal Mad for Munis investors goingforward? Let’s lookat investments increase, while those holders have seenthevalue oftheir muni-bond andmuni-bond-fund W So, what doesthismeanformuni One result isthat many existing (TCJA) was nearing passage in hen theTax Cuts andJobs Act

realities ofthe new tax code should n three reasons: for many fixed income investors—for believe muniscontinue tomake sense expect demand toremainstrong—and record forthefirst two quarters. funds during thefirst halfof2019, a poured $47 billion into muni-bond In spiteoflow relative yields, investors Continued demand and could continue torestrict supply. 2018’s 25%declineinmuniissuance elimination may be partly to blame for help reduce borrowing costs—whose popular strategy muniissuers usedto with so-calledadvance refundings—a thus driving updemand. shield moreoftheirtaxable income, full SALT expenses, turnedtomunis and New York, unable to deduct their high-tax states like California,Illinois, cap. deduction. (Previously, there was no on thestate-and-local-tax (SALT) of theTCJA was the$10,000capplaced One ofthebiggerchangestocome out A recipe for costs rising

Even ifdemandcools somewhat, the At thesametime, theTCJA didaway SPRING 2020 1 ) Asaresult, many taxpayers in | ONWARD |15 3 We We 2

PERSPECTIVES | MUNICIPAL BONDS

continue to drive demand and bolster A leg up returns for tax-advantaged munis for The higher the federal marginal income tax rate, the more valuable muni bonds’ the foreseeable future. tax-free income becomes in comparison to corporate bonds and U.S. Treasuries. n The muni market’s overall credit health remains strong, and issuers 2.5% should be able to continue making 2.0% timely interest and principal payments. Indeed, from 1970 through 1.5% 2017, the default rate among muni

issuers was less than 1%—compared 1.0% with 6.7% for corporate bonds during After-tax yield After-tax 4 the same period. 0.5% n Because of their tax-free status, munis may also offer higher after-tax 0.0% yields than corporate bonds of similar 12% 22% 24% 32% 35% 37% maturity (see “A leg up,” right). That Federal tax bracket said, individuals in lower tax brackets Municipal bonds Corporate bonds U.S. Treasuries or those who reside in low-tax states

may find better after-tax yields from Source: Bloomberg Barclays Indices, as of 12/16/2019. Corporate bonds assume an additional 5% state taxable bonds, including corporates. income tax and U.S. Treasuries assume an additional 3.8% surtax for the 32%, 35%, and 37% tax brackets.

Shopping around If you’re looking to add munis to your which are backed by a specific tax however, be sure to do your homework portfolio, we suggest keeping three source or the full taxing power of a and consider the regions and munic- factors in mind: state or local government. ipalities that make the most sense for n Revenue bonds, which are sup- your needs and tax situation. n 1 Geographic diversification: Despite ported by the revenue from a specific 1Prior to the TCJA, taxpayers could deduct either a positive credit outlook for the muni project or public service, such as a income or sales taxes, plus property taxes. | 2 market overall, some regional pockets, sports stadium or utilities. Capital Markets Fact Book, 2019, sifma.org. | 3Britton O’Daly, “Investors Want Municipal such as areas of the Rust Belt, suffer Bonds, but Issuance Is Rare,” wsj.com, 4 from heightened risk. Investors should Revenue-bond issuers vary in 07/18/2019. | US Municipal Bond Defaults and Recoveries, 1970–2017, moodys.com, stick to issuers in economic regions terms of credit quality and are 07/31/2018. | 5Gunjan Banerji and Heather Gillers, “Muni-Bond Investors Embrace Higher- with stable or growing populations, therefore generally viewed as less Risk Issuers,” wsj.com, 09/21/2019. which generally have stronger finan- secure than issuers of GO bonds, cials than those in areas experiencing but it’s important to evaluate the slow growth or outmigration. risks and benefits of both options. Cooper Howard is a director of fixed Furthermore, it’s generally wise You should ideally look to combine income and income for most investors to diversify across different muni types to build a well- planning at the multiple U.S. municipalities. Investors diversified portfolio. Schwab Center for Financial Research. who live in California or New York, however, may want to consider an all 3 Credit rating: Recently, investors in-state portfolio in order to shelter as have been scooping up hundreds See page 46 for important information. u The information provided here is for general much income as possible from their of millions of dollars in munis from informational purposes only and should not be state’s high taxes. Both states issue lower-rated issuers in the hopes considered an individualized recommendation a wide variety of munis each year, of earning higher yields. Because or personalized investment advice. The investment strategies mentioned here may making a home-state portfolio fairly such bonds have a much higher risk not be suitable for everyone. Each investor easy to implement. of default than investment-grade needs to review an investment strategy for his issues, we recommend sticking with or her own particular situation before making u 2 any investment decision. Tax-exempt bonds Bond classification: Broadly higher-rated issuers (AA/Aa and above), are not necessarily a suitable investment for speaking, munis fall into one of two which comprise about two-thirds of all persons. Information related to a security’s categories: the $3.6 trillion muni market.5 tax-exempt status (federal and in-state) is LET’S obtained from third parties and Schwab does n TALK General obligation (GO) bonds, not guarantee its accuracy. Tax-exempt income Pick and choose may be subject to the Alternative Minimum Tax Need help deciding if munis make sense as part Munis are a great way to earn compet- (AMT). Capital appreciation from bond funds and discounted bonds may be subject to state of your fixed income strategy? Call866-893-6699 itive yields while protecting income or local taxes. Capital gains are not exempt to speak with a Schwab fixed income specialist. from taxes. Before you join the fray, from federal income tax. (0220-9BCE)

16 | CHARLES SCHWAB | SPRING 2020 Drowning Down and up While the debt of households … government and in Debt and financial institutions has nonfinancial corporate debt decreased since 2009 … have climbed. How might the country’s rising tide of red 150% ink affect your portfolio? By Liz Ann Sonders 120%

T he debt bubble may have burst 90% during the 2008–2009 financial crisis, but the United States has been 60% in an ongoing, if subtler, debt crisis ever since. 30% In fact, the current economic expansion, although the longest, is also the weakest since WWII—due in of nominal GDP as a percentage Debt 0% no small part to the ever-growing debt 1999 2009 2019 1999 2009 2019 problem plaguing corporations and the U.S. government. And as debt rises, Years Years it tends to crowd out more productive Household Nonfinancial corporate investments and leave the economy Financial Government (federal, state, local) vulnerable to a slowdown.

Let’s take a look at the depth of Source: Charles Schwab, FactSet, and U.S. Federal Reserve, as of 06/30/2019. our debt—and how investors might prepare for any repercussions. Diminished by debt In the red Historically, economic activity—as measured by the growth of a variety of indicators— has been slower when the debt-to-GDP ratio has surpassed normal levels. To illustrate the magnitude of U.S. debt, let’s look at total credit market High debt-to-GDP Normal debt- Low debt-to-GDP debt (TCMD), which includes all debt levels (> 320%) to-GDP levels levels (< 160%) from financial and nonfinancial corpo- (160%–320%) rations, governments, and households. TCMD is considered high if it exceeds Nominal GDP 3.7% 6.3% 7.5% 320% of gross domestic product (GDP) and low if it falls below 160%. Real GDP 1.8% 3.2% 3.6% Prior to the financial crisis, the debt-to-GDP ratio rose as high as 380%, Nonfarm payroll 0.9% 1.5% 2.3% fueled in large part by the unmanage- CPI inflation 2.0% 3.7% 3.9% able debt loads of financial institutions and households. Although there’s been Real 3.5% 5.2% 9.0% a significant decrease in such debt since nonresidential 2009, the debt-to-GDP ratio remains investment only slightly lower—at 350%—thanks to government and nonfinancial Nonfinancial 0.9% 2.3% 2.3% corporate debt (see “Down and up,” productivity upper right). The problem, according to Ned Source: Charles Schwab, FactSet, and Ned Davis Research, Inc. Data from 12/31/1951 through 09/30/2019. Nominal GDP refers to growth in gross domestic product, measured in current prices. Real GDP refers Davis Research, is that economic out- to growth in gross domestic product after adjustments for inflation. Nonfarm payroll refers to growth put becomes severely stunted when in the number of U.S. workers, excluding farm workers. CPI inflation is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and the debt-to-GDP ratio surpasses that services. Real nonresidential investment refers to investments by businesses. Nonfinancial produc- 320% threshold (see “Diminished by tivity refers to labor productivity at nonfinancial corporations. ©2020 Ned Davis Research. Further distribution prohibited without prior permission. All rights reserved. See Ned Davis Research debt,” lower right). disclaimer at ndr.com/copyright.html. For data vendor disclaimers refer to ndr.com/vendorinfo.

SPRING 2020 | ONWARD | 17 PERSPECTIVES | DROWNING IN DEBT

And if you think the government If you haven’t already done so, con- debt problem, in particular, is going sider adding defensive assets to your to ease up anytime soon, think portfolio, such as low-volatility stocks again. Over the next decade, the and precious metals. U.S. Treasuries, Congressional Budget Office expects too, remain a good defensive choice; net interest payments on outstanding it would take much more than the federal debt to increase nearly 150%,1 current debt problem to jeopardize potentially crowding out more produc- the security of federally backed bonds. tive investments such as infrastructure Listen to and research. n To screen for low-volatility stocks, WashingtonWise log in to schwab.com/stockscreener, Investor™ click Analyst Ratings, select Fear not Schwab’s new podcast focuses a SER Volatility Outlook, and then nonpartisan eye on the stories that choose Low. Until policymakers can come up with a matter most to investors. viable solution to ballooning debt, we may be in for an era of weak economic 3 Rebalance regularly: During periods The policies and politics coming out growth and increased volatility. Given of volatility, your portfolio may deviate of Washington move markets and that possibility, investors should con- from your target asset allocation more affect every aspect of our personal sider taking the following actions to dramatically than usual—resulting finances, from the taxes we pay help offset those risks: in undue risk. Adopting a disciplined to how our portfolios perform. For rebalancing strategy can keep your example, Congress has temporarily 1 Look abroad: U.S. equities may not investments on a more even keel. suspended the debt ceiling—meaning continue to deliver strong relative the federal debt can grow unfettered returns over the coming decade, so n To learn more about the benefits until July 31, 2021, at which point it’s all but the most risk-averse investors of rebalancing, see “Rebalance, projected to reach $25 trillion. should consider having exposure to Rebalance, Rebalance,” page 9. “That number is indisputably international and even emerging mar- outrageous, and yet few Americans kets for diversification purposes. Of In short, investors are right to be understand just how profoundly course, international investing comes concerned about historically elevated the federal debt can affect their with its own risks, including currency debt levels, whether from the private lives,” says Mike Townsend, host weakness and geopolitical turmoil, or public sectors. But with a little plan- of WashingtonWise Investor and which is why Schwab suggests that: ning, you can reposition your portfolio Schwab’s D.C.-based vice president of to help weather the uncertainty. n legislative and regulatory affairs. “And n Conservative investors allocate no that lack of understanding means a 1Updated Budget Projections: 2019 to 2029, more than 5% of their portfolios to 05/02/2019. lack of pressure on politicians to do international equities—including anything about this crisis.” both developed- and emerging- In each episode, Mike tackles market companies. such issues, while his expert guests n Moderate investors who can stom- suggest what to do (and not do) in Liz Ann Sonders ach a bit more risk allocate no (@lizannsonders) is a response. more than 15% to international senior vice president Listen and subscribe for free at and chief investment equities. strategist at Charles schwab.com/washingtonwise or n Aggressive investors allocate no Schwab & Co., Inc. through your favorite podcast app. more than 25% to international equities.

n Log in to schwab.com/ See page 46 for important information. u Investing involves risk, including loss of principal. portfoliocheckup to see if your u International investments involve additional risks, which include differences in financial current exposure to international accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks. u investments is in line with your Commodity-related products, including futures, carry a high level of risk and are not suitable for all target asset allocation. investors. Commodity-related products may be extremely volatile, illiquid, and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions, regardless of the length of time shares are 2 Play defense: As debt crises persist held. u Diversification and rebalancing a portfolio cannot ensure a profit or protect against a loss and we near the end of the current in any given market environment. Rebalancing may cause investors to incur transaction costs and, when rebalancing a nonretirement account, taxable events may be created that may affect your economic cycle, bond and stock tax liability. u The policy analysis provided by Charles Schwab & Co., Inc., does not constitute and markets are likely to turn choppy. should not be interpreted as an endorsement of any political party. (0220-9B7W)

18 | CHARLES SCHWAB | SPRING 2020 Meet the newest members of our fixed income ETF family.

Fund Name Schwab Annual Industry Average Annual Operating Expenses Operating Expenses*

Schwab® 1–5 Year SCHJ 0.05% 0.11% Corporate Bond ETF

Schwab® 5–10 Year SCHI 0.05% 0.18% Corporate Bond ETF

Schwab® Long-Term SCHQ 0.05% 0.14% U.S. Treasury ETF

*Category average expense ratio from Morningstar Direct as of 12/13/2019.

We believe in giving you more choices and better investing opportunities. We couldn’t be happier with what the new Schwab ETFs offer you:

• $0 online ETF trade commissions1 • Operating expense ratios that are among the lowest in the industry • Leadership from Charles Schwab Investment Management, one of the industry’s largest and most experienced asset managers

Get more details at schwab.com/newETFs or call 866-855-7728.

Brokerage Products: Not FDIC-Insured • No Bank Guarantee • May Lose Value

1 The standard online $0 commission does not apply to foreign stock transactions, large block transactions requiring special handling, restricted stock transactions, transaction-fee mutual funds, futures, or fixed income investments. Options trades will be subject to the standard $0.65 per-contract fee. Service charges apply for trades placed through a broker ($25) or by automated phone ($5). Exchange process, ADR, and Stock Borrow fees still apply. See the Charles Schwab Pricing Guide for Individual Investors for full fee and commission schedules. Investors should consider carefully information contained in the prospectus or, if available, the summary prospectus, including investment objectives, risks, charges, and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing. Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. Shares of ETFs are bought and sold at market price, which may be higher or lower than the net asset value (NAV). Diversification does not eliminate the risk of investment losses. Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. All of these factors can subject the funds to increased loss of principal. Investment income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax. Capital gains are not exempt from federal income tax. An investment in the fund(s) is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Government backing applies only to the government-issued bonds that make up the fund, not the fund itself. TIPS generally have lower yields than conventional fixed rate bonds and will likely decline in price during periods of deflation, which could result in losses. Charles Schwab Investment Management, Inc. (CSIM) is the investment advisor for Schwab Funds, Laudus Funds and Schwab ETFs™. Schwab Funds and Laudus Funds are distributed by Charles Schwab & Co., Inc. (Schwab), Member SIPC. Schwab ETFs are distributed by SEI Investments Distribution Co. (SIDCO). CSIM and Schwab are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation, and are not affiliated with SIDCO. ©2020 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. CC3172613 (0220-90DD) ADP109276-00 (01/20) 00238448

ADP109276-00.indd 1 1/6/20 1:31 PM 7 RETIREMENT PLUS

529s can be used to pay back SECURE 1 2 3 4 5 student loans

RMDs kick in at 72 IRA contributions Inherited IRAs must 401(k)s are available Account owners can now use up to $10,000 Act aren’t restricted by be depleted within a to more part-time from a 529 college savings account to repay IRS-mandated required age decade workers student loans—so long as it’s for the account’s minimum distributions primary beneficiary or the beneficiary’s siblings Takeaways (RMDs) from tax-deferred Contributions to traditional Other than a spouse, a Employers are now or stepsiblings. retirement accounts now IRAs are now permitted no minor child, and certain required to offer their THE FINE PRINT begin at 72 for anyone who matter your age, so long as other “eligible designated 401(k)s or other workplace New legislation aims to help Americans turns 70½ after December you have earned income. beneficiaries,” inheritors of retirement plans to Those with excess 529 assets now have another penalty-free way to use them—though such funds save more for the future—and manage costs 31, 2019. retirement accounts must employees with three should be used to pay the beneficiary’s college in the present. THE FINE PRINT now deplete those assets consecutive years of tuition first, all things being equal. THE FINE PRINT Whether you’re working or within 10 years. service of at least 500 If you turned 70½ in 2019, the not, you’ll still be subject to hours per year in addition The SECURE (Setting Every Community Up for old law still applies and you RMDs at either 70½ or 72 THE FINE PRINT to employees with more Retirement Enhancement) Act includes provisions must take your first RMD by (see “RMDs,” left). The new withdrawal schedule than 1,000 hours of service 6 Retirement savings can be used for that can help new parents, retirees, savers, and April 1, 2020. If you turned could generate significant within a 12-month period. adoption and birth costs students. But these potential new benefits could 70½ before 2019, you must taxable income for inheritors, Account owners can now withdraw up to $5,000 come at a cost to some taxpayers. Here are seven continue to take your RMDs potentially pushing them THE FINE PRINT from a 401(k) or an IRA to pay for qualified key changes—and what they could mean for you. by the end of each calendar into a higher tax bracket. If Newly qualified part-time adoption or birth expenses without penalty. year. Failure to take RMDs on assets remain after 10 years, employees can save money time results in a 50% penalty inheritors face a penalty equal on a pretax basis—and THE FINE PRINT on the portion not withdrawn. to 50% of the undistributed capture the employer match, Parents may be able to avoid taking on debt to amount. if offered—once they’ve cover such expenses; however, tapping retirement accrued the requisite work funds early could put your long-term savings goals history starting in 2021. at risk.

Late tax returns trigger a 7 bigger fine

If your tax return is 60 or more days late, you will now incur a penalty of the lesser of $400 or 100% of taxes owed.

THE FINE PRINT Although the new penalty is at most only $200 Listen to WashingtonWise Investor™, a Schwab more than the previous one, every dollar you original podcast, where host Mike Townsend lose to penalties is one you can’t invest for future discusses the SECURE Act and other legislative growth. and political topics relevant to individual investors. Subscribe at schwab.com/washingtonwise. See page 46 for important information. ◆ This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Source: The United States Congress, 12/20/2019. Note: This is not a complete list of changes resulting from the SECURE Act. Where specific advice is necessary or appropriate, Schwab See congress.gov/bill/116th-congress/house-bill/1865 recommends consultation with a qualified tax advisor, CPA, for full details. financial planner, or investment manager. (0220-9936)

20 | CHARLES SCHWAB | SPRING 2020 SPRING 2020 | ONWARD | 21 Are your international investments missing something?

Put the full power of Asia behind your investments. With over 25 years of investment experience in Asia, we aim to uncover unique companies across Asia that have the potential to benefit from consumer trends that are often overlooked in broader international and emerging markets. Find out more about our experience, insight and passion for Asia—and the role Asia can play in your portfolio—at www.matthewsasia.com/opportunity or view the Matthews Asia Funds available on the Schwab Mutual Fund OneSource Select INVEST IN OPPORTUNITY List® at www.schwab.com/matthewsasia.

Investors should consider the investment objectives, risks, charges and expense of the Matthews Asia Funds carefully before making an investment decision. This and other information about the Funds is contained at matthewsasia.com. Read the prospectus carefully. Investing involves risk including the possible loss of principal. International and emerging markets may involve additional risks including higher volatility and market illiquidity. Foreside Funds Distributors LLC. Charles Schwab & Co., Inc., Member SIPC, receives remuneration from fund companies and/or their affiliates in the Mutual Fund OneSource® service for recordkeeping, shareholder services and other administrative services. Schwab and Mutual Fund OneSource are trademarks of Charles Schwab & Co., Inc. and used with permission. The amount of fees Schwab or its affiliates receive from funds participating in the Mutual Fund OneSource® services is not considered in the Select List selection, or does any fund pay Schwab to be included in the Select List. Trades in no‐load mutual funds available through Mutual Fund OneSource® service (including Schwab Funds) as well as certain other funds, are available without transaction fees when placed through schwab.com or our automated phone channels. For each of these trade orders placed through a broker, a $25 service charge applies. Schwab reserves the right to change the funds we make available without transaction fees and to reinstate fees on any funds. Funds are also subject to management fees and expenses. Matthews Asia and Charles Schwab & Co., Inc. are not affiliated. ©2019 Matthews International Capital Management, LLC

Q319_OO_MatthewsAsia.indd 10 7/8/19 3:04 PM Fail Better display it as a ratio so I can dig deeper into where my profits Scrutinizing your losses can help you realize and losses are coming from: more gains. By Joanna Payne # Profitable trades Average gain Total gains x = A s traders, we’re often so enamored of our winning trades that we ignore our losers. But it’s our losers from # Unprofitable trades Average loss Total losses which we stand to learn the most. Here are four ways to learn from the trades that didn’t pan out. For example, let’s say I had 17 profitable trades with an average $150 gain per trade and eight unprofitable trades with an 1. Calculate your performance average $225 loss per trade:

First things first: Gather your gain and loss data so you can 17 $150 $2,550 x = begin to assess the factors affecting your overall performance. 8 $225 $1,800 ILLUSTRATION BY ANDREA UCINI ANDREA BY ILLUSTRATION Instead of simply looking at total gains or losses, I like to

SPRING 2020 | ONWARD | 23 TRADING

If I looked just at the net gain/loss ratio ($2,550 vs. $1,800), I your percentage of profitable trades and average gain per might think I’d been doing pretty well with $750 in net profit trade with your percentage of losing trades and average loss and 17 profitable trades out of 25. Looking more closely at my per trade: average gain versus my average loss, however, I can see that I lost 1.5 times more money than I gained ($225 vs. $150), % % on average. Winning x Average – Losing x Average = Expectancy trades gain trades loss The average gain versus average loss per trade also tells you how effectively you’re managing and closing out your positions. If your average loss is uncomfortably close to your For example, let’s say 40% of your trades in the past six average gain, ask yourself: months were profitable and your average gain was $500 per trade, while 60% of your trades were unprofitable with an n Do I generally stick to my original trade plans average loss per trade of $250. Using the calculation above, or diverge from them? you could reasonably expect an average gain of $50 per trade: n When trades are profitable, what influences my decision to exit? 40% x $500 = $200 – 60% x $250 = $150 = $50 n When trades are unprofitable, do I exit within my planned risk parameters or hold on too long? You should aim for an increasingly positive outcome with Answering these questions can help you identify weak- each trade. If the opposite is happening, revisit your losers nesses and build better trading habits over time. to see where the breakdowns might be occurring.

2. Drill down on your losers 4. Examine other variables

When it comes to learning from my past mistakes, I pay Finally, it can be helpful to see if any patterns emerge by extra attention to my average losses because I have the most dividing your trades into categories, such as: control over them. Even when you do your homework, a position can move n Fundamental vs. technical analysis techniques against you without notice, turning a once-profitable trade n Investment types into its inverse. It’s how you control n Order types those situations that can make or n Time frames break your success as a trader. If you’ve n Trade size experienced a similar about-face with one or more of your trades, take a look Do you find less success with longer-term trades, for at how long you allowed the position example? Or when you choose exchange-traded funds versus to fall before you acted. stocks? Breaking down your positions in this way can help

Joanna Payne Focusing on my average losses identify which strategies tend to work for you and which you is a senior manager helped me identify a bad habit in my may want to improve upon—or avoid altogether. with Schwab Trading own trading that was contributing Services Client Experience. to lackluster results: hanging on to Taking control unprofitable trades too long. Simply by exiting each losing trade before it reached my average loss, Examining your trading performance on a regular basis can I noticed an immediate improvement in my performance. help you better understand the behaviors and other factors Indeed, you can be wrong more than you’re right and still that may be influencing your outcomes. Paying particular come out ahead—so long as you keep your average loss to a attention to losses is a great way to identify shortcomings— minimum. and to up the ante on your trading approach. n

3. Look at your expectancy

Expectancy is the average dollar amount you expect to gain See page 46 for important information. u The information provided NEXT or lose per trade based on previous performance. It combines here is for general informational purposes only and should not STEPS be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment Use Schwab’s Gain/Loss Analyzer tool at strategy for his or her own particular situation before making any schwab.com/analyzertool to review your trading investment decision. u Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to performance and gain insight into the factors achieve. u Investing involves risk, including loss of principal. u Past impacting your trades. performance is no guarantee of future results. (0220-9CF3)

24 | CHARLES SCHWAB | SPRING 2020 Numbers tell only half the story. Your investments deserve the full story.

Strategic investing takes us beyond the numbers. That’s why over 4251 of our experts go out in the ﬁ eld to examine investment opportunities ﬁ rsthand—like mobile payment adoption in new markets around the world. Our rigorous approach helps us select and manage investments for our funds. Explore 33 funds on the Q1 2020 Mutual Fund OneSource Select List®. Visit Schwab.com/troweprice

Request a prospectus or summary prospectus at Schwab.com/OneSource; each includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. 1 Investment professionals as of 12/31/19. All funds are subject to market risk, including possible loss of principal, and are subject to management fees and expenses. Charles Schwab & Co., Inc., Member SIPC, receives remuneration from fund companies in the Mutual Fund OneSource® service for recordkeeping and shareholder services and other administrative services. Schwab also may receive remuneration from transaction fee fund companies for certain administrative services. The amount of fees Schwab or its aﬃ liates receive from funds participating in the Mutual Fund OneSource® service is not considered in the Select List selection, nor does any fund pay Schwab to be included in the Select List. Schwab, Mutual Fund OneSource® and Mutual Fund OneSource Select List® are trademarks of Charles Schwab & Co., Inc. and used with permission. T. Rowe Price and Charles Schwab & Co., Inc. are not aﬃ liated. T. Rowe Price Investment Services, Inc., Distributor. or many current and future retirees, income—so at some point they’ll need to “Fortunately, not all investments are sub- one question is paramount: How start liquidating their investment assets,” ject to the same tax treatment,” Hayden F can I ensure I don’t burn through says Hayden Adams, CPA, CFP®, and direc- says, “and if you liquidate them in an Going the Distance my savings too quickly? tor of tax planning at the Schwab Center efficient way, you may be able to extend “Most retirees don’t have enough for Financial Research. the life of your savings.” invested to live off the interest alone— Selling investments generally triggers With that in mind, here’s a step-by- even when combined with Social taxes, however, which can undercut such step approach to making tax-smart Smart tax planning can help extend the life of your retirement savings. Security, pensions, and other nonportfolio sales and further eat into your nest egg. withdrawals in retirement.

PROP BY TALK TO THE HAND; PHOTOGRAPHY BY VANESSA MCKEOWN SPRING 2020 | ONWARD | 27 GOING THE DISTANCE

1 Take your RMDs Using a tax loss to get a tax break $50,000 in income, you’d take $40,000 30 days before or after the sale, lest however, that converting a Roth 401(k) A hypothetical investor who realized $20,000 in short-term capital gains and (80%) from your tax-deferred IRA your losses be disallowed. to a Roth IRA could reset the five-year If you turned 70½ in or before 2019, $25,000 in capital losses could use tax-loss harvesting to cut down her tax bill. and $10,000 (20%) from your taxable holding requirement—unless funds start by taking the required minimum brokerage account. Next, focus on selling investments are rolled into an existing Roth IRA, distributions (RMDs) from your tax- Short-term capital gains: Capital losses: “This strategy can help smooth out you’ve held for more than a year to in which case they benefit from the deferred retirement accounts. Failure $20,000 $25,000 the potential spike in income caused take advantage of lower long-term holding period on that account. to do so means getting hit with a 50% by RMDs, which may reduce your total capital gains tax rates. You can sell If you’re considering a rollover, it’s penalty on the difference between $3,000 of losses used taxes paid in retirement,” Hayden says. these appreciated investments as best to check with a financial advisor what you withdrew and what was to offsetcurrent Distributions from your tax- part of your regular portfolio rebal- before you decide. $2,000 ordinary income required. Those who turn 70½ in 2020 deferred accounts will be taxed as ancing, using whatever’s necessary or later can now wait until age 72 to of losses used ordinary income, so the order in which to meet your spending needs and Get help if you need it begin taking RMDs (see “7 SECURE Act $20,000 to offsetfuture you sell them doesn’t matter from a reinvesting the remainder in under- While some retirees enjoy actively Takeaways,” page 20). of capital gains or ordinary tax perspective; however, you should weight areas of your portfolio. managing their investments, others losses “Because of the penalty, RMDs income still draw them down in a way that might not want to get bogged down used to Save Roth accounts should be your first stop when tapping offset maintains your target asset allocation. 5 in the intricacies of handling their your retirement portfolio,” Hayden says. $20,000 for last withdrawals and taxes. (Most financial institutions—including of capital ■ If you have modest tax-deferred “It’s in your interest to hold off on “Determining which assets to sell Schwab—can help calculate your RMDs gains savings or your RMDs aren’t likely to tapping Roth assets for as long as can be complex, and some savers would when the time comes, or you can push you into a higher tax bracket, possible,” Hayden says. That’s because: really benefit from working with a estimate them ahead of time using an depleting your taxable brokerage financial advisor, a tax professional, or online calculator like the one available accounts first leaves your tax-deferred ■ Withdrawals are entirely tax-free an automated robo-advisor,” Hayden at schwab.com/RMDcalculator.) Taxes that could have been owed without tax-loss harvesting assets to potentially grow until RMDs starting at age 59½, provided you’ve says (see “Creating tax-smart withdraw- Whatever you withdraw will be kick in. To tap your taxable accounts held the account for at least five years. als during retirement,” below). “Either taxed as ordinary income, so if you Capital gains Ordinary income most efficiently: way, managing your tax liability can don’t need this money to cover your ■ Roth IRAs aren’t subject to RMDs— be an effective way to help keep more $6,400 ($20,000 x 32%) $960 ($3,000 x 32%) living expenses, consider depositing it $7,360 First, part with investments that you can leave these assets to grow money in your pocket and potentially into a taxable brokerage account, where have lost value. Your losses can be indefinitely during your lifetime. extend the life of your savings.” n you could potentially generate gains. Source: Schwab Center for Financial Research. Assumes a 32% combined federal/state marginal income used to offset any gains you may tax bracket, with short-term capital gains taxed at ordinary income tax rates. The example is hypotheti- realize—a strategy known as tax- ■ Withdrawals are also tax-free for cal and provided for illustrative purposes only. It is not intended to represent a specific investment Tap interest and product and the example does not reflect the effects of fees. loss harvesting (see “Using a tax loss your heirs. “The laws could always See page 46 for important information. u Please read the 2 dividends to get a tax break,” left). “And if you change, but at least for now it’s one Schwab Intelligent Portfolios Solutions™ disclosure brochures at schwab.com/intelligentdisclosurebrochure for important Next, withdraw the interest and don’t realize any capital gains, you of the best assets you can pass on to information, pricing, and disclosures related to the Schwab dividends—but not the original invest- can use those losses to offset up to the next generation,” Hayden says. Intelligent Portfolios and Schwab Intelligent Portfolios ® ment—from your taxable accounts. and/or CDs with staggered maturity expenses, you’ll need to sell additional $3,000 of your ordinary income per Premium programs. Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium™ are made available through “Leaving the original investment dates and reinvesting the principal as assets to close the gap. But which year until all your losses have been Unlike Roth IRAs, Roth 401(k)s are Charles Schwab & Co. Inc. (“Schwab”), a dually registered untouched means it can continue to each comes due—can help provide a accounts should you tap first—and in used up,” Hayden says. Just be sure subject to RMDs—which is why it investment advisor and broker dealer. Portfolio management grow and potentially yield more div- steady stream of income while evening what proportion? you don’t violate the wash-sale rule might make sense for some people services are provided by Charles Schwab Investment Advisory, Inc. (“CSIA”). Schwab and CSIA are subsidiaries idends and/or interest in the future,” out your portfolio’s yields over time. by repurchasing the same or “sub- to roll over any existing Roth 401(k) of The Charles Schwab Corporation. u Schwab Intelligent Hayden says. However, should you still need cash ■ If you have significant tax-deferred stantially identical” securities within accounts into a Roth IRA. Be aware, Income™ is an optional feature for clients to receive recurring Interest is taxed as ordinary after exhausting RMDs and your inter- savings, it’s possible that the size of automated withdrawals from their accounts. Schwab does not guarantee the amount or duration of Schwab Intelligent income—unless it’s from a tax-free est and dividends, the principal from a your RMDs could push you into a Income withdrawals nor does it guarantee any specific tax municipal bond or municipal bond maturing bond or CD is often the next higher tax bracket once they kick in, results such as meeting required minimum distributions. u Tax-loss harvesting is available for clients with invested assets fund (see “Mad for Munis,” page 15). place to turn—particularly if interest especially after accounting for Social Creating tax-smart withdrawals during retirement of $50,000 or more in their account. Clients must choose Dividends, on the other hand, are rates have declined and you won’t earn Security, pensions, and other income. to activate this feature. u The information provided here is often taxed at the lower capital gains as much by reinvesting the proceeds. If you suspect this to be the case, you for general informational purposes only and should not be Schwab Intelligent Income™—a Schwab Intelligent Income can considered an individualized recommendation or personalized rate of 0%, 15%, or 20%, depending on Generally speaking, you won’t owe may want to consider drawing down feature of Schwab Intelligent handle that complexity for you. investment advice. The investment strategies mentioned here income level—provided you’ve held any taxes on your original principal, so your tax-deferred accounts alongside Portfolios®—is an automated Using sophisticated algorithms, may not be suitable for everyone. Each investor needs to review the investment for more than a year long as you hold on to a bond or CD your taxable savings. an investment strategy for his or her own particular situation investing solution that generates Schwab Intelligent Income before making any investment decision. u This information (see “Stocks That Pay,” page 8). until its maturity date; an early sale will With this approach, you take with- a predictable, tax-smart, monthly considers enrolled assets across is not intended to be a substitute for specific individualized trigger capital gains taxes if you earn a drawals from both your tax-deferred paycheck from your investments. your taxable, tax-deferred, and tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, you should consult with Collect principal from profit on the sale. and taxable accounts in amounts Whether it’s deciding which tax-free retirement accounts and 3 a qualified tax advisor, CPA, financial planner, or investment maturing bonds and CDs proportionate to their balances. For accounts to draw from, harvesting makes withdrawals in a tax-efficient manager. u Diversification and rebalancing a portfolio cannot Many retirees rely on bonds and Sell additional assets as example, say you have $800,000 in a your losses, or prioritizing required manner. ensure a profit or protect against a loss in any given market certificates of deposit (CDs) to gener- 4 needed traditional IRA and $200,000 in a bro- minimum distributions, making environment. Rebalancing may cause investors to incur transaction costs and, when rebalancing a nonretirement ate regular income. Laddering such If the income generated from Steps 1 kerage account for a total of $1 million tax-efficient withdrawals from your To learn more or get started, visit account, taxable events may be created that may affect your investments—that is, buying bonds through 3 isn’t enough to cover your in savings. If you require an additional portfolio is a complex undertaking. schwab.com/intelligentincome. tax liability. (0220-9ARX)

28 | CHARLES SCHWAB | SPRING 2020 SPRING 2020 | ONWARD | 29 DIY v s. Pro There’s never been a better time to When to take financial take charge of your own finances. matters into your Fund fees and other expenses are lower than ever, and the proliferation of digital tools has put the power of planning own hands—and when firmly in the hands of consumers. Even novice do-it-your- selfers can set financial goals for themselves, select invest- to ask for help. ments, and designate beneficiaries for their accounts. But everyone has their limits. Some investors lack the dis- cipline, interest, or time required to achieve optimal results. ILLUSTRATIONS BY Others face financial circumstances too complicated for QUENTIN MONGE any one person to reasonably handle alone. “Today’s tools,

30 | CHARLES SCHWAB | SPRING 2020 DIY VS. PRO Professionals

transparency, and low costs make it easier as well as provide an honest assessment of “When unexpected expenses arise or your rental properties, or have other complex “Some estate-planning tasks, such as than ever to manage your own finances, what is and isn’t possible. financial situation changes for the worse, financial needs, you have a greater chance designa ting beneficiaries for retire- but they also can foster a false sense of Of course, a financial plan is only as good your goals are often the first thing to suffer,” of running afoul of tax laws or missing ment assets, are as simple as logging in to security that could put your goals at risk,” as its execution—which means sticking to Rob says. But diverging from your savings out on tax-saving opportunities. Hiring a your financial accounts and filling out a says Rob Williams, CFP® and vice president your plan through good times and bad. strategy, even for a short period of time, Certified Public Accountant to pre- form,” David says. Others are slightly more of financial planning at the Schwab Center can significantly undermine your plan. pare and file your taxes can help ensure you complicated but still perfectly manageable, for Financial Research. “Set t ing up Recurring Contributions pay your due—and not a penny more. like confirming your assets are titled cor- That’s where personal-finance pro- can help counter the temptation to cut back That said, there’s a big difference between rectly and double-checking that your will fessionals come in. “If you run into chal- Tools on your savings when things get tight.” preparing your taxes once a year and man- is up-to-date. lenges—or are simply overwhelmed by the aging them day to day. “Taxes are one of the financial planner If you need to create or update any sheer volume of information out there—a biggest expenses investors face, but employ- Qualified—and often certified— legal documents, however, working with professional can help fill in any gaps and 2 Investments ing simple strategies can make them more to create financial plans for clients an es t tate at orney can save you—and in the areas of budgeting, estate provide customized advice,” says David manageable,” Rob says. “If you buy, sell, and your heirs—a lot of headaches. “Unless planning, investments, retirement, Jamison, a Certified Financial Planner™ To create an investment portfolio that sup- manage your investments with taxes in you have a very simple estate—no kids, taxes, and more. (Learn more professional with Schwab Intelligent ports your goals, first you need to consider mind, you stand to save a lot of money in about working one-on-one with no house, no assets outside of your retire- Services. your risk tolerance and time frame, which the long run.” a Certified Financial Planner ment accounts—you’re probably better While getting professional help often will help determine the appropriate mix of professional at schwab.com/ off working with someone who can tailor comes at a cost, such expenses should be assets for your needs. Such tax-smart strategies include: portfoliospremium.) your estate documents to your specific weighed against the potential setbacks Afterde termining your target asset Making charitable donations for max- circumstances,” Rob says. that can arise from faulty planning, poor allocation, it’s time to start research- imum tax benefit. investment manager Of course, attorneys typically charge by Licensed to provide financial investment decisions, and tax-filing snafus. prioritizing your goals ing and selecting investments. “This is Optimizing your investments across the hour, which is why both David and Rob advice to and execute investment The trick is figuring out which tasks you can schwab.com/chart-your-future often the step where people stall out,” David taxable, tax-advantaged, and tax- recommend doing some of the legwork transactions on behalf of clients. confidently and successfully handle on your says. “With so many investments to choose deferred accounts. before you meet with one. “The most (See all the ways Schwab can own and which should be outsourced. estimating your savings from, it’s hard to know where to start or Using investment losses to offset invest- important thing is to figure out in advance help manage your investments at Here’s a look at four key areas of your targets how to evaluate comparable choices.” ment gains and/or ordinary income. who you want to inherit what—no small schwab.com/advice.) financial life—along with a host of helpful College: Fortunately, there are a variety of invest- task—so you’re not running up a tab work- schwab.com/collegecalculator Tools (right) and Professionals (far right). ment options that can help build and “There are a variety of strategies you can robo-advisor ing through questions only you can answer,” Retirement: monitor your portfolio—from investing deploy to minimize your tax bill,” Rob says. Creates, monitors, and executes David says. schwab.com/ in set-it-and-forget-it target-date funds “The challenge for many investors is know- trades using sophisticated 1 retirementcalculator Savings and using a portfolio builder to ing what they are and how to implement algorithms. (Schwab Intelligent Collaboration is key Portfolios® uses a robo-advisor to setting up recurring employing a professional inves tment them effectively.” build, monitor, and automatically The goal-setting aspect of financial planning contributions manager and an algorithm-based robo- A financial planner can help you assess If you do decide to bring in a pro, whether to rebalance a diversified portfolio is a perfect do-it-yourself task, because only schwab.com/contribute advisor. “In the past, you had to have con- your total tax situation and may recommend manage a few key tasks or your entire finan- based on your goals. Learn more you can decide what you want out of life. siderable savings to get quality advice,” Rob working with a t ax advisor, who can help cial picture, there’s no substitute for you in at schwab.com/intelligent.) Maybe you hope to retire at 62, fully finance determining your target says. “But these days you can get top-level with everything from creating a charitable- the decision-making process. “To achieve asset allocation your child’s college education, or purchase a portfolio management at a low cost.” giving strategy to timing the sale of your Certified Public optimal results,” David says, “collaboration schwab.com/ n second home. Even those who’ve successfully managed investments to managing the required Accountant is key.” portfolioquestionnaire That said, “having a general sense of their own investments during their working minimum distributions (RMDs) from your Licensed to provide various where you want to end up isn’t the same as lives may feel the need for outside help as tax-deferred retirement accounts mandated accounting services, including researching and selecting making a concrete plan to get there,” David they approach retirement, when income by the IRS. (For more information on RMDs, tax preparation and planning. See page 46 for important information. investments u Please read the Schwab Intelligent Portfolios says. “Too often we end up saving what we Bonds: generation (as opposed to wealth accumu- see “7 SECURE Act Takeaways,” page 20.) Solutions™ disclosure brochures for important tax advisor can and hoping for the best, without any schwab.com/bondsource lation) takes center stage (see “Going the “A lot of people make costly mistakes that information, pricing, and disclosures related to Qualified to provide advice con- the Schwab Intelligent Portfolios and Schwab real sense of whether it’s actually enough.” ETFs: Distance,” page 26). are perfectly avoidable,” David says. “Working cerning ways to minimize taxes Intelligent Portfolios Premium programs. Schwab So start by articulating your financial schwab.com/ETFscreener “When you reach those inflection points with a tax pro can help you make the most of Intelligent Portfolios® and Schwab Intelligent while adhering to federal, state, goals, listing them in order of priority, and Mutual funds: in your investing life, you want to know the tax code and keep more of your money, Portfolios Premium™ are made available through and local laws. schwab.com/fundscreener Charles Schwab & Co., Inc. (“Schwab”), a dually assigning a dollar amount and due date to you’re making the right decisions,” David both before and during retirement.” registered investment advisor and broker dealer. Stocks: ® each. If you need help prioritizing your says. “And working with a professional can estate attorney u Schwab Intelligent Portfolios and Schwab schwab.com/stockscreener Intelligent Portfolios Premium™ are designed to goals or es timating your savings help bring that peace of mind.” Bar certified to provide Target-date funds: 4 monitor portfolios on a daily basis and will also targets, there are a number of online Estate planning estate-planning services, schwab.com/targetfunds automatically rebalance as needed to keep the resources and tools available to help. including the drafting and portfolio consistent with the client’s selected risk Once you’ve sorted out your goals, it’s 3 Taxes People tend to think estate planning is only implementation of wills, trusts, profile. Trading may not take place daily.u This using a portfolio builder and other legal documents. information does not constitute and is not intended time to figure out how much you need to (for ETFs and mutual funds) for the very wealthy, but if you have any to be a substitute for specific individualized tax, save each month to achieve them. If the schwab.com/portfoliobuilder If your tax situation is relatively straight- assets whatsoever—such as a house, invest- legal, or investment planning advice. Where prospect of juggling multiple goals feels forward, there may not be much benefit ments, or retirement accounts—you need to specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax daunting, a financial planner can help designating beneficiaries from having someone else do your taxes. articulate what to do with them once you advisor, CPA, financial planner, or investment you establish a savings strategy and timeline, schwab.com/beneficiaries However, if you run a small business, own MONGE QUENTIN BY ILLUSTRATIONS pass away. manager. (0220-9BSB)

SPRING 2020 | ONWARD | 33 Worth Their Weight Alternatives to ubiquitous capitalization-weighted index funds can help diversify your portfolio.

performance). The top 10 companies So, how can you determine which to investors who want less exposure generate a high degree of turnover in in the S&P 500, for example, represent alternative indexing methodolo- to the handful of highfliers that often the fund’s holdings and hence inordi- only 2% of the stocks in the index but gies are right for you? Let’s break dominate capitalization-weighted nate capital gains. approximately 22% of its value (see down seven common strategic-beta indexes. Even in appreciating markets, Who it’s for: Momentum funds “Outsize influence,” far right). approaches—and the investors to however, fundamental funds can might be right for investors looking This potential for overexposure whom they may appeal. complement traditional cap-weighted to potentially boost their returns over to a handful of market behemoths approaches because of their differenti- the short term, especially during rising has helped give rise to alternative 1. Dividend ated performance. markets. That said, “momentum can weighting methods, which determine change direction quickly, leaving a company’s influence on an index What it is: A mix of stocks weighted 3. Momentum investors whipsawed and with high using metrics other than market cap- by the highest-dividend payers, typ- turnover in their portfolios, which italization. “Investors are recognizing ically based on the aggregate dollar What it is: These funds look to could trigger unexpected taxes,” Steve that there are drawbacks to investing amount of each company’s dividends capitalize on an upward market says. “For this reason, it’s wise to incor- proportionate to market cap alone,” or other approach tied to payouts. trend by favoring stocks with the porate these funds in moderation.” says Steve Greiner, senior vice presi- Who it’s for: These funds are strongest price movements while dent of Schwab Equity Ratings®. often favored by investors who are avoiding those with the weakest price 4. Growth nearing retirement and shifting movements. Managers of momentum Beyond cap weighted their focus from growth to income funds rebalance at regular intervals What it is: Growth funds seek to generation. Because equities with to reflect the latest price changes in amplify returns by giving more weight One alternative methodology—called strong and rising dividends have their underlying indexes, which can to stocks that exhibit superior growth equal weighting—is to hold all the in recent decades outperformed stocks in an index in equal amounts; their low- and non-dividend-paying hence, as some companies rise in value, counterparts (see “Stocks That Pay,” Outsize influence a portion of their shares are sold and page 8), they might also appeal to any the money reinvested in other com- investor looking to maximize her or The top 10 stocks in the S&P 500® Index Individual stock pickers rarely beat the ↑ Equal weight: An equal-weight index panies in the index to maintain equal his returns. represent only 2% of the stocks in the index ...... but approximately 22% of its value. market over the long term1—which can holds all the stocks in an existing weighting. Other approaches focus on make a compelling case for investing index in equal amounts—irrespective growth or value or volatility. 2. Fundamental in index mutual funds and exchange- of whether its component companies These alternative weighting meth- traded funds (ETFs). What’s more, a are big, little, or in between. odologies—known collectively as What it is: These funds screen and single index fund can provide exposure “strategic beta”—account for about weight stocks based on various finan- to hundreds if not thousands of stocks, shares. In other words, if the total 17% of U.S. equity index fund invest- cial metrics—such as their underlying ensuring you’re not overexposed to the market value of Microsoft’s outstanding ments.2 “Strategic beta is where we’re companies’ cash flow, dividends, and ups and downs of any one security. shares were 10 times that of Nike’s, the seeing some of the largest growth in sales. Fundamental strategies tend Be that as it may, many broad-market technology company would have 10 the ETF industry,” Steve says. to outperform during the middle to index funds—including those that track times more influence on the index’s Most strategic-beta funds may offer late stages of an economic expansion, the S&P 500® Index—aren’t nearly as performance than the activewear some degree of diversification and when growth becomes scarce and diversified as you might think. That’s company. complement the cap-weighted funds value becomes more important. because their underlying indexes are Thus, the capitalization-weighted many investors tend to hold, but inves- Who it’s for: Because they are likely often capitalization weighted, meaning approach contains a hidden risk: A few tors might find certain strategic-beta to be less volatile in down markets they weight each stock according to the large companies can come to dominate funds more suited to their investment than, say, momentum funds (see next total market value of its outstanding an index’s overall value (and hence its goals than others. entry), fundamental funds may appeal Source: S&P Dow Jones Indices, as of 11/29/2019.

34 | CHARLES SCHWAB | SPRING 2020 ILLUSTRATIONS BY GREG CLARKE SPRING 2020 | ONWARD | 35 WORTH THEIR WEIGHT

Who it’s for: Value funds can be shift between styles—which is a tall especially attractive to those in or order even for professional money nearing retirement because they can managers,” says Mark Riepe, head of the provide steady returns without overex- Schwab Center for Financial Research. posing investors to high-flying, highly Instead, Mark suggests a diversified volatile growth stocks. approach—incorporating strategic beta as a complement to the cap-weighted 6. Quality funds many already hold. The good news, he says, is that “given the number What it is: A fund that favors com- and variety of methodologies available, panies that have historically delivered most investors are sure to find one that higher returns on equity, lower debt fits their risk appetite and investment burdens, and steadier earnings. objectives.” n Who it’s for: Quality funds are mainly geared toward investors who 1Aye M. Soe, Berlinda Liu, and Hamish Preston, SPIVA® U.S. Scorecard, S&P Dow Jones Indices, want exposure to stable companies 2018. | 2Morningstar, as of 08/31/2019. with a proven track record of stronger profits and prudent financial management, and who favor consistent performance over the potentially See page 46 for important information. u greater returns—and risk—of high- Investors should consider carefully growth stocks. information contained in the prospectus ↑ Low volatility: Low-volatility funds give or, if available, the summary prospectus, including investment objectives, risks, more weight to stocks that have smaller price 7. Low volatility charges, and expenses. Please read it swings than the market as a whole over a carefully before investing. u The information What it is: provided here is for general informational specified time period. Funds in this category purposes only and should not be considered give more weight to stocks that have an individualized recommendation or characteristics. They score their com- historically generated smaller price personalized investment advice. The investment strategies mentioned here may ponent companies by such growth swings than the market as a whole over not be suitable for everyone. Each investor metrics as rapidly rising earnings and previous periods. needs to review an investment strategy sales—irrespective of price trends. Who it’s for: Because of their orien- for his or her own particular situation before making any investment decision. Who it’s for: This strategy may be tation toward lower-volatility stocks, u Diversification and asset allocation appropriate for investors looking for such funds may be particularly appeal- strategies do not ensure a profit and cannot better potential returns than those ing to those nearing retirement or who protect against losses in a declining market. u Investment returns will fluctuate and typically provided by traditional are otherwise concerned about their are subject to market volatility, so that an cap-weighted funds—and who are ability to wait out a market downturn. investor’s shares, when redeemed or sold, comfortable with the increased risk. Be aware, however, that investing in may be worth more or less than their original cost. Shares of ETFs are not individually Because you’re betting that the low-volatility funds may also mean redeemable directly with the ETF. Shares fastest-growing companies are going sacrificing potentially bigger returns are bought and sold at market price, to continue to outperform the market, during rising markets. which may be higher or lower than the net asset value (NAV). All ETFs are subject to such funds could suffer if growth slows. management fees and expenses. u Indexes Stay diversified are unmanaged, do not incur management 5. Value fees, costs, and expenses, and cannot be invested in directly. u “Fundamental Index” While momentum and pure growth is a registered trademark of Research What it is: Essentially the opposite funds can boost performance when Affiliates, LLC. Russell Investments and Research Affiliates, LLC have entered into a of growth, these funds incorporate growth stocks are leading the way, strategic alliance with respect to the Russell prices in determining how much of a pure value and low-volatility funds may RAFI Index Series. Subject to Research discount a stock is trading at relative offer better protection when stocks Affiliates’ intellectual property rights in certain content, Russell Investments is the to fundamental characteristics such slump. But does that mean you should owner of all copyrights related to the Russell as book value, earnings, and sales. The use strategic-beta funds to respond to RAFI Index Series. Russell Investments and bigger the discount, the greater the prevailing market conditions? “Only Research Affiliates jointly own all trademark and service mark rights in and to the Russell weight in the index. if you can accurately predict when to RAFl Indexes. Charles Schwab & Co., Inc. is not affiliated with Russell Investments or Research Affiliates.u Schwab is a registered NEXT To search for alternative-weighted ETFs, log in to schwab.com/ETFscreener, trademark of Charles Schwab & Co., Inc. STEPS select Portfolio from the list of criteria, then Weighting Scheme. Fundamental Index is a registered trademark of Research Affiliates, LLC.(0220-95SH)

36 | CHARLES SCHWAB | SPRING 2020 Now even more savings on home loans for Schwab clients.

¼% ½% ¾% interest rate discount interest rate discount interest rate discount

$250k - $999k $1M - $4.9M $5M+ in qualifying assets1 in qualifying assets1 in qualifying assets1

Enjoy exclusive discounts and competitive interest rates available with Schwab Bank’s Investor Advantage Pricing.1

As a client, the more qualifying assets you have with Schwab, the more you may save on home purchase or refinance loans.

Call Quicken Loans at 877-524-2932 or visit schwab.com/mortgages to get started.

Brokerage Products: Not FDIC Insured • No Bank Guarantee • May Lose Value

In order to participate, the borrower must agree that the lender, Quicken Loans, may share their information with Charles Schwab Bank, and Charles Schwab Bank will share their information with the lender Quicken Loans. Nothing herein is or should be interpreted as an obligation to lend. Loans are subject to credit and collateral approval. Other conditions and restrictions may apply. This offer is subject to change or withdrawal at any time and without notice. Interest rate discounts cannot be combined with any other offers or rate discounts. Hazard insurance may be required. 1. For Schwab Bank Investor Advantage Pricing: Only one Investor Advantage Pricing discount eligible per loan. Purchase and refinance loans are eligible for an interest rate discount of 0.250% - 0.750% based on qualifying assets of $250,000 or greater. Discounts available for all Adjustable-Rate Mortgage (ARM) loan sizes, and selected Jumbo Fixed-Rate loans. Discount for ARMs applies to initial fixed-rate period only with the exception of the 1-month ARM where the discount is applied to the margin for the life of the loan. This offer is not valid on Home Equity Lines of Credit. Qualifying assets are based on Schwab and Schwab Bank combined account balances, including the following retirement account types: Traditional, Roth, Rollover, and Inherited IRAs. Clients that utilize an eligible IRA account balance to qualify for certain discounts may qualify for one special IRA benefits package per loan. This includes an in-depth personal financial plan analysis to include a detailed review of your IRA(s) by a Certified Financial Planner. This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab Bank recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager. Clients of Independent Investment Advisors: IRA account balance eligibility is not available for clients of independent investment advisors. Qualifying assets are based on Schwab and Schwab Bank combined non-retirement account balances. Qualifying assets must be verified 15 days prior to the anticipated closing for an on-time close. If the qualifying assets are deposited with less than 15 days remaining before closing, the closing date may be delayed, and eligibility to receive the interest rate discount may be affected. Clients must apply and lock the interest rate after 08/15/2019 to qualify for the discount offer. The application date will be printed on the Loan Estimate. Quicken Loans is licensed in all 50 states. Quicken Loans Inc.; NMLS #3030; www.NMLSConsumerAccess.org. Equal Housing Lender. Licensed in 50 states. AL: License No. MC 20979, Control No. 100152352, AR, TX: 1050 Woodward Ave., Detroit, MI 48226-1906, (888) 474-0404; AZ: 1 N. Central Ave., Ste. 2000, Phoenix, AZ 85004, Mortgage Banker License #BK- 0902939; CA: Licensed by Dept. of Business Oversight, under the CA Residential Mortgage Lending Act and Finance Lenders Law; CO: Regulated by the Division of Real Estate; GA: Residential Mortgage Licensee #11704; IL: Residential Mortgage Licensee #4127 – Dept. of Financial and Professional Regulation; KS: Licensed Mortgage Company MC.0025309; MA: Mortgage Lender License #ML 3030; ME: Supervised Lender License; MN: Not an offer for a rate lock agreement; MS: Licensed by the MS Dept. of Banking and Consumer Finance; NH: Licensed by the NH Banking Dept., #6743MB; NV: License #626; NJ: New Jersey – Quicken Loans Inc., 1050 Woodward Ave., Detroit, MI 48226, (888) 474-0404, Licensed by the N.J. Department of Banking and Insurance.; NY: Licensed Mortgage Banker – NYS Banking Dept.; OH: MB 850076; OR: License #ML-1387; PA: Licensed by the Dept. of Banking – License #21430; RI: Licensed Lender; WA: Consumer Loan Company License CL-3030. Conditions may apply. Lending services provided by Quicken Loans Inc., a subsidiary of Rock Holdings Inc. “Quicken Loans” is a registered service mark of Intuit Inc., used under license. Charles Schwab Bank and Charles Schwab & Co., Inc. are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation. Brokerage products offered by Charles Schwab & Co., Inc. (Member SIPC) are not insured by the FDIC, are not deposits or obligations of Charles Schwab Bank, and are subject to investment risk, including the possible loss of principal invested. Charles Schwab & Co., Inc. does not solicit, offer, endorse, negotiate or originate any mortgage loan products and is neither a licensed mortgage broker nor a licensed mortgage lender. Home lending is offered and provided by Quicken Loans, Inc. Quicken Loans Inc., is not affiliated with The Charles Schwab Corporation, Charles Schwab & Co., Inc. or Charles Schwab Bank. Deposit and other lending products are offered by Charles Schwab Bank, Member FDIC and Equal Housing Lender.

38 | CHARLES SCHWAB | SPRING 2020 Your guide to buying, renting, and selling a second home. Illustrations by Jeff Östberg HOME SWEET HOMES

in the market,” says Ken Szymanski, a n A home equity line of credit However you choose to finance your while helping you fulfill your tax claimed for tax purposes reduces that property’s Home buying managing director at Charles Schwab (HELOC): A HELOC allows you purchase, do your homework to obligations. “Some people think of cost basis. If the property is later sold for a profit, the Banking & Trust Services. to borrow against the equity in understand the considerations and a rental property as a hobby, but it’s seller will owe a 25% tax on any previously claimed If instead you decide to borrow to your existing residence—and the risks involved in obtaining a second not—it’s a business,” Hayden says. depreciation before being subject to potential capital has gone plural. fund your second home or investment interest may be deductible if the home. Chief among them: “That’s certainly how the IRS sees it, gains taxes. property, there are several financing funds are used to purchase, build, and that’s how you should see it, too.” What’s more, if the property has not been your According to the National Association of Realtors, options open to you, including: or substantially renovate a primary n Additional debt: Taking on new Another question to tackle in primary residence for at least two of the past five one in eight home buyers is shopping for a second or secondary residence, up to the debt could impact your cash flow advance: How will you interact with years, you may not qualify for the capital gains exclu- home1—a majority with rental income in mind. In n A traditional mortgage: The most limits mentioned previously. and savings plan. renters? Some owners take a hands-on sion, which allows you to shield the first $500,000 fact, more than two-thirds of those who own a second popular types include fixed-rate n A cash-out refinance: This refi n Bigger down payment: Lenders may approach to everything from collecting in profit from capital gains taxes if you’re married home plan to rent it out for at least part of the year, up loans—typically for 15 or 30 years approach replaces your existing require a larger down payment on a rent to making repairs, while others and file jointly ($250,000 if you’re a single filer). The from 20% in 2000, according to Savills.2 (generally speaking, the shorter mortgage with one that carries second home, in which case you’ll hire handymen and even full-service rules surrounding the capital gains exclusion can be However you utilize a second home, it’s a substan- the loan, the lower the interest a larger balance (see “To Refi or need to consider how to come up property managers who can find complex, so it’s best to check with an accountant tial investment—one that’s subject to different rules rate)—and adjustable-rate mort- Not to Refi,” page 13). The differ- with the money without putting suitable renters, help refurbish the before attempting to claim this exclusion for rental than your primary residence. “Whether or not you’re gages (ARMs), whose interest rates ence between the two loans is your other investments at risk. property between tenants, and do properties, in particular. using it for rental income, a second home comes reset after a fixed period of time distributed as cash, which can be everything in between. Such white- Another potential option to discuss with a tax with its own set of financial considerations,” says and adjust in response to prevail- especially useful if you have Finally, be realistic about expenses. glove service comes at a cost, but it can advisor is a 1031 like-kind exchange, which allows Hayden Adams, CPA and director of tax and financial ing market rates. Jumbo loans—or house-related expenses over and Beyond the purchase price, there are be especially helpful with a property in you to roll the proceeds from one rental property planning at the Schwab Center for Financial Research. those that exceed $484,350 in most above the new property’s purchase an array of ongoing costs, including a distant locale. directly into another, thereby deferring any capital Here, then, are the factors to consider when buying, counties in the United States—may price. repairs, utilities, and possibly home- Also be sure to check with a real gains taxes until the second property is sold. A 1031 renting, and selling a second home. require heftier down payments and n Securities-based lending: These owners’ association fees. A good estate agent and/or your homeown- like-kind exchange can be done multiple times, have higher interest rates, closing nonpurpose lines of credit can starting point is to calculate what ers’ association regarding local rental potentially deferring for many years the taxation of Buying costs, and fees. Under the Tax Cuts allow you to borrow against the you’re paying monthly for the upkeep laws. These can vary by municipality any capital gains. and Jobs Act of 2017, you can deduct value of your nonretirement on your current residence and assume and even by neighborhood and are Once you’ve found the right home for your needs, the interest on up to $750,000 assets while helping to keep your a similar outlay for your second home. evolving rapidly in response to the rise “A team effort” it’s time to figure out how to pay for it. “Paying in worth of such loans for married investment strategy on track Also, note that many popular of vacation rentals through companies cash is one option, though in a low-interest-rate couples filing jointly and $375,000 (see “Another way to borrow,” vacation spots, particularly in coastal such as Airbnb. In New York City, for Buying a second home involves a lot of work, not environment that money might be put to better use for individuals or separate filers. below). communities, are at increased risk of example, you cannot rent out an entire only in advance of buying but throughout the rental flooding, wildfires, and other weather- apartment or home to visitors for process and eventual sale. Finding a reliable team related events, so make sure you’re fewer than 30 days, even if you own or of professionals—an accountant, an attorney, a real adequately insured and at a price that live in the building. estate agent, and possibly a property manager—can makes sense. Owners should also strongly con- help. “More so even than your primary residence, Another way to borrow sider setting aside emergency funds successful second-home ownership is a team effort,” Leveraging the value of your assets rather than liquidating them can be a smart strategy. Renting to avoid selling securities in a down says Hayden. market to pay for any unexpected And of course an experienced financial advisor or You also need to decide up front expenses. wealth strategist can help you to realize your dream If you need access to capital but are hesitant to liquidate part of whether you’ll rent out your second Finally, Hayden urges those plan- of second-home ownership to begin with. n your portfolio because of concerns about selling during a tempo- BROKERAGE PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE rary market decline, tax consequences, or other considerations, it home, be it occasionally or on an ning to rent out a second home to ongoing basis. treat it as a separate business entity. “If 1“Existing-Home Sales Increase 1.3% in August,” National might make sense to borrow against your assets to fund your goal. 2 Important risk information: At collateral approval. Other conditions A rental property can provide not your rental isn’t structured properly, Association of Realtors, 09/19/2019. | “More Vacation Home One securities-based lending option you could consider is any time, including in the event and restrictions may apply. u Buyers Purchasing for Financial Gain, Not Just Family Schwab Bank’s Pledged Asset Line®, a flexible, nonpurpose line that the loan value of collateral is Charles Schwab & Co., Inc. and only income but also potential tax any renter who brings a lawsuit could Getaways,” vrbo.com, 09/17/2018. of credit* that lets you leverage the value of your nonretirement insufficient to satisfy the minimum Charles Schwab Bank are separate benefits. For example, you may be potentially take your car, house, or loan value of collateral or to support but affiliated companies and See page 46 for important information. u Investing involves risk, portfolio while helping maintain your investing strategy. able to deduct certain expenses, such hard-earned savings,” he says. For the outstanding loans, Schwab subsidiaries of The Charles Schwab including loss of principal. u This information is not intended The line of credit is secured by assets held in a separate Pledged Bank may demand immediate Corporation. Brokerage products, as depreciation, from your annual example, registering a business as a to be a substitute for specific individualized tax, legal, or Account that is required to be maintained at Charles Schwab & Co., payment of all or any portion of the including the Pledged Account, rental income. limited liability company (LLC) can investment planning advice. Where specific advice is necessary or Inc. Line amounts start at $100,000 (with a required minimum initial outstanding obligations, or require are offered by Charles Schwab & appropriate, you should consult with a qualified tax advisor, CPA, Keep in mind, however, that you’ll help protect your assets in the event financial planner, or investment manager.(0220-9YAD) advance of $70,000). To learn more about Schwab Bank’s Pledged additional cash or securities to Co., Inc., Member SIPC, and are be added to the Pledged Account not insured by the FDIC, are not likely face a host of tax obligations as you’re sued—as can liability insurance. Asset Line, call your regional banking manager at 888-577-7040. maintained at Charles Schwab deposits or obligations of Charles well. Apart from property taxes, any Entering into a Pledged Asset Line and pledging securities as & Co., Inc. If a Demand is not Schwab Bank, and are subject collateral involve a high degree of risk. Before you decide to apply addressed, the pledged securities to investment risk, including the rental income could potentially push Selling for a Pledged Asset Line, make sure you understand the risks. may be immediately liquidated possible loss of principal invested. you into a higher tax bracket. Also, if Schwab Bank, in its sole discretion, will determine at any time the without further notice to you, which Deposit and lending products, you use a second home as both a rental Once it comes time to sell a property, may result in tax consequences. u including the Pledged Asset Line, eligible collateral criteria and the loan value of collateral. property and for extended personal it’s a good idea to meet with a tax Your Schwab financial consultant This offer is subject to change or are offered by Charles Schwab LET’S withdrawal at any time and without Bank, Member FDIC and an Equal use, you may not be eligible for all the professional first. can help you think through financing notice. Nothing herein is or should Housing Lender. Charles Schwab TALK *A nonpurpose line of credit may not be used to purchase securities or pay deductions a rental property alone In particular, many owners are options, plan for rental income, be interpreted as imposing an Bank is not acting or registered down margin loans, and can’t be deposited into any brokerage account. would provide. A tax advisor can help surprised to learn that any deprecia- and much more. Call today to schedule Proceeds must be used for a lawful personal, commercial, or business purpose obligation to lend. Pledged Asset as a securities broker-dealer or under state, federal, or other applicable law. Lines are subject to credit and investment advisor. you maximize the available deductions tion in the value of a rental property an appointment.

40 | CHARLES SCHWAB | SPRING 2020 SPRING 2020 | ONWARD | 41

SPOTLIGHT INSIGHTS Schwab Live Daily

Market insights, About Liz Ann Sonders economic analysis, and As chief investment strategist at fresh perspectives— Charles Schwab, Liz Ann analyzes and interprets the straight to you. economy and markets on behalf of Schwab’s clients. She is a Want to better understand what’s moving the regular guest on CNBC, CNN, market—and why? Whether you’re a frequent Fox Business, PBS NewsHour, trader or an investing novice, Schwab Live Daily and more, and is regularly quoted offers shows on a range of topics matched to in financial publications, your experience level: including The Wall Street Journal, The New York Times, > Get real-time market insights and and Barron’s. perspectives from Schwab experts and third-party guests.

FOLLOW LIZ ANN > Develop a better understanding @lizannsonders and watch “Liz Ann Live” of how market news could impact your on Schwab Live Daily investments. every other Monday at 4:30 p.m. Eastern time.

> Learn more about trading strategies from our experts as they break down complex See page 46 for important information. ideas in clear ways. (0220-99ZL)

Sharpen your skills by tuning in to more than 10 segments, like “Liz Ann Live” with Schwab Chief Investment Strategist Liz Ann Sonders. Every other Monday at 4:30 p.m. Eastern time, Liz Ann and host Joe Mazzola discuss timely topics from her Market Commentary column and update you on relevant topics that could impact the investing landscape, like these:

> The latest job growth, manufacturing, TUNE IN and GDP data SCHWAB LIVE DAILY MONDAY–FRIDAY > Fed interest rate cuts and what STARTING AT 10 A.M. EASTERN TIME could happen next SCHWAB.COM/LIVE > Heightened recession concerns and the current economic cycle

42 | CHARLES SCHWAB | SPRING 2020 SPRING 2020 | ONWARD | 43 SPOTLIGHT ® FROM Schwab Bank Visa SCHWAB BANK Platinum Debit Card

Security features for your Schwab Bank Debit Card

Schwab Bank’s Visa Platinum Debit Card offers a variety of security features to help you control and monitor activity in your account.

Security feature How to set it up

Debit card transaction and bank alerts: Create custom alerts Online: Visit schwab.com/bankalerts. to help identify unfamiliar charges and track spending. In the app: Tap More > Client Service > Manage Cards > Set Up Debit Card Alerts.

Card lock/unlock: Quickly lock your card if you temporarily Online: Visit schwab.com/cardlock. misplace it. Once you locate it, unlock and continue using it In the app: Tap More > Client Service > Manage like always. Cards. Then toggle the card lock/unlock button.

Travel Notices: Notify Schwab about your travel plans to help Online: Visit schwab.com/travelnotice. us monitor your account for possible fraudulent activity. In the app: Tap More > Client Service > Travel Notices > Add Travel. Then just follow the steps.

Mobile Wallet1 access: Add an extra layer of security by using Online: Visit schwab.com/mobilewallet. your mobile wallet. Payments are authenticated using your fingerprint, face scan, or passcode, so merchants never see your debit card number, and none of your payment details are stored.

NEXT STEPS Learn more about Schwab Bank 1Use of your card through a mobile wallet is also subject to the terms and conditions of your Schwab Bank Deposit and the Schwab Bank Visa Account Agreement (which contains information on any potential liability for unauthorized transactions), your Visa Debit Platinum Debit Card today at Card Agreement, the terms and conditions of the mobile wallet you use, the privacy policy set forth at schwab.com, and the privacy policy of the mobile wallet you use. schwab.com/checking.

See page 46 for important information. (0320-923N)

44 | CHARLES SCHWAB | SPRING 2020 Schwab’s 1099 Dashboard SPOTLIGHT SERVICES Brings Transparency to Tax Season

Find out when your 1099 tax forms will be available See page 46 for important information. u The information provided here is for on schwab.com or via the Schwab Mobile app. general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. u The expected availability date for your account(s) applies to the original Form 1099 Composite and may change if all necessary information to complete your Form 1099 Composite has not been received from the issuers of securities in your account. u Schwab sends all necessary tax forms by the regulatory filing due date. We provide 1099 Composite information during the month of February. In early February 2020, 1099s will be sent out for accounts that hold investments for which we have all necessary tax information, including stocks, options, and money market funds/cash deposit interest. We expect these 1099s to be available on Schwab.com on Friday, December 31. Mail- ings of paper 1099 Composites will take place from February 1 through February 15. In mid-February 2020, 1099s will be sent out foraccounts that contain at least one investment for which the issuer can’t provide information on time for the earlier On the 1099 Dashboard, you’ll find: mailing. Examples include ETFs and mutual funds, fixed income, REITs, UITs, WHFITs, and U.S. and foreign stocks that have been reclassified in the past. We expect these Tax season can be fraught enough on > Expected availability dates for 1099 1099s to be available on schwab.com on its own, without the added stress of Composite forms for brokerage accounts Friday, February 14. Mailings of paper 1099 having to track down tax documents for Composites will take place from February your various accounts or wondering that had taxable activity. 15 through February 28. u Requires a wire- less signal or mobile connection. System when they’ll become available. availability and response times are subject That’s why we’ve eliminated some > Other tax forms as they become available: to market conditions and your mobile of the guesswork. connection limitations. Functionality may u Log in to schwab.com/1099dashboard • Retirement accounts (Form 1099-R) vary by operating system and/or device. Independent investment advisors are not to view your 1099 Dashboard (above). • Bank accounts (Form 1099-INT) owned by, affiliated with, or supervised by There, you can access tax forms for all Schwab. u This general information is not • Employer Sponsored Account forms of your Schwab accounts and see when intended to be a substitute for specific (Form 1099-B, Form 1099-DIV) individualized tax, legal, or investment new forms become available. planning advice and is not intended to be You can also access the 1099 construed as tax advice. This information Dashboard on the Schwab Mobile > Educational resources, including filing cannot be used for the purpose of avoiding app. Just tap More at the bottom of the penalties that may be imposed under dates and other tax-related information. the Internal Revenue Code or applicable screen, then tap Client Service, and foreign tax authority provisions. Where then select the special 1099 Tax specific advice is necessary or appropriate, Forms menu. > Quick links to easily manage paperless Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, and security preferences. or investment manager. (0220-92L5)

SPRING 2020 | ONWARD | 45 IMPORTANT DISCLOSURES

The information provided here is for general informational purposes bond funds and discounted bonds may be subject to state or local taxes. only and should not be considered an individualized recommendation or Capital gains are not exempt from federal income tax. personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an Pg. 7, 9, 13–14, 15–16, 38–41: The Schwab Center for Financial Research investment strategy for his or her own particular situation before making is a division of Charles Schwab & Co., Inc. any investment decision. Pg. 8: Indexes are unmanaged, do not incur management fees, costs and All expressions of opinion are subject to change without notice in expenses, and cannot be invested in directly. reaction to shifting market conditions. Data contained herein from third- party providers is obtained from what are considered reliable sources. Pg. 15–16: Diversification and asset allocation strategies do not ensure a However, its accuracy, completeness or reliability cannot be guaranteed. profit and cannot protect against losses in a declining market.

Examples provided are for illustrative purposes only and not intended to Pg. 15–16, 17–18, 25–29, 34–36: Fixed income securities are subject to be reflective of results you can expect to achieve. increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in Pg. 6: Charles Schwab Investment Advisory is a division of Charles credit quality, market valuations, liquidity, prepayments, early redemption, Schwab & Co., Inc. corporate events, tax ramifications and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk. Pg. 6, 25–29: Tax-exempt bonds are not necessarily a suitable investment for all persons. Information related to a security’s tax- Pg. 25–29: A bond ladder, depending on the types and amount of exempt status (federal and in-state) is obtained from third parties and securities within the ladder, may not ensure adequate diversification of Schwab does not guarantee its accuracy. Tax-exempt income may be your investment portfolio. This potential lack of diversification may result subject to the Alternative Minimum Tax (AMT). Capital appreciation from in heightened volatility of the value of your portfolio. You must perform your own evaluation of whether a bond ladder and the securities held within it are consistent with your investment objective, risk tolerance and financial circumstances. ◆ A rollover of retirement plan assets to an IRA is not your only option. Carefully consider all of your available options which may include but not be limited to keeping your assets in your former employer’s plan; rolling over assets to a new employer’s plan; or taking Find this issue and a cash distribution (taxes and possible withdrawal penalties may apply). ONLINE archives of Onward at Prior to a decision, be sure to understand the benefits and limitations . of your available options and consider factors such as differences in schwab.com/onward investment related expenses, plan or account fees, available investment options, distribution options, legal and creditor protections, the availability of loan provisions, tax treatment, and other concerns specific to your individual circumstances.

Pg. 34–36: Dividend-focused funds may underperform funds that do not limit their investment to dividend paying stocks. Stocks held by the fund may reduce or stop paying dividends, affecting the fund’s ability to generate income. ◆ International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks. ◆ All corporate names shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security.

Index Definitions S&P 500® Index measures the performance of 500 leading publicly traded U.S. companies from a broad range of industries. It is a float-adjusted market-capitalization weighted index.

Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

46 | CHARLES SCHWAB | SPRING 2020 BONDSON

BONDSON BONDS.

High-yield. Short-duration. International. Domestic. Whatever your strategy, we’ve got the bond ETF. Invest in something bigger. HP Epson 12.12.19 K23935_2b_iShares_SchwabPrintAd_120519.indd K23935_iShares_Wordmark_Primary__Blk_CMYK_A.ai

Visit www.iShares.com to view a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal. Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a correspond- ing decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. The iShares Funds are distributed by Black- Rock Investments, LLC (together with its affiliates, “BlackRock”). ©2020 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. ICRMH1219U-1029394.

Pub: Onward Magazine Bleed: 8-1/4” x 10-3/4” Trim : 8” x 10-1/2” Live: 7”x 9-1/2” ON YOUR SIDE A Helping Hand

Generating tax-smart withdrawals in retirement just got a whole lot simpler.

® D uring my more than 50 years in this business, Intelligent Portfolios helps maximize your with- I’ve heard from countless retirees who worry drawals by considering your income needs, required about their portfolios lasting—and with good reason. minimum distributions, taxes, and total portfolio. More and more Americans must rely on their own The result is a predictable, tax-smart monthly savings to see them comfortably through retirement. paycheck—so you can spend with confidence in The challenge is how to turn those savings into a retirement. steady stream of income that lasts. To learn more about Schwab Intelligent Income, That’s why we created Schwab Intelligent visit schwab.com/intelligentincome. I trust you’ll be Income™. This game-changing feature of Schwab as impressed with it as I am.

Charles R. Schwab Founder & Chairman

48 | CHARLES SCHWAB | SPRING 2020 SCHWAB PRIVATE CLIENT™ Wealth management with you in mind.

Get personalized advice and support from a dedicated team.

With Schwab Private Client, you’ll collaborate with a dedicated team of experienced professionals who will get to know you and your goals personally. They’ll work with you to build a personalized plan to help grow, preserve, and manage your wealth while providing ongoing recommendations based on your unique needs. And they’ll continue to work side-by-side with you as you make all final investing decisions.

To learn more, ask your Financial Consultant about Schwab Private Client or call us at 877-520-6533.

Investment minimum: $500,000

Brokerage Products: Not FDIC-Insured • No Bank Guarantee • May Lose Value

Wealth management refers to a number of different products and services offered through various subsidiaries of The Charles Schwab Corporation. See schwab.com/wealth. Please read the Schwab Private Client and the Schwab Private Client Investment Advisory, Inc. Disclosure Brochures for important information and disclosures about this service. Schwab Private Client™ (SPC) is a non-discretionary investment advisory service sponsored by Charles Schwab & Co., Inc. (“Schwab”). Schwab Private Client Investment Advisory, Inc. (SPCIA) is a registered investment advisor and provides portfolio management for the SPC service. Schwab and SPCIA are affiliates and are subsidiaries of The Charles Schwab Corporation. ©2020 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. CC3584562 (0220-9JTG) ADP109443-00 (01/20) 000238860

ADP109443-00.indd 1 1/6/20 1:37 PM Printed on 10% post-consumer recycled paper. 00239936

Introducing the modern way to pay yourself in retirement. Schwab Intelligent Income™ A simple, modern way to generate a paycheck from your portfolio.

Plus, ﬂ exibility to start, stop or adjust your Available with Schwab Intelligent Portfolios®, paycheck at any time with no penalties so you pay no advisory fee or commissions

Find out how it works at Schwab.com/IntelligentIncome

To learn more about our modern approach to wealth management,

CHAT CALL VISIT talk to your Schwab Consultant today.

Wealth Management at Charles Schwab PLANNING | PORTFOLIO MANAGEMENT | INCOME STRATEGIES | BANKING

Graphics are for illustrative purposes only and not intended to represent a specific investment product. We encourage you to read the Schwab Intelligent Portfolios Solutions™ disclosure brochure for important information, pricing, and disclosures. Before you enroll, it’s important you understand any and all costs, including the role of cash and the way Schwab earns income from the cash allocation in your portfolio, which may affect performance, and how Schwab and its affiliates work together. We can’t guarantee the amount or duration of your withdrawals or any specific tax results such as meeting Required Minimum Distributions. You may incur IRS penalties for early withdrawal of funds depending on what type of account you have. Schwab Intelligent Income is an optional feature available with Schwab Intelligent Portfolios, which has no advisory fee and doesn’t charge commissions, and Schwab Intelligent Portfolios Premium™, which offers financial planning for an initial fee of $300 and a $30 per month advisory fee charged quarterly after that. Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium are made available through Charles Schwab & Co. Inc. (“Schwab”), a dually registered investment advisor and broker dealer. Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. (“CSIA”). Schwab and CSIA are subsidiaries of The Charles Schwab Corporation. ©2020 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0120-9WTP) ADP109770-00

19sch_3697-1_OnWard_SII

FINAL Client: Charles Schwab APPROVAL SIGNATURES ROUND(s) 10 Filename: 19sch_3697-1_OnWard_SII.indd SIZE / Date: 12-20-2019 4:48 PM MECHANICAL SPECS (w x h) FONTS & IMAGES PROOF FORMAT Job #: 3697-1 Bleed: 8.25” x 7.625” Fonts TRAFFIC Insert Date: None Trim: 8” x 7.375” Charles Modern (Bold, Condensed Bold, Condensed Light, Reg- Pubs or Loc: PROD. None Viewing: 8” x 7.375” ular), Minion Pro (Regular), Helvetica Neue (Regular) Print Description: None Live: 7.5” x 7.125” Images STUDIO Scale: 1” = 1” ICN-FC_ALL_CMYK.ai (22.01%), Simulator_updated_red- AD Notes: None ACTUAL SIZE (w x h) line_horizontal3_No_reﬂ c_CMYK.psd (CMYK; 600 ppi; 12%), CSchwab logo-tagline-lockup right core blue CMYK-100K.eps CW Bleed: 8.25” x 7.625” Mekanism (24.92%) Trim: 8” x 7.375” CD 640 Second St Viewing: Inks SF, CA 94107 8” x 7.375” BM 415.908.4000 Live: 7.5” x 7.125” Cyan, Magenta, Yellow, Black Gutter: None Designer: Mekanism Printed at: None CLIENT