Q: Last year was ugly. I’ve looked over my year-end statements and I think I lost as much in bonds as I did in stocks. To stop the bleeding, I’m thinking about selling my bonds and moving into cash or even buying CDs. Does this move make sense?
A: You’re right, last year was particularly bad for bonds. Arguably, it was one of the worst years in modern history for investors with balanced portfolios. The Fed’s moves on interest rates caused bonds to fall a whopping 10% to 15%. Adding insult to injury, stocks fell about 15% to 20% last year. Clearly, there was no great place to hide.
Looking forward, while nobody really knows what 2023 will bring, I think the pain you’ve felt in bonds is likely a thing of the past. The bond market has largely “priced in” the impact of the Fed’s current war on inflation. Rather than moving out of bonds now, holding tight is probably smarter. Changing your portfolio based on recent pain almost always turns out to be a mistake.
Q: I’m starting to receive some 2022 tax documents. I’m really confused about my IRA distributions, as shown on Form 1099-R. I donated money to charity directly from my IRA believing those distributions wouldn’t count as taxable income. But, looking over my IRA’s 1099-R, it appears my donations were taxable distributions, nonetheless. Did my brokerage firm make a mistake or did I do something wrong?
A: No, the brokerage firm didn’t make a mistake. And, no, you didn’t make a mistake. Form 1099-R is simply a summary of all of the money that came out of your IRA last year. Brokerage firms include a tally of every dollar that left your IRA, regardless of whether it was a charitable donation or not.
Why aren’t your donation checks subtracted out? Because brokerage firms aren’t in the business of verifying whether you gave to a “qualified” charity or not. This leaves it up to you or your tax preparer to subtract your qualified charitable donations, or QCDs, from your total distributions as shown on your Form 1099-R.
Q: For 2022, it turns out I’m in a much lower tax bracket than usual. As a result, I overpaid by a lot with my estimated tax payments last year. Since I’ve already paid in more than enough taxes, can I do a Roth conversion before I file my 2022 taxes?
A: I’m sorry, you can no longer do a Roth conversion and have it apply to last year’s taxes. Unlike making a regular IRA, Roth IRA or even an HSA contribution by the filing deadline in mid-April, any Roth conversions had to be completed by the end of the calendar year. Unfortunately, this highlights the need to sit down and do your tax planning near the end of the year.
Jason P. Tank, CFA, CFP® is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at [email protected] and at www.FrontStreet.com
