No one fell off the fiscal cliff, and we’re likely to see more economic drama with the looming debt ceiling debate that’s up next. How do you cope with one crisis after another? Focus on what you can control.
Whatever the latest news or legislation may bring, what’s most important for you is to be clear on your personal goals, the timeframe for reaching them, and what it will take to get there. These choices are within your control and form the basis of your financial security plan, a long-term approach to protecting against risks and accomplishing your hopes and dreams. As long as you are working your plan, you can keep your eye on the future, adjust as the environment changes, and be confident in the road ahead.
Like many other events that you’ll experience in your lifetime, the American Taxpayer Relief Act of January 2013 brings changes in the external environment that could have implications for your finances. Now is a good time to review all aspects of your financial plan in light of changes that may affect you in areas such as income tax and capital gains tax rates, personal deductions or estate and gift tax exemptions.
A financial representative can provide guidance and resources to help you determine your best direction, depending on how the new law affects you. Here are some actions to consider and discuss in detail when you meet to review your plan:
- Confirm your goals, objectives and time horizons to ensure your financial plan reflects appropriate savings and asset allocations for reaching your goals.
- Adjust your investment strategy for the new tax environment. For example, to accommodate higher tax rates for capital gains and dividend interest, you may want to hold capital assets longer than planned, or use tax-favored investments such as your 401(k) or IRA differently.
- Set aside enough assets in cash to meet shorter-term obligations, address unforeseen emergencies, and reduce worry about market ups and downs.
- Adjust estimated tax payments as necessary to reflect rates and changes in the new law.
- Examine the tax implications of investment or retirement distributions. If you regularly take distributions – whether for income, loan payments, education or other purposes – be sure to understand the impact of the new tax laws on your strategy and adjust if needed.
- Analyze your retirement savings and distribution plan – Higher tax rates for those with incomes greater than $400,000 could impact the taxes you’ll pay on retirement income. If you are nearing retirement, be sure your after-tax distributions are used to greatest advantage. Even if retirement is years away, you may want to adjust your savings amounts or vehicles to account for the tax impact on your future retirement income.
- Update your estate plan and documents to be sure they satisfy your objectives, keeping in mind that the new law sets estate and gift tax exemptions at $5.25 million per individual. A financial representative or tax advisor can provide guidance on tax planning implications. Whatever your income level, it’s a priority each year to update estate planning documents including your will, powers of attorney, medical directives, and beneficiary designations.
As you look at the implications of the new tax law and how it affects you, keep in mind that this is just one change in the environment that you will experience in your long journey to financial security. Talk to a financial representative and tax advisor about issues that are most important to your unique situation. As long as you have your destination in mind and a plan to get there, you can focus on things you can control to reach your desired goals.