Tag Archives: Certified Financial Planner

The Turbo Charged ‘Back-Door’ Roth

8/2022

By Louis Williams, CPA, CFP®

Given the complexity of the federal tax code, “tax-free” is one of the few terms that has the potential for grabbing a client’s attention. Oftentimes when someone uses this term, it proves to be too good to be true.  One exception to this rule exists when an employer offers a 401(k) plan that incorporates after-tax contributions and a Roth conversion tool.  If these features are included within your plan, this is an article that you may find interesting.

The ‘back-door’ Roth IRA contribution has become a frequent topic of discussion in financial planning circles, as it provides the opportunity for high income earners to accumulate Roth assets that grow tax free. However, due to the dollar limits placed on IRA contributions, the Roth IRA may not be the most attractive vehicle to accomplish this for individuals who participate in a 401(k) plan as described above.

While company 401(k) plans have traditionally been designed around allowing pre-tax employee contributions, there has been a trend to also allow an employee to make Roth 401(k) contributions. IRS rules for the 2022 calendar year permit an employee under the age of 50 to contribute $20,500 in combined pre-tax and Roth contributions. Some employers have gone a step further and added a feature to 401(k) plans that permits ‘after-tax’ contributions. These are not Roth or traditional pre-tax 401(k) contributions, but they could be described as a hybrid of the two. While these contributions are after-tax, their earnings are treated as tax-deferred and therefore are taxable upon withdrawal. While tax-deferred growth is not a bad option, it is certainly less favorable than the tax-free Roth alternative. The real benefit offered by after-tax contributions is that they are not restricted by the $20,500 annual limit.

Further, converting after-tax contributions with a Roth conversion tool only requires paying taxes on any growth or earnings accumulated after the contribution is made. With this in mind, the conversion tool is used most effectively when after-tax contributions are converted shortly after they are deposited. This is where the opportunity for “tax-free” exists, as there is potential for significant Roth contributions in addition to those allowable up to the $20,500 limit.

Although I am sure that it is difficult for most to contain their unbridled excitement generated by this strategy that I have childishly titled the ‘Turbo Charged Back-Door Roth’, there are additional important considerations when looking toward implementation. Among these are maximizing the receipt of any company-match and an additional IRS limit that governs the total amount of money contributed to a participant’s account. As such, we recommend contacting your financial advisor to help carefully calculate an amount to dedicate to this ‘back-door’ strategy.

In summary, if your plan incorporates after-tax contributions and a Roth conversion feature, there may be opportunity for additional Roth savings. Furthermore, there may even be potential for a productive conversation at the water cooler with the calculated use of the word “tax-free”.

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

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.

Benefits of Diversification in a Tough Market

4/2022

By Brian O’Neill, CFP®

2022 has been a difficult year to be an investor. Through Tuesday, April 26th, the S&P 500 and S&P 600 (small caps) are down more than 12%, foreign stocks are down more than 13%, and bonds are down almost 9%. There has been no place to hide…

Percentage of market change in 2022

Even with this negativity, we continue to preach our consistent message of understanding your financial plan, knowing we have maintained flexibility with an intimate knowledge of client cash flow needs. That said, there are also reasons to focus on our investment approach, and remind clients why diversification still matters, even when it feels like everything is falling.

The S&P 500 is constructed of roughly the 500 largest US companies, weighted by market capitalization. We say roughly because this index does change over time, and companies can be added or deleted from the index at any given time, so 500 is a round target. Additionally, the S&P Index Committee has specific criteria that must be met for inclusion in any index, and thus not every company stock may qualify.

With the stocks that do qualify, 2022 performance has been anything but uniform. The best performing stock in the index so far this year has been Occidental Petroleum, up more than a whopping 90% year to date! However, the worst performing stock has been Netflix – once the darling of Wall Street, but currently down more than 67% as of this writing. In fact, many of the true high flying stocks of the post-pandemic era, and technology winners of the past decade, are performing well below the S&P 500.

Year-to-date returns of FAANG stocks.

This chart shows the year-to-date returns of the FAANG stocks (Facebook (now Meta), Apple, Amazon, Netflix and Google (now Alphabet)), and the ARK Innovation ETF (symbol ARKK), which has been a headline grabbing investment star over the past 36 months. All but Apple have underperformed the S&P, and most by large margins.

The point of this is a quick reminder of why we diversify. Going after the hot names can feel great when it works, but you can see the damage it can cause when it does not. Very few analysts were predicting the fall of technology stocks. In most cases, they argued strongly that there was no reason to own anything but those stocks!

Investing is hard, and much of that comes from our own emotions and biases. We constantly allow the tendency to place too much emphasis on experiences that are freshest in our memory (Recency Bias) to dictate our investing decisions. Fear of Missing Out is a powerful concept, but it’s times like these that we can know that sometimes, missing out is ok.

Brian O’Neill, CFP®, is president and a financial advisor in the Atlanta office of Cahaba Wealth Management, www.cahabawealth.com.

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.

Cahaba welcomes Don Keeney

Don Keeney
Don Keeney, CFA, CFP® 
Financial Advisor, CIO

Cahaba Wealth Management is delighted to announce that Don Kenney has joined as Financial Advisor in the Nashville office, and Chief Investments Officer (CIO) with the goal of expanding Cahaba’s proven efforts of providing customized financial planning, tax and estate planning, and active investment advisory services. In addition, he is assuming the role of Chief Investments Officer (CIO).

With more than 20 years’ experience in asset management, Don translates client’s life and financial goals into a practical, understandable financial plan to provide resolve in achieving goals.

Don holds a Certified Financial Planner® designation, is a Registered Investment Advisor, holds the Chartered Financial Analyst™ designation, and is a member of the CFA Society of Nashville. He graduated from Rhodes College with a Bachelor’s degree in Economics & Mathematics, and from the Owen Graduate School of Management at Vanderbilt University with a Master of Business Administration with an emphasis in finance.