Financial Planning Month: Slick Finances Now

October marks the arrival of autumn, a season of change and reflection. As the leaves turn and temperatures drop, it’s also the ideal time to assess your financial health and proactively plan for the remainder of the year. Financial Planning Month serves as a potent reminder to take stock of your current situation, identify potential risks, and implement strategies to minimize tax liabilities and maximize your financial well-being before the calendar turns to January.

This month, we’ll delve into three key areas that deserve your attention: reviewing insurance policies, maximizing Health Savings Account (HSA) contributions, and employing tax-loss harvesting strategies. These areas represent powerful tools for mitigating risks, lowering your tax burden, and ultimately, ensuring a more secure and prosperous financial future.

1. Reviewing Your Insurance Policies: A Shield Against the Unexpected

Insurance policies are often seen as a necessary evil, a recurring expense that offers intangible benefits until disaster strikes. However, a comprehensive insurance portfolio is a cornerstone of sound financial planning, acting as a crucial safety net against unforeseen events that could devastate your finances. Financial Planning Month is the perfect time to dust off those policies and ensure they still adequately protect you and your loved ones.

Why Reviewing Your Insurance is Crucial:

• Life Changes: Life is dynamic, and your insurance needs evolve accordingly. Marriage, the birth of a child, a new job, a home purchase, or even a significant increase in assets all warrant a reassessment of your coverage. What was sufficient five years ago might be woefully inadequate today.
• Changing Market Conditions: The insurance industry is constantly adapting to new risks and economic realities. Policy terms, premiums, and coverage options can change over time. Regularly reviewing your policies ensures you’re getting the best possible value and adequate protection in the current market.
• Uncovering Gaps in Coverage: You might believe you’re adequately insured, but a closer examination could reveal gaps in your coverage. For instance, you might have insufficient liability coverage on your auto policy, leaving you vulnerable in the event of a serious accident.
• Identifying Opportunities for Savings: Conversely, you might be paying for coverage you no longer need or can obtain at a lower premium. Comparing quotes from different providers can often lead to significant savings without sacrificing adequate protection.

Key Insurance Policies to Review:

• Health Insurance: Ensure your health insurance policy provides adequate coverage for your medical needs, including preventative care, doctor visits, hospital stays, and prescription drugs. Pay close attention to your deductible, co-pays, and out-of-pocket maximum. Consider whether your current plan still aligns with your evolving health needs. Are you anticipating any major medical expenses in the coming year? Do you need to adjust your strategy to account for them?
• Life Insurance: Life insurance provides financial security to your loved ones in the event of your death. Determine if your current coverage adequately replaces your income, covers outstanding debts (mortgage, loans), and provides for your family’s future expenses (education, childcare). Consider term life insurance for a specific period (e.g., to cover your mortgage) or permanent life insurance for lifelong coverage and potential cash value accumulation.
• Homeowners/Renters Insurance: Protect your home and personal belongings from damage or loss due to fire, theft, natural disasters, and other covered perils. Review your coverage limits to ensure they are sufficient to rebuild your home and replace your possessions. Consider adding riders for valuable items like jewelry, artwork, or antiques. Renters insurance protects your personal belongings even if you don’t own the building.
• Auto Insurance: Protect yourself from financial liability in the event of an accident. Ensure you have adequate liability coverage to cover potential damages to other vehicles and injuries to different people. Consider collision and comprehensive coverage to protect your own vehicle from damage or loss. Review your deductible and explore potential discounts.
• Disability Insurance: Disability insurance provides income replacement if you become unable to work due to illness or injury. This coverage is often overlooked but can be crucial for protecting your financial security. Understand the definition of “disability” in your policy and ensure it aligns with your needs.
• Long-Term Care Insurance: Long-term care insurance helps cover the costs of long-term care services, such as nursing home care, assisted living, or in-home care. Consider purchasing this coverage if you are concerned about the potential financial burden of long-term care expenses.

Taking Action:

• Gather Your Policies: Collect all your insurance policies and review the coverage amounts, deductibles, and exclusions.
• Assess Your Needs: Evaluate your current life circumstances and identify any changes that might necessitate adjusting your coverage.
• Shop Around: Compare quotes from different insurance providers to ensure you are getting the best possible rates and coverage.
• Consult with an Insurance Professional: If you are unsure about your insurance needs or have questions about your policies, consult with a qualified insurance agent or broker.

By taking the time to review your insurance policies during Financial Planning Month, you can protect yourself and your family from financial hardship in the face of unexpected events.

2. Maximizing Health Savings Account (HSA) Contributions: A Triple Tax Advantage

Health Savings Accounts (HSAs) are a powerful tool for saving and paying for healthcare expenses, offering a unique triple tax advantage:

• Tax-Deductible Contributions: Contributions to an HSA are typically tax-deductible, reducing your taxable income.
• Tax-Free Growth: Earnings on your HSA investments grow tax-free.
• Tax-Free Withdrawals: Withdrawals for qualified medical expenses are tax-free.

Financial Planning Month is a great time to review your HSA contributions and ensure you are maximizing the benefits this year, especially considering the year is nearing its end.

Who Can Contribute to an HSA?

To be eligible to contribute to an HSA, you must:

• Be covered by a qualifying high-deductible health plan (HDHP).
• Not be covered by any other health plan that is not an HDHP (with certain exceptions).
• You can’t be enrolled in Medicare.
• Not be claimed as a dependent on someone else’s tax return.

Contribution Limits for 2023:

• Individual: $3,850
• Family: $7,750
• Catch-up Contribution (Age 55 and older): $1,000

Why Maximize Your HSA Contributions?

• Reduce Your Taxable Income: Contributing to an HSA lowers your taxable income, potentially resulting in significant tax savings.
• Save for Future Healthcare Expenses: HSAs allow you to save for future healthcare expenses on a tax-advantaged basis. This is particularly valuable for individuals anticipating higher healthcare costs in retirement.
• Invest for Long-Term Growth: HSA funds can be invested in a variety of assets, such as stocks, bonds, and mutual funds, allowing you to grow your savings over time.
• Use for Qualified Medical Expenses Now or Later: HSA funds can be used to pay for a wide range of qualified medical expenses, including doctor visits, prescriptions, dental care, vision care, and more. You can use the funds immediately or save them for future costs. Even if you don’t have significant medical expenses now, keeping in an HSA can be a smart strategy for managing healthcare costs in retirement.
• Portability: HSAs are portable, meaning you can take them with you even if you change jobs or health plans.

Strategies for Maximizing Your HSA Contributions:

• Calculate Your Potential Tax Savings: Estimate the tax savings you could realize by maximizing your HSA contributions. This can provide a powerful incentive to contribute more.
• Automate Your Contributions: Set up automatic contributions from your paycheck to your HSA to ensure you consistently contribute throughout the year.
• Adjust Your Withholding: If you are not contributing the maximum amount to your HSA, consider adjusting your tax withholding to increase your take-home pay. You can then use the extra funds to contribute to your HSA.
• Review Your Investment Options: Explore the investment options available through your HSA and choose investments that align with your risk tolerance and investment goals.
• Understand Qualified Medical Expenses: Familiarize yourself with the IRS guidelines for qualified medical expenses to ensure you are using your HSA funds appropriately.

Taking Action:

• Determine Your Eligibility: Confirm that you are eligible to contribute to an HSA.
• Calculate Your Remaining Contribution Limit: Determine how much you have already contributed to your HSA this year and calculate your remaining contribution limit.
• Increase Your Contributions (if possible): If you have the financial means, increase your contributions to your HSA to reach the maximum limit before year-end.
• Review Your Investments: Assess your HSA investments and make any necessary adjustments to align with your financial goals.

By maximizing your HSA contributions during Financial Planning Month, you can reduce your tax liability, save for future healthcare expenses, and build a more secure financial future.

3. Employing Tax-Loss Harvesting Strategies: Offsetting Capital Gains and Reducing Tax Liability

Tax-loss harvesting is a strategy used to reduce your capital gains tax liability by selling investments that have lost value. The losses can then be used to offset capital gains, potentially lowering your overall tax bill. With the end of the year approaching, now is a prime opportunity to review your investment portfolio and identify opportunities for tax-loss harvesting.

How Tax-Loss Harvesting Works:

1. Identify Losing Investments: Review your investment portfolio and identify any investments that have declined in value.
2. Sell the Losing Investments: Sell the losing investments.
3. Offset Capital Gains: Use the capital losses from the sale to offset any capital gains you have realized during the year. If your capital losses exceed your capital gains, you can deduct up to $3,000 of the excess losses against your ordinary income. Any remaining losses can be carried forward to future years.
4. Repurchase Similar Assets (Avoid the Wash-Sale Rule): If you want to maintain exposure to the same asset class, you can repurchase similar assets after a 30-day waiting period. This waiting period is crucial to avoid violating the “wash-sale rule,” which prevents you from claiming a tax loss if you repurchase substantially identical securities within 30 days before or after the sale.

Why Use Tax-Loss Harvesting?

• Reduce Capital Gains Tax Liability: The primary benefit of tax-loss harvesting is the ability to reduce your capital gains tax liability.
• Lower Your Overall Tax Bill: By offsetting capital gains and deducting losses against ordinary income, tax-loss harvesting can lower your overall tax bill.
• Improve After-Tax Returns: By reducing your tax burden, tax-loss harvesting can improve your after-tax returns on your investments.
• Opportunity to Rebalance Your Portfolio: Tax-loss harvesting can be a strategic opportunity to rebalance your portfolio by selling underperforming assets and reinvesting in more promising opportunities.

Things to Consider Before Implementing Tax-Loss Harvesting:

• The Wash-Sale Rule: Be aware of the wash-sale rule and ensure you do not repurchase substantially identical securities within 30 days of selling them.
• Transaction Costs: Consider the transaction costs associated with selling and repurchasing investments. Small losses might not be worth harvesting if the transaction costs outweigh the tax benefits.
• Long-Term Investment Goals: Ensure that tax-loss harvesting aligns with your long-term investment goals. Don’t sell investments that you believe will appreciate in the long run simply to realize a tax loss.
• Tax Bracket: The tax benefits of tax-loss harvesting will depend on your tax bracket.
• Complexity: Tax-loss harvesting can be complex, and it’s essential to understand the rules and regulations before implementing this strategy.

Alternatives to Repurchasing Identical Securities Immediately:

• Invest in a Similar, but Not “Substantially Identical” Asset: For instance, if you sold an S&P 500 index fund, you could purchase a different S&P 500 index fund from a different provider to avoid the wash-sale rule. Ensure that the funds have slightly different tracking methodologies or expense ratios.
• Invest in a Broadly Diversified ETF: Consider investing in a broader market ETF that includes the asset you sold, but isn’t considered “substantially identical.”
• Reinvest in a Different Asset Class: Use the proceeds from the sale to invest in a different asset class that aligns with your investment goals.

Taking Action:

• Review Your Portfolio: Examine your investment portfolio and identify any investments that have losses.
• Calculate Potential Tax Savings: Estimate the potential tax savings from harvesting the losses.
• Consult with a Tax Professional: Seek advice from a qualified tax professional to determine if tax-loss harvesting is proper for you and to ensure you comply with all applicable rules and regulations.
• Implement the Strategy: If tax-loss harvesting is appropriate, sell the losing investments and consider reinvesting in similar assets (after the 30-day waiting period or using a similar, but not identical, investment) or other asset classes.

By employing tax-loss harvesting strategies during Financial Planning Month, you can potentially reduce your capital gains tax liability and improve your after-tax returns.

Conclusion:

Financial Planning Month is a crucial reminder to manage your finances and prepare proactively for the year ahead. By reviewing your insurance policies, maximizing HSA contributions, and employing tax-loss harvesting strategies, you can mitigate risks, minimize your tax liabilities, and optimize your financial well-being. Take the time this October to focus on these key areas and build a stronger foundation for your financial future. Don’t hesitate to seek professional advice from a financial advisor, insurance agent, or tax professional to ensure you are making informed decisions that align with your individual circumstances and goals. Remember, proactive financial planning is an ongoing process that requires regular attention and adjustment. Make October the start of a more financially secure future!

Tom Rooney