Help Reduce Your Taxable Income
WASHINGTON (4/28/10) — In this tough economy, you may think tax shelters are of little use to you. But as President Barack Obama's fiscal reform commission considers raising taxes in its war on debt, methods of reducing taxable income are more important than ever (The Hill, Apr. 13).
This is especially true for retirement plans such as 401(k)s and individual retirement accounts (IRA). Here's why:
- Tax shelters are off-limits for creditors. Unfortunately for many debtors, this will be important. Money in a tax shelter strengthens your hand if you have to negotiate with lenders and is protected if you end up in bankruptcy.
- Federal deficits mean your taxes probably will be higher in the future. Tax shelters are more valuable as your tax rate goes up. This is also a reason to own a Roth IRA. By paying the tax upfront, assuming you're 59-1/2 or older and the money's been in the Roth at least five years, you don't owe taxes when you take money out.
- Keeping bonds in a tax shelter increases returns. Recent stock market volatility has reminded investors to keep some money in bonds. But bonds, except for municipals, don't get favorable tax treatment — unless they're in a tax shelter. This is especially important if you hold Treasury inflation-protected securities (TIPS) bonds. Always try to hold TIPS bonds in a tax shelter. Why? The value of TIPS bonds is adjusted twice a year for inflation and counts as taxable income.
- You'll be expected to contribute less if your children apply for financial aid for college. Money in tax shelters like an IRA or a 401(k) doesn't count against you in the federal formula for financial aid. Money in a regular investment account does.
- The less money you have in retirement, the more your tax shelter will pay you. That's because income tax rates are progressive — you'll get to keep more of your money.
If your situation is more like that of the average married couple in retirement, according to the U.S. Census you'll live on about $31,000 a year. That would put you in the 15% income tax bracket. This will help you keep most of the money you withdraw from your tax shelters.
John Habing, Investment Services Manager at New Mexico Educators Federal Credit Union, available through CFS* added, "It is more important than ever to take advantage of your tax-sheltered plans and investments which can help maximize your overall return.”
— Tax laws are complex and subject to change. This information is based upon current federal tax rules in effect at the time this was written. CUSO Financial Services, L.P. (CFS) and its Registered Representative do not provide tax or legal advice , and do not, by providing this information, hold themselves as “fiduciaries” of your tax deferred plans. Individuals should always check with their tax or legal advisor before engaging in any transaction involving IRAs or other tax-advantage investments.
— Municipal bond funds normally seek to earn income and pay dividends that are expected to be exempt from federal income tax. If a fund investor is resident in the state of issuance of the bonds held by the fund, interest dividends may also be free of state and local income taxes. Such interest dividends may also be subject to federal and/or state alternative minimum taxes. Investing in municipal bond funds for the purpose of generating tax-exempt income may not be appropriate for all investors in all tax brackets. Fund Shareholders may also receive taxable distributions attributable to a fund’s sale of municipal bonds. Fund redemptions, including exchanges, may result in a capital gain or loss for federal and/or state income tax purposes. The bond market is volatile and can be significantly affected by adverse tax, legislative and political changes and the financial condition of issuers of municipal securities. Interest rate increases can cause the price of a debt security to increase. Information provided is general and educational in nature. It is not intended to be and should not be construed as legal or tax advice. CFS does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Consult an attorney or tax advisor regarding your specific legal or tax situation.
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. New Mexico Educators Federal Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
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