current financial topics · personal exemptions begin to phase out once agi exceeds $258,250...

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JAS Financial Services, LLC Joseph A. Smith, CPA/ PFS, JD, AEP® Member 1603 Orrington Avenues Suite 600 Evanston, IL 60201 847-328-8011 Fax 847-780-7920 [email protected] www.jasfinancialllc.com January 2015 Key Numbers for 2015 10 Financial Terms Everyone Should Know Should Life Insurance Be Part of Your Retirement Plan? Should I be worried about a Federal Reserve interest rate hike? Current Financial Topics Food for Thought Key Numbers for 2015 See disclaimer on final page Annually the first major conference I attend is the Advanced Personal Financial Planning Conference presented by the American Institute of CPAs. Bill Winterberg spoke about computer and internet security. One of his topics was login security. We have been incorrectly told to use upper and lower case letters, add numbers, characters and character substitution. Length and random variable are what is needed to have strong passwords. Mixing words that are not connected to each other is better than the traditional guidance. Passwords should not be shared and not be visible. Self stick notes on your screen or under your keyboard is not safe. If you believe you are a victim of an attack, contact the Internet Crime Compliance Center (IC3) and/or The FTC Identity Resource Center. Stay Safe! I look forward to our continuing relationship and appreciate your referrals. Joe Every year, the Internal Revenue Service (IRS) 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 2015. Retirement plans Employees who participate in 401(k), 403(b), and most 457 plans can defer up to $18,000 in compensation in 2015 (up from $17,500 in 2014); employees age 50 and older can defer up to an additional $6,000 in 2015 (up from $5,500 in 2014) Employees participating in a SIMPLE retirement plan can defer up to $12,500 in 2015 (up from $12,000 in 2014), and employees age 50 and older will be able to defer up to an additional $3,000 in 2015 (up from $2,500 in 2014) IRAs The limit on annual contributions to an IRA remains unchanged at $5,500 in 2015, 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: 2014 2015 Single / head of household (HOH) $60,000 - $70,000 $61,000 - $71,000 Married filing jointly (MFJ) $96,000 - $116,000 $98,000 - $118,000 Married filing separately (MFS) $0 - $10,000 $0 - $10,000 Note: The 2015 phaseout range is $183,000 - $193,000 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: 2014 2015 Single / HOH $114,000 - $129,000 $116,000 - $131,000 MFJ $181,000 - $191,000 $183,000 - $193,000 MFS $0 - $10,000 $0 - $10,000 Estate and gift tax The annual gift tax exclusion remains $14,000 The gift and estate tax basic exclusion amount for 2015 is $5,430,000, up from $5,340,000 in 2014 Personal exemption The personal exemption amount has increased to $4,000 (up from $3,950 in 2014). For 2015, personal exemptions begin to phase out once AGI exceeds $258,250 (Single), $309,900 (MFJ), $284,050 (HOH), or $154,950 (MFS). Note: These same AGI thresholds apply in determining if itemized deductions may be limited. The corresponding 2014 threshold amounts were $254,200 (single), $305,050 (MFJ), $279,650 (HOH), and $152,525 (MFS). Standard deduction The standard deduction amounts have been adjusted as follows: 2014 2015 Single $6,200 $6,300 HOH $9,100 $9,250 MFJ $12,400 $12,600 MFS $6,200 $6,300 Note: The 2015 additional standard deduction amount (age 65 or older, or blind) is $1,550 if filing as single or HOH (unchanged from 2014) or $1,250 (up from $1,200 in 2014) for all other filing statuses. Special rules apply if you can be claimed as a dependent by another taxpayer. Page 1 of 4

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Page 1: Current Financial Topics · personal exemptions begin to phase out once AGI exceeds $258,250 (Single), $309,900 (MFJ), $284,050 (HOH), or $154,950 (MFS). Note: These same AGI thresholds

JAS Financial Services, LLCJoseph A. Smith, CPA/ PFS, JD,AEP®Member1603 Orrington AvenuesSuite 600Evanston, IL 60201847-328-8011Fax [email protected]

January 2015Key Numbers for 2015

10 Financial Terms Everyone Should Know

Should Life Insurance Be Part of YourRetirement Plan?

Should I be worried about a FederalReserve interest rate hike?

Current Financial TopicsFood for ThoughtKey Numbers for 2015

See disclaimer on final page

Annually the first major conference I attendis the Advanced Personal FinancialPlanning Conference presented by theAmerican Institute of CPAs.Bill Winterberg spoke about computer andinternet security.One of his topics was login security.We have been incorrectly told to use upperand lower case letters, add numbers,characters and character substitution.Length and random variable are what isneeded to have strong passwords. Mixingwords that are not connected to each otheris better than the traditional guidance.Passwords should not be shared and notbe visible. Self stick notes on your screenor under your keyboard is not safe.If you believe you are a victim of an attack,contact the Internet Crime ComplianceCenter (IC3) and/or The FTC IdentityResource Center.Stay Safe!

I look forward to our continuing relationshipand appreciate your referrals.

Joe

Every year, the Internal RevenueService (IRS) announcescost-of-living adjustments thataffect contribution limits forretirement plans, thresholds fordeductions and credits, and

standard deduction and personal exemptionamounts. Here are a few of the keyadjustments for 2015.

Retirement plans• Employees who participate in 401(k), 403(b),

and most 457 plans can defer up to $18,000in compensation in 2015 (up from $17,500 in2014); employees age 50 and older can deferup to an additional $6,000 in 2015 (up from$5,500 in 2014)

• Employees participating in a SIMPLEretirement plan can defer up to $12,500 in2015 (up from $12,000 in 2014), andemployees age 50 and older will be able todefer up to an additional $3,000 in 2015 (upfrom $2,500 in 2014)

IRAsThe limit on annual contributions to an IRAremains unchanged at $5,500 in 2015, withindividuals age 50 and older able to contributean additional $1,000. For individuals who arecovered by a workplace retirement plan, thededuction for contributions to a traditional IRAis phased out for the following modifiedadjusted gross income (AGI) ranges:

2014 2015

Single / headof household(HOH)

$60,000 -$70,000

$61,000 -$71,000

Married filingjointly (MFJ)

$96,000 -$116,000

$98,000 -$118,000

Married filingseparately(MFS)

$0 - $10,000 $0 - $10,000

Note: The 2015 phaseout range is $183,000 -$193,000 when the individual making the IRAcontribution is not covered by a workplaceretirement plan, but is filing jointly with a spousewho is covered.

The modified AGI phaseout ranges forindividuals making contributions to a Roth IRAare:

2014 2015

Single / HOH $114,000 -$129,000

$116,000 -$131,000

MFJ $181,000 -$191,000

$183,000 -$193,000

MFS $0 - $10,000 $0 - $10,000

Estate and gift tax• The annual gift tax exclusion remains

$14,000• The gift and estate tax basic exclusion

amount for 2015 is $5,430,000, up from$5,340,000 in 2014

Personal exemptionThe personal exemption amount has increasedto $4,000 (up from $3,950 in 2014). For 2015,personal exemptions begin to phase out onceAGI exceeds $258,250 (Single), $309,900(MFJ), $284,050 (HOH), or $154,950 (MFS).

Note: These same AGI thresholds apply indetermining if itemized deductions may belimited. The corresponding 2014 thresholdamounts were $254,200 (single), $305,050(MFJ), $279,650 (HOH), and $152,525 (MFS).

Standard deductionThe standard deduction amounts have beenadjusted as follows:

2014 2015

Single $6,200 $6,300

HOH $9,100 $9,250

MFJ $12,400 $12,600

MFS $6,200 $6,300

Note: The 2015 additional standard deductionamount (age 65 or older, or blind) is $1,550 iffiling as single or HOH (unchanged from 2014)or $1,250 (up from $1,200 in 2014) for all otherfiling statuses. Special rules apply if you can beclaimed as a dependent by another taxpayer.

Page 1 of 4

Page 2: Current Financial Topics · personal exemptions begin to phase out once AGI exceeds $258,250 (Single), $309,900 (MFJ), $284,050 (HOH), or $154,950 (MFS). Note: These same AGI thresholds

10 Financial Terms Everyone Should KnowUnderstanding financial matters can be difficultif you don't understand the jargon. Becomingfamiliar with these 10 financial terms may helpmake things clearer.

1. Time value of moneyThe time value of money is the concept thatmoney on hand today is worth more than thesame amount of money in the future, becausethe money you have today could be invested toearn interest and increase in value.

Why is it important? Understanding that moneytoday is worth more than the same amount inthe future can help you evaluate investmentsthat offer different potential rates of return.

2. InflationInflation reflects any overall upward movementin the price of consumer goods and servicesand is usually associated with the loss ofpurchasing power over time.

Why is it important? Because inflation generallypushes the cost of goods and services higher,any estimate of how much you'll need in thefuture--for example, how much you'll need tosave for retirement--should take into accountthe potential impact of inflation.

3. VolatilityVolatility is a measure of the rate at which theprice of a security moves up and down. If theprice of a security historically changes rapidlyover a short period of time, its volatility is high.Conversely, if the price rarely changes, itsvolatility is low.

Why is it important? Understanding volatilitycan help you evaluate whether a particularinvestment is suited to your investing style andrisk tolerance.

4. Asset allocationAsset allocation means spreading investmentsover a variety of asset categories, such asequities, cash, bonds, etc.

Why is it important? How you allocate yourassets depends on a number of factors,including your risk tolerance and your desiredreturn. Diversifying your investments among avariety of asset classes can help you managevolatility and investment risk. Asset allocationand diversification do not guarantee a profit orprotect against investment loss.

5. Net worthNet worth is what your total holdings are worthafter subtracting all of your financial obligations.

Why is it important? Your net worth may fundmost of your retirement years. So the faster andhigher your net worth grows, the more it may

help you in retirement. For retirees, a typicalgoal is to preserve net worth to last through theretirement years.

6. Five C's of creditThese are character, capacity, capital,collateral, and conditions. They're the primaryelements lenders evaluate to determinewhether to make you a loan.

Why is it important? With a betterunderstanding of how your banker is going toview and assess your creditworthiness, you willbe better prepared to qualify for the loan youwant and obtain a better interest rate.

7. Sustainable withdrawal rateSustainable withdrawal rate is the maximumpercentage that you can withdraw from aninvestment portfolio each year to provideincome that will last, with reasonable certainty,as long as you need it.

Why is it important? Your retirement lifestylewill depend not only on your assets andinvestment choices, but also on how quicklyyou draw down your retirement portfolio.

8. Tax deferralTax deferral refers to the opportunity to defercurrent taxes until sometime in the future.

Why is it important? Contributions and anyearnings produced in tax-deferred vehicles like401(k)s and IRAs are not taxed until withdrawn.This allows those earnings to compound,further adding to potential investment growth.

9. Risk/return trade-offThis concept holds that you must be willing toaccept greater risk in order to achieve a higherpotential return.

Why is it important? When considering yourinvestments, the goal is to get the greatestreturn for the level of risk you're willing to take,or to minimize the risk involved in trying for agiven return. All investing involves risk,including the loss of principal, and there can beno assurance that any investing strategy will besuccessful.

10. The FedThe Federal Reserve, or "the Fed" as it'scommonly called for short, is the central bank ofthe United States.

Why is it important? The Fed has three mainobjectives: maximum employment, stableprices, and moderate long-term interest rates.The Fed sets U.S. monetary policy to furtherthese objectives, and over the years its dutieshave expanded to include maintaining thestability of the entire U.S. financial system.

Page 2 of 4, see disclaimer on final page

Page 3: Current Financial Topics · personal exemptions begin to phase out once AGI exceeds $258,250 (Single), $309,900 (MFJ), $284,050 (HOH), or $154,950 (MFS). Note: These same AGI thresholds

Should Life Insurance Be Part of Your Retirement Plan?Most of us think of life insurance as protectionagainst financial loss should we dieprematurely. But if and when we reachretirement and the kids are all self-sufficient, dowe still need life insurance? The answer ismaybe--or maybe not. Here are some situationswhere life insurance may make sense forretirees, or those close to retirement.

Benefits at deathProvide for a dependent family member

Sometimes, even in retirement, there are familymembers who'll depend on you for financialand/or custodial support. Should you dieunexpectedly, life insurance may help providefunds needed to support dependent familymembers who are physically or mentallychallenged.

Income replacement for surviving spouse

Generally, Social Security retirement benefitsare paid to both spouses, either based on theirindividual work records or on the work record ofone spouse, with spousal benefits available forthe other spouse. At the death of a spouse, hisor her benefits end, reducing the total benefitsavailable to the surviving spouse. Lifeinsurance can be used to replace the loss ofincome for the surviving spouse.

Pay off debt

While past generations often retired with little orno debt, it is not uncommon for today's retireesto leave the workforce while still carrying amortgage, car loan, and credit-card debt. Lifeinsurance can provide the cash to pay off thesedebts, which is especially beneficial for asurviving spouse.

Provide a legacy

For many approaching retirement, as well as forthose already there, a primary concern ishaving enough savings to provide incomeneeded to live comfortably. While conservingsavings and keeping track of spending inretirement are important, all too often retireeswill forgo spending on themselves in order tofulfill a desire to leave a legacy. The deathproceeds from a life insurance policy canprovide a legacy for surviving family members,while allowing retirees to spend a little more onthemselves, with the knowledge that they'll beleaving something for their loved ones.

Final expenses

Unfortunately, the expense of dying is oftenoverlooked or underestimated. Uninsuredmedical bills, funeral costs, debts, and estateadministration costs can add up. Typically,these expenses are paid in a lump sum, whichcan reduce savings for surviving spouses and

dependent family members. Proceeds from lifeinsurance can be used to help pay for thesefinal expenses, which may help preservesavings for other needs.

Living benefitsSource of retirement income

While life insurance is designed to protectagainst unexpected economic loss, cash-valuelife insurance also may provide a source ofincome during retirement. Earnings in lifeinsurance accumulate tax deferred, and insome instances cash-value distributions can beincome-tax free. However, loans used toaccess cash values from a life insurance policywill reduce the policy's cash value and deathbenefit, could increase the chance that thepolicy will lapse, and might result in a taxliability if the policy terminates before the deathof the insured.

Income you can't outlive

Your financial circumstances may changeduring retirement, and the need for the policy'sdeath benefit may not be as important as theneed for a steady income. One option that maybe available is to exchange a portion or all ofyour policy's cash value for an immediateannuity that can provide a fixed income for therest of your life, and for the life of your spouse ifyou choose. If the policy is not a modifiedendowment contract and there are nooutstanding policy loans, the exchange to anannuity should be income-tax free. Butexchanging your cash value for an annuity willlikely decrease or eliminate the policy's deathbenefit. And these exchanges work only oneway--you can't exchange an annuity for a lifeinsurance policy.

Long-term care benefits

Some cash-value life insurance policies providemultiple sources of protection. Along with thedeath benefit and potential cash value, thesepolicies may also provide a long-term carebenefit. Often, these policies allow for a portionor all of the death benefit to be "accelerated" ifused for the payment of qualifying medical andlong-term care expenses.

Life insurance provides protection for yourfamily's financial future should you die duringyour working years. However, life insurancemay provide other benefits that can be usefulduring your retirement. Whether life insuranceshould be part of your retirement plan is bestdetermined based on your individualcircumstances and goals. You may want to talkwith an insurance or financial professionalbefore making this decision.

As with most financialdecisions, there areexpenses associated withthe purchase of lifeinsurance. Policiescommonly have mortalityand expense charges. Inaddition, if a policy issurrendered prematurely,there may be surrendercharges and income taximplications.

Any guarantees associatedwith payment of deathbenefits, income options, orrates of return are based onthe claims-paying ability andfinancial strength of theinsurer.

Page 3 of 4, see disclaimer on final page

Page 4: Current Financial Topics · personal exemptions begin to phase out once AGI exceeds $258,250 (Single), $309,900 (MFJ), $284,050 (HOH), or $154,950 (MFS). Note: These same AGI thresholds

JAS Financial Services, LLCJoseph A. Smith, CPA/ PFS, JD,AEP®Member1603 Orrington AvenuesSuite 600Evanston, IL 60201847-328-8011Fax [email protected]

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2015

The foregoing is provided forinformation purposes only. It is notintended or designed to providelegal, accounting, tax, investmentor other professional advice. Suchadvice requires consideration ofindividual circumstances. Beforeany action is taken based upon thisinformation, it is essential thatcompetent, individual, professionaladvice be obtained. JAS FinancialServices, LLC is not responsible forany modifications made to thismaterial, or for the accuracy ofinformation provided by othersources.

How can I try to manage the impact of an interest ratehike?With higher interest rates adistinct possibility in 2015, youmay want to think aboutwhether the bond portion of

your portfolio is positioned appropriately givenyour time horizon and risk tolerance. One factoryou might consider is which types of bonds maybe most vulnerable to a rate hike.

Some investors forget that a bond's principalvalue may fluctuate with market conditions.When interest rates rise, longer-term bondsmay feel a greater impact than those withshorter maturities. When interest rates arerising, bond buyers may be reluctant to tie uptheir money for longer periods if they anticipatehigher yields in the future. The longer a bond'sterm, the greater the risk that its yield mayeventually be superseded by that of newerbonds.

High-yield bonds (also known as junk bonds)may be affected disproportionately becausethey involve greater risk. Issuers must paythose higher yields because they are seen ashaving a greater risk of default, especially if acompany already has a high debt burdenand/or a relatively short history of successful

debt repayment, or is otherwise on shakyfinancial footing. Investors may be reluctant topurchase risky debt if they foresee receiving acomparable yield from an issuer seen as moretrustworthy.

Bonds redeemed prior to maturity may be worthmore or less than their original value; however,if you hold a bond to maturity, you would sufferno loss of principal unless the issuer defaults.Bond investments also may be laddered. Thisinvolves buying a portfolio of bonds with varyingmaturities; for example, a five-bond portfoliomight be structured so that one of the fivematures each year for the next five years. Aseach bond matures, you might be able toreinvest the proceeds in an instrument thatcarries a higher yield.

Don't forget that all investing involves risk,including the potential loss of principal, andthere can be no guarantee that any investingstrategy will be successful. In addition tointerest rate risk, bonds also face credit risk,inflation risk, and market risk.

Should I be worried about a Federal Reserve interestrate hike?After years of record-lowinterest rates, at some pointthis year the Federal Reserveis expected to begin raising its

target federal funds interest rate (the rate atwhich banks lend to one another funds they'vedeposited at the Fed). Because bond pricestypically fall when interest rates rise, any ratehike is likely to affect the value of bondinvestments.

However, higher rates aren't all bad news. Forthose who have been diligent about savingand/or have kept a substantial portion of theirportfolios in cash alternatives, higher ratescould be a boon. For example, higher ratescould mean that savings accounts and CDs arelikely to do better at providing income than theyhave in recent years.

Also, bonds don't respond uniformly to interestrate changes. The differences, or spreads,between the yields of various types of debt canmean that some bonds may be under- orovervalued compared to others. Depending onyour risk tolerance and time horizon, there aremany ways to adjust a bond portfolio to helpcope with rising interest rates. However, don't

forget that a bond's total return is a combinationof its yield and any changes in its price; bondsseeking to achieve higher yields typicallyinvolve a higher degree of risk.

Finally, some troubled economies overseashave been forced to lower interest rates on theirsovereign bonds in an attempt to provideeconomic stimulus. Lower rates abroad havethe potential to make U.S. debt, particularlyTreasury securities (whose timely payment ofinterest and principal is backed by the full faithand credit of the U.S. Treasury), even moreattractive to foreign investors. Though pastperformance is no guarantee of future results,that's what happened during much of 2014.Increased demand abroad might help providesome support for bonds denominated in U.S.dollars.

Remember that bonds are subject not only tointerest rate risk but also to inflation risk, marketrisk, and credit risk; a bond sold prior tomaturity may be worth more or less than itsoriginal value. All investing involves risk,including the potential loss of principal, andthere can be no guarantee that any investingstrategy will be successful.

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