Tax Planning Ideas and Tax Updates

3 Ways to Prepare Your Investments for Potential Tax Hikes

by Alli Thomas

Sep 8, 2021

The coronavirus pandemic has touched every aspect of our lives. From a financial perspective, the two biggest effects have been unemployment and the stock-market roller coaster.

However, the virus may affect you financially in ways you may not have even thought about yet. And they all have to do with ballooning debt at the federal, state, and local levels.

Many advisors and economists think that tax rates will rise. Fortunately, there’s plenty of time to prepare your investments so that you reduce the hit you take from any potential tax hike:

Consider converting your traditional IRA to a Roth IRA before any tax rate changes happen.

As we have mentioned before, tax rates are at historic lows. And, although they are set to revert in 2026, things could change much sooner. If you’ve been thinking about converting your traditional IRA to a Roth, now may be the best time to do so—especially if the market value of your IRA has declined due to stock-market volatility.


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Reduce the size of your estate.

Estate taxes are another area that could see major changes. For 2021, the estate tax exclusion is $11.7 million for individuals and $23.4 million for couples.

If this is a concern, you may want to consider steps like gifting money to your children now to avoid paying estate taxes or transferring as much of your wealth as feasible into an irrevocable trust, which would not be subject to estate taxes.


Review your municipal bonds.

Many people who are seeking stability and tax-free income have a portion of their portfolio in these securities. In most cases, municipal bonds are considered quite safe. However, the finances of many states and cities have taken a big hit due to the COVID-19 pandemic. When these entities aren’t receiving income in the form of payroll taxes or sales taxes, they run the risk of defaulting on interest payments to their bondholders. While selling out of any investment blindly is never advisable, one thing that you can do is review the credit ratings of your municipal bond issuers. If you discover that the issuer’s credit rating is a candidate for a potential downgrade, it may make sense to sell sooner rather than later.

Because none of us have a crystal ball to see into the future, it is important to plan for any potential risks looming over the horizon. Working with an experienced financial advisor can help you be as prepared as possible for big changes that could affect your portfolio and estate plan. If you’re ready to talk about making some changes – or even if you just want a second opinion –click here to schedule a free consultation with one of our advisors.

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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