Mid-year tax planning is important for 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 2014, employees can contribute $17,500 to their 401(k). Individuals 50 and older are allowed a $5,500 catch-up contribution. Maximizing IRA contributions is also important. In 2014, individuals can contribute $5,500 with an additional $1,000 catch-up contribution available to individuals 50 and older.
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 35 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
September 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.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice.
There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.
Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results. Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice.