It’s Tax Season – Time to Get Tax-Smart

Although tax day comes around once a year, don’t let a deadline catch you unaware. There are a number of ways throughout the year that you can reduce your tax burden while pursuing long-term financial goals like retirement, a college education for your child or investing for current income.

Be Tax-Smart When Saving for Retirement

Enjoy tax-advantaged investing through Individual Retirement Accounts (IRAs) and company-sponsored retirement plans such as 401(k)s or 403(b)s. While it often makes sense to participate in a company-sponsored plan, particularly if your employer offers matching contributions, IRAs such as a Roth or Traditional IRA can round out your investing for retirement strategy. Contributing to both an employer-sponsored plan and an IRA throughout the year can be a tax-smart move.

Good to know:

• A Roth IRA, although not tax deductible, allows earnings to grow tax-free and you have the opportunity for tax-free withdrawals. Roth IRAs are subject to income limitations.
• A Traditional IRA combines the advantages of a possible tax deduction now (depending on income) with the opportunity for tax-deferred growth. However, withdrawals at retirement will be subject to income tax.

One way to fund your IRA retirement account throughout the year is through a systematic investment plan. The maximum IRA contribution for 2023 is $6,500 per year or $7,500 if aged 50 or older. Whatever you can contribute to an account on a monthly basis, the better off you will be in retirement. Remember small amounts can grow significantly over time.

Be Tax-Smart When Saving for Education

A 529 Plan (also called a Qualified Tuition Program or QTP by the IRS) is an investment account established on behalf of a child for a wide range of qualified educational expenses, including tuition, books, and room and board for college or post-secondary training. Contributions can be no more than the amount necessary to cover the qualified educational expenses.

While contributions to a 529 Plan are not tax-deductible on a Federal tax return, any growth of the account is tax-advantaged. Depending on the state, contributions may be tax-deductible on a state return. When the money is withdrawn and used for qualified educational expenses, it is tax-free. In addition, 529s offer the flexibility that if the funds are not used by one child or beneficiary, they can be rolled into another beneficiary’s 529, such as to a younger sibling, to fund their education.

Little known fact: 529s are not just for children. You can set one up for yourself, your friend or any family member with educational goals.

Be Tax-Smart with Income Investing

If you are in a higher tax bracket and looking for a tax break, tax-free municipal bond funds can be an attractive way to earn monthly or quarterly income. State specific funds invest in high-quality municipal bonds sourced in that state and provide opportunities for income free of both Federal, state and in some cases local income tax, as well as alternative minimum tax (AMT).

Helping you and your community: Municipal bonds are used to fund projects in your state such as schools, airports and roads. So not only will you enjoy tax-free income, you will help fund a local project that will benefit the state you live in.

Be Tax-Smart This Year—It’s Easier Than You Think

A few thoughtful tax-smart steps this year when it comes to investing for retirement, education or current income can help to maximize the ways in which you have put the money you have worked so hard to save to work for you. It doesn’t have to be overly complicated and you don’t have to do it alone. Jemma Financial can help.