Kabarec Financial Advisors, Ltd.: Look Now to Save Taxes in 2005.

PALATINE, Ill. -- Kabarec Financial Advisors, Ltd. (KFA) says now is the time to prepare for tax savings in this New Year.

"We expect Congress to make the tax cuts passed in 2003 permanent this year," said Michael Kabarec, CFP(TM), CPA/PFS, principal of KFA, which oversees about $125 million.

"This certainty in tax cuts for at least the next few years is critical to where you hold certain investments," said Kirk Hackbarth CFP(TM), CPA/PFS, MS of KFA. He suggests holding investments that generate ordinary income, such as bonds, in tax-deferred accounts. More aggressive investments that typically generate capital gains should be held in taxable accounts in order to take advantage of the low 15% capital gains tax rate. Another advantage comes when you pare a few investments that experienced losses from your portfolio. If the investment was held in a taxable account, you can deduct up to $3,000 in losses against other income on your individual income tax return. Losses not used in one particular tax year can be carried forward to future years.

Also, if eligible, consider investing in a Roth Individual Retirement Account (IRA). The primary advantage of the Roth IRA is your investment grows tax-free, meaning you will never have to pay federal income taxes on your earnings provided certain requirements are met. In addition, contributions can be withdrawn at any time without paying taxes or penalties. Also, the Roth IRA is not subject to required minimum distribution rules at age 70 1/2 like other IRAs. Contributions to a Roth IRA are not tax deductible, but depending on the investor's particular situation, tax-free growth may result in more savings than comparable investments in a traditional IRA.

Roth IRA contributions are subject to a modified adjusted gross income limitation. The phase-out range is $150,000-$160,000 for married couples filing jointly, $95,000-$110,000 for single and head of household filers, and $0-$10,000 for married filing separately. Contribution limits for 2005 are $4,000 if under age 50 and $4,500 if 50 and older.

Hackbarth also recommends investing in an employer retirement plan such as a 401(k), 403(B) or 457. These accounts are still one of best ways to accumulate retirement assets. If possible, try to defer the maximum amount allowable each year. For 2005, it's $14,000 for employees under age 50 and $18,000 for those age 50 and over. For workers early in their careers, deferring the maximum may not be realistic. But if the employer offers a company matching contribution, defer at least enough to obtain the full match.

Another important planning idea that is often overlooked as part of an employer-provided benefits package is a flexible spending account (FSA). This IRS Section 125 cafeteria plan allows employees the option of pre-tax payroll deductions for some insurance premiums, unreimbursed medical expenses, and child/dependent care costs.

"Tapping into this benefit can result in big savings for taxpayers," Hackbarth said. "For example, let's assume our client is a married couple with two children and that both spouses have a FSA available through their prospective employers. Let's also assume that both children are in day care at an annual cost of $5,000. If one spouse is over the Social Security wage limit ($90,000 for 2005), it's more beneficial from a tax standpoint for the lower wage-earning spouse to have the $5,000 day care expenses deducted from their paycheck." Hackbarth explained the savings is the result of FSA amounts not being taxed for income, Social Security, and Medicare taxes. The savings would be 6.2% of $5,000--the higher wage earner would save only 1.45% from their Medicare portion versus the lower wage earner's savings of 7.65%.

With the Social Security trust fund expected to be bankrupt by the year 2042 as baby boomers leave the work force and more employers phase out the traditional pension plan, Kabarec believes there's no better time to take tax-saving investing into your own hands. "The magic of compounding creates massive amounts of wealth," he said. For example, a 26-year-old contributing $4,000 annually into a Roth IRA earning an 8% average annual rate of return would accumulate over $1 million at age 65.

About Kabarec

Kabarec Financial Advisors, Ltd. is a "fee-only," full-service financial advisory firm with more than 20 years experience helping clients build better futures. It provides portfolio management and financial planning services. KFA's strategic focus is on preserving, protecting, empowering and perpetuating wealth for the benefit of its clients and its clients' future generations. Kabarec previously has been named by Worth, Money Magazine, Bloomberg Investment Management and Medical Economics as one of the country's best financial advisors.

For more information on tax-saving strategies for 2005, consult Kabarec Financial Advisors at 847-934-7777 or www.kabarec.com.