Annual Financial To-Do List

Actions you can take this year to improve your financial security.

What financial, business, and life priorities do you plan to address in the coming year? Now is a good time to think about strategies to accomplish your specific objectives, from building your retirement fund to managing your taxes. Here are a few investing, saving, and budgeting methods to help you meet your goals this year.

Can you contribute more to your retirement plans this year?

The contribution limit for a Roth or traditional individual retirement account (IRA) increased from $6,000 in 2021 to $6,500 in 2022 ($7,500 for those making “catch-up” contributions).¹ Your modified adjusted gross income (MAGI) may affect how much you can put into a Roth IRA: singles and heads of household with MAGI above $144,000 and joint filers with MAGI above $214,000 cannot make 2022 Roth contributions.²

Keep in mind that, with some exceptions, withdrawals from traditional IRAs are taxed as ordinary income, and they may be subject to a 10% federal income tax penalty if taken before age 59½. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½.³

Consider tax-savvy charitable gifting.

You can claim a deduction on your tax return for charitable gifts, subject to certain qualifications, and provided you itemize your deductions using Schedule A. Also, as of 2020, those who do not itemize may be able to claim a charitable contribution up to $300. In either case, the IRS requires that you retain specific documents as proof of all such gifts. ⁴

Can you take a home office deduction for your small business?

If you are a small-business owner, you may be able to legitimately write off expenses linked to the portion of your home used exclusively for conducting your business. Using your home office as a business expense involves a complex set of tax rules and regulations. Before moving forward, consider consulting a professional who is familiar with accounting and tax law for home-based businesses.⁵

Do you qualify for an HSA?

A Health Savings Account (HSA), available to those enrolled in eligible health care plans, is a triple tax advantaged account; you fund it with pre-tax dollars, it can be invested and grows tax-free, and the money can be spent (tax-free) directly on allowable health-related expenses, including both goods and services. However, note that this applies to federal taxes; a few states do tax some aspects of HSA usage.

For 2022, you can contribute up to $3,650 to an HSA if you are single, or $7,300 for those with a spouse or family. Those limits jump by a $1,000 “catch-up” limit for each person in the household over age 55. The money can be used for non-medical expenses once you reach age 65, but it will be taxed as ordinary income in that case. You can also withdraw money for non-medical expenses before age 65, but you’ll pay a 20% penalty in addition to taxes on it.⁶

Asset location may or may not make a significant difference to your finances.

Conventional wisdom for tax-efficient asset location holds that your least tax-efficient securities should be located in pretax accounts and your most tax-efficient securities in taxable accounts. Whether this matters much to your own finances will depend on your relative account sizes, your specific holdings, and your investment strategy. It is worth taking the time to understand what role this aspect of investment could play in your own portfolio.^7,8

Review your withholding status.

Should your withholding be adjusted due to any of the following factors?
=> You tend to pay a great deal of income tax each year.
=> You tend to get a big federal tax refund each year.
=> You recently married or divorced.
=> A family member recently passed away.
=> You have a new job and you are earning much more than you previously did.
=> You started a business venture or became self-employed.

These are general guidelines and they are not a replacement for real-life advice. So, make certain to speak with a professional who understands your situation before making any changes.

Are you marrying in the coming year?

You may want to review the beneficiaries on your retirement accounts, insurance policies, and other assets. If you will have a new last name, you will need to request a new Social Security card. If the two of you have individual retirement accounts and investment strategies, you may wish to revise or adjust them to reflect your new family situation.

Are you coming home from active duty?

Check the status of your credit and the state of tax and legal proceedings that might have been preempted by your orders. Make sure any employee health insurance coverage is still in place and revoke any power of attorney you may have granted to another person.

Consider the tax impact of any upcoming transactions.

Are you planning to sell any real estate this year? Are you starting a business? Do you think you might exercise a stock option? Might any large commissions or bonuses come your way? Do you anticipate selling an investment that is held outside of a tax-deferred account? Considering the ramifications in advance, and perhaps modeling a few different scenarios to compare their effects, could lessen any negative tax consequences and significantly improve your long-term finances.

If you are retired and age 72 or older, remember your year-end RMDs.

Retirees must begin taking annual Required Minimum Distributions (RMDs) from traditional IRAs and 401(k), 403(b), and profit-sharing plans once they reach age 72. You have until December 31 of each year to take your distribution for that year, with the exception that your first distribution can be taken as late as April 1 of the following year. The I.R.S. penalty for failing to take an RMD can be up to 50% of the calculated RMD amount.⁹

Reviewing your finances every year with a financial professional who understands your individual situation can keep you up-to-date on strategies you can use to meet your financial goals.

1 - irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

2 - irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2022

3 - investopedia.com/ask/answers/102714/how-are-ira-withdrawals-taxed.asp

4 - irs.gov/publications/p526#en_US_2020_publink1000229790

5 - nerdwallet.com/blog/taxes/home-office-tax-deductions-small-business/

6 - fool.com/retirement/plans/hsa/rules/

7 - thefinancebuff.com/tax-efficient-asset-placement-difference.html

8 - investopedia.com/articles/tax/08/asset-location.asp

9 - jerryyu.retirevo.com/the-secure-act-2019-tax-and-retirement-implications