 to our presentation, Saving for Retirement with Heather Liston, and moderator is Zoe Liston. The program is brought to you by the Business, Science, and Technology Center. We're located on the fourth floor of the main library. While we're close to the public, you can reach us at bizcitech at sfpl.org. That's B-U-S-S-P-I-T-E-C-H at sfpl.org. Go to our website and scroll all the way down to support and services. You'll see the link tiles for business and finance resources and job resources. Well, today we're talking about finances, so we'll click on that one. And it takes you to this page. You can find personal finance resources here in the second link, click on that one. I want to apply for you of a very special program we have called Smart Money Coaching. This is free one-on-one financial coaching with the organization called Balance. We don't ask for consumer credit of California, free advice on budgeting, saving, credit card, and they don't do retirement. And they don't do investing, but they do everything else. So check those people out. We put together some financial assistance resources for you during COVID-19. I also want to make you aware that we have three databases for doing research on stock. Morningstar, Value Line, and Weiss Ratings, all three of them are good, all three of them different. Weiss Ratings was created by librarians, and it was intended to be user-friendly, and it is. We can learn a lot from that one. We put together some resources for tax support. I will send you these slides at the end of our program today, and you can access them if you need to. We have a lot of programs coming up, so please check out our events calendar at sfpl.org.org slash events. We have timely tips for successful job searches on the first with Tim Bumbush. We have how to apply for California State Job also on Thursday. That's with the Employment Development Department. We have how to apply for city jobs. That's with the Department of Human Resources for the city. And last but not least, we have limited library service while we're closed to the public. You can request materials and pick them up at various locations. Please check our website first before you go, because not all of our libraries are offering this limited service. And with that, I'm going to introduce you to our tax expert Heather Liston, and her sister is moderating as well, and that is Zoe. Oh, thanks, Leah. Okay, I'm gonna share my screen. And here we go. Can you see it? Somebody nods, so I'll know it's okay. Yes, we can. Okay, good, thanks. And I'm just taking a minute. Well, I'm gonna show you one of my favorite cartoons, and then you can read that while I try to organize the screen a little bit. Try to set things up so I can see more of you. Okay, good, we're getting there. All right, thank you so much for coming. So what we're gonna talk about today is all different kinds of retirement plans. Now, there's a huge number of them, and they are not in any way coordinated. They were invented by different people at different times with different goals so they don't make any sense as a group, which is one reason it's hard to kind of figure it all out. But there's probably something that's good for you that will help you save money both systematically and with tax advantages for retirement. So that's why it's worthwhile. And what I've done is I've made a list of all the topics that we could talk about today, all the topics I have slides to illustrate. I'm putting that up here now because basically what I have here is enough material for an entire semester you see Berkeley. I teach a whole class in this. The students are professional financial advisors and they work really hard for 10 weeks on this. So chances are we won't cover everything in detail in our hour to an hour and a half today, which is why it would be good to know kind of which parts you're most interested in. If you came to find out something in particular, I don't wanna skip it. So what I'm gonna ask you to do is look at this list and if you see things on here that you're really hoping I'm gonna cover, send a note in chat. And Zoe, my lovely assistant is gonna monitor the chat and let me know sort of which things to focus on. Interestingly, Leah our librarian, I was calling her the head librarian and she told me she's not but you can call her the queen of the library. So she told me three questions that had come in in advance and guess what? None of them were on the list of things we were gonna talk about. So I'll just quickly mention somebody wanted to know about annuities. That's an insurance product and I am not an insurance expert but we will see if we can find somebody who will give a talk on that another time. And somebody asked how much money you should plan to need in retirement which is a really interesting question. It's not primarily what I was gonna focus on today but it's a good question. So next week on April 6th, we've got another topic. It's about particularly it's about tax planning for the years between 59 and a half and 72 what I call your golden years. It's sort of when you're getting ready for retirement or when you're starting retirement and how to plan your taxes during that time period. So I'll try to cover a little more about how much you need next week. As a very quick answer to that right now I'll say some people estimate that you'll need about 75 to 80% of whatever you're living on now. Now the ideal thing to do though would be to make a real budget for yourself and figure out what you spend money on now and what you're gonna need more of later and less of later. Like usually I say you're not gonna spend money on commuting and dry cleaning and new clothes and lunches out but you're already getting used to what it's like not to spend money on those things, right? So you may have a little bit of a preview there but when the world goes back to normal some people as soon as they retire start playing a lot of golf there or some people take a cruise to Antarctica. Either of those things makes your expenses suddenly shoot upward. So try to if you can do a real budget for yourself and figure out what you might need. Okay, after all that chatting I'm gonna ask Zoe now if she's got any overview yet of people's most interested topics. So far I have four votes for backdoor Roths. Oh, okay. I have three for RMDs. Okay. And I haven't even gotten to all of the answers yet. I've got, there's another one for backdoor I've got several up to about four for mega backdoor. Oh, these are an advanced crowd. Okay. Another one for RMD just came in. Can you inherit, well, this is IRA can you convert it to a Roth if you inherit it? Yeah. More about RMDs. Okay, got it. All right, that's a good enough overview for now. Okay. So I'll jump to RMDs in a minute then. So what I thought I was gonna talk more about actually was particularly retirement plans for self-employed people and the set by IRA versus the solo 401K. So if anybody is interested in those things or other self-employed questions go ahead and again, shoot Zoe a message in the chat. But meanwhile, I'll assume we should pay more attention to RMDs and the whole backdoor thing. Okay. So we'll move quickly through some of these things then. So as an introduction to like why are we bothering to learn all these incredibly complicated rules? The answer is that it's always good to reduce your taxes and when you have money withheld from your paycheck like when you're investing in a 401K you don't miss it as much as you think you would. It's not as painful as actually getting money in your hands and then trying to remember to put it in your savings account. When it's withheld, it's automatic, it's systematic and also because it's tax deferred, your paycheck doesn't go down by quite as much as you thought it was going to. Like if you have the full 19,500 withheld from your paychecks, your paycheck is not gonna be reduced by 19,500 because you're not gonna have taxes withheld for that money. So your savings account will grow faster than you expect if you're doing this through a workplace plan like a 401K or a 403B. Other reasons to participate, your contributions are usually tax deferred if it's a 401K. If it's a Roth 401K, they're not tax deferred now but the growth is tax free which is fantastic. Same thing is true for a Roth IRA. If you contribute to a Roth IRA you don't get a tax deduction right now but you never pay tax on that money again for the rest of your life. So that's one reason Roths are great is because any interest dividends, capital gains or growth that happens on the Roth from the time you put your money in, it is never taxed. So particularly if you're young or maybe you have young adult children start a Roth IRA for them now because they have years and years for that money to grow that'll be an enormous tax saving over time. So another reason to participate, automatic savings you don't have to think about it you don't have to budget. And by the way, studies always show that financial planning works best if you don't think too much. So set up things to be as automatic as you possibly can and then don't second guess them. So having things with what held from your paycheck or doing an automatic contribution to an IRA which you could do through a Vanguard or Fidelity or something like that you can go onto their website and say put $200 into my IRA each month or something like that, make it automatic then you don't have to remember and you don't have to rethink. And also because if you're at a workplace if you've got a 401K it's a valuable part of your compensation. Your employer put that in place to be a benefit for you and you really should take advantage of it. Okay, reasons not to participate. Either you enjoy paying as much tax as possible you already have so much money you can't imagine what to do with more or you love your job so much you never wanna retire. These are the only reasons not to participate in a retirement plan. This is a magnet I found down at Fisherman's Wharf one day some people's retirement plan. Another one of my favorite cartoons it's not actually that much after taxes. So remember that a lot of the point of all these retirement plans for talking about is there are tax advantages and it does really matter. So here's really the reasons people don't participate. I have found this as a former HR director people will come to see me I try to get them to sign up for the 401K plan and they say, oh, my wife handles that or I don't understand these things let me talk to my husband. That's not a good excuse. You're the smart one in the family you can figure it out and there's not really as much to figure out as you think there might be. Like people often are afraid to join because they don't know what funds to invest in. In fact, investing in almost anything is better than not investing at all particularly when it comes to your 401K because when you invest in your 401K or your 403B or your 457 plan which is through your workplace your company and the company they work with to manage your 401K plan the Vanguard or Fidelity or Empower or MaraPrize or Schwab wherever they have your 401K or your 403B plan they have selected a limited number of funds and none of those funds are terrible. So you can't go too far wrong. So it's better to invest in something. If you really don't like to think about funds just choose a Fidelity Freedom Fund or a Lifestyle Fund or something like that. They are automatically rebalanced they have some stocks and some bonds you don't have to think. So just choose one of those and get on with it. Don't waste your time worrying that you don't know how to invest. Okay, other reasons people think there's more interesting things to do today. Again, this year maybe people don't really find their lives that interesting. So maybe it's a good time and some people think it's too complicated. So here's the answers. You're the smart one in the family it's better to invest in something than a nothing this is super interesting and it's really well, yeah, it is complicated but we'll just look at the basic stuff although interestingly you're an advanced crowd you wanna know about the trickier things like the backdoor Roth and the mega backdoor. So we will talk about those but for those of you who aren't interested in things with silly terms like that some of this is quite simple. Like you can just sign up for your 401k plan or you can just put $6,000 in your IRA and be done with it sometimes. Okay, systematic savings and tax shelters. Those are the two reasons we do it. Key concept tax free versus tax deferred. So in general, if you see the word Roth it's named for a Senator William Roth. This came about from a bill he passed in 1998 he's now dead. So anyway, that's a person's name but Roth generally means not taxable not tax deductible now but tax free growth. Everything else that doesn't say Roth usually is tax deferred which means you save on taxes right now but later whenever you take the money out in the future you pay tax at your ordinary rate when you take it out. So as far as which one is better my basic answer is usually some of both which was my father's approach to ice cream always if you can't decide just to have some of both. So that's what I do with if people don't know whether to withhold into their 401k regular or their 401k Roth do some of both but other general rules of thumb if you're a very high tax bracket now you may wanna do the tax deferred to save some taxes right now. If you're young or if you're in a low tax bracket now do more Roth savings because there's more time for it to grow and you will be in a higher tax bracket later likely. Also just a prediction but I think tax rates are gonna be higher in the future. So Roth makes sense if you agree with me that you think tax rates are gonna be higher in the future because that money will never be taxed. Okay, here's just some of the plan types that are available. So if you have an employer, the day job you most likely have a 401k most employers offer something like that these days. A 403B is for nonprofits and government organizations but it's almost exactly like a 401k now. There's a law passed in 2006 that got rid of most of the differences. So almost exactly the same. If I say 401k and you have a 403B assume I'm talking to you. 457 is an employer plan that's only for nonprofits and government organizations. It is a very valuable thing but I'm not gonna dwell on the differences here unless somebody tells us in chat that they really wanna know about 457s because I don't know if it applies to you but if it does find out about it it's really, really useful. A 409A is a non-qualified deferred compensation plan. We won't dwell on that right now either. Individuals can do a traditional IRA or a Roth IRA and small businesses there are three plans that are really good for them. SEP IRAs, simple IRAs and solo 401ks. So all of these are good types of plans. They all have different rules that again do not fit together. So depending on what your income level is and what your company is making and all that kind of stuff you might be able to do several of these in the same year. I did have a year once where I contributed to a 401k from my workplace, a SEP IRA for my self-employed income and a Roth IRA for myself because my income wasn't too high to do that. So, but everyone has its own different rules. Just know that it's possible you could do more than one in the same year. Heather? Yeah. Just wanted to let you know that we did get a lot of votes in the chat for the SEP versus the solo 401k and the self-employed information. Okay, we did. Thanks for letting me know. Okay, SEP versus solo. All right, we'll get to that. So employer plans, I'll rush through a little bit. We've already talked about this. Here's some important things. In 2021, the most you can put in a 401k or a 401b is $19,500. But if you will be 50 by the end of this year you can also put in another 6,500 as your over 50 ketchup. So if you're 50 or over put 26,000 in your 401k if you're under 50, put 19,500 in, you can withdraw that money after you leave the company but there is a penalty for early withdrawal if you are under 55. Now, you may be thinking to yourself, wait a minute I always heard it was 59 and a half. And the answer is it is 59 and a half for most types of plans. But under President Obama during the 2008 recovery around 2010, I think he put in this so I mean the recovery from the 2008 great recession. He put in a new rule that if it's the plan for the company that you're working for when you leave you can take that money out at 55 without penalty. The idea behind that was basically if you got laid off from your job when you're 55 you might be retired whether you meant to be or not it might be hard to find another job. So whatever is the 401k in the company you're working for at the time you're 55. If you leave you can take that money out without penalty you don't have to wait till 59 and a half. Okay, always maximize your contributions if at all possible. Another really important tip here if you've got children and you're trying to save for their education do not say, oh I can't afford to contribute to my 401k this year I gotta put all my money in the 529 or I gotta put all my money in my kids savings account for college. No you don't, okay. Go ahead and max out your 401k. This is like the airplane rule take care of yourself first and the reason is if you apply for financial aid later they're gonna look at your assets they're not gonna count what's in your retirement plan because the government and the FAFSA program they don't want you to starve and die in old age just to get your kid through college. So go ahead and max out your retirement savings and then save for your kid's education. Also most important tip of all always always always get the full employer match, okay. I hope you can afford to save 19,500 from your paycheck but even if you can't don't put $0 in. If your employer is matching up to 3% of your salary put in at least 3% of your salary that is free money the biggest mistake anybody can make is not to get the full match at least. Okay, 457s we're gonna skip over IRAs we're gonna rush a little because we wanna get to some other things, yeah. But here's the, okay traditional IRAs there are income limits but notice that for traditional IRAs these income limits they're relatively low at least for California you couldn't live on 66,000 in California someplace else maybe you could. So these are relatively low but they only matter if you are an active participant in a workplace plan. So if you do not have access to a 401K plan this doesn't matter, okay. You can save the full amount in your traditional IRA if you do not have a workplace plan a 401K or 403B then your income doesn't matter, okay. Roths I wanna get to by contrast these income limits for contributions to a Roth IRA they're a little bit higher but in this case, it doesn't matter they don't care whether you have a workplace plan or not. So these income limits apply even if you have a 401K and even if you don't have a 401K. All right, I'm gonna come back to this because I like the savers credit but let's go ahead and get a few votes for it also. All right, we'll go to put the savers credit now the reason I like to talk about this is this is a wonderful way to encourage people who aren't making a lot of money to get started saving and I like to talk about it because this is the kind of thing where it's for low income people and low income people don't have a financial advisor so they don't know about it. So I want you to know about it and I want you to tell your friends and your children, okay. So if you have adult children over 18 years old make sure they know about this they can't be a full-time student and they can't be claimed as a dependent for anyone else. But the way this works is the government if you are relatively low income and you save some money in one of your retirement plans whether it's a 401K or an IRA or anything like that the government will give you money to match it. I'm gonna admit Jonathan Massey and I'm gonna give a little commercial right there. Jonathan Massey who just joined us is giving a talk on I think April 26th I think about trading and options that'll be super fun for you in advanced people. Okay, back to the savers credit the government will give you money they will match your contribution in part to your 401K or your IRA. Now the reason for this is kind of like what I said earlier about don't stop saving for retirement just cause you're saving for your kid's education. Also don't stop saving for retirement just because you're low income and you think, oh that's for rich people or because you're young and you're in your first job and you think, oh that's way in the future. The government, the IRS is pushing us to start saving now even if we feel like we can't really afford it. So here's how it works. Let's look at 2021 first. If you are married filing jointly and your adjusted gross income for the two of you is less than $39,500 put in $2,000 into your IRA the government will match it and add another $1,000 to your IRA. So that's an incredible thing, right? It's a non refundable credit. So and let's say you're married filing jointly and you make $66,000 that's not a bad income that's not super low income. They will still match 10% of your contribution. So still put in $2,000 they'll give you $200 to add to your IRA. See why I wanted you to know about this? Okay, and notice all other filers. So this would be for a single person. So if you have a young person in your family maybe a 19 or 20, 21 year old person who's not in college they're earning less than $19,750 and they're single, encourage them to put $2,000 in their IRA and get it matched. The reason I keep saying $2,000 is the total maximum credit you can get is $1,000. So if you're getting the 50% match put in 2000, you get a thousand. Okay, really important credit to know about if you forget this or you need to look up the income numbers or something, you can always just Google it it's called the savers credit. Okay, small business. I have a question about that one. Somebody asked regarding the savers credit how does your RMDs make this credit obsolete? I never seem to be entitled. Your RMDs. Well, required minimum distributions are what happens when you're taking money out of your accounts and this is when you're putting money in your accounts. Now they could both be happening at the same time. But I think what that person is talking about is when you take your required minimum distributions those become taxable income. So they raise your AGI, your adjusted gross income. So they do make you have higher income which could then make you not eligible for this which is too bad. So ways to lower your AGI. Okay, if you wanna lower your adjusted gross income so that you're eligible for this and by the way, lowering your adjusted gross income is helpful for a lot of things too. It will also lower your Medicare premiums. So there are a few ways to lower your AGI. One is contribute to your IRA. You'll notice that was circular, right? You wanna lower your AGI so you can get a credit for contributing to your IRA, contributing to your IRA lowers your AGI. So it is circular. So if you can afford to put in the full amount and if you're getting RMDs you're in the over 50 catch-up time period. So you're actually allowed to put $7,000 into your IRA if you're over 50. So go ahead and do that. You have to have earned income but if that person who's over 70 or 72 has earned income they can put $7,000 in your IRA that will lower your AGI. Another really important way to lower your AGI if you are 70 and a half or older and I do mean that age even if you're thinking, wait, I thought that changed. It didn't change for this purpose. If you are 70 and a half or older and you have any charitable inclinations give your charitable contributions through what's called a qualified charitable distribution. What that does is it takes your RMD it sends it directly to a charity much better than taking your RMD and then trying to deduct it on schedule A. Do a qualified charitable distribution also called a QCD it takes the money right out of your RMD sends it direct to the charity and it never hits your AGI. So I'm talking about a lot rather fast. You might just want to jot that down. If you're over 70 and a half, write down QCD and research it more later. It helps you lower your AGI it helps you be qualified for a lot of good things. Okay, small business plans. Yes, Zoe? Got a couple of questions regarding the savers. There's no age limit, correct? Just have to be over 18. That's all right. Okay, can the match be made in a Roth account? Yes, yep. Any type of retirement savings account. And how do we get the savers credit? When you fill out your tax return, you click the right boxes on your tax return or tell your tax preparer that you think you're eligible for it and that's how it works. And what do you do with no earned income? What vehicle for retirement is there? Oh, that's tough because you really do have to have earned income to add money to any of these. Now, if you have no earned income try to marry somebody who does, okay? Because when you're married filing jointly you're thought of as a unit and in some cases your spouse who has earned income can contribute for both of you. So we have this thing called the K. Bailey Hutchinson Spousal IRA. And that means that like if you don't have any earned income but your spouse does they can contribute for both of you even though you have two separate accounts. But otherwise if there's no earned income you are out of luck, you can't save tax deferred. Just try to make the most of the savings you already have. Anything else? Does the saver's credit depend on your total savings in any way or only on your adjusted gross income for one year? It depends on your adjusted gross income for that year. Oh, right, good question. I think what that person's asking is suppose I'm wealthy and I have a lot of savings and stuff. So no, there's no limit on your assets. The only thing is if you have a lot of assets invested in taxable accounts you might have so much investment income that you're over the limits here. But no, they're not gonna check your assets in any other way for this. Are pension payments considered earned income? Are pension payments earned income? I am not sure for this purpose it would depend on a few things. So I'm not gonna answer that, sorry. Okay, anything else? Same question about retirement accounts. Does earned income include from retirement accounts? Oh, no, it doesn't. Okay, from retirement accounts, no. So for example, if you're taking money out of your IRA that is increasing your AGI and your taxable income but it's not earned income. So taking the money out doesn't then qualify you to put more money in. So what counts for earned income is money from your job, money from your self-employment. Those are basically it. What does not count as earned income is alimony anymore and rental income from rental properties doesn't count. Kinda sounds like it should because you feel like you're earning it but for this purpose it doesn't. It's considered passive income and investment income is not earned income. So basically work and self-employment count as earned income. But you only have to have enough earned income to cover your contributions. So for example, let's say you're mostly retired but you're 50 or so and so you wanna put in you're earning or whatever age you are. Let's say you're over 50, you could be 80. So you're not earning much money but you do a little part-time work and you earn $6,000, put the $6,000 right in the IRA. You can put in 100% of your earned income. So you don't have to be earning much but it does have to be earned. Okay, on with the small business plans. So a simple IRA can be useful for small businesses but I'm gonna skip over it because if you are self-employed the two best plans are the SEP IRA or the solo 401K. So I wanna talk mostly about those. And the solo 401K is relatively new. So for those of us like I know Zoe and me we've had our own businesses for a long time. So we have SEP IRAs. She's a realtor by the way and we'll eventually be giving her own presentation on being a realtor. So you can look out for that. I don't know the date yet but in any case because we work for ourselves we've had SEP IRAs for a long time and I continue to use mine even though as of about 2014 the solo 401K is actually better in some circumstances. So the basic difference between the two is if you have no employees except possibly your spouse you should have a solo 401K. If you have employees other than your spouse you are not allowed to have a solo 401K and then your best bet is the SEP IRA. So that's the basic difference but more details about all that. So the SEP IRA first of all stands for simplified employee pension. I always think it's a self-employed plan but technically this is the name simplified employee pension. The rules the way it works are you can put in the smaller of $58,000 or 25% of your net earnings from the business. So that could be a considerable amount of money, right? $58,000 as opposed to if you just have a regular IRA and you're under 50 you can only put in $6,000. So if you have a small business you probably want one of these small business plans. These are better for you than just the IRA. You can withdraw the money without penalty after you're 59 and a half. If you withdraw early the penalty is the same as it is from early withdrawal from any kind of plan. 10% for federal and if you live in California a lot of people don't know this. There's an extra early withdrawal penalty of 2.5% in California. So plan to not withdraw until you're 59 and a half. But if you're earning enough money I think to put in 58,000 you'd have to be earning about 290 or something. Go ahead and save it all. You can afford to save it. Okay, so those are basic SEP IRA rules. You can contribute for yourself. Now, one tricky thing about SEP IRAs is if you have employees and you contribute for yourself you have to contribute for employees as well. Another interesting issue, the SEP IRA has no employee contributions. That's one way it's different from a 401K. So if you've got people working for you and they really want to have a 401K and they want to save that 19,500 of their own money the SEP IRA is not the right plan for you. Then you probably need to look at a simple IRA or set up a real 401K. But SEP IRA is particularly good for companies that are pretty small. Maybe you think of you're basically a sole proprietor but you have maybe three or four college students who intern with you or you have two or three part-time employees or something like that. That's when the SEP IRA is best because they cannot contribute for themselves but you can contribute for them. It's very inexpensive to manage and easy to set up unlike a full-scale 401K which has a lot of rules and expenses. You can put in bigger contributions than you can to a traditional IRA although they're usually smaller than for a solo 401K. Another great thing is a SEP IRA is flexible. You fund it when you feel like it. You fund it when you had a good year. Years when you didn't, you don't have to. That's not true of a 401K in many cases. A lot of times you have to commit what you're gonna contribute each year for yourself and others. Okay, SEP IRA disadvantages. There's no Roth option. There's no over 50 ketchup. There's no employee contributions. And if you have employees, you have to contribute for them if they meet certain criteria. Here's the criteria. In 2021, they have to be at least 21. So again, you can exclude them if they're college students or they're teenagers. You don't have to worry about it. But if they're at least 21, if they've worked for your business in at least three of the last five years, meaning that they've received at least $650 in compensation in the current year and three of the last five. So again, notice that if you've got a lot of part-time people or young people, that's good. This is a good plan for you because you don't have to worry about that. But if you have employees who meet these criteria, then you have to contribute for them the same percentage you are contributing for yourself. So if I make $200,000 and I want to contribute for myself 25% of that, I'm going to put away $50,000 for myself. But then let's say Zoe works for me, I paid her $1,000. If she meets all these criteria, I have to contribute 25% of her salary. So I would put into her CEP IRA account $250. But I have to by law put $250 into her account if I'm putting $50,000 into my account. It's the same percentage. So again, this plan works best if you have employees but either they're young or they're part-time or they don't earn very much, and then that's a good plan. Now the solo 401K is an even better plan, but you can't do it if you have employees other than your spouse. So that's the basic difference. The solo 401K, first of all, if you're thinking, wait a minute, I have an I 401K, is that the same thing? Yes, it is. Every company calls it by something different. So every one of these is exactly the same thing as a solo 401K. Schwab calls it an I 401K. Vanguard sometimes calls it that. Fidelity calls it a self-employed 401K. It's also called a solo K, a one participant K. All these things are exactly the same thing, the solo 401K. Okay, what it basically is, is it works like a 401K, but it's much simpler. So if you have a full 401K, like the one at your big company that you work for by day, they have to fill out a lot of paperwork. They have to meet a lot of non-discrimination rules and they have a lot of expenses. So the solo 401K has all the advantages, but it's much, much simpler. You don't have to prove non-discrimination because who would you discriminate against? It's just you basically. So one owner and one spouse and your spouse does have to work for the company in order to be included. The maximum you can contribute if you are over 50 is 64,500. So it's 58,000 if you're under 50, but then we add the over 50 ketchup so the max could be 64,500. Same rules as others about withdrawals. Let's see, it's easy to establish and inexpensive to manage. It usually allows the biggest contributions for a business owner of any type of plan. Other advantages, this behaves like a 401K. So there's an over 50 ketchup, unlike with the SEP, there's a Roth option, there's an after tax option, which we'll talk more about later when we get into mega. And you can set it up so that you can take loans out of it. So almost all the advantages of a regular 401K apply here. So when I have clients who own their own business and make a lot of money, they definitely tell them solo 401K and sometimes we set up a Roth option. And by that, I mean the Roth 401K because any type of 401K plan, if you're under 50, you're limited to 19,500 in contributions, but you can split that any way you want between Roth and regular as long as your plan allows Roth contributions, which many of them do now. And if you set up your own, why not go ahead and allow Roth contributions. You can decide each year how to split your money. Okay. So can I interrupt for one second? Yep. You've mentioned ketchup a few times and there's a question about it. Do I need to have contributed less than the maximum to the 401K or 457 in previous year or years to be able to make ketchup contributions after 50? Nope. This was part of the Bush tax laws of 2001 and 2003. He invented the, they're called EGTRA and JIGTRA, if you like initials. He invented the over 50 ketchup. And no, it's not sort of tied to anything. All it really means is if you're 50 or over, that administration realized you probably haven't saved enough and you better save more as fast as you can, but no need to add it, no need to do any complicated math. It's just as soon as you turn 50 in that year you can start putting in another 6,500 to your 401K or another 1,000 to your IRA. Okay. So the solo 401K, you get elective deferrals up to 100% of your compensation. And basically the reason you can put so much in a solo 401K is that you are the employee and the employer. So the rules are the same as far as employee deferrals, 19, 5 or 26,000 if you're 50 or over. You're the employee, so go ahead and do that. But if you're the employer, you can also make employer contributions to the plan of up to 25% of your compensation. That's how we get to this number of 58,000. That's the total amount that's allowed to be contributed to any 401K. But at our workplace plan, we usually don't even know that because like our 401K manager may say, hey, you can put 19,500 in your plan. And then they may say, we're gonna match the first thousand dollars. Well, great, that's really nice. What they don't tell you is if we wanted to, we could put in another 38,000 or something because the limit is 58,000. But most people never even realize that because it doesn't come up. But it's true for workplace ones and for solo ones. So this gives you a lot of flexibility to save a lot of tax deferred money if you own your own business. Now, as far as which one's right for you, the solo includes both the employee deferral and profit sharing, which means employer part whereas the SEP is purely the employer part. It's easier to contribute the max to a solo 401K. The solo 401K includes the catch-up. It includes the Roth option. It includes the loans. And it includes this other after-tax thing that we'll go into later. Here's the maximums you can contribute. To a SEP IRA, it's 58,000 is the max, but you have to learn at least 290,000 to do it. For the solo 401K, the max, if you're 50 or over is 64,5, and you only have to earn 204,100. Now, the math for how I got to that is a little complicated. If you're my Berkeley students, I'd make you understand this. I'm just gonna tell you, go ahead and take my word for it. But if you wanna do more investigation of that, here's a calculator, mysolo 401K.net. It's an online calculator. You could just Google that. And by the way, there are a few other calculators and they're really great. They will show you the comparison. You put in, here's my age, here's how much my business earned. It'll show you exactly which plans you could save, which amounts in. And now we're ready for RMDs. Zoe, any relevant questions before I move on? Yes, what does the elective deferrals mean regarding the solo 401K? Okay, elective deferral means you choose to have that money taken out of your paycheck and put in. Elective deferral is the code word for employee contributions. They used to be called salary reduction agreements. When these were first invented, when 401Ks were invented around 1978, it was called a salary reduction, but that wasn't very popular. So it's called now an elective deferral. That's your money that you agree to put in. Is that all? That's it for now. There's plenty of other questions on other topics, but we'll get to them later. Okay, RMDs are super important. These are required minimum distributions. And this is one of the key terms you need to know because a lot of people like me will say RMDs all the time and forget that you might not know what that means. So now you know what it means. Required minimum distributions are the government's way of making sure that eventually somebody pays tax on this money. So minimum distribution rules apply to all these types of accounts. Traditional, SEP, simple 401Ks, yada yada. This is the one that surprises some people. It applies to Roth 401K plans. Does not apply to Roth IRAs. So here's the accounts you don't have to take RMDs from. From a Roth IRA, if you are the original owner and you're still alive, you do not have to take required minimum distributions. That's one reason Roth IRAs are really great and that it's a good idea to have some money in a Roth IRA because with no RMDs, you are in control. Use that money when you want or save it and leave it to your heirs. Now, if you inherit a Roth IRA, you do have required minimum distributions. There's no tax on them when you take it out, but you are required to start taking it out and reducing that account. And there's no RMDs if you've got an employer plan like a 401K and you're still working for that company. Usually, even if you turn 72, you don't have to take an RMD until after you leave the company. And of course, there's no RMDs for investment accounts that were not tax advantaged, that were not qualified like 401Ks or IRAs. So one trick here, if you have a Roth 401K plan at your job, when you leave that job, roll it into a Roth IRA. Okay, that's an important little tip. A lot of people aren't aware of this difference, but you don't want RMDs, you wanna be in charge. So roll over your Roth 401Ks. Don't necessarily roll over all the other kinds. That's all I have on RMDs. Okay, then I'll wing it a little more then. So other important things about RMDs. They start at age 72. Oh, we do have that because it's under the secure app. RMDs, if you turn 72 on January 1st, 2020 or later, your required minimum distributions begin at age 72. If you turned 70 and a half, before that, your RMDs begin at age 70 and a half. The Secure Act of 2019 changed that and made the RMD age a little bit later, which is good for most of us. It means we have more flexibility. We can keep our money growing tax deferred longer. So RMDs for newly old people start at 72. For people who were already 70 and a half as of 1231, 2019, you're stuck under the old rules. RMDs began at 70.5 and they don't adjust. Now, inherited IRAs, you might not be old at all, right? You can inherit an IRA at any age and you are under the old RMD rules if you inherited it before 1231, 2019. So more about that. The way that the old inherited RMD rules work is when you receive it, first of all, you figure out, did you inherit it from your spouse or from somebody else? Those are the only two categories for an inherited IRA. You're either a spouse beneficiary or a non-spouse. We don't care if you're a child or a grandchild or a best friend or a homeless person on the corner, okay? You're either a spouse or you're not. So if you are a spouse and you inherit an IRA, you can roll it over into your own IRA account, start treating it as your own, you can contribute more to it, you can name new beneficiaries, that's really great. If you inherit an IRA from somebody who is not your spouse, like your father or your grandmother or your aunt, you inherit it from a non-spouse, then under the old rules, you wanna roll it into your own IRA account by 1231 of the year following the year of death. So get it done, but you have possibly as much as almost two years to get it done, but you roll it into your own account, it is called an inherited IRA account, or if you're with fidelity, they call it a BDA for a beneficiary designated account, exactly the same thing, it's an inherited IRA. So you roll that into your own account and then under the old rules, you then look up the tables for your life expectancy. Don't try to think yourself how long you're gonna live, just check with the IRS, they know how long you're gonna live. So look at their life expectancies, and then what you do is you divide the balance in your account at 1231 of the first year you inherited, after you rolled over that IRA, 1231, you divide that balance by your remaining life expectancy, that's your RMD. Now, if that sounded too quick and you don't know how to do that math, don't panic, wherever that account is, they will help you. Like fidelity will probably say, hey, you have to take $7,322 out this year. If they don't call up somebody there and ask them for help figuring your RMD, don't worry too much about how much the amount is. But basically that was the old rule for inherited IRAs, was you rolled it into your own account and then you divided it by your life expectancy and you had to take X dollars out for the rest of your life. The new rule under the Secure Act is if you inherit an IRA, January 1, 2020 or after, still need to roll it into your own inherited IRA account, but you do not need to calculate your RMD each year. What you need to do is just make sure all the money's out within 10 years. So you could do it a number of ways. If you inherit it and you're young and have no income, maybe take it all at once, get it over with, pay the taxes and get it out of there. Or if you have a high income or something like that, maybe split it one tenth each year. Or if you don't need the money yet, wait till the 10th year, but take it out on time so you don't get any penalties. But you're totally in control. Any time within the 10 years after you inherit it is how the RMDs for new inherited IRAs work. If you inherited an IRA before this date, you're under the old rules, keep doing what you're doing. You don't need to change. You don't need to go to this new 10 year thing. Okay, before I go on, any relevant questions about inherited or something? Yes. Can the money that goes into a traditional IRA be investment income or does it have to be earned income? The contribution you make has to come from earned income. So if you're going to contribute to an IRA, if you want to contribute, say $6,000, you have to earn at least $6,000 in the year that you make the contribution. And by the way, I always talk in terms of maximums because I want you to contribute as much as you possibly can. But if you don't have $6,000, you can spare. Or you don't have $6,000 in earned income this year, put in whatever you do have. You know, maybe you only earn $10,000 this year. If you only earn $10,000, the magic rule is contribute $2,000 to your IRA so you can get the maximum saver's credit match. But you don't have to put in six to play. Something else? With the 401K is the money that goes into it after tax money. If it's a traditional 401K, no, it's tax deferred. So you're putting in pre-tax money, which lowers your tax for this year right now. But many possibly even most 401Ks now have an option. You can split that $19,005 between regular, also called traditional and Roth. So you get to choose in most cases. The default is it'll be tax deferred, but you can choose and say, hey, I want the Roth option instead, usually. If someone has more than one IRA account, is it $6,000 each or over? Oh, no, it's overall. And by the way, here's a fun fact. I bet you think you know what IRA stands for, right? Sounds like it ought to stand for individual retirement account, but it doesn't. It stands for individual retirement arrangement, okay? Because the government thinks of all your savings as an arrangement. So they will add together, or you will add together when you do your tax return, all of your IRA accounts. And they all count as one, no matter how many different banks you have them in. So you as a person are limited to $6,000 per account, or per, no, you're limited to $6,000 in IRA contributions for the year, unless you're 50 or over and then it's 7,000. Kind of a couple of questions about that 10 years. Is the 10 year limit starting from 2020 or is it 10 years after you get the account? And also just explaining more what the 10 years means again. Like if you have $100,000 in your account and you got 10 years, what has to happen? Okay, so first of all, when the clock starts. So you inherit an IRA, let's say anytime during 2020, you need to get it rolled over into your own account. Don't just leave it where it is or you've got even more problems. Like don't leave it in your grandfather's account. Roll it into your own IRA account, talk to a bank or a fidelity or somebody and say, I inherited an IRA, please set up an inherited IRA account for me. Roll that money in. You have until 1231 of the year after the person died. So if the person dies January 2nd of 2020, you have till 1231, 2021. If they die 1231, 2020, you still have till 1231, 2021. So you have somewhere between a year and two years to get it into the new account. Then your clock starts as after that, after 1231, 2021, okay? Then you've got your 10 year clock starting. Now, and as far as how that works, basically it means whatever the total amount in that account is and that amount is gonna probably grow. Probably got it invested. And if your grandfather left you 100,000 by the time you're taking it out, maybe it's 102,000 or 250,000 if the stock market's been good, whatever it is, you need to get it all out by the end of 10 years and do it at any speed you want. A dollar a day or all at once, whatever you want as long as it's all gone by in this case, 1231, 2031. Anything else about these? If you're contributing your max to a 401K and working in over 60, what's the max you can also put into IRAs? Aha, okay. So that depends on your income. So you are over 60, that's good because you get more access to things and you've got a 401K. So the first thing I want you to do is definitely max out your 401K and that's gonna be $26,000, okay? We do that first. And there's a good reason for that that's sort of complicated. But if you have access to a workplace plan, max that out first. Totally fill up your 401K or your spouse's 401K. You know, if you're a team, that's fine too. Fill up their 401K before you contribute to any of your business accounts like a set by IRA or solo 401K. Just wanna get back to the... No, I know what I'll do. Whoops, I think I have my charts of all the limits here together. Control and, it's not letting me. All right, here we go. We're zooming to the bottom. Oh, come on. We're trying to zoom to the bottom. I wanna show you our limits here. Okay, AGI limits. So you're gonna fill up your 401K first. So that person was 60 years old, he or she should put a 26,000 into their 401K. Then the person said, can I also contribute to an IRA? The answer is about income limits. So it depends on what you're earning. And I'm gonna guess if you have a job and you can afford to max out your 401K, you probably make too much money to contribute to a traditional deductible IRA. So I'm gonna ignore these. You might be within the income limits to also contribute to a Roth IRA. So if you are single or head of household and you make less than $125,000 at your day job, put in the 26,000 into the 401K and then put 7,000 into your Roth IRA. If you're married filing jointly and you make less than 198,000, put $7,000 into your Roth IRA. And by the way, if you're married filing separately, this is the official rule. This is sort of nonsense. The basic fact is if you're married filing separately, you cannot contribute to an IRA. I could do the math and show you why, but just trust me, it's one more reason not to file separately. You can't contribute to an IRA of any kind. So again, for that person, it's about income limits. Max out your job plan first and then if you're under these income limits, go ahead and contribute to a Roth IRA also. Okay, now one other thing about RMDs, why do we talk about them so much? The answer to why we hammer on RMDs so much is if you fail to take the RMD you were supposed to, the penalty, first of all, you gotta take the money out as soon as you get caught. But then the penalty for not taking RMDs each year is 50% of what you were supposed to take out. So it's this huge fine that goes to the government. Now, if you got in a situation where like maybe you didn't understand the inherited IRA rules or something like that and so you did not take out your RMDs in the past, don't freak out. I mean, take me seriously that 50% is a real rule, but there are ways to appeal that. So if you suddenly realize you should have taken RMDs and you didn't contact a tax professional, tell them the whole truth and get it figured out and caught up, you can probably maybe get that penalty waived, but be careful about it and try to always take your RMDs on time. Any last questions on RMDs before we move on? What happens if you inherit the IRA and then you pass away within that 10 years but you haven't taken the RMDs yet? What happens to your beneficiaries? Let's check the Secure Act because, aha. Yeah, if you're under the old rules of an inherited IRA, one of the really great things about the old rules was what we call the stretch IRA. You were able to designate beneficiaries of your own and they could then take them over their lifetimes. So that was good. The new rule is this is Secure Act. They're trying to get rid of that stretch thing. So let's see. Definitely, first of all, really important point, definitely name beneficiaries on all of your retirement accounts, including your inherited IRAs. And I think what will happen is that if you die before your 10 years are up and you haven't taken the money out, it will go to your beneficiary and then I'm not sure if they have 10 years or if they need to take it immediately. Not quite sure, because that's a new rule. So I would look into that and I will look into it but you can Google it also. But that's good time for another commercial which is about the importance of beneficiaries. Name beneficiaries on all of your retirement accounts and check them. A lot of people say, oh yeah, yeah, we did that. And then they find out, oh yeah, I made my mother my beneficiary and she died two years ago. Or oh my goodness, my high school boyfriend was my beneficiary. So check them. It's not on your mind all the time but it's super duper important. One reason is, look at the penultimate one here, your beneficiary designation outranks a will. So if I go to all the trouble to hire a lawyer and pay her a lot of money and set up a will and say leave all my IRAs to the, I don't know, to the Sierra Club but my beneficiary designation says leave all my money to Zoe Liston, she gets it, okay? The IRA designation and the 401K designation outranks your will. Even better, it's totally free. Like to write a will, I have to hire a lawyer. To check my beneficiaries, I could do it on my phone while I'm talking to you. You just log into your accounts wherever they are and make sure they all have beneficiaries. That goes for your 401K, your 403B, your 457, your IRA, your Roth IRA, all that stuff, always have beneficiaries. Also on your life insurance, not an insurance expert but as long as we're at it, check all your beneficiaries on your insurance because there is absolutely no point in having life insurance if you don't say who the money goes to. You're gonna be dead, it's not gonna save you. So the only important thing is who's that money going to? All right, so check all your beneficiaries. It's cheap, easy and free. You can do it right now while we're talking. You don't have to pay your lawyers. You don't have to tell your family. Your beneficiaries do not have to know they're your beneficiaries and it's super important. One other thing, as long as we're talking about beneficiaries, you may wanna know that if the workplace plan like a 401K, your spouse has first dips, okay? So if you are married and let's say you have a husband but you wanna leave your 401K to your boyfriend, you can do it but only if your husband shows up and signs off that he knows you're leaving the money to your boyfriend and you have to have a notary president saying, yeah, he really signed this, she didn't make that up, okay? So your workplace plan, your spouse has first dips. That's not true of your IRA though. Leave that to anybody you want, nobody has to know, okay. You mentioned the will. Does the beneficiary designation outrank a trust? It depends on what kind of trust. So I better not answer that. If you have a trust, you probably have some kind of a state planning attorney. So ask them that question, okay? Cause it depends. Okay, before we get into, and our timing is good, we're gonna have time for backdoor rots and mega backdoors which are fun to talk about. But before we get in, I'm gonna take a little sidestep here about vocabulary, also known as magic words, okay? These four words mean completely different things. And I talk to clients and sometimes even to students who use them interchangeably. That is a terrible mistake, okay? A rollover is not the same thing as a contribution. It's not a conversion and it's not a distribution. Each one of these has completely different tax ramifications. And sometimes people use them somewhat casually. Like one time, I was instructing a client in how to do a backdoor Roth. And I told him, you need to go through the steps. And he just kind of called up his broker and said, roll some money over. A rollover is not a conversion. It didn't work, okay? He didn't achieve the goal we were trying to achieve. Another place where I see this as a problem is people say, oh, I can't roll money into my IRA because I already contributed this year. Your contribution is that six or $7,000 you're putting in from new money. Rolling over, you could roll over $2 million from one IRA into another or from one company plan into an IRA. That has nothing to do with your $6,000 limit for this year, okay? There's no limit on what you can roll over. Now a conversion is what happens when you take money from a tax deferred account like a traditional IRA or 401K and you convert that into a Roth. Often a good thing to do, but has tax implications. The year that you convert, you pay full taxes on the total amount that you convert. So don't use these words carelessly, okay? And a distribution is money you take out and pay tax on. A distribution is not the same as a rollover. Might sort of feel like it. But one thing I would do is just think of these as a magic spell. And for example, if your financial advisor or your broker or somebody says to you, hey, I want you to make a contribution or you should do a conversion, write that word down. And when you contact the next person in your chain of events, use the exact same word. Do not add lib. Don't say, hey, I wanna do a rollover when you wanna do a conversion or Rumpelstiltskin gets to keep your baby, okay? I said that to my family the other day, they didn't know what I was talking about. My point is it's like a magic spell. And if you get part of the spell wrong, you lose, okay? So now advanced vocabulary, recharacterization doesn't happen as much as it used to, but just so you know, that's if you contribute too much to a Roth and you broke the rules and you need to uncontribute to your Roth and put it back into a traditional, that's called a recharacterization, okay? Now for the fancy stuff. The backdoor Roth and the mega backdoor. These are not for everybody. They're very powerful tools. They're very helpful, particularly if you're high income and you wanna save more taxes, very, very good things to know about. But if you are not high income or you don't really wanna do these, don't panic at how complicated this is about to sound. And I'll stop for questions one more time before I jump in. Anything I should catch up on? Well, somebody asked if transfer is a magic word on that list. Yeah, that's a word I should add. I'll add it later to my notes. Yeah, usually what people mean by a transfer is they're moving money, they're keeping it in the same type of account. Like I have a traditional IRA account at a merit prize and I wanna move it to a different bank. Like I wanna move my traditional IRA from a merit prize to Schwab, but it's still a traditional IRA. I would call that a transfer. Sometimes it's called a trustee to trustee transfer. And you can do that as many times as you want as long as it's direct, as long as you call a merit prize and say, hey, move my money to Schwab. Then you can do that as many times as you want and there's no tax implications. Where it gets messy is if you say, hey, I'm gonna handle it. I'm gonna call a merit prize and say, hey, send me all the money in my traditional IRA. I'm gonna move it to Schwab. Not a great idea to do that. It's easy to make a mistake. You are allowed to do that once a year. But if you don't follow all the rules and get it back into the right type of account on time in 60 days or less, all of a sudden you have mistakenly done a withdrawal or a disbursement and you owe tax on the whole thing. So trustee to trustee transfer, call the trustee or the bank, have them do it and do it as much as you want and there's no tax implications. Yes. How is a transfer different from a rollover then? A rollover is from one type of account to another, like from a 401K to a traditional IRA. No tax implications, but you're changing the type of account. A transfer is from one institution to another, but keeping the same type of account. I know, right? You're shaking your heads. Well, remember again, this is a 10 to 15 week course at Berkeley and you've been at it for 65 minutes. So you're doing great. Okay, the back door and the mega back door. So what these are is these are ways for high income people to get around the rules, okay? They're perfectly legal. There was a period of time when it wasn't really clear whether the back door Roth was legal and some companies wouldn't do it. Some financial advisors didn't wanna do it. It's fine now, okay? It's been acknowledged by Congress and the IRS. They know you're doing it, it's okay. So they're perfectly legal, but they're a little wonky and they are ways to get around the high income problem of making too much money to be able to contribute directly. So the back door Roth, first we do a quick review. Why are we so keen to get into a Roth IRA that we're gonna go to all this trouble? By the way, I was talking to a tax preparer this morning who said, so complicated for me to deal with the tax returns of people who've done back door Roth and thinking about charging them more. But they're a little bit complicated, but they are worth it. So first of all, why is a Roth IRA so great? The reason is that over the long run, all your income growth, dividends, et cetera is completely tax-free. The younger you are, the more valuable that is and the higher your tax bracket later in life, the more valuable that is. For most people, very, very valuable, tax-free growth. No required minimum distributions, also really great. Okay, now there's contribution limits though, right? If you're making a direct contribution to a Roth IRA, we're assuming now that your income's low enough, you can do that. You can only put in 6,000 a year or 7,000 if you're 50 or over. Another problem, income limits. If your adjusted gross income is more than 125,000 in your single, you can't put in the full amount. If you're married filing jointly and you make more than 198 together, can't put in the full amount. If you're married filing jointly, you make more than 208, you can't put in anything, okay? Between this, the reason there's this range here is if you make between 198 and 208, you could put in part of that 6,000, do a little math and you make some contribution. Okay, so that's a limit. That's why some people can't go direct to a Roth IRA. So the way we get around it, if we do the legal backdoor trick. So there's a thing called a non-deductible traditional IRA. Works like other kinds of IRAs with the limits. You can put in 6,000 or $7,000, but you don't get to deduct it now. So a non-deductible traditional IRA, it's usually not super valuable because all it would mean is that the growth on your money would be tax deferred. So it's a little bit better than nothing if you're wealthy and you've exhausted all your other savings opportunities, but it's not that great. But for these people, these high-income people who wanna do a Roth contribution, you put your money in a non-deductible traditional IRA because there's no income limits. So you put your 6,000 or $7,000 in. And now there's no income limit on who can convert from a traditional IRA to a Roth IRA. So the way this works is you put your 6,000 or $7,000 in a non-deductible traditional IRA, then you immediately convert it to a Roth IRA. Now, normally when we do a conversion, it's a taxable event, but we didn't take a tax deduction for our original contribution. So there's nothing to tax. We convert it, we've got it into a Roth IRA. Now, again, it's like a magic spell. This seems super annoying. Like I had a client, I told him to do this and he just said, oh, it seems like a waste of time. I'll just put the money straight in a Roth IRA. Guess what, it failed. His income was too high. He was not able to, we had to undo the Roth. It was really messy and complicated. We had to undo the Roth and it happened to be his last year of work. So it was his last chance to get money into a Roth IRA because he didn't have earned income after that. So he really blew it. He didn't believe me that you have to go through these patently ridiculous steps. I mean, everybody knows what you're doing at this point. You're putting money in a non-deductible traditional IRA then you're immediately converting it to a Roth. But if you try to bypass that step, you lose. So one good thing about this is by now, everybody's familiar with this term. This started in 2010. What happened was they changed one of the rules in January of 2010 and this became possible. So at this point, everybody knows that term back to a Roth. So if you're not sure exactly how to do it, call your advisor at Vanguard or Schwab or whatever or call your tax preparer and say, hey, I wanna do a back door Roth and somebody will help you use the magic words. Now, here's where we get to the mega backdoor. This is even newer. These only started around 2014. They're even more valuable but they're not available to everybody. In order to do a mega backdoor, you have to do it through a 401K or 43B plans through a workplace plan and your plan has to make it possible. So to move on with this, we look at that backdoor Roth, we say, okay, that seems really great but it's kind of a lot of trouble for six or $7,000 a year. Is it worth it? First, the answer is yes. If you're putting $7,000 a year and it's growing tax free, yeah, it's worth it in the long run but it is a pain in the neck. We'd like to get more of it. So if you have a 401K plan, first thing you do is you get your summary plan description often called an SPD. That is a document that your company has probably already given you but you were not interested. So you deleted it or you put it in a file drawer or something but it exists somewhere. There is a summary plan description that explains how your 401K works. So if you don't know what it is or where it is but you work for a good company, go to your HR website or call your HR lady and say, I need my SPD, okay? Then you skim through it. When I read these for clients, what I do is I just do a search because I'm looking for two terms to find out if they can do the mega backdoor. We have to see after-tax contributions and in-service withdrawals. Now, the first time I heard of this, I said, oh, yeah, yeah, I know what an after-tax contribution is. That's a Roth. It's not, okay? A Roth is an after-tax contribution but this is a third category. Your 401K would have to say you're allowed to make traditional 401K contributions, you're allowed to make Roth 401K contributions and you're allowed to make after-tax contributions. It will refer to it specifically as after-tax contributions and it's different from Roth. Okay, so we have to have that option and then we have to be able to make in-service withdrawals. What in-service means is you're still working for the company. I once had a student who got something wrong on a test and she said, well, how did we know this person was in the service? Okay, fair question. It has nothing to do with military service or waitress service or anything. In-service means you work for the company. So normally with a 401K plan, you can only withdraw money after you leave the company but some of the newer plans, particularly for big tech companies but also the University of California for my fellow UC employees here. And this works even if you're just an instructor at the UC University of California and you only make a tiny amount of money and you're part-time, you still have access to this. Plus, definitely Google First Republic has a great plan lots of tech companies and they're catching on fast too. If you work for a big tech company that takes good care of its employees and you don't have this yet, I'm sure you will very soon. They're catching on fast. Salesforce definitely does it. Okay, so you look at your SPD, you look for after-tax contributions and in-service withdrawals. If it has both of those things, then what you do is you contribute to your 401K plans after-tax account and then you open a Roth IRA account wherever it's managed. So that's not through your company. Like you work for Salesforce, let's say, and I don't remember, but let's say Fidelity manages their 401K. So you open yourself your own Roth IRA at Fidelity or at E-Trade or wherever it is and then you contribute money to your after-tax account, then you open that IRA, then when you get your paycheck, the end of the week or the end of the month, you see on your paycheck an after-tax contribution, you call Fidelity and you say, hey, I have after-tax money in my 401K, I wanna roll that into my Roth IRA. You do that after each paycheck and then you are rapidly building huge balances in your Roth IRA. Even though the Roth IRA concept was invented to help lower income people, high income people can kill on this. They can totally clean up if their country does allow it. If their company allows it, not all 401K plans make this possible. So, but wait, there's more. So the maximum you can put in is the lesser of 100% of your salary or $58,000 or if you're over 50, $64,500, you may have noticed these maximums before. These are the same maxes we looked at for the 401K and this one for the CEP IRA. These are what's called 415 limits. So again, and for those of you who showed up late, what these are is this is the... So let's talk first about people who are under 50. If you're under 50, 58,000 is the maximum that can go into your 401K plan or your CEP IRA or your solo 401K, that's the maximum. But again, most of us never know that because all we know is, hey, I'm allowed to contribute 19,500. We don't realize there's this extra flexibility in there of around $37,000 or something like that. And what can make that up is employer matches and then there's probably still a lot of room left for after-tax contributions. So when you're trying to figure out how much can I put in my mega-back door, how much, the answer is you start with this number of 58,000, you say, okay, I already contributed 19,500. My company's contributing 10,000. You subtract those and then whatever's left between those two things and the 58,000, you can put in your mega-back door. And you can change your mind, by the way, when I had a full-time gig at the University of California, I changed this every month. I got paid once a month. And sometimes I'd say, you know what? I don't really need any cash this month. I'm gonna put like $6,000 of my check into the mega-back door. And then I'd roll it into Roth IRA and build that up quickly. Other times I'd think, oh, I wanna put more money in deferred this month. I just kept changing it. And since you do it online now, you don't even drive the HR lady crazy. Just change it as often as you want. Like if you wanna try it out, try it a little bit, see if it works for you. And then as far as process, I said back here, I said as soon as you get your paycheck and see that money in your after-tax account, call your plan administrator and ask them to roll it over. The reason I said that is for the University of California, that's how I do it. I call Fidelity, who manages our plan. And they manage a lot of these. Some companies, it's much more automated. Like I have several clients at First Republic. They've got a great plan. You can set it up totally automatically with them. They will do the rollover for you. So you don't need to think about it every month. And they will also be careful to make sure that you don't go over the max. You don't have to keep doing the math and saying, uh-oh, I made more than I thought this year. You know, I contributed more than 58,000. I'm in big trouble. So your company may manage this even better, but it's still a great plan. Okay, I bet we have questions now. All right. Yes, we do. All right. Can I use a mega backdoor with a SEP IRA? No, not with a SEP, but you can do it with a solo 401K, okay? So that's another really brilliant thing about solo 401Ks. I think I listed it back here, but I didn't talk about it when we talked about solos because I knew you weren't ready. Yeah, here we go. Differences between a solo 401K and a SEP. You can make after-tax contributions to a solo 401K plan. So I have a couple of clients, very high income. They're married, they both earn a lot. The husband is self-employed. So I told him, I want you to set up a solo 401K, do make in your plan documents, say that after-tax contributions are possible and in-service withdrawals are possible and just completely maximize your mega backdoor through your solo 401K. What else? Okay, that answers the other question that says, can you do a mega backdoor if you're self-employed? So that's how you do it. Do a solo, yes. Okay, when converting from a 401K to a Roth IRA, will a tax be based on the cost basis or the current market value of the equities? Current market value. When you put money in a tax deferred account, whether it's a traditional IRA or a traditional 401K, you don't even need to track the basis. When you put money in, because all that matters is how much is it worth when you take it out? If I'm converting $2,000, I pay tax on $2,000. Or if I'm withdrawing $100,000 because I wanna spend it, I pay tax on $100,000. Nobody asks me, well, how much of that was principal and how much was dividends, it doesn't matter. You pay tax on what you take out of a deferred account. What else? Does deferred income count in calculating the maximum allowable earned income for Roth IRAs? Probably not. Yeah, and that person said deferred income. So they might be referring to either a deferred account like a 401K or an IRA. In those cases, definitely does not count because that doesn't hit your 1040. So it's not gonna count as your AGI. So it's gonna lower your income and make more things possible. And if you have a non-qualified tax deferred plan also, yeah, it's not gonna increase your income. Married jointly, can you put 6,000 in for your spouse and yourself? Yes. Another good reason to get married, by the way. So if you're living with someone and they're not your spouse, you can't do that. But if you're married, you can. Okay, if one already has a traditional IRA with earnings, can you still use the backdoor conversion? Super good question. I'm so glad you asked that because if I don't have that in my notes, I should. Okay, warning about the backdoor Roth. I'm gonna make sure that I put this in because this is really important. If you wanna do a backdoor Roth, they work best for people who do not have any traditional IRA money now. The reason is, it's what's called the aggregation rule or the pro-rata rule. When you convert money from a traditional IRA to a Roth IRA, the government considers all your traditional IRA balances together and they consider that you are converting some of that whole pool. And if most of that is tax deferred, you're gonna pay tax on that. So backdoor Roth works best for people who have no money in traditional IRAs right now because then it's clean. Then you know you made a non-deductible contribution and you roll that over and you converted it. Sorry, made a non-deductible contribution and you converted it. There's no taxes because you never took a tax deduction. But if you have a lot of money in IRA accounts that you have taken a tax deduction on, you probably don't wanna do the backdoor Roth. Super important. Now there's a workaround for that sometimes too. If you have a lot of money in traditional IRA accounts, but you have a job with a 401K, again, get your summary plan description, your SPD and see if it allows you to roll money in. Sometimes your 401K will let you take your old IRAs wherever they were from before and roll them into your 401K. If you can do that, you get that money out of the way and then you've got no money in IRAs and you're clean to start doing a backdoor Roth. I think you're doing an advertisement to hire a financial planner. Well, when it comes to backdoor Roths, be very careful. Yeah, either hire a planner to help you or maybe you can get help. If you have like a good banker you work with or like, at this point, mega backdoors are still confusing to a lot of people. But the backdoor Roth has become really common. If you don't wanna hire a financial advisor and you do wanna get in on the backdoor Roth thing, you might just like call the general number at Vanguard or E-Trade and say, hey, can you talk me through the backdoor Roth? Or talk to your, you probably have colleagues who are wealthier than you and sophisticated to do this all the time. So do make sure you understand it and be very, very careful. Whoever asked that quest, tell me the name of the person who asked that question about what if you already have IRAs because they get a prize. Okay, she'll find that in a minute. Giovanni. Giovanni, okay, great name too. Yeah, thank you Giovanni, super important. Be very, very careful with the backdoor Roth if you have existing deductible IRAs. Okay, there are workarounds, but be careful. What else? If you put both after tax and before tax money into a Roth IRA, do you have to keep track of that until you take the money out? Okay, first answer is yes. So, but second part is you're not gonna put both kinds into a Roth. Roth is always after tax money, but you might have both pre-tax and post-tax money in a traditional IRA. And yes, very, very important to keep track of the basis. That's what we call the basis is what you already paid tax on and you do need to keep track of it because if you don't and then later you do a conversion or a withdrawal, the IRS, if you can't prove what your basis was they will assume the basis was zero and they'll make you pay tax all over again. So do keep track of your basis. And to make that simpler, I don't mingle them in the same account. Like if I'm gonna have some after tax and some pre-tax, I'm gonna open two completely different accounts. You don't have to legally, but it just makes it simpler. If I know this account has never had post-tax money in it then I won't be confused. Is the mega contribution limit separate from the Roth IRA contribution limit? Yes, completely different. So if your income works out that somehow you're able to do both, you can put in 58,000 into a mega backdoor and you can also put 6,000 into a Roth IRA, completely different. Someone just asked what's the deadline for 2020? I assume that's for filing taxes. Yeah, the deadline for making contributions for 2020 to an IRA is April 15th or the date you file your taxes, whichever is sooner. I'm sorry, this year it's May 17th. They changed it to May 17th. Most years it's April 15th, but interesting point, these are never simple by the way. And again, the people who design these, the congressmen and the lobbyists, they do not talk to each other. So the answers are never simple. So for a traditional or Roth IRA, you can still contribute your six or 7,000 up to April 15th or May 17th. Doesn't change if you file for an extension, but if you're funding a CEP IRA and you file for an extension, you can contribute up to October. If you're a medical student with work study, can you contribute to a Roth? Does work study count as earned income? It probably does. If you get a W-2 or a 1099, it's income. Yeah, if they applied it directly to your tuition and you never saw that money, then maybe not. But if you get any kind of a W-2 or 1099, it's earned income. Okay, we've only got a few left and there are a lot more questions, but there are two of here that I want to ask. One is a few people are asking for good companies to do things, do you recommend certain companies for stuff? Yeah, I'm not sure if I should, I don't know who supports the library or whatever, but I'll tell you a few answers to that. One is if clients don't know where to invest or they're starting from scratch, I usually send people to Vanguard. The reason is Vanguard has very low fees, they're known for their low fees, they have excellent funds, they have a long track record, and so nobody could sue me for recommending you should invest through Vanguard. Personally, I do a lot of investing through Fidelity, mostly because I've been with them since the 70s and I've always gotten great service. They have very good employees. These are subjective. You may have somebody you love at Schwab and that's fine, but so these are subjective. I like Fidelity and Vanguard, I do a lot of business with both. Other companies that are totally fine are T-Row Price, Dreyfus, Schwab, AmeriPrize, and anybody you're happy with or that your financial advisor is happy with. I don't know of any companies that I've ever heard anything really bad about. I would just say if you're choosing a place to hold your account, look for fees and expenses. That's what matters. Pay the lowest possible fees and expenses. You want very low fees. That's the main thing that matters. What else? You're muted, you're muted. Sorry, I was in chat. I was using the space bar to just kept spacing in chat instead of unmuting me. Somebody asked a question at the very beginning of class and I think it's a really important one. Okay. If I'm in my late 50s, is it too late? No, that's what George W. Bush was trying to tell you. It's not too late, but get busy. That was the message of the, I think it was the 2003 when he invented the over 50 catch up. The message was get busy. And partly because we're all gonna live a long time, right? We got modern medicine. We've survived the plague. You're gonna live to be a hundred. So you've got half your life to save. So get busy, save more and faster. What else? Well, again, there's so many questions. You only have a few minutes left, but the big one right now is what date do we have to pay taxes this year, even though taxes are due in May? And by the way, did California match federal? California conformed, yes. So California taxes are also due May 17th. And also they have confirmed that May 17th is not only the date your paperwork is due, it's also the date your money is due. So if you pay taxes that you owe by May 17th, you're cool for federal and for California. Now, if you live in another state, double check it. Not every state has agreed to this yet. What else? You were at only three minutes to the end. We have a lot more questions. Do you wanna round off things? Sure, I'll wrap up by showing you my top 12 tips here. I tried to make a top 10 list, but I kept thinking of new things. So number one is never, never, never miss out on getting your company match. If you feel like you can't afford to contribute to your 401k, but your company is matching part of it, absolutely do that. That is totally free money. Put in whatever you have to put in to get the total company match. Then in general, maximize your tax deferred and tax free savings. If you're saving for your children's education, save for your 401k first, your 529 second, your kids will be fine if you're not starving in the gutter that helps everybody. If you have access to a 457 plan, we didn't talk about that in detail, but that's a really great plan. Fill that up first. When you leave a company, you don't have to roll over to an IRA. Okay, and here's the only place I think that these notes stress that important point that came up earlier. If you think you ever might wanna do a backdoor Roth, do not roll over your old company 401k to an IRA. Just leave it in the old company 401k. It's totally fine there. It's safe there unless you really don't trust that company. But otherwise, leave your money in your old 401k. Don't roll it into a Roth IRA because it's gonna get in your way if you wanna do a backdoor Roth. If you're a small business, no employees do a solo 401k. If you're a small business with employees, do a SEP IRA. If you have a 401k and a SEP or a solo, fill up your employer plan first. I didn't go into this in detail, but the reason is we wanna maximize your qualified business income deduction. We'll have to do another seminar on that. So for now, just trust me on number eight. Fill up your 401k before you contribute to your SEP or your solo. Try to fund a Roth IRA each year in addition to whatever else you do. If your income is too high, do the backdoor. If your income is within the limits, do the regular. Invest your Roth plans aggressively. That's another important point. Don't just put your money in a Roth IRA and then leave it in a money market fund because the whole point is you want it to grow to some huge sum by the time you retire. So do your conservative investments elsewhere. In your Roth, use stock funds. Use your magic words. Don't say convert when you mean contribute and see if your company offers a mega backdoor. Those are my tips to wrap up. And I have 129 or 130. So thank you very much everybody for coming. Thank you Leah for arranging this. Thank you Zoe for being our moderator. Thank all the friends and other interested parties who came, so nice to see you all. Zoe and I are doing another one of these next week, April 6th, Tuesday at noon. That one is on another topic, but you can ask your questions. It's our last one in this series. There are lots of other good ones coming up by other people, as I've mentioned in particular. Jonathan Massey talking about investing options. That'll be really fun. On April 22nd, Rich Arzaga is talking about REITs, Real Estate Investment Trust. That's really important. And there's Tim Bombosh, I think he's talking about job hunting tomorrow. Wonderful person. Am I right, Leah? Is that tomorrow with Tim? It's on Thursday at 10 o'clock. Thank you, Thursday at 10, Tim Bombosh. He has a Stanford PhD and a very nice person. Okay, thank you all for coming. I hope I'll see you next week. Thanks so much Heather and Zoe. It's a fantastic presentation. And we'll see you all at the next program. Good.