The remaining contribution of $38,500, which will come from the client acting as the employer, will be split between a tax-deductible employer contribution and an after-tax contribution, which is the mega-Roth IRA portion. The exact division for the allocations will depend on his tax situation for each particular year.
The after-tax mega-Roth portion counts toward the second portion (the $38,500), not toward the employee deferral. “This is the key to a mega-Roth IRA,” Larsen says.
Next, Larsen transferred the client’s existing 401(k) balance of $250,000 and invested it in Columbia Advisory Partners’ growth portfolio, held at the firm’s primary custodian, Charles Schwab. Accounts at Columbia Advisory Partners are diversified globally, across multiple asset classes.
“This client is comfortable with a high degree of risk, which gives him the potential for large returns,” Larsen says. “He wants to dedicate a large amount to cryptocurrency each year, and I determined that, for him, it made sense. One of our firm’s specialties is digital investing, which is why he chose us.
“We are using an 8% to 10% return on his investments as a planning guide, but in reality the cryptocurrency part will probably be outrageous returns or 0%,” Larsen says. “But at least now he has a strategy.” The cryptocurrency investment will be in the Roth structure, and the client’s traditional assets from the rollover of the investments he already had will be in ETFs and mutual funds.
“The novelty of it is that we are sending the investment funds to two different places: the traditional 401(k) part and the cryptocurrency Roth part,” Larsen says. “This plan opened up that additional Roth option for him so that he did not have to put the entire investment into cryptocurrency, which would not be good financial planning. Sending just the $19,500 annual salary deferral to the cryptocurrency account is better planning and allows for different investment objectives and standards for the two pots of money.”
Since the client had been handling his own investments in the past, once he brought Larsen and his firm on board he wanted to keep doing some investments on his own. “It was entertainment for him,” Larsen says. “I told him to go for it, but he soon lost the appetite for doing it himself, and he put all of the investments under our management.”
The client also wants his savings and investments to be as tax efficient as possible. By using pretax money for the 401(k), he is putting money aside at a time in his life when he is in a high tax bracket. His tax liability will probably be less in the future when the money is withdrawn. In addition, when money is withdrawn from a Roth, no taxes are owed. Ordinary income taxes are applied to the traditional part of the 401(k) because the money is put in before taxes.
The client wants to retire early in order to have more mobility and free time. He is earning a large income now, but he is on call 24/7, which is stressful.
The intriguing part of the plan Larsen developed for this client was the cryptocurrency feature, he says.
As digital currency is becoming more well known, “clients want to know what cryptocurrency is, how it works and, most importantly, if they should own any,” Larsen says. “If an advisor cannot answer these questions, you can bet that the advisor’s competitors will do so. Whether you believe digital assets are the future—like we do—or not, as a fiduciary, you need to understand this new financial ecosystem in order to give your clients the best advice possible.”
Larsen adds, “Crypto isn’t going away, but advisors who refuse to learn the fundamentals of it may be. With the plan for this client, we created a road map for high-income, self-employed business owners who have high risk tolerance and want to lower their tax bills.”