Year-End Investor Checklist
The end of the year is one of the most important times. And not only for investors, but for everyone who has money because there are so many decisions to make that impact our overall finances. And this time around, the year’s end is marked with a lot of financial challenges; including inflation, market volatility, domestic political uncertainties and global geopolitical risks. So to help you navigate these complicated times, in this post we’ll cover 12 year-end checklist items to review and implement as applicable.
01 - Max 401K
By maxing out your 401K, not only are you ensuring that you are receiving your employer match, but you are also lowering your taxable income. In my book, maxing out your employer retirement is one of the simplest, yet the most effective ways to reduce your taxes.
Workers who are younger than age 50 can contribute up to $20,500 to a 401(k) in 2022. And if you’re at least age 50, you can add an extra $6,500 per year in “catch-up” contributions.
Most often the easiest way to do this is to set up automatic withdrawal at the beginning of the year to the max amount so you don’t need to think about making any adjustments at the end of the year. This helps psychologically because you get used to seeing the less take home amount every paycheck and it also helps you save time because you aren’t scrambling at the end of the year calculating how much more money you need to contribute. Some hardcore people I’ve seen even front load all their 401k contribution at the start of the year - setting 100% of their paycheck to 401k contribution until they hit the max.
The bottom line is you want to make sure that you are taking full advantage of your 401k by Dec 31st.
02 - Max Roth IRA
In my personal opinion, the Roth IRA is one of the most tax-efficient and effective accounts available to investors. Contributions are made on an after-tax basis, but any growth and withdrawal is tax-free.
We just don’t know what the tax landscape will look like in the future. New politicians are constantly entering the political landscape and we have no idea what new initiatives could impact our taxes. When you contribute to a Roth IRA, you mitigate the unknown tax related risks in the future because you’ve already paid taxes on your money.
For 2022 the maximum Roth IRAs is up to $6,000. $7,000 if you’re 50 or older. For Roth IRA you usually have until the tax-filing deadline, typically April of next year to contribute. But my thought is why wait. Max it out as soon as possible so you don’t have to think about it.
The easiest way to ensure you are maxing out your Roth IRA every year is to set up an automatic contribution at the start of year for the maximum amount. For example, $6,000 divided by 12 months, have $500 deducted each month from your checking account and have it automatically invested.
03 - Max HSA
If your health insurance is part of a high-deductible health plan, also known as HDHP, you can open up a Health Savings Account, the HSA. HSAs offer what’s known as a triple tax benefit. Your contributions are tax deductible. Your money grows tax-deferred while in the HSA. And you can withdraw money from your HSA tax-free as long as it’s used to pay for qualified medical expenses.
The limits of pre-tax funds contributed to an HSA for 2022 are $3,650 for a single person and $7,300 for a family, plus an additional $1,000 if you’re 55 or older.
If you’ve never heard of HSA before, no worries. If your company offers a high-deductible health plan and you are relatively healthy, consider choosing an HDHP during your next enrollment period so you can open up a HSA. As I mentioned earlier this will allow you to take advantage of the triple tax benefits. An unspoken secret to a HSA is that not all expenses necessarily need to be used for health care expenses. If you want to learn more check out my video here where I go more in depth.
04 - Give
According to the IRA, you may deduct charitable contributions of money or property made to qualified organizations if you itemize your deductions. Qualified organizations like your local church or your favorite nonprofits. If you are already giving, make sure to get a receipt for your donation so you have proof. I’ve seen too many people who are already making sizable donations not understand how it impacts their taxes.
If you are struggling to find a specific organization you want to give your money to, not a problem. A way I’ve gotten around this dilemma has been to open up a Donor Advised Fund. A DAF is an account where you can deposit assets for donation to charity at a later point in time. A great thing about a DAF is that you get an immediate tax deduction the year you contribute to the DAF. If you like to learn more, make sure to check out my video here where I go more in depth.
05 - 529 Education Savings Plan
A 529 Education Savings Plan is basically like a Roth IRA, but for education expenses. Contributions are made on an after-tax basis, but growth is not subject to federal tax. Some states offer state-level tax deductions on 529s as well.
529 plans do not have annual contribution limits but contributions to are considered completed gifts for federal tax purposes, which falls under the annual gift tax exclusion.
In 2022, you can give up to $16,000 a year gift tax free per person. The annual exclusion recycles on January 1, so if you don’t use your 2022 gift allowance by then, you lose it. Make sure to consider this as you calculate how much to contribute to your kids 529 plan.
Just a quick personal perspective on this. I do have 529 plans for my kids but I only contribute a moderate amount. I personally believe that education is one of those things that if we are creative, there are tons of different, more cost effective ways to fund it. My wife’s nursing education is a great example. When she was in undergraduate, she was able to find a hospital willing to pay for her bachelors if she was committed to working there after she completed her degree. And with her Nurse Practitioner degree, her employer was also willing to pay 100% for the degree if she was willing to continue working and commit to another 3 years afterwards. Now was this easy? Of course not and I’m so proud of her achievement. In the long run, passing onto our kids the example of hard work and sacrifice is way more important than a fully funded 529 account.
06 - Use FSA
I like to think of the FSA like the shorter, less attractive cousin to the HSA. Like the HSA, you can set aside pretax money from your paychecks for medical and dental care that insurance doesn’t cover. However, there is a deadline unlike the HSA. Often the end of the calendar year by which you need to spend the funds, or forfeit them.
And making sure to check your FSA account is very important right now, because in the last couple years, the federal government let employers relax those rules through the pandemic to give people more time to spend the money. But now the rules are coming back to normal and many individuals may have more cash than usual to spend in the coming months.
There is no easy way to get around this except to purchase items that you could really use, ideally for the long-run. FSA contributions can pay for a broad range of products including over-the-counter medication, first-aid kits and other health related items. Amazon makes this easy by identifying products that are FSA and HSA eligible. I had this happen to me a couple times and let’s just say the Kim family will never need to buy bandaids again as long as we live.
07 - Tax Loss Harvesting
The basic idea behind tax-loss harvesting is that you sell investments that have decreased in value and then use the losses to decrease your income taxes. This might be especially useful in a year like this where we’ve seen the market dip by up to 20% from the start of the year.
Let’s say that you bought 100 shares of Vanguard Total Stock Market Index for $100 last year and now it is worth $90. Your $10,000 investment is now worth $9,000 and you have $1,000 worth of unrealized losses in your portfolio.
If you sell your shares of VTSAX and take the $1,000 loss, you can then use that loss to cancel out capital gains or lower your taxable income by a maximum of $3,000 per year. Better yet, any losses in excess of $3,000 can be carried forward to future years.
And as long as you understand the wash sale rule - which is when you sell shares at a loss but buy substantially identical investments 30 days before or after the sale, and you work around it, you can have your cake and eat it too. You get to not only reduce your taxes, but get right back into investing those same dollars.
After you sell your share of VTSAX, purchase shares of a fund that performs similarly but tracks a different index, like the Vanguard 500 Index Fund, also known as VFIAX. A fund that tracks the S&P 500 instead of the total market.
Smart investors don’t just let the down market take them for a ride, but they take advantage of it by implementing strategies like Tax Loss Harvesting.
08 - Review Asset Allocation
The market went down significantly in 2022 so there is a good chance that your asset allocation is a bit out of your target allocation. It could make sense to rebalance your portfolio over the next couple months to ensure your allocation is brought back to its appropriate risk tolerance.
However, I do want to caution that we don’t want to get too carried away with this. If our allocation is off by a couple percentage points, my personal take is that it's not worth adjusting at this time. The market is fluid and there is a good chance it may correct itself naturally. Check it to make sure you are in the right ballpark but don’t obsess over it.
Another note I like to mention here is that this is where the benefit of a simple asset allocation comes into play. I know of people who love to slice and dice their portfolio into 8 different asset categories and classes. Some in small caps. Some in mid cap. Some in emerging markets. Some in commodities. I understand why people do this because it could lead to higher returns. But when it comes to rebalancing do you see how this could become a nightmare? Trying to adjust 8 different buckets instead of just a couple?
I firmly believe that most people would do well with a simple 3 fund portfolio. Some even 2. Simple is good and simple is effective because it keeps us on track despite what the market is doing. But regardless of whether you agree with me or not, review your asset allocation before the year ends.
09 - Review Estate Plan
Although your estate plan isn’t an investment, it determines what happens to your investments and assets once you die.Ask yourself the following questions:
Are all your assets included in your estate plan?
Did you acquire any new ones this year that need to get added?
How about your beneficiaries?
Retirement accounts and insurance policies have beneficiary designations, so make sure to review your various beneficiary designations to ensure that your money is passing according to your wishes. Also if you set up a trust, make sure beneficiaries listed there are updated as well. I’ve seen people who had a new kid and hadn’t updated their estate plan yet. And that was 6 years ago. Make sure not to leave little Johnny out of your will.
If there are any changes, consider reaching out to your estate planning attorney to review and update your planning documents such as a will, Power of Attorney, Health Care Proxy and many more.
10 - Review Insurance Coverages
Life gets busy and it's easy to fall into the “set it and forget it” mentality, especially with our insurance coverage. I mean how many of us can honestly say we remember the last time we read our home insurance policy document?
But with time our assets may have grown to include multiple homes or other assets. We want to ensure that everything we own is adequately covered. I believe the four must have insurances that we can’t live without are the following: Homeowner insurance, Auto insurance, Health Insurance and Term Life Insurance.
Review your coverage, even just briefly to ensure your family and assets are properly protected and your policies are in line with what you expected.
You might even find savings. I used to have my auto and home insurance with different companies and when I realized I could save money by bundling them under one company, it was a no brainer move.
11 - Understand 2023 Tax Changes
Tax credits, tax deductions, and income tax brackets are constantly changing. You want to be mindful of them so you can set yourself up for success to kick off the new year.
For example, for 2023, the contribution limit for 401k is increasing to $22,500 and for Roth IRA, to $6,500. If you want to continue to maximize your contribution, you want to tweak your plan now to take full advantage at the start of the new year. Increasing the monthly withdrawals from your paycheck and your checking account to start on Jan 1st so you aren’t needing to make any adjustments at the end of next year.
The 2023 federal income tax brackets are also updated compared to 2022. Though there might not be specific action steps to take with these changes, it's good to know. For example, are you planning a move to a higher paying job next year? You want to understand if this move will push you up to a higher tax bracket that might make you reconsider. Likely not but just something to think about
12 - Financial Goals & Budget for 2023
I am obsessed with goal setting and planning. I’m so obsessed that I have a whiteboard in my bedroom where I ‘encourage’ my wife to join me in our planning sessions. As we come to the end of the year, it is good to reflect on how we did this year. And we can start visioning and thinking about the future. Then use your budget as a tool to help you reach those goals.
I like to look at our budget line by line and see if there are areas that we can cut back. Or areas that we were unrealistic with so we need to increase. It's good to do this regularly, maybe once a month and not wait until the end of the year, but if you haven't, maybe now is a better time than never.
