9 Planning Ideas to Wrap up the Year
The end of the year is full of holidays, family, friends, and planning! Many time-sensitive financial planning topics coincide with the end of the year. While this list of nine year-end planning topics is intended for educational purposes only and should not be considered investment, tax, or other advice of any kind, I hope the content and questions below will shed light on some items I’m working through with clients as we turn the corner on 2022.
#1 – Flexible Spending Accounts (“FSAs”)
FSAs are typically ‘use-it-or-lose-it’ accounts. It is surprisingly easy to opt into an FSA during open enrollment in the fall and then forget that the funds are available the next year. Have you used all of the dollars available in yours? If not, a helpful list of eligible expenses is available here. Additionally, there is usually a deadline to submit requests for reimbursement from the account (if not paid using an attached debit card). Checking your claim deadline is a wise move.
Two other specific notes on FSAs by type are as follows:
Healthcare FSAs – While employers may allow a) a nominal rollover amount to the 2023 calendar year or b) the ability to use lingering funds during the early part of next year, an employer is not required to make either option available. Plan documents or human resources staff should be able to answer questions regarding the availability of unused funds.
Dependent Care FSAs – IRS rules do not allow dependent care FSAs to be rolled over in any amount from one year to the next. Those of us with kids in preschool know how easy it is to rack up these costs. Have you 1) used all of your funds that were set aside and 2) submitted any necessary reimbursement requests?
#2 – Health Savings Account (“HSA”) Contributions (If Eligible)
HSA contributions are also limited each year and must be made as a payroll deduction during the year in order to maximize tax savings. With that being said, HSA contributions are allowed through the tax filing deadline in April. For 2022, the maximum contributions are $3,650 for self-only and $7,300 for families, with an additional catch-up allowance of $1,000 for those ages 55 and above.
#3 – Retirement Plan Contributions
With these account types, employers may provide a match. It is wise to make certain that you 1) are clear on how yours is calculated, 2) determined the contribution amount required to max out your match, and 3) are on track to make the contributions you have in mind. Leaving ‘free’ money on the table is never a good feeling!
It might be easy to dismiss the match as trivial when thinking in terms of 3% of your salary (for example). However, a $5,000 yearly match with a 6% growth rate for 20 years adds nearly $184,000 to a retirement account. There is nothing trivial about that!
Each year, the federal government sets the maximum employee contribution limits to retirement plans. For 2022, the basic limits for 401(k) and 403(b) plans are $20,500 for those 49 and under and $27,000 for ages 50 and above.
Additionally, while most employer-sponsored retirement plan contributions must be made by December 31st, contributions to Traditional and Roth IRAs (if eligible) can typically be made through the tax filing deadline in April.
#4 – Education Funding
Many states offer income tax credits or deductions for 529 plan account contributions, typically up to a certain maximum. Contributions must be made by December 31st to apply for the current tax year.
For those with children entering or currently attending college, it is also time to complete your FAFSA application. Schools and states have different deadlines (see here) for completing the application, and some awards are only available until funds run out. The FAFSA application opened on October 1st.
#5 – Tax Withholding
Ah, taxes…are you withholding enough? Too much? Will you meet safe harbor requirements? These are questions I work through with clients as we plan together throughout the year as well as when their tax picture begins to solidify during the 4th quarter. For many, a tax withholding projection is valuable to avoid underpayment penalties and interest.
Receiving uneven income – such as vesting stock awards, bonuses, option exercises, etc. – makes this process particularly important, since the “supplemental” tax withholding rate (22% federal and varies by state) may or may not be sufficient to cover the tax bill (for my clients, it often isn’t). As a result, this tax surprise can quickly amount to a five-figure sum – and no one likes a surprise tax bill!
#6 – Charitable Contributions
For those who are charitably inclined, giving often takes place toward the end of the year to meet the December 31st deadline for a tax benefit in the current year. In some circumstances, it can make sense to ‘bunch’ gifts into a single tax year and/or contribute to a donor-advised fund (“DAF”) instead of making gifts directly to the charity(ies) of your choice. Additionally, it may be possible to avoid capital gains taxes altogether on gifts if planned effectively. When optimized for impact, tax-efficiency, and intentionality, charitable giving strategies prepared for clients are often structured over several years.
#7 – Concentrated Stock Review
Concentrated stock is, of course, an ongoing planning topic throughout the year. However, December 31st presents a unique deadline for strategies such as:
Using the entirety of your marginal tax bracket,
Ensuring the alternative minimum tax exemption is fully utilized for exercising certain stock options, and
Reviewing unrealized capital losses to offset taxable capital gains (often referred to as “tax-loss harvesting”).
#8 – Series I Savings Bond (“I Bond”) Purchases
Though there are certain methods for buying additional amounts, individuals are generally limited to $10,000 in I Bond purchases per calendar year. And, as you’d likely expect, I Bonds must be bought by December 31st to take advantage of the 2022 allowance. For easy reference, the current interest rate on I Bonds is 6.89% (which is not subject to state and local taxes).
#9 – Life Changes
New jobs, starting a business, having a child, and other changes in circumstances usually serve as a catalyst for revisiting and updating your financial plans. Tax planning opportunities often emerge from these types of events, and changes could offer new strategies for consideration. When life happens – both the good and the bad – it is wise to reassess your goals and pathway toward achieving them. The end of the year provides a natural opportunity to do just that.
I hope these nine items have given you valuable things to think about as you close 2022 and look ahead to 2023. If you’d like to talk more about year-end planning, please feel welcome to reach out here.
Wishing you and yours a wonderful holiday season!