EP 25 – Extension Deadlines: IRA & 401k Strategies

Extension dates in ANY year bring with them other important deadlines regarding IRA, Roth, HSA, and ESA contributions. Mat and Mark break down the #s and the strategies to consider when facing these regular deadlines.
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Mat Sorensen: Welcome, everyone, to the directed IRA podcast with Mat Sorensen and Mark Kohler. We’re excited to be coming to you four days before the IRA contribution deadline for 2020, pretty special day here at Directed IRA.

Mark Kohler: Yes. Now, for those of you that are like, oh, I shouldn’t listen to this podcast, it’s after May 17. No, no, no, no, no. This is an evergreen podcast, because whether it’s April 15th, May 17th, March 15th, or we’re down the road in September, October 15th, all this extension deadline crap can get confusing on what deadlines allow you last minute procrastinator itis options so that

Mat Sorensen: You know you’re going to be doing the same thing next year. You’re gonna be ahh crap what’s the deadline and the next year and what can I get in? We can use this account yet. Or that one. What one does the extension count for which ones does it not? So we’re going to break it down. There’s a little nuance for 2020 with the May 17th as opposed to April 15th, but everything else the same. And so hopefully this will help you get a good grasp of what ones you’ve got to remember each year, because a good person using a retirement account is contributing every year and if you can afford it, contributing the max. And so these deadlines are critical and also figuring out how you can maximize them, too, are going to talk about that.

Mark Kohler: Yeah. And again, make sure this is even broader. Don’t forget about the March 15th deadlines with S-Corps and LLCs that plays into it two people. And and I’m going to throw this out as well. I just had a phone call Mat two hours ago with a brother in law. We all have one. I think most people do. Anyway, he’s calling

Mat Sorensen: If you want one. I got an extra one

Mark Kohler: For the free advice brother in law and I can tease him. He knows I’m getting a deal from him on his business. That’s all I’m going to leave it because I’ve got three or four brother in law. So I’m just I don’t want to call not too much here anyway. I was saying, hey, if I put money into a Roth, is it really locked down till I’m 59 1/2. And I said no, the contributions can still come out for anything. So let’s get the money in there and some people freak out. Well I might need it later. Throw it in, get it going. So yeah. Part of this conversation.

Mat Sorensen: Yeah. That’s the cool thing on the Roth IRAs is grab those contributions out whenever you want, not traditional accounts. Yes. You’ve got to pay the piper to get them out because the IRS gave you a tax deduction to put it in. So they’re going to hit you a 10% penalty. So OK with that your tip, that was your tip or,

Mark Kohler: No, no, I’ve got a new tip here.

Mat Sorensen: Oh, that was just I thought that little the brother in law was your tip.

Mark Kohler: No, as that I’m OK. Adlib, that was Adlib.

Mat Sorensen: Oh, gosh, you’re so good. I’m no,

Mark Kohler: I thought by now, you know my adlibbing, but that’s OK. I have a tip normally on the Main Street business podcast with which some of you have not gotten over to the Main Street business podcast. We encourage you to do so. It’s more broad, again, in the sense that we want to talk about small business in general, tax legal growth strategies. Yesterday, we talked about the emotional support animal and are they a write-off and what do you do as a landlord if someone shows up with these animals? Really, really interesting show. A little different from our normal format. We had a guest. It was. But I would encourage all of you to get over to Main Street Business podcast on that show. We do a little tax, a legal tip, something we normally don’t do here. We just dive into our topic. So I thought Mat today you need a tip. So I’ve got a new book. I’m just embracing parenthood because any of you parents out there, you pretty much are just shooting for not screwing up your kids. I mean, that’s right. That’s usually the bar. Once they’re teenagers, you’re like I give up. Obviously I screwed up because any of you with a teenager. You experience that and you go, whatever I did the first 15 years of life obviously was not helpful. I’ve got this hellion and they turned 20 and they’re sleeping on the couch and you’re like, what the hell did I do? So I have a new book. It’s titled Right Here. For those that are on YouTube, you can see this, How to Traumatize Your Children. Seven proven methods to help you screw up your kids deliberately and with skill. And I thought, yeah, literally, this is the book. It is so, so good. I thought, hey, if I don’t screw up, I might as well take pride in that. So, OK, so I’m going to give you just I mean, there’s a

Mat Sorensen: Tip in here

Mark Kohler: There’s five tips

Mat Sorensen: Book recommendation on how to screw up your kids if anyone and anyone can give this tip. You know just kidding.

Mark Kohler: Thank you. Thank you. Boy, kick a guy when he’s down. All right. It’s college acceptance time right now, so. Yeah, yeah. You know, if you’re looking in the mail, did my kid really get in anywhere? We going to the junior college. OK, all right. So here’s tip number one. Perfection is the goal setting up your child for failure? OK, there is no such thing as good enough. It’s only perfection. So teach them early in life. OK, number two, love is for winners, your child and his achievements. If your child believes you will love them no matter what, even if he’s a failure, you’re doing them wrong. Teach your child that he has intrinsic worth, that he does not have intrinsic worth unless he succeeds. OK, that’s a good one. No limit. Number three, no limits, no boundaries. This is a whole chapter. I’m just giving you the title of chapter. I mean, you’ve got to you’ve got to really dive into this thing. You got to know no limits, no boundaries. Discipline is for mean evil parents. Not to mention that discipline is the least fun part of it. So you need to embrace no limits and no boundaries. The indulgent parent lets the child be in charge. OK, no, number four never hold your child accountable if it is never your child’s fault. When your child attempts to blame someone else for a problem, encourage this resourcefulness. Where are you loving these? You’re not.

Mat Sorensen: And I’m giving some laughs. I’m, I’m. I’m giving some laughs

Mark Kohler: I think these are great. OK, number five, which I think is a winner. And this relates to the Roth IRA, because we’re going to we’re going to talk about the deadline here for putting money into your kids Roth IRA.

Mat Sorensen: You’re bringing it back.

Mark Kohler: Ok, it’s it’s a loose. It’s OK.

Mat Sorensen: And I feel like you’re a comedian on stage trying to transition from like.

Mark Kohler: I’m the opening act.

Mat Sorensen: Yeah, you’re like it’s going to fail in the transition here.

Mark Kohler: Will you just enjoy a number of these lists? OK. All right. OK. OK, number five buy your child’s love. Children are becoming consumers at younger and younger ages thanks to clever advertising campaigns that are targeted, targeted directly at your offspring. No longer is that the parent’s job to introduce kids to products, materialism, embrace it in their stages of indulgence. I love it. Nine stages don’t. And number nine is. Don’t ask your child to move out at any age. Send her money whenever she requests it. All right. And get about getting your kids a Roth IRA. It takes skill, you just got to do it and embrace the fact you’re going to turn them into a trust baby someday and they’re going to be completely useless citizens in America, contributing to society. So just that’s what we’re trying to do here.

Mat Sorensen: You know, if you’re going to have a little trust fund babies, you might as well give them a tax free account like a Roth IRA. And it was an efficient way. Yeah. I mean, why not

Mark Kohler: Do it with skill. What do you want me to send you a copy?

Mat Sorensen: I think I just got the highlights. I’m good.

Mark Kohler: I’ll get. We’ll go next week. I’ll give you more. There’s a whole chapter on promoting sibling rivalry. Oh, OK. While parents play a key role in killing their children’s self-esteem. Siblings can also be enlisted in the effort. All right. And on the table here in front of the camera, producers not happy. All right. OK, so let’s get on to the boring topic. Mat Sorensen.

Mat Sorensen: You know, just like any good relationship, there’s like the fun dad. And then there’s the mom who gets everything done, you know, that’s

Mark Kohler: Someone’s got to be the adult here.

Mat Sorensen: Yeah. Someone’s got to do it so well.

Mark Kohler: Ok, I

Mat Sorensen: Know you guys you guys come for the IRA tips and you just get some Mark Kohler Comedy Hour as we get into the topics. And that’s that’s what makes this digestible. All right. Well, let’s start hitting the deadlines and what you need to know by April 15th of each year, which for 2020, 2020 contributions, which we’re doing now, is a special deadline of May 17th, 2021. So if you want to make 2020 contributions for this year, you’ve got until May 17th, 2021. Typically each year you get April 15th. We want to categorize the ones you got to worry about because it’s not all of them. Some of them, you get different dates. We want to hit the deadlines you need to know for May 17th. All right, let’s start rattling,

Mark Kohler: No, I’m going to say this, too, we’ve got the 401K and the SEP. Yeah, we’re going to reserve those for a little later because we’ve got a March 15th deadline every year, which wasn’t moved this year. So we’ll come back to the SEP and 401k. But Mat, why don’t you start with your top favorite?

Mat Sorensen: All right. OK, so let’s hit the common ones that you need to do April 15th, typically each year, again, March 17th for for this year. Right now, IRA, traditional IRA.

Mark Kohler: You said you said March 15th. May 17th.

Mat Sorensen: May 17th.

Mark Kohler: Yeah. April 15th. Every year.

Mat Sorensen: Yeah. April 15th typically. Which again, you get to May 17th this year because of COVID. So. All right. So we’ve got the Traditional IRA, the Roth IRA, the health savings account, the Coverdell Education Savings Account. These are all deadlines typically on April 15th of every year for the prior year contribution. Now, one thing that’s important to note is a lot of people like to double up contributions when they make them. So right now, if you didn’t make a 2020 contribution, you have until May 17th this year. To make your 2020 contribution to any one of those accounts and you can make your 2021 contribution because we’re in 2021 so you can double up contributions to any of those accounts I just rattled off.

Mark Kohler: All right. And we’ve got another nuance we’ll come back to in a moment, and that is the step for the back door Roth. Some you’re saying, can I still do the back door Roth? Yes, I may add that to the list if I could, because it is kind of unique. So we’ll come back to that. Here’s something I think Mat that should be said right from the start. So if we’ve got traditional IRA, Roth IRA, HSA, ESA, and the backdoor Roth, so there’s five. Those are all typical April 15th deadlines, someone two days ago, I was on a consult with a client and they said I already filed my tax return, my 1040, because one of my kids needed to get their FASFA form in for college applications and student aid. Obviously, they were filing the program of, you know, screwing up their kids, making them go into student debt further. That’s a chapter in here, too. So anyway, they have filed their tax return. Some of these it doesn’t matter if you already filed, for example, a Roth, Roth is not a deduction on your tax return. So if you already filed your 1040, maybe in January, February or March because you were in a hurry, you can still do the Roth and you could do the traditional IRA, the backdoor. I’m going to say the back door Roth IRA. So let me start that. You do the Roth IRA, the back door Roth and the education savings account because you don’t get a deduction in those three scenarios. Roth, a backdoor Roth or an ESA will go through the numbers here in a minute. But those three, don’t worry if you’ve already filed your return, because the other two, a traditional and an HSA, those are going to give you a write off and you’ve got to wait to do your return.

Mat Sorensen: Yeah, I love it. OK, so now the next thing I think that’s important to know is there’s no extension for this. So April 15th is the normal year on these contribution deadlines. You do not get an extension even if you file an extension to file your tax return. But I got an extension until October 15th on my personal return. Don’t I get can I contribute up to that deadline? Not for any of those accounts we just rattle off traditional Roth HSA ESA.

Mark Kohler: I love this point, Mat, because I’m just dying to jump in on this is because if you say, well, I’m extending so these deductions don’t work. If I extend. No, no, no. You can still make the traditional IRA contribution and the HSA contribution and harvest the write off. In a sense, you just haven’t put it in your basket yet. So you haven’t filed the return yet, but you can check it off if I did it. So when you go to do your tax return in July or August, you can say, yeah, I did meet the deadline before April 15th, that year, May 17th, to do a traditional or an HSA.

Mat Sorensen: Ok, so all right, so we got the main accounts that you’re going to do for April 15th. April 15th, typically each year, May 17th for this year. Now, let’s talk about ones that shall

Mark Kohler: We just talk about each one a little bit, the numbers. Oh, sure. Yeah. OK, we’ll let you we’ll go with the order you gave. OK, but we’ll actually let me change it up. I say we go traditional and HSA first because those are deductible. Yep. OK, then we’ll do the Roth the ESA in the back door Roth ok. OK, traditional. What would you say first, Mat. But you give me your take, I’ve got six more Kohler calendar here with important numbers, but OK, you go, you get

Mat Sorensen: $6,000 for 2020. That’s also the amount for 2021, by the way. Plus you get a thousand-dollar bump up if you’re 50 or older. All right. And so you get to throw in an extra thousand for those that have, you know, hit the hit the 50 year old or Mark. OK, not

Mark Kohler: Some. You go, oh that’s simple. No it’s not what happens if you turn 50 before your tax return filing? Or is it 50 before December 31st it is 50 before December 31st, so you get to put in an extra thousand, which is the next issue if you turn 50 before December 31st of 2020. But if your spouse doesn’t, they get to do the six. So you don’t your spouse doesn’t get to piggyback on your age in this situation. We’re going to come to the HSA in a minute.

Mat Sorensen: Where they do, you can get them the senior discount at the movie theater when you go though. OK, that’s different rule.

Mark Kohler: Boy, that’s a little aggressive.

Mat Sorensen: That’s what I’ve heard. You know what you want

Mark Kohler: Now, said Mat. Mat’s getting digs in here, folks, because I turned 50, which many of you ladies watching this on YouTube are like, really? I can’t believe that he looks so much younger than Mat, but. I’m now over 50, so

Mat Sorensen: Those were subtle digs, you know,

Mark Kohler: They are subtle, those were inside digs that many of you would notice, but I’m going to bring them to light. Just tell you that Mat is a very mean person.

Mat Sorensen: It just happens to be a magic age for retirement account contributions too. So embrace it. It’s a good thing. OK, I are. You are. Want to talk about the IRA?

Mark Kohler: Well, I want to talk about the traditional because here’s the deal too. OK, yes. Because Mat here, I think this is a little more challenging because a lot of people say, should I do a traditional IRA or a Roth? And I say, if you need to write off, what do you think

Mat Sorensen: I like to do the Roth, I’m always like, go Roth for new contributions. Just go, Roth. Just don’t worry about the tax deductions now build a tax-free account for the future. That’s a different question for people who already have traditional. And do I go to Roth? I don’t know. That’s a different equation. But for IRA contributions, it’s six grand. It’s not a huge tax deduction you’re going to get. Let’s just go Roth, let’s just start off strong.

Mark Kohler: Now you can do a traditional and get a write-off if you or your spouse have an employer plan at work. But your income comes into play, and so rather that I’m just going to say I’m in general, if you are a participant in a plan at work and you’re single if you make more than $76,000, you’re not going to be able to do a deductible traditional. If you’re married, that limit is one hundred and twenty-five grand. If you’re a non-participant at a plan at work, but your spouse is a participant at work, that number goes up to two hundred and eight grand. If neither spouse has a plan at work, then you can always get a deductible traditional. But if you’re making that much money, we’re going to be leaning towards possibly a solo 401k or other strategies, but I just wanted to get that out there. People that you’ve got to say, we’re sometimes chasing our tail with a traditional IRA. The write off I don’t think is worth it. Mat you told me this earlier this morning, that sometimes when you do the math if you can start with a Roth, you’re always going to win in the end is converting where you maybe have to do a little more math? What do you think?

Mat Sorensen: Yeah, and I think especially for if you’re in a lower income bracket, like if you’re below a hundred grand, you know, the tax deduction you get on your traditional accounts, not that significant. Now, if you’re like in the highest tax bracket, you know, like you’re in the 37% bracket, you’re making a few hundred grand a year. I get it. You’re going to have a higher tax bill. And so the traditional account is nice. But you know what? You’re going to phase out on a lot of these traditional contributions if you got any 401k work or your employer or your spouse does, like Mark mentioned. So just do the backdoor Roth, which which is what we’re going to recommend there, which has no tax deduction. So I like to, if you don’t know, go Roth. You don’t know, go Roth. That’s the default.

Mark Kohler: But all right. Now, here’s a caveat to what Mat just said. If you don’t know if the write offs worth it, go Roth. Now, here’s another quirk, though. Now, once we get through some of these little quirks, the other options we’re going to go through are going to go faster. It’s just this first thing you’ve got to think through this. Do I need to write off now? Here’s another one. I had a client last week that said, well, I want to do I haven’t done my tax return for last year. I made a made too much to do a Roth. So then I said, if you don’t know, go traditional because we can convert it to Roth later, if you do a Roth right now, see if Mat says when in doubt, go Roth. Well, if you think you’re going to make more than one hundred and forty grand single or two hundred grand married. Now, you’ve got to go hold it, if I might make that much, I better go traditional now. I’m not going to get a write off anyway and convert it to rock. That’s the back door rock. And so the back door rock starts with traditional. And you have to think, how much income am I going to have? Is that a fair point? You’re amending your rule.

Mat Sorensen: Yeah, that’s a great point. Great consideration. I think that’s a good that’s a good point for people who are going to be on the bubble, because if you are on the bubble where it’s like, man, I might need to do a here’s one thing you could do. Also if you’re like well I just I just want to be Roth from the get go, you know, just do a back door. Because if you’re under the income limit, the back door still works, if you’re over the income limit, the back door still works, just go traditional immediately convert to Roth.

Mark Kohler: Now, Mat says that easily because if DirectedIRA.com Little plug. We have a backdoor Roth IRA program where you fill out one frickin application, you only pay one account, set up fee. And boom, you’re done. But if I told a client this morning I go, if you’re going to do the backdoor Roth, just go to our program. Because if you go to Merrill Lynch or Ameritrade and try to do a back door in the next four days, you have to set up two accounts. You have to do a traditional and then convert it to Roth later. And you are going to set up two accounts that could cost you more. A lot of times they’ll screw it up because I think you meant a Roth to begin with and it’s just more cumbersome. So if you’re going to do the backdoor, Roth, that’s why Mat says when in doubt, just do it back to Roth package, which we have easy. Yeah.

Mat Sorensen: And we do set up two accounts to see everybody knows. And we do have a discounted fee for the additional kind of dummy account, which is your traditional account in this example where you contribute in and it gets converted to Roth. And we have a whole separate episode on the back door Roth. So the problem right now is executing this the next couple of days, depending on your listening this for 2020 years, we are setting up accounts like crazy right now. So I hope there’s not many trying to get through the door right now. Now we’re we’re working them. So you got a couple of days, but be ready to get that stuff in. Now here’s another tip on getting your contribution deadline in by the actual deadline.

Mark Kohler: Yes. Yes. Good tip.

Mat Sorensen: Ok, now you can always wire it or ACH it, but if it’s postmarked, if you send a check, as long as that envelope was postmarked on May 17th, typically April 15th, you know, for every other year, we can receive it and accept it in as a 2020 contribution, it’s going to go in our system, but we will be able to accept it. We have to scan on the envelope and have evidence of it that it was actually made timely.

Mark Kohler: Yeah, and you want to go with the envelope method if it’s two o’clock on Monday, the 17th is on a Monday and it has to leave your bank account by mail on or before May 17th close of business. So if you’re going to miss the wire deadline or an ACH deadline, stop, write out a damn cheque and run down to the post office and have them stamp it. Or if likely you maybe have a meter at your office or something, you can just run it through the machine and go May 17th, then drop it in the mail. You’re good as long as it’s stamped on an internal posted machine. May 17th, you’re good. But if you go down to the post office and put it in at 11:59 at night and they open up the bin in the morning and stamp it May 18th, you’re dressed up so. Got to help, yeah. OK. OK. All right, you’re going to open this. I thought you were going to say this Mat if you were like, OK, I better do it before May 17th. Don’t wait till Monday to do this, people Mat brings up getting the money in, but just getting the account set up can be some time. We have DocuSign and we try to make it as simple and as fast as possible. But, you know, you don’t want to be blaming your broker dealer or us or your bank. Start this on the weekend. Get it going in is your first thing on Monday morning. If you are going to do on May 17th, don’t wait again till four o’clock and think someone’s going to pull a rabbit out of a hat for you. So. Yep, yep.

Mat Sorensen: Ok, let’s let’s go over let’s go over the Roth IRA in General.

Mark Kohler: Should we stick with that before we go to HSA? Probably because we’re to.

Mat Sorensen: If you’re going back for in traditional and Roth and HSA is got a different limit. So let’s hit Roth. It’s the same six you get to put in 50 and older, you get an extra thousand seven. I will make zero jokes. Now on the Roth, as we’ve been talking, we’ve been talking a little bit about the backdoor Roth and peppering that into some of the conversation here. But the Roth IRA is limited for those that are high income. All right, so if you’re for 2020, if you’re single or head of household. In your adjusted gross income, once you add about $124,000, you start phasing out and you’re fully phased out of $139,000, how much you can put into a Roth IRA for married. It starts phasing out at one hundred ninety six thousand and you’re fully phased out and can put nothing in at two hundred six thousand of adjusted gross income. So. Unless you do the backdoor.

Mark Kohler: Don’t hang up, a lot of people just stop there and turn off and go my accounts that I can’t do it. No, no, no. OK, so Mat continue the story. I just wanted to

Mat Sorensen: Those of you underneath these limits, you know, you don’t feel like you’re going to break them now for 2020, you know, typically now and maybe you don’t have your return done. But you generally know, I hit those numbers or didn’t so I can throw this in it’s just six thousand go clean and easy through the front door for my Roth IRA. I put my six grand in and and you’re done. And if you want to throw in your 2021 contribution at the same time because you want to just get 12 grand in there for that, that’s six grand in there too because we’re in 2021. All right, now, if you’re high income, you will do the back door, Roth all right, this is a combo thing we’ve mentioned already of making a traditional contribution that’s non-deductible because you’re high income anyways. You don’t get it that you immediately convert to Roth. There’s no tax to convert because you didn’t take a deduction. It’s a it’s a slick, cool strategy that works for high income people that want Roth. Now, there’s a couple of catches to it and things you got to know. So we got details at Directed IRA. There’s a backdoor Roth IRA page that goes to the rules. And also we did a whole podcast episode just on the back door Roth.

Mark Kohler: And for you techies out there, let me add a little nuance. You’re doing the six or seven thousand dollar non-deductible traditional IRA contribution now for 2020 before May 17th. And then you’re converting it to a Roth in 2021 now, some people would say, well, I’ve got to pay tax on the conversion, not in this instance because you didn’t get a deduction in the first place because you made too much money. And you’re like, oh, my gosh, this is a loophole. Yes, it is. It is pretty darn cool. It’s been around for years. It’s not high risk, very, very common. But it gets complicated at the broker-dealers when you wait to the last minute again. Now, theoretically, again, for you techies, because you’re probably thinking this, well, I could make my traditional contribution before May 17th. And then I could convert it in June or July. I don’t have to convert it the same day. That’s true. You could wait to do the conversion a month later. But don’t forget and you have to do it by December 31st. We like it done all at once because it’s the cumbersome process of creating two accounts and some broker-dealers. And Mat said this before, if you’re going to go that route, wait a month because you need to let that traditional account go through the system so they know that you really have a traditional if you call them up three days later and go convert that to a Roth, someone on the front end. And we’ve seen this happen many, many times, they’ll go, oh, well, this person obviously meant to do a Roth on the first point. I’m not going to convert. I’m just going to change the account type. That doesn’t cut it. So, yeah, anyway,

Mat Sorensen: And one thing and one thing to on the back door, just to know if we have a lot of backdoor accounts coming in right now, it’s worth noting this is there’s no such thing when you contribute to your custodian, whoever it is, with Directed IRA or TD Ameritrade or Fidelity, to say this is a non-deductible traditional IRA contribution. It’s just a traditional IRA contribution. OK, you’re going to claim it to be non-deductible when you file your 1040. OK, that’s on your personal return. I think it’s form 8606 which goes with that, which is where you’re going to claim the Roth conversion. So when you contribute your traditional account, you’re making a traditional contribution. And so don’t get caught up to be like, well, I need to make sure this is non-deductible. I mean, we’re just going to book it as a contribution to a traditional account that you’re going to convert to Roth and you’re going a 1099. But when you fill out this 8606 with your 1040, you’re going to say, oh, it was non-deductible that I converted. So no tax.

Mark Kohler: Ok, but here again, people that, that form claiming that it’s a conversion that’s not taxable is on your 2021 tax return. So see you’re making your traditional contribution non deductible for 2020. It doesn’t go on, you’re 2020 return because it was on deductible and you could have already filed. That’s what I said earlier. So you can do the back door Roth if you’ve already filed your 1040 because it doesn’t show up there. But this back door conversion that’s nontaxable has to, you’ve got to tell the IRS what’s going on. IRS doesn’t want to be in the dark and that form is on your 2021 return. All right. Now, one more thought on Roths. Kids, so this brings it around to my amazing five tips at the beginning of the show, you can still contribute to your kid’s Roth IRAs before May 17th for their earned income for last year. Now, I had a client the other day that said, well, I never paid my kid in my business, I’m going to do it this year. I said, well, did your daughter have babysitting income? Yeah, well, that’s earned income. Oh. And so think outside the box. If you want to contribute five hundred dollars or a thousand dollars or it’s up to six thousand again, no matter what their ages, you have to just show that they have earned income last year and it could even be babysitting income. Now I would prefer it’s well documented. Pay your kids out of your business before December 31st we talk about that every year. But for some of you that missed it, it’s not the end of the world. You might be still able to create it. Now, if you’re not going to Self-direct their account and you’re only thrown out of a couple of thousand, just go open up an online account somewhere. I don’t care. I say Ameritrade all the time because their website is pretty slick and easy. And whatever you could do an ACORN’s account, which I love and that could be a Roth. So get the money into your Roth for your kids by May 17th based on their earned income for last year.

Mat Sorensen: Yeah, I love it. OK. All right,

Mark Kohler: Knocked out three now, we knocked out traditional yet. Roth and Back-Door. All right.

Mat Sorensen: Next one goes to the health savings account.

Mark Kohler: All right. Now this one. Gets to be a little trickier, and I wrote an article on it this week, it’s on my website and MarkjKohler.com will put it in the show notes also Mat. We should put in the show notes that back door Roth stuff, because I know you’ve got an article on it and it’s

Mat Sorensen: https://directedira.com/backdoor-roth-ira/

Mark Kohler: Ok, on the HSA, this is a deductible contribution. So if you’ve already filed your 1040 you would need to amend it. It’s on the front page of your 1040. There’s all sorts of rules, all sorts. But you’ve got to have a high deductible plan and that plan must have been in effect by December 1st of 2020. So let’s say you meet the rules for an HSA. We’re not going to go. We had a whole podcast on that before, too, but the point is this year for 2020 before May 17th, you can put in $3,550 if you’re single. $7,100 if you’re married, if you’re over age 55 to age 65, you can put in an extra thousand. I’m about ready to make it more tricky, but what would you say on the basics, Mat anything you’d add to it?

Mat Sorensen: Well, again, I just the concept of you can make 2020 contributions still and 2021 one all at once. Just see that a lot of clients is doubling up and just getting it in, you know, and again, you always have the qualifying HSA coverage, insurance plan, high deductible plan in force and you would have had to have that back by December 1st for 2020 in order for this to count. So that’s one thing I know is just keep in mind you can make double contributions and you have to have the high deductible plan in the year you’re making the contribution.

Mark Kohler: Now what makes this nice? There is no income limits. There’s no income assessment. There’s none of that crap. Mitt Romney or I want to say Warren Buffett, but I think he’s over age 65. Once you turn 65, you can’t make new contributions. So I’m trying to think of someone that might. Mark Cuban is under age 65. Mark Cuban, owner of the Mavericks on Shark Tank. He can do an HSA contribution and he can get a write-off on the front page of his tax return, no matter how much money he makes. I don’t know how Elon Musk is not 65 either. So he could do it. Yeah, Mat Sorensen think of another rich person, you know, Mat Sorensen could do it. OK, now

Mat Sorensen: Thanks for not questioning whether I’m 65 or not. Yeah.

Mark Kohler: Yeah, yeah. OK, but I will say this now here’s where it gets a little tricky. For those of you that have turned to age 55, you get this make up provision of a thousand. Well, if you’re married. Then you and you turn 55 before December 31st, you can do the makeup of a thousand dollars into the joint HSA account. OK, that’s cool. So for 2020 you would put in $7,200 dollars in the next five days, four days because one of you turned 55 before December 31st. What happens to both of you turned 55 last year, OUP, different strategy because now you only get the thousand for the Joint Plan. You only get each a thousand if you separate the HSA into two separate HSA accounts now, actually, I even said that wrong, I want to clarify this. The joint HSA lives on. But this year, because both of you turned 55, you both open your own HSA at this point, which is and I’m going to tell you why this plays out down the road, too. So you both have an HSA and then you can put in $4,550 rather than just $7,200, so you get you get that sorry. $8,100, I said seventy two hundred and the thousand goes on to the seven. One hundred. So you, you get an extra thousand which add up and is a big deal and you want to set up two separate houses once both of you are 55. Now, what happens if you’re in the 55 to 65 and your spouse turns 60, turned 65 last year? That’s OK, but they had to make the contribution before they turn 65. So you don’t have until May 17th for the last year, you can only make those contributions up until you turn age 65, not the year you turn 65. So you missed the boat. If one of you turn 65, it’s too late now. You had to make that contribution before you turn that age. But your spouse lives on and they’re under age 65. So they’re going to keep their HSA going. You can keep investing yours, you just can’t put new money in it. But your spouse can. So anyway, you can see how this gets a little tricky. In my article, I go through three or four different scenarios where one is over 55 one is not both are ones over 65. But for all of you, young people put money in breaking and you’re going to need it. You’re going to have a kid, you’re going to blow out your knee. You’re going to rip your rotator cuff. You’re going to fall off your bike. You’re going to get in a car wreck. You are going to need that health savings account and you can pull it out at any time. You don’t have to wait till you’re older, so. Don’t get into this ghastly group of I’m not 55 frickin put money in your HSA, it’s a right.

Mat Sorensen: Yeah, you brought up a good point on the age like how old you are. So when you when you’re too old to contribute like 65 on the HSA for IRAs. This is a new change for traditional IRAs. You used to not be able to contribute at the once R&D start, which used to be 70 1/2, is now 72. But that restriction has been removed. So you can still contribute to even traditional IRAs past age 70 to Roth IRAs the same. You’ve always been able to do that. So you can always contribute to a Roth IRA at any age now to so. So don’t worry about that on your age. And whether you still should at that age is another factor. But that age restrictions been removed for traditional IRAs and Roth IRAs, too. You don’t have to worry about being too old.

Mark Kohler: Ok, can I ask you a hard question? OK. I don’t know the answer. So before this rule change, could you not do a back door? Roth, when you were over age 72 and made too much money?

Mat Sorensen: No, you wouldn’t be able to because you couldn’t put in money to a traditional.

Mark Kohler: Oh, even if it was non-deductible. OK, next question. I had another really good question. OK, so with this rule change that you can put money into, oh, is it is your income limit for the Roth or the traditional based on your AGI or earned income?

Mat Sorensen: It’s modified adjusted gross income, that’s the income of it,

Mark Kohler: Which is pretty much AGI, it’s not because it’s going to include rental income, interest, dividend, K1 income. It’s generally OK. All right. We could say generally AGI. Yep. OK, that’s very interesting. OK, good. Something new today too. OK, anything else on HSAs? Now and yesterday on our show on Main Street Business, we talked about how your HSA can pay for that pet of yours. As an emotional support animal. Mat simply obtained an ESA, Emotional Support Animal for himself, and I’ve really noticed a new Mat I think you’re more stable. I really do. Yeah, yeah.

Mat Sorensen: I mean, I got a cute little cat, so her name is Duffie. She’s adorable.

Mark Kohler: She’s going to give my disclaimer. I know it’s Mental Awareness Week and emotional support. Animals are legit. They are real. Nothing is more soothing and seriously relaxing for me to come home at the end of a long day and throw a ball for my dog and just play fetch. I mean, really. And so we joke about it. But the ESA is legit. Some people take advantage of it. And we talked about that on the show. But no offense, anyone out there, you run with it, you go.

Mat Sorensen: Yeah. All right. So let’s let’s hit the Coverdell next, OK? Because that’s on April 15th this year, May 17th contribution deadline. That is two thousand dollars. OK, you put in two thousand. There’s no difference depending on age. But remember, the Coverdell is you’re putting that money in. And you’re listing a child as the beneficiary who was going to use this for higher education to stop them.

Mark Kohler: And I would say you’re opening the account for a child. Then someone’s to put in the money. I think we need to make that distinguish that right from the beginning to just start over. This is good. We want this this is good because people need to realize there’s there’s two there’s three people involved. Go ahead. Start over. OK, so.

Mat Sorensen: Yeah. So the coveredell. Let’s hit the deadlines. April 15th is the regular deadline, May 17th for this year for 2020. You can put two thousand dollars in. Now who do you put it in for and who puts it in can depend. So if you’re a parent you’re typically the one setting up the account for your child. You may put the money in for them. You may not. OK, because there’s depositor rules on the income of the person depositing the money, you’re still the responsible person on the account. You’re the parent setting up for your kid who is the educational beneficiary that gets to use it. But there’s an income limit on who can put the money into a Coverdell. So if you exceed the income limit, you can say, that’s cool. I’m still the responsible person on the account. It’s still for my kid, but I’m not going to put the money in. Maybe I have someone else put the money in who’s called the depositor,

Mark Kohler: And that can be pretty much anybody. And a lot of times parents gift money to grandparents or whatever. Now I’ve got an article on ESAs and Mat and I covered this entire topic on coverdell’s on a previous show and we’d encourage you to listen to it. But here’s just the big takeaways for today. It’s two thousand dollars per child now if they have to. Coverdale Education Savings Accounts. That’s one thousand each. It’s two thousand combined overall accounts per kid, and the deadline as Mat mentioned for last year’s contribution. Two thousand dollars is non-deductible. You don’t get a deduction for it. Now, some people are like, well, this sucks. I’m going to go do a 529. No, no, no, no, no, no, no. In my article, I take it head on. I think the 529 is a joke. I know it makes people mad that I say that I will debate it all day long. I think your annualized rate of return after administrative costs for a 529 is pathetic. Yes. You can put in a bunch of money that’s not helping you. It’s helping the person managing your money. I want you to have a Coverdell ESA because it’s a lower contribution amount that you control the investment you can buy stocks, bonds, mutual funds, cryptocurrency, gold, silver or even real estate or investments privately held. And that way you can get a far, far better rate of return. So even though it sounds low on the contribution amount, you can get such a better rate of return. So be careful thinking it’s all 529 or nothing.

Mat Sorensen: Yeah, yeah, the 529 is kind of like a savings account, I mean, it’s got a really low yield yield. You can look them up, you don’t get a tax deduction to put money in a 529 from the IRS either. So, I mean, some states give a tax deduction on 529 contributions, but it’s not significant. So the upside, of course, is improving the value of that account by getting good returns so that there’s more money in the account that can come out to cover your child, grandkid, whoever it may be, educational expenses.

Mark Kohler: Ok, now this goes back to our book on how to screw up your kids. There’s a whole section on spoiling your children, which I think is very, very important. So if you’re going to start saving for your kid’s college and not make them work through college, you want to hear some sob story, you get Mat, Sorensen started on paying for college and working three jobs. All but you’re going to. So I don’t know Mat is it spoiling the happily spoiled child? Page 95. Oh I just want to dive into it. But I don’t know Mat for your kids college. Any progress towards, you know,

Mat Sorensen: Pros and cons to it? You know, I think that a good parent would want to help with that, but not satisfy every penny, you know what I mean? Like, kids need to have a job that’s good for them, builds character, helps them learn to work with someone else and take orders from someone else, not just their parents or their teacher. So college is kind of like a coming of age thing. Going to college really for me is and I think. Elon Musk, I think, is the one who famously quoted colleges about showing that you can show up on time and do your chores more than is about the knowledge you learn, but it’s kind of like to prove, hey, I can do this and do what I’m told and get my stuff done and, you know, get in on time and do a good job at something that that’s what it’s showing. And so,

Mark Kohler: Yep, there’s a section in the book Mat just hit it results for the Indulged Child. It says if you put every effort towards indulging your child’s every whim, which Mat said don’t I don’t know. This book says otherwise. It says you’re there’s so much to look forward in adulthood. Your Gorme offspring, after having all of their whims indulged upon, are characterized by the following traits. One chronic boredom, thanks to never having learned to entertain themselves. Low tolerance for frustration. Demanding and self-centered attitude. Oh, I love that one in a kid that’s I’d love to that they face the harsh reality when they get into the outside world without parents and parents paying their way. I mean, this is classic so that people have. Yeah, yeah. They believe the rules do not apply to them. I’ve really succeeded on that one. I just want to say I have lived this book I’m really excited about. OK, now, OK, let’s talk about the 401k in the SEP for you business owners. Is that right? We switch over there. All right now. I don’t want everybody out there to think it’s this scarcity mentality or it’s all small business strategies or all personal strategies, you can do a lot of both of these. For example, you can have a solo 401k or a SEP and still do a backdoor Roth and some Roth strategies. So when you if you’ve got the money to put away and I had a phone call with a client just recently. I know it was this week. It’s Thursday today. He said, I’m having one of the best years. Luckily, my business has been benefited from the covid pandemic. And she said, I’m going to make twice or three times as much as I did last year. I want to put it away as much as I can. So we’re going to double down, so when we move on to the business topic, don’t forget, you can probably do both some of these things we’ve already been talking about maybe three or four or five of them, and then still do something on the business side. So that’s my first point. Don’t don’t think it’s one or the other. Yeah, which one, I think wasn’t.

Mat Sorensen: Let’s do the solok, OK, OK. OK, that’s good. Yeah, yeah, that’s the popular one, as are most of our clients are doing. And there’s many people who still do a SEP IRA. But if you’re self-employed and you can want to contribute large amounts, the Solok just a better deal. It really is. It’s a little more work and fees, but it’s just a better deal, OK? The Solok is a little tricky because it depends on what your company structure is. See a solo 401K the same as the SEP. Your contribution deadline depends on what type of tax filing you make as a business, are you an S-CORP or are you a partnership? Are you a sole proprietorship? Your deadline to contribute depends on your company return deadlines. All right, good call. Now let’s walk. You want to walk through some of the different ones?

Mark Kohler: You do it. Yeah, I was doing all HSA age crap. I’ll sit back and let you run this man. You know what you’re doing, OK?

Mat Sorensen: All right. So contribution deadlines for let’s do S-CORP and Partnership LLC. OK, your company Return Deadline for an S-Corp or Partnership LLC is March 15th. That means you got until March 15th to put employee and employer contributions in. Now, you can extend that, so if you do the six-month extension and you file a company extension, your contribution deadline for employee and employer also gets extended until the extension deadline of September 15th. So if you haven’t contributed yet for 2020. The only way you’re getting money in now is if you extended your S-CORP return deadline. Because it’s past March 15th,

Mark Kohler: Yep now, Mat, just as much as I’d like to say that was technical, it really is the general rule because things can get even more unique. For example, there’s yeah. If some of you did not take a salary out of your S-CORP. Your employee contribution isn’t going to happen because you didn’t take the salary, you weren’t an employee, you didn’t take a salary, I had a call the client this week that was an LLC last year and didn’t make the selection or take a salary. And she said, am I out on the floor when Sullivan came and I said, no, this is a new rule as well, is that you could still set up the solo for Onek right now, pass the extension deadline, which is great. The extension buys you more time and I can do a 401K now, but I only get the employer contribution as a deduction and contribution for 2020. Now that’s never been allowed. So this is a good thing. So you don’t have to go down that SEP route and then convert it to a 401K later. You can say, oh, I’ll set up my solo 401k now I’ll harvest a deduction for last year at least from the employer side, and then I’ll get ready and do it right this year for the employee side. So that that’s cool, you got that going in on your deathbed. I got total confidence in my 401k. What movies that total consciousness on your deathbed from the Dalai Lama. Caddyshack, Bill Murray, and he’s like, yeah, so I met the girl, you said you are a total coachman’s on your deathbed, so get that done for me.

Mat Sorensen: I’ve not seen caddyshack in a long time. I got to get back to. Yeah. Yeah, that’s. OK, so we’ve got on the on let’s hit the sole proprietorship because many of you that are sole proprietorship or let’s say you’re an LLC, which you don’t have an S selection is not a partnership. So you’re just getting taxes. So you’re doing schedule C when is your tax return deadline, your individual deadline. So right now, you have until March 17th, typically April 15th, that’s what you would contribute and you may, May, May, may. Sorry. Or.

Mark Kohler: All right, tell me just think all the way from. Who played all the way May Madonna and what movie? A hero all the way, all the way may.

Mat Sorensen: That’s right. I remember. All right. I get I got that. Yeah. I love how

Mark Kohler: I got two movies on you today, bud. I’m killing you

Mat Sorensen: Yeah. You’re killing me. I’m I’m. I’m on this. I’m struggling today. All right. I got to come back. I’ll have to come back here soon.

Mark Kohler: Ok?

Mat Sorensen: All right. I’ll just focus on these dates I can’t get right. So.

Mark Kohler: Sole prop May 17th or October 15th.

Mat Sorensen: Right, OK, October 15th if you file an extension. So if you’re like sitting right now and you haven’t done this, you’re like, oh, I’d like to do a solo 401k so for 2020 I’ve done nothing. If you have your extension done your personal extension, which is where you file your business, return your schedule C, you’re going to buy yourself some time here to get your Solok contribution in. And that’s employee and employer.

Mark Kohler: Yeah, I just had I really think we should have said this earlier, and I think this is an important tip right now, this could be the biggest takeaway for many of you. When in doubt, file an extension. It’s a form 4868. You’ve already missed your extension for multimember LLCs and S-Corp’S, that was March 15th. But if you are single-member LLC from last year or know business, a little side hustle last year, whatever it is, please file your extension. I have a whole other article on our newsletter this week and on my website, on should I file an extension and the answer is always yes because the penalties start to add up for not filing an extension. And even though you might and if you don’t file an extension, you don’t get this extension on the SEP or 401k either. You got to file the extension. 4868.

Mat Sorensen: Ok. All right, let’s let’s see, do you want to add anything else on the Solok? One thing I’ll say on the Solok just just it doesn’t really apply right now because you missed the boat. For those of you that are S-CORP, the employee contribution, you know, you had to you had to put that on your W-2. Even if it’s Roth, it still has to be on your W-2 as a contribution. And those were due on January 31st. You didn’t have to put the money in yet, but you did have to claim it on your W-2. So employee contributions are kind of dead right now for those of you in escort’s for 2020, even if you filed an extension, if you didn’t note it on your W-2, you could still throw the employer in and your good or even set up a new Solok still now in your S-CORP and do the employer contribution without doing the employee because you still got time to do that again, assuming you filed an extension from March 15th on your S-CORP return.

Mark Kohler: Ok, now, since I think we’re good, I don’t have anything else to say about you. Set up a 401k later if you need to. You could do a SEP later if you wanted to. I would generally not recommend now. OK, let me give a little tip here to some of your like. Well, I have employees. Well, it depends. Are they full time or part time? And then if it is full time, how long have they been full time, because if they have been full time for less than a year, you could do the solo 401k and at least get a contribution in. And then once they hit the full year mark, you get to roll that out to an IRA. So now you get kind of an extra bang for your buck that you wouldn’t get with an IRA if your employees have not been with you for any full time employee, has not been with you for up to two years. You can do the SEP now, although Mat and I are not a fan of the SEP, sometimes that step the SEP or the simplified pension not simplified. Sorry, small employer pension is a nice Segway to the 401k. So some of you have to do a SEP because you’re full time employees have been there at least a year but not two years. So you’ve got this kind of little window where the SEP does work. But while we’re talking about retirement accounts and extensions and deadlines, what about the 990T? That was an April 15th extension deadline for the 8868 990Ts. Was that also extended? I don’t think it was. Was it?

Mat Sorensen: Nope you had to file an actual extension for the 990Ts, so you would have had to file the extension, which we did for many clients that needed 990Ts.

Mark Kohler: So now that sounds good, Mr. Sweaty. I like that.

Mat Sorensen: Ok, yeah.

Mark Kohler: All right. Now that’s the soup of the day. I’ll have that soup.

Mat Sorensen: Sounds good.

Mark Kohler: Could you help me put it on desk? Check for me. I’m on fire today. I just I’m not going to tell you what that is. That’s an American classic. If you don’t that’s. And the boys. Are you better people that watch that movie.

Mat Sorensen: See about that. Yeah. Yeah. See, I said that right.

Mark Kohler: C Bass and the boys look

Mat Sorensen: Right over here.

Mark Kohler: Ok, well if we can’t finish on that quote, I don’t know what we can do, but I don’t have anything else except pay attention to the deadlines people. Our newsletter has all of these every freaking week opening for just two minutes. We’re here for you. We got your back at noon.

Mat Sorensen: Yeah, well, I mean, if you were still listening to this show, I just want to commend you. You know, you listened to a podcast on IRA and 401k contribution deadlines. And it’s important because it’s a bucket list item. I mean, this is I know this you know, you have many choices when you open up your phone and what you can do or sitting working out whatever it is you’re doing to listen to. And you chose a podcast on contribution deadlines. But I say that jokingly, but also in total seriousness. We love this because this is one of the best places to build wealth. Maxing out your contributions, getting your money in by the deadline, getting as much in as you can is one of the best ways to build and save for retirement so you can truly live those golden years you’re looking forward to. So thanks for tuning in. Please give us a five star review if you like the show. If you don’t send those comments to Mark at markjkohler.com.

Mark Kohler: Knows you people didn’t even notice his little passive aggressive. I’ve got to go see our counselor. I’m not happy about this this passive aggressive because he’s alluding to the fact my golden years are closer than his. Something that you guys catch that

Mat Sorensen: I was not that was not in that that was that was for the listeners, OK, for the listeners.

Mark Kohler: I thought, OK, everybody, we love you, we’ll see you next week for another show. Thanks, Mat. Thanks.

Mat Sorensen: Thanks, guys.

 

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