Roth IRAs and 529s

Transcription – WCI – 451

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 451.

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.

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All right, it's good to be back with you. I had a wonderful Thanksgiving trip to Hawaii, and now I'm back and it's time to work. So let's get some work done today. I think I'm spending like five hours today in front of the camera. I had a presentation this morning to University of Arizona Emergency Medicine Residency. I think tomorrow I'm going up to the University of Utah and doing a live presentation. And then this is my third or fourth podcast we're recording today.

So lots of work for us today, but that's all for your benefit. I think this drops on Christmas day actually is when this podcast is scheduled to drop. Merry Christmas to all of you that celebrate Christmas.

 

WHEN TO TAKE SOCIAL SECURITY

Dr. Jim Dahle:
All right, let's talk about a couple of things I've been thinking about a lot lately.The first one was a discussion I listened to actually on another podcast with David Bach, who we're actually trying to get on the White Coat Investor podcast. I think we'll get him on here in the next few weeks. He's the author of Automatic Millionaire, if you've read that book or heard of that book. But he was having a discussion on a podcast and arguing for taking Social Security at 62 unless you really need it.

Now he admits that if you really need Social Security, if this is a big piece of your retirement puzzle, that you still probably ought to wait till 70 if you can, even if it means spending other assets. Because that's the financially optimal way, the mathematically optimal way to live your financial life in retirement, having that inflation indexed money that will last as long as you live, provide serious longevity and inflation risk that should not be discounted.

But he was arguing to take it at 62, the first moment you can. And his argument was primarily behaviorally based. His argument was that people just have the hardest time spending their money, which I think is very true. I see it in all kinds of White Coat Investors. I see it in family members, that people don't want to take money, the worst is out of their tax deferred accounts. Because then they have to pay taxes, not just taxes, but taxes at ordinary income tax rates.

And that maybe you ought to do whatever you can, whatever it takes to get you to actually spend your money in retirement. Because so many people struggle with this. It's really hard. Anything you can do behaviorally that helps you to do that, maybe isn't a bad thing, including taking Social Security early, because it's now income. It feels like a paycheck that you can spend.

And so, you're more likely to spend it than you are to sell some assets in your taxable account that you have to pay capital gains taxes on, or to pull money out of your IRA that you're going to pay ordinary income taxes on, or to burn Roth money that you want to let grow in Roth forever and leave it to your kids and let it grow even more, just helps you to spend a little bit more money. And maybe he's got a halfway decent point there, that spending money is not that easy. It's hard for a lot of us.

Maybe a better strategy is to get used to spending money that you saved earlier in life, getting used to selling appreciated assets in your taxable account, getting used to pulling money out of tax deferred accounts.

Here's a couple of ways you can do it. Just like the best trial run for saving up that big nest egg you need to retire on is paying off your student loans within just a few years.

It's a great trial run if you can have the financial literacy and discipline to wipe out your student loans in two years, you're probably not going to have any trouble saving up a nest egg in 15 or 20 years that you can retire on.

But just like that, 529s, college saving and spending is maybe the best trial run for getting used to spending assets that you saved up for a specific purpose for many years, and now it's time to spend them. Right now I'm spending from, I don't know, six or seven 529s. I've got nieces and nephews and a couple of my kids in college. We've got, I think we started with 35, we're down to 33, because two of them have been cleaned out and closed. 33 529s that we've been funding for years for these nieces and nephews, and now they're spending from as they get into college.

It's a great trial run psychologically, behaviorally for us to go, this is what we saved the money for, now it's time to spend it. And so, almost every week, I'm pulling money out of 529s. They text me, “Hey, I need $1,001.92, and I just sent you the receipts.” And so I Venmo them $1,001.92, and I pull $1,001.92 out of the 529. I'm not only putting money into 529s right now, I'm taking money out of 529s. But it's great practice, a great trial run for spending money in retirement. I think it'll be easier for me because I'm doing that.

Another method might be spending your HSA money. We've invested lots of money in an HSA. I don't know what it is today, but it's like a quarter million dollars we've have in an HSA. It's time to be spending the money. It's not a great account to leave to anybody. It's a great account for you to actually spend during your life. So now we're spending from our HSA.

And in fact, as I'll mention later in the podcast, this saving receipts thing in your HSA may not be something that's going to go long term. Maybe start spending from your HSAs just for the behavioral aspect of being able to get used to spending money that you saved up for later in your life.

Maybe giving does that in a way. You take money that you save for a long time, you transfer it to your donor advised fund, and then you start distributing it. This is a great trial run for getting used to using that money. And even outside of charitable giving, giving money that you saved up for a long time so you can help somebody you care about is a great trial run for getting used to spending your money.

But recognize this is a big problem for a lot of people. Most people that get to retirement are having trouble spending their money. If you do what we tell you here at the White Coat Investor, and you save up 20% of your income over the years, and you invest it in some reasonable way, and so you're retiring as a financially independent multimillionaire, you're probably going to have trouble spending that money.

Start thinking now about how you're going to do that. It doesn't mean you should spend all your money now and not save anything for retirement. You have to take care of future you, too, but recognize that this is something that you may struggle with.

 

FINANCIAL CALCULATIONS WHEN YOU DON'T WORK A TYPICAL LENGTH CAREER

Dr. Jim Dahle:
The other thing I've been thinking about a lot lately, and especially as I gave that talk to those emergency medicine residents this morning, is that we all assume when we run these financial projections that we're going to be able to work for 30 years. And as I've looked around my own group of emergency physicians and other data for emergency physicians as well as other physicians, there are an awful lot of people that don't make it to 30 years in their career.

One of my partners, I don't think she's been a partner more than four or five years, just let us know she was retiring from emergency medicine. One of the best docs in my residency class, she punched out emergency medicine five or six years as well. There are a lot of people that don't make it 30 years. The burnout rates are very high. They're 50%-ish in most specialties. And other things happen, you get disabled, or you have to take another role in life, maybe you go part time, or you're in a caretaker role, you have to take care of a parent or whatever.

There's lots of reasons why people don't make it to 30 years. Think about that. You may need to get pretty darn close to financial independence a lot earlier than 30 years, maybe in just 15 or 20 years. It's a good reason to have that live like a resident period early in your career, get your finances taken care of upfront, and recognize that while some docs do make it 30 years, the majority, particularly in a specialty like emergency medicine, don't.

As I look at the partners that have left my group in the last 15 years or are still here that were here when I got here, I think only two out of the 10 or 12 that have left the group practiced emergency medicine for 30 years in any sort of a full time manner. And one of those isn't even full time and hasn't been full time for a long time.

And so recognize that you might have to accelerate your wealth building process a little bit, which likely means a pretty high savings rate, at least in the beginning, and getting your ducks in a row as soon as you can. Let compound interest be your friend. Let compound interest help you build that wealth that you're going to need. Take care of yourself knows you care about later in life. And then once you have it, don't be afraid to spend it.

Okay, we started something, we had tried to keep a page of discounts for doctors and other healthcare workers for years. And it just became really, really hard to do. People kept emailing us right after we ran the post telling us about more discounts, of course, and then we can send those out. And a bunch of the discounts would expire every year, and we'd still have them on the page, it was just really hard to maintain.

We had a company that came to us and said “We're kind of in this business, and we can probably do this better than you can, and make a win-win-win situation. It's a win for them. It's a win for us. You're a White Coat Investor, and it's a win for you. Because you get more discounts, better discounts and an updated list of discounts.”

We're calling it WCI Healthcare Perks. It's powered by a team at Wizard Perks. And together with us, we've taken all the deals we used to have on that page, every one of them that still exists, and we have run them through Wizard Perks. On behalf of physicians, other medical professionals, these are the lowest discounts we know of that are available to you that you'll find anywhere. You'll find the most significant ones in categories like travel, and your phone bills. Seriously, you could cut 50% or more of the cost of your cell phone bill for your family. But there's plenty more.

So, it's worth a quick look, see if there's something you already use, it could cost you less. But go here first before your next purchase, go to whitecoatinvestor.com/discounts, and check it out.

When I just went to look for a post I was doing about, I went and looked for a hotel in Park City, and the discount was like two thirds or three quarters off. It was pretty impressive how big the discount was. So you might as well check it out. It only takes you a couple of minutes to see if you can save a bunch of money. And then you can spend that money on something else. Or you can save it for retirement. Or you can give it away, whatever. But the bottom line is don't pay more than you have to, especially if it only takes a couple of minutes to get a substantial discount on what you're paid.

Okay, we're taking a lot of your questions today. I don't know if we've run out of Speak Pipe questions or what, or I think maybe I've just been sending Megan a lot of really great emails you guys are sending in. But we're doing mostly email questions today. If you want to leave us questions on the Speak Pipe, I think the audience likes hearing from you directly. You can do that at whitecoatinvestor.com/speakpipe.

 

ROTH CONVERSIONS WITHIN THE TSP

Dr. Jim Dahle:
But this came in just like last week. It says, “I hope you're well. I was hoping you could speak to the upcoming Roth conversions within the TSP, the Thrift Savings Plan, the federal government, and how this differs from typical backdoor Roth conversions outside the federal government in regards to the financial implications more so than the process of doing the conversion.”

Okay. Well, it's cool that the Roth TSP or the TSP is offering in-plan Roth conversions now. They should have done this 15 years ago. They're like one of the last 401(k)s in the country to do this. A little embarrassing for the TSP, they've always been a little slow to adapt new stuff, which is sometimes a good thing. But in this case, not a good thing.

They should have done this a long time ago. They should have done this when I was making tax-exempt contributions when I deployed back in 2007, so I could convert them to a Roth. Instead, I had to wait until I got out in 2010, do this complicated maneuver to isolate my basis by pulling almost everything out of the TSP into an IRA and then rolling the tax-deferred money back into the TSP and converting what was left behind. Well, now you can just do the conversion within the TSP. So thank you, TSP folks, for finally doing this. You're way behind the times.

But many, many 401(k)s offer this sort of a thing. This is one of the required steps to do a mega backdoor Roth in your 401(k). So you got to make an after-tax contribution of some kind, and then you got to do an in-plan conversion of that money. Well, sometimes people might want to do a Roth conversion in the plan anyway, even if they're doing tax-deferred conversions.

For those, unlike a mega backdoor Roth or the typical backdoor Roth IRA that you do in an IRA, not your 401(k), there's a tax bill. If it's pre-tax money, you got to pay the tax bill when you convert it to a Roth. If it's after-tax money, like what you're doing in the backdoor Roth IRA process or what you're doing in the mega backdoor Roth IRA process in your 401(k), there's no tax cost to that.

Yeah, this is a good thing. I'm happy to see the TSP doing it. But if you can't get tax-exempt money in there or after-tax money of some kind, it's not a super useful mega backdoor Roth option, but better to have the option than not to have it. Certainly, those military members who have tax-exempt money in there from deployments can do Roth conversions, and other people might want to do Roth conversions that will have to pay a tax bill on. But yeah, this is a good thing for those of you who aren't aware of it. Check it out.

But it's really the same thing you do outside of a 401(k) or the TSP. You're just taking money that was pre-tax and you're making it Roth. You got to pay the tax bill. So it's just a Roth conversion. If it makes sense to do it, it might make sense to do it now during your career.

And just be aware that whether you do those conversions or whether you make Roth or traditional contributions is like the hardest question in personal finance and investing. It relies on so many unknown variables that you can't know for years. Like what your tax rate is when you pull the money out. Who's actually going to pull the money out? It might not be you. It might be charity or it might be one of your family members in a higher or a lower bracket. How will tax rates change between now and then? What kind of returns will you have on the money between now and then?

There's just so many variables in it. It's hard to get it exactly right, but it's worth spending some time thinking about and trying to get as right as you can. But don't beat yourself up if you don't do it exactly right, because most of us don't at every point during our career. Good on TSP. Thank you for doing that. Finally, TSP board or whoever makes those decisions. You're a little late, but you got it right eventually.

 

QUOTE OF THE DAY

Dr. Jim Dahle:
Our quote of the day comes from Owen Feltham, who said, “The greatest results in life are usually attained by common sense and perseverance.” And that's what we're trying to preach here at the White Coat Investor. Common sense, personal finance techniques, common sense investing techniques, and staying the course, being persevering through the market ups, market downs over the years.

 

BACKDOOR ROTH AND ROTH CONVERSIONS

Dr. Jim Dahle:
Our next email comes in, and this one's about the backdoor Roth. We're going to have a lot more of these questions, I suspect in the next couple of months on the podcast, we're getting the backdoor Roth season, which is usually the beginning of the year. Remember there is a tutorial on the website. You go search backdoor Roth IRA on the website. Every question you can ever ask about the backdoor Roth has been answered in that blog post. So check it out.

All right. This question is “My wife and I are 29 years old. I'm three years away from anesthesia attending income. And my wife and I are trying to decide how to handle her traditional IRA. It's valued at $165,000.” Wow. That's pretty awesome to be still in training and only 29 and already have $165,000 in there. I'm assuming that's from her career. Pretty cool.

“She's planning on staying home starting in January to be with our new baby girl. So our income will be much lower next year. And if we're going to convert the traditional IRA to Roth, next year would probably be the best time to do it. If we want to contribute to the backdoor Roth IRA. Can the tax out on the conversion be paid from the traditional IRA itself, or do we have to pay that with cash from our emergency fund? I'm honestly not sure we'd have enough cash on hand to cover that tax bill. Any advice is appreciated.”

Okay. Great question. Great situation to be in. And obviously doing Roth conversions in years when your income is lower and thus your tax bracket is lower can be a pretty smart move. Yes, that bill can be paid from the IRA. It's best not to, if you can. But you don't have to convert the whole thing this year or even at all.

This is a good thing to do, but there's so many good uses for money at this stage of your career. This might not be the best one. You just have to weigh them all and decide which ones to spend your limited cash and income on.

I guess the question is, “Do you do $165,000 conversion now less the tax bill using only the retirement money?” I think I probably wouldn't do that. I think I'd spread as big of a conversion as I can afford over at least a couple of years to keep the whole conversion in a lower bracket. And maybe that'll allow you to use a little more cash and less of the IRA money to pay the bill.

Keep in mind also that the money you pull out and use to pay the taxes is subject to the 10% early withdrawal penalty too. So it still has to make sense, even with that additional 10% penalty in addition. So, keep that in mind as you weigh this. Ideally, you will just do as much as you have cash to cover the tax bill for or can come up with the cash.

Keep in mind a lot of times you can wait till next April to pay this tax bill. There might be a slight penalty associated with that, but you've got until April to pay it. And for most of us, as we move forward throughout our careers, income goes up and up and up in the first few years. And so it can be easier to pay that tax bill in nine months than it is right now. Keep that in mind as you weigh these decisions.

The other thing to keep in mind is she could just open a separate IRA and make after-tax contributions to it now so she can get her backdoor Roth IRA process started and do the conversion on that later after taking care of this other IRA. Maybe she can roll it into a solo 401(k) later, or she'll go back to work and have an employer 401(k), or maybe you'll have more money that you can pay the conversion tax bill later. Lots of things you can do to preserve the ability to optimize and max out that tax-free space.

All right, we're going to bring one of our sponsors on for a minute and discuss some ways to reduce tax bills.

 

INTERVIEW WITH FOX & COMPANY CPAs

Dr. Jim Dahle:
Today on the White Coat Investor Podcast, we have Laura Clifford, CPA. She is the president of Fox & Company CPAs. Laura, welcome to the podcast.

Laura:
Thank you. It's good to be here.

Dr. Jim Dahle:
Now, we've here at White Coat Investor, we've been working with Fox & Company for I don't know how many years. It might be more than a decade. It's been a long time.

Laura:
Yeah, it is. It's definitely getting there.

Dr. Jim Dahle:
I think a lot of your clients are White Coat Investors. And so, the unique aspects of a physician's financial life is not different or unique at all to your firm. Tell us a little bit why you guys decided that doctors were your thing and helping doctors to get control of their finances and their tax situation was what was going to drive your business.

Laura:
Yeah, absolutely. Our firm has existed for quite a long time. Joanna Turner, who's my partner currently, she had operated a small firm here in Mayfield, Kentucky, but had gotten into financial planning space as well. And essentially, as she tried to figure out a little bit more about what market might work best for serving clients on that firm, it eventually led to physicians and led to us developing our tax services for physicians.

For us, it's great to work with clients who care a lot about their financial lives and want to make changes so that when we make recommendations, they actually follow through with them, which I think is a little bit different than maybe what we've been through with some other clients in the past.

And so, that's really great to be able to make recommendations, have clients decide to move forward with those changes, and then also just stay challenged by the high-quality clients that we do receive from typically White Coat Investor referrals.

Dr. Jim Dahle:
Yeah. Well, there's a number of things, but being interacting with the White Coat Investor community for so long, you've realized doctors care about transparency of pricing, they like flat fee pricing, and they want more than just tax preparation. Tell us how you guys structured your firm and your fee structure to be able to provide all of that.

Laura:
Sure. Some of those things go right in line with kind of the firm we already were before. Like you said, about a decade ago, we got into working primarily with physicians. We were already doing flat fee before that point. We were already doing fixed price agreements every year so that clients knew upfront what that would look like and what they would pay for their tax preparation service, and already had a little bit of planning involved in that. We wanted clients to be able to ask questions.

But really, after working with physicians for so long, we've learned that it is really great to have those projection services, to have those additional things that we can provide throughout the year so that they can get their questions answered on a timely manner when it matters to make a decision, and they're able to change and have time to implement strategies or make a difference in their situation.

And we also, as far as pricing, are very upfront about what our fees look like. We do have that all posted on our website so that prospective clients can know before they meet with us whether it fits within their budget, it fits within what they're looking for. So we do have that all up already provided.

Dr. Jim Dahle:
Yeah, one of the things I like about your fee structure is you divide people up into tiers. The example of the tiers kind of demonstrate the complexity of the situations. And it's a good way for doctors to think about what's my situation, how complicated is it? For example your tier one's primarily a W-2 income. Maybe they have a Schedule C for their side hustle, and maybe they have one rental property or instead of that Schedule C, or maybe they have one K-1 instead of that Schedule C, and that's kind of tier one.

And you work your way through those. The next one you have two or three rental properties or two or three K-1s. And then the next section, you start having some 1099 income in tier three. In tier four, you're dealing with real estate professional status. You're trying to qualify for the short-term rental loophole. And then you get to tier five where you've got multiple state returns and a dozen K-1s, et cetera, where things are starting to get complicated. And I can certainly relate to tier five. That's what drove me from being a DIY tax preparer was when I entered tier five, and I couldn't figure out which states I had to file in. So I get it, for sure.

Laura:
Yeah, absolutely. And we do a little bit of combination there, whereas people's situations get more complex. We do have those example situations out there, but we do have clients that even go above that point where that it can kind of build on it. But like I said, it does allow clients to know when we're meeting with them in the prospect phase to know where I might fit and kind of have an idea before they even meet with us.

And then all of those clients do get the same service. So, it is just all based on complexity on that personal side of things, where you do have obviously your tax return preparation. That's a very key part, but it's only a piece of what we're doing. Those projections that we offer at the mid-year point and the end of your point, all clients receive those. And we are pretty standard in having all clients be a part of those projections. They don't have to participate, but we definitely offer them to everyone and want them to take advantage because that does avoid any surprises when it comes to filing your return in April, if you've already done some planning before earlier in the year.

Dr. Jim Dahle:
Yeah, for sure. The planning becomes more critical. A lot of people have this mistaken idea out there that the way you lower your taxes is by filing your tax returns differently. You just got to get the right tax person and you'll pay less in taxes rather than the truth, which is that your tax bill changes depending on how you're living your financial life. If you want to lower your tax bill, buy a house with a mortgage and give money to charity and form a business, save for retirement and save for healthcare and these other things that really can allow you to lower your tax bill.

Now, most doctors out there think that they're paying too much in taxes. Is it true? Are most of them paying too much in taxes? Should they be paying less?

Laura:
By the time a client comes to us and are looking at their situation, a lot of times they're already doing the main things that they should be doing as far as retirement savings, that sort of thing. But I would say probably the average population is paying more than they should in taxes because they don't know about the different strategies.

But because people are coming from the White Coat Investor, a lot of times they already do know these things, but we're able to just kind of pinpoint which items are most relevant to that client's particular situation. Instead of muddling through all of the various financial topics that are out there, kind of pinpoint which ones go best with their situation to help them to save in taxes and pay the minimum that they need to based on the current set of rules.

Dr. Jim Dahle:
Yeah. Now, Joanna, your partner has referred to some techniques people use as an audit lottery. How do you decide whether a technique is just an audit lottery strategy versus something that you'd feel comfortable defending in an audit?

Laura:
Sure. When it comes to what we're going to put on a return, that is going to be anything that we feel like we can back up at an audit where you have the records to stand behind that. And so especially in some of the areas that a lot of prospective clients are looking at, such as the short-term rentals or real estate professional status, it's making sure that you have your hour logs, you have the different things you need for your expenses and those expense, our requirements, that goes across everything, not just rentals, but also businesses as well.

And so making sure that you have the backup, have the records that the IRS would ever look at. And as far as taking that other step and putting things on your return that you shouldn't be, typically that's going to be thinking, “Oh, well, if I just sub this number in and I don't have backup for it, but I don't necessarily, it's not too large, the IRS won't ever find it.” And that may be true. They have their systems for how they look at things, but anything that we're going to put on a return is going to pass the test that it would be defendable if it was ever audited.

Dr. Jim Dahle:
What are the biggest tax mistakes you see doctors making?

Laura:
Sure. I would say that when it comes to the biggest single item that is able to be written off on your return, it is your retirement contributions. If someone doesn't understand what they're able to do, if they've added 299 income and they don't understand how to do a solo 401(k) and what their contributions would look like, or if they've started a new job and didn't look into that fully, they are missing a pretty big deduction. Because that is going to be usually the largest deduction that someone's going to get is doing pre-tax retirement contributions.

But as far as a DIY, done your return yourself before. The most common thing that clients kind of miss and we end up having to fix is either related to their backdoor Roth. So they're trying to do that, but they don't fully understand how to report that correctly on their 8606. Or if they have a rental property, not doing the depreciation correctly. Those are definitely a couple things that when you're preparing your return yourself, we do see mistakes on those.

Dr. Jim Dahle:
Yeah. Now looking at your website right now, it mentions that you don't really take new clients as tax season is coming up and throughout tax season. It sounds like you actually take new clients mostly during the summer months. Explain how that works with the wait list and all that.

Laura:
Yeah, absolutely. We do. Because of the number of people who have wanted to work with us over the years and us wanting to stay high quality in the services that we provide. We did make the choice to only open to new clients in the summer, which is in our less busy time where we're not in the midst of tax season, trying to onboard someone.

It also seems to work pretty well with physicians. We definitely get a lot of people come on our wait list throughout the year, but a lot of people are looking for services in the summer. Maybe they have either are transitioning out of residency and are looking for something for their first attending job. Or sometimes even down the road, a few years later, you're still making changes to your employment in the summer months, maybe because it's tied to that original start date that you had.

Also, sometimes people have had a bad experience with their return preparer and realize, “Okay, I want to do something better. I want to plan more. Maybe I owed a lot of money on this return I previously filed in April, and I want to figure out how not to do that again next year.” And so, that works really well for clients to talk with us and meet with us for an initial consultation during those months. But anyone who is interested in our services can join our wait list at any time, and that way they'll be notified first when we do open up to new clients.

Dr. Jim Dahle:
Would that work for someone that filed an extension for the prior year's return and came to you mid-summer for help with that?

Laura:
It actually does, yeah. We do have some clients join at that point, and we do file those extended returns. And our fee structure for that actually is on the website as well.

Dr. Jim Dahle:
Yeah, very cool. Well, we've been talking now here with Laura Clifford. She's a CPA. She is the president of Fox & Company CPAs. If people want to learn more about Fox & Company, where's the best place to do that?

Laura:
Yeah, absolutely. Our website has all the information that we've been talking about today, and that website is fox-cpas.com.

Dr. Jim Dahle:
Thank you very much. Appreciate your time, Laura.

Laura:
Thank you.

Dr. Jim Dahle:
Okay, I hope that information was helpful to you in figuring out some ways you can lower your tax bill. Let's get into another question. This one's about 529s. Comes in by email.

 

SOLUTIONS FOR AN OVERFUNDED 529

Emailer:
“My daughter is graduating from college, and because of the stock market…” It's the stock market's fault. “We have too much in our 529. I was researching options. I know I can roll it over to my other kid or do the Roth, etc.” That's $35,000 a year. You can move into the kid's Roth if the account's been open for at least 15 years.

“I started exploring even other things and found some new provisions under the OBBBA law for 529s. I was hoping if you could help clarify things. It sounds like it can now be used for credentialing, licensing, and even CME as long as it is a credentialed organization.

My questions are, can I open an account, roll some of the money to me as a beneficiary, and then reimburse myself for required CME or conference fees, or even my state license, etc? I'm a member of ABEM, etc. Can I then still write it off as business expense, tax-free growth, plus a tax write-off? That seems too good to be true. How do we find out what the credentialed organizations are?

Also, my husband's in real estate, and I know many physicians also have a real estate license, so can that also be covered? Including the MLS fees, etc. We both have 1099 incomes, so we're always looking for different options, tax breaks, etc.”

Dr. Jim Dahle:
Okay, let's talk a little bit about this. When you're starting to get into these more complex techniques, it might be worth hiring a tax strategist like the Fox organization that we just had on the podcast. But let's answer the questions that came in.

First, can you do this? Can you change the beneficiary to you, from your kid to you? Absolutely, you can. You can do that. Then you have to be able to spend the money in an approved way, an approved 529 expense, or when you pull it out, you allow ordinary income tax on the gains, plus the penalty. 10% penalty. It's bad. You don't want to pull it out and use it for something that's not an approved expense.

What are approved expenses? Well, if you go back and get a degree, that's approved. Even if you go and take a class, like a cooking class. If it's from an institution that is approved to use federal student loans for, you can use 529 money and use it for that.

The new thing though, with the One Big Beautiful Bill Act, was that continuing professional education is now something that 529 money can be used for. So it's not that complicated. It just has to be an organization that's approved for it.

Now, I've been told that ABEM, the American Board of Emergency Medicine, is one of those approved organizations. So hopefully lots of CME providing organizations will soon be approved. But otherwise, it's going to be universities and those sorts of organizations that are approved to use that.

I've got a link. It's basically studentaid.gov/fafsa-apply/colleges that lists all those schools that are approved for 529 expenses. And you can use that to see if your 529 expenses might be eligible.

But all this other stuff, your state licensing fee, your DEA fee, your stethoscope and your white coat. No, that stuff's not a 529 eligible expense. It's a business expense. You can write it off as a business expense if you're 1099, but you can't use CME money to pay for it. And no, you can't do both. You can't pay for your CME with 529 money and then write it off as a business expense. It's one or the other. That's called double dipping. It is definitely not allowed. So keep that in mind.

Now, real estate license, again, that's not a continuing education thing. That's a license. Your MLS fees, that's not a continuing education thing. 529s are for education. And even with the changes in the OBBBA, you can't just use 529s willy-nilly for whatever. It still has to pay for education. It's just they've broadened the definition of what education is to include your continuing education for your profession. I hope that's helpful and answers that question.

I guess if you're going to find a continuing education for real estate folks coming from a university or other approved provider, then that could probably work. But otherwise, I think this is going to be maybe a way to get rid of an overfunded 529 for lots of docs that they can burn some CME money.

But the big problem is I see people putting a gazillion dollars into 529s. They're all convinced their kid's going to go to Harvard and then go to dental school. And so they need $600,000 in their 529. And then they're shocked when the kid goes to the state university and that's it. And all of a sudden, now you've got an extra three quarters of a million dollars in a 529. You're not going to burn through that with a CME fund. You're not going to burn through that putting $35,000 into your kid's Roth IRA. You've now got this huge legacy 529. And I hope that kid has grandkids and a lot of them because give it another 30 years to grow, you're going to have an awful lot of money in 529s.

Be a little bit conscious of that as you put money into 529s. If you have better use for the money, maybe put it there. It's okay to pay for some of college out of cashflow. It's okay to pay for some of it out of your taxable account. It doesn't all have to go through a 529. And our plan for our overfunded 529s and ours are overfunded at far less than $600,000 because our kids are going to a cheap college. One of them is on a full tuition scholarship. So our plan is just to change them to grandkids.

But I know lots of you out there just go 529 crazy on some of this stuff and be careful about that. So keep in mind, you don't want too much money in a 529. It's not the end of the world. It's not a bad thing. Heaven forbid, you got to pay some taxes on some gains. But for the most part, you'll pay less in tax if you're just going to blow it on a sailboat if you just invest it in your taxable account than if you put it in a 529 and later pull it out and use it to buy a sailboat.

 

YOU MIGHT NEED MORE IN YOUR 529 THAN YOU THINK

Dr. Jim Dahle:
But other people don't agree with me. So I got this great email just a week or two ago from somebody who thinks I'm contending badly that many 529s are overfunded. So here's what he says.

He says, “I think saving $300,000 to $400,000 for college is reasonable for a wide swath of the population. You sometimes mentioned needing to save a lot if your kid is going to the most expensive school in the country. But pretty much every private school in the US is going to cost $85,000 in 2025. I randomly Googled Notre Dame and it's right there at $86,000. But beyond that, out-of-state tuition for a California school like my kids are attending is also around $85,000. The University of Washington is $72,000 for those kids who want to go to an elite software engineering school.

We live in Hawaii and many kids here prefer to get off the rock for undergraduate. I hear you make that statement quite often and it's one of the few things you opine that doesn't ring true, at least in my world.”

Well, I told him that plenty of people disagree with me. And it's going to be fun watching them sort out what to do with their seven figure 529s if their kids go to an average school or don't go to college at all instead of a super expensive one like out-of-state Cal or UW or Notre Dame.

The average college tuition in this country is $9,700 in-state and $28,000 out-of-state. That's the average. $10,000, not $85,000. Maybe every college you're going to consider is $90,000, that's far from saying every college costs that much. Notre Dame is far from average. Lots of people would also consider it foolish to attend any out-of-state public university. Besides, lots of people get in-state tuition there after a year or two anyway.

College, like weddings, costs what you're willing to pay. This particular writer is willing to pay a lot. So you might as well save up for that known expense, I suppose, with a big fat 529. But I wouldn't sit around waiting to hear some different message on the podcast. Personally, I think it's kind of idiotic for most people to spend $400,000 on a degree they can get for $50,000 or $100,000.

Now, lots of White Coat Investors, including this person, are rich and they can afford it. Spend your money on whatever you want. Don't expect to be able to convince everyone else you're some kind of value consumer though. I've got two kids in college right now. Tuition is $7,000 and one of them has a full tuition scholarship. Their 529s are dramatically overfunded and they're half the value of what this guy's planning to put into 529s.

Okay, somebody else disagrees with this take and sent me an email about it. They said, “I realize some of us podcast listeners are in a bit of a silo. However, I felt it would be worth mentioning one thing on air at some point regarding 529s. Jim likes to preach that people not overfund 529s. I get why, but personally, I think this mantra is a bit egocentric and overvalues his personal circumstance.” Okay, he's right about that. College is cheap in Utah. It's cheap in some other places, too, and I get that it's much more expensive in other places.

He goes on, “Having said that, the next time he rants about overfunding 529s and the few options that exist to address that issue, please add this. Beginning in January, 2026, the OBBBA increased the K through 12 tuition limit to $20,000 per year. It was $10,000 per year. If your kid is in a private school for K through 12 education and you've been saving for the college via 529, which you think is overfunded, then make sure you utilize the new $20,000 limit before they reach college. Sure, it would be ideal of the funds to compound, but that's not always possible.”

Okay, this is a great tip. The problem is funding K through 12 and knowing you're overfunded don't come at the same time. I didn't think I was overfunded when number one was in high school. It only became obvious once her college and major selection had occurred. But it's good feedback. It's quick and easy to mention on the podcast. So I told him I would.

And again, of all the financial problems to have. Overfunded 529s, big required minimum distributions. These are pretty good problems to have. So don't feel bad if you have these problems. They're good problems to deal with. But at least give a thought to the possibility that maybe you're putting a little too much money in 529s and maybe you have a better use for that money.

Thanks everybody out there, by the way, for what you're doing. I know you get paid well. The reason you get paid well is because your job is difficult. And if nobody told you thanks for doing it today, let me be the first.

 

CORRECTION REGARDING 529 REIMBURSEMENT WITHDRAWAL

Dr. Jim Dahle:
Okay, let's do a bit of a correction here. This email says “In the 8/14/25 podcast, you said that a 529 reimbursement withdrawal must be in the same year that the expense accrues and that therefore reimbursement cannot be delayed to maximize tax-free growth a la an HSA. However, the existence of any deadline is controversial unless you have an update that I haven't seen. Certainly this would be very dicey to time perfectly for expenses late in December.”

Okay, apparently this is somewhat controversial. I went looking as well to try to figure out if you actually do have to pull that money out of 529 the same year that you spend it. And it's not clear. It really isn't. I still think matching them is smart though. Rather than doing this save your receipt strategy and leave it in the 529 for decades.

You should be aware actually that there is a bill in Congress right now. I just saw this in the last couple of days. By the time you hear this, it won't be the last couple of days. This thing drops on Christmas, I think we said. But at the very beginning of December, this was being discussed in Congress. It had been introduced by a couple of, I can't remember if it was the Senate or if it was the House.

But basically it sounds like this saving strategies receipt for HSAs could go away. And the thing about putting a limit on it that you got to take the money out within a year or two of when you spend it. So, if that thing passes, and we'll keep an eye on it here at White Coat Investor and let you know if it passes, but sometimes they just change these rules and they go into action immediately or even retrospectively, that strategy might go away.

And those of you who've got $30,000 or $40,000 in healthcare expenses worth of receipts that you've been saving up, you can get hosed if they say you can no longer do this. This is something worth watching if you're doing that strategy. We don't have anywhere near that many receipts saved up, but we're thinking about actually using the receipts we do have this month just in case this sort of a thing passes.

And of course, if you're trying to do this with a 529 where it is not clear that's legit at all, this is something to keep an eye on as well, because just like it could be clarified and changed with HSAs, it could also be clarified with 529s as well.

So keep that in mind, keep an eye on these changes. Those sorts of strategies that require decades to play out are inherently risky. They've got legislative and executive risk that you ought to be aware of when you embark down that pathway. Keep an eye on it. And you might want to pull your HSA money out if you've got a bunch of receipts you've been saving long-term.

 

SPONSOR

Dr. Jim Dahle:
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Thanks for telling your friends about the podcast and leaving us five-star reviews. Those do help spread the word about the podcast. A recent one came in, “My constant companion since 2017. I discovered the WCI podcast in 2017 when I was towards the end of paying off my medical school loans. Since that time, I've read the books, followed blog posts, and listened to most podcasts during workouts and car rides.

I paid off all my student loans in 2019, was fortunate to be featured on an early Milestone to Millionaire episode. The learnings have provided far-reaching effects. Since that time, I began funding my kids' 529s, bought a car with cash, self-funded my spouse's mid-career degree in law, rolled over four 401(k)s, served as the executrix for my parents' estate, including probate, reviewed for the WCI scholarship, and invested in a second mountain home for our ski and hiking adventures.

The knowledge from this community has given me confidence to take charge of my financial situation and make small but continuous improvements. Thank you for being an amazing resource.” Five stars.

Wow, that's a great review and a great success story. Apply this stuff in your life. It really does work. It's not that complicated. It's relatively simple. Not always easy, but relatively simple. And I know on the podcast, we get way out there into the weeds all the time, and I kind of apologize for that, but I got to keep the people that have been listening since 2017 interested a little bit. But the basics are not that complicated. Get the basics right, and you can screw up a whole bunch of other stuff and still be just fine.

Keep your head up and your shoulders back. You've got this. We'll see you next time on the White Coat Investor podcast.

 

DISCLAIMER

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

Transcription – MtoM – 254

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 254 – Hospitalist becomes a full-time entrepreneur.

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Also be aware we have a recommended list. Whatever you might need, whatever help you need from the financial services industry, we'll try to connect you with the good guys. It might be insurance. It might be financial advice. It might be tax help. It might be contract review. It might be student loan advice. It might be real estate investments.

We're going to try to connect you with the good guys we can find out there. Just go to whitecoatinvestor.com/recommended and check out our sponsors, our partners, these folks that we're trying to connect you with.

All right, we got a pretty interesting interview today. It's a physician who's been extraordinarily successful as an entrepreneur. Stick around afterward. We're going to talk for a few minutes about tax loss harvesting.

 

INTERVIEW

Dr. Jim Dahle:
Our guest today on the Milestones podcast is Jay. Jay, welcome to the podcast.

Jay:
Hi, thank you.

Thanks for having me.

Dr. Jim Dahle:
Give us a sense of who you are. Tell us what you do for a living, how far you're at a school, and what part of the country you're in.

Jay:
Sure. I finished medical school residency in 2017. I'm about eight years out. I'm in San Diego. I'm 39 years old, and I'm a hospitalist.

Dr. Jim Dahle:
Okay. Now, with that background information, you're clearly crushing it in your financial life. So, tell us what milestone you're celebrating today.

Jay:
I have decided to give up my partnership at my practice before the 10-year mark, before I get vested, and I'm switching to different business ventures.

Dr. Jim Dahle:
Okay. Based on success you've had in the past or based on a desire to get out of medicine or just finding it interesting? What's led to this change?

Jay:
It's probably a combination of both. There's a little bit of burnout. I was working a lot, and then I just realized there's something liberating about being your own boss. You're kind of like your own CEO, and it just gave me a lot of freedom, a lot of freedom to do what I wanted on my own time and then practice when I wanted to.

Dr. Jim Dahle:
Okay. Now, you've acquired a substantial amount of net worth in this time you've been practicing, a relatively short period of time. Approximately what's your net worth now, and what's it made up of?

Jay:
It's close. It's probably $8.5 million. I would say $4 million of that is in business and real estate that I've been doing. In the last two years, I've acquired six car washes with a partner, and we're about to acquire three more by the year end. That's another reason why I'm scaling back on medicine to focus more on the car washes.

I've got about $2.8 million in retirement with me and my wife. I have $1.5 million in a Bitcoin position. I have over $100,000 in savings. That's my three-month emergency fund. I've got some physical gold and jewelry.

Dr. Jim Dahle:
Okay. You're an entrepreneur. You've got this entrepreneurial mindset.

Jay:
Yes.

Dr. Jim Dahle:
Where did that come from? When did that show up in your life, in your career, et cetera?

Jay:
I think it came more growing up. When my dad was in business, I always had a little bit of a business knack. I started my own tutoring company when I was in high school and then college, just something on the side. It was a little bit of a side hustle. I think money became really important, and I started to understand it more. It wasn't really talked about in my family. It was more of a taboo situation.

We lived through booms and busts in my life. There's the one point where I lived on food stands. At one point, we had nice cars. In the next minute, the next part of my life, growing up, cars were getting repoed.

It made me want to understand money and business and go into that. I knew I wanted to be a physician and help people, but I knew that was not going to probably be the only thing that I was going to ever do.

Dr. Jim Dahle:
At some point in your 20s, you decided, “I'm going to medical school. I'm going to residency.” Here you are now, not even a decade out of residency. Are you moving on completely from medicine? You're going to be totally out of medicine?

Jay:
No. I'm going to practice on my own terms now. I'm a hospitalist. The great thing about it is it's shift work. Instead of being scheduled and assigned shifts months out and having to work a week on, week off, or certain nights, I get to just wake up like, “Hey, if there's any shifts available, I'm available these days”, and I get to work. Most of it, too, is I'm focusing more on the car wash side because I get to build a legacy there that I get to actually pass down to my kids and my family going forward.

Dr. Jim Dahle:
Give us a sense of med school and residency. Was there any entrepreneurship stuff going on there? Were you borrowing to pay for your education? What did life look like when you came out of training?

Jay:
During med school and residency, I didn't work. I just borrowed money. I ended up with $370,000 in debt, I think. During that time, I remember the great financial crisis happened, and people eventually were buying homes, and this whole FIRE movement. I was so interested, but my head was in the books. I was in residency. I was like, “I don't have money. But that's what I'm going to do when I finish.”

And when I finished residency, before I actually took my first job as a hospitalist, I leveraged my contract to go buy a home on a doctor's loan. I put myself literally before my first paycheck, like $1.1 million total in debt before I had even my first paycheck.

Dr. Jim Dahle:
This is your first paycheck as an attending hospitalist?

Jay:
Yeah.

Dr. Jim Dahle:
What did the contract say you were going to make as an attending hospitalist?

Jay:
About $300,000 a year.

Dr. Jim Dahle:
And so you ended up with the $1.1 million in real estate debt at that point.

Jay:
Well, $1.1 million plus the med school debt.

Dr. Jim Dahle:
Right. Okay. Right from the beginning, you're like, “I'm going for it, man. If I got to borrow some money, that's okay. I'm going to take some risks. I'm going to bust my butt. I'm going to be scrappy, and this is going to work for me right from the beginning.”

Jay:
Yeah.

Dr. Jim Dahle:
Okay. So tell us the journey from there.

Jay:
I dabbled in real estate, did a ton of real estate, and I worked a lot. I was always like 130%, 140%. I was known to work a lot, and I was just saving money. Eventually I did my biggest real estate deal, which was ground-up development, and then realized that was very lucrative, but it was time-intensive and capital-intensive. And then this was during COVID, interest rates are rising, and I realized this is going to get harder to do, especially in my market in San Diego, and I need to find different things.

And at that point, I was kind of into gold. I was into Bitcoin. I took half that sale, and I bought my home by the water, which I always wanted to dream like my beach home. So I went and did that. And I took the other half, and I put it into Bitcoin after a substantial amount of studying.

And then eventually, I realized my biggest liability was my taxes. I was paying six figures in taxes every year, and I was like, “How do I get an instant 30% return on my money year after year if I could just get rid of my tax bill?” So it led me down the route of business, and everyone was talking about the silver tsunami. People are retiring. Baby boomers are giving up their businesses. These are great opportunities.

I went into that, and then I discovered bonus depreciation through car washes that eventually were able to literally wipe out a six-figure tax bill every year. And so, I've been doing that and compounding that with a partner. I've scaled to six car washes and three more by the end of this year too.

Dr. Jim Dahle:
Yeah, very cool. So just along the way, every time you had an opportunity, you tried to make the most of it.

Jay:
Exactly, yeah. And it's not that I've lived frugally. I still have my med school debt. I haven't paid it off, but it's because I'm comfortable with that debt. I know I can pay it off. It's just that I've found these other opportunities where my returns are high double digits. And it's like that opportunity is much more lucrative to me than to pay off that debt.

Dr. Jim Dahle:
How many other debts do you have? How much do you totally owe and everything?

Jay:
If you include the car washes, the car washes alone are probably $7 million in debt, but they're probably worth $14 million. My home is about $1.4 million, and I've got my med school debt and I have a HELOC on that that I use to leverage to buy more car washes. So I would say my debt portion is probably about $4 to $5 million. And my net worth after the debt is probably around $8 million.

Dr. Jim Dahle:
Yeah, it's because the car washes you have a partner on, right?

Jay:
Yeah. Well, the car washes, we bought these for a total of $10 million. And through grit, hard work, understanding business, and then coming in and making them more efficient, we have increased growth sales. And now there's a multiple on these businesses and they're worth a lot more now. Buying it for $10 million and my entire portfolio is probably worth $14 and a half to $15 million, which I split again with a partner, but then I'm buying three more that will, hopefully, I can generate that premium or that equity in them as well.

Dr. Jim Dahle:
Any plans to decrease the amount of leverage you're using now?

Jay:
Yeah, I don't think I'm going to be doing more personal debt borrowing. If I'm going to borrow, it will probably be more through SBA loans. We kind of take these car washes in these businesses that we're looking at and we battle test them. We run them to models and I stress test the numbers. At the end of the day, if I know I can weather a bear market or like, say, 50% down year back to back and they still cashflow and they make sense, I'm still going to buy those with debt because it's just an intelligent way to leverage to use that money to buy something bigger.

But otherwise, I don't have any other plans to really do anything extravagant. At this point, I'm comfortable where I'm at in life that I get to choose to work when I want to, especially in the hospital. Then I get to work on my own businesses on the side. I work mostly from home too, which is a really great thing.

Dr. Jim Dahle:
What are your future financial plans?

Jay:
I think I'm probably even going to continue the car wash route. I've explored storage units, possibly doing that as well. I'm thinking about building a car wash ground up. I think long term, I'm going to maybe start like an investor fund, an accredited investor fund, probably with car washes, where maybe go raise $5 to $10 million to go out and purchase and rebrand and build a car wash portfolio that I can return to investors.

Dr. Jim Dahle:
Have you ever come up with a number that's enough for you that “This is my goal, I want to get to this”, or is that just kind of a vague, “Let's see what I can do out there?”

Jay:
I think it's more of a vague, see what I can do. I have enough now in cash flow and income that I could probably sit back and just focus on what I have and be very comfortable, but I think I would get bored at home. I think eventually my wife would tell me, “You got to get out of the house and do something.”

I've always had that spirit of just like, “What's the next thing I can just kind of do and go after?” But I do know my kids are younger and I do want to spend more time with them. So that I weigh a lot of the decisions I go forward based on, “How much time does this take now?” Because if it's going to take away and detract from my family and spending time with friends and enjoying life rather than stressing out over business or making money, I'd rather just not do it at that point.

Dr. Jim Dahle:
Any thoughts on whether you took the right pathway to start with? Do you regret going to medical school and going down that pathway to start with? Should you have gone to business school and become an entrepreneur right from day one? Or do you think this was the right way for you to go?

Jay:
I've thought about that. I think if I had to do it again, I probably would have done it the same way. I do like helping people. I do enjoy the medicine. It's always a challenge. I just don't want to be identified as just a doctor. I think a lot of physicians identify only as that when they're probably capable of a lot more.

And going through medicine, I think, and going through training and you pick up a very wide range of skill sets that makes you very formidable in any arena that you step into. I think a lot of doctors don't realize that you have really great communication skills. You probably negotiate all the time, especially with patients or insurance companies or whatever you're doing, that you have these skills that are innate in you.

You just got to bring them on and just apply them to different areas of your life that you feel passionate about. I think if I didn't have that core training of residency and just as practice as a hospitalist, I don't think I would have probably gotten to this point today.

Dr. Jim Dahle:
Now, most physicians are not as interested in entrepreneurship as you are. Do you think they should be? Do you think they're making a mistake?

Jay:
No, I don't think they're making a mistake. But I think in this day and age, we live in a different time where you're not only just like your one core profession, but you're also like a financial manager, you have financial planner, you have to manage your own money and your own investments. Otherwise, you will be working for someone else.

And I think that's where the burnout happens. When you don't have your own time, your own freedom, and you're stressing over a paycheck, you start to feel that burnout. So I don't think they have to be entrepreneurial and have to say, shoot for a $10 million company or start something.

But I think you need to have a little bit of know-how, how to manage your money and put your money to work efficiently and smart so that you can break free from the chains. I gave up golden handcuffs from my partnership to pursue something different. And now I feel liberated.

I literally can go and spend three months in Mexico a year and travel more and just pick up shifts when it's heavy or when it's light. I'm never going to miss a wedding again. I'm never going to miss a birthday party that I want to go to. I think that freedom comes and I don't think that you necessarily, again, have to be entrepreneurial, but you should know how to manage your money.

Dr. Jim Dahle:
Now there are people out there, they're in med school or they're in residency or they're already in attending or whatever. They want to do what you've done. What advice do you have for them?

Jay:
I think the biggest thing I learned, I'm self-taught in managing money. Again, I didn't have any guidance or anything. I did stumble across White Coat Investor. I've read a ton of financial blogs, YouTube videos. You're going to spend 20,000 to 40,000 hours of your life just working for money. You owe it to yourself to sit down and study money and study investing and study all sorts of aspects, real estate, Bitcoin, AI, all these things that are coming.

You owe it to yourself to sit down and study probably at least a good hundred hours because then you can make the right moves for you in the future. And I think that's the biggest step.

The other thing is that there's no reason you can't learn to do something else. If you're passionate, you've got something else you want to do like a project or you want to do real estate investing, you've got all the tips and tools in front of you. You should be able to go to YouTube, Google, ask ChatGPT and learn everything. And therefore you can seek out experts, talk to them, have intelligent conversations, and they can guide you towards what you want to do in the future.

Dr. Jim Dahle:
Well, congratulations on your success. It's pretty awesome to see the freedom you created for yourself. And you should be proud of what you've accomplished. It's pretty awesome. You're building an empire. You're going to own every car wash in the state soon at the rate you're going. So, it's going to be a heck of a heck of a business.

Jay:
Yeah, it's funny. When it started out, I was like, this is going to be like a side hustle. And it's now my main hustle. And I really enjoy it. And again, I've learned so much doing it. And I never had any business experience before, true business experience before doing this. It's kind of a new journey. I don't forget the roots that I came from. And I hope to help inspire other people to take it a different path.

Dr. Jim Dahle:
Well, thank you for being willing to come on the podcast and sharing your story.

Jay:
No problem. Thank you.

Dr. Jim Dahle:
Okay. That was a great interview. That is not the usual pathway to wealth that we have on this podcast, which is fine. I've talked before about three pathways to wealth. I talk about what's not a guaranteed pathway, but it's pretty darn close. This is go get a job as a physician, carve out 20%-ish of your income to invest, put it into boring old index funds inside retirement accounts and in taxable accounts. Give us some time to compound and in 20 or 30 years, you're going to be a pentamillionaire.

It works very well, works very reliably. But it does take a career to do. If you save 40 or 50% of your income, you can do it very quickly. But it generally takes most of your career to really build the wealth where most people are comfortable not working. At least most physicians that are spending like physicians.

The second pathway is what I've described as the real estate pathway. And I think the fastest way to out of medicine that's reliable, is actually a real estate pathway is building a portfolio of short term rentals. You get five or 10 short term rental doors in your portfolio. And that's likely six figures of income, enough that you can go live on that and don't have to do medicine anymore.

It's going to be faster to get there than it is to do the boring pathway, the boring guaranteed pathway of just doing your physician work, carving out 20%, investing in some reasonable way and giving it some time. It's going to require you to learn some stuff, it's going to require you to do some additional work, it's going to require you to take on some additional risk. But it's reasonably reproducible.

The third pathway is not reproducible at all. It's the entrepreneurial pathway. But a few of you find that very exciting, very interesting. And obviously, this is a pathway that I've taken. And it's worked out just fine for us, just like it has for Jay. And you basically try to do things that either aren't being done very well, and you can do them better, or you try to come up with some new idea, or whatever. And you go down this pathway as an entrepreneur.

And sometimes you can do it with not that much risk, as far as finances go. I just risked lots of time in doing the White Coat Investor. I didn't really have to borrow a whole bunch of money to do it. Jay, on the other hand, has taken a substantial amount of risk in his life. We're talking about seven figures of debt to acquire a business portfolio. And some of his investments are not the least risky investments out there. He's taken lots and lots and lots of risk. So far, at least for him, that's really paid off.

What I typically find are people willing to take those risks, are so hustling so hard at everything else in their life, to give them a little bit better chance of those risks paying off. For example, yeah, putting a whole bunch of money into real estate can be risky. But if you put even more equity down it reduces that risk, and all of a sudden, now they're cash flow positive. And you can own an awful lot of car washes or an awful lot of long term or short term rentals, when they're all cash flow positive.

And so, paying some attention to it and working hard on it and taking a reasonable amount of risk, and it can pay off. Really three pathways to wealth. Obviously, the last one has the potential for the most wealth has the potential to help you reach your goals the fastest. But it's not that reliable. It's not guaranteed in any way, shape or form. That doesn't mean it doesn't attract a certain percentage of us.

 

FINANCE 101: TAX LOSS HARVESTING

Dr. Jim Dahle:
Now at the top of the podcast, I mentioned we're going to talk a little bit about tax loss harvesting. All right, tax loss harvesting. What is it? It is acquiring tax losses to reduce your tax bill without changing your portfolio. The IRS has some rules. They say, if you sell something and buy something else that is substantially identical, you can't count your loss.

But as long as it's not substantially identical, you can count your loss. Otherwise, you got to wait 30 days before you buy back the same thing. Well, the problem with waiting 30 days is sometimes the market goes back up in those 30 days. Now you bought it, it lost value, you sold it, you're waiting 30 days. But in the meantime, the price creeps up. And all of a sudden, now you're buying it back at the same price you bought it for, you just locked in your losses. That's not tax loss harvesting.

Tax loss harvesting is not changing your portfolio, but still getting the loss. We're talking about swapping from like a total stock market index fund to a 500 index fund. You just swapped, you did that in 30 seconds online, and you booked your loss. And now you've basically got the same portfolio because the correlation between those two funds is like 0.99. It's just not that different.

It's not substantially identical in the words of the IRS, although they are very careful never to actually define what that term means to them. But you can make a very good argument that those are not substantially identical investments, but you booked that loss. And what can you use the loss for? Well, you can use $3,000 a year of it against your ordinary income, and you can use an unlimited amount of that loss against capital gains.

Any capital gains distributed by your mutual funds, you can use it against. Any capital gains from selling a business or a real estate property, including your home, if you've got more than the amount you're allowed to exclude from your taxable income. If you sell a business down the line, or even just selling shares in retirement to spend the money, you can use some of those tax losses.

Because anything you don't use gets carried forward. And you can carry it forward for years and years and years and years and years. You just do it on Schedule D, and every year it says this is how much you're carrying forward, and you add that to your Schedule D the next year. And that's how you carry it forward.

A couple of things to be careful about when tax loss harvesting. One is not screwing up the trades. You go in there, you do the sale, and then you do the buy. And if you screw those up somehow, well, you may end up losing more money than you're actually gaining in tax benefits. So, don't screw up the trades.

Another thing to be aware of is the wash sale rule. If you buy something back within 30 days of selling it, or vice versa, it's a wash sale and you don't get to use the loss. So, that's a bad thing. In general, not trying to do this too frenetically is the way you avoid having wash sales. I never tax loss harvest more often than every two or three months, and so I never run into those wash sale rules, because it's a 30-day rule.

The other thing to keep in mind is you can turn qualified dividends into unqualified dividends if you don't own the security paying the dividend, whether that's an ETF or a stock or whatever. If you don't own it for at least 60 days total around the ex-dividend date, you'll turn that qualified dividend to an unqualified dividend.

Again, another reason not do this frenetically. If you watch the dividends real carefully, you can avoid that issue, but if you just only do this every two or three or four months, you never have an issue with either the 30-day rule or the 60-day rule. I hope that's helpful.

 

SPONSOR

Dr. Jim Dahle:
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Keep your head up, shoulders back. We'll see you next time on the podcast.

 

DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only. It should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.