End-of-Year Action Items for Investors

As we enter the final month of 2022, your calendar is likely filled with holiday parties, work deadlines, and family commitments. Many of us also carve out time for strategic planning for the year ahead. However, there are some planning items that expire with the start of the New Year and others that should be periodically reviewed, making now an ideal time to review these year-end items while there is still time to take action.

Final 401(k) Contributions

In 2022, individuals can contribute up to $20,500, and those age 50 or older can deposit another $6,500. If you haven’t already maximized your 401(k) contribution for the year and are looking for a way to defer additional taxes while saving for retirement, you still have one or two more pay periods to make an impact. Remember, 401(k) contributions can only be made through payroll and must be made before December 31 to count toward 2022, so adjust your withholding now to take advantage of those year-end paychecks or bonuses.

After the New Year, there are still opportunities as Traditional and Roth IRA contributions for 2022 are allowed until the federal tax filing deadline on April 15, 2023. SEP IRA contributions are allowed up to the tax filing deadline, including extensions.

Remember Your Favorite Charity

Charitable contributions can help reduce your overall tax burden for 2022. Regardless of the amount that you would like to donate to your favorite 501(c)(3) organization, you will need to do so before December 31. An important consideration for your charitable giving is the increased standard deduction created by the Tax Cuts and Jobs Act of 2017, which is currently $12,950 for individuals and $25,900 for married taxpayers who are filing jointly. You will need to exceed this threshold in order to itemize and receive the tax benefit of your donation. One way to do this is to “bunch” your donations. Bunching involves making two years of contributions in the same year and using the standard deduction the following year. For example, you can make your 2023 charitable contribution in 2022 in order to itemize. Then, in 2023, you would use the standard deduction.

Donate Appreciated Stock

For investors with appreciated, publicly traded securities, such as stocks, bonds, exchange traded funds and mutual funds, there is an opportunity to benefit from directly donating those securities to charity as well as avoiding the capital gains tax that would otherwise be due when the shares are sold. Here is how it works. If you were to sell appreciated stock held for more than one year to make a cash donation to charity, you would owe capital gains on the sale. This may be 15% or 20% of the gain, which reduces the amount available for your donation. However, if you donate the shares, you receive credit for the full market value of the stock and avoid paying capital gains because you never sold the position. This strategy can lead to more funds going to your charity and a larger tax deduction for the year.

Annual Required Minimum Distributions (RMD)

Tax deferred retirement accounts such as traditional, SEP, and SIMPLE IRAs as well as qualified plans including 401(k), 403(b), 457(b), and profit-sharing plans require a minimum annual withdrawal be taken once the owner reaches age 72. This “new” higher age for minimum distributions went into effect in 2020, replacing the previous age 70 ½ requirement. The calculation is based on your age and account balance as of December 31^st of the previous year. While you can take more, failing to meet the minimum calculated amount will lead to a 50% tax in addition to the remaining distribution!

What if you have multiple retirement accounts? Regardless of the type of retirement account, the RMD must be calculated for each. An advantage to IRAs (traditional, SEP and SIMPLE) is that the RMD for each account can be aggregated and distributed from the account of your choice. However, qualified plans (including 401(k), 403(b) and 457 plans) require that the RMD be taken from each account.

There are a few notable exceptions. Roth IRAs do not require an RMD since distributions are not taxable. For non-business owners still working at age 72 and beyond, RMDs are not required from your workplace retirement account if you are still actively employed, although you will still be required to take the distribution from your IRAs.

Use a Qualified Charitable Distribution (QCD) to Avoid RMD Taxation

The IRS allows IRA account owners to make charitable contributions directly from their IRA in order to satisfy their annual RMD. This strategy enables you to donate up to $100,000 tax-free when the funds are disbursed directly from an IRA account to a qualified non-profit organization. In this process, income tax is avoided on the gifted funds, regardless of whether you claim the standard deduction or itemize your deductions. Although RMDs are not required until age 72, the QCD strategy is available for IRA account owners beginning at age 70 ½. It is important to note that this strategy is not available from qualified accounts such as 401(k)s and 403(b)s.

Consider Tax Loss Harvesting

Tax loss harvesting involves selling an investment that has declined in value from its original purchase price and using the tax loss to offset gains on other investments. Excess losses can even reduce income up to $3,000 for the year. As an example, if you have highly appreciated stock in your portfolio and have resisted selling the stock to prevent the inevitable taxes, you could sell another stock or fund with a current loss as a way to offset the taxes due. If the loss is greater than the gain, up to $3,000 can be used to offset income in that calendar year. Additional losses above this amount can be carried over into the subsequent year and used to offset future gains and/or income. In addition, you can use the proceeds from the sale to purchase another investment that meets your asset allocation needs.

Review Your Beneficiaries

Retirement accounts such as IRAs, 401(k)s and annuities each have their own beneficiary designations, which typically receive little attention after the account is established. While updates are infrequent, necessary changes are often overlooked because they occur at some of the busiest times in our lives. These situations include births, deaths, marriages, and divorces, among others. Review your beneficiaries each year to ensure your money will go to the right person or people in the event of your death.

Consider Roth Conversions

While converting pre-tax balances to Roth can take place at any time, down markets present an opportunity to convert a greater number of shares at a lower total value. 2022 has seen large declines in most areas of the stock and bond markets, with the S&P 500 down 15% and the US Aggregate Bond index down over 13% as of the end of November. Although your conversion will be taxable as income for the year, growth of the converted shares will be free from future taxation. Unlike annual IRA contributions, which are limited to $6,000 per year (an additional $1,000 is available for those age 50+), there is no limit to the amount that can be converted.

As we approach the end of 2022 and get ready to settle into the holiday season, be sure to give consideration to these end-of-year retirement and tax saving strategies before it is too late. If you have questions, reach out to your financial advisor and tax preparer to discuss whether these strategies make sense within the context of your goals and financial plans.

The Fiduciary Group team is here to assist you with reviewing accounts, evaluating strategy, and updating investments. We want to make your year-end planning as smooth as possible and help you make the most of your investment strategy in the New Year.

Do you need help completing your year-end financial planning? Please reach out to us for assistance.