Year-End Roth Strategies

Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
SPEAKER_01 (00:06):
Welcome everybody to the Directed IRA podcast.
My name is Mark Koller.
I'm here with the CEO and authorof the book, the self-directed
IRA handbook, second edition,the one and only Mr.
Matt Sorensen.
Welcome, everyone.

SPEAKER_00 (00:20):
Yeah, welcome.
Thanks for being here.
We're going to be talking aboutsomething you need to be
thinking about.

SPEAKER_01 (00:25):
I worked on that intro for you.
And yeah, you don't get like Idon't even get a you know, thank
you for that intro, Mark.
Nothing like that.

SPEAKER_00 (00:30):
We have Mark here.
He's my co-host.
He's, you know.

SPEAKER_01 (00:36):
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 alittle early Christmas love, but
okay.

SPEAKER_00 (00:45):
Yeah, yeah.
You know, we got we got uh MarkJ.
Kohler.
I mean, you know who he is.
He's a man that needs nointroduction.
You know, um, he's you know,good looking.
You don't have to return thefavor.
You know, his favoritevegetables are baby carrots.
All right.
So many things out more.

SPEAKER_01 (01:07):
Oh my gosh.
Oh my gosh.
All right.
Well, everybody, thanks forletting us banter a little bit
and have some fun with you.
We are excited to talk aboutyear-end Roth strategies.
And there's three, and we'regonna go hard and fast.
We know how valuable your timeis this time of year.
So we want to get into it, saveyou money, make you money, help
you self-direct your retirementinto what you know is best.

(01:30):
Like what is your favoriteinvestment?
We want to unlock that for youwith three killer Roth
strategies.
Matt, what's number one?

SPEAKER_00 (01:36):
All right, can I say the all three of them?
Because I want to give you aroadmap of where we're going so
you're not surprised.
Okay, we're gonna hit the Rothconversion, we're gonna hit the
kids Roth IRA, and we're gonnahit the mega backdoor Roth.
Okay, he's all got some year-endconsiderations you need to be
thinking about.
So let's hit number one, Rothconversion.

unknown (01:54):
Okay.

SPEAKER_00 (01:54):
Roth conversion is a year-end consideration in
strategy because when youconvert, in what tax year
depends on when you're gonna paythe tax.
So, for example, if you'resitting there thinking, I've got
50 grand in a traditional IRA, Iwant to convert to Roth, you
might want to say, maybe I'lljust wait until January 1st,
2026.
And I'll just convert the whole50K and I'll push that into

(02:14):
2026.
That could be one way ofthinking about it.
Or you might be, hey Matt, I'vegot 600 grand in traditional IRA
or traditional 401k funds.
I really want the whole thing tobe Roth.
What should I be doing?
Well, maybe you should be doingsomething we call Roth chunking.
And right now is a perfect timeof year.
You got 600K, you've got a fewoptions.
You might want to say, I'llconvert 300,000 in 2025 and

(02:39):
300,000 in 2026, and I'll breakit up over two tax years.
Or you might say, I'll take200,000 in 2025, 200 in 2026,
and 200k in 2027, and break itup over three years.
I love it.

SPEAKER_01 (02:53):
And the driving factor, everybody, two words tax
bracket.
Because you want to find thatsweet spot of where you're not
jumping into a higher bracket,chunking too much, and you want
to take advantage of a lowerbracket up to a certain dollar
amount.
Plus, you've got to take intoaccount, ooh, I've got some real
estate write-offs over here,I've got some flow-through

(03:16):
losses here and some capitallosses, but I've got extra gains
here.
So you want to kind of distilldown to what you think your
taxable adjusted gross income isgoing to be.
Sorry, those are two differentthings.
Adjustable gross income, thenyou're going to back into your
taxable income and go, okay,what bracket am I in?
Because there's a big jump fromthe 12% to the 22%, and then

(03:38):
from the 24% to the 32%.
Those are the biggest jumps inthe bracket world.
And we want to make sure thatwe're finding that amount to
chunk and spreading it out.
So there's a lot to considerthere.
It's particular to every person,but that's the strategy.

(03:59):
And you have until December 31stto pull the trigger.

SPEAKER_00 (04:02):
Now keep in mind, this is just about what amount
do I want to convert to get onmy 2025 return, or what do I
want to push and wait into 2026or chunk over time.
So just an opportunity to be alittle more strategic about it,
minimize the tax burden on theRoth conversion.
The upside of the Rothconversion is that money is now
going to grow and come outentirely tax-free rather than
those traditional dollars youyou have right now or may have

(04:25):
that are going to get taxed onthe way out.
So remember, we're going to havea lot of, we like to say,
long-term gain on this.
The short-term pain is this tax.
We're going to try and minimizethat by chunking it over time
and being strategic, looking atour tax brackets, how much tax
am I going to be paying on thisconversion?
Um, but just keep in mind thewhole purpose of this is to get

(04:45):
that tax-free bucket growing andcoming out tax-free later.
So that's the end goal.

SPEAKER_01 (04:49):
I love it.
Now, before I share tip numbertwo, I just want to add if your
accountant has said you make toomuch money to do a Roth or talks
this down or doesn't even bringit up, you have a terrible, may
I repeat, terrible advisorbecause you can contribute to a
Roth at any age, at any incomelevel, through what's called the

(05:10):
backdoor Roth method.
We've got other podcasts andarticles on this.
It's a chapter in Matt'sfreaking book.
Just do not listen to anybodythat says you make too much
money to use the Roth strategy.
Topic for another day.
Okay.
Tip number two, Kid Roth.
And I love Kid Roth.
Oh my gosh, some of his songs,some of the best songs,
especially summertime songs.
I love his songs in the summer.

(05:31):
But anyway, we also have what'scalled the Kid Roth.
And that concept is if you'vebeen supporting any family
members, kids in particular, inthis example, under age 18, over
age 18, and they can play a rolein your business that's
legitimate, typically on a boardof advisors, board of directors
at the very least, let's notjust pay taxes and give them

(05:52):
money.
Let's convert it to a payment tothose kids through a methodology
of a 1099 if they're over age18, or an outside labored line
if they're under age 18.
Topic for another day.
I've got chapters of that in mybook, the Tax and Legal
Playbook, and podcasts.
But the point is, once you'vepaid the kids, which you need to
do before December 31st with theproper method, and you've

(06:14):
already helped them throughoutthe year.
This is just a papertransaction.
We got to document it.
It unlocks the ability to open aRoth IRA for them and contribute
through a gift or some of theincome you've already given
them.
Lots of options.
Matt, where do we go from thepaying the kids to getting it in
a Roth?
Because that's the kind of thatnext hurdle.

SPEAKER_00 (06:36):
Yeah, and this is the thing people think, well, I
just do a 529 for my kids or acovered out because there's no
earned income requirement forthe kid.
But when you want to do a RothIRA that's in your kid's name,
this they have to have earnedincome.
Because we want you to do yourRoth IRA first.
Okay.
And you got a spouse, they'redoing their Roth IRA.
Your high income, you're doingthe backdoor Roth IRA.

(06:57):
Next, we're like, you got kids?
Let's get them working in yourbusiness.
Maybe you got a rental property,they're working on the rental
property.
Okay.
And so we want to justifylegitimate income that you can
pay them so they have earnedincome.
So now we have something calleda kids Roth IRA, a directed IRA,
which they could do a cryptokids Roth IRA, invest in crypto.
They could use a regular kidsRoth IRA and invest in other,

(07:18):
they could buy stocks, theycould invest in real estate, put
them in on deals with you.
A lot of options there on oncethat money is invested and in
the account.
But the mechanics is it is a kidRoth IRA.
We have a special account appfor this where you, as the
parent or guardian, areresponsible for the account.
If your kids, you know, 15 yearsold, right, you're going to be
doing the things for them andmaking the decisions.

(07:39):
Once they're 18 or the age ofmajority, and depending on the
state, they will have authorityon the account, though.
But we love the kids Roth IRAbecause one, it's a way to teach
your kids about investing.
We're not even in the great taxand investing strategies here,
just like teaching your kids.
Two, if you paid them out ofyour business, by the way, you
got a tax deduction, reducedyour taxable income, and then it

(08:00):
went to your kids that areprobably under the standard
deduction, under 14 grand orwhatever the standard deduction
is.
And so they don't even have tofile a tax term or claim this as
income.
Three, we get the money in aRoth IRA.
Now it's growing and coming outtax-free.
How many of us have seen thechart where it's like, well, if
you just started a Roth IRA 40years ago, this is the numbers
if you put it, if you startedRoth IRA 50 years ago, okay.

(08:21):
Oh great.
Oh my god.
I'm I'm I'm 40 years, I'm 45.
I started it, you know, negativefive.
Okay.
Think about this for your kidthat's 15.
If they just made annualcontributions, getting a 9%
return, you can get that as theS P 500 or if you're doing other
great stuff, but just hang withme at least there.
That account will be$6 millionby the time they hit 65 of

(08:42):
retirement account age.
And the the difference is theearly start.
And so and so this can be areality for your kids if you
help them with that early start.
So we love this strategy.
Um, and it's a great way to uhnot only get great tax savings,
teach kids about investing, butget them on a journey to um
learning how to invest and buildwealth.

SPEAKER_01 (09:04):
Love it, love it.
High five um ditto, two thumbsup.
And I will also say for yougrandparents out there, there's
an extra step involved utilizingyour children, your adult
parent, your adult children thatare the parents of your
grandchildren.
If you can involve them in theplanning process, this can still
work for a grandchild.

(09:25):
So what's the call to actionhere?
I know it can be a littlecomplicated.
Please get a year-end consultwith one of our tax lawyers.
You can go to KKOS Lawyers, booka call with it.
We're out about five days tomaybe 10 at times, because this
is our busiest time of theseason, but you got plenty of
time during the month ofDecember to do the proper
paperwork, to document thewrite-off, get the account open,

(09:46):
get it funded, and put this giftof a Roth IRA in their Christmas
stocking.
Super powerful.

SPEAKER_00 (09:53):
Yeah.
Now remember the contributiondeadline isn't until April 15th.
The reason we're bringing thisup at year end is they have to
have their earned income in 2025if we want to do a 2025
contribution that doesn't haveto go in until April 15th of
2026.
Another thing to think about isthose of you that don't are a
small business, don't have abusiness to pay your kids from,
but your kid has a job that theywork in the summer or a

(10:14):
part-time job, maybe they're inhigh school, they'd be paying
five grand through the year thatthey've spent it all on, you
know, kids, teenage stuff thatthey spend money on.
You can still fund the fivegrand into their Roth IRA
because they did have earnedincome.
So it doesn't have to be thatincome that they made.
You can still help them byfunding that for the parent or
the grandparent getting thatinto their Roth IRA.

SPEAKER_01 (10:34):
I love this.
I literally remember where I wassitting 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 hegoes, you know, it's in February
or March now.
He goes, but I never put her onthe books of the business and
paid her last year.
And I really wanted to fund herRoth for a few thousand.
I go, well, how old is she?
He goes, 16.
I go, did she babysit at alllast year?

(10:55):
He's like, holy crap, she'sbabysitting every weekend.
I go, how much she make on anormal weekend?
He goes, she'll make 50 bucks,maybe 75, 100, do it a couple
families or whatever.
I'm like, dude, you times thatby 50 weekends, hypothetically,
at 100 bucks a weekend, we gother five grand right there.
He goes, Well, she already spentit.
Doesn't matter.
She didn't file a tax return.

(11:16):
Doesn't matter.
All you have to do is be able toshow she has earned income
babysitting.
And if the IRS really wants togo interview all your neighbors,
knock yourself out.
This is not a high-risk issue.
Putting money away is what thegovernment is trying to
incentivize us to do.
They are giving all these savercredits and 401k tax credits and

(11:38):
all these things are trying toencourage Americans to start
saving sooner.
They're not crashing down onpeople for strategies like this.
They're trying to encourage it.
So do not think this is ahigh-risk issue.
Get your kids involved, get themoney there, and let's get this
Roth area going.

SPEAKER_00 (11:55):
All right.
Number three, Matt, roll it out.
All right.
Number three, we got to go fastand furious here, is the mega
backdoor Roth.
Now we're going to talk aboutthis in two times.
I just like the name of that.
I just like the name of that.
It just sounds cool, right?

SPEAKER_01 (12:07):
I love mega.
I love backdoors.
I love Roth.
I mean, I'm all in.

SPEAKER_00 (12:14):
I know we used to name a band.
That's just like a great bandname.
You know, they're opening up forKISS.
We got mega backdoor Roth.
Yeah, like Mega Death.

SPEAKER_01 (12:23):
Mega backdoor.
Mega Roth.

SPEAKER_00 (12:24):
Um, so okay.
So let's talk.
We're gonna talk about this intwo scenarios here.
One is a job where you work whatyou have a or a spouse that has
a 401k at work, and then two,any of you self-employed doing
maybe the solo case strategy.
Okay.
You take the worker, I'll takethe self-employed.
Okay, all right.
If you're the you're the personat a job that has a 401k, not
your business, um, you can dothe mega backdoor Roth.

(12:47):
About 60% of 401k plans allowfor something called the
after-tax contribution.
This is what you do to do thismega backdoor Roth.
And what this is is, is it's away you can put more money in
your 401k up to 70 grand for2025.
Let's say you've put 10 grand inso far this year.
You put in some money, you putin five grand.
Let's say the company you workat did a match, they put in five

(13:09):
grand.
So you got 10 grand in.
Well, you have up to you have60,000 more dollars you can put
in your 401k.
Now, a lot of people are like,but Matt, I thought I could do
up to 23,5 as an employee.
Okay, we got 13.5 left as aregular employee contribution
that you can do as Roth dollars.
How do I get the rest?
I still got 46,500 to go.

(13:30):
Well, this is where we're gonnado, so that'd be minus the five
that the company put in.
So I got 41,500 left to go.
This is where you do anafter-tax employee contribution
into the 401k that you can rollout to a Roth IRA, or you can
convert in the plan to Roth 401kdollars.
Generally, for day job 401k,you're gonna roll it out to a
Roth IRA.

(13:51):
After tax employee contributionsdo not get stuck in the plan.
You don't have to hit retirementage, you don't have to quit the
job to roll it out.
After tax employee contributionscan get rolled out over to a
Roth IRA, but this is criticalfor year end.
So you've got to make thecontributions by year end with
your employer 401k to be able toexecute on this for 2025
contribution rule purposes.

(14:12):
Now, we have other content onthis articles, podcast episodes
on the mega backdoor Roth.
We want to highlight thatstrategy here because it is
critical for year end,particularly for those that have
a 401k at work where you need toget the mechanics done by
December 31st.

SPEAKER_01 (14:27):
Perfect explanation.
Now, for you small businessowners that you're like,
freaking hey, I wish someone wasmatching my 401k.
I hear your pain, I feel it.
I uh you understand.
But you get the blessing of moreflexibility.
You have the opportunity to dowhat's called a solo 401k, which

(14:48):
gives you a lot of options todial up compensation, dial it
down, find that sweet spot,throw your spouse on payroll for
him or her, and bring them intoplay on this.
So the concept is if you're asole proprietor, small business
owner, S Corp owner, but youdon't have employees.
And again, we have so much morecontent on the solo 401k.

(15:10):
In fact, I'm gonna say thisright now.
People, while our speaking,please, it's already on our
website at kkoslawyers.com.
We have a webinar on the solo401k year-in strategy where the
government's giving you a taxcredit to set up the solo 401k.
You actually make money to setup the 401k.
It's unbelievable.
Like, this is not a deduction,it is a tax credit.
The government's like, here'ssome money, go get this done.

(15:33):
So it's it's amazing.
So you have the flexibility todo this, you pull the trigger
before year-end, you get yoursolo 401k set up, then you can
dial it up, your payroll levelto the perfect amount come
January.
You can back into it.
This is where the consult wouldbe very helpful with someone
kind of really manufacturingthis and and um figuring out the

(15:55):
details that would apply to you.
But it's not that difficult.
You can dial up your salary andyour contribution to hit the
mega amount.
And it can be that Roth amount.
You may even say, we had such akick ass year, I'm gonna do the
same thing for my spouse.
Now you double down.
Holy crap, now you're talkingabout 150 grand plus in a Roth
IRA.

(16:15):
Talk about the momentum you canbuild with that sucker.
So this is all at yourfingertips.
It takes a consultation that'sit could be extremely
affordable.
We charge like a thousand bucksto set up a 401k, and you meet
with a real tax lawyer on Zoom.
It's built for you to get a taxcredit, you get a deduction to
do it, and a tax credit to doit.
I'm freaking, you're makingmoney, people, to do this.

(16:37):
So take action on this.
If you have the wherewithal, andI know it's tight out there for
so many of you, I understandthat.
But there's other businessowners that have the year of
their life.
Let's not just give that away tothe IRS more tax dollars.
This is a great strategy.

SPEAKER_00 (16:51):
Yeah, yeah.
And we're of course putting thismoney in as Roth dollars.
So we're not getting a taxdeduction, but we're building a
bucket of tax-free wealth that'sgonna build.
But there are the deductionyou're gonna get for the cost of
setting it up.
There's a tax credit that thegovernment's offering right now.
That's hitting that the CiculousLawyers webinar that we've hit.
So get over there for that aswell.
And then um the other thing Iwant to say on this is for you

(17:12):
that are self-employed, youstill got to be thinking about
this at your end because wheredo these contributions go?
Your employee contributions,whether this is the regular ones
or the after-tax ones, on yourW-2.
If you're an S-corp owner, yougotta be thinking about that
right now, because that W-2 isgonna be hitting you in January
of 2026 and it's gonna be due.
Now, there are some rules on youdon't actually have to get the
money in until later.

(17:33):
So don't be careful if you startreading up on this, even some of
our stuff where it's like, well,the contributions in solo
casen's due until the tax returndeadline.
Yeah, but you need the plan setup for any of you that are new,
and we need to make sure for USCorp owners, which is the most
common business owner doing asolo K, that your W-2's dialed
in because that's gonna be dueright around the corner here in
January.

SPEAKER_01 (17:52):
Yeah, yeah.
Look, there's a few movingparts, but can have a big
payoff.
Well, everybody, MerryChristmas, and you're welcome.
And uh thanks for being here.
We love the topic of Roth IRAs.
We are just, you know, we arehopped up and juiced up on Roth
IRAs every day of the week andon Sunday.

(18:12):
So thank you for being here.
Please share this podcast withany family members, business
associates, or friends that youknow it could benefit.
Give us a five-star rating ifyou feel so inclined.
We would greatly appreciate it.
Drive safe, be careful, and takeadvantage of the Roth IRA and
one of those three strategies.
Everybody on this web thispodcast can use one of those
three strategies and takeadvantage of what will help you

(18:35):
better live your American dream.
Thanks so much for listening.
See you next week.
And thank you everyone forlistening.

A quick disclaimer and reminder: this presentation does not (18:40):
undefined
constitute an attorney or CPAclient relationship, and it is
always in your best interest toconsult competent legal and tax
professionals when conductingyour own personal transactions.

SPEAKER_00 (18:55):
We also want to make sure you know this is not
investment advice or financialadvice.
We're just trying to give youeducation, ideas, and strategies
that you can take to yourprofessionals or conduct your
own research on exactly.

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