Prepare Your Portfolio Now for Tax Code Changes
By Eric Henderson of Nationwide Financial
COLUMBUS, Ohio (TheStreet) -- No one knows for sure how the tax code will ultimately look in the next year, but we know the tax code will change. Bush-era tax cuts are set to expire at the end of 2013, and if our lawmakers take no action we can expect higher estate, investment and income taxes. In a lame duck congressional session, it's unclear what actions lawmakers will take before the end of the year.
That's why it's a great time to meet with a financial adviser to begin formulating a plan to ensure your portfolio is prepared for the changes to come. You won't find an adviser who knows exactly how things are going to play out, but a good one can help you understand the three most likely potential tax change scenarios:
- Tax rates will increase, particularly for the wealthy.
- Tax deductions will be reduced.
- Tax rates will decrease, but tax preferences are removed.
Despite a lack of clarity on which scenario may finally materialize, there are several actions worth considering that may put your portfolio in a better position for an uncertain future. Some opportunities may disappear when current tax laws expire, so don't wait until next year.
When you sit down with your financial adviser, be sure you ask him or her about the three types of taxes that are likely to change: investment taxes, income taxes and estate taxes, and how they may affect your portfolio.Investment taxes: Starting next year, tax on dividend income is set to increase from 15% to ordinary income rates as high as 39.6%. Long-term capital gains rates are scheduled to rise from 15% to 20% for most taxpayers. Those with high overall income and investment earnings should plan for an additional 3.8% Medicare investment earnings surtax. Ask your adviser:
- Should I consider selling large stock or mutual fund positions this year to generate a capital gain at the current rate?
- If so, can I reinvest the proceeds from these sales in a more tax-efficient manner or in a tax-deferred vehicle?
- Should I consider converting funds or investments that are taxable (for instance, bank CDs, money market accounts, mutual funds and other vehicles that result in annual taxable income) into tax-deferred opportunities such as tax-free municipal bonds, tax-deferred annuities or life insurance?
- Should I adjust my dividend stock position?
- Should I take advantage of current low income tax rates by accelerating income such as bonuses, receivables and associated deductions into the current tax year?
- Is this a good time for me to fund a Roth 401(k) or Roth IRA?
- Should I consider converting traditional IRA assets to a Roth IRA now?
- Are there opportunities for me to maximize my deductible retirement plan contributions in 2013?
- Does it make sense for me to shift assets from taxable accounts to a deferred variable annuity to gain tax deferral?
- Should I roll assets from a 401(k) to an IRA to gain access to mutual fund strategies that may not be available in a 401(k)?
- Should I set up an irrevocable life insurance trust before current exemption levels expire?
- If so, does it make sense to buy an annuity inside the trust to pay premiums on the life policy?
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