Very likely your investment portfolio includes bonds as well as equities. Like other bond investors, your objectives in purchasing them were to reduce volatility, preserve your capital, and have interest income higher than you could get from cash investments. Another benefit that many bondholders have realized during the prolonged period of low-interest rates has been appreciation of market value.
Some analysts predict that interest rates will begin to rise as the Federal Reserve begins to taper its purchase of long-dated government bonds that forced down long-term interest rates. If that happens, the unrealized capital gain in your bonds could disappear. In fact, if interest rates were to rise by two or three percentage points, corporate bonds could dip in value by 25 percent. Also, the modest amount of interest you are receiving may not keep pace with inflation.
To protect yourself against these possible events, you may have considered reducing your exposure in long-term bonds and moving to bonds with shorter maturities or to cash equivalents. However, you hesitate to incur the tax on the capital gain resulting from a sale of appreciated long-term bonds, particularly when your capital-gain tax rate may have increased as a result of legislation enacted last year. Another possible concern is the temporary reduction of the interest income on which you may be depending during retirement.
One strategy you might want to consider is contributing some of your long-term bonds for a charitable remainder annuity trust. You can lock in for your lifetime fixed payments that are likely above the interest you are receiving, avoid immediate taxation of the capital gain, and receive a charitable deduction that will reduce your income tax. Whereas the payments you are currently receiving from your bonds are fully taxable as ordinary income (unless you hold municipal bonds), a portion of the payments from the trust may be taxed at the lower capital-gain tax rate.
Please contact us to discuss a possible strategy for your own bonds.