Today, we cover a variety of your questions. We talk about when it is worth passing cash through a 529 account and if you should use 529s to fund K-12 education. We talk about how interest on I Bonds works and go into why TIPs have been performing pretty poorly as of late. We dive into the tax implications for S Corps and talk about why it is not a great idea to purchase ETFs after hours. And finally, we talk about the age-old question of Roth IRAs vs. 403(b)s. There is a little something for everyone today.

 

Moving Cash Through a 529 Account

“Hi Jim. I have a question about 529 accounts that I haven't heard directly addressed in the past. My situation is that currently we're contributing a monthly amount auto-deducted from our checking account into our 529 account as a college savings vehicle for our kids. Well, this year we decided to move them to a private elementary school, and my understanding is that we can pay for that with 529 money, although our state does not give us a tax deduction for 529 contributions.

So, my question is, is there any benefit to putting the additional private school tuition into the 529, then immediately withdrawing it to pay for that tuition? Our plan was to continue our monthly contributions for college, and then on top of that, cash flow the private school. Is there any advantage to doing that, or is it just too much hassle? The only thing I could think of maybe is that if there's possibly an advantage to doing that as a way to flush out the lowest cost basis shares just like you do for your charitable giving and your taxable accounts. Again, I don't know if there's any real benefit to that, or if there's just too much headache to do that and we should just cash flow it. Thanks for your advice.”

Great question. In a state where you're getting a state tax deduction, this is a good idea. You ought to run it through a 529. In my state, it's a 5% tax credit for using the state 529. If you put your money in there and immediately take it out and pay for K-12 education, you get a 5% little credit on your taxes. In your state, there is no benefit there. If you're going to invest it and maybe not spend it on K-12 education for a couple of years, well, you could get all those earnings tax-free. That would make some sense, but if you're literally just putting it in and then taking it right out and paying tuition with it, there's no point to doing that in your state.

I don't spend a lot of time thinking about the cost basis in my 529. The reason why is when I put that money in there, I have committed that money to education. If my kids don't use it, my grandkids are going to use it. I don't think about the cost basis there. If you really think there's a possibility that you're going to be pulling that money out and spending it yourself, well, maybe it's worth updating that cost basis. You're essentially tax-gain harvesting by doing that. But I think most people are going to do what I'm doing with the 529, which is simply changing the beneficiary to grandkids if the kids don't spend it. I wouldn't bother with that hassle. Way too much hassle for me. Maybe it's worth it for you, but I kind of doubt it.

More information here:

529 Plans – A Tax Break for the Rich

How to Superfund a 529

 

Should You Use 529 Accounts for K-12 Education? 

“We live in New York and have 529 plans for our children. New York gives a state tax deduction for the first $10,000 you contribute if you use the New York state plan. We contribute more than this, given we have three children. We also send our children to a private school. I know that, by federal law, you're allowed to use 529 plans to pay for K-12 private education. However, New York will call back your tax deduction if you do so.”

Well, that's something to watch for, isn't it? I guess maybe that doesn't work so well in New York, does it? You'll need to know your own state laws with regards to that if you use that strategy.

“My question is regarding 529 plans for K-12 education: do you advocate for using 529 plans to save for K-12 education?”

Sure. Again, if you're putting the money right in and taking it right out, New York's clawing back that tax deduction, so that's not going to help you much. But in your case, you're probably putting enough in there each year that $10,000 of it is not being used for K-12 education. So, it's probably fine. But again, if you're putting it in and taking it right back out, maybe there is no real benefit to you there. If you're going to leave it there for a few years, sure, why not? If you start putting it in there when they're born and they don't start spending it until they're in kindergarten, that's five years of tax-free gains that you get.

“Would it be worthwhile to open a specific account for K-12 education that is separate from the college 529?”

I can't think of one unless you're trying to really go crazy in 529 savings. Remember that each state has a limit on how much you can put in there, but you can just go to the state next door, and you get a whole new limit. If you want to put a million dollars into a 529 for a kid, then sure, maybe it's worth getting a separate account for the K-12. You can go to Utah in your case maybe, open one in Utah and use the New York one for college. I guess you could do that, but I don't think it's worth it for most people.

“If I had a K-12 529, would it be more sensible to have it in a different state plan, such as Utah, while leaving the college 529s under the New York state plan to avoid the tax deduction clawback? Are there tax consequences to this?”

Not really. If you want to do it, you can. But the only real reason to do it is if you just want to save more than the limits of what you can put into the New York 529. That's probably pretty high in New York state. A 529 plan limit contribution is usually around $400,000-some dollars that you can put into the plan. It does vary by state, which I always found kind of interesting. It's a state law that limits how much you can put in there, but it's probably $400,000 or so. If you really want to save more than that for college and high school, then maybe you need to use two 529s. But for most people, I just use the same one. Keep your life simple. Trust me, it is not super fun to have a gazillion 529s. I've got like 35 of them because I have one for each of my nieces and nephews. It's a lot of accounts to open and keep track of.

 

I Bonds Interest

“Hey Jim, this is David from California. I just bought an I bond and I'm wondering is that interest compounded or simple and how often does it change? Thanks.”

You can go to treasurydirect.gov if you want to buy I bonds or if you want to learn about I bonds. They have tons of information there on I bonds. Just about every Google search you come up with has an answer on the actual treasurydirect.gov website, including your question.

If you go on there, it says, “What interest will I get if I buy an I bond now?” Well, you basically get the current rate and you get it for the next six months. Even if the interest rate changes at month 4, you get it for six months, and then you go to the new rate for the next six months. That's the way it works. An I bond earns interest monthly from the first day of the month. On the issue date, the interest accrued is added to the bond until the bond reaches 30 years or you cash the bond, whichever comes first.

Here's the part that answers your question. The interest is compounded semi-annually. Every six months from the bond's issue date, interest the bond earned in the six previous months is added to the bond's principal value, creating a new principal value. Interest is then earned on the new principal. Keep in mind, you can't cash them out in less than 12 months. If you cash them out in less than five years, you lose three months of interest as a penalty. So, you should plan on keeping those for at least five years. I don’t know how long the interest rate is going to stay as high as it is now. But right now, it's 9.62%. It's a heck of a very safe investment, heck of a yield for a very safe investment.

More information here:

What Is an I Bond? — Are They a Good Investment?

How to Buy I Bonds at TreasuryDirect

 

Why Are TIPS Doing Poorly? 

“Hi Jim. This is David. I'm a radiation oncologist from New Jersey. I just wanted to ask you about TIPS. I do have a small allocation of my bond portfolio with TIPS to combat inflation, but they seem to be doing poorly in this high-inflation environment. Can you explain to us and to me why TIPS are not doing well despite high inflation? And if they don't do well in high inflation, why should we bother buying them or allocating them to our portfolio? Thanks.”

A lot of people aren't too thrilled with their TIPS performance this year, because they are expecting them to be up when inflation gets bad. Inflation is pretty bad right now so you would expect something that's indexed to inflation to actually be doing pretty good. But you have to keep in mind TIPS are really two things. They have this inflation-protection feature, but they're also bonds. When interest rates go up, that hurts the value of bonds, because you can get new bonds at the new higher interest rate that's available. The old bonds with the lower interest rate are now not worth as much. You have both of those effects working with TIPS. Now, for the most part, you will see if you have regular nominal bonds that are similar to those TIPS, that they're doing a little bit better. The TIPS are outperforming their comparable nominal bonds, but they're not necessarily providing you a positive return year to date.

Disappointing, sure, but it just turns out that their rise in interest rates has a bigger effect than current inflation. Will that change in the next few months? I don't know. What I do know is they act differently from regular bonds. They act differently from my stocks and they have reasonable long-term returns. I think they're a good component of a portfolio, but to really understand what's going on, you have to dive into the details.

Let's look at the year-to-date return on the Vanguard Inflation-Protected Securities Fund (VIPSX). That's their TIPS fund. It is down about 6.78% on the day I'm recording this. If you look at a relatively comparable fund at Vanguard, you can look at their Intermediate-Term Treasury Index Fund (VSIGX). That is down 6.76%. So, about the same year to date. But if you actually look at what's in those funds, you will see that the duration on the TIPS fund is longer than the duration on the nominal bond fund. The TIPS fund duration is 6.7 years. The nominal bond fund is only 5.3 years. Because the TIPS duration is longer, the rise in interest rates has affected it more severely. Despite that, it still has similar returns to the nominal bond fund, and that's because of the inflation component.

It's hard to get really excited about TIPS yields or TIPS returns so far this year. Just a couple months ago, they were doing significantly better than nominal bonds. I'm not sure exactly what happened in the last month with TIPS. I don't know if people's expectations for inflation have changed or what, but it's definitely been a little bit of a change in the last few months. If you look at the current TIPS yield curve, you'll see that the yield on a five-year is about 0.25% real. A 10-year is 0.37%, 20-year is 0.95%, and a 30-year is 0.81%. Those are after-inflation yields. If you look at the regular treasury yield curve, you'll see that right now as I'm recording this, the one-year is just over 3%, 3.06%. The five-year is at 2.89%, the 10-year is at 2.81%, the 20-year is 3.27% and the 30-year is at 3.03%.

A little bit of inversion on some of that yield curve, maybe that portends a coming recession. It's hard to say. I think they say inverted yield curves have successfully predicted nine of the last 11 recessions or something like that. So, it's not a perfect predictor by any means, but that may be affecting why the TIPS returns are so similar to nominal bond returns at this point year to date. If you do go back and look at it a little longer term, you'll see the TIPS have outperformed the nominal bond fund over the last year. They're only down 5% instead of 8%. Over the last five years, they're up 3% a year instead of up 0.8%. And over the last 10 years, they're up 1.56% vs. 1.06%. If you go out a little bit longer, you'll see you did get a little bit of advantage for owning those TIPS. I intend to continue to keep 10% of my portfolio in inflation-protected bonds. Most of that is in TIPS. Some of it is in I bonds. I bonds are a much better deal right now, but you can only buy $10,000 a year for you, your spouse, your trust, your business, etc.

More information here:

What Bond Fund Should You Hold?

 

S Corps

“Hi, Dr. Dahle. First, I wanted to thank you for your amazing blog and podcast. I've gone from $300,000 in debt to nearly financially independent in just a few years, and that's as a veterinarian who's not a specialist, in great part thanks to you. I have a question about S Corps and solo 401(k)s and what's called a relief veterinarian for emergency hospitals, which is equivalent to what physicians call locum tenens. I'm paid as a 1099 contractor. I also have a small solo house call practice with no real employees.

I have an LLC and, in the past, I've been taxed as a sole proprietor, but I'm changing to being taxed as an S Corp. In the past, I've always maxed out my solo 401(k). I'm told that I should pay myself the lowest reasonable salary the IRS will accept, which for a veterinarian is probably around $60,000 a year, to avoid as much payroll tax as possible. But then I can no longer max out my solo 401(k). It seems to me that the tax benefits of maxing out my 401(k) far outweigh the benefits of paying less in payroll taxes. In which case I think I should pay myself the lowest salary I can that also allows me to max out my 401(k)? I was wondering, is my thinking correct? Am I missing anything here? Do you have any thoughts on where to strike that balance? Thank you very much.”

You have noticed the dilemma when it comes to an S Corp. Yes, you can save a lot of payroll taxes by using an S Corp, but the lower your salary, the less you can contribute to a solo 401(k) as an employer contribution. It's a balancing act, and this is something that Katie and I have been dealing with ever since she came on at The White Coat Investor. Despite the fact that she probably works more hours in White Coat Investor than I do these days, she gets paid dramatically less than I do. The reason why is that tax savings. The less you get paid, the less you have to pay in payroll taxes. She makes way more from her share of the profits than she does from her salary. That difference is much smaller for me for various reasons, including the 199A deduction, which also plays into this calculation a bit, right? Because the less you pay yourself in salary, the smaller your 199A deduction. It becomes this spreadsheet calculation to try to decide how much to pay yourself.

But here's the deal. As a veterinarian, you're able to get away with a salary that's significantly less than the wage limit for Social Security. You can save not just Medicare taxes, which is relatively trivial at 2.9%. You can save the whole shebang of 12.4%. Of course, part of that is deductible. So, it's a little bit less than that, but 12.4% of your Social Security taxes. That's a huge savings, right? You're saving 15% and it's not just deferring those taxes. You don't pay them at all. Now, does that mean you may get less in Social Security later? Yes, it does, but that's a pretty huge tax savings.

In your case, that factor should be outweighing the fact that you can't put as much into a solo 401(k). It's a huge tax savings for you. If you pay yourself $60,000 instead of $120,000, that's $60,000 * 15%, that's $9,000 in taxes you save by doing that. You're probably not going to get that big of a benefit by putting a little bit more money into the solo 401(k). Now, if you leave it in there years and years, and years and years, maybe that tax-protected growth will give you that big of a benefit, but that's an awfully big tax benefit right up front. I think what I would do in your situation is I would probably take the lower salary, have a lower solo 401(k) contribution, and just invest the rest in a taxable account. You're going to be able to invest very tax efficiently in a taxable account and probably pay very little in capital gains taxes there. I think that's the way to go for you, and that is what I would do.

There are a lot of people who are making more money and can't justify as low of a salary. If you're an ENT surgeon, you're not going to be able to justify to the IRS a salary of $60,000 a year. It's probably going to be $200,000+, and it's probably going to be high enough that you can also max out your solo 401(k) in that situation. But in your case, there's a lot of savings for getting your salary down to the $60,000 a year range.

More information here: 

S Corporation Tax Strategies

 

Purchasing ETFs After Hours

“Does it matter if you purchase ETFs or bond funds after hours if you're dollar-cost averaging or purchasing a set amount of, say, VTI every month? Does it matter what time of day you make this purchase? I've noticed I tend to make these transactions purchasing or reinvesting dividends after hours due to convenience after my workday, but I've seen after hours market prices go up a bit. Do you advise people to make these purchases in the morning when the markets are open?”

Here's the deal. If you're using mutual funds, transactions all take place at 4pm Eastern. If you put the transaction in at 3:45pm Eastern, it takes place 15 minutes later. If you put the transaction in at 4:15pm Eastern, it takes place at 4pm the next day or the next trading day. If it's Friday, it might be three days from then. As a general rule, I wouldn't do that just in case some crazy thing happens in the world or the markets over the next 24 hours. I would try to put in that purchase sometime during the day, and then know it will take place at 4pm.

When it comes to buying and selling shares on the market—whether these are stocks, individual bonds, or ETFs (exchange traded funds)—I would try to put that in during the day. This is one of the hassles of using ETFs instead of mutual funds. There are upsides, but there are also downsides. The downside is you really need to get in there during the day and take care of it. As a general rule, it's probably not a great idea to buy and sell in the first 30 minutes or so the market is open or in the last 30 minutes before the market closes. It tends to be a little bit more volatile in those times. This is a good thing to do at lunch. If you have to put in a couple of orders that day, then you can do that at lunch. Obviously, make sure you're on a secure computer, not the hospital computer. But figure out a way to do it on your phone, via their app, or connect your computer to your phone, or have a VPN or whatever. Anyway, make it secure so you don't have to worry about that.

That's the way I would do your orders. I would try to do them during the day, because weird things happen after hours. There's a lot less liquidity. Your bid-ask spreads can get wide. All of a sudden, there could be one person really moving the market. I wouldn't get in the habit of buying and selling stocks or ETFs after hours. I don't think that's a great idea. If you're really just dollar-cost averaging and you're just putting in an automated transaction for mutual funds every month, I think that's fine to leave it that way. Just realize that whenever the transaction goes in, that's when it takes place and that's when you buy at. But there are benefits to paying a little more attention. There are benefits to automation. You've got to find the balance for you.

 

403(b)s vs Roth IRAs

“Hi Dr. Dahle. My partner is a first-year resident in the Northeast. He brought up a good question about the difference between 403(b) Roth contributions and investments in a Roth IRA. Say I only have $5,000 post-tax dollars to invest. I understand that the general consensus would be to invest the $5,000 into my Roth IRA over the 403(b). I understand that the advantages of investing in a Roth IRA and 403(b) via Roth contributions is that the principal and growth would grow tax-free. I also understand that the 403(b) max contribution limit is $20,500 this year. And the Roth IRA has income limits. In the scenario where I have the option of investing only $5,000 into either a Roth IRA or 403(b) via Roth contributions, why is it that the general consensus is to prioritize the Roth IRA contributions? Is there a difference between the Roth IRA and 403(b) that I'm not noticing? Thank you for all that you do.”

We're really dancing on the head of a pin here, right? There is not a big difference. It doesn't matter a lot, but let's go through the reasons it might matter a little.

First of all, if you get a match from the employer, you should use the 403(b). Otherwise, you're leaving part of your salary on the table. In many states, a 403(b) also gets additional asset protection. In the event that you got sued for above policy limits and had to declare bankruptcy, there are some states that don't protect your Roth IRA nearly as much as the ERISA protection that you get in a 403(b) or a 401(k) plan. That might be another reason why you might want to use a 403(b). You might have a really unique investment in your employer-provided retirement account. For instance, the Thrift Savings Plan, basically the federal 401(k), has the G Fund in it, which you can't just go buy. If you really like the G fund and you want to use it, well, that would be a reason to put more money into that plan instead of a Roth IRA.

However, as a general rule, Roth IRAs offer more investment options, and you can move them into a self-directed Roth IRA if you like and invest in all kinds of crazy stuff like crypto and real estate and hedge funds or whatever. Also, lower costs. A lot of employers' 403(b)s are not that good, and they charge you significant costs. If you can go to Vanguard or wherever and get a Roth IRA essentially for free and then invest in ETFs with expense ratios of under 10 basis points a year—essentially free—you’ll have very, very low cost and lots of investment options. That's why most people prefer a Roth IRA before going to the 403(b). Obviously, it's better if you can max out everything, but if you're having to choose between one or the other, that's why a lot of people choose the Roth IRA.

Keep in mind, if your income is too high, you have to do your Backdoor Roth IRA process in order to get money into a Roth IRA. You don't have to hassle with that in a 403(b). If you had another big traditional IRA out there and you didn't want to roll it into the 403(b), maybe you'd use the 403(b) instead of doing a Backdoor Roth IRA. That might be another reason to do a 403(b). Also keep in mind, when you get to retirement years, Roth 403(b)s and Roth 401(k)s have required minimum distributions whereas a Roth IRA does not. Most people, when they get to retirement age anyway are moving their Roth 401(k), their Roth 403(b) into a Roth IRA so that they can take money out when they want, not when the government says they should.

Yet another advantage of a 403(b) or a 401(k) is that the age 55 rule applies instead of the age 59 1/2 rule. That is if you separate from your employer and you're already 55, you can take money out of a 401(k) or a 403(b) without paying any penalties whereas that age is 59 1/2 for an IRA or a Roth IRA. Those are the main reasons. It doesn't matter much. If you really like your 403(b) and it's not high cost and it's got good investments, put your money in the 403(b). No big deal. You can always do a rollover when you separate from the employer into a Roth IRA. On the other hand, if it's not a great 403(b) and you want to invest in something that's not available in the 403(b) or it has significant expenses or you want to do a self-directed Roth IRA or you're going to be at retirement age soon or whatever, then use the Roth IRA preferentially. It doesn't matter much, though. So, do what you want to do. You're not missing a lot, but there were a few little details there that you had not mentioned in your question.

More information here:

Should You Make Roth or Traditional 401(k) Contributions?

 

The folks at SoFi are the ones who help you get your money right. They've got exclusive rates and offers to help medical professionals like you when it comes to refinancing your student loans, and that could end up saving you thousands of dollars. Still in residency? SoFi offers low interest rates and the ability to whittle down your payments to just $100 a month while you're still in school. Already out of residency? SoFi's got you covered there too with great rates that can help you save money and get on the road to financial freedom. Check out their payment plans and interest rates at sofi.com/whitecoatinvestor. SoFi student loans are originated by SoFi Bank, N.A. Member FDIC. Additional terms and conditions may apply. NMLS #696891.

 

WCI Scholarship and Judges 

If you haven't gotten your scholarship application in for the White Coat Investor Scholarship, get it in. It's due August 31. We're strict about that. Submit them at whitecoatinvestor.com/medical-school-scholarship. Professional students can apply. We give away tens of thousands of dollars every year to these students.

We also still need more judges. If you would like to be a judge, you can't be a student, you can't be a resident. But otherwise, we'll take you as a judge. Email us at  [email protected]. Just put “Volunteer judge” in the email heading, and we will let you participate in the process and help decide who the winners are going to be. To remain unbiased, we don't do any of the judging ourselves. We let our audience do all of the judging on who's going to win that contest.

 

WCICON23

By mid-September, the speakers in the program are going to be announced for WCICON23. That's going to be the first week of March in Phoenix next year. If you want to get a reminder when registration opens in October, go to www.wcievents.com. Now, we didn't sell out last year. Maybe you'll be able to register all the way up to the event, but we've sold out twice before and very quickly both of those times—once in six days, once in 23 hours. So, it's possible if you don't sign up right away that you won't get to come. We suggest signing up at least for the reminder.

 

Student Loan Advice

The pricing is about to change for studentloanadvice.com. As of right now, a consult is $479, and that includes six months of email follow-up. That means any questions you have later on for the next six months are totally free. Our man, Andrew, will answer those for you. That price is going up, though. So, I'm giving you some notice. If you book your consult before September 1, you get that price. After September 1, the price is going up to $559. You do get a couple of other nice changes with that increase in price, though. First of all, the email follow-up is going to go from six months to 12 months. They're also allowing for repeat consults to now get a $100 discount. If you come back in a couple of years, want to do another consult with Andrew, it'll be $100 off. So, a nice little benefit there. If you want to book before September 1, if you're thinking about getting advice as with all these changes coming up with student loans, go to studentloanadvice.com today and book that.

 

Quote of the Day 

The quote of the day comes from P. T. Barnum that you might be aware of from the excellent musical movie, “The Greatest Showman.” He said,

“Money is a terrible master, but an excellent servant.”

 

Milestones to Millionaire

#79 — Pilot Gets Back to Broke

This airline pilot has a net worth of $50K, having paid off $78K in flight school loans, 2 1/2 years out of training. His income has only been $28K- $110K/year. His secrets to success? Working really hard and having a plan for every dollar.


Sponsor: Peak Housing REIT

 

Full Transcript

Transcription – WCI – 276
Intro:
This is the White Coat Investor podcast, where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.

Dr. Jim Dahle:
This is White Coat Investor podcast number 276 – 529s, I bonds, TIPS, S Corps, ETFs and 403(b)s.

Dr. Jim Dahle:
I'm your host, Jim Dahle. I'm the founder of the White Coat Investor and I'm excited to have you here with us.

Dr. Jim Dahle:
Let me tell you a little bit about our sponsor SoFi. Those are the folks who help you get your money right. They've got exclusive rates and offers to help medical professionals like you when it comes to refinancing your student loans, and that could end up saving you thousands of dollars.

Dr. Jim Dahle:
Still in residency? SoFi offers low interest rates and the ability to whittle down your payments to just $100 a month while you're still in school. Already out of residency? SoFi's got you covered there too with great rates that can help you save money and get on the road to financial freedom.

Dr. Jim Dahle:
Check out their payment plans and interest rates at sofi.com/whitecoatinvestor. SoFi student loans are originated by SoFi Bank, N.A. Member FDIC. Additional terms and conditions may apply. NMLS# 696891.

Dr. Jim Dahle:
Thanks for what you do out there. It's not easy work. If no one said thank you today, let me be the first. It's hard sometimes what we do, and I want to give a special thank you to those of you out there who are already financially independent and still practicing.

Dr. Jim Dahle:
I've come to learn something is true that I think I first heard from Leif Dahleen, the Physician on FIRE, who said once he was financially independent or realized he was financially independent, the little things at work bothered him more.

Dr. Jim Dahle:
And I'm starting to be able to relate to that a little bit more. I was asked to credential at an entirely different hospital system. So, I could cover maybe one shift a month at a free-standing emergency department that our group's going to start covering.

Dr. Jim Dahle:
And I look at that five-hour process to take their sedation training and to round up all my CME and licensing and board certification stuff and get credentialed. And it really makes me wonder if I really want to do that. So, for those of you who are still jumping through those hoops to help your patients, despite being financially independent, a special thank you for you.

Dr. Jim Dahle:
All right. By mid-September the speakers in the program are going to be announced for WCICON23. That's going to be the first week of March in Phoenix next year. If you want to get a reminder when registration opens in October, go to www.wcievents.com. Now we didn't sell out last year. And so, maybe you'll be able to register all the way up to the event, but we've sold out twice before and very quickly both of those times, once in six days, once in 23 hours.

Dr. Jim Dahle:
So, it's possible if you don't sign up right away that you won't get to come. So, I would suggest signing up at least for the reminder. There's no commitment to that. www.wcievents.com is where you do that.

Dr. Jim Dahle:
Also, a reminder I gave you last week about Student Loan Advice. Pricing is going up there as of September 1st. Book before then, even if you don't complete your consult before then, and you get the lower $479 price, otherwise it's going to be going up to $559.

Dr. Jim Dahle:
It’s still a great deal at $559, don't get me wrong. You might save tens of thousands of dollars or even hundreds of thousands of dollars via PSLF. It's still a great deal, but the price will be going up soon.

Dr. Jim Dahle:
All right, let's take some questions and we have a potpourri of questions off the Speak Pipe this week. So, thanks for those of you who have been leaving us questions. If you would like to leave us questions, you can go to speakpipe.com/whitecoatinvestor or if you forget that, go to whitecoatinvestor.com/speakpipe. Either way, it's going to get you there, leave us your questions.

Dr. Jim Dahle:
We answer almost all of them on the podcast at some point. Sometimes it takes us a few weeks, but we like to let you as the listener drive the content to the show. So, this one is about 529s. It comes from Wes. Let's take a listen.

Wes:
Hi Jim. I have a question about 529 accounts that I haven't heard directly addressed in the past. My situation is that currently we're contributing a monthly amount auto deducted from our checking account into our 529 account as a college savings vehicle for our kids.

Wes:
Well, this year we decided to move them to a private elementary school and my understanding is that we can pay for that with 529 money. Although our state does not give us a tax deduction for 529 contributions.

Wes:
So, my question is, if there's any benefit to putting the additional private school tuition into the 529, then immediately withdrawing it to pay for that tuition. Our plan was to continue our monthly contributions for college. And then on top of that cash flow, the private school.

Wes:
Is there any advantage to doing that or is it just too much hassle? The only thing I could think of maybe is that if there's possibly an advantage to doing that as a way to flush out the lowest cost basis shares just like you do for your charitable giving and your taxable accounts. Again, I don't know if there's any real benefit to that, or if there's just too much headache to do that and we should just cash flow it. Thanks for your advice.

Dr. Jim Dahle:
Great question. In a state where you're getting a state tax deduction, this is a good idea. You ought to run it through a 529. Get, my state it's a 5% tax credit, for using the state 529. So, if you put your money in there, immediately take it out and pay for K-12 education you got a 5% little credit on your taxes.

Dr. Jim Dahle:
In your state, no benefit there. So, if you're going to invest it and maybe not spend it on K-12 education for a couple of years, well, you could get all those earnings tax free. That would make some sense, but if you're literally just putting it in and then taking it right out and paying tuition with it, there's no point to doing that in your state.

Dr. Jim Dahle:
I don't spend a lot of time thinking about the cost basis in my 529. And the reason why is when I put that money in there, I have committed that money to education. If my kids don't use it, my grandkids are going to use it. And so, I don't think about the cost basis there. If you really think there's a possibility that you're going to be pulling that money out and spending it yourself, well, maybe it's worth updating that cost basis. You're essentially tax gain harvesting by doing that.

Dr. Jim Dahle:
But I think most people are going to do what I'm doing with the 529, which has simply changed the beneficiary to grandkids if the kids don't spend it. So, I wouldn't bother with that hassle. Way too much hassle for me. Maybe it's worth it for you, but I kind of doubt it.

Dr. Jim Dahle:
All right. Here's another question on 529s. This one comes in via email. Several questions it looks like.

Dr. Jim Dahle:
“We live in New York and have 529 plans for our children. New York gives a state tax deduction for the first $10,000 you contribute if you use the New York state plan. We contribute more than this given we have three children. We also send our children to a private school. I know that by federal law, you're allowed to use 529 plans to pay for K through 12 private education. However, New York will call back your tax deduction if you do so.”

Dr. Jim Dahle:
Well, that's something to watch for, isn't it? I guess maybe that doesn't work so well in New York, does it? So, you'll need to know your own state laws with regards to that if you use that strategy.

Dr. Jim Dahle:
“My question is regarding 529 plans for K-12 education, thus, do you advocate for using 529 plans to save for K-12 education?” Sure. Again, if you're putting the money right in and taking it right out, and New York's clawing back that tax deduction, well, that's not going to help you much. But in your case, you're probably putting enough in there each year, that $10,000 of it is not being used for K-12 education. So, it's probably fine.

Dr. Jim Dahle:
But again, if you're putting it in, taking it right back out, maybe no real benefit to you there. If you're going to leave it there for a few years, sure, why not? If you start putting it in there when they're born and they don't start spending it until they're in kindergarten, that's five years of tax-free gains that you get.

Dr. Jim Dahle:
All right. Number two. “Would it be worthwhile to open a specific account for K-12 education that is separate from the college 529?” I can't think of one, unless you're trying to really go crazy in 529 savings. Remember that each state has a limit on how much you can put in there, but you can just go to the state next door and you get a whole new limit. So, if you want to put a million dollars into a 529 for a kid, then sure, maybe it's worth getting a separate account for the K-12. You can go to Utah in your case maybe, open one in Utah and use the New York one for college. I guess you could do that, but I don't think it's worth it for most people.

Dr. Jim Dahle:
And third. “If I had a K-12 529 it would be more sensible to have it used in a different state plan such as Utah.” Hey, look, I thought about that. “While leaving the college 529s under the New York state plan to avoid the tax deduction clawback. Are there tax consequences to this?”

Dr. Jim Dahle:
Not really, if you want to do it, you can. But the only real reason to do it is if you just want to save more than the limits of what you can put into 529. And that's probably pretty high in New York state.

Dr. Jim Dahle:
Let's see, a quick Google search says 529 plan limit contribution. Let's see what that is for New York. You're going to have to dive into their plan to get it. It's not popping right up, but usually these are like $400,000 some dollars that you can put into the plan. And it does vary by state, which I always found kind of interesting. It's a state law that limits how much you can put in there, but it's probably $400,000 or so.

Dr. Jim Dahle:
So, if you really want to save more than that for, for college and high school, then maybe you need to use 2 529s. But for most people, I just use the same one. Keep your life simple. Trust me, it is not super fun to have a gazillion 529s. I've got like 35 of them because I have one for each of my nieces and nephews. So, that's a lot of accounts to open and keep track of.

Dr. Jim Dahle:
All right. Now a question on I bonds interest. Let's take a listen.

David:
Hey Jim, this is David from California. I just bought an I bond and I'm wondering is that interest compound or simple and how often does it change? Thanks.

Dr. Jim Dahle:
All right, great question. You can go to treasurydirect.gov if you want to buy I bonds, or if you want to learn about I bonds. They have tons of information there on I bonds. And just about every Google search you come up with has an answer on the actual treasurydirect.gov website, including your question.

Dr. Jim Dahle:
If you go on there, it says, “What interest will I get if I buy an I bond now?” Well, you basically get the current rate and you get it for the next six months. Even if the interest rate changes at month four, you get it for six months and then you go to the new rate for the next six months. That's the way it works.

Dr. Jim Dahle:
An I bond earns interest monthly from the first day of the month. On the issue date the interest accrue is added to the bond until the bond reaches 30 years or you cash the bond, whichever comes first.

Dr. Jim Dahle:
And here's the part that answers your question. The interest is compounded semi-annually. Every six months from the bonds issue date, interest the bond earned in the six previous months is added to the bonds principle value creating a new principle value. Interest is then earned on the new principle.

Dr. Jim Dahle:
So, keep in mind, you can't cash them out in less than 12 months. If you cash them out in less than five years, you lose three months of interest as a penalty. So, you should plan on keeping those for at least five years. I don’t know how long the interest rate is going to stay as high as it is now. But right now, it's 9.62%. It's a heck of a very safe investment, heck of a yield for a very safe investment.

Dr. Jim Dahle:
All right, our quote of the day today comes from P. T. Barnum that you might be aware of from the excellent musical movie, “The Greatest Showman”. He said “Money is a terrible master, but an excellent servant.” I like that quote.

Dr. Jim Dahle:
All right, let's do a question. We've talked about I bonds. Let's talk about TIPS. This one from David. Let's take a listen up on the Speak Pipe.

David D'Ambrosio:
Hi Jim. This is David D'Ambrosio. I'm a radiation oncologist from New Jersey. I just wanted to ask you about TIPS. I do have a small allocation of my bond portfolio with TIPS to combat inflation, but they seem to be doing poorly in this high inflation environment. Can you explain to us, and to me, why TIPS are not doing well despite high inflation? And if they don't do well in high inflation, why should we bother buying them or allocating them to our portfolio? Thanks.

Dr. Jim Dahle:
All right. Yeah. A lot of people aren't too thrilled with their TIPS performance this year because they are expecting them to be up when inflation gets bad. Inflation is pretty bad right now so you would expect something that's indexed to inflation to actually be doing pretty good.

Dr. Jim Dahle:
But you got to keep in mind TIPS are really two things. They have this inflation protection feature, but they're also bonds. So, when interest rates go up, that hurts the value of bonds, because you can get new bonds at the new higher interest rate that's available. And so, the old bonds with the lower interest rate are now not worth as much.

Dr. Jim Dahle:
And so, you have both of those effects working with TIPS. Now, for the most part, you will see if you have regular nominal bonds that are similar to those TIPS that they're doing a little bit better. So, the TIPS are outperforming their comparable nominal bonds, but they're not necessarily providing you a positive return year to date.

Dr. Jim Dahle:
Disappointing, sure, but it just turns out that their rise in interest rates has a bigger effect than current inflation. Will that change in the next few months? I don't know. What I do know is they act differently from regular bonds. They act differently from my stocks and they have reasonable long-term returns.

Dr. Jim Dahle:
And so, I think they're a good component of a portfolio, but to really understand what's going on, you have to dive into the details. So, let's look at the year-to-date return on the Vanguard inflation protected securities fund. That's their TIPS fund. And it is down about 6.78% on the day I'm recording this.

Dr. Jim Dahle:
If you look at a relatively comparable fund at Vanguard, you can look at their intermediate term treasury index fund. And that is down 6.76%. So, about the same year to date. But if you actually look at what's in those funds, you will see that the duration on the TIPS fund is longer than the duration on the nominal bond fund. The TIPS fund duration is 6.7 years. The nominal bond fund is only 5.3 years.

Dr. Jim Dahle:
Because the TIPS duration is longer, the rise in interest rates has affected it more severely. So, despite that, it still has similar returns to the nominal bond fund and that's because of the inflation component.

Dr. Jim Dahle:
So, it's hard to get really excited about TIPS yields or TIPS returns so far this year. Just a couple months ago, they were doing significantly better than nominal bonds. I'm not sure exactly what happened in the last month with TIPS. I don't know if people's expectations for inflation have changed or what, but it's definitely been a little bit of a change in the last few months.

Dr. Jim Dahle:
If you look at the current TIPS yield curve, you'll see that the yield on a five year is about 0.25% real. A 10 year is 0.37% to 20 year is 0.95% and a 30 year is 0.81%. Those are after inflation yields. If you look at the regular treasury yield curve, you'll see that right now as I'm recording this, the one year is just over 3%, 3.06%. The five year is at 2.89%, the 10 year is at 2.81%, 20 year is 3.27% and the 30 year is at 3.03%.

Dr. Jim Dahle:
A little bit of inversion on some of that yield curve, maybe that portends a coming recession. It's hard to say. I think they say inverted yield curves have successfully predicted 19 of the last 11 recessions or something like that. So, it's not a perfect predictor by any means, but that may be affecting why the TIPS returns are so similar to nominal bond returns at this point year to date.

Dr. Jim Dahle:
If you do go back and look at it a little longer term, you'll see the TIPS have outperformed the nominal bond fund over the last year. They're only down 5% instead of 8%. Over the last five years, they're up 3% a year instead of up 0.8%. And over the last 10 years, they're up 1.56% versus 1.06%. So, if you go out a little bit longer, you'll see you did get a little bit of advantage for owning those TIPS.

Dr. Jim Dahle:
I intend to continue to keep 10% of my portfolio in inflation protected bonds. Most of that is in TIPS. Some of it is in I bonds. I bonds are a much better deal right now, but you can only buy $10,000 a year for you, your spouse, your trust, your business, etc.

Dr. Jim Dahle:
Okay, let's take another question. This one from Jessica about S Corps.

Jessica:
Hi, Dr. Dahle. First, I wanted to thank you for your amazing blog and podcast. I've gone from $300,000 in debt to nearly financially independent in just a few years, and that's as a veterinarian who's not a specialist in great part thanks to you.

Jessica:
I have a question about S Corps and solo 401(k)s and what's called a relief veterinarian for emergency hospitals, which is equivalent to what physicians call locum tenants. I'm paid as a 1099 contractor. I also have a small solo house called practice with no real employees.

Jessica:
I have an LLC and, in the past, I've been taxed as a sole proprietor, but I'm changing to being taxed as in S Corp. In the past, I've always maxed out my solo 401(k). I'm told that I should pay myself the lowest reasonable salary the IRS will accept which for a veterinarian is probably around $60,000 a year to avoid as much payroll tax as possible. But then I can no longer max out my solo 401(k).

Jessica:
It seems to me that the tax benefits of maxing out my 401(k) far outweigh the benefits of paying less in payroll taxes. In which case I think I should pay myself the lowest salary I can that also allows me to max out my 401(k)? I was wondering, is my thinking correct? Am I missing anything here? Do you have any thoughts on where to strike that balance? Thank you very much.

Dr. Jim Dahle:
All right. Great question. You have noticed the dilemma when it comes to an S Corp. Yes, you can save a lot of payroll taxes by using an S Corp. The lower your salary, the less you can contribute to a solo 401(k) as an employer contribution.

Dr. Jim Dahle:
So, it's a balancing act, and this is something that Katie and I have been dealing with ever since she came on at the White Coat Investor. We, as a tax reason, despite the fact that she probably works more hours in White Coat Investor than I do these days, she gets paid dramatically less than I do. And the reason why is that tax savings.

Dr. Jim Dahle:
The less you get paid, the less you have to pay and payroll taxes. So, she makes way more from her share of the profits than she does from her salary. That difference is much smaller for me for various reasons, including the 199A deduction, which also plays into this calculation a bit, right? Because the less you pay yourself in salary, the smaller your 199A deduction. And so, it becomes this spreadsheet calculation to try to decide how much to pay yourself.

Dr. Jim Dahle:
But here's the deal. As a veterinarian, you're able to get away with a salary that's significantly less than the wage limit for social security. And so, you can save not just Medicare taxes, which is relatively trivial at 2.9%. You can save the whole shebang 12.4%. And of course, part of that is deductible. So, it's a little bit less than that, but 12.4% of your social security taxes. So, that's a huge savings, right? You're saving 15% and it's not just deferring those taxes. You don't pay them at all. Now, does that mean you may get less in social security less later? Yes, it does, but that's a pretty huge tax savings.

Dr. Jim Dahle:
And so, in your case, that factor should be outweighing the fact that you can't put as much into a solo 401(k). It's just a huge tax savings for you. If you pay yourself $60,000 instead of $120,000, that's $60,000 times 15%, that's $9,000 in taxes you save by doing that. And you're just probably not going to get that big of a benefit by putting a little bit more money into the solo 401(k).

Dr. Jim Dahle:
Now, if you leave it in there years and years, and years and years, maybe that tax protected growth will give you that big of a benefit, but that's an awfully big tax benefit right up front. So, I think what I would do in your situation is I would probably take the lower salary, have a lower solo 401(k) contribution and just invest the rest in a taxable account. You're going to be able to invest very tax efficiently in a taxable account and probably pay very little in capital gains taxes there. So, I think that's the way to go for you and what I would do.

Dr. Jim Dahle:
Now, for a lot of people who are making more money and can't justify as low of a salary. If you're an ENT surgeon, you're not going to be able to justify to the IRS a salary of $60,000 a year. It's probably going to be $200,000 plus, and it's probably going to be high enough that you can also max out your solo 401(k) in that situation. But in your case, there's a lot of savings for getting your salary down to the $60,000 a year range.

Dr. Jim Dahle:
All right, let's talk about 403(b)s and Roth IRA. Oh no, we got to do this ETF question first. This one comes via email. “Does it matter if you purchase ETFs or bond funds after hours, if you're dollar cost averaging or purchasing a set amount of say VTI every month? Does it matter what time of day you make this purchase? I've noticed I tend to make these transactions purchasing or reinvesting dividends after hours due to convenience after my workday, but I've seen after hours market prices go up a bit. Do you advise people to make these purchases in the morning when the markets are open?”

Dr. Jim Dahle:
Well, here's the deal. If you're using mutual funds, transactions all take place at 04:00 o'clock Eastern. If you put the transaction in at 03:45 Eastern, it takes place 15 minutes later. If you put the transaction in at 4:15 PM Eastern, it takes place at 04:00 o'clock the next day or the next trading day. If it's Friday, it might be three days from then.

Dr. Jim Dahle:
So, as a general rule, I wouldn't do that just in case some crazy thing happens in the world or the markets over the next 24 hours. I would try to put in that purchase sometime during the day, and then knowing it'll take place at 04:00 o'clock.

Dr. Jim Dahle:
When it comes to buying and selling shares on the market, whether these are stocks, individual bonds, or ETFs, exchange traded funds, I would try to put that in during the day. This is one of the hassles of using ETFs instead of mutual funds. There are upsides, but there are also downsides. And the downside is you really need to get in there during the day and take care of it.

Dr. Jim Dahle:
As a general rule, it's probably not a great idea to buy and sell in the first 30 minutes or so the market is open or in the last 30 minutes before the market closes. It tends to be a little bit more volatile in those times. This is kind of a good thing to do at lunch. You go in there at lunch. If you have to put in a couple of orders that day then you can do that at lunch. Obviously, make sure you're on a secure computer, not the hospital computer. But figure out a way to do it on your phone, via their app or connect your computer to your phone, or have a VPN or whatever. Anyway, make it secure so you don't have to worry about that.

Dr. Jim Dahle:
But that's the way I would do your orders. I would try to do them during the day, because weird things happen after hours. There's a lot less liquidity. And so, your bid ask spreads can get wide. All of a sudden there could be one person really moving the market. So, I wouldn't get in the habit of buying and selling stocks or ETFs after hours. I don't think that's a great idea.

Dr. Jim Dahle:
If you're really just dollar cost averaging and you're just putting in an automated transaction for mutual funds every month, I think that's fine to leave it that way. Just realize that whenever the transaction goes in, that's when it takes place and that's when you buy at. But there are benefits to paying a little more attention. There are benefits to automation. You've got to find the balance for you.

Dr. Jim Dahle:
All right. Now let's take that question on 403(b)s versus Roth IRAs. This one comes from Jovanni. Let's take a listen off the Speak Pipe.

Jovanni:
Hi Dr. Dahle. My partner is a first-year resident in the Northeast. He brought up a good question about the difference between 403(b) Roth contributions and investments in a Roth IRA.

Jovanni:
Say I only have $5,000 post tax dollars to invest. I understand that the general consensus would be to invest the $5,000 into my Roth IRA over the 403(b). I understand that the advantages of investing in a Roth IRA and 403(b) via Roth contributions is that the principle and growth would grow tax free. I also understand that the 403(b) max contribution limit is $20,500 this year. And the Roth IRA has income limits.

Jovanni:
In the scenario where I have the option of investing only $5,000 into either a Roth IRA or 403(b) via Roth contributions, why is it that the general consensus is to prioritize the Roth IRA contributions? Is there a difference between the Roth IRA and 403(b) that I'm not noticing? Thank you for all that you do.

Dr. Jim Dahle:
All right. Great question, Giovanni. We're really dancing on the head of a pin here, right? There is not a big difference. It doesn't matter a lot, but let's go through the reasons it might matter a little.

Dr. Jim Dahle:
First of all, if you get a match from the employer, you should use the 403(b). Otherwise, you're leaving part of your salary on the table. In many states, a 403(b) also gets additional asset protection. So, in the event that you got sued for above policy limits and had to declare bankruptcy, there are some states that don't protect your Roth IRA nearly as much as the ERISA protection that you get in a 403(b) or a 401(k) plan. So that might be another reason why you might want to use a 403(b).

Dr. Jim Dahle:
You might have a really unique investment in your employer provided retirement account. For instance, the thrift savings plan, basically the federal 401(k), has the G fund in it, which you can't just go buy. If you really like the G fund and you want to use it, well, that would be a reason to put more money into that plan instead of a Roth IRA.

Dr. Jim Dahle:
However, as a general rule Roth IRAs offer more investment options and you can move them into a self-directed Roth IRA if you like and invest in all kinds of crazy stuff like crypto and real estate and hedge funds or whatever.

Dr. Jim Dahle:
And also, lower costs. A lot of employers 403(b)s are not that good and they charge you significant costs. Whereas if you can go to Vanguard or wherever and get a Roth IRA essentially for free and then invest in ETFs with expense ratios of under 10 basis points a year, essentially free, you’ll have just very, very low cost, lots of investment options.

Dr. Jim Dahle:
That's why most people prefer a Roth IRA before going to the 403(b). Obviously, it's better if you can max out everything but if you're having to choose between one or the other, that's why a lot of people choose the Roth IRA.

Dr. Jim Dahle:
Keep in mind, if your income is too high, you got to do your backdoor Roth IRA process. In order to get money into a Roth IRA, you don't have to hassle with that in a 403(b). So, if you had another big traditional IRA out there and you didn't want to roll it into the 403(b), maybe you'd use the 403(b) instead of doing a backdoor Roth IRA. That might be another reason to do a 403(b).

Dr. Jim Dahle:
Also keep in mind when you get to retirement years, Roth 403(b)s and Roth 401(k)s have required minimum distributions whereas a Roth IRA does not. So, most people when they get to retirement age anyway, are moving their Roth 401(k), their Roth 403(b) into a Roth IRA so that they can take money out when they want, not when the government says they should.

Dr. Jim Dahle:
Yet another advantage of a 403(b) or a 401(k) is that the age 55 rule applies instead of the age 59 and a half rule. That is if you separate from your employer and you're already 55, you can take money out of a 401(k) or a 403(b) without paying any penalties whereas that age is 59 and a half for an IRA or a Roth IRA.

Dr. Jim Dahle:
So those are kind of the main reasons. It doesn't matter much. If you really like your 403(b), it's not high cost, it's got good investments, put your money in the 403(b), no big deal. You can always do a rollover when you separate from the employer into a Roth IRA.

Dr. Jim Dahle:
On the other hand, if it's not a great 403(b), you want to invest in something that's not available on the 403(b), it has significant expenses, or you want to do a self-directed Roth IRA, or you're going to be at retirement age soon or whatever, then use the Roth IRA preferentially. It doesn't matter much though. So do what you want to do. You're not missing a lot, but there were a few little details there that you had not mentioned in your question.

Dr. Jim Dahle:
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Dr. Jim Dahle:
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Dr. Jim Dahle:
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Dr. Jim Dahle:
We still need more judges. If you would like to be a judge, you can't be a student, you can't be a resident. But otherwise, we'll take you as a judge. [email protected] Just put “Volunteer judge” in the email heading, and we will let you participate in the process, help decide who the winners are going to be.

Dr. Jim Dahle:
To remain unbiased, we don't do any of the judging ourselves. We let our audience do all of the judging on who's going to win that contest.

Dr. Jim Dahle:
Thanks for those of you who've been telling your friends about the podcast and leaving us five-star reviews. Here's one of our early reviews who said “It was a must listen for all white coat wearers. As a pediatrician with a passion for underserved kids who would also like to have our kids attend college, Jim is a solid source of advice with your interests in mind.” Thanks for that great review.

Dr. Jim Dahle:
Keep your head up, shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor podcast.

Disclaimer:
The hosts of the White Coat Investor podcast are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.