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 work towards for the next 12 months and beyond. This “start over” mindset allows people to review and evaluate what worked (or didn’t) over the course of the previous year and review or create short-term and long-term goals to strengthen their financial plan.

The new year also resets the calendar from a tax planning perspective, so it’s beneficial to think about tax-efficient opportunities like gifts, retirement 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 that their portfolios are properly aligned. This is particularly important now, as a decade-long bull market has likely left underserved portfolios with a higher stock weighting than anticipated.

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

Step 2: Maximize retirement contributions

IRA contributions can be made through the April tax filing deadline, which means an investor can use the next 3 1/2 months to maximize their 2021 contributions. Alternatively, for investors making contributions in 2022, they have more than 15 months, or until April 2023, to fund their accounts. That said, it’s advantageous to invest in an IRA as early in the year as possible to fully benefit from the power of compounding.

Notable for 2022 is the IRS decision to increase the contribution limit on 401(k), 403(b), and most 457 plans to $20,500, up from $19,500 in 2021 (for those 50 and 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 see if there is additional cash flow (for example, if an individual recently received a raise) to put into retirement accounts.

In general, I advise my clients to contribute at least 12% to 15% of their salary, including employer contributions, to retirement savings. At a minimum, contribute enough to earn the employer’s full matching contribution.

Also, because it’s a new tax year, it could be an opportunity for some investors to consider converting a traditional IRA to a Roth IRA. Depending on an investor’s tax bracket for 2022 compared to prior years or anticipated future years, assess whether a 2022 Roth conversion makes sense. For example, if an investor recently retired and has less earned income, he could pay Roth conversion taxes at a lower rate than when he was working.

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

Many individuals and families wait until closer to the end of the year to implement their charitable giving strategy, but 2022 may be a good time to move this action to the beginning of the year. Given the market’s strong 10-year run, donors should consider donating through appreciated securities, as this technique allows the investor to:

  • Rebalance your portfolio.
  • Receive a tax deduction.
  • And avoid paying capital gains tax on the value donated.

Taking this tactic one step further, a donor-advised fund (DAF) can be financed using appreciated securities, allowing an investor to receive the tax deduction once the vehicle is financed, but ” park” the donations in the DAF until they are ready to be allocated to the charity or charities of your choice.

Step 4: Understand the impending estate tax changes

Individuals may see their lifetime estate and gift tax exemption go from $12.06 million in 2022 to about half of that amid provisions scheduled to expire in 2026. These changes may take four years, but until more clarity is provided, investors with an estate plan, or those thinking of creating an estate plan, should connect with your advisor and/or attorney. Discuss future provisions and the impact they may have on your plans.

Just as a person might set fitness or lifestyle goals at the start of the new year, take the time to review financial goals. Financial planning is often a year-round journey, but devoting attention and putting actionable plans in place 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 for Vanguard Personal Advisor Services. She specializes in creating personalized investment and financial planning solutions for her clients and is particularly well versed in comprehensive wealth management and legacy planning for multigenerational families. A Boston College graduate, Virta has more than 25 years of industry experience and is a member of the CFA Society of Philadelphia and the Boston College Alumni Association.

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