More On Tax Planningfrom The Advisor's Professional Library
- ETF Taxation The use of ETFs may be attractive to certain investors. The tax advantages may make them even more attractive.
- Charitable Giving Charitable giving can reduce your clients’ tax liabilities. However, the general and verification rules for the deduction of charitable gifts must be understood in order to take full tax advantage of such gifts.
Brinton Eaton, a New Jersey-based wealth advisory firm, has some suggestions for investors for the coming year, starting with “keeping the faith” in equities and keeping a tight rein on emotions. While neither one may be easy in a market gyrating worse than a slowing-down top, a third hint may be easier to swallow: watch for opportunities to plan against changes in tax legislation for 2013.
“Our resounding message is to invest for the long term,” says CEO Robert J. DiQuollo. “It’s a troubling time in terms of geopolitics and global economic change, but be strong in your investment convictions.”
Jerry A. Miccolis, CIO, adds: “Don’t let your emotions dictate your investing behavior. History has shown that investors who shift their investment strategy based on market behavior do significantly worse than those who make a choice—whatever it is—and stick with it.”
Here are Brinton Eaton’s eight suggestions you might want to share with your clients for 2012.
8) Proactively Prepare for the Possible Change in Estate Tax in 2013.
In 2013, unless Congress intervenes, estate tax law will revert back to a $1 million exemption and a 55% tax rate. Thus 2012 presents a valuable opportunity to structure your estate plans accordingly. Consider leveraging historically low interest rates to provide low-interest loans to adult children, as well as funding grantor retained annuity trusts (GRATs). “Individuals who fail to plan in advance may wind up giving more money to the IRS than they have to, rather than to their loved ones or favorite charity. This should be a component of anyone’s financial plan,” says DiQuollo.
7) Take Advantage of Roth IRA Recharacterization Rules.
If you converted your IRA to a Roth IRA during 2011, you may want to consider a “recharacterization.” One of the main reasons people recharacterize is a market decline. Let’s say you converted your IRA to a Roth IRA and at the time, the IRA was worth $50,000. If you decided to pay all the tax up front, you paid tax on $50,000. If the account is now worth $40,000, due to a drop in the stock market, it may make sense to recharacterize to a traditional IRA and get back the tax you paid on the conversion. You can always reconvert back to a Roth at a later date and pay tax on the lesser amount.
6) Read the Fine Print Before Purchasing an Annuity.
Although fixed annuities promise a steady income stream for life, you are paying a hefty cost for the privilege. By locking up a sizable sum of your money until the day you die, you are restricting your ability to use those funds to participate in any future equities rally or other attractive investment. And a fixed annuity won’t serve you well in the face of inflation. Variable annuities, which are marketed as investment vehicles, are rarely a good alternative to investing the money in other, lower-cost vehicles.
5) Consider Investments That Incorporate Portfolio Protection and Exploit Volatility.
Volatility is omnipresent in today’s market. One way to combat this is by investing in volatility itself. The trick is to invest in volatility in such a way that the investment does not lose its appreciation when markets and volatility return to normal. Other proactive risk management strategies include momentum-based sector rotation. Any risk management product should work in concert with, not in place of, any carefully designed asset allocation.
4) Invest in Equities for the Long Term.
Ideally, you should be invested in equities up to your personal risk tolerance level. Remember that you are in it for the long term: don’t be distracted by the daily news, and don’t let election-year politics and potential gridlock alter your long-term investment strategy. Focus on the fundamentals, such as corporate earnings. Investing in equities is the best defense against the biggest threat to your financial future—inflation. Even if you’re already retired, inflation will likely double or even triple your living expenses over the rest of your life.
3) Diversify, Diversify, Diversify.
Be diversified in your investments. A proper asset allocation combined with opportunistic rebalancing, to ensure your allocations stay true, continues to be the best way to reduce risk. A well-diversified portfolio that invests across a range of equity sectors, fixed income, and alternative investments is always a good choice. A plethora of mutual funds and ETFs offer exposure to a wide variety of asset classes.
2) Beware of Investments That Prey on Investor Fears.
Investors are looking for the silver bullet that will protect them when markets collapse. “Buyer, beware,” warns Miccolis. “Many investment vehicles that are popular during volatile times are expensive and complex, and sold predicated on fear. While there are quite a few products that offer risk protection—such as black swan funds, puts and collars—many are limited in the benefits that they provide, and some can have significant adverse effects on portfolios during normal market environments.
1) Stick to Your Guns.
Research shows that typical investors will let their emotions rule their financial decisions—letting fear or euphoria prompt them to exit and enter the markets at precisely the wrong times—severely impairing their results. With market and geopolitical uncertainty continuing to roil equities, it’s more important than ever to stick to your guns, maintaining a well allocated and balanced portfolio that reflects sound investment principles and your long-term needs—not your gut reaction to every market whipsaw.
Read AdvisorOne's complete lineup of Outlook 2012 stories.
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