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Tag Archives: Roth

Year-End Tax Planning Items: What You Need to Know

12/2024

By Stetson Ponder

As we come to the end of 2024, many families and individuals find themselves reflecting on the year that was. A portion of this reflection certainly involves their financial health and ways to improve for the upcoming year. At Cahaba Wealth, here is an overview of tax-planning strategies that we use to ensure our clients are as tax-efficient as possible.

Tax Loss Harvesting

In taxable accounts, taking a capital loss can be a strategic way to offset other capital gains that may have occurred over the year.
Selling off long-term investments at a loss and reinvesting them in similar positions allows you to “harvest” the negative return while maintaining the integrity of the portfolio.
In general, we look for these opportunities during periods of market volatility.
We also look for areas where capital gains may be harvested for those in the 0% capital gains tax bracket (those in lower-income filings).

Required Minimum Distributions

Those who turn 73 or older this year must take required minimum distributions (RMDs) from their IRA accounts by April 1, 2025.
Donating to qualified charities by way of Qualified Charitable Distributions (QCDs) for those 70 ½ years or older is a way to lower your taxable income and maximize your charitable income.
At Cahaba Wealth, we work individually with our clients to strategize the best way to disperse each respective account’s RMD.

Roth Conversions

With a Roth IRA, contributions are made with after-tax dollars and earnings can grow tax-free. In addition, Roth IRAs do not have RMDs associated with them, allowing your investments a longer time horizon.
A Roth conversion involves transferring retirement assets from a traditional IRA, SEP IRA, or 401(k) plan into a Roth IRA.
Roth accounts can be beneficial if you expect to be in a higher tax bracket in retirement or if you want to reduce your taxable income in retirement.
Roth Conversions should be considered carefully, as these conversions are irreversible and have significant tax implications.
If you have questions about your specific situation and whether a Roth conversion may be for you, Cahaba Wealth would be more than happy to help you think through this process.

Retirement Account Contributions

Maximizing your contributions to tax-advantaged retirement accounts lowers your taxable income for the year.
Contribution limits to IRAs for those under 50 is $7,000 this year and an additional $1,000 for those over 50. This limit includes contributions to both a traditional and a Roth IRA.
Contribution limits to 401(k) plans are capped at $23,000 this year for those under 50. “Catch-up” contributions of up to $7,500 are available to those over 50.
The contribution limit to SIMPLE IRA plans is $16,000, with an additional $3,500 for those 50 and older.
Contributions that can be deducted from SEP IRA plans are limited to either 25% of the employee’s pay or $69,000, whichever is less.

Charitable Giving

Donations to qualified 501(c)(3) organizations can be deducted on a tax return.
Deciding on a donation amount and charity by year-end enables you to make the contribution and receive the associated tax benefits in the same year.
Consider donating appreciated securities to avoid capital gains on highly appreciated assets.

Stay Informed and Prepared

Effective end-of-year tax preparation involves multiple facets, and there is no “one size fits all” answer to any tax situation. Your unique financial situation, goals, and life stage will predicate which strategies are best for you.

Reach Out

At Cahaba, our strategy aims to wholly encompass everything that makes you and your family unique when creating a tailored financial plan. If any of these topics spark your interest or you generally would like more financial guidance, please contact our team.

Sources

Stetson Ponder is a Financial Planning Analyst 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.

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.

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.