Roth Conversions for a Smarter Retirement

Transcription – WCI – 466

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 466.

This podcast is sponsored by Bob Bhayani of Protuity. He is an independent provider of disability insurance and planning solutions to the medical community nationwide and a long-time White Coat Investor sponsor. Bob specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies.

If you need to review your disability insurance coverage or to get this critical insurance in place, contact Bob by emailing [email protected] or by calling (973) 771-9100 or simply by going to www.whitecoatinvestor.com/protuity.

 

CORRECTIONS

Dr. Jim Dahle:
All right, let's start with, this isn't a correction, it's like an add-on. I got emailed this week, like, people have been emailing me for months to talk about and write about Trump accounts, 530A accounts, and we've done that. You heard a couple of weeks ago on the podcast, and by the time you listen to this, I think I'll have my Trump account blog post written and we'll get that out as well.

But I got this email from somebody who's like, he said, “I read that you plan to release a post on the Trump account in quarter two. Since these accounts have to be open when we file taxes, I worry that people may miss out on opening them. That would be a shame, especially if you qualify for the thousand dollar seed money. Can you speak to this on the podcast and consider releasing the post in March?”

And I'm like, “What are you talking about?” I actually went to the tax form that they just came out with. The tax form where you get your $1,000. This is for the baby. This is the baby bonus. Babies born between, I think it's 2025 and 2028. If you fill out this tax form, I think it's 4547, you get $1,000 from the government. The seed money for this baby bonus account, this 530A account, this Trump account.

Now, the problem is, well, I don't know if it's a problem. It's a benefit if you knew this before you filed your 2025 taxes. If you actually send in this form with your 2025 taxes, the US government's going to put this $1,000 into the baby bonus account this year. Because otherwise, you're probably waiting until you file this form with your 2026 taxes. Now, it's okay. You don't miss out on getting your $1,000. You still get the thousand dollars. You just don't get it for a year.

So if you've already filed your taxes, I guess you could do a 1040-X and just send in this form, 4547. You'd have 1040-X, which is like one page and nothing would change on it. And then you send in a 4547 with it, and then you would get the baby bonus account started this summer. So you get an extra year of compounding on that thousand dollars. So maybe that's worth another $100 to you or something like that.

But there's more. The other thing you can do, as Tyler and I discussed a couple of weeks ago on the podcast, is that you can start these things for your kids with your own money. You're putting your $5,000 or whatever in each year. And then in their early adult years, you're doing a Roth conversion on it.

And so we calculated, I think a couple of weeks ago, you could basically pay for the retirement by saving up the Trump account by putting this $5,000 or so in each year while you could, and it'll add up to a lot of money. Well, if you don't get the Trump account started sooner, you miss out on the compounding on that first $5,000, and that $5,000 can't go in the account. The sooner you open this thing, the better.

I told the email, I'm like, “Okay, you convinced me, I should mention this on the podcast, an extra year has some value, especially for those of us trying to optimize everything we can.”

And so, I'm probably going to start, I got one kid left, I think, that I can actually do a Trump account for her for a few years. She won't get the baby bonus, she's already 10. She'll get seven or eight years, whatever it is, six or seven years, that we can put $5,000 a year in for her and do a conversion on that in a few years.

And you know what? Her older siblings are going to be mad about it, but I've told my kids many times, life isn't fair. And trust me, they're all going to get plenty of money in their inheritances.

It's interesting, I had a discussion just the other day with my daughter, we did some tax gain harvesting for her last year, because she's in the 0% long term capital gains bracket. But we filed her taxes this weekend. And guess what? She's not in the 0% long term capital gains bracket for her state taxes. So, it was actually a substantial state tax on that tax gain harvesting she did. I paid that tax for her, and she was very grateful, not only that I helped her with her taxes, but that I paid that tax bill.

She was thrilled to get her $44 back for her that had been withheld from her job on her federal return, but a little bit bummed to learn she was going to owe over $1,000 on her state return, because Utah does not have a 0% long term capital gains bracket. They don't have a long term capital gains bracket at all, it turns out.

Okay, let's get into your questions. This podcast is all about you. You are the White Coat Investor. A lot of people introduce me when I'm doing speaking gigs is “This is the White Coat Investor.” I'm not the White Coat Investor. You're the White Coat Investor. That was the whole idea when we put that name on it back in 2011.

All right, let's listen to your first question.

 

TSP ROTH CONVERSION

Speaker:
Thank you for everything you do for all of us and for the significant positive impact you've had on the financial life of my family and many others. I'm a fellow liberated military doctor with a TSP question. They provide more clarity than the TSP Roth conversion rules and it's specified that any Roth conversion of combat zone contributions must be accompanied by proportional conversion of taxable balance.

Meaning if I want to convert 100% of my $40,000 combat zone tax exempt TSP holdings to Roth, I'd also have to convert 100% of my just over $60,000 tax deferred contributions to Roth as well. Either tax deferred contributions from back when we only had the traditional option for TSP prior to 2012.

My combined federal and state marginal tax rate is going to be somewhere in the 45% to 47% range for this year, which would mean paying $27,000 in taxes or so to get the $40,000 tax exempt plus the $60,000 traditional bonus over to Roth.

As I'm saying this and doing this math, I'm starting to realize that this is probably very much trying to do way too much at the wrong time. I just wanted to get your thoughts on whether or not this would be a prudent move to get that money over to Roth and just earning more Roth money now, or if this is something I should just wait until I'm past peak earnings.

For additional complexity, I'm going to have a reserve pension once I turn 60. I'll be filling up a lot of those tax-free buckets with that by that point in time. Thanks. Have a great day.

Dr. Jim Dahle:
Great question and thanks for your service. When I hear this, I'm like, I wrote a blog post about this. Why doesn't anybody read the blog? Then I realized this blog post hasn't been published yet. Yes, I did write a blog post on this topic a month or two ago. It has not yet come out at the time I'm recording this podcast. It probably won't be out for a few more weeks or even a few months.

It turns out we're anywhere from six to 18 months out when I write blog posts. It's a constant shuffling game of, “Is this important to get out right away, or is this something we can put off for a few months?” Because we're not going to run 12 blog posts a day for a month and then have nothing for a few months because I wanted to go rafting. We just tend to run one a day. You guys aren't going to read 12 blog posts if we publish them all at once anyway.

I have a blog post written all about this topic. The Thrift Savings Plan is near and dear to my heart. It was my 401(k) from 2006 to 2010 while I was in the military. We've actually kept ours. We've got it all invested in the G fund. It's now a small part of our portfolio, but we still have access to the G fund or to the TSP, which we have invested in the G fund.

The TSP is great. For a while, it was the cheapest 401(k) in the country. Rock bottom prices. It's all index funds. Generally, they do the right thing for everybody. These are federal employees. These are military members.

The one beef that most people have with the Thrift Savings Plan is that it's federal. It's the government running things. It's a little confusing. It's sometimes not the best customer service that you might get, but it takes a while to change.

When I was in the military, 401(k) plans were allowed to have Roth contributions. Was I allowed to make Roth contributions? No. The only TSP contributions I ever made when I was not deployed were tax deferred because those were the only ones I was allowed to make. They took their sweet time adding that in. They've made some other cool changes over the years, but always a decade later than they should have. That's one of the beefs people have with the Thrift Savings Plan.

Well, this year, starting in 2026, you can do Roth conversions in the Thrift Savings Plan. Everybody got really excited because that's awesome, especially for military members who deployed because while you're deployed, you can make after-tax contributions into the TSP.

You start thinking about this if you're into this finance stuff and you're like, “Oh, well, maybe I can do a mega backdoor Roth IRA, an after-tax contribution. Now that conversions are allowed, do a Roth conversion and basically get my $72,000 in there all in Roth.”

Well, there's a problem. The TSP folks have set this up so that your tax-exempt contributions go into the same sub-account of this 401(k), of this TSP, as your tax-deferred contributions. There's a Roth sub-account and then there's this other sub-account.

That's a crappy way to design a plan. When we put together the White Coat Investor 401(k), there are three sub-accounts, not two. There's a tax-deferred one, there's a Roth one, and there is an after-tax one.

When I do a mega backdoor Roth IRA each year, I put my $72,000 or whatever into that after-tax account and then it's moved to the Roth account. You can't do that with the TSP. It has to go into that combined tax-deferred and after-tax account. That means any conversions you do are prorated between your tax-exempt money and your tax-deferred money.

If you got $50,000 in there while you were deployed and you had $50,000 in there that was tax-deferred money and you do a $10,000 conversion, $5,000 of it comes from the tax-exempt money and $5,000 of it comes from the tax-deferred money and you'll pay taxes on half of that conversion. It's an issue. It doesn't work as well as people would love for it to work.

Now the question is, well, what does everybody do in this situation? Have you got a bunch of tax-exempt money from a deployment? Well, in the case of this caller, sounds like there's going to be a pension filling up a bunch of the lower brackets. Roth conversions are probably a good thing. Now the Roth conversion question is still the most complicated decision in personal finance and investing. Whether you make Roth contributions, whether you do a Roth conversion, it's complicated.

Now I'm not talking about the Roth conversion part of the backdoor Roth IRA process or the mega backdoor Roth IRA process. I'm not talking about those conversions. Those conversions are tax-free because you're converting after tax money. I'm talking about regular tax conversions where there's actually a tax bill.

In this situation, is it probably worth converting the whole thing? Probably, but there's a lot more information. It would take like four hours with a financial planner to decide how much Roth conversion is worth doing for this person. It's just really complicated and even then you're making a lot of assumptions that might not turn out to be true.

There is one other option here though, and that is to isolate the basis. This is what I did when I got out of the military. We rolled all of my TSP money except like $200 just to keep the account open into an IRA.

And then I rolled an amount equal to the tax deferred portion of that account back into the TSP. And so, the TSP only accepts pre-tax and Roth money. It doesn't accept after-tax money, even though it let me contribute after-tax money. And what did that leave behind in the IRA? It left behind just the tax-exempt money. And I did a free Roth conversion on that the year that I got out of the military. And so, I isolated my basis and just converted the basis.

That's probably the best way to deal with this sort of a situation. But if you really think you're going to be filling up the lower brackets with pensions or rental income or something like that, social security, all this stuff in your retirement years, you might want to just do the whole big Roth conversion and pay the tax bill now. Maybe it's not that big a deal, especially if you're still in the military and in a relatively low bracket. But if you want to get a free conversion, you can try to isolate the basis and put that pre-tax money somewhere else or back into the TSP or in another 401(k) or whatever, so it doesn't screw up your regular backdoor Roth IRA. And then convert the basis tax-free.

Those are kind of your options. I hope that's helpful. I've got posts on the website. There will soon be this one about thrift savings plan Roth conversions. Also, there's one about isolating your basis in the TSP. There are posts about Roth conversions. There are posts about whether to do Roth contributions or conversions each year. There are posts about the mega backdoor Roth IRA process. There's a post about the backdoor Roth IRA process.

All this stuff is on the website. If you will search it, you will find it. It will come up. If you can't find it, email me. I will email you the exact link. This stuff's hard to get into all the details that you need to know on the podcast, but I assure you there are tutorials and blog posts all over the website that can help with it.

By the way, student loan refinancing is cool again. It seemed for a while after 2022 when rates went up like 4% in a year and when the student loan holiday was on and everybody was at 0% zero dollar payments, student loan refinancing basically went away.

Not only for those companies that do student loan refinancing for the White Coat Investor community and for us as a business, we basically stopped referring people for student loan refinancing because we're at 0%. Of course, you're not going to refinance to 5.5% or whatever when you're at 0%.

Well, lately, we're running into people who are now refinancing again at 3.5, 4, 4.5%, those sorts of interest rates. If you're at 6.8% or worse, your rate like student loans are being taken out of this year for current medical students, 7% or 8%, or you got worse loans, I don't know, you went to a Caribbean medical school and you got 11% loans or something because you couldn't get federal loans. Whatever you have, I assure you, student loan refinancing works.

Now, obviously, you don't want to refinance something when you're going for PSLF or something because a refinance loan is a private loan. It's no longer eligible for the IDR programs. It's not eligible for PSLF. But if you anticipate paying off your loans or if they're private loans, and for sure you're going to be paying them off, you might as well refinance them early and often.

We'll give you cash back. We got the best deal on student loan refinancing. If you go through our links, we're even giving you access to an online course when you do that. Go to our recommended pages at whitecoatinvestor.com. The first one on the drop-down list is student loan refinancing. Check it out. See which company will give you the lowest rate. It only takes a few minutes to apply. You might as well save a few thousand dollars that can go toward principal instead of interest like it would otherwise if you just kept your student loan rates where they are right now.

It's something you can do. Obviously, it doesn't get rid of your student loans just to refinance them, but it sure makes them easier to pay them back quicker. Might as well save a few thousand dollars. You might save a few tens of thousands of dollars depending on how long you're taking to pay them off and how long and how much student loan debt you have.

We got another question about the TSP. Hopefully, I can answer this one a little more quickly than the last one.

 

TSP ROLLOVERS

Speaker 2:
Hello, Dr. Dahle. Thank you for everything you do. I have a question about TSP rollovers. Like you, I started a military TSP account during active duty with combat zone tax-exempt contributions from the years before Roth TSP was available, plus some tax-deferred contributions as well.

Unlike you, I stayed in the reserves and kept contributing to that military TSP throughout my reserve career, adding both tax-deferred and Roth dollars along the way. I recently retired from the reserves and no longer need to keep that account active.

A few years ago, I also left private practice and took a federal civilian job, so I now have a second TSP account for my civilian employment. I'm still about a decade away from needing to access any of my tax-deferred money.

Here's my question. Can I roll the military TSP into my civilian TSP? Specifically, can I move the combat zone tax-exempt balance into my civilian Roth TSP? The reason this matters is I do backdoor Roth contributions through my Schwab account, and I want to keep my IRA empty to avoid any prorata issues. So I really prefer not to roll anything in a traditional IRA if I can avoid it. Thank you.

Dr. Jim Dahle:
Okay, great question, and this one actually came to us in two formats. I'm like, I recognize that name. Yeah, he's sent me an email about this question as well. One thing I've never had, I've never had a civilian TSP account. I've only had the military one, and so this was a newsflash to me that they're separate accounts.

Apparently, when you get out of the military and you take a civilian job, you get a different TSP account. It's not the same as your military TSP account, which makes it a little bit easier though to do that basis isolation that I discussed with the last caller, and then I did send him a copy of that post that I wrote about Roth TSP and TSP Roth conversions.

So, I think probably a solution for this issue is to roll the entire military TSP out to an IRA, then just roll the tax-deferred dollars back into the tax-deferred civilian TSP and do a Roth conversion of the rest. Then you still won't have any money in a tax-deferred IRA, so it's not going to screw up your backdoor Roth IRA process. You'll be able to convert that entire amount of basis you have, those after-tax contributions to Roth, and you get to keep all your money in the TSP, and even better, you only got to manage one TSP account instead of two.

So, I would look into that. I think that's the solution for this one. As long as the military TSP lets you move the money out, and I would assume they would, lots of 401(k)s don't let you move money out while you're still working for the employer, but if they got two separate TSP accounts, you're no longer working for the military employer.

So, I think they would let you move that out and isolate that basis and convert it, and then, of course, the earnings will, instead of being tax-deferred, the earnings will now be Roth or tax-free. That's the real benefit to doing that. So, go for it, and thanks for your service.

All right. Another question off the Speak Pipe.

 

BACKDOOR ROTH IRA AND PRO RATA RULE WITH A SIMPLE IRA

Speaker 3:
Hi, Jim. Thanks for your help with my personal finances over the years. I really appreciated your advice on the podcast, and I have both read and shared your book with my peers in medicine.

I'm a primary care doc in the Northeast, and both myself and my husband regularly contribute to backdoor Roth IRAs each year, so combined income exceeds the limits for direct Roth contributions.

I just completed my backdoor Roth this January, as always, and we were about to do my husband's, but something in our lives changed. He got a new job offer at a nonprofit organization. Upon learning through the benefits, we discovered that his plan only offers a simple IRA retirement plan.

He really wanted this job, and it's for a good cause, so he plans to start it. We got as far as putting $7,500 in my husband's traditional IRA for 2026 this month, but he held off on doing a Roth conversion once we realized his plan offered a simple IRA at the employer site. I'm concerned about the pro rata rule from the IRS and what we can and cannot undo at this point. We will be married filing jointly.

My situation question is this. Is my Roth conversion now going to be subjected to taxes due to the existence of my husband's simple IRA employer plan? Also, what are we to do with this traditional IRA money for 2026 at this point of $7,500? Are we going to have to bite the bullet and pay some taxes on the post-tax money we already contributed to IRAs this year? Thank you so much for your help.

Dr. Jim Dahle:
Great question. Very well asked, by the way. You included all the relevant information anybody would need to actually answer this question. I know a lot of you that listen to these questions on the podcast try to answer them yourselves and see if you got the answer right before I listen to them. Hopefully, lots of you have already nailed this one.

Before we give the answer, I think it's important to recognize that being able to do a backdoor Roth IRA is not like the end-all, be-all, be-all, end-all, whatever the phrase is of personal finance. It's okay if you don't do a backdoor Roth IRA every year. It's not that big a deal.

It's good. It's better than investing in a taxable account, but it's not like investing in a taxable account is bad. It's not like investing in an after-tax IRA is bad. Roth is better, but it's only $7,000 a year. It's not the end of the world for most people saving as much as they should be on a physician type of income. Don't feel like you got to bend over backwards every time just so you can do backdoor Roth IRAs every year.

But you're right. This is an issue. It's an issue for the Roth conversion step. Because this is reported on form 8606, specifically line six of that form, you want to be $0 at the end of the year. It's asking you what is your balance in traditional, rollover, simple, and SEP IRAs. You want that to be $0 so your conversion step that you did that year doesn't get prorated. You know you're going to have some money in a simple IRA at the end of the year. So that's going to keep you from being able to have a conversion that's not prorated.

So, what do you do? Well, first of all, recognize this does not affect your spouse's backdoor Roth IRA process. All these retirement accounts, these IRAs, the simple, the traditional IRA, it is all individual. Just like IRA stands for individual retirement arrangement, they're all individual. You don't have combined retirement accounts. When your spouse dies, theirs gets combined with yours, but it's now just yours. They're all individual. Just because your spouse is getting prorated doesn't mean yours is getting prorated. So you can keep doing your backdoor Roth IRA as usual, no problem.

But for your spouse that is now going to have this simple IRA balance at the end of the year and make sure there's actually going to be a balance at the end of the year. Maybe there won't be because he's not eligible to use it for six months or 12 months or whatever.

But then what do you do? Well, you probably stop doing your backdoor Roth IRA each year and you just invest in taxable, no big deal. But you've already got $7,500 in a traditional IRA of after-tax money. That's okay, just leave it there. You'll have to fill out form 8606 each year carrying the basis forward because you don't want to pay taxes on that money twice when you take it out.

So you need to document what the basis is and carry that forward with a form 8606 filled out every year on your taxes. And in fact, you can keep contributing to it. You can put your $7,000 in there every year. Just recognize that the earnings are going to be fully taxable because the earnings on tax-exempt money in a traditional IRA are taxed at ordinary income tax rates when they're taken out of the account.

What would I do? Well, I'd use the simple IRA, especially if the employer is going to give you a match or something in it. And I'd probably keep making the tax-exempt contributions, step one of the backdoor Roth IRA process.

What I wouldn't do is step two. Put your $7,000 in there every year, it'll grow a little bit. And maybe in five years when you quit working for this nonprofit or when they decide, “Oh yeah, simple IRAs suck, we're going to put a 401(k) in place”, then you do the conversion. Maybe in five years, you've got $35,000 in contributions and you've got another $20,000 in earnings. Well, now you've got $55,000 in there. Do a Roth conversion on that and you'll pay taxes on 20 and you'll have a $55,000 Roth IRA.

It's not as perfect as if you were able to do that conversion every year, but it beats a kick in the teeth. So you might as well do it. I'm a big fan of Roth. I think Roth's great. Roth is not always the answer and you don't have to do a backdoor Roth IRA to be financially successful, but that's I think how I would manage this situation. I hope he enjoys the new job. Obviously don't choose a job just because you like the retirement benefits. There's a lot more to your life and choosing a job than that.

By the way, speaking of life, thanks everybody out there for what you're doing with your lives. As I continue to have medical issues, I'm 50 now and so I have medical problems. I got to sleep with CPAP now. I got to see a sleep clinic and I got to get my wrist worked on every now and then. I'm seeing occupational therapy and obviously I had another surgery this year, I think I've mentioned before on the podcast.

It just makes me grateful for all the dedication, the education, the time everybody is putting in. My medical problems are relatively trivial. I know that. I still see patients in the emergency department. But I’m super grateful that there are people who know how to take care of them and who are willing to take care of them, even with all the problems there are in medicine, even with the hassles and the liability hanging over your head. Thank you for dealing with that. Thank you for making this contribution to our world.

 

ROTH VS. TRADITIONAL

Dr. Jim Dahle:
All right. Everybody wants to talk about Roth. Here's another question about Roth versus traditional. Looking forward to this. Most complicated question in personal finance and investing. Hopefully this is an easy version of the question.

Charlie:
Hey Jim, my name is Charlie and I have a question about Roth versus traditional. I'm four years out of training and in my early 30s. I built up pretty sizable retirement accounts since then due to having a 403(b), 401(a), 457(b) and make a backdoor as well as backdoor Roth IRAs. I also have a taxable account that I contribute to.

My wife also maxes out her pre-tax 403(b) and has a 401(a) and makes mega backdoor as well as backdoor Roth IRA contributions. She also has her own separate taxable account. In total, we have about $1.1 million invested in index funds throughout these various accounts.

At this rate, I think we'll end up having pretty sizable pre-tax accounts by the time we retire and was wondering when it would make sense to transition to Roth 403(b) and forego current tax savings in order to decrease RMDs.

I know RMDs aren't necessarily a bad thing, but if we expect an 8% return, our RMDs will probably be more than what we're making today. Again, not a bad thing at all, but what is your take on it? Thanks for all that you do.

Dr. Jim Dahle:
Wow, that's disappointing. This is not one of the easy Roth versus tax deferred questions to answer. This is about as complicated as it gets. I'm sorry, there is no obvious right answer to this question. If you want to really dive into the details and try to make the best decision possible, I would go to the website, whitecoatinvestor.com and search Roth contributions.

It's a whole long post that goes into all the details and why this is such a hard decision, because you don't know a whole bunch of things. You don't know what tax rates are going to be later. You don't know what tax bracket you're going to be in. You don't know what your returns are going to be and exactly how wealthy you're going to be.

Most importantly, you don't know who's actually going to be spending this money. There's a good chance that for a large chunk of it, that person won't be you. It might be a charity. Well, what's charity's tax rate? It's zero percent.

So, why would you pre-pay tax now by putting money in a Roth account when it's just going to charity later. That's dumb. You ought to have it all in tax deferred account. The charity won't pay any taxes on it anyway. Or maybe it's going to an heir of yours that's in a lower tax bracket than you are, in which case paying taxes at the maximum tax rate now might not be such a wise thing.

So it's complicated. It's hard. There is no right answer. A mix of Roth and tax deferred is probably a good thing. Sounds like you're getting that naturally with the accounts you have.

The other thing to keep in mind is you are sweating the details when you shouldn't be. Yes, it'll make a difference. Yes, there's a right answer to this question, but you might not be able to know the right answer for another 80 years. It is almost impossible for you to know it now for sure. And so, it's very, very hard.

Some things to think about. You are doing lots of Roth money now already. You're both doing mega backdoor Roth. You are doing backdoor Roth IRAs every year as well. So, it's not like you're not doing any Roth contributions. You got money going to Roth. You got money going to tax deferred. If you want to change the mix up a little bit, I don't think that's unreasonable. Put a little more into Roth. That's not a bad thing.

And even if it ends up going to your heirs, they'll appreciate not having to pay tax on it. Even if they would have paid tax at 24% and you're now paying tax at 32% on it, they'll appreciate it. It's not a bad thing, even if you end up not choosing the optimal exact right thing to do.

I don't know that I can give you an exact answer. I don't know that anybody can give you an exact answer. If you're worried that you're getting a little too much into tax deferred, that your RMDs will literally be more in today's dollars than you are spending now, well, it seems to make sense to maybe do a little bit more Roth than you're doing now. That's probably okay to do, but to know for sure is probably impossible.

A few things that I ought to mention to you, though. Number one, you're killing it. Your financial literacy, just to be able to ask that question the way you did, is off the charts. You've learned about how all these accounts work, how backdoor Roth IRA process and mega backdoor Roth IRA process works. I'm sure you're just as intelligent with the insurance portion of your plan and the estate planning portion of your plan and your housing portion of your financial plan. All this stuff you're probably doing just as well as you're doing these retirement accounts. There's probably an HSA and 529s and all this other kind of stuff out there as well.

I would caution you that, like many White Coat Investors, but a very small percentage of our society, to worry a little bit more about the possibility that you're over-saving. That maybe you should be spending more money now.

This is the whole Die With Zero philosophy. Your goal is not to die the richest dock in the graveyard. It's to turn your money into happiness during your lifetime. Yes, you don't want to run out of money. You need to make some plans to make sure you don't run out of money.

But the truth is it's way easier to convert money to happiness at 35 or 45 than it is at 85 or 95, both for you and other people. So, consider spending more of your money and giving more of your money now than maybe you are.

I don't know exactly what your net worth is. I think you said you had close to a million dollars and maybe it's still time to be going at it pretty hard. But if you're really worried that you're going to have more coming out of RMDs because of your career plans, your savings plans or whatever than you're spending or earning, even earning now, then maybe cutting back a little bit's okay.

I had this discussion with my partner just yesterday on shift. He actually started reading my blog as an intern. It's only a few years behind me. And so obviously he's kind of nailed it. He manages finances very well. And we had a long discussion. He's like, “I'm thinking about saving less for retirement, putting less into the profit sharing portion of our 401(k), because we're thinking about upgrading our house and getting a nice house.” And I'm like, “Absolutely, you should do that. You get that house that you're going to now, you enjoy it while your kids are young and growing and do that instead of stuffing a little bit more money into your retirement accounts.”

Now there's a time and a place for that. The problem is giving advice like this, the wrong people take it. People that are broke are like, “Oh, I should die with zero.” And the people that have millions are like, “Oh, I better save. I could run out of money.” They listen to the talks about sequence of returns and boosting your savings rate and those sorts of things.

But you got to understand some advices for some people and other advices for other people. For this person who's probably a super saver, maybe spending a little more money or giving a little more money away would be a good thing.

Givers generally are wealthier and they're happier and they live longer. Giving is a good thing. So consider maybe giving a little bit more money away, even if you can't think of anything to spend any more money on.

One other comment I wanted to make from this question, you mentioned his and hers taxable accounts. Generally, most people have a combined taxable account, a joint taxable account. That's what we have. Well, I guess we do technically still have that. We have a trust taxable account now mostly. But there is an asset protection reason to have separate accounts. Because if just one of you got sued, theoretically you could have your taxable account cleaned out, but your spouse's would be totally okay.

So it's okay to have separate taxable accounts. I don't know that I would recommend that for most people, but if you're concerned about asset protection, that is one way that you'd at least protect each other's accounts from lawsuits against just one of you.

You got to be a little bit careful with that approach. The classic technique of putting everything in your spouse's name, well, it might get a little tricky in a divorce. Everything belongs to your spouse. It probably still works out okay and you probably still end up half of the divorce, but who needs that kind of hassle.

Some things to think about. Hopefully that's helpful to you and helps you make your decision about whether to make Roth contributions or traditional contributions this year. And even if you're not 100% sure, split the difference. Recognize they're both good things. A tax break now is a good thing. A tax break later is a good thing. Don't beat yourself up too much trying to get it exactly right. The harder the decision is, the less of a difference it probably makes.

 

QUOTE OF THE DAY

Our quote of the day today comes from Will Rogers who said, “The goal isn't more money. The goal is living life on your terms.”

Next question off the Speak Pipe.

 

GO-GO RETIREMENT YEARS AND SEQUENCE OF RETURNS RISK

David:
Aloha, Dr. Dahle. This is David calling from Hawaii. Thanks so much for all you do for us out here in WCI land calling today about a situation that a lot of people have when they want to spend a high percentage of their retirement assets in the early go-go years, but they're faced with a potential sequence of returns risks that might hamper their enthusiasm.

The solution I'm proposing is the WCI P2P SBLC, peer-to-peer securities-backed line of credit. Instead of spending down their retirement accounts, they could benefit from borrowing money for their expenses for a few years just to reach the escape velocity of sequence of returns risks. WCI subscribers could apply for membership with a small fee for evaluation of their portfolio, credit report, etc.

You might be thinking, “Great, but where does the money come from?” From other WCIers. People at different stages of life can buy WCI P2P bonds and earn reliable income at a reasonable rate while supporting other WCIers.

In conclusion, the WCI peer-to-peer SBLC has the potential to fortify your existing commitment to community with additional altruism and financial security. And with WCICON approaching quickly on the horizon, what better time than now to inquire with your supporters to explore their degree of interest.

I hope that you're interested in this program. I think it could benefit people on both sides of the table, and thanks again for all you do.

Dr. Jim Dahle:
Okay, not a question, but a topic worth discussing. First of all, no, we're not going to do this. We have so much other low-hanging fruit as a business and even trying to serve the WCI community that's going to make a bigger difference than this. We're probably not doing this. If somebody else out there wants to do this, there might be a viable business there. There might be enough people interested in this sort of a product.

There have been businesses out there that started out with this sort of model. When you think about how SoFi started. That was kind of the idea behind SoFi. And they realized after a few years that this really was very hard to do, to get money from individuals backing loans essentially to other people. And so, SoFi stopped doing it. They realized it was easier to get the money from other places than individuals.

But I love the idea. The issue is, I think it's just the implementation would be very, very challenging to do. But as far as sequence of returns risk, there's so many different ways to deal with it. I don't know I'd put this way at the top of my list. This is kind of a relatively complicated way.

But buffer assets is what we're talking about here. The idea is you go into retirement and oh, the market's just tanked like crazy. So instead of selling your stocks low during those first few years of retirement, you spend money from a buffer asset, something that didn't drop in value.

The classic buffer asset is cash. If you've got a big pile of cash, well, you just spend that while you wait for your stocks to recover. And that's why often people in retirement have two or three years’ worth of spending sitting in cash. Yeah, it's only making 3 or 4 or 5% or whatever, but it didn't go down in value. So even if the stocks and bonds and real estate all goes down in value, like in 2022, you can just spend the cash while things recover, hopefully over the next few years.

But other buffer assets, sometimes people push whole life insurance as a buffer asset because it doesn't fall in value. You can borrow against the whole life and spend that money that year and pay that loan back with stocks after stocks recover in a few years.

You can do the same thing borrowing against anything. You can borrow against your house. You can borrow against your rental properties. You can borrow against a vacation property. You can borrow against all kinds of stuff. And it works the same way. Debt isn't taxable income. You do have to pay interest on it. And that's the downside.

This also reminds me a little bit of the buy, borrow and die theory or philosophy or whatever you want to call it, technique. The idea behind this is you build up this big taxable account and usually later in life, rather than selling those assets and paying capital gains taxes, you just borrow against them and you pay interest instead. And especially if you're only doing it for a year or two, the interest on those loans is probably less than the capital gains taxes you would pay if you sold assets.

And then when you die assets get a step up in basis of death, they're sold and the loan is paid off and it all works out great. But I don't know that you want to start the buy, borrow and die philosophy in your 60s. Because then you might have 20 or 30 or 40 years of interest adding up. I think that's probably going to outpace the long-term capital gains taxes that you would have paid to just have sold something.

Bottom line, we're not going to be starting this thing anytime soon, but we appreciate the suggestion. Every now and then we do get an idea that we implement from a member of the WCI audience and maybe someday we'll implement this sort of thing.

But I'll tell you what, we have way too much on our plate to be chasing this right now. If somebody else wants to get it going, let us know and maybe we'll come up with some sort of a partnership, but we don't have the resources and people to manage that sort of a thing right now. Nor am I convinced that it would be super popular, even among White Coat Investors. Would it work? I think it probably would, if you could get enough people to actually buy the bonds that are funding this thing. That would be the hard part, I think.

 

SPONSOR

Dr. Jim Dahle:
Thank you for listening to the podcast today. This podcast was sponsored by Bob Bhayani at Protuity. One listener sent us this review. “Bob has been absolutely terrific to work with. Bob has quickly and clearly communicated with me by both email and or telephone with responses to my inquiries usually coming the same day. I have somewhat of a unique situation and Bob has been able to help explain the implications underwriting process in a clear and professional manner.”

Contact Bob at www.whitecoatinvestor.com/protuity. You can email [email protected]. You can call (973) 771-9100, but however you contact him, contact Bob, get your disability insurance reviewed, or just get this critical insurance in place today.

Don't forget if you need to refinance your student loans, the best deals we know of can be found at whitecoatinvestor.com. Just go to the recommended tab. The first thing down is student loan refinancing. Going through those links gets you cash back, gets you a free online course and gets you the best rates you can get. If you're going to be paying off your student loans anyway, you might as well send more of your money to principal and less of your money to interest.

Thanks for those of you leaving us five-star reviews and telling friends about the podcast. A recent review came in from Heather who said, “Awesome content, great mix of topics and engaging guests. This podcast presents actionable tips that can easily be implemented.” Five stars. Thanks for that kind review. It does help spread the word.

Okay, this is it. End of the podcast. Keep your head up. Keep your shoulders back. You've got this. We're here to help. See you next time on the White Coat Investor podcast.

 

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 – 269

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 269.

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

Okay, we've got our Financial Educator Award coming up. So you can submit for this up until April 25th, whitecoatinvestor.com/educator. Get somebody to nominate you or nominate somebody else that's passionate about improving financial literacy among your colleagues, trainees, and students.

We encourage you to nominate them for the highly coveted 2026 Financial Educator of the Year Award. The winner of the award gets a prize of $1,000, but that's not all. As an added incentive to craft a compelling nomination, we're offering the nominator who writes the best submission a free WCI online course of their choice. And that's often worth more than $1,000.

You can nominate someone at whitecoatinvestor.com/educator. You have until April 25th to do it. And that helps us get the word out, making financial education accessible to everybody.

We have got financial presentations put together that are free. And I just ran into something on the subreddit this morning where someone was like, “Oh, why doesn't White Coat Investor ever update this stuff?” Somehow they had found a link to the 2019 version of the slides. I'm updating these things every year, at least every two years. So if you're using a 2019 version, there is a more current version of those slides that we produced to help you.

Feel free to modify them as needed for whatever presentation you're giving. We're just trying to make it easier for you to present this sort of stuff to your colleagues and trainees.

But if you go to whitecoatinvestor.com/educator, you'll see that most current links to those most current sets of slides. And I'll probably be redoing them in between the time that I record this and the time that you hear this. So, keep that in mind. You shouldn't be seeing old slides. You're in the wrong place if you're downloading old slides to help put your own presentation together.

At any rate, thanks so much for what you're doing. I know there's a lot of you out there. If there was one of you at every medical school and every residency and fellowship program, I could just stop doing this. I could spend all my time climbing and rafting and mountain biking and playing ice hockey. It'd be great.

I'm a big fan of you helping out with this work. But more importantly, when you teach this stuff to somebody early in their career, it's probably worth literally millions of dollars to them over the course of their career. It's going to help them be a better parent, a better partner, a better physician, let's do this together. This is a community. The rising tide lifts all boats for sure.

Okay, we've got a great interview today. Stick around afterward. We're going to talk for a few minutes about custodial accounts. We're talking about UTMAs, UGMAs, UTMAs, UGMAs, whatever you want to call them. We're going to talk about them after this interview. So, stick around.

 

INTERVIEW

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

Nancy:
Thank you, Jim. Happy to be here.

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

Nancy:
Yeah, I'm a pediatric emergency physician. I'm three and a half years out of fellowship and I work in a rural community in the Northeast.

Dr. Jim Dahle:
And what milestone are we celebrating with you today?

Nancy:
Well, I am back to broke because I just got public service loan forgiveness.

Dr. Jim Dahle:
Awesome. That's kind of two milestones, but it's a wonderful combination. Congratulations. As I said, before we started recording, this might be my favorite milestone.

Nancy:
Yeah.

Dr. Jim Dahle:
It's a big deal for doctors to get back to broke. Something like 73% of docs are paying for school with student loans and that's often $200,000, $300,000, $400,000, $500,000. And just gaining that much money in net worth is not insignificant at all. So, tell us a little bit about your journey. I assume you borrowed to pay for medical school, right?

Nancy:
I did. I did. I went into medical school with no debt. I had no undergrad debt and I was very concerned about student loans. I think I made a mistake at that time. I closed out a trust fund I got from my grandparents to pay for some of med school. It was only about $30,000.

Dr. Jim Dahle:
But in retrospect, it's going to feel a little bit painful, isn't it?

Nancy:
It is because I don't think it really mattered and it probably would be quite large now, which is a little sad.

Dr. Jim Dahle:
Which is totally different for anybody listening to this and going to medical school now. It just happened to be circumstances that you benefited from.

Nancy:
Yes. I ended up borrowing approximately $270,000 and that was living expenses and everything. And by the time it was forgiven, it was about $370,000.

Dr. Jim Dahle:
So it grew. It grew in residency. You did a PEDS residency. It grew in fellowship. You did what, two years of PEDS EM fellowship?

Nancy:
I had three.

Dr. Jim Dahle:
Three years of PEDS EM fellowship.

Nancy:
And I also did a two-year. I did seven years of training by the time I was done.

Dr. Jim Dahle:
Wow. And so, it grew from $270,000 to $370,000. And that's with whatever it was, three and a half year student loan holiday in the middle of it. It still grew $100,000.

Nancy:
Correct.

Dr. Jim Dahle:
Okay. When did you decide, “Okay, PSLF is the route for me?”

Nancy:
I think I was not sure through a lot of my residency and listened to a lot of your stuff. And I also listened to a lot of Dave Ramsey during that time. We were doing a separate debt snowball for all of our other debt, me and my husband. I think it was more as I got closer to fellowship and saw those numbers starting to add up towards 120 payments, that we just decided to continue that path. And when I signed onto my job and got my sign-on bonus and everything, we decided not to use that for the loans and just to continue for PSLF. Especially when people I worked with started to get the forgiveness and it became more real.

Dr. Jim Dahle:
It's funny how knowing somebody or hearing somebody like on this podcast, and you go, “Oh, this actually does work.” Even though I've been telling people who's going to work for 15 years it doesn't feel that real. And it didn't help, I think back in 2017, 2018, when they were coming out with all these statements that only 1% of people applying were getting it that sort of stuff.

I think it scared a lot of people and a few of them maybe didn't make the right decision managing their loans. Maybe they were in a PSLF qualifying job and still refinanced and paid them off and came out a few hundred thousand dollars behind because of that.

Okay. Well, tell us about the other debt. You alluded to some other debt. What other debt did you have?

Nancy:
We, in our marriage, my husband, we had some undergrad debt. We had some car debt. We had some credit card debt. We had a little bit of everything and paid most of that off during residency, which required a lot of energy and focus. And again, now that we're on this side of it, sometimes I wonder if the juice was really worth the squeeze.

Dr. Jim Dahle:
Maybe lived a little too frugally during residency?

Nancy:
Yes, yes. And I printed out, because we've always had a written budget. I printed out our written budget from that time and just like thinking about what our written budget is now, it's funny to compare.

Dr. Jim Dahle:
Yeah, this is a funny exercise. We've gone back and looked at budgets from as early as like 2000. I was in medical school in 2000. It's shocking what we lived on. Not just the effects of inflation, but just how frugal we were. It was kind of crazy looking back knowing now what income we have. I can definitely relate to that.

Was your husband working during residency, during med school? What was going on there? When did you get married and what does he do?

Nancy:
Yeah, we got married right before we moved for residency. And in residency, he followed me, he's very supportive and did a job switch during residency. So we got there and he ended up switching into a different field. And we worked through that job switch and then he worked through all of residency with me.

And then we moved back near our home and thought there were good job opportunities for him here. But it didn't really work out like we thought it would. And so now he is doing a job switch and we're able to finance him going back to school without any issues and live off of my income, which has been kind of a fun little adventure for our family.

Dr. Jim Dahle:
So it doesn't sound like he was any sort of a high income professional while you were in residency. He was working kind of a typical job, typical income.

Nancy:
Yes.

Dr. Jim Dahle:
Okay, you guys got rid of all that other debt and then come out of training, start earning like a typical pediatric emergency medicine doc. What are we looking at for household income the last three or four years?

Nancy:
Yeah, I started my job because I'm in a rural area. I'm definitely on the higher end. So I started at $270,000. And then peds typically makes less than generally am, but the hospital system I'm in just started pay parity. So I got a big bump this year and now we're about $370,000.

Dr. Jim Dahle:
Which is about the average emergency medicine income across the country for at least a full-time emergency doc. Okay, you just got a $370,000 bump in your net worth.

Nancy:
Yes.

Dr. Jim Dahle:
This probably did a little more than just get you back to broke. Am I wrong?

Nancy:
Well, it gets us pretty close back to broke. We do have a big doctor house. For better or worse, when we moved near home, we ended up with a very nice 10 acre property that carries a lot of debt. With that, now we're right about at broke.

Dr. Jim Dahle:
Are you counting the value of the property though? What's the property worth?

Nancy:
The property is worth about $900,000 and we have about $300,000 of equity in it.

Dr. Jim Dahle:
Okay. That's $300,000. Do you have some other $300,000 debt somewhere offsetting that?

Nancy:
I don't think so. The house, we have about $600,000 in debt on the house.

Dr. Jim Dahle:
Right.

Nancy:
Then we have about $300,000 of equity. And then our other net worth is, we have about $80,000 some in cash money market. And then retirement accounts add up to approximately $250,000. And then plus the house, it gets us right about back to even.

Dr. Jim Dahle:
Well, I think you're not quite calculating it right. I calculate your net worth is $600,000 or $700,000, because you get to count the home equity in there too. You don't just subtract your debt from your other assets. So I think you're doing great. It's $300,000 in home equity, $250,000 in retirement, $80,000 in cash. That's $600,000 or $700,000. So we're going to celebrate not only back to broke, we're going to celebrate half a million dollars. We're going to celebrate PSLF with you. So you guys are doing great. Congratulations on all that.

Nancy:
Thank you. Thank you. It's been an interesting journey.

Dr. Jim Dahle:
Yeah. Tell us how you save for retirement. What you've been doing to do that.

Nancy:
I do the boring stuff. I maximize what I can do through my employer for pre-tax. And then they have a very generous match. That ends up being close to 40 a year that we put away. And then that's most of what we do. And then we do some 529s. And then, yeah, just that automatic savings every month.

Dr. Jim Dahle:
All in tax protected accounts for now, it sounds like.

Nancy:
Yes. And then we have a Roth during residency that we have still too.

Dr. Jim Dahle:
Very cool. Well, tell us a little bit how the two of you got on the same page financially so you could achieve this level of success. Because it's not insignificant. Even if you just look at what you've got in retirement and what you've got in cash, this is more than a year's income. After just three or four years out of residency, it's not insignificant what you've been saving. Tell us how you guys have worked together to achieve that.

Nancy:
Well, I think one of the biggest things for financial success for anyone is being on the same page as your spouse. I think if you can work as a team, you are far more likely to be successful than if one person really wants to save and one person wants to be more liberal with their spending. My husband and I come from very similar backgrounds. Our families are very similar. We did not have extravagant upbringings. And my parents have retired early with a very comfortable nest egg after having basic American jobs. They were the quiet millionaires.

I think having that same understanding worked well. And then we did buy a fixer upper at the beginning of residency for the whopping cost of $72,000. We bought a home that needed a lot of work. And my husband is very handy. And he redid many parts of the home. And one day I remember I was at residency working and he sent me a picture of the floor of the kitchen ripped up. And so, we redid the kitchen together. We did tiling. And then we sold the home for about $220,000 at the end of my residency.

Dr. Jim Dahle:
Very cool. That contributed significantly to your net worth.

Nancy:
That helped a lot. And that was part of our down payment on our new home. And then I think just having a written budget every month and knowing where your money goes. And in residency, decreasing our debt. That was not something we were planning on having to be forgiven. And ensuring that we were not accruing more debt every month was important for us.

And it's still important because I still do a written budget every month. I know where our money is going. We're on the same page for where we want to spend money. And just slowly doing those goals, like each month picking something. Well, we have money for this month. So let's buy that piece of furniture. We have money for this next month. Just slow, patient, incremental savings, I think gets you there. You just have to be willing to take the time to do all those things.

Dr. Jim Dahle:
What did you guys learn about the credit card debt and the auto loans while you had them?

Nancy:
I really hated auto loans. We paid those off as fast as we could. And then when we moved here, we had some issues with cars and bought a new car. And it was the first brand new car we ever bought because we had bought used cars all our life. And then we bought that new car since starting attendingship and paid it off in six months. Because I feel like that car loan every month is not something that contributes to your financial success. Getting rid of that is something that we've always prioritized and have been able to do those very quickly, which I think has been important.

Dr. Jim Dahle:
Where did all the credit card debt come from?

Nancy:
When we got married as my husbands from before we were together. It was small, it was like $2,000. And we got rid of that relatively quickly. And then have never carried credit card debt since then.

Dr. Jim Dahle:
Wiped that out quickly, took it in the corner and dropped an anvil on it.

Nancy:
Yes, yes.

Dr. Jim Dahle:
Very nice. All right, somewhere out there, there's somebody like you sitting there maybe in residency going, “I got to figure this money stuff out. And is this PSLF thing really work? And how can I be like this person that three or four years out now has a net worth of more than half a million dollars as student loans are gone, is doing what she wants with her life.” What advice do you have for that person?

Nancy:
Well, I was thinking about this for coming on today, and I have two things. Number one, developing simple money habits early is really important. A written budget, figuring out what your priorities are in doing that, but also doing it in a way that is sustainable and doesn't delay gratification for too long.

One thing that I remember was in residency when we were very, very focused on paying off debt and I was extremely stressed about money. Aretha Franklin came to town and I was like, we cannot pay for these $40 tickets. And we didn't go. And then she died and I never got to see her. I feel like those sorts of decisions were too legalistic. And it would be better to be more free for small things like that.

And then number two, in medical school and in residency, choosing a job that you really, really love, even if there is a lot of training. Pediatrics is not classically a high income specialty. And I did seven years before I got to my job, which is quite a long time for training. But I love my job and I expect to have quite a long career of income.

Even though the training's longer, doing something you really, really love that you can sustain for a long career will really contribute to your financial success because you're not going to burn out if you're really fulfilled in your career and in your specialty. So, those two things are really important.

Dr. Jim Dahle:
For sure. Much better off being a pediatrician for 30 years than burning out of orthopedics in six.

Nancy:
Absolutely.

Dr. Jim Dahle:
No doubt about it. It just works out better. Very cool. Well, thank you so much for being willing to come on the podcast. Thank you for what you're doing in your life. Congratulations on your success. I think we've just celebrated at least three milestones. So you're well on your way. It won't be that long before you are a millionaire. You'll be amazed how quickly that happens. And we encourage you to continue working your way down the list of milestones and building an awesome financial life like you are.

Nancy:
Thank you. Thank you very much.

Dr. Jim Dahle:
All right. That was a fun interview. Afterward, we got into the details about net worth calculations. I suspect there's a lot of people out here making the same mistake when calculating their net worth. Remember, when calculating your net worth, it's everything you own minus everything you owe. So you put your assets on one side of the ledger. You put your liabilities on the other side of the ledger. And then you add it all up. And the sum total is your net worth. It's the measurement of wealth.

Now, that's maybe not the most important number out there when it comes to your finances. Your investable assets might be a more important number than your net worth. But when it comes to your net worth, it's everything. Includes your home. It includes your business. Includes your practice. Includes your cars and your stuff if you want to add all that. And I'm not sure everybody does that usually.

But when you're calculating home equity into that, you don't just put the equity on one side of the ledger and put the mortgage on the other side. That was the mistake that our fine interviewee today, Nancy, was making. What you put over there is the value of the house on the assets and the mortgage on the liability side. So the sum total of that is the home equity.

But if you're only using the equity as the asset and you're using the entire mortgage, you're basically counting the mortgage twice. She thought she was back to broke. In reality, her net worth is $600,000 or $700,000. So I had a good time delivering that good news to her today.

 

FINANCIAL BOOT CAMP: UTMA AND UGMA ACCOUNTS

Dr. Jim Dahle:
All right, let's get into UTMAs and UGMAs for a few minutes. UGMA or UTMA accounts are basically custodial, taxable accounts for your children. They first came up with the Uniform Gift to Minors Act in like 1950s, and were subsequently revised about a decade later. And that's when UTMAs came about.

The UTMA was slightly better than the UGMA in that you can hold things that aren't just stocks and bonds in it. You are allowed to hold some life insurance policies and real estate and those sorts of things in a UTMA. But for the most part, they're the same thing.

A UTMA is available in all states, except Vermont and South Carolina. In those two states, you still have a UGMA account with its slightly more restrictive investments. For the most part, though, most people that open one of these accounts for their children, it will be a UTMA account.

Now this is money you want to give to your children when they reach a certain age, typically age 21 in most states, and it becomes their money at that point. This is not like a 529 account for a college education where it's your money. This becomes their money at a certain point. They can go spend it on anything they want. If they want to go use it to buy a car or give it away to somebody you don't approve of or use it for drugs or alcohol, that's up to them. Once they hit that age, it's their money.

Why would anybody even think about doing this instead of just giving them money later? Well, a couple of reasons. The first one is it gets money out of your estate. It becomes their money. And so it's a way you can give them a gift amount every year that's not subject to gift taxes. It's not subject to having to file a gift tax return and reduce the size of your estate.

But mainly the reason people do it is to save a little bit of money on taxes. You see the first certain amount of income that it makes every year is totally tax-free. And the next little chunk of income that it makes, and these both go up a little bit year to year, and the total between the two is about $3,000-ish.

But the next amount is taxable at their income tax rates. The problem is any amount of income above that gets taxed at your tax rate as the custodian. This is known as the kiddie tax. And it's a bit of a pain, which suggests that you probably ought to invest these UTMA accounts very tax efficiently and not let them get too big.

If you'll invest them in something like a total stock market account, and you'll keep it to a five-figure amount, you probably won't have to pay any kiddie tax on it. The yields are just low enough that they will keep you below that amount where kiddie tax has to start being paid.

What do people use these for? Well, if you want to give your kids money like we have, that we call a 20s fund, money that they can use for anything they want, an early inheritance, if you will, UTMA is a good account for it. If you want to let them use it to go on a mission, or to do a summer in Europe, or to buy a car, pay for a wedding, or a honeymoon, or down payment on a house, or those sorts of uses, that aren't education. If it's education, use a 529. If it's something else, you can use a UTMA account for it.

You get a little bit of tax favorability out of it. That money either doesn't get taxed or gets taxed at their income rather than your higher tax rates, but you give up control over the account.

Once they turn 21, it's their account to do with as they please. Even before they reach that age, you can only spend this money for their benefit. You can't take the money back out and use it to go buy yourself a boat. It's got to be spent for their benefit. Now that might be a car for them when they're 16 or something, but it's not a boat for you.

So keep that in mind as you fund a UTMA account. This really is a gift that you're giving to your children. You're giving it to them a little bit early, retaining a little bit of control until they get to a certain age in exchange for a little bit of tax benefit. That's really what a UTMA is. It's a custodial taxable account for your kids.

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All right, that's the end of this week's Milestones to Millionaire podcast. Thank you so much for being here. Without you, it's not much of a podcast. We're grateful to have you in the White Coat Investor community. If you want to come on this podcast, you can submit for it at whitecoatinvestor.com/milestones.

Till next time, keep your head up, shoulders back. You've got this.

 

DISCLAIMER

Dr. Jim Dahle:
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.

This is the white coat investor podcast, financial boot camp, your fast track to financial success.

Dr. Jim Dahle:
Credit cards are a tool many of us use, but they can also be an easy way to get into trouble. A high percentage of Americans carry credit card debt, and that creates a couple of problems. First, it builds the habit of spending money you do not have, which works against building wealth. Second, credit cards come with very high interest rates, often in the 15% to 30% range after any introductory period. At those rates, debt can double in just a few years, making credit cards a terrible option for long-term borrowing. If there were ever a clear example of bad debt, credit cards would be near the top of the list.

So how should you use them? In many cases, if you have ever carried a balance, it may be best to avoid them entirely and stick to debit cards. That said, credit cards are undeniably convenient. They are especially useful for online purchases and often come with better protections if something goes wrong with a transaction. While debit cards technically offer similar protections, credit cards tend to be easier to work with in practice. Many people also enjoy rewards like cash back, points, or travel miles, especially when taking advantage of sign-up bonuses.

Used carefully, those rewards can add real value. If you charge a few thousand dollars, pay it off in full every month, and avoid interest, you can earn meaningful benefits. But this only works if you are disciplined. Just a few months of carrying a balance at high interest rates can wipe out any rewards you earned. It is very easy for the math to turn against you if you are not careful.

There is also a behavioral side to consider. When spending is easy, whether through credit cards, Venmo, or other digital tools, people tend to spend more. Studies suggest that spending can increase by around 15% when using credit cards. If you are struggling to maintain a strong savings rate, cutting back on credit card use may help you spend less and save more. On the flip side, if you are someone who struggles to spend money at all, credit cards can sometimes help loosen those habits a bit, which is not always a bad thing.

One rule remains consistent for everyone: carrying a balance on a credit card is almost always a bad idea. Even if you start with a 0% introductory period, that window closes quickly, and the interest rates that follow are extremely high. Paying off credit card debt is one of the best guaranteed returns you can get. Eliminating a 20% interest rate is the equivalent of earning a 20% return, which is hard to beat anywhere else.
Finally, while many people focus heavily on their credit score, it is not the most important financial metric. If you consistently pay your bills on time and manage your finances responsibly, your score will take care of itself. There is no need to obsess over it or open multiple cards just to boost it. Income, savings rate, and net worth matter far more in the long run. Credit cards can be useful and even beneficial when used wisely, but they require discipline. Used poorly, they can quickly become a major financial setback.

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.