Tying up loose ends

December 23, 2022

As we come into the final days of 2022, now is a good time to tie up some financial loose ends. Here are some questions you might want to ask yourself.

Is my cash working for me?

When interest rates were near-zero, cash got lazy. It didn’t matter what you did with it. You could leave it in a checking account or a passbook savings account or bury it in a tin can in your backyard and it earned about the same—zero. But things are different now. With the Fed waging war on inflation, it pays to get your cash working. Instead of earning 0.2 percent at the bank, you can earn 4 percent in a money market fund or 4.5 percent in a 3-month Treasury Bill. So do yourself a favor and get your lazy cash working for you again.

Have I maximized my retirement savings?

If you are serious about saving for retirement, you need to make sure you maximize your retirement account savings every year. In 2022, the maximum contribution you can make to a traditional IRA is $6,000, or $7,000 if you are 50 years old or older. In 2023, the contribution limits increase to $6,500 and $7,500. If you participate in a 401(k) plan, your contribution limit for 2022 is $20,500, or $27,000 if you are age 50 and over. In 2023, the 401(k) contribution limits will increase to $22,500 and $30,000 respectively.

If you find yourself struggling between fully funding your retirement accounts or spending a little more this holiday season, it might help to think about it this way. Every year the IRS opens a new window to help you prepare for retirement. If you do not take advantage of the opportunity, the window closes and you lose that opportunity forever. A new window will open the following year, but you will never be able to go back and make up for the opportunities you missed. Those opportunities add up. The $6,500 you contribute to your IRA this year invested to earn 7 percent, would grow to be more than $25,000 in the next 20 years. Contributions to your IRA can be made up until your tax filing deadline; 401(k) contributions need to be completed by year-end.

Should I take some tax losses?

Difficult markets sometimes have silver linings. Tax losses are one of those. You can carry tax losses forward indefinitely. They can be used to offset capital gains or $3,000 a year of ordinary income.

Harvesting tax losses is easy, but you need to be careful about the wash sale rule. The wash sale rule is triggered when you repurchase a security you sold at a loss within 30 days of the sale date. If you want to book a loss, but keep your exposure to the market, you can avoid the wash sale rule by simultaneously buying a similar security at the time you book the loss. Be careful when selecting the substitute security. If it is deemed to be “substantially identical,” the IRS could disallow the loss and make you subject to the wash sale rule. For example, if you took losses by selling one S&P 500 index fund and reinvested the proceeds in a different 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 required minimum distribution?

The IRS is serious about required minimum distributions (RMDs) from IRAs and other qualified retirement plans. If you turned 72 during 2022, you will probably need to take a required minimum distribution by April 1 of 2023. If you are older than 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 you assume that they apply to you. Penalties for missing an RMD are severe—50% of the missed distribution amount.

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 because of the confusion, the IRS has waived any fees for missed RMDs in inherited IRAs in 2021 and 2022.

Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey.   He welcomes questions you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to smerrell@montereypw.com.