Show Notes

• (00:51) Can I Get Out of a Bad SIMPLE IRA and Stash Money in a Roth? (Matty, Chandler, AZ)
• (10:36) Disqualified Persons and Prohibited Transactions: Can I Load Up on Company Shares In My Roth IRA Before Sale If I’m an Owner? (E-Dog, Boulder, CO)
• (23:07) Which Annuity Beneficiary Designations Take Precedence in a Community Property State Like California? (JAAW, San Diego)

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Can I Get Out of a Bad SIMPLE IRA and Stash Money in a Roth? (Matty, Chandler, AZ)

Joe: I’ve got Matty writes in from Chandler, Arizona. He goes, “I make Moscow Mules on Fridays while playing Sequence, fun game with the wife-”

Andi: It’s a board game. I looked it up.

Joe: I was thinking something else. “- and drive the 2014 Toyota RAV4.” Okay. Very cool. Matty. You ever played Sequence, Big Al, with the lady friend?

Al: No, never heard of it.

Joe: Andi, you play sequence with your little man friend?

Andi: Like I said, I had to look it up to find out that it was a board game, so no. That is not on our list.

Joe: “I work at a small family business making $100,000 and I have a bad simple IRA managed by a third party, making high commissions. I’ve tried to switch and do the legwork, but they have friends in the business and are resistant to changing. The funds available have 5.75% load fees or 2% annual management fees. And there are no good options. All I want is some low-cost index funds or TDA- ” those are the-

Andi: -Target Date Funds-

Joe: -Target Date Funds, TDFs, “- that don’t have exorbitant costs. I’ve read that after two years from the first contribution, I can roll over my balance to a rollover IRA while I’m still employed. Can you shed some light on this strategy and any possible pitfalls? I love my job and want to continue working here for as long as I’m able. I will max out my simple this year and max my Roth, my wife’s Roth and our HSA, but want to take advantage of the tax-deferred dollars without getting crushed by fees. I am hoping to rollover once per year, and continue working at this great job. Secondly, can I roll this yearly to a Roth and pay the taxes yearly to stash away some extra Roth money? I’m 33, married with a 3yo and a 1yo. We have doing great these past few years, but just starting investing a few years ago.

I’m trying to catch up a bit and set ourselves up for a bright future. My income may continue to go up and I would like to get a good stash.” Good stash. Big Al had a nice stash.

Andi: Mustache.

Al: Yeah, I did. But it turned gray and it didn’t suit me anymore.

Joe: Just dye it red.

Al: Yeah, that wouldn’t look good either.

Joe: He wants a “good stash of Roth dollars. He’s got a simple balance of $15,000, Roth of $40,000, an HSA of $12,000, and a brokerage account of $25,000. Thanks for all you do. My wife falls makes fun of me for listening to YMYW but appreciates its value.”

Al: I think you take the word ‘falls’ out. ‘My wife makes fun of me for listening to YMYW.’ I think somehow he got an extra word in there.

Joe: So she makes fun of him and he calls her ‘the wife’.

Joe: And they play Sequence. I don’t know why his wife makes fun of us. We’re here to help.

Al: We try.

Joe: Okay. So he’s got a simple plan, high fees, big commissions upfront. Simple plans are you work for a small business, like a small family business. And he went to the owner and was like, hey, this plan sucks. Fix the plan. And then the owner of the company is like, no, these guys are my boys.

Al: Yeah. They’re friends.

Joe: We’re not changing the plan.

Al: We go way back. I can’t do it.

Joe: Yeah. You know, I don’t want to upset my boys here. So he doesn’t want to cause a riff. He likes his job. And so he’s thinking, hey, can I do an in-service withdrawal from the simple plan after two years? I don’t think he can. I think the plan itself can move, but as a participant of the simple plan as an employee of that-  I don’t know.

Al: Well, I don’t know the answer to that either. However, what I do know is that you can, or you may be able to transfer after two years to an IRA. You have to wait two years. It’s kind of a weird thing. You can go to another simple IRA, which presumably is if you quit, and then transfer at that point, but after two years you can go to an IRA. If you don’t wait two years, then there’s a 25% penalty in addition to the tax. So it’s not something that you want to do. But I suppose it depends upon the plan. Simple IRA plans are usually pretty simple. I’m not sure. I don’t think most of them allow in-service withdrawals, but I guess you’d have to go check with the plan.

Joe: Because here’s the deal is that I’m the business owner. I want to set up a retirement plan for myself. I want to- I got a couple employees and I don’t want to set up a 401(k) plan because it’s going to cost me too much money. I got to get a third-party administrator. I got to do all this accounting. I got to do the 5500s. I got to do all this other stuff. I’m not going to do that. So I’m going to set up a simple plan. And so I’m going to call up my boys at American Funds or whatever and they’re going to come. And so they have high commission fees when you put your dollars in. And then the internal fees are fairly high and so Matty’s like, this plan is garbage. But I think he’s stuck with the plan as a participant. If he owned the business, then he’s fine. Once you establish it. And the reason why they had that rule is because they don’t want small business owners establishing a plan as a tax shelter and putting dollars away. And they’re probably doing something different with the plan. And I think that rule is so old and stupid, but I mean, that’s- who am I to change anything that- maybe we can put that in the SECURE Act, Al.

Al: Maybe we could. but I think that- I think we are probably right, but the thing to do is to go to the plan itself and see if it allows that, which it probably doesn’t.

Joe: Here’s a better question for you, Al. Even though I’m stuck with some commissions upfront and some internal costs, do you still contribute to the plan to get the tax deduction? Or do you bypass the plan altogether?

Al: Well, with the simple, you can put away $12,000, $13,000. I don’t remember the number right now. So it’s a lot more than–could do a Roth IRA, a regular IRA-  but, let’s see –

Joe: If he’s maxing it out, you put $13,000 in- I don’t know what tax bracket he’s in.

Al: Plus you get a match, either 2% or 3%, depending upon what the employer picked.

Joee: Right. So-

Al: I would do that even though with the fees, most of the fees are one time. I mean it’s not great, I agree. Most investments now have no loads and 2% is a fairly high ongoing rate, but it’s not outrageous. The outrageous part is upfront. But I think if you think about the match you’re getting and the tax deduction, I think it’s still worth it.

Joe: Yeah. It’s going to offset the cost and fees. And the reason why there’s costs and fees and why we still see some of these plans with smaller employers is because they don’t want to pay for all the administration of it. That’s why- they’re just passing the cost to the employee is basically kind of what they’re doing, because that plan probably didn’t cost the employer anything. Here, we’ll set it up for you. No problem. We’ll manage the plan for you. Sounds great. Right. And then, so how they’re getting compensated for setting up the plan is through the commissions and internal costs and fees. So I get it. I mean, ideally it’s not, you know, there’s going to be drag on it, but you’re young. It’s a great- if you don’t have the plan, are you going to- let’s say he maxes it out and it puts $13,000 in, I mean, that saves him about, who knows his tax bracket, but maybe $3000 to $4000 in tax. Plus he gets a match of another few thousand bucks. I mean, I think that that should offset the cost, but-

Al: Maybe-

Joe: And then once he gets a larger balance, then roll the thing out.

Al: Maybe Matty could have his employer or maybe his employer would talk to his friends that are managing the plan and come up with some lower cost options, like index-type funds. Even though there’s- and you know, they probably don’t want to, cause maybe they don’t get a commission for that, but that, you know, that would be a thing to at least try.

Joe: Right. Or, yeah. Those commission boys are not going to come in and say, all right, here’s a plan with the low cost funds. We’re not going to get paid anything on it.

Al: I don’t know, I never worked in that world, Joe, so I’m- that’s what I would try, even though I probably would have a 1% success rate.

Joe: Well good luck, Matty. Appreciate the email and I’m definitely gonna- I’ll try Sequence out one Friday night. I’ll report back.

Disqualified Persons and Prohibited Transactions: Can I Load Up on Company Shares In My Roth IRA Before Sale If I’m an Owner? (E-Dog, Boulder, CO)

Joe: Got a question Al, from E-Dog.

Al: Love the name, from Boulder, Colorado.

Joe: E-Dog. I wonder what ‘E’ stands for.

Andi: It’s probably something boring like Eric.

Al: I dunno. I mean, I know Boulder has a Lazy Dog restaurant. I’ve eaten there. But I don’t know about an E-Dog.

Joe: What up Dog? Sounds good. Alright. He goes, “Hello and thank you for taking my question. I have a Roth IRA question for you experts. Not the garage door, the Megatron that you normally get, but a private equity Roth question for you today. I am a minority shareholder in a private C Corp, which likely will be acquired by a BFC, a big f-ing company.”

Al: I wondered how you’re going to say that.

Joe: A little BFC. “I currently own roughly 6% of this small company. My question is if I could and should buy additional shares of the private company through my Roth IRA or better yet, transfer shares that I already own into my Roth. I am both an employee of the company and a member of the board of directors of the company. The current stock value of the small company is about $.17 a share. And I own roughly 400,000 shares. The expected sale price of the company is $2 per share.” The BFC is going to buy it for $2 a share. “If I were able to buy or transfer into the Roth before the sale closes, I could have $800,000 in my Roth, happily growing tax-free until my retirement. Sounds pretty nice. My understanding is since I own less than 10% of the company’s stock, I would not be a disqualified person. Assuming this is true, how would I go about executing this buy? Would I call up Vanguard and say, ‘go buy private equity in XYZ Corp’? I currently have $70,000 in my Roth IRA that could in theory, cover the price of purchasing 400,000 shares at $.17. I also have not contributed any money to my Roth this year. How does this change if the BFC buys my company for stock versus cash, assuming the purchase is complete and I now have over $800,000 of my Roth? Should I then take the Roth principal out and bring it back to my brokerage account? I appreciate the candid discussion in the spirit of spit balling. I realize this may not impact the broader base of your listeners, but I also think it’s a subject that hasn’t really been covered anywhere else.” Cool. “In order to paint a picture for Joe’s vivid imagination, I provide the following background, I’m 38 yo, drive a 2021 Honda Pilot.” Interesting. “Have a lovely wife and the two, mostly good boys at 7 and 10 and a golden doodle puppy. My beverage of choice is my own homebrewed rye IPA.” A little home brewer. E-Dog is in the garage, cooking up some little sweet sauce.

Al: I bet it’s good.

Joe: He makes it a few times a year “But my beautiful wife prefers little good gin and tonic. I tend to listen to the show while walking my dog through the vast open space behind my house, on my lunch break. Thank you so much, love the show.”

Andi: And he’s walking his dog, drinking his rye IPA in his back yard. Perfect. Listening to the show.

Al: We got the picture painted. It’s all good.

Joe: I got it. It’s very wide open space behind his house. A little Boulder, Colorado, could see the mountains in the background. IPA. He’s probably got like a little beard. I can see E-Dog having a beard.

Al: I can too. He’s looking at the Flat Irons. Those are right above the town. Very beautiful. I could see it too.

Joe: Thanks E-Dog. Okay, so this is pretty cool. Cool, cool question. Cause this has pretty much been in the news with Thiel that has like $5,000,000,000 in his Roth IRA.

Al: Peter Thiel. Yeah. He had invested in PayPal and Facebook in his Roth and now it’s worth $5,000,000,000.

Joe: Something like that. Give or take a couple of bucks.

Al: And the IRS tried to change the rule just because of him, which they didn’t quite do. I should say our politicians tried to change the law. They couldn’t get it done last December, but I’m sure they’re still working on it.

Joe: So stupid though. It’s like how many people, I mean, it’s- I dunno, he probably didn’t donate to someone’s campaign. And so they’re after him and –

Al: It’s possible.

Joe: Because most people have very little money in a Roth IRA, unless they listen to our show. Most people now are converting them, doing the Megatrons and things like that. So E-Dog here, he’s got a little private company, so a BFC is going to buy it. And so he’s thinking, instead of having my stock in my brokerage account, it’s a privately held company, or however he’s going to hold the privately held stock, it’s probably just not a ledger, a piece of paper until they sell it. Then he’s going to get cash and he’s going to get cashed out at $800,000 and he has $17 a share. And then he’s going to get taxed on that from $.17 a share- I’m sorry- to $2 a share. So he almost has zero basis. So the total $800,000 that he’s going to receive as being a board member and a shareholder of this private company is a) good news, he’s got $800,000; bad news has got a lot of tax. And also the additional $800,000 or whatever the net effect after taxes, is always going to be subject to capital gains tax. He’s thinking, hey, there’s a better way I could- I should do this. I already know what the stock price is going to do. It’s going to go to $2 a share. So might as well put it in my Roth. And so when the transaction happens, guess what? I pay no tax on the transaction. And then the $800,000 that I have is now sitting in my Roth. So all future dollar that grows is going to grow 100% tax-free. It sounds like an awesome plan.

Al: Yep. I love it.

Joe: However-

Al: There’s a few issues here and there. And I think one off the bat, Joe, is there’s all kinds of rules so that you can’t do this for the exact reason you said, because it sounds too good to be true. So I guess if you think about it, there’s a lot of prohibited transactions for your own IRA and stock in your company, first of all. And I guess maybe to summarize it, is you can’t have an investor- you can’t have a stock from a disqualified person in your IRA, and then there’s all kinds of rules- well, who’s disqualified? And right off the bat, I will tell you that if you already- if the company’s already in existence and you own an IRA or a Roth, and you want to buy the shares from yourself or buy more shares, you’re already a disqualified person. You can’t even do it with yourself, your spouse, your kids, your grandkids. It has to be someone completely unrelated to you. And there’s all kinds of other rules that you could run afoul of. So I don’t think it works in this case. It can work though, Joe, when it’s a brand new company, a company not in existence yet. And so when a company is not yet in existence, it’s not a disqualified person. So that is possible. So that’s likely what Peter Thiel did way back when. But an existing company, it’s really, really tricky.

Joe: Because what’s interesting is that the company itself could be a disqualified person.

Al: Right.

Joe: And so it’s like, what’s the definition of a disqualified person? Because we’re thinking you just hear the word disqualified person, you’re just thinking it’s a human being, but it could be the entity itself that’s issuing the shares. So I own the shares and I’m trying to put my own shares into my own IRA. That could be self-dealing. So then I’m a disqualified person by doing that. However, I could purchase additional shares, if the company itself is not a disqualified person or the person that I purchasing it from, is not a disqualified person, and how the hell do you find out who’s disqualified or qualified?

Al: And then there’s all these rules, these 10% rules and fiduciary, are you a fiduciary? Are you not a fiduciary? What kind of ownership do you have? What sort of control do you have? So it’s tricky. And I would say for anyone that really wants to do this, it’s a great strategy if it works. But there’s a lot of gray area in this and if you get it wrong, the IRS will then basically say you needed to do a distribution-

Joe: – full distribution-

Al: – full distribution, way back when, fully taxable, plus penalties. It’s not something you want to screw around with. So my top advice, I guess, is anyone-

Joe: We’re not giving advice, we’re just-

Al: Well, my top spitball thought- good point – is this, is if you’re considering something like this, bring in a tax attorney. This is very complex stuff. It’s easy to get all fouled up in this.

Joe: And don’t go- it’s not Vanguard. You have to go to a self-directed IRA. So anytime you want a hard asset or a private asset, things like that- so let’s say if I wanted to buy an apartment building, I can do that inside my IRA. Vanguard is not going to hold the apartment building. I have to set up my own trust within a self-directed IRA. Then that trust then purchase the overall shares of company XYZ or purchases whatever corporation or real estate holdings or things like that. So the 3 things that cannot be purchased in an IRA is like collectibles. So if you have an art collection. Life insurance is another one. And then like S Corps for some odd reason. So those are really the only 3 things. So everything else is fair game. Then you go through a self-directed IRA, get a really good tax attorney and let them kind of figure it out. Big Al and I are just spit balling here. And who knows? You might be able to do this. You might not. It’s an awesome strategy and you’re right, it doesn’t really affect a ton of people, but it’s super interesting if you could figure out can I maximize my overall wealth by being smarter than the average person? And then that’s what this- basically the show’s all about is trying to educate people to do things maybe a little bit differently, a little bit better. But we don’t know if this is going to work for E-Dog’s case. But if it does, I’m going to Boulder and I’m going to have some moonshine and have some of his IPA, sitting outside his backyard, looking at his Labradoodles or whatever kind of dogs you got.

Al: Golden doodle puppy. I like it. I’m thinking it doesn’t work, but it’s worth investigating. I’ll put it that way. It’s worth investigating. The reason why Vanguard can’t hold the shares is because it’s a private company. If it became public, then it could be a different story, then Vanguard could get involved. But that’s why you have to have a self-directed account. And by the way, assuming this does work, which I don’t think it does, but let’s say it does work. Whether the new company, the BFC company, buys with stock or cash, it doesn’t matter. Because it’s inside a Roth. It’s a non-taxable transaction and you pull it out when you can. And then it’s tax-free. Of course then Joe, you have to have the 5-year rule, all that stuff too. Right. That’s a whole ‘nother topic.

Joe: All right. Very good. Thanks E- Dog.

Which Annuity Beneficiary Designations Take Precedence in a Community Property State Like California? (JAAW, San Diego)

Joe: Got Jaaw writes in from San Diego. “Please advise which directive takes precedence on a beneficiary form in California, state law or the annuity’s owner’s designation? My spouse has an annuity that we both agreed should have our children as primary beneficiaries and I as contingent beneficiary. Since California is a community property state, the statute precludes our wishes from being enforceable? Question mark. That was very- Jaaw. J A A W Jaaw.

Al: So it’s the beneficiary form.

Joe: Well, here’s what happens. If you want- but you can’t- let’s say if I’m married and I want to give my pension income or the annuity income, to not my spouse, to my children, there’s going to be a spouse consent form that the spouse will need to sign. So they’re fine. Their wishes will not be precluded. Because he can just sign the spousal consent form, and then it just goes to the kids versus him.

Al: Yeah. I agree with that. There is a consent form required, but it’s the beneficiary form. So you can do what you want to do. As long as you fill out and sign the proper paperwork.

Joe: Yeah, the beneficiary form will-

Al: That trumps virtually everything. Yep. Even like when you get divorced, someone that you hate and you forgot to change your beneficiary statement and even in your will and your trust or whatever, wherever you have, it says, it goes to your new spouse, it doesn’t matter. It’s the beneficiary form.

Joe: So always check your beneficiary forms, IRAs, 401(k)s. People think, all right, well, let me name the trust as the beneficiary now in my estate. That’s probably the worst thing that people can do given the new SECURE Act, right? Because they got rid of the stretch IRA. And then a lot of times people name the trust as a beneficiary of their retirement account, because a) they want to control the money from the- when they’re dead. They want to say, all right, well, Jr is not going to get the money until he’s 30. And then he gets a little bit more at 35 and he gets a little bit more at 40 or whatever. You know, that’s a discretionary trust. You’re trying to say, all right, well, it’s not going- you want to hold the money in trust and only distribute dollars out when you want the dollars to come out. And that is going to be controlled by the trust because you’re no longer living. Well with all of that money sitting in trust, it’s going to get taxed at trust rates and you’re going to get blown up. I guess the word to the wise for Jaaw and anyone listening is check your beneficiary forms. And if you have a trust listed as your beneficiary, I would immediately change that and call a professional to help you. Check your local listings for-

Al: – estate planning attorneys is who you want.

_______

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