It’s Time for Financial New Year’s Resolutions!

Many of us make new year’s resolutions – new habits we want to cultivate in order to achieve our goals. Amid your weight loss and other self-improvement intentions, here are some financial goals to consider:

Review your investments. With market fluctuations, your portfolio needs a periodic checkup to ensure it’s appropriate for your risk tolerance and financial objectives. Remember to review all your investments, both those inside and outside your retirement accounts, to get the big picture. Two things to keep in mind in your review:

• Don’t keep all your eggs in one basket. Your portfolio should be spread across different types of investments, including stocks, bonds, real estate, precious metals, and cash in order to spread your risk. If the value of one category goes down, it’s less likely to demolish your entire nest egg.
• Have an asset allocation strategy. Set a specific percentage for each category of investments and rebalance periodically.

Contribute to your retirement. How do you want to spend your golden years? Now is the time to set aside funds toward this important goal. If you have a 401(k) available to you at work, in 2022 you can contribute up to $20,500. . . and $27,000 if you’re at least 50. At the very least, contribute up to the point where your employer matches because otherwise, you’re leaving money on the table. If you don’t have a 401(k), you can fund your IRA up to $6,000 in 2022 or $7,000 if you’re at least 50.

Consider whether converting a traditional IRA to a Roth IRA makes sense for you. Traditional IRAs are “tax-deferred” but not “tax-free”. You receive tax savings in the year in which you contribute to your IRA. You pay taxes later – on both your contributions and the return on your investment – in the year in which you withdraw from your account, usually after retirement. The concept is that after retirement, you’ll be in a lower tax bracket than in your working years, so the ultimate tax you pay would be lower. That may or may not be the case, depending on your income and tax brackets at that future time.

In contrast, contributions to a Roth IRA are after-tax, but withdrawals after retirement are tax-free on both the contributions and earnings as long as they follow certain rules.

This additional flexibility and the opportunity for tax-free withdrawals can make converting a traditional IRA into a Roth account an attractive option. But be aware the converted amount is subject to taxes in the current year. To help mitigate the tax implications, you can convert a traditional IRA over a few years – you don’t have to convert the whole account at once.

Due to income limitations, not everyone is eligible to make Roth IRA contributions, but currently there’s no limitations on converting a traditional IRA to a Roth account. Visit with your tax advisor to determine whether this is a good move for your situation.

Save for college. The College Board estimates average tuition and fees for the 2021-22 academic year at $10,740 for public 4-year schools and $37,070 for private four-year schools. Whew! That doesn’t include other fees, such as room and board, books, and supplies. Parents and grandparents can receive favorable tax treatment by saving through 529 plans. More information about these state programs can be found at https://www.savingforcollege.com/.

Manage – and reduce – your debt. Other than a home mortgage, minimizing debt is a good idea. Nobody likes the burden of credit card and student loan balances, so now is a good time to take steps to reduce that load.

First, stop adding to the debt you’ve already accumulated. Don’t spend money on things you don’t need.

Next, start chipping away at your loan accounts. While making payments on all your accounts each month, put extra money on the loan with the highest interest rate. Once that’s paid off, put that extra money to work on the next account. Scrimp in other areas so you can increase the payments you’re making, and always pay more than the minimum monthly payment.

And if it makes sense, consolidate your loans under one or two accounts with more reasonable rates. Visit with your credit card company to see if they have options for lower interest rates.

Maintain a budget and create a financial safety net. When designing your budget, start by paying yourself first. Set aside a certain percentage of your income – like 10% – into an emergency savings account. Experts suggest having 3-6 months’ worth of expenses set aside in case something unforeseen comes up (and if 2020-21 have taught us anything, it’s to expect the unforeseen)!

Then budget for recurring expenses such as housing, utilities, food, etc. . . . and expect costs to continue to rise in 2022, at least for a while. Once you’ve established your budget, regularly keep track of how you’re doing so you know where to adjust your spending.

Review your estate plan. Even if you don’t have much, everybody needs a will. Without a will, your state’s laws will determine how your assets are distributed, and it may not be the way in which you intend.

Estate planning includes making an inventory of your assets and determining your big-picture objectives. Under 2022 rules, you can transfer $12.06 million* to heirs without incurring federal estate taxes, and can make gifts of $16,000 per individual without having to file a gift tax return. These amounts are important, because federal estate tax rates can be as high as 40%. Visit with an estate planning professional for strategies that fit your situation.

*As of this writing, estate tax exemption amounts are scheduled to roll back in 2026.

Be flexible. It’s important to revisit your strategies periodically to ensure you’re still on track. Happy 2022!