#286: How To LEGALLY Pay Less In Taxes (And Invest It Instead) — Ankur Nagpal

Jay Clouse [00:00:00]:
Ankar Nagpal sold his course platform Teachable for $250 million in 2020. But he knew that sale would come with a giant tax bill.

Ankur Nagpal [00:00:09]:
It was only a few months before selling the company that I hired a team of expensive lawyers and accountants to audit my situation, to try and help me structure the company so I would keep more of what I earned with the sale. They were able to structure my acquisition where I saved many millions of dollars just because I had that conversation.

Jay Clouse [00:00:27]:
Wow. So Ankur became obsessed with the tax code and he wanted to make it anybody to legally operate within it. That led him to a big discovery.

Ankur Nagpal [00:00:36]:
I think a solo 401k could be the most powerful retirement account in America.

Jay Clouse [00:00:41]:
So he built a new company called Carry that lets you legally keep more of what you earn and invest it the way you want.

Ankur Nagpal [00:00:47]:
You can set it up to get a deduction of up to $70,000. Your money grows and compounds tax free. It unlocks all kinds of other benefits. It's really almost as if you were to design the perfect retirement plan just for yourself. That's what it gives you.

Jay Clouse [00:01:01]:
Settle in. Let's talk. Before we get started, two quick disclosures. Number one, this podcast is for informational purposes only. These are our opinions and do not represent financial or investment advice. Number two, I am a small investor and affiliate for Carry, which means I receive cash compensation for any referral I make and represents a material conflict of interest. But before that, I was and still am a very happy Carry customer. I'm sharing this above all because I think all creators need more financial education.

Jay Clouse [00:01:30]:
Okay, let's dive in.

Ankur Nagpal [00:01:32]:
So a little bit of background. I mean, before this, you know, maybe people listening know I ran a company called Teachable. Fully different universe. We helped creators and business owners earn money online. A lot of times they were making money for the first time ever. And at the time, I knew basically nothing about personal finance or taxes. Like, I just wasn't interested in it. I had a business to run at my day to day to take care of.

Ankur Nagpal [00:01:55]:
It was only a few months before selling the company that I hired, you know, a team of expensive lawyers and accountants to audit my situation, to try and help me structure the company so I would keep more of what I earned with the sale. What happened there radicalized me a little bit since they were able to structure my acquisition in a place where I saved, you know, many millions of dollars just because they had that conversation.

Jay Clouse [00:02:21]:
Wow.

Ankur Nagpal [00:02:22]:
And that was eye opening. Right? Then you realize the tax code. There's so many things inside it where if you don't know what's in it, you're never going to be able to take benefit of it. How can I productize this for everyone else? And to be quite candid with you, the thing that drew me to building this company was less about the Solo 401k, but it was more like my entire life I've looked at a system and it's always fun to sort of beat the system, to win the game, to hack the system. And the tax code in America is sort of this insanely complicated system with all these crazy rules. But if you learn how to beat the system, you get to keep potentially hundreds of thousands and millions of dollars more. So it's a very fun game. And I was like, okay, how can we build a company that productizes these tax savings? And that's what's led to this world of building this startup where we're basically trying to help people save money on taxes and therefore grow their net worth.

Jay Clouse [00:03:18]:
Which is so insane because creators, we spend so much time trying to maximize revenue, and yet the more that you are able to retain, that's not net new effort or sales that you have to make, and yet it's impacting your bottom line just as much. But we spend like no time thinking about optimizing for it, doing this type of thing.

Ankur Nagpal [00:03:43]:
It's not what you earn, it's what you keep. Right? With that said, I should caveat that there's a threshold and a point where this matters. Like I was talking to someone making $50,000 a year who wanted to spend their time on saving taxes, and that's not the right time. I think as a creator, as a business owner, get to at least 100k net income and then it's a good time to start spending on optimization, taxes, all of that. But at the same time, I know creators making mid hundreds of thousands of dollars, even millions of dollars, who have not thought about this. And the difference, there can be an extra, you know, 100, 200K in your pocket every year.

Jay Clouse [00:04:19]:
Crazy. And that, like really compounds over. And the thing is, like most creators, this whole thing has only been around for, I don't know, 20, 25 years, right?

Ankur Nagpal [00:04:30]:
Yeah, it's a charitable. That's a charitable account as well. I would say it's really sort of accelerated with the proliferation of Instagram, YouTube and all these sort of channels for attention, which I would say is closer to 10, 15 years.

Jay Clouse [00:04:42]:
And what we don't know is what the actual average lifespan of even a successful creator is like. There are very few examples of YouTubers who have been there from the beginning and are still uploading today. We see a lot of people burnout. So I think this is important because when you are in what feels like peak earning years and you meet this threshold, it just benefits you so much to start this compounding process. I feel so fortunate with my timing because literally I was talking to my accountant and luckily I was paying a CPA and she was pretty good. And she was like, we're at the point where you should start filing your LLC as an S Corp and explore solo 401k. And you were literally talking about coming out of beta at that time. And I look at my carry account and what my wife and I, we're going to talk about that strategy here in a second too.

Jay Clouse [00:05:33]:
What we've been able to contribute from our earnings to those accounts is. And every day I just feel so much more comfortable about my future, regardless of what happens to the business tomorrow. And that's such a gift.

Ankur Nagpal [00:05:45]:
The compounding is a really good point because even like my perspective is when you look, take a step back, right? Let's say your goal is to grow your net worth. Your goal is to grow your wealth as fast as possible, as efficiently as possible. You want to end up with the most amount of money possible. The mistake a lot of people make is they try and do it with fancier investments. They try and look for this crazy startup to invest in, they try and look for this real estate deal, they try and outsmart the market. I fundamentally don't believe that's a good idea for most people. I think the best way of growing your net worth is be smart about taxes. Save some amount upfront, and then you use that to index the market.

Ankur Nagpal [00:06:24]:
So you have the compounding. So it's not just 100,000. You save on taxes this year, you save 100,000 on taxes every year. You use that to index the market. You extrapolate that over 20, 30, 40, 50 years. That's a difference of tens of millions of dollars. And that's sort of the thesis behind what we're building.

Jay Clouse [00:06:41]:
So you're making this accessible to regular, everyday creators. The thing that you learn from paying fancy lawyers and financiers as you're going through this acquisition. Help me, help me go to the far end of the spectrum here because you've probably seen this more than anybody else. How crazy does this get for companies that are like, really thinking about tax strategy and they, they earn a lot.

Ankur Nagpal [00:07:02]:
I mean, it's not just that it Gets crazier and crazier. I'll say this just as an example. I don'. I don't know how many deca billionaires you have watching this show, but just in case, just in case you do, right? Like, this goes all the way, like to give you some extreme examples. So, for instance, did you know if you ever were to buy a sports team? Let's imagine, okay, you're in. You're in Cleveland, right? Let's. Let's imagine. Who's your.

Ankur Nagpal [00:07:26]:
What's, what's your favorite team?

Jay Clouse [00:07:27]:
I mean, I love the packers, which is a weird example because they're publicly owned, they're public. But let's, let's. Let's say the Browns. Let's say the Browns.

Ankur Nagpal [00:07:33]:
Okay, cool. Now let's imagine you want to buy the Browns. What people don't realize is when you buy a sports team, you can actually depreciate most of that asset the same way you can have real estate depreciation. So what that effectively means is the Lakers were bought for $10 billion. The majority of that purchase price is a tax deduction for the next 15 years. So effectively, part of the reason sports teams are that expensive is once you put those dollars upfront, one, your investment is growing and compounding, but you can effectively deduct that purchase price from your taxes over the next 15 years. It's not just that you look at how movies are funded. Movie studios are typically set up separate companies for the production and the distribution.

Ankur Nagpal [00:08:18]:
One side gives you a tax write off, the other side makes the money. So you have different investors on both. The deeper you look into our financial system, you realize that every single level, there are tax strategies for that level. It's very easy to look at the tax code and be like, the tax code is rigged. The tax code is biased. And while it is true, it's rigged and biased, it's not like the IRS is intentionally writing these loopholes. The IRS actually tries their level best to levy a fair tax system. But what happens is some smartass lawyer somewhere reads the letter of the law, chooses to interpret it in a specific way, does it? The IRS sues them, the IRS loses, and then we have tax loopholes.

Ankur Nagpal [00:08:58]:
So that's basically the history of how tax law in America works. But mastering this or having access to mastering this can unlock such a big difference. And that's sort of what I've spent the last three years studying, which has taken me to this point today.

Jay Clouse [00:09:14]:
It's so interesting because you look at this in a super cynical way. And say, wow, if I have the cash, I basically can buy a sports team. And it's as if I didn't even spend the cash. It's like very much a rich get richer world. But it's also the empowering side of this, which is like every little bit you build, you gain access to these things and you can find incremental gains, which I think is exciting.

Ankur Nagpal [00:09:39]:
And look, you and I, we can't change the tax code, right? So if you can't change the tax code, I think it's worth thinking about who the tax code is written in favor of and how you can use it to your benefit. And it so happens the tax code in this country is very pro entrepreneurship and is very pro business ownership. It is very pro investing, it's very pro real estate. These are things that tax code incentivizes. Instead of kind of complaining about it, I think it's a better attitude to think about how can I leverage this to my benefit.

Jay Clouse [00:10:09]:
And those incentives are big reason why we probably see continued market and GDP growth that all of our dollars in the market benefit from. So I'm going to take the pro approach here. And I love that we're making this accessible to people.

Ankur Nagpal [00:10:23]:
Yeah, look, let's start at the very top, right? Like, what are retirement accounts? I mean, most people know this, but some people don't even know this. Generally, the government gives us tax incentives for things they want to incentivize. You get a tax break for saving for education, saving for healthcare expenses, and saving for retirement. And the Government typically provides two types of major retirement accounts. One is a 401k, which is typically provided by your employer. These are bigger accounts, have a larger benefit, but are typically more complicated to set up. And then you have an ira, which is an individual retirement account, which you can do as an individual. It's much, much smaller, typically, and has more flexibility.

Ankur Nagpal [00:11:02]:
The challenge when you start working for yourself or you are a creator or you're a consultant, or you're someone that doesn't have a traditional workplace is you don't have an employer that would set up a 401k plan for you. That's where a solo 401k comes in. It's sort of a 401k plan you can set up for yourself if you have a business partner or spouse for them as well. And the cool thing is it gives you the same benefit as a corporate 401k, but because it's yours, you can set it up even better. Historically, people used to use an account called a SEP IRA or SEP ira, which is the IRA equivalent for self employed people. A SEP IRA gives you the same size of tax benefit. However, it's actually harder to hit it since you can only make one type of contribution.

Jay Clouse [00:11:48]:
What do you mean by that? What do you mean by one type of contribution?

Ankur Nagpal [00:11:51]:
Typically, with a 401k, you can contribute as an employee and as an employer. With a Solo 401, the benefit is you are both the employer and the employee, so you can effectively double up your contributions. With the SEP ira, you can only make employer contributions. So the upshot is let's imagine, jay, you're making 100,000 this year. You've talked about it publicly, you're likely making a lot more than that. But for simplicity, let's imagine you're making 100 grand a year. Back of napkin math, approximately you could put in about $20,000 into a SEP IRA, but you could put in about $43,000 into a Solo 401K. So you can get twice as big a tax deduction from a Solo 401K.

Jay Clouse [00:12:38]:
What do you mean I could? Like that is what is legally allowed or what is likely based on the expenses that I have as a human being.

Ankur Nagpal [00:12:46]:
Yeah, it's a very good question. So when you're trying to figure out how much money you can put into a Solo 401 or SEP IRA and the money you put in is important because this is the tax deduction you get. So the size of tax deduction matters on how much money you make. Everyone looks at the signature headline number. It's a $70,000 tax deduction, but you need to have enough income to actually max that out. So there's two types of contributions you can make. You can make the employee contribution and the employer contribution. The employee contribution is 23,500.

Ankur Nagpal [00:13:15]:
It's a maximum of that amount as long as you have enough earned income. The employer side depends on how your business is set up. If you're a pass through LLC or you're a sole proprietor, it's roughly 20% of your net income. If you're an s Corp, it's 25% of your W2. So in the example where you're making 100 grand a year with a SEP IRA, you can only do employers, that's only about 20,000. With a Solo 401, you get the 23,000 employee plus 20% employer, closer to $43,000.

Jay Clouse [00:13:47]:
That's interesting because I almost would have assumed it would be the opposite where the SEP is saying only you the individual can contribute to this, but it's employer versus employee.

Ankur Nagpal [00:13:57]:
It's very weird and it's kind of like a misnomer in terms of, you know, it's very different from how other IRAs work. Your point is very astute, but our tax code is just filled with so many insane contradictions. This is just one of many.

Jay Clouse [00:14:10]:
One of those contradictions that I've seen you post before on threads and X is you have this point of view that W2 employees are typically like the least tax advantaged individuals in a country. And yet this solo 401k strategy requires me to pay myself as a W2 employee.

Ankur Nagpal [00:14:32]:
That's actually only partially true. A solo 401k requires you to pay yourself as a W2 employee. If you are an S corp, let's imagine you are just making a little bit of side income on your Social Security or just on your ssn. You don't even have a business. You can still do a solo 401k. You can be an LLC and pay yourself no salary and you can still do a solo 401k. However, if you are an S corp, which we can talk about either now or later, what you have to do is you have to bifurcate your income into a W to salary you pay yourself and the rest of it flows down to you as profits. Now, if you opt for that business structure, then your employer, then your contributions are limited by your W2 salary, but not if you're an LLC or sole proprietor.

Jay Clouse [00:15:16]:
Talk to me about this, this take about W2 employees. If somebody's watching this and their creator side is still kind of a side hustle and they're they're on W2. What should they know? What should they be thinking about?

Ankur Nagpal [00:15:32]:
Ultimately, the. There's a few reasons I think like being a business owner is better than being a W2 employee. And I actually ran a simulation recently where I made the assumption you were making a million dollars a year in California. You're a physician. There's a lot of physicians in California making a million dollars a year. Even though it sounds crazy and running the math on what a W2 physician would make versus 1099, since a lot of them are kind of contractors, the 1099 physician ends up paying almost $200,000 less in taxes. And the reason for that is there's all of these structuring things you can do as a business owner that you cannot typically do as a W2 employee. A very big example is as a business owner.

Ankur Nagpal [00:16:16]:
Jay, I'm guessing you have a lot of business owner expenses. And if you're paying taxes at, let's call it a 30% federal rate, anything you need for your business is deductible. And what's crazy is some things that are deductible for business owners. The same thing is not deductible for a W2 employee. Like if you have a home office that you use exclusively for your business, you can deduct the pro rata square footage from your rent or mortgage. But let's imagine you work at Facebook, you're W2 and you still only use that home office for your W2 job. You don't get that deduction. So there's all these things in the tax code that are just rigged for business owners.

Jay Clouse [00:16:51]:
Okay, so let's, let's get back to the Solo 401K. Specifically creators watching this. They're generating some income. You mentioned there's like a threshold for when you should start thinking about optimizing your tax strategy, which I think you said was 100 or 150.

Ankur Nagpal [00:17:06]:
100K onwards, 100k net income.

Jay Clouse [00:17:09]:
And is that the threshold where you think it starts to make sense to elect as an S corp on your taxes?

Ankur Nagpal [00:17:15]:
Generally, yes. So again, an S corp. If you don't elect an S corp, what you do as a self employed person is you end up paying payroll taxes. These are Social Security and Medicare taxes on all of the income you make. And these can be as high as 15%. So that starts getting pretty expensive. But once you hit a certain income threshold, you can elect to file your taxes as an S Corp. And what that does is it bifurcates your income into a W2 salary you pay yourself with the rest coming to you in profits.

Ankur Nagpal [00:17:46]:
And the benefit of this approach is you only pay the self employment taxes on the W2. So it makes a big difference. Personally, I think you should start thinking about electing to be an S Corp at about 100,000 in net income, since at that point based on where you live, you'll save a few thousand dollars. But a couple of important caveats I always tell people, check with the tax professional. You said you had your CPA run the numbers because there are weird exceptions like the state of Tennessee has an extra tax on S Corps, New York City has an extra tax on S Corps. So there's all these little gotchas that if you aren't careful can come back and bite you.

Jay Clouse [00:18:26]:
Yeah, functionally the thing that I had to get over was I heard like this idea of an S Corp And I was like, ah, but I'm an llc. Do I have to like change this? How do I change this? And the answer is like no. And you don't. And on your actual return you elect as an S corp. And the downstream effects of that, as you're saying, was, now I have actual payroll in my business. I'm a W2 employee. My wife is a W2 employee. And we get a salary from the business, which actually feels pretty legit.

Jay Clouse [00:18:55]:
I'm like, I'm a big boy now.

Ankur Nagpal [00:18:56]:
This is nice. Yeah, it's so confusing, right? Like the tax code, like an S corp is honestly not even really a corporation type. It's a tax election. But you call it an S corp. So obviously people are going to think that. But an S corp, it's an election. You can make that with your llc.

Jay Clouse [00:19:12]:
So that's crazy. So is that not true for a C corp? Like I couldn't elect as a C.

Ankur Nagpal [00:19:16]:
Corp. You could, you could elect to be taxed as a C corp, but a lot of people are actually full C corps, while typically you're just an LLC that's taxed as an S Corp. So it doesn't, it doesn't make a lot of sense. But for creators in positions like that, I think it's worth doing at 100k. You'll hear some people say it's worth doing at 80k, 90k. I don't think so. Because while an S corp could save you a few thousand dollars in taxes, there's additional concerns like as you say, you have to run payroll, you have to have a separate tax return. It is slightly more painful to operate an S corp.

Ankur Nagpal [00:19:51]:
So I always believe you want the payoff to be worth it. So I tend to think 100k and above is where it starts making sense. Totally.

Jay Clouse [00:19:58]:
This is why it's great to hire a cpa because yeah, I don't know how to do that math. But every year, as painful as it is to pay my accounting bill, it's still less than the money that was saved for me.

Ankur Nagpal [00:20:11]:
So like, I'll give you another crazy example of how a great CPA will help in this situation. So something else that you probably get on your tax return is called a QBI or Qualified Business Income Deduction. This is basically a free deduction that the government gives business owners. Going back to the thesis of why being having a business is awesome, the government gives up to 20% as a 20% deduction for business owners of pass through businesses. So LLCs and S Corps. However, once you make above a certain threshold. I think it's about $400,000 or whatever. You need to have enough in W2 wages to maximize this out.

Ankur Nagpal [00:20:50]:
So what a good CPA will do is sometimes they will tell you to increase your S Corp salary even though it means more self employment taxes because it saves you more on qbi. Now this is way too complicated for you and I to be thinking about, but it's just an example of where a good CPA can help. Because getting the W2 number right, that single decision saves thousands right off the top. So super worth it to find a tax professional that is good with this stuff.

Jay Clouse [00:21:16]:
Yeah, I don't imagine like if I walk through TurboTax, I'm getting these numbers.

Ankur Nagpal [00:21:22]:
Yep, absolutely.

Jay Clouse [00:21:23]:
Yeah. So when, when we made that election, my, my CPA had me go through like this very official calculator like from the state actually to like mark my activities as CEO and basically say this is what the minimum viable salary for you is. And we kind of hovered around there because as you said, it's not that that's the only money we're taking home, but then we distribute from the business profits. And my understanding is we're not taxed on that the same way.

Ankur Nagpal [00:21:55]:
So homework for you, Jay, by the way, is as your income goes above that threshold, I would check with your CPA if you're getting your maximum 20% QBI deduction because there may be a case where you hit a point where first low W2 is helpful, but then you actually want a higher W2 because your QBI deduction saves more. So that's a little bit of homework for you.

Jay Clouse [00:22:14]:
Okay, noted. I have a meeting on the calendar because I have questions and this is like, it just always is this way. There's always questions. And it's nice just to have people that have this figured out. What's always surprising to me is that in most cases it seems like CPAs and financial planners are not the same person. But it seems like there's so much overlap here. Like there's, there's legal, accounting and finance where there's so much that should be in communication that it feels like I have to be the one in the middle of that.

Ankur Nagpal [00:22:47]:
Almost quarterbacking it. Yeah.

Jay Clouse [00:22:49]:
Is this. Am I missing something?

Ankur Nagpal [00:22:51]:
No, you're not missing. You're not missing something. And very often tax planning is weirdly in between. Like the historical CPA model is they file a ton of returns, you send them a bunch of forms, they file a bunch of returns, it's kind of last minute. They're servicing a lot of people. They're not proactively thinking about how to save you money on taxes. Financial planners, some of the good ones do, but historically they just helped you manage your investments. So tax planning was in this weird middle ground where no one was really picking it up.

Ankur Nagpal [00:23:22]:
Now you're seeing people pick it up from either side. But I still think as a business owner, the more you are informed about this, the more you ask questions, the more you do your own research. Don't ever do anything fully without talking to a professional. But the more you give them, the more you'll kind of get out of it as well. But you're absolutely right. I mean, it's in very weird, like the problem statement that we came up with where we asked a bunch of people like, do you feel like your CPA is proactively helping you reduce taxes? Almost no one says yes. And that's sort of a bit of a black box that, you know, we're trying to solve. But I also think the industry will eventually shape up where I think it's more likely financial planners will take on more tax planning versus CPAs doing tax planning since it's just kind of far from their business model right now.

Jay Clouse [00:24:08]:
Right. Is it, is it just an incentives thing? Because probably for most CPAs, their take home isn't impacted by the tax strategy unless you like stopped working with them.

Ankur Nagpal [00:24:19]:
And most CPAs right now run a volume business where they're kind of judging the quantity of returns that get out of the door. So a lot of them are not set up for tax planning correctly. I've also been surprised sometimes about how many CPAs are not the most well aware of tax planning. Like I've had many CPAs tell me a sole proprietor and like only an S corp can do a Solo 401. If you don't have a corporation, you can't do a solo 401k. That is factually inaccurate. And there are all of these little inaccuracies that I think come up because a lot of CPAs are very used to sort of working with their software. They get the numbers, they extract the K1s, they have the forms, they plug it into their tax filing software, they see what comes out.

Ankur Nagpal [00:25:02]:
But they're not really on top of tax planning, which is a whole different skill.

Jay Clouse [00:25:07]:
Finding good tax professionals, CPAs, lawyers, all of these professional services. That's one of the things we help you do inside my membership, the lab. It's a community of six and seven figure creators having nerdy high leverage conversations. Just like this one. Learn more and apply@creatorscience.com lab who is eligible then for a solo 401k? Like let's assume I'm above this 100, 150, whatever makes the most sense for my state threshold where it makes sense to consider this, who is literally eligible for solo?

Ankur Nagpal [00:25:36]:
For what it's worth, those are just the thresholds. At which point I think you should spend a lot of your energy worrying about taxes. Eligibility wise, anyone who makes any kind of net self employment income, which means you're profitable, is eligible to set up and contribute to a solo 401k. It doesn't matter if you don't have a business. It doesn't matter if you're an llc. You could be an S corp, you could be a C corp. The limits are you cannot have any W2 full time employees, excluding your spouse, your business partners, or your business partner's spouses. So you could have a partnership with multiple people.

Ankur Nagpal [00:26:11]:
That's totally fine. You just can't have full time W2 employees. You can have as many 10, 99 contractors as you want, but you just have to have no other full time employees because otherwise it's no longer a solo 401k.

Jay Clouse [00:26:25]:
I see in that world I have to set up like a real 401k.

Ankur Nagpal [00:26:29]:
Correct. And the problem with a so called real 401k is you can't do any of the fun stuff. There are so many laws in erisa, which is an employment act that is written to ensure that when a company sets up a 401k plan, the owners don't benefit themselves more than everyone else, which is pretty much the opposite of what you're doing with the Solo 401K, where you're trying to make this massive benefit for yourself. So as soon as you have a regular 401k plan, you can't contribute that much on the employer side without doing it for everyone. If you're putting 50, 60K for yourself, you do that for every single person. You can't do the mega backdoor Roth. You lose a lot of the benefits with a traditional 401 plan because it now has to go through rigorous compliance testing where they check to see if you're benefiting yourself more than your employees, which typically will fail.

Jay Clouse [00:27:17]:
Talk to me about the spousal exemption. We're doing that and we're benefiting from it. Let's say I run a business and my spouse is like loosely involved. When does it make sense to say like, you know what, let's like double down on the two of us contributing versus just like one of you, hiring.

Ankur Nagpal [00:27:37]:
Your spouse for your business when you start getting to mid hundreds of thousands of dollars and you may realize like, hey, I can, you know, max out 70k, but actually to maintain the quality of my Lifestyle, I'd like $140,000 tax deduction or even more. What you can do is you can hire your spouse to the business and. And now each of you get your own $70,000 limit. So you effectively, as a household have a $140,000 limit. With a solo 401k, this is a fantastic strategy. As soon as you realize you have enough income where the math makes sense that you actually want to double up on your retirement contributions. So it's something that I think you did what, last year or two years ago?

Jay Clouse [00:28:17]:
Yeah, and my wife is full time. She's not loosely involved. I was wondering if someone is at home and they're thinking, should my wife join the business? Like, there's a, there's a, there's the obvious capacity benefit to it and there's this, this savings benefit.

Ankur Nagpal [00:28:33]:
I think it makes a ton of sense. It doubles your contribution limits and it avoids the need for something called a cash balance plan. A cash balance plan. So let's imagine for whatever reason, 70,000 isn't enough. You want to contribute $200,000 to retirement plan. There's an even more complicated, painful plan to set up called a cash balance plan. These are very painful to set up and they can typically get you, you know, 150 to 300k deduction. But hiring your spouse can potentially put that off since now you don't even need that.

Ankur Nagpal [00:29:05]:
With two solo 401ks, you get up to 140,000. Let's imagine you still wanted to do the cash balance plan. Having your spouse is still a benefit, since now you may be able to put in 400,000 or something even crazier.

Jay Clouse [00:29:17]:
And talk to me about self direction, because that's a big benefit of this plan. Also, that wasn't even really something I was understanding or aware of. Talk to me about how the actual savings get invested and what's the opportunity there.

Ankur Nagpal [00:29:32]:
Yeah, absolutely. So if you've had a corporate 401 plan, most corporate 401 plans, not all have very few and very expensive investments. You typically have to choose between one of five or six funds. A lot of them have high fees. Some corporate 401k plans pass on fees to participants. And as an employee, you have basically no discretion. You can't say Nope, I don't want this or I want to invest in something else. You have to go along with a Solo 401K.

Ankur Nagpal [00:29:59]:
You pick exactly what you invest in. So if you want to be vanilla and invest in the Vanguard ETF that indexes the market, you can do that. And because It's a Vanguard ETF, you'll pay 3 basis points versus 1% in your corporate 401k. If you have a strong opinion on a specific individual stock, you can actually do individual stocks. If, let's say, you have a very high risk tolerance and you want to go kind of crazy and invest in crypto or startups or real estate, you can do all of that. It's your private 401k plan. So only you get to decide what you invest in, which for the right person can be a great strategy. For most of us, we should still index the market, do it at a low cost.

Ankur Nagpal [00:30:35]:
I don't generally recommend going crazy with your private investments unless you fully know what you're doing. So for those people, they have that. For everyone else, you can get the investments you want at a much lower cost.

Jay Clouse [00:30:46]:
And this isn't like just a static thing that I set up when I set up my account. It's not like, oh, I just want to put all of it in this or even this portfolio of things. Every time I contribute to my solo 401k, I can decide if I want to direct that specifically towards a stock today.

Ankur Nagpal [00:31:00]:
And because there's no taxes while the money is growing, right, it means you're not paying any taxes on capital gains, on dividends, on interest, so the dollars compound faster. I don't recommend this, but I know a lot of people who are like almost day trading in and out of positions and stocks inside these accounts, since there's no tax drag and potentially in some cases growing and compounding a balance very fast. My own solo 401k. Again, this is not my general recommendation to be very clear, but there's a few individual stocks I have a good, you know, I've had strong conviction on, and it's been kind of cool to be able to grow and compound that account faster than the market in some cases.

Jay Clouse [00:31:42]:
I've seen you talk recently about direct indexing as part of your strategy. Can you explain what that is?

Ankur Nagpal [00:31:49]:
Yeah, absolutely. So once you get to a certain threshold invested in the market, I tend to think mid hundreds of thousands of dollars or more. And to be clear, this is for your regular taxable brokerage account. A direct indexing strategy refers to buying Instead of buying a single index fund, like instead of buying the Vanguard S&P 500, what a direct indexing strategy will do is it'll buy every one of the 500 companies individually. And the benefit of this approach is let's consider 2025 as an example. The S&P 500 is up a lot. If I had just bought an etf, I would be up a lot, which is very good. But by direct indexing, I'm still up a lot since I have the same performance, but a lot of the individual companies are down.

Ankur Nagpal [00:32:34]:
And a good direct indexing algorithm can harvest these as tax losses, which means it sells these losing positions automatically, rebuys them strategically to maintain the same performance. But along the way of this growth and compounding, I get a large amount in usable tax losses. So this year, just me Personally, I have $100,000 in tax losses by indexing the market. So I have the same performance as if I'd done a Vanguard etf. I just have now more losses that can be used to offset gains elsewhere in my portfolio. This is definitely an advanced strategy, but it makes sense again, once you're at high hundreds of thousands or more in the stock market.

Jay Clouse [00:33:13]:
That sounds tedious. It sounds like you're saying I'm going and setting up 500 transactions and then monitoring them and then selling them. But I'm guessing you have a better way.

Ankur Nagpal [00:33:22]:
Absolutely, yeah. I have a software solution that I use a company called Freck. I use them and they kind of do it for me, but for everyone listening. It's not just Freck. I mean, you can do this. I believe on Fidelity, you can do this on Wealthfront, you can do this on Public, you can do this on Titan. They all implement it a little bit differently. But I strongly believe direct indexing is the future of index funds.

Ankur Nagpal [00:33:46]:
And it's slowly sort of coming to most brokerages around you.

Jay Clouse [00:33:49]:
And you said this is specific to a brokerage account, but why not inside of a solo 401k?

Ankur Nagpal [00:33:55]:
Tax losses are not useful inside a solo 401k since you already don't pay capital gains taxes.

Jay Clouse [00:34:00]:
I see.

Ankur Nagpal [00:34:00]:
So doing this inside a tax free account makes no difference. The whole point is this tax loss can offset gains elsewhere, but in a tax free account, there's no real benefit.

Jay Clouse [00:34:13]:
What are the downsides to a solo 401 strategy?

Ankur Nagpal [00:34:16]:
The downsides to a solo 401k strategy?

Jay Clouse [00:34:19]:
If I'm eligible, why would I not do this?

Ankur Nagpal [00:34:22]:
Got it. So a few things right. One, can I afford to put away money until Retirement. That's sort of the big, big question. When you contribute To a solo 401k, you typically cannot access pre tax money until retirement. Now, what that means is you actually do have one caveat. Like you can borrow up to $50,000 from your solo 401k at any time for any reason. You pay interest, but the interest goes back to your plan.

Ankur Nagpal [00:34:49]:
But let's say you need more than 50k. You can't really do that without paying penalties. So that's one downside. The other annoying part about solo 401ks are once your account gets over $250,000 a year, you have to file one additional tax form called the Form 5500. It's not a big downside, but again, it's, you know, it's just worth stating. It does, you know, sort of minorly increase complexity. The third thing to watch out with with Solo 401 case, and this is honestly more of an issue if you're trying to get too fancy. I've seen people get into trouble by making an alternative investment from their solo 401k.

Ankur Nagpal [00:35:28]:
Let's imagine you invest in a private equity fund, but now you are hiring an employee and need to shut down your solo 401k. That can get annoying to deal with because you have to find an IRA provider who can roll over this alternative asset. But generally these are all edge cases. I do think these are phenomenal accounts. And I never want to say almost everyone can benefit like in the world of personal finance. It's bad advice to give, but it's generally such a phenomenal account type that I do think it's one of sort of the greatest tax hacks, if you'll call it that, in the US today.

Jay Clouse [00:36:00]:
But if I never hire employees other than myself and maybe my spouse and I never become ineligible for the solo 401k, do I ever outgrow it?

Ankur Nagpal [00:36:12]:
You don't fully outgrow it. But what could happen? Let's imagine now, Jay, your business keeps crushing. You're telling me in two years you're making $2 million a year, $3 million a year. I would tell you to also set up a cash balance plan in addition to a Solo 401. What a cash balance plan is. It's a different type of retirement account. It's what's called a defined benefit account. So 401 s are defined contribution.

Ankur Nagpal [00:36:34]:
You have a limit on what you put in every year, but no limit on how big the account can get. A defined benefit plan works the other way Around a defined benefit plan tries to give you like $3.5 million when you're 60. So how much you can put in is a factor of your age and how close you are to it. But the upshot is you may be able to contribute an additional $200,000 in addition to your solo 401k. So you may be able to get in 250k or whatever. So at a certain point, you can graduate to an even more complicated structure to have an even bigger tax deduction. But even then, a Solo 401K remains part of the strategy. It's just no longer the only thing you're doing.

Jay Clouse [00:37:12]:
And if I'm setting up one of these cash balance plans, would I say that right?

Ankur Nagpal [00:37:17]:
Yeah. Cash balance plan, yep.

Jay Clouse [00:37:19]:
Who does that? Is that the cpa? Is that a financial advisor, like, who's helping me set that up?

Ankur Nagpal [00:37:23]:
So it's a challenge with cash balance plans, and I apologize to any cash balance plan providers that are listening to this, but they all suck. Like, all your technology options are terrible. It's boomer software built like 40 years ago. There's a world Carrie does this. We haven't done it yet. Since it's a niche product, we haven't sort of, you know, there's not that many people who need it. Maybe someday we'll do it. We don't right now.

Ankur Nagpal [00:37:45]:
But typically you look at a lot of these old school providers, they'll charge you 2,500 bucks upfront, 2,500 bucks a year. The math still works out because you save enough, but it's bad software. I'm just going to sort of set it. It's an industry based like 30, 40 years ago. And the reason for this is there's a weird actuarial math that calculates exactly how much can contribute every year. It's a weird calculation based on expected account growth and how long you live for and all of this stuff. And as a result, these are gnarly, annoying things to set up. But when you're getting an extra $200,000 a year in a tax deduction, it still ends up being worth it.

Jay Clouse [00:38:25]:
There have been a bunch of times this year where I've thought to myself, I need to hire. And one of the things that slows me down is I know I'm going to change my benefits set up. And it just is unclear to me what I would have to do. And just that little bit of friction gives me enough. I mean, I have enough reasons now that I'm also like, I'm not going to do that right now.

Ankur Nagpal [00:38:44]:
I think it's worth thinking through the trade off. Right. There's also like worth caveating that this only applies to W2 employees. So if you have 1099 contractors, if you have a team based anywhere in the world, people who are not US W2 employees, you can kind of keep doing this without blowing anything up. But if it's the right thing for your business to hire people. One of the expressions I love is like, don't let the tax tail wag the dog, right? If you're going to build a bigger and better business, go ahead and do that. Taxes come second to me. The first thing is you optimize for your primary function and then you find the tax strategy.

Ankur Nagpal [00:39:19]:
Don't let tax strategy dictate your life in that world.

Jay Clouse [00:39:22]:
Is it just like I'm graduating to a full 401k system now, or is there a world where you set up a parallel entity that is the employing entity of the employees and you still have a solo 401k from the previous entity?

Ankur Nagpal [00:39:38]:
It generally gets all very difficult, almost impossible to do unless there's a different ownership structure. Because there's a rule that the IRS will take, like, let's imagine you and your wife or you or someone you're related to own two businesses. One has employees, one doesn't. The IRS will take the stance it's a controlled group because of the shared ownership. So generally those strategies don't work. The strategy could work if there was a different ownership structure. Let's imagine you have a 50% owner that's someone else in the business with employees, and you own 100% of the business with no employees, that's fine. Since the ownership group doesn't overlap more than 80%.

Ankur Nagpal [00:40:21]:
So it gets complicated. But if there's different owners, that can work. And by the way, from this perspective, you and your wife are treated the same. You can't be like, oh, this is me and my. You know, you're still the same household, but generally I would say you may be over complicating it at that end. Yes, you lose a solo 401k and other tax benefits, but the bet you're making is your overall business will be making much more money and be much more successful. In that case, what you would do is just roll the assets over into your ira, which you can invest however you want.

Jay Clouse [00:40:49]:
Well, obviously Carry provides this and I did this conversation because I think it's important that people become more aware of these. But from the standpoint of when this is Aired. And if someone's like, I feel like I should explore having a solo 401k, are there timeline considerations that I should be aware of?

Ankur Nagpal [00:41:07]:
I generally recommend people do not just the solo 401k, but all of their tax planning by December 31st. There's far more things you can do if you do it by December 31st. However, for a solo 401k specifically, the actual deadlines vary a lot based on your business type and which year of your plan it is in. So technically, if you are an LLC and you've never had a solo 401k before, you could do it until April 15th. But if you're an S corp, you can't do an employee contribution as long as you do it by December 31st and you get into this weird kind of edge case scenario. So if you ask me a specific scenario, I'll tell you when the deadline is. But my general guidance is for everyone. You're good as long as you do these things by December 31st.

Ankur Nagpal [00:41:54]:
One, you set up your solo 401. Two, you make an election for how much you intend to contribute. As long as you do those two things by the end of the year, you can actually put dollars in the year after, before April 15th. But just set up the plan and make the election. When you're making an election, something to note is it's not a big deal if you end up contributing less than you elect. That's fine, just enter the lower number into your tax return. But you can't do it the other way around. You can't elect a lower number and then contribute a higher number.

Ankur Nagpal [00:42:28]:
So do with that what you will.

Jay Clouse [00:42:31]:
And then you get to the question of like, well, if I did this on January 2nd, that's before December 31st of the following year.

Ankur Nagpal [00:42:38]:
Exactly.

Jay Clouse [00:42:39]:
It's like, I guess the optimal is kind of like towards the end of a year, but before the actual end of that year.

Ankur Nagpal [00:42:48]:
Correct though. Look, I mean, again with Carrie, we clearly run a company that helps people set up solo 401ks. Our single biggest day of new customers signing up for the platform was December 31st last year. Guess what's going to be the new biggest day? It's going to be December 31st this year. And it just blows my mind. It's like 11:55, December 31st. People are not out partying, they're setting up their solo 401k panicked at that time. So I always recommend do it well before.

Ankur Nagpal [00:43:20]:
Don't be doing it on December 31st. But I guarantee you, knowing Human nature. A lot of people are going to be doing this on December 31st.

Jay Clouse [00:43:28]:
If I did this on December 1st and I made an election and then I talk to my CPA and my election should be different, am I able to change that election before the following year?

Ankur Nagpal [00:43:39]:
You can change your election until December 31st. It's totally fine. And even after that, you can contribute less than your election. So going, going above is the issue. So if you're unsure, like, there's honestly very little downside to electing a bit more than what you think you'll contribute.

Jay Clouse [00:43:55]:
So what is the best first step? And I'll. I'll give you the space to say, if you want to try Kerry, do this. What is the best first step for somebody to take if they hear this conversation? Are like, I want to know more.

Ankur Nagpal [00:44:06]:
Yeah, look, so obviously the company I started, carry.com lets people set up a solo for 1K. But regardless, right. There's other places you can do it as well. I think it's a phenomenal account whether you use our software or not. But I think the first step is to one, evaluate if you actually are eligible, and two, if you are eligible, go ahead, set up the account, make an election, and at least give yourself time next year to figure out if you want to take advantage of this tax benefit separately. I think we can link to it in the show notes. We created a free sort of guide for anyone in this situation that just. It's a.

Ankur Nagpal [00:44:42]:
Basically, I spent a month documenting everything I've talked about for the last three years on strategies to save money, on taxes. We can link to that guide. And it just has all the different things people, especially business owners, should look into before the end of the year. And people can see kind of what's worth doing, what's worth not doing. But I just do recommend trying to do whatever you can by December 31st, since the universe of things you can do between January and April is much smaller.

Jay Clouse [00:45:08]:
Yeah.

Ankur Nagpal [00:45:08]:
Okay.

Jay Clouse [00:45:08]:
We'll link that guide in the show notes and in the description. Any resource I've ever seen you put together is so ridiculously thorough. Excited to look at this.

Ankur Nagpal [00:45:18]:
I feel like the bar has gone up now because I asked our team that right now with AI creating resources, like creating dumb resources, is not valuable anymore. AI can create the most generic boilerplate stuff. So what we've tried to do with what we're creating is also add our opinions. There are things that we uniquely believe that is not sort of universal knowledge. And I think that's what is slowly becoming the most interesting content probably in your space as well. Right. It's not about boilerplate information. It's just like what is unique to what Jay thinks that is more interesting versus something I can get from ChatGPT or whatever.

Jay Clouse [00:45:56]:
Is there anything that you're currently thinking about in this world of tax or finance optimization that you think is under spoken about, that you just want to share and pass along?

Ankur Nagpal [00:46:12]:
So I'll give. I'll give one last tax saving strategy. And this is not just for business owners, for anyone, but I think a lot of people who earn a lot of money. So at this point, if you're paying money at high federal or state tax brackets, are leaving quite a bit of money by using high yield savings accounts. I realized this myself when I was paying almost 50% of what I made in a high yield savings account to taxes. Because I pay highest federal tax rates, I pay New York State tax and New York City tax. However, as an alternative, you can look into money market funds. Everyone has them, Vanguard has them, Fidelity has them, Schwab has them.

Ankur Nagpal [00:46:48]:
And you can either find a Treasury money market fund which will pay no state and local taxes, so for me, no state and city taxes, or a Muni money market fund that ends up paying no federal taxes. And by doing this, you basically get a similar yield as a high yield savings account, but keep much more of it net of taxes. So that's just a quick little thing for people to look into.

Jay Clouse [00:47:10]:
Amazing. I have one of those set up and so now I just feel so smart.

Ankur Nagpal [00:47:14]:
Yeah.

Jay Clouse [00:47:15]:
Well, man, thank you so much for the time. Thank you for the platform because again, every day I'm just like, I feel so much safer about my future. And that is great.

Ankur Nagpal [00:47:25]:
Awesome, man. Appreciate your support. From day one, we just talked about.

Jay Clouse [00:47:28]:
How to financially protect yourself. Now let's talk about legal protection. Watch this video where the creator's attorney, Tyler Chao discusses how you can legally protect your channel and your business.