Tag Archives: Wealth Management

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.

Cahaba Welcomes Maggie Truitt

Maggie Truitt
Financial Planning Analyst

Please join us in welcoming Maggie Truitt as a Financial Planning Analyst in our Nashville office. In May 2022, Maggie graduated Summa Cum Laude from Xavier University where she earned a Bachelor’s of Science in Mathematics and a Bachelor’s of Art in Spanish. Maggie’s collegiate interests in applied mathematical models allowed for specific development in her quantitative reasoning skills. While attending Xavier, Maggie was a member of Pi Mu Epsilon, served as the Spanish Major Declaration Mentor, and worked as a Committee Co-Chair for Xavier’s Student Activities Council.

Originally from Birmingham, AL, Maggie enjoys cheering on Auburn football and the Tennessee Titans. In her spare time, she loves hiking, trying new restaurants, and exploring her new home of Nashville.

We’ve Come So Far

6/2022

By Brian O’Neill, CFP®

I’ve just returned from a weeklong trip to Ireland with my family. It was rejuvenating in many ways – spending time with my daughter before she goes off to college this fall, talking European soccer with my boys, sharing quiet, peaceful time with my wife that isn’t always possible at home. The only negative was that I missed my dog!

Spending time in Europe always makes me pause and consider the incredible tumult the world has been through, even in the not too distant past. I toured a prison in Dublin where ordinary folks demanding Irish independence from England were detained, and later executed, all for wanting freedom. Ireland only became an independent country in 1922!

As I watched another down week for the markets while on vacation, I also reflected on the rough markets I’ve experienced during my career. The 2000/2001 dot.com bubble was very early on for me, but certainly introduced me to the idea that I wasn’t as smart as I thought. The late 1990s made everyone feel like the best investors in the world, and introduced me to the concept of behavioral biases. If you lived through that period, you’ll also remember a wave of people who quit jobs to become “day-traders” in the market. Just writing that sentence speaks to the hubris that was everywhere in early 2000. Then the S&P 500 declined 49% through October 2002 and the NASDAQ fell over 77%! People weren’t feeling quite as smart when that correction ended.

The Great Financial Crisis of 2008/2009 didn’t quite have the explosive growth in stocks, but real estate took center stage, and people were flipping houses as if they could never lose value. We all know the end of that story.

Obviously, the pandemic created different issues. But the end results seemed eerily similar. Investment capital was flowing freely, tech stocks were selling at valuations that reminded me of 2000, Cryptocurrencies created overnight millionaires, and the fear of missing out reared its ugly head again. Investors began to make decisions as if they were smarter than the market. The past few months have wiped out much of that euphoria.

Stock market declines are painful. For many, this one is more painful given a war torn Ukraine, domestic divide and a quick snap in inflation. However, the long gas lines and 16% mortgage rates of the late 70s/ early 80s eventually came to an end, and patient investors with a long term plan were rewarded. Historical turmoil tends to quickly fade from our memory making each bear market seem brand new and permanent. But one central tenet of corrections is that they end. This one will end too. We don’t know exactly when, but the end will come. Having a firm understanding of your long term goals and cash needs during these periods gives a person a significant advantage.  It allows the investor to think strategically rather than defensively.  For me, it’s another reminder to reflect on how far we’ve come, and to feel confident that a new dawn is just over the horizon.

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.