Published September 2001

Tax season is lurking,
so plan now to pay less

Even though the official tax season for most of us ended more than four months ago, it’s not too early to start thinking about next year’s taxes. If you feel you paid too much this year, can you do anything to change the outcome next April?

The answer is YES! There are definitely steps you can take. Here are a few that might be appropriate for you:

“Max out” your 401(k) contributions — If you have a 401(k) or other tax-qualified retirement plan where you work, consider yourself fortunate. Earnings on your 401(k) investments grow on a tax-deferred basis, which means your investment dollars are in a position to grow faster for you than they would if their returns were being taxed every year. And, even better, in a 401(k), the employer often matches a portion of the contributions you make. Additionally, your 401(k) contributions are typically made with pretax dollars — so the more you put in, the more you reduce your taxable income for the year.

Most people don’t contribute as much as they can to their 401(k) plans. But, if you’re in a position to do so, max out your contributions. You’ll be building additional savings for retirement — and, at the same time, you’ll be lowering your income-tax bill.

Consider “tax smart” investments — You may be able to lower your taxes through tax-deferred and tax-free investments. Let’s take a quick look at both:

• Tax deferred: In one sense, your stocks can be considered “tax deferred” investments, because, until you sell them, you pay no capital-gains taxes. If you subscribe to the “buy and hold” philosophy (which, by the way, does NOT mean “buy and ignore”), your investment could grow in value considerably before you are faced with paying taxes on the earnings. You also can gain the advantages of tax deferral through a traditional or rollover IRA, an annuity and cash-value life insurance.
• Tax free: If you are in one of the higher tax brackets, you may be able to benefit significantly from investments in tax-free municipal bonds. Some of these bonds offer freedom from federal, state and local taxes. Investment earnings also can grow tax free in a Roth IRA, provided you meet certain conditions.

Review your asset mix — If you think you paid too much tax on your investments last year, you may want to review the mix of assets in your portfolio. Remember, you pay no capital-gains taxes on “growth” investments until you sell them. But if you have a lot of money in fixed-income vehicles such as money-market funds, CDs or corporate bonds, then you also may be generating a lot of taxable investment income.

Consequently, you may want to consider moving a portion of those investment dollars out of taxable instruments and into tax-free municipal bonds, annuities or high-quality growth stocks. If you do move “fixed income” money into stocks, keep in mind that those stocks are likely to be more volatile. Before you make any changes, be aware of the risks involved, insist on quality and make sure you’re properly diversified.

Your tax adviser and investment representative can help you determine which, if any, of these moves may benefit you. But whatever action you decide to take, don’t delay. Fall is already upon us, and before you know it, it will be tax season again.

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 7,000 locations nationwide.

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