Today, Dr. Tyler Scott joins Dr. Jim Dahle to help answer your questions about 529 plans and Trump Accounts. We talk about the right amount to save in a 529 and how to think about long-term education funding goals. We explore whether 529 funds can be used for continuing education expenses, such as CME, and how the rules around qualified education expenses actually work. We discuss what we know about the much-anticipated Trump accounts, or 530A accounts, and what they are intended to do.
In This Show:
Fund a 529 or Invest Elsewhere?
“Hi, we have an infant daughter, and we were discussing how much to fund her 529. We're concerned that if we overfund it, it may be hard to use those funds in the future, and they would get tied up. I'm wondering what your thoughts are about overfunding 529s and if it's better to invest that money elsewhere where it might be more flexible.”
This is one of those questions that comes from a really good place. A lot of white coat investor parents are still carrying the emotional scars of their own student loans, and they want to do everything they can to keep their kids from starting adult life under that same weight. The instinct to start early makes sense. The longer money has to compound, the less you may have to contribute out of pocket later. But if you are funding a 529 for an infant, there is a very good chance you are going to overfund it, because at that stage, you have no clue what that child is actually going to do. Parents may be imagining Yale, then dental school, then some very expensive professional path. But most kids are not going to follow that script. The biggest variable by far is not investment return. It is what school they choose and what kind of education they actually pursue, and you simply cannot know that when they are a baby.
Tyler said the better way to think about it is to start with an actual goal instead of just trying to “max out” a 529. A lot of people come in thinking about it like a 401(k) or Roth IRA, but that is not really how 529s work. There is not some practical max that most people need to worry about. The better question is what percentage of your child’s education you want to cover. Some families want to cover all of it. Others want to cover half or maybe two-thirds, because they want their kids to have some skin in the game. From there, you can estimate whether you want to aim at public or private school costs, factor in education inflation of around 3%-3.5% percent, and reverse engineer a reasonable monthly contribution. You might decide you want to cover 80% of a public university education 18 years from now, and once you run the numbers, you might discover that maybe $450 a month gets you there. That is a much more grounded approach than just dumping in a giant lump sum and hoping for the best.
Jim made the point that even when kids get older, you still may not know where they are headed. He thought one of his daughters was going to go to medical school, so he increased 529 contributions during her high school years only to watch her pivot after getting to college. Even when your child seems headed down one road, that can change very quickly. In reality, most families are actually pretty pragmatic. They are not all trying to fund some fantasy scenario where every kid goes to the most expensive private school and then medical school. A lot of them are just trying to cover a chunk of a state school education. Tyler said what often happens is families start early, let the market do some work, and then simply turn off contributions in middle school or high school once it becomes clear they are on track or headed toward overfunding.
Many people misunderstand what counts as a qualified expense for your 529. Qualified expenses include the big, obvious items like tuition, books, fees, and computers. It also includes apprenticeship programs and vocational education, not just traditional college. You can even use up to $10,000 total over a beneficiary’s lifetime for student loans, including a sibling’s loans in some situations. But there are also things people assume are covered that are definitely not. Transportation is the big one people get wrong. Gas, flights, parking passes, and travel costs are not qualified expenses. Health insurance and extracurriculars are not included either.
The downside of overfunding a 529 is often overstated. Tyler said that when people hear “taxes and penalties,” they tend to panic and assume the whole account gets hammered. But that is not how it works. If you take a non-qualified withdrawal, you only owe ordinary income tax and the 10% penalty on the earnings portion, not on your original contributions. He walked through an example where a 529 has $20,000 left in it, with $15,000 of contributions and $5,000 of growth. If you withdrew $10,000 and 25% of the account represented earnings, then only $2,500 of that withdrawal would be exposed to taxes and penalties. At a 40% marginal tax rate, that is $1,000 in taxes plus a $250 penalty, for a total cost of $1,250. Tyler’s point was that yes, it is not ideal, but it is also not the end of the world. You also got the benefit of tax-protected growth along the way, so even that cost should be viewed in context. Sometimes the simplest solution really is just to take the money out and move on.
There are also some safety valves for an overfunded 529. One option is scholarships. If your child gets a scholarship, you can withdraw that amount from the 529 without paying the 10% penalty, though you still owe ordinary income tax on the earnings portion. Jim said that his family had that situation and chose not to pull the money out because they did not need it and preferred to let it keep growing. It is worth remembering that undergrad is not the end of the road. The money can be used for grad school, medical school, dental school, and other future education.
Another major option is changing the beneficiary of the 529. Tyler emphasized that “family member” is defined very broadly here. It can include siblings, step-siblings, cousins, parents, in-laws, spouses, adopted children, and more. The most obvious move is often to shift excess money from one child who did not need it to another child who does. But the favorite strategy for many families is to leave the money for future grandkids. If there is money left in the account and it keeps compounding for another 20 or 30 years, it can turn into a huge head start for the next generation. That is when a supposedly overfunded 529 starts to look a lot more like generational wealth than a problem.
There is a newer Secure 2.0 provision that allows up to $35,000 of unused 529 money to be rolled into the beneficiary’s Roth IRA. This can be a nice safety valve, but it is not some magical optimization trick. Intentionally overfunding just to set up a Roth conversion later is not a good optimization. The rollover is capped. It has to happen over multiple years because it is still subject to annual Roth contribution limits, and the beneficiary needs earned income. The 529 must also have been open for 15 years, and contributions made in the last five years, along with earnings on those contributions, are not eligible. There is also still some uncertainty on details, like whether moving from one state’s 529 plan to another restarts the 15-year clock. While the rollover is federally tax-free, a handful of states may still treat it as taxable at the state level. So yes, it is useful, but only for a relatively small leftover balance—not for a massive overfunding mistake.
Remember to zoom back out and put the 529 in its proper place. People should generally save for retirement before they get too aggressive with college savings. Parents can get so focused on shielding their kids from student loans that they neglect their own savings rate and their own work-optional goals. But there are lots of ways to pay for college later. You can cash-flow it, use taxable investments, redirect retirement savings contributions for a few years, or adjust as the picture becomes clearer. Retirement has no similar fix if you fail to save enough. The first financial job of a parent is making sure they are not a burden to their children later. The big takeaway is that 529s are great, and overfunding is not nearly as scary as people think. And when in doubt, save more for yourself first and let the college plan stay flexible.
More information here:
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How Much Should You Sacrifice to Pay for Your Child’s Medical School Education?
Despite Our Student Loan Debt, Here’s How We’re Filling Our Kids’ 529s
Trump Accounts vs. 529s and UTMA Accounts
“Hi, Dr. Dahle. Thanks for everything you do. I'm an early-career radiologist with two young kids and currently use a mix of 529 and UTMA to prepare for their future. I recently heard about the new 530A account, also called a Trump account, and I'm very confused about the rules and how to use in comparison to the 529 and UTMA account that I already have.”
This question is really about how to think through three different buckets for kids and where each one actually fits. Ideally, you keep it simple. A 529 is for education. That is its lane. It works great for K-12, college, grad school, and even professional school, but you should not be putting more in than you realistically expect to use for education. There are plenty of other ways to pay for school later if needed, including taxable accounts and even retirement accounts in some cases. The key point is that the 529 is a focused tool. It is not meant to do everything.
There is also a UTMA, which Jim described as more of a “20s fund.” This is money that is legally the child’s once you contribute it. You are just the custodian until they reach the age of majority, which is often 21. At that point, the account becomes fully theirs, and you lose all control. They can spend it however they want, whether that is wise or not. That is the tradeoff. While the money can be used for things like summer camp or education along the way, it must always be spent for the child’s benefit. You cannot take it back. The appeal of a UTMA is that it allows for some early tax advantages. A certain amount of income is tax-free, and then a small amount is taxed at the child’s lower rate. But once the account grows large enough, the kiddie tax kicks in, and you lose that benefit. Somewhere around $100,000, especially if the investments are not very tax-efficient, you are probably not getting much tax advantage anymore.
The newer account option is a 530A account, or a Trump Account. These accounts are not better than a 529 for education, and they are not better than a UTMA for giving your kids money in their 20s. They are not replacing anything. At best, they are another tool that might fit later in the planning process. Tyler described them as sitting way down the “tax-efficient waterfall,” meaning you would likely use other accounts first before even considering this one.
At their core, these 530A accounts function a lot like a non-deductible traditional IRA with no income limits. You put in after-tax money, you do not get a deduction up front, and the money grows tax-free, but the growth is taxed when withdrawn. So, you are only getting one of the three major tax benefits. No deduction, no tax-free withdrawal, just tax-protected growth. Jim compared it to doing the first step of a Backdoor Roth IRA and then never doing the conversion. This account is not especially exciting on its own.
There is, however, a lot of attention around the “baby bonus” feature. Kids born between 2025-2028 will receive $1,000 from the government into one of these accounts, and accounts can be opened starting July 4, 2026, for anyone under 18. The concept of baby bonds is actually a good idea in theory. It is meant to give young adults a small financial head start. But $1,000 is not exactly life-changing when you consider the real cost of raising kids. Contributions can then be made up to $5,000 per year, adjusted for inflation, and potentially supplemented by employer contributions up to $2,500. Over time, that can grow into a meaningful amount ($5,000 per year over 17 years at an 8% return could grow to around $170,000 or more).
One cool feature of the 530A is that the account must be invested in a low-cost, broad-based US index fund. That keeps fees low and simplifies investing. But the account is also fairly restrictive. You cannot withdraw from it before age 18, and contributions stop at the beginning of the year the child turns 18. There are also some quirks around how employer contributions work and how broadly the program might be adopted. At the time of this recording, there is still uncertainty about which custodians will even offer these accounts.
Where things get more interesting is what happens at age 18. At that point, the account essentially becomes a traditional IRA, which opens the door to Roth conversions. This is where some real planning opportunities show up. If a young adult has low income in their late teens or early 20s, they could convert portions of the account to a Roth IRA at very low tax rates. Tyler ran an example where a child ends up with around $190,000 in the account, with about $100,000 of that being growth. By converting roughly $25,000 per year over several years and taking advantage of the standard deduction and low tax brackets, the total tax bill might only be a few thousand dollars. The end result could be a six-figure Roth IRA in their early 20s, which is an enormous head start on retirement.
Jim pointed out that this is where the account starts to look much more compelling, especially for higher-income families who can afford to contribute the full amount each year. But you do have to be careful with the kiddie tax if the child is still considered a dependent. In many cases, it may make sense to wait until the child is no longer a dependent before doing conversions. They also note that for high earners, there are often advantages to getting adult children off their tax return earlier than people realize, especially when you factor in opportunities like this, along with HSA contributions and UTMA tax treatment.
The big picture takeaway is that each account has a clear role. The 529 is still the best tool for education. The UTMA is still the most flexible way to give your child money they can use in early adulthood, with the understanding that you lose control. And the 530A account is a newer, more niche tool that may have some value, particularly as a way to jumpstart a Roth IRA through strategic conversions. But it is not something most people should prioritize early. It is probably going to live much lower on the priority list compared to the other options you already have.
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Can 529 Funds Be Used for CME?
“I'm a sports medicine employed private practice physician in the Midwest and have a question regarding use of 529 accounts. I was wondering if I could potentially use money that I put into a 529 account for CME as I also am using this account to put $10,000 in to max out this for paying off of my student loans.”
This is one of those questions people have been quietly wondering about, especially as the rules around 529s keep expanding. Thanks to the recent tax law changes, 529 money can now be used for certain licensing and credentialing expenses. That includes maintaining a professional license, which means CME can qualify. If it is legitimate continuing education required to keep your license active, it likely fits under the new rules.
That said, there are some important limitations. You can use the 529 for the actual educational component, like the course or conference registration, but not for travel, hotels, or meals. This expanded definition goes beyond physicians. It can include things like CFP coursework and exams, since those fall under professional credentialing. The general idea is that if it is required education tied to a license or credential, it is probably eligible, even if the exact wording is still being clarified in some cases.
Remember, just because you can use a 529 for something does not mean you should. If you are self-employed, CME is usually better treated as a business expense, which is paid with pre-tax dollars and avoids payroll, state, and federal taxes. That is often a better deal than using 529 money. On the other hand, if you are an employee, you have already used up your employer CME allowance, and you have leftover 529 funds, then using the 529 for CME could make sense. The key is understanding which bucket gives you the best tax advantage in your specific situation.
Also important is that you cannot double-dip. You cannot pay for something with a 529 and also deduct it as a business expense. You get one tax benefit, not both. The same principle applies across the board with things like education credits and HSAs. If it feels like you are getting two breaks on the same dollar, you are probably doing it wrong.
If your state offers a tax deduction for 529 contributions, you can run $10,000 through a 529 and then use it to pay down student loans, potentially picking up a small state tax break in the process. It is not a huge windfall, but it is a nice little optimization if you are going to make the payment anyway. Jim pointed out that this same idea can apply to private K-12 tuition, as well. Run the money through the 529 up to the state deduction limit, grab the tax break, and move on. It is not life-changing money, but it is an easy win if you are paying those expenses regardless.
To learn more from the conversation, read the WCI podcast transcript below.
Milestones to Millionaire
#266 — $850,000 Net Worth as an Anesthesia Assistant
Today, we talk to a certified anesthesiologist assistant (CAA) who has built an impressive $850,000 net worth early in her career. She shares her financial journey, including the realities of working in anesthesia, how locums work has influenced her income strategy, and the steps she has taken to steadily build wealth. We discuss how high-income healthcare professionals outside of medicine can still follow many of the same white coat investor principles, including maintaining a strong savings rate, avoiding lifestyle inflation, and creating a long-term investing plan. Her story highlights how consistent saving, intentional financial decisions, and a clear plan can lead to significant progress toward financial independence.
To learn more from this episode, read the Milestones to Millionaire transcript below.
Financial Boot Camp Podcast
Financial Boot Camp is our new 101 podcast. Whether you need to learn about disability insurance, the best way to negotiate a physician contract, or how to do a Backdoor Roth IRA, the Financial Boot Camp Podcast will cover all the basics. Every Tuesday, we publish an episode of this series that’s designed to get you comfortable with financial terms and concepts that you need to know as you begin your journey to financial freedom. You can also find an episode at the end of every Milestones to Millionaire podcast. This podcast will help get you up to speed and on your way in no time.
Thrift Savings Plan Explained for Federal Employees
The Thrift Savings Plan (TSP) is basically the federal government’s version of a 401(k), and if you have access to it, it’s a really solid retirement account. You can contribute either pre-tax or Roth. The costs are very low, and it keeps things refreshingly simple. Instead of overwhelming you with options, it gives you a handful of core funds—US stocks, international stocks, and bonds—that are more than enough to build a well-diversified portfolio. At this point, the difference in expenses between TSP and places like Vanguard or Fidelity is so small that it shouldn’t drive your decision.
One of the standout features is the G Fund, which is unique to the TSP. It gives you Treasury-like returns without the typical risk of losing principal—kind of like a supercharged money market fund. That alone is a reason some people keep their TSP even after leaving federal service. You also get the usual retirement account benefits like tax-protected growth, strong asset protection from creditors, and easy beneficiary transfer. You also get a great match of up to 5% of your salary. If you’re not contributing enough to get that, you’re literally leaving free money on the table.
There are some downsides, but they are relatively minor. The fund lineup is simple, which means you don’t get access to things like REITs, TIPS, or true small cap funds. If you like to tilt your portfolio or add more complexity, you’ll need to do that elsewhere. Withdrawal options used to be clunky but have improved, and starting in 2026, the TSP is even adding in-plan Roth conversions, which is a big win. Bottom line is it’s a good plan; it keeps getting better, and for most people, it’s a no-brainer to use it.
To learn more about the TSP, read the Financial Boot Camp transcript below.
WCI Podcast Transcript
INTRODUCTION
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 463.
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All right, welcome back to the podcast. We have a great episode today. I'm excited about it. I am here with Tyler Scott. His title is president of planning at White Coat Planning. This is a company we've been starting and have been ramping up here. This is essentially the financial planning firm that I always wanted to see in the world. It turned out that the way to see that was actually to create it. We've been working on doing that for the last few months. It's very exciting. We're not going to spend a lot of time talking about that today, but Tyler, welcome to the podcast.
Dr. Tyler Scott:
Thanks for having me. It's been fun to be here in the past on my own. I've interviewed you a little in the past. Now it's fun to take some questions and collaborate together.
Dr. Jim Dahle:
Yeah, this is going to be a good time. You guys always like having more voices on the podcast. We got more voices. I couldn't talk Tyler into just arguing with me about whole life the whole time, so we're actually going to talk about some other stuff like 529s, but we're still going to have a good time. Maybe we can argue about something. I'm sure there's something we disagree with here soon.
Okay, it's match week. From now until March 23rd, if you book a consult with the experts at Student Loan Advice, all you have to do is book it. You don't have to complete the consult during this time period, but if you book it between the 16th and the 23rd, you're going to get Fire Your Financial Advisor, the resident version, for free after you have your meeting with the student loan planner.
And so, that's pretty exciting. It's a great deal and pays for like half of the cost of the planning session, so it's a wonderful addition. Honestly, though, the consultation is worth the price paid for it. It's a professional guiding you through the best options to manage your loans. These are experienced staff. They've consulted with more than 2,300 borrowers on over $720 million in student loan debt.
And on average, the average client saves $160,000 on their student loans. Now, that comes from a lot of public service loan forgiveness, obviously. That's what we're trying to help people get, and we're trying to help make sure they're in the right IDR program and figure out exactly how to file their taxes and which IDR program to be in, and all those questions you have about your student loans, just get the right answers. Book a consult at studentloanadvice.com. If you book it between the 16th and the 23rd, you get Fire Your Financial Advisor, the resident version, for free.
All right, Tyler, we have to answer some questions here, and one of the things we're going to talk about today, which I'm not happy about, and let me tell you why I'm not happy. We're going to talk about Trump accounts, and I don't like the name, let's be honest. I think it's a little narcissistic to name everything after yourself, but beyond that, they came out with Trump accounts as part of OBBBA, this big tax bill that passed in the middle of last summer, and I wrote an article about it, everything we knew about it at the time, and published that article in, I don't know, July or August or something.
It was literally everything the world knew about Trump accounts at the time. It was totally accurate and up-to-date, and since then, I get questions every other day about Trump accounts. People are super excited about Trump accounts, despite the fact that, for months, we didn't know anything else besides what I put in that blog post, and besides the fact that nobody can contribute to a Trump account until July. You can't put a dime into a Trump account until July.
But I get questions every other day about Trump accounts, and they have updated some of the information out there. The government put an update out, I think, in December, and I'll confess, I haven't yet read it, and that's because you can't put any money in a Trump account until July.
All these people writing me, I promise I'm going to write a blog post in the second quarter and put it out there before anybody can fund a Trump account with all the updated details, but now I've been pinned down with a Trump account question on the podcast, so we're going to wade into these.
Tyler's actually read that document and knows the answers to all your hard Trump account questions because everyone wants to know exactly how they work and all the exact details, so we're going to get into that today, but let's listen to the first question of the Speak Pipe, shall we?
Fund a 529 or Invest Elsewhere?
Speaker:
Hi, we have an infant daughter, and we were discussing how much to fund her 529. We're concerned that if we overfund it, it may be hard to use those funds in the future, and they would get tied up. I'm wondering what your thoughts are about overfunding 529s, and if it's better to invest that money elsewhere where it might be more flexible. Thank you.
Dr. Jim Dahle:
Okay, great question. I love that it's only 25 seconds long. Did you guys hear that? You don't have to use all 90 seconds to leave your questions here, but the best part about this is we can spend the next hour fighting about this.
Dr. Tyler Scott:
Oh yeah, there's content here.
Dr. Jim Dahle:
This is a great question. Okay, you have an infant. By definition, you are overfunding your 529, almost surely. If you're talking about putting money in now, you're almost surely overfunding it, in my view.
I've got four kids. I have two in college. I already have four overfunded 529 accounts, and I don't have anywhere near as much as a lot of White Coat Investors having their 529s. I'm not going to say I'm the world's expert on 529s, but I have 36 529s, all right? I have a 529 not only for each of my kids, but for all my nieces and nephews. I have contributed money to them.
I have withdrawn money from them. I have closed the accounts because I withdrew everything from them. I've used a 529 account. I know about 529 accounts. I know about the cost of education, and I think anyone who's like, “I got an infant and I'm going to fund a 529” is going to overfund their 529, and this is the truth of the matter.
Dr. Tyler Scott:
I think you're right, especially members of our community, and let's talk about why that is. It comes from a good place, which is so many WCIers are traumatized by their student loans, and they've felt the burden of that and how heavy that is to get their young adult life launched under those loans, and implicit in this desire to fund the 529 early is a good truth, which is the longer compound interest works for you, the less money you have to put in. The market, hopefully, is going to do more of the heavy lifting for you. I like the nature of the question. I like where it's coming from in people's heart.
Dr. Jim Dahle:
And what if she told you she's got $250,000 in student loans and wants to start a 529?
Dr. Tyler Scott:
For your infant, I'd say that's a lot of trust in the future academic acumen of that infant that we don't know yet of going to Duke and going to medical school, but I don't think people should fear overfunding a 529 too much. There are so many ways to get the money out, which we'll talk about.
Even if you take the money out subject to taxes and penalties, I've noticed that most clients overestimate or overstate what those taxes and penalties are. We'll go through a little math example here, but I want to support the ethos of the desire to start early, try to prevent your child from having as much of that student loan trauma as you can, and also implicit in the question is an understanding that there's rules, that this 529 money is meant for qualified education expenses. And if we don't have enough of those qualified expenses, the money can be stuck. Well, I don't think it's as stuck as people realize. That's what people think. And that's what I want to talk about.
Dr. Jim Dahle:
Tyler has like five pages of notes for this question. You should be aware. He is really dug into this, but I think the first question people come up with when they start talking about this, “Well, how much money should I put in a 529? I got my three month old, I got my social security number for him. Now I can start a 529. How much should I put in there? I heard I can put in like five years worth of contributions.”
Dr. Tyler Scott:
Well, yeah, let's talk just briefly about some people come to us and say, I want to max out a 529. You've written extensively that that would be literally a billion dollars. In short, there is no max. You could open one in every state, put the $500,000 in every state. So don't worry about maxing it in the way we talk about our 401(k)s or Roth IRAs.
But the question is a good one. And one of the things we do with White Coat Planning clients is ask them, “Well, what percentage of your child's education do you want to fund?” And some people say 100%. Some people say 50%. They want their kids to have some skin in the game and they don't want to cover it all. So that's the place to start is how much do you want to cover? And then do you think you're going to aim for a public university or a private university?
We have data on what the average four-year cost is for a public and private university. And then we can put in an inflation assumption. It's about three to three and a half percent on average for education. I can say, well, if you want to fund 80% of your infant's public education 18 years from now, here's the average cost inflate that three and a half percent. And I can say, it's going to cost roughly X dollars. And you want to cover 80% of that. And there's a number. So, now we know what we're aiming for.
And then you can reverse engineer the math based on a reasonable investment return assumption to say, well, then you should start putting in $450 a month and do that for the next 18 years. And you'll be prepared to cover roughly 80% of their public cost. That is a conversation that is worth having that usually is followed by this question, “What if we put in too much? What if they don't use it all? What do we do with it then?”
Dr. Jim Dahle:
Right. But before we get to that, these are parents who are thinking about the education of their infant. In their view, this infant is not only going to Yale, but is then going to go to the top rated, most expensive dental school in the country. They need like $800,000 in their 529 in the view of these new parents.
Dr. Tyler Scott:
Sometimes. Yeah.
Dr. Jim Dahle:
And the truth is most people don't go to dental school.
Dr. Tyler Scott:
Yeah. And I have opinions about that.
Dr. Jim Dahle:
For those who aren't aware, Tyler is a recovering dentist.
Dr. Tyler Scott:
That is still active in the recovery. But most of the people I talk to Jim, when I actually get into a meeting with someone, if they work here in Salt Lake with us and they're like, “I just want my kids to go to the U. What would it cost to cover 70% at the university of Utah?” Because we don't really know. They're pragmatic about it. And we don't know if they're going to go to medical school or not.
There are those who are the optimizers. A lot of those people call in here and want to do what you said, but most of the people I talk to in the real world, they're, they're practical about it. And we can give them a reasonable amount to put in to cover two thirds of the costs at the university of Utah. And they feel good about that. And then as we go through the planning process, now the kid fast forward 12 years, they're in middle school. And now we have a sense of “Is this someone that might be headed to follow in my medical footsteps or are they expressing interest in something else?”
And then we adapt. All the time with clients we turn off the 529 contributions once the kids hit middle school or high school, and that becomes clear. And I've never had any of those people be regretful that they started when they were babies. And they've made those contributions early. The market provided good returns, and then they can just stop the contributions if they realize they're on track to overfund.
Dr. Jim Dahle:
Okay. Here's the first one you've met apparently. I didn't have any money when my first kid was a baby. I was a resident. We didn't have any money to put in the 529. She was a few years old before we put any money in a 529, even then it wasn't very much money.
And then somewhere in high school, she starts talking about medical school. And I start going, “We don't have that much in a 529. We better put more in.” And so we actually put in the gift tax amount for the year, for several years, for two or three or four years or whatever it was, I don't remember, thinking she'd go to medical school.
And so, by the time she enrolls at an incredibly inexpensive university, and she goes to those pre-med classes, and she goes to whatever it is, Chem 105 or something. And she's like, “Wow, this is kind of hard.” And then she goes over to the business building, and they're giving out free food in the business student lounge. Well, within a month or two, she's a business major. She's no longer pre-med. And I'm like, “Why did I put all my money in a 529?” Maybe she'll go get a really expensive MBA or something and use a good chunk of it. But the bottom line is the school selection, the educational selection of what your program is, is the most important factor. It's the most important factor by far. And you have no idea what that is when you have an infant.
Dr. Tyler Scott:
No, and to your point, maybe not even when they're in high school. And you didn't know if Whitney was going to go to BYU for much or if she was going to go to Georgetown for a whole bunch. So it's hard. And that sort of leads us to our listener's question, which is implicit in there is like, what are my options? What can I do if I overfund the account?
Dr. Jim Dahle:
I think that I think we can get into some very practical things you can do when you overfund. But my point is, if you're starting this early, and you're talking about the five-year super fund. Because you can put basically a five-year contribution into a plan.
Dr. Tyler Scott:
Five years of gift tax exemption.
Dr. Jim Dahle:
Yeah, gift tax exemption. And your spouse can do it too. And if you wanted to use up some of your estate tax exemption, you could fund them in every 529 in the country. There's no limit. You can put all kinds of money in there. But if you're starting to think about those sorts of things, just recognize that you're probably going to have an overfunded 529 most of the time. Not everybody. Some of your kids are somehow going to go to an $80,000 a year college and not get any scholarship whatsoever. And then they're going to go to medical school and pay the going rate for it. And maybe they will burn through $300,000 or $400,000 529.
But most kids aren't. And you got to recognize that if you're on a path to have more than $100,000, $150,000, $200,000 in a 529, you're probably going to be overfunded. And you're going to be dealing with some of these issues. So let's talk about overfunding. What are the options?
Dr. Tyler Scott:
Yeah. The first thing we want to discern between is what is a qualified expense and what's not a qualified expense? Because if we're worried about money getting stuck in the 529, the real question is, “Am I going to have to take a non-qualified withdrawal? And then what are the costs of that?”
The things that are covered are the things you'd think. Tuition, books, fees, computers, even if the school doesn't require the computer, you can get them a computer. Apprenticeship program. So it's not just universities. You can go get vocational degrees. And then you can use up to $10,000 of it once in your lifetime for your student loans or for your siblings student loans.
Dr. Jim Dahle:
That's cool. Even without changing the beneficiary of the 529.
Dr. Tyler Scott:
Yeah. Which I think was designed like if I have a 529 for Lucy and one for Rose and Rose ends up with student loans, but Lucy doesn't, I could use Lucy's, my oldest daughter's 529 to pay Rose's student loans off. So you can use it for your sibling in that way.
Dr. Jim Dahle:
Is $10,000 total or $10,000 each?
Dr. Tyler Scott:
$10,000 total lifetime.
Dr. Jim Dahle:
$10,000 total per what?
Dr. Tyler Scott:
Per beneficiary.
Dr. Jim Dahle:
Per beneficiary.
Dr. Tyler Scott:
Yeah. Yeah.
Dr. Jim Dahle:
So, per beneficiary and per account owner. So your spouse could do $10,000.
Dr. Tyler Scott:
No, no. Sorry, if it is Whitney's 529, she could use $10,000 total to pay off student loans for her or her siblings.
Dr. Jim Dahle:
If she's the owner or if she's the beneficiary?
Dr. Tyler Scott:
If she's the beneficiary. That's my understanding. Maybe someone will write in and give me a correction.
Dr. Jim Dahle:
Probably. You guys like to write us in. Correct Tyler too so it's not just me making all the errors.
Dr. Tyler Scott:
Yeah, call me out. That's my understanding. That's qualified expenses. So it's kind of the things you think. But what's non-qualified expenses? And this is a good education. The most common one I get is, “Well, my kid needs a G wagon.”
Dr. Jim Dahle:
Yeah. It's transportation. Everybody thinks transportation is included. It is not. My daughter tried to send me a parking pass. No dice. That cannot come out of the 529. Gas doesn't come out. Airplane tickets doesn't come out. If it's transportation, doesn't come out.
Dr. Tyler Scott:
No travel, no transportation, no health insurance, no extracurricular activities.
Dr. Jim Dahle:
Although Whitney found a workaround.
Dr. Tyler Scott:
Did she?
Dr. Jim Dahle:
I told you this around the world trip. She's a business major and she takes a spring term for like, I don't know what it was, 12 credits or 14 credits or something. It's an around the world trip. She went to 15 countries and visited, toured businesses in all these countries.
Dr. Tyler Scott:
That's a good hack.
Dr. Jim Dahle:
That was paid for. Because you paid tuition for the program. The program paid for all the travel.
Dr. Tyler Scott:
And that's fair. That makes sense to me. But to fly to Georgetown, to fly to DC, to get her there, that's not going to be covered. Okay. So, then what happens if I take a non-qualified withdrawal? I think we've talked a lot about on the podcast. “Oh, you owe taxes and penalties.” And that's usually where I hear this podcast conversation on many podcasts end. “Oh, you owe taxes and penalties.” And once you throw taxes and penalties at the public…
Dr. Jim Dahle:
Yeah, nobody wants that.
Dr. Tyler Scott:
Oh, panic. Oh, worst thing ever.
Dr. Jim Dahle:
We didn't like taxes to start with and penalties are worse.
Dr. Tyler Scott:
Yeah.
Dr. Jim Dahle:
We're probably going to jail. That's probably what the penalty is.
Dr. Tyler Scott:
There's anxiety, there's frothing at the mouth. And I find that people overstate that. So, here are the rules. If you take a non-qualified withdrawal, you owe ordinary income tax on the growth, on the growth only. So your basis, your original contributions, those are coming out tax and penalty free. So, it's only the growth amount. That's the first area I see people make a mistake. “Oh, I have $200,000 in there. I'm going to pay all this tax on $200,000.” No, no, no. A lot of that's contribution. Some of that is growth. Same thing on the penalty. Pay 10% penalty on the growth. That's all we're talking about.
Here's a math example of that. Let's say it's $20,000 left over in the account. And $15,000 of that is contributions, $5,000 is growth. And we're going to take $10,000 out as a non-qualified withdrawal. How much would I owe in taxes and penalties on that $10,000 withdrawal from the $20,000 529?
Well, the first thing is you got to know that what percent of it is earnings? We said 25%. $5,000 of the $20,000 is earnings. 25% are earnings ratio. Then on the $10,000 withdrawal, $10,000 times 25% is $2,500. Okay. What's your marginal tax rate? Let's say it's 40%. $2,500 times 40%, $1,000. We owe $1,000 of income tax. And now we owe a 10% penalty on the $2,500, and that's an extra $250.
I took a $10,000 non-qualified withdrawal with my stuck money, and it cost me $1,250 bucks in taxes and penalties to get out. That stinks a little bit. It's not like the most optimal, but it's not the worst thing ever. That's not so bad. We don't have to move heaven and earth to avoid $1,250 in taxes and penalties.
Dr. Jim Dahle:
Especially when you consider you got something out of the account in the meantime. You got tax-protected growth. That money was not taxed as it grew, so it grew a little bit faster than it would have with that tax drag, and that offsets some of that $1,250.
Dr. Tyler Scott:
Yeah, it's reasonable. The thing grew tax-free. You got growth on it. We talk about all the time, taxes aren't the worst thing. You pay taxes, means you made money somewhere. I want to get that out there, that it's not the worst thing to just take the money out.
Dr. Jim Dahle:
So, option number one for an overfunded 529 is take the money out, pay the taxes and penalties on the earnings.
Dr. Tyler Scott:
It's really simple, and it's just not that bad. But let's say you don't want to do that, and you're looking for ways to avoid it. Well, one thing I want to talk about is scholarships. So, if your kid's sharp, they get some kind of scholarship. You can take the amount of the scholarship out of the 529, and you do not owe the penalty on that. That 10% penalty goes away. You do owe ordinary income taxes on the scholarship withdrawal.
And for best practices, maybe you can speak to this. I don't know if this has happened for any of your family, but you should try to match up the scholarship year and the withdrawal and show those in the same year if possible. Has that happened for any of your nieces or nephews?
Dr. Jim Dahle:
I've got a kid on a scholarship. We didn't pull the money out.
Dr. Tyler Scott:
You left it in?
Dr. Jim Dahle:
We left it in. We could have pulled it out penalty-free, then we would have had to pay taxes on it. And this way, we can just leave it in there to continue to earn. So we chose not to pull it out on the kid that got a scholarship. That is an option. You don't have to take it out, but it is an option if you're worried you're going to be overfunded and you might need that money for something else. Because this is an important part of the conversation. If you don't need the money for anything else, you can just leave it in 529.
Dr. Tyler Scott:
Yeah, and that's where we're going with this next.
Dr. Jim Dahle:
Let's go to the next option, which is probably the one we're going to use for our kids.
Dr. Tyler Scott:
Because you didn't need the few thousand bucks of whatever the scholarship was. That wasn't the cash flow difference for you guys. Okay, let's say we don't want to do that. Let's leave it in. Well, first, a lot of your kids listening are going to go to grad school. Grad school is not free. It's not cheap. So you can use it downstream for more educational expenses. It doesn't have to be undergrad. You can change them.
Dr. Jim Dahle:
The best part, if you're going to use it for med school or dental school, you got four, five, six, four years for it to grow. It might double again.
Dr. Tyler Scott:
Let that compound and keep going. And so grad school is always a common safety valve. You can change the beneficiary to another family member. Family member defined very broadly in this category. Spouses, kids of any kind, step kids, adopted kids, step siblings, parents or ancestors of parents, brother and sister-in-laws, step parents, parents-in-laws, the spouse of any of those people, first cousins.
Dr. Jim Dahle:
They do actually have to be related, though. You can't just change it to some random person.
Dr. Tyler Scott:
No, but that definition of family is pretty broad. So you can get it and help someone else with a qualified education expense.
Dr. Jim Dahle:
So, what's the obvious family member that most of these get changed to, you think?
Dr. Tyler Scott:
Yeah, siblings is the one I see most often. “Hey, Whitney didn't end up going to medical school, put all this money in there. Maren's going to go to medical school. Okay, let's transfer it over there and use it for a sibling.”
But the one that I see that clients actually like the most is I say, “Hey, if you've got it in there and there's too much, just leave it for the unborn grandkids.”
Dr. Jim Dahle:
Right, that's my plan.
Dr. Tyler Scott:
That is the most common answer.
Dr. Jim Dahle:
30 more years of compound interest. We're talking about maybe doubling four times. So if you got whatever, $50,000 left over, and it doubles four times before the grandkid comes along, that's $100,000, $200,000, $400,000, $800,000. That probably covers medical school.
Dr. Tyler Scott:
Yeah, that's generational wealth for your yet-to-be-born grandkids.
Dr. Jim Dahle:
That's my favorite option.
Dr. Tyler Scott:
Clients love that. From a cash flow point of view, using it for other siblings. But once we talk about that in the way you just did, there you go. Oh, suddenly there's no more overfunded 529 fear. The notion of taking care of those grandkids' generation is really appealing. So, that's really popular.
Since we're in the deep dive, we should take a moment to acknowledge the Secure 2.0 Act, the 529 to Roth conversion option.
Dr. Jim Dahle:
Everybody's excited about this one. I don't think it's awesome.
Dr. Tyler Scott:
I like it as another safety valve. I do not like it as some sort of optimizer hack out there. This is not a way to fund your own retirement. This is not some new optimization strategy, but it is a great option if you've overfunded the 529.
Dr. Jim Dahle:
A little. A little bit.
Dr. Tyler Scott:
By $35,000.
Dr. Jim Dahle:
Well, less than that, because it's growing while you're waiting for the next year to make your next contribution.
Dr. Tyler Scott:
Oh, sure.
Dr. Jim Dahle:
In reality, if you're overfunded by more than about, I don't know, 20, 25, you probably can't use this option.
Dr. Tyler Scott:
Yeah. To be clear, the Secure 2.0 Act allows $35,000 of unused 529 money to make its way to the kids' Roth IRA. And that's not indexed to inflation, so that's going to stay the same. And so I've had clients say, “Hey, Tyler, I want to fund 100% of their public college plus $35,000.
Dr. Jim Dahle:
Plus $35,000. Yeah, yeah.
Dr. Tyler Scott:
Don't do that.
Dr. Jim Dahle:
These optimizers out there. Yeah. If you're optimizing that hard, get a life. Get a freaking life. Go skiing or something. Go for a hike. You need to get outdoors.
Dr. Tyler Scott:
Cheers to that. It's not going to make the difference, so that's not the utility of this. But if you have a little bit left over in there, it's a nice option. And so, the rules are the 529 has to be open for 15 years. Any contributions and growth in the last five years cannot be converted.
Dr. Jim Dahle:
Any growth in the last five years.
Dr. Tyler Scott:
Yeah, contributions and earnings on those over the last five years are not…
Dr. Jim Dahle:
The earnings on contributions made in the last five years, not necessarily earnings for money you contributed 20 years ago.
Dr. Tyler Scott:
Right, right. And you can see why. They don't want you scrambling last minute to make use of this. That's how I imagine the policy. Now there's some uncertainty about the 15-year thing. I opened accounts in Oregon where we used to live for the girls. And then when we moved here to Utah five years ago, I closed the Oregon account.
Dr. Jim Dahle:
Did you restart the clock? Nobody knows.
Dr. Tyler Scott:
Yeah, I just want to say, I don't know. And the conversion's still subject to the annual Roth IRA contribution limits of $7,500 in 2026.
Dr. Jim Dahle:
And the requirement for earned income.
Dr. Tyler Scott:
You have to have earned income. Kind of hard for some 18-year-olds unless they're working in the summers. You still have an earned income requirement. Happily though, you do not have an income limitation like normal Roth contributions. Once you make over a certain amount.
Dr. Jim Dahle:
There's no backdoor Roth 529 to Roth conversion?
Dr. Tyler Scott:
I'm so happy they didn't do that. You can come out as an orthopedic surgeon, make $800,000. And if you've got money left in your 529, you could still do this.
Dr. Jim Dahle:
Direct Roth IRA contribution.
Dr. Tyler Scott:
That's nice. And it is tax-free at the federal level. This is considered a tax-free conversion, but not in every state. So, just know that. There's eight states plus Washington DC that consider that a taxable conversion at the state level. Three states that are still waiting to decide.
Dr. Jim Dahle:
I'll bet New Jersey and California are on the list, aren't they?
Dr. Tyler Scott:
California is. Shockingly, New Jersey's not.
Dr. Jim Dahle:
That is amazing, actually.
Dr. Tyler Scott:
Well, New Jersey is a waiting decision.
Dr. Jim Dahle:
Yeah, yeah. Trust me, New Jersey's going to tax it.
Dr. Tyler Scott:
New Jersey's one of those awaiting a decision.
Dr. Jim Dahle:
Did you know New Jersey taxes like…
Dr. Tyler Scott:
457. I just learned this this morning. On the blog post today, I saw, yeah, Ricky wrote about that.
Dr. Jim Dahle:
457 contributions.
Dr. Tyler Scott:
New Jersey's the worst.
Dr. Jim Dahle:
Are subject to New Jersey. You haven't even gotten the money yet. You got to pay taxes on it. And then it grows. It grows for whatever, 10, 20 years. And you take it out. And you got to pay taxes again on it. It's like the worst. New Jersey hates you. They deserve no doctors in New Jersey if they're going to treat us that badly. Seriously, it's terrible. But if you have a 401(k), that's okay. Yeah, but not a 403(b).
Dr. Tyler Scott:
457.
Dr. Jim Dahle:
Or a 457.
Dr. Tyler Scott:
Yeah, yeah.
Dr. Jim Dahle:
Or the federal TSP.
Dr. Tyler Scott:
Yeah, it's insane. Yeah, it's wild. California and New Jersey, they don't treat 529 contributions well. They don't treat HSA contributions well.
Dr. Jim Dahle:
They hate your HSA too.
Dr. Tyler Scott:
That's where we're coming from with that. Okay, so we like leaving it for the unemployed.
Dr. Jim Dahle:
Don't leave New Jersey. They need doctors too. California's a beautiful place to live. There's a lot of fun stuff to do there. Don't leave just because they're going to tax your HSA growth. If you're having trouble reaching your financial goals, geographic arbitrage is real.
Dr. Tyler Scott:
Yeah, yeah. And those are lovely states. We love those states. Just as financial planning nerds, it makes us sad that they're not treated the same way the rest of our friends are.
That's the 529 to Roth safety valve. It's not for optimizers. It's a nice safety valve. We leave it for the unborn grandkids. That's really popular. Some people ask me about gift tax and generation skipping tax in those cases. Remember that's a smart question, but you guys, those have $30 million lifetime exemptions. So, don't get too bound up.
Dr. Jim Dahle:
And index to inflation. Under current law, at least. They could change it anytime.
Dr. Tyler Scott:
But we're not threatening.
Dr. Jim Dahle:
Yeah. What we're talking about is if you change the beneficiary from your kid to your grandkid, that's a state taxable event. Actually, I looked into this. You're not burning your estate tax exemption. You're burning your kids.
Dr. Tyler Scott:
It counts against theirs.
Dr. Jim Dahle:
It counts against theirs. There you go. Who cares?
Dr. Tyler Scott:
Then it kind of makes sense. You helped them. I didn't know that. That's a good nugget. And then just the last little safety valve is you can use it for yourself. When we say you can change the beneficiary, that includes to you. And so, if you've got $10,000 of student loans left over, use it for that. We're going to talk a little later about CME, medical CME as a 529 use.
Dr. Jim Dahle:
I hope there's not a lot of people out there that still have their own student loans and are using a 529 for their kid. As a general rule, you help others from a position of strength. This is why the classic line, when it comes to financial planning, is you save for retirement first, even though retirement's after college and college second, because when your kid gets to college, when you're 50 or whatever, and your kid's going to college, you can stop saving for retirement if you've done a good job and you can redirect all that cashflow to college.
529s are not the only way to pay for college. You can actually cashflow it if you make enough money. And you can use your taxable account to pay for it. You can use all kinds of other resources to pay for college. You don't have to use a 529 and you don't have to pre-save it all 15 years early or anything. So keep that in mind. There's a lot of flexibility.
Dr. Tyler Scott:
And that's a great note to end on for this question that you've got to put your own oxygen mask on before assisting other passengers. If there's a hard conversation I have with planning clients, it's that they get really hyper-focused on protecting their kids from student loan burden, and they will fund these 529s and not establish an adequate savings rate for their own work optional goals.
I don't push back really hard on many things. I push back on that one and say, for the reasons you just said, Jim, there will be other ways we can solve for this. We don't know what your kid's going to do for college. We don't know what their goals are. We know that you're an OB that's starting to burn out and you want to be able to take less call and less shifts. We need to get your savings rate in a place where you can cut back and retire in a way that supports you. The first job of a parent financially for their kids is to make sure they're not a burden to their kids in retirement.
Dr. Jim Dahle:
Absolutely.
Dr. Tyler Scott:
We've got to put our own oxygen mask on first. 529s, great option, but it comes downstream quite a ways in the planning process when it comes to “What should I do with my money?” It's a great option, but when in doubt, save more for yourself first, and we can always ramp up later or use other options later. But if you end up with an overfunded 529, there's a lot of ways to get it out, including just taking the money out and paying the tax and penalty that's not really about that.
Dr. Jim Dahle:
If you really want to avoid having an overfunded 529, send your kid to private K-12. That'll take care of it. Now you're not just spending for four years, you're spending for 17.
Dr. Tyler Scott:
And that's one of the qualified withdrawals I kind of skipped over, which the new OBA, that's what I call the tax bill from last summer for short, OBBBA, OBA, increased the amount you can use for K-12. It used to be $10,000, now it's $20,000. And it's not just tuition anymore, but it's tutoring, it's standardized exams, it's a whole basket of things around K-12 education. So, that's another safety valve for the overfunded 529.
QUOTE OF THE DAY
Dr. Jim Dahle:
Okay, we should probably get on to another question. Before we do, let's do a quote of the day. This one's from Dave Ramsey. He says, “Earning a lot of money is not the key to prosperity, how you handle it is.” It's a good quote.
Dr. Tyler Scott:
Yeah.
Dr. Jim Dahle:
But let's be honest, this game is a lot easier when you earn more money.
Dr. Tyler Scott:
I'll take the problem, the first problem and solve for the other part.
Dr. Jim Dahle:
This is actually a legitimate problem among a lot of physicians, because a lot of physicians, they know they're being paid well, they feel bad negotiating contracts, or they don't get the contract reviewed as we recommend so often. And the range of physician incomes is dramatic in the given specialty, even for the same amount of work. It's amazing how much less somebody might be paid.
And I'll tell you what, paying off your student loans, saving up for your dream house, saving for retirement, saving for your kid's college in a 529 is way easier when you're making $30,000, $40,000, $50,000, $60,000 more a year. It just is. So make sure you're being paid fairly. Earning a lot of money helps a lot. Let's be honest. The quote's accurate.
Dr. Tyler Scott:
Totally.
Dr. Jim Dahle:
But earning more money helps a lot.
Dr. Tyler Scott:
Start with the problem of earning a lot of money, then we'll solve for the problem of how to handle it.
Dr. Jim Dahle:
Well, that's the fun thing about the White Coat Investor. 90% of Americans have an earning problem. That's what they're working on. They don't make enough money, but almost everybody listening to this does or will soon. So, we're working on the other 10% of problems rather than the big problem that most people in America are working on. And frankly, the problems we're working on are more interesting. All right, our next question.
Trump Accounts vs. 529s and UTMA Accounts
Speaker:
Hi, Dr. Dahle. Thanks for everything you do. I'm an early career radiologist with two young kids and currently uses a mix of 529 and UTMA to prepare for their future. I recently heard about the new 530A account, also called a Trump account, and I'm very confused about the roles and how to use in comparison to 529 and UTMA account that I already have. Thank you so much for what you do.
Dr. Jim Dahle:
Okay. Another great question. That one was only 30 seconds. Still less than 90. Anyway, I'm going to take the first two accounts because Tyler did the research for the Trump accounts. I've got a great blog post about it with everything we knew last summer about Trump accounts on the blog, but I have not yet updated, I confess. So let me tell you about the first two.
529s. 529s for education. Don't put more money in there than you think you're going to use for education. You can use their UTMA account. You can use your taxable account for their education. You get old enough, you can even use your retirement account. In fact, even if you're not that old, there's some education exemptions for your retirement account to pay for education. But for the most part, that's what 529 money is for, is for education. K through 12, as well as college, grad school, medical school, whatever.
A UTMA account is kind of what we refer to in my household as a 20s fund. In Utah, when you turn 21, Vanguard calls up your father and says, “We're going to move this account to your kid's account.” Ask me how I know this. And all of a sudden, you have no visibility into that account anymore. It really is their account. And they can withdraw it and spend it all on cocaine and new cars and trips around the world or whatever they want to spend it on. So, you've got to be okay with that. It is a gift to them.
When you put it in that account, it must be spent on them. Now, you can still spend it when they're 15 on their summer camp, but it has to be spent on them. You cannot pull it out and buy yourself a snowmobile. I guess you could pull it out and buy them a snowmobile, but you can't pull it out and buy yourself a snowmobile. It's their money. You gifted it to them when you put it in the account.
So, you got to be okay with that when it comes to a UTMA. Now, they can still use it for college. The reason people tend to use UTMAs, it's a good way to teach your kid, give some money to your kid and maybe teach them something about investing. But mostly, people are trying to have it grow with a little bit less tax consequences. It's indexed to inflation, so it goes up every year, but it's about the first $1,300 or so, $1,400 or so in income that that account makes is not taxed. And the next $1,400 or so, it makes is taxed at the kid's rate, which usually means 10%. So, that's the advantage, is until it gets to a certain size, you pay less taxes on the income from the account.
Now, once it gets to a certain size, what's called the kiddie tax kicks in, which is where you're paying on the income from that account at your rate. So, you're really not saving anything. You might as well put it in your own taxable account at that point. And in general, if you invest it tax-efficiently, you cross over there, maybe around $100,000. If you've got much more than $100,000 in a UTMA account, you're probably not saving much in taxes. Especially if it's not invested very tax-efficiently, you might hit that amount of income long before you get to $100,000 in the account.
But for a relatively small amount of money that you want to transfer to your kid in their 20s, in some states it might be as young as 18, but in most states it's 21 when they get control of that account. A UTMA account, formerly known as a UGMA account, very subtle differences between the two. They're essentially the same thing. Works really well for that.
So, that's 529. That's a UTMA. Both great accounts to give money to your kids and get a few tax advantages with. And a little bit of asset protection as well. Very state-dependent, but it's not your money. So, they can't really take it away from you.
Now let's talk about… What's the number on this one? 438? 338?
Dr. Tyler Scott:
530A.
Dr. Jim Dahle:
530A. It would have been a lot better if it was a 338 account. Then I'd connect it to a rifle or something. 530A. Maybe we should call it that so we don't feel like we're contributing to narcissism.
Dr. Tyler Scott:
Yeah. There's a reason I refer to the Affordable Care Act and not Obamacare. I will be calling these 530A accounts, not Trump accounts. It's nice to remain neutral on those.
Dr. Jim Dahle:
Very well. Tell us, where does this fall in the mix? What's the point of a Trump account?
Dr. Tyler Scott:
Yeah. Let's get into that. So, the short answer is that these 530A accounts are probably not as good as other accounts meant for the same purpose. They're not as good at paying for college as a 529. They're not as good at giving your kids a start in their 20s as a UTMA.
So, that doesn't mean they don't have any utility, but that's my short answer to clients. There is some application and it's worth knowing the rules, but if you're looking for a quick answer, if you're going to do it, it's going to come way down at the end of what we call the tax-efficient waterfall. It is way towards the end of trying to optimize your finances.
But there's a lot of interest in it. The Super Bowl was totally unwatchable this year as a game. The game was terrible. The most interesting part of the Super Bowl for me was the commercial about the Trump accounts, and that got my attention. And so, I think that's infused some interest lately as well for people that saw that.
So, this was part of OBA as well. They were originally called MAGA accounts, but they got renamed to 530A is where we want to live.
Dr. Jim Dahle:
I'm trying to decide if I like MAGA account better. Maybe it's better.
I don't know. I have no comment on this topic in this forum. There is $15 billion in OBA set aside for these 530A accounts. So, that's where they came from. That's how they're funded. Zoom out a little, and you and I haven't talked about this.
Dr. Jim Dahle:
Well, let's talk about where that $15 billion is going. I am not totally against these 530A accounts. I like the idea of a baby bonus account. That's what it is. It's a baby bonus account. And I love the idea. It encourages families. It helps families. It's something that's really challenging. It's expensive to have kids, and you get a little bit of money from the government for having a kid, essentially. It's a baby bonus account. So, I'm not totally against that part of it.
Dr. Tyler Scott:
Not at all. You don't have your reading glasses on, so you couldn't read my notes. But that's my first note here that says the idea behind baby bonds is an economically popular and pretty reasonable idea. There's many countries who utilize baby bonds with the intent of democratizing wealth in some way of promoting savings. We do that here in America. We democratize wealth. We provide an inflation-adjusted pension to our older generations. Very popular program in Social Security, meant to help you at a really pivotal stage of life.
Baby bonds are the same thing, except the stage of life they're trying to help you at is not retirement. It's at young adulthood. It's at the beginning of your professional chapter, not the end. And so, I totally agree that the idea is excellent, and I support it as an economic concept, by and large.
The 530A accounts do some of those things well. They do some of those things kind of clunky, and that's what I wanted to zoom in on. So, how do these work? And for the financially literate out there, I will say these accounts, what they really are, they are a non-deductible traditional IRA with no income requirements. That's what they are. I'm going to say that again. They are non-deductible traditional IRAs without an income requirement.
Dr. Jim Dahle:
That gets money thrown into them by the government when you're born.
Dr. Tyler Scott:
Well, yeah. So, let's talk about that, maybe, and only a little bit. What do I mean by non-deductible traditional IRA with no income requirements? The money that goes into these is going to be after-tax money. You do not get a tax deduction for making the contribution. Anytime we're talking about tax-protected accounts, we're always talking about three points in time. Do I get a tax deduction today? Do I get tax-free growth? Do I get tax-free withdrawals? The answer to 530A accounts is you just get the middle one. You only get tax-free growth. You do not get a deduction. You do not get tax-free withdrawals.
Dr. Jim Dahle:
So, it's kind of like an annuity that way. It's kind of like a non-deductible IRA that way.
Dr. Tyler Scott:
Yeah.
Dr. Jim Dahle:
It's like making after-tax contributions into your 401(k), step one of the make-a-backdoor Roth IRA, without ever getting a step two.
Dr. Tyler Scott:
I must have been listening to you a long time, because my second note says it's like if you do the first step of a backdoor Roth IRA and forget the conversion step. You put non-deductible money in your traditional IRA, and now that's going to enjoy tax-free growth. But you're going to end up with a mix when you go to withdrawal, and that's true for these Trump accounts. You're going to have an after-tax basis that you can withdraw tax-free, and then you're going to have taxable growth.
And that example I gave in the last question about the 529, of calculating the earnings ratio and what part's taxable, that's what's going to happen with these accounts, calculating what the tax is.
Dr. Jim Dahle:
Withdrawals come out prorated.
Dr. Tyler Scott:
Yeah. And so, that example I gave, people are going to have to get good at that, or the custodian of whoever they choose to manage this is going to have to really keep good records. Depending where you read in the forums, Robinhood has the inside track, allegedly, to be the custodian…
Dr. Jim Dahle:
And you get confetti when you invest.
Dr. Tyler Scott:
Yeah, that's going to be a joy. Okay, let's talk about your free money thing. So, babies born anytime in 2025 through 2028 are going to get $1,000 put into their 530A account from the government. That's what's got people…
Dr. Jim Dahle:
$1,000, man. You want to have a baby?
Dr. Tyler Scott:
$1,000. I'm here from the future to tell you it costs more than that. Don't do it for that reason. But that's what's got a lot of energy, that's what was talked about on the Super Bowl commercial. You cannot open the account until the 4th of July, 2026. So, if you've had kids born, and you're looking for your $1,000, you can't open them until this summer. You can open the accounts this summer for anyone 18 and under, or I should say under 18, excuse me.
Dr. Jim Dahle:
Starting July 4th.
Dr. Tyler Scott:
Yes. That was one of the questions was like, well, my kid wasn't born in that age range. This isn't for me. No, all of my kids were born before 2025. I will be able to open an account for all of them this summer.
One thing I really like is they must be invested in a U.S. broad-based index fund with an expense ratio of 10 basis points or less. Market-weighted…
Dr. Jim Dahle:
I love that part of it.
Dr. Tyler Scott:
Love it. That's so great. It's taking fees and educating the public that fees matter. Market-cap indices are allowed, so you could go all small-cap value if you want, but you can't do industry or sector-weighted investments. You cannot mess with the account at all until January 1st of the year your kid turns 18.
Dr. Jim Dahle:
What do you mean mess with it? You mean like change investments?
Dr. Tyler Scott:
You can't withdraw from it. You can't do anything other than this.
Dr. Jim Dahle:
What if I want to day trade it? If I want to swap between indexes every other day?
Dr. Tyler Scott:
I think you can do that within the allowed indices.
Dr. Jim Dahle:
You can change the investments, but you can't withdraw from them.
Dr. Tyler Scott:
Right. And you can't say, “Hey, I've done it for 10 years. My kid's 10. I want to invest in individual security.” That's what I mean by mess with it. You've got a 17-year-old. It's January 1st with your 17-year-old. Now you can change the investments if you want at that moment.
Dr. Jim Dahle:
Is it January 1st after they turn 17?
Dr. Tyler Scott:
No. They're not 18 yet. It's the year they're going to turn 18. That's when you can start to change it. At that same day, you can no longer contribute. That's when contributions stop, is on January 1st.
Dr. Jim Dahle:
Because you can contribute to it all along. How much can you put in there?
Dr. Tyler Scott:
$5,000. The annual contribution limit.
Dr. Jim Dahle:
That's a lot of money. If I pull up Excel here and I put in $5,000 a year for 17 years, I got to put on my glasses to do this.
Dr. Tyler Scott:
For this part. What are you going to give it? An 8%?
Dr. Jim Dahle:
Let's go an 8% return. Let's go 17 years, $5,000. That's $169,000. That's a heck of a start.
Dr. Tyler Scott:
And that $5,000 is adjusted for inflation. If you actually put in, it'd be over $200,000. So, it's not an inconsequential amount of money.
Dr. Jim Dahle:
And it's all growing tax-free over these 17 years. It's not like your UTMA. There's no tax drag on it.
Dr. Tyler Scott:
Right. Yeah. So, it's more efficient in that way. Your employer, should they so choose, can put in $2,500. That counts towards the $5,000 limit. And that is tax-free to the employee. And the employer gets a tax deduction for that. If they put in more than $2,500, that excess is considered taxable income to the employee.
Dr. Jim Dahle:
What if you're the employer?
Dr. Tyler Scott:
Yeah. You get a $2,500. You can deduct $2,500.
Dr. Jim Dahle:
I'm the employer. I'm also the dad of the kid.
Dr. Tyler Scott:
Oh, yeah. My note on here is, yeah, WCIRs are going to want to know, I'm a dentist with an S-corp. Can I put in $2,500, take the deduction at the business? The answer is we don't know yet.
Dr. Jim Dahle:
But if you're going to do it, you have to do it for all the employees too.
Dr. Tyler Scott:
These things tend to apply to non-discrimination testing.
Dr. Jim Dahle:
Almost surely, that's correct.
Dr. Tyler Scott:
Now, there are some big employers. JPMorgan Chase and BlackRock have come out and said they will do the $2,500. Now, notably, that's $2,500 per employee, not per kid. So if you were going to do it here at White Coat for me and Meg, we'd have to take the $2,500 and divide it by three for our three girls. So, $2,500 per employee is the amount they can put in tax-free. And that $5,000 limit is generally true. There are a couple exceptions. The $1,000 the government gives you, not included in the $5,000.
Dr. Jim Dahle:
You can put $5,000 in your first year, even though the government put in $1,000.
Dr. Tyler Scott:
So $6,000 can go in that first year for those babies. There's also something called qualified general contributions that don't count towards the limit. Basically, this is like nonprofits and governments can put in money for certain demographics. Maybe they're in underserved areas or they're a demographic they're looking to help.
An example of this is the Dell family, like of Dell computers, Dell technologies. They just contributed $6.25 billion to Trump accounts. They're going to put $250 into $25 million accounts for kids who live in zip codes, where the median income is $150,000 or less. And that $250 does not count towards the $5,000 limit for that kid.
Okay, that's all interesting. Where the rubber meets the road for me, where I think about being a financial planner and would I recommend this? Would I do it for myself, for Megan and our girls? The burning question is, can you convert it to a Roth IRA? When the kid's 17…
Dr. Jim Dahle:
In a year they're going to turn 18, can you do a Roth conversion of some kind? This is what everybody wants to know. I get this question every other day.
Dr. Tyler Scott:
It appears the answer is yes.
Dr. Jim Dahle:
Because it becomes an IRA.
Dr. Tyler Scott:
Because it becomes a traditional IRA.
Dr. Jim Dahle:
So it's now just a traditional IRA with some non-deductible dollars in it. So you should convert it because you got these non-deductible dollars in it.
Dr. Tyler Scott:
Yeah. Now let's think, I've got some math on that.
Dr. Jim Dahle:
Plus you're 18 or you're going to be 18, 19, 20. You're not going to have any income.
Dr. Tyler Scott:
What a great year to do a Roth conversion.
Dr. Jim Dahle:
What a great year to do a Roth conversion.
Dr. Tyler Scott:
Yeah. I had similar math to you. My hypothetical is you do it $5,000 a year for your kid. You end up with, in my example, $190,000 in the account. $100,000 of it is growth, let's just say. And so, you've got $100,000. That's the part that's taxable because it was tax-free growth. The $90,000 tax-free return of basis. We're not worried about the taxability of that.
Let's say the kid's going to have four years of low income coming up. Well, let's move our $100,000 of growth. Let's do it $25,000 at a time. Well, what's the standard deduction right now as we sit here for a single person?
Dr. Jim Dahle:
I think it's $16,000 this year.
Dr. Tyler Scott:
$16,100 tax-free. So now we've got $9,000 left over that we need to pay tax on at what's the lowest tax bracket?
Dr. Jim Dahle:
10%.
Dr. Tyler Scott:
At 10%. I've moved $25,000 of growth plus some prorated tax-free return of basis over to a Roth IRA for $900. And we do that three years, four years in a row. We pay our $3,600 in taxes in total. And now my 22-year-old has a $200,000 Roth IRA. And we paid $3,600 to get it there.
Dr. Jim Dahle:
Okay, optimizers, did you hear that? You don't even have to be like hardcore optimizer to want to do this. This sounds like a great deal.
Dr. Tyler Scott:
Now we're onto something.
Dr. Jim Dahle:
Well, right. It's a traditional IRA though. They got to pay 10% penalty if they pull the money out in their 20s?
Dr. Tyler Scott:
Yes, it appears that way.
Dr. Jim Dahle:
Maybe it doesn't work great for that 20s fund, but it's a huge jumpstart on their retirement. They're going to have four decades. So this money is probably going to double four or five, six times. $200,000 doubling four or five, six times. That's their entire retirement. You're basically saving for their retirement before they turn 18.
Dr. Tyler Scott:
You and I have talked and written about the HSA family contribution for your non-tax dependent adult child. And the same thing. We were like, hey, you can basically have a million dollars tax-free for your 65-year-old if you do that. This is another one of those things.
Dr. Jim Dahle:
The rich families that have an extra $5,000 per kid per year are getting another benefit. And the poor families get $1,000.
Dr. Tyler Scott:
And you originally said in your article this summer, you were like, look, I'm not really into these, but I think they're good for two groups of people. The really wealthy and the really poor. And you just kind of recapped that again.
Now, I'm glad you mentioned kiddie tax earlier, because you got to be a little careful around kiddie tax for this.
Dr. Jim Dahle:
Because a lot of those kids are dependents.
Dr. Tyler Scott:
Yeah, yeah. So you may want to wait optimizers. You got all excited when I said that. You may want to wait until the kid has established tax independence from you to do your Roth conversions. Otherwise, if they're considered a tax dependent, we're going to be back in kiddie tax land.
Dr. Jim Dahle:
For many of you, you want to do this as soon as possible. You want your kids independent of you because you're not getting any benefit for claiming that dependent on your taxes anyway, because you make too much money. And the reasons why you want them independent is, number one, so they can start doing this Trump account thing. And number two, so they can make those HSA contributions, family size HSA contributions to their own HSA because they're on your family HSA. And two great reasons. What else?
Dr. Tyler Scott:
Reason three is if you have UTMAs, and now once the kids reach tax independence, you're not subject to kiddie tax.
Dr. Jim Dahle:
Good point, good point.
Dr. Tyler Scott:
I often find that CPAs try to keep the adult kids as dependents.
Dr. Jim Dahle:
Right, because that's the right thing to do for low earners.
Dr. Tyler Scott:
And so I'm telling people all the time…
Dr. Jim Dahle:
It's like CPAs also tell people to roll their 401(k)s over IRAs.
Dr. Tyler Scott:
And so clients look at me a little cross-eyed sometimes like “We got to get these adult kids off of your tax return.” They're like, “Wait, wait, don't I get a deduction?” And I put it in dollars. It is an inconsequential amount of money relative to these benefits. The benefits for high earners to get their kids tax independent is a post one of us should write. A valuable thing, I think, for our audience to understand.
But anyway, yeah, that's 530A accounts. It's TBD. If you're listening to this in the future, feel free to write in corrections. We're still waiting on some clarity. But Jim's got his post coming out Q2 next year.
Dr. Jim Dahle:
That I haven't started yet. It's Q2 this year. I got to write it in the next couple of months. But we don't even know who's going to… Can you go to Vanguard and open them? Can you go to Fidelity and open them? We have no idea. Apparently, Robin Hood's the place to go. We're going to have confetti and baby bonus accounts. So it's going to be great.
Dr. Tyler Scott:
Great question. Thanks for your 30 second question that turned into whatever that was. 20 minute discussion.
Dr. Jim Dahle:
Thanks for doing the research on the updates. There were a lot of questions last summer about Trump accounts. And a lot of those got answered in a publication the government put out in December that I haven't read yet. Tyler looked at it. And I think we've covered all the important points and most of the important questions about it.
Okay. Let's get on to the next thing here. This is another question about 529s, I think. And given we've covered them pretty extensively.
Dr. Tyler Scott:
What's left?
Dr. Jim Dahle:
Hopefully, we can answer this question pretty quick. But this is great. This one's only 30 seconds long too.
Can 529 Funds Be Used For CME?
Speaker 2:
Thank you, Dr. Dahle for all you do. I'm a sports medicine employed private practice physician in the Midwest and have a question regarding use of 529 accounts. I was wondering if I could potentially use money that I put into a 529 account for CME as I also be using this account to put $10,000 in to max out this for paying off of my student loans. Thank you for all you do.
Dr. Jim Dahle:
Okay. Great question. We didn't cover this. Deliberately, we didn't cover this, huh? When does this podcast drop, Megan? 19th of March. Before WCICON, this podcast drops. I know the burning question you all have is whether you can use your 529 money to come to WCICON. That's what you want to know, really. Tyler, you want to answer this question for me?
Dr. Tyler Scott:
Yeah. The short answer is yes. That OBA, again, this tax bill from the last summer, expanded the use of 529 money as we've been talking about in these other cases. And you can use your 529 money now to obtain a state-required license or credential.
Dr. Jim Dahle:
Like a medical or dental license.
Dr. Tyler Scott:
And to maintain it. And so, yes.
Dr. Jim Dahle:
Including the education required to maintain it, which for most of you is 20 or 25 or 30 hours a year of continuing education.
Dr. Tyler Scott:
Now, not for travel to get there. Not for the food you're eating. So just pump the brakes a little bit before you get too big of eyes for this. But legitimate credentialing maintenance is covered. Also, selfishly for me, the CFP exam and coursework is now covered as well in this broader definition of vocational training and licenses.
So, those of you out there that want to leave dentistry and become a financial planner, you can use your 529 money to take the CFP coursework for $5,000 or $6,000. And take the $1,000 exam. And to get your CFP license. Those kind of things are now covered. We’ve spent some time before this to try to look up chapter and verse of exactly, it was AMA category 1 and covered, and we couldn't quite pin that down. So any of the listeners out there, if you have…
Dr. Jim Dahle:
But everything we see suggests that if it's legitimate CME, it counts. And WCICON is legit CME. So we think you can use your 529 to pay for it. Not for the hotel, not for the airfare, not for the food, but the conference fee, you can use 529 to pay for it.
Dr. Tyler Scott:
Now, do you want to take a minute and help people understand the difference between CME and business expenses? Because that's the other area where I think people will go with this. And wait, because I think a lot of our listeners, they think they categorize CME and they start thinking scrubs and stethoscopes.
Dr. Jim Dahle:
First of all, recognize the CME is not scrubs and stethoscopes. That's the first point, right? You can't go buy your scrubs with 529 money. So, let's make that really clear. Sometimes you're better off taking something as a business expense than using your 529 to pay for it.
Really, we already talked about this. Save the 529 from the grandkid for the grandkids is going to be like a bazillion dollars in 30 more years. But if you can take something as a business expense, that's generally your best tax break for anything. All business expenses are paid for with pre-tax money.
You don't have to pay payroll taxes on them. You don't have to pay state income taxes on them. You don't have to pay federal income taxes on them. Anything that's a legitimate business expense. I guess food, there's a little restriction there. You can only deduct 50% of food, but anything, scrubs, stethoscopes, CME, that sort of stuff, you're buying with pre-tax dollars anyway.
So if you're self-employed, this is probably not the way to pay for your CME. But if you're an employee, you've already exhausted any CME fund. Employer has offered. You still want to come to WCICON. You got a 529 left over, or you want to change some of your kids 529 into your name. That's a legit expense now. So as of last summer.
Dr. Tyler Scott:
Just for the registration.
Dr. Jim Dahle:
Actually, when does it start? Did it kick in and legislation passed?
Dr. Tyler Scott:
Yeah.
Dr. Jim Dahle:
Was it retroactive back to the beginning of 2025?
Dr. Tyler Scott:
I don't know on that. Some of them were, some of them started January 4th. I don't know. I know that's true right now.
Dr. Jim Dahle:
I already got a correction on this podcast. One of those that I missed, I don't even remember what the deduction was, but I screwed it up. I said it was 2026 and it kicked in retroactively to 2025. I wouldn't be surprised if this one does the same.
Dr. Tyler Scott:
Standard deduction last year, changed kind of retroactively.
Dr. Jim Dahle:
But nobody thought to use their 529 for this stuff before OBBBA anyway.
Dr. Tyler Scott:
And when we say WCICON, if the registration for the conference is $2,000, that's the part we're talking about.
Dr. Jim Dahle:
Or if you want to come virtually, it's like half that much. And there's no hotel anyway.
Dr. Tyler Scott:
Right. Shameless plug. And so, that's the part we're talking about. And then again, just word to the optimizers who heard you on the business expense piece. You can't double dip.
Dr. Jim Dahle:
Right. Excellent point. Excellent.
Dr. Tyler Scott:
It's one or the other. We're not going to pay for it with the 529 and now listed as a business expense. It seems too good to be true.
Dr. Jim Dahle:
It is. That's a general rule for all taxes. Keep that in mind. If you feel like you're getting a double break somewhere, you're getting an education credit for sending your kid to college and you're also paying for it with 529, that doesn't fly either. You can't deduct it on schedule A, if it's a healthcare expense and then use your HSA to pay for it. And you get one or the other, you don't get both.
Dr. Tyler Scott:
One thing he tagged on there just in closing, he said, I'm going to use $10,000 of it to pay for my student loans. Like I mentioned earlier. If you get a tax break, a state tax break for making a 529 contribution and you still have student loans, you can run $10,000 through one time, it's not much like here, you and I in Utah…
Dr. Jim Dahle:
We get $500.
Dr. Tyler Scott:
Yeah. We get a couple of hundred bucks.
Dr. Jim Dahle:
It's not even be that much, whether it'd be $200.
Dr. Tyler Scott:
Yeah. No one's getting rich on this, but if you're going to do it anyway, if you're going to pay off $10,000 of your student loans and you've got some optimizer tendencies and you're in a state with a state tax break, go ahead and put the $10,000 in the 529 for yourself, take it out the next day and pay your student loans off. And then on that year's tax return, you can claw back a few hundred bucks.
Dr. Jim Dahle:
This is a great move for a lot of you paying private K through 12 tuition. Right. You might as well run it through the 529 to the level that you're getting a state tax break. And some states are pretty generous. Some states will give you a tax break on up to $10,000 a year run through a 529. It might not help that much if you're paying $30,000 for high school tuition, but it's better than a kick in the teeth.
Okay. We have waxed eloquent today, Tyler. No surprise. You put two hosts on together and you end up with a longer episode. I hope it's been helpful to you guys. We jumped into the weeds a little bit, but we covered some burning questions you guys have out there in WCI land.
And hopefully clarified some things and made some interesting content. If not, let us know, tell us that Tyler ought to be doing all these podcasts from now on. And I shouldn't do any of them. That's okay feedback to send in.
We do appreciate the feedback you guys give and the corrections you send in. We try to get into the weeds. That means we screw up a lot and your corrections help us to at least be accurate.
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Milestones to Millionaire Transcript
INTRODUCTION
This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.
Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 266.
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All right, welcome back to the Milestones podcast. It's great to have you here. I have a lot of fun doing this podcast. I love talking to White Coat Investors. I do a lot of it at WCICON every year at the end of March. I think it's going to go like 10 days after you hear this podcast, but I also get to do it throughout the year when I'm doing speaking gigs or when we're recording these Milestones episodes.
I really love it. It keeps me grounded, helps me remember what we're doing, keeps me focused on our mission here, which we're becoming more and more focused on every year.
I appreciate you guys being willing to participate in this, listen to the podcast and participate in the podcast. I think it's really helpful and really inspires a lot of people to be financially successful so they can focus on what really matters in their lives.
A brief bit of business before we move on to today's interview. Today is the last day for 20% off courses. We're having this sale for podcast listeners. PODCAST20 is the code. If you're interested in buying a White Coat Investor course, whether it's our No Hype Real Estate Investing, whether it's one of the versions of Fire Your Financial Advisor, whether it is Continuing Financial Education, whatever the course, you can get 20% off by using that code.
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All right, let's get our subject, our interviewee on the line here. You're really going to like this one, I think.
INTERVIEW
My guest today on the Milestones Millionaire podcast is Chabely . Chabely , welcome to the podcast.
Chabely:
Thank you so much for having me. I'm a big fan of the podcast and I love listening to the episodes. I'm happy to be a part of your podcast today.
Dr. Jim Dahle:
This would be a particularly fun one for you to listen to, but let's introduce you to the audience. Tell us what you do for a living, how far you are out of school, what part of the country you're in, etc.
Chabely:
I'm a certified anesthesiologist assistant. I've been working as a locum tenens contractor. I've been bouncing around across the U.S., working in Missouri, Florida, Georgia, New Mexico, and currently in Michigan.
Dr. Jim Dahle:
All over the place.
Chabely:
Yes.
Dr. Jim Dahle:
Okay, there's a few people out there listening to this who don't know what an anesthesiologist assistant is. Can you explain the difference between a CRNA and an AA?
Chabely:
Yes. My training or my schooling was a bit more pre-med focused. I wanted to apply to medical school and I took a gap year and I learned about a different pathway to becoming an anesthesia provider given my training or my background with a chemistry degree.
I was working as a scribe. I was doing all sorts of healthcare experiences, but I was not a nurse. I could not go through the CRNA pathway, but there was a pathway for me to go through somewhat directly out of undergrad and that is the AA pathway.
I took all sorts of prereqs with a pre-med background and I applied, I interviewed, and I was accepted. My training was a little bit over two years. First, it was a didactic portion and then for the last year it was a pure clinical portion and I also had to take a board certification.
There's also slight legislative differences and there's also differences in the practices that we can do. I always work with an anesthesiologist under their supervision or direction and a CRNA can work under an anesthesiologist or independently. So, those are some of the differences.
Dr. Jim Dahle:
So, in a lot of ways, the difference between an AA and a CRNA is the difference between a PA and an NP. Fair enough?
Chabely:
Yes.
Dr. Jim Dahle:
All right. Well, you have hit some awesome milestones. A lot of people might not realize this. There's often a delay in between the time people apply to come on the program and when we actually get them on the program. So, when you applied, you just hit half a million dollars in net worth. That's pretty awesome. Congratulations on that, but tell us what your net worth is now.
Chabely:
Right now, it is $850,000, not including my emergency fund and some other just like emergency funds that I keep on this side.
Dr. Jim Dahle:
So, what's that made up of?
Chabely:
Basically, just investing in the S&P 500 through my taxable brokerage, through my solo 401(k) and also through my IRAs.
Dr. Jim Dahle:
Okay. Now, you're working all over the place. Is that because you're doing locums? Is that your main job is you're doing locums all over the place?
Chabely:
Yes. I did work as a W-2 employee for about two years in Florida and also in Missouri and I just got into locums. There are a couple benefits because I am a 1099 contractor. I can pay myself through my business, my LLC, and that helps offset some costs and also helps with taxes.
Dr. Jim Dahle:
Yeah, pretty cool. So, where did you go when you went to open up a solo 401(k)?
Chabely:
I went to Vanguard and Fidelity, but I basically automate my 401(k) through Vanguard branch.
Dr. Jim Dahle:
All right. Well, let's talk a little bit about your financial life. I mean, give us a sense. What are you earning going around working all these different places? I'm imagining it's a pretty good income for an AA.
Chabely:
Yeah. A lot of people confuse my profession with anesthesia techs and when we think about the income, there's I would say a significant difference. I would say that I've earned around $300,000 on average over the last four and a half years or so that I've been practicing as an AA.
Dr. Jim Dahle:
Are you maintaining a home somewhere or are you just living off what the locums company provides and wherever you're going?
Chabely:
I have done Airbnbs, leases, but right now a lot of my stuff is in storage, but also a lot of my family is in New York. To a degree, New York is still my home base, but I'm currently keeping a lot of my stuff in storage and I'm just doing Airbnbs right now. I'm kind of a nomad.
Dr. Jim Dahle:
But there's no home equity involved in this net worth calculation right now.
Chabely:
No.
Dr. Jim Dahle:
And tell us your thoughts about that. Some people are like, “Oh, I have to own a home” and other people are like, “I'm going to be a nomad forever.” What are your thoughts? Is this a temporary phase in life? Do you expect you're going to settle down, buy a home at some point or are you loving this aspect of your career?
Chabely:
It can be challenging for sure to kind of pick up and have leases and Airbnbs and things of that nature. But at the same time, I felt like for the past few years, I've been figuring out where I want to live.
One thing to know about the AA profession is that there is a limitation in state legislation. So, we don't practice in private practice in every state. We can practice through the Veteran Affairs, but that was something that I wanted to think about. I really wanted to work in environments, different states before I figured out where I wanted to live long-term.
Now that I've done that, I've gotten to live and work in the Southeast a good bit. And then recently, I was working the Southwest and I've loved the Southwest. So, if I could, I think the Southwest is where I would like to settle. That's what I see for myself. Things could change, but it's been good to move around and kind of experience different environments and see where I would like to live. So, long story short, I think I will settle in the Southwest to a degree. I don't know if I will buy a home yet. It's hard for me to commit to something.
Dr. Jim Dahle:
Well, I don't blame you for that. I love the Southwest. I've lived for five years in Arizona and now I don't know how many years in Utah, a lot of years in Utah as well. There's a lot of benefits to being in the Southwest for sure.
Okay. Well, if we think back, you've been making $300,000-ish each of the last four plus years. We're talking about $1.2 million, somewhere between that and $1.5 million. And you've still got $800,000 of it left.
Chabely:
I know. That's kind of crazy when I think about it.
Dr. Jim Dahle:
Which is pretty cool considering a big chunk of that, you're single, I assume, right?
Chabely:
I'm in a relationship and I've been in a relationship, but I'm not married.
Dr. Jim Dahle:
But paying taxes as a single person.
Chabely:
On taxes, yes.
Dr. Jim Dahle:
So, 25-30% of this has been going to taxes, right?
Chabely:
Yes.
Dr. Jim Dahle:
You've got almost everything you earned left. Well, tell us how you managed to do that.
Chabely:
A big part of it was I budgeted from before I left school. I had a plan for paying off my loans and I lived with roommates for a little over two years after school. Even though I was earning this high income, I could support myself. I lived with a roommate and I also was living with my boyfriend, my partner for a good bit. So, that significantly brought down my costs.
And then I feel like I didn't have too many hobbies besides some social media creation, which is pretty low cost in terms of a hobby. I think those two things combined has helped me a lot with saving and investing and earning.
I feel like I was also kind of aggressive with investing from the beginning. I put basically my emergency fund at one point into the stock market and then I rebuilt it. And so, yeah, I was pretty aggressive with my investing, I would say, as well.
Dr. Jim Dahle:
Yeah. Yeah, for sure. So, how did you get interested? People who are not interested in personal finance and investing, who don't have goals, who don't have a good “why”, don't tend to do what you did. When did you become interested in finances? When did you become financially literate? How did you do it, et cetera?
Chabely:
Well, I grew up low income. My parents, however, did their best to raise us and they actually would give us an allowance. And I think this is kind of the start of my personal finance journey. They would give us an allowance and I feel like I started to save that and I would be able to buy something for myself when I was younger by saving my allowance. So, that was my first taste of what it's like to save and delay gratification.
Growing up low income, I also wanted to be able to provide for myself and just have enough to be comfortable. When I graduated undergrad, I just started getting into personal financing videos on YouTube. And so, that's why I also like sharing my story because I feel like I learned through YouTube about personal finance, particularly a channel called Millennial Money has shown me a lot of personal finance stories. And especially during COVID, people were reacting to other people's personal finance stories. And so, I just had a fascination for how people have been managing their incomes and I would just listen to that on my free time.
Dr. Jim Dahle:
Tell us about the student loan plan. What did you do with your student loans?
Chabely:
I paid them off pretty soon as well. Actually, I was paying off my student loans during the COVID pause, which was perfect. I got myself down to $100,000 in student loans and then I just kept going at it like maybe $8,000 at a time. I would just try to throw as much as I can at my student loans. And thankfully, there was a pause on the interest so that I feel like was a momentum to save up and pay off my student loans immediately.
Dr. Jim Dahle:
Pretty cool. Okay. Well, at some point in the next year or so, you're going to become a millionaire. How's that going to feel?
Chabely:
I hope so. I'm actually going part-time this year. So, my investing…
Dr. Jim Dahle:
It might slow down a little bit.
Chabely:
It might slow down a little bit, but I can see it happening soon. So, it's really, really exciting. And so, I feel like with that looming, that milestone looming, I feel it's given me the belief that I can start going part-time and just trying this work-life balance to balance things out a little bit more. So, I'm really excited and I don't know. I don't want to get too excited before it happens, but I do feel really happy about it.
Dr. Jim Dahle:
Yeah, that's exciting. You have front-loaded the financial tasks in your life. You wiped out your student loans very quickly. You've built up a substantial nest egg for being just a few years out of school. You have more money four years out than I certainly had four years out of residency. I often call this period of time for physicians, I call it your live-like-a-resident period, where you kind of front-load the stuff. You're kind of toward the end of that now. You're even talking about going part-time. What advice do you have to somebody? How glad were you that you front-loaded these financial tasks in your life?
Chabely:
I'm shocked at how fast wealth can accumulate when you front-load it. And there's still so much more time that I feel like my wealth can accumulate, but just seeing it… You can't see the big picture while you're in it. Honestly, just take it one step at a time. I think that's something to keep in mind. Make your goal like $5,000 towards your debt or towards your investing.
Just keep little goals. And I think that makes it more enjoyable. If you say, hey, I can get myself down from $100,000 in student loans to $90,000. Now let me get to $80,000. So just make it a stepwise process. And soon enough, when you look back, you'll be shocked at how far you have gone in five years or four years or whatever the time is. That's basically the way I approached it. And it's worth it.
The way I feel today, after so much delayed gratification and sacrifice, I can't even believe that I feel so light in the way I'm living, that I can have so many more options for myself. So, it's worth it. And now I can slow down and I can upgrade my lifestyle a little bit. And I feel comfortable to do that because I know I've taken care of so much already.
Dr. Jim Dahle:
All right. What do you think was your biggest financial mistake? You made any mistakes along the way? You're clearly hitting the ball out of the park here, but you must've slipped up at some point with something, right?
Chabely:
Let me think.
Dr. Jim Dahle:
It's actually pretty awesome that it's that hard for you to think of a financial mistake. That basically demonstrates just how powerful being prepared is. When you are already financially literate, when you hit that high income, it's super powerful.
Chabely:
It is. I can't say that I've been perfect. I think I've just been feeling so grateful for where I am that I haven't thought back to the way that I messed up.
Dr. Jim Dahle:
And it's probably better not to dwell on the mistakes anyway.
Chabely:
Exactly. Yeah. There was a point where I didn't negotiate for a larger sign-on bonus as an AA. I saw how much the salary was going to be. I saw what the sign-on bonus… It wasn't too much relative to some other sign-on bonuses, but I just signed the paperwork within an hour and sent it back.
And then later on, I talked to some of my CA work colleagues and they told me that they had another double that sign-on bonus. And I realized if I had been a little more patient, I could have gotten a little bit more out of it. I'm still very fortunate overall. So I can't say that it was that negative, but I feel like that was something that I learned to negotiate early on.
Dr. Jim Dahle:
Great tip. All right. There's somebody out there like you were a few years ago. They're sitting in AA school. They're a PA, they're an NP, they're a CRNA, they're a physician in residency, and they want to be as successful as you have been the last four or five years. What's the most important piece of advice you can give them?
Chabely:
I would say to budget. Budgeting and organizing is key. I think looking back on it, I feel like I was always trying to budget for one or two steps ahead of where I was. When I was in AA school, I was thinking about my budget for AA school and then my payoff plan for when I graduated. And so then when I was paying off my student loans, I'm also thinking about how to invest and pushing things a little bit further and just trying to keep in mind that foresight is so powerful.
And there's still mistakes. I think day-to-day sometimes I have a loss. If I think about it, I've had miscommunications with emails. And so, there have been times where maybe I didn't get a shift assigned to me that day because there's a miscommunication. And these small things can happen. But when you're prepared for the larger picture, I think it'll all come together. You'll have some losses along the way, but keep in mind your larger goal. I think it'll all work out in the end.
Dr. Jim Dahle:
Well, Chabely , you are crushing it. You should be very proud of what you've accomplished. And thank you so much for being willing to come on the podcast and inspire others to do the same.
Chabely:
Thank you. I'm so happy that you share your podcast and that there's so many people that are willing to share their personal finance journeys. That's how I've learned. And I hope someone can learn from me as well. So thank you for having me.
Dr. Jim Dahle:
That's a great tip. And for those of you who want to come on and share your journey, go to whitecoatinvestor.com/milestones, and we'll sign you up, come on the podcast and inspire somebody else to do what you've accomplished.
I hope you enjoyed that as much as I did. It's awesome to talk to people and just see how excited they are and how bright they are. I love the part where I asked her about her mistakes, and it took her a long time to think of one.
That does not happen to me. I've made so many mistakes that I can think of them very readily. I've got a list of a handful or so of mistakes. None of them were huge dollar amounts, but they're the classic mistakes that physicians make in finances. I bought a whole life insurance policy. I mistook a fee-based advisor for a fee only advisor. I bought loaded mutual funds. I didn't negotiate well, whether it was jobs or whether it was contracts or whether it was to buy a house or whatever. I've made these mistakes. I almost bought or almost even refinanced into a mortgage loan that I wouldn't have been able to prepay without a penalty. Luckily, I caught that one at the last minute.
Most of us have made significant mistakes. She hasn't made very many at all. Maybe she should have asked for a little larger signing bonus or got her contract reviewed and spent a few more hours sitting with it before signing it and sending it back, but that's pretty minor in the great scheme of things. Good on her, and I hope you're having as much financial success as she is having.
FINANCIAL BOOT CAMP: HEALTH CARE FSAs EXPLAINED
One way of paying for healthcare is to use an employer-provided flexible spending account or FSA. This is different from a savings account or HSA. The biggest difference is that HSAs roll over year to year, so you can actually invest them for the long term, whereas an FSA is a use it or lose it account. So, don't put more in there than you know you're going to spend on healthcare that year. Yes, the tax break is great, but not if you lose the money.
There are annual limits on them. It changes every year, so you need to look it up every year to see what the annual limits are and how much can go in there. But the real limit for you is how much you're likely, essentially guaranteed to be spending on healthcare expenses that are eligible to use the FSA money for.
Note that these limits are per employee, not per household. Both spouses could theoretically have one, and be aware that if an HSA, an HDHP, high deductible health plan, and health savings account cover you, you probably shouldn't be using an FSA.
Now, there's some exceptions. Limited use FSAs that can only be used for like eye care, for example, are still okay to use. And of course, you can use dependent care FSA and an HSA, but a typical FSA you cannot use while you're also eligible to make contributions to an HSA.
Don't forget, you got to actually reimburse yourself out of these accounts. You got to actually do the paperwork to make it work. If you just put the money in there and never take the money out, you end up losing it at the end of the year.
What can you use a flexible spending account for? Well, you can use it for medical appointments, including annual physicals. You can use it for contact lenses and eyeglasses, dental treatment, prescription medications, deductibles and copayments, but not insurance premiums. Generally with an FSA, you'll get a debit card that you can use to pay for your expenses. You can also just pay for them and then basically reimburse yourself, but you typically don't have to prove to anyone that your expenses were eligible unless you're audited. So you want to keep your medical receipts just in case.
Because a flexible spending account is set up and administered by employers, they are the ones that set the rules on whether to offer an FSA. If you're a full-time employee that gets health insurance from an employer, you're likely eligible to participate in an FSA. If you're not sure if your employer offers FSAs, check with your HR or benefits department.
Is it worth it to fund your FSA? Yes. If you're going to spend the money on healthcare, this is a way to buy healthcare with pre-tax dollars. That's a good deal for you. You just want to make sure you're not putting more in the account than you're going to spend on healthcare. While a little bit can be rolled over every year, for the most part, if you got a big amount of money in that FSA, you just lose it at the end of the year if you haven't spent it on healthcare.
Pay attention when your employer offers you this benefit. It is often a benefit you want to use, at least in some regard, but be careful not to overfund it and realize that it is not the same as an HSA. It is not an investing account that you can keep for decades. It is a use it or lose it account.
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All right. We've come to the end of our podcast. Keep your head up, shoulders back. You've got this. We're all here to help you. See you next time on the Milestones to Millionaire podcast.
DISCLAIMER
The White Coat Investor podcast is for your entertainment and information only. It should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.
Financial Boot Camp Transcript
The TSP has long been known for its low expenses. While companies like Vanguard, Fidelity, Schwab, and iShares have largely caught up, the TSP is still very inexpensive. It used to be the absolute cheapest option available, and while that’s no longer strictly true, the differences are now so small that they shouldn’t drive your decision. All of these options are essentially “close to free” when it comes to investing.
One of the biggest advantages of the TSP is its simplicity. It offers five core funds. The C Fund tracks the S&P 500, while the S Fund represents smaller U.S. companies—essentially an extended market index. Together, these two can approximate a total U.S. stock market portfolio. The I Fund provides international exposure and now includes both developed and emerging markets, making it similar to a total international index fund.
There are also two bond funds. The F Fund is a broad bond market index fund. The G Fund, however, is unique to the TSP. It offers Treasury-like yields with almost no risk to principal, functioning similarly to a money market fund but typically with slightly higher returns. Because of this unique structure, many investors keep money in the TSP specifically for access to the G Fund. Even today, I still hold my TSP assets in the G Fund, though it represents only a small portion of my overall portfolio.
If you have access to the TSP, you should absolutely use it. It’s a high-quality retirement plan—far better than many 401(k)s out there. Retirement accounts allow your money to grow tax-advantaged, offer strong asset protection from creditors, and simplify estate planning by allowing assets to pass directly to beneficiaries without probate.
Another important feature is the employer match. In the past, military members did not receive a match, but that has changed. Today, both federal employees and military members can receive up to a 5% match on their contributions. Not contributing enough to get the full match is essentially leaving part of your salary on the table, so at a minimum, make sure you’re contributing enough to capture that benefit.
In addition to the five core funds, the TSP also offers Lifecycle (L) Funds. These are similar to target-date retirement funds and automatically adjust your asset allocation based on your expected retirement date. They become more conservative over time, shifting toward bonds and the G Fund. If the TSP is your only retirement account, these funds can be a great simple solution. If you have multiple accounts, you may want to build your own allocation instead.
So what are the downsides? Expenses are slightly higher than the absolute lowest-cost options available today, though not enough to matter much. The C Fund tracks only the S&P 500 instead of the total stock market, and the S Fund isn’t a true small-cap fund—it leans more toward mid-caps. This means you can’t fully replicate certain tilts, like small value investing, within the TSP alone.
Another limitation is the lack of broader diversification. The TSP has historically been slow to add new asset classes. While it now includes emerging markets, it still doesn’t offer things like REITs, TIPS, foreign bonds, or alternative assets. For many investors, simplicity is a strength—but for others, it can feel restrictive.
In the past, withdrawal options were also limited. You could only take one partial withdrawal, which often pushed retirees to roll their TSP into an IRA. Fortunately, this has improved over time, and there are now more flexible withdrawal options, including installment payments and annuitization. Still, many retirees continue to roll their TSP into an IRA for simplicity.
Another previous drawback was the lack of a “mega backdoor Roth” option. Historically, you couldn’t do after-tax contributions with in-plan Roth conversions. However, starting in 2026, the TSP will allow in-plan Roth conversions, opening the door to this powerful strategy—especially for those with tax-exempt contributions from deployments.
The bottom line is that the TSP is a solid, well-designed retirement plan. It’s simple, low-cost, and offers unique features like the G Fund. It continues to improve over time, and if you have access to it, you should absolutely take advantage of it.