Maximize the Value of Your Retirement Accounts

Today's Newsletter: ~4 minute read

Author

Danny V
April 08, 2023

It’s no secret:

I am not a fan of traditional retirement vehicles (IRA & 401k).

Here’s why:

  1. Limited Selection - in most cases you can only invest in stock/bond funds

  2. Illiquidity - you can’t touch the money for years (with few exceptions)

If you can’t touch the money for years, you shouldn’t accept an average 7% return.

We’ve been pre-conditioned to accept that.

And unfortunately hundreds of “Influencers” continue to push this narrative:

No offense, Steve — but not interested in tying up my cash for 50 years to generate an average return.

Despite my frustration, here’s the reality:

99% of us (myself included) have at least 1 retirement account.

If you’ve ever worked a full-time job, it’s almost impossible not to.

So rather than ignore the topic altogether, in this issue I’d like to highlight two ways to maximize the value you derive from these accounts:

  1. Open a Self-Directed Account

  2. Put Your Kids on Payroll

Let’s dive in 👇🏻

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Strategy #1: Open a Self-Directed Account and Invest in Alternative Assets

Dartmouth’s endowment fund is worth $8 billion dollars.

40% of their fund is invested in private equity and venture capital.

These investments have returned 23% per year over the past decade, more than double their next best category:

All of us should consider allocating a piece of our portfolio to alternative assets.

This includes:

However, if most of your wealth is in an employer-sponsored IRA or 401(k), you will not be able to invest in alternatives.

The way around this limitation is to setup a self-directed retirement account.

There are two ways to do this:

Solo 401(k)

This is a great solution for a small business owner with no employees.

Any self-employed individual or business owner is eligible as long as no employee works over 1,000 hours per year (excluding the owner’s spouse).

Here’s the kicker: even if you have a full-time job, you can open a solo 401k.

You just need a legitimate business with no employees.

If this piqued your interest, this article goes into incredible depth on the topic.

Self-Directed IRA

A second approach is to “convert” or “rollover” your employer-sponsored plans into a Self-Directed IRA.

Current employees will need to call their HR department to determine what can and cannot transfer. For example, you may be able to transfer your contributions, but not the employer-match portion.

Regardless, you should be able to transfer funds from a retirement account held with a former employer.

If this option interests you, I’d recommend contacting The Equity Trust Company.

Strategy #2: Hire Your Kids and Contribute to a Custodial Roth IRA in Their Name

Here’s how it works:

  • Own a business (or legitimize your side hustle)

  • Hire your kids to perform a basic task (eg. bookkeeping, data entry, graphic design)

  • Pay them a “reasonable wage” - ideally more than $13,850 (2023 standard deduction)

  • They pay no federal tax on the first $13,850

  • Your business income is reduced by the wage you pay them

  • Take the tax your business saves and put it into a Custodial Roth IRA in their name

  • Repeat for years until they enter the workforce

If, for example, you pay a $13,850 annual wage, at a 40% marginal tax rate, your business saves ~$5,500 in tax.

This is a total win-win scenario:

The child’s salary reduces the business income.

The child gains real-world skills and builds an after-tax nest egg.

Also, contributions to a Roth IRA can be pulled out any time, for any reason.

Meaning when the child needs some cash to pay for school, buy a car, pay for a wedding ring, etc. they can pull money from the account with no penalty and pay no tax.

Two important reminders:

  1. The child's responsibilities need to be "ordinary and necessary" as with any business expense.

  2. Work with your CPA to confirm your specific State labor laws. Every state varies.

Go Deeper:

Your friendly disclaimer: I am not a CPA. Consult one before implementing any of this.

🔍 Community Spotlight

Ever wonder how your favorite creator built an audience of 50,000 loyal followers?

Each week, Chenell breaks down their exact playbook, in crazy detail. Her newsletter has quickly become my favorite weekly read.

Hopefully I kept this free of too much confusing jargon.

As always, if you found this valuable please consider sharing it with others.

If you have any questions about these strategies, simply reply to this email and let me know.

It’s been fun hearing from so many of you recently.

Until next week,

Danny