2022 Year End Financial Checklist
2022 is shaping up to be tough for investors. However, as the year draws to a close, focusing on short term market performance is not productive. Now is the perfect time to focus on your financial goals and re-evaluate your progress. It is important to take proper steps before year end in order to best position yourself for achieving your goals.
Required Minimum Distributions
If you are 72 or older and have a Traditional IRA or an employer-sponsored retirement plan such as a 401(k) or 403(b) and are retired, you must take a required minimum distribution (RMD) by December 31st each year. The IRS penalty for failing to do so is 50% of the required amount not withdrawn. In addition, an owner of an Inherited IRA that was inherited prior to 2021 is required to take a minimum distribution. The same December 31 deadline and 50% penalty apply to an Inherited IRA. Keep in mind that most custodians do not send out notices about the Inherited IRA RMD; it’s up to the owner in most cases to stay involved with calculating the RMD amount and making sure it is distributed. There is no need to wait until December to take the distribution and risk missing the deadline. The distribution amount is calculated by dividing the prior year-end balance of the account by an IRS estimate of your life expectancy. We calculate the RMD amount you need for your accounts with Provident.
Emergency fund
If you have not already done so, give yourself and your family the gift of an emergency fund. With the uncertainty in the current economic environment, our recommendation is that you have six months’ worth of expenses saved and easily accessible in a low risk and liquid type of an account such as a money market account. You can reduce the size of your emergency fund by any guaranteed income you receive, such as paychecks, pension, Social Security, rental income, or municipal bond income.
Tax Loss Selling
If you have investments with significant losses in your taxable accounts, selling them will let you offset realized capital gains. If your losses exceed the realized gains, you are allowed to deduct $3,000 a year in capital losses against your ordinary income. Any additional losses can be carried forward to future tax years. Keep in mind, you cannot re-purchase the same investment within 30 days before or after the sale or you will trigger a wash sale and the loss will be disallowed for tax purposes this year.
Roth Conversions
With the market down this year, it might be a good time to do a Roth conversion. A Roth conversion is a retirement planning strategy where you transfer funds from a tax deferred Traditional IRA to a tax free Roth IRA. The premise of this strategy is that your future tax liability will be greater on the tax deferred IRA distributions, so it might be better to pay those taxes now rather than later. If the tax bill is a limiting factor to converting, you may consider a partial conversion versus a full conversion. With a Roth IRA conversion being a taxable event consult your tax advisor prior to making this decision. Your tax advisor will have all the necessary tax information to determine if a conversion makes sense in your situation.
Gifting
If you are considering making gifts to individuals, the 2022 gifting limit under the federal annual gift tax exclusion has been raised to $16,000 per person. Using assets that are likely to appreciate will offer the optimal benefit. This amount will increase to $17,000 in 2023.
If charitable giving is being considered, Qualified Charitable Distributions or (QCDs) allow people to make a tax-free donation of up to $100,000 from their IRA, so as long as they are required to take a minimum distribution. The donation counts toward your required minimum distribution but is not taxable. The gift needs to be transferred directly from the IRA to the charity in order to qualify. If you take a withdrawal from the IRA first and then give it to the charity, you can deduct the gift as a charitable contribution (if you itemize), but the withdrawal will be taxed as income.
For those that don’t qualify for a QCD, you may consider donating appreciated stock, even though portfolio values are down due to the market drop. Some may have long held positions with large unrealized capital gains. Donating these appreciated stocks directly to a charity will help alleviate large future capital gains taxes.
Check Beneficiaries
Life-changing events can occur throughout the year, such as a death in the family, marriage or divorce, or a newborn child. Conducting a beneficiary review of all your investment and bank accounts as well as any life insurance policies to ensure the listed beneficiaries are up to date and accurate is one of the most important tasks in a year-end review. You wouldn’t want to have your ex-spouse listed as your beneficiary, would you? This task can be done at any time of the year, however adding it to your year-end financial review checklist will ensure that it is done annually.
The end of the year is a great time to reflect on your spending and develop a budget for the new year. Planning today will provide for financial security tomorrow.
Dan Krstevski, CFP®