Benefits and Drawbacks of an MSO – Podcast #203 | White Coat Investor

Intro:
This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We’ve been helping doctors and other high-income professionals stop doing dumb things with their money since 2011. Here’s your host, Dr. Jim Dahle.
Dr. Jim Dahle:
This is White Coat Investor podcast number 203 – Benefits and drawbacks of an MSO.
Dr. Jim Dahle:

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Dr. Jim Dahle:
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Dr. Jim Dahle:
Thanks for what you do out there. Medicine is still hard. Maybe the pandemic is weighing a bit, but medicine is always going to be a difficult profession. There’s a lot of reasons why. Sometimes it’s the administrative hassles, which are what we’re going to be discussing here in a few minutes. But sometimes it’s just the parts of the job that are profession specific. You’re dealing with the dead and dying and terribly injured and the diseased and when people are upset. Their family members are upset and it can be a very heavy profession to carry around.
Dr. Jim Dahle:
So, thanks for being willing to do that. Congratulations to all those who mashed recently, we’re actually recording this on Monday the day, all these MS-4 found out they match or they didn’t match. I guess a bunch of them are scrambling right now, but to those who matched whether in the scramble or regularly, congratulations to you.
Dr. Jim Dahle:
For those who are not aware, this week is the last week for our sale of Continuing Financial Education. 2021. This is the online course made from WCI con 21, which was a smashing success. It really went well. And this basically preserves the content from it. You don’t get the same live interactive experience you got if you came to the conference, but you get all the content, all the presentations. If you have an iPhone or an iPad, you can even listen to it on that and use it in your car and your commute, just like you might this podcast.
Dr. Jim Dahle:
We’ve got a hundred dollars off through Doctors’ Day, March 30th. So, from the time this is released, you got another five or six days to buy that and get a hundred dollars off. It’s normally $779, through March 30th it’s $679. So be sure to check that out.
Dr. Jim Dahle:
All right, let’s take our first question. This is the one where we’re going to talk about management service organizations. This one comes from Carmen.
Carmen:
Can you discuss an MSO, its benefits and drawbacks for a high earning physician?
Dr. Jim Dahle:
All right. So, Carmen, great question. A lot of doctors wondering about MSOs, particularly with the trends in practice ownership, which is lower and lower practice ownership every year and more and more employees every year. As the practice of medicine becomes more complicated, more compliance issues, more administrative headaches, you can see why people start considering MSOs.
Dr. Jim Dahle:
But when we talk about this, we really need to talk about two things. One is an MSO that you hire that they basically do your business and administrative stuff for the practice. The other MSO is an MSO that’s basically acquiring you. And this is essentially a private equity buyout where they come and buy your practice and you become an employee of the MSO. Now, maybe you’re not technically an employee. Maybe you still have some ownership or something like that, but you are going to lose a lot of autonomy by allowing this MSO to own the practice.
Dr. Jim Dahle:
I like ownership. I think doctors do a lot better when they have ownership. So, I’m not a huge fan of selling out to private equity. Although I totally understand why people do it. Given the hassles of running a practice while still trying to practice awesome medicine. Not to mention if you’re at the end of your career, it’s wonderful to get some sort of lump sum for what you’ve spent the last few decades building.

Dr. Jim Dahle:
However, the first type of MSO is essentially just outsourcing a bunch of your business stuff to one entity and you really have to ask yourself, “Do I want to have one entity doing it all? Or do I want to do it all à la carte and pick what I want to keep in-house and decide what I want to send out and have them do?” But with an MSO, you tend to be giving them more rather than less.
Dr. Jim Dahle:
Every MSO is a little bit different and they offer all kinds of services. It might be operational services, financial management, human resources, and personnel management, staff education and training, providing managing office space, coding, billing, collection, EHR, medical equipment, credentialing, contract management, regulatory compliance.
Dr. Jim Dahle:
And you might get some benefits too due to their economies of scale, right? You might save some money because the MSO is a bigger organization than just your practice is. So that’s a big selling point as well. The other big selling point is they try to help with risk management. So, you get sued less and you’re less likely to be successfully sued.
Dr. Jim Dahle:
But the main benefit of an MSO is to get rid of administrative headache. That’s why doctors hire an MSO. It’s “I don’t want to do this stuff. You guys take care of this stuff and I’m just going to do the medicine part”.
Dr. Jim Dahle:
Just be careful with that. They provide a lot of things that you need, but it’s critical that you understand the agreement – What are they going to provide? What do they not going to provide? The MSO needs to really clearly spell out exactly what services you’re being provided and what the terms are for which you’re contracting with them. You need to understand all the limitations, et cetera. So, you actually have to read all these contracts and understand what they say.
Dr. Jim Dahle:
If they’re going to buy your practice as well, you want to make sure that they’re paying a fair price. If they’re paying too much, it can actually be interpreted as a stark issue and be a violation of the stark law.
Dr. Jim Dahle:
Otherwise, if you’re selling out to private equity, essentially the MSO is buying your practice. There’s a whole longer list of stuff you need to be aware of. With the acquisition, it’s a little bit different than a traditional sale. Perhaps the timeframe is longer rather than just getting a bunch of cash and walking away with, there’s usually an earn-out meaning. You’re going to be still working for the practice for two or three years afterward.
Dr. Jim Dahle:
So that puts more need to do due diligence on you, because not only are you evaluating these guys to buy your practice and give you a good amount of money for it in good terms, but you’re also essentially taking a job. So, it’s also a job interview with this organization and you want to make sure that they’re actually somebody you’re willing to work for, for two or three years. You want to understand the financing of it, how much they’re going to pay, when they’re going to pay, what happens if they don’t pay et cetera, and what the structure of the company is going to look like during the transition.
Dr. Jim Dahle:
You also want to understand what could happen if things go bad, right? This is the most important part of any contract. If everything goes awesome, nobody cares what the contract says. If things are going bad, that’s when everybody looks to contract. So, understand what your requirements are. In addition to maybe a workback requirement, if you are just cashed out, the amount you get may be dependent on how the practice performs after you’re gone. So be aware if it underperforms, you might not get what you thought you were going to get.
Dr. Jim Dahle:
So, understand those risks, understand how much you’re going to be paid at closing, how much it’s going to be held in escrow, how much it may not be paid to you at all and make sure those numbers add up to what your practice is really worth. Obviously, you want to get multiple opinions when you’re selling your practice and professional advice from your accountants and attorneys. This probably is not a “Do it yourself” project.
Dr. Jim Dahle:
All right. So, keep that in mind. That’s basically the story about MSOs. It can be a great way to exit from your practice. It can be a great way to reduce the headaches of your practice. Whether you are going to keep as much control over your practice as if you did all this yourself and sorted it out yourself and hired out each piece of yourself, you’re probably not going to have the same amount of control that you would otherwise have but it may still be worth it to you.
Dr. Jim Dahle:
All right, let’s take on another question. This one is from Jackie about life insurance.
Jackie:
Hi Jim. I’m a new listener as of two weeks ago. Thank you for sharing your knowledge. I’m a psychiatrist at a major state university in South Carolina. A patient recently contacted me to let me know that she was denied life insurance due to her diagnosis of bipolar disorder. She is married with a preschool aged child. What advice do you have for someone who has denied life insurance coverage? Is there another way for her to protect her family financially?
Dr. Jim Dahle:
Good question, Jackie. The bottom line is no, there really isn’t another good way. That doesn’t mean she can’t get life insurance though. A lot of times when you go to apply to an independent agent to get life insurance, they do underwriting, and you don’t qualify due to some of your dangerous hobbies like climbing or flying, or jumping out of airplanes or scuba diving or whatever.
Dr. Jim Dahle:
And a lot of times it’s just because of a medical condition, and you’d be surprised how minor those medical conditions can be. Just a relatively minor thing that you think wouldn’t matter at all it might drop you down a notch and cost you more to get life insurance. For example, something as simple as hypothyroidism is going to cost you more when you buy life insurance and some things are going to keep you from being insured at all. Apparently, it sounds like bipolar it’d be one of those things. And I don’t know if the concern is increased suicide risk or what it is, but you’re not really going to argue with the insurance company actuaries about that. There’s no way to do that. You basically either get it or you don’t.
Dr. Jim Dahle:
Now, a nice agent that’s doing this the right way will kind of pre-shop you around so you don’t get that denial. So, you don’t have to report a denial and there’s not a denial in their database. They’ll pre-shop you around and say, “Hey, would you even consider offering this person insurance if they have a diagnosis of bipolar?” And they may tell you, no, we won’t. So, you don’t even bother applying. And that keeps you from getting the denial and maybe down the road, it’s a little bit easier to get life insurance later. You don’t have to at least report that you had a denial.
Dr. Jim Dahle:
So, what are your options if you aren’t going to make it through underwriting? Well, you might be able to get it through a professional organization that doesn’t ask any of those pesky underwriting questions. Generally, a group plan provided by an employer will not go through underwriting. You’ll just get the insurance as a benefit. The downside of that is it’s often only like two or three times your annual salary. So, it’s usually not enough life insurance for a young family with a bunch of dependents. But it’s better than nothing. I mean, it’s better to leave your family a couple of hundred thousand dollars than nothing. It’s not the 2 million they might need, but it’s better than them setting up a GoFundMe and hoping for the best.
Dr. Jim Dahle:
Other options. Well, some people take this sort of problem when they can’t get disability insurance or they can’t get life insurance and they use it to motivate themselves to get to FI very quickly. And so, they save a huge chunk of their income and they get to the point where they don’t need disability or life insurance very quickly five, six, seven, ten years, something like that. You’re still exposed, but you’re exposed for much shorter period of time and it’s the least risky period of time. You’re far better off running that risk from age 25 to age 35 then you are running that risk from age 55 to age 65 for instance.
Dr. Jim Dahle:
I hope that’s helpful, Jackie. I wish there was an easier way, but unfortunately with life insurance, you got to buy it before you take up anything dangerous or develop any dangerous conditions. They just don’t want to take a bet on you if you’re more likely to die than other people.
Dr. Jim Dahle:
All right. So, if you are not aware, if you are interested in being a direct real estate investor, there’s a course. It opens up a couple of times a year. It’s run by our friends over at Semi-Retired MD. It is a course called Zero to Freedom Through Cash Flowing Rentals. And it is on sale on March 27th and 28th. So, this weekend, I guess. Let’s see, it would be Saturday and Sunday. It is being sold at a $300 discount from its usual price. It is not a cheap course. The regular price is $2,691. So, you get $300 off if you buy it the 27th and 28th. You can still buy it through April 4th, but it’ll cost you more than if you buy it this weekend. So, if you’re interested, I recommend you sign up at whitecoatinvestor.com/rental.
Dr. Jim Dahle:
What this course teaches you to do is it teaches you to invest directly in real estate where you own the property yourself. You take care of the financing. You pick the property. It’s direct active real estate investing. If that’s something you’re interested in learning how to do, they will teach you how to do it. You can even make three payments. You can divide that purchase price into three and make three payments so that you don’t have to come up with the cash all at once. But if you’re interested in real estate investing, hopefully that is not a barrier to you doing it.
Dr. Jim Dahle:
But these guys generally have their students buying properties before they’re even done with the course. So, it’s been a pretty effective course for a lot of docs. We’ve gotten a lot of great feedback on it. I think it runs for about eight weeks, but then you basically have access to a community of like-minded docs doing what you want to do, which is achieve financial independence, at least partly through real estate investing.

Dr. Jim Dahle:
So be sure to check that out. If you sign up through our link, that’s whitecoatinvestor.com/rental, we’re going to throw in two freebies for you. One is a signed copy of the White Coat Investor’s Financial Boot Camp book. And the second thing is online access to WCI con 18. This is WCI con Park City. It’s 13 hours of material including Bill Bernstein, Jonathan Clemons, Mike Piper, Nisha Metta. It’s got some great stars given some great talks, and we’ll provide that to you absolutely free if you sign up for the course through our links. So be sure to check that out.
Dr. Jim Dahle:
All right. Our next question comes from Trevor, a dental student. Let’s take a listen.
Trevor:
Hey Jim. First off, thank you for everything you do. I’ll be starting dental school this summer. And by the time school starts, I will have about $20,000 saved up. I am planning to budget and live frugally off student loans while in dental school. So, I do not want the money in my savings to just sit there in the bank for four to five years. But at the same time, I also want as much liquidity as possible so that I can use that money to buy a practice when I graduate. What do you suggest I do? Do I invest? Do I let us sit there? Any advice or suggestions would be greatly appreciated. Thank you.
Dr. Jim Dahle:
Good question, Trevor. There are three options of what you can do here, and you only listed two of them. You listed you could let it sit in a bank account and have it still sitting there in four or five years, knowing the principal’s not going to go down. At least till you apply inflation to it. You can invest and hopefully it will be a larger amount when you need that money in four or five years.
Dr. Jim Dahle:
But you didn’t even mention the third option, which I think is the right option and the one I would certainly do in this situation. I would use that $20,000 to pay for dental school. Now it’s not going to pay for all of dental school, but it’ll pay for maybe the first semester’s tuition. And that will mean you come out of dental school with less debt. You will have less of that debt growing at compounded interest rates over the next four or five years till you get out and probably another five years until you pay off those debts.
Dr. Jim Dahle:
So I think that’s the best use for any money you have saved up before dental school. Now maybe if it’s in a retirement account and it’s going to cost you a bunch of penalties and interest to get it out, or there’s an opportunity to do a Roth conversion for free in dental school. Maybe I wouldn’t do that, but it sounds like this is just money sitting in a savings account. So, I would use this pay for dental school.
Dr. Jim Dahle:
You will be able to get a loan for a practice when you come out. You’re going to need a lot more than $20,000 to buy a practice. You’re probably looking at a half million dollars minimum. So, it’s not like this money by itself is going to pay for your practice when you get out. You’re still going to need a practice loan in order to buy a practice after you finished school.
Dr. Jim Dahle:
So, I think the best use for this money is just to pay off your student loans or rather avoid taking out additional student loans. You seem to be looking at it as a separate pot of money, but if you think about it, if you’re going to be borrowing student loans at 6%, 6.8%, 5.4%, something like that, this money is going to earn a guaranteed 5.4% to 6.8% while you’re in dental school. And that’s better than anything else you can get by far that provides a guaranteed return.
Dr. Jim Dahle:
So, unless you want to go down to the casino and put it all on red or put it in Bitcoin and hope for the best over the next five years, what I would do is use it to pay for dental school. I hope that’s helpful for you.
Dr. Jim Dahle:
All right, let’s do our quote of the day. This one comes from Rick Ferri who says, “I have a theory. As bull markets lengthen, memories shortened.” And boy has that seemed true lately with the proliferation of cryptocurrencies and SPACs and stocks and all this stuff going on on the internet where people are kind of engaging in speculative behavior. It’s like everybody’s totally forgotten about the late 90s and the last time we did all this, or even 2005/2006, when we were doing this with real estate.
Dr. Jim Dahle:
But bull markets do not go on forever. Trees do not grow to the sky. So, it would help to keep history in mind and realize that it might not repeat, but it certainly rhymes as we go along.
Dr. Jim Dahle:
All right, let’s take our next question. It sounds like this one’s about mega backdoor Roth IRAs.
Speaker:
Hi, Dr. Dahle. Thank you for taking questions. I want to ask you about whether I should put money into my Roth IRA. As background, I have about one and a half years left before I graduate a surgical subspecialty residency. My wife has a great job that compensates about $500,000 per year. I therefore I’ve had the luxury of maxing out my 403(b) and 457 accounts during residency. I recently learned that my institution allows for mega Roth IRA contributions. I anticipate to start making about $250,000 to $300,000 per year when I’m an attending.
Speaker:
My question to you is whether I should stop funding my 403(b) and 457 accounts for the next year and a half and instead max out my mega Roth IRA while I have the chance. Does it make sense to do this considering that our tax bracket is already quite high based on my wife’s salary, or should I continue to fund my tax deferred accounts? Thanks so much.

Dr. Jim Dahle:
This is a complicated question. Mega backdoor Roth IRAs are great. They’re basically a way you can put more money into a Roth IRA than you would otherwise be able to. You put in after tax contributions into your 401(k), and then either convert them within the 401(k) into the Roth 401(k), or pull them out of the 401(k) and convert them into a Roth IRA. Since there was no deduction for the money going in, there’s no tax costs for the money going out, just like with the regular backdoor Roth IRA. The difference is instead of it being $6,000 a year, it might be $30,000 a year or even more. So, it can be a big way to put a whole bunch of money into a Roth IRA.
Dr. Jim Dahle:
But what your question really boils down to is should you be doing as much tax deferred investing as you can, or should you be doing as much tax-free investing as you can. Because you are not in the same situation as a typical resident, you are married to somebody making half a million dollars a year, right? So, you’re essentially living as an attending at this point. And earning as an attending, when you look at your household income.
Dr. Jim Dahle:
So, you want to make sure you guys are putting away at least 20% of your money for retirement, in addition to any other saving you’re doing. It’s also a good idea to be wiping out student loans at this point, right? Just because you’re still in residency doesn’t mean that you should be living a residency sort of financial paradigm. You’re an attending paradigm here and you need to be wiping out debt. So, if you have a bunch of student loans, that’s a great use for your money. Maxing out your retirement accounts, that’s a great use for your money.

Dr. Jim Dahle:
Does it really matter a whole bunch whether you’re doing it in Roth or whether you’re doing it in tax deferred? No, it doesn’t matter a whole bunch. At this point, this is relatively minor compared to how much money you’re putting toward building wealth.
Dr. Jim Dahle:
So, which would I do? Well, knowing your income’s going to go from $500,000 or $550,000 to $750,000 or $800,000, you’re probably going up a tax bracket at least one here in the next couple of years. And so, does it make sense now to be doing Roth like a typical resident would? Well, maybe not because you might still retire in a lower tax bracket than what you’re in right now.
Dr. Jim Dahle:
It really depends on you guys, how long you’re going to work for, what happens to tax brackets, how much of your income you save? If you’re going to end up with $15 million tax deferred accounts, then it probably makes a lot of sense right now for you guys to be doing tax-free contributions.
Dr. Jim Dahle:
On the other hand, if you’re thinking that you’re going to FIRE in 10 years out of residency, well, maybe it makes sense for you to be using tax deferred accounts then you’ll spend the whole rest of your life in lower tax bracket than what you’re in even now during residency.
Dr. Jim Dahle:
So, a lot of it comes down to your plans and how long you’re going to work for. The longer you’re going to work for, the more likely you are to be better off using a tax-free account at this point in your life. But I just don’t have enough information to really give you great advice. When you’re not sure, it’s always good to split the difference, but you may find that you can do 457s and you can do tax deferred contributions to the 403(b) or whatever it is, and you can still do mega backdoor Roth contributions in addition to that.
Dr. Jim Dahle:
I mean, you guys are making half a million dollars a year. You can probably put in a couple of hundred thousand dollars into savings without really impacting your lifestyle too much. So maybe you can do it all. That’s what I’d try to do if I was able to, but if I had to choose between tax-free and tax deferred at this point in life, it would really come down to what my long-term financial plans were. Certainly, both of them will be nice to have in retirement and there’s not really a wrong answer. At least not one that you can know at any point in the next 10 or 20 years.

Dr. Jim Dahle:
All right, let’s take our next question here.
Speaker 2:
I’m having a difficult time keeping all of that data in the same place in my head, in the same place in the spreadsheet. I had originally started spreadsheets using the Physician on FIRE’s templates, and those have been pretty helpful. But now when I sit down to look at it all again and make sure that I understand our asset allocation, I understand our percentages, I understand our expense ratios that I’m having a hard time pulling it together. Any help that you can give or any place you can direct me to figure out how you hold all of these decision-making capacities would be helpful. Thanks so much.

Dr. Jim Dahle:
I think we missed the first five seconds of your question there. I’m not sure if you started talking and then hit record or what happened, but I’ve got the gist of it. The gist is how do you keep all this organized in your head or on your spreadsheet or on paper. And you know what I recommend to people that are clearly motivated to do this themselves? I recommend Fire Your Financial Advisor. That’s our online course that helps you put together a written investment plan that you can follow.
Dr. Jim Dahle:
And what we teach during the investment portion of that course is that there’s four things you need to do, and you need to do them in order. And if you don’t, things get really confusing really fast.
Dr. Jim Dahle:
The first thing you need to do is set your goals, what you actually want to accomplish with your money. Make sure they’re realistic, achievable, specific. All the smart things that you do when you set goals. Write each of these down, how much are you going to have for retirement and how much you’re going to have for college for each kid. And when you’re going to buy the Tesla and whatever your financial goals are.
Dr. Jim Dahle:
Then the next thing you do is you decide what accounts are you going to invest in for each goal? And maybe for retirement, you’ve got a 401(k) and a 457 and a Roth IRA and a taxable account. Maybe for college, you got a 529. Maybe for the Tesla fund, you’re investing it all in taxable. But you’ve got the accounts lined up, right? And you’re putting all this on paper. Your goals are now on paper. The accounts you’re going to use for each goal are now on paper.

Dr. Jim Dahle:
And then you select your asset allocation for each goal. The mix of investments that you’re going to use to reach that goal. It might be US stocks and international stocks and US bonds, international bonds, small value stocks, REITs, TIPS, cryptocurrency, whatever you’re going to throw into your asset allocation for each of these goals. And you write them down as a percentage, the percentage of the portfolio that’s going into each of those asset classes.
Dr. Jim Dahle:
And then, and only then do you select the investments to meet that asset allocation. You’re going to put 20% of your money into real estate for instance. You then have to go out and figure out what real estate investments you’re going to use to do that 20%.
Dr. Jim Dahle:
And when people get confused, it’s usually because they’re skipping the step four -Picking the investments first rather than first starting with the goals, the accounts, the asset classes, and finally the investments themselves. But if you write all this down on paper, as you go along, I find it a lot easier to keep track of it. Then I don’t have to keep track of it in my head. I can keep track of it on paper. And you’ll find too that if you don’t make things too complicated, it’s even easier to keep track of it.
Dr. Jim Dahle:
As a general rule, I think there’s a lot of benefits to having three asset classes in your asset allocation. I think there’s some benefit in going even from three to seven or so. As you move beyond seven, you’re starting to wonder if the additional complexity is worth the potential additional return and diversification. And beyond 10 asset classes, you are just playing with your money. At this point, you’re introducing complexity that is not helping you. It is just using up your time. Maybe costing you some additional fees, probably costing you some additional taxes and it’s not really helping you.
Dr. Jim Dahle:
So, try to keep your number of asset classes to 10 or fewer. If you prefer simpler, lots of people have only three or four in their portfolios and that’s perfectly fine. Do you want to keep it ultra-simple? Do what Mike Piper does. He puts all of his money in the life strategy growth fund. I think it’s the growth fund is the one he’s chosen, but it’s all his money there. Now all his money is in retirement accounts. So, he doesn’t have to deal with the fact that it’s not a super tax efficient fund.
Dr. Jim Dahle:
But if you want to keep things simple, you could even do that in taxable. Just realize you’ll be given up a little bit in taxes to have such a simple portfolio. But if you do that, it sure makes everything else really, really easy. So, I hope that’s helpful to you.
Dr. Jim Dahle:
All right, let’s take our next question. This one’s going to be about a solo 401(k) and what to do with an allocation.
Bo:
Hello, Dr. Dahle. I recently started an employed position that doesn’t allow me to do locums on the side, which was a source of investments in my solo 401(k). On a personal level, I’m enjoying my work more with better life balance without the extra work. I would like to ask your advice regarding how this affects my REIT allocation as a percentage of my total assets.
Bo:
I would like to allocate 5% of my assets in REIT through index funds, such as Vanguard REIT index fund. I’m not interested in syndications at this point. From everything I’ve read, including from WCI, since REITs are not tax sufficient, I should avoid putting it in taxable account. My work 401(k) doesn’t offer REIT index funds. Even if I invest all $6,000 through my backdoor Roth IRA and my last employer contribution to my solo 401(k), it doesn’t come close to 5% of my total assets.
Bo:
Is it worth trying to get to 5% even if it means allocating to a taxable account and being tax inefficient? Or should I just accept that I won’t have 5% allocation in REIT. I really appreciate you and your dedication to helping physicians like me get a fair shake at Wall Street as I continue to devote to my vocation. I look forward to your thoughts on the matter. And thank you once again for all that you do.
Dr. Jim Dahle:
All right, Bo. Good question. You win. You win. Okay? When you were asking questions like this, you have won the physician financial literacy game. You now understand the tradeoffs you’re dealing with and you understand that you’re probably not going to have a perfect portfolio and you are now one of those docs like me that is dealing with less than ideal asset location.
Dr. Jim Dahle:
No big deal though. You’re doing fine. And the fact that you can even think to ask this question basically means you’re either already have one or soon will win the game. So, congratulations on that.
Dr. Jim Dahle:
What should you do? Well, the general rule is don’t let your tax tail wag your investment dog. And that’s what you’re talking about doing. If your plan calls for 5% in real estate, well, put 5% in real estate. Taxes be darned, even if you end up paying a little bit more in taxes.
Dr. Jim Dahle:
Now, should you max out that Roth IRA with all REITs? Sure. Should you take advantage of that entire solo 401(k)? Remember you don’t have to close it just because you’re not doing 1099 work anymore. You can still leave it open. You can put that all in REITs as well. And then the rest go in taxable. If you want 5% in REITs, that’s what it takes.
Dr. Jim Dahle:
Now, if you’re interested in doing something that’s maybe a little bit more tax efficient for real estate, you can look into a private real estate fund. You can look into syndications. You mentioned you don’t want to really get into the private world. And that’s fine. Just realize that there are some additional tax benefits of doing so. Yes, you may end up having to file in multiple states, but you can also, at least for equity real estate, cover some of that income with depreciation. So, it comes out tax-free.
Dr. Jim Dahle:
The return is bad in taxable as they used to be. At least for now, although I don’t necessarily like the way the Biden administration is talking about this, but at least for now, that investment counts for the 199A deduction. So, 20% of the income from your REITs are now a deduction. So, it’s a little more tax efficient than it used to be. But you’re right. It’s not an awesome asset class to have in taxable.
Dr. Jim Dahle:
But keep in mind when you’re doing asset location, it’s not this one must go in taxable and this one must go in tax protected, right? It’s a continuum. And ideally you want everything in tax protected. And it’s just a matter of ordering the assets in your investment asset allocation by tax efficiency and deciding which ones go first into taxable.
Dr. Jim Dahle:
Over the last five years since Katie and I started a taxable account and now ours is mostly taxable, we have slowly moved assets over from our tax protected account to our taxable account.
Dr. Jim Dahle:
The first three we moved over were total stock market fund. Super, super tax efficient, right? And a total international stock market fund, super tax efficient. And a municipal bond fund, super tax efficient. That’s great. So far so good, right? But then you’ve got all of those already in taxable and you need to move something else there. And so, you start looking at other things to move over there. Like we’ve moved our small international allocation over there, we’re now moving our small value asset allocation out to taxable. And we’ve already got most of our real estate out there already.
Dr. Jim Dahle:
So, these are the dilemmas you have. It means you’re winning the game. Don’t worry about it too much. Don’t let the tax tail wag the investment dog and congratulations on your success Bo.
Dr. Jim Dahle:
All right, let’s take the next question. This one is from Mike about self-directed IRAs. Again, wanting to talk about real estate.
Mike:
Hey Jim, it’s Mike in San Antonio. The other day, I was thinking about opening a self-directed IRA for the purpose of sheltering inefficient real estate debt fund investments. Then I was wondering how painful it might be using that custodian to do backdoor Roth conversions in that account every year going forward. I imagine it would be more inconvenient, maybe even associated with fees, just so easy right now with a few clicks on Vanguard and TurboTax to do it. I was wondering what it would look like via the SDI IRA every year. Let me know what you think. Thanks.

Dr. Jim Dahle:
All right, Mike from San Antonio, you win too. You’re asking the right questions. These are great. You’re absolutely right, that it may not be worth the hassle. Self-directed IRAs are not known for being super easy to do backdoor Roth through, but there are some that are used to doing it. They can certainly all do it. You don’t necessarily want to have a self-directed tax deferred IRA if you want to keep doing backdoor Ross though, remember.
Dr. Jim Dahle:
And the way most people get a sizeable self-directed IRA is by rolling a 401(k) out into a self-directed IRA. And oftentimes they don’t want to do a Roth conversion of that money when they do it because the tax cost is too high for them. And so, a lot of times you’re choosing between continuing to do backdoor Roth IRAs and keeping your real estate in taxable or moving a 401(k) out into a self-directed IRA and doing it in an IRA.
Dr. Jim Dahle:
There’s no right answer to that. Everyone has to figure it out for themselves and how important it is to have that particular asset class in their portfolio and what their individual tax account situation is.

Dr. Jim Dahle:
What should you do? It’s hard to say. If you’ve already got a big Roth IRA, that’s large enough to do investments in these funds which usually have $50,000 or $100,000 or $250,000 minimum. While no big deal you can just do it there. And you can gradually roll money in there and invested in the fund because most of these funds are evergreen. They’ll let you roll money in and take money out just like you would in a mutual fund.
Dr. Jim Dahle:
It’s not quite like most of the equity real estate funds where they buy properties for the first two or three years, and then they hold them for four or five years, and then they sell them over two or three years. That’s not the way most of the debt funds work. They’re more evergreen. And so, they’re easier to work with inside a self-directed IRA or a self-directed 401(k).
Dr. Jim Dahle:
That’s another option of course, if you have an individual 401(k), you can make that a self-directed individual 401(k) and you can do your debt fund investing in there as long as the funds are available at your custodian. For example, of the three funds I’m using right now, two of the three are available in my individual 401(k) through Fidelity. Or I guess it’s not an individual 401(k), it’s now the WCI 401(k), but they’re available at Fidelity. So that might be an option as well.
Dr. Jim Dahle:
So, can you do a backdoor Roth IRA at a self-directed IRA? Yes, you can. Is it going to be a little harder than doing it at Vanguard and Fidelity and Schwab? Probably. I love that you say it’s super easy there because right now I feel like I’m getting 5 or 10 questions a day from people who can’t figure out how to do a backdoor Roth IRA. So, I’m glad that you understand the process and we’re not having any trouble doing it each year. It’s not the way all doctors feel about the process. Let’s put it that way.
Dr. Jim Dahle:
All right, let’s take the next question.
John:
Dr. Dahle, my name is John and my wife is the white coat in the family in her first year of residency. I recently completed your online Fire Your Financial Advisor course, which I recommend to your listeners and have a few follow-up questions that you might be interested in answering on your podcast.

John:
The first one is I have a Roth 401(k) from my former employer. What are the decision-making factors on whether or not I should keep it where it is or roll over and do my existing Roth IRA?
John:
My second question is my employer offers a general employee stock purchase plan, where I get a 15% discount on purchasing the company stock as long as I do not sell it for one year after purchase. How should I or anyone in your audience evaluate this investing opportunity and decide how it fits into a financial plan? Thanks for helping out folks like me. I have implemented your teachings, and I think we are on a good path to financial freedom because of you. Have a great day.

Dr. Jim Dahle:
Some great questions. I hope you regular listeners out there listen to these questions and try to answer them yourselves. After a while, I’m hoping that for most of these questions you’ve got an answer for. These ones aren’t too bad, but they’re fairly common questions among White Coat Investors.
Dr. Jim Dahle:
The first one, what you should think about when you’re considering moving a Roth 401(k) out to a Roth IRA? Well, it’s a much easier decision than moving a tax deferred 401(k) out to a tax deferred traditional IRA. If you do that, it might hose you from doing backdoor Roth each year, which given that you’re married to a doc, you’re almost surely going to be doing soon.
Dr. Jim Dahle:
And so, I would caution you against rolling 401(k)s out at any point, if they are tax deferred. Usually, you want to roll them from one employer to the next employer or into your individual 401(k), or if the time is right in your life, maybe doing a Roth conversion of the entire thing.
Dr. Jim Dahle:
But it’s not as big of a deal to move money out of a Roth 401(k) into a Roth IRA. There are a few things you lose and a few things you gain by doing so. One thing you might lose, there might be some unique investments inside that 401(k) like the Federal TSP has its G fund, right? If there’s some really cool fund in your 401(k) that you really like that you can’t just buy anywhere. Well, maybe you want to keep some money in that 401(k).

Dr. Jim Dahle:
In 401(k)s you can also start withdrawing money from 55 instead of 59 and a half. So, if you’ve separated from the employer and the money is in a 401(k), there’s no 10% penalty at 55 whereas there would be if you had rolled it out to an IRA.
Dr. Jim Dahle:
Starting at age 72, a Roth 401(k) has required minimum distributions and a Roth IRA does not. So that’s one reason you generally don’t want any money in Roth 401(k) by the time you’re 72. You want to roll that over to a Roth IRA.
Dr. Jim Dahle:
And lastly, in many states a 401(k) as an ERISA plan gets better asset protection than an IRA does. So, keep that in mind. You actually may lose a little bit of asset protection by going from a 401(k) to an IRA. While IRA still generally get quite a bit of asset protection in most states, but it’s not as good most of the time as what you would get in a 401(k).
Dr. Jim Dahle:
So those are really the considerations. I would say most of the time, most people do roll money out of the 401(k) into an IRA. It gives them more investment options, usually lower investing expenses. And I guess if I had to come up with a recommendation of what you do most of the time, that’s what you’re going to do most of the time, but you may not want to do that in your situation.
Dr. Jim Dahle:
All right. The second question, if you’re allowed to buy your employer stock at a 15% discount, that’s enough of a discount that I would take it. I would take as much as they’d let you and I would sell it at the 366 days. I don’t want to stay undiversified any longer than I have to, but a 15% discount is enough to entice me to buy that.
Dr. Jim Dahle:
Again, you generally want to keep this to less than 5% of your portfolio, right? You don’t want to let the tax tail wag the investment dog, but that’s enough of a discount on the stock price that I do that. And maybe you get lucky. Maybe the company does really well and it gains a whole bunch of money over that year and you come out okay. But that’s enough that I would go ahead and take advantage of that program if I were you. It’s a nice benefit they’re offering.
Dr. Jim Dahle:
All right, let’s take our last question here. This one’s about some of the credits you get when you send your kids to college.

Matt:
Hey, Jim. My name is Matt. I’m calling in from Philadelphia. My question is specific for first year residents who paid tuition in 2020, and also are now employed in 2020. As far as the AOTC and LLC tax credits go, on my 1098-T form from 2019 I unknowingly selected a checkbox to include the first tuition payment of 2020s tuition on my 2019 1098-T.
Matt:
Specifically, this is box seven on that form. I reached out to my bursar office who told me that basically because of my selection of this check box, I will not be receiving a 1098-T for the year 2020.
Matt:
My question is having been a student in 2020 who paid tuition in 2020 but cannot receive this 1098-T, is there another way to access this tax credit or by clicking the checkbox did I unknowingly or unwillingly forego a four-digit tax credit? I know this sounds like a rare specific situation to me, but in talking to my colleagues from med school and residency program, a significant amount of us are in the same situation. Any help would be appreciated. Thanks for all that.
Dr. Jim Dahle:
You know, Matt? One of the best parts about this podcast is it isn’t live. So, when you ask your question, I can actually pause the podcast and go look up the answer because there’s no way I can answer this one off the cuff. But after pausing the podcast, I pulled up a form 1098-T. This is a form that the college fills out or the school of medicine or whatever it is fills out for you and sends to you. So, you didn’t check that box. They checked the box. What you did is you paid tuition for your last semester in 2019 instead of paying it after the first of the year, which is what you should have done if you wanted to take this credit the first year or the year you start internship. So, in your case 2020, it sounds like.
Dr. Jim Dahle:
So, the precaution I give to all of your peers, those who are a year behind you, or two years behind you is, don’t pay that tuition check until the first of the year, if you can, in any way, avoid doing so. And then of course they won’t be able to check box seven and you’ll get this on the next year’s form and be able to actually use that deduction.
Dr. Jim Dahle:
Now for someone whose tax situation is the same every year, it doesn’t really matter. In fact, they think the IRS thinks, and maybe the school thinks, if they don’t think it through, that they’re doing you a favor. They’re sending you this 1098-T and they’re even letting you pay for next year’s tuition on that and get a credit for that, the AOTC credit or the LLC credit or whatever it is that you’re qualifying for through this form.
Dr. Jim Dahle:
They think they’re doing you a favor, but in reality, they’re not because you’re not paying any taxes anyway, and this isn’t a refundable tax credit, I don’t believe. But you’re not paying any taxes anyway, that year that you’re in MS-3 and MS-4. It’s the year that you’re an MS-4 and an intern that you really want this credit and the way you do it is by making sure you pay for that last semester after the first of the year. I don’t think you did that. I don’t think you can get this credit. I’m very sorry about that.
Dr. Jim Dahle:
The good news is, well, you’re in an internship and you’re going to be a doctor and you’re going to make a lot of money and soon a four-figure tax credit won’t matter as much to you as it does in your financial situation this year. Thanks for what you do.
Dr. Jim Dahle:
This episode is brought to you by 37th Parallel Properties. There are a substantial body of evidence supporting commercial real estate investing. Through the years as I gained a deeper understanding of the asset class, I added more and more to my portfolio. But unless you want to manage it yourself, the real trick is to find a trusted investment sponsor. It’s one of the good guys in the industry. 37th Parallel Properties is a partner I trust. To check them out, go over to whitecoatinvestor.com/37parallel.
Dr. Jim Dahle:
Be sure to check out our courses. The ones that you ought to be thinking about right now that the deal is going away in the next week or so is our Continuing Financial Education 2021. It’s with a hundred dollars discount that you’re going to lose if you don’t buy it before the 30th.
Dr. Jim Dahle:
And of course, the Zero to Freedom Through Cash Flowing Rentals. For those interested in direct real estate investing – whitecoatinvestor.com/rental. Not only do you get $300 off if you sign up for that course on March 27th or 28th, but if you go through our links, we’ll send you a White Coat Investor Financial Bootcamp book that is signed by me, and we will give you WCI con Park City, which has some great, great lectures as well. So, you get all kinds of things if you buy that through our links.
Dr. Jim Dahle:
Thanks for those of you who have been leaving us a five-star review on the podcast. Here’s the most recent one. This one comes from Robin who says, “Awesome motivation. The WCI podcast is fantastic! I am an orthopedic surgeon finishing my training, and I’m useless as a supplement to the WCI blog and the Fire Your Financial Advisor course. Couldn’t be happier with the advice, discussions and insights”. Wow, I think you just endorsed everything we do. We appreciate that Robin.
Dr. Jim Dahle:
All right, for the rest of you, thanks for what you do. It’s not easy work but you can do it. Have a great day at work or have a great evening with your family, whatever you’re on your way to do. Keep your head up, your shoulders back. You’ve got this and we can help. See you next time.

Disclaimer:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney or financial advisor. So, this podcast is for your entertainment and information only and should not be considered official personalized financial advice.