Six Financial Considerations for 2022 and Beyond
Last year’s not over yet! (at least in the eyes of Uncle Sam)
Did you know that you have until the tax filing deadline (typically April 15) to make contributions to IRAs and HSAs for the 2021 tax year? For those who haven’t yet maxed out their Health Savings Account, Traditional IRA or Roth IRA for the previous year, the start of a new year is the time to do it. In the case of traditional IRAs and Health Savings Accounts, these contributions are tax deductible and can help make a dent in that April tax bill. More importantly, they’re excellent ways to help meet your long-term life goals.
January is the time to automate
The best month of the year to begin new savings goals is January. Why? Because starting in January allows us to break down future goals into smaller monthly amounts. Do you want to go to Florida in December? You could try to save the $3,000 you plan to spend on that trip all at the end of the year, forcing you to find $1,000 a month in October, November and December (or worse yet, figure out in January you haven’t paid for your trip yet!). Or, you could plan ahead and comfortably find $250 each month starting in January. The same is true for funding longer-term goals. It’s much easier to hit the annual max on your 401(k), IRA, and HSA if you simply start in January. You can start small until you reach your comfort level.
Expenses are only one side of the ledger
To improve our personal finances, much of the canned advice found on the internet and elsewhere is about cutting expenses. This is effective, yes, but it’s only one side of the equation. Equally as important is setting a plan in motion to increase income. What income goals do you have for this year, next year, and five years from now? How are you going to get there? The old adage of failing to plan is planning to fail seems appropriate. Map out your career. Determine your worth. Make more productive use of your time.
Tax planning is a multi-year exercise
It’s easy to focus on reducing this year’s tax burden. Sometimes, though, that’s done at the expense of future years’ tax burden. Planning this year for next year’s taxes can help you make the best of both worlds. For example, making charitable contributions twice the dollar amount but every other year may allow you to itemize and deduct them from taxes. The same can be true of property tax payments, depending on when they’re due. Additionally, sometimes it makes sense to bite the tax bullet this year through a transaction called a partial Roth Conversion to allow for tax-free monies in years to come.
Employee benefits can make a huge difference
Many employers offer generous benefits that go beyond your health insurance plan. And, sadly, many employees skip right past them at the time of annual enrollment. Here are a few to review:
401(k) or other workplace retirement plan: If your employer matches
contributions, be sure you’re taking full advantage of the match. This
is free money. Don’t turn it down!
HSA: Some employers will contribute to an employee’s Health Savings
Account. This can be a great benefit and often swing the decision
pendulum in the direction of a high-deductible healthcare plan.
Dependent-Care FSA: These special-purpose accounts are specifically
made to help cover the cost of childcare expenses. If you have little
ones at home they’re a great way to essentially discount those
expenses by your tax rate, as monies that go into them go in pre-tax.
Life Insurance: Employer-sponsored life insurance is amongst the
cheapest coverage available. It shouldn’t be your only coverage, but it
can help affordably supplement what you may have elsewhere.
Disability Insurance: This kicks in when you’re not able to continue
the type of work you were doing before. Especially for single-earner
households, this should be an important consideration.
It’s important to talk about money
This one is hard. It’s against our nature. We don’t like to talk about money. Talking about it, though, can bring to light ways to save more, make more, spend less, lower our tax burden, and plan for future goals. No, you don’t need to broadcast your personal business to the world, but there are several people with whom you should be having money conversations every year. These include:
• Your spouse and other family members
• Your tax preparer
• An estate-planning attorney
• A trusted financial advisor (Note: this is not the same as someone who’s constantly trying to sell you financial products you may or may not need!)
Simply put, two heads are better than one. Using the list above, five are even better! If you’re not having money conversations with these people, you’re likely leaving money on the table. We don’t know what we don’t know…but other people do. Take the time to communicate with loved ones, ask advice of professionals, and review your own money assumptions. The start of a new year is a great time to reflect on the financial successes and setbacks in order to learn from them and plan for the years ahead.
Disclaimer: This article is generalized in nature and should not be considered personalized financial, legal, or tax advice. All information and ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.
