Tax-smart moves for 2005 … and beyond | VailDaily.com
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Tax-smart moves for 2005 … and beyond

Charlie Wick

Now that tax season is coming to an end, you may want to review your returns for opportunities to brighten your tax picture for next year. Specifically, are you paying too heavy a load on your investment income? If so, you may want to explore some “tax-smart” moves for 2005 and future years. Consider these techniques: Tax-deferred investing, tax-free investing and tax-efficient investing. Let’s take a look at all three. Tax-deferred investingWhen you invest in a tax-deferred vehicle, you pay no taxes on your earnings until you start taking withdrawals (withdrawals prior to 59 12 may be subject to a 10 percent penalty), so your money can grow faster than it would if placed in an investment on which you paid taxes every year. You have several tax-deferred options available, including the following: *401(k) – It’s almost always a good idea to contribute as much as you can afford to your 401(k) or other employer-sponsored retirement plan. (In 2005, you can put in up to $14,000 to your 401(k), or $18,000 if you’re 50 or older.) Your contributions are made with “pre-tax” dollars, so, the more you put in, the more you’ll be able to reduce your adjusted gross income. And, of course, you get the benefit of tax-deferred earnings growth. Plus, your employer may match part of your contributions. *Traditional IRA – In 2005, you can put in up to $4,000 to a traditional IRA, or $4,500 if you’re 50 or older. Depending on your income level, your contributions may be tax deductible, but your earnings will always grown on a tax-deferred basis. Plus, you can fund your IRA with virtually any investment you choose: stocks, bonds, certificates of deposit, government securities, etc. Tax-free investing One way to help reduce your investment taxes is to avoid paying taxes. And you can do that through municipal bonds and the Roth IRA. *Municipal bonds – When you invest in municipal bonds, your interest payments are exempt from federal taxes – and possibly state and local taxes, as well. (However, municipal bonds may be subject to the alternative minimum tax, and any increase in principal value may be taxable.) *Roth IRAs – Your Roth IRA earnings grow tax-free as long as you’ve had your account for at least five years and you don’t begin making withdrawals until you’re 59 1/2. Roth IRA contribution limits are the same as those for the traditional IRA, but certain income limits apply. Tax-efficient investing *”Buy-and-hold” – Income taxes aren’t the only types of taxes associated with investing; you may also have to pay capital gains taxes. That’s why it makes sense to be a “buy and hold” investor. If you hold your stocks for more than one year before selling them, then your gains will only be subject to a maximum capital gains rate of 15 percent (effective through Dec. 31, 2008). But if you sell your stocks within a year of buying them, then your gains will be taxed at your ordinary income tax rate. Start thinking “tax smart” To see if the ideas mentioned above are suitable for your individual needs, consult with your investment and tax advisers. But take action soon – the quicker you start making tax-smart investments, the better your results will be.Charlie Wick is an investment representative with Edward Jones in Eagle. He can be reached at 328-4959.Vail, Colorado


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