“End of Year Financial Considerations“
It’s crazy to think we are 4 weeks from the end of 2022 but that is reality. Amidst the Thanksgiving hangover, staying focused at work, and getting Christmas shopping completed, it can be easy to let other areas of your life take a back seat. In reality, someone’s financial picture might not be significantly impacted if it remains on the back burner in December, but there are a few simple steps you can take to tie up any loose ends heading into the new year.
Look to Max out Your Retirement Accounts
The idea of being able to make maximum contributions to an IRA or 401(k) plan might seem out of reach for some people, but knowing the maximums can also make for a good long term goal. For 2022, those aged under 50 can contribute up to $6,000 to an IRA account (Traditional or Roth combined) and $20,500 to a company provided retirement plan (401(k), 403(b), etc.). Technically, contributions to an IRA can be made up until April 15th of the following year for the previous year, while contributions for a company plan should be done by December 31st. For those 50 years old and above the IRA contribution limit is up to $7,000 (an additional $1,000 compared for others), and $27,000 for workplace plans (an additional $6,500 compared to others). Keep in mind that for these retirement plan contributions you are required to have “earned income” in the calendar year so contributions for retirees are not allowed.
Check for Significant Gains or Losses to Offset
The end of the year can also be a good time to see whether you have any significant gains or losses in non-retirement accounts that can be optimized. For example, if someone owns Apple stock in their portfolio and has $10,000 of gains from the time they purchased the stock, they should take the opportunity to look across all of their other investments and potentially find other holdings that have losses to offset the $10,000 gain. By taking the chance to offset long term capital gains with long term losses, you can avoid paying more taxes when you sell in the future. It’s important to keep in mind that the gains and losses should be matched as either short term (less than 1 year of holding) or long term (1 year or more) before making the decision. Additionally, if you plan to re-purchase a security that you have sold for tax purposes, keep in mind that you need to wait 30 days to re-purchase to avoid the “wash sale” rule.
2022 could be an especially good year to complete this strategy and put some of the losses the market has seen to work. Even if you don’t have capital gains to offset, you can still use up to $3,000 of capital losses to offset ordinary income in any given tax year.
Complete Any Charitable Giving
With the standard deduction now so high, charitable giving sometimes doesn’t get the focus that it used to when it comes to end of year tax implications. That being said, if you are using a donor advised fund, or you will have enough deductions to itemize your taxes then getting your final charitable donations completed before year-end is a must. If you aren’t familiar with Donor Advised Funds or how they work, I encourage you to check out our previous posts on the topic. (Donor Advised Funds for the Charitably Minded).
Make a Solid Game Plan for 2023
Perhaps the most important thing you can do at the end of 2022 doesn’t have anything to do with your current investments or financial profile. Maybe you have put off some important financial decisions this year, or things like life insurance, wills, and automatic investing have always been in your to-do list but they don’t get done. One of the best things you can do as you enter into 2023 is to sit down (with your spouse included if you are married) and make a solid game plan for the coming year. Taking the time to pause and talk about your financial goals and dreams, and then making a written game plan to achieve them is a powerful step.