Key Takeaways: 5 Financial Mistakes
- One year-end mistake to avoid with your money is retirees not receiving the required minimum distribution if they are required to do so.
- A related mistake, you say, that some people might be prone to is missing the opportunity or missing the boat on qualified charitable distributions.
- It’s a mistake not to reconsider your Medicare coverage during open enrollment in the fourth quarter.
- Not pursuing a tax-loss selling opportunity is a missed opportunity and a mistake.
- Finally, very savers investors could actually undercontribute to tax-deferred accounts in 2023 if they don’t do something soon.
Susan Dziubinski: Hello, my name is Susan Dziubinski from Morningstar. We’re already in the fourth quarter and the end of the year will be here before you know it. Christine Benz joins me to discuss money issues that can trip up investors at the end of the year. She is the director of personal finance and retirement planning at Morningstar.
Good to see you, Christine.
Benz: Susan, nice to see you.
Missing required minimum distributions
Dziubinski: Christine, At the top of your list of year-end mistakes to avoid with your money is retirees not taking the required minimum distribution if they are required to do so. Why is this potentially a bigger deal this year than perhaps it has been in previous years?
Benz: RIGHT. So this applies to people aged 73 and over in 2023. And that’s interesting because Secure 2.0, which was a piece of legislation with a lot of retirement-related provisions, actually reduced the penalty for not minimum distribution required. It was 50% of what you should have taken, but you didn’t take it. Today it’s 25%, which seems like a good thing. But some retirement and tax planning experts said it’s more likely that penalty will actually be imposed on people. In the past, it was virtually unheard of for anyone to find themselves facing this 50% penalty. They now think the IRS might be a little more serious about imposing this penalty. So if you wait until the last minute, you can potentially get a small tax benefit simply by doing additional tax-deferred compounding by having your money in the market. But the amount is the same. It is based on your 2022 end-of-year balance. So I think you shouldn’t delay. Go ahead and grab that RMD. Of course, don’t wait until December 29th or 30th or anything like that.
Missing qualified charitable distributions
Dziubinski: A related mistake, you say, that some people might be prone to is missing the opportunity or missing the boat on qualified charitable distributions. Who should consider a QCD in the fourth trimester if they haven’t already and why?
Benz: This is something that is accessible to anyone aged 70.5 years or older. Don’t ask me why these strange ages are…
Dziubinski: The ages don’t line up.
Benz: They don’t queue. They were used to it. This is no longer the case. So, 70.5, you are eligible to enjoy this QCD. And the idea is that you take a portion of your IRA up to $100,000 and you ask your investment provider to send it to the charity or charities of your choice. You can certainly contribute much less than $100,000. It’s just the maximum. But the advantage is that it doesn’t count as taxable income. If you are subject to these required minimum distributions, if you are age 73 and older, this will satisfy your RMD and tend to be more tax efficient than using non-IRA assets to make a charitable contribution. If you are inclined towards charity and are over 70.5 years old, you should consider this giving strategy. Ask your tax advisor or financial planner if this might be right for you.
Reconsidering Your Medicare Coverage in the Fourth Trimester
Dziubinski: Got it. While we’re on the subject of retirees, let’s talk about why it’s a mistake not to reconsider your Medicare coverage during open enrollment in the fourth quarter.
Benz: RIGHT. This runs from October 15 to December 7. And this is an opportunity to get your prescription drug benefit back, your Part D benefit. So the medications that you’re taking may have changed in the last year or your coverage with the plan that you have may have exchange. So renew that coverage, see if another type of plan might be beneficial. It would be time for a change. And then the other opportunity that open enrollment provides is the ability to move from Medicare Advantage to traditional Medicare or vice versa. And that’s a whole other topic that Mark Miller, our contributor, writes a lot about every year. But now is the time to reconsider this decision. So it’s just a window that people should take advantage of. This is just some homework on your part, but you may be able to come up with a better plan based on your needs.
Looking for tax-loss selling opportunities
Dziubinski: Let’s pivot and talk a little about portfolios. You might think that at this time of year, not pursuing a tax-loss selling opportunity is a missed opportunity. The stock market, except for the last few weeks, has been reasonably strong this year. It’s been decent. Is this a good use of people’s time this year?
Benz: Actually it depends. I think individual stock investors are certainly more likely to find these tax-loss selling candidates. But for people who didn’t have any tax losses in 2022, they may still have losses on their books, even if they hold widely diversified holdings in their portfolio, mutual funds or ETFs. And I would argue that bond investors may find tax-loss selling opportunities particularly opportune as we have seen continued weakness in the fixed income market. So, in particular, if you own some sort of long-term bond, ETF, or mutual fund, you may be able to lock in that tax loss and use it to offset up to $3,000 of ordinary income or any capital gains. if you know it.
Very savers investors could undercontribute to tax-deferred accounts in 2023
Dziubinski: Got it. And then, last but not least, you think that very savers investors could actually undercontribute to tax-deferred accounts in 2023 if they don’t do something soon. What should they watch?
Benz: Well, one thing is if people are aiming to put the maximum amount allowed into their company retirement plan, their IRA or their health savings account, those limits, those contribution limits, have seen a nice increase for 2023 to take into account the fact that we have had quite high inflation. So if you haven’t reconsidered how much you’re investing in these accounts, take a look and see if you’re on the right track to maximizing your investment. You may be able to change your withholding to help you reach the maximum contribution limit for all of these account types.
Dziubinski: Well, Christine, thank you very much for stopping us from making those mistakes in the fourth quarter. We appreciate that.
Benz: Thank you very much, Suzanne.
Dziubinski: My name is Susan Dziubinski from Morningstar. Thank you for listening.
Watch “What “higher and longer” interest rates can mean for your investment portfolio» to learn more about Christine Benz.