Six 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. 

While nobody likes to see portfolio values decline, lower market values and rising rates may provide opportunities to manage your 2022 tax bill, and make smart financial planning decisions to benefit you in the years ahead. Here are six action items worth tending to before 2022 is a wrap.

1. Make Savvy Tax-Planning Moves 

One way to save money is to pay less tax. Here are a couple of year-end ideas.

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 our 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; tax-loss harvesting isn’t for everyone, and must be carefully managed.

Consider a Roth conversion: You may want to convert some of a traditional IRA into a Roth IRA, paying the tax now on the amount converted, allowing for tax-free growth and withdrawals in retirement. One reason to consider a Roth conversion when stock market values are down is that the value of the assets you convert to a Roth IRA will be lower, which means you'll pay less in taxes on the conversion. This can be a good strategy if you expect the value of those assets to recover in the future and you want to pay taxes on them at a lower rate. Again, this strategy is best executed with the assistance of an experienced financial advisor or tax professional.

2. Revisit Your Cash Reserves

Where is your cash stashed these days? After years of offering essentially zero interest in money markets, savings accounts, and similar platforms, some banks are now offering higher interest rates to savers. Others are not. It might pay to …

Shop around: If you have significant cash reserves, now may be a good time to compare rates and fees among local institutions and online banks. Double check fees; make sure your money remains FDIC-insured; and remember, if it sounds too amazing to be true, it probably is. 

3. 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 an 8.7% increase for 2023, among the biggest Cost-of-Living Adjustments (COLAs) ever. This substantial increase will compound on top of the already-large increase of 5.9% in 2022. 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. 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; the rest could be used to replenish cash reserves. 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 (QCD) to your favorite non-profit organization. Be sure to work with your financial professional to ensure that you properly execute any RMDs and/or QCDs.

4. Check Up on Your Healthcare Accounts

As year-end approaches, make sure you and your family have made the most of your healthcare accounts. 

Examine all your benefits: 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? Temporary rules under the 2020 Cares Act that allowed participants to roll over unspent FSA funds end December 31, reverting back to “use-it-or-lose-it” rules. Check with your employer to see if you’re eligible to roll over any unused funds to 2023; if so, the maximum allowable rollover amount is $570. 

5. Year-end gifting

Saving for education: 529 plans are among the most familiar tools for catching a tax break on educational costs. You fund your 529 plan(s) with after-tax dollars. Those dollars can then grow tax-free, and the beneficiary (usually, your kids or grandkids) can spend them tax-free on qualified educational expenses. Many states offer tax breaks on 529 contributions. Making and investing a 529 contribution when markets are down may offer the potential for increased growth as markets recover.

Annual gift exclusion: Gifts must be made by December 31 in order take advantage of the 2022 annual gift exclusion of up to $16,000 per person, per beneficiary. The annual gift tax exclusion is the amount that any individual may give to another individual in a given tax year with no tax reporting or gift tax consequences. Note that for 2023, the annual gift exclusion will increase an additional $1,000, for a total eligible gift exclusion of $17,000 per person, per beneficiary.

6. 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. 

2022 has challenged all of us as we grapple with the intersection of inflation, rate hikes, bumpy markets, and economic uncertainty. As always, we encourage clients to focus on what they can control, and to tune out the noise.

This content is developed from sources believed to be providing accurate information as of the date of publication, and is intended for informational purposes only. Please consult your financial professionals for specific information regarding your individual situation. Past performance does not guarantee future results. All investing involves risk, including risk of loss.