Financial Planning

With the year-end quickly approaching, many of us are ready to close the books on what has been a volatile and unpredictable year and welcome a new year.

While we wait for the ball to drop, these final few weeks of the year are a great time to take stock of your finances and consider some simple steps that may meaningfully improve your situation. Below, we highlight 12 year-end planning opportunities that are worth looking into.

Tip 1: Maximize retirement account contributions by year-end.

• If you are not on pace to maximize your contributions by year-end, consider increasing your deferral rate during the last few remaining pay periods. Not only does this help prepare you for retirement, but it may also help to reduce this year’s tax bill (the maximum contribution for 2022 into a 401(k), 403(b), or 457(b) is $20,500 for individuals under 50 and is $27,000 for people aged 50 and over).
• Make Traditional or Roth IRA contributions by next year’s tax deadline, April 18, 2022 – Emancipation Day is April 15th! The maximum contribution in 2022 is $6,000 for individuals under 50 and $7,000 for people aged 50 and over, depending on income limits.
• Roth IRAs grow tax-free and are not subject to RMDs, making them great for both retirement planning and multi-generational planning.

Tip 2: Explore Other Tax-Advantaged Accounts (Owner Only Plans, Single LLCs).

• Explore other ways to maximize contributions to tax-advantaged retirement accounts. These include cash balance plans, SEP IRAs, SIMPLE IRAs, and spousal IRAs.

Tip 3: Don’t forget about your Health Savings Account (HSA).

• Don’t forget about your HSA, if you have one. For the 2022 tax year, the maximum HSA contributions are $3,650 for individuals, $7,300 for families and an additional $1,000 for individuals over the age of 55.
• These accounts are triple tax advantaged, meaning that contributions reduce your taxable income, any investment growth within the account is tax-free, and qualified withdrawals used for medical expenses are tax-free.
• Learn more about how HSAs can also serve as the ultimate retirement account.

Tip 4: Review 401(k) allocation and investment options.

• With recent volatility and the market drawdown, we recommend reviewing your overall investment allocation to ensure that your current asset allocation aligns with your risk capacity, as well as your long-term financial plan.
• Investment options are occasionally added or dropped from retirement plans, so now is an ideal time to review your investment options and reevaluating the original reason you had for choosing certain investments.

Tip 5: Review your tax situation with your accountant.

• Confirm you are withholding enough taxes from each paycheck, or you have made large enough estimated tax payments to satisfy your ‘safe-harbor’ tax requirement.
• Take advantage of tax-loss selling opportunities to mitigate potential capital gains taxes. Alternatively, with tax rates at historically low levels, you may wish to consider taking gains now to hedge against the risk of higher long-term capital gains tax rates in the future.
• For individuals with highly concentrated and highly appreciated stock positions, consider a plan to sell some shares prior to year-end. Then, sell additional shares in early 2023. This can help spread the tax liability across multiple tax years, potentially dampening the tax impact.

Tip 6:  Review your employer benefits & beneficiaries.

• Evaluate any needed changes, or new opportunities as open enrollment approaches. Take advantage of all available options, including a flexible spending account, health savings account, medical and dental insurance, and other benefits.
• Double check your various policies to ensure that your current beneficiaries align with your intended wishes

Tip 7: Explore a Roth conversion.

• It may make sense to convert all or a portion of your IRA to a Roth IRA, particularly if you expect 2022 to be a relatively low-income year, due to changes to the ‘stretch IRA’ strategy under the SECURE Act. Roth IRAs are not subject to RMDs (for the owner) and grow tax-free, which is a beneficial factor when considering tax planning.
• However, converting an IRA to a Roth IRA is a taxable event, meaning you pay taxes at your ordinary tax rate on the amount converted. This may unintentionally put you in a higher tax bracket.

Tip 8: Consider a Qualified Charitable Distribution (QCD) to fulfill charitable goals.

• IRA owners wishing to lower their adjusted gross income can use QCDs as a strategy to disperse money to charities of their choice tax-free. Given that fewer people itemize deductions under the new tax laws due to the higher standard deduction, a QCD is an effective way for those over 70 ½ to give money to charity and still receive a tax benefit.

Tip 9: Make charitable gifts before year-end.

• This may help fulfill charitable desires while reducing your taxes. Highly appreciated and/or concentrated stocks can be a good source for gifts. Rather than selling stock and realizing capital gains, consider donating directly to a charity. By gifting appreciated stock directly to charity, you avoid realizing embedded gains and generate tax savings (even if you do not itemize deductions and receive a tax deduction for the gift).

Tip 10: Contribute to 529 College Savings Plans for your children, grandchildren, or others.

• In addition to the tax-deferred growth within the account, many states offer a full or partial tax deduction or 529 plan contribution credit.

Tip 11: Complete annual exclusion gifts to transfer wealth out of your estate.

• Consider making annual exclusion gifts (up to $16,000 per spouse, per beneficiary, per year) to help you achieve multi-generational gifting goals and reduce the overall value of your estate.

Tip 12: Check Flexible Spending Accounts (FSA) balances and understand how much you can roll over.

• FSAs require you to choose how much you want to contribute at the start of the year, and because of the strict rules on changing this amount, people will typically end the year with extra funds leftover. Typically, you are allowed to rollover up to $500 to the next year but the rest of the funds will revert to your employer. The CARES act made slight changes to these rules, but they will disappear by next year. You should review your benefits to determine exactly what you can do with your FSAs.

The most important decision you can make as the year comes to a close is to speak with a financial professional to ensure everything is in order with your overall financial situation. There is still time left in the year to act if needed, but time is running out.

Please consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation. The information in this article is not intended as legal or tax advice.