Distribution Funds: Putting Income on Autopilot

As baby boomers retire, they begin to focus less on accumulating assets and more on how those assets can be converted into an ongoing stream of income. Distribution funds are one way to simplify that process.

Distribution funds are actively managed mutual funds that focus not on maximizing asset growth but on making regularly scheduled payments to investors. Distribution funds were primarily designed to give retirees an easier way to receive income. For example, early retirees might use one to provide income until they reach full retirement age. They also can be used to complement a pension or other income sources.

How distribution funds work

A distribution fund basically functions much like a systematic withdrawal plan. Its annual payout (either a percentage of assets or a specific dollar amount) is divided into equal payments that are scheduled to be made at regular intervals (typically monthly or quarterly).

As with so-called lifestyle or lifecycle funds, distribution funds typically are offered as part of a group. All funds in the group use a similar investing methodology, but each fund has a different payout target or distribution rate. For example, one fund in the group might offer a 3% annual payout. Another fund in the same group might target a 4% payout, and a third might aim for 6%.

One size doesn’t fit all

Even though funds within a given series are consistent in their approach to income distribution, methods used by various families of distribution funds to generate returns and calculate payments vary widely. For example, one series might differentiate its funds based on the annual percentage each one distributes. Another group of funds might determine annual income levels and asset allocation based on how long each fund’s portfolio is intended to last. The shorter a fund’s time horizon, the higher the targeted annual payout.

Some distribution funds are managed so that all capital is exhausted by the end of a designated time period, generally getting more conservative as that end date gets closer. Others are designed to preserve capital and make payouts primarily from earnings; these typically have no time frame attached. Regardless of how the targeted payout rate is derived for a given fund series, it’s based on what is considered a sustainable withdrawal rate given the fund’s objectives, planned asset allocation, and time frame (if applicable). Also, in some cases, the amount of the payout is adjusted to keep pace with inflation.

A distribution fund’s method of providing its targeted income is generally based on historical rates of return for various types of investments in both good and bad markets. Each fund’s strategy is intended to minimize the impact of market fluctuations on its income payout. However, there is no guarantee a fund’s payout will remain the same from year to year. Also, it’s important to remember that all investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.

A distribution fund is generally structured as a fund of funds, meaning that it is comprised of other mutual funds. However, some also include other types of investments.

Distribution funds aren’t annuities

Because of their focus on income, distribution funds are designed to fill a role in retirement that is somewhat similar to that of payments from an immediate annuity. However, there are some key differences. Perhaps the most important is that distribution funds offer no guarantees of the payout levels they offer; immediate annuities generally do (subject to the claims-paying ability of the annuity’s issuer). Also, a mutual fund is not an insurance contract, as an annuity is. And immediate annuities often are designed to ensure an income that lasts throughout an individual’s lifetime, and/or that of a spouse. Though an investor can attempt to provide that with an appropriate distribution fund, no fund can guarantee income for life.

Advantages of distribution funds

A distribution fund can help simplify and streamline the process of receiving ongoing income. You don’t have to worry about constructing that diversified portfolio yourself, shifting its asset allocation over time, or rebalancing it periodically. Also, the concept of a distribution fund may be easier to understand than an insurance contract that has many riders and variables. In addition, a targeted payout rate may make it easier to estimate how long your savings will last than if you were to try to manage your portfolio on your own.

Distribution funds also offer a great deal of flexibility. Even though you receive regularly scheduled payments, you can withdraw additional amounts from your principal at any time. That means you can adjust your annual retirement income from year to year, or make withdrawals to take care of unexpected costs. Investments that guarantee a regular income stream typically restrict the use of your principal.

Because distribution funds were intended as low-cost alternatives to annuities, expense ratios tend to be comparatively low.

Tradeoffs with distribution funds

As mentioned previously, a distribution fund may strive to provide a certain level of income, but there are no guarantees that it will do so. Depending on how a fund is structured and managed, a steep or prolonged market decline could affect the amount of the scheduled payments from year to year, or how long your investment will last. If you cannot afford either possibility, a distribution fund may mean more uncertainty–either long term or short term–than you’re comfortable with.

If you are willing and able to structure and administer a systematic withdrawal program independently, you may be able to replicate many of the advantages of a distribution fund with a well-diversified portfolio. That would give you greater ability to customize payouts to your individual situation. For example, you could shift investments based on what’s happening in the financial markets or your own life, and manage your tax situation from year to year.

Distribution funds are designed for individuals who plan to stay invested in a given fund for an extended period of time. If you’re an active trader or might withdraw your money relatively quickly, you may want to think twice; in-and-out investing will undercut the very reason for choosing a distribution fund. And be aware that even though you can withdraw amounts over and above your scheduled payments, those withdrawals will reduce future earnings that would have supported distributions in later years. That could leave you vulnerable to longevity risk–the possibility of outlasting your savings.

You also may need to consider any projected distribution fund payouts in the context of other retirement income concerns, such as the tax consequences of those payouts, or required minimum distributions from a qualified retirement plan or IRA.

One of many choices

As with most investment options, a distribution fund may not fill all your retirement income needs. Don’t hesitate to get expert advice on whether one might be useful for part of your portfolio, or for a specific purpose.

Note: Past performance is no guarantee of future results and asset allocation alone can’t guarantee a profit or prevent a loss. Before investing in a distribution fund, carefully consider its investment objectives, risks, charges, and expenses, which can be found in the prospectus available from the fund. Read the prospectus carefully before investing.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Linda Bullwinkle, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, Hughes, access.att.com, ING Retirement, Merck, Pfizer, AT&T, Qwest, Chevron, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Linda Bullwinkle is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Comparing Bond Yields

Coupon Rates and Current Yield

If you’re considering investing in a bond, one of the factors you need to understand is its yield. But it’s important to know exactly what type of yield you’re looking at.

What exactly is “yield?” The answer depends on how the term is used. In the broadest sense, an investment’s yield is the return you get on the money you’ve invested. However, there are many different ways to calculate yield, particularly with bonds. Considering yield can be a good way to compare investments, as long as you know what yields you’re comparing and why.

Coupon rate

People sometimes confuse a bond’s yield with its coupon rate (the interest rate that’s specified in the bond agreement). A bond’s coupon rate represents the amount of interest you earn annually, expressed as a percentage of its face (par) value. If a $1,000 bond’s coupon rate pays $50 a year in interest, its coupon rate would be 5%.

The coupon rate is typically fixed. Though it does represent what a bond pays, it’s not the best measure of the return you’re getting on that investment.

Current yield

A bond’s current yield represents its annual interest payments as a percentage of the bond’s market value, which may be higher or lower than par. As a bond’s price goes up and down in response to what’s happening in the marketplace, its current yield will vary also. For example, if you bought a $1,000 bond with a 5% coupon rate for $900 on the open market, its current yield would be 5.55% (the $50 annual interest divided by the $900 purchase price). If you bought the same $1,000 bond for $1,200, the current yield would be 4.16% ($50 divided by $1,200).

If you buy a bond at par and hold it to maturity, the current yield and the coupon rate would be the same. However, for a bond sold at a premium or a discount to its face value, the yield and the coupon rate are different.

If you are concerned only with the amount of current income a bond can provide each year, then calculating the current yield may give you enough information to decide whether you should purchase that bond. However, if you are interested in a bond’s performance as an investment over a period of years, or you want to compare it to another bond or other income-producing investment, the current yield will not give you enough information. In that case, yield to maturity will be more useful.

Watching the Yield Curve

Bond maturities and their yields are related. Typically, bonds with longer maturities pay higher yields. Why? Because the longer a bondholder must wait for the bond’s principal to be repaid, the greater the risk compared to an identical bond with a shorter maturity, and the more return investors demand.

If you were to draw a line on a chart that compares the yields of, for example, Treasury securities with various maturities, you would typically see a line that slopes upward as maturities lengthen and yields increase. The greater the difference between the yields on T-bills and 30-year bonds, the steeper that slope. A steep yield curve often occurs because investors want greater compensation for tying up their money for longer periods and running the risk that inflation will cut net returns over time. A flat yield curve means that there is little difference between short and long maturities.

However, sometimes the yield curve can actually become inverted; in this case, short-term interest rates are higher than long-term rates. For example, in 2004 the Federal Reserve Board began increasing short-term rates, but long-term rates didn’t rise as quickly. A yield curve that stays inverted for a period of time is believed to indicate a recession may be about to occur.

Yield to Maturity, Yield to Call

Yield to maturity

Yield to maturity (YTM) reflects the rate of return on a bond at any given time (assuming it is held until its maturity date). It takes into account not only the bond’s interest rate, principal, time to maturity, and purchase price, but also the value of its interest payments as you receive them over the life of the bond. Yield to maturity includes the additional interest you could earn by reinvesting all of the bond’s interest payments at the yield it was earning when you bought it.

If you buy a bond at a discount to its face value, its yield to maturity will be higher than its current yield. Why? Because in addition to receiving interest, you would be able to redeem the bond for more than you paid for it. The reverse is true if you buy a bond at a premium (more than its face value). Its value at maturity would be less than you paid for it, which would affect your yield.

Example: If you paid $960 for a $1,000 bond and held it to maturity, you would receive the full $1,000 principal. The $40 difference between the purchase price and the face value is profit, and is included in the calculation of the bond’s yield to maturity. Conversely, if you bought the bond at a $40 premium, meaning you paid $1,040 for it, that premium would reduce the bond’s yield because the bond would be redeemed for $40 less than the purchase price.

Why is yield to maturity important?

Yield to maturity lets you accurately compare bonds with different maturities and coupon rates. It’s particularly helpful when you are comparing older bonds being sold in the secondary market that are priced at a discount or at a premium rather than face value. It’s also especially important when looking at a zero-coupon bond, which typically sells at a deep discount to its face value but makes no periodic interest payments. Because you receive all of a zero’s return at maturity, when its principal is repaid, any yield quoted for a zero-coupon bond is always a yield to maturity.

Yield to call

When it comes to helping you estimate your return on a callable bond (one whose issuer can choose to repay the principal before maturity), yield to maturity has a flaw. If the bond is called, the interest payments will come to an end. That reduces its overall yield to the investor. Therefore, for a callable bond, you also need to know what the yield would be if the bond were called at the earliest date allowed by the bond agreement. That figure is known as its yield to call; the calculation is the same as with yield to maturity, except that the first call date is substituted for the maturity date.

A bond issuer will generally call a bond only if it’s profitable for the issuer to do so. For example, if interest rates fall below a bond’s coupon rate, the issuer is likely to recall the bond and borrow money at the newer, lower rate, much as you might refinance your mortgage if interest rates drop. The less time until the first date the bond can be called, and the lower that current interest rates are when compared to the coupon rate, the more important the yield-to-call figure becomes.

Why is yield to call important?

If you rely on the income from a callable bond–for example, if it helps pay living expenses–yield to call is especially significant. If the bond is called at a time when interest rates are lower than when you purchased it, that reinvested principal might not provide the same amount of ongoing income. Why? Because you would likely have difficulty getting the same return when you reinvest unless you took on more risk.

Comparing Taxable and Tax-Free Yields

$5,000 taxable bond paying 5% interest $5,000 municipal paying 3.5% Federal tax bracket 28% 33% 35% 39.6% Annual interest $250 $250 $250 $250 $175 Paid in taxes $70 $82.50 $87.50 $99 $0 Net income $180 $167.50 $162.50 $151 $175

 

  $5,000 taxable bond paying 5% interest $5,000 municipal paying 3.5%
  Federal tax bracket  
28% 33% 35% 39%
Annual interest $250 $250 $250 $250 $175
Paid in taxes $70 $82.50 $87.50 $99 $0
Net income $180 $167.50 $162.50 $151 $175

 

Note: This hypothetical example is intended only as an illustration and does not reflect the return of any specific portfolio.

It’s important to consider a bond’s after-tax yield–the rate of return earned after taking into account taxes (if any) on income received from the bond. Some bonds–for example, municipal bonds (“munis”) and U.S. Treasury bonds–may be tax exempt at the federal and/or the state level. However, most bonds are taxable.

Consider what you keep

A tax-exempt bond often pays a lower interest rate than an equivalent taxable bond, but may actually have a higher yield once the impact of taxes has been factored in. Whether this is true in your case depends on your tax bracket. It also can be affected by whether you must pay not only federal but state and local taxes as well.

For example, let’s say you consider investing in either Bond A, a tax-exempt bond paying 4% interest, or Bond B, a taxable bond paying 6% interest. You want to find out whether Bond A or Bond B would be a better investment in terms of after-tax yield. For purposes of this illustration, let’s also say you are in the 35% federal tax bracket and do not have to pay state taxes.

You determine that Bond A’s after-tax yield is 4% (the same as its pretax yield, of course). However, Bond B’s yield is only 3.8% once taxes have been deducted. You’d probably decide that tax-exempt Bond A would be better because of its higher after-tax yield.

The impact of being tax-free

In order to attract investors, taxable bonds typically pay a higher interest rate than tax-exempt bonds. Why? The associated tax exemption effectively increases the after-tax value of a tax-free bond’s yield. That tax advantage can mean a difference of several percentage points between a corporate bond’s coupon rate–the annual percentage rate it pays bondholders–and that of a muni with an identical maturity period.

Still, as the earlier example demonstrates, a tax-free bond could actually provide a better after-tax return. Generally, the higher your tax bracket, the higher the tax-equivalent yield of a muni bond will be for you.

Comparing apples to oranges

To make sure you’re not comparing apples to oranges, you can apply a simple formula that involves your federal marginal tax rate (the income tax rate you pay on the last dollar of your yearly income). The formula depends on whether you want to know the taxable equivalent of a tax-free bond, or the tax-free equivalent of a taxable bond. Calculating the taxable equivalent of a tax-free bond requires subtracting your marginal tax rate from 1, then dividing the tax-free bond’s annual yield by the result. To calculate the tax-free equivalent of a taxable bond, you subtract your tax rate from 1, then multiply it by the taxable bond’s yield.

If a taxable bond also is subject to state and local taxes and the tax-exempt isn’t, the tax-equivalent yield on the tax-free bond could be even lower and still come out ahead.

A financial professional can help you compare taxable and tax-free bonds, and evaluate how to maximize the benefits of both.

What’s Taxable, What’s Not

Comparing taxable and tax-free yields involves making sure you understand a bond’s tax status. The interest on corporate bonds is taxable by local, state, and federal governments. However, interest on bonds issued by state and local governments–generically called municipal bonds, or munis–generally is exempt from federal income tax. If you live in the state in which a specific muni is issued, it may also be tax free at the state or local level.

Unlike munis, the income from Treasury securities, which are issued by the U.S. government, is exempt from state and local taxes but not from federal taxes. The general principle is that federal and state/local governments can impose taxes on their own level, but not at the other level; for example, states can tax securities of other states but not those of the federal government, and vice versa.

As is true of almost anything that’s tax-related, munis can get complicated. A bond’s tax-exempt status applies only to the interest paid on the bond; capital gains realized from any increases in the bond’s value are taxable when the bond is sold.

When are munis taxable?

Specific muni issues may be subject to federal income tax, depending on how the bond issuer will use the proceeds. If a bond finances a project that offers a substantial benefit to private interests, it is taxable at the federal level unless specifically exempted. For example, even though a new football stadium may serve a public purpose locally, it will provide little benefit to federal taxpayers. As a result, a muni bond that finances it is considered a so-called private-purpose bond.

Also known as private activity bonds, taxable munis are those in which 10% or more of the bond’s benefit goes to private activities, or 5% of the proceeds (or $5 million if less) are used for loans to parties other than government units. Other public projects whose bonds may be federally taxable include housing, student loans, industrial development, and airports

Even though such bonds are subject to federal tax, they still can have some advantages. For example, they may be exempt from state or local taxes. And you may find that yields on such taxable municipal bonds are closer to those of corporate bonds than they are to tax-free bonds.

Agencies and GSEs (government-sponsored enterprises) vary in their tax status. Interest paid by Ginnie Mae, Fannie Mae, and Freddie Mac bonds is fully taxable at federal, state, and local levels. The bonds of other GSEs, such as the Federal Farm Credit Banks, Federal Home Loan Banks and the Resolution Funding Corp. (REFCO), are subject to federal tax but exempt from state and local taxes. Before buying an agency bond, verify its tax status.

Don’t forget the AMT

To further complicate matters, interest from private-purpose bonds may be specifically exempted from regular federal income tax, but still may be a factor in determining whether the alternative minimum tax (AMT) applies to you. Even if you are not subject to the AMT when you purchase a bond, more people are feeling its impact each year, and the interest from a private-purpose bond could change your status. A tax professional can evaluate a bond’s potential impact on your AMT liability.

Pay attention to muni bond funds

Just because you’ve invested in a municipal bond fund doesn’t mean the income you receive is automatically tax free. Some funds invest in both public-purpose and private-purpose munis and must disclose on their yearly 1099 forms how much of the tax-free interest they pay is subject to AMT. If you own a muni bond fund, review this information periodically, especially if you think you might be subject to the AMT. Note: Before investing in a mutual fund, carefully compare its investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the fund. Read the prospectus carefully before investing. A bond fund is subject to the same inflation, interest-rate, and credit risks association with its underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund’s performance.

Use a tax advantage where it counts

Be careful not to make a mistake that is common among people who invest through a tax-deferred account, such as an IRA. Because those accounts automatically provide a tax advantage, you receive no additional benefit by investing in tax-free bonds within them. By doing so, you may be needlessly forgoing a higher yield from a taxable bond. Tax-free bonds are best held in taxable accounts.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Linda Bullwinkle, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, Qwest, Northrop Grumman, netbenefits.fidelity.com, Raytheon, ExxonMobil, Chevron, Hughes, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Linda Bullwinkle is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Organizing Your Paperwork for Tax Season

If you haven’t done it, now’s the time.

How prepared are you to prepare your 1040? The earlier you compile and organize the relevant paperwork, the easier things may be for you (or the tax preparer working for you) this winter. Here are some tips to help you get ready:

As a first step, look at your 2013 return. Unless your job, living situation or financial situation has changed notably since you last filed your taxes, chances are you will need the same set of forms, schedules and receipts this year as you did last year. So open that manila folder (or online vault) and make or print a list of the items that accompanied your 2013 return. You should receive the TY 2014 versions of everything you need by early February at the latest.

How much documentation is needed? If you don’t freelance or own a business, your list may be short: W-2(s), 1099-INT(s), perhaps 1099-DIVs or 1099-Bs, a Form 1098 if you pay a mortgage, and maybe not much more. Independent contractors need their 1099-MISCs, and the self-employed need to compile every bit of documentation related to business expenses they can find: store and restaurant receipts, mileage records, utility bills, and so on. And, of course, there’s the Affordable Care Act; if you got coverage through your state or federal marketplace, Form 1095-A is needed to fill out Form 8962.1

In totaling receipts, don’t forget charitable donations. The IRS wants all of them to be documented. A taxpayer who donates $250 or more to a qualified charity needs a written acknowledgment of such a donation. If your own documentation is sufficiently detailed, you may deduct $0.14 for each mile driven on behalf of a volunteer effort for a qualified charity.1

Or medical expenses & out-of-pocket expenses. Collect receipts for any expense for which your employer doesn’t reimburse you, and any medical bills that came your way last year.

If you’re turning to a tax preparer, stand out by being considerate. If you present clean, neat and well-organized documentation to a preparer, that diligence and orderliness will matter. You might get better and speedier service as a result: you are telegraphing that you are a step removed from the clients with missing or inadequate paperwork.

Make sure you give your preparer your federal tax I.D. number (TIN), and remember that joint filers must supply TINs for each spouse. If you claim anyone as a dependent, you will need to supply your preparer with that person’s federal tax I.D. number. Any dependent you claim has to have a TIN, and that goes for newborns, infants and children as well. So if your kids don’t have Social Security numbers yet, apply for them now using Form SS-5 (available online or at your Social Security office). If you claim the Child & Dependent Care Tax Credit, you will need to show the TIN for the person or business that takes care of your kids while you work.1,3

While we’re on the subject of taxes, some other questions are worth examining…

How long should you keep tax returns? The IRS statute of limitations for refunds is 3 years, but if you underreport taxable income, fail to file a return or file a claim for a loss from worthless securities or bad debt deduction, it wants you to keep them longer. You may have heard that keeping your returns for 7 years is wise; some tax professionals will tell you to keep them for life. If the tax records are linked to assets, you will want to retain them for when you figure out the depreciation, amortization, or depletion deduction and the gain or loss. Insurers and creditors may want you to keep federal tax returns indefinitely.4

Can you use electronic files as records in audits? Yes. In fact, early in the audit process, the IRS may request accounting software backup files via Form 4564 (the Information Document Request). Form 4564 asks the taxpayer/preparer to supply the file to the IRS on a flash drive, CD or DVD, plus the necessary administrator username and password. Nothing is emailed. The IRS has the ability to read most tax prep software files. For more, search online for “Electronic Accounting Software Records FAQs.” The IRS page should be the top result.5

How do you calculate cost basis for an investment? A whole article could be written about this, and there are many potential variables in the calculation. At the most basic level with regards to stock, the cost basis is original purchase price + any commission on the purchase.

So in simple terms, if you buy 200 shares of the Little Emerging Company @ $20 a share with a $100 commission, your cost basis = $4,100, or $20.50 per share. If you sell all 200 shares for $4,000 and incur another $100 commission linked to the sale, you lose $200 – the $3,900 you wind up with falls $200 short of your $4,100 cost basis.5

Numerous factors affect cost basis: stock splits, dividend reinvestment, how shares of a security are bought or gifted. Cost basis may also be “stepped up” when an asset is inherited. Since 2011, brokerages have been required to keep track of cost basis for stocks and mutual fund shares, and to report cost basis to investors (and the IRS) when such securities are sold.6

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – bankrate.com/finance/taxes/7-ways-to-get-organized-for-the-tax-year-1.aspx [2/18/15]

2 – bankrate.com/finance/taxes/premium-tax-credit.aspx [1/6/15]

3 – irs.gov/Individuals/International-Taxpayers/Taxpayer-Identification-Numbers-%28TIN%29 [2/2/15]

4 – irs.gov/Businesses/Small-Businesses-&-Self-Employed/How-long-should-I-keep-records [1/27/15]

5 – irs.gov/Businesses/Small-Businesses-&-Self-Employed/Use-of-Electronic-Accounting-Software-Records;-Frequently-Asked-Questions-and-Answers [2/9/15]

6 – turbotax.intuit.com/tax-tools/tax-tips/Rental-Property/Cost-Basis–Tracking-Your-Tax-Basis/INF12037.html [2014]

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, ExxonMobil, Hughes, Northrop Grumman, Raytheon, Merck, Glaxosmithkline, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of Linda Bullwinkle, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

Linda Bullwinkle is a Representative with FSC Securities and may be reached at http://www.theretirementgroup.com.

What’s Your Financial Health Score?

Can a 5-question test predict how wealthy you will become?

In the future, will you become wealthier or poorer? Who knows, right? It seems like you would need a crystal ball to really answer that question given life’s up and downs. What if the answer is right in front of you? What if you can determine it from your present financial behaviors?

Two economists present a brief questionnaire – and an audacious claim. Last month, the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis published an article titled “Five Simple Questions That Reveal Your Financial Health and Wealth.” The authors, William Emmons and Bryan Noeth, argue that your answers to these questions can effectively predict your financial future.1,2

Q: Did you save any money last year?

Q: Did you miss any loan or mortgage payments in the past year?

Q: Did you have a balance on your credit card after the last payment was due?

Q: Do liquid assets make up at least 10% of the value of your total assets?

Q: Is your total debt service (i.e., the cash you devote each month to paying principal and interest) less than 40% of your income?1

The Federal Reserve has actually asked these questions of consumers for decades as part of its Survey of Consumer Finances. Studying the eight SCFs conducted from 1992-2013, Emmons and Noeth looked at the answers respondents provided to these questions and the level of personal wealth they reported. Their assertion: “In summary, good financial health – as measured by our simple five-question scorecard – is highly correlated with the accumulation of wealth.”2

As part of their research, Emmons and Noeth scored the answers. A financially positive answer to a question was assigned 1 point; a financially negative answer, 0 points.2

The average total score (across more than 38,000 households) was 3.01. The highest average score to a question was 0.91 (the one about debt load being less than 40% of income) and the lowest average score to a question was 0.27 (the one about the percentage of liquid assets among total assets).2

There was a surprising conclusion. The authors found that education was no reliable indicator of personal wealth. When it came to being rich or poor, well-educated individuals had no leg up on lesser-educated individuals.2

What’s your score? If you are able to successively answer the above questions with “yes,” “no,” “no,” “yes” and “yes”, your household is probably in pretty good financial shape – or better. In simple terms, those answers would get you a 5.0.

Here’s the bottom line. If you save money consistently and maintain a good cash position, if you make loan and mortgage payments on time and pay off 100% of your credit card debt each billing cycle, if you avoid debts that put a strain on your budget … congratulations. You are doing the right things on behalf of your financial life and promoting your chances to build wealth.

If you’d like to see the precise methodology the researchers used and their definition of a “positive” and “negative” answer for each question, you can go online and download Issue 10 of the St. Louis Fed publication In the Balance (which contains the article and the scorecard) at stlouisfed.org/publications/itb/.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – stlouisfed.org/newsroom/displayNews.cfm?article=2390 [12/15/14]

2 – stlouisfed.org/publications/pub_assets/pdf/2014/In_the_Balance_issue_10.pdf/ [12/14]

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, ExxonMobil, Glaxosmithkline, Merck, Hughes, Northrop Grumman, Raytheon, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of Linda Bullwinkle, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

Linda Bullwinkle is a Representative with FSC Securities and may be reached at http://www.theretirementgroup.com.

After the Military: Tips for Your Financial Transition to Civilian Life.

A drawdown is looming. You’re separating at the end of active service. You’ve decided to retire after a long career. No matter why you’re leaving the military, a big part of preparing for your civilian life is taking steps to proactively address the financial issues you might face. Here are some tips to help ease the transition.

Get your road map ready

An impending separation from service may be both exciting and anxiety-provoking for you and your family. Your lifestyle, income sources, and benefits will be changing. Major decisions that may affect your finances include:

  • Where you decide to live
  • Whether you’ll be selling or purchasing a home
  • Whether you and/or your spouse will need to find new employment
  • Your plans to return to school
  • Your eligibility for benefits (e.g., from the military or a future employer)

To help you prepare for your transition to civilian life, the Department of Defense, along with other agencies, has developed a program called Transition GPS. All servicemembers who are retiring, separating, or being released from a period of at least 180 days of active duty must participate in this program. Transition GPS includes preseparation counseling, briefings, and workshops that cover topics such as education and training, employment and career goals, financial management, and VA benefits. You’ll also prepare an Individual Transition Plan. For more information, visit the DoD Transition Assistance Program (TAP) website at www.dodtap.mil.

Prepare a realistic budget

Having a realistic budget is important. Once you leave the military, it’s likely that your living expenses will increase because you won’t be receiving tax-free allowances, and costs for insurance, housing, groceries, and other day-to-day expenses may be higher. Preparing a budget that reflects your new sources of income and expenses, and adjusting it when necessary, can help you stay on track as you adapt to your new financial circumstances.

Here are some questions to consider as you prepare your working budget:

Income

  • Will you be eligible for separation pay or cashing in unused leave? These can be sources of short-term income if necessary.
  • What about retirement pay? Make sure you understand how much you’ll receive, if applicable, and what other sources of retirement income you’ll be eligible for.
  • What salary can you expect from your new career?
  • Will your spouse be working?
  • Will you be eligible for any veterans benefits that will provide ongoing income?

Here’s a tip: If you’re unable to find a job right away, you may qualify for unemployment compensation, but your eligibility may be affected by any retirement or separation pay you receive. Unemployment benefits vary from state to state, so for more information you’ll need to contact your local unemployment office.

Expenses

  • Will the general cost of living (for example, gas, food, and utilities) be higher in your new location?
  • How will your health expenses change? Will you have access to employer-sponsored health insurance?
  • What will your housing costs include (e.g., rent or mortgage payment, property taxes, and insurance)?
  • Will you need to purchase and insure a vehicle?
  • What about other expenses, such as commuting costs, clothing, and child care?

Here’s a tip: Have a plan in place to reduce your expenses if necessary. Identify items in your budget that you consider discretionary and would be willing to cut at least temporarily. It will likely be much easier to pay off debt now while you have a steady paycheck from the military rather than later when your job situation might be uncertain.

Save for transition expenses

Some of your costs will be covered through transition assistance (for example, storage and shipment of household goods), but it’s likely that you’ll have expenses for which you won’t be reimbursed, such as housing deposits. Having some savings set aside in a transition fund that you can easily access may help you avoid having to dip into your long-term savings and investments to cover unexpected expenses. It will also decrease the odds that you’ll rack up credit-card debt that you’ll have to pay off down the road.

Before leaving the military…

Housing  – Determine how much you can afford to pay for housing, and contact a local real estate agent who can show you properties available to rent or buy. Visit and evaluate the area where you’d like to move.

Health care  – Schedule medical and dental appointments, and review and copy your records. Learn about your postseparation or retirement health insurance options and determine whether you’ll need transitional insurance.

Life insurance  – Review your life insurance needs. Decide whether it’s cost-effective to convert your SGLI policy to VGLI, or whether you should purchase an individual policy. If you have FSGLI coverage for your spouse, remember that it’s not convertible to VGLI, so look at options for replacing your spouse’s coverage.

Estate planning  – Update your estate plan, including your will, powers of attorney, and other documents to reflect your new situation.

Retirement planning  – Decide what to do with your Thrift Savings Plan (TSP) account, if you’ve contributed. If you’re seeking employment in the civilian sector, learn about any new options for retirement savings, such as contributing to a tax-deferred employer sponsored retirement plan. If you’re retiring, consider how your military retirement pay fits into your overall retirement income plan.

Education planning  – Make sure you understand your education benefits that can help you pay for college or vocational training. Consider transferring Post-9/11 GI Bill benefits to dependents. While you’re still on active duty, take tests that can help you earn college credit or a license or certification, and find out whether any of your military training may be substituted for college credit.

Career planning  – Attend relevant employment workshops and counseling. Attend job fairs and network with potential employers and recruiters. Military spouses can connect with the Spouse Education and Career Opportunities (SECO) program for career planning help at www.militaryonesource.mil/seco.

Here’s a tip: Don’t wait until the last minute. Make saving for your transition a priority, and start as far ahead of time as possible to ensure that you have several months of savings set aside to cover transition expenses.

Review and revisit

After your transition is complete and your income and expenses have stabilized, update your budget to reflect your new circumstances. It’s also a good time to review your financial goals. Now that your focus has shifted from your short-term priorities, you can refocus on pursuing your long-term goals to prepare for your next stage in life.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Linda Bullwinkle, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, Hughes, access.att.com, AT&T, Qwest, ING Retirement, Chevron, Northrop Grumman, Merck, Raytheon, ExxonMobil, Glaxosmithkline, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Linda Bullwinkle is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Common Deductions Taxpayers Overlook

Make sure you give them a look as you prepare your 1040.

Every year, taxpayers leave money on the table. They don’t mean to, but as a result of oversight, they miss some great chances for federal income tax deductions.

While the IRS has occasionally fixed taxpayer mistakes in the past for taxpayer benefit, you can’t count on such benevolence. As a reminder, here are some potential tax breaks that often go unnoticed – and this is by no means the whole list.

Expenses related to a job search. Did you find a new job in the same line of work last year? If you itemize, you can deduct the job-hunting costs as miscellaneous expenses. The deductions can’t surpass 2% of your adjusted gross income. Even if you didn’t land a new job last year, you can still write off qualified job search expenses. Many expenses qualify: overnight lodging, mileage, cab fares, resume printing, headhunter fees and more. Didn’t keep track of these expenses? You and your CPA can estimate them. If your new job prompted you to relocate 50 or more miles from your previous residence last year, you can take a deduction for job-related moving expenses even if you don’t itemize.1

Home office expenses. Do you work from home? If so, first figure out what percentage of the square footage in your house is used for work-related activities. (Bathrooms and other “break areas” can count in the calculation.) If you use 15% of your home’s square footage for business, then 15% of your homeowners insurance, home maintenance costs, utility bills, ISP bills, property tax and mortgage/rent may be deducted.2

State sales taxes. If you live in a state that collects no income tax from its residents, you have the option to deduct state sales taxes paid the previous year.1

Student loan interest paid by parents. Did you happen to make student loan payments on behalf of your son or daughter last year? If so (and if you can’t claim your son or daughter as a dependent), that child may be able to write off up to $2,500 of student-loan interest. Itemizing the deduction isn’t necessary.1

Education & training expenses. Did you take any classes related to your career last year? How about courses that added value to your business or potentially increased your employability? You can deduct the tuition paid and the related textbook and travel costs.3,4

Those small charitable contributions. We all seem to make out-of-pocket charitable donations, and we can fully deduct them (although few of us ask for receipts needed to itemize them). However, we can also itemize expenses incurred in the course of charitable work (i.e., volunteering at a toy drive, soup kitchen, relief effort, etc.) and mileage accumulated in such efforts ($0.14 per mile, and tolls and parking fees qualify as well).1

Armed forces reserve travel expenses. Are you a reservist or a member of the National Guard? Did you travel more than 100 miles from home and spend one or more nights away from home to drill or attend meetings? If that is the case, you may write off 100% of related lodging costs and 50% of meal costs  and take a mileage deduction ($0.56 per mile plus tolls and parking fees).1

Estate tax on income in respect of a decedent. Have you inherited an IRA? Was the estate of the original IRA owner large enough to be subject to federal estate tax? If so, you have the option to claim a federal income tax write-off for the amount of the estate tax paid on those inherited IRA assets. If you inherited a $100,000 IRA that was part of the original IRA owner’s taxable estate and thereby hit with $40,000 in death taxes, you can deduct that $40,000 on Schedule A as you withdraw that $100,000 from the inherited IRA, $20,000 on Schedule A as you withdraw $50,000 from the inherited IRA, and so on.1

The child care credit. If you paid for child care while you worked last year, you can qualify for a tax credit worth 20-35% of that amount. (The child, or children, must be no older than 12.) Tax credits are superior to tax deductions, as they cut your tax bill dollar-for-dollar.1

Reinvested dividends. If your mutual fund dividends are routinely used to purchase further shares, don’t forget that this incrementally increases your tax basis in the fund. If you do forget to include the reinvested dividends in your basis, you leave yourself open for a double hit – your dividends will be taxed once at payout and immediate reinvestment, and then taxed again at some future point when they are counted as proceeds of sale. Remember that as your basis in the fund grows, the taxable capital gain when you redeem shares will be reduced. (Or if the fund is a loser, the tax-saving loss is increased.)1

As a precaution, check with your tax professional before claiming the above deductions on your federal income tax return.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – kiplinger.com/article/taxes/T054-C000-S001-the-most-overlooked-tax-deductions.html [1/7/15]

2 – irs.gov/Businesses/Small-Businesses-&-Self-Employed/Home-Office-Deduction [1/9/15]

3 – irs.gov/publications/p970/ch06.html [2015]

4 – irs.gov/publications/p970/ch12.html [2015]

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Linda Bullwinkle, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, Merck, Qwest, ING Retirement, AT&T, Glaxosmithkline, Chevron, ExxonMobil, Hughes, Northrop Grumman, Raytheon, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Linda Bullwinkle is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

2015 IRA Deadlines Are Approaching

Here is what you need to know.

Financially, many of us associate April with taxes – but we should also associate April with important IRA deadlines.

*April 1 is the absolute deadline to take your first Required Mandatory Distribution (RMD) from your traditional IRA(s).

*April 15 is the deadline for making annual contributions to a traditional or Roth IRA.1

Let’s discuss the contribution deadline first, and then the deadline for that first RMD (which affects only those IRA owners who turned 70½ last year).

The earlier you make your annual IRA contribution, the better. You can make a yearly Roth or traditional IRA contribution anytime between January 1 of the current year and April 15 of the next year. So the contribution window for 2014 is January 1, 2014- April 15, 2015. You can make your IRA contribution for 2015 anytime from January 1, 2015-April 15, 2016.2

You have more than 15 months to make your IRA contribution for a given year, but why wait? Savvy IRA owners contribute as early as they can to give those dollars more months to grow and compound. (After all, who wants less time to amass retirement savings?)

You cut your income tax bill by contributing to a deductible traditional IRA. That’s because you are funding it with after-tax dollars. To get the full tax deduction for your 2015 traditional IRA contribution, you have to meet one or more of these financial conditions:

*You aren’t eligible to participate in a workplace retirement plan.

*You are eligible to participate in a workplace retirement plan, but you are a single filer or head of household with modified adjusted gross income of $61,000 or less. (Or if you file jointly with your spouse, your combined MAGI is $98,000 or less.)

*You aren’t eligible to participate in a workplace retirement plan, but your spouse is eligible and your combined 2015 gross income is $183,000 or less.3

If you are the original owner of a traditional IRA, by law you must stop contributing to it starting in the year you turn 70½. If you are the initial owner of a Roth IRA, you can contribute to it as long as you live provided you have taxable compensation and MAGI below a certain level (see below).1,3

If you are making a 2014 IRA contribution in early 2015, be aware of this fact. You must tell the investment company hosting the IRA account what year the contribution is for. If you fail to indicate the tax year that the contribution applies to, the custodian firm may make a default assumption that the contribution is for the current year (and note exactly that to the IRS).4

So, write “2015 IRA contribution” or “2014 IRA contribution” as applicable in the memo area of your check, plainly and simply. Be sure to write your account number on the check. Should you make your contribution electronically, double-check that these details are communicated.

How much can you put into an IRA this year? You can contribute up to $5,500 to a Roth or traditional IRA for the 2015 tax year, $6,500 if you will be 50 or older this year. (The same applies for the 2014 tax year). If you have multiple IRAs, you can contribute up to a total of $5,500/$6,500 across the various accounts. Should you make an IRA contribution exceeding these limits, you will not be rewarded for it: you will have until the following April 15 to correct the contribution with the help of an IRS form, and if you don’t, the amount of the excess contribution will be taxed at 6% each year the correction is avoided.1,4

If you earn a lot of money, your maximum contribution to a Roth IRA may be reduced because of MAGI phase-outs, which kick in as follows.3

2014 Tax Year 2015 Tax Year
Single/head of household: $114,000 – $129,000 Single/head of household: $116,000 – $131,000
Married filing jointly: $181,000 – $191,000 Married filing jointly: $183,000 – $193,000
Married filing separately: $0 – $10,000 Married filing separately: $0 – $10,000

If your MAGI falls within the applicable phase-out range, you may make a partial contribution.3

A last-chance RMD deadline rolls around on April 1. If you turned 70½ in 2014, the IRS gave you a choice: you could a) take your first Required Minimum Distribution from your traditional IRA before December 31, 2014, or b) postpone it until as late as April 1, 2015.1

If you chose b), you will have to take two RMDs this year – one by April 1, 2014 and another by December 31, 2014. (For subsequent years, your annual RMD deadline will be December 31.) The investment firm hosting your IRA should have already notified you of this consequence, and the RMD amount(s) – in fact, they have probably calculated the RMD(s) for you.5

Original owners of Roth IRAs will never face this issue – they are not required to take RMDs.1

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs [11/3/14]

2 – dailyfinance.com/2014/12/06/time-running-out-end-year-retirement-planning/ [12/6/14]

3 – asppa.org/News/Browse-Topics/Sales-Marketing/Article/ArticleID/3594 [10/23/14]

4 – investopedia.com/articles/retirement/05/021505.asp [1/21/15]

5 – schwab.com/public/schwab/nn/articles/IRA-Tax-Traps [6/6/14]

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Merck, Pfizer, Chevron, Northrop Grumman, Raytheon, Hughes,ExxonMobil, Glaxosmithkline, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of Linda Bullwinkle, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

Linda Bullwinkle is a Representative with FSC Securities and may be reached at http://www.theretirementgroup.com.