How to Use a Self-Directed Solo 401k | Main Street Business

Welcome, everyone, to the Main Street Business podcast. This is Matt Sorenson. Excited to be here today. Mark J. Kohler, my regular co host, he's kind of like, you know, if I'm Maverick, he's Goose, you know, so Goose is, Goose is on the loose, Goose is fishing in Alaska. And so I am doing the podcast here, but I got Kevin Kennedy, one of our amazing attorneys and KQS lawyers, to join me today on the important topic of solo ks, which he knows a lot about. Kevin's also a heck of a good guy, so welcome, Kevin.

Thanks, Matt. Yeah, we, you know, for those of you who don't know, Matt's even better looking in person, so you're missing out.

Yeah, so you gotta go to the YouTube to see that. But I appreciate that. I, you know, I'm not, not Tom Cruise, you know, Maverick, but, you know, whatever. What do I say that. Okay, well, this is a big topic today. Now, Kevin's been an attorney in our firm for years and set up Hundreds of solo 401ks, as have I. And of course, I'm working in Directed IRA, where we handle accounts, too. And so there's kind of two pieces to this with KQS lawyers and Directed ira. But we want to go over just the topic. And I don't care whether you're using our firm or someone else. Doesn't matter. We just want to teach and go over the solo K. And if you're listening to the podcast, I am sharing a couple slides on the video that might be helpful if you're into that. So you want to go to the YouTube Main Street Business Podcast. You can find it@mainstreetbusinesspodcast.com so go there. You can also sign up for our newsletter. We're always getting articles out every week on cutting edge strategies. I just had a new article up just this last week on or just a couple days ago on the new Accredited Investor rule. And this is on entrepreneur.com too, on the new Accredited Investor rule, which came out, which kind of widened certain licensed people to qualify as accredited investors, too. So just an example of stuff we're always trying to update everyone on out there, the business and tax world. All right, well, let's talk. Let's just get in the topic and talk about what the heck a solo K is. And so, Kevin, what, what the heck is a Solo 401K?

Yeah, well, it's the cat's meow, first of all. No, but it goes by a few different names. So like online if you're, if you're googling stuff. The IRS calls it a one participant plan.

Okay.

You know, I think it's important that we talk about right out of the gates as far as what is it? Ours is not just any solo 401k. Not to toot on our own horn, but it's a self directed solo 401k.

Yeah. You could have a solo K. Like you could call Charles Schwab and say, hey Schwab, I want a solo 401k. Right. And they'll set one up for you and they'll make an account. But what can you do with it? You can buy stock from Schwab. Okay. That's all you're gonna be able to do. And if that's what you want, then that's cool because that's actually the cheap and easy way to go. But if you want to self direct, you need a plan which like our law firm, like you know, KQS lawyers, we have a pre approved 401k plan that, that you can self direct.

So.

Kevin, Sorry.

Yeah, no, I think it's important to, to highlight that, you know, if you're a business owner, as a business owner, that's one of the things that this is. You know, when we talk about requirements later, you have to be a business owner. So what is it? It's a, it's a 401k plan that a business adopts. So if you're a business owner, one of the attractive features of the, of the solo 401k is the write offs. And so I mean you can get those, those big contribution limits that we'll talk about. You can get those at your Schwab Solo 401K. You can get those here with this 401K. So it's basically to answer the question, it's a really, I think cost effective, pretty easy way for a business owner who doesn't have employees to get some pretty significant write offs. And as a vehicle to build wealth to be able to invest in things like real estate and other alternative investments outside of the stock market.

Yeah. Okay. Awesome. Okay, so it's a 401k though. So let's. It's a retirement account. All right. Let's assume, take another step back. So like just like you can have an IRA, but you know, in an IRA you can put a 6,000 bucks a year into an IRA. And so if you're starting at zero, IRAs are tough to build up. And you know, I've done it, but in like a lot, everybody does it, but. Or people roll over from a 401k of a prior employer. But a 401k lets you put way more money in. Right. So I can put more money in a 401k than an IRA, right, Kevin?

Yeah, almost in, you know, in some cases 10 times more. So, you know, you mentioned IRAs again, if you're the business owner who's looking for write offs, you should still have an IRA too, but you're capped. I mean, you can only put in six grand. An IRA versus what we're talking about, this 401k that your business would adopt. Depending on the income of your business, which we can talk about, you can put in as much as 10 times almost into this 401k than you can the IRA.

Yeah. And the max for 2020 is 57,000. And if you're over 50, you get an extra $6,500 kicker on top of that. So you're, you're over 60 grand you can put in in this solo 401k. And if you want the deduction, you can do that all traditional and you'll be getting a $57,000 tax deduction. Oh, when your spouse works in the business, you can do it for them too. You know, again, if your business has that income and you have enough throw away. I say throw away like you're throwing away to put away for retirement.

That's what I was going to say, just to jump in. It's hard to find a write off. If you're a business owner. Where else can you find a write off of, you know, 50 grand plus that you don't actually lose the money. You go by that big old SUV at the dealership, that money's gone with this. This is a write off. This is lowering your taxable income, but it's still within your portfolio. You can still invest with it. You haven't lost the money. So I think that's a key thing.

Yeah. And of course with the retirement account, it's growing tax deferred for those traditional investments where you're making money. But whether it's stock or you're self directing and doing real estate or notes or other private investments, you're making money and it's tax free. And so one of the concepts Mark and I love to talk about is the best way to save money on taxes is to have tax free income in the first place. Right. So why don't I just make my money or do my next deal in my retirement account that builds up the value of that account, but I don't pay Taxes, when I make money, I got to reinvest the whole thing into the next thing. And if it's a Roth, it comes out totally tax free. And you can have a Roth component in the solo K. So retirement accounts in general are powerful and the solo K is one that's became really popular for our self employed clients. Because now who can set up a solo K? Kevin?

Well, so you have to have a business and you can't have full time employees. So you know, it can be a new business, you know, so you may, you may be sitting there thinking to yourself, I'd like to start a business, but I don't have one. That's okay. You know, it can be a brand new business, but you have to have some form of self employment. So what wouldn't work is, you know, if you just had a rental property with some passive income. You have to have earned income to be able to have this.

So, so let's give examples of somebody you set up a solo K for recently. So I set one up recently for a physician that does like what's called locum tenens. They're like a staffing. They just get staffed and they get 1099. They have no employees, they don't get a retirement plan through this. So they wanted their own solo 401k real estate agent. Last one I did one for. I've done a lot for real estate investors that flip homes, you know, and so they don't have employees, they're self employed, but they are wanting to put more away than six grand a year. And generally a lot of those people that are making money, they're making more than 100 grand a year, got a successful business, it's like six isn't going to get me very far in retirement. I want to be thrown away. 20, 30, maybe up to 57,000, maxing it out. So what are some of the business owners, you see that? Just to give examples, people understand.

So I just did one for a consultant. Again, it's 1099 income, you know, so, so let me give you an example. So Angie and I, my wife and I were watching Cobra Kai on Netflix.

Okay.

Yeah, you gotta check that out everybody if you haven't seen it, it's so good.

Well, I see there's like a new movie too, like Bill and Ted's Next Adventure or something like that too. Like all these 80s and 90s throwbacks.

Yes, it's pretty great. I love it. So in Cobra Kai, you remember Karate Kid, you had Danielson, Daniel LaRusso. Yeah, and then you had Johnny. He was the bully.

Right.

So Cobra Kai, they're now adults.

Yeah.

And Daniel actually has a dealership. He owns a car dealership.

Okay.

LaRusso Luxury Motors.

He wax the cars on and off. He does.

I don't want to give too much away. Okay, yes, there's some waxing going on, but he's a business owner. He has a full staff. It's, he's got sales guys, he's got office staff.

So if he does a 401k, he's into a regular 401k, not a solo. Because solo is meant for just the business owner. Okay.

Yes. Versus Johnny. So in the, in the show, Johnny sets up his own dojo and it's just him though. He doesn't have any employees. So he runs Cobra Kai 2.0, basically. And so Johnny would qualify. If Johnny's making some good money teaching his students, he should, he should set up a little self directed solo 401k. But Danielson needs to get a, you know, a group 401k, a typical 401k, those are more expensive. You have all sorts of ERISA compliance. It's, it's kind of costly. Versus Johnny's solo 401k, very simple, very easy to set up.

You know, Mark would love this because he likes to explain everything through a movie or a TV show. And you can tell that Kevin works with Mark. So I love it. That's a great example. So now let's say that Johnny, you know, Cobra Kai dojo has some contractors, like he's got some other karate instructors or some trainers or something. And they're 1099. They're not employees that could work still. Right. Maybe he's got a part time person that comes in on weekends and helps. And so the full time rule. So let's hit some detail on that. Let's just put it out there more. The full time rule or, sorry, the no employee rule is they can't be full time, which for purposes of the rules, a thousand hours a year, which is like 19 hours a week. If you calculate it out, 19 point something. So someone's working more than 19 hours a week, they're going to be considered full time. Now you. So what we. Let me say it this way. It's probably better. Who can I exclude? That's usually the question. Who can I exclude?

Yeah.

Okay. All right. You can, you can exclude people that haven't worked for you for a year yet, no matter how many hours they do. People that have worked you for you for a Year, but they don't. They only work 19 hours or less or they're under age 21. But those are people that Congress, when they create a retirement plan, said you don't have to offer your 401k plan to these groups of people, people that work less than 19 hours a week for you, haven't worked for you yet for a year or they're under age 21, you can exclude them. And so the solo case still works for those. So Johnny's part time instructor that comes in and works 10 hours on the weekend. He's still cool. He can do it. He's got some contractors that come in and help or do training for students. That's cool. Even if they're working 50 hours or whatever because they're not employees. So. Or he's got some college kid that's 20 years old that's helping him. Also totally cool. You know, they're not 21 yet, even if they're working 40 hours a week. So that's how the rule works on this kind of soul. Now also, does Johnny have a wife in the show? You got a spouse?

Johnny's divorced.

Okay.

But you were going where I was going to go, which is a lot of times people here, you know, the Solo 401Ks also if you Google this, you know, sometimes called an owner's only plan.

Yeah.

You know, or like the IRS calls it a one participant plan. That's actually if you have a spouse, they can participate if they're working in the company or if they have ownership. So if Johnny gets married, he can have her participate. If he had a business partner that he brought on, that would work. So it's a lot more flexible than I think people realize. You know, you mentioned all the exclusions of employees you touched on. Independent contractors are fine. And then these family members, they can all participate. So I have clients that they, the owner participates and throwing, you know, 40, 50 grand in. I mean you got the wife, you got even our plan. Matt has an option for kids who work in the business can also have a 401k plan.

Yeah. And that there still qualifies as a solo K. So now here's a big thing to know though, about a solo K. A solo K is a big deal because it's easier to administer. See, when I have a more a regular 401k or like a safe harbor 401k, be a common one and that's even a low maintenance 401k, you've got to file a lot of tax reporting. You've got a lot of notices you got to give. You've got to provide a platform for the investments for any employees. I mean, you're talking thousands a year to administer that plan and a lot of paperwork and headache, quite honestly. But in a solo K, Congress has said, you know what, this is just a one employee business. We want us to let them, they're a business owner and they're self employed. We want us to let them put money away. What, just let them have a 401k for them and we're going to relax all these rules. Like one of the tax things you have to do with the 401k is you have to file something called a 5500 tax return. But do you have to do that in a solo K? Kevin, do you have to file a tax return for your solo K?

So a lot of clients are surprised to know that with the Solo 401K, the only sort of external reporting that has to take place is once the 401k hits at the end of any given year, $250,000 or more of assets. Then there's what's called a 5500 easy, which as the name implies, it's like two or three pages. There's no taxes to pay. It's a pretty simple form. But until then, in any year that you have less than that, there's really no external reporting. So the costs and the administrative burden on this are very nice.

Yeah. So now there's still things you got to do. Obviously you have the plan documents done, you got to do things right. But you can't have a, you don't have to do the tax return again unless you're over 250,000. And you will have your plan documents. You gotta have an accounting of what's going in. Remember, when you contribute money in, you gotta track that because you're taking a deduction on your company return for putting the money in or on your W2. If you're, let's say you're an S corp, then you'd be reporting your employee contribution. The W2, the employer contribution goes on the company tax return because the company's putting the money in an expense of it. So, and we'll go through the employee and employer and how that adds up here in a second. But I just want clients to know it's like this was relaxed. It's a little, I mean there's still stuff to do, but it's a little more chill, if you like that word, than a full blown 401k. Right. Okay. So I got to be a business owner. Can't have other full time employees. Do I have to have an entity? Can I just be a sole proprietor? Do I need like an S Corp or an LLC to do it? Like what? But what business qualifies? I know the rental property doesn't work. We talked about that. But yeah.

So the entity type, I mean, really? Yes. A soul prop could set up a Solo 401K. An LLC could set up a Solo 401K. We prefer S Corps for other reasons. If you're a small business owner that has net income annually of, you know, $50,000 or more, you should probably be operating your business as an S corp anyway. But yeah, it doesn't have to be a certain entity type. And even the rental property guy, you know, if they wanted to, they could set up a little management LLC that doesn't actually own the rental and they could pay some, some fees to them, basically their affiliated entity and get some earned income. So there are ways, even with the real estate investor who just has some rentals to still fit this model. We can, you know, it can be flexible like that.

Yeah. So. Okay, cool. All right. What about, what if I have a 401k already, Kevin? Like, let's say that I got a 401k where I work or maybe my spouse does and I'm starting a small business on the side, a side hustle. But I want to start throwing money into the solo K or I want to roll over other dollars into the solo K to self direct. Can I, can I do that if I already have a 401k where I'm working?

Absolutely. Yeah. A lot of my clients, I mean, they're working in corporate America, you know, for Apple or Microsoft or whatever, for Larussa, you know, Luxury Motors. And you know, so the, so the guy who's, who's working there, he has a side hustle, something on the side. Maybe he's got an online business. That's fine. You can still have a side business that has a Solo 401K and still be contributing to the LaRussa Luxury Motors 401K plan. Now, there is some coordination there because for when we talk about the contributions, you're an employee of Larussa Motor Companies, so you can put in up to 19,500 if you, if you put 10,000, let's say into the, into the LaRussa 401k plan. Your solo 401k that your side hustle business sets up, you can't put in the full 19,500 there because you've already put in 10 into the. Into your, you know, day job. 401K. So there's some coordination there. But definitely you can have multiple 401ks.

Yeah. Okay. So I can't double up. I can't be dropping 57,000 into LaRussa Luxury Motors 401k and then 57,000 into my solo K on my own small business that I'm doing on the side. Like. Right. It's total for the 57. Okay. It's funny this the Larussa and Cobra Kai because I'm like, I would always give the example of Dunder Mifflin, you know, so from the office, of course. And I think my cultural pop culture references are a little dated, apparently. This is cool, though, Cobra Kai. It's the new thing on TV right now. Is this a series or is it like just a movie?

So it's a series. So it's on Netflix. It started out on YouTube. I think they call it YouTube Red. They were trying to get you to subscribe to YouTube Red. So I don't know what happened. But anyway, Netflix picked it up and it's a series. I think Angie and I are on episode five. Honestly, it's so good. I know we're here to talk about the Solo 401K. I'm really here to promote. I'm getting paid to promote Cobra Kai. Yeah.

This is. We're sponsored by Netflix, obviously. Okay. So let's talk about how I get the money in the solo K. So let's walk through a couple different ways. There's really three different ways money goes into your solo K to fund it. The first would be I just roll over money. I have an IRA somewhere else or I got an old employer 401k. I've already got retirement plan dollars saved away. Let's say I've got a traditional IRA at TD Ameritrade. And now I want to self direct, but I want to use the solo K. I'm self employed. So I set up the solo K. I roll over those existing dollars that I have, drop them into the solo K. Now I can start investing that. I don't even need to put new contributions in. I could if I want, but I just do the rollover and I get lots of clients that do that and really come to the solo K. Frankly, just to self direct. Or another group is they're setting up a new small business. So we set up a new S Corp for their new small business and they're Wanting to fund it. And so it's like, all right, we'll set up a solo K in your new S Corp. Small business, roll over your existing traditional IRA or old traditional $401 into the S, the solo K, and then take a loan from the solo K, which we'll talk about here in a minute. Or you can take 50,000 from the solo K and loan it to yourself. You could then use in your own business or to pay off personal debt or anything that may be at higher interest rates. So. So the first thing I get money into the solo K is I can fund it just from a rollover. How does it work, though, when I'm putting new money in Kevin, though, like employee versus employer contributions, how does, how do I get that money? And then what's the max? Is there?

Yeah, so. And just on the rollovers real quick, I love that you touched on that because that's a lot of my clients too. You know, most. For most of us, the biggest amount of money we have is in our 401k. You know, and if you leave your job, you've left Dunder Mifflin. Reason why? So the reason Dunder Mifflin, you know, Kevin is a character in Dunder Mifflin. Yeah, he's this.

Right.

Yeah. So I. Anyway, anyway,

is there Kevin in Cobra Kai?

Yes, Cobra Kai is much cooler.

Yes, but is there a Kevin?

There's no. Okay. There's no Kevin. All right, Matt. There's no Kevin. But it's just a, it's a cool show.

Okay.

So I want to just touch on. You can pretty much roll over any existing retirement account. And maybe we're going to cover this later. But just while you brought it up, accept a Roth IRA. And if you're currently working your current employer, 401ks, not really going to be available to move into a self directed solo 401k. But a lot of our clients, you know, they left a job or they're retiring and they're going to have access to a large amount of money. And rather than taking a distribution or even rolling over to a self directed ira, they can roll it over to this vehicle, this self directed solo 401k. And for some other reasons we'll talk about, there's some, some advantages to do that. So as far as the contributions, the way that works is basically there's two types. And I think it's important that people know as a business owner, you're wearing a few different hats, so you are the owner of the company, but you're also for 401k purposes, the employee. And so what that means is, is as the employee, you can make contributions to this solo 401k like we've already talked about. So as Matt's showing that diagram, you're on the bottom there, on the bottom left, and you can contribute up to 19,500 in the year 2020. That's the, that's the maximum. There's no minimum. I mean, it's up to you how much you want to contribute. Like Matt said, have a lot of clients that their main focus, at least initially, is they want to roll some money over. So there's no minimum contribution limits, but there is a maximum. And the maximum amount in 2020 is 19,500. That's the employee contribution. So there's a second type which is the business or the employer contribution. So on the, on the diagram on the left, you have the company, that's your business, that's adopted the Solo 401k. The business can also make a contribution and that also has a cap. And that cap, if you're an S Corp or a C Corp, is 25% of your salary. So when you're an S Corp or a C corp, you need to be taking a salary and that's going to determine how much the business can actually contribute because the business can't put in more than 25% of your salary. So if you're a sole prop. If you're a partnership, for some reasons, probably doesn't make sense to get into. It's actually 20% that the business can contribute. So between those two contributions, that's why when the law changed a few years ago, these solo 401ks became so much more enticing because to compare it with a SEP ira, A SEP ira, the only thing that can happen is the business contributes the 25% and that's it. But with the Solo 401K, you can make contributions and so can the business. And practically speaking, you know, it's just a checking account. It's just a solo 401k checking account that you're the trustee and you're just transferring money into. It is really all that's happening there.

Yeah. So let's give the example. And most of our clients are an S corporation. Most of our clients who are contributing at least to a solo K have the money. You're making 50,000 of your net, you know, net a year. In your business, you're going to be an S corporation. If you're working with us or really any other Tax lawyer knows what they're doing. So let's see, let's say you took 100,000 W2. Okay, maybe you made 300 grand that year in the business. You're like, all right, I'm taking $100,000 W2. The contribution for an S Corp goes off the W2. You made 300,000 in the business total, 100,000 of that was salary. 200,000 came through as profit. But your retirement plan contribution in an S corp or a C corp is off your W2. So you had 100,000 W2. You're going to be able to put 19,5 in right out of the gate as an employee. And then the employer can put in 25% of 100K, 25,000. And so what's going to happen? You're in a 19.5 deduction on your W2. And then the company's going to take a 25,000 deduction on your 1120s on your S Corp tax return. So off 100,000, you're going to put in. What's the math that? That's 44,500 that you're going to be able to put in off 100 grand of income. Now if you had a SEP IRA, let's say you did a SEP IRA instead of this. And some people do separate IRAs instead of solo KS. That's why I bring it up. You can only put in 25 grand. So the solo K you can get more in. There's some other reasons. We like the solo care with a SEP IRA in certain situations. You could still do SEP IRAs. I still think they're a good fit for some people, but, but I can get more money in if I'm looking to maximize contributions and stick as much money in there on as little of a salary as possible. We just like the solo camp or the SEP ira.

Totally. And just to, just to touch on, you know, that's a $44,500 deduction that lowered your taxable income. That now you can actually keep in a, in a tax advantaged account and grow on a tax deferred basis and invest in things you want to invest in. And as Matt touched on, if you need to get in, you know, you're in a liquidity crunch, you can actually pull that money back out as a loan. I mean, it's, it's really powerful as a wealth building tool, as a tax savings tool. It's hard to find anything else out there like this.

Yeah. So, okay, so let me, I'm going to show some more Slides here, I think. And I believe the catch up right now. Is it 6500 or is it 6000? I believe it's 6500 now.

6500.

Yeah, for 20. 20. So let me just, I want to hit these numbers again just for a second. Just everybody's on the same page on this. Let me share my screen again. So for those of you listening to the podcast, I'm just showing a couple, I'm just showing two slides here that outline the contribution amount that we're talking about verbally here and has a diagram too. So. All right, so you can throw in 9500 and 6500 and that can be employee. Now, the 6500 is only for those 50 and older. Now what about Roth though? Kevin, can I. How's the Roth work?

Yeah, we love Roth. Roth is the, is the gravy train.

Right, Right.

I don't know why they say that. I don't want to be on a train full of gravy, but that's what they say. It's a gravy train.

Sounds delicious. Yeah.

Call it the Money Train. I'd rather be on a train full.

Me too.

So, yeah, with Roth, as some of you may know, I mean, that's a tax free account. It's like the Holy Land. It's hard to find accounts that are truly tax free. So this 401k plan is set up when we got it approved by the IRS to allow for Roth contributions. So the Roth contributions can only come in on the employee side. So that 19,500, or if you're over the age of 50, that 26,000 can consist of all traditional pre tax deferrals. If you need write offs in any given year, throw it all into the traditional bucket and get a write off if you're in a year where you can, you know, put money into the Roth, which again, long term is the better move, in my opinion. You can put all 19,500 or all 26,000 if you're over 50 into the Roth account. And it's a separate account within the 401k. You don't need a, you don't need a second 401k. It's still just one 401k. But I mean, that's, you know, what a Roth IRA contribution, 6,000. So already you're, you know, four times higher than what you could put in a Roth ira. So this is a huge thing as far as building wealth on a tax free basis.

Yeah. And that's, you know, The Roth is tricky because it's only on the employee side. Now, if you want to. I've had some clients back. I want to do 57,000 a year Roth. Can I do it? Yeah, but it's a two step process. So you're going to throw in the 195 Roth employee contribution. And the other, you know, what do I got left there to get up there? 34, you know, 28,000 or whatever. I don't know the math here. Like 28. 28, yeah. So I got a little crap. Why am I dying on the math here?

Well, are you in 50 or older or younger?

Yeah, well, let's say I'm younger. I'm gonna do the math here. This is hurting my brain. So, okay, you can put in 57,000 total, right? I already put in 19 5, so it's 37, 5. I didn't sound right to me. Okay, so the other 37,500 is going to come in as employer contributions.

So.

But that's going to be traditional dollars. The company expenses that. So it has to come in as traditional dollars. But what you can do is you can then convert it. It can come in day one as traditional dollars. You can do a Roth conversion. And now I've got all the 57,000 in as Roth. So that's a cool strategy. Just you get the deduction, you get the employer contribution in, but you immediately convert it over to Roth. And so. And that kind of negates the deduction, right? I got a 37,000, what was it, 37,500 deduction to put it in as traditional. But then I got a 1099 for 37,500 to convert it to Roth. So it's kind of a wash. But it's the way you get 57 Roth.

I mean, I have some clients that, you know, they're in a year where, you know, maybe they sold an asset and they're in a higher tax bracket than they would be this year. And maybe it's, you know, November, so they need a tax write off this year badly. So they throw that $37,000 employer contribution on the, on the, on the traditional side. And then to your point, if next year they're back in a lower tax bracket, it can still make sense to do that Roth conversion. And I think that's an important thing to mention. I don't know that all 401 s, you know, do that. But our 401k plan, you can do an in plan conversion over to Roth. So if for all of our Roth lovers, Out there. That is a legitimate way to get more than just 19,500 into. Onto the Roth side of things.

Okay, cool. Now, Roth IRAs cannot be rolled in here. You can make new Roth 401k contributions, and I can roll over other Roth 401k. But Kevin noted that earlier. It's an important point of talking. Roth is. Roth IRAs are forever Roth IRAs. You can never roll it into anything else. I can't roll it into a Roth 401K now. I can roll my Roth 401K out to a Roth IRA later. But you can't go Roth IRA in the Roth 401K. So it's a dumb, quirky tax roll. It's a mistake technically in the code, actually. And Congress knows that, but they don't. Nobody cares enough to do anything about it. The Obama administration talked about fixing it. I was actually in, like, a meeting with the czar, Obama's retirement plan czar, about this rule. And I asked him about. He's like, it's totally done. We need to fix it, but no one cares. That's basically the answer. It's, like, not a big enough issue where it's, like, getting into anything.

We get it, Matt. You're meeting with czars.

You're a very important person. I know. Yeah. I just throw that story in there. It's like every time I meet a famous person, you know, like, I bump into a famous person, I have, like, no idea what to say. And, I mean, there are. These are, like, D list celebrities, if that, you know? Like, I ran into Karl Rove. You know, like, he's on TV a lot on Fox. He's Bush's campaign guy, whatever. I don't know. He's a White House advisor. If you're a political person, you know who he is. But I'm walking down the street in Austin, Texas, and he walks right by me, and it's like, hey, I stopped literally on the side, and I'm right in front of the Fox. Actually, I didn't even know. I'm like, hey, your car, Rove? He's like, yeah, nice to meet you. He's like, so nice. And I was like, huh. See you later. So.

Well, good for you, man. I haven't ran into a celebrity in probably 30 years. When I was a kid, I ran into Dustin Diamond. Remember Screech, from.

Oh, yeah. Oh, yes.

On the slopes at Big Bear, I think is one of the resorts in California. And I was starstruck, man. But he totally blew me off. So Screech if you're listening, I still remember that.

Yeah, yeah, he's definitely listening. About how to get money into his soul. Okay. Because Saved by the Bell is not cutting it anymore. He's gone nowhere. I mean, he peaked at Saved by the bell at 20, you know. Right.

Yeah.

Okay, let's talk about the trustee part here and, like, the parties involved. Let me go back to the diagram, Kevin, and start talking about, like. So I am. The company adopts it, right? Like a 401k. That's one thing that's important to know. Like IRAs, an individual can set up an IRA, individual retirement account or individual retirement arrangement. But a 401k is created by a business for the benefit of its employees. So in the solo K, it's like, well, I own the business. Okay, your business is adopting the 401k for the benefit of its employee, which just happens to be you. But I think a lot of business owners don't get that because it's like, well, it's all the same. Don't make a big deal about this map. It matters. So just think like, Microsoft has a 401k plan. It adopts it for the benefit of all of its employees. And then people within the 401k have an account. So we have a plan that creates an account for the people involved. And this could be a traditional account. It could be like, Kevin could have an account in this, in a solo K. That's traditional dollars. He could have Roth dollars in it, too. And so we have that. But then there's the trustee. So talk about the trustee and how that works in a solo K. Maybe it's different than IRAs. And I'll bring up the diagram here.

Yeah. So this is an important point. With an IRA, you know, you're required to have a third party custodian to custody that account with a 401k. With this solo 401k, you as the business owner can select the trustee. And yes, you could appoint a third party as the trustee. So Matt's company directed Iraq, could serve as the basically custodian of your solo 401k. Most of our clients, you know, they want to be the trustee because with that power, with that authority, you can have what they call checkbook control, where there's an actual just 401k checking account that you have access to make investments. So if you need to buy a property quick, you have that control. And that's a little bit different than an ira. Where to get that, you have to set up one of Those ira, LLC that we can talk about. There are other reasons why we want you to still set up an LLC inside the 401k for liability protection and so forth. But the trustee role is something that you, the client, you the business owner, you can take that role on yourself and most of our clients do. So again, you're wearing a few different hats. You're the business owner, you're the trustee that has that role within the 401k. Because a lot of people don't know a 401k is basically a trust. And then you're also a participant within the 401k. So it's a little bit different than the IRA. Like Matt said, there doesn't have to be a third party involved. You can fill that role. You have that as an option.

So, yeah, and so like it directed IRA and directed trust company. Like, we help with your solo K account once it's set up. So some clients are like, hey, can you guys do it? Just have an account for me. I'll roll my money over there. I'll contribute through the. You guys, you hold my cash and just invest it with me when I direct it or maybe put into a 401k LLC here. But I want you guys to handle things because I want to make sure it's tracked. And we're like, okay, run it through us and we're going to deposit in our accounts and process it like an ira. And that way we can track it, we can do tax reporting. If you do a Roth conversion, we'll do the 1099R and all that. And you get your statements and everything. And for a lot of clients, that's really good. Now you, you're still the trustee even in that situation, and you can still have a bank account that we just send the cash into as an investment. Basically, that's the holding bank account that you're using the cash. So now. So that's one option when you're doing a solo K, at least with direct and with us, just, you know, the other is I'm just going to have a bank account. I'm not going to run it through anyone. I'm just going to do the record keeping and tracking. I don't need anyone. I'm going to track it and talk to my CPAs and accounts and make sure everything's coordinated. And I'm just going to have everything go right into my solo K. So when I make a contribution, I'm not sending it to direct IRA or anywhere else. I'm just going to Drop it in to the solo K bank account. When I transfer over rollover money from another prior IRA or 401, it's going to drop it right into the solo case checking account. Because that checking account is in fact the solo K account. It's got the money, it's receiving the income and contribution rollovers. You're investing the money out like on the diagram here we got, you know, you can do some private money lending and have a promissory note investment. You can put it into a 401k LLC that buys real estate. You could buy real estate directly out of the 401k if you wanted. You can have a brokerage account and all this stuff and you can even attract it eventually for opening up brokerage accounts soon. You can do right out of the 401k if you wanted to. So there's lots of options. But the key is in an IRA you have to use a custodian. You have to run all your contributions through it, all your distribution. You have to have someone that does your statements of reporting to the IRS on the account. In the solo K, you do not have to, you can just be the trustee, that's on you. But now you got to do the accounting. So now always in a solo K, and this is a little confusing, you're always the trustee, you're always going to be the trustee, you're always going to have final signing authority. You can always have a checking account no matter which option you pick. And that's something that a lot of self directed investors in particular that want to buy these alternative assets we've talked about and if you know us, you know, self directing, we talk about it. I wrote a book on it. And even my book just, you know, the self directed IRA handbook has an entire chapter on solo 401ks. It's like over 50 pages. So we've got of course a lot of resources on that.

And I know Matt's humble. Anyone who's seriously interested in learning about this or even doing it, even if you use a law firm like us to set this up, you should get Matt's book, if only for that chapter because it's seriously awesome. There's nowhere else you're gonna find, you know, 30 to 40 pages of very clear, concise instructions of accept this video. So, so maybe.

Yeah, yeah, yeah. This is the cheat sheet. But yeah, the book's got all the details and citations too, and high risk provisions and publications for those that like to geek out on it, like me. I do too. Okay, now, okay, so I can get checkbook control right out because I'm the trustee and I have a bank account right in the name of the solo. Okay. And we got banks that we can refer you to if you need, you know, help there. Sometimes when you walk into a bank and you're like, alright, I'm open up my 401k checking account there, you're going to be there like you need like bring a tent. You're going to be there for like a couple days because they don't know what the hell you're talking about. So there are banks that know what these are. So if you need a contact, we have a bank guide when we set that instructs you if you want to use your bank. Here's what type of account you need and what to say and not to say. Unfortunately the banks just, this is not a common product for them. So you're like a square peg trying to go in a round hole in most of those places. What else do you think is important about a solo K? Why else would someone use it? Or what's an important aspect we haven't touched on yet?

Well, I mean I think we touched on it but I think we should spend some time talking about, you know, what can you invest in and that will touch on, I think a key feature or distinction about the 401k versus like an IRA for example, this leveraging in real estate and UDFI tax. And then I think we should touch on to circle back on the loan. Okay, I think that's a key thing. You know, you talked about clients wanting to use some money to fund their own S Corp, that just adopted it. The loan is a pretty important thing. So maybe just things we can invest in. And I'll start just by again reiterating as Matt's book, the Self Directed IRA Handbook. Sort of the theme is invest in what you know. So whether you're trying to do a rollover like we talked about out of your Morgan Stanley IRA and or you're making contributions into your business, if you feel you can get higher returns, better returns on that money in things outside of the stock market, whether it's real estate, cryptocurrency, startup companies, you know, precious metals, this is, this is what you need. This is the right type of vehicle to do that. So the whole mantra of invest in what you know, that's a key feature again just to, just to hammer that in with this, with this 401k.

Yeah. And so that's what a lot of solo K people do is they're of course self directing. Many of them, not all, but many of them are self directing because there's different people that are attracted to this and I so and there's some people that it hits all sides for them. You know, some people are like, I just want to contribute a lot of money. I'm self employed. I want to be saving 50 grand a year in taxes, I want to contribute. Or they're like doing the Roth and throwing a lot of money in there. It's like I just want a great tax strategy going to build it up and they may be in the market, you know. Right. You got other people who are like, I just want to self direct. Give me a cool account to self direct. I am self employed so I can do it. But give me a cool account to self direct. I'll use the existing retirement $10 I got and I'll try to contribute more in but I just want to self direct and I want to be able to checkbook control and so solo K can be a good fit for me. So. And then of course there's other people that hit both of those things and it's awesome. Let me hit the loan, I'll hit the loan and then if you do want to do udfi, we'll go, we'll volley on that. Okay.

The loan.

This is something that's unique on a 401k that you cannot do in an IRA. In a 401k you can loan yourself half the balance of the 401k not to exceed $50,000. And it's a note. The 401k is going to write you as the lender and loan you the money as borrower gets usually prohibited with IRAs and for any of you that know IRAs and prohibited transactions, lots of content on that. You can't transact or loan yourself money from your IRA. But in a 401k there's a special rule that allows you to access for whatever purpose you want half the balance of the 401k not to exceed 50 grand. So if I got a $200,000 401k, I can take half the balance. Not to exceed 50 grand. I can take 50 grand. If I got an 80,401k, I can take half the Balance. Not to exceed 50 grand, I can take half the balance. I'm going to take 40. Okay, now I'm going to loan that to myself. The IRS gives you five years to pay it back as long as they pay it back in five years and you got to make at least Quarterly payments. It's not like a lump sum you can do at the end of five years. You got to make quarterly payments, get on a payment schedule which we help with if needed. And, and you're, and so you're, you're making quarterly payments to it. As long as you pay it back within that five year window, you don't pay any taxes on it. Comes back in, no taxes or penalty for taking the money out, even though you were using it. Now the interest rate you charge on that is prime plus 2% and prime's pretty low right now. It's maybe 2 or 3% so you just add 2% on it. So you're probably, the rate's not 4 or 5% right now on taking a loan from your own 401k. So that's how it works. 50 grand. Now if you have a spouse that has a solo K account too, you can both be taking that 50k loan. I mean, I've had many clients that have started up new businesses. They both had prior accounts. We set up an S corp for the new business. Solo k took out 50k loans to fund the new business and get them some startup capital. And it's out of the same solo K, but each participant in the plan, you know, in this case solo Ks it generally is going to be. Spouses can do a 50k loan to themselves.

Yeah. And I've had clients use that loan feature to start up a business, but also just for some seed money for some down payments to get some rental properties outside their 401k. You know, I hear people all the time say, should I buy real estate inside my retirement account or outside my retirement account? And the answer is you should do both. So this is a way to pull some money out to buy some real estate outside your 401k and then hopefully still maybe do that inside the 401k.

So yeah, or you can use it to pay down high interest debt. You know, I mean if you got credit card debt and stuff at 18%, you know, you're throwing that 18% away. Take the loan out of 50K and you're paying yourself back. Okay. When you pay now that 5% interest prime plus 2%, you're paying yourself back your own 401k and it's only 5%. So not only are you saving money, the money you are paying in interest, you're paying back in your own retirement account. Yes. So it's a good, just debt consolidation strategy too.

Yes. Do you want to touch on while we're Talking about the 401k loan, I believe the CARES act. Didn't they give a loan feature larger amounts?

Right, yeah. So you can do up to 100 grand out of the CARES Act. Now the. A lot of the CARES act stuff goes to the end of the year. The loan provision, I believe, expires at the end of September, actually. So you're listening to this. You catch this early. I believe it's like maybe November 27th or, sorry, September 27th. So if you're looking to do. That's it. Okay. Got Kevin Nelson. Okay, sweet.

You're right.

Okay, so you could do the hundred thousand right now. And even if you only have 100,000, so it's 100% of your 401k, you can loan yourself up to a max of 100 grand. Pretty cool.

Yeah, I mean, that's huge. I've had a couple clients, you know, do that and obviously, you know, sort of self certifying that you've been impacted by Covid. But yeah, that's a, that's a unique opportunity that's going away. So.

Yeah, I love it. What about udfi? What the heck is that?

Yeah, it sounds like a disease or something. Something you don't want to get.

Yeah. UDFI 19.

Right. So it's an acronym. It stands for unrelated debt financed income and it's a tax. When IRAs, nonprofits can get hit with this, are leveraging investments with debt. And so a lot of clients in real estate, you know, there's the use other people's money, OPM leveraged, buy more properties, bigger properties. If we're talking about real estate Investing, the Solo 401K, you can leverage and not pay UDFI tax with an ira, you can still leverage, but you're going to, you're going to potentially have to have to pay some UDFI tax and maybe file a 990t tax return. So again, forever reason, I don't know if that was a mistake or that was intentional, but there's a leg up that the 401k has over the IRA. If you're a real estate guy or gal and you want to leverage, you want to do that with the 401k. Because you don't have to pay UDFI tax with an ira.

You do. Yeah, yeah. And UDFI is not the end of the world. We have lots of IRA clients that just pay it and deal with it. And so. But the solo K, if you are self employed and can do that option, it is cool. And I think it's really. Kevin, the only reason 401ks get out is they got better lobbyists. I mean seriously, the IRA industry just not organized and doesn't have lobbyists for the this stuff. 401k industry does say got an exemption for this. So and remember that exemption is specific to debt and UDFI on buying real estate. So it's a, it's a really narrow exemption but for a lot of our real estate clients or self directed clients who are buying real estate with their 401k, it's a nice little exemption.

So go ahead while we're talking about, you know, what can I invest in and some of these things just to real quick on that loan. If you're going to get a loan, you know you have maybe $100,000 in your 401k, you want to go buy a $200,000 property, you go get $100,000 loan. That, that has to be a non recourse loan. That cannot be your typical mortgage that you might get. So I don't know how deep you want to get into prohibited transactions, Matt, or not, but that's. I just wanted. If we're going to touch on this topic of UDFI tax, it's got to be a non recourse loan. So.

Yeah, yeah. So yeah, keep that in mind. And I think there's a lot of their content. We'll get too far on privity transactions of that. But that, that's the distinction on the 401k. The solo 401k is you do get out of UDFI on leveraged real estate. So that's a, that's a perk in its favor. So. All right, so let me summarize a lot of the benefits here. No udfi. When I buy leverage real estate, if I'm self directing I can loan myself 50k out of it, you know, up to 100k from we're in this CARES act window right now. But otherwise this general rules up to 50k I can loan to myself. I can self trustee it. I don't need to have a custodian if I don't want, if I just want someone to give me my plan amendments every year, which we'll do it directed. I don't need someone touching the money. I can control the whole dang thing and have the bank account you could use of course directed if you want and you still can have your own bank account with the, that has checkbook control. But if you want us to help do tracking and reporting and statements and 1099 and stuff, if you're converting or distributions we can do that, but you got to run all your money through us. So there's a little trade off there. So just saying there's options. I can put 57,000 a year in the solo K. If I'm over 50, I can put an extra 6,500. I can have a Roth account in there and a traditional. Or just do all Roth. What other benefits? What am I missing? I was trying to sell the cool

things and I'm sold. Where do I sign up?

I can self direct it. You know, that's like the best. So now here's the catch, okay? We always talk about this, and Kevin and I have done this a number of times, you know, right? Everybody's like, well, I just want to solo K. Okay. Not everyone can have a solo K, though. All right, you must be self employed with no employees. So, like, I had a dentist I was talking to a month ago, wanted to do a solo K. I'm like, all right, how many employees you got? About 12. Okay. Do you have a retirement plan at work? Nope. How are we gonna do a solo K? I can't set up a 401k plan for you. And you have full time employees in your business, right? Yep. Ain't gonna work. Okay, so that guy's not over. What if you have no employees? Like, you have no business at all. Sorry, no business at all. You can't do a solo K either. So it only works. It's a narrow group that it works for, but it works really well if you fit into it. But if you fit into this, you are self employed. You have some business that's legit, okay? You're not just setting up an LLC and being like, it's a business. Okay? So let me tell you what happens to that. And there's other competitors of ours who do that, and it's total bs And I end up winding these down for clients. And they come to me after a few years, they start talking to their accountant or thinking about this, and like, I totally screwed this up. Yes, you did. But they said I could. And they set me up an LLC that adopted the 401k plan. Like, what did you do in the LLC? Nothing. Well, that's not a business, okay? What happens is, if you have a company, let's say you did that, you set up an llc, right? S Corp. And that LLC or S Corp, then adopts your solo K, but that any has nothing, eventually the IRS is going to apply the Hobby Loss rules to that business and say, this isn't a business, this is A hobby, you're not making money in it. There's no profit motive. And then the 401k is going to collapse too. So I've had to unwind some of those and roll them out, frankly, to IRAs, self directed IRAs, because they were in a solo K that had no legit employer that created it. And what the IRS calls those eventually is orphan plans. There's no employer that exists and they need to be wind down and shut. So just keep in mind, it's not for everybody, but if you are self employed, it can be a pretty sweet option.

Yes, I love it.

All right. Did we miss anything, Kevin?

Well,

let's cover it if we did. I mean, I don't. I mean we owe it to.

I mean, I think we covered honestly for having a conversation about the self directed solo 401k. I think we've covered the main things, obviously. I think you can still, you know, just to reference the CARES act, something that's relevant this year, you could take a distribution all the way up until the end of the year from your 401k. Different than a loan. I think one thing that's unique, it's kind of, this is miscellaneous, this is maybe going to get lost some people. But with the Roth 401K, you do have required minimum distributions, if you have any. You know, if you know anything about Roth iras, you don't. So, you know, Matt talks about unwinding and rolling things out into IRAs, sort of by necessity. But there are some reasons why it makes sense to proactively. You know, you've used the 401k for what it's been used for in. And now it's time to maybe get into it, roll it from a self directed Roth 401k over to a Roth IRA.

Great point. And RMD now is 72, so that's good. That was an update from the Secure act and a year ago. Now our fees. Let me hit this. We do a full attorney setup in the law firm. Today's Main Street Business podcast is brought to you by KQS lawyers offering full service 401k plan setups for $995. Or if you just want the docs only, you're like, hey, I read Matt's book or I listened to the Main Street Business podcast on Solo KS. I'm good. I don't need a console 495 bucks. And then if you want to count it directed for us to your tracking and statements and tax reporting for the solo k account, it's 350. If you're like, guys, just give me plan amendments and updates to keep my docs in order, that's 150 bucks a year. So that's what you can look at for fees. But keep in mind a solo cape takes a little more work. If I have a client that's like, hey, I don't want to put more money in to my retirement account. I am self employed, but it's not a lot. I'm not trying to throw more money. I just want to work with the money I have. As long as you're not buying stuff that's leveraged real estate. I'm always just going to do an ira. It's easier, it's cheaper. The solo key is a little bit of work. There's a plan document involved, it needs to be updated. Once you're over 250, there's a 5,500, you know, easy that gets filed. So it's not rocket science, but it is some administrative work to pull off. So just keep that in mind. Any final words, Kevin, or.

No, I agree with that. I mean, I think we're comparing the solo 401k to most typical 401ks. This is way easier than that. Yeah, but there is a spectrum to the facts. You just gave that type of client the IRA. We're not here, I'm not certainly here to knock IRAs. They're simpler. They're great too. So that's why having a consult, even listening to this hopefully is giving you some good information. But getting a consult with one of US attorneys who actually can look at your situation and sort of give you the lay of the land in your circumstances and give you these options, you know, not to toot our own horn, but you know, I'm just a guest, Matt, so I can self promote. You know, you're, you're the host. You have to be more neutral. There's a lot of guys selling 401ks out of their trunk of their car. You know, just trying to get everybody into these. These aren't for everybody. As Matt talked about, for those that it does work, it works great. And so that's why I think even getting a 20 minute, 30 minute, a la carte consult, you know, before you do the docs, only just to make sure it's a good fit is an

important step to take. Yeah. Love it. Okay, well, thanks everybody for hanging in here on a little bit of a, you know, technical topic. But it is a really popular account for those are self employed. Now I want to make one last point that is pretty important. You have to set up the solo K within the tax year if you want to take contributions or due deductions for that year. So if you want to do it big contributions into your solo k for 2020. For 2020 tax deductions, you've got to have that set up by December 31, 2020. And in our office, we want to be have it done by November because there are some processing work, and at the end of the year, the IRS always shuts down. And if we can't get your stuff done with the IRS by December 31st, we got a problem. So we'll run a special, by the way, in November. You can get your solo K going now. There's always a special in November, too, which we'll be promoting throughout the podcast on solo K. We set up hundreds of them every year doing that. And the solo K is a great option. Just keep in mind, you need it set up in the year if you want the taxes a lot of people are used to. Well, as long as they do my IRA contribution by April 15, it counts for the last year. It's not like that for 401ks. 401ks got to be set up by the end of the year. You can contribute later. And let's say if you want to do 2020 deductions, we set it up in 2020. You don't contribute until March of 2021. That's okay. Okay. There's some deadlines you got to meet there, and we got the rules on that. But. But you have to have the four solo case set up. So that was my final point.

Great point. That's why. That's why you're the sensei.

Yeah, you're right. But watching too much Cobra Kai, I think all I know is put him in a body bag. Johnny, was that the coach that told him that the sensei or.

No, buddy, I think it was just the friend. Okay. Yeah, yeah.

Okay.

Go watch the. Go watch it. Because you actually like Johnny after you start to watch it because you see all those past events. You remember the scene when Danielson gets, you know, he pushed on his bike and he gets, you know, beat up.

Okay.

This goes into Johnny's side of things where everybody's got two sides of the story, and you're like, oh, you know what? I could see maybe Johnny wasn't such a bad guy, you know, so.

Okay, all right. Okay, cool. All right. Well, thanks, Kevin, and thanks, everyone, for tuning in. Of course. Go to mainstreetbusiness.com for more information. KQS lawyers where we have an intake form for the solo kqslawyers.com and a special page on our services there. Solana is the expert in the office. The paralegal also works in directed up IRA that can help with any questions. So if you call in and want to just chat with some of the staff, ask for Solana. And also there's, there's Misty and some other staff that can help as well. So thanks for being with us. We'll see you next week.