U.S. Fiscal Uncertainty and Your Portfolio
The fiscal cliff loomed as we sent this issue to the printer three weeks before the November election. Unless Congress and the president reach an agreement, tax cuts enacted under the George W. Bush administration will expire and automatic budget cuts will go into effect on January 1, 2013. As I said in my Editor’s Note, we are delaying publication of our 2012 tax guide until the January 2013 issue in hopes that we will have more clarity about 2013 tax rates.
Congress is expected to reconvene on November 13. It is possible that both parties will agree on a plan or at least be close to agreeing on a plan by the time you read this. It is also possible that no agreement will have been reached and fiscal uncertainty will still loom. Either way, there are portfolio actions you can and should not take heading into the new year.
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Use the tax status of your accounts to your advantage
If you have an individual retirement account IRA or a Roth IRA, use them for your less tax-efficient investments and strategies. Capital gains, dividends and corporate bond interest payments are not taxable events when they occur in an IRA or a Roth IRA. (You will pay taxes on amounts withdrawn from a traditional IRA, however.)
Use your taxable brokerage accounts for your most tax-efficient investments, such as index funds and municipal bonds.
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