Insights

Commentary, insights and analysis from Cahaba Wealth Management

Tag Archives: Certified Financial Planner

Secure Act 2.0

3/2023

By Louis Williams, CPA, CFP®

Secure Act 2.0 has become a hot topic of discussion in recent months, as this piece of legislation includes several law changes that have the potential to impact our clients’ financial circumstances and opportunities. After spending some time reviewing the subject matter of Secure Act 2.0, we wanted to highlight some of the changes that we feel are most relevant.¹

Delay of Required Minimum Distributions from Retirement Accounts

Congress passed a law in 2022 that pushed back the age for required minimum distributions (RMDs) from 70.5 to 72 as long as you turned 70.5 after January 1^st, 2020. Secure Act 2.0 has delayed RMDs even further for those born in 1951 and later. Depending on one’s date of birth, the age at which RMDs are mandatory could be anywhere from 70.5 to 75. In an effort to simplify this topic, we have included a summary table below.

Date of Birth	RMD Age
Before July 1^st, 1949	70.5
July 1^st,1949-December 31^st, 1950	72
1951-1959	73
1960 or later	75

Changes to the Catch-Up Contribution

The ‘catch-up’ contribution within employer 401(k) retirement plans refers to a contribution that is allowed for individuals nearing retirement, and it is allowed in addition to normal retirement plan contribution limits. For 2023, the catch-up contribution limit is $7,500 and applies to those who are at least 50 years of age at the end of calendar year. Beginning in 2025, individuals who are ages 60-63 at the end of the calendar year will have the option to contribute $10,000 (or 150% of the standard catch-up, whichever is greater) in an expanded catch-up contribution.²

An additional change to the catch-up contribution will only apply to those whose annual income exceeds $145,000. Currently, most employer plans offer the capacity to make catch-up contributions on either a pre-tax or Roth basis. Beginning in 2024, however, those who exceed $145,000 in annual income will only have the Roth option.²Roth contributions are made on an after-tax basis, and thus this move will increase current tax revenues from a government perspective.

Other Retirement Plan Roth Opportunities

As the Roth tax designation continues to become more prevalent, Secure Act 2.0 provides additional Roth opportunities relating to retirement accounts.

Among these opportunities is the option to make Roth contributions within Simple IRAs and SEP IRAs, which are retirement plans that are generally reserved for small employers and self-employed persons, respectively. Historically, contributions made to plans of this nature have only been treated as pre-tax.

Employer contributions within 401(k) plans have also historically been treated as pre-tax and therefore are not immediately taxable to the participant. Secure Act 2.0 allows for employer plans to offer the option for employer contributions to be treated as Roth. This would trigger the taxability to the participant in the year the contribution is made. The benefit of Roth contributions of any kind is to promote tax-free growth rather than tax-deferred, and this option would need to be carefully considered within the context of an individual’s financial plan.

529 to Roth Conversions

529 education accounts have long been considered to be the most tax-efficient savings vehicle for future education costs. One of the drawbacks of 529 accounts is that there is generally a penalty applied to earnings withdrawn from an account when funds are not used for qualified education expenses. As a result, most are careful not to ‘overfund’ these accounts out of fear of being subjected to this penalty. Beginning in 2024, Secure Act 2.0 provides a potential solution to this risk.² 529 account holders who meet a specific set of requirements will have the opportunity to transfer 529 funds directly to a Roth IRA. Eligibility for this type of transfer will need to be carefully determined, but it is certainly an option that should be considered for those with 529 assets that exceed education needs.

This summary is in no way meant to be a comprehensive analysis of the entirety of Secure Act 2.0, but we hope that the detail in this article can identify areas by which one’s financial plan can be enhanced. As with any law changes, it will be important to consult a financial professional before implementing any changes in response to this legislation.

Louis Williams, CPA, CFP® is a financial advisor in the Birmingham office of Cahaba Wealth Management, www.cahabawealth.com.

¹For a complete Section by Section Summary of Secure Act 2.0, please visit https://www.finance.senate.gov/

²Secure Act 2.0 contains a number of important provisions that become effective in future years. We will continue to monitor these provisions for any new or clarifying legislation. The information in this article is as of March, 2023.

Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.

A Silver Lining Within Today’s Interest Rate Environment

A Comparison Between Cash Management Products

3/2023

By Robert Eifert, CFP®

In light of recent events such as the Silicon Valley Bank collapse, many individuals have questions about cash management strategies. As the Federal Reserve has been on a campaign to raise interest rates to combat inflation, the cost to borrow has increased significantly, and the broader markets are exhibiting volatility while investors attempt to interpret what’s next for the economy. On the other side of the coin, rates in short-term cash-like instruments have begun to rise to reflect the current rate environment.

In the midst of a tortuous market cycle, the ears of many investors and financial professionals tend to perk up when they hear there are ways to earn a 3%-5%¹ return while taking on very little (or, in some cases, zero) risk.

While the exact path and duration of the Fed’s current monetary policy may be uncertain, we at Cahaba Wealth avoid altering our strategy based on short term predictions or pontifications. We choose to focus on the opportunity to take advantage of these high yielding and highly liquid products when it makes sense for clients.

Every decision we make for client portfolios is based on a comprehensive financial plan and the 3 pillars of investment management:

Risk tolerance
Time horizon
Cash flow needs

Below, we will compare and contrast a few methods of managing cash for clients who have excess savings. An important distinction to make is that the savings vehicles we are comparing here are only one small component of a well-diversified portfolio that is aligned with goals and risk tolerance. Depending on your unique situation, the following vehicles could be preferable to traditional checking accounts that are currently paying little to no interest ¹.

High Yield Savings Accounts:

These are traditional deposit accounts at various banking institutions that compete for the highest rate and most account flexibility. There may be limitations on the amount of transfers in or out of these account in any given month, but this still affords very quick access to a linked checking account for any expenditures. As these accounts are offered by banking institutions, depositors receive full FDIC insurance (up to the limit of $250k per account holder). Because of the safety and flexibility of these accounts, rates are generally lower than other products available.

Certificate of Deposit (Brokered):

A CD is a banking product that offers a fixed rate of interest in exchange for holding a deposit with that bank for a pre-determined time period. For our purposes, we will focus on the higher yielding “brokered” CDs that banks offer to depositors through larger brokerage houses like Fidelity, Schwab, Vanguard, etc. These are still bank products and are insured up to the FDIC limit.

The rate on a brokered CD is generally higher than a savings account because purchasers are agreeing to leave their deposits with the bank for anywhere from a few months to a number of years. This can be beneficial because the rate is locked up for that period, despite any interest rate fluctuations.

A brokered CD actually has a secondary trading market where one can sell before the end of the term if funds are needed (CDs obtained directly from a bank lack this feature and charge penalties to do so). The price of these CDs is highly dependent on prevailing interest rates and a number of other factors, so there is still a risk that the purchaser could receive less than the actual value that would be achieved if held to maturity.

Treasury Bills:

A T-Bill is U.S. Government debt that matures in a period of one year or less. These securities are typically sold at a “discount to par value”. This essentially means that the purchase price is less than the stated “par value”, and upon maturity the purchaser is paid that par value. The difference between purchase price and par value represents interest earned (in order to compare with other interest-bearing instruments).

T-Bills are regarded as one of the safest assets in existence, as they are backed by the unlimited taxing authority and borrowing power of the U.S. Government.

As of late, T-bills and Brokered CDs of similar maturities have been trading rank for the highest interest rate¹. However, T-bills have the advantage when it comes to liquidity. The secondary market for treasury instruments is very robust which means that they are very easy to liquidate before maturity, should the need arise.

An additional benefit of Treasury instruments is that they are generally exempt from state and local income tax. This can result in significant savings depending on one’s tax situation and the amount invested.

Money Market Mutual Funds:

These Mutual Funds consist of a mix of very safe, short term assets from the U.S. Government, banks, and high quality corporate issuers. There is a wide offering of Money Market Funds that allow investors to tailor their exposure to various instruments based on desired yield, risk and tax treatment. The rates earned with these funds are variable, but we’ve found that they can be competitive with the other instruments listed even after the fund management fees are considered.

A distinct benefit of a money market fund is the ability to liquidate all or a portion of the investment at the $1.00 “per share” value that the funds maintain. This allows investors to earn and re-invest the interest, all while preserving the ability to utilize the cash in short order.

These products each have different use cases, and are no substitute for a diversified portfolio that is aligned with investment objectives. The financial planning process is a critical piece needed in order to effectively manage a liquidity portfolio. Armed with the knowledge of our clients’ short and intermediate term liquidity needs, we can align our clients’ hard earned savings in the appropriate vehicles. If you have questions regarding your specific situation, please do not hesitate to reach out.

Robert Eifert, CFP®, is an associate advisor in the Birmingham office of Cahaba Wealth Management, www.cahabawealth.com.

¹ Based on interest rate environment as of March, 2023.

Source: “Fidelity Money Market Funds.” Money Market Funds | Fidelity Institutional, Fidelity Institutional Asset Management®, 19 July 2022, https://institutional.fidelity.com

Source: Kozlowski, Julian, and Samuel Jordan-Wood. “Where Do You Keep Your Liquid Wealth-Bank Deposits or T-Bills?” Economic Research – Federal Reserve Bank of St. Louis, 16 Dec. 2022, https://research.stlouisfed.org

Source: Leondis, Alexis. “CDS versus T-Bills: For High-Yield Savings, Go with Treasuries.” Bloomberg.com, Bloomberg, https://www.bloomberg.com

Source: “Maintaining the Stable Net Asset Value Feature of Money Market Funds.” GFOA.org, Government Finance Officers Association, https://www.gfoa.org

Courage

12/2022

By William Jackson, CFP®

When discussing successful wealth management, most will typically include investment management/asset allocation, cash management, risk management, and other predictable factors. What is typically omitted or minimized relates to behavioral psychology. How one reacts to adversity is arguably more impactful to long-term success than all the other factors combined. Specifically, having the courage to stay the course during uncertain times is often the greatest determinant of long term success.

Holistic financial planning permits a good advisor to focus every conversation on the client’s long term plan. This approach enables the advisor to provide a service that truly helps clients lead their lives with greater financial clarity. The challenge is that we work in an industry that is intentionally opaque. Having a plan and staying the course is not standard operating procedure for the majority of industry participants. These firms have a strategy of offering reactionary products to clients that attempt to solve the problem of the day. They bombard our inboxes with updates to make us aware of solution “de jour”. Frequently, these products are of a complex nature, and render the buyer feeling underqualified to understand but worried about missing out. These firms are well aware that when clients are overwhelmed with “over their head” concepts, they might feel hesitant to ask questions. This ultimately results in many clients agreeing to purchase products that are often unnecessary or even inappropriate for their personal plans. A good advisor who is “fee-only” and focused on financial planning serves as an agent of clarity with the mission of helping clients understand why any products chosen for them are beneficial and necessary. This might sound simplistic, but the rewards are real.

The foundation of Cahaba Wealth was built on knowing our clients and their financial goals. We provide comprehensive financial planning in a way that leads clients to have greater understanding of their financial lives. The financial plan dictates the investment plan. The investment plan and process are intentionally designed to encourage a discipline that has shown to be beneficial to long term wealth creation. In asking you to trust in the process and have the courage to take a road less traveled, we are demonstrating our commitment to your success. We are aware of the magnitude of this request and are grateful for the faith shown.

Eleanor Roosevelt wrote, “You gain strength, courage and confidence by every experience in which you really stop to look fear in the face. You are able to say to yourself, ‘I have lived through this horror. I can take the next thing that comes along.’ You must do the thing you think you cannot do.”

We are proud to call you clients and thankful for the opportunity to serve.