Many Carlsbad citizens are filing their taxes this week. If you think that things might have turned out differently had you paid less in investment-related taxes, you might want to take steps soon to help ensure a different outcome in 2011.
Here are some tax-smart strategies to consider:
• Invest in municipal bonds. If you are in an upper-income bracket, you might benefit from owning municipal bonds. The interest payments from these bonds are typically exempt from federal income taxes, and may be exempt from state and local taxes, depending on where you live.
• Max out on your Roth IRA. If you qualify for a Roth IRA, try to fully fund it every year. Your earnings grow tax-free, provided you have had your account at least five years and you don't take withdrawals until you are at least 59 and a half years of age. Starting this year, you can convert funds to a Roth IRA even if your maximum adjusted gross income is more than $100,000. If you convert in 2010, you can report the taxable income from the conversion over a two-year period (2011 and 2012).
• Distribute assets between taxable and retirement accounts. You'll want to look at your investments as a whole to determine if they are working toward your goals. But in considering ways to control investment taxes, you may also find it useful to look at two separate categories: tax-deferred retirement accounts, such as the traditional IRA , and 401(k), and taxable accounts, which hold all the investments that are not in your retirement accounts. As a general rule, you might want to put income-producing securities, such as taxable bonds, into your tax-deferred retirement accounts. When you ultimately take out this money, presumably at retirement, your withdrawals will be taxed at your current income tax rate, but by then you may be in a lower tax bracket. Conversely, you may want to put growth-oriented securities, such as stocks, in your taxable account. As long as you hold these assets at least a year, you'll only have to pay the long-term capital gains rate, which is currently 15 percent for the top three tax brackets. (This rate may soon rise, however.)
• Sell your “losers” throughout the year. If you own investments that have lost value, consider selling them throughout the year. Your losses can offset any capital gains you might have achieved. If you don't have any gains, the losses can offset up to $3,000 of your regular income. Additionally, any losses that you don't use in a given year can be carried forward indefinitely for use against future capital gains.
Before embarking on any of these strategies, consult with your tax and financial advisors. Every tax-smart move may not be appropriate for your individual situation. But if you're concerned about the impact of investment taxes, it can pay to explore your options.
Justin Peek of Edward Jones can be reached at (760) 635-1097.
Here are some tax-smart strategies to consider:
• Invest in municipal bonds. If you are in an upper-income bracket, you might benefit from owning municipal bonds. The interest payments from these bonds are typically exempt from federal income taxes, and may be exempt from state and local taxes, depending on where you live.
• Max out on your Roth IRA. If you qualify for a Roth IRA, try to fully fund it every year. Your earnings grow tax-free, provided you have had your account at least five years and you don't take withdrawals until you are at least 59 and a half years of age. Starting this year, you can convert funds to a Roth IRA even if your maximum adjusted gross income is more than $100,000. If you convert in 2010, you can report the taxable income from the conversion over a two-year period (2011 and 2012).
• Distribute assets between taxable and retirement accounts. You'll want to look at your investments as a whole to determine if they are working toward your goals. But in considering ways to control investment taxes, you may also find it useful to look at two separate categories: tax-deferred retirement accounts, such as the traditional IRA , and 401(k), and taxable accounts, which hold all the investments that are not in your retirement accounts. As a general rule, you might want to put income-producing securities, such as taxable bonds, into your tax-deferred retirement accounts. When you ultimately take out this money, presumably at retirement, your withdrawals will be taxed at your current income tax rate, but by then you may be in a lower tax bracket. Conversely, you may want to put growth-oriented securities, such as stocks, in your taxable account. As long as you hold these assets at least a year, you'll only have to pay the long-term capital gains rate, which is currently 15 percent for the top three tax brackets. (This rate may soon rise, however.)
• Sell your “losers” throughout the year. If you own investments that have lost value, consider selling them throughout the year. Your losses can offset any capital gains you might have achieved. If you don't have any gains, the losses can offset up to $3,000 of your regular income. Additionally, any losses that you don't use in a given year can be carried forward indefinitely for use against future capital gains.
Before embarking on any of these strategies, consult with your tax and financial advisors. Every tax-smart move may not be appropriate for your individual situation. But if you're concerned about the impact of investment taxes, it can pay to explore your options.
Justin Peek of Edward Jones can be reached at (760) 635-1097.