4 Steps to Kickstart a Financial Plan in 2022

The start of a new year marks a strategic time to review a financial plan and develop goals to work toward over the next 12 months and beyond. This “fresh start” mentality allows individuals to review and assess what worked (or didn’t) over the course of the previous year and revise or create short- and long-term goals to strengthen their financial plan.

The new year also restarts the calendar from a tax-planning perspective, so it’s beneficial to think through tax-efficient opportunities, such as gifting, retirement contributions and more. Here are four steps to consider that can have a lasting impact on a financial plan both this year and well into the future.

Step 1: Rebalance your portfolio

In addition to reviewing overall goals, the start of a new year also marks a good time to review portfolio allocations. Investors should assess their objectives and risk tolerance to ensure their portfolios are appropriately aligned. This is particularly important now, as a decade-long bull market has likely left unattended portfolios more heavily weighted to equities than intended.

If overweight in any area, January is a great time to consider rebalancing. I recommend evaluating the portfolio’s asset allocation and rebalancing if the equity or fixed income positions have strayed more than 5 percentage points from their intended targets. An added benefit of rebalancing in January, especially with the markets being strong, is the possibility to defer paying capital gains taxes until next spring.

Step 2: Maximize retirement contributions

IRA contributions can be made until the tax-filing deadline in April, meaning that an investor can use the next 3½ months to maximize their 2021 contributions. Alternatively, for investors making 2022 contributions, they have more than 15 months – or until April 2023 – to fund their accounts. That said, it’s advantageous to invest in an IRA as early as possible in the year to fully benefit from the power of compounding.

Notable for 2022 is the IRS’ decision to raise the contribution limit on 401(k)s, 403(b)s, and most 457 plans to $20,500, up from $19,500 in 2021 (for those 50 years old or older, they can contribute an additional $6,500 in 2022, a figure that remains unchanged from 2021, bringing the total to $27,000). Investors should review their employer-sponsored plan and aim to maximize these contributions or look to see if there is additional cash flow (for example, if an individual recently received a raise) to direct toward retirement accounts.

In general, I advise my clients to contribute at least 12%-15% of their salary, including any employer contributions, to retirement savings. At the very least, contribute enough to earn the full employer match.

Additionally, because it is a new tax year, it could be an opportunity for some investors to consider converting a traditional IRA to a Roth IRA. Depending on an investor’s tax bracket for 2022 in comparison to prior years or anticipated future years, assess whether a Roth conversion in 2022 makes sense. For example, if an investor just retired and has less earned income, they could pay taxes on the Roth conversion at a lower rate than when they were working.

Step 3: Avoid pushing gifting plans until year’s end

Many individuals and families wait until closer to the end of the year to deploy their charitable giving strategy, but 2022 may be a good time to move this action to earlier in the year. Given the market’s strong 10-year run, donors should consider making gifts through appreciated securities, as this technique allows an investor to:

• Rebalance their portfolio.
• Receive a tax deduction.
• And avoid paying capital gains tax on the security donated.

Taking this tactic one step further, a donor-advised fund (DAF) can be funded using appreciated securities, allowing an investor to receive the tax deduction once the vehicle is funded, but “park” the donations in the DAF until they are ready to allocate them to the charity or charities of choice.

Step 4: Understand looming estate tax changes

Individuals may see their lifetime estate and gift tax exemption go from $12.06 million in 2022 to near half of that amid expiring provisions slated for 2026. These changes may be four years away, but until more clarity is provided, investors with an estate plan – or those thinking about creating an estate plan – should connect with their adviser and/or attorney to discuss future provisions and the impact they may have on their plans.

Just as an individual might set fitness or lifestyle goals at the start of the new year, take time to review financial objectives. Financial planning is often a year-round journey, but dedicating focus and implementing actionable plans today can have a significant impact on financial wellness for years to come.