Retirement Accounts vs. Real Estate

In a July 2020 episode of The White Coat Investor podcast, Dr. Jim Dahle addressed whether physicians should withdraw money from retirement accounts, or skip contributions, to invest in real estate. His answer was no. The episode was prompted by a listener email describing a physician contributing roughly $75,000 to $90,000 a year to retirement accounts, including a cash balance plan, and weighing whether to redirect that money to real estate investing, which the listener said was being promoted through the Semi-Retired MD program. Dahle said he becomes wary when someone is advised to take money out of retirement accounts early or before required minimum distributions, and he said physicians should be cautious of advice that recommends against a benefit as valuable as retirement accounts.

Dahle acknowledged that real estate is an attractive asset class, citing solid returns, low to moderate correlation with stocks and bonds, and tax advantages from depreciation. He said he invests 20% of his portfolio in real estate, but only after maxing out retirement accounts. He also cited pandemic-related income disruptions for physicians in spring 2020, which had prompted many to look at side income and passive investments.

He identified three main benefits of retirement accounts: tax-protected growth over decades, the likelihood that physicians will save at higher marginal rates during peak earning years than they pay on withdrawals, and the ability to fill lower tax brackets in retirement. He cited figures for a married couple: the first $24,800 of withdrawals (the standard deduction) is tax free, followed by $19,000 taxed at 10%, $50,000 at 12%, and $75,000 at 22%. Retirement accounts also avoid probate through beneficiary designations, and in many states 401(k)s and IRAs receive substantial protection from creditors, including in bankruptcy, which Dahle said exceeds the protection available for real estate held through LLCs.

For physicians who want real estate exposure, Dahle outlined options that keep retirement savings intact. These include publicly traded REITs, such as those in the Vanguard REIT index fund, held inside IRAs or 401(k)s, and private real estate through self-directed IRAs or individual 401(k)s, which require strict separation of funds and attention to unrelated business income tax on leveraged property in IRAs. He also described 401(k) loans of up to $50,000 or 50% of the balance, repayable over five years, with a shorter deadline if employment ends. He said withdrawals are a poor option because of ordinary income tax plus a 10% penalty, producing an effective rate of about 40% to 50%. Dahle concluded that real estate is optional and that many physicians have built wealth through index funds in retirement accounts, though he acknowledged that aggressive financial independence goals may justify greater entrepreneurial and leverage risk.