Obama, the New Congress and You
There sure was a lot of talk about ‘change’ during the 2008 election. Well, some of that change may be coming along soon. Here’s what it might mean for you.
President Obama and the new Congress have a litany of pressing issues to address. Trying to spur the nation out of its economic doldrums is front and center on that list, which also includes health care reform and managing conflicts in the Middle East. Some potential financial policies may affect you directly, such as a shift in the capital gains rate or new rules governing withdrawals from retirement savings accounts. Other changes, such as a large fiscal stimulus package, probably will have less-direct but meaningful effects. Below is an overview of some of the most important policies likely to come out of the new Administration, and the impact they may have on you.
Fiscal stimulus: With the economy deep in recession, passage of a sweeping economic stimulus package rated high on the list of priorities for the new President and Congress, and the size and scope of the package grew in recent months.
The response to the fiscal package, however, has been guarded, which reflects the reality that spending will not begin until later in 2009 and that two-thirds of the stimulus will be focused on the years 2010 to 2012. Nevertheless, the proposal has brought additional stability for investors and, combined with other global initiatives, these measures will raise the global GDP by 2 percent. The beneficiaries include healthcare, defense, clean energy, and, above all, transportation.
Taxes: On the campaign trail, candidate Obama pledged to reduce taxes for many low- and middle-income Americans. He said he would offset those tax cuts by raising taxes on higher-income taxpayers.
Taxpayers in the highest brackets are likely to see their rates increase—eventually. President Obama’s plan would boost the tax rate from 33% to 36% for individuals earning between $164,550 and $357,700 (and joint filers earning $200,300 to $357,700). Individual and joint filers earning more than $357,700 a year would see their top rate rise from 35% to 39.6%. That said, there is some question about when those increases would go into effect. Many analysts expect the new Administration to delay tax increases for the highest brackets until 2010, when the current rates are set to expire. You may want to review your tax strategies with your financial advisor when rates do increase.
Capital gains: The tax rate on long-term investments also is likely to get an overhaul. Long-term capital gains and qualifying dividends currently are taxed at 15% for most investors, but the legislation that established that rate expires in 2010. Many observers expect President Obama and Congress to increase the capital gains rate for some investors, particularly those in higher tax brackets. For individuals earning more than $200,000 a year and families earning more than $250,000 annually, the capital gains rate would jump from 15% to 20%.
Retirement savings: The new Administration is likely to propose changes to retirement savings plans such as 401(k)s and IRAs to help investors cope with the market’s decline and the economic recession. For example, President Obama has proposed temporarily suspending required minimum distributions from retirement accounts. If his proposal becomes law, you’ll be able to leave your savings in place after age 70 ½ to continue earning tax-protected investment returns (provided you don’t need the money from your RMDs).
Another proposal would temporarily allow investors to withdraw 15% of their savings, up to $10,000, from qualified retirement accounts penalty-free, for any reason. (Regular income taxes would still apply.) Penalty-free withdrawals today are generally available only in cases of severe financial hardship. Bear in mind that making early withdrawals from retirement plans can be costly even in the absence of penalties, because you’ll lose tax-protected compounding on any money you take out.
The new President and Congress’ to-do list is long and complex. Before making any changes to your finances based on likely policy changes, consult your investment advisor. He or she can help you determine the best course of action, based on shifting policies and your personal situation.
