Investment

By Kanaly Staff

As mid-year approaches it is important to do various tax projections to determine if certain investment planning strategies can be implemented or improved. Often, this reveals potential tax liability reductions that would have otherwise been overlooked.

• Maximize Retirement Account Contributions

When it comes to tax planning it is important to contribute the maximum annual amount allowed to your tax-deferred retirement accounts. These contributions are made pre-tax with the assumption that when distributed upon retirement, the recipient will be in a lower tax bracket. In 2007, employees can contribute $15,500 to their 401(k). Individuals 50 and older are allowed a $5,000 catch-up contribution. Maximizing IRA contributions is also important. In 2007, individuals can contribute $4,000 with an additional $1,000 catch up contribution available to individuals 50 and older. Also, if AGI requirements are met, individual tax payers can receive a deduction on their tax return for the contributions to Roth IRAs. Contributions limits for Roth IRAs are the same as for Traditional IRAs.

• Create a Strategy For Potential Losses/Gains

Although there are many items in your investment future that can change as the year progresses, it is important at this time to take a look at your gains and losses to determine a proper offset strategy. This is best created with your financial advisor and should not be implemented until further into the year.

• Taxable vs. Tax-Exempt

Taxable versus tax-exempt? The answer to this question may not be as complicated as some may think. Often, when considering an investment, investors take into account several factors including, risk, yield, and potential growth, without considering the potential tax consequences. For individuals in higher tax brackets this can be particularly detrimental.

To compare taxable and exempt investment returns, calculate the "tax-equivalent yield." For example, comparing a taxable return of 7.5 percent with a tax-exempt yield of 5 percent. Start by converting your tax bracket to a decimal and subtracting it from one. (Example: The 31 percent bracket becomes 0.35 which, subtracted from 1.0, leaves 0.65.) Divide the tax-free yield by the remainder to get the tax-equivalent yield. (Example: 5.0 percent divided by 0.65 equals 7.6923 percent, beating the yield of a taxable investment returning 7.5 percent.)

This calculation is merely a rule of thumb for investors. It is important to discuss these matters with your financial advisor.

• Estimated Tax Payments

June 15th is the next due date for individuals who file estimated tax payments. As this time draws near, consider where the money for this payment will come from. As it relates to investment planning, it is important to consider the following: Are you planning to make this payment with money from your investment portfolio? Do you have enough liquidity to support this transaction? Strategies for how these funds can be acquired can be discussed with your financial advisor.