A new year brings an opportunity to reflect on the prior year and establish goals for the year ahead. Common New Year’s resolutions often center on health and self-improvement; however, this can also be a great time to evaluate your financial picture and set financial goals for the year to come. As you consider your resolutions for the coming year, here are five strategies you may want to implement to strengthen your financial health in 2022.
Resolution #1: Boost Your Retirement Savings
You can build a larger retirement nest egg by contributing to retirement plan vehicles, including employer-sponsored 401(k) plans and IRAs.
- The maximum amount you can contribute to a 401(k) plan increased to $20,500 for 2022. If you are age 50 or older, you can contribute an additional $6,500 as a catch-up contribution, bringing your total to $27,000.
- For Traditional and Roth IRAs, the maximum contribution remains unchanged at $6,000 ($7,000 if you are age 50 or older) for 2022.
You can make 2021 IRA contributions until April 15, 2022. However, keep in mind that there are income limitations that may prohibit you from being able to contribute directly to a Roth IRA.
Resolution #2: Consider Making Roth Conversions
Depending on your financial circumstances and tax bracket, a Roth IRA may be a more valuable retirement savings vehicle compared to a Traditional IRA. A Roth conversion is a strategy that allows you to convert money in a Traditional IRA into a Roth IRA. While converting generally means you must pay taxes on the converted assets, any subsequent earnings will then be tax-free upon distribution from the Roth IRA, provided you meet the age and holding requirements.
You may want to consider a Roth conversion if you anticipate that you will be in the same or a higher tax bracket in the future. Roth conversions are also not an all-or-nothing proposition. You can convert a portion of your assets over a series of years to spread out your overall tax liability. You do not have to convert the entire IRA at once. Having cash available to pay the tax outside of the IRA will also make the conversion more effective.
There are several advantages to initiating a Roth conversion. However, there are also some drawbacks to consider. If you are interested in completing a Roth conversion, we recommend discussing it with your advisor before you make a final decision.
Resolution #3: Check Your Credit Report
You are entitled to a free credit report every 12 months from each of the three major credit reporting bureaus (Equifax, TransUnion, and Experian) under federal law. You can also request a copy of your credit report by visiting AnnualCreditReport.com. By requesting the reports separately, such as every four months, you can monitor your credit without incurring a cost throughout the year. It is good practice to review your credit report at least annually to check for accuracy. This will allow you to identify any errors and correct them right away. The precision of your credit report is also important, as it could impact whether you can borrow money—and how much you will pay to do so.
Resolution #4: Take Advantage of Low-Interest Rates
The window to take advantage of today’s historically low-interest-rate environment could begin to close soon. Interest rates are projected to rise three times in 2022. As such, if you have a higher-rate mortgage, auto, and/or student loan, you may want to consider refinancing it soon. This would in turn allow you to potentially lower your interest rate, reduce your monthly payment, and free up additional funds to allocate toward your other financial goals.
Federal student loans are in forbearance through at least August 2022. If you are interested in refinancing your federal student loan to lock in a lower interest rate, it will be important to weigh the pros and cons. When you refinance federal student loans, they become private student loans, which makes them ineligible for federal student loan benefits.
Resolution #5: Establish or Update Your Estate Plan
An estate plan is a collection of written documents that specify how you want your personal and financial affairs to be handled in the case of your incapacity or death. A thoughtfully prepared estate plan can bring tremendous peace of mind for both you and your loved ones. A basic estate plan typically includes a last will and testament, durable power of attorney, health care power of attorney, and an advance directive. Depending on your circumstances, however, you also may want to consider establishing a revocable living trust to streamline and simplify the wealth transfer process for your heirs.
If you have already executed an estate plan, many life events may trigger a need to update your existing plan. These life events may include:
- death of a family member
- the birth of a child
- loss of a job
- moving to another state
At a minimum, you should consider revisiting your estate plan every five-to-seven years, to ensure it aligns with your wealth transfer goals and current law.
Lastly, don’t forget to review the beneficiary designations on your life insurance policies and retirement accounts to ensure they are consistent with your wishes. Beneficiary designations will usually override the terms of your will and trust.
The start of the new year can be the perfect opportunity to make resolutions that will improve your financial health. However, following through on any meaningful goals will require discipline and motivation along the way. Keep in mind that you do not have to do everything at once. You can improve your financial outlook by taking one step at a time. Your Aldrich Wealth advisors are here to help you navigate these opportunities and provide you with holistic advice based on your unique circumstances.
MEET THE EXPERT
Tyler Conroy, CFP®
Aldrich Wealth LP
Tyler Conroy joined Aldrich Wealth in 2019. Before joining the firm, Tyler spent several years as an Associate Financial Consultant with Charles Schwab. He has particular expertise in providing comprehensive wealth management and financial planning services. Tyler enjoys educating individuals and families on how to play an active role in their financial well-being. Tyler earned…
- Wealth Management
- Financial Planning
- CERTIFIED FINANCIAL PLANNER™