Selling Your Practice to a Private Equity Firm – Podcast #184

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Selling Your Practice to a Private Equity Firm - Podcast #184


Podcast #184 Show Notes: Selling Your Practice to a Private Equity Firm

It is becoming more and more common for physician groups to be approached by a private equity firm that wants to buy the practice and make them “more efficient”. Of course, the older partners think that this is a good time to sell. The younger doctors thought they just joined a partnership and were looking forward to owning their business and having control. What do you do if you are the younger doctor? We discuss some ideas in this episode that will hopefully help if you find yourself in this situation.

We also answer a lot of other listener question about challenges facing families with children with special needs, small business retirement accounts, understanding a wash sale, reporting the backdoor Roth IRA with a loss, understanding dividend stock investing, the S&P 500 vs total stock market index fund, and what recommendations I have for medical students to do early in their career to prepare themselves for entering the workforce.

This podcast is sponsored by Bob Bhayani at drdisabilityquotes.com. He is an independent provider of disability insurance planning solutions to the medical community in every state and a long-time White Coat Investor sponsor. He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. If you need to review your disability insurance coverage to make sure it meets your needs or if you just haven’t gotten around to getting this critical insurance in place, contact Bob at drdisabilityquotes.com today by email [email protected] or by calling (973) 771-9100.

Quote of the Day

Our quote of the day today comes from Thomas J. Stanley, Millionaire Next Door fame, who said,

You can act rich or actually become rich. Few of us will ever be able to do both, and we certainly won’t get rich by acting the part before we have the financial resources with which to pay for la dolce vita.

I think that is a great quote and there is a lot of truth to that. It’s one or the other; you either become rich or you act rich. The nice thing about becoming rich is you can then act rich just fine, but if you act rich first, you’re probably never going to get there.

Physician Wellness and Financial Literacy 2021 Conference

Our next conference will be March 4th through 6th. We were really hoping to do this as a live, in-person conference. Unfortunately, given the stage of the pandemic, that is probably not wise. Instead, we are going to do a live but virtual conference. We are offering at least 14 credit hours of CME. There will be three tracks: a wellness track, a basic finance track, and an advanced finance track. Registration goes live Monday, November 16th so watch the blog for more information.

 

Selling Your Practice to a Private Equity Firm

A listener, who has just made full partner at his practice, asked about selling to a private equity firm. Their business is doing well, but there is concern about sustainability with aging partners and trouble recruiting new physicians. They have been approached by a private equity (PE) firm that wants to buy the practice and make them “more efficient” to streamline the process, but take control of the business. Of course, the older partners think that this is a good time to sell at a high point. This younger listener is concerned about giving up control and would maybe rather hedge their bets when they are doing so well currently. He has seen other groups in the area not be able to recruit and end up being bought out by the hospital. He is asking for advice or red flags to watch out for with private equity firms.

This is a more and more common situation all the time. PE firm wants to buy the practice, and the older doctors want to go for it. Of course, they want to cash out. The younger doctors are like, “Wait, I thought I joined a partnership. I want to own my business. I don’t want to lose this control”.

I had Sarah Catherine Gutierrez of Aptus Financial on the podcast for a few minutes. I asked her what advice she would give to this listener.

Yes, this is a tough one. And I actually have more questions probably than answers on this one. One of the biggest dangers, aside from any kind of financial impact it can have on a younger doc in there, is the work environment. With all the cost cutting measures, that can be a not very fun place to work.

So, we have actually seen, recently, a client come through here who was able to negotiate a nice ownership stake. So not a majority, not close to a majority, but enough where this physician is reaping the benefits of the profits from this buyout. So, if that’s a possibility, to negotiate a 15% or a 20% stake, at least you have some kind of benefit from it if you can’t talk the older physicians out of selling to a private equity firm.

If I were in this situation, someone was coming to me and saying, we’re going to give you a big lump sum of cash for your practice, I might take it. I’m far enough along in my career. I might take that money, but I’m not going to keep working for them afterward. I’m out, I’m done. I’ve really liked being an owner. I really like having that control over my practice. Even if it costs me something, I would probably still maintain ownership of the practice because I like being able to select who I work with, being able to hire and fire staff, being able to decide how the holidays, call, and money are split up. That is one of the best parts for me of being in my group.

I know the first few years out of residency, that didn’t matter to me that much. I was much more excited just to be working shifts, seeing cool diseases, and taking care of people. But by the time I was five years out, that was really important to me to have that control over my practice.

So, give that up at your own peril knowing that it will probably get more important to you as your career goes on. But I think a lot of doctors in these situations, they’re just out-voted. They don’t have a choice. You might as well get what you can out of it. If you’re happy, go ahead and stay. If you’re not happy, well, start looking around, see what other situations you can get into. Sarah Catherine added,

I think that if you have any control over which private equity firm, as well, that can make a difference. So, the larger ones, you’re really going to have very little power, even if you still retain some ownership. But some of these smaller private equity firms would probably see you more as a partner. And so, you could maybe influence a decision closer to that, to have a little bit more autonomy.

As you might expect this is a hot topic in the White Coat Investor Forum. Here are a couple of discussions that may help if you find yourself in this situation.

Negotiating Contract to Include Protections Against Private Equity Acquisition

Private Equity Employment

Sell to Private Equity

When to Sell Practice – Private Equity Offers

 

Reader and Listener Q&As

Children with Special Needs

A few weeks ago I did a podcast about financial planning for families with children with special needs. A listener who falls into that category wrote in to share more helpful information. The first thing was about ABLE accounts. I discuss these accounts on the podcast. They are like 529s but for living expenses for children with disabilities. It is a great way to save for these children. But this listener said,

One thing you didn’t mention, though, is that only the first $100,000 in an Achieving a Better Life Experience Act (ABLE) account is not counted as a resource when it comes to Supplemental Security Income (SSI). Once you get above this amount, the social security administration will suspend all SSI payments until the balance gets back below this level. So, despite the state maximums, which are typically about $300,000, you really don’t want to get above $100,000.

Another thing to note, state ABLE programs can differ pretty significantly when it comes to fees and investment options, which makes it extremely difficult to choose the best one. The program in one’s own state may not be best unless they happen to offer tax benefits, which actually isn’t too common.

He also mentioned a difference between ABLE accounts and special needs trusts. The advantage of ABLE accounts is that the funds can be used for food and shelter without affecting government benefits unlike the trust, where the benefits would be reduced or suspended if you use them to cover food and shelter. That is why having both an ABLE account and a special needs trust is essential for higher-income individuals who are able to fund both. You use the ABLE for food and shelter, use the trust for extras to improve the quality of life. For trusts, he said,

We have a revocable living trust within which our special needs trust is embedded. That way it’s only created when we pass away.

That is common among people that they know in the world. I think that is a great tip, to fund it at the end of life.

He also mentioned Medicaid. It came as a surprise to them that they were able to get their daughter onto Medicaid, or Medi-Cal in California, despite their high family income. In many states, you can apply for a waiver so that the state health agency will only consider the income of the child and not that of the parents.

My sense is that it’s easier to get approved for a waiver in some states than others. We were put on a five-plus year waiting list when we were living in Maryland, but got it immediately in California. So that likely varies by state, like most things Medicaid.

That makes Medicaid the second insurer, that will pick up the copays, a number of other things that your employer-based insurance doesn’t pick up.

Thank you to this listener for writing in and adding that information. Some of that stuff you just don’t learn until you’re in that situation. So, I appreciate those additions to that podcast.

Recommended Reading from the Blog:

Financial Planning for a Child with Special Needs

ABLE Accounts

SIMPLE IRAs

I’m an owner of a private practice with a partner and employees. We decided to do a Savings Incentive Match PLan for Employees (SIMPLE) IRA since a 401(k) was too expensive. Should I keep making the max contribution to it, $13,500 a year, since it’s a non-taxable account?

Yes. Obviously, tax-protected accounts are usually asset protected, as well, and they beat investing in a taxable account. If that is what you’re going to use for your practice, use it. He also asks,

Should I just contribute up to the 3% match and then do a traditional IRA in order to do a backdoor Roth IRA?

You can max out the SIMPLE because the downside of using it is you’re not going to be able to do a backdoor Roth IRA, probably for you or your spouse. Remember, SIMPLE IRAs, Simplified Employee Pension Plan (SEP) IRAs, traditional IRAs, rollover IRAs, all of these tax-deferred IRAs, they count on line six of your form 8606. This is the pro rata rule we’ve talked about with the backdoor Roth IRA.

So, if you’ve chosen to use a SIMPLE IRA for your practice, and this is pretty common in dental practices and small medical practices, to use a SIMPLE IRA. If you’ve chosen to do that, you’re not doing backdoor Roth IRAs anymore. That is just the way it is. It is one or the other.

If you decide you don’t want to offer a plan in your practice, then sure, do a backdoor Roth IRA, and probably invest mostly in a taxable account. But if you’re going to use the SIMPLE then you’re not doing a backdoor Roth IRA, so you might as well max out the SIMPLE. He asks about rolling over the balance of the SIMPLE IRA to a Roth IRA. I think it is two years from every contribution. So, if you’re making ongoing contributions to the SIMPLE IRA, you’re not going to roll it over to a Roth IRA periodically to allow you to do backdoor Roth IRAs. Just invest anything extra in a taxable account.

He asks whether they should reconsider a 401(k).  You need to do a study of your practice. Sometimes it makes sense to use a SIMPLE. Sometimes it makes sense to use a SEP IRA. Sometimes it makes sense to use a real 401(k). For us at the WCI, we are using a real 401(k) for our employees. They want to put a ton of money into it. But if you have a bunch of people that aren’t going to put much money into it, that means you’re not going to be able to put much money into your 401(k). All of a sudden, you’re paying several thousand dollars more in 401(k) fees every year and you’re really not getting all that much money into it.

That is why people choose a SIMPLE IRA. It is simple. It’s easy to put together. It doesn’t cost much.  The downside is you can’t do backdoor Roth IRAs and the maximum is relatively low. It’s less than the employee contribution to a 401(k) is. So, really, the decision you make first is what you’re going to use for your practice. Then you decide what you’re going to use personally. Once you have employees that are not you and your spouse, you can’t use a solo 401(k) anymore.

You’re probably investing mostly in a taxable account, and that is okay. You can invest very tax efficiently in a taxable account. It is not the end of the world. You’ll be just fine investing in a taxable account.

Backdoor Roth IRA and Wash Sales

A listener asked about selling $6000 of depreciated shares in a taxable account and buying it back in a Roth IRA. That would be a wash sale. They are very specific that you cannot just sell it in taxable and buy it in your IRA and expect to harvest that loss.

Now, is anyone going to know? That’s a totally different question. Especially if it’s not at the same custodian, they’re probably not going to know because your Roth IRA custodian does not report what you own in your Roth IRA to the IRS every year. But it’s specifically prohibited to do that. That is a wash sale.

They never really get into your 401(k), though. It is a little bit vague in the rules; no one really knows whether you can sell in taxable and buy in the 401(k). In my opinion, it violates the spirit of the law. If you can’t do it in an IRA, you shouldn’t be able to do it in a 401(k), but the jury is still a little bit out on that question.

But most of the time, this is not an issue. You can work around this without too much trouble. For example, just use a different fund in the Roth IRA than you use in taxable. Or just wait 30 days before you buy it, if you need to buy it in your Roth IRA. But most of the time you can work around this. No problem.

This listener talks about using the 500 index. Now, if you’re tax-loss harvesting and you own the 500 index in taxable, you might as well go to the better fund, the total stock market fund. You can swap from 500 index to total stock market fund. They are substantially different in the eyes of the IRS. So, you can tax loss harvest from one to the other.

Of course, they’re very highly correlated. So, you basically have the same investment, but not in the eyes of the IRS. Unless your brokerage is reporting it as a wash sale, the IRS is probably not going to do anything about it.

There are people who just get really worked up about wash sales, like it’s a big deal. What if you get a wash sale? Then the next time you sell those shares, because the market is probably still going down, you’re going to recapture that.

So, these are not that big of a deal. If you screw one up, that’s okay. I’ve screwed up tax-loss harvesting before. It’s not the end of the world. You’ll get enough losses eventually that you can get that $3,000 off your taxes every year.

Backdoor Roth IRA with a Loss

This year my wife and I anticipated that our income would exceed the Roth IRA contribution thresholds. We initially contributed $6,000 to each of our IRA accounts with Fidelity early in the year. I was concerned about the step doctrine. So, I invested the IRA contributions into our typical ETF securities. Then the volatility hit in March. With massive drops in value, I wasn’t sure when I can convert this year. I saw an opportunity in May where the value of the IRAs were above $6,000 each and decided this would be a good time to convert to the Roth. What I didn’t realize, unfortunately, is that the value of the securities on the day I requested the conversion is not the value of the reported distribution. Instead, it was the value a day later, which was actually below our initial contributions, respectively $5,970 and $5,985 for my wife and I. How do I report this conversion with a loss? Can this be accomplished in TurboTax?

Reporting a backdoor Roth IRA with a loss can be a bit of a mess. I would caution you not to do what he has done. Everyone is worried about the step doctrine. But the IRS and Congress have come out and said they don’t care. You don’t have to wait a certain period of time between the contribution step and the conversion step of your Roth IRA. So, you don’t have to invest it while it’s in the traditional IRA. It only has to be there overnight. Just leave it in a money market fund so you don’t end up with a loss in there and then put it into your Roth IRA and then invest it.

It is a little hard to walk through this verbally, but basically, you just work your way down form 8606 and answer the questions. What you’re going to find is when you get to line 10 it says that the result is 1.000 or more, just put 1.000. And from then on, in the form it really doesn’t matter about the loss. You don’t get any credit for it, but neither is it a huge hassle.

I suspect TurboTax can handle it. I haven’t been in this situation because I leave my money in the traditional IRA in a money market fund until I do the conversion. But I think TurboTax can handle it. You just tend to the numbers. The Finance Buff has a really great tutorial on the reporting of a backdoor Roth IRA in TurboTax.

Recommended Reading from the Blog:

Backdoor Roth IRA Ultimate Guide and Tutorial

100% Stock Portfolio

A listener asks if you are 15-25 years from retirement, isn’t it best to be in 100% stocks? He says,

That can be still diversified funds, maybe total stock market, total international stock market, maybe a small value tilt, but 100% in stocks. Is the only reason not to do this is if in a bear market you lose so much that it causes you to sell low? I know that’s a big risk, but if we would not sell for sure, is it better to stay 100% stocks? Is there any reason why it would be better to have any sort of bonds if theoretically you would never sell or go away from your written investment plan?

If you’re 15-25 years out from retirement, 100% stocks is not a crazy thing to do. Is the only reason to do that, to avoid selling low? No, that’s not the only reason. It’s probably the biggest reason though.

100% stocks is probably better, but there’s no guarantee of that. I think it’s really important to really understand the argument against a 100% stock portfolio before you decide on that. Here are six arguments against 100% stocks.

  1. If 100% is right for you, why not 130%? I mean, you can leverage up a portfolio. There’s no reason to stop just at 100% just because it’s a round number. Why would you decide that 100% is right for you and not 110% or 120% for instance? And so, I think you ought to probably think about that, as well.
  2. If you’re just looking for what’s best long-term without concern for diversification, why not 100% small value stocks? The long-term data suggests they outperform despite their lack of performance in the last 10 years or so. But you can carry out that same argument and use it for a 100% small value portfolio. Now, why don’t we ever own a 100% small value portfolio? For diversification reasons. You have to consider not only the possibility of you being wrong, but also the consequences of being wrong.
  3. Bonds might outperform stocks. I know it seems weird, but it can happen. And not just for short periods of time. Three times in the last 100 years, bonds have outperformed stocks for 10- to 15-year periods. You have to worry if you’re in one of those periods, you might start doubting your plan at year seven or eight and bailout and end up selling low. Changing your plan every few years is much, much worse than having a less aggressive plan to start with. In fact, there is a period of time in the United States when bonds outperformed stocks for a very long time. It began in 1793 and went to 1942. For 150 years bonds outperformed stocks. So, these periods do happen. Don’t assume just because interest rates are really low, that bonds generally underperform stocks that they must over your investment horizon. The nice thing about putting some of your money into bonds is, well, if it turns out that this is one of those unusual periods where bonds outperform stocks, you still have some money in the better performing asset class. Generally, when stocks go down hard, bonds come up, at least a little bit, and that helps moderate the ride. It makes it easier. Not only mathematically, but psychologically. Losing money is not a purely logical exercise; it’s also an emotional experience. If you have not had that emotional experience of losing a large quantity of money that you used to own, you really don’t know how you’re going to react in that situation.
  4. Consider that a lot of very experienced investors don’t use a 100% stock portfolio, and you might want to ask yourself, “What do they know that you don’t?” I’m always interested in talking to the 60- and 70-year olds who are multimillionaires, who are very financially successful, and seeing what they say. What do those older people say? Well, they say pay off your mortgage, put a few bonds into your portfolio. Buy insurance, those sorts of things. Because they have the world and life experience that they’ve seen bad things happen to their friends and family members and themselves. They know that things don’t always work out the way you expect them to. And so, it’s good to hedge your bets those ways.
  5. You shouldn’t take risks that you don’t have to take. Once you’ve won the game, stop playing the game. If you are a high-income professional, like a doctor, you can become a multimillionaire, have plenty of money to spend in retirement, never run out of money, leave millions to your kids or your favorite charities without having a 100% stock portfolio. 60%, 75%, 80% stock should be plenty if you have a 20% savings rate and a physician income. So, you’ve got to ask yourself if you’re going to take 100% stock risk, why are you taking risks that you don’t have to take to reach your financial goals? Remember investing is not about beating the market. It is not about beating John down the street. It is not about beating Dr. Sue in the doctor’s lounge. It is you against your financial goals. That is the only competition that matters. So, consider how much risk you need to take to reach your goals and then design your portfolio accordingly.
  6. We overestimate how much the future will resemble the past. We assume because stocks have outperformed bonds over everything that we know in the last few decades that they’re going to continue to do so going forward. We just don’t know that that’s true. There is a reason that mutual funds have to put in their prospectus that past performance does not indicate future performance, because it’s true. It really might be different in the future. I think it’s good to have different asset classes. Stocks and bonds are obviously two very different asset classes. They perform very differently in different economic environments, but both have a positive expected return. I think they’re both good to have in a portfolio in some amount.

But is 100% stock probably better over your investment horizon? Probably, but there’s no guarantee. I think you really need to understand the arguments against it before deciding on it.

Recommended Reading from the Blog:

7 Reasons Not to Use a 100% Stock Portfolio

Estimated Taxes

On your last podcast, you mentioned paying estimated taxes. For dual physician W-2 earners I can adjust my withholdings via the W-4 electronically at work any time. Instead of paying estimated taxes in the second half of the year, once I realized my earnings from all sources, I just increased my withholdings to get my taxes within the safe harbor. Is there any downside risk of doing this instead of paying estimated taxes?

No, that is fine to do if you could do it, but I can’t do it. W-2 income makes up too little of my income to be able to withhold enough money to pay my taxes. So, I have to make estimated tax payments. I think that is the case for many doctors out there. If you’re having to make large estimated tax payments every quarter, chances are you can’t use this trick.

But if you’re only making $20,000 or $30,000 in 1099 income a year, and you’re making $200,000 or $300,000 at your W-2 job, you can probably just increase your withholdings and get yourself into the safe harbor.

But the key is you have to get into the safe harbor, meaning you paid 110% of what you owed last year, or you paid 100% of what you owe this year, within a thousand dollars. By the time you add up all your estimated taxes paid and all of your withheld money from your paychecks, you just have to get into that safe harbor. Without actually doing your taxes and seeing what you really owe, it’s a little bit hard to estimate that sometimes.

So, what a lot of people like me do is look at last year’s taxes, we multiply by 110% divided by four. That’s what we send in for our estimated quarterly payments. That may result in a pretty significant overpayment, but it does keep you in the safe harbor. You can adjust that fourth one as well. If it looks like you’re making less money, you can adjust that fourth one and pay less tax on it so you don’t overpay it quite so much.

Now, if you have both W-2 and 1099 income, you have to look at about how much you’re having withheld from your W-2 and you can subtract that from what those quarterly estimated payments would need to be. If you can do that just by withholding more from your W-2’s, great go for it. But I don’t think there’s a lot of people that can do that.

Recommended Reading from the Blog:

Estimated Taxes and the Safe Harbor Rule

Defined Benefit Plans

I work at one of the traditional large academic state university hospitals. My main retirement account is a defined benefit plan in which I receive 14% and is actually a part of the state teacher’s retirement system. Luckily, my institution also offers pre-tax 403(b) and 457 accounts, which I max out along with my backdoor Roth IRA and other taxable brokerage accounts.

My financial plan states that I should have an 80 to 20 stock to bond ratio this early in my career, due to the ability to tolerate risk and volatility. My question is when it comes to asset allocation, how should I look at my defined benefit plan? Should I try to do research in the plan’s asset allocation, or simply invest as if it didn’t exist? Should I plan on being more aggressive with my other accounts?

I asked Sarah Catherine what she would tell this listener.

It’s a really great concept and it’s especially helpful if you are nearing or you can see the light of your work optional days. If you’re early in your career, you don’t know the actuarial assumptions are going to hold for a really long time. And earlier on in your career, you don’t know that you’re actually going to be there long enough to actually see the benefit of that program.

So, I would not touch an asset allocation in any different way if this is in early career, even with the large defined benefit as part of your retirement. As you get closer, however, and you can actually see what kind of income benefit, you can actually calculate the income benefit in your retirement assumption and be able to back into what your asset allocation is, considering that you’re not going to have to save as much because you have that defined benefit that’s going to be rolling through.

And so, for that reason, we can make a case that more towards your mid or later career that you could have potentially a more aggressive asset allocation, have a little bit more stocks than you would otherwise at that stage.

I couldn’t quite tell from his question whether it was a true pension or whether it was a defined benefit plan, but it sounds like a true pension to me. So, I agree you should ignore that for your asset allocation purposes and just use it to decrease how much income you need in retirement. But if it’s more of a cash balance plan, that’s eventually going to be rolled into a 401(k). You can usually figure out what the asset allocation in it is. And you could add that to your asset allocation overall, if you want.

I’m in that situation, but I don’t bother. I just ignore mine as far as my asset allocation goes, because it’s a relatively tiny amount of my overall investment assets. And plus, every few years we seem to roll it over into our 401(k)s for some IRS approved reason. And so, at that point I start counting it, but not before then.

But a lot of people ask about their pensions and about social security. “How does this go into my asset allocation?” And I agree with Sarah Catherine, just leave it out.

Dividend Stock Investing

I had a question about dividend stock investing. Is it best done in a Roth account so as to avoid, or rather not have to pay, taxes on all the dividends that get paid out to you? This is not a question of whether you believe in dividend stocks or not but rather where I should keep them, if I decide to go in that direction.

Should I do dividend stock investing in a Roth IRA or elsewhere? What would Sarah Catherine tell this person if they were her client? Not getting into the discussion on whether he should invest in dividend stocks.

We have done asset location with clients in the past, and I think that it is potentially a good strategy for people who are true optimizers. He sounds like a true optimizer here. This could be potentially great, but the risk of this is that you can get your portfolio really out of whack. That is what we found with folks who didn’t want to stay on top of it pretty routinely.

With a dividend fund like this, the issue with that in a Roth is it’s a little bit of a wasted opportunity because you would prefer to have your best or growing stocks in a Roth account, if you are going to optimize, so that it can be essentially in this tax exempt account. So preferably we would want something like that more in just a tax deferred account, like your 401(k) or 403(b), but there is probably a reason he didn’t say that. It is because it’s probably not in his menu of options in those accounts.

If he is following the White Coat Investor advice and following the tax efficient waterfall that we recommend and doing backdoor Roth, then that is probably the only other place between tax exempt and tax deferred to put it. So it’s fine, but we would probably put the more value oriented stocks, dividend stocks in tax deferred, and the more growth stocks into a Roth, if we had a perfect world.

I’m not even sure he’s talking about a fund. I think he might be talking about individual stocks, which Sarah Catherine is definitely not recommending.

I’m definitely not going to go there. We really believe that simple wins every time. So, if you want to ask what we believe, remember we are former stock analysts, every single one of us, that’s what we did for a living. We tried to pick the winners. And so, we uniquely have an outlook on this investing world. It’s not just a buzzword for us to do passive. We’ve lived in that world. We’ve been in the belly of the beast and we are here to tell you, the market simply is too efficient to beat and simpler is going to win. We think a simple allocation with simple passive funds with as simple a strategy to be able to maintain it as possible, is going to be a winning strategy for most people.

I have a lot to say about this question. First of all, if we’re talking about individual stock investing, I’m not a big fan of that because I think you’re taking on uncompensated risk. If you’re going to do it, which it doesn’t sound like we’re going to be able to talk him out of doing it, a Roth IRA is not a terrible place to do it in that there are no transaction costs. You can probably go to a brokerage where you get a hundred free trades or something. So, you’re not paying the trade fees. You do have the bid-ask spreads, of course. And there are no tax consequences, assuming you’re making money.

So, it’s not a terrible place if you’re going to try to pick stocks. I just don’t think you ought to be trying to pick stocks at all, whether they’re dividend stocks or growth stocks or anything else. Yes. A dividend stock that’s kicking out big dividends compared to Berkshire Hathaway is going to be less tax efficient. So that’s why you might try doing that inside a tax protected account of some kind, rather than your taxable account, if you insist on doing it, so I can see why you’d be motivated to do that.

But I think, and what I’ve found in my portfolio, especially as my taxable account grows, that tax protected space is becoming so precious to me now, because there are some asset classes I really don’t want to hold in taxable. Things like TIPS, where you have to worry about the Phantom income issue, real estate investment trusts, which are so tax inefficient because they have to pay out 90% of their profits each year in what basically qualifies only at ordinary income tax rates. Things like that, that are so tax inefficient.

When you look at everything on the spectrum, dividend stocks aren’t the least tax efficient thing around there. They’re fairly efficient because they’re stocks, even though they’re less efficient than a growth stock might be. So, I wouldn’t necessarily feel like it has to go in a Roth IRA for that reason. It really depends on what else you have in your portfolio.

If this is just play money for you, if it’s a little bit of money where you’re like, “I want to try picking stocks”, do it in taxable, don’t play with your serious money. Go take your $5,000 or $10,000 in taxable and pick stocks with it if you want to. And if you want to have a dividend focus on that, knock yourself out.

Recommended Reading from the Blog:

5 Reasons to Avoid Focusing on Dividend Stocks

S&P 500 vs Total Stock Market Index

A listener asked why I prefer the total stock market index to the S&P 500. There is not a lot of difference. If you look at the correlation between the 500 index fund and a total stock market index fund, it’s like 0.99. They’re almost the same fund. But if you have to choose between them, I prefer a total stock market index fund for a few reasons.

  1. It includes more stocks. 3,000 or 4,000 stocks instead of 500. So, it’s a broader index. It’s a broader representation of the U.S. stock market than the 500 index is.
  2. In some ways the 500 index is actively managed. A lot of people were surprised to find out this year that Tesla is not in the S&P 500 index. Despite being a very large company in the United States, it’s not in there. Maybe it’ll be added soon, but it’s not. There is a little bit of active management deciding which stocks go into that fund and which ones do not. There is a committee that decides that. It’s supposed to be representative of the overall U.S. market. It’s mostly large cap stocks, but it is not just the 500 largest stocks in the U.S.
  3. Some people front run the S&P 500. As stocks are added to it, they literally buy it before the index funds have to buy it. And so that produces a very minimal drag on returns while using an S&P 500 index fund.

So as a general rule, if you have the choice, use a total stock market index fund. That is aside from the point that it has more small and mid-cap stocks, which in the long run generally have higher returns. But it’s just a little bit more tax efficient. It doesn’t get front run. It’s more diversified. It’s a better fund. But how much better? Well, not very much. Like I said, the correlation is 0.99 between them.

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Recommendations for Medical Students

Aside from continuing to build my financial literacy, is there anything you would specifically recommend to medical students early in their careers to do, to prepare themselves for entering the workforce?

The first thing I tell medical students is try to minimize the debt. The less debt you come out with, the closer you are to a net worth of zero. And so, I think it’s important to live frugally. That applies whether you have debt or not, though. You’re not going to have much income, I’m sure, even if you’re getting by. So, live frugally. If you’re single, get some roommates. If you’re married, send your spouse to work, etc., and try to minimize that debt.

Second, if you have some money coming in, generally use that, if it’s not in a retirement account, use that to pay for medical school or for interviews or for your moving expenses to residency. The best investment you can make is really in you and your future earning ability.

If you have retirement accounts, I probably wouldn’t necessarily cash those out to pay for medical school. It wouldn’t be a crazy thing to do, but I probably wouldn’t. That’s asset protected money. It’s tax protected money. It’ll grow for a long time.

If you have tax deferred accounts, however, going into medical school, I would try to do Roth conversions of that money during medical school. If you’re careful in how much you do, you may be able to do that entire Roth conversion at zero tax cost to you.

These are probably the lowest income years you’ll ever have in your entire life. So, you can do basically free Roth conversions of any tax deferred money you had coming into medical school. You have four years to do it. At least three years, maybe that last year you have half a year’s salary as an intern. You could do some pretty serious Roth conversions. So definitely do that.

But the big decisions, the big financial decisions in medical school, aside from choosing to live frugally and maybe delaying when you take your loans out until you absolutely need them, are really specialty choice. So, I caution medical students to do two things with regards to their specialty choice.

First of all, choose something that you can do for a long time. Something you love. Something that’s going to give you career longevity, 20, 30, 40 years. You’re far better off being a public health and preventive medicine doc for 40 years than you are being an anesthesiologist for eight. You’ll pay less in taxes along the way because you make less. You’ll have more time for your money to compound. You’ll pay more into social security and get more benefit out of it. Everything works better with a longer career. So, pick something that you love. That’s really important.

But if there are two things you love, remember these other two facts. First of all, a couple of years out of residency, how much you make is going to matter much, much more than it matters to you as an MS3 or an MS4 choosing a specialty.

So, pay does matter; let it come into your calculation. It shouldn’t be the primary thing in your calculation, but it does matter. Don’t ignore it completely. I’m amazed when I do surveys of young attending physicians, 25% of them tell me they had no idea what the various specialties made in medicine. You’re training for a career here. It’s okay to know how much you’re going to get paid in that career and to make plans for it.

So, look at the specialty surveys, understand how the specialties earn compared to one another. Yes, things change a little bit over the years, but for the most part, the way they stack up now is about the same way they stacked up 20 years ago and 40 years ago. It’s probably not going to change in another 20 years.

Do keep in mind, however, that the interspecialty pay differences are often greater than the intraspecialty differences. What one pediatrician makes versus another pediatrician is often bigger than the interspecialty pay differences, what an orthopedist makes versus what a family doc makes. So, keep that in mind. There’s a really wide range of what people in any given specialty earn. And you can obviously affect that after your specialty training.

The other thing to keep in mind is that, 10 years out of training, you’re going to care a lot more about lifestyle and control over your practice, how much call you’re taking, how many weekends and nights you’re working and all that sort of stuff in control of your practice. That matters a lot more as you move toward mid-career, than you ever thought it would as a senior medical student. So, keep that in mind.

Also try to choose a cheaper residency. Obviously, the primary concern is to fit with the people in that residency and the quality of the training you’re getting. But all else being equal, pick a place that’s a little cheaper to live. Your money’s just going to go a lot further in Indianapolis than it is in the Bay area.

 

Ending

If you want to learn more about Sarah Catherine and her firm, get a second opinion on your portfolio or get started with a written financial plan, go to Aptus Financial. If you need some financial advice, that’s a great firm to check out.

 

Full Transcription

Transcription – WCI – 184

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 184 – Should we sell our practice to a private equity firm?
Dr. Jim Dahle:

This podcast is sponsored by Bob Bhayani at drdisabilityquotes.com. He is an independent provider of disability insurance planning solutions to the medical community in every state and a long-time White Coat Investor sponsor.
Dr. Jim Dahle:
He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. If you need to review your disability insurance coverage to make sure it meets your needs or if you just haven’t gotten around to getting this critical insurance in place, contact Bob at drdisabilityquotes.com today or by email at [email protected] or by calling (973) 771-9100.
Dr. Jim Dahle:
I just got a nice email about Bob from one of his clients. It had a lot of great things to say about him. They think he walks on water.
Dr. Jim Dahle:
Our quote of the day today comes from Thomas J. Stanley, Millionaire Next Door fame, who said, “You can get rich, you can act rich or actually become rich. Few of us will ever be able to do both, and we certainly won’t bet rich by acting the part before we have the financial resources with which to pay for la dolce vita”.
Dr. Jim Dahle:
Well, I think that’s a great quote and there’s a lot of truth to that. It’s one of the other, you either become rich or you act rich. The nice thing about becoming rich is you can then act rich just fine, but if you act rich first, you’re probably never going to get there.

Dr. Jim Dahle:
Thanks for what you do. Life is hard. It’s getting harder in most parts of the U.S. according to the news, including Utah here. In fact, I am getting all kinds of condolence emails from people across the country saying they’re really sorry about our terrible Covid situation here. Now, our Covid situation is the worst it’s been. I mean, when we came out of lockdown first to June, we were only having about a hundred cases a day in the state, and now we’re getting closer to 2,000 cases a day.
Dr. Jim Dahle:
So, it’s definitely worse. I’m actually seeing Covid patients at work this week. I worked five shifts last week, and I’ll bet I saw six positive cases. And so, it’s certainly here and certainly on our minds.
Dr. Jim Dahle:
But apparently what is triggering all these emails is the Salt Lake Tribune ran an article where they interviewed the head of the hospital association. Some people up at the university who are really raised an alarm about the situation in Utah. And then of course, that got picked up on the national newswires, like CNN.
Dr. Jim Dahle:
And so, they announced in this article here, a group of administrators representing Utah’s hospitals, presented the governor with a list of criteria they propose doctors should use if they’re forced to decide which patients can stay in overcrowded intensive care units.
Dr. Jim Dahle:
I think it’s great to have that plan in place. We had that plan in place months ago, though, this isn’t new. And so, it’s very interesting to see it really making the news and going around. I worry that it’s going to come across a little bit as crying wolf, right? I mean, when you actually see what’s going on, they’re saying some of our nurses are working overtime. Well, nurses are always working overtime because we’re always short nurses. Or they talk about capacities in the ICU, which are often near full capacity just because we’re always short nurses, just like everybody else in the country.
Dr. Jim Dahle:
So, I thought it was interesting, but I do worry a little bit that if our local health leaders keep crying wolf, that when things get really bad, nobody’s really going to believe us. All know things are bad when they start canceling the elective surgeries and transferring patients from their hospital over to ours. And I can assure you that isn’t happening yet.

Dr. Jim Dahle:
The problem is every time something like this goes in the news, people stop coming into the emergency department at all because they assume, we’re overwhelmed with Covid. And so, all of a sudden, we’re not seeing the strokes and the heart attacks that we really do need to be seen. Our volumes are still down from what they were before the coronavirus hit. And so, we’re certainly okay, seeing a few more patients in the emergency department around here, as far as I’m concerned.
Dr. Jim Dahle:
Obviously, this is a pandemic that is primarily affecting the intensivists and hospitalists. So those of you who are on the front lines there, thanks for what you do. It is very real in your units even if it’s not necessarily affecting everybody.
Dr. Jim Dahle:
I had a little bit of an interesting time. I decided to get myself tested the other day. When I went into my shift, I woke up with the cold I get about once a year and thought, “Well, what if this is coronavirus? I’ve seen a few positives this week”. And I got the nasal pharyngeal swab. And I thought they put that thing into my brain. It really was uncomfortable.
Dr. Jim Dahle:
So, I’ve got whole new bit of empathy for my patients that I’m ordering that test on, but it was something else. Luckily, it was negative. It’s just a nasty cold, but if I sound a little nasally today or a little short of breath, that is why. I do not have Covid. At least I didn’t three days ago when I was tested.
Dr. Jim Dahle:
All right, we got something cool coming up that I want you to know about. We have the Physician Wellness and Financial Literacy conference coming up. This is going to be March 4th through 6th. I announced those dates months ago. And we were really hoping to do this as a live in-person conference.
Dr. Jim Dahle:
Unfortunately, I think given the stage of the pandemic at that we are at that is probably not wise. And it’s not that we didn’t come up with ways that we thought we could make it safe. We actually looked into testing everybody on arrival for Covid, giving them a total refund if they showed up positive and passing out N95s and eye shields in the swag bags.
Dr. Jim Dahle:
We really had a plan to actually run this thing. But at the end of the day, we looked around the table and said, this isn’t going to be any fun. If we’re all standing around in masks and social distancing and wearing glasses and all that, it’s just not going to be fun.
Dr. Jim Dahle:
So, we want to do something that would still be fun, allow everyone to be perfectly safe and still get the message of wellness and financial literacy out there as best we can. So, we are going to do a live but virtual conference. And so, it’s going to be this awesome event. We have a new conference person that we hired this year that’s going to help run this.
Dr. Jim Dahle:
We’re going to offer at least 14 credit hours of CME. So, if you have CME funds to spend it’s been hard to go to conferences this year. So, I know a lot of you do. If you have CME funds to spend, you can spend them either for 2020 or 2021 on this conference.
Dr. Jim Dahle:
It’s going to be a great conference. There’s going to be three tracks. There’s going to be a wellness track. There’s going to be a basic finance track and an advanced finance track.
Dr. Jim Dahle:
So, the way it’s going to work is every day there’s going to be several live events, the keynotes, et cetera, that we’re actually going to fly into Salt Lake City. We’re going to sit in a little room with 15 or 20 people and record these events live just like they were at a real conference and take live questions from the audience, et cetera.
Dr. Jim Dahle:
And then each day we’re also going to release a number of lectures in each track. So, whatever you’re interested in that day, there will be three times as much material as you actually have time to watch. And so, that’s going to be really excited. Whatever you are interest in, whether your focus is primarily on wellness and burnout, that’s the stuff that gets all the CME credit, obviously.
Dr. Jim Dahle:
Or if your focus is more on getting started and getting your financial plan in place, or if you’re really looking for the advanced stuff and really want to learn from some experts in the field about niche topics, this is going to be your chance at this conference. And so that’s going to be a really exciting, and then we’re going to come back at the end of each day, we’ll have another keynote speaker live and doing, taking questions, et cetera. So, it’s going to be really awesome.

Dr. Jim Dahle:
Now, our conferences are also known for having the best swag bag of any conference you ever go to. And in this swag bag, we’re going to have several books. We’re going to have a t-shirt. But if you want to get the swag bag, you can’t sign up for this at the last minute because it’s virtual and because we can accommodate unlimited numbers of people, we’re going to let you sign up all the way until the day before the conference begins.
Dr. Jim Dahle:
But you’re not going to get the swag bag if you sign up after January 5th. So, you have to sign up by January 5th, or we’re not going to have time to put the swag bag together and ship it to you. So that’s your deadline if you want to sign up for the conference.
Dr. Jim Dahle:
However, we’re going to incentivize you to sign up even earlier. If you will sign up before the end of November, we’ll give you a discount on the conference. The regular price is going to be $899. You can sign up for that all the way until the day of the conference, but if you will sign up during November, you will get the conference for $779. That’s $120 discount. You get the swag bag. You get everything for doing that. You’ll also get access to all of the presentations you missed during the conference, as well.
Dr. Jim Dahle:
So, three tracks. There’ll be a live forum for those attending the conference that are going to be able to interact with other conference attendees. You’ll be able to interact with the speakers and ask them questions in this online forum.
Dr. Jim Dahle:
The signup goes live next week on Monday, the 16th of November. Right now, I’m recording this obviously a few weeks before then, we’re still lining up speakers. So, I don’t want to announce speakers until the 16th, but we’ll be announcing them on that day. And we’ll be lining them up between now and then. If you want to sign up, you can find that a whitecoatinvestor.com/conference, and you can start signing up on the 16th of November.
Dr. Jim Dahle:
All right, let’s get into my email box. We’re going to spend a lot of time in my email box today on this episode. First of all, I got some feedback about the episode we did a few weeks ago about special needs children. It starts out with a nice note.
Dr. Jim Dahle:
First of all, let me thank you for focusing the podcast on the particular challenges facing families with a special need’s child. My wife and I have a seven-year-old daughter with special needs, and I would have loved to known a lot of this information seven years back when she first entered this world, rather than having to learn at piecemeal the hard way.
Dr. Jim Dahle:
But I want to mention a few things your podcast didn’t go into that I think are important. First of all, about ABLE accounts, which I discussed on that podcast. Remember those are like 529s for living expenses for disabled kids. And he says, as you noted, these are indeed a great way to save for special needs child. They’re really the only way to protect assets when they’re under the child’s name.
Dr. Jim Dahle:
One thing you didn’t mention though, is that only the first a hundred thousand enabled account is not counted as a resource when it comes to SSI. Once you get above this amount, the social security administration will suspend all SSI payments until the balance gets back below this level. So, despite the state maximums, which are typically about $300,000, you really don’t want to get above $100,000.
Dr. Jim Dahle:
Another thing to note, state able programs can differ pretty significantly when it comes to fees and investment options, which may say extremely difficult to choose the best one. The program in one’s own state may not be best unless they happen offer tax benefits, which actually isn’t too common.
Dr. Jim Dahle:
And he also wanted to mention something about ABLE accounts and special needs trusts. The advantage of able accounts is that the funds can be used for food and shelter without affecting government benefits ISSI unlike the trust where the benefits would be reduced or suspended, if you use them to cover food and shelter.
Dr. Jim Dahle:
That’s why having both an ABLE account and a special needs trust is essential for higher income individuals who are able to fund both. You use the ABLE for food and shelter, use the trust for extras to improve the quality of life.
Dr. Jim Dahle:
We have a revocable living trust within which our special needs trust is embedded. That way it’s only created when he and his wife pass away. So that’s common among people that they know in the world. So, I think that’s a great tip there funded at the end of life.
Dr. Jim Dahle:
All right. He also mentioned for Medicaid. He says it came as a surprise to us that we were able to get our daughter onto Medicaid, or Medi-Cal in California, despite our high family income. In many states, you can apply for a waiver such at the state health agency will only consider the income of the child and not that of the parents.
Dr. Jim Dahle:
My sense is that it’s easier to get approved for a waiver in some states than others. We were put on a five-plus year waiting list when we were living in Maryland, but got it immediately in California. So that likely varies by state, like most things, Medicaid. And that makes Medicaid the second insurer that’ll pick up the copays, a number of other things that your employer-based insurance doesn’t pick up.
Dr. Jim Dahle:
So, thank you for writing in and adding that information. Some of that stuff you just don’t learn until you’re in that situation. So, I appreciate those additions to that podcast.
Dr. Jim Dahle:
All right. I got another email here. This one’s kind of funny the way it starts out. “Let’s see if you have an advice for me in this situation”. All right. Well, let’s see if I have some advice. “I’m an owner of a private practice with a partner in Baltimore. I’m 42 years old. I have five employees. My wife’s the office manager. We decided to do a simple IRA since a 401(k) was too expensive. Should I keep making the max contribution to it $13,500 a year since it’s a non-taxable account?”
Dr. Jim Dahle:
Well, sure. Obviously, tax protected accounts are usually asset protected as well, and they beat investing in a taxable account. So yeah, if that’s what you’re going to use for your practice, use it.
Dr. Jim Dahle:
“Should I just contribute up to the 3% match and then do a traditional IRA in order to do a backdoor Roth IRA?” No, you want to max this thing out. And the downside of using it Simple is you’re not going to be able to use a backdoor Roth IRA probably for you or your spouse. Remember, simple IRAs, SEP IRAs, traditional IRAs, rollover IRAs, all of these tax deferred IRAs, they count on line six of your form, 8606. This is the pro rata rule we’ve talked about with the backdoor Roth IRA.
Dr. Jim Dahle:
So, if you’ve chosen to use for your practice, and this is pretty common in dental practices and small medical practices to use a simple IRA. If you’ve chosen to do that, you’re not doing backdoor Roth IRAs anymore. And that’s just the way it is.
Dr. Jim Dahle:
So, it’s one of the other. If you decide you don’t want to offer a plan in your practice, then sure do a backdoor Roth IRA, and probably invest mostly in a taxable account. But if you’re going to use the simple that you’re not doing backdoor Roth IRA, so you might as well max out the simple.
Dr. Jim Dahle:
“I spend two years from our first contribution, kind of roll over the balance of the simple IRA to a Roth IRA now”. Yeah, but I think it’s two years from every contribution. So, if you’re making ongoing contributions to the simple IRA, you’re not going to roll it out to a Roth IRA periodically to allow you to do backdoor Roth IRAs. Just invest anything extra in a taxable account.
Dr. Jim Dahle:
“Four. Should I reconsider a 401(k)? Is it a possibility to do a solo 401(k)?” Well, yeah. I mean you to have your practice studies. Sometimes it makes sense to use a simple, sometimes it makes sense to use a SEP IRA. Sometimes it makes sense to use a real 401(k).
Dr. Jim Dahle:
That’s what we’ve chosen to use for the White Coat Investors, a real 401(k) for our employees. A lot of our contractors are becoming employees at the end of the year. And the reason why is because they all want to put a ton of money into it. So that’s great.
Dr. Jim Dahle:
But if you’ve got a bunch of people that aren’t going to put much money into it, that means you’re not going to be able to put much money into your 401(k). And all of a sudden, you’re paying several thousand dollars more in 401(k) fees every year and you’re really not getting all that much money into it.
Dr. Jim Dahle:
And that’s why people choose a simple IRA. It is simple. It’s easy to put together. It doesn’t cost much the downside. You can’t do backdoor Roth IRAs. And the maximum is relatively low. It’s less than the employee contribution to a 401(k) is. And so, it’s really the decision you make first is what you’re going to use for your practice. And then you decide what you’re going to use personally.
Dr. Jim Dahle:
No, once you have employees, you cannot use a solo 401(k). You either need a real 401(k), or you need to use something else, but you can’t use a solo 401(k) once you have employees that are not you and your spouse.
Dr. Jim Dahle:
Okay. And then he asked finally, “Is there another option for a pretax retirement contribution? I already max out an HSA account” Well, if you’re doing some 1099 work and you have other owners in that practice, you may be able to have an individual 401(k) for that 1099 work. But probably not. You’re probably investing mostly in a taxable account and that’s okay. You can invest very tax efficiently in a taxable account. It’s not the end of the world. Don’t let that situation make you run for a whole life insurance salesman. You’ll be just fine investing in a taxable account.
Dr. Jim Dahle:
All right, let’s take a question off the Speak Pipe. This is Kyle from the Upper Midwest.
Kyle:
Hi Jim, this is Kyle from the Upper Midwest. Thanks for the education you’ve provided helping me and others to achieve some financial literacy. I had a question about backdoor Roth and wash sales.
Kyle:
For the first time coming up in 2021, I’ll have the income level to require the backdoor Roth. I did do all it cost averaging into a Vanguard brokerage account instead of taking a total of $12,000 from the bank account to find the backdoor Roth IRA for myself and for my wife. I was thinking about selling $6,000 worth of the Vanguard 500 shares twice one for each Roth in order to fund them.
Kyle:
If I sold depreciated shares and then bought the same thing back in a Roth, would I be subject to wash sale, even though I am gone from taxable to tax protected? If so, would it make sense to just buy something like a total stock market fund or that also fall into the territory of substantially identical?
Kyle:
And if I did this maneuver, would this allowed me to tax lost harvest or that would not be possible, given that I’m already moving things to a tax advantage account? Thanks again.
Dr. Jim Dahle:
Okay. If you sell $6,000 of depreciated shares in taxable and you buy it back in a Roth, would that be a wash sale? Yes, it is. They are very specific that you cannot just sell it in taxable and buy it in your IRA and expect to harvest that loss.
Dr. Jim Dahle:
Now, is anybody going to know? That’s a totally different question, right? Especially if it’s not at the same custodian, they’re probably not going to know because your Roth IRA custodian does not report what you own in your Roth IRA to the IRS every year. But it’s specifically prohibited to do that. That is a wash sale.

Dr. Jim Dahle:
They never really get into your 401(k) though. And so, it’s a little bit vague in the rules, nobody really knows whether you can sell in taxable and buy the 401(k). In my opinion, it violates the spirit of the law. If you can’t do it in an IRA, you shouldn’t be able to do it in a 401(k), but the jury is still a little bit out on that question.
Dr. Jim Dahle:
But most of the time, this is not an issue. You can work around this without too much trouble. For example, just use a different fund in the Roth IRA then you use it in taxable. Or just wait 30 days before you buy it, if you need to buy it in your Roth IRA. But most of the time you can work around this. No problem.
Dr. Jim Dahle:
He also talks about using the 500 index. Now, if your tax loss harvesting and you own the 500 index and taxable, you might as well go to the better fund. The better fund is the total stock market fund. And you can swap from 500 index to total stock market fund. They are substantially different in the eyes of the IRS. So, you can tax loss harvest from one to the other.
Dr. Jim Dahle:
And of course, they’re very highly correlated. The correlation between the two is like 0.99. So, you basically have the same investment, but not in the eyes of the IRS. It’s a different CUSIP number, different investment, different index, different stocks. It’s fine. I have yet to hear of a reader, listener, blogger, anybody who’s really been audited on tax loss harvest issues with the IRS going those two funds are really similar. It just doesn’t happen. It doesn’t happen.
Dr. Jim Dahle:
So, unless your brokerage is reporting it as a wash sale, the IRS is probably not going to do anything about it. So, let’s be honest about what’s going on with wash sales. There are people who just get really worked up about them. Like it’s a big deal. So, what if you get a wash sale? Then the next time you sell those shares because the market is probably still going down, you’re going to recapture that.
Dr. Jim Dahle:
So, these are not that big of a deal. If you screw one up, that’s okay. I’ve screwed up tax loss harvesting before. It’s not the end of the world. You’ll get enough losses eventually that you can get that $3,000 off your taxes every year.
Dr. Jim Dahle:
Okay. Let’s get back into my email box. This one says, “I’m the husband of a doctor. I found your site, podcast and book. I have to do some research for my wife. I wanted to send you a thank you for all the amazing work you do for her and all the other physicians and others in the medical community. Thank you very much. However, I’m not the only one who’s a fan of your work in our family. We recently got a puppy and I started listening to your podcasts while sitting with her so I would have something to do Minutes after turn it in on she fell asleep”. I have that effect on a lot of listeners I bet.
Dr. Jim Dahle:
“She now happily listens to your podcast in her crate when we are busy and will immediately get upset when it stops. So, thanks for helping us navigate the exciting world of personal finance and for helping us not go crazy while raising a puppy”.
Dr. Jim Dahle:
Well, it turns out I’m huge among dogs, so that’s really going to help us monetize the podcast I’m sure. So, if you start seeing a bunch of ads for puppy chow, you’ll know why.
Dr. Jim Dahle:
All right, our next question comes from Brandon off the Speak Pipe. If you want to leave your Speak Pipe questions, go to whitecoatinvestor.com/speakpipe. You can record a question of up to a minute and a half. You don’t have to use the whole thing and we’ll answer them on the podcast.
Brandon:
Hi Jim. Thank you for all the quality advice you put on. It’s a tremendous value. The question is about reporting the backdoor Roth IRA with a loss. This year my wife and I anticipated that our income would exceed the Roth IRA contribution thresholds. Initially contributed $6,000 to each of our IRA accounts with Fidelity early in the year.
Brandon:
I was concerned about step doctrine them. So, I invested the IRA contributions into our typical ETF securities. Then the volatility hit in March. With massive drops in value I wasn’t sure when I can convert this year. I saw an opportunity in May where the value of the IRAs were above $6,000 each and decided this would be a good time to convert to the Roth.
Brandon:
What I didn’t realize, unfortunately, is that the value of the securities on the day I requested the conversion is not the value of the reported distribution. Instead, it was the value a day later, which was actually below our initial contributions, respectably $5,970 and $5,985 for my wife and I.

Brandon:
How do I report this conversion with a loss? Can this be accomplished in TurboTax? The irony here is that after a brief job loss and salary reduction, we didn’t need to contribute through the back door in the first place. Any help would be appreciated.
Dr. Jim Dahle:
Okay. This is a bit of a complicated question, right? Reporting a backdoor Roth IRA with a loss. This can be a bit of a mess. It’s not too bad. I would caution you not to do what Brandon has done. Everybody’s worried about the step doctrine.
Dr. Jim Dahle:
Well, the IRS and Congress have come out and said they don’t care. You don’t have to wait a certain period of time between the contribution step and the conversion step of your Roth IRA. So, you don’t have to invest it while it’s in the traditional IRA. It’s only got to be there overnight.
Dr. Jim Dahle:
Just leave it in a money market fund so you don’t end up with a loss in there and then put it into your Roth IRA and then invest it. Stop doing this people. It just gives you a headache and then you have to leave me Speak Pipe questions.
Dr. Jim Dahle:
So, it’s a little hard to walk through this verbally, but basically you just work your way down form 8606 and answer the questions. What you’re going to find when you get to line 10 whoever is that it says that the result is 1.000 or more, just put 1.000. And from then on, the form it really doesn’t matter about the loss. You don’t get any credit for it, but neither is it a huge hassle.
Dr. Jim Dahle:
I suspect TurboTax can handle it. I haven’t been in this situation because I leave my money in the traditional IRA in a money market fund until I do the conversion. But I think TurboTax can handle it. You just tend to the numbers. It requests like you normally do. The Finance Buff has a really great tutorial on the reporting of backdoor Roth IRA in TurboTax.
Dr. Jim Dahle:
If tax time comes around and you’re still having trouble with this, shoot me an email and I’ll try to help you some more, but this isn’t as big a deal as you think. The loss isn’t going to help you any, but it’s not going to hurt you either. So, it’s just not that big of a deal. But I’d recommend you avoid it in the future just by not doing that.

Dr. Jim Dahle:
Okay. Let’s take another one off Speak Pipe. This one’s anonymous.
Speaker:
Hi, Jim, I have a question for you. I’m wondering theoretically if you’re not within five years of retirement and say you have at least 15, 20 years till retirement or more 25 years. Theoretically, isn’t it best to be in a hundred percent stocks? And that can be still diversified funds, maybe total stock market, total international stock market, maybe a small value tilt, but a hundred percent in stocks.
Speaker:
Is the only reason not to do this is if in a bear market you lose so much that it causes you to sell low? I know that’s a big risk and we can’t tell ourselves as we’ll do that or not, but theoretically, if we would not sell for sure, is it better to stay a hundred percent stocks? Is there any reason why it would be better to have any sort of bonds if theoretically you would never sell or go away from your written investment plan? So, yeah, I was wondering your thoughts on that. Thanks.
Dr. Jim Dahle:
Okay. A hundred percent stock question, right? I just did a podcast or a blog post on this. I guess, by the time you hear this it’ll be a month old or so about a hundred percent stocks. If you’re 15 and 25 years out from retirement, a hundred percent stocks is not a crazy thing to do. Is the only reason to do that, to avoid selling low? No, that’s not the only reason. It’s probably the biggest reason though.
Dr. Jim Dahle:
A hundred percent stocks is probably better, but there’s no guarantee of that. And I think it’s really important to really understand the argument against a hundred percent stock portfolio before you decide on that.
Dr. Jim Dahle:
For example, the first argument is if a hundred percent is right for you, why not 130%? I mean, you can leverage up a portfolio. There’s no reason to stop just at a hundred percent just because it’s a round number. Why would you decide that 100% is right for you and not 110% or 120% for instance? And so, I think you ought to probably think about that as well.
Dr. Jim Dahle:
Next question. If you’re just looking for what’s done well done best long-term without concern for diversification, why not a hundred percent small value stocks, right? The long-term data suggests they outperform despite their lack of performance in the last 10 years or so. But you can carry out that same argument and use it for a hundred percent small value portfolio.
Dr. Jim Dahle:
Now, why don’t we ever own a hundred percent small value portfolio? For diversification reasons. You have to consider not only the possibility of you being wrong, but also the consequences of being wrong.
Dr. Jim Dahle:
Which brings us to my third point. Bonds might outperform stocks. I know it seems weird, but it can happen. And not just for short periods of time. Three times in the last a hundred years, bonds have outperformed stocks for 10- to 15-year periods, right? And you got to worry if you’re in one of those periods, you might start doubting your plan a year seven or eight and bail out and end up selling low.
Dr. Jim Dahle:
Changing your plan every few years is much, much worse than having a less aggressive plan to start with. In fact, there is a period of time in the United States when bonds outperformed stocks for a very long time. It began in 1793 and went to 1942. For 150 years bonds outperformed stocks. U.S. bonds have outperformed Japanese stocks for the last 30 years. That’s 30 or 40 years.
Dr. Jim Dahle:
So, these periods do happen. Don’t assume just because interest rates are really low, or the bonds generally underperform stocks that they must over your investment horizon. The nice thing about putting some of your money into bonds is, well, if it turns out that this is one of those unusual periods where bonds outperformed stocks, you still have some money in the better performing asset class.
Dr. Jim Dahle:
Okay. But the big reason as you mentioned is that it’s easier to stay the course, right? This decreases the volatility on your portfolio. Generally, when stocks go down hard, bonds come up at least a little bit, and that helps moderate the ride. It makes it easier. Not only mathematically, but psychologically.
Dr. Jim Dahle:
Losing money is not a purely logical exercise. When you are losing real money, that used to be yours, that money you didn’t use on a kitchen renovation, money you didn’t use to buy a Tesla, money you didn’t use to go to Paris, money you didn’t put toward your student loans, whatever. That is not an entirely logical experience, it’s also an emotional experience.

Dr. Jim Dahle:
And if you have not had that emotional experience of losing a large quantity of money that you used to own, you really don’t know how you’re going to react in that situation.
Dr. Jim Dahle:
So, until you’ve gone through a bear market or two, I would caution you against using a hundred percent stock portfolio. Just throw a few bonds in there. That allows you to say, “Well, at least not all my money is going down in value”. And I think it makes it much easier to stay the course behaviorally.
Dr. Jim Dahle:
Okay, next point. Consider that a lot of very experienced investors don’t use a hundred percent stock portfolio, and you might want to ask yourself, “What they know that you don’t?”
Dr. Jim Dahle:
I’m always interested in talking to the 60- and 70-year old’s who are multimillionaires, who are very financially successful and seeing what they say. What do those older people say? Well, they say pay off your mortgage, put a few bonds into your portfolio. Buy insurance, those sorts of things. Because they have the world and life experience that they’ve seen bad things happen to their friends and family members and themselves. And they know that things don’t always work out the way you expect them to. And so, it’s good to hedge your bets those ways.
Dr. Jim Dahle:
Point number six. As a general rule, you shouldn’t take risks that you don’t have to take. Once you’ve won the game, stop playing the game. And if you are a high-income professional, like a doctor, you can become a multimillionaire, have plenty of money to spend in retirement, never run out of money, leave millions to your kids or your favorite charities without having a hundred percent stock portfolio. 60%, 75%, 80% stock should be plenty if you have a 20% savings rate and a physician income.
Dr. Jim Dahle:
So, you’ve got to ask yourself if you’re going to take a hundred percent stock risk, why are you taking risks that you don’t have to take to reach your financial goals? Remember investing is not about beating the market. It is not about beating John down the street. It is not about beating Dr. Sue in the doctor’s lounge. It is you against your financial goals. That is the only competition that matters. So, consider how much risk you need to take to reach your goals and then design the portfolio accordingly.

Dr. Jim Dahle:
The final reason is we overestimate how much the future will resemble the past. We assume because stocks have outperformed bonds over everything that we know in the last few decades that they’re going to continue to do so going forward. And we just don’t know that that’s true.
Dr. Jim Dahle:
There’s a reason that mutual funds have to put in their prospectus. That past performance does not indicate future performance because it’s true. It really might be different in the future. And so, I think it’s good to have different asset classes. Stocks and bonds are obviously two very different asset classes. They perform very differently in different economic environments, but both have a positive expected return. And so, I think they’re both good to have in a portfolio in some amount.
Dr. Jim Dahle:
But is a hundred percent stock probably better over your investment horizon? Probably, but there’s no guarantee. And I think you really need to understand the arguments against it before deciding on it.
Dr. Jim Dahle:
Okay, here’s another one out of my email box. “On your last podcast, you mentioned paying estimated taxes. For dual physician W-2 earners I can adjust my withholdings via the W-4 electronically at work any time. Instead of paying estimated taxes in the second half of the year, once I realized my earnings from all sources, I just increased with withholdings to get my taxes within the safe harbor. Is there any downside risk or gotchas and doing this instead of paying estimated taxes?”
Dr. Jim Dahle:
No, that’s all fine to do if you could do it, but I can’t do it. W-2 income makes up too little of my income for me be able to withhold enough money to pay my taxes. So, I have to make estimated tax payments. And I think that’s the case for many doctors out there. If you’re having to make large estimated tax payments every quarter, chances are you can’t use this trick.
Dr. Jim Dahle:
But if you’re only making $20,000 or $30,000 in 1099 income a year, and you’re making $200,000 or $300,000 at your W-2 job, you can probably just increase your withholdings and get yourself into the safe harbor.
Dr. Jim Dahle:
But the key is you have to get into the safe harbor, meaning you paid 110% of what you owed last year, or you paid 100% of what you owe this year, within a thousand dollars. By the time you add up all your estimated taxes paid and all of your withheld money from your paychecks. You just got to get into that safe harbor. And without actually doing your taxes and see what you really owe, it’s a little bit hard to estimate that sometimes.
Dr. Jim Dahle:
So, what a lot of people do like me is we just look at last years, we multiply about 110% divided by four. That’s what we send in for our estimated quarterly payments. That may result with your income’s not rising in a pretty significant overpayment, but it does keep you in the safe harbor. You can adjust that fourth one as well. If it looks like you’re making less money, you can adjust that fourth one and pay less tax on it so you’re not quite overpay it so much.
Dr. Jim Dahle:
Now, if you have both W-2 and 1099 income, you got to kind of look at about how much you’re having withheld from your W-2 and you can subtract that from what those quarterly estimated payments would need to be. But that’s kind of the lay of the land as far as estimated payments go. If you can do that just by withholding more from your W-2’s, great go for it. But I don’t think there’s a lot of people that can do that.
Dr. Jim Dahle:
All right, we’ve got a special guest coming on the podcast. Let’s bring her on now. Okay, we wanted to take a minute to bring out a special guest and do a short segment with her.
Dr. Jim Dahle:
Our guest today is Sarah Catherine Gutierrez with Aptus Financial. Aptus is perhaps the premier assisting firm for those who want to shift to do it yourself financial planning, but don’t feel like they’re quite ready to do so.
Dr. Jim Dahle:
They basically built a service that supports people on varying points of the DIY continuum. They actually believe that most people can DIY their finances. Which not only lowers fees, but also gives a greater sense of control and perhaps even leads to better decisions and outcomes.
Dr. Jim Dahle:
They start with a comprehensive guided planning process for most clients, or just do a more limited review if you’re experienced and more confident and just want to validate your plan. The cool thing about them is rather than have the usual number of clients that a financial planning firm has, which is perhaps 50 clients. They’ve done hundreds of financial plans for physicians. And so, they’re pretty well versed in their unique planning needs such as student loan repayment, cashflow prioritization, risk management, et cetera.
Dr. Jim Dahle:
And once you have a solid plan in place, they teach their clients to invest on their own or offer the option to invest for them if they feel ready to take it on themselves, and they just provide ongoing support and guidance in that situation.
Dr. Jim Dahle:
They have mostly flat fee pricing to help eliminate conflicts of interest and foster transparent objective advice. Sarah Catherine has also been a speaker at WCI con Park City and WCI con Las Vegas. She’s the author of a new book she has out called “But First, Save 10%”. And I’m excited to have her on the show here with us. Welcome to the show.
Sarah Catherine Gutierrez:
Hey dr. Dahle. It’s such an honor to be on it.
Dr. Jim Dahle:
Briefly, let’s just talk a little bit about you and your firm. Why did you decide to be a financial advisor?
Sarah Catherine Gutierrez:
I did not set out to be one. I thought I was going to be a stock analyst. That’s what I was aspiring to be and that’s what I started my career in. And in fact, in college I had interned for a stock analyst and thought that world of stock picking was pretty exciting.
Sarah Catherine Gutierrez:
But as anyone can probably guess the story of becoming a financial planner began when I started my career as a stock analyst in 2007. So, if you can imagine trying to pick stocks starting in 2007, going into 2008-2009, you can imagine what kind of wakeup call that was.
Sarah Catherine Gutierrez:
And I just believe it was good divine intervention because in 2008-2009, I was faced with this idea of how did all these people buy houses they couldn’t afford. And really that was the question, that was what sparked an interest in becoming a financial planner. I’ve spoken about it in the conference I’ve spoken about on your podcast in the past.
Sarah Catherine Gutierrez:
If you look at how people get advice, for the most part, people are still getting financial advice from a sale. That’s what can lead people to buying houses they can’t afford in mass. That’s how we still see doctors buying whole life policies and annuities that are just mostly inappropriate for them. And so, that’s what led to me becoming a financial planner.
Sarah Catherine Gutierrez:
But more importantly, I didn’t want to just become a financial planner doing things the way they had been done in the past. I wanted a financial planner who could give financial planning in a way that had no conflicts of interest.
Sarah Catherine Gutierrez:
And then interestingly enough, being a stock analyst, seeing that the efficient markets hypothesis probably is pretty true. It really is hard to beat the market. And at the same time, seeing the technological advancements and the mainstreaming of these passive mutual funds, I realized that I could actually be a financial planner, not have to sell products, not have to manage money, and instead just enable people to do it themselves, teach them how to do it.
Dr. Jim Dahle:
Okay. So, tell us about the fee structure for Aptus Financial. How is it work?
Sarah Catherine Gutierrez:
We have just flat fees based on our time planning. So, we charge $250 an hour. My partner, Tim Quillin, who’s our CFO, when he came early on into the firm, what he realized is having an hourly model is fine, but what’s better is if you can actually have a standard financial planning process, and that’s what you had referred to earlier.
Sarah Catherine Gutierrez:
So, we have a financial planning process that is the bulk of what we do. It costs $3,000 to run a financial plan. And then it’s $125 a month for us to help people implement the plan and then have an annual review. And during that process, we teach people that they open up their own accounts, we teach them to do their own management. That is the bulk of what we do.
Sarah Catherine Gutierrez:
Now when people have a little bit more complication like their pre-retirement, or they own their own business, we have the flexibility to be able to expand that, to be able to do more work for them. And then, like you said before too, people who have taken the Fire Your Financial Advisor course, and they really have run their own financial plan, they don’t need us to run another financial plan for them.

Sarah Catherine Gutierrez:
So, we do have the opportunity for people to bring in their financial plan. We look it over. We see if there are any holes in anything they’ve missed. And I think that’s a nice little insurance policy for them that they haven’t overlooked anything.
Dr. Jim Dahle:
You also offer them the option for you to help them manage their investments as well.
Sarah Catherine Gutierrez:
Yes. This is a new offering and I’m really proud of it because what we have learned over the years is that some people just don’t want to DIY. They don’t want to manage their money. So, if they’ve got a couple million in assets, they’re about to fire their advisor, they don’t want those $2 million dumped into an account that they’re responsible for yet.
Sarah Catherine Gutierrez:
So, what I’m proud about in our managed offering, is it again, we price it hourly fee. It’s a little bit higher because we do more work, but more importantly, we can actually help people. We can demystify the investing process and we want people to move from us managing it, to not managing it. So, we do have a fiduciary 10 basis 0.1% AUM fee.
Sarah Catherine Gutierrez:
But importantly, we want to have no conflicts of interest in our managed offering. So that feed does not go to the advisor. Instead, the advisor is only paid on the flat fee because we want them incentivized to continuously encourage the client to move from managed to offering to a DIY.
Dr. Jim Dahle:
It goes to the firm rather than the individual advisor then.
Sarah Catherine Gutierrez:
That’s right. That’s right.
Dr. Jim Dahle:
And I think you’ve probably already explained what’s unique about your firm, but is there anything else you want to add about that?
Sarah Catherine Gutierrez:
Oh my gosh. I’ll tell you. It is the people. I mean, it is the people who work at Aptus, the financial planners themselves. If you look at Matt Duncan, he is a CFA, a chartered financial analyst. That is one of the toughest certifications out there. So, I have a CFP, which is pretty hard, but a CFA, I mean, it’s just a totally different category. Two decades as a stock analyst. I still can listen to him explain to people an investment policy and seeing the care and concern he has for the client to not just say, “Okay, here’s our strategy”, but really wanting them to understand it at an elemental level. I just could not be prouder of having someone with that kind of passion for education. That’s a planner.
Sarah Catherine Gutierrez:
Or Denise Chai, 20 years as a stock analyst for Bank of America in Hong Kong, Singapore, and the U.S. She retired early in her late 40s. Lives the mission of so many people who are coming in to Aptus through White Coat Investor, who wants to set these audacious huge financial goals, and then be shepherded by somebody who has lived them successfully.
Sarah Catherine Gutierrez:
She had retired, she was running a reading program for prisoners reading to their children and basically saw the passion and saw the dedication to doing something completely different that can have a positive change in the financial industry at Aptus. And we’re just incredibly lucky that she came on. So, I think about Tim and Matt and Denise and what we’re trying to accomplish at Aptus. And I think that is actually what makes us more unique than even any pricing.
Dr. Jim Dahle:
Cool. Thanks for sharing that. Will you stick around and answer a few questions from listeners with me?
Sarah Catherine Gutierrez:
I would love to, yes.
Dr. Jim Dahle:
Awesome. Let’s take one off the Speak Pipe from Phil.
Phil:
Hi dr. Dahle. Thanks for all that you do. My entire financial literacy is thanks to you and your podcast and your blog. I really appreciate it. My question involves defined benefit plans, which is something I haven’t heard you talk much about. So, I was wondering if you could give me your thoughts.
Phil:
My situation is that I’m early in my career. In my mid-thirties. I work at one of the traditional large academic state university hospitals. While no one can know for certain, I’ve developed a niche in emergency medicine and hope to stay on this faculty for the next 20 to 30 years.

Phil:
My main retirement account is a defined benefit plan in which I received 14% and is actually a part of the state teacher’s retirement system. Luckily, my institution also offers a pre-tax 403(b) and 457 accounts, which I max out along with my backdoor Roth and other taxable brokerage accounts.
Phil:
My financial plans state that I should have an 80 to 20 stock to bond ratio this early in my career, due to the ability to tolerate risk and volatility. My question is when it comes to asset allocation, how should I look at my defined benefit plan? Should I try to do research in the plan’s asset allocation, or simply invest as if it didn’t exist? Should I plan on being more aggressive with my other accounts? Any help you could provide would be very much appreciated. Thank you again.
Dr. Jim Dahle:
All right. So, Phil is trying to figure out how to look at his defined benefit plan for asset allocation purposes. What would you tell him?
Sarah Catherine Gutierrez:
It’s a really great concept and it’s especially helpful if you are nearing or you can see the light of your work optional days. If you’re early in your career we have had actually quite a bit of defined benefit come through the office, but here’s the thing. You don’t know the actuarial assumptions are going to hold for a really long time. And earlier on in your career, you don’t know that you’re actually going to be there long enough to actually see the benefit of that program.
Sarah Catherine Gutierrez:
So, I would not touch an asset allocation in any different way if this is an early career, even with the large defined benefit as part of your retirement. As you get closer, however, and you can actually see what kind of income benefit, you can actually calculate the income benefit in your retirement assumption and be able to back into what your asset allocation is considering that you’re not going to have to save as much because you have that defined benefit that’s going to be rolling through.
Sarah Catherine Gutierrez:
And so, for that reason, we can make a case that is more towards your mid or later career that you could have potentially a more aggressive asset allocation, have a little bit more stocks than you would otherwise at that stage.
Dr. Jim Dahle:
Yeah. I couldn’t quite tell from his question, whether it was a true pension or whether it was a defined benefit plan, but it sounds like a true pension to me. So, I agree you should ignore that for your asset allocation purposes and just use it to decrease how much income you need in retirement.
Dr. Jim Dahle:
But if it’s more of a cash balance plan, that’s eventually going to be rolled into a 401(k). You can usually figure out what the asset allocation in it is. And you could add that to your asset allocation overall, if you want.
Dr. Jim Dahle:
I’m in that situation, but I don’t bother. I just ignore mine as far as my asset allocation goes, because it’s a relatively tiny amount of my overall investment assets. And plus, every few years we seem to roll it over into our 401(k)s for some IRS approved reason. And so, at that point I started counting it, but not before then.
Dr. Jim Dahle:
But a lot of people ask about their pensions and about social security. “How does this go into my asset allocation?” And I agree with you just leave it out.
Dr. Jim Dahle:
All right. Let’s take one from Andy in the Midwest off the Speak Pipe.
Andy:
Thanks for all that you do. This is Andy in the Midwest and I’m in a 10-person specialty group. I’ve been practicing for seven years and now I’m a full partner. Business has been doing well, but there’s some concern about sustainability with some aging partners and trouble recruiting new physicians.
Andy:
We’ve been approached by a private equity firm that wants to buy our practice and make us “more efficient” to streamline the process, but take control of our businesses. My older partners think that this is a good time to sell at a high point and get guaranteed in the future. While I kind of look at it as giving up control and maybe hedging our bets when we’re doing so well currently.
Andy:
We’ve seen other groups in the area get smaller, not able to recruit and ended up being bought out by a hospital. I just am not sure how to go forward. I’ve never been in this situation. I didn’t know if you have any advice about private equity firms or red flags to watch out for, but any advice would be appreciated. Thanks.

Dr. Jim Dahle:
Okay. This is a more and more common situation all the time. PE firm comes in and they want to buy the practice and the older docs want to go for it. Of course, they want to cash out. And the younger docs are like, “Wait, I thought I joined a partnership. I want to own my business. I don’t want to lose this control”. What do you tell Andy?
Sarah Catherine Gutierrez:
Yes, this is a tough one. And I actually have more questions probably than answers on this one. Denise in our firm has seen, she was a retail analyst. So, she’s seen quite a bit of the impact of private equity on businesses. And one of the biggest dangers aside from any kind of financial impact it can have on a younger doc in there is the work environment. With all the cost cutting measures, that can be a not very fun place to work.
Sarah Catherine Gutierrez:
So, we have actually seen recently a client come through here who was able to negotiate a nice ownership stake. So not a majority, not close to a majority, but enough where this physician is reaping the benefits of the profits from this buyout. So, if that’s a possibility to negotiate a 15% or a 20% stake, at least you have some kind of benefit from it if you can’t talk the older physicians out of selling to a private equity firm.
Dr. Jim Dahle:
Yeah. I mean, I just think what would happen if I were in this situation. If somebody was coming to me and saying, we’re going to give you a big lump sum of cash for your practice, I might take it. I’m far enough along in my career. I might take that money, but I’m not going to keep working for them afterward. I’m out, I’m done. Because I’ve really like being an owner. I really like having that control over my practice.
Dr. Jim Dahle:
And even if it costs me something, I would probably still maintain ownership of the practice because I like being able to select who I work with, being able to hire and fire staff, being able to decide how the holidays are split up and the call split up and the money is split up. That’s one of the best parts for me of being in my group.
Dr. Jim Dahle:
And I know the first few years out of residency, that didn’t matter to me that much. I was much more excited just to be working shifts and seeing cool diseases and taking care of people. But by the time I was five years out, that was really important to me to have that control over my practice.

Dr. Jim Dahle:
So, give that up at your own peril knowing that it will probably get more important to you as your career goes on. But I think a lot of docs in these situations, they’re just out-voted. They don’t have a choice. Say might as well get what you can out of it. And then if you stay there, if you’re happy, go ahead and stay. If you’re not happy, well start looking around, see what other situations you can get into.
Sarah Catherine Gutierrez:
I might add one more thing too. I think that if you have any control over which private equity firm as well, that can make a difference. So, the larger ones, you’re really going to have very little power, even if you still retain some ownership. But some of these smaller private equity firms would probably see you more as a partner. And so, you could probably maybe influence a decision closer to that to have a little bit more autonomy.
Dr. Jim Dahle:
Yeah. All right. Let’s take our last one here from David off the Speak Pipe. And this sounds like a simple question, but I think there’s a lot that goes into this question. So, let’s take a listen.
David:
Hi, Dr. Dahle. My name is David. I had a question about dividend stock investing. Is it best done in a Roth account as to avoid, or rather not have to pay taxes and all the dividends that get paid out to you? This is not a question of whether you believe in dividend stocks or not but rather where I should keep them, if I decide to go in that direction. Thank you.
Dr. Jim Dahle:
All right. Sounds very simple. Should I do dividend stock investing in a Roth IRA or elsewhere? What do you tell this person if you were a client?
Sarah Catherine Gutierrez:
Asset location. Okay. So, first of all we’re not getting into a discussion on whether we want to pick dividend stock funds.
Dr. Jim Dahle:
Or maybe we should, right? He doesn’t want to talk about it, but that doesn’t mean we can’t talk about it.
Sarah Catherine Gutierrez:
I’m respecting his decision to not talk about it. So, he’s asking specifically where to put it. And so, I will say we have done asset location with clients in the past, and I think that it is potentially a good strategy for people who are true optimizers. He sounds like a true optimizer here. And so, this could be potentially great, but the risk of this is that you can get your portfolio really out of whack. And so, that is what we found with folks who didn’t want to stay on top of it pretty routinely.
Sarah Catherine Gutierrez:
So, here’s the thing. With a dividend fund like this, the issue with that in a Roth is it’s a little bit of a wasted opportunity because you would prefer to have your best or growing stocks in a Roth account, if you are going to optimize so that it can be essentially in this tax exempt account and zoom up and not have to pay taxes. And you want the zoom your stuff in that kind of an account.
Sarah Catherine Gutierrez:
So preferably we would want something like that more in just a tax deferred account, like your 401(k) or 403(b), but there’s probably a reason he didn’t say that is because it’s probably not in his list of menu of options in those accounts.
Sarah Catherine Gutierrez:
And so, if he’s following the White Coat Investor advice and following the tax efficient waterfall that we recommend and doing backdoor Roth, then that is probably the only other place between tax exempt and tax deferred to put it. So it’s fine, but we would probably put the more value oriented stocks, dividend stocks in tax deferred, and the more growthy stocks into a Roth, if we had a perfect world.
Dr. Jim Dahle:
I’m not even sure he’s talking about a fund. I think he might be talking about individual stocks.
Sarah Catherine Gutierrez:
I’m definitely not going to go there. Yeah. We really believe that simple wins every time. So, if you want to ask what we believe, remember we are former stock analysts, every single one of us, that’s what we did for a living. We tried to pick the winners. And so, we uniquely have an outlook on this investing world. It’s not just a buzzword for us to do passive. Like we’ve lived in that world. We’ve been in the belly of the beast and we are here to tell you, the market simply is too efficient to beat and simpler is going to win.
Sarah Catherine Gutierrez:
And so, we think a simple allocation with simple passive funds with as simple as strategy to be able to maintain it as possible, it’s going to be a winning strategy for most people.

Dr. Jim Dahle:
Yeah. I mean, I got a lot to say about this question. First of all, if we’re talking about individual stock investing, I’m not a big fan of that because I think you’re taking on uncompensated risk. If you’re going to do it, which it doesn’t sound like we’re going to be able to talk David out of doing it. Whatever is he’s wanting to do. A Roth IRA is not a terrible place to do it in that there are no transaction costs. You can probably go to a brokerage where you get a hundred free trades or something. So, you’re not paying the trade fees. You do have the bid-ask spreads, of course. And there are no tax consequences assuming you’re making money.
Dr. Jim Dahle:
So, it’s not a terrible place if you’re going to try to pick stocks. I just don’t think you ought to be trying to pick stocks at all, whether they’re dividend stocks or growth stocks or anything else.
Dr. Jim Dahle:
Yes. A dividend stock that’s kicking out big dividends compared to Berkshire Hathaway is going to be less tax efficient. So that’s why you might try doing that inside a tax protected account of some kind, rather than your taxable account, if you insist on doing it so I can see why you’d be motivated to do that.
Dr. Jim Dahle:
But I think in what I found in my portfolio is, especially as my taxable account grows, that tax protected space is becoming so precious to me now, because there are some asset classes I really don’t want to hold in taxable. Things like TIPS where you have to worry about the Phantom income issue, real estate investment trusts, which are so tax inefficient because they got to pay out 90% of their profits each year in what’s basically qualifies only at ordinary income tax rates. Things like that, that are so tax inefficient.
Dr. Jim Dahle:
When you look at everything on the spectrum, dividend stocks aren’t the least tax efficient thing around there. They’re fairly efficient because they’re stocks, even though they’re less efficient than a growth stock might be. So, I wouldn’t necessarily feel like it has to go on a Roth IRA for that reason. It really depends on what else you have in your portfolio.
Dr. Jim Dahle:
If this is just play money for you, if it’s a little bit of money where you’re like, “I want to try picking stocks”, do it in taxable, don’t play with your serious money. Go take your $5,000 or $10,000 in taxable and pick stocks with it if you want to. And if you want to have a dividend focus on that, knock yourself out.

Dr. Jim Dahle:
The fun thing about that is a lot of these dividend focused people are really interested in income to help them live right now that they can spend right now. And obviously if you’re getting that a Roth IRA, that’s not going to work out very well. So, you need to do it in a taxable account for that purpose. But I think we just don’t have enough information to really answer this question, which is sit down and make a whole written financial plan for this person. And we just don’t have enough information to answer it. So good question, David. Thanks for calling in.
Dr. Jim Dahle:
Well, Sarah Catherine, it has been good having you on. I appreciate all you do for White Coat Investors and obviously, thanks for coming out and speaking with us at our conferences and good luck with the new book. It’s really an exciting opportunity to write a book, but it’s a lot of work too. So, thank you for doing that.
Sarah Catherine Gutierrez:
Well, thank you. And it’s such an honor to be on here.
Dr. Jim Dahle:
If you want to learn more about Sarah Catherine and her firm, you can go to aptusfinancial.com and you can sign up for an appointment and get a second opinion on your portfolio or get started getting a written financial plan in place today.
Dr. Jim Dahle:
Okay. That was great. I always enjoy having her on the podcast. She’s been on before. I think it was number 58 when we had her on earlier. And she’s gotten lots of good feedback on that podcast and we’ve loved having her out of the conference. So, if you need some financial advice, that’s a great firm to check out.
Dr. Jim Dahle:
We have lots of recommended firms under the recommendations tab at whitecoatinvestor.com. If you need some help, it’s not something to be ashamed of. I figure about 80% of docs want and need a good financial advisor. So, if you’re in that category, get good advice at a fair price.
Dr. Jim Dahle:
Let’s get back into my email box here. This one says, “Hi, Jim. I just paid off my student loans. $330,000 a little over three years”. Nice work. “In my younger years I never thought it would be possible as a podiatrist. I was able to say I have approximately a hundred thousand dollars in retirement accounts during that time as well. I don’t want to be features on social media or anything like that. I just want to say thanks for being a great resource during that time and for everything you do for us docs. I was living paycheck to paycheck when I first became an attending, but after I started listening to the podcast, all of that changed. Thanks again for making such a huge impact on my financial life”.
Dr. Jim Dahle:
You’re very welcome. I didn’t put you on social media, but I put you on the podcast just kept you anonymous though. Even a podiatrist can pay off $300,000 in student loans in three years while saving up a hundred thousand dollars toward retirement.
Dr. Jim Dahle:
So, I hope that gives a little bit of inspiration for podiatrists, physicians, dentists, attorneys, veterinarians alike, that this can be done if you’ll pay attention to your finances.
Dr. Jim Dahle:
All right, here’s another one that came in via email. “Doctor, I just want to tell you your podcast and information is fantastic. For some reason I never caught wind of your podcast until recently. I’ve been working backwards and I’m down to number 115. They’re all superb. I appreciate everything you do.
Dr. Jim Dahle:
While driving into the hospital day I heard you said something that puzzled me. If you can please elaborate because I’m not sure it made sense to me. You indicated you don’t prefer low cost S&P 500 index funds like VOO. You favor only the total market index funds like VTI. Please explain”.
Dr. Jim Dahle:
Well, there’s not a lot of difference, right? If you look at the correlation between 500 index fund and a total stock market index fund, it’s like 0.99. They’re almost the same fund.
Dr. Jim Dahle:
But if you have to choose between them, I prefer a total stock market index fund for a few reasons. One, it includes more stocks and includes 3,000 or 4,000 stocks instead of 500. So, it’s a broader index. It’s a broader representation of the U.S. stock market than the 500 index is. So that’s reason number one.
Dr. Jim Dahle:
Reason number two is in some ways the 500 index is actively managed. A lot of people were surprised to find out this year that Tesla is not in the S&P 500 index. Despite being a very large company in the United States, it’s not in there. Maybe it’ll be added soon, but it’s not.
Dr. Jim Dahle:
And so, there’s a little bit of active management deciding which stocks go into that fund and which ones do not. And there’s a committee that decides that. It’s supposed to be representative of the overall U.S. market. It’s mostly large cap stocks, but it is not just the 500 largest stocks in the U.S.
Dr. Jim Dahle:
The third thing is some people front run the S&P 500. As stocks are added to it, they literally buy it before the index funds have to buy it. And so that produces a very minimal drag on returns while using an S&P 500 index fund.
Dr. Jim Dahle:
So as a general rule, if you have the choice, use a total stock market index fund. That is aside from the point that it has more small and mid-cap stocks, which in the long run generally have higher returns. But it’s just a little bit more tax efficient. It doesn’t get front run. It’s more diversified. It’s a better fund. But how much better? Well, not very much. Like I said, the correlation is 0.99 between them.
Dr. Jim Dahle:
Okay. Another one via email. “I’ve been listening to you for a few years because of my son, who is an MS3. I just finished up your latest podcast about millionaire female docs and enjoyed it much. I’m 60 years old and practiced as an RN for the last 33 years plus, mostly at bedside. I retire at first of next year and my wife will finish her 28-year teaching career next spring.
Dr. Jim Dahle:
As I listened, I’ve reflected on what my wife and I started in 1990 as young workers. Both left home at age 17, from lower income households and began making our way. Every month, we decided to save more than we spend and avoid debt. We paid for each other’s education, provided a mom and pop full ride for our son to go to college.
Dr. Jim Dahle:
Along the way by accident, I read Bogle Bernstein, Harry Brown, many more authors about how to save over the years. We focused on low cost Vanguard funds and employer sponsored plans. Gave to the cause until it hurt over and over and over again. Never had a financial adviser, never caught a windfall, made a few mistakes along the way, but by and large did what you suggest over three decades.
Dr. Jim Dahle:
At the end of the cycle, we retire soon with a net worth of $2 million, no debt and no “wants” really. Best news is we are healthy and still like each other quite a bit looking forward to more time together and a few adventures.
Dr. Jim Dahle:
I suppose the only reason I’m writing is just to tell you to keep up the good work and let your readers know that if a nurse and a teacher can do it, never having ever made a six-figure salary alone, combined the most we ever made was $160,000. Any doctors should be able to do just fine if they pay attention to your advice”.
Dr. Jim Dahle:
I agree. The only difference between a low earner and a high earner is you just need a little bit more time. The habits are the same. The game is the same. Doctors in a lot of ways have a big advantage, yes. But we have a few disadvantages, we start late. We have a few more liability concerns. We often have a big student loan debt burden to overcome at the beginning. But I still rather have the higher salary. It does make the game a lot easier.
Dr. Jim Dahle:
All right. Via email. Let’s take another one. “First off, thanks for all you do. I’m a first-year medical student. I had been following your podcast at work for over a year now, and I’ve learned a ton about personal finance that will surely benefit me in my future career. I’m fortunate to have parents able to pay for medical school so I will not graduate with any undergraduate or medical school debt”.
Dr. Jim Dahle:
Awesome. Good for you. That’s actually about 27% of medical students these days. “I opened a Roth IRA at Fidelity. I put a few thousand dollars I received from a summer job and invested in a low-cost U.S. index fund as you advise but I’m not making regular contributions given I do not have a steady income as a student.
Dr. Jim Dahle:
Aside from continuing to build my financial literacy, is there anything you would specifically recommend to medical students early in their careers to do, to prepare themselves for entering the workforce? I think there are many other medical student listeners out there who would benefit from hearing you answer this type of question”.
Dr. Jim Dahle:
Okay. Congratulations. It’s really great that you’re able to come out debt-free. That puts you so far ahead of your average peer you have no idea. Not only are you saving for retirement as an MS1 but you have no debt.
Dr. Jim Dahle:
The first thing I tell medical students is try to minimize the debt. The less debt you come out with, the closer you are to a net worth of zero. And so, I think it’s important to live frugally. That applies whether you have debt or not though. You’re not going to have much income I’m sure even if you’re getting by. So, live frugally. If you’re single, gets some roommates. If you’re married, sent your spouse to work, et cetera, and try to minimize that debt.
Dr. Jim Dahle:
Second, if you have some money coming in, generally used that if it’s not in a retirement account, you use that to pay for medical school or for interviews or for your moving expenses to residency. The best investment you can make is really in you and your future earning ability.
Dr. Jim Dahle:
If you have retirement accounts, I probably wouldn’t necessarily cash those out to pay for medical school. It wouldn’t be a crazy thing to do, but I probably wouldn’t. That’s asset protected money. It’s tax protected money. It’ll grow for a long time.
Dr. Jim Dahle:
If you have tax deferred accounts, however, going into medical school, I would try to do Roth conversions of that money during medical school. If you’re careful in how much you do, you may be able to do that entire Roth conversion at zero tax cost to you.
Dr. Jim Dahle:
These are probably the lowest income years you’ll ever have in your entire life. So, you can do basically free Roth conversions of any tax deferred money you had coming into medical school. You got four years to do it. So, go for it there. At least three years, maybe that last year you got half a year’s salary as an intern, but at least three years there, you could do some pretty serious Roth conversions. So definitely do that.
Dr. Jim Dahle:
But the big decisions, the big financial decisions in medical school, aside from choosing to live frugally and maybe delayed when you take your loans out until you absolutely need them are really specialty choice. So, I caution medical students to do two things with regards to their specialty choice.
Dr. Jim Dahle:
First of all, choose something that you can do for a long time. Something you love. Something that’s going to give you career longevity, 20, 30, 40 years. You’re far better off being a public health and preventive medicine doc for 40 years than you are being an anesthesiologist for eight. You’ll pay less in taxes along the way because you make less, you’ll have more time for your money to compound. You’ll pay more into social security and get more benefit out of it. Everything works better with a longer career. So, it picks up that you love. That’s really important.

Dr. Jim Dahle:
But if there are two things you love, remember these other two facts. First of all, a couple of years out of residency, how much you make is going to matter much, much more than it matters to you as an MS3 or an MS4 choosing a specialty.
Dr. Jim Dahle:
So, pay does matter, let it come into your calculation. It shouldn’t be the primary thing in your calculation, but it does matter. Don’t ignore it completely. I’m amazed when I do surveys of young attending physicians, 25% of them tell me they had no idea what the various specialties made in medicine. You’re training for a career here. It’s okay to know how much you’re going to get paid to that career and to make plans for it.
Dr. Jim Dahle:
So, look at the specialty surveys, understand how the specialties earn compared to one another. Yes, things change a little bit over the years, but for the most part, the way they stack up now, by average special pay within the specialty, is about the same way they stacked up 20 years ago and 40 years ago. It’s probably not going to change in another 20 years.
Dr. Jim Dahle:
Do keep in mind, however that the inter specialty pay differences are often greater than the intra especially differences. What one pediatrician makes versus another pediatrician is often bigger than the inter specialty pay differences. What an orthopedist makes versus what a family doc makes. So, keep that in mind. There’s a really wide range of what people in any given specialty earn. And you can obviously affect that after your specialty training.
Dr. Jim Dahle:
The other thing to keep in mind is that 10 years out of training, you’re going to care a lot more about lifestyle and control over your practice, how much call you’re taken, how many weekends and nights you’re working and all that sort of stuff in control of your practice. That matters a lot more as you move toward mid-career, than you ever thought it would as a senior medical student. So, keep that in mind.
Dr. Jim Dahle:
Also try to choose a residency. Obviously, the primary concern is to fit with the people in that residency and the quality of the training you’re getting. But all else being equal, pick a place it’s a little cheaper to live. Your money’s just going to go a lot further in Indianapolis than it is in the Bay area.

Dr. Jim Dahle:
So that’s about all the advice I have for medical students. If you want more, I actually have a book coming out soon that is primarily directed to medical students and dental students. And so, I encourage you to pick that up and read through there. I think you’ll find it very helpful.
Dr. Jim Dahle:
This podcast was sponsored by Bob Bhayani at drdisabilityquotes.com. He is an independent provider of disability insurance planning solutions to the medical community in every state and a long-time White Coat Investor sponsor.
Dr. Jim Dahle:
He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. If you need to review your disability insurance coverage to make sure it meets your needs or if you just haven’t gotten around to getting this critical insurance in place, contact Bob at drdisabilityquotes.com today by email at [email protected] or by simply calling (973) 771-9100.
Dr. Jim Dahle:
Be sure to check out the conference that’s coming up. You don’t have to make an immediate decision this year. It’s not going to fill up in seven minutes like it did last time. And that we’re able to take an unlimited number of people. But to get the early bird pricing, you got to buy it during November. And if you want to get the sweetest swag bag of any conference you’ve ever been to, you have to sign up by January 5th. So, keep that in mind.
Dr. Jim Dahle:
Thanks to those of you who are leaving us five-star reviews and telling your friends about the podcast. Our most recent review comes from Radtime69, who said, “Dahle for president! Dr. Dahle deserves credit for the financial education of this generation of medical professionals. He’s opened the hood on topics for me and has illuminated an avenue to approach my lifetime goals. I listen weekly, and owe him a debt of gratitude”. Five stars. Thank you for that review.
Dr. Jim Dahle:
Head up, shoulders back. You’ve got this and we can help. Stay safe out there. Wear your PPE. We’ll see you next time on the White Coat Investor podcast.

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.





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