What Dentists Want to Know — Listener Q&A #9 – Episode 161

At what point should high-interest rates on your loans keep you from investing?

What’s on the mind of Dentist Money™ Show listeners? Well, taxes for one—especially as another year just ended and filing is just around the corner. And you’ll want to hear if the interest rate on your debt should dictate whether you pay down loans or invest. Plus, you’ll find out why creating passive income is not what you’ve been taught—and why that matters as you invest.

Podcast Transcript:

Reese Harper: Hey Dentist, Money listeners. It’s Reese Harper here. It’s time for our 9th listener Q&A. Since it’s end of year and with a few new changes in the tax code, we discuss some of the things that have to be done before 2018 ends and it’s a pretty good list, so listen closely. Student loan debt is never far from the mind of many of our listeners. We talk about student loans and interest rates of other loans and we decide if there’s a magic interest rate or dept interest rate where you try to pay off debt instead of investing the money. We also talk about finding the right career path for you and making sure that you look at how debt affects the growth of that career path. In addition, we talk about corporate sponsored group, life insurance policies, as well as what it takes to create passive income and my opinions on Robert Kiyosaki.

Reese Harper: It’s time for number nine. Make sure and visit us at DentistAdvisors.com and check out our education library. You’ll find a lot of videos, podcasts of new articles that we’re releasing every week. Also, when you go to the website, don’t forget to book a free consultation, clicking the book free consultation button, where you’ll be paired with one of our dental specific financial advisors on a day that works for you. We book appointments on off days, lunches, even on some Saturdays. Just check out the calendar and find a time that’s convenient. Call us anytime at 833-DDS-PLAN. You can also text us at the same number. Don’t forget to submit your financial questions on our free Facebook group at dentistadvisors.com/group. We take the questions from the Facebook group and use them in the podcast. Thanks again for listening and enjoy the show

Speaker: Consult an advisor or conduct your own due diligence when making financial decisions. General principles discussed during this program do not constitute personal advice. This program is furnished by dentist advisers, a registered investment advisor. This is Dentist Money. Now here’s your host, Reese Harper.

Reese Harper: Welcome to the Dentist Money show where we help dentists make smart financial decisions. I’m your host, Reese Harper, here with my trusty old co-host, Sir Ryan Isaac.

Ryan Isaac: Good morning on this snowy day.

Reese Harper: Yeah, I’m loving this snowy day.

Ryan Isaac: Powder day, we’ve got to get you out of here.

Reese Harper: Yeah. Well-

Ryan Isaac: Night skiing?

Reese Harper: The trick today is it started to snow an hour ago, what you do is you let it snow all day, and you hit it tomorrow.

Ryan Isaac: Tomorrow morning early, the first thing.

Reese Harper: Because it’ll set up by this afternoon and people will go today early thinking they’re going to have all the snow-

Ryan Isaac: Suckers.

Reese Harper: …, and it’s going to be the ice from yesterday.

Ryan Isaac: They don’t know.

Reese Harper: And so, tomorrow will be the day.

Ryan Isaac: But you’ve got your boots on. I thought maybe you were ready to go.

Reese Harper: Well, I mean I would. I mean-

Ryan Isaac: You’re prepared.

Reese Harper: I’m ready for the woods but today is a back to back for series of… I have a lot going on so that’s a lot part of it.

Ryan Isaac: A lot of media to record today.

Reese Harper: To be candid, there’s a little on the schedule.

Ryan Isaac: Let’s jump into it. Today is a Q&A episode, and we took all of the questions for today’s episode from our Facebook group. The first thing I want to do is just to invite everyone to join the illustrious Facebook group that I know you’ve heard about.

Reese Harper: There are some amazing people on there.

Ryan Isaac: It’s trending.

Reese Harper: Chiming in, yeah.

Ryan Isaac: The group itself, just the idea of it is probably trending, it’s probably viral.

Reese Harper: Yeah, it’s gone viral.

Ryan Isaac: It’s gone viral.

Reese Harper: Now it has, dentistadvisors.com/group to tune in to the free Facebook group and find your sense of peace in the universe.

Ryan Isaac: Wow, big promise. I think we can fulfill it. Question number one today, is a common question here, especially lately. This person says, “Is there a magic number for student loan debt interest rate or any other debt for that matter, that is not deductible that you’d rather pay off versus investing. With investments and gains on those investments there are tax implications, so an 8% ROI might not be that high, if figuring what tax bracket someone falls in. I know there’s a ton of variables at play here but ballpark percentage would be interesting. Would you do at 6% or less minimum, or would it be more?” Basically he’s asking, what’s this percent, what’s a loan percent?

Reese Harper: Okay.

Ryan Isaac: That’s like where you go, you know what, that feels like a fair trade-off to just pay it off versus invest money. And I think people are asking that because there’s finally volatility back in the market in 2018.

Reese Harper: Yeah. My first response would be, do not analyze it that way first. Don’t think about interest rates first. First think about liquidity. I’m writing this article right now called-

Ryan Isaac: Look for it, heads up.

Reese Harper: I think we’re going to call it, how much cash do you really need to keep around.

Ryan Isaac: Snappy.

Reese Harper: But the thing that I found myself… I wanted to have it be like a murder in the back alleys of Chicago on a Wednesday, who killed… But I figured, I’m trying to create some click bait, but it doesn’t really-

Ryan Isaac: Yeah, don’t be that guy.

Reese Harper: It’s not working for me. I’m that guy that just writes the actual title of what I’m going to say and everyone’s like, why isn’t it like, sexy dentists in their 20s finding world travel to solve peace in Africa.

Ryan Isaac: Sexy dentists only. You should be naming something like, the five tricks for building liquidity, you’ll never believe number four. What are these other factors then that you feel like are important to consider besides just analyzing rate of return and interest rate.

Reese Harper: In this article, the thing that came out and for me again, was you really have to know the optimal strategy for your career before you start going down the financial planning route, okay?

Ryan Isaac: Interesting.

Reese Harper: If you know you’re going to be an associate, and you want to pursue that path, that has a specific set of objectives financially that go with that. And the more you get … I guess, the larger your ambitions in practice ownership, the less likely the interest rate matters to me.

Ryan Isaac: Okay, give me an example.

Reese Harper: If you are going to be an associate and you’re going to practice and you know what your income is going to be and you’re comfortable with, and you love the opportunity, and you’re just comfortable with your income, then the interest rate actually plays into this equation a great deal. Because now my opportunity cost really is that interest rate, right?

Ryan Isaac: Okay.

Reese Harper: But if I’m a practice owner, and even more complicated, if I’m a practice owner that wants to hire an associate, even more complicated if I’m a practice owner that wants a second location, or a five location DSL, or I’m trying to build 40 practices-

Ryan Isaac: And multiple partners in associate.

Reese Harper: The interest rate on the student loan becomes less and less and less and less relevant, because it’s your lowest opportunity cost either way. And so I think the real question is, who are you first? And then as soon as you’re able to assess that, meaning, who are you in your career and how hard do you want to push, the further up the spectrum you go and practice ownership, the less the interest rate matters. So let’s assume you’re an associate. As an associate, I would say the interest rate on student loans is actually really important. It’s pretty critical, because … And if it was above 6%, I would start thinking about it. As long as I had my six month personal emergency fund, and I was saving into my, at least maxing out my basic retirement plan available to me, which would be a 401(k), or IRAs-

Ryan Isaac: Whatever is the practice [crosstalk].

Reese Harper: If I was maxing those things, okay, and I had my six month personal reserve, then student loans would actually be a pretty big focus.

Ryan Isaac: So you’re saying if I’ve got some of those older loans, or actually, it’s the newer ones have the worst rates on it. It’s like 7.2%.

Reese Harper: Yeah, definitely I would go there.

Ryan Isaac: You’d be like, okay, you could see that.

Reese Harper: Yeah.

Ryan Isaac: How about balance, if it’s a $400,000 loan, and you’ve got a little extra savings money, do you just chip away at it with like, 500 bucks a month?

Reese Harper: I really do think … You need to talk to a financial advisor and make sure you understand. I’m not a market timer in terms of like stocks and picking stocks.

Ryan Isaac: I think that’s the pitfall if you want to talk about that for a second. Because I think what a lot of people are thinking is like, well, this year might be a negative 10% return in my investments, and the loan is seven. So clearly, that’s a better decision. But that’s not really the way to look at it because that’s not how you measure market returns.

Reese Harper: But I do think right now, you can look and say, okay, like best case scenario, right? I know what my stock market returns could be if I have an average 10 year period moving forward right? And that’s the assumption you have to make. You have to make the assumption that any point in time you’re starting, the expected return from the market you’re investing in is its historical average. That’s the way to think about markets. That’s your opportunity cost of stock. So if you could make the argument that if your student loan interest rate is at 6, and the average historical stock market return that you’re expecting is 10, then you should still invest in the stock market-

Ryan Isaac: It’s hard to make an argument that a long term investment in the stock market would ever be worse than what a loan consumer market-

Reese Harper: Yeah, you can’t really make that. You can’t say it’s going to-

Ryan Isaac: Because you have to have like an 18% of credit card-

Reese Harper: Yeah, because there’s advantages of putting it into this liquid market. You have access to the capital, you can use it if you’re in a bind and you need the cash, you can get it if you pay the student loan down, you’re like less liquid. And so I pay as a premium on liquidity, but my argument for the associate of paying their student loan down is, there is a guaranteed rate of return there, it’s not a bad thing to do. I would just make … I don’t generally advise people to do that aggressively because I find that people’s personalities change, their temperament changes, their goals change. And a lot of times they miss that liquidity. So I wouldn’t be aggressively paying every month-

Ryan Isaac: All of your money you don’t put it in there.

Reese Harper: But if you wanted to disproportionately pay down your student loan while you were saving money in an after tax account, because you’d already maxed out your qualified plans, meaning the ones we discussed, then I think that’s reasonable. I just think it becomes less compelling. At 6% and above, it starts becoming compelling just because an after tax return, on an average, all stock account, you’re really not going to earn more than seven after taxes, because you’re going to get 10, maybe pay 30% tax on your-

Ryan Isaac: On your gain.

Reese Harper: On your gains, but those gains are deferred. So keep in mind, you’re deferring those gains a lot of cases, it’s not really like you’re going to get seven after taxes. Because depending on how you construct the portfolio, you could really be getting north of nine after taxes and deferring a few percentage points, because you’re not selling those gains. And you’re donating those gains to charity, and in some cases. And so, to me it’s a sticky question. But if you had to pinpoint me, which they wanted to do on this question, which I’m happy with-

Ryan Isaac: Just give us an answer, give the people what they want.

Reese Harper: I would say I start having heart ache above 6%, I start having a little concern for an associate. Just don’t quote me on that for a practice owner. Because the opportunity cost of practice ownership-

Ryan Isaac: Yeah, there’s just a lot of things that could come up.

Reese Harper: And then the opportunity cost of hiring an associate, there are significantly better returns. So for example, if I took $100,000 of my cash as a practice owner, and I paid down my student loan debt, then over a calendar year, all right, of 6%, I saved $6,000. In interest expense. So that feel good, right? And I know I won’t have that $6,000 moving forward forever. But if I took that same $100,000 and I said, you know what, I’m going to hire an associate. I’m going to hire that associate with that $100,000 and I know that in six months of working with this associate, I’ll be able to get production onto their plate, spend a little more time on marketing, and get to the point where I was producing 30% where the practice of producing 30% more. Because that a hundred grand is going to pay that salary of that associate for that six month period and give me a little bit of budget for marketing, which I would.
You could hire a capable associate in almost any specialty, with that amount of money for at least a three to five months, maybe six months, seven month period of time depending on the market you’re in. You could turn that $100,000 investment into $100,000 of net income. So you could double your money by making … But most people, that’s a scarier investment. It requires more planning more thought, more effort. I’m just saying in that scenario, you’re going to crush the student loan and that student loan is the best money you’ve ever borrowed. It’s the best opportunity cost you’ve ever heard. Take it and run with it, and build a business with it and just be grateful that, that’s even an option in your industry. If you’re entrepreneurial and if you’re trying to push that hard to sell.

Ryan Isaac: Okay, I was just going to mention, let me just throw this. We’ve done two episodes with more in depth analysis on debt versus investing episode number seven. Why debt isn’t always a bad four letter word. And Episode 73, should you pay down debt or invest?

Reese Harper: What a boom, what a bang.

Ryan Isaac: Two episodes. Question number two. What do you know about corporate sponsored group life insurance policies using universal index life insurance? The situation, I think you read this question on the forum too. The situation is that this person says, as I understand it, if you establish a management entity, like an LLC an S or a C Corp, for your S-Corp practice, and the fee that your practice pays for this management company for the management duties, goes into premiums for life insurance. And the large premium, they’re paid over a short period of time. He said five years, but the shortest period of time you can do is seven. The premium then goes in tax free, can grow and be withdrawn tax free alone. There’s obviously cost like third party administrators like a 401k. You have to have coverage on your employees.

But he’s wondering, what do you think of this as … His main question is, what do you think of this as an investment strategy when the 401k is maxed out? Is this an investment question? Or is this a tax question? And which one has the higher priority? Because the question was, when my 401k is maxed out, now, we don’t know what the assumptions are for a possible profit sharing or pension or cash balance or anything like that. Maybe that’s not a possibility. Maybe it’s a very large staff. But then the group life insurance would also have carried a cost as well. So I think there’s two things here. There’s like that are maybe butting up against each other-

Reese Harper: I can make this really easy, or I can make it hard. Let’s do the easy version, and then we’ll do the hard version. The easy version for those of you-

Ryan Isaac: Okay, it’s like for the good cop, bad cop. We can do this the easy way or the hard way, your choice buddy.

Reese Harper: You’re Matthew McConaughey and I’m-

Ryan Isaac: I’m Matthew, Oh, cool.

Reese Harper: I’m Woody Harrelson. We are true detectives fighting these dangerous criminals selling life insurance. It’s just analogy.

Ryan Isaac: It’s just an analogy, it’s not true.

Reese Harper: Shout out to all those dangerous criminals.

Ryan Isaac: Alright, let’s go the easy way then.

Reese Harper: So the easy way is, this is something that would never exist if life insurance didn’t have commissions built into it. That’s the easy thing. This question wouldn’t even come up, okay? If people didn’t get paid so well, to sell this strategy.

Ryan Isaac: The incentives are so great that it just makes it really compelling argument to want to go sell this to somebody.

Reese Harper: Yeah, and invent ways to sell life insurance that are really like roundabout ways of getting a very simple thing turned very complicated real quick. So a couple things. Number one, if you’ve been listening to the show for any period of time, you know that I’m not a big fan of life insurance as an accumulation vehicle. Not because it’s a bad thing, like quite, it’s not quite a Ponzi scheme.

Ryan Isaac: It’s not a scam.

Reese Harper: It’s sometimes close but, it’s just something that started in the 1800s. And it was … In the United States, it was early on one of the only ways you could like diversify your portfolio. And there wasn’t like a stock market or bond market or mutual fund market. And so life insurance companies started pooling money together and offering ways for people to save. And by life insurance, because they had these big blocks of money, they were bigger than … They were like the banks back in the day. They were big, and they’re still massive. But there’s just a lot of things that worked a long time ago, that have changed a lot with the invention of the stock market.

Ryan Isaac: Yeah, our big stodgy industry though it’s really slow to adopt some of the changes.

Reese Harper: And the mutual fund industry or the internet. And so if you’re like contemplating this kind of stuff, right now, all I would say is, you’re just really under informed about what is actually happening in the insurance industry. They’re going through massive change right now. And people are starting to realize the world is not flat, it is round.

Ryan Isaac: [inaudible].

Reese Harper: So the insurance is a very expensive way to accumulate. And whether you can fund it tax-free or not, it’s a really expensive way to invest money, and it doesn’t grow that efficiently. And so it’s just over. And the reason it doesn’t is because it’s so expensive to administer. And there’s a lot of compliance around it. Insurance companies have very high cost structures, when it comes to whole life insurance, because their brokers are used to making a certain amount of money to distribute these products. And if they don’t pay them enough, then they stop selling them and they go sell something different. It’s like I could sell software, or I could sell insurance-

Ryan Isaac: Or just insurance for the other company who are still paying a better commission.

Reese Harper: Yeah. So the day that software pays more than insurance to sell a lot of sales-people will just say like, I’m not going to sell this anymore. And advisors who are paid to advise they don’t … Like if you’re that kind of temperament you’re not motivated to sell things, you want to like teach the truth. So no one can pay you. You’re not touchable for-

Ryan Isaac: You are not buyable man.

Reese Harper: You can’t get bought. And so, ultimately, I just think that’s the big thing I would just like to highlight this wouldn’t exist if there wasn’t a lot of compensation. Now, the hard answer behind this, the one that you probably really want is why not? What’s really so bad about this thing. And I would just say there are better alternatives to doing the same thing much less expensively, and accomplishing a similar outcome.

Ryan Isaac: Okay, so you’re bringing up a point I’ve been thinking about when I hear these things is, this is not the only, call it a tax loophole strategy that has existed by using insurance in certain corporation or entities, right?

Reese Harper: Yeah.

Ryan Isaac: That used to be used a lot more in the 80s and 90s. That got … It was like big crackdown on legislation. And they changed a lot of law since then. It’s like one of those heavily … It’s on the SEC list of the top things to look out for. Some of these old plan.

Reese Harper: When I tell you right now, sometimes you’ll hear from your CPA that something’s possible and the CPA’s lack of sophistication, will actually make you feel like good about doing something and you’ll realize during an audit that what your CPA thought would fly, he had just never had an audit on that case before. So what I’m saying is just because your CPA says, this is a good deal, or this is something you should do, if your CPA hasn’t done it 50 times and been through several audits, and really feels comfortable at it-

Ryan Isaac: And these are heavy audit type of transactions plans.

Reese Harper: Yeah. Back in the day, like in 15 years ago, this was like happening all the time. And it was called 412(i). And it’s a section of the code that allows you to put a life insurance policy in place that is tax deductible.

Ryan Isaac: It acts like instead of a 401(k), it’s life insurance policy. But you can over fund it, because the costs inside of a life insurance policy is so high, that there’s actually no cash value built up. So you can put in 100 grand, but at the end of the year … And you get the tax deduction for 100 grand, but the end of the year, the cash value is like zero, after 12 months. And so they use that as like where you almost put in nothing in. So you can put even more in.

Reese Harper: Yeah, and if you do a defined benefit plan, there’s another way to do this with pension plans, cash balance plans, defined benefit plans. They typically will work better as you age in your late 40s, early 50s. We have some that are in place and do perform quite well in your early 40s. But for people who are already maxing out a 401(k), my first preference would be if the for 412(i) works, if you’re thinking that might work, then have you at least run with a competent professional, have you run pension plan test to see if you can put the same amount or more away, instead of having a cash value that’s like zero or low, or you put in 100,000, you’ve got even 40,000. And once you put in 100,000, you actually have 100,000 available to you because that’s how pensions work. When you put money in, they don’t steal it all from you, and call it like-

Ryan Isaac: A cost.

Reese Harper: It’s like really the cost of that first few years. That’s the broker. It’s not the insurance company even. My advice would be all you brokers out there selling this right now, you got to go find a real job, alright? A real job is one where-

Ryan Isaac: I don’t know if there’s many listening to this-

Reese Harper: Do a sustainable career where you provide a service to someone or a product that is transparent and not pulling the wool over people’s eyes. Because the truth is, the stuff is not good. And you got to change your cost structures. And you can’t tell people in the day where the Internet has been invented, but it costs $100,000 to implement an insurance plan. That’s just that’s the cost of doing business.

Ryan Isaac: It’s not 100% of the money you-

Reese Harper: I’d rather buy like a brand new Tesla, or something fun, okay? So just, you got to get a job.

Ryan Isaac: To the dentist.

Reese Harper: Now to the dentist, just don’t listen to people who are selling your stuff. Don’t set up a management company unless you really have professional management over multiple entities, and you’re really trying to grow large operation. And even in that case, I don’t think a 412(i) would make sense, there’d be no scenario in which I would say, corporate own life insurance, because what will happen … I’m just telling you what will happen. If you do this, look at the internal rate of return, even after taxes, you’re not going to be able withdraw and loan out all the money tax-free. When they say loan out all money tax-free, you’re going to be able to get the bulk of it out. But there is a loan balance that’s accruing and it is complicated to maintain this thing for 30 years.

Ryan Isaac: It’s complicated when it’s owned personally, let alone inside of a C Corp.

Reese Harper: It gets complicated. So I just don’t like things that are not following congressional intent. Because what happens over time is that you’re subject to laws getting changed on you. And then you have to like unwind stuff. And there’s nothing illegal about this, though. From my perspective, there’s nothing sketchy about setting up a legitimate management company and running legitimate expenses over there. Even if you have a small practice, it’s just unnecessarily expensive and complicated. It just doesn’t give you the advantage until you have larger scale. So I know a lot of practices who need this kind of complexity, but it’s not because they want to own corporate life insurance.

Ryan Isaac: Well, and that’s the other thing. So we’re giving up a group of things that are probably more important than trying to lower taxes.

Reese Harper: You’re not necessarily giving up lowered taxes. My point is there’s an alternative to not having to pay-

Ryan Isaac: So you can have all those things and lower taxes?

Reese Harper: You can have all those things. You’re not going to be able to put more into a 412(i), then you can … Or into a corporate life insurance plan, then you can put into a defined benefit plan. There’s going to be similar limits to the maximum amount of capital, you can build site. Yeah, you are right that in that scenario that’s the analysis that’s happening. But it doesn’t have to feel that way.

Ryan Isaac: It’s not your only option.

Reese Harper: It’s not your only option. I just say, someone tell me why this is a good thing, because it’s been 15 years of hearing this story, and for the first three years of my career, I had all the incentive in the world to support that. Because I was working at a large life insurance company where I made a ton of money if I sold this stuff. And every time I looked at the projections, and the performa, and the ledger’s, and the IRR-

Ryan Isaac: You couldn’t look in the eyes of the client.

Reese Harper: I can’t go to my client and tell them this is good. I’m like this is … I make a lot of money. And me and my wife are broke right now and it’d be really nice to have this commission for Christmas. But like, I have some dignity left, just a little bit left.

Ryan Isaac: So you built popsicle stick toys for your children.

Reese Harper: Just a little bit of dignity left. And I put the we on the credit card.

Ryan Isaac: You put a we on the credit card.

Reese Harper: You just bring Super Mario Party home on a credit card, and you say, look, we’ll build a legitimate business. And then we’ll pay off the credit card later.

Ryan Isaac: Pay off the we later.

Reese Harper: It just drives me nuts.

Ryan Isaac: Those are good days. I remember those days.

Reese Harper: What’s the next question? Let’s just put this thing to rest.

Ryan Isaac: Let’s get out of here.

Reese Harper: Because I respect the line of questioning around insurance because I want to get feedback on this. But we need to make sure that-

Ryan Isaac: You got to keep your blood pressure down.

Reese Harper: Yeah, the blood pressures get too high.

Ryan Isaac: Okay. Alright, good question, though. Question number three. This person was just saying, this tax year is a little different. We’re kind of coming to the end of the year, what can wait until I file taxes? What are some of the housekeeping items that you would list to somebody. It’s a good discussion on the forum, by the way.

Reese Harper: Yeah. Let’s just bring up some of the things that were set on the forum. I think those were actually really insightful.

Ryan Isaac: There was a list, a running list here of 9 or 10 things that are due before the end of the year. Any retirement plan contribution that has to get funded through payroll, so any payroll related item, like any income that you have to push through or anything that has to be deducted from payroll, it has to be ran by the end of the year. You can’t run it in January and call it for 2018.

Reese Harper: Yeah, and that’s a complicated thing. You’ve got to be thinking about those before the year is over.

Ryan Isaac: Yeah. So limits, you have your 401(k) limits 185, you have catch-up limits, if you’re over 50, simple IRAs, are the same kind of thing. Charitable contributions have to be in by the end of the year. They have to be like submitted and in, including transfers of stock to charitable organizations. Usually those charitable organizations have deadlines, like a week before the end of the year.

Reese Harper: Yeah, like some of the brokerage houses and custodians will have deadlines in the early 20s of December-

Ryan Isaac: It’s like the 20th. Shout out to my anniversary, December 20th.

Reese Harper: Roth IRA conversions.

Ryan Isaac: Conversion, so Roth IRA conversions have to be done before December 31st. Placing equipment in service has to be done before the end of the year.

Reese Harper: When it comes to clarifying, though, when it comes to the profit sharing portion of retirement plan contributions, or the defined benefit plan contributions, those actually can happen by your tax filing deadline. Just the payroll part, your personal deferrals-

Ryan Isaac: Yes, out of your paycheck-

Reese Harper: Need to happen before the end of the year.

Ryan Isaac: So we’ll get to those in a second. To stay on before the end of the year, most states have 529 deadlines by the end of the year. A few you can pay until tax time, but most states I found have 529 for kids, that are due by the end of the year. Medical expense deductions like if you’re going to go get some procedures done, you wanted a few things done before the end of the year. I was thinking about some hair restoration.

Reese Harper: I always get a little done.

Ryan Isaac: I can’t afford all the follicles because I have a lot of empty follicle so I was going to be like a few on the sides in the back. Maybe in the front up here.

Reese Harper: I want you to just get the side, the rap … What do you call it when the whole top is exposed but the rap. So you can connect your beard and then do the rap.

Ryan Isaac: Oh, just a beard into the-

Reese Harper: Into the rap.

Ryan Isaac: Into it like a skull.

Reese Harper: Yeah.

Ryan Isaac: Anyway, things that can wait until tax filing. HSA contributions can wait. You mentioned this. This is profit sharing, defined benefit, pension plans. You can do those. Well, you have to wait because the year has to end to do the final year end calculations. And then you can submit those. So profit sharing pension contributions. Personal IRAs, Roth IRAs, SEPs, kids IRAs, those can wait. That’s probably the list of it.

Reese Harper: Yeah. I think a lot of people … Here’s what you’ll find about part of this question. I don’t know if this was articulated in the question or not. But part of the anxiety people have is with the new tax laws. Is there something different about this year than last year-

Ryan Isaac: Or what’s one of the big ones here. So the month of December for us is tax rate month. It’s the element that we report everyone’s total gross income and how much of that income, what percentage went towards income taxes. So what I found, I have to go calculate this, but I would say just off the top my head, probably 20% of the people maybe 25% of the people that I looked at these reports are going to be close to the qualifying, the new 20% QBI deduction, that happens this year. And I think that’s a big thing on people’s minds, is how close am I, what kind of thing should I do to bump myself under that threshold? Because over the threshold dentist won’t qualify because of your occupational class. But under it, you will. And so that was one of the big things in the question.

Reese Harper: Yeah. But it’s all pro rata too, right? So here’s the thing that you need to … There’s no scenario in which making less money actually-

Ryan Isaac: Actual less money.

Reese Harper: Because it’s not like … Well, if we could just make 10,000 less, I’m going to save 50,000 in taxes. That’s not how it’s working-

Ryan Isaac: Just spend more money.

Reese Harper: So this QBI deduction, while it is a good deduction, there’s never a scenario in which you’ll be like, I’m going to make … If I make less, then I’ll actually have more.

Ryan Isaac: I was just having this conversation with a client yesterday. We were laughing about that.

Reese Harper: It doesn’t work that way. So and it’s-

Ryan Isaac: Because that’s where this turns into, like, lately. It’s just been like, how can I have less money, less income and you get a tax deduction.

Reese Harper: Yes, like seriously? And it’s a massive branding problem. It’s a design problem that the IRS had with this, okay? If you study design, you know the study of design basically says, in some cases, you can say something that you want something to be communicated, but you communicated something different. They could have worded this differently and kind of positioned it differently so that people weren’t like … Most of us when we first hear about it we are like, I got to make less money then, so I get this deduction.

Ryan Isaac: Yeah.

Reese Harper: And it doesn’t work that way. The amount of money that you’ll get to deduct never is better than having made more money, okay? So just know, that you don’t really need to over obsess about … There’s not a scenario in which you’re going to want to be incentivized to go and earn less.

Ryan Isaac: Yeah. I think the incentive is going to be like … And this is a CPA question. Talk to your CPA. Do you take the new equipment? Do you spread out the depreciation or this year do you just take the 179 so bumps you under the threshold.

Reese Harper: Yeah, go listen to the podcast we did, with Jonathan, like two weeks ago on the 179. Reducing year in taxes, because could be as easy as 179. It’s Episode 154. Just go listen to that one. And if you have a question about the QBI stuff.

Ryan Isaac: Okay. Last question is from a newer Doc, this is something that gets talked about a lot. The question is, I’ve been out for a short period of time, I’m interested in trying to create passive income in my life. Does anyone have any tips on how I can begin that process? And it goes on to a few details in there.

Reese Harper: Is this person, an associate, or an owner? What does he say?

Ryan Isaac: I’ve been out for a year, and a half.

Reese Harper: Okay.

Ryan Isaac: No, does not say … No. Just interested, how do I get into passive income? I’d be interested to hear this from you. Can you think of any passive income sources that you just start passively? Can you just get into passive income? Or is it passive income only is a product of a lot of active work for a period of time, and then becomes passive because you put in the active work, and the sacrifice and the cost and all the time before it even became passive? I think there’s this idea because it’s clickbait. It’s great marketing to say things like tax-free and passive. But what’s the scenario where you just get into passive income, without a lot of non passive work and sacrifice before it?

Reese Harper: This is like Robert Kiyosaki, like, love you to death, but-

Ryan Isaac: He’s listening.

Reese Harper: You’ve destroyed the competency level of most Americans with your passive income, and rat race board games. And I just do not respect anything about that messaging. Here’s the point. It’s like passive income right now is a manipulative term … Search for passive income, okay? Just in Google. You are going to find 400 companies who are going to manipulate that word, so that you feel like they’re your solution. I’m just going to give you the first example.

Ryan Isaac: You googled it? Such a millennial poll not to google.

Reese Harper: Here we go, realcrowd.com, passive income investments, like they’re obsessed over that SEO term. Build passive income, fund rise, passive income opportunity, diversify fund, passive income investments, pierce street. Why passive income? Okay, income is one source of return, okay? The other source is growth, you can have capital gain, or you can have income, alright?

Ryan Isaac: Dividends, interest.

Reese Harper: If you get a higher rate of return from capital gains, then that is a higher returning investment. I still really struggle with this concept and yesterday to kind of go back and forth in a forum where someone’s like, you just don’t get it. Like dividends and like passive income and rents, those are all-

Ryan Isaac: Income being kicked off from the source.

Reese Harper: Now it’s passive. So like I don’t have to work anymore.

Ryan Isaac: But that’s my argument, like, what am I going to get to that point?

Reese Harper: But if the stock market goes up passively 10% a year and income is 7%, why wouldn’t I want to passively have my gains be 10 instead of passively have my income be seven? We need to just clarify that all returns can be passive, alright? In your demo practice, when your hygiene department grows by 40% one year, and you lease a new building, and you put another hygienist in there, you didn’t do anything. You hired someone, then you made the money from that. That’s passive income.

Ryan Isaac: Kinda you didn’t do anything, you just went to school for 10 years and put a million dollars in loans to even have the expertise that hire that person and loan that business.

Reese Harper: You are right. I should not have said that. That is a bad thing to say.

Ryan Isaac: No, but it’s just like that’s why people overlook … There’s always something that goes into the thing that eventually becomes passive.

Reese Harper: Yes, there’s always some active event, it might be an education that you had to go through to build your knowledge in real estate. Real estate, is a great way to build a business. So is build being a dentist. So is being a financial advisor. There’s a lot of great ways to build passive income. But there isn’t one investment that is passive income. Passive income is the result of either-

Ryan Isaac: Building something.

Reese Harper: It’s building something. And if you buy real estate that isn’t … That’s something I hesitate for people to say, well, passive income equals real estate, because real estates typically not pass as passive. If you’ve ever owned property-

Ryan Isaac: Multiple properties.

Reese Harper: Multiple properties that require tenants and decisions, you’re either interacting with your property manager, or you’re interacting with your tenants directly. Or you’re interacting with your contractor. Or you’re interacting with the cities that you have to pay your property taxes to. There’s work involved and it adds up. And I just think that we get … How can I build passive income early? The way you can build passive income early as get really, really, really focused on what your career objective is. Like I said earlier, you’re going to be an associate, you’re going to be an owner, you can have multi-location. What is your path, know who you are well enough to get to that point. And then once you know that, find a way to create the highest returns possible given your career path. But don’t focus on whether it’s passive or not focus on whether the return is the optimal return for your capital.
So if you have $50,000, left over, is the optimal return to buy a rental property. Because that would be Robert Kiyosaki definition of passive income, right? Or is the optimal return to get a 12% return plus a tax deduction by putting it into your 401(k) at the point where you’re at the highest possible income bracket that you’ll ever be at for the next 25 years. And not only get 50,000 in there earning a higher return than what the property will likely kick off to you for that investment. But you’re also going to get a $20,000 chunk of money in your pocket because the government’s incentivizing you to do that. I’m not saying 401(k) is always better than real estate. I’m just saying in each individual scenario, the optimal decision is not whether it’s passive or not, it’s whether it’s the highest return-

Ryan Isaac: Which is a subjective term anyway.

Reese Harper: Yeah, with the capital. We just need to stop being obsessed with passive income.

Ryan Isaac: And we won’t stop till it’s bad marketing.

Reese Harper: But I love it because I’m still going to use it. If you notice my highest performing article-

Ryan Isaac: In the description title of this episode we’ll probably use it.

Reese Harper: We’re going to use passive income all throughout.

Ryan Isaac: Wait till you hear number six, you’ll never believe what we said next.

Reese Harper: Please don’t stop asking us questions just because I have a little bit of a violent tone occasionally.

Ryan Isaac: No, it’s not violent it’s loving.

Reese Harper: It’s coming from a place of caring because there is a lot of manipulation around the title passive income. It’s one of the highest searched financial terms. And if you want to get an article that’s clickbait-

Ryan Isaac: You use it.

Reese Harper: Here’s my favorite one, on listen money matters, it was the fifth thing on Google. 31 passive income ideas to get you off the hamster wheel, in 2018.

Ryan Isaac: Freaking hamsters everyone hates hamster.

Reese Harper: The rat race, the hamster wheel. You idiot stuck in the rat race.

Ryan Isaac: I had hamsters and rats as pets as a child, and I think they’re fantastic animals.

Reese Harper: Oh, my goodness.

Ryan Isaac: Alright, shout out to-

Reese Harper: You’re not in the rat race if you’re working. If you have a good job, and you’re making-

Ryan Isaac: You like what you do, and you are happy, you live a happy life.

Reese Harper: If you’re happy, and you’re making eight times the average wage of an American, you’re not in the rat race. And you don’t need to be distracted by taking your discretionary money and pursuing lower returning investments that somehow fit the passive income box.

Ryan Isaac: Get off that wheel.

Reese Harper: I still own a commercial building, and I’m about to … In a very difficult situation right now wanting to buy a cabin and renting it out on VOBO. I’m not saying these are bad things to do. You just have to make sure they’re the optimal return for your capital. Real estate could be if you’re buying it at a certain price point in the market was an efficiency, able to get a great deal. Rents are higher than normal-

Ryan Isaac: And you hold it for long time-

Reese Harper: You hold it for a long period of time. And you put the work into it and you do some repairs, and you show up, and you learn about real estate-

Ryan Isaac: It turns out all this stuff just ends up looking like hard work.

Reese Harper: It turns out, a lot of this ends up being, oh okay, so I said work hard, and I’m only getting 7%. And I’m actually having to do stuff. So if you want to specialize in that, go do it because real estate is one of the best investments in the world. It’s one of the best. It’s not the highest returning investment though. And it’s not the least effort. And some people shouldn’t change their career path completely, or feel like they’re not doing a good job just because they choose to pick a higher returning investment that is actually the most passive. The most passive income investment I know is the stock market, or the bond market or liquid public securities. Those are the most passive thing I know. Like you can-

Ryan Isaac: Complete the outsource of all they require and none of your time-

Reese Harper: You don’t have to lift a finger now. And they’re much less expensive than property managers and much less expensive than operating expenses and liability from what happened today is a two, and a half foot snow fall caving the roof and if the cabin I want to get. In my mind real estate is more of a love investment. And that’s why people-

Ryan Isaac: It’s a full time career.

Reese Harper: It’s like a child like you will embrace your property in a way that you would not deal with-

Ryan Isaac: A natural embrace of property.

Reese Harper: Anyway.

Ryan Isaac: Okay. Thank you for listening. Let’s just give a couple invitations here again, all these came from our Facebook group. It’s wonderful it’s exciting. Reese promised you’ll find the meaning of life in it earlier in the episode.

Reese Harper: And a little bit of Yuletide for the season.

Ryan Isaac: And some Yuletide for the season. The group is dentistadvisors.com/group. Post your questions post a pol, say something, post a picture what you did on the weekend.

Reese Harper: Be controversial-

Ryan Isaac: Post a controversial statement.

Reese Harper: Tell us you don’t agree with our overly pessimistic view of passive income from Robert Kiyosaki.

Ryan Isaac: With a smiley emoji, so we know you’re not mean.

Reese Harper: Yeah, like that gets scalar, we may delete you if we don’t like your tone.

Ryan Isaac: Join us Facebook group dentistsadvisors.com/group. You can schedule, if you’d like to talk to someone directly. You can schedule a call very conveniently on one of your days off, or during a lunch break, or maybe someone canceled, you have a break between patients.

Reese Harper: And we even work six days a week here unlike some people so if you want to pick a Saturday-

Ryan Isaac: We have a conversation.

Reese Harper: Some of our advisors work a different five day shift.

Ryan Isaac: Yeah, so go to dennisadvisors.com. Click on book free consultation schedule an appointment that works for your schedule and let’s talk.

Reese Harper: We are so grateful for you as listeners. We are very grateful for your support and participation in the show, the questions, it means a lot and thanks so much for tuning in everybody.

Ryan Isaac: Finally, you can call or text us 833-DDS-PLAN. Talk to you next time.

Debt & Financing, Insurance