1. THE LINK Newsletter
Provided by Nexus Financial Management
February 2009
Nexus Financial
Management LLC
Tax-Friendly States for Retirees
Bryan Dudones
4600 Touchton Road E.
Social Security benefits to the same extent
Building 100, Suite 150 If you're retired, or about to retire, you may be
they're taxed for federal income tax purposes.
Jacksonville, FL 32246 thinking about relocating to a state that has
Phone: 904-334-1376
low tax rates, or that provides special tax
bryan@nexusfm.com State income tax and pensions
benefits to retirees. Here's a survey that may
www.nexusfm.com
Of the states with an income tax, 36 fully or
jump-start your search for a tax-friendly state
partially exempt pension income--only
in which to spend your golden years.
Hello Everyone,
California, Indiana, Nebraska, Rhode Island,
New Year....similar results.
Income taxes generally and Vermont do not. But the exemptions vary
Unfortunately, 2009 has gotten
considerably by state. Some states exempt
off to a rocky start. The stock
State income taxes
market, as measured by the
public pensions from taxation but tax private
typically account for a
S&P 500, finished its worst
pensions, or exempt public pensions earned
January ever as reports on
large percentage of
economic growth and quarterly
in that state, but not public pensions earned in
the total taxes you
earnings were grim. The DJIA
another state.
finished the month lower by
pay. So, you may
8.8%, while the S&P 500 and
consider yourself
Nasdaq fell by 8.6% and 6.4%.
Some states exempt employer retirement
The GDP (gross domestic
lucky if you live in one benefits, but not IRA income. Some states
product) for the 4th quarter
of the seven no-income-tax states--Alaska,
confirmed the economy is
exempt a specific dollar amount of retirement
firmly entrenched in a
Florida, Nevada, South Dakota, Texas, Wash- income, but only if you've reached a certain
recession, falling at an annual
ington, and Wyoming (New Hampshire and
rate of 3.8%. It was the largest
age or have income within certain limits. In
quarterly decline in over 26
Tennessee impose income tax only on inter- some states, military pensions are partially or
years. The unemployment rate
est and dividends). If you're considering a
will continue to rise over the
fully exempt, while in others they're fully
near term as companies
state that does impose an income tax, you'll taxable. Some states exempt defined benefit
announce large layoffs.
want to know how it treats Social Security and
With that being said, I continue
pension payments, but tax 401(k) benefits.
to be optimistic, albeit
pensions in particular. Make sure you understand how your particular
cautiously, that we will begin to
see improvement in the type of retirement income is treated.
State income tax and Social Security
economy, especially later in the
year. The main wild card is how
Social Security income is completely exempt Keep in mind that federal law prohibits states
the government's new stimulus
from tax in 27 of the states with an income tax from taxing certain retirement income (chiefly
packages will be utilized.
(as well as the District of Columbia): Alabama, pension income) unless you're a resident of,
Bryan
Arizona, Arkansas, California, Delaware, or domiciled in, that state. For example, if you
Georgia, Hawaii, Idaho, Illinois, Indiana, Ken- receive a pension from your former California
In this issue:
tucky, Louisiana, Maine, Maryland, Massachu- employer, but you now reside in Florida,
Tax-Friendly States for
setts, Michigan, Mississippi, New Jersey, New California can't tax your retirement income.
Retirees
York, North Carolina, Ohio, Oklahoma, Ore-
Other considerations
gon, Pennsylvania, South Carolina, Virginia,
Retirement Plan and IRA
Limits for 2009
and Wisconsin. Missouri and Iowa partially tax Remember that states impose many other
benefits, but will fully exempt benefits begin- kinds of taxes (for example, sales, real estate,
College Costs: Increases and
ning in 2012 and 2014, respectively. and gift and estate taxes). Some states offer
Trends
tax breaks to seniors, like property tax reduc-
Two states (Connecticut and Kansas) don't
What is an expense ratio?
tions, or additional exemptions, standard de-
tax Social Security benefits if your other in-
ductions, or credits based on age.
come is less than a specified dollar amount
($50,000 or $60,000 in CT, $50,000 in KS). For an accurate comparison among the
Three states (Colorado, Utah, and West Vir- states, you'll need to consider your total tax
ginia) provide a general retirement income burden. A number of web sites dedicated to
exclusion that takes Social Security benefits providing information to retirees can help you
into account. Most of the remaining states tax in this daunting task.

2. Page 2
Retirement Plan and IRA Limits for 2009
An increasing number of retirement plan and Contribution limits: 2009 tax year*
IRA limits are indexed for inflation each year. (2008 limits in parentheses)
Some of the key numbers for 2009 are dis-
Annual Catch-up
cussed below. Plan type
dollar limit limit
Elective deferrals
401(k), 403(b),
$16,500 $5,500
and 457(b)**
If you're lucky enough to be eligible to partici- ($15,500) ($5,000)
plans
pate in a 401(k), 403(b), 457(b), or SAR-SEP
plan, you can make elective deferrals of up to $11,500 $2,500
SIMPLE plans
$16,500 in 2009, up from $15,500 in 2008. If ($10,500) ($2,500)
you're age 50 or older, you also can make a
Traditional
catch-up contribution of up to $5,500 to these $5,000 $1,000
and Roth
plans in 2009, up from $5,000 in 2008. ($5,000) ($1,000)
IRAs
If your 401(k) or 403(b) plan allows Roth con-
*Contributions can't exceed 100% of your pay. If you par-
tributions, your total elective contributions,
ticipate in a 403(b) or 457(b) plan, special rules may allow
pretax and Roth, can't exceed $16,500 an even greater catch-up contribution.
($22,000 with catch-up contributions). You **$5,500 catch-up applies only to governmental 457(b)
plans.
can split your contribution any way you wish.
For example, you can make $9,500 of Roth Some other key numbers for 2009
contributions and $7,000 of pretax 401(k) con-
For 2009, the maximum amount of compensa-
tributions. It's up to you.
tion your employer can take into account
If you participate in a SIMPLE IRA or SIMPLE when calculating SEP and qualified plan con-
401(k) plan, you can contribute up to $11,500 tributions and benefits is $245,000 (up from
in 2009 (up from $10,500 in 2008). If you're $230,000 in 2008).
age 50 or older, the maximum catch-up contri-
The maximum annual benefit you can receive
bution to a SIMPLE IRA or SIMPLE 401(k)
from a defined benefit pension plan is limited
plan in 2009 is $2,500, unchanged from 2008.
to $195,000 in 2009 (up from $185,000 in
IRA limits remain the same for 2009 2008).
The amount you can contribute to a traditional And the maximum amount that can be allo-
or Roth IRA remains at $5,000 for 2009, and cated to your account in a defined contribution
the maximum catch-up contribution for those plan (for example, a 401(k) plan or profit shar-
age 50 or older remains at $1,000. You can ing plan) in 2009 is $49,000 (up from $46,000
contribute to an IRA in addition to an em- in 2008), plus age-50 catch-up contributions.
ployer-sponsored retirement plan. But if you (This includes both your contributions and
(or your spouse) participate in an employer- your employer's contributions. Special rules
sponsored plan, your ability to deduct tradi- apply if your employer sponsors more than
tional IRA contributions may be limited, de- one retirement plan.)
pending on your income. Roth contributions
are also subject to income limits.
Income phaseout range for determining deductibility of traditional IRA contributions in 2009
1. Covered by an employer plan
$55,000 - $65,000 ($53,000 - $63,000 in 2008)
Single/Head of household
$89,000 - $109,000 ($85,000 - $105,000 in 2008)
Married filing jointly
$0 - $10,000 (same for 2008)
Married filing separately
2. Not covered by an employer plan, but filing
$166,000 - $176,000 ($159,000 - $169,000 in 2008)
joint return with a spouse who is covered
Income phaseout range for determining ability to fund Roth IRA in 2009
$105,000 - $120,000 ($101,000 - $116,000 in 2008)
Single/Head of household
$166,000 - $176,000 ($159,000 - $169,000 in 2008)
Married filing jointly
$0 - $10,000 (same in 2008)
Married filing separately

3. THE LINK Newsletter Page 3
College Costs: Increases and Trends
they paid no attention to cost when searching
Many of the developments we saw last year in
for a college. But there's evidence this pattern
the world of higher education will continue to
may be changing. Around the country, college
play out in 2009, as the largest high school
administrators report an increased focus on
class in American history heads off to college. A look at
price at college fairs, and a majority of families
student debt
Costs, costs, costs say in online surveys that they are seeking
less prestigious schools for money reasons. According to the
For the 2008/09
College Board,
school year, the Public college trends
almost two-thirds
total average
of college students
But just as public colleges find themselves
cost (tuition and
graduated with
more in demand than ever by cash-strapped
fees, room and
student loans last
students and employees looking to gain a leg
board, books
year, with an
up in the workforce, state budget deficits are
and supplies,
average debt load
forcing many states to reduce their public
transportation,
of $22,700.
higher education expenditures, resulting in
and other miscellaneous expenses) for an in-
markedly higher tuition and fees. So far, at
state public college student is $18,326; for an One unfortunate
least 20 states have made cuts to their public
out-of-state public college student, $29,193; trend of widespread
university budgets or are planning large tuition
and for a private college student, a whopping student borrowing
increases. And more states are expected to
$37,390 (Source: The College Board's Trends has been an
be in financial peril in 2009, jeopardizing fu-
in Student Pricing 2008 Report). According to increase in the
ture public higher education expenditures
the College Board, over the past decade, col- number of heavily
(Source: The Wall Street Journal, October 17,
lege costs have increased an average of 5% leveraged young
2008, quot;State Budget Cuts Push Tuition
to 6% a year. college graduates.
Higherquot;).
In fact, many families
This year, the ever-increasing cost of college
are considering
Private college trends
comes at a time when many parents may be
private bailouts for
grappling with reduced college savings due to The highest tier private colleges--the Ivies and their children who
the ailing economy. With less savings, lower a few select institutions--have enjoyed record took on too much
home equity against which to borrow, and endowment growth over the past few years college debt.
possibly stagnating incomes or a recent job (not counting the economic downturn) and
loss, parents may be less able to contribute to (Source: The
have translated those gains into increased
their children's ever-growing college financial Wall Street Journal,
merit aid awards (which aren't based on finan-
need. October 8, 2008,
cial need) for the best students. Many of these
quot;The Next Bailout:
institutions have even gone so far as to offer a
Borrowing
Your Adult
free education to students whose families
Enter student loans. The amount of borrowing Children?quot;)
earn up to $150,000 or $200,000 per year.
for college has increased tremendously over
But go one or two levels below, and many
the past decade, especially in the area of pri-
colleges in the second and third tiers aren't in
vate student loans. Last year, private loans
a position to meet all of their students' finan-
comprised 23% of total education loan dollars,
cial need. These colleges continue to hand
compared to 5% ten years ago (Source: The
out merit aid, but are more selective (and less
College Board and The Project on Student
generous) in their awards. So students at
Debt). The reason for the increase? The bor-
these schools could end up paying more out-
rowing limits on federal student loans haven't
of-pocket.
kept pace with the rise in college costs.
Federal legislation
However, the ongoing credit crunch has al-
tered the marketplace this year. Many private Against this backdrop, the federal government
lenders have dropped out of the student lend- passed the Higher Education Opportunity Act
ing business completely, and those still in it last year. Among other things, the Act will
are charging higher interest rates and requir- make it easier for students to apply for federal
ing more stringent credit checks. student loans and to research college costs
on a new website, www.college.gov.
A study conducted last August by educational
lender Sallie Mae concluded that 70% of fami- And in 2009, it will be interesting to see what
lies didn't even consider their child's likely ideas and policies President Obama, who just
post-graduation income when deciding how finished paying off his own student loans in
much to borrow for college, and 40% said 2004, brings to the college table.

4. Ask the Experts
What is an expense ratio?
help make a fund more cost-effective for each
Every mutual fund must
investor. In recent years, there has been dis-
disclose certain costs asso-
cussion of whether 12b-1 fees should be
ciated with running the
eliminated--especially for funds that are
fund. Those costs, which
closed to new investors and therefore should
are expressed as a percent-
have little need to market themselves--but
age of the fund's assets, represent a fund's
they are still very common.
expense ratio, which can be found in its pro-
Nexus Financial
spectus. For example, a fund that has $100 Administrative fees: Includes the cost of re-
Management LLC
million in assets and annual expenses of $1 cord keeping, custodianship, taxes, and legal,
Bryan Dudones
million would report a 1% expense ratio (1%
4600 Touchton Road E. accounting, and auditing services.
of $100 million equals $1 million).
Building 100, Suite 150
A fund's expense ratio can help you gauge
Jacksonville, FL 32246
An expense ratio includes the following:
Phone: 904-334-1376 how efficiently it operates. You do not need to
bryan@nexusfm.com
deduct a fund's expense ratio from the returns
Management fees: Fees paid to the fund's
www.nexusfm.com
quoted in its prospectus; the figures that
investment manager or advisor, which man-
measure average annual and cumulative re-
ages the fund and makes investment deci-
Nothing in this document should turn have already taken them into account.
sions. These often represent the single largest
be construed as specific
portion of a typical fund's expense ratio.
investment advice. For Before investing in a mutual fund, carefully
investment and tax concerns
consider its investment objectives and risks as
Marketing costs: Also known as 12b-1 fees,
specific to your needs, please
well as its charges and expenses. This infor-
request a personal consultation. named after the legal provision that permits
mation is available in the prospectus, which
them. These were originally designed to let
can be obtained from the fund. Read it care-
funds recoup costs associated with distribu-
fully before investing; a fund's expense ratio
tion and advertising, on the theory that attract-
can affect your long-term net returns.
ing new investors and additional assets would
What are trading expenses and why do they matter?
costs aren't included in a fund's expense ratio.
Trading expenses represent the cost of buy-
However, funds are required to report the per-
ing or selling securities, and can have a sub-
share cost of their annual commissions; this
stantial impact on your net return over time.
can be found in a fund's annual report or
Brokerage commissions are the most obvious Statement of Additional Information.
example of trading expenses, but there are
Many investors use a fund's turnover ratio to
others. For example, the bid/ask spread is the
help gauge the impact of its trading expenses.
difference between the price sellers are ask-
The turnover ratio indicates the value of a
ing for a security and the price buyers are
fund's trades as a percentage of its net asset
willing to pay for it. Still another example of
value. Trading expenses for a fund with a high
trading expenses is what's known as market-
turnover ratio would typically be higher than
impact effect costs, which occur when an in-
for one that trades infrequently and therefore
stitutional investor's purchases or sales of
incurs fewer brokerage commissions.
large quantities of a given security affect that
security's price. If you use leverage--for exam- Though not part of a fund's internal trading
ple, if you buy on margin--you will likely pay expenses, there are other potential trading
interest, which also should be included in your costs of which you should be aware. A fund
estimate of trading costs. may charge a redemption fee if you sell your
shares before a designated length of time. It
For individual securities, it's relatively easy to
also may impose a sales charge, either when
know what your trading costs are. However,
you buy a fund (a front-end load) or sell it (a
with a mutual fund, understanding the impact
Prepared by Forefield Inc, back-end load). Not all funds have a redemp-
of trading expenses can be more challenging.
Copyright 2009 tion fee or sales charge, but they should be
Funds also incur brokerage commissions and
considered when estimating your total trading
bid/ask spreads on their trades, but those
costs.