Use our new AI tool to find the right Self-Directed IRA!

IRA Financial Blog

Contributing to a 401(k), Roth Conversions and more | Client Q&A

AdMail Podcast

In this week’s episode, IRA Financial’s Adam Bergman Esq. answers questions about contributing gains to a 401(k) plan to save on taxes, doing a Roth conversion with an LLC and tips for growing a podcast.

Question 1 from Steve J in Louisville, KY: I recently sold my business for a big gain. Can I contribute the gains to a 401(k) plan to save tax?

First, it’s important to understand what types of income can be contributed to a 401(k) plan. Most people will use compensation they earn from a job to save for retirement. There is income that cannot be considered for your 401(k) plan contribution. Since Steve earned money from the sale of a capital asset, he cannot shelter that gain in a 401(k).

Therefore, if you do not have any other earned income and your only source of income was from the sale of the business, you cannot contribute to the plan. Of course, if you (or your spouse) has income from a job, you can base your contributions off of that income.

The simple answer to Steve’s question is that no, you cannot take the money you made from the sale of a business and contribute those gains into a 401(k). You must pay tax based on the sale price and how long you’ve held the asset (either short-term or long-term capital gains).

Let’s assume Richard’s LLC is owned 100% by the pretax IRA. He has the ability to convert however much he wants into a Roth. Essentially, you are converting the LLC itself and not the assets held by it. Therefore, if his pretax IRA owns the entire LLC as it stands, whatever he converts to a Roth will own part of it now. Thus, it goes from being a Single Member LLC (wholly owned by the IRA) to a Multi-Member LLC (85% owned by the traditional IRA and 15% owned by the Roth IRA). With that, other IRS forms would be required to be filed.

All distributions would be taken on a pro rata basis. 85% of each distribution is taxable since it is held by the pretax IRA, while the 15% held within the Roth would not be taxable. While there are ways to withdraw from one or the other, known as dilution, it does get a little tricky. It can be done, but if you take from only one side of the LLC, a new percentage would have to be calculated.

Therefore the easiest way is to simply withdraw funds and pay taxes on the taxable percentage. Of course, you may choose to convert more pretax funds to a Roth at a later date. If Richard was to convert another 35% over the next few years, he would then have a 50/50 split of the LLC. If the goal is to convert all to a Roth, once you convert the entire pretax IRA, the LLC will then be wholly owned by the Roth IRA.

Question 3 from Amy S in Provo, UT: I really like how you have built your podcast over the last few years. Any tips? I am a serial entrepreneur that loves helping small business owners grow their business.

The easiest thing to say to Amy is just to do it! If you are passionate about a particular subject, just grab a mic and start recording. If you have interesting things to say and there are people interested in the topic you are talking about, people will listen. You know what the worst thing that may happen? People won’t listen. That’s it. If your podcast doesn’t get traction, the only thing you are out is the time you spent creating it.

However, you should give it time to grow. Don’t give up after a couple of weeks if you see you only have a couple dozen listens/downloads and six subscribers. Plus, if you enjoy talking about a topic, and you help just one person, maybe it’s worth it to you to keep at it.

Also, it’s good to put your product out wherever you can. As you may know, you can find our podcasts on SoundCloud, iTunes, Spotify, etc. We also post them on YouTube as well. Obviously, if you are reading this, we post them on the blog on our website, too. Also, take advantage of social media. Post links to your podcast all over Twitter, Facebook, LinkedIn, wherever you think you may find listeners.

Lastly, don’t be afraid of critiques. Not ever podcast (including ours) is perfect. Someone might be able to help you out with a simple suggestion that you may have overlooked. Good luck Amy!

AdMail – Keep it Coming

We hope you enjoyed the latest episode of AdMail. Mr. Bergman will continue to respond to questions each week so long there is a demand for them! If you have any questions for him, email him at [email protected].

As with his other podcasts, you can check out AdMail on SoundCloud. Be sure to subscribe to know when the next one pops up! Thanks for listening and have a great day, Self-Directed Nation!


Latest Content

Send Us a Message!