Monthly Archives: February 2018

Thoughts From Willis | Market Corrections Revisited and the Lessons We Learned

February 27, 2018

It has been almost 9 years…

Next week, March 6, 2018, will mark the nine-year anniversary of the stock market bottom that resulted from the 2007-2008 Financial Crisis.


March 6, 2009 Stock Market Bottom: A Brief History

The Standard & Poor’s 500 declined 37% in 2008 alone. However, this market crisis did not start in the equity market. It started as a result of the over-inflated real estate market that was financed through the creation of weak-to-improper loan practices where commission-motivated loan officers loosely qualified home buyers for home loans they could not afford.


These loans were packaged by creative brokerage firms and banks, and were sold mostly to institutions and individual bond buyers who did not have a thorough understanding of what they were buying. Such individuals and sophisticated institutions purchased these bonds hoping to receive above average yields with little risk and low volatility. These types of investments can work for experienced investors, but they tend to have a very short shelf-life. In addition, they almost always end poorly for the average, unsuspecting buyer.


Let’s take a moment to travel back to the bottom of the market in March 2009…



On March 9, 2009, the S&P 500 closed at 676. Fast forward to Friday, February 23, 2018, where the S&P 500 closed at 2747.


This comparison represents an annualized return of 16.65% over the last 9 years. These returns have been supported on two fronts. The first being very low stock market valuations after the crash, and the second, a sustained period of very low interest rates.



The 10-year Treasury rate over the same period has held the lowest interest rates in modern history. On March 9, 2009, the 10-year Treasury yield closed at 2.89%. On March 9, 2015, the same corresponding yield was 2.19%, and on March 9, 2016, it closed at 1.89%.


To put this in perspective, the 10-year Treasury closed Friday, February 23, 2018, at 2.94%, which was almost the same level as the close the day the markets bottomed.


Your Perspective: Market Activity 2009 vs. 2018

The important question to ask considering this information is: How did you react after the 2008 correction? Did you buy, sell, or stay the course?

An even more important question: How have you reacted since 2008? The market corrected from 5-15%. Did you buy, sell, or stay the course? Did you panic, assuming the next crash was coming and that you needed to get out fast?


Throughout February 2018, the market experienced a 10% drop. At Willis Johnson & Associates, we took this opportunity to add to our equity positions. 


What did you do?



President and CEO, CFP®
Willis Johnson 

Financial Fact | How Will Rising Wages Impact Inflation? Understanding the Impact of Recent Wage Increases on the Market’s Future

February 20, 2018

The country’s largest employer, Wal-Mart, raised their starting wages from $9 to $11?

This is an increase of over 20 percent!


Wal-Mart was the most visible example of this trend among a multitude of U.S. companies that have given their employees either a bonus, or an increase in pay following the law changes implemented by the Tax Cuts and Jobs Act. There are indications that this increase was the result of a combination of factors. For example, in addition to the recent tax cuts, the U.S. unemployment rate is very low, which forces companies to raise wages so they can attract workers.


In this article, we will assess the good and bad of rising wages and how this trend may affect market conditions in the future.


Pros & Cons: Wage Increases and Their Impact on the Market  


–> So, what ramifications are associated with widespread wage increases for U.S. workers?

–> What impact will this shift have on the market environment going forward?


The first is obviously positive: Rising wages give employees more disposable income, thus increasing consumer spending and bolstering the economy.


The second is negative: Higher wages increase costs for businesses, which leads to inflation. This concerns the financial markets, as higher inflation will cause the Federal Reserve to raise interest rates more quickly, stifling economic growth.


The Department of Labor recently announced that wages for private industry workers grew over 2.8% in the fourth quarter of 2017. This release of this information has been partially responsible for the rapid movement of interest rates, as well as the stock market volatility we have seen in the last few months. The response of Jay Powell, recently nominated chairman of the Federal Reserve, will be imperative to monitor going forward as the economy experiences increased interest rates and higher inflation.


If you’d like to learn more about the rise in wages and how it may affect your long-term financial plan, contact your financial advisor, or reach out to a member of the WJA team.



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.


Jason Mishaw, Associate Wealth Managers,Jason Mishaw, MSF



As an associate wealth manager at Willis Johnson & Associates, Jason Mishaw is actively involved in both the Financial Planning role and the Investment Management role. On the financial planning side, he helps to implement customized financial plans for WJA clients. On the Investment Management side, under the supervision of a Senior Wealth Manager, he assesses the financial goals of WJA clients and assists in creating a customized strategy to further those goals.


Jason received a Master of Science in Finance at the University of Houston C.T. Bauer College of Business, a B.A. in economics and a B.S. in biochemistry and cell biology from Rice University.



How the Lower Marginal Tax Rates Make Partial Roth Conversions More Attractive

February 13, 2018

The 2017 tax reform changes resulted in a number of adjustments to the laws and associated strategies taxpayers are accustomed to.

One element I want to talk about today is how the Tax Cuts and Jobs Act has made Partial Roth Conversions even more attractive.

But first, the basics…


To understand why Partial Roth Conversions are even more attractive, you need to have a firm understanding of how the marginal tax rates have changed under the recent tax reform.


 In case you don’t know, the marginal tax rate is the percentage of taxes an individual pays on an additional dollar of income. In other words, for each additional dollar, you earn (via a pay raise, job change, consulting, etc.), your income increases, thus shifting your marginal tax bracket or the tax rate of your last dollar of income.


For example, consider that Tom and Sue have $276,000 of taxable income after taking the $24,000 standard deduction available to married couples filing jointly in 2018 (or $300,000 in total household income).


The chart below shows that $276,000 of taxable income is in the marginal bracket of 24%. Thus, Tom and Sue will owe $54,819 in taxes for the 2018 year.


2018 Marginal Tax Rates

2018 marginal rates-2


However, if Tom and Sue had $300,000 of total household income in 2017 (before tax reform) and took the 2017 standard deduction of $12,700, they would have $287,300 in taxable income and be subject to a marginal rate of 33% as highlighted in the chart below. Tom and Sue would owe $70,026 in taxes for the 2017 tax year.


2017 Marginal Tax Rates

2017 marginal rates-2



Thus, Tom and Sue fare better under the 2018 marginal tax brackets than they had under the 2017 marginal tax brackets, as they save $15,207.




In some cases, it may be possible for an individual to not owe ANY federal taxes, even though there is not a 0% tax bracket.


How does this occur?


If the difference between an individual’s income and deductions is zero or less, they may be exempt from paying federal taxes. Considering the increase of standard deductions for single and married individuals, such a situation is most likely to occur among corporate executives and professionals in the first few years after retirement (specifically those that took pensions as a lump sum and are living off after-tax income first).


Although recent changes to the tax code have lowered personal tax rates for a majority of individuals, these reductions are expected to go back up in the future, unless Congress makes the lower rates permanent as it did with some of the Bush administration’s tax cuts in 2012. Therefore, it may be best practice to modify your financial plan so that you take advantage of this tax break while it’s still in effect.


Roth IRAs Allow for After-Tax Contributions and Tax-Free Growth

I’ve talked about the marginal rate, but let’s do a quick refresher on Roth IRA. They are a particularly tax-advantaged way to save for your retirement years. A few of the main advantages of this retirement account are as follows:


-After-tax contributions

-Growth on the Roth investment is tax-free

-Roth IRA distributions during retirement do not count towards your personal taxable income

-This also means the money will not be considered as personal income for purposes of determining whether your Social Security income will be taxed or if you will have to pay a Medicare surcharge

-Unlike an IRA or a 401(k), you’re not required to take a required minimum distribution (RMD) at age 70 ½, which is particularly beneficial for estate planning purposes as it allows the investment to continue to grow.


Roth Conversions in Low Tax Years are Even More Attractive with Future Expectations of Higher Income and Higher Tax Rates


Why am I talking about Roths and the Tax Cuts & Jobs Act? Because of how powerful partial Roth Conversions can be, given the lower marginal rates that are expected to go up in the future!


A partial Roth Conversion may make the most sense in low-income years (often in retirement before RMDs & Social Security begin). In case you don’t know, a partial Roth Conversion is where an individual moves a portion (but not all) of their IRA money to a Roth IRA and pays federal ordinary income taxes on the amount converted.


For example, an opportune time to do a Roth Conversion is during a year when you have a lower income than you expect to have in the future. Typically, this would be someone who just retired, was laid off, or has made large charitable gifts.


A common mistake we’ve observed among the newly retired professionals we serve is their tendency to become overly excited when they experience the transition of paying little to no taxes in the first few years after retirement. We often see this from our clients at Shell, Chevron, Exxon, and others (especially when they decide to take a lump sum pension as opposed to annuitization).  


However, this elation will be short-lived if they do nothing to take advantage of these low tax years, as their marginal tax brackets will likely be increasing significantly as Required Minimum Distributions (RMDs) and Social Security will shift them to a much higher tax bracket in the future.


It’s important to remember that if you do not take advantage of low tax brackets during these low-income years, you will be forced to take out the money when you’re in a higher tax bracket, thus increasing the amount of taxes you pay during that time.


For example, consider that you’re a sixty-year-old, married household who files a joint tax return and has a significantly large IRA. The IRA will begin automatically kicking out RMDs at age 70, and the Social Security payouts must begin by age 70 as well. If the above household has $100K of income from a pension today, they will pay a marginal tax rate of 22%.



However, by the time this household turns 75, the pre-tax IRAs will have had a lot of time to grow. It would be expected for this household to have significant required minimum distributions (RMDs) and Social Security income on top of their $100k pension. Let’s say their RMDs at age 75 are about $200,000 and the household Social Security is $60,000. All of a sudden, this household which only had $100,000 of income at age 60 now has $360,000 of income, increasing their marginal rate by 11% to a total of 33%.


Website Infographic FEB 2018 WNR- WITHOUT RC (1)


Remember, the lower marginal rates from the Tax Cuts & Jobs Act only lasts for 10 years before reverting!


However, if this household were to employ a partial Roth Conversion, it would allow them to pull future income forward taking it out at a 22% rate (instead of a 33% marginal rate). This household could take an additional $65,000 of income each year for the next 10 years, by converting $65,000 of IRA money to Roth IRA money. Yes, they will be required to pay taxes upon making the Roth Conversion, but these strategic conversions will increase the Roth IRA assets and decrease the size of the IRAs. This lowers the future RMDs thus decreasing their total future income and shifting their future marginal tax bracket to a lower rate of 28%.



Website Infographic FEB 2018 WNR- WITH RC (2)


What makes partial Roth Conversions even more exciting in the context of today’s tax laws is that the current lower rates will Sunset (Remember the tax cuts expire in ten years and almost all the rates get worse!). Even if the household happens to have the same taxable income in the future as they do today, they are most likely in a lower tax rate today.


Other Considerations for Tax Payers


No More Roth Recharictarizations 

A major change implemented by the recent tax reform law is the elimination of Roth Recharacterizations. Therefore, if you convert money to a Roth, you are unable to move the money back to a pre-tax IRA account. Because of this, we generally recommend that our clients convert their money at year-end once they know the total income they have earned. It’s common for households to underestimate their total income for the year as investments, pensions, restricted stock payouts, consulting income, and various additional items are often overlooked when looking ahead for the year.


A Decrease in Tax Rates May Decrease the Value of Roth Conversions

If tax rates decrease for American taxpayers as a whole or an individual household, Roth Conversions may not be a smart financial decision. This is because you are converting money at potentially higher tax rates today and you might be paying in the future. Of course, we do not think it is likely for rates to go down in the future.


Roth Conversions and the 5-Year Rule   

As we move forward under the new tax code, it’s important to remember a few of the time limitations associated with Roth Conversions. You are not able to immediately withdraw money from a Roth IRA because of the five-year clock rule.


This rule stipulates that five years must have passed since the tax year the Roth Conversion was made before you can withdraw the converted portion of the earnings on the account without being subject to penalties or taxes.


It’s also important to remember that Roth IRA distributions are taken from contributions, conversions, and earnings, in that order.


In addition, the five-year clock always starts on January 1st of the year the conversion was made.  For example, if a Roth conversion is completed in December 2018, the five-year countdown starts on January 1, 2018.


Roth conversions are not the only option available to help fill up low-income years. There are other opportunities available and it’s worth understanding the pros and cons before making a decision. Additional options include:


-Variable Annuity withdrawal

-IRA/Pre-tax 401(k) withdrawal

-Realizing capital gains to receive a step up in basis

-Trust Distributions


If you would like to learn more about the recent tax code changes and how they may affect your financial strategy, contact a trusted advisor or a WJA representative for more information. You can also register for one of our upcoming webinars, here.


Want to check out my first blog post breaking down the changes given the Tax Cuts & Jobs Act? Read it here.

nickNick Johnson, CFA®, CFP®


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.


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.


Market Update | The Markets (as of market close January 31, 2018)

February 2, 2018

Equities pulled back off of their record-setting gains at the end of January, but not enough to forestall a month of significant gains. January provided several noteworthy storylines for investors to consider. Unemployment remained low as the number of available job openings continued to recede, possibly signaling a push for higher wages. Fourth-quarter corporate earnings were relatively strong. 

MU Graph

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.


The president’s first State of the Union address preached optimism and called for bipartisan cooperation on major economic and international issues. The government shut down for a few days before approving a stopgap budget resolution through early February. Some American workers saw a modest bump in pay, courtesy of the Tax Cuts and Jobs Act legislation passed in December. And Janet Yellen’s final meeting as chair of the Federal Reserve saw the Committee… Click here to read the full article.

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