Financial Planning in 2022: What You Should Know to Manage Your Tax Burden

Leo Wealth
by Stephen Tally

Here we are, early in the new year, which means you might be starting to get to those New Year’s resolutions. According to the latest Economist/YouGov Poll, one in four Americans is making a New Year’s resolution. And within that group, 13% have “financial goals” as their main resolution. So, where to start? Have you gone beyond the general “save more” or “pay down debt” goals? 2022 may present new investment options. It’s also a good annual resolution to review current allocations as your current amounts may not be entirely in line with your updated financial goals. 

We’re always mindful of a few tenants we continually espouse to our clients. One that comes to mind is, “control what you can or at the very least influence what you can.” In particular, if you can influence or manage your tax burden, you should take every opportunity to do so.  

An excellent place to start is your retirement accounts. Contributions to tax-qualified accounts such as IRAs and 401Ks directly reduce your taxable income. For those who are eligible for company benefits such as a 401k, 403b, or 457 plans, you should review your current contribution rate. Workers younger than age 50 can contribute a maximum of $20,500 to a 401(k) in 2022. That’s an increase of $1,000 from the limit of $19,500 in 2021. If you’re 50 and older, you can add an extra $6,500 per year in “catch-up” contributions, bringing your total 401(k) contributions for 2022 to $27,000. The same applies to 403b plans. The maximum amount you can contribute to a 457-retirement plan in 2022 is $20,500, including any employer contributions. 

Income deferral into a defined contribution plan can be pretty beneficial come April 15th. Employees who benefit less from a tax discount today should consider Roth 401k contributions. While those contributions won’t reduce your reported income today, future distributions are tax-free. Roth eligibility is contingent on your modified adjusted gross income (AGI) not exceeding $204,000 for married and joint filers or qualifying widow and single/head of household filers up to $129,000. In addition, review your plan and ensure that you are eligible for a company match of contribution if available. Free money is a great price. And don’t forget to review your allocation while you’re sprucing up. New investment options may be available, and your previous allocation may not be entirely in line with your current goals or work in concert with assets you may have outside the plan.  

If you’re self-employed, you have similar options. A regular IRA has a contribution limit of $6,000 and a catch-up of $1,000 for those 50 and older. Self-employed business owners may also establish a SEP IRA. Contributions can be 25% of the employee’s compensation or $61,000, whichever is less. If the business owner has employees beyond themselves, be aware that the company will make contributions for employees.

Another vehicle is a health savings plan or HSA. It’s a plan designed to work together with a high deductible health insurance plan. Eligible contributions are tax-deductible and can be used for qualified medical expenses for you, your spouse, and your qualified dependents. Self-only coverage contributions have increased in 2022 to $3,650 and family plans to $7,300. These aren’t “use it or lose it” funds. They are yours to use when needed and can continue to grow. A 20% penalty only applies to non-qualified distributions. 

Along the same “free money” line as the employer 401k match, your employer may offer a health reimbursement arrangement or HRA. An HRA is an employer-funded plan that reimburses employees for qualified medical expenses and, in some cases, insurance premiums. Employers can claim a tax deduction for the reimbursements they make through these plans, and reimbursement dollars received by employees are generally tax-free.

It’s always a good idea to review your financial life, and things are constantly changing and evolving, just like in real life. You get pay increases, children grow up and are no longer dependents, insurance needs change, you get a new job, you get closer to retirement, or better yet, you retire. Whatever the case, take time to connect with your adviser to address all your needs and are in a better position to achieve your financial goals. Do all you can when you can, because it all matters.  

The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to the accuracy, completeness, or reliability of this information. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth or the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.

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