3 Ways to Stay Tax-Smart in 2014
If you're like most people, you probably wait until this time of year to think about taxes. But by implementing tax-smart investing strategies year-round, you can potentially save a bundle of money. Consider these three strategies.
1. Fund your IRA fully and early
Traditional IRAs are tax-deferred retirement accounts that offer immediate tax savings. Individuals can contribute and fully deduct up to $5,500 for the 2013 tax-filing year ($6,500 for savers age 50-plus). Your tax deduction may be limited if you (or your spouse, if you're married) participate in a retirement plan at work and your income exceeds certain levels. Fellow Foolish writer Chuck Saletta recently detailed IRA deductibility here.
Investors have until the tax-filing deadline to make a contribution for the prior calendar year. While many folks delay funding their IRAs until March or April, waiting until the deadline can cost you up to 15 months of tax-deferred growth. That might not seem like a significant amount of time, but it could considerably impact your retirement savings over the long term.
2. Contribute or gift to a 529 college savings plan for your kids or grandkids
Earnings in a 529 college-savings plan accumulate tax-free. Distributions used for qualified higher-education expenses (tuition, room and board, books, laptop computer, etc.) are free from federal income tax. In addition to the federal treatment, your own state may also offer some tax breaks, like an income exemption on withdrawals.
Contributions may also be immediately eligible for a state income-tax deduction or credit. In fact, 34 states and the District of Colombia offer a tax deduction for 529 college-savings plan contributions. For example, residents of Indiana receive a 20% tax credit on up to a $5,000 contribution for a maximum yearly credit of $1,000.
You can find out if your state sponsors a similar plan here. Keep in mind that 529 plan withdrawals used for expenses other than qualified education may be subject to taxes and a 10% penalty.
3. Consider municipal bonds
Invest in tax-free municipal bonds to take your tax savings to the next level. Income from municipal bonds is free from federal taxes. For extra tax savings, buy a muni bond issued in your state of residence. That way you'll also be exempt from paying state income taxes on the interest income. Even better, local municipal bonds and those issued in Puerto Rico are triple-tax-exempt, meaning you'll avoid federal, state, and local taxes.
Before investing in muni bonds, be aware that if you receive Social Security income or are subject to the alternative minimum tax, your muni income may not be entirely tax-free after all.
Foolish bottom line
Become a more tax-savvy investor this year. By implementing these strategies, you can keep more of what you earn in 2014 and beyond.
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The article 3 Ways to Stay Tax-Smart in 2014 originally appeared on Fool.com.Follow Nicole Seghetti on Twitter @NicoleSeghetti. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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