Woe are the retirees reliant on ever-increasing required minimum distributions (RMDs) to support them. Stock market gains for 2019, 2020, and 2021 generated big increases in RMDs. Stocks dropped a lot in 2022 resulting in lower RMDs this year, tantamount to a pay cut; with inflation’s rise this created a financial double whammy. For those accustomed to spending the entirety of their RMD, this must be addressed through either an unkind cut in spending (tough to do for many retirees) or tapping into additional retirement money in excess of the RMD to make ends meet. In our experience, most retirees in that situation opt for the higher withdrawal. That could be okay if, over the years, it doesn’t make too big dent in retirement savings.
The lesson here is to pay attention to how much you’ve been withdrawing from your retirement and other accounts. This year’s RMD reduction will be a good test of how you can cope with financial adversity in the future, including potential big demands on your finances like expensive medical and care costs. Not an upbeat subject, but an important one.
Last Minute Tax Saving Ideas
There are still a couple of things you can do between now and the tax deadline that could reduce your 2022 income taxes. First, you have until April 18th to contribute to an IRA for last year. If you qualify for a tax-deductible IRA contribution, you will reduce your tax bill. If not, you’ll still be able to avoid taxes in the future on income earned within an IRA through either a nondeductible IRA contribution or a Roth IRA contribution. Don’t worry if you can’t fund the entire amount, every little bit helps move you toward a better retirement while paying lower taxes along the way.
The second tax saving opportunity is for those who had any income last year from either full- or part-time self-employment. There’s still time to set up and fund a simplified employee pension (SEP) plan. You can deduct the contributions you make to a SEP plan on your 2022 tax return, even though the contribution was completed this year.
Spend some time organizing your tax records and looking for ways to save taxes. Review one of the tax preparation guides found online or in bookstores or IRS Publication 17 which you can review or download from the IRS website, www.IRS.gov (search for “Publication 17” within the site).
If you feel rushed, you can always file an extension to postpone the inevitable, even a SEP contribution. As the saying goes, the only two things in life that are certain are death and taxes, but unlike death, taxes can be postponed by filing an extension.
If you have already filed but discover that you missed a substantial opportunity to reduce your 2022 income taxes, your return can still be amended.
Smart Money Tips
- Budgeting without a budget. Preparing a household budget can be a useful exercise, but many people have neither the time nor the inclination to do so. The purpose of a budget is to motivate you to live beneath your means, to spend less than you earn. Of course, even a well-prepared budget is of no use unless you are prepared to live within its strictures. But there is another way to spend less than you earn without going through the drudgery of budgeting. All you need to do is to regularly and automatically contribute to a retirement, brokerage, or savings account. This investing program can be established directly from your paycheck each pay period. Automatic investing is a great way to both begin and stick with a recurring savings program. The result is relatively painless budgeting. Since you never get your hands on the money, it shouldn’t be missed, particularly if you start small and gradually increase the amount that’s transferred.
- Track everyday spending. If you’re looking for ways to reduce your spending, and who isn’t these days, you’ll probably discover that you’re spending a lot of cash or using your credit or debit cards on daily money dalliances that are hardly necessities. Online shopping is a particular culprit. A useful and possibly shocking exercise is to review your Amazon order history which they conveniently summarize online, or your monthly credit card statements. It will be a fruitful exercise. A useful speed bump to slow spending is to remove any store credit cards for frequently visited online sites.
Food for Thought
Have more than thou showest,
Speak less than thou knowest.
-Shakespeare
Money Can Be Funny
Budgeting:
Nobody was ever meant
To remember or invent
What he did with every cent.
-Robert Frost
Word of the Week
velleity (vuh-LEE-i-tee), noun: 1. Volition in its weakest form. 2. A mere wish, unaccompanied by an effort to obtain it.
Origin: Velleity stems from the Latin word velle which meant “to be willing.” The suffix -ity is used for abstract nouns.
Her constant comments of “I want to lose weight” were pure velleity; she neither watched what she ate, nor did she make any attempt to exercise.