What a spectacular end to 2021, the parties, the fireworks, Covid omicron surges.
Perhaps as an alternative to New Year’s Eve festivities, you were scurrying away in your home office, creating spreadsheets and gathering documents for the upcoming tax season. Or not. If you did, hopefully, you had a glass of celebratory champagne in your hand!
Let me guess. You finished everything on your 2021 financial and tax “to-dos” and on time, right?
So much emphasis is put on year-end planning, especially for taxes, which is a good thing since we have a clearer idea of our income and expenses. But December is busy, busy and sometimes things just don’t get done.
I don’t know about you, but I don’t want to worry about these things when I could be spending time with family and friends, especially if there is champagne involved. That’s why I suggest starting the year on the right foot and beginning your tax and financial planning in the early part of the year!
Where to start? Your Paycheck Withholding
Google the phrase “1040 Income Tax Calculators” and you’ll find lots of free options to quickly help you estimate your 2021 tax liability. Then pull out your year-end paystub. Did you withhold way too much or too little? Evaluate what this year’s income will look like and then make adjustments to your W-4 at work. There are also many “Tax Withholding Estimators”, just not the IRS one, as it is offline until late Jan 2022. Tip your server, not the IRS!
Employee Assistance Program (EAP)
Just finished your new benefits election? A hidden gem offered to many is the Employee Assistance Program. This obscure benefit flies under the radar but deserves a deeper look. The Pacific Northwest National Laboratory (PNNL) EAP, for example, offers free and discounted legal and financial assistance to the tune of two free 60-minute financial consultations, a 25% discount if they do your tax return, and a free 30-minute legal consultation with a 25% discount on additional legal services. Who knew?
Is a Roth Conversion Beneficial This Year?
If you think tax rates will go up over your lifetime and you’d rather pay taxes at today’s known rates, especially if you expect 2022 to be a lower-income year, a Roth conversion should be something to consider. But don’t wait until December to do so. Financial institutions get very busy at year-end, and it seems that paperwork is now being processed at (I’ll coin a phrase here) a poky pandemic pace so make a point to take care of that earlier in the year. It’s especially beneficial if you can do it when there’s a “dip” in the market. Roth conversions can be done even if your income is too high to normally contribute to a Roth.
Want more bang for your buck? Try a Mega Backdoor Roth. Most employer retirement plans do not make this easy but there still may be a way. It all depends on your company’s plan rules, but it generally goes like this. Let’s use the PNNL plan as an example.
Employees can make a maximum salary deferral of $20,500 ($27,000 if over 50) (2022) into their pre-tax 401k account.
Then because the PNNL retirement plan allows non-Roth, after-tax contributions (and assuming there is room under the ACP test – talk to your plan sponsor) one can make additional contributions up to the maximum allowed, $61,000 (this number is for employee and employer contributions, excluding any catch-up contributions).
$61,000 -$20,500 = $40,500 additional after-tax contribution.
The second part is many plans, like PNNL’s, allow for in-service distributions after age 59 ½, so at that point, you can roll over only your after-tax subaccount to an outside IRA (without having to separate service, aka quit). You’ll want to act quickly to minimize the earnings that accrue in the after-tax subaccount (which will have pre-tax character) and move the funds into your Roth IRA for tax-free growth and distributions. Who doesn’t want that!
The upside? This is a great strategy to implement starting around age 59 ½ until you retire to build up your retirement superpower: your Roth. The downside? This might be on the chopping block with the recently proposed tax law changes.
Why wait until December to make any required distributions (for inherited IRAs or traditional IRAs if you are 72). There are some good reasons to wait like delaying the tax due, maximizing the return while still inside the pre-tax retirement wrapper, and like we discovered during Covid, there can be unexpected new rules that pop up in the year. So sure, wait until fall, but not all the way to December and like Roth conversions, distribute during a market dip.
Need I say more? Goals, goals, goals. The beginning of the year is a great time to take stock of your goals. Where are you today? Where do you want to be? How much is required to reach them? When is the goal due? What’s holding you back? Who is going to help you get there? Are there any new goals for 2022 and any that should drop off (like getting that 2022 ROCKS tattoo)?
Having a conversation with yourself or a financial planner now can set you up for success without the last-minute rush. Cheers to a fiscally fantastic 2022!
Angie Furubotten-LaRosee is a Certified Financial Planner™, speaker, podcaster, and founder of Avea Financial Planning, LLC, a fee-only, fiduciary financial advice and investment management firm specializing in retiring PNNL employees. www.AveaFP.com
Angie Furubotten-LaRosee, Certified Financial Planner™, speaker, podcaster, and founder of Avea Financial Planning, LLC, a fee-only, fiduciary financial planner specializing in retirement, fiduciary investment and tax advice and portfolio management for retiring PNNL (Pacific Northwest National Laboratory) employees.
Financial planner for PNNL employees, Tri-Cities WA.
You can read this article on the Tri-City Area Journal of Business site as well.
#realfinancialplanning #financialplannertricities #fiduciary
We are all in this together. Let’s stay connected, Tri-Cities, WA.
My offer stands to do a “Walk and Talk” outside in any Tri-Cities weather, while social distancing, of course.
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**This is not investment, financial or tax advice. A financial planner or tax advisor can help you determine if any of the above strategies might benefit you.
Angie founded Avea Financial Planning and is a fee-only advisor helping retiring PNNL employees with tax-smart retirement planning, investments & fiduciary financial advice so they can be more confident and live life on their own terms.