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 Good afternoon.
This year has continued to be a pretty good year to be an investor. As of Friday, large cap US stocks are up 6.6% year-to-date and e
merging markets stocks are up 17.07%. Developed international stocks are flat for the year
. Bonds continue to do well with the broad US bond market up 5.43% year-to-date.*
Medicare open enrollment is going on now from Oct. 15 - Dec. 7. If you are on Medicare, we strongly encourage you to at minimum review your Part D drug coverage to ensure your plan is still providing the best price / benefits for your situation.
October is the month when inflation adjustments are announced for next year for social security, retirement contributions, and more. Social security has already announced, and we have the
summary in this newsletter. For retirement contributions, limits for 401(k)s and IRAs are projected to stay the same for 2017, but we're waiting on the official announcement from the IRS. You can watch our
website, my twitter (
@jeankeener), or our
Keener Financial Planning facebook page for details when those limits are finalized.
This is our last planned newsletter for 2016, so I want to share our holiday hours with you. Our offices will be closed Thursday and Friday of Thanksgiving week. We'll also be closed Friday Dec. 23 for Christmas Eve and Monday Dec. 26 for Christmas Day, as well as January 2 for New Year's day. I hope your year-end is productive and you have a joyful, meaningful holiday season, whatever those holidays may be.
As always, please let us know of any suggestions for newsletter topics or questions in your financial world. Thanks for reading, and live well!
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Inherited IRAs:
5 Key Tips
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 Social Security 2017 COLA |
 Social security announced that retirees and SSI recipients will receive a 0.3% cost of living adjustment (COLA) for 2017. While this amount seems incredibly small, it's not a discretionary decision by the Social Security administration. The Social Security Act ties the annual cost of living adjustment to the consumer price index as measured by the Department of Labor's Bureau of Labor Statistics. So to have COLAs tied to a different metric, we'd need to have a change in the law. More details on this change are available on this Social Security COLA fact sheet.
The maximum earnings that are subject to social security also increased. The 2016 maximum is $118,500. The 2017 maximum increases to $127,200.
Medicare premiums for 2017, which affect the net amount of social security received for most retirees, have not yet been announced. The announcement will be at
www.Medicare.gov when available.
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| Third Quarter Investment Review |
100 days after the Brexit scare, three quarters of a year after the most recent Fed rate hike, the markets once again confounded the instincts of nervous investors and went up instead of down. Fed Chairperson Janet Yellen has told the world that the U.S. economy is healthy enough to weather a rise in interest rates, but the Fed governors met in September and declined to serve up the first rate hike since last December 15. That was reassuring news to the Wall Street traders, and investors generally, helping to provide yet another quarter of positive gains in U.S. stocks.
The S&P 500 index of large company stocks posted a gain of 3.85% in the third quarter, and is up 7.84% for the year so far. Small company stocks, as measured by the Russell 2000 Small-Cap Index, gained 9.05%, posting an 11.46% gain so far this year.
Looking abroad, both international developed and emerging markets posted gains in 3rd quarter. The broad-based EAFE index of companies in developed foreign economies gained 6.43% in dollar terms, and is up 1.73% for the first three-quarters of the year. Emerging markets stocks, as represented by the EAFE EM index, gained 9.03% for the quarter, and are sitting on gains of 16.02% for the year so far.
On the bond side, the interest rate story is essentially unchanged: rates are still low, once again confounding all the experts who have been expecting significant rate rises for more than half a decade now. The US Barclays Aggregate Bond index was barely positive for the quarter with a 0.46% return, and through the first three quarters of the year is up 5.8%.
What
'
s keeping stock prices high while sentiment appears to be
-
let
'
s call it
"
restrained?
"
Nobody knows the answer, but a deeper look at the U.S. economy suggests that the economic picture isn
'
t nearly as gloomy as it is sometimes reported in the press. Economic growth for the second quarter has been revised upwards from 1.1% to 1.4%, due to higher corporate spending in general and especially as a result of increasing corporate investments in research and development. America
'
s trade deficit shrank in August. Consumer spending
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which makes up more than two-thirds of U.S. economic activity, rose a robust 4.3% for the quarter, perhaps partly due to higher take-home wages this year.
Meanwhile, if someone had told you five years ago that today
'
s unemployment rate would be 4.9%, you would have thought they were highly optimistic. But after the economy gained 151,000 more jobs in August, unemployment remained below 5% for the third consecutive month, and the trend is downward. At the same time, average hourly earnings for American workers have risen 2.4% so far this year.
The U.S. returns have been so good for so long that many investors are wondering: why are we bothering with foreign stocks? A recent Forbes column suggested the answer: historically, since 1970, foreign stocks have outperformed domestic stocks almost exactly 50% of the time, meaning the long trend we
'
ve become accustomed to could reverse itself at any time.
Nobody would dispute that the economic statistics are weak tea leaves for trying to predict the market
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s next move, and it is certainly possible that the U.S. and global economy are weaker than they appear. But the slow, steady growth we
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ve experienced since 2008 is showing no visible signs of ending, and it
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s hard to find the usual euphoria and reckless investing that normally accompanies a market top and subsequent collapse of share prices. At the current pace, we might look back on 2016 as another pretty good year to be invested, which is really all we ask for.
If you like this kind of information and would like more detail, we've published a
quarterly market review
on our website with more details. In addition, the quarterly market review includes some perspective and data on how elections have historically affected investment markets (Hint: less than you might think).
Source of investment returns is Morningstar for the period ending Sept. 30, 2016. S&P 500 TR USD for the S&P 500. MSCI EAFE NR USD for developed international markets. MSCI EM NR USD for emerging markets stock. Barclays US Agg Bond TR USD for the US Aggregate bond index. Russell 2000 TR USD for the Russell 2000 Small Cap Index.
Portions of this article adapted with permission of financial columnist Bob Veres.
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| Inherited IRAs |
 When an IRA owner dies, the IRA proceeds are payable to the named beneficiary--or to the owner's estate if no beneficiary is named. If you've been designated as the beneficiary of a traditional or Roth IRA, it's important that you understand the special rules that apply to "inherited IRAs."
It's not really "your" IRA
As an initial matter, while you do have certain rights, you are generally not the "owner" of an inherited IRA. The practical result of this fact is that you can't mix inherited IRA funds with your own IRA funds, and you can't make 60-day rollovers to and from the inherited IRA. You also need to calculate the taxable portion of any payment from the inherited IRA separately from your own IRAs, and you need to determine the amount of any required minimum distributions (RMDs) from the inherited IRA separately from your own IRAs.
But if you inherited the IRA from your spouse, you have special options. You can take ownership of the IRA funds by rolling them into your own IRA or into an eligible retirement plan account. If you're the sole beneficiary, you can also leave the funds in the inherited IRA and treat it as your own IRA. In either case, the IRA will be yours and no longer treated as an inherited IRA. As the new IRA owner (as opposed to beneficiary), you won't need to begin taking RMDs from a traditional IRA until you reach age 70½, and you won't need to take RMDs from a Roth IRA during your lifetime at all. And as IRA owner, you can also name new beneficiaries of your choice.
Required minimum distributions
As beneficiary of an inherited IRA--traditional or Roth--you must begin taking RMDs after the owner's death. In general, you must take payments from the IRA annually, over your life expectancy, starting no later than December 31 of the year following the year the IRA owner died. But if you're a spousal beneficiary, you may be able to delay payments until the year the IRA owner would have reached age 70½.
In some cases you may be able to satisfy the RMD rules by withdrawing the entire balance of the inherited IRA (in one or more payments) by the fifth anniversary of the owner's death. In almost every situation, though, it makes sense to use the life expectancy method instead--to stretch payments out as long as possible and take maximum advantage of the IRA's tax-deferral benefit.
You can always elect to receive more than the required amount in any given year, but if you receive less than the required amount you'll be subject to a federal penalty tax equal to 50% of the difference between the required distribution and the amount actually distributed.
More stretching...
What happens if you elect to take distributions over your life expectancy but you die with funds still in the inherited IRA? This is where your IRA custodial/trustee agreement becomes crucial. If, as is sometimes the case, your IRA language doesn't address what happens when you die, then the IRA balance is typically paid to your estate--ending the IRA tax deferral.
Many IRA providers, though, allow you to name a successor beneficiary. In this case, when you die, your successor beneficiary "steps into your shoes" and can continue to take RMDs over your remaining distribution schedule.
Federal income taxes
Distributions from inherited IRAs are subject to federal income taxes, except for any Roth or nondeductible contributions the owner made. But distributions are never subject to the 10% early distribution penalty, even if you haven't yet reached age 59½. (This is one reason why a surviving spouse may decide to remain as beneficiary rather than taking ownership of an inherited IRA.)
When you take a distribution from an inherited Roth IRA, the owner's nontaxable Roth contributions are deemed to come out first, followed by any earnings. Earnings are also tax-free if made after a five-calendar-year holding period, starting with the year the IRA owner first contributed to any Roth IRA. For example, if the IRA owner first contributed to a Roth IRA in 2014 and died in 2016, any earnings distributed from the IRA after 2018 will be tax-free.
Creditor protection
Traditional and Roth IRAs are protected under federal law if you declare bankruptcy. The IRA bankruptcy exemption was originally an inflation-adjusted $1 million, which has since grown to $1,283,025. Unfortunately, the U.S. Supreme Court has ruled that inherited IRAs are not covered by this exemption. (If you inherit an IRA from your spouse and treat that IRA as your own, it's possible that the IRA won't be considered an inherited IRA for bankruptcy purposes, but this was not specifically addressed by the Court.) This means that your inherited IRA won't receive any protection under federal law if you declare bankruptcy. However, the laws of your particular state may still protect those assets, in full or in part, and may provide protection from creditors outside of bankruptcy as well.
Article adapted with permission of Broadridge Forefield Investor Communications.
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| Year-End Tax Tips |
 You won't start hearing tax preparation commercials on TV until next January. However, it will be too late for many of your best tax planning opportunities by then. Other than making some retirement contributions, most of your tax-affecting moves for 2016 need to be completed before December 31. So, sometime in the next month or so, take a few minutes to think about your tax situation for this year and consider these options.
1. Defer income to next year
Consider opportunities to defer income to 2017, particularly if you think you may be in a lower tax bracket then. For example, you may be able to defer a year-end bonus or delay the collection of business debts, rents, and payments for services. Doing so may enable you to postpone payment of tax on the income until next year.
2. Accelerate deductions
You might also look for opportunities to accelerate deductions into the current tax year. If you itemize deductions, making payments for deductible expenses such as medical expenses, qualifying interest, and state taxes before the end of the year, instead of paying them in early 2017, could make a difference on your 2016 return.
3. Factor in the AMT
If you're subject to the alternative minimum tax (AMT), traditional year-end maneuvers such as deferring income and accelerating deductions can have a negative effect. Essentially a separate federal income tax system with its own rates and rules, the AMT effectively disallows a number of itemized deductions. For example, if you're subject to the AMT in 2016, prepaying 2017 state and local taxes probably won't help your 2016 tax situation, but could hurt your 2017 bottom line. Taking the time to determine whether you may be subject to the AMT before you make any year-end moves could help save you from making a costly mistake.
4. Bump up withholding to cover a tax shortfall
If it looks as though you're going to owe federal income tax for the year, especially if you think you may be subject to an estimated tax penalty, consider asking your employer (via Form W-4) to increase your withholding for the remainder of the year to cover the shortfall. The biggest advantage in doing so is that withholding is considered as having been paid evenly through the year instead of when the dollars are actually taken from your paycheck. This strategy can also be used to make up for low or missing quarterly estimated tax payments.
5. Maximize retirement savings
Deductible contributions to a traditional IRA and pretax contributions to an employer-sponsored retirement plan such as a 401(k) can reduce your 2016 taxable income. If you haven't already contributed up to the maximum amount allowed, consider doing so by year-end.
6. Take any required distributions
Once you reach age 70½, you generally must start taking required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans (an exception may apply if you're still working and participating in an employer-sponsored plan). Take any distributions by the date required--the end of the year for most individuals. The penalty for failing to do so is substantial: 50% of any amount that you failed to distribute as required.
In the first year you reach 70½, you have the option to wait until April 1 of the following year to take the distribution. However, we don't generally recommend that approach because you then have two distributions in 1 year which can result in a higher tax rate.
Be aware that the opportunity to take your RMD as a direct charitable contribution is now permanent law. If you're making charitable contributions anyway, it can save you more money on your taxes by making them directly from your IRA rather than taking them as an itemized deduction because the direct contribution also reduces your adjusted gross income.
7. Consider non-required IRA distributions
If you're in your 60s, you're at the point in life where there's no penalty for IRA distributions, and they're not required either. If you're retired, it's entirely possible that during this decade taking some voluntary IRA distributions in low tax brackets can save you significant taxes in the future. It makes sense to do some detailed retirement distribution planning to avoid missing out on this opportunity.
8. Consider Roth conversions
If this is a relatively low income year for you, you may wish to consider doing a partial Roth conversion. These conversions become particularly attractive when you've had a year with partial unemployment, career change, or early in retirement. Converting funds means you'll pay taxes on the income today, and then benefit from tax-free growth in the future. Again, if you're considering this, coordinate with your tax professional and us to make sure it's helpful in your situation.
9. Consider harvesting capital gains or losses
It seems odd to consider harvesting gains and losses, but which is best all depends on your tax bracket. If you're going to be in the 15% or lower tax bracket this year, the tax rate on long term capital gains is 0%. Selling investments at a gain to reset the cost basis higher at zero tax cost can create a big savings in the future. On the other hand, if you're in a 25% or higher tax bracket, you may wish to sell positions at a loss to offset other gains for the year or to realize the up to $3,000 deduction against ordinary income. In either case, please coordinate with your tax professional and us to ensure that you're seeing the big picture on implementing either of these strategies.
10. Beware the net investment income tax
Don't forget to account for the 3.8% net investment income tax. This additional tax may apply to some or all of your net investment income if your modified AGI exceeds $200,000 ($250,000 if married filing jointly, $125,000 if married filing separately, $200,000 if head of household).
Parts of this article adapted with permission of Broadridge Forefield Investor Communications.
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I hope you found this newsletter informative. KFP offers a free, no-obligation initial consultation to start the financial planning process for new clients. To learn more or schedule a time, call 817-993-0401 or e-mail [email protected].
Sincerely,
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Jean Keener, CFP®, CRPC®
Keener Financial Planning
Keener Financial Planning provides as-needed, fee-only financial planning and investment management services.
*Source for investment returns is Morningstar as of October 21, 2016. S&P 500 TR USD for the S&P 500. MSCI EAFE NR USD for developed international markets. MSCI EM NR USD for emerging markets stock. Barclays US Agg Bond TR USD for the US Aggregate bond index.
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