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Weekly Market Commentary

09/28/2022

Cafeteria Plans Explained

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Are you looking for a way to reduce your taxable income? If so, a Cafeteria plan may be a great option for you assuming your employer offers it. A Cafeteria plan is an employer-sponsored program that employees can opt in to contribute pre-tax dollars for certain qualified expenses.

Qualified Expenses Include
  • Health Insurance Premiums (excluding long-term care insurance)
  • Accident insurance
  • Adoption expenses
  • Dependent-care expenses
  • Group term life insurance coverage
  • Health savings accounts, including long-term care services
  • Flexible spending accounts (FSA)
Let’s use a dependent care account as an example. You could use your contributed pre-tax dollars to pay for things like preschool, day care, summer day camp, etc. At your employer’s open enrollment, you can specify how much of your income you want to set aside (up to $5,000 for individuals or married couples filing jointly, or $2,500 for a married person filing separately as of 2022). Whatever amount you decide on will be split between your pay periods and withheld from your paychecks.
Example
$5,000 contribution for the year / 26 pay periods
$192.31 withheld per paycheck.

Cafeteria Plan Non-Cafeteria Plan
Bi-weekly Income

$2,500

$2,500
Pre-tax Dependent Care Benefit $192.31 $0
Taxable Income $2,307.69 $2,500
Taxes Paid at 20% Tax Rate $461.54 $500
Post-tax Expense $0 $192.31
Take-Home Pay $1,846.15 $1,807.69


In the example above, you can see that the Cafeteria plan enrollee receives a bit of a tax break per pay period. Cafeteria plans tend to reduce a person’s tax liability because expenses are taken out pre-tax. Keep in mind that unless your employer’s documentation shows otherwise, any unused funds left in the cafeteria plan at the end of the year will be forfeited.

Want to Learn More?

Determining whether to opt in to a Cafeteria plan and how much to set aside can be difficult. We can team up with you and your tax professional to discuss strategies are right for you.


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U.S. equities declined across the board. For the second straight week, all three major indices: the S&P 500, the DJIA, and the tech-heavy Nasdaq, fell at least -4%. Domestically, smaller-sized companies underperformed their larger counterparts as the Russell 2000 index declined -6.58% on the week. Similar story for international stocks, which saw the developed markets of the MSCI EAFE index fall -5.6%. Emerging markets were also negative, though not as significantly, down just over -4%. U.S. bonds were broadly negative across credit qualities as Bloomberg Barclays U.S. Aggregate Bond index was down -1.56% for the week, -1.75 for High Yield Corporates. International fixed income faired even worse as the Global Agg declined -2.44%.
 

Dollar vs. Yen – Japan intervened in the foreign exchange market by buying yen for the first time in 24 years, shortly after the Bank of Japan accelerated a fall in the currency by confirming it would maintain ultralow interest rates. The rare intervention was the latest example of global concern triggered by the strong dollar, which has gained ground on the back of the Federal Reserve’s interest-rate increases. One nation hit by the fallout is Japan, the world’s third-largest economy, which has to pay more for essential imports of oil, natural gas and food. These imports are generally denominated in dollars and now are costing more in yen terms.

Fed Calls it a Career – Roger Federer, one of the greatest men’s tennis players of all time, has played the final match of his career, a doubles loss alongside his rival turned pal, Rafael Nadal. Over the course of his competitive career, now officially over at the age of 41, Federer won 20 major titles including 8 Wimbledon Championships, 5 of those consecutively from 2003-2007, and completed the career grand slam.

British Pound hits Record Low Against Dollar – The British pound hit its lowest-level against the U.S. dollar Monday, dropping heavily after the U.K. government announced a series of tax cuts on Friday, before later paring losses. The currency touched $1.0349 during Asian trading hours Monday, breaking through its previous record low in 1985. The pound was recently trading at $1.0776. The U.K government is planning to issue large amounts of bonds to help fund its spending, which has sent yields on existing debt soaring. Yields continued to climb Monday.

Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. Past performance cannot guarantee future results.
 
Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect again loss. In general, the bond market is volatile; bond prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer term securities. Any fixed-income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Vehicles that invest in lower-rated debt securities (commonly referred to as junk bonds or high-yield bonds) involve additional risks because of the lower credit quality of the securities in the portfolio. International investing involves special risks not present with U.S. investments due to factors such as increased volatility, currency fluctuation, and differences in auditing and other financial standards. These risks can be accentuated in emerging markets.

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