With tax season upon us, it’s time to focus on your tax return, which is due on April 15. As you work on your return, you may see some areas in which you’d like to make some changes for 2014 and beyond – and one of these areas may be your investments.
You may be able to benefit from taking the following steps:
• “Max out” your IRA. Depending on your income level, you may be able to deduct some or all of your contributions to a traditional IRA. And your earnings can grow on a tax-deferred basis.* (Roth IRA contributions are not deductible, but your earnings and eventual distributions will be tax-free, provided you meet certain conditions.) You can contribute to your IRA for 2013 right up until the tax-filing deadline on April 15. And for 2014, the annual IRA contribution limit remains at $5,500 (or $6,500, if you’re 50 or older).
• Boost your 401(k) contributions. You generally contribute pre-tax dollars to your 401(k), so the more you put in, the lower your taxable income. (Depending on your employer, you may even be able to make Roth contributions to your 401(k) plan.) For 2014, you can put in up to $17,500 to your 401(k) or other employer-sponsored plan, such as a 457(b) or 403(b). If you’re 50 or older, you can add another $5,500 on top of the contribution limit.
• Consider tax-advantaged investments. For example, you may be able to benefit from investing in municipal bonds, which provide interest payments that are free of federal taxes, and, in some cases, free of state and local taxes, too. (Some municipal bonds may be subject to the alternative minimum tax.) Another investment possibility is a fixed annuity, which offers tax-deferred earnings growth.
• Avoid frequent buying and selling. If you sell an investment that you’ve held for one year or less, you may have to pay the short-term capital gains rate, which is the same as your ordinary income tax rate. But when you sell an investment that you’ve held for more than one year, you’ll be assessed the more favorable long-term capital gains rate, which will be 15 percent or 20 percent, depending on your income level.
Work with your financial advisor and tax professional to see how you may be able to make progress toward your objectives and still keep control of your investment-related taxes.
*Taxes are due upon withdrawal and withdrawals prior to age 59 1/2 may be subject to a 10 percent IRS penalty.
Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation.
Information provided by Adam Kline, Edward Jones, 107 Second St. S.E., Altoona, 515-967-7644.