The Power of the Solo 401k | Mark J Kohler LIVE|

We are live. We are live. Mark Kohler here. Thanks everybody for taking a quick moment. Please to just let me introduce the topic today for our weekly live Q and a, Facebook, YouTube live here on markjkuller.com KQS Lawyers and Entrepreneur magazine. Just love being here. I want to give a shout out to my producer. First of all, Corey White working in the studio, making this all look great. And we're going to add a special guest today who's going to help with this topic. And so it's a little trickier because I want to be throwing up a whiteboard. We're going to have special guests. It's all going to be good. So I'm a CPA and attorney. If you haven't watched our Facebook Live before, please give this a chance. If you're a side hustler, side gig, small business owner and want to build wealth, this is a show for you. I want to take live Q and A throughout this entire hour and please type your first name in the city you're from. I've told Jack over here, first name and city or we're not calling on you. So get it out there. And I love the easy questions. I love the hard questions. If you have a little hate mail, he'll tone it down and I'll take it all. Let's talk now. Today's topic is why a solo 401k? What a solo 401k help you? How do you have a solo 401k? And yes, even an Uber driver can have their own solo 401k and that's after passage of Prop 22 in California, which I think is great. I know drivers in California want to be an independent contractor. So much more freedom. So that's the topic today. How do you get a write off this year in 2020, even though you don't have to fund this until 2021. It's a huge, wonderful, amazing strategy that 10 years ago you couldn't do as a small business owner. It was a mess. But with the onset of the solo 401k, anyone with a side gig can have a 401k for their small business, even if they have one at work. You can get three, four times the deduction you would get with an Iraq. So I want to break it down, answer your questions and help you get set up with the right strategy before your end. Well, I'm going to introduce our special guest. Is that all right, Cory, let's get him out here. I have the one, the only, the infamous Matt Sorenson. Do we have a copy of his book somewhere in here? Jack, you want to throw a copy at me? You don't. Matt Sorenson is the author of the Self Directed IRA Handbook and he is also the president and CEO of Directed IRA or Directed Trust Company. He is also a senior partner at KQS Lawyers. This guy's amazing. We don't have his book anywhere in here. I was signing his book the other day and it increased the value and I think someone took it.

So it's out of here. Yeah, yeah. Those books are hot topics. You got to watch them. People would just walk out of the office with them. You know, you got to do some putting like a security thing on it so no one walks out of there with it. I get it. It happens. But that book, actually, I have a 52 page chapter on the solo K alone. So, I mean, I got a whole chapter in my book about it. That's how much I care about this topic.

Cool. Cool. I love it. Now, Corey, we've got Matt visually out here too. I don't see the split, but we're good. Okay. We are shooting live on four different mediums with a whiteboard and two people from two different states. I'll tell you, it's artwork that Corey is pulling this off today. So we're so glad he's here and hopefully we don't have any problems. I hear exasperations. We're good, we're good. Okay. All right, well, let's dive into this. I'm not going to put the whiteboard up yet. Let's just get our feet under us. Matt, I'm just going to introduce the 401k and then just really ask some questions of you while you're with us. I don't know if you'll be here the whole hour.

All right.

Okay. So everybody out there, you come, generally, most Americans from two perspectives. The first one is you've probably heard of an IRA or an individual Retirement Account. No matter who you are, no matter what income level, no matter if you have a day job or a side business, you should be able to contribute to an ira. There's the Roth IRA is a version of this. And yes, your income level can affect the deductibility or what type of IRA you choose. And if you have a plan at work, it might affect your ira. But I think most people can get their head around this retirement account that I'm going to put money in. Usually get a deduction. I can invest in whatever I want, tax deferred, and when I Pull out the money, I get taxed. A Roth IRA is I pay taxes on the money first. It's just sitting there. I put it into my ira. It grows tax free with the tax free strategy. Tax free means that when I pull that money out of the Roth, I don't pay taxes at all. So that's an IRA. Well, there's this whole other world called the 401K. And the 401K 10, 15 years ago was just for big corporations with thousands of employees, maybe 50 employees. They just were a big company thing. Well, the laws were modified and simplified, frankly, to make it easy for the small business owner, even a mom and pop, single, married, whatever small business owner, to set up their own little 401k in our office. Every year we have a special where we sell it for Even I think it's 399 right now. Normally 500 bucks and $800 for a full setup 401k, where you get an hour with a real attorney answering your question. So very, very affordable to set up anywhere from 4 to $800 in the month of November for us. But the beauty of the Solo 401k is the cost to maintain it is very, very low. You have complete control to invest it in what you think is best. And you get a tax deduction this year if you set it up this year. But you can fund it next year as far out as September 15th. Crazy. So that's the 401k we want to answer your questions about. Well, does it work for me? How much can I put into it? You know, all those different questions. So, Matt, I want to just throw it out to you first with this 401k option on the table. When do you see clients choose the 401k over an IRA? When does that seem to make sense for the clients you might meet with?

So I think for those of you that may want to think about a solo K, the first one is I want to put more than 6,000 in a year. Right? Like, I could do that six grand in an IRA. But I want to get as much into this 401k as possible for a couple reasons. One, I want tax deductions today, maybe, right. And two, I got to get my button gear to start getting money saved away for retirement. I've got some extra money. I want to do it in a more tax efficient manner. Like it's tax deferred or tax free. Right. Whether you do traditional or Roth. And so you're just getting this money socked away in this account. And it's, you know, wealth has been built in this country on real estate and also in retirement accounts. People that like the millionaire next door, right, they just maxed out their retirement account every year. They threw money away, they got it invested, they paid attention to it. And so if you're thinking six grand a year in your IRA is not going to cut it, you're probably right. So someone who wants to sock a little more away than six grand, love it.

Now I think that is reason number one. Now here's an important point. Everybody before you just tap out and say, this is the same old crap. They're selling stocks. No, we're not selling insurance. We're not selling stocks. We're not selling mutual funds. This is your 401k. That's number one. We're a law firm and accounting firm. We want to set this little bad boy up for you and you run it also. So many people think a 401k is a stock, is Wall Street. It's not. It's not. There's, there's so much more. You can do it with it. So Matt, can you explain now, and you do it so well. Is the difference between a big 401k or a group with my day job and a solo. What's a solo 401k?

Yeah. So like we're all familiar with the 401k. Maybe you've had one at an employer. You know, like you work at Dunder Mifflin, right? And you get Dunder Mifflin's got the 401k. You go to Toby and HR, you enroll and whatever, you know, you start putting your money away and you buy mutual funds that you don't even know what the heck they are. But your account's invested in it and you're saving and that's good. Maybe the company's doing a match for you and that's great. That's a good way to save and get money away. And hopefully those investments are doing well and growing. But a solo K was this way that like Mark said, maybe about 10 years ago, the IRS made a way for if you're just self employed and it's like, well, I'm not a big company that has employees. It's just me. It's just me and my business partner or maybe me and a spouse and some family members. They said, you know what, we're going to let you do an easier solo 401k. We're going to call it a solo 401k or an individual 401k and this is a much simplified version. It's got an easier document set. You don't have to do all this testing and actuary stuff that companies have to do with their big 401k plans. So really what it is is it's get a document that's pre approved with the IRS. Our law firm, Caicosaurus has a solo 401k IRS pre approved plan document. You use that document to establish the 401k. You start putting money into it, which can just be a bank account like Mark said. It doesn't have to be a brokerage account buying stocks or mutual funds, you can, but you can just have a bank account and you can buy a rental property with it or you could self direct it and buy alternative assets. All these things that a lot of our clients do. But the thing with the Solo 401k in general is it's meant for the solopreneur. And maybe you have a side hustle, but you've got the day job at Dunder Mifflin. And maybe you've got, you know, some little side hustle where you're earning money and you want to save a little more than your day job. 401k. You can also do a solo 401k. So that's the solo 401k. It's meant for the business owner that has no other employees other than their partners and family members.

Love it. Now if we don't have questions flying in, that's we do. Yes. Because this is huge. There's so many little variables. Can I roll my old 401k into this 401k? How much can I put in this 401k and that 401k? If I have an IRA, should I pay my spouse? What can. Can I put a car truck in my 401? There's so many questions. Please put down your first name. In the city you're from, we're going to rapid fire and do it best we can. Now I want to go to the whiteboard here and give you just a little visual. So Corey, if you could you let me know when the whiteboard's up. I'm going to start with what Matt and I have teach constantly called the trifecta. Much like the Pentabla in so I married an actual but the that's a great movie with Mike Myers if you haven't seen it. So with the trifecta, your foundation of your plan is going to be a revocable living trust. Married or single, what's going to happen to your stuff when you die. This is usually in combination with a will. Okay? Now, the trifecta says, you know what? I've got a day job over here and I have a 401k at work. Okay, that's cool. And they might do some matching. Let's say they do a 3% match. So they're going to put whatever you put in. They're going to add to it 3% or up to sometimes 4 or 5% of your salary if you put money into. So that's called the match. But also, many of you out there may have a small sole proprietorship. Some. You might have an LLC that's operational, not a rental property. And. Or an S corp. And like Matt said, you're a solopreneur. Preneur. It's just you and. Or a spouse. And so there's some sort of ownership. That's just family in this situation. You can set up a second 401k. If you don't even have the day job, forget that. But you can set up this other 401k and fund it through your LLC, your sole proprietorship. We have all sorts of options. And this 401k can invest in stocks, bonds, and mutual funds or whatever you want. Or it can even form LLCs and buy the next rental property or invest in an alternative investment or even another small business. So this 401k is what we're talking about. It could be traditional or Roth. I don't know. Matt, can you explain that? Like, it's almost like a honeycomb. There's parts to this 401k. Maybe tell us a little bit of how you could fund it in some creative ways.

Yeah. So let's talk about setting up the 401k. So like Mark said, you have your small business, okay? This is just your company, your sole proprietor, S corp, llc. You can establish it. And I've got this diagram over here. It might be hard to see. Let me expand it here. But this is your company, okay? You adopt a solo 401k. So if you're Dunder Mifflin, all right, you're gonna have the Dunder Mifflin 401k. Individuals could not establish a 401k. A business establishes a 401k for the benefit of its employee. You just happen to be the employee. Now, we haven't said this yet, but you can put $57,000 a year into a solo K. And in 2021. I just. I just have an article on Entrepreneur that went up last week. IRS increased the limits to 58,000. That's way better than 6,000 in an IRA, right? If you're really trying to save, get tax deductions, sock some money away for retirement, the solo K is gonna get you a lot farther along the way each year. So I can put new money into the 401k. I can also roll over other money. Let's say I've got an old 401k. Maybe you lost your job in the pandemic and you've got an old employer 401k, you're starting a new business. Well, you could do a solo K in that business. You can roll over that old employer 401k into your new solo K. Maybe you've got a traditional IRA laying around that you've been contributing to and putting six grand a year in, or that you rolled over an old employer 4012 years ago. That traditional IRA can get rolled into the Solo 401K. So the Solo 401K get new contributions that you're putting in as the employee of your business. The company's doing a big match, you know, up to that 57,000 a year. If you're so aggressive, you want that much, and we can go through the calculations on that and how you do it, but also, again, rollovers, you can get other accounts rolled into it.

Okay, now, hopefully the diagram's working here, Cory. We're doing okay. Hopefully most people can see this. I trying to give a visual here of this trifecta that Matt and I talk about, where here's the foundation in your trust, here's your operational entity, and then over here on the right hand side are your assets or investments. And one of those big assets is your 401k or retirement accounts or rental property. So this 401k that Matt's talking about can be funded with new money, old 401k or old IRA. And it's almost like a honeycomb in the sense that you can have half of it be Roth, and you could have half of it be traditional. You could have your half in two different ways. And maybe your spouse, you can even have kids or a business partner in a solo 401k. But once you get other employees that aren't owners or family, solo's over. You gotta upgrade to the group. That's a topic for next year because it's too late to set up a group this year. But right now, you can set up a solo 401k before December 31st and get the write off this year in 2020. We have a special where we knock off a couple hundred bucks and you get it set up by December 1st and help us out. So we're not stressed out on Steve, but, oh, how do we set it up? Oh, several people already asking questions about where to go to set up a 401k at our office and again, shop around some of the best prices you're going to see here with us. This is not to be an infomercial. When I get to some of these other questions, Jack, I'm coming to you, but you can go to ww kkoslawyers.com kkoslawyers.com and right there, there's a banner that says Special 401K. Click on that, you can get started. If you go with the full service, you get a consult for an hour with a real tax attorney on the phone, not someone in a cube in Vegas trying to sell you crap you don't need. This is a consult with an attorney. That's the full service. Shop around, you might find somewhere cheaper. You may not. I don't think so. With a real attorney on there. And then we have our DIY service that's typically 500. And now it's 400 bucks right now. So this is 500 usually. This is usually 1,000. And if you can get on it before December 1st, that's where you can go. So again, I don't want to be too salesy today, but that's where you can go. All right, before we go, Matt, or should we take our first question, or do you want to say something else, Matt, on this?

Well, I was just going to say the solo K. There's a lot of other cool things to it that you can do. Like you can loan yourself money from the solo K. We see a lot of new business owners who are like, I just need like 50 grand to start up my business. Well, you can do a solo 401k loan where you loan yourself money from the 401k up to 50 grand that you can use to pay off high interest debt to start up the business. Whatever you want, you go to Vegas if you wanted. So you know you got to pay it back over five years. But there's a lot of creative strategies we've seen business owners do in their startup phase or to pay off maybe higher interest debt by just taking a loan from your own 401k, which again, you can't do with an IRA. So solo k is cool in that I get more money in. I can have access to the money With a loan, if I need it up to 50,000, it's up to half the balance not to exceed 50 grand. I can roll over other IRAs or old employer 401ks. Now you can't roll in a Roth IRA. That's one that'll quirk in this tax rule. The Roth IRAs, even though you have a Roth 401k account in the Solo K, you can't roll Roth IRA money in. But I just want to note the loan option for particularly for business owners or people startup right now. I've just seen that a lot in the last couple of my consults is a recent client basically got laid off and is now starting her own business. Anna's gonna roll over a 401k from their prior employer. They're setting up an S corp for their new business, adopting a solo K, taking out a $50,000 loan from their 401k which is not a distribution that you pay taxes on. Like when you pull money out early from a retirement account. It's a loan. And is using those loan proceeds to be to fund the star. Some of the startup costs in her new business.

I love it. Okay, let's hit Q and A, people. It's all your time now. We want to get the general issues out there. Hopefully Matt can stay just a little bit with us on a few questions and then I'll carry us over the finish line. Jack, what do we got?

Okay, we got Mike from Iowa asks, I have 12 employees I would love to stash away for retirement. How do I do this without having to fund everyone? I did this once with Seth. All of our other employees cashed out and paid.

Okay. So Mike, I am so sorry. Mike in Iowa had. Has an S corp, I presume. Mike, that's the way to go. He's got 12 employees and he has himself here and we'll just call him single for now. And so here's Mike's situation and he was given and Mike just admitted it there. Maybe I can do a sep because I've got these other employees and I don't want to. I want to do a solo 401k but I don't want to include all these other employees. So maybe I'll do a sep. And he got some bad advice as he just said, and they funded that and then he had to because it was all jacked up. They all got penalties and they had to distribute it and blah, blah, blah. So we know the SEP's not going to be great for an employee situation. The 401k group. Now, this is called a 401k safe harbor. Now, Mike, let me say this and I'll just give my two cents and then Matt can throw out some ideas here. Yeah, here's the thing. We know a SEP's not a good idea. We know you can't do a solo. So what it's called is a safe harbor. And your only real option there is to do a match. Now, they call it a safe harbor match because you only have to give in 3 to 4%, typically of a match of whatever your employee salary may be. Now, what we find out when you go down this path, Mike, is around 50% of the employees don't even participate. So when you try to look at your worst case scenario, it if all the employees participated, what's it going to cost me? And you may say, mark, that's still not worth it. It's just too expensive. I can't do a 401k for all my employees. So let me give another option. Two of them. One is a lot of employers will say this year I'm not doing raises or I'm going to help all of you with your 401k. And if you're upset about it, just put some money in and I'll double it. And it kind of opens the door maybe where you kind of tone down raises or bonuses to try to help get them all into a 401k so you're back at baseline and not paying extra for this. The other idea that we just really help clients with if they're not going to do the group 401k is really double down on the Roth strategy for yourself and your family, Mike, where you can do what's called the backdoor Roth and just really just focus on the Roth strategy for you, your spouse, the family members, and just try to get in Roths and use that strategy rather than playing with the 401k due to this cost. Matt, that's my only. I'm just trying to think of anything that might help him out when he's got these employees over here.

Yeah, once you start adding in employees that are not family or business partners, the solo K doesn't work. The SEP IRA eventually doesn't work either. Once they've worked you for three years, the sep, you got to start, you know, they get up, start playing in the set. And so you're not gonna do it for yourself because you don't want to do all this matching. So what you're gonna end up is what Mark talked about with the Safe harbor or group 401k. And there's a lot of varieties of that, but that's what we do. Like, I can't mark and I can't do a solo K either. I'd love to do a solo K. I have so many clients that get to do it because they're self employed with no other employees other than family and partners, and they can get away with it. But I. We have other employees in our companies and so I'm restricted from doing the solo. But I do the safe harbor 401k. I max it out every year. You get a little over 20 grand in there with your employee and some matching contributions from your own company. And I think it is a good employee benefit. If you've been in business for a while, you can at least restrict employees up to a year. So if they haven't worked yet for a year, they don't have to participate if they're part time, not which is 19 hours a week. If they're part time, you don't have to include them either. So your part timers don't have to plan either. And if they're under 21, you don't have to offer it for them. So some of them won't qualify, some of them, you know, they have to wait a year. But I think it's a good employee benefit to have and I think your employees like it, even though it will be a cost to you. And that's the thing with the group in the solo. You're like, well, it's a cost, but it's a cost just for me. And I'm socking away a ton of money, so what do I care? And that's why everybody jumps on the solo. Once you get to the group though, there's this additional consideration I think Mike's making here of, well, hold on, I'm gonna have some employee costs if I'm doing some matching on like, like for example, on the 3%. If someone makes 50 grand a year and they put in 3%, well, you gotta put in 3%. That's 1500 bucks you're gonna put in now for them. They appreciate that over the long haul. If that's an employee you want to keep, that's a nice benefit for them. And a lot of them jump ship, especially in the competitive market. If they've worked me for a long time and they're in their 40s now and they don't have a 401k or any retirement account and they're working for you, they're going to be like, can we do something about this? I want to retire one day.

Yeah. Now I have two just cautionary points. And we'll go to our next question quickly is one. Mike, when you open the door and say, all right, I'm going to do this safe harbor thing, you're going to be like honey with flies all around you. They're going to be all over you. And these are the brokerage, stockbroker account financial advisors. They're going to, they're going to just be licking their chop saying we got a, we got a group 401k for you, safe harbor. It costs you nothing to set up. You're going to love it and they're going to try to sell you on this because they're going to what? And this is what Warren Buffett's talked about. Tony Robbins in his book, any financial advisor, Dave Ramsey's talked about this as is the exorbitant costs that are hidden in 401ks. Because these big broker dealers and banks, they're going to make up for the fact that they're giving you this free 401k with backdooring, with fees and management fees where the rates of return end up being 4 or 5% after they take out all the fees if you're lucky. So watch out for that. We do a Safe Harbor Type 401k that's self directed where you might have some fees for those that are more, that are, it's more flat fee. And those that want to do the stock market, they bear their own cost. Now again, this time of year is not the time to shop around for that. Get in touch with this in the spring. We'll put you in the right direction. But the first point is be careful of these companies that are going to offer you these free 401ks and they look cheap upfront, but they're not. The second thing is once you do the math on this, it's really not as bad as it seems because no one under a year gets to play that. No part timers get to play and No 1 under 21 gets to play and that Matt just said that, but I want to re emphasize that. And those that do can really play. 50% of them don't because they're idiots. And so if you're out there pounding the drum, participate, participate is going to cost you more. If you're a little more subtle, you make sure everybody knows about it. You're going to find out that participation rates are lower than you would imagine. And it's not going to cost you as much, but your key employees are going to appreciate it and not go anywhere else. So I just said it a different way what Matt was saying. But I think that really helps in that decision making. Okay, Jack.

Okay, this is kind of a follow up question about that. They say, what about creating a separate company owned by my wife that is doing marketing for a company that has the 401k?

Alright, so this is called the separate line of business strategy and Matt has a section in his book on it. It's very complicated. But let me just throw this out. We've got our trifecta and let's say Mike over here. Just stick with Mike for a minute. He could have a day job or he could have this business with 12 employees and he's like, that's too expensive. Not going to run it over here in my business. But his spouse says, you know what, I'm going to form a company and we do marketing over here and we've got a whole different type of business. Mike could be in manufacturing and his wife might be in a realtor, let's say, and it's a separate business. Maybe that's what we're going to talk about. But this separate line of business, slb so different from manufacturing and I make enough money over here and if wife says I want to do a W2 and I want to set up my S corp and do a 401k, I want to do a solo and not include these other employees because it's not fair. The question is, will the spouse qualify for separate line of business? Mass Hornson.

All right, in that exact example, yes, the spouse has a separate line of business that has nothing to do with Mike's in this example, manufacturing business theoretically here Mike, and then you're fine. Now if it's like, well we're going to set up a marketing company my spouse owns, pay money from a manufacturing business to the marketing company, then the marketing company is going to put my spouse on payroll and put money in a 401k and even throw me over there on payroll too to throw money into a solo K. That doesn't work. That's not a separate line of business. If it's getting money from the manufacturing company or it's doing business with that manufacturing company where you have employees, the strategy doesn't work. Also what Mark talked about there, you have to follow those exact facts for that to work. Now the spouse there in the example is doing marketing or real estate, let's say Realtor, totally independent of manufacturing Nothing to do with it. Had separate customers, separate business, all that and only the spouse opened up a solo 401k account. So even if there is, you have a spouse that has their own separate business from yours with employees and the spouse has their own business, they do a solo K, you've got your other business over here where you've got employees and you can't do a solo K. Well, you can't come over and play in the spouse's 401. Alright. The spouse can, but you can't come over as an employee over there and plan that even if it is a separate line of business. Yeah, Mike, possible but tricky to. There's, there's a couple snags when people try to do it.

Yeah. And Mike and those out there that are frustrated this by this saying darn it, I want to get my own 401k going. And these 12 employees are noose around my neck. What the freak. It's there as a protectionism because businesses 30, 40 years ago were trying to benefit the owners only and leave the employees in the cold. And some people think this is a labor pro labor type strategy. But it's there, there are options and that's what our tax attorneys can do in an hour consult to help you decide what your long term plan could be. But the separate line of business rules are actually there's a variety of exceptions and different scenarios that might allow you to get into that strategy. So just meet with your advisor and go through it. It's worth looking into, especially when you have multiple businesses in a family. Jack, next question.

Okay, lots of great questions. This one's from Jim in Oklahoma. He says do you have to have your LLC file as an S Corp in order to start or fund a solo 401k? Or can I do it as a sole proprietor?

Okay. Jim in Oklahoma says I've got an llc, single member llc. This means that Jim can file down here at the bottom on his 1040. He is going to file a schedule C. And he said if I do a schedule C and I have profit here in my Little Sole Proprietor LLC, can I set up a Solo 401K? Oh yeah, yes you can. You can do it in an llc. In fact, you might even be just a sole proprietor. You don't have to have the LLC filing. You could do a 401k. But here's the problem. You've got the contribution. I'll take my take at it, Matt. And again, usually I hit, I get barely get to first base and then Matt comes In and hit bats cleanup and takes us around the diamond here. My life story is I only get to first base. Okay? So anyway, that's a little comment for another day. So. But the thing is with a LLC or a sole proprietor, you're paying self employment tax. Not good. And whatever your net income here, it's going to play in the calculation. And as to how much you can put in the 401k this year it's 19,500 plus 25% of your profit or your W2 or your income, well by the time you start running the numbers on this, your self employment tax is going to be through the roof. We find it time and time again, if you want to do a solo 401k and you got the money to do it, nine times out of ten you're going to want to make the S election along the way. Now I don't know who's telling you an S corp is bad, but I'm telling you in this scenario the S corp 401k, usually you're money ahead. So have someone help you run the numbers on that.

Yeah, and you can just add an S election to the LLC and totally fine, but you don't have to again for solo K qualification purposes you can be a sole proprietorship, you don't have to have an llc, you could just be, you know, Susan Smith sole proprietorship and you will get an EIN under that and you can go set up a solo 401k under Susan Smith sole proprietorship with that EIN. Roll over old retirement plan money, put new contributions in. Now the one difference though, on anybody that's a sole proprietor, whether you're just a sole proprietorship with an EIN or you've got an LLC that is single member that flows down, you file as a sole proprietorship. The one difference is you can put in the 19,5 per year, that's for 2020 and 2021 on your self employment income plus 20% of the self employment on your. When you're an S corp you get to put more in, you get to do 19.5plus 25% of your W2 and so you only get the 20% factor on the sole proprietorship. Or also even if you're just doing a partnership, which we generally wouldn't recommend either. But that's just a little technical rule on the company putting in money. 20% in the sole proprietor or partnership versus 25% for those in an S corp or C corp, which we don't love. As you probably know if you listen to Mark at all. We love the S Corp. Now here's

a couple thoughts for some of you out there that are small side gig business owners and talking about Jim, in Oklahoma, we are a law firm and an accounting firm that helps clients around the country consult with one of our tax lawyers. 400 bucks. They'll zoom with you, get on the phone, whatever you want. Now you may say $400, it sounds like a lot, but that could be the doctors, even sometimes primary care physicians doing some basic work for you. Could be more expensive at a doctor's office. Please consider if you're thinking about putting away more money getting a consultation with some tax type law advisor that can help point in the right direction. Now a disclaimer. We are swamped through Thanksgiving. I think our first appointments right now are in early December. We're bringing on more team members and attorneys to help during the busy season. This is our busy season. If you want to save taxes, it's not in April, it's right now. So Jim, what you're going to want to do with your advisor is going to say under option A, I'm a sole proprietor llc, whatever you want to say, sole prop. Llc. And here's what my profit is that I expect in 2020. How much can I put in a 401k? So you're going to just do this simple. How much can I contribute? Now that's question one Q1 is how much can I put in? Question two is how much is my self employment tax going to be? Then you're going to go over here to your same advisor on the whiteboard or we do this on the phone with you and go, okay, if I'm an S corp, what's my profit going to be? And as I do that, and by the way Jim, you can retroactively become an S Corp, back to 1120 so we can file an election. We charge 200 bucks. So now you're an S corp and you say okay, what's my W2 and what's my pass through? And you get the pass through deduction as well. And then you say now how much can I put in a 401k and what is my self employment tax? You're going to ask the same two questions. This is what we knock out in at least a half hour to 40 minutes. We're already there. And you're going to go, huh, I put the same amount in my 401k but I'm paying lower. Self employment tax. Happens every time. So Jim, run the numbers with your advisor. Okay? Next question.

Marty from California says, I want to set up a Solo 401k to use for real estate. What type of real estate investments can I get into? Rentals, flips, notes.

Okay, Marty in SoCal says he wants to get into real estate with his solo. Oh, okay, so he's already got a S corp, let's say, and he's in Southern California and he's like, I'm funding my solo 401k. His question is, what can I invest in out of my 401k? He's like, okay, so forget about getting money in there. Forget freaking. Marty's got my money in my solo 401k. What can I invest in? Rentals or flips or whatever. Oh my gosh, Marty, you are so lucky. You got the master of the commander and master. Master of the ship, Matt Sorensen. Tell him what he can do.

Yeah, Master and commander. Was that a Russell Crowe movie? I don't know.

Yeah, it was. Russell Crowe killed it in that. He was awesome.

Okay, all right. Okay. Yes, Marty, yes, yes, yes and yes. You could do a rental, you could do a flip, you could do notes. And that's what this self directing is. So when you set up a solo K, you know, like Mark said at the very, at the outset of this, if you set up a solo K, let's say a Schwab, they might not charge you fees to set it up, but they're going to charge you fees when you're buying and selling stock and mutual funds. That's how they're going to make their money now. But you're captive to just buying stocks and mutual funds. So if you want to buy real estate or you want full kind of like options or whatever the heck you want, that's legal under the rules for retirement accounts, you're going to want a self directed solo 401k, which is the type of 401k we set up where you're the trustee of the 401k. Okay, you have a checkbook in the 401k's name. You go buy real estate with and you're going to put it in the 401k's name. It could be a rental, it could be a flip and you're paying for it, you're receiving the income on it. And if you're better at real estate than buying mutual funds and you can make more money on a rental property or a flip or on a note investment. A note investment being like you loan someone money and charge them interest like the bank, and they pay you back, of course, hopefully, if you're better at doing those types of investments than stocks, bonds and mutual funds, which many of our clients are, many small business owners are more entrepreneurial that way and want to take more control of their retirement. By investing in this way, the Solo K could be a great fit. And so all those things on the table, I'll say the one type of real estate you're not going to do, though, you're not going to buy real estate. You're going to live in or use. Okay. These are investment assets. You're buying investment real estate, not real estate for personal use.

Okay. And Marty, you're going to love this. Everybody watching. Okay, this is so important. This is a decision making moment. If we'll come back to the 401k decision. But right now, if you've got an IRA, if you've got a 401k, an old 401k, an old IRA, and you're thinking, I'm scared to death of what's going to happen in Wall street with the new administration. You may love Biden, that's true, but there's some uncertainty. It's a little crazy out there. So if you're saying, I want to invest and Marty's asking what to do, here's the answer. Go to SDIRA Handbook right here up on your web on the page sdira handbook.com. head over there and there's two options. Get Matt's book. I make no money on this. If you buy his book, but go over there and get his book, he's got an entire 52 page chapter on what you can do with your 401k. And all the chapters relate to the different options of things you can invest in and what the rules are. Also, if you're like, mark, I hate reading books. I'm busy. I don't want to do that. I want to get a bowl of popcorn and a Diet Coke and just snuggle up to a computer and watch a workshop day and a half workshop where we talk about this and more. Matt, how much is the summit on your site right now?

199 for the day and a half. You could buy the virtual from last year, which is pretty great. We had plenty of guest appearances from Mark Kohler on it. And you can also make any money from that.

And you can start watching that video right now. Now, here's one of the practical steps. This is so easy. Okay, everybody, this will blow your mind.

Let me say this. There's a ton of free resources on my site too. Like, let me just digest some basics. I got a free investor toolkit and all that. You can get some of the free stuff.

Love it. Tons of free stuff. We all love free stuff. Now here's how easy this is. You've got two options. One is you say, yeah, I've got an old 401k. Okay, cool. You've got an old 401k. Or you have an old IRA just sitting there in Wall street and you're like, it's not doing anything. It's not making me any money and I'm scared to death. This is option one. What you do is open an account. Directed ira.com directed ira.com, one of the best websites to get this going. You just go over there, directed ira.com open an account. You can do this in your underwear at night. Docusign the whole thing right there online. And you're going to start step two, just a, you're going to take this and open the account and then you're going to start transferring the money over there. Within sometimes a week's time, your money is over here at a new custodian that says, what do you want to do with it? How do you want to invest it? Option two is what we've been talking about is you're going to create a new 401k, a Solo 401k. It'd be set up within a couple weeks. You're going to be out anywhere from four to 800 bucks, very easy. Then you're going to start transferring all these accounts into it. You may not even make a deposit in it yet, but you can transfer all the old money into it. And now you've got a new 401k that you're in control of. And for a thousand to twelve hundred bucks in the maintenance every year could be as low as 300, $400. You're maintaining this thing and investing it the way you want with no stockbroker financial advisor in the mix. That is what we're talking about. It can be done within a few weeks, very affordably. All right, next question.

Okay, this one's interesting. Mike from Atlanta says, I have an S corp and I want to start aggressively paying down my debt. Can I do that with the Solo 401K?

Matt, go ahead.

Yeah, well, the first thing, Mike, on the solo 401k is remember, if you've got some existing retirement plan money Already, an old IRA or old employer 401k, set up the solo K in your S Corp rollover. The old employer 401k or IRA dollars. And you can do that solo 401k loan I talked about earlier, you can take up to half the balance of the 401, not to exceed 50 grand. So for example, if you had $100,000 in the 401k to roll over, you could take out $50,000. If you had 80,000, you can take half the balance. You can take 40. Okay, okay. So you can let me add to

it at that point and then keep going. Is what you're doing, Mike, is you're consolidating your debt. You may not be paying it off. You're just going to consolidate it and let your 401k pay off those crappy credit cards. And now you're paying your 401k back rather than a new credit card company. That's what Matt's talking about. So this loan that you create now brings together all those credit cards. Okay, keep going, Matt.

Right, so now you're taking that 50 grand and you're going to go pay off your MasterCard or your high interest debt that you might have. That's crushing, that's hard to get stay up on. And instead that 50 grand, you know, it's going to pay those high interest rates off. Now you're paying back your own 401k and you're paying it back at prime plus 2%, which is only like around 5% now. But guess who's getting that 5%? It's not MasterCard. American Express. That 5% is going into your 401k. You're paying yourself back for being the own bank with your own 401k money. It's a no brainer. Okay. And so we've seen a lot of clients use the 401k just as a way to do some debt consolidation. And for those that are business owners that can do the solo K, like Mike with the S Corp, I think it's a great little strategy. It'll at least get you 50k.

Yeah, well, now I want to throw fire on it, Mike. And everybody listening. This little Strategy under the CARES act, you could even access more.

And there's the 401k loan, expired already. The 100k distribution goes through year end. But the hundred thousand 401k loan, unfortunately, if you didn't do it yet, it expired in October.

Oh, okay. So. So it's this distribution strategy that could work instead of the loan. I was just gonna say, the reason why I wanna say throw fire on it is under the CARES act, there was a variety of ways to access your retirement account in a creative way and maybe even consolidate debt. Now, what I would recommend is get over to Matt Sorenson's article on this topic@sdirahandbook.com so right here, go to the article on the CARES act and how you can retire. Access your retirement account, and that could give you a little extra strategy, Even if it's not the loan.

There's a 100k distribution where you can take out 100k, pay off that high interest debt. You get three years to pay that back into the. Into your IRA or 401k. So, but that's up until December 31st. So you've. I mean, I can't believe it. But we've only got like six weeks left, seven or eight weeks in the year.

Crazy. Okay, Jack, what do we got?

Okay, we got a lot of questions about this. This one's from Tico from Indiana, says if I'm still employed, can I take a portion of my employer's based 401k and roll it into a solo 401k?

Yeah. Love it. Okay, I'm going to just diagram it as we talk here. So Teco in Indiana says, I've got my trifecta and I've got a old 401k. And so this is probably from a prior job. And so current employer. Oh, current employer. Okay.

Whoa, whoa, whoa.

Okay, now this gets a little trickier. Okay, so Tico has a 401k right now from a current employer. And he says, now the trick here with the solo, we got to get that step done too. So if I was on a phone call with Tico, I'd go, okay, what's your side business? What do you do? And he says, well, I sell crap on ebay or Etsy or I do Amazon resell, or I run a landscaping business, or I work on the weekends doing this, that, and or another. So if you've got a little sole proprietorship or a little LLC or maybe an S corp, any of those entities, any one of them could create the solo 401k. So that's step one. We got to get this 401k up so that we can even try to get money into it. Now, some people use the backdoor 401k strategy, and that is if you have rental property, you can't fund a 401k from rentals, but you can pay yourself to manage your own rentals. 0 out the profit by funding a 401. Go to YouTube and type backdoor 401k. My videos number one, check it out, share it. Now, Matt, this is where it gets tricky. If you have a current job with a current 401k, there might be some vesting or some, you know, I don't know. Matt, what are the words you use to talk about not quitting your job but still trying to do a little rollout of some money? What are the methods?

Couple options there. So if you're still employed by that same employer, there's a few ways to get it out. The first is if you've reached retirement plan age, which in Most plans is 59 and a half, some are 55. And they'll say you can do what's called an in service rollover of the entire amount in your current employer 401K or 403 or whatever company plan you have. Once you're at retirement age under the plan, which is the latest, they can set that as 59 and a half. And many, many do. So if you're like, I'm 60, I've got half a million bucks in here, you could roll the whole thing out to an IRA or your own solo K if you wanted. Now let's say you're like, nah, I'm 45, I'm not there yet. But I got a bunch of money I want to peel out of it because I want to get it to a solo K. And maybe I want to self direct and do some of these cool things you guys are talking about, but I can't do. I can just buy mutual funds. In my day job corporate 401k. There is something called an in service rollover or withdrawal where you can take out a portion of the 401. Now I've seen statistics that say about 60% of employer 401k plans allow for an in service rollover withdrawal. I've helped many clients over the years get this. Frankly, it's more of an administrative nightmare in getting it pulled off than it is anything else. But they're not going to send you the money. They've got to send the money to another retirement account like a 401k, your solo k if you get one set up or an IRA or something like that. Now the plan does not have to allow that. It's kind of a permissible thing if they want to let you do it. So. But I'm surprised by the statistics. I've seen my experiences. It's more like a fourth of company 401k plans allow you to roll money out, but it's only the company matching money which makes no sense. You'd think it would be the employee contributions you put into the 401k over time. Nope, it's actually the company matching funds what they let you roll out. So look for that if you're like, hey, I've got a big 401k, I've worked here for a long time. The company's thrown in a bunch of money over the years. That's usually the bucket you can roll out even while you're still employed and even before you're at retirement Plan age of 59 and a half. So I've seen a lot of clients do it. It's kind of like you're not going to get that answer on the first person you call at your 401 administrator. Okay. This is not like the front line of defense of those companies. Do not know what the heck this is. It's called an in service rollover withdrawal. You may have to go up the food chain a couple steps to get someone that knows what the heck it is.

And I throw this out, Tico. And any of you out there that are currently employed with a 401k and you're like, how can I invest that? Better make some noise. And you don't want to get fired. But if you go to the HR department and start calling them up going, hey, I need to roll this out, I need to roll it to an IRA, I've got another 401k, I want to roll it out. And you know, the squeaky wheel gets the grease and you start going up the chain. Sometimes that options there, I'll tell you, they don't want you to take the money because their broker dealer that's got all this money under their control, the last thing they want to do is let you take any of your money out. And so it's not even your half the time. Your employer is like, I don't know, call Fidelity, call whoever. So nine times out of 10 your employer is not even going to know you're making noise. You're just calling the stupid broker dealer going, what are the provisions? I sent me a copy of my freaking 401k. And you're entitled to that. It's your money. It's just when do you get it? So I just tried Wall street drives me crazy. Now I did have a client once, it's kind of funny, she worked at Wells Fargo and she was like mid level exec, been there almost her whole life. She had like a half a million dollar 401k and she hated that she couldn't Invest it the way she wanted, but they loved her there. And she went into her vice president, whatever and said, hey, I need you to fire me on Friday, Let me take a day off on Monday and rehire me on Tuesday. And I want to roll out my 401k. And he goes, that's all you want to do? And I goes, yep. And the stupid broker dealer won't let me do it unless you fire me. Now, I don't recommend this for anybody out there that might not get rehired, but she was confident enough and she was a little older. Anyway, like I said, she'd been there most of her life. So they, if they didn't rehire her, she was like, screw you anyway. But they were like, no, no, no, no. Okay, let's just do it. So administratively, they let her go. She filed the paperwork, and on the next day they rehired her and she was able to roll out all her money. Now, I'm not saying you can do that at every company. I'm not saying you could, you know, recommend that. But if there's a will, sometimes there's a way. Just be pushy and see if you can figure it out. Next question.

Mike from Iowa says, if I lend money with my self directed ira, can I require collateral? And if they don't pay, can I take the title of the collateral as part of my IRA?

Well, he threw out IRA somewhere in there, but I think he meant 401k.

He's talking about a self directed IRA.

Okay, so Mike, where. We kind of used Mike as an example here where he's got these 12 employees and so he's getting creative. And Mike says, hey, FYI, I've got an IRA over here. And he said, okay, thanks guys. While I've got you here, I'm trying to paraphrase. Mike's saying, hey, I got this IRA over here. Can I loan it to someone and get a good interest rate, Take collateral against a home, let's call it a first trust deed, hard money, loan, whatever you want to call it, and take collateral back here that if they default, my IRA gets the asset. Yes, you can do that. You could do it tomorrow? Absolutely. All day long, go to directed ira.

Yeah, Every day at directed ira, we're doing it funding two or three of those loans a day out of someone's account to some other investor that's secured against the property. You're basically doing what the bank would do. Don't loan someone money without taking a lien on the property. They're using the Money to buy real estate. What does the bank do? The bank's going to get a lien on the property. Why does the bank do that? Because if they don't pay you back, they want something to go get. And so if you're loaning your own retirement account out, like you've spent a lot of money and time socking it away, make sure you're being smart in how you're investing it. So definitely get collateral. Whether like Mark said, it's first trustee or a, it could be in second position too. You know, a little more risk there or a mortgage, depending on the state you're in. But that's probably the second most common self directed investment after just buying real estate with a retirement account is just doing private money loans that are secured against real property.

Okay. I love it. All right, now we're gonna take one last question, but I just had an urgent question come in. They said, mark and Matt, who are you picking for the Super Bowl? I appreciate the question because. Yes, we know everything. I'm gonna go, I'm going with the Seahawks. Russell Wilson is going to pull it together again. He's, you know, this guy's awesome. He's like a magician back there. And I believe in the Seahawks and Bigfoot and I just, I have to go with that. Matt, do you have a pick?

I think the Bulls.

Michael Jordan and the Bulls. Okay, I like it. That's a great pick.

Yeah, no, I, I have not followed the NFL like, I'm like, are they even playing? I don't even know. And I, I guess they are.

You're killing me.

You're killing me.

The Raiders. The Raiders are in Las Vegas. Are they there yet? Are they still in la?

I don't even know they're in Vegas now. I don't think anybody's in Vegas, but

I mean, I'm in Arizona, so I've tried to be a Cardinals fan. It's tough though. But I haven't even followed anything. I'm just gonna go with the Ravens because that's my go to team. I, I lived in Baltimore for a while. They won the super bowl while I was there because, you know, such a good fan. And yeah, so I'm going Ravens.

You're the 12th man now. I will say this, Jack, is it

already the playoffs and they're not even in. I don't even know. Is that just the dullest prediction?

Yeah. I'll just tell you this. Jack is probably going to win the office pool at kkos. So he's on fantasy football he's killing it. And so there's my pick. All right, what's our last question?

Okay, Jim from Milwaukee says, my wife set up a loan from her solo 401k and our Airbnb business was negatively, negatively affected by Covid. Can we convert her loan to a distribution and get rid of the loan?

Okay, we're going to start from the top again. They have a what? An Airbnb. Start again.

So

I got it.

You got it. Okay, Matt, you. You run with it and I'll diagram it while you talk. Okay. Don't repeat.

So they already have a solo 401k. They took a loan out. Let's say they took the max of 50k.

Okay.

And this was then their Airbnb business. That sounds like. Or they use the money into their Airbnb business because it was affected by Covid. I don't think that part matters so much. But they already have a solo 401k. So now the question is, I would

say, Matt, the Airbnb is like the red herring in the law question here. If a train leaves from LA and goes to New York, you know, how long until it passes the Mississippi? And by the way, they're hauling cows. You know, it's like, why are there cows? Okay, so we don't care about the Airbnb. They have a loan out of their solo. What are their options? That's really what the question is.

Right? So I think the question is, can I take a distribution of it like the loan? Cause I can. If you don't pay off your solo 401k loan, you got five years. You're supposed to make at least quarterly payments when you take the solo K loans. If you don't pay it off or you miss it over two payments, over two quarters in a row, it's considered distributed. Now there's some relief right now under the CARES act if you miss them. But let's say you want it distributed. Like, is it a Jim, who's asking here if you want it distributed? I guess you could take, and I believe this would work. You take an in kind distribution of the loan and you could take it under the CARES act. So you would have three years to pay it back in. You're going to have to pay a third of it now on your 2020 taxes, a third in 2021 and a third in 2022. But that's possible. I've had someone look at it and I've tried to find. I spent at least 15 minutes trying to find some guidance on it. Because it's not a cash distribution.

Matt, I got an idea. Let me throw out an idea. Okay. If they've got a loan for 50 grand under traditional rules here, that means they should have another 50 grand sitting in there at least. Right. Because you can only take 50 grand or 50%.

Right.

So we know they've got 50 grand sitting in the 401k. Rather than do an in kind distribution and go through all those headaches, just do a distribution for 50 grand, then turn around and put it back in as a payoff on the loan. Now you've got a distribution that you're sitting on.

Yeah. That would have the same effect. I was just gonna say. Yeah, same effect.

Yeah.

And now you're in this three year distribution rule. Closed up. Excuse me, Closed out the loan instead. And now you got three years to get the distribution back. So I've, I've. Like I said, I haven't seen guidance on in kind distribution. I think it works. I went back and read the CARES act for a client that asked us a while back. I don't see any distinction between in kind or cash distribution. Because the distributing the loan is what's called in kind.

Yeah.

I'm just saying be safe and do Mark's method.

Yeah. I'm just saying it's. It's the same effect. I'm just saying it might be easier than chasing down this in kind crap, is just take a distribution for 50, put it in the bank for one day and then turn around and go back to the 401k with the documentation in your solo 401k binder. And then you would pay off the loan. Now what's interesting, there's a point that there's the tail. Let's talk about the tail. You got to pay a third of the tax on $50,000 now. Or whether it would be April 15th or are you required to withhold that from your distribution? Matt, can you wait until April 15th?

You're excused from the withholding and the 10% early withdrawal penalty. So that's nice. You don't have to do any withholding.

Okay.

Usually when you take an excuse for a 401, you got to withhold 20%. So let's say under the CARES Act.

Yeah. Now what's interesting here is let's say that what the years. Let's say you're an effective rate of 25%, fed and state. So on $50,000, what's the tax going to be? 0.25 would be 12,500. Oh, but you only have to pay a third of that right now. So right now, that's basically about 4,000, $4,100. So you have $4,100 in tax due. You don't have to make any more loan payments because you don't have a loan anymore.

And if you've been really financially affected, you might be in a low tax rate. You might have a lot of losses this year. They're an offset anyways.

And.

And if that is the case, take the whole 50,000, because it's optional. If you want to take the whole 50,000 into your income this year, you can. If you want to spread it out over three years, you can also. But if, like, if you're an example, I think they said they've really been financially affected. They had an Airbnb business that's gone down the toilet. If they've got a lot of losses, I just take it all in this year.

Yeah. So it's $4,100 in tax max. If you went that route. But. But here's what's cool. If you do in the next three years, world comes back to normal and you pay back the $50,000, then you get a refund of any tax you did pay. You got three years to put the money back. If you don't put it back, it's over, tax paid. Done. Is that right, Matt?

Yep. Yep. Love it.

All right, well, I want to say this. I'm going to go out on a limb here. If you're still listening, this is the requirement. We took a question from. Okay, here's the names. Corey, write these down. Okay, we took a question from Mike in Iowa. Jim, Marty, and Mike in Atlanta. Tico, how many people is that? We got Mike, Mike, Tico, Jim and Marty. I think there was a female in there somewhere in the. But I didn't write the name down. Am I missing anyone? Okay, how many people is that? Six. Five. Five. Six people. I'm gonna send you a book. Each one of you that asked a question today. I didn't want to entice people to ask questions just to get something free, but since we answered your questions here on the show, I'm going to send you a book. Now, I know you want my book because it's probably the most valuable here, but if I can, I'll get a hold of one of Matt Sorensen's books, and we'll throw those out in the mix, too. So now, here's the deal. If you're still here, you got to say, jack, I'm still here. And those are the. But if one of those six people already left, they don't get the book. So you're going to email jack@kkoslawyers.com email jackqslawyers.com oh, Mark@markjkoler. Okay, it's jackarkjkohler.com so we want to say thank you for listening. So jackarkjkohler.com markjkohler.com we're going to send you a book. Please everyone subscribe to our channel on YouTube. And also we have a podcast. Every week you can get to the Directed Ira Podcast or the Main Street Business Podcast. If you go to those mainstreetbusiness.com or directed ira.com you can get our ebooks. You can sign up for our newsletter, people, we're here for you. And I think next week on Thursday we'll be off. The next week after that is Thanksgiving. So it might be a couple weeks. But if you sign up for our newsletter, you'll be notified whenever we do go live. I'll keep you posted. And Matt, any final words for people?

No, thanks for staying here. Of course. We got a lot of resources on our website that we dropped out there and let us know if we can be a resource for you. We love this stuff.

So yeah, thanks everyone. Keep living the dream. Don't give up. We'll be right there along your side with.