Fiscal cliff may obscure long view
BOSTON — A frightful scenario could play out in a couple of months unless a lame-duck Congress and the White House are able to resolve their differences on taxes and spending.
If they don't, Bush-era tax cuts will expire Jan. 1, and automatic federal spending cuts will be phased in. Such a combination could doom the fragile economic recovery and send the stock market into a tailspin.
What's more, tax rates on investment income would rise, a particularly scary prospect for investors in the upper tax brackets.
Investors may be inclined to sell some investments to take advantage of today's historically low rates. While acknowledging that could be sensible, John Sweeney of Fidelity Investments urges investors to heed the adage, “Don't let the tax tail wag the investment dog.” In other words, consider whether you're becoming preoccupied with tax issues at the expense of long-term investing objectives.
“Building a well-constructed portfolio will give you the confidence to weather any number of geopolitical or economic crises,” says Sweeney, an executive vice president with Boston-based Fidelity.
In an interview this week, Sweeney discussed how to take a big-picture approach to the short-term risks from any fall over the fiscal cliff.
But first, here's a look at the tax consequences if that happens. The maximum rate of 15 percent on long-term capital gains — the profits from selling such investments as stocks or mutual funds held for at least a year — would increase to 20 percent.
The tax on dividend income that now tops out at a 15 percent rate could rise more sharply. For those in the top income bracket, the rate would rise to more than 43 percent, with smaller increases for those making less.
Those rates may not take effect if Congress delays or otherwise averts tax increases. But it could be just a matter of time before rates rise, given the extent of the nation's debt problem.
There are relatively simple steps investors can take to minimize tax bills. For example, keep investments that are likely to generate a tax bill in tax-sheltered accounts where only withdrawals are taxed.
Here are excerpts from the interview with Sweeney:
Q: What are you advising clients to do with the fiscal cliff looming?
A: It's the same advice we would offer in any given situation. Remember, presidential elections occur every four years. There are always economic cycles, debt crises, and various crises in other parts of the globe. We try to help folks come back to a place of confidence and comfort, where they understand the importance of constructing their portfolio to meet their specific objectives. We emphasize finding the right balance between stocks, bonds and short-term cash investments.
When folks say, “I'm planning for a retirement that's 20 years away,” we want to make sure they have enough exposure to stocks so they can continue to grow their portfolio over that time frame. We remind them that historically stocks have outperformed bonds, and that bonds have outperformed cash investments. Recognizing how long it will be before an investor needs to draw from savings is very important.
Q: Does the potential for higher taxes on investment income affect how to allocate between different investment accounts?
A: Many investors have a 401(k) or IRA, so taxes are deferred until you begin to draw down from savings. So the main impact from any short-term rise in tax rates would involve taxable accounts, and those who are in the high tax brackets. But you'll have to pay taxes at some point.
Q: For investors with taxable accounts, what steps are worth considering now?
A: You want to make the right investment decision first. But it might make sense to sell a particular stock if it has appreciated in value, and your portfolio might be out of balance as result. Stocks are up about 13 percent this year, so your stocks might have appreciated to the point that they're a bigger component of the portfolio than you want. Finding an appropriate balance is the first thing to think about. If you decide you should reduce exposure to stocks, look at holdings you may want to sell or cut back. Then think about the tax consequences.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Polamalu could be next in long line of Steelers greats given unceremonial exit
- Weather continues to cause crashes, public transportation delays
- Over the falls — Cucumber Falls that is — go 3 kayakers in Ohiopyle
- Wolf reverses Corbett, says deal between Highmark, UPMC doesn’t limit continuity of care to very ill
- Rossi: Kang would benefit from less attention
- Mother, baby found dead in Millvale apartment
- Loose barges on Monongahela River highlight woes of winter’s end
- Penguins’ Lovejoy embracing defensive pairing with Pouliot
- Pirates pitcher Locke fighting for 5th spot in starting rotation
- Alcoa may close or sell some aluminum plants to cut costs
- Experts: Clinton took dangerous path with email system