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Supreme Court Justice Oliver Wendell Holmes, Jr. famously remarked
in 1904 that taxes are the price Americans pay to live in a civilized society. That seems
fair enough, but unfortunately the cost of a civilized society has risen dramatically.
According to research by the Tax Foundation, a nonpartisan,
nonprofit organization that monitors fiscal policy, citizens in 1904 paid $375 per year in
federal, state and local taxes (in inflation-adjusted 2002 dollars). Today the privilege of
civilized living costs every man, woman and child, on average approximately $11,250 in total taxes.
While this comparison demonstrates how the tax bite Americans
pay each year has grown, it also reinforces the need for effective tax-free investing and
smart money-saving moves.
We all have an obligation to pay our fair share of taxes, but
why pay even a dollar more than necessary?
There are several potentially beneficial tax-free and tax-deferred
investment vehicles available. By utilizing tax-exempt investments, you may be able to grow your
money while keeping more of what you earn. The following are some techniques to try to ease the
pain of tax time come April 15.
First, take advantage of your company's tax-deferred retirement
plan. Most organizations offer a 401(k), or for nonprofit groups, a 403(b) plan. These plans
allow for pre-tax contributions to be made to a retirement account. Let's look at how a
worker making $60,000 per year can benefit. If she contributes the maximum allowable amount,
she'll add $11,000 (2202 limit) to her plan, lowering her taxable income to $49,000.
This hypothetical worker gains a tax benefit of over $2,000 from investing the maximum in her
401(k) plan. If her company matches any of her contributions to her 401(k), the benefit can be
even larger.1 |
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By utilizing
tax-exempt investments, you may be able to grow your money while keeping more of what you earn. |
Another investment vehicle that can potentially save you tax
dollars is the Roth IRA. This retirement account features many options for investors seeking
tax-free growth earnings and withdrawals.2 The guidelines for making
contributions, which are made with after-tax funds, are similar to the Traditional IRA, but
there are significant differences affecting deductions, distributions and withdrawals. A
married couple investing $6,000 per year into individual Roth IRAs would have a combined
total of $1.1 million available tax-free after 30 years.3
Other investments include tax-free municipal bonds4
and tax-deferred annuities. For information or advice on these and other investment vehicles,
consult your financial representative. While most Americans are
willing to exchange their taxes for membership in a civilized society, nobody wants to overpay
for this privilege. Tax-advantaged investing is one way you can decrease the "membership
dues" you pay in mid-April of every year.
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This article is not intended to provide specific
advice or recommendations for any individual. Consult the CBB Investment Center,
your financial adviser, or
your attorney, accountant or tax adviser with questions.
1
Taxes are due upon withdrawal.
Additionally, penalties may also apply to withdrawals prior to age 59-1/2.
2
Restrictions, penalties and taxes
may apply.
3
Assuming a 10% annual return.
This hypothetical example is for illustrative purposes only and is not indicative of any
particular investment. Assuming the account has been held at least five years, funds are
available tax-free at age 59-1/2.
4
May be subject to other taxes such
as alternative minimum tax, state or local taxes.
Securities offered through Harbour Investments,
Inc.
Not FDIC insured. May involve loss of principal.
No Bank guarantee.
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