Volume VI, Issue IV

Five Things to Know About Inherited IRAs

FinanceFOCUS

October, 2016

Five Things to Know About Inherited IRAs

How to Get a Bigger Social Retirement Benefit

Can You Get to a Million Dollars?

What is the Most Important Component of the GDP in the United States?

How Long Should I Keep Financial Records? Ten Year-End Tax Tips for 2016

Should I Accept my Employer’s Early-Retirement Offer?

FinanceFocus is published quarterly by Samalin Investment Counsel

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When an IRA owner dies, the IRA proceeds are payable to the named beneficiary–or to the owner’s estate if no beneficiary is named. If you’ve been designated as the beneficiary of a tra-ditional or Roth IRA, it’s important that you understand the special rules that apply to “inherited IRAs.”

It’s not really “your” IRA As an initial matter, while you do have certain rights, you are generally not the “owner” of an inherited IRA. The practical result of this fact is that you can’t mix inherited IRA funds with your own IRA funds, and you can’t make 60-day rollovers to and from the inherited IRA. You also need to calculate the taxable portion of any payment from the inherited IRA separately from your own IRAs, and you need to determine the amount of any required minimum distributions (RMDs) from the inherited IRA separately from your own IRAs.

But if you inherited the IRA from your spouse, you have special options. You can take ownership of the IRA funds by rolling them into your own IRA or into an eligible retirement plan account. If you’re the sole beneficiary, you can

also leave the funds in the inherited IRA and treat it as your own IRA. In either case, the IRA will be yours and no longer treated as an inherited IRA. As the new IRA owner (as opposed to beneficiary ), you won’t need to begin taking RMDs from a traditional IRA until you reach age 70½, and you won’t need to take RMDs from a Roth IRA during your lifetime at all. And as IRA owner, you can also name new beneficiaries of your choice.

Required minimum distributions As beneficiary of an inherited IRA–traditional or Roth–you must begin taking RMDs after the owner’s death.* In general, you must take payments from the IRA annually, over your life expectancy, starting no later than December 31 of the year following the year the IRA owner died. But if you’re a spousal beneficiary, you may be able to delay payments until the year the IRA owner would have reached age 70½.

In some cases you may be able to satisfy the RMD rules by withdrawing the entire balance of the inherited IRA (in one or more payments) by the fifth anniversary of the owner’s death. In almost every situation, though, it makes sense to use

the life expectancy method instead—to stretch payments out as long as possible and take maximum advantage of the IRA’s tax-deferral benefit.

You can always elect to receive more than the required amount in any given year, but if you receive less than the required amount you’ll be subject to a federal penalty tax equal to 50% of the difference between the required distribution and the amount actually distributed.

More stretching... What happens if you elect to take distributions over your life expectancy but you die with funds still in the inherited IRA? This is where your IRA custodial/trustee agreement becomes cru-cial. If, as is sometimes the case, your IRA language doesn’t address what happens when you die, then the IRA balance is typically paid to your estate–ending the IRA tax deferral.

Many IRA providers, though, allow you to name a successor beneficiary. In this case, when you die, your successor beneficiary “steps into your shoes” and can continue to take RMDs over your remaining distribution schedule. (Continued on page 2)

FinanceFOCUS

How to Get a Bigger Social Retirement

Benefit Federal income taxesDistributions from inherited IRAs are subject to federal income taxes, except for any Roth or nondeductible contributions the owner made. But distributions are never subject to the 10% early distribution penalty, even if you haven’t yet reached age 59½. (This is one reason why a surviving spouse may decide to remain as beneficiary rather than taking ownership of an inherited IRA.)

When you take a distribution from an inherited Roth IRA, the owner’s non-taxable Roth contributions are deemed to come out first, followed by any earnings. Earnings are also tax-free if made after a five-calendar-year holding period, starting with the year the IRA owner first contributed to any Roth IRA. For example, if the IRA owner first con-tributed to a Roth IRA in 2014 and died in 2016, any earnings distributed from the IRA after 2018 will be tax-free.

Creditor protection Traditional and Roth IRAs are protected under federal law if you declare bank-ruptcy. The IRA bankruptcy exemption was originally an inflation-adjusted $1 million, which has since grown to $1,283,025. Unfortunately, the U.S. Supreme Court has ruled that inherited IRAs are not covered by this exemption. (If you inherit an IRA from your spouse and treat that IRA as your own, it’s possible that the IRA won’t be consid-ered an inherited IRA for bankruptcy purposes, but this was not specifically addressed by the Court.) This means that your inherited IRA won’t receive any protection under federal law if you declare bankruptcy. However, the laws of your particular state may still protect those assets, in full or in part, and may provide protection from creditors outside of bankruptcy as well.

You are generally not the “owner” of an inherited IRA. The practical result of this fact is that you can’t mix inherited IRA funds with your own IRA funds, and you can’t make 60-day rollovers to and from the inherited IRA. Spousal beneficiaries, however, may be able to assume actual ownership of an inherited IRA.

*If the traditional IRA owner died after age 70-1/2 and did not take an RMD for the year of his or her death, you must also withdraw any remaining RMD amount for that year.

Five Things to Know About Inherited IRAs (Continued from page 1)

Many people decide to begin receiving early Social Security retirement benefits. In fact, according to the Social Security Administration, about 72% of retired workers receive benefits prior to their full retirement age.1 But waiting longer could significantly increase your monthly retirement income, so weigh your options carefully before making a decision.

TIMING COUNTS Your monthly Social Security retirement benefit is based on your lifetime earnings. Your base benefit–the amount you’ll receive at full retirement age–is calculated using a formula that takes into account your 35 highest earnings years.

If you file for retirement benefits before reaching full retirement age (66 to 67, depending on your birth year), your benefit will be permanently reduced. For example, at age 62, each benefit check will be 25% to 30% less than it would have been had you waited and claimed your benefit at full retirement age (see table).

Alternatively, if you postpone filing for benefits past your full retire-ment age, you’ll earn delayed retirement credits for each month you wait, up until age 70. Delayed retirement credits will increase the amount you receive by about 8% per year if you were born in 1943 or later.

The adjacent chart shows how a monthly benefit of $1,800 at full retirement age (66) would be affected if claimed as early as age 62 or as late as age 70. This is a hypothetical example used for illustrative purposes only; your benefits and results will vary.

$1,350$1,440

$1,560$1,680

$1,800$1,944

$2,088$2,232

$2,376

62 63 64 65 66 67 68 69 70

BIRTH YEAR FULL RETIREMENT AGE PERCENTAGE REDUCTION AT AGE 62

1943-1954 66 25%

1955 66 and 2 months 25.83%

1956 66 and 4 months 26.67%

1957 66 and 6 months 27.50%

1958 66 and 8 months 28.33%

1959 66 and 10 months 29.17%

1960 or later 67 30%

EARLY OR LATE?Should you begin receiving Social Security benefits early, or wait until full retirement age or even longer? If you absolutely need the money right away, your decision is clear-cut; otherwise, there’s no ‘’right” answer. But take time to make an informed, well-reasoned decision. Consider factors such as how much retirement income you’ll need, your life expec-tancy, how your spouse or survivors might be affected, whether you plan to work after you start receiving benefits, and how your income taxes might be affected.

Sign up for a my Social Security account at ssa.gov to view your online Social Security Statement. It contains a detailed record of your earnings, as well as benefit estimates and otherinformation about Social Security.

1 Social Security Administration, Annual Statistical Supplement, 2015

Often in life, you have investment goals that you hope to reach. Say, for ex-ample, you have determined that you would like to have $1 million* in your investment portfolio by the time you retire. But will you be able to get there?

In trying to accumulate $1 million (or any other amount), you should generally consider how much you have now, how much you can contribute in the future, how much you might earn on your investments, and how long you have to accumulate funds.

Current balance–your starting point Of course, the more you have today, the less you may need to contribute to your investment portfolio or earn on your investments over your time horizon.

Time (accumulation period)In general, the longer your time hori-zon, the greater the opportunity you have to accumulate $1 million. If you have a sufficiently long time horizon and a sufficiently large current balance,

CAN YOU GET TO A MILLION DOLLARS?

In trying to accumulate $1 million (or any other amount), you should generally consider how much you have now, how much you can contribute in the future, how much you might earn on your investments, and how long you have to accu-mulate funds. But remember, there are no guarantees–even when you have a clearly defined goal. For example, the market might not perform as expected, or you may have to reduce your contributions at some point. All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful. Review your progressperiodically and be prepared to make adjustments when necessary.

with adequate earnings you may be able to reach your goal without making any additional contributions. With a longer time horizon, you’ll also have more time to recover if the value of your investments drops. If additional contributions are required to help you reach your goal, the more time you have to target your goal, the less you may have to contribute.

The sooner you start making contri-butions, the better. If you wait too long and the time remaining to ac-cumulate funds becomes too short, you may be unable to make the large contributions required to reach your goal. In such a case, you might consider whether you can extend the accumulation period—for example, by delaying retirement.

Rate of return (earnings) In general, the greater the rate of return that you can earn on your investments, the more likely that you’ll reach your investment goal of $1 million. The greater the proportion of the investment portfolio that

comes from earnings, the less you may need to contribute to the portfolio. Earnings can benefit from long time horizons and compound rates of return, as returns are earned on any earlier earnings.

However, higher rates of return are generally associated with greater investment risk and the possibility of investment losses. It’s important to choose investments that meet your time horizon and tolerance for risk. And be realistic in your assumptions. What rate of return is realistic given your current asset allocation and investment selection?

Amount of contributions Of course, the more you can regularly contribute to your investment portfo-lio (e.g., monthly or yearly), the better your chances are of reaching your $1 million investment goal, especially if you start contributing early and have a long time horizon.

Note: This hypothetical example is not intended to reflect the actual performance of any investment. Actual results may vary. Taxes, fees, expenses, and inflation are notconsidered and would reduce the performance shown if they were included.

* We are using $1M for ease of calculations. You can easily use this formula to get to $10 million or any other amount.

SCENERARIO 1 2 3 4

Target $1,000,000 $1,000,000 $1,000,000 $1,000,000

Current $450,000 $450,000 $0 $0Balance

Years 15 10 30 20

ROR 6% 6% 6% 6%

Annual $0 $14,728 $12,649 $27,185Contributions

Contributions needed Now that the primary factors that affect your chances of getting to a million dollars have been reviewed, let’s consider this question: At a given rate of return, how much do you need to save each year to reach the $1 million target? For example, let’s assume you anticipate that you can earn a 6% annual rate of return (ROR) on your investments. If your current balance is $450,000 and ]you have 15 more years to reach $1 million, you may not need to make any additional contributions (see scenario 1 in the table below); but if you have only 10 more years, you’ll need to make annual contributions of $14,728 (see scenario 2).If your current balance is $0 and you have 30 more years to reach $1 million, you’ll need to contribute $12,649 annually (see scenario 3); but if you have only 20 more years, you’ll need to contribute $27,185 annually (see scenario 4).

What is the Most Important Component of GDP in the United States?

In trying to accumulate $1 million (or any other amount), you should generally consider how much you have now, how much you can contribute in the future, how much you might earn on your investments, and how long you have to accu-mulate funds. But remember, there are no guarantees–even when you have a clearly defined goal. For example, the market might not perform as expected, or you may have to reduce your contributions at some point. All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful. Review your progressperiodically and be prepared to make adjustments when necessary.

We often hear in the media that consumer spending is crucial to the overall health of the U.S. economy, but exactly how important is it? Representing approximately two-thirds of overall GDP, consumption--the almighty consumer–is the largest driver of economic growth in the United States. Of the nearly $18 trillion in U.S. GDP (2015), American shoppers are responsible for a piece of the pie worth about $12 trillion.

Consumption is tracked by the Bureau of Economic Analysis, and is reported as Personal Consumption Expenditures (PCE) in its monthly “Personal Income and Outlays” news release. Since the late 1960s, PCE as a percentage of overall GDP has crept up from a low of approximately 58% to nearly 70% today.

PCE is divided into goods and services. The services category typically represents the largest part of PCE, accounting for more than 65% over the past two years. Examples of services include health care, utilities, recreation, and financial services.

Goods are broken down further into durable and nondurable goods. Durable goods are those that have an average life of at least three years. Examples include cars, appliances and furniture. Nondurable goods are those with an average life span of less than three years and include such items as clothing, food, and gasoline. Durable goods represent approximately 10% of total PCE, while nondurable goods make up about 20%. So the next time you’re out shopping, for anything from a bottle of ketchup to a new car, consider thatyou’re doing your part to fuel our nation’s growth.

Sources: World Bank.org, accessed June 2016;Federal Reserve Bank of St. Louis, 2016;Bureau of Economic Analysis, 2016

There’s a fine line between keeping financial records for a reasonable period of time and becoming a pack rat. A general rule of thumb is to keep financial records only as long as necessary. For example, you may want to keep ATM receipts only temporarily, until you’ve reconciled them with your bank statement. But if a document provides legal support and/or is hard to replace, you’ll want to keep it for a longer period or even indefinitely. It’s ultimately up to you to determine which records you should keep on hand and for how long, but here’s a suggested timetable for some common documents.

HOW LONG SHOULD I KEEP FINANCIAL RECORDS?

*The IRS requires taxpayers to keep records that support income, deduc-tions, and credits shown on their income tax returns until the period of limitations for that return runs out--generally three to seven years, depending on the circumstances. Visit irs.gov or consult your tax professional for information related to your specific situation.

Contributions needed Now that the primary factors that affect your chances of getting to a million dollars have been reviewed, let’s consider this question: At a given rate of return, how much do you need to save each year to reach the $1 million target? For example, let’s assume you anticipate that you can earn a 6% annual rate of return (ROR) on your investments. If your current balance is $450,000 and ]you have 15 more years to reach $1 million, you may not need to make any additional contributions (see scenario 1 in the table below); but if you have only 10 more years, you’ll need to make annual contributions of $14,728 (see scenario 2).If your current balance is $0 and you have 30 more years to reach $1 million, you’ll need to contribute $12,649 annually (see scenario 3); but if you have only 20 more years, you’ll need to contribute $27,185 annually (see scenario 4).

ONE YEAR OR LESS MORE THAT ONE YEAR INDEFINITELY

Bank or credit Tax returns and Birth, death union statements documentation* and marriage certificates

Credit Card Mortgage contracts Adoption Statements and documentation papers

Utility bills Annual Retirement Military and investment discharge statements papers

Paycheck stubs Receipts for major Social Security purchases and card home improvements

FinanceFOCUS

Ten Year-End Tax Tips for 2016

SET ASIDE TIME TO PLANEffective planning requires that you have a good understanding of your current tax situation, as well as a reasonable estimate of how your circumstances might change next year. There's a real opportunity for tax savings if you'll be payingtaxes at a lower rate in one year than in the other. However, the window for most tax-saving moves closes on December 31, so don't procrastinate.

DEFER INCOME TO NEXT YEARConsider opportunities to defer income to 2017, particularly if you think you may be in a lower tax bracket then. For example, you may be able to defer a year-endbonus or delay the collection of business debts, rents, and payments for services. Doing so may enable you to postpone payment of tax on the income until next year.

ACCELERATE DEDUCTIONSYou might also look for opportunities to accelerate deductions into the current tax year. If you itemize deductions, making payments for deductible expenses such as medical expenses, qualifying interest, and state taxes before the end of the year, instead of paying them in early 2017, could make a difference on your 2016 return.

FACTOR IN THE AMTIf you're subject to the alternative minimum tax (AMT), traditional year-end maneuvers such as deferring income and accelerating deductions can have a negative effect. Essentially a separate federal income tax system with its ownrates and rules, the AMT effectively disallows a number of itemized

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 filing as head of household), your personal and dependent exemptions may be phased out, and your itemized deductions may be limited. If your 2016 AGI puts you in this range, consider any potential limitation on itemized deductions as you weigh any moves relating totiming deductions.

IRA and retirement plan contributions

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 or Roth IRA($6,500 if you're age 50 or older). The window to make 2016 contributions to an employer plan generally closes at the end of the year, while you typically have untilthe due date of your federal income tax return to make 2016 IRA contributions.

Here are 10 things to consider as you weigh potential tax moves between now and the end of the year.

deductions. For example, if you’re subject to the AMT in 2016, prepaying 2017 state and local taxes probably won’t help your 2016 tax situation, but could hurt your 2017 bottom line. Taking the time to determine whether you may be subject to the AMT before you make any year-end moves could help save you from making a costly mistake.

BUMP UP WITHHOLDING TO COVER A TAX SHORTFALL If it looks as though you’re going to owe federal income tax for the year, especially if you think you may be subject to an estimated tax penalty, consider asking your employer (via Form W-4) to increase your withholding for the remainder of the year to cover the shortfall. The biggest advantage in doing so is that withholding is considered as having been paid evenly through the year instead of when the dollars are actually taken from your paycheck. This strategy can also be used to make up for low or missing quarterly estimated tax payments.

MAXIMIZE RETIREMENT SAVINGSDeductible contributions to a traditional IRA and pretax contributions to anemployer-sponsored retirement plan such as a 401(k) can reduce your 2016taxable income. If you haven’t already contributed up to the maximum amountallowed, consider doing so by year-end.

TAKE ANY REQUIRED DISTRIBUTIONSOnce you reach age 70½, you generally must start taking required minimumdistributions (RMDs) from traditional IRAs and employer-sponsored retirementplans (an exception may apply if you’re still working and participating in anemployer-sponsored plan). Take any distributions by the date required–the end of the year for most individuals. The penalty for failing to do so is substan-tial: 50% of any amount that you failed to distribute as required.

WEIGH YEAR-END INVESTMENT MOVESYou shouldn’t let tax considerations drive your investment decisions. However, it’s worth considering the tax implications of any year-end investment moves that you make. For example, if you have realized net capital gains from selling securities at a profit, you might avoid being taxed on some or all of those gains by selling losing positions. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 if your filing status is married filing separately) or carried forward to reduce your taxes in future years.

BEWARE THE NET INVESTMENT INCOME TAXDon’t forget to account for the 3.8% net investment income tax. This additionaltax 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, $200,000 if head of household).

GET HELP IF YOU NEED ITThere’s a lot to think about when it comes to tax planning. That’s why it oftenmakes sense to talk to a tax professional who is able to evaluate your situationand help you determine if any year-end moves make sense for you.

Deductions may be limitedfor those with high incomes

Ten Year-End Tax Tips for 2016

FinanceFOCUSSamalin Investment Counsel is registered as an investment adviser with the SEC. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability.

All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals, and economic conditions, may materially alter the performance of your portfolio. Past performance is not a guarantee of future success.

Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client's portfolio. There is no guarantee that a portfolio will match or out perform any particular benchmark.

Third-party rankings and awards from rating services or publications are no guarantee of future investment success. Working with a highly-rated adviser does not ensure that a client or prospective client will experience a higher level of performance or results. These ratings should not be construed as an endorsement of the adviser by any client nor are they representative of any one client’s evaluation. Generally, ratings, rankings and recognition are based on information prepared and submitted by the adviser. Additional information regarding the criteria for rankings and awards is available upon request.

IMPORTANT DISCLOSURESBroadridge 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.

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The right answer for you will depend on your situation. First of all, don't underestimate the psychological impact of early retirement. The adjustment from full-time work to amore leisurely pace may be difficult. So consider whether you're ready to retire yet. Next, look at what you're being offered. Most early-retirement offers share certain basicfeatures that need to be evaluated. To determine whether your employer's offer is worth taking, you'll want to break it down.

Does the offer include a severance package? If so, how does the package compare withyour projected job earnings (including future salary increases and bonuses) if you remain employed? Can you live on that amount (and for how long) without tapping into your retirement savings? If not, is your retirement fund large enough that you can start drawing it down early? Will you be penalized for withdrawing from your retirement savings?

Does the offer include post-retirement medical insurance? If so, make sure it's affordable and provides adequate coverage. Also, since Medicare doesn't start until you're 65, make sure your employer's coverage lasts until you reach that age. If your employer's offer doesn't include medical insurance, you may have to look into COBRA or a private individual policy.

How will accepting the offer affect your retirement plan benefits? If your employer has a traditional pension plan, leaving the company before normal retirement age (usually 65) may greatly reduce the final payout you receive from the plan. If you participate in a 401(k) plan, what price will you pay for retiring early? You could end up forfeitingemployer contributions if you're not fully vested. You'll also be missing out on the opportunity to make additional contributions to the plan.

Finally, will you need to start Social Security benefits early if you accept the offer? For example, at age 62 each monthly benefit check will be 25% to 30% less than it would be at full retirement age (66 to 67, depending on your year of birth). Conversely, you receive a higher payout by delaying the start of benefits past your full retirement age– your benefit would increase by about 8% for each year you delay benefits, up to age 70.

Should I accept my employer's early-retirement offer?