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Year-End Financial Checklist

Year-End Financial Checklist

2022 has been a difficult and trying year for stock and bond indexes in both emerging and developed markets. We are on pace to post the first double-digit loss in the major US markets since 2008. After a run of 13 years, it is understandable for investors to want to close their eyes and wait for the storm to pass. However, in times of market runoffs, it is important to review your finances and check the boxes on year-end tasks to ensure you are well-positioned for when the markets rebound. Here is our list of things to consider as we come to the end.

CONTRIBUTIONS ACCOUNTS

Employer-Sponsored Accounts such as 401(k) and 403(b)

The maximum contribution amount for these respective accounts is $20,500, with an additional catch-up contribution limit of $6,500 for individuals aged 50 or older. We are advocates of trying to contribute the maximum amount to these accounts every year. However, if your budget doesn’t allow for that level of contribution, we encourage you to contribute at least enough to receive your full company match, if that is offered. As we look forward to 2023, the IRS recently announced that the contribution limits for employer-sponsored retirement plans are going up. You may want to review your contribution amounts and adjust for January payrolls if your goal is to maximize funding your retirement plan contributions. 

IRA Accounts

For Roth IRA and traditional IRA accounts, the maximum contribution amount is $6,000, with an additional $1,000 allowed if you are age 50 or older. Bear in mind that IRA accounts do have income restrictions so it is important to work with your financial advisor or tax preparer to determine if you are eligible to contribute in 2022. Assuming you are eligible, these accounts can be quite tax advantageous for your overall financial situation.

529 College Savings Plans

For 529 plans, contribution amounts are tied to annual/lifetime gifting limits. The gift limit for 2022 is $16,000. However, there is a provision that allows for five years of gifting to be given in one year so long as it is accounted for. Should you decide to contribute more than $16,000 in 2022, we would recommend that you work with your tax professional to ensure that you are properly documenting the gift. The deadline for 529 contributions is December 31, 2022. The owners of a 529 account receive tax benefits on the growth of the investment account and may also receive state tax benefits depending on each state plan.

Health Savings Accounts (HSA) & Flex Spending Accounts (FSA)

Depending on your employer’s benefits package, you may be eligible for an HSA or FSA account. Both of these respective plans offer generous tax benefits, but the two plans have significant differences. Here is a great side-by-side comparison of the two plans.

These plans will not be offered to everyone and have restrictions for use. I would encourage you to check with your employer to see if these accounts are an option. 

 

TAX AND ESTATE PLANNING

Tax Loss Harvesting

If there is a silver lining to this year’s market sell-off, it is the opportunity to harvest tax losses. Investors have until year-end to realize capital losses by selling poorly performing investments. Losses can be used to offset capital gains and reduce your tax liability. Tax loss harvesting requires careful consideration and awareness of certain restrictions (such as the wash sale rule), but if done correctly, it can be a powerful way to defer taxable gains. In addition to offsetting taxable gains, the IRS allows investors to deduct up to $3,000 worth of unused losses against their income tax liability. Any remaining unused losses can be carried forward indefinitely to be used in future tax years.

Gifts and Charitable Donations

Charitable donations are another common way of reducing taxable income. Taxpayers can claim a deduction of up 30% of adjusted gross income (AGI) for charitable gifts of non-cash assets, and up to 60% of AGI for gifts of cash (note that the temporary provisions allowing deductions up to 100% no longer apply in 2022). While charitable donations have fallen out of favor somewhat in recent years due to increased standard deductions amounts, there may still be opportunities for tax-efficient gifting, such as donating highly appreciated assets or making a qualified charitable distribution (gifting from an IRA).

Those looking to manage their exposure to gift and inheritance tax also have until December 31 to make use of the annual gift exclusion amount. For 2022, a taxpayer can give up to $16,000 to as many people as they wish without reducing their lifetime gift and estate tax allowance.

Roth Conversions

For some, 2022 may present a good opportunity to convert some money to Roth. If your income has reduced significantly you may have an opportunity to convert money to Roth at a lower tax bracket than you have been in years past. Once the money is in the Roth bucket, it can grow tax-free. There are many factors at play to determine if a Roth conversion makes sense, some of which include the following: 1) income received year-to-date, 2) capital gains/dividends/interest from investments, and 3) projected future tax brackets. Before making a decision, coordinate a discussion with your accountant and financial advisor (sometimes a quick three-way can be very impactful!). If a Roth Conversion is part of your strategy for the 2022 tax year, it must be completed by 12/31/22.

 

YEAR-END REVIEW

Beneficiary Updates 

The closing out of a year provides a great opportunity for us to take stock of the events of that year and determine if any changes need to be made. Beneficiary designations are often overlooked as our lives change. Marriages, divorces, children growing from minors to adults, and individuals passing away all represent significant events and will likely warrant changes to the beneficiaries listed on our retirement accounts, life insurance, and estate plans. We recommend reviewing your beneficiary designations on an annual basis unless you have major changes in your life.

Insurance Amounts 

Another overlooked area of a sound financial plan is insurance coverage and their respective coverage amounts. We should review our personal insurance coverage yearly as our assets and liabilities change. If we complete a major improvement to our home or experience significant real estate appreciation, there may be a gap in our homeowner’s coverage. It is our recommendation to work with your insurance professional to better understand the replacement coverage in your homeowner’s insurance policy. You may also be overexposed to personal liability if your net worth has grown significantly through market gains or company stock options for example. This is where a personal umbrella policy can help to pass some of the liability risk to the insurance company. 

We are happy to discuss any of these items in greater detail and how they may apply to your specific situation. The end of a calendar year can become hectic with holidays, gatherings with friends and family, and ringing in a new year. Taking the time now to review your financial situation and checking a few of these items off of your list will help you start 2023 off on the right foot.

ABOUT THE AUTHOR

Nate Condon

FINANCIAL ADVISOR

Nate Condon is one of the co-founders and managing partners of Walkner Condon Financial Advisors. He is a fee-only, fiduciary financial advisor who works with clients locally in Madison and around the country.

What are the Limits for My Investing and Spending Accounts?

What are the Limits for My Investing and Spending Accounts?

As Spring springs and we approach the end of the first quarter of 2022, it is a good time to familiarize yourself with the changes to the more popular savings vehicles. It is imperative to understand the basics of these accounts to avoid mistakes, as the penalties can be quite onerous. This is not an exhaustive list, but it is a good place to start. 

The list is broken up into the appropriate categories of employer-sponsored plans, personal retirement plans, healthcare and spending accounts, and educational accounts.   

Employer-Sponsored Plans

401(k), 403(b), and most 457 plans have a new maximum employee contribution limit of $20,500, up from $19,500 in 2021. The overall maximum annual additions into defined contribution plans (which include 401(k) and 403(b) plans) increased from $58,000 to $61,000. 

Individuals aged 50 and older are allowed an additional $6,500 of contributions. Note that the “age 50 catch-up” amount did not increase from 2021 to 2022.

Personal Retirement Plans

IRA and Roth IRA contribution limits are unchanged at $6,000 for people under the age of 50 and $7,000 for individuals 50 years old and older. 

The traditional and Roth IRA income phase-out ranges are also increasing. 

Healthcare and Spending Accounts

Health Savings Account contribution limits increased from $3,600 to $3,650 for individuals and $7,200 to $7,300 for families. 

The HSA catch-up contribution for individuals 55 years old and older is an additional $1,000. This is unchanged from 2021.

The  Health Care Flexible Spending Account (FSA) limit has increased to $2,850 in 2022 – up from $2,750 in 2021.

The Dependent Care FSA limit in 2022 has reverted back to $5,000 for a married couple filing a joint tax return. The American Rescue Plan temporarily increased the limit to $10,500 in 2021.

529 College Savings Plan

529 plans do not have contribution maximums; however, contributions are considered completed gifts for federal tax purposes, and in 2022 up to $16,000 per donor ($15,000 in 2021), per beneficiary qualifies for the annual gift tax exclusion.

The Coverdell IRA contribution limit is $2,000 per student, per calendar year. 

The annual changes to contributions and income limits are not consistent year-over-year; therefore, understanding the changes and how they affect your specific situation is important. It is a good idea to check your contribution levels early in the year as payroll adjustments and/or automatic contributions into your IRA accounts may be required periodically. 

Nate Condon 

Financial Check List for the End of the Year

Financial Check List for the End of the Year

There is a small, but distinct, satisfaction that comes from crossing items off of a list. The immediate sense of accomplishment gives us a boost that propels us to the next thing on the list. Whether it is a chore list on the weekend or items off a grocery list, we, as a whole, increase our productivity when we have a set of priorities. 

Our financial lives would benefit from a task list just the same. As we move through 2021 with Covid still in the news and the stock market enjoying another great year, we should keep in mind that there are still things to accomplish pertaining to our finances. Think of this as a mid-year financial checklist: 

1: Fund your IRA, HSA accounts

If you have personal retirement accounts, such as Roth or Traditional IRAs, be aware of how much you have contributed to this point and how much you plan to fund before April 15, 2022. The maximum contribution amount for Roth or Traditional IRAs for 2021 is $6,000, or $7,000 if you are over the age of 50. Monthly systematic contributions plans are a great way to fund these accounts; however, many of these plans were set up years ago when the contribution limits were lower. You may not be max funding your account if you haven’t increased your monthly amount within the last few years. Health Savings Accounts are another great way to save money in a tax-preferred way. Not everyone is eligible for an HSA, so check to make sure you qualify. The 2021 contribution limit for individual HSA accounts is $3,600 and $7,200 for family accounts. 

2: Complete your RMDs from IRA, Beneficiary RMD

Required minimum distributions, or RMDs, are annual distributions from IRA accounts. In 2020, required minimum distributions were suspended and have been reinstated for 2021. Recent legislation has increased the age for RMDs to 72 for tax-deferred IRA; however, inherited IRA accounts have different distribution restrictions, so be aware if you are the owner of an inherited IRA as you may need to take distributions prior to age 72. RMD’s must be taken by December 31 of each year, except in the year that you turn 72, in which you have until April 1 of the following year. It is the responsibility of the IRA owner to ensure that the total RMD amount due is withdrawn each year and that the calculation takes into consideration all of their tax-deferred IRA assets.  

3: Verify your 401k, 403b Contributions

The maximum amount that employees can contribute to their 401k or 403b accounts for 2021 is $19,500, with an additional $6,500 allowed if the employee is over the age of 50. This maximum contribution amount has been increasing over the last few years so it is important to verify the amount coming out of each paycheck if your desire is to max fund your account. These limits do not take into consideration any match provided by your employer. Most employers offer flexibility in making and changing contribution amounts, so you could increase your amount mid-year if you are not on track. Also, be aware that many of the 401k or 403b plans now offer a Roth option within their plan. This doesn’t affect any Roth IRA contributions. 

4: Check Your Mortgage Rate For Possible Refinance Opportunities

I fully realize that the mortgage refinance discussion is becoming quite repetitive at this point, but it does bear repeating. The current mortgage rates are under 3% for a 30-year fixed mortgage, and the 15-year mortgage rate is in the low 2% range at many lending institutions. We generally advise looking into a mortgage refinance if you are planning on staying in the home for at least 3-5 more years and a rate reduction of at least .5%-.75%. That said, everyone has a different financial situation and should consult with a financial advisor or mortgage specialist prior to making a final decision. For many people who have refinanced within the last few years, another refinance may not be appealing; however, it would behoove you to look into this option again if the variables are in your favor. 

5: Review Your Cash Position, Travel Expenditures

Take time to review your current cash position and the amount of cash you prefer to have at any given time. A person or family’s cash position is an interesting subject within the world of financial advising. We have clients who need six-figure cash positions to feel comfortable, while other clients desire to hold small cash positions as they don’t like “money on the sidelines.” We like to frame this conversation by taking into consideration any other investment and retirement accounts. For example, a client with a large taxable account can afford to get away with a smaller cash position in contrast to a client with all of their non-cash assets in IRA or 401k accounts, where liquidity provisions are more onerous. We strongly believe that every well-built financial plan has a healthy cash position to cover job losses, emergency expenses or unexpected travel. The current low-rate environment is creating a challenge to find a decent return for cash; however, safety is the main job for this portion of your financial plan. 

This is not a comprehensive list, by any means, but I hope this makes you think about a few things to review between now and the end of the year. We are more than happy to discuss any of these items with you and how they pertain to your overall financial plan.

Nate Condon