Tuesday, October 02, 2012

2012 To-do list

In a normal year, I would say there's no reason to hustle to rebalance your portfolio before year-end. But this year is different because a host of Bush-era tax rates that were favorable to investors are set to expire at the end of December, barring Congressional action. Top of mind for rebalancers? Long-term capital gains taxes, which are set to rise from 15% currently to 20% for those in the highest tax brackets, and to 10% from 0% for those in the 15% tax bracket or below. (This article summarizes some of the key investment-related tax changes that will kick in next year.)

If your portfolio review indicates that it makes sense to lighten up on a winning position that you've held for more than a year--either because its valuation seems high or because it's too large a piece of your portfolio--it's a layup to do so this year, at today's low capital gains rates. After all, tax rates may stay the same, but no one's talking seriously about them going any lower than they are right now. On the other hand, there are risks in going overboard in an effort to lock in low long-term capital gains rates. If you don't have a convincing fundamental impetus for selling a security and tax rates stay the same, unloading it now will trigger a gain that you might have otherwise deferred. This article provides an overview of key tips and traps to bear in mind if you're considering selling something preemptively.

Yet another maneuver that's worth putting on your radar between now and the end of 2012 is converting traditional IRA assets to Roth, a tack that would have multiple benefits in a higher-tax climate. First, the taxes due upon conversion would be based on 2012's relatively low income tax rates. Second, Roth assets will be even more valuable if income tax rates rise in the future because Roth withdrawals are tax-free. Finally, Roth assets aren't subject to the new Medicare surtax going into effect in 2013, which I discussed in this article.

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