Adhering to your financial plan throughout 2022 may have been a challenge with rising inflation, natural disasters, roller coaster markets and international turmoil. As we enter the final weeks of the year, we’re encouraging clients to take stock of any final year-end adjustments and contributions to maximize your tax savings and investment accounts. This checklist will help you focus on the most impactful areas of any financial plan.
Review Your Overall Plan
Inflation has cropped up in all aspects of life. Raising a family just became more expensive, and with that comes the reality that our mix of spending and saving has shifted. Now is the ideal time to adjust any savings, investment, and budget-related goals that need a quick update.
Another reason to adjust your plan goals: have you experienced any major life changes? Babies, careers, marriages, college, illness – no one is immune to life’s surprises, pleasant or otherwise. Make sure you’ve accounted for any that you are currently, or anticipating, experiencing. Finally, evaluate your long-term goals and see if any timelines, opportunities, or personal feelings have shifted, therefore requiring a tweak to your overall financial plan. (Don’t forget to loop in your advisor!)
Year-End Financial Checklist
1. Max out your retirement accounts.
The 2022 qualified contribution limit for 401(k) contributions is $20,500, with a higher $27,000 limit for those 50 years of age or more. Employer matching or non-matching contributions do not count toward this individual limit. Total employer and employee contributions cannot exceed $61,000. These limits have been increased for 2023 contributions, so don’t forget to adjust any savings to reflect this increase come January 1, 2023. Income limitations do not apply to employer 401(k) contributions – though if you are a Highly Compensated Employee (HCE) you may have some additional rules. The IRS defines HCEs as either having owned 5% or more of a company last year and are participating in its 401(k) plan this year, or having earned $130,000 or more in 2020 from a company with a 401(k) plan that you’re participating in this year. If you qualify as an HCE, review your employer’s 401(k) paperwork to ensure you are adhering to those rules and maximizing your investments.
2. Contribute to IRAs.
If you can, max your traditional or Roth IRAs. For 2022, the total amount an individual can contribute cumulatively to all IRAs is not to exceed $6,000 (or $7,000 for those 50 or older). Remember, to contribute to an IRA, an individual must show at least that amount in income for the year. Contributions for 2022 don’t have to be made by year end, but by the tax-filing deadline in 2023.
Traditional IRA – There are no income limitations for contributing to your traditional IRA, but there are income limits on tax-deductible contributions. For those married filing jointly, this limitation kicks in at a Modified Adjusted Gross Income (MAGI) of over $109,000 and completely phases out at $129,000.
Even if you exceed the income limitation, you can still make nondeductible contributions and could benefit from tax-free growth utilizing a Roth conversion, but make sure to consult your tax and financial advisor given some of the complexities of such a conversion. If you – and your spouse (if married) – do not have access to a 401(k) through your employers, then you can deduct your full contribution to your traditional IRA on your tax return, regardless of how much you earn.
Roth IRA – Your income may limit your ability to contribute to a ROTH IRA. In 2022, these income limitations kick in at a Modified Adjusted Gross Income (MAGI) of $129,000 if single and $204,000 if married filing jointly.
3. Review health insurance benefits and health savings plans.
Review your insurance benefits to determine any last chance opportunities to take advantage of having met your deductible and/or out-of-pocket maximum. There could still be time to squeeze in additional medical procedures and save money. If you have a child turning 26 in the next year, consider whether this will change your future insurance needs and expenses.
Check on your flexible spending account (FSA) or health savings account (HSA). Remember, an FSA is a use-it-or-lose-it situation. You may have until March 15, 2023 to utilize all funds, or you might have a December 31, 2022 deadline. Review your benefits paperwork to confirm your date. As for your HSA, ensure you’ve maxed out any contributions. For 2022, individuals can contribute up to $3,650 and families can contribute $7,300. Note that these totals account for both employee and employer contributions. Anyone 55 years or more can make an additional $1,000 “catch-up” contribution.
4. Consider tax strategies.
A sliding market can create a compelling argument for tax-loss harvesting. You may want to discuss this with a professional tax advisor or financial planner, but at a high level, selling any investments at a loss will allow you to make a deduction on any capital gains taxes resulting from other investments you sold for a profit during the year. The main rules are that the investments must be held in a taxable account (not 401(k), IRA, 529, etc.), you must keep a record of every purchase, and you cannot sell and repurchase a “substantially similar” investment within 30-days. There are additional recommendations your financial advisor can review with you to ensure a beneficial tax-loss harvesting strategy.
5. Set up student loan repayments.
If you owe on a student loan (or are assisting a child or relative with their repayment), prepare to begin making payments again on January 1, 2023. Pay attention to ongoing legislation around the Student Debt Relief Plan, as the courts continue to shape opportunities for student loan forgiveness of $10,000 or more in the coming year.
6. Make charitable contributions.
This is one strategy that provides two great benefits! The 2022 deduction limits for gifts to recognized public charities, including donor-advised funds, are 30% of adjusted gross income (AGI) for contributions of non-cash assets, if the assets were held more than one year. Alternatively, cash contributions can receive a deduction of up to 60% of AGI.
Setting aside dollars in a donor-advised fund is an excellent option for those who want to contribute to charity while continuing to grow the assets in a tax-free environment. Because charitable giving can have a large impact on a financial portfolio, it’s best to discuss a comprehensive, tax-minimizing strategy with a professional.
7. Update Estate and Trust Documents.
Are all your papers in order? If you’ve experienced any life-changing events this year, make sure to adjust any notarized, end-of-life paperwork as well. Now is a great time to add or remove dependents or caregivers and ensure that your property deeds and other assets are all currently held in your trust. Working with an estate attorney to ensure your trust is appropriately set up and funded, may prove invaluable.
Pay attention to designees and trustees, as monetary gifts up to $16,000 to any recipient are currently federal tax-free. Note the individual lifetime gifting exemption of $12.06 million per individual is scheduled to reduce to only $5 million per individual (indexed for inflation) in 2025.
While you’re at it, double check all of your beneficiaries on your insurance and retirement plan benefits.
8. Double Check Insurance Coverage.
It’s best to review your policies annually, including home, auto, personal excess liability, and of course life insurance. As your life evolves, so should your insurance coverage. What you need for your growing family may be very different from what you need during other life stages. Consider ways to save on policies by reducing coverages and shopping around for the best provider.
There are often more comprehensive and complex strategies to consider when building a financial plan. It’s important to identify a trusted advisor to help you define, develop and execute your plan. This is where experts like our team at Odyssey Group Wealth Advisors can assist. With years of experience serving individuals and families in the Lancaster, PA region, we are ready to support you on your journey to – and through – retirement.
