Financial Strategies Every Physician Needs: Taxes, Retirement, and Real Estate

Transcription – WCI – 459

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 459, brought to you by Laurel Road for Doctors.

Laurel Road is committed to serving the financial needs of doctors, including helping you get the home of your dreams. Laurel Road's Physician Mortgage is a home loan exclusively for physicians and dentists, featuring up to 100% financing on loans of a million dollars or less. These loans have fewer restrictions than conventional mortgages and recognize the lender's trust in medical professionals' creditworthiness and earning potential.

For terms and conditions, please visit www.laurelroad.com/wci. Laurel Road is a brand of KeyBank N.A. and an equal housing lender, NMLS #399797.

All right, welcome back to the podcast. We're excited to have you. The White Coat Investor community wants you to be successful, wants you to be successful in your career, in your finances, with your family, in your relationships, et cetera.

Burnout is a problem in medicine. We want to help you crush it. One of the best ways to crush it is to have your financial ducks in a row. If you can have your finances taken care of, you'd be surprised just how much you can do to crush burnout in your career.

It might be changing jobs. It might be cutting back. It might be less call. It might be just being able to tell an administrator to shove it because you don't need the money and you have the ability to make changes in your workplace that not only impact your life, but impact those of your coworkers and your patients.

While we are trying to become your source for all things financial, we're trying to help you become financially literate and financially disciplined and connect you with those resources you might need, let's not forget that we're really focused on something far more important than just your money. That said, we still have to teach you about money.

For you students out there, it's time to do our live Money Masterclass aimed at students. What medical students need to know about money. You can sign up for this at whitecoatinvestor.com/moneymasterclass. I'm going to be here with Andrew Paulson. The reason I'm bringing Andrew is because he knows more than anybody else on the planet on how to manage medical school loans.

We're going to be presenting on everything you need to know as a medical or dental student, et cetera, financially speaking. And we're also going to be giving away five Fire Your Financial Advisor student version courses for those who attend this webinar live.

This webinar, if you're listening to this the day the podcast drops, is today. It's at 06:00 PM tonight. So if you're listening to this and it's 06:15, switch over to the webinar. You can listen to this podcast later, but again, you can sign up for that whitecoatinvestor.com/moneymasterclass.

If you're listening to this after today maybe we can get you a recording of that. If you still sign up or something like that. I want to make sure those out there interested in coming to the Physician Wellness and Financial Literacy conference know that you've only got one more day to get the $200 off that. So tomorrow, if you're listening to this, the day of the podcast drop is the last day to get $200 off your in-person registration. This drops on the 19th. The 20th of February is the last day to get that $200 discount. Use VEGAS200 when registering at whitecoatinvestor.com/wcicon to register for that.

You don't want to miss this year's conference. It runs March 25th through 28th and it's going to be awesome. Yes, the JW Marriott hotel is sold out because so many of you are coming, but we've got one just down the street that's a very nice place to stay, and it's still going to be a wonderful conference for you.

Even if you're not sleeping in the same building in which you're doing all the activities, it's literally a 10 minute walk from the venue. And the exercise is probably good for you. It'd be good for your wellness. And come on, this is Vegas in March. It's not like it's going to be steaming hot or freezing cold or anything. It's going to be a nice walk.

So, book your hotel now before it sells out, too, of course. If you can't come in person, that's okay. We'd still like to have you participate. You can come virtually. Virtual is obviously cheaper. It's much cheaper for us to put it on and we don't have to feed you and house you and all those sorts of stuff during it as well.

But you get all the content and the content is awesome. We've got dozens of great speakers and we're going to have a good time even virtually. And of course you get the lifetime access to all the content later, just like you would if you were coming in person. You can sign up for all of that at whitecoatinvestor.com/wcicon. That code again is VEGAS200.

I have to do some corrections and clarifications, whatever you want to call them. Let's make sure this show is accurate. So when I screw something up, send us an email to [email protected]. We'll get it fixed. I do screw things up from time to time, mostly because we're not afraid to get into the weeds on this podcast. And the more detail you get into, the more likely you are to get something wrong.

 

CORRECTION: TSP AND ROTH CONVERSIONS

Dr. Jim Dahle:
But I got an email saying, “I just listened to podcast number 451. You discuss the new option in the TSP to perform in-plan Roth conversions. Unfortunately, the TSP has decided that any traditional TSP money that's converted to Roth in the plan will be converted pro-rata.”

And this is what I get for talking about this on the podcast before I wrote a post about it. I've since written a blog post all about the new TSP Roth conversions. That'll be out soon. You'll be able to see that.

But the bottom line is the TSP is not doing this the way I would have liked them to do it, which is to have three sub-accounts. Your tax deferred sub-account, your Roth sub-account, and your after-tax sub-account.

With the TSP, this is the Federal Thrift Savings Plan, for those of you who are military members or otherwise federal employees, they only have two of those sub-accounts. All your tax-exempt money from when you're deployed in the military goes into the tax-deferred sub-account. And the problem with that is when you do a Roth conversion, you can't just convert the tax-exempt money, which is a real bummer.

It basically means you can't really do the mega backdoor Roth IRA process with the federal TSP unless you have wisely chosen not to have any tax-deferred money in the TSP, which is probably the right thing for lots of people who have access to the TSP.

Military members are either going to get a pension that's going to fill the lower brackets later, or they're going to get out and make a whole bunch more money. And so, it can make sense for them to only do Roth money while they're in the military. But if you've got a bunch of tax-deferred money in there, any Roth conversion you do is going to be prorated. So, you should be aware of that. They also don't let you convert the entire thing. You have to leave, don't quote me on this, I think it's $500 you have to leave behind in each sub-account.

So, keep that in mind as you go and do Roth conversions. It's nice of the TSP to actually allow them. The IRS has allowed this for the last 15 years, and the TSP is just barely getting on board a decade and a half later. It's good that you can do some Roth conversions, and maybe these Roth conversions work for you and your situation in the TSP. But don't expect to be able to do the classic mega backdoor Roth IRA process in your TSP. You can still separate the basis when you separate from the military like I did, and convert your tax-exempt money to Roth at that point. But you do have to wait until you separate from the military.

 

CORRECTION: CASH BALANCE PLANS RE OHIO HOMESTEAD EXEMPTION

Dr. Jim Dahle:
Second correction, and this is great. This is somebody who left a note. It's an attorney who left a note on the show notes for a recent podcast, which we talked about cash balance plans and trusts in the $1 million debate.

He says, “I'm an Ohio attorney. You erred in describing the Ohio homestead exemption. Ohio added an inflation adjustment, so one cannot simply look at the statute to know the current amount of the homestead exemption. The inflation adjustment is done once every three years. This period is good for April 1st, 2025 through April 1st, 2028. The current exemption amount is $182,625 per person. This means that married couples who jointly own a property can protect from creditors double that amount.”

I appreciate those corrections. Not necessarily because there's a lot of you that live in Ohio and are really worried about the exact amount of the homestead deduction, but because I'm also going to correct it in the White Coat Investor's Guide to Asset Protection book. That's the White Coat Investor's Guide to Asset Protection. We have all the state laws that have to do with asset protection, and we try to keep that as up-to-date as we can. We don't call them second editions. We just update it. And so, we try to keep that as up-to-date as we can.

And obviously, when you're talking about 15 laws times 50 states, it's a lot of laws to keep up-to-date. It's never completely up-to-date, of course, but we're doing the best we can by helping people make wise asset protection decisions. Thank you, Attorney Ben Rodriguez, for writing in and correcting that particular mistake.

Okay. Let's listen to some of your questions and see if we can get them answered.

 

DIRECT INDEXING AND TAX LOSS HARVESTING

Stan:
Hi, Jim. This is Stan Gertler. I was wondering if you could comment about direct indexing using long and short extensions to maximize tax loss harvesting. When is this appropriate, and is it ever worth the extra cost? Thanks.

Dr. Jim Dahle:
Okay. I guess we're going to start out right on the weeds today. Not only are we going to talk about direct indexing, which is in the weeds to start with, but we're going to talk about long short strategies while doing direct indexing.

Let's step back for a minute and talk about direct indexing. What is direct indexing? Direct indexing is a process where you're trying to overcome a problem with mutual funds. This is a problem that has always existed with mutual funds since the 1940 Investment Company Act that basically established the mutual fund industry.

Mutual funds are required by law to pass through any gains that they realize when they're buying and selling the various stocks in the fund. They have to pass through those gains to you as the owner of the mutual fund shares, but they cannot pass through losses to you.

It's very unfortunate, but this is the way mutual funds work. They cannot pass through the losses to you. So, even if your mutual fund has all kinds of losses from selling shares that have fallen in value, it can't pass those losses through to you to use on your own taxes. A fund cannot tax loss harvest for you. You must tax loss harvest on your own.

Now you can do that with fund shares or ETF shares, and this is what I've done for the last 20 plus years, is when there's a big bear market, you take all the shares you bought with new contributions in the last year or two or three, and you tax loss harvest them. You swap them for another ETF that's very similar, but not in the words of the IRS, substantially identical, and you get a big fat tax loss.

I've been able to acquire all kinds of tax losses over the years by doing this. The pandemic rolls around in 2020, and I do a bunch of tax loss harvesting. The interest rates go up 4% in 2022, so I do a bunch of tax loss harvesting. By doing that, I've accumulated seven figures of tax losses over the years, and they're useful. You can use $3,000 a year against your ordinary income, and you can use an unlimited amount against any capital gains that you have.

I haven't paid capital gains taxes in a long, long time because I offset them with these capital losses, and they're very useful that way. And when it's easy and cheap to grab some more capital losses, you might as well do so. It's just a little bit of effort and not much expense, and if those losses are useful to you, you might as well grab them.

Direct indexing is a method to get more tax losses than you would get by just tax loss harvesting at the fund level, because what you are doing is not buying an index fund. You are building an index fund, and if you got enough money, you can do this. Instead of buying an S&P 500 index fund, you'll literally buy all 500 stocks, and you can hire people to do this for you.

And it used to be that they would charge you some money to do this, 1% or 2% or whatever, and then it got down to about 0.7%. And more recently, with one of our partners, it's down to about 10 basis points, at which point maybe it makes sense for you now that you've gotten it down that cheaply.

And so, the idea is there's stocks going up and down all the time. There's just a lot more opportunities to tax loss harvest when you own 500 investments than when you own one investment. That's the idea. So, you get more tax losses. Yeah, they're still heavily front-loaded. You can really only tax loss harvest, for the most part, for the first few years after you buy an investment. After that, the tax losses kind of peter out, because everything's appreciated from what it costs when you bought it.

That's the idea behind direct indexing, is to get more tax losses than you could otherwise get. And who might that be useful for? Well, somebody that expects to realize a lot of capital gains. Maybe you're selling a practice, or maybe you're selling a small business, and millions and millions and millions of dollars of capital losses would actually be useful to you. But if you're one of those people, you're like, “I'm never going to realize any gains anyway, and I can only use $3,000 a year against my ordinary income.” You don't need more tax losses. You don't need to do direct indexing.

Okay, that brings us to the next iteration of this. Oh, and by the way, there are critics of direct indexing as well. They say it's not as easy as you think to track the index. And that error, that tracking error on the index, maybe eats up a lot of the value that a lot of people are getting from those additional losses.

There are some people that don't think this is a no-brainer, even if you need those additional losses, because then you're locked into that investment long-term. And if they're having trouble tracking the index long-term, even if it's only by 10 or 20 basis points a year, that really adds up over 20 or 30 years that you might be holding these investments. Direct indexing, kind of like whole life insurance, if you're going to do it, you probably need to do it the rest of your life.

Long-short version of this is you're buying some stocks long and some stocks short. You're shorting some of the stocks. You're betting they're going to go down. And by doing this in kind of an equal way, all you're doing is mostly getting that index performance, maybe paying a little more in cost, but getting that index performance and just getting a whole lot more losses. Because you're getting these stocks long and you're getting them short, you can just get more losses.

That's the idea, is you're supercharging the ability to get tax losses. And the downside of doing this is at this point, you're letting the tax tail wag the investment dog. There's just a lot more that can go wrong, more difficulty in tracking the index return you want.

At the end of the day, you don't actually want to lose money. You want good returns. And as you make this more and more complicated, you got to really ask yourself, “Do I really need all those losses? Are those really going to be that beneficial to me to have all these tax losses?”

And as you move from direct indexing to long-short direct indexing, I get pretty skeptical. Maybe if you've got a really good use for tax losses, you can convince yourself that it's worth investing this way for the rest of your life, but I'm not entirely convinced. I hope that helps and hope that trip off into the weeds did not lose everybody else listening to the podcast today.

 

QUOTE OF THE DAY

Dr. Jim Dahle:
Our quote of the day today comes from John Hope Bryant, who said, “You can make money two ways, make more or spend less.” And I love that quote. One thing you may not realize is spending less is even more powerful than making more. Because when you spend less, you don't have to pay any more in taxes, but when you make more, you do have to pay more in taxes. And for a lot of you out there, your marginal tax rate on an additional dollar of earnings is 35, 45, even 50% plus, depending on what state you live in. And so, it's not insignificant. You might have to earn $2 in order to have one. Whereas if you just spend $1 less, you get that dollar.

All right. Thanks everybody out there for what you do. Your job is hard. And if no one said thanks today, let me be the first. I appreciate what you're doing, whether you are an attorney, whether you are a tech worker. Most of you, of course, are doctors and doctors tend to be people pleasers. We do this because we want to help people. And it's nice to get a thank you every now and then. And it doesn't happen maybe nearly as often as it should.

 

BUYING PROPERTIES TO SAVE ON TAXES

Dr. Jim Dahle:
Okay. Here's a question from a doc who's interested in buying properties and seeing how that's going to interact with their 1099 income.

Speaker:
Hi, I'm a 1099 physician, and I've heard this from a few other physicians in the same situation. The concept of buying a property every year. Essentially, a certain amount of money is either going to go to the IRS or to a property. So they figure that by buying a property, you have the investment opportunity of money that would be leaving your account anyways.

This is a relatively historic time in the sense that mortgages have outpaced rents. And many times you're going to be in the red on a monthly basis if you rent it out. Is this still a generally advisable thing to do? Thanks for everything that you do. I've really learned a lot.

Dr. Jim Dahle:
Okay. There is so much in that question that we're going to be talking about this one for a while. First of all, the fact that you're paid on a 1099 is essentially irrelevant to the whole rest of the conversation. There is nothing about this that has anything to do with being a 1099 doc or being a W-2 doc or being a K-1 doc or whatever you want to describe yourself as.

If you want to be a direct real estate investor, you want to own properties yourself, then you have to buy the properties at some point. And unless you've gotten a big inheritance or won the lottery, you're going to have to buy the properties with money you earn. And you only earn so much money every month, every year.

What that means for most people who are trying to build a portfolio of direct real estate property is you're buying one at a time. And maybe that works out that the amount of money you have to put into real estate each year is enough to buy one property. Maybe you make enough that you can buy two properties or three properties, or maybe you can only buy a property every couple of years.

The truth is as you go along, those properties should all have positive cashflow. You need to be buying properties wisely and putting enough down that they all have positive cashflow, but they start contributing to the process over time.

So maybe you start out buying a property every three years, and then every two years, and then every one year, and then all of a sudden you're buying a property every few months. Because not only are you working earning money, but all those properties you already bought are working and earning money that you can use to buy the next property. Or after you've had them for a while and they've appreciated, maybe you refinance them. I can do a cash out refinance, take some money out, still cashflow positive, but now you've got some additional cash you can use to buy the next property.

So, it typically accelerates. One property a year would be pathetic. If you've been doing this for 30 years, I'm like, really? You buy one property a year, you've done this 25 times, and you got to wait another year to buy another property? That doesn't make any sense at all. The one property a year ideas, somebody's clever, I don't know, maybe there's a book titled that or something, buy one property a year, I don't know. But it doesn't really make sense.

The bottom line is if you want to be a direct real estate investor, you got to get started. And if telling you to buy one property a year gives you the motivation to get started, great. Buy one property a year. But there's nothing magic about one property a year. And I suspect the rate at which people buy properties typically accelerates as they build that little real estate empire.

Okay, let's move on to the next part of this question, which is the idea that you can either buy a property a year, or you can pay the IRS what you owe them. That's not exactly how it works. You really need to understand the details of this.

That can work for some people. And it works for people who can use depreciation from the property to offset their earned income, whether that earned income was paid on a W-2 or a 1099 or a K-1 or whatever. There are some very specific rules that dictate who can do that, who can use a passive loss from depreciating a property against active earned income.

There's basically two groups of people. The first group are real estate professionals. This is REPS status, real estate professional status. And typically, it's not the 1099 doctor, it's their spouse. Because the requirement to be a real estate professional is twofold. You have to work at least 750 hours in a year in real estate. And I'm not just talking browsing the MLS for properties to buy, or reading real estate investing books. I'm talking actually working in real estate. You're a realtor, you're a property manager, you're renovating your own properties, whatever. That's like 16 hours a week. It's a part-time job. That's requirement number one.

Requirement number two is you have to do that more than all your other professional stuff. If you're also doctoring, you can't doctor any more than 749 hours, if you're only going to work 750 hours in real estate. This is why it's usually your spouse. Now, if you're filing a married filing jointly tax return, it's okay. Your spouse can be the real estate professional. You can be the ENT getting paid $800,000 a year and using that extra earnings to buy properties. Works out very well. It's a nice combination. It's a nice combination to be married to an interventional radiologist as well. But if you're going to be married to somebody in real estate, you might as well take advantage of it.

If you are a real estate professional or your spouse is, you can use those depreciation losses, those paper losses from your real estate investment that you just bought this year against your earned income. And it's not a one-year thing. You can do it the next year as well and the year after that.

But you tend to not have losses after a while. Because you've depreciated the property and the cashflow has gone up and it's now more than the losses you get from depreciation. And so, you don't have losses after a while. It tends to be early on in the life of an investment property that you bought that you get these losses.

And you can actually accelerate them. You can do a cost segregation study and you can take depreciation a little bit faster on some of the contents of the home furniture and some of the furnishings and those sorts of things than you can on the home itself. And of course, you can't depreciate the ground it's sitting on. It's only the dwelling that you're depreciating.

But the bottom line is it is possible to get a whole bunch of depreciation very quickly right in the year you buy a property. And if you have real estate professional status, you can use that to offset your earned income. So, it is possible to use the money instead of sending it to the IRS to use it to buy a property. Now you're technically deferring those taxes, but if you never sell the property, you're deferring them indefinitely. And so, it does work out.

The other category besides real estate professional status is what is usually called the short-term rental loophole. And so, if you are renting out the property for short time periods, i.e. an average occupancy of a week or less, you don't have to do 750 hours. You can get away with as few as a hundred hours of management on properties during the year. And trust me, if you're managing a bunch of short-term rentals, you're going to get your hundred hours in. And it doesn't have to be more than you do doctoring.

And so, you could have that property be a short-term rental for a year or two or three, and then convert it to a long-term rental if you want, and have this actually work where you're using money you would have paid in taxes to buy rental properties. But your life's going to revolve a little bit around this rental property empire that you're building. This isn't something that you can just do passively and have no involvement with whatsoever, but it can work this way. Real estate investing can be very tax efficient when you do it properly, but it's going to require some work from you.

I think I've explained the situation in which this can work, but it's not nearly as simple as you might've been led to believe when you listened to the speak pipe question that was left. And I hope I answered your question. Yes, it can work, but read the fine print. There's a lot of fine print involved in doing this.

And of course, you got to be careful not to let the tax tail wag the investment dog. Never buy an investment mostly or primarily for the tax benefits. I get it that it's shocking when you become an attending physician and you're now paying more in taxes than you ever even made as a resident or as a fellow. It's shocking and it doesn't feel fair.

You just realize that we have a progressive tax system. Well, guess what? We have a progressive tax system. The more you earn, the more you pay in taxes. Get used to it. It's a good problem to have. It's not necessarily bad to pay a bunch of money in taxes. I much prefer my life now that I pay a bunch of money in taxes than my life back when I hardly paid any taxes and got deployed to the Middle East every year. I'd much rather pay the taxes. You can have zero taxes if you just don't make any money.

Your end all and be all is not to have a low tax bill. The goal is to have the most leftover after you pay the taxes. So, don't get caught in that tax trap that so many people do. But yes, real estate investing can be done very tax efficiently, especially if you're willing to be a direct real estate investor, especially if you or your spouse is a real estate professional or you're willing to build a short-term rental empire.

I still to this day believe that this is the fastest route out of medicine. If you're 35 years old and you realize you made a mistake going into medicine, this is probably your fastest route out is to start carving out a huge chunk of your medical income and use it to build an empire of short-term rental properties. And it's probably the fastest way out, quite honestly. That's reasonably reproducible.

But most people that go to medical school actually want to be doctors and don't actually want to be Airbnb hosts. And that's okay too. You're going to be able to build wealth just fine, never being a real estate investor. But it's nice to understand exactly how the process works.

Speaking of taxes, we've got one of our partners that works with White Coat Investors to help reduce their tax bills, a tax strategist. And we're going to spend a few minutes chatting with them.

 

INTERVIEW WITH BRYAN MARTIN OF TAXSTRA

Dr. Jim Dahle:
Today on the White Coat Investor podcast, we have one of our sponsors, Bryan Martin. Bryan is the founder and managing partner of Taxstra. Taxstra stands for tax strategist, and you can find them at taxstra.com or going to whitecoatinvestor.com/taxstra. Bryan, welcome to the podcast.

Bryan Martin:
Glad to be here.

Dr. Jim Dahle:
Tell us a little bit about why you decided to start this firm and what you do.

Bryan Martin:
We started Taxstra three years ago. We're a firm that specializes in high-income earners, such as physicians. We do a lot of real estate investors, and we do small business owners.

We wanted to get out there and help them achieve all the tax savings they could get. And obviously, one thing that we see is like a lot of tax strategists is they look at the big tax picture, but they don't always look at just what your ROI is going to be overall. We look at trying to get you the most income in your pocket and not necessarily always looking for the deductions on everything.

Dr. Jim Dahle:
And you're married to a doc, correct?

Bryan Martin:
That's correct. She's an OB.

Dr. Jim Dahle:
It gives you a little bit of insight into the unique financial lives of physicians anyway.

Bryan Martin:
Yeah, yeah. I've lived it. We had the financial constraints early in life. So you do medical school and residency. You're delaying your higher income. And then you go in and you get hit with this big tax bill all of a sudden. And it's not always as much money take home as what a lot of people think from the outside of what positions take. Your readers and listeners are probably very familiar with this. We have a lot of clients that come over from White Coat Investor. They're all very familiar with the challenges that we face in this situation.

Dr. Jim Dahle:
Yeah, I'm in the middle of a day recording here where I'm spending about five hours in front of a camera. And my last presentation was to my residency program down in Arizona, actually. And one of the things I was pointing out to them was that most of you will have a higher tax bill than your current salary. And that's appalling to new physicians to realize that we have a very progressive tax system and they've hardly been paying anything for the last 30 years of their life. And now they're going to make up for it.

So, it's appalling and a lot of people just hate paying taxes. And even those who don't mind it, don't feel like leaving a tip to the IRS anyway.

Bryan Martin:
Exactly.

Dr. Jim Dahle:
We mentioned before we started recording that there are some typical client profiles and maybe how you might think about each of these as we go through them. Let's go through these one by one. The first one is a single doc that's getting paid on a W-2 or a married dual W-2 high income earners where both spouses want to continue working. What kind of tax strategizing should those folks be thinking about?

Bryan Martin:
Yeah, one thing that we really point them to is one of the assets that you created was that White Coat Investor Waterfall. We're kind of looking at, first we want to get the free money that you get with your match. And then we look at the different retirement accounts.

When you're that W-2 earner, you're just kind of limited on what you can do. We really try to focus on retirement accounts. And then if some of our clients are interested in real estate we start looking at short term rentals. I know that's something you're familiar with and that you like as a potential but there's just a lot of work that goes with them too. So, you don't always necessarily have to do short term rentals but there are a lot of tax benefits with bonus depreciation. And then if you start doing the cost segregation studies on that, that can be some substantial tax savings.

Dr. Jim Dahle:
Yeah, being able to use that short term rental loophole to use that depreciation that normally would only shelter passive income. Being able to use that against your active income is awfully powerful when it comes to building wealth. You're absolutely right about that.

What about the new? There's SALT changes this year with the OBBVA. And I suspect that's affecting a lot of your clients.

Bryan Martin:
It is, and that's one of the big things we're planning about. For those that don't know, SALT stands for state and local tax. That's your income tax by state of California or state of Illinois, and it's your property taxes too. Those are the two primary ones that clients are paying.

Before that was capped at $10,000 but recently in the one big beautiful bill it went up to $40,000. That's great for most of our clients but once you start hitting that $500,000 income limit, it starts to phase out at 30% for every dollar you make over $500,000 till it reaches $600,000 once it goes back down to the original cap of $10,000.

We really want to focus on trying to alleviate that for our clients because not only are you getting taxed at a high tax bracket, usually if you're at the 35% bracket there already and then if you're paying 9% to California or whatever your state income rate is at that point, you also get hit with losing that deduction. That deduction, when it phases out, you lose another $30,000 on that $100,000 income on deductions. And if it's a 35% tax, like you're paying almost additional $55,000 in tax just on that $100,000 income. So, it gets really hairy for a lot of our clients. Any client that's making between $500,000 and $600,000, we're really trying to get them down to under $500,000 at that point.

Dr. Jim Dahle:
Hopefully by things like tax deferred contributions and HSA contributions, those sorts of things, right?

Bryan Martin:
Yes, exactly.

Dr. Jim Dahle:
Not necessarily just quit earning money.

Bryan Martin:
No, no.

Dr. Jim Dahle:
Okay, let's move on to the second hypothetical group of clients who are married, one spouse is earning way more than the other on a W-2. Let's talk about some strategies they might be able to use.

Bryan Martin:
Yeah, and that's where we start to look at getting a little more creative. Obviously we still look at the retirement accounts and everything, but at that point we look at the short-term rental loophole, which you can do with the dual income, but maybe not always have the time available. Like my spouse and I, we both work full-time and we got nine long-term rentals, but we don't do short-term rentals because of time constraints.

You can do the short-term rental loophole. We also look at real estate professional status with a lot of same benefits as short-term rentals, but you don't have to manage the short-term rental. And then the last one we look at is possibly setting up some side businesses for the spouse that's not working or the spouse that is working.

Dr. Jim Dahle:
Okay, and then of course, I suspect the biggest category of clients you work with, business owners. These are people that tend to be making enough money that they can see a return on their investment of hiring a tax strategist, but also have lots more options available to them when they're on a 1099, considering doing an S election and being taxed as an S corp or they're already an S corp. What do you do for those folks?

Bryan Martin:
Yeah, first we evaluate whether the S corp election's worth it for them. We want to see at least $50,000 to $75,000 in net income. And part of it depends on like, if you have another W-2 and things like that. We look at the whole picture to make sure it's worth it for you. You're going to be doing that 1099 gig for longer than a year usually.

If we do the S corp, there's some things we can do there. Set up the retirement accounts. There's a lot more deductions we can look at and having either your vehicle or accountable plans set up for you. Just any expenses that we can put towards the business. But we really want to focus on the deductions that are saving you taxes that you aren't having to spend extra money on. Because if you're having to spend $100 to save $35, that's usually not a wise investment unless you need that otherwise.

Dr. Jim Dahle:
Yeah. Now, when we start talking about tax strategizing, there are some people out there that are more aggressive than others and get into strategies or sometimes referred to as audit lottery kind of strategies. We're starting to talk about things like charitable conservation easements, the way people are claiming home offices or their business vehicle use.

They're trying to have their business buy a really heavy vehicle, for instance. Or some of the more outrageous ones I've seen are buying tax credits from native tribes, actually. And I've seen an entire company that revolves everything around hiring your kids and paying your kids and getting money into their Roth accounts. How do you think about some of those more aggressive, controversial tax strategies when it comes to your clients?

Bryan Martin:
Yeah, it really depends on the strategy, but let's take having your kids in the business, for instance. That's one that we get a lot of questions on. The kids, I always like to ask the client, would you hire someone else's kid to do this job for this amount of pay? That's kind of the question I like to ask with some of those. And typically, if they have an Airbnb and they want to pay their kid $5,000 a month for their Airbnb, usually the answer is no, so we throw that out. But if they have a 16-year-old that goes over and cleans their Airbnb all the time, that's usually a typical investment that we'll allow, as long as they're being paid a reasonable wage.

Dr. Jim Dahle:
Some of the others, like the vehicle, we want to make sure the business use percentage is there, you're tracking your mileage. Same with home office, we want to make sure it's actually home office and not just your basement that has no business use. We're just looking at things like that just to make sure, in the case you are audited, because sometimes they are random and sometimes they are targeted, and you just want to make sure that you have your ducks in a row and we make sure that we're comfortable with what we're filing as well.

If somebody wanted to hire Taxstra, what should they expect to pay?

Bryan Martin:
Yeah. Individual returns, we start at $850. That's kind of our base rate, and then if you want to include some planning, usually somewhere between $1,500 to $2,000 for an individual return. Business returns start at $1,200, so usually that's for a rental partnership with two partners, and it goes up from there. And then monthly accounting, we go about $400 a month and then go up from there depending on complexity and number of transactions, things like that.

Dr. Jim Dahle:
If somebody comes to you with 30 K1s and 12 rental properties, and wants to start not only strategizing but having you prepare returns, are they going to be up there pushing the five-figure amount to do all that?

Bryan Martin:
Yeah, probably. If you have 30 K1s, 12 rental properties, yeah, you're going to be close to that five-figure mark. Obviously everybody's different, so it depends on how many states are involved and things like that. Maybe $8,000 to $12,000, somewhere in there.

Dr. Jim Dahle:
If somebody's interested in working with you, what's the best way other than going to whitecoatinvestor.com/taxstra or going to taxstra.com? What are the next steps?

Bryan Martin:
Yeah, we'll have a landing page for White Coat Investors to come visit, so it's taxstra.com/wci. That'll give us a 30-minute exploratory call with some of our staff to discuss what you have going on, if we can help you. If we don't think we can help you or if we're too high priced for what you need, we'll tell you. We’ll be honest with you and just say, we're probably not a good fit, but I think we're a good fit for a lot of White Coat Investor community. So, go to taxstra.com/wci, and then we can put our socials in the show notes.

Dr. Jim Dahle:
All right, thank you so much, Bryan, and thanks for what you're doing for White Coat Investors.

Bryan Martin:
Thank you, Jim.

Dr. Jim Dahle:
Okay, I hope those interviews are helpful for you. Obviously, we get paid by these people. They advertise with us, and I hope that's very obvious when we bring on partners like this onto the podcast. It provides some publicity and some marketing for them, but hopefully, it's also useful content for you to learn a little bit more about how taxes work, about how tax strategizing works, and maybe decide if this is the sort of professional you're interested in hiring.

Okay, let's take another question off the Speak Pipe.

 

SOLO 401(K) FOR TAX SAVINGS

Speaker 2:
Hi, Dr. Dahle, I had a quick question for you. I'm currently employed by a nonprofit health system, and we have a 403(b) and a 456, which I've been maxing out. I'm also looking into a potential part-time 1099 job.

One of the things that I noticed with 1099 jobs was that the tax burden was pretty high, and one of the thoughts that I had was to open up a solo 401(k) to at least get the employer match portion into the solo 401(k) in order to save money on the taxes. I just kind of wanted to hear your thoughts on it. From what I understand, it's legal, but I didn't know if you had any other advice, anything else that I could consider. Thank you so much.

Dr. Jim Dahle:
Okay, great question. I get this question all the time. I'm sure we've addressed it on the podcast at some point in the last 458 episodes, but I can't tell you exactly where or when. But it's so common, we got to hit it every now and then.

I have a blog post on the White Coat Investor blog called Multiple 401(k), Rules with Multiple 401(k)s or something like that. If you search “Multiple 401(k)” on the blog, this post will pop up. It's got a gazillion comments below it, and I keep it up to date because it gets used so often. I send it out by email every week.

It goes over all the rules that are involved when you have multiple 401(k)s. And this is super important because accountants don't understand these rules because they don't have any clients that have more than one 401(k).

While this situation is super common among doctors and among White Coat Investors and people who want to save a lot of money for retirement, et cetera, et cetera, it is not common for your accountant. And there's a very good chance that your accountant doesn't know these rules. And HR doesn't know these rules. And your 401(k) provider doesn't know these rules.

So, you have to know those rules. I promise you they're true rules. This is really the way it is. I've dived into this as deeply as it can be dived into, but this is the way the rules work when you have more than one retirement account, like a 401(k). And your situation is a little bit unique as well because you don't have a 401(k) at your nonprofit. You have a 403(b), but I'll get to that in a second.

Okay, you are allowed to have more than one 401(k). Newsflash for those of you who didn't know that. That means for most doctors, the situation is they've got one provided by their employer and they've got one for their moonlighting work, their 1099 work. Sometimes it's for another employer.

But bottom line, as long as those employers are not related and there's a definition of what related means, as long as they're not related, you get a maximum contribution to each of those, the 415(c) limit. For 2026, that's $72,000 for those under 50. $72,000 can go into each of those 401(k)s. Pretty cool, right? Because the employers are unrelated.

Now there's a good chance you're not going to be able to get $72,000 into each of those because maybe your employer doesn't let you put that much in there or you don't earn enough in your 1099 gig to put a full $72,000 in there.

But that's the total contribution from employee contributions. Your $23,500 contribution or whatever it is this year. I'd probably just botch that and someone's going to call in with a correction. But you know what I mean, you put in that tax deferred or Roth contribution and maybe you get an employer match in there and maybe they let you make after-tax employee contributions, a.k.a make a backdoor Roth contribution in there. But the total of those has to add up to $72,000.

And same with the solo 401(k). The total of all contributions can't be more than $72,000. There's another limit though. It's called the 409 limit. And that is the employee contribution. No matter how many 401(k)s you qualify for with unrelated employers, whether it's two or three or four or 12, you only get one employee contribution amount, that $23,500 amount. You get one of those across all the plans.

What often happens is you put your employee contribution into the one at work and your employed job and you get a match. Maybe they give you $8,000 too in there. And then when you go to your solo 401(k) for your 1099 job, you can only make employer contributions, which is essentially 20% of your net income at that job. Net of everything, all the expenses as well as the employer half of your payroll taxes at 20%. So you make $100,000 there and you put $20,000 into your solo 401(k).

Now, if you will go get a customized solo 401(k) from some of the people on our recommended retirement account provider list at whitecoatinvestor.com, they will build you a customized solo 401(k). And it's super cheap. It's maybe $500 upfront and $150 a year or something like that. You will be able to design a solo 401(k) that allows you to make mega backdoor Roth contributions in there. And if you do that and make $100,000 at this side gig, you could actually put all $72,000 in there. Some of it might be employer contribution or maybe all of it is after tax employee, a.k.a mega backdoor Roth contributions.

Now you're not going to be able to do that in the cookie cutter plan at Schwab or Fidelity or whatever. But if you get a customized solo 401(k), you can really do that. You can get $30,000 in your employer's 401(k) and you can get $72,000 into your solo 401(k), which is pretty cool.

All right, now the 403(b) caveat that applies to this particular question. Unfortunately, due to the way 403(b)'s are looked at by the IRS, your 403(b) and your solo 401(k) share the same 415(c) limit. That's that $72,000 limit. If you got $30,000 into your 403(b) at work, you could only put $42,000 into that solo 401(k). It's not the case if your work offered you a 401(k), but it is the case if what your work is offering you is a 403(b). Very unfortunate, I'm very sorry.

The 457, not 456, but the 457(b) limit is totally separate from these 401(k) and 403(b) limits. And what most people are able to put in there, they do have some catch-up contributions. It's actually even more complicated than the 401(k) catch-up contribution laws. But usually what people are allowed to put in there is the exact same amount as their employee or their 409 contribution into the retirement account. But it's nice to be able to put a little bit more into another tax-protected retirement account, like a 457(b).

All right, super complicated. Sorry we had to get way out into the weeds on that today as well as some other things today, but that's the way it works. Separate limit for every 401(k) at an unrelated employer, but you share one employee contribution limit across all employers, and you got the special little caveat with 403(b)s. Hope that's helpful.

 

SPONSOR

Dr. Jim Dahle:
Our podcast today was brought to you by Lower Road for Doctors. Lower Road is committed to serving the financial needs of doctors, including helping you get the home of your dreams. Lower Road's physician mortgage is a home loan exclusively for physicians and dentists, featuring up to 100% financing on loans of a million dollars or less. These loans have fewer restrictions than conventional mortgages, and recognize the lender's trust in medical professionals' creditworthiness and earning potential.

For terms and conditions, please visit www.laurelroad.com/wci. Laurel Road is a brand of KeyBank N.A. and an equal housing lender, NMLS #399797.

All right, don't forget tonight is the Money Masterclass aimed at medical students, 06:00 P.M. Mountain. Sign up at whitecoatinvestor.com/moneymasterclass. And tomorrow is the last day for $200 off in-person WCICON. You can sign up for that at whitecoatinvestor.com/wcicon.

Thanks for those of you leaving us five-star reviews. We actually got a one-star review recently, and I wonder if it was an error. If this was yours, you might even want to go fix it. But here's how it read. “I was so angry, but then I found White Coat Investor. For the first 10 years of my career after finishing internal medicine residency, I was working for another doctor as a W2 employee. Then in 2015, I started working for myself as an owner of my small primary care practice.

When I had to pay my first tax bill, I was in disbelief. Then it turned into anger and frustration. I was in my early 40s, and I had never learned or been exposed to basic investing and personal finance topics. I immediately started searching on how to lower my tax bill.” What we talked about today, right?

“And to begin saving for my personal goals and even retirement. This is when I found White Coat Investor. Now I can easily say that my personal and financial life has improved immensely because of the simple but powerful principles discussed on the podcast and the forum. Thank you, WCI, for helping us become better doctors by securing our financial futures.” One star. All right, Mr. or Mrs. Calong, if you don't mind changing that to five stars, that'll actually help more people find the podcast. But we do appreciate your kind words.

All right, we've come to the end of our podcast. Keep your head up, keep your shoulders back. You've got this. We're all here to help you. You're going to accomplish your goals. All you got to do is become financially literate, develop a little bit of financial discipline, stick with it for a while, and you'll be amazed what you can accomplish. And then it's going to make your life way better. Thanks for listening to the White Coat Investor podcast. We'll see you next time.

 

DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only and 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.

Transcription – MtoM – 262

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 262 – Pediatric intensivist becomes a millionaire.

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Locums also gives you more control of your career, allowing you to go where you want, when you want, with a schedule that works for you. It's the perfect way to get ahead financially while getting focused on what you love.

Whether it's locum tenants or regular permanent position, visit whitecoatinvestor.com/comphealth and build your career your way with the power of CompHealth.

All right, students, we've got a masterclass for you. We call it the Live Money Masterclass. Put it on your calendars. It is February 19th, 06:00 P.M. Mountain. I'm going to be doing this with Andrew Paulson of studentloanadvice.com fame, and we're going to be talking about the million-dollar decisions that you need to make now as a student. We're going to talk about how you really can't afford to wait to learn about money. We're going to talk about the secrets of being a financially successful doctor.

Your medical school is not teaching you about money, but we are going to do it. We're going to teach you in this masterclass only the high-yield stuff, the stuff that medical students need to know about money.

And then just like as if I was coming to your medical school to speak to you, we're going to hang around afterward and answer all your questions. So you'll be able to submit questions throughout the presentation, and we'll answer as many of those as we can afterward and give you help, whether it's with your student loans or whether it's with your career decisions or whether it's with investments or whatever. Disability insurance, I don't care. We're going to talk about all that stuff afterwards.

Sign up for this great masterclass at whitecoatinvestor.com/studentwebinar. Even if you don't end up being able to attend, we'll get a recorded version of it to you.

All right, we've got a great interview for you today. Stick around afterward, and we're going to be talking about some cool stuff as well as part of our bootcamp series that we've been doing. But I think you're going to like this interview.

 

INTERVIEW

Dr. Jim Dahle:
My guest today on the Milestones to Millionaire podcast is Neil. Neil, welcome to the podcast.

Neil:
Thank you, Jim, for having me. I'm really happy to be here.

Dr. Jim Dahle:
Let's introduce you to the audience. Can you tell people where you live, what you do for a living, and how far you are out of training?

Neil:
I live in the Midwest. I am a pediatric ICU doctor, and I am around five years out of training from fellowship.

Dr. Jim Dahle:
All right, currently married? Does your spouse work? Are you single?

Neil:
Single, just got engaged. So now I have a fiancé.

Dr. Jim Dahle:
Yeah, congratulations.

Neil:
Thank you. Thank you so much.

Dr. Jim Dahle:
Okay, now we're kind of set up for what your situation is. Now tell us what you've done. What milestone we're celebrating today?

Neil:
I became a millionaire.

Dr. Jim Dahle:
Millionaire!

Neil:
Yes! Yes, February 2025.

Dr. Jim Dahle:
Okay, it's taken us a little while to get you on this episode. It's going to be about a year by the time we actually run this episode. I think we have this scheduled for February 16th to drop. So, it'll have been almost a year since you became a millionaire. As we're recording this, do you know what your net worth is now after the new year?

Neil:
Right now it is $1.7 million.

Dr. Jim Dahle:
$1.7 million. So you had a really good last year. That happens a lot, actually. You're adding more money as you go along. And of course, all your money's now working. And investments did great in 2025. So I'm sure your money did some of the heavy lifting last year, but that's pretty awesome. Congratulations to you on both becoming a millionaire and just what you did in the last year, because that's pretty awesome.

Neil:
No, thank you. And I just want to say, most of this is, I know you might hear this a lot, but this is all because of your training, your teaching, your books, the podcast, listening to other Milestones to Millionaire people. It's essentially like, I owe it to almost most of you guys. I take the credit, but it's also because of you guys.

Dr. Jim Dahle:
Yeah, for sure. It's a community and we're all helping each other. But you can lead a horse to water. And that doesn't necessarily mean they're going to drink. I was just ranting on a podcast I just recorded, I don't know when that one's going to run, about how 25% of docs in their 60s are still not millionaires. And here you are five years out of training, not only a millionaire, but not all that far from becoming a multi-millionaire. And so, there's still plenty of room to improve for us in our profession.

Okay, give us a sense of what your incomes looked like over the last five years. I don't know what pediatric intensivists are making these days.

Neil:
When I joined, my first job was around somewhere in the $320,000s. It did go up to, I think, the $400,000s. And then I did a job change in the last one to two years, and then it went back to the $300,000s. So it's in the middle, like it's not too high, it's not too low, $300,000-ish.

Dr. Jim Dahle:
But the bottom line is, we look at your net worth now, it's basically everything you've ever made you still have.

Neil:
Yeah.

Dr. Jim Dahle:
That's pretty impressive. Okay, break down your net worth. What's it divided up into?

Neil:
I have a little bit of real estate. My personal assets, that's the bank accounts, credit cards and stuff, it's around $32,000. In my taxable account, it's around $600,000-ish thousand. And in my tax protected, that's the 401(k), 403(b)s and then through my job, it's around $756,000. And then I also have a locum, so I just do like the mega backdoor Roth and stuff. And then I have a locum business that's around $30,000 assets. And then real estate is around $305,000.

Dr. Jim Dahle:
Is that your house that you live in, or is that investment or real estate?

Neil:
Two investment properties. And then we just bought a house, which is like a townhouse. So that's like nothing. I just took out the mortgage, so it's worth like maybe $100,000 itself.

Dr. Jim Dahle:
All right. A pretty typical mix. Some taxable, some tax protected, some home equity, some investment properties, pretty good swath of assets there. Sounds like you're doing things the right way to me. Do you feel like you're making progress and doing everything right?

Neil:
True. It's essentially the same thing. I think it's like a mix of your podcast as well, like live like a resident. And then there's another podcast as well, like giving myself a 10% boost. We enjoy ourselves. We go on vacations and stuff, and I don't feel like I'm wanting money or anything.

I really think that that's the one thing that I think when I talk to my residents as well. They go, “Oh, you should live like a resident.” But I'm like, it's not like live like a resident forever. You're just living like a resident for maybe one, two years. And then you can give yourself a boost. You have been fine with $60,000 or $70,000 as a resident. So when you get $300,000, why do you need to spend the entire amount? You were happy at $70,000. You might have been paycheck to paycheck, but you can still live. You can give yourself a boost to $100,000. You can still relax. You can enjoy. I don't see any reason why you have to deprive yourself is what I'm trying to get at.

Dr. Jim Dahle:
Yeah. Amen. Preach it. Okay. So, what's your savings rate looked like over the last five years? What percentage of that income you made did you save?

Neil:
Initially I thought it was only 20%, but then when I was looking back and I was trying to add up everything, I think it's close to 50% if I'm not mistaken.

Dr. Jim Dahle:
50% of gross.

Neil:
Yes. That's what it looks like because I was just looking at my locum's income. I was just looking at my 401(k)s and stuff. And if you add them all up, it's close to 40 to 50% if I'm not mistaken.

Dr. Jim Dahle:
And you mentioned a couple of investment properties. What's the rest of your portfolio look like? If we had to break down your asset allocation, can you tell us what it is?

Neil:
I have put more like 90% stocks and 10% bonds. And pretty much it's like the VTSAX, but I just use the Fidelity because it's much more user-friendly for me. So I just use the FXAIX thing. And that's pretty much where most of my money is. And then I do some self-directed, like the self-directed IRAs and the self-directed 401(k). And I consider that as my real estate.

And then the rental properties are just essentially for the tax play, like using the short-term rental loophole. And then now we've just converted over to like long-term rental because I felt like it's more headache than anything else. So, then I've done it for one, two years and then I just transitioned it over to a long-term rental. That's pretty much the entire breakdown of my entire network.

Dr. Jim Dahle:
Very cool. A little bit of everything. I love it. Okay. You mentioned a mortgage. What other debt have you dealt with in the last five years?

Neil:
Pretty much the only things that I think the mortgage. I am an international medical graduate. I came from India. So, my parents kind of paid for everything. And when I came over here, initially I did not really understand the investing, the philosophy. I just thought you need to save and you'll be fine because in India, the banks give you 10% for a fixed deposit. I thought that was the same thing that applied in the US. And then I realized that it's only like 2%.

And in my final year of fellowship is when I read your book. Initially, people did tell me about the White Coat Investor. And I was like, it's just somebody who's peddling something and they're just trying to make money off of people.

Dr. Jim Dahle:
That's true. We are a for-profit business, to be fair.

Neil:
That is true. You guys have to make money, but in my head, it was just like, “Everybody says that if you follow me, you'll become a millionaire.” But it's not true. You do take, like it's like a horse to the water and then you have to teach a man, take a man towards the pond and teach them how to fish or give them a fish or something along those lines.

But I think when I initially read your book, I definitely was overwhelmed. I wasn't really sure what I'm supposed to be doing because the funds that you say sound so simple. But then when you look at your portfolio, “Wait, he says VTSAX, but this is some other name. What the hell? What's the difference between this?”

And then I did some reading and learning more about it. And then slowly I started getting back into, “What do you mean by it?” Reading some Boglehead forums, they all essentially are the same thing. Then I started understanding what the index fund is. Along those lines.

And then slowly teaching myself, “What do you mean?” Because the book I think is meant for a generic audience and it's not for an individual person. Then I'm like, “Okay, what does my hospital have?” It doesn't look the same thing. He's saying, “Go and find VTSAX.” And I'm like, “It's not there in my 401(k). So, where do I find this?”

Then I realized, I think in one of the forums, they were like, it's not going to be that in every 401(k). You need to go and find out what looks like at the index. And I was like, okay, that makes much more sense.

And then I think I read your Bootcamp. And then I think the Bootcamp was super simple. It's got 12 steps. You just need to do those 12 steps. You'll be fine. And I was like, “Oh, this is easy.”

And then that's what I technically try to do for my residents. Every year that they graduate, I just try to give them the Bootcamp book because I'm like, even if you don't listen to me the entire three years, because I do pediatrics residency, I help with the teaching of the residents. I'm like, even if you don't listen to me, at least read this book. These 12 steps, you will be fine. No matter how much you mess up right now, you will be fine. That's essentially my thing.

Again, in the grand scheme of things, it's not a lot of money. Yes, it's like $500, $600. It's fine. But it's for the medical residents. And I really wish somebody had done that for me when I was the resident, when I was graduating and stuff.

Dr. Jim Dahle:
Hey man, I went looking for the White Coat Investor when I got out of medical school. I couldn't find it.

Neil:
Too bad, too bad it was nothing.

Dr. Jim Dahle:
All right. Well, you're a first generation Indian immigrant, right?

Neil:
Yes.

Dr. Jim Dahle:
Indians have a reputation for allocating some of their investments to gold. Do you have any substantial amount of money in gold?

Neil:
Yes and no. Not a substantial amount. It's like $30,000 to $40,000.

Dr. Jim Dahle:
It's not a lot.

Neil:
But it's there. I'm just keeping it. I'm not doing anything. I'm like, in case if the entire stock market crashes, at least I have some odd gold. And I'll just keep that and I won't do anything else with it.

Dr. Jim Dahle:
Then you had a good year with it last year.

Neil:
Yes. Oh my God, yes. When I started the year, I think it was $20,000. And now it's like $$30,000. And I was like, “Oh, this is great.”

Dr. Jim Dahle:
Okay. Along with that immigrant upbringing, how did that affect how you manage money now?

Neil:
That's too bad a question, I would say. My dad was pretty good with finances. He made sure that the money was okay with everyone. We never took any debt when we were in med school. He paid for everything out of pocket with no loans, nothing. It was always cash that he had. And he retired, I think, honestly, I think he was the FIRE, if I'm not mistaken, because I think after the age of 40 or 45, he did not work. And all his investments were essentially paying off for everything.

I was like, “Okay, I want to be like that.” And it was amazing, just looking at him and he could do whatever he wants to. And it was just like, he had a high savings. I think he might've saved like 60 to 80%, I think of his take-home pay. That's one part of it. I think that definitely affected me. And that made me, “Hey, if I don't really need it, I'm not going to buy it.” But I was happy with what I had.

And then coming to the other side, the second part of this one, I feel that I was never wanting anything. And like in India, you have everything that you need to. And there was never anything that I needed, like a fancy car or anything. I'm happy with a car if it takes me from point A to point B. Cars don't excite me. Gadgets definitely excite me, like electronics, like laptops, headphones, they excite me. But again, in the grand scheme of things, it's like $100 or $200. It's not like going to make a big dent in my paychecks. It's the little vices. And I'm okay with that.

Dr. Jim Dahle:
Very cool. A brand new intern walks into your residency program and walks up and says, “Neil, I want to get this right. I want to do what you've done.” What advice do you have for that doc?

Neil:
For me, I think the best thing was, initially my biggest advice was, we should invest and you should do the Roth and stuff. And when I take a step back, I think right now my philosophy has changed. Rather than just saying, “Hey, you need to focus on investments”, I think you need to protect the way that you can earn. The disability insurance, the boring stuff. You need to take care of the boring stuff before you start like, “Oh yeah, let's just do the S&P 500 or so.”

It's sad. They feel like, “Oh my God, you should have told me something more exciting.” And I'm like, no, it's actually the boring stuff that will get you to where you need to be. It's not “Let's buy $50 of cryptocurrency, Bitcoin or anything.” It's all the boring stuff that will make you a millionaire, if not a multimillionaire.

Dr. Jim Dahle:
Yeah, awesome. All right,. Well, what's next for you? What's your next financial milestone you're working on?

Neil:
For me, honestly, I think that I want to get to the multimillionaire and I know I will get there, but my hope is in the long-term, maybe to back off because I work in the ICU. At least looking through all the podcasts, I think my biggest thing is I want to get rid of my night shifts. Once I make enough, or at least when I think it is enough, which I'm hoping is going to be by the age of 45 or so, I am hoping I can cut down on my night shifts and just do day shifts. I love teaching. I love day shifts. Night shifts, not the best.

Dr. Jim Dahle:
Yeah, I can relate to that. That was the first thing I bought with financial freedom. I bought my way out of night shifts. Subsequently, fewer shifts and got rid of my evenings eventually so I could play hockey and coach in the evenings. We have housekeepers now. We bought other stuff along the way, but that was the first thing. That was a big motivation for me for financial independence, for sure. So, I totally relate to that.

Well, Neil, thank you so much for being willing to come on the podcast, share your story and inspire others to do the same. And thank you for your work directly with your residents and colleagues and for helping them to become financially literate, become financially disciplined and be able to focus their lives on what really matters. Thank you so much.

Neil:
No, thank you. Thank you. I'm indebted to you and to the entire White Coat Investor and the entire physician team, or the community that actually is responsible. You might not know me directly, but thank you guys.

 

FINANCIAL BOOT CAMP: INCOME-DRIVEN REPAYMENT (IDR) PROGRAMS

Dr. Jim Dahle:
I hope you enjoyed that interview. Let's talk for a moment about the basics of income-driven repayment programs or IDR programs. There have been a number of these over the years and they come and go. They come and go by acts of Congress, which are obviously harder to get rid of the program if it came through Congress. And sometimes they just show up by fiat of the executive branch, often through the Department of Education.

But some of the programs that have existed at some point or still exist include ICR, Income Contingent Repayment, IBR, Income-Based Repayment. There's actually two versions of that. PAYE, Pay As You Earn, Revised Pay As You Earn or REPAYE, and the SAVE program, which is perhaps the shortest lasting one of those IDR programs.

It's likely there will be future IDR programs with different rules and amounts, but these all have a few things in common. The most important one is that your payments on your loans are not based on your interest rate and they are not based on how much money you owe. They're based solely on two things, your income, and that's as often as a year or even two years ago, and your family size. The more family members you have, the lower your payments. The lower your income, the lower your payments. That's what payments are based on.

The payments may not even cover the interest that these loans are generating. For example, if you had $200,000 in student loans at 6%, that's generating $12,000 in interest a year, but your payments on those might only be $100 a month. So you're not even coming close to covering that interest.

Now, some of the IDRs have had features where they subsidize your interest and lower your interest rate or even waive your interest completely, but those programs are coming and going. There's constant change in them. So, pay attention to the current landscape as far as which is the best IDR program for you and just how generous is it right now. And be aware, you might have to change programs during the course of paying off your student loans.

Another feature of these IDR programs is often a forgiveness component. And typically, you can get student loans forgiven via IDR forgiveness after making 20 to 25 years of payments. Whatever is left after making 20 to 25 years of payments is forgiven. That forgiveness is taxable.

So, if you had $400,000 forgiven, it's like your taxable income just went up by $400,000 that year. That is likely going to be taxed at a pretty high rate because it's going to be in the top tax brackets. It wouldn't be unusual for that to be taxed at 40% or so. While it's cool to have $400,000 forgiven, it's not so cool to have a $180,000 tax bill from it. So, be aware of that tax bomb.

That's why the IDR forgiveness programs are generally much less attractive than something like Public Service Loan Forgiveness. Public Service Loan Forgiveness comes after 10 years of payments. IDR forgiveness after 20 to 25. Public Service Loan Forgiveness has tax-free forgiveness. IDR forgiveness is taxable. So it takes a lot longer and it's taxable.

For most doctors, with a typical doctor income and a typical doctor amount of loans, you'll pay off your student loans before you ever get that forgiveness after 20 or 25 years. Now, if you have a particularly low income or you have a particularly high loan burden, that might not be the case. And those are the people who should look at maybe considering IDR forgiveness. Just be aware you better be saving up for that tax bomb as you go along as well.

It's not my favorite plan for dealing with student loans. I think you're a whole lot better off refinancing them, living like a resident, paying them off quickly, or going for Public Service Loan Forgiveness. But there are a few people for whom that plan might be right.

If you're wondering if you might be one of them, you might want to consider booking a consult at studentloanadvice.com for a few hundred dollars. You can get advice that might be worth literally hundreds of thousands of dollars to you. It's money well invested, well spent to get some specific advice if you're in that sort of a student loan situation where you would consider IDR forgiveness.

But most docs are going to use an IDR program at least throughout their training. And maybe the entire time they're paying back their student loans. But generally for federal loans, while you're an intern, while you're a resident, while you're a fellow, you're going to keep those in one of the federal IDR programs to help you make more affordable payments. And that's the whole point of the program is to make low income people have lower payments on their student loans.

Learn about the IDR programs, plan to use them at least for a while, but you need to have a comprehensive plan for dealing with your student loans. Whether that is paying them back by living frugally and sending big checks to your lender or whether that is going for a forgiveness program. Have a plan, follow your plan. You'll be amazed how quickly you can get those student loans taken care of.

 

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All right, we've come to the end of this podcast. I hope you are making progress toward your milestones. If you want to share them on this podcast, you can do so. whitecoatinvestor.com/milestones is where you sign up to make your contribution to this community.

Until next time, keep your head up and your shoulders back. You've got this. We're all here behind you to help. You're going to get there and you're going to be able to reach those goals. Congratulations on what you've done so far and let's get going on to the next goal.

 

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. Tyler Scott:
Hello. My name is Tyler Scott with White Coat Planning. And today, Jim has asked me to come share the principle of expense ratios with you and make sure we have a good understanding of that term.

Both individual investments and the accounts that hold those investments can have all kinds of fees to be aware of. There are sales loads, broker commissions, advisory fees, account fees, management fees, redemption fees, transaction fees, 12b1 fees. It's a cavalcade of fees out there. Today we're just going to talk about one of those types of fees, the one I think you've probably read about and heard about the most when you read on White Coat Investor, and that relates to investment choices, and that is where we arrive at the term expense ratio.

The expense ratio is a measure of a mutual fund, or exchange traded funds, operating costs relative to its assets. It's determined by dividing a fund's operating expenses into its net assets. Operating expenses reduce the fund's assets, thereby reducing the return to investors, because the expense ratio is deducted from the fund's gross return and paid to the fund manager.

You never have to calculate the expense ratio. It will always be provided in the fund's prospectus. You can also just Google it if you know the ticker symbol for the fund in question. It's available on analytics sites like Morningstar or Yahoo Finance. Good and ethical 401k custodians will just provide the expense ratio right on the statement or website where you're looking at the investment options.

In financial conversations, you'll sometimes hear expense ratios expressed as basis points, or bips for short, written out bps. When I say basis point, that is referring to 1/100 of a percentage point. It is the cost of the investment expressed as a percentage. If you have an investment that has an expense ratio of 0.12%, that's the same as saying the fund has an annual fee of 12 basis points. That means you owe 0.12% of the value of that investment each year to the firm that created the investment like Vanguard or Fidelity. So if your investment is worth $100,000, you owe them 120 bucks for the year.

Twelve basis points is a very low cost fund. Sadly, most mutual funds and exchange traded funds out there are not low cost funds. It's not uncommon for me to review a client's list of available funds in their 401k, 403b, or 457, and see that all of the options have expense ratios of 1% or higher. In other words, the fees are 100 basis points and up.

When I was working at a public health dental clinic in Oregon, we had funds in our 457b with 240 basis point fees. That is a ridiculous 2.4% expense ratio. If I had $100,000 in that fund, they would charge me $2,400 each year, every year, just to own the fund. Now imagine my investment returns for the year in that fund were 5%. That means the expense ratio would consume a whopping 50% of my investment return for the year. I'd have to give away half of my growth to the underlying investment. Thus, keeping expense ratios in your investments low should be a goal for any savvy investor.

Fortunately, there has been a lot of pressure to lower expense ratios since John Bogle started the index fund revolution at Vanguard in the mid 70s. Today, there are many wonderful, tax efficient, highly diversified, low cost funds available at places like Vanguard, Fidelity, and Schwab. Fidelity even offers their so called Zero funds that have an expense ratio of zero.

Funds like this can be compelling to people once they learn about expense ratios, but some folks can become a little obsessive about whether a fund costs seven bips or nine bips. Don't worry about that. Don't be that person. Jim often talks about anything below 20 basis points doesn't really matter. The goal is not to go from nine basis points to seven. The goal is to go from 145 basis points to nine.

If you don't know the expense ratio on the funds you're using, go find out. A good investor always knows what they're paying for their investments.