Lebel & Harriman, LLPInvestment DivisionMichelle M. Romano366 US Route 1Falmouth, ME 04105207-773-5390mromano@lebelharriman.comwww.lebelharriman.com

March 2016Rates on the Rise: Strategies forFixed-Income Investors

Earn Too Much for a Roth IRA? Try the BackDoor!

Can You Get to a Million Dollars?

How long will I have to pay for privatemortgage insurance?

Lebel & Harriman NewsletterInvestment Division

Rates on the Rise: Strategies for Fixed-Income Investors

See disclaimer on final page

Hopefully you find this month'snewsletter informative andinteresting. If any of the articles bringup topics that you would like todiscuss further, please do nothesitate to reach out to us, we arealways happy to hear from you.

Warmest Regards,

Lebel & Harriman InvestmentDivisionMichelle Romano, Chris Klimash,Josh Chase, Jennifer Breton, &Emily Helliesen

A long period of low yieldshas been challenging formany fixed-incomeinvestors, but owning bondinvestments in a risinginterest-rate environmentcould become even trickier.When interest rates go up,

the prices of existing bonds typically fall.Consequently, the Federal Reserve'srate-setting decisions could affect the entirefixed-income market.

Still, bonds are a mainstay for conservativeinvestors who prioritize the preservation ofprincipal over returns, and for retirees in needof a predictable income stream. Althoughdiversification does not guarantee a profit orprotect against investment loss, owning adiversified mix of bond types and maturities isone way to manage interest-rate and credit riskin your portfolio.

Consider durationOverall, bonds with shorter maturities are lesssensitive to interest-rate fluctuations thanlong-term bonds. A bond's maturity is the lengthof time by which the principal and interest arescheduled to be repaid. A bond's duration is amore specific measure of interest-ratesensitivity that takes cash flow (interestpayments) into account.

For example, a five-year Treasury bond has aduration of less than five years, reflectingincome payments that are received prior tomaturity. A five-year corporate bond with ahigher yield will have an even shorter duration,making it slightly less sensitive to interest-ratefluctuations. If interest rates increase 1%, abond's value is generally expected to drop byapproximately the bond's duration. Thus, abond with a five-year duration could loseroughly 5% in value. (U.S. Treasury securitiesare guaranteed by the federal government as tothe timely payment of principal and interest.)

Build a ladderBond laddering is a buy-and-hold strategy thatcould also help cushion the potential effects ofrising rates. This process puts your money to

work systematically, without trying to predictrate changes and time the market.

Buying individual bonds provides somecertainty, because investors know how muchthey will earn if they hold a bond until maturity,unless the issuer defaults. A ladder is aportfolio of bonds with maturities that arespaced out at regular intervals over a certainnumber of years. When short-term bonds fromthe low rungs of the ladder mature, the fundsare reinvested at the top end of the ladder. Asinterest rates rise, investors may be able toincrease their cash flow by capturing higheryields. A ladder may also help insulate bondportfolios from volatility, because higher yieldson new bonds may help offset any paper losseson existing holdings.

Bond ladders may vary in size and structure,and could include different types of bondsdepending on an investor's time horizon, risktolerance, and goals. Individual bonds aretypically sold in minimum denominations of$1,000 to $5,000, so creating a bond ladderwith a sufficient level of diversification mightrequire a sizable investment.

Rise with ratesAdding a floating-rate component to a bondportfolio may also provide some protectionagainst interest-rate risk. These investments(long offered by U.S. corporations) haveinterest payments that typically adjust based onprevailing short-term rates.

The U.S. Treasury started issuing floating-ratenotes with two-year maturities in January 2014.Investors receive interest payments on aquarterly basis. Rates are tied to the mostrecent 13-week Treasury bill auction and resetweekly, so investors are paid more as interestrates rise and less as they fall.

Note: Bonds redeemed prior to maturity couldbe worth more or less than their original cost,and investments seeking to achieve higheryields also involve a higher degree of risk.Interest payments are taxed as ordinaryincome. Treasury bond interest is subject tofederal income tax but exempt from state andlocal income taxes.

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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.

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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 3 of 4, see disclaimer on final page

Lebel & Harriman, LLPInvestment DivisionMichelle M. Romano366 US Route 1Falmouth, ME 04105207-773-5390mromano@lebelharriman.comwww.lebelharriman.com

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016

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This material is intended forinformational purposes only andshould not be construed as legal ortax advice, or investmentrecommendations. You shouldconsult a qualified attorney, taxadvisor, investment professional orinsurance agent about the issueddiscussed herein.

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.

How long will I have to pay for private mortgageinsurance?It depends. There aregenerally two ways that privatemortgage insurance (PMI) canbe removed from your

mortgage loan. The first is if you request PMIcancellation directly from your lender. Thesecond is through termination by your lender.

You can request PMI cancellation directly fromyour lender once you have reached the datewhen the principal balance of your mortgage isscheduled to fall to 80% of the original value ofyour home. You can find this date on the PMIdisclosure form that was given to you when youfirst obtained your mortgage. The cancellationrequest can be made earlier if you have madeadditional mortgage payments that havereduced your principal balance to 80% at anearlier date. Your lender may also require youto meet certain other criteria in order to cancelyour PMI, such as certification that there are nosubordinate liens on the home and evidencethat the property has not declined below theoriginal value.

If you don't request PMI cancellation directlyfrom your lender, your PMI could still beremoved from your loan if it is terminated by

your lender. Your lender is required toterminate PMI on the date when the principalbalance on your loan is scheduled to reach78% of the original value of your home or onceyou reach the midpoint of your loan'samortization schedule (e.g., year 15 of a30-year loan), whichever occurs first.

Unfortunately, some mortgage companies don'talways follow the rules pertaining to PMItermination and continue to collect PMIpremiums from borrowers beyond thetermination date. As a result, many borrowersfind themselves paying unnecessarily for PMI.(Source: Private Mortgage InsuranceCancellation and Termination, ConsumerFinancial Protection Bureau ComplianceBulletin, August 2015) If you think you havereached, or are about to reach, the point in yourloan where PMI cancellation or termination is apossibility, you should contact your mortgagelender for more information.

Keep in mind that the above rules regardingPMI apply to borrowers who are current on theirloans and apply only to conventional mortgageloans closed on or after July 29, 1999.

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