Ways to Stay Tax-smart in 2018

March 01, 2018

Man and woman meeting with their financial advisor

After you’ve focused on what needs to be done by April 17, it’s time to consider what you can be doing the rest of this year when it comes to your tax strategy. Here are five tips to help during tax time next year.

  1. Talk to your tax professional about how tax reform may affect you. The new law includes lower individual income tax rates, an increased standard deduction and adjustments to itemized deductions, among other things. Keep in mind that many of the provisions in the new law are temporary, expiring at the end of 2025, which could affect your situation.
  2. Fund your IRA early and fully. The new tax law did not change IRA solutions available to individuals, so you can continue to take advantage of their savings benefits. If you wait until the tax deadline to fund your IRA, you could be missing out on 15 months of tax-deferred growth potential. Although that may not seem like a long time, it may considerably impact your retirement savings over the long term. If you set up systematic contributions to your IRA, that’s one less thing to remember. 
  3. Contribute or gift to a 529 savings plan for your children or grandchildren. Earnings in a 529 plan aren’t subject to federal income tax (provided they are used for qualified education expenses1), and contributions may be eligible for a state tax deduction or credit. Before investing, however, check to see whether your or your beneficiary’s home state offers any state tax or other state benefits, such as financial aid, scholarship funds and protection from creditors, that are only available for investments in your state’s 529 qualified tuition program.
  4. Consider tax-advantaged investments if appropriate. For example, municipal bonds earn investment income that’s free from federal income tax (and potentially state income tax), which may be appropriate particularly if you’re in a higher tax bracket.2 In addition, if you’re already contributing the maximum amount to an IRA and employer-sponsored retirement plan, an annuity may offer you the opportunity to save additional tax-deferred money with no annual contribution limits.3 
  5. Explore tax diversification options with your financial advisor. Having money in retirement accounts with different tax treatments, such as Roth IRAs and traditional IRAs, can provide flexibility in retirement. Where you focus your contributions may change depending on your life stage and tax situation. And if you’re not eligible for some IRA options given your income level, talk to your tax professional to see if other options, such as Roth conversions, may make sense for your situation.

Important Information:

Edward Jones, its employees and financial advisors cannot provide tax or legal advice. Please consult your attorney or qualified tax advisor regarding your situation.

1 Withdrawals used for expenses other than qualified education expenses may be subject to federal and state taxes, plus a 10% penalty. Make sure you discuss the potential financial aid impacts with a financial aid professional. Tax issues for 529 plans can be complex. Please consult your tax advisor about your situation.

2 Bonds may be subject to state, local or the alternative minimum tax.

3 Withdrawals taken prior to age 59½ may be subject to a 10% federal tax penalty. Surrender penalties are usually assessed if you withdraw all or a portion of your principal during the guarantee period.

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