Summer Jobs and – IRA Contributions?

As summer progresses, teenagers everywhere are working at part-time or full-time summer jobs.  Some are saving for college, some are paying for a car, and others are using the income to enjoy the summer months with their friends.  Very few are using that money to save for the future.  This does present a great planning opportunity for parents and others to help those teens get ahead down the road.

Anyone with earned income can contribute to an IRA or Roth IRA, so this includes teenagers.  Even if the teen isn’t interested in using their income to fund either of these accounts, a parent, grandparent, or really anyone else, can do so for them, up to the lesser of the teen’s earned income or the IRA contribution limits ($5,500 for 2013).

Using a traditional IRA will allow the teen to take out money penalty free for the big, important items in life, like paying for college or paying for up to $10,000 of a first home.  Or, if the contributions are allowed to grow in the account over their lifetime, the IRA can provide a significant retirement asset when the time comes.  Though the teen might not appreciate the value of this type of planning now, the impact will be felt and genuinely appreciated as they continue into adulthood.

As always, we’re here to discuss these and many other options, as we have been for more than 35 years.

Bulls Keep Running on Earnings Results and Fed Reassurance

Markets rallied strongly for another week, posting their second best weekly performance of the year and sending the S&P 500 and Dow indexes to new highs. Earnings reports and calming words from Fed Chairman Ben Bernanke contributed to the market surge. For the week, the S&P 500 gained 2.96%, the Dow grew 2.17%, and the Nasdaq gained 3.47%.[1]

Second quarter earnings were in focus last week, and banks led the way. JP Morgan Chase (JPM) and Wells Fargo (WFC) both beat earnings expectations with in-line revenues, setting the bar for the rest of the financial sector.[2]

On the other hand, United Parcel Service Inc. (UPS.N) gave a weak profit outlook, citing economic conditions as one reason for the lack of optimism. Overall, analysts at Thomson Reuters expect earnings to grow 2.8% and revenue to grow 1.5% in the second quarter.[3]

Markets reacted positively to some reassurance from Ben Bernanke’s speech Wednesday; the chairman pushed back against the idea that the Fed would definitely begin tapering asset purchases in September. He commented that current unemployment levels may be overstating the health of the job market and that rates may be kept low even after the 6.5% unemployment threshold is reached, should conditions merit. The June FOMC meeting minutes showed some dissension in the Fed ranks, underscoring the fact that some officials believe that the Fed should start tapering sooner than Bernanke may like.[4]

Either way, investors appear to have gotten their heads around the idea that tapering will definitely happen at some point in the future.

We’ve got a big week ahead as investors will be closely watching earnings to either confirm or deny the sustainability of the rally. It wouldn’t be unusual to see some consolidation after such a strong run, but management teams have done a good job of setting investor expectations low and some earnings beats are expected. If earnings reports remain positive, we might see the rally continue, though some volatility is likely. Investors will also be closely watching the Fed as Ben Bernanke testifies before the House Financial Services Committee and Senate Banking Committee on the state of the economy.

Chinese central bank to keep credit growth steady. China’s central bank pledged to fight tight credit conditions through a mix of policy tools. The credit crunch, which has worried financial markets, was caused by factors such as fast credit growth, regulatory requirements, and a crackdown on loans between banks to cover deposit requirements.[5]

U.S. monthly budget surplus largest on record. Rising tax revenues, public spending cuts, and Treasury repayments helped the government post a surplus of $117 billion in June. Unfortunately, the improving budget picture may sap Congress’ urgency to negotiate a budget deal that would raise the federal borrowing limit.[6]

Unemployment claims rise, seasonal factors likely. The number of Americans filing new claims for unemployment benefits rose slightly to a seasonally adjusted level of 360,000. However, the reading was likely clouded by seasonal factors like scheduled factory closings.[7]

Consumer sentiment slips. A June reading of consumer sentiment fell short of estimates, indicating consumers are worried about the future. While consumers are still confident about the present economy, they appear to be concerned about how rising interest rates, higher mortgage rates, and increased volatility in the stock market will affect the economy later this year.[8]

Disclaimers and Sources

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification does not guarantee profit nor is it guaranteed to protect assets. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896. The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies. The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia. The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market. Google Finance is the source for any reference to the performance of an index between two specific periods. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. You cannot invest directly in an index. Consult your financial professional before making any investment decision. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.
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Expiring Tax Breaks

A report by the Congressional Research Service released on June 27th lists a number of individual tax deductions that are set to expire after the 2013 tax year.

Most of these have been extended at least once before, but given the recent trouble getting tax bills through Congress and signed by the President by the end of the year, it’s hard to tell when, or if, all of these items will be extended.

  • Above-the-line deduction for teacher’s out of pocket expenses
  • Deduction for state and local sales taxes
  • Above-the-line deduction for qualified tuition and fees
  • Deduction for Private Mortgage Insurance (PMI)
  • Exclusion from income for debt cancellation related to a principle residence.

We’ll keep up to date as these issues come up in Congress, likely later this fall, and will bring you the details as they become available.

Some “Obamacare” Penalties Delayed

Late last week, the Obama Administration announced that it will delay until 2015 the penalty imposed on employers for not providing “minimum essential health care coverage” to its employees as part of the Affordable Care Act.  The penalty would have applied to employers with 50 or more full time equivalent employees starting in 2014.

Based on the press release by the Treasury Department, the agency in charge of imposing the penalty, as well as writing the regulations explaining how to comply with the law, there has been significant push-back from the business community about the penalty.  The main concerns raised are the lack of clear guidance from the Treasury department on a penalty that was to go into effect in five short months, as well as the complexity of reporting proposed by the department and the burden that reporting would impose on employers.

The “individual mandate” requiring individuals to have health insurance or be assessed a penalty, is still set to go into effect at the beginning of 2014.  The requirement for employers with more than 250 employees to report the value of employer-provided health insurance on the employee’s W2 is also still scheduled to go into effect in 2014.

Based on the implementation of the Affordable Care Act to date, it would not be surprising to see more delays announced on other parts of the law in the future.  The best advice when working with this law is to determine how it will affect your business and work to comply with the law as it stands at the end of the year.  This also happens to be the advice of the Treasure Department as well.

We’re here to help, as we have been for more than 30 years.

July 1st Update

Starting today, a number of tax-related changes agreed to during the last legislative session go into effect, along with the effect of one key U.S. Supreme Court ruling.  Below is a summary of the key points.

  • The new, 9.85% top Minnesota tax rate went into effect, but is retroactive to January 1st, 2013. Those that are single with taxable income of more than $150,000, and married couples with more than $250,000 in taxable income will see the new 9.85% rate imposed on income over those amounts. This also points to a significant marriage penalty, since two single people can earn $50,000 more than a married couple before the new tax kicks in.
  • Starting with Minnesota tax refunds issued in 2014, those not choosing direct deposit will instead be issued a prepaid debit card; paper checks will no longer be issued.
  • The following items paid by an employer on behalf of an employee will now be subject to Minnesota income tax (these items are still exempt on the Federal level, but starting January 1, 2013 not for Minnesota). In these cases, Box 16 of the employee’s 2013 W2 will likely exceed Box 1.
    • Up to $5,250 of education expenses for education not directly related to the employees job. This includes many tuition reimbursement programs.
    • Up to $12,970 of adoption expenses paid on behalf of an employee or reimbursed to them.
    • Transit passes and vanpool expenses in excess of $125 per month.
  • The U.S. Supreme Court overturned the Defense of Marriage Act (DOMA), which clears the way for same-sex couples that are legally married in their state of residence to file joint tax returns. Beginning August 1st, 2013, same-sex couples will be allowed to marry in the State of Minnesota, allowing them to file jointly on both the Federal and State tax returns, which simplifies the process significantly. Those couples with income from states other than those that allow same-sex marriage will still face significant hurdles to correctly filing in multiple states.

We’re working hard to keep up on the changes as they come about, including the impending enactment of most of the Affordable Care Act.