February Newsletter 2009

Synergy Financial Group Newsletter - February 2009

Synergy Financial Group George Van Dyke Financial Consultant 401 Washington Ave Suite 700 Towson, MD 21204 410-825-3200 [email protected] www.synergyfinancialgrp.com

Tax-Friendly States for Retirees If you're retired, or about to retire, you may be thinking about relocating to a state that has low tax rates, or that provides special tax benefits to retirees. Here's a survey that may jump-start your search for a tax-friendly state in which to spend your golden years. Income taxes generally State income taxes typically account for a large percentage of the total taxes you pay. So, you may consider yourself lucky if you live in one of the seven no-income-tax states--Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming (New Hampshire and Tennessee impose income tax only on interest and dividends). If you're considering a state that does impose an income tax, you'll want to know how it treats Social Security and pensions in particular.

In this issue: Tax-Friendly States for Retirees Retirement Plan and IRA Limits for 2009 Rethinking Your Retirement Game Plan What is an expense ratio?

State income tax and Social Security Social Security income is completely exempt from tax in 27 of the states with an income tax (as well as the District of Columbia): Alabama, Arizona, Arkansas, California, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Virginia, and Wisconsin. Missouri and Iowa partially tax benefits, but will fully exempt benefits beginning in 2012 and 2014, respectively. Two states (Connecticut and Kansas) don't tax Social Security benefits if your other income is less than a specified dollar amount ($50,000 or $60,000 in CT, $50,000 in KS). Three states (Colorado, Utah, and West Virginia) provide a general retirement income exclusion that takes Social Security benefits into account. Most of the remaining states tax

Social Security benefits to the same extent they're taxed for federal income tax purposes. State income tax and pensions Of the states with an income tax, 36 fully or partially exempt pension income--only California, Indiana, Nebraska, Rhode Island, and Vermont do not. But the exemptions vary considerably by state. Some states exempt public pensions from taxation but tax private pensions, or exempt public pensions earned in that state, but not public pensions earned in another state. Some states exempt employer retirement benefits, but not IRA income. Some states exempt a specific dollar amount of retirement income, but only if you've reached a certain age or have income within certain limits. In some states, military pensions are partially or fully exempt, while in others they're fully taxable. Some states exempt defined benefit pension payments, but tax 401(k) benefits. Make sure you understand how your particular type of retirement income is treated. Keep in mind that federal law prohibits states from taxing certain retirement income (chiefly pension income) unless you're a resident of, or domiciled in, that state. For example, if you receive a pension from your former California employer, but you now reside in Florida, California can't tax your retirement income. Other considerations Remember that states impose many other kinds of taxes (for example, sales, real estate, and gift and estate taxes). Some states offer tax breaks to seniors, like property tax reductions, or additional exemptions, standard deductions, or credits based on age. For an accurate comparison among the states, you'll need to consider your total tax burden. A number of web sites dedicated to providing information to retirees can help you in this daunting task.

Page 2 Retirement Plan and IRA Limits for 2009 An increasing number of retirement plan and IRA limits are indexed for inflation each year. Some of the key numbers for 2009 are discussed below. Elective deferrals If you're lucky enough to be eligible to participate in a 401(k), 403(b), 457(b), or SAR-SEP plan, you can make elective deferrals of up to $16,500 in 2009, up from $15,500 in 2008. If you're age 50 or older, you also can make a catch-up contribution of up to $5,500 to these plans in 2009, up from $5,000 in 2008. If your 401(k) or 403(b) plan allows Roth contributions, your total elective contributions, pretax and Roth, can't exceed $16,500 ($22,000 with catch-up contributions). You can split your contribution any way you wish. For example, you can make $9,500 of Roth contributions and $7,000 of pretax 401(k) contributions. It's up to you. If you participate in a SIMPLE IRA or SIMPLE 401(k) plan, you can contribute up to $11,500 in 2009 (up from $10,500 in 2008). If you're age 50 or older, the maximum catch-up contribution to a SIMPLE IRA or SIMPLE 401(k) plan in 2009 is $2,500, unchanged from 2008. IRA limits remain the same for 2009 The amount you can contribute to a traditional or Roth IRA remains at $5,000 for 2009, and the maximum catch-up contribution for those age 50 or older remains at $1,000. You can contribute to an IRA in addition to an employer-sponsored retirement plan. But if you (or your spouse) participate in an employersponsored plan, your ability to deduct traditional IRA contributions may be limited, depending on your income. Roth contributions are also subject to income limits.

Contribution limits: 2009 tax year* (2008 limits in parentheses) Annual dollar limit

Catch-up limit

401(k), 403(b), and 457(b)** plans

$16,500 ($15,500)

$5,500 ($5,000)

SIMPLE plans

$11,500 ($10,500)

$2,500 ($2,500)

Traditional and Roth IRAs

$5,000 ($5,000)

$1,000 ($1,000)

Plan type

*Contributions can't exceed 100% of your pay. If you participate in a 403(b) or 457(b) plan, special rules may allow an even greater catch-up contribution. **$5,500 catch-up applies only to governmental 457(b) plans.

Some other key numbers for 2009 For 2009, the maximum amount of compensation your employer can take into account when calculating SEP and qualified plan contributions and benefits is $245,000 (up from $230,000 in 2008). The maximum annual benefit you can receive from a defined benefit pension plan is limited to $195,000 in 2009 (up from $185,000 in 2008). And 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 2009 is $49,000 (up from $46,000 in 2008), 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.)

Income phaseout range for determining deductibility of traditional IRA contributions in 2009 1. Covered by an employer plan Single/Head of household Married filing jointly Married filing separately 2. Not covered by an employer plan, but filing joint return with a spouse who is covered

$55,000 - $65,000 ($53,000 - $63,000 in 2008) $89,000 - $109,000 ($85,000 - $105,000 in 2008) $0 - $10,000 (same for 2008) $166,000 - $176,000 ($159,000 - $169,000 in 2008)

Income phaseout range for determining ability to fund Roth IRA in 2009 Single/Head of household

$105,000 - $120,000 ($101,000 - $116,000 in 2008)

Married filing jointly

$166,000 - $176,000 ($159,000 - $169,000 in 2008)

Married filing separately

$0 - $10,000 (same in 2008)

Page 3 Rethinking Your Retirement Game Plan Periodic market downturns may result in significant investment losses, particularly within retirement accounts. If you are faced with this situation, you may have to reconsider when, or even if, you can retire. The effects of a decline Historically, the stock market has had its ups and downs. How any substantial market change impacts your retirement outlook may depend on how close you are to retirement. If you plan on working and contributing to your retirement savings for many more years, you may have time to recoup losses to your accounts due to poor investment performance. But if you're closing in on retirement or you're already there, a dip in your savings may affect how much you can safely withdraw and how long your savings can last. To demonstrate, assume you and your spouse have $1 million in retirement savings, expect an annual average rate of return of 7%, and estimate that you presently need $100,000 annual retirement income for both of you to live comfortably, of which $30,000 will come from Social Security. Presuming withdrawals increase by 3% each year to offset the effects of inflation, your savings will last about 22 years, as shown in the chart below (scenario 1). However, a decrease of 14% in the value of your savings in one year shortens the duration of your savings by over 4 years (scenario 2). (This example is hypothetical and does not reflect a specific investment or strategy.) $1,000,000 $900,000 $800,000 $700,000 $600,000 $500,000

What are your options? If you're fortunate, even a significant decrease in savings may not impact your retirement income dramatically. You may have other sources of fixed income such as companysponsored pensions, so you won't need to rely on your savings to provide much of your income. Or you may be able to offset the effect of diminished savings by spending less -forgoing that planned cruise, putting off buying that new car, or making smaller gifts to children and grandchildren, for example. But if you rely on your savings for most of your retirement income, considerable investment losses of the magnitude recently experienced can require major lifestyle changes. Here are a few ideas to help you cope with the erosion of your retirement savings. Continue working You may have to delay the retirement party a little longer. Postponing retirement lets you continue to add to your retirement savings, which can offset losses caused by poor investment performance. Also, working allows you to delay withdrawing from your savings. That could allow more time for your retirement accounts to recover from investment-related losses. Delay taking Social Security Social Security may be the only source of fixed income you'll have in retirement. If you delay applying for benefits until your full retirement age, you can get as much as 30% more in monthly payments compared to taking benefits early. And, for each year you defer benefits past your full retirement age (between 65 and 67, depending on when you were born) to age 70, your benefit is increased by 8%. That could mean an additional $500 or more in your benefit check each month--and that doesn't include annual cost of living increases. Consider fixed income investments

$400,000 $300,000 $200,000 $100,000 $0 67 69 71 73 75 77 79 81 83 85 87 89 Age Scenario 1 Scenario 2

By 2016, the number of working people over age 65 is expected to increase by 80%. Source: U.S. Bureau of Labor Statistics

Investments such as single premium immediate annuities (SPIAs) provide an income for the rest of your life, or for the combined lives of you and your spouse. However, while the income is dependable (subject to the claimspaying ability of the annuity issuer), you generally don't have access to the money you paid for the SPIA and you may not be able to change the amount of income payments or their duration once you've started.

If you delay your Social Security benefit, don't forget to sign up for Medicare at age 65.

Ask the Experts What is an expense ratio?

Synergy Financial Group George Van Dyke Financial Consultant 401 Washington Ave Suite 700 Towson, MD 21204 410-825-3200 [email protected] www.synergyfinancialgrp.com

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Securities offered through LPL Financial, Member FINRA/SIPC

Every mutual fund must disclose certain costs associated with running the fund. Those costs, which are expressed as a percentage of the fund's assets, represent a fund's expense ratio, which can be found in its prospectus. For example, a fund that has $100 million in assets and annual expenses of $1 million would report a 1% expense ratio (1% of $100 million equals $1 million). An expense ratio includes the following: Management fees: Fees paid to the fund's investment manager or advisor, which manages the fund and makes investment decisions. These often represent the single largest portion of a typical fund's expense ratio. Marketing costs: Also known as 12b-1 fees, named after the legal provision that permits them. These were originally designed to let funds recoup costs associated with distribution and advertising, on the theory that attracting new investors and additional assets would

Administrative fees: Includes the cost of record keeping, custodianship, taxes, and legal, accounting, and auditing services. A fund's expense ratio can help you gauge how efficiently it operates. You do not need to deduct a fund's expense ratio from the returns quoted in its prospectus; the figures that measure average annual and cumulative return have already taken them into account. Before investing in a mutual fund, carefully consider its investment objectives and risks as well as its charges and expenses. This information is available in the prospectus, which can be obtained from the fund. Read it carefully before investing; a fund's expense ratio can affect your long-term net returns.

What are trading expenses and why do they matter? Trading expenses represent the cost of buying or selling securities, and can have a substantial impact on your net return over time. Brokerage commissions are the most obvious example of trading expenses, but there are others. For example, the bid/ask spread is the difference between the price sellers are asking for a security and the price buyers are willing to pay for it. Still another example of trading expenses is what's known as marketimpact effect costs, which occur when an institutional investor's purchases or sales of large quantities of a given security affect that security's price. If you use leverage--for example, if you buy on margin--you will likely pay interest, which also should be included in your estimate of trading costs.

Prepared by Forefield Inc, Copyright 2009

help make a fund more cost-effective for each investor. In recent years, there has been discussion of whether 12b-1 fees should be eliminated--especially for funds that are closed to new investors and therefore should have little need to market themselves--but they are still very common.

For individual securities, it's relatively easy to know what your trading costs are. However, with a mutual fund, understanding the impact of trading expenses can be more challenging. Funds also incur brokerage commissions and bid/ask spreads on their trades, but those

costs aren't included in a fund's expense ratio. However, funds are required to report the pershare cost of their annual commissions; this can be found in a fund's annual report or Statement of Additional Information. Many investors use a fund's turnover ratio to help gauge the impact of its trading expenses. The turnover ratio indicates the value of a fund's trades as a percentage of its net asset value. Trading expenses for a fund with a high turnover ratio would typically be higher than for one that trades infrequently and therefore incurs fewer brokerage commissions. Though not part of a fund's internal trading expenses, there are other potential trading costs of which you should be aware. A fund may charge a redemption fee if you sell your shares before a designated length of time. It also may impose a sales charge, either when you buy a fund (a front-end load) or sell it (a back-end load). Not all funds have a redemption fee or sales charge, but they should be considered when estimating your total trading costs.