10 ‘Nerdy’ Year-End Planning Tips for 2022: Jeff Levine

2. Adjust the retirement date if needed or if possible.

“Perhaps you have a client who is facing sequence risk, but they can simply continue to work an extra year or even six months so they can put off making portfolio withdrawals in such a depressed market,” Levine proposed.

Delaying the use of the portfolio for six, 12 or 18 months can have a really big impact, Levine said.

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3. Skip inflation adjustments for retired clients.

According to Levine, another strategy that can be useful to address sequence risk concerns is to encourage clients to plan to forgo making inflation adjustments to their income, as would be suggested by traditional 4% withdrawal strategies.

“That’s one way to frame a reduction in expected income in a more modest and positive way,” Levine explained. “It can be really hard for a client to stomach the idea of cutting their income from $100,000 down to $75,000 in one go.”

Instead, the client can lock in at that $100,000 level for the next few years.

“It’s a way to spread out the pain of cutting the income,” Levine said.

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4. Consider paying back CARES Act distributions.

Next, Levine pointed to the potential that a client may have taken coronavirus-related distributions from tax-advantaged retirement accounts at some point over the past three years. The deadline for paying back such distributions in order to avoid income taxes is quickly approaching.

As Levine recalled, the 2020 CARES Act provided relief for 401(k) borrowers that made the 401(k) “loan” option much more attractive. While much of the relief was limited to early distributions taken out in 2020, many taxpayers are still grappling with decisions regarding those loans.

“The three-year grace period is about to expire for many taxpayers who opted to take advantage of the early distribution option,” Levine warned. “Clients should take note and evaluate their individual situations to make sure they are reaping all of the tax benefits afforded to plan loans and early distributions during the height of the COVID-19 pandemic.”

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5. Evaluate the RMD outlook for inherited IRAs.

Levine urged financial advisors to study up on the “demise of the stretch IRA” and what it will mean for clients who either have inherited an IRA or could do so in 2023.

As Levine recalled, the Secure Act upended inherited IRAs for most non-spousal beneficiaries by instituting a 10-year window for withdrawing from the inherited accounts. Notably, the IRS released proposed regulations on this rule earlier this year, under which IRA beneficiaries must take required minimum distributions in years one through nine if the account owner died after their own required beginning date. However, the IRS also issued special relief for tax years 2021 and 2022 in the form of Notice 2022-53, in which the agency clarified that it soon intends to publish a final regulation.

“Remember, just because you technically don’t have to take RMDs at this moment, that doesn’t necessarily mean you shouldn’t,” Levine warned. “In fact, for many individuals, it probably makes sense to take a voluntary distribution in order to spread the income out and avoid triggering higher income or capital gains taxes in the future.”

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6. Plan for normal FSA spending rules to return.

As Levine noted, for the last few years, the COVID-19 pandemic relief passed as part of CARES Act allowed employers to adopt special rules about spending flexible spending account dollars.

“Basically, if the employer allowed them, clients could roll their FSA money forward year over year,” Levine explained. “This is something to remind people of and speak to them about, especially considering FSA balances are right now about 50% higher than they were at this time in 2021. It looks like a lot of people will need to be reminded of the FSA use-it-or-lose-it rules for 2023.”

Levine said advisors should remind clients that many over-the-counter medicines and hygiene products are now eligible for payment in FSA dollars, including items like masks, hand sanitizer, gloves and other items meant to help keep people from getting sick in the first place.

One caveat is that “stockpiling” of supplies is not permitted.

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7. Update clients on the state of federal student loan debt relief efforts.

At the moment, Levine said, efforts by the Biden administration to forgive significant amounts of federal student loan debt appear set to be blocked by a very conservative Supreme Court.

“Advisors should tell their clients to be prepared to start paying back the debt again at some point in 2023, and the debt needs to be factored back into the overall financial plan,” Levine said. “Many advisors have clients who have applied to the program and who were expecting to see quite a bit of debt forgiven.”

Levine also reminded advisors that some 9 million student loan borrowers who had applied for relief had received incorrect emails between Nov. 22 and 23, stating that their debt had already been forgiven.

“This is worth bringing up and keeping an eye out for,” Levine said. “You very well may have clients who now falsely believe this debt is already gone, notwithstanding what happens in the Supreme Court.”

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8. Review whether clients are over- or underinsured.

Levine said many advisors will have clients whose home values have skyrocketed over the past three to five years.

“What does this mean from a planning perspective? Well, consider the fact that it would cost a lot more today to replace a clients’ home, especially with the rate of inflation,” Levine said. “It is worth taking a look at your clients and considering whether they may actually be underinsured.”

Home policies are the most pressing topic, according to Levine, but clients should also reassess such items as life insurance, supplemental disability insurance and long-term care insurance.

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9. Prepare to make timely year-end Roth conversions.

In Levine’s view, one of the brightest prospects advisors see for late 2022 is the opportunity to make <a href="https://www.thinkadvisor.com/2022/11/18/why-late-2022-is-a-great-time-for-roth-ira-conversions/" target="_blank">conversions between traditional individual retirement accounts and Roth IRAs.

As a general matter, down markets present an opportunity for clients to convert a larger percentage of their traditional IRA to a Roth while keeping the tax burden manageable. As Levine pointed out, it may make sense to consider opportunities to make in-kind transfers of assets between taxable and Roth accounts, in order to avoid selling depressed assets at a loss.

While these strategies often make a lot of sense mathematically, Levine warned, some clients have a hard time with the fact that a conversion will generally require the payment of higher taxes in a given year than is strictly speaking necessary.

“Also, remember that 2022 conversions must actually be moved and made in 2022,” Levine warned.

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10. Engage in tax loss harvesting while markets remain depressed.

Levine warned advisors on the line that, if they are not already engaged in some level of fairly sophisticated tax-loss harvesting, they are falling behind the industry standard.

Advisors with the right approach can help significantly reduce their clients’ tax burdens in years such as this, when the markets have dropped so precipitously from January.

“Frankly this is a table-stakes operation in late 2022,” Levine said.

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