Newsletter - August 2013

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Issue: # 56 AUGUST 2013
Dear ,
Welcome to August 2013 issue of The Wealth Chronicle!
Are Fees and Poor Performance Destroying your 401k
and Retirement?
Last year I wrote a paper, Top Reasons to Rollover Your 401k, describing the
options available that you have with your 401k once you retire or leave the company you
are working for. Because of the high fees and poor investment choices associated with
most 401k plans I wrote that it usually makes sense to roll it over into an IRA.
Recently the media and some prominent financial industry groups have made the
shortcomings of 401k plans more prominent.
In April, PBS Frontline produced a special titled The Retirement Gamble, primarily
focusing on 401k plans and their inadequate performance.
What's Inside?
401k Fees and
Performance
Rules for Education
Funding
The New Medicare
Tax
Watercooler
Summer Key
Planning Dates
MEET MARC
Marc Bautis is a Wealth
Manager specializing in
working with young
families as well as
retirees and those
nearing retirement. He
understands that
everyone wants to not
only protect their
principal, but also be
sure that their money
lasts. He is committed
and proud to deliver
independent advice,
always in the interest of
his clients.
Marc is the creator of
the Retirement Fitness
Challenge™, a program
designed to be sure his
clients enjoy the
retirement years as they
have always envisioned
them. Marc's program is
designed to prevent

The special is a great watch, but if you don't have the time to view it, two of the main
points in the video are:
Costs Matter
You do not receive a bill for the fees and expenses in your 401k plan, but rest assured
they are being deducted and have an overall impact on how much money you wind up
with when you retire. Some of the fees you are being charged include fund expenses,
administration, and asset management expenses. A recent AARP study concluded that
70% of Americans did not even realize there were fees associated with their 401k.
One of the reasons that I recommend IRA's over 401k plans is that most IRAs have no
fees associated with them and you can add almost any type of investment in an IRA
versus the 10-15 choices that you are usually limited to in a 401k plan.
Fiduciary Responsibility
If you are going to invest in a 401k plan ensure that you use a provider that agrees in
writing to act in your company's 401k plans best interest. The unfortunate reality is that
firms in the brokerage, banking, and insurance industry have no legal fiduciary obligation
to their clients that would require them to place the interests of those clients ahead of all
others, including their own. Instead they operate on a much lower "Suitability"
standard. Their representatives are commissioned salespeople who are incentivized to
sell products, especially the ones that generate the highest earnings for themselves and
their companies.
You may think that you do not have any input on the decision your company makes with
its 401k plan, but you would be surprised if you and other employees bring your
concerns to your HR and finance department of your company.
Frontline is not the only outlet talking about 401ks. Jim Cramer, the host of CNBC's
show Mad Money is not the biggest fan of 401k plans either. In a CNBC article, 401k
Dirty Little Secrets, Cramer said "One of the basics of retirement planning -
outliving your money but
also to minimize
expenses during
retirement and find the
best time to start taking
Social Security benefits.
Marc is also the author
of a recent book The
Retirement Fitness
Challenge: Shape Up
Your Finances and Make
Your Money Last a
Lifetime, which is
available on
Amazon.com.
Marc is a graduate of
Seton Hall University.
He is a Bergen County
native, from Lyndhurst,
where much of his
extended family still
resides. He currently
lives in Hasbrouck
Heights with his wife
Katie, new daughter
Charlotte and Old English
Bulldog, Winnie.
Quick Links

contributing to a tax deferred 401k plan - could come with a serious downside." "As
much as I like the tax-favored status of 401k plans, I need to tell you something
heretical, something almost nobody else will come out and say: Most company 401k
plans stink." Many people think Cramer is a maniac for acting like he drinks a gallon of
redbull right before he goes on the air on his show Mad Money, but he is spot on with
his assessment of 401k plans.
Dan Solin of the Huffington Post recently wrote an article, 401k Participants Pay
Dearly for the Crime of Underperformance on how 401k plans are usually loaded
with actively managed funds which often underperform. It's no coincidence that
actively managed funds almost always come with higher fees.
Corporate America has shifted the burden retirement to individuals. Companies offering
guaranteed pensions are on the decline and ensuring a secure and safe retirement is up
to you. The wrong decisions or not making a decision can cost you hundreds of
thousands of dollars over your career.
College Planning: Know the Rules for Education
Funding
As college tuition continues to skyrocket, it's becoming more important than ever to
know how the various savings plans work. The following is a link to a handy
reference that outlines the latest rules on the most popular college savings programs
(529 plans, Coverdell savings accounts, and the Education Savings Bond program) and
how to use them to save money on your children's education
In addition to details of each of the plans, the reference also contains information on
Student loan availability and limits, Education tax credits, and Student loan interest and
Tuition and fees deduction.
Whenever I have a discussion with someone about 529 plans and saving for their child's
college costs I am almost always asked the same couple of questions.
What if my child doesn't go to college? You have a couple of options if your child
does not go to college. Another family member can use the funds for education. That
can include another child, yourself, or even nieces and nephews. There is no time limit
to use the funds so you can keep the money in the 529 plan and use it to finance your
grandchildren's education. Having the money compound tax free for 30+ years can
generate a substantial amount of money. If you decide to take the money out of the
account and not use it for education you will have to pay tax and a 10% penalty on the
earnings in the account.
What if my child receives a scholarship? You can withdraw money from a 529 up
to the amount of the tax-free scholarship without paying the 10% penalty. You still
have to pay income taxes on earnings, but contributions can always be withdrawn tax
and penalty free. You still may be able to find some qualified expenses that you could
use the 529 money for and avoid some of those taxes. In addition to tuition, you can use
the money for tuition, room, board, books and mandatory fees there.

Should I prioritize saving for retirement or my child's education? Retirement is
probably many years away and we want to do everything for our children, but my
advice is almost always to secure your retirement first. You can borrow to pay for
college, but you cannot take out a loan to finance your retirement.
How to Handle the New Medicare Tax
Last year's 5-4 Supreme Court ruling left the Patient Protection and Afordable Care
Act (PPACA) intact and questions have been swirling on everything as to how the
chronically uninsured will receive insurance, and how some small businesses will be
compelled to wade through a sea of new rules and regulations.
Moreover, high-income earners and investors are also asking questions, since they will
likely be forced to grapple with a new set of taxes. One major source of new revenues
that will be imposed by PPACA, is centered around two new Medicare taxes.
The Net Investment Income Tax
A 3.8% surtax on unearned income
The Additonal Medicare Tax.
An additional 0.9% Medicare tax that will be levied on wages
Net Investment Income Tax
A 3.8% surtax on unearned income that took effect on January 1, 2013
The tax will be applied against the lesser of the taxpayer's net investment income or
modified adjusted gross income (MAGI) in excess of the threshold amounts.
Keep in mind that the 3.8% surtax is in addition to ordinary income tax and any
alternative minimum tax.
Income subject to surtax

Let's look at which types of income are subject to the tax and which are not.
Unearned income will be subject to the tax. This includes gross income from:
Taxable interest
Dividends
Rent
Taxable annuities
Royalties
Net Capital gains
Passive activity - income from businesses in which the taxpayer does not actively
participate
The net gain from property held for investment, including taxable portion of a gain
from selling a personal residence that is above the $500,000/$250,000 exclusion.
Examples
Tom is single, earns $120,000 , and has dividends and capital gains of $40,000.
His MAGI of $160,000 is below the threshold of $200,000. Tom avoids the 3.8%
surtax.
Noah and Tina, married filing jointly have wages of $240,000 and net investment
income of $40,000 (MAGI of $280,000). The 3.8% surtax applies to $30,000.
Strategies that should be considered
1. Bulk up on tax-exempt interest. Consider tax-exempt municipals in lieu of other
income-producing securities.
2. Increase contributions to tax-deferred retirement plans. Maximize the
contributions to IRAs, 401(k)s, or 403(b)s. Consider setting up a SEP-IRA if you
are self employed which has more beneficial contribution limits.
3. Defer taxes. Whenever possible, place investments that generate unearned
income into tax-deferred accounts.
4. Factor in retirement withdrawals. Qualified withdrawals from a Roth IRA are
not included in MAGI and would not risk exposing investment income to the
surtax. Consider converting a traditional IRA into a Roth. Be aware that the
Roth conversion is a taxable event which will add to MAGI, and will possibly
increase your exposure to the surtax.
5. Time the income. Can you spread out income payments over several years,
minimizing or eliminating the impact of the tax.
6. Consider installment sales. Installment sales could defer income over several
years and keep the seller under the MAGI limit or minimize the surtax.
7. Use College Savings accounts. Save for education using Section 529 plans and
Coverdell Education Savings Accounts.
8. Make greater use of charitable trusts. Consider charitable remainder trusts to
defer recognition of income, and non-grantor charitable lead trusts that shift
income away from the grantor to the trust.
The bottom line
The new maze of complexity will create an extra level of frustration for many high-
income investors. It's unlikely the levies can be completely avoided, but with prudent
planning, you can face the 2013 tax season armed with knowledge that eliminates
unwanted surprises.
For additional information and before making any final decisions, please consult a tax

advisor.
Watercooler
Riddle: Jim offers Bill the opportunity to select bars of fine chocolate from a large
bowl filled with bars of Swiss chocolate and Danish chocolate. Bill randomly pulls out
two chocolate bars. One of the bars is Danish chocolate. What is the probability that
the other bar is also Danish chocolate?
Assumptions - there are the same number of Swiss and Danish chocolate bars in the
bar and Bill pulls one out with each hand. Answer below.
Abbott and Costello talk about unemployment
Costello: I want to talk about the unemployment rate in America.
Abbott: Good Subject. It's 7.8%.
Costello: That many people are out of work?
Abbott: No, that's 14.7%
Costello: You just said 7.8%.
Abbott: 7.8% unemployed.
Costello: Right 7.8% out of work.
Abbott: No, that's 14.7%.
Costello: OK, so it's 14.7% unemployed.
Abbott: No, that's 7.8%.
Costello: WAIT A MINUTE. Is it 7.8% or 14.7%?
Abbott: 7.8% are unemployed. 14.7% are out of work.
Costello: If you are out of work, you are unemployed.
Abbott: No, Congress said you can't count the "out of work" as the unemployed. You
have to look for work to be unemployed.
Costello: BUT THEY ARE OUT OF WORK!!!

Abbott: No, you miss his point.
Costello: What point?
Abbott: Someone who doesn't look for work can't be counted with those who look for
work. It wouldn't be fair.
Costello: To whom?
Abbott: The unemployed.
Costello: But ALL of them are out of work.
Abbott: No, the unemployed are actively looking for work. Those who are out of work gave
up looking, and if you give up, you are no longer in the ranks of the unemployed.
Costello: So if you're off the unemployment rolls, that would count as less
unemployment?
Abbott: Unemployment would go down. Absolutely!
Costello: The unemployment just goes down because you don't look for work?
Abbott: Absolutely it goes down. That's how they get it to 7.8%. Otherwise it would be
14.7%. Our government doesn't want you to read about 14.7% unemployment.
Costello: That would be tough on those running for reelection.
Abbott: Absolutely!
Costello: Wait, I got a question for you. That means there are two ways to bring down
the unemployment number?
Abbott: Two ways is correct.
Costello: Unemployment can go down if someone gets a job?
Abbott: Correct.
Costello: And unemployment can also go down if you stop looking for a job?
Abbott: Bingo.
Costello: So there are two ways to bring unemployment down, and the easier of the two
is to have people stop looking for work.
Abbott: Now you're thinking like an economist.
Costello: I don't even know what the hell I just said!
Abbott: Now you're thinking like Congress.
Think you Work a lot. The people in Singapore don't think so. France on the other hand
....

Riddle Answer:
The answer is one-third. If Bill places both hands in the bowl and draws two chocolate
bars simultaneously, Bill has the following possible combinations:
1. Danish in left hand/Danish in right hand
2. Danish in left hand/Swiss in right hand
3. Swiss in right hand/Danish in left hand
4. Swiss in left hand/Swiss in right hand
Since we already know that Bill has drawn a Danish chocolate bar with one hand, we
can remove from consideration combination 4. Therefore, there is only one option
remaining out of the three where Bill could have a Danish chocolate bar in the other
hand.
Summer Key Planning Dates

Please contact me if you have any questions about the articles above or about your
personal or business finances.
Sincerely,
Marc Bautis
Wealth Manager
office: 201-842-7655
cell: 201-221-6895
fax: 201-754-9760
marc@bautisfinancial.com
Disclaimer:The information contained in this newsletter is for information purposes only and may not be
suitable for your specific financial situation. You should consult a financial advisor before making any
investment decisions relating to the information contained in this newsletter

Newsletter - August 2013

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