Key Takeaways: 5 Money Mistakes
- One year-end mistake to avoid with your money is retirees missing on taking a required minimum distribution if they’re required to do so.
- A related mistake, you say, some people might be prone to is missing the opportunity or missing the boat on qualified charitable distributions.
- It’s a mistake not to reconsider your Medicare coverage during open enrollment in the fourth quarter.
- Not scouting around for tax loss sales opportunity is a missed opportunity is also a mistake.
- Lastly, high-saving investors could actually be under-contributing to tax-deferred accounts in 2023 if they don’t do something soon.
Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar. We’re already in the fourth quarter, and year-end will be here before you know it. Joining me to discuss some money matters that can trip up investors as the year winds down is Christine Benz. She is Morningstar’s director of personal finance and retirement planning.
Nice to see you, Christine.
Benz: Susan, great to see you.
Missing Required Minimum Distributions
Dziubinski: Christine, at the top of your list of year-end mistakes to avoid with your money is retirees missing on taking a required minimum distribution if they’re required to do so. Why is this potentially a bigger deal this year than maybe it’s been in years past?
Benz: Right. So, this is relevant for people who are age 73 and above in 2023. And it’s interesting because Secure 2.0, which was a piece of legislation with a lot of retirement-related provisions, actually lightened the penalty for missing a required minimum distribution. It had been 50% of what you should have taken but didn’t take. Now it’s 25%, which seems like it should be a good thing. But some retirement and tax-planning experts said that it’s more likely that this penalty will actually be levied upon people. In the past, it was practically unheard of that anyone would be shouldering that 50% penalty. Now they think that the IRS may be a little bit more serious in terms of levying that penalty. So, if you’re waiting until the last minute, there is potentially a little bit of tax benefit you can pick up just by some additional tax-deferred compounding by having your money in the market. But the amount is the same. It’s based on your year-end 2022 balance. So, I think don’t delay. Go ahead and take that RMD. Certainly, don’t wait until Dec. 29 or 30 or something like that.
Missing Qualified Charitable Distributions
Dziubinski: A related mistake, you say, some people might be prone to is missing the opportunity or missing the boat on qualified charitable distributions. Who should be looking at a QCD in the fourth quarter if they haven’t done so already and why?
Benz: This is something that is available to anyone who is age 70.5 or higher. Don’t ask me why these odd ages are …
Dziubinski: Ages don’t line up.
Benz: They don’t line up. They used to. They don’t anymore. So, 70.5 you’re eligible to take advantage of this QCD. And the idea is that you’re taking a portion of your IRA up to $100,000 and directing your investment provider to send it to the charity or charities of your choice. You can certainly make a much lower contribution than $100,000. That’s just the max. But the advantage is that this does not count as taxable income. If you are subject to those required minimum distributions, if you’re age 73 and above, it will satisfy your RMD, and it will tend to be more advantageous taxwise than using non-IRA assets to make a charitable contribution. If you’re charitable inclined and you are over age 70.5, you ought to be looking at this giving strategy. Ask your tax advisor or financial planner if that might make sense for you.
Reconsidering Your Medicare Coverage in Q4
Dziubinski: Got it. While we’re on the topic of retirees, let’s talk about why it’s a mistake not to reconsider your Medicare coverage during open enrollment in the fourth quarter.
Benz: Right. This is running from Oct. 15 through Dec. 7. And this is an opportunity to reshop your prescription drug benefit, your Part D benefit. So, the drugs that you’re taking may have changed over the past year or your coverage with the plan that you’ve got may have changed. So, reshop that coverage, see if another type of plan might be advantageous. This would be the time to switch. And then, the other opportunity that comes up with open enrollment is the opportunity to either switch out of Medicare Advantage into traditional Medicare or vice versa. And that’s a whole other subject that Mark Miller, our contributor, writes a lot about every year. But that’s your time to reconsider that decision. So, it’s just a window that people should take advantage of. It’s only a little bit of homework on your part, but you may be able to get into a better plan given your needs.
Scouting for Tax Loss Sales Opportunities
Dziubinski: Let’s pivot over and talk a little bit about portfolios. You think that this time of year not scouting around for a tax-loss sales opportunity is a missed opportunity. The stock market, the last couple of weeks aside, has been reasonably strong this year. It’s been decent. Is this a good use of people’s time this year?
Benz: Well, it depends. I think, certainly, individual stock investors are more likely to find those tax-loss sale candidates. But for people who didn’t take any tax losses in 2022, they may still have losses on their books, even if they have some broadly diversified holdings in their portfolio, mutual funds or ETFs. And I would say bond investors may find particularly opportune tax-loss sale opportunities because we’ve seen ongoing weakness in the fixed-income marketplace. So, especially, if you have some sort of a long-term bond holding, an ETF, or a mutual fund, you may be able to lock in that tax loss and use that to offset up to $3,000 in ordinary income or any capital gains if you’ve got them.
High-Saving Investors Could Be Under-Contributing to Tax-Deferred Accounts in 2023
Dziubinski: Got it. And then, last but not least, you think high-saving investors could actually be under-contributing to tax-deferred accounts in 2023 if they don’t do something soon. What should they be looking at?
Benz: Well, one thing is, if people are aiming to put the maximum allowable amount into their company retirement plan or their IRA or their health savings account, those limits, those contribution limits, got a nice bump up for 2023 to account for the fact that we’ve had pretty high inflation. So, if you haven’t revisited how much you’re putting into those accounts, take a look at that, see if you’re on track to max out. It may be that you can change your withholding to help get you up to the maximum contribution limit for all of those account types.
Dziubinski: Well, Christine, thanks so much for preventing us from making these mistakes in the fourth quarter. We appreciate it.
Benz: Thank you so much, Susan.
Dziubinski: I’m Susan Dziubinski with Morningstar. Thanks for tuning in.
Watch “What ‘Higher for Longer’ Interest Rates May Mean for Your Investment Portfolio” for more from Christine Benz.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.