Updated: Jan 7
As we turn the page to a new year, I would like to suggest the following top 5 tasks to keep you on the right track financially.
Adjust your withholding with W-4. Depending on changes to your family situation, income-level, mortgage and other changes, please make sure that the tax withholding is in line with the estimated taxes for the year. Typically, change of job or having multiple sources of income, stock compensation such as RSUs will require you to update the IRS Form W-4 in the employer's payroll site.
Do Backdoor Roth IRA Conversion. If you/your spouse do not have Traditional IRA accounts, you and your spouse each can contribute a non-deductible $6,000 ($7,000 if you are age 50 or over) for the year 2022 and immediately convert to a Roth IRA, also called backdoor IRA conversion. IRA contribution limits have not changed for 2022. Perform this task now, instead of waiting any longer, because the "Build Back Better Act" could stop backdoor Roth conversion as well. If your projected income (MAGI) for 2022 is less than $214,000 for joint filing ($129,000 for single), you and your spouse can contribute to Roth IRA directly even if you/your spouse have an employer-sponsored plan. There are two caveats to backdoor Roth: 1) you/your spouse must have earned income to the extent of the contributions and 2) each one performing the Backdoor Roth conversion should not have any IRA accounts in order to avoid triggering "pro rata rule" resulting in additional taxes.
Adjust Retirement Contributions. The limit for employer-based retirement accounts such as 401(k), 403(b), 457 plans have been increased to $20,500 for 2022. The catch-up amount for age 50+ remains $6,500 with a maximum contribution limit of $27,000. If you need to make adjustments to maximize your contributions or increase the contributions, this may be a good time. Some of you may have increased the contribution towards the end of the year to maximize 2021 contributions and may need a change to make the equalize deductions over the year. Also, this is a good time to decide your ratio of Pre-Tax vs. Roth contributions depending on your tax situation now and in the future.
Maximize After-Tax 401(k) Contributions. If your employer allows for After-Tax 401(k) contributions that can be converted to Roth, also called Mega Backdoor conversions, you may want to maximize* your after-tax contributions in the early part of the year. This is to hedge passage of the "Build Back Better Act" that may shutdown such a conversion. The total contribution limit of both employee and employer contributions have been increased to $61,000 in 2022 for anyone under age 50, and $67,500 for age 50 or over. *Maximum contribution may depend on your cash flow and your ability to defer savings for retirement. Here is a hack suggested by a savvy client to work around if the new tax law passes: you can supersize your after-tax contributions in the beginning of the year for Mega Backdoor Roth conversions while keeping your pre-tax 401k contributions to a level that will give you full employer contributions (say 5%). Once the after-tax contribution target (say $20,000) is reached, you can reduce the after-tax contribution to zero and increase the pre-tax contributions to permissible limit for the year.
Q4 Estimated Taxes: Jan 18, 2022 (Tuesday) is the deadline for filing the final quarterly estimated taxes for 2021. This is not only for self-employed but also for people who sold stocks for gains towards the end of the year, received extraordinary income due to RSUs vesting and other grants. Typically, the income withholding from RSUs is set to default of 22% by the employer. However, you/your spouse may have a joint income that is in 32% or higher bracket for 2021.
Having completed the above tasks, you may want to review your contributions to College Planning (529-Plan), personal savings and other goals. If your New Year Resolution is to get your finances organized and build a secure financial future, please schedule a no-obligation, free initial consultation.
Disclaimer: This write-up is for educational purposes only and it is not a personal advice. Note that the tax laws in the "Build Better Back Act" are subject to change if and when it is enacted into law.