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Meet the Masters – An important piece of planning for retirement when you are a sole owner of a business. Alex Mihajlov discusses the advantages of a SOLO 401k, Why you should take advantage of SOLO Roth 401k. Another Fun Conversation from Sunny Raleigh, North Carolina.
In order to qualify for a Solo 401(k), you cannot have any employees (other than your spouse), so if you have employees or want to have employees in the future, this plan is not for you. With a Solo 401(k), you are required by the IRS to file an annual report on Form 5500-SF if the account has $250,000 or more in assets at the end of the year. If you have less than $250,000, you may be exempt from the annual filing requirement. The IRS requires contributions to a Solo 401(k) to be “recurring and substantial.” In general, this means you must make contributions somewhat regularly for the account to remain active. According to the IRS, if the amount is not significant enough to show an intention to continue the plan, the IRS will treat the contributions as discontinued. Please check with an attorney or CPA for more information.
Trevor Chambers: Hey everybody. This is Trevor from Olde Raleigh Financial and I have Alex Mihajlov. Good – good – good evening and welcome, Alex. How are you today?
ALEX MIHAJLOV: Good evening, Trevor.
MIHAJLOV: Seems like we always talk on Fridays –
MIHAJLOV: — we should really maybe start trying to work instead of talking.
CHAMBERS: Oh, okay. Well –
MIHAJLOV: I mean, not that I don’t enjoy our conversations.
CHAMBERS: Yes. It’s over coffee, man. I thought we were having a moment here.
MIHAJLOV: Coffee and Trevor.
CHAMBERS: So, it’s – it’s the 15th of January of 2021. We are in a new year. New year. New us. One of the hot topics that we were – we’ve been talking to people about right off the bat of ’21 are Roth, excuse me, are Solo 401k’s and more specifically Roth Solo 401k’s. An important piece of planning for your retirement. So, what is – what is a Solo 401k?
MIHAJLOV: So, Solo 401k allows an employee or a sole owner of a business or a sole employee to set up a retirement plan that doesn’t have any employees. So, they don’t have to cover anybody but themselves. And it’s a great plan because it gives them the advantages of a Corporate 401k with the same limits but they don’t have to cover other employees because they don’t have other employees. And the cool thing about that is the employer piece of that Solo 401k, the money that the employer/employee can put away themselves directly from their paycheck and in 2020 that limitation was $19,500 plus another $6,500 if the individual’s over age 50. So, you could basically put $26,000 and I think that’s going up in ’21 as well. You could put that away for yourself and you can either do it in a deductible sense meaning it would reduce your taxable income or you can do it in the Roth sense meaning it doesn’t reduce your income but the growth on that money and the money you put away, you theoretically should never pay tax on again unless congress changes the law.
CHAMBERS: So, you can have a Solo 401k, just let me clarify, you can have two buckets. It’s – one is the Roth and then the employer bucket?
CHAMBERS: And the employer bucket is pretax. Always will be pretax.
CHAMBERS: And you can – you can put away quite a bit in that?
MIHAJLOV: Yeah. So basically in 2020 the total between the two of them was upwards near $57,000 if not more that somebody could save in a Solo 401k and decide how they wanted to make their share either deductible or non-deductible.
CHAMBERS: Right. I mean, I mean that’s a pretty huge
CHAMBERS: — part of planning. And why do a Roth? I mean –
MIHAJLOV: I just think – I think we’re going to be in a long cycle of increasing tax rates. People always ask me if I worry about the Stock Market. I’m not as worried about the stock market as I am about tax rates. And I think we went through a cycle where we went through very low tax rates and I think we’re going to go through a cycle now where the government is going to raise the taxes. And so, I think being prudent and looking out a little bit further with your tax rate cycle is very important at this time.
CHAMBERS: And we find, you know, a lot of realtors, you know, we deal with quite a few realtors and it’s surprising how many people don’t take advantage of that in that space.
MIHAJLOV: It’s – it’s not that new of a concept but it’s kind of a new concept and a lot of people don’t offer it. It does cost a little bit more money administratively than some of your SEP IRA’s and that sort of stuff but it allows you to put more money away and it allows you to control the future taxation a little bit more where the rest of those plans are pretty much pretax and so you will be paying tax at the end when your 72 you have to start taking money out and you have to start paying tax on that money.
CHAMBERS: Yeah. So, think about that. Talk to your CPA’s about that if you are a consultant and you have – own your own business, just a solo operator. Any solo operator of a company, this is a great, great option for you when it comes to long term savings and tax planning and estate planning, so. I want to change the subject, sir. Are you ready?
CHAMBERS: So –
MIHAJLOV: Is the coffee still hot?
CHAMBERS: The coffee is – I don’t know about the coffee being hot but the coffee is still –
MIHAJLOV: It’s still coffee.
CHAMBERS: — still free. Let’s put it that way.
CHAMBERS: For now.
CHAMBERS: We’re – the name of this firm that we work at is called Olde Raleigh Financial, so how – which would then, you would think is in the middle of Olde Raleigh, which it is, so how did you – how did you end up here because I know that you live in the area and obviously the office is in the area and you’ve been in the quadrant for some – for a long time.
MIHAJLOV: Yes. This is my grid. I don’t leave my quarter mile grid very often.
CHAMBERS: Yeah. But you started in this office that we’re in?
MIHAJLOV: So, we’ve been – I’ve been involved in leasing space here starting with A.G. Edwards in basically 1999. So, the funny thing is I’ve been in every space – every office on the third floor, here. But this is a great little neighborhood. It’s just a great area with – with, you know, your favorite restaurant, Bella Monica –
MIHAJLOV: — across the street.
MIHAJLOV: And I live across the street in the neighborhood and I can walk to work and do walk to work a lot and pretty much everything I need. My friends tease me that I get a little nervous when I leave this quarter square mile, but it’s a great, great area. Right down the road from the hockey games.
CHAMBERS: Yep. And the airports not far —
MIHAJLOV: Basketball games.
CHAMBERS: — away.
MIHAJLOV: Airports close.
CHAMBERS: We’ve got the mall right down the street which is really, really nice.
CHAMBERS: Yeah, and there’s a lot of great residential over here and – and good solid services. Plenty of banks.
MIHAJLOV: Got a couple great realtors that we could introduce people to the neighborhood.
CHAMBERS: Yes. Absolutely. There’s some great – truly great neighborhood realtors.
CHAMBERS: We’ve got some really good, yes, that we’ll tag in this post.
CHAMBERS: Well, that’s good. The other thing that we – it’s kind of nice. In this location is 3110 Edwards Mill Road here in Raleigh. And one of the, sort of, unsung heroes of this building is the parking is really good.
CHAMBERS: And –
MIHAJLOV: It’s very easy.
CHAMBERS: — easy to get to. Easy to get out and that’s nice.
MIHAJLOV: You’re not fighting the downtown traffic.
MIHAJLOV: You’re not parking in a garage.
MIHAJLOV: It’s very close. It’s a good spot.
CHAMBERS: Good. Well thank you all for listening and we appreciate it. We’ll be back with other topics in the future here. And thank you Dr. Mihajlov for your time please.
MIHAJLOV: No problem, Trevor.
CHAMBERS: Excellent. Thank you. Have a good weekend everybody
Alex Mihajlov – Full Bio
The arch of his career has now landed his firm, Olde Raleigh Financial, to become a fee-based, Independent Advisory firm. Prior to that Mr. Mihajlov was a branch manager at A.G. Edwards, Wells Fargo and Raymond James. His career has been an evolution and, in turn, his perspective on service has evolved. “My team and I have experienced the large brokerage houses and banks. While they have carved out their spot in the marketplace, I can say it is not for us. We have evolved and we tend to attract those who have evolved away from cookie cutter to a world of customization. They want collaboration. They wanted to be listened too. They want a relationship and we want them to be excited about our relationship.”
Trevor Chambers – Full Bio
Trevor joined Olde Raleigh Financial Services in January of 2015 and his primary role is new business development and marketing. Prior to joining the firm, Trevor spent 12 years working at his family’s restaurant, Raleigh’s Bella Monica Cucina & Vino. “Exceptional service, no matter the industry, is paramount and we attract clients who value and take comfort in being taken care of.”