Hey, part of what we wanna be doing on this show is just sort of bringing you insights and strategies to help you, obviously as a mission-driven messenger, to become more well known, but also as an entrepreneur, to become more savvy and sophisticated. And today we’re gonna talk about a little bit about tax strategy in investing which may not seem always that exciting, but specifically I’ve asked this guest to be on the show. We’re gonna talk about a tool called Self-Directed IRAs. We’ll explain what that means why you might care about them, how you potentially use them and, you know, immediate action steps. But let me introduce you to Henry Yoshida. So, Henry was referred to me by one of the smartest people I know, Jason Dorsey. He’s been on the show se a couple times. He’s a close friend.
We we’re, we’re best friends in real life. His company is who we use to do our, our trends and personal branding, national research study. And Jason told me that Henry is one of the smartest people that he’s ever met. So that said a lot because I was asking Jason about self-directed IRAs, and then I got to learn about Henry. So Henry is the c e o and he’s the co-founder of a company called Rocket Dollar. So this is a FinTech financial technology. It’s a FinTech platform that lets people invest tax advantage retirement dollars into private alternative investments. Now, that’s a mouthful. We’re gonna, we’re gonna break that apart and help you understand what that means. But Henry is a C F P. So he’s a certified financial planner. In fact, he’s been a C F P since he was 22 years old.
He was the youngest c f CFP at Merrill Lynch, which is where he worked for 10 years. He’s also a, a professional licensed realtor. And he’s got 20 years of experience in finance. He, he actually was the founder of a venture backed company which was a robo-advisor company called Honest Dollar, that was acquired by Goldman Sachs. And he is the founder of another group that has managed had 2.6 billion in assets under management. He graduated from the University of Texas, UT at Austin has an MBA from Cornell University. And, you know, now is building his like personal brand and expertise really around these kind of like, vehicles of self-directed IRAs and Rocket dollar among other things. So with that, Henry, welcome to the show.
Thank you very much, Rory. Thanks for having me on today. Yeah, I’m really excited to be here. And Jason’s spoken very, very highly of yourself. I mean, he, he literally took time from his vacation to
Talk about I’m, I am the reason for his success. So he should be speaking highly
Denise first and you second. I’m sure
Denise first. Yes, Denise for sure. But the you know, so I was asking him about self-directed IRAs be and, and, and was something, you know, we have always had 401k. You know, I think I had a Roth, I when I, when I was 22 years old or something, and started learning about that. But only recently learned about this tool called a self-directed i r a. So can you just like high level layman’s terms, tell us what, what is a self-directed I r a
Sure. Self-Directed ira, it’s a, it’s a pretty n terribly de non-descriptive term for a type of ira. So the way we explain it and the way it’s become known, a self-directed IRA is an IRA account, very bespoke product. A lot of people in America have these accounts know generally about how they work, but a self-directed IRA is one that lets you keep the same tax treatment tax benefits of a, of a regular IRA that you would have in any brokerage firm. But instead of public stocks, bonds, mutual funds index fund ETFs, you can make private and alternative investments. So anything that the IRSs allows, which is anything from real estate to digital digital currency to making private investments into a friend’s startup technology business those all can be done inside of an IRA if you have a specialized provider that could do self-directed ira. So that’s what it is. Just think private and alt investments with the ta, same tax benefits for an IRA is what you
Can do. So, yeah, so basically this becomes a vehicle that I can take my money and if I don’t like the poll markets or don’t wanna put it there for whatever reason, or I have more there and I just wanna, I wanna invest in other things. Like some of the things you mentioned, I mean, crypto’s been obviously a hot topic in recent years. Real estate. Sure. et cetera. I can then use this account as a retirement account. I can do those investments, I can control those investments all the way to private companies and even debt instruments, et cetera. But have it have the same tax treatment, meaning I don’t, I it is tax deferred. So all the money I put in there, yes, those investments are gonna stay, those assets are gonna grow. Hopefully if I do a good job of stewarding that well and managing it well, and then when I retirement, when I retire, I take it out and then I’m taxed on the gains there. So exactly like an ira, it’s just, it has more flexibility into what kinds of things I can invest into. Yeah,
Exactly. Yeah, because the industry, you, you, you know, it’s almost so much so that you said you and Jason were talking about this, that people think that an IRA can only invest in public market securities or some derivative of it, like a mutual fund. But the reality is that the ability to invest in things that aren’t public market securities has actually existed since the inception of IRAs. It’s just not as well known. It’s not as well there aren’t a lot of providers in that space. So really, you know, my company’s mission and sort of my own personal background was thinking that, that now maybe to properly diversify someone should create a very simple, very affordable you know, household brand name to let people do private investments inside of an ira because that’s where a lot of investment opportunities are. But you’re exactly right that, that the, the gains everything is in there is tax deferred. And if and when you sell these investments in retirement, that’s when you actually pay taxes. So you can control it just like your regular IRA right
Now. And so basically there is some compliance and headaches and regulations and paperwork and details and kind of like that stuff around starting a self-directed ira. And what you guys do is you basically created a, a vehicle where it’s like you can, you know, for a, for a pretty low, very low fee, you can just, you guys can deal with all that and then now I can open an account and it gives me the ability to manage and do whatever I want to do.
Exactly. And, and our fee is structured that way because since these are self-directed, people typically find these investments on their own. So we’re not a mutual fund company creating a packaged product and then we charge the customer a management fee for however much money they put with us. But our fee is actually just a one-time flat fee because we typically are not sourcing those investments for the individual. Our fee, our ongoing fee and our signup fee are just flat dollar amounts 360 upfront and 15 a month. It’s just there to cover exactly what you mentioned. The, the not so fun part, cuz this is an audio podcast, but you know, I can see your face when you say paperwork compliance, the setting up painful and so forth. Yeah, it’s painful. So what, and that’s
Why we people do what you said earlier. You said like the, the idea of alternative investments in an I R A has existed for a long time, but you don’t hear about it because there hasn’t been as much of a way to like sort of deal with that stuff. The in, in a, in a really smooth fashion. And that’s kind of the problem you guys are trying to solve, right?
That part. And then I’ve been very public about talking about this too. It’s that the, the, the existing industry players that provide IRAs to the vast majority of the American public, they’re also the manufacturers of these these as package products as well. So it doesn’t really, there’s no real incentive for them to allow Rory to invest in Jason Dorsey’s business, for example using an account at a major existing provider because there’s no management fee that they can, that they can take for doing so because that’s a, that’s a deal between you two. Yeah.
And so forth. So that’s another reason that that’s why this industry really hasn’t become as well known. But you’ll find that sophisticated investors have been doing this for decades. Yeah. And there are several hundred billion of IRA monies inside of private investments.
Yeah. So, so here was my initial question. So I’ll ask you cuz this was the catalyst, right? So the catalyst for me was going, you know, we’ve always done 401k, I r a, we, you know, we’ve got that, we’ve got, you know, somebody that manages that and you know, but we are wanting to kind of start doing more with real estate mm-hmm. . And the thought was going, golly, we’ve got all of this money in public markets which we don’t fully understand and we don’t follow it that closely. We would love to do more in real estate and go, gosh, maybe we should take some of that money and put it over here into real estate. And my, my honest first thought was going, how can we use that money to buy a vacation home? Is there a way that we can take some of our invest, like our retirement dollars, put it into a self-directed IRA and use that to then basically buy like a second home that we would rent out and, and use. Now I think you can’t do that, right? What I’ve learned is you’re not allowed to, to do anything, not invest in real estate that you get a personal benefit from. Is that right?
Exactly. No personal benefit. It’s a, it’s a prohibited transaction is the technical term.
Dang it. so, so then you can invest in two things, but you can’t get personal benefit. So I can’t buy artwork and hang it on my wallet at my house. Like you can’t do that kind of a thing.
And artwork is a collectible. So that’s actually one of the two things that are specifically disallowed inside of an IRA generally. But, but it’s kind of interesting that we’re in a 2022, almost 2023 world now that many investments are actually now securitized. So it, it’s, it’s kind of crazy. But the private investment world now allows stock certificates that, that are, are actually backed by a piece of famous artwork or a collectible baseball card and so forth. And there’s websites that do that. And if the investment is properly securitized, then actually I RRA providers are allowed to hold shares of that. But the example you use, which is by a Picasso, hang it up in your house you wouldn’t be allowed to do that because you have the benefit of of enjoying the artwork or showing it off to your friends.
Uhhuh come over the most common vehicle or the most common investments that you would see. Well let, so actually we’ll come back to that in a second. If I look at this from an entrepreneurial tax component, tax strategy, right? So one of the issues, some, occasionally we’ll talk about tax strategies and ideas on here just because as AJ and I have been become more successful over the years, we found that almost nobody, even CPAs have like, often don’t have great tax strategy or tax planning for entrepreneurs. The, there’s not there’s still a limit to how much you can put into an ira, whether it’s a traditional or it’s self-directed. Right? And so you, you can’t, it’s not like a double, you can’t double dip here each year. You can just put it either in a traditional I rra or you could put it in self-directed, right?
Exactly. Yeah. It’s just all IRAs. These, these are just the types of IRAs. So my own vision is that sometime in the next few years people will say there’s traditional IRAs, there’s Roth IRAs, as you mentioned, you had when you were 22. And then there’s alts capable IRAs or self-directed IRAs. It, it’s just not the known third one, but it’s just, they’re all different types of IRAs Yeah. And so forth. So you’re right. And, and what’s the limit? You can put money in the limit for 2022 is $6,000. If you’re under the age of 50 then you can do another 1000 in 2023. And this is all inflation adjusted. So that’s been kind of nuts this year and probably heading into next that you, next year you’ll be able to put away 6,500 into an ira if you’re under the age of 50.
Cuz it’s, it’s just adjusting up for inflation. But remember most of these accounts, and probably a lot in your audience, Rory, that the reason why there’s so much money in IRAs is that most people actually sock away a lot of money in some sort of stint in a corporate world before be going out on an entrepreneurial journey. So, myself included, I worked for Merrill Lynch slash Bank of America for a decade and I contributed larger amounts than 6,000. It was less than at that time for IRAs in a 401k, then the company provided a match. And then when I left Merrill Lynch, that account is able to be rolled into my own IRA in my name and, and it had much more than if I’d been able to just put away three, four, $5,000 per year by the time I was there and so forth. So most IRA money is actually old 401k,
Old 401K money that then when you leave the company, it can’t be in that 401k and then it gets moved into an I R A.
Right? You’re able to leave it if you want, but you’re even more restricted because that company you know, probably only offered you 20 mutual fund choices. And then if you move to an irate at a major brokerage house, then you can buy any public stock that you want. And then if you are having a discussion to potentially buy real estate or invest in cryptocurrency or a small investment in your friend’s business, then you would need a self-directed ira. So that’s kind of the, the evolution,
Right? Yeah. And, and so, you know, a couple of the things, and just correct me if I’m wrong here, but like, as I think about this, I’m going, all right, if I wanna start investing in real estate, which typically takes a lot of money right? To, to, to, or, you know Yeah. Takes a lot of money to get to get going Yeah. Is saying part of the way that I can access capital is to pull it from my own retirement account. Whereas normally if I pulled money out of my retirement account, I would get penalized. But in this, in this mechanism, you could, you could convert from your traditional IRA into a self-directed ira. And now I have capital that I can, I can use to go out and buy real estate as an example. Right,
Exactly. You just can’t buy the one that you described, which is a vacation home that I use, you might personally use sometimes on your own up to a certain number of days. But the good news for your audience is that you could actually use a self-directed IRA to buy a vacation home that you permanently rent out on Airbnb. And any of us in your audience can actually go to your vacation home. It’s an investment for you. And it’s a, maybe like a getaway for us, for example. You just can’t use it.
Even the vacation business can a and can a and the business can’t benefit from it either. Like, can you buy a commercial property that your business is in and the commercial property is in your self-directed ira?
You can’t do that either, because if you control that business, then you can’t do it. But for example, if you bought a commercial property and you wanted to lease space to my business, I have no connection to to to your IRA or to you personally from a, just a relationship status. And then I could be your tenant paying a market rate. It, the, the basic rule thumb to make me make it easy is think that anything that you have inside of an ira, whether it’s self-directed or traditional, it just has to be purely an investment. It can’t be something that you, you know, derive personal benefit from that we talked about earlier, or that you get, you get any sort of benefit from. It has to be arm’s length you know, from you. It has to be purely an investment. And then that’s when the government allows you the opportunity to defer those taxes for years, decades and maybe even longer.
Yeah. And then, so when you think about the type, the common types of investments that somebody would do here one of the things that is potentially interesting to me about a self-directed IRA is well, first of all, you’re self-directing it so you have more control over like, what’s going on there. Mm-Hmm. , you’re going, yeah, I’m interested in real estate. I wanna do real estate, or I’m interested in crypto, I want, I wanna do crypto, or I’m interested in you know, whatever. But you, there tends to be more risk. Pri private, a private company would be another thing, right? Like, I wanna invest some money in my friend’s company. I can’t do that in my normal ira, so I’m, I’m going to open a self-directed IRA and do it, do it through there. If, you know, it’s more risky, but then also it grows, like it probably, you know, it has the chance of growing much more than typically maybe, you know, an investment that you would have that’s like a public security, right? So Exactly.
There, there’s more flexibility. It gives you a chance to have bigger wins as well as typically bigger losses like Sure. So what are the other like, major types of investments that people are doing inside of a self-directed? Does that mean real estate? You got real estate, crypto, private companies? If I wanna invest in my buddies business mm-hmm. , what are the other big ones?
Another big one is, is, so the industry itself is, goes all the way back to the seventies. So IRAs were essentially created in 1974. So for probably the first 20, 25 years, the only IRAs that were not offered by the major brokerage houses to do public stocks, let’s say self-directed IRAs for the first two decades were probably only created to do real estate investments. Private credit investments and probably precious metals. So maybe another one that we didn’t talk about was actually investing in, let’s say, gold. For example, like people held gold inside of ira. So that was a big industry, maybe less so now. And again, you can’t hold the gold bar in your house while it’s in your ira. You have to actually have a custodial provider to keep it in a vault for you. But remember these were created in the seventies and eighties. So at that time, oddly enough, that was probably the last very high inflationary environment and people kind of looked at tangible assets like real estate and assets that might hold their value for the long haul, like precious metals. So the industry actually developed around those asset classes first and
So forth. That’s, that’s interesting. So then basically, you know, the market conditions back then were, you know, maybe similar to what we may or may not be heading towards, but certainly recently interest rates have been going up and things like that. Yeah. And so you’re saying that people, you know, sort of tend to start to look more towards alternative investments and these kinds of
Sequence? Yeah, and I do wanna go back and say that, you know, I, I talk a lot and people always say that, you know, all alternative investments may be, you know, may be riskier than public investments. And I don’t know if that’s actually the case cuz you know, we just talked about that if you did cryptocurrency or investing in a small private business, yes that may be riskier than buying an s and p 500 company like Tesla or Microsoft for example, or Johnson and Johnson, McDonald’s. But, you know, I think it might be argued that, that as we record this today, Tesla is down 65% year to date so far, you know, heading into the end of 2022, that’s 63, 60 5% is down year to date. And even when what you might consider like the confluence of very bad events for real estate, I’d be hard pressed to think that a single family home has dropped 65% in value, you know, just this year.
So it could be argued that that tangible investments, some of which you could do in a self-directed IRA, actually might be considered y you know, relatively more stable than some investments you do in the public markets. So some alt alternative and private deals, yes. Maybe more, I guess you could say risky. But that riskiness is usually due to either you’re investing in an early not yet mature company or there’s an illiquidity issue with that investment. But, you know, sometimes if you’re buying something tangible like precious metals or real estate I would say that that actually is very good. And, and right now there’s, we talked about this before recording, there’s 15 trillion in IRAs in America. Almost all of it is invested in stocks and mutual funds right now. And if there aren’t providers like mine that allow people to get into some more tangible investments, well that’s a risk to the American public at this point cuz they have nowhere to go. Even bonds are down actually 15% year to date right now in the us
Uhhuh . And, and that, I mean, the other, the other thing of course is that it’s physical. I mean, if real estate drops in value, I I there’s, I still actually have something physical that’s there. That’s a big difference.
A big difference. It’s tangible. You can see it versus a piece of paper that, that may or may not you know, know, represent an actual stake in, in an, in a maximum mature company that’s publicly traded.
Mm-Hmm. . Sure. Is there so when you look at like h how do, how do you see people okay, let’s stay on the self-directed IRA for a second. Sure. And then I want to, and then I want to talk a little bit more about tax strategy and things, but are there any other major benefits to a self-directed IRA that we, we haven’t talked about or yet?
I I just think that self-directed IRAs to me are maybe very similar to your audience. The, the, you’re your listeners, a lot of people are pursuing their passions or what they want to do. They don’t wanna work for a 100 to 200 or 2000 or 200,000 employee company any longer. And they go out on their own. I think self-directed IRAs are almost the embodiment of being able to invest in things that you know about that you care about and so forth. I mean, you, you could do that through your public stock investing and say you believe in, in climate change. So you invest in Tesla for example. You hate supporting the cable companies, so you buy Netflix. But in a self-directed ira, people can really say that, you know, I’m going to use my own capital support a local business if they would take an investment from me to be a passive partial owner of this or real estate in a town.
So one of our first customers, and this is one of our first customers at Rocket Dollar. I remember talking to her on the phone. She grew up in San Antonio. She went to business school in New York and was a management consultant with a great salary and said, you know, I actually want to buy all rental properties in San Antonio, like where I grew up. I live in New York, I live in a nice apartment here, great salary. But I would feel so much better if I know that I bought four homes with my I r a there. And were able to let families rent it and live and raise their children in a house that I owned. It’s an investment for me. I’m making money, making gains, making income on a monthly basis. But I also know that there’s four families that live in these homes as well and so forth.
And I remember thinking, wow, that was huge. I mean, you know, yes, you may feel some benefits on investing in a public company, but nothing like that. She knew these people you know, they were at otherwise living in an apartment, right? But now they can live in a home with a backyard. And she knew their kids and she’s like, this is the best of both worlds. I’m making money, it’s an investment for me. And I’m able to provide households like real homes with real backyards and real neighborhoods for four families. And where I grew up,
What happens with the cash flow on that real estate? So the, the, the property itself is held in the self-directed ira, it’s throwing off rental, is that flow through as personal income or does that have to stay inside the ira? Somehow
Everything stays in the ira. So IRAs that are self-directed are exactly the same as IRAs that hold public stock. So if you own a stock that pays a dividend and you bought it in your ira, that dividend stays in the IRA u unless you’re over 59 and a half, at which point you could maybe decide to get that distributed to you and then you pay taxes on it cuz you can control that. But if you’re collecting 1500 in rent times, four homes in your ira, 6,000 a month, that’s 6,000 just accumulates inside of your ira. And what we find with our customers that they end up getting to like, Hey, now I got $50,000 after one year of owning these four properties, I can go do another deal maybe not real estate, but now I’m gonna go buy a $50,000 investment into this real estate syndication for storage units. And so where they build up cash, just like if you owned a bunch of dividend stocks inside of your current ira after a couple years, you’d have a bunch of cash inside. You either redeploy it back into something or if you’re old enough, you might take it as income and just pay taxes on it while leaving the rest of the property in the ira in this case
And that’s the tax strategy component that we were kind of hinting at
Uhhuh . Right. So you’re, so it’s staying in there. And then can you pay the expenses of managing the property out of the I r a
If you own real estate, everything is done with the I rra dollars. So again, you don’t mix and mingle in, in that, in that sense. So th that’s one of the things about owning real estate is everything is done in there. And that’s actually how we’re structured at Rocket Dollar. I kind of liken our account to sort of like an I r A bank account. And you set yourself up to pay property manager landscaper, you know, if you cover some of the bills, for example, for your rental properties, you do it from the I r dollars. You don’t do it with Rory Vaden regular dollars for a property inside of an ira. You have to keep it one or the other. And that’s why a lot of our people, maybe your people as well,
Property taxes, landscaping capital improvements too.
Uhhuh . And so it all just happens. This money’s just staying over there and, but you’re using the, but but then any cash flow that you’re getting and then anytime you sell, if you sell the property, then that money has to stay in the R and it has to stay in there until you’re 59 and a half. Yeah. well that’s a question. You can pull it out before 59 and a half. There’s just massive penalties, right?
You would, you would pay whatever income taxes are due on that money. If, let’s say it originally was a 401k, you never paid taxes on any dollar in a 401k and now it’s an ira. If you pull out a $300,000 cash value and you’re under 59 and a half and you’ve never paid taxes, you will add that to your taxable income for that year. That year all at once. But the beauty of IRAs, just so you know, is once you become 59 and a half, you could decide to take out as much as or as little as you like to supplement you know, your own living standard or needs. So if you created, let’s say 15,000 in income but you want to keep the properties, you could just take that 15,000 out when you’re 60 years old and, and use that to supplement against like other income sources. You have follow. That’s what our
Customers do. I didn’t follow that part.
So after 59 and a half, you can take out any amount in your IRA that you want that’s available in cash and whatever you take out, if you haven’t paid taxes, you will just add that to your taxable income for that year. So if you decide that you want an extra 5,000 a month, cuz you have two properties that generate 2,500 in rental income, you could, if you’re 60 years old, for example, just take that 5,000 every month and then you’ll
It’s just taxable income. But remember you were able to roll that, maybe you bought those properties 20 years ago and so forth. You, you didn’t liquidate the property, you’re just taking a distribution on the income from that property.
Right. Which is an, which is an advantage at that point cuz now you have your, you have turned your retirement account into an income stream that goes forever and ever, which theoretically you would have also from dividends I guess if you were, if you were in a like, public market or whatever. So
So then how do, like, if, how do companies buy real estate inside of their businesses and how do entrepreneurs typically buy their second homes? Like from a tax, you know, advantage place? How do you see those kind of tend to be structured?
Yeah, so they, they don’t really do, if it’s an ira, they don’t do that. And they, they, you know, again, we talked about it earlier, they wouldn’t really co-mingle.
Yeah. So this doesn’t, so now we, now we have to leave, we have to leave the, the self-directed ira, by the way y’all, I haven’t mentioned this yet, but so Henry’s company’s called Rocket Dollar. If you go to brand builders group.com/rocket that’s our affiliate link where you can check this out and you can learn about it. And like you said, it’s, it’s a, it’s a ridiculously low thing. It’s like 360 bucks or something at the time of this recording, one time fee and then a small monthly, like 15 bucks a month. And that, and that helps you deal with the compliance and have this vehicle and this account open and gives you some other features and stuff that allow you to sort of, it becomes the mechanism, I guess the vehicle at which you can like actually do this and, and move money around.
So, and then I, so I guess, and then we’re leaving now we’re leaving that conversation. Yeah. Behind. So we have to leave the conversation with a self-directed ira. When you go in, when you, when you start saying, okay, what are some of the tax strategies I can do as a company if I’m a higher earning, you know, entrepreneur because my personal brand is crushing it and you’re generating millions of dollars in speaking fees or your membership side or your royalties or your course sales mm-hmm. . And then you go, okay, I gotta think about ways that I’m lowering my taxes. I might also be wanting to buy a bus buy a building or some commercial property. Yes. and then also vacation homes. So like moving in that conversation, what are some of the, some of the common ways you see move people move down that path?
The big one, and, and this is actually a very known thing for a lot of your small community and regional banks here in the us they love actually financing successful cash flowing business owners to buy a commercial property that they may use up to 30% ish of the building. So let’s say you purchase a a 10,000 square foot building in the suburbs of Nashville or the suburbs of Austin. And I have friends that actually where I live, I, I have a bunch of friends that actually own these types of buildings and then they run their small business in roughly 10, 15, 20, 30% of it. And the bank is actually happy to finance that. So the business owns, owns the property or the business owner in this case your, your audience listener would buy that property and actually have a lease agreement with the with your business for 30%.
And then you’d rent out the remaining 70 and the bank and they help pay that mortgage. And in 10 years time, because commercial loans are, are not amortized over 30 years, in 10 years time, you now might own outright this building for 6 million while actually using a, a normal known expense on a monthly basis for your business. Cuz right now all of these businesses are probably paying some sort of rent right now, but instead wanna pay yourself the rent and have it pay down that loan and 10 years later you own this 6 million building in the suburbs of Nashville, for example. I see a lot of that, that that has nothing to do with IRAs, but I think that’s a great business strategy. Maybe better than the vacation home because it’s, it’s, you know, little, I think that’s something that’s a little more amenable to the local community banks that, that do that a lot right
Now. And so in that case, you then start a separate business, like a separate L L C that owns this commercial property that’s then renting it 30, renting like 30% of it, you’re saying
The part that you need. Yeah.
Back to this other business that you own, which is like, let’s call it your main business mm-hmm. . And then the other 70% of that space, you, this new L L C is now in the business of renting out that space to help cash flow the mortgage on the
Building. Exactly. Yeah. Uhhuh , I see that quite a bit. So that’s probably like in and of itself, like you know, like maybe a piece that that I guessed right for, for you and your audience. But that happens a lot and banks love that. They, they don’t always like it if you’re a, the a hundred percent tenant of the entire building because again, that’s a concentration risk of sorts and so forth.
very known here. Lots of I would say these sort of like small businesses that are cash flow, cash flowing. They do this and they know it’s just another asset that they’ll own outright and they could choose to keep that building or they could choose to sell that building in 10 years down the road. And if you think about it, you’re gonna run your business and you’re gonna, you’re already allocated to pay x percent of inex expenses for rent for the next 10 years. This is a way to just get you know, use it to create equity.
Uhhuh now, now you have a separate business that you gotta manage and the rental income from the other tenants, the other 70% of the building that’s now, that’s a new business that has its own sort of income and, and tax implications. But is, and so generally, generally the goal there is just to cash flow. Generally the goal is to at least cash flow the mortgage for 10 years and then 10 years you now you have an asset that you own outright that you, you can sell. Yeah,
Exactly. Yeah. So I see that quite a bit. And then, you know, if you don’t want to be too actively involved in that business, you can, you can bring on a partner. You could just be very sort of integrated with a property manager that’s experienced. I mean, at the end of the day, you most people probably want to concentrate on their primary business. They’re not in the business of running multiple businesses and so forth. But that’s just just a strategy. The other one I would say this is maybe more specific to the business owner and doesn’t involve needing another outside thing is that if you’re a very successful cash flowing business and you have a small group of employees, let’s say anywhere from five to maybe 20, but these are, you know, maybe even up to 50 a lot of people don’t do this.
And this goes back to my pre FinTech days, but I would encourage business owners to actually look at things beyond a 401k. Like we don’t have ’em as much in America anymore, but pension plans are actually very, very good vehicles for business owners to accumulate a large amount of money for themselves while still having an attractive benefit to keep your key people for not just two years or five years, but probably 10 and 20. I mean, that’s another problem we have in, you know, today probably being a business owner is it’s very hard to retain employees. Most people think that they’re gonna stay two years at a place and then go from job to job to job. But you know, you and I, Rory, we probably know a lot of businesses where they’ve had their core group of people with them for a decade or longer.
And those tend to be very successful businesses. And if that person sets up a small business pension plan, typically the owner if their spouse is involved, they could put away over a hundred thousand dollars a year to themselves and shield it from taxes while then providing a smaller benefit to the employees in the form of a guaranteed pension. But over the course of 10 years, you’d be able to sock away like a seven figure amount that would turn into a guaranteed income stream. The lesser known, I used to set up a lot of those back in the early, you know, kind of 2000 to 2012 timeframe
Now for these businesses. And so pension plan, what is, when you say pension plan, define pension plan for me, cuz I don’t, when I think pension plan, I think very large entities and big structures. I don’t think small businesses. I get that. I get what you’re saying is basically the, the, the mechanism here is that by introducing this benefit to all of your employees or some portion of your employees, you’ve now created a way for you to put more money away each year into retirement accounts so that you don’t have short-term taxes, you don’t get to have that money, but you don’t have to pay taxes on it. And now that money, you have a larger and larger pile that’s growing tax deferred, not limited by the, the normal thresholds of like the 401K and the ira, which are much, much lower. Right. So I’m, I follow you there. Sure. But like what does pension plan mean?
Yeah, so pension plan means essentially this is a plan where only the business contributes on behalf of every employee. So you are required to cover every eligible employee. So if you have 10 people in the business, let’s say it’s a spouse and a a couple that basically own the business, the couple might be in their mid to late forties, the other eight employees may average age only 25. So you do a pension plan, it’s adjusted for accumulating retirement. So every year you have an administrator and they tell you that, hey, your business, you need to put $200,000 or $150,000 is your contribution for the whole company’s plan, all 10 people. But because you’re older and you’re more highly compensated, maybe 90% of that money goes to you and 10% goes to the other eight people. But they’re happy because they actually have a guaranteed retirement benefit down the road.
You know, pension plans actually do exist for small businesses. I think they’re gonna make a comeback here over the next like several years. But not at the big gigantic companies or government or let’s say, you know, municipal type employers. But it’s a powerful tool and, and you have a lot of audience members who you just said that maybe they’re just crushing it with their course sales or their speaking engagements. And this is a 10 person business and the, let’s say the, the couple that run it, they’re usually decade, a couple decades older than the average employee at that business. They could put away a big amount with, for tax benefit for retirement for a guaranteed income stream and shield themselves in current income. Right Now the great thing about making a million dollars in income is you made a million dollars in income. The problem is you’re probably gonna end up netting only 650,000 of that income if you make all 1 million.
Right. And the other thing is, a lot of these, if they’re small business, they don’t have tons of employees and tons of you, you know, you might have a couple assistances or whatever. Like it’s not like you have five people on the payroll that make a quarter million dollars a year doing, you know, highly, you know, complex C-level type jobs. So
You might have a great core group of eight people, that average income is 70,000 and if you’re, let’s say running the business and taking more and you’re older, you would find that you would be putting away probably a six figure amount for yourself. And you’re still doing it right by those employees.
No, you still have to have a lot of cash flow. That’s the problem is that you gotta have the cash flow. Yeah. But you’re either gonna pay it to the government in taxes or you’re gonna pay it to your employees as a benefit to them. Exactly. And and to yourself. So like that money is not gonna stay in your pocket either way. It’s basically how, unless you put it, unless you do this. So if you is a defined benefits plan is like a cash balance plan, is that the same thing as a pension plan?
It, yeah, it defined benefit pension plan. Similar cash balance is a type of, of pension plan that is kind of a, it looks a little bit like a 401k, looks a little bit like a defined benefit pension plan and so forth. Like that’s getting a little bit into the weeds. But for people that are your audience, if they say that, you know, I am one of these people, I’m, I’m more highly compensated than the general employee who’s on my team. And I’m also maybe generally older if they look into this, they, they might find that if they can sustain cash flow and of course after they work with you and aj, they surely that’s, that’s that that’s gonna happen right away. In time that they’ll have this great business, they may say to themselves that this is a way to like, you know, really have the benefit down the road because otherwise you’re gonna get taxed very heavily today.
Yeah. Well and that’s, you know, the only reason I know defined benefit plan is cuz that’s, that’s come up several time with our, and in some of our like high level mastermind circles with some of our, our, our higher level clients is we’re always, we’re telling them. So I, it’s interesting I didn’t equate that to pension plan, but it’s the same vehicle which is ef it’s effectively a completely legal mechanism by which you can increase the limits, the, the thresholds of what you would normally be able to invest into tax deferred accounts like a 401K or an ira. And you get to provide this awesome benefit for your employees, which is that they, you’re contributing to their retirement in a small business. That’s pretty wild because you go, man, I’m working with a small business, my benefits package is like as good if not better than some of the biggest companies out there. You, you know, it’s really cool thing. I love that.
Exactly. Yeah. And, and you know, we were talking, we were introduced by Jason and I was just reading his book, which is basically showing business owners and companies and corporations how they might take advantage of hiring into that Gen Z you know, generation for people younger, if there’s two levers, if they’re younger and they have lower salaries it is something to consider if, if you’re the small business very stable with your business and cash flows, that that’s how you could put away, I mean, we just talked about IRAs allow you to put away six, $7,000 a year 7,000 if you’re over 50 401ks allow you to put away 20,000. This is how people put away 100, 1 50 200,000 and shield it from taxes, which is why it probably comes up in your high level master mastermind groups.
Uhhuh, . Yeah. and you said four Oh [inaudible] limits like 20,000,
Right? It’ll be a 22,500 next year, but it’s it’s 20,500
This year. So, so yeah, that, that’s something to ask about. And it is the kind of thing where it’s like no one ever told us that. And you don’t know to ask about it now, you know, the thing is you gotta be careful is you have to commit to it for a certain number of years, right. So you have to like lock it in. So you need to have stable cash flows. But
That is true. That’s a, that’s a good point. And you know what’s funny is I’ve made my entire, I’ve always, I’ve been in this industry for over 20 years and oddly enough, someone asked me this one time, he said, you know, you’ve done it this whole time that you technically never recommend an investment strategy or an investment itself. I said, exactly, I have this belief that people are gonna invest in things, whether it’s in the private markets, to the public markets already. They’re gonna do what, what, you know, is appropriate for them. And all I’m saying is that look, if you think about how you hold that money, whether it’s in an ira, a pension plan, a 401k, that same investment that you are gonna do, if you hold it in a better way, you’ll actually make usually somewhere between 20 to 50% more per year on that investment.
You know, whether you invest in the s and p 500, someone likes that someone wants to invest in Tesla, another person wants to invest in real estate, crypto or private businesses. If you hold it the right way and I show you how to do it, you’ll make thir 20, 30, 40, 50% more per year Yeah. On the investment you were already gonna do. That’s not my job to recommend the, the, the investment to you that’s your advisor’s job or your own decision to make. But you sh people don’t pay nearly enough attention to how they hold investments.
Yeah. And I think where the magic part of where the magic is, is going, if I take that money as income and I pay taxes on it, I could still invest that money into my friend’s company. I could still invest that money into crypto and if I hold it for longer than a year, I’m still only paying capital gains tax. The the, the magic though is if I do that through the self-directed ira, all of the money that I would be paying in taxes now stays in the investment and it rolls and it rolls and it rolls and it rolls. Right. And that’s like a pretty, like over the course of time, that’s a monumental you know, IM impact. So
Exactly. You’re rolling a dollar, you’re, you’re, you’re a hundred cents. The whole dollar, $1 is going in if you do it after maybe 60, 65, 70, 70 5 cents of that dollar. So over time, that holding period, you’re compounding on either 65 cents or you’re compounding on a dollar. There’s a big difference.
Yeah. Just by the technicality of how it’s held. Now, the, now the other thing is you don’t have access to the money. So that’s the big thing is like, it’s in here, it’s staying in here, it’s not going anywhere.
Well the beauty of private investments is they typically are a liquid anyways. So the reason why there’s a premium there is because they aren’t quite as liquid as being able to buy and sell a hundred times a day or a week, let’s say some public stock. So you actually get compensated for that. So the way economics works, you’re getting a slight you know, premium for the ability not to, to always be a hundred percent liquid, which, you know, right now, maybe it’s been proven that it’s probably a good thing. You know, you read a lot of articles that say that 2022 is the year where you may not want to like overly look at your investment statements, right? Yeah. You’re, you’re probably better off just focusing on your business and, and building your audience and growing your business.
The investments are a long-term thing, so don’t really worry about what it’s gonna say here at the end of Q4 in 2022.
Henry, how do we buy our vacation home? What’s the, what’s like, what’s the smartest way to go about doing that or to think about that?
Yeah, well, inside, again, inside of an ira it wouldn’t be a vacation home that you use. So that is one thing that if you, if you just know that there’s this lock solid investment opportunity, but something that you could do with not having on your own then you can use IRA dollars if you wanna buy one on your own. I mean, this is, I I have no association with this company, but I have friends and, and I’ve seen these particular platforms develop, but where you might actually just fractionally own a vacation home. So it’s, it’s a modern digital twist on probably timeshare but only luxury properties. I just think it’s safer cuz for me, I’m a big proponent of how you hold the investment and maybe if at all possible not locking up you know, all the capital at one time and at which point, if you own the entire investment with a lot of locked up capital, you exponentially increased your risk.
So maybe you can buy one 32nd of a luxury property through one of these digital platforms instead of you coming up with a 20% down payment and making sure that you tell your tax advisor that you only stayed in the place for less than 21 days a year and tracking everything. That’s, that’s risky to me. I think that I, I do this myself. I think you should actually look at some of these digital platforms where you could just pay y you know, a set like $40,000 for example, and own one 32nd and get your allocation of time to a property. The, the, the one you know, in my mind I think about is park City, Utah. Interesting. And for example, because of 20% down payment on a $900,000, you know, luxury property there, small two-bed, two and a half bath cabin, that’s a lot of capital. We’re talking over a hundred thousand dollars in down payment plus the risk of owning it outright
And I specifically think of Park City because there were wildfires there that severely impacted some of these properties in like a Lake Tahoe or Park City. What if that was yours? And, and you and I are col respectively, 1700 and 1300 miles away from there right
Now. Uhhuh , yeah. Risky. Yeah. That’s, that’s, that’s interesting. You know, I find like, it, it feels like it’s pretty hard to cash flow some of these high-end luxury properties. Like when you add in all the property tax and all the maintenance and the HOAs and all that sort of stuff, it’s like, eh,
And you’re limited from, you know, the amount of time you can actually physically be there. Anyway, in a sense. Yeah. Anyway. And you know, people are, someone sees this as a problem to a certain subset of the population, just like Rocket dull does as well. And you know, you just stick to like very tried and true ones, which is that maybe the outlay of capital is limited, right. And so forth. So that might be a way to do it through one of these platforms. I don’t own a property, you know, in my name fully outside of my primary residence that I’m talking to you from right now, but do take advantage of these platforms because it’s a, it’s a known limited amount of capital known, limited exposure to me. And then everything I can, I consider every investment I do private, public how I hold it, you know, I got eight days here, so I think a lot about you know, where I should sort of dole out different things. Are there some, like other advantages I can take right now before the end of the year?
I have a very limited skillset, Rory. It’s I think about this, I’ve done this for 22 years. I’m like the I always think about optimization of how you might hold an asset. That’s, that’s sort of how I’ve been trained.
And you’re, are you an active, you’re not an active advisor, you’re not really an active advisor anymore, right?
No. I sold that practice, you know, prior to the Robo-advisor. You know, so that was back in 2000 14, you know, we had 2.6 billion in assets that we managed on behalf of individuals and, and, and businesses. But I sold my stake and, and it’s a conflict to do that right now. It, it’s actually an impact thing. It’s funny that you just asked that question here kind of as we wind down. I really just thought that by building a FinTech product company, I can actually impact more people than I could ever by just selling some little fractional portion of my business week Yeah. To certain folks. So I really thought about that way. It’s that it’s been successful for me, but the really, the real thinking is that if I create Rocket Dollar the platform, I can work with 1 million people and billions of dollars if I basically just, you know advise people for time, you know, on an assets under management basis I can maybe work with at most 30 families effectively.
Yeah. Well, and that, that was part of why, that’s part of why I, I thought to have you on the show, because, you know, we, we have, we have advisors. We love, we trust lots of clients that are advisors. Right. We’ve got lots of advisors. Yeah. But, you know, since you’re not actually, you’re incentivized to like, sell any product other than Rocket Dollar, it was like, Hey, let’s bring Henry on and ask him some of these questions. Of course, again, y’all, if you go to brand builders group.com/rocket, you can learn about this and how to open the accounts, a few hundred bucks, very low monthly fee. And then Henry’s team is taking care of the, the backend. And now you are, you’re free to self-direct your own retirement investments in a tax-deferred way. And there’s some really cool things and, and it does seem like the way the world is shifting in the economy, et cetera. It’s, it’s kind of like an, an, it’s important to at least know that this vehicle exists. And that’s why we wanted to talk about this subject and that’s why we found you, Henry. So you’ve been so generous with your knowledge, your wisdom, your experience. Thank you so much for that time. And man, we look forward to following this journey.
Thank you very much. Thanks for having me. And I’m, I’m glad I was able to share a little bit and explain some of these self-directed IRAs, which will become a big, big thing over the next five to seven years.
. Yeah. Yeah. We think you, we think so too. All the best, my friend. Thank you.