Monthly Archives: May 2018

Non-Qualified Retirement Plan Tax Risks the Corporate Professional Should Avoid

May 28, 2018

Republished: May 28, 2018

Without proper financial planning, you may be paying more taxes on your Non-Qualified Retirement Plan than necessary.

If you have a retirement savings plan with the words ‘Excess Compensation’, ‘Excess Benefit’, ‘Benefits Restoration’, or something similar in the title, you may have a non-qualified retirement plan.


What is a Non-Qualified Retirement Plan?

Employers establish non-qualified retirement plans to circumvent the IRC Section 415 limitations so that their high-income earning employees can save more for retirement. The IRS rule limits both you and your employer’s contribution to your 401(k) based on the first $275,000 of income for 2018. This means that you and your employer can only make contributions to your 401(k) based on the first $275,000 that you earn. When your income exceeds the $275,000 limit, neither you nor your employer can contribute any more money to your 401(k).
Large corporations often want to continue their matching benefit for employees who have income that exceeds this limitation. They do so by establishing a Non-Qualified Retirement plan and depositing the excess matching contributions there. These funds can be invested and grow until the employee’s retirement or departure from the company.


Non-Qualified Plan Tax Risks: Your Non-Qualified Retirement Plan Assets May be Forced Out as Taxable Income in the Year You Retire

If the employee makes no elections, these plans are often paid out as a lump sum very soon after retirement. Receiving all of the proceeds from the non-qualified plan in the year of retirement can cause a substantial portion of this payment be taxed at the highest marginal income tax rate. Without proper planning, you may be paying more taxes than necessary.
For example, if a client receives a $400,000 lump sum Non-Qualified payout instead of annuitizing it over a period of 10 years, they will be in the 35% Marginal Income Tax Bracket, assuming $100k of other income, either a pension, investments, etc. When annuitizing, they will be in the 22% marginal Income Tax Bracket.



What Should You Do When Managing Your Non-Qualified Retirement Plan?


Different companies have different rules regarding payout elections for their Non-Qualified Plans. For example, our Shell clients were required to have made their elections prior to 2009 in order to annuitize the payout of their Benefit Restoration Plan. We work with those of our clients that did not make their elections to time their retirement decision so we can strategically manage and disperse their various payouts and minimize their overall tax burden.


We find that other companies, such as BP Global, allow their employees to make the election for a payout of their Non-Qualified Retirement benefits at the beginning of each year. We proactively assess this payout decision with these clients to ensure a distribution plan to manage cash flow needs and minimize their tax impact.
With proper planning, these plans can be a very useful tool to help provide income in the first few years after retirement. If you have one of these plans, we recommend you speak with a professional advisor, like Willis Johnson & Associates, who specializes in helping corporate executives and professionals minimize taxes and maximize their company benefits. 



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.




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.

Thoughts From Willis | Congratulations, Nick Johnson for Obtaining the Designation of Certified Financial Planner®

May 21, 2018

For this month’s piece, I’d like to take a moment to congratulate WJA Vice President, Nick Johnson for obtaining the esteemed designation of Certified Financial Planner®.

What does it mean to be a Certified Financial Planner®? Why does it matter?


The CFP® designation distinguishes the title holders from their peers by requiring individuals to complete extensive training, education, and experience requirements, as well as abide by stringent ethical standards. All of these elements work to ensure the financial planner who wears the designation will ultimately put the client’s best interest over their own when providing wealth management services.


The CFP Board’s education requirements include both the completion of a financial planning curriculum at a college or university approved by the CFP Board, as well as the successful completion of the CFP Board’s Certification Exam.


Nick completed his certification requirements, a comprehensive effort in itself while managing the everyday operations of the firm. However, if you know Nick, that comes as no surprise. His passion for education has remained a consistent theme in the development of his career, from completing three degrees at Trinity University, to achieving his CFA® at only 27, to heading the WJA internship program. These are only a few of the ways Nick continues to learn– and help others learn– as he develops his professional career.  


I am very proud of the team here at Willis Johnson & Associates. The individuals we hire exhibit an insatiable desire to grow and understand the value of continued education to their professional development. Nick leads in continuing to build a culture of sharp, talented, and most importantly, driven individuals who are always looking for ways to improve.


Congratulations Nick, and thank you for leading by learning.


You can connect with Nick on LinkedIn to read his latest thoughts on the industry and browse our custom WJA content.


CEO and President,

Willis Johnson CFP®



Willis Johnson, CFP®



Willis Johnson is President and Chief Executive Officer of Willis Johnson & Associates. As a CERTIFIED FINANCIAL PLANNER™ professional (CFP®), Mr. Johnson provides a full complement of financial services to individuals as they go through the transitions in their corporate life. 


During his 34 years as an advisor, 13 years with a national financial advisory firm and 21 years as a principal at his own firm, Mr. Johnson implemented exclusive estate and financial planning techniques. His structured methodology, customized for each client, is still the basis of his approach today. Building grounded, long-term relationships, while understanding client objectives and goals, is always the key to Willis’ success as a Certified Financial Planner® professional.



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 | Did You Know You Can Now Use a 529 Savings Plan for Private School Education Costs (K-12)?

May 14, 2018

If you have (or want) children, you may already know about 529 savings plans, but did you know 529 qualified expenses now include private school education costs?


As of January 2018, private school tuition now falls under the 529 plan’s umbrella of qualified education expenses. Savings from a 529 account can be tapped to fund education-related expenses as early as a child’s kindergarten year, and continue to be used throughout the entirety of their primary, secondary, high school, college, and graduate school years.  

While our firm remains a heavy proponent of using 529 plans to pay for college tuition, we have expanded our focus to include using a 529 savings plan to assist with private school education costs. In this article, we will walk through the advantages of using a 529 plan to save for a child’s private school K-12 education, as well as the limits, restrictions, and discrepancies you should consider when determining your long-term savings strategy.


What to Consider When Using a 529 Plan for Private School Education (K-12) Expenses

A 529 savings plan works much like a Roth IRA and the new rules under the 2018 Tax Cuts & Jobs Act allow for greater flexibility when using a 529 savings plan. However, the changes may impact the way parents and grandparents incorporate the savings vehicle into their long-term financial plan. Now that the time between a 529’s initial funding and the date the assets are available for use has been shortened, families may need to reconsider how their current investment strategy will support their education savings goals.


Private school tuition has skyrocketed and is only predicted to increase over the next eighteen years. Today, the total cost of private school education (K-12) for a child entering kindergarten is approximately $182,868.


If a child is born today (2018), the total cost for their private school education will be approximately $239,001 once they are old enough to attend kindergarten. This is assuming an education inflation rate of 5.5% and that the child will enter kindergarten at age five.


That’s a $56,133 increase after only five years!


We recommend estimating the cost of sending your child/grandchild to a private institution for their primary, secondary, and high school years. has a helpful online 529 Savings Calculator for Private K-12 Tuition you can use to estimate the costs associated with your unique situation, as well as how much you need to save in a 529 to be able to cover these costs. Please note that these are merely estimates and you should talk with your financial advisor to ensure your savings strategy aligns with your long-term financial plan before you take action.


Whether a 529 is used to fund college or private school tuition, the tax-free growth remains its most notable advantage. With that in mind, a number of families with young children may not have the means to simultaneously max out their retirement plan, cover living expenses, AND contribute to a child’s 529 savings account. This is where grandparents may be able to ease the future burden of education costs for their children and grandchildren.


The Power of Gifting for Grandparents: Understanding the 5-Year Election Limits of a 529 Plan for Private School Education (K-12) Expenses

The flexibility inherent to a 529 savings plan provides a valuable opportunity for grandparents to supplement their children’s future cash flow by gifting education savings to a 529 account for their grandchildren, and doing so while the grandchildren are still very young. In addition, the account can be transferred between relatives so that if a 529 is overfunded, the family’s investment does not go to waste.


Consider that you are the grandparent of a newborn child today (2018). You and your spouse want to help fund your grandchild’s private school education by contributing the maximum amount of funds possible to a 529 without being subject to gift tax on the investment. The 529 Plan’s 5-year election rule allows you to do just that! Couples can contribute up to $150,000 ($75,000 for an individual) per child to a 529 savings account and still qualify for the annual gift tax exclusion on the contributed funds.


For example, if you gift the maximum tax-free contribution of $150K ($75K for individuals) to your grandchild’s 529 today in 2018, the investment will total $266,939 by the time they’re old enough to attend kindergarten. This is assuming the child starts kindergarten at age five and the 529 contribution compounds at a rate of 7%.  


That’s $116,939 of growth in only five years!


By gifting to the 529 plan early on, you enable the compounded tax-free growth to be in full effect by the time your grandchild starts his/her private school education.


The tax-deductible contributions, tax-deferred compounding and flexibility to change the account beneficiary to another family member also position 529 accounts as a strategic estate-tax planning tool for grandparents. They can save for the future of their grandchild and shelter a large amount of assets from estate taxes, all while retaining control of the funds.


Limits to Using a 529 Plan for Private School Education (K-12) Expenses


One noteworthy difference between paying for private school and paying for college using a 529 is that while there is no cap on 529 withdrawals for qualified college expenses, a $10,000 cap exists for annual tax-free withdrawals from a 529 plan when funding private school expenses. You can still withdraw more than the $10,000 cap from a 529 account for private school costs, but you will pay taxes on any amount exceeding the limit for that tax year.


Some states have yet to conform to federal tax code. These states still allow families to fund pre-college private school education expenses, but the withdrawal may not share the same state-tax benefits as the over 30 U.S. states already offering a tax credit or deduction for contributing to a 529 plan. Review full list of states that consider k-12 tuition to be a qualified education expense under the 529 rules.


It’s important to note that parents and/or grandparents should generally avoid reducing their annual retirement plan contributions in order to contribute to a 529 savings plan. In most cases, we recommended maxing out your retirement savings accounts before contributing to a 529 plan. Why? Because you can still withdraw funds for education related expenses from after-tax accounts such as an IRA or Roth IRA penalty-free, even if you’re not 59 ½.  In addition, a 529 plan should align with your long-term financial strategy and you should avoid pulling cash from these accounts just because you can.


Nevertheless, if you have the cash flow to allow it, taking advantage of the new 529 rules can be a valuable way to support a child’s educational development from day one.


You should always approach saving with a concrete strategy, which is why you should speak with a trusted financial advisor to determine how a 529 savings plan can help maximize your contribution to the future of your children and/or grandchildren.


To discuss 529 plans further, feel free to contact us to schedule a meeting, or to speak to one of our financial professionals.


person1Robert (Bobby) Cope, M.S.


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.

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. 


Avoid Paying 2X the Tax on Non-Deductible IRA Contributions

May 9, 2018

I hate to see people pay taxes twice, but it happens more often than you might think.


We see this most often among new clients who overlook the tax on non-deductible IRA contributions and their growth.


When we work with clients, especially new ones, we like to review their tax returns. A tax return tells us a lot about someone: 1) How many after-tax accounts they have, 2) If they are charitably inclined, and 3) What deductions they take. One of the sections we always check is Form 8606. This form tells us if they have non-deductible money (basis) in their IRA, which we consider to be a huge red-flag.


Why is it concerning to have non-deductible money in your IRA?  For one, we prefer our clients to have the contribution basis in a Roth IRA so all future growth is tax-free. In addition, individuals risk paying taxes on their basis twice at some point in the future if they keep the non-deductible basis in their IRA. In this article, we will outline the basics regarding traditional deductible IRA contributions and non-deductible IRA contributions, their corresponding tax implications, and how an in-depth understanding of how to navigate their tax discrepancies can help you avoid leaving money on the table as you save for retirement.


How do you get non-deductible money (basis) in your IRA?

We often work with our Shell, Chevron, Marathon Oil, and BMC clients to help them understand why they have non-deductible basis in their IRAs, and what they can do to mediate the tax risk they face as a result. 


Let’s say you are a successful professional or executive in the Houston area.  You are a saver. After paying your necessary expenses, you put all the money you can aside to prepare for retirement. After maxing out the pre-tax contribution on your company’s 401(k) plan, you resort to putting your extra funds in an IRA in an attempt to sock additional dollars away for your golden years. The dilemma here is that your household income is too high to contribute to a deductible IRA, so the $13,000 IRA contribution you made for you and your spouse ($6,500 each) ends up being non-deductible. 


Suddenly, ten years have passed and you now have over $100,000 of basis in your IRA. You are a natural saver and have been diligent about setting your extra money aside for retirement. That’s great! However, without careful planning, you may pay taxes on the contributed funds twice. Why? Let’s first review how traditional deductible IRA contributions work before diving into the complexities of a non-deductible IRA contribution.


How do traditional deductible IRA contributions work?

A traditional IRA has two primary advantages: 1) Tax-deductible contributions on the entire contribution amount as long as you’re not covered by an employer’s retirement plan and over the income limit, 2) Earnings on the contribution’s growth are tax-deferred. When you make a deductible IRA contribution, you receive a tax deduction for the money you contributed, effectively making this a pre-tax contribution. The contribution funds grow tax-deferred while in the IRA, but you will be subject to paying taxes on the growth upon making withdrawals throughout retirement.


For example, consider that your household income is only $100,000 and you qualify for an IRA deduction. You and your spouse (both age 50 or over) each contribute $6,500 to an IRA ($13,000 total). You are able to deduct the $13,000 from your taxes. For your tax-return, your $100,000 household income went down by $13,000 and is now only $87,000. The $13,000 contribution to your deductible IRAs effectively reduces your taxable income by $13,000!


How do non-deductible IRA contributions work?

Non-deductible IRA contributions work a bit differently and are often the result of the contributor’s household income being too high, thus exceeding the IRA deduction limits. For example, if you’re married and your income is over $101,000 –$63,000 for individuals– your IRA contribution is not fully deductible.  You can always contribute to an IRA, but you cannot receive a deduction for the (entire) contribution, thus the funds are treated like after-tax money.


How are non-deductible IRA contributions taxed when withdrawn?

With a non-deductible IRA contribution, you are putting after-tax money into an IRA and any growth on the contribution is still tax-deferred. When you eventually withdraw from your IRA, the contribution will come out tax-free, but you will have to pay taxes on the growth. At least that’s how it works, in theory, assuming you have handled the administration of tax Form 8606 each and every year!


The dilemma with IRAs is that unlike your company’s 401(k) plan, YOU are in charge of tracking the source (in this case the basis) of all non-deductible contributions. You must record current and historical contributions each and every year on Form 8606 of your tax return. This form shows the IRS the amount of after-tax (non-deductible) contributions you’ve made each year, and without it, your IRA basis will be taxed AGAIN when you withdraw the funds in retirement.  Essentially, if you miss one year, you may find yourself paying twice the taxes in another. Note: This is your job to track, not your custodian’s.


What should you do when you have non-deductible basis in your IRA?

We had this exact issue arise with a Shell Oil executive we recently on boarded to our firm. As part of our comprehensive planning process, we reviewed his tax return and noticed there was an $89,000 basis of non-deductible IRA contributions, with another $42,000 in his spouse’s IRA. The total value of his individual IRA was a little over $300,000. That’s $211,000 of taxable growth over time on the initial contribution of $89,000! So, how can he avoid paying taxes on both the contribution ($89,000) and the growth ($211,000) in retirement?


The solution we used for this client’s situation was to roll the growth into a 401(k) plan and convert the basis into a Roth IRA account via a Roth conversion.


One of the benefits at Shell Oil is that their 401(k) plan, the Shell Provident Fund, accepts incoming rollovers. This means that we can roll the $211,000 of growth into the Shell Provident Fund, so that the earnings are held in the client’s 401(k). This strategy reduces the client’s basis held in his IRA to $89,000 of non-deductible after-tax money. Since the entirety of the money left in his IRA is non-deductible (after-tax money), we then used a Roth Conversion to move the non-deductible money from his IRA to a Roth IRA, which is funded by after-tax income contributions and allows the growth to be withdrawn tax-free. 


Whereas before, the client would have paid on the initial contribution of $89,000 to his IRA AND the contribution’s earnings, he can now withdraw the contribution and its earnings without being subject additional taxes beyond the initial contribution tax already applied. In other words, he will only pay taxes the non-deductible IRA contribution one time.


What are the benefits of your IRA contribution basis being in a Roth IRA?

Assuming you follow this strategy, you will no longer be required to track your IRA contribution basis on Form 8606 after the 2018 tax year, meaning you will not be at risk for being taxed twice. What’s even more exciting is that any future growth from the $89,000 basis will never be taxed in a Roth IRA! Tax-free growth for life!


If you currently have non-deductible funds in an IRA, you may want to consider speaking with your financial advisor about what you can do to avoid paying more taxes that you have to. However, you should first make sure your financial advisor isn’t giving you conflicted advice. Too often, do I see “advisors” recommending clients NOT to roll the pre-tax into the 401(k) and the basis into the Roth IRA, solely so they can continue managing –and billing on– the client’s IRA! This advice is likely in the advisor’s best interest, not yours!


Note: there are situations when rolling pre-tax money to a 401(k) isn’t the right fit, such as when there are limited investment options, or when expenses are really high in the 401(k). However, such situations are becoming increasingly rare.


If you would like more information regarding how to handle non-deductible basis already in your IRA, take advantage of our free, 90 min consultation. During this meeting, a WJA financial professional will take an in-depth look into where you are today, where you want to be tomorrow, and how you can use strategic financial planning to reach your retirement goals.


Related Articles:

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

What Nick’s Reading | Withdrawing Money During Your Retirement Years in the Most Tax-Efficient Way

What Nick’s Reading | Saving Non-Roth After-Tax Contributions

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

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

Thoughts From Willis | Building Your Financial Planning Team

What Nick’s Reading | Tax Cuts & Jobs Act: The Basics



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. Insurance products and services are offered or sold through individually licensed and appointed agents in various jurisdictions. 

Market Update |The Markets (as of market close April 30, 2018)

May 2, 2018

April was marked by the impending tariff war between the United States and China. Tensions between the world’s two largest economies certainly affected stocks both home and abroad. Escalating strife in Syria posed an additional reason for investors to be concerned. However, surging energy stocks lifted the market as crude oil prices approached $70 per barrel for the first time in almost three years. Talks between North and South Korea also helped ease investor tensions. By the close of April, the dollar reached its highest level since January, while yields on 10-year Treasuries approached 3.0% for the first time since 2014 —signs that the world views U.S. economic growth as on the rise.

Market Update for Market Month April 2018

With all of the upheaval during the month — both positive and negative — it’s no wonder that equities essentially closed April about where they began the month. Each of the benchmark indexes listed here posted meager positive monthly gains over their March closing values. The Global Dow enjoyed the best month, as the only index listed here to post a gain of over 1.0%. The Russell 2000 gained a little less than 1.0%, while the large caps of the Dow and S&P 500 crept up about 0.25%, respectively. The Nasdaq posted the smallest gain, however it leads the year-to-date race by a telling margin…Click here to read the full article.

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