In This Show:
Mitigating Long-Term Capital Gains Taxes from a Solo Stock Position
“I'm a retired physician who is a long-time listener and first-time caller. A recent podcast call regarding a large concentrated position in Apple stock piqued my interest as I, too, have a large position in Apple from my purchase 25 years ago. My basis is 58 cents per share. So selling would generate a large capital gains tax bill. I would appreciate your thoughts on mitigating this problem, utilizing either a charitable remainder trust or what's known as an exchange or swap fund.”
When facing a legacy investment such as highly appreciated Apple stock, the core issue is the large embedded capital gains tax if sold. Several strategies can mitigate or manage this problem, depending on the investor’s broader goals, income level, and charitable intentions.
If the holding represents a small part of the portfolio, the simplest option is to do nothing. Legacy investments can be left intact, particularly if they will eventually be passed on to heirs or charity. Upon death, heirs receive a step up in cost basis to the current market value, eliminating the capital gains tax burden. Likewise, charities pay no taxes on capital gains, making both inheritance and charitable bequests tax-efficient ways to dispose of such assets.
However, if the position is highly concentrated—such as 90% of a portfolio in a single stock—diversifying may be worth the tax hit. Selling, paying the taxes, and reinvesting in a diversified portfolio is often safer than maintaining excessive risk. Another timing-based strategy is to delay selling until retirement, relocation, or another period of lower income. Lower-income years may qualify for a reduced capital gains tax rate (15% or even 0%), or the investor may move to a state without income tax, further reducing the burden.
Transferring appreciated shares directly to family or friends in lower tax brackets is another tactic. The recipient might fall into the 0% long-term capital gains bracket, enabling the shares to be sold tax-free. Similarly, for those who already donate, gifting appreciated shares to charity instead of cash is one of the most tax-efficient options. The donor can claim a deduction for the full fair market value while the charity sells the shares without paying taxes, permanently eliminating the capital gains.
Another path is to “build around” the position. This means treating the Apple shares as part of a large cap stock allocation and directing future contributions to other asset classes—bonds, international stocks, or smaller companies—to gradually restore diversification. Over time, this passive approach naturally dilutes concentration risk without triggering large capital gains.
For investors with substantial wealth, exchange or swap funds may provide a solution. These funds pool appreciated stocks from many investors, exchanging them for shares in a diversified portfolio without immediate taxation. However, these require significant minimum investments (often $500,000–$1 million) and involve illiquidity, typically locking up assets for seven years. They can be effective for deferring taxes, but they’re complex and best suited for very high-net-worth individuals.
Finally, charitable remainder trusts (CRTs) offer another approach, though they are less ideal purely for tax mitigation. A CRT allows an investor to transfer appreciated assets into a trust, receive income from it during their lifetime, and leave the remainder to charity. The donor gains partial tax deductions, and they may defer capital gains. But these trusts are primarily philanthropic vehicles rather than efficient diversification tools. For most investors with legacy positions, direct charitable gifting or long-term holding until death provides simpler, more effective solutions.
More information here:
The 6 Stages of Diversification — Where Are You?
How to Pay No Taxes on Capital Gains and Dividends
Tax or Other Benefits to Forming an LLC vs. Sole Proprietorship
“I'm a radiologist who is transitioning from a standard W-2 job to 1099 independent contractor work. I'll be practicing 100% remotely from my home. Are there significant benefits to forming an LLC vs. practicing as a sole proprietor in this situation? I understand the liability benefits to an LLC when there is a physical office people come and go from, but as a remote radiologist practicing from my home, I'm not sure there would be substantial liability benefits. Do you foresee any, which I'm overlooking? And second question, are there substantial tax benefits to forming an LLC vs. practicing as a sole proprietor?”
For a remote radiologist transitioning from W-2 to 1099 income, forming an LLC rarely provides meaningful advantages over operating as a sole proprietor. The two main areas to consider are liability protection and tax benefits. Once both are analyzed, most independent physicians find that the extra administrative burden of forming an LLC outweighs the small potential gains.
From a liability standpoint, creating an LLC does not shield a physician from malpractice risk, which is always personal. Professional liability stems from medical decisions, not from the business entity. While an LLC can protect business owners who have employees, contracts, or clients physically entering an office, a solo radiologist reading images from home faces almost no additional non-malpractice exposure. In this setting, carrying robust malpractice coverage is far more effective than establishing a legal entity. Without employees or significant business operations, forming an LLC for liability purposes offers little practical protection.
Some businesses form LLCs to separate business assets from personal assets, limiting exposure to potential lawsuits unrelated to professional services. For example, companies like The White Coat Investor use LLCs because they have employees, contracts, and broader business relationships. If something goes wrong, only the business assets are at risk. But a solo 1099 physician has no such business infrastructure, so the theoretical protection doesn’t apply. In short, if you have no office, no employees, and no significant business relationships, there is no real liability advantage to forming an LLC.
On the tax side, forming an LLC by itself doesn’t change how taxes are paid. A single-member LLC is a “pass-through” entity, meaning income flows directly to the owner’s personal return, just like a sole proprietorship. You can elect for the LLC to be taxed as a corporation and further choose S Corporation status, which introduces a potential for small savings on Medicare taxes. This structure lets you divide business income into two parts: a “reasonable salary” (subject to payroll taxes) and a “distribution” (not subject to payroll taxes).
For most high-earning physicians, the only potential savings come from avoiding Medicare taxes of roughly 2.9%-3.8% on the distribution portion. Social Security taxes usually don’t apply because physicians typically exceed the wage base cap through salary. However, the S Corp route brings extra complexity—corporate filings, payroll compliance, and higher accounting costs. The savings often don’t justify the hassle unless distributions exceed six figures. If your business income is $400,000 with $200,000 paid as salary and $200,000 as distributions, you might save a few thousand dollars annually, but smaller practices see minimal benefit.
Moreover, all typical business deductions—continuing medical education, licensing, home office equipment, software, and internet—are already available to sole proprietors. You don’t need an LLC or S Corp to claim them. They’re reported on Schedule C. The misconception that you must form a company to deduct expenses is widespread but incorrect.
In the end, unless you expect significant non-malpractice liability or very large self-employment income with six-figure distributions, forming an LLC or S Corporation doesn’t make sense for a remote physician. The sole proprietorship structure is simpler, equally deductible, and fully adequate. The only genuine reasons to incorporate would be psychological, like a desire to “feel like a business owner,” or practical, such as hiring staff or signing complex contracts. For most solo 1099 doctors, professional liability insurance and clean bookkeeping are far more valuable than the paperwork of an LLC.
More information here:
Can a Doctor Form a Corporation to Reduce Liability and Save Taxes?
Simplifying After Direct Indexing
“I'm a family medicine doctor in the Southwest. I recently transferred my Wealthfront Direct Investing into my Vanguard account. And now I have approximately about 500 individual stocks in my Vanguard account. I like to simplify things. I was wondering what's the best way to go about doing this transfer from the Direct Investing Wealthfront to the Vanguard. And this was a few months ago. Any suggestions would be great.”
Direct indexing aims to replicate an index fund’s performance while allowing investors to harvest individual stock losses for tax purposes. This is something mutual funds cannot pass through. In mutual funds, losses stay inside the fund, offsetting its own gains but providing no direct tax benefit to the investor. Direct indexing solves that by buying the underlying stocks directly and managing them to create opportunities for tax-loss harvesting at the stock level. The result can be more deductible losses, which help offset other capital gains or even some ordinary income.
The benefits of direct indexing are most valuable to investors who can use large realized losses—for example, those expecting to sell a business or other appreciated asset. However, there are downsides. The portfolio often does not track the index perfectly, and it may underperform or outperform slightly. The service also comes with fees because someone has to manage all the buying, selling, and rebalancing across hundreds of individual holdings. While early versions of direct indexing charged up to 1% annually, newer platforms may charge around 0.10%, which can make it more appealing for some investors.
The main problem arises when an investor wants to stop using direct indexing. Exiting leaves them with hundreds of individual stocks—each with different cost bases, embedded gains, and loss histories. Essentially, the investor becomes the portfolio manager of their own custom index fund, and simplifying it back into a traditional index fund becomes cumbersome and potentially costly. Selling each stock triggers capital gains taxes on appreciated positions, turning the process into a major cleanup effort.
The most straightforward solution is to sell all the holdings, pay the taxes, and move the proceeds into a broad index ETF such as Vanguard’s VTI or VOO. While this involves filing hundreds of sell orders and paying capital gains taxes, it permanently restores simplicity. For investors wanting to minimize the tax hit, a phased strategy can work better. First, identify all the stocks currently at a loss. Those can be sold immediately without tax consequences. Then, sell positions with minimal gains. Finally, match remaining gains against existing losses to neutralize the tax effect as much as possible.
After that process, the investor might still have a smaller group of stocks left. These can be addressed gradually and sold over several years, gifted to charity for a full fair market value deduction, or even transferred to heirs who would receive a step up in basis upon death. Regardless of the chosen method, all dividend reinvestment programs should be turned off to prevent further complexity and the creation of new fractional positions.
Ultimately, direct indexing can be a useful tax strategy, but it locks investors into a highly complex portfolio structure that’s difficult to unwind. Those considering it should view it as a long-term commitment, especially in taxable accounts. For investors who prioritize simplicity and low maintenance, traditional index funds remain the cleaner and more efficient option.
White Coat Planning Announcement
For years, White Coat Investor has referred readers to vetted financial advisors who provide good advice at a fair price—helping physicians and other professionals who prefer guidance over doing it themselves. After years of studying the industry and listening to feedback, the team is now building its own financial planning firm designed from the ground up to deliver comprehensive, fiduciary advice without sales pressure or commissions. This new firm will focus on financial planning—cashflow, taxes, insurance, retirement accounts, estate issues, and long-term strategy—while offering investment management as an optional service for those who want it. The firm will be a fee-only service model provided by highly credentialed planners who want to help, not sell. It’s not open to clients yet, but both interested advisors and future clients can now connect to stay informed.
To learn more:
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To learn more about the following topics, read the WCI podcast transcript below.
- Helping your kid with their taxes
- Revenue credits
- Save up to buy into practice or keep investing and take out a loan for the practice?
Milestones to Millionaire
#245 — Physician Aids Her Parents in Buying a Car with Cash for the First Time
Today, we are chatting with a physician who helped her parents pay cash for their car for the first time in their lives. She was vulnerable with us and shared that her parents don't have great financial habits and are going to need a lot of financial help from her. She has begun to educate them on how to be wise with their money, and paying cash for the car was a big step for them. She knows that her parents want to be independent, and she sees helping them learn what she has learned about money as a kindness to them that will allow them to be independent longer.
Finance 101: Helping Your Parents with Their Finances
Many of us eventually reach a point where we start thinking about our parents’ financial well-being. Some parents are financially savvy, but for many, their adult children are the first generation to combine a solid income with strong financial literacy. This means that even small bits of help—like explaining fees, reviewing an investment portfolio, or simplifying retirement plans—can make a meaningful difference. It’s often not about taking over but about guiding them toward better decisions and protecting them from poor advice or high-cost management.
Helping parents with finances can also be an emotional experience. It often starts with simple conversations like discovering they might be paying unnecessary fees or working with an advisor who isn’t acting in their best interest. Over time, children can introduce more efficient, lower-cost investing strategies, such as using index funds or consolidated accounts. With a basic, diversified plan, their money can grow steadily while remaining easy to manage. The peace of mind that comes from knowing their finances are secure—and that someone they trust is helping—can be just as valuable as the financial gains.
Still, it’s important to tread carefully. Managing or advising on a parent’s money comes with responsibility and potential family dynamics to navigate. Be transparent with siblings and other heirs, and consider involving a professional planner if needed to avoid misunderstandings. Beyond investments, adult children can help parents with insurance reviews, long-term care decisions, and transitions that come with aging. The goal isn’t control. It’s support. By approaching it from a place of strength and compassion, you can make their later years both more comfortable and financially secure.
To learn more about helping your parents with their finances, read the Milestones to Millionaire transcript below.
Sponsor: Bob Bhayani at Protuity
Sponsor
Today’s episode is brought to us by SoFi, the folks who help you get your money right. Paying off student debt quickly and getting your finances back on track isn't easy, but that’s where SoFi can help. It has exclusive, low rates designed to help medical residents refinance student loans—and that could end up saving you thousands of dollars, helping you get out of student debt sooner. SoFi also offers the ability to lower your payments to just $100 a month* while you’re still in residency. And if you’re already out of residency, SoFi’s got you covered there, too.
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WCI Podcast Transcript
INTRODUCTION
This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.
Dr. Jim Dahle:
This is White Coat Investor podcast number 442.
Today's episode is brought to us by SoFi, the folks who help you get your money right. Paying off student debt quickly and getting your finances back on track isn't easy. That's where SoFi can help. They have exclusive low rates designed to help medical residents refinance student loans. That could end up saving you thousands of dollars, helping you get out of student debt sooner.
SoFi also offers the ability to lower your payments to just $100 a month while you're still in residency. And if you're already out of residency, SoFi's got you covered there too. For more information, go to sofi.com/whitecoatinvestor.
SoFi student loans are originated by SoFi Bank, N.A. Member FDIC. Additional terms and conditions apply. NMLS 696891.
All right, welcome back to the podcast. I had a glorious morning. I was out for a run this morning and the sun rose. This time of year rises right between the walls of Little Cottonwood Canyon and some beautiful clouds up there, beautiful lighting, incredible morning.
I hope you're having a good day as well as you listen to this. Looks like we're recording this only about a week in advance. So that's a short period of time for us. We're not making these things a day before you hear them for sure, mostly because I'm trying to do so many other things in my life. I just have to do things out in advance. I think between yesterday and today, we recorded about two months’ worth of milestones podcasts. That's just the way we tend to do our work around here.
But thanks for what you're doing out there, everybody. It is not easy work. That's why you're a high income professional. That's why you're a White Coat Investor. Because you do hard work. And that usually pays pretty well, can make for a pretty awesome financial life as long as you manage it well.
QUOTE OF THE DAY
Dr. Jim Dahle:
A couple of things I wanted to bring up today. Our first one is a quote of the day. This one's from Shelby M.C. Davis, who said, “Invest for the long haul, don't get too greedy and don't get too scared.” I love that quote because it reminds us that the investor matters more than the investment.
REBUTTAL ON WHERE TO BANK IN A SMALL TOWN FROM PREVIOUS EPISODE
Dr. Jim Dahle:
First thing we need to do is we have to, I don't know if it's a correction or a clarification or a rebuttal or what, but somebody wrote in about something I said. Somebody called in that was moving to a small town in Minnesota, I think, and was asking about where they should bank and where they should get their mortgage, those sorts of questions.
I probably told them you can get a better rate from somebody that's not a small town credit union bank, et cetera. If you go to Physician Mortgage, one of the big national companies or something like that.
Well, that did not make this particular listener happy. He wrote in an email and said “Today on your podcast, a resident asked you about his plan to move to rural northern Minnesota and where to put his money. Being semi-rural in Utah, I was surprised by your answers. You expect patients to stay in town and support you, the local pharmacy, the local ER. Then you better not drive 40 miles or 100 miles to open your bank accounts.
You and your family need to shop local whenever possible. Does not mean you cannot go into the bank or SNL or credit union with details about a doctor's mortgage and offer them an opportunity to match that. If you're already running your paychecks into their bank, they'll often do what it takes to keep you there.
Doing otherwise is how smaller towns die. It may be the perfect town for them now, but when the most prosperous businesses, including the young doctors in town, invest elsewhere, your own dreams may be crushed.”
I thought that was a pretty good rebuttal. There's some truth there. Small town America has got a lot of problems. Just like healthcare is being consolidated, our cities are being consolidated, our population is being consolidated, and there's a lot of people in small towns that are struggling for various reasons.
And it's true, if you don't support the small town businesses, the small town businesses go away. I guess you've got to find some balance in your life and some moderation in your life. Thank you for the correction and the rebuttal. Also thank you, this particular person also does a lot for the docs that they work with helping spread financial literacy. So thank you for that as well.
HELPING YOUR KID WITH THEIR TAXES
Dr. Jim Dahle:
Okay, I think we need to also go over an email exchange where I didn't know the answer and I had to get some help from my friend, Mike Piper. Mike Piper is one of the most humble people I know, but he's brilliant, especially about really neat stuff in the tax code. When I get some really tough questions and I don't know the answer to, Mike is often a resource that I use.
If you don't know about Mike, he's run a blog called the Oblivious Investor for at least the last 20 years. He basically monetizes it by selling his short little inexpensive books, but he was one of my inspirations for getting into blogging 15 years ago. So Mike's great.
But I get this email, it says “My 22-year-old college student has an Etsy business where she makes a net income of $8,000 per year after business expenses. This is the first year, so hopefully it will grow over time. I am planning to gift for the following 2025 contributions, $8,550 for an HSA family contribution as she's filing independent and is on our high deductible health plan.”
I've talked about that elsewhere. If you're not aware of that, if your kid's under 26 on your family HDHP and financially independent of you, not your dependent, not being claimed on your taxes, they can make a family contribution to an HSA, something we're doing for our kids as well.
But let me go on with the email. “Also $8,000 a Roth IRA is allowable based on income. She's self-employed without W-2 income. And then whatever she can to a Roth Solo 401(k) in addition to the Roth IRA. I'm having trouble finding information about the total she can do or not for the Roth IRA and Roth Solo 401(k).
Some of this is to educate her how to structure retirement savings with long-term tax planning. I'm very proud she's doing well as a full-time college student and running a profitable business at the same time.”
You're earning $8,000. I figured you probably can't put that $8,000 into a Roth IRA and another $8,000 into a Solo 401(k). It seems against the spirit of these rules for retirement accounts. But the truth is I've never actually seen anything from the IRS that says you can't do it. And I'll bet there's people out there doing it accidentally all the time. So I'm like, “Mike, I bet you can cite chapter and verse on this. I'll bet it's not allowed, but I don't know for sure. Can you tell us for sure?”
And so, Mike writes back and says, both the Roth IRA contribution limit from IRC 219b1b and the relevant contribution limit for a Roth Solo 401(k) from IRC 415c1b are a function of compensation. That is the contributions to each must not exceed taxable compensation, and they are separate limits. With $8,000 of compensation for 2025, a $7,000 Roth IRA contribution could be made. Because she's under 50. And an $8,000 Roth Solo 401(k) contribution could be made.
A key point here is that the contributions must be Roth. If either were a pre-tax contribution, the contribution itself would reduce compensation and thus reduce the other contribution. For example, an $8,000 pre-tax Solo 401(k) contribution would reduce compensation to zero, thus reducing the Roth IRA contribution limit to zero.
Important note, in addition to the fact that deductible contributions reduce compensation, we also have to note that compensation for a sole proprietor is defined as accounting for the deduction for a half of self-employment tax. In other words, if her profit from business is $8,000, she makes no deductible contributions, her compensation would be $8,000 minus half of the amount she pays as self-employment tax. If it's of any interest, I wrote an article about this way back in 2016, it provides a link to that we'll put into the show notes.
That's very interesting. Separate limits. Obviously there's a $7,000 limit for the Roth IRA could be made, and an $8,000 Solo 401(k) contribution could be made, but they have to be Roth. Very interesting that it gets so complicated. So, it's not necessarily against the spirit of the law.
I think the IRS looks at it and goes, “Well, if someone only makes $8,000, of course, they're not going to be able to put $7,000 into a Roth IRA and $8,000 into a Solo 401(k). Where's it going to come from?”
So they don't put things like this out there explicitly into the rules that we look at most of the time when we look this stuff up, because they think no one would bother. But if you're getting money from somewhere else, or you got savings, you can move that into a retirement account in that sort of a situation. Super interesting, very in the weeds kind of a question, but we do a lot of those here at White Coat Investor. Sorry if we lost anybody with that explanation.
Okay. We've got another one, this one's a Speak Pipe, but references a question I answered on another podcast a few weeks ago. So let's listen to that one.
MITIGATING LONG-TERM CAPITAL GAINS TAXES FROM SOLO STOCK POSITION
Speaker:
Hello, Jim. I'm a retired physician who is a long time listener and first time caller. A recent podcast call regarding a large concentrated position in Apple stock piqued my interest as I too have a large position in Apple from my purchase 25 years ago. My basis is 58 cents per share. So selling would generate a large capital gains tax bill. I would appreciate your thoughts on mitigating this problem, utilizing either a charitable remainder trust or what's known as an exchange or swap fund. Thank you.
Dr. Jim Dahle:
All right, great question. The problem we're dealing with here is a problem we usually refer to as a legacy investment. I've got some legacy investments right now I'm actually dealing with this week as I record this. And so, this is near and dear to my heart.
There are lots of ways to deal with legacy investments. And if they're not a big part of your portfolio, one of the easiest ways to deal with them is to just ignore them. A legacy investment is something with a very low basis in your taxable account. It doesn't matter if it's a Roth IRA or 401(k), you can just sell it. No tax consequences for that.
But in a taxable account, if you have a very low basis, meaning you paid very little for the investment and now it's worth a lot. So, it's all capital gains. You're going to pay lots of taxes if you sell it, but you don't actually want to own it anymore. Usually because you bought individual stocks or something and you want to own index funds. Or in my case, I've changed from one index fund to another as my preferred holding for a couple of asset classes.
And so, you have something you don't really want, but there's a big tax cost to sell. One option, especially if it's a tiny piece of your portfolio, is to just hold on to it. Right? Lots of us are not going to spend everything we have. We're going to leave something behind, whether it's to charity, whether it's to our heirs or whatever.
And the beautiful thing about leaving that behind is it eliminates those tax consequences. If it's left to a charity, charities don't pay taxes anyway. If it's left to your heirs, they get a step up in basis to whatever the value was when you died. And so, holding on to it is an option.
Another option is, and this is probably a better one if this is a huge part of your portfolio. If your portfolio is 95% Bitcoin or it's 95% Apple stock or Tesla stock or something, yeah, selling is probably the right move. Just bite the bullet, pay the taxes. The only thing worse than having to pay taxes is not having to pay taxes. Recognize your good fortune, pay the taxes, move on.
The other thing you can do is you can hold it for a little while and sell it later when maybe the tax consequences aren't so bad. Maybe after you stop working, you drop out of the 20% long-term capital gains bracket into the 15% or even the 0% capital gains tax bracket. Or maybe you move from California to Nevada or from New York to Florida.
And so, you're reducing the tax cost later. So why not hold on to it for two or three or four years until you move or until you quit working or your income goes down or you go part-time or you go on the parent track or whatever and you sell it at that point.
Another option, especially if you give money away is you can give it to a family member or a friend that has a lower income. They might be in the 0% capital gains tax bracket. So if you had $100,000 and you got to pay 25% of that in taxes, if you sold it and then gave them cash, you could just maybe give them the $100,000 worth of stock. They sell it, they don't pay anything in taxes and they get the full $100,000. That might be an option as well.
For charity, charity is always in a 0% tax bracket. This is the method we're using to get rid of our legacy investments. We give lots of money to charity every year. So instead of giving cash, we give appreciated shares. Which shares? The shares we don't want. Those are the ones we give. As long as you've owned them for at least a year, you get to take the full charitable deduction for the full value of it. If you've owned it for less than a year, you only get to take your basis as deduction.
But as long as you've owned it for at least a year, you get to take the full value at the time of the donation as a charitable deduction. Then the charity sells it. They don't pay any taxes. Nobody ever pays the capital gains taxes. It's a beautiful thing, but obviously you're not coming out ahead giving money to charity. You've got to actually want to give money to charity.
Another option is to just build around it. Building around it is if you've got a bunch of large cap stocks, you just say you've got 10 of them. And you're like, well, that's an awfully similar allocation to S&P 500 fund. And maybe you just go, okay, we're going to call this stuff part of our large cap US stock allocation, and we're just going to build around it.
Our new money we're going to put into VTI, the Vanguard Total Stock Market Index ETF. We're not going to reinvest any of the dividends from those stocks, but we're not going to sell them. We're just going to build around it. And that is an option. And as time goes on, presumably most of those stocks become a smaller and smaller percentage of your portfolio. So the risk you have, this concentration risk becomes less and less and less over time.
Another option is what was mentioned in the question from the listener. This is often called a swap fund or an exchange fund. It's referred to as a 351 exchange. It's a relatively new option out there. But basically you're swapping a diversified portfolio of appreciated individual stocks in a taxable account for shares of a newly created ETF. And that defers taxes, but hopefully provides you with a little bit better investment. And this can be called an exchange fund. It can be called a swap fund.
You tend to have to be at least an accredited investor to use these, sometimes a qualified purchaser, which means you've got $5 million in investable assets. And the minimum investments are often half a million or a million dollars. That puts us out of reach of the vast majority of White Coat Investors, we’re just not wealthy enough to deal with these swap and exchange funds.
But if you've done particularly well, this might be an option for you. There's some out there from Eaton Vance and Goldman Sachs and cash. Some of the minimums are as little as $100,000. So there's some requirements for it. To get this tax deferred exchange into it, it needs to hold at least 20% of its money in illiquid assets like real estate or commodities or something like that.
And once it's in there, you can redeem your portfolio without triggering taxable gains after it's in there for seven years. A seven year holding period. If you take it out before then, you can redeem your own stock back, but basically at the lower the value of the contributed stock or their fund ownership. In exchange for tying up your money and being really illiquid, maybe you get out of some capital gains taxes.
Is it an option worth looking into? Sure. Unless one of the options works better. Because I think the other options for dealing with legacy stocks are probably better most of the time. If you give to charity, give it to charity. Or if you don't think you're going to need it during your life, just hold on until you die, leave it to your heirs. They'll get the step up in basis of death. So I don't think it's an awesome option there.
The other thing that the caller mentioned was a charitable trust. And there's basically four kinds of charitable trusts. These are called CRATs, CRUTs, CLATs, and CLUTs. So it's a charitable remainder annuity trust, charitable remainder unitrust, charitable lead annuity trust, and charitable lead unitrust.
Four different types, four different terms. But they're all split interest gifts, meaning you get some benefit and the charity gets some benefit. UT or unitrust is where the income payments vary with how well the investment in the trust is doing. So, it's kind of a variable payment thing. With the annuity trust, the payments get fixed. So no matter how well the investments are doing, they're based on a percentage of the original amount that you put in there.
Now a lead trust and the remainder trust refers to what the charity gets. If the charity gets the income from the trust, it's a lead trust. If the charity gets the principal at the end, it's a remainder trust. A charitable remainder trust is a split interest gift. You put it into this trust and the charity gets whatever's left in there after a certain period of time, until you die maybe, or 10 years maybe, and you get the income from it.
So you get some benefit, the charity gets some benefit, and maybe it helps you save some capital gains taxes along the way. Because you're putting it into this charitable trust. I don't know exactly how that saves a lot of capital gains trust. I don't think this is usually a great method for people to get rid of legacy investments. It's more of a way to support charity while at the same time getting something for yourself.
Obviously, the benefit of just giving the whole thing to charity is usually more than doing some sort of a charitable trust. So this is just a way to kind of split it a little bit and get some benefits for both.
I don't know that that's the thing you want to look into if you're really trying to get rid of a bunch of shares of Apple stock. I'd probably look more into the exchange or the swap fund or some of the other methods of getting rid of your legacy investments that I mentioned.
Personally, I'm a big fan of giving to charity. If you've got enough money that you're eligible for some of these swap and exchange funds, you probably have enough money that you're not going to spend it all yourself, and chances are good you want to give some of it to charity. Well, this is the asset to give to charity, the one you don't want, the one that's appreciated highly with a massive tax bill. I hope that helps.
Okay, let's take another question. This one from Mike, not Mike Piper, and it's kind of one of the classic questions that lots of docs have as they become self-employed.
TAX OR OTHER BENEFITS TO FORMING AN LLC VS. SOLE PROPRIETORSHIP
Mike:
Hi, Jim. I'm a radiologist who is transitioning from a standard W-2 job to 1099 independent contractor work. I'll be practicing 100% remotely from my home. Are there significant benefits to forming an LLC versus practicing as a sole proprietor in this situation?
I understand the liability benefits to an LLC when there is a physical office people come and go from, but as a remote radiologist practicing from my home, I'm not sure there would be substantial liability benefits. Do you foresee any, which I'm overlooking? And second question, are there substantial tax benefits to forming an LLC versus practicing as a sole proprietor? Thanks so much.
Dr. Jim Dahle:
Love it. Great question. It's such a good question. It's been asked about 10 billion times by White Coat Investors. So if you have a question out there, there's a good chance that someone else has that question. And people have been asking me these questions for 15 years. And when I get on more than once or twice, I write a blog post that answers them. This blog post was written years and years and years ago.
You're asking exactly the right questions. First, is there some other benefit besides tax benefits? Is there a liability benefit? And the second question, is there a tax benefit? So let's go through both of these.
First on the liability. Malpractice liability, which is your main work-related liability, if you're a doc, is always personal. Becoming an LLC, becoming a corporation does not reduce your malpractice liability. It's always personal. The only reason to form a business entity for liability reasons is if you have some other source of liability out there.
Now the White Coat Investor does have some other sources of liability. We've got employees that work for us. We've got all kinds of business relationships and contracts and things like that. So not very long after the white coat investor started, we went from a sole proprietor to an LLC, a limited liability company.
The reason we did that was to help reduce that liability. So if, heaven forbid, something terrible happens and we have massive liability that's upheld in court, at worst, all we lose is the value of the White Coat Investor. So that's the benefit of putting something into an LLC like that. And that can make sense for some businesses.
It probably doesn't make sense for a single doc business. If you're just a 1099 independent contractor doing your doctor work from home or wherever, it probably doesn't make sense for you to form an LLC or a corporation to get that additional liability protection. There's no real benefit there because you just don't have any liability.
If you're not even going to bother buying liability insurance, forming an LLC or a corporation probably is not worthwhile. And I don't know any independent contractor docs with no employees whatsoever that bother buying business liability insurance. They just don't because liability just isn't there. You got lots of liability, but it's all malpractice. So, buy professional liability insurance rather than business insurance and don't bother forming an LLC or a corporation for that reason.
Okay, that's the first aspect of this question. The second one is tax benefits. And the thing you should know about limited liability corporations is they are passed through entities. So if you are one doc and you go form an LLC in your state, how do you pay taxes? As a sole proprietor. It's exactly the same as if you're a sole proprietorship. If there's two of you and you form a partnership and you decide, “Oh, we should probably do an LLC”, how is that LLC taxed? It's taxed as a partnership.
Now, there is an option for your LLC to choose to be taxed as a corporation. That is an option to you. And if it's a corporation, you can make an S election and basically have it taxed as an S corporation or an S corp. The benefit of doing that is it allows you to kind of split the revenue, split the profit, whatever you want to call it from this business into salary and distributions. And they're not dividends, they're distributions. They're still taxed to your ordinary income tax rate.
But the difference between your salary and the distribution is you don't pay payroll taxes on the distribution. And for most docs, they've got to pay themselves enough of a salary. They're already paying the maximum social security tax. So, you don't save any social security tax if you're a typical 1099 doc, you end up saving Medicare tax.
How much is Medicare tax? Well, 2.9% before you count on the additional 0.9 for the Obamacare tax, but maybe 3.8%. And some of that's deductible. So, it's really not 3.8%, it's something less than that. That's what you're saving by forming an LLC, having it taxed as a corporation, making an S election and now having this business of yours as a sole proprietor taxed as an S corp. You're saving 3.8% or something less than 3% probably on your taxes for whatever you call distribution.
But there's a little bit of a hassle associated with forming an LLC and corporation. Now you got a corporate tax return. It's a pain. There's some hassle there. You're probably paying a little more to an accountant. So you got to ask yourself, “Well, how much tax savings does it take for this to be worth it?” And my rule of thumb is, if your distributions aren't at least six figures. You're not saying, “I'm going to pay myself $400,000 in salary and take a $200,000 distribution.” It's probably not worth it. It's probably more hassle and more accounting expenses than you're really saving in taxes.
All the other deductions for the most part, there's a few very minor exceptions, but all your other business deductions are totally deductible to you as a sole proprietor. You don't have to form an LLC to deduct your CME costs or your licensing costs or that computer on your desk you're reading films from. None of that stuff do you need to form an LLC to deduct. You can deduct it as a sole proprietor. You just put it on schedule C when you do your taxes every year. It's no big deal.
This urge people have to form corporations and LLCs when they're a one person business and their only liability is malpractice is kind of silly. Now maybe it helps change your mindset a little bit or something like that. Now you think like a business owner a little more than you did before, fine. But I can think like a business owner is a sole proprietor just fine. I didn't need to form a micro corporation or anything like that to do that. I hope that helps.
SAVE UP TO BUY INTO PRACTICE OR KEEP INVESTING AND TAKE OUT A LOAN FOR THE PRACTICE?
Dr. Jim Dahle:
Our next question comes by email. “I'm an ophthalmology fellow and will be joining a private practice after fellowship. My wife and my combined income will be approximately $470,000 before taxes.” Awesome, congratulations. That's pretty awesome to be raking that kind of dough in.
“The practice is a wonderful opportunity and after two to three years I hope to be able to enter partnership via buy-ins as well as buy-in to the ASC, the surgical center and real estate. As of now my wife and I have no debt and been putting some money into our 401(k)s and maxing out our Roth IRA while putting the rest of our savings in a high yield savings account since we were trying to save up for a down payment for a house.
My question is looking ahead to the next two to five years, many large purchases coming up. Is it smart to try to max out our 401(k) contributions and lower our taxable incomes to try to save up our money to put towards the house and buy-ins or should we keep trying to invest it all and when time comes take out a loan to buy into the practice or ASC? Thanks for your insights over the years.”
Okay, this is classic early attending year stuff. You come out of residency and you realize you have 12 great uses for your money and you don't have enough money to do them all. Maybe you want to do Roth conversions on tax deferred contributions you made during fellowship. You want to buy that doctor house. You have student loans to pay down. You need to replace your car. Your emergency fund stinks and you need to make it bigger. You have to save up for a buy-in for your partnership or to buy a practice as a dentist or whatever.
You have all these great uses for money and you don't have enough money to do them. So you prioritize it and make a list top to bottom of what's most important to you and use a waterfall concept. Think of it as one pool flowing into the next pool, flowing into the next pool, flowing to the next pool. Once one pool is full, your first pool's maybe credit card debt you have. It's at 29%. So super high priority. Everything's going toward that until it's paid off and once it's paid off, money flows over into the next pool and I don't know what that is. Maybe it's boosting up your emergency fund. Or maybe it's the down payment on a house or maybe it's saving up for the buy-in for a partnership or maybe it's maxing out your retirement accounts or paying off student loans.
It just has to be your priority but I can't tell you what your priorities are. Some things are pretty clear should be really high priorities, like credit card debt or if your car's dead. You need a new car.
The question here is should I borrow to get my buy-in? Well, if you have a better use for your money, yes. You should borrow to get the buy-in. The buy-in's almost surely worth making. It's going to boost your income long term. The assets you're buying are probably going to appreciate, the value of the practice and the value of the ASC and the value of the real estate. You get to manage this sort of stuff and when you talk to docs, a lot of times they tell you their best investment they ever made was the surgical center they bought into.
So I don't want to tell you don't buy that stuff if you have to buy it with some debt but try to get the best debt you can. Try to save up some of it. If you can pay cash for it, great, but I don't know that it's your best use of money because I don't know what your other uses for money are. This is part of the financial planning process. When you meet with a financial planner, they go over these things. They talk to you about your goals. They talk to you about your priorities. They help you weigh one of these against another. Help you decide what to go after first.
I would say this though. As a general rule, I'm a much bigger fan, early in your career, of buying stuff that are going to make you money rather than stuff you kind of consume. I'd rather see a dentist come out and take a big loan out to buy the practice rather than to buy the big doctor house.
Because the practice is going to double or triple their income, especially over time. Buying the house is just going to make you pay more in property taxes and more in insurance and more in upgrading costs. It's a consumption item mostly. Yeah, it'll probably appreciate. Yes, it pays you some dividends in the form of saved rent, but it's not like buying into a practice. It's going to double your income. Those become pretty high priorities for me.
But if I had to borrow that money to get the buy-in, I would. Maybe the practice will loan it to you. Maybe your partners will loan it to you. Maybe you have to go to a bank and do it. You try to get the best debt you can, but it's probably still worth doing.
I'm not a big debt guy. I don't love debt. We don't have any debt. We paid off our last debt, which was our mortgage, back in 2017. And don't plan to take any more out. But I'm not like fanatic about debt. I recognize that debt can be a useful tool. And if you're thinking about using debt in your life, I encourage you to think about it systematically, to actually intentionally decide how much debt you're going to take out.
And when you do that, using the best possible debt available to you. When I mean best debt, I'm talking about lowest interest rate, best terms, right, longest term you can get, not callable, fixed interest rates better than variable interest rates. And so you think about all these things that make one debt better than others.
It's also probably worth reading a book from the series called The Value of Debt. It's probably the best book, best books actually, there's multiple of them, on the use of debt in your life that I've ever seen. And he certainly starts out the books with tons of cautions going, this probably isn't right for a whole lot of people. They shouldn't be using debt at all. They should go, Dave Ramsey said pay it all off, be done with it because most people just don't handle debt very well.
And that probably includes you. You're probably in that most people category. But if you decide you want to use it, he recommends that you limit it to about 15 to 35% of your assets. So, if you add up all your assets, all your savings and retirement accounts and investing accounts and your investment properties and your house and all your assets, add all that up and then try to keep your debt to less than 15 to 35% of that amount.
The truth is most docs coming out of training, they've got way more debt than 15 to 35% of their assets. They're already at 400% of their assets in debt. So, most people actually need to reduce their debt to get into that range rather than increase the amount of debt they have to get into that range.
But it's well worth a read if you're interested in using debt. If you're interested in taking on some leverage risk to either supplement the market risk you're taking or to reduce your market risk and substitute leverage risk for it, I don't think that's a crazy thing to do, but be intentional about it, be systematic about it.
Don't just go, “Oh, my student loans are at 3%, so I'm not going to pay them off.” No, because what happens is you just spend that money. The investor matters more than the investment. Your behavior matters. And most people's financial behavior is not awesome.
When you recognize that in yourself, you start going, “Oh, maybe I should pay off even 2 or 3 or 4% interest rate debt because I'm just spending the money anyway. And you wouldn't go out and take out a 4% loan just to buy a boat or something, but in effect, you're doing the same thing because your behavior is not working. You're not investing the difference like you anticipated you would.
NEW FINANCIAL PLANNING FIRM
Dr. Jim Dahle:
Okay, we made an announcement on the blog a little while ago and I thought it's probably worth talking a little bit about it on the podcast as well. For a long time, I have spent some time thinking about financial advisory firms. Maybe I've spent more time than most other people on the planet thinking about financial advisory firms.
We've been referring people to financial advisors for most of the last 15 years because I recognize that there's a whole bunch of White Coat Investors out there who are not interested in being DIY investors. They are not do-it-yourselfers and they want some help. They barely find this stuff mildly interesting. They can stand to listen to a podcast once a month, maybe.
And I know this is appalling to those of you that are do-it-yourselfers. I can't believe anybody would pay a financial advisor or anything for something they could do themselves, but it's true. There's lots of people that not only want but probably need a good financial advisor.
Our mantra here as we've referred people to financial advisors over the years is good advice at a fair price. And so, we've worked very hard to determine what a fair price is. And the way you do that is you go around to the good advisors and you see what they're charging. And that's what a fair price is. It might be more than you want to pay, but if you're not willing to learn enough about this to be a do-it-yourself financial planner and a do-it-yourself investment manager, that's the going rate. That's just what it is.
We've spent some time educating White Coat Investors as to what a fair price is. There's a lot of people are paying way too much. Now, if you can get something for $10,000 a year and you're paying $60,000 a year, you're getting ripped off. You're not paying a fair price.
And the other thing, of course, is you want people to get good advice. So we spend a lot of time focusing on making sure that the financial advisors we refer people to are talking about the same things we talk about here on the podcast, the same things we talk about on the blog, the same stuff we've been teaching to White Coat Investors for the last 15 years.
If they're not using index funds, they probably haven't kept up to date on the data on the best way to invest in stocks. If they're out there trying to time the market and pick stocks and do all these sorts of things that just aren't a great idea, that's not good advice.
The truth is good advice is mostly focused on planning, financial planning. Not just picking investments. That's what everybody thinks they're paying for. I'm going to hire somebody and they're going to help me beat the market. That's not why you hire a financial advisor. You hire a financial advisor to help you draw up a good financial plan and help you follow it. That's the point.
I don't even like the term financial advisor. It doesn't actually mean anything. There's no legal meaning to financial advisor. I kind of like financial planner a little bit better because it emphasizes the real value they're providing.
Once you realize that the investment management is not that hard to do, especially once you recognize that index funds are probably the way you should be investing in stocks, the investment management piece actually gets pretty easy.
And so, it's the financial planning that's hard. It's helping you learn to manage your cashflow. That's hard. It's helping you deal with taxation issues. It's helping you sort out the 12 different retirement accounts you're having to deal with. It's helping you prioritize those 12 different things you need to do in those first few years as an attendee. It's helping you deal with the state planning issues and asset protection issues. So they'll make sure you've got adequate insurance that you're insuring as financial catastrophes, but not buying too much insurance or buying the wrong kinds of insurance.
It's helping you avoid products that are designed to be sold, not bought. It's helping you stay the course in a nasty bear market. This is the value of a financial advisor. This is what they provide for you. You want to get that at a fair price, but you want to make sure you're getting good advice.
A lot of times people walk into somebody they think is a financial advisor, someone who calls themselves a financial advisor, but in reality, they are just a financial salesperson. And that is not the same thing.
So, probably the best differentiator is the way that person gets paid. A financial advisor, a real financial advisor is paid fees. Just like you pay your attorney, just like you pay your accountant, just like you pay your doctor. They give you a service, you pay them a fee. That's called a fee only advisor.
There are also fee-based advisors. Fee-based is not the same thing as fee only. And a lot of people mistake those terms. I did as well, 20 plus years ago. And I made the mistake of hiring a fee-based advisor. Now what does fee-based means? It means they charge you fees, yes, but they also charge you commissions. I was paying mutual fund loads and I was paying a fee for the crummy advice I was getting.
I wasn't very happy about it. So I started educating myself. After a few years, I realized I was teaching more people than I was learning in that process. And decided to start the White Coat Investor. If I'd just been put in with a good advisor to start with, there might not be any White Coat Investor. So maybe some good came out of that bad, some lemonade out of those lemons. But that's the truth is you want a fee-only advisor.
We've been referring people to financial advisory firms for years. And I try to find the best ones we can. And sometimes they're not perfect. I don't love everything about the firm, but it's way better than all the other ones out there. And so we put them on our list. We refer people to them.
We refer a lot of people to financial advisors over the years, but that page has given me more angst than anything else we've done at the White Coat Investor over this time period.
And so, we've thought from time to time, “Well, what if we could make a difference in this space? What if we could bring this, for lack of a better term, in-house?” Then instead of having to worry about this person that maybe charges a little more than I think they should, or maybe somebody that doesn't, maybe they do a little bit of market timing on the side or something. What if we just created the firm that we want to see, that we want to refer people to? What if we just created it from the ground up? What would it look like?
And so, over the last couple of years, we've been working toward this, talking to different financial advisors, and talking to different people, and trying to put this in place. And we're now building it. We're building the firm I've always dreamed I could refer White Coat Investors to.
It's not quite ready for you to join as a client. But if you want to be on an email list, it's just for people who are interested in this, we can put you on an email list and let you know what's going on with it. And eventually, we're going to take clients.
But right now, we're still more in the preparation phase. We are hiring high quality financial planners. If you're an experienced planner, CFP, et cetera, especially if you have a CFP and a CSLP, some expertise in student loans, you're highly attracted to us. And we'd like you to come and help us in this important mission.
What can we offer these financial planners? Well, we offer you a job where you don't have to go looking for new clients. You're not coming into a sales job. Most people trying to hire financial planners, they want them to sell. I don't want you to sell products. I don't want you to be out there trying to hawk loaded mutual funds or commissioned insurance products. That's not what we want you to be doing. And it's not what you want to be doing.
Likewise, we don't want you out there beating the bushes trying to find new clients. We've got plenty of clients. There's hundreds of thousands of White Coat Investors and a significant percentage of them want a good financial advisor that will charge them a fair price. What we need is people to serve those good folks.
If you're interested in planning, if you're interested in helping, and if you're interested in meeting with people and helping them to manage their money and to do their financial planning, we want you. If you're interested in selling stuff, if you're interested in prospecting for new clients, you're probably not the person we're looking for. But what we find is the best financial planners have no interest in prospecting. They have no interest in selling. They just want to help people. And those are the kind of people we like.
So if you're interested in that, we want you to get in touch with us. Here's how to do it. If you're a financial planner, you're interested in helping us fulfill this mission, you're interested in doing this the right way, you're interested in a job, go to whitecoatinvestor.com/planner. Get the job description and information about how to apply.
If you're just, “This might work for me, or this might be the backup plan for me. I'm a do-it-yourselfer, but I want somebody to send my spouse. So I'm just interested in learning more about this, when you start taking clients, et cetera, I'd like to know about that. I'm just interested.” Go to whitecoatinvestor.com/interest. Put yourself on the list. We'll keep you advised of what's going on with the firm.
Obviously, we're going to be talking about this more going forward. At some point, we're going to open the doors and we're going to bring on clients. And it's going to be awesome. But we can't serve all the White Coat Investors at once. There's no way. So we're going to continue to refer people to the firms that we've been trusting for years. And we're going to continue to work with them to help meet this need for White Coat Investors.
I don't know that this firm can ever get big enough to serve all the White Coat Investors, but we're going to do the best we can to scale it and grow it while still treating you the right way while still doing financial planning the way it should be done, which is planning first and good advice at a fair price.
Thanks for your support in this effort. Obviously, some people don't like us doing anything different from what we've been doing over the years, but change is inevitable. And we think this is a change for the better. And we're excited to be offering this sort of a service to our community, because you guys are awesome and you deserve it.
Okay, let's take another question. This one's off the Speak Pipe.
REVENUE CREDITS
Ellie:
Hi, Dr. Dahle. My name is Ellie. I'm a resident from the Northeast. I have a question about taking revenue credits. My residency program provides a 403(b) plan through Fidelity. I was going through my records and saw that there was a revenue credit to a money market fund from about six months prior. And I'm wondering, what is revenue credit? What do I do with it if I do sell it to buy my original investment from my 403(b)? Would it be a taxable event or do I leave it where it is at this point? Thank you.
Dr. Jim Dahle:
Okay, we had to listen to this one a few times to figure out what you were asking about. But it sounds like you're asking about a revenue credit. Meaning you looked in your 401(k) account online or on a statement or something. There was a line on there that says “Revenue credit.”
This is not an investment in your account. This is an accounting term. So it's a line on there, probably in addition to the account. So now there's more money in the account than there was before. I think that's what we're talking about. If you look at the definition for a revenue credit, it's the revenue from the plan's investment funds, if any, that are held in the revenue credit account within the plan. And that remain after the payment of plan expenses.
So, periodically all revenue credits remain, if any, after the payment of plan expenses will be reallocated to all eligible plan participants existing accounts on an ongoing basis. What I think is going to happen is that this money that's listed there as a revenue credit at some point is going to be lumped in with the rest of your money.
I think it's just an accounting term basically in your retirement plan. I don't think this is an investment you can sell. And I don't know that it's yet money that you can invest, but I think that's what it is. It's just an accounting line in there. And I expect that that money is eventually going to be added to your account, but may not quite be there yet due to various reasons of how this plan runs.
I don't have any more information from you than that on it, but I think that'll give you an idea of what this thing is and why you see it on your statement. If somebody is an expert out there in revenue credits, feel free to shoot me an email and we'll update this in a future podcast. But as near as I can tell, that's what you're seeing and that's what we're talking about here.
Okay, next question is about stocks.
SIMPLIFYING AFTER DIRECT INDEXING
Speaker 2:
Hello, I'm a family medicine doctor in the Southwest. I recently transferred my Wealthfront Direct Investing into my Vanguard account. And now I have approximately about 500 individual stocks in my Vanguard account. I like to simplify things. I was wondering what's the best way to go about doing this transfer from the Direct Investing Wealthfront to the Vanguard. And this was a few months ago. Any suggestions would be great, thank you.
Dr. Jim Dahle:
Okay. Well, this is a little bit like the legacy investment issue we began this podcast with. Direct indexing. What is direct indexing? What are its benefits and what are the problems with it?
Direct indexing is a result of the fact that mutual funds can't pass losses through to you. When a mutual fund sells something at a loss, it retains that loss. It can use it to offset the fund's gains, but it can't send you the loss. You can't use that loss against your ordinary income. You can't use it against your other capital gains that you might have. It is just kept in the fund and the fund uses it. And that's a downside of the mutual fund structure.
What some smart people have been thinking about and doing the last few years is what's called direct indexing. And the goal of direct indexing is to give you an index fund return or as close to it as they can get while passing through those losses to you. So you can use those losses, essentially turbocharging your tax loss harvesting that you would do at the fund level. Now they're doing it at the stock level within the fund.
And that's cool. Who wouldn't want more losses that they can use against capital gains and against a little bit against ordinary income every year. So, it's not necessarily a bad thing, but there are a couple of downsides.
One, they usually don't track the index perfectly. Sometimes they're a little ahead of it. Sometimes they're a little behind it, but it's not a perfect index fund. So keep that in mind.
Another downside is they got to charge you something for it. They're doing all this work. You got 500 stocks there. They're basically running a mutual fund for you and you got to pay them to do that.
Now, when this first came out, people were paying 1% or 0.7% or 0.6% for this. I don't think it's worth that just to get a little bit of extra tax losses. I get plenty of tax losses just by tax loss harvesting at the fund or ETF level. But lately they've gotten the price down to about 10 basis points, 0.1%. At that level, I think you can make a case for it for lots of people, especially if you have a really good use for additional losses. Like if you're going to sell a business, like your practice or the White Coat Investor at some point in the future. Maybe more losses will help offset those capital gains and maybe you can justify the price.
The other downside about direct indexing is if you ever decide you don't want to do it anymore, in a lot of ways, it's a little bit of a whole lifelike commitment. You're committing to it for the rest of your life because it's a mess to clean up if you decide you don't want to do it anymore.
You were having this done at Wealthfront and decided you didn't want to have them do it anymore. So now in your brokerage account, you got the 500 stocks they bought for you because they were trying to create an S&P 500 index fund for you. So they're like, here you go, here's your stocks. You don't want us to do this anymore? You deal with it.
They have created a very complicated portfolio for you. And guess what? Now you're the portfolio manager. So if you want to clean it up and you want to put it all into a single index fund, you're going to have to sell 500 positions. I'm sorry, that's the way it works. And of course, a lot of these positions, because they've been tax loss harvested as you go and they've had gains, they have capital gains. You're going to have to pay.
Instead of just having one or two legacy investments that you're dealing with, like I have, you got 500 of them. Yeah, it's a big mess. So how do you do it? The easy way to do it is just bite the bullet. Sell them all. Get in there, start putting in sell orders. Most of them are probably pretty liquid. If they're S&P 500 kind of stocks, you can just put in market orders. Sell, sell, sell, sell, sell as you go along. You buy, buy, buy, buy, buy VTI or VOO or whatever your large cap US ETF of choice is. And you're swapping them.
And every time you do that with the capital gain, you're going to pay capital gains taxes. That's the easy way is just sell them. I say easy. You still got to put in 500 sell orders. And a certain number of buy orders, unless you're going to sell them all before you buy anything. And then you're kind of out of the market for a little bit.
But you may want to build around some of them. You may want to lessen the tax cost of doing this. So if that's the case, what do you want to do? Well, first of all, write them all down. 500 of them. I'm sorry you got so many of these, but write them all down. And all the ones that you have a loss on currently, well, you can sell those. There's no capital gains tax due on those. Anything that's very close to its basis that you have minimal gains on, you can sell those as well.
Now look at how many losses you have. You can use up some of those losses to sell some of the things with gains without any new tax bill due. And maybe you can get rid of 450 of these 500 stocks. Just by selling the losers, those who haven't gained much and selling enough of the winners that you can offset with the losses that you have. Presumably, you've got a bunch of losses if Wealthfront's been doing this for you for a while that can help offset some of these gains.
Then you can look at the last 25 or 50 or whatever of these things and decide whether you're going to build around them, whether you are going to sell some of them, whether you're going to use some of them for gifting to charity or to heirs or other people in lower tax brackets. And you can whittle your way down through those as best you can.
Obviously, turn off any dividend reinvestment. If you have any drip programs going, you want to shut those down because you don't want to make this problem any worse than it already is. But that's the way you deal with this. You've got a legacy investment issue. You got 500 of them and it's going to be a mess to clean up.
A warning for those of you who are interested in direct indexing that you may have this issue if you ever decide you don't want to do direct indexing anymore. But it is one of the downsides of doing it. It might be beneficial to you, especially now that costs have come down on it, but you better be sure you want to do a long-term in your taxable account.
SPONSOR
Dr. Jim Dahle:
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Milestones to Millionaire Transcript
INTRODUCTION
This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.
Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 245 – Physician aids her parents in buying their first car with cash.
This podcast is sponsored by Bob Bhayani of Protuity. He is an independent provider of disability insurance and planning solutions to the medical community in every state and a long-time White Coat Investor sponsor. He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies.
If you need to review your disability insurance coverage or to get this critical insurance in place, contact Bob at www.whitecoatinvestor.com/protuity. You can email [email protected] or you can also call (973) 771-9100.
All right, all of you out there getting new jobs this fall. All you PGY-3s or PGY-8s or PGY-17s, whatever. You're going out into the real world or maybe you're changing jobs. Get your contracts reviewed. I can't believe how many docs signed dumb contracts without actually knowing what they're signing. It does not cost very much to have your contract reviewed.
Go to whitecoatinvestor.com/contractreview. We've got a number of providers there. They're all great. They'll all tell you what you're signing, answer your questions, help you negotiate. They'll even negotiate for you. They might charge a little more to do that. They'll tell you what you're worth. They'll show you what other contracts they've been reviewing for people in your area and your specialty and give you an idea of what you're worth and what a fair price is. Not doing this is being penny wise and pound foolish. Please get your contracts reviewed.
All right, we have got a great interview today. I'm looking forward to this one. I think you're going to love it. We're going to talk a little bit afterward about helping your parents with their finances. We're going to get personal today. So let's have some fun.
INTERVIEW
Dr. Jim Dahle:
Our guest today on the Milestones to Millionaire podcast is Rebecca. Rebecca, welcome to the podcast.
Rebecca:
Thank you so much for having me. I’m excited to be here.
Dr. Jim Dahle:
Tell us about where you live in the country, what you do for a living, how far you are out of training, et cetera.
Rebecca:
Sure. I live in San Diego, California, which is a beautiful place to live, but definitely high cost of living. I graduated from training in 2022 and I do halftime research and then halftime maternal fetal medicine and clinical genetics.
Dr. Jim Dahle:
Okay, very cool. All right. Well, we have a unique milestone today. I don't think we've ever celebrated in 244 prior episodes. Tell us what milestone we're celebrating today.
Rebecca:
Sure. I helped my parents actually save enough money that when their car died, they were able to, with their own money, buy a car with cash. In their 75 and 76 years have never purchased anything larger than, I'd say, $500 to $1,000 with cash.
Dr. Jim Dahle:
Wow. Pretty awesome. We need some background information. Tell us about your parents. Are they immigrants? Did they grow up in relatively lower class circumstances? Tell us about your upbringing. Tell us the story. This is a super interesting story.
Rebecca:
I think most of your listeners will probably have read the Millionaire Next Door book or something associated in that family. And when I first read that, the thing that stood out to me is that my family is like the poster children for under accumulators of wealth.
I think my parents have made almost every big financial mistake that you can make. My dad definitely had a full life insurance policy. They were relatively high earners and had their own company, but I don't think really took advantage of most of the tax benefits and really didn't have thoughtful retirement savings. They had a trust from the sale of grandparents' houses and kind of used all of that. And whenever they got money in, they would spend it very quickly.
And so, I think I would say I didn't have a very good financial background in education. They're not immigrants. They came from families that were very low income and just didn't really have good financial education themselves and didn't have the support or education. They didn't go to college. They're both high school graduates. They really didn't have that good background.
Dr. Jim Dahle:
Okay. Well, let's turn the page now and tell us a little bit about your story, because coming out of this kind of upbringing you're a doc. At some point, something changed there education wise in your family. Tell us about that.
Rebecca:
Yeah I'm actually a very grateful first generation college student. I went to UCLA and I was very fortunate to have a full ride scholarship there. I didn't have educational debt coming out. And my whole goal was to go to college. I didn't have any other goal because that was something that was never previously attained in my family.
And then after college, I was in this weird spot where I was like, “Well, I did the thing. And now what do I do?” I loved genetics and I got a job in a hospital cytogenetic lab and kind of just followed different people around and really loved what the pediatric geneticist did. And I had really wonderful mentors. And so I decided to go to med school.
I went to med school without any plan to have any help in terms of finances. I went to a relatively expensive medical school and had to fund the whole thing on student loans. And then I think medical school, particularly when you're living on your own in a new place, is very expensive.
And I actually wound up getting consumer credit card debt, having a personal loan that I needed because of the need, I took out a residency relocation loan. I had a stupidly high interest rate. And then I was in residency and not making very much. And I had this consumer debt and this residency relocation loan. I was living in Boston, which is a really high cost of living area. And you're so busy as a resident and a fellow. I was just kind of playing an ostrich and getting worse and worse as opposed to better. And now with $500,000 of educational debt.
At some point, I read your book and I met with a financial planner and started to take some small steps and then had a small windfall of money from a relative dying in COVID in a terrible way that helped us wipe out what was ultimately a small amount of consumer debt. And then just started to slowly take the right steps.
Dr. Jim Dahle:
You started becoming financially literate, financially disciplined. Really, it sounds like after coming out of training. And at some point you turned your mind back toward your upbringing, toward your parents. And you decided I got to share these blessings with people I care about. Tell us about that process.
Rebecca:
Yeah, absolutely. I moved back to San Diego so that my three children could grow up with their grandparents despite not having the best financial background, the most wonderful, loving, phenomenal people who I think part of their problem is if they had two cents and they saw somebody who needed it, they would give it away. They're just wonderful people.
As somebody who now knows more about finances, I observed how they live their lives and just started to make small changes for them. I opened a separate Vanguard account and when their social security wage increase happened, but their cost of living didn't really rise that appreciably. I just asked their permission and created an account in their name and started transferring $200. They're the kind of people they like to see a certain amount in their accounts and they will change their behaviors so that they have that amount in their accounts.
Every time they were above that amount, I would just take it out and move it. And then they would slightly adjust their behavior, not in meaningful ways, but they wouldn't go out and get Thai food. They would eat at home. And little things, like I started buying them some groceries so that they would eat food at home more instead of going out because there were things that were made. Just small changes that really over the last few years have added up significantly. So that when the time came and they needed something, they had the money to do it.
Dr. Jim Dahle:
Awesome. Tell us about the car. The old car died or what happened?
Rebecca:
Yes. It wasn't even that old. It was like a 2012 Mazda. My dad was a mechanic, so I don't really know how this happened, but I think he never really got it serviced. I think he got oil changes but didn't actually have the transmission serviced. And so the transmission failed.
Dr. Jim Dahle:
In a 2012, when the transmission fails, it's total.
Rebecca:
Yeah, yeah. In a 2012 Honda, when the transmission fails, you're done. He had looked around and his neighbor got a new Hyundai and wanted to go get that car. I pulled out a calculator because his thought was, “It's only going to be $200 or $300 a month.” And I said, well, if you actually calculate that out over the life of the car, you're paying like $33,000 for that car. And I think that that's probably not worthwhile. That kind of broke his brain and he didn't even think of ever paying with a car for cash. And then I was like, “Well, you have $25,000 in this account. So let's go find you the right car.”
Dr. Jim Dahle:
Did you go car shopping with them or how'd that go?
Rebecca:
I went car shopping with them. I learned a lot about my dad's unique behavior preferences, but ultimately they got a used Toyota Corolla that they're very happy with. And I have a calendar invite in my calendar to remember when they're going to need to go get their car serviced.
Dr. Jim Dahle:
Did they spend the whole $25,000? How much did they end up spending?
Rebecca:
No, I think they wound up spending about $18,000.
Dr. Jim Dahle:
Okay. How did they feel having a car that was paid for? It sounds like maybe for the first time, at least the car right after they bought it.
Rebecca:
I think very uncomfortable. They're still trying to get used to it. They're in their mid to late seventies. They're creatures of habit. I think my mom is very grateful because she was worried about having a new payment every month. But they're having a great time. They're driving around the city with the windows down feeling like they're fancy.
Dr. Jim Dahle:
All right. Very cool. We talk a lot about changing your family tree and I think most people think about that and they think about their kids, the next generation, not the last generation. What inspired you to take a look at the last generation and see what you could do to help?
Rebecca:
I'm very grateful to my parents for so many things. I think they've worked very hard for their entire lives. They're getting older and their health and welfare in terms of both physical health and financial health, like ultimately I'm going to take responsibility for that because there's no way in the world that I would let them be in any sort of distress or need. Ultimately I'm going to pay for whatever is needed for them.
I suppose you could say it's selfish in a way that as I think about it, their financial welfare is ultimately my financial welfare too because I love them and care about them and I'm going to make sure they have anything that they need.
I don't necessarily trust their judgment and often think moving to San Diego is also helpful to make sure that I can help them do things that they need to do that are the best for them. And yeah, I suppose that's what I would think of with that.
And your kids, you hope that they grow up and make good choices, but they're unknown entities. You have lots of hope, but you don't have lots of data. And for my parents, I actually have lots of data and I know exactly what they're going to do in most situations. So it makes them far more predictable than my kids.
Dr. Jim Dahle:
Well, the interesting thing about this is you're at a place where you're having to balance. You're balancing your own financial life with their financial life. The classic Sandra's generation kind of situation. So, how have you found balance in how much you're using your financial resources, your income, et cetera, to help them versus getting yourself into a position where you can help more from position of strength?
Rebecca:
The interesting thing is they have a lot of pride and don't want for me to pay for things or do things for them, but they will get to the point that they need it. I see taking small measures after talking to them about it and advising it on them, advising things for them, really as increasing their autonomy and respecting their ability to take care of themselves as incredibly independent people. Both of them were on their own and didn't have any help from their parents from very early ages. So, it's something that they're very used to. And I think they don't ask for help, have never asked for help and probably won't ask for help. I'm just trying to preserve their independence as long as I can.
Dr. Jim Dahle:
Yeah, very cool. You haven't gone to the point where you have a dedicated savings account, this is my helping parents account or anything like that, or you haven't gone and bought them a long-term care insurance policy or anything like that?
Rebecca:
I think moving to San Diego and being very close to them and buying a house with a room on the first floor that is just dedicated. Currently it's an office, but it'll eventually be a grandparent room. I'd say we're self-insuring for long-term care insurance where we made lifestyle choices that will allow us to be there for them.
Dr. Jim Dahle:
And if at some point somebody has an illness and needs additional care, they probably will live with us and get that care as part of our day-to-day lives with a hired nurse or something. I have money saved, but I don't have a dedicated account for that.
All right. Well, what's next for you? You've accomplished something pretty cool here. What are you working on next in your life?
Rebecca:
Yeah. We have a projection for financial independence within the next 10 years. And so, I'm just tracking to make sure we're on track for that. And as illustrated with my parents, I automate a lot of things like our bank accounts really, our paychecks get split up into six different bank accounts so that we live in that same behavioral finance process that my parents do actually. And we're just chugging along. It's all automated. I don't have to pay attention to it. I check into it once in a while and make sure that we're in accordance with our written financial plan. And it's pretty easy.
Dr. Jim Dahle:
Preach it. I love it. I love it. Rebecca, you have done something incredible. You've got, not only have you helped your parents in a significant way, but you have managed after 244 prior Milestone to Millionaire episodes to come up with a new milestone we have never celebrated. Thank you so much for being willing to come on, be so vulnerable, talk about you and your family and inspire others to maybe look a little bit at the last generation and see what they can do to help. Thank you so much.
Rebecca:
Thank you so much. Thanks for all you do.
Dr. Jim Dahle:
All right. Great interview with Rebecca. That was a lot of fun. I love doing new milestones. I've got a set list of questions for each of the popular milestones. I had none for that one. So, it ends up just being completely conversational and that's always a lot of fun for me.
We don't mind new milestones. We'll celebrate whatever milestone you have and we'll pitch it and format it in some way that we can use it to help others to get closer to their own financial goals. But I promised you at the top of this podcast that we would talk about helping parents.
FINANCE 101: HELPING YOUR PARENTS WITH THEIR FINANCES
Dr. Jim Dahle:
Now, some of us are estranged from our parents. I get that. Maybe there was abuse or a relationship broke down. You feel no need whatsoever to help your parents. That's fine. But recognize that there is a significant portion, large percentage of the audience out there that we feel at least some amount of love and concern and care for our parents. And our parents sometimes are very good at finances. They're financially literate, et cetera. But I would say it's more common that we're the first ones in our generation, not only with our income but with our level of financial literacy.
So, it doesn't take much to be able to provide a lot of help when you're not only in the financial position that most White Coat Investors are in, but you have a level of financial literacy that most White Coat Investors have.
When I first became financially literate, the first people I started thinking about was my parents. And it turned out as we dove into it, that they were overpaying for terrible financial advice. I can't remember what the asset under management fee was. My recollection is it was 2% or something like that. And what was this “financial advisor” doing? It was dumping my, he was dumping my parents into individual stocks and high expense ratio mutual funds and all this bizarre stuff.
It was interesting because the conversations I had with my parents were, “Well, what if you just bought all the stocks? What if you just dumped it into index funds? How much would you have now instead of what you have?”
Investing was relatively new to them. My dad worked primarily for a pension throughout his career. It wasn't until he was kind of retiring from his public job and doing similar work as an independent contractor that it really started getting paid more and putting money away for retirement. They're still mostly retired on that pension and social security, but they were able to build a nest egg in those last few years of his career, which has continued to compound since.
But I kind of came along at the very beginning of this nest egg building process. He was still making contributions at that point. I was in residency. I just become financially literate. And I'm like, “What is going on here?” And so, we talked about it. We did some financial education, and over the course of two or three years, they decided, “Okay, we're going to quit paying this guy 2% or whatever a year to underperform the market. And we're just going to get the market returns and not pay anything.”
And so, I helped with that process, helped them to manage money using a pretty simple, even simpler than my asset allocation investment plan, all at Vanguard. And they've followed that since. It's been more than 20 years now. They've been following this investment plan. Their money has continued to grow. They're paying almost nothing in investment expenses.
And frankly, it's super easy to manage their portfolio. I go in there once a year, literally for less than 20 minutes and we rebalance the account and take their RMD. That's it. In fact, usually they just reinvest the RMD in the taxable account that was started when they started taking RMDs.
This year, I've finally managed to talk them into spending some of it. They're doing a renovation, which I think is great. And they're doing well from that perspective. But it has made a significant difference, not only in how much wealth they have, but in how much comfort they feel. Because not only do they have somebody they know cares about them watching over this stuff, but they know that they're not doing anything stupid with their money, which I think hangs over a lot of our heads until we become financially literate.
Now, do they love this stuff like I do? No, I got them to read like one financial book. That was it. Are they capable of being DIY investors? Probably not. Are they capable of understanding what we're doing and stay in the course of the plan? Absolutely.
In fact, I had a conversation with them recently. They turned 80 this year. I had a conversation with them recently. And they're like, “You know what? We had that fraud issue with the bank account a couple of years ago. We don't even really want to be directly accessing our investment account. We want to make sure we're going through you anytime we're pulling money out.”
I'm like, “Well, that's a real vote of confidence that they feel that way about me.” And I don't mind doing that. It's super easy for me to help them transfer money back. In fact, we had to relink a bank account. It turned out they hadn't taken any money out of their investing account in a couple of years. And so we had relinked the bank account to their investment account. But it's something that we can do for our parents.
Now, be very careful doing this. When you are inserting yourself into your parents' finances, not only is there a certain level of responsibility there to make sure you're doing it right, but your siblings better be okay with it or any other heirs to this estate better be okay with it. You got to better have a good relationship there and some trust there.
Sometimes the best money spent is to hire them a real professional financial planner and investment manager so you're not getting into trouble with your siblings that they think you're doing something underhanded or worse, they're blaming you for terrible investment performance your parents had because you decided to put it all in NVIDIA and NVIDIA crashed or something. Who knows.
Be a little bit conservative. Don't take a payment for what you're doing if this is the sort of thing you're comfortable doing with your family and make sure everybody else knows what's going on. This isn't some sort of one thing being done in the back room behind everybody's back.
Other ways you can help your parents. Maybe you can help them to buy a car like in Rebecca's situation. Maybe you can help them to sort through their various insurance policies. Maybe there's a long term care insurance policy or there's a health insurance policy or something that you can help them to sort through. Maybe you can help them decide when they need to stop driving, when they need to stop flying. In the case of my dad these sorts of issues that you run into as you get older.
Because for all of us, there's these questions. What do we do when we're not competent to manage our own financial or physical or whatever affairs? Who's going to be helping us with that? There's a lot of ways you can help your parents to prepare for those moments. And if you recognize that they're not prepared at all, maybe this can be one of your financial goals that you're working toward. Maybe you can put a little bit of money aside, knowing that, of course, you're going to help your parents and now you have the means to do so.
It is far easier to help from a position of strength. It's way easier to pull somebody up onto a ledge than it is to push them up onto a ledge. And so, keep that in mind as you go through your own financial life and it intertwines with those of not only your children, but of your parents. I hope that's helpful to you.
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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.
Guess I had never considered this, but of course it’s simple- if I give my kid $10,000 or $100,000 of Apple stock they don’t step up the basis, but they can sell it and pay their tax rate not mine, and all I need to do is make the ownership transfer legit and declare any amount over the gift tax exemption on a gift tax form. So if I choose to sell Apple stock to give my kid $100,000 I can maybe save my 15 or 20% cap gain and let them pay their 15 or 0% cap gain. Don’t actually know my kids’ cap gain rates but I expect it may be 0% for at least one of them.
Hmm, they and we are probably all 15%. Do they have to hold it for a year after the gift to pay only long term cap gain tax rates?
After ~$2,600/year, they will pay tax at your rate, See https://www.whitecoatinvestor.com/kiddie-tax/
I believe her children are already adults, so the kiddie tax won’t apply.
No. It just has to be owned for more than a year.
Hey Jim, do you recommend reading “The Value of Debt” or “The Value of Debt in Building Wealth?”
I got an AI overview as follows: the first book (2013) is a bit denser and lays out the core principles to a sophisticated audience whereas the second book (2017) is more approachable and has an actionable framework for “younger” investors. Did you read one or the other?
Maybe I’ll read both…