Main Street Business

#541 CPA EXPLAINS: Optimal Order Of Investing For High Income Earners

• Mark J Kohler and Mat Sorensen

Share episode

In this episode of the Main Street Business Podcast, host Mark J. Kohler and Mat Sorensen break down essential strategies for high-income earners looking to maximize their retirement contributions. Learn how to utilize "backdoor Roth" and "mega backdoor Roth" methods to surpass traditional contribution limits, gain insights into employer matches and after-tax contributions, and explore the powerful role of Health Savings Accounts (HSAs) as part of your retirement plan.

Here are some of the highlights:

  • Mark and Mat address the misconception that retirement accounts aren't beneficial for high-income earners due to contribution limits.
  • Emphasize the importance of planning together with one's spouse to understand and align on retirement goals.
  • Introduction to "spousal backdoor Roth IRA" for married couples to maximize their contributions.
  • Advise against prioritizing college savings over retirement contributions, emphasizing the need to secure one's own financial future first.
  • In-depth discussion on advanced retirement strategies for self-employed individuals, including cash balance plans and defined benefit (DB) plans.
  • The concept of "match and out," where one contributes enough to receive employer matches and then focuses on other accounts.
  • Mark and Mat encourage listeners to seek professional advice to maximize their retirement contributions and achieve financial security.
Speaker 1:

Welcome to the Main Street Business Podcast with your distinguished hosts, mark J Kohler and Matt Sorenson. Both are best-selling authors and have over 25 years of industry experience, with 10,000 client consultations, making them the leading tax and legal experts in the nation. Together, they'll unpack the most complex tax, legal and financial strategies crucial for saving more, stressing less and building generational wealth. Today they're your personal advisors, ready to break it down for you and make the tax and legal game easier than ever. Here is Mark and Matt.

Speaker 2:

A lot of high-income people think like oh, retirement accounts, because they're like I make so much money, why would I? I can put $6,000 in an IRA Wrong.

Speaker 3:

If you're a high-wager. You wanted to be in Roth Gamma Gamma Chi party. You wanted to wear a Toga outfit. You wanted in the party, but you made too much money. You couldn't go in the front door, so you had to go around to the back door to get into the Roth party. You can do that. Your financial advisor is wrong.

Speaker 2:

I cannot emphasize that enough. You talk about investing over 10, 20, or 30 years. The difference in that is incredible.

Speaker 3:

This is how the rich get richer, because you start plowing away 80 to a hundred grand in a Roth IRA and boom, you're sitting on a million dollars.

Speaker 2:

Welcome everyone to the Directed IRA Podcast. This is Matt Sorensen, joined by the incredible Mark J Kohler, and we're going to talk about rich people, rich people. This is, for you, okay, and we always are talking about people trying to, you know, make their first contribution to retirement account, but I want to talk about maxing it out for high income earners, why you should do it and also the order that you should do it.

Speaker 3:

Maybe, if you want to be a rich person, this is what to do too. Yeah, this is. I mean. We hear so many of those influencer podcasts. Right, all of us see it where, if you want to be rich, do what the rich people do. All right, we're delivering. Here's what rich people do. So I like I asked Matt, before I go, you've got a decision tree on how a one percenter high income earner should consider what to do when it comes to retirement accounts? And you said I go, can I see it? He goes, it's up in my head. I said, oh really, okay, well, we're just going to explore that little decision tree chart.

Speaker 2:

And I might debate with you a little. I do actually have a decision tree chart and you have to be following me on social media to find that, and you have to be following me on social media to find that, but I'm going to display it for you.

Speaker 2:

I'm going to roll it out for all the podcast listeners here. But here's why I want to talk about it though. When you put money in your retirement account, it's tax advantaged, and I'm not even getting into traditional or Roth. We can talk about that. We talk about a lot of episodes in the podcast when to do which, and we love Roth in general, but we're not even talking about that. I'm just talking about getting money in. A lot of high-income people think, particularly our high-income earners, even our entrepreneurs like oh, retirement accounts, because they're like I make so much money, why would I? I can put $6,000 in an IRA. They have all these misconceptions. Correct that. It's just not going to move the needle. Much Wrong.

Speaker 3:

Wrong. Okay, when you add it up, it's a lot, Yep. Number two myth or misconception is well, someone said I don't want to die with too much of my retirement account, or I should use life insurance now, or I should go over to some alternative method. Now we're all for diversification. I love rental real estate notes, alt assets we just held our alt asset summit but you can do a lot of those investments. Now let's not talk about life insurance per se. I'm not saying life insurance is bad either, but we've got to continue to stay committed to passing. Go on our Monopoly board every year putting money on our retirement account, because that snowball grows so much faster than we realize. It's just out of sight, out of mind, and it's okay. If you dive with money in your fricking retirement account, it's going to go to your spouse or your kids. It'll still be tax preferred, so get over it.

Speaker 2:

Yeah, and let me just make sure you understand this, you can be putting in over a hundred K a year, we're not talking about just like 5,000 bucks. 6,000 bucks, okay, we're talking about over a hundred K a year into your retirement account, even if you're a W-2 employee. I'm not talking about you have to be self-employed to do this, which a lot of our amazing tax strategies work best If you're self-employed. This is, even you're a high income W-2 earner. Yep, this can work. So let's break it down, okay.

Speaker 3:

Last point, may I? Okay? Last myth conception is well, I don't want to put money in retirement accounts because I'm going to be stuck in Wall Street. Now, if you're listening to this podcast, you already know we would assume that we busted that myth. You're going to be able to invest it in whatever you think is best for the best rate of return, but okay, so those are three myths out there. Okay so, matt Sorensen, I'm a high wage earner, okay. Okay so, matt Sorensen, I'm a high-wage earner. I work at Verizon, I work at IBM, I work at Facebook. I'm going to have a big fat W-2. What should I do first, according to Matt Sorensen?

Speaker 2:

lore. Okay, first I want you to match an out. I want you to put in as much money in your 401k to go and get the match. Let's say you make $200k a year. Okay, your 401k to go and get the match. Let's say you make 200k a year. Okay, let's say make 200k a year. Well, you can put in and let. Well, let's say that you work at Facebook and let's say that Facebook has a 4% match. They say, if you put in 4% of what you make, which would be $8,000, we'll put in 4% of what you make $8,000. So now I'm at $16,000 and it only cost me eight. So I got a hundred percent return.

Speaker 3:

A hundred percent return on my money Boom, that's easy one, even if they invested in crap in wall street, you're like no offense, my financial investment advisors in wall street products. I have wall street products too but even if they choose something terrible, I've already doubled my money. Okay, that's the number one. I want to write that down, number. That down, number one. Get the freaking match.

Speaker 2:

Yeah, and we tell this to every client. Whether you're middle income, high income, this makes sense for everybody. Match and get out. The difference here for high income earners is we got a lot more steps and buckets to drop.

Speaker 3:

Oh, we got. Yeah, this is step one. Okay, can I throw out step two? I want to see if this fits in your model. Okay, step two fund your personal Roth. Yep, that's your number two.

Speaker 2:

Okay, all right. Mark said is this is this the Mark Kohler approved method? I'm like this is the Matt Sorensen method, but pretty sure it's going to be the same.

Speaker 3:

Okay, fund your personal Roth, but, matt, my accountant, said I make too much money.

Speaker 2:

You do make too much money and we said 200K in the example. You're over the standard Roth IRA contribution limit, so you can't just drop 7K in a Roth IRA but you can do $7,000 in a backdoor Roth IRA. We've got separate podcasts, videos, a lot of training on that, but it's basically a way you put money in a traditional IRA non-deductible and you convert it to Roth. At the end of the day, you're doing 7K a year Roth IRA.

Speaker 3:

Yeah, Let me just put this on a practical note. If you're a high wage earner, you're old enough to remember animal house with Jim Belushi. You wanted to be in Roth Gamma Gamma Chi party. You wanted to wear a Toga outfit. You wanted in the party, but you made too much money. You couldn't go in the front door, so you had to go around to the back door to get into the Roth party. You can do that. Your financial advisor is wrong. I cannot emphasize that enough. Watch our podcast, check out our articles. Just Google backdoor Roth IRA Sorenson or backdoor Roth IRA Kohler. We'll give you everything you need to know about how to do it. So that's step two. Now I'm going to throw out step three. I want to just see what you're saying at this juncture.

Speaker 2:

I thought this was my list.

Speaker 3:

I know, I know, but I just want to say okay, all right, you tell me what number three is. I think I've got a number three that's going to blindside you.

Speaker 2:

Oh, really Okay. Okay, what's your number three? My number three would be okay. I'm going to do the HSA Wrong.

Speaker 3:

Number three You're already wrong. See, I would you know what I'd do, spouse spouse backdoor Roth IRA. I'm just saying I'm like I think at this juncture before you go, I love HSA Okay.

Speaker 2:

Okay, we didn't say we were married.

Speaker 3:

Okay, okay, okay.

Speaker 2:

So let's go for you married. I like where you went there. Yeah, spousal backdoor Roth IRA.

Speaker 3:

Do not repeat that again.

Speaker 2:

Let's just say you get another 7K because you have a spouse. Your spouse is going to also do the backdoor. Roth IRA.

Speaker 3:

I'm trying to refocus here. We're going to talk about the sweet spot on the 401K too, but that's another topic too. Okay, so no, but I think that I think if you're married, you know I love the HSA and I'm going to go HSA with you on number three, but I think if you're married, you've got to look at your spouse. Do they have a day job with a match? Yep, and have they funded their personal Roth? I think you times two here.

Speaker 2:

Yeah, and what I would say and this is why I think about it individually if you're married and you have a working spouse, we're pretty much doing the same damn list over on their side. We're going to go on the same order there. Now they they might be a different income than you, and so there might be a little difference here, but okay, so let's do this. Okay, same spousal. Back to Roth IRA. You know what?

Speaker 3:

Can I? I'm not. I'm just going to throw out a little digression here. What do you call it when you go off the freeway here for a minute? A little sign, not a diversion, a detour, detour, little detour, little detour. I just want to throw this out.

Speaker 3:

Matt and I have the love of our lives, michelle and Patty, and I just want to throw this out. You know, this week Patty and I are having an afternoon retreat planning session to go over these things before year end. And I want to say this I think this is an important emotional piece of this process. You can't just decide this in a vacuum if you are married. I think it's so important you take your spouse whether your husband or wife, listening to this and do a little off-site retreat, go to a spa, go somewhere fun, and just say let's talk about our retirement accounts, what are our current balances, what can we be doing together? I'll tell you right now. Your spouse is going to love that because they want to be a part of that conversation and I know in some relationships the woman's doing all the financial planning and the man's doing all the financial planning. But I think this conversation, especially when you're determining this order, it's a great opportunity to plan together so that you understand why you're doing this, and it could be a real bonding experience.

Speaker 2:

Yeah, yeah, and I think you're going to be more successful, encouraged, collaborative, better opportunity to meet all your investment goals and retirement goals if you're doing it together. So I think that's an awesome recommendation.

Speaker 3:

A little detour there. Yeah, for sure, yeah, okay, number four, drop it, I love it.

Speaker 2:

Okay. Number four we're going to do the HSA. Okay, health Savings Account. Now some of you might be thinking, matt, you said for retirement accounts. I want you to think about your HSA as a retirement account, not really as a health savings account, because the HSA I don't have to spend the money in it. Remember, I put the money in, I get a tax deduction as I invest it, it grows and I don't pay any tax on the investment gains. But as I pull the money out for medical and healthcare expenses, there's no expense on the way out.

Speaker 2:

There's no tax on the way out At any age At any age, now or later where, if you're looking to really maximize money for the long haul in retirement, don't draw on that HSA yet. Leave it for later, because you can use it later. The number one expense you're going to have in retirement is medical. Damn it. I was going to say that.

Speaker 3:

I'll say this too the number one reason for bankruptcy medical. Yeah, we just had a Medicare podcast, a Medicare training for our main street tax pros. Two weeks ago I called you after dinner. It was unbelievable that the Medicare.

Speaker 2:

I got some learn.

Speaker 3:

I got some learning to do.

Speaker 3:

Oh, it's a blind spot for me, or was but? Um, one of the takeaways from that is the average American spends after age 55, over 350,000 on medical average. Now, whether your insurance is covering the bill or not, or Medicare is not, you're going to have a six figure times three medical bill between 55 and day to death. And how are you going to plan for that? So anyway, I think the HSA is number four again, times two. If you're married and we've done podcasts and trainings on the HSA is number four again, times two if you're married, and we've done podcasts and trainings on the HSA. And if you're listening to this podcast, guess what? It's open enrollment. Open enrollment started November 1st.

Speaker 3:

It's so important that you choose at your company or in your individual plan, if you're an entrepreneur, a high deductible plan. If you have the high deductible plan, it unlocks the HSA. We've done so many shows on it. I think it's one of the best kept secrets in tax planning. I really do. I think the HSA is cruel. I like that. It's number four again, times two. All of these we're going to say I'll just say it from now on, I won't repeat it Times two. If you're married, you're going to be going through the same lineup.

Speaker 2:

Yeah, and so let me tell you where we're at here in terms of total numbers. We said you did 8,000 to get the match of an employee contribution. Your employer matched at 8,000.

Speaker 3:

And it could be 10 grand or 12 grand, we don't know.

Speaker 2:

I'm just doing one freaking example thousand in the back door, roth, cause you're under 50. If you were a 50 year old you could have done 8,000. Now let's say you did the family HSA. Cause you have a kid or a spouse, you can do family. That's 8,300.

Speaker 3:

We're at $31,000 so far and we're not done yet, guys, is that 31 times two, or just one, that's?

Speaker 2:

just one. So if you've got a spouse we're at 60. You know 60 plus thousand Now. I did the family HSA, so, but you're pretty much about 55.

Speaker 3:

See, and this is I'm I know some of you might be a little I'm going to use a word my mom would use I am so galled, I'm going to, I'm so mad I could spit you know some weird thing my mom would say. But I know some of you are like frustrated because we are in a tough economy right now. I know that there's many, many people struggling with the cost of groceries, the cost of gas and transportation and housing. We get that, but there still is I hate to say this one to five or 10 percenters out there that are like, hey, I'm paying a ton in taxes and I'm flipping the bill for the rest of the country. I want to save some taxes.

Speaker 3:

Well, these are tax deferred or tax free type strategies. Some of you may say, well, I don't get a tax deduction for a Roth, yeah, but you'll never pay tax again, don't get hung up on getting the deduction. It can also be a plan to build a bucket that will be tax free. So anyway, I just wanted to, as a digression, say don't be too frustrated or offended with our cavalier attitude towards putting this way this much money. But when we have clients that have $500,000 W-2s in small businesses. They want to know this. Yeah, when I was broke.

Speaker 2:

I wanted to know this and I didn't feel offended or anything like that. I'm like that's just where I'm going I want. That's the mindset you should have, is that's where I'm going to be going. I need to know this for the future. The other thing I would say about this I think a lot of people think, well, why don't I just put $30,000 in a brokerage account, matt? Why don't I just advantage?

Speaker 2:

Okay, you're either getting a deduction to put it in, or that money grows and is coming out totally tax-free. In any event, though, when you're making investment gains, it's not going on your 1040. You're not paying taxes. Every dollar of investment gains you have in these accounts gets reinvested. When you talk about investing over 10, 20 or 30 years, the difference in that is incredible. Okay, so you get a huge headstart and boost by using these tax advantage accounts versus just dropping it into a taxable account.

Speaker 3:

All right, now I've got, I'm going to throw out number five. I'm trying to use you If you listeners are here. You know I'm trying to throw Matt a. You know a curve ball here. All due respect to the Dodgers who are up three one, but anyway, so I want to.

Speaker 2:

I think, they can hit a curve ball.

Speaker 3:

One of the major drains on a couple's retirement savings plan is college savings. So I would say, if you really are 30 to 60 grand in, so I would say, if you really are 30 to 60 grand in, you've done your match. You doubled, you did your Roth, you did your HSA. I think it's a time to just sit back and go okay, do I have children under age 18? Am I trying to do a college savings plan?

Speaker 1:

for them.

Speaker 3:

And I'm not saying throw every dollar that direction, but at least decide. Am I going to fund the educational savings account, which was like a Roth IRA for education? Am I going to do Roth IRAs for the kids, hoping that they can pull that out for college? Should I look at a 529? We've done many podcasts on that so I don't know. I think would you divert a little and go look at college?

Speaker 2:

saving. I like to wait on college savings for kids. I want to come to them later. They're definitely in the order here, but for me they're a little bit later because I think you need to put more money in your retirement account.

Speaker 3:

You've got to put your own oxygen mask on first.

Speaker 2:

You've got to put your own mask on first. Every good flight attendant knows that, so we want to put your own mask on first. Now, if you're like Matt, I've been saving my retirement account for a while. I've been saving my retirement account for a while. I got a million plus in this. I'm going to continue to save and doing this 30K a year and I got kids that are 10 or something and I want to start setting aside for college. Cool, I'm good there. If you're under a million bucks and you got kids, I'm not doing this yet.

Speaker 3:

Thank you, community college.

Speaker 2:

Let me say this Mark and I have done a show on this you need need to be at two and a half million dollars in your IRA or 401k to retire. If you don't have that much money in your retirement account, you don't have enough. And you know what we did. We did a survey with our directed IRA customers and we said how much money do you think you're going to need in your IRA retirement accounts to retire? And I had options uh, two, 50 to 500, 500 to a million, a million to one and a half, one and a half to 2.5, 2.5 million or above. Do you know what the majority answer was of how much they thought they needed in their retirement?

Speaker 3:

Let me guess Under a million probably.

Speaker 2:

No, over two and a half million. They said we need to have over two and a half million in our retirement account.

Speaker 3:

They shocked me.

Speaker 2:

They went to the proper answer. It's because they know what's up. They're listening to the directed IRA podcast, listen to Mark and Matt, okay, but you know what the follow-up question I asked in the survey was how likely do you think it is that you will meet your retirement goal? Okay, that was the question right after this. What do you think the answer was?

Speaker 3:

Oh, my God.

Speaker 2:

I would think it would be and I gave them an answer. I said not likely, somewhat likely, very likely.

Speaker 3:

Somewhat somewhat.

Speaker 1:

Somewhat likely.

Speaker 2:

No, okay, you've got to have more faith in our customers. The vast majority of answers said very likely. They felt it was very likely that they could hit that retirement goal of $2.5 million Geez.

Speaker 3:

Matt Sorensen, you're doing your job, you're changing America.

Speaker 2:

Wow Of two and a half million dollars. Jeez, matt Sorensen, you're doing your job, you're changing America. I love those numbers, but the point I'm trying to make there is really assess and be realistic where you're at. I think the impulse is I want to help my kids go to college. It just makes you feel good. It seems more tangible. It might be five or six years away and you might have retirement 20 years away, and so it's like a better start saving for it.

Speaker 2:

Now I'm still like let's make sure your max, not your retirement, and make sure you're on track to be at that 2.5 million, adjusted for inflation too, by the way, in your 20 or 30 years, All right.

Speaker 3:

Well, it goes back to the. I'm not going to trust any polls during this cycle.

Speaker 1:

Okay.

Speaker 3:

Okay, all right, so I do my HSA, matt. We're going to put I'll put okay College savings off to the side, depending on where they're at. This brings us to the concept of match and out, so I got my match. I went out and did a couple things we did the out.

Speaker 2:

You're coming back home now. We're coming back.

Speaker 3:

All right, tell me where we're going All home.

Speaker 2:

Now we're coming back. All right, tell me where we're going. All right, we're coming back to the 401k and we're going to do an after-tax contribution.

Speaker 3:

Oh well, we're going to still do our deferral amount up to our deferral, that's true.

Speaker 2:

I only did 8k Okay. Let's do finish the employee deferral and that is actually on my list by the way, let's finish the employee. We only did 8,000. So as an employee under age 50, you get to put 23,000 total into your 401k. Now remember, on step one we did eight and the employer match date. So I've got 15 K left of employee deferral which you can do as Roth pretty easy.

Speaker 2:

So let's do that first. That's pretty simple. So now I'm at 46,000,. By the way, if you're following on the math, here we're at 46 K, cause that's a 38 K after the HSA. By the way, if you're following on the math, here we're at 46K because I was at 38K after the HSA. I did another 41, 15K which you could have picked to do traditional Roth. Now we're up to 46K.

Speaker 3:

Okay, now a couple of thoughts, if I may. For those that are 50 or over, it's 30,500. If you're under age 50, it's 23,000. And I'll say it a little where I know. Sometimes I get comments from listeners that are like you guys do this all the time, you talk too fast, all right, well, I want to slow down and say this You've done a match, got the company match.

Speaker 3:

You went and funded your personal Roth. You went and did your health savings account. You're coming back to the 401k and you walk into or call up your administrator at your company. If you're an employee and you say, hey, I want to change my withholding on my paycheck and get it up to the complete deferral for my age. So they'll go oh, okay, well, there's eight months left in the year, there's this and they're going to go. Okay, that'll mean we're going to withhold X dollars from your paycheck for the rest of the year to get you up to the 23 of the 30,500. And you say, yes, they're probably going to have you sign something. Then boom, you've got your deferral amount. That would be stage five here. Same for your spouse.

Speaker 3:

Now this is where I talk about the sweet spot also, because if you're an entrepreneur and you are a 1% or high income earner with a small business, you're going to be able to still do this. It's not going to be prohibited from an over-weighting testing thing. Highly compensated employee rules Yep, you're going to be okay. Even if you have a safe harbor plan, you can still do this part. You've got to play with the match. Like all the other employees. You can't really sock away some major money. We're going to come to other ideas in a moment.

Speaker 3:

But if you're an entrepreneur too, this is where you're going to put your spouse on the payroll for the exact amount to get this deferral. So approximately, if your spouse is under age 50, you'd put him or her on payroll for about $25,000 and change FICA hits the net paycheck's about 25,000 and change FICA hits the net paychecks 23,. You dropped out in Roth or traditional. You're off to the races, so you can choose a lower payroll amount for your spouse If you can control that narrative. But it again, if you're both W2, corporate America, you're just going to.

Speaker 2:

You're doing your spouse is doing the second thing, exactly what you did. Yeah, let me say one other important point on that on the 401k is many 401k plans and administrators will just say okay, you can just make a one-time contribution yourself, you can just mail in the check or ACH it to your 401k. It doesn't have to necessarily come from your employer. You want to coordinate? Yeah, they actually like and withheld from your paycheck. That's usually the easiest. But if you're like, well, I've got 10K left to put in on an employee contribution and it's December and I'm not going to have a paycheck that high where they can withhold the whole thing, you can throw the payment in directly.

Speaker 3:

This is a great year-end strategy because you may go well, I don't have enough payroll left, that doesn't matter. Go, take it from your inheritance from grandma two months ago. That money can come from anywhere. Go into your HR department and go. Here's the rest of my deferral. Put it in. They don't care where it came from, because your paycheck for the whole year is going to be greater than that Exactly. It doesn't matter what your November or December paycheck is. Great comment.

Speaker 2:

Okay. So step five. We finished our employee contribution. We had 15K left. Now we're up to 46K and again we're doing under 50 numbers here and just you, your spouse, can come do the same thing here. Next Okay, number six, my friend. The same thing here. Next Okay, number six, my friend. Now we're to where I was wanting to go, which is the after-tax employee contribution, because you get to go up to $69,000. Again, this is under age 50. You can go up to $69,000 of total money in the 401k. So we got to look at where we're at. We did we just maxed out the employee at 23K. We got an 8,000 match earlier on step one. So now we are at $31,000 in the 401K.

Speaker 2:

This is your day job 401K, your high-income earner. I've got $38,000 left that I can put into the 401K, but I can't do an employee contribution. The company's not doing any more match. So how do I get it in? This is the after-tax employee contribution you can put in. Most plans allow for this. We've had many clients that have been a big companies. You know many different varieties dropping this in. This can roll out to a Roth IRA. Even though most 401k plans your money's locked down, this is one that can actually roll out the after-tax employee contribution.

Speaker 3:

Okay, Now I want a couple of thoughts for everybody. Write this down. I know if some of you are driving down the road or on a treadmill, you have to know this term. I bugged Matt's for years once we learned it, Because if you say it wrong your employer will jack it up. It's called an employee after tax contribution, which in a sane world no one would ever do. Let me tell you how we learned this. I think it put some context to it, Matt. I remember almost where I was at when Matt called me and said dude, I just learned something so cool and we learned it from some clients, a very unbeknownst client. So we had a bunch of guys up in South Dakota, Alaska. They were in Alaska.

Speaker 3:

Oh, that's right, they were in Alaska working in trailers doing natural gas drilling, oil drilling. La la la. These guys have all their housing paid for all their food. All they do is get drunk on the weekends and go back and work on the oil rig. And so they've got these big fat W2s.

Speaker 3:

And in this, keeping it to the point here, they were the ones that said, yeah, we're doing this after tax contribution because we have so much money, we wanted to keep putting money in our 401k and then convert it to Roth. Can we do that? That's what we've been doing, please verify. And we're like what the hell are you doing? So, in a nutshell, they called their HR department and said, yeah, I did my deferral for 23. I may have did my Roth personally, but I want to put more in the 401k. And the company said, okay, you can do that, but you don't get a deduction for it because you've already done your deferral. And they say, that's okay, just put it in, I'm going to convert it to Roth anyway on day two. And the employer's brain explodes. The client's like am I crazy? And they call us yeah, and Matt Sorenson verified for them yeah, you can convert this to a Roth on day two, and so basically it's like a supercharged backdoor Roth, yeah, and then your example is like 38 grand.

Speaker 2:

Yeah, right, there, that was $38,000. And I do remember these guys. They were a Fidelity and we did it there and this is around 2014. There was a case that came out and then kind of like a revenue ruling from the IRS that validated this, that said, yes, you can put more money in up to the 401k total deferral and maximum limit, which now is 69k for 2024.

Speaker 2:

And it can also roll out to a Roth IRA, which is the key because they didn't take a tax deduction See it's after-tax dollars, meaning you already paid tax on it. You're not getting a deduction, but it is going. It can then roll to a Roth IRA with no conversion. You don't need to convert it because it's already after tax. You didn't take a deduction on it. So that was a cool strategy and where we kind of picked it up. And this 2014 or whatever, is where this kind of new strategy came about, and this has been coined the mega backdoor Roth 401k, not to be confused with the backdoor Roth IRA, which is a little different, little different procedural steps. This is the mega backdoor Roth 401k.

Speaker 3:

And to put a very tactical twist on this, between now and the end of the year you would call your employer and go I want to do an after-tax contribution. And again, you're probably not going to have this with W-2 wages. So you've got to show up with a check and that money can come from anywhere. It could come from rental income, it could come from your stock brokerage portfolio, it could come from your grandma that left you in inheritance, it doesn't matter. So you'd show up and make this contribution directly to the 401k plan, work with your HR administrator and then you're able to roll it out again into that Roth.

Speaker 3:

So this is just incredibly powerful, because now we are pushing close to 80 grand, and if you're over age 50, even more. And then you're married times two. Holy crap, this is how the rich get richer, because you start plowing away 80 to a hundred grand in a Roth IRA. We're putting your HSA in the mix here too, but you're putting that money away every year. It's not just a few years with a good ROI of 10 or 15%. Self-directing this, you're sitting on a million dollars and boom. And for those that are in your fifties or sixties and scared to death about retirement and you're like, how do I catch up?

Speaker 2:

This is how you do it. Yeah, and if for any of you I'm we're actually doing math here we're at $84,000. Okay, $84,000. You don't need to be self-employed, you don't need to do a DB plan or a pension plan or these crazy strategies. We're not bringing in a whole life or anything like that. We're just talking about tried and true retirement accounts, 401ks, roth IRAs, health savings accounts. When you add up these buckets and you're strategic about it, you can get $84,000. If you're over 50, this would have been in the $90,000. And, like Mark said, if you're married, we're talking like $160,000, $180,000 a year in contributions that can be saved in a tax-advantaged way. That's the secret sauce.

Speaker 3:

All right, now, that would be number six. Oh, pen drop, there we go, I'm joining the crowd here. All right, now number seven oh, we're not done yet. Oh, my gosh, no. Okay, now you get into cash balance plans, 401h and DB plans. Now we could put those all in one bucket rather than break those down.

Speaker 3:

But we have Because if you're self-employed, yeah, and so fair enough. Or you have a side hustle, true, you or your spouse. And so now you're saying I've got some additional income with consulting at 1099, or you're self-employed, I've done everything I can with my 401k, roth and HSA, what more. And so we have financial advisors that we work with in our Main Street Tax Pro program. We teach this at our 360 conference. We have a whole class on what to do for one percenters. We're getting into solar, we're getting into oil and gas, we're talking 1031s, we're talking equipment and real estate, short-term rentals and costs. We're trying to find every write-off we can for you. But you're going to get into I'm going to call it cash balance, db or 401H Still not the life insurance route. These are all deferred comp plans and you could do two or 300 grand.

Speaker 2:

Yeah, that's taxandlegal360.com. Yes, that'll be here in Phoenix in early December and you know what's awesome about all the tax strategies and savings there is that's the money. If you're doing it in a tax-advantaged way, you can be dropping into these retirement accounts because all that money you're saving on taxes. So, but I think those last ones work for self-employed and if you are self-employed, you might've been doing a solo K in this process and we should probably do an order for self-employed people, cause it is a little different than the high income W-2 earner. It's, frankly, simpler Cause we're like solo K backdoor Roth HSA you got a spouse, we're doing the same thing for them. And HSA you got a spouse, we're doing the same thing for them. And if you're over this 80 K ish, cause you end up at the same 80 K ish at the end of the day, we're looking over here and maybe you should have just done a cash balance plan or DB plan where you could be doing $300,000 a year.

Speaker 3:

Yeah, and let's big picture. As tax advisors which all of our attorneys are If any of you are feeling like, holy crap, my accountant, my tax lawyer, my lawyer, my financial advisor is not talking like this please do what we call a comprehensive tax and business consultation. You can go to KKOS lawyers work with any of our 12 to 13 tax lawyers now and they'll get on a call and spend several hours building a plan and then delivering with a diagram and a checklist. Then you can take it wherever you want. I mean, we're talking a few thousand dollars.

Speaker 3:

We're not charging these big $20,000, you know offshore crazy retainer crap for under five grand and that's for the highest, highest net worth individual. Many of our clients are doing this for $1,500 to $2,000. Just getting a consultation where you build a plan that you can build upon and we're going to save you 10 times that in taxes. So get a consultation, come up with a plan and when you're looking at the big picture, we're going to talk real estate. We're going to talk about setting aside money for rental property or some other types of investments maybe life insurance it's not all retirement accounts, but I think this is where it starts, because it's asset protected. You can choose the investment.

Speaker 2:

You're not locked into premiums. There's just so many good things, yeah, yeah. So now directediracom. We do a lot of these accounts. At directediracom you need the backdoor, roth IRA, the HSA, solo K. If you're self-employed, we can definitely help with the accounts there. But whoever you use whether you're working with us or you're doing it on your own or different companies we want you to use us. Our companies are amazing. We've got an incredible team. But I just want to make sure you know you can maximize this. We're not just talking thousands of dollars, we're talking 84K there in that example that we gave. That can be tax advantaged, can be money working for you, helping you build your financial future.

Speaker 3:

Well, matt Sorensen, I guess I will give you a stamp of approval on your decision tree. Mark Kohler certified Yep certified decision tree. I think we really flushed it out there. And thanks everybody for listening this week. Please give us a five-star. Share this podcast. There's so many people that are starving for this information. You're actually doing a wonderful service to others to help spread the good news about the ability to use retirement accounts and invest them in what you know best. We're grateful to have you as part of our podcast. Thank you so much for listening and we'll see you next week. See you next time.

People on this episode

Head Shot

Mark J. Kohler

Host