A Year-End Checklist for Retirees

As I write this, I'm sipping a Thanksgiving Blend from one of the new Starbucks holiday cups, and workers are setting up the Christkindlmarket in Daley Plaza outside of Morningstar headquarters. The tree is up at Macy's and the bargain-hunters have cleared any remaining Halloween candy from the shelves at Walgreens.

Yup, it's November, and with just two months left in the year, a host of financial and investment-related tasks that seemed easy to back-burner earlier in the year are coming up on a hard deadline.

The post-Halloween, pre-Thanksgiving period is the ideal time to tackle some of these jobs. Some of them aren't simple--such as taking your required minimum distributions in a way that improves your portfolio or selecting the best prescription drug plan. To give these jobs your full attention, it's better to tackle them before the holiday mania is in full swing.

To help focus your energies--and your mind--here's a year-end to-do list for retirees.

Re-shop Your Medicare Put this one at the top of your punch list, because the deadline is Dec. 7. Medicare-eligible adults can re-shop their Medicare coverage--specifically, their Medicare Part D (prescription drug) coverage and Medicare Advantage plans--during this period. Mark Miller, a Morningstar contributor who focuses on Social Security and Medicare, among other topics, says it's wise for seniors to shop their coverage each year. In particular, it's a good time to revisit your existing Medicare Part D coverage: Not only can premiums jump up, but the list of covered drugs--and the prices you pay for them--can change. In addition, enrollees in Medicare Advantage plans can and should revisit their coverage during open enrollment season; the list of healthcare providers available through a given Medicare Advantage plan may change from year to year, as might the drug coverage for a given plan. This article provides a checklist of what to look for as you re-shop your Medicare coverage.

Review Your Tax Situation in Nonretirement Accounts Mutual funds typically distribute capital gains in December, if the fund manager has sold securities that appreciated in price in the year prior, and over the past month have begun publishing estimates of impending distributions. As in the previous few years, those distributions could be large at some funds. Not only has 2017 been a stellar market for stocks--one in a fairly long string of strong equity returns dating to 2009--but ongoing redemptions at some actively managed equity funds have exacerbated capital gains distributions. That's because managers have had to sell off stocks to pay off departing shareholders, and that money is then distributed over a shrunken base of shareholders.

Capital gains distributions are a nonevent if you're investing in a tax-sheltered account and reinvesting those distributions--or if you're investing in a taxable account and spending the capital gains distributions. (You'd owe tax on the distribution no matter what.) But capital gains distributions can be a nuisance for investors in taxable accounts who are reinvesting those distributions. Those distributions are taxable, meaning that you could owe taxes on a fund even if you yourself haven't sold any shares. Selling pre-emptively can make sense if you wanted to lighten up on a holding for fundamental reasons or if your fund has been a serial distributor and you'd like to make your taxable portfolio more tax-efficient. As discussed in this article, you receive an increase in your cost basis when a fund makes a distribution that you reinvest, so a healthy share of the capital gains taxes you might pay when you unload a fund in which you have a gain may already be accounted for. Investors in the 10% and 15% tax brackets owe capital gains tax at a 0% rate and are prime candidates for tax-gain harvesting, discussed here.

Year-end is also your deadline to harvest tax losses if you want to use them to reduce your tax bill for the 2017 tax year. Of course, most portfolios will have more gainers than losers, given the strength of the equity market, but individual-equity investors may be able to identify some losing positions: 99 individual equities with market caps of more than $10 billion have posted losses of more than 10% over the past year. You can sell depreciated securities from your taxable account and use those losses to offset an unlimited amount of capital gains and up to $3,000 in ordinary income.

Take Required Minimum Distributions You have until year-end to take your required minimum distributions from IRAs and company retirement plans. But don't wait until the very last minute if you can avoid it. With a little time and energy, you can actually use RMDs to help improve your portfolio. As discussed in this article, you don't need to take RMDs from all of your holdings; rather, you can strategically employ RMDs to help rebalance and improve your portfolio's risk/reward profile. My suggestion is to conduct a cohesive year-end portfolio review, and use that exercise to help determine which holding(s) you cut back on to help meet your RMDs. If you're time-pressed, pruning your best-performing holding over the past three years is a good shortcut.

Develop Strategy for 2017 Charitable Gifts Year-end is also your deadline to make charitable contributions if you want to be able to deduct them on your 2017 tax return. If you're using the qualified charitable distribution maneuver--that is, steering a portion of your IRA distribution directly to a qualified charity--you also need to make that contribution by year-end. You can use QCDs to satisfy required minimum distributions, as discussed here . Alternatively, you can steer highly appreciated holdings from your equity portfolio into a donor-advised fund; you can deduct the amount you've contributed to the donor-advised fund, then take your time in getting the money deployed into the charities of your choice.

Tally Deductible Healthcare Expenses In a related vein, it's also a good time to gauge your out-of-pocket healthcare expenses for the year to date, including health insurance and Medicare premiums, premiums for long-term care insurance, nursing home costs, and prescription drug expenses. If those expenses exceed 10% of your adjusted gross income for 2017--up from the 7.5% threshold that applied to individuals 65 and older through 2016--you'll be able to deduct any additional amount on your tax return for the year. If it appears that you're close to hitting that threshold heading into 2017's fourth quarter, it may make sense to incur healthcare expenses this year rather than next in situations where you have the leeway to do so. But don't go too far out of your way--you don't get to deduct the 10% of adjusted gross income plus any overage; you can only deduct the amount that exceeds 10% of your adjusted gross income.

Tee Up Cash for Next Year If you use a bucket strategy for managing your retirement portfolio, it's a good time to check your liquid reserves. The last thing you want is for your cash bucket to run dry amid a weak market for long-term securities. The approach I favor for maintaining ample liquid reserves during retirement is to bolt a cash "bucket" onto the long-term portfolio, then periodically refill it with a mix of income and dividend distributions, as well as rebalancing proceeds from the long-term portfolio. Retirees who are subject to RMDs can trim their distributions from highly appreciated portions of their portfolios and use those funds to supply cash for their living expenses in the year ahead.