4 Must-Dos Before Tax Season Wraps Up

Key Takeaways

• If you have the funds, consider making the 2024 contribution while it’s top of mind.
• If you were covered by a qualifying high-deductible healthcare plan in 2023, make sure that you’ve made those HSA contributions to the best of your ability.
• Now is a good time to take a good hard look at those 1099s from 2023.
• Higher required minimum distributions are likely for those who do have to take RMDs in 2024.

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar. It’s gratifying to close the books on tax season, but before you do, there are just a couple of things you might want to take care of. Joining me to discuss a few to-dos to consider while you’re still on the tax zone is Christine Benz. Christine is Morningstar’s director of personal finance and retirement planning. She is also the host of The Long View podcast.

Nice to see you, Christine.

Christine Benz: Good to see you too, Susan.

Consider Making a 2024 IRA Contribution

Dziubinski: All right. So, there are a couple of things we should to-do before we close the books on the season. One of the first ones is related to IRA maintenance. And here, you’re not just talking about those last-minute IRA contributions, are you?

Benz: No, but you should check that to make sure that if you were able to make a 2023 contribution, you should do so before the tax filing deadline of April 15. So, check that. While you’re in there, if you have the funds, if you have, say, a taxable account that lives side by side with your IRA, consider making the 2024 contribution while it’s top of mind. You’ll get investment earnings compounding sooner. And then I would say the backdoor Roth contributor, so people who have been making traditional IRA contributions and then converting periodically, just check to see that you’re moving those things along. I think it’s easy to make those traditional contributions with the thought that you will go back and do those conversions. Sometimes people like to wait a few weeks or a month or a couple of months. Just make sure that you are converting as you go along because you don’t want your account to rack up too much in investment gains, and then you’ll owe taxes on that amount that you then convert. So, check those things. Also check to make sure that you haven’t just rushed in a contribution and not actually gotten the funds invested in anything. So, make yourself a little checklist with respect to these IRA contributions because, especially for these backdoor contributors, it can be a little difficult to remember exactly which step you’re on in the process.

HSA Contributions and Maintenance

Dziubinski: Got it. So, HSA maintenance is also on your to-do list. What should people be thinking about here?

Benz: Right. So, same thing. The tax filing deadline is also the deadline for 2023 HSA contributions. So, if you were covered by a qualifying high-deductible healthcare plan in 2023, you want to make sure that you’ve made those contributions to the best of your ability. Then also just recheck your strategy for what you’re doing with your HSA. Some people are using their HSAs to spend, to cover their healthcare expenses as they incur them. Well, check to see what kind of yield you’re earning on that savings account because yields have gotten so much better. I was just checking Fidelity, which was the best HSA for savers and investors when Morningstar did this research last year. Fidelity is paying 5% on the savings account if you’re in the HSA. So, if you’re a saver, check just what kind of yield you’re getting. If you’re an investor, if you’re someone who has built up a balance in that HSA with an eye toward investing it in long-term securities, well, revisit your strategy there and also just revisit the menu of investment choices.

Ideally, you would find some low-cost exchange-traded funds or index funds on the list. If you don’t see what you like there, consider doing a transfer. I think people sometimes don’t think that they can get out of that employer-provided HSA, but you can do a transfer to another provider of your choosing, which I think is where our HSA landscape report comes in handy. If you’re out there looking for a good HSA provider, well, you can do these transfers. So, consider doing that if your HSA provider is not up to snuff.

Take a Look at 1099s

Dziubinski: Now, you also think now is a good time to take a good hard look at those 1099s from 2023. So, what should people be looking for in those?

Benz: Right. So, you want to scrutinize a couple of things. As I mentioned, yields have come up a lot. So, chances are, you are probably paying more taxes related to those income distributions. That’s a good thing. But it may be a wake-up call to kind of revisit your asset location, which types of assets you’re holding where. Ideally, if you have assets that are kicking off a lot of ordinary income, you’d want to silo them in something where you’re not paying those annual tax bills on the distribution. Ideally, you’d have them in some sort of tax-sheltered account. If that’s not practical, and the fact is many of us keep our more liquid assets in our taxable account, see whether on an aftertax basis a municipal-bond fund or even a municipal money market fund might not be the best option for you.

And then another thing to keep in mind if you have been paying hefty capital gains bills because your funds, oftentimes actively managed funds, have been making big distributions of capital gains, well, here again is an opportunity to just say, hey, is this the right place for me to hold this fund? Can I potentially get into a more tax-efficient portfolio mix for my taxable equity holdings? If you’ve had one of these serial capital gains distributors, you may consider doing kind of a tax-efficient makeover on that account. And then the silver lining if you’ve been paying big tax bills is that you’ve effectively been paying the taxes that will be due when you eventually sell or when you transfer into something else. So do a little bit of due diligence. I’ve written about this before, how this tax-efficient makeover may cost you less than you think it will.

Higher Required Minimum Distributions in 2024

Dziubinski: And then, lastly, you say that higher required minimum distributions are likely for those folks who do have to take RMDs in 2024. So, why worry about that now? And what should folks be thinking about and looking for?

Benz: Right. So, your RMD amount—and by the way, the people who are subject to required minimum distributions are people who are age 73 and above. So, if you’re in a younger cohort, no need to worry about this yet. But RMDs are based on whatever your balance was at year-end of the year prior. So, Dec. 31, 2023—good market year, right? And this is something that Ed Slott flagged in a recent video interview, where he has been hearing lots of complaining from people who are subject to these RMDs. It’s a high-class problem. Unfortunately, once you are of RMD age, you just have fewer levers that you can pull to get yourself out of these higher tax bills. There can be knock-on tax effects like IRMAA. And so, one thing to investigate is whether this qualified charitable distribution is potentially a tool you can use. It’s especially attractive if you’re charitably inclined and you’re subject to required minimum distributions. The amount that you send to charity via the QCD is effectively removed from the RMD calculation. You won’t owe taxes on that amount. The charity won’t owe taxes on that amount. So, a lot of reasons to consider using the QCD. If you’re making any charitable contributions at all and you’re over age 73, check it out or get some tax advice if you’re not perfectly comfortable making those qualified charitable distributions. But it’s a nice way to address a high RMD year.

Dziubinski: Well, Christine, thanks for your time. Seems like you’ve given us a few good reasons to maybe stay in the tax zone a little bit longer.

Benz: Just a little bit longer.

Dziubinski: Yeah.

Benz: OK. Thanks, Susan.

Dziubinski: I’m Susan Dziubinski with Morningstar. Thanks for tuning in.

Watch When Cashing Out an Old 401(k) Makes Sense for more from Christine Benz.