Today we are answering your questions about taxes. We talk about how investing can impact taxes and how to manage estimated payments for your taxes and qualified dividends. We even answer a question about the tax breaks from investing in oil and gas. We also answer a few questions about asset allocation. Before we get into all of that, Dr. Jim Dahle gives his opinion on what advice Dave Ramsey should have but didn't give to an unmatched doc in a mountain of debt.


 

Dave Ramsey Gives Ex-Med Student Bad Advice

I was sent a link to a call that Dave Ramsey took on his show recently. For intellectual property reasons, I don't think we can play the whole call, but you can listen here. Let me give you the summary. A doc calls in. Not a doc but rather a former medical student. This is a medical student who had failed the boards a couple of times and had been dismissed from school. Medical school is over, and he is basically kicked out. He owes $430,000 in student loans, and he is now working as a substitute high school science teacher. He asked Dave what he should do about all the debt. And Dave gave what I thought was absolutely terrible advice. It's reasonable to make sure that this pathway into medicine is really over for this former medical student. It sounds like it really is. I can't imagine you're going to get accepted back into medical school after the school has actually dismissed you after failing the boards multiple times.

Following that, Dave's advice just got bizarre. He's like, “Well, go to PA school and pay off your student loans.” Borrow more money for PA school? What makes you think PA school is going to go any better than medical school did? Next, he said to try to find a job and pay off this debt. It's $430,000, Dave. What job are you going to get that allows you to pay off that student loan? It doesn't matter how much you eat rice and beans, that debt is not going away without a physician-like income. It's just not going to happen.

Meanwhile, he's teaching. This is a PSLF-qualifying job. He's working for the government—a state government and municipal government school district, whatever. This is a PSLF-qualifying job. Dave, why will you not acknowledge that PSLF works and that hundreds, even thousands, of doctors are receiving public service loan forgiveness? You put in your 10 years, you make your payments, the rest of your federal student loans are forgiven. Yes, you have to work for a 501(c)(3) or a government entity. You have to work full-time. You have to fill out the paperwork, and that's it. It goes away. This is clearly the path this medical student should take. Without a doubt, that is what should be done.

Now, is there another path? Yeah, you could put in 20 or 25 years and go for an income driven repayment program forgiveness. That would be a taxable forgiveness. Obviously, it takes at least twice as long to get that forgiveness. Then, you have to save up for the tax bomb on the side. That might not be a terrible option in this sort of a terrible situation. But PSLF is so obvious. If you want to teach, if that's the backup plan now, great. Go teach and make these little tiny IDR payments for 10 years and get the rest forgiven. That's the advice that should have been given. Not go to PA school or try to find some other job that pays enough money to pay off these student loans. That's great if you can get it, if you can go work on Wall Street and make $800,000 a year, sure, you can pay off these medical school loans. But I'm guessing that's probably not all that likely, whereas he already ought to be on this PSLF pathway. Have a listen to it and see if you agree with the advice I gave. I'll be surprised if you don't.

More information here:

What Happens If You Don’t Match Into Residency and What to Do

How to Ensure Student Loan Forgiveness Through the PSLF Program 

 

Estimated Quarterly Taxes

“Dr. Dahle, I'm doing my quarterly taxes right now and went down the rabbit hole in terms of trying to estimate the payments, including my qualified dividends and taxable interest. First of all, do I make estimated quarterly payments for the taxable interest in qualified dividends or are the quarterly taxes just on earned income? And then the second question is how do I know which tax rate the qualified dividends and taxable interest are? I'm looking at my Form 1040 from last year and I see where the taxable income is, but it doesn't have it broken down in terms of percentages of my earned income tax rate vs. the interest and dividend tax rate. Any advice you have on this would be helpful.”

Our federal income tax system is a pay-as-you-go system. You're not supposed to save it all up to the end of the year and pay out on April 15. That's not the case with all the states. For example, my state, Utah, has no problem whatsoever if you just pay all your taxes on April 15 for the whole year. There are no penalties, there's no interest. It's not a pay-as-you-go system. But the federal income tax system is a pay-as-you-go system. The way that works for most taxpayers in the United States is their employer takes money out every two weeks or every month—however often they get paid—and withholds it and sends it to the IRS on your behalf. Seems like a nice service, right? If you have to pay-as-you-go, at least they help you do it. Now, it's a bit of a burden on employers, but it works pretty well and funds the government pretty well, and you don't end up having to come up with a whole bunch of money come April.

If you are not an employee or even if you are an employee and you have a lot of other sources of income, in addition to that withholding, you are also supposed to make quarterly estimated tax payments. These are due not every three months throughout the year but on a specific schedule. They're due April 15, June 15, September 15, and January 15. You'll notice there are only two months between the first and second one, and there are four months between the third and fourth one. It is a mystery to a lot of people to figure out how much to send in. It really is hard to get it exactly right. Even the amounts that employers are required to withhold from your paychecks are not exactly right. It is just an estimate. Then come April 15, when you file your return, or October 15, if you file an extension, you settle up with the government. If they withheld too much or you paid too much in quarterly estimated taxes, you get a refund. If they didn't withhold enough or you didn't pay enough in your quarterly estimated taxes, you have to make a payment. If you really underpaid it, you might have to pay some additional interest on money you should have paid. That's the way the tax system works.

Now, when you get paid dividends, when you get paid interest, do you have to pay on that? Yes, you have to pay on everything, but you might have enough withheld from your employer that you don't have to actually file any quarterly estimated taxes. The only way to know for sure is to get yourself into the safe harbor. How do you get in the safe harbor? One method is just paying everything you owe. If you pay everything you owe this year, you're automatically in the safe harbor. If they're sending you a refund, you were in the safe harbor. Not necessarily true if you paid it all with your fourth quarter estimated tax payment and a lot of it was for income in the first quarter, but as a general rule, that's the way it works.

Another way to be in the safe harbor is to pay at least 100% of what you paid last year. Or if you're a high earner and there's a threshold there—and most of those listening to this podcast are going to be over it—you pay 110% of what you owed last year in taxes, then you'll be in the safe harbor. If the only way you pay taxes is via quarterly estimated payments, this is really easy. You take last year's income, you multiply it by 110%, you divide it by four, and that's what your quarterly estimated tax payments should be.

The last way you can be in the safe harbor is if you get really close and you only miss by a little. If you underpaid by less than $1,000, that's a pretty good estimate for a moderate earner. But for a high earner, it's very hard to be within $1,000. For some of us, it's hard to be within 100 times that. It can be really hard to estimate your taxes. Things come up and your income can be very variable for some of us. For most of us, this is a big fat guess. You do the best you can, but the only way to know for sure is basically to do your taxes throughout the year. You're continually doing your taxes to see what you're going to owe. You know your deductions and you know your income, and you can calculate it that way.

That's basically what I do. I know what my big deductions are. My big deductions are the QBI deduction, that 199A deduction. Charitable contribution is another huge deduction for me. I've got some smaller deductions with some tax-deferred contributions. I subtract those out. I know what my income has been and I total it together and can get pretty close to knowing what my tax bill will be. That's how I know how much to pay in quarterly estimated taxes. But it's a guess and I've been off by a lot on both ways. I've been too low and too high. I've had to pay some interest, and I've also loaned the government an awful lot of money.

As far as your qualified dividend and long-term capital gains rates, those are 0%, 15% and 20%. You just have to see what your income is. Those are pretty big brackets. It's pretty darn easy to see what bracket you're in there. For 2023, the tax brackets for capital gains, if you are single and if your income is under $44,625, you pay 0% on your long-term capital gains. If you're Married Filing Jointly, it's twice that. So, just under $90,000. Fifteen percent ranges for singles from $45,000-$492,000. For married, from $89,000-$554,000. That's the 15% bracket. Anything over $492,000 or $553,000 is 20%. If you make over $200,000, you also add on that 3.8% tax (or $250,000 if you are married).

For lots of docs, you're going to be in the 18.8% long-term capital gains bracket or the 23.8% long-term capital gains bracket. You just have to estimate that when you make your quarterly estimated tax payments. There's a reason they're called estimates because we don't really know. Try not to miss too much. If you don't like paying interest to the IRS, well, give them a little extra, and then you don't have to worry about coming up with that money. If you're content with that and you'd rather not give the IRS a tax-free loan, maybe pay a little bit less. But most of us are just trying to guess the best we can and deal with the consequences later.

More information here: 

Estimated Taxes and the Safe Harbor Rule 

 

Asset Allocation 

“Hi Jim. I'm an anesthesiologist in the southeast, not far out of training, working in private practice. I've been reading through many of the staple personal finance and investing books that you recommend, and I recently have been contemplating my asset allocation. As a young physician with many years of investing ahead of me, I initially intended to invest in the simple Boglehead three-fund portfolio for the tilt toward small cap value and also plan to include a REIT index fund. My question to you is this. Knowing what you now know and given your vast experience thus far, would you continue to tilt your portfolio toward small cap value or would you instead opt for the simple three-fund portfolio plus REITs? For the sake of simplicity and ease, said another way, if you were a new physician just starting out and investing but had the investing knowledge that you have now, what would your asset allocation look like?”

First of all, remember what matters in investing. You invest so you can spend more later than you have now. You want your money to keep up with inflation, time value of money, you want it to grow. That's the point of investing. What really matters is funding the account. How much you put in is probably the most important thing. Your savings rate, that's what matters. Then, your asset allocation matters and then you staying the course with that asset allocation matters.

It really doesn't matter all that much what that asset allocation is as long as it's reasonable. The more important thing is that you stick with it because each asset class—each reasonable asset class at least—tends to have its day in the sun. Just like large growth stocks have had a great last decade. If you look at the 2000s, small value stocks did much better and really haven't done great for 10 or 15 years now.

But if you own both of those, chances are at some times the large growth stocks are going to do well; at some times the small value stocks are going to do well. Now, a total stock market approach is pretty heavily weighted toward those large growth stocks because that's what the stock market is. A large part of it is Apple and Amazon and those kinds of big companies. A very tiny part of it, only about 3%, is really small value stocks. If you want to tilt your portfolio toward small value stocks, you'll usually need some sort of a small value fund in addition to a total market fund. That's what I've done. I've been investing since 2004 or 2005-ish, and I've maintained a tilt essentially since that whole time. That has not paid off over that time period from 2005, 2006, 2008, until now. The better bet has been about US large growth stocks. That's what has done the best out of the stock market over that time period. But I've got a lot longer investment horizon than just 15 years. I'm only in my late 40s now. I expect to be investing for another 30, 40, 50 years, and I think that pendulum's going to swing. I'm a believer in the long-term data on the small and value factors. I think that tilt is going to pay off over my entire investment lifetime even though it has not yet paid off.

If I was designing a portfolio now, yes, I would have a small value tilt, but it's really important that you don't tilt that portfolio more than you believe that data. It's entirely possible with this limited data set that it was just an anomaly and that you'd be better off just keeping costs low, buying everything, using total stock funds. Good luck with your decision. Whatever you do, remember, the most important thing is whether you decide to tilt 2% of your portfolio, 5%, 15%, none of it, is that you stick with that decision. What you don't want to be doing is chasing your tail. Buying small value after small value and then selling small value just before it does well. That's a recipe for investment disaster. Pick something reasonable, stick with it, fund it adequately, and you'll be successful.

 

If you want to learn more about the following topics, check out the WCI podcast transcript below. 

 

Milestones to Millionaire Podcast

#142 — Emergency Physician Becomes Multi-Deca Millionaire

This ER doc is celebrating his success building his net worth and his impending retirement. He did not do anything fancy with investments; he didn't build a real estate empire. He shows us that savings rate matters! If you save a high percentage of your income, you will succeed financially. His advice to you is to save as much as you can and live well within your means. After 40 years of practicing medicine, he feels ready to retire and to start a new chapter of his life.

 

Finance 101: Cash Balance Plans

Cash balance plans, aka defined benefit plans, represent a significant component of retirement account options. In contrast to defined contribution plans, such as 401(k)s, where the contribution amount is fixed, defined benefit plans promise a specific payout upon retirement. This commitment transfers investment risk from employees to employers. While traditional pensions have become less common, defined benefit plans, often referred to as cash balance plans, offer a similar structure. Contributions to these plans are determined by actuaries and typically increase with age, allowing for substantial contributions, especially for older people.

Savvy professionals use cash balance plans strategically by initially investing conservatively in them and concurrently contributing to more aggressively invested 401(k) profit-sharing plans. After a few years, they close the cash balance plan, roll the balance into their 401(k), and start a new plan with potentially higher contributions. This method, combined with other retirement vehicles like Backdoor Roth IRAs and HSAs, can result in substantial tax-advantaged savings. Over time, diligent savings and smart investing can lead to significant wealth accumulation, even without elaborate entrepreneurial ventures or large real estate portfolios.

Ultimately, following this “basic plan” of working, saving, and investing diligently can lead to financial success and the potential for a comfortable retirement. It's a testament to the power of consistent saving, responsible investing, and leveraging the available retirement account options—even without extravagant income or complex financial strategies. Successful implementation of this approach can not only secure one's financial future but also enable generous support for heirs and charitable causes.

 

To learn more about cash balance plans, read the Milestones to Millionaire transcript below.


 

Today’s episode is brought to us by SoFi, the folks who help you get your money right. They’ve got exclusive rates and offers to help medical professionals like you when it comes to refinancing your student loans—and that could end up saving you thousands of dollars. Still in residency? SoFi offers competitive rates and the ability to whittle down your payments to just $100 a month* while you’re still in residency. Already out of residency? SoFi’s got you covered there too, with great rates that could help you save money and get on the road to financial freedom. Check out their payment plans and interest rates at sofi.com/whitecoatinvestor. SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. Additional terms and conditions may apply. NMLS 696891

 

WCI Podcast Transcript

Transcription – WCI – 339
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 339 – Dave Ramsey gives poor advice to an unmatched doc.

Today's episode is brought to us by SoFi, the folks who help you get your money right. They've got exclusive rates and offers to help medical professionals like you when it comes to refinancing your student loans, and that could end up saving you thousands of dollars.

Still in residency? SoFi offers competitive rates and the ability to whittle down your payments to just $100 a month while you're still in residency. Already out of residency? SoFi's got you covered there too with great rates that can help you save money and get on the road to financial freedom. Check out their payment plans and interest rates at sofi.com/whitecoatinvestor.

SoFi student loans are originated by SoFi Bank, N.A. Member FDIC. Additional terms and conditions may apply. NMLS# 696891.

All right, welcome back to the podcast. Thanks everybody for what they do. I recently recorded a podcast. I don't remember when it runs, but my dad came out of surgery late last night and while I'm thanking you for what you do, I want to thank his doctors specifically for what they did for him. The pain he went in to get eliminated is now gone and doesn't seem to have had any complications at least so far. So we're all thrilled with our most recent encounter with the medical establishment.

All right. Those of you who don't know about Financially Empowered Women, the FEW, this is a WCI associated group and they have their next event next week. It's on November 8th at 6:00 PM Mountain Time.

And guess who's going to be talking? Not only is Queen Bee Megan who introduced a few to you a few weeks ago, going to be helping run that, but SC Gutierrez who is on here as a friend of WCI, helping answer your questions a few weeks ago, she will be on there as well. She's going to be talking about how to make a financial plan.

Great option there. I think there's a thousand or more of you in this group now, so I hope a bunch of you show up to take advantage of that. You can sign up for this if you haven't yet at whitecoatinvestor.com/few.

 

READER CRITIQUE AND RESPONSE FROM DR. SHTEYNSHLYUGER FROM EPISODE #334

Dr. Jim Dahle:
All right, let's do, not a correction, but maybe a clarification. After having Dr. Shteynshlyuger on the podcast to talk about these issues with fees from insurance companies that are really pretty darn unfair, I got an email from a doc who is associated with the AMA. He said “In your recent podcast I wanted to correct the statement that the AMA will not do anything to help regarding unfair fees for EFT payments. I'm an alternate delegate to the AMA from my state.

Twice a year delegations from all 50 states, National Specialty Societies and the federal health services take time away from our busy practices and families to set policy and priorities for the AMA. It's never accurate to say that the AMA will not do anything to help because the House of Delegates dictate what the AMA does.

If an individual physician wants to advocate for stronger positions or a change in direction, they can bring resolutions to their state medical society or specialty society to ask their delegation to advocate their position and seek the support of other delegations.

That being said, the AMA has been fighting against these unfair practices for several years. In 2021, the AMA, along with the 50 State Medical Associations and 40 specialty societies sent a letter to CMS asking the Biden administration to take action on these unfair practices.” And we include a link to that letter in the show notes.

It goes on to say, “Furthermore, the AMA has a multitude of resources and guides on their website so that physicians and practices know the rights in how to navigate the system. While physicians face challenges like these, it's important for us to stick together with a unified voice. Making inaccurate remarks about our own professional organizations does not move the needle.”

I sent that along to Dr. Shteynshlyuger, who replied rather vociferously. This is what he said. “I greatly appreciate the fact that he listened to the podcast and found a point of disagreement. I also appreciate the time and effort delegates like you commit to running the AMA. As you can imagine I've put quite a few hours and dollars in advocacy on behalf of physicians.

I'm an AMA member as well and introduce many of the resolutions that you're alluding to. I'm in solo private practice and it appears that you're a part of a small practice as well. Our interests should align. You're correct, to some extent the members write resolutions that are supposed to set policy. In reality things work a little differently. Perhaps that's one of the reasons that the AMA has a 15 to 20% approval rating based on membership data.

In fact, many AMA policies are set without resolutions. So why should one have to write a resolution to reverse such policies? For example, the AMA decided to call virtual credit cards a valid payment method. Whose bright idea is that? Valid means legal. Nowhere does the law say that virtual credit cards are legal to use as a payment from insurance to doctors. In fact, it's the opposite. I've been fighting to get that language changed for years now.

The AMA board of directors are well aware and nothing has been done, but here's a resolution which should not be needed.” Again, we'll include that link in the show notes. “While the AMA management keeps writing the letters, it fully knows that letters will not achieve anything. Talking to elected representatives will not achieve anything either since they have already spoken. In fact, most recently, AMA refused to confront the insurance lobby's attempt to normalize virtual credit cards.

Do you know who confronted the insurance lobby? The American Hospital Association, whose policy team is run by a former AMA employee. I got 500 physicians to write letters to counter the AMA’s complicity with UnitedHealthcare and Zelis.

I hope you would be enraged if you found out what the AMA wrote. Need a full understanding of the financial administrative burden impacts to physicians prior to recommending adoption, referring to the proposal of adding virtual credit card information to the standard 835 remittance advice.”

So, at any rate, I won't read the entire email, but basically the bottom line is, he certainly feels the AMA could be doing a lot more than it is doing now. And this doc, furthermore, replied that he would continue to work on that point and bring a resolution to the next meeting.

A lot of people commented on that podcast and hopefully we can move the needle on this, get rid of this garbage fee that physician practices are paying and really actually make a difference. So, hopefully that podcast will make some changes.

All right, I was sent a link to a call that Dave Ramsey took on his recent show. For intellectual property reasons, I don't think we can play the whole call here, but we'll have a link to it in the show notes. Let me give you the summary.

A doc calls in. Not a doc, I guess a medical student, former medical student. This is a medical student who had failed the boards a couple of times and had been dismissed from school. Medical school is over and he is basically kicked out.

He owes $430,000 in student loans and is now working as a substitute high school science teacher and was asking Dave, what should I do about this? And Dave gave what I thought was terrible advice, terrible advice. It's reasonable to make sure that this pathway into medicine is really over for this former medical student. And it sounds like it really is. I can't imagine you're going to get accepted back into medical school after school has actually dismissed you after failing the boards multiple times. I'm assuming failing step one, but yeah, that's appropriate to ask.

But following which, Dave's advice just got bizarre. He's like, “Well, go to PA school and pay off your student loans.” And borrow more money for PA school? And what makes you think PA school is going to go any better than medical school did? Or go try to find a job and pay off this debt. It's $430,000, Dave. What job are you going to get that allows you to pay off that student loan? It doesn't matter how much you eat rice and beans, that debt is not going away without a physician like income. It's just not going to happen.

Meanwhile, he's teaching. This is a PSLF qualifying job. He's working for the government. State government and municipal government school district, whatever. This is a PSLF qualifying job. Dave, why will you not acknowledge that PSLF works? That hundreds, thousands of doctors are receiving public service loan forgiveness? You put in your 10 years, you make your payments, the rest of your federal student loans are forgiven. Yes, you have to work for a 501(c)(3) or government entity. You have to work full time. You have to fill out the paperwork and that's it. It goes away. This is clearly the path this medical student should take. Without a doubt that is what should be done.

Now, is there another path? Yeah, you could put in 20 or 25 years and go for an income driven repayment program forgiveness. That would be a taxable forgiveness. And obviously it takes at least twice as long to get that forgiveness. And then you got to save up for the tax bomb on the side. That might not be a terrible option in this sort of a terrible situation.

But PSLF is so obvious. If you want to teach, if that's the backup plan now, great. Go teach, make these little tiny IDR payments for 10 years and get the rest forgiven. That's the advice that should have been given. Not go to PA school or go try to find some other job that pays enough money to pay off these student loans.

That's great if you can get it, if you can go work on Wall Street and make $800,000 a year, sure, you can pay off these medical school loans, but I'm guessing that's probably not all that likely, whereas he already ought to be on this PSLF pathway.

All right, we'll include a link to that call. You can listen to it and see if you agree with the advice I gave. I'll be surprised if you don't.

All right, let's take some of your questions now. This one's about investing in taxes.

 

INVESTING AND TAXES QUESTION

Speaker:
Hi Dr. Dahle. Thanks for all you do. I'm an oncologist in the Midwest. I have about $300,000 in savings in my non-retirement account and they currently are in the Vanguard sweep fund, which is about 5%. How will that affect my taxes? Ideally, I want these in either S&P 500 or something like Berkshire Hathaway and pass it on to my children with the elevated cost basis. But with the current market, I favor the Vanguard sweep fund. I’m interested to know your thoughts about how this affects my taxation. Thank you.

Dr. Jim Dahle:
Okay, this is pretty straightforward. A sweep account. A sweep fund. This is just a money market fund at Vanguard. And at Vanguard it is the Federal Money Market Fund. The Federal Money Market Fund is a taxable interest paying account. An interest is taxed to your ordinary income tax rates. So, you got $300,000 in there. It's paying a little over 5% a year. Basically it's going to give you $15,000 of income this year and you'll owe taxes on it at your ordinary income tax rates.

If you're like a typical doc, maybe you're paying 32% federal and 5% state on that. So 37% of that $15,000 is going to go to the tax man. The rest you get to keep. That's the way the taxation works.

So what should you do with it? Well, it sounds like this is money that you're pretty sure you're not going to need yourself. I don't know if that's actually the truth. I don't know where you're at in life. Most of us leave money behind to our heirs after we're sure we don't need it. But you're investing this for your heirs mostly, it sounds like. So for the long run.

When you invest in money for the long run, you generally want to invest it pretty aggressively. We're talking about stocks, we're talking about real estate, that sort of stuff.

The Vanguard Total Stock Market Fund is a great option. It's very tax efficient. The yield on it is less than 2%. Instead of paying taxes on 5% kicking out every year, you'll be paying taxes on less than 2% plus almost every dividend coming out of that fund is qualified. So, instead of paying at your ordinary income tax rates, you would be paying at your qualified dividend tax rates, which for a typical doc is either 15 or 20% and possibly plus the 3.8% NIIT tax, the net investment income tax.

So, paying at 23.8% sure beats paying at 40-ish% and especially since it's kicking out a lot less income. That's going to be a lot more tax efficient. If you're concerned about tax efficiency, that'd be a good reason to invest that into stocks rather than just a money market account.

If you are interested in having more growth on it, you're likely to do better than 5% in the long run holding onto stocks. Now, that might not be the case for the next year or two years, or five years or 10 years, but over the next 50 years, it's almost surely the case. So, that would be a good option.

You mentioned Berkshire Hathaway. Now Berkshire Hathaway is a single stock, it's one company. Now, yes, Warren Buffett and those associated with them, they buy a whole bunch of other companies under the umbrella of Berkshire Hathaway.

And so because of that, some people treat it a little bit like a mutual fund, but it still isn't, it's still a single stock. It's hard for me to recommend you put all your money into Berkshire Hathaway.

Obviously, Warren Buffett has done very well over the years, maybe not so well over the last 15 or 20 as he did the 30 before that, but he's got a pretty good track record. Unfortunately he's pretty old. He's not going to be managing Berkshire Hathaway much longer and neither is his partner, Charlie. So, it's going to be in somebody else's hands soon. And if you choose down the road to change out of that, because of that, there's going to be a capital gain associated with changing.

The one nice thing that Warren understands, and I hope each of you understand, is that paying a dividend is just a tax event. It doesn't actually mean anything. When a stock pays you a dividend, the remaining stock is worth less. The nice thing about Berkshire Hathaway is it doesn't pay dividends on purpose. So, it's extremely tax efficient to own. And with the step up in basis of death, money invested in there may never be taxed again. But that assumes you hold onto that until you die, which I don't know how old you are, but 40, 50, 60 years, whatever from now. And that seems like a stretch.

So, I don't think I can recommend you just pump it all into Berkshire Hathaway. I think I'd rather see you using a total stock market index fund or perhaps a diversified collection of funds for this taxable account and go from there. But that's how the taxation on each of those options would work. I hope I answered your question.

 

ESTIMATED QUARTERLY TAXES QUESTION

Dr. Jim Dahle:
Next question. This one is also about taxes. As I record this, it's four days before the October tax deadline, for those who have filed extensions. I guess no surprise, we're doing some tax questions. I just met with my tax preparer yesterday and like the year before and the year before that, I also got a chance to educate my tax preparer. I know a lot of you have had that experience as well.

But you got to pay attention to this stuff because even the professionals sometimes get it wrong. Admittedly, the point I was correcting her on was not a very mainstream question or problem. But still, this is what we're paying people for. I expect them to know more than me about it.

Speaker 2:
Dr. Dahle, I'm doing my quarterly taxes right now and went down the rabbit hole in terms of trying to estimate the payments, including my qualified dividends and taxable interest.

First of all, do I make estimated quarterly payments for the taxable interest in qualified dividends or are the quarterly taxes just on earned income? And then the second question is how do I know which tax rate the qualified dividends and taxable interest are?

I'm looking at my form 1040 from last year and I see where the taxable income is, but it doesn't have it broken down in terms of percentages of my earned income tax rate versus the interest and dividend tax rate. Any advice you have on this would be helpful. Thanks.

Dr. Jim Dahle:
Okay, our federal income tax system is a pay as you go system. You're not supposed to save it all up to the end of the year and pay out on April 15th. That's not the case with all the states. For example, my state, Utah, has no problem whatsoever if you just pay all your taxes on April 15th for the whole year. There's no penalties, there's no interest, nothing you pay. It's not a pay-as-you-go system. But the federal income tax system is a pay-as-you-go system.

The way that works for most taxpayers in the United States is their employer takes money out every two weeks or every month, however often they get paid and withholds it and sends it to the IRS on your behalf. Seems like a nice service, right? If you have to pay-as-you-go, at least they help you do it. Now it's a bit of a burden on employers, but it works pretty well and funds the government pretty well and you don't end up having to come up with a whole bunch of money come April.

If you are not an employee or even if you are an employee and you have a lot of other sources of income, in addition to that withholding, you are also supposed to make quarterly estimated tax payments. These are due not every three months throughout the year, but on a specific schedule. They're due April 15th, June 15th, September 15th, and January 15th. You'll notice there's only two months between the first and second one, and there are four months between the third and fourth one.

And this is a mystery to a lot of people to figure out how much to send in. And it really is hard to get it exactly right. Even the amounts that employers are required to withhold from your paychecks are not exactly right. They're just an estimate. They're a formula that the government uses.

And then come April 15th, when you file your return, October 15th, if you file an extension, you settle up with the government. If they withheld too much or you paid too much in quarterly estimated taxes, you get a refund. If they didn't withhold enough or you didn't pay enough in your quarterly estimated taxes, you have to make a payment. And if you really underpaid it, you might have to pay some additional interest on money you should have paid. That's the way the tax system works.

Now, when you get paid dividends, when you get paid interest, do you have to pay on that? Yeah, you got to pay on everything, but you might have enough withheld from your employer that you don't have to actually file any quarterly estimated taxes. The only way to know for sure is to get yourself into the safe harbor.

Now, how do you get in the safe harbor? Well, one method is just paying everything you owe. If you pay everything you owe this year, you're automatically in the safe harbor. If they're sending you a refund, you were in the safe harbor. Not necessarily true if you paid it all with your fourth quarterly estimated tax payment and a lot of it was for income in the first quarter but as a general rule, that's the way it works.

Another way to be in the safe harbor is to pay at least 100% of what you paid last year. Or if you're a high earner, and there's the threshold there, and most of those listening to this podcast are going to be over it, you pay 110% of what you owed last year in taxes, then you'll be in the safe harbor.

So if the only way you pay taxes is via quarterly estimated payments, this is really easy. You take last year's income, you multiply it by 110%, you divide it by four, and that's what your quarterly estimated tax payments should be.

And then the last way you can be in the safe harbor is if you get really close and you only miss by a little. If you're less than $1,000 underpaid, which for a moderate earner, that's a pretty good estimate. But for a high earner, it's very hard to be within $1,000. For some of us it's hard to be within a hundred times. It can be really hard to estimate your taxes. Things come up and your income is very variable or whatever.

And so, for most of us, this is a big fat guess. You do the best you can, but the only way to know for sure is basically to do your taxes throughout the year. You're continually doing your taxes to see what you're going to owe you. You know your deductions, you know your income what it's going to be.

And that's basically what I do. I know what my big deductions are. My big deductions are the QBI deduction. That 199A deduction. Charitable contribution is another huge deduction for me. I've got some smaller deductions with some tax deferred contributions. And so, I subtract those out, I know what my income has been and I total it together and I go, “What's the tax bill on that going to be?” And that's how I know how much to pay in quarterly estimated taxes. But it's a guess and I've been off by a lot on both ways too low and too high. And so, I've had to pay some interest and I've also loaned the government an awful lot of money. It's not easy to do.

As far as your qualified dividend and long-term capital gains rates, those are 0%, 15% and 20%. And you just got to see what your income is. Those are pretty big brackets. It's pretty darn easy to see what bracket you're in there.

For 2023, the tax brackets for capital gains, if you are single, if your income is under $44,625, you pay 0% on your long-term capital gains. If you're married filing jointly, it's twice that. So, just under $90,000.

15% ranges for singles from $45,000 to $492,000. For married from $89,000 to $554,000. That's the 15% bracket. Anything over $492,000 or $553,000 is 20%. And if you make over $200,000, you also add on that 3.8% tax, $250,000 married.

For lots of docs, you're going to be in the 18.8% long-term capital gains bracket or the 23.8% long-term capital gains bracket. And you just got to estimate that when you make your quarterly estimated tax payments. There's a reason they're called estimates because we don't really know.

Try not to miss too much. If you don't like paying interest to the IRS, well, give them a little extra and then you don't have to worry with coming up with that money. If you're content with that and you'd rather not give the IRS a tax free loan, maybe pay a little bit less. But most of us are just trying to guess the best we can and deal with the consequences later. I hope that's helpful.

 

SOCIAL SECURITY TAX ON FEDERAL TAXES QUESTION

Dr. Jim Dahle:
All right, the next question comes in by email and this comes in asking, “I have a question on the social security tax portion of federal taxes that I can't seem to get a clear answer on.

Here's a quick breakdown in my wife and I's anticipated 2023 tax situation. We're married filing jointly. My income, I made $150,000 as a W-2 earner. My wife made $50,000 in wages as a W-2 earner and then began doing 1099 work. She expects to make about $20,000 in 1099 work.

Combining all of that, we get to around $220,000 for the year. My question is around the social security tax component. Am I seeing the $160,200 limit for 2023? But I'm not clear how this applies. Since we're married filing jointly is this a limit for all of our income combined regardless of source? Or does our 1099 income have a separate limit from our W-2 wages?”

There are not separate limits for your W-2 and your 1099 wages. You have to pay on both of them, no separate limits. But you each have a separate limit. Yours is $160,200. So once you start making more than that, you do not have to pay social security tax anymore on additional income. Once she makes more than that, she does not have to pay any additional social security tax on additional income.

In this case, that $20,000 is going to be pretty heavily taxed because you're in a relatively higher tax bracket due to your combined high income and she's going to be paying both halves of social security and Medicare tax on that money. I know that's not the news you wanted, but that's the way it works.

 

CAN OIL AND GAS DRILLING BE A GOOD INVESTMENT FOR TAX BREAKS QUESTION

All right, let's take another question, this one about oil and gas drilling.

Speaker 3:
Hi, Dr. Dahle. Thanks for all you do for us White Coat Investors out here. I wanted to ask a question about some unique tax breaks. We work with an accounting firm that also has a wealth management side. Fortunately, our incomes this year were significantly higher because of some bonuses that both my wife and I received. And so, we were looking for additional ways to save on taxes. They mentioned oil and gas drilling partnerships.

I did a search on the WCI website and found that you had just written an article about it. And so, I wanted to see if I can get a little bit more clarity about what you wrote. And obviously it's a high risk investment. You mentioned that some of these will never find oil, but I wanted to see if you in your research found maybe some percentages on this, as well as how this exactly works. Are these operators just drilling in one place and if they don't find oil, that's it, or are they going to then look for multiple sites? And again, maybe this depends on the operator and the exact deal.

But I wanted to see if you could provide a little bit more clarity on this and whether this is something that would be advisable for those who are in some of their high income earning years. Thank you for your time and attention and look forward to your answer.

Dr. Jim Dahle:
Okay, good question. For those who didn't see it or don't read the blog, there's a blog post published on September 18th of this year called Investing in Oil and Gas. And it's a pretty extensive deep dive I took into not only the investment options but also the taxation of these investment options. And I don't know that I can add a lot more detail if you've already read that post. That's much of what I know about investing in oil and gas. I do not personally invest in oil and gas in any way other than via the publicly traded stocks in a total stock market fund.

So, how does it work? Well, you got lots of options. You can buy publicly traded stocks that invest in oil and gas and they get taxed exactly like all your other stocks do. You can buy oil futures and actually gamble on the price of oil. There are mutual funds and ETFs that invest in either futures or in these equities.

Or you can kind of go direct. You can invest in the mineral rights side, you can invest in working interests. You can invest via master limited partnerships. These are often transporting gas, pipelines and that sort of a thing. And just like in real estate there are often private general and private limited partnerships that you can invest in. And there are a few unique tax advantages to oil and gas investing.

But the important part here is that you do not let the tax tail wag the investment dog. It sounds like your interest in this is just because you for the first time in your life had to pay a big fat tax bill. That is not a reason to go invest in oil and gas. That is not a reason to go invest in real estate. That is not a reason to do lots of other things that people do just to lower their taxes.

As a general rule, if you're paying more in tax, that's a good thing because you made more money. That's not a bad thing. So, pat yourself on the back and say, “Hey, good job.” That's a good thing. You don't go around going, “Oh, how can I get out of this?” Because here's the best way you can lower your tax bill. Stop making money. Stop making money and you'll quit paying taxes.

As a general rule, when you invest, whether you're investing in real estate or oil and gas or stocks or bonds or whatever, you want to invest tax efficiently. So, if you are going to invest in oil and gas, sure, get the tax benefits for that. But don't go rushing into oil and gas investing just to lower your tax bill. Because I tell you what, the best way to lower your tax bill through investing is to lose money. If you lose money, your income goes down, you pay less in tax. And that's what a lot of oil and gas investments end up being.

Now obviously some of them do make money, but you want to first choose the investment based on how it's going to do, not based on what tax break you're going to get from it. There's been lots of things, especially in the 1980s, lots of things sold to doctors to lower their tax bill. Yeah, it lowered their tax bill but getting a 30% deduction on something and losing 100% of your investment is not a good deal.

So, be careful with that. Read that article carefully so you understand how the taxation works. But as a general rule, this is not what you do when you have a great clinical year and make a bunch of money and you start going, “Oh, I have to invest in oil and gas now to lower my tax bill.” That's a very bad way to approach any investment. So please don't do that.

I hope that answered your question. I don't know that I have more information for you. Yes, it's a high risk investment. Yes, there are some tax breaks associated with it, but you need to become a bit of an expert in oil and gas if you want to start investing in oil and gas or at least stick with something simple like a mutual fund that invests in it or a very broadly diversified partnership.

But yeah, these companies, if they don't find oil in one place, they go somewhere else. A partnership, it just depends. Because some of them might be a partnership on one well. And if that's it, that's obviously pretty high risk. If they don't get oil, they don't get oil and you don't make any money, even though you got a tax break. And if you're not making any money, you lost your investment.

All right. The quote of the day today comes from Ginni Rometty who said “Growth and comfort do not coexist.” If you want to grow personally in your world, just like building a muscle, it's not comfortable, you got to go work out.

 

TAX LOSS HARVESTING QUESTION

All right, another question on taxes. This one on tax loss harvesting from Shareen.

Shareen:
Hi Jim, this is Shareen from Florida. My question is regarding tax loss harvesting. I understand the wash sale rule, but I'm somewhat confused about how tax loss harvesting may turn a dividend from qualified to non-qualified. Does this occur even if I have auto reinvestments turned off? Or does this switch occur simply from the dividend being distributed to my sweep account? And if that's the case, how exactly can I tell when a dividend will be distributed for a fund and therefore know the best time to do the tax loss harvesting?

I looked at my index funds at Vanguard and it looks like these distributions are pretty random. So, how do I avoid this reclassification from qualified to non-qualified dividend when doing tax loss harvesting? Thanks so much in advance for your time.

Dr. Jim Dahle:
Okay. The rule is that if you own a stock for less than 60 days, 60 days around when a dividend is paid, 30 before, 30 after whatever, then it is no longer a qualified dividend. It is now an ordinary dividend and you pay your ordinary income tax rates on it instead of the lower qualified dividend tax rates.

So, what's the best way to avoid this? Well, don't do frenetic tax loss harvesting. If you only go in there to look every couple of months, every two or three months to see if there's anything worth harvesting, then you'll never have a problem with this. You'll never have a problem with the 30 day wash sale rule. So, just chill on the tax loss harvesting. You don't have to get every single dollar of loss that ever happens in your accounts.

The way this works for most people is that they start a taxable account. They're kind of excited about tax loss harvesting and as that taxable account gets bigger and bigger over three or four or five years, they hit a bear market. And everything they've bought in the last five years is now underwater and they tax loss harvest all of it. And now they've got enough losses that they've got $3,000 a year for the rest of their life and they can offset a number of other capital gains in their life.

And then they go another four or five years and they hit another bear market and they do a whole bunch more tax loss harvesting. But they don't have to be in there every two weeks checking for tax losses to get every $30 drop in the funds.

And so, that's the way you avoid those two issues is you just don't do it that often. If there's a pandemic and the market drops 30%, yeah, you ought to go check and see if you should tax loss harvest. If you hit 2022 and the stock market is down 20%, yeah, go in and look see what's underwater, do some tax loss harvesting. But in a year like 2023, I don't think I've done any tax loss harvesting at all.

So, no problem with 30 day wash rules, no problem with the 60 day qualified dividend rule because I haven't done any of it. Nothing's really been underwater all that much. Everything's done okay this year. Maybe something was underwater for a couple of weeks but it wouldn't have been a big loss. And that's really the only losses I'm interested in grabbing at this point. So, I hope that's helpful.

Those dividends are not random though. Most fund companies will tell you when the dividends are going to be paid. Just look at the history of the dividends, and they'll announce the dividends a couple of weeks in advance usually too.

But for the most part, if you look at like most Vanguard funds, dividends are often paid quarterly. That's probably the most common thing. Some of them only get paid twice a year and some of them only pay once a year, generally in December.

So, I expect dividends around the end of March, around the end of June, around the end of September, and around the end of December. That's when I expect dividends. The only ones who are paying more frequently than that are like bond funds and money market funds, that sort of a thing. The stock funds, which are the ones you're generally tax loss harvesting, are generally paying quarterly.

 

ASSET ALLOCATION QUESTION

All right, let's take a question on asset allocation here.

Speaker 4:
Hi Jim. I'm an anesthesiologist in the southeast, not far out of training, working in private practice. I've been reading through many of the staple personal finance and investing books that you recommend and I recently have been contemplating my asset allocation.

As a young physician with many years of investing ahead of me, I initially intended to invest in the simple Boglehead three fund portfolio for the tilt towards small cap value and also plan to include a REIT index fund.

My question to you is this. Knowing what you now know and given your vast experience thus far, would you continue to tilt your portfolio towards small cap value or would you instead opt for the simple three fund portfolio plus REITs?

For the sake of simplicity and ease, said another way, if you were a new physician just starting out and investing, but had the investing knowledge that you have now, what would your asset allocation look like? Keep up the good work and thanks for all that you do.

Dr. Jim Dahle:
All right, that's a great question. First of all, remember what matters in investing. You invest so you can spend more later than you have now. You want your money to keep up with inflation, time value of money, you want it to grow. That's the point of investing. And what really matters in that, funding the account matters. How much you put in is probably the most important thing. Your savings rate, that's what matters. And then your asset allocation matters and then your staying the course with that asset allocation matters.

It really doesn't matter all that much what that asset allocation is as long as it's reasonable. The more important thing is that you stick with it because each asset class, each reasonable asset class, tends to have its day in the sun. Just like large growth stocks have had a great last decade. If you look at the 2000s, small value stocks did much better and really haven't done great for 10, 15 years now.

But if you own both of those, chances are at some times the large growth stocks are going to do well, at some times the small value stocks are going to do well. Now a total stock market approach is pretty heavily weighted toward those large growth stocks because that's what the stock market is. A large part of it is Apple and Amazon and those kind of big companies. Whereas a very tiny part of it, only about 3% is really small value stocks. So, if you want to tilt your portfolio towards small value stocks, you'll usually need some sort of a small value fund in addition to a total market fund.

And that's what I've done. I've been investing since 2004, 2005-ish and I've maintained a tilt essentially since that time. That has not paid off over that time period from 2005, 2006, 2008, whatever, until now. The better bet has been about US large growth stocks. That's what has done the best out of the stock market over that time period.

But I've got a lot longer investment horizon than just 15 years. I'm only in my late 40s now. I expect to be investing for another 30, 40, 50 years and I think that pendulum's going to swing. I'm a believer in the long-term data on the small and value factors. I think that tilt is going to pay off over my entire investment lifetime even though it has not yet paid off.

So, if I was designing a portfolio now, yes, I would have a small value tilt, but it's really important that you don't tilt that portfolio more than you believe that data because it's entirely possible with this limited data set that it was just an anomaly and that you'd be better off just keeping costs slow, buying everything, using total stock funds.

So good luck with your decision. Whatever you do, remember, the most important thing is whether you decide to tilt 2% of your portfolio, 5%, 15%, none of it, is that you stick with that decision. What you don't want to be doing is chasing your tail. Buying small value after small value does well, selling small value just before it does well. That's a recipe for investment disaster. Pick something reasonable, stick with it, fund it adequately, you'll be successful.

 

ASSET ALLOCATION FOR INTERMEDIATE MONEY QUESTION

Dr. Jim Dahle:
All right, another question via email. This one also on asset allocation said. It said “I hope you're enjoying your summer. After taking your FYFA course and listening to your podcast, I haven't seen much of this discussion, so I would like your input. What are your thoughts on the following? We're in our mid-thirties, one, intermediate term money, 10 to 15 years and two, using a different asset allocation for that goal.

Our short-term money assigned to short-term goals is basically in high yield savings accounts and money market accounts.” Good. I like that. “Our retirement money is in retirement accounts as well as in a taxable account. We're on track to reach our goals as we stick for our plan.” Great.

“My question is about intermediate money, money I may want to use pre-retirement such as a summer home or renovation, et cetera. What do you think of index fund investing for that in general?

And secondly, do you see the benefit of dumping money into a second brokerage account with a different asset allocation to reach those goals similar to how a 529 may have a different allocation? It seems that dumping all money in the same account can throw the allocation out of sorts, both when in inputting and withdrawing a large sum.”

It's a great concern. I don't know that it matters that much, let's be honest, but it's a great question. And there's no right answer like most great questions. I think it's very clear that you're doing it right for short-term money. If you're going to need this money in the next year or two, three years, cash is a place to be. And the nice thing is these days you get paid for that.

If you put it in a Vanguard Federal Money Market Fund is paying like 5.25%. So much better than two years ago when it was paying 1%. I feel like even if you got money sitting there for a while, you're not being punished for that these days. Savers are doing much better in comparison to borrowers than they were a couple of years ago due to the increase in interest rates.

Long-term money, of course, you tend to invest for the long run, whatever your asset allocation that you can tolerate for long-term money is. Stocks, bonds, real estate, maybe something else. Whatever. That intermediate money is hard to sort out though, nobody knows exactly. It's probably some combination of the two.

If you need the money in seven or eight years, maybe you put some of it in stocks and the rest in cash. How much is some? Well, there's no guidelines. Nobody knows. Obviously, if the stocks do better over those seven or eight years, you wish you had more in it. If they do poorly, you'll wish you had more in cash. It's just hard to say without a functioning crystal ball.

But here's the deal. If it's a goal that's like all wishy-washy, if it's a goal that's 15 years out, just invest it for retirement, whether it's in your retirement accounts, whether it's in the taxable account.

Then when this thing comes up and you're like, “Okay, now we're serious. We want to buy that lake house in two years. Let's start saving toward that and making plans for that.” And you go, “Okay, well, I can't save it all up in the next two years, so I'm going to use some of the money out of my portfolio.”

You probably are looking at your taxable account. Well, what's in my taxable account? Well, I've got some total stock market fund in there and I got some total international stock market fund in there. What am I going to sell? Probably the shares with high basis so the tax hit isn't so much. And then you simply adjust for that. If you adjust your retirement allocation, your new money is going to be going in toward that total stock market and a total international stock market allocation. You might even sell some of something else inside one of your retirement accounts and buy some more of those two asset classes in order to rebalance the accounts at that time.

But that's what I would do. If it's vague and it's way off in the distance, I just invest it all into the long-term portfolio and then make adjustments when things come up. If you're like, “Okay, now we're going to do it in two years”, now is the time to put it in cash. You know you're only two years out, you don't want anything to happen to that money so you can buy that house, or you're building a house and you're going to have to make payments over 15 months or something, then you want to get that money out of stocks and into cash. I hope that's helpful.

If it's a definitive thing, if it's college, you know it's going to start in nine years, yeah, I'd put a separate asset allocation for it. If for sure you know you want to have $500,000 in six years to buy a vacation home in Tahiti and it's a very specific goal, sure, set a different asset allocation for it. I don't know that you necessarily need a different brokerage account for that. It's easy to open another brokerage account. You can have multiple brokerage accounts at Fidelity or Vanguard or Schwab all at the same place. You can do that just like you can open different bank accounts. But I wouldn't feel like you had to. You can keep track of it on a spreadsheet. But don't feel bad if you want to open one, that's not bad.

 

SPONSOR

Dr. Jim Dahle:
Okay, I think I've answered most of your questions here today. This is good. All right. As I mentioned at the top of the podcast, SoFi could help medical professionals like you save thousands of dollars with exclusive rates and offers for refinancing your student loans. Visit sofi.com/whitecoatinvestor to see all the promotions and offers they've got waiting for you. SoFi student loans are originated by SoFi Bank, N.A. Member FDIC. Additional terms and conditions may apply. NMLS# 696891.

All right, don't forget about the FEW event. This is Financially Empowered Women. It's November 8th at 6:00 PM Mountain Time. SC Gutierrez is going to be talking about how to make a financial plan. Then they usually have some breakout sessions where you can talk to your peers about your financial concerns and issues. Obviously that's for financially empowered women. You can sign up at whitecoatinvestor.com/few.

Thanks for those of you who have been leaving us five star reviews. We appreciate that. A recent one came in from Moemen just this month actually who said “Financial advice gems with medical COI clarity.” That's conflict of interest clarity, I think.

“Jim in my opinion is a unique financial educator. Not only he provides very high quality financial advice but he combines that with something that is very hard -if not impossible- to find in the financial industry, the clarity of his COIs. Something that is very stressed on in the medical profession. This unique mix, not only builds trust in his material but actually makes his audience willing to make him make more money.” That sounds great.

“If someone is providing you with a quality service and telling you that’s how you can pay me back, why not pay them very well back. He should be a theory to teach in the financial industry, no need to hide your fees or COIs or how you make money, put it out clear, provide a quality service and your clientele will be more than willing to make you richer.” Five stars.

Well, I appreciate that. It's kind of a unique review. It is true. We are really big on transparency. Now, obviously we're not going to put out the whole roadmap of how to build a business just like ours but I want you to know about our conflicts of interest. We do have conflicts of interest. This is a for-profit business, and we are not apologetic about that. Without profit, I don't have any staff, and right now we've got, I can't even keep track of them. 16, 17 people are working here. They've all got families. They all need health insurance. They like getting their paychecks. Without income, without profit, we can't make those paychecks.

That also helps us fund some of the cool stuff we do, like the WCI scholarship. We've endowed some other scholarships, Katie and I personally. And we also do things like the Champions program. By the way, if you haven't applied for that, and you are first year medical, dental, PA, NP, or pharmacy student, you can apply for that at whitecoatinvestor.com/champion.

We basically are trying to give out a copy of The White Coat Investor's Guide for Students to every first year student in the country. You can't do that thing, those things without making money. And the problem is you cannot make money without having conflicts of interest. So, absolutely we have conflicts of interest. SoFi, for instance, the sponsor of this episode, they paid us for us to tell you about them. That's a conflict of interest. Do I want you to go tell SoFi that you came from the White Coat Investor and that they should keep advertising with us? Absolutely I do.

Same thing with any other product line we've got. If you buy our stuff, if you come to our conference, you should do that by the way, WCICON is coming up in February, or you buy our books, or you buy something out of the WCI store, you buy one of our online courses. Yeah, we make money. That's how it works. And obviously we have ads, sponsorships and newsletter sponsorships and banner ads on the website. And if you click on those and go there and buy stuff from them, they will keep supporting us and we'll continue to make money.

But we decided we could do a lot more good as a for-profit business then we could if this were just a charitable endeavor on the side. So, we decided to go that route. Maybe it was the wrong choice, maybe it wasn't, but that's what we're doing, so that's why we do it.

In the meantime, we feel very strongly about our mission. And if you haven't heard about our mission, let me tell you a little bit about it. The White Coat Investor mission is simply this. While our vision is to serve as the most trusted, authoritative, and useful resource for financial information and services for doctors and other high earners, but the mission is to strengthen and support the White Coat Investor community on the path to financial success by providing engaging, useful and accurate content and connecting White Coat Investors with best in class financial resources to empower the creation of meaningful, personal and professional lives.

And we live that every day. That's very important to us here, and you're very important to us. We want you to be successful because we know that financially successful doctors are better physicians, parents, and partners.

So, keep your head up, your shoulders back. Thanks for what you're doing. You can do this financial stuff too. I promise you. No matter how bad of a situation you're in, you can improve it by becoming financially literate and financially disciplined, and we're here to help you do that. 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.

 

Milestones to Millionaire Transcript

Transcription – MtoM – 142
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 142 – Emergency physician becomes multi-decamillionaire.

The White Coat Investor is proud to introduce our No Hype Real Estate Investing course, which will provide the framework for developing further knowledge and experience as you progress in your real estate investing career.

We call it an introductory course because there's always more to learn. This is no short superficial course. There are over 200 lectures and videos adding up to more than 27 hours of content by over 15 different instructors. We think it just might be the best real estate course on the planet.

Continue your wealth building journey today with the No Hype Real Estate Investing course at whitecoatinvestor.com/courses.

All right, welcome back to the podcast. This is the Milestones to Millionaire podcast where we profile you, we celebrate your accomplishments, your milestones, and use them to inspire others to reach those same milestones or whatever their goals might be.

Because this financial journey you're on is a single player game. It's you against your goals. You really don't have to beat anybody else. You don't have to have more money than anyone else, or you don't have to have a higher investment return than anyone else. It's all about you and what you want and accomplishing that. If you'd like to come on and celebrate your milestone with us, you can do so. Apply at whitecoatinvestor.com/milestones.

Today we have a doc who's become very wealthy and we're going to talk with him and talk about what he did to do that, and some of his secrets. Stick around afterward though, we're going to talk about cash balance plans, which he mentions is a significant part of his wealth building technique. So, stick around after the interview and we'll talk about that.

 

INTERVIEW

My guest today on the Milestones to Millionaire podcast is Dr. John. Welcome to the podcast.

Dr. John:
Thank you for having me.

Dr. Jim Dahle:
All right, well let's start off by telling people what you do for a living, how far you are out of training and what part of the country you live in.

Dr. John:
I am an emergency physician. I am now 39 years out of training. I live in the Midwest pretty much my entire professional career ever since I left home.

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

Dr. John:
It's achieving certain levels of net worth. That was a goal. And also I plan to retire in the next two months.

Dr. Jim Dahle:
Okay. Pretty cool. A couple of things that have gotten you up there. I don't know how comfortable you are actually talking about your net worth, but for the listeners out there, it's quite high. Much higher than most physicians I run into. Certainly, much more than most physicians retire on. So, tell us a little bit about how your net worth's divided up into? What are you invested in, what are your assets and liabilities?

Dr. John:
My net worth is primarily invested in retirement accounts. I'd say the total value of retirement accounts approach approximately $15 million. And that's because I'm a little bit of an obsessive saver. My wife and I like simple things, simple clothes, simple cars, and we saved as much as we could and we tried to do that in the most tax advantaged way. And retirement accounts, particularly cash balance plans are extremely advantageous and we tried to take full advantage within the law of everything we could take.

Dr. Jim Dahle:
Okay. And above and beyond the retirement accounts?

Dr. John:
We have probably about a million dollars in just personal accounts. And then we have some real estate. We have a ski home in Colorado and we have our personal home that encompasses all our assets. And the ski home maybe it was valued at $4.5 million now. And then our personal home, probably a little less than a million dollars I think.

And at this point, no debt. Debt always was an anathema for me. I never liked to have debt and I always tried to pay it down as quickly as possible.

Dr. Jim Dahle:
When did you get rid of all the debt in your life? How long has it been since you've been debt free?

Dr. John:
Probably about 15 years or so.

Dr. Jim Dahle:
Very nice. Okay. Well, tell us the story. You mentioned before we started recording that “live like a resident” was something you were doing long before I started telling people to “live like a resident.”

Dr. John:
Yes. I have the age to prove it. And I'd actually even taken a step further. When I became a resident, I lived like a medical student. As a medical student I survived on $3,000 or $4,000 a year and I tried to do that as a resident.

Even though when I started in residency in 1984, I was making about $19,000 a year, I still saved about $5,000 of that. I didn't have a car my first year. I used to walk to work, walk to the grocery store. Then I met my wife. She was a nurse and she actually made probably twice as much as I did at the time. That gave me a little more flexibility. I actually got a car after I got in with Kathy.

But fortunately she has the same perspective on life. We enjoy life without having to spend a lot of money on things that may temporarily make you feel good, but then in the long run don't add a lot of value to your life.

Dr. Jim Dahle:
So let's talk about your savings rate over the years. What do you think your average savings rate was from the time you finished your training until now?

Dr. John:
If you average it out, probably on the order of 35 to 50%.

Dr. Jim Dahle:
So throughout your career, you saved that much.

Dr. John:
Yes. Some years it was higher. There was a period of time where I had my own corporation and had a cash balance plan. And during those years, I might have been saving close to 90% or 95% because at that time the cash balance plan was such an advantage because if you took all your clinical income, and between Kathy and I working, we could incorporate both into the cash balance plan.

We could certainly defer federal tax, which is an advantage in and of itself, although you eventually have to pay it. But then state income tax, you certainly defer it. But depending where we retire, we may have eliminated it. We eliminated social security tax, which when you're independent you're paying both sides of social security. Same thing with Medicare, same thing with local income tax. So, taking advantage of that during those years was very, very helpful. Literally we were not paying $30,000 or $35,000 in tax that we otherwise would've had to pay by using the cash balance plan.

And during those times, we don't really spend a lot of money, but we had two kids. So, we did spend some money and we had purchased stocks earlier in my career and I lived off those stocks. I would sell them and have capital gain on them. But then since we don't spend a lot of money, we ended up paying 0% capital gains rate. So, there were a number of years that we paid little to no federal income tax, although we did pay state income tax.

And the thing I would convey to your listeners is it's taking advantage of every potential tax benefit you can and try to maximize the value for yourself and then not having to live an extravagant lifestyle.

Dr. Jim Dahle:
When you first started saving for retirement, there was no such thing as Roth IRAs, Roth 401(k)s, Roth conversions. At what point in your career, if at all, have you started taking advantage of that opportunity to use a tax-free account?

Dr. John:
That was later in my career actually. Once the law changed where you were permitted to do Roth conversions is when I started using the Roth accounts. Because of my income level for most of those years, I didn't qualify to contribute to Roth.

I did, however, even back many years ago, contribute after tax monies to a traditional IRA that had accumulated over a period of years. And then once I had the ability to convert, I did convert those to Roth once the law permitted me to do so.

I had done it years ago. When I had the cash balance plan, my income was actually low enough to qualify for Roth, but I really directed everything into the cash balance plan at that time because it was just so advantageous from a tax standpoint.

Dr. Jim Dahle:
What would you say your ratio is now of tax deferred money to tax free money?

Dr. John:
It is roughly 80/20.

Dr. Jim Dahle:
80/20. Okay.

Dr. John:
I've been trying to convert pre-tax money to after-tax money.

Dr. Jim Dahle:
And what lessons did you learn from your parents? Tell us about your upbringing that affected the way you've managed money.

Dr. John:
I was one of six children. My parents were high school dropouts, emphasized the importance of education to us. Even though they had been high school dropouts, they really emphasized that to us. And they also emphasize frugality and not spending beyond your means.

And one of the most intangible things that have really helped me is that family is important, relationships are important, and that's where you can get a lot of your pleasure in life is your relationships with friends and family.

Dr. Jim Dahle:
Yeah. Now you're expecting to retire here in just a few months. What do you expect to spend in retirement in any given year?

Dr. John:
We have a certain level of income we need just to meet our expenses. And Kathy and I will take some trips. To be perfectly honest, I don't think we could spend the money that we've accumulated and it is ultimately going to be left to charity.

Dr. Jim Dahle:
Are you planning to leave any of it to your children?

Dr. John:
I tend to believe, and I think Kathy believes as well, that you need to earn your own success in life, certainly from a monetary standpoint. We've helped them with college. They each got a car when they finished college. I think they need to make their own lives. We will support them to a certain extent, but I don't think it's beneficial for anyone to inherit a large sum of money. I think you have to earn it to really appreciate it.

Dr. Jim Dahle:
Okay. Well, let's say there's somebody out there that's like you were 30 years ago that wants to be financially successful, wants to be a decamillionaire plus. What advice do you have for them?

Dr. John:
First is, don't live beyond your means. Control the spending and learn to appreciate life without having to spend a lot of money. I think that's the first thing. The second thing is save all you can save. I've never regretted the money I saved. I've spent a lot and I don't think that I've lived a spartan lifestyle where we denied ourselves things. But we enjoy trips and things where we don't have to spend a lot of money, whether it's hiking up the mountains or doing other things. We get a lot of joy from that and enjoyed our time with our children when we did that as well.

The third thing I would say is educate yourself as much as you can. And I think WCI is a great way to educate yourself. I think the advice is extremely cogent and extremely useful. And I think that no one will watch after your money as carefully as you will. So, if you educate yourself and understand the opportunities that you have from a financial standpoint, it'll help you make really good decisions in the future so that you can maximize the value to yourself and your family.

Dr. Jim Dahle:
Now, you and Kathy are very wealthy and there's a lot of people out there that say you can't become very wealthy without starting a business or using a whole bunch of leverage or having all of your investments in real estate. But clearly your primary savings method has been simply funding retirement accounts and saving money from pretty typical careers. What's your answer to those people that say you can't become really wealthy without doing those other things?

Dr. John:
I think you have to think of yourself as a can-do person rather than a can't-do person. And I think you can do what you set out to achieve if you focus on it and educate yourself and are disciplined with it. And I think that is certainly something that you can do. We did make some money in real estate with the vacation home in Colorado, but that's not most of our savings. Most of our savings was knowing the law, knowing what you're permitted to do and taking advantage of that and living frugally.

Dr. Jim Dahle:
So how did you decide it was time to retire? Both from the non-financial aspects and the financial aspects?

Dr. John:
Primarily it's time to spend with your family and your spouse. For me that was the biggest motivation. From a financial standpoint, some salesperson I'll say, if insurance said, “Oh, you can retire now.” And it's like, yeah, I'll retire when I feel like retiring. I'm actually retiring early compared to my brothers who work till their 70s.

It wasn't really a financial decision as much as a family decision. It was the right time to spend more time at home. You see some of your colleagues whom you've known for many years passing away or getting sick, and you have to pick the right time. I’m in my 40th year of practicing medicine now, and I think this was the right time.

Dr. Jim Dahle:
Okay. Well, Dr. John, you have done very well for yourself. You should be proud of yourself. You and Kathy both, you have accumulated a significant sum of wealth. You'll have a very comfortable retirement and you'll be able to do a ton of good with your charitable giving throughout the rest of your life and after you pass. So thank you so much for coming on the podcast and being willing to share your experience and your wisdom and inspire others to do the same.

Dr. John:
Thank you for having me and thank you for WCI. I think you really help hundreds or thousands of physicians throughout the country. The knowledge that you pass will help many people achieve their financial goals.

Dr. Jim Dahle:
It's our pleasure. Okay, lots of lessons to learn from that interview. I think there are a few to think about. One, savings rate matters. When you save a lot of money, you become very wealthy. When you don't save much money, you don't become very wealthy.

It's sexy to talk about investments. Everyone wants to talk about investments. Let's talk about Bitcoin or Ethereum or a real estate empire or let's talk about timing the market or factor investing. Everybody wants to talk about that. Nobody wants to talk about savings rates.

But the truth is the most important determinant of how much wealth you end up with, how large your retirement accounts become is how much money you put in there. So, how do you put more money in there? You fill them up, you do it early in the year and you do it for many years.

Dr. John has been saving and investing 39 years. Whatever you want to call a full career in medicine, that's beyond that. He worked into his 60s and saved money the whole time. From the time he was a resident on through until the time he was about to retire. And that's a lot of time for money to compound. Someone that's maxing out retirement accounts. He actually doesn't have that big of a taxable account. It's almost all in retirement accounts outside of the real estate that he uses.

But if you put that money in there, give it time to compound. And the magic and miracle of compound interest over the decades really builds to a lot of wealth. Lots of estate planning ideas in there as well. You've got to struggle. Each of us have to struggle.

How much are you willing to leave heirs? How much do you want to give away during your life versus after you pass? Now those are all questions that once you become successful, you're going to have to wrestle with too. So, be thinking about that.

 

FINANCE 101: CASH BALANCE PLANS

All right, I told you at the beginning of the podcast we're going to talk about cash balance plans. These are often called defined benefit plans. And a cash balance plan is really a type of defined benefit plan.

As you'll recall, when it comes to retirement accounts, there are two main types. The first is a defined contribution plan. These are your classic 401(k)s, 403(b)s, 457s, what's defined as the amount you can put in there every year, the contribution. There's no definition of what it'd be worth in the end. That all depends on how well the investments do.

Over the years, corporations and employers have slowly leaned more toward these types of plans because it reduces their liability and risk down the road. If they promise you a defined benefit in 30 years, the investment risk is now on the employer, it's on the pension plan.

If it's simply a defined contribution, the risk of not having enough money for retirement is now on you. That is its pluses and minuses. It's now under your control, which is great, but if you suck at investing or you suck at saving, you're not going to have much money in there. You would've been better off with the pension. All right. So, that's a defined contribution plan.

A defined benefit plan is a pension classically. You go to work for GM building cars, you stay there for 25 or 30 years, and when you finish, they give you a gold watch and a pension, meaning they pay you a certain amount of money every year for the rest of your life.

If you're lucky, it's indexed to inflation and also includes a healthcare benefit. Those have kind of been going away more and more over the years. It's harder to find a job with a pension. These days for docs, maybe the VA and military and jobs like that. That's about it. That was about the only ones where you're getting pensions.

However, there is a type of retirement account that is called the defined benefit plan/cash balance plan. And the best way to think about this is that it is another 401(k) masquerading as a pension. So, it's required to follow the pension rules. That determines how much can be put in there in any given year. And it's actuarially determined, meaning you have to get the pencil pushing actuaries to tell you how much you can contribute.

And the way it tends to work is that the older you are, the more you can put in there. When you get into your 50s or 60s, you can have huge contributions into these defined benefit plans. Contributions like $100,000, $200,000 a year that you can put into a defined benefit plan. And if you're 32, your contribution is probably not that much.

And the reason why is there's a total amount that you can put into these things and the total amount it's supposed to grow to. And so, the actuaries calculate backwards and assume a rate of return and tell you, “Well, this is how much you can put in this year.”

For example, the defined benefit plan that we have in place at my partnership right now, I'm allowed to put $17,500 into, and the docs that are even younger than me may only be able to put $5,000 into. And yet the docs that are older than me might be able to put in $120,000 a year. And so, it's not really fair that way in some respects, but that's because it's a retirement account. A 401(k) masquerading as a pension. So it has to follow the pension rules.

But here's the way savvy docs are using these things. You start a defined benefit plan, you use it for five-ish years, you put your money in there, you invest it relatively conservatively. So you take your risk on the 401(k) side because you usually have a 401(k) profit sharing plan in conjunction with this defined benefit plan. And the defined benefit plan tends to be invested a little bit less aggressively. Higher percentage of money in bonds and that sort of a thing.

But after five or six years, there's usually a good reason why you can close this plan. You close it, there's a few fees associated with that that you got to pay the lawyers and the actuaries, but usually not too bad. You close the plan and you roll the balance into your 401(k) and then you start again with another plan. A plan in which you're probably able to now contribute more to because you're now older.

So, if you're maxing out a 401(k) profit sharing plan, this year for people under 50, that's $66,000. And you got a defined benefit plan on top of that, and you're doing backdoor Roth IRAs for you and your spouse, maybe you're doing an HSA as well. It wouldn't be unusual to be putting away $100,000 or even $200,000 a year into tax protected and asset protected accounts where this money is now growing faster than it otherwise would be because there's no tax drag on it.

Now imagine you run that process out for 20 or 30 or 39 years. How much money are you going to have? And the answer is probably eight figures. That's just what it grows to when you're putting away that kind of money every year.

And so, that's how Dr. John and his wife became very wealthy people. They just maxed out retirement accounts, made sure they understood what retirement accounts were eligible to them, took advantage of these big defined benefit plan contributions and went with it.

Now, even if you aren't eligible for a bunch of money going into retirement accounts, you can always use a taxable account. There's nothing keeping you from saving $100,000 or $200,000 a year toward retirement. No matter who you are and what retirement accounts are left to you. Obviously you have to have the income to do it, but if you have the income, you can put away that much for retirement. And guess what? It grows and you'll become very wealthy doing that.

I thought that was a pretty good example of a doc that's just done the basic plan. This is what I call the basic plan, the default plan, which is to go to work, see patients, work hard, save a good chunk of your income, invest it in some reasonable way, max out your retirement accounts.

Nothing special, no entrepreneurship, no huge real estate empire or anything. And over time it really works well. People become multimillionaires. If you really do it well, decamillionaires. And you go and have a very comfortable retirement and can do a lot of good for heirs, for people around you, you can be ridiculously generous and you can support some serious charitable causes.

 

SPONSOR

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All right, that's the end of another great episode of Milestones to Millionaire. I hope you're enjoying these. Send your feedback if you think there's something we can do better. If you don't think there's something we can do better, go out there and give us a five star review on Amazon. We could really appreciate it. It helps spread the word. Thanks so much. Keep your head up. You've got this. We'll see you next time.

 

DISCLAIMER
The hosts of the White Coat Investor podcast 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.