Student Loan Forgiveness, Taxes, and Retirement Accounts

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 455.

Today's episode is brought to us by SoFi, the folks who help you get your money right. Paying off student loans quickly and getting your finances back on track isn't easy. But 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, we've had Gretchen Green on this podcast before, at least a couple of times. Gretchen's one of our partners because she offers you something we don't. She calls it Expert Witness Startup School. And the enrollment for this is January 14th through the 26th. So, you got four days from this time this podcast drops. Expert Witness Startup School. And all you got to do is go to whitecoatinvestor.com/expertwitness to sign up for this.

Well, who's this for? This is for you if you're thinking about a side gig as an expert witness, which can be not only a cool way to use your expertise to make a little bit of money, but also a chance to contribute.

A lot of these contributions are defending people whose care has been perfectly fine. Obviously, if you're a good expert witness, you don't care who you're working for. You're just giving your opinion on what you think appropriate care in that situation would have been. But you can launch and build an expert witness business in four weeks to build another source of income while still doing what you do best, being a doctor.

With physicians charging a typical range of $500 to $900 per hour for expert work and a typical retainer of $2,500 to $3,500 per case, the course could pay for itself with one case and is generally tax deductible as a business expense or using CME funds.

We're also going to throw in a free WCI course. We're going to throw in Continuing Financial Education 25. If you buy this course, it's got a $789 value. It gives you 35 plus hours of material from our annual conference, including up to 17 hours of CME and CE credit. Maybe if you buy the combination of the two, you can write it off or you can use your CME funds. You ought to be able to use CME anyway for expert witness course, but go to whitecoatinvestor.com/expertwitness if you want to learn more. And it can be a pretty nice side gig that's heavily reliant, of course, on your medical knowledge that you already have.

CLARIFICATION – ACATS

Dr. Jim Dahle:
Okay, let's get into your questions. Before we do that, though, we got to do a correction or clarification. We did a post or podcast a few weeks ago about ACATS fraud. ACATS is Automated Customer Account Transfer Service.

This is basically a way where you can move securities between brokerages, and what has happened is some people, scammers have taken the fact that this is a system designed to rapidly move things between accounts and rapidly moved things between accounts that you don't want them to move. They got into one account and moved it to their brokerage account, and then they sold it, took the cash and ran off with the cash. There's an article in the Wall Street Journal or the New York Times recently where this happened to somebody and they barely caught it before Vanguard lost all their money.

Well, I went to a conference a few weeks ago, spoke at a conference, the Bogleheads conference, and guess who spoke there? The CEO of Vanguard. He said, yeah, our security guys are working on this. We think we're going to have this solved soon, essentially, was what he was saying about it. And it sounds like since we ran that podcast in December, they have. I got a couple of emails on this or something on the forum and something on the emails.

Forum said, “I was able to do an ACATS lock on Vanguard last week. This is a new feature they now offer. I did have to call Vanguard to place it. It doesn't affect transfers to preset banks. It's just an ACATS lock.” And he was asked, “Well, how'd you find out about that?” He said, “I was speaking with the Vanguard rep on another matter. I asked about it and he said, yeah, it's in place. It won't affect other transfers.”

That is now available at Vanguard. You don't have to move your account to Fidelity if you are just worried about ACATS fraud and you can actually call them up and put an ACATS lock on there, you'll have to call them up and unlock it before any of your securities can be transferred out of your account using the ACATS system.

Also had somebody else email me about it, said, “On one of your most recent podcasts, one of your listeners asked about this and talked about how is it available on Fidelity, not on Vanguard. I just checked with my advisor on Vanguard. He said it's possible to put a freeze in the brokerage account internally. So I had him do that for me. It's not something one can turn on and off, but if there's a transaction expected that I call Vanguard and they would lift the freeze right away.

I found the New York Times article really frightening. I've been a victim of an online scam previously where somebody got access to my business account. These scams are only going to get worse with the AI adding to the mix.

But you may want to double check with your Vanguard advisor as well, and perhaps mention on your next podcast that Vanguard does offer a freeze for their clients. That way they do not have to move to a different institution if they don't wish to. Otherwise there might be an exodus of people leaving Vanguard unnecessarily from a lack of updated knowledge about this issue.” Okay, that's great.

The other email I got on this topic though was, it says, “For folks that really want to get into the weeds on financial security, Verizon and other carriers allow you to lock your phone number and eSIM from transfers, preventing scammers from getting access to your cell to bypass your two-factor authentication.

I think the idea behind that scam is that they transfer your phone number and your SIM card somehow, and then if they've got your password, too, well, now they've got your phone essentially, and they can do your two-factor authentication, get into your account, initiate an ACATS transfer, etc. So you can lock your phone too, as well as your Vanguard account. At a certain point you got to go, man, what a pain, but if you're lying awake at night worrying about this sort of thing, those are some things that you can do.

Okay, we got kind of a cool, I don't know if it's an email, we got an audio message sent in by email. Just in case you guys forget, we've got a Speak Pipe. whitecoatinvestor.com/speakpipe is super easy to use. You don't have to record your own audio and send it to me, but this person did, and it's a cool enough story that I want to play the audio for you and talk about it for just a minute. Here's that audio.

BORROWER DEFENSE CASES

Regan Hanson:
Hi, this is Regan Hanson. I'm a nurse practitioner in Denver, Colorado and a listener of the White Coat Investor. I wanted to share a little information that I don't know is out on the internet, because I surely didn't find it when I was looking, and this is in regards to defense cases.

I applied for Borrower's Defense as a student of Walden University around 2018, and my application was denied because of lack of evidence. However, in the spring of 2023, I got a letter stating that it had been reversed and I now owe $0 of $120,000 that I originally had applied for.

Unfortunately, in the meantime, I made a better decision to refinance with Laurel Road for an interest rate, at least half of the government's interest rate, which allowed me to pay my student loans from $120,000 down to $80,000 in that time frame.

I continued to fight, and everyone told me that I was fighting an uphill battle. I talked with attorneys here in Colorado who specialize in student loans, as well as attorneys on the East Coast, class action attorneys. Everyone told me that because I privatized, I lost my ability to get the loans forgiven. And so, yes, this felt like a punch in the stomach. I continued to fight and send letters to the ombudsman. Ultimately, this last spring, I got a check in the mail for $80,000 that paid off the balance of my student loans, and I am student loan debt free. Thanks for all your help.

Dr. Jim Dahle:
Okay. I hope you were able to make out that audio. We'll clean it up as best we can, I'm sure. But what are we talking about here? We're talking about borrower's defense cases. This is for schools that basically engaged in misconduct. All these fly-by-night universities that offer crap education and basically scam people and go out of business or whatever.

Well, if you went to a university like that or some sort of program like that and ended up with a bunch of student loans from it, you can apply to have those student loans go away with the federal government. That's called borrower's defense.

I don't think it's very common among WCIers. I don't think it's very common for med schools at all. Most med schools are legitimate institutions, not the schools for whom borrowers defense cases typically apply. But the problem for this WCIer is that she had refinanced the student loans. There were no longer federal loans for the federal government to forgive. She'd refinanced them with a private lender and started paying them down.

I think she said she'd paid them down from $120,000 to $80,000. Then she was realizing, “Oh, this is a borrower's defense case. Let me see if I can get the federal government to pay for these.” She fought and fought and fought and fought and did get them to pay for at least what she hadn't paid off yet. She got $80,000 of student loans wiped out, even though they were private student loans.

That's pretty cool. If you're in that situation, know that this is worth fighting for. You can get borrower's defense cases, even if you have already refinanced the student loans.

Speaking of loans, let's talk a little bit about some loan repayment strategies.

LOAN REPAYMENT STRATEGIES

Speaker:
Hi, Dr. Dahle. I'd appreciate your advice on loan repayment strategies. I'm a first-year attending psychiatrist and my wife is a first-year stroke fellow. We've maxed out our HSAs, backdoor IRAs, and gotten our 401(k) matches. I'm not eligible for PSLF, so I recently refinanced my $240,000 in federal loans at 6.5% to a seven-year fixed rate of 5.3% with SOFI.

My wife will pursue PSLF. She has $180,000 in federal loans at 6.5% and is still on the SAVE plan. She's made about 3.5 years of qualifying payments. We recognize she needs to switch repayment plans to begin making PSLF qualifying payments again. However, her projected payment amounts vary significantly when my income is or isn't included. This depends on how we file taxes.

Running the numbers, she would pay around $200,000 less over 10 years if we file separately. This number doesn't include her additional PSLF loan forgiveness, but it also doesn't factor in any future potential missed tax benefits of filing jointly if we were to have a kid in the future or donate larger sums of money.

Given this, our current plan is to file separately as soon as possible in 2026, switch her repayment plan so that it qualifies for PSLF, and then likely file separately over the next several years until she gets her loans forgiven. I would greatly appreciate your thoughts on our plan and to see if there's any other variables or other factors I should consider before we make this change. Thank you for all that you do.

Dr. Jim Dahle:
Okay. Well, that was very comprehensive. Thank you for sharing your student loan plan. It sounds like you've done a pretty good job thinking about it and putting that together. Let me give a plug for two of our sponsors. You mentioned SOFI. You go to whitecoatinvestor.com/sofi, they will refinance your student loans and you get a lower rate. The shorter term you're willing to commit to paying it back in, the lower your rate. If you're willing to use a variable rate loan and make sure you can handle the worst case scenario. If there's another 2022 and rates go up 4% in a year, can you handle that before you take a variable rate loan? But if you're going to be paying them off in two or three years, maybe that risk isn't that high.

You can even get loans refinanced with SOFI while you're in residency. They limit them to a hundred dollar payments a month until you get out of training. So great partner. We've been working with SOFI since SOFI almost started. White Coat Investor and SOFI basically grew up together. At one point, I went to San Francisco and sat around a conference table with the entire C-suite of SOFI.

Now they grew a lot faster than White Coat Investor did. They're a much bigger company than we are now, but they've been a great partner for a long time for White Coat Investor. So great for you. You got a better rate. Yeah, 6.5% to 5.3% doesn't seem dramatic, but if you went through our links, you probably got some cash back too. You got a free copy of Fire Your Financial Advisor and you got a lower rate. What's not to like?

So, if you're paying back your student loans, you might as well pay them back at a lower interest rate. More of your payments can go toward principal and less toward interest. Good job refinancing your student loans. I don't see any problem whatsoever with how you're managing that other than I bet you can pay them down sooner. Maybe you ought to go back and look at a five-year loan. Maybe it'd be a little better deal for you.

The other person I want to plug or the other company I want to plug is the one we started a few years ago called studentloanadvice.com. And we're eventually going to work this into White Coat Planning.

But this company was founded because I just got a bunch of hard questions that I couldn't answer by email or on the podcast by SpeakPipe to help people manage their student loans.

So, what you get for a flat fee when you go to studentloanadvice.com and book an appointment is you have somebody go over all your stuff before your appointment. You spend maybe an hour on the phone or a teleconference call with somebody there. And then they will help make sure you have the right plan for your student loans, that you are filing taxes the right way, that you're using the right retirement account, tax deferred versus Roth, that you're in the right type of IDR program, that you're working together with your spouse on their student loans in the same way.

And your student loans are complicated enough that I'd say, well, that's well worth paying a few hundred dollars to have a consultation at studentloanadvice.com. But as you present your plan, it seems like you know a lot of the stuff already that they're going to be teaching you at studentloanadvice.com.

You recognize that still being in SAVE is not making progress toward PSLF right now. SAVE is not making payments. No payments are counting toward PSLF. That's a bad idea. If you're trying to get PSLF, you want to be making payments that count. So most people are now transitioning to the new IBR program out of SAVE, but there is the RAP program as well. This new one that came out in mid-2025.

So, if you want to evaluate all those with somebody that can help you run the numbers, go to studentloanadvice.com to do that, and you can get some assistance with that. But it sounds to me like you got to get out of SAVE ASAP at a minimum. I think that’s one piece of advice that I can give to you and other people out there.

A few people are writing out SAVE just because they don't want to make payments on their student loans, and as long as SAVE isn't making them pay, they think that's great. It's great for their cash flow. I don't think it's actually helping them get rid of their student loans right now, though.

So, if you actually want to get rid of your student loans, and I hope you do, you probably need a different plan than SAVE right now. SAVE sounded great. It was very, very generous. This is a program that came from Executive FIAT, basically the Department of Education under the Biden administration, and was challenged in court and has had changes made to it now via Congress and the new administration.

SAVE is not an option going forward. It's going to be RAP and IBR. Three years from now, those are going to be the only plans that are available to manage your income-driven repayment plan. So, you might as well make those changes now and get out of SAVE. Very little reason to be hanging out in SAVE right now that I can see, other than if you just don't want to make payments. But those are going to restart again soon, I'm sure. I hope that's helpful. I hope those resources are helpful. Your plan sounds like you've thought things through.

Okay, one other thing I ought to mention in connection with your particular plan. I don't know that I feel that this is particularly ethical, but there are people managing their student loans this way, so I'm going to tell you about the strategy. You mentioned married filing separately is going to increase your tax bill, but decrease her student loan payments and leave more of that to be forgiven.

Okay, what's the strategy? The strategy is recognizing that the Department of Education and the Department of the Treasury do not talk to each other. What some people do is they file their taxes, married filing separately, and then show that tax return to the Department of Education and get lower student loan payments.

Then they turn around at some point in the next three years, because you're allowed to refile your tax returns for three years, and they refile their taxes, married filing jointly with the Department of the Treasury, and usually getting a tax refund, sometimes a significant tax refund, from the Department of the Treasury who never goes and tells the Department of Education that you refiled those taxes.

And then the next year they do it again. They file married filing separately, show the Department of Education, and then refile their taxes with the Department of the Treasury. I don't know that I feel that's super ethical. I think I'd have a problem with doing it personally, but if you do not, know that there are people out there managing their student loans that way, you would probably come out ahead financially for doing that. I want you to be aware of the strategy. I suppose you can decide if that's ethically okay to put your student loans on the taxpayer in that manner.

QUOTE OF THE DAY

Dr. Jim Dahle:
Our quote of the day today comes from Thomas J. Stanley. Stanley of Stanley and Denko fame wrote the “Millionaire Next Door.” He said, “Before you can become a millionaire, you must learn to think like one. You must learn how to motivate yourself to counter fear with courage.”

Our next question also off the speak pipe is from Matt. Let's take a listen.

OPTIMIZE OR SIMPLIFY RETIREMENT SAVINGS

Matt:
Hey Jim, this is Matt from Midwest. I want to thank you so much for everything you've done in the physician financial sphere. I got your book during medical school and the knowledge that I've gained from it has given me and my wife the confidence to be able to manage our own finances and to take careers that for both of us in medicine have allowed us more autonomy and caring for our patients and more time with our family because we don't have to worry about absolutely maxing out our salaries.

Through work, I get a 403(b). It's the only employer-sponsored retirement plan that we have. There's a mandatory contribution that goes along with it. Because of my salary and the mandatory contribution rates, I actually max out the 415(c) limit entirely with that mandatory contribution. I still have the entire elective contribution on the side. I also have a little bit of 1099 side gig income, which depending on the year varies from the mid to high five figures.

Historically, we've just invested everything else in taxable and maxed out our Roth IRAs. We do not have a high deductible health plan and otherwise, we were satisfiers. We just put the rest in taxable and let it ride.

I wasn't sure if because I can't open a solo 401(k) or rather contribute to a solo 401(k) because of the 403(b) maximization at work, whether this would be a situation where it would make sense for me to open one of the newer simple Roth IRAs or if there was any other way to shield a little bit of the retirement income. Again, if not, that's totally fine. We're fine investing in taxable. I just wanted to see if that was an option given our unique situation. Thank you.

Dr. Jim Dahle:
No. That's the answer. No, you're doing fine. I love that you describe yourself as a satisficer though. I've got news for you, Matt. You are not a satisficer, at least not right now at this point in your career. You're an optimizer. You're asking me if you can somehow open a Roth SIMPLE IRA in addition to the 403(b) you're maxing out, your backdoor Roth IRAs and your HSA because you've already learned that a 403(b) and a solo 401(k) share the same 415(c) limit.

I'm sorry. Satisficers don't talk like that. It's fine. There's nothing wrong with being a little bit of an optimizer. Of course, it's a spectrum. If you were a satisficer, you'd call me up in 20 more years going, “I'd probably save something for retirement and was what I did good enough.” No, that's not how satisficers work. You're a bit of an optimizer. That's okay.

I'm probably leaning way too much toward the optimizer side as well. Although I've been making progress in the last few years of really only concentrating on what really matters, which of course is not where you put your retirement savings, but how much of it you put in there.

It sounds like you're doing a pretty good job. If you put $70,000 into your 403(b), you're putting another $14,000, I presume into Roth IRAs. You're doing an HSA. We're up to what? $90,000 right there. You're putting stuff into taxable every year as well. Let's say you're putting another $30,000 into taxable. That's $120,000 a year. If I pull up Excel here, equals future value. We'll use a rate of 8%. We'll use 30 years. We'll use $120,000 a year. In 30 years, you're going to have $14 million, Matt. You're going to have a great retirement. You're going to do just fine.

You seem to feel like there's something terrible about using a taxable account as well. I don't think that's the case. I like my taxable account. Now, I'm of course going to max out my Roth IRA and my 401(k)s, et cetera, before I put money in taxable. I'm not dumb, but I don't feel bad about doing it. Sometimes people feel so bad about doing it, they run over to their local insurance agent and they buy a whole life policy. I think that's usually a mistake.

It's okay to use a taxable account. It is our largest investable investing account now. Almost all of our investments are in a taxable account. That's okay. There's lots of ways to invest a taxable account very tax efficiently. You want to be a little bit conscious about what goes in the taxable account. You want your more tax efficient asset classes in there.

We're talking about things like a total stock market index fund, a total international stock market index fund. If you have to stick bonds in there, they're probably municipal bonds. Maybe something like one of Vanguard's excellent municipal bond funds. Those are the things you tend to put into taxable first. Pay attention to asset location once you're using a taxable account. Don't put your target retirement fund in there, especially if you are an optimizer like Matt and I are.

What else can you do in there? Well, you buy and hold. If you're not buying and selling stuff all the time, you don't get short-term capital gains. In fact, you don't get capital gains at all. Because most of those asset classes, and you're probably using most of those funds that invest in those asset classes, and you're probably using ETFs in your taxable account anyway, don't distribute very many capital gains unless you buy and sell.

By buying and holding, you're putting off those capital gains taxes for a long, long time and reducing that tax drag. Also, by holding things for a long time, almost all of the dividends coming out of there are going to be qualified dividends. Not only do you only pay taxes rarely at long-term capital gains rates, but you only pay taxes on the dividends at qualified dividend rates.

If you're investing in muni bonds, you don't pay at least federal taxes, sometimes state taxes too, but at least federal taxes, you don't pay taxes on those muni bond dividends anyway. That's very, very tax efficient.

But there's more. You can tax loss harvest. When you buy something and then the market falls, well, you swap it for something similar, but not in the words of the IRS, substantially identical, you book those losses. And now whenever you have some capital gains, you can offset them with those losses. You can even use $3,000 of those losses against ordinary income every year.

But wait, there's more. What if you give to charity? Well, look what you can do. You can donate appreciated shares you've owned for at least a year instead of cash, and you can flush those capital gains out of your account, making it even more tax efficient.

There's all these cool things you can do with a taxable account that you can't necessarily do with a tax deferred account or a Roth account, but you can with a taxable account. Plus it's super flexible. You can use it for whatever you want. You can give it away. You can spend it before you're 59 and a half without having to worry about that 10% penalty. It's just awesome.

It's not like an HSA where you got to spend it on healthcare. It's not like a 529 where you got to spend it on college. You can spend it on anything you want. It's very flexible. So, don't beat yourself up about a taxable account. It's fine. You're already getting $70,000 a year in your 403(b). You're already getting $14,000 a year in your Roth. You're already getting $8,000 something a year, almost $9,000 now probably, into an HSA. It's okay to put some money in a taxable account. You're going to be fine.

All right. Let's take our next question.

FORMS TO FILL OUT AFTER COMPLETING FIRST BACKDOOR ROTH

John:
Hello, Jim. This is John, sports med doc from the Southeast. Thanks for all you do. I just completed my first mega backdoor Roth IRA. I set up a solo 401(k) through my solo 401(k), and they set me up with accounts at Schwab. My question is, do I need to fill out any special forms or is there anything I need to know when I am filling out my taxes for this upcoming year? Any help would be appreciated. Thank you.

Dr. Jim Dahle:
That's a pretty broad question. Is there anything you need to know while filling out your taxes? Yes. There's a lot of things you need to know if you're going to file your own taxes. But I think you mean with regards to the mega backdoor Roth you just completed for the first time.

Remember out there in WCI land, the mega backdoor Roth IRA is different from the backdoor Roth IRA. Mega means something. What it means is that this isn't an IRA at all. It's a 401(k). This is a process similar to what you do with the backdoor Roth IRA, except you're doing it in a 401(k). You're making after-tax contributions to your 401(k), and you're converting them to a Roth IRA, usually inside or not to a Roth IRA, to the Roth 401(k) subaccount, usually inside the 401(k).

It's also possible to have in-service distributions and actually convert it to a Roth IRA, but I think that's much more rare these days. So, you've set it up right. You got yourself a customized solo 401(k) that allows not only after-tax contributions, but in-service conversions or in-plan conversions.

So, you've done the right thing from that perspective. Typically you can't just go to Vanguard or Schwab or Fidelity and open up their free cookie cutter solo 401(k) and do this process. You do have to get a customized one from somebody like mysolo401(k).com.

We've got a number of those companies listed. If you go to whitecoatinvestor.com and you go on our new website, you go under Recommended, and then you go under retirement plans under experts. And that's where you'll find that list of people that can help you with this.

But here's what you got to keep in mind. You paid my solo 401(k) a few hundred dollars and you'll pay them a hundred something a year to maintain this plan for you. Well, guess what? They do as part of maintaining that plan. They do the paperwork. They do the 1099R sending you this information.

All you do is you enter it into your tax software. And because that's after-tax money, you don't have to pay taxes on the conversion, but you don't do a form 8606 like you do for a backdoor Roth IRA process. That's a form you fill out for IRAs, not 401(k)s. And it ends up on line seven or something of your 1040. But it's just coming off the 1099R that your 401(k) provider is going to send you for that conversion step that you did.

So it's not quite as complicated, I think, as the backdoor Roth IRA from that respect, but obviously when you include everything else you have to do to do a mega backdoor Roth, it's kind of a little bit more complicated.

But still, better than investing in a taxable like Matt. Matt's got to put all his money in taxable. You can do a mega backdoor Roth IRA. So, that's great. Might as well take advantage of that, but don't sweat it. It won't be that bad. Just make sure you do it right the first time and copy it the next year.

If you need some more help with that, feel free to reach out to us or better yet, just ask on one of the WCI online communities. If you got a question about that. The regular posters, both on the subreddit, in the Facebook group, on the WCI forum, in the FEW, they all know how to do this. It's not that hard to ask your questions there. We're a community. We'll walk you through this together. And the next time you got to do it, you'll remember how to do it. And you'll see somebody else asking on the subreddit or the forum or the Facebook group about it and you can help walk them through it.

Thousands and thousands of doctors before you have sorted out how to file taxes when you've done a mega backdoor Roth, you'll be able to figure it out as well.

Thanks everybody out there for what you do. It's not easy work. Whether you're walking the dog, whether you're off running or at the gym or commuting, if no one said thanks for what you're doing, let me be the first.

All right. We've talked about mega backdoor Roths and 403(b)s and solo 401(k)s and taxable accounts. Now let's talk about cash balance plans. Our next question comes from Abby. Let's take a listen.

CASH BALANCE PLANS

Abby:
I'm in my early 40s and have been maxing out my cash balance contributions every year, six figures. I recently realized my company does not close the account to roll it over unless you hit 59 or leave the company, which I'm not planning to do anytime soon.

As I have a long financial horizon, I was thinking about not contributing anymore and just investing in the market, given the conservative investments in the cash balance versus continuing to contribute when I run mock calculations. I would contribute later when I'm closer to retirement.

My other retirement accounts include a maxed out 401(k) with full employer contribution, a backdoor Roth and a brokerage, all invested aggressively. Thank you for all your financial advice over the years. I wanted to hear your thoughts on this situation.

Dr. Jim Dahle:
Okay. Well, I don't have all the details, so we're just going to have to talk generally. As a general rule, I'm surprised that in your early 40s, which I think is what you said you are, you've been making six figure cash balance plan contributions for years.

Typically, to be able to make contributions that large, you need to be at least in your late 40s, preferably 50s or 60s, because a cash balance plan is an extra 401(k) masquerading as a pension. It's governed by pension laws and pension rules. There's only a certain amount of money you can put into a pension.

The younger you start, the less you can put in there. Being able to put in large amounts for long periods of time isn't really consistent with the cash balance plan. I worry that whoever's running your cash balance plan maybe isn't managing it all that well.

The other reason I worry about that is because you're saying you don't think they're going to close this thing at any point in the next 17-ish years, and that's usually a mistake. Most physician partnerships, companies, et cetera, that are running these cash balance plans find a good reason to close them every five to 10-ish years.

The reason why you want to close them is because you want to eliminate the possibility of really poor market returns or really great market returns, either ending up with too much money in there or not enough money in there. That's the other reason why you don't invest these things super aggressively, is because you don't want a lot of fluctuation in the returns.

The main reason you're doing a cash balance plan is for the tax benefit. It's not for necessarily the awesome returns. Typically, cash balance plans are not invested very aggressively. I think the one in my partnership is like 40% stock. We're all invested in one thing. It's a Vanguard life strategy fund. I think it's the one that's 40% stock. Even that, some people think they're a little on the aggressive side.

The point is you don't want to have too high returns in the cash balance plan or you have the potential of excise taxes. If they're too low, then you have to make additional contributions. Now, that might not be a problem for you because those are like additional savings. You get another tax break if you put that money into your cash balance plan. It's not all bad, but when you look at a group of physicians or something, a lot of them aren't going to be able to come up with the cash flow to be able to make that extra contribution and get that additional tax deduction. That can be a bad thing. That's why you don't invest them super aggressively.

Now, it sounds like you're worried about the fact that you're going to have money in this cash balance plan, quite a bit of money because you're putting in six figures a year, invested not that aggressively for a long period of time. Maybe that's okay because you're investing so much money elsewhere. You just mentioned you're maxing out a 401(k), you got a backdoor Roth, maybe you set an HSA too, and I know you set a brokerage or taxable account.

Maybe you're saving enough money that even if the cash balance plan isn't invested that aggressively, your overall asset allocation is still about what you want it to be. But if not, then yeah, I think it does make sense to maybe make a little bit smaller contributions to the cash balance plan when you're allowed to change them. Oftentimes, you're locked in for three years with the level of contributions that you've selected.

But I would start asking more questions. Maybe get yourself onto this retirement plan committee at your work because I'm worried that cash balance plan is not being managed maybe optimally like it could be.

I think you're asking good questions. I don't know that I can answer your specific questions without knowing exactly what asset allocation you desire, where you're at right now, and what your future contributions and how long you plan to work and all that kind of financial planning stuff is. I think really this question requires a full financial plan to answer. If you need help with that, you can go to our recommended financial advisors and hire one, or you can work it through yourself, maybe with some assistance from some of the folks on our forums.

But it's a complicated question you're asking. Recognize that. Also, recognizing that you're doing awesome. If you're putting away that kind of time, that kind of money for retirement, you're going to hit financial independence probably pretty young. Nice work. Congratulate yourself, Abby. Maybe you can optimize it a little bit better. I think you're asking enough questions and maybe it's time to get onto your retirement plan committee at work though.

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Dr. Jim Dahle:
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Yeah, I love that sponsor. I think I mentioned this at the top. You know that $100 a month thing they offer to residents? That was my suggestion like 13 years ago, and I'm pleased to see them doing it. I think Laurel Road is doing it as well. For whatever reason, they just didn't understand how exactly medical residency worked. So I helped them do that, and I think that's helped lots and lots and lots of White Coat Investors over the years.

All right, don't forget Expert Witness Startup School. If you're interested in that, go to whitecoatinvestor.com/expertwitness. Thanks for those of you leaving us five-star reviews, telling your friends about the podcast. A recent one came in from, I think it's Itman. He said, “Love it. Psychiatry intern here who no longer worries about finances thanks to WCI.” Five stars. Thanks for that review.

All right, keep your head up, shoulders back. You've got this. We can help. We'll see you next time on the White Coat Investor podcast.

DISCLAIMER

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

INTRODUCTION

This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 258 – Medical student gets full tuition scholarship.

If you're a high-income physician, you already know how hard you work for every dollar. The question is, how much of it are you actually keeping after taxes? Gelt is a tax firm focused on proactive tax strategy guided by expert CPAs and optimized via in-house AI tools.

They work with physicians and practice owners to use the tax code more intelligently. So your entity structure, deductions and income timing all work together to help you keep more of what you earn.

As a White Coat Investor, visit whitecoatinvestor.com/gelt to book a free strategy intro and receive 10% off your first year with Gelt. It's time to start using your tax plan as a lever for growth.

All right, welcome back to the Milestones Podcast. You can come on this podcast. You apply at whitecoatinvestor.com/milestones and we'll celebrate any milestone with you. We'll use it to inspire others to do the same, whether they're working on the same milestone as you or a different milestone.

But the beautiful thing about it is to get your voices on the podcast. This podcast really is centered on you. We want to encourage you to be successful because we think if you're financially successful, you actually become better. You become a better partner, you become a better parent, you become better at your job. If you're a doc, you become a better physician or dentist or whatever when you don't have to worry so much about money and you can concentrate on your family, your wellness, your patients, your clients, the things that matter most. So please, work on your milestones. If you feel like coming on and celebrating it with us, we appreciate that and we'd welcome you to do so.

Right now, we've got a promo going for Expert Witness Startup School. Hey, this is run by Dr. Gretchen Green. We've been working with her for years. We've had a number of white coat investors go through this startup school. It's not the cheapest thing on the planet, but Expert Witnesses also get paid very well. So, if it can get you into that sort of a side gig, it only takes one case to pay for your education as an Expert Witness.

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We're going to bribe you to sign up for it. If you sign up for it and take the course, we'll give you a free White Coat Investor course with enrollment. We're going to give you Continuing Financial Education 2024. It gives you 37 hours of material. You get up to 16 CME credits. Sign up for all this, whitecoatinvestor.com/expertwitness. That promotion, again, runs the 14th through the 26th of January. We're right in the middle of it. If you're hearing this right as it dropped.

INTERVIEW

Dr. Jim Dahle:
We've got a great interview today. I think you're going to like it. Let's get Jacob on the line.

My guest today on the Milestones to Millionaire podcast is Jacob. Jacob, welcome to the podcast.

Jacob:
Hey, Dr. Dahle, thanks for having me.

Dr. Jim Dahle:
Tell everybody where you're at in your career.

Jacob:
I'm a second year med student.

Dr. Jim Dahle:
Okay, and what milestone are we celebrating today?

Jacob:
I got a full tuition scholarship for all four years of med school.

Dr. Jim Dahle:
Full tuition. That's pretty awesome. Not a full ride then, nobody's paying for your room and board or anything, just full tuition.

Jacob:
Well, mine was paying for my room and board.

Dr. Jim Dahle:
Okay, so you got two sources going on there, both of which were pretty awesome.

Jacob:
Yeah.

Dr. Jim Dahle:
Okay, now this is not that common. The first thing I think about when I hear I got a scholarship for medical school is I think about the “scholarship” that I got for medical school, which was not really a scholarship, it was a contract. The military paid for my schooling and I paid them four years after I finished my training. Is that the sort of scholarship you have? Or are you indeed, you finished medical school and you don't owe anything for tuition?

Jacob:
No, I don't owe anything. It's actually through the foundation, through my school, through a donor. They donated a bunch of money and just actually realized there'll be a new program and they give, I think it's four students per year at our school, a full tuition scholarship for all four years. So, no tuition. They actually paid my fees too, which I don't know if they know about that, but a whole thing.

Dr. Jim Dahle:
But it's four students per year at your school?

Jacob:
Yes.

Dr. Jim Dahle:
All from the same donor, do you know?

Jacob:
Yeah, yeah, it's from the same donor. Him and his wife, they did a lot of business and they had close ties with the school and they actually passed away. And when they passed away, they gave a very large sum of money and they actually told us that the interest that they make from that money just basically pays for those four students' tuition.

Dr. Jim Dahle:
Yeah, it's an endowed scholarship. They endowed, it sounds like basically 16 scholarships with their estate when they died. Pretty awesome. Okay, well, there's more than four people in your class, I assume.

Jacob:
Yeah, it's like over 200.

Dr. Jim Dahle:
Yeah. So, why'd you get the scholarship?

Jacob:
Oh, I don't know, that's a good question. They actually didn't advertise, even when I applied, I actually applied to one school, I did early decision. They didn't really advertise the scholarship. I don't know if that's on purpose or the reason, but I think they just used my med school application as kind of a scholarship application as well.

When you apply to my specific school, you don't really apply for specific scholarships, they just use your med school application, they kind of just apply to all of them and their system. So as to why I got it, that's still a mystery to me. I guess they liked my application.

Dr. Jim Dahle:
You didn't apply for this scholarship?

Jacob:
No, no.

Dr. Jim Dahle:
Did you even know this scholarship existed before you got it?

Jacob:
I had no clue, no clue.

Dr. Jim Dahle:
Okay, well, it's hard to call this an accomplishment, but it's pretty awesome nonetheless.

Jacob:
Yeah.

Dr. Jim Dahle:
That's pretty cool. And hopefully becomes more and more and more common. Obviously, there's a few schools now that have some sort of free tuition sort of thing, that's obviously not your whole school, but it's still 2% of the students a year that are getting this because of this generous donor.

Okay, tell me how you felt when you found out you were getting this, because how were you planning to pay for scholars for your medical school?

Jacob:
Actually, before I proposed to my wife, I actually wrote on a sticky note how much I planned my loans to be, how I was planning to pay them off, that kind of stuff, because I felt like that was probably relevant information for her to know before we got married.

Dr. Jim Dahle:
You thought you'd put it on a sticky note, leave it on the fridge or what?

Jacob:
Yeah, that was my plan. That was my financial plan as of then. But really, it was just all loans, even undergrad. My grandpa actually had a 529 for me. It was like $10,000. I paid for room and board my first year of undergrad and the rest I had to take out loans.

Dr. Jim Dahle:
So you do have some loans still?

Jacob:
Yeah, I do have loans from undergrad just because I work part-time, but tuition costs a living. I still have some loans, but it's nowhere near where it would be. So yeah, it was just all going to be loans.

Dr. Jim Dahle:
Okay, what's the timing of the marriage here? Were you married when you received this scholarship?

Jacob:
No, I actually got married last June.

Dr. Jim Dahle:
After the first year?

Jacob:
Yes, yeah. And I actually got the scholarship. I'd actually already taken out money for the first year.

Dr. Jim Dahle:
You'd already taken out the loans?

Jacob:
Yeah, I'd already taken out the loans. I remember I was studying biochemistry in a library and my phone's obviously not disturbed. And so, I look at my phone, I have a missed call and a text, and it said, “I'm just going to use a fake name here, “Amy from the foundation. We have some news for you, if you could give me a call back.”

Dr. Jim Dahle:
That's a fun call to make.

Jacob:
Yeah, yeah. And so, I was like, “Is this a scam? What's going on?” I looked up her name, looked up the foundation and it was her name. I was like, “Okay, I'm going to call them back.” And she told me and I was shocked. I was like, “What do you mean? Like me?” And she said, yeah. I got pretty emotional because I was planning to pay off $250,000, $300,000 worth of loans. And she said, “Yeah, it's one of my favorite calls to make every year because I get to make it.”

Dr. Jim Dahle:
I bet.

Jacob:
Yeah, it was pretty awesome. I called my now wife and she said the same thing. She's like, “Is this a scam? What do you mean? What's going on?” And I was like, “No, it's for real.” I went and told my parents and it was awesome.

Dr. Jim Dahle:
That's a pretty fun way to run a scholarship program actually.

Jacob:
Yeah, yeah.

Dr. Jim Dahle:
All right, what has that changed for you? Has that made you maybe consider other career paths, other specialties that maybe you weren't considering? What does this mean for you to know that you're coming out of medical school, $300,000 ahead of your peers? Granted, you're still a second year. I don't know that you're locked into a specialty by any means anyway.

Jacob:
It really just takes kind of a weight off your shoulders because it was a big stress for me. That's actually why I started reading your stuff was I got accepted early decision in September of my senior year, something like that. And then it kind of hit me. I was like, “This is a lot of money I'm going to have to pay. How am I going to pay all of this back?” Then I read your book, started listening to podcasts and it made me feel a little bit better to know that you will be able to pay this off. It'll take a long time.

Dr. Jim Dahle:
As long as you learn how to manage money, it's going to work out. That's the bottom line. Medical school is still a good investment, even if you've got to borrow the whole sum. So long as you complete it, match into residency, complete that, get the average job for your specialty and work full time for five years, it still works out as a good decision, even if you've got to borrow it, for sure.

Jacob:
Yeah, exactly. But still, it's a big weight off your shoulders.

Dr. Jim Dahle:
All right, let's turn to your other source of income during this typical zero income time of life, which is your spouse. You got married, you said after your first year.

Jacob:
Yes.

Dr. Jim Dahle:
She's working or what's going on there?

Jacob:
Yeah, she's a nurse. She works at the Children's Emergency Department. So, don't plan to say get any more loans. Hopefully that can get us through. And we live pretty frugally.

Dr. Jim Dahle:
So you're living under nursing income?

Jacob:
Yes.

Dr. Jim Dahle:
Yeah, pretty awesome. You should come out basically just your undergraduate debt.

Jacob:
Yes, that's pretty much it.

Dr. Jim Dahle:
How much do you owe from undergraduate?

Jacob:
I took out like $10,000 a year just to cover. I lived on $1,200 a month. It was rent and food, was pretty much what I had. I think it was around $40,000.

Dr. Jim Dahle:
$40,000, $50,000. Okay, how long is it going to take you to wipe that out when you walk out of residency?

Jacob:
Oh, a few months. Don't plan to drag it on for long. I really want to pay it off. And then there's PSLF and all that. I felt like because I was blessed with a scholarship, maybe not feel obligated, but I think I can pay off the rest.

Dr. Jim Dahle:
Okay, having been the recipient of such largesse, how does that make you feel about the role of giving, generosity, charity in your life?

Jacob:
They actually told us when they gave it that the donors, their goal for the scholarship was that each recipient, they do a day a month of pro bono work, go work in a homeless shelter or something like that and care for people who maybe couldn't afford healthcare. So, I definitely plan to do that. And then I definitely plan to donate and hopefully help, maybe not just medical students, but also my wife is a nurse, nursing students, other healthcare profession students. Hopefully just reduce their debt burden as well because it's changed my life. So, hopefully I can do that for somebody else.

Dr. Jim Dahle:
Yeah, pretty awesome. Okay, you started financial planning when you found out you got into medical school and it was going to be really expensive and you're probably going to pay for it with debt. How far have you gone? How many years ahead do you think you've really planned at this point? You just getting through medical school and then sort it out as an intern or do you have some lifelong plan already mapped out?

Jacob:
Maybe not lifelong, but I did buy your student course. I was on the podcast every week. I think I have two of your books on my shelf right here. I'm always reading about financial stuff now. I don't think I have lifelong things, but definitely I feel like you can never learn too much. I try to just learn as much as I can. And then once I started actually making money, I'll have the knowledge to handle most of it myself.

Dr. Jim Dahle:
Now, some doctors out there say, anybody who talks about money or thinks about money or focuses on money is a bad doctor, that they're money grubbers or whatever adjective we want to use. What do you think about this focus on finance from the beginning of your career? Do you think it makes you a worse doctor or better doctor?

Jacob:
I think better. I feel like it's kind of maybe a privileged point of view to say that you shouldn't talk about money. You shouldn't care about money. Money doesn't matter. I don't come from much money and I can tell you it matters, but also I get the sentiment that it shouldn't be your number one priority. And you've said this before too, it should be maybe top five.

But yeah, I think it makes you a better doctor. I think if you're not stressing about money, if you're not rushing through patients in clinic and trying to see people just because you need to make a car payment or a mortgage, it helps you be a better doctor. And if that's the only thing in your mind, that's bad, but it should definitely be a priority. It's a big part of your life, financial planning.

Dr. Jim Dahle:
Now there's a bunch of medical students out there listening to this podcast. Most of them have not been as fortunate as you with regards to their method of paying for school. About 75% of docs come out with student loans. What advice do you have for them?

Jacob:
I think just what you said and what you say all the time is, if you get through med school, you match in residency, you get through residency and you work full time. Granted, if you didn't go to Harvard, some private school and then you're a pediatric endocrinologist, then you can pay off your loans. And I had a plan, I kind of made my peace with that, but it is possible.

And when you run the numbers, if you're making $350,000 a year, it really isn't a very large portion of your income you have to put away for these loans. If you're looking at your whole career, you're paying off these loans for three to five years and then those are gone. And then that's it. You can do with that money what you want. So, it is possible, just work hard, get through med school, get through residency.

Dr. Jim Dahle:
All right. Well, thank you so much, Jacob, for being willing to come on the podcast to share your story and maybe inspire some others to do well while doing good in their lives. Thank you so much.

Jacob:
Thank you.

Dr. Jim Dahle:
Okay, I hope you enjoyed that interview. There's lots of ways to pay for medical school. Some people might have a 529, which is what we're going to be talking about in financial bootcamp in a minute. Other people, of course, take out loans. About 75% of medical students take out loans. Some people use a contract like I did, military contract, National Health Service Corps, Indian Health Service, MD, PhD, those sorts of contracts. But however you do it, please pay attention to your finances. Just put a little bit of attention into it and you'll be amazed how much better it makes your life.

FINANCIAL BOOTCAMP: 529S

Dr. Jim Dahle:
A 529 is a college savings plan, probably the best college savings plan. The way it works primarily is that it gives you tax-free earnings and tax-free withdrawals when you spend the money on an eligible education expense. Some states also give you a deduction or a credit for putting money into the account. Not all states, but some states do.

You want to be careful which plan you use because every state offers at least one 529 plan. If your state gives you a deduction or a credit, you should probably use your own state's plan. If your state doesn't give you any deduction or credit or gives you the same deduction or credit, no matter what plan you contribute to, you can look for the best plan, which is usually found in places like Michigan and Utah and Ohio and Nevada and New York. Those tend to be the better 529 plans in most rankings that they do every year.

Truthfully, there's lots of great 529 plans. Over the last 10 years, I would say the vast majority of plans are good now, whereas I would have said 10 years ago, it's only a minority of plans that are really good. The expenses have come down, the investments have gotten better, and most 529s are pretty good these days.

Lots of people want to max out their 529s. Quit doing that. There is no maximum on a 529. You can literally open a 529 for every one of your kids. Both you and your spouse can open a 529 for every one of your kids in every state. You can literally put billion dollars into 529s if you want. So, you really can't max this thing out. It's not like a 401(k) that way. So, stop trying to max it out.

The amount that generally can be contributed to them is typically the gift tax limit for the year. Because the problem is, if you start putting in more than that, you got to start filling out gift tax returns, and that's a pain. Not entirely true. You can actually super fund them for five years worth of contributions. But it's a little bit of a pain.

Frankly, people trying to do this or trying to start these in their own name before their kid's even born, I think you're looking beyond the mark in New Testament speak. This is probably not a great idea. Wait until the kid's born. Wait until you have a social security card for them. Don't bother putting in more than $19,000 a year or whatever the year's annual gift tax limit is. That's going to be enough. You don't have to have hundreds and hundreds of thousands of dollars in a 529 for your kid to go to college.

There are other ways to pay for college. They can get scholarships. They can work in the summers. They can work during the school year. You can pay for it from your current cashflow. They can choose a cheaper school. And there's even student loans still available out there. Don't really recommend you use those for undergraduate school. But the point is you don't have to save it all up in advance. So, you don't have to put a gazillion dollars in there.

All right, another thing to consider with these is a lot of people get fixated on the state tax deduction. The real value is in the federal tax-free growth and the federal tax-free withdrawals. Now, you typically also get state tax-free growth and state tax-free withdrawals. That's where the real value is. It's not in the little deduction you get up front.

I think in my state, I get a deduction of 5% of the first $4,000 that goes into the account per beneficiary. And 5% of $4,000 just isn't that much money. It's a couple of hundred bucks. That's all it is. It's not something you need to rearrange your entire financial life to get.

Now, a lot of people wonder what investments should they choose. Well, there's two schools of thought here. One is to make it less and less risky as your kid gets closer to college. And I think that's a reasonable school of thought for people for whom not having a certain exact amount of money in that account at time of enrollment is a big deal.

I think for most White Coat Investors, that's not a big deal. If there's a big stock market crash the year before your child starts school, well, they're going to be in there for four years anyway. Maybe you cashflow the first year and then use the 529 for the other years to give the stock market a little bit of time to recover.

And if you're in that sort of a situation where it's not critical that you have the exact amount in there right when they enroll, I think you can invest very aggressively. And in fact, we invest our 529s very aggressively. Even while the kids are in college, we leave it invested in 100% stock portfolios. And so, I think that's fine as long as you can take care of the downsides of a nasty stock market downturn.

Okay, the bigger problem that I think more and more White Coat Investors are dealing with is what do you do with leftover 529 money? And there's a lot of options. There's a new one that came out of the Secure Act 2.0, which is the rollover to the beneficiary's Roth IRA. Now they still have to have earned income just like they would if they were contributing their own money to the Roth IRA. And you can only put the amount they're allowed to contribute that year into it. But the total amount that you're allowed to rollover is $35,000. That's probably going to take something like five years to actually clean out that $35,000 out of the 529 into the Roth IRA.

But that's a good option if you're only a little bit overfunded in the 529. If you got $200,000 too much in there, that plan is not going to work. Now that might be because they chose not to do the schooling you thought they were going to go to, because you can always use this for grad school or something.

Probably the best option if you have a very overfunded 529 is to change the beneficiary. You can change it to yourself, you can change it to their sibling, you can change it to their cousin. Probably most frequently you change it to their kids. That gives you another 30 years of tax-free compounding that account. And now you've not just paid for your kids' schooling, but you paid for your grandkids' schooling without having to make any additional contributions. I think that's probably the best option.

You can always take the money out. Not only are you going to pay the taxes at ordinary income tax rates on all your earnings, but you're also going to pay a 10% penalty in addition to that. This is not a good place to invest money for retirement or anything other than education.

If your kid has a big, huge 529 because they got a big, huge scholarship, you can actually take the money out equal to the amount they got in scholarship. You do have to pay taxes on the earnings at ordinary income tax rates, but you don't have to pay that 10% penalty for the amount that is equal to the amount they had in scholarships.

Other uses of 529s is not just college and grad school. You can actually use it for K through 12, your kids in private school. You can use $10,000 per year from the 529 for private school, but there's a lot of states that don't allow you to do that. And some of them are states where there are lots of White Coat Investors. California, New Jersey, New York, and Illinois. It's not state tax-free. It's still federal tax-free. You take the money out and you pay for private school with it, but it's not state tax-free. When you pull that money out, you're going to have to pay tax on the earnings at relatively high California, New Jersey, and New York, and Illinois tax rates. So, keep that in mind.

529s are probably the best way to save for college education. Put an appropriate amount in there. You don't have to have the entire cost of your kid's education in there, but it's a great way to save and have your money grow tax-free for that purpose. It's a great way to show your kids you care about them.

They really do appreciate it. I've got a child right now traveling the world using 529 money for an international business degree, and she's thanked me multiple times for it. It's a wonderful thing to do, but just be careful not to get too overfunded in there to the point where you don't have a great option for the overfunding.

SPONSOR

Dr. Jim Dahle:
If you're a high-income physician, you already know how hard you work for every dollar. The question is, how much of it are you actually keeping after taxes? Gelt is a tax firm focused on proactive tax strategy guided by expert CPAs and optimized via in-house AI tools.

They work with physicians and practice owners to use the tax code more intelligently, so your entity structure, deductions, and income timing all work together to help you keep more of what you earn.

As a White Coat Investor, visit whitecoatinvestor.com/gelt to book a free strategy intro and receive 10% off your first year with Gelt. It's time to start using your tax plan as a lever for growth.

All right, that's the end of our podcast. Keep your head up, your shoulders back. We'll see you next time on the Milestones to Millionaire podcast.

DISCLAIMER

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

Dr. Jim Dahle
A healthcare FSA, or Flexible Spending Account, is a tax-advantaged account that allows you to set aside money specifically to pay for qualified medical expenses. These accounts are typically offered through your employer as part of a benefits package and are funded with pre-tax dollars, which means the money you contribute is not subject to federal income tax, Social Security tax, or Medicare tax.
When you contribute to a healthcare FSA, you choose an annual amount during open enrollment. That full amount is then available to you on day one of the plan year, even though the contributions are deducted gradually from your paycheck throughout the year. This can be especially helpful if you have predictable medical expenses early in the year, such as planned procedures, prescriptions, or ongoing therapy costs.

Healthcare FSAs can be used for a wide range of qualified medical expenses. These include things like doctor visits, prescription medications, copays, deductibles, dental care, vision expenses, glasses, contact lenses, and many over-the-counter medical items. The list of eligible expenses is fairly broad, but it’s still important to confirm that an expense qualifies before using FSA funds.
One of the most important rules to understand about healthcare FSAs is the “use it or lose it” feature. In most cases, money you contribute must be used within the plan year or it is forfeited. Some employers offer limited flexibility, such as a short grace period or the ability to roll over a small amount into the next year, but these features are optional and vary by employer. Because of this rule, it’s important to be conservative and thoughtful when deciding how much to contribute.

Healthcare FSAs are different from Health Savings Accounts, or HSAs. Unlike HSAs, FSAs are not portable, meaning if you leave your job, you typically lose access to any unused funds. FSAs also do not allow you to invest the balance, and they are meant to be spent on current healthcare expenses rather than saved for long-term use.

For many people, a healthcare FSA can be a powerful way to reduce taxes while paying for everyday medical costs. If you know you’ll have consistent healthcare expenses during the year, contributing to an FSA can make those costs more affordable by allowing you to pay for them with pre-tax dollars. Like any benefit, the key is understanding the rules and using the account intentionally.