Published May 2004

Here are some tax-smart investment tips for 2004

Just a few short weeks ago, millions of Americans scrambled to file their tax returns. And many of them (perhaps you included) wondered if they could have done anything to lower the taxes resulting from their investments. Of course, by then it was too late for 2003, but there’s plenty of time for you to make some “tax smart’’ moves for 2004.

Are investment taxes an issue for you? If so, then you may want to take some action. Here are a few steps to think about:

n Boost your 401(k) contributions. If you’re under 50, you can put as much as $13,000 into your 401(k) in 2004 — up from $12,000 in 2003. If you’re 50 or over, you can put in $16,000 this year — up from $14,000. Of course, your 401(k) provides you with two major tax benefits. First, you generally contribute pre-tax dollars, which lowers your taxable income. And second, earnings on those contributions can grow on a tax-deferred basis, so they have the opportunity to accumulate faster than if they were placed in a taxable investment. Finally, there may also be an employer-matching contribution to sweeten the deal even more.

n Consider adding dividend-paying stocks. In 2003, new legislation lowered the taxes for qualified stock dividends. Previously, when you received these dividends, they were taxed at your individual income-tax rate. But now, if you’re at the 25 percent tax bracket or above, your dividends will only be taxed at 15 percent. On the other hand, interest income (like from CDs or corporate bonds) will continue to be taxed at your individual rate. Consequently, for the income portion of your portfolio, you may want to shift some assets from bonds and CDs to dividend-paying stocks. (Keep in mind, however, that, by doing so, you will increase your investment risk, including the risk of loss of principal. Also, stocks are not fixed-income investments. Dividend payout rates may fluctuate.)

n Invest in municipal bonds. If you’re in a higher tax bracket, you may be able to benefit from investing in municipal bonds. When you own municipal bonds, or “munis,” your interest payments will be free from federal income taxes; if the municipality that issues the bond is located in your state, your interest payments also may be exempt from state and local taxes. In fact, the tax advantage of municipal bonds may be so great that you’d have to earn a considerably higher interest rate on a taxable bond or CD just to get the same after-tax return. (However, interest on some municipal bonds such as airport and housing bonds may be subject to the alternative minimum tax.)

n Open a Roth IRA. If you meet the appropriate income guidelines, you may want to open a Roth IRA. Your Roth IRA earnings grow tax-free, provided you’ve had your account at least five years and you don’t begin taking withdrawals until you’re 59-1/2. For 2004, you can put in $3,000 to your Roth IRA, or $3,500 if you’re 50 or older.

n See your investment professional. Not all the suggestions described above may be suitable for your individual needs. To find out which ones may work for you, and what other tax-advantaged opportunities exists, see your investment professional and your tax adviser.

Also, remember that taxes, while important, are just one component of your investment strategy. So, while you’re thinking “tax smart,’’ don’t forget other key elements, such as diversification and quality. By putting all these pieces together, you should be able to create a well-balanced plan.

Eric Cumley is an investment representative with Edward Jones Investments at 1201-C SE Everett Mall Way in Everett. He can be reached at 425-353-2322. Edward Jones is an NYSE-member investment firm with more than 8,000 locations nationwide.

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