EP 31 – 401k and ROTH Strategies

In this week’s episode of the Directed IRA Podcast, Mark and Mat outline a variety of strategies to help you take control of your retirement and maximize your retirement savings.

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Mat Sorensen: Welcome, everyone, to the directed IRA podcast, this Mat Sorensen, along with the fabulous Mark J Kohler looking very dapper today. He’s wearing a jacket, folks, if you’re looking for catching us on YouTube, he’s wearing a suit jacket and he’s got a t-shirt underneath, but.

Mark Kohler: This is a quality shirt underneath the shirt

Mat Sorensen: And no collar, no collar for those on the podcast. Just want to point that out.

Mark Kohler: For those eighties crew out there, this would be more of a Don Johnson Miami Vice look, little slick back

Mat Sorensen: You have the tan for it.

Mark Kohler: So I’m working the tan. It’s summertime. Let’s get a working the pasty white indoor AC Arizona tan.

Mat Sorensen: That’s obvious I guess. Yes.

Mark Kohler: What’s the temperature in Arizona today just so we can all just commensurate.

Mat Sorensen: The temp is too damn high. I don’t know. It’s not good.

Mark Kohler: It’s over 110. Right. It’s always over one. I don’t know.

Mat Sorensen: It rained yesterday. You know what it was like 80 something. It was great. So I’m sure it’s 110, 115 by now. Who knows? Let’s not talk about it.

Mark Kohler: And then one last current event are the Suns. How are they doing against the Clippers.

Mat Sorensen: Suns in four, Suns and four.

Mark Kohler: Wow, you’re calling it.

Mat Sorensen: Ok, no, you don’t see the Suns and four guys. There’s this guy that got in a fight at the Nuggets game when the Suns were playing the Nuggets and he’s wearing a Suns jersey and the Nuggets guy was wearing a Nuggets jersey. The Suns guy won the fight and it’s on cell phone cameras on it went viral on social media.

Mark Kohler: I’ve got to. Right.

Mat Sorensen: And after he kind of won the fight and the guy’s walking with his tail between his leg and his Denver Nuggets jersey, the Suns fan guys, goes Suns in four. And this is like game one or two. And then they end up winning in four games with this this way he’s got like action figures at the Suns games. People like go take their picture with him, like this guy’s like turn into this, like local celebrity, the Suns in 4 guy.

Mark Kohler: OK, all right. I’m looking it up.

Mat Sorensen: All right. All right. There are some current events for ya

Mark Kohler: I can live with that. The New York Post this morning reported, is anybody going to talk about Biden’s mental capacity? What was the actual article? Is anybody going to talk about Biden and I? Hey, we on our show, we both would comment regularly about Trump’s stupid tweets. I mean,

Mat Sorensen: Mental capacity.

Mark Kohler: Yeah, yeah, yeah. When it came to tweets. But the guy could field questions and not look like he was lost. And it’s scary right now. And whether you’re a Democrat or Republican, it’s here’s the New York Post op-ed today. Is no one going to mention how confusing and out of it Joe Biden was? And if it was one gaffe or stumble, that’s one thing. But. People are whisking him out of press conferences before you can even field a question. Yesterday was a really, really important topic and he just stumbled and confused. It’s scary. So. I don’t know that’s in the news and again. Well, I’ll tell you,

Mat Sorensen: I was taking us to a safe area sports, and then you took us into dangerous territory, politics and mental health. Way to go.

Mark Kohler: Well, some of you, you know, Trump hater, Biden lovers, Trump lovers, Biden haters, whatever. I’m just saying, hey, we can call a spade a spade. Trump had a problem with Twitter. Biden has a hard time answering questions. I think that’s a fair statement. And I’m a little nervous about both people, so we’re just going to leave it there. All right. Our topic today, everyone is the 401K and Roths. Can you have a Roth in 401k? Can I move Roth to 401k? When can I move a Roth one out to a regular Roth? Can I do a Roth conversion in my 401k? What about R&D and Roths? Are they different in a 401k there’s a lot of questions we get on this topic? So, yeah, everybody, you should know this because frankly, 90 percent of Americans have both. They have some sort of 401K through their day job, whether they own their own business or not. And they have some sort of Roth in their personal Roth where their spouse does or their kids. And we frankly want clients to have both maximize both. In my article last week on the mega Roth is a part of the 401k example as well. So. All the above. Sound. Are you OK with that intro?

Mat Sorensen: I mean, those are things we love, obviously Roths and we have separate episodes on Roth IRAs and the back door Roth IRA for those that are high income. So we’re going to focus on the 401k, though. And this is for those of you that are Solok people that may self-direct or your 401k, you’re like Mark said, your day job or even if you’re just buying stocks, bonds and mutual funds, you know, the the boring stuff. But so the rules are all the same. But this is new, too, for Roth IRAs came around first, the Roth 401k came around second. And listen, we’ve been around for maybe 10, 12 years now that you can actually do a Roth 401k.

Mark Kohler: So the Roth 401k, kind of like that crappy 12 year old teenager that you just. You don’t know how to deal with them.

Mat Sorensen: Yeah, they’re not mature enough that we figured everything out yet. Yeah, but they can walk and, you know, they can feed themselves if they can

Mark Kohler: They can talk back. They can, you know, sweat a little and you want to slap them around. So, yeah, we’re still figuring I think Congress is still figuring out the Roth 401k. Yeah. Because there are some rules that we’d really like Congress to change on the Roth 401k that I think will eventually happen. And we’ll talk about that also. Mat did you hear that nice little hum.

Mat Sorensen: That hum is sound of money. Is that the sound of someone making money?

Mark Kohler: It is. It is. That is the sound of my Crypto mine. Paying its own separate rental bill to the city of Rexburg in the electrical bill is nothing. Let me just say it is so cheap and my little mine I got to my studio today and I’m like, I don’t hear the sound of money being made and my mine was down. So I called my it Peter Guntur. We’ve had him around on our summit. We had him visiting the summit and he’s like, Oh, I’m just out and about. I’ll stop in five minutes. He’s here. Turn it back on, reset this that in another something IT guys do. And then

Mat Sorensen: He turned it off and back on

Mark Kohler: To shut up. He did not. He did not. I even said to him, I go, you think I tried that already? Right. He was like, just making sure Mark. And then you said you do have a part that burned out. He goes, I just bypassed it. You’re making money again. But I said, do you want to come on the podcast and talk about how mining is going on in the country? He’s like, no, I’m too busy. You know, I just I cannot have someone else call me right now. I’m backed up on building mining rigs. But here’s what’s going on. I’ll just say this quickly, OK? If you’re mining, you may say, well, I’m not making as much mining. That’s because the value of the bitcoin is down, most cryptocurrencies are down all across the board. But in my mining rig, I’m making the same quantity of Bitcoin. So my I’m feeling like my Rev’s down, but it’s really not because when Bitcoin value bounces back up my wallet of my mining. Product by mining accomplishment, what would you call your mining income? No, it’s not the income statement by my mining wallet, just whatever sitting in there quantity wise will go up in value when the value of Bitcoin goes up. So I’m kind of stoked. It’s working in my Roth IRA. People my mining rig is in my Roth IRA and I’m making I’m paying UBIT. We’re going to talk about UBIT and UDFI in the Roth 401k World today too. So I’ve kind of set the stage. So my Roth is paying what’s called unrelated business income tax because I mining. But the minute it’s mined, appreciation is tax-free. There’s a structure that I describe on YouTube for that. OK, so Mat, why don’t we just go back and forth? What do you think the first thing people need to know when it comes to a Roth and the Roth 401k and the interplay and just that term, Roth 401k, what would you say?

Mat Sorensen: The first thing is, is you can have it and it must be a separate account from your traditional dollars. So if you’ve got traditional dollars you’re putting into your 401k, you’re contributing. If your employer is doing a match or if you’re self-employed and your business is doing the match or employer contributions, you’re going to have a traditional account. But you can also have a Roth. And it’s just it’s a separate account. So that’s the first thing I would say, is that it’s a separate account and I’ll track it and invest it separate from your traditional.

Mark Kohler: Just do all 401ks allow for this. You’ve told me no.

Mat Sorensen: Yeah, not all do because again, this has only been around for 10 or 12 years where you could do a Roth and then some are like, well, you can do new Roth dollars, but we won’t let you convert, which we’ll talk about in a minute. You can actually convert traditional to Roth in your 401k. So not all plans allow it, but legally they can. It’s just you just decide to set the rules in your plan or the company you may work for to not allow it. But I think like 90 to 95 percent of plans out there, if you’re an employee, have Roth. Of course, our Solok plans, of course, allow for Roth. And you can convert over to Roth at any time.

Mark Kohler: Ok, so Microsoft and I, I’m not I don’t have a family member or an employee friend that works at Microsoft. Actually, they

Mat Sorensen: Definitely have a Roth component, I’m sure.

Mark Kohler: I would assume they do. So if I work at.

Mat Sorensen: Now for Dunder Mifflin. Dunder Mifflin may not. Yeah, they’re a little behind.

Mark Kohler: Yes. Toby, Toby’s going to have to lobby for that. So let’s say I work at Microsoft and they have a Roth option. Could we call it that? So if I’m an employee, when I fill out my annual H.R. update or status or whatever they call it, I don’t know, they send out a little email and go, how much are you going to contribute to your 401K this year? And I can say I want well, this year I can do $19,500 if I’m under age 50 or I can be employee as an employee or I can do $26,000 if I’m 50 or older. So I get my little request from the H.R. department at Microsoft and they go, how much do you want to put your 401k out of your paycheck? I could say, well, ten thousand Roth nine thousand five hundred traditional or nineteen five traditional or nineteen five Roth. I could choose either one typically right now. Then I track it separately, like you said. Does it affect the match.

Mat Sorensen: No. OK, that’s an employee contribution, whether it’s traditional or Roth, it has no effect on the match. OK, so

Mark Kohler: But the match is traditional,

Mat Sorensen: But the match must be traditional because the match and we say the match, we’re talking about the employer contribution where a lot of 401(k)s where the business is incentivized you and says, hey, if you put an X amount of dollars, we’re going to throw in a match. So we’re going to throw in some money from the company that’s not coming out of your paycheck and in your pay. So it’s kind of like free money, so to speak. But the matches, the company takes it as an expense. So it has to be traditional dollars. It’s kind of like when you put money in a traditional dollars and you get a deduction. Right. So it’s the same thing. The company takes an expense to put it in. So it has to come in as traditional. Now, you can convert that. If there’s a company match that comes in,

Mark Kohler: You’re moving to a new topic. So conversion is OK. And I start to get excited. I mean I mean, jeez, exciting stuff. We’re still in the foreplay portion of the show here. Can you slow down?

Mat Sorensen: Right, right. Right. I want to make sure and can just you know, I am I am on Mountain Dew zero sugar right now, OK? This is a new product with me.

Mark Kohler: Without being. This is a PG 13 show, I’m just saying this is the crescendo on making sure everybody feels comfortable. There’s a romantic glow in the room, OK, talking. This is the foreplay of the show. So, OK,

Mat Sorensen: The music’s coming on. Yeah, a little too.

Mark Kohler: Ok, now let’s say I think the last thing I want to say here is everybody think of your 401k at work. As having two buckets and one could be Roth if you want, and one is traditional if you want. But if you’re getting a company match your traditional and the match is going to go into that second traditional bucket, there’s not a third bucket for matches. There’s just two buckets. Yeah. And the match is going to go into that traditional bucket. Now, if you’re a soul, if you’re a small business owner with a solo 401k you have more flexibility to create some different accounts or buckets, but I would say for the majority of people, Mat right. It’s a two bucket concept. Fair.

Mat Sorensen: Yeah. Now, a lot of times your 401K is going to track the money separately, though, just for a tracking purpose. But it’s for tax purposes. And what you need to know, you have traditional dollars and Roth dollars. You have the two buckets because.

Mark Kohler: That’s right, because in some 401k plans, the employer may say, well, the match we put in doesn’t ask for a certain period. It may be

Mat Sorensen: If you leave early or whatever, you’re not. You’re not.

Mark Kohler: Yeah, yeah. OK, all right. So let’s say everybody out there, we’re on the same page. We’ve got this 401k, we’ve got a Roth bucket, we’ve got a traditional bucket. And now we say, hmm, I’d like more Roth money. And you said Mat, I could convert some of the traditional money to Roth. Inside my 401k. Yes, even the employer match?

Mat Sorensen: As long as that’s vested, because as long as that’s vested.

Mark Kohler: Tell everybody what vesting means.

Mat Sorensen: So sometimes in a 401k, you can never do this in a Solok, because why impose this rule on yourself? But sometimes your day job 401K, let’s say, or maybe in your small business for one, can’t we got employees too? You have vesting that says we’re going to put the match in, but you only vest and get it if you’ve been here for three years. So let’s say they put in three thousand bucks as a match for you, but you vest that over three years. That says they’re vesting schedule. So you’d get one thousand would be released to you each year and that would start again every year that they put in the match. And you have to meet the vesting schedule. So it’s kind of a way for the company, like keep handcuffs on you, the golden handcuffs, so to speak. Don’t leave because you’re going to leave this money on the table in your 401k if you leave before your all of your company 4001K matches happen. So so if you’re looking to convert the company match, just make sure it’s the vested piece the unvested piece, you won’t be able to convert. OK.

Mark Kohler: All right. So I can convert. Can I choose how much I convert.

Mat Sorensen: Yeah you could say. I got let’s say you got one hundred grand in your traditional and you’re like oh I’ll leave sixty thousand of it. Still traditional. I want to convert 40 to Roth. I got a really sweet self-directed deal I want to make and they’re going to make a big pop and it takes 40 grand or I want to throw 40 in the Crypto or whatever you do.

Mark Kohler: I have to sell by the way, people, some of these questions, I’d be at 98% certainty. So I’m asking what I’m going to add the play-by-play here. I’m the color commentary. You so Mat do I have to sell? Let’s say that my I have one hundred grand in my traditional bucket, my 401k. It owns one hundred percent Lululemon stock and I say I want to convert that to Roth. Do I have to sell the investment that it owns to convert?

Mat Sorensen: No this converts it in kind would that would be called please take the daily value of the stock the day you want to convert.

Mark Kohler: Ok, now this is where we start to get into what’s called, if you will, Mat the mega Roth. Yeah, all right, so let me take a stab at this first Mat, and then you clean up, clean up the mess. OK, so I put in my 19 five. If I’m 50 or over, it’s it’s twenty six and so I’ve got this Roth 401k with twenty-six grand or nineteen five, my company doesn’t match of let’s say just let’s say ten thousand dollars. So we are math’s pretty clean here. So I’ve got twenty nine thousand five hundred dollars in my 401k as a whole, but nineteen five is in the Roth bucket and ten thousand is in the traditional bucket. OK. And I say ok, I want to convert the ten to Roth. So now I’ve created twenty nine thousand five hundred dollars of Roth money in one year. Pretty cool. OK, yeah, now my limit, if I’m correct. Is. So this year, fifty eight thousand dollars, yeah. Now, what throws me off here is I want to say 64. Why would I save 64.

Mat Sorensen: Because you’re over 50 now, you get an extra sixty five hundred, actually, but I don’t know,

Mark Kohler: You don’t ask for answers. My hair’s OK.

Mat Sorensen: Marks over 50, folks that’s what I was.

Mark Kohler: I don’t know. I just I’m loving this. I’m I’m going to frickin live this all week. I just threw Mat Sorensen on the reason why is it sixty four. Because I’m under age 50. I put in my 19 five the company match ten. I’m at twenty six five and I say well I can put it in a total of fifty eight but then I said sixty four. Here’s why. Because on the side I can have a Roth IRA on the side for six. OK so there.

Mat Sorensen: Yeah that was good.

Mark Kohler: Ok, I threw a curveball at Mat Sorensen strike one

Mat Sorensen: Strike, one tip of the hat tip

Mark Kohler: That, that’s up from tip of the hat out of the spear. Oh that’s it. Yeah. Yeah. OK, so anyway, here’s what’s happening everybody. You can have a Roth individual Roth on your own, which is the back door Roth strategy. We’ve done podcast on that. Go listen to that.

Mat Sorensen: To be back door. If you already maxed out your 401k, you have to do back, yet

Mark Kohler: You’re doing backdoor. So you’ve got six grand of Roth on the side and everybody can do it at any income at any age. OK, so you’ve got that little backdoor Roth going then. I’ve got this fifty eight thousand dollar limit. If I’m gonna reach fifty in my 401k I’ve done nineteen five and ten. Well Mat how do we get up to the fifty eight. This is the mega Roth, can you explain that?

Mat Sorensen: Oh, OK. This doesn’t work for everyone. Let me just say that at first I just want to say that, but does mean a lot of people get to do this. So what do we have left? Let’s say we have nine to five and then ten thousand company match or twenty nine five. We get up to fifty eight thousand. So that’s the total in a four week, twenty eight thousand five hundred.

Mark Kohler: So I can put in twenty eight thousand five hundred more to get to my fifty eight. The company. That’s not going to put it in for me. 

Mat Sorensen: How do I. Yeah. They’re like are you already. We gave you the max. You’re done. Yeah. And you’re already maxed out where you could put in as an employee of regular Roth dollars. So how do I get the other twenty eight five in? As long as you have that much income and salary from that business, which I presuming you are, if you’re maxing out all the stuff you’ve made Fifty eight thousand. OK, then you’re going to do an after tax employee contribution.

Mark Kohler: Say that again. But you want to write this down.

Mat Sorensen: Yeah. You’re going to do an after tax employee contribution.

Mark Kohler: It’s not a conversion. It’s not a Roth contribution.

Mat Sorensen: Nope. And it’s not a traditional deductible contribution,

Mark Kohler: Say it one more time for everybody.

Mat Sorensen: After tax, which which means you did not get a tax. There’s no tax deduction on it after tax. Employee contribution.

Mark Kohler: Ok, now, everybody, I’ve literally had Mat teach me this concept three times because it is tricky. Now, once I make that contribution, which bucket does it go in?

Mat Sorensen: It goes in its own bucket, frankly. What we do is and what a lot of places do that implement this strategy, fidelity, a lot of big places that if you get the sophisticated department, the ultra high net worth departments, you know, you get to the nice places that know what the hell they’re talking about is you immediately convert it, because here’s the thing

Mark Kohler: To Roth. So it’s a two step process. I aftertax employee contribution. I make sure my employer knows what the freak I’m doing or the custodian that’s handling it for me. That’s OK. And then on day two, I’m doing a Roth conversion.

Mat Sorensen: Exactly. And it’s all in one thing, so here’s the contribution, it’s after-tax dollars for a day, then it’s converted to Roth and now it frankly just goes to the Roth bucket

Mark Kohler: When’s my deadline to do that. December 21st,

Mat Sorensen: There’s no deadline, there’s no tax on it because you didn’t take a deduction, it’s after tax dollars, so there’s no deduction and then there’s no tax to convert after tax dollars to Roth.

Mark Kohler: Well, I can’t do it for 2018. I mean, right now. Yeah.

Mat Sorensen: Yeah. I’m wondering in 2021 after tax contribution.

Mark Kohler: Yeah. I have to do it by December 31st of 2021.

Mat Sorensen: Yeah. These are employee contributions so you need to have done this in the tax year.

Mark Kohler: Ok, so like

Mat Sorensen: The match of the matches and a lot of the company contributions you can do until the company return deadline. So even right now in a 401k for all of you Solok people, you could technically still make a 2020 employer contribution if you extended your company return. But these are employee contribution dollars, so this doesn’t work for 2020. But you’ve been on it for 2021.

Mark Kohler: So in our example, I’ve now created a mega Roth strategy. Now the reason why I say that everybody is in my article, which you can all get to, it was published on. Two weeks ago, I’m looking at my own frickin article was published. Who the hell is this bozo? OK, here’s the deal. It’s a strategy because you’re combining your personal Roth of six or seven thousand. And then your 401K Roth contribution, 19, five or twenty six. And then the company match and whatever’s left, you can do up to that fifty-eight becomes the non-taxable employee contribution. Did I say see? No, I said non-deductible, what’s it called?

Mat Sorensen: Yeah, that’s for that’s for the back door Roth its after aftertax employee contribution.

Mark Kohler: Aftertax employee contributions. That’s what I told all of you to write it down. And I didn’t because you start blending aftertax nondeductible contributions. OK, because this is a different term than when you’re doing a back door Roth.

Mat Sorensen: You just call it aftertax employee contribution, not aftertax and non-deductible is really meant for IRA that that kind of more but I mean, it’s descriptive. I know what you’re saying. And that is accurate description. I’m just saying in the 401K world, when you call your administrator, there’s just After-Tax employee contribution.

Mark Kohler: Ok, thank you for correcting me. Tip of the hat. OK.

Mat Sorensen: I was hoping I’d get one back. We’re OK. OK, let me make a couple of points on this because I think this will help illustrate it by giving some examples. I wanted to do this and can’t do it. You did, Mark, you can’t do it, OK? What? We can’t do it. OK, here’s why. So this is for you small business owners that have your own 401k. If we are in what we have, what’s in our law firm and directed we have a safe harbor 401K. All right, we do the backdoor Roth to IRA and stuff. But of course. But this one we can’t do and it might apply to some of you. That’s why I want to go over. A safe harbor 401k and many 401(k)s have have all these rules about the owners of the business and highly compensated employees in the business and base with these rules. And 401(k)s are designed to do is to prevent the high-income earners in the business or the owners of the business from getting a bigger benefit out of the 401k than the rank and file employees. So when you start doing an after tax employee contribution and maxing out up to fifty-eight thousand in a safe harbor 401k, you start blowing up these testing rules and and and you start favoring highly compensated employees, which causes all sorts of issues in a one can can disqualify the for. OK, so in summary, what that means is those of you in a safe harbor for 401K, again, Mark and I are in this boat, too. It sucks. We can’t do this. All right. Now, here’s where I here’s what I can learn this strategy. I had clients that were oil workers making a couple hundred grand a year living in Alaska. And like Wade, they had their housing paid for and they were doing this. This is where I saw people doing it. They had fidelity accounts. They were like, I don’t remember the oil and gas company, but big oil and gas company, they were making great income, had low expenses. They were just plowing money into their 401k as Roth dollars. And they were doing this after tax strategy. And now they’re not considered high high income earners. They’re not owners of the business, even though they still had a high enough income to. You need to have a high income to want to do this. You’re plowing a lot of money in. So so that’s. So I don’t that helps the now the Solok people. Don’t worry, you’re not in a safe harbor plan. You could do this in a Solok.

Mark Kohler: Ok, so safe harbor is where the hurdle is. Yeah. Man, that sounds good. What’s the soup des jour.

Mat Sorensen: That’s the soup of the day.

Mark Kohler: That sounds good. I’ll have that, Mr. Sweaty. I love it. OK, now, boy, I pulled in some Dumb and Dumber and some Saturday Night Live. And yeah, I just want to say to

Mat Sorensen: You, kind of married those up. Yeah. Mr. Sweaty, I was trying to think of what’s the guy what’s the guy in Dumb and Dumber at the bar. The trucker t t bone. T bone.

Mark Kohler: No, no, no, no, no, no.

Mat Sorensen: Bass t bass was a t bone t bass.

Mark Kohler: Corey, you’re going to fact check us out becaus I need Reuters fact checking me.

Mat Sorensen: Yeah. OK, T-Bass said that. Yeah. Yeah. T Bass said that. Yeah. Yeah right.

Mark Kohler: Dumb and Dumber. See anyone? Yeah. Ok, Don. Sea bass, sea bass and the boys. Yeah, well, all right, anyway, so that was important. Ok, now here, everybody, we’re not just talking about mega Roths today. Now, let’s say I had a training meeting with some of my own attorneys yesterday on this topic. Someone says, well, I’ve got a Roth in my 401k and I want to roll it out in inservice rollover or whatever. There’s different terms. I’ll let Mat Sorensen work his magic, but I want to roll over this Roth in my 401k and move it to my Roth IRA because I’ve got an investment over there. I want to do some crypto or I want to do some real estate. I don’t want to take it and move it over to my Roth IRA. Can I do that?

Mat Sorensen: Yes. OK, this is again where the rules get complicated.

Mark Kohler: But we’re past the foreplay. We’re into some tricky moves now.

Mat Sorensen: I don’t want to take it too far to stop there. All right. With three tries after tax dollars can be rolled out to a Roth IRA if you want it. So lets say you are? You have a good income. You’ve got a day job at a corporate America company that has a 401K you can do after-tax contributions. You can actually drop those into the 401K and then roll them out to a Roth IRA. So if you want to self-direct, you could throw that after-tax employee contribution into your 401k day job and roll it out, even if you still work there, even if you’re only forty five and you’re not retirement planning after tax dollars are not locked up in the fall. OK. So you could roll that to a Roth IRA. Right there, it’s one of the one of the weird exceptions that just kind of works.

Mark Kohler: I like it. And right now some of you watching YouTube are like, why is Mark Kohler distracted here? I was just doing my fat check on Dumb and Dumber on CBS, and there’s a lot of fun GIFs on that sort of thing. Yeah. You know, so it’s good. Well, if that guy at that table over there, Seabass, he’s paying the tab, you know. So. Yeah, so. So I just want to get that out there. All of you feel a lot smarter today or listen to our podcast because of that. OK, now then the question is, well can I roll Roth money into my Roth 401k? Is it a Roth IRA money? Yeah, a Roth IRA into my Roth 401k and can I roll it backwards.

Mat Sorensen: Now, Roth Roth IRAs are always Roth IRAs. Once money’s in a Roth IRA, it will never be anything else but a Roth IRA. It can go somewhere else from like Fidelity to directed IRA. But it’s it’s always a Roth IRA. Now, you can always go out. Let’s say you had Roth 401k dollars again, even if it’s not the after taxes, you UNPROFOR, when you leave that employer or your Solok and you decide to retire or shut down the plan, you can then roll out the Roth 401K to Roth IRA.

Mark Kohler: Now, this is where it gets tricky.

Mat Sorensen: It can’t go in, though,

Mark Kohler: Because Roth IRAs and Roth money in a roth in a 401k. So let’s just call it a Roth 401k because a lot of people don’t want a Roth IRA. OK, well, it’s really a foreign key that has a Roth bucket in a traditional bucket. Remember the first point we made everybody. So there’s no such thing as a really Roth for when it’s just the Roth money for a compared to a Roth IRA. There’s pros and cons and Mat. I will put you on the spot again. Tell us about the RMD, what is a RMD and how they’re different between a Roth IRA.

Mat Sorensen: So RMD stands for required minimum distributions. And this is the amount of money that the IRS, Congress really tells the IRS that they want you to take this money out of your retirement account once you hit age 72. So let’s say you had a IRA with one hundred grand in it or or a 401K doesn’t matter. Let me just say, like traditional let’s just say traditional dollars, traditional IRA or you had one hundred grand in the account, you hit 72. They want you to take out maybe three to four percent of that each year. So you’ve got to start taking like three, four grand at first out every year because they’re like, we want you to start pulling this money out in retirement and we kind of want you to pay tax on it. And from on traditional dollars. Now, Roth IRAs got exempted from this. It’s like, you know, if it’s a Roth IRA, Congress was like, we don’t make any tax revenue on it. If you want to keep it invested, knock yourself out. What do we care? We don’t make any money on it. So knock yourself out. So there’s no RMD on a Roth IRA. It’s pretty sweet. Yeah. But the Roth 401k is subject to RMD because it’s just a clunky set of rules and it’s in the 401K world, not the IRA world. And so they just treat it like your traditional in a form. OK, even if you have Roth 401k dollars, you will have to do RMD at age 72.

Mark Kohler: Say so, say 72 is the new 62 and I’m plugging along, kicking but taking names, beating people up at Phoenix Suns games. Suns in 4 and I’m like, I don’t want to take our money out of my Roth 401K if the 401k plan allows, I’d probably want to roll that out to a Roth IRA to avoid the RMD. I could do that, right?

Mat Sorensen: Yep. Yep, absolutely. Well, even if you’re still working there because your retirement plan age, you’ll always be able to roll out to a Roth IRA.

Mark Kohler: OK, now let’s say now some of you are like you. The Roth IRA is better shorts tiger. OK, so here it is. I may have a Roth IRA and I’m investing in crypto and precious metals and small business and I’m all good. But OK, my Roth IRA is going to buy some real estate. So my Roth IRA goes out and puts down 50 grand and buys one hundred thousand dollar little rental property with nonrecourse debt. And we’ve got lenders that love us to give out their names. So you can take your Roth IRA and borrow typically 50 cents on the dollar. Your credit doesn’t matter. There’s no FICO score in this or no person guarantee your Roth goes out and buys real estate with nonrecourse debt of a Roth IRA, pays tax on the leveraged percentage of the profit. So if I have if I’m 50 50 debt to equity and I have. One hundred thousand in gain, I sell the property for two hundred thousand seven hundred thousand. Again, I’ve got to pay UDFI this crappy tax on the profit that was leveraged. Like you don’t owe tax on your Roth money, but you leveraged it, you bozo. So you’ve got to pay taxes on the leveraged portion of the profit. Well, Mat, does a Roth 401k pay UDFI?

Mat Sorensen: Not unleveraged real estate, so that example, no. So if you’re buying real estate, which my 401K has a rental property, the tenant just moved out today. I’m kind of annoyed. I’m not happy. The property manager. We’re having a conversation later.

Mark Kohler: My Roth mine was down today. I was a little annoyed.

Mat Sorensen: Yeah, we’re having a conversation. So but I actually have a nonrecourse loan on that property. No, UDFI. So, yeah, 401(k)s solo(k)s, they’re all exempt from UDFI only unleveraged real estate. You still have. You bet. And you’d on other stuff, but there’s a little exemption for debt leveraged real property that you get an exemption for on 401(k)s.

Mark Kohler: Now this is cool because you can make a Roth IRA. They call our office, they go, oh, I need an IRA LLC, I’m going to buy some real estate. And our attorneys are trained to say, what are you going to leverage that purchase? Yes. So you’re going to use your Roth IRA. Or even your traditional IRA, and you’re going to go buy this piece of real estate and use debt. Yes, I am. Do you happen to have a 401k? Oh. I do does that 401k allow you to self-direct? No I’m at Microsoft. OK, sorry, stick it in your Roth IRA, traditional IRA and just go leverage it. Buy real estate. See UDFI isn’t the end of the world. You’re still probably getting a better rate of return than some an ETF or stock. So go buy real estate even if you use debt. Don’t stress, but you’re like, I don’t want to pay this UDFI on the way out. So we tell clients, would you have a small business can we open a solo 401k and go, Yeah, we’ve got a little side hustle with no employees? Well, let’s say let’s create a 401k and the solo a solo 401k in that small business roll the IRA Roth or traditional into the 401k and go buy the same real estate. Now you don’t have to worry about UDFI. So some people go, what’s the purpose of a solo 401k? Well, sometimes it’s to get bigger contributions, but sometimes it’s to avoid UDFI. Deep is that now that was that was a special moment in our program that was kind of a yeah. What one might say with a crescendo up to a special moment.

Mat Sorensen: Careful choice of words there.

Mark Kohler: I don’t know what you were thinking about. I was just like this.

Mat Sorensen: I thought that was a great, great word selection. Thank you. Yeah.

Mark Kohler: So Mat may have a potty mind, but I don’t.

Mat Sorensen: Those for those real estate investors, that is a great benefit. And we did a webinar, by the way, a week or two ago on comparing the Self-directed IRA to the solo 401K and one of the benefits on the Solok column, in addition to be able to put more money in, as you know, as Mark mentioned, too, is this UDFI for those buying real estate, that’s debt leveraged. Is this exemption that the 401(k)s get the IRAs don’t So that’s that’s one of the nuggets. And I, I, I mean, I don’t. I think I was the one that found that exemption in the first place to everyone else now talks it like 10 years ago I was researching this in the code. I had never heard anyone talking about this. And I was like, whoa. And I was chasing citations citation because it’s a little tricky in the code. Now everybody talks about it this is why you use a Solok. Did you know this? And I’m like, yeah, I think I’m the person that I feel like I mined this one. I was found this little juicy nugget, but wow. But here, let me say one thing, though, because this is one thing I hear we get confusion on here at Directed IRA. A lot of people will say, well, Mat, I heard the Solok are are exempt from UBIT. No, only this little piece we just talked about, debt, leveraged, real estate, all the other UBIT you can get from flipping properties and stuff in an IRA, the 401(k) still has all that. It’s just this little exception for debt leveraged real estate that’s unique in the 401K.

Mark Kohler: Well, I, I love it. I mean Mat you heard it here. Mat discovered that 401(k)s you’re not subject to you if UDFI did you discover the Internet too. Are you going to claim that now we’re going to leave that to Al Gore.

Mat Sorensen: I mean, I worked on it with Al

Mark Kohler: Letting everybody know if you didn’t know Al Gore discovered the Internet. So I just I’m just

Mat Sorensen: And he didn’t discover it. He invented it.

Mark Kohler: Oh, yeah, that’s true. I get that it just wasn’t there. It was like, yeah, I was in a mountain one day and discovered the Internet. Yeah, he invented the Internet, which is almost better than

Mat Sorensen: I kind of miss Al Gore, though. Can it can we can we just have like a normal politician, again, as I just feel like with the Trump and Biden stuff, as it’s like he got the old crazy guy that forgets what he’s saying and then he got the other old crazy guy that just legit crazy and was like, you know, he to mind like a normal politician that just like sweet talk to you and then just does whatever. I mean, just give me that old school, Al Gore.

Mark Kohler: You know, and the press president that kind of just schmoozed everybody. It was it was Bill Clinton, dude. He was a schmoozer. I mean, he would love him or hate him, but that’s why

Mat Sorensen: I call him Slick Willy. Yeah, I liked Bill Clinton.

Mark Kohler: You’re like at the end, you did what, in the Oval Office. But but that time he was done talking. You’re like, all right.

Mat Sorensen: When Trump comes around anyway, you know, we’re all going to be like Donald Trump. What to expect?

Mark Kohler: Yeah, we’re in politics too much, you know, about Al Gore. If any of you want to fun listen, let me tell you this. Some of you may listen to moth radio might get a little digression. This is a little tidbit many of you might love. Moth Radio is a really fun thing. It’s played on NPR and there’s Moth Nights or moth. Yeah, clubs and all this. But anyway, people get up and tell stories with no notes and they have to be true and they’re recorded. And these moth radio hours choose the best in these little venues all over the country. I think moths have been going on for fifteen to twenty years. Yeah. Anyway, this guy got up and told a true story of him being a speechwriter and how he got a chance to write a speech for Al Gore. And it is the funniest moth I have ever. listened to I got Mat to listen to. You loved it, right?

Mat Sorensen: Yeah, I loved it. I’ve shared it. I think it’s hilarious.

Mark Kohler: Yeah, it’s so good. So anyway, so Mat, we’re going to give you that

Mat Sorensen: Line in that. I’ll just go listen to it. It’s hilarious. But the best line is and those of you old enough to remember Al Gore, I know some of you young kids are like, who that who is Al Gore? You know, Google him. All right, he was a vice president. He was he was vice president.

Mark Kohler: Ok, under slick Willy.

Mat Sorensen: Clearly understood. Clearly under under Bill Clinton. And and so one of the jokes was and there’s a funny story about how he gets to this joke, but is that Al Gore is so boring that Al Gore’s Secret Service code name is Al Gore.

Mark Kohler: Yeah, it was good. It was good fun. Fun stuff. So everybody just get on a listening device. Actually, I would go to Google and type Al Gore moth and it comes right. And then it will take you to an app to watch that and you’ll love it. So, OK. I don’t think there’s many more nuances that we haven’t already covered, we’ve got the Roth IRA versus the Roth IRA when we talked about RMD conversions. Oh, I’ve got one more.

Mat Sorensen: I had one more to note. So. 

Mark Kohler: Oh, you’re going first. OK, go ahead.

Mat Sorensen: I thought the ball was starting to come my way. Sure. I was squaring up. And you’re like you’re

Mark Kohler: The inventor of UDFI. And 401(k)s, go ahead.

Mat Sorensen: I did not invent that. Al Gore invented the Internet. OK, I discovered it. Discovered. OK, sorry. Yeah, I’m more of an explorer, than an inventor.

Mark Kohler: Ok, well we are not going to touch that word today with our ongoing analogy, but.

Mat Sorensen: Ok, go ahead. Yeah. Was different, you know like and it was like Magellan, you know. OK.

Mark Kohler: You forgot yours, didn’t you? Do you want me to go now?

Mat Sorensen: I remember. I remember. All right. All right.

Mark Kohler: I’m ready to go. I’m here to play. I’m ready.

Mat Sorensen: Ok, I got it. I got on a swing through. Ready right off the bench. All right. From the contributions on a Roth 401K, I just want to note a few tax reporting things in your IRA, a Roth IRA Directed IRA were your custodian. We’re doing everything for you. Right. We’re reporting that to the IRS. We’re tracking all that we got you don’t worry. You don’t need to worry about anything in a 401k, though. You got some work in coordination to do. Your accountant needs to know that you’re putting this money in. Even if it’s Roth, it still goes on your W-2 for US court owners. OK, you so prompt, you’ve got to be tracking it to it’s going on your taxes. When you convert, you’re going to get a 1099. So. So now when we’re going to do that here, Directed. If your account is a custodial account it directed and the 401K, it’s going to Roth like we’re going to help do those tax reporting things. But just keep in mind there’s some more tax reporting on the Roth 401K side. And the one that seems to get missed a lot is remember even a Roth contribution for you S-CORP owners. It still goes on your W-2. And I don’t know. You remember the box mark?

Mark Kohler: We talked to take a wild guess. I’m going to say 13. Right.

Mat Sorensen: It’s on there somewhere. Now, you don’t get a tax deduction for it, so it doesn’t reduce your taxable wages on your W-2 like a traditional employee contribution does, but it still goes on there and gets recorded on your W-2.

Mark Kohler: Ok, I’m going to see if I’m right. Let’s fact check.

Mat Sorensen: You were with box 13. Was that your final answer? Take it,

Mark Kohler: Box 12 box 12? Yeah, I think it is BOX 12.

Mat Sorensen: Baker’s dozen dozen. What’s the difference? Yeah.

Mark Kohler: OK, now. I have an idea here, and I could be anyway. We don’t worry about boxes on the W2, that’s a whole other world. OK, here’s my other little tidbit I remembered. Let’s say some of you are trying to do the back door Roth and you want to convert your non-deductible contribution to a Roth. That’s kind of what you do in the outside of the 401k when you’re going to like, I’m going to roth IRA. I make too much money. I’m going to put money into my traditional IRA and convert it to a Roth IRA. That’s called a back door Roth. If you have traditional IRA money already sitting there, you cannot convert that to a sorry, you cannot do the backdoor Roth, until you convert what you already have in traditional money to a Roth. OK, so let me give an example. Let’s say you’re a high-income earner. You make two hundred grand a year and you normally can’t make a Roth contribution. That’s what your accountants told you. That’s what your broker-dealer told you. Your banker told you and you thought you’ve been screwed all these years. Now you’re about ready to throw something at the wall because Mat and I are going to tell you right now that no matter what your income level is, you can do a Roth contribution. What you do is a nondeductible IRA contribution of six grand if let’s say, and then on day two, you convert it to a Roth IRA. Now you have Roth, it’s called a backdoor Roth, any income level. But let’s say you already have a traditional IRA was 50 grand sitting there and you’re listening to this podcast and you go, oh, my gosh, I’m going to go do a backdoor Roth. So you run down to the bank, you make your traditional contribution and you want to convert that six thousand to a Roth. You didn’t get a write off for the traditional because you make too much money. That’s OK. You can convert it to Roth anyway. Oh, you’ve got that 50 grand and traditional just sitting there so you’re not allowed to do that nondeductible contribution and conversion until you deal with the fifty first. So you’ve got to do with that 50 grand and convert it to Roth. We call it chunkin. You’re going to chunk at that fifty without getting into the wrong tax bracket all over the topic. Listen to our Chunking Roth conversion podcast. But what can you do? How can they get around this? Well, here’s another nuance. You can take that traditional IRA and move it to your 401k and convert it. I’m going to say rollover Mat rollover, fair term. I’m going to roll. I’m going to take my traditional IRA and roll it into my 401k. To get rid of it, I no longer have a traditional IRA. I moved it.

Mat Sorensen: Yeah, you could do a direct rollover, direct rollover, a traditional IRA to 401K, changing the account type of traditional bucket.

Mark Kohler: Ok, so it’s called a direct rollover. Thank you Mat from a traditional IRA into a 401k. Now, some of you may say, well, why would I do that? I’ve already got a traditional IRA already have a traditional bucket in my 401k. The reason why is you don’t have to convert it to Roth to do the backdoor Roth once it’s in the 401K. Let me say it another way. 401K traditional money doesn’t have to be converted to Roth before you do the backdoor Roth, the Traditional IRA money does. Now, if that send your brain spinning, that was my goal. My hour with you,

Mat Sorensen: That’s what I was going for.

Mark Kohler: Your brain is spinning, baby. I took you to that level and you’re just boom.

Mat Sorensen: There you go. Yeah, well, fair enough. Give us a call. OK, all right. I think it’s magic. Oh, it’s magic. Yeah, I don’t know that the cars who sings that song, my band used to sing that song. Oh, it’s magic. When I’m with you, I forget that. That’s not one of my favorite Spilly dog song. OK, well, I think we covered 401KS and Roths. For those of you with the day job, just look out for the Roth option and most of you know, company 401(k)s allow for this. You can always convert traditional dollars over to Roth. If there’s a traditional is you got a tax deduction on, you’re going to pay taxes to convert for those trying to max out one of those mega Back-Door Roth 401k strategy. It works those with business owners because you’re the business owner or if you’re a highly compensated employee, an executive at a company that’s really high up, you may be limited to this, but otherwise it’s a great strategy for the Solok. Don’t worry, you’re not subject to all these rules. You can do the mega backdoor Roth, but just know it’s a little takes a little careful planning. It’s not as easy as all the other stuff.

Mark Kohler: Oh I. Oh did I say box 13 or box 12.

Mat Sorensen: You said thirteen and then you said looks like it’s twelve.

Mark Kohler: Yeah it was twelve. Yeah. I was doing some research here on the IRS website and I thought I got it. Bucks. Thirteen bucks. Thirteen is a retirement plan indicator that you’re, you’re in a certain type of retirement plan. But Box twelve is where you put a designated Roth contribution under a 401k plan. It’s in box twelve code 8A. Yeah. There you go. Hey, I don’t want to leave anybody hanging I want to make sure every customer was satisfied today.

Mat Sorensen: Yeah, that’s.

Mark Kohler: There we go.

Mat Sorensen: That’s just what you do. Well, I think

Mark Kohler: Everybody thinks this is fun. Please share this podcast. If you have anybody in the world that you know that might want to self-direct their retirement account at work, at home, at play, just anywhere and everywhere in between. Share this podcast, please give us a five-star review. It helps others find it. And if you’re a new listener, please go back and listen to the first five to ten podcast. We go through the basics so that when you’re now in the middle of these more in-depth podcasts, you’re up to speed. So thanks, everyone. We’ll see you next week.


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