Tis’ the Season

No, I am not talking about Christmas. It’s election season, and it continues all the way to the first Tuesday in November. Right now, Donald Trump looks poised to take the Republican nomination barring an event truly out of left field. However, with current court cases pending and a rising competitor in Nikki Haley we should not count the former president as a shoo-in just yet.

Bah humbug

Is what Americans are saying toward President Biden’s leadership thus far. He remains the presumptive Democratic nominee but his approval rating in recent polling sits at only 33%—the worst of his entire presidency thus far. There’s even more bad new for the Biden campaign, as the current president trails the former President in most polls conducted in the last 10 days. 

Who’s been naughty?

We’ve seen several business magnates rise and fall since COVID. Probably the biggest splash was Donald Trump’s fraud verdict, but Sam Bankman-Fried’s multi-billion dollar FTX fraud is not far behind.

Speaking of presidents, the House is looking to impeach Biden. This inquiry follows over a year of investigation into whether Biden profited from his son’s overseas business dealings.

The newest addition to the naughty list is Elon Musk as the SEC turns its magnifying glass towards Twitter.

The secret retirement sauce - A Deep Dive on the Mega Backdoor Roth

The Mega-Backdoor Roth is the secret weapon for high earners who want to maximize their retirement.

Backdoor Roth IRAs are nice and all, but the Mega-Backdoor Roth lets you contribute $46,000 a year. I’m going to show you how they work.

You can put $69,000 in your 401k in 2024. Yes you heard that right it’s not $23,000, it’s $69,000.

The $23k is the amount you can contribute pre-tax, meaning it saves you taxes in the year you contribute. When you retire, that money gets taxed when it comes out and your are required to take out a certain percentage when you get into your 70s.

These required withdrawals are called Required Minimum Distributions or RMDs.

They make it so you can’t control your taxable income and even if you can live on $50 or 60k a year, you might pay taxes on hundreds of thousands of dollars of income.

Roth IRAs and Roth 401ks do not have minimum distributions. (Note that RMD rules for Roth 401ks changed recently). This gives you complete control over how much tax you pay on that money.

Roth accounts get taxed this year, but they grow tax free and come out completely tax free in retirement.

That remaining $46k will be your employer match, any profit sharing from your employer, and then you can add the rest after-tax.

After-tax is not Roth and this is essential to know.

After-tax money gets taxed this year, and any gains on the money will be taxed as ordinary income in retirement, which is even worse than a taxable brokerage which is taxed at capital gains rates!

So the money is in a weird spot right now. It’s in the 401k, but not getting any of the benefits. To get the benefits, we need to roll the after-tax money into a Roth account.

This can happen in one of two ways. You can roll the money into the Roth portion of your 401k, which is called an “in-plan conversion”, or you can roll it out of your 401k and into a Roth IRA.

This will depend on if your employer lets you do in-plan conversions. The easiest way to find this out is to ask HR if they allow it, but you can also find it in the summary plan description or SPD that your employer has to give you annually.

Speaking of your employer, they have to give you permission to do a Mega-Backdoor Roth. 401k plans have rules that keep the owners and officers of the company from abusing the account, so the contributions from key employees need to balance out with the contributions from non-key employees.

These are the top-heavy rules and to summarize, 40% or more of all the money in the plan must be from non-key employees.

A key employee is anyone who owns more than 5% of the company, an officer making more than $215,000, or any employee who owns at least 1% of the company and is making $150k or more.

A non-key employee is anyone else, so chances are you are a non-key employee.

If your Mega-Backdoor Roth is going to throw off the balance, they won’t let you do it, but if you’re a non-key employee they might WANT you to do it because it means they can contribute more!

If your company lets you do it, you have to watch out for the Pro-Rata Rule. If you have other Traditional IRAs or SEP IRAs, doing a Roth Conversion will create a huge tax headache.

The Pro-Rata rule states that if you want to roll money from a Traditional IRA into a Roth IRA, it has to come out of your entire IRA balance, not just the one account.

This is important because you might have already paid taxes on the amount you hope to roll over, but if you have money in another Traditional IRA that hasn’t been taxed yet, you may have to pay taxes on part of that money as well.

It’s usually better to roll all Traditional IRAs into your 401k before doing a backdoor Roth.

If you want to know if the Mega-Backdoor Roth is right for your unique situation, schedule a call with me down below.

ALT INVEST

Amongst high net-worth portfolio managers, you often hear the term alternative investments, but what does that actually mean? The three main investment asset classes are stocks, bonds, and cash/cash equivalents—so alternative investments means asset classes outside of the big three. This week I want to focus on a rising sector of alternative investments, private credit. 

Companies need financing. Like a student who takes on loans to pay for college in hopes of making more money after graduation, corporations take on loans to buy more equipment, hire new workers, or invest in research and development with the hope that their borrowing will lead to larger revenues that can cover the payments of these loans and leave the company with a profit. Typically, companies will go to banks or issue bonds that are bought by mutual funds, broker-dealers, and other financial institutions. With private credit, these companies are going to specific teams at financial institutions that specialize in private credit. These teams raise money from investors, then solicit companies in need of cash and use this investor pool of money for financing.

The attractiveness of private credit for companies lies in the flexible structuring of these loans. The terms of a private credit agreement can be adjusted in many different ways, more so than bonds or regular bank loans. At the same time, the financial institutions providing these loans are able to extract concessions from the borrowing companies in the form of floating rate interest or other beneficial arrangements in exchange for providing flexibility. The private credit market currently sits at around $1.2 trillion, growing significantly following the Global Financial Crisis in 2008 and during the COVID-19 Pandemic and continuing into today.

At this time, private credit is largely restricted to high-net-worth investors and institutions.

Do you feel obligated to blow your budget to buy gifts this month?

Is that sense of obligation real or self-imposed?

Work with Hoskin Capital

Knowing is half the battle, we help you get it done.

We manage your entire financial life for a fixed annual fee. 

Meet our team of experts, peep our services, and learn why we exist.