Endowment WealthManagement, Inc.Robert Riedl, CPA, CFP, AWMADirector of Wealth ManagementAmerican National Bank Bldg2200 N. Richmond St. Suite 200Appleton, WI 54911920-785-6010 x6011Rob@EndowmentWM.comwww.EndowmentWM.com

May 2017Tax Benefits of Homeownership

Is It Wise to Trade Your Pension for aLump Sum?

Are you ready to retire?

What is an ERISA fiduciary?

EWM May 2017 NewsletterPlanning Your Financial FutureIs Smart Beta a Smart Strategy for You?

See disclaimer on final page

Traditional investmentindexes such as theS&P 500 are weightedbased on marketcapitalization, thevalue of a company'stotal outstandingstock. This means thelargest companies inthe index may have

much greater influence on index performancethan smaller companies. For example, the 10largest companies in the S&P 500 account formore than 18% of the index's performance, asopposed to about 2% if every company wereweighted equally.1

Funds that track market-weighted indexes maybe the most direct way to participate in broadmarket performance, but there has beenincreasing interest in an alternative indexingstrategy called smart beta (also known asstrategic beta or factor-based investing). Morethan 100 smart-beta exchange-traded funds(ETFs) were launched in 2016.2

Shifting the weightSmart-beta funds use factors other than marketcapitalization to select and weight investmentsin order to track an existing or newly createdfactor-based index. Some factors that might beconsidered are momentum, risk, volatility,earnings, growth potential, price-to-book value,dividend growth or yield, cash flow, or equalweighting of all securities. (Traditionally, beta isa measure of an investment's volatility, butsmart-beta indexes may or may not considervolatility.)

The idea of using factors to select investmentsis not new. For example, numerous indexestrack stocks perceived to have higher growthpotential or to offer greater value. However,even if the investments are selected based on afactor, such indexes are typically still weightedbased on market capitalization. Thoughinvestments tracking such indexes might beconsidered in the smart-beta category, a truesmart-beta growth or value index would beselected and weighted based on a measure ofgrowth or value.

Long-term strategyThe goal of smart-beta strategies is tooutperform the broader market, but even if afactor does outperform during one marketcycle, it may underperform in the next cycle.This is one of the fundamental challenges notonly of smart beta but of any strategy thatattempts to outperform the market. Even withina given cycle, a successful strategy maybecome neutralized or unsuccessful as otherinvestors adopt the same strategy.

Because of these limitations, smart-beta fundsare generally not wise for short-term investors,but they may be appropriate as a long-termstrategy in a diversified portfolio. Diversificationis a method used to help manage investmentrisk; it does not guarantee a profit or protectagainst investment loss.

The S&P 500 is an unmanaged group ofsecurities considered to be representative ofthe U.S. stock market in general. Theperformance of an unmanaged index is notindicative of the performance of any specificinvestment. Individuals cannot invest directly inan index. Past performance is not a guaranteeof future results; actual results will vary.

The principal value of mutual funds andexchange-traded funds will fluctuate withchanges in market conditions. Shares, whensold, may be worth more or less than theiroriginal cost. Supply and demand for ETFshares may cause them to trade at a premiumor a discount relative to the value of theunderlying shares.

Mutual funds and exchange-traded funds aresold by prospectus. Please consider theinvestment objectives, risks, charges, andexpenses carefully before investing. Theprospectus, which contains this and otherinformation about the investment company, canbe obtained from your financial professional. Besure to read the prospectus carefully beforedeciding whether to invest.1 S&P Dow Jones Indices, 2017

2 Morningstar, 2017

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Tax Benefits of HomeownershipBuying a home can be a major expenditure.Fortunately, federal tax benefits are available tomake homeownership more affordable and lessexpensive. There may also be tax benefitsunder state law.

Mortgage interest deductionOne of the most important tax benefits ofowning a home is that you may be able todeduct any mortgage interest you pay. If youitemize deductions on your federal income taxreturn, you can deduct the interest you pay on aloan used to buy, build, or improve your home,provided that the loan is secured by your home.Up to $1 million of such "home acquisition debt"($500,000 if you're married and file separately)qualifies for the interest deduction.

You may also be able to deduct interest youpay on certain home equity loans or lines ofcredit secured by your home. Up to $100,000 ofsuch "home equity debt" (or $50,000 if yourfiling status is married filing separately) qualifiesfor the interest deduction. The interest you payon home equity debt is generally deductibleregardless of how you use the loan proceeds.For alternative minimum tax purposes,however, interest on home equity debt isdeductible only for debt used to buy, build, orimprove your home.

Deduction for real estate property taxesIf you itemize deductions on your federalincome tax return, you can generally deductreal estate taxes you pay on property that youown. For alternative minimum tax purposes,however, no deduction is allowed for state andlocal taxes, including real estate property taxes.

Points and closing costsWhen you take out a loan to buy a home, orwhen you refinance an existing loan on yourhome, you'll probably be charged closing costs.These may include points, as well as attorney'sfees, recording fees, title search fees, appraisalfees, and loan or document preparation andprocessing fees. Points are typically charged toreduce the interest rate for the loan.

When you buy your main home, you may beable to deduct points in full in the year you paythem if you itemize deductions and meet certainrequirements. You may even be able to deductpoints that the seller pays for you.

Refinanced loans are treated differently.Generally, points that you pay on a refinancedloan are not deductible in full in the year youpay them. Instead, they're deducted ratablyover the life of the loan. In other words, you candeduct a certain portion of the points each year.If the loan is used to make improvements to

your principal residence, however, you may beable to deduct the points in full in the year paid.

Otherwise, closing costs are nondeductible.They can, however, increase the tax basis ofyour home, which in turn can lower your taxablegain when you sell the property.

Home improvementsHome improvements (unless medicallyrequired) are nondeductible. Improvements,though, can increase the tax basis of yourhome, which in turn can lower your taxable gainwhen you sell the property.

Capital gain exclusionIf you sell your principal residence at a loss,you can't deduct the loss on your tax return. Ifyou sell your principal residence at a gain, youmay be able to exclude some or all of the gainfrom federal income tax.

Capital gain (or loss) on the sale of yourprincipal residence equals the sale price of yourhome minus your adjusted basis in theproperty. Your adjusted basis is typically thecost of the property (i.e., what you paid for itinitially) plus amounts paid for capitalimprovements.

If you meet all requirements, you can excludefrom federal income tax up to $250,000($500,000 if you're married and file a jointreturn) of any capital gain that results from thesale of your principal residence. Anything overthose limits may be subject to tax (at favorablelong-term capital gains tax rates). In general,this exclusion can be used only once every twoyears. To qualify for the exclusion, you musthave owned and used the home as yourprincipal residence for a total of two out of thefive years before the sale.

What if you fail to meet the two-out-of-five-yearrule? Or you used the capital gain exclusionwithin the past two years with respect to adifferent principal residence? You may still beable to exclude part of your gain if your homesale was due to a change in place ofemployment, health reasons, or certain otherunforeseen circumstances. In such a case,exclusion of the gain may be prorated.

Other considerationsIt's important to note that special rules apply ina number of circumstances, including situationsin which you maintain a home office for taxpurposes or otherwise use your home forbusiness or rental purposes.

Limit on deductions

You are subject to a limit oncertain itemized deductions ifyour adjusted gross incomeexceeds $261,500 for singletaxpayers, $313,800 formarried taxpayers filing jointly,$156,900 for married taxpayersfiling separately, and $287,650for head of householdtaxpayers. This limit does notapply for alternative minimumtax purposes, however.

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Is It Wise to Trade Your Pension for a Lump Sum?Most private employers have already replacedtraditional pensions, which promise lifetimeincome payments in retirement, with definedcontribution plans such as 401(k)s. But 15% ofprivate-sector workers and 75% of state andlocal government workers still participate intraditional pensions.1 Altogether, 35% ofworkers say they (and/or their spouse) havepension benefits with a current or formeremployer.2

Many pension plan participants have the optionto take their money in a lump sum when theyretire. And since 2012, an increasing number oflarge corporate pensions have beenimplementing "lump-sum windows" duringwhich vested former employees have a limitedamount of time (typically 30 to 90 days) toaccept or decline buyout offers.3 (Lump-sumoffers to retirees already receiving pensionbenefits are no longer allowed.)

By shrinking the size of a pension plan, thecompany can reduce the associated risks andcosts, and limit the impact of future retirementobligations on current financial performance.However, what's good for a corporation'sbottom line may or may not be in the bestinterests of plan participants and their families.

For many workers, there may be mathematicaland psychological advantages to keeping thepension. On the other hand, a lump sum couldprovide financial flexibility that may benefitsome families.

Weigh risks before letting goA lump-sum payout transfers the risksassociated with investment performance andlongevity from the pension plan sponsor to theparticipant. The lump-sum amount is thediscounted present value of an employee'sfuture pension, set by an IRS formula based oncurrent bond interest rates and average lifeexpectancies.

Individuals who opt for a lump-sum payout mustthen make critical investment and withdrawaldecisions, and determine for themselves howmuch risk to take in the financial markets. Theresulting income is often not enough to replacethe pension income given up, unless theinvestor can tolerate exposure to stock marketrisk and is able to achieve solid returns overtime.

Gender is not considered when calculatinglump sums, so a pension's lifetime income maybe even more valuable for women, who tend tolive longer than men and would have a greaterchance of outliving their savings.

In addition, companies might not include thevalue of subsidies for early retirement orspousal benefits in lump-sum calculations.4The latter could be a major disadvantage formarried participants, because a healthy65-year-old couple has about a 73% chancethat one spouse will live until at least 90.5

When a lump sum might make senseA lump-sum payment could benefit a person inpoor health or provide financial relief for ahousehold with little cash in the bank foremergencies. But keep in mind that pensionpayments (monthly or lump sum) are taxed inthe year they are received, and cashing out apension before age 59½ may trigger a 10%federal tax penalty.6 Rolling the lump sum intoa traditional IRA postpones taxes untilwithdrawals are taken later in retirement.

Someone who expects to live comfortably onother sources of retirement income might alsowelcome a buyout offer. Pension payments endwhen the plan participant (or a survivingspouse) dies, but funds preserved in an IRAcould be passed down to heirs.

IRA distributions are also taxed as ordinaryincome, and withdrawals taken prior to age59½ may be subject to the 10% federal taxpenalty, with certain exceptions. Annualminimum distributions are required starting inthe year the account owner reaches age 70½.

It may also be important to consider the healthof the company's pension plan, especially forplans that don't purchase annuity contracts.The "funded status" is a measure of plan assetsand liabilities that must be reported annually; aplan funded at 80% or less may be struggling.Most corporate pensions are backstopped bythe Pension Benefit Guaranty Corporation(PBGC), but retirees could lose a portion of the"promised" benefits if their plan fails.

The prospect of a large check might betempting, but cashing in a pension could havecostly repercussions for your retirement. It'simportant to have a long-term perspective andan understanding of the tradeoffs when alump-sum option is on the table.1 U.S. Bureau of Labor Statistics, 2016

2 Employee Benefit Research Institute, 2016

3, 4 The Wall Street Journal, June 5, 2015

5 Society of Actuaries, 2017

6 The penalty doesn't apply to employees who retireduring or after the year they turn 55 (50 for qualifiedpublic safety employees).

About 41 million people areparticipants (active, retired,or separated vested) ofPBGC-insured corporatepension plans.

Source: CongressionalBudget Office, 2016

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Endowment WealthManagement, Inc.Robert Riedl, CPA, CFP, AWMADirector of Wealth ManagementAmerican National Bank Bldg2200 N. Richmond St. Suite 200Appleton, WI 54911920-785-6010 x6011Rob@EndowmentWM.comwww.EndowmentWM.com

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2017

IMPORTANT DISCLOSURES

The information presented byEndowment Wealth Management, Inc. isnot specific to any individual's personalcircumstances and should not be takenas personal investment advice, norshould it be construed as a firmrecommendation.

To the extent that this material concerns taxmatters, it is not intended or written to beused, and cannot be used, by a taxpayer forthe purpose of avoiding penalties that may beimposed by law. Each taxpayer should seekindependent advice from a tax professionalbased on his or her individual circumstances.

These materials are provided for generalinformation and educational purposes basedupon publicly available information fromsources believed to be reliable—we cannotassure the accuracy or completeness ofthese materials. The information in thesematerials may change at any time andwithout notice. If you have any questionsplease call our offices at 920-785-6010.

Investments involve risk and unless otherwisestated, are not insured or guaranteed. Pastperformance is no guarantee of future results.A copy of Endowment Wealth ManagementInc.'s disclosure document, Form ADVBrochure Part 2, is available upon request.

What is an ERISA fiduciary?The Employee RetirementIncome Security Act (ERISA)was enacted in 1974 to protectemployees who participate inretirement plans and certain

other employee benefit plans. At the time, therewere concerns that pension plan funds werebeing mismanaged, causing participants to losebenefits they had worked so hard to earn.ERISA protects the interests of planparticipants and their beneficiaries by:

• Requiring the disclosure of financial and otherplan information

• Establishing standards of conduct for planfiduciaries

• Providing for appropriate remedies,sanctions, and access to the federal courts

It's the fiduciary provisions of ERISA that helpprotect participants from the mismanagementand abuse of plan assets. The law requires thatfiduciaries act prudently, solely in the interestsof plan participants and beneficiaries, and forthe exclusive purpose of providing benefits andpaying reasonable expenses of administeringthe plan.

Fiduciaries must diversify plan investments tominimize the risk of large losses, unless it'sclearly prudent not to do so. Fiduciaries mustalso avoid conflicts of interest. They cannotallow the plan to engage in certain transactionswith the employer, service providers, or otherfiduciaries ("parties in interest"). There are alsospecific rules against self-dealing.

Who is a plan fiduciary? Anyone who:

• Exercises any discretionary control over theplan or its assets

• Has any discretionary responsibility foradministration of the plan

• Provides investment advice for a fee or othercompensation (direct or indirect)

Plan fiduciaries may include, for example,discretionary plan trustees, plan administrators,investment managers and advisors, andmembers of a plan's investment committee.

Fiduciaries must take their responsibilitiesseriously. If they fail to comply with ERISA'srequirements, they may be personally liable forany losses incurred by the plan. Criminalliability may also be possible.

Are you ready to retire?Here are some questions toask yourself when decidingwhether or not you are readyto retire.

Is your nest egg adequate?

It may be obvious, but the earlier you retire, theless time you'll have to save, and the moreyears you'll be living off your retirementsavings. The average American can expect tolive past age 78.* With future medical advanceslikely, it's not unreasonable to assume that lifeexpectancy will continue to increase. Is yournest egg large enough to fund 20 or more yearsof retirement?

When will you begin receiving SocialSecurity benefits?

You can receive Social Security retirementbenefits as early as age 62. However, yourbenefit may be 25% to 30% less than if youwaited until full retirement age (66 to 67,depending on the year you were born).

How will retirement affect your IRAs andemployer retirement plans?

The longer you delay retirement, the longer youcan build up tax-deferred funds in traditionalIRAs and potentially tax-free funds in Roth

IRAs. Remember that you need taxablecompensation to contribute to an IRA.

You'll also have a longer period of time tocontribute to employer-sponsored plans like401(k)s — and to receive any employer match orother contributions. (If you retire early, you mayforfeit any employer contributions in whichyou're not fully vested.)

Will you need health insurance?

Keep in mind that Medicare generally doesn'tstart until you're 65. Does your employerprovide post-retirement medical benefits? Areyou eligible for the coverage if you retire early?If not, you may have to look into COBRA or anindividual policy from a private insurer or thehealth insurance marketplace — which could bean expensive proposition.

Is phasing into retirement right for you?

Retirement need not be an all-or-nothing affair.If you're not quite ready, financially orpsychologically, for full retirement, considerdownshifting from full-time to part-timeemployment. This will allow you to retain asource of income and remain active andproductive.* NCHS Data Brief, Number 267, December 2016

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