Littlejohn column: 2022 year-end financial planning checklist

Brian Littlejohn

With year-end quickly approaching, here are some valuable financial to-do’s you can check off your list before Jan. 1 rolls around: 

1. Review and update your employee benefits

Although timing can vary, many employers offer benefit “open enrollment” near the end of the year. Open enrollment can provide a great opportunity to make strategic financial decisions while maximizing your compensation package.

Start by reviewing any new changes to your benefits package. Then, consider how your financial situation has changed this year — or how you expect it to change next year — and select your benefits accordingly.

Here are a few key benefits to consider adding or updating:

  • Insurance: Life, disability income, and health insurance are some of the most valuable benefits.
  • Retirement: Be sure to take advantage of the benefits your plan offers, whether it’s a 401(k) with matching contributions, an employee stock purchase plan, or a deferred compensation plan.
  • Legal: Some employers offer legal services at a discounted rate. If you have access to this benefit, you may want to consider using it to create or update essential estate planning documents.

2. Conduct a 2022 tax review

For most taxpayers, Dec. 31 will mark the end of the 2022 tax year. That means year-end may be your last chance to proactively lower your 2022 tax bill.

As you review your tax situation, here are seven key tax-planning tips to consider:

  1. First, identify any changes to your tax situation.
  2. Harvest capital gains or losses.
  3. Review your charitable giving plan.
  4. Look for ways to reduce taxable income.
  5. Consider Roth conversions in low-income years.
  6. Make any remaining annual exclusion gifts for 2022.
  7. Donate your RMD for an above-the-line deduction.

3. Review your investment portfolio and rebalance if necessary

Year-end can also be a great time to review your investments and make updates or contributions as needed.

First, review your desired asset allocation — that’s your ideal mix of stocks, bonds, and other assets in your portfolio. This mix should reflect your financial goals, as well as the amount of risk you’re willing to take with your investments.

Then, cross-check your desired asset allocation with your current investment portfolio and consider rebalancing your accounts if necessary. Just remember, if you’re rebalancing within a taxable account, you may trigger capital gains and/or losses.

4. Maximize your retirement plan contributions

If you haven’t maxed out your retirement plan contributions for 2022, now may be a good time to do so. In 2022, the contribution limit for employees who participate in 401(k), 403(b), most 457 plans is $20,500 (plus a $6,500 catch-up contribution if you’re age 50 or older). In 2023, this limit will increase to $22,500, plus a $7,500 catch-up contribution.

For individual retirement accounts (IRAs), you can contribute up to $6,000 in 2022, plus a $1,000 catch-up contribution for those age 50 and older. In 2023, this limit will increase to $6,500, with the $1,000 catch-up contribution remaining the same.

5. Consider making charitable donations

As you review your charitable donations for the year, remember that you can only take a charitable deduction on your tax return if you itemize deductions. If you don’t typically itemize, consider “bunching” your donations if you have extra cash on hand. Bunching means making two or more years’ worth of donations in the current year to maximize the amount you can deduct from your taxes.

You may also want to consider donating to a donor-advised fund (DAF). A DAF allows you to make a charitable donation and take the deduction in the current year. However, unlike bunching, you don’t have to decide where your donation goes right away.

6. Don’t forget to take RMDs

The deadline to take required minimum distributions (RMDs) is Dec. 31. The IRS requires anyone age 72 or older to take RMDs from their traditional IRA(s). There are no RMDs for Roth IRAs unless they are inherited.

If you don’t need the extra income this year, you can donate your RMD to charity by making a qualified charitable distribution (QCD). A QCD allows IRA owners to transfer up to $100,000 directly to charity each year. Unlike RMDs, QCDs are excluded from your taxable income. 

It’s important to note that the IRS considers the first dollars out of an IRA to be your RMD until you meet your requirement. If you take advantage of this strategy, be sure to make the QCD before making any other withdrawals from your account.

Brian Littlejohn, MBA, CFP®, CFA is the founder of Sherwood Wealth Management, an independent registered investment advisor firm. He specializes in inherited wealth and works with clients in the Roaring Fork Valley and beyond.

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