Top Three Overlooked Financial Planning Items to Consider in 2022

By Tom Knutson, CFP®

There are a few common pitfalls that individuals miss when reviewing their financial plan. In this article, my goal is to outline what these pitfalls are and how to plan for them throughout the year.

Common Pitfall #1: Not Reviewing Tax Returns

Many individuals believe that since they have hired a CPA and paid them for the service of filing their taxes, that their return should be correct, when in fact that may not be the case. This is not due to any fault of the CPA on their own, but more so due to miscommunication or under communication of what has been completed throughout the year. For example, a common strategy in retirement is for individuals to give their required minimum distribution (RMD) from their IRAs to charity, otherwise referred to as a qualified charitable distribution (QCD). The way this is completed is similar to the required minimum distribution with the difference being that the charity receives the funds and not the owner of the IRA. The impact this has on a person’s tax return, is that they can deduct these contributions from their return and not count the distribution as ordinary income. Although this strategy is common, it is not always entirely clear on the tax statements that a qualified charitable distribution has occurred rather than the standard required minimum distribution. If an individual does not discuss this with the CPA and it is recorded as a standard distribution, this could result in large tax swings on the return, often tens of thousands of dollars for higher net worth individuals. The QCD versus RMD differentiation is just one of many important items to discuss with your CPA when filing. When reviewing, our recommendation is to start at the top of the return and go line by line down the return verifying as much of the information as possible. Unfortunately, we have seen many errors that are as simple as  a misspelled name, an incorrect social security number, or even an incorrect filing status (e.g., filing single when married). For these reasons and more, it is crucial to review your return every year.

Common Pitfall #2: Not Keeping Track of Cash on Hand

Having a clear understanding of your expenses and how they will be covered is paramount to managing your financial picture. I have witnessed incorrect cash management on both sides of the spectrum. First being, insufficient cash on hand to cover their basic emergency fund. Some individuals feel that if they keep their cash invested in the market this will act as an inflation hedge and when they need cash for an unexpected event, they will just go into their investment account, sell funds, and use it for the cash need. What is overlooked in this circumstance is that the markets do not only go up, hedging against inflation, and you may be forced to sell during a market dip or recession to cover these expenses. The timing of these events may result in loss of principal due to an unforeseen need, no true inflation hedge, and an overall loss to your financial picture. Depending on the size of the cash need, the impact of incorrect cash management could have drastic impacts on your financial plan. On the opposite side, there are some individuals who hold onto too much cash for various reasons. One common explanation is that they are waiting for the market to dip, then they will get into the market, and once the market does dip down, they believe it is too risky to invest at that time, so they do not take any action. Thus, holding onto too much cash for years, results in an overall portfolio drag that drastically reduces the potential spending power and future value of money years down the road. This is not just about having more money at the end of the day, it is about the missed opportunity to impact others lives, spend more time with family, take the family trip you have always dreamed of while everyone is still together, donate to charity, and more.

Common Pitfall #3: Not Reviewing Employee Benefits

Getting a new job is often an overwhelming time in individuals’ lives. You are meeting new coworkers, figuring out what the new job entails, hoping the move you made is the correct one, and so much more. Then you receive a booklet of paper or an email, mixed in with several other onboarding items that are about your employee benefits. You take a quick glance over the benefits offered and move on. What many individuals miss is free money and/or tax savings offered by their employer. Since people often do not take advantage of these early on when they start at their company, they often miss opportunities and never go back to ensure they are not leaving any money on the table. The most common opportunity missed is 401k matching programs. Many companies will match a certain percentage of your salary, up to a certain amount as long as you also contribute that amount of your salary into the plan. For example, a company may say, if you contribute 3% of your salary into your 401k, we will match that dollar for dollar, up to 3%. Many individuals do not know their company rules so they choose an amount that is less than the maximum matching benefit, when they could afford to contribute more into their 401k and realize the full matching benefit.

Other examples of missed opportunities with your employer are the following:

  1. Employee assistance programs that offer counseling and other mental health services.
  2. Health savings accounts, that allow you to save for healthcare expenses tax free, allow the funds to grow tax free, and then withdraw the funds tax free years down the road, thus realizing a triple tax benefit.
  3. Flexible spending account, realizing a tax deduction for funds that you know you will need to spend throughout the year on certain out of pocket medical expenses.
  4. Employee stock purchase programs that allow individuals to purchase shares in their organization at a discounted rate.
  5. Estate planning benefits in which the employer provides paid access to estate planning attorneys and resources.
  6. These are just a few reasons why reviewing benefits offered by your employer is critical. These benefits are given to you as a reward for your hard work and service to the organization, you should ensure you are aware of what is offered and capitalize on them.

In summary, in 2022, remember to:

  1. Review your tax returns for accuracy
  2. Maintain the proper amount of cash (not too much, not too little)
  3. Evaluate your employee benefits

The Olson Wealth Group team is here for you.

Olson Wealth Group is a full-service wealth management firm. With wise counsel and clear strategies, our experienced specialists provide tailored approaches that strive to maximize wealth.

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

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