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Should I sell stock now to avoid higher taxes in 2013?

November 27, 2012: 6:30 AM ET

Both of my daughters own Home Depot stock that my father gave them. With the pending tax changes in 2013, should I sell their stock now and place the money into their 529s? One starts college in the fall of 2014, and the other in 2016. —Kathi L.

Long-term capital gains rates are set to rise from 15% to 20% in 2013 (though President Obama and Congress may end up agreeing on other rates). But you shouldn't let a potential tax increase guide your investment decisions, says Charles Buck of Buck Financial Advisors in Woodbury, Minn.

And yet Buck's advice is to sell the stocks — but for another reason: You have all your eggs in one Home Depot basket. "The stock price could and would drop quickly if we slipped into another recession," he says. Even a poorly timed market downturn could mean less money for your daughters' educations.

Since you're going to need the money in the next few years, consider selling and stashing the proceeds in your daughters' 529 plans. These plans typically offer broad diversification that can help protect your savings, and qualified distributions aren't subject to federal, and in many cases state, income tax.

— Austin Kilham

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