John Hyre Part 2 – Learn to Grow Your Retirement Accounts Through Tax-Free Real Estate Investing

Welcome back to the Next Level Income show where we help you take your income, your investments and your life to the Next level. I'm Chris Larsen.

And I'm Caleb Welborn.

And today we're excited to have John Heyer back on. John Heyer is an attorney. He's an accountant and a real estate investor. He's worked at two large accounting firms. He's also worked as a tax counsel for a Fortune 500 company before leaving and starting his own practice. And for the past 13 years, he's run both an accounting practice and a tax law practice, which he talks about in the first episode that he was in on. He's also written three home study courses, numerous art. John's a frequent speaker on the taxation of real estate and IRAs. And I learned about John through one of his online webinars with the new tax laws that we dove into in the past. And tonight, I'm sorry, today we're excited to have John back on to talk specifically about IRAs and how you can use those to maximize business planning and real estate investing. John, thanks for being back on.

Glad to be here. Anything I can do to help you keep what is yours?

Absolutely. And that being said, if anybody's interested in the show notes afterwards, you can go to nextlevelincome.com and learn more about John on his website, iralawyer.com John, like I said, we talked a little bit about the new real estate laws and what they mean specifically for real estate investors. You also gave some good advice for business owners. Tell us how you came from being an accountant to a lawyer and why you like to specialize in in IRAs.

So accountant and lawyer. I mean, I argued a lot growing up. My parents knew I was going to be a lawyer from when I was 6. I was a debater. I did really well at it. I got in the taxes because I was an exchange student to Germany. I still speak it fairly fluently. And my German guest father introduced me to an international tax lawyer and said, John, with your languages, this is what you should do. And with your philosophy, I like you to keep it. I want you to keep what's yours. I like the chess game. That is the code. I like to win and it pays really well. So I get the trifecta. I love what I do. I absolutely love it. And iras, how did I get into that? Real estate investors more than any other subgroup of entrepreneurs are in the self directed IRAs. So you heard about it a lot dealing with those guys. Almost all my clients are real Estate investors. But then I got called in to do an audit. I had a client show up and say, I'm getting audited on my Iraq. And I am oddly honest for a lawyer. And so I told him I've never done an IRA audit. You got to find someone who's done one. They'll do a better job than me. I hate to lose the work, but I want you well represented. And he said, no one's done them and no one's honest. You're doing it. And we did a great job. They said he owed 150 grand. I charged him at that time five grand to get him off completely. He owed zero or. And then we've had a few other audits. We've gone the tax court on IRAs. And then I noticed that very few attorneys and accountants are into self directed IRAs. Very few. It's a tiny, tiny number. And I really like Monopoly. As long as I'm the one running it.

I love it, man. I love it. That's. Yeah, just like Bill Gates, right?

I got to add a few zeros. I'm working on it.

Yeah, yeah. Well, it sounds like you're on the right track, man. I love it.

So in Chris's book, he goes into qualified accounts a bit in his four financial buckets. If you guys don't know what I'm talking about, you can find the book in the show notes. It's really helpful. So, John, what advice would you give someone potentially younger or just someone who's getting into that game? And are there common mistakes you see people make when they're trying to set up these accounts? And how would. What advice would you give someone so they can avoid any pitfalls?

Well, a couple thoughts. First, I'll make a generalization that probably doesn't apply to the listeners of this show. The younger generation doesn't save, they spend. You look at their habits and what they've been taught. They're consummate consumers. Now if you're on this show, you presumably are different. You have some interest in investing and saving and having a future as opposed to spending it all now. So you're thinking longer term. So the first thing I would say is put the money aside and understand you don't get to touch it. And that's good. It's going to grow if you're not going to touch it. IRAs, 401ks Health Savings Accounts, Coverdale Educational Savings Accounts are perfect for you because the catch is they're tax free. And we'll talk the difference between tax deferred and tax free. In a second, I promote tax free. The Roth style plans, they're tax free if you don't touch the money and you shouldn't touch the money. People view that as a downside. It really isn't. Second, educate yourself first. Get the education. But also get really good advice. The problem with the Internet is too much information and you don't know who to trust. People contradict themselves 50 Ways to Sunday on this topic, particularly on the topic of checkbook LLCs. There's a lot of garbage information out there. So at some point you have to be willing to pay someone for their judgment to filter and tell you what in that massive information is correct and most importantly, why. So get good information. But finally you got to act right. If you're one of these course wonders, you buy a bunch of courses and they sit on a shelf and you never do a damn thing, then the information is useless. So get good information on the net, do your homework, pay for good help. Don't be cheap. That's foolish. That's not cheap. It's very expensive ultimately. And finally, act on it.

I love it. So John, talk about the difference between I've been a W2 employee, I've had a 401k. We also have self directed IRA. Can can you? For some listeners that may not be familiar, we had Sean McKay on the show prior to this talking about how they can set up self directed IRAs. If you didn't hear it, you guys can listen to that. But do you mind diving into the differences and why anybody would want to have a self directed IRA versus just a 401 or a traditional IRA?

Sure. First, a shout out to Sean and American IRA. I've worked with them. Good People would have been a great show. I may have to look that one up. What's the difference between an IRA and a 401k? First, you can have both. They're not mutually exclusive. You can contribute to both. That's very important. Understand this. The 401k, if it's self directed. Because see, your W2 401k is not self directed. The self direction there is. Which mutual fund would you like? That's about it. Yep. But once you're an entrepreneur, and you can be an entrepreneur, while you have a W2 job, you can have a side business.

You can.

If you have a side business that generates earned income. So this is non passive income. You're consulting or you're selling something. Typically it can have a 401k. The 401k is a superior account. It's better than an IRA. You can do both. You should do both. I do both. Why is the 401k better? You got this concept called prohibited transactions. It's the number one rule you have to be familiar with. If you commit a prohibited transaction in a self directed ira, the IRA dies, the money comes out and is taxed at a high rate, typically right around 50%. That's bad. 401ks if you have a prohibited transaction and the idea is not to have one, but if you stumble into one or have one, is penalized at about 15% of the transaction, but it does not destroy the account itself. Usually when you do the math, it's way less bad. Add to it. 401ks can have checkbook control, meaning you don't need a custodian. With an ira, there's a custodian, a bank that you're always going to saying, could you write this check? Could you write that check? Would you accept this deposit? And there are reasons for that. With a 401k you can be the custodian. Now there's always the question of should you be right? If you're one of these dealmakers who knows how to make deals, but you're lousy with details and paperwork, you really shouldn't be your own custodian. That's like giving a 12 year old kid a flamethrower, sending him to the gas station and, and being shocked at what happens. So if you're good at paperwork and you're organized and you follow through, you can be your own custodian with a 401k. Here's an important one. A 401k can borrow on real estate. It can borrow to acquire or rehab real estate and not pay tax, which is unusual. You see, normally when one of these accounts borrows, there's a tax called ubit. UBIT stands for unrelated Business Income tax. Borrowing through one of these accounts is a great way to expand the account, for example, to buy an apartment complex. But you pay this tax unless what you do it through a 401k. You can buy rental property, including complexes through a 401k if the debt is properly structured. And it's pretty easy to do, if the debt is properly structured, that is truly a tax free investment. By the way. That's what I do now. I do it with single families, but will this apply to multi units? Sure. So just some of the reasons in brief, I mean for a lawyer that was brief. But in brief, why a 401k is better but you have to have a side business that generates earned income that you can contribute to the 401k. So I'm going through a lot very quickly. Take the time and dissect those words. For example, research what is earned income, what does that mean? What's a prohibited transaction, what is ubit? These are all key issues on using these accounts properly.

Terrific. So John, what's. If people want to look all this up afterwards, do you have a page on your website that we can go and read through all this stuff?

Yeah, I mean, I have a bunch of articles there. They're in no particular order, mainly because I'm so busy lawyering that my website is a technological mess. So you'll be able to tell them a very good lawyer and a really lousy website guy. But there are some articles on there and there's a book we're going to be putting up shortly. It's a cheap book. I just finished co writing a book with a couple of people on solo 401ks and it gets into a lot of these issues and it's a really cheap book. It's like 28 bucks. It hurts me, it's so cheap. But we'll get that up on the website shortly. The website is iralawyer.com okay, IRA lawyer.com and you can look at what we've posted. We provide services, we put on seminars. There's so many ways for you to give us money and for us to save you way more in exchange. Right. This is a free market system. You don't give me money unless you get way more out of it than the money's worth to you. So I'm not Bernie. I'm not putting a gun to your head or actually Bernie's too gutless and lazy to put a gun to your head and take your money. He has other people do that. Bernie loves guns. I'm not that guy.

Bernie. Bernie's the name of my father in law that just left this morning. So you're not talking about him just for listeners?

No. He probably likes guns in a good way. He doesn't point them at other people unless they point them at him first. That's what we call a normal American and not a socialist.

Yeah, I think he has like three beach houses or something too. And anyway, we could go way into that. But back on track, back on track, on track. So. And I really appreciate you giving that advice because I've been in business for myself for about a year and a half now. And so I've been especially with Chris's help. He's been giving me a lot of good advice on it, but really trying to figure out how I want to structure everything for myself. So I'm definitely going to be looking into everything that you were just talking about. But so a lot of people who listen to the show and watch this show, they're way further along in their careers already. Super successful, like Chris, you know, they're either a professional, an entrepreneur. We have a lot of surgeons, lawyers who listen to this. What advice would you give them on these qualified accounts? And I mean, perhaps there's something that you see a lot of people like that. Maybe there's something that they're not taking full advantage of.

Yeah, you got to think bigger. You know, it's funny, here are two things I hear all the time. I make too much money to invest in a Roth because, see, I like roth accounts. Roth IRAs, Roth 401ks Health savings accounts and Coverdale accounts are Roth style. You get no deduction for putting money in them, but it comes out tax free later. Do the math. Do a net present value comparison side by side. Of the two, here's what you're going to find out. Even if you're in the highest bracket, if you're making 12% or more internally in the account, you should have a Roth. And I know, look, guys, I'm in the high bracket. I work hard, I do well. I've paid my dues for years and years to make good money. So I'm in the highest bracket. It hurts me to give up the tax deduction that I get for a traditional. But I've done the math. I'm thinking long term. Everything I have is in a Roth account of some sort. Because the net present value. Bear in mind, I invested about 18, 19%. I get really good deal flow, and that's before leverage. That's just straight cash investment. So first of all, do the Roths. Second, when your accountant says you make too much to put money in a Roth Wrong. Fire the accountant wrong.

What do you do?

There are two ways. Two ways to put money in a Roth. No matter how much you make, and I repeat, no matter how much you make a. If it's an ira, Google backdoor Roth Roth ira. This is not a secret. It's a commonplace thing. All the custodians will do a backdoor Roth ira. Here's what the accountants leave out. They don't read the law. They're not detail oriented enough. They're just sometimes a little bit on the gutless side. You cannot Directly invest in a Roth IRA if you make too much. But you can indirectly do it by putting the money in a traditional IRA and immediately converting it to a Roth, or just go straight into a Roth 401k which has no income limits. So the first thing I would say is you can invest in Roth. You should invest in Roth if your return rate internally in the account is 12% or more, which for a lot of people that follow you, it really should be. Second, there are ways to get more money in the account, more than I can talk about on the show, some of which I won't talk about publicly in terms of propriety, proprietary information. But let me give you two examples. Your IRA can borrow. Your 401k in particular can and should borrow. So you can leverage. What do you do when you can't afford to buy a multi unit property? You borrow. Your account can do the same thing or it can partner. For example, let's say I have an IRA, it has 100 grand, I want to buy a 500 grand building and I don't want to pay the UBIT tax because if I borrow the 400 in an IRA, unlike a 401k, I pay tax when I borrow. Without going into details, just trust me, the act of borrowing in an IRA causes a high tax hit. Where in a 401k, when you borrow on real estate, no tax hit. I have an IRA with 100 grand, I want to get something for 500, I don't want to pay UBIT. I set up an LLC. I go find investors who are willing to take, let's say, 7% preferred dividends. And in this market there are plenty of civilians, normal people, doctors, accountants, et cetera, who think 7% is a great return. And for them it is. I bring them in as preferred partners, they get a 7% return. My IRA is the common partner. It gets all the upside. If you Google preferred stock, that's what I'm talking about. Transported into a different context. So instead of preferred stock, it's the same concept, but with an LLC and an ira. And no, don't do that at home. That requires a lawyer that really knows what they're doing. With Both self directed IRAs and subchapter K of the Internal Revenue Code, which is partnerships and the associated drafting. So what happens? Your IRA, functionally borrowed, it's got 400 grand, it's paying 7% on, it's leveraging. But instead of debt leverage, it's equity leverage. And equity leverage is not subject to ubit.

Interesting.

So there are that's just one example. There are ways that smaller accounts can be made into significantly larger accounts. That seed that tiny little seed that is your $5,000 IRA can be grown just like an acorn into a massive, not just an oak, but an oak that itself throws off acorns. That acorn can grow into a forest if done right. But that requires thoughtful planning ahead of time if you're disorganized, if you pardon my French. But if you half ass it, that ain't going to happen.

Interesting, John. So if somebody has a self directed IRA and they want to convert it to a Solo, a 401k, can you do that?

You can convert a traditional IRA into a 401k. A Roth IRA can only roll to other Roth IRAs. So if you set up a 401k, a Self Directed Plan, a Solo 401k or a Safe Harbor 401k, but either one of them is self directed through your side business. You can and should roll the traditional IRA and to be specific, the pre tax portion of the traditional IRA into the 401k, because as we discussed, the 401k is a very superior account. The after tax traditional IRA should be rolled into a Roth IRA. Roth IRAs lamentably cannot be rolled into Roth 401ks. How much do I contribute a year? How much do I contribute a year between my Roth 401k, my Roth IRA? I'm no longer eligible to contribute to Coverdale Educational Savings Accounts because my kids are all 18 or older. And how much do I put into my hsa? I put per year about including my spouse's contribution. Let's see, I put about six grand a year into each IRA, seven grand into the HSA. I put about 60 grand into my 401k, and I only put about 20 grand a year into her 401k. I suppose we could structure it to put 60 in it. We just haven't done so because she would have to work more hours for me. And I want to stay married and alive. And therefore 20 grand seems to work. Look, yeah, look. Every morning, as we mentioned on the other call, I'm married to a Latina. And they're wonderful. They're so wonderful and they're happy. But every morning we have a discussion, baby. The net present value of my earnings is much greater than the net present value of the life insurance. Very important conversation to have every morning.

I love it.

You got to put that on the wall, man.

She's not here right now. Sometimes you'll hear her in the background on one of these calls going, are you talking about me again? Oh dear, no.

Gotta lock the door. So John, are there any times when you would advise, well as a broad statement, any times you should not invest through your IRA in your opinion that really stand out?

You know, let me answer the reverse of the question. Who should? And then we'll look at who shouldn't.

Sounds great.

If you. There are two cases where you should. If you make enough money that you don't need the income from the real estate to live on, if you're able to make the investment through one of those accounts, you should, why pay tax? And that's my case. I only live off of about 20% of what I make on my law practice. Everything else gets invested and so the real estate is just going to get reinvested. So right now we are selling the last non IRA investments I have. Everything gets done through one of those accounts. The other group of people who should do this, what age do you have to be to take money out of a roth tax free 59 and a half. Let's round it to 60. Let's round it to 60. If you're 60 and you're not running your deals through one of these accounts, that filters it, that cleanses it, that strips away the taxation, you're nuts. Now if you're not one of those two positions, basically you need the money to live on, you're going to spend it personally and you're under 60, then it's not practical to run these two accounts. There are also some deal types that are just not practical to run through one of these accounts. I'll give you an example. You've got 50 grand in a 401k, you want to buy an apartment complex for a million and you can't find someone who will do non recourse. And I've seen people structure the deals with 50 grand. It gets a little more complicated. It usually involves other people's private money getting involved in the deal. So it's still doable, but it requires contacts, financial friends and some knowledge both networking and working. Let's say you're not in that position. Or let's say you're buying a dozen million dollar complexes this year. As a practical matter, not all of those are going to get run through the ira. Which one do you run through the ira? You cherry pick the best one. Which one's going to be tax free? The one that makes the most money, right?

Oh yeah, that's a good filter.

So you obviously didn't always know all of this or you weren't always this knowledgeable. If you could go back and give yourself one piece of advice on these qualified plans when you were young, say 25 or 30, what would you say?

Start sooner, start sooner. I, you know, the irony of me being a tax lawyer and not having really gotten into these until my early 40s, I knew about them and I put money aside at work. But I was so focused on the practice and the real estate and the accounting practice and doing too many things, really, that was my biggest mistake, doing too many things. Instead of like we talked about on the last call, I read the book the One Thing and really got me focused on the practice. And I backed off on my investing. Not in terms of the quantity at the time. I've gotten more passive. I look for sharp people to invest with. I don't have time to do everything well, what's the old saying, Jack of all trades, master of none. And so I focused on the practice and what would that lead to in terms of the qualified plans? Having jammed more money with the tricks I now know particularly the 401k thing is fairly new. The laws have changed. But even it took even me a few years to figure out what a self directed 401k through your business can do, I would have jammed so much money into those things and it would have been my first priority. So instead of starting that process in my mid-40s, I would have started it in my mid-20s.

I love it. We were talking on the last show as well, John, about My boys are 7 and 9. They started their Roth IRAs last year. And I mean, you look at the magic of compound interest, it's just fantastic. So for our younger listeners that want to get in touch with you, that want to talk and see some of the resources, you can go to nextlevelincome.com you're going to see all this in the show notes. And then, John, can you end by telling about some of the stuff you have coming up later this year for people that they may want to talk to you one on one or spend more time getting to know about what you have to offer?

If you reach out to us, it's iralawyer.com couple things. My practice is virtual, both for the IRA and 401k stuff, but just tax planning in general for entrepreneurs and especially real estate investors, it's a virtual practice. Right. If you're happy with zoom or a phone or better yet, you want to come visit me in Puerto Rico. I mean, we're in the Transition moving to Puerto Rico, a great place to visit. We live right in Old San Juan where the cruise ships dock. My job is to save you a bunch of money and typically my goal is to save you 10, 20, 30 times what I bill you. So that's a pretty good return ratio. We do seminars. If you look on the website, we're planning a few for later in the year. We had just finished the one in Puerto Rico, so I've got to get some more stuff up there. And finally we do a webinar series twice a month. Super advanced. I will say this. It's very advanced topics twice a month. It's only 50 bucks a month. And you do get some Q and A in, so there's some thoughts. But if you just follow the website, there's usually things up there that we're doing. I know I'll be in Vegas with Gary Johnston in November and he's always entertaining if you look up Gary Johnston, and he's a great one for kids. He does classes on financial freedom for kids and it's for adults too. But so many people bring the kids to get them exposed to it. I remember taking my kids there and watching them on the financial calculators do the math on some real world stuff. It changed their opinions and it didn't matter that I told them the same thing. He's not their dad. But anyway, I'll be there with him in Vegas.

Cool, man.

That's really cool. So at what income level would you recommend people reach out to you?

You know, even newbies can profit. They just got to tell me ahead of time, I'm a newbie. I'm on a budget and I get it. I have a business. You don't want to nail someone for a ton of fees in the beginning. The object is to get them the basics in terms of an entity and not overdo it. People get so obsessed with entity structures and they grossly overdo it both in terms of time and money. No, when you're getting started, simple will do. It still needs to be done right. So even if you're just getting started for entities or for tax planning, an hour or two as a noob is worth it. And we should be coming up with because we hired some new staff in Puerto Rico, we were going to come up with a newbie, but I have to define what's a newbie. I wanted to keep it to a thousand bucks or less for entity creation and tax consulting. And with staff that's easier to do. So just some thoughts on that.

Awesome. John. Yeah, I mean one of our, you know the reason that Caleb and I do this show is to provide financial advice for every age whether you're starting off maybe even thinking about whether it's worth it to go to college or not. All the way to people like those invest with us that are in their late 70s that are just looking to enjoy their life to the most and provide a legacy for the future. So it means a lot to us that you're coming up with material in that and we're going to be sure to have access to all this in the future. And it's been a blast having you on the show again. So if you missed the first episode with John please go back check it out. Super entertaining. Chock full of information on the new tax law. And John, thanks again for being here today. We really appreciate it.

Yeah, it's always a blast. Take care. Thanks so much.

Awesome. Thanks.

See you guys.