EP 24 – OPEN FORUM – Answering Your Self-Directing Questions
Join Mark and Mat as they answer your difficult Self-Directed retirement plan questions. Mark and Mat dive deep into all of your questions on Self Directing your Roth IRA, 401(k), Traditional IRA, Coverdale, HSA, and more.
Mark Kohler: Welcome, everybody, to this week’s episode of the directed IRA podcast with yours truly, Mark Kohler and Mat Sorensen. I got to introduce us. So it’s Mark Kohler and Mat Sorensen. I don’t care who came first in the Bible, so. Deal with it.
Mat Sorensen: Are we still fighting over that?
Mark Kohler: Yes, we are. My feelings were hurt yesterday, so I just you know,
Mat Sorensen: I thought I thought I threw down the the best source of reference and how you should order that. I mean, I didn’t make that decision. You know, someone someone a little smarter than me decided. Does Mathew come before Mark? I was
Mark Kohler: The Isle of Patmos to the. Anyway, I’ll say this. You know, Mat is a headliner. I’m a headliner. It’s hard to decide sometimes who’s who’s a big deal for the night. So I. I’m just going to I’m going to take it by the the bull by the horns today and in the introduction is just that’s the way it happened. So welcome, everybody. As you can tell, we try to keep this fun, keep it interesting. Both of us are tax lawyers. Now, the firm is twenty years old. We’ve got an amazing team of tax lawyers in our law firm. Our sister accounting firm CPA is doing taxes like crazy. They’re not even coming up for air right now. It’s tax season. They won’t even talk to Mat or I. So then our sister company, of course, that is sponsoring our podcast is Directed IRA Trust Company DirectedIRA.com. Mat is the CEO I’m the CFO. We’ve got some great investors and a whole other team of amazing employees that are working their butts off right now at our Phoenix headquarters, helping clients set up all sorts of cool directed accounts. So, yeah, we hope you’re at the right spot, people.
Mat Sorensen: Yeah. And so and self-directed accounts that’s our thing we love to talk about. And this podcast is dedicated to self-directed questions. Today’s episode is going to be what you want to know. We’ve got a number of questions that have come in. This is open forum. Remember, you can always go to DirectedIRA.com/podcast. There’s an ask a question button. If you get a self-directed question that pops in your head like, I don’t want to go call the law firm and pay by the hour to answer this. And it’s a good question you think other people might want to hear, hey, free legal advice, go put in your question at DirectedIRA.com.
Mark Kohler: All right. I’d like it. And that’s what we’re doing today. It is the Q&A forum. My assistant brought me lunch, but my producer also said you cannot eat while on camera or on the podcast, and I’m dying here, so I might have to just mute and take a bite while we’re here. We’re just so busy. We’re so grateful. Thank you for bringing that people. I just love the American Dream. I just got out of a staff meeting today and talking with our team about the clients calling up from around the country, just thrilled about building wealth and saving a few taxes and just having a place where they can get straight answers. That’s not an arm and a leg and expensive. And so this podcast is one of those venues. We’ve got a weekly newsletter, a second podcast that we do each week called Main Street Business, which is more general in nature on small business,Main street.
Mat Sorensen: 1.4 Million downloads of that podcast. So, yeah, it does get listened to. So don’t feel crazy like, you know, if you’re like I must be the only one listening to a podcast with two tax attorneys. No, there’s others. You are not alone. It’s OK. Don’t feel like a nerd.
Mark Kohler: Yeah, we’re nerds. It’s OK to be a nerd.
Mat Sorensen: It is, it’s cool
Mark Kohler: Nerds rule the world.
Mat Sorensen: I think Ashton Kutcher, Ashton Kutcher at the or that the. He he won some awards, like some Kid’s Choice Award or whatever, and he said being smart is cool. Something like that is good.
Mark Kohler: Ok, OK. Well, as many of you know, we try to get in a few jokes, a little movie quote here and there. We try to keep this fun and real. Do not let that reflect be a reflection of our skillset or our intellect. We are reading and studying anything and everything regarding the self-directing retirement accounts. It’s a crazy world out there with lots and lots of opportunities to invest. I took my health savings account and did another unique investment this week, so maybe we’ll talk about that. It involves. So hey,
Mat Sorensen: Hay, OK.
Mark Kohler: Hay, you know, it’s like trading places.
Mat Sorensen: Hey, ho, hip hop hurray
Mark Kohler: Commodity grain futures. Oh, you know, pork bellies. I’m thinking of trading places with Dan Aykroyd and Eddie Murphy trading commodities. But that’s an 80s throwback there for some of you. But yeah, I bought hay and I’ll explain why later. OK, for those that are in the know when it comes to farming, that is called alfalfa.
Mat Sorensen: Oh, OK. It’s great. I do not know that hay is from alfalfa.
Mark Kohler: Well, now, you know,
Mat Sorensen: I always come to this podcast and learn something.
Mark Kohler: Wheat we turn it can turn into straw and. But hay, what cows eat is alfalfa.
Mat Sorensen: So interesting.
Mark Kohler: Ok. OK. All right. Well, we’ve got a bunch of questions from people off our website off social media in our email inbox. Oh, my gosh. We won’t get to all of them. We will continue to try to do so. And if you feel like you’re a little bit lost, please get to DirectedIRA.com or any of our family websites and purchase the two day summit that we held two weeks ago at one $199, 12 hours of content on location, reporting out in the field, teaching people the self-direct. It was a hit this year.
Mat Sorensen: So it was it was awesome. And the production quality of it, you’ll see, is amazing. I mean, it’s there’s a category for virtual summits at the Oscars. We would win. I think we just win best picture or, you know, one of the big ones we’d win. All right. Well, let me start off. I’ve got a good question that came in from social media, from Hope. I figured let’s just start a question. Let’s start off with a question from Hope
Mark Kohler: That’s just positive in nature right there.
Mat Sorensen: I know. It’s just it’s a Roth IRA question. On top of this, so
Mark Kohler: You how, you know, naming your kid hope is just it’s a good move. You know, it is. You don’t want to name your kid Debbie Downer.
Mat Sorensen: Don’t tell the Debbie’s out there. I apologize for Mark. Yeah, OK. All right. Hope’s question was, should I start a Roth IRA now if next year and on, I’ll be making too much to contribute again? OK, so, yes, I would start a Roth IRA now, I would always start a Roth IRA if you got the money to contribute, definitely start a Roth IRA. But what Hope’s question is getting at is an important thing to know about Roth IRAs. The first thing is you can put six thousand in a year. So we always want to start now because you can only get in six grand a year. So you’ve got to get enough fuel in the tank, so to speak, to get where you want to go at the end of the day and thrown in six grand a year. You have to be disciplined to do that in order to get enough fuel in the tank to make the investments you want to do. So just for that purpose, even if your income is not going to change hope. Yes, get it in because we want six and now and you still have until May 17th to make 2020 contributions. So you could put in twelve thousand right now. You could put in six for 2020 still and six again for 2021 thing for us to.
Mark Kohler: Yes. Yes but. Just a quick side note, if you are 55 or over, you can put seven. That’s right, 50 or over, you can put in an extra thousand. So it’s seven and next. Didn’t she say I might make too much money this year, or next year?
Mat Sorensen: Next year? So that’s the next point. So that’s and that’s the second part I want to say. So the first.
Mark Kohler: So you’re going to take both parts. OK, go ahead. Sorry, I just I mean, I was just going to contribute, but
Mat Sorensen: This is my question. Mean, you take your own questions. All right. All right.
Mark Kohler: Go ahead. You go on ahead.
Mat Sorensen: All right. I claimed this one. Right. So so the first tip is, remember, start now because you want to get in the 2020 contribution, which you only got, you know, less than 10 days now by the time this recording’s live. So you’ve got a short window there and we don’t want to lose the ability to get that six in. The second point that Mark is Noting and which is premised on Hopes question is I’m going to make too much money next year. What do you mean too much money? Is there is there ever such a problem of making too much money? Like whenever you start a question with like, I’m going to make too much money next year. OK, just first, I want you to sit back and think. Things are going good, things are going good for me. I’m making too much money. Here’s my problem, all right. OK, now on the Roth IRA context, if you’re making more than about one hundred and thirty grand single, two hundred married somewhere in there, you will phase out to make Roth IRA contributions through the front door, the regular six thousand bucks you can put in. But for high income earners, you can still do a back door Roth IRA, where you put in six grand to a traditional IRA that’s non-deductible and you convert it to Roth. It’s a two step process. But for high income earners are those that maybe max out their 401k already and they can’t make tradition or say they can’t make regular Roth IRA contributions for the front door. There is the backdoor Roth IRA. Go back and listen to that podcast. We have podcasts on it on directed our podcast and on the Main Street business podcast, just on the back door, Roth IRA strategy, as well as a page on the directory website. Oh, are you done? I will. I will. Oh, my time. I will yield my time now to the gentleman from Idaho.
Mark Kohler: Ok, I, I didn’t know you were talking. OK, so you’re finished, right. Just making sure I ran and got a sandwich.
Mat Sorensen: I was buying time for lunch you said.
Mark Kohler: Oh yeah, yeah, yeah. Well it’s not sitting here. I’m going to pass out. Damn it. OK now. OK now as much as I want to move on from that question, I feel I have a very important tip that I need to share with all of you. That have a concern about maybe making too much money this year or next, sometimes you’re like, I don’t know if I’m going to make more than that. You know, my business is on a upscaling, right. Or scaling up right now and we might make more money. So here would be my recommendation that directly conflicts with Mat Sorensen today. So that’s that’s how he wants to run the show today. A little more adversarial. I would say this in all. All kidding aside, for those of you that think you might make too much money and not sure, just open a traditional IRA, but the money in. And then at the end of the year, Hope you can before December 31st, you just convert it to Roth. That way you’re safe because if you go put the money in a Roth and make too much money unwinding that is a pain in the butt. Wouldn’t you agree? Mat like when in doubt, just do the traditional and then do a conversion at the end of the year.
Mat Sorensen: No, I don’t. I don’t love that what I mean for 2020, you know, so for 2020 we know,
Mark Kohler: 2020 we’re done water under the bridge
Mat Sorensen: 2021 Let’s say you’re not sure you’re going to hit the income level. The hard thing is if I put the money in and traditional. Now what if I want to invest it today. What if I want to go buy Crypto today or I’m going to put it in an investment
Mark Kohler: And it goes up and then you convert to Roth.
Mat Sorensen: Yeah. And then it goes up and then I convert to Roth and now I put in six and my accounts now worth, you know, seven or whatever it is, you know. So now I have to pay.
Mark Kohler: Ok, what happens if? What happens if Hope puts it in Roth today for puts it in Dogecoin or something? It’s it’s twenty thousand come December. But she made too much money to do the wrath in the first place. Yeah, what’s the solution? What happens? I’m actually asking you honestly, I thought the other day I was trying to figure that out.
Mat Sorensen: It’s a good question. We should submit that to the Directed IRA podcast open forum
Mark Kohler: Those losers they’ll know, yeah, those guys know what they’re doing.
Mat Sorensen: Rother is going to be disqualified so that it can go to traditional
Mark Kohler: At the day you contributed.
Mat Sorensen: Yeah. Go back to all the gains. Go back too
Mark Kohler: So now you’re back to my strategy that you might just have to convert. So your opinion is start with the Roth. If you make too much money, it reverts to a traditional contribution and then you can convert at that point. Yeah, OK. All right. I stand corrected. Mat your muted, which I’m not opposed to, but your muted.
Mat Sorensen: I thought you did that. Did you mute me?
Mark Kohler: No, no that was not. Is that my lunch? Are you going to. I can’t have it up here. You bought me. What? She didn’t bring you lunch either. OK, all right. So OK, everybody, if that was a little confusing, let’s take a breath. This is a really good question. Whole brought up. Everybody stop for a minute and just go, boy, that was a whirlwind. Let me say this. Mat Sorensen I from day one. Have always said. Always contribute to your Roth every year. If you have the wherewithal to do it, do it, and if you say, well, I make too much money, then you do the backdoor Roth. Well, I have a day job with a 401k. You can still do a Roth people. There are ways to do this and you’re here at the right place to learn how to do it. So that’s point number one. Now, Hope says, well I make too much money I can’t do it now, she knows I can do the back door. So you’re OK? But the big issue that we’re debating right now is if you do make too much money, sometimes you don’t know that till the end of the year, but you want to start investing now. So instead of doing a traditional and convert to a Roth later, when the account value has gone up, start a Roth now if you do make too much money, the Roth will revert to a traditional IRA contribution and you’re going to have to convert any gain that occurred during that period. That’s really probably the best move am I right?
Mat Sorensen: Yeah, I’m just looking it up now. It doesn’t automatically revert to a traditional. So you actually have to pay a penalty for an excess contribution and then get the funds out. So. Oh,
Mark Kohler: I’ve got a third option. Ok, I got a third one. OK, here’s mine before you go further. I say. Make a traditional contribution and convert to Roth on day two right there. Just do it right there.
Mat Sorensen: So if you think if you think your income is going to be close to the limit.
Mark Kohler: Well, if yeah. If you’re questioning, your income might be too high. Don’t risk it. So hope do a traditional sorry do your Roth right now before May 17th for 2020. Easy Smeasy.
Mat Sorensen: Because you’re uncertain about people.
Mark Kohler: And if you’re unsure about your income this year, do a traditional and on day two do a Roth, then you’re done. Then you don’t have to worry about it at all. Problem solved. OK, and then you were going to give us a quote.
Mat Sorensen: Well, you know, you don’t risk it, but you know what they say, no risk at bisquet.
Mark Kohler: Who says that someone somewhere,
Mat Sorensen: People, people like riding motorcycles over like flaming cars.
Mark Kohler: And I think I think that’s someone at Waffle House. That Exit 92 in South Carolina said that brisket or no biscuit. OK, I’ll take the grits with butter and. Yeah, yeah.
Mat Sorensen: Oh, No risk it no biscuit.
Mark Kohler: That’s my weakness. Like, if there was a Waffle House right nearby, I just blow my lunch date right now when you call me right now. Corey Corey knows Waffle House. He’s from Texas. Oh, yeah. OK. All right. Let’s move on to another question, and I’m going to call a truce. I think we just need to get back to our normal friendly selves.
Mat Sorensen: Ok, let’s be operating a bipartisan nature. Yes.
Mark Kohler: If only our Congress could do that. Yeah, OK. This is from Gary. Gary says, How long does it take before I can start trading using an IRA LLC, assuming we just started the process of changing custody from another company to yours, i.e., I was at Fidelity. Now, Gary. There’s several answers to this question. So can I take first stab, Mr. Sorensen?
Mat Sorensen: Yeah, representative in question, before Gary was asking about crypto, about trading or what trading is he talking about?
Mark Kohler: Yeah. And Gary, you’re only entitled to one question. Don’t be offended by that. We have so many questions. We can’t just make this the Gary show. So I’m sorry, but but I appreciate you sending in questions. OK, so here’s this. This is a good one. OK, so I’m going to assume since Gary’s talking about crypto in another question he submitted, the answer is for any of you that want to start trading in crypto. You could do it within the next 24 to 48 hours that fast. Option one,
Mat Sorensen: Yeah, I don’t see how that’s not that’s not feasible, I’ll just say that that’s not that’s way too fast because you’ve got to set up your account. That takes us 24 hours and you’ve got to get it funded. So if you’re sending money from Fidelity, they’re going to take three to five days to get it here.
Mark Kohler: Ok, no, I apologize. I shouldn’t say once your account is funded, the money’s in there and your Gemini account is being created, which takes about 24 hours. Right.
Mat Sorensen: There’s twice about twenty four hour time frame. Once you submit your ID and you get verified, that’s all you got to do. Everything else set up the account for you. All you got to do is verify who the heck you are and you get access to trade. And that is about a twenty four. Forty eight hours has been the most sometimes on weekends.
Mark Kohler: Yeah. And that’s a fair point. When some people. How long until you trade. Oh twenty four hours from this event. Now you’re talking starting from square one you call Fidelity and go I’m going to sell all my shares, I’m going to move my account and then you call directed, you get on line directed IRA to open your account, then you’ve got to move it, then you get it going. But that’s option one. So for any of you to want to trade crypto, you would set up a crypto account, whether it was a Roth of traditional or Coverdell or whatever it is, at Directed IRA, there’s a webpage just for that. OK, that’s option one option two.
Mat Sorensen: That’s the fast option. Let me see that. Yeah, I would like Gary’s question is how how long until I can do this with the crypto IRA. It’s about a week. If you think if you’re starting from scratch, like you have reacted, you haven’t funded it, you can be trading in about a week. And we’ve had some clients go four days, probably the fastest I’ve seen so far.
Mark Kohler: And on that note, I’m going to say this to everybody. Don’t beat the crap out of our employees, please. They’re working hard and fast. In fact, sugar will add a little bit of honey. A little bit of kindness on the phone is always going to get your account faster. So please.
Mat Sorensen: The thing is, I’ll just say on the processes, we’re fast. Fidelity is not OK. So we’re going to get everything you need done on our end. It’s going to be the delay in getting money over now. Fidelity actually faster than most Fidelity and TD are pretty fast, but there are certain institutions you could be at that might take two weeks to get your money over here.
Mark Kohler: Now, look at this map. What is this that I’m pouring? Can you see that?
Mat Sorensen: Is that that, like, ranch on it? Oh, it’s
Mark Kohler: The Cafe Rio Cafe dressing.
Mat Sorensen: Oh, isn’t it a ranch dressing that they call it their ranch. I don’t know.
Mark Kohler: It’s got cilantro in it and stuff
Mat Sorensen: To the first cilantro ranch.
Mark Kohler: Whatever. OK, know it all. OK, but it’s going to be good here because I’m pouring it on my salad and I cannot wait to take a bite. Now option two in Gary’s. Question, he actually said, can I start trading using an IRA LLC? OK, so option one was fast Gemini account. Now, Gary may want to be doing some crypto trading or some sort of trading that would require an LLC. He doesn’t want to use Gemini platform. He’s got another creative idea going on now that you need an LLC, you’ve got the law firm engaged in the process. And we have lawyers that have created space on our legal team for clients that are in a hurry. And we appreciate if you’re not in a hurry, don’t ask to be put to the front line.
Mat Sorensen: Don’t clog up the emergency room. All right.
Mark Kohler: I got you just a superficial wound. You can wait, right?
Mat Sorensen: Ok, it’s just a mere flesh wound. That’s OK.
Mark Kohler: It’s a flesh wound. That’s all you got. Boy, we even quoted some Holy Grail. This is good. Yeah. OK, so now with the law firm, the lawyers can expedite, the paralegals can expedite. And I think you could have an LLC depending on the state because it has to be registered with the state. We’ve got to get a tax ID number. You’ve got to open a bank account. So you’ve got banking that can slow this down, yada, yada. So not only do you need to open the account and get the money from a fidelity, now you’ve got to have the law firm prepare the LLC, get it over to Directed. And again, we have a very cohesive relationship between the law firm and directed, which you’re not going to find very many places whatsoever. And the two will communicate. We can tell Savanah, at the law firm, to talk to Heidi at directed and and they’ll help move things along. But I would say probably two weeks at least. And that’s assuming you’re in a state where I can get your L.L.C. done quick,
Mat Sorensen: Yeah, let me just give a reality check to On the IRA/LLC. The IRA will see is what we used for Krypto before we started, had a special relationship with Gemini. So, you know, we have an institutional relationship with Gemini. We can set up the accounts for your specific IRA account and you can go trade directly out of your IRA account. Now, if you want to trade on, use another exchange, you want to hold the private keys and use the IRA LLC. Great. That’s what we’ve been doing for years. You, but you’ve got to get the LLC set up, so that’s an additional time block that you don’t have with the crypto IRA. The second problem is the exchanges and the wallets when you’re setting up with an LLC are taking forever. They had been this last six months, the crypto market and every provider that offers Waltin has an exchange, particularly the credible ones. They are hammered with business and they have prioritized these smaller L.L.C. that aren’t a hedge fund trading tens of millions, they’ve they’ve prioritized as low priority. So you’re not getting done quickly. You have heard clients waiting over a month to two months and a lot of other competitors, though, that’s the only structure they have the all clear telling their people two to three months to get this done.
Mat Sorensen: So the IRA will see if you’re willing to trade crypto. Now, just think about trading it in June. OK, it is just not the way to do it. So we got a lot of clients that have just done well. I want to get in on crypto today, but I want to do it a long term. Also with an LLC to both accounts. Do the crypto IRA because they’re there in a hurry. They feel like something’s going to happen in May. The opportunity won’t be there so much in June or whatever. And so that’s. That’s the tough part on it, we’re dealing here every day because we’re doing, you know, we’re spending a lot of accounts, self-direct accounts and crypto accounts right now. And everybody’s watches the crypto market and it fluctuates heavily. And people freak out because they see it dip and they want to buy and they’re waiting for someone to approve their wallet for their LLC.
Mark Kohler: Now, let me add a couple other points. Third option. Some of you may be saying, well, he’s talking about trading in real estate or trading in notes or trading some other asset, if you don’t need to set up a crypto wallet, getting an LLC done and getting it funded from your fidelity to direct it to your LLC so you can start trading vehicles. I talked to a client this morning that’s trading on cars so that LLC, you can have up and go in in a couple of weeks, again, depending on the state where you’re trying to get set up and going. There’s not this wait for a wallet thing that’s Crypto driven, the last option, I would say is some you’re going oh well, I’m talking about trading in the stock market. I want to self-direct, but I’m not sure what I’m going to self-direct yet. But I want to get the account over to you guys. I want to get the L.L.C. formed and I want to start trading a few stocks while I’m waiting in the wings to pull the trigger on a bigger self-directed idea. Very common. Well, and the last this last year, we’ve been able to add a trading brokerage feature. Mat, How long does that take it? How would that process work? Oh, sorry, I’m again.
Mat Sorensen: Yeah, that set up in a day so you can set up the trading account. I mean, for stocks of mutual funds, that’s just added. But that’s a you know, the Gemini trading account is like you log in and go trade the crypto the brokerage account you add on for your account, if you wanna buy stocks, bonds or mutual funds, like we’re adding up the ability to buy those stocks and then you’re going to request what to buy through us. And it’s 80 bucks a year for that. Thirty five bucks a trade for a mutual fund. Thirty five bucks plus three cents per share for stock.
Mark Kohler: Ok, all right. And it’s not three cents per share. No, it’s three cents per share. Three cents per what per share.
Mat Sorensen: Thirty five bucks on three cents per share.
Mark Kohler: Yeah, not three cents a dollar. We’ve had people ask that. Right, OK. Wow. Boy, Hope and Gary, about two great questions that really opened the doors to a lot of Mat your question.
Mat Sorensen: Ok, let’s go to Bill, OK. He says, love the podcast question regarding the solo 401k. If the plan allows for after tax contribution, which are solo 401k does can one hundred percent of the contribution for the year be allocated to this? Or there have to be an employee elective deferral before after-tax contributions can be made. OK, this is a weird question. I don’t know a requirement that you would couldn’t that you could let me say say I don’t say you could make an aftertax, but I have no reason. There’s no reason I could see. On this earth, why you would do that? I don’t get that you would you would do like I don’t know, maybe you’re trying to go all Roth. I don’t know that you would just do 19 five of Roth contributions. Then the rest would all be after tax. Let me say, after tax contributions, though, are not while you can make them, you have to account for them separately. You know, if you’re going to convert them to Roth, which is usually what we would recommend, you’re going to have an extra form on your 1040 showing you did that. So after tax contributions and your Solok aren’t as easy as you may think are Solok allows for it. It’s usually the thing you do after you’ve maxed out any other contributions you can make the easy ones like your 19 five elective deferral, but you still have to have earnings and income to the wages to do the after-tax contribution also. That was a wonky question, I don’t know, look at where you were going with that Bill. I don’t know where he’s going with what he’s trying to do.
Mark Kohler: Yeah. And I didn’t know if using the word weird or wonky is offensive to Bill. Bill, you say that’s a very unique question, Bill, Man you’ve got work on this PC stuff. I know that. Bill, keep listening. I got your back. I’ll try to talk about Mat after.
Mat Sorensen: Ok, what is wanky? That was that means, you know, that means he’s smart. Like, that’s not a good question.
Mark Kohler: Ok, sure. OK, now I’m going to jump over to Michael Ceasar question. And this is are you. This is a politically. A charged question plagued with landmines in front of me, so I’ve got to be careful what I say. OK, I’m going to read the question and then we’ll go from there. I have researched and have found a whole life cash value life insurance policy, I have heard of a strategy that allows rollover of self-directed into life insurance using either investment grade insurance contract IGIC or an ILIT irrevocable life insurance trust. I’m told they are compliant with IRS and involves the IRA purchasing shares of a company and the company has a life insurance policy. Thoughts? OK, now I’m going to make a more policy type comment and Mat can comment on whether this is even legal possible or whatever. Maybe here’s my policy comment. Oh, and I’m going to make someone mad, but I’m just going to say it and I have to just be who I am. David Ramsey is offended and alienated every insurance company, every credit card company on the planet, calling them evil compared to the devil. So that’s OK. I almost feel as strongly about whole life insurance as Dave Ramsey feels about credit cards and debt. There is always some life insurance company that is coming up with some crazy idea. And I will stand by the word crazy trying to get people to divest themselves of their retirement accounts and to also liquidate the retirement accounts so that they can go over fully fund a whole life insurance policy so they can borrow against it tax free and there’s a death benefit and it’s the best thing next to sliced bread. And I’ve heard it. I’ve studied it. I know it. I understand it. I’ve looked at Universal whole life, the to the contract and not over funding. I could go through all the terms. Been there, done that. And I’m still not a believer, and I’ll tell you why life insurance people I have never in my life met someone that actually overfunded a whole life insurance policy 10 years ago or 15 years ago or even seven years ago. And they’re actually using the policy with these tax free loans and even died, let alone in a family member go, oh my gosh, that was the best deal ever. Never seen it. Never heard of it. In fact, I meet, life insurance agents said I had to get out of that racket because I couldn’t sleep at night because 90 percent of the people that do those policies and plans, the policy fails. The only winner is a life insurance agent that got a huge commission that people have drained their retirement accounts. It fails. It’s a nightmare. I have never seen it work. And someone out there said, I’ve seen it work. Great, send me an email, send me the hate mail. I get it. And maybe one out of a thousand. This actually works. Oh, boy, I opened up floodgates of hate mail, But I just I don’t see how you really feel. I know. I’m just so sick of this life insurance salesman now. Is life insurance bad? Nope. Is whole life insurance bad, nope, if you’ve got money coming out of your ears and you’ve bought your rentals and you’ve funded your retirement accounts and your business is strong and you’ve paid down the debt on your home and you’re doing all these right things and you still have money to invest and you want to do some whole life, knock yourself out, but to drain a retirement account. It’s almost criminal, in my opinion. Yeah, Mat, can they even do it?
Mat Sorensen: Can they even do it?
Mark Kohler: Can an IRA own a company that owns life insurance on my life to somehow back door to door to a life insurance policy?
Mat Sorensen: Definitely not. This is not one IRAs can’t own life insurance as an investment anyways. There’s only three things you can’t buy with an IRA, collectibles, life insurance and S-CORP stock. So now plus even that is on your life, but you can’t do that. So, OK, I want a new opinion. Yeah, not fans over here. My guess here’s the hard thing is, is someone’s always selling that policy, right? And so and they know your money’s in an IRA. So the whole life insurance policy, they just they know that’s where your money’s out. So they’ve tried to sell it to your IRA, even though it’s a square peg in a round hole. And that’s not really what fits but. OK, let me go to David’s question. This is a good one. OK, he says, Can contributions to a Roth Solok be withdrawn at any time like contributions to a Roth IRA? Thanks for a great podcast, David.
Mark Kohler: That’s a great question.
Mat Sorensen: It is a great question. It doesn’t have a great answer, though. So Roth IRAs. Remember, when you put money into a Roth IRA, you can take the contribution out without tax or penalty at any time. The earnings in the Roth IRA, so let’s say you put six grand in and now the accounts worth eight a year later and you’re like I need that six grand back, you can take out the six grand. Let the other two stay in there. You can take out a six grand at any time. No tax, no penalty. The extra two thousand of earnings still need to sit in there. And you pay tax and penalties to get those out, though. But you can always take out what you put in from a Roth IRA. The Roth Solok is not the same. There’s a couple of problems with that in the in the 401K context. The first is that you can’t get employee contributions out of a 401K period while you’re still working. So this is even for your solo(k)s, that’s just a that’s a rule employer contributions can come out early, but those are going to be traditional. They’re not going to be your Roth dollars. So you got kind of a clunkiness issue there that 401(k)s have that IRAs don’t. The second is the ordering rules on how you have to pull the money out between contributions and earnings is not like you get to take the contributions out first where you get a take and then you take out earnings second in the Roth IRA in the Solok, there’s a five year earnings rule where you have to clock the time that the earnings that are in there to when they can come out. It’s not the same. Let me just say that, don’t plan on being able to pull out your Roth Solok contributions early this year. The only way you’re getting the Roth Solok contributions out is you hit fifty nine and a half and you’ve had the money in there for five years.
Mark Kohler: Wow, K, how tough. All right.
Mat Sorensen: I told you good question, bad answer,
Mark Kohler: Yeah, OK, it’s that time of the show where I talk about the investment in my Roth actually health savings account. OK, all right. I’ll take my glasses off for this. First, our normal disclaimer, please, everybody. We are not advocating that you flip real estate trade notes buy crypto, buy cows, crypto mine, any sort. We just want you to know what you can do as options for your choice in investing your retirement account. So we just have to be careful, give that little disclaimer and we appreciate your understanding. We’re always excited to hear about new ideas. So some of you that listen to this summit got to actually even see the cows I bought inside my Health Savings Account LLC called the Dutton Kohler Livestock Company so excited about that name reference to Yellowstone and shout out to all those fans out on Yellowstone. So Kevin Costner sure looks good. I’ve got to get a hat. Just like Kevin Costner. I’m making a drive to Jackson Hole in the next week or two just to buy a sweet cowboy hat. I’m telling you, an hour drive, but I’m doing it,
Mat Sorensen: Yeah, I’m gonna do. You do own some cows. So it’s
Mark Kohler: True. Actually, I do not own cows. My health savings account owns cows right now.
Mat Sorensen: Ok, I think I think you still earned a cowboy hat for that.
Mark Kohler: All right. So now here’s to. Yeah, I did. I did just try to help our you know, our listeners, our customers understand the difference between me and my HSA just being a little anal there. OK, so here’s my new investment. So, my rancher that is the custodian of my cows and taking care of the pasture because I cannot do it, that self-dealing prohibited transaction, I can’t go out there and play with my cows over there. I can go out and pet them if they’re asleep, I can tip them over, you know, I can tease them, but I cannot go out and feed my cows. That would be prohibited.
Mat Sorensen: I can’t believe you’ve never been cow-tipping before.
Mark Kohler: Mainiac, maniac. Oh, Tommy boy. OK, so my rancher called me up and he’s like, Mark, are you going to keep these cows through the winter? I said, well, I don’t know. I still can see. I have five moms that just gave birth to five bull calves. They’re called bull calves. I had to think through it because heifers are female calves, bull calves are male calves, soon to be steer calves. When a fateful day comes in the near future and they’re turned into steers, just circle of life. Sad thing. All the guys out there cringed. OK, now. He said, are you going to keep them through the winter because you got to feed your cows through the winter, you there’s no pasture to go out and eat, you know, green grass. So you put them in a pasture or in a barn and you have to feed them hay, which now Mat is called. Really what? OK, you’re on mute, alfalfa, that’s it, alfalfa, so well, for some of you out west, you may know California is in a major drought. Utah is in a drought. Wyoming is in a drought. Parts of Idaho are in a drought. And what that means is alfalfa crops are not as productive. So hay is starting to become very valuable.
Mat Sorensen: To the good old supply and demand supply, right?
Mark Kohler: Yeah. Can you feel it coming?
Mat Sorensen: Yeah, I was an econ major. That was my major
Mark Kohler: Supply and demand buy low sell high key to life. All right. So then he called me up and he goes, I got a buddy. It’s in a town called Haymer. I don’t know where it’s at some little town an hour away. But he goes, I got this buddy with an Haymer. We’re good old friends. He’s willing to sell me 80 tons of hay for a dollar. One hundred and fifty dollars per ton. One hundred and fifty dollars a ton. For those of you that drive down the road and you see these huge hay bales that are like eight feet long and five feet tall and they make corn mazes out of them around Halloween and all that. Those are a ton of haybale. That’s a ton.
Mat Sorensen: Or did you know that? No, I say that a lot. That’s a ton. Yeah.
Mark Kohler: So a ton is one hundred and fifty bucks. And I go, how many tons I get a need for my ten cows. And he goes, you’re going to need about eighteen tons to get them through the winter. So I did the math that’s around two grand or so, and so in my investment in my cows, I need to budget about two grand in my health savings account. I did my contribution for this year and then funded the LLC because I bought the cows for eight grand. And I need to pasturing is going to run me about twelve hundred this summer and then to 2500 for hay in the winter. All right, there we go. Now, folks, the reason why I’m bringing breaking down these basics to this is what you need to do. This is what we talked about in the summit. When you’re ready to invest your IRA, you’ve got to run some financial models. What am I buying? What are the costs holding costs going to be and what am I going to sell it for? And then you do your ROI. What’s my return on investment divided by 12? There’s your annualized ROI and you want to go. How am I doing so anyway? Quickly, I guess I’m wasting time here. Maybe, maybe not. But I took those costs and I said, OK, if I hold the cows to the winter, they’re going to weigh each two to 300 pounds more than I can sell them for more in the spring. I think I’m going to hold them through the winter. Then he said, Do you want to buy the extra hay? And I go, What do you think? and he goes, well I’ll split it with you. So we might go buy another 60 tons of hay. He goes, one hundred and fifty dollars a good price, and I said, hold that thought, I’ll get back to you. So I started texting some of my other rancher friends and I text Lidell, er, the partner in our accounting firm. And I just said, hay, is $150 dollars a good price for a ton. Ladell, text me back and he goes, I’m paying $225 right now. Because you southern Utah is a terrible drought, and then I text one other person, I said one hundred and fifty and she’s like, Oh my gosh, we’re paying 200 a ton. So I said, buy it. And I go. He goes, where do you want to put it? I go, What do you mean where do I got to put it? I can’t just leave it there. He’s like, No, this guy doesn’t. Why don’t you got to come get it? So he goes, Well, we’ll send a semi over there. It usually costs about five dollars a ton for a semi to pick him up and drop it off over here. And we’ll cover it with blue tarps. Some you that drive by farms, see that? And he goes, we’ll cover it with TARP so it doesn’t get wet and mold. And then come December, when all the farmers are desperate for hay probably going to double your money. That’s fine by health savings accounts doing it. There you go. That’s how you that’s how you self-direct people self-direct 101. Isn’t that a fun example?
Mat Sorensen: That is cool. I love that. I mean, I would never have thought you’d buy hay. Yeah. Know, I mean, alfalfa just. Some may call it alfalfa.
Mark Kohler: Some may call it scrumptious, a cow may call it scrumptious, but that’s what I’m doing. OK, next question. You go. While I eat my salad here, I’m going to take my bite off camera and then chew very quietly.
Mat Sorensen: Ok, I had a question come in about inherited accounts. The question is, is do I? If my spouse has passed away, do I need to receive the funds in an inherited account or can I roll them over to myself? This is a social comment post, so I want to break down the difference between doing a spousal rollover and an inherited IRA. So if you receive funds, let’s say you have a spouse and your spouse passes away, you’re the beneficiary on their account. How am I going to receive that?
Mark Kohler: Lots of assumptions there. First of all, are you happily married and your spouse dies. Are you happy or sad? And then I can’t be your spouse could have left the money to a. Saw a person, you know, Mat Bridges of Madison County well. You never know, they could have left.
Mat Sorensen: I don’t know that reference.
Mark Kohler: Oh, really? All right. OK. Anyway, keep going, because we’re going to just assume that your spouse loved you enough to make you the beneficiary of the IRA. All right.
Mat Sorensen: Ok, because if they didn’t, they would have had to like, you know, you would have had to sign a disclaimer saying it was OK for them to leave someone else anyway. So it’s kind of hard not to leave your spouse unless you got a prenup or you they sign off on you leaving with someone else. But nonetheless, this is the common scenario, despite, you know, Mark,
Mark Kohler: I’ve got a question for you after this.
Mat Sorensen: Ok, all right. So your spouse passes away. You’re dealing with, you know, the assets. A lot of people think, oh, I need to get inherited IRA, then I don’t want to distribute the account. And the surviving spouse thinks I need to do an inherited IRA. No, do not do an inherited IRA. Spouses can do what’s called a spousal rollover if your spouse passed away. You can rollover their account. Let’s say they had a Roth IRA, you can rollover their account from their Roth IRA into your Roth IRA, or you can set up a new Roth IRA and rollover your spouse’s account into a Roth IRA. Now, it’s just a Roth IRA in your name to be the same if it’s a traditional IRA SEP or whatever, so you can receive the account from your deceased spouse into your own account, in your own name. That now goes based on your age. You can combine it with your other accounts and assets. It’s so much easier and simpler. An inherited IRA, if you take the inherited IRA over as a spouse, you now have 10 years of when you use that account, that account has to be closed down and fully distributed in 10 years on inherited IRAs now. So now inherited IRAs are great options for kids or other non spouse beneficiaries. But if you’re a spouse, we want you. Generally, the general rule would be to receive that those assets into an IRA in your name using a spousal rollover. That’s it.
Mark Kohler: I like it. Now, let me I have to ask a question. Are the rules for designating a beneficiary different for a retirement account than a life insurance policy? Because I thought I could take out a life insurance policy and I could name not my spouse as a beneficiary, some. Floozie or whatever, right, and then I don’t know what that word means, but my wife would call it that. So but if I didn’t but if I had made my spouse on my life insurance policy, I don’t have to get a waiver from her.
Mat Sorensen: I don’t know, I mean, I don’t know I know in retirement accounts that you do have to have a spousal waiver and every retirement account provider, you know, from Fidelity, you know, everyone went in the beneficiary section of when you designated beneficiary. It says if you’re married and listing a spouse and listing someone else who is not your spouse is the beneficiary. You have to have a spousal waiver. Now, this is in the law for retirement accounts in Arissa for 401Ks. And it is generally the same rule, always applied on IRAs as well. So we require it here to have a spousal waiver. If you’re not going to list your spouse, everyone else does too. And those have to be notarized as well because you need to make sure that signatures valid of the spouse who said, I know I’m not getting I won’t be inheriting this account, OK? All right, let me say this, too, there are laws in a lot of states when you’re married, unless you have a prenuptial or post-nuptial agreement that says your surviving spouse is entitled to a certain portion of your estate, like 50 percent automatically. If you know so so you’ve got to be careful on those things, and obviously if those getting married, you know, make sure you’re thinking through those issues.
Mark Kohler: I’ve got a question from Nathan. I apologize a lot of times. You know what? I think this is fair for many of our podcasts in years past. A lot I’ve gotten some complaints once around going, can you talk about Self-directing in anything other than real estate? I mean, that really consumes so many of our podcasts, people buying rentals, flipping homes, doing wholesaling, rehabs. It was just self-directing. A lot of people thought you only self-direct it for real estate. Now we’re bringing up cryptocurrency constantly. And I’ve gotten a couple of thoughts. Can you quit talking about crypto? And I’m like, you know, whatever the flavor of the month
Mat Sorensen: Is a real estate question then? Yeah. I mean, we’re still doing more real estate accounts, but crypto is hot and there’s it does everyone’s still learning it. The real estate stuff you could have within all of our stuff before read our books. And you know that we’ve been teaching that for years.
Mark Kohler: So this is a question regarding crypto. That was my disclaimer. This is from Nathan. He said, I’ve been doing crypto mining for his question is over about three paragraphs are just going to truncate it here, summarize it. And so he said, I built my mining rigs. I’m drawing an income from some of this mining. I’m having a good time making money, blah, blah, blah. And he said essentially his question is. How can I move my rigs into my IRA? Oh, I hate to say, Nathan, it’s not easy. In fact, moving your rig is impossible. But there’s a back door, there’s a loop here. We if you know what you’re doing with mining and you’re making money now, people, everybody, whether you like crypto mining or not, let’s step back for a minute. This is the theme of Self-directing. I just got chills because I want to say this. This is so exciting. If you’re good at something, figure out a way to do it in your retirement account. Yeah, that’s it. That’s the secret to success right there.
Mat Sorensen: Yeah, that’s our real estate clients that are like they bought rentals, they flip houses, their private money lenders, and they’re like that’s how they make money day to day. And then they’re like, wait, even I can do this with my retirement account. I don’t have to buy a crappy mutual fund.
Mark Kohler: Yeah, yeah, yeah, well,
Mat Sorensen: So invest in what you know, yeah,
Mark Kohler: And so, Nathan, you’re on to it. You’re saying, hey. I figured I’ve cracked the code, I’ve figured it out, I know how to make money mining. Now I want to move my rig into my retirement account. That’s kind of like saying I have this rental property, this cash flowing crazy. Can I move the rental property into my IRA? Same type of concept? The answer’s no, but it doesn’t mean you give up your onto something. This is a good idea, Nathan. And for all of you out there with cash flowing rental properties. What we would do is say your next rig, your next rental, take some profits from your current rig, Nathan, and start buying the pieces for a new rig now for you to assemble it and get it going. We have some questions of sweat equity and how engaged in the process you are. I would prefer that you would hire one of your buddies because if your crypto mining, you have a buddy that’s mining, too. You didn’t learn this in a vacuum on your own. So pay one of your friends a hundred bucks and say, hey, can you please put together my crypto rig for me? I’ll pay one hundred dollars. Here’s the parts I’ve ordered. And you’ve set up your LLC and you’re doing your thing. So try to make sure you get someone involved in that sweat equity portion. But don’t give up on the concept, Nathan. And for those of you out there that know how to buy a rental, that cash flows turn your pivot, which is a new word in business these days. But pivot, turn your perception, your angle and look out the window at doing this with a retirement account. I can guarantee you five to 10 years from now or sooner, you’ll be so happy you did to create that tax free for your tax-deferred structure. That’s my answer.
Mat Sorensen: Those are the people who are most successful with their Self-directed IRA people who have already realized this is what I’m good at. And people have the really big accounts over here. The stuff their IRA invests into is the stuff they do personally. It’s in the industry that they’re in personally. It’s it’s they’re just, you know, they’ve just figured out. All right. Here’s the type of stuff I do in my IRA in real estate. Here’s what I’m doing. Person, real estate, their knowledge base and opportunity and deal flow and an edge they have on everyone else is what gives them big returns in their IRA. Same thing here with crypto. I mean, it’s the same thing. A great example. OK, Sam, I got how many more questions do you got?
Mat Sorensen: Why don’t you take one? You take one. I’ll take one.
Mat Sorensen: All right. OK, Sam had a question. Another Solok question a lot of Solok, questions coming in. He says question can you still deduct dollar for dollar the funds you place in a Solok for the twenty twenty calendar year. Oh from.
Mark Kohler: Now, hold it before you finish. I just want to say this, we answered this question on the Main Street business podcast we recorded yesterday, so I told Sam to go listen to yesterday’s podcast. So as soon as you started to say it. Now, if you want to quickly reply to it for our other listeners, that may have missed that. But just FYI, Sam,
Mat Sorensen: I do remember this now. OK, so can you still deduct all the funds you place in a solo 401K, 2020 calendar year from your income if your business operated a net loss in 2020. OK, now remember, you can still make twenty 20 employer contributions to a Solok. Even if you haven’t set up the Solok yet, you could set it up now until your company tax return deadline and make employer contributions. You’ll be able to make employee. You would have had to do that by December 31st. That’s one point. But the question about can I make a Solok contribution if my business is at a loss? No, you cannot. If you’re a sole proprietorship and you’re going on Schedule C because you contribute there based on net income. So if you had a loss in 2020. Sam in your soul propp No, but if you’re a S corporation, your contributions are not based on the net income of your S CORP. It’s based on your wages. OK, so, yes, effectively, you could still contribute because it’s based off your S CORP W2, it’s not based off your net profit or loss. So in the S CORP, you could contribute, get the deductions in 2020, giving you a further net loss and that’s it. So it depends. OK, now we get a little more color to that on the Main Street business podcast. Just trying to make over that. It was a good episode last week too.
Mark Kohler: In fact, I’d say we took almost five to 10 minutes on that question. So any anybody that’s not aware of it. Please get over to MainStreetBusiness.Com and the other podcast. All right. I’d like Chet’s question because it’s gosh darn hard.
Mat Sorensen: Yeah, it’s I know this one I was going to I can get this if you want.
Mark Kohler: I mean, yeah, I know you could hit it. It’s hard for me at Mat you since you wrote the book on this. You can talk to it more quickly and probably distinctly. But let me take part one. Can I do that? OK, there’s three parts to Chet’s question said. Thanks, guys. Enjoy the show there. And you said No. One, our funds in an inherited IRA counted in the pro-rata traditional IRA, aggregate calculation when converting to Roth IRA. All right. Now, let me put that in English for everybody. Let’s say we go back to Hope, our first question on the show and Hope says, I want to contribute to Roth, but I have too much money. And we told her, do the back door, Roth. And but we skipped over an important piece there if hope has traditional IRA money sitting around somewhere. Before she can do the back door Roth, she’s got to convert that other traditional money to Roth. Now, that may not be a problem for her, she’s like, I’ve been wanting to convert it to Roth anyway, so let’s do it and let’s do it all at once. Let’s rip off the Band-Aid, get it done with. But. I have a YouTube video that’s got a lot of traction on chunking and when to convert to a Roth and doing it in stages because converting too much wrath in one year might kick you into a higher tax bracket. So you kind of want to find that sweet spot. All right. So we brushed over that when we were talking about Hope’s question.
Mat Sorensen: Yeah, Jennifer didn’t have a traditional IRA. She gets to skip that, don’t worry. Or if she’s got traditional 401k dollars, she gets to skip that.
Mark Kohler: Yeah. So one method there Hope and anybody listening. She could roll over her traditional IRA money into a 401k in a shelter from this requirement. And interestingly enough, Chet asked, I’ve got inherited IRA, so a loved one of his died and it wasn’t his wife or else he would have rolled it over into his current IRA because he has that spouse roll over that Mat talked about. And I’m assuming.
Mat Sorensen: Man you’re bringing the show all together,
Mark Kohler: As in this court has come together. And that’s why I want to do part one. Chet, I’m also assuming is male because I’ve never met a girl named Chet, so I’m hoping that I’m kind of OK there. So Chet’s not his wife didn’t die. It was probably a Grandma or a parent or a grandpa that said, I’m going to leave you an IRA now that inherited IRA. It could be Roth or it could be traditional. Now, since he’s asking this question, we have to assume this is called deductive reasoning, that it is a traditional IRA, or he would be asking this because it sounds like he wants to do a Roth conversion and he’s saying, hey, I got this traditional IRA over here. Do I have to convert that to Roth first, like you were talking about with Hope? Do what I have to do that or could I roll it into a 401k or how do I deal with that if I want to convert to Roth? And he said pro-rata traditional IRA aggregate calculation. I think that’s a little too much. verbiage there Chet your overcomplicating it. The question is,
Mat Sorensen: Do I have to.
Mark Kohler: Yeah. Yeah. Do I have to. Do I have to convert that to Roth at the same time or not. Here’s the easy answer. No, in fact you can’t. An inherited IRA is something you can’t convert to a Roth. You’re stuck traditional and it’s over, so you don’t even have to include it in the calculation. You also cannot roll it into a traditional 401k because it’s like a spotted white leopard now. And that’s what it’s going to stay. You can’t change the character of it, so don’t worry about it. It’s outside the box. You’re good did I answer that well enough. Kind of brought together some of the show.
Mat Sorensen: Yeah, I love that. I was I love the answer too I was just going to say I concur, OK, I inherited IRAs. You can’t convert anyway, so I don’t even get into the the I don’t even get into the conversation now.
Mark Kohler: I think you folks are going to like two and three and they’re tricky. So Mat I, I may comment but you go for it but yeah. Take it to the hoop.
Mat Sorensen: Ok, can you talk a little bit about the mega back door. Back door IRA and when the $58K or $64K limit does not apply. Now I presume you’re talking about the Roth backdoor 401k. OK, because the IRA, you’re getting six or seven, you know, if you’re 50 or over a year and that’s it.
Mark Kohler: Now Mat stop. Put it in English for everybody else. Say this is what Chet’s asking. There’s this term called. Can I do that? I’ll just say that fast. Yeah. Go for everybody. There’s this thing called a mega Roth and it’s out there on the Web. We’ve got comments. We’ve got articles on it and videos, too. But some people are out there going, you need to do a mega Roth. You could do up to $58k or $64k to the and then kind of go through this mega Roth concept and everybody’s like, oh, I want to get on that bandwagon, I want to get a ticket to that train choo choo get me on that money train. So that’s what Chet’s asking about. How do I get this mega back door IRA Roth going and then Mat go ahead, put him. Put it in. I just want to build context.
Mat Sorensen: Yeah. Yeah. OK, so you’re going to need a 401k and most people doing this are going to be using a solo 401k.
Mark Kohler: Can’t do with an IRA,
Mat Sorensen: You can’t do with an IRA. OK, you’re getting seven in the year Max and that’s assuming you’re over fifty everyone else. We’re doing six. OK, so if I want to do this 58K. It’s actually a mega back door Roth 401k to be specific. Now how do I get fifty eight K sixty four. If you’re over fifty, how do I get those maximum amounts in to a 401k. Because that’s the maximum contribution you can put into a Solok. Nineteen five, the employee contribution can be Roth from the beginning. OK, but all the rest, the other you know what does that thirty eight, five or whatever that is all traditional contributions made by the employer typically. Now you can convert that immediately to Roth. Boom. There you go. You’ve got. 58K Roth dollars in a 401k per year.
Mark Kohler: And if you buy a company one hundred percent, you
Mat Sorensen: That’s easy. Yeah, yeah. And not to take about a W-2, if you’re an S-Corp, be probably do an S-Corp for those who would be doing this, had this type of income. You know, you’re going to have about a W-2, about $140,000 to pull that off. OK, now the second way to get there. Is to do the 19 five and Roth and the other thirty eight five or Mat, three nine five, whatever it is, thirty eight five, I think to get to the to the total fifty eight thousand. Now. The other thirty eight five you could do is after tax contributions. It’s not a match. It’s not the employer contribution of twenty five percent of your wages. It’s more employee contributions made after tax. So let’s say you’re like Mat. I only took a W-2 for one hundred grand or I only want to do a W-2 for 80. OK, and you’re wanting to get this 58K in, it’s possible to then instead do thirty eight five here the difference? I haven’t done the math here, but you know what I’m talking about to get up to the 50. OK, ok. OK, ok. I was hoping my handy dandy, you know, cohosts, CPA could confirm. Yes. Thank you. All right. So you do that as an after tax contribution and then convert it to Roth and you don’t get a deduction because it’s after tax, but you get you don’t pay tax either when you convert it. So it just is like you pretty much did. $58k in Roth from the beginning. Now on a Solok, you can do this in our Solok has allows for after tax contributions. Now it’s a little it takes some work. I just want to say when a lot of clients ask a lot of these strategies, I think sometimes when they go do it, they’re like, oh, how come I have to do it this way? Well, you’re using a loophole. You’re like you’re stretching the tax code in your favor, you got to you got to like, actually, like tie the knots and walk through him. Like the the loophole is not like the easy button that took that to that six thousand in your Roth. OK, that’s 19 five. That’s the easy part. So just know there’s some extra steps, but there is a way. Absolutely. To get fifty eight kind of Roth dollars per year.
Mark Kohler: Now, if I may say two things, one. You could do the mega back Roth at your day job. The mega backdoor Roth, 401k people you can because you’re not relying on your employer to match the rest up to 58, you’re just doing first.
Mat Sorensen: Yeah, that’s the first clients I’ve seen do this. And frankly, that’s who the strategy was created for a lot of people in the Solok space that came around to it. And I’m like, big deal. You’ve always been able to do this because just convert your employer contribution to Roth on day two and it’s really only the really high income people really willing to go this far, 60 grand basically in Rotha year, you might be one hundred forty grand anyways. So I’ve never I’ve always been like, OK, we’ve always dealt with this. Now this strategy came about because the IRS gave a ruling about four or five years ago on can after tax contributions in a 401k be converted to Roth. And they said yes. And those people, Mark, mentioned the people with their day job, you’re a high income earner, you know, you’ve got the cash and ability you want to be able to because not everyone can throw 60 grand into a retirement account every year. Yeah, I get that. And and if you’re, like, not there yet, don’t worry about it. This is a later thing. Yeah. And that’s where I first came upon it was actually oil and gas workers, these clients of mine that self-direct their their Roth IRAs. But then in there, for one case on their day job, they were doing this because they were making like two hundred grand a year almost. And they were they were like, we don’t need this money. We can live in like Alaska on like, you know, and company approved housing. So they just they’re throwing it in to a Roth. I thought it was really cool.
Mark Kohler: Now here’s my second point. For those that do have a solo 401K. Correct me if I’m wrong, Mat, you’re actually better off to do the after tax employee contribution and don’t rely on your company to do the remaining 25%, and the reason is two words self-employment tax, self-employment is hyphenated people, one word. So self-employment tax is see if you have an S corp, you’re trying to take the lowest possible salary. That’s the strategy. So you’re going to take what’s called reasonable comp, take the lowest possible salary on what the IRS is going to get, let you get away with. And that’s what you’ve been teaching for 20 years. And we feel very confident on a matrix that helps you get there. And then whatever’s left you do you’re 19, five and a 25% company match on your total salary. That’s what we’ve been teaching for years. And tell this little backdoor Roth 401K came around and then we said, oh, well, I could take more salary and do the company match to get to the fifty eight. But that sucks because you’ve got to take way too much in self-employment tax. So we really didn’t, we dismissed the mega Back-Door Roth because of that tax issue. But then we learned about this after-tax employee contribution, which doesn’t require you to take that massive salary to get there. Theoretically, you’re only going to need a salary of about. 80, because you’ve got to take your salary minus your 15. For FICA, so you’re probably going to be around that, so that’s that’s the beauty of this. So little more technical for some of you out there.
Mat Sorensen: Yeah, yeah, absolutely right.
Mark Kohler: And part three.
Mat Sorensen: All right, Chet, man, he went for three. These were also not easy ones.
Mark Kohler: No good. They’re good ones.
Mat Sorensen: Yeah. Chet’s like an expert. Or maybe he’s a CPA or tax lawyer. I don’t know. Do you know if Roth IRAs can borrow money based on securities, backline of credit or if they need providers of such a thing? I know it’s available for regular money, but what about retirement money? All right. Theoretically, yes, a Roth IRA could borrow money based on its assets and or even have a line of credit for such kind of like, let’s say, a margin trading account, but. We don’t see that for two reasons, one is most margin accounts or lines of credit, even if there’s an asset backing it, they’re going to make someone sign a guarantee. If you guarantee that for your IRA that you’ve caused what’s called an extension of credit privative transaction. So that ain’t going to work. The second problem is when you leveraged purchasing power, let’s say, a Roth IRA brokerage account. To go by, you know, let’s say you’ve got 50 grand of stock already in your Roth IRA. I want a margin account. No, they’ll let me borrow the whole thing to buy another 50 grand so I could buy one hundred thousand of assets and I’ll have fifty thousand in debt. But I think the market’s going to go up, so I’m going to make it all up. I’ll be fine. Well, you’re leveraging the purchasing power of your Roth with debt. You’re going to it’s going to cost and this is for traditional too causes, a tax called UDFI. We’ve got a podcast episode on that to explain how that works. When you leverage purchasing power of your retirement account with debt, whether it’s a mortgage on a property, there’s a there’s little tax on it called UDFI chapter in my book. We cover it in the summit at length and gave examples. So just make sure you’re aware of that. So theoretically, it’s possible practically no one does it. The banks don’t do it because they know you have to sign a personal guarantee and they know that violates the rules, but they don’t want to lend you the money unless you do. So I just don’t see it. We definitely see loans to IRAs buying real estate and banks that are loaning because they’re like we’re buying real property. Like this is a flat asset, that hard asset that we know the value of. It’s not the stock market that we lend on that goes up and down and is super volatile. Real estate’s a little more traditional for banks to lend on, of course. And so they’ll loan on those what’s called nonrecourse. We are not guaranteeing the debt. There’s no personal guarantee required. They’re just loaning to the IRA. And if you default, they’re going to foreclose and just take the property back.
Mark Kohler: So, OK, well, I heard from producer. This is our longest show we’ve ever recorded. It’s an hour and 20 minutes, I don’t know, we got carried away.
Mat Sorensen: I’ve enjoyed it. I did. You know, Mark and I, you know, we spent years billing by the hour, so. Can you blame us? Yeah, I mean,
Mark Kohler: No one else talks to us at home, so we just come to work, you people out there in podcast land you’re the only one to listen to us, our kids won’t.
Mat Sorensen: And really, I don’t have anything important or interesting to say or insightful outside of retirement accounts. Yeah, I’m just, you know, I’m just average out there on everything else.
Mark Kohler: It is kind of funny when Mat and I go to lunch, like, how’s your how’s your relationship? How’s your kids doing anything fun lately. OK, well let’s talk about IRAs people over here. Our lunch, they’re like, man, those guys are boring. Well, anyway, that’s us. Well, we love you guys. Thank you so much, everyone, for listening. And we sure appreciate it. This is a fun time for us. So sorry we went a little long. Hopefully there is a golden nugget or two in there for you. Mat take us out. Any final words for our listeners? Yeah.
Mat Sorensen: If you made it an hour and 20 minutes on this podcast, five commutes two tax attorneys. Talk about retirement accounts. I think you like the show. Give us a five-star review already. OK, or like us or whatever it is subscribe, it just helps other people find the show. And please, if you’re thinking, why don’t you guys cover this? I want you guys to cover this. Go throw it in the podcast questions. Go to DirectedIRA.com/podcast. We truly want to cover what you want and that’s what we do on open forum. So throw in your questions there. Like David, Chet, Gary, you know, all your other fellow listeners that are thrown in their questions. We look forward to seeing you next week. We’ll be back with another amazing episode. Don’t forget the Self-directed IRA summit recording is up and available. You’ll be able to get that at SDIRAHandbook.com. That’s for Self-direct SDIRAHandbook.com Or SDIRASummit.com. Thanks, everyone.