Mastering Retirement Savings Strategies for Solopreneurs with Financial Expert Sean Mullaney

  Welcome to today's episode of the wealthy after 40. Today's episode is for all my entrepreneurs out there. This episode topic is about savings, but more specifically how you can effectively save for retirement as a solopreneur. My guest is Sean Mullaney, who is a financial planner and president of Mullaney financial and tax. He offers fiduciary fee only and advice only financial planning. He writes the Plutus award winning blog, FITaxGuy. com on the intersection of tax and financial independence. Thank you for joining me today, Sean. I'm excited to talk about this Solo 401, which I didn't even know about till I saw you had written a book about it. Dalene, thanks so much for having me. Looking forward to our conversation. So , I worked in the government sector. So we also had some other accounts, but I did have access to our 401. I contributed to that. My employer did as well, which is amazing. And then when I exited, you know, I retired with a pension, but when I left and then I saw you post about your book, I'm like a solo 401. What is this? So share with us what that is, what that means and all of the things. Thanks. Absolutely, Dalene. So my background has some similarities to yours in the sense that I was a career W 2 employee at large employers until age 40. So I worked for big four accounting firms. I did a spell through the IRS office at chief counsel for a little over three years. So at those large employers, I had a 401k and federal government, they call it the TSP, right? And so you get, you know, a packet or an email from HR and says, Hey, we have this retirement savings plan. Please go ahead and set this up. Right? Well then at age 40 I started setting up my own business. And when you set up your own business, you don't get that email from HR saying, please go ahead and set up your retirement plan. Right? Right. So people get worried. They say, Oh, no, you know, I'm working for myself and now I can't invest for my retirement. Not so. And you know, most businesses in the United States, I was at a conference Bogle heads this year and Dr. Jim Dolly, the white coat investor noted that there's something like 27 million businesses in the United States of which 21 million of them have a single employee. Right. And most of those employees would like to retire one day. I myself would like to retire one day. So, okay, I'm working for myself. There's this thing called the solo 401k. And when we think about a solo 401k, I actually think the best place to start is with the large employer 401k in many ways is just like the large 401k, large employer 401k, but I would argue in some ways it's actually better. It's better for two main reasons. One. You get to control the financial institution and the investments. So when you're setting up your own solo 401k for your self employment, guess what? You're not, it's not what did the, what did the company pick? Which institution, which investments? No, it's what did you pick, right? So you get to pick the financial institution, the portal, the investments, that sort of thing. So that's. One real main advantage. The second main advantage of the solo 401k is the contribution limits are mostly driven by your own desires and planning and your own cash flow to be fair, right? So when we work for a large employer, they often have like a matching contribution as the employer, which is great, by the way. And For those who are W 2 workers out there, you should be making sure you're picking up as much of that as possible, right? You really don't want to be leaving any of that on the table, right? But that tends to be modest for two reasons. Well, actually really only one reason I should say, and that is this, your employer wants to reward you, but they also have a profit and loss. You know, they have to control their expenses. So, you know, I'll, I'll give you an example. dalene, maybe you were making a hundred thousand dollars as a W2 worker and the match at the 401k said, well, you up to 6%. We'll match 50 cents on the dollar. That's a 3% match. That's good. That's $3,000. My little example. That's really good. Let's translate that to no, no, no, no. We're now self employed and we have a solo 401k. We don't have any employees. We just have our own solo 401k where we're our only employer or employee. We have a hundred thousand dollars of profit in our. business. We report that on, they call it a schedule C. Well, how much can I put in as an employer? Well, guess what? Now the limit is not the 3000 that the large employer might put in. It's over 18, 500. And that's just as the employer. You could also do the employee contribution, which in that case would be 23, 000 in the year 2024. And oh, by the way, it'd be 30, 000 if you're 50 or older. So when we strike out on our own, And we want to save for retirement, which is still important when we're self employed The solo 401k gives us a lot of flexibility in terms of investment choice and financial institutions Which we can work with and it gives us a nice high Limit in terms of how much we can actually put in there every year yeah, that's amazing. I didn't realize that, as a solo, you are, it's true. You're acting as your employee and as your employer. So to be able to take that advantage, holy cow, did not realize those limits were that high as well, either. Okay, so entrepreneurs are also familiar with an IRA, the Roth, as you know, as well, how would this influence their decision or decisions, I guess, to, you know, straddle income, to choose one, all of those things? Yeah, Dalene, that's a great point that, so, I step back and I say, you know, people worry about IRAs, Roth IRAs, there's 401ks, there's all this stuff. I step back and I say, let's talk about it as our home retirement account and our workplace retirement account. And, the two of them are distinct. In theory, you can contribute to both. So a home retirement account is just a traditional IRA or a Roth IRA. They have relatively modest contribution limits. It's 7,000 in the year, 2024, 8,000 if we're 50 or older. And by the way, you know, one of the things I want the audience to take away from this is not every retirement account needs to be maxed out every year. Right. Your goal is retirement, financial independence, financial stability, success. You define your goal, how you define it. The goal is not to max out every retirement account every year, right? That's not the goal. That's a tactic. And maybe for many years, maybe 10, 15 years, 20 years of your working career, that's what you wind up doing. But it's not about every last retirement account gets maxed out every year. That's those are tactics. They're nice. They're important, but goals are more important. So. We have our home retirement account, IRA, Roth IRA. They're relatively modest. Maybe we're starting off in our self employment journey and the income just isn't all that great. Maybe the best we could do for the first year or two is maybe just max out a Roth IRA. That's fine, right? That's a great beginning, of our retirement savings journey when we're self employed But as we get more and more income in the picture one, we're going to pay a lot more tax, right? Self employment's great I'm happily self employed but it's a great way to pay a lot of tax because now you're paying income tax Plus both halves of the payroll tax, right? So it's a great way to pay tax. So maybe now the solo 401k is something to take out and, you know, to start and now we can maybe get some more tax deductions and lower our tax bill and build up the retirement savings. You know, in some ways the self employed need retirement savings, I would argue more than the W 2 worker in the sense that A big piece of their own financial life is in their own individual business. So it's a highly undiversified position using a solo 401k can actually be a way of sort of taking our balance sheet and saying, well, okay, we have this self employment income. It's important, but now we're going to invest in other things. So our economic life has more than just our own ability to do a certain service or whatever we do in our own particular industry. Right? So that's a highly undiversified position. So that's probably the reason I like retirement accounts for the self employed and it can be both. It could be. We can maybe do a Roth IRA at home and a solo 401k at work. Sometimes there can be some advantages to mixing and matching, right? So maybe your income's too high to make an annual regular contribution or Roth IRA. You can actually get that income down by contributing to a traditional solo 401k and now we qualify for the Roth IRA contribution. There could be some interplay between these two accounts, but absolutely we can have them both. And, you know, maybe we do a partial contribution, say Roth IRA, a partial contribution to a solo 401k, that could be a valid planning tactic as well. Yeah, there's so much to think about. And I think as solopreneurs, especially if they haven't had experiences being a W 2 employee and having navigated 401s and other accounts on their own maybe do we have a suggestion for them as where to start. They're new. They're like, I don't have any retirement. I don't understand what a 401 is. I don't understand what is an IRA. Can we help educate them and maybe steps one and two to do today to start learning about that? Yeah. So what I would do is I would start reading up on what is a Roth IRA and what's a traditional IRA. That might be the first place I would go to. And there are plenty of resources out there. I did a little introductory post on IRA contributions on my own blog. I can send you that for the show notes. If you're interested in doing that, it's called 2024 IRA contributions, I think for beginners, right? So it just sort of says here are the three types of IRA contributions you can make for the year 2024. Here's the limits and whatnot. So that would be one place to start. Now I wrote a book, I'll toot my own horn here, right? I wrote a book on the solo 401k and I, I did it for a number of reasons, One is I'm both a pusher and a user, right? So I advise clients around solo 401ks and I myself have a solo 401k. The second thing is the solo 401k is this odd retirement account in that it hasn't got as much attention as frankly, I think it should have, and there's some historic reasons for that. And so when I wrote this book part, you know, you know, so I'm a financial planner. And I try to do some content creation to get my voice out there in the world. But there are plenty of topics that have had a lot of ink spilled about them, a lot of podcasts recorded about them. So one of the things I was thinking about in my content creation is are there areas where I can make a contribution? And maybe not as many others have made a contribution so that, you know, when you start Google and Dr. Google gets involved, I might get a little higher credibility just because, you know, if you write about some of these more written about topics, well, you have these. Massive media publications massive financial institutions. It's very hard to rank and to get traction on some of those topics And the solo 401k to my mind was absolutely a ripe area where? Frankly, not enough had been written about it. It it can't you know, it's the sort of thing It can be confusing, but it is in no way rocket science. I know that because I wrote a book about it. If I could write the book about it, it's not rocket science, but I think it is nice to have some examples, some explanation about how these things are set up. And so, yeah, I think Dalene just getting some education and also just understanding Rome was not built in a day. Yeah. Meaning when we're on our financial journeys, it's not about optimizing every last thing. It's not about getting, you know, to this nirvana, which doesn't exist anyway, in terms of financial planning, but it's not about getting our finances right. Just tomorrow, right? When you work with clients and it's about debt payoff strategies very few of your clients are going to pay off all their debt, say in a week or two. Right. It's about how do we get incrementally better? And so if anyone out there in the audience is worried about, Oh, Retirement savings and this sounds like a whole lot. I would say let's get a little incrementally better. Yeah, and I you know every every tactic every you know information I put out there You know i'll say you'll see somebody and they'll have twenty thousand dollars in their emergency fund and you're like i've got to save that No, you've got to start with a thousand dollars. You've got to start like you're saying incrementally better and I also share back in my very first, episode how I You Was actually to increase my journey got and my journey quicker was my the education portion so as a solopreneur if you're like, I do need to worry about retirement, you know, after listening to this pick one area will learn just a little bit more. How can you be better? Let's say in a month than you are today after you've, you know, consumed information about it, but then take action, you know, because I think a lot of times we can consume and not take action, but it's, it's a lot out there. So I want to backtrack just a little bit to also help listeners. So the companies where you invest with. So I know of Fidelity. Can we share a few more? Sure. That solopreneurs would explore and how that may work for them. Yeah. So the, the solo 401k is offered by a whole bunch of providers, including most of the largest brand names out there. And look, I'm not here to endorse any one particular provider. But to my knowledge, E Trade, Fidelity, Schwab, Vanguard are among the solo 401k providers. And one of the nice things about it is they tend to be very low cost, right? So when you have a solo 401k, you generally invest in financial assets, right? There's a whole conversation around that. But let's just say you decide I want to invest in financial assets like mutual funds or what they call exchange traded funds. Those things tend to have costs inside them. Now at the large providers, there are these things called index funds that tend to be very low cost. Those you're going to have to pay just because you'd have to do that. Whether it was a taxable brokerage account or Roth IRA, a solo 401k, you just have to pay those. But in today's investing environment, those tend to be very modest. Okay. So that's one thing. Then you say, well, wait a minute though. It's a 401k plan. Aren't they going to charge me all these other fees to set it up? And the answer tends to be no, or very little, I'll give you an example. You got to go on vanguard. com to validate this. My understanding is today, Vanguard says, well, for each mutual fund you have in our solo 401k, we'll charge you 20 a year, but we will waive that. If you have 50, 000 or more of assets in Vanguard, right. Doesn't even have to be in the solo 401k. My understanding is Schwab and Fidelity don't even have a fee like that. And the Vanguard one is you see is a modest and be pretty, you know, a lot of people can get around that. And you ask yourself, well, why the heck is that? And I think, look, I don't work in the marketing departments of any financial institutions, but I think what's going on there is they look at people with solo 401ks as They say, well, if these people have the wherewithal to set up a solo 401k, not that it's rocket science, but it's, it's more than just setting up an IRA or Roth IRA. Not a whole lot more, but it is more. If these people have the wherewithal to set these things up, they're probably going to be invested for 10, 20, 30, 40 years. And it's not about having them as clients today so much as, you know, Well, if we can have them for 20, 30, 40 years, that's a really good thing for our institution. So we'll use this as a marketing tool, get these people in the door and then they're going to be our larger clients tomorrow. So it turns out the investing climate for solo 401ks. I think it's just fantastic today in terms of choices that you have with your different financial institutions, some other choices to think about. One is literally the portal. Right? So you just want to understand how they accept contributions. Is it user friendly? Do you like it? There's enough options and choice today that that can actually be a driver of decision making, right? Why be frustrated when you log in? Right? So I would at least look at that. The other thing you would want to think about is do they offer traditional contributions or do they offer Roth contributions or both? Now everybody's going to offer traditional. Some offer Roth, some don't. I actually don't, you know, we could talk about this a little further. Dalene, I don't worry too much about not offering Roth, but that said, maybe some folks in the audience say, look, I really want to make sure I have the access to a Roth contribution. Well, some of the plans don't offer Roth. Well, if they don't offer Roth, then you shouldn't sign up with that particular financial institution. If Roth's going to be a driver for you. So those are some of the considerations when we set up a solo 401k is. You know, investments fees, which tend to be pretty pretty small anyway portal quality and user experience and traditional and Roth. Yeah. Very good. I love that. So listeners how can they connect with you if they're interested in more? And also let us know about your book and where they can find that as well. Yeah, so you can reach me at my financial planning firm, Mulaney financial. com. I've got a blog, fi tax guy. com, the intersection of tax and financial independence. I'm on a X slash link or slash Twitter at Sean money and tax. And then the book is called solo for one K the solopreneurs retirement account. It's available on Amazon Barnes and Noble and many of the digital platforms. Very good. Very good. We will have all of those links down in the show notes so you can connect with him. I want to thank you for sharing your expertise and educating the entrepreneurs out there on how to start approaching retirement planning. Dalene, thanks so much. It was a pleasure chatting with you. Yeah, I appreciate it so much. We'll see you guys next week.