Balancing Your Investment Choices with Asset Allocation

A chocolate cake. Pasta. A pancake. They’re all very different, but they generally involve flour, eggs, and perhaps a liquid. Depending on how much of each ingredient you use, you can get very different outcomes. The same is true of your investments. Balancing a portfolio means combining various types of investments using a recipe that’s appropriate for you.

Getting An Appropriate Mix

The combination of investments you choose can be as important as your specific investments. The mix of various asset classes, such as stocks, bonds, and cash alternatives, accounts for most of the ups and downs of a portfolio’s returns.

There’s another reason to think about the mix of investments in your portfolio. Each type of investment has specific strengths and weaknesses that enable it to play a specific role in your overall investing strategy. Some investments may be chosen for their growth potential. Others may provide regular income. Still others may offer safety or simply serve as a temporary place to park your money. And some investments even try to fill more than one role. Because you probably have multiple needs and desires, you need some combination of investment types.

Balancing how much of each you should include is one of your most important tasks as an investor. That balance between growth, income, and safety is called your asset allocation, and it can help you manage the level and type of risks you face.

Balancing Risk and Return

Ideally, you should strive for an overall combination of investments that minimizes the risk you take in trying to achieve a targeted rate of return. This often means balancing more conservative investments against others that are designed to provide a higher return but that also involve more risk. For example, let’s say you want to get a 7.5% return on your money. Your financial professional tells you that in the past, stock market returns have averaged about 10% annually, and bonds roughly 5%. One way to try to achieve your 7.5% return would be by choosing a 50-50 mix of stocks and bonds. It might not work out that way, of course. This is only a hypothetical illustration, not a real portfolio, and there’s no guarantee that either stocks or bonds will perform as they have in the past. But asset allocation gives you a place to start.

Someone living on a fixed income, whose priority is having a regular stream of money coming in, will probably need a very different asset allocation than a young, well-to-do working professional whose priority is saving for a retirement that’s 30 years away. Many publications feature model investment portfolios that recommend generic asset allocations based on an investor’s age. These can help jump-start your thinking about how to divide up your investments. However, because they’re based on averages and hypothetical situations, they shouldn’t be seen as definitive. Your asset allocation is–or should be–as unique as you are. Even if two people are the same age and have similar incomes, they may have very different needs and goals. You should make sure your asset allocation is tailored to your individual circumstances.

Many Ways to Diversify

When financial professionals refer to asset allocation, they’re usually talking about overall classes: stocks, bonds, and cash or cash alternatives. However, there are others that also can be used to complement the major asset classes once you’ve got those basics covered. They include real estate and alternative investments such as hedge funds, private equity, metals, or collectibles. Because their returns don’t necessarily correlate closely with returns from major asset classes, they can provide additional diversification and balance in a portfolio

Even within an asset class, consider how your assets are allocated. For example, if you’re investing in stocks, you could allocate a certain amount to large-cap stocks and a different percentage to stocks of smaller companies. Or you might allocate based on geography, putting some money in U.S. stocks and some in foreign companies. Bond investments might be allocated by various maturities, with some money in bonds that mature quickly and some in longer-term bonds. Or you might favor tax-free bonds over taxable ones, depending on your tax status and the type of account in which the bonds are held.

Asset Allocation Strategies

There are various approaches to calculating an asset allocation that makes sense for you.

The most popular approach is to look at what you’re investing for and how long you have to reach each goal. Those goals get balanced against your need for money to live on. The more secure your immediate income and the longer you have to pursue your investing goals, the more aggressively you might be able to invest for them. Your asset allocation might have a greater percentage of stocks than either bonds or cash, for example. Or you might be in the opposite situation. If you’re stretched financially and would have to tap your investments in an emergency, you’ll need to balance that fact against your longer-term goals. In addition to establishing an emergency fund, you may need to invest more conservatively than you might otherwise want to.

Some investors believe in shifting their assets among asset classes based on which types of investments they expect will do well or poorly in the near term. However, this approach, called “market timing,” is extremely difficult even for experienced investors. If you’re determined to try this, you should probably get some expert advice–and recognize that no one really knows where markets are headed.

Some people try to match market returns with an overall “core” strategy for most of their portfolio. They then put a smaller portion in very targeted investments that may behave very differently from those in the core and provide greater overall diversification. These often are asset classes that an investor thinks could benefit from more active management.

Just as you allocate your assets in an overall portfolio, you can also allocate assets for a specific goal. For example, you might have one asset allocation for retirement savings and another for college tuition bills. A retired professional with a conservative overall portfolio might still be comfortable investing more aggressively with money intended to be a grandchild’s inheritance. Someone who has taken the risk of starting a business might decide to be more conservative with his or her personal portfolio.

Things to Think About

• Don’t forget about the impact of inflation on your savings. As time goes by, your money will probably buy less and less unless your portfolio at least keeps pace with the inflation rate. Even if you think of yourself as a conservative investor, your asset allocation should take long-term inflation into account.

• Your asset allocation should balance your financial goals with your emotional needs. If the way your money is invested keeps you awake worrying at night, you may need to rethink your investing goals and whether the strategy you’re pursuing is worth the lost sleep.

• Your tax status might affect your asset allocation, though your decisions shouldn’t be based solely on tax concerns.

Even if your asset allocation was right for you when you chose it, it may not be appropriate for you now. It should change as your circumstances do and as new ways to invest are introduced. A piece of clothing you wore 10 years ago may not fit now; you just might need to update your asset allocation, too.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016

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* Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. NASA Federal Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

 

CUSO Financial Services, L.P. and its representatives do not provide tax advice. For such advice, please contact a tax professional.

2016 Year-End Tax Planning Basics

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The window of opportunity for many tax-saving moves closes on December 31, so it’s important to evaluate your tax situation now, while there’s still time to affect your bottom line for the 2016 tax year.

Timing is everything

Consider any opportunities you have to defer income to 2017. For example, you may be able to defer a year-end bonus, or delay the collection of business debts, rents, and payments for services. Doing so may allow you to postpone paying tax on the income until next year. If there’s a chance that you’ll be in a lower income tax bracket next year, deferring income could mean paying less tax on the income as well.

Similarly, consider ways to accelerate deductions into 2016. If you itemize deductions, you might accelerate some deductible expenses like medical expenses, qualifying interest, or state and local taxes by making payments before year-end. Or you might consider making next year’s charitable contribution this year instead.

Sometimes, however, it may make sense to take the opposite approach — accelerating income into 2016 and postponing deductible expenses to 2017. That might be the case, for example, if you can project that you’ll be in a higher tax bracket in 2017; paying taxes this year instead of next might be outweighed by the fact that the income would be taxed at a higher rate next year.

Factor in the AMT

Make sure that you factor in the alternative minimum tax (AMT). If you’re subject to the AMT, traditional year-end maneuvers, like deferring income and accelerating deductions, can have a negative effect. That’s because the AMT — essentially a separate, parallel income tax with its own rates and rules — effectively disallows a number of itemized deductions. For example, if you’re subject to the AMT in 2016, prepaying 2017 state and local taxes won’t help your 2016 tax situation, but could hurt your 2017 bottom line.

Special concerns for higher-income individuals

The top marginal tax rate (39.6%) applies if your taxable income exceeds $415,050 in 2016 ($466,950 if married filing jointly, $233,475 if married filing separately, $441,000 if head of household). And if your taxable income places you in the top 39.6% tax bracket, a maximum 20% tax rate on long-term capital gains and qualifying dividends also generally applies (individuals with lower taxable incomes are generally subject to a top rate of 15%).

If your adjusted gross income (AGI) is more than $259,400 ($311,300 if married filing jointly, $155,650 if married filing separately, $285,350 if head of household), your personal and dependency exemptions may be phased out for 2016 and your itemized deductions may be limited. If your AGI is above this threshold, be sure you understand the impact before accelerating or deferring deductible expenses.

Additionally, a 3.8% net investment income tax (unearned income Medicare contribution tax) may apply to some or all of your net investment income if your modified AGI exceeds $200,000 ($250,000 if married filing jointly, $125,000 if married filing separately).

Note: High-income individuals are subject to an additional 0.9% Medicare (hospital insurance) payroll tax on wages exceeding $200,000 ($250,000 if married filing jointly or $125,000 if married filing separately).

IRAs and retirement plans

Take full advantage of tax-advantaged retirement savings vehicles. Traditional IRAs and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds on a deductible (if you qualify) or pre-tax basis, reducing your 2016 taxable income. Contributions to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) aren’t deductible or made with pre-tax dollars, so there’s no tax benefit for 2016, but qualified Roth distributions are completely free from federal income tax, which can make these retirement savings vehicles appealing.

For 2016, you can contribute up to $18,000 to a 401(k) plan ($24,000 if you’re age 50 or older) and up to $5,500 to a traditional IRA or Roth IRA ($6,500 if you’re age 50 or older). The window to make 2016 contributions to an employer plan typically closes at the end of the year, while you generally have until the April tax return filing deadline to make 2016 IRA contributions.

Roth conversions

Year-end is a good time to evaluate whether it makes sense to convert a tax-deferred savings vehicle like a traditional IRA or a 401(k) account to a Roth account. When you convert a traditional IRA to a Roth IRA, or a traditional 401(k) account to a Roth 401(k) account, the converted funds are generally subject to federal income tax in the year that you make the conversion (except to the extent that the funds represent nondeductible after-tax contributions). If a Roth conversion does make sense, you’ll want to give some thought to the timing of the conversion. For example, if you believe that you’ll be in a better tax situation this year than next (e.g., you would pay tax on the converted funds at a lower rate this year), you might think about acting now rather than waiting. (Whether a Roth conversion is appropriate for you depends on many factors, including your current and projected future income tax rates.)

If you convert a traditional IRA to a Roth IRA and it turns out to be the wrong decision (things don’t go the way you planned and you realize that you would have been better off waiting to convert), you can recharacterize (i.e., “undo”) the conversion. You’ll generally have until October 16, 2017, to recharacterize a 2016 Roth IRA conversion — effectively treating the conversion as if it never happened for federal income tax purposes. You can’t undo an in-plan Roth 401(k) conversion, however.

Changes to note

If you didn’t have qualifying health insurance coverage in 2016, you are generally responsible for the “individual shared responsibility payment” (unless you qualified for an exemption). The maximum individual shared responsibility payment for 2016 increased to 2.5% of household income with a family maximum of $2,085 for 2016, up from 2% of household income for 2015. After 2016, the individual shared responsibility payment will be based on the 2016 dollar amounts, adjusted for inflation.

Since 2013, individuals who itemize deductions on Schedule A of IRS Form 1040 have been able to deduct unreimbursed medical expenses to the extent that the total expenses exceed 10% of AGI. However, a lower 7.5% AGI threshold has applied to those age 65 or older (the lower threshold applied if either you or your spouse turned age 65 before the end of the taxable year). Starting in 2017, the 10% threshold will apply to all individuals, regardless of age. This is something that you may want to factor in if you’re considering accelerating (or delaying) deductible medical expenses.

Expiring provisions

Legislation signed into law in December 2015 retroactively extended a host of popular tax provisions — frequently referred to as “tax extenders” — that had already expired. Many of the tax extender provisions were made permanent, but others were only temporarily extended. The following provisions are among those scheduled to expire at the end of 2016.

• Above-the-line deduction for qualified higher-education expenses
• Ability to deduct qualified mortgage insurance premiums as deductible interest on Schedule A of IRS Form 1040
• Ability to exclude from income amounts resulting from the forgiveness of debt on a qualified principal residence
• Nonbusiness energy property credit, which allowed individuals to offset some of the cost of energy-efficient qualified home improvements (subject to a $500 lifetime cap)

Talk to a professional

When it comes to year-end tax planning, there’s always a lot to think about. A tax professional can help you evaluate your situation, keep you apprised of any legislative changes, and determine whether any year-end moves make sense for you.

Source: Broadridge

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* Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. NASA Federal Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

CUSO Financial Services, L.P. and its representatives do not provide tax advice. For such advice, please contact a tax professional.

Retirement Plan Considerations at Different Stages of Life

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Throughout your career, retirement planning will likely be one of the most important components of your overall financial plan. Whether you have just graduated and taken your first job, are starting a family, are enjoying your peak earning years, or are preparing to retire, your employer-sponsored retirement plan can play a key role in your financial strategies. How should you view and manage your retirement savings plan through various life stages? Following are some points to consider.

Just starting out

If you are a young adult just starting your first job, chances are you face a number of different challenges. College loans, rent, and car payments all may be competing for your hard-earned yet still entry-level paycheck. How can you even consider setting aside money in your employer-sponsored retirement plan now? After all, retirement is decades away–you have plenty of time, right? Before you answer, consider this: The decades ahead of you can be your greatest advantage. Through the power of compounding, you can put time to work for you. Compounding happens when your plan contribution dollars earn returns that are then reinvested back into your account, potentially earning returns themselves. Over time, the process can snowball.

Example(s): Say at age 20, you begin investing $3,000 each year for retirement. At age 65, you would have invested $135,000. If you assume a 6% average annual return, you would have accumulated a total of $638,231 by age 65. However, if you wait until age 45 to begin investing that $3,000 annually and earn the same 6% return, by age 65 you would have invested $60,000 and accumulated a total $110,357. Even though you would have invested $75,000 more by starting earlier, you would have accumulated more than half a million dollars more overall.1

That’s the power you have as a young investor — the power of time and compounding. Even if you can’t afford to contribute $3,000 a year ($250/month) to your plan, remember that even small amounts can add up through compounding. So enroll in your plan and contribute whatever you can, and then try to increase your contribution amount by a percentage point or two every year until you hit your plan’s maximum contribution limit. As debts are paid off and your salary increases, redirect a portion of those extra dollars into your plan.

Finally, time offers an additional benefit to young adults–the potential to withstand stronger short-term losses in order to pursue higher long-term gains. That means you may be able to invest more aggressively than your older colleagues, placing a larger portion of your portfolio in stocks to strive for higher long-term returns.2

Getting married and starting a family

You will likely face even more obligations when you marry and start a family. Mortgage payments, higher grocery and gas bills, child-care and youth sports expenses, family vacations, college savings contributions, home repairs and maintenance, dry cleaning, and health-care costs all compete for your money. At this stage of life, the list of monthly expenses seems endless.

Although it can be tempting to cut your retirement savings plan contributions to make ends meet, do your best to resist temptation and stay diligent. Your retirement needs to be a high priority.

Are you thinking about taking time off to raise children? That is an important and often beneficial decision for many families. But it’s a decision that can have a financial impact lasting long into the future.

Leaving the workforce for prolonged periods not only hinders your ability to set aside money for retirement but also may affect the size of any pension or Social Security benefits you receive down the road. If you think you might take a break from work to raise a family, consider temporarily increasing your plan contributions before you leave and after you return to help make up for the lost time and savings. Or perhaps your spouse could increase his or her contributions while you take time off.

Lastly, while you’re still approximately 20 to 30 years away from retirement, you have decades to ride out market swings. That means you may still be able to invest relatively aggressively in your plan. But be sure you fully reassess your ability to withstand investment risk before making any decisions.

Reaching your peak earning years

The latter stage of your career can bring a wide variety of challenges and opportunities. Older children typically come with bigger expenses. College bills may be making their way to your mailbox or inbox. You may find yourself having to take time off unexpectedly to care for aging parents, a spouse, or even yourself. As your body begins to exhibit the effects of a life well lived, health-care expenses begin to eat up a larger portion of your budget. And those pesky home and car repairs never seem to go away.

On the other hand, with 20+ years of work experience behind you, you could be reaping the benefits of the highest salary you’ve ever earned.

With more income at your disposal, now may be an ideal time to kick your retirement savings plan into high gear. If you’re age 50 or older, you may be able to take advantage of catch-up contributions, which allow you to contribute up to $24,000 to your employer-sponsored plan in 2016, versus a maximum of $18,000 for most everyone else. (Some plans impose different limits.)

In addition, if you haven’t yet met with a financial professional, now may be a good time to do so. A financial professional can help you refine your savings goal and investment allocations, as well as help you plan ahead for the next stage.3

Preparing to retire

With just a few short years until you celebrate the major step into retirement, it’s time to begin thinking about when and how you will begin drawing down your retirement plan assets. You might also want to adjust your investment allocations with an eye towards asset protection (although it’s still important to pursue a bit of growth to keep up with the rising cost of living).4 A financial professional can become a very important ally in helping to address the various decisions you will face at this important juncture. You may want to discuss:

• Health care needs and costs, as well as retiree health insurance
• Income-producing investment vehicles
• Tax rates and living expenses in your desired retirement location
• Part-time work or other sources of additional income
• Estate planning

You’ll also want to familiarize yourself with required minimum distributions (RMDs). The IRS requires that you begin drawing down your retirement plan assets by April 1 of the year following the year you reach age 70½. If you continue to work for your employer past age 70½, you may delay RMDs from that plan until the year following your actual retirement.5

Other considerations

Throughout your career, you may face other important decisions involving your retirement savings plan. For example, if your plan provides for Roth contributions, you’ll want to review the differences between these and traditional pretax contributions to determine the best strategy for your situation. While pretax contributions offer an upfront tax benefit, you’ll have to pay taxes on distributions when you receive them. On the other hand, Roth contributions do not provide an upfront tax benefit, but qualified withdrawals will be tax free.6 Whether you choose to contribute to a pretax account, a Roth account, or both will depend on a number of factors.

At times, you might face a financial difficulty that will tempt you to take a loan or hardship withdrawal from your account, if these options are available in your plan. If you find yourself in this situation, consider a loan or hardship withdrawal as a last resort. These moves not only will slow your retirement saving progress but could have a negative impact on your income tax obligation.

Finally, as you make decisions about your plan on the road to retirement, be sure to review it alongside your other savings and investment strategies. While it’s generally not advisable to make frequent changes in your retirement plan investment mix, you will want to review your plan’s portfolio at least once each year and as major events (e.g., marriage, divorce, birth of a child, job change) occur throughout your life.

1This hypothetical example of mathematical principles does not represent any specific investment and should not be considered financial advice. Investment returns will fluctuate and cannot be guaranteed. 2All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful. Investments offering a higher potential rate of return also involve a higher level of risk. 3There is no assurance that working with a financial professional will improve your investment results. 4Asset allocation is a method used to help manage investment risk; it does not guarantee a profit or protect against a loss. 5Withdrawals from your employer-sponsored retirement savings plan prior to age 59½ (or age 55 in the event you separate from service) may be subject to regular income taxes as well as a 10% penalty tax. 6Qualified withdrawals from Roth accounts are those made after a five-year waiting period and you either reach age 59½, die, or become disabled.

Source: Broadridge Investor Communications, Inc.

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* Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. NASA Federal Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members. CUSO Financial Services, L.P. and its representatives do not provide tax advice. For such advice, please contact a tax professional.

The New Estate Tax Rules and Your Estate Plan

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The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Act) included new gift, estate, and generation-skipping transfer (GST) tax provisions. The 2010 Tax Act provided that in 2011 and 2012, the gift and estate tax exemption was $5 million (indexed for inflation in 2012), the GST tax exemption was also $5 million (indexed for inflation in 2012), and the maximum rate for both taxes was 35%. New to estate tax law was gift and estate tax exemption portability: generally, any gift and estate tax exemption left unused by a deceased spouse could be transferred to the surviving spouse in 2011 and 2012. The GST tax exemption, however, is not portable. Starting in 2013, the American Taxpayer Relief Act of 2012 (the 2012 Tax Act) permanently extended the $5 million (as indexed for inflation, and thus $5,450,000 in 2016, $5,430,000 in 2015) exemptions and portability of the gift and estate tax exemption, but also increased the top gift, estate, and GST tax rate to 40%. You should understand how these new rules may affect your estate plan.

Exemption Portability

Under prior law, the gift and estate tax exemption was effectively “use it or lose it.” In order to fully utilize their respective exemptions, married couples often implemented a bypass plan: they divided assets between a marital trust and a credit shelter, or bypass, trust (this is often referred to as an A/B trust plan). Under the 2010 and 2012 Tax Acts, the estate of a deceased spouse can transfer to the surviving spouse any portion of the exemption it does not use (this portion is referred to as the deceased spousal unused exclusion amount, or DSUEA). The surviving spouse’s exemption, then, is increased by the DSUEA, which the surviving spouse can use for lifetime gifts or transfers at death.

Example: At the time of Henry’s death in 2011, he had made $1 million in taxable gifts and had an estate of $2 million. The DSUEA available to his surviving spouse, Linda, is $2 million ($5 million – ($1 million + $2 million)). This $2 million can be added to Linda’s own exemption for a total of $7,450,000 ($5,450,000 + $2 million), assuming Linda dies in 2016.

The portability of the exemption coupled with an increase in the exemption amount to $5,450,000 per taxpayer allows a married couple to pass on up to $10,900,000 gift and estate tax free in 2016. Though this seems to negate the usefulness of A/B trust planning, there are still many reasons to consider using A/B trusts.

• The assets of the surviving spouse, including those inherited from the deceased spouse, may appreciate in value at a rate greater than the rate at which the exemption amount increases. This may cause assets in the surviving spouse’s estate to exceed that spouse’s available exemption. On the other hand, appreciation of assets placed in a credit shelter trust will avoid estate tax at the death of the surviving spouse.

• The distribution of assets placed in the credit shelter trust can be controlled. Since the trust is irrevocable, your plan of distribution to particular beneficiaries cannot be altered by your surviving spouse. Leaving your entire estate directly to your surviving spouse would leave the ultimate distribution of those assets to his or her discretion.

• A credit shelter trust may also protect trust assets from the claims of any creditors of your surviving spouse and the trust beneficiaries. You can also include a spendthrift provision to limit your surviving spouse’s access to trust assets, thus preserving their value for the trust beneficiaries.

A/B Trust Plans With Formula Clauses

If you currently have an A/B trust plan, it may no longer carry out your intended wishes because of the increased exemption amount. Many of these plans use a formula clause that transfers to the credit shelter trust an amount equal to the most that can pass free from estate tax, with the remainder passing to the marital trust for the benefit of the spouse. For example, say a spouse died in 2003 with an estate worth $5,450,000 and an estate tax exemption of $1 million. The full exemption amount, or $1 million, would have been transferred to the credit shelter trust and $4,450,000 would have passed to the marital trust. Under the same facts in 2016, since the exemption has increased, the entire $5,450,000 estate will transfer to the credit shelter trust, to which the surviving spouse may have little or no access. Review your estate plan carefully with an estate planning professional to be sure your intentions will be carried out under the new laws.

Wealth Transfer Strategies Through Gifting

Because of the larger exemptions and lower tax rates, there may be unprecedented opportunities for gifting. By making gifts up to the exemption amount, you can significantly reduce the value of your estate without incurring gift tax. In addition, any future appreciation on the gifted assets will escape taxation. Assets with the most potential to increase in value, such as real estate (e.g., a vacation home), expensive art, furniture, jewelry, and closely held business interests, offer the best tax savings opportunity.

Gifting may be done in several different forms. These include direct gifts to individuals, gifts made in trust (e.g., grantor retained annuity trusts and qualified personal residence trusts), and intra-family loans. Currently, you can also employ techniques that leverage the high exemptions to potentially provide an even greater tax benefit (for example, creating a family limited partnership may also provide valuation discounts for tax purposes).

For high-net-worth married couples, gifting to an irrevocable life insurance trust (ILIT) designed as a dynasty trust can reduce estate size while providing a substantial gift for multiple generations (depending on how long a trust can last under the laws of your particular state). The value of the gift may be increased (leveraged) by the purchase of second-to-die life insurance within the trust. Further, the larger exemptions enable you to increase, gift tax free, the premiums paid for life insurance policies that are owned by the ILIT or other family members. Premium payments on such policies are taxable gifts, so these premium payments are often limited to avoid incurring gift tax. This in turn restricts the amount of life insurance that can be purchased. But the increased exemptions provide the opportunity to make significantly greater gifts of premium payments, which can be used to buy a larger life insurance policy.

Before implementing a gifting plan, however, there are a few issues you should consider.

• Can you afford to make the gift in the first place (you may need those assets and the related cash flow in the future)?

• Do you anticipate that your estate will be subject to estate taxes at your death?

• Is minimizing estate taxes more important to you than retaining control over the asset?

• Do you have concerns about gifting large amounts to your heirs (i.e., is the recipient competent to manage the asset)?

• Does the transfer tax savings outweigh the potential capital gains tax the recipient may incur if the asset is later sold? The recipient of the gift gets a carryover basis (i.e., your tax basis) for income tax purposes. On the other hand, property left to an individual as a result of death will generally receive a step-up in cost basis to fair market value at date of death, resulting in potentially less income tax to pay when such an asset is ultimately sold.

Caution: The amount of gift tax exemption you used in the past will reduce the $5,450,000 available to you in 2016. For example, a person who used $1 million of his or her exemption in 2012, will be able to make additional gifts totaling $4,450,000 during 2016 free from gift tax.

Tip: In addition to this opportunity to transfer a significant amount of wealth tax free, it’s important to remember that you can still take advantage of the $14,000 per person per year annual gift tax exclusion for 2015 and 2016. Also, gifts of tuition payments and payment of medical expenses (if paid directly to the institutions) are still tax free and can be made at any time.

Source: Broadridge Investor Communications, Inc.

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* Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. NASA Federal Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

CUSO Financial Services, L.P. and its representatives do not provide tax advice. For such advice, please contact a tax professional.

Protecting Your Loved Ones with Life Insurance

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Your life insurance needs will depend on a number of factors, including the size of your family, the nature of your financial obligations, your career stage, and your goals. For example, when you’re young, you may not have a great need for life insurance. However, as you take on more responsibilities and your family grows, your need for life insurance increases.

Here are some questions that can help you start thinking about the amount of life insurance you need:

• What immediate financial expenses (e.g., debt repayment, funeral expenses) would your family face upon your death?

• How much of your salary is devoted to current expenses and future needs?

• How long would your dependents need support if you were to die tomorrow?

• How much money would you want to leave for special situations upon your death, such as funding your children’s education, gifts to charities, or an inheritance for your children?

• What other assets or insurance policies do you have?

Types of life insurance policies

The two basic types of life insurance are term life and permanent (cash value) life. Term policies provide life insurance protection for a specific period of time. If you die during the coverage period, your beneficiary receives the policy’s death benefit. If you live to the end of the term, the policy simply terminates, unless it automatically renews for a new period. Term policies are typically available for periods of 1 to 30 years and may, in some cases, be renewed until you reach age 95. With guaranteed level term insurance, a popular type, both the premium and the amount of coverage remain level for a specific period of time.

Permanent insurance policies offer protection for your entire life, regardless of your health, provided you pay the premium to keep the policy in force. As you pay your premiums, a portion of each payment is placed in the cash-value account. During the early years of the policy, the cash-value contribution is a large portion of each premium payment. As you get older, and the true cost of your insurance increases, the portion of your premium payment devoted to the cash value decreases. The cash value continues to grow–tax deferred–as long as the policy is in force. You can borrow against the cash value, but unpaid policy loans will reduce the death benefit that your beneficiary will receive. If you surrender the policy before you die (i.e., cancel your coverage), you’ll be entitled to receive the cash value, minus any loans and surrender charges.

Many different types of cash-value life insurance are available, including:

• Whole life: You generally make level (equal) premium payments for life. The death benefit and cash value are predetermined and guaranteed (subject to the claims-paying ability and financial strength of the issuing insurance company). Your only action after purchase of the policy is to pay the fixed premium.

• Universal life: You may pay premiums at any time, in any amount (subject to certain limits), as long as the policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value will grow at a declared interest rate, which may vary over time.

• Indexed universal life: This is a form of universal life insurance with excess interest credited to cash values. But unlike universal life insurance, the amount of interest credited is tied to the performance of an equity index, such as the S&P 500.

• Variable life: As with whole life, you pay a level premium for life. However, the death benefit and cash value fluctuate depending on the performance of investments in what are known as subaccounts. A subaccount is a pool of investor funds professionally managed to pursue a stated investment objective. You select the subaccounts in which the cash value should be invested.

• Variable universal life: A combination of universal and variable life. You may pay premiums at any time, in any amount (subject to limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value and death benefit goes up or down based on the performance of investments in the subaccounts.

With so many types of life insurance available, you’re sure to find a policy that meets your needs and your budget.

Choosing and changing your beneficiaries

When you purchase life insurance, you must name a primary beneficiary to receive the proceeds of your insurance policy. Your beneficiary may be a person, corporation, or other legal entity. You may name multiple beneficiaries and specify what percentage of the net death benefit each is to receive. If you name your minor child as a beneficiary, you should also designate an adult as the child’s guardian in your will.

What type of insurance is right for you?

Before deciding whether to buy term or permanent life insurance, consider the policy cost and potential savings that may be available. Also keep in mind that your insurance needs will likely change as your family, job, health, and financial picture change, so you’ll want to build some flexibility into the decision-making process. In any case, here are some common reasons for buying life insurance and which type of insurance may best fit the need.

Mortgage or long-term debt: For most people, the home is one of the most valuable assets and also the source of the largest debt. An untimely death may remove a primary source of income used to pay the mortgage. Term insurance can replace the lost income by providing life insurance for the length of the mortgage. If you die before the mortgage is paid off, the term life insurance pays your beneficiary an amount sufficient to pay the outstanding mortgage balance owed.

Family protection: Your income not only pays for day-to-day expenses, but also provides a source for future costs such as college education expenses and retirement income. Term life insurance of 20 years or longer can take care of immediate cash needs as well as provide income for your survivor’s future needs. Another alternative is cash value life insurance, such as universal life or variable life insurance. The cash value accumulation of these policies can be used to fund future income needs for college or retirement, even if you don’t die.

Small business needs: Small business owners need life insurance to protect their business interest. As a business owner, you need to consider what happens to your business should you die unexpectedly. Life insurance can provide cash needed to buy a deceased partner’s or shareholder’s interest from his or her estate. Life insurance can also be used to compensate for the unexpected death of a key employee.

Review your coverage

Once you purchase a life insurance policy, make sure to periodically review your coverage; over time your needs will change. An insurance agent or financial professional can help you with your review.

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IMPORTANT DISCLOSURES
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

How To Start Investing With A Small Amount Of Money

smallmoneyOutside of a 401(k) or other employer-sponsored retirement plan, do you invest? If you answered no, you are not alone. Investing is often seen as the domain of the wealthy, not for people who only have a small amount of money left over at the end of month. True, brokers may not be rushing to roll out the red carpet for you if you can only invest $300 a year, but there are many investment choices for those of us without a lot of cash to spare.

Why is investing a wise financial move? Because of inflation (the rise in the cost of goods and services over time), if you keep all of your savings in a safe vehicle that provide a low return, such as savings account, certificate of deposit, or shoebox buried in the back yard (just kidding about the last one!), the real value of your money will decline over time. While you should keep your emergency and short-term savings in an easily accessible account that you know won’t lose value, it is a good idea to put long-term savings in vehicles that have the potential for a higher return. (One caveat, if you have credit card or other high-interest debt, it is a good idea to pay that off before investing – chances are that the interest you are being charged is greater than what you will earn on your investments.) Historically, in the long run stocks have provided the highest return, followed by bonds, with cash equivalents (i.e. the safe vehicles mentioned above) providing the lowest return.

Dividend Reinvestment Plans and Direct Stock Purchase Plans
Direct stock purchase plans (DSPs) and dividend reinvestment plans (DRIPs) can be a great option for the small-time investor. Under a DSP, you purchase stocks directly from the company offering them, allowing you to skip using a broker (and the commission charges that go along with that – although be aware, some companies charge a fee for their DSP.) You can make a single purchase (usually the minimum is set fairly low) or set up an automatic regular purchase plan. In order to participate in a DRIP, you must already have at least one share in the company. Instead of receiving cash dividend payments (a distribution of a portion of the company’s profits to stockholders), you receive an equivalent in additional shares of stock. So if the stock is selling at $10 a share and the dividend payment is $20, you would get 2 shares. Many DRIPs also allow you to purchase additional shares after you enroll. To get started, go on-line – there are many websites that list what companies offer a DSP and/or DRIP.

Mutual Funds
One of the most fundamental rules of smart investing is that you should have diversity. Think about it – if your whole investment portfolio consists of shares in Company X and Company X goes out of business, you are sunk, But if you are also invested in Company A, B, and C and have some bonds as well, it will have less of an impact. Purchasing shares in a mutual fund is an easy way to get diversity. In a mutual fund, money from several investors is pooled to buy different stocks, bonds, and/or cash equivalents.

One potential downside to investing in mutual funds is that they can come with sizeable fees that eat away at your profits. When selecting a fund, you should pay attention to its expense ratio – the percentage of the funds assets that are used to pay for expenses. Index funds, which track a particular index, such as the S&P 500, often have a very low expense ratio because there is no advisor actively picking funds. Also look at the load – the sales commission that is charged by the broker and/or financial advisor. There are many no-load funds available as well as on-line/discount brokers that charge low commission fees.

Another challenge for the small-time investor is that the minimum amount required to invest is commonly a thousand dollars or more, so you may have to do some research to see what mutual funds allow you to buy in with a lower amount. Often the minimum amount is lower if you are investing through an Individual Retirement Account (IRA). But because it is a tax-advantaged account for retirement, there are rules about withdrawing money. (See the IRS’s website, www.irs.gov, for more information.) Roth IRAs offer a bit more flexibility than Traditional IRAs – you can withdraw your contributions at any time without paying a penalty.

Invest your pennies today, and you can have dollars tomorrow.

 

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