5 Financial To-Dos for Investors in Q4 2023

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar. We’re entering the fourth quarter, and that means the clock is ticking on financial and tax planning jobs that investors need to attend to before year-end. But don’t worry, we’ve got you covered. Joining me to discuss some key fourth-quarter financial to-dos is Christine Benz. She’s director of personal finance and retirement planning for Morningstar. Hi, Christine. Great to see you.

Christine Benz: Hi, Susan. Always great to see you.

Checking Up on Retirement Plan Contributions

Dziubinski: Your first fourth-quarter financial to-do is checking up on retirement plan contributions. What do people need to know this year?

Benz: The key thing to know is that you got a nice inflation increase related to retirement plan contributions for 2023. If you’re under 50, you can make up to $22,500 in terms of a company retirement plan contribution. If you’re over 50, you can take it up to $30,000. So, if you’re the type of person who just has your 401(k) plan contributions on autopilot, you don’t revisit them frequently, take a look at that in these waning days of this year. If you can supersize your contribution, especially if you have an eye toward maxing out to the limit, then you may be able to increase those contributions and get that full amount in. So, check up on your retirement plan contributions. You have a little bit more leeway with respect to IRA and health savings account contributions. You actually have until your tax-filing deadline in mid-April 2024 to get those in. So, mainly focus on those retirement plan contributions.

Making Charitable Contributions

Dziubinski: Got it. Another fourth-quarter to-do is making charitable contributions. That’s also on your to-do list. Now, many taxpayers may think that charitable giving isn’t really going to move the needle for them in terms of tax savings. Is that really true?

Benz: Well, it’s somewhat true in that the Tax Cuts and Jobs Act did do a couple of things that made most people not itemize their deductions on their tax return. It increased the standard deduction and it also put this $10,000 cap on state and local taxes that you could claim as a deduction. So, 90% of taxpayers are currently standard-deduction people. They’re not itemizing. But there are a couple of ways to think about making charitable contributions. One would be to do this bunching strategy where you make big charitable contributions in a given year with an eye toward getting your itemized deductions over that standard-deduction threshold. And a really nice strategy there is to either donate appreciated securities to the charity itself or to use a donor-advised fund in this context. So, you’re taking appreciated securities, ideally ones that are creating risk in your portfolio, you’re donating those to charity. And you can get a nice tax deduction and effectively wash out the taxes associated with the appreciation in that position. And you may also be able to address some risk in your portfolio.

That’s a strategy to consider episodically for investors. Then another strategy for people who are over age 70 and a half is one we’ve talked about before. It’s called a qualified charitable distribution. This is where you’re taking up to $100,000 of your IRA assets, donating those directly to charity, and instructing your investment provider to make those contributions to charity for you. And this reduces your taxable income and will tend to be a more effective strategy than taking money out of your IRA, depositing it into your account, writing a check, and then deducting that contribution on your tax return. So, it’s an option for anyone who’s aged 70 and a half or above.

Required Minimum Distributions in 2023

Dziubinski: So, now speaking of age, people who are of a certain age have to take their required minimum distributions if they haven’t done so already. What do they need to know this year?

Benz: Well, a couple of key things. One is that the RMD age is moving up for 2023 to age 73. The other thing to know is that the penalty for missing an IRA RMD is decreasing to 25%. It had been 50% of the amount that you should have taken but didn’t. So that’s going down a little bit, but tax experts that I’ve talked to actually think that the IRS may get a little bit more serious about enforcing that missed RMD penalty. So just be careful. Take your RMDs on time, and take them by year-end. And I always say people love to hate their RMDs—use your RMDs to improve your portfolio. Take a look back, look at your portfolio’s asset allocation, and compare it to whatever your target is. Prune your RMDs from the securities that you wanted to trim otherwise. Use them as a way to make your portfolio a little bit better.

Scout for Tax Losses in Your Portfolio

Dziubinski: Christine, another fourth-quarter to-do on your list is for investors to scout around for tax losses in their portfolios. Now, given that it’s been a pretty decent year in the market, where might investors find some of those losses?

Benz: For individual stock investors, they’ll probably have an easier time of it in an upward-trending market. You may still have positions that are below what you paid for them. So, individual stock investors should take a look at the positions in their portfolios. If you’re more of a fund investor, if you have broadly diversified funds in your portfolio, a couple of sectors are worth looking at. So real estate has been down in the dumps for reasons that are familiar to many of us. That’s a category to consider if you hold some sort of a REIT fund or a REIT ETF in your portfolio and you’ve made recent purchases that may be trading below your purchase price.

Utilities, kind of a niche area, not so popular anymore, but utilities have not had a great year. And then another category to consider would be fixed income, where even though the fixed-income market has made a little bit of a comeback this year, investors really saw red ink in 2022. And if they didn’t do anything then, they may still have positions that are trading below what they paid for them. So, especially if you have long-term fixed-income positions, but even intermediate-term fixed-income positions, you may be able to find some tax-loss opportunities there.

Mutual Funds and Capital Gains Distributions

Dziubinski: And then lastly, Christine, you also think it’s time to start watching out for mutual funds’ capital gains distributions. It’s likely to be another bad year from the standpoint of those distributions. And what, if anything, can investors do about that?

Benz: I think it is potentially likely to be another bad year because we continue to see active funds having to meet redemptions. That means that they’re having to sell positions to pay off those departing shareholders. That has tended to create some of these taxable capital gains distributions. We’ve been seeing that maybe outflows from active funds are slowing down a little bit relative to years past. But nonetheless, the broader trend seems to be persisting. So, if you’re someone who has mutual funds in your portfolio, especially active funds, you want to keep an eye out for these estimates that start to come online, usually starting in October. And then the distributions themselves typically happen in the November/December period. Keep an eye out for estimates.

Gauge the magnitude of the distributions on the holdings in your portfolio. I would say if there is a distribution of, say, less than 10% of the fund’s net asset value, not a big deal. But if you see those over 10% distributions, maybe that’s a reason to take a step back, look at your cost basis in that position, and see how it compares to the current net asset value of the fund. You may find, if you have one of these serial capital gains distributors in your portfolio, you may find that there’s not that big a distance between those two data points. And so that means that if you wanted to sell preemptively, the tax bill associated with that position may not be that great. So, do a little bit of homework. I’ve written about this topic about how to give your portfolio a tax-efficient makeover. Generally speaking, selling preemptively doesn’t make sense. But if you have had one of these funds that has been consistent, check it out and you may find that just getting into some sort of tax-efficient ETF or index fund is the right way to go for the future.

Dziubinski: Well, Christine, thanks for getting us started early on our fourth-quarter to-dos. We appreciate your time.

Benz: Thank you so much, Susan.

Dziubinski: I am Susan Dziubinski with Morningstar. Thanks for tuning in.

Watch “Good News About RMDs in 2023″ for more from Christine Benz.