Financial Focus

Tax-smart Investment Tips for 2004

By Mark Sonnier AAMS, Investment Representative
August 23, 2004

There's plenty of time to make "tax-smart" moves for 2004.

Are investment taxes an issue for you?

If so, then you, too will want to take action. Here are a few steps to think about:

Boost your 401(k) contributions -

If you're under age 50, you can put up to $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, so the more you put in, the lower your taxable income.

And second, your earnings can grow on a tax-deferred basis, so they have the opportunity to accumulate faster than if they were placed in an investment on which you paid taxes every year.

Consider adding dividend-paying stocks -

In 2003, new legislation lowered the taxes for qualified stock dividends.

Previously, when you received these dividends, you were taxed at your individual income tax rate.

But now, if you're at the 25 percent tax bracket or above, your dividends will be taxed at only 14 percent. On the other hand, your interest payments 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 certificates of deposit 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, and they may not pay out dividends.)

Invest in municipal bonds -

If you're in one of the top tax brackets, 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 - such as a corporate bond - just to get the same after tax return.

(However, some municipal bonds - particularly airport and housing bonds - may be subject to the alternative minimum tax.)

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 contribute $3,000 to your Roth IRA, or $3,500 if you're 50 or older.

See Your Investment Professional

Not all the suggestions described above may be suitable for your individual needs.

To find our which ones may work for you, and what other tax-advantaged opportunities exist, see your investment professional and you 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 quantity.

By putting all of these pieces together, you'll have a more complete picture.

Mark Sonnier is an investment representative for Edward Jones. If you have an investment question or problem you would like Mark to address, you may reach him at (281) 332-8554 or 1025 East Main, Suite 102 in League City.