Preparing Your Finances for 2023
With just over a month remaining in the year, investors should focus not only on goals and plans for next year, but also what opportunities still exist for the end of 2022. Focusing on a few of these financial matters could be a great step in getting you ready for 2023.
Maxing out your 401k
With 6 weeks left in 2022, there is still time to review how much you have invested into your 401k and how much room you have left to contribute, if possible. For 2022, the contribution limit was $20,500 for savers under age 50, and up to $27,000 for those age 50 or over. In addition to putting as much as you can into your 401k, you may also want to review your benefits package to ensure you have contributed enough to maximize any employer matching opportunities, if your employer offers one. It is important to understand the rules to ensure you’re not missing out on the full potential of an employer match program.
Like the 401k, you may also be able to invest in a tax-advantaged retirement account such as an IRA. Any IRA contributions reduces your taxable income and could help lower your tax burden. The IRA contribution limit in 2022 was $6000, or $7000 if you are age 50 or older. Keep in mind you have a few more months for the IRA contribution deadline, which is typically the tax filing deadline in the following year. Focusing on maximizing your contribution limits in both your IRA and 401k are great ways to keep your tax burden as low as possible.
Spending your FSA/HSA balance
Some employers offer health benefits that include a flexible spending account (FSA) or health spending account (HSA). These accounts allow you to put pre-tax money into a spending account, which can then be used to cover a variety of medical expenses. Now would be the time to review how much is in your FSA, how much may still be contributed in the remaining weeks of the year, and how you plan on spending that balance. It could be time to schedule that medical appointment you’ve been putting off, ordering a fresh batch of contact lenses, going to see your dentist, or renewing a prescription that may be available. Certain FSAs also include dependent coverage, so be sure to prepay for upcoming winter camps or daycare expenses. Some FSA accounts do not allow carryforward of balances into the following year, so be sure you’re not leaving any money on the table.
Review with your CPA
Your financial situation in 2022 may have changed from previous years due to financial events such as employee stock options, inheriting assets, business activities, or selling off some investments. You may have some unrealized losses that may impact how much taxes you owe for 2022, and there may be certain things you can do in the coming weeks to reduce your tax burden. Meeting with your tax professional to review your financial activities to date could reveal some opportunities before you file your taxes next year.
Set aside an emergency fund
Many financial experts are warning that a recession may hit in 2023. If you have the means, it is advised to boost your emergency fund to ensure that if anything unexpected happens with your job, health, family, etc., you can cover your living expenses. Typically, experts recommend that you have three months of expenses put aside in your savings account, while some predict that amount should be closer to 6 or even 12 months of expenses. In any case, it is recommended that you are aware of your monthly spend and focus on saving an amount that provides you with a comfortable cushion.
Minimize interest payments
With the Fed continuing to hike interest rates, unpaid balances on credit cards are becoming much more expensive. Focusing on paying down your high interest debts, such as credit cards or lines of credit, will dramatically reduce the amount of money you are wasting on interest. While financial experts always recommend paying your credit card balances in full each month, a focus on reducing those balances will help set you up for success in 2023.
Monitor and control holiday spending
The holiday season is right around the corner, and unfortunately many individuals will go overboard with their holiday spending. Before hitting the websites and shops in the coming weeks, it is advised to prepare a budget on how much you would like to spend over the season and stick to it. In addition to the gift giving, we can’t forget the other holiday spending items such as holiday parties, entertaining expenses, white elephant gifts, dinner celebrations, holiday cards, shipping expenses, transportation, and decorations. Maxing out your credit cards is not a way to start the new year, so try to be cautious of your spending and stick to your budget. There are also a lot of gifts that don’t cost anything at all, such as giving experiences or making homemade items, so remember that buying expensive gifts may not be the best ways to show you care over the holidays. And might be gentler on your wallet.
Make a plan for your Holiday Bonus
If your employer typically gives a holiday bonus at the end of the year, spend time planning out your options for how to spend that bonus check. Using it to add to your emergency fund account or to contribute to your 401k before year-end are just two examples of how you could be responsible with that money.
Meet with your Financial Advisor
If you find yourself with some extra savings, now may be a good time to pay tax on a Roth IRA conversion. You may also be a business owner who may benefit from opening a SEP IRA or Solo-401k. Reviewing your finances with your financial advisor may help uncover further opportunities for you to achieve your goals, but keep in mind these strategies are not suitable for everybody and should be reviewed with a certified financial planner.
Set Goals and Prepare for 2023
The end of the year is a great time to evaluate how you and your family performed during 2022 and what needs to be adjusted for next year. Evaluating your savings while also thinking about what’s coming up this year will help determine what your goals can be and what your budget should be. Is there a big wedding coming up or is someone heading off to college? Is there a large trip or big-ticket item that is going to be purchased this year? Evaluating how much you were able to save last year and planning ahead for the changes in 2023 will set you on a good path towards setting your next short-term financial goals.
Being prepared already in January will help avoid any last-minute financial tasks at the end of the year. For example, if one of your goals for 2023 is to max out your 401k contributions, you can adjust your payroll deductions to ensure you achieve that goal by end of December. Keep in mind the 2023 401k contribution limits are increasing to $22,500 for those under age 50, and $30,000 for those age 50 and older. Dividing the limit by the number of payroll periods will ensure you will achieve your goal.
You may also need to adjust your tax withholding information, depending on the outcome of your 2022 tax calculations. If you receive a large refund from your 2022 taxes, you are having too much tax taken from your paycheck. Vice versa, if you owe a significant amount in unpaid taxes, you are not having enough taxes taken out. Correcting your tax allowances and adjusting the necessary tax withholding information can be achieved by filling out a W-4 form, with the goal that there is minimal amount owed/due when the tax calculations have been completed.
Evaluating your 2022 performance and planning for 2023 is a big job but identifying year-end opportunities and acting on them could be a huge financial reward. Whether you’re looking to work with a Houston financial advisor or a Bay Area financial advisor, Insight Wealth is here to help. We offer comprehensive, holistic planning that takes all aspects of your life into account.
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Insight Wealth Strategies, LLC (IWS) and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.