Put tax-smart investing moves to work

Long version:

We’re now well into what’s known as “Tax Season.” If your income in 2020 was affected by the COVID-19 pandemic, your tax return will reflect it. However, if your earnings were fairly normal last year, you might look at your tax situation and wonder how you could improve it in 2022. One area to look at may be your investment-related taxes.

To help control these taxes, consider these moves:

  • Take full advantage of tax-deferred investments
    As an investor, one of the best moves you can make is to consider contributing as much as you can afford to your tax-deferred accounts – your traditional IRA and 401(k) or similar employer-sponsored plan – every year. If you
  • Look for tax-free opportunities
    Interest from municipal bonds typically is exempt from federal income tax, and, in some cases, from state and local income tax, too. (Some municipal bonds, however, may be subject to the alternative minimum tax.) And if you qualify to contribute to a Roth IRA – eligibility is generally based on income – your earnings can be withdrawn tax-free, provided you’ve had your account for at least five years, and you don’t start taking withdrawals until you’re at least 59-1/2. Your employer may also offer a Roth 401(k), which can provide tax-free withdrawals. Keep in mind, though, that you contribute after-tax dollars to a Roth IRA and 401(k), unlike a traditional IRA and 401(k), in which your contributions are made with pre-tax dollars.
  • Be a “buy and hold” investor
    Your 401(k) and IRA are designed to be long-term investments, and you may face disincentives in the form of taxes and penalties if you tap into them before you reach 59 ½.  So, just by investing in these retirement accounts, you are essentially pursuing a “buy and hold” strategy. But you can follow this same strategy for investments held outside your IRA and 401(k). You can own some investments – stocks in particular – for decades without paying taxes on gains. And when you do sell them, you’ll only be taxed at the long-term capital gains rate, which may well be less than your ordinary income tax rate. But if you’re frequently buying and selling investments you’ve held for one year or less, you could rack up some pretty big tax bills, because you’ll likely be taxed at your ordinary income tax rate.
  • Be prepared for unexpected taxes
    Mutual fund managers are generally free to make whatever trades they choose. And when they do sell some investments, they can incur capital gains, which may be passed along to you. If this is a concern, you might look for funds that do less trading and bill themselves as tax efficient.

While taxes are one factor to consider when you invest, they should probably not be the driving force. You need to build a diversified portfolio that’s appropriate for your risk tolerance and time horizon. Not all the investments you select, and the moves you make with them, will necessarily be the most tax efficient, but by working with your financial and tax professionals, you can make choices that can help you move toward your long-term goals.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

Edward Jones, Member SIPC

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.

Number of words: 551

Short /radio version:

PSA: Put Tax-Smart Investing Moves to Work   

TBA: Feb. 1, 2021 
 Words: 186 (excluding FA’s name, address/phone number)

It’s time to think about filing taxes. If your income in 2020 was affected by the COVID-19 pandemic, your tax return will reflect it. However, if your earnings were fairly normal last year, you might look at your tax situation and wonder how you could improve it in2021. One area to consider may be your investment-related taxes.

For example, are you contributing as much as you can afford to tax-deferred vehicles, such as your traditional IRA and your 401(k) or similar retirement plan? If not, consider ramping up your contributions this year.

And if you can afford to invest outside your retirement accounts, try to follow a “buy and hold” strategy. By holding investments for years before selling them, you’ll be taxed at the long-term capital gains rate, which may be lower than your personal income tax rate.

Taxes should be a consideration when you invest. However, not all the investments you select, and the moves you make with them, will necessarily be the most tax efficient. Work with your financial and tax professionals for help in making the right choices for your long-term goals. 

This is (FA’s NAME), your Edward Jones financial advisor at (Branch address or phone #).

Member SIPC

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.

Number of words: 186 (excluding FA’s name, address/phone number)