Advisers prep antidotes for tax hike

Adding tax-efficient investments, taking capital gains, re-balancing portfolios among options

Mar 28, 2010 @ 12:01 am

By David Hoffman

Investor concern over the cost of health care reform is likely to manifest itself in a flood of questions to financial advisers about how best to protect assets from an expected hike in taxes.

In preparation, advisers are weighing several solutions, including increasing exposure to tax-efficient investments, portfolio re-balancing, and taking capital gains now and putting some of the money into Roth individual retirement accounts.

“I think we're going to get deluged with questions,” said James Holtzman, an adviser at Legend Financial Advisors Inc., which manages $350 million. “Investors will want to know what is going on and what, if anything, they can do about it.”

At least one adviser is recommending that investors consider the benefits of holding assets in unified managed accounts, the structure of which makes asset allocation and investment changes easier to accomplish.

“Through the UMA, we can manage down to the individual investor's circumstance,” making it easier to maximize tax efficiency, said Ronald Knipping, a managing principal at Rehmann LLC. The accounting, financial services and business consulting firm manages $1.8 billion in client assets via Rehmann Capital Advisors Group LLC.

Of course, the typical UMA comes with high minimum investments, typically between $250,000 and $500,000.

For investors who can't afford that, Mr. Holtzman suggests that they simply re-balance.

Such conversations with clients now about the implications of the health care reform law can help focus investors on the benefits of tax-efficient investing, said Micah Porter, president of Minerva Planning Group Inc., which has $60 million under management.

Even before the bill became law last week, he had begun sending clients a letter discussing why it makes sense to own tax-efficient mutual funds that keep capital gains low by having low turnover. Mr. Porter thinks that such funds will grow in popularity as a result of the new law.

As for whether investors should take capital gains now, it could make sense in some circumstances — especially for investors who are considering a Roth IRA, he said. Capital gains tax rates are expected to go up after tax cuts passed in 2001 and 2003 expire at the end of the year, and again in 2013 as a result of health care reform.

New rules took effect Jan. 1 that allow individuals who earn more than $100,000 annually to convert to Roth IRAs. Additionally, though investors still must pay ordinary income tax on each dollar converted, they can spread the tax bill on a 2010 conversion over two years, splitting it between their 2011 and 2012 returns.

“I think if you think taxes are going up, it makes Roth conversions that much more attractive,” Mr. Porter said.

On the surface, the taxes associated with health care reform don't seem that onerous.

Starting in 2013, the law imposes a 0.9% Medicare hospital insurance tax increase on the self-employed and employees with respect to earnings in excess of $200,000 for individuals and $250,000 for couples filing jointly. And a series of agreed-upon “fixes” to the law winding their way through Congress include a 3.8% Medicare tax hike, also starting in 2013, on taxpayers' “unearned income,” such as capital gains.

And those tax increases come on top of other expected tax hikes.

Because the tax cuts of 2001 and 2003 are set to expire at the end of this year, federal income tax rates will rise.

The tax rate on long-term capital gains is set to go up next year to 20%, from 15%, for households earning more than $250,000 annually. And the federal estate tax — which is now at zero because it expired Jan. 1 — will be reinstated next year at a maximum rate of 55%.

“I think what is going on here is this is another incremental hit to individuals,” said Lewis Taub, tax director with consulting firm RSM McGladrey Inc.

Andrew Altfest, executive vice-president of strategy and investments at Altfest Personal Wealth Management, which manages about $500 million in assets, predicts that most questions from clients will be related to capital gains. “For large earners, this certainly is another reason for them to look at bringing gains in for this year,” said Mr. Altfest, head of the firm's tax task force.

But for it to make sense to take capital gains now, an investor would have to believe that the appreciation of a stock would exceed the tax loss that would be realized, he said. And even then, it may not make sense, since the additional 3.9% increase doesn't kick in until 2013.

There is no reason to rush, said Clint Stretch, a managing principal in the tax policy group at Deloitte Tax LLP. “People at the end of this year should do their analysis and ask: "Do I want to go ahead and recognize the gains or hold on to the stock?'” he said.

But thanks to health care reform and other federal initiatives, managing money to reduce clients' tax exposure is more important than it has been in years, Mr. Knipping said.

E-mail David Hoffman at


What do you think?

View comments

Recommended next

Upcoming event

Oct 22


San Francisco Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print