The holidays usher in a joyful time of family gatherings, holiday parties, fun with friends and the promise of a bright new year. But before you put a bow on 2022, there are a few financial housekeeping tasks that you should review. From my experience with clients, I have compiled a top ten list of considerations to make your festivities a little greener. But hurry, you need to take advantage of these money saving opportunities before the ball drops on December 31st.
Now let the countdown begin!
10. Maximize your 529 contributions
The gift of learning is always in style! When you contribute funds to a 529 educational account, you not only provide your favorite student with lifelong knowledge, but many states will also award your generosity with tax deductions or credits. Couples can give up to the gift tax exclusion of $32,000 per beneficiary without needing to file a gift tax return, but states vary in how much of a contribution will result in a tax benefit.
9. Consider a year-end charitable gift
The season of giving is a great time to make monetary donations to a favorite medical organization, deserving animal shelter or struggling soup kitchen. Besides feeling good, when you make a qualified charitable distribution (QCD) from your IRA, your required minimum distribution (RMD) is fulfilled up to $100,000 for that year. Please note that while the RMD age is 72, you can make a QCD at age 70.5. QCDs can be even more valuable than gifting directly to a charity and then taking a deduction, since the income never hits your tax return at all.
8. Explore tax loss harvesting
Even a down market has a silver lining when it allows you to take advantage of potential tax savings. Tax loss harvesting is when you sell a fund that is at a loss and then immediately purchase a similar fund. This way, you aren’t out of the market if it turns around. When you implement tax loss harvesting strategies, losses may fully offset any capital gains income or up to $3,000 per year of ordinary income for any amount not used by capital gains. Losses must be generated before December 31, 2022 to be part of your 2022 filing.
7. Review your allocations
While you can’t control volatility in the market, you can help safeguard your portfolio by reviewing your asset allocation to make sure your investments are still allocated the right way to meet your goals. By doing this – especially after big swings in the market – you can ring in the new year knowing that your goals are on track.
6. Use your FSA funds
Because contributions made to a flexible spending account (FSA) are tax-free, they are a great option to pay for certain out-of-pocket health care costs, such as deductibles, over the counter medication and even everyday necessities such as contact solution and hand sanitizer. While some employers allow individuals to rollover $570 annually, for the most part these funds must be used before the clock strikes midnight on December 31, or you will lose that hard earned money. Confused about which expenses are covered through an FSA account? Check out this handy guide.
5. Contribute to non-deductible IRA/convert to Roth IRA
Converting funds to Roth mean you will never pay taxes on those retirement dollars again. Also known as a “back-door” Roth, this approach may be useful for a non-working spouse, or a spouse who has all of their retirement savings within a 401(k), particularly for individuals or couples who make too much to contribute to a Roth IRA directly. You can fund an IRA without getting a tax deduction, and then convert the whole amount to a Roth IRA. One thing to note is that if you have other pre-tax IRA balances, this strategy often does not make sense since some or most of the conversion would then be taxable. Late last year, the tax law changes proposed eliminating this strategy. While that particular bill didn’t pass, it could very well happen immediately upon approval in a future bill.
4. Review any other Roth conversions
This consideration is particularly important in early retirement (pre-RMDs/Social Security) or if income is lower than normal for a year (i.e. one spouse took time off from work). Roth conversions allow you to pay taxes at lower rates while your guaranteed income is lower. Roth funds are funds you will never pay taxes on again. Tax rates are set to go up in 2026, if Congress does not act, since the Tax Cuts and Jobs Act will be sunsetting.
3. Prepare to resume student loan payments
The federal student loan payment pause that was first initiated in 2020 will end at the end of the year. With payments rapidly approaching, it’s important to contact your student loan servicer and make sure your payments will be made. It also makes sense to look into income-based options to repaying this debt. If you are considering refinancing your student loans in forbearance, ensure that you are taking the best course of action by watching Chief Planning Officer Jeffrey Levine’s deep dive into President Biden’s Federal student debt forgiveness program.
2. Maximize 401(k) contributions
Maxing out your 401k contribution is a win-win situation! Not only are you proactively building a comfortable nest egg for retirement, but this strategy will also save you money during tax season. Each individual can contribute $20,500 for the year. If you are 50 or older, or if you are turning 50 by December 31, you can invest an additional $6,500 for a total of $27,000 annually.
Cue the drum roll please! The most important money saving action you should implement before the end of the year is …
1. Take your required minimum distribution (RMD)
When it comes to tax savings, I cannot emphasize enough how important it is to take your RMD from your IRA, 401(k), inherited IRAs or other retirement account before December 31st. By not doing so, you would incur a 50% penalty tax on the undistributed amount in addition to the regular taxes owed on the distribution.
By implementing some or all of these considerations by the end of 2022, you may save thousands of dollars in taxes. Please reach out to use here if you have any questions.
Ellerbrock-Norris Wealth Strategies is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.