By Michael Evans, Founder & CEO of Cogent Strategic Wealth
Fortune favors the bold, right? As an intrepid entrepreneur, I’ve long embraced this adage. For example, after an early, ill-fated investment experience threatened to derail my life’s goals, I resolved to never again let that happen to me or those I care for. Instead, I redirected my course to embrace evidence-based investing, which I now use to manage my own and our clients’ hard-won wealth. More recently, I took another bold leap when I reimagined my own best life during the pandemic.
As a successful professional, you can probably think of similar milestones in your life, when you’ve seized important opportunities or prevailed against daunting odds. Once again, in 2022, let’s not wait for random fortune to find us. Instead, here are 12 great financial moves you can make each month to invite year-round fortune into your life.
January: Fully Fund Your 401(k) or Similar Plan
Since we’re already halfway through January, we’ll lead with an easy one. If you’re eligible to participate in a 401(k), 403(b), 457 or similar employer-sponsored retirement plan, don’t let that important benefit go to waste. Check out your paycheck to make sure your employer is withholding the maximum allowable contribution you can make. The maximum allowable contribution increased to $20,500 in 2022 (from $19,500 in 2021), plus an additional $6,500 if you’re over 50 (unchanged from 2021). Can’t quite manage the maximum amount at this time? At least make sure you’re contributing enough to qualify for all matching funds available from your employer.
February: Establish or Fund a Health Savings Account
Are you a high-earner? Even if your employer offers a high-deductible insurance/Health Savings Account (HSA) combo (or you’ve got individual coverage) you might have opted for traditional healthcare insurance. If so, you may want to take a second look. Establishing an HSA and letting the money grow during your career years might serve you even better. HSAs are highly flexible, and triple-tax-free. Contributions are pre-tax and pre-FICA, and HSA investments grow tax-free. Withdrawals are also tax-free, as long as you spend the money on qualified medical expenses (including Medicare premiums). To learn more, read “How HSAs Can Boost Your Retirement Savings and Offer Triple Tax-Free Benefits."
March: Step Up Your Tax Game
Staying on top of taxes is a year-round pursuit, but March is a good time to set yourself up for success. March 15 is the deadline for reporting 2021 income for many businesses, such as LLC partnerships and S-Corporations. It’s also time to prepare your 2021 personal income filing, due April 18 (April 15 falls on Good Friday), and establish estimated tax payments for 2022. If you’ve not been paying quarterly estimates on 2021 non-payroll income, that’s unfortunate, but better late than never. And while you’ve got taxes on your mind, why not consult with a tax-planning professional to assess your big-picture goals?
April: Fund a 529 Plan
With most of your major tax chores out of the way, think about establishing or adding to your children’s or grandchildren’s 529 college savings plan, so you can keep those funds growing tax-free. If you are contributing to an in-state plan that offers a tax deduction, be sure to contribute up to the annual limit before year-end, so you can deduct it on your state return next April.
May: Take the Backdoor for Even More Tax Savings
If you’re a high-end professional earning $500,000+/year, let’s face it: Even once you’ve maxed out your employer’s plan, you may still want to shelter more current income for your retirement years. Backdoor or mega backdoor Roth IRA contributions may help you capture excess income, invest it for the future, and reduce your overall tax liability … with some caveats. New tax laws may eliminate these strategies moving forward, so do this sooner than later. Even while they remain, they may trigger an audit, to ensure they’ve been properly executed. We suggest consulting with a seasoned tax professional to guide the way.
June: Consider a Roth IRA Conversion
While income tax rates remain historically low, a taxable Roth conversion today may spare some of your retirement income from potentially higher rates down the road. Roth conversions may or may not survive this year’s legislative sessions, so if a conversion still makes sense for you (based on your tax bracket and personal circumstances), now may be an optimal time to get it done. In contrast to the longer timeline for Roth contributions, Roth conversions must be completed by year-end. By the way, you can no longer undo a Roth conversion once it’s done, so consider all angles before you pull the trigger.
July: Contribute to Your Do-It-Yourself Retirement Accounts
You have until year-end to open an account, and until April 2023 to make a 2022 contribution to a solo 401(k), IRA, Roth IRA, or SEP plan. But why wait until the deadline? The sooner you make an eligible annual contribution, the sooner you can invest it in tax-sheltered positions. Income phaseouts apply, so check on that before you proceed.
August: Don’t Forget Those Required Minimum Distributions
If you’ve been glossing over the last few tips, it’s time to stop skimming: If you are subject to annual Required Minimum Distributions (RMDs) from your own and/or inherited retirement accounts, be sure to take them before year-end, lest you incur a 50% penalty on undistributed amounts. Most types of employer-sponsored and individual retirement accounts are subject to RMDs, with the exception of Roth IRAs. Currently, if you turned 70 before July 1, 2019, RMDs began at age 70½. If you turn 70 on or after that date, they begin at age 72. There are also relatively detailed RMD rules for inherited accounts. We make sure our clients take their RMDs from any accounts we manage for them, but unmanaged accounts must be tended to as well.
September: Get Your Charitable Groove On
It may be traditional to wait until year-end for the bulk of your charitable giving. But maybe some traditions are worth breaking. Your favorite causes certainly won’t mind receiving your gift sooner than later, and it may give you extra time to be more intentional about how, and to whom you’d like to contribute. For example, if you’ve not yet established a Donor Advised Fund (DAF), you could use the extra time to set one up, and use it as a conduit for gifting highly appreciated taxable securities to your favorite causes. The charity receives the full market value of your gift; you pay no taxes on the gains. Win-win.
October: Tap Out Your Flexible Savings Account
If you have a Flexible Spending Account (FSA) through your employer, be mindful of actually spending any remaining FSA funds as you swing into the fourth quarter. Unlike a Health Savings Account (HSA), an FSA is mostly an annual, “use it or lose it,” tax-free reserve to cover qualified out-of-pocket medical expenses. From a fresh set of contact lenses, to over-the-counter medications, to uncovered dental care for you, your spouse, and your dependents, there are always ways to get it spent.
November: Get Ahead of Your Cash Basis Accounting
This one applies to business owners who are accounting on a cash basis rather than accrual method. If that’s you, and you receive Form 1099 income, use November to be deliberate about whether you want to receive that income before or after year-end. If you’d like to maximize the amount you can contribute to a Solo 401(k) or SEP, you may want to ensure all your receivables are actually received by year-end. Likewise, keep an eye on any payables you plan to deduct in the current year, and make sure you’ve actually paid them.
Wow, that year sure went by fast, didn’t it? Many of the actions we covered aren’t technically “due” until December 31. But by taking on your financial power plays one month at a time, you can prioritize moving your assets to where they can have the most impact the soonest; and follow up with the tasks that will cost you the most if they’re not completed by year-end. Best of all, by spreading the efforts throughout the year, you get to reduce the usual year-end scramble. Imagine how great that will feel when it’s time for your holiday break.
Could You Use Some Cogent Advice?
Some of the items above are simple enough to manage on your own. Others are best completed in alliance with a seasoned professional. Either way, life’s short, and you’re busy.
We can help.
We partner with a select group of high achievers and earners who are at the top of their game. Do you long to have a plan for eventually easing away from the fast-paced life you’ve created? Even though you’re killing it financially, do you worry you are unprepared to successfully transition when the time comes? Do you feel vulnerable as you go at it alone, or work with an advisor who isn’t quite the right fit for your current, complex needs?
By ignoring the situation and doing nothing, you may feel frozen and ineffective. At Cogent Strategic Wealth, we offer a fresh, strategic approach to help you Design | Build | Protect Life on Your Terms.
What would your best evidence-based investment portfolio look like? To find out, sit down with us today for a Cogent Conversation. We’ll listen to what success looks like for you, explore any challenges your family faces, suggest a portfolio tailored to you, and help you build and manage it every step of the way.
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