The Optometry Money Podcast Ep. 152 Listener Q&A – Practice Ownership, Backdoor Roths, and Student Loans

Evon: [00:00:00] Hey everybody. Welcome back to the Optometry Money Podcast where we’re helping ODs all over the country make better and better decisions around their money, their careers, and their practices. I am your host, Evon Mendrin, Certified Financial Planner(TM) practitioner, and owner of Optometry Wealth Advisors and independent financial planning firm just for optometrists nationwide.

And thank you so much for listening. And on today’s episode, we are having our first ever listener Q&A episode where I’m gonna be talking about answering questions submitted by our listeners.

And I think these questions are gonna resonate with a lot of you if you want to submit your own questions for future Q&A episodes. Depending on the amount I continue to get, I may do this at least once a month. I will have a link in the show notes. You can click on that link to submit your question and I will answer it on a future episode. you can also just go to OptometryWealth.com/podcastquestion, [00:01:00] and without further ado, let’s dive on into our first question.

What can younger optometry practice owners do to build wealth in the first few years of ownership?

Evon: And the first one up is around practice ownership and Wealth building opportunities for young practice owners. And so the question is, there seems to be a fair amount of tax strategies to build retirement Wealth for older OD practice owners, catch up contributions, profit sharing.

other than maxing out 401Ks or Roth IRA and HSA, what else can a young practice owner in their early thirties, in their first five years of practice do to build Wealth? This is a really good question. While all of those things are available to young ODs, 401k contributions you can still make as an employee of the practice, you can still make IRA contributions if you have a health plan that qualifies. You can still make HSA contributions. A lot of it, especially for a recent practice owner in the first five years, comes down to cashflow. You may not have the cashflow in order to max out those accounts and make the most use of them.

So what other opportunities do you have as a younger practice owner in the [00:02:00] early years? there’s a super important opportunity that young practice owners have to build Wealth. And that’s the practice itself. Your Optometry practice is maybe the most single important asset on your balance sheet. Just like stocks.

You own a business and you get a return from that business in two ways. Through the profit and cash flow of the practice that you’re able to take as income and do things with, and the growth of the value of the business itself as you improve profitability and as you pay down the debts in the business.

And so you’re able to get a return from owning the business, we can calculate a return on your equity, and in the early years, your practice is your single most important investment, and it may not feel that way because you don’t see account balances change.

I mean, you look at your IRAs and 401ks, you can see, wow, my account balance is going up, and you don’t see like your contributions to your business in your household savings rate. It’s not like you’re tracking [00:03:00] deposits into your business, for example. but your work and your effort in growing and improving your business is the single most important thing you can do as a young practice owner.

Then as cashflow improves, you’re able to cover your lifestyle. you can use that cash flow your practice is kicking off to first, reinvest back into the practice, into your skills as a clinician, as a leader. consulting, potentially coaching, better tech and better systems. A new equipment where there’s a clear business case for it.

additional lane, staff, or associate doctors and so on and so forth, you first take that cashflow you’re earning and reinvest in back into improving the practice. But there’s, , at the end of the day, only so much equipment you can buy.

there’s only so much square footage in the practice, and so then you can take that cash flow into it, invest in other assets, retirement accounts, investment accounts, HSAs, Roth IRAs, real estate, if that’s where your passion, your interest is. but it all starts with your practice. Everything starts with your practice.

Your [00:04:00] practice is the most single, most important generator of Wealth that you’re gonna have in your life. Not only in the value of the practice as it grows, but also in your ability to fund every other financial goal in your life. We very often don’t think of your practice as an investment, as something on your balance sheet.

as something that’s contributing to Wealth and maybe sometimes it just feels like a job, but your business is an investment. It is an a asset on your balance sheet, and it’s the most important asset, especially early on in your career. your focus really is in improving and growing the practice and improving the cash flow that it generates so that you can cover your ideal lifestyle and continue to invest those dollars.

I mean, there are other lifestyle things that you can do potentially. I’ve seen some ODs house hack where, for example, they’re staying at one half of a duplex. they’re living in one half a d of a duplex and renting the other half. But that’s really lifestyle dependent.

If you’ve got a larger family, maybe that just doesn’t work for you. [00:05:00] also just watching lifestyle creep in general. Just keeping an eye on your expenses. especially the two big categories, housing expenses and car expenses.

And so just generally keeping an eye on your, on your finances, keeping an eye on your spending. But for the most part, there’s no secret other than focusing on your role as the practice owner and focusing on your investment in the business and and on continuing to grow your practice.

That is a significant driver of Wealth.

And that’s growing Wealth. But you also want to protect your ability to do that, and that’s cover the big risks that can derail all of that. It starts with having an appropriate emergency fund or cash reserve in your household, having an appropriate cash buffer in the practice.

and that’s really important as well. Not too much, not too large of a cash reserve. But an appropriate cash reserve and then having appropriate insurances. So disability insurance, it’s gonna protect your ability to show up to work and work in your business. term life insurance, where it’s needed, appropriate [00:06:00] levels of home and auto insurance, and then umbrella liability insurance as well.

And you’re gonna have malpractice insurance too, to cover you as a professional. So hopefully that’s helpful. If you have any additional questions to follow up from that. Please let me know, but it all starts with your practice. That’s your most important investment early on.

How are “backdoor” Roth IRA contributions recorded on an optometrist’s tax return?

Evon: Okay. Two questions now related to backdoor Roth IRA contributions and.

As often as this is talked about, just about everywhere on the internet, this continues to be something that just confuses optometrists nationwide. And so Eric asks, I’m trying to do a “backdoor” Roth IRA contribution for last year, which in this case would be 2025. If I do this in 2026, does it go on my 2025 tax return or 2026?

And the answer, Eric, is both. So when we think about a backdoor Roth IRA contribution, what that really is is two separate transactions cobbled together, and that is a [00:07:00] contribution to your traditional IRA that’s not deductible. So just after tax dollars going into there, and then separately you are converting or transferring those after tax dollars from your Traditional IRA over to your Roth IRA. Those are two separate transactions. we’re smushing together and we call that the backdoor Roth IRA.

And those two separate transactions are each accounted for separately for tax purposes, depending on what actual year you do them in. The IRA contribution, you can do this up until the April tax filing deadline and still make that contribution for the previous tax year.

So for example, we are in January right now, 2026. If you make that IRA contribution before April, that is accounted for on your 2025 tax return.

But the conversion, that second step. That conversion is reflected on the tax return for whichever tax year you actually do that in. So you [00:08:00] are probably at this point in the year, you’re probably going to be recording each of those separate halves of that on two separate tax returns, because if you do that conversion in 2026, even though the IRA contribution was for 2025.

The conversion is going to be 2026 tax year activity and so if you’re making it 2025 IRA contribution that’s recorded on 2025 tax return. And if you do the conversion step in 2026 calendar year, that shows up on 2026’s tax return. So it’s split. Now, if you were to do this before December 31st, like you did this last year, for last year, both of those transactions would show up on 2025 tax return, and they both end up on the same form.

All the, all of activity shows up on form 8606, in your tax return. It’s just the tax years are split in this case, if you’re doing it right now, hopefully that’s not [00:09:00] clear as mud.

Why does a traditional IRA “ruin” the “backdoor” Roth IRA contribution for optometrists?

Evon: and then the second one here from anonymous is that I want to do the backdoor Roth IRA contribution, but my accountant said my rollover IRA ruins this.

I’m not sure I understand why. Please explain. Okay,like we talked about the backdoor Roth IRA contribution, what we call that is really two separate steps. It’s the contribution to your IRA, which is your traditional IRA, which is non-deductible. It’s just after tax dollars. And the conversion to the Roth.

And when you do this right, all you’re doing is moving after tax dollars from one account into another. So there’s no taxable, extra taxable income that’s created. However, when you have any pre-tax IRA dollars, so it could be, a traditional IRA or rollover IRA, it could be a simple IRA, it could be a SEP IRA. For tax purposes, when you do these conversions, The IRS looks at all of those IRAs as one giant IRA, and so if you have a [00:10:00] traditional IRA that’s empty and you are doing the backdoor Roth account through that empty Traditional IRA, but you have this old rollover IRA over here and that has a hundred thousand dollars of pre-tax IRA dollars, what the IRS sees is that you’re taking.

you’re taking pre-tax dollars, including that rollover IRA and moving and converting that to the Roth account, which is going to cause taxable income. and if you add all these together, if 99% of all of these IRA dollars was pre-tax. When you do that conversion step, the IRS is gonna say, Hey, 99% of that is taxable income, and then the 1% is not, it’s after tax.

so that’s why any pre-tax dollars in any IRA account, it doesn’t ruin it. You still could technically do it, but it’s gonna cause taxable income to show up on your return, which is you want to avoid.

And so how do you get around that? there’s a few different ways depending on the situation.[00:11:00]

One example of something you can consider and look through for yourself or talk through with your own advisor is that, if you have access to a 401k plan at work, or if you are self-employed and you have a solo 401k and the 401k plan at work has decent fees, it has good investment options, what you can do is you can roll over the pre-tax dollars in your IRAs into that, uh, 401k plan . And when doing this conversion, it doesn’t take into account 401k dollars that only takes into account IRA dollars. So, that’s one example of something you can do.

Now if you have a simple IRA, there’s potentially nothing you can do.

If it’s a live SIMPLE IRA plan, you kind of have to wait until you no longer have a SIMPLE IRA plan. So SIMPLE IRA plans are maybe a different story.

But if you have other IRA plans like a SEP IRA, traditional IRA, things like that, you maybe have some other options.

Now, I know some people are gonna say, why don’t you just con convert the full amount?

And that may be something you wanna consider. If your taxable [00:12:00] income is low enough, if it makes sense to, and or your IRA balance is low enough, maybe you just convert the full amount, yes, pay tax on those dollars. But if it’s a favorable tax year to do that, then that can be fine. But that’s highly situationally dependent, right?

It just depends on the situation. and this whole rule I’m talking about is called the pro rata rule. That’s something you can Google. It’s, there’s a lot of content out there about that, but, that’s what happens.

And I probably could have explained that in a shorter explanation, shorter answer, but there it is, everything you wanna know about that.

Why is a 401(k) Plan “Better” for Optometry Practices Than a SIMPLE IRA?

Evon: Okay. Next question for Morgan. I own a practice. Please explain why a 401k plan is better than a simple IRA plan. well, here’s some reasons I usually would suggest a 401k plan over a simple IRA. number one is the higher contribution limits because you can contribute as an employee. And then you can add to the account as an employer through matching dollars, as well as through profit sharing. And for the employee amount for 2026, the 401k plan is [00:13:00] $24,500 if you’re under 50.

If you’re over 50, there’s an additional amount. So that amount’s gonna be higher than what you can put into the simple IRA. And then when you add in the matching dollars and the profit sharing, if the math supports it, the max, you can get into a 401k plan. With all of those different layers, the employee and employer amounts is $72,000 in 2026, which is far more than you can ever put into a simple IRA plan.

And if you’re over 50, it’s even more. So that’s one reason is the higher contribution limits. Now, if you don’t have the cash flow, like if you have a simple IRA plan already and you don’t have the cash flow to get there. And you’re not even close to hitting the max in the simple IRA plan. that’s fine.

that’s ultimately okay. the other thing I’ll add is that you usually will have more investment options with 401k plans. Usually simple IRA plans, you’re opening it up with a provider of funds and usually you’re gonna be limited to that provider’s funds. Fidelity, American Funds, things like that.

And so usually you have more [00:14:00] flexibility in creating,a 401k investment lineup,based on your needs and wants. and then there’s additional features, loans up to $50,000 or half of vested account balances. There are additional features that you can add onto a 401k plan that you’re not gonna have with a simple IRA plan.

Now that comes with additional administrative work, which is why you have to have a, an administrator, a third party administrator to make sure that your plan is, is operating within the law. it also clears the way for backdoor Roth IRA contributions. As I mentioned, the 401k is not taken into account for that pro-rata role.

so you can do those backdoor Roth IRA contributions if you’d like. there’s also ERISA federal liability and creditor protections that you get with 401k plans, not with solo 401k plans to make that clear, it’s only with 401k plans where there are employees attached to it. So there are additional higher ERISA federal protections based on law that you don’t get with SIMPLE or SEP [00:15:00] IRAs.

And I know a lot of the times people hesitate to have a 401k plan because they’ve heard about the costs and it is true that 401k plans will cost more than simple IRAs. due to the basic fact that a lot of the simple IRA plans are free to administer, there’s no administrative costs.

Now they make that up with the funds that you have to use from that company and, and it’s on you to fix issues with the plan. But yes, 401k plans have a cost that’s higher than zero, and historically have had pretty high administrative fees, especially for smaller businesses like Optometry practices and smaller 401k plans. But, that has changed a lot with these tech-based bundled providers, like the 401GOs or Guidelines or Human Interest and, as well as plan administrators that work specifically with smaller businesses like Optometry practices and have a much more favorable pricing.

And if it’s the first plan that you’re starting in your practice, meaning you [00:16:00] don’t already have a retirement plan, there, there are tax credits that are gonna help you recoup most of, if not all of the admin costs in the first few years.

So especially for those new plans, that may be a moot cost. You do have to cover those costs through your cash flow through the year, but you get to recoup that on, when you file your tax return through tax credits.

Hopefully that helps Morgan. Now a again, if you have a simple IRA plan already, that doesn’t mean you have to automatically go switch right away.

think about your own cash flow. If you have the cash flow where you’re going to be hitting that, simple IRA maximum pretty soon, then that’s when it starts to make sense to make a switch. And you can do that now mid-year.

In the past, if you didn’t make that switch from a simple IRA to 401k and you didn’t get that process started by this very rigid October fall deadline, you would have to wait another calendar year.

To make a switch. You were stuck with a simple IRA plan for another year, but now you can actually make a switch midyear if you’re [00:17:00] switching to a Safe Harbor 401k plan. the contribution limits are a little wonky because I, if you do it midyear, you can’t put into the 401k plan, the full $24,500.

B etween the two plans, your simple and your 401k. Your total maximum that you can put in as an employee between the two plans. It’s prorated based on how many days you had in a simple IRA plan and how many days you were in the 401k plan.

Are owner’s distributions from optometry practices taxable?

Evon: Okay. next question. I’m a private practice owner. I’d like to take distributions from the practice on top of my salary, but I’m not sure what it’s going to do to my taxes.

Can you explain how that works? Yes. highly recommend you talk to your tax professional. I’m gonna give you some general guidelines here, but, have that conversation with your own financial advisor, your own professionals here, but generally speaking. and I’m assuming your practice is taxed as an S corporation because you mentioned that you are paying yourself a salary.

so with that assumption in place, when you take distributions from the practice, meaning you’re simply [00:18:00] sending business dollars out of the business bank account to yourself personally, when you take owner’s distributions It does not cause for the most part, generally speaking, it does not cause additional taxes.

And why is that? because S corporations and LLCs, when you’re taxed as a Schedule C sole proprietor, those type of business entities are called pass through business entities. Meaning that all of the business profit Is taxed to you on your tax return, whether you take it outta the business or not.

So whatever your taxable profit’s going to be for the year, that amount will still be taxable to you on your personal tax return. if you leave it all in the business that’s still the case. If you take every dollar of profit outta the business. It doesn’t change that. So the decision to distribute additional dollars to yourself, it’s not generally speaking, going to impact your taxes at all.

It really is just mostly about cash flow. Can your practice support those distributions? in addition to the business [00:19:00] expenses, in addition to needing to set aside dollars for taxes in addition to having an appropriate cash buffer in the practice, it’s really about cash flow. Now, there are some situations where distributions can cause capital gains income to you.

It’s pretty wonky, but basically what happens is that in your business, if you look at your. Your tax returns, your personal tax returns. There’s a sheet in there that talks about shareholders’ basis for your S corporation. And what’s happening there is that in your business there’s an after tax dollar amount that’s building up in there to where if you sold it, that amount of that sale price would not be taxable to you.

It’s just your own after tax dollars are getting back. It’s kinda like when you buy a, a stock or an ETF, like your initial investment is after tax already, and the, any gain above that is capital gain. it’s a similar concept here in your business and.

and that basis changes depending on what’s happening in the business. So for [00:20:00] example, if you have profit for the year, well that profit increases your basis. if you have losses for the year. For example, in the early years of ownership, you have a bunch of depreciation happening that those losses decrease your basis.

If you add dollars into the practice for some reason, that increases your basis. If you take distributions from the practice, that decreases your basis and so if you take distributions above and beyond, the amount of this basis that you have, that extra amount can cause some capital gains income to you.

and so, that’s a weird tax quirk that you just wanna confirm with your tax professionals to say, especially if you’re planning to take out a large amount out of the practice, ask them, Hey, are there any tax issues with taking those distributions?

So more than you probably wanted to know about basis in the practice, but hopefully that’s helpful.

Should optometrists pay down student loans or save for practice ownership?

Evon: Okay, two more here. This one’s a little bit more of a case study. I have just under $200,000 left of student loans [00:21:00] and interest rates are somewhere between 5% and 7% depending on the loan. Okay. So we’ve got a bunch of federal student loans, all the different interest rates, and I’m able to put a pretty good amount of money into them each year if I want to.

But I want to own a practice at some point, and I’m stuck on what to do with that extra money. Do I throw it at the loans and get rid of them before focusing on the practice? Or do I build up dollars, I’m assuming in savings with the extra cash flow? Do I build up dollars and get into practice ownership sooner?

Okay, so understanding that I can’t provide direct advice here over the podcast. you’ll want to think through this conversation with your own financial Planner, your own professionals. And you probably shouldn’t take direct advice from someone that doesn’t know you or your entire financial picture.

But here’s some general thoughts to think about this. Assuming you’ve done the math , and that paying down the debt is going to be the best approach that makes the most sense for you, number one, what [00:22:00] makes the most sense financially? Meaning that. What is gonna have the highest impact on your net worth over time?

Is it gonna be getting into practice ownership as soon as possible, or is it going to be paying down the debt and getting rid of it? Practice ownership is very likely going to have the highest impact on your net worth over time. Of course, we can’t guarantee thatthat’s the risk you take. We can’t guarantee that it’s gonna be successful, but.

With the cashflow that it’s gonna generate and the growth of the value of the business, plus what you can do with that cashflow to invest into other assets like retirement accounts and other investments, it’s very likely gonna have a higher impact on your net worth versus paying down the debts.

And so under that framework, one might consider trying to get into practice ownership as soon as possible and get that process started. Getting the growth of revenue and profits started as quickly as possible, and the main financial things you’re gonna want, if you’re gonna [00:23:00] consider prioritizing practice ownership, it’s gonna be building up cash reserves.

If you’re going to buy a practice, then you’re probably aiming for seven to 10% of that purchase amount, depending on the bank you’re gonna work with to finance. And even with a cold start, one thing that helps substantially, not only with qualifying for a loan, but with managing the stress and responsibilities of a new business and the ups and downs of the cash flow, you’re no doubt gonna face in those early years, is a healthy amount of cash and savings.

and also cash flow flexibility, which can be hurt if you’re committed to heavily paying down debt. And so that might sway your decisions around what to do with the extra dollars you’re earning, depending on what you feel is gonna have the highest impact on your net worth over time.

The second thing though, to consider is your comfort with carrying the debt into practice ownership. Now, many people are too stressed about the loans and the business responsibilities to be able to operate well in the business. I’ve heard many say that they were able to be a [00:24:00] better business owner without the loan payment each month.

So you have to know yourself a little bit, especially with cold-starts. If you’re going to take the risk of a brand new business, what’s gonna allow you to go into that and operate as best as you can?

On the other hand, I work with several practice owners as clients that successfully got into practice ownership with student loans, even spouses, where both couples have really healthy high student loan amounts. And it’s just simply another thing to plan around. So, you know, I often say don’t let student loans run your life.

Let your goals and your priorities around your family and your career dictate your decisions. And then make student loan decisions around those goals and priorities. And there is a way to handle your student loans regardless of which direction you wanna go. That’s a general framework of how I would think through this.

Of course, you have to know yourself and know what you’re comfortable with, and then, take the next best step from there. are you okay with waiting on practice ownership and waiting on the additional Growth of the businessand putting off [00:25:00] potential growth of a business, i f you were to prioritize paying down debts, would you be comfortable with that trade off?

Because everything’s about trade-offs, and you have to think about which trade offs makes the most sense for you.

If an optometrist is on the PAYE plan for student loans, does he/she need to switch repayment plans due to the One Big Beautiful Bill Act?

Evon: Okay, last question here. Finally a student loan one, I’m surprised we only got one student loan question, this batch here.

And so I’m on Pay As You Earn for my student loans. With the rules changing, am I going to have to make a change soon off of Pay As You Earn and my date to show my income is 2027? Is that right? My servicer said I don’t have to do anything until then.

Okay. So for the first part of that question, you’re on Pay As You Earn. the rules changing. What that’s referring to is probably the One Big Beautiful Bill Act that was passed last year and due to that law, you are going to make a change at some point. Because what that law did is it consolidated all of your income-driven repayment options.

And it’s eliminating Pay As You Earn. It’s eliminating SAVE. It’s doing away with ICR and it’s consolidating [00:26:00] them into IBR. And there’s two versions of IBR depending on when you took your first, your very first federal student loans. And so with that said, you are eventually going to have to move off of Pay As You Earn onto the IBR plan.

Now when do you have to do that? That change is going to be forced sometime between now and July 1st, 2028. So at some point you’re gonna have to move off of PAYE and onto IBR. T he other plan that will be available is the one that they’re creating new and they’re creating from scratch was the RAP plan.

So at some point you’re gonna have to make a decision to get off of Pay As You Earn onto IBR or the new RAP plan or a standard plan, whichever makes the most sense for you, depending on whether you are paying down your debts entirely or whether you’re going for some for, or whether it makes sense for you to go for some type of forgiveness.

And the next part of that question. in terms of recertification dates or anniversary dates? Yes. Many [00:27:00] borrowers had their recertification dates pushed off into 2027. Many of you haven’t recertified your income for several years now, and assuming that’s the case, assuming your anniversary date, your recertification date, says at some point in 2027, that’s the date you have to work with. And 90 days before that, they’re gonna start notifying you by email that you’re gonna have to,that the certification date’s coming up, look out for those emails. But if that’s the date you have, then trust that date until you hear otherwise.

And it is possible that Department of Ed changes that they, decide to have those recertification dates moved up. But, But yes, that is happening. And that may be, that very well may be the case. I don’t know. I haven’t seen your student loan file, right?

I can’t confirm that with my own eyes. But, but if you see that as your anniversary date, then yes, that very well may be the case.

And with that we’re gonna wrap up for today. And in the show notes, I’m gonna add other podcast episodes that are related to these questions.

For example, I’m gonna add episodes about different financial planning [00:28:00] decisions that you have to make at different stages of practice ownership. I’m gonna put some student loan related, student loan related episodes in there as well.

And if you’re a listener and you want your questions answered on future Q&A episodes, you can go to the link in the show notes and enter your questions there.

Or you can head over to OptometryWealth.com/podcastquestion. And with that, appreciate your time. We will catch you on the next episode. In the meantime, take care.