This Election, Your Financial Plans Should Focus on Taxes

Don't let election drama tempt you into changing the makeup of your portfolio. The sensible move right now is to work out how to lower your future tax burden.

By Jared Elson, Investment Adviser

published 23 October 2024

in Features

An older man on a hike uses binoculars while holding a guide book. — (Image credit: Getty Images)

The 2024 presidential election is one of the most hotly contested and unusual political races in recent memory. A deeply divided nation has watched as one candidate has been the target of more than one assassination attempt, and the other dropped out to be replaced by his vice president. As with any series of turbulent events, stressful election seasons like this one can cause people to fear for the future.

When you feel the future is in doubt, it can be tempting to make financial decisions based on what you fear will happen. Particularly in close elections, as the 2024 race is predicted to be, investors can become extremely nervous about the outcome and the impact it will have on their finances.

If you believe one candidate will harm the economy and also think that candidate is likely to win, it’s hard to resist the urge to protect your finances by divesting yourself of assets you feel will be at risk when the new president takes office in January.

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Conversely, if you’re confident your preferred candidate will win and will be a boon to the economy, you’d be tempted to shift your investments toward assets you think are likely to prosper under that candidate’s presidency.

Election-year stock market impacts

Historically, while the stock market often displays some volatility in the months leading up to an election, once that election is in the rearview mirror, market volatility tends to calm. Within a few months of the new president taking office, the market is usually right where it would be expected to land had the election never taken place.

In short, despite common assumptions that they will either rout or boost the markets, elections don’t tend to have much impact, regardless of which party’s candidate wins the Oval Office. This can be unfortunate for those who assume otherwise and make financial decisions based on that assumption.

Prudent financial moves during election season

Whether an election year or otherwise, it’s crucial to have a solid financial plan tailored to your individual situation and risk tolerance. A financial adviser can help you devise a plan designed to grow your money in a balanced portfolio that has appropriate levels of investment risk. If you have such a plan, the prudent move during an election is to stick to that plan.

A properly designed plan is already set up to take advantage of good times and weather bad times. History suggests that making major portfolio changes in response to election uncertainty can cause more harm than good.

Apolitical financial planning

One aspect you could consider, however, is taxation. Regardless of which party wins in November, it’s likely we are currently enjoying the most favorable tax environment we will see for years to come. To fund the government and service existing debts, at some point the country will likely have to increase its income, which means higher tax rates.

The Tax Cuts and Jobs Act set our current tax rates and brackets, but it is due to expire at the end of 2025, barring congressional action — an action that most electoral scenarios deem unlikely at this time. Once it expires, we will return to the higher tax environment the TCJA replaced. This means any action you can take to lower your future tax burden is likely to save you money in the long run.

One common way to accomplish this is to consider converting your tax-deferred retirement accounts to their Roth equivalents. You will pay taxes on them now, at current tax rates, but will not have to pay taxes on withdrawals or gains in the future. Plus, while tax-deferred accounts have required minimum distributions (RMDs) that you must take whether you need the money or not, Roth accounts do not.

Those RMDs are considered income when you take them, and if you have other sources of income in retirement that cannot be paused, such as pensions, Social Security or annuities, they could move you from a lower tax bracket to a higher one.

Roth conversions don’t make sense for everyone, and like investing, the wisdom of converting to Roth accounts depends on your individual circumstances. It’s important to sit down with a financial adviser to devise a financial plan that’s right for you.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Jared Elson is a Series 65 Licensed Investment Adviser Representative (IAR) and the CEO of Authentikos Advisory. Following a 10-year career with Yahoo, Jared identified an acute need for sound financial counsel in the tech industry and has excelled in giving tech professionals the tools they need to grow and preserve their wealth.