Year-End Roth Strategies

Welcome everybody to the Directed IRA Podcast. My name is Mark Kohler. I'm here with the CEO and author of the book, the Self-Directed IRA Handbook, Second Edition, the one and only Mr. Matt Sorenson. Welcome everyone.

Yeah, welcome. Thanks for being here. We're going to be talking about something you need to be thinking about.

I worked on that intro for you and you don't get like, I don't even get a You know, thank you for that intro, Mark. Nothing like—

We have Mark here. He's my co-host.

He's, you know, I was trying to, you know, you could say, thank you, Mark. That was a great introduction. We're so excited to be— but nothing. That's okay. That's all right. I was just trying to give you a little early Christmas love, but okay.

Yeah. Yeah. You know, we got, we got, uh, Mark J. Kohler. I mean, you know who he is. He's a man that needs no introduction. You know, um, he's, you know, good looking.

You don't have to return the favor.

You know, oh my gosh, favorite vegetables, baby carrots. All right. So many things.

Oh my gosh. Oh my gosh. All right. Well, everybody, thanks for letting us banter a little bit and have some fun with you. We are excited to talk about year-end Roth strategies, and there's 3, and we're going to go hard and fast. We know how valuable your time is this time of year. So we want to get into it, save you money, make you money. Help you self-direct your retirement into what you know is best. Like, what is your favorite investment? We want to unlock that for you with 3 killer Roth strategies. Matt, what's number 1?

All right. Can I say all 3 of them? Because I want to give you a roadmap of where we're going. So you're not surprised. Okay. We're going to hit the Roth conversion. We're going to hit the kids Roth IRA, and we're going to hit the mega backdoor Roth.

Okay.

He's all got some year-end considerations you need to be thinking about. So let's hit Number 1, Roth conversion. Roth conversion is a year-end consideration and strategy because when you convert in what tax year depends on when you're going to pay the tax. So for example, if you're sitting there thinking, oh, I've got $50,000 in a traditional IRA, I want to convert to Roth, you might want to say, maybe I'll just wait until January 1st, 2026, and I'll just convert the whole $50,000 and I'll push that into 2026. That could be one way of thinking about it. Or you might be, hey, Matt, I've got $600,000 in traditional IRA or traditional 401(k) funds. I really want the whole thing to be Roth. What should I be doing? Well, maybe you should be doing something we call Roth chunking. And right now is a perfect time of year. You got $600,000. You've got a few options. You might want to say, I'll convert $300,000 in 2025 and $300,000 in 2026, and I'll break it up over 2 tax years. Or you might say, I'll take $200,000 in 2025. $220,000 in 2026 and $200,000 in 2027 and break it up over 3 years.

I love it. And the driving factor, everybody, 2 words: tax bracket. Because you want to find that sweet spot of where you're not jumping into a higher bracket, chunking too much, and you want to take advantage of a lower bracket up to a certain dollar amount. Plus, you've got to take into account, ooh, I've got some real estate write-offs over here. I've got some flow-through losses here and some capital losses, but I've got extra gains here. So you want to kind of distill down to what you think your taxable adjusted gross income is going to be. Sorry, those are two different things. Adjustable gross income. Then you're going to back into your taxable income and go, okay, what bracket am I in? Because there's a big jump from the 12% to the 22%, and then from the 24% to the 32%. Those are the biggest jumps in the bracket world. And we want to make sure that we're finding that amount to chunk and spreading it out. So there's a lot to consider there. It's particular to every person, but that's the strategy. And you have until December 31st to pull the trigger.

Now, keep in mind, this is just about what amount do I want to convert to get on my 2025 return? Or what do I want to push and wait into 2026 or chunk over time? So just an opportunity to be a little more strategic about it, minimize the tax burden on the Roth conversion. The upside of the Roth conversion is that money is now going to grow and come out entirely tax-free rather than those traditional dollars you have right now or may have that are going to get taxed on the way out. So remember, we're going to have a lot of, we like to say, long-term gain on this. The short-term pain is this tax. We're going to try and minimize that by chunking it over time and being strategic, looking at our tax brackets. How much tax am I going to be paying on this conversion? But just keep in mind, the whole purpose of this is to get that tax-free bucket growing and coming out tax-free later. So that's the end goal.

I love it. Now, before I share tip number 2, I just want to add, if your accountant has said you make too much money to do a Roth or talks this down or doesn't even bring it up, you have a terrible, may I repeat, terrible advisor because you can contribute to a Roth at any age, at any income level through what's called the backdoor Roth method. We've got other podcasts and articles on this. It's a chapter in Matt's freaking book. Just do not listen to anybody that says you make too much money to use the Roth strategy. Topic for another day. Okay. Tip number 2, kid Roth. And I love Kid Rock. Oh my gosh, some of his songs, some of the best songs, especially summertime songs. I love his songs in the summer. But anyway, we also have what's called the kid Roth. And that concept is if you've been supporting any family members, kids in particular in this example, under age 18, over age 18, and they can play a role in your business that's legitimate, typically on a board of advisors, board of directors at the very least, let's not just pay taxes and give them money. Let's convert it to a payment to those kids through a methodology of a 1099 if they're over age 18 or an outside labor line if they're under age 18. Topic for another day. I've got chapters of that in my book, "The Tax and Legal Playbook" and podcast. But the point is, once you've paid the kids, which you need to do before December 31st with the proper method, and you've already helped them throughout the year, this is just a paper transaction. We got to document it. It unlocks the ability to open a Roth IRA for them and contribute through a gift or some of the income you've already given them. Lots of options. Matt, where do we go from the paying the kids to getting it in a Roth? Because that's the kind of that next hurdle.

Yeah. And this is the thing people think, well, I just do a 529 for my kids or a Coverdell because there's no earned income requirement for the kid. But when you want to do a Roth IRA that's in your kid's name, This, they have to have earned income because we want you to do your Roth IRA first. Okay, you got a spouse, they're doing their Roth IRA. You're high income, you're doing the backdoor Roth IRA. Next, we're like, you got kids, let's get them working in your business. Maybe you got a rental property, they're working on the rental property. Okay, and so we want to justify legitimate income that you can pay them so they have earned income. So now we have something called a kids Roth IRA at Directed IRA, which they could do a crypto kids Roth IRA, invest in crypto. They could use a regular kid's Roth IRA and invest in other— they could buy stocks, they could invest in real estate, put them in on deals with you. A lot of options there once that money is invested in the account. But the mechanics is it is a kid Roth IRA. We have a special account app for this where you as the parent or guardian are responsible for the account. If your kid's, you know, 15 years old, right, you're going to be doing the things for them and making the decisions. Once they're 18 or the age of majority, and depending on the state, They will have authority on the account though. But we love the kids' Roth IRA because one, it's a way to teach your kids about investing. We're not even in the great tax and investing strategies here. It's like teaching your kids. Two, if you paid them out of your business, by the way, you got a tax deduction, reduced your taxable income, and then it went to your kids that are probably under the standard deduction, under 14 or, and, or whatever the standard deduction is. And so they don't have to file a tax return or claim this as income. 3, we get the money in a Roth IRA. Now it's growing and coming out tax-free. How many of us have seen the chart? It's like, well, if you just started a Roth IRA 40 years ago, as this is the norm, if you put a— you started out there 50 years ago, okay, oh great, I'm 40 years, I'm 45, I started at, you know, negative 5. Okay, think about this for your kid that's 15. If they just made annual contributions, getting a 9% return, you can get that S&P 500, or if you're doing other great stuff, but just Hang with me at least there. That account will be $6 million by the time they hit 65 of retirement account age. And the, the difference is the early start. And so, and so this can be a reality for your kids if you help them with that early start. So we love this strategy, um, and it's a great way to, uh, not only get great tax savings, teach kids about investing, but get them on a journey to, um, learning how to invest and build wealth. Love it, love it.

High five. Ditto. Two thumbs up. And I will also say for you grandparents out there, there's an extra step involved utilizing your children, your adult parent, your adult children that are the parents of your grandchildren. If you can involve them in the planning process, this can still work for a grandchild. So what's the call to action here? I know it can be a little complicated. Please get a year-end consult with one of our tax lawyers. You can go to KKOS Lawyers, book a call with it. We're out about 5 days to maybe 10 at times, 'cause this is our busiest time of the season. But you got plenty of time during the month of December to do the proper paperwork to document the write-off, get the account open, get it funded, and put this gift of a Roth IRA in their Christmas stocking. Super powerful.

Yeah. Now remember, the contribution deadline isn't until April 15th. The reason we're bringing this up at year end is they have to have their earned income in 2025. We want to do a 2025 contribution that doesn't have to go in until April 15th, 2026. Another thing to think about is those who don't are small business, don't have a business to pay your kids from, but your kid has a job that they work in the summer or part-time job. Maybe they're in high school, babysitting $5,000 through the year, but they've spent it all on, you know, kids, teenage stuff that they spend money on. You can still fund the $5,000 into their Roth IRA because they did have earned income. So it doesn't have to be that income that they made. You can still help them by funding that, whether you're the parent or the grandparent, getting that into the Roth IRA.

I love this. I literally remember where I was sitting when I had a phone call with a client that was like, yeah, I wish I could do a Roth IRA for my daughter, but I, you know, it's in February or March now. And he goes, but I never put her on the books of the business and paid her last year. And I really wanted to fund her Roth for a few thousand. I go, well, how old is she? He goes, "16." I go, "Did she babysit at all last year?" He's like, "Holy crap, she's babysitting every weekend." I go, "How much does she make on a normal weekend?" He goes, "She'll make $50, maybe $75, $100 doing a couple families or whatever." I'm like, "Dude, you times that by 50 weekends hypothetically at $100 a weekend, we got our $5,000 right there." He goes, "Well, she already spent it." Doesn't matter. "She didn't file a tax return." Doesn't matter. All you have to do is be able to show She has earned income babysitting. And if the IRS really wants to go interview all your neighbors, knock yourself out. This is not a high-risk issue. Putting money away is what the government is trying to incentivize us to do. They are giving all these saver credits and 401(k) tax credits and all these things are trying to encourage Americans to start saving sooner. They're not crashing down on people for strategies like this. They're trying to encourage it. So do not think this is a high-risk issue. Get your kids involved, get the money there, and let's get this Roth IRA going. All right. Number 3, Matt, roll it out.

All right. Number 3, we got to go fast and furious here, is the mega backdoor Roth. Now we're going to talk about this in 2 seconds.

I just like the name of that. I just like the name of that.

It just sounds cool, right?

I love mega. I love backdoors. I love Roth. I mean, I'm all in.

I don't know, we use the name of a band and it's just like a great band name, you know, they're opening up for KISS. We got Mega Backdoor Roth.

Yeah, like Megadeth, Mega Backdoor.

So, okay, so let's talk— we're talking about this in two scenarios here. One is a job where you work, where you have a— or a spouse that has a 401(k) at work. And then two, any of you self-employed doing maybe the solo K strategy?

Okay, you take the worker, I'll take those self-employed.

Okay. All right. If you're the, you're the person at a job that has a 401(k), not your business, um, you can do the mega backdoor Roth. About 60% of 401(k) plans allow for something called the after-tax contribution. This is what you do to do this mega backdoor Roth. What this is, is, is it's a way you can put more money in your 401(k) up to $70,000 for 2025. Let's say you've put $10,000 in so far this year. You put in some money, you put in $5,000. Let's say the company you work at did a match. They put in $5,000. So you've got $10,000 in. Well, you have up to, you have $60,000 more dollars you can put in your 401(k). Now a lot of people are like, but Matt, I thought I could only do up to $23,500 as an employee. Okay, we got $13,500 left as a regular employee contribution that you can do as Roth dollars. How do I get the rest? I still got $46,500 to go. Well, this is where we're going to do, I said that'd be minus the $5,000 that the company put in. So I got $41,500 left to go. This is where you do an after-tax employee contribution into the 401(k) that you can roll out to a Roth IRA, or you can convert in the plan to Roth 401(k) dollars. Generally, with your day job 401(k), you're going to roll it out to a Roth IRA. After-tax employee contributions do not get stuck in the plan. You don't have to hit retirement age. You don't have to quit the job to roll it out. After-tax employee contributions can get rolled out over to a Roth IRA, but this is critical for year-end. So you've got to make the contributions by year end with your employer 401(k) to be able to execute on this for 2025 contribution rule purposes. Now, we have other content on this, articles, podcast episodes on the mega backdoor Roth. We want to highlight that strategy here because it is critical for year end, particularly for those that have a 401(k) at work where you need to get the mechanics done by December 31st.

Perfect explanation. Now, for you small business owners that you're like, Freaking A, I wish someone was matching my 401(k). I hear your pain, I feel it. I understand. But you get the blessing of more flexibility. You have the opportunity to do what's called a solo 401(k), which gives you a lot of options to dial up compensation, dial it down, find that sweet spot, throw your spouse on payroll for him or her and bring them into play on this. So the concept is if you're a sole proprietor, small business owner, S corp owner, but you don't have employees, and again, we have so much more content on the solo 401(k). In fact, I'm going to say this right now, people, while we're speaking, please, it's already on our website at kkoslawyers.com. We have a webinar on the solo 401(k) year-end strategy where the government's giving you a tax credit to set up the solo 401(k). You actually make money to set up the 401(k). It's unbelievable. Like, this is not a deduction, it is a tax credit. The government's like, here's some money, go get this done. So it's amazing. So you have the flexibility to do this. You pull the trigger before year end, you get your solo 401(k) set up, then you can dial it up, your payroll level to the perfect amount come January. You can back into it. This is where the consult would be very helpful with someone kind of really manufacturing this and and, um, figuring out the details that would apply to you. But it's not that difficult. You can dial up your salary and your contribution to hit the mega amount, and it could be that Roth amount. You may even say, we had such a kick-ass year, I'm going to do the same thing for my spouse. Now you double down. Holy crap, now you're talking about $150,000 plus in a Roth IRA. Talk about the momentum you can build with that sucker. So This is all at your fingertips. It takes a consultation that could be extremely affordable. We charge like $1,000 to set up a 401(k) and you meet with a real tax lawyer on Zoom. It's built for you to get a tax credit. You get a deduction to do it and a tax credit to do it. I'm freaking, you're making money, people, to do this. So take action on this if you have the wherewithal. And I know it's tight out there for so many of you. I understand that. But there's other business owners that had the year of their life. Let's not just give that away to the IRS, more tax dollars. This is a great strategy.

Yeah, yeah. And we're of course putting this money in as Roth dollars, so we're not getting a tax deduction, but we're building a bucket of tax-free wealth that's going to build. But there are the deduction you're going to get for the cost of setting it up. There's a tax credit that the government's offering right now.

We're—

that's hidden— that the Kickass Lawyers webinar that we've hit. So get over there for that as well. And then, um, the other thing I want to say on this is For you that are self-employed, you still got to be thinking about this at year end because where do these contributions go? Your employee contributions, whether this is the regular ones or the after-tax ones on your W-2. If you're an S corp owner, you got to be thinking about that right now because that W-2 is going to be hitting you in January of 2026 and it's going to be due. Now, there are some rules on you actually have to get the money in until later. So don't be careful if you start reading up on this, even some of our stuff where it's like, well, the contributions in solo case aren't due until the tax return deadline. Yeah, but you need the plan set up for any of you that are new. And we need to make sure for US corp owners, which is the most common business owner doing a solo K, that your W-2 is dialed in because that's going to be due right around the corner here in January.

Yeah, yeah. Look, there's a few moving parts but can have a big payoff. Well, everybody, Merry Christmas and you're welcome. And thanks for being here. We love the topic of Roth IRAs. We are just, you know, We are hopped up and juiced up on Roth IRAs every day of the week and on Sunday. So, thank you for being here. Please share this podcast with any family members, business associates, or friends that you know it could benefit. Give us a 5-star rating if you feel so inclined. We would greatly appreciate it. Drive safe, be careful, and take advantage of the Roth IRA and one of those 3 strategies. Everybody on this web, this podcast can use one of those 3 strategies. Take advantage of what will help you better live your American dream. Thanks so much for listening. See you next week. And thank you everyone for listening. A quick disclaimer and reminder: this presentation does not constitute an attorney or CPA client relationship, and it is always in your best interest to consult competent legal and tax professionals when conducting your own personal transactions.

We also want to make sure you know this is not investment advice or financial advice. We're just to give you education, ideas, and strategies you can take to your professionals or conduct your own research on. We'll see you next time.