As we enter the final days of 2022, now is the time to sort out some financial issues. Here are some questions you might want to ask yourself.
Does my money work for me?
When interest rates were close to zero, liquidity became sluggish. It didn’t matter what you did with it. You could leave it in a checking account or passbook savings account or bury it in a tin can in your backyard and it paid off about the same – zero. But things are different now. With the Fed waging war on inflation, it’s worth making your money work. Instead of earning 0.2% in the bank, you can earn 4% in a money market fund or 4.5% in a three-month Treasury bill. So do yourself a favor and make your lazy money work for you again.
Have I maximized my retirement savings?
If you’re serious about saving for retirement, you need to make sure you maximize the savings in your retirement account each year. In 2022, the maximum contribution you can make to a traditional IRA is $6,000, or $7,000 if you’re 50 or older. In 2023, the contribution limits increase to $6,500 and $7,500. If you’re in a 401(k) plan, your contribution limit for 2022 is $20,500, or $27,000 if you’re 50 or older. In 2023, the 401(k) contribution limits will increase to $22,500 and $30,000 respectively.
If you’re struggling to fully fund your retirement accounts or spend a little extra over the holiday season, it might be worth thinking about it this way. Each year, the IRS opens a new window to help you prepare for your retirement. If you don’t take advantage of the opportunity, the window closes and you lose this opportunity forever. A new window will open the following year, but you can never go back and catch up on the opportunities you missed. These opportunities add up. The $6,500 you contribute to your IRA this year, invested to earn 7%, would grow to over $25,000 over the next 20 years. Contributions to your IRA can be made up to your tax return deadline; 401(k) contributions must be completed by the end of the year.
Do I have to accept tax losses?
Tough markets sometimes have silver linings. Tax losses are one of them. You can carry forward tax losses indefinitely. They can be used to offset capital gains or $3,000 per year of ordinary income.
Collecting tax losses is easy, but you have to be careful of the wash sale rule. The wash sell rule is triggered when you buy back a security that you sold at a loss within 30 days of the date of sale. If you want to recognize a loss while maintaining your market exposure, you can avoid the wash sale rule by simultaneously buying a similar security when you recognize the loss. Be careful when choosing the substitute title. If deemed “substantially identical,” the IRS could disallow the loss and subject you to the wash sale rule. For example, if you incurred losses selling an S&P 500 index fund and reinvested the proceeds in another S&P 500 index fund, the new fund would be considered substantially identical and the wash sale rule would apply. However, if you reinvested in a Russell 1000 index fund, which is closely correlated to the S&P 500 index, you would probably be safe.
Did I take my full minimum required distribution?
The IRS is serious about required minimum distributions (RMDs) from IRAs and other qualified retirement plans. If you turned 72 in 2022, you will likely need to take a required minimum distribution by April 1, 2023. If you are over 72, you will need to take your RMD by December 31 of this year. There are a few exceptions, but check with your advisor before assuming they apply to you. The penalties for missing an RMD are severe – 50% of the amount of the missed distribution.
The RMD rules for inherited IRAs are confusing, so please work with your advisor to see if you are required to take a distribution. The good news is that due to the confusion, the IRS has waived all fees for missed RMDs in inherited IRAs in 2021 and 2022.
Steven C. Merrell is a partner at Monterey Private Wealth Inc., an independent wealth management firm in Monterey. He welcomes your questions regarding investments, taxes, retirement or estate planning. Send questions to Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to [email protected].