Get Your 2023 Financial House in Order
By Net Worth Advisory Group
With 2022 thankfully behind us, we’re hoping 2023 will be a fresh start. And with every new year comes renewed commitments to improving your finances, strengthening your savings, and planning for the future. Although the ball has already dropped, we at Net Worth Advisory Group believe it’s not too late to jump-start your financial plan for 2023.
We hope you’ll find this guide helpful in reviewing each area of your financial plan to make sure you’re starting 2023 off on the right financial foot.
Retirement
Maximize Your Retirement Savings
Be sure to max out your retirement contributions. Many employers offer retirement plans like 401(k)s, 403(b)s, and 457s, which allow you to contribute up to $22,500 for 2023 ($30,000 if over age 50).
These contributions are automatically deducted from your paycheck and won’t show up as part of your annual income, so the more you can maximize your contributions during the year, the less taxable income you will have. With this strategy, you can defer taxes until your retirement years when you could potentially be in a lower tax bracket.
Keep in mind that the SECURE 2.0 Act will increase catch-up contributions starting in 2025. At that point, individuals between ages 60 and 63 will be able to contribute up to $10,000 or 150% of the regular catch-up contribution to their retirement plan.
Contribute to a Traditional IRA
Contributing to a traditional IRA is another strategy to reduce your AGI if your income is within certain limits. The 2022 contribution limit for traditional IRAs is $6,000 with additional $1,000 catch-up contributions for individuals over the age of 50. Contributions can be made until April 18th, 2023, for the 2022 tax year so there’s still time to utilize this strategy. The 2023 contribution limit is for $6,500 with additional $1,000 catch-up contributions for individuals over the age of 50.
Understand Your RMDs
Starting in 2023, the rules around required minimum distributions (RMDs) will change again thanks to SECURE 2.0. If you turn 72 after December 31, 2022, your RMD age will be increased to 73. If you turn 74 after December 31, 2032, your RMD age will be 75. If you are subject to RMDs in 2023, the sooner you understand the rules around your distribution, the better. Though we are barely into the new year, you don’t want to be caught off guard come December 31. Depending on what age you are required to start taking distributions (70 ½, 72, 73, or 75), you could face a 10% - 25% penalty on missed distributions.
Cash Flow
Assess Your Emergency Fund
Now is the time to ensure that you have enough money set aside in your emergency fund or create a plan to build this up over the next year. An adequate emergency fund should cover 3-6 months of necessary living expenses, including mortgage or rent, utilities, groceries, transportation, etc.
If you’re single, or your household only has one source of income, consider saving on the higher end of this scale to make sure you’re covered in the event of a job loss or reduction in income.
However much you save, be sure this money is held in a highly liquid account. It needs to be readily available and easily accessible.
The SECURE 2.0 Act has made saving for emergencies a bit easier. In 2024, participants will be allowed to contribute up to $2,500 to an “emergency fund” within the 401(k) plan. These contributions can be accessed before retirement and will not be subject to the 10% early withdrawal fee.
Taxes
Contribute to a Health Savings Account
If you’re enrolled in a high-deductible health plan, consider contributing to a health savings account (HSA) in 2023. HSAs offer triple tax savings. Contributions are tax-deductible, earnings grow tax-free, and withdrawals are tax-free if used to pay for medical expenses.
The 2023 IRS contribution limits for HSAs are $3,850 for individuals and $7,750 for families. If you are 55 or older, you may also be able to make catch-up contributions of $1,000 per year.
Invest in a College Savings Plan
If you have children or grandchildren in your life, contributing to a 529 savings plan is an excellent way to jump-start their college savings in the new year.
This type of educational savings plan was created so that families can receive tax benefits for saving toward qualified higher-education expenses. After-tax money is invested in a 529 plan where it grows tax-free. When the money is later taken out for qualified expenses, there are no federal taxes due.
In 2023, you can give up to $17,000 (or $34,000 if gift-splitting with a spouse) per 529 account gift-tax-free. There’s also a special election that allows you to give 5 years’ worth of contributions as a lump sum, meaning you could give up to $85,000 (or $170,000 if gift-splitting) entirely gift-tax-free!
What’s more, remaining 529 balances can be rolled into a Roth IRA for the account beneficiary starting in 2024, so you won’t have to worry about losing the funds if your child chooses not to go to college or doesn’t use the full account amount. Keep in mind that the account must be at least 15 years old and the maximum lifetime rollover limit is $35,000. Contributions made in the last 5 years will not be eligible for rollover.
Consider a Roth Conversion
Roth IRAs are an attractive savings vehicle for many reasons, including no required minimum distributions (RMDs), tax-free withdrawals after age 59½, and the ability to pass wealth tax-free to your heirs. Unfortunately, Roth IRAs have income restrictions, and you may not be able to open an account outright if you are above certain limits.
To get around this threshold, consider a Roth conversion. Using this strategy, you will pay tax on money contributed to a traditional IRA, thereby converting it into a Roth. If you believe you will earn less income in 2023, or your traditional IRA balance has taken a hit due to recent market volatility, a Roth conversion may be a great opportunity for your specific situation. Converting to a Roth also allows your money to grow tax-free for as long as you’d like.
Consider Tax-Loss Harvesting
Tax-loss harvesting involves selling investments at a loss in order to offset the gains in your portfolio. By realizing a capital loss, you are able to counterbalance the taxes owed on capital gains. The investments that are sold are usually replaced with similar securities in order to maintain the desired asset allocation and expected return.
Given the unprecedented market volatility throughout 2022, this can be a great way to make the most out of a losing situation by using an investment loss to offset your tax liability. Even though the deadline for this to count toward the 2022 tax year has passed, there will likely be ample opportunity to revisit this strategy in 2023. Talk with your advisor about potentially harvesting your losses and if it makes sense for you.
Estate Planning
Review Beneficiary Designations
If you had any major life events happen in 2022, like a birth of a child, marriage, divorce, or a death in the family, make sure you review your beneficiary designations for 2023. There are several assets, including retirement accounts, bank accounts, and life insurance policies, that are distributed based on beneficiary designation and not the terms of your will. If you have an updated will but an outdated beneficiary listed on one of these accounts, there is a chance your assets will not pass according to your wishes.
Review Your Estate Documents
Similarly, it’s important to review your estate planning documents, including your last will and testament, any powers of attorney, living wills, and/or trust documents. The new year is always a good time to take another look at these documents or start drafting them if you don’t already have them in place.
We’re Here to Help
Does this list feel overwhelming? We get it. You’ve got a lot on your plate; we at Net Worth Advisory Group are here to ease your burden. After two decades, we have the tools and expertise to help clients get their financial house in order. And, as always, our goal is to help clients improve their financial plans and get the most out of life. Call us at 801-797-2833 or schedule a complimentary, no-obligation consultation to see if we are a good fit to help you pursue your goals. To learn more, visit our website.
About Net Worth Advisory Group
Founded in 2003, Net Worth Advisory is an independent, fee-only, CERTIFIED FINANCIAL PLANNER™ and investment advisory firm located in Salt Lake City, Utah. We specialize in helping people transition from the workplace into retirement, and ensuring that those who are already retired will not outlive their nest egg. Our top priority is to have clients experience a greater sense of ease with diligent, personalized wealth care and the implementation of customized financial plans and ongoing personalized asset management. We equip all clients with a comprehensive financial plan, meeting every six months to update as needed and review investment performance. Our team is passionate about providing comprehensive financial planning with the fee-only model, and we love feeling like we’re making a difference in our clients’ financial lives.
As a NAPFA-registered fee-only advisory firm, our recommendations are untainted by a hidden agenda to sell financial products paying large commissions. Unlike our competitors at brokerage firms, insurance companies, and banks, we are compensated solely by our clients, so we are financially motivated to provide objective advice that is always in our clients’ best interests. Anyone can call himself or herself a financial planner, but only an advisor with the CERTIFIED FINANCIAL PLANNER™ (CFP®) designation has met the education, examination, experience, and ethical requirements mandated by the CFP® board. Of the estimated 800,000 financial advisors in the U.S., only 55,000 have earned the CFP® designation. All Net Worth advisors are either CFP® professionals or CFP® professionals in training.
Net Worth Advisory’s mission is to significantly improve the lives of our clients by delivering exemplary financial planning and wealth management advice that enables them to live the lives they have imagined.
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