Greetings!

Let me get this off my chest.  Go Packers!  Time to buckle down!

O.K. on to this issue.  Well the big news back in December was the Fed raising interest rates.  My first article talks about the rate hike and some of the "Glittering Generalities" you may have heard and the actual complexity of actual interest paying investments.

The second article talks about some number "changes" for the 2016 tax year (planning versus reacting anyone?)

My quick comment talks about the concept of "income" when it comes to your taxes.

I wrap up with two articles I found interesting.  The first covers the 'tax extenders" included in the Protecting Americans from Tax Hikes (PATH) Act.  For those with kids who are or will be in college there is some good news. The second article covers keeping your estate plan up to date.  I strongly believe this is one of the best gifts you can give your survivors.

I did want to let you know that starting in February you will pay more for TRICARE Prescription Refills (if you don't get them filled on base).  The dollar amount per prescription isn't a whole lot, but it is a 20% increase -- you can add that to the TRICARE Young Adult premium increase.  But there is no real inflation.  I know that because I didn't get a COLA increase this year.  Did I say that out loud?...

One last thing, in case you forgot I do offer tax preparation services.  Let me know if you would like me to prepare your taxes.  And, check out my tax article in the upcoming February issue of Military Officer Magazine (MOAA).

Go Packers!  (I had to do that one more time)

Curt

Curtis L. Sheldon, CFP�, EA, AIF�
C.L. Sheldon & Company, LLC
(703)542-4000 or (800) 928-1820

 
Featured Article
The Fed Raised Rates. Now What?
 
Well the Fed finally raised interest rates.  I won't pass judgment on whether that was a good idea or a bad idea.  The fact is that we won't know until some time passes.  That doesn't mean others don't have opinions and predictions.

I'm sure you've heard, "If interest rates go up, bond prices go down."  But it isn't quite that simple

For example, for several months I've been listening to someone who claims to know The Truth About Money.  He basically claimed that when the Fed raised rates, bonds would lose money and the longer the duration (a technical measure calculated using the bonds time to maturity and the coupon rate) the worse the carnage would be.  But so far, it hasn't been that bad.  Why?  Well there are several reasons, but here are a few (Tthis doesn't mean there won't be carnage in the future).
  • The Yield Curve.  The Yield Curve shows the relationship between short-term and long-term interest rates.  In general (but not always), as you move further along the curve (i.e. longer term bonds) interest rates go up.  That is true.  But the relationship is not constant.  Long-Term rates are influenced more by investors' expectations of future inflation than Fed actions.  For example 30 year Treasury Bonds might be at 4%.  The Fed might raise the overnight rate from 0 to 0.25% and the 30-year might not move at all.  So, long-term bond prices might not move at all.  The bottom line is that an increase in short term rates doesn't mean the yield curve will move in "lock-step".

 

  • Rolling Maturities.  This factor has to do with Bond Funds or ETFs.  It works like this.  In a constant interest rate environment, bonds or negotiable CDs become more valuable as they "age"  Here is an example.
  • You buy two negotiable CDs.  A one year CD at 1% and a two year CD at 2%.
  • A year passes and interest rates stay the same
  • Now you have what is effectively a one-year CD that pays 2% while new issue one-year CDs are paying 1%.  Your CD will be worth twice as much as a new issue one-year CD.

   This effect lessons the impact of incremental interest rate increases.  But increases in your

   Bond/CD value as they age will offset some of the decrease in the value due to a rate increase.

 

  • Rates as a Prediction of Future Actions.  The interest rate increase may have already been "baked" into the price of bonds before the Fed raised rates (this is at least partially true).  In other words, the market had already priced bonds assuming that rates would increase.

The bottom line is that the relationship between short-term and long-term interest rates is not linear and it is not fixed.  Predicting interest rate reactions to Fed moves is risky business.  If you have intermediate or long-term bonds in your portfolio for a reason don't panic just because the Fed might raise rates.  Take a look at your strategy and see if it has changed before you take any action.  

 

Second Thoughts
Few Cost of Living Adjustments for Retirement and Health Plans for 2016

The IRS has released the cost-of-living adjustments (COLA) affecting dollar limitations for Individual Retirement Accounts (IRAs), defined contribution and other retirement-related items for tax year 2016. In general, most limits will remain unchanged for 2016 because the increase in the cost-of-living index did not meet the threshold that would trigger their adjustment.

The table below compares both the retirement plan and health insurance plan limits for 2014 through 2016, with items that have changed for 2016 asterisked. Further guidance can be found on the IRS website.

 Retirement Plans
2014 Limit
2015 Limit
2016 Limit
 IRA contribution limit
$5,500
$5,500
$5,500
 IRA catch-up contributions for ages 50+
$1,000
$1,000
$1,000
IRA AGI Deduction Phase-Out Starting at
 Joint Return
$96,000
$98,000
$98,000
 Single or Head of Household
$60,000
$61,000
$61,000
 IRA contributor not covered by a workplace retirement plan, but filing joint return with spouse who is
$181,000
$183,000
$184,000*
AGI Phase-Out for Contributions to Roth IRA
 Joint Return
$181,000
$183,000
$184,000*
 Single or Head of Household
$114,000
$116,000
$117,000*
 401(k), 403(b), 457(b)(2) elective deferrals
$17,500
$18,000
$18,000
 401(k), 403(b) "catch-up" contributions for ages 50+
$5,500
$6,000
$6,000
 SIMPLE plan elective deferral
$12,000
$12,500
$12,500
 SIMPLE "catch-up" contributions for ages 50+
$2,500
$3,000
$3,000
 Defined contribution plan maximum
$52,000
$53,000
$53,000
 Defined benefit plan maximum
$210,000
$210,000
$210,000
 Maximum includible compensation
$260,000
$265,000
$265,000
 Highly compensated employee
$115,000
$120,000
$120,000
 FICA taxable wage base
$117,000
$118,500
$118,500
 Health Insurance Plans
 
 
 
 Health Savings Account (HSA) contribution limit -- individual
$3,300
$3,350
$3,350
 HSA contribution limit -- family
$6,550
$6,650
$6,750*
 HSA "catch-up" contributions for ages 55+
$1,000
$1,000
$1,000
 Minimum deductible for high-deductible health plan (HDHP) -- individual
$1,250
$1,300
$1,300
 Minimum deductible for HDHP -- family
$2,500
$2,600
$2,600
 Maximum out-of-pocket for HDHP -- individual
$6,350
$6,450
$6,550*
 Maximum out-of-pocket for HDHP -- family
$12,700
$12,900
$13,100*
 Flexible Spending Account (FSA) contribution limit
$2,500
$2,500
$2,550
*Represents change from 2015.
 
Required Attribution
 
Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.
� 2015 Wealth Management Systems Inc. All rights reserved.
Around the Horn
Form 1040
Curt's Quick Comment
In case you were wondering... You don't have to declare the value of employer provided identity theft protection (thank you OPM) as income on your taxes. 

You may be laughing at this, but it wasn't guaranteed.  If you receive something of value that isn't a qualified gift, it is income unless excluded or exempted.  The IRS in two recent rulings declared that the identity theft protection provided by an employer is excludable from income.  Just when you thought taxes were simple... 
New "Tax Extenders" Law Has Even Greater Reach
Unlike past legislation that granted a temporary reprieve to expired and expiring tax breaks, the new "Protecting Americans from Tax Hikes" (PATH) Act of 2015 goes further, modifying some provisions and making several of them permanent.  Read More Here

5 Reasons to Amend Your Estate Plan
It's 2016...do you know where your estate plan is? If you're like most busy people, you may have made a will, perhaps when your children were born, and it's possible you've taken other steps to lay out what will happen after you're gone. But frequently those plans are just gathering dust.  More Here

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC 's current written disclosure statement discussing our advisory services and fees is available for review upon request.
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