May 10, 2010
Vol 3, Issue 5
Jean Keener
Jean Keener
Good afternoon. 
I usually like to start the newsletter off with a little market update.  But after last week's events, a quick paragraph didn't seem to do justice to addressing some of the questions you may be asking.  So I've included my thoughts on last week's volatility in a separate section below.
In addition to the market update, this month's newsletter has information on the new Vanguard fee reduction, limits on the TX state guarantee association insurance coverage, how new Medicare taxes may affect you, using a Roth IRA as a back-up emergency fund, and more.  As always, feel free to e-mail me at with requests for newsletter topics you'd like to see covered.  If you're considering schedules for an upcoming appointment or call, please note that I will be out of the office the week of May 24.  Thank you, and live well.
In This Issue
Markets last week
Reduced fees at Vanguard
What happens when an insurance company fails
Roth IRA as emergency fund back-up
New 3.8% Medicare tax
Keller Public Library free investing workshop next Tuesday
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The Markets Last Week
stock market volatilityI usually do not comment on short term swings in the stock market since we have to expect them.  But last week was different. As you may have heard, the equity markets experienced a steep decline last week, with Thursday afternoon being especially memorable.  At one point, for a few minutes, the Dow Jones Average was down 1,000 points. We may never know exactly what caused "the big drop" but computer trading error is the leading suspect, heightened by concern about Greek debt.
You may find it interesting to know that many of the trades executed during one 20-minute time period actually triggered action under the NASDAQ "Clearly Erroneous Ruling" which resulted in the trades being cancelled.  An excerpt from a Scottrade email sent to advisors on Friday:
Pursuant to rule 11890(b), NASDAQ, on its own motion, will cancel all trades executed between 14:40:00 and 15:00:00 greater than or less than 60% away from the consolidated last print in that security at 14:40:00 or immediately prior. This decision cannot be appealed. NASDAQ has coordinated this decision with all other UTP Exchanges. NASDAQ will be canceling trades on the participant's behalf. The stocks affected and the break points will be disseminated shortly.
For example, if XYZ printed at $10.00 at 14:40:00 PM EST on 05/06/2010, then any trades at or above $16.00 will AUTOMATICALLY have the execution removed as will any trades at or below $4.00.  Anything that does fall into these parameters WILL NOT HAVE THEIR EXECUTIONS REMOVED.  Please note that this decision CANNOT be appealed.
A bit of perspective
in April many stock market indices reached  one-year highs.  Then last week all the major U.S. stock indices declined substantially, as did overseas markets.  For example, the S&P 500 was down 6.4% and was actually slightly negative for 2010 to date as of the close on Friday.  Naturally, your portfolio was also down, but not as much, since you are not invested 100% in equities.
Today, it looks like stock prices are rebounding substantially.  Such is the nature of short-term swings.  Obviously what matters is long-term success and having a portfolio built around your current and future plans.
The folks that were hurt most significantly last week were those that had sold as the market fell, esentially locking in their losses and missing out on the rebound that's following.  If you can weather the ups and downs without making reactionary decisions in the heat of the moment, you have the best opportunity to benefit from the long-term economic growth that the markets are tied to.
If you have any questions or concerns about this issue, I welcome your call.  I can't promise I'll always have the answers, but I'm always happy to share my persepective and talk through issues with you.
$0 transaction fees on Vanguard ETFs
$0 Vanguard ETF transaction feesLast week, Vanguard announced they were eliminating transaction fees on Vanguard ETFs (exchange traded funds) traded at the Vanguard brokerage.  They also announced reductions in other transaction fees.  This is exciting news and follows the no-transaction-fee announcements last fall for Schwab ETFs at Schwab and some iShares ETFs at Fidelity.  Here's the link to the full announcement on Vanguard's website.
How does this affect you?
It means that investing is getting cheaper, and that competition is working.  Regardless of where your investments are held, prices going down at one brokerage often have a ripple effect at others.  In terms of specific actions, if you have previously avoided ETFs in portfolios where you were making frequent purchases because of the transaction fees, it may be time to re-evaluate your options.  If you'd like to review your investment options, please fee free to give me a call.
What Happens When an Insurance Company Fails
state guarantee insurance coverage limitsLast week I attended the Financial Planning Association annual symposium in Dallas, and one of the speakers was Bart Boles, executive director for Texas' insurance guaranty association.  He shared the association's processes when an insurance company fails, and how we as the consumer would likely be affected.  Some of the exclusions and limits on this safety net are important to consider in your individual planning process.
For a list of the limits, see my blog post on this topic at 
Being aware of these limits doesn't mean that you should never buy a policy over the covered limits or have multiple lines with a single company that exceed the aggregate.  But you should consider the limits as part of your purchase decisions.  You often receive lower rates or better pay-outs by combining multiple policies with a single carrier and exceeding certain breakpoints.   These savings need to be weighed against increased risk of loss if the insurance company fails.  If you do purchase policies exceeding the limit, extra attention needs to be paid to the ratings and stability of the company.
In addition to the limits, being aware of the exclusions is also an important part of the insurance purchase process.  If your policy is fully excluded, an extreme amount of due diligence needs to be done on the company prior to purchase.  If a particular guarantee is a critical part of your purchase decision, you need to read the actual contract and make sure it's clearly communicated in the contract and not just in the marketing materials.  You should also verify that the guarantee falls within the limits of what's covered.  If it's above the limits, consider the worst-case scenario and ask yourself if you could live with that outcome and if your purchase decision still makes sense given that possibility.
A list of some important exclusions is included in the same blog post at
Roth IRA as Emergency Fund Back-Up
Roth IRA as back-up to emergency fundWhen you're juggling creating an emergency fund and saving for retirement, you may have an option you haven't considered: using a Roth IRA as a supplement to your primary emergency fund.  
You can withdraw contributions to Roth IRAs penalty- and tax-free anytime.  This feature allows a Roth IRA to be tapped with a lot fewer negative effects on your long-term financial goals than dipping into some other retirement accounts.  It also potentially allows you to start contributing to a Roth IRA a bit sooner than you might have otherwise planned.  However, if you withdraw earnings from a Roth, you need satisfy the 5-year rule and be over 59 1/2 (or qualify for another exception) to avoid paying income taxes and a 10% penalty on the earnings.  
Using Roth IRA funds for non-retirement purposes is still not something that should be done lightly -- it truly is a backup, and you should have other emergency funds outside your IRAs. You need to understand the pros and cons of the strategy and make sure it really makes sense for you.  Also be aware that Roth contributions are not treated the same as funds converted to a Roth. reporter Teri Cettina recently interviewed me on this topic.  You can see her full article on
New 3.8% Medicare tax
New 3.8% medicare taxThe recently enacted health-care legislation includes new Medicare-related taxes. These new taxes take effect in 2013, and target high-income individuals and families. While additional details and clarifications will become available between now and 2013, here's what you need to know for now.

New additional Medicare payroll tax
If you receive a paycheck, you probably have some familiarity with the Federal Insurance Contributions Act (FICA) employment tax; at the very least, you've probably seen the tax deducted on your paystub. The old age, survivors, and disability insurance ("OASDI") portion of this FICA tax is equal to 6.2% of covered wages (up to $106,800 in 2010). The hospital insurance or HI portion of the tax (commonly referred to as the Medicare payroll tax) is equal to 1.45% of covered wages, and is not subject to a wage cap. FICA tax is assessed on both employers and employees (that is, an employer is subject to the 6.2% OASDI tax and the 1.45% HI tax, and each employee is subject to the 6.2% OASDI tax and the 1.45% HI tax on wages as well), with employers responsible for collecting and remitting the employees' portions of the tax.
Self-employed individuals are responsible for paying an amount equivalent to the combined employer and employee rates on net self-employment income (12.4% OASDI tax on net self-employment income up to the taxable wage base, and 2.9% HI tax on all net self-employment income), but are able to take a deduction for one-half of self-employment taxes paid.
Beginning in 2013, the new health legislation increases the hospital insurance (HI) tax on high-wage individuals by 0.9% (to 2.35%).
Who's subject to the additional tax?
If you're married and file a joint federal income tax return, the additional HI tax will apply to the extent that the combined wages of you and your spouse exceed $250,000. If you're married but file a separate return, the additional tax will apply to wages that exceed $125,000. For everyone else, the threshold is $200,000 of wages. So, in 2013, a single individual with wages of $230,000 will owe HI tax at a rate of 1.45% on the first $200,000 of wages, and HI tax at a rate of 2.35% on the remaining $30,000 of wages for the year.

Employers will be responsible for collecting and remitting the additional tax on wages that exceed $200,000. (Employers will not factor in the wages of a married employee's spouse.) You'll be responsible for the additional tax if the amount withheld from your wages is insufficient. The employer portion of the HI tax remains unchanged (at 1.45%).
If you're self-employed, the additional 0.9% tax applies to self-employment income that exceeds the dollar amounts above (reduced, though, by any wages subject to FICA tax). If you're self-employed, you won't be able to deduct any portion of the additional tax.

New Medicare contribution tax on unearned income
Beginning in 2013, a new 3.8% Medicare contribution tax will be imposed on the unearned income of high-income individuals (the new tax is also imposed on estates and trusts, although slightly different rules apply). The tax is equal to 3.8% of the lesser of: 
  • Your net investment income (generally, net income from interest, dividends, annuities, royalties and rents, and capital gains, as well as income from a business that is considered a passive activity or a business that trades financial instruments or commodities), or
  • Your modified adjusted gross income (basically, your adjusted gross income increased by any foreign earned income exclusion) that exceeds $200,000 ($250,000 if married filing a joint federal income tax return, $125,000 if married filing a separate return). 
It's worth noting that interest on tax-exempt bonds, veterans' benefits, and excluded gain from the sale of a principal residence that are excluded from gross income are not considered net investment income for purposes of the additional tax. Qualified retirement plan and IRA distributions are also not considered investment income.
Affect on investment choices
If your part of the affected group, this new tax needs to be incorporated into investment decisions and tax planning over the next couple of years.  It potentially makes Roth conversions even more attractive as a method of reducing income levels in retirement, and requires consideration of other planning strategies.
Free Investing Workshop Tuesday May 18
Keller Public Library Free Financial Education SeminarsI will be speaking at a free investing workshop on Tuesday, May 18 at 6:30 pm at the Keller Public Library.  We will cover some of the basic principals of investings, as well as some common mistakes that even smart investors frequently make.
Space is limited and registration is encouraged to ensure your space. RSVP to or on Facebook Find us on Facebook.
Future months topics include (always the third Tuesday of the month):
June: Where does all your money go? How to build a budget that works for you and stick with it.
July: Saving for College in Texas
August: Maximizing social security benefits
The Keller Public Library is located at 640 Johnson Road.
I hope you found this newsletter informative.  KFP offers a free, no-obligation initial consultation to start the financial planning process for new clients.  To learn more or schedule a time, call 817-993-0401 or e-mail
Jean Keener, CRPC, CFDP
Keener Financial Planning

Keener Financial Planning is an hourly, as-needed financial planning and investment advisory firm working with individuals at all financial levels.
All newsletter content Copyright 2010, Keener Financial Planning, LLC.