Election-Proof Your Portfolio
The next president will likely make changes that could dramatically affect your portfolio. Tax changes are especially likely.
Two financial strategists offered CNBC tips for creating an election-proof portfolio.
Hal Rogers, a retirement strategist with Retirement Services, takes the estate/retirement plan approach: Since we can't know who'll win, we need to take advantage of strategies that work under existing laws -- strategies that will work regardless of who wins.
1. Take Some Cap Gains Now
Selling winners and limiting tax exposure are two moves that always make sense, but make more sense now with capital gains rates likely to change under McCain or Obama.
2. Beware Fewer Benefits for Heirs
The government may get rid of the "step up in basis" rules, which means any inherited investments (stocks, real estate, etc.) could have dramatically more capital gains exposure than under current laws. This is something a tax-hungry president could do easily.
Example: Now, if you buy at 10 and sell at 15, you pay tax on 5. But if you give it to your son at 15 and he sells at 15, no tax. They will change this.
3. Estate Tax May Not Die in 2010
Under current legislation, in 2010 the credit against estate taxes will be unlimited. There will be NO estate tax! With the current downturn in the economy and resulting tax revenue decrease, it's not likely Congress will leave this as is.
As of right now, the estate tax credit (in effect the exemption) is $2 million. In January 2009 it will be $3.5 million, and in 2010 it will be unlimited.
4. Company Stock Exemption May Disappear
This is a little-known, little-used tax exemption that a new president may eliminate. Currently, the rule (net-unrealized appreciation or NUA) allows holders of certain company stock to take that stock out of their 401(k) without paying taxes.
The stock is taxed on its cost basis. If you got it for free, perhaps as a company match, it has no cost basis. No cost, no tax!
But this only works if you take it from your 401(k) and put it, for example, in a brokerage account. If you roll it over into an IRA this exemption is lost. Many people make this mistake when they change jobs.
In any case, the NUA provision could be eliminated by a tax hungry president.
Dean Barber, founder, president and chief investment officer of Barber Financial Group, takes the investment approach based on the uncertainty the election adds to the current economy.
1. Stay Away from Discretionary Stocks
Avoid areas like retail. Go to staples, like P&G , for example. The consumer will cut back on spending. So anything consumer related will be volatile.
2. Sell Out of High-Dividend-Paying Stocks
There's been so much emphasis on capital gains. But the special tax rate for dividends, also 15 percent, will likely go away too, whichever side wins.
3. Get on the Short End of Bonds
Commodities prices have fallen, but are still likely to rise. And rising inflation will be a threat whether it's a Democrat or a Republican in the White House.
4. Get Out of the Market for a Time
Be prepared for higher taxes across the board. If that happens, you want to get out of the market for some period of time. If consumers slow spending and consumers are 70 percent of GDP, that will lead to corporations needing to produce less, which will lead to layoffs. And if government has a smaller tax base, it must raise taxes. You can keep contributing to your 401(k), but put it in short term bonds. Otherwise take dramamine, close your eyes and hang on.
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Disclosure informatfion was not available for Rogers, Barber or their companies.