I am reminded as the leaves fall from the trees that right now is an ideal time for us to re-examine our financial situations. As we put away the porch furniture, bring in the plants and bring out our warmer clothing, these peaceful and cool days of early fall are the respite before the storm of holidays. Then the year ends.
And this year, more than many recent years, is a year for financial re-examination.
The stock market has risen. Is that meaningful to our objectives in the long term? Income and capital-gains taxes are likely to rise next year. Is that meaningful to what we hold as investments?
Besides these distinct issues in 2010, there are annually recurring reasons to take advantage of this lull in our frenetic lives. Are our investments well aligned with our goals, as well as our tolerance for risk? Should we be making gifts to charities or our families before year's end? And as we get older and time passes, have we taken careful note of any added risks to our financial future?
The year 2010 is a major transitional year from the perspective of income taxes. The current law sunsets at the end of this year, and unless Congress acts, income taxes and taxes on capital gains will rise in 2011. The tenor of today's election and the recent inability of Congress to make consensus-building decisions offer little hope that the tax question will be clarified soon.
In that context, we are advising our clients to consider three actions to take. First of all, we believe that long-term capital gains should be taken in 2010. The market has delivered them (for those who invested in stocks) and the tax code will never treat them more favorably than in 2010.
Secondly, we advise all of our clients to take a serious look at the special Roth conversion available only in 2010. Before the market rises further and before income taxes rise, this is the perfect time to consider converting some or all of your traditional IRA assets in a Roth IRA. It doesn't make sense for everybody, but nobody should avoid taking a serious look at it.
Thirdly, if you believe income taxes will rise, even slightly, in 2011, then you may consider withholding some of your charitable giving until next year, because in a higher-tax environment, the benefit of tax deductibility will be greater.
Those are reasons specific to 2010 why this is the appropriate season to re-examine the whole of your financial picture right now before things get busier in your life. But there are also the annually recurring reasons for re-examination, such as realigning your holdings with your plan and mitigating the risks that threaten your plan.
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Donald E. Askey, a Certified Financial Planner professional and president of Provident Advisory Group, is a registered fee-only adviser, now headquartered in Newburyport. For questions, visit www.providentadvisory.com.