A new year is a wonderful time to make financial plans. As the calendar changes, new windows of opportunity open for time-sensitive investments like qualified retirement plans. Now that the old tax year is largely closed as well, investors can set aside short-term focused practices like tax-loss harvesting and instead focus on longer-term financial objectives for their money.
With all the possibilities now available in the new year, these are my five highest-conviction stock market moves for 2022. I so fervently believe in each of them that I am committing to put my own money where my mouth is to make them a reality for myself and my family.
No. 1: I will contribute to a backdoor Roth IRA
In 2022, people under age 50 with earned income can contribute as much as $6,000 to a Roth IRA to help save for retirement (the limit is $7,000 for those aged 50+). The challenge with Roth IRAs is that if your total income gets high enough, your ability to contribute starts to phase out. In 2022, the phase-out ranges start at $129,000 for those who are single or head of household, $204,000 for those who are married filing jointly, and $0 for those who are married filing separately.
In my household, our salaries are low enough that we could potentially make direct Roth IRA contributions, but we are not entirely in control of our unearned income. That unearned income also counts in those phase-out ranges. For instance, when Warren Buffett bought out an electric generating company I owned shares of, the forced sale led to a capital gain that raised our household’s income for the year.
By making backdoor Roth IRA contributions instead of direct Roth IRA contributions, our household can sidestep the risk that unearned income would push us over the limit. That way, we can make the contributions early in the year and not have to worry about having to remove them later if something happens to push our income too high.
No. 2: I will contribute to my children’s 529 accounts
529 accounts can be used to fund qualifying educational expenses. Money goes in after-tax on a federal level, but states can offer deductions for people who contribute to the plans. Once in the plan, money can compound tax-deferred, and it can come out tax-free if used to pay for those qualifying educational expenses.
In the state I currently live in (Ohio), parents can deduct $4,000 per child per year for making contributions into an account where that child is the beneficiary. Different states have different deduction rules, so check with your state when considering a contribution.
I plan to contribute up to as much as the state deductibility limit, but I do not intend to go over that amount. The key reason is that college costs are wildly unknowable in advance. The price tag depends on whether the kids choose to go to college, where they go to college, and what (if any) aid they qualify for that doesn’t need to be paid back.
Because those costs are so unknowable and because 529 plans can only be tax-efficiently used to pay for education expenses, I have no desire to over-save in those accounts. My state’s tax-deductible amount provides the opportunity to build up a decent balance over time without risking too much if the child’s education expenses wind up cheaper than planned. That’s why it serves as the upper limit of where I intend to contribute.
No. 3: I will maintain my bond ladder at between six and seven years
Bond ladders can be a reasonable place for money that you expect you’ll need to spend from your portfolio within the next five or so years. With two kids nearing college age and two more not too far behind them, I’m staring down about a dozen consecutive years of potentially very high expenses. While the 529 plans will help a great deal, the bond ladder provides us the opportunity to chip in above and beyond if needed and if we choose to do so. Should that money not be needed for college, I’m certain we could easily use it elsewhere.
My target for the bond ladder is five years of potential expenses that the ladder might have to cover, but due to the recently roaring stock market, I’ve been able to boost it to seven. The big challenge with bonds is that they mature and expire, so if you want to keep a bond ladder going, you need to replenish it over time.
Because of low interest rates, investment-grade bonds are not keeping up with inflation at the moment. As a result, I don’t want to boost my bond ladder beyond seven years even if stocks continue to soar. On the flip side, it generally doesn’t make much long-term sense to sell stocks when they’re down to invest more in bonds. So if stocks continue to do well, I’ll maintain my bond ladder at seven years, but if they fall, I can afford to let the bond ladder shrink as bonds mature and still be above a five-year target.
No. 4: I will contribute to my Roth 401(k)
One of the best parts of 401(k)-style plans is that they offer automatic investing for your retirement directly from your paycheck. And the key advantage of Roth-style plans over traditional-style ones is that once money is in a Roth, it can compound completely tax-free (as opposed to merely tax-deferred) for your retirement.
Since I have a Roth-style 401(k) available to me, that’s where I direct my automatic paycheck contributions. I direct the investment into a stock-focused mutual fund that I hope can grow over the decades between now and when I expect to tap the money in retirement. I trust that the combination of automatic investments, tax-free growth, and long-term compounding can add up to a decent nest egg there by the time I need it.
No. 5: I will contribute to my health savings account
Because I’m on a high deductible health insurance plan, I have the ability to contribute to a health savings account. Since my health insurance plan is a high deductible one, I do contribute to that health savings account, as I’m on the hook for nearly all medical expenses my family routinely faces. Putting money in that account gives me the cash to pay those doctor bills when they arrive.
Due to the costs of putting four children through braces, I’ve spent through most of the money I’ve managed to contribute to my health savings account over the years it has been available to me. Still, if all goes well and we stay healthy, 2022 could be the year we reach the point where the balance in our health savings account will reach the one-year out-of-pocket maximum for in-network costs.
If we reach that point, then I’ll be willing to start investing in the long-term growth-oriented investment choices in the plan, as opposed to simply stockpiling cash. Since a health savings account can be used either for medical costs at any time or as a supplemental retirement plan once you reach age 65, long-term focused investments could be very useful in that account.
If our balance doesn’t grow large enough, then I’m still very appreciative of the tax benefits that come with contributing to (and then using) a health savings account. The tax-deductible contribution and tax-free use of that money to pay healthcare costs makes it far less expensive than using after-tax cash to pay the same bill.
I’m in it for the long haul
Four out of my five highest-conviction moves for 2022 involve contributing new money into investment accounts. Only one — the bond ladder — depends on what the stock market happens to be doing throughout the year. Even then, if the stock market happens to drop, my plan is one that gets relatively more bullish on stocks by not selling those stocks while they’re down (thus letting the bond ladder shrink as the bonds mature).
This works because I follow an asset allocation strategy that differentiates between near-term money and long-term money and invests in each bucket differently. That way, even if the market does nosedive, I’m not forced to sell stocks when they’re down to cover near-term costs and can instead keep that money invested in the hopes of a longer-term recovery.
When the market is skyrocketing, that strategy tends to dampen my overall returns. In periods of higher uncertainty when the market may crash at any time, it’s what allows me to stay invested even as fear takes hold.
Get started now
If that’s a strategy that seems compelling to you, now just may be a great time to put the pieces in place for yourself. With the market near an all-time high and the new year bringing with it the annual reset on capital gains, your flexibility and assets may very well be in a better spot now than ever before to make it a reality.
So make today the day you start putting a stronger end-to-end financial strategy in place. By doing so, you’ll give yourself a great shot at navigating 2022 in a money-smart way, virtually no matter what the market does.
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