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Your November Financial To-Do List

While you're thinking about open enrollment, take some time to review your insurance coverage and tax situation.

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. 2021 is rapidly winding down, but there's still time to improve your financial position heading into the New Year. Joining me to share a few money matters to put on your calendar for the month of November is Christine Benz. Christine is Morningstar's director of personal finance and retirement planning.

Hi, Christine. Nice to see you.

Christine Benz: It's good to see you too, Susan.

Dziubinski: So, one item on your to-do list for November is to conduct an insurance review. So, why is this something that people should be doing annually? And why is November a good time to take care of that?

Benz: Well, you should do it annually because your situation changes, your health needs might change, your personal situation, dependence, and so forth might change. The coverage that you have might change, the competitiveness of the pricing of that coverage might change. So, ideally, you would reshop these coverages annually, and I think November is a logical time to do that total insurance review, because this is the time of year when many of us are already participating in open enrollment through our employers in terms of our healthcare coverage. So, it's kind of a logical time to revisit all of your insurance coverages.

Dziubinski: Speaking of health insurance coverage through your employer, one fork in the road that people face is should they go with that preferred provider option, the Cadillac option that we think of? Or should they go with a high-deductible plan if their employer does provide that? How should they be thinking about that?

Benz: The premium difference will probably be pretty obvious. So, typically, you will pay a higher ongoing premium to be covered by that PPO. With the high-deductible healthcare plan, "high deductible" is right in its name. You are on the hook for some of those expenses. And so, I think you want to think about your financial wherewithal, your ability to cover expenses that you might incur before insurance kicks in. That's really an important part of the calculus. There are tools that you can find, calculators that can help you crunch numbers based on your own healthcare usage to decide which is the right option for you. You sometimes hear jokes that the high-deductible plan is appropriate for the healthy and wealthy, because in an ideal use case you would have someone who has the funds to cover health expenses on an ongoing basis but doesn't have a lot of healthcare usage. So, they can take advantage of the health savings account that typically accompanies a high-deductible plan but instead let that money grow, even grow all the way until retirement, and take maximum advantage of the tax benefits during that time.

Dziubinski: And you alluded to the health savings account. So, if you have chosen your company's high-deductible plan, you definitely should be looking into what the health savings account is that comes along with that usually.

Benz: Right. And so, it needs to be a qualifying high-deductible healthcare plan for you to be able to pair it with an HSA. But certainly, to the extent that you expect to have any healthcare expenses whatsoever next year, and you're signing up for a high-deductible plan, also participate in the health savings account. And the nice thing is that if you're doing this through your employer, those contributions are automatically coming out of your paycheck, so they're pretty painless, and it's a nice way to build yourself a cushion to cover those healthcare expenses before insurance kicks in. 

Dziubinski: So, let's move away from health insurance now and just talk about what other types of insurance coverages should you be thinking about in November.

Benz: If you're doing a total survey of your coverage, you'd want to look at your property and casualty, so your homeowners, your auto insurance. Take a look at life insurance coverage if your situation with dependents has changed. For example, some people who are getting a little further in life and their kids have flown the nest and are no longer dependent on them, they might be a good candidate for actually dropping life insurance coverage, if it's term insurance especially. That might be an easy decision. So, do a review of life, and certainly, disability is a coverage type that I often recommend, because when you look at the statistics, we're very likely to need disability insurance coverage at some point during our lifetime. So, if you're not currently purchasing disability, take a look at whether that might not make sense given your situation.

Dziubinski: To pivot away from insurance for a minute, another one of the to-dos on your list for November is to watch out for capital gains distributions from your funds. This is the time of year where we start to see estimates, fund families come up with estimates. What are you thinking--what do you expect that we're going to see this year? Is it going to be another bad year for capital gains distributions, you think?

Benz: I think it may well be, Susan, because we've had this confluence of events that has been somewhat persistent, where we've had a very strong market environment again so far in 2021. We've had great gains from the U.S. stock market especially, but international stocks have performed well. So, a lot of different investment types have had another great year. So, they have gains to pay out. And then, another factor in the mix is that we have had these ongoing fund flows out of actively managed mutual funds and into index funds and especially exchange-traded funds, and that selling pressure that is building up in some of these active funds forces management of these funds to sell winning securities because they need to pay off the departing shareholders. This has been something we've seen over the past several years. I wouldn't expect it to abate, except perhaps we have seen maybe the worst is over in terms of active outflows, but I keep thinking that and we keep seeing them. So, I do think that investors in active funds within a taxable account should brace themselves that we may see more distributions, especially from U.S. growth funds. I should also underscore, none of this matters if you're holding your investments within a tax sheltered account. This only matters if you have nonretirement assets that you're holding in a taxable brokerage account. That's the only reason you would be subject to these capital gains distributions.

Dziubinski: So, let's say, I do own a fund that's estimated to give me a sizable capital gains distribution this year. What should I be thinking about? Is there anything I should be doing about it?

Benz: Well, I think it's important to remember that as a fund shareholder, we're liable for taxes on two separate levels. So, one is if the fund makes income distributions or capital gains distributions like we're talking about in a given year. Well, if I own the fund in a taxable account, I'll owe taxes on those distributions. Separately, I'll also owe taxes when I sell the fund on any gain that I have in the fund. The thing about the distributions that we've been talking about is that you are able to increase your cost basis in the holding. So, if you receive one of these distributions and you reinvest it, you don't spend it, that increases your cost basis. That means that when I hit that second phase and I want to sell myself, my capital gains basis has been stepped up and so the tax hit at that time is relatively less. So, I think the key decision point here is whether this is something you want to hold or not. Don't let taxes be the decision-maker. Look at your holding. If it's something that you wanted to sell anyway, and it's about to make a distribution, you could sell now ahead of the distribution. And remember that even if you hang on, you do get that increase in your cost basis to account for these taxes that you're paying this year, and that lessens the tax bill when you eventually sell.

Dziubinski: Christine, thank you so much for your time today and for giving us some tasks to take care of in the month of November. We appreciate it.

Benz: Thank you so much, Susan.

Dziubinski: I'm Susan Dziubinski. Thanks for tuning in.