EP 017 - Tax-Advantaged Benefit Plans with David Podell

We had a great conversation with David Podell of Business Benefits Consultants on how to reduce your taxable income by hundreds of thousands per year using benefit plans with your businesses.This will be extremely valuable for our clients who are looking for additional strategies to further reduce their taxes after the cost segregation studies have been performed. Some of the topics we will cover are:
- How to Pull Profits from Businesses on a Pre-Tax Basis
- How to reduce your taxable income by hundreds of thousands per year with pension plans
- Long-Term Income Timing Tax Strategies
- Tax Reduction Plans for Business Owners with Active Income and Employees
- Potential Tax Benefits of Generating Active Income for Real Estate Investors

About our guest:
David Podell started Business Benefits Consultants when he identified a niche space that was filled with complexity and a need for systems in the larger deductible tax strategy space. He has lectured extensively as an industry thought leader and sought out specialist. He has been featured in FORBES, American Institute of CPA’s, CPA Practice Advisor, and multiple small business journals. His firm is commissioned by accountants and financial advisors throughout the country to provide an outsourced solution that allows those professionals to adapt and manage these plans for their clients. He can be contacted at: david@bbconsultantsllc.com

Transcript

SPEAKER_00 0:00

How's it going, guys? I just had a great conversation. I'm excited to share with you with David Podell of Business Benefits Consulting. We discussed how we can maximize tax-deferred vehicles such as pension plans and how much you can put in and really how powerful this can be, where you can reduce your taxable income by hundreds of thousands of dollars per year. We also talked about other considerations with entity structuring, other activities, other tax strategies, and what kind of circumstances may lead you to implement this strategy. Lots of stuff to talk about here, lots of really valuable stuff. Tune in, you're gonna get some great information. And remember to subscribe to the podcast in our YouTube channel. Listen, it's gonna be good. All right, you guys, welcome, welcome. I'm really excited to have our guests today. We're gonna be, I want to talk to you guys about a topic and you know, some planning opportunities here that are less common for a lot of our audience but are extremely valuable. This is not something that you're gonna hear on your common blogs, and this is a wonderful opportunity when it comes to deferring your taxes. And the strategies we're gonna talk are gonna be more and more and more important as the tax code changes over the next five years. And we're gonna talk about some ways where we can set up some tax advantage plans that will reduce your taxes by literally hundreds of thousands of dollars per year. And I've already done a similar plan with a client, and we are gonna start doing this with lots of our clients. Um, so we have an expert here, David Podell, who will be telling you a little bit more about what he does. And we're gonna be diving into some of the uh strategies and tax implications and what this might mean for you as a business owner and real estate investor. Lots of wonderful opportunities. So we're gonna we're gonna jump into this and riff on a bunch of different topics. Let's start off. Um, Dave, can you introduce yourself in about 60 seconds or less and tell us tell the audience what you do and let's get into it.

SPEAKER_01 2:27

All right, thank you, Mark. Um, so we are a uh uh benefits uh company, we are consultants, um got into this area because um we noticed that uh there were all these different actuarial designs out there of uh all different retirement plans and different ways of that these things get tested and calculated, and it was so much complexity around it. And um we work always worked with business owners and said, well, how are we supposed to figure this out, or who can figure out what works and how it works for somebody versus the next design? And um and what's the best way of creating these plans? There's so many different combinations. There was a big need for this. So um we set out to uh to learn this, to specialize in niche specifically in this, um, finding the largest deductible benefit plans for business owners. Um, Mark, you specialize in in real estate uh investors, and we have tons of clients that are real estate investors that are taking advantage of these tax deductible strategies. They're like you said, large deductions, um, great benefits. Uh they are out of the box, they're not traditional, they do have complexities to them, but they can be a silver bullet in in planning. And um, it's something that uh lots of CPAs are taking a look at and saying this is this is something that we need to talk to our clients about.

SPEAKER_00 4:04

Absolutely. Can you give us some examples of maybe some of the results and the strategies that you've helped some of your clients implement?

SPEAKER_01 4:13

Sure. And just to talk to your audience, um, for example, right now you have um a lot of um real estate agents who are doing extremely well with the markets. Um they're 1099, they have income coming in, they're putting money in some of these traditional plans, regular retirement plans, which are great. Um we all know the common plans that are out there, and they're looking for much bigger deductions because sometimes those limits that are there are not big enough for them, even with their additional deductions. So real estate brokers, um, somebody who uh who is doing the flips, the flips um have become more and more popular over the years. Now they're getting a little bit harder because of the market. Um, very popular right now. Uh, those investors who are buying the short-term rentals, the Airbnbs, and uh and really looking for places to get much bigger deductions because of the income and the amount of money that they're making from these things. To get a little bit more specific with some of those cases, um, it's we're talking about cash balance, defined benefit plans, combination with other retirement plans, and a multitude of ways of putting these things together in order to get six-figure deductions and contributions in that go way beyond the scope of what the traditional plans allow.

SPEAKER_00 5:43

So, can you give some examples of maybe how much potentially these people can deduct in what you've seen?

SPEAKER_01 5:50

Sure. Always depends on the type of design, the type, the age. Um, are there employees? Do you have people working for you? Are you a solo? Are you husband-wife doing this? There are a lot of variables. But um generally on the low end, these plans are around$150,000. On the high end, depending uh on age, you're upwards of half a million dollars. So um, and if there's partners and there's other people involved, then um you you really can can get it even higher than that, but just depends on on age. It also obviously depends on how much is being brought in. So, my rule of thumb that I'll use when it comes to benefits is stick with the traditional items that are out there that financial advisors have and um and that anyone you know is setting up on their own, which might be 401ks, SEP, simple, all those types of things. But when you're looking to defer and put away a lot more in contribution, or there's a lot more in profit that you'd like to take out of your company or put away for yourself on a pre-tax basis, that's where we come in and we get brought into this to help find the proper designs.

SPEAKER_00 7:10

So in fantastic. Can you tell me and tell the audience what a cash balance and what a defined benefit plan is?

SPEAKER_01 7:20

Sure. These are plans that are they're essentially pension plans, they're plans that are set to give a specific benefit in retirement or at the end of the day when when everything is done. And um because of that, there are complex calculations that allows you to solve for that end-of-the-day benefit. For example, let's call that age 60. 60 is going to be the retirement date. And somebody who is 50 now has to they're solving for that specific benefit. So they need to fund to that to that level over time. Um there's a lot of questions that come into this as far as flexibility, which I'm I'm sure we'll we'll touch on because that's the big thing, especially in real estate. We could have great years, we could have horrible years. Um, we could have we're in there's different markets, right? So you might have a client that wants to put away$150,000 today, but next year maybe they can't fund, or maybe they can only put in uh you know$50,000 or a much smaller amount. So there's the flexibility issue that needs to get uh addressed in the um in the plan design. And that's that's one of our primary focuses that we look at when on those designs is what is the flexibility? Because a business owner does not want to hear, hey, I have to put money away every single year at this high amount, no matter what happens to me. Um, especially an entrepreneur who's thinking, well, what if I want to buy another business? What if I want to invest more in my business or do more or sell or retire? There's so many variables that are there. And we know that. So we we know where to go and and and how to solve for these things.

SPEAKER_00 9:24

Fantastic. And so some of the examples that I'm starting to recommend for our clients. So we have one client that is a commercial broker, and he you know makes that around a certain amount every year, and he had some extraordinary deals that took forever to close that are going to be irregular, and his income is spiking to be at an extremely high amount here, you know. So, you know, all of a sudden he goes from making maybe a hundred and to two hundred thousand, and all of a sudden he has a year where he has maybe six hundred thousand dollars of taxable income here. And because the real estate market is so high, he doesn't want to buy any real estate. So he's looking for a way, you know, and we already know with real estate we can accelerate the depreciation with the cost segregation and that whole that whole that whole story, which I'm sure you guys have heard me tell a million times if you can't you haven't just listened to any of my old webinars. But we're looking for a place to part the cash that'll reduce his taxes and create some long-term savings. And so when we see a spike in the income like this, one of the things that we could do potentially is we could park this cash in something like one of the plans that you're discussing, and now we're reducing his taxes by a significant amount here. We're putting it into something that's gonna build wealth, and we now are controlling the timing of the recognition of this taxable income. So let's say he has another year where maybe the deals stall a little bit, maybe he has a lower income year. Maybe that's the type of year where we decide to recognize this income, shift the recognition of it into a lower tax rate year. And maybe, and we can do that by rolling it into a Roth IRA, and then it grows tax-free inside of the Roth. Lots of other planning opportunities and instances where this is gonna work, but you know, you were talking about real estate brokers, and that's just one of the things that we're talking about with our clients as a situation here where we can take control of when we're gonna recognize the taxation of these events that could be really, really powerful for reducing your taxes and building wealth.

SPEAKER_01 11:30

Mark, you're you're spot on with that client when we've seen a lot of those. Um, you know, these plans have to stay open and have to get funded for really three to five years. You really, it's not something that you want to put money in and not do it again. There, there is that. Okay. So the we we have to recognize the fact that we're not opening a plan to then close. Um, as far as the flexibility in the plan, we have seen many designs and worked with actuaries where they are sometimes front-loading a lot of the benefit in certain years and then bringing it down in lower years. So there's amendments that can be done. There are different ways to add that flexibility in so your client that had this great year can take advantage of that. And knowing next year, hey, I might just go back to a regular norm, normal market, and he's gonna have a specific range, and he can now put in on the low end of that range uh and continue his benefit that way. So, and then if he has another great year, well, we're going back to the actuary and we're we're looking at the plans and saying, okay, what can we do? We're we're also constantly, and that's where we come in as consultants on this, and we're we're um we don't set these up and and help the advisor, the CPA, and everybody else to and then disappear. We are an ongoing um uh relationship here to help with what are things looking like each year and each quarter in funding, what what has to be changed, who's doing what, and and how the plan is the plan working properly? So there is more involved, obviously, than the traditional easy throw money in a plan and uh you know, take your deduction, but that's also because there's a much bigger benefit at the end of the day. You can really trigger a lot, and you, I mean, you can speak to this, but you can trigger a ton of tax benefits when you take an income that might be in your case right there, 600,000 and now turn it into 300,000 of taxable because you deferred 300 into a plan.

SPEAKER_00 13:50

Yeah, and another cool thing here is you can contribute to the plan for the prior year after the year has closed. And you know, correct me if I'm wrong, but we can wait until the extended filing date to make this decision. So we have until um, you know, if it's a Schedule C activity, we would have have until October 15th of the following year to decide that we want to put this cash into the prior years uh to defer the prior year's income and and how much is gonna go in there, which is wonderful because you know, as far as how much he wants to put into there or set aside for maybe a real estate deal, let's say he doesn't find a real estate deal, and you know, for this client, if if we wind up doing this, you know, he's gonna wait a little bit and see how the following year pans out. And and that's one of the reasons why we may be extending his, you know, we're extending his return and waiting things out so we can have a little bit more foresight on what is 20, you know, this this is a kind of our conversation is in the year 22. So we're waiting to see how 2022 pans out a little bit more. So you have a a lot of opportunities to to have um you know a greater insight on on the impact of this and and when you want to what years you want the deferrals to apply to and how much, which is you know, lots of flexibility here.

SPEAKER_01 15:14

Yeah, we used to we used to have uh the deadline of the end of the year, and it was always a rush of time. Let's let's get documents in place, let's get these things set up, and then worrying, worry about funding after. Now, because uh they had changed this uh this deadline. Um, you can set up a plan right now and get a deduction for 2021. Um we are doing a lot of 22 plans right now, just because it gives an entire year plus to fund, you know, anything that gets set up right now, you're not rushing or stuck with this cash flow lump sum, hundreds of thousands of dollars going in at one time. You now can look at things on a quarterly basis and say, hey, this is what I'm expecting in 22. And the plan gets set up that way. And you're now each quarter looking to how do we do? Should we put some money in? Should we put nothing in? Should we wait? Um, and it gives you all that time to accumulate that cash flow. Should you want to just, you know, hold off and not put anything in the plan, but still have it set up for that time. It really is a it adds so much more flexibility from cash flow, which is that that's what a business owner is really looking for.

SPEAKER_00 16:39

Yeah, and here's some other opportunities. Let's say you so you know, we're talking about, you know, it's helpful when you have lots of taxable active income. You put your active income into this. But let's say we have a lot of capital gains. Now, let's say we have an extra 500,000 of capital gains on top of all the active income that we're paying taxes on. Now, you couldn't do it to reduce your, you know, you it's not like a you know uh an opportunity zone where you put the funds in to reduce your capital gains, but you have all this cash from your capital gains, and you're thinking, maybe thinking to yourself, you know, where are some strategies that we can reduce our overall taxes? Some of which is going to be impacted by the capital gains. You could take the cash from the capital gains, and this can be contributed into these plans, it'll reduce your taxes at your marginal rate, so it'll actually have more of an impact, and you could potentially drive you into a lower capital gains tax bracket, at least a portion of it, depending on how everything plays out.

SPEAKER_01 17:38

Yeah, yep, absolutely.

SPEAKER_00 17:40

And then another opportunity qualified business income deduction, which we've discussed. Um, if you get phased out, that's a 20% of your profit is uh uh can be deducted with qualified business income deduction as of 2017. It's a wonderful opportunity for for business owners, but it gets phased out once your income hits a certain point. You put the money into this plan and now you unlock a 20% qualified business income deduction on this activity, which is another fantastic opportunity.

SPEAKER_01 18:11

Yeah, and Mark, you know, on the low end, I would say um yeah, or or kind of I maybe on the average, because the low end I would say we're seeing around$150,000. But on average, we're probably um, I would say around$250,000 of contributions. Now, yes, there's ones that are a lot higher. Uh, we have ones that are lower, but um, I'm just gonna, you know, saying this is this is what I'm I'm seeing out there. And if you have real estate investors that are are a solo and they're operating that way with um, you know, without other employees to test and um and do all this different, you know, uh additional actuarial work. Um, it it helps also, you know, there's we always look at what's the cost of a plan. A cost is what do you have to give away to employees? When you do any retirement plan, you're always looking at what has to go to everybody else, non-owner. And um when we're looking at this as a benefit, it's an owner's enhanced benefit plan. How are you enhancing the owner's benefit? Well, pulling out money on a pre-tax basis out of the business, whichever way you're doing it, whether it's corporation or it's a 1099 or whatever it is, you're pulling money and putting it aside for yourself pre-taxed. So again, it's a significant amount. It's going to trigger all these other things, whether it's QBI, whether you're using it because you have capital gains on something else or anything, you know, that that's going that it's going to help with reducing the additional tax burden.

SPEAKER_00 19:47

Wonderful. Yeah. And so so let's so let's say we have so you're you're interested in this type of strategy, you create these plans. What can can you tell our audience? Um, what do you once the money is in these plans, where does this money go? And what kind of activities and securities? And this is not investment advice, but what what what happens with the with the funds when they're in these plans?

SPEAKER_01 20:14

Yeah, I can't speak to the investment advice. What I can tell you is that we work with an advisor, um, you know, whether that's a client's advisor, um, or if you're doing it on your own, then we're gonna try to tell you to kind of, you know, this is this is someone that you should talk to in regards to the investment, the investments with it. But you can look at it similar to your 401k or SEPIRA or simple, whatever they have going on. Um, it's going to generally be in traditional investments. Now, because you're solving for a future benefit, you probably don't want to be as aggressive as you are in your other um in your other investments. There is a different uh you're you're getting a crediting rate from the IRS every year, and that money is going in. So the the balance is going up um on paper, and the actuaries are giving statements to show that. So the investments then kind of have to match or adhere or get close to that number. They don't have to be there because you're gonna have ups and downs, but it does kind of coincide with the funding. So that's why everyone needs to be involved with whether it's uh the the advisor or if someone's doing the the uh clients doing it on their on their own. Um, they just need everyone, there's got to be guidance and people involved actuary, CPA, uh consultant, advisor there. And um we have had clients that said, hey, I want to put money, I want to use this uh for for real estate. We want to put real estate inside of this pension plan. And there are ways to do that. There's complexity to it, but there Are ways to do it? We do think that it's probably better off, you know, staying with traditional investments and keeping things a little bit simpler and using their real estate investments on the outside. Like you and I have spoken before, you know, you get depreciation when real estate is not in an IRA, but when it is, you're going to lose that. So, you know, we we've we've been asked about having private equity in there. So there are ways to add non-traditional investments inside of these pension plans, but um you're they are better off because they're they're already complex. So we say don't make them more complex than they are.

SPEAKER_00 22:45

Yeah. Great, all great stuff, all great information there. Um, and by the way, I just want to remind our audience if you have questions, put them in the chat. So we in and I'll ask David as we go along as well. Um, and what what about someone who's who who really wants to put money into cryptocurrency? That is that something we can do as well?

SPEAKER_01 23:05

That's such a great question, Mark. And we we're we're getting asked it um more frequently. Um, I have not seen it. I have not seen it yet. Um, will something like that, you know, come to fruition? Um, it might. I think what they're probably gonna have to find is uh the you know, one of these custodians that deals with that and um and see and and talk to the, I would say, you know, talk get to the custodian and say, will you go and allow this to be inside of a defined benefit or pension plan? Somebody had put in the in the chat Madison Trust. Yes, we're we're familiar with Madison Trust as a as a custodian who deals with real estate and some other alternative assets. So they might be willing to do that. And if they are, that's that's for them to do. Um, you know, also having someone, you know, a good good CPA that knows how to how to deal with the taxes on that, because now it is going to be in a qualified, qualified uh plan.

SPEAKER_00 24:09

Awesome. And um so when we're talking about putting real estate also into retirement accounts, um one of the you know the greatest benefits of investing in real estate here is that we even when we have cash flow positive rentals, we get them to operate at a loss with our tax strategies, in particular with cost segregation. And you know, when we have a loss, the beauty the beauty of that is those losses are gonna flow through to our um, you know, under certain circumstances, can offset our other sources of income and create refunds. But if it's in a retirement account, those losses stay in the retirement account and it's the retirement accounts' losses, it's not your losses. So there's no benefit to having a cost tag and and and to have these losses, these paper losses in your retirement account is not gonna offset your it is not gonna create any tax savings on your 1040. Um some other things just that you know we're we're discussing here is we talked about how the these pension plans and uh you know these these tax deferral plans are gonna reduce your taxes and apply to active income and real estate investing is passive income here. So someone might say, Well, this is not relevant to me, you know, and besides, I just want to put my money into real estate and do the cost tag. What's the point? Well, here's some reasons why you might want to consider this is because bonus depreciation is gonna be phasing out right now. It's 100%, it's gonna be 80 and then 60 and then 40 and 20 starting in 2023 that phase out. So it's gonna get harder and harder to get your rentals to operate at a loss. Not only is the bonus depreciation gonna phase down, but we've already done all these costings for our clients. We front-loaded our depreciation, the margins are likely gonna go up and it's getting harder and harder to operate a loss as we increase our profitability. I'm not saying we won't, you're gonna have to buy larger properties and access more and more depreciation, but it's gonna get harder for us. So if we have uh potential tax liabilities from our investing activity and we have cash and we're looking for a place to park it, a strategy here is gonna be to create active income. That may sound counterintuitive to some of you guys. But what we can do is we create an S corporation that we hire to manage our rentals, and the S corporation pays us an income, a W2 income, and now we have active income that we can throw into these tax-deferred accounts.

SPEAKER_01 26:38

Um and and Mark, we've seen that so many times too. We've seen that with some so many clients that are um that are doing that. And sometimes they're doing that because they want to use that's what they want to use for their pensionable money, for their to be able to put money away. They might have other businesses and they're trying to look to see do we have a control group here? Are there other employees that have to get brought in? Um, so they're they're looking for different ways and different things. And sometimes that is the case. We spend a lot of time determining and working through things, and sometimes we'll work with ERISA attorneys to to really figure out and get to get a determination. Is there a control group? Is there a connection? Uh, do employees have to be covered? Um entrepreneurs, real estate owners, they're going to they're going to have multiple businesses in general, just because that is the mindset of you know grow, grow, grow and and and acquire additional assets. So it's not just real estate, it's the same folks that own real estate a lot of times own businesses as well.

SPEAKER_00 27:47

Awesome. Um now we have a yeah, and exactly. And for some of our clients that are you know looking who aren't interested at all in real estate is a fantastic thing to consider. Um, what a great question from our audience here. What is the limit on lifetime contributions? Or how do you determine it?

SPEAKER_01 28:08

Nick, yeah, and I I I see that in there, and it's I I believe in 22, it's a pro in in 2022, it's approximately 3.2 million or around that number. So it is there is a there is a max number, it's there. Um, and uh and I I can't get the the exact amount, but that that's uh it it's over three million.

SPEAKER_00 28:32

Wonderful. Um so and earlier I was talking about an S-corp management company is one strategy. Um, we can also do it with C Corps. C Corps are a little challenging though, because we have to worry about double taxation on dividends and we take the money out. It can work, but it is uh it may be a little more challenging. Something that you know I'm discussing with our clients. Have you seen people create C Corp management companies or S-corps are more common? What have you seen?

SPEAKER_01 29:01

Yeah, and you know, Mark, we always try to take, you know, the uh that we always try to let the the CPA lead in that way. We'll explain what um what needs to happen and what kind of income that we need to create. We'll go back and forth to different actuals to determine, you know, what is this income that's credible? Can we use this? If not, what can be done? Um, but we've seen this with whether it's a C, whether it's an S, 1099, what whatever it is, we are seeing. Um we're taking a look at it and we're we're we're seeing these plans being created that way. And we have not really come into you know any kind of situation where it's like you can't do this because you you're set up that way. It's more along the line for the plan doesn't work because somebody might not have enough net income. So, for example, um, if they are taking a, let's just use an S Corp, for example, and they have a very low W 2 and they want to put in a big contribution, most of the time you're gonna hear from an actuarial standpoint you have to increase that W-2 up. And a lot of times people don't want to do that because they don't want to pay the additional tax on there. But if you look at the other side of it and the massive deduction that you're getting and the savings that's there, it really cancels it out. So yep.

SPEAKER_00 30:31

And so here's a play, another planning opportunity and consideration is that when you're creating the active income, one of the downsides is you have that self-employment tax or payroll tax, which is your social security and Medicare. There are other uh taxes associated with payroll, with um, you know, the unemployment insurance, but the big ones are the self-employment and are the social security and the Medicare, which is 150 is um 15.3 percent on your first, I think it's uh as of 20, it's changing a little bit every year. I think it's around 145,000 for 20 uh 22. I could be a little bit off on that that amount. Um, but you know, so so so what we want to consider here is where are your other how much are you already paying into your social security, which is the biggest one. Because once you've got past that phase out on the Social Security, you're only paying 3.8% on your Medicare tax. So we want to look at those phase out thresholds when we consider the tax implications and the overall um cost-benefit here. Usually it makes sense to take the hit and increase the payroll taxes to implement these plans.

SPEAKER_01 31:43

Yeah, absolutely. Absolutely. Yeah, that's what we see. Yeah, that's what we see all the time is if you're you're increasing on one end, but where you're removing on the other side, it's just you know, we we've seen uh accounting professionals model this stuff out for their clients. They'll take our numbers that we came up with and the the look to see what that deduction is based on what they're doing, and then they'll come back to us and their client with a model that shows look what you're saving on this end, and it's always such a big benefit um that it's it it doesn't even move the needle with anything in regards to the the increase in the payroll taxes.

SPEAKER_00 32:27

Great. So we got another question for the audience here. Are these planes usually rolled into an annuity or something similar to provide that defined benefit, or is it just a systematic withdrawal from an account?

SPEAKER_01 32:42

So here's what we're seeing. We have not seen, I've never seen it could be, but I've never seen these plans rolled into some type of an annuity. Um, they're basically built that way to be annuitized uh for bigger companies. That's always what a pension was for. Pay out a pension and increments. Um, small business, we're always seeing the plan closes at some point, money goes to an IRA, just like a 401k or anything else. And then you're doing whatever you want to do with it as an IRA and balls in your court. Um, obviously subject to RMDs, but you want to do any of your other strategies or anything from the you know financial advisory uh level, you're able to do all that stuff. So um it it's it's an option, we don't see it at all.

SPEAKER_00 33:35

Great. Um great answer there. Um here's now here's I want us to talk a little bit about some planning, and some of this is going to be on the CPA's end as well and requires looking at multiple factors here, but planning the planning on the you know, as we're talking about the distributions of these funds and when they are eventually taxed. And so here's something I want you guys in New York City and California to listen up here. When we think about the timing here, you know, when you put these in, you are deferring your taxes at the state level as well. And let's say you move to Florida where there's no taxes. When you take the money out and you do your taxes and you are now a Florida residence, you are not gonna pay state taxes on this deferred income. So it's a wonderful strategy thinking long-term and our retirement plans. If we're gonna move to a retirement community, perhaps in Florida or somewhere with no taxes, and now we have the opportunity to completely eliminate the state taxes of when we first incurred, you know, first created this taxable income. Um, but can you tell me some other um some other ideas and considerations on um what how this income is going to be eventually taxed?

SPEAKER_01 34:54

Yeah, Mark, we've seen um we've seen all different all different options, you know, just like you do, just and different strategies, just like you know, or anyone is doing with a with a 401 or any kind of other retirement plan that they might be doing, whether that's like you spoke about before, Roth conversions or um, you know, when you we've even had actually uh situations with um clients that were older and they wanted they were at RMD age or beyond. Uh that's that required distribution when you have to take money out, which is now 72, um, where they've put money into these plans for a few years and they've been able to avoid the RMD for a few years by by putting the money in the for a certain amount of time. Generally, after three years, that money has to come out, but it allowed them to come out in increments, obviously, or move to the IRA plan closed, but it allowed them to defer um even at those ages. So there's a ton of things that could be done. Every situation is totally separate from the next. From a diversification standpoint, and again, not talking about the advisory side, but if you're if all your money is in real estate and you want to put money into something that you know is going to help you from a from tax-wise and really get you closer to where you want to be in building your nest egg, well, this is just another great place to put money in that's outside from what you're doing. And it from a diversification standpoint, we don't want to have everything in one place. And um, a lot of times people, especially real estate investors, will say, That's that's all I know, that's all I want to be involved with. I don't want to do anything else. Um this money could be in in in assets that are extremely safe. Um, if they wanted to be very conservative, um, and the plans could still work that way.

SPEAKER_00 37:00

Yep. Um, and no, this isn't investment advice. But you know, one of the places when you're looking at inflation, you may say to yourself, well, one place I don't want to have this money is sitting in my bank account as cash, where my bank will only pay you uh like a point, I don't know what it is, less one than one percent, typically what the banks are giving you in interest when you keep your money in your savings accounts. So you, you know, you when you look at the historical growth of the stock market or other securities, you know, you're likely going to find it's much more favorable to put it into some of these securities, and especially in one of these places.

SPEAKER_01 37:36

You know, we talk about uh we talk about inflation and um and just to just to you know totally separate that from where the assets are going or where you're funding or anything else. Because like I said, we only deal on the benefit side of it, but um it's the tax savings. That's the first thing that you're doing. Like, you know, you you're not paying the IRS, for example,$100,000 in taxes because you put it into this plan, which you're allowed to do. It's qualified, it's tested, you're not pushing the line on anything. These plans have been around forever. It's just more that more and more small businesses are now starting to adopt them and warm up to them. Um, but you're you're saving all those funds that you're not giving to the IRS and you're keeping. A lot of times, especially our younger clients will say, Yeah, but I can use that money, I can keep purchasing more real estate, I can do more stuff with that money and get taxed on it. Um, there's not too much of an argument around that, except for it makes sense to do both, you know, use some of the advantages the IRS offers, such as define benefit type plans and structures to do this, just like they are using some of the benefits that you're implementing with them through depreciation and um uh management structures and all that other stuff, um, to take take advantage of it while still building your investments, your uh real estate investments that you're that you plan on doing or anything else.

SPEAKER_00 39:13

Yeah. Um and one strategy that you know we haven't discussed is you could potentially have the ability to, you know, once you've maxed out on your these plans, you can hire your spouse in your business. And you know, once you've maxed out what you can contribute, and then you can create additional contributions for your spouse, which is what what one of the things I've seen people do. Um, and then when we think about, let's say you're saying to yourself, well, I want to have a control, you know, I want to invest in my own endeavors, I want to have the cash, I don't want to wait until I'm 59 and a half. Well, if we do a Roth IRA rollover, right, which with some of these plans, and you have money in your in your Roth IRA for five years, you can take the principal out without paying taxes on the principal. So that may be a pot obviously, that may not be the easiest way to access your cash, but it may be one potential opportunity and consideration to um for your distributions and how you take the funds out.

SPEAKER_01 40:09

Yeah, Mark, um, I I will tell, I'll tell you, you know, everyone always wants to know about access, right? They everyone wants liquidity, even on funds that they're might or might not ever touch. But um when you put money in any of these plans, um, the reason that you're getting these benefits, it's essentially because they're meant for retirement. They are meant for the future. So um they're never going to make it easy. The IRS is never gonna make it easy to um to take that money or touch money that goes in these plans. So you do want to go into this with funds that you plan on kind of locking up, which nobody likes that word or putting away, but that's what it is. It's for the future, it's for the deferral. And the benefit that you're getting today on that is a very large uh tax benefit. And if you have a company or you're doing anything that is um self-employed, that is go that's going very well, and there's profits that are there, then this is one of those levers that that gets pulled.

SPEAKER_00 41:16

Yeah, and this is also a really great strategy for if you're putting a lot of your money into real estate, and let's say you don't have real estate professional tax status and you're not and you have a lot of multifamily long-term rentals, let's say, and we have an accumulation, let's say, of all these um maybe suspended passive losses that'll offset your future taxable income in your real estate when you retire. So you're building this nest egg of this whole real estate portfolio to retire on. We defer all our taxes, and when we know that you know, as when you get older and perhaps you retire to live off your real estate, and we have these, you know, potentially we have the depreciation and we have our suspended losses where you know we know that source of your income potentially could be untaxed or taxed at a very low rate. You know, it is when we think about the timing of the the taxation on on your deferred tax, you know, your deferred vehicles, it could potentially, you know, here's another opportunity where potentially, when it is eventually taxed, it that income is going to be taxed at an overall lower marginal rate. Um think uh what about secession planning? Have you seen this as a strategy for secession retirement and and for you know for people's children? Do you see people um this being a consideration for setting up these uh massive planes um in thinking that this is going to be something that is inherited to their children?

SPEAKER_01 42:44

You know, I think when any of the plans that we've really have gotten involved with is has has been done for the upfront deductions for today, right? The advisor, if there's a really good advisor, which we've dealt with many of them, they're do they're they're looking at things long-term and they're setting up other pieces around it. Um, we have seen different situations where the uh advisor has put some alternative assets in there, um, insurance type assets that help with uh long-term planning um and for state and and um and legacy type type reasons. Um, but in in general, it's being looked at today. And then there's other planning that goes on around it. We've seen businesses that have sold, we've seen businesses that have closed, um buyouts, mergers, uh you know, retirement, you name it. So the plans can be closed. Um, there's reasons out there that they can be closed. They're not forever, but it's also not something. That you want to set up and then shut down right away. Um, there is uh, you know, you do want to come up with with funding and um on an annual basis, really uh look to see what does cash flow look like? Does it match? Does a plan need to be adjusted, amended, changed? Um during COVID, we there were some plans that we had that that were frozen, um, which is not a bad thing. People look at the people think, oh, it's bad to freeze a pension plan. But because there's an accrual every year, because it accrues, uh, it often makes sense if it's not going to get funded uh to be frozen. And then it gives you time to catch up to whatever that funding might be over time. And right away after things got better in the economy, we saw all those plans become unfrozen and back to normal. And no negative impact. We have not seen that.

SPEAKER_00 44:56

Thanks for clarifying. Um, what about um so so for for for people who are interested in in considering this as one of their tax strategies, what would you say is the first step?

SPEAKER_01 45:13

So I think they you know they can contact you, and I know you're gonna give out our information as well. And um, you know, if they contact you and pass it on to us and we get involved, um, um, in any way, really the first step is a 10-minute conversation. We want to know what's going on, what what does the tax situation look like? Are there employees? Where's the income coming from? I'm not saying that we need a tax return right away, but we do have to get an idea of what's going on with the you know, with with where the income's coming from, what does it look like? What does cash flow look like? Flexibility, like I said, is the most important part of the design. And um, and we we want to figure out how does that match? How does that match what someone's looking to do? And what else are they doing, right? They're probably doing a retirement plan in some sense, uh, unless they just had their first great year and now's the now's where they want to put money away. But they're generally most of the folks that we're seeing are that they have something in place. So now we have to put all that into account. And sometimes people are under the impression that they need to change their 401k or profit sharing and move things around or disrupt things. We always look to see what can stay the same and how do we how do we make the smallest changes that have to be made on those items if they do? So um we I I've yet to see a situation that's the same as the next. So it's really 10-minute conversation, want to know what's going on. Next step is to dig a little deeper on some of the information that we need.

SPEAKER_00 47:00

Okay, so Luna is here and she has a question. Luna wants to know um where are some maybe potential mistakes that you see people make in in the planning for this?

SPEAKER_01 47:12

That's such a great question. Um going into this and thinking you could just take this huge deduction and then and then you're done and it's over. Um going into this and thinking that it's just simple, uh, like a 401k, and you have uh all the flexibility in the world, and you can just do anything you want. Great example of 401k. People want to make that's a benefit where you want to make as much money as possible. You especially if you're younger, you want to they want to grow the money um long term, invest, make as much money as possible. Defined benefit and cash balance plans are different. Um they they are built for steady growth to fund to a longer-term benefit, whether that takes three years to fund to that benefit or five years, or whether it takes 20 years to do it, um, calculations and different parties have to be involved to make sure these things are running properly, working the right way. And um and it's just we're we're up front with letting people know here's how this works. And um the other the other side of this too, Mark, is some people will will get we some clients will get way too involved in the analytics and details, and um, and it causes them to just kind of shut down and not do anything and just pay taxes. So, like anything else, it's taking a look at it for what it is, having the right people involved, and then um continuous management.

SPEAKER_00 48:55

Okay, you great answer. Um, really great stuff to keep in mind. Um, so I think that those are all the questions that I had. Is there anything else that perhaps you you would like to discuss on this matter before what I really want you to do is which is to give everybody your contact information. We have a lot of CPAs that listen to the the podcasts and the recordings. So um, I'm gonna let you take it away. And also if you have a call to action and anything that you any ask that you have of the audience, I want to give you a chance to to give that to everyone right now.

SPEAKER_01 49:35

Yeah, Mark, I I think the the biggest takeaway is these the these are this is a niche area, it's a specialized area. Um, it is not a traditional type plan, but it is becoming more and more widely used. Um, it's definitely one of the fastest growing segments in retirement plans. There's not enough people like us that actually uh only do this. So um it being a great benefit, there's complexities to it, and there's different parties that have to be involved. I know you had uh Yona Weiss on and in with the doing the uh depreciation podcast, which was great. And um I'm listening to it and think it thinking about some of the similarities because um they only do one thing, right? They only specialize in one thing, and it's because there is some complexities to that. We're in the same situation where our area, totally different from what he does, nothing to do with it, but it's something where you got to have those experts lined up: good CPA, good advisor, good consultant, good TPAs, all involved. What we found out years ago, for anyone that knows about these plans or has looked into them before, is all these different administrators and actuaries, they do things very differently. And there's very different designs from the next. So sometimes you can look at these things, these plans, and look at a cash balance or different one way of doing the combination plan with profit sharing 401 and it works well. And another time it just another situation, another design, it just doesn't look good. So you have to have someone that's doing the due diligence on it.

SPEAKER_00 51:30

Yeah, and you know, tax planning is not one answer. You know, we're looking at so many different things, and another thing we didn't talk about. We'll probably get someone eventually is you know, on you know, with life insurance is another retirement planning that we'll consider. And there's there's no there there's so much complexities, and the the scope is almost in it is infinite when you're talking about taxes and planning and all these things. So um, yeah, that's um and so you know, there's uh we have some, you know, this is gonna be an ongoing conversation with our experts such as yourself, because we always need to learn more um and leverage experts such as yourself. And so can you you want to give your kind contact information and how people can get a hold of you as well?

SPEAKER_01 52:17

Sure. Uh it's it's david at bbconsultantslc.com. And I'll I know you'll you'll put that in the the notes for the uh the podcast and everything, the uh chat notes as well.

SPEAKER_00 52:32

Yeah, absolutely. Um yeah, actually I could put your let me post that in the chat right now. Oh, actually, you want to yeah, you want to post that there in the chat? Okay, and uh all right, well Dave, I think that this is a great stopping point. This was a really, really valuable conversation, and I'm excited to share this with a lot of our clients and our audience. Um, and um again, thank you so much for our time. Everybody stay tuned. Um subscribe to the podcast and our YouTube channel where you can listen to this and share it with all your friends. Thanks everybody for tuning in and enjoy the rest of your night.

SPEAKER_01 53:14

Thanks for having me, Mark. Appreciate it.

SPEAKER_00 53:17

Thank you very much.