Optima Asset Management,LLCDiane T. McIntee, CFP®400 Millstone DriveSuite 202Hillsborough, NC 27278919-933-9019diane@optimaasset.netwww.optimaasset.net

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?

Investing That Makes an Impact

See disclaimer on final page

May is here and summer is on our doorstep! Iwish you all a pleasant Memorial Day andhope you will take a moment to rememberthose who have made the ultimate sacrificewhile defending our freedom.

I have gotten some inquiries recentlyregarding Socially Responsible Investing(SRI). The first article herein provides somegood information and I hope you will take amoment to read it. If you have any questionsplease feel free to contact me.

The pieces on the lump sum pension optionand retirement readiness also provide somegood information that may be helpful if makingthese decisions. We are happy to lend ourexpertise as well.

Our office will be open and staffed throughoutthe summer, so we are only a phone call oremail away. Please don't hesitate to contactus if we can help you in any way. I hope youenjoy upcoming celebrations, longer days,and warm weather!

Regards,

Diane

Your greatest compliment is the referralof your family and friends.

Socially responsibleinvesting (SRI) has cometo represent variousinvestment strategies thatfavor companies withbusiness practicesgenerally viewed associally responsible,ethical, and/or sustainable.

Overall, investor interest in SRI has beengaining momentum. In fact, the number ofinvestment funds incorporating ESG(environmental, social, and governance) factorshas increased 12% in the last two years alone,from 894 in 2014 to 1,002 in 2016. These 1,002funds represent $2.6 trillion in net assets.1

What is SRI?Fundamentally, SRI is an investment strategy inwhich companies' social and environmentalrecords and objectives are factored in whenbuilding a portfolio.

Money managers who use SRI strategies oftenintegrate ESG factors with traditional financialanalysis to choose securities for their funds.The heightened focus on corporatesustainability issues allows investors tocompare how businesses in the same industryhave adapted to meet social and environmentalchallenges, and provides some insight intowhich companies may be exposed to risks orhave a competitive advantage. For example, insome instances, poor decisions and lack ofplanning could cause negative financial resultsfor a company, whereas good corporatecitizenship may boost a company's publicimage and help create value.

Why is SRI attractive to investors?Individual investors may have different opinionsabout which policies and practices have apositive or negative impact on society.Fortunately, there are a number of SRI optionsto choose from. This gives investors the abilityto build a portfolio that aligns with their personalvalues and offers the potential for earningpositive returns.

In addition, investors may have difficultymeasuring the intangible value associated withsocially responsible companies, which meansthese companies may be undervalued andrepresent a potential buying opportunity.

What might investors find unappealing?SRI opponents claim that investing should beabout making money first; therefore, social andenvironmental issues are viewed as nobleimpediments to that goal. Focusing on SRIstrategies limits the total universe of availableinvestments and could make it morechallenging to diversify and maintain yourdesired asset allocation. Diversification andasset allocation are methods used to helpmanage investment risk; they do not guaranteea profit or protect against investment loss.

Moreover, although data is available, it can bedifficult to thoroughly assess the ethics of agiven company. For example, beyond the valuechains of a company itself, investors might alsoneed to look at the different social standardsamong the contractors and subcontractorsassociated with the company.

Remember that different SRI funds may focuson very different ESG criteria, and there is noguarantee that an SRI fund will achieve itsobjectives.

All investing involves risk, including the possibleloss of principal, and there can be noassurance that any investment strategy will besuccessful. The return and principal value ofSRI stocks and mutual funds fluctuate withchanges in market conditions. Shares, whensold, may be worth more or less than theiroriginal cost.

Mutual funds are sold by prospectus. Pleaseconsider the investment objectives, risks,charges, and expenses carefully beforeinvesting. The prospectus, which contains thisand other information about the investmentcompany, can be obtained from your financialprofessional. Be sure to read the prospectuscarefully before deciding whether to invest.1 The Forum for Sustainable and ResponsibleInvestment, 2016

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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

Page 3 of 4, see disclaimer on final page

Optima AssetManagement, LLCDiane T. McIntee, CFP®400 Millstone DriveSuite 202Hillsborough, NC 27278919-933-9019diane@optimaasset.netwww.optimaasset.net

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2017

This article was created by a ThirdParty and was not written orcreated by Diane T. McIntee anddoes not represent the views andopinions of Cambridge InvestmentResearch, Inc.

Securities offered throughRegistered Representatives ofCambridge Investment Research,Inc., a broker-dealer, memberFINRA/SIPC.

Advisory services throughCambridge Investment ResearchAdvisors, Inc., a RegisteredInvestment Adviser.

Cambridge and Optima AssetManagement, LLC are notaffiliated.

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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