The eggnog is gone, the reindeer are hibernating, you’ll get around to taking down the tree and someone in your family probably still has some triple-demic. Clearly, that has you asking: “What should be at the top of my list to financial plan the heck out of this next trip around the sun?”
Call them New Year’s resolutions or just additions to the to-do list, whichever has less baggage and increases the Pk that you’ll get to spend some time on the topic, but here are some key issues to consider tackling this year and why.
Goals: We all know the drill—specific, measurable, achievable, relevant, and time-bound. We set goals, because “if you aim at nothing, you’ll hit it every time.” It’s way better to at least identify goals and start on the path towards them than to skip the process all together.
Life Events: If your family is likely to have a major change such as a birth, death, marriage, move, job change, start of college, or retirement, what effects will this have on your finances? What steps can you take now to ensure a better outcome later? For example, if you’ve had money in an index fund to defray the cost of a home you plan to buy this year… your principal is at very high risk. When do you plan to sell in order to create the cash you’ll need?
Age Milestones: In financial planning, there are key ages you should know:
High School Sophomore: The year your child finishes their sophomore year is the one that will impact your first FAFSA for seeking college financial aid. Can you do anything to “look poor”?
18-21: Age of majority. Depending on your state, it may be time to turn that UTMA/UGMA over to junior. Is s/he ready?
26: I. Bill expires for children. This can be one of the reasons to plan on using the G.I. Bill for the first kiddo to enter college.
30: Coverdell educational savings accounts must be distributed. This is one of the reasons why Coverdell can be inferior to 529 savings plans.
50: Catch-up contributions for both IRAs and 401(k)/TSP plans. You get to contribute an extra $1,000 / $6,500 respectively (and more going forward thanks to SECURE 2.0). Retirement is coming.
55: Early distributions from qualified plans without a 10% penalty, IF you’re separating from service.
55: Remarriage age for SBP (Survivor Benefit Plan). Surviving spouses that receive SBP benefits lose them if they remarry prior to age 55. After that, they can remarry and retain them.
59 ½: No penalty on distributions from qualified plans (IRA, TSP, etc.)
60: Earliest age to claim Social Security survivor benefit, assuming you haven’t remarried.
62: Earliest age to claim Social Security on one’s own work record or a spouse’s record.
63: First year of “look back” for Medicare IRMAA (Income-Related Monthly Adjustment Amount).
65: Medicare claiming age. Heads up, that IRMAA—the means test that may increase your premium) looks back 2 years, so signature managing the tax man is critical in your early 60’s.
67: Full, unreduced Social Security Benefit claiming age for most people.
70: Maximum Social Security Benefit claiming age. You won’t get more for waiting past 70.
70 ½: Qualified Charitable Distributions become an option to reduce the size of a bloated IRA before the tax man starts taking his chunk.
73: The SECURE Act 2.0 raised the Required Minimum Distribution begin for pre-tax accounts and Roth 401(k)/TSPs to 73 starting in 2023.
That’s a lot of ages to know, thankfully, we have the internet (which both stores all the knowledge and saps us of our ability to remember what we wanted to search the internet for…).
Tax Forms: Your employers owe you a W-2 by the end of January and your custodians owe you 1099 forms by the end of February. You also need to plan to gather 1098 forms from your mortgage lender(s) and any college funding sources such as 529s that you took distributions from. If you have complexities in your world such as alternative investments, businesses, and real estate holdings, it’s never too early to declare “my homework will be late” and work with your tax professional to pay your estimate and file and extension.
Tax Preparation: Most CPAs and Enrolled Agents fill to capacity, so waiting to establish a relationship isn’t a winning tactic. If you self-prepare, building a shell early with estimated numbers can help prevent nasty surprises. Finally, if you’ll recall from the past few years, the IRS struggles to process returns as tax season drags on. Prompt filing might secure a return payment sooner.
Roth Conversions: If your tax rate will be lower this year than the year(s) you expect to pull money from your qualified plans, a Roth conversion is worth considering. Food for thought… your tax advisor is usually focused on lowering your current year tax bill. Roth Conversions don’t do that. Your (insert large brokerage name here) investment advisor probably isn’t allowed to give tax advice by his/her compliance department. It’s usually best to consult an independent financial planner to navigate this decision.
IRA Contributions: Time in the market usually beats timing the market. If you’re sitting on a bunch of cash, investing in your IRA early in the year gives those dollars an extra year of compounding. Dollar-Cost Averaging is a great behavioral strategy too, especially if you’re allergic to parting with large lump sums. The 2023 limit is now $6,500 or $541.66 per month. Make sure you verify whether you should contribute to a “Front door Roth,” Backdoor Roth, or deductible Traditional IRA!
TSP / 401(k) Contributions: The employee limit has increased to $22,500 for 2023, so that’s $1,875 a month. Of course, in the TSP, if you submit the increase today, you’re already a month behind so you’ll need to overshoot a bit.
Tax-Loss Harvesting: If at any point in the year, you have losses in a taxable account, it’s worth considering a sale. Those losses offset gains in the same year; then they offset up to $3,000 of ordinary income; then they offset gains in future years if you still have losses left over.
Risk Management (Insurance Planning)
Tricare Prime or Select: Tricare Select offers a lot of freedom of choice and modest, but nonzero costs. You can switch each year, and if you use select, it may be worth considering a Tricare Supplement policy. Tricare Supplement policies usually reduce the cost of a high-consumption year, but they don’t cover things that Tricare doesn’t cover.
Life Insurance: It’s never a bad time to recalculate what risks you’re insuring against. The most common are a paid-off home, children’s college funding, and grieving/adaptation living expense for some number of years. Many families will become self-insured against these risks at some point, but it’s usually not while the kiddos are still at home.
Survivor Benefit Plan: This is insurance for your military pension. 2023 has a rare open season that allows you to opt in or out. Read more here.
Long-Term Care: If you’re in your fifties, it’s time to start learning about Long-Term Care Insurance. Few choose to buy it earlier than their late fifties, and it starts to get much more expensive into your late 60’s. Like Life Insurance, your current health bears strongly on your insurability. This market is rapidly changing. States are starting to make it mandatory, and the Federal Long-Term Care Insurance program is temporarily closed while it studies how to maintain solvency.
Homeowner’s Insurance: Some policies automatically keep up with inflation, or at least an automatic percentage increase. The key is that you need to be covered for at least 80% of the rebuild cost of the home to be fully covered. The other number that I often see on the low side is the replacement of personal possessions. Inflation is always eating away at the utility of that number.
Assets and Debt
Emergency Fund: If yours seems skinny, this is a great year to rebuild it. It’s important to consider what risks such as job loss, military transition, medical issues, and natural disasters that you’re insuring against (an emergency fund is insurance, not really an asset). It’s common to only carry cash to cover the minimum expected lifestyle expenses so that the emergency fund isn’t too much drag on your overall portfolio. If you hate holding on to cash, read this.
Home Sale: If you might sell a home this year, it’s time to take a lead turn on what gains you expect, how they’ll be taxed, and whether a 1031 exchange might be appropriate. Timing matters and you’ll need to consider the “2 of 5”, “2 of 15” and “45/180” rules as you evaluate your sale options. Remember that you can’t eliminate depreciation recapture, even with the “2 of 5” and “2 of 15” rules. This means that the sale of a rental will increase your AGI and MAGI and quite possibly make you ineligible for a “Front door” Roth IRA.
Investment Performance: Now that 2022 is officially closed out, why not check the change in value of your various accounts? It’s good to at least have a sense of what return you’re getting so that you can evaluate whether or not you’re on track for your future goals. If you decide you need to make changes, make sure you consider the tax implications first.
Rebalancing: Research generally supports rebalancing somewhere between quarterly and annually. There’s no perfect time of year to do it, so New Year’s is probably as good as the 4th of July. But you’re reading this, so perhaps at least check your investing plan versus what proportions your investments are currently at? Again, consider the tax implications before trading in your taxable account.
Cleared to Rejoin
Clearly, if you take action on every item in this list, you won’t have much room for hitting the gym, skipping cookies, and spending more time with family. While each of these items deserves some thought, financial planning is a year-round activity and it might best to put the relevant topics on your calendar for action over the coming weeks rather than let the list crowd out the rest of your New Year’s resolutions. The important thing is to stay proactive and periodically revisit key issues each year.
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“Winged Wealth Management and Financial Planning LLC (“WWMFP”) is a registered investment advisor offering advisory services in the States of Florida and Texas and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WWMFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WWMFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.