4 steps to launch a financial plan in 2022

The start of a new year marks a strategic time to review a financial plan and develop goals to achieve over the next 12 months and beyond. This “fresh start” mentality allows individuals to review and assess what has worked (or not) over the past year and revise or create short and long term goals to reinforce their plan. financial.

The new year also restarts the calendar from a tax planning perspective, so it pays to think about tax-efficient opportunities, such as gifts, pension contributions and more. Here are four steps to consider that can have a lasting impact on a financial plan both this year and in the future.

Step 1: Rebalance your portfolio

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

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

Step 2: Maximize pension contributions

IRA contributions can be made up until the April filing deadline, meaning an investor can use the next 3.5 months to maximize their 2021 contributions. Alternatively, for investors who pay contributions in 2022, they have more than 15 months – or until April 2023 – to fund their accounts. That said, it pays to invest in an IRA as early in the year as possible to take full advantage of the power of compounding.

Of note for 2022 is the IRS’ decision to increase the contribution limit on 401(k)s, 403(b)s and most 457 plans to $20,500 from $19,500 in 2021 ( for those age 50 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 someone has recently received a raise) to direct to the accounts of retirement.

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

Also, since this is a new tax year, this might be an opportunity for some investors to consider converting a traditional IRA to a Roth IRA. Based on an investor’s tax bracket for 2022 compared to previous years or expected future years, assess whether a Roth conversion in 2022 makes sense. For example, if an investor has just retired and has less earned income, he could pay taxes on the Roth conversion at a lower rate than he had when he was working.

Step 3: Avoid putting off giving plans until the end of the year

Many individuals and families are waiting closer to the end of the year to roll out their charitable giving strategy, but 2022 might be a good time to move that action to earlier in the year. Given the strength of the market over the past 10 years, donors should consider donating through valued securities, as this technique allows an investor to:

  • Rebalance your portfolio.
  • Benefit from a tax deduction.
  • And avoid paying capital gains tax on donated securities.

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 to “park” the donations. in the DAF until they are ready to allocate them to the charity or charities of your choice.

Step 4: Understand the impending estate tax changes

Individuals could see their lifetime estate and gift tax exemption drop from $12.06 million in 2022 to nearly half of that under expiring provisions scheduled for 2026. These changes could take four years, but until more clarity is provided investors with an estate plan – or those considering creating a plan estate – should contact their advisor and/or attorney to discuss future arrangements and the impact they may have on their plans.

Just as a person might set fitness or lifestyle goals at the start of the new year, take time to review your financial goals. Financial planning is often a year-round journey, but focusing and implementing action plans today can have a significant impact on financial well-being for years to come.

Senior Financial Advisor, Vanguard

Julie Virta, CFP®, CFA, CTFA is a Senior Financial Advisor at Vanguard Personal Advisor Services. She specializes in creating personalized investment and financial planning solutions for her clients and is particularly familiar with comprehensive wealth management and estate planning for multi-generational families. A graduate of Boston College, Virta has over 25 years of industry experience and is a member of the CFA Society of Philadelphia and the Boston College Alumni Association.