by Mat Sorensen | Jan 20, 2026 | Retirement & IRAs, Uncategorized
Roth IRAs can be established and funded for high-income earners by using what is known as the “back door” Roth IRA contribution method. Many high-income earners believe that they can’t contribute to a Roth IRA because they make too much money and/or because they participate in a company 401k plan. Fortunately, this thinking is wrong. While direct contributions to a Roth IRA are limited to taxpayers with income in excess of $153,000 ($242,000 for married taxpayers, 2026), those whose income exceeds these amounts may make annual contributions to a non-deductible traditional IRA and then convert those amounts over to a Roth IRA.
Examples
Here are a few examples of earners who can establish and fund a Roth IRA.
- I’m a high-income earner and work for a company that offers a company 401(k) plan. I contribute the maximum amount to that plan each year. Can I establish and fund a Roth IRA?
Yes, even though you are high-income and even though you participate in a company 401(k) plan, you can establish and fund a Roth IRA.
- I’m self-employed and earn over $242,000 a year; can I have a Roth IRA? Isn’t my income too high? Yes, you can contribute to a Roth IRA despite having an income that exceeds the Roth IRA income contribution limits of of $242,000 for married taxpayers and $153,000 for single taxpayers
The Process
The strategy used by high-income earners to make Roth IRA contributions involves the making of non-deductible contributions to a traditional IRA and then converting those funds in the non-deductible traditional IRA to a Roth IRA. This is oftentimes referred to as a “back door” Roth IRA. In the end, you don’t get a tax deduction in the amounts contributed, but the funds are held in a Roth IRA and grow, then come out tax-free upon retirement (just like a Roth IRA). Here’s how it works.
Step 1: Fund a new non-deductible traditional IRA
This IRA is “non-deductible” because high-income earners who participate in a company retirement plan (or who have a spouse who does) can’t also make “deductible” contributions to an IRA. The account can, however, be funded by non-deductible amounts up to the IRA annual contribution amounts of $7,500. The non-deductible contributions mean you don’t get a tax deduction on the amounts contributed to the traditional IRA. You don’t have to worry about having non-deductible contributions as you’re converting to a Roth IRA, so you don’t want a deduction for the funds contributed. If you did get a deduction for the contribution, you’d have to pay taxes on the amounts later converted to Roth. You’ll need to file IRS form 8606 for the tax year in which you make non-deductible IRA contributions. The form can be found here.
If you’re a high-income earner and you don’t have a company-based retirement plan (or a spouse with one), then you simply establish a standard deductible traditional IRA, as there is no high-income contribution limitation on traditional IRAs when you don’t participate in a company plan.
Step 2: Convert the non-deductible traditional IRA funds to a Roth IRA
In 2010, the limitations on Roth IRA conversions, which previously restricted Roth IRA conversions for high-income earners, were removed. As a result, since 2010 all taxpayers are able to convert traditional IRA funds to Roth IRAs. It was in 2010 that this back door Roth IRA contribution strategy was first utilized, as it relied on the ability to convert funds from traditional to Roth. It has been used by thousands of Americans since.
If you have other existing traditional IRAs, then the tax treatment of your conversion to Roth becomes a little more complicated, as you must take into account those existing IRA funds when undertaking a conversion (including SEPs and SIMPLE IRAs). If the only IRA you have is the non-deductible IRA, then the conversion is easy because you convert the entire non-deductible IRA amount over to Roth with no tax on the conversion. Remember, you didn’t get a deduction into the non-deductible traditional IRA so there is not tax to apply on conversions. On the other hand, if you have an existing IRA with say $95,000 in it and you have $5,000 in non-deductible traditional IRA contributions in another account that you wish to convert to Roth, then the IRS requires you to covert over your IRA funds in equal parts deductible (the $95K bucket) and non-deductible amounts (the new $5K) based on the money you have in all traditional IRAs. So, if you wanted to convert $10,000, then you’d have to convert $9,500 (95%) of your deductible bucket, which portion of conversion is subject to tax, and $500 of your non-deductible bucket, which isn’t subject to tax once converted. Consequently, the “back door” Roth IRA isn’t well suited when you have existing traditional IRAs that contain deductible contributions and earnings from those sums.
There are two workarounds to this Roth IRA conversion problem and both revolve around moving the existing traditional IRA funds into a 401(k) or other employer-based plans. Employer plan funds are not considered when determining what portions of the traditional IRAs are subject to tax on conversion (the deductible AND the non-deductible). If you participate in an existing company 401(k) plan, then you may roll over your traditional IRA funds into that 401(k) plan. Most 401(k) plans allow for this rollover from IRA to 401(k) so long as you are still employed by that company. If you are self-employed, you may establish a solo or owner-only 401(k) plan and you can rollover your traditional IRA dollars into this 401(k). In the end though, if you can’t roll out existing traditional IRA funds into a 401(k), then the “back door” Roth IRA is going to cause some tax repercussions, as you also have to convert a portion of the existing traditional IRA funds, which will cause taxes upon conversion. Taxes on conversion aren’t “the end of the world” though as all of the money that comes out of that traditional IRA would be subject to tax at some point in time. The only issue is it causes a big tax bill initially, so careful planning must be taken.
The bottom line is that Roth IRAs can be established and funded by high-income earners. Don’t consider yourself “left out” on one of the greatest tax strategies offered to Americans: the Roth IRA.
Mat has been at the forefront of the self-directed IRA industry since 2006. He is the CEO of Directed IRA & Directed Trust Company where they handle all types of self-directed accounts (IRAs, Roth IRAs, HSAs, Coverdell ESA, Solo Ks, and Custodial Accounts) which are typically invested into real estate, private company/private equity, IRA/LLCs, notes, precious metals, and cryptocurrency. Mat is also a partner at KKOS Lawyers and serves clients nationwide from its Phoenix, AZ office.
He is published regularly on retirement, tax, and business topics, and is a VIP Contributor at Entrepreneur.com. Mat is the best-selling author of the most widely used book in the self-directed IRA industry, The Self-Directed IRA Handbook: An Authoritative Guide for Self-Directed Retirement Plan Investors and Their Advisors.
by Mat Sorensen | Mar 14, 2024 | Uncategorized
The new law known as the Corporate Transparency Act, which required LLCs and corporations to register its ownership and management with the federal government has been ruled unconstitutional by a federal Judge in Alabama in
National Small Business United v Yellen. A small business owner in Alabama named Isaac Winkles and the National Small Business United (NSBU) association challenged the new law as outside the scope of the federal government’s authority and prevailed in Court. Judge Burke wrote in his opinion, “..the wisdom of a policy is no guarantee of its constitutionality.” The federal government is appealing the ruling, and this case will likely be fast-tracked to the U.S. Supreme Court because of its wide-ranging application to millions of small business owners.
What Does This Mean For LLC and Corporation Owners Right Now?
FinCEN, the federal government agency where ownership and management of an LLC or corporation are reported via a beneficial owner information report (BOI), issued a notice stating that the Court’s ruling only applies to the plaintiffs of the case. This includes Mr. Winkless and any LLC or corporation that is a member of the NSBU. For the millions of other small business owners, you must still file the BOI report. For new businesses set up in 2024, you have 90 days from the date the LLC or corporation was established to file your BOI report to FinCEN. For businesses established prior to 2024, owners have until Jan 1, 2025, to be compliant. Failure to file the BOI report may result in significant financial penalties and up to 2 years in jail.
If you are setting up a new LLC or corporation, you need to comply within 90 days. You will not be able to wait for the outcome of the appeals process, as this case likely won’t be fully decided until the fall at the earliest.
For entities set up before 2024, some business owners may decide to wait rather than file their BOI report now. While my advice would be to file anyway, as I believe the federal government will prevail in its appeal at the end of the day, some business owners may decide to wait to file until the appeal is decided. There will likely be a mad rush of BOI reports towards the end of 2024 as business owners try to comply with the ruling by the deadline.
What is the BOI Report Filing?
Our law firm, KKOS Lawyers, and our company compliance company, Main Street Business Services, have filed hundreds of BOI reports for our clients. The BOI report is essentially a disclosure document whereby every LLC or corporation must disclose anyone who owns 25% or more of the company and any person who has substantial control over the company (e.g., the president, manager, CEO). Each person’s name, address, and date of birth must be disclosed, and a copy of a government-issued photo ID must also be provided for each person. The BOI reports are not available to the public and can only be disclosed by FinCEN to federal or state law enforcement agencies. For a more comprehensive overview of the BOI filing requirement please check out my video here and view our corporate transparency guide here.
by Mat Sorensen | Sep 11, 2023 | Uncategorized
Seller financed deals can be a win-win strategy for buyers and seller of real estate or businesses. Seller financing means the seller of the asset, whether a business or property, agrees to take payments over time for the purchase price and as a result the seller is financing the sale of the asset to the buyer. This has many benefits for a seller as it only opens up more buyers and hopefully a higher sales price but it also includes a tax incentive to the seller who will get to consider the sale of the asset as an installment sale. An installment sale allows the seller to defer recognition of the gain until the time the payments and the resulting gain are received.
In an installment sale, you report your gain on the sale of asset only as it is received. Each payment will be partially non-taxable as it represents a return of basis (what you invested into the asset) and the taxable part which is your profit (gain, appreciation). So, when you sale an asset on an installment sale you do not pay all of the taxes in the year you sale the asset because you have not fully received payment. Instead, you pay taxes only as you receive payment. To correctly report the taxes, you need to determine what portion of each installment payment is a return of basis versus profit.
To do this, you divide your gross profit (selling price minus basis) by the contract price. For example, say you purchased a property for $100,000 and later sell it for $400,000 under seller financed terms. Since you purchased the property for $100,000, you have a basis of $100,000 (you would also adjust the basis for improvements, depreciation, and other factors) and we are assuming here a contract sale price is $400,000. This gives you a gross profit of $300,000 (selling price minus basis). You then divide your gross profit of $300,000 by the $400,000 contract sale price, which equals 75%. You then take this 75% and apply it to each payment to determine which portion of the payment is taxable. This makes sense because each payment you receive, in this example, equally consists of a return of your basis, which is not taxable, and a payment towards the gross profit, which is taxable. To finish this example at 75%, if the annual payments totaled $40K, you’d have $30K that is taxable and $10K that is not taxable. If there is interest charged on the amount due that interest portion is also taxable as it is received.
The tax benefit of the installment sale is that you only take a portion of the gain into income each year over time. This gives the advantage of deferring taxes over time and can also keep you in a lower tax bracket on your other income. The major disadvantage is that you do not obtain the sale proceeds immediately and as a result you cannot invest them elsewhere. To counter this, most sellers will charge the buyer interest on the seller financed balance that is due, say 7-10%, to offset the inability to invest the funds immediately. As a seller, you will want to have a properly drafted promissory note as well as a security document that is secured against the asset being sold (e.g. mortgage/deed of trust recorded against the property). Make sure you are collaborating with experienced professionals when selling assets with seller-financing as there are tax considerations and legal protections you want to ensure are being considered in the structuring and documents.
by Mat Sorensen | Oct 6, 2022 | Retirement & IRAs, Uncategorized
Many self-directed investors have the option of choosing between a self-directed IRA or a self-directed solo 401k. Both accounts can be self-directed so that you can invest in any investment allowed by law such as real estate, LLCs, precious metals, or private company stock. However, depending on your situation, you may choose one account type over the other. What are the differences? When should you choose one over the other?
We’ve been advising clients for over a decade on self-directed IRAs and solo 401(k)s and what we’ve learned is that there is no universal answer to the question. Instead, you need to learn what is best based on your personal situation and investment objectives. Do you even qualify for a solo(k)? What investments do you plan to make and does one account type make a difference for your investments? The good news is that either way you go, we can help with a self-directed IRA at Directed IRA, where we are a licensed trust company and can serve as custodian of your IRA. Or, we can set-up a solo(k) at KKOS Lawyers using our pre-approved plan documents.
|
IRA |
Solo 401K |
|
|
|
| Qualification |
Must be an individual with earned income or funds in a retirement account to roll over. |
Must be self-employed with no other employees besides the business owner and family/partners. |
| Contribution Max |
$6,000 max annual contribution. Additional $1,000 if over 50. |
$61,000 max annual contribution (it takes $140K of wage/se income to max out). Contributions are employee and employer. |
| Traditional & Roth |
You can have a Roth IRA and/or a Traditional IRA. The amount you contribute to each is added together in determining total contributions. |
A solo 401(k) can have a traditional account and a Roth account within the same plan. You can convert traditional sums over to Roth as well. |
| Cost and Set-Up |
You will work with a self-directed IRA custodian who will receive the IRA contributions in an SDIRA account. Most of the custodians we work with have an annual fee of $300-$350 a year for a self-directed IRA. |
You must use an IRS pre-approved document when establishing a solo 401k. This adds additional cost over an IRA. Our fee for a self-directed and self-trusted solo 401(k) is $995 with Atty consultation or $495 for the plan only. |
| Custodian Requirement |
An IRA must have a third-party custodian involved in the account (e.g. bank. Credit union, trust company) who is the trustee of the IRA. Of course we recommend our company, www.directedira.com. |
A 401(k) can be self-trustee’d, meaning the business owner can be the trustee of the 401(k). This provides for greater control but also greater responsibility. |
| Investment Details |
A self-directed IRA is invested through the self-directed IRA custodian. A self-directed IRA can be subject to a tax called UDFI/UBIT on income from debt leveraged real estate. |
A Solo 401(k) is invested by the trustee of the 401(k) which could be the business owner. A solo 401(k) is exempt from UDFI/UBIT on income from debt leveraged real estate. |
Keep in mind that the solo 401(k) is only available to self-employed persons while the self-directed IRA is available to everyone who has earned income or who has funds in an existing retirement account that can be rolled over to an IRA.
Conclusion
Based on the differences outlined above, a solo 401(k) is generally a better option for someone who is self-employed and is still trying to maximize contributions as the solo 401(k) has much higher contribution amounts. On the other hand, a self-directed IRA is a better option for someone who has already saved for retirement and who has enough funds in their retirement accounts that can be rolled over and invested via a self-directed IRA as the self-directed IRA is easier and cheaper to establish.
Another major consideration in deciding between a solo 401(k) and a self-directed IRA is whether there will be debt on real estate investments. If there is debt and if the account owner is self-employed, they are much better off choosing a solo 401(k) over an IRA as solo 401(k)s are exempt from UDFI tax on leveraged real estate.
Choosing between a self-directed IRA and a solo 401(k) is a critical decision when you start self-directing your retirement. Make sure you consider all of the differences before you establish your new account.
Mat has been at the forefront of the self-directed IRA industry since 2006. He is the CEO of Directed IRA & Directed Trust Company where they handle all types of self-directed accounts (IRAs, Roth IRAs, HSAs, Coverdell ESA, Solo Ks, and Custodial Accounts) which are typically invested into real estate, private company/private equity, IRA/LLCs, notes, precious metals, and cryptocurrency. Mat is also a partner at KKOS Lawyers and serves clients nationwide from its Phoenix, AZ office.
He is published regularly on retirement, tax, and business topics, and is a VIP Contributor at Entrepreneur.com. Mat is the best-selling author of the most widely used book in the self-directed IRA industry, The Self-Directed IRA Handbook: An Authoritative Guide for Self-Directed Retirement Plan Investors and Their Advisors.
by Mat Sorensen | Oct 3, 2022 | Uncategorized
Have you taken a loan from your employer 401(k) plan and plan on leaving? Unfortunately, most company plans will require you to repay the loan within 60 days, or they will distribute the amount outstanding on the loan from your 401(k) account. Its one of the ways they try to keep their employees from leaving. “Don’t leave or we’ll distribute your 401(k) loan that you took from your money in your 401(k) account.”
How to Buy Yourself More Time & Avoid the Distribution
The good news is that following the Tax Cuts and Jobs Act (TCJA) you now have the option to re-pay the loan to an IRA to avoid the distribution and you have until your personal tax return deadline of the following year (including extensions) to contribute that re-payment amount to an IRA. By re-paying the amount outstanding on the loan to an IRA, you will avoid taxes and penalties that would otherwise arise from distribution of a participant 401(k) loan.
How It Works In Practice
Let’s say you left employment from your employer in February 2019 and that you had a 401(k) loan that was distributed by your employer’s plan following your termination of employment. You will have until October 15th of 2020 (if you extend your personal return, 6 month extension from April 15th) to make re-payment of the amount that was outstanding on the loan to an IRA. These funds are then treated as a rollover to your IRA from the 401(k) plan and your distribution and 1099-R will be reported on your federal tax return as a rollover and will not be subject to tax and penalty. While it’s not perfect it’s far greater time than was previously allowed. Traditionally, you had 30 or 60 days at most to make re-payment.
Limitations
The ability to rollover an outstanding 401(k) loan amount to an IRA is only available when you have left an employer (for any reason). It does not apply in instances where you are still employed and have simply failed to re-pay the loan or to make timely payments.
Mat has been at the forefront of the self-directed IRA industry since 2006. He is the CEO of Directed IRA & Directed Trust Company where they handle all types of self-directed accounts (IRAs, Roth IRAs, HSAs, Coverdell ESA, Solo Ks, and Custodial Accounts) which are typically invested into real estate, private company/private equity, IRA/LLCs, notes, precious metals, and cryptocurrency. Mat is also a partner at KKOS Lawyers and serves clients nationwide from its Phoenix, AZ office.
He is published regularly on retirement, tax, and business topics, and is a VIP Contributor at Entrepreneur.com. Mat is the best-selling author of the most widely used book in the self-directed IRA industry, The Self-Directed IRA Handbook: An Authoritative Guide for Self-Directed Retirement Plan Investors and Their Advisors.
by Mat Sorensen | Sep 21, 2022 | Retirement & IRAs, Uncategorized
A SEP IRA is a powerful retirement account used by many self-employed persons and business owners. It is particularly attractive as you can contribute up to $61,000 into it annually. That’s in comparison to a Traditional IRA, where you can only contribute up to $6,000 a year. “But what if I have employees? If I have employees in my business do I need to offer then plan and contribute for them?” The answer is “yes” and “no,” as it depends on your employees. The devil’s – or perhaps we should say loopholes – in the details.
Employer Contribution
Keep in mind that the money contributed to a SEP IRA is an “employer contribution.” This means that the money comes from the company and is set at a maximum of 25% of the employee’s wage. So, if you are the only employee and you make $100,000 that year, the company can contribute $25,000 to the SEP IRA. For a business owner with no employees, it doesn’t really make a difference whether you pay into the SEP IRA from your company’s account or from your personal account as its all effectively your money in the end.
However, once you have employees, you are required to offer the same SEP IRA and same employer contribution to them that you offer to yourself. Now, you will likely care whether that money comes from the employee’s wages or from the company’s account. So, let’s say you had an S-Corporation and had a W-2 of $100,000, and you had one employee who had a W-2 of $40,000. The company would contribute $25,000 to your SEP IRA account (if doing the 25% max rate) and would also contribute $10,000 to the employee’s SEP IRA. While you, as the business owner, may be excited about contributing $25,000 into your own SEP IRA from the company’s funds, you may be less excited about contributing $10,000 to an employee’s SEP IRA account from the company’s funds. But, this is what’s required if the employee is eligible.
Employee Eligibility Loophole and Flexibility
The good news is that you only need to offer the SEP IRA to “eligible employees,” and you can make employees “ineligible” if they have not worked for you for 3 years out of the prior 5 years (see IRS SEP IRA FAQs). In other words, until someone has worked for the company for at least 3 years, you do not need to offer the SEP IRA to them. For many small businesses, self-employed persons and new companies, a SEP IRA can be an excellent choice for the business owner as they may be the only eligible person who has worked for the company for 3 years. You can also restrict eligibility if an employee has not yet turned 21. This 3 year employee eligibility rule under a SEP IRA is far superior to the 1 year employee eligibility rule that would apply when using a Solo K upon hiring employees.
Keep in mind that you are subject to the same eligibility rules. So, if this is a new company, then the strategy of offering the plan to yourself while restricting others doesn’t work so well. But, as is usually the case, if you have worked the business for years before having an employee, then you can set the work year requirement to make yourself eligible while setting it out up to 3 years for any employees.
If an employee has worked 3 out of the prior 5 years and is now eligible, the business owner can decide to cease the SEP IRA plan (and their own contributions), and can instead move to a 401(k) or other more common retirement plan structure where the company is not required to offer such a generous employer contribution.
A SEP IRA can be self-directed and invested into real estate, LLCs, private stock, notes, and precious metals. Directed IRA establishes SEP IRA accounts for self-directed investors and you can set-up an account entirely online. Learn more now at www.directedira.com.
Mat has been at the forefront of the self-directed IRA industry since 2006. He is the CEO of Directed IRA & Directed Trust Company where they handle all types of self-directed accounts (IRAs, Roth IRAs, HSAs, Coverdell ESA, Solo Ks, and Custodial Accounts) which are typically invested into real estate, private company/private equity, IRA/LLCs, notes, precious metals, and cryptocurrency. Mat is also a partner at KKOS Lawyers and serves clients nationwide from its Phoenix, AZ office.
He is published regularly on retirement, tax, and business topics, and is a VIP Contributor at Entrepreneur.com. Mat is the best-selling author of the most widely used book in the self-directed IRA industry, The Self-Directed IRA Handbook: An Authoritative Guide for Self-Directed Retirement Plan Investors and Their Advisors.
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