Midyear Investment Strategies

Midyear Investment Strategies

Whether preparing income taxes or squeezing in last-minute charitable contributions, most financial planning occurs at the beginning and end of the year. But for investors who like to stay on top of their finances, summer gives you some breathing room to focus on the long term. To help get your financial plan in order, BLACK ENTERPRISE outlines four steps to implement midyear.

The cornerstone of any financial plan is saving for retirement. "Make the maximum contribution to your 401(k)," advises Alfred Osbourne, a senior financial adviser with American Express Financial Advisors in East Meadow, New York. "At the very minimum, max out to the employer match." A 50% employer match is equal to a 50% return on your investment. Where else are you going to find such opportunities?

Putting money into a 401(k) also reduces your taxable income and could place you in a lower tax bracket. Money in these accounts grows tax-deferred until you withdraw, at which point you’ll pay income tax on your withdrawals. You’ll be surprised at how little boosting your contribution will detract from your take-home pay since the money comes out pre-tax.

In 2005, the maximum annual 401(k) contribution increased to $14,000. Those 50 and older can contribute up to $18,000 under a catch-up provision. Patricia Turner, 36, and her husband, James Rice, 43, who live in Silver Spring, Maryland, contribute as much as they can to their employer-sponsored 401(k) accounts. Turner, a laparoscopic surgeon, and Rice, an electrical engineer for the Navy, spent years living on Rice’s salary and accumulating student loan debt.

Since August 2004, the couple, who have a 6-year-old daughter, Jessica, and are expecting their second child in October, have been making up for lost time. "This is the first time that we both have had a retirement account," says Turner. "We’re maxing out my contribution and playing catch-up."

So far, Turner and Rice have managed to squirrel away $125,000 for retirement. Turner saves $13,000 a year, a figure matched by her employer; Rice is setting aside $12,000 into his account, and his employer is matching up to $5,000. They are also funding individual retirement accounts.

Just because you have to pay taxes, doesn’t mean you should pay more than your fair share. Halfway through the year is a good time to run a tax check. "If you wait until calendar year-end, then there’s nothing that can be done about your taxes," says Jaime Wright, a financial consultant with AXA Advisors in New York. "Midyear is a good time to review your whole tax picture."

This is especially important if you think you might be one of the more than 12 million Americans who will be ensnared by the alternative minimum tax this year. When it was first enacted, AMT was meant to ensure that even the ultrawealthy paid taxes. But now, more middle-class Americans are subject to the tax because it was never indexed to inflation.