How about this presidential election, huh? It has been bizarre, to say the least.
November 8th is rapidly approaching. Most of us have made up our mind already on who to vote for. We have done so despite being bombarded with Facebook posts about with candidate is a worse human being. Everyone bases their voting decision on issues that are important to them. How about the impact on your finances? As a financial advisor, I often get asked, “Which candidate is the best for my money?” Interesting question. What they want to know is: who is better for my investments and retirement outlook? The two big issues here are taxes and investment performance. Let’s take a closer look.
Are you pursuing financial independence? Taxes play a HUGE (or “Yuge”) factor in your journey. Families often hold the majority of their wealth in qualified retirement plans. Examples of these include 401ks, 403bs, and Traditional IRAs.
Contributions to qualified plans lower your taxable income in the year of contribution. The growth in these accounts is tax deferred. Using assets from these accounts after age 59 1/2 is called qualified distributions. When you take qualified distributions you pay ordinary income tax. Ordinary income tax is also what you pay year to year on your earnings. The candidates have different proposals for ordinary income tax rates.
If you have money outside of qualified plans in a brokerage account, you pay capital gains tax on all growth, upon distribution. Short term capital gains are paid on assets held less than one year. Short term capital gains are currently equal to your ordinary income tax rates. Long term capital gains are paid on assets held longer than one year. Long-term capital gains rates are currently taxed at 0% in the lowest tax brackets to 20% in the highest. The candidates don’t see eye to eye on capital gains rates either.
How do the candidates tax plans differ?
Current Tax Rates
- Would keep ordinary income tax rates about the same as they are today. She would keep the same 7 tax brackets.
- Wants to add a 4% surtax for those with income over $5 million.
- Plans to keep Obamacare, adding a 3.8% surtax on certain “net investment income”. This affects those in the highest tax bracket.
- Proposes capital gains rates start at 39.6% in year one and tiering down on a per year basis to 20% if held for 6 years or more.
- Wants to lower the estate tax exemption to $3.5 million from the current $5.45 million.
- Trump wants to simplify tax rates on ordinary income into three tax brackets, 12, 25, and 33%.
- Wants to repeal Obamacare, which would drop the 3.8% surtax.
- His 33% highest tax bracket would be on families with taxable income of $225,000 or more.
- Wants to keep the current capital gains tax rate as is, maxed at 20%.
- Wants to repeal the estate tax unless you have capital gains valued at death over $10 million.
For a great summary of both candidate’s tax proposals, check them out here via the tax foundation.
What about your investment portfolio? Which candidate would be best for market performance over the next 4 to 8 years? Let’s first look at how the two parties have fared in the past. All mentions of the market or performance is based on the S&P 5oo.
As you can see, Democratic presidencies have seen more robust returns since 1929. Much of the discrepancy can be explained by Hoover’s time during the Great Depression. Yet, even looking at the returns since 1945 shows a gap. Democratic presidencies have averaged 9.7% annual gains compared to 6.7% by Republican presidencies. Also, the last two years of a presidency normally see higher returns than the first two years.
The following is a great infographic that shows statistics of elections and market outcomes:
What does this election mean for my money?
Look, I’m not going to tell you who to vote for. Nor do you want me to tell you. There are many important issues to you outside of what I have outlined here. It is always best to stay abreast of what is going on around you, especially when it affects your money. I wanted you to be educated on the financial impact of this election and with election history. I say that to say this: when it comes to your financial planning, NOTHING SHOULD CHANGE! Sure, if radical tax changes come around or if a catastrophic global event occurs, it is important to reevaluate your plan. However, you should never make investment decisions based on 4 year presidential cycles. You should invest for the long-term.
CONTROL WHAT YOU CAN CONTROL! You can’t control this election or the election after. What you can control, is being diversified across many asset classes. Also, make sure that you have cash reserves, insurance, and estate planning in place to protect your family. You can work with a professional to ensure the location of your assets is tax-efficient. You can make sure that you have a plan in place to turn your assets into a retirement income stream.
With the political whirlwind going on around us, I encourage you to take a step back. Only 38% of Americans have a written financial plan. How much time have you spent researching these candidates? How much time have you spent watching debates and videos on their stance on important issues? Have you put the same amount of effort into the decisions that will impact your financial future?