Five Financial Best Practices for Year-End 2022
To say the least, there’s been plenty of political, financial, and economic action this year—from rising interest rates, to elevated inflation, to ongoing market turmoil.
How will all the excitement translate into annual performance in our investment portfolios? Markets often deliver their best returns just when we’re most discouraged. So, who knows! While we wait to find out, here are five action items worth tending to before 2022 is a wrap.
1. Put Your Money to Work
Has your emergency savings fund exceeded a practical balance? Holding too much cash can increase the risk of losing purchasing power when inflation weakens the value of your dollar. If you’re sitting on excess cash, you may be able to put it to even better use under current conditions. Here are two possibilities:
Rebalance: You can use cash reserves to top off investments that may be underweight in your portfolio. Many stock market prices have been depressed as well, so this may be an opportune time to “buy low,” if it makes sense within your investment plans.
Lighten your debt load: Carrying high-interest debt is a threat to your financial well-being, especially in times of rising rates. Consider paying off credit card balances, or at least avoid adding to them during the holiday season.
2. Replenish Your Cash Reserves
Not everybody has extra money sitting around in their savings accounts. Here are a couple ways to rebuild your reserves.
Earning more? Save more: To offset inflation, Social Security recipients are set to receive among the biggest Cost-of-Living Adjustments (COLAs) ever. Or, if you’re still employed, you may have received a raise or bonus at work for similar reasons. Rather than simply spending these or other new-found assets, consider channeling a prescribed percentage of them to saving or investing activities, as described above. If you repurpose extra money as soon as it comes in, you’re less likely to miss it.
Tap Required Minimum Distributions (RMDs): If you need to take required minimum distributions (RMDs) from your own or inherited retirement accounts, that’s a must-do before year-end. Set aside enough to cover the taxes, but the rest could be used for any of the aforementioned activities. Another option during down markets is to make “in-kind” distributions: Instead of converting to cash, you simply distribute holdings as is from a tax-sheltered to a taxable account. Or, to avoid being taxed on the distribution, you also could donate the assets through a Qualified Charitable Distribution to your favorite non-profit organization.
3. Make Some Smooth Tax-Planning Moves
Another way to save more money is to pay less tax. Here are a couple of year-end ideas for that.
It’s still harvest season: Market downturns often present opportunities to engage in tax-loss harvesting by selling taxable shares at a loss, and promptly reinvesting the proceeds in a similar (but not identical) fund. You can then use the losses to offset taxable gains, without significantly altering your investment mix. When appropriate, we’ve been helping FVIM clients harvest tax losses throughout 2022. There still may be opportunities before year-end, especially if you’ve not yet harvested losses year to date. We encourage you to consult with a tax professional first; tax-loss harvesting isn’t for everyone, and must be carefully managed.
Create a future tax-free income: Fully utilize your Roth IRA. The Charles Schwab website has a summary of IRS tax rules for IRAs. If this year’s income has you in a low tax bracket, consider doing a Roth conversion. You’ll pay tax on the funds you roll out of your traditional IRA, but your Roth account can grow tax-free and the balance is not subject to future required minimum distributions.
4. Check Up on Your Healthcare Coverage
As year-end approaches, make sure you and your family have made the most of your healthcare coverage.
Examine all your benefits: For example, if you have a Health Savings Account (HSA), have you funded it for the year? If you have a Flexible Spending Account (FSA), have you spent any balance you cannot carry forward? If you’ve already met your annual deductible, are there additional covered expenses worth incurring before 2023 re-sets the meter? If you’re eligible for free annual wellness exams or other benefits, have you used them?
Don’t miss open enrollment: Medicare elections and plan options can be changed until December 7th. Many pension and employer plans have a similar deadline. Now’s the time to review if your coverage is adequate and appropriate for the year ahead.
5. Get Set for 2023
Why wait for 2023 to start anew? Year-end can be an ideal time to take stock of where you stand, and what you’d like to achieve in the year ahead.
Audit your household interests: What’s changed, and what hasn’t? Have you welcomed new family members or bid others farewell? Changed careers or decided to retire? Received financial windfalls or incurred capital losses? Added new hobbies or encountered personal setbacks? How might these and other significant life events alter your ideal investment allocations, cash-flow requirements, insurance coverage, estate plans, and more? Take an hour or so to list key updates in your life, so you can hit the ground running in 2023.
How Can We Help?
How else can we help you wrap 2022, and position you and your loved ones for the year ahead? Whether it’s helping you manage your investment portfolio, optimize your tax planning, consider your cash reserves, weigh insurance offerings, or assess any other components that contribute to your financial well-being, we stand ready to assist—today, and throughout the years ahead.