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At The Money: How to Max Out Your Small Business Retirement Plan · Masters in Business

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  Speaker 1: Saving for retirement is challenging, especially if you're a small
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  Speaker 1: business owner or solo practitioner. Various retirement plans like s
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  Speaker 1: e P solo CA's megabackdoor roths can really be confusing.
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  Speaker 1: There are so many choices, the options have increased, and
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  Speaker 1: the rules have become even more complex. To help us
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  Speaker 1: unpack all of this and what it means for your
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  Speaker 1: retirement portfolio, let's bring in Dan L. Rossa. He is
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  Speaker 1: an expert in corporate qualified retirement accounts working with clients
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  Speaker 1: all over the count Full disclosure. Dan runs the corporate
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  Speaker 1: Retirement Planning Group at the Riholts Wealth Management, my firm,
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  Speaker 1: and he's one of my partners. So Dan, let's start basic.
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  Speaker 1: What options exist for either solo or small business owners
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  Speaker 1: if they want to save more money for retirement on
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  Speaker 1: a tax deferred basis.
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  Speaker 2: Sure vers, the main options, or at least the options.
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  Speaker 3: That you'll more likely than not start with, are a
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  Speaker 3: sep IRA or a solo four one K. A lot
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  Speaker 3: of people default to a sept even if you're in
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  Speaker 3: a situation where the solo K might actually be a
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  Speaker 3: better option. The step is just simpler, and it's often
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  Speaker 3: the first thing that your CPA is going to mention
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  Speaker 3: to you or recommend solo four one K with a
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  Speaker 3: megabactoor Roth feature has also gotten more popular in recent years.
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  Speaker 3: And once you have one of those in place, if
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  Speaker 3: you're still looking for more tax deferral opportunities, a defined
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  Speaker 3: benefit cash balance plan might be a good fit.
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  Speaker 1: Huh really really interesting. Now, last time when we talked
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  Speaker 1: about megabackdoor Roth, the total you can contribute if you're
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  Speaker 1: working for a firm is seventy two thousand dollars. But
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  Speaker 1: these days, so many people have side hustles. They set
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  Speaker 1: up an LLC or a little company to do something,
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  Speaker 1: and maybe they're a solo practitioner. Maybe it's a husband
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  Speaker 1: and wife, and this is income beyond what their regular
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  Speaker 1: paycheck is. If you maxed out your megabackdoor Roth at
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  Speaker 1: your regular employer and you have this side gig, how
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  Speaker 1: much can you add above that seventy two thousand dollars?
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  Speaker 3: Yeah, a lot of people don't realize this, but each
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  Speaker 3: plan has its own seventy two thousand dollars limit.
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  Speaker 1: Right.
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  Speaker 3: The only thing that aggregates across all plans is the
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  Speaker 3: twenty four and a half thousand dollars employee deferral limit. Right,
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  Speaker 3: that's the amount of money that each of us can
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  Speaker 3: contribute to our four one K plan. But each plan
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  Speaker 3: has seventy two thousand dollars limit. So what you can
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  Speaker 3: do if you have a sidehouse solo or a solo gig,
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  Speaker 3: you can set up a solo four to one K
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  Speaker 3: with a magabact or OFF or even just a regular
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  Speaker 3: SOLOK or SEP.
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  Speaker 2: As long as your income is.
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  Speaker 3: High enough, you can make additional contributions into that retirement
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  Speaker 3: plan of up to seventy two thousand dollars.
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  Speaker 1: And how do they figure out the seventy two thousand
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  Speaker 1: Is that based on over one hundred and forty five
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  Speaker 1: or one hundred and fifty thousand a year? Or is
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  Speaker 1: there a percentage calculation? What where does that seventy two
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  Speaker 1: thousand number come from?
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  Speaker 3: Yeah, well, the seventy two thousand number is just the
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  Speaker 3: overall four to one K limit right or retirement plan limit.
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  Speaker 3: The set actually has the same limit, but how to
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  Speaker 3: get there is a bit of a loaded question, and
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  Speaker 3: it's different for each of those plans. So the set
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  Speaker 3: the set IRI is technically all employer contributions, So your
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  Speaker 3: contribution amounts are directly tied to your earnings, all right,
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  Speaker 3: So you can contribute up to twenty percent of your
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  Speaker 3: net income to get to that seventy two thousand dollars number.
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  Speaker 2: All right, So you do the math.
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  Speaker 3: You need an income of three hundred and sixty thousand
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  Speaker 3: dollars to max out and get to that seventy two
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  Speaker 3: thousand all right. The solo K only a portion of
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  Speaker 3: your contribution is tied to your income, so you can
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  Speaker 3: contribute a lot more on a lower income, all right.
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  Speaker 3: An income of about two hundred and thirty five two
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  Speaker 3: hundred and forty thousand will get you to that seventy
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  Speaker 3: two thousand dollars max. The megabackdoor Rough, it's a bit
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  Speaker 3: of a cheat code if you have as long as
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  Speaker 3: your income, as long as your net income is seventy
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  Speaker 3: two thousand dollars, you can contribute all of that into
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  Speaker 3: the solo for ONEK.
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  Speaker 1: What are the tradeoffs between the sepira, the Solo four
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  Speaker 1: or one K the solo megabackdoor Roth. It sounds like
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  Speaker 1: this is really complex. Are there any advantages or disadvantages
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  Speaker 1: to each of these?
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  Speaker 3: Yeah, it is complex, and that's why a lot of
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  Speaker 3: people just kind of default to a SEPT because it's easier,
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  Speaker 3: But it really depends on your income and your objectives.
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  Speaker 2: If your income is on the.
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  Speaker 3: Lower side, or maybe it varies from year to year,
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  Speaker 3: the solo K is going to certainly allow the most
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  Speaker 3: flexibility and let you maximize your contribution even in.
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  Speaker 2: Those lower income years.
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  Speaker 3: If WROTH contributions are the objective, you just can't beat
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  Speaker 3: the solo K with the megabackdoor WROTH it's going to
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  Speaker 3: again allow you to contribute up to seventy two thousand
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  Speaker 3: in rough contributions. You can't find that anywhere else. But
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  Speaker 3: if your income is consistently high and ROTH is not
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  Speaker 3: a priority, you just want to maximize your tax deferrals,
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  Speaker 3: then a SEP is going to get the job done.
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  Speaker 1: So if you're making one hundred or less, or two
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  Speaker 1: fifty or more, or a million or more, that may
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  Speaker 1: affect which of these you choose.
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  Speaker 2: Yeah, for sure.
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  Speaker 3: And again assuming let's work with the assumption that you
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  Speaker 3: want to maximize your contributions, you want.
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  Speaker 2: To contribute as much as you can.
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  Speaker 3: The lower your income is, the more powerful the solo
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  Speaker 3: four one K is right. You're just gonna have a
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  Speaker 3: lot more flexibility with your contributions, and the higher your
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  Speaker 3: income goes, you're fine with a SEP because that twenty
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  Speaker 3: percent of your net income.
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  Speaker 2: If your income is high.
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  Speaker 3: Enough, again, over three fifty three sixty, you're going to
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  Speaker 3: be putting seventy thousand plus.
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  Speaker 2: Away a year.
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  Speaker 1: Really intriguing. How do you count an employee if your
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  Speaker 1: SOLO four one K doesn't matter if you're ten ninety
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  Speaker 1: nine or W two or part time or spouse, a
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  Speaker 1: husband and wife own a small business who counts as
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  Speaker 1: an employee For these the SOLO.
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  Speaker 2: Four one K is easy.
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  Speaker 3: Once you have a W two employee that becomes eligible,
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  Speaker 3: it's no longer a solo KAY and it's going to
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  Speaker 3: be hard for the owner to max out without contributions
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  Speaker 3: to that employee. The SEP is a little bit different.
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  Speaker 3: Eligibility requirement is referred to the three or five rules.
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  Speaker 3: So once you have an employee that's worked three out
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  Speaker 3: of any five years earning more than something now only
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  Speaker 3: I think seven hundred or seven hundred and fifty dollars,
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  Speaker 3: they're eligible and that means they would receive the same
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  Speaker 3: percentage of compensation that you're giving yourself, So that that
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  Speaker 3: could get expensive in a hurry.
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  Speaker 2: As far as a spouse.
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  Speaker 3: Being classified as an employee, you can have your spouse
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  Speaker 3: in the solo ka and still run the solokay. You're
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  Speaker 3: not going to be disqualified. Your spouse counts as another owner. Also,
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  Speaker 3: a lot of people don't realize that a soloka can
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  Speaker 3: have multiple partners in them, right.
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  Speaker 2: So in other words, if a.
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  Speaker 3: Company has four different partners, you can have all four
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  Speaker 3: partners and each of the spouses in the solo kay
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  Speaker 3: as long as no non As long as there are
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  Speaker 3: no non owner employees, you're good to go.
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  Speaker 1: And that's seventy two thousand per person husband and wife per.
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  Speaker 2: Person, again assuming the income allows for it.
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  Speaker 1: But yes, really really intriguing, man, Let's talk about the
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  Speaker 1: administration and compliance burdens of these various options. I know
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  Speaker 1: you need plan documents, and then there's the infamous Form
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  Speaker 1: fifty five hundred, and there are all sorts of record
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  Speaker 1: keeping rules. What do small businesses have to know? How
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  Speaker 1: do they avoid getting tripped up by all of this?
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  Speaker 2: Yeah, that is the easiest, for sure.
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  Speaker 3: It's just a few forms to set up and there's
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  Speaker 3: no annual maintenance, no filings. Owner just needs to track
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  Speaker 3: their contributions with the solo form on K there is
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  Speaker 3: a little more and the biggest thing is once the
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  Speaker 3: plan reaches a total of two hundred and fifty thousand
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  Speaker 3: dollars in total plan assets on the SEMBI thirty first
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  Speaker 3: of any plan here a form fifty five hundred easy
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  Speaker 3: must be filed.
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  Speaker 2: Right. That's basically the tax return for the plan. It's
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  Speaker 2: a really simple form, but the penalties are insane. It's
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  Speaker 2: two hundred and.
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  Speaker 3: Fifty dollars a day up to one hundred and fifty
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  Speaker 3: thousand dollars. So for a very long time this really
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  Speaker 3: wasn't regulated, but in recent years we've actually really seen
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  Speaker 3: an uptake and enforcement of these penalties. So shouldn't prevent
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  Speaker 3: you from setting up is soil, okay, but it's very
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  Speaker 3: important to be aware of this when you set the
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  Speaker 3: plan up.
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  Speaker 1: So let's talk set up and funding. When do these
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  Speaker 1: plans need to be set up and funded by you know,
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  Speaker 1: we're recording this in February of twenty twenty six. Is
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  Speaker 1: it too late to set something up and funded for
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  Speaker 1: twenty twenty five? What are the options? What does the
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  Speaker 1: timing look like?
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  Speaker 2: Yeah, I know, you still have plenty of time.
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  Speaker 3: The SEP is an IRA, So just like any other IRA,
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  Speaker 3: it's always been able to be established and funded for
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  Speaker 3: a prior year. You have until tax filing plus extension
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  Speaker 3: to get that plan funded effective. I believe of last year,
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  Speaker 3: the solok got a lot more leaning and kind of
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  Speaker 3: follows that same path as the set So you can
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  Speaker 3: establish a solokay and funded for the prior year with
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  Speaker 3: some caveats if the plan is set up by April fifteenth.
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  Speaker 3: Let's say say for this year, the plan is set
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  Speaker 3: up by April fifteenth of twenty twenty six, you can
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  Speaker 3: make employee and employer profit sharing contributions, so you can
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  Speaker 3: get to that full seventy two thousand as long as
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  Speaker 3: you fund by the extended filing deadline of October fifteenth
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  Speaker 3: of this year, right if you can. If you set
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  Speaker 3: up the plan after April fifteenth of this year, you
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  Speaker 3: can only make your employer contributions your profit sharing contributions
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  Speaker 3: to it, so you're going to be a little more
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  Speaker 3: limited to how much.
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  Speaker 2: You can fund.
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  Speaker 1: Let's talk about succession planning or exit planning, or with
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  Speaker 1: a husband and wife, the death of a spouse. Are
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  Speaker 1: there any one structure superior to others? If the owner
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  Speaker 1: either expects to sell the business or retire or maybe
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  Speaker 1: even bringing partners, which is the most flexible here.
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  Speaker 3: The solo case always going to give you more flexibility
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  Speaker 3: than the SEP. You know, if there's multiple partners in
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  Speaker 3: the solo KY, they can ease to contribute different amounts
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  Speaker 3: or some not at all, and a step the contributions
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  Speaker 3: are proadus, so everyone has to get the same percentage
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  Speaker 3: of comm so obviously non ideal if there are going
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  Speaker 3: to be multiple partners or people with different goals involved.
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  Speaker 3: On the other hand, steps are just structurally a lot simpler,
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  Speaker 3: easier to unwind if necessary. So it really one isn't
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  Speaker 3: always going to be better than the other. It really
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  Speaker 3: depends on the situation.
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  Speaker 1: So one of the advantages of for one k's is
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  Speaker 1: the creditor and risk of protections. Even if you lose litigation,
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  Speaker 1: nobody can take your retirement money away. Do the same
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  Speaker 1: things apply to the SEP or solo for on one k's,
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  Speaker 1: is it really the same set of rules?
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  Speaker 3: Yeah, So what you're talking about with four one K
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  Speaker 3: is that additional ARISSA protection. So ARISA plans, which are
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  Speaker 3: your employer four one ks and defined benefit plans have
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  Speaker 3: the most.
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  Speaker 2: Creditor protection of all qualified plans.
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  Speaker 3: It is a common misconception that solo CAYSE because they
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  Speaker 3: are four one k's, also have this enhanced creditor protection.
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  Speaker 3: They do not because they don't cover any non owner
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  Speaker 3: employees they don't have they.
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  Speaker 2: Don't qualify for that extra ARISA protection.
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  Speaker 3: So STEPS and solo k's are on the same level
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  Speaker 3: in terms of predator protection, the same as a regular IRA.
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  Speaker 3: If you are in a religious profession and that protection
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  Speaker 3: is important, might be a good idea to roll some
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  Speaker 3: of those IRA or solo key balances into your employer
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  Speaker 3: four to one K or defined benefit plan if you
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  Speaker 3: have one available.
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  Speaker 1: Huh, that is really interesting. I would imagine doctors or
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  Speaker 1: I remember back in the day brokers used to get
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  Speaker 1: sued on a regular basis, so that seems to be worthwhile.
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  Speaker 1: Last question, so, if you have a business owner that's married,
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  Speaker 1: whether or not the spouse works for them in the business,
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  Speaker 1: can that spouse also open either a solo for a
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  Speaker 1: one K or SEP or megaback door WROTH for a
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  Speaker 1: one K and legitimately increase the household contribution assuming the
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  Speaker 1: revenue allows for it.
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  Speaker 3: Yeah, as long as your spouse is a legitimate employee
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  Speaker 3: of your solo practice. You can do that and it
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  Speaker 3: has tremendous benefits, but they have to be an employee
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  Speaker 3: on payroll receiving wages.
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  Speaker 1: Right.
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  Speaker 3: So okay allows you to contribute a lot, even on
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  Speaker 3: a low income. Right, so a spouse would be able
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  Speaker 3: to actually contribute one hundred percent of their compensation up
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  Speaker 3: to that twenty four and a half thousand, or if
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  Speaker 3: you're over fifty thirty two and a half, right, So
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  Speaker 3: that ends up quickly. It's an easy way to kind
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  Speaker 3: of supercharge your household savings. Is adding your spouse to
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  Speaker 3: your solo practice retirement plan.
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  Speaker 1: Huh really? All this stuff is so intriguing, and it's
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  Speaker 1: just another tool in the toolbox to wrap up. If
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  Speaker 1: you're a small business owner or solo practitioner and you
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  Speaker 1: haven't taken advantage of the various tax deferred retirement savings plan,
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  Speaker 1: whether it's a step a solo for a one K,
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  Speaker 1: a megaback door routh for a one K, Speak to
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  Speaker 1: your fill in the blank financial advisor, accountant, tax professional
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  Speaker 1: and get hopping on this. This is an enormous way
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  Speaker 1: to accumulate wealth over in the next ten or twenty
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  Speaker 1: years and have various options of whether this goes in
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  Speaker 1: pre tax or post tax that allows you to maximize
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  Speaker 1: your long term returns. I'm Barry Ridults. You're listening to
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  Speaker 1: Bloombergs at the Money Working sh