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Oppenheimer & Co. Inc.The Israelite Group ofOppenheimer & Co. Inc.500 W Madison Suite 4000Chicago, IL [email protected]
November 2016
Will vs. Trust: Is One Better Than the Other?
Are You Ending 2016 Healthy, Wealthy, and Wise?
Pretax, Roth, or After-Tax Contributions: Which ShouldYou Choose?
Do I need to make any changes to my Medicarecoverage for next year?
What changes can I make during this year's MedicareOpen Enrollment Period?
The Israelite Group Monthly NewsletterWill vs. Trust: Is One Better Than the Other?
See disclaimer on final page
With the election season endingnewspapers, talk shows and tweeters willhave to find a new topic to keep theirsubscribers tuning in. The next hot topicwill most likely be the Fed and whether ornot they raise interest rates in December.The odds of a rate increase in Decemberare currently at 70%.
A rate increase would signal that the Fedthinks the U.S. economy is getting strongerand that the easy money policy of the lasteight years is less necessary to keep thingsmoving in the right direction. Since the lastFed meeting we have seen jobs increase,the labor participation rate increase –albeitfrom a very low number and a good start tothird quarter earnings.
Hopefully these three critical factors willcontinue to improve giving the Fed ampleroom to increase rates throughout 2017.This is a rosy scenario, but if you have notdone so already, now may be a good timeto refinance your home mortgage or gofrom a variable rate to a fixed rate.
The Israelite Group
When it comes to planningyour estate, you might bewondering whether youshould use a will or a trust(or both). Understanding thesimilarities and thedifferences between thesetwo important documents
may help you decide which strategy is better foryou.
What is a will?A will is a legal document that lets you directhow your property will be dispersed (amongother things) when you die. It becomes effectiveonly after your death. It also allows you to namean estate executor as the legal representativewho will carry out your wishes.
In many states, your will is the only legal wayyou can name a guardian for your minorchildren. Without a will, your property will bedistributed according to the intestacy laws ofyour state. Keep in mind that wills and trustsare legal documents generally governed bystate law, which may differ from one state to thenext.
What is a trust?A trust document establishes a legalrelationship in which you, the grantor or trustor,set up the trust, which holds property managedby a trustee for the benefit of another, thebeneficiary. A revocable living trust is the typeof trust most often used as part of a basicestate plan. "Revocable" means that you canmake changes to the trust or even end (revoke)it at any time. For example, you may want toremove certain property from the trust orchange the beneficiaries. Or you may decidenot to use the trust anymore because it nolonger meets your needs.
A living trust is created while you're living andtakes effect immediately. You may transfer titleor "ownership" of assets, such as a house,boat, automobile, jewelry, or investments, to thetrust. You can add assets to the trust andremove assets thereafter.
How do they compare?While both a will and a revocable living trust
enable you to direct the distribution of yourassets and property to your beneficiaries atyour death, there are several differencesbetween these documents. Here are a fewimportant ones.
• A will generally requires probate, which is apublic process that may be time-consumingand expensive. A trust may avoid the probateprocess.
• In order to exclude assets from probate, youmust transfer them to your revocable trustwhile you're living, which may be a costly,complicated, and tedious process.
• Unlike a will, a trust may be used to manageyour financial affairs if you becomeincapacitated.
• If you own real estate or hold property inmore than one state, your will would have tobe filed for probate in each state where youown property or assets. Generally, this is notnecessary with a revocable living trust.
• A trust can be used to manage andadminister assets you leave to minor childrenor dependents after your death.
• In a will, you can name a guardian for minorchildren or dependents, which you cannot dowith a trust.
Which is appropriate for you?The decision isn't necessarily an "either/or"situation. Even if you decide to use a livingtrust, you should also create a will to name anexecutor, name guardians for minor children,and provide for the distribution of any propertythat doesn't end up in your trust. There arecosts and expenses associated with thecreation and ongoing maintenance of theselegal instruments.
Whether you incorporate a trust as part of yourestate plan depends on a number of factors.Does your state offer an informal probate,which may be an expedited, less expensiveprocess available for smaller estates?Generally, if you want your estate to passprivately, with little delay or oversight from aprobate court, including a revocable living trustas part of your estate plan may be the answer.
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Are You Ending 2016 Healthy, Wealthy, and Wise?Although the year is drawing to a close, you stillhave time to review your finances. Pausing toreflect on the financial progress you made in2016 and identifying adjustments for 2017 canhelp you start the new year stronger than ever.
How healthy are your finances?Think of a year-end review as an annualphysical for your money. Here are somequestions to ask that will help assess yourfinancial fitness.
• Do you know how you spent your money in2016? Did you make any progress towardyour financial goals? Look for spending habits(such as eating out too much) that needtweaking, and make necessary adjustmentsto your budget.
• Are you comfortable with the amount of debtthat you have? Any end-of-year mortgage,credit card, and loan statements will spell outthe amount of debt you still owe and howmuch you've been able to pay off this year.
• How is your credit? Having a positive credithistory may help you get better interest rateswhen you apply for credit, potentially savingyou money over the long term. Check yourcredit report at least once a year byrequesting your free annual copy through thefederally authorized websiteannualcreditreport.com.
• Do you have an emergency savings account?Generally, you should aim to set aside atleast three to six months' worth of livingexpenses. Having this money can help youavoid piling up more credit-card debt orshortchanging your retirement or collegesavings because of an unexpected eventsuch as job loss or illness.
• Do you have an adequate amount ofinsurance? Your insurance needs maychange over time, so it's a good idea toreview your coverage at least once a year tomake sure it still meets your needs.
How wealthy are you really?It's easy to put your retirement savings onautopilot, especially if you're making automaticcontributions to a retirement account. Butmarket swings this year may have affected yourretirement account balances, so review anystatements you've received. How have yourinvestments performed in comparison togeneral market conditions, against industrybenchmarks, and in relation to yourexpectations and needs? Do you need to makeany adjustments based on your owncircumstances, your tolerance for risk, orbecause of market conditions*?
Finally, look for ways to save more. Forexample, if you receive a pay increase thisyear, don't overlook the opportunity to increaseyour employer-sponsored retirement plancontributions. Ask your employer to set aside ahigher percentage of your salary.
How wise are you about financialmatters?What you don't know can hurt you, so it's timeto honestly assess your financial picture.Taking into account your income, savings andinvestments, and debt load, did your financesimprove this year? If not, what can you dodifferently in 2017?
What are your greatest financial concerns? Doyou have certain life events coming up that youneed to prepare for, such as marriage, buying ahome, or sending your child off to college? Youcan't know everything, so don't put off askingfor assistance. It's a wise move that can helpyou prepare for next year's financial challenges.
*All investing involves risk,including the possible lossof principal, and there is noguarantee that anyinvestment strategy will besuccessful.
Page 2 of 4, see disclaimer on final page
Pretax, Roth, or After-Tax Contributions: Which Should You Choose?If your employer-sponsored retirement savingsplan allows pretax, after-tax, and/or Rothcontributions, which should you choose?
Pretax: Tax benefits nowWith pretax contributions, the money isdeducted from your paycheck before taxes,which helps reduce your taxable income andthe amount of taxes you pay now. Consider thefollowing example, which is hypothetical andhas been simplified for illustrative purposes.
Example(s): Mark earns $2,000 every twoweeks before taxes. If he contributes nothing tohis retirement plan on a pretax basis, theamount of his pay that will be subject to incometaxes would be the full $2,000. If he was in the25% federal tax bracket, he would pay $500 infederal income taxes, reducing his take-homepay to $1,500. On the other hand, if hecontributes 10% of his income to the plan on apretax basis--or $200--he would reduce theamount of his taxable pay to $1,800. Thatwould reduce the amount of taxes due to $450.After accounting for both federal taxes and hisplan contribution, Mark's take-home pay wouldbe $1,350. The bottom line? Mark would beable to invest $200 toward his future but reducehis take-home pay by just $150. That's thebenefit of pretax contributions.
In addition, any earnings made on pretaxcontributions grow on a tax-deferred basis. Thatmeans you don't have to pay taxes on anygains each year, as you would in a taxableinvestment account. However, those taxbenefits won't go on forever. Any moneywithdrawn from a tax-deferred account issubject to ordinary income taxes, and if thewithdrawal takes place prior to age 59½ (or insome cases, 55 or 50, depending on yourplan's rules), you may be subject to anadditional 10% penalty on the total amount ofthe distribution.
Roth: Tax benefits down the roadOn the other hand, contributing to anemployer-sponsored Roth account offersdifferent benefits. Roth contributions areconsidered "after-tax," so you won't reduce theamount of current income subject to taxes. Butqualified distributions down the road will be tax-free.
A qualified Roth distribution is one that occurs:
• After a five-year holding period and• Upon death, disability, or reaching age 59½
Nonqualified distributions are subject to regularincome taxes and a possible 10% penalty tax.However, because Roth contributions are madewith after-tax dollars, a distinction is made
between the portion of the distribution thatrepresents contributions versus earnings onthose contributions. If at some point you needto take a nonqualified withdrawal from a Roth401(k)--due to an unexpected emergency, forexample--only the proportion of the totalamount representing earnings will be taxable.
Example(s): In order to meet an unexpectedfinancial need of $8,000, Tina decides to take anonqualified hardship distribution from her Roth401(k) account. Of the $20,000 total value ofthe account, $18,400 represents after-tax Rothcontributions and $1,600 is attributed toinvestment earnings. Because earningsrepresent 8% of the total account value ($1,600÷ $20,000 = 0.08), this same proportion ofTina's $8,000 distribution--or $640 ($8,000 x.08)--will be considered earnings subject toboth income taxes and a 10% penalty tax.
However, keep in mind that tapping youraccount before retirement defeats its purpose.If you need money in a pinch, try to exhaust allother possibilities before taking a distribution.Always bear in mind that the most importantbenefit of a Roth account is the opportunity tobuild a nest egg of tax-free income forretirement.
After-tax: For those who are able toexceed the limitsSome plans allow participants to makeadditional after-tax contributions. This planfeature helps those who want to makecontributions exceeding the annual total limit onpretax and Roth accounts (in 2016, the limit is$18,000; $24,000 for those age 50 or older). Aswith a traditional pretax account, earnings onafter-tax contributions grow on a tax-deferredbasis.
If this option is offered (check your plandocuments), keep in mind that total employeeand employer contributions cannot exceed$53,000, or $59,000 for those 50 and older(2016 limits).
Another benefit of making after-taxcontributions is that when you leave your job orretire, they can be rolled over tax-free to a RothIRA, which also allows for potential tax-freegrowth from that point forward. Somehigher-income individuals may welcome thispotential benefit if their income affects theirability to directly fund a Roth IRA.1
1 In addition to rolling the proceeds to a RothIRA, participants may also (1) leave the assetsin the original plan, (2) transfer assets to a newemployer's plan, or (3) withdraw the funds(which in some cases could trigger a taxableevent).
When choosing betweenpretax and Rothcontributions, the generalrule is to consider whetheryou think you will benefitmore from the tax breaktoday than you would froma tax break in retirement.Specifically, if you thinkyou'll be in a higher taxbracket in retirement, Rothcontributions may be morebeneficial in the long run.
Generally, non-Roth after-taxcontributions should beconsidered after reachingthe maximum contributionamount for pretax and Rothoptions.
Keep in mind thatdistributions of earnings onnon-Roth after-taxcontributions will be subjectto regular income taxes andpossibly penalty taxes if notrolled over to a traditionalIRA. IRS Notice 2014-54clarifies the rules regardingrollovers of non-Rothafter-tax plan contributionsto a Roth IRA.
For more informationspecific to your situation,consult a qualified taxprofessional. (Working witha tax or financialprofessional cannotguarantee financialsuccess.)
Page 3 of 4, see disclaimer on final page
Oppenheimer & Co. Inc.The Israelite Group ofOppenheimer & Co. Inc.500 W Madison Suite 4000Chicago, IL [email protected]
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016
The content herein should not beconstrued as an offer to sell or thesolicitation of an offer to buy anysecurity. The information enclosedherewith has been obtained fromoutside sources and is not theproduct of Oppenheimer & Co. Inc.("Oppenheimer") or its affiliates.Oppenheimer has not verified theinformation and does notguarantee its accuracy orcompleteness. Additionalinformation is available uponrequest. Oppenheimer, nor any ofits employees or affiliates, does notprovide legal or tax advice.However, your OppenheimerFinancial Advisor will work withclients, their attorneys and their taxprofessionals to help ensure all oftheir needs are met and properlyexecuted. Oppenheimer & Co. Inc.Transacts Business on all PrincipalExchanges and is a member ofSIPC.
What changes can I make during this year's MedicareOpen Enrollment Period?Each year, current Medicarebeneficiaries can makechanges to their Medicarecoverage for the following year
during the Medicare Open Enrollment Periodthat starts on October 15 and runs throughDecember 7. Because this period is the onlytime during the year that all people withMedicare can make changes to their health andprescription drug plans for the following year,you should carefully consider your options.During this annual enrollment period, you can:
• Change from Original Medicare to a MedicareAdvantage Plan
• Change from a Medicare Advantage Planback to Original Medicare
• Switch from one Medicare Advantage Plan toanother Medicare Advantage Plan
• Switch from a Medicare Advantage Plan thatdoesn't offer prescription drug coverage to aMedicare Advantage Plan that does offer it
• Switch from a Medicare Advantage Plan thatoffers prescription drug coverage to aMedicare Advantage Plan that doesn't
• Enroll in a Medicare Part D prescription drugplan if you didn't enroll when you were firsteligible (a late enrollment penalty may apply)
• Switch from one Medicare Part D prescriptiondrug plan to another
• Drop Medicare prescription drug coverage
Your new coverage, or changes to your existingcoverage for the new year, will take effect onJanuary 1.
If you're currently in (or join) a MedicareAdvantage Plan, you have another opportunityto leave your plan and switch to OriginalMedicare (with or without a Part D prescriptiondrug plan) during the Medicare AdvantageDisenrollment Period that occurs every yearfrom January 1 to February 14. However, if youhave Original Medicare you cannot make anychanges during this period. In certaincircumstances, if you're enrolled in a MedicareAdvantage Plan or Part D prescription drugplan, you may also qualify to make changesduring Special Enrollment Periods. Visitmedicare.gov for more information.
Do I need to make any changes to my Medicarecoverage for next year?During the Medicare OpenEnrollment Period that runsfrom October 15 throughDecember 7, you can make
changes to your Medicare coverage that will beeffective on January 1, 2017. If you're satisfiedwith your current coverage, you don't need tomake changes, but you should review youroptions before you decide to stay with yourcurrent plan.
Your Medicare plan sends two importantdocuments every year that you should review.The first, called the Evidence of Coverage,provides information about what your plancovers and its cost. The second, called theAnnual Notice of Change, lists changes to yourplan for the upcoming year that will take effectin January. You can use these documents toevaluate your current plan and decide whetheryou need different coverage. You should alsoreview the official government handbook,Medicare & You 2017, which is availableelectronically or through the mail. It containsdetailed information about Medicare that shouldhelp you determine whether your current plan isright for you.
As you review your coverage, here are a fewpoints to consider:
• What were your health costs during the pastyear, and what did you spend the most on?
• Will your current plan cover all the servicesyou need and the health-care providers youneed to see next year?
• Does your current plan cost more or less thanother options? Consider premiums,deductibles, and other out-of-pocket costssuch as copayments or coinsurance costs;are any of these costs changing?
• Do you need to join a Medicare prescriptiondrug plan? When comparing plans, considerthe cost of drugs under each plan, and makesure the drugs you take will still be coverednext year.
If you have questions about Medicare, you cancall 1-800-MEDICARE or visit the Medicarewebsite at medicare.gov. You can use the site'sMedicare Plan Finder to see what plans areavailable in your area and check each plan'soverall quality rating.
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