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IRA and Retirement Plan Limits for 2022

IRA and Retirement Plan Limits for 2022

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    Many IRA and retirement plan limits are indexed for inflation each year. While some of the limits remain unchanged for 2022, other key numbers have increased.

    IRA contribution limits

    The maximum amount you can contribute to a traditional IRA or a Roth IRA in 2022 is $6,000 (or 100% of your earned income, if less), unchanged from 2021. The maximum catch-up contribution for those age 50 or older remains $1,000. You can contribute to both a traditional IRA and a Roth IRA in 2022, but your total contributions cannot exceed these annual limits.

  • 2021 Action Plan

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Income limits for deducting traditional IRA contributions

If you (or if you’re married, both you and your spouse) are not covered by an employer retirement plan, your contributions to a traditional IRA are generally fully tax deductible. If you’re married, filing jointly, and you’re not covered by an employer plan but your spouse is, your deduction is limited if your modified adjusted gross income (MAGI) is between $204,000 and $214,000, and eliminated if your MAGI is $214,000 or more.

If your 2022 federal income tax filing status is: Your IRA deduction is
limited if your MAGI is
between:
Your deduction is eliminated
if your MAGI is:
Single or head of household $68,000 and $78,000 $78,000 or more
Married filing jointly or qualifying
widow(er)
$109,000 and $129,000
(combined)
$129,000 or more (combined)
Married filing separately $0 and $10,000 $10,000 or more

If your filing status is single or head of household, you can fully deduct your IRA contribution up to $6,000 ($7,000 if you are age 50 or older) in 2022 if your MAGI is $68,000 or less. If you’re married and filing a joint return, you can fully deduct up to $6,000 ($7,000 if you are age 50 or older) if your MAGI is $109,000 or less.


Income limits for contributing to a Roth IRA

The income limits for determining how much you can contribute to a Roth IRA have also increased from 2021.

If your 2021 federal income tax
filing status is:

Your Roth IRA contribution is
limited if your MAGI is:
You cannot contribute to a Roth
IRA if your MAGI is:
Single or head of household More than $129,000 but less than
$144,000
$144,000 or more
Married filing jointly or qualifying
widow(er)
More than $204,000 but less than
$214,000 (combined)
$214,000 or more (combined)
Married filing separately More than $0 but less than
$10,000
$10,000 or more

If your filing status is single or head of household, you can contribute the full $6,000 ($7,000 if you are age 50 or older) to a Roth IRA if your MAGI is $129,000 or less. And if you’re married and filing a joint return, you can make a full contribution if your MAGI is $204,000 or less. Again, contributions can’t exceed 100% of your earned income.


Employer retirement plan limits

Most of the significant employer retirement plan limits for 2022 have increased from 2021. The maximum amount you can contribute (your “elective deferrals”) to a 401(k) plan remains $20,500 in 2022. This limit also applies to 403(b) and 457(b) plans, as well as the Federal Thrift Plan. If you’re age 50 or older, you can also make catch-up contributions of up to $6,500 to these plans in 2021. [Special catch-up limits apply to certain participants in 403(b) and 457(b) plans.] The amount you can contribute to a SIMPLE IRA or SIMPLE 401(k) remains $14,000 in 2022, and the catch-up limit for those age 50 or older remains $3,000.

Plan type: Annual dollar limit: Catch-up limit:
401(k), 403(b), governmental 457(b),
Federal Thrift Plan
$20,500 $6,500
SIMPLE plans $14,000 $3,000

Note: Contributions can’t exceed 100% of your income.


IMPORTANT FENIMORE ASSET MANAGEMENT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax
professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

The views and opinions expressed in this article are those of Broadridge Investor Communication Solutions, Inc. and do not necessarily reflect the views of Fenimore Asset Management or its officers. Fenimore Asset Management or its officers have no editorial control over the content of the article or subject matter, and is independent of Broadridge Investor Communication Solutions, Inc.

The information herein is subject to change and is not intended to be complete or to constitute all of the information necessary to evaluate adequately the consequences of investing in any securities or other financial instruments or strategies described herein. These materials also include information obtained from other sources believed to be reliable, but Fenimore does not warrant its completeness or accuracy. In no event shall Fenimore be liable for any use by any party of, for any decision made or action taken by any party in reliance upon, or for any inaccuracies or errors in, or omissions from, the information contained herein and such information may not be relied upon by you in evaluating the merits of participating in any transaction.

In part, the purpose of this presentation may be to provide investors with an update on financial market conditions. The description of certain aspects of the market herein is a condensed summary only. This summary does not purport to be complete and no obligation to update or otherwise revise such information is being assumed. These materials are provided for informational purposes only and are not otherwise intended as an offer to sell, or the solicitation of an offer to purchase, any security or other financial instrument. This summary is not advice, a recommendation or an offer to enter into any transaction with Fenimore or any of their affiliated funds.

We undertake no duty or obligation to publicly update or revise the information contained in this presentation. In addition, information related to past performance, while helpful as an evaluative tool, is not necessarily indicative of future results, the achievement of which cannot be assured. You should not view the past performance of Fenimore funds, or information about the market, as indicative of future results.

All projections, forecasts and estimates of returns and other “forward-looking” information not purely historical in nature are based on assumptions, which are unlikely to be consistent with, and may differ materially from, actual events or conditions. Such forward-looking information only illustrates hypothetical results under certain assumptions and does not reflect actual investment results and is not a guarantee of future results. Actual results will vary with each use and over time, and the variations may be material. Nothing herein should be construed as an investment recommendation or as legal, tax, investment or accounting advice.

Clients or prospective clients should consider the investment objectives, risks, and charges and expenses carefully before investing. You may obtain a copy of the most recent mutual fund prospectus by calling 800-932-3271 and/or visiting www.fenimoreasset.com.

There is no guarantee that any of the estimates, targets or projections illustrated in this summary will be achieved. Any references herein to any of Fenimore’s past or present investments, portfolio characteristics, or performance, have been provided for illustrative purposes only. It should not be assumed that these investments were or will be profitable or that any future investments will be profitable or will equal the performance of these investments. There can be no guarantee that the investment objectives of Fenimore will be achieved. Any investment entails a risk of loss. An investor could lose all or substantially all of his or her investment. Unless otherwise noted, information included herein is presented as of the date indicated on the cover page and may change at any time without notice.

Fenimore Asset Management Inc. is an SEC registered investment adviser; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made.

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Meeting with Management: Getting Informed and Building Relationships

Meeting with Management: Getting Informed and Building Relationships

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    By: William Preston, CFA®
    Portfolio Manager – FAM Dividend Focus Fund

    Ever since Tom Putnam established Fenimore in 1974, he has maintained the practice of getting out from behind the desk and meeting in-person with management teams, a key tenet of Fenimore’s research process.

    Why do we do it? There are a few factors that support Fenimore’s longstanding belief that face-to-face meetings are a best practice including learning the business better, getting a bigger picture view and building relationships.

    Today, our entire research team is responsible for conducting in-person meetings annually with our portfolio companies with the purpose of achieving the following:

  • Andrew Boord, Portfolio Manager - Fenimore Small Cap Strategy

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  1. Understanding the business better. Many companies communicate their investment thesis through scripted conferences and regulatory filings. However, our in-person meetings give us a much better feel for how the business is managed, how employees are treated and other intangibles, like a great culture, that truly make the business exceptional. These meetings also help increase our conviction to hold onto an investment when the markets become volatile or the stock begins to look expensive, a practice that has served us well throughout our history.
  2. Learning out of the office. While truer in the early days when there was no internet, getting out of the office often grants broader insights about the economy and market environment. Our research team interacts with businesses and management teams in a variety of settings, including at company HQs, store locations, warehouses, distribution centers, manufacturing facilities, industry trade shows and investment conferences, which help provide diverse perspectives.
  3. Building relationships over the long-term. In a world where it is becoming harder for active managers to differentiate themselves, by connecting in-person every year management teams often get an appreciation for Fenimore’s shared long-term investment horizon. This distinguishes us from many short-term investors and traders that are worried about quarterly earnings numbers as opposed to long-term value creation.

Fenimore’s trips to AHR Expo, an annual HVAC (heating, ventilation, an air conditioning) industry trade show, provide a great example of the in-person value we seek to create. Over the years, we have made a number of investments in the HVAC industry and this conference provides an efficient way for us to talk with all of our portfolio companies in this industry, as well as their competitors, suppliers, and customers.

At the last expo, we gained a better understanding of how powerful the tailwind of sustainability through reduced energy consumption will be for the industry.  We also learned that several companies believed consolidation will continue, particularly as foreign companies try to buy their way into the US market to bypass the tremendous barriers to entry.

While the pandemic has temporarily changed the way we interact with management teams, the industry has done a great job adapting to a virtual world, which has enabled us to continue to have valuable face-to-face engagements with existing and potential investments. Most important, you can be assured that the Fenimore team is eager and planning to get back out on the road and resume in-person meetings as soon as possible.

It is this direct connection, and industry understanding that Fenimore has embraced for nearly 5 decades – a tradition we expect to remain for generations to come.

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Comparison of Traditional
IRA’s and Roth IRA’s

Comparison of Traditional
IRA’s and Roth IRA’s

Traditional IRA Roth IRA
Maximum yearly contribution
(2022)
Lesser of $6,000 or 100% of
earned income ($7,000 if age 50
or older)
Lesser of $6,000 or 100% of
earned income ($7,000 if age 50
or older)
Income limitation for
contributions
No Yes
Tax-deductible contributions Yes. Fully deductible if neither you
nor your spouse is covered by a
retirement plan. Otherwise, your
deduction depends on your
income and filing status.
No. Contributions to a Roth IRA
are never tax deductible.
Age restriction on
contributions
No. No.
Tax-deferred growth Yes. Yes; tax free if you meet the
requirements for a qualified
distribution.
Required minimum
distributions during lifetime
Yes. Distributions must begin by
April 1 following the year you
reach age 72.
No. Distributions are not required
during your lifetime.
Federal income tax on
distributions
Yes, to the extent that a
distribution represents deductible
contributions and investment
earnings.
No, for qualified distributions. For
nonqualified distributions, only the
earnings portion is taxable.
10% penalty on early
distributions
Yes, the penalty applies to taxable
distributions if you are under age
59 1/2 and do not qualify for an
exception.
No, for qualified distributions. For
nonqualified distributions, the
penalty may apply to the earnings
portion. (Special rules apply to
amounts converted from a
traditional IRA to a Roth IRA.)
Includable in taxable estate of
IRA owner at death
Yes. Yes.
Beneficiaries pay income tax
on distributions after IRA
owner’s death
Yes, to the extent that a
distribution represents deductible
contributions and investment
earnings.
Generally no, as long as the
account has been in existence for
at least five years.

IMPORTANT FENIMORE ASSET MANAGEMENT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax
professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

The views and opinions expressed in this article are those of Broadridge Investor Communication Solutions, Inc. and do not necessarily reflect the views of Fenimore Asset Management or its officers. Fenimore Asset Management or its officers have no editorial control over the content of the article or subject matter, and is independent of Broadridge Investor Communication Solutions, Inc.

The information herein is subject to change and is not intended to be complete or to constitute all of the information necessary to evaluate adequately the consequences of investing in any securities or other financial instruments or strategies described herein. These materials also include information obtained from other sources believed to be reliable, but Fenimore does not warrant its completeness or accuracy. In no event shall Fenimore be liable for any use by any party of, for any decision made or action taken by any party in reliance upon, or for any inaccuracies or errors in, or omissions from, the information contained herein and such information may not be relied upon by you in evaluating the merits of participating in any transaction.

In part, the purpose of this presentation may be to provide investors with an update on financial market conditions. The description of certain aspects of the market herein is a condensed summary only. This summary does not purport to be complete and no obligation to update or otherwise revise such information is being assumed. These materials are provided for informational purposes only and are not otherwise intended as an offer to sell, or the solicitation of an offer to purchase, any security or other financial instrument. This summary is not advice, a recommendation or an offer to enter into any transaction with Fenimore or any of their affiliated funds.

We undertake no duty or obligation to publicly update or revise the information contained in this presentation. In addition, information related to past performance, while helpful as an evaluative tool, is not necessarily indicative of future results, the achievement of which cannot be assured. You should not view the past performance of Fenimore funds, or information about the market, as indicative of future results.

All projections, forecasts and estimates of returns and other “forward-looking” information not purely historical in nature are based on assumptions, which are unlikely to be consistent with, and may differ materially from, actual events or conditions. Such forward-looking information only illustrates hypothetical results under certain assumptions and does not reflect actual investment results and is not a guarantee of future results. Actual results will vary with each use and over time, and the variations may be material. Nothing herein should be construed as an investment recommendation or as legal, tax, investment or accounting advice.

Clients or prospective clients should consider the investment objectives, risks, and charges and expenses carefully before investing. You may obtain a copy of the most recent mutual fund prospectus by calling 800-932-3271 and/or visiting www.fenimoreasset.com.

There is no guarantee that any of the estimates, targets or projections illustrated in this summary will be achieved. Any references herein to any of Fenimore’s past or present investments, portfolio characteristics, or performance, have been provided for illustrative purposes only. It should not be assumed that these investments were or will be profitable or that any future investments will be profitable or will equal the performance of these investments. There can be no guarantee that the investment objectives of Fenimore will be achieved. Any investment entails a risk of loss. An investor could lose all or substantially all of his or her investment. Unless otherwise noted, information included herein is presented as of the date indicated on the cover page and may change at any time without notice.

Fenimore Asset Management Inc. is an SEC registered investment adviser; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made.


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Simplified Employee Pension Plans (SEPs)

Simplified Employee Pension Plans (SEPs)

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    A simplified employee pension (SEP) is a written plan that allows small-business owners to make retirement contributions to traditional IRAs (SEP-IRAs) set up for themselves and for each eligible employee. These contributions may be deducted from your business’s income and excluded from your employees’ income. A SEP may not only provide you a tax-advantaged way to save for your own retirement, but may also help you attract and retain qualified employees by providing for their retirements. And it may help your business avoid some of the complexities posed by certain other employer-sponsored retirement plans.

    Who can establish a SEP?

    You can establish a SEP if you’re an employer or you have self-employment income. “Employer” includes a sole proprietor, a partnership, a C corporation, an S corporation, a limited liability company, and a limited liability partnership. You don’t need employees to set up a SEP, but if you do have them, all eligible employees must be included as SEP participants.

  • Simplified Employee Pension Plans (SEPs)

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    A SEP may not only provide you with a tax-advantaged way to save for your own retirement, but may also help you attract and retain qualified employees by providing for their retirements. And it may help your business avoid some of the complexities posed by certain other employer-sponsored retirement plans.

How do I set up a SEP plan?

Setting up a SEP plan is fairly easy. You may be able to establish a SEP by (1) simply signing IRS Form 5305-SEP, Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement; (2) adopting a prepackaged prototype SEP from a bank, insurance company, financial institution, or other company; or (3) creating a custom-designed SEP. The easiest way is to use Form 5305-SEP. You can use this Form if you don’t maintain any other retirement plans, don’t use leased employees, and meet certain other IRS requirements. You have until the due date of your business’s federal income tax return (including extensions) to set up a SEP and make contributions. By contrast, an ordinary IRA contribution can’t be made later than the due date of your federal income tax return, with no extensions (generally April 15). So if you’re self-employed and file for an extension you could have until October 15 to make a SEP contribution to your SEP-IRA.

Which employees must I include in the plan?

In general, you must include all employees who have (1) reached age 21, (2) worked for you at least three of the last five years, and (3) received a minimum amount of pay (at least $650 for 2022) from you for the year the contribution was made. An employee who meets the criteria above in any year must be covered under the SEP for that year even if he or she is not employed by you at the end of the year.

How do I contribute to my plan?

In order to avoid discrimination rules, most employers determine a contribution percentage for a year, and apply that same rate to all employees. However, contribution formulas can be more sophisticated and can even be integrated with Social Security (you’ll likely need professional assistance if you adopt a nonstandard contribution formula). Your contributions to the SEP are pre-tax dollars. This means that your employees can exclude your contributions from their gross income. In addition, the funds can grow tax deferred. Employer contributions and earnings are taxed when distributed from the SEP-IRA.

How much can I contribute to a SEP?

You can contribute up to 25% of compensation or $61,000, whichever is less, to an employee’s SEP-IRA in 2022 (up from $58,000 in 2021). Generally, when calculating the amount you can contribute in 2022, you can consider only the employee’s first $305,000 of compensation (up from $280,000 in 2021).

If you’re self-employed, contributions to your own SEP-IRA are calculated differently. While the above limits also apply to you, your compensation is considered to be your net earnings from self-employment. Basically, your net earnings from self-employment represent the net income you earned in the business that established the SEP, less the deduction for contributions to your SEP and the deduction allowed to you for one-half of the self-employment tax. This effectively reduces your maximum contribution rate to 20% of compensation or $58,000 (in 2021), whichever is less.

Can my employees contribute?

SEPs are not like 401(k) plans — your employees cannot elect to contribute pre-tax dollars to a SEP-IRA from their pay.* However, your employees can make normal annual IRA contributions to their SEP-IRAs, just as they can to any other traditional IRA. But SEP-IRAs cannot accept Roth contributions.

What are some advantages of a SEP?

SEPs offer several advantages:

  • You don’t have to make contributions to the SEP every year. You choose whether or not to make a contribution and, if so, how much to contribute. However, if you do make a contribution, it must be allocated among all participating employees according to a written allocation formula and must not discriminate in favor of highly compensated employees.
  • Reporting requirements are minimal. Reporting requirements are fairly easy to satisfy. In fact, if you use Form 5305-SEP, you don’t even file the form with the IRS.
  • Contribution/deduction limits are high. The contribution limits are much higher than those applicable to traditional IRAs and SIMPLE IRA plans, and are similar to those applicable to qualified retirement plans.
  • A SEP does not preclude you or your employees from establishing or contributing to a separate IRA. In addition to any contribution made by the sponsoring business to your SEP-IRA, you and your employees can contribute up to the $6,000 annual maximum for 2022 (plus an additional $1,000 catch-up contribution for those age 50 or older — both unchanged from 2021) — or 100% of compensation, whichever is less, to either the SEP-IRA or separate IRA accounts. However, bear in mind that in any year for which SEP contributions are made, you and any of your employees participating in the SEP are considered to be covered by an employer-sponsored retirement plan. That means the deductibility of traditional IRA contributions will be subject to the IRA phase-out rules.
  • Generally, you don’t have fiduciary responsibilities for your employees’ investment decisions. After you adopt a SEP plan, your employees typically set up individual SEP-IRAs (traditional IRAs) to accept contributions. Once your employee sets up a SEP-IRA account, he or she makes the investment decisions and bears all the risk of loss.

What are some disadvantages?

  • You must include all eligible employees in the SEP. The rules for including employees in a SEP plan are generally more inclusive than the corresponding requirements for other employer-sponsored retirement plans. For example, in some cases, more part-time workers must be included in a SEP. As noted earlier, you may even have to include and make contributions for terminated employees. However, you don’t have to include an employee in your SEP plan until he or she has worked three years for you.
  • Your employer contributions vest immediately. Unlike a qualified retirement plan such as a profit sharing plan, which generally allows vesting over time, your employees are immediately vested in SEP plan contributions. Once you make a contribution, it belongs to the employees. Consequently, a SEP might not be the best choice if your goal is to encourage employees to remain with your company long term by having vesting occur more gradually. Immediate vesting can also be costly if you have high employee turnover.
  • All eligible employees must set up a SEP-IRA or modify an existing IRA to accept SEP contributions. The failure of even one qualifying employee to set up his or her own SEP-IRA or to modify a traditional IRA into a SEP-IRA may defeat the entire SEP. You can set up an IRA for an employee, but doing so may rob a SEP of its fundamental simplicity. It also means that you may incur certain fiduciary obligations.

What are some advantages of a SEP?

*Prior to 1997, SEPs could include salary reduction arrangements (SARSEPs), under which employees could elect to have you contribute part of their pay to their SEP-IRAs. New SARSEPs, however, can no longer be established (although those established before 1997 can continue to operate provided there are no more than 25 eligible employees at any time during the prior taxable year).


IMPORTANT FENIMORE ASSET MANAGEMENT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

The views and opinions expressed in this article are those of Broadridge Investor Communication Solutions, Inc. and do not necessarily reflect the views of Fenimore Asset Management or its officers. Fenimore Asset Management or its officers have no editorial control over the content of the article or subject matter, and is independent of Broadridge Investor Communication Solutions, Inc.

The information herein is subject to change and is not intended to be complete or to constitute all of the information necessary to evaluate adequately the consequences of investing in any securities or other financial instruments or strategies described herein. These materials also include information obtained from other sources believed to be reliable, but Fenimore does not warrant its completeness or accuracy. In no event shall Fenimore be liable for any use by any party of, for any decision made or action taken by any party in reliance upon, or for any inaccuracies or errors in, or omissions from, the information contained herein and such information may not be relied upon by you in evaluating the merits of participating in any transaction.

In part, the purpose of this presentation may be to provide investors with an update on financial market conditions. The description of certain aspects of the market herein is a condensed summary only. This summary does not purport to be complete and no obligation to update or otherwise revise such information is being assumed. These materials are provided for informational purposes only and are not otherwise intended as an offer to sell, or the solicitation of an offer to purchase, any security or other financial instrument. This summary is not advice, a recommendation or an offer to enter into any transaction with Fenimore or any of their affiliated funds.

We undertake no duty or obligation to publicly update or revise the information contained in this presentation. In addition, information related to past performance, while helpful as an evaluative tool, is not necessarily indicative of future results, the achievement of which cannot be assured. You should not view the past performance of Fenimore funds, or information about the market, as indicative of future results.

All projections, forecasts and estimates of returns and other “forward-looking” information not purely historical in nature are based on assumptions, which are unlikely to be consistent with, and may differ materially from, actual events or conditions. Such forward-looking information only illustrates hypothetical results under certain assumptions and does not reflect actual investment results and is not a guarantee of future results. Actual results will vary with each use and over time, and the variations may be material. Nothing herein should be construed as an investment recommendation or as legal, tax, investment or accounting advice.

Clients or prospective clients should consider the investment objectives, risks, and charges and expenses carefully before investing. You may obtain a copy of the most recent mutual fund prospectus by calling 800-932-3271 and/or visiting www.fenimoreasset.com.

There is no guarantee that any of the estimates, targets or projections illustrated in this summary will be achieved. Any references herein to any of Fenimore’s past or present investments, portfolio characteristics, or performance, have been provided for illustrative purposes only. It should not be assumed that these investments were or will be profitable or that any future investments will be profitable or will equal the performance of these investments. There can be no guarantee that the investment objectives of Fenimore will be achieved. Any investment entails a risk of loss. An investor could lose all or substantially all of his or her investment. Unless otherwise noted, information included herein is presented as of the date indicated on the cover page and may change at any time without notice.

Fenimore Asset Management Inc. is an SEC registered investment adviser; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made.

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Understanding IRA’s

Understanding IRA’s

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    An individual retirement account (IRA) is a personal savings plan that offers specific tax benefits. IRAs are one of the most powerful retirement savings tools available to you. Even if you’re contributing to a 401(k) or other plan at work, you might also consider investing in an IRA.

    What types of IRA’s are available?

    There are two major types of IRAs: traditional IRAs and Roth IRAs. Both allow you to make annual combined contributions of up to $6,000 in 2022 (unchanged from 2021). Generally, you must have at least as much taxable compensation as the amount of your IRA contribution. But if you are married filing jointly, your spouse can also contribute to an IRA, even if he or she does not have taxable compensation. The law also allows taxpayers age 50 and older to make additional “catch-up” contributions. These folks can put up to an additional $1,000 in their IRAs in 2022 (unchanged from 2021).

  • Understanding IRA's

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Both traditional and Roth IRAs feature tax-sheltered growth of earnings. And both typically offer a wide range of investment choices. However, there are important differences between these two types of IRAs. You must understand these differences before you can choose the type of IRA that may be appropriate for your needs.

Traditional IRA’s

Practically anyone can open and contribute to a traditional IRA. The only requirement is that you must have taxable compensation. You can contribute the maximum allowed each year as long as your taxable compensation for the year is at least that amount. If your taxable compensation for the year is below the maximum contribution allowed, you can contribute only up to the amount you earned.

Your contributions to a traditional IRA may be tax deductible on your federal income tax return. This is important because tax-deductible (pre-tax) contributions lower your taxable income for the year, saving you money in taxes. If neither you nor your spouse is covered by a 401(k) or other employer-sponsored plan, you can generally deduct the full amount of your annual IRA contribution. If one of you is covered by such a plan, your ability to deduct your contributions depends on your annual income (modified adjusted gross income, or MAGI) and your income tax filing status. You may qualify for a full deduction, a partial deduction, or no deduction at all.

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    Traditional IRA’s — Tax Year 2022

    Individuals Covered by an Employer Plan
    type Single/Head of Household Married Joint* Married Separate
    Deduction is limited if
    MAGI is between:
    $68,000 – $78,000 $109,000 – $129,000 $0 – $10,000
    No deduction if
    MAGI is over:
    $78,000 $129,000 $10,000
    * If you’re not covered by an employer plan but your spouse is, your deduction is limited if your MAGI is $204,000 to $214,000, and eliminated if your MAGI exceeds $214,000.
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    What happens when you start taking money from your traditional IRA? Any portion of a distribution that represents deductible contributions is subject to income tax because those contributions were not taxed when you made them. Any portion that represents investment earnings is also subject to income tax because those earnings were not previously taxed either. Only the portion that represents nondeductible, after-tax contributions (if any) is not subject to income tax. In addition to income tax, you may have to pay a 10% early-withdrawal penalty if you’re under age 59 1/2 unless you meet one of the exceptions. For details on these exceptions, please visit the IRS website.

If you wish to defer taxes, you can leave your funds in the traditional IRA, but only until April 1 of the year following the year you reach age 72. That’s when you have to take your first required minimum distribution (RMD) from the IRA. After that, you must take a distribution by the end of every calendar year until your funds are exhausted or you die. The annual distribution amounts are based on a standard life expectancy table. You can always withdraw more than you’re required to in any year. However, if you withdraw less, you’ll be hit with a 50% penalty on the difference between the required minimum and the amount you actually withdrew. (Note: If you reached age 72 before July 1, 2021, you will need to take an RMD by December 31, 2021.)

Roth IRA’s

Not everyone can set up a Roth IRA. Even if you can, you may not qualify to take full advantage of it. The first requirement is that you must have taxable compensation. If your taxable compensation is at least $6,000 in 2022, you may be able to contribute the full amount. But it gets more complicated. Your ability to contribute to a Roth IRA in any year depends on your MAGI and your income tax filing status. Your allowable contribution may be less than the maximum possible, or nothing at all.

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    Roth IRA’s — Tax Year 2022

    type Single/Head of Household Married Joint Married Separate
    Contribution is limited if MAGI is between: $129,000 – $144,000 $204,000 – $214,000 $0 – $10,000
    No contribution if MAGI is over: $144,000 $214,000 $10,000
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    Your contributions to a Roth IRA are not tax deductible. You can invest only after-tax dollars in a Roth IRA. The good news is that if you meet certain conditions, your withdrawals from a Roth IRA will be completely free of federal income tax, including both contributions and investment earnings. To be eligible for these qualifying distributions, you must meet a five-year holding period requirement. In addition, one of the following must apply:

    • You have reached age 59 1/2 by the time of the withdrawal
    • The withdrawal is made because of disability
    • The withdrawal is made to pay first-time homebuyer expenses ($10,000 lifetime limit from all IRAs)
    • The withdrawal is made by your beneficiary or estate after your death

Qualified distributions will also avoid the 10% early withdrawal penalty. This ability to withdraw your funds with no taxes or penalty is a key strength of the Roth IRA. And remember, even nonqualified distributions will be taxed (and possibly penalized) only on the investment earnings portion of the distribution, and then only to the extent that your distribution exceeds the total amount of all contributions that you have made.

Another advantage of the Roth IRA is that there are no required distributions after age 72 or at any time during your life. You can put off taking distributions until you really need the income. Or, you can leave the entire balance to your beneficiary without ever taking a single distribution.

Making the choice

Assuming you qualify to use both, which type of IRA might be appropriate for your needs? The Roth IRA might be a more effective tool if you don’t qualify for tax-deductible contributions to a traditional IRA or if you want to help reduce taxes during retirement and preserve assets for your beneficiaries. But a traditional deductible IRA may be a better tool if you want to lower your yearly tax bill while you’re still working and possibly in a higher tax bracket than you’ll be in during retirement.

Note: You can have both a traditional IRA and a Roth IRA, but your total annual contribution to all of the IRAs that you own cannot exceed the annual contribution limit.


IMPORTANT FENIMORE ASSET MANAGEMENT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax
professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

The views and opinions expressed in this article are those of Broadridge Investor Communication Solutions, Inc. and do not necessarily reflect the views of Fenimore Asset Management or its officers. Fenimore Asset Management or its officers have no editorial control over the content of the article or subject matter, and is independent of Broadridge Investor Communication Solutions, Inc.

The information herein is subject to change and is not intended to be complete or to constitute all of the information necessary to evaluate adequately the consequences of investing in any securities or other financial instruments or strategies described herein. These materials also include information obtained from other sources believed to be reliable, but Fenimore does not warrant its completeness or accuracy. In no event shall Fenimore be liable for any use by any party of, for any decision made or action taken by any party in reliance upon, or for any inaccuracies or errors in, or omissions from, the information contained herein and such information may not be relied upon by you in evaluating the merits of participating in any transaction.

In part, the purpose of this presentation may be to provide investors with an update on financial market conditions. The description of certain aspects of the market herein is a condensed summary only. This summary does not purport to be complete and no obligation to update or otherwise revise such information is being assumed. These materials are provided for informational purposes only and are not otherwise intended as an offer to sell, or the solicitation of an offer to purchase, any security or other financial instrument. This summary is not advice, a recommendation or an offer to enter into any transaction with Fenimore or any of their affiliated funds.

We undertake no duty or obligation to publicly update or revise the information contained in this presentation. In addition, information related to past performance, while helpful as an evaluative tool, is not necessarily indicative of future results, the achievement of which cannot be assured. You should not view the past performance of Fenimore funds, or information about the market, as indicative of future results.

All projections, forecasts and estimates of returns and other “forward-looking” information not purely historical in nature are based on assumptions, which are unlikely to be consistent with, and may differ materially from, actual events or conditions. Such forward-looking information only illustrates hypothetical results under certain assumptions and does not reflect actual investment results and is not a guarantee of future results. Actual results will vary with each use and over time, and the variations may be material. Nothing herein should be construed as an investment recommendation or as legal, tax, investment or accounting advice.

Clients or prospective clients should consider the investment objectives, risks, and charges and expenses carefully before investing. You may obtain a copy of the most recent mutual fund prospectus by calling 800-932-3271 and/or visiting www.fenimoreasset.com.

There is no guarantee that any of the estimates, targets or projections illustrated in this summary will be achieved. Any references herein to any of Fenimore’s past or present investments, portfolio characteristics, or performance, have been provided for illustrative purposes only. It should not be assumed that these investments were or will be profitable or that any future investments will be profitable or will equal the performance of these investments. There can be no guarantee that the investment objectives of Fenimore will be achieved. Any investment entails a risk of loss. An investor could lose all or substantially all of his or her investment. Unless otherwise noted, information included herein is presented as of the date indicated on the cover page and may change at any time without notice.

Fenimore Asset Management Inc. is an SEC registered investment adviser; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made.

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FAM Dividend Focus Fund: 6 Key Lessons Learned

FAM DIVIDEND FOCUS FUND:
6 KEY LESSONS LEARNED

FAM DIVIDEND FOCUS FUND
25 YEARS OF INVESTING IN DIVIDENDS

As we celebrate 25 years of service to our shareholders, we’re pleased to provide an insight into 6 Key Lessons Learned along the way that have helped contribute to the Fund’s long-term success.

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6 key Lessons Learned


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25 Years of Distinctive Dividend Investing

25 Years of Distinctive
Dividend Investing

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    Dividend investing has been around for over 100 years, but for the last 25 years Fenimore Asset Management has been implementing its own style of dividend investing through the FAM Dividend Focus Fund by investing in the growth potential of the dividend over the long term versus its current yield.

    Much has changed since 1996, when the 10-year Treasury was at 7%1 and money market funds would pay investors 5%.

    Finding Growth in Dividends

    And even the Fund’s name has changed in that time, but what has not changed is the return potential from investing in dividend-paying mid-cap companies that are on a growth trajectory.  The FAM Dividend Focus Fund Co-Managers evaluate every business in order to determine if it is best in class and can grow for years to come. Together they analyze whether the management team is strong and ethical, and why clients want to do business with the company to build the case for growth.

  • Image of Albany Skyline

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“We kiss a lot of frogs to find the right businesses,” noted William Preston, Co-Manager. “We are looking for that company to be the best holding over the next five to 10-plus years. It’s truly an unrelenting focus on quality and it is one of the things we don’t compromise on.”

The Intrinsic Value of Dividends

But what value do dividends really add? Going back all the way to 1926, dividend income has constituted more than 30% of the monthly total return of the S&P 5002, according to analysts. At Fenimore, the dividend growth focus allows the team to determine not only whether a company is growing, but also creates guard rails around managements’ capital allocation. This trusted Fenimore strategy is dividend focused with a growth filter.

Since inception the FAM Dividend Focus Fund has produced 9.62% annualized. To see the full track record, click here. To learn more about how the FAM Dividend Focus Fund could add value to your portfolios contact us.

1Factset. 10 year was as high as 7%.
2S&P Dow Jones Indices, “DIVIDEND INVESTING AND A LOOK INSIDE THE S&P DOW JONES DIVIDEND INDICES” September 2013

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Individual Retirement Accounts

Individual Retirement Accounts

IRAs RMD Age Change: 70½ to 72
  • The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 pushes back the age at which retirement plan participants need to take required minimum distributions (RMDs) from age 70½ to 72.
  • The SECURE Act also allows retirees to make contributions indefinitely to a Traditional IRA if they have earned income (this feature was already in place for Roth IRA owners).1

 

IRA Beneficiaries — Your Annual Review

We recommend that you review, and update as necessary, both your primary and contingent IRA beneficiaries annually. If your situation has changed, there may be unintended consequences from your beneficiary designations.

 

1www.irs.gov/retirement-plans

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Key Reasons Why Fenimore Avoids Short Squeezes

KEY REASONS WHY FENIMORE
AVOIDS SHORT SQUEEZES

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    By Andrew Boord, Portfolio Manager – Fenimore Small Cap Strategy

    There is much discussion lately about highly shorted stocks getting squeezed higher, like GME (GameStop Corp.) — not a Fenimore holding.

    • Short-Selling Basics: A short seller expects a stock price to decline. First, they borrow someone else’s shares and sell them at the market price. Later, they must return those shares to the rightful owner by going into the market to buy the same number of shares back (known as “covering”). If the stock price falls between the sale and the cover, then they earn a profit.
    • Short Squeeze: A short squeeze can occur when a security has a relatively high, short interest. If other market participants buy shares pushing the price higher, the losses for short sellers can become extremely painful and cause the shorts in turn to buy more shares to cover their short positions. A squeeze is wave after wave of short sellers forced to buy shares to cover their shorts at higher and higher prices.
  • Andrew Boord

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  • Short Interest & GME: Short interest is usually measured by “days to cover,” which can be defined as the number of shares shorted divided by the average volume. GME was particularly vulnerable because the short interest was massive versus average volume. As a result, once the squeeze begins, the short interest struggles to buy enough shares to cover.
  • Recurring Trend: While GME is an amazing episode that the marketplace is watching carefully, short squeezes are a recurring trend in market history.
  • Key Reasons Why Fenimore Avoids Short Squeezes:
    – Short squeezes almost always end with the stocks returning to their approximate starting levels.
    – Even as investment professionals with decades of experience, we never know exactly what catalyst drives a stock price over the short term. That is why we believe that investing with extensive research and knowledge, and a long-term perspective, is mission critical to managing risk and growing capital.
    – Fenimore does not speculate with our investors’ hard-earned assets. We are dedicated to protecting our investors’ capital and see these market anomalies as interesting to watch, but critical to avoid.
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Is a Roth IRA Conversion Right for You?

IS A ROTH IRA CONVERSION
RIGHT FOR YOU?

Concerned about future tax rates? You may want to consider converting your Traditional IRA to a Roth IRA. A Roth conversion is a permissible transaction that allows you to pay income taxes on some or all your retirement assets when you convert and benefit from taxfree withdrawals in the future.

Some benefits:

  • A Roth IRA allows for an after-tax contribution, tax-deferred growth, and taxfree distributions at retirement age.
  • You may pay lower taxes if your current tax rate is lower than your expected tax rate in retirement.
  • Inheritance or long-term wealth accumulation goals — Roth IRAs do not require investors to take required minimum distributions at age 72. Also, inherited Roth accounts offer taxfree distributions to any beneficiaries.
  • Tax diversification — What are your other sources of retirement income? Having both tax-free and taxable distributions gives you greater control. When is a conversion appropriate?
  • If your income is too high to contribute directly to a Roth IRA or if you have existing funds invested in a Traditional IRA, you may want to consider a Roth conversion.
  • If you feel your tax bracket is lower now than it will be in the future when you take a Roth IRA distribution, this could be an appropriate strategy. There are other considerations, so we encourage you to speak with us to learn more. We always recommend including your accountant or tax preparer in the final decision.
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DID YOU KNOW?

YOU CAN CONVERT A TRADITIONAL IRA FROM ANOTHER COMPANY INTO A FAM FUNDS ROTH IRA


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Thomas O. Putnam founded Fenimore in 1974 with two passions: conduct in-depth, firsthand, independent investment research and serve investors with excellence and integrity. Today Fenimore Asset Management, manager of the FAM Funds, is nationally recognized, yet locally rooted and independently owned. Decades have passed, but our approach endures.

Securities offered through Fenimore Securities, Inc. Member FINRA/SIPC,
and advisory services offered through Fenimore Asset Management, Inc.

© Fenimore Asset Management. All Rights Reserved.