Year-End Financial Planning & Investments Among Market Volatility
By: Andy Reynolds, CFP®, MBA
COO/Partner – Ballast, Inc.
With the recent stock market volatility, many investors have, and understandably so, buried their heads in the sand, shredding investment statements without looking and focusing outside their financial life. While many choose not to look, the volatility provides significant opportunities for financial improvement, several of which we have not experienced in many years.
Below are areas to consider by the end of the year. Proactive planning is beneficial during expansionary times and in years of contraction.
Roth conversions must be completed by the end of the calendar year 2022 to count towards current year taxes. While there are many benefits to owning investments inside an account with Roth tax treatment [The Ballast Roth Manifesto], converting Pre-Tax dollars into Roth dollars today presents additional advantages. Converting during market contractions allows taxpayers to convert a more significant portion of their pre-tax account while still paying the same amount in taxes. When the market recovers, the growth occurs outside the pre-tax account, avoiding tax on the previously contracted value1.
Tax loss harvesting is selling a position with an unrealized loss and using the loss to offset a gain from a different position. This strategy has been challenging over the past decade because most indices have experienced positive growth yearly. However, this year presents an opportunity to opportunistically offset gains from concentrated positions or from accounts where allocations are no longer appropriately balanced. In addition, tax loss harvesting is a portfolio management tool that can help provide additional value within a portfolio over multiple market cycles.
During a market contraction, accumulators with a long-term time horizon are likely “buying low.” If it aligns with your personal financial plan and current financial situation, increasing contributions now toward retirement is a prudent approach. You may also achieve additional value by accelerating annual 2023 contributions in the first few months of the calendar year. Simply stated, when the market is contracting, accumulators should look to be a buyer if this approach fits their personalized financial situation.
Required Minimum Distributions (RMD)
RMDs continue to bring challenges to retirees and those who have inherited a retirement account post-2019. In early 2022, the IRS issued guidance, but no formal law, about new requirements previously misunderstood by most in the legal/tax industries. Anyone who has inherited an account after 2019 or who will inherit an account should pay close attention to ongoing IRS guidance. Additionally, RMDs may present challenges this year, as the balances were based on the end-of-year 2021 balances. Values today may be much lower at this point in the year, forcing people to take distributions while account values are reduced. If you have not already taken your RMD, you should consider prudent planning at this point.
Qualified Charitable Distributions
Donating RMDs continues to be one of the most impactful uses of RMD funds for those who are charitably inclined and over age 72. However, if you are charitably inclined and have an RMD to take, we recommend familiarizing yourself with this strategy [Qualified Charitable Distributions].
Employee Retirement Plan Contributions
Employees have until the end of the calendar year to max out their employee deferrals. For those eligible for an employee deferral and under 50 years old, this is $20,500; for those over 50, this is $27,000. Employees should check their paystubs to ensure that they are maxing out their retirement plan contributions if that is a goal of their financial situation. Total contributions among all a defined benefit retirement plan or a SEP IRA are limited to $61,000 per taxpayer in 2022. Business owners seeking to max out retirement contributions above these figures should consider a cash balance pension plan for 2023. These contributions can sometimes be well above $100,000 per year.
Charitable Giving – Bunching
Bunching means combining two or more years’ worth of donations into a single calendar year for tax purposes. As most know, the standard deduction is greater than $25,000 for a married couple. With such a high standard of deduction, most couples do not donate enough in a single year to receive a meaningful deduction for tax purposes. Therefore, this strategy should be strongly considered if your annual donations combined over two or three years exceed $25,000.
As always, meeting with your accountant before the end of the year is advantageous. Unfortunately, not much can be done about tax liability once the calendar year ends. However, the tools at our disposal during the calendar year are greater. Therefore, we always recommend projecting a tax liability around this time of year and welcome being involved in these conversations.
Flexible Spending Account (FSA) Balances
In most cases, FSA balances do not roll over and are use-it or lose-it accounts. So be sure to zero out FSA balances before the funds return to the employer.
Typically, open enrollment occurs in November or December if you are employed. The open enrollment period is a great time to reevaluate your benefits and whether they still meet your needs.
Ballast is an employee-owned financial planning and investment management firm in Lexington, KY. Ballast provides individualized services to high-income earners, high-net-worth clients, and those individuals/businesses with complex situations. To learn more about the intricacies of the information above or our firm, please visit BallastPlan.com or call our office at 859-226-0625.
- Under certain circumstances.
Ballast, Inc. is a registered investment adviser with the SEC. Registration with the SEC does not indicate that the adviser has achieved a particular level of skill or ability, nor is it an endorsement by the SEC. All investment strategies have the potential for profit and loss. Ballast, Inc. is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation.