Bodnar Financial Advisors, IncJohn Bodnar, III, CFP®, CIMA®,248 Columbia Tpk.Suite 104Florham Park, NJ 07932Phone: 973-966-6939Fax: 973-966-0032john@bodnar.netwww.bodnar.net

WINTER 2015Correlation and Portfolio Performance

2015 Year-End Tax Planning Basics

Frequently Asked Questions on Openinga 529 Plan Account

What is this new chip-card technologyI've been hearing about in the news?

BODNAR FINANCIAL ADVISORS INCClient Quarterly NewsletterCorrelation and Portfolio Performance

See disclaimer on final page

The Holiday Season is approachingagain, which means it’s time to relax andreflect on time well spent with family andloved ones. However, there are a fewresponsibilities to keep in mind as theyear comes to a close.

For some, that means calling the officeabout tax-loss selling, or makingabsolutely SURE you took your requiredminimum distribution (RMD) out of yourIRA to avoid the penalty.

If you can’t stand the thought of buyingyour children or grandchildren yetanother stuffed animal or action figurefor Christmas, consider opening a 529Plan instead. If you are planning to bravethe stores on Black Friday, be sure toread the article about liability andunauthorized purchases on your debitcard.

But most importantly, enjoy the momentand the company of those you careabout. The best gifts this time of yeardon’t cost anything at all. :)

Different types ofinvestments are subject todifferent types of risk. Ondays when you notice thatstock prices have fallen, forexample, it would not beunusual to see a rally in thebond market.

Asset allocation refers to how an investor'sportfolio is divided among asset classes, whichtend to perform differently under differentmarket conditions. An appropriate mix ofinvestments typically depends on the investor'sage, risk tolerance, and financial goals.

The concept of correlation often plays a role inconstructing a well-diversified portfolio thatstrikes a balance between risk and return.

Math that mattersIn the financial world, correlation is a statisticalmeasure of how two securities perform relativeto each other. Securities that are positivelycorrelated will have prices that tend to move inthe same direction. Securities that arenegatively correlated will have prices that movein the opposite direction.

A correlation coefficient, which is calculatedusing historical returns, measures the degree ofcorrelation between two investments. Acorrelation of +1 represents a perfectly positivecorrelation, which means the investmentsalways move together, in the same direction,and at a consistent scale. A correlation of -1means they have a perfectly negativecorrelation and will always move opposite oneanother. A correlation of zero means that thetwo investments are not correlated; therelationship between them is random.

In reality, perfectly positive correlation is rare,because distinct investments can be affecteddifferently by the same conditions, even if theyare similar securities in the same sector.

Correlations can changeWhile some types of securities exhibit generaltrends of correlation over time, it's notuncommon for correlations to vary over shorterperiods. In times of market volatility, forexample, asset prices were more likely to be

driven by common market shocks than by theirrespective underlying fundamentals.

During the flight to quality sparked by thefinancial crisis of 2008, riskier assets across anumber of different classes exhibited unusuallyhigh correlation. As a result, correlations amongsome major asset classes have been moreelevated than they were before the crisis. Therehas also been a rise in correlation betweendifferent financial markets in the globaleconomy.1 For example, the correlationcoefficient for U.S. stocks (represented by theS&P Composite Total Return index) and foreignstocks (represented by the MSCI EAFE GTRindex) increased from 0.75 over the last 25years to 0.89 over the last 10 years.2

Over the long run, a combination ofinvestments that are loosely correlated mayprovide greater diversification, help manageportfolio risk, and smooth out investmentreturns. Tighter relationships among assetclasses over the last decade may be a goodreason for some investors to reassess theirportfolio allocations. However, it's important tokeep in mind that correlations may continue tofluctuate over time because of changingeconomic and market environments.

The performance of an unmanaged index is notindicative of the performance of any particularinvestment. Individuals cannot invest directly inan index. Past performance is no guarantee offuture results. All investing involves risk,including the possible loss of principal. Assetallocation and diversification strategies do notguarantee a profit or protect against investmentloss; they are methods used to help manageinvestment risk.

Investing internationally carries additional riskssuch as differences in financial reporting,currency exchange risk, as well as economicand political risk unique to the specific country.This may result in greater share price volatility.When sold, investments may be worth more orless than their original cost.1 International Monetary Fund, 20152 Thomson Reuters, 2015, for the period12/31/1989 to 12/31/2014

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2015 Year-End Tax Planning BasicsAs the end of the 2015 tax year approaches,set aside some time to evaluate your situationand consider potential opportunities. Effectiveyear-end planning depends on a goodunderstanding of both your currentcircumstances and how those circumstancesmight change next year.

Basic strategiesConsider whether there's an opportunity todefer income to 2016. For example, you mightbe able to defer a year-end bonus or delay thecollection of business debts, rents, andpayments for services. When you defer incometo 2016, you postpone payment of the tax onthat income. And if there's a chance that youmight be paying taxes at a lower rate next year(for example, if you know that you'll have lesstaxable income next year), deferring incomemight mean paying less tax on the deferredincome.

You should also look for potential ways toaccelerate 2016 deductions into the 2015 taxyear. If you typically itemize deductions onSchedule A of Form 1040, you might be able toaccelerate some deductible expenses--such asmedical expenses, qualifying interest, or stateand local taxes--by making payments beforethe end of the current year, instead of payingthem in early 2016. Or you might considermaking next year's charitable contribution thisyear instead. If you think you'll be itemizingdeductions in one year but claiming thestandard deduction in the other, trying to defer(or accelerate) Schedule A deductions into theyear for which you'll be itemizing deductionsmight let you take advantage of deductions thatwould otherwise be lost.

Depending on your circumstances, you mightalso consider taking the opposite approach. Forexample, if you think that you'll be paying taxesat a higher rate next year (maybe as the resultof a recent compensation increase or theplanned sale of assets), you might want to lookfor ways to accelerate income into 2015 andpossibly defer deductions until 2016 (when theycould potentially be more valuable).

Complicating factorsFirst, you need to factor in the alternativeminimum tax (AMT). The AMT is essentially aseparate, parallel federal income tax systemwith its own rates and rules. If you're subject tothe AMT, traditional year-end strategies may beineffective or actually have negativeconsequences--that's because the AMTeffectively disallows a number of itemizeddeductions. So if you're subject to the AMT in2015, prepaying 2016 state and local taxes

probably won't help your 2015 tax situation,and, in fact, could hurt your 2016 bottom line.

It's also important to recognize that personaland dependency exemptions may be phasedout and itemized deductions may be limitedonce your adjusted gross income (AGI) reachesa certain level. This is especially important tofactor in if your AGI is approaching thethreshold limit and you're evaluating whether toaccelerate or defer income or itemizeddeductions. For 2015, the AGI threshold is$258,250 if you file as single, $309,900 ifmarried filing jointly, $154,950 if married filingseparately, and $284,050 if head of household.

IRA and retirement plan contributionsDeductible contributions to a traditional IRA andpretax contributions to an employer-sponsoredretirement plan such as a 401(k) could reduceyour 2015 taxable income. (Note: A number offactors determine whether you're eligible todeduct contributions to a traditional IRA.)Contributions to a Roth IRA (assuming youmeet the income requirements) or a Roth401(k) plan are made with after-tax dollars--sothere's no immediate tax savings--but qualifieddistributions are completely free of federalincome tax.

For 2015, you're generally able to contribute upto $18,000 to a 401(k) plan ($24,000 if you'reage 50 or older) and up to $5,500 to atraditional or Roth IRA ($6,500 if you're age 50or older). The window to make 2015contributions to an employer plan generallycloses at the end of the year, while you typicallyhave until the due date of your federal incometax return to make 2015 IRA contributions.

Important notesThe Supreme Court has legalized same-sexmarriage nationwide, significantly simplifyingthe federal and state income tax filingrequirements for same-sex married couplesliving in states that did not previously recognizetheir marriage.

A host of popular tax provisions (commonlyreferred to as "tax extenders") expired at theend of 2014. Although it is possible that someor all of these provisions will be retroactivelyextended, currently they are not available forthe 2015 tax year. Among the provisions:deducting state and local sales taxes in lieu ofstate and local income taxes; the above-the-linededuction for qualified higher-educationexpenses; qualified charitable distributions(QCDs) from IRAs; and increased businessexpense and "bonus" depreciation rules.

AMT "triggers"

You're more likely to be subjectto the AMT if you claim a largenumber of personalexemptions, deductible medicalexpenses, state and localtaxes, and miscellaneousitemized deductions. Othercommon triggers include homeequity loan interest whenproceeds aren't used to buy,build, or improve your home;and the exercise of incentivestock options.

Required minimumdistributions

Once you reach age 70½, yougenerally must start takingrequired minimum distributions(RMDs) from traditional IRAsand employer-sponsoredretirement plans (an exceptionmay apply if you're still workingand participating in anemployer-sponsored plan).Take any distributions by thedate required--the end of theyear for most individuals. Thepenalty for failing to do so issubstantial: 50% of the amountthat should have beendistributed.

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Frequently Asked Questions on Opening a 529 Plan Account529 plans are savings vehicles tailor-made forcollege. Anyone can open an account, lifetimecontribution limits are typically over $300,000,and 529 plans offer federal and sometimesstate tax benefits if certain conditions are met.Here are some common questions on openingan account.

Can I open an account in any state's529 plan or am I limited to my ownstate's plan?Answer: It depends on the type of 529 plan.There are two types of 529 plans: collegesavings plans and prepaid tuition plans. With acollege savings plan, you open an individualinvestment account and direct yourcontributions to one or more of the plan'sinvestment portfolios. With a prepaid tuitionplan, you purchase education credits at today'sprices and redeem them in the future forcollege tuition. Forty-nine states (all butWyoming) offer one or more college savingsplans, but only a few states offer prepaid tuitionplans.

529 college savings plans are typicallyavailable to residents of any state, and fundscan be used at any accredited college in theUnited States or abroad. But 529 prepaid tuitionplans are typically limited to state residents andapply to in-state public colleges.

Why might you decide to open an account inanother state's 529 college savings plan? Theother plan might offer better investment options,lower management fees, a better investmenttrack record, or better customer service. If youdecide to go this route, keep in mind that somestates may limit certain 529 plan tax benefits,such as a state income tax deduction forcontributions, to residents who join the in-stateplan.

Is there an age limit on who can be abeneficiary of a 529 account?Answer: There is no beneficiary age limitspecified in Section 529 of the InternalRevenue Code, but some states may imposeone. You'll need to check the rules of each planyou're considering. Also, some states mayrequire that the account be in place for aspecified minimum length of time before fundscan be withdrawn. This is important if youexpect to make withdrawals quickly becausethe beneficiary is close to college age.

Can more than one 529 account beopened for the same child?Answer: Yes. You (or anyone else) can openmultiple 529 accounts for the same beneficiary,as long as you do so under different 529 plans

(college savings plan or prepaid tuition plan).For example, you could open a college savingsplan account with State A and State B for thesame beneficiary, or you could open a collegesavings plan account and a prepaid tuition planaccount with State A for the same beneficiary.But you can't open two college savings planaccounts in State A for the same beneficiary.

Also keep in mind that if you do open multiple529 accounts for the same beneficiary, eachplan has its own lifetime contribution limit, andcontributions can't be made after the limit isreached. Some states consider the accounts inother states to determine whether the limit hasbeen reached. For these states, the totalbalance of all plans (in all states) cannotexceed the maximum lifetime contribution limit.

Can I open a 529 account in anticipationof my future grandchild?Answer: Technically, no, because thebeneficiary must have a Social Securitynumber. But you can do so in a roundaboutway. First, you'll need to open an account andname as the beneficiary a family member whowill be related to your future grandchild. Thenwhen your grandchild is born, you (the accountowner) can change the beneficiary to yourgrandchild. Check the details carefully of anyplan you're considering because some plansmay impose age restrictions on the beneficiary,such as being under age 21. This may pose aproblem if you plan to name your adult son ordaughter as the initial beneficiary.

What happens if I open a 529 plan inone state and then move to anotherstate?Answer: Essentially, nothing happens if youhave a college savings plan. But most prepaidtuition plans require that either the accountowner or the beneficiary be a resident of thestate operating the plan. So if you move toanother state, you may have to cash in theprepaid tuition plan.

If you have a college savings plan, you cansimply leave the account open and keepcontributing to it. Alternatively, you can switch529 plans by rolling over the assets from thatplan to a new 529 plan. You can keep the samebeneficiary when you do the rollover (under IRSrules, you're allowed one 529 plansame-beneficiary rollover once every 12months), but check the details of each plan forany potential restrictions. If you decide to staywith your original 529 plan, just remember thatyour new state might limit any potential 529plan tax benefits to residents who participate inthe in-state plan.

529 plan assets surpass$230 billion

Assets in 529 college savingsplans reached $231.9 billion inthe first quarter of 2015, a10.1% increase over the firstquarter of 2014. (Source:Strategic Insight, 2015)

Note: Investors shouldconsider the investmentobjectives, risks, charges, andexpenses associated with 529plans before investing. Moreinformation about 529 plans isavailable in each issuer'sofficial statement, which shouldbe read carefully beforeinvesting. Also considerwhether your state offers a 529plan that provides residentswith favorable state taxbenefits. As with otherinvestments, there aregenerally fees and expensesassociated with participation ina 529 savings plan. There isalso the risk that theinvestments may lose moneyor not perform well enough tocover college costs asanticipated.

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Bodnar FinancialAdvisors, IncJohn Bodnar, III, CFP®, CIMA®,248 Columbia Tpk.Suite 104Florham Park, NJ 07932Phone: 973-966-6939Fax: 973-966-0032john@bodnar.netwww.bodnar.net

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2015

John Bodnar, III, RegisteredPrincipal, Securities offeredthrough Cambridge InvestmentResearch, Inc., a Broker/Dealer,Member FINRA/SIPC.

Investment Advisor RepresentativeCambridge Investment ResearchAdvisors, Inc., a RegisteredInvestment Advisor.

Financial Planning Services offeredthrough Bodnar Financial Advisors,Inc., a Registered InvestmentAdvisor.

Cambridge and Bodnar FinancialAdvisors, Inc., are not affliated.

Am I liable for unauthorized transactions on my debitcard?It depends. Federal lawprovides consumers withprotection against mostunauthorized credit- and

debit-card transactions.

Under federal law, consumer liability forunauthorized credit-card transactions is limitedto $50. However, many banks and credit-cardcompanies offer even more protection for creditcards in the form of "zero liability" forunauthorized transactions.

For unauthorized debit, rather than credit,transactions, the rules get a bit trickier. For themost part, you won't be held responsible for anyunauthorized debit-card withdrawals if youreport the lost card before it's used. Otherwise,the extent of your liability depends on howquickly you report your lost card. If you reportyour lost debit card within two business daysafter you notice your card is missing, you'll beheld liable for up to $50 of unauthorizedwithdrawals. If you fail to report your lost debitcard within two days after you notice your cardis missing, you can be held responsible for upto $500 of unauthorized withdrawals. And if youfail to report an unauthorized transfer or

withdrawal that's posted on your bankstatement within 60 days after the statement ismailed to you, you risk unlimited liability.

The good news is that some banks andcredit-card companies are offering the same"zero liability" protection to debit-card users thatthey offer to their credit-card users. This zeroliability protection, however, does come withexceptions. In order to have zero liability forunauthorized debit-card transactions,consumers may be required to report the lossof their card "promptly" (typically, no more thantwo days after they learn of the card loss ortheft). In addition, a consumer may need toexercise "reasonable care" to safeguard his orher debit-card information. For example, anindividual who gives someone else his or herdebit card and PIN could be held responsiblefor any unauthorized transactions.

It's important to remember that, unlike creditcards, debit cards directly link to your financialaccounts. As a result, you should act quicklyand call your bank or credit-card company assoon as you learn of any unauthorizedtransactions on your account.

What is this new chip-card technology I've been hearingabout in the news?In recent years, data breachesat major retailers haveincreased across the UnitedStates. As a way to counteract

these data breaches, many U.S. credit-cardcompanies have started implementing a moresecure chip-card technology called EMV (whichis short for Europay, Mastercard, and Visa).

Currently, most retailers use the magnetic stripson the back of your debit or credit card toaccess your account information. Unfortunately,the information contained in the magnetic stripsis easily accessed by hackers. In addition, themagnetic strips use the same accountinformation for every transaction. So once yourcard information is stolen, it can be used overand over again.

With the new EMV technology, debit cards andcredit cards are embedded with a computerchip that generates a unique authenticationcode for each transaction. So if your cardinformation is ever hacked, it can't be usedagain--it's a "one-and-done" scenario.

While many developed nations moved to EMVtechnology years ago, U.S. retailers havepreviously been unwilling to shoulder the costs.

Fortunately, there is good news for U.S.consumers on the horizon.

Beginning in 2015, many large retailers willswitch to the new EMV technology by installingpayment terminals designed to read the newchip-embedded payment cards. It may takeadditional time, however, for smaller retailers toadopt this latest technology.

Along with EMV, even more advancedencryption technology is being developed thatwill increase security for online transactions andpayments made with smartphones. In fact, newmobile payment options like Apple Pay andGoogle Wallet could eventually make payingwith plastic entirely obsolete.

In the meantime, in the wake of these databreaches, you should make it a priority toperiodically review your credit-card and bankaccount activity for suspicious charges. If youtypically wait for your monthly statements toarrive in the mail, consider signing up for onlineaccess to your accounts--that way you canmonitor your accounts as often as needed.

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