Roth IRA vs Roth 401(k) - Where Should You Put Your Money?

Welcome everyone to the Directed IRA Podcast. This is Matt Sorenson, excited to be with you today. I'm gonna be covering Roth IRAs versus Roth 401s. I did this live and I wanna share it with everyone here on the Directed IRA Podcast. Roth IRAs are the number one account we open up at Directed IRA, followed by traditional IRAs, but also Roth 401s, whether you have one of them at your employer or you have a solo Roth 401. Critical strategies. I'm comparing and contrasting both in today's episode. Please enjoy. Let's dive into Roth IRA versus Roth 401. And let's talk about 6 areas. I'm going to go into 6 different areas on the Roth IRA versus Roth 401. We're going to talk about how do you get the money in? We're next going to talk about the tax rules. And there's a lot of stuff in here many people do not know. I happen to be a tax lawyer, run a big company called Directed IRA where we have 25,000 retirement accounts, the most common of which is a Roth IRA. So we're going to break down some of the cool things you can do with it that you probably aren't even thinking about. Third, we're going to talk about investment options. How can you invest these accounts? Fourth, we're going to go over the differences between the Roth IRA and Roth 401. And then we're going to be going over getting the money out of these accounts. How do I access this money? At retirement or earlier. And then we're going to go over how do I use both of these accounts? Can I do the Roth IRA and the Roth 401 together? How does that work? So we got a lot to cover today. Um, this is really substantive, a lot of great info in my humble opinion. Um, you be the judge by the end of this. Uh, but we have a deck. And so with all of this info I'm going to be dumping on you, we do have a deck. It's in the description in the link.

Below.

Last but not least, the Alt Asset Summit is going to be October 22nd and 23rd. This is a live event hosted by Directed IRA. There's a number of other sponsors, but my company Directed IRA hosts this every year. It's 2 days hearing from other experts in different investment categories, from real estate to private equity to venture to precious metals to crypto. Some of the tax and legal strategy associated with it. There'll be CPAs, attorneys, even financial advisors speaking about this. So, um, it's really 2 days condensed, meet other like-minded investors, learning about alternative assets specifically. Um, it'll also be streamed virtually, but we'd love to see you there live. We had 250, 300 people, I think 300+ at the last one that we did in Phoenix. I think we'll have more at this one coming up again, October 22nd, 23rd. Costa Mesa, California. That's Orange County area in Southern California. Um, catch the virtual stream if you can't make it out there, but we'd love to see you there live as well. And do we have a discount code we want to throw out yet?

It's just code CLIENT.

Oh, just code CLIENT. Okay, don't share that with anyone. Um, and all right, I got the go from Jordan. So all right, let's dig back into it, um, and talk about the Roth IRA, Roth 401, and getting the money in. So Roth IRAs, 401s, Roth 401s, the government only lets you put so much money into these accounts every year. Now you can invest it and grow it as much as you want, but the government says, hey, this account and retirement accounts in general, these are like tax advantaged. So we're not going to just let you dump as much money in there and then go invest it. We're only going to let you put so much money in every year. So because of that limitation, you want to be consistent about getting the money in and starting as early as possible, because that's how you start compounding and growing this. And remember, in a Roth account, Roth IRA or Roth 401, that money's growing, we're investing it, and you pay no taxes on it. And then it comes out entirely tax-free later in retirement. Now, in a Roth account, when I put money in— and for a Roth IRA for 2026, it's $7,500 a year— when I put that $7,500 a year into the Roth IRA, I do not get a tax deduction. Traditional IRAs, you get tax deduction, or traditional 401s, you get tax deductions. When you put the money in, where you get to reduce your taxable income by $7,500. And the, the catch with the traditional though is you don't pay taxes as you grow it, but when you pull it out and that money's grown and is invested, you're paying taxes as you're distributing the money later in retirement. So the Roth is frankly the exact opposite. You put the $7,500 in, no tax deduction, but now the growth and what's coming out later in retirement, you pay zero taxes on. So the amount for 2026 for Roth IRAs, $7,500. If you are 50 or older, you get an additional $1,100 you can put in for $8,600. So I can put that in every year and we're gonna go, what if you're a high income earner? We'll talk about that here in a second. Now if we contrast this with a 401, I want to break down two different 401 types. There's the corporate 401 person where you're an employee working for a company that has a 401. There's another 401 user that's the self-employed 401 user. And this is someone who will use what's called a solo 401. So let's talk about the most common, which is I work at a corporate job. Okay, I'm Jim Halpert. I work at Dunder Mifflin. I have the Dunder Mifflin 401. All right. So in that scenario, with a 401 at an employer where you work, you can put in $24,500 a year as the employee. All right, if you're 50 or older, you can put $32,500. For age 60 to 63, there's a new kicker for years 25 to 28 where you can actually put $35,750. Um, but everybody can at least put in, regardless of your age, $24,500 in Roth 401 dollars. Now, this is coming out of your paycheck. Most 401 providers have a match. We'll talk about here in a second. Um, but, and, and you want to get that. So if I'm working at a company that offers a 401, and let's say I make $200 grand a year and they say, well, we match 4% of your salary dollar for dollar. So if you put in 4% of your salary, we'll put in 4% of your salary into the 401. So 4% of my salary, if I'm making $200 grand is $8,000. And so they're saying, if you put in 8 grand, we'll put in 8 grand. So that's $8,000 as an employee contribution that goes against your $24,500. And then they're dropping in $8,000 as a match, which is an employer contribution that doesn't eat into your 24/5. That's the company putting money in. All right, now they can put in money up to the total of your 401 being up to $72,000. So they've got another $40,000 and change they could put in and matches. Most corporate 401s never do that. I would say, and say most, I'd say all. I've never ran into a corporate 401 that maxes out the employer contribution for their employees. Um, so, but, but the, the important point here is if you have a match from your employer, that does not count against the dollars you can put in as an employee. And remember, $24,500 is the amount you can put in. Now we're going to get to advanced strategies, um, in episode 3 here that we'll get into the mega backdoor Roth 401 where you can put more in as an employee. And I'll dig into that strategy in the next episode. But for now, let's just leave it there. You can put $24,500 in again, if you're over 50 or over in that year, 60 to 63, you can put more of those amounts are on the deck. Now let's contrast this to someone self-employed. If I'm self-employed, I can have something called a solo 401. This is for people who are self-employed with no employees. We see a lot of consultants, real estate agents, brokers, just people who have a small business, maybe even, or even a side hustle. They might even have a 401 at a day job, but they have a side hustle or their own business where they have a solo 401. So the solo 401 is meant for a self-employed person that doesn't have other third-party employees. They might have business partners or family that works in the business. They don't have other third-party employees. So the IRS lets them have something called a solo 401. It's just kind of like a 401 for yourself. And in the solo 401, the reason I talk about it separately than the corporate 401 is even though you can put in still $24,500 as an employee, that can be Roth dollars, the rest of the money you put into the 401 is called an employer contribution. But it's still coming out of your pocket. It's really just coming out of the business account, right? It's still coming from you because you're the owner of the business if you're someone who's self-employed. So in the Solo 401 for 2026, you could be putting in a maximum of $72,000 because you're the employee and the employer. You could decide to max the whole thing out and max out employee contributions, and you can max out the employer contributions because you're such a good employee. Why not? That's how you can get to $72,000 a year in a solo 401. Now, technically, could I do $72,000 in my corporate 401 where I work? Yeah, but you don't get to decide the employer contributions. You could max out 24/5 as an employee. That's your choice. Those are— that's coming off your paycheck. But is my employer going to put the rest in to get me to $72,000? Probably not. Again, we'll get to the backdoor Roth 401, the mega backdoor. Um, in the next episode. There are some workarounds there if you want to do more. Um, but for now, just contrast— you might meet a self-employed person with the Solo K, you might be the person with the corporate 401, or you might be that person that actually has this business on the side and you still have a corporate 401 where you work. So those are the dollars that can get in. The Roth IRA is less, but it's simpler because any, any individual can have an IRA. The 401 I can put more in, but it is through my employer unless I'm that self-employed person with the solo 401. All right. So now we're getting the money in every year. Okay. We're putting the money in. We know the tax rules here and we just have a little breakdown here on the slides of, remember, these accounts are all growing tax-free. The money can be invested as I'm making money on this, whether I'm investing the IRA in stocks or an index fund or real estate or a private company. Like the gains are building up in the retirement account. It's not going on my 1040. All right. Um, so both accounts, the Roth 401 and the Roth IRA have that same tax-free nature. No taxes as you're investing it, no taxes on the way out. Once you get to 59 and a half, the Roth IRA though has some flexibility in how I can get the money out though. And this is one of the unique rules for Roth IRAs that I love. Which is whatever contributions you put into a Roth IRA, you can take out with no tax or penalty at any time. So let's say I put $7,500 into the Roth IRA for 10 years for $75,000 of contributions. And let's say over that 10-year window, I had investment returns of 50 grand. So the account's worth $125,000. Well, let's say I'm age 45 or 50 and I'm like, I want to take out that $75,000 I put in. You can take it out now. The contributions you put into a Roth IRA can always come out tax and penalty-free at any time. It is only the earnings and growth in this example, that $50,000 that you would have to wait until you're 59 and a half to pull out tax and penalty-free. So little unique rule there with the Roth IRA that I can access those dollars earlier. A Roth 401, you cannot do that. All right, once those contributions are in, tax and penalty to get it out early. So just know that's a very unique rule just for the Roth IRA where your contributions come out— can come out early, tax and penalty free. By the way, just a note for those of you that are high-income earners doing the backdoor Roth IRA, that strategy kind of works, but you have a 5-year clock on each contribution of when you put it in to when you can get it out. Um, we'll cover that in the next episode on advanced Roth strategies. All right, Roth 401 withdrawals. Basically, when I pull out with the Roth 401 withdrawals early, you have to take them out pro rata. You don't get to say, these are contributions, I'll take the contributions first because there's no tax or penalty, these are the earnings. They just don't let you do that. That's why these, uh, early withdrawal strategy of contributions doesn't work with the Roth 401. Um, okay, another rule on the tax side you need to know, um, and actually we'll get to this in withdrawals. There's something called the 5-year rule. Let's look, we'll dig into that later here in a second. Okay, so we got the money in, we all know the tax, the basic tax rules on this grows and comes out tax-free. I can get the money out of the Roth IRA that I put in, the contributions Penalty and tax-free at any age. Roth 401, I can't do that. I'm gonna have penalty or tax to pull even the contributions out early. But let's— I got the money in. What are my options to invest those dollars? Most people are familiar with a Roth IRA or Roth 401, investing in index funds or the stock market, even if you're buying individual stocks, or maybe it's a mutual fund, a target date fund in your 401. A Roth IRA is going to have much greater investment options, whether you have a brokerage IRA and you're buying individual stocks or you're doing a self-directed IRA, which is what we do at our company, Directed IRA. And I'm investing that IRA into real estate deals. I'm doing private lending, I'm buying crypto, I'm investing in a startup and a private fund and a venture capital deal like self-directed Roth IRAs. I mean, it's what I do with my own account. And we, and we have 25,000+ accounts of clients that do this every day. Is they're investing in these private assets with their Roth IRA, but Roth IRAs in general, because you are the individual owner and that's the IRA part of the, of the account, you know, is this is an individual account. You are the decision maker on how it's invested and you can choose where to put the account. In IRA world, you decide, do you want to use Merrill Lynch? Do you want to use Directed IRA? Do you want TD Ameritrade? Do you want Robinhood? 401, that's up to you. You're the decider and you determine how to invest the account in the IRA world. Once we get over to your corporate 401 and think of Jim Halpert at Dunder Mifflin and the Dunder Mifflin 401, he doesn't have a say in what 401 company is being used. He has no say of what investment options he has. If he's an employee at Dunder Mifflin, he gets the Dunder Mifflin 401. Dunder Mifflin uses Vanguard. He's going to use Vanguard. Dunder Mifflin makes you buy target date funds. He's gonna have to buy target date funds. Okay. So in the corporate 401, where you're working, you're an employee. This is common. This is just how it is.

Okay.

It's not Dunder Mifflin's fault. Okay. It's just how it is in that space for the most part. Well, it is a little bit, but this is how it is in the 401 space. Your investment options are what your employer decided, or the advisors or companies that they engage to offer that 401 plan. All right, it's a menu. You can invest as long as something's on the menu. If we contrast that though with your solo 401, because you're the business owner in the solo 401, you can decide to self-direct it. You can let it be open architecture, whether that's individual stocks, self-directing, doing a real estate deal, a private fund, a private equity deal, whatever you want to do. It's up to you because you control what the investment options is, are in a solo 401, just like you get to do in an IRA. But just know if you're someone that has that corporate 401 where you're an employee, where you work, it's nice because you get the match and your employer's giving you that match, which is some free money. You always want to do that. Um, but you typically are gonna have limited investment options of target date funds, mutual funds, index funds, which isn't the end of the world. It's just, they're not letting you invest in the best investment you can find. They're letting you invest in the best investment that's on their menu. All right. Um, so you just have to live with that. All right. Where are we at? I got investment options. Okay. Differences. Shout out to Jared on the slides. These slides are great. Thank you. Uh, all right. This needs a chart. Okay. So we had to do a chart to break down the differences because there are little nuances between them. There's a common theme again of growing and coming out tax-free, but there is some nuance here on it. So let's just hit a couple of things. We've talked about some of them already. The employer match, you're not getting that in an IRA. You get it in a 401. The contribution limits, higher in a 401 than an IRA. Um, loans, you can't take a loan from the IRA to yourself. If you have a 401, whether it's a solo 401 or a 401 at work, most 401s, the corporate 401s out there, allow these, these loans. They don't have to, but most do. But there's something called a participant loan in the 401 world where you can lend yourself half the balance of the 401, not to exceed $50,000 total. So if I have a $200,000 401, I could get a total loan max amount of $50,000 because it's half the balance, not to exceed $50,000. And that loan is something where you can basically get the money out of the 401. Maybe you need it to buy a home. If you're starting a business, you're paying off high-interest credit cards. Financial emergency, medical, whatever it is. Okay. You can just access the money in your 401 and lend it to yourself. Now you have to pay it back at prime interest plus 2%, which is going to put you around 7% ish, let's say. And you're paying that interest back plus the, the total loan amount you took from the 401, it's going back to your 401. All right. So that's just a mechanism that's kind of nice for a 401 that lets me get that money early if I need it. And, but I get to put it back in the 401 later through this loan strategy, which I like because it gives me access, but it lets me get it back in there so I can let it keep compounding later. So if I'm 35 and I'm like, ah, I'm starting a small business or I'm buying a house or something, and I need that $50 grand, but I can catch back up in the next few years. I like that I can get that $50 grand back in. So for the next 20 years or whatever, I'm still building and investing, growing for my retirement. That money can get back in and get compounding. Um, so that's the participant loan that you can do in a corporate 401. Most of them offer it, not all, but I'd say 95% plus do. And your solo 401, you can use that loan option as well. Um, okay. One other thing that's unique in the IRA that doesn't apply to the 401s is Roth IRAs have high-income phase-outs for standard contributions. So if you make more than $153,000 a year single or $242,000 a year married filing joint, you can't just put $7,500 into a Roth IRA every year. The IRS is like, mm, these accounts grow and come out tax-free. We don't want the rich to use them. So if you're a high-income earner over these limits, you can't put $7,500 a year in the front door. Into a Roth IRA. Now I'm going to get to the backdoor Roth IRA here in a second, but Roth 401 accounts don't care. They don't care your income limit. There's no income restriction. So you can be putting as much money in a Roth 401 every year as you want. You could be making millions of dollars a year. Doesn't matter. You can just do Roth contributions in the regular way as you're building and saving in a Roth 401. So let's come back to the Roth IRA. Let's say you're someone who's over the income limits. What do you do? Well, you can do something called a backdoor Roth IRA. This is like the most commonly used tax loophole in the tax code. All right. And this is a, this is a strategy where you essentially put $7,500 into a traditional IRA is what's called a non-deductible contribution. You put $7,500 in a traditional IRA and you don't take a tax deduction. And then you convert that $7,500 over to a Roth IRA. The reason this backdoor Roth IRA works is Congress at first, when they created this income restriction, they said, if you're over these income limits, you can't contribute to a Roth IRA, nor can you do a Roth conversion. But about 15 years ago, Congress changed the rules and said, actually, you can do a Roth conversion. You still can't put the contribution in the front door, but you can convert traditional dollars to Roth. Now Congress did that because it was a way to raise revenue. They wanted people to convert traditional IRAs to Roth IRAs, high-income earners, because they wanted to raise revenue. Now Congress was greedy and Roth conversions created tax now. So they changed the rules on it. Well, that left this door open for the backdoor Roth IRA, whereby now I can just put $7,500 in a traditional IRA. I don't need a tax deduction for it. Who cares? Some of you might be, well, Matt, I'm high income and I have a 401 at work and I do a Roth IRA. I don't get a deduction to put the money in. Who cares? Don't worry about it. Everyone can do $7,500 no matter what your income. You got a 401 at work. You can do $7,500 a year non-deductible in a traditional IRA. We're going to convert that to Roth dollars. When I convert non-deductible dollars from traditional to Roth, there's no tax on the conversion because I didn't take a deduction. All right. So that's the backdoor Roth IRA. You can do $7,500 a year. Again, it's 3 steps. You have a traditional IRA, you put $7,500 into it, and then you convert it over to Roth. Traditional IRA, $7,500 non-deductible contribution converted to Roth. That's your backdoor Roth IRA. Now, it's not that difficult to execute. If you have an advisor, they definitely know the strategies. And if they don't, you should fire them. Most CPAs that are smart and, and tax savvy understand this rule. Um, a lot of IRA providers, even the Fidelities, the Schwabs of the world, have like a structure of this. We have a package just called a Backdoor Roth IRA. We'll dig into more of it because there are some mistakes people make and some traps on it, but we'll hit that in episode 3. I just wanted to know if you're that high income earner and you're looking at this chart saying, well, Matt, what about me? Can I do a Roth IRA? Yes, you're going to do the backdoor Roth IRA. Make sure you subscribe to the channel so you'll get notified when we go live to talk about it in episode 3. And I have some other videos on YouTube already on this, so I think I'm good on differences. And I'm sure you're getting questions, Jordan. I'm going to be ready. We have a couple.

Here we go.

Okay, so we got a couple. So I'm going to come to you guys in a second. Keep throwing in questions. All right, let's go to getting the money out. Um, the whole point of using the Roth account is that one day we want to get the money out. We want to live off of this sacrifice of this money we set aside that we saved and the time and effort we put into investing it and managing this. We want to pull this money out one day. Now there is most everyone's familiar with, you don't get to pull money out of a retirement account until you're 59 and a half. There's another quirky rule for Roth IRAs and Roth 401s called the 5-year rule. And what the 5-year rule is, let's just talk about it for IRAs, is it says, hey, you must have a Roth IRA for 5 years and be 59 and a half in order to get the earnings, the growth, and the gains out tax-free. So let's say you're someone that's 58. You've never had a Roth IRA before and you start putting money into it and you got investment gains and growth, and now you're 62. You're like, well, I want to start pulling all this money out. I want to pull the contributions out and the gains. Can I do it? Nope. Because you haven't had a Roth IRA for 5 years. So you would have to wait until you're 63 in that example, in which case you would have had 5 years of having a Roth IRA and over age 59 and a half. Now, if you're someone that's saving earlier, this isn't going to matter. Um, and, and really that clock on a Roth IRA ticks The first day you have a Roth IRA and it's not— and it's once you have had one Roth IRA for 5 years, you're good. Okay. You don't need to like— every Roth IRA doesn't need to be in existence for 5 years. It's just you've had one Roth IRA for 5 years that qualifies you and qualifies all your Roth IRAs. So when you're 59 and a half, you can pull not only the contributions out penalty and tax-free, but also all of that earnings and growth. Also, one thing on the Roth IRA that's unique when you do hit 59 and a half is you don't have to take the money out if you don't want to. Many people are familiar with, um, traditional IRAs or even traditional 401s that have something called RMD, required minimum distributions. And that usually hits at age 73. And it says, hey, you need to start pulling money out of this account. We gave you tax deductions on this traditional account. You invested it. We need to get some tax revenue. So you need to pull the money out because traditional IRAs, they got to pay tax on the distributions. So traditional IRAs and 401s have this RMD rule where they're forced to start pulling money out at age 73. Roth IRAs don't have it. So you don't even have to worry about it with the Roth IRA. And that's a huge benefit to the Roth IRA because you can keep investing it and compounding it under your schedule and your timeline. And also, I think the Roth IRA is the last account you touch in terms of your wealth building and all the assets you're going to use in retirement. Because I'm telling you, the best account you could leave your kids, the best inheritance someone could give you, is a Roth IRA. Your kids could receive that as an inherited Roth IRA. They can continue investing it for another 10 years. Well, over 10 years, if they invested at a 7% rate of return, they can double the size of that account and it still comes out tax-free. So The Roth IRA is awesome. It's a great account to inherit. Remember, it gets to compound for another 10 years after you pass away, even, which makes it twice as valuable to your kids if they are smart about it and can continue to invest it and grow it themselves. So, um, so I love the Roth IRA. We don't— we have no RMDs. I mean, obviously draw on it if you need to. I mean, have a retirement you love and enjoy. I don't want you to be like, you know, cheap and don't just leave everything to your kids. I'm just saying, if you don't need to, this is the last account to touch. All right. Now, Roth 401s, and this will apply to the corporate 401 or your solo 401. There's a new rule that came into effect a couple of years ago, which is Roth 401s don't have RMD either. Used to be this weird rule that, you know, your Roth 401, even though it was Roth dollars and the IRS collected no revenue when you pulled the money out because it wasn't taxable. You still had to do RMD. Well, Congress changed that in SECURE 2.0 a couple of years ago. So now Roth 401s have no RMD, just like Roth IRAs. Let's dig into using both. Um, I, I don't want you to think, hey, this is Roth IRA versus Roth 401. This is more Roth IRA and Roth 401. All right. I do both.

All right.

I'm doing Roth 401 contributions. Into my company 401 every year. I actually self-direct mine. And then I do Roth IRA contributions using the backdoor Roth IRA every year as well. And I'm compounding and building both of those accounts up because I want these two tax-free buckets, right? Because Congress only lets you put so much money in each bucket. I'm going to use both buckets. All right. I don't want to use either one. I want to drop as much money into each as I can. To get that tax-free bucket of money that I can continue to invest and grow. So using both is good, but let's go through a little ordering here. I want you to think about this because everyone's a little different. You might be like, Matt, I'm the person who wants to drop as much money as possible, and so I'm just going to go. But you might be like, Matt, I just, I can kind of put $5,000 away a year. What should I do first? Let's think about this first. If you have a 401 somewhere where you work, where they do a match, you should go there first. Because if you have someone that offers you a match, we want you to do what we call matching out. It's free money. It's, it's, if they're doing 100% return up to say 4%, they're doubling your money. If I make $100,000 a year and I put in $4,000 and they're going to match 4% of my salary, they put in $4,000 because they're matching 4% dollar for dollar. I now have $8,000 in my 401k, but it was only $4,000 of my money. I have 100% return on day one. It is very hard to find an investment that's going to beat that. So start there. You could do a Roth 401k contribution and the company can do a match of dollars as well. Now, when they do the match, there's a new rule where employer contributions can be Roth dollars, but most corporate 401ks are still doing the match on traditional dollars. So you want to look into that and be clear. Hey, HR, 401 administrator, how is that match coming in? Can I have it be Roth dollars? Now, when the company does a corporate match of traditional dollars, it's not income to you. It's not taxable to you, right? The company takes an expense, but it just goes right into your, into your traditional 401 bucket. If the company does a match of Roth 401 dollars, which you can elect for them to do in some— many 401s are starting to, you know, over time it's going to get more common here. But this is still relatively new in law the last couple of years. If the company matches Roth dollars, they're going to send you a 1099. So in that example, if I, if I put in $4,000 and the company put in $4,000 of Roth dollars, they're actually going to send me a 1099 for $4,000. That goes into my taxable income because this is money that I basically made. All right. So a little new, but the match, just keep that in mind. If you do the match and you want Roth dollars on the match too, which I like, you will pay tax on that $4,000 coming in, but you don't pay tax on the traditional. But remember, if the company drops the match in of traditional dollars, that's going to grow and come out, and I'm going to be paying taxes on the way out. Okay. Once I get the match on the 401, then I want you to go to a Roth IRA. Don't put more money in the 401 because you have limited investment options. So now the money going in the 401 is just your dollars. So there's no doubling of the money here, 100% return with the match. After you've got the match, get out. Now roll over to the Roth IRA. Where you can put in the $7,500 a year. Again, if you're 50 or older, this is $8,600 a year. And the reason I like going to the Roth IRA now is, um, even though it's still your own dollars as well, I have greater investment options. If I want to do a brokerage IRA and pick individual stocks, or I want specific index funds or whatever, I'm not stuck to the 401 plan menu at my employer. Also, I might be someone who wants to self-direct. I might be wanting to invest my Roth IRA into a private fund, into a real estate deal, oil and gas, precious metals, crypto. All the stuff you can do like that we do every day at Directed IRA with our self-directed Roth IRAs. So just, you're gonna have greater investment options with the Roth IRA. And also they have pretty reasonable fees. Generally on a corporate 401, the average total fees in on a 401 is 1.5%. You just don't see it. You're, you're just getting nickeled and dimed everywhere. You just don't see it. So if you have $100,000 in there, You're actually paying $1,500 a year for that account. So, um, I know the IRA fees are a lot of times more transparent. Um, and you can see those, but just keep that in mind. Um, I generally like the IRA because you have more control of investment options with it. Um, you're not stuck to the 401, your 401 administrator. It's not locked up with there with your employment and all that. I get more freedom with the IRA. And then last, I'll just say. I don't want you thinking of either or. Think of both again. And then when you leave that Roth 401 with that employer someday, if that happens, you can roll those dollars to the Roth IRA you already have. You will have satisfied the Roth IRA 5-year rule because you've already had a Roth IRA for 5 years. So using both is great. I use both because it's a way I can just get more money in, right? There's only so much the IRS lets us put in of Roth dollars and have these tax-free buckets. So I want to use both buckets because I want to maximize how much tax-free growth I can get and how much tax-free income I can have in retirement. Now, if you're a solo K person, the dynamics could change a little bit here because you get no match. So I might bypass the Roth IRA if you're someone who wants to drop a lot of money in and just say, just do solo K and come back to Roth IRA later. If you're someone that's like, Matt, I just want to put $5,000 a year in, let's just do the Roth IRA. Even if you are self-employed, it's just simpler. We can just start there. So everyone's situation is a little unique. So just keep that in mind. Now remember the slide deck that I've been referencing here. If you're new, there's a link in the description below where you can access and get an email of the slide deck. So go check it out there. We've got a lot of details in there. We have the chart there with the differences and then all the stuff I've been going through today on getting money in, Tax rules, investment options, differences between Roth IRA versus Roth 401, getting the money out, and then of course using both. All right. Enough, Matt. Or at least all Matt. It's time for your questions. So if you have some questions and I think Jordan might have some queued up.

We do have some good questions here. Uh, and fun, fun with screen names.

I'm just glad you're trying to read them. Yeah.

So, so I'm sorry if I butcher this. Maylin 2360 asks, can I get a low-interest asset-backed loan from a regular Roth IRA? Um, not a self-directed Roth IRA.

No, you can't. You can't get a loan off of your IRA assets to yourself. So I don't, I don't know if that's what the question is, but like you can have a brokerage account and you can say, hey, I want to get a loan against this brokerage account. I'm going to go buy a house or I'm. Paying off high-interest debt. So you can use your brokerage account as collateral, but your IRA, you can't do that. You cannot use that as collateral for a loan you're taking to yourself, nor could your IRA lend you money. Like we have a lot of, obviously with self-directed IRAs, if you had a self-directed Roth IRA, directed IRA, you can lend your IRA and basically be a private lender with your IRA, but you can't lend yourself money. That's called a prohibited transaction. So sorry, it's a no-go. All right.

We have another question from, uh, Nirali 105. Can I do a backdoor Roth IRA if my husband is, if my husband and I are married filing separate?

Ooh, yes, absolutely. Um, you're going to be, and you would do that if you're exceeding the single rates, because if you're married filing separate, you're going to be on the single rates. Your tax return gets a little more complicated. But that's not going to preclude the backdoor Roth IRA. So, um, absolutely don't worry about it. Do the backdoor Roth IRA.

Okay. Um, and we have this kind of goes into prohibited transactions territory again with self-directed IRAs. Um, if, if we own a family business, um, can we invest in it with our Roth IRA?

Depends on the ownership of the family business. So, um, as Jordan mentioned, there's something called the prohibited transaction rules. It's like. 4 chapters in my book are just on prohibited transactions. I'm looking over here because my book's over there. Okay, we got some— we got books. Okay, 3rd edition just came out. All right, I talk about how to use a self-directed Roth IRA. By the way, the audiobook's coming out. Kudos to Jared. 4 chapters on prohibited transactions. What that rule is about is when you have an IRA, you can invest it into private deals. You can put into a small business, a private equity fund, a real estate deal. But the IRS is like, but you can't just put it in any deal. We don't want your IRA investing in a business you personally own, or your spouse or your parents or your kids. We don't want your IRA— it can buy real estate, it could buy a rental, it could flip a property. We don't want it buying property that you already personally own. So when you ask, can my IRA invest in a family business? My question is, who in the family owns that business? If you're like, oh, it's my brother's, cool. Yeah. Your IRA could invest in that. They're not what's called a disqualified person or prohibited party. Your IRA could invest in your brother, your sister's real estate deal, business startup, big business, small business, doesn't matter. Your IRA could be a shareholder in that. Um, also let's say it's like your uncle or cousins or other more distant family members. Totally cool. Your IRA could invest in that. But if 50% or more of that family business is owned by you, your spouse, your parents, or your kids, the business itself is prohibited and your IRA could not invest in that. So that's, again, the prohibited transaction rules. We have podcast episodes on, on the Directed IRA podcast. We have articles. We can even just probably drop the Directed IRA Prohibited Transaction Guide and page in here. That's probably the quickest resource. So you might not want to dig into the book if, you know, I don't know, maybe you do. It's $20. It's not that much, but it'll be coming out on audio too. So this came in from Salsa Rican, Salsa Rican 3097. So you did not want to have to do this one. Um, Jordan, you're like the tough ones. I feel like it's like, it's actually Sal Serrican. Okay, sorry. Geez, I'm not salsa.

I don't know.

You don't know, you know. Give me like a, a dot, a period here, a dash, something. Okay. So I'm going with Salsa Rican 3097 asks, which one is more beneficial for low-income earners or retired persons? I would say the Roth IRA. It's the easiest. $7,500 a year into it. If you're 50 or older, $8,600 a year. I like that. You don't worry about your corporate 401k. I guess I would say if you do have a, if you're still working, where at a corporate 401, you can be putting money into that if they have the match. So I'd actually go there first because you're going to get some free money from your employer. Um, but if you don't have that, a corporate 401 where you work, or, um, or maybe you do have a 401 where you work but they don't have a match, I would just do the Roth IRA. Now, you technically, when you ask that question about retired persons, You can contribute to a Roth IRA at any age. There used to be a rule that said you can't contribute to a Roth IRA after age 72. That rule went out the window. Okay. You can contribute to a Roth IRA at any age, as long as you have earned income and Social Security income is not earned income. So when you ask, or retired persons, I'm kind of like, eh, I just need to make sure you have earned income from self-employment or a job. That's going to be your earned income. All right, next question was from JAudioDB1674.

Again, who knows?

That's my guess, best guess. So if my employer matches 5% of my Roth 401k contributions, are their contributions also tax-free when the time comes to withdraw them? Great question. Um, it depends. I know that answer sucks, but I would say my guess is if you're not sure on how your employer is doing this, they're probably matching with traditional dollars. That is the most common way, and that's traditionally— I hate to use that word again here, but that's how 401 providers have typically done this— is even if you're doing Roth dollars as the employee, the employer just puts in traditional contributions for the match. So you probably have a bucket at your 401 provider of Roth dollars, what you put in, in traditional dollars. That's essentially your match. Now, because SECURE 2.0, which passed and went into law 2 years ago, it's relatively new. Under SECURE 2.0, the employer could do Roth contributions if you elect and if they provide it, where the match is Roth dollars. Most 401 providers haven't got there yet. The IRS guidance, even after 2 years, has been terrible. Um, the 401 plan administration industry has not rolled this out super quick. So it's there. There are employers that are doing it. It's just not as common. And remember, if your employer is doing matching Roth contributions where the employer match that they're putting in are Roth dollars, you will be getting a 1099. So the dollar amount that they throw in as the match is taxable income to you. Okay, because this is money— like, Roth dollars, you're— are kind of sometimes called post-tax dollars. You pay tax on them first and then you put it in. So, so that's why, um, you actually get a 1099. All right, when they're withholding it off of your W-2 and off your paycheck, your Roth dollars, you're paying tax on that. It's not a deduction. It still shows as income on your W-2 that goes on your 1040. Next question came in from Blue3749 says, you always make great videos. Thank you very much. Can you explain how to get the total $72K in the Roth solo 401K please? I thought I could only get $24K employee contribution in the Roth and the rest $47,500 goes into the regular 401K. That is the employer contributed. That was my understanding. Am I wrong? No, you're right. That's true, but you can still get to the $72,000. So, so let's, let's just do some math here. Okay. So, um, the first bucket you're going to fill in the easiest is that $24,500. All right. Now we're talking about a solo 401.

All right.

So because you're the employer, you can do the biggest match or employer contribution possible because you're such a great employee. The corporate 401s, if you're an employee somewhere, is not going to do this. But just getting that out there. Okay. So if I put $24,500 in as Roth employee contributions, that's the max I can do. Say you're under 50. Um, the total I can get in is $72,000. That leaves me with $47,500 that I could still put in to the solo 401. Well, Matt, I've already maxed out the employee contribution of $24,500. How do I get more money in? You have two options. Option one is do an employer contribution of $47,500. All right. Now, the way you put money into a solo 401 as an employer is you get to put in 25% of whatever your W-2 is. So let's say you had a $100,000 W-2. The employer contribution, maximum amount you can put in is $25,000. So what do I need to get to? How much W-2 do I need to put in? $47,500 is really the question. $190,000. You need $190,000. 25% of $190,000 is $47,500. So if you're following the math here and sorry for mathing out here, but if I have a W-2 of $190,000, I can do an employer contribution of 25% of that, which will be $47,500. Now I have hit the $72,000 total because I had $24,500 in on employee side, $47,500 in now on the employer side, and that is $72,000. I hope I did the math right. Was anybody checking?

Okay.

Yeah, everybody here is like, what?

What?

Okay, I think I nailed it, actually. Saying I even did the— I divided $47,500 by 0.25 to get to $190,000.

We'll have to run the tape back and just confirm.

I mean, yeah, that was pretty good. Saying, you know, pretty good. Um, I'm not even an accountant. I'm just a, I'm just a dumb tax lawyer. What do we know?

Okay, so we, we do have one more kind of a buzzer beater. Okay, uh, live question, and we're gonna allow it because it's a great question.

Okay.

When Matt starts going rapid fire, guys, we got to get questions in before then because we can't stop that momentum sometimes.

I got the calculator out, right? And the math is mathing. I mean, guys, don't—

so like get questions in early, but this one's a really good one. So I want to hit on that. This is from Lil N7784. And they ask, I would like to do a Roth conversion from my 401. Should I roll over to an IRA? First, presumably, and then convert to a Roth IRA?

Good question. Um, I assume this is a 401 at an employer where you don't work. Cause if that—

let's run with that assumption.

Okay. Let's, let's run with that. Cause if you're in that scenario, you can roll the traditional 401 dollars out to a traditional IRA and just do a Roth conversion. That is probably easier. 401 providers. Are slow, dated on how they process stuff, and not as excited to talk to you. I'll just say that. Like, you're more like a problem to them. They're like, oh, somebody needs something? Uh, a customer? We, we tried to— can't you just chat us on our AI chat that will, you know, run you in circles? So, um, You can go either way. The downside I would say on, so let's go pros and cons. I think the pros are rolling the money out from the traditional 401 to a traditional IRA and just doing a Roth conversion is probably faster because you can control that the IRA side better. We actually have what we call a Roth conversion app at Directed IRA. If you're wanting to self-direct your, your account where we just open both a traditional and Roth at the same time. We receive the rollover in the traditional, we immediately convert it and you can close out the traditional IRA. So at the end of the day, you basically just have the Roth IRA. It's a two-step process. It is temporarily two accounts. It might seem like more, but on the IRA side, we just, we just feel like we can do things faster and better than your 401k administrator. Now, on the other hand, you could say, well, let me just convert it with my 401k administrator now to Roth. And then I'll just roll the Roth 401 dollars to a Roth IRA. You can do that. What I would say is maybe give it a shot with your 401 administrator and test out how quickly they are responsive to you and, and, um, is how, how difficult that process appears to be. If it seems pretty simple and they got their crap together, you could just do it with your 401 administrator, get to Roth dollars, then roll out to Roth IRA. So I guess for me, if I'm in your situation, I would first kind of test how good is it? How good is my 401k administrator? Last question here came from SZ7362. And they asked, how do you move money from a Roth 401k to a Roth IRA? Any limitations? Well, the first thing is, is if you have a Roth 401k with an employer, You typically can only move the money from the Roth 401 once you are no longer an employee or you've reached retirement plan age. There's some exceptions here, something called an in-plan service rollover and stuff, but the two main ways that you kind of get unlocked from your employer 401 is you no longer work there, or you've reached retirement plan age, which in most plans is 59 and a half. In some plans is 55. What that allows you to do is now I'm not locked into the company 401. Okay. I'm Jim Halpert. I no longer work at Dunder Mifflin. I went to go do this sports business that he did in season 6.

Yeah.

Something like that. I don't know what season it really was, but yeah, he went to do some sports business with, I forget who. Athlete. Oh, athlete. Okay. We're getting some good. All right. Some good Office trivia today. Um, and I don't, was Robert California his boss at that point? I don't know who was the, who was the, who was the boss?

He was the underrated one.

Robert California. I love Robert California.

I liked him as much as Michael Scott.

I really did. Robert California was great. Will Ferrell, I forgot who his character was, but he wasn't as good.

No, he was like the first new boss.

Yeah, he was, he was okay. Robert California was great. It was James Spader, right?

Yeah. Yeah. James Spader.

Anyways. Okay. All right. Let's go back. You're Jim Halpert. You had the Dunder Mifflin Roth 401. You're working with, you're working at Athlead now. All right. You're no longer an employee at Dunder Mifflin. Well, you can roll that money out of your Roth 401 to a Roth IRA. Or let's go back to this and let's say that you are Creed. You still work at Dunder Mifflin, but you're over 59 and a half. Even though you still work there, you could roll your Roth 401 to a Roth IRA. Okay. So, um, so those are the two most common. You no longer work there or you are reached retirement planning. But let's say that you're Pam, you've always worked at Dunder Mifflin, you still work at Dunder Mifflin, you're not 59 and a half, your Roth 401 is going to stay there as a Roth 401. Um, there are something called in-service rollovers. I don't want to get too technical and we're wrapping up. Maybe I'll cover that in the advanced strategies. Actually, I'll just save it. Let me just say there's a couple workarounds to that, um, on how you could possibly get money out even if you're not 59 and a half and even if you still work there.

Cliffhanger.

Yeah, a little cliffhanger. Look, it's something to come back for. Well, thank you everybody for tuning in live. Remember the slide deck in the link in the description below. This will be on YouTube, so come back and watch it. Please share it with your friends. And if you haven't subscribed to the channel, what are you waiting for? We seriously want to give you awesome education information. We have a lot of videos coming out. We'll be coming live as best we can, as much as possible. So make sure you're subscribed so you don't miss out on any future videos or lives. We'll see you next time.