Your 2022 Year-End Financial Checklist

Really Maxing Out Your 401(k)

In 2022, you can contribute up to $20,500 in a 401(k). If you’re 50 or older, that number jumps to $27,000 thanks to $6,500 in catch-up contributions. 

You fund a traditional 401(k) with pre-tax dollars, so every dollar you funnel into the account lowers your annual taxable income. Reducing your taxable income is important because you could pay fewer taxes in April. 

But your contribution momentum doesn’t necessarily have to stop there. Including your employer contributions (aka a match), the IRS enables you to put up to $61,000 ($67,500 with catch-ups) in your 401(k). If the funds from you and your employer don’t add up to that number, you may be able to make additional after-tax contributions to maximize your account.

Keep in mind that after-tax contributions are different from typical payroll deductions, so check with your employer and financial planner to see if A. they allow after-tax contributions, and B. if it’s a good idea given your financial situation.  

After-tax contributions can be unique and open up various planning opportunities, like converting the funds to a Roth 401(k) or Roth IRA. 

Know Your Options for an IRA

Speaking of IRAs, the maximum amount you can put into your IRA in 2022 is $6,000 (or $7,000 if you’re 50 or older). That limit applies to each IRA separately, so you could directly contribute $6,000 into a traditional IRA and $6,000 into a Roth IRA (if you qualify). 

You’ll likely come across three types of IRAs:

• Traditional IRA (pre-tax contributions, tax-deferred growth, taxable withdrawals)
• Non-deductible Traditional IRA (after-tax contributions, tax-deferred growth, taxable withdrawals). You may have to make non-deductible contributions if you or your spouse has retirement coverage through work and you earn above a set threshold. 
• Roth IRA (after-tax contributions, tax-deferred growth, tax-free withdrawals when you follow the rules). If you earn above the income phaseouts, you can use a backdoor Roth IRA, or Roth conversion, to get money into this account. 

If you’re self-employed, there are several other IRAs at your disposal:

• SEP IRA (For business owners: up to 25% of an employee’s compensation or $61,000)
• SIMPLE IRA (For business owners; must match up to 3% of an employee’s compensation or a 2% nonelective contribution for each employee)

Keep Investing Funds in Your Health Savings Account (HSA)

If you’re enrolled in a high deductible health plan, you can access a valuable tax-advantaged account: an HSA. A Health Savings Account comes with three critical tax benefits:

• Pre-tax contributions (i.e. contributing lowers your taxable income)
• Tax-free growth on earnings within the account
• Tax-free withdrawals for qualified medical expenses like prescriptions, premiums, and more

You can contribute up to $3,650 for self-coverage and $7,300 for family coverage this year, and those limits will increase in 2023 to $3,850 and $7,750, respectively.

Instead of treating your HSA like a savings account, start leveraging it as another long-term investment tool. By investing the funds in your HSA, you can take advantage of compounding returns and create a generous bounty when you likely need it most: retirement.

Discover how to maximize the benefits of your HSA here.

2. Analyze Your Asset Allocation and Rebalance if Necessary

Given the notable market volatility this year, there’s a possibility your investments aren’t in the same position they were last January. 

This means now could be a good time to review your asset allocation (meaning, the type of securities you’re investing in and the weight you give each category). 

Your “ideal’ asset allocation depends on several factors: 

• Your risk tolerance (willingness to take risks)
• Risk capacity (ability/necessity to take risks)
• Time horizon (how long until you reach your goal)
• Investment goals (what you want to achieve)

If you’ve noticed a shift in your allocations, whether to typical market movements or a change in your investment needs, it might be time to “update” or rebalance your investments to align more closely with your goals. 

Whenever you buy and sell investments, it’s essential to keep the big picture in mind. You don’t want to sell out of fear or buy out of hubris. Your advisor can help determine if you need to rebalance your portfolio and how to keep your investments working toward your larger goals. 

3. Decide if You’re Taking the Standard Deduction or Itemizing

One of the biggest tax preparation decisions is whether or not you’ll itemize deductions. But why do you have to worry about this now? Don’t you decide in April? 

While you’ll make the final decision when you and your tax professional prepare your taxes in the spring, planning now can help you make informed decisions before the year-end deadline. 

In 2022, the standard deduction is:

• $12,950 for single filers and married couples filing separately
• $19,400 for heads of household
• $25,900 for married couples filing jointly

While these numbers are relatively high, you may have other deductions that exceed these limits. If so, itemizing them can help you reduce your tax bill. Here are some common deductions to track throughout the year:

• Interest on loans (mortgage, student loans, home equity line of credit (HELOC), etc.)
• State and Local Taxes (SALT)
• Healthcare expenses that exceed 7.5% of your adjusted gross income
• Charitable contributions 
• Family credits (child tax credit, adoption credit, etc.)

If you’re right on the line, it might make sense to explore increasing your charitable efforts or springing for an extra pair of glasses to push you over the standard deduction. 

4. Get on Your CPA’s Calendar

Come January 1st, your CPA’s calendar will start to fill up and you’ll want to secure a slot before tax time.

Take a minute before year’s end to book a convenient time on their calendar. Otherwise, you may be left scrambling to meet next spring’s deadline.

5. Think Through Tax-Loss (and Gain) Harvesting

Watching your investments lose money is a bummer, but that loss could present a strategic tax opportunity. 

Tax-loss harvesting enables you to sell assets at a loss to offset other investment gains. In fact, you can deduct up to $3,000 from your ordinary income, and if your losses exceed that amount, you can roll it over into the following year. 

In conjunction with managing your losses, it’s also wise to effectively track your gains. 

Suppose you anticipate a significant liquidity event, like your company going public, receiving a sizable inheritance, a lot of stock vesting, selling a vacation home, etc. In that case, it’s crucial to strategically prepare for the tax consequences. 

For example, you might want to look at realizing losses in the same year as significant gains to help cancel the other out as much as possible. 

6. Consider a Roth Conversion

If you earn over $214,000 married filing jointly and $144,000 filing single in 2022, you can’t directly contribute to a Roth IRA. But a Roth conversion is like a golden ticket for high-income earners to access Roth IRAs.

A Roth IRA conversion lets you convert funds from a traditional account (IRA, 401(k), etc.) into a Roth. You’ll pay taxes on the conversion amount in the year you make it, the funds will grow tax-free, and you can enjoy qualified tax-free distributions in retirement. 

Since paying taxes on the money up front increases your taxable income for the year (rather than decreases, which is what we’ve been emphasizing in this article), why should you give this strategy the time of day? 

Well, with Roth IRAs you can:

• Accumulate tax-free dollars in retirement, adding diversity and flexibility to your spending
• Take advantage of a lower-income year/down market, lower your present tax bracket, and leverage future tax brackets
• Give yourself more spending wiggle room in your golden years, as Roth IRAs are one of the only tax-advantaged accounts without required minimum distributions
• Set up a tax-friendly inheritance vehicle for your beneficiaries

But Roth conversions are complex, and there are several tax and other wealth considerations. Working with your financial advisor and tax professional is critical to see if a conversion makes sense for you this year. 

7. Make the Most of All Company Benefits

Be honest with yourself, do you really know all the benefits your company offers? 

We get it: rummaging through a bulky HR handbook that feels like it was written for computers instead of people is not a fun afternoon. But completely understanding your benefits package can be a financial game-changer. 

Here are some top benefits to watch out for:

• Medical insurance. Are you on the right plan for your current health needs? Do you need any new medications? Will you require specialist visits? 
• Health savings options. Do you still have money left over in a Flexible Spending Account (FSA)? Since there’s a cap on how much you can roll over, most FSA benefits are “use it or lose it.” Are you using other FSAs, like a Healthcare Dependent FSA, to help cover daycare or other caregiving expenses? Are you maximizing your HSA if you qualify? 
• Group insurance policies. Look into life, disability, casualty, pet, and other affordable group insurance policies to get the best deal.
• Paid time off. Spending quality time away from your inbox can improve productivity and joy at work. Be sure to use all your allotted vacation time to prioritize a strong work/life balance. 

8. Evaluate Your Cash Flow Plan for Next Year

For most people, spending comes in seasons. You might notice more spending during vacation-heavy summer months or stocking up on year-end gifts. 

While the ebbs and flows of spending are entirely normal, it’s vital to keep tabs on what your spending looks like overall to ensure it’s aligned with your larger financial goals. 

If you find yourself spending on things that aren’t fulfilling, it might be time to make a change. By overspending in one area, you could limit yourself in others. Prioritize your core goals and values, and be intentional about spending in a way that brings your values to life. 

For example, quality time with your family may be a core value. If so, spending money on a flight to see your family would align with those values, whereas buying an extra knick-knack might not. 

When you start spending money with your values in mind, cash flow planning becomes far less burdensome.