As we approach year-end, investors should start to focus on tax planning. Given the volatile state of the markets, and the steady drumbeat of bad news, this is not easy. Retirement expert and Equifax blogger Dan Solin shares some tips to avoid taking a big tax hit in 2010.
- Max out a Roth IRA contribution: Tax avoidance is the holy grail of tax planning. The best tax-avoidance investment is the Roth IRA. First, you need to determine if you qualify.
- Contribute to a Roth 401(k): There are no income limits for those who contribute to Roth 401(k)s. This is great for high-income earners. They may not qualify for a regular Roth IRA, but they can contribute to a Roth 401(k). Contribution limits for a Roth 401(k) are generous: $16,500 for 2010, or a whopping $22,000 for those 50 or older.
- Consider tax-deferred investments: You can defer the inevitable, even if you can’t avoid it. Consider tax-deferred investments like traditional IRAs, Keogh plans, regular 401(k)s, 403(b) plans, 457(b) plans, and defined-benefit plans (if you are lucky enough to have one).
- Invest in low-cost index funds: You can significantly reduce the amount of taxes you will pay even in your after-tax accounts. According to one study by Vanguard founder John Bogle, over a sixteen-year period, taxes gobbled up 20 percent of the returns in actively managed mutual funds (where the fund manager attempts to beat a designated benchmark). In comparable index funds, the tax hit was only 11 percent.
For more tips and information, including IRA contribution rules and more tax-deferred investments, check out Dan Solin's full article on the Equifax personal finance blog at http://retirement.equifax.com/2010/10/strategies-for-outsmarting-uncle-sam-at.html.