A Few Personal Finance Housekeeping Items as Yearend Nears

Thanksgiving is just around the corner, and if you are at all like us, the rest of this year will be a blur—a mad-dash of decorating, prepping holiday feasts, braving the busy travel season, tracking down that perfect present and more. At times like this, essential housekeeping items can easily get back-burnered and forgotten, which can be problematic when it comes to your personal finances—as you may have some important tasks with yearend deadlines. Here, for your convenience, is a short checklist of things to make time for before the clock runs out.

Take your RMD.

Yes, for those age 72 and older with qualified retirement accounts—including traditional IRAs and 401(k)s—you must withdraw a predetermined amount each year and pay income taxes on it. If you fail to complete this required minimum distribution (RMD) by yearend, you will face an additional penalty of 50% of the RMD amount not taken in time.^[i] So, if you haven’t taken yours, this would be a good time to get on it.

Your RMD amount will be your account value at last year’s close divided by your life expectancy as shown in the Internal Revenue Service’s (IRS’s) life expectancy tables. The IRS publishes this information and has a handy worksheet you can use to calculate how much you owe, but the brokerage firm housing your account (or your 401(k)’s plan administrator) should also be able to calculate it for you. When you request the distribution, you may elect to have taxes withheld, which could help you avoid having to scramble in April and reduce the risk of underpayment penalties.

Now, one unfortunate wrinkle this year is that if you have been invested in stocks and/or bonds, your account value is probably lower now than it was at yearend 2021, magnifying the impact of your distribution. For those hoping to have maximum market exposure when stocks and bonds rebound from this year’s downturns, we imagine this is frustrating. However, as we covered in some depth here, there is a workaround if you don’t need the distribution to cover living expenses: You can elect to take your distribution by transferring securities in-kind from your IRA to a taxable brokerage account. You will still have to pay taxes on the amount withdrawn, but you won’t have to liquidate your holdings and reduce your overall market exposure. (Your cost basis and holding period reset to the date of distribution.) But this does allow you to leave your funds invested for the long term.

Lastly, if you don’t need the money to live on, you may consider using some or all of your RMD for a qualified charitable distribution (QCD). This not only satisfies your RMD, but it excludes the donated amount from your gross income, enabling you to get the tax break even if you don’t itemize your deductions. The annual maximum for this is $100,000 for individuals and $200,000 for married couples. If you are interested, you might start researching qualified charities now. But you won’t want to wait for the holidays to make the gift. We suggest giving yourself more leeway than that to get donation instructions from the charity and inform your financial professional of your intent.

Make any charitable contributions you wish to deduct.

Speaking of charitable contributions, those who itemize deductions may still make normal tax-deductible donations. If you wish to do this on your 2022 tax return, the donation deadline is December 31. Conveniently, charities from coast to coast are sending out holiday donation solicitations, giving all of us a helpful reminder.

Top up your retirement accounts.

This is also a good time to ensure you are taking full advantage of tax-deferred accounts, including traditional IRAs and 401(k)s. For the former, this year’s contribution limit is $6,000, plus an extra $1,000 for folks 50 years and older. For 401(k)s, the max is $20,500 plus $6,500 in catch-up contributions for the 50-and-older set. And if your employer offers a partial contribution match, you get even more—the closest thing to a free lunch the world has to offer. So have a quick gander at your year-to-date contributions, and if you aren’t on track to max out (or close to it)—and you have the means to contribute more amid this year’s big bump in living costs—consider topping them up.

Spend your FSA.

If you have a Flexible Spending Account (FSA)—an employer-sponsored account where you can contribute pre-tax money to pay for healthcare-related expenses—log into it and check your balance pronto. Normally, participants can’t let funds accumulate from year to year unless they have a carryover provision, which lets them keep a maximum of $570, depending on their plan. They must spend them down or forfeit the remainder. However, Congress waived this requirement during the pandemic, letting people carry over their full contributions in 2020 and 2021. Therefore, someone who contributed the maximum and hasn’t spent any of it could have $8,350 that they must use or lose by yearend (or by next March 15 if their plan has a grace period).

If you have a pile of unspent money, don’t get discouraged: A huge laundry list of items and services are eligible for FSA money. You can find the rundown in full in IRS Publication 502. It includes eyeglasses, hearing aids (which are newly available over the counter), chiropractic treatment, crutches, medical supplies, contact lens solution and much, much more. One person interviewed in a recent Wall Street Journal article on this subject spent her FSA on a health-related DNA testing kit and supplies for her diabetic husband.^[ii] So your options stretch far beyond clearing out the bandage aisle.

A final, more forward-looking word on FSAs: If you find a boodle is left that you have to spend or lose, you might wish to reconsider how much you are plugging into the plan. There may be a better use of these funds in the interim that doesn’t require a late-year scramble.