Iowa Wealth ManagementLori McKnightFinancial Consultant1301 Grand AvenueWest Des Moines, IA 50265515-698-4546877-425-1924lori@iowawealth.comwww.iowawealth.com

April 2016Six Potential 401(k) Rollover Pitfalls

When Disaster Strikes: DeductingCasualty Losses

What's New in the World of HigherEducation?

What is the federal funds rate?

Six Potential 401(k) Rollover Pitfalls

See disclaimer on final page

You're about to receive adistribution from your 401(k) plan,and you're considering a rolloverto a traditional IRA. While thesetransactions are normallystraightforward and trouble free,

there are some pitfalls you'll want to avoid.

1. Consider the pros and cons of a rollover.The first mistake some people make is failing toconsider the pros and cons of a rollover to anIRA in the first place. You can leave yourmoney in the 401(k) plan if your balance is over$5,000. And if you're changing jobs, you mayalso be able to roll your distribution over to yournew employer's 401(k) plan.

• Though IRAs typically offer significantly moreinvestment opportunities and withdrawalflexibility, your 401(k) plan may offerinvestments that can't be replicated in an IRA(or can't be replicated at an equivalent cost).

• 401(k) plans offer virtually unlimitedprotection from your creditors under federallaw (assuming the plan is covered by ERISA;solo 401(k)s are not), whereas federal lawprotects your IRAs from creditors only if youdeclare bankruptcy. Any IRA creditorprotection outside of bankruptcy depends onyour particular state's law.

• 401(k) plans may allow employee loans.• And most 401(k) plans don't provide an

annuity payout option, while some IRAs do.

2. Not every distribution can be rolled overto an IRA. For example, required minimumdistributions can't be rolled over. Neither canhardship withdrawals or certain periodicpayments. Do so and you may have an excesscontribution to deal with.

3. Use direct rollovers and avoid 60-dayrollovers. While it may be tempting to giveyourself a free 60-day loan, it's generally amistake to use 60-day rollovers rather thandirect (trustee to trustee) rollovers. If the plansends the money to you, it's required towithhold 20% of the taxable amount. If you laterwant to roll the entire amount of the originaldistribution over to an IRA, you'll need to useother sources to make up the 20% the planwithheld. In addition, there's no need to taunt

the rollover gods by risking inadvertent violationof the 60-day limit.

4. Remember the 10% penalty tax. Taxabledistributions you receive from a 401(k) planbefore age 59½ are normally subject to a 10%early distribution penalty, but a special rule letsyou avoid the tax if you receive your distributionas a result of leaving your job during or after theyear you turn age 55 (age 50 for qualified publicsafety employees). But this special rule doesn'tcarry over to IRAs. If you roll your distributionover to an IRA, you'll need to wait until age 59½before you can withdraw those dollars from theIRA without the 10% penalty (unless anotherexception applies). So if you think you mayneed to use the funds before age 59½, arollover to an IRA could be a costly mistake.

5. Learn about net unrealized appreciation(NUA). If your 401(k) plan distribution includesemployer stock that's appreciated over theyears, rolling that stock over into an IRA couldbe a serious mistake. Normally, distributionsfrom 401(k) plans are subject to ordinaryincome taxes. But a special rule applies whenyou receive a distribution of employer stockfrom your plan: You pay ordinary income taxonly on the cost of the stock at the time it waspurchased for you by the plan. Any appreciationin the stock generally receives more favorablelong-term capital gains treatment, regardless ofhow long you've owned the stock. (Anyadditional appreciation after the stock isdistributed to you is either long-term orshort-term capital gains, depending on yourholding period.) These special NUA rules don'tapply if you roll the stock over to an IRA.

6. And if you're rolling over Roth 401(k)dollars to a Roth IRA... If your Roth 401(k)distribution isn't qualified (tax-free) because youhaven't yet satisfied the five-year holdingperiod, be aware that when you roll thosedollars into your Roth IRA, they'll now besubject to the Roth IRA's five-year holdingperiod, no matter how long those dollars werein the 401(k) plan. So, for example, if youestablish your first Roth IRA to accept yourrollover, you'll have to wait five more years untilyour distribution from the Roth IRA will bequalified and tax-free.

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When Disaster Strikes: Deducting Casualty LossesWildfires, tornadoes, storms, landslides, andflooding.... It's almost as if you can't turn on thenews without seeing images of a disasterstriking somewhere. If you've suffered propertyloss as the result of these events or othercircumstances, you may be able to claim acasualty loss deduction on your federal incometax return.

What's a casualty loss?A casualty is the destruction, damage, or lossof property caused by an unusual, sudden, orunexpected event. You can experience acasualty loss as the result of something assweeping as a natural disaster, or as limited inscope as an act of vandalism. You probablydon't have a deductible casualty loss, however,if your property is damaged as the result ofgradual deterioration (e.g., a long-term termiteinfestation).

Calculating your lossThe rules for calculating loss can be differentfor business property, or property that's used toproduce income (think rental property). Tocalculate a casualty loss on personal-useproperty, like your home, that's been damagedor destroyed, you first need two importantpieces of data:

• The decrease in the fair market value (FMV)of the property; that's the difference betweenthe FMV of the property immediately beforeand after the casualty

• Your adjusted basis in the property before thecasualty; your adjusted basis is usually yourcost if you bought the property (different rulesapply if you inherited the property or receivedit as a gift), increased for things likepermanent improvements and decreased foritems such as depreciation

Starting with the lower of the two amountsabove, subtract any insurance or otherreimbursement that you have received or thatyou expect to receive. The result is generallythe amount of your loss. If you receiveinsurance payments or other reimbursementthat is more than your adjusted basis in thedestroyed or damaged property, you mayactually have a gain. There are special rules forreporting such gain, postponing the gain,excluding gain on a main home, andpurchasing replacement property.

The $100 and 10% rulesAfter you determine your casualty loss onpersonal-use property, you have to reduce theloss by $100. The $100 reduction applies percasualty, not per individual item of property.Two or more events that are closely related

may be considered a single casualty. Forexample, wind and flood damage from thesame storm would typically be considered asingle casualty event, subject to only one $100reduction. If both your home and automobilewere damaged by the storm, the damage isalso considered part of a single casualtyevent--you do not have to subtract $100 foreach piece of property.

You must also reduce the total of all yourcasualty and theft losses on personal propertyby 10% of your adjusted gross income (AGI)after each loss is reduced by the $100 rule,above.

If you are married and file a joint return, you aretreated as one individual in applying both the$100 rule and the 10% rule. It does not matterwhether you own the property jointly orseparately. If you file separately, you are eachsubject to both rules. If only one spouse ownsthe property, usually only that spouse can claimthe associated loss on a separate return.

Reporting a casualty lossGenerally, you report and deduct the loss in theyear in which the casualty occurred. Specialrules, however, apply for casualty lossesresulting from an event that's declared a federaldisaster area by the president.

If you have a casualty loss from a federallydeclared disaster area, you can choose toreport and deduct the loss in the tax year inwhich the loss occurred, or in the tax yearimmediately preceding the tax year in which thedisaster happened. If you elect to report in thepreceding year, the loss is treated as if itoccurred in the preceding tax year. Reportingthe loss in the preceding year may reduce thetax for that year, producing a refund. Yougenerally have to make a decision to report theloss in the preceding year by the federalincome tax return due date (without anyextension) for the year in which the disasteractually occurred.

Casualty losses are reported on IRS Form4684, Casualties and Thefts. Any lossesrelating to personal-use property are carriedover to Form 1040, Schedule A, ItemizedDeductions.

Getting helpThe rules relating to casualty losses can becomplicated. Additional information can befound in the instructions to Form 4684 and inIRS Publication 547, Casualties, Disasters, andThefts. If you have suffered a casualty loss,though, you should consider discussing yourindividual circumstances with a taxprofessional.

A list of federally declareddisaster areas can be foundat the Federal EmergencyManagement Agency (FEMA)website atfema.gov/disasters. Majordisaster and emergencydeclarations in 2015included areas in 30 states.

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What's New in the World of Higher Education?If you're a parent or grandparent of a collegestudent or soon-to-be college student, youmight be interested to learn what's new in theworld of higher education.

Higher college costsTotal average costs for the 2015/2016 schoolyear increased about 3% from the previousyear: $24,061 for public colleges (in-state),$38,855 for public colleges (out-of-state), and$47,831 for private colleges.1

Total average costs include direct billed costsfor tuition, fees, room, and board; and indirectcosts for books, transportation, and personalexpenses. Together, these items are officiallyreferred to as the "total cost of attendance."Note that the cost figure for private collegescited by the College Board is an average; manyprivate colleges cost substantially more--over$60,000 per year.

Higher student debtSeven in 10 college seniors who graduated in2014 (the most recent year for which figuresare available) had student loan debt, and theaverage amount was $28,950 per borrower.2It's likely this amount will be higher for theclasses of 2015 and 2016.

Student loan debt is the only type of consumerdebt that has grown since the peak ofconsumer debt in 2008; balances have eclipsedboth auto loans and credit cards, makingstudent loan debt the largest category ofconsumer debt after mortgages. As ofSeptember 2015, total outstanding student loandebt was over $1.2 trillion.3

Reduced asset protection allowanceBehind the scenes, a stealth change in thefederal government's formula for determiningfinancial aid eligibility has been quietly (andnegatively) impacting families everywhere. Youmay not have heard of the asset protectionallowance before. But this figure, which allowsparents to shield a certain amount of theirnonretirement assets from the federal aidformula, has been steadily declining for years,resulting in higher expected family contributionsfor families. For the 2012/2013 year, the assetprotection allowance for a 47-year-old marriedparent was $43,400. Today, for the 2016/2017year, that same asset protection allowance is$18,300--a drop of $25,100. The result is a$1,415 decrease in a student's aid eligibility($25,100 x 5.64%, the federal contributionpercentage required from parent assets).

New FAFSA timelineBeginning with the 2017/2018 school year,families will be able to file the government's

financial aid application, the FAFSA, as early asOctober 1, 2016, rather than having to wait untilafter January 1, 2017. The intent behind thechange is to better align the financial aid andcollege admission timelines and to providefamilies with information about aid eligibilityearlier in the process.

One result of the earlier timeline is that your2015 federal income tax return will do doubleduty as a reference point for your child's federalaid eligibility--it will be the basis for the FAFSAfor both the 2016/2017 and 2017/2018 years.

School Year Tax ReturnRequired

FAFSA EarliestSubmission

2016/2017 2015 January 1, 2016

2017/2018 2015 October 1, 2016

2018/2019 2016 October 1, 2017

American Opportunity Tax Credit nowpermanentThe American Opportunity Tax Credit wasmade permanent by the Protecting Americansfrom Tax Hikes Act of 2015. It is a partiallyrefundable tax credit (meaning you may be ableto get some of the credit even if you don't oweany tax) worth up to $2,500 per year forqualified tuition and related expenses paidduring your child's first four years of college. Toqualify for the full credit, single filers must havea modified adjusted gross income (MAGI) of$80,000 or less, and joint filers must have aMAGI of $160,000 or less. A partial credit isavailable for single filers with a MAGI over$80,000 but less than $90,000, and for jointfilers with a MAGI over $160,000 but less than$180,000.

New REPAYE plan for federal loansThe pool of borrowers eligible for thegovernment's Pay As You Earn (PAYE) plan forstudent loans has been expanded as ofDecember 2015. The new plan, called REPAYE(Revised Pay As You Earn), is available to allborrowers with federal Direct Loans, regardlessof when the loans were obtained (the originalPAYE plan is available only to borrowers whotook out loans after 2007).

Under REPAYE, monthly student loanpayments are capped at 10% of a borrower'sdiscretionary income, with any remaining debtforgiven after 20 years of on-time payments forundergraduate loans and 25 years of on-timepayments for graduate loans. To learn moreabout REPAYE or income-driven repaymentoptions in general, visit the federal student aidwebsite at studentaid.gov.

Tools for students

The Department of Educationand the Consumer FinancialProtection Bureau havelaunched the "Know BeforeYou Owe" campaign, whichincludes a standard financialaid award letter for colleges touse so that students can betterunderstand the type andamount of aid they qualify forand more easily compare aidpackages from differentcolleges. In addition, to helpstudents search for and selectsuitable colleges, theDepartment has launched itsCollege Scorecard online toolat collegescorecard.ed.gov.

Sources1 College Board, Trends inCollege Pricing 20152 The Institute for CollegeAccess and Success, StudentDebt and the Class of 2014,October 20153 Federal Reserve Bank ofNew York, Quarterly Report onHousehold Debt and Credit,November 2015

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Iowa Wealth ManagementLori McKnightFinancial Consultant1301 Grand AvenueWest Des Moines, IA 50265515-698-4546877-425-1924lori@iowawealth.comwww.iowawealth.com

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016

IMPORTANT DISCLOSURES

Investment Centers of America, Inc. (ICA),member FINRA/SIPC and a RegisteredInvestment Advisor, is not affiliated with PremierCredit Union or Iowa Wealth Management .Securities, advisory services and insuranceproducts offered through ICA and affiliatedinsurance agencies are *not insured by theNCUA or any other Federal governmentagency*are not obligations of the CreditUnion or any of it's affiliates*and involveinvestment risk, including possible loss ofprincipal .

Broadridge Investor Communication Solutions,Inc. does not provide investment, tax, or legaladvice. The information presented here is notspecific to any individual's personalcircumstances.

To the extent that this material concerns taxmatters, it is not intended or written to be used,and cannot be used, by a taxpayer for thepurpose of avoiding penalties that may beimposed by law. Each taxpayer should seekindependent advice from a tax professionalbased on his or her individual circumstances.

These materials are provided for generalinformation and educational purposes basedupon publicly available information from sourcesbelieved to be reliable—we cannot assure theaccuracy or completeness of these materials.The information in these materials may changeat any time and without notice.

Chart: Tracking the FedAlthough the prime rate has been closely aligned to the federal funds rate over the past 20 years,rates on conventional 30-year fixed mortgages have followed a more independent trajectory,generally trending downward over the period.

Source: Federal Reserve, 2016

What is the federal funds rate?In December 2015, theFederal Open MarketCommittee (FOMC) raised thefederal funds target rate to arange of 0.25% to 0.50%, the

first shift from the rock-bottom 0% to 0.25%level where it had remained since December2008.

The federal funds rate is the interest rate atwhich banks lend funds to each other from theirdeposits at the Federal Reserve, usuallyovernight, in order to meet reserverequirements. The Fed also raised a number ofother rates related to funds moving betweenFederal Reserve banks and other banks. TheFed does not directly control consumer savingsor credit rates, but the federal funds rate servesas a benchmark for many short-term rates,such as savings accounts, money marketaccounts, and short-term bonds.

The prime rate, which commercial bankscharge their best customers, is typically about3% above the federal funds rate. Other forms ofbusiness and consumer credit--such assmall-business loans, adjustable-ratemortgages, auto loans, and credit cards--areoften directly linked to the prime rate. Actual

rates can vary widely. Fixed-rate homemortgages and other long-term loans aregenerally not linked directly to the prime rate,but may be indirectly affected by it

The FOMC expects economic conditions to"warrant only gradual increases" in the federalfunds rate. Most Committee members projecteda target range between 0.75% and 1.75% bythe end of 2016, so you can probably expect aseries of small increases this year. Althoughrising interest rates make it more expensive forconsumers to borrow, higher rates could begood for retirees and savers who seek currentincome from bank accounts, CDs, bonds, andother fixed-interest investments.

The FDIC insures CDs and bank savingsaccounts, which generally provide a fixed rateof return, up to $250,000 per depositor, perinsured institution. The principal value of bondsmay fluctuate with market conditions. Bondsredeemed prior to maturity may be worth moreor less than their original cost. Investmentsseeking to achieve higher yields also involve ahigher degree of risk.

Source: Federal Reserve, 2015

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