The Power Of a Solo 401K | What You Need To Know

So we're going to hit. When do I get a solo 401k? How should I get it? How much can I fund it? What are the deadlines? We're going to fricking nail it because this is the time of year to deal with it, people. You'd be shocked how many clients we meet with that are 55, 60 years old and they are scared to death.

This is one of the tax strategies. Clients come, there's like, I made a ton of money today or this year, I'm worried about my taxes. How can I reduce those?

If you don't have any full time or part time employees on a W2 and you're making money in a small business, you freaking are a perfect candidate

for solo K. Welcome everyone to the Main Street Business Podcast with Matt Sorenson and Mark Kohler. Stoked to be here today.

Whoa, is that an 80s or a 90s throwback? Let me come out of the gate with this first point. If some of you have employees now, all is not lost. And what I mean by that is you've had a full time employee for at least one year or you've had part time employees for at least three years.

Yeah. Now that's 500 hours. We ran into this actually, the self directed IRA summit. Someone had a part time employee be like, yeah, they're like not even five hours a week. You know, it's like, oh, they're gonna be under 500 hours for the year. So if it's a part timer, that's 500 hours or more, you got to worry about them.

Yeah. And that means the same employee. So let's say you've had a lot of turnover and you've never had a part time employee stay with you more than a year and a half or two, you're fine for a solo K. Yeah. Okay, this employee topic we want to get right out of the gate here because some of you like, well, I have employees, but I don't. Do I qualify for solo? So let's just. Is that all right? We hit this.

Yeah, we got to hit this. This is the big qualification.

So in fact, I'm going to start here. If you don't have any full time or part time employees on a W2 and you're making money in a small business, you freaking are a perfect candidate for solo K. Including those of you that have just rental property income, we have what we call the side door 401k. We'll hit that in a moment. But if you have no employees, green light. Yeah, now, but if you have part time employees, do you want to describe how you would look at that? You know, the turnover, how long and the hours. Let's be clear about it.

Yeah. So the old rule was you only need to worry about full time employees, which is about 20 hours a week. And if someone was a full time employee that worked for you for a year longer, at least 20 hours a week, you couldn't do a solo K because you had employees. Solo KS are this product of awesome 401k plans for solopreneurs. Individual business owners, their partners and spouses can be included, but they've created these plans assuming you don't have other employees. And so that was the requirement as well. If someone worked for you at least 20 hours or more a week and it was a year, you can't do the solo K anymore. The new rule still has that, but also said, and part time employees that work for you three years. Well, part time means 500 hours or more over a three year. Each year for three years, that same employee, if that person hits that and you're still employing them, that's now going to disqualify you from a solo.

Which means the first strategy here is if you've had an employee part time with you for two years and 364 days, it's time to fire them. Yeah. See ya.

Have a retirement party for him.

Yeah. Yep. You've graduated, you're moving on.

Yeah.

Okay, so now why we. So that's right out of the gate. Now there is a wonderful plan called the safe harbor plan for those of you that do have employees. And you can put a heck of a lot of money away on top of a Roth ira. We love those plans, but the deadline to start them for this year was October 1st. It's long gone. Right. We're a month past that. So the Solo 401K, we'll give you some deadlines for that. We're still fine. But if you want to do a 401k and you have this part time or full time employee issue, you want to tackle this topic in January, get it in place for next year. The deadline is October 1st.

Okay, all right, let me, let me hit who you might be where this fits. We set up a ton of solo case for real estate agents, real estate investors, consultants, people have an online store. If you're making good money and you're self employed and you're like, man, I don't have the corporate 401k. I've been told I can do an IRA, but that's six grand. I've heard of SEP IRAs, maybe, and maybe I've been doing one of those every once in a while. Guys, focus in. The number one retirement account strategy is a Solo 401K. You've got to be doing this. This is the best structure and strategy. You can put more money into the other plan. You have more options on how to do it. You can take loans from it. This is going to be the one you should focus on.

Okay? Now I'll throw in this caveat. I was just with my daughter last week who's a Realtor, and yesterday I was speaking at Club Wealth. Give them a shout out. It was a wonderful group in Orange County. 450 realtors Michael and Tara, Helix and Club wealth doing a great job educating realtors around the country. And there's Realtors out there that don't even have an ira. So. So let's back up and say this, too. If you're just starting to save, you're finally like, okay, I got the bug. I'm making a little bit more money. I know I need to be better at this. I paid off my credit card debt. I'm ready to start saving. You're going to start with the ira, and of course, in our opinion, the Roth ira. You may even start funding your health savings account. So I want to be clear about this. Matt and I are always first. Fund your Roth, your health savings account. Maybe you're doing some college savings accounts for your kids. You're saving up for a new home, you're buying a rental. Let's hit those base hits. But once you say, man, I'm having a hell of a year. I'm making 200 grand, 300, 400, 500 grand or more. And you're like, I could do a little bit more. I could do it. That's when the solo K hits, too. So don't forget the basics that are easy. You can open up a Roth IRA account right now@directed ira.com. we were doing it a lunch yesterday at the conference for realtors at Club Wealth. They're like, I just need a Roth. I haven't. I'm not. And you can do 500amonth. That's about the average. You want to think about that? If you can Save more than 500amonth, you're a good candidate for a solo, too.

Okay, awesome. All right.

Okay. So that brings us to what do you want to hit first? Like now, after what's next? I mean, that's not what first. Those were first. Yeah. What's next.

Well, we talked about qualifying. Okay? You've got to be self employed, no employees. Remember? Those are the 2, 2 points. The next is how do I get the money in? Like, how do I get the money in? But actually, you know what, let me take a step back.

I want to step back. I'm going to kind of do a little why?

Oh, you want to do a why? Okay. I was gonna say what you got to do before you get the money and you have to have the plan set up.

Yeah, yeah, yeah. I want to do this why too. I just feel it for a moment. Let me take 30 seconds and just say this. If you're just starting again to catch the bug of saving people, you'd be shocked how many clients I we meet with that are 55, 60 years old, and they are scared to death. They have no retirement at all. I just kind of.

You know what? Many of them are self employed.

Yeah. Yes.

They are this perfect. They put all their money back in the business. They didn't have the company 401k that just came out of their paycheck that forced them to save.

And they were told by their accountant for years, well, you have employees, you can't do anything. And so they just gave up. And they were told, you make too much money to do a Roth or an ira. So they were like, what the hell do I do? I have no choice but to put money in my business. We're here to clear up those misconceptions. So there is hope. So whether you're 20 years old or 60 years old, you. You can still save. You still should save. And I have clients that are in their 70s with rental properties funding a side door 401k, you can still be building that Roth 401k. You're never too old to save. I love Dave Ramsey for this. He's just a huge advocate for living within your means and saving. So yesterday too, I had a realtor come up to me and he goes, he comes up to this. If he's listening, he knows who he is. He came up to me right after my breakout session and he's like, yeah, but Mark, I don't know about a 401k. I mean, I can't touch the money till I'm 59 and a half. And I go, that's right. That's what you want. And he was like. I kind of shook him for a minute. I literally grabbed him by the shoulders. Dude, do you know how many people I meet that are 59 and a half that are dying because they don't have some savings. And he's like, oh, you're right. I go buy your rentals individually and then buy them inside your 401k too. He's like, okay. He goes, I needed to hear that.

Yeah.

So, yeah.

And I want to hit another topic on this, too, that we. We left out, actually. You might have a 401k, you might have a day job, and you can also do a solo K if you have a side hustle or small business. We set up lots of solo case for people in that scenario that are like, all right, I'm working on my company 401k at Dunder Mifflin, whatever. But I happen to own Schrute Farms. You know, good old Dwight Schrute, little throwback to the office. And Schrute Farms solopreneur can do his own solo K. You can be doing the same thing that you can put more money away. You're not locked into the crappy investments in the day job, 401k. So also, those of you that got the side hustle that may Even have a 401k at your day job, think of this solo K also as an option for your side hustle.

Okay, I think it's time to talk matching out. I think when Matt was going to get into the steps and the numbers and the deadlines, and I'm glad that we're stopping for a mom, stick with this concept stuff. I think if all of you know where the buckets are and why I'm doing this and the reason to be doing it, then it's going to be easy to go, oh, the deadline's here, and here's where I go to set it up. And we have a special this month starting November 1st. We're going to make it easier for you so it's done before year end. You're going to love this. Okay, I want to go to the whiteboard. So if some of you are again on the podcast and not on YouTube, try to get over there. It's not the end of the world. But what I just am creating here is our trifecta. This is the trifecta that makes sense of life and finances and tax planning. So down here at the bottom of your trifecta is your revocable living trust and your 1040. And then over on your left are your ops operations. And over on your right are your assets. Okay, so over here on your op side, kind of over in the corner, we're going to put day job. And see, this is Very common. If you're single, you might have a day job and a side hustle, or you might be married and your spouse has the day job and you have the, the entrepreneurship business or the small business. So you could have a combination of this. But I love what Matt, I just want to diagram to this. So let's say you've got a side hustle. It could be a sole prop, it could be an llc, it could be a full on S corporation. And so if you're watching on the left side, I've got this little day job box up above. And then I've got your three different business structures that you might be choosing from for your, for your small business. Okay, so here's the power of what Matt just talked about. On the day job. Most companies are going to say, okay, we're going to fund your 401k and match up to a certain percentage of your payroll if you'll put in some money. So let's say they're doing a 4% match and you make 100 grand, that's $4,000. Or let's say you make 50 grand a year and they do a 4% match, that's 2 grand a year. So if you put in 2 grand, they'll match 2 grand. You just doubled your money. That's, that's pretty good investing. You don't have to, you don't have to be a rocket science to choose the right stock or the right mutual fund or whatever you can say. So what I call it is matching out. If you do have a side hustle, I want to see you play in the 401k at work, put in your 2 grand or your 4 grand in that example, whatever. They're going to match and get the 2x, get it doubled, get it doubled. Now that's just step one. Then what I like to do is come back and go, all right now, are you funding your Roth ira? Your individual Roth? Did you put your six grand or seven grand in that? Are you married? Did you match out both of them? Do you have an hsa? Did you fund that? So you've got these little buckets over here you want to not ignore. Then you say, okay, I did my 2 grand at the 401k. I did my Roth IRAs. I can do more and I want to be able to self direct it. See, if you put it in your day job, you're kind of stuck. I mean, Matt, that's why I like the solo K is because that's. Or some people go, well, I just Put it all in my work 401k.

Really?

That's where you want it?

Yeah. I mean, if that's your only option, maybe I like that. But if you got options, you got this side hustle, okay, Shrut farms, whatever your side hustle may be. No, no, no. We're getting the matching out and we're getting the hell out of there. The average fees on a 401k plan in a small business are one and a half percent. You don' that right? You got a hundred thousand 401k. You're paying 1500 bucks for every penny you're dropping in there. And you got crappy investment options, right? You're going to buy a mutual fund or some target date fund. A lot of company 401k plans just aren't that flexible, so. But the solo K a lot more flexible. Okay, you can self direct, you can do real estate, you can invest in notes and crypto and all these things that people want to do. Those are options in your solo K. Plus you're going to be in control of it. You're going to have charge of it. You're not locked in with the company 401K.

That's why I like doing the matching out. Get the double, double your money at work then. And I'm going to put this for those that are watching on YouTube. I'm going to give you the steps. Now, this is everybody's facts. Patterns are a little different, I get that. But I'm going to say in general, this is not a bad line of attack. So number one, you do your matching out. So I just put a number one up by the company 401k, get your match, get out, then go down here. And I hate to do this, it pains me, but I'm going to put a number two by the Roth ira because I want to put it by the hsa, but I'll put it by the Roth ira.

Thank you.

But a close number three, in some situations, I'd even go number two on this. We're going to debate that all day long is we're going to fund our HSA if you can. So if you have a health savings account, you've got a Roth, we're going to go number one matching out. Number two, Roth number three, HSA. If you're married, you're doing 2x on all this, you're going to have a. You're going to do your Roth times two. Yeah, the hsa.

Well, you do the family, you do

the family amount, which is double the amount and so then number four, you go to your solo 401k and you say now I can put the rest in there. And this probably is a good. So that's number four. I'm going to go back to the solo and then you may go back to the company 401K. That's okay. There's some other options that you might go to. But there's the 1, 2, 3, 4 and maybe it's a good time to bring up dollar amounts. Why are we doing. What are, what's our limit? Can I have two 401ks?

Absolutely freakin lutely. Okay, but, but you can't make, you can't max out both. So there's a total contribution limit of how much you can put in a 401k which by the way, in 2022 is 61,000 total. That's a total amount you can get in. And we're going to get into the total numbers. 20,500 is the employee contribution for 2022, 20,500 and then 22,500 is employee contribution for 2023. So basically think of it this way. I can have $61,000 a year in the solo K for me, if I got a spouse that works in the business, they can do 61,000. Now if I have the day job 401k that I put in, you know, four grand total, I'm subtracting that from that 61. So, so I got what's left, you know, that's only 4,000. Was that 57,000? Now I could put into my solo. So don't think you can max out your day job 401k and your solo.

So here's be an example for those watching on YouTube. I did the under age 50, you can put 20,500 if you're 50 and older, 27,000 in the totality of all your 401ks. So let's go back to our example where you're doing a $2,000 match at work. Well, if you're under age 50, that means you're going to put your 2,000 in at work. That comes off your 20,500. You get your match. That's cool. But I've got 18,500 left over. I can put that in to my work 401k or my solo. And you say, okay, I'll go put that 18,500 in my solo. And so this, you have to start doing math on how much money are you making in your business. And you're doing this really? Because you've had a good year with your side hustle. You've got your day job killing it. Your side hustle's killing it again. Maybe you're married and you're family business is doing well. And so now you're going to start looking at this combination. And this builds upon a theory that we've been talking about for years, the mega backdoor Roth. So what you're trying to do is figure out how much can I put away? Not everybody can put away 40, 50 grand or more. Some of you are sitting here going, guys, I'm going to be happy if I can save ten grand this year.

Great.

Well, we got a plan for you. But if you really are having that kick butt year and you want to put away 30, 40, 50, 60, 70 or more, that's where this planning really starts to get technical.

Yeah, let me back up for everyone too for a second because let's say you don't have the day job. Okay, I'm just want to talk to you. You're 100% self employed, okay? You're making good money. You're like, guys, I've been doing the Roth ira. I'm high income, so I'm having to do the backdoor Roth, I'm doing my HSA. I got no company 401k to play with. I want to start saving. All right, let's talk about the solo K. Remember we said for 20, 22 you can put a total of 61 grand in there. That's on top of the Roth IRA and the HSA. Okay, that's not. Those numbers aren't getting affected. I can do 61,000. Now. I want to go through the numbers on how that works.

Okay?

Okay. All right, let me hit the numbers on how this works. There's two ways you contribute into a Solo 401K. Now the Solo 401K, by the way, is a plan you set up. You get a consult in the law firm. We do these at KQ Solaries every day. We have a special right now going on, but you have to have the plan document set up. The company in the example here, Mark has adopts the 401k for the benefit of its employee, which happens to be you because you're such an awesome employee. But now the company is going to basically be putting the money in. Just like if you got a day job or you've ever had a job with a 401k, the company throws some money in and you throw some money in as an employee. We're doing the same thing in the solo kitchen. We have employee contributions and employer contributions.

Okay. I like to say this, a solo 401k is like a honeycomb and you've got these different little cells and you can fill them up with Roth. Your money, the company match money. You might convert some to Roth, you might have a spouse and you start building their cells.

Let's worry about Roth second though. Yeah, we will contributions in and then how you want.

Yeah, but I was just saying, you know, think of them like a honeycomb because it's not one account per se. There's going to be some accounting to track your contributions, the match. What are you converting or do you ever. Are you married or whatever. So anyway, so you have the Solo 401K. I've kind of diagrammed a little S Corporation. On the left here's you and you're going to get a W2.

Let's say. Let's say you made 150 grand gross in your S Corp gross and you took a 50,000 W2.

Okay, so I have 150,000 gross income in my S Corp. I took 50,000 write offs. I have a net of 100. And I'm going to do a 50, 50 split. That's fine. And I'm going to put that in red and I'm going to take 50,000 and a W2. Now that's a great strategy. I saved on FICA. There's a whole principle here we're going to talk about don't do a SEP for this reason. So I saved on FICA, I got a $50,000 W2. What next?

Now the first thing is contributions are based on your W2 in an S corp, not your K1. It's just your W2 we're focused on. So the employee contribution, you get to put in dollar for dollar based on what you made. So If I made 20,500 essentially on my W2, I can put in 20,500 as employee contribution. If I made 100,000 on my W2, my employee contribution can only be 20,500. If I made $10,000 on my W2, My employee contribution can be $10,000. So here, I've got 50, I've got enough. I can max out the employee contribution of 20,500.

Okay, okay, so we're going to.

Now that's the employee contribution I put in. That's. And we'll get to that. Roth and traditional, don't worry, we'll come back to that. But you can be one or the other. You can pick. But I got 20,500 in now on top of that, plus, since I'm such an awesome employee, I'm going to do a match, and I'm going to match it the maximum amount the IRS allows by law, which is 25 of your payroll. Of your payroll. So that W2 of 50, I get to put in 20,000. Sorry, 25% of that, which is 12,500.

Okay? So I add that up. I am now at $33,000. Wow.

Yeah. Now for some people, you're like, that's plenty. I really only made 100 grand this year. I'm saving one third of it in my 401k. And I might have already done my Rothma HSA. I'm not even, like, interested. Yeah, I might even do 10 or 15 of this. We're just showing the max, okay? And the easy thing is just do the employee contribution. That's the easy one to throw in. Worry about the max when you're trying to get more in. And we got more strategies, by the way, to get more in on less W2, but we're just showing the easy first calculation to think about.

And so in this example, I like what Matt just alluded to. Even before you go down this path, you've maxed out your individual Roth and maybe an hsa. And if you have kids, you're saving for college, maybe even a Coverdell. So you're hitting base hits with the. Just the basic plans, but now you're saying, I'm going to put more away, so you do the solo. And another side note, just for those out. There you go. Well, I make too much money to do a Roth. Please go to our podcast on what we call the Backdoor Roth. You can just easily Google Backdoor Roth, Kohler, Backdoor Roth, Sorensen, and we will. We've got great videos and all sorts of things on there on that topic. Okay? Now, a lot of times people say, okay, I'm having a better year. Instead of making 150, I did 250. I need to shelter some more money. I'm going to give you a technical tip here. Don't peg your salary for the 401k. First, peg your salary. As to what should my minimum salary be to keep the IRS happy under my S Corp rules? Let me repeat that. Many of you already know. I do the Kohler payroll matrix to help business owners. We've been doing it our firm for years. Set up an S Corp and peg their payroll to save on the F word. Fica. Find what that number is first, then calculate what would be my maximum 401k. At that point, you may discover, oh, that's perfect. That's about what I wanted to do. And if you're married, we haven't even went there yet, so we've got. So do that first. And then you can say, I want to do more. Because if you want to do more, we're going to have to probably play with your payroll. And we have to be careful there, because the more payroll we do, the more FICA we pay. But then we can do more with the 401K. And there's some sweet spots. Spots there, too.

Yeah, yeah. And let me just say, if you're. You can also be doing a sole proprietorship or general partnership and have a solo K. If you're a sole prop. It's the same rules. 20,500 employee contribution. We're looking at your net income on schedule C. But then the match is 20% of your net income. Okay. They don't let you do 25 on a sole prop. You're only doing 20%. So sole props. Just know that you can still do a solo can. A sole prop. If you're an LLC and you're like, I don't make it up for the S Corp, or. I just haven't gotten to that yet. It's okay. You can still do a solo K and a sole prop.

Okay. I want to give you an important warning here. With all this searching and research, when you use the word sweet spot or even backdoor, make sure you're putting in the names Kohler and Sorenson in those searches because.

Or how about Ira, too? Yeah, yeah.

Ira. Just be careful. You know, your company laptop. You know, you may want to be careful on your search engine there.

Okay?

Go into incognito mode if you need to. All right, now let's throw in. Let's say you've done the math. You're like, okay, my salary's right where it should be. I don't want to take any more fica, Roth, hsa, Coverdale. Got it, guys. And for those out there that are married will say, well, should I put my spouse on payroll? That was a question I got yesterday. There's only two times I want you to put your spouse on payroll. Well, I'm going to do three. Okay, three. The three times you might put your spouse on payroll is number one. They're actually working in their business. In the business. There's no way around it. Maybe they're a realtor. Licensed realtor with you. They're a licensed physician. They're a lawyer, a dentist, an engineer with you, they're consulting with you. They're not just on the board of advisors and helping out on the side. They're literally working with you. When that happens, the IRS is going to require they take a salary. So that's option one. Option two, when you want to pay your spouse or when you would pay your spouse, is you want to handle some medical expenses, you want to try to write off some medical expenses, and you can do it through your spouse. And a subsidiary strategy that we use was called as the HRA or 105 plan. We've got shows on that third reason you'd ever put your spouse on. Other than that you can just give your spouse money, Just take a draw and give your spouse money. But if you. The only third reason you'd ever put them on a W2 would be so they could do a 401k because they got to have a W2 to play in the 401k. Now, they can still do the Roth, they can still play with you in the HSA and the Coverdells, but if you want to help double down on these numbers, you're going to have to give them a W2. So that's where another sweet spot comes in.

Yeah. And this is something at year end for if this is one of the tax strategies, clients come. There's like, I made a ton of money today or this year. I'm worried about my taxes. How can I reduce those? Okay, we can do traditional contributions in the solo K for you. And if you made a lot of money and your spouse is in the business, let's add them to payroll here in fourth quarter before year end, and we can make contributions off of them as well. Now we're talking. We're getting over 100 grand, 120 grand between the two of you, that could be a tax deduction that's now getting you in a tax deferred savings vehicle where this 401k money is growing. Now, we love Roth, and I want to come to that in a moment. Choosing Roth because it grows and comes out tax free. But just for those of you that are like, at your end here, you've had a great year or you're worried about your tax bill, you want to go traditional. If it's you, you're looking at 60 grand, you could do again, you're high income, you're probably gonna max it out. Or if you want to add your spouse, and if they're in the Business, we could double that 120. That's an awesome strategy to start whittling down your tax bill.

Yeah. Now, this is a technical point, but you'll say, okay, I'm going to put my spouse on payroll. How much should I pay him or her? And if they're going to do the 401k, you again want to start with how much can I do? And if you say, I want to do as much as I can without paying too much in fica, and that's a sweet spot in this spouse payroll scenario. So let me.

Careful talking about sweet spots in spouses.

I know, I know. Yeah. This is for PG 13 today. All right. Okay. So you really want to study this because you want. It's not an area that you want to skimp on. You know, this keeps your marriage Together,

your spouse's 401k honest to be satisfied.

Yeah, we do, we do.

It's.

There's sweet satisfaction here. Okay. It's a gift that gives. Okay, now, all right, so when it comes to payroll, what can. If they're under age 50, your spouse can do 20,500. So you're like, oh, I'll give them a payroll of 20,500. No, you have to gross it up for the FICA amount. So when you gross it up, that's actually $22,198. So I'm going to pay the spouse on the W2 in the gross payroll box number one on the W2, 22,198. Because when you take out FICA, that leaves a net paycheck of 20,500. Boom. We go to box 12, drop that into the 401k, and they're going to use. You're going to use code AA. So that's a Roth contribution on W2 form. So for those out there that are listeners that are. We have a lot of CPAs that listen, that's what you're doing is you're putting that on the W2 and showing where going. Then you say, oh, well, I got to do a company match. Well, oh, well, 25% of $22,198 is $5,549. I've got my little spreadsheet up here, so. Oh, the IRS says, hey, if you're going to have a company match for a total contribution of 25, it'd be $26,049. You've got to take enough payroll and FICA wages to get the $26,049. So the payroll ends up being around 29,300, and you get this kind of spot where payroll's right where it's supposed to be. Now, one of my other attorneys was saying, no, payroll is 27,300 anyway. It's tricky. So you're going to back into that payroll amount to get the perfect contribution because we want to pay the least amount of fica.

Okay. All right, let's hit Roth, because I want to talk about how you can do Roth. Remember, if you're chasing tax deductions, just put them in as traditional. You're getting a tax deduction on the W2. It reduces your taxable amount on the W2 on the employer contribution. It becomes an expense of the business. So that's basically tax deductions. All right? Now, if you're like, hey, guys, I love the idea of tax actions, but I actually love the Roth account more, which I. I'm in that camp because I want this account to grow and come out totally tax free at retirement. I'm not going to get tax deductions today. Remember a Roth 401K, which you can do on a solo. You can have a Roth account, you can have traditional account. You can do both. You can do it. Mix it up a little bit if you want to, but the Roth account is on the employee on the 20,500. That can be Roth from the get go. You just say it's Roth, it's Roth. You don't get a tax deduction. 20,500 went in as Roth. Now, the company match here is where it gets dicey. The company match has to be traditional dollars because the company expenses it. Now on day two, you can convert it to Roth, and some people just do it that way. That's one easy way to do it. I put, let's say that 50,000 example, the 12,500 went in as traditional dollars, and on day two, I converted it to Roth. That's one way to do it. There's multiple ways here. I just want to give you option one. Now, I effectively took a tax deduction and do it. A conversion, which made me pick it up as income, which washes out no tax deduction. But now I've got that 30,000. What do we have, 30,500 now or 33,000 total of Roth dollars off 50 grand. Now, that might be enough. There's other options here. There's the mega backdoor Roth, which I think you're teeing up here on the whiteboard.

Yeah, and, and I think if you're watching on the whiteboard I've created and for those not being able to see it on the whiteboard, I've created a cylinder. And this cylinder of power is going to be sweet. Is it?

I always think of like he man when you say that, the cylinder of power.

Thank you.

There's something like the something of power.

Oh my gosh, I love it. So here we have, I've created three colors. The first color is black and that is a Roth ira. That's just your Roth IRA down at the bottom. That's step one. And you can do again I'm going to do under age 50 in this example. So that's six grand. Then you can do your employee contribution in Roth, which is that. And we'll put that in red and that's 20,500. And then the green I've made here is going to be your company match. So the company matches here and that's going to vary based on your payroll level because remember we're going to take our minimum payroll based on what the IRS says. Then we get into a fourth color and because we just want to be technical here and blow your guys mind is there's this. At the very beginning, Matt said an important point. You can get up to 61,000 in your 401k piece and then add the six on it with your Roth. You've now put a total of $67,000 in Roth in one year. Now if you're watching, you're going, well, where's Waldo? How did you go from 20,500 plus a company match? There's a difference. There typically going to be around 40. You know, I'm going to say 30 to 40,000. This little 30 to 40,000 realm. Where does that come from? There's different ways to tackle it. But what do you like to call this to keep life simple for the entrepreneur?

Well, so remember, if you can do 61,000 total and we know we can do 20,500 out of the gate, that means we got 40,500 left to fill.

Well, minus whatever the match was because we don't know what it is.

Right. So you got 40,500 to fill. Yeah, you can do that with the match if you want. Or you can and then, and then you can do what's called an after tax employee contribution. Or you could just do full blown after tax employee contribution. If you know you're going to go Roth on this whole thing. You're a Roth person, you're into it like I'm all Roth. I just say just go after tax, just don't even worry about the company match. Just do your 20,500 in Roth employee and do the other 40,500 in after tax employee contribution that you can convert right to Roth. You can even roll it out to a Roth IRA if you wanted.

Yep, I love it.

Now on that, you would have had to have made at least 61,000 to do that.

Yeah. And the payroll level for that is for those techies out there, $66,053. So as long as you have payroll of at least $66,053 and you have the wherewithal because you have other sources of income and you're like, I want to throw down. I want the biggest Roth I can get this year. In totality, it would be a $67,000 Roth 61 in the 401k Roth 6 on the side, total of 67. Well, your paycheck in your S Corp would be 66,000 5. 3. Now I like what Matt's saying is that figure out early on if this is going to be all Roth and just make sure you really designate this after tax employee contribution in a simple way for you professionals out there. This is going to go in box 14 and it's going to be called after tax EE cont contribution stand for contribution. So after tax employee contribution, box 14. And so that way the IRS knows that this employee put more money in the 401. But the IRS is like, well, that's stupid. Why would they do that? They didn't get a write off. It's because you're converting into Roth.

The IRS lets you and under the tax code you can convert after tax employee contributions right out of Roth. You would be dumb to not do that. Yeah, you can leave it as just after tax employee. That's basically non deductible traditional dollars. But you would be dumb. Immediately convert it to Roth. Which is going to take a process. You have to do a Roth conversion. You want a piece of paper and election form to do that. And then you should get a 1099. Also a 1099R. But when you go on your 1040 and you do your tax returns, it's not taxable because it was. You did not take a deduction on it. It's after tax employee.

So it is. If some of you are thinking, man, this is weird. Well, it is kind of pissy the way the IRS did this. They said, oh, you can put up to 61,000 in a 401. But they didn't tell you how they're like, you can. Okay, bye. And so this is. So you would never really go to 61 unless you were doing all Roth. That's the misnomer. I don't think I've ever seen a client try to do 61,000 that wasn't Roth. Because you don't get a write off to do that. You're like, it's dumb.

Unless you're doing the traditional. You mean like, you were like, I just want all the tax write offs. I made a lot of money.

Well, the company, through a profit sharing, might be able to do that 40,500. But you're definitely not a deduction on your W2. So where are we getting the write off in here?

So I'm just saying, if I did traditional, I wasn't a Roth guy. I just want to do all traditional. I want a $61,000 deduction between my employee and employer. I could. I could do that. I mean, it's gonna be a higher W2, but I could get 61 in and traditional and have a huge deduction. I'd take your S corp. In my S corp, it take about 140 or 50, I think the. Maybe six. I forget the number to max it out.

Yeah, because you're taking the write off at that point, people in the S corp and not on your W2. And so because again, you can only do 20,500. So when you're trying to get up to 61, the company is doing the rest for you and taking a write off in your for in your S corp. So it's just. It's unique. Not something we, you know, recommend, but. Okay. Yeah.

Whoo.

All right. Should we get into the side door for one K? Yeah. Okay, now, before we go here, let's give a quick commercial break. And if you take the whiteboard off for a minute. Tristan, let me. Here's the commercial break. If you want to do a solo 401k, here's what's cool. You don't have to decide a lot of the total amounts you want to do until January, because that's when you've got to issue your W2 to yourself. That's where the rubber meets the road. You got to decide now, this is an important point. You got to decide by January how much you want to put in everywhere. But you actually don't have to even put it in until April 15th. Nope. Gets even better. If you extend your S corp return, you could be all the way out until September 15th on this. So you've got all year to Put the money in. You have until January to decide the exact amounts. But to set this thing up, you got four weeks with us because we got to get all this paperwork done before year end. Our deadline is December 1st and thus you want to do it after that. You're going to pay extra and beg because our paralegals are going to want to punch you in the face because it's a lot of work before the end of the year. So we have imposed an internal deadline of December 1st to do a self directed solo 401k. You can go out on December 30th and set up some weird crazy expensive online Wall Street 401K. But that's not what you want. And if you see someone out there selling you a solo K, what do they call them?

They call them the eqrp.

Yeah. Employee qualified, they call them. Some way. There's everybody out there calling them different names. It's a damn 401k. And they're gonna let you set it up before your end. But they don't give you a consult. It's just a cookie cutter structure. Be careful. So if you're gonna do it with us through the month of November, we knock off $100 in your full consultation with an attorney to get it set up. So it's eight, it's 900 bucks. So it's normally a thousand. We knock off a hundred bucks, it's $900. If you just want the paralegals to assist you and you're like, I don't need a conversation. I know this backwards and forwards. You better know it backwards and forwards. Then you get $50 off and you can do it for 500 bucks. But that's our special. You're going to love it.

Yeah. Now let me rephrase that process Mark was running through that. You need a plan. A solo 401k takes a plan agreement. The law firm KQS lawyers, we have a pre approved plan with the IRS that's a solo 401k plan that you can max out contributions, that you can do these Roth elections that we've talked about about. You can do Roth conversions, employee after tax contributions, do the mega backdoor Roth. You can self direct it. You can do loans where you can loan yourself half the balance with a 401k not to exceed 50 grand. All these bells and whistles we have on our solo K doc, it's amazing. But you've got to have the plan set up by year end in order to make employee contributions. Now you may hear Matt I've heard after the Secure Act 2.0, this is a new law. We've talked about it before. So many of you that are like nerded out on this. That's for employer contributions that you can set up the plan late. You can set up even into 2023 and still do 2022 contributions. Employer only. We need to have this set up in 2022 to do the employee contribution piece of this, which is the easiest.

And that's the bit that's where the money 60 plus.

Yeah.

If not, you might as well just do a sep. Yeah, I mean SEP sucks. I mean, I have whole videos on I screwed up and had to do

a SEP because I waited too long. Yeah.

Some of you are like, well, I've got a sep. In fact, I had someone yesterday come and go, well, I've got a SEP because I have employees. I can do a sep. No, you cannot do a SEP with employees either. Now you have two years before your full time employees kick you out. But still, seps are terrible. You get a foot race going with the 401k and this 401k wins every time. So. All right, so we've got the special. If down in the link below on the YouTube video or in the podcast, you can click@kqslawyers.com we'll have the direct link to the page where in the middle of the night you can fill out the information you need and pay for it and have it done. And then you'll get your consultation scheduled with the attorney and bring a bunch of questions. Bring all this, watch this video again so you can come with all your questions.

And what I'll say on the solo K is that it might seem a little complicated at first because you're learning all these little buckets that we're talking about. But guys, it is not rocket science. You set it up, you get the process down for your first year and it takes. There's a little learning curve. So you want some professional help. That's what we're here for. All right, don't try to hack this out online yourself. We're here to fill in the questions, help you understand the tax planning options, the Roth options. If you're trying to max out and do the mega backdoor Roth, the self directing piece. If you're like, I don't want to just buy stocks, bonds and mutual funds, you can, guys, you can just easily do a brokerage account if that's all you're ready for right now with this solo K and get into real estate or other alternative assets later. We can help on that piece too. We'll be a resource for it. But once you get the solo K dialed in, you're just doing the same thing every year. You know how to do it, your account knows what's going on, you get the payroll dialed in and it becomes just easy. It becomes habit and practice and routine. And after you've been doing it for 10 years, I just know because we've been doing it long enough and I see the clients that have just stuck with it and contributed. This is a powerful strategy. I have a lot of clients have seven figure solo 401k accounts because they started doing it 10 years ago, maxing it out, investing in the stuff that they know. And now they got a big account and they're able to see the benefits of it because they stuck with it, they saved, they got consistent, they didn't get hung up on. This sounds complicated.

I love it. Now before we do this last strategy, which is called the side door 401k and I'll explain that in a moment. Those are for you rental property owners. Just one other point here and that is this power of self directing it. That's a big item you can't overlook. Here we set up solo 401ks where there's an actual bank account set up for the 401k which you get to be the trustee of. Now we have a custodial Service Plan directed IRA to do your accounting, to do your 5000-500-500 and take care of you. Please sign up for that. You don't want to start trying to maintain this on your own. And it's only like three or four hundred bucks a year, super affordable. But this 401k is going to have its own bank account and you can do notes, you can do real estate, you can set up an LLC and buy a little meth lab. You can do all sorts of fun little things with it. So the Solo 4 and Solo 401k can buy cryptocurrency, can invest in NFT, utility NFT. So you can do all sorts of cool things with it. And that's another powerful aspect because our clients tend to do better than Wall street rates of return 10 to 20% or better because they're investing in what they know. We're not making promises that we don't tell you what to invest in. You get to. But I'll tell you, is it better than an ETF or mutual fund? And the fees are far, far less. So, so powerful.

Yeah, all Right, let's hit the side door. 401K, wrap this up. One of the issues that we have a lot of real estate clients that have built a big rental portfolio and maybe they got no day job or they just have the day job 401k and they're like, guys, I want to be able to do a solo cab, no side hustle. Besides my real estate, my rental properties. Well, rental income does not qualify as self employment income that you could contribute into a solo K. You have to have left side income over here on the trifecta, you have to have business income, self employment income, operational income, rental income. We love guys because rental income is not subject to self employment tax. So we love just leaving it over there. But if you're like, guys, I want to be able to do a solo K, I want to contribute or just be able to qualify and roll over some other funds. That's another perk. By the way, we didn't even mention you can roll over other IRA dollars and stuff into your solo K, by the way.

Yeah, you love to talk about that.

Let's stick on this strategy though. Sorry, I can get distracted. Now here's the solution for you rental property owners. Rather than trying to set up a solo K in an LLC with rentals, which we see happen all the time and is totally wrong, if you have that, let me just tell you right now, you're screwed up. Start over, get with us, get a consult. We'll try and help you clean it up. But the solo K can still work for you. We're going to set up a management company. Your rental property LLC is going to send over a management fee and some income to your, your little property management company, your management company. Now this could be an llc, sole prop, whatever, but it's going to show up on your tax return, probably on schedule C. All right? And your LLC is going to take an expense for sending this management fee over. Now in my schedule C, I now have self employment income. I now qualify for a Solo 401. So that side hustle. Sorry, not side hustle. This management company is who adopts your solo K plan. Now you're in the game.

Yep. And if you've seen this on YouTube, you've seen this cute little picture.

Work of art, man. You should sign this in auction. This is an nft.

And this makes an NFT right now. Derek, where are you? Okay, all right. So this little management fee coming over here replaces the W2 because you're so you're not going to need an S corp you're not going to need a W2. Now we strongly recommend an LLC so that you have a separate EIN and you might. This, this llc, we see a lot of clients, this LLC evolve. All of a sudden things start happening. They've got side gigs, they've got 1099s, they have consulting. And then if you don't have an LLC with an EIN and you just set up a sole prop solo, you got to readopt a whole new one.

True.

If things go crap happens, you know. So we recommend just an affordable, simple llc, Schedule C, like Matt said, tax return for that property management company, the management fee is grossed up just like the W2. So if you want to do 20,500, you're going to pay a management fee of around $22,100. So you're going to your accountant and this is what our tax attorneys will do, will help you determine how much that management fee should be so that after fica you end up netting exactly what you need to do the 401k. Now the cool thing about this little management company, it opens the doors to a lot of other things. We might do an HRA health reimbursement plan. Now we got a 105 health reimbursement. We might be taking some write offs over here that you wouldn't be able to take because you weren't a real estate professional over on the right side. So now we've got some office expenses, maybe some travel expenses. We could run this baby and really do some fun things with it. So you're opening up a whole new world here and unlocking this for this 401k. So I love the side door 401k to quote unquote, unlock, unlock this opportunity. And this, that's kind of the key is this, this little management company. Now Matt the other day kind of surprised me. He goes, you know Mark, it's funny, not a lot of people are opening. Not a lot. We have more people opening solo 401ks to roll over old 401k money than to put in new for when the new 401k money is kind of a bonus to them. The main thing they wanted was a new receptacle. Yeah, A new bucket to take this crappy old Dell 401k they had sitting around.

Right. And yeah, because the solo K, once you get into self directing, it's really cool. You can have a checking account right in the solo case name that you get checkbook control of. You can invest in real estate and IRAs, have to pay UDFI if you leverage that with debt. But you can leverage debt in a solo K with no UDFI tax. This is all stuff we hit at the self directed IRA summit, by the way. Stra summit.com you'll be able to get the, the recording in a week or two here. But, but once you get into self directing and so there's a lot of these rental property clients that are like real estate investors, they have a lot of rentals. Like I want to get some rentals in my solo K too. I mean, I got some deals I want to do. I got all this retirement plan money invested in mutual funds from prior careers or retirement savings. And I love the solo K concept. So this is a good strategy for them.

So is that called a rollover?

Yeah, just roll over.

It's not a transfer, it's a rollover.

It's a rollover money coming out of a 401ks. It's a direct rollover because it's going from plan to plan. So it's not taxable to you, of course. It's just going from one employer plan to a new one.

Yeah. And some of you might be sitting on a crappy 401k from an old job years ago and you're like, I don't. You know what's in it? And it's sitting in some mutual fund or etf, getting the crap kicked out of it Right now by setting up this solo, you now just created a checkbook for that old 401k. Maybe that resonated with some of you. That's just how simple it is. So now you're like, holy crap, I can get a checkbook for my old 401k and go invest it in what I know best. My sister in law is opening a new catering business down the street. I'd like to invest in that and be a 30% owner with her. Or I'm going to go into the DAO and some sort of decentralized autonomous organization in the metaverse. Or I'm going to go, oh, my friends doing a rehab and they need some hard money. And I'm going to do a note. See, all this has opened up with that checkbook. And super fun.

Yeah.

Okay, well that my friends and you can pull that whiteboard down. That is the power of the Solo 401K. Boom.

Can you feel it?

I can feel it. Can you feel it? The power of love. Let's turn that speaker up.

Let's blow it. Love that song.

Little Hugh Lewis.

All right, well, thanks everyone for being here. There's a lot more resources we have on the solo K and so self directing. So check out the other podcast episodes. Remember the special right now. If you're listening to this November 2022, get over to kqslawyers.com we have that special on the homepage. Save 100 bucks to get your solo cake done. You need it for 2022. Make sure it's done by year end. Get started now so you can be making 2022 contributions. We're gonna be back next week with another incredible episode, the Main Street Business Podcast. Thanks for being here.

See you them.