A few bits and pieces of conversations I'm in active discussions with clients about potentially higher capital gains taxes are:
- Take much greater advantage of ROTH IRA's
- Considering converting large IRA's into ROITH IRA's. Yes, this is a taxable distribution (no 10% penalty for the under 59 crowd). The tax free distributions will be tax free at a time when personal income tax rates could be higher. Plus, distributions from ROTH's won't raise your annual income since they are tax free.
- BACKDOOR ROTH IRA's are an underutilized tool that more and more people may want to consider. (easy to set up!)
- Continue to be as tax efficient with investments. Tough to be perfect with this, but at least a much higher degree of sensitivity to it would be very helpful.
- Use ETF's (exchange traded funds) in non-qualified accounts because ETF's are generally tax efficient, especially those that track the broad averages.
- Donor Advised Funds should be worth a closer look for those who do not utilize this amazing charitable giving vehicle.
- Only give to charities that will accept appreciated assets.
- Dividend paying stocks could be worth even more as there is no talk about raising taxes on that.
- Never sell, which could be a little too unrealistic. But still an option for investors.
- Sell appreciated assets in chunks to spread out the potentially bigger tax hit.
- Trade more actively since holding long term may no longer give benefit of long term capital gains. (Terrible idea for vast majority of investors)
- Wait for a new administration to change the tax rates back.
While this is not an exhaustive list, it'll have to do for now because we don't have the details we need to plan for a hike to the long term capital gains tax. Then again, we don't even know if and by how much it could be raised.
At this moment, I'm not making any changes to clients' portfolios because of the proposal. As we get more clarity, one thing I may do is move up the timeline to sell a few highly appreciated holdings for clients who are near retirement, just to beat the tax clock.
In any event, the above list is what I am speaking about with my clients who earn one million dollars+ annually and those who are getting close. Plus, we don't know if the one million dollar income threshold is for couples, making 500 K the threshold for individual tax filers.
Regardless of what happens on the capital gains tax front, I'll still be advising my clients based on their time horizons to their goals, risk tolerance, and their overall personal financial situation. Long term investing is what works best and nothing changes that. Let's not let the tax tail wag the dog.
I'll keep an eye on things and report back to you as the details roll in.
The videos below are snippets from my livestream, Be the Boss of Your Money. If you have any questions about how changes to current tax rates will impact your personal finance and what you might be able to do to soften the potential blow, all you have to do is call. Oh, and don't forget to subscribe to my YouTube channel.
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Thanks for reading and see you next week,
Mitch
