By Greg Hart, CFP®
The new year is right around the corner! As 2022 comes to a close, many people are looking ahead to a more positive financial outlook in 2023. While this year has brought about many concerns for investors, including market volatility and ongoing recession fears, there is still plenty of time to prepare for a successful new year. With the holiday season upon us, many people are making their Christmas wish lists. But one of the best gifts you can give yourself is a bright financial future. Here are 10 things to do before December 31st that will set you up for success next year.
1. Maximize Your Retirement Contributions
Before the end of the year, be sure to max out your retirement contributions. Many employers offer retirement plans like 401(k)s, 403(b)s, and 457s which allow you to contribute up to $20,500 annually in 2022 ($27,000 if over age 50).
These contributions are automatically deducted from your paycheck and won’t show up as part of your annual income, so the more you can maximize your contributions during the year, the less taxable income you will have come April 15th. With this strategy, you can defer taxes until your retirement years when you could potentially be in a lower tax bracket.
2. Contribute to a Health Savings Account
Health savings accounts (HSA) offer triple tax savings. You can contribute pre-tax dollars, pay no taxes on earnings, and withdraw the money tax-free to pay for medical expenses. Unused funds roll over each year and can be withdrawn without penalty for non-medical expenses at age 65, essentially becoming an IRA. You must be enrolled in a high-deductible health plan to qualify for an HSA.
HSAs can be a great tax-management tool if you can pay medical expenses out of pocket and leave the HSA funds to earn tax-free growth. The 2022 IRS contribution limits for HSAs are $3,650 for individuals and $7,300 for families. If you are 55 or older, you may also be able to make catch-up contributions of $1,000 per year. You technically have until April 15th for your contributions to count for the previous year’s tax return, but we recommend making contributions by December 31st to ensure you don’t forget.
3. Contribute to a Traditional IRA
Contributing to a traditional IRA is another way to reduce your AGI if your income is within certain limits. By contributing pre-tax funds, you can effectively reduce your current-year tax liability, but you will owe tax on both the contributions and the account growth when you withdraw the funds in retirement. The 2022 contribution limit for traditional IRAs is $6,000 with additional $1,000 catch-up contributions for individuals over the age of 50. Like HSAs, contributions can be made until April 15th for the 2022 tax year, but the sooner they are made, the less likely you are to forget.
4. Use Up Your Flexible Spending Account
Unlike HSAs, flexible spending accounts (FSAs) have limits on how much you can carry over from year to year. Because of that, you’ll want to use up as much of your FSA dollars as possible by the end of the year. In 2022, you are only allowed to carry over $570 going into 2023. Also, keep in mind that the COVID-19 relief measures that allowed taxpayers to carry over their entire FSA balance are no longer in effect for 2022.
That being said, check the restrictions on your account to see what the money can and cannot be used for, and take care of any needs you may have as allowed by your plan.
5. Consider Tax-Loss Harvesting
Tax-loss harvesting involves selling investments at a loss in order to offset the gains in your portfolio. By realizing a capital loss, you can counterbalance the taxes owed on capital gains. The investments that are sold are usually replaced with similar securities to maintain the desired asset allocation and expected return. Given the unprecedented market volatility throughout 2022, this can be a great way to make the most out of a losing situation by using an investment loss to offset your tax liability. This is a tactic that we use throughout the year in the portfolios that Haddon Wealth manages for our clientele and we are especially attentive to it as year-end approaches, so as to provide our clients with the most tax efficiencies come filing time in April.
6. Donate to Charity
Annual gifts to qualified charitable organizations may be deemed an eligible itemized deduction and can be a very useful tax-minimization strategy. With the higher standard deduction, you’ll need to make sure your total itemized deductions for the year exceed $12,950 for an individual filer and $25,900 for married filing jointly. If your deductions fall below this amount, consider bunching your giving or doing several years’ worth of giving in one year.
Donor-advised funds are another option that allows you to contribute a lump sum all at once and then distribute those funds to various charities over several years. With this strategy, you can itemize deductions when you make the initial contribution and then take the standard deduction in the following years, allowing you to make the most out of your donation tax-wise. It’s not too late to set one up for 2022 – ask us how!
7. Make the Most of the Annual Gift Tax Exclusion
If you’re in the giving spirit as you head into the new year and you want to reduce your taxable estate, consider making gifts up to the annual exclusion amount. In 2022, individuals can give to each recipient (and to an unlimited number of recipients) up to $16,000 and married couples can give up to $32,000 without triggering gift tax. Not only that, but the beneficiary of your gift will not have to report it as income. This is a great way to spread your wealth amongst family and friends.
8. Consider a Roth Conversion
Roth IRAs are an attractive savings vehicle for many reasons, including no required minimum distributions (RMDs), tax-free withdrawals after age 59½, and the ability to pass wealth tax-free to your heirs. Unfortunately, Roth IRAs have income restrictions, and you may not be able to open an account outright if you are above certain limits.
To get around this threshold, consider a Roth conversion. Using this strategy, you will pay tax on money contributed to a traditional IRA, thereby converting it into a Roth. If you have earned less income in 2022, or your traditional IRA balance has taken a hit due to recent market volatility, a Roth conversion may be a great opportunity for your specific situation. Converting to a Roth allows your money to grow tax-free for as long as you’d like.
9. Review Your Asset Allocation & Invest With Impact
The end of the year is also a great time to review your asset allocation strategy.. Given the dramatic market volatility and historic levels of inflation over the last year, it’s crucial to evaluate your investments and make sure your portfolio is properly diversified. It should also be tailored to your specific risk tolerance level, ensuring you earn enough returns to keep up with inflation but you’re not overexposing yourself to risk.
10. Partner With a Professional
Before you implement any of these tips, you may want an in-depth review of your financial situation to ensure they make sense for you. Partnering with a trusted professional is a great place to start. They can help you determine which recommendations to follow that will best meet your financial needs.
Financial planning and wealth management are not one-size-fits-all solutions to your financial problems. They work best with a customized approach. At Haddon Wealth Management, we look at the big picture of your finances and take a relationship-driven approach to financial planning and investment management. If you would like to learn more about our financial recommendations going into 2023, call us at (856) 888-1744 or contact us online to schedule a complimentary get-acquainted meeting.
About Greg
Gregory M. Hart, CFP® is the founder and managing director of Haddon Wealth Management, LLC, an independent, fee-only registered investment advisory (RIA) firm that provides comprehensive wealth management (in-depth financial planning and sophisticated investment management) for clients who value a relationship-driven approach that delivers customized solutions. Based in Haddonfield, New Jersey, Greg works with clients throughout the Delaware Valley, as well as nationwide. To learn more, connect with Greg on LinkedIn, visit our website at www.haddonwealthmgt.com, or call (856)-888-1744 to begin a discussion.
