Communicating with Your Spouse About Finances When You Don’t See Eye to Eye

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 370.

Today's episode is brought to you by SoFi, helping medical professionals like us bank, borrow and invest to achieve financial wellness. SoFi offers up to 4.6% APY on their savings accounts, as well as an investment platform, financial planning and student loan refinancing, featuring an exclusive rate discount for med professionals and $100 a month payments for residents. Check out all that SoFi offers at whitecoatinvestor.com/sofi.

Loans are originated by SoFi Bank, N.A. NMLS 696891. Advisory services by SoFi Wealth LLC. The brokerage product is offered by SoFi Securities LLC, member FINRA/SIPC. Investing comes with risk, including risk of loss. Additional terms and conditions may apply.

All right, don't forget, tomorrow is the last day to get the discount on all of our Fire Your Financial Advisor courses. There's four of them now. There's a student version, it's $99 regularly, 20% off until tomorrow. Residents, normally $299, 20% off until tomorrow.

The attending regular version for normal working professionals or people just coming out of residency, $799. And the one that qualifies for CME, because it includes eight hours of burnout prevention and financial wellness material, is $1099. Again, 20% off until tomorrow.

The FYFA course grows with you now, so you can upgrade to the next course as you move into the next career phase. You just pay the difference between the courses. As you go along and become a resident, you pay the difference between the student course and the resident course. You don't have to pay for the entire resident course. So check that out. You can go to wcicourses.com, use discount code LAUNCH20 to get that discount, and get your financial plan in place.

The point of the Fire Your Financial Advisor course is to help you get a written financial plan in place so you can follow to investing success. We hope you have that in place. If the course is helpful, that's great. If not, we have the same guarantee we have on all of our courses. One week, 100%, money back, no questions asked, guaranteed. As long as you watch 25% or less of the course, we'll give you your money back. So you can check it out. There's no risk to you. LAUNCH20 is the code, wcicourses.com is the URL.

THE IMPORTANCE OF BEING ALIGNED WITH YOUR PARTNER ON THE BIG TOPICS

Okay, we're going to have a couple of Speak Pipe questions today from people who are not seeing eye to eye with their partner, especially on things that they see as being incredibly important.

And the truth is, when you're trying to figure out how to talk to your partner about this, ideally, you talk to them before you get married. In the past, people considered five big subjects. Five big subjects that can be a problem in marriages that you should try to be aligned with on as many of those five as possible. What are they? Religion, relationships with in-laws, sex, money, and kids.

These days, a lot of people are adding a sixth one to the list, which is politics. A lot of people are having trouble being married to someone who leans to the right when they lean to the left. And so, all six of those subjects are worth discussing before you get married. Try to get on the same page on as many of them as possible.

Can a marriage survive if you guys having serious disagreements with one or two of those? Maybe. But four or five of them, probably not. You're just not compatible. And so, have those discussions before you get married. Interview your future spouse and try to get those things ironed out.

As far as unmarried partners go, as a general rule, I recommend you don't combine finances. That's incredibly risky to pay off your boyfriend's $300,000 in student loans. And then your boyfriend walks out a month later. There's no protection that you get from the legal institution of marriage in those sorts of situations.

As a general rule, my recommendation is separate finances until you get married. Combine finances once you are. If you want your own money, that's fine. Set up an allowance system. You can have each get an equal allowance. You can have them be different, whatever you want to set up that's what I would recommend you do rather than having separate money and trying to decide who pays what bills from their income. That sort of thing is messy. And plus, if you end up having separate investments as well, it's hard to manage it all as one portfolio when you're managing it as two portfolios.

All right. Now that information out of the way, let's get to our first Speak Pipe question. This one comes from Ben.

ONE PARTNER WANTS A FINANCIAL ADVISOR AND ONE DOES NOT

Ben:
Hi, Dr. Dahle. I'm an orthopedic surgeon in the Midwest. I have been a longtime listener and reader of the White Coat Investor, and thank you for all you do. Since getting rid of my financial advisor who was a commission-free advisor during residency, I've been very happy with my financial progress.

I have a high savings rate, 35% to 40%. I have about a half million in savings, now two and a half years into practice. I have disability insurance, term life insurance. I always max out my 401(k) and backdoor Roth IRA. I have no debt outside of a house at about 2.99% loan. That's roughly the size of one year of income and a very small car loan.

My problem is my wife, who's an ER doc, keeps bugging me about whether I'm missing something or more specifically, whether we're leaving money on the table by not investing it in the right places. I've always been a firm index fund believer, and that's where I keep my money.

She trusts me, but she doesn't trust me, if you understand. I've shared my written financial plan with her. I wish I could get her to take your course or read your material, but that's a long shot. She wants to get a financial advisor now, but to me, that's a huge waste of cash. Do you have any suggestions? Thank you.

Dr. Jim Dahle:
What a great question, Ben. Thanks for sending that one in. Congratulations to you on all your progress. You're obviously doing great. You have a house you can afford. You're saving great. You got your debt under control. You got your insurance in place. You have a written financial plan. You're doing awesome. Maybe you can share that with your wife.

But there's a couple of issues here that I think we ought to talk about. The first one is your reference to my written financial plan. I'm pretty sure you said wife, he's married to this person. There's no more “my plan” and “my money” after you're married. There's “our plan” and “our money.”

The problem here is that she hasn't bought into the financial plan yet. So, you guys need to put together our plan. Now, there's basically three ways to do that. If you're capable of doing it, which you likely are, you can write up “our plan” together. You can take fire your financial advisor. You said that's probably not going to happen for her. You can also hire a financial professional to help draft up the plan. But either way, it needs to be “our plan.” It doesn't do any good if she just sees it as “your plan.” So, that's issue number one.

Issue number two, and it sounds like you've at least started this, is to find out what her concerns are. You can't resolve the concerns until you discover what they are. Let's get them out in front of us, set them on the table. We can walk around the table, look at the concerns and say, “Okay, let's address each of these one by one, whatever the worry is.”

You mentioned she fears leaving money on the table or missing something, particularly with the investments. Like there's some investment out there that the financial advisor will know about, but you don't know about that can give you higher returns and speed your way toward financial independence.

Now, those of us who have looked at the data on index investing versus picking stocks versus trying to find an actively managed fund manager versus hedge funds, we're pretty confident that nobody really knows what the best thing out there is and that no one can really time the market. Nobody can really select securities well enough to beat an index investing plan. She's not convinced of that yet.

So, what will it take to convince her? Well, if she doesn't want to read anything and she doesn't want to take any online courses, your best bet, and I think money well spent, is going to see a financial planner. A good fee only, probably an hourly rate or a flat fee financial planner.

You need to go sit in a room with a professional and your spouse. And your spouse needs to hear that, “Yeah, this plan you've got is great. Here, I'd tweak this little thing and this little thing and that's it. Otherwise, come back and check in with me in a year or two.”

That does a couple of things. One, it establishes you as actually knowing what you're doing. Number two, it gets rid of her concerns that something is missing, that you're leaving money on the table. She can learn from somebody else besides you that index fund investing is actually a pretty darn smart way to invest.

And number three, it gives her the connection with somebody that she would need if you became terribly disabled or died. It does not sound like she is nearly as comfortable managing a portfolio as you are. She needs a plan. What am I going to do if something happens to you? And this advisor, somebody you pay an hourly rate, you check in with every couple of years or whatever, somebody that helped you draft up “our financial plan”, that's what she needs.

And even if it costs you $2,000 or $3,000, that is money well spent to get the two of you on the same page. They say you don't have to be on the same page, but you definitely need to be reading from the same book. And you guys just aren't right now.

A lot of what financial advisors do is actually like couples counseling with a financial spin on it. And I think that'd be pretty beneficial to you guys. So, I would go meet with somebody. We've got several people on our list that do that sort of a thing. They provide a second opinion or a flat creation of a financial plan for a fee. And I think that'd be beneficial to you.

I'd go to the recommended page, whitecoatinvestor.com/recommended and click on the financial advisors and go meet with one. Now, it doesn't necessarily mean you got to pay them 1% of assets under management going forward for 30 years and lose some huge percentage of your assets. But you're an orthopedic surgeon, you can afford $2,000 or $3,000 to get the two of you on the same page. And I think it'd be money well spent.

All right. Here's another question we have on the Speak Pipe that also deals with partners.

HOW TO CONVINCE YOUR PARTNER THAT DISABILITY INSURANCE IS WORTH THE BIG PRICE TAG

Giovanni:
Hi, Dr. Dahle. Thank you for all that you and your team do for the White Coat Investor community. I've been listening to your podcast and I've been reading your blogs for the past three years now. My name is Giovanni and I live in the Northeast. My partner is a second year IM resident and plans to work for a private practice after residency.

I recently explained that the significant benefits of owning a true own occupation disability policy. He has bought into the benefits of owning such a policy in theory. However, in practice, he struggles to wrap his mind and checkbook around paying such a high monthly premium for a benefit that he believes has a low probability of actually collecting the monthly benefit.

Furthermore, he wonders if there are docs out there that regret purchasing a similar policy. For some context, he's a super saver, has maxed out his Roth IRA, and is currently on track to max out his 403(b) this year. I'm stumped. Have any words of advice or tips for him or me? Thank you again.

Dr. Jim Dahle:
I can't tell if you guys are married or not. If not, my usual advice is separate finances. If you are, combine finances. But that's not really what you're asking. What you're asking is for me to convince your partner that he needs disability insurance. I don't know that I can do that.

I can tell you this. I don't regret buying disability insurance. I no longer have disability insurance. I've canceled it. But I paid premiums for many years of disability insurance. If something had happened to my ability to earn money, we would have been in a terrible position without that disability insurance.

I guess the question for your partner is what position would he be in if he became disabled without disability insurance? Is he perfectly fine being in that position? He might be. He says, “Fine, I'll live off your income, or I'll just hope I can get some social security disability. If not, just live on what I have saved so far.”

Maybe he's fine with that. You have to run the numbers. You don't necessarily need disability insurance as you need a plan in the event someone gets disabled. For some two doc income families, they decide we're each going to be each other's disability insurance. If something happens, we will just live on the other person's income. Obviously, it's possible for both to become disabled. The numbers suggest something like one out of seven docs uses their disability insurance at some point during their career. The likelihood of both docs needing it at the same time is obviously significantly lower than one out of seven.

Lots of other couples decide, “Well, let's just buy smaller policies or let's insure both of us because I don't want to worry about this. And frankly, we spend both of our incomes. It's not like we got a 70% savings rate here. It would be a big deal to cut our lifestyle back to what we can afford on just one of our incomes.” So, they buy disability insurance on both people. But you've got to decide what the plan is for you.

It is sticker shock when you go price this stuff out. Even when you're young and healthy, you're looking at paying 2% to 6% of the benefit you're going to get. If you're buying a $10,000 a month benefit, you're going to pay $200 to $600 a month for that. That's what it costs. As you get older or develop medical problems, you're not in perfect health anymore, it can cost even more.

Disability insurance is not cheap. The reason it's not cheap is because people use it. Use it all the time. Let me give you another example here. We had episode 365. What was that? Five episodes ago. Five weeks ago, we had Tyler Scott on here. Disabled doc, living on disability insurance proceeds, benefits.

Here's another one. I got an email after that episode from an anesthesiologist. Let me read it to you. It says, “I became hearing disabled at age 55 after working as an anesthesiologist for 14 years. Considering my hearing, I doubt I'd be good for an interview, but I can write my story. I got a personal disability insurance policy with Inflation Rider during my last year of residency. The payout was $9,200 a month. With our lifestyle that was plenty to get by.

I worked for a small group in the south that had some financial difficulties. Once our kids graduated, I moved to a large group in a different state. Neither of these groups provided disability insurance. About a year after starting the new job, I needed to start wearing hearing aids. After two to three years with this group, there was a hostile takeover of the group by the hospital. Two years after the takeover, I noticed my hearing declined dramatically. I went to see an ENT to see if anything could be done. He said, “You're still working? Not anymore, you're not.” That, shockingly, was my last day as an anesthesiologist.

I really enjoyed my job, so I hated to stop. But financially, I hoped I was fine since I had the disability policy. I called my boss to tell him the news, and this is when I found out how lucky I was, if everything is approved. I had my personal policy that started after three months and runs to age 67, tax free. I did not know, but the hospital had two policies. One group policy through the standard that maxed out at $15,000 per month, and one personal through UNUM for $5,000 per month.

Both policies started after six months of disability and run to age 65. Both are taxes, ordinary income, not inflation adjusted. The hospital covered short-term disability for six months by leaving me on the payroll as an employee with benefits. The hospital also had a life insurance policy that covers through age 65 if you become disabled.

So now the stressful waiting period began. Will I be approved? I'd listened to your previous podcast about disability and the problems people had getting approved, so I was definitely worried. I didn't want to quit working, so I was happy to try anything that might help. I took steroids, consulted for cochlear implants, none of which helped or would help.

The implants only bring word recognition to 70 percent, not good enough for a physician. After several phone conversations with the insurance companies, my wife as interpreter, all the while hoping I wouldn't say something that would get me canceled, I was approved for all the policies. The approval was for permanent hearing loss. Permanent. This is where we learned about the details.

My Inflation Rider starts after I start receiving payments. That original $9,200 was not inflation adjusted all along. That's the way those work. The adjustment doesn't start until one year after you start getting payments.

The hospital policies are not inflation adjusted, but even though my disability is permanent, I still have to fill out paperwork yearly for each policy. The standard policy required me to apply for social security disability benefits, which I got, but they deduct that benefit from their payout. Still, it's a win for me because I get to keep the yearly cost of living adjustment.

I think the disability insurance company is supposed to pay for required doctor visits for the policy. This is not the case for the life insurance policy. This company requires doctor visits yearly at my expense.

So, that's my story. I was very lucky to have almost my entire income replaced until age 65 due to a hostile takeover. Now I spent a lot of time traveling and still saving for retirement that would not have been possible with the original insurance policy.

This is a very important point that I missed with the original personal policy. I also didn't increase my policy because my income increased. I apparently should have. I was in a group with 80 anesthesiologists. In the last five years, three went out on disability that I know of. Yes, it's expensive, but if you need it, you really need it. This is an important topic. Thanks for covering it.”

This does happen to people. They do get disabled all the time. It's not everybody, obviously, but that's the way insurance works. You don't hope your house burned down so you can use your fire insurance. You don't hope you die young so you can use your term life insurance. You don't hope you get your money's worth out of your auto policy. You hope that you pay for it and nothing ever happens. Same with your malpractice and every other policy you buy. You don't actually want to have to use it. Not only can it be a pain to use it, but it means something terrible happened.

So, that's the way disability insurance works. The sooner you become FI, the sooner you can dump it. You can also get a graduated premium policy. I think it might be just Guardian offering those, but I'm sure someone will correct me if I got that wrong. Basically, in the first few years, you pay lower premiums. In later years, you pay higher premiums. That works out really well if you're a super saver and you hit FI halfway through your career and can dump the policy. Then you only ever paid the cheaper premiums.

I guess I would encourage your partner to either buy a policy and just recognize it's one of the costs of doing business or to actually write down what his plan is in the event that he becomes disabled. I think that will help. Obviously, you guys may not completely agree on it, but try to come to a compromise that works for both of you.

All right. Let's take a question now on Roth. It's now June by the time you're hearing this. We're a little bit out of the backdoor Roth period when we're inundated with backdoor Roth questions. People still manage to struggle with this and screw it up from time to time. Let's hear about this one.

RECHARACTERIZING VS CONVERTING ROTH MONEY

Speaker:
Hello, Dr. Dahle. Thank you for all the work you do. I am a high-income bracket technology worker. I have a backdoor IRA question. I contributed for my 2022 backdoor IRA into a traditional IRA in 2023, but I forgot to move the money and recharacterize it. Now it's 2024, and I want to know if I can still do the recharacterization one year later, or I just cannot do anything with that money, and so I cannot contribute any more for 2023 or 2024. Any help is greatly appreciated. Thank you.

Dr. Jim Dahle:
Okay. It's important when learning about finance, when asking questions, etc, to understand the terms. All these terms have very specific meanings, and if you use them incorrectly, you get bad advice. So let's go through the terms to start with.

Anybody that earns money or whose spouse earns money can make an IRA contribution. That's when you put money into the account. The limit for 2024 is $7,000, for those under 50. If you're 50 plus, it's $8,000. That's the contribution. Some people can make a contribution directly into a Roth IRA, but once you earn too much, you lose the ability to do that. So you have to contribute to the traditional IRA, which any earner can contribute to.

However, if they have a plan at work and their income is above a certain amount, which really isn't all that high, they can't deduct that contribution to a traditional IRA. They can just put the money in there in the traditional IRA, and when it comes back out, assuming you keep careful track of that money you put in, which is called basis, which is after-tax money, it will come out tax-free. Any earnings it has in that traditional IRA will come out fully taxable income. So you have to pay taxes on all the earnings.

Rather than having that non-deductible traditional IRA, what most people do that are high earners in this situation is do a Roth conversion. All a Roth conversion is, is moving money from the traditional IRA to the Roth IRA. That's all a conversion is.

And once you do that, if it's not deductible money in the first place, there's no tax cost to converting it. If it was pre-tax money in the traditional IRA, you have to pay taxes as you convert it to a Roth IRA. But the beautiful thing about the Roth IRA is when you take that money out in retirement, not only do you pay taxes on the principal, the original contribution, but you don't pay taxes on any of the earnings. That's way better than having money in a non-deductible traditional IRA.

So, that's what most people do. That's the backdoor Roth IRA process. And essentially it allows you to put money into a Roth IRA like a lower earner would be able to, but you have to go through this extra step. You have to put it into the traditional IRA and then move it to the Roth IRA. That's a Roth conversion.

Now you use a phrase, recharacterization, that I don't think, as they say in the movie The Princess Bride, means what you think it means. I think you're meaning to say conversion, but you're saying recharacterization. Now what a recharacterization is, is what a high earner does who accidentally puts money directly into a Roth IRA. They have to recharacterize that contribution. And when you recharacterize it, it's as though you put the money originally into the traditional IRA. That's all a recharacterization is.

Years ago, you could recharacterize conversions. You can no longer do that, but you can recharacterize contributions. If you accidentally didn't realize you needed to do your Roth IRA contribution indirectly or through the backdoor, you can recharacterize the contribution later, and there's a period of time in which you have to get that done, to a traditional IRA contribution, and then you can convert it back into a Roth IRA.

The question you're asking is, “Can you still do the recharacterization?” Well, if you still needed to do a recharacterization for 2022, I think that ship has sailed. It's too late for you to do that. But that I don't think is what you actually want to do. What I think you want to do is do a Roth conversion.

I think you're asking, “Can I still do a Roth conversion?” And the answer to that is yes. Because while there's a deadline on an IRA contribution, tax day of the next year, usually April 15th, there is no deadline on conversions. You can do a conversion anytime you like.

Now, we recommend you do it as soon after the contribution as you can, because you're going to have to pay taxes on anything that contribution earned in between the contribution and the conversion. But you can do it anytime. You can do it the next year, the year after that, 10 years from then, you can do the Roth conversion. So, no problem with that.

I think that's what you're asking. I think what you're asking is, can I still do the Roth conversion in 2024? And the answer is yes. You can still do the Roth conversion in 2024 and almost surely should do the Roth conversion in 2024 for that 2022 contribution that you made in early 2023. I hope that's helpful.

QUOTE OF THE DAY

The quote of the day today comes from Yogi Berra, who said, “A nickel ain't worth a dime anymore.” And that is obviously a reference to inflation.

All right. Let's talk about another issue with Backdoor Roth. This question is coming in from John.

ISOLATING TRADITIONAL IRA BASIS AFTER PRO-RATA MESS UP WITH BACKDOOR ROTH

John:
Hi there. My name is John. I've been watching your videos from YouTube to do the Backdoor Roth IRA conversion. I'm asking a question because in the last year, I made the full contribution to an empty traditional IRA of $6,500 and that was rolled over to my Roth IRA for that amount of $6,500, which is showing on my 1099-R with code distribution 2. So that looks fine.

But however, after that Backdoor Roth IRA finished, I actually had to roll over my previous 401(k), traditional pre-tax 401(k), and those funds got moved over to my traditional IRA. I made the mistake of not being able to move that money away by the end of the year of 2023, December 31st. So on December 31st, 2023, I actually had a balance in my traditional IRA, which triggered the pro rata rule. In which case, out of my $6,500 that I contributed to my Roth IRA, only about 10% of it was non-taxable and tax deferred. And then the 90%, I actually had to pay taxes on again.

Moving forward to 2024, that means I do have a basis of around $6,000 in my traditional IRA. Does that mean I can go ahead and make that conversion to the Roth IRA with that $6,000 plus the additional contribution that I'll make in the next year of 2024? I'm just curious what to do in this situation, how to handle this given that I have basis right now in my traditional IRA. By the end of the year, I am planning on rolling over my traditional IRA to the new 401(k) to empty out the traditional IRA.

Dr. Jim Dahle:
Good question, John. This is probably the easiest thing to screw up with the backdoor Roth IRA process. It turns out that there's a calculation done on IRS form 8606. And because of that calculation, you need to make sure you don't have any money in a traditional IRA, SIMPLE IRA or SEP IRA on December 31st of the year you do a conversion or that conversion will be prorated. And while proration is not illegal, it kind of defeats the purpose of doing the backdoor Roth IRA process. You basically end up essentially with a traditional non-deductible IRA.

John, this happened to you. It doesn't matter whether you do the conversion first in the year and then have money in the traditional IRA or have money in the traditional IRA and then do the conversion. All that matters, all that gets put on form 8606 line six is your balance in an IRA on the 31st of December. And John, as you know, you screwed that up. And now you're having to deal with consequences, which is getting prorated.

So, your question is, “How do you fix this situation?” The way you fix this situation is by isolating the basis. What does that mean? Well, you go to your 401(k) and you go, “Hey, can I do a rollover of my IRA into your 401(k)?” And they say, yes, because almost every 401(k) or 403b will allow you to do this.

Your second question is, “Do you only accept pre-tax money into that traditional 401(k) account?” And the answer to that is almost always yes. And that's what you want. Because what you want to do is just move the pre-tax money in there, the $60,000 or whatever it is. You want to leave the basis behind in that traditional IRA. Because once you've done that, you can convert it tax-free to a Roth IRA.

So, you figure out exactly how much is basis, you roll everything else into your 401(k), you convert the basis and you're good to go moving forward. And obviously watch that this doesn't happen to you again.

Now, if for some bizarre reason, your 401(k) doesn't take rollovers at all, that's a problem. Or if for some bizarre reason, they take rollovers of basis, which they probably don't, that could be a problem because then your rollover would have to be prorated. But for the most part, they don't. And so, this gives you an opportunity to isolate the basis, convert the basis to a Roth IRA, and it cleans up your mistake. So, that's what I would do if I were you.

Okay, our next question, also related to backdoor Roth.

WHAT TO DO WHEN YOU/YOUR ACCOUNTANT FAIL TO FILE FORM 8606 FOR YOUR BACKDOOR ROTH IRA

Marcy:
Hi, Dr. Dahle. My name is Marcy. I'm a PA from the Midwest. We've been using a CPA to file our taxes for the last two years because we have some short-term rental investment properties. And we've been doing the backdoor Roth IRA for six plus years now, as my husband and I both make over the limit.

My question is, the accountant, we didn't notice last year that he did not file an 8606. However, the numbers were correct on the 1040. And this year, when I caught that he didn't file the 8606, I asked about it. And he specifically said that he did not need to file the 8606. When I look up the rules on the IRS website, it says that there's a $50 or $100 fine if you are supposed to file and don't.

My question is, should we have filed an 8606? Or is he correct, as long as the numbers play out, that it shouldn't be a problem? And can we back file on our own if we have to, or do we have to do an amended return? We will likely be using a different CPA next year due to the lack of communication with this one that we have. But that's my question, basically. Thank you for all you do.

Dr. Jim Dahle:
All right. The bottom line is your accountant was wrong. You do need to file 8606. And you can go back and just file that. There's a question of whether you have to send in a 1040-X, an amended return with that or not, since it's not going to change what you owe in your taxes. Maybe you do, maybe you don't. I probably would send in a 1040-X with it. It'd be really easy to fill out, since nothing is actually changing on your tax bill.

You can probably get your new accountant to help you file that as well. But I would definitely send in the 8606s for each of the years that accountant did not do it. If you need chapter and verse, I would encourage you to go to the form 8606 instructions. Scroll down to page two. It says, “Who must file?” File form 8606 if any of the following apply. You made non-deductible contributions to a traditional IRA for 2023. It's the first line.

Also, if you received distributions from a traditional SEP or SIMPLE in 2023, and your basis in these IRAs is more than zero, then you got to do an 8606. You or your spouse transferred all or part of their traditional SEP or SIMPLE IRA in 2023 to the other spouse under a divorce or separation agreement.

You converted an amount from a traditional SEP or SIMPLE IRA to a Roth in 2023, or you received distributions from a Roth, Roth SEP or Roth SIMPLE IRA in 2023. Or you received distribution from inherited traditional SEP or SIMPLE IRA that has basis, or you received distribution from an inherited Roth, Roth SEP or Roth SIMPLE IRA that wasn't a qualified distribution.

It's pretty clear. You have to file it. I don't know why your accountant didn’t; I think they're wrong. And maybe you'll get fined for it. Maybe you won't. I don't know about that. But you certainly are expected to file it by the IRS. So, get them filed. Obviously, you have three years to fix tax returns. So get them fixed and hopefully you don't end up having to pay any penalties.

W-2 SALARY AND PRETAX/ROTH DECISION MAKING IN REGARDS TO QBI CONSIDERATIONS FOR S CORP OWNERS

Okay, let's take a question. This one is related to our recent episode where we had Chris Davin as a guest and we talked about making pre-tax versus Roth contributions, whether to do Roth conversions. If you recall that episode, this question is about that.

Joe:
Hey, Dr. Dahle, this is Joe from North Carolina. My wife is a psychiatrist and I run a mobile game studio. And your podcast episodes have been really helpful. We've been listening to you for many years now.

I have two questions. The first regarding the Chris Davin Roth versus pre-tax podcast. You guys didn't touch on QBI. And my wife and I, we both have QBI income, which would be a 20% write off. And the way I understand it is you might not necessarily want to defer income in that case because you're not going to get that write off once you're retired, but you would get it if you were taxed on that income, even if you used it as Roth.

And then the second question is regarding S Corp, how much to pay yourself as a W2. I told my accountant that I wanted to max out my 401(k). And what they ended up doing was giving me a huge W2 because of that, which then increased all my payroll taxes. And I think kind of defeated the whole purpose of running the S Corp for the most part. I’m curious about your advice on QBI and then also how much W2 income to give when planning for retirement. Thanks.

Dr. Jim Dahle:
Okay, Joe, great question. Thanks for what you do too. Without you, I guess we wouldn't have video games to play. We all have different jobs and we appreciate what you do.

Let's talk first of all on the section 199A deduction or the QBI deduction in retirement accounts. This is a big issue for Katie and I. Basically the bottom line is if we made tax deferred retirement account contributions as employers, we would not get a 37% deduction on that. We would only get about a 29% deduction on that because we would lose QBI deduction because of that.

Now the QBI deduction only is scheduled to go through 2025. After that, it doesn't matter. But until then it does matter. Basically the problem is when you make employer tax deferred contributions into the 401(k), you are lowering your ordinary business income. And the QBI deduction is basically one of the limitations on it. And there are several, but one of the limitations is 20% of your ordinary business income. If you lower your ordinary business income, you're also lowering the size of that QBI or section 199A deduction. That's a bad thing for us.

So, what did we decide to do? Well, we decided instead of doing that, we're going to make mega backdoor Roth IRA contributions. What these are is, despite the name, it doesn't take place in an IRA. It takes place in a 401(k). So, we have a customized 401(k). We had a customized solo 401(k) before, but when we got employees at WCI instead of contractors, we now have a regular ERISA 401(k) provided by an employer. And we are the employer.

But we customized it such that we can still make after-tax contributions, after-tax employee contributions. We don't get any employer contributions. We put in our, actually Katie does, I make all after-tax contributions, but she puts in her employee contribution. And then the rest up to the $69,000 limit is after-tax employee contributions. And my entire $69,000 contribution is after-tax employee contributions. So, those are a non-deductible traditional IRA. It's after-tax money, but the earnings on it would be fully taxable.

As step two of the mega backdoor Roth IRA process, we then convert those contributions to Roth. And so, I call Fidelity and I say, “Move from this account to that account.” It's a Roth conversion. There's no tax cost on it because I got no tax deduction on the original contribution. But basically it allows me to put $69,000 a year into a Roth 401(k). And that's what I choose to do for various reasons. One of which is the fact that if I made it as tax deferred, I would only get a 29% deduction instead of a 37% deduction due to the loss of that QBI deduction. Hopefully that helps flesh out that question for you.

Your second question was paying yourself as an S Corp employee owner. Now, when you have an S Corp, part of your income is salary and part of your income is a distribution from that S Corp. You pay payroll taxes on the salary. You don't pay payroll taxes on the distribution. Payroll taxes include both social security up to a certain amount, I think it's 160,000-something this year you have to pay social security tax on.

Once you make more than that, you don't pay social security tax on that. Obviously you pay Medicare taxes and some various Affordable Care Act taxes on all your income. Above a certain level for the Affordable Care Act taxes, but on all income for your Medicare taxes.

The idea behind setting up an S Corp is to try not to pay payroll taxes on all of your income. So maybe you say “my salary is going to be $100,000” or “my salary is going to be $200,000. Then I'm going to take another $100,000 or $200,000 as distribution.”

And so, for a typical doc, they're going to have a salary that's higher than that $160,000 limit. And all they're going to be saving is the Medicare taxes. Because that ACA tax is going to get you either way. So you're saving the 2.9%, a little less than that once you include the employer deduction portion of that. But basically you're saving 2.9% on whatever you call distribution instead of salary. If your salary is lower, if you can justify a salary of $80,000 or $100,000, you can save a significant amount of social security taxes as well. That's the whole point of an S Corp.

Now I get that you want to max out your 401(k). That's a great thing. Maxing out your 401(k) is a great thing. Saving on Medicare taxes or possibly social security taxes is also a great thing. But the problem is in order to max out your 401(k) with employer tax deferred contributions, and probably soon employer Roth contributions once they're allowed, you've got to have a big old salary.

I think it might have to be more than $300,000 this year. I'd have to go back and see exactly how big it'd have to be for you to max out a 401(k). And obviously, the more you do that, the more you're going to pay in payroll taxes. And particularly with Medicare tax, you're not getting anything additional for paying that tax. You pay a little more in social security, at least it increases your social security benefit down the way. You may still not want to pay it, but at least there's a benefit.

For your Medicare tax, there's really no benefit. You make 10 years of Medicare tax payments, you're going to qualify for Medicare. And it really doesn't matter if you pay tens of thousands of dollars in Medicare tax. My benefit for Medicare is going to be exactly the same as someone that hardly paid any. That's just the way Medicare tax works. It's a social program. It's a social insurance. That's the way it works. No real benefit to paying additional Medicare tax.

A known tax cost and all you're getting on the 401(k) side is tax deferral. And that can be valuable, especially if you pull the money out at a lower tax rate. And of course, you get tax protected growth for a number of years, but you don't have to pay a lot of extra payroll taxes to completely eliminate that benefit.

One workaround that may be very good for you is to basically do what Katie and I did. Go get a customized 401(k) plan, probably a solo 401(k) plan. I don't know if you have employees or not. Get a customized one. And we keep a list of those folks on our recommended page that can offer that for you. And instead of making employer tax deferred contributions, you can make employee after tax contributions. And if you do that, you don't need $300,000 of W2 income to max out the 401(k). You can do it for a six figure amount or a five figure amount rather, less than a six figure amount and max out that 401(k). That's a pretty cool trick. Maybe that's what you ought to be doing.

The downside of course, is you're now doing Roth contributions instead of tax deferred. That might not be the best for you, but it is an option if you really want to maximize how much goes into the retirement account.

The other option of course, and a lot of people forget this for whatever reason, you can always invest in taxable. You don't have to max out the 401(k) if it doesn't make sense otherwise. You don't have to go buy whole life insurance because you ran out of retirement accounts. You can just invest in a taxable brokerage account. You can put as much in there anytime you want. You can take it out anytime you want. You can use it for anything. You can get some tax benefits in there like qualified dividends and long-term capital gains tax rates. You can do tax loss harvesting. There's lots of benefits of a taxable account, and there's no limit on how much you can put in there. So that would be another option for you. I hope that's helpful.

SOLO 401(K) AND MEGA BACKDOOR ROTH IRA CONVERSION

Speaker:
Hi, Dr. Dahle. My question is about the solo 401(k) and mega backdoor Roth IRA conversion. I have a full-time position that's paid as an employee on a W2, but also have a small side gig taking call for another practice for which I'm paid as an independent contractor and receive a 1099 each year.

The yearly income for that side job is about $10,000 per year. I've heard you talk about setting up solo 401(k)s that allow for mega backdoor Roth conversions in the past for independent contractor jobs. But I'm wondering, does it make sense to go ahead with the setup and yearly expenses of a solo 401(k) with this amount of side income? Or is it better to just invest it in some index funds and a taxable account? For context, I already maxed out my Roth IRA, 403(b) and 457b each year. Thank you.

Dr. Jim Dahle:
Good question. I guess it comes down to whether you're an optimizer or a satisficer. You got two options if you do go through the hassle of opening a solo 401(k). You can put about $2,000 a year in there as an employer tax deferred contribution. So, I'll assume you're maxing out your 401(k), 403(b) contribution limit at $23,000 a year for those under 50 in 2024 at the regular gig.

You're limited to two things on the side gig solo 401(k). You can put $2,000 in there of your $10,000 as an employer tax deferred contribution, or you put in basically all of your $10,000 that you earn as an after tax employee contribution. And then if the plan allows it, convert that to a Roth 401(k).

You'll need a customized plan. That'll cost you something, maybe something like $500 to set up and $100 or $200 a year to maintain. It's not super expensive, but it'll cost you something. But that'll allow you to have $10,000 growing in a Roth account versus $2,000 growing in a tax deferred account.

Is it worth it? Well, I guess we could run the numbers over 30 years and see what the difference is. But I think most people would conclude that that is probably worth it in your case. But it would not be wrong to just say, “I'm not going to bother. It's only $10,000. I'm just going to invest in taxable.” And I think that's perfectly acceptable.

You do not have to optimize every single little detail of your finances when you are a high earner who is paying attention to your finances. You can still reach your financial goals without using a solo 401(k) that you're putting $2,000 to $10,000 a year in and just investing that money in taxable instead. You can still be plenty financially successful.

So if you don't want to go through that hassle, I think that's a very reasonable decision. But if you do, it'll probably be worth enough to justify the small amount of hassle that it would be to deal with the solo 401(k).

SPONSOR

All right. As I mentioned at the top of the podcast, SoFi is helping medical professionals like us bank, borrow and invest to achieve financial wellness. Whether you're a resident or close to retirement, SoFi offers medical professionals exclusive rates and services to help you get your money right. Visit their dedicated page to see all that SoFi has to offer at whitecoatinvestor.com/sofi.

Loans are originated by SoFi Bank, N.A. NMLS 696891. Advisory services by SoFi Wealth LLC. The brokerage product is offered by SoFi Securities LLC, member FINRA/SIPC. Investing comes with risk, including risk of loss. Additional terms and conditions may apply.

Don't forget, student or resident, actually all of the five-year financial courses sale ends tomorrow, June 7th. Go to wcicourses.com, use LAUNCH20 as your code at checkout and you get 20% off that. It always comes with our guarantee. One week, no questions asked, money back, 100% guarantee as long as you watch 25% or less of the course.

The beautiful thing about the Fire Your Financial Advisor course now is that it grows with you. You can upgrade to the next course as you move into the next career phase, just paying the difference between the courses instead of the full price. Again, that's wcicourses.com, the code is LAUNCH20.

All right, thanks for those of you telling your friends about the podcast, it really does help. I know some of you tell your doctors when you're in there for a doctor appointment and I appreciate that. I'm glad to hear back from lots of you that your doctors already know about the White Coat Investor.

A recent five-star review came in and these help us to spread the word about this podcast. It came in from bradchandlercoaching who said, “What a great podcast. I recently started listening to The White Coat Investor podcast and it quickly became my go-to source for financial advice.

The host, Dr. Jim Dahle, is a real asset to the show. His expertise and insight are invaluable, and he delivers the information in an easy to understand format. The topics covered are so varied and relevant that I never get bored listening. From investing advice to personal finance, Dr. Dahle covers it all.

He also interviews some amazing guests that bring even more value to the show. I would highly recommend The White Coat Investor podcast to anyone looking for sound financial advice no matter where they are in their journey. Five stars!” I appreciate that review, thank you.

All right, we've come to the end of another episode. Don't worry, we'll be back next week. Keep your head up and shoulders back. You've got this. We're here to help. We'll see you next time on the White Coat Investor podcast.

DISCLAIMER

The hosts of the White Coat Investor 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.

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 173 – Hospitalist pays off student loans in two years.

At PKA Insurance Group Inc., Pradeep Audho and Matthew Pedersen are independent brokers focusing on disability and life insurance. They excel in securing coverage for physicians, including those on visas like J-1, H-1B, etc.

Protecting your family in the event of a disability or death is important. There is now an A+ rated carrier offering up to $10 million of life insurance without labs. If you're very healthy with limited or no medical issues, approval is likely in five minutes.

Reach out to PKA Insurance to discuss your disability or life insurance needs at whitecoatinvestor.com/pka, 1-(800) 258-1018 or emailing [email protected].

Don't forget, you've only got a few days left on our student and resident course sale. These are the student and resident versions of our flagship Fire Your Financial Advisor course. June 7th is the last day of the sale. These are already super cheap, so students and residents can afford them, but it's even cheaper until June 7th, 20% off.

All of our Fire Your Financial Advisor courses, even if you're an attending or you want the one with the CME credits, they're all 20% off through the 7th of June. Just use the discount code LAUNCH20 and get your written financial plan in place. This course can help you to do it.

The course now grows with you. You can upgrade to the next course as you move into the next career phase, and you only pay the difference between the courses each time you upgrade to the next one.

INTERVIEW

All right. Our guest today has paid off his student loans. Let's get him on the line. Our guest today on the Milestones podcast is Preju. Welcome to the podcast.

Preju:
Thank you, Jim. I'm glad to be here.

Dr. Jim Dahle:
Tell us what you do for a living, what part of the country you're in, and how far you are out of training.

Preju:
I'm a hospitalist. I live in the Northeast, and I graduated in 2021. So it will be three years next month.

Dr. Jim Dahle:
Okay. Tell us what milestone we're celebrating with you today.

Preju:
I paid off my student loans on August 2023.

Dr. Jim Dahle:
Wow. In two years, you paid off all your student loans.

Preju:
Yes, I'm still very happy and relieved about that. Yeah.

Dr. Jim Dahle:
So how much did you owe when you came out of residency?

Preju:
I had $155,000.

Dr. Jim Dahle:
Okay. That seems really low these days. That's well below average. Average is $200,000 to $250,000. How did you keep your debt down so far?

Preju:
I was fortunate. The medical school that I went to gave me a scholarship. That helped defray a lot of the costs of my studies.

Dr. Jim Dahle:
Very cool. Between the scholarship and loans, that's how you paid for med school. You didn't have a bunch of money saved up for a prior career, or your parents didn't give you tens of thousands of dollars a year or anything else?

Preju:
No, no. They couldn't. I'm sure they would have if they could, but they couldn't.

Dr. Jim Dahle:
Yeah. Very cool. Okay. You came out of residency in 2021. You're an internist. So you went into residency in 2018. Do you remember how much you owed when you came out of school initially?

Preju:
I do. I owed $126,000 when I started residency in 2018.

Dr. Jim Dahle:
A lesson here for all you young people who have never been in anything but SAVE, your loans used to grow during residency. That doesn't happen anymore. But typically, they would grow during residency and significantly. And so, people would come out of residency with 50% more in loans than they had when they started residency. It was a long residency. But yours went up another $29,000 while you're in residency.

Preju:
Yeah, residency and medical school.

Dr. Jim Dahle:
Yeah, that's right. Since 2012, loans are not subsidized in medical school either.

Preju:
Yeah.

Dr. Jim Dahle:
In fact, that's the only time students these days are having their federal loans anyway grow, is during med school. Once they get into residency and they enroll in the SAVE plan, their loans aren't growing anymore, which is a really cool feature.

Preju:
It is, yes.

Dr. Jim Dahle:
All right. You decided you didn't want to drag these around your whole life. Why was that? Why did you decide to get rid of these in two years?

Preju:
Like you said, my debt burden is below the average. And definitely my ratio compared to my salary, I figured I wouldn't be able to take advantage of the PSLF. When I was in residency, I thought maybe I could pursue PSLF. But as soon as COVID hit during my second year of training, and then when I graduated subsequently, I realized I wouldn't be able to benefit from it. I started to make plans to pay it off as soon as I was able to.

Fortunately or unfortunately, because of COVID, all the interest rates were deferred. And the payments just kept getting postponed and postponed. So that gave me definitely a significant advantage to save up and pay off before the interest rate started.

Dr. Jim Dahle:
What did you do? Were you saving in a separate account or were you actually making payments?

Preju:
I was saving in a high-yield savings account. Basically, I would save up to 50% of my net income in a high-yield savings account every month, waiting for, I guess, when I had enough money or whenever the payments restarted to pay off.

Dr. Jim Dahle:
Are you married with any kids?

Preju:
No, not married, no kids.

Dr. Jim Dahle:
Okay, so this was all your decision of what you wanted to do with your money and your life. Why did you decide to put up to 50% of your income toward your student loans?

Preju:
I think you've probably mentioned in your podcast before as well, I think the burden of this debt weighing on me, there's a psychological burden. And I felt since I couldn't take advantage of any loan forgiveness programs, and when the payments resumed in September, my interest rates were 7.9%.

At the time, the SAFE plan was still being talked about, but I didn't know much about it as well. I figured it didn't make sense, financial or sense to me to keep this dragged out. And I made it a priority to pay it off.

Dr. Jim Dahle:
Very cool, very cool. Did you feel like you had to make any sacrifices to be accumulating that money to pay off your student loans?

Preju:
I wouldn't call it a sacrifice per se. It's a goal. It's one of the goals that I prioritize to achieve towards. Since I graduated residency, one of my biggest passions or interests were traveling, because I didn't travel at all during my time in college or medical school, or even residency because of lack of funds. Even during this time when I was saving up to pay off these loans, I was traveling all around wherever that I wanted to go and enjoy my life as much as I could. So I never really felt that I was sacrificing anything during that time.

Dr. Jim Dahle:
What was your favorite trip during that two-year period?

Preju:
Oh, it's a hard one to pick. But I would say I was fortunate to go to Israel. And this was three months before everything started over there in October. It's a beautiful country, I’m very passionate about history. And I think I was very, very fortunate to make that trip at the time that I did. So I would say that.

Dr. Jim Dahle:
Yeah, you sure were. You got in right under the flag there.

Preju:
I did, yeah.

Dr. Jim Dahle:
All right. Well, what advice do you have for somebody else that wants to get rid of their student loans quickly? They want to pay them off in a year or two or three. What advice do you have for that person?

Preju:
Not advice per se. I think it's what priority you have. Someone like me, in my situation, I felt paying off my loans made sense. I was at the right time of my life being single to prioritize that and to be able to do that. If anyone is in a similar situation like me and have the means and they're in their point of life where they're able to do that, I would definitely say paying off your debt. And as in my case with the 7.9% student loans that I had, it made sense for me to prioritize that and pay it off. So that's what I would recommend.

But at the same time, I would say still enjoy your life. I think every physician or every other professional who listens to us know we made a lot of sacrifices in our 20s, basically, devoting ourselves and still do devoting ourselves to our career. It's very important to enjoy your life and do whatever that makes you happy as well. So, that's also important.

Dr. Jim Dahle:
Yeah. Did it turn out to be easier or harder than you thought it was going to be?

Preju:
I would say I didn't realize it. But when I look back now, it was definitely, probably maybe a little bit more challenging than I thought it would be because everything was automated. I had this high yield savings account where I made sure half of my net income went into it. I didn't even realize at the time this was going on. And then when suddenly I started getting reminders, “Hey, your student loan is about to be due in September”, I looked and I saw that I had the money and then I paid it off. So it wasn't much of a cognitive burden, I would say. I think it just was automated and I put it out of my head and it just fortunately worked out at the right time.

Dr. Jim Dahle:
Yeah. Automation is very powerful.

Preju:
It is.

Dr. Jim Dahle:
That's pretty cool that your amount lined up. It doesn't sound like you were necessarily planning to be done in exactly two years, but it just worked out really well for about the time that you were going to start having to pay 7.9% interest.

Preju:
Exactly. I think it just happened at the right time and I was lucky to be able to do that.

Dr. Jim Dahle:
Yeah. How does it feel to have them gone?

Preju:
It's amazing. I was able to also buy a home during that same time as well. I think now when I travel, I feel like I could splurge a little bit more. When I was saving up to pay off my loans, I was definitely very conscious of where I was staying and how much I was spending because I knew that I had this big debt to pay off.

But now I guess I don't feel bad treating myself to a nicer dinner or staying at a nicer place or maybe buying something that I wouldn't have bought when I was saving up to pay off my loans.

Dr. Jim Dahle:
I can really relate to that. I remember having that feeling after paying off a mortgage. I'm like, “Okay, now I'm not paying for everything with borrowed money.” Because money is fungible. If you're borrowing for your house, you're really borrowing for everything you buy. That money is not going toward paying off that house. And the same way with your student loans. Very cool. Very cool. Well, what's next for you? What's your next financial role you're working on?

Preju:
I've been looking into real estate and syndications. Obviously, listening through your podcast and reading up on the blogs of the various guests that you have on your show. I would say that's something that I'm looking towards next to see where I can invest.

Dr. Jim Dahle:
Well, as you become more and more wealthy, those sorts of things can make more and more sense. Very cool. Well, congratulations to you, Preju. You have done a great job. Paying off loans in two years on a hospitalist salary is no small feat. You should be proud of yourself. Congratulations.

Preju:
Thank you. Thank you so much, Jim.

Dr. Jim Dahle:
Okay. I hope you enjoyed that interview. I always think it's great to hear people knocking these things out in a year or two or three years, whether they owe a lot or whether they don't owe that much. It's just nice to have that monkey off your back and be able to go into your career. It just doesn't feel like you finished med school or dental school until you paid off your loans. And doing that early is something very few people regret. In fact, I can't remember ever meeting anybody that regretted having their student loans paid off within five years.

FINANCE 101: BUYING A HOUSE AS A RESIDENT

All right. Today, let's talk for a minute about buying a house as a resident. I figure I'm only able to talk out about 5 or 10% of residents who want to buy a home out of buying that home. But the truth is, it's probably not a great idea. There's a lot of reasons why. The good news is sometimes it works out okay. Lately, the last few years has worked out pretty good for people as homes have really appreciated dramatically in just a few years.

And even when it doesn't work out, which is probably the majority of the time for a three-year residency, probably two-thirds of the time you end up coming out behind financially for buying a house during a three-year residency. But even when it doesn't work out, most people are rescued by their attending income. Because yeah, now they're stuck with this house or underwater on it or didn't make much money on it or they're having trouble selling it or now they're a long distance landlord. But their income also quadrupled or quintupled or more. And so, even if there's a drag on them, they can handle it. It's not the end of the world.

But it still doesn't make it a smart move. What people don't get about buying a home is that it's not just about comparing your mortgage to your rent payment. Your rent payment is the maximum you'll ever pay for housing. Your mortgage payment is the minimum you'll pay for housing. There's lots of other expenses associated with owning a home. There's insurance, there's taxes, there's maintenance, there's now you need a lawnmower and a snowblower, HOA fees. There's all these other expenses associated with buying a home.

But perhaps the most significant ones are the transaction costs. As a general rule, you'll put down about 5%. Not as a down payment, I shouldn't say put down. You'll pay about 5% of the value of the home when you buy it and about 10% of the value of the home when you sell it. That's all in. That's realtor fees, that's the cost to fix it up at the end and make you replace the water heater as you sell and it's all that stuff. Maybe it's vacant for a month or two. 15% round trip is a pretty good estimate. Obviously an average, sometimes a little more, sometimes a little less. But 15% of the value of the home is what it costs you to go round trip.

So if you're buying a $300,000 home, 15% of that is $45,000. If that home does not appreciate or you pay down the debt $45,000 over the course of the three years you're in it, you will come out behind financially. And you don't get much of a tax benefit as a resident for owning a home. It's all about appreciation, overcoming the transaction costs.

The longer you're in the home, the more time you have to spread the transaction costs over. If you're in there four years, five years, six years, it's more likely that you'll come out ahead. If you're in there for 10 years, you almost always come out ahead owning a home instead of renting it. But it's all about overcoming those transaction costs.

If you happen to own a home in a very lucky time period like 2003 to 2006 or 2020 to 2023, those sorts of periods of time, everybody comes out ahead, because the rate of appreciation was so high. But if you own a home from 2006 to 2010, or maybe from 2024 to 2027, it doesn't work out so good. Maybe you can't even sell it at the end. You're stuck being a long distance landlord.

There's plenty of those horror stories. If you talk to older docs, they'll tell you, be a little more patient. It's not the end of the world if you don't own a home during residency. If you need a house with a backyard and a fence for your dog, you can rent that. You don't have to buy it. Now, maybe there's some area in the country where you literally can't find anything to rent. But it's not nearly as common as people think it is.

Every resident is looking for an excuse while they're an exception. “Well, my spouse is also working, or I got a little bit more of a down payment, or I want to be a real estate investor. And so this is going to be my first real estate property.” But the truth is, most of the time, these are just excuses. They're just justifications.

Look, if you want to buy a house, go buy a house. I don't care. It's not my money. But I wish you'd run the numbers. Something like the New York Times, buy versus rent calculator can help you to run the numbers. Run the numbers and see what's likely to happen. Don't assume that buying always works out better. Don't believe the mortgage industry and the realtor industry that likes to tell you that this is the American dream to own your own house.

Trust me, it's not throwing money away to pay rent. You're trading money for housing. It's no more throwing money away on rent than it is throwing the money away on property taxes or realtor fees or home insurance or mortgage interest. They're throwing that money away just as much.

So don't believe these little one liners that make it sound like it's always better to own. Most of the time as a resident, you're probably better off renting. It's a more certain cost of your housing. It's a lot less hassle. Something breaks, you're not fixing it. You just call the landlord and they take care of it. And if there's anything you don't have a lot of during residency, it's time and money. And so, renting allows you to have better control over both of those things.

Trust me, you're not going to be renting forever. You're going to be able to own a home. If you feel like that's the American dream, you'll be able to have it. But don't rush things. Don't put the cart before the horse and you'll likely be happier that you did so.

SPONSOR

At PKA Insurance Group Inc., Pradeep Audho and Matthew Pedersen are independent brokers focusing on disability and life insurance. They excel in securing coverage for physicians, including those on visas like J-1, H-1B, etc.

Protecting your family in the event of a disability or death is important. There is now an A+ rated carrier offering up to $10 million of life insurance without labs. If you're very healthy with limited or no medical issues, approval is likely in five minutes.

Reach out to PKA Insurance to discuss your disability or life insurance needs at whitecoatinvestor.com/pka and also call 1-(800) 258-1018 or email [email protected].

Thanks so much for listening to the Milestones podcast. We'll have another great episode for you next week. Until then, keep your head up, shoulders back. You've got this and we're here to help.

DISCLAIMER

The hosts of the White Coat Investor 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.