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Ideas for Reducing Investment Expenses

Looking to earn more on your investments? One way, of course, is to select securities (e.g., stock and growth mutual funds) with the potential for a high return. Another way is to control investment costs and income taxes. Below are eight specific suggestions:

• Look for investments with the lowest-cost expenses among their peers. For example, some stock index funds have expense ratios (the percentage of fund assets subtracted for management and operating costs) as low as one-fifth of one percent.
• Put tax-efficient mutual funds that generate small dividend and capital gain distributions (e.g., most index funds) in taxable accounts and tax inefficient funds in tax-deferred accounts, where gains might not be taxed for decades.
• Keep a file folder for each stock or mutual fund that you own and save the year-end summary statement. Be sure to add reinvested mutual fund distributions that you pay tax on each year to your original cost basis so you don't pay tax on them again when an investment is sold.
• If you make investments with sales loads, check to see what the "breakpoints" are for lower expenses. Some mutual fund families also allow investors to reduce expenses by linking together different investments or accounts to qualify for a lower load category.
• Compound interest works best when income taxes are eliminated, reduced, or deferred. Tax-free income can be obtained by investing in debt instruments issued by state and local governments (e.g., municipal bonds), which benefit investors in high marginal tax brackets the most. Another tax-free investment is the Roth IRA. Earnings on Roth IRA investments can be withdrawn tax-free if an investor reaches age 59 ½ and an account has been in place at least five years. For taxable securities, income taxes can be reduced by holding investments for more than a year to take advantage of the 20% maximum long-term capital gain tax rate (10% for investors in the 15% marginal tax bracket). These rates will decrease further, to 18% and 8% respectively, for assets acquired after December 31, 2000 and held more than five years.
• Tax-deferral (payment of taxes upon withdrawal, usually at retirement) is available through contributions to employer retirement savings plans (e.g., 401(k)s) and 403 (b)s) and traditional IRAs. 401(k) and 403(b) plans allow up to $10,500 of savings in 2001, plus a couple can contribute a total of $4,000 to IRAs. If additional funds are available, an investor could also select a fixed or variable annuity, preferably from a low-cost provider like The Vanguard Group or TIAA-CREF.
• Don't purchase shares of mutual funds in a taxable account before they make a distribution (usually in December).
• Know your marginal tax bracket to compare whether taxable (e.g., corporate bonds) or tax-exempt (e.g., municipal bonds) are a better choice in your tax bracket. To obtain a list of 2001 marginal tax brackets, and the income required for each filing status (e.g., married couple filing jointly), send a self-addressed, stamped envelope to Rutgers Cooperative Extension, 3 High Street, First Floor, Newton, NJ, 07860. This information can also be obtained from the "Tax Information" page of the Rutgers Cooperative Extension Money 2000 Web site: www.rce.rutgers.edu/money2000/taxinfo.