What Your CPA Wants You to Know
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What Your CPA Wants You to Know
107. How We Invest for Retirement as Accountants: Step-by-Step from Carson
We walk through our sequence for retirement contributions! Here's how we invest our money as accountants!
• Start with any employer matching funds available - it's free money and an immediate 100% return
• Max out a Roth IRA if eligible ($7,000 limit for 2025, $8,000 if over 50)
• Aim to save 15% of income for retirement (12-20% range is generally recommended)
• Business owners should consider a Solo 401(k) rather than SEP IRA when operating as an S-corp
• Solo 401(k)s allow both employee contributions (up to $23-24k) and employer contributions (25% of salary)
• Once all tax-advantaged accounts are maxed, use a taxable brokerage account for additional savings
• Coordinate retirement planning between your CPA and financial advisor, especially when changing salary levels
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And a proper plan would be that you have your CPA and your financial advisor in the loop, because sometimes you come up with a plan with your CPA that's like, hey, you know, we're not making as much money, or the industry standard salary for my career is this, and so we're going to lower my salary. Okay, well, the financial advisor has been making retirement contributions for you, or you know, he really needs to be in on the loop too because he doesn't know. Okay, now your contribution limit is lower because your salary is lower.
Speaker 2:Yeah.
Speaker 1:Welcome to what your CPA Wants you To Know.
Speaker 2:Tax and accounting help can be expensive, so we've created this podcast to help guide you through it all and make you feel like you have a CPA in your back pocket.
Speaker 1:I'm Carson Sands.
Speaker 2:And I'm Taryn Sands.
Speaker 1:I'm a CPA with over 10 years of experience helping people start and grow their businesses.
Speaker 2:And I'm an MBA with a specialization in marketing and entrepreneurship. Taxes suck and we want to make sure you don't pay more than your fair share.
Speaker 1:We're here to share everything your CPA wants you to know.
Speaker 2:In a fun and easy to understand way.
Speaker 1:Let's get started.
Speaker 2:Let's do it Today. We are talking about retirement savings.
Speaker 1:The most exciting podcast you'll ever hear.
Speaker 2:This is the most exciting podcast. All of our episodes are so exciting. They leave our listeners on the edge of their seat waiting for the next one.
Speaker 1:Are they on the edge of their seat because they dozed off?
Speaker 2:Probably.
Speaker 1:But you know what? Even in sleep they probably retain some of it and they know a little bit more about accounting than everyone else and retirement and taxes. But you know what? Even in sleep they probably retain some of it and they know a little bit more about accounting than everyone else and retirement and taxes.
Speaker 2:If you're choosing to listen to this particular podcast, I feel like you probably find it interesting. We do get a lot of really good feedback.
Speaker 1:Yeah, People are like you take a boring topic and you make it a little bit less boring.
Speaker 2:Well, it's something that people have to know, okay, and we're doing a service. We are making it, hopefully, to where you can understand it and retain it and use it.
Speaker 1:I wish other fields would do this. Like when I go to the doctor and he has bad news for me, I mean, can you do like a little dance for me or something? When he tells me at least something to make it a little bit better.
Speaker 2:We're doing a service that does make me think of. We got a few fan mails this week. That's our first ones. I don't know if that's new or not, but I got a few fan mails and I can't respond to them. So if you are sending fan mail, there is one person saying, hey, did you get this? I did get it, but we can't respond. So you either have to email us, which is in the show notes, or you have to give us your email when you put your fan mail in.
Speaker 1:That's really weird that they wouldn't have that feature where you can actually respond. It's actually designed to make the fans hate you, because everyone's like, hey, whatever. And they're like, oh, you think you're too big and famous to respond to us. We're not Promise.
Speaker 2:We're not promise, we're not. No, we're excited to get famil. But it said on there that it was basically for listeners to give you support, like loved your episode. Y'all are doing great. I love listening. It's like a one-way communication, just support. It is new.
Speaker 1:So we appreciate it. But yeah, if you put your email address in there or you know some some way to contact you, then that would probably be the best email. Then we will do our best to actually get back to you, especially if you had a question or something like that.
Speaker 2:And it's for user submitted questions. So if you wanted them to read your name on a podcast, you would have to put your name on there, but otherwise it could be anonymous If you had like a question you wanted answered on the podcast. So a few of you were reaching out for the monthly accounting help and we do list our email address so that you can reach out to it that way. Anyways, let's jump into today's episode, where we are going to talk about the steps that Carson takes for us in our retirement savings, because a lot of people they know what they should be doing as far as, like they have a good idea about how much they should be saving as a percentage of their income for retirement, but, like, what are the best accounts? What would we do?
Speaker 2:This is what this episode is. Carson does give a lot of clients advice on this and walks them through specific accounts and talks to them about the tax implications of all the accounts. But today Carson's going to shine and he's going to walk us through the steps he would take or he takes for our retirement. So if you are in the same boat and you have the same questions, then those will be answered today.
Speaker 1:Right, and this isn't Carson says I should pick Microsoft over Facebook because I'm going to. No, this isn't. I don't know. I don't know that, I can't tell you, but I don't think anybody can. But this is more like whatever you do invest in, should I do it through, you know, a brokerage account? Should I do it through an IRA? Should I do it through a 401k? What should I do? This is, you should do all of them, but this is the order you should do them in and the order of importance.
Speaker 2:And the reason this comes up is because let's say that you know you're going to max out your IRA Okay, good job. But what if you want to save 15 or 20% of your income and that's not enough? What do you do next?
Speaker 1:Right, I mean, if you make you know over what 50 to $75,000 a year then 15% of that is going to be above what the IRA limits are for each year. Well then, you would just stop, but this podcast episode is for business owners.
Speaker 2:We'll just kind of walk you through that scenario. Okay, you'll start by doing this, this is what I recommend, and then, if you were needing a second account, this is what would be next. So let's start us off with step one. What type of account would you pick and what would you do?
Speaker 1:First and most important, if you or your spouse have a work plan, let's say either one of y'all have a normal W-2 job and that they have an option where they match anything that you contribute, and I don't care if it's 100% match or they match half of what you contribute up to a certain amount. You need to contribute up to that maximum Because even if that retirement plan isn't invested in the greatest thing, as long as it's invested pretty well, then that 100% match is going to beat any growth you can get on anything else. So that's number one.
Speaker 2:It's free money.
Speaker 1:Yeah, it's day one, 100% return. You're not going to get that anywhere else, so, of course, do that up to whatever they'll match. Now the next option is that you want to max out a Roth IRA. If that's an option for you, for most people it is an option.
Speaker 2:And is it an option for business owners? Yes, it is an option for business owners and if you are a business owner and you don't have a Roth IRA, where would you find one?
Speaker 1:Oh, you can open a Roth IRA with any company Edward Jones, fidelity, vanguard, schwab you know any of these people or even a local person that's not with one of the big guys. If you want to do it yourself and do it online, I think that Schwab, fidelity and Vanguard are great options If you are going to go through somebody. I think there's an Edward Jones agent in almost every town, even tiny ones, and you know you're going to want to talk to them because they are, you know, a lot of times fairly independent from. I mean, they do work for Edward Jones, or at least they're connected with Edward Jones in some way, but they're not all created equally. So talk to them and get to know them. We have a guy that we really like that works through Edward Jones, and so, you know, talk to him, maybe find somebody like that.
Speaker 2:Reach out to your CPA or someone that you know and ask for recommendations. If you want one from us, feel free to reach out to us and we can give you a good recommendation, but it's always a good place to start. I know that's kind of a goofy question. Carson looked at me weird when I asked where would you get one of these accounts? But no, that is what comes up if someone goes from working for a different company and they don't have to set any of that up Like how, how do I start? So it is. I think it's hard for you to understand because it's just something that you know. You don't. You don't remember how it is to not know.
Speaker 1:Right, that's true. Yeah, I didn't think it's. I live in this world and so I forget about that. There are so many options to do that. But if you're already somewhat knowledgeable about this and you want to try to go it your own, that's an option. But if you don't already know the answer to that question, you're going to want to find somebody to help you. It's worth the 1% that you'll pay them.
Speaker 2:The financial advisor.
Speaker 1:Yes to a financial advisor. Yeah, somebody that maybe that works at an Edward Jones or something like that. That's going to be a better option than you're trying to do it yourself if you don't know anything about any of this.
Speaker 2:They will help you open up a Roth IRA. But let's circle back. Can you just quickly explain the difference between a Roth IRA and a non-Roth IRA, in case someone doesn't know?
Speaker 1:Yes, or a Roth IRA or a traditional IRA. So a traditional IRA is what they had in the beginning. You contribute the money to it and you get to deduct that on your tax return and it reduces your taxable income, which saves you taxes. For that year, the money grows tax-free. But because you get that tax deduction, when you reach retirement age and you pull out the money, it is income, all of it's income.
Speaker 2:So you pay taxes on it when you pull it out. Yes, exactly You're kicking the can down the road.
Speaker 1:Right.
Speaker 2:For your future self.
Speaker 1:Yes, and the idea was that people would spend less at retirement. Their house is paid for, maybe they're not buying as fancy of cars, they don't have kids to pay for. Overall, their income is less. They're only pulling out what they need to live off of and with our tax brackets the way that they are, then you're probably going to pay less tax in retirement, or at least a lower tax rate at retirement, than you do when you're working. That was the idea.
Speaker 2:Because they're generating more income while you're working.
Speaker 1:Right, but that doesn't always happen that way. Sometimes people invest well and invest for a long time and they never maybe they never even made a ton of money, but they just invested really well and diligently and they're able to pull more income out of retirement than or even required to pull more income out of retirement because of the required minimum distributions than they ever made in their life, and now they're paying tax on it. They would have been better off paying tax on it before life and now they're paying tax on it. They would have been better off paying tax on it before. So that brings us to the Roth IRA, which they invented, where you don't get to deduct it. You contribute it during this year. It's not a deduction, but it grows tax-free and when you pull the money out, you pull the money out tax-free as well, both what you originally put in and the growth.
Speaker 2:So in retirement you don't have to worry about the tax part of that. You're good to go. Exactly growth.
Speaker 1:So in retirement you don't have to worry about the tax part of that. You're good to go. Exactly, you've already paid the taxes. I like that option because we don't know what they're going to do with the tax brackets. It's possible that they would go down, but it's way more likely they'll stay the same or go up. And if they stay the same or go up, then it tends to be that the Roth ends up saving you more taxes in the long run.
Speaker 2:So you recommend the Roth, and those are all the reasons why. So I don't think that you mentioned this. Let's circle back to this. What do you aim for as far as a percentage of your income to be put into retirement every single year?
Speaker 1:15% is a nice round number. People that do Dave Ramsey have heard that number many times. That's a great one. In general, almost all experts recommend somewhere between 12 and 20%. I mean, I think that if you are young and you don't make much money and you're doing 12, you're still doing better than most people and I wouldn't pick on you for that. I would still tell you good job. And if you are 45 or 50 and you're just starting, it's okay, you can still get there. But maybe if you want to do 20% because you're making a little bit more money now, you're further along in your career or whatever, or you're just that scared.
Speaker 2:Yeah, maybe you haven't started.
Speaker 1:Yes, you're playing catch up and you want to. You want to get there and you don't want to retire when you're 80. You want to retire when you're 65. Well then, that's your way to catch up. You can contribute a little bit more. So I won't go into all the reasons why Dave Ramsey says 15%. Even if you're older, he might be right. That's neither here nor there, but somewhere in that range you're going to be fine.
Speaker 2:So it's just a rule of thumb and we need to talk about that for this episode, just because we're talking about steps. So the first thing he would recommend is to do the Roth IRA, but let's talk about those limits, and then you would go above and beyond that if you were trying to invest more money than the limits.
Speaker 1:That's right. You would go above that if you contribute more than the limit, which the Roth IRA limit for 2025 is $7,000, unless you're over 50 years old, and then it's $8,000. So most people are going to be above that amount with their annual income if they're trying to contribute 15%.
Speaker 2:When it's per person. So you and your spouse both put that much money into your Roth IRAs, then if you still need to invest more above and beyond that amount, what would you do next? What's step number two?
Speaker 1:So the simple solution if you have a W-2 job, you go back to that we already started there at the beginning to the match. But normally you can contribute well above that match. It's just that you know we like the Roth IRA better. So you get the match first and you go to the Roth IRA and then you go back to your 401k plan at work and you can contribute all the way up to the max there, which is much higher. It changes every year, but it's it's of $23,000, $24,000. It doesn't really matter because it changes from year to year, but you can go up to that max, which is much higher than the IRA limit.
Speaker 2:That was actually step three. Sorry about that, I misspoke. So step three would be go back to that work plan, if you have it.
Speaker 1:If you have it Now. There's also a step three for business owners, and it could be step because if you're a business owner, you might not have been able to contribute to the match. So, either way, this is.
Speaker 2:Yeah, if you don't have a work plan and you're a business owner, then number one wouldn't even apply to you. So what would you do next for a business owner after the Roth IRA max out?
Speaker 1:Right. So after the IRA, then you go to a work plan, which some people do a SEP or a simple. I'm okay with those when you have a Schedule C business, but my long-term plan for every single person that's a business owner is that they're eventually going to make enough profit that it's worth it to switch to an S-corp. And we've talked about that a million times. If you listen to this podcast so you know we love the S-corp.
Speaker 2:Whenever you have a SEP or a SIMPLE Can you explain a little bit what those are, because people might not know.
Speaker 1:Sure. So a SEP just stands for Self-Employed Pension IRA and what you do is you contribute up to 25% of the profit from your business. And so if you have a Schedule C business and let's say you make $200,000, but you had $100,000 in expenses, now you have $100,000 in profit you can contribute up to. Ideally it would be $25,000, but the calculation gets complicated. It ends up being $20,000 because it's up to 25% of what your profit is, taking into account that you made this deduction. Anyway, long story short, you could contribute $20,000 in that case, which is a pretty good contribution. Problem is when you switch to an S-corp. Now your contribution for the SEP is limited to 25% of your W-2. Well, we all know the goal is to keep your W-2 as low as you are allowed to. Now you have to keep it up to reasonable salary for yourself, but still you're trying to keep it as large as you can If you're paying yourself from your S-corp.
Speaker 1:Yes, and so that limits the amount that you can contribute. Now let's say the same guy he's making a hundred thousand dollars. Let's say that we put him on a salary of 36 to $50,000. Well, now we're cutting his contribution to you know, very small amounts, possibly as low as, I don't know, $5,000 or $6,000 a year.
Speaker 1:In this case, if you're in a solo 401k, then the contribution limits for your S-corp will be as an employee, you can contribute up to 100% of what your W-2 is from your own S-corp, and then, as an employer, you can also match up to 25% of the salary. So the same guy now he's making a $36,000 salary, he could contribute up to 25% of the salary. So the same guy now he's making a $36,000 salary, he could contribute up to the 401k max, which is, you know, 23 to $24,000 in that range, and then the company could also match another 9,000 on top of that. All of this to say, the specific numbers don't matter that much because they change every year and you know your tax expert can help you figure out what those are. But all of that say that the solo 401k is a lot more versatile long-term as you convert to an S-corp, and so that's why that's what I consider. The next step after the IRA would be a solo 401k. That's what we do, and I think that's the best option.
Speaker 2:That was a lot of information, but it's just confusing. It is.
Speaker 1:It is, it is. There's a lot of nuance to the rules and ifs and thens and then more ifs and thens for every single scenario, but suffice it to say we've looked at all the options. And if your plan is to grow your business large enough that you want to become an S-corp, or you already are an S-corp or you already are an S-corp then a solo 401k is going to be a better option for you. I think maybe I should make a chart at some point.
Speaker 2:It helps you could. You could make a chart.
Speaker 1:A visual chart. Yeah, okay, be honest, how's your bookkeeping going?
Speaker 2:If you just cringed a little, this is for you.
Speaker 1:We created a monthly accounting program where you hop on a one-hour call with us every month to tackle bookkeeping, tax planning, business decisions, basically anything you need.
Speaker 2:The best part of this is it's at a reduced hourly rate so you can easily budget for your accounting help. And because we love our clients, we throw in a free annual tax projection so you're prepared every April 15th.
Speaker 1:Our clients love this plan. It's perfect if you're doing your own books but want an expert watching over your shoulder and training you on everything you need to do.
Speaker 2:We have all the fine details in episodes 101 and 102 of this podcast if you want to check it out, or just email us at carson, at sansconet.
Speaker 1:Now back to the show. So now let's talk about the last option, the last step of this plan. If you make so much money that your 15 to 20% is already maxing out your 401k option, your IRA option, every single option that you have, we go to the last step and it's really simple. It's just a taxable brokerage account. You put money in there. It's just like anybody invests in stocks or mutual funds or whatever it is, and you can use it like a retirement plan. You just don't take money out, you only put money in.
Speaker 2:It's like a savings account, but you're getting a higher return.
Speaker 1:Sure. Sure, because you're investing in things that make way more than a high-yield savings account. But the downside to those is that along the way you're paying taxes. As soon as you make those dividends or capital gains, then you have to pay taxes on them that year. There's no deferment of that, like there is in all of these retirement plans. So that's part of the problem.
Speaker 1:So one thing people do is they might make sure that that taxable brokerage account is investing in things that don't churn out a lot of dividends or turn over the stocks a lot.
Speaker 1:And turn over the stocks just means that there's a lot of sales in the year with the goal to capitalize on when the stock value is up and then you sell and then you buy low, and that's great, I mean, if people are able to do that.
Speaker 1:But that's probably better to be done in a retirement type account, because you're not getting hit with all these taxes every time you make a little bit of money. You might want to invest in things that you don't turn over and sell a lot, that maybe don't spin out a ton of dividends, and that way it just sits there and it grows and you're not getting slammed with taxes on this stuff. Now, if you do, if you, if you have dividends or whatever you can pull the good news is you can pull money out of that account Cause, again, this isn't a retirement account. You might be thinking of it as using it for retirement, but it's not something that you're not allowed to pull out of until you're 59 and a half or anything like that. So if this is causing you to have some taxes and you don't want to pay that out of your ordinary income, then you would just pull out enough to cover the taxes that that income generated.
Speaker 2:And I know that's a lot.
Speaker 1:If you're a monthly client of ours, you can definitely get some help with that on your call with Carson, and if not, this is something that you could set up a meeting with your CPA or your financial advisor and make a clear plan that works for you and a proper plan would be that you have your CPA and your financial advisor in the loop, because sometimes you come up with a plan with your CPA that's like, hey, we're not making as much money, or the industry standard salary for my career is this, and so we're going to lower my salary. Okay, well, the financial advisor has been making retirement contributions for you, or, or you know, taking money from you and turning those into retirement contributions. He really needs to be in on the loop too, because he he doesn't know. Okay, now your contribution limit is lower because your salary is lower, and so, yeah, just keeping everyone in the loop is a really good idea.
Speaker 2:I hope everyone can hear our children sounding like they're dying in the background.
Speaker 1:It's a game they're playing. They're actually not fighting. It sounds like they're trying to kill each other, but they're just loud.
Speaker 2:They're just very loud, and this is our second podcast episode we're recording today. We also have a homeschool podcast, and then now this is less exciting, but also very important, and so I think that's probably our sign. To wrap this up for today. If you have any questions, make sure just to send those to our email rather than the fan mail, and until next time, thank you so much for listening to.
Speaker 1:What your CPA Wants you To Know Podcast. This podcast is intended to provide accounting and tax information for educational purposes only. All tax situations are unique and should be handled with the assistance of a tax professional.