Don’t Let 2023 Catch You Unprepared: Review Your Financial Plan

By Bryan Lee, CFP®, MBA

With the new year comes renewed commitments to improving your finances, strengthening your savings, and planning for the future. At Strategic Financial Planning, we believe that you don’t have to wait until January 1st to get a jump-start on your financial plan for 2023. Use this guide to review each area of your financial plan and make sure you’re starting the new year off on the right financial foot.

Retirement

Maximize Your Retirement Savings

Review your latest paystub to ensure that you have maximized your retirement contributions, and if not, submit changes to HR so that you will max fund for 2023. Many employers offer retirement plans like 401(k)s, 403(b)s, and 457s, which allow you to contribute up to $22,500 annually in 2023 ($30,000 if age 50 or over). Even if you max funded your retirement plan during 2022, you may need to make adjustments to your withholding since these contribution limits have increased for 2023.

These contributions are automatically deducted from your paycheck and won’t show up as part of your annual income if you elect pre-tax contributions, so the more you can maximize your contributions during the year, the less taxable income you will have come April 15th. With this strategy, you can defer taxes until your retirement years when you could potentially be in a lower tax bracket. However, given the current historically-low income tax rates, a case can be made for making Roth 401(k) contributions instead of pre-tax contributions, which results in the contributions being included in taxable income but the growth and eventual distributions are tax-free.

Contribute to a Traditional IRA

Contributing to a traditional IRA is another year-end strategy to reduce your AGI if your income is within certain limits. By contributing pre-tax funds, you can effectively reduce your current-year tax liability, but you will owe tax on both the contributions and the account growth when you withdraw the funds in retirement. Contributions of up to $6,000 for the 2022 tax year can be made until April 15th of 2023, but the sooner they are made, the less likely you are to forget.

The 2023 contribution limit for traditional IRAs is $6,500 with additional $1,000 catch-up contributions for individuals that are 50 years old or over. If your income is too high to make tax-deductible IRA contributions or direct Roth IRA contributions, you can still make nondeductible IRA contributions and then convert those contributions to Roth under current law.

Don’t Forget About RMDs

If you are over the age of 72, you are required to take minimum distributions from all your retirement accounts (except Roth IRAs). In the year in which you turn 72, you have until April 1st of the following year to take your RMD. Every year thereafter, however, you must take the distribution no later than December 31st.

If you haven’t yet taken your RMD for 2022, be sure to do so. If you don’t, you will face a 50% penalty on the distribution you should have taken. If you don’t need your RMD money to cover your expenses, consider donating the funds directly to a worthy cause, which could also lessen your tax burden for the year. To calculate your RMD, use one of the IRS worksheets or an online calculator; some firms will also calculate your RMD for you. Additional distributions may be needed if you have inherited IRAs as well.

Cash Flow

Assess Your Emergency Fund

Now is the time to ensure that you have enough money set aside in your emergency fund or create a plan to build this up over the next year. A common rule of thumb is that an adequate emergency fund should cover 3-6 months of necessary living expenses, including mortgage or rent, utilities, groceries, transportation, etc.; however, you may need more or less of a cushion depending on your situation (i.e., single or dual income household, job security, own a business).

With stock market volatility and recession fears, many experts have suggested maintaining a larger emergency fund, closer to 6-12 months of expenses, unless you have other liquid funds that you can access in an emergency, such as a taxable investment account or a home equity line of credit. If you’re single, or your household only has one source of income, consider saving on the higher end of this scale to make sure you’re covered in the event of a job loss or reduction in income.

However much you save, be sure this money is held in a liquid account. It needs to be readily available and easily accessible, but it should also be in an account that offers a competitive interest rate such as a money market or high-yield savings account so that you don’t lose out on potential growth. An alternative strategy in order to maximize long-term net worth is to leave as little in a money market or high-yield savings account and consider your taxable investment account as being available for your short-term emergency needs. This is a less conservative strategy and your financial advisor can determine the appropriateness of the strategy depending on your particular situation.

Create and Maintain a Budget

The word “budget” seems to have a negative connotation; many people think that you only need to budget if you’re broke. Budgeting actually gives you permission to spend and is a simple way to keep track of your expenses and be aware of how much you’re saving each month; think of it as a “spending plan.” If one of your goals for the new year is to improve your cash flow and make better financial decisions, creating and maintaining a budget is a great place to start and some online tools can make the process easier (both free and as a subscription).

Risk Management

Contribute to a Health Savings Account

If you’re enrolled in a high-deductible health plan, consider contributing to a health savings account (HSA) before the end of the year. HSAs offer triple tax savings. Contributions are tax-deductible, earnings grow tax-free, and withdrawals are tax-free if used to pay for medical expenses.

The 2022 IRS contribution limits for HSAs are $3,650 for individuals and $7,300 for families (this increases to $3,850 and $7,750, respectively, for 2023). If you are 55 or older, you may also be able to make catch-up contributions of $1,000 per year. You technically have until April 15th of the following year for your contributions to count for the current year’s tax return, but we recommend making contributions by December 31st to ensure you don’t forget and so that those funds can begin to grow now.

Review Your Workplace Benefits

The end of the year is a great time to review your workplace benefits and take advantage of any remaining sick days, vacation time, or deductibles before they reset.

Depending on your company, your sick or vacation time might expire at the end of the year. Check with your HR department to learn about any expiration dates. If your sick or vacation time does expire, consider taking advantage of a last-minute vacation or a staycation before the end of the year.

Similarly, if you’ve hit your health, dental, and vision insurance deductible for the year, now may be a good time to incur additional medical expenses before your deductible resets in 2023. Take the time to get that dental work, blood test, or other medical procedure you’ve been putting off. Dental plans in particular often have a maximum coverage amount. If you haven’t used up the full amount and anticipate any treatments, make an appointment before December 31st.

Use Up Your Flexible Spending Account

Unlike HSAs, flexible spending accounts (FSAs) have limits on how much you can carry over from year to year. Because of that, you’ll want to use up as much of your FSA dollars as possible by the end of the year. In 2022, you are only allowed to carry over $570 going into 2023. Also, keep in mind that the COVID-19 relief measures that allowed taxpayers to carry over their entire FSA balance are no longer in effect for 2022.

That being said, check the restrictions on your account to see what the money can and cannot be used for, and take care of any needs you may have as allowed by your plan.

Revisit Your Plans and Policies

Your insurance needs may also change as the year goes by, especially in the current high-inflation environment, so periodically review your coverages and designated beneficiaries to bring them up to date to reflect your current financial situation. For example, if you paid off debt, you may not need as much life insurance coverage since your family’s liabilities have decreased. You might also want to evaluate your need for other types of insurance, such as long-term care, umbrella or disability insurance.

Taxes

Donate to Charity

Annual gifts to qualified charitable organizations may be deemed an eligible itemized deduction and can be a great way to give back at the end of the year while also minimizing your tax bill. With the higher standard deduction, you’ll need to make sure your total itemized deductions for the year exceed $12,950 for an individual filer and $25,900 for married filing jointly for 2022. If your deductions fall below this amount, consider bunching your giving or doing several years’ worth of giving in one year.

Donor-advised funds are another option that allows you to contribute a lump sum all at once and then distribute those funds to various charities over several years. With this strategy, you can itemize deductions in the year you make the initial contribution and then take the standard deduction in the following years, allowing you to make the most out of your donation tax-wise. Other strategies, such as a charitable trust, could make sense in years when income is exceptionally high.

Invest in a College Savings Plan

If you have children or grandchildren in your life, contributing to a 529 savings plan is an excellent way to jump-start their college savings and give a thoughtful holiday gift that will last longer than a few months.

This type of educational savings plan was created so that families can receive tax benefits for saving toward qualified higher-education expenses. After-tax money is invested in a 529 plan where it grows tax-free. When the money is later taken out for qualified education expenses, there are no federal taxes due.

In 2022, you and your spouse can each give up to $16,000 per 529 account beneficiary without needing to file a gift tax return (increasing to $17,000 and $34,000, respectively, in 2023). There’s also a special election that allows you to give 5 years’ worth of contributions as a lump sum, meaning you could give up to $80,000 (or $160,000 if gift-splitting) without reducing your estate tax unified credit, but a gift tax return is required to be filed in the year of the gift (and for the next 4 years if additional gifts are made).

Consider a Roth Conversion

Roth IRAs are an attractive savings vehicle for many reasons, including no required minimum distributions (RMDs), tax-free withdrawals after age 59½, and the ability to pass wealth tax-free to your heirs. Unfortunately, Roth IRAs have income restrictions, and you may not be able to open an account outright if you are above certain limits.

To get around this threshold, consider a Roth conversion. Using this strategy, investments held in your traditional IRA will be moved to your Roth IRA where they can continue growing tax-free, but you will owe tax on the amount converted. If you have earned less income in 2022, or your traditional IRA balance has taken a hit due to recent market volatility, a Roth conversion may be a great opportunity for your specific situation. Converting to a Roth also allows your money to grow tax-free for as long as you’d like.

Consider Tax-Loss Harvesting

Tax-loss harvesting involves selling investments at a loss to offset the gains in your portfolio. By realizing a capital loss, you can offset the taxes owed on capital gains. The investments that are sold are usually replaced with similar securities that maintain the desired asset allocation and expected return, but there are rules to navigate for the loss to avoid being disallowed. Given the unprecedented market volatility throughout 2022, this can be a great way to make the most out of a losing situation by using an investment loss to offset your tax liability. Talk with your advisor about potentially harvesting your losses at year-end and throughout 2023 if it makes sense for you. Any appropriate actions must be taken by December 31st to offset 2022 gains.

Investments

Review Your Asset Allocation & Align Your Investments With Your Values

The end of the year is also a great time to review your asset allocation strategy and consider incorporating a values-based strategy for at least a portion of your portfolio. Given the dramatic market volatility and historic levels of inflation over the last year, it’s crucial to evaluate your investments and make sure your portfolio is properly diversified. It should also be tailored to your specific risk tolerance level, ensuring you earn enough returns to keep up with inflation but you’re not overexposing yourself to risk.

Sustainable, responsible, and impact (SRI) investing strategies aim to align your investment capital with your long-term vision of an ideal future, while potentially reducing your exposure to companies or industries that may be less adaptable to a changing world. If this is important to you, incorporating an SRI strategy for at least a portion of your portfolio can be a way to earn financial returns while also promoting change on causes you care about.

Estate Planning

Review Beneficiary Designations

If you had any major life events happen this year, like a birth of a child, marriage, divorce, or a death in the family, make sure you review your beneficiary designations. There are several assets, including retirement accounts, bank accounts, and life insurance policies, that are distributed based on beneficiary designation and not the terms of the will. If you have an updated will but an outdated beneficiary listed on one of these accounts, there is a chance your assets will not pass according to your wishes.

Review Your Estate Documents

Similarly, it’s important to review your estate planning documents, including your last will and testament, any powers of attorney, living wills, and/or trust documents. The new year is a good time to take another look at these documents or start drafting them if you don’t already have them in place.

Make the Most of the Annual Gift Tax Exclusion

If you’re in the giving spirit as you head into the new year and you want to reduce your taxable estate, consider making gifts up to the annual exclusion amount. In 2022, individuals can give to each recipient (and to an unlimited number of recipients) up to $16,000 and married couples can give up to $32,000 without triggering gift tax consequences (increasing to $17,000 and $34,000, respectively, in 2023). Not only that, but the beneficiary of your gift will not have to report it as income. This is a great way to spread your wealth amongst family and friends.