Saving Taxes Through Your Investments

Consider that any dollar that you do not pay out in taxes is available to grow on your behalf over the years. The purpose of this e-newsletter is to make you aware of some of the methods by which you may be able to save tax dollars for your own use.

The most effective way to save taxes and invest money for your future has been through retirement plans.

As an individual, you can use:

• Your employer-provided 401K or 403B plan. If you take a dollar of wages or other income and use it for consumer goods or services, you must first run it through the tax collector. So, for example, you might pay out 27% of that dollar in federal income tax and then have 73 cents left for consumer purchases. If instead you contributed that same dollar to your contributory retirement plan, 100 cents would be available for that contribution. The government has given you, in effect, an interest-free loan equal to your highest tax bracket to invest for yourself. Withdrawals made prior to age 59-1/2 subject to 10% IRS penalty plus applicable income tax.
  
• Individual Retirement Accounts (IRAs). These may include tax deductible or non-tax deductible contributory plans. But, all such retirement planning vehicles grow tax deferred until withdrawn during your retirement years. They are meant for retirement, so a 10% early withdrawal penalty is assessed if money is withdrawn prior to age 59 ¸. Exceptions are made in the case of disability or if a beneficiary withdraws after the death of the owner. The most intriguing of such plans is the Roth IRA where the withdrawals are made totally tax-free during retirement. Roth IRA owners must be 59-1/2 or older and have held the IRA for 5 years before tax free withdrawals are allowed.

As a business owner, you can use various retirement planning vehicles. The big news this year is that all defined contribution retirement plans now allow for maximum contributions up to 25% of net income! This can be a wonderful opportunity to build substantial wealth and security. Someone said recently to us, "My business and my home are my retirement plans." Very true, but the problem there is that both are illiquid investments. That means they must be sold in order to raise cash. Retirement plans are liquid investments and readily can throw off income and make principal distributions for retirement living.

The correct type of retirement plan for your business will be decided based on several factors. Those include:

• Cash flow
• Employee retention and motivation issues
• Your age and compensation level as well as the age and compensation profile of your work force

We can help evaluate the right type of plan for your situation and work with your accountant, tax attorney and plan administrator to implement it.

After retirement plans, education savings ranks high for tax saving opportunities.

The basic economic principles of time and tax burden shifting allow for a much cheaper cost of funding than the pay-as-you-go method or borrowing. Time and tax burden shifting are hallmarks of:

• Education IRAs
• 529 Plans
• Uniform Transfer to Minors Accounts (UTMA)
• Trust accounts

All of these allow for an asset allocated portfolio to go to work on behalf of your child's or grandchild's education funding. The compounding effects afforded by the use of time as well allow that growth to pay for education dollars that would otherwise need to be found from then current income. Simply stated, it's much better to pay 25 cents now and let it grow to $1.00 than it is to find that dollar later on during the child's college years. Next, as is the case with retirement plans, money not sent away in taxes remains available to grow and pay tuition bills. That tax savings compounds along the way also.

The last tax savings vehicle to be discussed here is saving taxes through charitable gifting.

That concept is well recognized. But, what is not so well understood or practiced is the concept of tax burden shifting or elimination as a part of the charitable gift itself. For example, many of us make regular cash contributions to our church, synagogue or mosque. Yet, sometime during each year, we may also sell a security at a gain. (Yes, there are still securities at a gain!) What if, instead of paying cash to the religious institution, we contribute an appreciated security equal to the entire year's expected contributions? The contribution is the same. The tax deduction is the same. But, what is different is that we would not have to pay capital gains tax on the appreciation inherent in the gifted security! For many people, that can be a savings of 20 cents on the dollar! Twenty cents you didn't pay in taxes is twenty cents you get to keep.

Charitable gifting strategies can be as simple as gifting appreciated securities as described, or it can become as sophisticated as charitable remainder trusts. What is right for you can readily be determined by an understanding of what you are trying to accomplish in your financial planning along with an analysis of your current situation.

Retirement plans and planning, education funding vehicles and charitable gifting strategies are all part of what we bring to our work with our clients. Talk to your financial advisor at Fragasso Financial Advisors now to determine what's right for you. And, enjoy the tax savings that the Internal Revenue Code has been programmed to provide to you!

This article is for informational purposes only and not intended as financial advice. Consult your financial advisor to determine what is appropriate for your situation.
Past performance is no guarantee of future results.

If you have any comments, questions or suggestions concerning this electronic newsletter, please email us at fgi@fragassogroup.com.

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The Retirement Planning and Wealth Preservation Specialists Since 1972
610 Smithfield Street, Suite 400, Pittsburgh, PA 15222

Phone 412.227.3200, Fax 412.227.3210, Toll Free 1.800.900.4492
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