February, 2011
By Michael Kalscheur, CFP®
Senior Financial Consultant, Castle Wealth Advisors, LLC

In keeping with our tradition of New Year updates, we have put together a compilation of some of the good, not so good and some that have yet to be determined. However, a new twist on things this year is a comparison of how last year’s assumptions, predictions and outright guesses actually turned out. Here is a breakdown by category:


Last year we talked about two “rules of thumb” in the investment world and their ability to predict the direction of the market for the rest of the year. Let’s review them and see how they did:

  • As January goes, so goes the year. There is a pseudo-science that says that if January is a good month for the stock market, the entire year should go well, and vice versa. In January of 2010, both the Dow and the S&P 500 were down about 2%, but both finished up strongly for the year.Result – FAIL

    Note – This year the stock market was up in January. How will 2011 go?
  • The “January” Effect. This says small cap stocks tend to outperform large cap stocks at the beginning of the year. Unfortunately, small stocks underperformed their larger brethren last January. Result – FAIL

    Note – To add insult to injury, small stocks rebounded strongly and outperformed large cap stocks for the year. This January, large stocks again outperformed small cap stocks, so we’ll see if recent history repeats itself.


Due to the low inflation environment we are in, contribution limits to retirement plans have not changed from last year:

  • IRA (Traditional & Roth) - $5,000 + $1,000 catch up (if over age 50)
  • 401k / 403b / 457 - $16,500 + $5,500 catch up

Also remember that Roth IRA Conversions are still available to everyone. Before 2010, only individuals with adjusted gross incomes of under $100,000 could convert a Traditional IRA to a Roth IRA.

If you converted a Traditional IRA to a Roth last year, the tax due on the conversion can be split evenly over tax years 2011 and 2012. Be advised, splitting the taxes may not be a good idea if you are in a low tax bracket (i.e. retired), because you can convert additional IRA assets in 2011 and 2012 too.

College Savings

The good news keeps coming on the college savings front. According to CollegeBoard’s Independent College 500 Index, higher education costs for the 2009 – 2010 school year were up “only” 4.15%. Bear in mind that this is still much faster than the overall inflation rate of 1.5%, but that is the lowest increase in almost 10 years (2009 – 2010 was 4.3%). Will this trend become the norm as people become more cost conscious about everything, including their college education? Only time will tell.

In the mean time, many states are continuing to improve college savings options. Internal costs are going down, state tax deductions or credits are going up, and investment choices are expanding. With the recent stock market rebound from the lows in 2008, fund balances have recovered for people who stayed the course. However, there are also ways to cut your children’s college education costs:

  • Take AP courses – Pass the exit exam (3 or higher out of 5) and you can earn college credit.
  • Take CLEP exams – CLEP stands for College-Level Examination Program, and it is much like the AP test, but without the coursework. Ideal for non-traditional students.
  • Dual Credit courses – Colleges and universities offer college level courses that also qualify for high school credit. In addition to killing two birds with one stone, the cost per credit hour is significantly discounted.
  • Take extra courses while in college – If you average 18 credit hours (vs. the normal 14 – 15) you can save an entire semester. Similarly, summer school can be used to take some of the core classes and help expedite graduation.


One of the reasons for the delay in putting out our “What’s New” is that Congress didn’t decide what income taxes were going to be for this year until a week before Christmas, 2010. Congress finally decided to extend the Bush tax cuts from 2001 & 2003, and provide some clarification on tax rates and estate planning (see below), but only until the end of next year. On 12/31/2012, everything reverts back to 2001, so Congress will again have to battle over tax rates later this year or early next year. Let’s hope they don’t wait until a week before Christmas again.

  • American Opportunity Credit – This could go under the College Savings section, but if you had a student in school this year, up to $2,500 in tax credits per student are available. Income limits apply, but even if you don’t owe taxes, you can still benefit, as up to 40% of the credit is refundable. It is extended through 2012.
  • Energy Improvements – If you purchased new windows, HVAC systems, heat pumps, solar systems, skylights, doors or insulation, you may qualify for a tax credit of up to 30% of the items’ costs. Some items are limited to a maximum credit of $1,500, while others do not have a limit. Go to this website for more information: http://www.irs.gov/newsroom/article/0,,id=206875,00.html. Just make sure to act quickly; these credits only last through the end of 2011.
  • Making Work Pay – This tax credit was part of the economic stimulus bill, but it was not renewed for 2011.
  • In addition, you can still take a tax deduction on your 2010 taxes for a contribution to your Traditional IRA. Until April 15th, 2011, you are allowed to contribute up to $5,000 ($6,000 if over age 50) to a Traditional IRA and still deduct it on your 2010 taxes. However, if you are covered by a retirement plan at work (i.e. 401k, 403b, etc.) there are income limitations.

Estate Planning

As previously mentioned, the Estate Tax is another reason for the delay in our report. In 2010, the federal estate tax “expired,” meaning that a person who died last year would not pay any federal estate tax, no matter how large their estate was.

For 2011 and 2012, the estate tax has been modified and increased from its 2009 levels, and now stands at $5 Million per person and 35% above this. The new law also allows for portability, meaning that if one spouse dies without utilizing his or her entire exemption amount, the remainder can be carried over to the other spouse.

Unfortunately, this is only a temporary fix. In 2013 the estate tax is set to revert to what it was in 2001: a $1 million exemption and 45% tax rate on everything over this amount. That means we’ll be hearing about this fight in Congress all over again in the next 6 – 18 months.

Michael Kalscheur, CFP®, is a Senior Financial Consultant at Castle Wealth Advisors, LLC. Castle specializes in helping families and closely-held business owners with strategies to protect and transition family assets from one generation to the next. Castle’s senior partners also work with clients throughout the country in making logical decisions to help them fulfill their personal and business financial goals. For more information visit www.Castle3.com, call 1-888-849-9559 or contact Michael directly at .