ChoiceNews · traditional IRA to a Roth IRA. In 2005, however, Congress passed the Tax Increase Prevention and Reconciliation Act (TIPRA), which repealed the second barrier, allowing

ChoiceOne Investment CenterRandy Schmidt, CFP®450 W MuskegonPO Box 248Kent City, MI 49330616-678-4961Fax: [email protected]/investment-center

March 2016ChoiceNews

Can You Get to a Million Dollars?

Earn Too Much for a Roth IRA? Try theBack Door!

Should I loan my child money for a downpayment on a house?

Quarterly NewsletterChoiceNews

See disclaimer on final page

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Customer Appreciation EventIce Cream SocialWednesday, June 15th

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April 29th -- Arbor Day

May 15th -- National Chocolate ChipDay!

June 18th -- International Picnic Day

Welcome to 2016. This has been one of thecraziest starts to a year that I have ever seen.One week it is 50 degrees outside and the nextit is 15 degrees. Six inches of snow fall one dayand three days later you can see my lawn. Thispresidential election is more bizarre than any Ihave ever seen. The most extreme candidatesfrom both parties are amongst the mostpopular. The stock market begins with the worstJanuary performance in 80 years. Just over ayear ago, many "experts" were commenting onhow the world was running out of oil. Now wefind out that we have more than we canconsume in our lifetimes. My two year old sontold me the other day to turn the TV downbecause he was having trouble concentrating.

Are these signs that the doomsday prophetsare on to something? There seems to be a lotof odd things happening right now. While I don'tknow much about weather patterns, I don't thinkmost news events are really a sign of the end.While we have had pretty normal elections thepast several decades, history tells us that evensome of the founders of our country didn'talways use polished language. They were justfortunate that CNN and FOX news weren'tthere to play it for the masses. While I wouldprefer to go back to a time where our politiciansspent more time in solving our nation'sproblems, I do understand that our country andthe economy is driven by "WE THE PEOPLE".The stock market has gone thru a period for thepast seven years where things went relativelysmoothly, but it wasn't always that way.

Right now the volatility from day to day is muchhigher than we have seen in recent years, but itwasn't long ago that this type of volatility wasactually the norm. It is interesting in that peopleare looking at cheap oil and gas as a bad thing.

This certainly won't last too long. As things calmdown, we may look back at this and realize thatthis is actually a good thing. A lot of the thingswe consume are byproducts of oil and naturalgas. If the prices stay low, eventually we willsee that there is a benefit to paying less forsome of the things we consume.

The last odd point I mentioned is that my sonLogan is using language that is abnormal for atwo year old. I have no explanation for that. Ifyou have any thoughts on that, please let meknow.

Take care!

Randy Schmidt

8 SIMPLE WAYS TO BE MORE ACTIVE

Start small. According to research, walking forjust 5 minutes every day will help get youstarted.Set goals. Choose the fitness goal that is rightfor you. Write it down to help yourself stick to it.Make it a routine . When you choose youractivity, pick something that you can fit into yourdaily routine -- you will be more likely to keepwith it.Step-by-step . You can wear a pedometer for aday to see how much you really walk. Then tryto add 250 more steps every day.Make it a Priority. Make staying active apriority in your life. Find at least a 30-minuteblock of time you can devote to exercise.Track your progress . Use simple checkpointsto measure how you are doing.Find a friend . Having a friend to work out withwill help to keep you both motivated.Add variety . This will help you stay motiviatedand be less likely to get bored with doing justone activity every time you exercise.

"An early-morning walk is a blessing forthe whole day" -- Henry David Thoreau

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Can You Get to a Million Dollars?Often in life, you have investment goals thatyou hope to reach. Say, for example, you havedetermined that you would like to have $1million in your investment portfolio by the timeyou retire. But will you be able to get there?

In trying to accumulate $1 million (or any otheramount), you should generally consider howmuch you have now, how much you cancontribute in the future, how much you mightearn on your investments, and how long youhave to accumulate funds.

Current balance--your starting pointOf course, the more you have today, the lessyou may need to contribute to your investmentportfolio or earn on your investments over yourtime horizon.

Time (accumulation period)In general, the longer your time horizon, thegreater the opportunity you have to accumulate$1 million. If you have a sufficiently long timehorizon and a sufficiently large current balance,with adequate earnings you may be able toreach your goal without making any additionalcontributions. With a longer time horizon, you'llalso have more time to recover if the value ofyour investments drops. If additionalcontributions are required to help you reachyour goal, the more time you have to targetyour goal, the less you may have to contribute.

The sooner you start making contributions, thebetter. If you wait too long and the timeremaining to accumulate funds becomes tooshort, you may be unable to make the largecontributions required to reach your goal. Insuch a case, you might consider whether youcan extend the accumulation period--forexample, by delaying retirement.

Rate of return (earnings)In general, the greater the rate of return thatyou can earn on your investments, the morelikely that you'll reach your investment goal of$1 million. The greater the proportion of theinvestment portfolio that comes from earnings,the less you may need to contribute to theportfolio. Earnings can benefit from long timehorizons and compound rates of return, asreturns are earned on any earlier earnings.

However, higher rates of return are generallyassociated with greater investment risk and thepossibility of investment losses. It's important tochoose investments that meet your timehorizon and tolerance for risk. And be realisticin your assumptions. What rate of return isrealistic given your current asset allocation andinvestment selection?

Amount of contributionsOf course, the more you can regularlycontribute to your investment portfolio (e.g.,monthly or yearly), the better your chances areof reaching your $1 million investment goal,especially if you start contributing early andhave a long time horizon.

Contributions neededNow that the primary factors that affect yourchances of getting to a million dollars havebeen reviewed, let's consider this question: At agiven rate of return, how much do you need tosave each year to reach the $1 million target?For example, let's assume you anticipate thatyou can earn a 6% annual rate of return (ROR)on your investments. If your current balance is$450,000 and you have 15 more years to reach$1 million, you may not need to make anyadditional contributions (see scenario 1 in thetable below); but if you have only 10 moreyears, you'll need to make annual contributionsof $14,728 (see scenario 2). If your currentbalance is $0 and you have 30 more years toreach $1 million, you'll need to contribute$12,649 annually (see scenario 3); but if youhave only 20 more years, you'll need tocontribute $27,185 annually (see scenario 4).

Scenario 1 2

Target $1,000,000 $1,000,000

Currentbalance

$450,000 $450,000

Years 15 10

ROR 6% 6%

Annualcontribution

$0 $14,728

Scenario 3 4

Target $1,000,000 $1,000,000

Currentbalance

$0 $0

Years 30 20

ROR 6% 6%

Annualcontribution

$12,649 $27,185

Note: This hypothetical example is not intendedto reflect the actual performance of anyinvestment. Actual results may vary. Taxes,fees, expenses, and inflation are notconsidered and would reduce the performanceshown if they were included.

In trying to accumulate $1million (or any otheramount), you shouldgenerally consider howmuch you have now, howmuch you can contribute inthe future, how much youmight earn on yourinvestments, and how longyou have to accumulatefunds. But remember, thereare no guarantees--evenwhen you have a clearlydefined goal. For example,the market might notperform as expected, or youmay have to reduce yourcontributions at some point.

All investing involves risk,including the possible lossof principal, and there is noguarantee that anyinvestment strategy will besuccessful. Review yourprogress periodically and beprepared to makeadjustments whennecessary.

Page 2 of 4, see disclaimer on final page

Earn Too Much for a Roth IRA? Try the Back Door!BackgroundRoth IRAs, created in 1997 as part of theTaxpayer Relief Act, represented an entirelynew savings opportunity--the ability to makeafter-tax contributions that could, if certainconditions were met, grow entirely free offederal income taxes. These new savingsvehicles were essentially the inverse oftraditional IRAs, where you could makedeductible contributions but distributions wouldbe fully taxable. The law also allowed taxpayersto "convert" traditional IRAs to Roth IRAs bypaying income taxes on the amount convertedin the year of conversion.

Unfortunately, the law contained two provisionsthat limited the ability of high-income taxpayersto participate in the Roth revolution. First, theannual contributions an individual could maketo a Roth IRA were reduced or eliminated if hisor her income exceeded certain levels. Second,individuals with incomes of $100,000 or more,or whose tax filing status was married filingseparately, were prohibited from converting atraditional IRA to a Roth IRA.

In 2005, however, Congress passed the TaxIncrease Prevention and Reconciliation Act(TIPRA), which repealed the second barrier,allowing anyone to convert a traditional IRA to aRoth IRA--starting in 2010--regardless ofincome level or marital status. But TIPRA didnot repeal the provision that limited the ability tomake annual Roth contributions based onincome. The current limits are set forth in thechart below:

Phaseout ranges for determining ability tofund a Roth IRA in 2016*

Single/head ofhousehold

$117,000-$132,000

Married filing jointly $184,000-$194,000

Married filingseparately

$0-$10,000

*Applies to modified adjusted grossincome (MAGI)

Through the back door...Repeal of the provisions limiting conversionscreated an obvious opportunity for high-incometaxpayers who wanted to make annual Rothcontributions but couldn't because of theincome limits. Those taxpayers (who would alsorun afoul of similar income limits that prohibitedthem from making deductible contributions totraditional IRAs) could simply make

nondeductible contributions to a traditional IRAand then immediately convert that traditionalIRA to a Roth IRA--a "back door" Roth IRA.

The IRS is always at the front door...For taxpayers who have no other traditionalIRAs, establishment of the back-door Roth IRAis essentially tax free. Income tax is payable onthe earnings, if any, that the traditional IRAgenerates until the Roth conversion iscomplete. However, assuming the contributionand conversion are done in tandem, the taximpact should be nominal. (The 10% penaltytax for distributions prior to age 59½ generallydoesn't apply to taxable conversions.)

But if a taxpayer owns other traditional IRAs atthe time of conversion, the tax calculation is abit more complicated because of the so-called"IRA aggregation rule." When calculating thetax impact of a distribution (including aconversion) from any traditional IRA, alltraditional and SEP/SIMPLE IRAs a taxpayerowns (other than inherited IRAs) must beaggregated and treated as a single IRA.

For example, assume Jillian creates aback-door Roth IRA in 2016 by making a$5,500 contribution to a traditional IRA and thenconverting that IRA to a Roth IRA. She also hasanother traditional IRA that contains deductiblecontributions and earnings worth $20,000. Hertotal traditional IRA balance prior to theconversion is therefore $25,500 ($20,000taxable and $5,500 nontaxable).

She has a distribution (conversion) of $5,500:78.4% of that distribution ($20,000/$25,500) isconsidered taxable ($4,313.73), and 21.6% ofthat distribution ($5,500/$25,500) is considerednontaxable ($1,186.27).

Note: These tax calculations can becomplicated. Fortunately, the IRS has provideda worksheet (Form 8606) for calculating thetaxable portion of a conversion.

There's also a side door...Let's assume Jillian in the example above isn'tthrilled about having to pay any income tax onthe Roth conversion. Is there anything she cando about it?

One strategy to reduce or eliminate theconversion tax is to transfer the taxable amountin the traditional IRAs ($20,000 in our example)to an employer qualified plan like a 401(k) priorto establishing the back-door Roth IRA, leavingthe traditional IRAs holding only after-taxdollars. Many 401(k) plans accept incomingrollovers. Check with your plan administrator.

If you have taxablecompensation, you cancontribute up to $5,500 toan IRA in 2016, or $6,500 ifyou'll be 50 or older by theend of the year. You can'tcontribute to a traditionalIRA for the year you turn70½, or thereafter.

To be eligible for tax-freequalified distributions froma Roth IRA, you must satisfya five-year holding periodand, in addition, one of thefollowing must apply: youhave reached age 59½ bythe time of the withdrawal,the withdrawal is madebecause of disability, or thewithdrawal is made to payfirst-time homebuyerexpenses ($10,000 lifetimelimit from all IRAs).

It's not clear how long theback door is going toremain open. There havebeen suggestions that thisis a loophole that should belegislatively closed.

Page 3 of 4, see disclaimer on final page

ChoiceOne Investment CenterRandy Schmidt, CFP®450 W MuskegonPO Box 248Kent City, MI 49330

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016

CFP® and CERTIFIED FINANCIALPLANNERTM are marks owned by theCertified Financial Planner Board ofStandards, Inc. This mark is awarded toindividuals who successfully complete theCFP Board's initial and ongoingcertification requirements.

Investment Centers of America, Inc. (ICA),member FINRA/SIPC and a registeredInvestment Advisor is not affiliated withChoiceOne Bank or ChoiceOneInvestment Center. Securities, advisoryservices and insurance products offeredthrough ICA and affiliated agencies are*not insured by the FDIC or any otherFederal Government agency *not adeposit of other obligation of, orguaranteed by any bank or theiraffiliates *subject to risks including thepossible loss of principal amountinvested

These are the views of Broadridge and notnecessarily of the named representative orICA and should not be construed asinvestment advice. Neither the namedrepresentative nor ICA gives tax or legaladvice. All information is believed to befrom reliable sources; however, we makeno representation as to its completenessor accuracy. Please consult your FinancialAdvisor for further information.

Should I loan my child money for a down payment on ahouse?For a lot of young peopletoday, it's difficult to purchasea home without at least somefinancial assistance. As a

result, many young adults turn to their parentsor other family members for help with a downpayment.

If you plan on lending your child money for adown payment on a house, you should try toassume the role of a commercial lender. Settingthe terms of the loan in writing will demonstrateto your child that you take both yourresponsibility as lender and your child'sresponsibility as borrower seriously.

While having an actual loan contract may seemtoo businesslike to some parents, doing so canhelp set expectations between you and yourchild. The loan contract should spell out theexact loan amount, the interest rate and arepayment schedule. To avoid theuncomfortable situation of having to remindyour child that a payment is due, considerasking him or her to set up automatic monthlytransfers from his or her bank account to yours.

This type of loan documentation is alsoimportant for IRS purposes because there maybe potential income and gift tax issues withthese types of loans. For example, interest paidby your child will be considered taxable income,and if adequate interest is not charged for theloan, special imputed interest rules may apply.

If you don't feel comfortable lending your childmoney, you may want to consider making asmaller, no-strings-attached gift that doesn'thave to be repaid. Currently, you can gift up to$14,000 annually per person under the gift taxexclusion. However, if you do gift money for adown payment, your child's lender may stillrequire him or her to put up some of his or herown money, depending on the type of mortgagechosen.

Keep in mind that lending money to familymembers can be a tricky proposition. Beforeentering into this type of financial arrangement,you should take the time to carefully weigh boththe financial and emotional costs.

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