A Financial To-Do List for March

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Christine Benz, who is Morningstar's director of personal finance, has put together a month-by-month financial to-do list for 2021, and she is here today to talk about our March to-dos, which are making IRA and HSA contributions for 2020.

Hi, Christine. Thank you for joining us today.

Christine Benz: Hi, Susan. It's great to be here.

Dziubinski: So, you put this in sort of your March to-do list, but in reality, you really recommend that people don't wait until the last minute to make HSA and IRA contributions, right? It's not ideal to do it this late.

Benz: That's right. In fact, Vanguard had some research a few years ago. They called it the procrastination penalty. And the assertion was basically that you should make these IRA contributions as soon as you possibly can, because if you wait until the last minute, you're foregoing some compounding opportunities. And the younger you are and the more you procrastinate, the more those compounding opportunities you miss out on. So, ideally, you'd be doing this earlier, as soon as you possibly can, rather than rushing in these contributions at the last minute.

Dziubinski: So, let's talk a little bit more specifically about how making a contribution to a health savings account or to an IRA can help reduce your tax bill for 2020.

Benz: Right. So, you are typically able to deduct these contributions on your tax return with health savings accounts. It's easy if you were covered by a qualifying high-deductible healthcare plan in 2020. You can make a contribution regardless of your income. For IRAs, there are some complicated rules about who can deduct their IRA contribution on their tax return. You have to make a traditional IRA contribution. If you're making a Roth contribution, by definition, you can't deduct it on your tax return. But if you're making a traditional IRA contribution and your income falls below certain thresholds or you're not covered by a company retirement plan at work, you should be able to make that deductible contribution. It's also important to note, Susan, that these are what are called above-the-line deductions. That means that it doesn't matter whether you take the standard deduction or whether you're itemizing your deductions, you can still take advantage of these deductions, assuming that you qualify.

Dziubinski: Now, what about people who can't deduct their contribution for 2020? Should they make the contribution anyway for 2020? Should they focus more on a 2021 contribution?

Benz: Well, it really comes down to your level of investable cash. But I would say, for higher-income folks, you really want to think about these IRA slots as well as your company retirement plan slots, health savings account slots as really valuable resources for you. So, if you're in the position to make your IRA contribution, even if you can't deduct it on your tax return, you should try to do it every year. And this is particularly important for people who aren't covered by any sort of retirement plan at work. It's also important the higher income you are, the more advantageous it is for you to take advantage of these tax-sheltered savings vehicles.

Dziubinski: Some IRA investors might be thinking, you know, the stock market has actually done quite well in the past year and they might have some trepidation with putting assets toward stocks at this point. What would you say to that?

Benz: It's a really good question, Susan. I like the idea of people determining how to invest their IRA assets by taking a step back and looking at how their portfolios are currently positioned and then comparing that to whatever sort of benchmark they're using for setting their asset allocation. So, for people getting close to retirement or anyone who I would say is like 50-plus, chances are they are light on more defensive positioned securities, light on fixed income, for example. They may, once they've taken a look at their asset allocation, decide that they need to add to the safer part of their portfolio. For younger investors, after they've taken stock of their portfolios' asset allocation exposures, a likely area to add to would be the foreign-stock space, which has underperformed U.S. But again, take a step back, look at where your asset allocation is today, and direct those new contributions to those areas where you might be underweight.

Dziubinski: And what about investors who may want to contribute to an IRA but may be a little concerned that they might actually need those assets for other things down the road?

Benz: That's another really important question. For them, I think, there's a pretty easy answer, which is that they should take advantage of Roth IRA contributions. And the reason I like to recommend Roths in this context is that they give you more flexibility to take money out if you need it prior to retirement. So, specifically, you can withdraw your contributions at any time and for any reason from a Roth IRA without taxes or penalties. And so, that's a really nice escape hatch for people who have the best of intentions of leaving their money until retirement but think that they might need it out sooner for some other purpose. It's really flexible from that standpoint.

Dziubinski: And let's pivot and talk about HSA assets. How should investors be investing those assets or thinking about investing those assets?

Benz: Here I really like thinking about your use case for your HSA. How are you using this money on an ongoing basis? So, many people use HSAs as kind of a spending vehicle to cover their healthcare costs as they incur them. If that describes your situation, then you should keep the money in something quite liquid. You really don't want to take risk with that portion of your portfolio that you might expect to spend over the next year or the next couple of years. If you're saving for retirement in an HSA and that's the best way to take advantage of the long-term tax advantages of the HSA, well, there you might invest in something more aggressive. You might invest in alignment with the rest of your retirement portfolio. For some people, maybe it's a hybrid where they are using it for both purposes that they're spending a little bit, but they're also saving a little bit and putting it toward longer-term vehicles. So, take a step back, think about how you plan to use your HSA and use that to decide how you invest your funds.

Dziubinski: Well, Christine, thank you for your time today to give us our marching orders for March, and we'll see you again next month and talk about what we should be thinking about for April.

Benz: Thanks so much, Susan.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thank you for tuning in.