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Your Financial To-Do List for March 2022

Funding IRAs and HSAs are among this month's tasks.

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. March is here, and Morningstar's Christine Benz has brought some financial jobs to keep us busy this month.

Hi, Christine. Thank you for being here.

Christine Benz: Hi, Susan. It's good to see you.

Dziubinski: One of the things that you say should be on our financial to-do-list for March is funding an IRA. But is there any reason that someone should be waiting until March, which is pretty close to the tax-filing deadline? Or should they really be thinking about investing IRA assets as soon as they can?

Benz: Well, as soon as they can, ideally. So, for 2022, for example, you were eligible to get those contributions in on Jan. 1; for the 2021 tax year, you were eligible to start contributing back in January of 2021. So ideally, you get those contributions in there and invest it in something as soon as you possibly can. And the reason is, especially if you have a long time horizon, that the sooner you can get the money working for you, the more it can compound over your investing horizon.

Dziubinski: One big fork in the road, and maybe one of the reasons that people sometimes procrastinate with an IRA, is they're not really sure whether they should be making a Roth contribution or a traditional IRA contribution. How should they be thinking about that and weighing the differences?

Benz: You're right, that is a key fork in the road. A key thing that will be a determinant of which account type you can fund is your income level. If you wanted to make a traditional deductible contribution, the income thresholds are lowest for that, assuming that you're covered by some kind of a company retirement plan at work. They're slightly higher for Roth IRA contributions. And even for people who are shut out of making a direct Roth contribution can make what's called a "backdoor Roth IRA contribution," where you're making a traditional IRA contribution, and then converting that to Roth.

So income levels will help you find your way there. But from there, I think the key thing you want to be thinking about is whether the tax breaks that you earn on having the investments in the IRA is better at the time you make the contribution or when you'll be pulling the money out in retirement. If you are in a higher tax bracket at the time of the contribution, you're generally better off making a traditional deductible contribution, assuming that your income level will allow you to do so. On the other hand, if you're someone who, where you think your income right now is at a relatively low ebb, relative to where it's apt to be in the future, you're a good candidate for doing a Roth IRA contribution.

So give a little bit of thought to that. For young accumulators, I usually say that Roth IRA is probably a good bet because their income level and their tax bracket is low relative to what it might be in the future. On the other hand, I would say for people who are fairly late in their investment career, and maybe at a high earnings level relative to the whole of their careers, they may be a good candidate for making a traditional deductible IRA contribution.

Dziubinski: Christine, what about spouses who aren't earning incomes? Can they make contributions?

Benz: They can. And I love this question, Susan, because a lot of times you will have a nonearning spouse, often kind of the primary child caregiver, and it's really valuable if the couple can swing it to make a contribution on behalf of the nonearning spouse. The key thing you'd need to have in that case is that the earning spouse would just need to have enough income to cover the whole family's contributions. But it's a great thing to do to keep retirement contributions going, even if someone's not currently earning a paycheck.

Dziubinski: Christine, what about IRA contributions for older adults? Have the rules changed around that? Is it possible or is it even advisable, for a retiree, say, to invest in an IRA?

Benz: Yeah, great set of questions. Roth IRAs have not had age limits. But historically, traditional IRAs have had age limits. Those were lifted as part of the Secure Act. So now you can make a traditional or a Roth IRA contribution at any age, as long as you have earned income. And that is a key factor that might limit older adults' ability to make contributions. If their income is just coming from Social Security or a pension or from their portfolio, they will not be able to make an IRA contribution because they don't have the earned income to qualify. So that is something to think about.

Whether those contributions are advisable, I think, is a separate question. But I would say a key category of older adult who should think about making additional IRA contributions would be folks who are saving primarily for the next generation, where they want their heirs, whether children or grandchildren, to inherit the accounts. They're a super candidate for making those additional IRA contributions, provided they have the earned income, because they have enough time presumably for the money to compound and grow and benefit from the tax deferral. I think that that's a group of people who ought to consider additional IRA contributions.

Dziubinski: We've talked in the past quite a bit about the types of investments to put in an IRA. And that's really a challenge that we still see in the industry is that people will open those IRAs, they will put money into an IRA, but then they won't actually invest the money that's in that IRA in something. Are there any easy answers about what to invest your IRA assets in?

Benz: Yeah, I think it's overwhelming for a lot of people. You have all the choices in the world that you could put within an IRA. A really easy answer to me, especially for younger accumulators or even people in the middle of their careers, would be to look at some kind of a target-date fund as a one-stop, hands-off, low-maintenance solution. On the other hand, I would say for people who have well established portfolios, they might use index funds to augment the exposures or maybe to add to asset classes, where they are light elsewhere in their portfolios, and there they can use really inexpensive index funds. I think those would be some of the easiest choices that people might use to populate their IRA portfolios.

Dziubinski: Let's pivot a little bit and talk about another financial to-do for March, and this one is funding a health savings account. And again, if you fund it before April 18, that's the deadline for the 2021 HSA contributions. Can anyone make an HSA contribution? What are the rules around that?

Benz: Right. Good question, Susan. And I think people salivate when they read about the great tax benefits that come along with HSAs. The key thing to know is that in order to make an HSA contribution, you need to be covered by a qualifying high-deductible healthcare plan. If you're covered by Medicare, if you're covered by a PPO, you won't be able to make an HSA contribution. You need to be covered by a certain type of healthcare plan in order to be eligible.

Dziubinski: And then, another question that comes up with HSAs is similar to the IRA question, which is: What do you invest those HSA funds in? If you are looking for something that's maybe a little bit more of a long-term investment, if you're working with your employer, do you stick with your employer's HSA plan?

Benz: That's a good question. In terms of the investment types to populate the HSA with, I would use my use-case to determine what to invest in. If I'm using my HSA to cover my healthcare costs, as I incur them, I would stick with the savings account. I wouldn't want to be taking a lot of risks with my investments. If I'm using it as a long-term sort of ancillary retirement savings vehicle--well, there you probably do want to take more risk. And of course, it depends on your proximity to retirement and to tapping into those funds. But assuming you have a nice long runway to retirement, I would invest in something pretty aggressive. I'd invest in maybe a static allocation fund or even an all-equity index fund for that portion of the portfolio.

A separate question is whether I'm wedded to my employer-provided HSA or whether I can go outside of it? And the answer is absolutely you can transfer assets periodically to the HSA of your own choosing. And that's a really nice workaround, Susan, for people who have maybe a not-great company-provided HSA. They can indeed use some other HSA and transfer the funds out. They can use payroll deductions to put the money in, but then periodically do a transfer to another HSA. And that's where I think our team's work on HSAs is so valuable in terms of helping people navigate those choices.

Dziubinski: Christine, our last financial to-do for March has to do with inflation protection and looking at it in your portfolio and in your own personal balance sheet. And it seems like a timely topic for so many of us right now. Right?

Benz: It absolutely is. And by the way, March is a busy month with these to-dos, but it is a good time I think to take stock of how well insulated you are from inflationary pressures. We've seen rising prices almost everywhere we look, whether filling up our cars with gas or heating our homes or in the grocery store. I think the key thing you want to be thinking about is looking at how your expenses have changed over the past year and also thinking about how inflation-protected your income sources have been in the face of higher prices. If you're earning a salary, you want to check into whether you have been able to negotiate a higher salary. Has your employer been helping you stay whole even as we've seen higher prices come online? If you're someone who's retired, you have most likely received a nice inflation adjustment from Social Security to the extent that you're receiving Social Security. But if you're withdrawing from your portfolio for a portion of your income, you want to make sure that that portfolio has some inflation protection as well.

Stocks, we know, are over long periods of time likely to outrun inflation. If you have bonds in your portfolio, you might also consider a component of Treasury Inflation-Protected Securities or I bonds. And you might also consider additional asset classes, perhaps some commodities exposure, perhaps some sort of floating-rate investment. I wouldn't use them as core investments, but they're investments that have historically done a decent job of hedging against inflation.

Dziubinski: Christine, thank you so much for giving us some financial marching orders for the coming month. We appreciate your time.

Benz: Thank you so much, Susan.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.