Five Ways to Stay Tax Smart This Year
If you’re like a lot of people, you probably wait until February or March to think about taxes. However, there are ways to incorporate tax-smart investing ideas into your year-round financial strategy. Consider these five things to help you become tax-smart.
1. The early bird gets the potential tax-deferred growth.
If you wait until the tax deadline to fund your IRA each year, you miss up to 15 months of potential tax-deferred growth on your contribution. For example, many people will wait until April 15, 2014,1 to contribute to their IRAs for 2013 when they could have funded them as early as Jan. 2, 2013. Although 15 months may not seem like a significant amount of time, it may considerably impact your retirement savings.
2. Tax deductions and tax credits are your friends.
When you work with your tax professional, don’t forget any tax deductions or tax credits you might be eligible to take.
Examples of tax credits include:
- Retirement savings contribution credit
- Education credit
- Child and dependent care credit
Examples of tax deductions include:
- IRA contributions
- Health savings account contributions
- Tuition and fees
3. Be direct with your tax refund.
Your 2012 tax refund is one way to help add to your retirement savings goals. You can instruct the IRS to directly deposit your tax refund into as many as three separate accounts. These include any checking, savings and retirement accounts, such as an Edward Jones IRA. Even if you use only a portion of your refund for retirement savings, your 2012 tax refund can help make it a little easier to work toward your retirement goals.
4. Variety is the spice of life – and of investing.
Different types of tax-favored accounts have different benefits. For example, with a traditional IRA, your contributions may be tax-deductible and can grow tax deferred. With a Roth IRA, your contributions are nondeductible, but distributions you take during retirement are tax-free.2 Each IRA provides benefits that could prove valuable depending on future tax rates. But while your situation and the tax code may be anything but constant, one thing is certain: An important benefit of having money in different types of tax-favored accounts (i.e., tax diversification) is flexibility when it’s time to withdraw your funds.
5. There’s no time like the present.
Sometimes, changes in life affect your investments. That’s why we encourage our clients to schedule a portfolio review at least annually with their Edward Jones financial advisor. We’ll talk about any changes in your life and help you decide whether it makes sense to revise your investments because of them.
¹The federal income tax filing deadline in 2013 is April 15.
²Earnings distributions from a Roth IRA may be subject to taxes and a 10% penalty under certain circumstances, including if the account is less than five years old and the owner is under age 59½.
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.