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  • Kyle Johnston

Year-End Personal Finance Action Items



While there are only a few days left in 2022, there is still time to take actions to improve your financial setup heading into the New Year. Below are some examples.


(1) Tax Loss Harvest: In a year where the S&P 500 is down over 18%, the aggregate bond index is down almost 13%, and real estate investment trusts are down over 25%, there may be ample opportunities for investors to harvest losses for tax purposes. By selling one investment and reinvesting the proceeds into a different investment vehicle that is substantially different under the eyes of the IRS (i.e. selling an active fund and buying a passive fund), investors are able to realize investment losses without drastically changing their asset allocation or sitting in cash for 30 days (wash sale rule). These losses can then be used to offset capital gains taken this year or to offset up to $3000 of ordinary income. Excess losses can also be carried forward into future years. (Note: consult with a financial advisor or tax professional before taking action)


(2) Contribute to your IRA: If you have excess savings and are eligible to contribute to a Traditional or a Roth IRA, it may be beneficial to do so. This is a less pressing action item as you have until Tax Day to make the contribution, but it is a good idea to begin thinking about contributing for 2022. Roth IRA contributions come after tax, grow tax exempt, and future withdrawals in retirement are tax-free. Traditional IRA contributions can produce income tax deductions in the current tax year and grow tax deferred just like traditional 401(k) plans. Both options can help bolster your retirement savings and having taxable, traditional retirement, and Roth retirement savings can provide tax flexibility in retirement.


(3) Contribute to your Health Savings Account (HSA): If you are in an eligible health insurance plan (eligibility), contributing to an HSA can be a very impactful personal finance tool. Contributions are tax deductible and can be invested (often at low minimum balances), any interest or investment gains are tax deferred, and future eligible withdrawals for healthcare expenses are tax exempt. The result is a tax-advantaged savings/investment account dedicated to future healthcare expenses. Maximum contributions for 2022 are $3,650 for individuals and $7,300 for families. Similar to IRAs, the contribution for HSAs is the current tax year’s filing deadline. (previous blog on HSAs)


(4) Revisit your Budget, Estimate your Expenses, Calculate your Savings Potential: A lot can change throughout a year. Inflation has increased the costs of utilities, groceries, gasoline, and many other items. You may also have seen an increase in wages in the form of an annual raise or job switch. In any case, it is a smart idea to frequently revisit your budget and, if you haven’t done so recently, year-end is a good time to do so. Laying out your fixed monthly costs, variable costs, income streams, savings, and liabilities can be a great activity for visualizing your savings potential, progress towards financial goals, and areas for improvement as we enter the new year.


(5) Set a Plan to Save and Invest in the Coming Year: Now that your budget is estimated, set a plan for savings and contributions to investment accounts. If you received a raise this year and are comfortable with your budget, consider increasing contributions to your 401(k), especially if you are not maxing out your employer’s matching contributions. If that is taken care of, plan to supplement those contributions with contributions to an IRA or a taxable investment account. Take time to think about your financial goals and allocate your savings accordingly.


(6) Analyze your Financial Goals, Time Horizons, and Asset Allocation: If you are currently allocating savings and investments towards financial goals such as buying a house, take a look at your accounts and make sure that your asset allocation matches your risk tolerance and time horizon. Given the movements in the market, many portfolios may have shifted to suboptimal asset allocations relative to their initial target allocations. Rebalancing can be a good practice in these instances by moving money from asset classes that have held up relatively well to asset classes that have performed relatively poorly. For shorter-term financial goals, you may have had cash savings piling up. With the rise in interest rates, there are many more low risk, short-term investment options that now pay a much more attractive interest rate than they did a year ago. Bonds are back.


(7) Assess your Diversification: We have just finished a decade plus of dominant performance by U.S. stocks, and specifically large cap U.S. growth stocks. Markets are mean reverting and dominant asset classes often fall back to more normal outcomes over time. If you are large cap U.S. heavy in your asset allocation, it may be worth considering adding exposure to other asset classes such as international stocks, real estate investment trusts, small cap US stocks, etc.


2022 has been a difficult year for investors across the majority of asset classes. Difficult years are often when individuals have the chance to make great personal finance decisions. This action list can help you on the path to smart financial decision making and have you entering 2023 on a constructive note.

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