Learn More About Tax Efficient Strategies.
No one wants to pay more taxes, but as tax laws currently stand, many Americans may end up opening their wallets a bit wider next year when it comes to paying the IRS. Tax laws that are scheduled to change at the end of 2010 are likely to affect how much tax consumers pay on income, capital gains, estates and other areas of their finances.
At People's United, we can help! Our branch employees can assist you with 401(k) rollovers and individual retirement accounts (IRAs). Additionally, through People's Financial Advisors*, we can offer you guidance and customized investment and insurance planning to help you achieve your dreams.
Visit our branches in NY, CT, VT, ME, NH and MA or call us at 1.800.392.3009 and our team of experts can assist you.
Tax Efficient Investing
If you can invest money you've earmarked for your long-term goals through a tax-deferred retirement account, you can postpone paying taxes on any earnings your investment produces. The account can be a plan your employer provides, and individual retirement account (IRA) you set up yourself, or a product such as a deferred annuity, as long as it meets IRS requirements.
In some cases, tax-deferred plans have the added advantage of reducing your current income, and therefore your taxes, either because your contribution is excluded from your income, as it is with salary reduction plans, or because you can deduct the amount of your contribution when you figure your taxes, as you can with a traditional IRA if you qualify.
That's why you should seriously consider participating in any tax-deferred retirement plan that's available at your job, even if it's the only investing you're doing. However, there are some contribution limits on the amount you can put into your taxdeferred accounts each year. And you will pay a penalty in most cases if you withdraw the money before age 59 1/2.
TAX-DEFERRED VS. TAXABLE GROWTH
This illustration shows the comparative values of a hypothetical investment of $2,000 a year over a 30-year period in two identically invested accounts, one taxable and the other tax deferred. It assumes an 8% annual return for each account, with all earnings reinvested in the tax-deferred account but not the taxable account. The results are estimates and not based on the performance of any specific investment.
Taxes are figured as if the investor was paying tax annually in the taxable account at the combined federal and state rate of 36%, withdrawing the amount due from the account.
Tax Exempt Investing
One way to pay less in income taxes is to invest in tax-exempt municipal bonds, or munis. They're bonds issued by state or local governments, usually to raise money for building or improvement projects or to pay for day-to-day operating expenses.
Munis usually pay less interest than comparable taxable corporate or Treasury bonds, but you usually don't owe federal tax on your earnings. Your earnings are also exempt from state tax if the bonds are issued in the state where you live.
Tax-exempt investments can make a lot of sense, especially if you're in the higher tax brackets or if you live in a state with high income tax rates, since you'd have to find a taxable investment paying substantially more to equal your tax-exempt earnings. However, in some cases, this income may be vulnerable to the alternative minimum tax (AMT).
For long-term tax-exempt income, you might also consider investing through a Roth IRA or a Roth 401(k) or 403(b) if your employer offers that option. While you contribute after-tax income, withdrawals are tax free provided that you're at least 59 1/2 when you take the money out and your account has been open at least five years. And if you're investing to pay education expenses, you might consider tax-free Coverdell education savings accounts (ESAs) or 529 college savings plans. There are rules about how the money can be spent to qualify for tax-free treatment, but the restrictions are clearly spelled out in the plan descriptions.
People's Financial Advisors can develop an investment plan to help you reach your financial objectives, taking into consideration your tax situation. If you would like to schedule an appointment with one of our Financial Advisors call us at 1-800-392-3009.