Monthly Archives: March 2018

Thoughts From Willis | Building Your Financial Planning Team

Published: March 27, 2018

We’re about to wrap up the first quarter of 2018, and many are still focused on their fitness goals and resolutions. Have you made a similar commitment to your long-term financial goals?

The beginning of the year is a great time to address both fitness goals and financial goals, as they both require a strategic plan and steady commitment to facilitate long-term success.

 

Statistics show that we have a greater chance of achieving our fitness goals when we work out with a group of individuals with health obstacles and fitness goals similar to our own.

 

A recent study published by American Osteopathic Association revealed that, “those who exercise individually put in more effort but experienced no significant changes in their stress level and a limited improvement to quality of life,” when compared to those working out in a group.

 

When there is someone else invested in your goal, there is someone else holding you accountable and supporting your efforts along the way. The same philosophy applies to developing and executing a financial plan, which is why it’s often most effective for an individual to engage professional guidance.

 

The Power of Accountability and Financial Planning

A financial planning professional can help build a long-term financial plan suited to each stage of your life journey,

and most importantly, they will hold you accountable if you begin to wander from your set plan.

 

Like your health, your financial well-being isn’t something you can wait until the last minute to address. You want to begin the financial planning process early-on, well in advance of retirement so you’re ready to overcome whatever curve-balls life may throw your way. Begin preparing for retirement today and consider the following questions:

 

Who can you trust to hold you accountable and keep you on track to meet your long-term financial goals?

Who can you turn to for clarity when it comes to your unique financial situation? How do you know if you’re still on the right path when/if things change?

 

It’s never too early to start planning for retirement. Take the time to prioritize your financial well-being today so you’re well-prepared when it’s time to retire. 

 

 

President and CEO, CFP®
Willis Johnson

 

Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein.

Financial Fact | Deadline Alert: IRA, Roth IRA, and Backdoor Roth IRA Contributions for the 2017 Tax Year

Published: March 20, 2018

Yes, we are nearing the 2017 tax filing deadline, but did you know April 17th is also the cutoff date for completing an IRA, a Roth IRA, or a Backdoor Roth IRA contribution for the 2017 tax year?

 

Tuesday, April 172018 is the tax filing deadline for all 2017 tax returns, which means you must complete your IRA, Roth IRA, or Backdoor Roth IRA contribution prior to filing your taxes.

 

 

If you want to make a contribution, you must do so before filing your 2017 tax return.

 

 

The IRA/Roth IRA contribution limits for the 2017 tax year remain the same as the 2016 limits:

 

–> Individuals may contribute up to $5,500 to an IRA or a Roth IRA

–> Individuals over 50 years of age enjoy an additional $1,000 catch-up contribution, bringing their annual contribution limit to a total of $6,500

 

It’s important to remember 2017 Roth IRA contribution phase-outs exist for households with an Adjusted Gross Income that exceeds:

 

–> $118,000 – $133,000 for Single Individuals

–> $186,000 – $196,000 for Married Couples Filing a Joint Tax Return

–> $0 – $10,000 for Married Couples Filing Separate Tax Returns

 

In addition, 2017 IRA deductibility phase-outs exist for households without a covered employer plan and with an Adjusted Gross Income that exceeds:

 

–> $62,001 – $71,999 for Single Individuals Receiving a Partial Deduction

–> $99,001- $118,999 for Married Couples Filing a Joint Tax Return and Receiving a Partial Deduction

–> Less than $10,000 for Married Couples Filing Separate Tax Returns and Receiving a Partial Deduction

 

 

One noteworthy tax arbitrage strategy applies to a portion of the corporate executives and professionals we serve. These individuals have some working income from consulting, and either took a lump sum pension or have not yet begun receiving their annuity pension. Because these individuals have earned income, they are eligible to contribute to an IRA and receive a deduction at the higher 2017 tax rates. Not only may they contribute to an IRA based on their earned income, but their spouse may be able to use spousal income to contribute as well. Let’s walk through an example:

 

 Let’s say Susan’s consulting income for 2017 was $98,000.  She will be able to receive a tax deduction based on the 2017 tax rate of 25%. In 2018, the same income level would be taxed at a 22% rate due to the marginal rate changes from the Tax Cuts & Jobs Act. If Susan needs the money (and is over 59.5), she can immediately withdraw the funds in 2018 and only pay taxes at a 22% rate. That is a 3% tax savings for Susan and her spouse. Alternatively, if Susan does not need the money, she could immediately convert the funds into a Roth IRA, paying taxes at the lower 22% rate. Again, Susan received a 3% tax savings!  Not only has this couple reaped the benefits of a rare tax arbitrage opportunity, they will also enjoy the tax-free growth this contribution will yield since it is now nested inside of the Roth IRA. 

 

Please reach out to us if you would like discuss making a contribution to an IRA or Roth IRA and how it may be an important piece of your retirement savings plan. If you want to make a Roth IRA contribution, but are concerned you will exceed the Roth IRA contribution limits for the 2017 tax year, read our article about the Backdoor Roth Contribution Strategy here. You may be able to max out contributions to your 401(k) and in addition, contribute money to an IRA, Roth IRA, or Backdoor Roth IRA.

 

 

Want to learn more? Read our related articles linked below…

What Nick’s Reading | The Power of a Backdoor Roth IRA Contribution

What Nick’s Reading | How the Lower Marginal Tax Rates Make Partial Roth Conversions More Attractive

What Nick’s Reading | How to Compare: Roth Contribution vs. Roth Conversion vs. Roth Re-Characterization

Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Insurance products and services are offered or sold through individually licensed and appointed agents in various jurisdictions.

 

 


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Robert (Bobby) Cope, M.S.

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Robert (Bobby) Cope joined Willis Johnson & Associates as a financial paraplanner in May of 2017. For Bobby, entering the financial planning profession allows him to not only assist the associate wealth managers of the firm in daily operations but more importantly assisting client’s in many other facets of their lives. Bobby graduated Summa Cum Laude from the University of Alabama Honors College in May of 2017. He completed a dual degree program that awarded him an M.S. in Human Environmental Sciences, with a concentration in Family Financial Planning and Counseling, as well as a B.S. in Human Environmental Sciences, with a concentration in Consumer Sciences. At Alabama, Bobby was a member of Delta Kappa Epsilon social fraternity, as well as many other groups and honor societies on campus.

What Nick’s Reading | The Power of a Backdoor Roth IRA Contribution

Published: January 12, 2016 

Edited: March 12, 2018

We like to make sure you have the most up-to-date information, which is why we wanted to refresh this helpful article regarding the power of a Backdoor Roth IRA Contribution. 

 

Our clients typically turn to their 401(k) account as the vehicle to maximize tax-advantage savings and ask the following questions:

 

1) How much money did I contribute last year?

2) Was my contribution made through a pre-tax account, or a Roth 401(k)?

3) Did I make an after-tax contribution?

4) Is it in my budget to contribute more this year?

5) Did my employer make any changes to my plan?

6) Have the employee contribution caps increased since the 2017 tax year? 

 

(Note: Maximum 401(k) contributions of $18,500 for pre-tax or Roth with a $6,000 catch-up contribution limit.)

 

What is a Backdoor Roth IRA Contribution?

We agree that the 401(k) is a very important part of retirement savings, however, many clients forget about Traditional IRAs and Roth IRAs. Many think that the maximum income threshold for married couples filing jointly to contribute to a Roth IRA (during the 2017 tax year) is $196,000 and that the tax deductibility phase out limit for a Traditional IRA ranges from $99,000 – $119,000, if covered by a plan at work.

 

While these limits are prominent in IRS tables, we want to steer your attention to the lesser-known Backdoor Roth IRA contribution strategy. As a broad overview, there are no income limits with this strategy.  Additionally, the Backdoor Roth IRA contribution strategy marries a contribution to a non-deductible IRA with a conversion to a Roth IRA.

 

This strategy allows you to save up to $6,500 annually per person (including spouses), over and above what you are already contributing to your employer’s 401(k). Many investors can still contribute $6,500 for the 2017 tax year (as long as the contribution is made before filing the 2017 tax return) in addition to contributing for the 2018 tax year.  If you are married, that means $13,000 in additional retirement plan savings for 2017 and an additional $13,000 for 2018, for a total of $26,000 in additional retirement savings.

 

What Should You Consider Before Making a Backdoor Roth IRA Contribution?

Before a saver can begin utilizing the Backdoor Roth IRA strategy, it is important to ensure that they do not have any pre-tax money in IRAs. Upon completing a Roth Conversion, an individual moves the money from an IRA to a Roth, and will pay taxes on any pre-tax money that was converted. If you only have non-deductible money in your IRA, this is not an issue.

 

The dilemma: If you have pre-tax money in any of your Roths, it’s important to understand the pro-rata rule and its stipulation that all IRAs are treated as one IRA. So, how can the pro-rata rule affect the outcome of using a Backdoor Roth IRA strategy? Let’s walk through an example of the consequences one may face upon completing a Backdoor Roth IRA contribution without proper planning:

 

Max has an IRA at Vanguard that contains $93,500 of pre-tax funds. He decides he wants to do a Backdoor Roth IRA contribution, so he opens an IRA at Fidelity. Max contributes $6,500 of non-deductible money and immediately proceeds to convert the money to his Roth IRA at Fidelity. Max thinks that he will not owe any taxes on the conversion because he converted money from his Fidelity IRA to his Fidelity Roth IRA. However, he did not understand the pro-rata rule before making this financial decision.  
The pro-rata rule says that all IRAs are treated as one IRA for the purposes of Roth Conversions. So, in reality, Max has $6,500 of non-deductible money across his IRAs and $93,500 of pre-tax money. In other words, 6.5% of the funds in Max’s IRAs are non-deductible, and the other 93.5% of the funds are pre-tax. So, of the $6,500 Roth conversion 6.5% is tax-free; the other 93.5% is taxable at ordinary income rates!

 

You may be saying to yourself, “I have pre-tax money in IRAs, does this mean that I cannot utilize the Backdoor Roth IR contribution strategy without incurring negative consequences?” For the majority of our clients, the answer is probably not. However, these individuals generally require some consolidation of accounts before applying the Backdoor Roth IRA Contribution strategy to their own financial plan.

 

Our clients are primarily corporate executives and professionals, many of whom are still working in corporate America and have a 401(k) plan with their employer. Employer plans are not considered part of the pro-rata rule. So, if Max were our client, we may decide to consolidate his pre-tax IRAs to his company’s 401(k) plan. After we consolidated the $93,500 of pretax money into Max’s company’s 401(k), then we could assist him in making a Backdoor Roth IRA Contribution because he no longer has any pre-tax IRA money.

 

We want to emphasize this strategy as one to discuss with a financial professional in early 2018, as its use may help you achieve your financial goals.

 

Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Insurance products and services are offered or sold through individually licensed and appointed agents in various jurisdictions. 

 


nick

Nick Johnson, CFA®, CFP®

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Nick Johnson believes that financial planning is more than numbers on a balance sheet and a standardized process. People are unique and should be treated as such.

 

As Vice President and Wealth Manager at Willis Johnson & Associates, his goal is to really get to know his clients, all the while providing a proactive approach to comprehensive wealth management.

 


 

 

Market Update | The Markets (as of market close February 28, 2018)

Published: March 6, 2018

The Markets (as of market close February 28, 2018)

Despite some positive economic signs, rising consumer confidence, and favorable corporate earnings reports, February marked the end of the 10-month winning streak for the benchmark indexes listed here. Concerns over rising inflation and interest rates triggered a notable sell-off early in the month and pushed volatility to the forefront. Although the indexes listed here recovered much of their early February losses to close the month ahead of their 2017 closing values (with the exception of the Russell 2000), stocks did not maintain the pace set last year into January.

 

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New Fed chair Jerome Powell’s bullish assessment of the economy last week pushed the yields on 10-year Treasuries to their highest rates in several years (bond yields rise as prices fall), giving investors more reason to believe multiple interest rate hikes are in the offing for 2018...Click here to read the full article.

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