Endowment WealthManagementRobert Riedl, CPA, CFP, AWMADirector of Wealth Management2200 North Richmond StreetSuite 200Appleton, WI 54911920-785-6010 x6011rob@EndowmentWM.comwww.EndowmentWM.com

November 2013

2013 Year-End Tax Planning Considerations

Buckets of Money: A Retirement IncomeStrategy

Paying for Long-Term Care Insurance withTax-Free Funds

Is it true that my child can receive Social Securitybenefits based on my earnings record?

EWM Monthly NewsletterPlanning Your Financial Future2013 Year-End Tax Planning Considerations

See disclaimer on final page

As the end of the 2013tax year approaches,set aside some time toevaluate yoursituation. Here aresome things to keep inmind as you considerpotential year-end taxmoves.

1. The tax landscape has changed forhigher-income individualsThis year a new 39.6% federal income tax rateapplies if your taxable income exceeds$400,000 ($450,000 if you're married and file ajoint return, $225,000 if you're married and fileseparately). If your income crosses thatthreshold, you'll also be subject to a new 20%maximum tax rate on long-term capital gainsand qualifying dividends (last year, themaximum rate that applied was 15%).

That's not all--you could see a difference even ifyour income doesn't reach that level. That'sbecause if your adjusted gross income is morethan $250,000 ($300,000 if you're married andfile a joint return, $150,000 if you're married andfile separately), your personal and dependencyexemptions may be phased out this year, andyour itemized deductions may be limited.

2. New Medicare taxes applyTwo new Medicare taxes apply this year. If yourwages exceed $200,000 this year ($250,000 ifyou're married and file a joint return, $125,000 ifyou're married and file separately), the hospitalinsurance (HI) portion of the payrolltax--commonly referred to as the Medicareportion--is increased by 0.9%. Also, a 3.8%Medicare contribution tax generally applies tosome or all of your net investment income ifyour modified adjusted gross income exceedsthose dollar thresholds.

3. Don't forget the basics--retirementplan contributionsMake sure that you're taking full advantage oftax-advantaged retirement savings vehicles.Traditional IRAs (assuming that you qualify tomake deductible contributions) andemployer-sponsored retirement plans such as

401(k) plans allow you to contribute fundspretax, reducing your 2013 income.Contributions that you make to a Roth IRA(assuming you meet the income requirements)or a Roth 401(k) plan are made with after-taxdollars, but qualified Roth distributions arecompletely free from federal income tax. For2013, you can contribute up to $17,500 to a401(k) plan ($23,000 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 windowto make 2013 contributions to an employer plantypically closes at the end of the year, while yougenerally have until the due date of your federalincome tax return to make 2013 IRAcontributions.

4. Expiring provisionsA number of key provisions are scheduled toexpire at the end of 2013, including:

• Increased Internal Revenue Code Section179 expense limits and "bonus" depreciationprovisions end.

• The increased (100%) exclusion of capitalgain from the sale or exchange of qualifiedsmall business stock (provided certainrequirements, including a five-year holdingperiod, are met) will not apply to qualifiedsmall business stock issued and acquiredafter 2013.

• This will be the last year that you'll be able tomake qualified charitable distributions(QCDs) of up to $100,000 from an IRAdirectly to a qualified charity if you're 70½ orolder; such distributions may be excludedfrom income and count toward satisfying anyrequired minimum distributions (RMDs) youwould otherwise have to receive from yourIRA in 2013.

• The above-the-line deductions for qualifiedhigher education expenses, and for up to$250 of out-of-pocket classroom expensespaid by education professionals, will not beavailable starting with the 2014 tax year.

• This will also be the last year you'll be able toelect to deduct state and local sales tax inlieu of state and local income tax if youitemize deductions.

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Buckets of Money: A Retirement Income StrategySome retirees are able to live solely on theearnings that their investment portfoliosproduce, but most also have to figure out howto draw down their principal over time. Even ifyou've calculated how much you can withdrawfrom your savings each year, market volatilitycan present a special challenge when you knowyou'll need that nest egg to supply income formany years to come.

When you were saving for retirement, you mayhave pursued an asset allocation strategy thatbalanced your needs for growth, income, andsafety. You can take a similar multi-prongedapproach to turning your nest egg into ongoingincome. One way to do this is sometimes calledthe "bucket" strategy. This involves creatingmultiple pools of money; each pool, or "bucket,"is invested depending on when you'll need themoney, and may have its own asset allocation.

Buckets for your "bucket list"When you're retired, your top priority is to makesure you have enough money to pay your bills,including a few unexpected expenses. That'smoney you need to be able to access easilyand reliably, without worrying about whether themoney will be there when you need it. Estimateyour expenses over the next one to five yearsand set aside that total amount as your first"bucket." Safety is your priority for this money,so it would generally be invested in extremelyconservative investments, such as bankcertificates of deposit, Treasury bills, a moneymarket fund, or maybe even a short-term bondfund. You won't earn much if any income onthis money, but you're unlikely to suffer muchloss, either, and earnings aren't the purpose ofyour first bucket. Your circumstances willdetermine the investment mix and the numberof years it's designed to supply; for example,some people prefer to set aside only two orthree years of living expenses.

This bucket can give you some peace of mindduring periods of market volatility, since it mighthelp reduce the need to sell investments at aninopportune time. However, remember thatunlike a bank account or Treasury bill, a moneymarket fund is neither insured nor guaranteedby the Federal Deposit Insurance Corp.; amoney market attempts to maintain a stable $1per share price, but there is no guarantee it willalways do so. And though a short-term bondfund's value is relatively stable compared tomany other funds, it may still fluctuate.

Refilling the bucketAs this first bucket is depleted over time, it mustbe replenished. This is the purpose of yoursecond bucket, which is designed to produce

income that can replace what you take from thefirst. This bucket has a longer time horizon thanyour first bucket, which may allow you to takeon somewhat more risk in pursuing thepotential for higher returns. With interest ratesat historic lows, you might need somecombination of fixed-income investments, suchas intermediate-term bonds or an incomeannuity, and other instruments that also offerincome potential, such as dividend-payingstocks.

With your first bucket, the damage inflation cando is limited, since your time frame is fairlyshort. However, your second bucket must takeinflation into account. It has to be able toreplace the money you take out of your firstbucket, plus cover any cost increases causedby inflation. To do that, you may need to takeon somewhat more risk. The value of thisbucket is likely to fluctuate more than that of thefirst bucket, but since it has a longer timehorizon, you may have more flexibility to adjustto any market surprises.

Going back to the wellThe primary function of your third bucket is toprovide long-term growth that will enable you tokeep refilling the first two. The longer youexpect to live, the more you need to think aboutinflation; without a growth component in yourportfolio, you may be shortening your nestegg's life span. To fight the long-term effects ofinflation, you'll need investments that may seeprice swings but that offer the most potential toincrease the value of your overall portfolio.You'll want this money to grow enough to notonly combat inflation but also to increase yourportfolio's chances of lasting as long as youneed it to. And if you hope to leave an estatefor your heirs, this bucket could help youprovide it.

How many buckets do I need?This is only one example of a bucket strategy.You might prefer to have only two buckets--onefor living expenses, the other to replenish it--orother buckets to address specific goals. Canyou accomplish the same results withoutdesignating buckets? Probably. But a bucketapproach helps clarify the various needs thatyour retirement portfolio must fill, and howvarious specific investments can address them.

Note: Before investing in a mutual fund,carefully consider its investment objectives,risks, fees, and expenses, which can be foundin the prospectus available from the fund. Readit carefully before investing.

Even with a bucket strategy,you'll probably also need todetermine a sustainablewithdrawal rate that lets youknow roughly how much ofyour portfolio you canwithdraw each year whilepreserving its longevity.

Don't forget that allinvesting involves risk,including the possible lossof some or all of yourprincipal, and there can beno guarantee that anystrategy will be successful.

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Paying for Long-Term Care Insurance with Tax-Free FundsThe high cost of long-term care can quicklydrain your savings, absorb most of yourincome, and affect the quality of life for you andyour family. Long-term care insurance (LTCI)allows you to share that cost with an insurancecompany. If you're concerned about protectingyour assets and maintaining your financialindependence, (LTCI) may be right for you.

But LTCI premiums can be expensive, andcash or income needed to cover thosepremiums may not be readily available. Thegood news is that there are several tax-freeoptions that can help you pay for LTCI.

Using a health savings accountA health savings account, or HSA, is a taxadvantaged savings account tied to a highdeductible health insurance plan. An HSA isfunded with pretax contributions up to certainannual limits set by the IRS. Any growth insidean HSA is tax deferred, and what you don'tspend in one year can carry over to subsequentyears. Just as importantly, withdrawals madefrom your HSA for qualified medical expensesare tax free.

Tax-qualified LTCI premiums are a qualifiedmedical expense eligible to be paid from HSAfunds. The maximum annual premium you canpay tax free is subject to long-term carepremium deduction limits.

Convert taxable annuity to tax-freelong-term care insuranceGenerally, withdrawals from a nonqualifieddeferred annuity (premiums paid with after-taxdollars) are considered to come first fromearnings, then from your investment (premiumspaid) in the contract. The earnings portion ofthe withdrawal is treated as income to theannuity owner, subject to ordinary incometaxes. IRC Section 1035 allows you toexchange one annuity for another without anyimmediate tax consequences, as long ascertain requirements are met. But, what youmay not know is that the Pension Protection Act(PPA) extends the tax-free exchange ofannuities for qualified stand-alone LTCI orcombination annuity/LTCI policies. Thiseffectively allows you to purchase LTCI withannuity cash values that would otherwise havebeen taxable to you if withdrawn.

However, there are some potential drawbacks:

• You may incur annuity surrender chargeswhen transferring your annuity.

• Transferring your annuity means you won'thave the potential income the annuity couldprovide.

• While premiums for qualified LTCI are taxdeductible as qualified medical expenses,annuity payments used to pay for long-termcare are not tax deductible.

• Not all long-term care policies allow you topay premiums in a lump sum, so you mayhave to make partial 1035 exchanges fromthe annuity to the LTCI company, but not allannuities allow partial 1035 exchanges.

HELPS may helpAnother opportunity to pay for LTCI on atax-free basis may be available to qualifyingretired public safety officers. Part of thePension Protection Act of 2006, the HealthcareEnhancement for Local Public Safety (HELPS)Retirees Act, allows certain retired public safetyofficers to make tax-free withdrawals from theirretirement plans to help pay for LTCI forthemselves and their respective spouses anddependents.

Eligible retired public safety officers include lawenforcement officers, firefighters, chaplains,and members of a rescue squad or ambulancecrew. Public safety officers must have attainednormal retirement age or they must beseparated from service due to a disability.HELPS does not extend to 911 operators,dispatchers, and administrative personnel. Inaddition, if an eligible participant dies, theexclusion from tax for withdrawals does notextend to surviving spouses or otherbeneficiaries of the participant's retirement plan.

Eligible government retirement plans includequalified trusts, Section 403(a) plans, Section403(b) annuities, and Section 457(b) plans. Upto $3,000 per year may be withdrawn on apretax basis, and the money must be paiddirectly from the retirement plan to the LTCIcompany. However, not all retirement plansmay allow for these withdrawals, and somestate laws may not allow the tax-free treatmentof distributions.

HSAs, the PPA, and the HELPS Act haveopened the door to long-term care coverage forpeople who might otherwise have a hard timeaffording it. Your financial professional may beable to provide more information on these andother ways to help you plan for the potentiallyhigh cost of long-term care.

Generally, to be considereda tax-free exchange ratherthan a taxable surrender,you cannot receive theannuity proceeds--theproceeds from the annuitymust be paid directly to theLTCI company. Also,Section 1035 applies only ifthe annuity owner and theLTCI policy owner are thesame person.

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Endowment WealthManagementRobert Riedl, CPA, CFP, AWMADirector of Wealth Management2200 North Richmond StreetSuite 200Appleton, WI 54911920-785-6010 x6011rob@EndowmentWM.comwww.EndowmentWM.com

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013

IMPORTANT DISCLOSURES

The information presented byEndowment Wealth Management,Inc. is not specific to anyindividual's personalcircumstances and should not betaken as a firm recommendation.

To the extent that this materialconcerns tax matters, it is notintended or written to be used, andcannot be used, by a taxpayer for thepurpose of avoiding penalties thatmay be imposed by law. Eachtaxpayer should seek independentadvice from a tax professional basedon his or her individualcircumstances.

These materials are provided forgeneral information and educationalpurposes based upon publiclyavailable information from sourcesbelieved to be reliable—we cannotassure the accuracy or completenessof these materials. The information inthese materials may change at anytime and without notice. If you haveany questions please call our officesat 920-785-6010.

Do I need to make any changes to my Medicarecoverage for next year?If you're currently enrolled inMedicare, you've probablybegun receiving informationabout your coverage. That's

because the annual enrollment period forMedicare runs from October 15 throughDecember 7. During this period, you can makechanges to your Medicare coverage that will beeffective on January 1, 2014. 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 you two importantdocuments every year that you should review.The first, called the Evidence of Coverage,gives you information about what your plancovers, and its cost. The second, called theAnnual Notice of Change, lists changes to yourplan for the upcoming year (these will takeeffect in January). You can use thesedocuments to evaluate your current plan anddecide if you need different coverage. If youhaven't already gotten one, you should soonreceive a copy of Medicare & You 2013, theofficial government Medicare handbook. It

contains detailed information about Medicarethat should help you decide if your current planis right for you.

As you review your coverage, here are a fewpoints to consider:

• 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 costsyou pay such as co-payments or coinsurancecosts; are any of these costs changing?

• Do you need to join a Medicare drug plan?When comparing plans, consider the cost ofdrugs under each plan, and make sure thedrugs you take will still be covered next year.

• Does your Medigap plan (if you have one) stillmeet your needs?

If you have questions about Medicare, you cancall 1-800-MEDICARE (1-800-633-4227 or TTY1-877-486-2048) or visit the Medicare websiteat www.medicare.gov.

Is it true that my child can receive Social Securitybenefits based on my earnings record?Your child--whether he or sheis your biological child,adopted child, orstepchild--may be able to

receive Social Security monthly benefits basedon your earnings record if you're receivingdisability or retirement benefits from SocialSecurity, or in the event of your death. Theseoften overlooked benefits can provide steadyincome for your family when it's needed themost.

How much will your child receive from SocialSecurity? When you start receiving retirementor disability benefits, your child may be eligibleto receive up to 50% of your benefit. When youdie, your child may be eligible to receive up to75% of your basic benefit (the benefit that theSocial Security Administration calculates youwould have received if you had reached fullretirement age at the time of your death).Various factors will affect the amount of yourchild's benefit, including whether other familymembers are also receiving benefits on yourearnings record.

To receive Social Security benefits based onyour record, your child must generally be a

dependent under age 18 (or age 19 if a full-timestudent in grade 12 or lower) and unmarried.However, if your unmarried child is disabledand was disabled before age 22, he or she canqualify for benefits based on your record at anyage; benefits for a disabled child may end,though, if your child marries or is no longerconsidered disabled.

You can find out more about family benefitsbased on your earnings record by checkingyour Social Security Statement. To access yourstatement, sign up for a my SocialSecurityaccount at the Social Security Administration'swebsite, www.socialsecurity.gov. Yourstatement will give you important informationabout Social Security that you can use to planfor your family's financial future. This includeshow you and your family members qualify forbenefits, estimates of your future retirementand disability benefits, and what survivorsbenefits your child and other family membersmight receive if you die.

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