FINANCIAL WELLNESS • READ TIME: 5 MIN
"The secret of getting ahead is getting started.
The secret to getting started is breaking your complex overwhelming tasks into small manageable tasks and then starting on the first one."
Mark Twain
As the end of the calendar year approaches, now is an ideal time to perform a financial “wellness check,” track progress toward financial goals, and consolidate or organize investments and accounts. While some items enumerated below may pertain only to particular “stages” of life (accumulation, retirement, etc.), a number of them are applicable at all times.
In addition to self-directed “financial housekeeping,” our team is available to provide guidance regarding the checklist below (and more) - schedule a meeting with us to learn more at https://www.rpwealthadvisors.com/schedule-a-meeting.
Tax-Loss Harvesting Opportunities
By selling securities that have decreased in value (in taxable, non-qualified accounts), investors can (1) wash out equivalent capital gains and/or (2) offset up to $3,000 of ordinary income. Tax-loss harvesting allows investors to negate some (or all) of the capital gains in a given tax year for the purpose of reducing their tax bill. While some investment managers/strategists actively tax-loss harvest throughout the year to offset capital gains, the end of the calendar year marks the "last opportunity" to realize any additional losses.
An example of tax-harvesting: Suppose a security (stock, bond, ETF, etc.) was originally purchased for $100,000 but is now down to $75,000. Harvesting this loss generates a $25,000 capital loss, which may offset a corresponding capital gain ($25,000.) This will produce a $3,750 tax savings at a 15% long-term capital gains tax rate. Relative to the investment's depreciated market value of $75,000, harvesting the capital loss generated "tax alpha” of $3,750 / $75,000 = 5.0%.
Shelter Income with Retirement Plans
The maximum contribution limit for 401(k) plans in 2022 is $20,500 (plus $6,500 if you are 50 or older.) That’s up to $27,000 that escapes taxation until it is distributed from the retirement account at 59.5+ years old (for the most part; some exceptions apply.) Additionally, investors can also consider contributing to Traditional or Roth IRAs for further tax advantages now or at disbursement. However, these accounts can be funded up to the tax-filing deadline (usually April of the following year.)
For further guidance regarding 401(k) or IRA contribution limits and income thresholds, visit the IRS website: https://www.irs.gov/retirement-plans/ira-deduction-limits, https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits. And, if you are already looking ahead to fiscal year 2023, the IRS recently published updates regarding items that will be indexed for inflation next year: https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023.
Required Minimum Distributions
Continuing with the theme of retirement accounts, another year-end necessity for investors age 72 and older is to ensure RMDs (Required Minimum Distributions) have been satisfied. For the most part, every individual over 72 years old with a retirement account (again, some exceptions apply) is required to disburse a (minimum) percentage of their account. Additionally, clients with Inherited (or Beneficiary) IRAs may also need to take an RMD. Additional information on required percentages, ages, types of accounts, etc. is available through the IRS at https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds.
Review Your Insurance Coverage
For all types of policies that apply, gather information on your life, health, home/renters, auto, liability, disability, and long-term care coverage. Collecting policy information will allow you to review coverage, coverage needs, deductibles, premiums, and beneficiary information. For more information on insurance needs, visit the relevant "needs assessment" - Single, Newly Married, Married with Children, and Retirees and Empty Nesters,
Rebalance, Update, and Consolidate Accounts
Keeping track of investments can be a challenge if accounts are spread out between custodians. Merging like-kind accounts or transferring from one custodian to another in an effort to consolidate investments is a way to streamline statements, reporting, and record keeping. This may also include rolling old 401(k) plans into IRAs or into an employer’s current plan.
In addition to account consolidation, other account-specific housekeeping items may include updating account information (address, contact information, beneficiary information) and/or portfolio rebalancing to realign asset class allocations after changes throughout the year.
Cash Flow Analysis
There are two significant metrics related to cash flow (https://www.rpwealthadvisors.com/blog/how-to-prepare-a-personal-cash-flow-statement) that can “make or break” financial plans - the savings rate and the spending rate. Analyzing your personal/household savings and spending rates at the end of the year provides a (calendar) year’s worth of available data. Important factors to consider when performing a cash flow analysis include proximity to targets (how much do I want to save vs. how much am I actually saving?), percent of portfolio liquidated to create cash flow (withdrawal rate), etc. Finally, projecting future expenses and cash flow needs against your portfolio (withdrawal rate) or salary (spending/saving rate) can help determine if adjustments need to be made in the next calendar year.
Gifting to Dependents and Charities
529 plans, custodial accounts (UTMA/UGMA, Custodial IRA), and ABLE accounts are all eligible vehicles for gifting funds to dependents/minors. Most states offer tax incentives for contributing to 529 plans, as well, so this can be an additional item to factor in to your tax plan. End-of-year planning with our team, in addition to a check-in meeting with a CPA, may clarify these (and other) tax opportunities.
Apart from gifts to family and/or funding custodial accounts, charitable gifting is another way to distribute capital. Like funding 529 accounts, eligible charitable contributions also qualify for tax deductions: https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions.
Although any time during the year is a good time to review, update, and plan, the actions investors take at the end of the year to maximize contributions, offset capital gains through tax-loss harvesting, etc. can have positive impacts on the tax bill due the following year. Proactive steps now can help create an organized financial life that will get the new year off to a positive start.
The RP Wealth Advisors team is available to help you tackle your year-end to-do list (relating to financial items - we can't assist with your last-minute holiday shopping...) - so reach out or schedule a meeting online to learn how we can help.
The content is developed from sources believed to be providing accurate information. All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy referenced here will be successful. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by RP Wealth Advisors to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Diversification and asset allocation are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss.