What the Senate’s FIFO proposal means for your portfolio

If you make a habit of following American news, chances are you’ve heard quite a bit recently about tax reform. Congress is seizing an opportunity to enact the first major overhaul of our country’s tax code in 31 years — the largest such revision since the Tax Reform Act of 1986 — inciting strong opinions across the political spectrum. Most of the talk centers around reduced corporate rates and individual income taxes. But what does it mean for investors? How might it affect our clients’ investments and the retirement plans that outline their family’s future?

One provision you might start paying attention to is FIFO, or “first-in-first-out.”

Thomas E. Faust, Jr., a global asset manager, issued a whitepaper this week decrying the potential effects this regulation would have on his company’s clients and other individual investors. Under current law, we can purchase and sell stocks however we choose and whenever we choose. But that might not be the case if the current version of the bill is passed.

“The Senate version of the tax reform bill seeks to change that,” writes Faust. “For individual investors who hold multiple positions in the same stock purchased over time, the provision would require them always to sell — and make gifts of — the oldest shares first.”

What does it all mean?

Because stocks increase in value over time, investors would now be required to sell thier oldest — and most valuable — holdings first, incurring a higher immediate capital gains penalty. The Senate bill estimates this rule will add $2.4 billion in new tax revenue over the next ten years. “A lot more in taxes for investors to pay,” writes Faust, “and only a drop in the bucket toward offsetting the overall costs of tax reform.”

But the tax considerations are only part of the problem with FIFO. What Faust and other investment advisors throughout the country lament is the limited choices they would be able to make in the best interest of their clients. “If the provision is enacted, investors in successful stocks will be less inclined to sell down their investments — because they’ll owe more in taxes — and discouraged from buying more of the same stock,” writes Faust. “Since tax considerations will increasingly influence what investors buy and sell, markets will become less effective in allocating capital appropriately to best support the growth of the economy.”

FIFO will fall especially hard on retirees

Faust provides an example of a worker who has developed a robust stock portfolio over a 30- or 40-year career: “When it finally comes time to sell stock to pay for retirement, no longer could the specific shares be selected on an economically rational basis. Instead the retiree will be forced always to sell the oldest — and often biggest gain — shares first. Whether or not the retiree’s nest-egg proves big enough to carry all the way through retirement is increasingly called into question.”

The rules don’t apply to everyone

So this provision applies equally to all investors, right? Wrong. FIFO would not apply to managers of mutual funds, ETFs (exchange-traded funds), and other “regulated investment companies.” They would be able to continue to buy and sell stocks just as they do under current law, where our clients would not. “Individually managed portfolios would have that right taken away,” writes Faust. “That’s not fair. All investors should have the freedom to manage their investments as they choose.”

FIFO is not yet set in stone

Now that the Senate has passed its version of the tax reform bill, it kicks back to the House of Representatives, who will discuss a final version of the bill this week with Senators before putting it to vote. It’s not too late to tell your Representative you feel there are better ways to pay for tax reforms than reducing investment options for retirees. If your retirement depends on the outcome of this bill, make your voice heard by clicking the link below. And if you have questions about what tax reform could mean for your portfolio, don’t hesitate to call your OWRS advisor!



Ryan Murphy 2017-12-05T20:28:03+00:00