Starting 2023 with a Clean Slate

What a year! There is a lot to unpack from 2022 whether it be inflation in the US, global issues in Ukraine, Iran and various other countries, COVID restrictions in China, and severe weather-related events. We cannot control these issues as it relates to our financial lives. We are all dealt a hand, albeit an ever-evolving hand, and must play the cards we are dealt, such as new tax legislation (SECURE Act 2.0) right at the end of 2022. As Wealth Advisors, our goal is to guide clients and provide them the tools to achieve meaning and joy in their lives.

The holiday break provided some time to think about some of the ways we can start 2023 fresh financially and to take control over those things which can be controlled. Here are some practical and easy action items that you can take in 2023:

1) Review the risk of your portfolio

When markets decline, it’s natural for risk tolerance to follow a similar path. Now is a good opportunity to meet with your financial advisor and decide if your portfolio aligns with your goals and risk appetite. A silver lining to the 2022 market downturn is the range of attractive options for investors in 2023:

• Stocks were beaten up in 2022, meaning they may provide good value and attractive return for long-term investors. Given the fluctuation in the market over the last several years, check to see if the type of stocks you own are diversified. Do you have an overweight to technology stocks that got hit hard in 2022? If you are overweight to your company stock, review diversifying it when tax ramifications may be lower. Are you sitting on a lot of cash? If so, now may be a good time to start putting some of that cash to work (see setting up an automatic investment plan in section 2).
• Speaking of cash, be sure to review how much interest you are receiving on your cash accounts (checking/savings etc.). The national average on a conventional savings account is 0.30%, according to the latest Federal Deposit Insurance Corporation (FDIC) data. There are high yield savings accounts protected by the FDIC that are paying more than 3% with limited fees and minimums.
• Bonds are back. The Federal Reserve raised rates in 2022 at a rapid rate to try to tamp down inflation, and subsequently, nearly every sector of the fixed income market experienced losses in 2022, but bond yields have now risen above dividend yields for the first time in several years. There is no alternative (TINA) to stocks has been the motto for many years, but it appears there has been a reset. A portfolio of high-quality bonds can yield more than 4% now.
• Diversify your portfolio with non-traditional holdings. Non-traditional investments include assets such as real estate and commodities, which are two of the oldest types of investments. By incorporating non-traditional holdings into your portfolio, you can potentially reduce risk and increase returns particularly during down markets. These assets are less correlated to the traditional stock and bond market.
• Review with an investment professional that the mix of stocks, bonds, cash, and non-traditional investments are working together for you.

2) Saving money with discipline

    a. Max out tax-advantaged plans where possible (most common vehicles):

• The 2023 limit is $22,500 for 401(k) plans with a catch up of $7,500 for individuals over age 50. Depending on your tax bracket and future income, it may make sense to take advantage of contributing to the Roth portion of a 401(k). The recently passed tax legislation, SECURE Act 2.0, has eliminated required minimum distributions for Plan Roth Accounts. The required minimum distribution age has also been increased to age 73 for those born between 1951 and 1959, and to age 75 for those born in 1960 or later.
• An IRA allows for contributions of $6,500 in 2023 with a catch up of $1,000 for individuals over age 50. Starting in 2024, catch up contributions will include a Cost-of-Living Adjustment to keep up with inflation. For those that make too much income to contribute to a Roth or receive a deduction on a Traditional IRA, speak to your financial advisor about a back door Roth conversion. No provisions in the SECURE Act 2.0 restrict or eliminate existing Roth strategies.
• Health Savings Accounts (HSA) are a great option for those that have a high deductible health plan available through their employer. They allow for a maximum family contribution of $7,750 in 2023 with a catch up of $1,000 for individuals aged 55 or older. An HSA has the benefit of pre-tax contributions, tax deferred growth, and tax-free withdrawals for qualified medical expenses. The funds can be invested with no requirement to use by the end of each year. An HSA can grow and create a pool to pay medical costs in retirement or serve as an alternative or supplement to long term care insurance.
• 529 accounts are college savings plans sponsored by a state or state agency. Contributions grow tax deferred and come out tax free for qualified educational expenses including $10K/year for K-12 education. From the SECURE Act 2.0, starting in 2024, up to $35,000 of leftover funds in a 529 account can be rolled over into a Roth account if the fund is at least 15 years old. There are some additional restrictions, but this should alleviate some of the concern about overfunding a 529 plan if a child doesn’t use the entire balance.

   b. Set up an automatic investment plan to make savings easier and to take advantage of dollar cost averaging into the market during volatile times.

   c. Use your bonus to pay down high interest debt, invest, or earmark it for that vacation that has been on hold due to COVID restrictions.

3) Estate planning and consolidation

Make 2023 the year that you simplify your life! If you are like most people, you probably have multiple providers for your financial needs for any number of reasons. Now is a perfect time to collect year end statements and start to consolidate those assets to fewer providers, create less complexity in your life, and simplify your tax returns saving you time and money. By consolidating your assets, it is easier to create a cohesive investment plan that accomplishes your goals.

As you start to consolidate your assets, review your beneficiaries to make sure they are accurate. It is common for people to complete their estate planning documents (wills/trusts, etc.) but never title their investment accounts to reflect the wishes in the documents.

Here are some items to review when thinking about your estate planning needs: Estate Planning Considerations

To summarize, save money consistently as tax efficiently as possible and make sure the dollars end up where you want them to go. Here is to a happy, healthy, and prosperous 2023!