Justin Smith 

Hey Mike, how’s everything going?

Mike Salmon 

Well. How are you doing?

Justin Smith 

Good. Well, thanks for joining. So brokers hearing they’re leaving money on the table is probably something that pains them all and you see them wince and grimace maybe. How are you finding you’re introduced to most of the people you’re working with?

Mike Salmon 

Yeah, in two ways. One would be us just providing great service and getting referrals from our existing client base of commercial real estate brokers. So that definitely happens. I’ve found that once you’ve got one person in one office, when tax season rolls around next year, that’s when everyone’s sharing their war stories right then and who’s helping you and the phone starts to ring. So there’s that and there’s also LinkedIn. So we pivoted during the pandemic to LinkedIn and creating a separate website specifically for CRE brokers, that’s literally the website address and that came as a result of most of our interactions had been in person. We’ve been using the chapters and getting introduced to broker training groups and various firms, so doing everything in person. When that went away, spring of 2020, I began writing content is basically how can I take all of these phone calls and interactions and advice that we give every day and basically give it away and get it out there distributed so more people can see it? Knowing that we can’t work with everyone, not everyone’s going to want to work with us. There’s plenty of do it yourselfers out there. You’ll never convince need any help, but you can give them some guidance subtly by putting out this content. And also knowing there’s plenty of brokers who are already have pre-established relationships with an accountant or financial advisor. I hear it all the time, a cousin or my brother-in-law is my Financial Advisor, I can’t walk away from that. So, we’re here to educate and the more that we can put out there giving back to the community, the more even those folks who can’t work with us can at least be better prepared to push the professionals they’re using to do more for them because most of those relationships they have, they are probably the only commercial real estate broker, as a client for that CPA or that financial advisor. So we take the community knowledge of what does everyone else doing? What’s been successful, and just apply that to everyone we’re working from entry level all the way to nearing retirement or into retirement.

Justin Smith 

So brokers, we categorize them as an entry level, mid-level seasoned and close to retirement. Is that how you would categorize them?

Mike Salmon 

Generally, there’d be certainly a range amongst each of those categories, everyone’s situations a little bit different income, each of those levels can be wildly different. We’re advising 26-year-olds in industrial right now making nearly a million dollars. So that’s different than the retail rep who’s been working for 20 years or the office-

Justin Smith 

Just saw Grants eyes balloon.

Mike Salmon 

If you get on the right team and you hustle, there’s a lot of opportunity there. Now, so industrial, seems to be the new multifamily. We’ve heard multifamily has peaked for a decade, and it still hasn’t. So maybe industrials got a decade ahead of it. But yet, everyone’s situations a little bit different. It depends on the income that you’re bringing in. It depends on your lifestyle. How much are you spending? Are you married? Do you have kids? What are your goals? We lead with tax planning, that’s every brokers pain point beginning, how can I lower my tax bill? But depending on your situation and phase of life, we’re ultimately financial advisors and we will move brokers into the financial planning phase, depending on where they’re at. So that the 26-year-old who’s single, no kids needs a different conversation than the 42-year-old married with three kids, or the broker who’s a few years away from retirement, although no one seems to be able to retire because you spent 30 years building your pipeline and it’s kind of hard to walk away from that at the very end.

Justin Smith 

You probably get a lot of funny answers when you ask people, when are you looking to retire? Or what’s your plan for retirement? Then you take a big pause and hear what people have to say for themselves.

Mike Salmon 

Yeah, it’s wildly different for everyone. Some want out very soon. We have brokers that we’re working with, who are 70 still working. So, it is a unique industry, in that there’s definitely a personal interest in, in what you’re doing. So if you really love what you’re doing, you can you can work a long time, even if you don’t have to. So what we try to help brokers do is become financially successful and financially independent. So that doesn’t necessarily mean retire at 50 because I can. It’s to have that knowledge in the back of your head that I can decide to go do something different at any point in time because I’m financially independent at this point.

Justin Smith 

Let’s start with the Grant’s future retirement, so he’s in year two and starting to have successful years, where does one start?

Mike Salmon 

Yeah, it depends what brokerage firm you’re with. Some of them start you off with a W-2 and keep you there unless you make a decision to change. So, our opinion is that every broker as soon as they can be paid 1099 needs to be paid that way. And in most states, I think maybe there’s five that you can’t do this but also at that same time set up an LLC and be taxed as an S Corp. And no matter what your income is, we’ll show you if you’re set up that way that you’ll save taxes immediately.

Grant Labounty 

I spoke with my accountant last year during tax season and he said if you’re making under $100,000 a year, don’t even think about forming LLC because the filing fees and a yearly fee or annual fee, I should say, just it doesn’t make any financial sense to do so. Do you agree with that?

Mike Salmon 

I disagree. I mean every state has different filing fees. I know California is pretty high, it’s like eight or $900. Other states, it’s a lot more reasonable. We present to a lot of developing leader groups within a NAIOP. And one case study that I’ve just memorized is a broker making 40 grand if they’re not an S Corp, but they’re paid 1099, we would call that a sole proprietor and making the switch to S Corp will save them $2,900 of tax between self-employment tax and income tax. It maybe a little bit more than that with state income taxes, depending on where you’re at. But our thought process there is, okay, well, that’s certainly less than 100,000 and probably at that income level you don’t have that much room to save money for the future. So, we just rearranged how you’re receiving your income, and found $2,900 for you. Let’s put that $2,900 in the 401k save you another four or $500 of tax, because you made that pretax contribution to a 401k. So, at the end of the day, doing nothing else other than changing the way you’re structured, you have about $3,000 in a 401k, and an extra four or 500 bucks in the checking account. So, we hear that suggestion from CPAs all the time. They’re not entirely wrong but we can pretty much prove that any income level where you want to be as an S Corp. And the other reason for that, especially in your industry, because every year we start the year off building what we call tax and cash flow plan for every broker. And one of those questions is, what do you think you’ll make this year? I know it’s really hard to tell in January but what’s cool about your industry is you don’t know that in November of this year, you’re going to have the largest transaction of your career and if you had been set up as an S Corp from the beginning, you would be in a much better environment to receive that income. And every brokerage firm is a little different about when they’ll let you make that transition. In my experience, probably Seabury is the worst, they only let you do it once per year during open enrollment. So, if you didn’t say you wanted to be QREA, qualified real estate agent, paid 1099. Even if you were that already as what they call individual, which would be a sole proprietor, then you go to the S Corp route, which now that’d be Corp status. They don’t let you make that switch but once a year. So, our advice is get to S Corp as soon as possible because that gives you the most flexibility to receive income. When you know it’s hard to tell at the beginning of the year, what your year to look like.

Justin Smith

Why put your catcher’s mitt on late in the game? Get it done and be ready. So common mistakes, I got to imagine, there’s a handful every like pitfall, it’s just like human nature. So not setting up your entity soon enough, or not even knowing you should be setting one up for a period of time. I got to imagine is the first pitfall. Then wonder a couple that some of the junior guys you’ve used see most commonly?

Mike Salmon 

Yeah, probably the first would be the real estate license, every state is a little different on requirements for transferring that to the LLC, which is your new entity whether you have to do that or not. So I’ve seen cases where the S Corp, everything had been done but the real estate license was never transferred. So you’re technically out of compliance there. So, knowing those steps to put in place, you’ll want to know that we’ve got a pretty good cheat sheet about what’s going on in our state.

Justin Smith 

California guys listening to that, I think will say I have no idea what you’re talking about. I’m not sure I need to transfer my license into an entity. So, I totally recognize that’s a state by state.

Mike Salmon 

I think in California it’s only the broker license that needs to be transferred not a salesperson. So, it’s knowing that we’ve got a good list of what needs to be done in every state but there’s always someone else in your office that’s already done it. So, we always recommend you speak with someone else in the office to see what they did and how they did it because the paperwork process can be different. The other that is pretty common, as far as a reason goes, why some brokers in depth going back to W-2 status. And usually not every brokerage firm lets you do that. Some going back to W-2 status might go work for an owner developer where you’re kind of captive. You can’t be paid 1099 anyway, you get a salary, it’s easier to deal with. It’s not knowing or having any expectation for what your tax liability is during the year. As soon as you’re 1099 you get the full amount of those paychecks and your checking account. And you need to know that maybe 20, 30, 40% of that or more needs to be set aside for taxes and other long-term savings. So, we like to set expectations and that’s usually what’s missing for a lot of brokers very early on is just receiving all this income and filing your tax return next April and realizing that you owe $35,000 or whatever the number is and you’re shocked, how did this happen?

Justin Smith 

Yeah, when you’re flying by the seat of your pants, it’s time to stop and slow down to think about stuff like that.

Mike Salmon 

Exactly. The other common mistake, this is part of our just basics, how you need to set yourself up? We help obviously, a lot of brokers go the S Corp route, we connect them with the attorneys we work with. Then we send out an email, okay you’re an LLC now, now what do you do? So, here’s kind of a step by step guide of what you need to do within your office and rearranging maybe your agreement, your contract and who they’re paying. Because it’s no longer your social security number, it’s your employer identification number. So, there’s some of those basics but the other is, immediately you need to set up a business checking account. That’s where your pay is going to drop into and anything that happens in that account needs to be business related. You’ll also get a business credit card. Put anything on that card that you think’s business related and then paid off every month from the proceeds in the business account. That’ll help simplify your reporting process and getting ready to do your tax return the next year. It’s all clean. It’s all in one type of an account, you don’t have your rent payment or your mortgage payment or other bills coming out of your business account. That’s the idea, keep it clean and so that’s the best practice certainly.

Justin Smith 

I remember those Nolo Guides, it’s like legal guides written by attorneys. That was where I started to figure out what are the expenses that are business related? What are some and where’s the limit of that? Or which items would you commonly think are but are not like buying suits. Things that you think of course, they’re business related and then you recognize like no. I know that you really need to be clear on what is and what isn’t.

Mike Salmon 

Exactly, it’s got to be something generally you can’t also personally use so the suit would be one. That’s a good example. Probably the most common business deduction question we get from brokers is about their vehicle. Everyone is putting so many miles on the car, that you’re wanting to buy a new vehicle. The other thing that happens commonly because cash flow is so erratic, you can have a big deal show up and now you got a pile of cash in the bank account. You don’t know what to do with it. So you just you pay down debt or you buy new toys and one of those toys is a car. And it’s a common question, do I buy that in the name of the business, or do I buy personally? How do I keep track of this? We have a calculator for that. We’ve developed that. The question happens many times a month we’re running these in probably nine out of 10 times you’re not buying it in the name of the business. What you need to do is simply keep track of your business mileage and reimburse yourself the standard mileage rate. The rare instances where maybe that one out of 10 it does make sense in the name of the business and that it’s called keeping track of actual expenses is if maybe 90% of the usage of the vehicle is for the business purposes. Most people don’t have business usage that high you’re probably using it as your personal vehicle as well.

Justin Smith 

Getting to the office isn’t one.

Mike Salmon 

Yeah. If it’s a high-ticket car purchase or you’re leasing it and it’s very expensive. Maybe those numbers on an actual expense basis could add up to enough to make it better tax wise to do it that way. Another common one is purchasing a vehicle that weighs more than 6000 pounds and being able to do special depreciation and write off most of that vehicle in year one. That there’s a breakeven analysis to that you got to also factor in not just what happens year one but what about when you sell the vehicle five years from now, then you have to recapture depreciation and pay tax on that. So, we’ve thought through all of that we run through a five year or a multiyear scenario of what makes sense for the business. Probably the best example I’ve seen for buying a vehicle in the business was a group of brokers, the team traveling all over the southeast and they realized it was just inefficient to fly from Orlando to Atlanta or down to Miami. Why not buy a Ford Sprinter van, have one of them drive while everyone else works in the back. You can get those sprinter vans up over 6000 pounds if you do enough optimizations here and they can get expensive. So, I thought that was a very unique and legitimate use for purchasing a vehicle. Obviously, that deduction only went to one of the brokers because it’s one of them buying it but I thought that was a pretty unique scenario.

Justin Smith 

You can see how in teams you could get into some unique stuff like that. And I’ve heard of a couple that have a vehicle that’s just for their tours. That’s an interesting way of doing it.

Mike Salmon 

Yeah, that’s a good example of us working with so many commercial real estate brokers preparing their tax return. We see what everyone’s doing, and we’re being presented with different questions and ideas and some of that will come up in conversation with other clients are brokers. So, we’re kind of a source of ideas as well because we see what’s going on.

Justin Smith 

But what I love is what you shared this, one of the many spreadsheets you use where you’ve done a lot of your analysis and can help demonstrate as you go up the scale of income what adjustments and tweaks you need to start making. I have to imagine that blows away what anybody’s doing on their own, and what anyone’s doing with their CPA. It’s only when you get into the financial advisor roles or fee planners, when you have people really start to break things down to help you make sense of it. So, I feel like I could imagine where there’s such a huge need for this, where most are just going by what they’ve know, what their friends are telling them, what they’ve researched and cobbled together and it’s not even close to their level of detail that you’ve gone through. So again, I imagine there’s 10 or 20%, or maybe even 30 or 40% in savings just by going through some of this analysis as people start to scale up what else they can do or other ways that they can structure themselves or their team or their retirement to really make a huge difference.

Mike Salmon 

Exactly, we kind of define what we do is rearranging your top line number so that less of it goes to taxes. There are a lot of variables at play there and how you can make adjustments. Two brokers with the same amount of income will have different variables to adjust. Part of that is marital status, if you’re married your tax bracket is different. If you’re married, you also can employ your spouse and pay him or her wages and then all of a sudden get a whole other 401k you can contribute to. So, there’s that opportunity there. But the other differences also really come down to what amount of cash flow can you save for the future because as an S Corp you kind of go full circle. Maybe starting as a W-2 broker to be paid 1099 to now be an S Corp where now you’re back to being a W-2 employee of your own business. So now you’re the employee and the owner. You’ve got to give yourself reasonable compensation and we have a strategy for what the reasonable amount is, and part of that formula relies on retirement account contributions. So a broker making $200,000 and saving only $10,000 in a 401k, in our formula will have a higher salary requirement for reasonable compensation, then the same broker making $200,000but being able to put $58,000 in the 401k, the maximum if you’re under age 50. So, there’s a lot of levers we can pull in adjust and one of them going up or down affects another one. But we’ve been through it on built pretty elaborate spreadsheet to very quickly come up with the best practices for each situation.

Justin Smith 

For brokers to mentally shift to you have to be running a business, you’re not just in 99 is such a big mental shift. But I feel like once you’re past that, it’s so great to be in the driver’s seat than like actively managing and trying to make improvements. I think what you’re talking about is how much you pay yourself and salary directly correlates to your different buckets, or your different retirement announced that you have based on what you’re looking to set up, that’s all based on gross revenue and marital status. When it comes to retirement, what are kind of the first main buckets as you go from Grant, me and the people are at the tip top?

Mike Salmon 

Yeah, the first is typically the 401k and we don’t use SEP-IRAs that is commonly used. We bring on board a lot of brokers using a SEP-IRA and those generally became prevalent because that type of account was one that you could actually open after the tax year had already closed. So perfect scenario, exactly what we’re used to seeing is your main advice coming from your CPA, you’re talking to your CPA only during tax filing season. You’re shocked at the amount of tax you owe. What can I do to lower this? The CPA says, why don’t you open a SEP-IRA and make a contribution that’ll at least lower your amount due right now.

Justin Smith 

I feel like you know how my life has turned out Mike. These are like a word for word, the experiences that I went through.

Grant Labounty 

Mike, what’s the main difference between that and the Roth IRA? Are they the same thing?

Mike Salmon 

So, SEP-IRA and a Roth IRA are different. The SEP-IRA, or just a traditional IRA, you make contributions into that that account pretax, so you get a tax deduction. The Roth IRA, you are not getting the tax deduction for the money on the way in, in exchange for not having to pay taxes on the way out in the future. Anyone could argue that tax rates will be higher in the future, but you got to go kind of a next question deep when that statements made is, will the tax rate be higher for you personally in the future? In our experience, nearly every retired person is in a lower tax bracket than while they’re working. One big reason for that is the ability to control your tax return in retirement. As long as we’ve been working with you long enough, we’ll have you saving into different types of accounts that have different tax consequences when you take money out of them. And when you’ve got four different types of accounts, different tax taxes result from each, we can really create your tax return in retirement. So, for the most part of our suggestion is take the tax savings and that will create even more cash flow to put more money in and have more money working for you sooner. So, the SEP-IRA, there’s a formula that that you have to run through to see determine what your contribution can be and it’s very much related to how much revenue you brought in. So, what’s your net income from the business. The 401k is a little different that relies more so on what is the salary and the W-2 wages you’re paying yourself. So, $58,000 is this year’s maximum contribution for anyone under 50, in either of those accounts, SEP IRA or 401k. I’ll just round that to get the $58,000 in a SEP-IRA, you need to bring in pretty close to $300,000 of income. For the 401k to get the same $58,000 you’re looking at closer to $180,000 of income. So, you’ve got more flexibility up and down income ladder to make a contribution of any amount into the 401k. So that that’s why we recommend 401ks. The other reason is for every broker, we’re wanting to make Roth IRA contributions and most make too much money to directly do a Roth IRA contribution. But you can do what’s known as a backdoor Roth IRA and that is basically making a contribution to an IRA not getting the tax deduction for it and then Roth converting it. Normally, when you talk Roth conversions, you think taxes are involved on the conversion, but because your contribution to the IRA was nondeductible, you didn’t get any tax savings for doing it, there’s actually cost basis in the IRA so there’s no taxes on the conversion. We’ve got everyone building a Roth IRA, even though their income may be way above the limits. The only way to do that is if you have a zero balance in any IRA out there. And a 401k, obviously, is not an IRA, but a SEP-IRA is and having that SEP-IRA would eliminate that strategy of being able to build a Roth IRA.

Justin Smith  

Although I think you officially lost both Grant and I. We appreciate that. That’s why we need you. These are the levels of detail that people gloss over and that they can’t always get an adequate help from just a pure CPA.

Mike Salmon 

Exactly we are your learning curve. We’ve already done it. So, you don’t need to spend the next 10 years figuring out everything that needs to be done, every opportunity, every deadline, everything that you need to think about. Your time is better spent canvassing for new clients and new opportunities and not wondering what deadlines around the corner.

Justin Smith 

Did you hear that Grant?

Grant Labounty 

Last year when I was canvassing in my car. My car has 40,000 miles on it right now due to my canvas.

Justin Smith 

Now we brokers like to buy property and invest with partners and limited partners, how’s that factor into the spreadsheets and into the retirement accounts and the thought process?

Mike Salmon 

Yeah, it definitely comes into play in long term planning, the real estate’s a great investment like any other. It’s a little bit different though. Generally, a lot of the return is based on leverage and how much other people’s money can you use and participate in price appreciation. So, it’s a little bit riskier, there’s less liquidity. So, we don’t want anyone investing only in limited partnerships or real estate, you’ve got to have some diversification using these retirement accounts. You need liquid accounts. We don’t want the 60 year old broker to have 90% of his or her net worth and in private reads and limited partnerships and then be ready to retire in a real estate recession hits like a decade ago, and your incomes gone to zero and you can’t sell any of these limited partnerships, because there’s no market for them. What are you going to do? There’s got to be kind of a mid-ground on using both. That really comes back to just long-term conversations about your goals and your cash needs in the future, how close you are to retirement. So, one way we approach that coming from the tax and cash flow plan is asking the question, how much do you think you have available to you to save for the future this year? We’ll help you prioritize and allocate where that money goes based on the answer to that question. A lot of that’s the retirement accounts mean that that’s our focus, especially with the tax planning, that’s your best way to lower taxes today. But ultimately, where you’re saving your money, you have a long term goal for that and what’s the time horizon there? The budgeting, no one likes to budget and so we don’t call it budgeting. We call it tax and cash flow plan.

Justin Smith 

I’m curious a little bit about the spouse and that’s another interesting take that I’ve heard about, and I’ve never figured out how to have that really makes sense that maybe we can touch on for a tad bit.

Mike Salmon 

Yeah, so I’ll address both of those they kind of are very related.

 

Justin Smith 

They’re the next levers you can pull. We’re pulling them all and we got to find two more levers. Those are the next two.

 

Mike Salmon 

Exactly. How to determine what accounts to use and whether to add your spouse to the mix here comes down to how you answer that question of, what amount of cash do you feel like you’ve got available this year towards saving for the future. And depending on that number, that could mean introducing your spouse as an employee into your company and making 401k contributions. It can also mean the defined benefit plan as well. The contributions that you can do for the 401k, yourself as the primary employee of the company at the maximum is 50,000. So maybe you’re getting close to that or you’re there already and you want to save even more. The next step is deciding to add your spouse. So when we do that, apparently what happens is we add your spouse as an employee, pay him or her $23,000 and that leaves enough room to do payroll tax withholding and put $19,500 in the 401k. You also now have a profit-sharing contribution to the 401k as well, 25% of those wages so you pick up another five to six grand that can go in there. So now you’re jumping from nearly $60,000 in a 401k to about $85,000. So, the next step is, if you’d answered, I can put $200,000 away, that’s clearly beyond what the 401k can do. So maybe now it makes sense to introduce a defined benefit plan and the defined benefit plan is similar to the 401k but it’s trying to create a future benefit, which as opposed to defined contribution. Exactly. So, if you were to set the plan up to get the maximum benefit proximately, that’s basically like creating an account that’ll grow about two and a half million dollars of value in the future. What you pay yourself in wages is very important to get in to that amount and also your age. So, think about if you’re 40 and you’ve got 22 years until age 62 to get two and a half a million dollars in this account, your contribution rate will be a different dollar amount than if someone’s age 50 and they only have 12 years to get there. Or if they’re 58, they only have four years to get there. The so there’s a lot of additional variables just inside have defined control, or the defined benefit plan will work.

Justin Smith 

The benefit is set up so that when you retire, there’s a certain amount that you then withdraw from each year afterwards.

Mike Salmon 

Yeah, it’s creating a pension for yourself, but no one actually uses it like a pension. What happens is it’s their retirement, you’ve got your 401k and your defined benefit plan, and we roll all of that together into an IRA in the future, so it ends up just being one big account. But the contributions can be huge and there’s always a range that actuaries and IRS tables will have to do proposals every year to do that. But if you start this later in your career and you’re nearing retirement, we’ve helped brokers put 6, 7, $800,000 into these plans in one year. So literally bringing top line income from a million down 150 to $200,000. So, you’ve got to have the perfect scenario there to be able to do that. Largely it’s dependent on age, but it can be done. That’s another tool that will be deployed at some point when it makes sense and in how its deployed really comes down to how much cash flow you’ve got available to save towards the future because if it’s only 50,000 a year no matter what you make then a defined benefit plan is never going to make sense for you.

Justin Smith 

You have to commit to doing it for a certain period of time, I understand.

Mike Salmon 

Yeah, you want to be committed to it for three years. We’ve had to unwind them before, so it is possible. We’ve had brokers go from seven figure income to zero and be at year two of the plan and need to stop it and unwind it. You can freeze them, we froze quite a few of them last year because income was so uncertain and that drops your minimum contribution requirement quite a bit. If you want an absolute maximum amount of money to go in there, you’ve got to pay yourself a salary upwards of middle $200,000 range on average for at least three years and you’ve got to keep the plant open for 10 years. It doesn’t mean you need to be contributing or even working. So, in my example, earlier, maybe the 58-year-old putting a half million or more into the account, maybe their plan is not to work 10 more years. But you can still do that, and we’ll just keep the plant open for 10 years. So, you can still have access to the money and get to it that way. But the plans are set up in a way that you earn credits, and each year as a credit. And once you get to 10 years, you’ve earned the full amount of credits to have the absolute maximum planned value that’s available. So again, a lot of different variables at play here, they can change every year, there are growth and interest rate assumptions that are built into that calculation, always looking at what was the value on 1231 or the prior year. So, another reason actually to have a different, possibly a different investment allocation in the defined benefit plan. If sometimes we’re working with the right amount of assets that maybe there’s an equal amount of 401k money and defined benefit plan money. Especially later in life, you should probably be adding more and more to bonds and fixed income. So having a little bit of more conservative portfolio, and we’ll allocate more bonds to the defined benefit plan, because the growth rate will be lower. If the growth rate can be less than what the implied assumption is, which is usually around six and a half percent, that just gives you more room for contributions. We’re trying to give you as much room for contribution as possible for as long as possible. Then it’s kind of like landing a plane at the end of the journey or even really thought about it as Apollo 13 and trying to link up to something in outer space, how precise it has to be because you’ve got to, you’ve got to land this thing perfectly. You don’t want to be overfunded. There are huge penalties for over funding but there’s ways of navigating that. So, you can’t just go into it like, I’m going to throw a ton of money at this very early on and then what happens over the next 15 years is it grows well beyond what the limit is and what do you do at that point? So, there’s precision to it as well.

Justin Smith 

And God forbid, you want to buy real estate with this money? That’s something that’s possible.

Mike Salmon 

I don’t believe so with the defined benefit plan or the 401k. So that’s where self-directed accounts come into play. That’s where the IRA is that the, we see that a lot. My first thought is, a lot of brokers are using self-directed accounts, primarily because they’re not saving enough money and their main source of capital is in the IRA. So, they don’t have other funds to put towards any real estate deals. That’s probably the first place. The other thought I have with that as to why not to do that, is there’s a lot of tax benefits to real estate, depreciation and all sorts of other things. So why hold that in a retirement account that is tax deferred, and you don’t get any benefit from. So, keep your boring, plain vanilla investing in the retirement accounts, we call it playing singles and doubles baseball, you don’t need your home runs over there, and let your home runs happen in a different type of tax environment. I know capital gains taxes might change next year for certain folks, we’ll see if that happens or not. But if you have an investment skyrocket, I’d rather you pay capital gains tax on that than ordinary income and future because it’s locked in your IRA.

Justin Smith 

Yeah, I gotcha. I would imagine we broke or sometimes still want to do that anyways. If there is a way we’d like to know about it even if it’s not the ideal way or the most advantaged way that’s something I would think a lot of people would explore. Just knowing that I would continue to push on those one or two more times, just to like drill into that because that’s been my focus up until present. Then with the spouse, what does your spouse do? Can you get your kids involved? Are they they’re doing the books for you? Or they’re taking people on tours or they’re driving your car driving you to your tour? How do you factor that part in the actual duties and job and what constitutes something that makes that make sense?

Mike Salmon 

Yeah, we’ve put together some basic job descriptions for spouses, it’s very administrative. Not every spouse that we do this for do we actually get some interaction with the email on some of these to do’s administrative things like can you send a bank account statement here or there, so it’s adding some legitimacy to it. The amount of salary is reasonable, it’s certainly tied to the 401k contribution limits. Not mentioned just a moment ago, your spouse also gets a contribution to a defined benefit plan.

Justin Smith 

I was going to say those are mutually exclusive. Those can combo with each other as you go up the scale.

Mike Salmon 

Exactly and the defined benefit plan, like I said is very age dependent but it’s also salary dependent. So, we’ve also moved up salaries for spouses when the defined benefit plan is being used because that gives you that much more contribution ability and that much more future benefit that you need to grow it to. So, there’s yet again, another variable that can be looked at adjusted. So, we do have some job descriptions there as far as kids go, that is looked at more closely by IRS because your child will file a tax return and pay a lower marginal income tax rate than you will presumably, especially if you’re in a top tax bracket. Having your three kids get paid $80,000 a piece from your business and they’re paying a lower tax rate than you is probably going to come on IRS as radar at some point. So, if they’re working for you, it needs to be a legitimate job, probably they’re not going to be paid that much. So, you’re picking up payroll taxes, employing your kids. I would only employ your kids if you’re really having them work and perform duties, and also to take that opportunity with those wages to maybe contribute for them in a Roth IRA because retirement accounts require wages in order to contribute to them. If your 14-year-old, is helping you out part time during the summer and you pay him or her three or $4,000, why not throw out a three or $4000 in a Roth IRA for your child. I would look at it from that perspective, not really from my saving taxes standpoint with employing your child or really with the with your spouse is a little bit different. It’s just trying to give yourself more opportunity to make pretax 401k and defined benefit plan contribution. So that’s a different goal entirely.

Justin Smith 

That’s a great way to clear that up because I had heard about that a couple times and was like I could never make sense of it. Lastly, what’s Mike salmon costs we brokers are making? We got to figure out what’s it worth to us. I think you spelled out about 50 different ways that we’re not doing it right or not thinking it through or not adjusting as things change, or being flexible, or including our family are thinking more about our retirement and the assets that we hold, and how long we hold them for. So, what’s a general ballpark way for us to think about the I look at it as the investment, right? That’s how I’ve come to all of these is just saying investing in your capabilities and in your skills that you’re missing and that you’re better to outsource than to try and pick up internally. So how does that work? Or how do people think about that?

Mike Salmon 

Yeah. What you just said to me describes us and what we do. We’re trying to be your Personal Chief Financial Officer and to be a sounding board for all sorts of personal finance decisions in front of you today and in the future. And to make you a better-informed decision maker, ultimately when it’s time to make decisions on a lot of these things. What do we charge? We’re financial advisors so this word known in the industry is fee only, which means we charge an annual fee based on the assets that we’re managing of our clients to put very simply the first million of assets that we manage, it’s 1%. It’s billed quarterly, debited directly out of the accounts. We open accounts at Charles Schwab and TD Ameritrade, for a lot of brokers much of the accounts are pretax retirement funds. So, it’s a great arrangement that we’re able to debit the fees, you’re not writing the check, it’s coming out of these pretax accounts, and it doesn’t count as a distribution. So effectively, you’re using pretax money to pay for professional service and advice. So, it’s an awesome arrangement. As you continue to accumulate and assets grow, it tears down below 1% with each incremental million, so it’s straightforward, it’s transparent. We’re a fiduciary 100% of the time for our clients and we sell service and advice. So, there’s no product sales or anything like that here. The only other fee we charge is for actual tax preparation services. If you’re an S Corp that means you’ve got a business tax return now, you’ve got a personal tax return. Generally, the fee we’re charging is states specific as well, because every state has different filing requirements. But for the typical returns, probably in the $1,000 to $1,200 range total between the both of them probably waited two thirds of the cost toward the S Corp and 1/3 for personal. But everyone’s personal return, that’s where the range can get much bigger, depending on what you’re doing. If you just have a W-2 from your S Corp, then you’re at the lowest end of the range. If you’ve got six rental properties and in 12 other K1s from limited partnerships. But all the tax planning is part of what we call wealth management and that percentage of assets under management fee. So, we’re doing that throughout the year, we established a tax and cash flow plan in January. Then we’re checking in and updating it with the brokers four times a year in line with the IRS quarter end dates, and then sometimes another one or two times the very end of the year because we know everyone’s trying to pull forward January’s deals because they’re at a higher split level and there’s a lot of activity and action at the end of the year. So, a lot of a lot of planning going on toward the end of the year. But that’s what we’ve found has just absolutely been missing for you all professionally is constant communication of tax planning and strategy. It’s not your CPA having that one interaction a year at tax time, it’s actually adapting the plan to a changing income environment. That should have been happening last year for everyone. When the pandemic hit, everyone’s income went to uncertainty. Hopefully, your accountant was actually having a conversation with you about what income looks like this year because if you’re an S Corp and they’re running payroll for you and all of a sudden there’s not enough revenue there to justify your salary, you needed to be making adjustments early on and not trying to play catch up at the end of the year. So that that’s what’s been missing so much is that communication, that high attention, and value. Ultimately, that leads to financial planning because we’re financial advisors and it’s having the tax team and the financial planning team together in the same office that provides a pretty seamless and frictionless process. For brokers, you’re not having to be the middleman communicating between different professionals and that saves you time, which means you can spend more of your time doing what you do best.

Justin Smith 

That’s helpful Mike, I appreciate you helping spell that out a little bit. I feel like it being part of assets under management for the advices, that’s common but I feel like most people miss out on that part. I feel like cash out of pocket expense and how do I feel about what advice I’m getting for that being something that’s rolled into the investment accounts. It makes perfect sense and seems like something most brokers would feel is pretty palatable.

Mike Salmon 

Yeah, it’s comprehensive. That’s what usually what’s missing, you’re not getting you’re not having someone look over everything all in one place.

Justin Smith 

Well, wonderful, Mike, I think we’ll wrap it up. That was great. I love going through revenue, all the different retirement accounts and some of the common pit falls we’re all finding between sporadic income and setting up our entities. Thinking about cars, we didn’t get into the home purchase, we can save that for the next one and thinking about spouses and then just how frequently you need to be adjusting. Then I think the way you hit at the last part is the how frequently you should be in touch with you in terms of making adjustments internally and how you’re planning and as your cash flow and your deals close or don’t close and how that all comes together. That is definitely a part we’re missing out on.

Mike Salmon 

Well, I appreciate the opportunity. And I’m glad that I came across your post on LinkedIn the other day and the podcast. So, it’s been my experience working with so many NAIOP chapters that the only financial people in the room are there to be part of the real estate transaction and they’re not there to serve the broker personally. That’s really been missing. We’ve just been positioned right from the very beginning of our founding of this firm to bring tax planning and financial planning together in one office and delivered by the same team.

Justin Smith 

We’ll put a link to all your contact information in the show notes and make it easy for people to reach out to you.

 

Mike Salmon 

I appreciate it.

Justin Smith 

Yeah, thanks, Michael. We’ll catch you later.