December 13, 2012Vol 5, Issue 10 
DFW Financial Planning

Jean Keener, CFPGood morning, and happy holidays to you!


The US investment markets have been down and back up since the election.  Even with the fluctuations, we are holding onto our gains for the year.   The S&P 500 (large US stocks) is up more than 16% for the year, and international developed and emerging markets stocks are in similar territory.  The US Aggregate Bond Index is up 4.2% year to date. 


In this month's newsletter, we have 2013 IRA and retirement plan contribution limits plus some tips on giving well during this holiday season.  We're also all still painfully aware of the fiscal cliff negotiations going on in Washington, so I've included two related articles on the math of harvesting capital gains and what we're seeing with special dividend payments. The schedule for my first quarter 2013 Countdown to Retirement workshop series is also available below.


Our offices are closed Dec. 24 and 25 and January 1.  I wish you and your family a truly wonderful holiday season and happy new year!

In This Issue
2013 Retirement Plan and IRA Contribution Limits
Fiscal Cliff: To Harvest or Not to Harvest
Fiscal Cliff: Special Dividends
How to Give Well to Charities
Countdown to Retirement: 2013 Personal Finance Workshops
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2013 Retirement Plan and IRA Contributions Limits

2013 IRA Contribution Limits

IRA contribution limits



The maximum amount you can contribute to a traditional IRA or Roth IRA in 2013 increases to $5,500 (or 100% of your earned income, if less), up from $5,000 in 2012. The maximum catch-up contribution for those age 50 or older remains at $1,000. (You can contribute to both a traditional and Roth IRA in 2013, but your total contributions can't exceed this annual limit.)


Traditional IRA deduction limits for 2013  

The income limits for determining the deductibility of traditional IRA contributions have also increased for 2013 (for those covered by employer retirement plans). For example, you can fully deduct your IRA contribution if your filing status is single/head of household, and your income ("modified adjusted gross income," or MAGI) is $59,000 or less (up from $58,000 in 2012). If you're married and filing a joint return, you can fully deduct your IRA contribution if your MAGI is $95,000 or less (up from $92,000 in 2012). If you're not covered by an employer plan but your spouse is, and you file a joint return, you can fully deduct your IRA contribution if your MAGI is $178,000 or less (up from $173,000 in 2012).

If your 2013 federal income tax filing status is:

Your IRA deduction is reduced if your MAGI is between:

Your deduction is eliminated if your MAGI is:

Single or head of household

$59,000 and $69,000

$69,000 or more

Married filing jointly or qualifying widow(er)*

$95,000 and $115,000 (combined)

$115,000 or more (combined)

Married filing separately

$0 and $10,000

$10,000 or more

*If you're not covered by an employer plan but your spouse is, your deduction is limited if your MAGI is $178,000 to $188,000, and eliminated if your MAGI exceeds $188,000.


Roth IRA contribution limits for 2013


The income limits for determining how much you can contribute to a Roth IRA have also increased. If your filing status is single/head of household, you can contribute the full $5,500 to a Roth IRA in 2013 if your MAGI is $112,000 or less (up from $110,000 in 2012). And if you're married and filing a joint return, you can make a full contribution if your MAGI is $178,000 or less (up from $173,000 in 2012). (Again, contributions can't exceed 100% of your earned income.)


If your 2013 federal income tax filing status is:

Your Roth IRA contribution is reduced if your MAGI is:

You cannot contribute to a Roth IRA if your MAGI is:

Single or head of household

More than $112,000 but less than $127,000

$127,000 or more

Married filing jointly or qualifying widow(er)

More than $178,000 but less than $188,000 (combined)

$188,000 or more (combined)

Married filing separately

More than $0 but less than $10,000

$10,000 or more

Employer retirement plans


The maximum amount you can contribute (your "elective deferrals") to a 401(k) plan has increased for 2013. The limit (which also applies to 403(b), 457(b), and SAR-SEP plans, as well as the Federal Thrift Plan) is $17,500 in 2013 (up from $17,000 in 2012). If you're age 50 or older, you can also make catch-up contributions of up to $5,500 to these plans in 2013 (unchanged from 2012). (Special catch-up limits apply to certain participants in 403(b) and 457(b) plans.)


If you participate in more than one retirement plan, your total elective deferrals can't exceed the annual limit ($17,500 in 2013 plus any applicable catch-up contribution). Deferrals to 401(k) plans, 403(b) plans, SIMPLE plans, and SAR-SEPs are included in this limit, but deferrals to Section 457(b) plans are not. For example, if you participate in both a 403(b) plan and a 457(b) plan, you can defer the full dollar limit to each plan--a total of $35,000 in 2013 (plus any catch-up contributions).


The amount you can contribute to a SIMPLE IRA or SIMPLE 401(k) plan has increased to $12,000 for 2013, up from $11,500 in 2012. The catch-up limit for those age 50 or older remains unchanged at $2,500.


Plan type:

Annual dollar limit:

Catch-up limit:

401(k), 403(b), governmental 457(b), SAR-SEP, Federal Thrift Plan



SIMPLE plans



Note: Contributions can't exceed 100% of your income.


The maximum amount that can be allocated to your account in a defined contribution plan (for example, a 401(k) plan or profit-sharing plan) in 2013 is $51,000 (up from $50,000 in 2012), plus age-50 catch-up contributions. (This includes both your contributions and your employer's contributions. Special rules apply if your employer sponsors more than one retirement plan.)

Finally, the maximum amount of compensation that can be taken into account in determining benefits for most plans has increased to $255,000, up from $250,000 in 2012; and the dollar threshold for determining highly compensated employees remains unchanged at $115,000.


Used with permission from Broadridge Investor Communication Solutions, Inc. 

To Harvest or Not to Harvest?

  Harvesting Capital GainsThe contentious fiscal cliff negotiations in Washington have drawn a lot of attention to taxes; specifically, to the possibility that tax rates on income, capital gains and qualified dividends will go up for many of us, beginning January 1.  If there is no tax deal and the automatic increases kick in, people in the 33% tax bracket will find themselves paying taxes at a 36% rate, and those paying at the 35% rate currently would jump up to the 39.6% tax bracket.  Capital gains rates, meanwhile, would rise to 20%--plus the 3.8% Medicare tax on investment income for people earning more than $250,000, which actually only applies to amounts over $250,000 in that year.


Some commentators are suggesting that, faced with higher taxes, investors should turn normal tax planning on its head.  Instead of harvesting losses in the portfolio to create deductions (and a lower tax bill) in tax year 2012, why not harvest gains at today's low 15% (for most of us) or 0% (for some of us) capital gains rates, and pay MORE in taxes?  That way, you would reset the cost basis of the investment up to its sales price, so that the gains would be lower when the investment is sold in the future.  Future higher tax rates would be applied to that lesser amount.  Of course, this strategy only applies to taxable investment accounts -- not IRAs, 401ks, or other retirement plans.


Interestingly, there is no wash-sale rule to worry about when you harvest gains.  When you sell at a loss, the IRS requires you to wait 30 days before you can buy the same (or a similar) security.  When you sell a security that has gained in value, you can buy that investment position back immediately.


For example, suppose that you own stock that is currently worth exactly $30,000, and you paid exactly $20,000 for it more than a year ago.  Between now and December 31, you sell the stock and then buy it back again immediately at the same price.  Capital gains taxes on that $10,000 gain come to $1,500--rather than the $2,000 you would have had to pay if you had sold the same stock at the same price in January.  You saved $500, right?


If you plan to sell the stock in January, and you know for sure that capital gains taxes are going to rise once Congress finishes posturing, then this is a terrific tax-savings strategy.  But what if you were planning to hold onto the stock?  What if taxes on capital gains stay at their current levels? 


Let's look at some of the possibilities.  If the current law expires and no tax deal is reached in Washington, then capital gains rates would rise to 20%--except for investments acquired after 2001 and held for at least five years, which would qualify for a special 18% rate.  If you have more than $250,000 in yearly income, you might find yourself paying at a 23.8% rate once the Medicare tax is calculated in.  And there is a small chance that Congress will decide to do away with the capital gains exclusion altogether, and at the same time raise ordinary income rates back to their former 39.6%.


How long would you have to hold your investment before you'd come out ahead by NOT harvesting gains this year? It depends on the average return on your investment, and also on the future tax rate.  The table below offers some scenarios. If capital gains rates go up to 20%, and you achieve an average 7% annual rate of return, then if you hold the investment for five years or more before selling and paying your taxes, your best choice would be to hold for the future.  If you plan to sell before that, then taking gains now may be your best option.


Look at your expected long term capital gains rate for future years and your expected rate of return.  If you plan to hold your investments more than the following number of years, harvesting capital gains is not a good idea.

     Rate of Return 

Future Capital Gains Rate






7 years

4 years

3 years

2 years


10 years

5 years

4 years

3 years


14 years

9 years

7 years

6 years


20+ years

20+ years

14 years

12 years


At the extremes, if you believe that returns will be dramatically lower than 7%, or if you believe that the 39.6% rate will apply to your future capital gains, you'll probably be better off having harvested gains today.  At the other (not so extreme) side of the debate, if Congress decides to keep capital gains where they are, then harvesting gains will have increased your 2012 tax bill for no good reason.  And if you hold the stock without selling for the rest of your life, then your heirs would receive it at a stepped-up cost basis--the accounting world's fancy way of saying that all the gains you earned during your lifetime would never be taxed. If you are at or near retirement, it's also possible that you will have opportunities during periods of lower taxable income in the future to realize gains at a lower rate than you would pay today.


Of course, this exercise doesn't take into account any state taxes or AMT calculations, both of which can make the numbers vastly more complicated without greatly changing the conclusions.  Nor does it take into account the trading costs involved in selling investments and then buying them back again.  Over the next few weeks, we may get a bit more clarity on how investments will be taxed in 2013 and beyond.  In any case, it's important to do the analysis for your particular situation and make a decision that factors multiple possible future scenarios into your planning.


Material adapted with permission of financial columnist Bob Veres.

Special Dividends

Smart decisions on special dividends One of the oddest things to come out of the Fiscal Cliff headlines is the sudden proliferation of so-called "special" dividends.  According to a recent article in the Wall Street Journal and another in CBS News, 349 publicly-traded companies have already moved up the date that they are paying their dividends or are paying additional dividends to shareholders, above what they would normally pay.


What makes these dividends so special?  Technically speaking, the owners of the shares of a publicly-traded company are, collectively, the owners of that company.  You can think of "ordinary" dividends as the money that the company has decided to return to its owners from the profits of its business operations.  Each year, the company's management and board of directors decides all over again how much of its profits to distribute; it can increase, decrease or maintain its dividend payout, and even pay out more than its earnings.  And, of course, many companies pay no dividends at all; they reinvest their profits in their enterprise or other business activities in hopes of generating more profits and making their company (and stock) more valuable, or they buy back shares of company stock.


These dividends receive special tax treatment under current law; the money is taxed at a maximum 15%--0% for people who fall below the 25% income tax rate.  But that special rate will expire at the end of the year, resulting in a maximum rate of 39.6%, as dividends are taxed as ordinary income, and the ordinary income rates rise.   Of course, the Fiscal Cliff negotiations in Washington could result in an extension of current rates; the truth is that nobody knows, at this point, what is going to happen with next year's tax rates.


Special dividends are simply a company's decision to pay its shareholders before rather than after the dividend tax rates are expected to go up.


They fall into two categories.  In one category, you have companies like Johnson Controls (a technology company) and Bon-Ton Stores (fashion apparel) that are paying their normal dividends early.  Instead of paying out their dividend as scheduled in, say, January, they will pay it instead in December as a convenience to shareholders.  Other companies, like Oracle, have gone a step further, and announced that they will bundle several future dividend payments into one bigger pre-December 31 payment.  Oracle will pay 18 cents per share in December to replace the dividends it would have paid out over the next three quarters.


In the other category, you have companies like Costco, Carnival (the cruise line company) and Brown-Forman (a wine and spirits distributor) that are actually borrowing money in order to pay a big dividend before the end of the year, on the theory that they are paying future earnings to shareholders at current tax rates, rather than at higher tax rates down the road.


The implication of some the news reports is that this is a special opportunity, where an astute investor can buy companies that will pay out a hefty dividend.  But in fact, this is almost certainly the wrong strategy.  Companies that are going into debt to make dividend payments are robbing Peter to pay Paul.  To make a special $7 dividend , Costco will borrow $3.5 billion, tripling its long-term debt and has already caused the Fitch rating service to downgrade the company's bond rating.


In addition, the payment of a dividend results in a simultaneous drop in the stock's share price.  If you buy a company that makes a dividend payment of 79 cents a share, the share price of that company will drop by 79 cents at the same time.  You come out exactly where you were before, all-in, except you have to pay taxes on that dividend payment.


And some of these special dividends seem to be driven more by the interests of insiders than a convenience to the outside shareholders.  The board of directors of Opt-Sciences, a company that makes special coatings for glass used in cockpits, has announced a special dividend amounting to 65 cents a share, in order, the company said, "to secure for the shareholders the benefits of the soon to be expiring current dividend tax treatment."  A nice gesture?  It would seem so until you are told that the family of one director, Arthur Kania, controls nearly 66% of the company stock.  He may be more concerned about HIS tax bill than yours.


Dividends and Tax Rates Another problem with these special dividend strategies is that higher taxes on dividends are not inevitable.  And even if Congress takes us over the fiscal cliff, or if part of the next Grand Bargain is to eliminate special treatment of dividends, it won't be the end of the world--or even the end of tax-efficient ways to reward shareholders.  As you can see from this chart, companies shifted strategies dramatically toward dividends precisely when the new lower tax rate was enacted back at the start of 2003.  Before that, and perhaps in the future, those same companies will redirect the same money they have been paying in dividends into the repurchase of company stock, raising the value of the shares owned by their investors, or reinvesting the money, raising the value of their enterprises and thereby (again) increasing the value of their stock.


Both options would reward shareholders without forcing them to pay immediate taxes on the amount of the reward--a more tax-efficient strategy that some "special" dividend payers might consider before they go into debt to create a tax liability for their shareholders.


Content used with permission of financial columnist Bob Veres.

How to Give to Charities Wisely and Well

Giving to Charity Wisely Giving to charity has never been easier. You can donate the old-fashioned way--by mail--but you can also donate online, by text, or through social networking sites. According to the National Center for Charitable Statistics, over 1.4 million nonprofit organizations are registered with the IRS. With so many charities to choose from, it's more important than ever to ensure that your donation is well spent. As you consider year-end giving, here are some tips that can help ensure you are both a generous and wise donor.


Choose your charities


Choosing worthy organizations that support the causes you care about can be tricky, but it doesn't have to be time-consuming. There are several well-known organizations that rate and review charities, and provide useful tips and information that can help you make wise choices when giving to charity (see a list at 


To get you started, here are some questions to ask:


How will your gift be used? It should be easy to get information about the charity's mission, accomplishments, financial status, and future growth by contacting the charity by phone or viewing online information.


How much does the charity spend on administrative costs? Charities with higher-than-average administrative costs may be spending less on programs and services than they should, or may even be in serious financial trouble. Some charities who use for-profit telemarketers get very little of the money they raise, so ask how much of your donation the charity will receive.


Is the charity legitimate? Ask for identification when approached by a solicitor, and never give out your Social Security number, credit card number, bank account number, account password, or personal information over the phone or in response to an e-mail you didn't initiate. There's no rush--take time to check out the charity before you donate.


How much can you afford to give? Stick to your giving goals, and learn to say no.


Some other tips to maximize your giving efficiency:

  • Harness the power of matching gifts through your employer or other organization.
  • Consider gifts of stock, real estate or personal property.  You may receive greater tax benefits with this type of gift than cash while equally benefitting the charity.
  • Use planned giving to leave a legacy through a will bequest, charitable gift annuity, or other estate planning techniques.
  • Keep good records.  If you itemize when you file your taxes, you can deduct donations you've made to a tax-qualified charity (subject to certain restrictions), but you will need documentation.

For more details on these tips and the links to charity ratings organizations, visit 


Some material adapted with permission from Broadridge Investor Communication Solutions, Inc. 

Upcoming Personal Finance Workshops
Keller Public Library Free Financial Education Seminars

I'm pleased to announce the schedule for my first quarter 2013 Keller Personal Finance Workshops.    The series is entitled Countdown to Retirement and is designed for individuals and couples within 5 - 10 years of retirement

 January, Part I: Creating your Retirement Plan

This session will cover how to maximize tax-efficiency in saving for retirement, assessing when it's time to retire, building a retirement budget, and making decisions on possible long term care funding needs.


February, Part II: Maximizing your Social Security Benefit

Attendees will learn how to increase their retirement income by making smart decisions on social security benefits.  We'll cover how to decide when to file, filing strategies for couples, and how to plan for taxes on your social security benefit.


March, Part III: Investing in Retirement

Attendees will learn how to adjust their portfolio to shift from accumulation to distribution and steps they can take to minimize the effect of a market downturn on their retirement plans.  We'll also cover the basics of how to build a low-cost retirement portfolio.



Cost: Free

Time: 6:30 pm, 3rd Tuesday of the month

Location: Keller Public Library, 640 Johnson Rd

RSVP: Please RSVP to [email protected]

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 [email protected].
Jean Keener, CFP, CRPC, CFDS
Keener Financial Planning

Keener Financial Planning provides as-needed financial planning and investment services on an hourly and flat-fee basis.

All newsletter content except where otherwise credited Copyright �2012, Keener Financial Planning, LLC.