EP 7 – OPEN FORUM SHOW – Self-Directed Retirement Plan Questions
Join Mark and Mat as they answer your difficult Self-Directed retirement plan questions. Mark and Mat dive deep into all of your questions on Self Directing your Roth IRA, 401(k), Traditional IRA, Coverdale, HSA, and more.
Mat Sorensen: Welcome, everyone, to the Directed IRA podcast with Mat Sorensen and Mark Kohler, your favorite tax lawyers, coming to you to talk about taking control of your retirement with a Self-directed IRA.
Mark Kohler: Wow. I think that’s a new introduction. Say your favorite tax lawyers. I don’t think many people have favorite tax lawyers anyway, so we might be OK.
Mat Sorensen: Well, that’s why I thought we were safe. I thought we were safe taking that title. Favorite person, you know, favorite cook. Yeah, I think.
Mark Kohler: 99% of Americans don’t even know a tax lawyer. So we may be.
Mat Sorensen: Exactly! That’s why we can still be favorites if they only know one and check the box. I mean, we could be your the one you don’t like the most. We just are what we are. But also today’s show about why.
Mark Kohler: You’re going to see right away we try to keep this topic light, but we try to powerpack it with very, very important and accurate information. If you’re interested in self-directing your IRA, your 401k set, simple, Roth IRA, Coverdell, HSA, any and all of the above self-directing is the most powerful way to get the greatest rates of return in your retirement accounts. And we’re going to break it down. As we have been doing every week. We have over a million listens on our sister show, the Main Street Business podcast, and we’ve started the directed IRA podcast this year to help keep up with the demand of questions on this topic. And Mat today, this is the Q&A.
Mat Sorensen: This is this is our first time doing it. But this is the time to get your questions answered on Self-directed retirement account topics exclusively here on the directed IRA podcast. So for future reference, you can always go to DirectedIRA.com/submit-a-question or just go to DirectedIRA.com/Podcast and you will see the submit a question button. You can actually record a question if you want and we may play some on the air. You can type them out as some have done and we’ll read some of those. We also got some people who still email us the old fashioned way, don’t love it, but we still got some good ones there and some comments on social media on questions, too. So we’re just going to hit your question. This is time to just get them answered and also hear what other people are thinking and what issues they’re facing as they think about Self-directing their IRA or they’re doing their first deal, or we’ve got some experience people questions here, too, that gets a little deep.
Mark Kohler: I love it. Yes. And the title of the show would be the Open Forum directed IRA podcast. And as you hopefully hit like and subscribe, you will get alerts whenever we record this. It’s also recorded on YouTube, so we try to make it even more engaging if you want to see our bugs on the camera, we’d love to have you go through YouTube as well. But this open forum show is something we’ve been doing for years. The Main Street business podcast and we’ll be doing now about every three weeks. So send in your questions. If we don’t get them to do them immediately, that’s why you would want to catch the open forum show. Ironically, it is one of the most listened to of all of our podcast on a regular basis, because it’s kind of fun for people go, oh my gosh, this person in Duluth, Minnesota or Miami or Seattle have that question. I’ve never thought of that. And so it’s really collaborative, I think, to hear whatever people are doing and asking. Mat you want to your first question.
Mat Sorensen: I love it. Let’s hit the person who went to the website that did it the right way. OK, you’re going to go first. This is Dave. He says in a checkbook. IRA is the LLC that is created only good for use within the IRA. It can’t question it can’t be used for real estate outside the IRA?.
Mark Kohler: Wow. Lots to talk about it. What a catch up IRA is first.
Mat Sorensen: You want to catch up on what, a checkbook IRA? What’s a checkbook IRA? Is that what you said.
Mark Kohler: Oh, sorry, I thought you said ketchup is in the condiment,
Mat Sorensen: But that’s a different category. Sorry.
Mat Sorensen: So you have a checkbook might catch up. This is the beauty of you listening. You can go back and see what the heck I said if I said catch up. Oh, my gosh. It is lunchtime, though, in my defense. So maybe I’ve got to satisfy that ketchup craving. OK, checkbook IRA. In a checkbook IRA, this is basically where you have your own an LLC 100%. We did a show on an entire podcast. Guys, I don’t know what you’re talking to that one, but that LLC is going to be used exclusively for deals the IRA owns. You cannot use that LLC for your personal real estate deals or put in some personal cash and that same LLC later on and go buy a property. OK this LLC is a sacred retirement account, money to the retirement account, keep it separate from everything else. Don’t commingle personal funds in there or other deals or property you’re doing personally. Actually I have an article on a guy. It was an Arizona guy, not one of our clients, of course, but he had all these LLCs that he had IRAs own and he had LLCs he personally owned and he would just move properties around him, whatever the heck you wanted. Of course, a prohibited transaction is alleged by the IRS and he goes to tax court and says, well, I tracked it all and everything and I kept it straight, which he actually did. But it doesn’t matter even if you’re still tracking it all, don’t mix in your personal assets in the LLC that you’re IRA owns. Keep it totally separate.
Mark Kohler: I like that. And just to add another perspective on this. Moving property around multiple LLCs is very common with your regular LLCs that you might own with your spouse or significant other maybe even business partners, and you’ve got multiple LLCs and multiple assets you own in equal percentages. You can horse trade all you want. That’s right. You track it. You book it. There’s carryover basis. So it it seems like that would be OK when you get to your IRA LLC, but it’s not. The IRS says, hey, if you want to do an IRA LLC, this checkbook LLC where you can be the manager and you can write the checks, but you don’t own the LLC the IRA owns it, you’re just almost like a trustee. That could be a very loaded term, but you’re the guardian, if you will, of this LLC and the IRA. And your job is to protect those assets, do not commingle them and invest them properly. Can’t pay for your cell phone, can’t pay for your laptop. This is not your money. It’s your IRAs. So all that a horse-trading that’s normal out there with regular LLCs. You’ve got to stop that when you buy their LLC.
Mat Sorensen: Is that not a Yellowstone reference horse-trading.
Mark Kohler: Oh yeah. I mean I could hear Kevin Costner say that all day long. OK, ok.
Mat Sorensen: I got another question here. You want me to go. I mean I got what I want to play. Can I throw out an easy one. Yeah. And Michael, don’t be offended if I say your questions easy doesn’t mean it’s a dumb question or nothing. It’s a good one that a lot of people, when they’re getting into this area of self-directing, this is one of their first questions. So Michael says have 25 rentals and would like to transition into lending. Can we transfer to the IRA then sell and lend. No, Michael.
Mat Sorensen: And the IRS thought of that. Let me just say, I mean, let’s Mike let’s think about this great strategy right. Sell properties that you owned for years that have a lot of gain built up and sell them to your IRA for what you bought them for, then sell them from your IRA for profit of what they’re worth today. Get all that gain into your IRA and then go do private money and pay no tax on the gain built up right. That would be freakin awesome Mike. Yeah, but IRS thought of that.
Mark Kohler: Now, it’s not the problem that you’re lending. That’s all good. Let’s say it this way. Let’s say Michael had 25 rentals in his Roth IRA or 401k and he wanted to sell them pay no tax more than likely unless there was some debt involved. Maybe, but in general he would sell those rentals with no tax and then he could start doing lending hard money lending, Long term first trust deeds, whatever. That’s not a problem because the properties were in the IRA to begin with. But if you have properties, Michael, or any of you out there that you own in your individual name, you can’t just transfer them to the IRA or give them to the IRA or sell them to the IRA because the IRS knows you’re going to screw over the IRS and you’re going to find a sweetheart deal for yourself and your IRA. So they said, but, Michael, if you want to start lending inside your IRA, let’s find some ways to get money into a 401k or IRA so you can start doing that. But you can’t do it with rentals you already own.
Mat Sorensen: Keep those separate. All right, Cynthia from Facebook asked Florida and lives in Florida, asked on Facebook, Is it too late to do an HSA for 2020? I heard the deadline was December 1st. All right, good question. Now there’s a couple of dates that are critical to doing a health savings account. We love HSAs. You can self-direct them. Mark’s got a lot of stuff on it. I got a lot of stuff, a lot of DirectedIRA.com, HSA owns an LLC that owns a rental, for example. The HSA is cool because you get a tax deduction when you put your money in right at any bracket. Yeah, doesn’t matter if you’re high income phase out, you don’t have to itemize above the line. Everybody can get it. Now, there is a qualification to qualify for an HSA, you must have a high deductible qualifying plan, health insurance plan. The deadline to have that plan to make a 2020 contribution was December 1st. Now you don’t put the money in until April 15th, but the deadline to have the qualifying plan that allows an HSA is December 1st. So some of you might be doing open enrollment right now, for example, like I’m going to do an HSA qualifying plan this year so I can do an HSA. That’s probably going to go into effect January 1, meaning you can make a 2021 HSA contribution, but unless the plan is already in place on December 1st, No 2020 HSA contribution.
Mark Kohler: You know, and I want to take a chance, an opportunity to say this to Cynthy and all of you out there. This is going to sound like bad news, but it’s really good news, this is not a get rich quick. There’s no quick way to build up an HSA or a Roth IRA in general. You could hit a home run with some certain types of investment strategies. But if you’re out there looking for this one and done, oh, I can do this with my HSA and yada, yada, you’re going to be disappointed. But here’s the good news if you look at it with a glass half full. The fact that we’re telling you that this is legitimate and in the long run, you can be a very, very wealthy tax free or tax deferred and that these are legitimate strategies that are not get-rich-quick that actually should give you some confidence. It should actually make you feel good, because whatever you hear get rich quick scheme. At first you’re like, oh, I love it. And then you start driving home and you go to bed and go. Now it doesn’t feel good. Yeah. These strategies that we’re trying to talk about here, at the end of the day, you’re still going to feel good about it. You may not get rich as fast as you’d, OK, but they’re not crazy. Get into schemes. So you may not have an HSA for 2020, but you can certainly have one for 2021 or take the steps to get it. And that’s OK. Five, ten years from now you’re going to have a heck of an HSA and you’re going to be grateful you did it. So don’t be too frustrated. Let’s just start now. Let’s get going.
Mat Sorensen: Should I share my Moneyball example I gave on your workshop on Saturday?
Mark Kohler: Oh my gosh, dude, I have been quoting that to everyone. I’m serious to dinner everybody. You’re going to love this. I was at a dinner over the weekend and I. I even gave Mat credit. I said I was doing my podcast workshop hour thing and Mat Sorensen gave this awesome quote and I told everybody at dinner and there was like that sweet. So Mat tell Cynthia I love that.
Mat Sorensen: And I think this is an important part of those who self-direct that really hit for me. So by the way, Mark’s workshop, I was on it for a little part and you get a lot of Mark on there if you missed it. Markjkohler.com. There’s the recording be up soon I believe. Yes. I think a lot of people, when they get to their retirement, get like you want to hit a homerun, you want to be a homerun hitter and just be done, score a bunch of runs and be like I got a big account. Guys it doesn’t work that way. And I love the movie Moneyball. OK, you’ve got Brad Pitt is the is the coach, right? And he’s are the GM general manager. He’s the GM and he’s picking the players. They’re going to get right. This is the trade. They got all the scouts in the room and he’s got his intern, Jonah Hill. And Jonah Hill is like this stats nerd kid right out of Yale, whatever he’s like. And Brad Pitt starts throwing out names of who these players they’re going to go after. And all the scouts in the room are like, these guys are duds. We don’t want them. You know, they’re not draws. They don’t hit home runs. And Brad Pitt said, but why are we going to get them? And he points over to Jonah Hill, who says if he gets on base and then they and then all the scouts are like, then he throws out the next day and all scouts complain about the next day. And he says, and why are we going to give him any points that Jonah Hill again, because he gets on base and go ahead.
Mark Kohler: And the method of acting of Jonah Hill and Brad Pitt is I mean, it’s Oscar level. It’s just great the way he snaps his finger. And Jonah Hill is like, well, of course, they get on base like, are you guys? And I mean, it’s just a really fun show is very family friendly. And I think it’s. And so Mat bring it home with the IRA.
Mat Sorensen: Yeah. So that’s what it’s like for your retirement account. And that’s sometimes like. You know, don’t try to hit home runs, I mean, you will eventually you can hit home runs every once in a while, but focus on getting on base, get good investments in the account, get them on base. The more you do that, the more money you get in, which is kind of like the more chances up to bat, the more money you’re going to score. But if you’re looking to swing the fences, you can strike out. And most of our Self-directed clients, they’re just doing the same thing over and over again. And it is not sexy. They’re not the home run hitters. It’s boring, but they score a lot of runs. And I think that’s what you can focus on when you’re self-directing, whether it’s real estate or anything else you’re doing.
Mark Kohler: I love it. Now, folks, again, it stumbled onto this podcast and you’re a little your head’s swimming and saying these guys are talking over my head. Remember, this is the open forum show where we’re going to have difficult, medium and easy questions. Take it for what it’s worth. But if you feel like a little discombobulated, please go back. We’ve tried to create the podcast series for this show, the show starting out with a lot of the building block topics. And the first ten shows are a must. And if you can go back and listen to those when you get to open forum, and this is why we waited several months before starting an open forum, because we want you to be able to go back and get those those meat and potatoes. Now, these are kind of fun because these are the this is the buffet line like that. And we’re and we’re going to throw out different ideas. OK, now Mat let’s do one more question and then we’re going to get to the bottom of the hour. Speed round. OK, these are questions on Instagram that must be answered in 60 seconds or less. So we’re going to come to the speed round here in a moment. Why don’t you throw in another general question?
Mat Sorensen: Ok, this was from Mike in Michigan. He says, I have a Self-directed IRA and a Self-directed Roth IRA. I typically buying Flip Homes with the LLC is owned by these IRAs. Occasionally, I don’t have the funds in one of the LLCs to do a particular deal. Is there a way to invest in a property together? All right, so, yes, Mike, it’s possible you could have your IRA LLC, that your traditional IRA and your IRA LLC, that’s your Roth IRA. So those two separate LLCs could invest into one property either in a New Multimember LLC that owns the property or those two LLCs can buy this new property tenants in common right on the deed, tenants in common. If the traditional IRA LLC put in 60% of the money in the Roth IRA, LLC put in 40% of the money, the deed is going to be 60% tenent in common interest to the traditional LLC 40% to the Roth LLC. Tenant in common is basically a way to own Title. Two different parties can own a title of the property based on a percentage basis, and if one party dies, the other doesn’t inherit like other title owners, which, just like you, own your separate piece of the interest in the deed. So that’s common. Doing tenent in common with the LLC like this. Or again you could do a multimember LLC where you pair up the traditional IRA and the Roth IRA LLC into a new Multimember IRA LLC. So we did talk about IRA LLCs I have some videos on the multimember IRA. It’s a one at DirectedIRA.com. If you go to the checkbook IRA page there on the multimember IRA/LLC. But there’s a way you just got you got to be careful and make sure you’re structure right. Come in together at the same time when you’re using those separate LLCs that you have Mike, break up the ownership in the deal based on the dollars. And then you got to be careful about properly sharing expenses between the two and making sure the income is fairly allocated and split up between the two traditional and Roth set of funds.
Mark Kohler: I like it. All right, we’re going to go into the speed round, which can be fun because we can cover more territory in a short amount of time. Obviously came through Instagram one, two, three, four or five questions.
Mat Sorensen: As a lawyer who bills by the hour. Speed round is something that’s going to take a change of gears for me. So now the goal is to answer it as fast as possible.
Mark Kohler: We’re not those type of lawyers. All right. In fact, we’re so busy, we try to answer them quick.
Mat Sorensen: So let me help the next person.
Mark Kohler: Ok, Mat, I’m going to ask you the question. You got 60 seconds and I will not amend your question, so you’ve got to get your stopwatch out. So you OK?
Mat Sorensen: I’m going do it. Let’s be real about this.
Mark Kohler: Then and then I’ll ask myself the next question and do OK, I’m going to amend it. It’s all you OK?
Mat Sorensen: All right. All right.
Mark Kohler: This is from Andrew Abat. Can one own a service business inside a Self-directed account and not pay taxes, go?
Mat Sorensen: Not pay taxes, no, you could own a service business in a Self-directed account, but you will pay some tax. So when you own a business or have business income in a retirement account, my IRA owns an LLC that’s a service business, let’s say. And I’m getting income in the service business, but when that income flows down to my IRA because it’s business income. I’m going to pay unrelated business income taxes is called UBIT it’s an entire chapter in my book. Now, you could say, Mat, I don’t want to pay UBIT, but how do I get out of that? UBIT is 37% it sucks. Put a C Corp blocker on the LLC, a C-corp election, have it taxed as a C Corp. or you’ll pay 21% better than 37%. I’m saving 16% and then those profits flow down to the IRA no UBIT tax but you’re going to at least pay 21% on the corporate income tax when you add in the C-corp Blocker. So there’s a way to do that. Lots of clients own service businesses or sell products in that way.
Mark Kohler: To one that was amazing.
Mat Sorensen: All right. I don’t know, did it include the Question Time or just the answer?
Mark Kohler: I’m going to do the answer in 60 seconds, but it be five seconds for the question. OK, I will field this one. This is from G with. Can I use a Self-directed IRA to buy into a company as a partner owning less than 50% if I currently get a 1099 from it? This is a tricky question because let’s say it’s John and he’s going to buy into a company that’s owned by David and David owns 50% and John’s going to buy 50% of the company with his IRA. Well, in this example, he even says, I’ll do less. I’ll buy 40% of the company in my IRA. And David can own the other 60%. But this company is going to hire me and give me a 1099. Let’s say it’s a construction company and it’s going to hire John. Who does drywall. Is that allowed? Well, the answer is. Fifty Shades of Grey, if your ownership by the IRA in this mutual partnership is less than 50%, technically, you could be allowed to do that, John, but the closer you get to one percent, the safer you are. We would prefer clients to own less than 10 to 15, maybe 20 percent at the most with their IRA if that company is going to turn around and hire you as a subcontractor, even as an employee. But is it allowed? Yes. Make sure you get a consultation with the tax lawyer knowing this law so that you don’t put yourself in harm’s way. It’s doable, but be careful.
Mat Sorensen: You know, I want to comment on that, but I’m not it’s not how this works when the speed round. Yes, I was good. I like that. Answer them.
Mark Kohler: Ok, this is from Pink Peonies 06 for Mat. I’m going to presume this is a female, maybe I shouldn’t, but we’re going to go with Pink Peonie says I was terminated from my job excuse me, I was terminated from my job during covid, can I roll over my retirement account at this old job to a Self-directed account?
Mat Sorensen: Yes, you can. OK, sorry about losing a job during covid, but yes, your old employer plans 401k are common, of course, but your old employer plan, when you don’t work there, the restrictions are off, you can roll that account over to an IRA. So now typically you have a traditional old employer accounts. You roll it to a self-directed traditional IRA, which we do at directed IRA, just go to DirectedIRA.com, pick the traditional IRA app. You can do it the DocuSign version and be done with it in five minutes online. Then we request a rollover of the money from where it’s at now. Let’s say the company you worked for used Vanguard or Fidelity. We’re going to tell them, hey, Pink Peonies has an IRA over here, send the money over here and put it in the IRA. Now, when you do that, it’s not taxable. There’s no tax ramifications for moving the money over to an IRA. Now you can Self-direct. Now you can go invest in a small business or real estate or a private fund or any of those self-directed assets that are common that clients are doing at Directed IRA.
Mark Kohler: Boom, 60 seconds. You’re awesome, Mat Thanks, Pink Peonie. All right, this is from G with a second question. I’ll take this one. Do my best. You said, Oh no, no, no, I don’t want to do that one. I think Mat will actually do better with that. OK, and I’ll explain why in a moment. I’m going to take Daniel Soldi question. He says, I have a traditional and Roth IRAs. Can I combine both into a Self-directed IRA? Daniel, the answer is kind of let me say what you can’t do, but what is possible. You can’t take a traditional and a Roth and combine them persay. That would not be proper lingo. But you and then invest it that way can both be a self-directed account. Absolutely. An IRA could be traditional IRA could be Self-direct and Roth self-directed. Option one to make this happen would be doing a conversion. You would convert the traditional IRA to a Roth. Now they’re combined into one account, a Roth account, and that could be Self-directed. So you’re not combining. The word would be converting. You’re converting traditional to Roth. The second option is if you say, well, Mark, I don’t want to convert the traditional and pay taxes. You could form an LLC very common at our office where you take 50% of this LLC, let’s say they have equal dollar amounts, 50% of the LLC could be owned by your traditional IRA, 50% to be owned by your Roth. And now you’re doing business together in a self-directed LLC with two accounts. But they’re combined at the LLC level, not at the IRA account level.
Mat Sorensen: Love it, yes, you can have it your way out your way.
Mark Kohler: That’s right. To a fast food commercial that way. All right. Now, Mat, this is from G With. Now, let me just say the reason why I think Mat is good to answer this is Mat is the CEO of Directed IRA. He sees a lot of deals come across his desk and G kind of asking for some examples so Mat he asks, do you have any examples of clients using a Self-directed IRA doing raw land investments or farmland that is leased so maybe run with that land, farmland or even leased land? Do you see that in IRAs and maybe some examples?
Mat Sorensen: Absolutely. So I work with a lot of clients that have done land that’s, let’s say, agriculture that has been leased to someone else who farms it. Now, you want to be careful on how you do this. Generally, your IRA is going to own an LLC 100%. The LLC will own the property, and then the LLC is going to lease it to someone else who’s going to farm it. Now you want to get rental income, this goes back to a really key part where you self-direct you don’t want business income, you don’t want farming income, you want investment income, which is generally going to be rental income in this context when you’re owning real estate. So if your LLC, your retirement account, effectively owns land, it’s going to rent it to a farmer or someone else who’s going to actually work the land, you know, get the crop or whatever it is that you’re doing there and just pay rent back to your LLC or your IRA. Now, it could be a fixed rate rent. It could be a rent based on production of crops as well. But we want to keep it to be rental income as investment income, because if you don’t, it could be UBIT.
Mark Kohler: Gosh, I want to add something to that, too, but I won’t. OK. That was our Instagram speed round. Folks, if you’d like to submit questions in that format, just search Instagram for Mark J Kohler and follow me on Instagram and make sure you put directed IRA podcast question and we’ll make sure we cover them through the Instagram format. Kind of fun. OK Mat, you have some questions there? Entered the from the website. Maybe you’ll do something a little meatier.
Mat Sorensen: Yeah. I had a question from Ricardo has an IRA LLC that owns a rental property, is in his mid 70s, wants to pull funds from the LLC effectively now to start living on. Let’s get to that. You can’t do that exactly that way. The question basically, do I need to sell the property? Is there a way I can get a loan and still keep the property? So let’s let me try to explain this here what Ricardo has. I’m making some assumptions here. I presume Ricardo has an IRA/LLC that owns a property 100% and he bought it with cash. OK, this property has some rental income. Riccardo’s in his mid 70s now he wants start taking more money out of this. All right. he wants to start taking distribution. Right. Is what you do when you’re in your 70s and got a retirement account. You might start living off the money totally fine. Now, the first thing is, remember, never take distributions from an LLC, so if you use an IRA LLC, which is common for real estate clients and some of these questions, we’ve been getting a lot of them had LLCs before. If you’re taking distributions, remember, don’t take it from the LLC. You send money from the LLC back to your IRA and then take a distribution from your IRA. So, Ricardo, if you have the rental income cash bill coming into the LLC, send that cash from the LLC back to your IRA and just take distributions from your IRA, which your IRA custodian, Us if we’re your custodian will report it to the IRS at the end of the year and you’ll pay taxes on it. And that’s just how it works with distributions from a traditional accountant. Now, let’s say you’re like the cash bill is not enough, but I don’t want to sell the property, which I think what the issue is facing here, I want to get more money out, but I don’t want to sell the property. You could get a non-recourse loan Ricardo so you could get a nonrecourse to basically strip out some equity for the IRA. The bank will put a loan on the property basically to strip out some equity, which will go to the LLC, which you can send back to the IRA, and then you can take a distribution of some of those funds and you have a loan on the property. But there may be a way if you’re looking to get more distributions out, but you’re not yet ready to sell the property to get some of that equity out early. OK, I like a complicated topic, but possible. You got some options you don’t have to sell.
Mark Kohler: Excellent coverage of that question, Mr. Sorensen. I want to throw out something a little different right here, too, if I may. And I could share I have three that I’d like to share, but we could do them in a row or take turns. What’s amazing, everybody. You may think that this topic is somewhat finite or compartmentalized, and once you learn it, you’re good to go, but I could not I have been astonished in the last year, frankly, at how much I learned from month to month. I can’t say day to day or week to week, but every month I learn something new in the self-directed industry. That’s just what you can do that. And I never do it. And I have to say humbly that I learn a lot of those tips through my amazing co-host Mat Sorensen. So I thought I’d like to share just two or three things I’ve learned in the last year that you would never have seen or recently in any sort of blog or speech of mine. Is that OK? Mat can I just mention I like it. OK, the first one is the most recent that blew my mind is in 2021. But let’s use 2020 numbers in 2020 if you want to contribute to a 401k. Or this would count for a SEP as well, but let’s just kind of do 401k world, many of you that have a soul for one that are solo entrepreneurs or you’ve got a 401k at work and then something a little back-door Roth yourself in the 401k rule, you were sold. And this is what I knew starting at the beginning of the year. You could only put $57,000 into a 401k. Pretty straightforward. You can go Google this? Everybody will say your maximum contribution is $57,000. No, it’s not. What’s interesting is let’s break it down really the first $19,500 if you’re under age 50. $19,500 is your contribution. And then the company contribution is $37,500 if you were going to try to get all the way up there. So if you have your own solo 401k, if you take the right amount of salary, you could do $19,500 + $37,500 match which it is sometimes called you get to your $37,000. But Mat what I learned recently, as you may not be surprised, you’re like duh is that if you have a 401k at work and the company matches let’s say $5,000 for you, so you put in $5,000 and the company matches $5 that $5,000 that the company matched, does not go towards the $57,000. So you could go back to your own side hustle, side gig, have a solo 401k and still put in $37,500 in a company match scenario if you get the right payroll figure. And finished putting in the max of $19,500, so if you put in 5,000 at work, you can still put in $14,500 in your solo and then get a match of $37,500. And so in that example, you would actually be up to $62,000 in A 401k, which I never thought you could do. I thought that $57,000 was a hard ceiling. Mat did I say that wrong? Is that right.
Mat Sorensen: I mean that’s essentially how it works is that if you have a day job for a company, you don’t own OK you’re just a day job. This is Microsoft. You have a day job and you got your side consulting thing on the side that you have a solok, it works. Some clients, everybody wants to take this to the next level because when the clients say Mat, why don’t I just set up two different companies? I’ll the one over here, which I throw $57,000 and then this S-corp I’ll have my other entity over here, which I’ll throw $57,000 into that one. That doesn’t work. OK, the way this will work is you get a count of $57,000 max per 401K as long as you don’t own or control that business. So the day job person who doesn’t own that business can do everything they want in that 401k. And it’s not going to affect the total of $57,000 they can throw into their solo. It reduces the employee contribution in the solo. Like Mark said, if you threw in five in the day job, you can’t do 19 five over here is employee, you can do 14 five. But that’s fine. You still do all the rest up to $57,000 in the solo as an employer contributions which in the solo who cares. You’re the employee and the employer throw it all in. So that was a cool one. I actually learned that this year and I’ll say it, I learned that from a client and I learned that from a client. He’s like, Are you sure? And so and we have lots of lawyers and CPAs and financial advisers who are clients of ours that are and just other investors that are just really smart. So I like to learn, too. And whenever a client challenges me, I’m like, I don’t want to be right I just want to get it right. So tell me what you know. And we chased it all down with this client and was like dang that was a great that’s a great tip. So we, of course, knew we couldn’t just stack up ten Soloks and get you a $570,000 in contributions because you maxed out ten. But the day job person that has their own separate Solok, don’t worry, you can still do $57,000 total regardless of what you’re doing in your day job 401k.
Mark Kohler: I love it. I’m going to share those. I got one more but we’ll do it later. Do you have a question about what do we got from our listeners.
Mat Sorensen: All right, let me go back. I had a question and we’ve talked about this recently on Back-Door Roth IRAs. So one hurdle on the backdoor Roth IRA. And there’s a whole Mark and I have done a Main Street business podcast episode on this alone. So go to Main Street Business podcast and you can search that MainStreetBusiness.com For that entire podcast episode. But like I do a backdoor Roth IRA, that’s how I can self-direct I have a lot of people over the years come to me and say Mat how can these rich people have a Roth IRA? You know, how can Peter Thiel have a Roth IRA? He’s a billionaire. OK, I thought you can’t have it if you’re high income. No, you can have it. You just have to convert into it. OK, so you can do a Roth conversion and convert into it. And that could be any set of dollars. You’ve got one hundred grand and a traditional IRA, you’ve got a million and a half. You convert the whole dang thing over to Roth. And you know what? The IRS loves it when you do that because you’ve got to pay a ton of tax to do it ok. They’re no going to send you a Christmas card or anything, but they like it. That’s why they let you convert into a Roth IRA. It’s because the government gets a ton of revenue.
Mark Kohler: And Mat if I can just highlight, I think this has to be in the top ten most misunderstood or, yeah, wrong strategies in tax planning in America, I probably hear that statement at least weekly, I want to say daily, but it’s weekly where some client comes in and goes and I say, OK, let’s get your Roth going. Well I make too much money? And they’ve got a legitimate accounting firm helping them. It is astonishing to me how many people don’t realize that you can build a Roth at any income level.
Mat Sorensen: Yep. Yeah. And and even if you want to just throw $6,000 a year and like like me, I have a bunch of traditional dollars which I self-direct, but I still there in my 401k actually. But you can convert there. Sorry, you can do a $6,000 a year contribution. Seven thousand if you’re over 50 that you can then immediately do a back door by doing a conversion of and that’s called a backdoor Roth IRA that lets you get $6,000 in a year. Now if you have other traditional dollars like you had a traditional IRA already, you have to automatically convert that first before you do this, which makes sense anyways. Just do that anyways. If you want Roth, get the low hanging fruit, get the traditional dollars you already have converted over to Roth. But I just want to first, let you know there’s a couple of ways to get to Roth the straightforward conversion, the second way is the back door Roth IRA, which if you go to DirectedIRA.com, we have a backdoor Roth IRA page. It’s got some videos of Mark and it’s got some diagrams, too, on the process. And so don’t feel left out like you can’t do the Roth IRA if you’re high income.
Mark Kohler: Well, it’s funny Mat you bring up that question, because the second thing I learned, and this is in the last week and some of you are like, man, I don’t know if I should trust this Kohler. You know what? I’m out there learning. And I think a lot of CPAs get into ruts and they get good at what they know and they don’t go outside that. And I I’m not saying I’m smarter or better than anyone else, but I will say that I try to be constantly learning. So what I learned in the last year. Mat just said you could put $7,000 in the back door Roth did you know you have the potential to do up to $70,500 in a Roth in a year that you can contribute. I never knew that. So let me give the two numbers, if I could Mat for under age 50 and you make a million dollars, I do not care any income level. You can do a back door Roth that Mat just described. Go to our show and listen to that or read it up in Mat’s book $6,000. Then I can set up a Self-directed or a solo 401k in my side hustle side business. If you have that opportunity, I could put $19,500 in a Roth 401k at any income level on top of the back door Roth. Then the $37,500 I talked about the company match or company contribution. You can convert that to Roth the day after the company makes that contribution. So at the end of the day, that’s $63,000 in new Roth contributions in a given year. Then if you’re 50 and over, you can do $7,000 in the back door Roth, and you can do a catch up of $65,000 in your 401k. So it’s not $19,500, it’s $27,000. So now if you add that up, that’s $70,500. So I shared that with a client this week, because they go we want to build up our Roth as fast as we can go. How much money you got. $7,000. You said you want to build up how much you got. They’re like we’ll do whatever you say. $70,000. No way. You can’t put $70,000 in a Roth. Yes, you can.
Mat Sorensen: Yup. Love it. Those are new dollars, too. So, yeah. I think, you know, Roth accounts are becoming more and more popular. I was looking at our account mix at directed IRA. We’re almost 50% Roth account, which is pretty high. So in comparison to the rest of the market and it’s just we track clients that like the tax-free for the long haul, want to pay tax on the seed now rather than on the harvest at the end of the day after they’ve invested in save from that account for years. Well, thanks, everybody, for all the questions. Did you have a last one there, Mark?
Mark Kohler: But I did say a third thing, so I guess I could work, so I’ll just throw this out as a kind of the culmination of our show today, probably the biggest thing that I’ve learned that has impacted me at a personal level as well. Is the creativity of bundling your different retirement accounts, as well as doing investments outside of your retirement accounts, finding that balance, that’s first and foremost, we don’t want you to think we’re just 100% 401k IRA guys. We like buying in rentals in our own name. We like having our side hustle side business main business building wealth. That all makes sense. But the one that I was going to call the trifecta of another sort is using the power of your HSA, your Roth and your 401k. And bringing that together, if you’re married with your significant other or with even your children, I have two years ago I didn’t even harp on this with my clients. Now I go, how many kids you got? We’re going to set up that many Roths. Get them going. Get those Roths going right away. And this is nothing new. You’re going to hear this from the Dave Ramsey community, that the sooner you start learning those good fundamental habits of saving and building a Roth IRA, you’re going to help the country. So more and more people are not reliant solely on Social Security and you’re going to help yourself and your family and leave a legacy. And so I think this conversation just needs to be talked about more often. And it’s probably been the biggest revelation this year for me.
Mat Sorensen: I’m sorry. That’s like a public service announcement, isn’t it? It’s like I feel like a little was it at NBC or CBS and I was like, the more you know, and they do so jingle. All right. Well, thanks, of course, for being with us today and for those that submitted questions. Well, I think once a month at least, we’ll do this open form show. So you could have DirectedIRA.com/Podcast to the podcast page. You can find other shows and you can also submit your questions there. So there’s ask a question button. Just hit that. You can type in then and we’ll come back and grab all those for the next upcoming open forum show.
Mark Kohler: And people are going to say this Mat was as too humble and self-conscious to say to himself, people, if you want to take advantage of the strategy and get better and better, get to the SDIRAhandbook.com site. Let me repeat that SDIRAHandbook.com. That’s Mat Sorensen’s personal page. I love him. I don’t make any money off of this get to his page. And buy the summit, it’s a two-day recording that we put together in 2020 all on Zoom. Lots and lots of Q&A. Amazing in the Zoom class with us. Get that recording, watch it and pick up a copy of Mat’s newest version of his book. It’s got a new cover with a gold seal on it. Get that book. It should be a resource on your desk at all times and has that legacy on your kids. It’s Christmas time buy everybody a copy of Mat’s book? Give them a pass to the summit. Watch it as a family, I really think you have an opportunity to help those around you with this topic. It is literally life-changing, so take the time to do that. Mat’s put together an amazing website and again, that’s SDIRAHandbook.com. So we’ll see you next week. We’re going to do every week. Come join us.
Mat Sorensen: Yeah. Thanks, everyone. Thanks, Mark. Thanks for the props on the book and being my sells guy today. I really appreciate. You betcha. Your commission is a big thank you.
Mark Kohler: Living the dream folks. See you next week.