Today, we are answering your questions about retirement accounts. We discuss SEP IRAs, Roth IRAs vs. traditional, 403(b) vs. 457(b), and more. We also answer some questions about pregnancy and healthcare and comparing safer investments. We have three guests on today from one of our recommended financial advisors, Personal Choice Financial Advisors. They will tackle a few of your questions to help you get a sense of who they are.
In This Show:
- Personal Choice Financial Advisors
- Should You Prioritize a 403(b) or 457(b)?
- Independent Contractors
- Roth vs. Traditional
- Roth IRA Conversions
- SEP IRA
- Pregnancy and Healthcare
- Safer Investments
- Sponsor
- Quote of the Day
- Milestones to Millionaire Podcast
- Full Transcript
Listen to Episode #286 here.
Personal Choice Financial Advisors
Our guests today on the show are from Personal Choice Financial Advisors. Here with me today, we have Chris Hansen, the founder, as well as Robert Hansen and Ben Dobler. Welcome to The White Coat Investor podcast.
Chris Hansen:
Thank you.
Robert Hansen:
Thanks for having us, Jim.
Dr. Jim Dahle:
We wanted to introduce you to the audience and have you help answer some of their questions. But before we get into the questions, can you explain to us why you decided to become a financial advisor?
Chris Hansen:
Back in 1991, I worked for Procter & Gamble. I'm somewhat the same as a lot of people I think that follow some of your writings. I'm a career changer. As a chemical engineer at Procter & Gamble, I really got interested in personal finance. After a while, people started bringing me proposals from their brokers for retirement. Back in the early 90s, as you know, everything was pretty much commissions. I would explain to them the commission structure, what they were paying for the advice, and offer to show them, “Look, there's a lot better mutual funds out there. All the Vanguard funds were available and so forth. There are a lot better options out there at a lot lower cost. I can show you how to do this.” What I found was almost all of those people came back and said, “I do not want to do this on my own. I'm either going to pay you to do it, or I'm going to hire somebody else to do it.”
So, I went and actually got registered with the SEC, started the company in 1991, and started a family financial planning practice when it was very, very uncommon to do that. Fast forward to 2016, my eldest son graduated from the University of Cincinnati Medical School. He's a neurologist at this point in time. That's when I realized as I helped him through a lot of the things he had going on, how different it was working with doctors, with young doctors, with student loans, all the people chasing them, trying to sell them different things. Getting all their finances up and running, I realized I really needed to become an expert in all these things. As I got more and more expertise in it, we started helping more and more doctors. And at this point, probably 90% of our new clients are physicians.
Dr. Jim Dahle:
What do you think makes your practice or firm particularly unique? What are you really good at?
Ben Dobler:
One of the things that I think we really specialize in doing is we work as a team. It's really hard as a financial planner or as anyone to know everything there is to know. We each try and bring something different to the table. We're all CFPs—we all come from that background—but we each kind of have some special thing that we focus on. When people work with us, we meet with everyone. Depending on the time of year, it's going to be a different person just depending on what's going on and who the best person is to jump in. We really take a lot of pride in that, and that's something that we focus on.
Dr. Jim Dahle:
Awesome. What's your particular pricing model, and why did you choose that?
Robert Hansen:
We actually have a flat fee structure and an AUM structure. We have both options available, and we set it up that way honestly to help as many people as we possibly can. However they feel most comfortable to engage and however they'd like to set it up, we can help them set it up that way. If you're leaning toward flat fee, that actually starts at $5,000 a year and goes all the way up to $15,000 a year, just depending on complexity. We are just trying to help as many people as possible. We do have a $3,000 a year engagement for residents and fellows.
Should You Prioritize a 403(b) or 457(b)?
Dr. Jim Dahle:
All right. Thank you for sharing that. Let's get into some listener questions. This first one comes from John Michael. Let's take a listen.
“Hi. Dr. Dahle. This is JM from West Virginia. I'm in my last year of residency and I have a question about prioritizing a 403(b) vs. a 457(b). I'm very fortunate in that my spouse started her attending job this year, so I'm able to max both of my retirement accounts for the first time ever as a resident. The problem is that next year I graduate in June, so I won't have enough total salary to max out both my 403(b) and my 457(b) before I graduate. I'm still looking for jobs, so I don't know what retirement accounts I'll have access to at my future employer. My initial thought is that I should fully fund my 457(b) since it's less likely that I'll have one available as an attending. I feel there's a much higher chance that I'll have a 401(k) or a 403(b) that I can max out later in the year as an attending.
Anyway, my question is really, am I thinking about this correctly? Am I missing anything?”
Dr. Jim Dahle:
Great question, John. Who wants to take a stab and give John something useful to think about this 403(b) vs. 457(b) question?
Ben Dobler:
I'll take a stab at this one. This is a great question. I love this question. I do think he's thinking about it right. But I want to kind of dive a little bit into why and some of the things to watch out for. I think there are really three pieces. The first piece is what kind of 457(b) are we talking about. Is this a governmental 457(b) or is this a non-governmental 457(b)? If this is a governmental 457(b), this would mean it's a state hospital, university hospital, maybe it's a county hospital. Any of these scenarios would mean that this works kind of like a 401(k) that you might be used to. It would mean after he leaves, he can roll this over into a new plan, he could roll it into an IRA (although depending on the Backdoor Roth and things like that, he may not want to). But on the other hand, if this is just for, say, a religious hospital residency, this is maybe a 457(b) that is non-governmental. If that's the case, then this is really going to be forced out. He'll have to liquidate that plan over some short period of time after he finishes residency. In that case, I would really steer him away from this.
I do think most likely this is a governmental 457(b), because typically the non-governmental ones would only be available if you are a very high earner, a highly compensated employee. Of course, as we know about residency, that is very hard to get. Most likely this is governmental. The next piece, which kind of gets into the meat of the question here, is the contribution limit. So, what makes 457(b) special? They don't count in the same bucket in the IRS's eyes as a 401(k) or a 403(b). For this year, in 2022, as of this reporting, you could put $20,500 into a 401(k) or a 403(b) or some combination thereof and then go and put another $20,500 into that 457 (Editor's Note: In 2023, those numbers rise to $22,500). He doesn't want to do that of course, but the worry is that if he puts money into the 401(k) or 403(b) side, once he gets into his new job, he's going to come up short where he's only got maybe $10,000, $12,000 left in that bucket. If he starts with the 457(b), he could put $20,500 in, turn around and start his attending position, and put that $20,500 back in there again.
That's just the nuance there. Then, one additional quick note. It's pretty rare on the 457(b) side to have an employer-matching contribution but that does happen when that happens. There is a unique feature there where on the 401(k) side or 403(b) side, you could put in the $20,500 and the employer match does not count against you. On the 457(b) side, if you're lucky to have a match on that side, that does count toward that $20,500. So just something else to watch out for. Be aware of those limits. I think he's looking at it right, that 457(b)s are a little less common. Typically, you're going to have a 401(k) or 403(b). So, if it's that governmental variety, it probably is going to make a lot of sense to put money into that first and then leave the door open for the 401(k) or 403(b) bucket later on in his attending position.
Dr. Jim Dahle:
What are the odds that he can actually access the new 401(k) or 403(b) in his first six months of the job? A lot of times, you have to wait a while until the next calendar year or even a full year from the start of employment before you can make a contribution. What percentage of the time do you think the new employer actually lets you use that 401(k) as soon as you get there?
Ben Dobler:
It's a great question, and it's going to come down to the plan. It's going to also come down to what type of employer-matching contributions they offer. I wish I had a real good rule of thumb here. It really does just depend. But if they are less generous with their matches, generally, they're going to let you participate more quickly and easily and start putting money in on your own because it doesn't obligate them as the employer to do anything on top of that. It is something to be aware of, as you're contemplating those two. That is another possibility. And who knows? Maybe this will be a 1099 role where he could open a solo 401(k). Any additional clarity that he would have in terms of specifically what kind of job he's getting and when he might be eligible for the 401(k) or 403(b), that would obviously help.
Dr. Jim Dahle:
It's tough without having all the details in any situation. That's the benefit of sitting down with a financial planner like you guys. You can bring in everything, you can look at all the details and make a comprehensive answer to any questions you have rather than just having what people can record in a minute and a half on the Speak Pipe in which you're left guessing about lots of details.
More information here:
What Is a 457 Retirement Plan?
Should You Use Your 457(b)?
Independent Contractors
“Hey, Dr. Dahle. A longtime fan of White Coat Investor. I started following back in med school. Anyway, I'm finishing a residency and looking into making that transition into attendinghood and looking at jobs. I heard you need some Speak Pipe questions. So here I am. My multipart question can probably be boiled down into a 1099 vs. W2, which you had a great blog post on, by the way. The job basically sounds almost like a partnership from the get-go. It's a very low guaranteed base salary—less than 50th percentile—and sounds like the majority of the compensation will be through profit-sharing. So, for the job, while the default is W2, they're open to structuring it as a 1099. And honestly, I'm kind of leaning toward that 1099 setup instead. As a 1099, it sounds like I'll still be able to buy into the group insurance plans. If I don't mind the extra working complexity of setting that up, the LLC or the S Corp, would 1099 make more sense than W2? Is there something else I might be missing that I should be alert for? And I guess on a more generalizable level, if all things are equal, docs could choose to be paid on W2 or 1099, which would make more sense numbers-wise? Is there kind of a breakeven point—like one side where W2 is better, and other side where 1099s are better?”
Dr. Jim Dahle:
Anybody who wants to take a stab at the overall topic, which is when should you take compensation as a 1099?
Ben Dobler:
I can jump in on this one. Again, another great question by Evan here because there are a lot of positives and negatives to both being a W2 employee or a 1099 independent contractor. In general it comes down to two main things. It's the differences in compensation and the ability of the individual if they're comfortable with those complexities, with setting up and managing the 1099 side of it. I would say just benefits of being a W2 employee. A lot of times you'll have those subsidized benefits, you'll have that health insurance, you'll have disability and life insurance that the company's helping subsidize for you. Again, it depends on the quality of those benefits—those plans—but you also have retirement benefits. So, a lot of times they'll have the 401(k) with a 401(k) match or 403(b) and possibly a 457(b).
They might even have in the 401(k), the ability to do a Mega Backdoor Roth as an option, which is fantastic. But it really comes down to what are those plans. Are they decent plans? Are the investments inside those decent investments? There's a lot that comes into play here, even looking at when you are a W2 employee that the company helps pay for half of the Social Security and Medicare taxes. They're helping subsidize that. Again, there are a lot of benefits of being that W2 employee, but there are also a lot of benefits of being 1099, an independent contractor. Maybe as a W2, you don't have a great 401(k) option. The investments aren't great, but you can set up a solo 401(k), you can get more money put away, you can select your own investments. Even after the Tax Cuts and Jobs Act, you no longer can deduct your expenses as a W2 employee on your tax return, but you can as a 1099 independent contractor.
Again, there are positives and negatives to both. One thing you do want to look out for that a lot of physicians have unique to them is pursuing PSLF, which you can't do as an independent contractor. You need to be a W2 employee for that. You want to make sure your student loans are being factored in, but you've really just got to weigh the positives and negatives to both. Overall, how is the compensation different? If the compensation is absolutely identical, you'd almost always lean toward the W2 employee side. But if you're leaning toward 1099, an independent contractor, you just want to make sure they gross it up, you'd want to push for that higher compensation for that lack of benefits that you'd have.
Dr. Jim Dahle:
Especially if you are having to pay both halves of the Social Security and Medicare taxes. It may be one of the greatest benefits of being an employee that a lot of people don't think about. They think, “Oh, 1099 or W2.” They don't think 1099 getting paid more vs. W2 being paid less.
More information here:
Best Retirement Savings Plans for the Self-Employed
Roth vs. Traditional
“Hey, Dr. Dahle. I had a two-part question about Roth vs. traditional 401(k) contributions. I recently listened to a podcast of yours and got a little confused in a short segment of it when you mentioned if someone is like you in a relatively high bracket, you're actually putting more money on an after-tax basis if you're making the Roth contribution. So really, what you should be comparing is putting $20,500 into a Roth account or putting something like $13,000 into a tax-protected account and investing another $7,000 or so into a taxable account. Could you explain what you meant here?
And secondly, you also mentioned that for someone who's in the same tax bracket at contribution and withdrawal comes out ahead with the Roth. How is this possible if, for example, I was in the 35% marginal bracket, contributed to a Roth account with tax free at retirement vs. saving 35% on taxes with the traditional contribution and paying that 35% at withdrawal?”
Chris Hansen:
I think a lot of this comes from if you simply take a look at lower tax brackets, having say $27,000 to put away in your 401(k), be it Roth or conventional. When you run that scenario of putting $20,500 into my 401(k), whether I go Roth or I go conventional portion on that, and then I take the $6,500 that's paid to taxes and either put it on my tax account or I put it in a taxable account. If you're in an identical, say a 12% or a 22% tax bracket, you run that scenario out, they're almost identical other than the slight tax drag you're going to have on the money you put into the taxable account. In that case, I think as you stated, the Roth IRA is going to have a bit of a benefit in that scenario.
But again, what we tell doctors, is any kind of rule of thumb like this usually doesn't fit very well. Most of the people that we deal with who are not doctors, they have one plan to choose from. It's a 401(k), or it's a 403(b). Part of that scenario with a doctor would be, “I can put this into a conventional 401(k). What do I do with my $6,500?” Well, unlike most industries, I have a 457 option. I have a top hat option. I have some other pre-tax option I can go to. I also have enough of an income that I can do a Backdoor Roth IRA. I may have a Mega Backdoor Roth IRA. But if I can completely remove the taxes from that equation, then that kind of gives the tax-deferred option somewhat of a benefit.
Everything I put into this plan comes off the top, it comes off at my 37% tax bracket. When I'm taking this money out, I've got a lot of room between zero and 37% taxes. I'm going to get that advantage. Not everything's going to come out at that 37% tax. There's another piece that really comes into play that helps the pre-tax side. Most of our physicians are young physicians. They've got student loans, and if I can lower my income, I lower my student loan payment if I'm looking for forgiveness. So, that's actually kind of an extra tax you want to include in there as you think about the equation. If I'm self-employed, the QBI deduction comes into play there. It's one of those that again, it boils down to, and I think we said this for all three answers, it comes down to it just depends on what else you've got available. You've got a lot of other options available. What's the best one in that particular situation?
Dr. Jim Dahle:
Yeah, for sure. Great, great thoughts on the QBI or 199A deduction as well as the student loans. Those factors absolutely come into play for at least as long as that deduction exists and as long as the forgiveness program exists, anyway. But a lot of people just see tax-free and they're like, “Oh, Roth must be better.” They don't realize there can be pretty significant tax arbitrage of saving money while you're putting it in at 37% and then bringing it out and filling the 10% and 12% and 22% and 24% brackets with those withdrawals. That's why, for most docs during their peak earnings years, tax-deferred is a great deal. Keep that in mind. But I think the main point is you've just got to be thinking in terms of after-tax amounts when you're saving money. Because $20,500 in a tax-deferred account is not the same as $20,500 in a tax-free account. You've got to make some kind of an adjustment to compare those.
It's been great chatting with you. I appreciate you coming on and help answering our listeners' questions. For those who are interested in learning more about Personal Choice Financial Advisors, the best place to do that is to go to financialrounds.com. They stand ready to help you with any financial planning questions you need, investment management concerns you have. You can check them out there on the website and sign up for an introductory phone call with them if you are so inclined. I appreciate your time, guys.
Ben Dobler:
Thanks. We appreciate your time, Jim.
Chris Hansen:
Thanks, Jim.
More information here:
Should You Make Roth or Traditional 401(k) Contributions?
Roth IRA Conversions
I hope you enjoyed that segment with getting a few extra opinions on the podcast. I'm going to have to answer the rest of your questions myself. So, let's take this one from Michael on Roth IRA conversions.
“Hello, Dr. Dahle. My name is Michael from the Midwest. I'm a big fan of your podcast. I listen to every episode. I have a question about Roth IRA conversions. I have a traditional IRA, which has some money sitting in the account invested in different ETFs. I'm planning on starting the Roth conversion starting next year. And my understanding is that I can deposit $6,000 to the traditional IRA account and then convert it to a Roth account. I was wondering if I can do it with some money already sitting in the traditional account invested in different funds.”
We're talking about the classic Backdoor Roth IRA process. This is something that higher earners couldn't do before 2010, but in 2010, Congress changed one of the rules that apply to IRAs and Roth conversions. Basically, they made it so high earners could do Roth conversions. However, a typical doc, a typical person listening to this podcast cannot contribute directly to a Roth IRA. They make too much money to do it. There's a limit on your income. If your income is above that limit, which is I believe just over $200,000 right now, if you're married filing jointly, then you have to contribute to the Roth IRA indirectly through this process we call the Backdoor Roth IRA process.
It's a pretty simple two-step process. First, you contribute to a traditional IRA because there's no rule that keeps you from contributing to a traditional IRA. As long as you have earned income, you can do it no matter how high that income is. However, often that contribution is not deductible. You don't get a tax deduction for it because you make too much money and you have a plan in place at work, a 401(k) or a 403(b) or whatever. But you can then take that money that you contributed to the traditional IRA and convert it immediately to a Roth IRA. Because you didn't get the tax deduction upfront, there is no tax cost to doing the conversion and the end result is identical to having contributed directly to the Roth IRA. Obviously, money in a Roth IRA is never taxed again. This is a good place to invest. It's much better than leaving it in the traditional IRA on a non-deductible basis, if you will, on which all the earnings are going to be taxed as ordinary income rates when they come out. It's much better than investing in a taxable account, which is totally accessible to your creditors and which is taxed as it goes. Even though you get lower long-term capital gains rates and lower qualified dividend rates, it is still getting taxed as it goes. In the Roth IRA, it doesn't get taxed. This is a good thing to get money into a Roth IRA.
However, one thing you need to be aware of when you are doing the Backdoor Roth IRA process is how that process is reported to the IRS. It is reported on Form 8606, which is just a form you include with your tax return each year. There's one for you, and if you're doing a Backdoor Roth IRA for your spouse, there's one for your spouse. One of the questions on that form, question No. 6, asks how much money you have in a traditional IRA, rollover IRA, SEP IRA, or simple IRA as of December 31 of that year that you did this conversion. The key is to be able to answer that question with $0. The reason why is if you don't, your conversion will be pro-rated. That doesn't mean it's illegal, that doesn't mean it's necessarily bad. But in general, you're not accomplishing what you were trying to accomplish with the Backdoor Roth IRA process if your conversion is getting pro-rated. You don't want it to be pro-rated.
You have to do something with money you have in a traditional IRA before or at least by the end of the year of the year you do the conversion step. There's usually one or two things that people do. The first one is if it's just a small little IRA, maybe it's $8,000 or something, you can probably eat the tax cost of just converting all that $8,000 to a Roth IRA and you'll owe $3,000 or so in taxes. No big deal. You can afford that. Then obviously, that money never gets taxed again. But if you have $800,000 in that IRA, well, the tax cost on that is probably going to be a little bit too much for you to be able to afford to do that. What people do in that sort of a situation is they roll the money in that traditional IRA into a 401(k) or into a 403(b) because that question 6 on form 8606 doesn't ask about how much you have in 401(k)s or 403(b)s. Those don't get pro-rated. Only traditional IRAs, including rollover IRAs and SEP IRAs and simple IRAs, get included. Inherited IRAs don't; Roth IRAs don't. It's important that you understand the pro-rata rule, which does apply in your situation, Michael. You have to do something with that money that's in the traditional IRA or it's probably not worth doing the Backdoor Roth IRA at all if you're not going to do anything with it.
More information here:
Roth Conversions
SEP IRA
“I'm not sure what to do in a particular situation. Up until recently I had steady 1099 income. I recently started with a new employer and have W2 income. I still generate a small amount of 1099 income.For 2021 at the suggestion of my accountant, I committed to put $15,000 into a SEP IRA to reduce my taxable income. The plan was to contribute to the SEP IRA and then roll it over into my new employer's 401(k).”
OK. That'll help you avoid the pro rata issue. I like that plan.
“I'm coming due for this contribution to the SEP IRA. I recently found out I may be able to roll it into my Roth IRA.”
Well, that's true. That would be a Roth conversion, not just a rollover, though. Keep that in mind.
“I'm not positive though which is my best option or if I've sort of just delayed a tax payment. Generally, I value money more in my Roth IRA over the 401(k) except in regard to 401(k) matches from my employer.”
Obviously, 401(k) matches are always tax-deferred. They're always traditional contributions in retirement accounts. All you're asking here is whether you should be doing Roth contributions or whether you should be doing traditional contributions here. It's the same question, “Should I do a Roth conversion or not?” It's a complicated question. There is no definite answer most of the time to this question. The rule of thumb is that you do tax-deferred contributions and don't do conversions during your peak earnings years, those years when you're making as much as you're ever going to make. But in those other years when you're a resident or you're a fellow or you're in medical school or the year that you left training or a year in which you cut back or a year in which you didn't work much because you were on parental leave or you took a sabbatical or you've cut back to half time in early retirement, those are years in which it can make sense to do Roth contributions and which it can make sense to do Roth conversions.
Now, there are all kinds of exceptions to that general rule of thumb. Really supersaver kind of people that are going to be in the highest tax brackets are going to be in higher tax brackets at the time they withdraw money than they were at the time they were contributing money. A lot of them may want to do Roth contributions, even during peak earnings years, and may want to do Roth conversions even during peak earnings years. There are lots of exceptions to those rules, but those are the general rules. I just don't have enough information to know whether you should be doing a Roth conversion on that SEP IRA money or whether you should just roll it into a 401(k). I just don't have enough information to really advise you on that. You'll have to look at it, make some assumptions, and try to make the best decision you can.
Now, here's the good news. It's not like either one of them is a bad thing. One of them might be better than something else, but neither of them is bad. Don't beat yourself too much up about it, make a decision, maybe split the difference if you want, but go forward with it and quit worrying about it. I look back over the years and there are probably a few times I made that decision wrong, but you know what? It all adds up together and we're still doing just fine.
Pregnancy and Healthcare
“Hi, Dr. Dahle. My wife is a resident in her third year of neurosurgery residency. We are looking to have a child or at least start the process of having a child at the beginning of 2023 with potential birth end of 2023, 2024. We are looking to switch healthcare plans from the high deductible plan with HSA to a PPO plan to cover out of networks since she would prefer to have the child at a different hospital than she works. Is there any risk to paying cash and pulling the money out of our HSA down the line? There is currently $10,000 in our HSA that is invested, but given the current market turmoil, it is down about 20%. I would rather spend the money now and pull out the money in the future but I wasn't sure about the time restrictions on that. Any advice on how to handle a pregnancy and healthcare during this time would be greatly appreciated.”
Great job of thinking about this in advance. I love your phrase, “start the process.” I've never heard it called that before, but I think that's a great thing to call it as this is a family-friendly podcast that we have here. In regard to your main question here, yes, you can leave the money in your HSA and pull it out next year or in 20 years. Just keep that receipt that you have from the hospital for the delivery. There's no rule like with a 529, where there's a rule that you have to take it out of the 529 the same year it's spent. There's no rule like that for an HSA under current law. You can keep it in there, let it grow, let the market recover, and then take the money out. No problem at all doing that.
I think the main thing when you're planning for these sorts of times—when you're having a pregnancy, delivery, paternal leave, maternal leave—is just to plan in advance. The nice thing about it is it takes that baby nine months to grow. That gives you lots of time to plan for this. Plan for how you're going to pay it, plan for how you're going to get through that parental leave period. Insurance likely plays a role there. Savings likely plays a role. Preparing to live on less income for a little while probably plays a role.
But everybody's a little bit individual in what resources they have available to them as they go through a pregnancy, as they go through those first few months of a newborn's life. It's a magic time, especially that first one. It is magic. Everything they do is incredible. By the time you have three or four, you're like, “Oh, we're at this stage again.” It's not quite as cool. You still love them just as much, but it's not as magical as it is with that first one when you just can't wait for every little thing that they do. So, congratulations to you guys, and I hope you have a wonderful time and have just a perfect little child.
Safer Investments
“Hi, Dr. Dahle. This is Rick from California. I have a question regarding US Treasuries and CDs. I currently see that the one-year US Treasury CD gives a yield of 4%, but an online bank such as Ally only gives a one-year CD rate of 2.7%. No online bank even comes close to the US treasury rate. I don't understand why the treasury rate would be that much higher than a bank, given that the treasury rate is considered much safer. Any ideas why?”
When it comes to safe investments, you have to be comparing yields all the time. There are times when it makes more sense for me to have money in a money market fund at Vanguard and other times when it makes sense to have money in an FDIC-insured bank account at someplace like Ally Bank. If Ally Bank is paying me 2% and the money market fund is paying me 0.5%, well, I'm going to have it in Ally Bank. If the money market fund is paying me 2.2% and Ally's paying me 1.7%, I'm going to put it in the money market fund. I make that transition frequently. Probably at least once a year I change where I'm investing that money, and that's just seeking yield.
That's OK because both of those are extremely safe investments. They both act basically the same. There's no downside to chasing yield there. Obviously, if you're in a high tax bracket, you have to do the calculation to determine if you should be in a municipal money market fund. You've just got to adjust that for your taxes. But that's a pretty easy decision. Now when you're talking about treasuries, yes, you can get a higher yield on treasuries right now. In fact, if you look, as I pull this up the day I'm recording this, the three-year trade, it's a little bit of an inverted yield curve. The three-year treasury right now is yielding about 4.3%, which is pretty awesome. Obviously more than you're getting in any money market fund, more than you're getting in a high yield savings account.
But there is a risk when you buy a bond, right? As rates go up, that bond falls in value. There's some risk there obviously. But you can get a six-month treasury right now at 4.1%. Rates going up aren't going to affect that very much. The duration for that instrument is very, very low. That's not going to hurt you very much. It's good to look at the yields that are around and make those comparisons. Sometimes, you will find a free lunch there. And it sounds like this is probably one that's mostly a free lunch for you. So, good job finding it.
Sponsor
The White Coat Investor is proud to introduce our No Hype Real Estate Investing course, which will provide the framework for developing further knowledge and experience as you progress in your real estate investing career. We call it an introductory course because there is always more to learn. But this is no short, superficial course. There are over 200 lectures and videos adding up to more than 27 hours of content by over 15 different instructors. We think it just might be the best real estate course on the planet. Continue your wealth-building journey today with the No Hype Real Estate Investing course at whitecoatinvestor.com/courses.
You can do this and The White Coat Investor can help.
Quote of the Day
Johnny Cash said,
“You don't try to forget the mistakes, but you don't dwell on it. You don't let it have any of your energy or any of your time or any of your space.”
Milestones to Millionaire Podcast
#89 — Pediatric Hospitalist Pays Off $270,000 in Student Loans
This pediatric hospitalist said that while consistency and discipline may not be glamorous, they sure are effective. This doc understands the meaning of stay the course! Get a financial plan in place and stick with it and you too can knock out those student loans and begin to build wealth.
Listen to Episode #89 here.
Sponsor: Monthly Newsletter
Full Transcript
Transcription – WCI – 286
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.
Dr. Jim Dahle:
This is White Coat Investor podcast number 286 – Comparing retirement accounts.
Dr. Jim Dahle:
The White Coat Investor is proud to introduce our No Hype Real Estate Investing course, which will provide the framework for developing further knowledge and experience as you progress in your real estate investing career. We call it an introductory course because there is always more to learn. But this is no short, superficial course. There are over 200 lectures and videos adding up to more than 27 hours of content by over 15 different instructors. We think it just might be the best real estate course on the planet. Continue your wealth-building journey today with the No Hype Real Estate Investing course at whitecoatinvestor.com/courses.
You can do this and The White Coat Investor can help.
Dr. Jim Dahle:
Thanks for what you do out there. It's not easy work. That's why you are a high income professional. That's why this podcast is for you. You do hard work, you spend a long time learning how to do it, and nobody probably taught you much about personal finance or investing.
Dr. Jim Dahle:
So here on the podcast, we try to bring you that information that you did not get in medical school or dental school or law school, that you didn't get during residency, that nobody seems to want you to know.
Dr. Jim Dahle:
Especially if you've been targeted by the financial services industry, this is a great opportunity for you to become financially literate, for you to learn how to do this stuff, for you to learn the language of finance.
Dr. Jim Dahle:
So, thanks for what you do but there is a little bit more. You've got a second job. You've got to become financially literate and hopefully this podcast can help you do that.
Dr. Jim Dahle:
Do you know what else can help you do it? It’s our conference, the Physician Wellness and Financial Literacy Conference, a.k.a. WCICON. WCICON23 is going to be March 1st through 4th at an awesome resort in Phoenix. It's just north of Scottsdale. We were there last year. We had a fantastic time. We had great food. We had all kinds of events outside on the lawn in the sun. People sat around the pool. They had a great pool complex there.
Dr. Jim Dahle:
And you can go inside and you can watch the events live in person. You can also sit around the pool, since this is also a virtual conference, and if you come in person, you get the virtual event as well. So, actually, if you want to take a break during the day and go watch one of the sessions while sitting around the pool, you can do that. And so, it's a pretty unique conference that way.
Dr. Jim Dahle:
But there's obviously in person options, there are virtual options. There's a premium option. It tends to be the first thing that sells out. But hopefully you can still get that. We opened registration for this a few weeks ago, but by the time you hear this, I hope it's not totally sold out, but it may be. If not, you can still come in person and you can obviously come virtual because there's no limit on how many people can come virtually.
Dr. Jim Dahle:
But you should be aware the price is going up after November 7th. Right now, you got a $300 discount on it for being an early bird register. And truthfully, almost everybody who comes registers early bird, especially in the years that it has sold out in the past. It always sold out before the pandemic, and I suspect now that people are traveling again, it's probably going to sell out again this year.
Dr. Jim Dahle:
Lots of great speakers we're having. One of our keynote speakers is a fellow by the name of Stacy Taniguchi, who may be the most inspiring person you've ever heard speak to you before.
Dr. Jim Dahle:
But the fun thing about Stacy is that I have a very personal connection with Stacy and he's probably… Well, not probably, he's definitely the only keynote speaker we've ever had at WCICON that I've tried to kill. Not purposely, but we've had some pretty cool experiences together, and I'm sure he'll include a little bit of insight into those during his talk.
Dr. Jim Dahle:
His talk is mostly going to be on living life intentionally and actually deciding what you want to accomplish in your life and methodically accomplishing those things throughout your career.
Dr. Jim Dahle:
If you'd like to come, and I think you should, because I'd love to meet you in person and you're going to have a wonderful time, and you can use your CME money to come or write it off as a business expense, register www.wcievents.com.
Dr. Jim Dahle:
For Thanksgiving this year, we are going to be talking about gratitude. Gratitude is important. It helps us to have a good attitude and to be psychologically healthy but most importantly, we've all been just incredibly blessed in our lives. We've been given a lot of things that a lot of people don't have. By virtue of our educations, by virtue of our incomes, by virtue of the wealth that we're building. This is a chance for you to talk about what you are grateful for this year. So please record on the Speak Pipe at whitecoatinvestor.com/speakpike what you're grateful for this year, and we'll share that on the podcast.
Dr. Jim Dahle:
All right, I've got a few guests I'm going to bring on there from a financial advisory firm. They're going to help us take the first few questions off of the Speak Pipe today to answer for you folks.
Dr. Jim Dahle:
Our guests today on the show are from Personal Choice Financial Advisors. You can get more information about them at financialrounds.com, but here with me today, we have Chris Hansen, the founder, as well as Robert Hansen and Ben Dobler. Welcome to the White Coat Investor podcast.
Chris Hansen:
Thank you.
Robert Hansen:
Thanks for having us, Jim.
Dr. Jim Dahle:
Yeah. We wanted to introduce you to the audience as well as have you help answer some of their questions. But before we get into the questions, can you explain to us why you decided to become a financial advisor?
Chris Hansen:
Back in 1991, I worked for Procter & Gamble. So I'm somewhat the same as a lot of people I think that follow some of your writings and so forth. I'm a career changer. As a chemical engineer in Procter & Gamble, I really got interested in personal finance. After a while people started bringing me proposals from their brokers for retirement and so forth.
Chris Hansen:
Well, back in the early 90s, as you know everything was pretty much commissions. So, I would explain to them the commission structure, what they were paying for the advice and offer to show them, “Look, there's a lot better mutual funds out there. All the Vanguard funds were available and so forth. There are a lot better options out there at a lot lower cost. I can show you how to do this.”
Chris Hansen:
What we found is, almost all of them to the person came back and said, “I do not want to do this on my own. I'm either going to pay you to do it or I'm going to hire somebody else to do it.”
Chris Hansen:
So, I went and actually got registered with the SEC, started the company in 1991 and started a family financial planning practice when it was very, very uncommon to do that. Fast forward to 2016, my eldest son graduated from the University of Cincinnati Medical School. He's a neurologist at this point in time.
Chris Hansen:
And that's when I realized as I helped him through a lot of the things he had going on, how much different it was working with doctors, with young doctors, with student loans, all the people chasing them, trying to sell them different things.
Chris Hansen:
Getting all their finances up and running, I realized I really needed to become an expert in all these things. As I got more and more expertise in it, we started to reach out, a lot of his friends reached out to us and we started helping more and more doctors. And at this point, probably 90% of our new clients are physicians.
Dr. Jim Dahle:
What do you think makes your practice or firm particularly unique? What are you really good at?
Ben Dobler:
I'm Ben. One of the things that I think we really specialize in doing is we work as a team. It's really hard as a financial planner or as anyone to know everything there is to know. So, we each try and bring something different to the table. We're all CFPs, we all come from that background, but we each kind of have some special thing that we focus on.
Ben Dobler:
And so, when people work with us, we meet with everyone. Depending on the time of year, it's going to be a different person just depending on what's going on and who the best person is to jump in. So, we really take a lot of pride in that, and that's something that we focus on.
Dr. Jim Dahle:
Awesome. And what's your particular pricing model and why did you choose that?
Robert Hansen:
We actually have a flat fee structure and an AUM structure. We have both options available and we set it up that way honestly to help as many people as we possibly can. However they feel most comfortable to engage and however they'd like to set it up, we can help them set it up that way. And if you're leaning towards flat fee, that actually starts at $5,000 a year and goes all the way up to $15,000 a year, just depending on complexity. But we do, again, leaning towards trying to help as many people as possible. We do have a $3,000 a year engagement for residents and fellows.
Dr. Jim Dahle:
All right. Thank you for sharing that. Let's get into some listener questions. This first one comes from John Michael. Let's take a listen.
John Michael:
Hi. Dr. Dahle. This is JM from West Virginia. I'm in my last year of residency and I have a question about prioritizing a 403(b) versus a 457(b). I'm very fortunate in that my spouse started her attending job this year, so I'm able to max both of my retirement accounts for the first time ever as a resident.
John Michael:
The problem is that next year I graduate in June, so I won't have enough total salary to max out both my 403(b) and my 457(b) before I graduate. I'm still looking for jobs, so I don't know what retirement accounts I'll have access to at my future employer.
John Michael:
My initial thought is that I should fully fund my 457(b) since it's less likely that I'll have one available as an attending. I feel there's a much higher chance that I'll have a 401(k) or a 403(b) that I can max out later in the year as an attending.
John Michael:
Anyway, my question is really, am I thinking about this correctly? Am I missing anything? I appreciate all you do and thank you for your guidance.
Dr. Jim Dahle:
All right. Great question, John. Who wants to take a stab and give John something useful to think about this 403(b) versus 457(b) question?
Ben Dobler:
I'll take a stab at this one. This is a great question. I love this question. I do think he's thinking about it right. But I want to kind of dive a little bit into why and some of the things to watch out for.
Ben Dobler:
I think there's really three pieces. The first piece is what kind of 457(b) are we talking about. Is this a governmental 457(b) or is this a non-governmental 457(b)? So, if this is a governmental 457(b), this would mean it's a state hospital, university hospital, maybe it's a county hospital. And any of these scenarios would mean that this works kind of like a 401(k) that you might be used to. So, it would mean after he leaves, he can roll this over into a new plan, he could roll it into an IRA, although depending on doctoral Roth and things like that may not want to.
Ben Dobler:
But on the other hand, if this is just for say a religious hospital residency, this is maybe a 457(b) that is non-governmental. And if that's the case, then this is really going to be forced out. He'll have to liquidate that plan over some short period of time after he finishes residency. So, in that case, I would really steer him away from this.
Ben Dobler:
I do think most likely this is a governmental 457(b), because typically the non-governmental ones would only be available if you are a very high earner, a highly compensated employee. And of course, as we know about residency, that is very hard to get. So, most likely is a governmental.
Ben Dobler:
The next piece, which kind of gets into the meat of the question here is the contribution limit. So, what makes 457(b) special? They don't count in the same bucket in the IRS's eyes as a 401(k) or a 403(b).
Ben Dobler:
For this year, in 2022, as of this reporting, you could put $20,500 into a 401(k) or a 403(b) or some combination thereof and then go and put another $20,500 into that 457. He doesn't want to do that of course, but the worry is that if he puts money into the 401(k) or 403(b) side, once he gets into his new job, he's going to come up short where he's only got maybe $10,000, $12,000 left in that bucket. If he starts with the 457(b), he could put $20,500 in, turnaround and store his attending position and put that $20,500 back in there again.
Ben Dobler:
So that's just the nuance there. And then one additional quick note. It's pretty rare on the 457(b) side to have an employer matching contribution but that does happen when that happens. There is a unique feature there where on the 401(k) side or 403(b) side, you could put in the $20,500 and the employer match does not count against you. On the 457(b) side, if you're lucky to have a match on that side, that does count towards that $20,500. So just something else to watch out for.
Ben Dobler:
So, be aware of those limits. I think he's looking at it right, that 457(b)s are a little less common. Typically, you're going to have a 401(k) or 403(b). So, if it's that governmental variety, it probably is going to make a lot of sense to put money into that first and then leave the door open for the 401(k) or 403(b) bucket later on in his attending position.
Dr. Jim Dahle:
What are the odds that he can actually access the new 401(k) or 403(b) in his first six months of the job? A lot of times you got to wait a while till the next calendar year or even a full year from the start of employment before you can make a contribution. What percentage of the time do you think the new employer actually lets you use that 401(k) as soon as you get there?
Ben Dobler:
It's a great question, and it's going to come down to the plan. It's going to also come down to what type of employer matching contributions they offer. I wish I had a real good rule of thumb here. It really does just depend. But if they are less generous with their matches, generally, they're going to let you participate more quickly and easily and start putting money in on your own because it doesn't obligate them as the employer to do anything on top of that.
Ben Dobler:
So, it is something to be aware of, as you're contemplating those two. That is another possibility. And who knows? Maybe this will be a 1099 role where he could open a solo. So, any additional clarity that he would have in terms of specifically what kind of job he's getting, when they might be eligible for the 401(k) or 403(b), that would obviously help.
Dr. Jim Dahle:
Yeah, it's tough without having all the details in any situation. That's the benefit of sitting down with the financial planner like you guys. You can bring in everything, you can look at all the details and make a comprehensive answer to any questions you have rather than just having what people can record in a minute and a half on the Speak Pipe in which you're left guessing about lots of details.
Dr. Jim Dahle:
All right, our next question comes from Evan. He's got a question about independent contractors. Let's take a listen to this one.
Evan:
Hey, Dr. Dahle. A longtime fan of White Coat Investor. I started following back in med school. Anyway, I'm finishing a residency and looking into making that transition into attending hood and looking at jobs. I heard you need some Speak Pipe questions. So here I am.
Evan:
My multipart question can probably be boiled down into a 1099 versus W2, which you had a great blog post on, by the way. The job basically sounds almost like a partnership from the get go. It's a very low guaranteed base salary, less than 50 percentile and sounds like the majority of the compensation will be through profit sharing.
Evan:
So, for the job, while the default is W2, they're open to structuring it as a 1099. And honestly, I'm kind of leaning toward that 1099 setup instead. As a 1099, it sounds like I'll still be able to buy into the group insurance plans and all other things aren't being equal. And if I don't mind the extra working complexity of setting that up, the LLC or the S Corp, would 1099 make more sense than W2? Is there something else I might be missing that I should be alert for?
Evan:
And I guess on a more generalizable level, if all things are equal, docs could choose to be paid on W2 or 1099, which would make more sense numbers-wise? Is there kind of a break-even point, like one side where W2 is better, and other side where 1099s are better? Thanks.
Dr. Jim Dahle:
Well, Evan, you got a lot of questions in there in a minute and a half. Let's see how many of them we can get answered. Anybody who wants to take a stab at the overall topic, which is when should you take compensation as a 1099 it sounds like?
Ben Dobler:
I can jump in on this one. And again, another great question by Evan here because there's a lot of positives and negatives to both being a W2 employee or a 1099 independent contractor.
Ben Dobler:
I would say, I think in general it comes down to two main things. It's the differences in compensation and the ability of the individual if they're comfortable with those complexities, with setting up and managing the 1099 side of it.
Ben Dobler:
I would say just benefits of being a W2 employee. A lot of times you'll have those subsidized benefits, you'll have that health insurance, you'll have disability life insurance that the company's help subsidizing for you. Again, it depends on the quality of those benefits, those plans, but you also have retirement benefits. So, a lot of times they'll have the 401(k) with a 401(k) match or 403(b) and possibly a 457(b).
Ben Dobler:
They might even have in the 401(k) the ability to do a mega backdoor Roth as an option, which is fantastic. But it really comes down to are those plans, decent plans? Are the investments inside those decent investments? So, there's a lot that comes into play here, even looking at when you are a W2 employee that the company helps pay for half of the social security and Medicare taxes. So, they're helping subsidize that.
Ben Dobler:
Again, a lot of benefits of being that W2 employee, but there's also a lot of benefits of being 1099 an independent contractor. So that's where, again, having the ability to set up your own retirement plan. Maybe as a W2 you don't have a great 401(k) option, the investments aren't great, but you can set up a solo 401(k), you can get more money put away, you can select your own investments. Even after the Tax Cuts and Jobs Act, you no longer can deduct your expenses as a W2 employee on your tax return, but you can as a 1099 independent contractor.
Ben Dobler:
So, there's again, positives, negatives to both. One thing you do want to look out for that a lot of physicians have unique to them is pursuing PSLF, which you can't do as an independent contractor. You need to be a W2 employee for that. So, you want to make sure your student loans are being factored in, but you really just got to weigh the positives and negatives to both. Overall, how is the compensation different?
Ben Dobler:
Again, if the compensation is absolutely identical, you'd almost always lean towards the W2 employee side. But if you're leaning towards 1099, an independent contractor, you just want to make sure they gross it up, you'd want to push for that higher compensation for that lack of benefits that you'd have.
Dr. Jim Dahle:
Yeah. Especially if you are having to pay both halves of the social security and Medicare taxes. It may be one of the greatest benefits of being an employee that a lot of people don't think about. They think, “Oh, 1099 or W2.” They don't think 1099 getting paid more versus W2 being paid less.
Dr. Jim Dahle:
Awesome. Let's move on to the next question. This last one we'll do together. This one's got some questions about that classic dilemma, Roth versus traditional.
Speaker:
Hey, Dr. Dahle. I had a two-part question about Roth versus traditional 401(k) contributions. I recently listened to a podcast of yours and got a little confusing in a short segment of it when you mentioned if someone is like you in a relatively high bracket, you're actually putting more money on an after-tax basis if you're making the Roth contribution. So really what you should be comparing is putting $20,500 into a Roth account or putting something like $13,000 into a tax protected account and investing another $7,000 or so into a taxable account. Could you explain what you meant here?
Speaker:
And secondly, you also mentioned that for someone who's in the same tax bracket at contribution and withdrawal comes out ahead with the Roth. How is this possible if for example I was in the 35% marginal bracket, contributed to a Roth account with tax free at retirement versus saving 35% on taxes with the traditional contribution and paying that 35% at withdrawal? Thanks for all you do.
Dr. Jim Dahle:
All right. Do you want to give your thoughts on this topic?
Chris Hansen:
Yeah. I think a lot of this comes from if you simply take a look at in lower tax brackets, having say $27,000 to put away in your 401(k), be it Roth or conventional. When you run that scenario of putting $20,500 into my 401(k), whether I go Roth or I go conventional portion on that, and then I take, say the $6,500 that's paid to taxes, either put it on my tax account or I put it in a taxable account.
Chris Hansen:
If you're in an identical, say a 12% or a 22% tax bracket, you run that scenario out, they're almost identical other than the slight tax drag you're going to have on the money you put into the taxable account. So, in that case, I think as you stated, the Roth IRA's going to have a bit of a benefit in that scenario.
Chris Hansen:
But again, what we tell doctors, it's any kind of rule of thumb like this usually doesn't fit very well. One of the places that doctors are very, very different, most of the people that we deal with who are not doctors, they have one plan to choose from. It's a 401(k) or it's a 403(b).
Chris Hansen:
Part of that scenario with a doctor would be, “I can put this into a conventional 401(k). What do I do with my $6,500?” Well, unlike most industries, I have a 457 option. I have a top hat option. I have some other pre-tax option I can go to. I also have enough of an income that I can do a backdoor Roth IRA. I may have a mega backdoor Roth IRA.
Chris Hansen:
But if I can completely remove the taxes from that equation, then that kind of gives the tax deferred option somewhat of a benefit because again, at 12% to 22%, where again, that rule of thumb kind of sits, if I look at that and say I'm a doctor, I might be in the 22%, but I'm probably in a 32%, 35%, 37%.
Chris Hansen:
Everything I put into this plan comes off the top, it comes off at my 37% tax bracket. When I'm taking this money out, I've got a lot of room between zero and 37% taxes. I'm going to get that advantage. Not everything's going to come out at that 37% taxes.
Chris Hansen:
The other piece that really comes into play that helps the pre-tax side is especially most of our physicians are young physicians. They've got student loans and if I can lower my income, I lower my student loan payment if I'm looking for forgiveness. So that's actually kind of an extra tax you want to include in there as you think about the equation.
Chris Hansen:
If I'm self-employed, the QBI deduction comes into play there. It's one of those that again, it boils down to, and I think we said this for all three answers, it comes down to it just depends on what else you've got available. You've got a lot of other options available. What's the best one in that particular situation?
Dr. Jim Dahle:
Yeah, for sure. Great, great thoughts on the QBI or 199A deduction as well as the student loans. Those factors absolutely come into play for at least as long as that deduction exists and as long as the forgiveness program exists anyway.
Dr. Jim Dahle:
But a lot of people just see tax free and they're like, “Oh, Roth must be better.” They don't realize there can be pretty significant tax arbitrage of saving money while you're putting it in at 37% and then bringing it out and filling the 10% and 12% and 22% and 24% brackets with those withdrawals. And that's why for most docs during their peak earnings years, tax deferred is a great deal. And so, keep that in mind.
Dr. Jim Dahle:
But I think the main point is you just got to be thinking in terms of after-tax amounts when you're saving money. Because $20,500 in a tax deferred account is not the same as $20,500 in a tax-free account. So, you've got to make some kind of an adjustment to compare those.
Dr. Jim Dahle:
Well, awesome. It's been great chatting with you. I appreciate you coming on and help answering our listeners' questions. For those who are interested in learning more about Personal Choice Financial Advisors, the best place to do that is to go to financialrounds.com. They stand ready to help you with any financial planning questions you need, investment management concerns you have. You can check them out there on the website and sign up for an introductory phone call with them if you are so inclined. I appreciate your time guys.
Ben Dobler:
Thanks. We appreciate your time, Jim.
Chris Hansen:
Thanks Jim.
Dr. Jim Dahle:
Okay, I hope you enjoyed that segment with getting a few extra opinions on the podcast. I'm going to have to answer the rest of your questions myself. So, let's take this one from Michael on Roth IRA conversions.
Michael:
Hello, Dr. Dahle. My name is Michael from Midwest. I'm a big fan of your podcast. I listen to every episode. I have a question about Roth IRA conversions. I have a traditional IRA, which has some money sitting in the account invested in different ETFs. I'm planning on starting the Roth conversion starting next year. And my understanding is that I can deposit $6,000 to the traditional IRA account and then convert it to a Roth account. I was wondering if I can do it with some money already sitting in the traditional account invested in different funds. Thank you.
Dr. Jim Dahle:
Great question Michael. We're talking about the classic backdoor Roth IRA process. This is something that higher earners couldn't do before 2010, but in 2010, Congress changed one of the rules that applies to IRAs and Roth conversions. Basically, they made it so high earners could do Roth conversions.
Dr. Jim Dahle:
However, a typical doc, typical person listening to this podcast cannot contribute directly to a Roth IRA. They make too much money to do it. There's a limit on your income. And if your income is above that limit, which is I believe just over $200,000 right now, if you're married filing jointly, then you have to contribute to the Roth IRA indirectly through this process we call the backdoor Roth IRA process.
Dr. Jim Dahle:
And it's a pretty simple two-step process. First, you contribute to a traditional IRA because there's no rule that keeps you from contributing to a traditional IRA. As long as you have earned income, you can do it no matter how high that income is. However, often that contribution is not deductible. You don't get a tax deduction for it because you make too much money and you have a plan in place at work, a 401(k) or a 403(b) or whatever.
Dr. Jim Dahle:
But you can then take that money that you contributed to the traditional IRA and convert it immediately to a Roth IRA. Because you didn't get the tax deduction up front, there is no tax cost to doing the conversion and the end result is identical to having contributed directly to the Roth IRA. Obviously, money in a Roth IRA is never taxed again. This is a good place to invest. It's much better than leaving it in the traditional IRA as a non-deductible basis, if you will, on which all the earnings are going to be taxed as ordinary income rates when they come out.
Dr. Jim Dahle:
It's much better than investing in a taxable account, which is totally accessible to your creditors, which is taxed as it goes. Even though you get lower long-term capital gains rates and lower qualified dividend rates, it is still getting taxed as it goes. In the Roth IRA, it doesn't get taxed. So, this is a good thing to get money into a Roth IRA.
Dr. Jim Dahle:
However, one thing you need to be aware of when you are doing the backdoor Roth IRA process is how that process is reported to the IRS. And it is reported on form 8606, which is just a form you include with your tax return each year. There's one for you and if you're doing a backdoor Roth IRA for your spouse, there's one for your spouse.
Dr. Jim Dahle:
And one of the questions on that form, question number six asks how much money you have in a traditional IRA, rollover IRA, SEP IRA or simple IRA as of December 31st of that year that you did this conversion.
Dr. Jim Dahle:
And the key is to be able to answer that question $0. The reason why is if you don't, your conversion will be prorated. That doesn't mean it's illegal, that doesn't mean it's necessarily bad. But in general, you're not accomplishing what you were trying to accomplish with the backdoor Roth IRA process if your conversion is getting prorated. You don't want it to be prorated.
Dr. Jim Dahle:
So, you got to do something with money you have in a traditional IRA before or at least by the end of the year, of the year you do the conversion step. And there's usually one or two things that people do. The first one is if it's just a small little IRA, maybe it's $8,000 or something. You can probably eat the tax cost of just converting all that $8,000 to a Roth IRA and you'll owe $3,000 or so in taxes. No big deal. You can afford that. And then obviously that money never gets taxed again.
Dr. Jim Dahle:
But if you got like $800,000 in that IRA, well, the tax cost on that is probably going to be a little bit too much for you to be able to afford to do that. And so, what people do in that sort of a situation is they roll the money in that traditional IRA into a 401(k) or into a 403(b) because that question six on form 8606 doesn't ask about how much you have in 401(k)s or 403(b)s. Those don't get prorated. Only traditional IRAs including rollover IRAs and SEP IRAs and simple IRAs get included. Inherited IRAs don't, Roth IRAs don't.
Dr. Jim Dahle:
So, it's important that you understand the pro rata rule, which does apply in your situation, Michael. You got to do something with that money that's in the traditional IRA or it's probably not worth doing the backdoor Roth IRA at all if you're not going to do anything with it.
Dr. Jim Dahle:
All right, let's do our quote of the day. This one's from Johnny Cash who said “You don't try to forget the mistakes, but you don't dwell on it. You don't let it have any of your energy or any of your time or any of your space.”
Dr. Jim Dahle:
All right, let's take an email from the inbox. This one's about SEP IRAs. “I'm not sure what to do in a particular situation. Up until recently I had steady 1099 income. I recently started with a new employer and have W2 income. I still generate a small amount of 1099 income.
Dr. Jim Dahle:
For 2021 at the suggestion of my accountant, I committed to put $15,000 into a SEP IRA to reduce my taxable income. The plan was to contribute to the SEP IRA and then roll it over into my new employer's 401(k).” Okay. That'll help you avoid the pro rata issue. I like that plan.
Dr. Jim Dahle:
“I'm coming due for this contribution to the SEP IRA. I recently found out I may be able to roll it into my Roth IRA.” Well, that's true. That would be a Roth conversion, not just rollover though. Keep that in mind.
Dr. Jim Dahle:
“I'm not positive though which is my best option or if I've sort of just delayed a tax payment. Generally, I value money more in my Roth IRA over the 401(k) except in regards to 401(k) matches from my employer.”
Dr. Jim Dahle:
Obviously 401(k) matches are always tax deferred. They're always traditional contributions in retirement accounts. All you're asking here is whether you should be doing Roth contributions or whether you should be doing traditional contributions here. It's the same question, “Should I do a Roth conversion or not?” Is the same question essentially. And it's a complicated question. There is no definite answer most of the time to this question.
Dr. Jim Dahle:
The rule of thumb is that you do tax deferred contributions and don't do conversions during your peak earnings years. Those years when you're making as much as you're ever going to make.
Dr. Jim Dahle:
But in those other years when you're a resident or you're a fellow or you're in medical school or the year that you left training or a year in which you cut back or a year in which you didn't work much because you were on parental leave or you took a sabbatical or you've cut back to half time in early retirement, those are years in which it can make sense to do Roth contributions and which it can make sense to do Roth conversions.
Dr. Jim Dahle:
Now there's all kinds of exceptions to that general rule of thumb. Really super saver kind of people that are going to be in the highest tax brackets are going to be in higher tax brackets at the time they withdraw money than they were at the time they were contributing money. A lot of them may want to do Roth contributions even during peak earning's years and may want to do Roth conversions even during peak earnings years.
Dr. Jim Dahle:
So, there's lots of exceptions to those rules, but those are the general rules. And I just don't have enough information to know whether you should be doing Roth conversion on that SEP IRA money or whether you should just roll it into a 401(k). I just don't have enough information to really advise you on that. So, you'll have to look at it, make some assumptions and try to make the best decision you can.
Dr. Jim Dahle:
Now here's the good news. It's not like either one of them are a bad thing. One of them might be better than something else, but neither of them are bad. So, don't beat yourself too much up about it, make a decision, maybe split the difference if you want, but go forward with it and quit worrying about it. I look back over the years and there's probably a few times I made that decision wrong, but you know what? It all adds up together and we're still doing just fine.
Dr. Jim Dahle:
Speaking of doing just fine, I hope you're doing just fine. Your job is difficult. Burnout rates are super high. I don't know if they've ever been this high. This might be the highest burnout has ever been among physicians and among dentists for lots of different reasons. We don't control as much as we used to control. We tend to be employees more than we used to be. But the COVID Pandemic certainly had a lot to do with increased rates of burnout recently.
Dr. Jim Dahle:
If you need some help, we have physician burnout coaching. If you go to our recommended tab at whitecoatinvestor.com and thumb down to Physician Burnout Coaching, you can see a product we have there that we call Burnout Proof MD.
Dr. Jim Dahle:
And this is a partnership we have with the Happy MD. It's a great six month program to help you develop the techniques and tactics and knowledge base that you need to really have a lengthy, enjoyable career. You can't buy burnout insurance. This is the closest thing to it that I know of. Just like you buy disability insurance, you buy life insurance, but you can't buy burnout insurance.
Dr. Jim Dahle:
So, if you're struggling with that or if you need some tools and skills, it'll help you to live your best life. Check that out by going to the recommended tab and scrolling down to Physician Burnout Coaching.
Dr. Jim Dahle:
All right. Let's talk about this question from Dane about pregnancy and healthcare.
Dane:
Hi, Dr. Dahle. My wife is a resident in her third year of neurosurgery residency. We are looking to have a child at the beginning or at least start the process of having a child at the beginning of 2023 with potential birth end of 2023, 2024.
Dane:
We are looking to switch healthcare plans from the high deductible plan with HSA to a PPO plan to cover out of networks since she would prefer to have the child at a different hospital than she works.
Dane:
Is there any risk to paying cash and pulling the money out of our HSA down the line? There is currently $10,000 in our HSA that is invested, but given the current market turmoil, it is down about 20%. I would rather spend the money now and pull out the money in the future but I wasn't sure about the time restrictions on that. Any advice on how to handle a pregnancy and healthcare during this time would be greatly appreciated. Thanks.
Dr. Jim Dahle:
Well, great job of thinking about this in advance. I love your phrase, “start the process.” I've never heard it called that before, but I think that's a great thing to call it as this is a family friendly podcast that we have here.
Dr. Jim Dahle:
In regards to your main question here, yes, you can leave the money in your HSA and pull it out next year or in 20 years. Just keep that receipt that you have from the hospital for the delivery. And there's no rule, like with a 529, there's a rule, you got to take it out of the 529 the same year it's spent. There's no rule like that for an HSA under current law. So, you can keep it in there, let it grow, let the market recover, and then take the money out. No problem at all doing that.
Dr. Jim Dahle:
I think the main thing when you're planning for these sorts of times when you're having a pregnancy delivery, paternal leave, maternal leave, the main thing is just to plan in advance. The nice thing about it is it takes that baby nine months to grow. So that gives you lots of time to plan for this. Plan for how you're going to pay it, plan for how you're going to get through that parental leave period. Insurance likely plays a role there. Savings likely plays a role. Preparing to live on less income for a little while probably plays a role.
Dr. Jim Dahle:
But everybody's a little bit individual in what resources they have available to them as they go through a pregnancy, as they go through those first few months of a newborn's life. It's a magic time, especially that first one. It is magic. Everything they do is incredible. By the time you have three or four, you're like, “Oh, we're at this stage again.” It's not quite as cool. You still love them just as much, but it's not as magical as it is with that first one when you just can't wait for every little thing that they do. So, congratulations to you guys and I hope you have a wonderful time and have just a perfect little child.
Dr. Jim Dahle:
All right, let's take another question about safer investments. This one comes from Rick.
Rick:
Hi, Dr. Dahle. This is Rick from California. I have a question regarding US Treasuries and CDs. I currently see that the one-year US Treasury CD gives a yield of 4%, but an online bank such as Ally only gives a one-year CD rate of 2.7%. No online bank even comes close to the US treasury rate. I don't understand why the treasury rate would be that much higher than a bank, given that the treasury rate is considered much safer. Any ideas why? Thank you so much for all you do.
Dr. Jim Dahle:
All right, great questions. When it comes to safe investments, you have to be comparing yields all the time. There are times when it makes more sense for me to have money in a money market fund at Vanguard and other times when it makes sense to have money in FDIC insured bank account at someplace like Ally Bank.
Dr. Jim Dahle:
If Ally Bank is paying me 2% and the money market fund is paying me 0.5%, well, I'm going to have it in Ally Bank. If the money market fund is paying me 2.2% and Ally's paying me 1.7%, I'm going to put it in the money market fund. So, I make that transition frequently. Probably at least once a year I change where I'm investing that money and that's just seeking yield.
Dr. Jim Dahle:
And that's okay because both of those are extremely safe investments. They both act basically the same. There's no downside to chasing yield there. Obviously, if you're in a high tax bracket, you got to do the calculation to determine if you should be in a municipal money market fund. You just got to adjust that for your taxes. But that's a pretty easy decision.
Dr. Jim Dahle:
Now when you're talking about treasuries, yes, you can get a higher yield on treasuries right now. In fact, if you look, as I pull this up the day I'm recording this, the three year trade, it's a little bit of an inverted yield curve. The three-year treasury right now is yielding about 4.3%, which is pretty awesome. Obviously more than you're getting any money market fund, more than you're getting in a high yield savings account.
Dr. Jim Dahle:
But there is a risk when you buy a bond, right? As rates go up, that bond falls in value. And so, yeah, there's some risk there obviously. But you can get a six-month treasury right now at 4.1%. And rates going up aren't going to affect that very much. The duration for that instrument is very, very low. So that's not going to hurt you very much.
Dr. Jim Dahle:
So yeah, it's good to look at the yields who are around and make those comparisons. And sometimes you will find a free lunch there. And it sounds like this is probably one that's mostly a free lunch for you. So, good job finding it.
Dr. Jim Dahle:
The White Coat Investor is proud to introduce our No Hype Real Estate Investing course, which will provide the framework for developing further knowledge and experience as you progress in your real estate investing career. We call it an introductory course because there is always more to learn. But this is no short, superficial course. There are over 200 lectures and videos adding up to more than 27 hours of content by over 15 different instructors. We think it just might be the best real estate course on the planet. Continue your wealth-building journey today with the No Hype Real Estate Investing course at whitecoatinvestor.com/courses.
You can do this and The White Coat Investor can help.
Dr. Jim Dahle:
Don't forget, www.wcievents.com if you want to come to the Physician Wellness and Financial Literacy Conference. It's going to be awesome. I hope you do come, but I hope you come for the early bird price. It's $300 off if you register by November 7th.
Dr. Jim Dahle:
Thanks for those of you leaving us a five star review and telling your friends about the podcast. Our most recent one comes from SN Chowdary, who said “Great podcast. Very informative. Every person who wants to have a decent retirement should follow this podcast.” Five stars. Thank you so much for that.
Dr. Jim Dahle:
Keep your head up and shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor podcast.
Disclaimer:
The hosts of the White Coat Investor podcast are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.
