After examining the checklist twice, there are some additional end of year items that will be very helpful for you. Here’s part two of the list.
First on the List – Diversify Large Positions
If you have more than 10% of your portfolio invested in a single company, you have a risky investment. This is especially true if it is your employer’s stock. This is worrisome because markets are volatile, and even more nerve-racking when markets decline. So what can you do?
Diversify your portfolio! If share prices in your concentrated positions have declined, selling some of your position could reduce your tax liability in 2022 because you are selling at a lower price. Additionally, you are gaining greater financial security through increased diversification.
More importantly, if you do have a large position in the stock of your employer, it’s important to work with a financial planner to set up a long-term, tax-efficient sale plan. Exiting out of a large employer position is rarely a one-and-done occurrence. Selling down the position occurs over time to average out sales prices and diversify a portfolio. Furthermore, many equity compensation plans continue to vest over several years and this requires a long-term plan.
Number Two – Roth Conversion
Roth conversions are next on the list. The main reason to convert a Traditional IRA to a Roth IRA is to enjoy tax-free income in retirement. You will have to pay ordinary income tax on the amount of money you convert to your Roth IRA.
However, the declining market in 2022 is a great time to do a Roth conversion because you are making the conversion at a (hopefully) lower account value. Once converted, you will keep 100% of your asset appreciation with a Roth IRA because all gains are tax-free.
Third on the Checklist – Spend Your FSA
The last item on the checklist is FSA’s. During the coronavirus pandemic, the CARES Act in 2020 allowed companies to adopt more lenient FSA policies. As a result, many FSAs have money from 2020, 2021, and 2022. On average, FSA balances now are 50% higher than at this time in 2021.
However, this reprieve expires at the end of the year and regular FSA rules resume in 2023. Typically, FSA’s are a use-it-or-lose-it account, and some employers do have grace periods until March 15th of the following year. Because the rules have been relaxed over the past few years, you may forget to spend your FSA dollars, and lose them. Once the deadline passes, you can no longer use the money. Check with your human resources department for specifics on your FSA plan.
The December 31st deadline will be here before you know it. Don’t wait. Be swift like Comet, Cupid, and Donner. If you have any questions, you can set up a chat.