April 15, 2011Vol 4, Issue 4
DFW Financial Planning

Jean KeenerGood morning.


March marked the two-year anniversary of the market low in 2009 and our now 2-year-old bull market.  During the month, we experienced a lot of volatility because of competing news -- positive economic signs in the U.S., while the Middle East and Japan experienced heart-wrenching challenges.  But to frame the short-term volatility with longer term perspective -- since March of 2009, the Russell 2000 (small caps) have gained 145% while the S&P 500 (large caps) is close to doubling.  This shows the rewards of maintaining your strategy even during periods of intense volatility.


In this month's newsletter, we have a reminder on Monday's deadline for 2010 IRA contributions, information on social security statements being suspended, in-plan Roth conversions, and more.  I'm also delighted to introduce the firm's new Planning Assistant -- Megan Horst.  As always, feel free to e-mail me at jean@keenerfinancial.com with requests for newsletter topics you'd like to see covered or to discuss concerns or questions on anything in the financial world.  Thanks, and Live Well.

In This Issue
Meet KFP's new Planning Assistant
Social Security Statements Suspended
2010 IRA Contribution Deadline Monday
Converting your 401(k) to Roth In-Plan
Estate Tax Exemption Portable
Retirement Savings Workshop
Join Our E-Mail List!
Quick Links
Meet Megan Horst
Megan Horst
Megan Horst

If you've been to the office in Keller in the past few months, you've likely already met Megan Horst.  If not, allow me to introduce you!


Megan joined Keener Financial Planning in January this year in the role of Planning Assistant.  She is handling the administrative duties for the firm including appointment scheduling, managing our files and investment paperwork, and the data-entry parts of the financial planning process. 


In the office from 8:30 - 12:30 and 1 - 5, Megan is accessible to schedule appointments, drop off materials, and answer questions on paperwork.  Her office is just down the hall from me in suite 106.  You can reach her through our main number 817-993-0401 or via email at megan@keenerfinancial.com

Social Security Statements Suspended

social security statements suspendedThe social security administration has suspended mail-outs of social security statements for the remainder of the fiscal year (through September) as a cost-cutting measure.  The option to request a statement on their website has also been removed.  


It's still possible to get an estimate of your benefit from the website at www.socialsecurity.gov using the Retirement Estimator, however the estimator doesn't show the earnings history used in the formula to allow verification.


Next year, the social security administration plans to resume mailing statements to those 60 and older and an online download version is being worked on for younger workers. 


For planning purposes, I highly encourage you to save the most recent copy of your social security statement.  The year-by-year earnings history is very helpful in reviewing multiple financial planning what-if scenarios.  You should also make sure that you're retaining documentation of your earnings and what you paid into social security from year-end paystubs or tax returns.  This will allow you to demonstrate your earnings record if you discover any errors in the social security data in the future.


The suspension of statements for a single year shouldn't cause any serious challenges in planning for social security.  We'll just need to stay tuned to this issue, and it's possible that younger workers may need to be more proactive in the future to go out and download their statement each year to review for accuracy.

2010 IRA Contribution Deadline Monday

IRA Contribution DeadlineThere's still time to make a regular IRA contribution for 2010! You have until your tax return due date (not including extensions) to contribute up to $5,000 for 2010 ($6,000 if you were age 50 by December 31, 2010). For most taxpayers, the contribution deadline for 2010 is April 18, 2011. Normally, your tax return must be filed by April 15. However, the IRS has extended the deadline to April 18 this year because the 15th is a holiday in Washington D.C. (Emancipation Day).


You can contribute to a traditional IRA, a Roth IRA, or both, as long as your total contributions don't exceed the annual limit. You may also be able to contribute to an IRA for your spouse for 2010, even if your spouse didn't have any 2010 income.

Traditional IRA


You can contribute to a traditional IRA for 2010 if you had taxable compensation and you were not age 70 by December 31, 2010. However, if you or your spouse was covered by an employer-sponsored retirement plan in 2010, then your ability to deduct your contributions depends on your filing status and whether your modified adjusted gross income (MAGI) is within prescribed limits. Even if you can't deduct your traditional IRA contribution, you can always make nondeductible (after-tax) contributions to a traditional IRA, regardless of your income level. However, in most cases, if you're eligible, you'll be better off contributing to a Roth IRA instead of making nondeductible contributions to a traditional IRA.

Roth IRA


You can contribute to a Roth IRA if your MAGI is within certain dollar limits. For 2010, if you file your federal tax return as single or head of household, you can make a full Roth contribution if your income is $105,000 or less. Your maximum contribution is phased out if your income is between $105,000 and $120,000, and you can't contribute at all if your income is $120,000 or more. Similarly, if you're married and file a joint federal tax return, you can make a full Roth contribution if your income is $167,000 or less. Your contribution is phased out if your income is between $167,000 and $177,000, and you can't contribute at all if your income is $177,000 or more. And if you're married filing separately, your contribution phases out with any income over $0, and you can't contribute at all if your income is $10,000 or more.


Finally, keep in mind that if you make a contribution to a Roth IRA for 2010--no matter how small--by your tax return due date, and this is your first Roth IRA contribution, your five-year holding period for identifying qualified distributions from all your Roth IRAs (other than inherited accounts) will start on January 1, 2010.

Converting your 401(k) to Roth "In-Plan"

Converting 401k to RothYou may have heard the buzz ... 401(k) plans can now permit in-plan Roth conversions. But is this an option for you?

What is it?

A 401(k) in-plan Roth conversion (also called an "in-plan Roth rollover") allows you to transfer the non-Roth portion of your 401(k) account into a designated Roth account within the same plan. The amount you convert is subject to federal income tax in the year of the conversion (except for any nontaxable basis you have in the amount transferred), but qualified distributions from the Roth account in the future are entirely income tax free. The 10% early distribution penalty doesn't apply to amounts you convert (but that tax may be reclaimed by the IRS if you take a nonqualified distribution from your Roth account within five years of the conversion).

What part of my account can I convert?

Here's where it gets a bit tricky. Assuming your 401(k) allows in-plan conversions (plans aren't required to), you have to be entitled to a distribution from the plan in order to make a conversion. For example, you're generally entitled to a distribution from your 401(k) plan after you terminate employment. If your account balance is greater than $5,000, you also have the right to keep your money in the plan until you reach normal retirement age (typically 65). So in this case, your plan may allow you to transfer all or part of your account into a Roth account (except for any required distributions and certain periodic payments).


But what if you're still employed? If you want to transfer your pretax contributions and earnings into a Roth account, you'll generally only be able to do so if you're age 59 or disabled, or you've received a qualified reservist distribution, because those are the only events that can trigger an eligible distribution (hardship withdrawals aren't eligible for rollover or conversion).  Plans can be amended by the employer to permit non-hardship in-service withdrawals for the purpose of Roth conversion only.  This would expand the opportunity greatly, but because the opportunity is so new, many employers have not yet made this change.


What else do I need to know?


If you have the choice of an in-plan conversion or a rollover to a Roth IRA, which should you choose? There are a number of factors to consider:

  • You can recharacterize (undo) a Roth IRA conversion if the conversion turns sour (for example, the value of the converted assets declines significantly), but you can't recharacterize in-plan conversions.
  • Investments available in an employer 401(k) plan can be quite limited, while virtually any type of investment is available in an IRA (on the other hand, your 401(k) plan may offer investments that you can't replicate in an IRA, or that aren't available at similar cost).
  • Finally, 401(k) plans typically enjoy more protection from creditors under federal law than do IRAs (consult a professional if creditor protection is important to you).
Estate Tax Exemption Portable (For Now)

estate tax exemption portableRecent legislation introduced a new, but perhaps temporary, estate planning concept--exemption "portability." In short, the estate of a deceased spouse can transfer to the surviving spouse any portion of the federal estate tax exemption that it does not use. The surviving spouse's estate can then add that amount to the exemption it is entitled to, increasing the total amount that can be passed on to heirs tax free. This new feature makes it easier for married couples to minimize the potential impact of estate taxes.

The federal estate tax exemption defined


The federal government imposes a tax on the value of your property when you pass it along to your descendants at your death. Any amount that is passed to a surviving spouse is generally fully deductible. The estate is also allowed to exclude a certain amount that passes on to nonspouse beneficiaries. That amount is called the "basic exclusion amount," which is $5 million in 2011.

How the exemption works for married couples


Prior to the new tax law, if a spouse died without having planned for his or her exemption, the deceased spouse's estate would have passed tax free to the surviving spouse under the unlimited marital deduction (assuming all assets passed to the surviving spouse), and the deceased spouse's exemption was lost or "wasted." The surviving spouse's estate could then only transfer an amount equal to his or her own exemption free from federal estate tax. To solve this dilemma, married couples typically set up what is commonly referred to as a credit shelter trust (aka "bypass" or family trust) that sheltered or preserved the exemption of the first spouse to die.

The following example illustrates how portability can achieve a similar result without the use of a credit shelter trust.

Example: Result without portability


Assume Henry and Wilma are married, have all of their assets jointly titled, and have a net worth of $10 million. Henry dies first, when the federal estate tax exemption is $5 million and there is no portability. Henry's estate passes to Wilma free from federal estate tax under the unlimited marital deduction and does not use any of his $5 million exemption. Assume that at the time of Wilma's death, the exemption is still $5 million, the federal estate tax rate is 35%, and Wilma's estate is still worth $10 million. With Henry's exemption completely wasted, Wilma can pass on only $5 million free from federal estate tax. Assuming no other variables, Wilma's estate will owe about $1,750,000 in federal estate tax: $10 million estate - $5 million exemption = $5 million taxable estate x 35% estate tax rate = $1,750,000.

Example: Result with portability


 Assume Henry and Wilma are married, have all of their assets jointly titled, and have a net worth of $10 million. Henry dies first, when the federal estate tax exemption is $5 million and there is portability. As above, Henry's estate passes to Wilma free from federal estate tax under the unlimited marital deduction and does not use any of his $5 million exemption. Even though Henry's estate owes no tax, Henry's executor files a timely return on which he elects to transfer Henry's unused exemption to Wilma. Assume that at the time of Wilma's subsequent death the exemption is still $5 million, the federal estate tax rate is 35%, and Wilma's estate is still worth $10 million. Since Wilma has "inherited" Henry's unused exemption, she can pass on the entire $10 million estate free from federal estate tax. Portability of the estate tax exemption saves Henry and Wilma's heirs $1,750,000 in estate tax.

Portability does not eliminate the benefits of credit shelter trusts


Even with portability, there are still tax and nontax considerations that may lead you to use a credit shelter trust, such as:

  • The portability feature is in effect for only two years and will expire after 2012, unless Congress enacts further legislation.
  • The trust can help protect assets against creditors of the surviving spouse or future beneficiaries (typically children and grandchildren).
  • The trust gives the first spouse to die control over the ultimate distribution of his or her assets. For example, in a second marriage situation, one spouse may wish to ensure that any assets remaining after his or her spouse's death pass to his or her children from a previous marriage.
  • Appreciation of assets placed in the trust will escape estate taxation in the survivor's estate.
  • The portability feature applies only to estate tax; it does not apply to the generation-skipping transfer (GST) tax. Without a trust, any unused GST tax exemption of the first spouse to die will be lost.

Some technical information


To use the exemption portability, the first spouse to die must elect to use portability on his or her estate tax return. An estate tax return must be filed by the first spouse to die to use portability even if the return is not otherwise required to be filed.


Many states have state estate tax exemptions that are less than the federal estate tax exemption. So, while your surviving spouse might not be subject to federal estate tax upon your passing, your surviving spouse may have to pay state estate tax if you rely solely on the federal exemption portability.  Texas does not have an estate tax.


Exemption portability is available only from the last deceased spouse. It will be lost if the surviving spouse remarries and is widowed again. In other words, if the surviving spouse survives spouse 1, the surviving spouse can use spouse 1's unused exemption even if the surviving spouse marries spouse 2. However, if spouse 2 also predeceases the surviving spouse, the exemption of spouse 1 can no longer be used. However, the surviving spouse can then use the unused exemption of spouse 2.

Your Retirement Savings Game Plan
Keller Public Library Free Financial Education SeminarsI am conducting a free retirement planning workshop at the Keller Public Library on Tuesday, April 19. 
There are many uncertainties in saving for retirement right now.  Even if you never plan to retire, planning for that day when work becomes optional still carries a lot of unknowns.  In this workshop, we will cover how you can take control of your retirement plans by focusing on your personal savings, investing, and tax efficiency. This workshop is designed for those more than 5 years away from retirement and will cover how to:
  • determine retirement income needs
  • assess the gap between guaranteed sources of retirement income and your spending needs
  • prioritize retirement savings and investing strategies to fill the gap
  • review which savings methods are most tax-efficient for your situation
  • calculate if you're on track for your retirement goals
  • create a plan flexible enough to accommodate future uncertainty

The workshop is free, but RSVP is encouraged for planning purposes to library@cityofkeller.com.  A drawing for a free copy of The Investment Answer by Daniel C. Goldie and Gordon S. Murray will also be held.


Upcoming topics: 

  • May: Investing: How to build a diversified portfolio and keep your costs low
  • June: Basics of disability and life insurance
  • July: Social Security Planning for Baby Boomers

Workshops are always the 3rd Tuesday of the month at 6:30 pm.  Please mark your calendars and tell your friends about ones that interest you.  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@keenerfinancial.com.
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 2011, Keener Financial Planning, LLC.