馃攳
Solo 401(k) & Solo Roth 401(k): Self-Employed Small Business Owners Retirement Savings YMYW podcast - YouTube
Channel: Your Money, Your Wealth
[4]
We have another email question and we have
a complaint from Christy.
[7]
(laughs) I don鈥檛 think it's a complaint,
she's just supplementing one of our answers.
[12]
She goes, "Hi Joe and Al.
[13]
Love the show, especially the fact that you
address tax and investing issues at the same
[17]
time and all in a very straightforward and
entertaining way. Thanks.
[21]
I have a question but wanted to add something
to your answer on the October 23 podcast about
[27]
the benefits of a Solo 401(k)."
[32]
So she goes to a very good explanation of
a Solo 401(k).
[37]
I think we might have just shortcut a Solo
401(k) just through passing of maybe a
[44]
recommendation that we made for a certain individual.
[46]
I think our buddy Mac in Brookfield, Connecticut,
about his wife being a dentist.
[53]
And she has a solo 401(k), and so she went
through a lot of great benefits of a Solo 401(k).
[61]
So for those of you that don't know what a
Solo 401(k) is, Al, what is that?
[63]
Well, you can actually set up your own private
401(k) if you have your own small business
[68]
and you don't have any other employees.
[70]
Now, your spouse can be an employee, that
counts as one, or solo, but if it's just you,
[76]
then you can set up your own private or they
call it individual or Solo 401(k), and it's
[82]
just an account - very simple.
[85]
You don't need an actuary, there are no fees
to set these things up or administer
[90]
or even terminate.
[91]
So very simple, and you can put a lot of money into it.
[94]
$18,500 in 2018, and $24,500 if you're 50
and older - and that's
[106]
the employee part.
[107]
And then you can also put a little profit
sharing on top of it.
[114]
You can, and that's 20% of your profits, unless
you're an S-corporation, then it's
[121]
25% of your salary.
[122]
And so with that being said, you can put a
lot more than $18,500 or $24,500.
[126]
You can.
[129]
If you look at the employee and employee part,
you can actually put $55,000 into these plans,
[135]
assuming that you have $275,000 of comp - that's
what you would need to do that.
[141]
Right. So if you made $50,000, you couldn't shelter
$18,500 and $18,500.
[147]
$18,500 is a dollar for dollar contribution
on any 401(k) plan.
[153]
So if you have a small business and you make
$20,000, you can contribute $18,500 of almost
[161]
your entire comp - you've got to pay payroll
comp, so I don't know what that computation
[164]
is, but pretty dang close to 100% of your
compensation.
[168]
So what Christy was saying is that, hey, well,
you guys kind of forgot to mention that you
[172]
could put a lot more into it - and she's absolutely right.
[175]
We love the Solo 401(k) for that fact, because
what we see is that small business might have
[183]
a SEP plan.
[185]
So a SEP plan is just that same computation,
it's a percentage of profits if I'm a solo
[192]
practitioner or a sole prop.
[195]
But if I go with a Solo 401(k) plan I can
go dollar for dollar, and then I can add on
[200]
top of that, as my "match" if you will, to
get more money up to that $55,000 limit.
[206]
Yeah.
[207]
And I will say one more thing, if you're a
business center and you're 50 or older, you
[211]
can also do the $6,000 catch up on top of
the $55,000, so you can actually put in $61,000
[217]
if you have enough income to be able to justify that.
[220]
She also went on to discuss another huge advantage
is that there could be a Roth component of
[226]
a Solo 401(k), which she is absolutely right.
[229]
So you could go $18,500 into the Roth, and
then you could put in the profit sharing or
[235]
the match, and you can pre-tax that thing.
[238]
So you can kind of toggle back and forth and
get best of both worlds.
[241]
You can get a tax deduction and you can get
a ton of money into a Roth 401(k)
[246]
or a Roth plan.
[247]
Yeah.
[248]
And I think it's important to mention, Joe,
that on the employee part, you can do a regular
[251]
401(k) or a Roth 401(k), the employer part,
profit sharing part, that's always pre-tax.
[256]
That's the traditional 401(k) part.
[258]
And then she goes on, "Finally, you can invest
in a much wider range of investment options
[263]
including individual stocks and so on and so forth."
[266]
So that is great information.
[269]
Thank you Christy.
[270]
But now for her question.
[273]
"I have a solo traditional 401(k).
[276]
My husband is a W2 employee and has both Roth
and traditional options in his 401(k) plan.
[284]
This year he started contributing half of
his retirement savings of the $24,500 into
[289]
each of those after many years of contributing
only to the traditional plans."
[293]
He's 50, she's 45, "we're in the 24% tax bracket
filing jointly.
[299]
At current tax rates we'll likely be in the
22% bracket in retirement.
[305]
So far the vast majority of my existing retirement
savings amounting to about $165,000, like
[312]
his, are traditional IRAs and traditional 401(k)s.
[316]
Would there be any advantage for me also to
put someone by contributions in the Solo Roth
[322]
401(k), especially when it comes to tax diversification
in retirement and given the fact that I'm
[327]
younger? I love the idea of Roth and ideally
I could invest relatively aggressively in
[334]
a Roth and see a big benefit down the road,
especially if tax rates go up in the future.
[339]
Should I continue to contribute to my account
based on my age and diversification situation,
[345]
or should I not worry about that since we're
putting half of my husband's savings in a Roth?
[351]
Obviously there are a lot of variables so
this is kind of a philosophical question..."
[355]
Ooh gosh, that was close.
[357]
(laughs)
[358]
(laughs) You got it though!
[359]
I got 'er done! "...about retirement income
buckets and how much the spouse situation
[363]
should inform a personal investment decision.
[366]
Thank you very much."
[367]
Wow, that's a well thought out question.
[369]
Very well thought out Christy.
[371]
Alan, let me see your calculator real quick.
[373]
So if I look at Christy, she's got $165,000
saved and she is putting $18,500 in.
[383]
She's 45 and she does that for the next 20
years at 7%, that is going to be $1.4 million.
[390]
Right. And that's not even including the employer
match profit sharing.
[393]
That's not including an employer match.
[395]
That is not including her husband's contributions.
[398]
So Christy, just taking a look in the future
here, if you continue to do the things that
[402]
you're doing, as long as you have a globally
diversified portfolio, and assuming the 7%
[406]
rate, over 20 years that could be aggressive,
that could be conservative, depending on what
[410]
you want to do.
[411]
I'm with you.
[412]
I think you're right on of looking at tax
diversification.
[416]
Two reasons.
[418]
Alan's going to give you the CPA math approach.
[421]
I'm going to give you the real life approach.
[424]
You're not going to remember the tax savings
that you're getting today - you're 45 years old.
[430]
You've got 20 more years, potentially, to
work, and the couple of bucks you're saving
[434]
in taxes because you went pre-tax versus Roth,
in 20 years when this $1.4 million is all
[440]
in a Roth versus a retirement account that's
going to be taxed at ordinary income rates.
[444]
you're going to be like, "I am the happiest
woman in the world!"
[450]
22% tax bracket in the future.
[452]
Well, those tax rates are going to expire.
[456]
Right.
[457]
That's how it's currently stated.
[459]
So you're going to be, probably, in the 25%
tax bracket or maybe 28 even.
[463]
Correct.
[464]
Now you got $1.4 million, let's say your husband
is doing the exact same thing.
[467]
He's got $1.4M. Now that's a pretty big number.
[472]
So depending on what you want, and if it's
all in deferred accounts?
[477]
I love the fact that you're in the 24% tax
bracket now, you think you'll be in the 22,
[482]
the 22 is actually the 25, potentially, I like 24.
[486]
I'd go Roth.
[488]
I would go full Roth on both, and then with
your profit sharing component of it go pre-tax
[493]
because you have to.
[494]
Yeah, I actually agree with you 100%.
[496]
Wow.
[497]
Done.
[498]
For the same reasons.
[499]
So first of all, the CPA part of me says you're
going to be in a higher tax bracket in retirement,
[504]
because that's what rates are scheduled to do.
[507]
Allegedly.
[508]
Well, that's what they are scheduled to do.
[510]
But who knows what will really happen.
[511]
But she could blow up her investments.
[514]
So that $1.4M, she could be broke.
[517]
With the assumptions.
[518]
I'm just being compliant here, Alan.
[520]
Yes very good.
[521]
OK.
[522]
Let me try to spit out my comment.
[524]
What was my comment?
[526]
Anyway so my comment is, I completely agree.
[530]
So the tax rate will likely, or at least as
it's scheduled to be right now, you'll be
[533]
in a higher bracket in retirement.
[535]
But I also agree Joe with what you said, which
is what we find is people that do the traditional,
[541]
they save a couple of bucks in tax, and then
they spend it and they don't remember it.
[545]
And then in retirement they got all this money,
they got to pay all this tax.
[548]
And so I completely agree with that thinking.
[551]
The other part of this is the employer part,
you call it the match and profit share, that
[556]
part has to be pre-tax, so why don't you just
do the employee part as a Roth.
[562]
I completely agree with that.
[564]
So if you look at it - I'm not sure where
Christy lives.
[568]
But by putting the $18,500 pre-tax, she probably
has a $5,000 tax savings.
[574]
Give or take.
[575]
If she's in a higher tax state...
[577]
I seem to remember she's in Seattle.
[580]
Seattle.
[581]
Oh, hey.
[582]
It's a little rainy.
[583]
(laughs) Yeah and there's no state tax in
Seattle so it's only federal in that case.
[587]
Yeah.
[588]
And then maybe she would like to come down
to San Diego with her husband to visit Joe
[592]
and Big Al, maybe ends up retiring in sunny
Southern California.
[596]
And then you've got 10% on the state.
[599]
Maybe Roth might be a pretty good idea.
[601]
So she's probably saving $4,500.
[604]
You're not gonna remember the $4,500 20 years
from now when you get o$1.4 million sitting
[608]
in a Roth.
[609]
Allegedly.
[610]
And you bring up a good point, which is if
you're in Washington state, which has no taxes,
[614]
so you're not getting a huge benefit, just
federal only.
[617]
If you do move to another state, you want
a little bit more sunshine in retirement,
[620]
you're gonna be paying taxes, so you would
want more money in a Roth for that reason too.
[625]
So yes, I love the tax diversification, for
you saving that much, that you have excess
[630]
cash flow, you're seeing the light a little bit.
[633]
"Hey, I got $165,000," splitting that half and half.
[637]
You could do it that way.
[638]
I thought Alan was going to give more of a
CPA approach to say, "well what tax bracket
[643]
are you in?"
[644]
Well she already told us.
[646]
Well no, not necessarily.
[647]
We don't know what our taxable income is,
is what I meant.
[649]
I'm just going with this at face value.
[651]
Right.
[652]
So but I guess a more scientific approach
could be this Christy, if you really want
[657]
to dive in the weeds and say, "well, what's
my taxable income.
[660]
And then you look at, how much should I go
pre-tax potentially to put me in that lower
[665]
bracket, and then put everything else ia Roth,
so you can kind of toggle this that way as
[670]
well, or you could say, "I'm already saving
for the future, and if I believe that the
[677]
tax code is going to stay how it's written
today, that tax rates will go up and the Roth
[683]
will continue to be tax free," then that's
what I would do.
[687]
Right.
[688]
And now the final point I want to say, and
when she already said this, which is if there's
[692]
more money in the Roth and you have a diversified
portfolio, naturally some of those components
[696]
are going to be more aggressive.
[698]
You stick those components in the Roth.
[700]
Obviously they're more volatile.
[701]
They go up and down more, but over the long
term they tend to outperform and you end up
[705]
with keeping more of your investments that way.
[707]
Right.
[708]
So she's right on, she talked about asset
location, putting higher asset classes in
[713]
a pool of money that's going to grow tax free.
[715]
Congratulations.
[716]
She looked at tax diversification.
[717]
She looked at current rates versus future rates.
[720]
She's saving the maximum, and then she's also
doing some homework on a Solo 401(k) to say,
[724]
"there's a lot more that you can potentially
do with this."
[727]
One of the best questions we ever had.
[729]
I would say if you want a job, Christy, we
need advisors... (laughs)
[735]
We're looking to hire, we might open an office
in Seattle Washington.
[754]
(laughs)
Most Recent Videos:
You can go back to the homepage right here: Homepage