Newspaper article The Christian Science Monitor

New Tax Law Calls for a Portfolio Tune-Up ; Changes Favor Stocks for Taxable Accounts, Bonds for Tax-Deferred Accounts

Newspaper article The Christian Science Monitor

New Tax Law Calls for a Portfolio Tune-Up ; Changes Favor Stocks for Taxable Accounts, Bonds for Tax-Deferred Accounts

Article excerpt

Investors are often reminded to review their portfolios regularly to make sure their exposure to stocks and bonds is still appropriate, given changes in market conditions and their personal situations.

Now they have another reason to check their investments: The tax law signed by President Bush last month contains several provisions that could change how people allocate their money among both tax- deferred accounts, such as IRAs and 401(k) plans, and taxable accounts.

The new law cuts the tax on profits from investments held at least a year from 20 percent to 15 percent. This rate applies to sales after May 5, 2003. The tax on most stock dividends also has been cut to 15 percent, retroactive to January 1, 2003. Dividends had been taxed at the investor's ordinary income rate. For investors in the 10 percent and 15 percent tax brackets, the tax on dividends will be just 5 percent.

The law also cut the top four income tax brackets to 25 percent, 28 percent, 33 percent, and 35 percent, effective January 1, 2003. The top brackets had been 27 percent, 30 percent, 35 percent, and 38.6 percent. These reductions were enacted as part of the 2001 tax law, but were not scheduled to be phased in fully until 2006.

Because of these changes, "we think people should consider combining their taxable and tax-deferred accounts into one - at least mentally,'' says Mary Malgoire, a certified financial planner in Bethesda, Md.

Of course, Ms. Malgoire stresses, money cannot be moved from a tax- deferred vehicle into a taxable account without penalties. But investors should view both types of accounts as two parts of an entire personal portfolio.

Under the old rules, it made sense to emphasize stocks and stock mutual funds in IRAs, 401(k) plans, and other tax-advantaged vehicles, in order to defer the tax on dividends and capital gains.

Now, with a 15 percent tax on dividends and long-term capital gains, stocks and stock mutual funds have become more attractive for taxable accounts, since the tax bite is smaller.

Meanwhile, fixed-income investments, such as bond mutual funds, may now play a bigger role in tax-deferred accounts. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.