You may know your federal income tax bracket. But that's not really what you pay. In fact, the middle 20% of Americans by income pay about 13% of income in federal income taxes. But that average hides a great deal of variation: Some Americans pay nothing, and others pay more than 30%.1

[How to invest tax efficiently]

What determines the percentage you will pay? A lot of it is based on how much you make. But you can affect your tax bill by knowing the rules, managing how you generate income, choosing what accounts you invest in, and taking advantage of potential deductions. In general, there are three strategies to consider to try to manage your federal income taxes:

Defer taxes with tax-advantaged accounts or investing strategies, such as 401(k)s, 403(b)s, IRAs, health savings accounts (HSAs), and products such as deferred annuities.
Manage your tax burden by employing strategic asset location, investing in lower turnover funds, understanding mutual fund distributions, and taking advantage of charitable gifts and capital loss deductions.
Reduce taxes now with federal income tax free municipal bond income, or reduce taxes in the future with a Roth IRA or 529 college savings account.

"We all make decisions about how we save, invest, and earn income," says Ken Hevert, senior vice president at Fidelity. "By considering the tax impact of those decisions, and adjusting your investment strategy with elements that make sense for your own circumstances and goals, you may be able to create a better financial outcome."

Here are a few educational ideas that can help you enhance your investing strategy. These general ideas are not advice but could help you begin to construct a tax strategy.


Defer taxes

Saving for retirement is a big job. Accounts that offer tax advantages can help and can be a key part of an overall tax strategy because they allow you to put off paying taxes. For savers, the key is to maximize the potential tax benefits of these accounts, if you and your adviser decide that attempting to defer taxes makes sense for you.

[tax-deffered] Take advantage of retirement accounts.

Among the biggest tax benefits available to most investors are the benefits offered by retirement savings accounts such as 401(k)s, 403(b)s, and IRAs. Traditional 401(k)s, IRAs, and other accounts can offer a double dose of tax advantages—the contributions you make may reduce your current taxable income, saving you cash this year, and any investment growth is tax deferred, saving you money while you are invested. In the case of HSAs, accounts that are used with high-deductible health care insurance plans, withdrawals used for qualified medical expenses could be triple tax free: tax-free contributions, earnings, and withdrawals.

"The tax advantages of these accounts are one reason we think a top financial priority for most investors should be to take advantage of 401(k)s, HSAs and other workplace saving plans, or IRAs," says Hevert.

Generally, the first step to tax-advantaged savings should be through workplace savings plans, IRAs, or both. But those accounts have strict annual contribution limit rules. If you are looking for additional tax-deferred savings, you may want to consider deferred variable annuities, which have no IRS contribution limits.


Daniel Cullinane CPA

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Daniel Cullinane CPA

25 Plaza 5 25th fl Jersey City NJ                                          phone 732-516-1648 fax 732-516-9778

MBA Taxation