2015 IRA Contribution Rules

The deadline to make IRA contributions for tax year 2015 is April, 15 2016. The maximum contribution is $5,500 per individual ($6,500 if age 50 or over) or 100 percent of earned income, whichever is less.

There are income limits which determine whether you can deduct your Traditional IRA contribution or if you qualify to make a Roth contribution. The following table gives the phase-out range for the most common circumstances.

Do you qualify to deduct your Traditional IRA contribution?
If your income is less than the beginning of the phase-out range, you qualify. If your income is over the phase-out range, you do not. If your income falls inside the range, you partially qualify.

Modified Adjusted Gross Income Phase-Out Range

Tax Filing Status For 2015 Contributions For 2016 Contributions
Single, participates in an employer-sponsored retirement plan: $61,000 – $71,000 $61,000 – $71,000
Married filing jointly, participates in an employer-sponsored retirement plan: $98,000 – $118,000 $98,000 – $118,000
Married filing jointly, your spouse participates in an employer-sponsored retirement plan, but you do not: $183,000 – $193,000 $184,000 – $194,000

Do you qualify to contribute to a Roth IRA for 2015?

Modified Adjusted Gross Income Phase-Out Range – Roth

Tax Filing Status For 2015 Contributions For 2016 Contributions
Single: $116,000-$131,000 $117,000-$132,000
Married, filing jointly: $183,000-$193,000 $184,000-$194,000

If your filing status differs from those listed above, please contact your advisor and he or she can help you determine whether you qualify.

Harli Palme, CFA, CFP®
Partner

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Market Update Through 12/31/2015

Total Return

Index

12 months YTD QTD

Dec

Stocks
Russell 3000 0.48% 0.48% 6.27% -2.05%
S&P 500 1.38% 1.38% 7.04% -1.58%
DJ Industrial Average 0.21% 0.21% 7.70% -1.52%
Nasdaq Composite 6.96% 6.96% 8.71% -1.92%
Russell 2000 -4.41% -4.41% 3.59% -5.02%
MSCI EAFE Index -0.81% -0.81% 4.71% -1.35%
MSCI Emerging Markets -14.92% -14.92% 0.66% -2.23%
Bonds
Barclays US Aggregate 0.55% 0.55% -0.57% -0.32%
Barclays Intermediate US Gov/Credit 1.13% 1.13% -0.73% -0.35%
Barclays Municipal 3.64% 3.64% 1.66% 0.77%

Commodity/Currency

Current Level Prior QTR Level TTM High

TTM Low

Crude Oil

$37.04

$45.09 $65.61

$33.77

Natural Gas

$2.34

$2.52 $3.57

$1.81

Gold

$1,060.20

$1,115.20 $1,305.70

$1,045.40

Euro

$1.0863

$1.1163 $1.1835

$1.0522

High-Yield Turbulence

You may have read some scary headlines on high-yield bonds recently.  We’d like to take a moment to update you on the situation and provide our perspective.  First a little background.  High-yield bonds are debt securities issued by companies with credit ratings below investment-grade.  These bonds are commonly called “junk bonds” because of the weaker balance sheets and growth prospects of the companies that issue them.  As a result of increased default risk, investors typically demand higher interest rates on these types of bonds to compensate for the additional risk they take on.  When things are going well, high-yield or junk bonds can deliver above-average interest payments and price appreciation.  When things are not going well, investors can experience sharp price declines and some companies may even default on bond payments.  In a nut shell, higher reward comes with higher risk.

Many advisors, including Parsec, include a modest amount of high-yield bonds in client portfolios.  Junk bonds are considered an asset class and can improve the diversification of a portfolio because they have lower correlations to regular bonds and even stocks.  This means when regular bonds are flat or down, high-yield bonds could actually rise.  The same goes for stocks – high-yield bonds and equities do not always move in the same direction, which confers some diversification benefits.

In addition to diversification benefits, junk bonds have historically delivered healthy returns.  The group tends to do well in the early years of an economic expansion when tight credit starts to loosen and company balance sheets improve.  On the flip side, high-yield bond performance becomes more volatile as an economic expansion starts to slow down and the spread between higher-quality bonds and junk bonds widen.  This indicates investors once again require more return to hold these higher-risk assets.

Earlier this year, interest rate spreads – the difference between high quality bond interest rates and low quality or “junk” interest rates – started to widen as energy company profits came under pressure and debt default rates ticked higher.  Since May 2015 through mid-December, high-yield bond prices have fallen over 12%*.  However, on a total return basis, the group is down about 8% as higher coupon payments were a partial offset.  While debt default rates on speculative-grade companies are below the 20-year average of 4.3%, at around 2.8%, they’ve jumped from 1.4% a year ago due to falling commodity prices that negatively affect profits**.

As high-yield returns tumbled over the summer, many investors ran for the exits.  Unfortunately, diminished bond liquidity following the 2008-2009 financial crisis made redeeming shares difficult for some.  Regulations that strengthened the banking and financial systems via higher capital requirements and reduced leverage have had the unintended side-effects of raising costs for banks and primary dealers to hold fixed income inventory.  With lower inventory levels, these critical market makers are less able to provide liquidity in the debt markets.  This was highlighted recently when investment firm Third Avenue froze investor redemptions in its high-yield fund (which is not a Parsec holding) due to liquidity constraints.  The Third Avenue fund was heavily invested in some of the lowest-ranked credit bonds, which exacerbated the management team’s ability to find willing buyers.  In the end, Third Avenue chose to freeze investor redemptions for one month.

The Third Avenue situation is unusual, but does it reflect deeper issues for the high yield space?  Our view is that current U.S. economic expansion is maturing, which suggests higher credit spreads and potentially more volatility (including downside risk) for the group.  At the same time, falling commodity prices and a strong dollar are headwinds for high-yield.  That said, U.S. jobs growth remains robust, the housing market continues to advance, and consumers are the healthiest they’ve been since before the Great Recession.  The recent Federal Reserve interest rate hike echoes our sentiments that the U.S. economy is on healthy footing.

While high-yield may see more downside, we believe investors are becoming more discerning after years of indiscriminate investing across high and low-risk asset classes alike.  This is a good thing.  It means that fundamentals, and not accommodative monetary policy, will once again drive asset returns.  Although high-yield bonds may face more headwinds in the near-term, our focus on higher-quality, higher-liquidity, high-yield debt should help us better weather a difficult environment.

Despite potential high-yield headwinds, we continue to recommend that clients remain fully invested.  This is based on our experience that market timing is a losing game, as asset class leadership can change sharply, and often without warning.  The historical record has shown that through various market cycles, both stocks and bonds have out-paced inflation over the long-term.  As a result, we recommend investors stick with their high-yield holdings.

*The BofA Merrill Lynch US High Yield Index

**S&P 500 data

Carrie A.  Tallman, CFA

Director of Research

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Holiday Retail Trends & Your Budget

In the midst of this holiday season, is your budget holding together? In this blog, we’ll look at the latest holiday spending stats, the most recent trends in giving, and offer a few tips to help you maintain a financially-stress free holiday season. While money is most definitively not the reason for the season, examining current holiday spending trends gives us some insight into the health of the U.S. consumer and might even inspire reflection on our own holiday spending habits.

According to the National Retail Federation (NRF), total U.S. holiday spending will rise about 2% in 2015 compared to 2014. NRF estimates that the average American will spend about $1,017 in holiday-related items this year versus $1,000 in 2014. No surprise that the bulk of spending, or 72% of budgets, is expected to go towards gift-giving. Family still comes first in this category as consumers plan to spend four-times as much on relatives than on friends. Spending on food comes in at a distant second, eating up 12% of the average American’s holiday budget, but arguably a very important piece of the pie. Other must-haves like decorations, cards, and flowers account for the remaining 16% of most Amercians’ holiday spending.

While holiday spending isn’t surging by any means, it’s up significantly from the depths of the Great Recession when the average American spent only $682 in November and December. For the last several years wage growth has been relatively lackluster while consumer debt has inched lower and savings rates have grown. This suggests consumers learned a valuable, if not painful lesson during the financial crisis: moderation. Lower debt levels and more savings are both net positives for economic growth and asset appreciation. These trends, coupled with signs that wage growth is finally starting to improve, suggests healthier consumers in the years ahead. Given that household consumption accounts for 70% of U.S. gross domestic product or GDP, we may be in for more holiday cheer for years ahead.

Now that we’ve covered some stats, let’s talk about gifts! What do family members want from Santa this year? A poll by the National Retail Federation found that our female relatives rank gift cards as their top gift item, followed by clothing/accessories, books, CDs, and DVDs. While men also named gift cards as number one choice, more of them wanted consumer electronics or computer-related products than women. Looking to give something a little more personal than a gift card? Check out Amazon’s most gifted list (www.amazon.com/gp/most-gifted) for a bevy of ideas by category. Some of the world’s largest online retailer’s best-selling gifts this year include the LEGO Minecraft Playset, the “Inside Out” movie DVD, Amazon’s tablet “fire”, and Adele’s latest CD, among others.

Have a twenty-something in the family mix? A survey from Eventbrite suggests that Millennials prefer experiences over things. In which case you might consider a gift card to the spa or tickets to a play or ball game for the young professionals in your clan.

All this gift-giving talk, while fun to think about, can really strain a budget if not carefully considered. While we’re more than half-way through the holiday season, it’s not too late to reassess your spending plan and even start strategizing for next year. If you’re feeling some financially-related holiday strain, now is the perfect time to stop and take inventory. What was your original holiday budget? Did you have one? And how much have you spent on holiday-related items so far?

In order to relieve money stress, the best and only place to start is by honestly looking at your current situation. The key is not to use your predicament as an opportunity to criticize yourself, but as a starting point for improvement in the years ahead. By intentionally setting a limit on the amount you’ll spend on decorations, gifts, food, etc… you’re less likely to overspend and more likely to avoid feeling financially overwhelmed during the most wonderful time of the year. If you’re already over-budget and swimming in financial strain, don’t sweat it! What’s done is done. The best thing you can do is use this as a learning experience for next year and beyond.

With that in mind, I find that planning ahead is often the best way to navigate any budget. Once you’ve determined a comfortable amount that won’t strain your finances – and you can do this as early as January – you’ll have an entire year to purchase thoughtful gifts for family and friends, on your terms. You can take advantage of sales throughout the year or simply be open to discovering the perfect gift for that special someone. By planning ahead and giving yourself plenty of time to find just the right gift, you’ll have more time to enjoy being with family when the holidays finally arrive. Instead of rushing around the mall at the last minute or spending a fortune on over-night shipping, you can relish the charm of the season and enjoy time spent with loved ones.

Good luck! Wishing you a happy and financially healthy holiday season!

Carrie A. Tallman, CFA
Director of Research

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Five Gas Saving Travel Tips for the Holidays

It’s that time of year again- entertaining, eating too much, and lots of travel.  Marshall Doney, AAA president and CEO, stated in a recent press release that over 46 million Americans will journey 50 miles or more from their home this Thanksgiving.  The chart below shows that gas prices are actually in our favor for traveling this Thanksgiving.

Here are five easy ways to save on fuel prices – not just for the holidays, but all the time!

2012-2015_Avg-Gas-Prices-11-23-15

    1. Drive the more fuel efficient car.  Many people jump to taking the family car with the most leg room and luggage space.  Perhaps take this opportunity to assess your packing and squeeze into the smaller more fuel efficient car.
    2. Lighten the load.  Take an inventory of what’s in your car.  By having a heavier car you use more fuel.  Take off the roof rack that you don’t plan on using this winter and empty out the trunk, leaving only the necessities.
    3. Get a tune up.  Consider getting your car serviced before taking off this holiday season.  The better shape your car is in, the more fuel you will save.
    4. Go back to driver’s ed.  Take this time to remember the basics of driving.  Accelerate slowly, eliminate aggressive braking and speeding.  All of these things lead to increased fuel cost.
    5. Find cheaper gas prices.  GasBuddy is my favorite app for this purpose.  You can use this to find the cheapest prices on your route.

Every penny counts when trying to stick to a budget to meet your long-term goals!

Ashley Gragtmans, CFP®
Financial Advisor

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The Power of Spending Choices

While it’s still well ahead of the official holiday season, a recent email got me thinking about what really drives my spending habits. My sister messaged our family a week ago asking if we were planning to buy presents for the kids this Christmas. I love my nieces and nephews but they are eight in number with at least one more on the way. Buying each one of them a birthday present reflective of their unique personalities is a delight, but as their numbers have grown, holiday shopping has become a little less joyful (‘tis the season) and definitely more stressful.

After the email arrived I knew immediately what I wanted to do – not buy Christmas presents. Only it wasn’t so easy to type those words back. So I waited. Everyone else had responded in the affirmative, but I held back. I felt torn between what I thought I should do and what I knew I wanted to do: enjoy the holiday season with family, minus the gift-giving.

After a little inner conflict and a healthy dose of anxiety, I realized that my desire to not offend, to maintain a magnanimous image, and to avoid the dreaded Scrooge moniker, prevented me from telling my financial truth. I saw that it wasn’t the criticism or praise from others that I was trying to avoid or earn; it was my own inner critic that I was trying to please.

With this newfound awareness, I discovered that not only does this happen at the holidays, but throughout the year! My misguided sense of propriety often influences my spending habits, in a way that is not always aligned with what I really value. Instead, when I notice and promptly ignore my inner critic’s arbitrary rules and demands, it frees me up to spend in a way that’s more aligned with what I really value — like retirement and that future trip to Paris I’ve been planning.

I bit the bullet and told my sisters that I would no longer buy Christmas presents for the kids. It turns out that none of my family criticized me for my decision. This non-reaction was even more proof that my own thoughts and fears – not other people – were behind my financial misalignment.

While some people may not react as well as my family did, when we stop worrying about other peoples’ reactions to our spending choices, they will have less of an impact. We’ll see them for what they are – simply other peoples’ reactions. In the meantime, giving ourselves a break, internally, frees up a lot more clarity to spend in alignment with what feels right. And I can’t think of a better holiday gift!

Carrie A. Tallman, CFA
Director of Research

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NPR Report on Excessive Fees

Investors have a strong desire to be good stewards of their retirement funds. This often includes seeking out professionals for financial advice.  For the retirement plan sponsor, the Department of Labor (DOL) is helping by creating fee disclosure rules and requirements.  A few years ago, the DOL mandated fee disclosure rule (404(a)5) in an effort to ensure plan sponsors are able to determine if the fees for services rendered are “reasonable.”

NPR ran a story this morning about excessive 401k fees.  See link here.  If I could add to this article, I would suggest plan sponsors review their plan fees and services at least every couple of years, if not more often through a fee benchmarking process.  The generated report should give plan sponsors a general idea of how their plan compares to others of similar size.  Benchmarking has other benefits as well.  Not only will this help to uncover fees and what services are being provided, but also some service providers are willing to re-price their services to lower fees.

While many thought the disclosure rules were a bright spot in a dark corner, we feel that further disclosure and transparency is warranted in this industry.  Since not all advisors are the same, we are thankful that the DOL has re-proposed a Fiduciary Rule which seeks to make anyone giving investment advice to 401k/retirement plans (and also IRAs) to act in the account holder’s best interest.  For RIAs like Parsec, it is business as usual.  However, broker-dealers may have a bit more difficulty with this rule, as they operate under something called a suitability standard.  While not to debate the virtues of the fiduciary standard versus the suitability standard, we do feel that greater disclosure is a good thing and will ultimately drive costs down even further.

Neal Nolan, CFP®
Director of ERISA, Financial Advisor

Neal