Money Advice for the Holidays That People Overlook

It is already that time of the year again and the holiday season is almost upon us. While this year might look a little different due to some normalcy since the pandemic, some things haven’t changed when it comes to proper planning.

There may be many to-dos on your financial planning list in the fourth quarter of the year, thanks to important deadlines that will swiftly approach between now and December 31st. Here’s what to pay attention to in your financial life during the holidays.

Re-evaluate your employee benefits during open enrollment

Many companies offer open enrollment periods toward the end of each year, giving you a chance to review what your employer offers and make changes to your current benefits selections.

Selecting your employee benefits solely on price (or employing a “set it and forget it” strategy where you do no review at all) can actually be detrimental to your cash flow. Considering that the average American pays $6,792 annually (varies based on location, employer subsidy, and type of plan) in health insurance premiums, there’s obviously a lot of money at stake when picking the right plan for your situation.

Instead of only looking at one number, consider the whole picture: look at deductibles, monthly premiums, and total possible out of pocket costs. Then consider your own situation and health; have things changed in the last year? Are you usually a heavy or light user of insurance?

Understanding these variables can help determine the right plan for you.

Another strategy to consider may be to forgo traditional health insurance (like PPO and HMO plans) and use a high deductible healthcare plan (HDHP) in conjunction with a Health Savings Account (HSA).

This could potentially lower your overall costs if you’re relatively healthy and don’t use your insurance much. While the deductible is higher, the monthly premiums are lower. Access to an HSA also means you can contribute tax-free dollars into an investment vehicle that benefits from both tax-deferred growth and tax-free withdrawals on any funds used on medical expenses.

Consider how you can lower your taxes

Most people know that increasing contributions to a traditional 401(k) can be a huge help come tax time. But what should you do if you hit the maximum limit and still have money available to save?

Participating in other tax-deferred savings vehicles via your employer, such as deferred compensation plans, can provide an additional way to lower your taxable income. Typically, these plans will allow your funds to go in with some form of pre-tax benefits, grow tax-deferred, but you will pay ordinary income taxes when those funds are withdrawn.

Don’t forget to evaluate the potential for after-tax 401(k) contributions, too. When contributing to your 401(k) with after-tax dollars, you can employ strategies such as Roth 401(k)s or Mega Backdoor Roth contributions, where individuals could put as much as $22,500 to $43,500 (2023 tax year) into Roth funds.

Take advantage of tax-loss harvesting

Many DIY investors often overlook their after-tax rate of return, which is your investment return minus the taxes you need to pay on any gains. To improve your overall after-tax return rate, you may be able to leverage a tax-loss harvesting strategy.

When you realize investment losses, it can allow you to offset gains elsewhere in your portfolio which lowers your overall tax bill.

Because 2022 has been a very volatile year, it opens up the door to tax-loss harvesting opportunities.

For example, sectors such as technology, consumer discretionary, and communications did not do well in 2022. If you hold assets from these sectors in your portfolio, then this might be the right time to sell those underperforming investments to generate tax savings.

If you have no gains to offset, you can still take advantage of a tax-loss harvesting strategy by using capital losses (up to $3,000 annually) to offset your ordinary income. If you are someone who is in the highest tax bracket of 37%, that could result in a tax savings of up to $1,110.

Make any last-minute charitable contributions now

The CARES Act that Congress passed in March 2020 provided many changes and adjustments to the charitable deduction rules around taxes. Unfortunately, many of those rules have expired to include the $300 “above-the-line” deduction allowed for qualified charitable contributions.

Most deductions for charitable contributions are itemized, but almost 90% of Americans use the standard deduction that the Tax Cuts and Jobs Act (TCJA) of 2017 put into place. Therefore, putting together a sound giving strategy prior to year-end can be paramount.

While this time of year is typically reserved for gathering together with family and friends, you may want to try something a little different this year and incorporate your finances too. Remember, these decisions you are making now will be sticking with you for the next twelve months.

Malik S. Lee, CFP®, CAP®, APMA®
Malik Lee is the Managing Principal of Felton & Peel Wealth Management. A CERTIFIED FINANCIAL PLANNER™ with more than 15 years of financial services experience, he is a Guest Lecturer at Morehouse College, serves on the CFP Board Council of Examinations, and is a Board Member for the FPA of GA.
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