Year-end is an excellent time to review your finances from the past year and plan out your goals for the upcoming one. A new year often comes with optimism and an opportunity for a fresh start. It brings a chance to reflect on the recent past and plan for the near future. To set yourself up for success as you ring in 2022, there are a few year-end money tips you will want to consider before the ball drops.
MAX OUT YOUR RETIREMENT ACCOUNTS
Use this money tip to make the most of your retirement savings. Your retirement accounts have annual limits, and maximizing those limits can help you stash away much-needed dollars for the future.
Regular contributions to your retirement accounts are critical throughout your financial life, but especially for Gen X in their peak earning years—yes, we’re talking about you!
Why should you contribute more to your retirement before December 31?
- Contributions will save you money on taxes. For traditional accounts, you will save money on your current year’s tax return. Lowering your taxable income can come with several important benefits like eligibility for specific tax credits and deductions, avoiding added taxes like the net investment income tax, or helping you meet the threshold for direct Roth contributions, and more.
- Are you 50 or older this year? If so, you can utilize “catch up” contributions in your 401(k). Catch-up contributions allow you to contribute funds over and above the typical limits. For example, instead of contributing $19,500 to a 401(k) in 2021, you could contribute $26,000 (an extra $6,500). P.S contribution limits for 401(k)s are increasing in 2022—$20,500 with $6,500 in catch-ups.
- The end of the year is also a great time to evaluate the investment allocation within your retirement accounts. Is your portfolio still in line with your goals? Has your allocation drifted away from your initial target? If so, it may be time to strategically rebalance.
- Not to be dramatic, but once this year passes, you miss out on those opportunities forever—no make-ups allowed. For example, if you contributed $10,000 to your 401k this year, the $9,500 you missed does not carry over to the following year.
CHECK ON YOUR TAXES AND MAKE A GIFT
Taxes are a year-round endeavor, but now is a prime time to ready your return and get an early jump on spring filing. Plus, when it comes to taxes, timing is everything. Are you taking advantage of all your options?
You have an excellent opportunity to check in on how much you earned this year and consider what taxes will look like come April. Once the calendar turns to January 1st, many of your tax savings opportunities come off the table.
What tax-related items should you consider?
- Are you charitably inclined? Donating to your favorite charities before year-end is a simple way to reduce your tax burden for those of you itemizing your tax deductions. For 2021, the CARES Act provides for 100% charitable deductions. Or are you taking the standard deduction? No worries! For 2021, you are eligible for a charitable deduction of up to $300 ($600 for couples filing jointly). Keep in mind that this deduction isn’t above-the-line like last year and only applies to cash donations, so contributions to donor-advised funds aren’t eligible.
- As discussed in the last section, contributing to retirement accounts before year-end (i.e., 401ks, 403bs, IRAs, etc.) can substantially impact your tax situation (now and in the future).
- Year-end is a good time to evaluate your unrealized capital gains situation for investments held outside of retirement plans (i.e., a taxable brokerage account). Have you held your investments for over one year? Is your tax bracket lower this year? It could make sense to rebalance your portfolio and take some gains off the table.
MAKE A PLAN FOR YOUR EQUITY COMPENSATION
Speaking of investments and taxes, what about your employee equity compensation? As you approach the end of the year, you will want to plan your employee stock compensation. What kind of impact will these investments have on your current tax return and household investment strategy?
- Restricted Stock Units (RSUs): If you had RSUs vest during the year, you would inevitably owe some level of income tax. Your employer likely withheld some taxes automatically on the vesting date. The question is, did they withhold enough? In many cases, 22% is withheld for federal tax purposes. Is that enough, given your level of income? Did they withhold state taxes?
- Stock Options (NSOs & ISOs): For these types of options, you may have had the ability to purchase your company stock at a discount. If so, you will owe taxes on that discount.
Below are some considerations and potential strategies:
- Whenever RSUs vest or you exercise stock options, you should have a plan to withhold taxes automatically. Even if the withholding is not exact, it will help you avoid an unexpected lump sum payment during tax season. Also, if your RSUs vested or stock options were exercised and you did not sell the stock, there is a good chance you will owe some money out of pocket for the tax burden
- Factor in your stock compensation to your decision-making process regarding other investments. If your stock compensation has pushed you into a higher tax bracket, you may not want to realize further capital gains this year. Conversely, you may want to max out your traditional 401(k) to reduce your tax burden.
- Prioritize diversification over time. Too much investment in one company (i.e., your employer stock) introduces a large amount of investment risk. Having your employment status and investments tied to one company is generally not an advisable strategy.
As you may have gathered, your stock compensation can impact your entire financial strategy and tax situation.
OPTIMIZE YOUR FLEXIBLE SPENDING ACCOUNT OR HEALTH SAVINGS ACCOUNT
Money tip #4: If you optimize your employee benefits package, you likely have a Flexible Savings Account (FSA) or Health Savings Account (HSA).
- Healthcare FSA: For these accounts, you often have to use nearly all of the funds before year-end (there may be a $550 rollover limit from one year to the next). There may be uses for your FSA that you may not have considered (i.e., OTC drugs and alternative medicine).
- HSA: These accounts are slightly different from FSAs. If you are enrolled in a high deductible health plan, you likely have access to an HSA. Unlike FSAs, you can accumulate your funds from year to year. For married couples filing jointly and utilizing a family HSA, the annual contribution limit in 2021 is $7,200. While you may be prioritizing spending down your FSA before year-end, you should be thinking about your HSA differently. Similar to a Traditional 401(k) or IRA, contributions to HSAs are tax-deductible in the current year. As an added bonus, any investment growth and qualified distributions remain tax-free! That means you get to use never taxed dollars and their earnings for medical care.
LEARN FROM YOUR MISTAKES AND CELEBRATE YOUR WINS!
Regardless of how well you did financially in 2021, now is the time to reset and set yourself up for success moving forward.
Take advantage of these year-end money tips and hit the ground running in 2022!
At Bienvenue Wealth, we review our client’s net worth from top to bottom regularly to ensure they are continuously moving in the right direction. If your finances have become too much to handle on your own, schedule some time to meet with us and see how we can help.