Contributing to Your Non-Dependent Adult Child’s HSA

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 379.

Today's episode is brought to you by SoFi, helping medical professionals like us bank, borrow and invest to achieve financial wellness. SoFi offers up to 4.6% APY on their savings accounts, as well as an investment platform, financial planning and student loan refinancing, featuring an exclusive rate discount for med professionals and $100 a month payments for residents. Check out all that SoFi offers at Whitecoatinvestor.com/sofi.

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All right, welcome back to the podcast. I know it feels like you just listened to one a week ago, but we didn't record one a week ago. We haven't recorded a podcast, in fact, in a month. And mostly because we've been off having fun. I have had a heck of a streak the last four weeks. I was back very briefly between each of four trips, and between two of them worked a single shift, and then was off again having fun. But it's been a wonderful summer break for me. And I hope you've had something that you could look forward to this summer and enjoyed by yourself, with a family member, whatever.

I got a chance to go float the Middle Fork of the Salmon, which I was looking forward to all spring. It was just as good as you'd expect. Not too much carnage happened. Nobody flipped a raft, although I did get paused in Pistol Rapid, for those of you who have been there. And when the raft paused, my son decided to fly out of the raft. And so, we got to do a little bit of swimming in that rapid, which is interesting, because it's the exact same rapid he swam in a year prior. He seems to have trouble staying in the boat during that rapid.

At any rate, after that, I came home, enjoyed a week at Lake Powell, staying on a houseboat. I'd never been there in July before. Lake Powell, to me, is a shoulder season kind of destination. You go there to go hiking when it's not super hot. And I'd never been there in July.

But I'll tell you what, it's not too bad if you stay in a houseboat with air conditioning. We had a great time playing on the water, water sports, etc. I never got too far away from the AC and I managed to stay wet all week. It was a great time. Always fun to see my nine-year-old getting up on skis again. The only downside was my boat was only working to surf on one side. And if that's the worst part that happens to you all week, it's hard to complain very much.

I came home from that, and after a very quick turnaround, I think it was one day in which I did work a shift, we took off for Hells Canyon on the Oregon-Idaho border and floated that. Put in just below the Hells Canyon Dam and floated down about 32 miles over the course of three days. Also moved over to the lower Salmon and did 10 miles on that river that last day, as well. Always a lot of fun.

Hells Canyon is big water. It's a lot like the Grand Canyon. Instead of dodging rocks like you are on the Middle Fork, you're trying to dodge big boat-eating holes and not let huge waves flip you. Well, we did okay there. Again, my son was the only one who did any substantial swimming. I think it seems to be a chronic issue. It's a little bit like trauma that way. Trauma is a chronic disease with many acute exacerbations. It seems to be the same people getting hurt over and over again. Those of you who had to ask a patient which bullet is the new bullet on this X-ray know exactly what I'm talking about.

But the last little trip we did was just a quick overnighter that Katie and I did celebrate our 25th wedding anniversary. When you think about your life, there aren't a lot of really important dates to celebrate. I can't think of very many more going forward that are as important as this one. We went all out and had a lot of fun, spared no expense. Everything we went to, we just asked ourselves what's the nicest thing we could do and really treated ourselves.

From the very beginning of our two-day date, this was all a surprise to Katie. This was a lot of fun. She knew we were going to do something to celebrate, but she didn't know what we were going to do. It started out with a McLaren in our driveway. If you've never driven a McLaren, I'll tell you what, all you Tesla folks don't know what you're missing. Yeah, Tesla's fast. It's pretty darn quick off the line. In fact, it might be faster off the line than a McLaren. It would not surprise me. But you cannot feel the engine rumbling in your lungs in a Tesla. I'm sorry. It's just really cool to drive a supercar like that.

If you've never had a chance to drive a McLaren or a Lamborghini or something like that, put it on your bucket list. Remember, we're not just saving money and investing money to get some huge pile of cash that we can leave behind when we die or be the richest person in the graveyard. You're saving money now so you can spend more money later. When you do that well from the beginning of your career, you'd be surprised how much fun you can have spending that money later.

I'm getting better at spending. It's definitely my weak point. When you look at the five money activities that you can do, earning, saving, investing, spending, and giving, spending is probably the one I'm not the best at. But I assure you, over the last couple of days, I did really good spending a lot of money. So congratulations to me on that.

But there was a very interesting thing that happened that surprised me. I expected a little bit of this. Occasionally, I get a compliment on my truck. I got an F-250 last year. It's a nice truck. People say, “Nice truck” from time to time. But I had no idea how much attention I was going to get for driving a McLaren around town. I had people that were pushing shopping carts at the grocery store come up and say, “Hey, nice car. What do you do for a living?”

I think I understand maybe why people get confused and start thinking they are what they drive. It's not true, though. You aren't what you drive. You can just go rent a McLaren and drive it around for a couple of days. It won't cost you that much. And you can have that experience if you really crave it. But we certainly got a lot of people looking at us and talking to us about the car as we drove it around.

All right. All of you out there who have been working hard this summer and not playing like me the last few months, I just want to say thank you. What you're doing is really important. A lot of you are docs. About 75% of our audience is docs. You're in the hospital. You're in clinic. You're dealing with sometimes life and death decisions. You're helping people through some of the hardest days of their lives. Sometimes they forget to say thank you. So if you haven't heard one today, let me be the one to tell you. Thank you.

By the way, we have a special deal for podcast listeners. Thanks for being a listener. If you use code PODCAST20 through Monday, August 19, you can get 20% off all of our White Coat Investor courses and at the White Coat Investor store. So, if there's something you've been wanting to buy, but you've been waiting for a discount, this is your chance. Just for podcast listeners. Don't tell all those people over on the subreddit. And don't tell the blog people. This is just for you. PODCAST20 is your code. You can find the information for all that at whitecoatinvestor.com.

CLARIFICATION RE: HSAs

All right. Let's do some clarifications. I don't know if this is a correction. Maybe it's just a little bit of additional information. Someone wrote in “I recently listened to the podcast that answered questions regarding HSAs. Please consider the following nuances in the future.”

I think they're both good. So I'm going to tell you about them. The first one is that when you get to be old enough that you get a catch-up contribution, that's when you're 55 plus, there's a benefit to using two individual HSAs instead of a family HSA. When you use a family HSA, you only get $1,000 catch-up. When you use two individual HSA plans, one for each spouse or whatever, you can get two $1,000 catch-ups. Instead of only being able to put in $9,300 this year, you can put in $10,300. Yeah, I believe that's correct. Thanks for writing in and telling us all about that.

Okay. Another thing this writer wanted to say was that if paying out of pocket prevents someone from achieving other goals, such as maxing out Roth contributions or doing Roth conversions in early retirement, consider submitting medical expenses. Actually putting the medical expenses, take money out of your HSA and use the proceeds to fund those other financial goals. And I think that's a great tip. You preserve your triple tax advantage, you don't want to lower your HSA contribution. Just pull money out of there for your healthcare expenses, either this year and past years. And now you can maybe you have more money in a Roth account or something to pass to an heir tax-free.

I thought that was great. If you're having any trouble maxing out those other tax protected accounts, maybe another source of income can be HSA withdrawals, qualified HSA withdrawals.

NEW VANGUARD CEO

Okay. I got another email asking me if I would talk about my take on the new Vanguard CEO. The new Vanguard CEO is a former BlackRock executive. I've never met him personally. His name is Salim Ramji. He's actually Vanguard's first ever external hire for the position. Vanguard's always promoted from within. And so, that's a little bit unique for them. Tim Buckley is stepping down and Salim Ramji is going to be the new dude.

Well, I don't know him personally. I'm sure he's qualified. I think they'd look very carefully at him. I don't know necessarily what his focus is going to be, but he certainly has experience in running a large organization with lots of ETF money, which is really a lot of what Vanguard is these days. A whole lot of their money is in their exchange traded funds, and coming from BlackRock, you ought to have some serious experience doing that.

I don't view BlackRock as a bad company. They're a good company. One of the good guys out there and somebody that was doing well there is now coming to Vanguard and hopefully will do well there. I don't think this is bad news.

People panic all the time about change. How long do you want a CEO to stay at Vanguard? 50 years? It's just not going to happen. That's not how CEOs work. They're there for five-ish years, 10 years maybe. And then you go on to a new CEO. That's just the way careers work. People retire, they move on to something else, whatever. It's okay to have a new CEO. You don't need to move your money away from Vanguard because they hired a new CEO, for crying out loud.

What else can I tell you about him? Well, he's got a degree in law from the University of Cambridge. He's got a Bachelor of Arts in economics and politics from the University of Toronto. Maybe a little more international focus we might see at Vanguard based on that. I don't have anything bad to say about him. I wouldn't spend a lot of time worrying about Vanguard getting a new CEO. Might there be some changes over the years? Sure, absolutely. Wouldn't you expect there to be? Nothing that I'd particularly worry about.

All right. We got some great stuff today off the Speak Pipe. I think you're going to love it. Let's talk about this one from Paul.

WHAT TO DO WITH YOUR SOLO 401(k) NOW THAT VANGUARD TRANSITIONED TO ASCENSUS

Paul:
Hi, Dr. Dahle. Vanguard recently sold its 401(k) business to Ascensus, which has led me to decide to change to either Schwab or Fidelity for my solo 401(k). Apparently, the more technical term for this process is restatement of the 401(k) plan. Could you talk a little bit about the process of restating the 401(k) to change companies and mistakes to avoid to help those of us who will be changing ours as Vanguard exits this space? Thanks.

Dr. Jim Dahle:
Okay. I wrote a blog post about this event. This is true. Vanguard is getting out of the solo 401(k) business, which is too bad because it really wasn't very long ago that they finally got good at doing this. Up until a year ago or two years ago, you couldn't even roll over a traditional IRA or a SEP IRA into your Vanguard solo 401(k). It was only a couple of years before that when they were making you use the higher cost investor shares instead of the admiral shares. It's not like the Vanguard solo 401(k) has always been awesome. It always had a problem with it.

More recently, I thought it was doing pretty good. I'm not thrilled about the change to Ascensus. I wrote a blog post all about this change. It ran on May 8th of this year. You can go back and take a look at that. But you have a lot of options. You could just leave it at Vanguard and let the Ascensus start managing it and see how that goes.

See if you like Ascensus, see if you're okay with the pricing and the service. Who knows? Maybe you'll get better service. Vanguard's never been known for their incredible service. So maybe it's a little better with Ascensus. You can roll that into an employer 401(k) or 403(b). You can roll it into an IRA. You can move like you're talking about to Fidelity or Schwab.

But you know what? I think the best option for most people is probably to go to a customized plan. We got a list of people. If you go to whitecoatinvestor.com, you go down the recommended list, you'll see retirement plans and HSAs. If you go in there, there are a bunch of companies that will customize an individual solo 401(k) for you.

And it's cool when you get it customized because you get better service and you get more features than you can get from the cookie cutter products available at Vanguard, Fidelity, or Schwab. You don't have to worry about whether they allow Roth contributions. You can get mega backdoor Roth contributions, which you can't get from any of those cookie cutter plans.

You can put the investments you want in there. There's all these great benefits. They'll even help you with your 5,500 EZ. And don't forget, if you got $250,000 in a solo 401(k), you must file that form by the end of July every year. If you don't, the penalties are terrible. They're really egregious. Solo 401(k) over $250,000 equals form 5,500 EZ every year. It's not a hard form to fill out. There's a tutorial on the blog that'll walk you through the form. Don't forget to do it though. It's really important.

If you did forget, you can beg for mercy. And most people I've heard who've done this have actually received some mercy on it, but just fill it out. Once your solo 401(k) gets big enough.

Fidelity's product, Schwab's product, they're okay. They're not bad. I got lots of accounts at Fidelity. The White Coat Investor 401(k) is at Fidelity, our HSA is at Fidelity. I don't think it's a bad place to be. My partnership 401(k) is at Schwab. I don't think it's a bad place to be. I'm putting orders into Fidelity and Schwab online all the time. I call them up rarely, like I do Vanguard. I don't have any problem with the service I'm getting from any of those organizations.

If you think one of those 401(k)s meets all of your needs, go ahead and use it. But I think most people are probably better off with a customized 401(k). It doesn't cost that much. It costs like a few hundred dollars to set up and $100 or $200 a year. For something that hopefully you're putting in $50,000 $60,000 a year into, that's nothing. And you get a little bit better service and more features, totally worth it, especially if it allows you to do a great big mega backdoor Roth contributions like a lot of White Coat Investors are looking for.

But as far as the restatement, if you're going to a customized 401(k), they can take care of all this for you. That's the beautiful thing about it. You've got somebody there, you say, “Hey, I'm a Vanguard. I don't like the Ascensus change. I want to have a customized plan. Can you take care of all the details? – Yeah, we got it, man. No problem. We've done this a hundred times this month for a whole bunch of other people.”

So I don't think that's a big deal. If you want to go to Fidelity or Schwab, I don't think it's that big of a deal either. You just have to let them know, “Hey, this is a 401(k). It was a Vanguard. I didn't want to go to the Ascensus. Can you assist me with restating this?”

Basically you're using the same solo 401(k) plan number. If you were 001 before, you're still 001. The assets move over. If those assets are allowed in the new plan, you can often move them over in kind. But even if you have to sell them, it's not a huge deal. You might miss a little time out of the market, but you can adjust for that elsewhere in your asset allocation, by taking another account, especially a tax-protected account, and maybe moving money there that's in cash or bonds into equities while that money that was in the solo 401(k) is sitting in cash during the transfer period.

They might just let you transfer it in kind as well. Just talk to them about that. Either way, you're probably only out of the market for two or three weeks, and hopefully it doesn't go crazy up while you're out of the market. You might get lucky. It might go down while you're out of the market and give you a chance to sell high and buy low.

Hope that's helpful, Paul. This is like an IRA rollover. So those are super intimidating to people until you've done them. Once you've done one or two, you're like, “Oh, this is nothing. It's just a form I fill out, and everything happens in two or three weeks, and move on with life.”

LIFE AFTER A POSSIBLE FELONY CONVICTION

All right. This next Speak Pipe we decided to use because I think it's a real question. The person who submitted it used the online robotic voice to submit it, and I think once you hear the question, you'll understand why. But I thought it was a really interesting question to consider and to talk about, and assuming this is absolutely a true case, which I think it is, this is somebody who can really use a little bit of help. So, let's take a listen.

Speaker:
Hi, Dr. Dahle. I am going to be arrested in the next few weeks. There is a chance for federal charges. I will lose my medical license in the state, and there is a high chance I will not be able to get a new license in other states. I am wondering about future employment options for MDs after I get out, but I am also prepared to not have a chance in medicine or any high-paying job afterwards.

I was able to save and invest about $520,000 at the time of this writing after a few years after residency, spread between my brokerage account, 403(b), and 457(b). I have about $140,000 in home equity. The money in the 457(b) will be paid to me in a lump sum 90 days after my resignation. I plan on dumping it in an S&P 500 index fund.

My parents will graciously help me with legal fees. It is very reassuring to know that even if I am a felon, I will hopefully come out a millionaire, assuming my assets are not touched. Thank you for all of your help during the years.

Dr. Jim Dahle:
All right. That's a unique one. I don't think we've had this on the podcast before. A challenging situation all around. Presumably, based on what you're talking about, you've done something bad that's going to put you in jail for a few years and cause you to lose your medical license.

I think the bigger problem than the lack of a medical license is the fact that you're going to have that felon label on you. When you talk to a lot of felons, and I have over the years, my work in the emergency department allows me to interact with a lot of people in different situations in life, it can be hard to get a job as a felon, any job, much less a high-paying job, a job where there's a lot of trust.

I think there's a pretty good chance you're not practicing medicine anymore. It's going to be a really hard pathway. It would be a really hard pathway even if you just dropped out of medicine for two or three or four or five years and it wasn't because you went to jail. It's just hard to come back into the field.

Now, are there companies out there that would love to have your expertise and might see this as a chance to get that expertise for cheap? I think there probably are. Are they going to be worried about the felon status? Absolutely, they are. That's going to be the biggest thing you're going to have to address in your applications and in your interviews and in all of that. You're going to have to apply more broadly to jobs. You're going to have to really work in the network you may have. It's going to be challenging to get a job.

The good news is, if you're going to be in jail, and I don't know how many years you're talking about, but you talk about your assets doubling, which suggests to me that we're talking about five, six, seven, eight years you might be in jail. Obviously, you don't know yet, either, but if your assets double, well, at least you're a millionaire. There's a whole lot Americans that retire with way less than a million dollars. 40% of retirees are living on nothing but Social Security. That's awesome news.

In fact, if you can just get a job after you get out that supports you, that doesn't allow you to save for retirement, but supports you, that money can continue to double every seven to 10 years if you leave it invested reasonably aggressively. That's just the rule of 72.

A lot of people call this Coast FIRE. Let's say you came out of residency at 30, you worked until 35, you saved up half a million dollars, you spent the next five years in prison, you get out at 40. Well, if you don't start touching that money until 60, that gives you two more decades. If that money has grown to $700,000 or $800,000, it doubles to $1.6 million, doubles to $3.2 million. That's Coast FIRE. Lots of docs are retiring on $3.2 million or less.

Good job saving, good job taking care of business, coming right out of training, obviously bad job on whatever's causing you to probably be arrested. I think you're probably also thinking worst case scenarios. Usually, that's what our minds jump to. Maybe this won't be as bad as you think. Maybe you're only going to prison for a year. Maybe you are only going to be on probation. Maybe you're not actually going to lose your medical license. Who knows what's going to happen? I suspect you're thinking about worst case scenarios right now. And maybe that's what you end up with. Chances are, it won't be the worst case scenario. And hopefully, you still have lots of career options.

Now, any of that stuff out there that we've talked about on the podcast over the years for nonclinical work for MDs, reviewing insurance stuff, or big pharma has need of expertise of MDs, especially MDs that have practiced for a few years. That's what they really want. They don't want someone right out of med school. They don't want someone right out of residency. They want somebody that came through med school, came through residency and has worked for a few years. Now, you're valuable. Now, you're super valuable to those sorts of companies. It wouldn't surprise me at all if you're able to still get a high-paying job. It might not be $800,000 a year, but if it could be a six-figure job, shoot, you're still way better than the vast majority of Americans.

I hope that's helpful to you. And stay in touch. Let us know how it went. I'm sure a lot of White Coat Investor podcast listeners would be curious to hear the rest of the story, whether that's in a year or whether that's in five years. We wish you the best. Obviously, we think whatever you've done, you should pay your price to society, but we don't necessarily need to ruin everybody's life once they've paid that price.

DAFS AND ASSET PROTECTION

Let's talk for a minute about DAFs and asset protection. I got an email. “I was hoping if you could do a deeper dive into the following, which I find most people I speak with regarding DAFs or donor-advised funds aren't so sure about.

First question, is it easy to transfer appreciated funds, say a total U.S. stock market fund from one brokerage such as Vanguard to another, Schwab or Fidelity? Personally, we have our funds in Vanguard, but I don't love the idea of maintaining a $25,000 balance with Vanguard, but also don't know how much of a hassle it would be to transfer funds to other brokerages. I figure Vanguard to Vanguard Charitable would be the most convenient.”

I think that's probably true. The DAF we use is the Vanguard Charitable one. It is convenient, but I am told by people who have both Vanguard and Fidelity Charitable accounts, that it is no big deal to donate assets from Vanguard to Fidelity Charitable. I think you can work around this without too much hassle. Fidelity's got a $5,000 minimum to open that account. And instead of having to make $500 minimum donations, you can do $50 minimum donations at Fidelity. I think that's a great option.

Another great option is probably Daffy. We had their CEO on the podcast a while back, if you'll remember. They've got pretty darn low fees as well. That could be another option. You might look into that. But it's no big deal to transfer funds.

Now, appreciated funds in a DAF don't matter. Once they're in the DAF, if you want to move them to another DAF, that's no big deal at all. Since they're each charities, you're just making a charitable donation to another DAF. That's super easy to do. Obviously, that's usually cash, not securities, but it doesn't matter because there's no capital gains you have to pay when you sell something in a DAF. It's no big deal.

“Second question, when the funds arrive at the DAF, can you keep them as is? Say you transferred 100 shares of VTSAX, keeping it at that, or do you have to choose what the DAF investment options are?”

You're going to have to choose what the DAF investment options are. If the one you're going to doesn't offer a total stock market fund, and I don't think that's the case with Fidelity or Daffy, then you would have to use something different. Yes, any moves within DAFs are tax-free and sheltered like a 401(k) or 403(b).

“The third question, when deciding to contribute to a charity, do they appreciate whatever asset you have in the DAF, or does the DAF typically liquidate it into cash and the charity receives cash?”

Cash. This is the convenient thing about having a donor-advised fund. You take your highly appreciated security, you give it to the DAF, the DAF takes care of everything, and the charities just get cash. Super convenient. Yes, the charity doesn't have to worry about that. You can donate appreciated securities directly to charities, but only the biggest ones are going to be able to handle it. You're giving money to the United Way, they can probably handle it. You're giving it to some charity that was started last year by somebody in your hometown, it's probably not going to be able to take appreciated securities, but they'll take cash from your DAF.

Another question about asset protection from the same writer. “Is having all your major assets under your spouse's name, house, cars, investments, other than retirement accounts, and not your name one way of approaching it? I know this puts you at risk if there was a divorce, but from strictly an asset protection perspective, would it work?”

Probably. It probably would work. Obviously, it's not a good idea because you got like a one in 10,000 chance of losing personal assets to your patient, but a one in 10 at best chance of losing assets to your spouse. Those numbers are very different, 10 and 10,000. One of them is a thousand times more likely than the other one.

I think this probably would complicate a divorce settlement issue. And if you're really going to transfer assets over there and not mingle them, then I think you might have trouble getting them back in a divorce situation. But would it work? For the most part, if it's just you being sued and it's pretty clear that is not your asset, they can't take it from you.

But remember what this means, all these asset protection techniques. They are for use when you declare bankruptcy. So, you have to be cleaned out before these techniques really start doing much for you. Yeah, you can use them to try to encourage the other party to settle in the unlikely event that you've got a judgment against you that's not reduced on appeal and not covered by insurance.

But you have to go through the bankruptcy process if you're really going to use these assets. Because you're going to declare bankruptcy, your spouse gets to keep all their stuff, the boat and the car and the bank account and all that. But if your name's on the bank account, which you probably need, you're going to lose those assets. Because they're your assets.

I hope that's helpful to you. Obviously, if you're both sued, which does happen, somebody slips and falls on your property. If you're both sued, then you can lose those assets. There's another risk too. Just your spouse can be sued. Let's say you decided to put the house in just your spouse's name and all the money in just your spouse's name and the car in your spouse's name. And then your kid kills somebody with the car and there's a huge judgment against you. Well, it's your spouse's car and your spouse's assets, so they can get those assets by suing your spouse. So, it's not just you that can be sued. Something to think about. Hope that's helpful to you.

All right, let's talk about this question from Wes.

ANOTHER GOOD OPTION FOR DONOR ADVISED FUNDS

Wes:
Hi, Jim. I just listened to your episode on the donor advised funds and wanted to throw out one other option that I haven't heard mentioned on your podcast or on your website that other White Coat Investors out there might be interested in.

I wanted to begin donating appreciated securities in place of my regular cash giving that I give to my church, which is the bulk of my charitable giving. I worked with my church for a while, but for whatever reason, they are not able to set up an account where they can directly receive securities.

That led me to search for a low cost and easy to use donor advised fund to accomplish my goal. I found charityvest.org, which again, I don't think I've heard you mention. It's been very easy to use. There's zero fees if you leave the money in cash, which is what I do, although they do have investment options. But it's been easy to just donate a stock and then they liquidate it. I have it as cash in my account and then I can immediately donate it to whatever charity. No minimum balance, and again, a very easy to use dashboard. It's been a great solution for me. So if anybody else is interested, I recommend them checking out, charityvest.org.

Dr. Jim Dahle:
All right. It sounds like an ad, but I guess if you're not associated with them, it's just an endorsement. So, there you have it from one White Coat Investor to the rest of you. He's had a good experience with Charityvest.

There's actually a lot of DAFs out there. There's hundreds of DAFs out there. Don't all of you call in and leave a Speak Pipe message telling me about your favorite DAF. I don't care which DAF you use. I don't even think we have a sponsor that does DAFs. Fidelity doesn't sponsor us. Vanguard doesn't sponsor us, Daffy doesn't sponsor us. Those are kind of my big three I usually mention. Maybe I ought to throw Charityvest into that list. There's not a lot of money in getting sponsors that do DAFs, but if there's a DAF out there that offers a nice low cost product with lots of great features and they want to sponsor us, let us know, you know where to find us.

DONOR ADVISED FUNDS AND QCD

Okay, another email, this one also about that same episode about DAFs. “One more bit of info you may want to add to your donor advised fund monologue.” Is that what we call it now, what I'm doing here? I'm monologuing. “Is that if you go the QCD route, Qualified Charitable Distributions, at least with Vanguard, you can't use a donor advised fund.”

Okay, that's true. You cannot do a QCD into a DAF. But you can use both. Let's say you're of RMD age, 72 plus, although QCD age is Qualified Charitable Distribution from an IRA is 70 and a half, not 72. But usually most people are going to be 72 plus before they're doing this.

You can't do it into a DAF, it has to go directly to a charity. So you can't QCD into a DAF, but you can use both. So you could do a QCD to a charity and you could also donate to a DAF and obviously take a deduction for that. You could also give from that DAF to a charity. Lots of options there.

But if you want to take money out of an IRA and put it into a DAF, you got to pull it out, pay the taxes on it and then put it in to the DAF and get that charitable deduction, assuming you're itemizing your taxes in order to do that.

All right, let's talk about another charitable question. This one's about donating real estate to charity.

DONATING REAL ESTATE TO CHARITY

Speaker 2:
Hi, Dr. Dahle, question about donating real estate to charity. We have a plot of land that we're looking to donate and I'm trying to figure out when I claim this on my charitable giving taxes, do I note the cost basis of the property or the current market value? For context, the current market value actually is substantially less than the purchase price, hence the donation. I appreciate your help and all that you do.

Dr. Jim Dahle:
Well, that's unfortunate. I'm sorry to hear the land depreciated while you owned it. The way these donations work though is the current value, if you've owned it for at least a year. If you owned it for less than a year though, I'm not sure this applies to you, but if you owned it for less than a year, I believe it is the basis. But after a year, it's the current value.

As a general rule, you don't donate stuff that's depreciated to charity. You sell it first, claim the loss on your taxes, then donate cash to the charity. The point of donating appreciated shares to charity is that nobody has to pay the capital gains taxes. You don't have to pay them and the charity doesn't have to pay them. That's the point of donating directly to a charity.

But if you have a loss on it, you're better off selling the thing and then donating the cash to the charity. Of course, you'd have to claim that on your itemized deductions, your Schedule A each year, but you could use that capital loss on your Schedule B to help lower your taxes.

Good question. I think once you understand exactly how that works, you're going to quit wanting to do this. But in the event you do want to donate real estate to a charity, this is for somebody else out there that actually has a gain on their real estate they've owned for at least a year, there are probably some DAFs out there that can help. I don't know if any of the ones I've mentioned so far in this episode, like Fidelity or Vanguard or Daffy can help with that, but I'll bet there are DAFs that specialize in this. Probably for a substantial fee.

Let's Google DAF that can accept real estate investment. And we see Schwab Charitable pops up with a page called Donating Appreciated Non-Cash Assets Real Estate. And it talks about the benefits of that, doesn't mention whether they can handle it or not.

The important thing is, when you move something into a DAF, it needs to be appraised. Anything that's over a certain relatively low dollar amount, less than most properties are going to be worth, needs to be appraised for charitable giving. And you got to keep a copy of that in case you are audited.

But I don't know if Schwab can actually handle that. They do say at the bottom of this article, the Charitable Strategies Group at Schwab Charitable is a team of professionals with specialized knowledge about non-cash asset contributions to charity. Our team stands ready to support you and your advisor.

So maybe they can handle it. Maybe Schwab can handle it. Vanguard or Fidelity, they may be able to handle it as well. If you already have a DAF, call them up. And if they say they can't handle real estate, ask them if they know a DAF that can. I'm positive there are DAFs out there that can help with this. I don't know exactly which ones to use.

The other thing, you can just check with the charity and see if they can handle it themselves. They accept the donation, they sell it themselves, and that's something else you can do.

Here's a thread from Bogleheads from about five years ago, somebody asking about it. Let's see if they name any specific DAFs. Fidelity, it says here, will accept primary residences in some circumstances. They don't name any other particular DAFs that can handle that sort of a transaction. I'm positive they're out there though. So I just keep looking until you've found one. Maybe just start calling up DAFs and asking if they can handle real estate.

QUOTE OF THE DAY

Our quote of the day today comes from Manoj Arora. He said, “The struggle for financial freedom is very unfair. Just look at the rewards.” And I think he's talking about the rewards when you struggle for financial freedom and achieve it. The rewards are out of proportion to the struggling that you do. A little bit of struggling creates a lot of rewards.

All right. Here's another question. This one's about HSAs for dependent adult children. Boy, people really like that. I got a lot of emails after I mentioned that on the podcast. Let's listen to this Speak Pipe and see if it's similar to the emails I got.

CONTRIBUTING TO YOUR NON-DEPENDENT ADULT CHILD’S HSA

Speaker 3:
I heard you mentioned on a previous podcast that you can now open an HSA account for your non-dependent children ages 19 to 26 if you have a high deductible health plan. Can you provide more details about this? Do you open it in their name with your HSA company? I assume I would fund it with post-tax dollars. Any additional details would be appreciated. Thanks much.

Dr. Jim Dahle:
Okay, so let's go over this one more time. We're talking about adult children that happen to be covered by your high deductible health plan and no other plan but are not your dependents financially. Meaning you're providing less than 50% of their support.

They're eligible not just to open a health savings account but to open a family health savings account. With the twice as high contribution limit. And obviously money is fungible. You could give them $8,300 and they can put that $8,300 into an HSA. It's their HSA though. They need to open it. They're an adult. You can't go opening financial accounts for adults willy-nilly. They have to open them themselves.

This is why you should always establish all investing accounts for your children before they turn 18. Otherwise you got to talk them into doing it. But in this case, they have to open it as an adult because they can't have this before they're 18. They can't have it while they're your dependent but it's a pretty cool little loophole that you can do that with.

So, they go and open an account. They put the money in, they get a deduction for it. It shows up on their taxes, not your taxes. Where does that money come from? Well, as long as you stay under the gift tax limits it could come from you. It doesn't have to be earned income that goes into an HSA. This isn't a retirement account. There's no earned income requirement. It can be somebody else's income. So, another cool little thing about that.

I've written a blog post about this. I don't think it's published yet. Let me see if it's scheduled to be published. No, I've just written it. I wrote it back in May, it looks like. We'll get it out on the blog eventually. It's got all kinds of details in it to give you the lowdown on how to do this. There's no rush. You got till the end of the year, of course, to make your contribution. In fact, I think you need to make a contribution a little bit after the end of the year. I'll have to double check on that.

But that post is preliminarily titled “Give Your Kid a Seven-Figure HSA.” And truly, if you contributed to them every year from 19 to 26, the HSA maximum, and let it ride until they were 65, they probably would have a seven-figure HSA by the time they get there.

SPONSOR

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All right, don't forget, podcast deal, just for podcast listeners. PODCAST20 is the code for anybody who would like to buy a White Coat Investor course, like Fire Your Financial Advisor, or CFE 2024, or our No Hype Real Estate Investing course, all 20% off to you through August 19th, if you use the code PODCAST20. It also applies to everything we sell at the WCI store, including White Coat Investor books.

Thanks for those of you who have left us a five-star review. One came in just this month, or last month, I guess, by the time you hear this, from Rod, who said, “Truly life-changing. To have all this knowledge available to me is life-changing. My life, financial and social, will never be the same now that I have this knowledge. It will be a major player in my financial success. All of this inspired myself and a few others to start a finance interest group in medical school. It got us published in academia, and now I'm grant-funded, developing personal finance curricula for my medical school. Thank you so very much.”

No, thank you for what you're doing for your other students, for your peers, for your colleagues. That is who deserves the five-star review, but we appreciate you giving us one. It does help us spread the word to other White Coat Investors.

All right, it's time to wrap this up. I actually need to do an interview with Michael Kitsis today. I'm super excited about this. When does the Michael Kitsis interview run, Megan? The next week. So, next week, we got Michael Kitsis on the podcast. We're going to be talking about financial advisors and the state of the current financial advisory profession, industry, whatever you want to call it. And I think it's going to be a great interview. I'm going to record it right now, and you get to listen to it next week.

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

DISCLAIMER

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

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 182 – Pharmacist pays off student loans in two years.

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All right. You guys hear ads every week on the podcast, and that's obviously part of the podcast. We're a for-profit business. We got to make payroll and all that. But sometimes an ad is an accomplishment. And this is one of those cases. This is a sponsor I've been trying to bring on to the podcast for like five or six years. It's a company I really like. This is where Katie and I had our Solo 401(k) before we had employees at WCI and had to change to an ERISA 401(k) plan. This is the company we had it with.

We just think they're great. We think they're the cat's meow. And we've been wanting to promote them to you like crazy for the last five or six years, but felt like we probably shouldn't give away too much free advertising.

But they're a wonderful company. And if you are transitioning away from the Vanguard solo 401(k), I think this is a great place to go. If you just want a customized 401(k) because you want customized features, like a mega backdoor Roth, you're not going to get that at a cookie cutter 401(k), solo 401(k) like at Schwab or Fidelity or Vanguard, which isn't available anymore, or a census. You're not going to get that feature. You got to have a customized plan. And this is a great provider of it and I can't say enough good things about them.

But anyway, today, after our interview, and we have a great interview today, stick around afterwards. We're going to talk a little bit more about solo 401(k)s and mega backdoor Roth IRAs. If you don't know what I'm talking about with that stuff, we're going to go through the basics and a few cool tricks you can do with those accounts.

One other thing I'm supposed to tell you about, for those of you who buy bulk orders of White Coat Investor books, like you pass them out to students, or you pass them out to residents, or you want to give them out at a meeting or something like that, we do offer a discount. If you're buying 25 plus, if you buy 100 plus, you can even bigger discount, but you can get a discount at 25 plus. Just email [email protected] and we'll work that out with you and ship them to you as a box. It's better for us. It's better for you. If you want to buy a whole bunch of them, you don't have to go to Amazon and just crank up the number that you're ordering. You can get a special deal. So, bulk book orders, email [email protected].

INTERVIEW

All right. Let's get into this great interview. It's a wonderful one today.

Our guests today on the Milestones to Millionaire podcast are Jason and Kristen. Welcome to the podcast, guys.

Kristen:
Thanks. Glad to be here.

Jason:
Wonderful to be here. Thanks for the opportunity.

Dr. Jim Dahle:
Okay. Let's start by, why don't you tell people what you do for a living, what part of the country you're in and how far you are out of school?

Jason:
My name is Jason. This is my wife, Kristen, as you mentioned. We live in Florida and I graduated in 2019. I'm five years out of pharmacy school. My wife is a nurse and she graduated. What year did you graduate?

Kristen:
2014.

Jason:
2014. Yeah, that’s us.
Dr. Jim Dahle:
Now tell us what milestone we're celebrating today.

Jason:
We paid off my pharmacy student loan, which I believe was about $185,000.

Dr. Jim Dahle:
$185,000. And how long did it take you to pay that off?

Jason:
Just around two years. If I remember correctly, just around two years. Two years. Two years. That's almost a hundred grand a year you're putting toward this debt. That's pretty impressive on your income.

Kristen:
Yeah. It was a journey for sure. I know that we basically lived off of most of my salary as a registered nurse, while every bit of money that he made, he used it towards his debt.

Dr. Jim Dahle:
Yeah, that sounds about right. That sounds about right. Tell us what was your income over those two years? Your combined household income.

Jason:
Our combined household income over the two years was about $170,000.

Kristen:
Yeah.

Jason:
$170,000, $175,000.

Dr. Jim Dahle:
$170,000. After paying taxes, there's not a lot left to live on. How much do you guys think you spent living over the course of those two years?

Jason:
That's a great question. We never broke down that math like that. Probably like $70,000 max, $60,000 max, somewhere.

Dr. Jim Dahle:
Yeah. I'm not even sure it was that much. I'm not sure the math works out to do that. Was there any other money coming in from somewhere? Did you sell something or did somebody give you something or did someone die and you inherited something or is this all just your earnings?

Jason:
No, none of that. You have to take it back a little bit. I graduated literally right before COVID. I got licensed in November of 2019 and then COVID happened. The biggest thing for us was that they had the student loan pause and there was no interest occurring on our loans. So, that was the biggest help in terms of money because normally those rates are at 6%, 7%. There's no way that would have happened in two years if we had to do the interest part of it.

As far as working or income, no, there was no inheritance. No, nothing like that. But we did have two and three jobs at a time. I was working at various pharmacies. We took all of the overtime that we could find. Any overtime, any day, any time, we worked. We just worked and worked and worked.

Dr. Jim Dahle:
Take me back a couple of years ago, this discussion you had where you guys decided to do this because people don't just do this accidentally. This doesn't happen naturally. At some point, you guys looked at each other and said, “Let's take these student loans in the corner and drop an anvil on them.” Tell me about that discussion.

Jason:
We got married in 2017. And so, you sign up for that program, you know a rough estimate of kind of where you're going to be. And I hated the idea of a student loan. I knew it was necessary for our school. But I said I did not want to carry this around for 30 years or 20 years. I didn't want to carry it around indefinitely. I was with my wife right as we got married, even though I was making zero dollars and I still had school to go. And she was working away just to put the roof over her head. And I said, “I want to pay this off in two years. I don't know if that's even possible. But that's my goal is to pay this thing off in two years so we can continue to live our life.”

And so, that was a discussion that we had had before we got married. Then even as we got married, and even though there's nothing actionable that was going on at that time, we just continued to say that out loud and said, “We need to have a plan for this.” Even though it wasn't a definitive plan, at least it was a goal. And then once I started working, and student loan pause was there, we really said, “This is our moment. This is our opportunity. But we need to make the very most of it.”

Because I know now you can look back on COVID and maybe we understand a little bit more. But at the time, nobody knew how long the student loan pause would last. I kept working. Every extension they had, I was like, “That's it. This is the end of it. We've got to do everything we can until then. The extension would happen, we'd be like, “Hey, we got more time. Let's go, let's go, let's go.”

Dr. Jim Dahle:
When did you realize this was going to be possibleAt the beginning, it just feels like it's such a huge goal. That you're never going to accomplish it. When did you feel like you really picked up the momentum?

Jason:
The snowball. We're Dave Ramsey people. We were doing the snowball effect. And I'm the nerd. She's more of the free spender. I'm the one getting up every morning. I know exactly how much it is, exactly where we're at. Kind of planning it out roughly. The overtime is what makes it a little harder to plan out and such, and how often I'm working the other jobs, and she's working the other jobs. But I think about midway through. We paid it off in November of, what was that?

Kristen:
2022.

Jason:
2022, yeah. And so, I think early 2021, maybe by the summer of 2021, we're sitting there going, “Okay, this is adding up. The pause is there. We're okay. Again, enough things broke in our favor. We're still working and things are going good. Okay, there's some raises in here.” It was on track.

Dr. Jim Dahle:
Now, Kristen, you're more the free spirit, the spender, whatever you want to call it. Although I don't think I really believe either one of you is a huge spender, given what you've accomplished. What was the hardest part of this for you?

Kristen:
It definitely takes two individuals. It takes someone who is determined like he is and saying we're going to stick to the budget. But it also takes the other person saying, “Okay, we are going to stick to that plan, but we're going to make sure in the budget, we have a little room to have fun, occasional restaurants every now and again, or just time over with our friends.” I made sure that we had some fun in the relationship. And then he brought more of keeping us on track.

Dr. Jim Dahle:
What was the biggest disagreement you had over the course of that two years? Financial disagreement. I don't need to hear about the other one.

Jason:
I think the one that comes to mind is house buying.

Kristen:
Yeah.

Jason:
That was one, which is complicated. Because how COVID changed all that. But that's one of the ones that I remember was other people were buying houses and we were watching the prices of houses and things go up and the limited quantity of supply and demand and all of that. And I was like, “No, we really want to stick to this plan. I don't want to buy a house on top of this, on top of the debt that we have and really alter our plan.” And so, that was maybe for me the primary disagreement.

Kristen:
Yeah. I say that I think the idea we had to remember along the way, or I had to remember is we're not keeping up with the Joneses. We had a plan, we had goals, and I wasn't to be looking around and what this person's doing and that one's buying because we had bigger dreams, bigger goals. And just saying no to yourself and making sure you have that self-discipline was really a part of our journey.

Jason:
Yeah. The delayed gratification.

Dr. Jim Dahle:
Did it end up being harder or easier than you thought it was going to be at the beginning?

Jason:
I'm not sure if I knew what to expect. I think once the ball got rolling, it was easier. I think initially it was difficult, and again, that's COVID. Even though we were in healthcare, nobody was hiring at the time when this thing first started. So that was really discouraging. I went eight months without a job, I think. That part I would say was harder. The circumstances under which it was happening was both easier and harder because student loan policy was great. Unanticipated, tremendous blessing and benefit. Finding a job initially, so much more harder than anticipated or expected.

And so, I think it was some combination of both. Once I got my job, she was rolling along because nursing, you can never have enough of those. Once I got my job and I was able to start really rolling, I think it was easier than expected because there was so much demand and so much need for healthcare professionals at the time. There was a plethora of opportunities to work. Literally, eight, nine, 10 days in a row, you'd be working. You had a day off and somebody called and you're like, “I'm coming.” That's just kind of what happened.

Dr. Jim Dahle:
This is fascinating. You decide to go to professional school. You borrow an ungodly sum of money to go. And you come out and basically the market tells you, we don't value what you just spent the last four years doing and borrowing a couple hundred thousand dollars to do. How were you mentally with that? Eight months looking for a job with a pharmacy degree. What did that feel like?

Jason:
Very discouraging. Very, very discouraging. You're sending out applications, sending out resumes. You're talking to people. I'm old school. I outlined every pharmacy in like a 15 mile radius and I printed out my resume and drove it to them and dropped it off. I'm walking into hospitals that I probably shouldn't have been walking into because of COVID. But I did everything I knew to do. Not understanding yet that these places were even just trying to hold on to the staff they had.

I heard about that on the other end of it after I got my job. It was like, “Oh yeah, we were struggling to keep our jobs just because you didn't know. Nobody knew anything.” But yes, it was that day after day. One, you have this degree that you've worked so hard to earn and now you can't use it. So that's terrible. And then it feels indefinite. It feels indefinite. It's just not the normal job seeking process because where you're like, “Oh, well, we'll just go on to the next interview or the next thing.” It's like, “No, we're not interviewing. No, we don't have a need. No, we're letting people go. No, we don't even know if we're going to be open, if our business is going to be open.” So you're like, “Well, shoot, there's not even light at the end of the tunnel here. It's just this is where we're at.” So it was rough.

Dr. Jim Dahle:
Yeah, that sounds really hard. All right, what advice do you have for somebody that is just like you were a couple of years ago or it's been a little while, four years ago that's sitting there coming out of pharmacy school or PT school or PA school or medical school or whatever, sitting there looking at $200,000 in student loans. What advice do you have for them?

Kristen:
I think my two things are stick to the budget. We have a monthly budget meeting where once a month at the beginning, we sit down and we talk for about an hour, review our expenses from last month, plan for what's in the month coming and the things that are ahead. So living, making sure that we stick to the budget.

And then the second thing that both of us talk about, and I think we can mostly say is living below your means. He'll talk about the pharmacy part of it and what it's like to have money once you become a pharmacist. But for us, it was just realizing we don't need some of the things we think we do. We don't need to eat out all the time, get as much coffee. We just learned to say, “You know what? Just because we're making money doesn't mean we need to spend it just as fast.”

Jason:
I wholeheartedly agree with what you said. Your lifestyle, maintaining a lifestyle that is below your means is so important because what they call lifestyle creep, that's so easy. “Oh, I've got a couple of dollars. Let me go do this. Let me go do that.” It's so easy for somebody to get trapped into.

I graduated and we're on social media and people are buying houses. They're buying cars. They're buying all kinds of stuff. And you're sitting there and you're like, “Wait a minute, we went to school together. What are you doing with your loan? What's your story? What's your plan?” And so, that's really big. And a little easier for me because I don't care so much.

But that and staying focused. Yes, the budget meeting, knowing what your goal is. In my case, being in agreement with my spouse that, “Hey, we have this goal together. This isn't going to last forever. We are going to be able to accomplish and do other things in our life after this. But let's tackle this and knock it out.” That was tremendously a big deal for us.

And I'm saying “no.” You got to learn to say no. You have to learn to say no to people. People are going to think you're weird. That's okay. It is weird. You have to be able to say no. People after church would be like, “Hey, you want to come out to lunch? You want to do something?” We're like, “No, we're going to go home and eat our sandwich or eat our leftovers or whatever.”

You have to be able to be selective. There's going to be a lot of things that you're just not going to do if you're really serious about knocking it out as fast as possible, which is kind of just where I was. I just thought about it every day with going, “Hey, I borrowed this money. I got something out of it. And I'm not going to wait around for anybody to forgive it because it's like me buying my house and saying, hey, why don't you pay for it?” And you're going, “But you're living in it. Why should I have to do that?”

It just never seems fair to me. I said, “I earned something. I willingly signed up for this. It's my responsibility to pay it off. And I have the ability to do it. Therefore I should do the very best that I could.” I think that's biblical. The Bible talks about not having debt as well. And I said we need to take care of this as best as possible. We're just motivated. Just got to be motivated.

Dr. Jim Dahle:
Awesome.

Jason:
There's one more thing I could say. I would say letting people know about your journey is all right. You will need that encouragement because there's going to be times where there is no light in the tunnel or you lose momentum and you will need those people who will maybe invite you to their house to eat something different than what you've been eating at home. Or it would take like a trip somewhere. We'd stay with friends. And of course, when you stay with friends, they're like, “Oh, we'll cook for you. We'll do this. We'll do that.”

And so, you need encouragement along the way. I would tell people, “Don't be ashamed of what you're doing. What you're doing is very noble and it's great.” And it has a fantastic reward because you wake up the next day after you push that button. It's just life is different. And so, I would highly encourage people. Just seek out encouragement. Don't go through it alone.

Dr. Jim Dahle:
Huge relief to pay that off, I'm sure. But I'm curious what you did. You got a raise after this was paid off in 2022. You got a raise of something like $8,000 a month. What'd you do with that?

Kristen:
Yeah.

Jason:
Yes. What we did with that was we saved and saved and saved so we could buy a house.

Dr. Jim Dahle:
So now you're in the house?

Jason:
Yes. In May of 2023, we were able to put down our down payment to get our house.

Dr. Jim Dahle:
Cool.

Jason:
That became the next thing, we didn't stop really our focus and mindset. Now, we weren't working three jobs, I think by the end of that, I think we had teared that down to maybe one or two. And maybe we were saying no to some overtime by that point, just for our own sanity. But yeah, we continued to save. We were like, “Well, we need to come and save. We want a house. Market continues to go up.” We just put that money away. Again, our lifestyle didn't really change or increase in that manner. We just changed our focus.

Kristen:
Yeah. And then we also went to Europe.

Jason:
Oh, yeah.

Kristen:
There was that. We made sure we saved the money and we paid for that. I cash flowed that and we don't owe anything on any credit cards or anything like that. We did get to go to Europe as well.

Jason:
That was her big goal or dream. We said you've been a big part of this. And I had been to Europe before, she had not. And I said, “That's something we need to get taken care of.”

Kristen:
Yeah, we went to England.

Jason:
Italy. France.

Kristen:
Italy, Switzerland. Everywhere in Italy.

Dr. Jim Dahle:
Oh, yeah. Just a huge trip. Awesome. Well, congratulations. That's awesome. Super proud of you guys. Jason and Kristen, you knocked out $185,000 in less than two years. You should be super proud. We're proud of you. Thank you for coming on and sharing your experience to inspire others to do the same.

Jason:
Absolutely.

Dr. Jim Dahle:
All right. I hope you enjoyed that. Those guys are fired up. It's really interesting. Almost everybody we bring on this show, I ask them “Have you listened to one or two of these so you know what we're going to do today?” And almost always the answer is “I've listened to almost all of them” or “I've listened to all of them” or “I've listened to them all twice” or something like that. In this case, it was really interesting because Jason's like, “No, I haven't listened to any of them.” And I'm like, “How'd you get on this podcast if you've never listened to it?”

But apparently somebody told him about it or he figured it out and applied. And there he was. Some people just figure it out without the White Coat Investor. And that's great. We're still happy to have you in the White Coat Investor community. And it's awesome to see what the power of focus can do in your financial life.

FINANCE 101: MEGA BACKDOOR ROTH

All right. I promised you at the top of the podcast, we're going to talk more about solo 401(k)s and particularly about the mega backdoor Roth IRA. A solo 401(k) is just a 401(k) when it's only you and your spouse. If you have employees that qualify for the 401(k) and that's going to be most employees, you can kind of exclude some minors and some part-time employees. But for the most part, any employees that you have to keep you from having a solo 401(k), sometimes called an individual 401(k).

But if you don't, if it's just you, if you're just an independent contractor, you're paid on 1099, this is your retirement account. It's a solo 401(k). It's wonderful. It's awesome. You can do all kinds of things with it.

This year, if you're under 50, you can put in $69,000 into your 401(k). And there's several different ways you can contribute that. We'll talk about that in a minute. If you are 50 plus, you get a catch-up contribution. You can put in more money into it. I think it's $7,500 more that you can put into there. And that's how you get to the $76,500 that the ad at the top of the podcast talked about. That's awesome.

And now you can get it all in there Roth, if you want. It might not be right for you. Tax deferred might make sense to you. It does for lots of people in their peak earnings years. But if Roth is right for you, you can get a lot of money in there as a Roth contribution. Any 401(k) that allows it and you can set up a solo 401(k) so it does whatever you want, especially if you use a customized one.

But if it allows it, you can do three types of contributions. You can make a traditional tax deferred employee contribution. This year that's $23,000 for those under 50 and that's tax deferred. It's $23,000 you don't have to pay tax on. So, that probably saves you something like $10,000 in taxes off your tax bill to put that money in there.

You can also make that employee contribution as a Roth contribution. So, it's after tax money, you pay tax on it, you put it in there, it's never taxed again. It grows tax-free, it comes out tax-free, and you roll it over to an IRA. And I think maybe even if you leave it in the 401(k) now since Secure Act 2.0, there's no RMDs on it. And so, you can leave it to your heirs and it grows tax-free for them for another 10 years. It's just a really awesome deal.

Okay, those are the employee contributions. You can also make employer contributions. And this generally works out to be about 20% of your profit on your business as a sole proprietor. And so, if you make $200,000, well, you can contribute $40,000 as a tax deferred employer contribution to your solo 401(k). If you're an S-corp, it basically works out to be 25% of what you pay yourself. If your salary is $200,000, you can put in $50,000, 25% of what you paid yourself as a salary into that account.

But for a sole proprietor, it works out to be 20% of what you earn. Sometimes when you read the IRS forms, it says 25% and that's confusing. What they mean is 25% not including the contribution or 20% including the contribution, but it's the same amount of money.

So, that's a cool way to contribute. But there is a third way and that's called after-tax contributions. These are not Roth contributions, they're after-tax contributions. So, you don't get a tax deduction for putting the money in. And when the money comes out, that principal comes out tax-free. But the earnings on an after-tax contribution are fully taxable, just like the earnings on a tax-deferred contribution, whether you do it as the employee contribution or whether your employer, a.k.a you, does it as an employer contribution, the earnings all come out fully taxable at ordinary income tax rates.

Well, that's the same way after-tax contribution earnings come out. But there's a cool trick you can do. And this cool trick is often called the mega backdoor Roth IRA. Not to be confused with the backdoor Roth IRA, which you do with an IRA. The mega backdoor Roth IRA, despite its name, is not done with an IRA. It's done with a 401(k), and it consists of two steps.

The first step is making an after-tax contribution into the account. The second step is then converting that contribution to your Roth account. So, moving it from the after-tax sub-account into the Roth sub-account. And I do this with one call to Fidelity every year and the money's moved in there. It's no big deal. But because you didn't get a tax deduction on the contribution, there's no tax cost to the conversion. So, just like the backdoor Roth IRA where it doesn't cost you to do that Roth conversion, it's the same with the mega backdoor Roth IRA.

The difference is you can put tons of money in there. If you make enough money and it doesn't take much, you don't have to make 4X or 5X. What you're putting in there, it can be a lot less as an after-tax contribution. So, even if you're only making a high five figure amount, you can max this thing out as after-tax contributions.

And so, it's really a sweet deal for those whom this is like a second retirement account. If you already have a 401(k), your main gig, and this is a second 401(k), and you just want to use it mostly for retirement savings. And you're like, “Well, how much can I get in there?” You might be surprised how much you can get in there as a mega backdoor Roth IRA. It won't be a tax deferred contribution, it'll be Roth, but it'll never be taxed again. And you can get a lot in there. Some additional asset protection, obviously lots of tax protection there. It's going to grow faster in the account. It's a good deal.

You just can't do that with a cookie cutter off the shelf, totally free solo 401(k) at Vanguard or Fidelity or Schwab. You got to go to a customized provider, like the one that's sponsoring this episode. For a few hundred dollars to get it set up, $100 or $200 a year to maintain it, you can make those huge contributions. Totally worth it, great deal. And this is something that lots of people do to increase their retirement savings.

Obviously, when you can save inside a tax protective and asset protective account, as opposed to a taxable account, that is a good thing. And this is something Katie and I do every year. Now with our ERISA 401(k), we set up the world's best employer 401(k) when we had to leave our solo 401(k). But this is something that's pretty darn easy to do if you're still allowed to use a solo 401(k).

Okay, this has been the Milestone to Millionaire podcast. If you'd like to come on this, you can apply whitecoatinvestor.com/milestones. Our goals with this podcast are to highlight what you've done and celebrate your accomplishments with you, but also to use those accomplishments to inspire others to do the same.

SPONSOR

Our sponsor today has been MySolo 401(k) Financial. Unlock the power of your retirement savings with a Mega Backdoor Roth Solo 401(k) from MySolo 401(k) Financial. As a leading provider, MySolo 401(k) Financial allows you to contribute up to $76,500 annually to your Roth account, enabling tax-free growth and substantial tax savings.

They simplify the process by helping you open accounts at your preferred bank or brokerage and handling all compliance support. Accelerate your retirement nest egg with a Mega Backdoor Roth Solo 401(k) Plan from MySolo 401(k) Financial at www.mysolo401k.net.

One other thing I should have mentioned, I'm really getting those people who turned this off as soon as they started hearing the ad at the end. One thing I should have mentioned, when you have more than $250,000 in your solo 401(k), you need to make sure that Form 5500-EZ is filed each year. Really important, the penalty for not doing that is super high. You do not want to mistake that. It's due by July 31st of the following year. If you had $250,000 or more on December 31st, you got to file that form by July.

The sponsor, MySolo 401(k), can help you with that. Other 401(k) providers will usually send you some sort of a form to help you fill that out, but it's a nice benefit when someone's going to fill that form out for you as it is a bad penalty if you forget to do so.

All right, that's enough for this episode. You guys are awesome. Thank you so much for what you're doing out there. It really is important work and we're here to support you.

Keep your head up and shoulders back. You've got this. See you next time on the podcast.

DISCLAIMER

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