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 Good morning.
2017 has started off a lot stronger than 2016 began for investors! We hope you've been enjoying opening your statements. As of Friday, large cap US stocks are up 5.5% year-to-date. Developed international stocks are up 6.7% and e
merging markets stocks are up almost 12%. Even though we've seen some upward movement on interest rates from the Fed, the broad US bond market is up 1.75
% year-to-date.*
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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Early Withdrawal
Penalty Exceptions
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2017 retirement and
tax limits
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 First Quarter Investment Market Review |
 The first quarter of 2017 provided the highest returns for U.S. large-cap stocks since the last three months of 2013. The first quarter of 2017 saw the S&P 500 index return 6.07% and the broader Russell 3000 index gain 5.74%.
Investors in the smaller companies of the Russell 2000 Index posted a relatively modest 2.47% gain over the first three months of the year. This was a pull-back from their 2016 21%+ returns.
International investments soared even more than US through the start of the year. The stocks of international developed foreign economies (as measured by MSCI EAFE) gained 7.25% in the first three calendar months of 2017. Emerging market stocks of less developed countries, as represented by the MSCI EM index, rose 11.45%.
In the bond markets, rates are incrementally rising. However, US bond indices still managed to eke out a positive return for the quarter. The Barclays US Aggregate Bond Index was up 0.82% from January - March.
There are many opinions about why the market has run so high since the end of last year and questions about whether it's justified by true underlying fundamentals. But that's an impossible question that we can't answer.
There are both strong and weak economic indicators. The latest reports show that the U.S. gross domestic product-a broad measure of economic activity-grew just 1.6% last year, the most sluggish performance since 2011. Consumer spending and construction activities also weakened with slower-than-average growth rates. The good news is that corporate profits increased at an annual rate of 2.3% in the fourth quarter, and the Fed views the economy as strong enough to support additional interest rate increases.
The really good news is that we don't need to answer the question about whether current market prices are "justified" to be successful investors.
In the short-term investment prices may fluctuate seemingly without reason, but in the long-term, they're pretty good at capturing true increases in economic value and rewarding long-term investors.
Today (and every day), prices reflect all information available to investors. This information includes details about each individual company's profits, sales, and prospects, along with expectations about broader regulatory and tax policy changes that may or may not develop.
As investors get new information, those prices will go up or down. And they may move dramatically and quickly.
So it's a good time to confirm with yourself:
- Do you know how much your portfolio could potentially drop when the next downturn occurs (it's not if, but when)?
- And are you prepared to let those (temporary) portfolio losses occur without making a bad decision to sell while the market is down?
If the answer to either of those questions is "no," it's important to re-evaluate your investment strategy soon. If, on the other hand, the answer is "yes," you're well-prepared to capitalize on the next correction. You can envision a terrific buying opportunity, a chance to rebalance your portfolio and take advantage of lower stock prices. After all, if history is any indication, the next downturn will be followed by another bull run.
Source of investment returns is Morningstar for the period ending March 31, 2017. 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.
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| IRS-Approved Ways to Avoid the 10% Early Withdrawal Penalty |
 You've probably heard that if you withdraw taxable amounts from your 401(k) or 403(b) plan before age 59½, you may be socked with a 10% early distribution penalty tax on top of the federal income taxes you'll be required to pay. But did you know that the Internal Revenue Code contains quite a few exceptions that allow you to take penalty-free withdrawals before age 59½?
Sometimes age 59½ is really age 55...or age 50.
If you've reached age 55, you can take penalty-free withdrawals from your 401(k) plan after leaving your job if your employment ends during or after the year you reach age 55. This is one of the most important exceptions to the penalty tax.
And if you're a qualified public safety employee, this exception applies after you've reached age 50. You're a qualified public safety employee if you provided police protection, firefighting services, or emergency medical services for a state or municipality, and you separated from service in or after the year you attained age 50.
Be careful though. This exception applies only after you leave employment with the employer that sponsored the plan making the distribution. For example, if you worked for Employer A and quit at age 45, then took a job with Employer B and quit at age 55, only distributions from Employer B's plan would be eligible for this exception. You'll have to wait until age 59½ to take penalty-free withdrawals from Employer A's plan, unless another exception applies.
And, if you roll your 401(k) to an IRA, you lose access to this penalty exception. So if you're separating from service after one of the above ages and before 59½, make sure that you won't need the money before 59½ before initiating any rollovers.
Think periodic, not lump sums
Another important exception to the penalty tax applies to "substantially equal periodic payments," or SEPPs. This exception also applies only after you've stopped working for the employer that sponsored the plan. To take advantage of this exception, you must withdraw funds from your plan at least annually based on one of three rather complicated IRS-approved distribution methods.
Regardless of which method you choose, you generally can't change or alter the payments for five years or until you reach age 59½, whichever occurs later. If you do modify the payments (for example, by taking amounts smaller or larger than required distributions or none at all), you'll again wind up having to pay the 10% penalty tax on the taxable portion of all your pre-age 59½ SEPP distributions (unless another exception applies).
And more exceptions...
Distributions described below generally won't be subject to the penalty tax even if you're under age 59½ at the time of the payment.
- Distributions from your plan up to the amount of your unreimbursed medical expenses for the year that exceed 10% of your adjusted gross income for that year (You don't have to itemize deductions to use this exception, and the distributions don't have to actually be used to pay those medical expenses.)
- Distributions made as a result of your qualifying disability (This means you must be unable to engage in any "substantial gainful activity" by reason of a "medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.")
- Certain distributions to qualified military reservists called to active duty
- Distributions made pursuant to a qualified domestic relations order (QDRO)
- Distributions made to your beneficiary after your death, regardless of your beneficiary's age
Keep in mind that the penalty tax applies only to taxable distributions, so tax-free rollovers of retirement assets are not subject to the penalty. Also note that the exceptions applicable to IRAs are different than the rules that apply to employer plans. So if you're considering an IRA rollover and using one of these exceptions, it's super important to consult with a financial professional BEFORE doing the rollover.
Article adapted with permission of Broadridge Forefield Investor Communications.
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| 2017 Tax and Retirement Figures |
Every year, the Internal Revenue Service announces cost-of-living adjustments that affect contribution limits for retirement plans, thresholds for deductions and credits, and standard deduction and personal exemption amounts. Here are a few of the key adjustments for 2017.
- Employees who participate in 401(k), 403(b), and most 457 plans can defer up to $18,000 in compensation in 2017 (the same as in 2016); employees age 50 and older can defer up to an additional $6,000 in 2017 (the same as in 2016).
- Employees participating in a SIMPLE retirement plan can defer up to $12,500 in 2017 (the same as in 2016), and employees age 50 and older will be able to defer up to an additional $3,000 in 2017 (the same as in 2016).
If you haven't already reviewed your contribution level for any employer retirement plans for this year, this is a great time to do it. If you've received a raise and aren't already maxing out your contribution, bumping your contribution up a percentage point or two can go a long way toward meeting your retirement goals.
IRAs
The limit on annual contributions to an IRA remains unchanged at $5,500 in 2017, with individuals age 50 and older able to contribute an additional $1,000. For individuals who are covered by a workplace retirement plan, the deduction for contributions to a traditional IRA is phased out for the following modified adjusted gross income (AGI) ranges:
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2016 |
2017 |
| Single/head of household (HOH) |
$61,000 - $71,000 |
$62,000 - $72,000 |
| Married filing jointly (MFJ) |
$98,000 - $118,000 |
$99,000 - $119,000 |
| Married filing separately (MFS) |
$0 - $10,000 |
$0 - $10,000 |
The 2017 phaseout range is $186,000 - $196,000 (up from $184,000 - $194,000 in 2016) when the individual making the IRA contribution is not covered by a workplace retirement plan but is filing jointly with a spouse who is covered.
The modified AGI phaseout ranges for individuals making contributions to a Roth IRA are:
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2016 |
2017 |
| Single/HOH |
$117,000 - $132,000 |
$118,000 - $133,000 |
| MFJ |
$184,000 - $194,000 |
$186,000 - $196,000 |
| MFS |
$0 - $10,000 |
$0 - $10,000 |
Estate and gift tax
- The annual gift tax exclusion remains at $14,000.
- The gift and estate tax basic exclusion amount for 2017 is $5,490,000, up from $5,450,000 in 2016.
Personal exemption
The personal exemption amount remains at $4,050. For 2017, personal exemptions begin to phase out once AGI exceeds $261,500 (single), $287,650 (HOH), $313,800 (MFJ), or $156,900 (MFS).
These same AGI thresholds apply in determining if itemized deductions may be limited. The corresponding 2016 threshold amounts were $259,400 (single), $285,350 (HOH), $311,300 (MFJ), and $155,650 (MFS).
Standard deduction
These amounts have been adjusted as follows:
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2016 |
2017 |
| Single |
$6,300 |
$6,350 |
| HOH |
$9,300 |
$9,350 |
| MFJ |
$12,600 |
$12,700 |
| MFS |
$6,300 |
$6,350 |
The 2016 and 2017 additional standard deduction amount (age 65 or older, or blind) is $1,550 for single/HOH or $1,250 for all other filing statuses. Special rules apply if you can be claimed as a dependent by another taxpayer.
Article adapted with permission of Broadridge Forefield Investor Communications.
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| Do You Need to File a Gift Tax Return? |
 If you transfer money or property to anyone in any year without receiving something of at least equal value in return, you may need to file a federal gift tax return (Form 709) by the April tax filing deadline. If you live in one of the few states that also impose a gift tax, you may need to file a separate gift tax return with your state as well.
Not all gifts, however, are treated the same. Some gifts aren't taxable and generally don't require a gift tax return. These exceptions include:
- Gifts to your spouse that qualify for the marital deduction
- Gifts to charities that qualify for the charitable deduction (Filing is not required as long as you transfer your entire interest in the property to qualifying charities. However, if you are required to file a return to report gifts to non-charitable beneficiaries, all charitable gifts must be reported as well.)
- Qualified amounts paid on someone else's behalf directly to an educational institution for tuition or to a provider for medical care
- Annual exclusion gifts totaling $14,000 or less for the year to any one individual (However, you must file a return to split gifts with your spouse if you want all gifts made by either spouse during the year treated as made one-half by each spouse - enabling you and your spouse to effectively use each other's annual exclusion.)
If your gift isn't exempt from taxation, you'll need to file a gift tax return. But that doesn't mean you have to pay gift tax. Generally, each taxpayer is allowed to make taxable gifts totaling $5,490,000 in 2017 (up from $5,450,000 in 2016) over his or her lifetime before paying any gift tax. Filing the gift tax return helps the IRS keep a running tab on the taxable gifts you have made and the amount of the lifetime exclusion you have used.
If you made a gift of property that's hard to value (e.g., real estate), you may want to report the gift, even if you're not required to do so, in order to establish the gift's taxable value. If you do, the IRS generally has only three years to challenge the gift's value. If you don't report the gift, the IRS can dispute the value of your gift at any time in the future.
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® and the entire Keener Financial Planning team
Keener Financial Planning provides as-needed, fee-only financial planning and investment management services. We're proud to have provided all advice on a fiduciary basis since the Firm's inception in 2008.
*Source for investment returns is Morningstar as of April 21, 2017. 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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