Q: We had some unexpected things happen in the last month. I don’t think we’ll be able to get all our tax information to our tax preparer on time. How does filing an extension actually work and what are the financial consequences?
A: Filing an extension of time to file your tax return really is a breeze. In fact, Form 4868 is officially called “Application for Automatic Extension of Time to File.” Note the word, automatic.
Remember, this is just an extension of the time to file your taxes. It is not an extension of the time to pay your taxes. So, it’s important to estimate the amount of taxes you should have paid in 2023 and send in a check to cover your full tax obligations to both the US Treasury and the State of Michigan.
Q I bought a couple of Series I savings bonds back in April of 2022 when they were promising incredible yields. But, I think the interest rate has come down a lot. What should I do now with my savings bonds?
A: Yes, a couple years ago Series I savings bonds were all the rage. With inflation spiking after the pandemic, these inflation-protected savings bonds were paying interest well above the yield you could earn in a money market fund or in a CD at your bank. We’re talking rates of about 8%.
But, things have changed. Today, money market funds pay above 5% and those Series I savings bonds that you purchased back in April 2022 are only paying about 3.4%. So, you might want to consider cashing them out. Keep in mind, though, you’ll owe federal tax on all of the interest you earned, but you won’t have to pay any state income tax.
Q: I have three IRA accounts with a number of different brokerage firms and mutual fund companies. This year, I’ve finally reached age 73 and have to start taking required minimum distributions. Do I have to take a distribution from each account?
A: To satisfy your required minimum distribution (RMD), technically you don’t have to take money out of each and every IRA in your life. You are allowed to add up each of your RMDs and then actually take the distribution from one of your IRAs. But, I don’t love this method.
Why? It requires you to keep really good records. It’s much easier to take your RMD amount for each IRA separately. Better yet, you should consider rolling over your various IRAs into one single IRA account. That way, you will have everything in one spot and only one RMD to contend with. This will make it easier for you to remember and it’ll be easier at tax time with fewer tax forms to process.
