Category Archives: Newsletter

Using Life Insurance to Retain MVPs An executive bonus plan funded with cash-value life insurance could be used to attract, reward, and retain valuable employees.

Employee turnover is increasing as the economy and job market continue to improve. As a result, 63% of companies now say that employee retention is a top concern, and about half of all employers report a lack of skilled applicants for their open positions.1

Thus, it may be difficult and expensive for businesses to replace experienced employees who decide to leave. It’s estimated that turnover costs are about 21% of an employee’s annual salary, but the cost to replace top performers and fill critical management positions could run even higher.2

An executive bonus plan funded with cash-value life insurance could be a cost-effective way to reward and help retain your most valuable employees.

Motivation to Stay

An executive bonus plan is typically easier to adopt and more flexible than some other types of employee benefits. The business pays the premiums with bonuses that are tax deductible to the employer but taxable to the employees. The company determines the amount of each bonus and when to pay it, so the timing of the expense can be controlled.

A bonus plan may also be designed with certain restrictions and vesting requirements that make the life insurance policy more valuable for an employee who remains with the company.

The employee owns the policy and also bears the responsibility for keeping it in force. He or she can borrow against, and sometimes withdraw from, the cash value if needed for emergencies, to pay college tuition, to help fund retirement, or for any purpose. If the policy is in force at the time of death, the employee’s named beneficiaries will receive the death benefit, minus any outstanding loans, free of income tax.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that the individuals for whom you are purchasing the policies are insurable. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.

1) PayScale 2015 Compensation Best Practices Report
2) The Wall Street Journal, March 13, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

A Wild Ride: Understanding Market Volatility Some reasons behind current market movements and why investors should refrain from emotional reactions.

On Monday, August 24, 2015, the Dow Jones Industrial Average plunged 1,089 points in the first 10 minutes of trading, the largest intraday point drop in the history of America’s oldest stock index. The benchmark rallied, regaining almost 1,000 points, only to slip again and close down 588 points — the most volatile day in a turbulent stretch that has seen the market bounce around while trending downward.1

As an investor, you might feel nervous about volatility, especially when the trend seems to be heading lower. However, it’s important to consider the reasons behind the market swings and maintain a long-term perspective.

China, Oil, and the Dollar

Three international concerns are at the heart of current volatility: economic weakness in China, low oil prices, and a strong dollar. All three are interconnected, but though they may slow the global economy, their effect on the U.S. economy and stock market reflects fear and uncertainty more than a direct threat.

A faltering Chinese economy, including reduced demand for oil, may affect trading partners that depend on exports to China. However, China accounts for only 7% of U.S. exports, and exports are a relatively small sector of the U.S. economy. Low gas prices and a strong dollar are a mixed bag — good for U.S. consumers while challenging for some multinational businesses.2

Balanced against these international issues is a stronger U.S. economy, as well as improving business results. On September 25, the U.S. Bureau of Economic Analysis released its third estimate of second-quarter 2015 economic performance, revising annual real GDP growth from the advance estimate of 2.3% (released before the big market drop) to a more robust 3.9%. Though consumer spending drove the overall increase, the revision also reflected increased business investment. Corporate profits rose at a 3.5% quarterly rate after falling by 5.8% in the first quarter.3

These are strong economic indicators that bode well for the long term, but uncertainty often has an outsized effect on short-term market performance.

What Will the Fed Do?

Adding to the uncertainty is concern about when the Federal Reserve will raise the federal funds rate. Despite expectations that it might pull the trigger at its September meeting, the Federal Open Market Committee (FOMC) held steady, saying “recent global economic and financial developments may restrain economic activity somewhat.” At the same time, the FOMC affirmed its belief that the U.S. economy is on the right track, and most members still anticipate raising the federal funds rate this year.4

In a measure of how interest-rate uncertainty makes investors nervous, the Dow dropped 121 points in four minutes after the Fed announcement and regained 119 points in the next eight minutes. It closed with a modest loss of 65 points or 0.39%.5

New Trading Strategies

Along with concerns about the global economy and domestic interest rates, new trading strategies may be adding to the volatility, creating rapid large-scale market shifts that do not always reflect investor sentiment about individual stocks. In one telling statistic, during the 15 trading sessions ending September 9, there were 11 “all or nothing” days when at least 80% of the stocks in the S&P 500 index either rose or fell — a daily mass movement unmatched in records dating back to 1990.6

Maintaining Perspective

Although a market loss may be difficult to accept, it’s important to keep the numbers in perspective. The S&P 500 index more than tripled in value from its recession low in March 2009 to its most recent high on July 20, 2015. The 9% loss from July 20 to September 25 still left the index up 185% over the last six-and-a-half years.7 No bull market lasts forever, but the recent pullback doesn’t necessarily mean the market has no more potential for gain, and it may be healthy in the long term.

Some analysts think stocks may have become overvalued during the long bull run, and a pullback or a correction (defined as a market drop of 10% from a previous high) can set a more realistic “floor” for future market growth.8

Fleeing the market during a downturn means you are not in a position to take advantage of growth on the upswing, as many investors learned when they left the market during the recession. In fact, a down market may be a buying opportunity, but it’s just as important to be careful about purchasing investments as it is to be careful about selling. In most cases, it would be wise to maintain a steady course and stick to the sound investment principles you used in building your portfolio.

All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost. The S&P 500 index is an unmanaged group of securities that is considered to be representative of U.S. stocks in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. Actual results will vary.

1, 8) money.cnn.com, August 24, 2015
2) The Wall Street Journal, August 24, 2015
3) U.S. Bureau of Economic Analysis, 2015
4) Federal Reserve, 2015
5, 7) Yahoo! Finance, 2015
6) barrons.com, September 10, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Coverage You Can Keep Differences between term and permanent life insurance and how consumers should consider what coverage they need.

In a 2015 study, 43% of Americans said they would feel a financial impact within six months if the primary wage earner died. Perhaps reflecting this concern, three out of 10 acknowledged that they needed more life insurance coverage.1

Four out of five consumers overestimate the cost of life insurance, which may explain why many people don’t always buy the insurance they need. Millennials, who can typically buy less-expensive coverage than older people, overestimate the expense by more than 200%, and Gen Xers overestimate by more than 100%. Many consumers also don’t understand the factors that could affect what they pay for coverage.2

An Individual Policy

You may have group life insurance through work, but the face value of employer-based policies is generally low — typically one or two times your annual salary. Although the amount of coverage you need depends on a variety of factors, one traditional guideline suggests having coverage equal to seven to 10 times your salary.3 Just as important as the amount of your coverage is the continuity — you might lose coverage if you change employers.

An individual policy is yours to keep for as long as you pay the premiums. Two basic types of individual life insurance are available.

Term life insurance is generally the most affordable. As the name suggests, this type of coverage offers a death benefit if the insured dies within the covered time period, which could range from one to 30 years. Premiums may adjust each year or remain fixed for the full term. You might be able to continue coverage beyond the original term at a higher premium, or possibly convert to a permanent policy (subject to age restrictions and policy minimums) while the policy is in force.

Permanent life insurance (also called whole life) offers lifetime protection and a guaranteed death benefit as long as you keep the policy in force by paying the premiums. Although the premium is usually higher than for term insurance, it typically remains level for the rest of your life.

A portion of the permanent life insurance premium goes into a cash-value account, which accumulates on a tax-deferred basis throughout the life of the policy. You might be able to borrow against the cash value during your lifetime to help pay for retirement, education, emergencies, or other needs.

Withdrawals of the accumulated cash value, up to the amount of the premiums paid, are not subject to income tax. Loans (as long as they are repaid) are also free of income tax. Loans and withdrawals from a permanent life insurance policy will reduce the policy’s cash value and death benefit, and may require additional premium payments to keep the policy in force. Any guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company.

Keep in mind that policies commonly have mortality and administrative charges beyond the cost of premiums. If a permanent life policy is surrendered prematurely, there may be surrender charges and income tax implications.

1–2) LIMRA, 2015
3) Bankrate.com, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Time to Make Medicare Changes Medicare beneficiaries can switch plans and coverage during different enrollment periods throughout the year.

When Medicare was first signed into law in 1965, it consisted of Part A hospital insurance and Part B medical insurance, now referred to as Original Medicare. These programs are administered directly by the federal government and have standardized services, premiums, and deductibles.

Two other types of coverage have since been added — both offered by Medicare-approved private insurance companies — with varying costs and benefits. Part C, or Medicare Advantage, replaces Original Medicare and often includes prescription drug coverage and other benefits. Part D Prescription Drug Coverage can be selected with Original Medicare or with Medicare Advantage Plans that do not offer drug benefits.

With all these options, it’s not unusual for beneficiaries to switch plans and coverage, either because of changing circumstances or because another plan better suits their current needs. Fortunately, there are opportunities to do so during several enrollment periods throughout the year.

Medicare Open Enrollment Period: October 15 to December 7. During this period, changes can be made by participants in Original Medicare, Medicare Advantage, and Medicare Prescription Drug Plans. Any changes made during this period become effective on January 1.

Medicare Advantage Disenrollment Period: January 1 to February 14. Participants in Medicare Advantage Plans can also switch to Original Medicare during this period, with Original Medicare coverage beginning the first day of the following month. Those who make this change have until February 14 to enroll in a Part D Prescription Drug Plan, with coverage beginning the first day of the month after the plan receives the enrollment form.

Five-Star Special Enrollment Period: December 8 to November 30 of the following year. An additional opportunity allows Medicare beneficiaries to switch to a top-rated “5-star” Medicare Advantage Plan, Prescription Drug Plan, or Medicare Cost Plan (alternate coverage available in certain areas of the country). Medicare rates these plans every year, and a 5-star rating is considered excellent. You can use the star ratings to compare plans based on quality and performance.

For more on Medicare enrollment, visit medicare.gov/sign-up-change-plans.

Source: Centers for Medicare & Medicaid Services, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Correlation and Portfolio Performance How correlation plays a role in constructing a portfolio that strikes a balance between risk and potential return.

Different types of investments are subject to different types of risk. On days when you notice that stock prices have fallen, for example, it would not be unusual to see a rally in the bond market.

Asset allocation refers to how an investor’s portfolio is divided among asset classes, which tend to perform differently under different market conditions. An appropriate mix of investments typically depends on the investor’s age, risk tolerance, and financial goals.

The concept of correlation often plays a role in constructing a well-diversified portfolio that strikes a balance between risk and return.

Math That Matters

In the financial world, correlation is a statistical measure of how two securities perform relative to each other. Securities that are positively correlated will have prices that tend to move in the same direction. Securities that are negatively correlated will have prices that move in the opposite direction.

A correlation coefficient, which is calculated using historical returns, measures the degree of correlation between two investments. A correlation of +1 represents a perfectly positive correlation, which means the investments always move together, in the same direction, and at a consistent scale. A correlation of –1 means they have a perfectly negative correlation and will always move opposite one another. A correlation of zero means that the two investments are not correlated; the relationship between them is random.

In reality, perfectly positive correlation is rare, because distinct investments can be affected differently by the same conditions, even if they are similar securities in the same sector.

Correlations Can Change

While some types of securities exhibit general correlation trends over time, it’s not uncommon for correlations to vary over shorter periods. In times of market volatility, for example, asset prices were more likely to be driven by common market shocks than by their respective underlying fundamentals.

During the flight to quality sparked by the 2008 financial crisis, riskier assets across a number of different classes exhibited unusually high correlation. As a result, correlations among some major asset classes have been more elevated than they were before the crisis. There has also been a rise in correlation between different financial markets in the global economy.1 Tighter relationships among asset classes may be a good reason for some investors to reassess their portfolio allocations.

Over the long run, a combination of investments that are loosely correlated may provide greater diversification, help manage portfolio risk, and smooth out investment returns. But it’s important to keep in mind that correlations between assets can and do change over time and in particular circumstances. Future correlations may also differ from those in the past because of changing economic and market environments.

All investing involves risk, including the possible loss of principal. Asset allocation and diversification strategies do not guarantee a profit or protect against investment loss; they are methods used to help manage investment risk.

Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. When sold, investments may be worth more or less than their original cost.

1) International Monetary Fund, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Executors Inherit Important Title Settling an estate can be a difficult and time-consuming job that could take months to a year or more to complete.

Being named as the executor of a family member’s estate is generally an honor. It means that person has been chosen to handle the financial affairs of the deceased individual and is trusted to help carry out his or her wishes.

Settling an estate, however, can be a difficult and time-consuming job that could take several months to more than a year to complete. Each state has specific laws detailing an executor’s responsibilities and timetables for the performance of certain duties. A thoughtfully crafted estate plan with up-to-date documents tends to make the job easier for whomever fills this important position.

If you are asked to serve as an executor, you may want to do some research regarding the legal requirements, the complexity of the particular estate, and the potential time commitment. You should also consider seeking the counsel of experienced legal and tax advisors.

Duties and Details

If the deceased created a letter of instruction, it should include much of the information needed to close out an estate, such as a list of documents and their locations, contacts for legal and financial professionals, a list of bills and creditors, login information for important online sites, and final wishes for burial or cremation and funeral or memorial services.

An executor is responsible for communicating with financial institutions, beneficiaries, government agencies, employers, and service providers. You may be asked for a copy of the will or court-certified documentation that proves you are authorized to conduct business on behalf of the estate.

Here are some of the specific duties that often fall on the executor.

Arrange for funeral and burial costs to be paid from the estate. Collect multiple copies of the death certificate from the funeral home or coroner. They may be needed to help you fulfill various official obligations, such as presenting the will to the court for probate, claiming life insurance proceeds, reporting the death to government agencies, and transferring ownership of financial accounts or property to the beneficiaries.

Notify agencies such as Social Security and the Veterans Administration as soon as possible. Federal benefits received after the date of death must be returned. You should also file a final income tax return with the IRS, as well as estate and gift tax returns (if applicable).

Protect assets while the estate is being closed out. This might involve tasks such as securing a vacant property; paying the mortgage, utility, and maintenance costs; changing the name of the insured on home and auto policies to the estate; and tracking investments.

Inventory, appraise, and liquidate valuable property. You may need to sort through a lifetime’s worth of personal belongings and list a home for sale.

Pay any debts or taxes. Medical bills, credit-card debt, and taxes due should be paid out of the estate. The executor and/or heirs are not personally responsible for the debts of the deceased that exceed the value of the estate.

Distribute remaining assets according to the estate documents. Trust assets can typically be disbursed right away and without court approval. With a will, you generally must wait until the end of the probate process.

The executor has a fiduciary duty — that is, a heightened responsibility to be honest, impartial, and financially responsible. This means you could be held liable if estate funds are mismanaged and the beneficiaries suffer losses.

If for any reason you are not willing or able to perform the executor’s duties, you have a right to refuse the position. If no alternate is named in the will, an administrator will be appointed by the courts.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

The ABCs of Incorporation The differences between organizing as a C, S, or B corp, primarily in relation to tax status and legal requirements.

One question that a business should revisit from time to time is whether its current organizational structure is meeting its needs. Sole proprietorships, partnerships, and limited liability companies (LLCs) are fairly basic forms of ownership, whereas corporations are significantly more complex.

A corporation is a separate legal entity from its owners, which means shareholders generally cannot be held liable for a corporation’s debts. S and C corporations may provide broader legal protections, but usually must meet more demanding regulatory requirements.

In addition, many states now recognize the legal status of benefit corporations, which may appeal to for-profit businesses with a stated “social mission.”1

Key Distinctions

Both S and C corporations must file annual tax returns, but they are taxed very differently. S corp profits and losses are “passed through” to the owners, who are taxed at personal income tax rates, even if profits are later reinvested in the business to pay for new employees or equipment. C corporations could be subject to the corporate income tax at both federal and state levels, but they may be able to deduct the salaries and bonuses of owners and employees as business expenses. Any dividends distributed to C corp shareholders are paid from the corporation’s after-tax profits and are taxable to the recipients, creating the potential for double taxation.

An S corp shares many of the formal corporate requirements as a C corp, including articles of incorporation (and other document filings), a board of directors, an annual meeting, corporate minutes, and shareholder votes on major decisions. Larger and fast-growing companies are commonly organized as C corps because multiple classes of stock and an unrestricted number of shareholders are allowed. S corps are limited to one class of stock and a total of 100 shareholders.

Accounting for the Greater Good

Normally, corporations might be compelled to make economic decisions that maximize profitability for shareholders, which can result in legal or ethical challenges for some firms. Benefit corporation status may provide legal protection by mandating other considerations, including the potential impact on employees, the environment, or the community.

Becoming a benefit corporation only affects requirements of corporate purpose, accountability, and transparency. It does not affect a company’s tax status, which means it can still elect to be taxed as a C corp or an S corp.

When choosing an organizational structure for your business, it’s important to weigh the potential costs and benefits of the various options and consult with your tax and legal professionals.

1) The Washington Post, April 20, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Small Island, Big Debt — Why Puerto Rico Matters to Muni Investors Puerto Rico’s dire fiscal situation and the potential implications for municipal bond and mutual fund investors.

On August 3, Puerto Rico missed a payment to bondholders for the first time. The default was not a big surprise, given the island’s weak economy and heavy $72 billion debt load.1 A painful recession has persisted for nearly a decade, while Puerto Rico’s debt-to-GDP ratio spiked to more than three times that of any U.S. state or territory.2

Tax-friendly municipal bonds, sold by state and local governments to finance public-works projects, are a key component of the portfolios of many investors who depend on the stable income. Puerto Rico’s bonds also have municipal status, but the U.S. territory’s municipalities don’t currently have a legal right to file for bankruptcy under Chapter 9, as Detroit and some other struggling cities have done in recent years.3

Nonetheless, additional defaults could be in store, and the fallout from Puerto Rico’s dire fiscal situation may continue to affect U.S. municipal bond and mutual fund investors.

Puerto Rico’s Issues

Puerto Rico has issued three different kinds of debt. The first default by the Public Finance Corporation involved appropriation debt, which is considered the riskiest of the three because payments depend on the legislature’s willingness to provide funds. General-obligation (G.O.) bonds have first priority under the commonwealth’s constitution, and revenue bonds are backed by dedicated revenue sources, such as public utilities.4

Officials are working on a proposal to restructure Puerto Rico’s debt, while major creditors are pressuring the government to meet its obligations.5 It might take years for Puerto Rico’s financial mess to be ironed out, and bondholders could suffer some losses in the process.

The Merits of Munis

Puerto Rico’s debt problems are fairly isolated and not expected to weigh heavily on the nation’s broader $3.7 trillion muni market.6 The U.S. economy is more than six years into a slow but steady economic expansion, and the default rate of the S&P Municipal Bond Index, which follows bonds of more than 22,000 issuers, was just 0.17% in 2014.7

Municipal bond interest is generally exempt from federal income tax and is usually exempt from state and local income taxes for investors who live in the state where a bond was issued. However, selling a municipal bond or tax-exempt fund at a profit could trigger capital gain taxes. (The interest on bonds issued outside an investor’s state of residency could be subject to state and local taxes, and some municipal bond interest could be subject to the federal alternative minimum tax.)

Because government entities have the power to raise taxes and fees to pay the interest, municipal bonds are generally considered to be higher-quality assets than taxable bonds such as corporates, so they typically pay less interest. The lower tax-free yields offered by muni bonds and tax-exempt mutual funds are often more valuable to investors in the top tax brackets. For example, a 3% tax-free yield is equivalent to a 4.62% taxable yield for an investor in the 35% federal income tax bracket.

Bond Fund Exposure

Nearly 20% of U.S. bond funds, including about half of municipal bond funds, hold Puerto Rican debt, with exposure varying widely from less than 1% to nearly 50% of fund assets.8–9

How did so much Puerto Rican debt end up in the portfolios of so many U.S. municipal bond funds? Because Puerto Rico is a U.S. territory, its bonds are not subject to any federal or state taxes regardless of where the investor lives, which allows them to be included in muni funds intended to be tax-free for residents of a single state. Some fund managers might also have been reaching for more generous yields, which are typically associated with a higher level of risk.10

For individual investors, owning an assortment of munis in a mutual fund makes it easier to attain credit diversification. However, Puerto Rico serves as a reminder that some muni funds are more diversified than others, and it highlights the importance of looking closely at any bond fund’s underlying investments. (Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against loss.)

Headline Risk Remains

Municipal bond prices may continue to fluctuate as events in Puerto Rico unfold. But credit jitters could also create opportunities for buy-and-hold investors who are willing to ride out periods of market volatility.

The return and principal value of bonds and mutual fund shares fluctuate with changes in market conditions. When redeemed, they may be worth more or less than their original cost. Bond funds are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund’s performance.

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

1) The Wall Street Journal, August 3, 2015
2) Kiplinger.com, July 22, 2015
3) CNNMoney, July 1, 2015
4–5) Bloomberg.com, August 3, 2015
6, 8, 10) The New York Times, July 24, 2015
7) S&P Dow Jones Indices, 2015
9) Investor’s Business Daily, August 13, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Inheriting an IRA If you’ve inherited an IRA or might inherit one in the future, it’s important to understand your options.

Although IRAs are primarily intended to help fund retirement, some people don’t withdraw all IRA assets during their lifetimes. Any remaining assets go to the account owner’s designated beneficiaries and could provide a generous legacy.

If you’ve inherited an IRA or might inherit one in the future, it’s important to understand your options. IRS rules and regulations for inheriting an IRA can be complex, and an uninformed decision could result in unexpected taxes and penalties.

To Stretch or Not to Stretch?

An individual who inherits an IRA can take all or part of the funds as a lump-sum distribution or stretch withdrawals over his or her life expectancy (under current law) by taking required minimum distributions (RMDs). If the original account owner was under 70½ at the time of death, the beneficiary can delay distributions until December 31 of the fifth year after the original owner’s death, but all the assets must be distributed by that time.

The lump-sum approach may be appropriate for small accounts, but you should think twice before liquidating a large account. Distributions from a traditional IRA are subject to ordinary income tax, so taking a large distribution could push you into a higher tax bracket and reduce the potential value of the inheritance. Roth IRA distributions might not be taxable (as long as the original owner met the Roth five-year holding requirement), but liquidating the account would lose the benefit of potential tax-free growth.

Taking RMDs

The rules on RMDs depend on the beneficiary’s relationship to the original owner. RMDs are generally based on the life expectancy of the beneficiary.

A nonspouse beneficiary who doesn’t cash out should properly retitle the account as an inherited IRA — such as “Joe Smith (deceased) for the benefit of Mary Smith (beneficiary).” Inherited IRAs are not subject to early-withdrawal penalties, but they are subject to annual RMDs, which must begin no later than December 31 of the year after the original owner’s death (regardless of the beneficiary’s age). However, if the original owner died after age 70½ and failed to take an RMD in the year of death, the beneficiary must take at least the amount of the RMD by December 31 of that year.

A surviving spouse who is the sole beneficiary has more options. The survivor can treat the assets as his or her own by rolling them over to an existing or a new IRA. RMDs would not have to start until age 70½ (distributions prior to age 59½ may be subject to a 10% early-withdrawal penalty). If the account remains an inherited IRA with the surviving spouse as sole beneficiary, minimum distributions are based on the beneficiary’s or the late spouse’s life expectancy (whichever is longer). If the late spouse died before reaching age 70½, distributions can be delayed until the year he or she would have turned 70½, but RMDs would be based on the surviving spouse’s life expectancy.

Another option that may be available to both spousal and nonspouse beneficiaries is to disclaim the IRA and allow it to pass directly to the account’s contingent beneficiaries. RMDs typically would be lower if based on the life expectancy of a younger beneficiary, which may result in a greater opportunity for the assets to pursue growth.

RMD rules become more complex when multiple beneficiaries are designated or when the IRA is left to the estate or a trust. Be sure to consult with a tax or estate professional before taking any specific action.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Investing in Your Values More investors are considering their values, social as well as environmental, when making investment decisions.

It’s probably safe to say that people choose an investment with the assumption that it will add financial value to a portfolio. However, more investors are considering other values when making investment decisions — the way a company does business, the way it treats employees, and the social and environmental impact of its products and services.

This type of value-based investing is called by various names, including socially responsible investing; sustainable and responsible investing; and sustainable, responsible, and impact investing. Typically, the acronym SRI is used to represent all these terms, and the principles are similar regardless of terminology. Investing based on your social beliefs does not necessarily reduce the potential for financial gain. In fact, SRI stocks tend to perform similarly to the broader stock market (see chart).

Interest in sustainable and responsible investing has grown steadily since it was first tracked in 1995, but growth has accelerated over the last two years. U.S. assets invested according to SRI principles increased by 76% from 2012 to 2014, rising from $3.74 trillion to $6.57 trillion — equivalent to about one out of six professionally managed U.S. investment dollars.1 Globally, the increase was 61%, rising from $13.3 trillion to $21.4 trillion.2

Strategies and Advocacy

SRI strategies typically incorporate environmental, social, and corporate governance (ESG) factors to analyze and construct investment portfolios. This is often done by professional investment managers for large institutional investors, but individual investors might consider these factors when developing their own portfolios. Along with screening individual stocks, investors can choose from more than 450 ESG mutual funds.3

ESG factors include such issues as employee relations, environmental practices, product safety and utility, and respect for human rights. For example, an SRI approach might include companies that produce “green” products or are proactive in community and employee relations; it might screen out companies that produce tobacco or alcohol products, engage in questionable employment practices, or invest in countries with poor human rights records. A more targeted ESG approach, often called community investing, channels dollars to benefit individuals or organizations that have been underserved by mainstream financial institutions.

In addition to considering ESG factors when choosing investments, shareholders are increasingly using voting power and other influence to encourage corporate management to follow practices that might improve the company’s ESG efforts. This may reflect shareholders’ personal values as well as the belief that greater ESG engagement could improve business results and increase share value.

Consider the Risks

Although the number of companies and funds that consider ESG factors continues to grow, focusing on SRI strategies limits the total universe of available investments and could make it more challenging to diversify and maintain your desired asset allocation. Diversification and asset allocation do not guarantee a profit or protect against loss, but they may help manage risk.

Like all investments, SRI stocks and funds entail risk and could lose money, and they may underperform similar investments not constrained by social policies. There is no guarantee that an SRI-focused investment will achieve its objectives, and different companies may use different definitions of ESG factors and SRI strategies. You should take the time to learn about a potential SRI stock or fund before making a commitment to purchase it.

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

1, 3) The Forum for Sustainable and Responsible Investment, 2014
2) Global Sustainable Investment Alliance, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Do You Need Disability Insurance? In 2013, 59% of new disability claims were for people 50 and older and it often takes more time for them to recover.

It might surprise you to know that the odds of long-term disability actually decline with age. For example, a 40-year-old has a 43% chance of experiencing at least one disability lasting 90 days or more before reaching age 65. For a 50-year-old, the odds drop to 36% — still a higher risk than most people might expect.1

Of course, the average 50-year-old is not healthier or less accident-prone than the average 40-year-old. The difference reflects the fact that the 40-year-old has a longer period of risk before reaching age 65.

In fact, disabilities tend to occur later in life. In 2013 (most recent data available), 59% of new long-term disability claims were for people 50 and older.2 And when older people become disabled, it often takes more time for them to recover, or they might not return to work at all. A 55-year-old who experiences a 90-day disability has a 60% chance of it lasting for at least five years.3

Individual vs. Group Coverage

If you’re concerned about the potential effect of losing your income due to sickness or injury, you might consider an individual disability income insurance policy. Though your employer may offer long-term disability coverage, group plans typically don’t replace as large a percentage of income as an individual plan could, and disability benefits from employer-paid plans are taxable to the employee if the employer paid the premiums. Of course, if you change jobs, you might lose your subsidized employer-based coverage.

An individual disability income policy could help replace a percentage of your income, up to the policy limits, if you’re unable to work as a result of an illness or injury. Benefits may be paid for a specified number of years or until you reach retirement age. Some policies pay benefits if you cannot work in your current occupation; others might pay only if you cannot work in any type of job. If you pay the premiums yourself, disability benefits are usually free of income tax.

A loss of income not only could put immediate pressure on you and your family, but might also alter your options for retirement. An appropriate individual disability income policy may help you weather a difficult time and stay on track to pursue your long-term financial goals.

1, 3) 2015 Field Guide, National Underwriter
2) Council for Disability Awareness, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Financing Options for Small Businesses Some common types of financing that a small biz may need in order to upgrade its operations or finance expansion.

While bank lending to large businesses (loans over $1 million) rose to record levels in 2014 — loans outstanding were more than 24% higher than before the recession — small-business loans (under $1 million) in 2014 were still 17% below pre-recession highs.1

Even though the credit market is becoming friendlier, small firms are still having difficulty tapping into today’s low interest rates. Here are the pros and cons of some common types of financing that small businesses may need in order to upgrade their operations or finance expansion.

Bank loans. Many financial institutions restrict lending to the most creditworthy businesses, and even qualified owners may need to contact many banks before finding one willing to offer financing. New or fast-growing small businesses — even healthy ones with good prospects — are often rejected. Banks often require significant collateral and documentation of stable profits. Because of lower property values in some places, owners may not be able to rely on real estate equity to help secure business loans, cash-out mortgage refinances, or equity lines.

SBA loans. The U.S. Small Business Administration guaranteed more than $19 billion in loans made by private banks in fiscal year 2014.2 The program often makes it easier to obtain financing and may offer more competitive terms and longer repayment periods. However, SBA loans also require “worthwhile” collateral, and it can take several months for qualified applicants to complete the process and receive the funds.

Alternative sources. Specialty lenders may extend short-term loans that are backed by business assets such as securities, equipment, inventory, and accounts receivable. These loans are usually more expensive but can sometimes be used to access capital quickly.3

Credit cards. About 36% of small businesses used credit cards to meet their capital needs in 2014.4 Business accounts often charge higher interest rates and offer fewer financial protections than personal accounts. Using a business credit card responsibly, however, is one way that a new business could help establish the positive credit history it might need to obtain business loans in the future.

If you are thinking about borrowing funds to strengthen or grow your business, be sure to do plenty of research and weigh your options carefully.

1) Federal Reserve Bank of Cleveland, 2015
2) U.S. Small Business Administration, 2014
3) Inc., May 2014
4) National Small Business Association, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Women May Need More Life Insurance While women make up more than half of the U.S. labor force, about 43% of women don’t have life insurance.

Did you know that 100 years ago, women were not even able to buy life insurance? Now women make up more than half (57%) of the U.S. labor force. Yet in spite of their important contributions to the nation and their families’ financial well-being, about 43% of women still don’t have life insurance.

In fact, the average insured woman has $129,800 of individual life insurance, which isn’t enough coverage to maintain her family’s current lifestyle. One rule of thumb calls for having life insurance that equals seven to 10 times annual salary, but each situation is different.

For women with a spouse, children, or even parents who depend on them, life insurance funds could help replace their incomes and provide essential financial support for survivors. The proceeds of a policy could also help pay for costly child care, future college costs, and other household needs that are often met by stay-at-home moms.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Policies commonly have mortality and administrative charges beyond the cost of premiums.

Sources: Insurance Information Institute, 2015; U.S. Bureau of Labor Statistics, 2015
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Could Chinese Market Turmoil Cause a World of Hurt? The Chinese government intervened in its financial markets in July. Will China’s troubles affect the global economy?

It’s been a stressful summer for millions of Chinese stock market investors. The Shanghai Composite Index dropped 32% and lost more than $3 trillion in value in less than four weeks. After hitting bottom on July 9, the market rebounded 15% by July 21 before plunging 8.5% on July 27.1–3

Foreign investors’ access to mainland China’s financial markets is limited by government quotas, but has slowly been expanding. It’s estimated that foreigners own about 4% of China A-shares, the local securities of Chinese companies trading on mainland exchanges.4 This differentiates them from H-shares, Chinese stocks listed in Hong Kong, and N-shares, Chinese stocks listed in the United States.

Still, China is the world’s second largest economy and has trade ties with much of the world. Chinese business activity accounted for 38% of global gross domestic product (GDP) growth in 2014, the largest share of any nation.5

If continued stock market weakness causes the broader Chinese economy to slow further, it could spell trouble for many other nations and the global economy as a whole. Moreover, the speed and depth of the Chinese market’s sudden descent have prompted unprecedented intervention by the ruling Communist Party, drawing attention to the risks that come with investments in foreign markets.6

Behind the Slide

The summer sell-off was preceded by a year-long stock rally that may have become overheated. The Shanghai Composite Index surged 150% in the 12-month period through June 12, and its median stock valuation reached 108 times earnings, even though the pace of GDP growth was slowing and profits were shrinking.7–9

The Chinese stock market is dominated by 90 million retail investors, many from working-class households. The Communist government has promoted stock investing, causing a large number of novice investors to wade into the rising markets over the last year.10

At the same time, margin debt on the Chinese stock market ballooned five-fold in the 12 months through June 12.11 The fact that Chinese investors were buying stocks with so much borrowed money likely made matters worse. As prices fell, more and more investors were forced to sell stocks to repay loans, resulting in a downward spiral.

Life Support

The Chinese government instituted a number of measures to help restore investor confidence and end the sell-off. Regulators tried to encourage stock buying by cutting interest rates, suspending IPOs to preserve liquidity, making loans more available for stock purchases, and allowing pensions to purchase stocks. In addition, a $19 billion stabilization fund was created to help shore up stock prices.12 When prices continued to fall, major shareholders were banned from selling for six months, and a government investigation into short selling was launched.13

Locked Out

Two Chinese market rules impeded trading during the sell-off. First, a daily-limit rule freezes a stock’s share price for the remainder of the day once it rises or falls by 10%. Second, companies can apply for trading halts ahead of major news that might cause their stock prices to fluctuate.

According to a Wall Street Journal analysis, only 3.2% of Chinese stocks were trading freely on July 9; the exchanges allowed about 51% of listed companies to suspend trading, while roughly another 46% of listed stocks were unavailable because of trading limits. Consequently, some U.S.-based money managers whose portfolios follow Chinese stock indexes had difficulty executing trades needed to rebalance holdings affected by market volatility.14

Chinese officials have defended their policies, contending they were necessary to stem an irrational panic that could have damaged the nation’s financial system. Considering that stock indexes were still well into positive territory for the year, some critics think regulators might have overreacted to a steep but necessary market correction.15 Going forward, the threat of aggressive government interference in the markets could have a chilling effect on foreign investment in China.

Financial news out of China and elsewhere in the world could continue to spur volatility in U.S. markets. Even so, it’s generally wise to ignore day-to-day fluctuations and stick to a long-term investment strategy based on your financial goals, risk tolerance, and time horizon.

The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to a specific country. This may result in greater share price volatility.

1, 14) The Wall Street Journal, July 21, 2015
2) BloombergBusiness, July 10, 2015
3) The Wall Street Journal, July 27, 2015
4) The New York Times, July 9, 2015
5–6) BloombergBusiness, July 13, 2015
7, 11) BloombergBusiness, July 15, 2015
8) BloombergBusiness, July 5, 2015
9–10) The Wall Street Journal, July 7, 2015
12) The Wall Street Journal, July 5, 2015
13, 15) The Wall Street Journal, July 20, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Gen X Turns 50: Time to Rescue Retirement? Some helpful strategies, not only for Gen Xers but for anyone concerned about falling short of retirement savings goals.

The oldest members of Generation X are turning 50 in 2015, and a recent study suggests that this generation is well behind in saving for retirement. Although Gen Xers expect to need at least $1 million for a comfortable retirement — and many think they’ll need even more — the median savings in their retirement accounts is just $70,000.1

An additional challenge is that Gen Xers will start reaching their full Social Security retirement age of 67 in 2032, just a year before the Social Security trust fund is expected to run out. At that time, it’s projected that the program may be able to pay just 77% of scheduled benefits, unless Congress finds a solution in the meantime.2

This may sound bleak, but there’s still time to get back on track. Here are some ideas to consider, not only for Gen Xers but for anyone concerned about falling short of retirement savings goals.

Calculate retirement needs. Only 12% of Gen X workers have used a calculator or worksheet to estimate the savings they will need for a comfortable retirement.3 Regardless of age, workers who try to calculate their retirement needs tend to have higher savings goals and are more confident about reaching those goals.4

Make saving a priority. Gen Xers have many competing financial priorities — mortgages, auto loans, college for their children, and sometimes their own student loans. If that sounds familiar, you might have to reduce expenditures in order to allocate more to savings. When your children are out of school or your auto loan is paid off, you can dedicate additional resources to saving for retirement.

Increase contributions. Even though 84% of Gen Xers who are offered a savings plan through work participate in their plans, their average contribution percentage — 7% of salary — may not be enough to achieve their retirement goals. Experts generally recommend saving at least 10% to 15% of salary throughout a working career, and even higher percentages may be required for those who start saving later.5 When you turn 50, take advantage of annual “catch-up” contributions that allow you to save an additional $1,000 in an IRA and an additional $6,000 in most employer-sponsored plans.

Keep your savings working. More than one out of four Gen Xers have used their 401(k) accounts for purposes other than retirement — cashing out when changing jobs, taking early withdrawals (which may include penalties), or borrowing against their account balances.6 Instead of tapping retirement funds, it’s wiser to keep a separate emergency fund and to save for special purchases outside of a retirement account.

Educate yourself and consider professional guidance. Sixty-five percent of Gen X workers say they do not know as much as they should about retirement saving and investing, and 58% would like outside advice. Yet only 35% work with a financial professional.7 There is no assurance that working with a financial professional will improve investment results. But by focusing on your overall objectives, a financial professional can provide education, identify strategies, and help you consider options that could have a substantial effect on your long-term financial situation.

Every generation faces retirement challenges. The good news for Generation X is that there is time to turn those challenges into opportunities to prepare for a comfortable retirement.

1, 6) Forbes.com, August 28, 2014
2) Social Security Administration, 2014
3, 5, 7) PlanSponsor.com, August 28, 2014
4) Employee Benefit Research Institute, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Protecting Your Most Precious Asset Why all parents should have a will, regardless of any material assets they may possess.

Americans tend to drag their feet when it comes to estate planning. Only 36% of adults have a will, and the numbers are even lower for young adults. For example, among adults aged 35 to 44 — an age when many people have accumulated substantial assets — only 20% have a will to help ensure that their assets are distributed according to their wishes.1

Protecting material assets is important, but protecting your children — your most precious asset of all — is even more important. Yet only 49% of married parents and 17% of single parents have a will.2 People cite various reasons for not creating a will: procrastination, a lack of urgency, or because they don’t think they need one.3 If you have minor children, however, you need a will regardless of any material assets you may possess.

Naming a Guardian

A will is generally the simplest and most appropriate way to select a guardian for minor-age children and adult children with special needs. If you do not select a guardian, a probate court will select one for you, and your child’s financial matters might be managed through the court. A legal guardian can provide daily care as well as financial oversight, but you may name a different person as custodian for specific accounts.

It’s usually not a good idea to name a minor child as the primary beneficiary of a retirement account, pension plan, or insurance policy, but it may be appropriate to name children as contingent beneficiaries as long as you also specify a guardian or custodian. Beneficiary designations on such accounts typically supercede instructions in a will, so be sure that the guardian/custodian you name on the beneficiary form corresponds with your will unless you want the account assets controlled by a different individual.

Creating a will does not have to be expensive or complex, but it could make a big difference for your children and other heirs. If you already have a will, you should review it regularly to make sure it reflects your current wishes.

1–3) Rocket Lawyer, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Should I Stay or Should I Go? Easing into Retirement Two strategies that might help those who are considering retirement make a smoother, more confident transition.

Unforeseen events can sometimes force a person to retire, but for many people the decision to retire is a personal choice. And like any big decision, it can be fraught with uncertainty.

If you’re considering retirement in the not-too-distant future but not sure whether you’re prepared — financially, emotionally, or both — here are two approaches that might help you make a smoother, more confident transition.

Practice Makes Perfect?

One “practice retirement” scenario that has been promoted in recent years goes like this: The pre-retiree would stop saving for retirement around age 60 and continue working into his or her late 60s, allowing current savings to grow and Social Security benefits to accrue, while spending the income formerly dedicated to savings on the fun things he or she imagines in retirement. Getting a jump-start on the fun would be great, but this approach might work only for those fortunate few who have saved enough by the age of 60 to support a comfortable retirement. For many people, spending instead of saving in their early 60s could be disastrous.

A more realistic approach may be to try living on your projected retirement budget for six months or a year before you make the decision to retire. You might even set up two separate accounts: one for the expenses you anticipate in retirement and another for expenses that you may no longer have when you retire (for example, commuter expenses or a mortgage that you expect to pay off). Put only the amount of retirement income you expect to have into the “retirement account” and determine whether you can live comfortably on that income. If not, you may have to adjust your spending or work longer to increase your savings and Social Security benefits.

If you plan to move to a different part of the country when you retire, it may be difficult to simulate your retirement lifestyle while maintaining your current job. In that case, you might take an extended vacation and try living for a time in your planned retirement destination.

Phasing Out

The federal government recently established a formal phased retirement program that allows eligible full-time federal employees to collect half their pensions while working half-time; at least 20% of their remaining work hours will be spent mentoring younger workers.

Only 11% of companies in the private sector offer some form of phased retirement, but there seems to be growing interest.1 If your company does not offer such a program, you might suggest an arrangement that could be beneficial for all concerned. Here are some ideas to keep in mind.

Make sure you understand the effect of reduced hours on your benefits, such as health insurance and employer pension or retirement plan contributions.

Because pensions are less common in private industry, you may have to supplement your lost income. If you claim Social Security before full retirement age and continue to work, not only will you receive a permanently reduced benefit but you’ll be subject to the “earnings test,” which may temporarily reduce your benefit until you reach full retirement age.

A moderate phaseout program, such as working four days instead of five, might allow you to try living on 80% of your income without tapping other sources. This could be good practice for retirement.

If you do phase out of your current job, make sure you don’t end up trying to do all of your former work in fewer hours!

Retirement should be a positive experience after a long working career. By taking a practice run or a phased approach, you may be more comfortable as you move into an exciting new stage of your life.

1) ConsumerReports.org, March 10, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Cyclical vs. Defensive Stocks Cyclical and defensive stocks differ and consumer spending and economic growth may affect various sectors of the stock market.

It’s no secret that consumers are the driving force behind the U.S. economy; consumer spending is responsible for more than two-thirds of U.S. gross domestic product (GDP).1

Even though real GDP increased at an unimpressive rate of 2.4% for all of 2014, consumer spending in the fourth quarter grew at the fastest pace in more than eight years.2 In January 2015, the Consumer Confidence Index followed suit and surged to its highest level since before the Great Recession hit in 2007.3

A stronger job market and lower gas prices, which left many consumers with a little extra money in their wallets, contributed to the fourth-quarter spending spree.4

But will U.S. consumers help shift the economy into higher gear in 2015? The answer will most likely depend on whether the average American’s financial prospects continue to improve.

Here’s a closer look at how consumer spending and economic growth may affect various sectors of the stock market.

Riding the Economy

The stocks of companies that primarily offer non-essential goods and services are generally referred to as “cyclical.” When times are tough, consumers often forgo spending on luxuries and delay big-ticket purchases they can live without.

The consumer discretionary sector is considered cyclical in nature; it includes industries such as retail, financial services, travel, and apparel that tend to benefit from growing consumer demand. Durable goods manufacturers (automobiles and appliances), home builders, and technology companies are also part of the cyclical category.

Cyclical stocks are “economically sensitive,” which means their share prices typically fall during recessions and rise as employment, consumer spending, and economic activity improve.

Playing Defense

“Defensive” (non-cyclical) stocks are less affected by economic changes, because these companies produce goods and services that people typically continue to buy no matter what. Examples of defensive sectors include consumer staples (which includes food, beverages, and household necessities such as toilet paper), utilities (water, gas, and electric), and health care.

The share prices of defensive stocks tend to hold up better during periods of economic uncertainty and financial market turbulence. On the other hand, companies in defensive sectors often carry higher amounts of debt, in which case their share prices or dividends might be negatively affected by a rise in interest rates.

Cyclical and defensive stocks tend to outperform during different stages of the business cycle. But keep in mind that every cycle is different from the last, and macroeconomic events or unexpected geopolitical shocks can sometimes disrupt regular trends. In most cases, it is difficult to recognize turning points until after they have passed.

Investors who “chase performance” and move assets into hot sectors may be too late to benefit from market gains and could suffer losses instead. Investing in an appropriate balance of cyclical and defensive shares may help increase return potential, smooth volatility, and moderate risk in your equity portfolio.

The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Past performance is no guarantee of future results. A portfolio invested only in companies in a particular industry or market sector may not be sufficiently diversified and could be subject to a significant level of volatility and risk.

1–2, 4) The Wall Street Journal, February 27, 2015
3) The Wall Street Journal, January 27, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Funding a Succession Plan with Insurance How life and disability insurance can be used to fund two different types of buy-sell agreements.

Death, disability, divorce, and bankruptcy are just a few of the events that can threaten the future of a once-thriving business. What would become of your life’s work if you decided to retire or had to leave suddenly for another reason?

In the midst of an emotional transition, it may be difficult or even impossible for surviving family members and/or co-owners to come to terms.

A properly drafted buy-sell agreement is a contract that establishes how ownership shares should be transferred when specified triggering events occur. Even though pre-negotiating who will buy out a departing owner may be a good idea, it could prove impossible if the timing of the sale is unexpected and the buyers don’t have the money to close a transaction. For that reason, it may be helpful to fund a buy-sell agreement with life and/or disability insurance.

Two Ways to Go

A buy-sell agreement can be structured to fit the business’s unique circumstances. A sale price is set in the agreement, or a formula is agreed upon for calculating the price at the time of the purchase to account for any changes in the value of the business.

A one-way agreement states that a specific person will buy the business when the owner retires, becomes permanently disabled, or dies. Permanent life insurance could be purchased on the owner’s life, with the successor as owner and beneficiary of the policy. The successor can use the proceeds from the policy’s death benefit to buy the company from the owner’s estate, with the monies passing through to heirs. Otherwise, the cash value that the policy has accrued could help fund the purchase of the business when the owner retires.

A cross-purchase agreement is for a business with multiple owners. It stipulates that the remaining owners will purchase the interest of the departing owner. Each owner could purchase insurance on the lives of the others and would be responsible for premiums on these cross-owned policies.

The guaranteed liquidity provided by insurance may help prevent surviving family members and/or co-owners from being forced to sell assets or borrow money.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing an insurance strategy, it would be prudent to make sure that you are insurable. Any guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Big Deals: What’s Behind the M&A Surge? A surge of M&A activity began in 2014 and has continued in 2015. Why and what it means for investors and consumers

U.S. companies announced more than $1.5 trillion worth of mergers and acquisitions in 2014, a 55% increase over 2013 and the highest total since 2007. Altogether, 10,615 deals were forged. The pace continued in the first quarter of 2015, with 2,507 deals worth close to $406 billion.1

Why the sudden burst of M&A activity? And what does it mean for investors and consumers?

Corporate Cash

Since the recession, U.S. corporations have been building record cash reserves as a result of increased productivity (primarily from automation and cost cutting), a rising stock market, and a reluctance to spend on hiring and capital investment until corporate leaders were more confident in the economic recovery.

A similar reluctance applied to mergers and acquisitions. Instead, many corporations have tried to satisfy shareholders — who may see too much cash as wasted opportunity — with dividends and stock buybacks.

The tide turned in 2014, as the United States experienced its fifth full year of economic growth, the stock market continued to rise, and interest rates remained at record lows. High stock prices give a company more equity to use in acquisitions when stocks are the medium of exchange, while low rates make it easier to borrow for cash deals. One CEO who had made two acquisitions early in 2015 said, “It’s an optimum time.”2

Mergers vs. Acquisitions

Although mergers and acquisitions tend to be considered together in big-picture analysis, understanding the differences may help investors and consumers gauge the possible implications of a deal.

An acquisition is the purchase of one company by another that is paid for with stock, cash, or both. The target firm is absorbed by the buyer, and the buyer’s stock continues to trade. The target firm’s stockholders may receive stock in the buying company and/or have the option to sell their shares at a set price.

A true merger occurs when two companies of roughly equal size combine into a single company and issue new stock. In this case, stockholders of both companies generally receive shares in the new company.

Acquisitions are often announced as mergers when the deal is “friendly,” with both sides agreeing to what they consider to be fair terms. Hostile takeovers, in which one company purchases a controlling interest in another against the wishes of the target firm’s leaders, are typically announced as acquisitions.

The Good, Bad, and Unknown

The stock prices of companies involved in a merger or acquisition typically move up or down after the announcement, depending on how investors view the deal. The true results, however, may become evident only over the long term. Although no one can predict the future, it might help to consider the logic behind a given deal.

When a conglomerate gobbles up companies in multiple industries, as was more common in the late 20th century, the company may move out of its comfort zone and lose focus on its core business. Cross-industry deals, in which companies hope to grow by combining different products or services, might have potential, but the anticipated financial benefits may not materialize.3

The current trend is toward industry consolidation, which may create economies of scale and boost share value. The risk is that the market must be big enough to support continued growth; if not, the merger becomes a cost-cutting exercise. Under the right circumstances, however, the combined company could reach new customers, take market share away from competitors, and develop new products for the target market.4

What About Consumers?

The obvious consumer concern is that less competition might lead to higher prices. Two big deals collapsed in April 2015 due to antitrust opposition by the U.S. Department of Justice, but it can be difficult to predict what will trigger regulatory action.5 In 2013, the DOJ allowed then-bankrupt American Airlines and US Airways to become the world’s biggest airline, capping a dozen years of airline consolidation — which has strengthened the industry but given remaining airlines greater control over routes and pricing.6

In June 2015, potential mergers among the nation’s top health insurers set off alarm bells. California’s insurance commissioner Dave Jones commented, “Further consolidation in the health insurance industry is not a good thing for consumers, employers or medical providers.”7 Even so, Wall Street analysts believe some form of consolidation is likely.8

Overreacting to a merger or acquisition may not be wise, but you might monitor the business performance of companies or industries in which you have an interest. Though the current M&A boom won’t last forever, it could continue as long as companies have cash, interest rates are low, and stock values are high.

The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Investments offering the potential for higher rates of return also involve higher risk.

1) The Wall Street Journal, March 31, 2015
2) MarketWatch, April 8, 2015
3–4, 9) The Economist, April 18, 2015
5) Barron’s, May 1, 2015
6) Bloomberg News, June 16, 2015
7) Los Angeles Times, June 17, 2015
8) The Wall Street Journal, June 16, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

New Flexibility for College Savings New investment flexibility for 529 plans and how these plans may help you accumulate savings for higher education costs.

The steady rise in the cost of a college education has slowed somewhat during the past two years. At public four-year schools, the average inflation-adjusted cost of tuition, fees, room, and board increased just 1.2% in the 2013–14 academic year and 1.0% in 2014–15. At private schools, the increases were 1.8% and 1.6%, respectively.1

That’s good news for families with current or future students. But even so, college is expensive, and the long-term trend suggests that costs may rise at a faster pace in the future (see chart).

Despite the cost, higher education is a valuable investment. College graduates not only earn more than non-graduates but tend to be healthier, more satisfied with their jobs, and more likely to remain employed during tough economic times.2 A strategic savings plan could be a key step toward providing your student with the many benefits of a college diploma.

Section 529 Plans

A Section 529 plan is a state- or college-sponsored program designed to help families accumulate savings for future higher-education costs. These plans have been available since 1996, but legislation passed in December 2014 provided additional investment flexibility that should be welcome to parents and grandparents who use 529 plans to save for their children’s or grandchildren’s college education. Owners of 529 accounts can now change the investment options in their existing plan contributions twice per calendar year instead of just once, allowing them to be more responsive to changing needs, time frames, or market conditions.

The funds in a 529 savings plan accumulate on a tax-deferred basis and can be withdrawn free of federal income tax when used for qualified education expenses at accredited post-secondary schools, such as colleges, universities, community colleges, and certain technical schools. Qualified expenses include tuition, fees, room and board, books, and supplies. Section 529 plans feature high contribution limits (set by each state), and there are no income restrictions for donors.

Each 529 plan has its own rules and restrictions, which can change at any time. As with other investments, there are generally fees and expenses associated with participation in a 529 savings plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. The tax implications of a 529 plan should be discussed with your legal and/or tax advisors because they can vary significantly from state to state. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents and taxpayers.

Before investing in a 529 plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses — which contain this and other information about the investment options, underlying investments, and the investment company — can be obtained from your financial professional. You should read this material carefully before investing.

1–2) The College Board, 2013–2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Tax Tips for Tying the Knot Some tax issues and other financial considerations to keep in mind when making the transition to married life.

Summer is a popular time for weddings. But no matter when you say “I do,” marriage typically leads to many changes — not only on a personal level but also in your finances. Here are some tax issues and other financial considerations to keep in mind if you or someone you know is making the transition to married life.

Name and address changes. The names and Social Security numbers on your tax return must match Social Security Administration (SSA) records, so report any name change by filing Form SS-5, Application for a Social Security Card. You can download the form on ssa.gov. Notify the IRS of an address change by filing IRS Form 8822. You may also report the change at your local post office.

Beneficiary forms. Update beneficiary forms for life insurance, retirement accounts, and other financial accounts as soon as possible. For some accounts, your current spouse is automatically the beneficiary, but you should still change your forms. (You may have to make specific provisions for any children from a previous marriage.)

Filing status. If you are married as of December 31, you are considered to be married for the whole year for tax purposes. You and your spouse can choose to file your federal income tax returns either jointly or separately each year, so you may want to calculate both ways to determine which one results in the lower tax liability.

Tax withholding. You must give your employer a new W-4 form to change your withholding. You and your spouse’s combined income could move you into a higher tax bracket, but it’s also possible that filing jointly will reduce your tax liability. You may want to use the IRS withholding calculator at irs.gov/Individuals/IRS-Withholding-Calculator. If you are self-employed, recalculate your estimated tax payments.

Affordable Care Act (ACA) issues. If you bought insurance from the Health Insurance Marketplace and received an advance payment of the premium tax credit, report any changes in income or family size to your marketplace. You should also notify the marketplace if you move out of the area covered by your plan.

Marriage is the beginning of a new life on many levels. Taking care of financial details should be the easy part!

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Indexed Annuities: Potential Upside, Protecting the Downside How indexed annuities work and the options that may be available to investors in an indexed annuity contract.

Indexed annuities have become more popular in recent years. This appeal may be due to features that can help protect the principal while also participating in market gains.

That’s an attractive combination, but indexed annuities are complex products and not appropriate for every investor. It’s important to understand how they work and the options you may have if you decide to purchase an indexed annuity contract.

Two Return Rates

Like all annuities, an indexed annuity is a contract with an insurance company that offers an income stream in return for one or more premium payments. Payments may begin right away (immediate annuity) or at a future date (deferred annuity) and are paid over the life of the contract — the owner’s lifetime, the lifetimes of two people, or a specific number of years. Of course, any guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company.

An indexed annuity offers a minimum rate of return (typically 1% to 3%) with a potentially higher rate based on the performance of a specified market index (e.g., the S&P 500). If the market has a down year, you would receive at least the minimum return (contingent upon holding the annuity until the end of the contractual term). If the market has an up year, you would receive a higher return, calculated in one or more of the following ways, based on the performance of the index.

Participation rate. Determines how much of the index gain will be credited to the annuity. For example, a participation rate of 80% means the annuity would be credited with 80% of the gain experienced by the index.

Spread/margin/asset fee. May be assessed in addition to, or instead of, a participation rate. For example, if the index gained 10% and the spread/margin/asset fee is 2.5%, then the gain in the annuity would be only 7.5%.

Interest-rate cap. The maximum rate of interest the annuity will earn. For example, if the index gained 10% and the cap rate was 6%, the gain in the annuity would be 6%. Index performance generally does not include dividends, and the way in which the performance is measured may vary, depending on the contract (see chart). Participation rates, cap rates, and other fees are set by the insurance company; some companies reserve the right to change these provisions either annually or at the start of each contract term. These types of changes could affect the investment return.

Most annuities have surrender charges that are assessed if the contract owner surrenders the annuity during the early years of the contract. However, some indexed annuities allow withdrawals of up to 10% per year without surrender charges. Of course, any withdrawals will reduce the principal, and withdrawals before the end of an index period will receive no interest for that period. Early withdrawals prior to age 59½ may be subject to a 10% federal income tax penalty.

Like all annuity contracts, indexed annuities have rules, restrictions, and expenses. Depending on the guarantees of the issuing company, it may be possible to lose money with this type of investment. Be sure to review the contract carefully before deciding whether to invest.

The S&P 500 index is an unmanaged group of securities that is widely recognized as representative of the U.S. stock market in general. You cannot invest directly in any index and do not actually own any shares of an index. Past performance is no guarantee of future results.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Understanding the Gift Tax It’s important to understand gift tax provisions in order to take advantage of the exemption and possibly eliminate or reduce potential tax liability.

You may have wondered whether the gift tax applies to any gifts you have made or plan to make. The good news is that the American Taxpayer Relief Act of 2012 set a permanent exemption for gift and estate taxes at a high-enough level ($5 million, indexed annually for inflation) that relatively few gifts should be subject to the tax.

Even so, it’s important to understand the gift tax provisions in order to take advantage of the exemption and possibly eliminate or reduce your tax liability.

Annual Exclusion

In 2015, you can give up to $14,000 ($28,000 for a married couple) in cash or certain types of property, including income-producing stocks and bonds, to as many people as you wish without any gift tax liability. Certain gifts are not subject to the annual limit, including gifts to your spouse (as long as he or she is a U.S. citizen), donations to qualifying charitable organizations, and payments of tuition or medical expenses on behalf of another person that are paid directly to the educational or medical institution.

For example, if a grandparent wants to help with a grandchild’s education at a level above the annual exclusion amount, it might be more tax effective to pay the school directly rather than give money to the student or his or her parents.

Lifetime Exemption

A lifetime exemption applies to federal estate and gift taxes combined. For estates of those who die in 2015, the exemption is $5.43 million (up to $10.86 million for a married couple). Any amount applied toward your lifetime gift tax exemption would reduce the exemption available for estate taxes. Both the annual exclusion and the lifetime exemption are indexed annually for inflation.

For gifts above the annual exclusion amount, you must file a federal gift tax return (Form 709) in order to apply the lifetime exemption to the gift. You may also have to file a return for certain types of gifts below the annual exclusion. Be sure to consult a tax professional before taking any specific action.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Factors That Influence Hiring Decisions Some signs that it might be time for small business owners to hire extra help, and the related costs.

In early 2015, an index that measures the hiring intentions of small businesses rose to its highest level in seven years.1 About 90% of the U.S. workforce is employed at businesses with 20 or fewer employees, so rising employer optimism is good news for the U.S. job market and the broader economy.2

Fortunately, successful small businesses are likely to continue providing employment opportunities in the years to come.

It’s exciting to discover an opportunity to expand the size or scope of your business, and sometimes extra help is needed to make that happen. But how do you know whether your company is really ready to add new employees?

Here are a few signs that it may be time to hire.

Customer demand for your company’s goods or services is steadily increasing. It may take some time to confirm that growth is consistent and not a seasonal or temporary surge.

You (and/or your staff) can no longer handle critical work in a timely manner, and customer service is suffering.

You regularly pay current employees a significant amount of overtime.

You would like to act on attractive growth opportunities, such as opening a new location.

A person (or people) with a particular skill set is needed to help develop a new product or add to your menu of services.

Consider the Costs

You may need to invest a fair amount of time and money to build a good team. Adding a salary can be substantial by itself. However, providing common benefits such as health and dental plans, disability coverage, and life insurance adds to the cost. In December 2014, the average employer cost for each full-time civilian worker was $31.32 per hour ($21.72 for wages and $9.60 for benefits).3

There may be additional expenses associated with recruiting and screening applicants, training new workers, purchasing workers’ compensation insurance, and complying with any federal and state regulations. It’s important to research the possible cost to implement requirements that apply specifically to your area and/or industry.

In fact, you may want to consult an accountant to help determine whether you can afford to hire extra help.

1–2) Gallup, 2015, 2014
3) U.S. Bureau of Labor Statistics, 2014–2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Fixing Social Security: America Faces Tough Choices America faces tough choices among potential solutions proposed to address Social Security’s fiscal deficit.

In May 2015, researchers from Harvard and Dartmouth published a report suggesting that actuaries for the Social Security Administration have been underestimating the demographic challenges facing the program since 2000.1 The fact that Social Security is in trouble was not a surprise, but the possibility that the day of reckoning might come sooner than previously projected generated considerable media attention and may spur renewed political debate.

Social Security is the centerpiece of America’s retirement safety net. Nine out of 10 retirees and eight out of 10 workers are counting on the program as an important source of retirement income.2

Regardless of your age and working status, this might be a good time to look at the challenges facing the program and the potential solutions for addressing its fiscal problems.

Battling Demographics

There is no mystery to the fundamental problem. Because of Americans’ longer life spans and lower birth rates, there are not enough workers to support the growing number of beneficiaries. In 1955, there were 8.6 workers for each beneficiary. The number of workers per beneficiary fell to 4.0 by 1965 and 3.2 by 1975. Currently, there are only 2.8 workers contributing to Social Security for each beneficiary. By 2035, this is expected to drop to 2.1, at which point it will level off.3

Since 2010, the Social Security system has been supplementing its revenues from trust funds built up during the period when revenues exceeded expenses. Based on current actuarial projections, these funds will run out in 2033, at which point the program might be able to pay only 77% of scheduled benefits; the percentage falls to 72% by 2088.4

Although the Harvard-Dartmouth researchers did not offer a specific date when the funds might run out, they found that the program’s expenses have been consistently underestimated since 2000, primarily because they were not fully adjusted for increasing life spans.5

Possible Solutions

A 2014 study by the National Academy of Social Insurance (NASI) looked at potential solutions addressing Social Security’s funding shortfall in terms of their impact (based on current actuarial data) and public opinion.

The most popular revenue-enhancing changes — “strongly” or “somewhat” favored by more than four out of five survey respondents — were to gradually raise the FICA payroll tax rate (paid by both workers and employers) from 6.2% to 7.2% over 20 years, and to gradually eliminate the taxable earnings cap over 10 years so that all earnings would be taxed.6

In 2015, workers’ earnings up to a maximum of $118,500 are subject to the payroll tax; the earnings cap is indexed annually for inflation. Raising the taxable earnings cap to $230,000 (which would cover 90% of all earnings by U.S. workers, a target set by Social Security legislation) would reduce the funding gap by 29%. Eliminating the earnings cap altogether would reduce the gap by 74%. Gradually raising the payroll tax would address about 52% of the shortfall.7

A majority of survey respondents oppose benefit reductions, such as reducing or eliminating benefits for high-income beneficiaries, raising the retirement age, and reducing the cost-of-living adjustment (COLA). In fact, 70% to 80% of respondents favored potential benefit increases, including raising the COLA, raising benefits for those who are 85 and older, reinstating survivor benefits for college students, and raising the minimum benefit. Of course, any benefit enhancements would only increase the deficit and would have to be offset by revenue increases.8

These reforms could work with the current Social Security system, but some legislators have suggested a more fundamental shift toward privatization ­— allowing younger workers to divert some or all of their payroll taxes from Social Security to private accounts. However, this approach would increase the current Social Security deficit, and it raises questions about the long-term security of a private savings program.

Finding Consensus

Using a trade-off analysis technique, the National Academy of Social Insurance found that 71% of survey respondents favored a reform package that included (1) gradually eliminating the taxable earnings cap, (2) gradually increasing the payroll tax rate, (3) raising the COLA to reflect inflation experienced by seniors, and (4) increasing the minimum benefit. This proposal would eliminate an estimated 113% of the shortfall currently projected by the Social Security actuaries.9 However, if the Harvard-Dartmouth researchers are correct, additional changes would be required, perhaps excluding the benefit increases.

The NASI study suggests that Americans may be ready to support steps to rescue Social Security. The larger question is whether policymakers are willing to make the difficult choices required.

With heightened public attention, the future of Social Security may become an issue in the 2016 political elections. If so, renewed focus on an old problem may help ensure the future of America’s retirement safety net.

1, 5) Journal of Economic Perspectives, Spring 2015
2) Employee Benefit Research Institute, 2015
3–4) Social Security Administration, 2014
6–9) National Academy of Social Insurance, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Aiming at Target-Date Funds How target-date funds work and why it’s important to understand a fund’s specific strategy.

Target-date funds are increasingly popular in workplace retirement plans, where they are often the default option for new employees. A 2014 study found that 15% of all 401(k) assets — including 32% of assets for recently hired plan participants — were invested in target-date funds.1

These funds are not limited to new hires. Overall, more than two out of five 401(k) participants have at least some assets in a target-date fund.2 Investors also hold target-date funds in IRAs and other types of accounts.

One-Stop Asset Allocation

The appeal of target-date funds is their apparent simplicity. They provide a professionally managed mix of assets — typically funds comprising stocks, bonds, and cash alternatives — selected for a specific time horizon.

The concept is to provide a balanced portfolio in a single mutual fund. Asset allocation is a widely accepted method to help manage investment risk; however, it does not guarantee a profit or protect against investment loss.

Although target-date funds offer investment simplicity, they are quite complex in the way they work. So whether you already own a target-date fund or may purchase one in the future, it’s important to understand the basic principles.

Anatomy of a Fund

The target date, which is typically included in the fund’s name, is the approximate date when an investor would withdraw money for retirement or another purpose, such as paying for college. An investor expecting to retire in 2040, for example, might choose a 2040 fund. As the target date approaches, the fund typically shifts toward a more conservative asset allocation to help conserve the value it may have accumulated.

This transition is driven by a formula called the glide path, which determines how the asset mix will change over time. The glide path may end once the target date is reached or continue to shift assets after the target date. Funds with the same target date may vary not only in the glide path but also in the underlying asset allocation, investment holdings, turnover rate, fees, and fund performance. Variation tends to be greater as funds near their target date. In 2014, funds with a 2015 target date had stock allocations ranging from 25% to 78%, whereas stock allocations in 2045 funds ranged from 80% to 100%.3

A target-date fund could be a sound retirement savings method, but keep in mind that choosing a target-date fund does not guarantee that you will have sufficient funds for retirement on that date. The principal value of a target-date fund is never guaranteed (before, on, or after the target date).

The return and principal value of all mutual funds fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

1–2) Employee Benefit Research Institute, 2014
3) Morningstar, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Financial Strategies for Changing Families Family life has changed over the past 4 decades. Here are some financial suggestions for nontraditional families.

It should come as no surprise that American family life has changed over the past four decades, but U.S. census data reveals just how widespread this change has been. In 1970, about 40% of households were married couples with children under 18 living at home. By 2012, only 20% of households fit this structure (see chart).

Although basic principles of budgeting, saving, and investing apply to all households, nontraditional families are less likely to feel financially secure than traditional families.1 Here are a few specific ideas that might be helpful for nontraditional situations.

Blended and Divorced Families

Set clear expectations for financial responsibilities. Well-defined guidelines might help avoid unnecessary conflicts.

College financial aid applications typically base their formulas on the parent who has primary custody. However, if you share custody with your ex, you might receive more aid if the parent with a lower household income fills out the forms.

Update your will and beneficiary designations to reflect your family situation. Be sure to take appropriate steps to provide for children from a previous marriage.

Single Parents

You may have to make hard choices to balance paying for your children’s college education and saving for your own retirement. Remember that children from single-parent households may qualify for a higher level of college financial aid than they might in two-parent households.

Have a current will that designates a guardian for your children and outlines other contingency plans. Life insurance companies generally will not pay a death benefit to minor-age children, so it’s important to identify a financial administrator for your estate. This person may be the child’s physical guardian or someone else.

Unmarried Couples

Make sure you understand the laws of your state and local government, and the policies of your employer. Register your domestic partnership, if possible.

Define legal arrangements through appropriate documents. For example, your partner may need financial and health-care powers of attorney to make decisions on your behalf. If you own a house together, specify what happens in the event of a separation.

Single Households

Maintain a healthy emergency fund and increase your retirement savings percentage. Without dependents, you should be able to save more; but without a partner’s financial contribution, you might need more savings for emergencies and a comfortable retirement than you would if you were married.

Be sure to have a will and other estate documents in place. If you die without a will, the state may decide who receives your assets.

Regardless of your household structure, you might benefit from professional guidance tailored to your situation. There is no assurance that working with a financial professional will improve investment results. But by focusing on your overall objectives, a professional can provide education, identify strategies, and help you consider options that could have a substantial effect on your long-term financial situation.

1) Money, December 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Coming to Terms with Long-Term-Care Needs Some people mistakenly assume Medicare or private health insurance will pay for long-term care if it becomes necessary.

It’s estimated that 70% of people aged 65 and older will need long-term-care services at some point, either in a facility or at home.1 Alzheimer’s disease, dementia, strokes, and advanced osteoporosis are just a few of the age-related health problems that can require a lengthy stay in a high-cost facility.

The costs for long-term care are rising, and rates vary greatly by state and the type and level of care provided. The nationwide median annual cost for a private room in a nursing home was nearly $88,000 in 2014.2

Some people mistakenly assume that Medicare or private health insurance will pay for long-term care if it ever becomes necessary, but the reality is that they do not cover the extended period of custodial care that many people will need. Families with substantial assets are unlikely to qualify for Medicaid, yet paying out of pocket for these services could quickly exhaust a lifetime of savings. A long-term-care insurance policy could help fill this financial gap.

How Policies Work

Long-term-care insurance will provide a contractual daily or monthly benefit for covered services (up to the policy limits). Benefit periods often last from two to six years but can cover a lifetime.

Benefits typically are triggered when the insured is unable to perform two or more activities of daily living (ADLs) for a certain period of time, or the insured requires supervision due to a severe cognitive impairment. Specific eligibility triggers and ADL definitions can be found in the long-term-care policy. An elimination period may apply (typically 0 to 180 days); therefore, policyholders may have to wait for a period of time before the insurance company pays benefits.

Because premiums can vary considerably depending on the type and amount of coverage chosen, it’s important to understand all the available options. Some people make the decision to purchase a long-term-care policy when they are in their fifties, because the fixed premium payments are generally less expensive and there is a reduced chance that an application will be rejected for health reasons. Married couples may be able to purchase a single policy with a rider that allows them to share benefits, which may be more cost-effective than buying separate policies.

Some long-term-care policies receive the same tax advantages as other qualified medical expenses. Up to certain age-based limits, premiums for long-term-care insurance may be deductible from federal income tax, and the benefits paid from a policy are not considered taxable income.

Are you confident that you could afford several years of care (for yourself or a spouse) and maintain a comfortable standard of living? A long-term-care policy could help prevent your retirement savings from being wiped out by the escalating cost of care and may ease the burden on your family.

Having private coverage in force may also broaden your options for care if you should need it, and possibly even keep you out of a nursing home by providing home care. Owning a policy that pays long-term-care expenses may also enable you to preserve and pass more of your wealth to your heirs.

1) The Wall Street Journal, April 13, 2014
2) Bankrate.com, July 1, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Solving the Salary Puzzle The size of the small business owner’s paycheck may initially depend on how much is left over after expenses and taxes.

To keep more money in the business, some small-business owners avoid paying themselves. According to one study, only a little more than half of small-business owners pay themselves a regular salary.1

Of course, the size of the owner’s paycheck largely depends on the type of business and how well it’s doing. If the company is new or doesn’t have any employees, the owner’s salary might simply be what is left over after expenses and taxes. After a business becomes established, hires employees, or has significant profits to work with, the question of compensation becomes more complicated.

Here are some of the key considera­tions when deciding how much your business should pay you.

Does business structure matter? For sole proprietors and partnerships, profits from the business and personal income are treated the same by the IRS. A corporation is allowed to deduct salaries paid to employees (including owners) as a business expense, but compensation must be “reasonable” considering their roles and duties.

How much are you worth? Potential investors or creditors may be critical of the company’s prospects if the owner’s salary is too high or too low. It may take some research to determine and justify the market value of your time and contribution to the company.

Are there reasons to reinvest? Even if you are satisfied with the size and performance of your company, you might need to modernize equipment or facilities, or take other steps to remain competitive.

Is it time for a raise? Consider giving yourself annual pay increases (or bonuses) that are linked to the growth of the business. For example, if sales have surged 25%, multiply last year’s salary by 125%.

What about benefits? You may be able to lighten your tax burden by deferring some salary and contributing to a qualified retirement plan. It may also be worthwhile to fund other types of workplace benefits such as life, health, and disability insurance for both you and your employees.

Whatever approach you take, it’s important to strike a balance between the business’s needs and goals and your own.

1) FoxBusiness, October 21, 2013
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Clue for Homeowners: Filing a Claim Could Cost You According to a recent report, homeowners who filed just one insurance claim saw their premiums rise by an average of 9%.

According to a recent report, homeowners who filed just one insurance claim saw their premiums increase by an average of 9% — and a second claim caused premiums to climb as much as 20%. Interestingly, the size of the claim didn’t matter much. Filing a small claim for a stolen bicycle could affect your rates about the same as filing a large claim for tornado damage.

Increases varied widely by state, however, and all types of claims were not treated the same way. The most costly were liability claims, which are made when someone gets hurt, and claims for theft and vandalism.

Unfortunately, it may not be possible to escape a rate hike by switching insurers. A database called the Comprehensive Loss Underwriting Exchange (CLUE) tracks all auto and property insurance claims — as well as inquiries about potential claims — for seven years.

To hold down your homeowners insurance costs, you could avoid filing small claims and rely on your insurance only for major, or catastrophic, events. You might also consider choosing a higher deductible (the amount you must pay out of pocket before the insurance company pays the covered amount on a claim, up to the policy limits). In fact, raising your homeowners insurance deductible from $500 to $1,000 could save as much as 25% on the annual cost.

Sources: CNNMoney, October 27, 2014; Insurance Information Institute, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Blame It on the Weather: The Economic Effects of Unusual Events The effects extreme weather events can have on businesses, regional economies, and overall U.S. GDP growth.

Many parts of the United States experienced a particularly harsh winter. The Midwest and Northeast suffered the toughest blows from a stream of heavy storms. Boston’s record seasonal snowfall topped 110 inches.1

As winter was settling in, U.S. economic growth fell to a seasonally adjusted 2.2% annual rate in the fourth quarter of 2014.2 Disappointing data on retail sales, manufacturing production and orders, housing starts, and payrolls suggests that gross domestic product (GDP) growth cooled further in the first quarter of 2015.3

Meanwhile, on the opposite coast, the weather was warmer and drier than normal. California is coping with possibly the most severe drought in its history.4 Here’s a closer look at some potential short- and long-term effects of these two extreme weather events.

Good-bye Winter

Many economic reports are seasonally adjusted, because even normal winters could skew the data and create a distraction from more serious economic problems. Still, when severe weather falls outside of historical norms, it can be difficult for economists and policymakers to gauge current economic conditions and produce accurate forecasts.

There’s no doubt that a number of powerful winter storms put a damper on economic activity in early 2015, but the jury is still out on how much of the weakness can be attributed to the weather. One early projection was that winter storms might have reduced first-quarter GDP growth by less than one percentage point, to an annual rate of 1.2%. However, in April, the government reported that GDP increased at an annual rate of only 0.2% in the first quarter.5

Hope for a Bounce

When weather takes a toll on GDP growth, it’s generally considered to be a temporary factor. In fact, weather-related periods of weakness are often followed by a significant rebound. That’s because some business activity that is delayed, such as construction, can be made up in the next quarter. Some losses, like those from canceled flights or restaurant meals, are never recovered.

In 2014, for example, U.S. GDP contracted 2.1% in the first quarter before expanding 4.6% in the second quarter and 5.0% in the third.6 Overall, the disruption from winter storms was more severe and widespread in 2014 than it was this year.

Dealing with Drought

California experienced its warmest winter ever, with temperatures averaging 4.4 degrees above the state’s 20th-century average.7 Most of California’s water supply comes from annual snowmelt from the Sierra Nevada mountains, but the record-low snowpack was just 5% of the March historical average.8 California reservoirs have only about one year’s worth of water left.9

A $1 billion emergency relief bill will aid drought-affected communities and fund water recycling and flood protection infrastructure.10 The governor also ordered the state’s first mandated water restrictions. Cities and towns must cut their water usage by 25%.11 Communities will decide how to accomplish this goal, but in many cases customers (including golf courses, campuses, and other large landscapes) will be forced to limit watering, heavy users will pay higher rates, and water wasters could be fined. Already, restaurants may serve drinking water only on request.12

Costs and Consequences

It’s estimated that California suffered $2 billion in economic losses in 2014, and the drought could cost another $3 billion — and 20,000 jobs — in 2015. California’s agriculture and food-processing industries are taking most of the hit.13 Without the normal allocations from the California Department of Water Resources, many farms must leave fields unplanted, buy more expensive water from private sources, or pay higher electricity bills to pump well water.14

Some farms survive by tapping into deeper wells. But research shows that land is sinking in some places, and the ground water supply is being depleted at an unsustainable pace. It could take a decade or more of normal precipitation for the state’s underground aquifers to recover.15

California produces nearly half of U.S.-grown fruits, vegetables, and nuts, but surprisingly, many economists do not expect higher-than-normal food inflation for 2015.16 Food supplies are national and even global. Some production could shift to other regions, while local farmers prioritize high-value crops that are not grown elsewhere. Still, each year that the drought continues to impact supplies increases the odds that food prices will rise.

A recent legislative report concluded that the drought will have a limited effect on the state’s economy in 2015. California’s $2.2 trillion economy is diverse; farming and related businesses account for only about 3% of state GDP.17

Many residents and businesses are installing drought-tolerant landscapes with more efficient irrigation systems, and are trying to break other wasteful water habits. Although current conditions may be difficult, California might benefit in the long run from the public’s heightened awareness and focus on conservation.

1) Weather.com, April 21, 2015
2, 6) U.S. Bureau of Economic Analysis, 2015
3) The Wall Street Journal, April 6, 2015
4, 8, 10–11) CNN.com, April 2, 2015
5) St. Louis Post-Dispatch, April 7 & 29, 2015
7, 9) The Atlantic, March 2015
12) California Environmental Protection Agency, 2015
13–14) CNBC.com, March 30, 2015
15) The Washington Post, August 17, 2014
16) MarketWatch, April 2, 2015
17) California Legislative Analyst’s Office, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Are You an Investor or a Speculator? Investor or speculator? The importance of committing to a long-term strategy based on sound investment principles.

Legendary investor and teacher Benjamin Graham — considered the “father of value investing” — once said, “The individual investor should act consistently as an investor and not as a speculator.”1 This simple quote captures a fundamental concept that could help you establish and maintain a sound financial strategy.

Big Risks

A dictionary of investment terms offers these definitions: “Speculators are typically sophisticated, risk-taking investors with expertise in the market(s) in which they are trading…. Speculators take large risks, especially with respect to anticipating future price movements, in the hopes of making large quick gains.”2

The danger of this approach for individual investors should be obvious. Few people have the expertise, time, and available resources to take large risks for quick gains. And even those who think they have the expertise often fail. As another legendary investor, Bernard Baruch, put it: “Don’t try to buy at the bottom and sell at the top. It can’t be done except by liars.”3

A Long-Term Approach

Investors also take risks, of course, and they certainly pursue gains. But unlike speculators, investors are generally committed to a long-term strategy based on sound investment principles. A smart investor buys assets that appear to be good investments and then builds them into a balanced portfolio that is appropriate for the investor’s goals, time frame, risk tolerance, and resources.

Of course, having a balanced portfolio — using strategies such as asset allocation and diversification — does not guarantee a profit or protect against investment loss. However, this approach is an established method to help manage investment risk. It may enable you to take advantage of market upswings while helping to control losses during downswings.

Cool Your Jets

Along with managing risk, an investor should manage his or her own emotions and expectations. That can be difficult in any market situation. When the market is rising, for example, it may be tempting to rush into the current “hot” investment and buy at a high price. And when the market is declining, it can be tempting to sell near the bottom. Even when the market is flat, you might feel that you have to do “something” just to keep your investments in motion.

If you have a well-constructed portfolio, one action you might take in almost any market situation is to make additional purchases in your investment account(s) — although the market could influence how you allocate your investments. Other than that, the most appropriate strategy may be to do nothing and let your investments pursue growth through long-term market trends.

Paul Samuelson, who won the 1970 Nobel Prize in Economic Sciences, described this approach in humorous terms: “Investing should be more like watching paint dry or watching grass grow.”4 A patient investment strategy, often called “buy and hold,” may not be as exciting as speculating, but it will probably serve you better in the long run.

All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost.

1) Thinkexist.com, 2015
2) Investopedia, 2015
3–4) BrainyQuote.com, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Highly Appreciated Giving A charitable remainder trust may enable donors to give appreciated assets to a favorite charity on a tax-free basis.

The stock market has been strong over the last few years, with the S&P 500 gaining about 200% from its bottom in March 2009 through the end of 2014.1 The housing market has also turned upward, and national home prices have bounced back to 2005 levels.2 In this improving economic environment, many people may have assets that have appreciated significantly in value since they were purchased.

That’s good news, but selling highly appreciated assets could generate a steep federal tax bill — as high as 23.8%, depending on your tax bracket (20% maximum long-term capital gains tax and 3.8% net investment tax). And state taxes could make the total liability higher. If you own such assets and also want to leave a legacy to a favorite charity, you might consider a charitable remainder trust (CRT).

Full Asset Value

When you transfer assets to a qualified charity using a CRT, the charity receives the full value of the assets without any tax liability. The charity can then invest the assets and make income payments to you or anyone else you choose.

The income payments must be made at least once a year and could last for a fixed term (not exceeding 20 years), for your lifetime, or for the lifetime of your surviving spouse or other designated beneficiary. Income payments might be fixed or variable, depending on the trust. The trust income is generally taxable.

At the end of the specified term — whether it’s a period of years or upon your death (or the death of your spouse or designated beneficiary) — the remaining assets in the trust go to the charity.

Along with the income stream from the trust, you may qualify for an income tax deduction in the year that you place the assets in the trust, based on the estimated present value of the remainder interest that will eventually go to the charity.

While a CRT could be a win-win situation for you and your favorite charity, keep in mind that all trusts incur up-front costs and often have ongoing administrative fees. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional and your legal and tax advisors before implementing a trust strategy.

1) Yahoo! Finance, 2015, S&P 500 for the period 3/9/2009 to 12/31/2014. The S&P 500 is an unmanaged group of securities considered to be representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. Actual results will vary.
2) S&P/Case-Shiller U.S. National Home Price Index, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Studying the Earnings Test The retirement earnings test reduces Social Security benefits for younger beneficiaries whose earnings exceed annual levels.

More than 2.7 million jobs were created in 2014, providing new opportunities for people of all ages.1 This is good news, but what happens if you find a good job after you’ve already filed for Social Security?

You may have heard that the retirement earnings test (RET) could reduce your benefits. This shouldn’t stop you from taking the right job, but it’s important to understand
this provision before you receive your first paycheck. Here are the basics:

The RET applies only if you are working and receiving Social Security benefits before reaching full retirement age (66 to 67, depending on birth year).

If you are under full retirement age for the entire year in which you work, $1 in benefits will be deducted for every $2 in gross wages or net self-employment income earned above the annual limit ($15,720 in 2015). Special rules, using a monthly limit, apply during the year you file for benefits.

In the year you reach full retirement age, the reduction in benefits is $1 for every $3 earned above a higher annual limit ($41,880 in 2015). Starting in the month you reach full retirement age, there is no limit on earnings or reduction in benefits.

The Social Security Administration (SSA) may begin to withhold benefits as soon as it determines that your earnings are on track to surpass the annual limit.

Even though the RET may seem like a stiff penalty, the deducted benefits are not really lost. Your Social Security benefit amount is recalculated after you reach full retirement age. For example, if you claimed benefits at age 62 and forfeited the equivalent of 12 months’ worth of benefits by the time you reached your full retirement age (66), your benefit would be recalculated as if you had retired at 63 instead of 62. In this case, the benefit reduction would be 20% instead of 25%, and you would receive this higher benefit for the rest of your life.

The RET applies only to wages and self-employment income, not to income from investments, pensions, or withdrawals from retirement accounts. Regardless of your age, keep in mind that you must pay Social Security and Medicare payroll taxes on your earnings.

1) U.S. Bureau of Labor Statistics, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

The Roundabout Way to a Roth IRA A 2014 IRS ruling makes it easier for taxpayers to move after-tax 401(k) contributions directly to a Roth IRA.

A 2014 IRS ruling makes it easier for taxpayers to move after-tax 401(k) contributions directly to a Roth IRA. Prior to the notice, it was possible to achieve a tax-free Roth conversion of after-tax dollars in an employer plan, but it was a complicated process using 60-day (indirect) rollovers rather than trustee-to-trustee transfers.

Not only did this involve several steps but it required taxpayers to have sufficient funds outside the plan to make up the 20% mandatory withholding that applied to the taxable portion of the distribution. Plus, when a 60-day rollover is not executed correctly, it could be deemed a taxable distribution, which is also subject to a 10% early-withdrawal penalty for participants under age 59½.

The prospect of a hassle-free Roth conversion may inspire some people to contribute additional after-tax money to their employer plans. Unlike the case with a Roth IRA, there are no income restrictions for contributions to a 401(k), so higher-income individuals may jump at this chance to build a tax-free income source for their retirement. Participants who already have a mix of pre-tax and after-tax funds in their 401(k)s could also benefit from the new rules.

A Larger Shelter

The ability to make after-tax contributions to a 401(k) plan is not available to everyone; it depends on the individual plan. Generally, plan participants must maximize salary deferrals to traditional and/or Roth 401(k) accounts before they can add after-tax money to the mix.

The annual employee contribution limit to a 401(k) plan in 2015 is $18,000, or $24,000 for those 50 and older. Yet the law actually allows an “overall limit” of $53,000 or 100% of compensation, whichever is less, to be put into a 401(k) on a worker’s behalf. This overall amount includes employer matches and employee after-tax contributions, if allowed.

Highly compensated workers (salary above $120,000 in 2015) are subject to additional rules based on the employer plan’s overall participation rate.

The Roth Advantage

Pre-tax contributions to a traditional 401(k) reduce a worker’s current tax bill, but withdrawals are taxed as ordinary income. A Roth 401(k) is funded with after-tax money just like a Roth IRA, and qualified withdrawals are tax-free after age 59½ as long as the five-year holding requirement has been met (under current law). By contrast, only the earnings on after-tax contributions to a traditional IRA are taxable when they are withdrawn.

You must take required minimum distributions (RMDs) from most tax-deferred retirement plans starting at age 70½. But a Roth IRA allows you to avoid RMDs during your lifetime. The money continues to accumulate tax-free until you need it, or you can leave this income-tax-free asset to your heirs.

Ready to Roll

When you leave your employer, any after-tax 401(k) contributions can be transferred directly to a Roth IRA at the same time that pre-tax contributions are directed to a traditional IRA.

For example, let’s say your 401(k) account balance is $100,000: $80,000 of pre-tax dollars and $20,000 of after-tax dollars. You can request a single $100,000 distribution, with instructions for the trustee-to-trustee transfer of $80,000 to a traditional IRA and $20,000 to a Roth IRA.

Some plans may accommodate only one direct transfer per distribution. In this case, if you wish to separate pre-tax and after-tax money, you should directly transfer pre-tax funds to a traditional IRA and request a 60-day rollover of after-tax funds to a Roth IRA.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Cyber Crime on the Rise Data breaches at large retailers have dominated the news, but cyber crimes also threaten small businesses.

When hackers gain access to consumers’ personal information, it opens the door for identity theft and other financial crimes. Data breaches resulting from attacks on large retailers have dominated the news, but sophisticated cyber crimes also threaten small businesses, many of which don’t have the funds needed for cutting-edge security strategies.

Ransomware, for example, is a menacing virus that locks businesses out of their computer files and demands payment of a ransom in exchange for the return of company systems and data. A trojan attack can compromise a small business’s website and access the databases of larger companies with which it conducts business.

In 2013, 30% of all hacking attacks were aimed at small businesses with up to 250 employees, compared with 18% in 2011.1 Given the risk, it might be safe to assume that your business could be targeted and prepare accordingly.

Liability Shift Coming

To fight fraud, retailers and banks are rolling out a more secure payment standard known as EMV, which requires that new credit and debit cards be embedded with computer chips. Each transaction uses a unique authentication code instead of a static card number, so if a store is hacked the information can’t be used again.

Beginning in October 2015, U.S. merchants without EMV-compatible readers will become responsible for fraudulent charges when chip-based cards have been provided. Business owners may want to start exploring new options and weighing the potential costs and benefits of updating their payment technology.

Serious About Security?

The Federal Communications Commission offers the following cybersecurity tips for small businesses.

Install and update antivirus and antispyware software on every computer, and maintain firewalls between the internal network and the Internet.

If you have a Wi-Fi network, set it up so the network name is hidden and a secure password is required for access. Require all passwords to be changed on a regular basis.

Train employees in security practices and set up a separate account for each user.

Lock up computers, laptops, and tablets to prevent them from falling into the wrong hands.

A company may be held liable if customers’ private information is disclosed. Fortunately, Internet liability insurance may offer some protection (up to policy limits) from the financial risks associated with computer hacking, spam, viruses, and other online perils.

1) CNBC, September 25, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Know Your Number: New Consumer Credit Protections Why your credit score matters and how recent changes could help you manage and potentially improve your credit.

Until recently, you typically had to pay to see your credit score. That’s changed as a result of an initiative by the Consumer Financial Protection Bureau (CFPB). In February, the CFPB announced that more than 50 million Americans now have free access to their credit scores through their credit-card companies, and tens of millions more should have access soon.1

In more good news for consumers, the three major credit-reporting agencies agreed to changes that should make it easier to correct errors and reduce the negative credit impact for late payment of medical bills.

Your credit profile can make a big difference in your financial life, not only for major purchases such as a home or car but also for college loans, credit-card terms, and insurance premiums. Your credit profile might even come into play when you apply for a job or rent an apartment. Considering the recent changes, this may be a good time to take a closer look at your credit score and your credit report.

Three Key Digits

The next time you receive your monthly credit-card statement, look for your score or check your online account. If you don’t see your score, ask when it will be provided. Free access to credit scores is an important benefit that could be the foundation for managing your credit. However, be sure you understand which score you are receiving and how to interpret it.

The most common credit score, and the one typically shared by credit-card companies, is your FICO® score — a three-digit number ranging from 300 to 850; this scoring model from Fair Isaac Corporation comes in several editions and variations. The VantageScore, developed by VantageScore Solutions, used a 501 to 990 scale in the past, but the newest VantageScore 3.0 uses a 300 to 850 scale. Multiple versions of these scores may be available to lenders, and scores might differ among reporting agencies. Even so, knowing at least one version of your score should provide a good clue regarding how a lender might perceive your credit risk.

What’s a good score? It can vary by situation. However, the CFPB published a report in 2013 that classified FICO scores in four categories: superprime (720 or higher), prime (660 to 719), core subprime (620 to 659), and deep subprime (under 620). At that time, it was estimated that 65% of Americans had superprime or prime scores.2

New Consumer Protections

In a March 2015 settlement with the state of New York, the three major credit-reporting agencies — Experian, Equifax, and TransUnion — agreed to changes that provide more leverage and flexibility for consumers. Although the settlement is with a single state, these changes should be implemented nationally over the next 6 to 39 months.3

Reports and disputes. Since 2005, the Fair Credit Reporting Act ensured consumers the right to receive one free copy of their credit reports annually from each of the three major agencies. Under the new agreement, consumers who are disputing their reports will be able to receive a second free copy from each agency within a one-year period.

Even more important, agencies must have trained personnel examine documentation from both the consumer and the lender and make a decision based on the evidence. In the past, the agencies examined documents from the consumer but generally accepted a lender’s assertion regarding a disputed issue. A CFPB report found that, on average, only 15% of disputes were resolved by the agencies and the other 85% were referred back to the lenders.4

Medical debt. About 43 million Americans have past-due medical debt on their reports, often due to difficulties with insurance companies or the strain of paying a large lump sum.5 Credit-reporting firms now have to wait 180 days before adding medical debt to a credit report. In addition, they must remove medical debt from reports when the debt has been paid by an insurance company. Other delinquencies may remain on a report for up to seven years, even after the debt has been paid.

Improving Your Score

If your score is lower than you expect or think you deserve, your first step should be to obtain your credit report from each agency and make sure that all versions are correct. Even if you have a high score, you should check your report on a regular basis.

You can order a free credit report annually from each of the three major credit-reporting agencies at annualcreditreport.com or by calling (877) 322-8228. If you find inaccurate information on your report, contact the agency in writing, provide copies of any corroborating documents, and ask for an investigation.

Whether your goal is to improve your score or maintain your current score, the following tips may help.

Use at least one major credit card regularly and pay accounts on time. Setting up automatic payments could help you avoid missed payments.

If you do miss a payment, contact the lender and bring the account up-to-date as soon as possible.

Keep balances low on credit cards and other revolving debt. Don’t “max out” your available credit.

Don’t open or close multiple accounts within a short period of time. Use older credit cards occasionally to keep them active.

For more information on obtaining and disputing your credit report, visit consumer.ftc.gov/topics/credit-and-loans.

1–2) Consumer Financial Protection Bureau, February 19, 2015, and October 1, 2013
3–5) The Wall Street Journal, March 9, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Interested in Interest Rates? Interest rates are expected to rise in 2015. Test your interest-rate knowledge by taking this short quiz.

After dropping to historic lows during the recession, interest rates are expected to rise in 2015. Try this short quiz to test your interest-rate knowledge.

1. Which of the following interest rates is directly controlled by the Federal Reserve Open Market Committee.

A) Prime rate
B) Federal funds rate
C) Mortgage rates
D) All of the above
E) None of the above

2. The Federal Reserve typically ______ interest rates to control inflation and ______ rates to help accelerate economic growth.

A) raises / lowers
B) lowers / raises

3. The stock market tends to applaud higher interest rates.

A) True
B) False

4. When interest rates rise, the value of _____ bonds generally decreases.

A) municipal
B) Treasury
C) corporate
D) existing
E) new

5. The longer a bond’s maturity date, the _____ sensitive its value is to fluctuations in interest rates.

A) more
B) less

The principal value of bonds may fluctuate with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Special Bequests for Special People A personal property memorandum could be used to make bequests of specific items to heirs.

Having a Last Will and Testament can help ensure that your estate is distributed according to your wishes. Yet almost two out of three Americans have not taken this important step.1

If you don’t have a will, it would be wise to create one. If you already have a will, you may want to review it periodically to make sure it still reflects your intentions and current family situation — and you might want to make some special bequests.

More Than Just “Things”

There are two ways to leave assets in a will: a general bequest and a specific bequest. For many people, the general bequest is fairly straightforward. For example, you might leave the bulk of your estate to your spouse, with your children as contingent beneficiaries.

However, there also may be specific items that you want to leave to a particular person — a family member or a friend. It might be a piece of jewelry, a musical instrument, a work of art, a furniture set, even an old car. Sometimes these “things” can have more meaning to your heirs than any money you may leave them. And though it’s fairly easy to divide financial assets among multiple heirs, a treasured object cannot be divided. By taking steps now, you can help avoid potential conflicts.

You could make specific bequests in your will, but it might be easier to create a personal property memorandum in which you simply list each item and who you want to inherit it. You should sign and date the memorandum, but you do not need to have your signature witnessed or notarized because the memorandum in itself is not a legal document. In most states, you can make it a legal document by referring to it in your will. Even if your state does not consider the memorandum legally binding, your heirs will have a clear indication of your intentions.

Most types of tangible personal property may be included in a memorandum, but you cannot use it to bequeath real estate or intangible property such as money, bank accounts, securities, and copyrights. Be sure to consult with an experienced estate planning professional who is familiar with the laws of your state.

1) Rocket Lawyer, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.