Main Street Business

#528 All Things Solo 401k

• Mark J Kohler and Mat Sorensen

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In this latest episode of the Main Street Business Podcast, hosts Mark J. Kohler and Mat Sorensen explore the Solo 401(k), detailing how self-employed professionals and small business owners can benefit from its substantial contribution caps and diverse investment opportunities, such as real estate and cryptocurrencies.

Here are some of the highlights:

  • Mark and Mat breakdown how a solo 401(k) is key to building retirement wealth.
  • Mark and Mat unpack the optimal order of investing: Company match, Roth IRA, HSA, then solo 401(k).
  • Why the Solo 401(k) is ideal for high-income self-employed individuals.
  • Cannot have solo 401(k) with full-time employees (1000+ hours/year)
  • Spouse can have separate solo 401(k) if they have their own business
  • Self-directing investments: Not limited to stocks, can invest in real estate, private companies, crypto
  • Importance of maintenance and requirements: Track contributions, file Form 5500 when assets exceed $250,000
Speaker 1:

Welcome to the Main Street Business Podcast with your distinguished hosts, mark J Kohler and Matt Sorenson. Both are best-selling authors and have over 25 years of industry experience, with 10,000 client consultations, making them the leading tax and legal experts in the nation. Together, they'll unpack the most complex tax, legal and financial strategies crucial for saving more, stressing less and building generational wealth. Today they're your personal advisors, ready to break it down for you and make the tax and legal game easier than ever. Here is Mark and Matt.

Speaker 2:

The amount of money you could put in that solo this year could be a huge game changer. And then you're like, ooh, take the money and run the estimate's over 50 million Americans with a side gig, side hustle, trying to make ends meet. You can have a 401k for that.

Speaker 3:

If you are self-employed with self-employment income. I know there's so many people listening. They're like I've never had an IRA, I've never had a 401k.

Speaker 2:

This is, for you, the side door is a great way to create more write-offs in the rental portfolio.

Speaker 3:

If you have a portfolio of rental properties, you're still in the party the common characteristic and trait of people that have large accounts is they don't wait for the deadline. They put it in as quickly as they have it because they want their money to compound faster. Welcome everyone to the Main Street Business Podcast. This is Matt Sorensen, joined by the incredible Mark J Kohler, the man, the myth, the legend and, by the way, I want to just say how good you look today.

Speaker 2:

Thank you. Your hair is like perfectly command occurred. I, you know, when I go with the Matthew McConaughey, look, there's always a hair that's somewhere. You know cause I? Just it's a messy.

Speaker 3:

Look, it's tricky, yeah, you just get 80% right if you're doing the McConaughey look, but here's the trick Lighting, Lighting. I came in here and I'm like we got to work on the lighting and we did that. Oh, and then look better yeah.

Speaker 2:

Thank you, dana, I'm not doing anything, it's lighting, it's lighting, okay. Well, everybody, thank you for letting us have a little fun here with you. 401k may be a seemingly boring topic, but it's not. This is the key to your future and building a beautiful retirement. And, by the way, can I just say a 401k does not mean wall street, does not mean stock, does not mean you have no control. So many people in America, millions of people in America, think a 401k means stock and they have no control over it.

Speaker 3:

Yeah, and here's what it is not as well. It is not. I got to work at a company that has one Self-employed people. You got a side hustle, main hustle. I don't care if you are self-employed with self-employment income. I know there's so many people listening. They're like I've never had an IRA, I've never had a 401k where you can put $69,000 a year. We're going to break it down, all the pros and cons. We love it. If I ever talk to someone self-employed hands down, 99.99% of the time I'm like your choice should be a solo 401k, don't even think about anything else. Do a solo 401k and we'll break it down today on all the rules, how you use it, how you maximize it, why it's freaking awesome, why you should have one.

Speaker 2:

Another thing it's not expensive. I was training over 130 CPAs and enrolled agents yesterday and someone said, yeah, but they're expensive, mark. I'm like what? No, they are not and there are so many myths about that. So today we're going to go through the myths, the how-to, the cost, the benefits. Try to break it down quickly for you. This will be a really well-listened to podcast and YouTube video, I know, because so many people just want the straight facts on this.

Speaker 3:

Let's start with who who should be doing this.

Speaker 2:

Okay, I was going to just say too an Uber driver can have a 401k, a door dasher, an influencer online, a real estate agent, a consultant, I mean you're selling stuff online.

Speaker 3:

I don't. You get a 1099 for commission sales Like you're self-employed.

Speaker 2:

Yeah, anybody. There's now, I think the estimate's over 50 million Americans with a side gig, side hustle trying to make ends meet and you can have a 401k for that and you can have one at work. You can have a Roth IRA, you can have an HSA, you can have a traditional IRA and a solo 401k. So they are the best kept secret.

Speaker 3:

Yeah, and you can have the day job 401k that your company is matching in and you also have a solo 401k for your side hustle.

Speaker 2:

Yep, we'll talk about some strategies there. So that's number one. I like, matt, that you led with. Who can have a solo 401k? So there's your answer. Anybody with self-employment income? There's your answer. Anybody with self-employment income, you're good to go Now. I want to say, too, that there is a hierarchy here. Who can have one, we just said, but who should? And I want to say this I think the average American, including myself, matt, we've taken the same approach Fund your Roth IRA first, get a match with your 401k at work first, because if you can put away enough money to get 100% match at work and that's all you can afford to do do that and then fund your Roth IRA at home.

Speaker 2:

Do that. So, right there, you're talking about someone with a hundred thousand dollar salary, which is a good salary I mean middle-income America, that's. That's pretty nice. A hundred grand, you're probably getting about a 4% match at work. So that's four grand. So that's about three 400 bucks a month. Then you can do your Roth IRA at home and we say you can invest in what you want. There's another 600 a month. So if you're putting away a thousand a month between your day job 401k and your Roth IRA at home and that's all you can afford to do. And then maybe you're doing a health savings account contribution and maybe you're trying to do a little rental property on the side. I'm good with that. But if things are going well, that's when the solo comes in. If you're like, hey, I can put away more than a thousand a month, mark, okay, that's that. Would you agree with that?

Speaker 3:

Exactly. Yeah, I shot a video called the optimal order of investing where I broke exactly that down. We've been talking about it for years, probably broken down into 13 steps on the optimal order of investing, and it was go get the match and get the hell out. If you got a day job 401k, do the Roth, ira and HSA next, then come back to your 401k. But here's what's different for the self-employed people. Let's say you don't have the day job 401k, where are you going to go? First, you can just go right to the solo K. Now you might say, yeah, matt, but I only want to throw a few hundred bucks a month away. You know I'm making 70 K a year. I'm not going to be dropping kids.

Speaker 2:

I'm incomes tight. I'm trying to get out of debt.

Speaker 3:

Don't worry about the solo. Okay, yeah, come to it later. Do the Roth IRA, that's right Start. But once you're like, no, I'm doing my seven K a year, cool, then we want to hit the solo 401k, because you can do $69,000 a year.

Speaker 2:

And here's for any of you that are up to it.

Speaker 3:

For any of you that are high income, this is the big thing about the solo 401k. You can do 10 times as much in annual contributions. So if you're like the 45 year old, the 50 year old self-employed person that's never had an ira or 401k and you're feeling like you're freaking behind, where are you going to move the needle in a solo 401k?

Speaker 2:

yes, all right now. We've talked about who can as a business owner, if you should, or the order. Now let's ask the question do you qualify Because here's the deal If you have employees? And I'm going to define that quickly, and then, matt, you clean up the mess here. I'll try my best, right, I'm going to define that. The rules have been shifting the last few years on this.

Speaker 1:

They have, they have.

Speaker 2:

Sometimes in your favor, sometimes not, but if you have employees, we have to address that. Okay, you cannot have a solo 401k if you have a full-time employee, which is defined as a thousand hours a year, which is freaking 20 hours a week. I know that sounds crazy.

Speaker 3:

Full-time huh yeah, that's full-time whatever.

Speaker 2:

But if you have an employee that's now had an anniversary date of one year, so they've been with you for at least a year, working an average of 20 hours a week or more, that is determined to be an FTE full-time employee, and that full-time employee has an anniversary date of one year with you, then you cannot play in the solo that year. You could play in a solo the first year while they're just kind of starting, but the next year, when they hit their one year anniversary, you're going to have to shut down that 401k, which is okay, roll it out to an IRA and then go with the group 401k a safe harbor, which is great too. That's fine. But the solo is only going to be okay up until that anniversary date. Now if your employee quits before they hit their anniversary date, or you fire them on the 364th day, you're good, you're out.

Speaker 2:

Now the part-time employee. You can't have more than three part-time employees and it's the same employee, the same three years. Sorry, a part-time employee that has their three-year anniversary. So I knew I'd screwed up somehow. So it's a three-year anniversary for a part-time employee, but this does not involve your family or kids. This is a third party employee. So three-year anniversary of a part-time, one-year anniversary of a full-time. You're out.

Speaker 3:

Yeah. And so now let me say who's okay in the employee Cause? You might be like, well, I'm an employee in the business, my spouse is, maybe one of my kids are. I got a business partner. You're good, those employees don't count against you. You can still do a solo K plan and each of those persons your spouse, that may work in the business, your business partner, they can have their own solo 401k account in the plan and they can be doing $69,000 a year.

Speaker 3:

Okay, but it's these third party employees, full-time, been working, work for you for over a year. Part-time, under a thousand hours, are doing. I've been there three years where you're like, eh, this isn't a solo K. And the point of that from Congress was, hey, we intended this type of 401k to be the self-employed person that doesn't have employees. And if you're going to have employees, by the way, you need to give them this incredible benefit too. And so most people are like, yeah, I'm not going to do a solo K, I'm not going to pay my assistant or my office manager and drop what I'm putting in my 401k for theirs. So that's kind of the gist and the logic.

Speaker 2:

Sometimes there's logic in the tax code. Now, this is where this is such a fun podcast. I want all of you to embrace this, because once you know the rules of the game, you can you exploit it. I play these board games with my kids at times, during the holidays especially, and I just I get killed until I know, understand the rules. Then I turn the tables on them and take their money. But you it's, but you got to just know the rules here.

Speaker 2:

Now here's a twist on this. You say, well, mark, this is my side hustle, that I'm going to do a solo 401k. Yeah, I have another business over here, but I'm not going to do the solo there. Nah, any employee you have in a full-time employee in any company that you own 50% or more. So if you've got a little restaurant over here with employees, or you're a doctor and you've got employees over here and you're doing a little consulting on the side, you're like, oh, I'll do my solo over here. You have to look at your whole umbrella of companies. So if you have full-time employees in any business that you own 50% or more, or your spouse we're not your spouse we're not going to go there.

Speaker 2:

Yeah, let me hit the spouse one. Yeah, there's some loopholes here we're going to play with and some strategy. But just know, you've got to look at all the companies of which you may own and if you have a full-time employee over there, then you've got to do a group and you've got to include all the people. Yeah, now, as spouses.

Speaker 3:

Now got to include all the people. Yeah, now as spouses. Now let's hit the spouse one, because this is one where you could have a business with employees and you can't do a solo. Okay, let's say you're the dentist and you got the office people and the hygienists and whatever, and you got 12 employees. You're like I want to do a solo. Okay, like that, you can't do it. We can do a group 401k and you're gonna do a 401k for you and your employees get included and maybe you throw in a little match and that's great, you can still do that, but we're talking about the solo today. But let's say your spouse is like a real estate agent. It has nothing to do with your dental practice, but they have their own business and they don't have employees. Your spouse could do a solo 401k. Okay, no-transcript, cool to say, hey, that spouse, it's not an owner in your business.

Speaker 2:

Um, where you have employees they can do their own thing. They're able to do their own thing and they can have a solo K and they can do a 69 K a year in it. Yep, All right. Now another little side strategy we'll mention it is if some people are like, well, I don't have a full-time employee, but I'm going to have one next year, so it's not worth the bother. Whoa, if you can ring the bell and drop some money in that solo this year, knowing that next year you're going to have to convert it to a group, that's okay.

Speaker 2:

Take the money and run, Because the amount of money you could put in that solo this year could be a huge game changer. And then you're like, ooh, and you're going to have the ability to contribute to that solo up until when you file the tax return next year too. So don't feel like you've got to put all that money in right now. Let's get it set up. Let's decide how much we want to put in it for this tax year. You might have until September or October of next year to put that money in. You may even borrow or refinance or say I'm going to throw some money in that thing and get that pump primed. Then I can fall back to a group Also. I'll just say, if you hit that one-year anniversary, I would argue, go over to a SEP for maybe one year, because you have a two-year anniversary deadline With the 401k. It's a one-year anniversary, you can't do a solo.

Speaker 3:

You get an extra two years on top of the one, so you get a total of three for the SEP IRA for employees. That's you get a total of three for the set buyer.

Speaker 2:

That's right, a total of three, and so some. Now that's a topic for another day. But so don't think it's no 401k at all. I'm stuck with a roth. You could do a set in that interim period and really get some good money in there and then go to the group maybe three years from now or whatever. I mean, there's some options here. Yeah, so that's where I'm doing. I'm going to say this too, if already your brain is swimming we have a 401k comprehensive consult at our office where you meet with one of our tax lawyers. For 1500 bucks you get a 401k, you get a consultation, a trifecta and a plan. So just learn enough here to be dangerous and know that your current advisor might be leading you astray and you can have that consultation and we'll bring it all together for you. Don't feel like you've got to do a DIY Home Depot thing here.

Speaker 3:

Yeah, and right now there's a special. I mean we have a special going in our law firm, kqs Lawyers, and at Directed, where we do the accounts, so you can be saving a couple of hundred bucks to get it done right now. Cause here's what happens we get buried in November and December and our team is buried doing year end tax planning. We're setting up tons of solo case for clients because they want to get the plan set up. They want to be maximizing their contributions, and so we're like let's get them ahead of the game here. So if you're listening to this now, just know KQSlawyerscom. You can go there on the homepage. There's a special. You can get going in this. You'll save money, get it done. You talk to a real tax lawyer that's going to talk about how to do this, how to maximize it, how clients are using it, how you can even self-direct it. Okay, like Mark said, you don't have to buy stocks, bonds and mutual funds. So let me hit one other thing, though, because I Because a lot of times we have clients that are like well, I got a bunch of rental properties, matt, does that count? I can, just because here's the thing In order to create a solo 401k, you have to have a business.

Speaker 3:

We've said self-employment, but you've got to have a business that sells goods and services main hustle, side hustle. We don't care what it is. Some people are like well, I got a rental property, I got an LLC that has some rentals. Can I use that? And my LLC will create a solo K? No, because that LLC is getting rental income or capital gain income when you sell the property.

Speaker 3:

That's not ordinary income or self-employment income, which is great right For tax purposes because you're not paying into Medicare and social security. It's exempt from that because it's rental income and capital gain income. But it doesn't let you play in the solo K. So we have created a side door solo K strategy where we will set up a management company that is going to charge a fee for services to manage your rentals and this could just be a sole proprietorship. You don't need to go set up more entities necessarily. You're going to have a bank account and you're going to expense some fees from the rental property, some costs, and you're going to pay income over to your management company solely for the purpose of having a solo K and then contributing that money into the solo K. Yep.

Speaker 2:

And there's a lot to that because we want to know what your vision is, your trajectory, your plan. Because we might want to do an LLC and even elect an S status and do a payroll. Put your spouse on payroll. How much money is your rental? We have clients with a big rental portfolio and they've already cost seg it, they've already depreciated it whatever or they're not getting passed through losses because they're not a real estate professional. The side door is a great way to create more write-offs in the rental portfolio. So we might even go with an S-corp.

Speaker 2:

Talk about again spouse payroll, your payroll, because if you do a sole prop, you're limited more to a 20% contribution. We might want to get it up to a 25%. Anyway, there's some things there. So if you have a portfolio of rental properties, you're still in the party and that's when you're going to do that consult, okay. One other thing on this I want to throw out is timing. Some of you listening to this our special is only good for a couple of weeks. It's always in the fall. You may be watching this and be like got it, what is the dates for that? It?

Speaker 3:

september, like 15th to october, 1st something like that, yeah, yeah.

Speaker 2:

So if you're not, this podcast go to kqslawyerscom.

Speaker 3:

it's right there yeah you're.

Speaker 2:

You're gonna see down in the description a link. You're only saving a couple hundred bucks. It's not, you know, gonna change your life, but it's a nice little perk if you're in that window. But a couple points. You can't do a last year 401k and say, oh, I want to throw down a 401k for 2023. Or you might be listening to this podcast in 2025 and you're like, oh, I want to do this in 24. There are some ways to go back in time and knock out a 401k. Sometimes it depends on the time of year. It depends on what kind of entity you have. I don't know if I want to go there right now. Can I try to?

Speaker 3:

explain it succinctly.

Speaker 2:

Yeah, I'm just saying in general, going back in time can be a challenge, but let me lead with this. The best time to do it is before year end. Get it done for this year before December 31st. You get the maximum benefits of the 401k. So if you're listening to this no matter when you're listening to this we can set up a 401k right now for this year and do it right, especially if you're even up until about December 15th. Then it gets precarious in the last couple weeks of the year. Just know we can't pull a rabbit out of our hat on that and notice how I was politically.

Speaker 1:

Yes, yes.

Speaker 2:

So just know, right now, for this year is a great time, but if you're, you know, after January 1st, how would you define?

Speaker 3:

Yeah, I think rule of thumb number one is if you want to make contributions for 2024, let's get it set up in 2024. And that no matter any S-Corp, llc, soprop, whatever it is, we know we can maximize contributions if we get it set up in the year before the end of the year. Now there's a couple fallbacks. If you're sitting here and it's February 2025 and you're like I still want to set one up for 2023, sorry, 2024. And you're like I want to make contributions for 2024. Okay, well, it's February 2025. We're good. You can still set up for sole proprietorships up until April 15th, okay, and you can make employer employer employer contributions up until that April 15th deadline. Now let's say you're like I'm an S-corp, which we love. Many of our self-employed clients that are making good money, which are the ones doing solo Ks, have an S-corporation. Your rule is the tax deadline plus extensions, and there's a caveat to this. But let's say it's now June of 2025.

Speaker 3:

And you're like ah, I want to do this solo, okay, and I want to make 2024 contributions and take a write-off on my 2024 return. You can do that because you would have extended, so it's tax return deadline plus extensions for your company, which is September 15th. So you're still on the game for doing 2024 contributions To some degree.

Speaker 2:

You're not going to be can I add to this?

Speaker 3:

I said there was a caveat.

Speaker 2:

Yeah, great job explaining that. The caveat is, the company can do their quote unquote, profit sharing or contribution yeah, yesterday when I was teaching accountants. They're like contribution's a scary word because employees want to do contributions or deferrals and there's. Or contribution, yeah, yeah, yesterday when I was teaching accountants are like contributions a scary word, because employees want to do contributions or deferrals and there's these terms of art. Here I'll just say the company portion yeah, can be done in 2025, take the write-off for 24, but you won't be able to do that employee deferral piece. Yeah, because you missed it. Yeah, with your s corp, you already did your payroll. Payroll was done back in january, so you missed it. With your S-corp, you already did your payroll. Payroll was done back in January, so you missed it.

Speaker 3:

But that's okay, we can still ring the bell with the company portion, yeah, which is, we'll get to the how you calculate this, but that could still be pretty good bang for your buck. And then you know, you're going forward, you're doing your employee contribution, your sometimes called elected deferral, or your employer contribution, the match or profit sharing, and so, and those are the two numbers, that total up to getting $69,000 a year. Now we're going to break down how you calculate those here in a minute. But just so you know, timing deadlines. Rule of thumb number one just get it done year end If you want to maximize contributions for that year. If you're listening to this later in the year, different rule depending on sole proper S corp. But as long as you catch it before the right deadline, you can at least get the employer contribution in.

Speaker 2:

Yeah, and I, like Matt, how we're going to save the actual numbers for the end of this podcast. Let's kind of some of these other rules. Now I want to give you another deadline. If you have to do a group or safe harbor, the deadline is October 1st. So that's right around the corner. For those that are catching this podcast as a new release, um, we're recording this in mid September right now. So, uh, october 1st is your deadline for a group, safe Harbor, if for 2024. So if you wake up in November and December, go, ooh, I want to do the group you're going to be setting up for 2025 at that point. So the deadline is October 1st. December 31st for a solo gets you all the perks, and April 15th is your deadline if you're a sole prop or single member LLC, and then with extensions up until September 15th if you're a S corporation. Okay, now I want to again.

Speaker 2:

Before we get to numbers, let's talk about the contribution deadline, and I kind of alluded to this earlier. You can say here's how much I want to put in for 2024, but you do have until 20, your filing of your tax return to make your contribution in 2025. A lot of people argue with us on that. So I want to be clear about this If you have employees, you do not get that flexibility because you are a fiduciary, meaning you are responsible for their money. So when they do little matches and put money in boom, you're on it. And even for yourself you've got to be on it. When you do a group safe Harbor 401k, you're not jerking around, playing around, putting money in down the road next year. You're doing it every month, when, when, it's required. Yeah.

Speaker 3:

And there's rules on that. There's a separate set of rules on this dealing with employee money, about the timing of when you have to get their contributions in.

Speaker 2:

Yeah, but the solo, it's a different ballgame. Yeah, the only person you can get pissed at or sue is the trustee of the plan. That's you. So you're not going to sue yourself. So that's where the government says we don't care and they don't broadcast that. But that's the rule. And so if your advisor is freaking out, going, no, you got to put that money on right now, they just okay. Who am I going to sue? Well, the plan administrator, you, which you're not going to do. So it's no big deal. So just don't stress about that. Again, this is something we're going to talk about with you because of the planning. Now, matt Sorenson would say be smart, don't do that. Because think of that the minute you decide how much you want to put in your 401k for this year. If you can get it in there, get the clock ticking, get the snowball going down the hill, right? You talk about this all the time.

Speaker 3:

Yeah, I mean there was a report by Fidelity of million dollar 401k accounts that said what are the common characteristics of people that have a million dollar 401k accounts? That said what are the common characteristics of people have a million dollar 401k? They contribute as soon as they can. They don't wait until the deadlines. And so why does that matter? I got a whole. Let's just back up for a second. The deadline is what Mark's saying, by the way. You can wait so it's like until September of next year. Yes, you could wait all the way until then to drop your employee and your employer contribution and you would have had to put it on your W-2 for S-Corps, but you still have to put it in. So you got till September 15th. Well, what if I put it in On January 1st?

Speaker 3:

Yes, of 2024, you've got 18 months of investment growth on your money, and so so just it's the fact of just getting your money into invest to grow it that's a common characteristic and trait of people that have large accounts is they don't wait for the deadline. They put it in as quickly as they have it because they want their money to compound faster. How do you do that? You get it in sooner. Now, can we catch up later? Yes, and so let's, let's hit those timing, though. Let's talk about the-corp owners. I think those are the most common people with a solo K.

Speaker 3:

Let's say, you set it up right now, september of 2024, and you're like all right, I got it ready, but you don't put any money in. Okay, well, your employee contribution can be $23,000. You got to make $23,000, at least We'll get into the numbers, or $30,500 if you're 50 or older. Okay, so. Yeah, so you're like, all right, 23 to 30. Okay, so now I don't have to put it in now, but I do need to put it on my W-2. Okay, cause that your employee contribution, even if it's Roth, still needs to be on your W-2. Now, the employer contribution the company's going to put that in and the company expenses that. See, your employee contribution goes on your W-2. The employer contribution is going to go on the 1120S as a company retirement contribution, which is an expense, and so you want to expense that there if you're doing traditional dollars. But the timing of that is the company tax return. So you could be September of 2025 is when you're a whole year later of when you're actually putting this money in.

Speaker 2:

Yeah, Well, we're there. Since we opened the door to numbers, let's hit it. I have other points, too, that are non-numerical, but I like what Matt, so just let's say it. If you have an S-corp, which is the most common for a solo owner, you can put in 23,000 or 30,500 if you're 50 or older, and then the company can put in typically it's going to be 25% of whatever your salary is. Now there's this mega backdoor, roth. Let's come to that later.

Speaker 3:

We'll come to that later.

Speaker 2:

It's going to allow you to go higher, and that's where we've thrown out the word 69,000 or 75,500. So we'll, or 76,500, we'll come back to that, but most people want to just let's get the 23 in or the 30 and then let the company do a match. So if you take a salary of, let's say, 40,000, then you could put in 25% of that, another 10. So the company could put in 10 grand and you would have done 23.

Speaker 3:

Okay, let's say so. You got 33,000 in the 401k off of a $40,000 W-2. Let's take a moment here to talk about why the solo K beats the SEP IRA, because some of you might've had that question here and we didn't address it. Of like guys, a SEP buy rate sounds easier. Why don't I just do a SEP buy rate? Well, this is exactly why. Because you can put $69,000 a year on a SEP buy rate, $69,000 a year on a solo 401k.

Speaker 3:

Okay, you took a $40,000 W-2 out of your S-corp. How much am I putting in a SEP buy rate? $10,000. How much can I put in? Because you can only put in 25% of whatever your W-2 is. How much can I do in a solo? Okay, 25% of whatever my W-2 is, plus 23,000. So I get 40, I get 33K and I can maximize my contributions on a lower dollar amount of W-2. Because one of the amazing strategies in a S corporation is taking a reasonable compensation, a small W-2, as much, as as little as you can get away with to minimize your self-employment tax. Now I'm going to.

Speaker 2:

I've got a slide here. I was just training this is. You guys are awesome for sticking in here with this podcast and this video, because this is the same stuff we train accountants and lawyers and enrolled agents on and they're like having aha moments the whole time. So this is next level stuff. I've got a slide here. I'm going to PDF it and send it to my producer here and let's see if we can get it at least in the YouTube video. But let's break that down.

Speaker 2:

The comparison a 401k, a solo 401k in an S-corp versus a SEP in a sole proprietor, and let's say they both make a hundred grand. You're going to make a hundred grand and this is a typical realtor, consultant, online producer, you know, whatever. And it's just you. You're flying solo, solo 401k, and so you make a hundred grand. Okay, if I'm a sole proprietor and make a hundred grand in my LLC remember LLCs don't save tax but I have my LLC, I do my sole prop, I make a hundred grand.

Speaker 2:

The max I can put in the SEP is 20,000, 20%. And I'm just repeating what Matt said just a little differently. Sometimes it clicks with Matt, sometimes it clicks with me, but I'm going to pay FICA a 15,000. So I paid $15,000 and only got to put in $20,000 in my SEP. If I do the solo 401k with an S-corp combo now, I'm going to do a salary of $40,000, only pay $6,000 in FICA. So I just saved $9,000 right out of the gate and I can up to 33 000 in my 401k. That's the 23 plus the 25 percent of the salary, which is 40, and now I got in 33. So with that s corp I'm going to take a salary of 40, pass through of 60, save six grand, only pay six grand in fika, save nine grand. Boom, now, that's a side note here, kind of fun. Yeah, that's the power of the solo and the escort.

Speaker 3:

I love that. That's awesome. That's just like uh yeah, tax planning. That is how you maximize your money. You want to know how to to get wealthy. You're doing the same thing, that you have to put the same amount of effort there to make a hundred grand. The question is how much do I get to keep and how much do I get to optimize in a tax advantage way? There is a better way. Okay, there's a better way than being a sole proprietorship and having a SEP IRA. It's what Mark just taught you right there. Yeah, freaking huge Okay.

Speaker 2:

Now my producer, make sure I send that to you. Okay, now let's hit a couple other points. The next one it's a big one is the Roth concept. With a Solo 401k you've got flexibility. That's the beauty. You can say hmm, I want a $33,000 write-off, or I want to put away $23,000 in traditional and get a write-off. I want to have my W-2 lowered or my income lowered by doing a traditional 401k contribution and then the company match is also a write-off. So I get a.

Speaker 2:

In that example you get a $33,000 write-off and you're only paying income tax on $67,000. So you made a hundred grand. You're only paying tax on 67 and you dropped in 33 into a traditional format. Or you can say I never want to pay tax on that again and I've kind of worked my life over here on this angle. I got some pass-through write-offs over here, maybe a little rental property. Here my spouse is doing X, y and Z.

Speaker 2:

You know what I'm going to make that all Roth and you have the choice. I could say I'm going to put away 23,000, call it Roth, and once the company does its match I'm going to convert that to Roth. Boom, now you're paying tax on a hundred grand. That's you got, you've got to pay tax on the hundred grand, but you've got 33,000 in a Roth structure. Now that'll never pay tax again, ever, ever smalls, okay, so that's a big deal. So that, and guess what. You can say well, I'll do Roth on my trip, my contribution, I'll let the company be traditional. Oh, next year I'll do traditional, next year I'll do Roth. Next year you get to choose, yeah.

Speaker 3:

And so that Roth aspect is so powerful. Yeah, and so like, let's say, you and a spouse are participating in this solo 401k and you're doing some traditional, you're doing some Roth, you could have four actual accounts under the solo four.

Speaker 2:

Four buckets.

Speaker 3:

Four buckets, so to speak, one solo K plan, and I want to talk about this because I want to hit some logistics, make sure everybody's connecting the dots here. Yeah Is, we're talking about 69,000. We're talking about per person, so you've got a business partner.

Speaker 3:

You've got a spouse, each of you could be doing $69,000, all Roth, all traditional. A little bit of traditional, a little bit of Roth. But let me talk about what this looks like in terms of documents. So you're like all right, guys, I love it, I want to do Roth, or I want to do traditional. I want the tax deductions. Whatever your strategy is, here's what it's going to look like. The first thing we need to know you have a business. Do you actually have a real company that makes money, okay, or you're doing the side door?

Speaker 2:

You're doing the side door solo, which is creates a real business.

Speaker 3:

You got that management company, all right. The second thing we're going to do is that business creates a 401k. See, individuals don't have a 401k plan. Individuals have 401k accounts under a plan. Think of the Dunder Mifflin 401k, right? Dunder Mifflin has a 401k plan for each of its employees. Pam's got an account, jim's got an account, michael Scott's got his account All right.

Speaker 3:

Now, when you're self-employed and you got the solo K Vandelay Industries whatever your company is called All right, you're doing great today, okay. Vandelay Industries, whatever your company is called, all right, you're doing great today. Vandelay all the TV references here, yeah, a little Seinfeld, yeah, vandelay Industries, you know, employs one person George. George Costanza, okay. And solopreneur, vandelay Industries Inc adopts the Vandelay Industries 401k plan. It's a plan document. George Costanza has an account in the bandolier industry's 401k plan, so your company will have a 401k plan and then you individually have an account in the plan. Love it, all right. So that's the logistics. Now KQS lawyers, our law firm, sets up these plans. We have an IRS pre-approved solo 401k plan that allows you to self-direct, because you could be like well, matt, I want to go to TD Ameritrade their solo plan is cheap.

Speaker 2:

Let's go there in a minute. Let's stay with this too.

Speaker 3:

We'll come back to this, but just say you do need a 401k plan and then an account.

Speaker 2:

Yeah, I love it and this big reveal that Matt just said of what you're going to invest it in and how we're going to come to in a moment too. But let's stick with George for a minute. So George has his 401k at Vanderlei Industries. He can play with the contribution amount, play with Roth or traditional every year. Make those decisions. That's the beauty of the solo. If he's to hire someone, he could hire Kramer, but as long as Kramer doesn't work a full year, he keeps the solo Kramer could be 1099.

Speaker 3:

Yeah, Kramer could be an independent contractor doing stuff here and there.

Speaker 2:

You know, and George could still have his Roth IRA on the side. So he could have a health savings account, he could have a Roth IRA, putting his seven grand in that and then come back and play in the solo. So you've got all this flexibility to really ratchet it up to a total of 69. If you under age 50 or 76.5, if you're 50 or older and still do a Roth, so that's where we get into some mega ideas, but not MAGA mega. All right, we're not going to go political on the show today, but this is super powerful. Is that flexibility of what George can do individually and in the Vandalay 401k? All right.

Speaker 2:

Now I want to say this too when you set up the 401k, like Matt just said let's talk cost just for a minute we charge a thousand bucks and you get a full hour with an attorney walking you through the do's and don'ts and helping you structure it properly. We have that. Get a trifecta comprehensive structure where we look at all the moving parts in your life and put it together with a trifecta for around $1,500. With the discount it's 15, I think it's 1,600 without, and you get 50 bucks off the thousand right now if you do that. So there's a couple options during that special period, but this is quite affordable. The annual fee to maintain it it's going to be around 500 bucks, could we say that four to $500?.

Speaker 3:

Yeah, you'll have your solo cake account three 95. So in your first year you get a hundred dollar discount if you go through the special here, and so it might be less. You know it might be less than that because that'll include, by the way, that includes doing your 5,500 if you have to do them, cause I want to talk about some maintenance stuff here in a second. So what do I need to do year to year with if I have a solo 401k?

Speaker 2:

so let's hit that too, yeah, so it's actually, in the big scheme of things, pretty affordable because you may not have a stockbroker in the mix. You get to be the trustee of that 401k. I talked about that a little earlier. Now you it's it's Jim Kramer on mad money would say that's a, that's a loaded gun. You know, you gotta be really careful just throwing that in someone's lap.

Speaker 2:

There's some maintenance math's going to talk about. You got to know what you're doing and you get to invest it how you want, which we're going to start talking about here. But the beauty is you're in control, it's yours, it's actually very affordable and you get a tax write-off to pay for those fees and you're cause it's a business plan and so very beautiful, you know beautiful, and you're off to the races and you can invest it how you want. Now you could have a stockbroker. You can go out there. Some of you are like a thousand dollars, I can open one up at Fidelity for nothing, yeah, and they're going to be taking fees out of that 401k in perpetuity and you're going to feel a lot more expense than $1,000 in the long run. So you've got to decide where do I want to set this up?

Speaker 3:

And I will say and what does Fidelity let you buy? When you have a solo 401k at Fidelity, you can buy what Fidelity sells. So you can buy stocks, bonds and mutual funds and that's all you want to do. Actually, I don't fault you for going and doing that. No, yeah, okay. But a lot of our clients are like I don't want to do that. I want to invest in real estate, I want to invest in private company. I want to do private money lending. I want to buy crypto.

Speaker 3:

You can do that with our solo-directed assets that we talk about all the time on the Directed IRA podcast. If you're listening to this, by the way, and you're just catching it, hit the Directed IRA podcast. First 10 episodes. We go over what the heck self-directing is. But that's what our solo K does and that's why it costs more. And you've got an attorney consult is. You're in control now and you have all these other investment options. Yep, I.

Speaker 3:

People come to us like well, matt, I did the TD Ameritrade solo Okay, cause it was free, and now I want to do real estate. What do I do? We can fix it. We restate the 401k onto our plan document, cause see that, the plan document you're going to have at TD Ameritrade or Fidelity is going to say you can buy stocks, bonds and mutual funds and that's what the plan investments allow for. That's all they'll let you do. Come over here. We're going to be like anything allowed by law. Anything allowed by law you can buy with your solo 401k, which includes real estate, private companies, small business, llcs, private money, lending, crypto the fun stuff.

Speaker 2:

Yeah, and let me see if I can. We're getting so close to wrapping up loose ends here. I love it. Let me throw some maintenance here in a second. Yeah, you want to hit maintenance? I'll say this too. Um, when you establish that 401k, uh, let me unpack that. Those options again, matt, I say it different ways sometimes that are really helpful. I listened to Matt and learned something every time we yesterday I was teaching the 401k and I'm calling Matt during the presentation Dude, what about this? What about that? I mean it can get really tricky, so let me unpack it a little bit more. So when you open that 401k with us, the attorney is going to meet with you. You're going to get it set up. The 401k is going to have a bank account. Now you don't run into Wells Fargo and go ooh, can I open a bank account for my 401k? Oh, they're gonna go oh, you want a 401k? No, no, no, no. I already have a 401k, I just need a bank account for it.

Speaker 3:

So we help teach you on how to get the bank account going for the 401k and we have a bank that knows what the heck that is, that takes care of it for you and does it yes and then you're going to need to do some maintenance so you're going to want some man it's kind of administration, we'll call it that man will talk about that.

Speaker 2:

But once you have it up and going, you could open an llc under that 401k. You'll hear about that sometimes out there people are going to be hawking these llcs and and, uh, so solo, what are all the some of the terms out there that some of you might hear that they're like they have these, um, these 401ks that are super special, like they've invented the EQRP and all this stuff.

Speaker 3:

Yeah, the QRP Do you have a QRP.

Speaker 2:

Yeah, you mean a 401k. Well, they're a QRP. Here we have a qualified retirement plan. You're going to hear all these little acronyms out there. They're going to make them sound super sexy and they're going to charge more than $1,000 to set this up. So try to work with a real law firm when you do this, please. And when you go out to look for this, you're going to see all these sponsored ads and this and that. Just be careful, do your homework. And so, at the end of the day, a QRP is just a solo 401k and they're going to go through the same rigmarole. They just think they've branded it and they've got something special, and they're typically not lawyers or accountants that are doing this.

Speaker 2:

So you're going to have an account that you could invest in multiple different ways. You could have an LLC, you could again buy crypto, do notes, you could do real estate, and this is where I'm going to recommend you go to our sister podcast, the self-directed IRA podcast. The first 10 to 15 episodes are incredible because they walk you through all the things you need to know about self-directing. So if you want to self-direct an IRA, you're going to follow the same rules to self-direct your 401k and a lot of the same strategies and platforms and procedures. So get over to that podcast and I just wanted to button up the self-directing.

Speaker 3:

Yeah, yeah, love that. Let me hit two other things. I got two things left on my list I want to talk about moving money over Cause. Some people are like well, matt, I left corporate America where. I had a 401k and now I am self-employed, I want to do a solo K and I want to roll that 401k at my prior employer into my solo 401k. You can totally do that.

Speaker 2:

I like calling it unlocking 401k.

Speaker 3:

So I've got that old employer 401k. Let's say I've got some traditional dollars Sometimes they call it pre-tax in your employer 401k. Let's say you've got some Roth dollars in that old employer 401k. Both of those buckets could get rolled into your solo case. You'd have a Roth solo K account and a traditional solo K account in your new solo 401k plan. Now let's say you're like Matt, I've got a Roth IRA already. I've got a traditional IRA already. Can I roll my IRA into my solo K Depends? Traditional IRAs can always go into your traditional solo K account. Roth IRAs can only move to other Roth IRAs.

Speaker 2:

Unless it originated as a Roth 401k, you can trace it back. If it was a Roth 401k at my old job, can you? I've never heard that I thought so. If I have a Roth, 401k.

Speaker 3:

I thought once it hits Roth IRA, it's now Roth IRA.

Speaker 2:

Ooh, okay, so now this is so good, I'm learning here.

Speaker 3:

Might be an exception to this. I don't know.

Speaker 2:

So this is an important point. So Matt said you've got an old 401k at Dunder Mifflin and you're like, ooh, now I'm an entrepreneur, yeah you're Jan.

Speaker 3:

You got fired by Dunder Mifflin. Whatever happened there, we don't know, we don't know, I don't know finding fault you know, but you're going to have to.

Speaker 2:

Yeah, All things considered office. But so when it's in that 401k structure and you're going to roll it to your solo 401k, you can go Roth to Roth 401k. In that situation you have to be careful if you roll it out to a Roth IRA. Yeah, I thought once it had the character of old 401k money it could go back up into a 401k. But that maybe not. I swear. I read that. I saw that there might be an exception to that.

Speaker 3:

I'm not familiar with it, though.

Speaker 2:

So be careful rolling it out to a Roth IRA.

Speaker 3:

What I would say is don't rely on that If you know you have Roth IRA dollars. Just the one rule of thumb I always just say is if you have a Roth IRA, that will only be a Roth IRA, and when you die it can be an inherited Roth IRA. But that's it, yes, fair. So because we do have a lot of clients that have Roth IRAs that are quite significant and then they want to start doing a solo K and they're like how do I get that Roth IRA into my Roth solo K? I just want to consolidate all the money and all my new contributions are going to be on my Roth solo K and I'm like can't do it, you're going to have to have two accounts. So now there might be a tracing rule. I'm not familiar with that one.

Speaker 2:

Yeah, don't hang your hat on that. Now. Another thought before you hit maintenance is you can do Roth conversions in your solo 401K. So if you roll over traditional money or you've got old traditional money in your solo K and then over traditional money, or you've got old traditional money and you're solo K and then next year you wake up and go, Ooh, I do want a Roth, it's called a Roth conversion and you can do that inside your 401k.

Speaker 3:

Yeah, and the last one I'll say is let's say you're one of these self-employed people that has been doing the SEP IRA. You can roll the SEP IRA into the solo 401k. The SEP IRAs are typically pre-tax traditional dollars, so that would get rolled into your traditional solo K account. Maybe it was the SEP Roth, because if it's SEP Roth money which is a new thing 2023, you can start doing SEP Roth contributions. Theoretically, I should be able to roll that into my Roth 401k?

Speaker 2:

That's a good question.

Speaker 3:

I don't know about that.

Speaker 2:

Man see we're on new frontiers here.

Speaker 3:

Okay, you know what? If you have one of the lawyers, the tax lawyers do it. They'll look that up for you. If you're doing it, we'll figure that out. If that's actually something you're going to do, don't just give them a hypothetical. Don't waste your time on that call with hypothetical questions.

Speaker 2:

Okay, so maintenance. I guess we're down to maintenance. You've set this thing up, you're self-directing it. You're making money. You're putting money in every year based on your capability, yeah, so here's on on maintenance.

Speaker 3:

The first thing is you got to track your contributions Now. This is something you typically work with your accountant or maybe payroll company. Employee contribution should be on your W2 US corp owners and the employer contribution is going to be on the books, and it'll be on your 1120 S on your tax return. Okay Now the next thing, though, is 401ks, file a tax return called a 5,500. However, the IRS has said for you solo Ks until you have $250,000 of assets in the 401k, like net value of assets. Don't bother us, don't send us anything. We don't care about what you're doing.

Speaker 3:

It's not even worth telling us that you have a solo K. Okay, now we're going to get a tax ID for your solo K when we set it up. You're doing. It's not even worth telling us that you have a solo K. Now we're going to get a tax ID for your solo K when we set it up. You're going to have a plan document. Right, there's going to be some tracking of your contributions. But once you hit 250K we will start doing an annual tax turn and if you have a solo K account, a custodial account directed where your money's at and you're investing it from it, we include that as part of your account and that's a 5,500.

Speaker 2:

EZ until you hit 500 grand, and then it goes through.

Speaker 3:

No, you're just always doing 5,500. Yeah, ez, all the way until you have employees and you have to convert. You can have a million, millions in your solo K and you're still doing an EZ, good, good.

Speaker 2:

I knew that I was just you know.

Speaker 3:

Chip testing me. I knew that I was just, you know, chit testing me. Yeah Well, no, throw me curveballs here I was asking you questions.

Speaker 2:

People might ask Like do I need to? Okay, so this is good. Now, on this process, I wanted to tell you so you know, if you want to self-direct it, then you want to let directed IRA provide what's called a custodial account. You might say, well, I'm just going to do it all myself, I'm going to manage my 401k all myself, I'm going to be my own trustee and my own accountant and I'm going to maintain it all. I don't even do that with my own 401k because you've got to be on top of it. You're now talking about a QuickBooks account to manage all the buckets inside your 401k. You're on your hook for your own 5,500 EZ. If it gets to that point, yeah, and you start taking distributions.

Speaker 3:

You got to start doing the 1099s. You do a Roth conversion. Now you got to do another 1099. That's all included when you have a custodial account.

Speaker 1:

Yeah, and the custodial account.

Speaker 3:

Is how much? A year? $395 for the first account and then $295 for every additional.

Speaker 2:

So if you're like, well, I'm doing you know an account my spouse has one $395, $295. But you got two accounts and you can be doing again $69,000 a year in each one of those, and there's no stockbroker in the mix taking their 1% or 2% or 3%. I mean, this is where Warren Buffett and even Tony Robbins have just been very outspoken on the fees buried inside company 401ks and this is where self-directing you actually are saving money.

Speaker 3:

The fee is just visible. So a lot of people are like, ah, $395. My 401k at the company I work for is free. Is it really? The average 401k fee is one and a half percent. I mean you got $100,000 in that thing. You're getting charged 1500 bucks. The problem is you don't see it because you get nickel and dimed every month on different fees here and there and they just subtract it out of your mutual funds or whatever you're invested into. So you're not paying it or seeing it. It's not visible. The nice thing about the solo cam Mark said this earlier is this is a company expense, this plan set up and the accounts even. This is a employee benefit. It's for you, the owner, but it's still a deductible expense.

Speaker 2:

Yeah, and where they really nail you in these group 401ks or the company 401k, is it's a one and a half percent administration fee. Then they're going to invest it and take fees out of the mutual funds or the ETFs. There could be trade fees, and this is where Warren Buffett's like it's a joke. You could hit three or four percent in some instances, because they'll put annuities inside these things that have big fees and things. So you've got to just love when you're self-directing, I really think, because now you're in control of what those costs are and you, yep, they're there in front of you, but they're typically a flat fee and you're off to the races and investing what you know.

Speaker 3:

So love it. Well, get over to kkoslawyerscom. That'll be right there on the homepage. You can get it direct at iracom as well, but that's where we're setting up the solo case. You can take advantage of this special Remember, you're going to talk to a lawyer when you set it up. That's going to go over this. Answer your questions no-transcript listening. You know you may have done this in two or three pieces.

Speaker 2:

But now it's all things 401k. You got it. You now have enough knowledge to be the captain of your ship. Get a professional to help you, you know, run that ship for you and, uh, watch out for the reefs out there and all those little things as you step back as the captain of the ship and just make sure it's headed in the right direction. That's the goal here. You got to know enough to direct your professionals.

Speaker 3:

Is the reef like the IRS, or or maybe the IRS are like the pirates? I think the IRS is like an iceberg.

Speaker 2:

You see the tip of it and you don't realize how bad it could be and what's underneath? Yeah, that's true, that's true, kate Winslet, she'll let you know, she'll walk you through that, so be careful. All right? Well, everybody, thank you for listening, and we're going to see you next week for another episode of.

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Mark J. Kohler

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