Podcast #118 Show Notes: How Do I Claim the Foreign Tax Credit?

medical school scholarship sponsor

If you invest in the total international stock market index you may be eligible for the foreign tax credit. As long as your foreign tax paid is less than $300 single, or $600 married, it is a rather straightforward process. However, once that threshold is breached, the more complicated form is required come income tax time. The good news is if you’re doing your own taxes, you’re probably using tax software, and it does this all automatically in the background. For those with higher foreign tax, form 1116 is required. We discuss this in the episode so if this applies to you, make sure you are getting your tax credit. We also talk about physician mortgage loans, sharing financial information with your surviving spouse should you die, setting up a practice retirement plan, Able accounts for disabled children, what the going rate for financial advice is, and more listener questions. 

A lot of physicians have questions about locum tenens, and locumstory.com is the place for them to get real, unbiased answers to those questions, basic questions like, “What is locum tenens?” to more complex questions about pay ranges, taxes, various specialties, and how locum tenens works for PAs and NPs. And then there’s the big question: Is it right for you? Go to locumstory.com and get the answers.

Reminders

Make sure you sign up for the monthly newsletter. We update you on all the cool things going on at the White Coat Investor. We give you links to all the best stuff that has come out for doctors and other high-income professionals on finances in the last month. We also have a super-secret special blog post.  I call it the monthly tip, but it is a blog post that isn’t published anywhere else. The only way you can get it is by signing up for the free monthly newsletter.

How Do I Claim the Foreign Tax Credit?

A listener wanted me to describe what the foreign tax credit is for someone who will soon invest in the Vanguard total international stock market index. He wanted to get a better understanding come income tax time. As long as one’s foreign tax paid is less than $300 single, or $600 married, it’s a rather straightforward process. However, once that threshold is breached, the more complicated form is required. The good news is if you’re doing your own taxes, you’re probably using tax software, and it does this all automatically in the background.

In fact, I had to go look at my taxes for the last two years to actually see how this is handled, because it was all done in the background. You download the forms from Vanguard, and it goes right into TurboTax’s forms wherever it needs to be. For example, two years ago it was line 48 on the 1040. I had a foreign tax credit of $178. So because that was less than $600, we file married filing jointly, then I didn’t have to do form 1116. It just goes straight onto line 48. No big deal. This year, my tax credit is a little bit larger. It looks like I actually do have to file form 1116, which TurboTax has very conveniently filled out for me from the data downloaded directly from Vanguard where I have my taxable account. I had almost $12,000 in dividends paid to me from Vanguard total international stock index fund. This exact fund that the reader is thinking about buying. It looks like that fund on my behalf paid $877 in foreign income taxes. So, that comes on this form back to me as a credit of $877.

It’s very straightforward. There are lots of lines on this form, but the bottom line is I paid $877 in foreign taxes to various sources, and I get a credit of $877 on my taxes as the foreign tax credit. Maybe this sounds complicated but it really isn’t. Your tax preparer can certainly handle it using the forms that your brokerage will provide, and obviously, TurboTax is handling it very well automatically. I have never had to fill out this form by hand or anything like that.

Reader and Listener Q&A

Should You Use a Physician Mortgage Loan?

“I’m a second year emergency medicine resident currently living in the Midwest. My question for you is about the subject of physician loans. One of my wife and my financial goals has been to save up enough money for down payment on our home for when I’ve completed residency. I’m planning to relocate to Colorado after residency, and plan to buy a home soon afterwards. This may be immediately, or we may a rent a house for the first couple of years depending on the situation. To this end, we have put $20,000 in a 14-month CD yielding 2.66% through our credit union. Our goal originally was to put down 20% to avoid private mortgage insurance, but since learning a little bit about physician loans, I’m starting to question this. My understanding is that the primary benefit of physician loans is being able to secure loan with less than 20% down payment without having to purchase private mortgage insurance, but what are the drawbacks? Is there a lower limit of down payment percentage required for most physician loans? Is there any reason that we or anyone for that matter should be putting aside more than $20,000 plus any growth from our CD for a down payment? Right now, we are both contributing very little to our ROTH IRAs, should we be working towards that with our money rather than purchasing another CD to go towards an eventual down payment? Basically, I’d really appreciate some information about the limitations and benefits of a physician loan.”

Basically, the point of physician mortgage loans is to allow you to put down less than a 20% down payment and still not pay PMI, which is private mortgage insurance. This is the insurance you have to buy in order to protect your lender from you defaulting on your loan. If you don’t want to buy that, which obviously there’s no real benefit to you buying it, you can avoid doing so by doing two things. One is put 20% down and get a conventional mortgage. Two is going to the lenders that do doctor loans. They allow you to put down as little as 0%, although sometimes as much as 10% of the price of the home in order to avoid that private mortgage insurance.

Now, it’s usually not a free lunch, they want your business. They sometimes make you open a bank account at the bank. They’re hoping you’ll stay with them for the next 30 years and use all of their other products. Mostly, they just charge you a little bit higher fees and interest rate in order to not put down quite as much on the down payment. It’s not a terrible thing. If you have a better use for your money then saving up a down payment, like maxing out ROTH IRAs, or paying off 8% student loans, you should probably do that and use a physician mortgage loan.

If you don’t have a better use for your money, I think saving up a down payment is still a good use of your money. It teaches you to save. It teaches you to be disciplined. I think you’ll probably buy a little bit smaller house, which is usually a good thing when you use a regular conventional mortgage. If I had to choose between maxing out a ROTH IRA as a resident and saving up a down payment, I’d do the ROTH IRA.  It is just a much better use of your funds for a typical resident, even if that means buying the house with a physician mortgage loan.

I’m not against using a physician mortgage loan. I take money from lots of banks that advertise these, and so I don’t have a problem with them. I think you just need to be wise about it. Make sure you don’t buy too much home, are actually using that money for a better purpose, and you’re not buying a house too soon. I generally recommend, even when you become an attending, that you rent for a little while, usually a 6 to 12 month period, basically just long enough to make sure your personal and your professional life are stable, but also that you are in a job that you like, and that the job likes you. Most physicians change jobs within the first couple of years of coming out of residency. So, it’s really a tragedy if you just forked out a ton of money for a big home and now you have to move for another job. Make sure the job likes you before you put down roots and buy a home.

Financial Instructions for the Surviving Spouse

“My wife is a physician. I’m a stay-at-home dad who handles the finances. I’ve been working on our investment policy statement. It occurred to me that it might be wise to have a document that leaves instructions regarding what to do should she survive me. Of course, we have wills in place, but other than them stipulating that everything goes to her or me there are no real specifics. My suggestion is, it might be beneficial for your readers or listeners if you had something available that spoke to the priority of actions to be taken should either the primary or the non-primary earner pass away. I realized the answer is case specific, but was wondering if some general guidance could be drawn. I’d like to draw up an “If I pass document”, that provides priority for steps to be taken should my wife find herself opening a check from my term insurance company. For example, should I pay off the mortgage first or maybe not depending on the mortgage interest rate, which is fixed at 3.5%. Should I max the state tax deduction for 529? Should I lump sum the investments?”

If you are the one who handles all the finances and you never talk about it, you’re probably going to need more than instructions. You’re probably going to need a financial advisor, so have someone in mind that you can send them to. Now, if you’re doing it all together, and your spouse really knows what’s going on with the finances, and he or she can take over what you’ve been doing without hiring a professional, then instructions can be helpful. At least a plan that you’ve worked on together about what’s going to happen.

I think it is a good idea to have some sort of plan for that money when it comes in. You’re probably going to want a little bit less aggressive retirement portfolio than you have, now that they’re going to be living off it. If it was 75% stocks, maybe you want it to be 50% stocks now. If you want some of that money to go the kids’ college funds, you can pretty much lump sum that into the 529s. You’re allowed to contribute up to $15,000 per year per kid, and that’s per spouse. You can put up to five years worth of that in. So, that’s $150,000 per kid that you can put in all at once. You could basically, if you wanted to, just front load those educational costs if that’s your goal.

Frankly, most of it’s probably going to go towards supporting the spouse, if not for the rest of their life, at least for a period of time until they can be earning. You want to think through all those things, whether you then go and put that money into back door ROTH IRAs, or into the 401K, or into a taxable account. Obviously, you max out retirement accounts first and everything else is going to have to go into taxable account.

If you get a $2 or $3 million lump sum all at once, obviously, most of it’s going to be invested in taxable. It’s also important to keep in mind that anytime you get a lump sum of money like this, especially in an emotionally difficult time like the death of a partner, you probably shouldn’t do anything quickly. A lot of people advise, “Don’t do anything with the money for a year.” Just let it sit in a bank account, earning 2 or 2-1/2%. Don’t go crazy picking new investments all at once. Give yourself a little bit of time to mourn first. I think those are the main considerations there.

The Going Rate for Financial Advice

One listener said he had been recommended to somebody who charges 1.2% for the first 500,000 and then lower as you go up, with a cap of $18,000 no matter how many assets you have. He wanted to know if this is a reasonable structure? It certainly is a little on the expensive side. You can hire lots of advisors for 1% of your assets under management or less. They often have a minimum. Now, they might require you to have $500,000 or a million dollars as a minimum, but certainly, there are plenty of advisors that take doctors with less than $500,000 and charge less than 1.2% per year.

The going rate for high-quality financial advice is a four-figure amount per year. That’s something between $1,000 and $10,000 a year. If you’re only paying 1, 2, 3, $4,000, I think you’re paying a fair price. If you’re paying $18,000, I think you can get just as good of advice for half the price. So, if I were hiring somebody that didn’t cap my fees until I hit $18,000, I’d either negotiate with them as my assets grew, and my fee went toward $18,000 or I would simply move on to a different advisor. I think that’s a little bit high. It’s fine to start with. Obviously, if you only have a $100,000 and you’re paying 1.2%, that’s only 1200 bucks a year. That’s a good deal for financial advice, but $18,000 is a little bit on the high side.

If you are looking for good advice at a fair price I keep a list of recommended advisors. We have recently revamped that page and now there are all kinds of videos on there, and other great resources for you to really get to know these advisors before you reach out to them. I can recommend everyone on that list. They all charge a fair price and give good advice. Reach out to one of them if you feel like you need an advisor. Certainly, don’t feel bad about it. I think probably 80% of doctors want and need a good financial advisor. If this isn’t something you want to spend your time doing, it can be outsourced. It is going to cost you several thousand dollars a year, but for a doctor making several hundred thousand dollars a year, that may be a good use of your money.

Managing Your Parent’s Money

“My question pertains to managing my parents’ money. Basically, I talked to them about all that I’ve learned, and the books I read, mostly White Coat Investor content and recommended reading, and talked to them about the 0.8% that they’re paying their financial advisor. This discussion ended with them asking me to help manage their money. While I feel completely comfortable managing my own portfolio, I don’t know much if anything about required minimum distributions and other issues that affect retirees. Do you recommend potentially managing your parent’s money? In your course, Fire Your Financial Advisor do you address managing retirees’ portfolios in required minimum distributions? If you don’t address that in your course, do you have a book that you recommend for me to help tackle this?”

He is being asked to do something that I helped my parents do about 15 years ago. Being asked to help them manage their money is a very precarious situation to be in,  especially if you don’t have any clue what you’re doing. Just because you know they’ve been getting ripped off, it doesn’t mean you can do a better job than a financial advisor can. The best thing you might be able to do for them is help them get a good financial advisor. It is not that hard to find. Then go with them to make sure that they understand what they’re being told, and that the advisor is giving them good advice. That’s one of the best things you could do for your parents.

You can also help them manage their own money. That is the way I look at what I’m doing for my parents. They have a written financial plan. They understand their financial plan. They’ve been following it now for over a decade. It has worked out very well for them. The advisor I rescued them from was charging them over 2% a year in advisory fees. The worst part was they were still underperforming the market by more than that 2%. It was bad advice at a bad price. It didn’t take much to convince them, just demonstrating what the difference would be in their returns if we just move them over to some simple basic index funds. I helped them move it over. It’s no big deal to do a rollover here and there, and to make a few purchase orders into some mutual funds, and then rebalance that once a year.

Now, it takes me literally less than an hour a year, basically, rebalance at some point in the spring, and we take an RMD at some point in the fall. A required minimum distribution or an RMD is not particularly complicated. When you turn 70, it’s 3.6% on your portfolio. The percentage goes up over time, but it doesn’t necessarily mean the dollar value that we’re taking out goes up over time. It’s really not that complicated, but you do want to make sure you take out the RMD every year, because the penalty for not doing so is 50% of what you should have taken out. Don’t leave that money in that IRA when it’s supposed to come out!

What can you do to learn more about investing in retirement? I don’t cover a lot of that in the Fire Your Financial Advisor course. I do make a few references to required minimum distributions and those sorts of things, but clearly, the course is a little bit more aimed at people at an earlier stage in their career, early to mid-career. I don’t know of any really great books that focus solely on that stage of life other than James Lange’s, Retire Secure, that deals with quite a bit of stuff in the withdrawal phase, which is a little bit more complicated than the accumulation phase.

Choosing a Practice Retirement Plan

“We have a simple IRA for the practice. We’d love to have something bigger. We’re afraid that anything like a 401K would impact our bottom line so much that it would not be worthwhile. I was asking if you have any ideas of how we might structure this to allow employees to make better investments for the future. We want to build a stronger tax deferred retirement plan.”

Here is the problem, in a small practice, once you have employees, this is no longer a do-it-yourself project. You really need professional advice, and preferably from somebody who sets these up all the time. The truth is, for any given practice, the right plan might be a simple IRA, it might be a SEP IRA, it might be a 401K and there are several different styles of 401Ks that can be set-up for a practice. It might be no plan at all. It might be just investing in a taxable account.

There is a lot to consider here. For example, you want to look at how your employees view this money. If the employees don’t view the match you’re providing them in this 401K, for which you’re paying the fees, as a great benefit that they’re willing to give up some salary for, well then, it’s just an expense to you because you still have to pay them a full salary, and you have to provide this benefit for them.

If they look at it the way they should, and hopefully they will if you provide the proper amount of education, that this is part of their salary, this 401K benefit, any match you have to provide, then theoretically you can pay them less than you otherwise would, and it becomes a wash to you, or at least reduces the cost of it to you. I think you really have to look at your employees. The other thing you have to look at is how much they’re going to contribute. If they don’t contribute a lot, you don’t have to match a lot.

On the other hand, if they don’t contribute a lot, you may not be able to put all that much in, because they’re all these actuary rules on how much profit sharing you can put in there if your employees aren’t putting anything in. So, the best thing to do is to have a study done of your practice, the ages of each employee, the ages of the doctors, how likely they are to contribute, how much they’re going to contribute, how much they make, and then make a determination of which of these various types of plan, if any, is best for you.

I have a few advisors on my recommended advisor page that specialize in these practice retirement plans. I recommend you call one up and ask them to do a study of your practice, and make a recommendation. It’s interesting, little changes in these assumptions and the ages of your employees can completely change which plan is appropriate for you. So, get some professional help on that. Unfortunately, there’s no general guideline that I can give that tells you what’s right for you.

Another listener asked about her practice retirement plan and wondered if she should pay her employees more in order to do a defined benefit plan. When is it worth it to pay extra in fees, match money, and profit-sharing in order to be able to tax defer more money for yourself? What you have to keep in mind is you can’t just look at the tax deduction you get this year. You have to look at the difference in what you are paying in taxes now versus later, and the time value of that, as well as the value of the tax deferred growth in that account, as well as what your employees think about having this benefit available to them, and how much they view that as a big benefit that they’re willing not to be paid as much for. You have to look at all of that together, and make a decision as to whether it’s worth it. There is not necessarily a right answer as to whether to put it in a defined benefit plan or not. A lot of it comes down to a study of your practice, and how much you’re going to have to pay in additional fees, and additional match for the employees, in order to get that deduction and that additional asset reduction for yourself. No great formula but certainly as the fees get higher, you really have to take a closer look at whether that’s really worth it to you. Remember, the goal is not to pay the least amount in taxes, it’s to have the most available after the taxes are paid.

 A 3 Fund Portfolio for Your Taxable Account

 

“I’m trying to keep things simple. Thanks to your advice. I’m utilizing the 3-fund portfolio in my 401K, and I suspect this will be a reasonable part of my retirement account. However, the taxable will also be a large part, and I’d like to mirror that same 3-fund portfolio in my taxable account. However, I know that a bond fund is not particularly tax efficient. What would you recommend as a tax efficient bond fund to be placed in my taxable account? The goal here is so that when I rebalance annually, I can limit the amount of transactions I do and just make things easier.”

This listener likes the 3-fund portfolio. The 3-fund portfolio is fine. It’s not like it’s something I recommend over everything else. As you will notice if you ever read my post called, The 150 Portfolios Better Than Yours, where I discussed the 3-fund portfolio and 149 other great portfolios. The issue he is having here is that he wants to mirror his asset allocation in each investment account, and that’s not necessary. You don’t have to have the same asset allocation in your 401K as in your taxable account as in your ROTH IRA.

Your ROTH IRA could be 100% US stocks. Your taxable account could be 100% international stocks, and you could have international stocks, US stocks, and US bonds in your 401K for instance and do all your rebalancing there. The general approach is to look at each account, and what goes well in that account. While still maintaining your desired asset allocation, you put what goes best in each account in there. For instance, in most 401Ks, there’s at least a halfway decent S&P 500 or total stock market fund and often a good bond fund as well. If you’re lucky, you’ll get a good international fund in there, but that’s usually the first one that doesn’t show up in a 401K if you’re trying to put together a 3-fund portfolio there. So, where would you put that? Well, you’d put it in your ROTH IRA, or you’d put in your taxable account. Look at all of your accounts as one big portfolio, and just make sure you have your overall asset allocation when you look at all the accounts together, rather than trying to make each account look exactly alike.

What tax efficient bond fund can you use in your taxable account? The one I use is the Vanguard Intermediate Tax Exempt Bond Fund. I like that one, because it’s not too long of a duration like the long-term. It’s not too short of a duration like the short-term. It’s intermediate. It’s obviously tax exempt, because it invests only in muni bonds. If you’re going to hold bonds in taxable as a high-income professional, you’ll usually want muni bonds. So, that’s a good bond fund for that. There are obviously other tax exempt bond funds, pretty much all of the ones from Vanguard are quite good, and I wouldn’t have any problems about using any of them in a taxable account. How should you do rebalancing? In general, try to avoid selling things with a gain in a taxable account. If you have a loss, obviously sell that anytime in a taxable account. You’re basically tax loss harvesting that, but in general you try to do your rebalancing inside your tax protected accounts like your 401K or ROTH IRA.

 

Purchasing a Vacation Property

“We make a little over $500,000. We have about a million dollars in traditional retirement account savings, we are about to be debt-free by the end of the year. We’re looking at the possibility of purchasing a vacation property. The area we’re looking to purchase the vacation property in is a year-round resort area, that’s pretty recession resistant. However, it is a plane flight from our house, so we really like the idea of a real hands-off kind of arrangement such as one of these condo hotels. Now, we’re not primarily doing this for income so much as to have the property, but ideally, it would be paying for itself with a rental income. Do you have any specific thoughts on condo hotels, or do you see any problems with this plan as I’ve described it to you? I’d love to hear your thoughts.”

These are not great investments. The reason why is you’re mixing work and pleasure. You’re trying to get an investment, but you also are looking at a property that you actually want to use, and that’s the main reason you’re buying it. You don’t actually look at it as an investment when you buy it, you’re looking at it to use it. You’re buying it like a consumption item, and then trying to treat it kind of like an investment. It often doesn’t work out well.

When you’re looking at investment real estate, you really want something that is going to appreciate. You want something that is going to cashflow well. You want something that’s going to rent easily. You want something that’s going to have low maintenance cost, all these things that you care about when you’re buying an investment. They’re totally different from when you’re buying something that you’re actually going to use.

I would be hesitant to do something like this in the first place. The alternative is go rent a place every time you go out there. It’s not that big a deal. People are afraid to do it, and so they end up buying time shares, and they end up buying second homes. Every time they go out there, they have to mow the lawn and do repairs. That’s not my idea of a vacation. I don’t want to go someplace that I have to do all kinds of repairs on.

In general, they say it takes 12 weeks a year in a second home before buying it works out better than just renting it. Most people are not spending 12 weeks on vacation in a year much less in one place. I think most people probably shouldn’t be buying second homes unless they just have all kinds of money and want to fritter it away. If you can afford it as a consumption item, knock yourself out. Enjoy it, but don’t think this is going to be some awesome investment, especially if it’s a plane flight away.

If I was going to invest in direct real estate again, which I probably am not, I want it to be something I can drive by in 10 minutes and take a look at. Doing it across the state or in another state is just too much of a pain. What do I think of condo hotels? The benefit of it is at least you can pay somebody else to maintain the grounds, and maybe there’s somebody else keeping an eye on the building, and there’re a few less hassles. You don’t have to do as much maintenance when you go there on vacation. But I started thinking about condo hotels and vacation property, it sure sounds like a timeshare to me. I don’t think I want to be in there with a bunch of other timeshare owners for instance. I’m not a huge fan. If that’s the only way you can go on vacation there, and it’s just someplace you love going, and you can afford to do it, okay fine. I think I’d probably avoid doing it, though.

When Does A Mega Backdoor Roth Make Sense?

A mega backdoor ROTH IRA is for someone who can put a whole bunch of after tax money, not ROTH money, but after tax money into their 401K. Most of the time, that means you’re self-employed, but sometimes employer 401Ks will allow this. A super saver asks whether it makes sense to make after tax contributions when they are very deep in the 36% married filing jointly marginal bracket with the standard deduction. His employer providers a 401K profit sharing contribution of 37,000 each year. He can elect to take the profit sharing as taxable income, but doesn’t. He invests that in the 401K. He has the ability to do a mega backdoor ROTH conversion, but isn’t, because intuitively, it seems like a bad idea from a current tax opportunity cost perspective, but isn’t sure he is correct. He can see why someone who does not receive profit sharing contributions would want to do a mega backdoor ROTH, but for him, over the course of his investing lifetime, does it ever make sense to take the profit sharing taxable income, and then do a mega backdoor ROTH?

It is a rather complex question. In general, people do it because they don’t get a match that takes them all the way up to the $56,000 limit. So, if the employer allows them to put an even more money, and allows them to convert that to a ROTH IRA either within the plan or by taking it out of the plan into a separate ROTH IRA, then it can make a lot of sense. In this case however, the doctor is wondering if it makes sense basically to make more ROTH contributions instead of tax deferred contributions.

This is really the same old question of whether you make ROTH 401K contributions, or whether you make tax deferred 401K contributions. In general, during your peak earnings years, the rule of thumb is to use tax deferred contributions. Obviously, one of the exceptions to that is if you’re a super saver. If you’re going to have some $10M portfolio in retirement, and you’re in the 24% bracket now, it probably makes sense for you to be making ROTH contributions.

How much of a super saver do you have to be to be a super saver? I think you’re probably not there yet. I think I’d just do the tax deferred profit sharing contribution in this situation, at least until I had a tax deferred account that was $2 or $3 million, which is likely still a few years away for these super savers.

Katie and I are actually doing mega backdoor ROTH IRA contributions this year, but we’re doing it for a very specific reason, because of the 199A deduction, which would not apply to this doctor’s case, because he is an employee. So, we’ll do that just because instead of comparing it to a 37% tax bracket that we’re in right now, we’re really only getting a deduction of about 29% on it. That’s not nearly as attractive.  I’d rather do the mega backdoor ROTH IRA contributions than take a tax deferred contribution at only 29%.

 

Factor Investing

 

“After listening to the most recent podcast with Allan Roth, it seems that he’s currently not a big fan of this small value tilt. I currently am doing a small value tilt, grab about 5% of my total portfolio in a small value index fund. I just want to know what your thoughts are, if this is a fad that has come and gone, or if we should continue factor investing. Note, I’m 34 years old and plan on holding this for about 30 years for long-term outlook, but just want to get your thoughts on that.”

This was super popular about 10 years ago, and that’s because small value stocks had outperformed over the long run since 1927, which is about as long as our dataset is when it comes to the publicly traded markets. In the recent past at that point, small value had really outperformed large and growth stocks. That is not the case today though. Over the last five or ten years, large growth has outperformed small value. A lot of those people that have a small value tilt including myself have started to go, “Man, is this really worth it? Is this really a good idea? Should I stick with this, or should I bail out of my plan and go do a more traditional large growth focused investing strategy such as buying a simple total market fund like a 3-fund portfolio.”

There is no surprise to see people doubting it given the performance recently. We all tend to chase past performance, especially recent past performance. You want to be careful that you’re not just bailing out, because performance has been bad in the last few years. Even if small value stocks outperform in the long run, 20, 30, 40, 50 years, you expect there to be periods of time, a five, or 10 or even 20 years, that small value does not outperform the overall market.

You expect that to happen. The question is, is this just one of those periods of underperformance, and in the long run you’re still going to be better off with the small value tilt, or were we just data mining to start with. Is small value really not going to provide higher returns in the long run? Is it really not riskier to invest in small stocks and in value stocks?  I think obviously the jury’s still out, and we only have a hundred years of data. It’s just not that large of a dataset. I think that it is likely that in the long run small stocks and value stocks are riskier than their large growth compatriots, and that they will likely outperform large growth over the long run. I’m talking decades as the long run. I continue to maintain a small value tilt. I view this as one of those periods of time that I knew would happen, where small value would underperform large and growth.

My tilt was actually larger than Parker’s. I have about 15% of my portfolio in small value stocks. So obviously, I believe in it. I don’t have 50% of my portfolio in there. If you thought it was a good idea for the long run five years ago, I think you ought to stick with it. If you can’t stick with it, well, I guess you might as well bail out now.

 

Contributing to an Individual 401K

“I have a private practice, but in addition I do medical legal consulting. After listening to your podcast and reading your blog, I obtained an employer identification number, so I can open an individual 401K. Thus far, my W9 for my side business is under my name, and my social security number. Must I begin my employer contributions from July of this year and move forward after changing my W9 to my new employer identification number and contribute only on future earnings under this W9, or can I catch up on my contributions from the first six months of the year even though the agreement at that point was under my name and my social security number?”

You should be able to use all the money you earned this year for a couple of reasons. One, no one is looking that closely. So just report it all under the EIN when you file your schedule C at the end of the year, and it’ll be fine. You reported all the income, you paid all the taxes due, it’s not a big deal. Second, if you were going to report there are two separate businesses, two schedule Cs, one for your business that was in your name, and one for your business that’s in your new business with an EIN, it’s not going to be that big of a deal, because they’re basically related businesses. You have to look at all the income together when it comes to doing a retirement plan anyway. It’s not like you get a retirement plan for each one, so I would use all the income from a year, obviously make sure the tax paperwork is in order when you do that.

 529 Able Account

“My wife and I have a 529 Able account for our disabled child, and are contributing to that on a monthly basis, but I would be interested to know any recommendations you have in addition to that that apply to this kind of more unique situation. Right now, our plan would be to open a special needs trust to fund the 529 Able. My understanding is that up to $100,000 in that account would not disqualify him for income-based services. So the plan would be to put assets in his special needs trust that will in the future keep that account funded up to that $100,000 threshold but not over, so that he would not in the future lose Medicaid or any other services that would be needed. Any other ideas that you have or guidance will be appreciated.”

Able accounts are like a 529 account. There is a combination of the two when you’re basically moving money from a 529 to an Able account. The point of an Able account is to provide for a disabled child. Money in there doesn’t count toward your Medicaid funding in most states, and so you can see why some people might try doing some Medicaid planning around it. This is really no different than the people who are trying to do Medicaid planning for their impoverished parents.

Trying to get Medicaid to pay for the nursing home by hiding the assets that they have, or spending down the assets that they have or whatever. I think people come from a good motive to do this, but sometimes we forget what the whole point of Medicaid is. It’s to provide for people that don’t have assets. If you leave your kid $3 million in life insurance, your kid has assets that he can live off of. He doesn’t need the state to provide for him. So you have to ask yourself a little bit about the ethics of doing Medicaid planning in the first place.

Obviously, the laws are there, and if you’re allowed to do it, you’re allowed to do it. The place to get that advice is a Medicaid planning attorney in your state. These are all state-specific laws. You want to talk to someone in your state that knows your state laws, and exactly how Medicaid rules are written in order that you can maximize those benefits. If you have a large enough trust that it is able to keep that Able account topped out over the years, you probably have too much assets to be getting state services anyway. So, I wouldn’t spend a lot of time doing Medicaid planning. I would just assume that you’re not going to have it if you’re leaving a seven-figure amount to your child.

Hard Money Lending

A Facebook group member asked what I thought of hard money lending. I have about 5% of my portfolio invested in that. I like the fact that they’re backed by a hard asset. If the person defaults on the loan, you have to repossess the property and sell it. I prefer owning this via a fund rather than owning them myself. The last thing I want to do is spend a bunch of time and money and hassle trying to repossess and sell a property. I generally own this via a fund that provides diversification. I do have to pay fees for it, but for that lack of hassle, that additional diversification, I think it is worth it. I do like the asset class. If you look at my returns on it, I think I’m making 8% or 9% over the years on these hard money loans. I think it’s a great asset class. I think it has low correlation with the rest of my portfolio, and I plan to continue to invest in it in the years to come.

Ending

Make sure you are signed up for the monthly newsletter and if you have questions you want answered on the podcast leave them at speakipe.com/whitecoatinvestor.

Full Transcription

Intro: 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. Here’s your host, Dr. Jim Dahle.

WCI: Welcome to White Coat Investor podcast number 118, the foreign tax credit. Have you ever wondered about a different way of practicing medicine? Whether you are burned out, need to change a pace, or want to see the world Locum Tenens might be that option for you. Not sure where to start? Locumstory.com is the place where you can get real unbiased answers to your questions. They answer basic questions like what is locum tenens? For more complex questions about pay ranges, taxes, various specialties, and how locum tenens works for PAs and NPs. Go to whitecoatinvestor.com/locumstory and get the answers.

WCI: Thanks for what you do. The work you do is meaningful that matters. I just came off a long rafting trip on the Salmon River. We rafted the main fork of the Salmon River for about the last week. So, I’m just coming in now. You can see my scruff that I’m bothered shaving yet, and starting to catch up here on podcasts. One of the other people on the trip with me was an orthopedic surgeon, also financially independent basically, but still practicing, because he wants to make a difference in the world. I know there’s a lot of you out there doing that, and I want to thank you, especially those of you that don’t have to work anymore who are still there seeing patients, and making a difference in their lives.

WCI: We’re doing something new today here, and it looks like a handful of people are watching us here recording this. We are actually recording the recording of the making of the White Coat Investor podcast. This is actually live on Facebook right now. So, we’re going to do a few cool things about it. I really like this technology. It’s fascinating, all the cool stuff you can do with it. Obviously, the real podcast is going to be a little bit more edited than this, and we’ll have the actual questions from the speak pipe that get asked on the podcast as usual.

WCI: In addition, I’m going to be taking questions from you guys in the Facebook group who are live right now, and want to ask your questions and get them answered here today both on the Facebook live and on the podcast. You can put those in if you like as a question just as a comment. In addition, I have opened up the guest request here. So, you can actually request to come in on this Facebook live and ask your questions live.

WCI: So, that would be awesome to bring you in here. Your voice will actually be on the White Coat Investor podcast and it’s a great way to ask questions. If you’d like to do that, just request to join. Now, I’m going to bring you right into the podcast and will answer your questions.

WCI: Those of you who have tried to sign up for our newsletter lately, I’m really sorry, we had a big technical snafu. There was a problem with the plug-in on the website. At any rate, anybody who tried to sign-up for our newsletter in the last month or two wasn’t able to. That’s now fixed. If you’d like to get the monthly newsletter, please come sign-up. You can find that at whitecoatinvestor.com/free-monthly-newsletter.

WCI: If you’ve never seen the newsletter, this thing’s awesome. It’s great. We put a marker report in it. We update you on all the cool things going on at the White Coat Investor. We give you links to all the best stuff that’s come out for doctors and other high-income professionals on finances in the last month. We also have a super secret special blog post basically. I call it the monthly tip, but it’s a blog post that isn’t published anywhere else. The only way you can get it is by signing up for the free monthly newsletter. I encourage you to do that at whitecoatinvestor.com/free-monthly-newsletter as soon as you can.

WCI: You can also leave SpeakPipe questions for the podcast just like those of you watching this live can leave questions today in the comment section or actually request to come on this Facebook live and ask me your questions directly. You can record those at speakpipe.com/whitecoatinvestor. We have a couple of really funny questions today, because apparently when doctors pick-up the phone, and start talking to it with nobody on the other end, they think they’re dictating.

WCI: A couple of the questions we have today have period at the end of every sentence. It’s funny, you’ll get a kick out of listening to it. I certainly did, the questions are good, so we’re putting them on. All right, our first question here, we’re going to plug-in from the SpeakPipe.

Anonymous: Hey, there Dr. Dahle. First off, thank you for everything that you do. I’m a second year emergency medicine resident currently living in the Midwest. My question for you is about the subject of physician loans. One of my wife and my financial goals has been to save up enough money for a down payment on our home for when I’ve completed residency. I’m planning to relocate to Colorado after residency, and plan to buy a home soon afterwards. This may be immediately, or we may a rent a house for the first couple of years depending on the situation.

Anonymous: To this end, we have put $20,000 in a 14-month CD yielding 2.66% through our credit union. Our goal originally was to put down 20% to avoid private mortgage insurance, but since learning a little bit about physician loans, I’m starting to question this. My understanding is that the primary benefit of physician loans is being able to secure a loan with less than 20% down payment without having to purchase private mortgage insurance, but what are the drawbacks?

Anonymous: Is there a lower limit of down payment percentage required for most physician loans? Is there any reason that we or anyone for that matter should be putting aside more than $20,000 plus any growth from our CD for a down payment? Right now, we are both contributing very little to our ROTH IRAs, should we be working towards that with our money rather than purchasing another CD to go towards an eventual down payment?

Anonymous: Basically, I’d really appreciate some information about the limitations and benefits of a physician loan. If the money that makes the difference between the 15 and 20% down payment could be better used elsewhere. Thanks again. I really appreciate your work.

WCI: Those of you on the Facebook live, obviously you’re not able to see this. So, the question is basically an emergency medicine resident wondering about physician loans. This couple is saving up $20,000 in a CD and plans to save more toward the down payment of the house they want to buy when they finish residency. It’s really asking, what’s the point of physician loans? What’s the minimum you have to put down on them? Should we be maxing out ROTH IRAs or saving up a down payment?

WCI: A physician loan as you’ll learn on the website, in fact, if you’re interested in these special doctor loans, which are available not only for doctors like physicians and dentists, but also for lots of other high-income professionals, you can find that under my recommended tab on the website where it says, “Physician mortgage loans,” and you can learn all about them.

WCI: Basically, the point of these loans is to allow you to put down less than a 20% down payment and still not pay PMI, which is private mortgage insurance. This is the insurance you have to buy in order to protect your lender from you defaulting on your loan. If you don’t want to buy that, which obviously there’s no real benefit to you buying it, you can avoid doing so by doing two things. One is put 20% down and get a conventional mortgage. Two is go to these lenders that do doctor loans. They allow you to put down as little as 0%, although sometimes as much as 10% of the price of the home in order to avoid that private mortgage insurance.

WCI: Now, it’s usually not a free lunch, they want your business. They sometimes make you open a bank account at the bank. They’re hoping you’ll stay with them for the next 30 years and use all kinds of their other products. Mostly, they just charge you a little bit higher fees and interest rate in order to not put down quite as much on the down payment. It’s not a terrible thing. If you’ve got a better use for your money and saving up a down payment like maxing out ROTH IRAs, or paying off 8% student loans, you should probably do that and use a physician mortgage loan.

WCI: If you don’t, I think saving up a down payment is still a good use of your money. It teaches you to save. It teaches you to be disciplined. I think you’ll probably buy a little bit smaller house, which is usually a good thing when you use a regular conventional mortgage. If I had to choose between maxing out a ROTH IRA as a resident and saving up a down payment, I’d do the ROTH IRA every day and twice on Sunday. It’s just a much better use of your funds for a typical resident, even if that meant I bought the house with the physician mortgage loan.

WCI: I’m not against using a physician mortgage loan. If I take money from obviously lots of banks that advertise these, and so I don’t have a problem with them. I think you just need to be wise about it. Make sure you don’t buy too much home, and make sure you actually are using that money for a better purpose, and make sure you’re not buying a house too soon. I generally recommend even when you become an attendee that you rent for a little while, usually a 6 to 12 month period basically just long enough to make sure your personal and your professional life are stable.

WCI: That you’re not about to get a divorce, you’re not about to have triplets, those kinds of things, but also that you are in a job that you like, and that the job likes you. Because most physicians change jobs within the first couple of years of coming out of residency. So, it’s really a tragedy if you just forked out a ton of money for a big home and now you got to move to go get another job. So make sure the job likes you before you put down roots and buy a home.

WCI: Those of you watching this on Facebook live, you can put your questions in as well. If you put them in as a comment, I will also answer them during this podcast. In fact, we’ll even bring you on the podcast live if you like. Just request to join, and we’ll bring you on. Our next question comes from my email box. This is about the foreign tax credit. The doc says, “Hi, Dr. Dahle. I know you’re receiving emails. I’m going to make this short.” I do appreciate that. “I’ve listened through all of your podcast.” That’s impressive. “However, there’s a topic I’ve yet to hear about, and this is the foreign tax credit.” Yup, I don’t think we’ve ever actually talked about this on the podcast, so you got me there.

WCI: “Do you have a blog post describing what this is in the various intricacies as someone who will soon invest in the Vanguard total international stock market index. I’m interested in getting a better understanding income tax time. From what I understand, as long as one’s foreign tax paid is less than $300 single, or $600 married, it’s a rather straightforward process. However, once that threshold is breached, the more complicated form is required income tax time.”

WCI: That’s all true. The good news is if you’re doing your own taxes, you’re probably using tax software, and it does this all automatically in the background. In fact, I had to go look at my taxes for the last two years to actually see how this is handled, because it was all done in the background. You download the forms from Vanguard, and it goes right into TurboTaxes forms wherever it needs to be.

WCI: For example, two years ago, I’m looking at my 2017 taxes. Let me try not to show my social security number on this video here, but if I go and look, in 2017, it was line 48 on the 1040. I had a foreign tax credit of a $178. So because that was less than $600, we filed, married file in jointly, then I didn’t have to do form 1116. It just goes straight onto line 48. No big deal. This year, my tax credit is a little bit larger. If I pull up TurboTax, and I’m still looking at it in the software, because I haven’t filed my taxes yet. I’m still waiting on some K1s actually, so we filed an extension this year.

WCI: This year, it looks like I actually do have to file form 1116, which TurboTax has very conveniently filled out for me from the data downloaded directly from Vanguard where I have my taxable account. I see here that I had almost $12,000 in dividends paid to me from Vanguard total international stock index fund. This exact fund that the reader is thinking about buying. It looks like that fund on my behalf paid $877 in foreign income taxes. So, that comes on this form back to me as a credit of $877.

WCI: It’s very straightforward. There’s lots of lines on this form, but the bottom line is I paid $877 in foreign taxes to a various sources, and I get a credit of $877 on my taxes as the foreign tax credit. So maybe this sounds complicated, it really isn’t. Your tax preparer can certainly handle it using the forms that your brokerage will provide, and obviously TurboTax is handling a very well automatically. I’d never had to fill out this form by hand or anything like that.

WCI: All right, our next question comes in from Mike by email. “Thank you for all you do. I have your books. I’m a fan of your podcast and blogs.” That’s very kind of you, Mike. “My wife is a physician. I’m a stay-at-home dad who handles the finances. I’ve been working on our investment policy statement.” That’s great. I think everybody needs one of those.

WCI: “It occurred to me that it might be wise to have a document that leaves instructions regarding what to do should she survive me. Of course, we have wills in place, but other than them stipulating that everything goes to her or me as she passes first, there are no real specifics. My suggestion is, it might be beneficial for your readers or listeners if you had something available that spoke to the priority of actions to be taken should either the primary or the non-primary earner pass away. I realized the answer is case specific, but was wondering if some general guidance could be drawn.

WCI: In our case, we’re about a year away from retiring all the student loans and anticipate paying off the mortgage with the debts snowball before attempting to contribute heavily towards retirement and fund our kids, three kids 529s to some degree. I have a $1 million term policy. I’d like to draw up a “If I pass document”, that provides priority for steps to be taken should my wife find herself opening a check from my term insurance company. For example, should I pay off the mortgage first or maybe not depending on the mortgage interest rate, which is fixed at 3.5%. Should I max the state tax deduction for 529? Should I lump sum the investments? We’re maxing her hospital’s 401K now, and two backdoor ROTHS, and are barely contributing the 529s for now.”

WCI: $50 per child per month, that’s actually not terrible. Okay, so the question is should you have some instructions for your spouse in the event of your death? Well, if you’re the one who handles all the finances and you never talk about it, you’re probably going to need more than instructions. You’re probably going to need a financial advisor. That’s something you ought to have in mind. You can actually send them too. Now, if you’re doing it all together, and your spouse really knows what’s going on with the finances, and he or she can take them over what you’ve been doing without hiring a professional, then instructions can be helpful. At least a plan that you’ve worked on together about what’s going to happen.

WCI: I’m actually a little more concerned about some other things here. I’m here in a young doc it sounds like with three kids and a mortgage that only has a $1 million term policy. That’s probably not enough. I think a typical doc in your situation will probably be carrying $2 or $3 million in term life insurance. The first thing I do is buy more insurance. There’s lot less for your wife, in this case, to worry about if there’s more money.

WCI: Bare in mind that a million dollars only produces according to the 4% rule about $40,000 in income a year, and that’s usually dramatically less than a physician family is living on. So, I’d bump that up to start with. Yes, I think it’s a good idea to have some sort of plan for that money when it comes in. You’re probably going to want a little bit less aggressive retirement portfolio than you have now that they’re going to be leaving off somewhat. If it was 75% stocks, maybe you want it to be 50% stocks now.

WCI: If you want some of that money to go the kids’ college funds, you can pretty much lump sum that into the 529s. You’re allowed to contribute up to $15,000 per year per kid, and that’s per spouse. You can put up to five years worth of that in. So, that’s a $150,000 per kid that you can put in all at once. You could basically, if you wanted to, just front load those educational costs if that’s your goal.

WCI: Frankly, most of it’s probably going to go towards supporting the spouse, if not for the rest of their life, at least for a period of time until they can be earning. In the case of you dying, in this case, you’re probably going to have to replace some of the functions you’re performing now as a stay-at-home dad, and that’s going to cost your spouse some money. So, it’s a good idea to have some money on that, a larger term policy on that.

WCI: You mentioned that you have a $1 million term policy. You don’t mention what your wife has on her. I hope it’s larger than a million given that she is the physician. Yeah, you want to think through all those things, whether you then go and put that money into back door ROTH IRAs, or into her 401K, or into taxable account. Obviously, you max out retirement accounts first and everything else is going to have to go into taxable account.

WCI: If you get a $2 or $3 million lump sum all at once, obviously, most of it’s going to be invested in taxable. It’s also important to keep in mind that anytime you get a lump sum of money like this, especially in an emotionally difficult time like the death of a partner, you probably shouldn’t do anything quickly. A lot of people advice, “Don’t do anything with the money for a year.” Just let it sit in a bank account, earning 2 or 2-1/2% something like that. Don’t go crazy picking new investments all at once. Give yourself a little bit of time to mourn first. I think those are the main considerations there.

WCI: Apologies to those of you watching this on Facebook live. We’re obviously having technical difficulties. Facebook keeps dropping this connection, which is a real bummer. All right, unfortunately the Facebook live is pooped out. So, I’m giving up on it after five tries, I think Facebook is just not working well today, which is unfortunate. It was a lot of fun. We’ll try doing that again later.

WCI: Our next question is, unfortunately or fortunately depending on how you want to look at it going to have to come from the SpeakPipe rather than Facebook live. This one comes from Greg, and here’s his question.

Greg: Hi, White Coat Investor. Thank you for all you do. I’m an orthopedic surgeon living in a very high cost of living and I would tell you about million dollars. I just turned 40 years old, but fortunately had no medical school loans or college loans due to HPSP scholarship and college scholarship. At this point, I’m looking to get a foothold on security and figure out when I can retire as well as what discretionary funds I can use for vacations, et cetera. I have three children aged 1, 3, and 5 and I’m looking to seek a financial advisor.

Greg: I’ve been recommended to somebody who charges 1.2% for the first 500,000 and then lower as you go up. There’s a cap of 18,000 no matter how many assets you have. Is this a reasonable structure? Should I do it myself for the Robo-advisor? I feel like I’d be better served having somebody to handle all this for me, that I can just cut a check on a regular basis, and have them distribute the money appropriately. I feel like it would be a large burden listed off my plate and I could rest easy. Is this just naïve, or is this something that you feel someone in my position should do? Thank you very much. Appreciate all of your help.

WCI: Okay. I love this question, especially because it sounds like Greg has been dictating earlier today, and is in the same mode every time he talks into the phone. Excuse the period at the end of each question, but it just goes to show that this is real. This is live. This is doctors who have real issues that we’re answering and helping with. This is your show really. I’m just sitting here giving my opinion about your life and your money. Basically, Greg is asking, should I hire an advisor charging 1.2% on the first $500,000 in assets? That’s capped at $18,000 a year.

WCI: Well, that’s certainly a little on the expensive side. You can hire lots of advisors for 1% of your assets under management or less. They often have a minimum. Now, they might require you to have $500,000 or a million dollars as a minimum, but certainly there are plenty of advisors that take doctors with less than $500,000 and charge less than 1.2% per year.

WCI: The going rate for high quality financial advice is a four-figure amount per year. That’s something between $1,000 and $10,000 a year. If you’re only paying 1, 2, 3, $4,000, I think you’re paying a fair price. If you’re paying $18,000 I think you can get just as good of advice for half the price. So, if I were hiring somebody that didn’t cap my fees until I hit $18,000, I’d either negotiate with them as my assets grew, and my fee went toward $18,000 or I would simply move on to a different advisor. I think that’s a little bit high. It’s fine to start with. Obviously, if you only have a $100,000 and you’re paying 1.2%, that’s only 1200 bucks a year. That’s a good deal for financial advice, but $18,000 is a little bit on the high side.

WCI: I think you’re looking for good advice at a fair price. I keep a list of recommended advisors on the White Coat Investor website. You can find that under the recommended tab that then says, “Best financial advisors.” We’ve just rebooted that page, revamped it, and there are all kinds of videos on there, and other great resources for you to really get to know these advisors before you reach out to them. I can recommend everybody on that list. They all charge a fair price, at least a certain amount of assets, and give good advice. So, that’s what I’d recommend you do if you feel like you need an advisor.

WCI: I certainly don’t feel bad about it. I think probably 80% of doctors want and need a good financial advisor. If that’s not something you want to do, and you don’t want to spend your time doing it, it can be outsourced. It’s going to cost you several thousand dollars a year, but for a doc making several hundred thousand dollars a year, that may be a good use of your money.

WCI: All right, our next question comes from Kevin on the SpeakPipe.

Kevin: Hello. My name is Kevin, and I’m an orthodontist. Thank you Dr. Dahle for all the great content you put out for us to learn from. My question pertains to managing my parent’s money. Basically, I talk to them about all that I’ve learned, and the books I read, mostly White Coat Investor content and recommended reading, and talked to them about the 0.8% that they’re paying their financial advisor. This discussion ended with them asking me to help manage their money. While I feel completely comfortable managing my own portfolio, I don’t know much if anything about required minimum distributions and other issues that affect retirees.

Kevin: So my first question is, do you recommend potentially managing your parent’s money? The second question is, in your course, Fire Your Financial Advisor do you address managing retirees’ portfolios in required minimum distributions? Third, if you don’t address that in your course, do you have a book that you recommend for me to help tackle this? Really appreciate all that you do. Thanks so much.

WCI: Okay, so Kevin is being asked to do something that I help my parents do about 15 years ago. You’re just being asked to help them manage their money, which is a very precarious situation to be into, especially if you don’t have any clue what you’re doing. Just because you know they’ve been getting ripped off, it doesn’t mean you can do a better job than a financial advisor can. The best thing you might be able to do for them is help them get a good financial advisor. As mentioned on the previous question, it’s not that hard to find. Then go with them to make sure that they understand what they’re being told, and that the advisor is giving them good advice. That’s one of the best things you could do for your parents.

WCI: You can also help them manage their own money. That’s just the way I look at what I’m doing for my parents, right? They understand their financial plan. They have a written financial plan. They’ve been following it now for over a decade. It’s worked out very well for them. The advisor I rescued them from was charging them over 2% a year in advisory fees. The worst part and it was they were still underperforming the market by more than that 2%. It was bad advice at a bad price.

WCI: It didn’t take much of demonstrating what the difference would be in their returns, and how large your portfolio was if we just move them over to some simple basic index funds before they realized, “Oh yeah, you’re right. Let’s do that.” I helped them move it over. It’s no big deal to do a rollover here and there, and to make a few purchase orders into some mutual funds, and then rebalance that once a year.

WCI: Now, it takes me literally less than an hour a year basically rebalance at some point in the spring, and we take an RMD at some point in the fall. A required minimum distribution or an RMD is not particularly complicated. When you turn 70, it’s 3.6% on your portfolio. The percentage goes up over time, but it doesn’t necessarily mean the dollar value that we’re taking out goes up over time. It’s really not that complicated, but you do want to make sure you take out the RMD every year, because the penalty for not doing so is 50% of what you should have taken out. So, don’t leave that money in that IRA when it’s supposed to come out.

WCI: What can you do to learn more about investing in retirement? I don’t cover a lot of that in the Fire Your Financial Advisor course. I do make a few references to required minimum distributions and those sorts of things, but clearly, the course is a little bit more aimed at people at an earlier stage in their career, you know, early to mid-career. I don’t know of any really great books that focus solely on that stage of life other than James Lange’s, Retire Secure, that deals with quite a bit of stuff in the withdrawal phase, which is a little bit more complicated than the accumulation phase.

WCI: I would recommend reading that book, James Lange, Retire Secure. That should give you a great handle on a lot of issues relevant to a retiree. All right, our next question comes from Jim on the SpeakPipe.

Jim: Hello. My name is Jim and we have a three MD ophthalmology practice with three part time optometrist, probably two full-time equivalence, and we have a very busy practice with 35 employees. Our overhead unfortunately is very high at 65%. Our interest is to develop some sort of retirement plan. I was fortunate in having done this for 39 years, I have a top heavy plan in distant past and was able to accumulate significant money, which has been transferred to a ROTH.

Jim: However, my two sons, both ophthalmologists are only able to put in the minimum into a simple IRA. We have a simple IRA to the practice. We’d love to have something bigger. We’re afraid that anything like a 401K would impact our bottom line so much that would not be worthwhile. I was asking if you have any ideas of how we might structure this to allow them a better investments for the future. They would like to build a stronger tax differed retirement plan.

WCI: All right. So, Jim’s basically saying we have a simple for our optho practice and would like to save more, but are worried about putting it in a 401K. What can we do to structure this to make it better? Is basically what he’s asking. Okay, well here’s the problem, in a small practice, once you have employees, this is no longer a do-it-yourself project. You really need professional advice, and preferably from somebody who sets these up all the time. Because the truth is, for any given practice, the right plan might be a simple IRA, it might be a SEP IRA, it might be a 401K and there are several different styles of 401Ks that can be set-up for a practice. It might be no plan at all. It might be just investing in taxable account.

WCI: There’s a lot to consider here. For example, you want to look at how your employees view this money. If the employees don’t view the match you’re giving them and you’re providing them this 401K for which you’re paying the fees as a great benefit that they’re willing to give up some salary for, well, it’s just an expense to you, right? Because you still got to pay them a full salary, and you got to provide this benefit for them.

WCI: If they look at it the way they should, and hopefully they will if you provide the proper amount of education, that this is part of their salary, this 401K benefit, many match you’ve got to provide, then theoretically you can pay them less than you otherwise would, and it becomes a wash to you, or at least reduces the cost of it to you. I think you really have to look at your employees. The other thing you have to look at is how much they’re going to contribute, right? If they don’t contribute a lot, you don’t have to match a lot.

WCI: On the other hand, if they don’t contribute a lot, you may not be able to put all that much in, because there’s all this actuary rules on how much profit sharing you can put in there if your employees aren’t putting anything in. So, the best thing to do is to have a study done of your practice, the ages of each employee, the ages of the doctors, how likely they are to contribute, how much they’re going to contribute, how much they make, and then make a determination of which of these various types of plan, if any, is best for you.

WCI: So, I’ve got a few advisors on my recommended advisor page that specialize in these practice retirement plans. I recommend you call one up and ask them do a study of your practice, and make a recommendation. It’s interesting, little changes in these assumptions and the ages of your employees can completely change which plan is appropriate for you. So, get some professional help on that. Unfortunately, there’s no general guideline that I can give that tells you what’s right for you. All right, our next question comes from Alex on the SpeakPipe.

Alex: Hi, Jim. Thanks for everything that you do. I’m an attending in my second year in private practice in ophthalmology, and I’m trying to keep things simple. Thanks to your advice. I’m utilizing the 3-fund portfolio in my 401K, and I suspect this will be a reasonable part of my retirement account. However, the taxable will also be a large part, and I’d like to mirror that same 3-fund portfolio in my taxable account. However, I know that a bond fund is not particularly tax efficient. What would you recommend as a tax efficient bond fund to be placed in my taxable account?

Alex: The goal here is so that when I rebalance annually, I can limit the amount of transactions I do and just make things easier. Thanks for all your help. Bye-bye.

WCI: So Alex likes the 3-fund portfolio. The 3-fund portfolio is fine. It’s not like it’s something I recommend over everything else. As you will notice if you ever read my post called, The 150 Portfolios Better Than Yours, which I discussed the 3-fund portfolio and a 149 other great portfolios. The issue Alex is having here is that he wants to mirror his asset allocation in each investment account, and that’s not necessary. You don’t have to have the same asset allocation in your 401K as in your taxable account, as in your ROTH IRA.

WCI: Your ROTH IRA could be 100% US stocks. Your taxable account could be 100% international stocks, and you could have international stocks, US stocks, and US bonds in your 401K for instance and do all your rebalancing there. The general approach is to look at each account, and what goes well in that account. While still maintaining your desired percentages, your desired asset allocation, you put what goes best in each account in there.

WCI: For instance, in most 401Ks, there’s at least a halfway decent S&P 500 in the X fund, or total stock market fund and often a good bond fund as well. If you’re lucky, you’ll get a good international fund in there, but that’s usually the first one that doesn’t show up in a 401K if you’re trying to put together a 3-fund portfolio there. So, where would you put that? Well, you’d put in your ROTH IRA, or you’d put in your taxable account, and look at all of your accounts as one big portfolio, and just make sure you have your overall asset allocation when you look at all the accounts together, rather than trying to make each account look exactly alike.

WCI: So, what tax efficient bond fund can you use in your taxable account? The one I use is the Vanguard Intermediate tax exempt bond fund. I like that one, because it’s not too long of a duration like the long-term. It’s not too short of a duration like the short-term. It’s intermediate. It’s obviously tax exempt, because it invests only in muni bonds. If you’re going to hold bonds in taxable as a high-income professional, you’ll usually want muni bonds.

WCI: So, that’s a good bond fund for that. There are obviously other tax exempt bond funds, pretty much all of the ones from Vanguard are quite good, and I wouldn’t have any problems about using any of them in a taxable account. How should you do rebalancing? In general, try to avoid selling things with a gain in a taxable account. If you have a loss, obviously sell that anytime you send a taxable account. You’re basically tax loss harvesting that, but in general you try to do your rebalancing inside your tax protected accounts like your 401K or ROTH IRA.

WCI: Okay, our next question comes from Matt on the SpeakPipe.

Matt: Hi, Jim. My wife and I are both CRNAs. She’s in her late 30s, I’m in my early 40s. Combined, we make a little over $500,000. We have about a million dollars in traditional retirement account savings, we are about to be debt-free by the end of the year. We’re looking at the possibility of purchasing a vacation property. The area we’re looking to purchase the vacation property in is a year round resort area, that’s pretty recession resistant. However, it is a plane flight from our house, so we really like the idea of a real hands off kind of arrangement such as like one of these condo hotels.

Matt: Now, we’re not primarily doing this for income so much as to have the property, but ideally, it would be paying for itself with a rental income. Do you have any specific thoughts on condo hotels, or do you see any problems with this plan as I’ve described it to you? I’d love to hear your thoughts. Thank you.

WCI: Matt’s part of a two CRNA family. They’re almost debt-free and they’re considering buying a vacation property in resort area. These are not great investments. The reason why is you’re mixing work and pleasure, right? You’re trying to get an investment, but you also are looking at a property that you actually want to use, and that’s the main reason you’re borrowing it. You don’t actually look at it as an investment when you buy it, you’re looking at it to use it. You’re buying it like a consumption item, and then trying to treat it kind of like an investment. It often doesn’t work out well.

WCI: When you’re looking at investment real estate, you really want something where the numbers were. The numbers are what you care about. You want something that’s going to appreciate. You want something that is going to cashflow well. You want something that’s going to rent easily. You want something that’s going to have low maintenance cost, all these things that you care about when you’re buying an investment. They’re totally different from when you’re buying something that you’re actually going to use.

WCI: I would be hesitant to do something like this in the first place, right? I mean, the alternative is go rent a place every time you go out there. It’s not that big a deal, right? People are afraid to do it, and so they end up buying time shares, and they end up buying second homes. Every time they go out there, they got to mow the lawn, and they got to do repairs. That’s not my idea of a vacation. I don’t want to go up someplace that I got to do all kinds of repairs on.

WCI: In general, they say it takes 12 weeks a year in a second home before buying it works out better than just renting it. Most people are not spending 12 weeks on vacation in a year much less in one place. I think most people probably shouldn’t be buying second homes unless they just have all kinds of money and want to fritter it away, right? If you can afford it as a consumption item, knock yourself out. It’s like driving a Tesla or anything else. I’ll get me some hate mail from Tesla drivers like usual, but the truth is we all buy luxuries. If we can afford it, it’s fine, buy the luxury. Enjoy it, but don’t think this is going to be some awesome investment, especially if it’s a plane flight away.

WCI: If I was going to invest in direct real estate again, which I probably am not, I want it to be something I can drive by in 10 minutes and take a look at. Doing it across the state or in another state is just too much of a pain. What do I think of condo hotels? The benefit of it is at least you can pay somebody else to maintain the grounds, and maybe there’s somebody else keeping an eye on the building, and there’s a few less hassles. You don’t have to do as much maintenance when you go there on vacation.

WCI: Boy, I started thinking about condo hotels and vacation property, it sure sounds like a timeshare to me. I don’t think I want to be in there with a bunch of other timeshare owners for instance. I’m not a huge fan. If that’s the only way you can go on vacation there, and it’s just someplace you love going, and you can afford to do it, okay fine. I think I’d probably avoid doing that thing given the opportunity. All right, the next question comes from an anonymous asker.

anonymous: Hi, Jim. I’m a married W2 physician with single income. My spouse and I are extremely aggressive savers. We maximize our backdoor ROTH IRAs, and our HSA, and we invest heavily in the tax worker’s account using Vanguard Index Funds. My question involves to make a backdoor ROTH, and whether it makes sense to make after tax contributions when we’re very deep in the 36% married filing jointly marginal bracket. We take the standard deduction. My employer providers a 401K profit sharing contribution of 37,000 each year.

Anonymous: I can elect to take the profit sharing this taxable income, but I don’t. I invest that in the 401K. I have the ability to do a mega backdoor ROTH conversion, but I am not doing so, because intuitively, it seems like a bad idea from a current tax opportunity cost perspective, but I’m not sure if my gut feeling is correct. I can see why someone who does not receive profit sharing contributions would want to do a mega backdoor ROTH by making after tax contributions followed by an immediate in search distribution to a rollover ROTH IRA.
Anonymous: For the rest of us, over the course of investing lifetime, does it ever make sense to take the profit sharing this taxable income, and then do a mega backdoor ROTH? Thanks for your time.

WCI: All right. So, this is a rather complex question actually from a super saver. He’s basically asking, does a mega backdoor ROTH IRA makes sense for us in the 35% bracket, or should he do the $37,000 profit sharing contribution? If you have no idea what we’re talking about, a mega backdoor ROTH IRA is for somebody who can put a whole bunch of after tax money, not ROTH money, but after tax money into their 401K. Most of the time, that means you’re self-employed, but sometimes employer 401Ks will allow this.

WCI: In general, people do it because they’re not allowed, they don’t get a match that takes them all the way up to the $56,000 limit. So, if the employer allows them to put an even more money, and allows them to convert that to a ROTH IRA either within the plan or by taking it out of the plan into a separate ROTH IRA, then it can make a lot of sense. In this case however, the doc is wondering if it makes sense basically to make more ROTH contributions instead of tax differed contributions.

WCI: This is really the same old, same old question of whether you make ROTH 401K contributions, or whether you make tax differed 401K contributions. In general, during your peak earnings years, the rule of thumb is to use tax differed contributions. Obviously, one of the exceptions to that is if you’re a super saver. If you’re going to have some $10 portfolio in retirement, and you’re in the 24% bracket now, it probably makes sense for you to be making ROTH contributions.

WCI: So how much of a super saver you have to be to be a super saver? I actually got a blog post coming up on this in the next few months. It should actually put some numbers to it and make the decision a little bit easier. In this case, I think you’re probably not there yet. I think I’d just do the tax differed profit sharing contribution in this situation, at least until I had a tax differed account that was $2 or $3 million, which is likely still a few years away for these super savers.

WCI: Katie and I are actually doing mega backdoor ROTH IRA contributions this year, but we’re doing it for a very specific reason, because of the 199A deduction, which would not apply to this doctor’s case, because he is an employee. So, we’ll do that just because instead of comparing it to a 37% tax bracket that we’re in right now, we’re really only getting a deduction of about 29% on it. That’s not nearly as attractive I’d rather do the mega backdoor ROTH IRA contributions than take a tax differed contribution at only 29%.
WCI: All right, our next question comes from Parker.

Parker: Hi, Dr. Dahle. My name is Parker. I’m a general surgeon in Texas, about three years out of training. My question for you is about factor investing. After listening to the most recent podcast with Allan Roth, it seems that he’s currently not a big fan of this small value tilt. I currently am doing a small value tilt, grab about 5% of my total portfolio in a small value index fund. I just want to know what your thoughts are, if this is a fad that has come and gone, or if we should continue factor investing. Note, I’m 34 years old and plan on holding this for about 30 years for long-term outlook, but just want to get your thoughts on that. Thanks again for everything you do. Look forward to your answer.

WCI: Okay. Parker’s talking about factor investing, so we’re talking about tilting the portfolio to things like small in value. This was super popular about 10 years ago, and that’s because small in value stocks had outperformed not only over the long run since 1927, which is about as long as our dataset is when it comes to the publicly traded markets. In the recent past at that point, small value had really outperformed large and growth stocks. That is not the case today.

WCI: Over the last five or ten years, large growth has outperformed small value. A lot of those people that have a small value tilt including myself have started to go, “Man, is this really worth it? Is this really a good idea? Should I stick with this, or should I bale out of my plan and go do a more traditional large growth focused investing strategy” such as buying a simple total market fund like a 3-fund portfolio.

WCI: So, there’s no surprise to see people doubting it given the performance recently. We all tend to chase past performance, especially recent past performance. You want to be careful that you’re not just baling out, because performance has been bad in the last few years, right? You expect even if small value stocks outperform the long run, 20, 30, 40, 50 years, you expect there to be periods of time, a five, or 10 or even 20 years, or small value does not outperform the overall market.

WCI: You expect that to happen. The question is, is this just one of those periods of under performance, and in the long run you’re still going to be better off with the small value tilt, or where we just data mining to start with. Is small value really not going to provide higher returns in the long run? Is it really not riskier to invest in small stocks and in value stocks? Thus they provide an additional premium in the long run.

WCI: I think obviously, the jury’s still out, and we’ve only got a hundred years of data. It’s just not that large of a dataset. I think that it is likely that in the long run that will small stocks and value stocks are riskier than their large growth compatriots, and that they will likely outperform large growth over the long run? I’m talking decades as the long run. I continue to maintain a small value tilt. I view this as one of those periods of time that I knew would happen, where small value would underperform large and growth.

WCI: My tilt was actually larger than Parker’s. I have about 15% of my portfolio in small value stocks. So obviously, I believe in it. I don’t have 50% of my portfolio in there, but I do have a larger tilt than you do. If you thought it was a good idea for the long run five years ago, I think you ought to stick with it. If you can’t stick with it, well, I guess you might as well bale out now. You might just realize you might be buying high and selling low with regards to that asset class.

WCI: Okay our next question comes from Amy on the SpeakPipe.

Amy: I work as a solo private practice urologist. I am working to move my current 401K to Vanguard after becoming an avid WCI follower. Last year, I was able to contribute the max of $55,000 to my 401K, plus I had to contribute a total of $5,315 to my two employees’ 401K through safe harbor, profit share, and match contribution. This year, the TPA of my plan offered a cash balance plan on top of the existing 401K where I could contribute a total of a $116,000 annually. In order for this to happen, I would have to increase employee contributions to total $9,734.

Amy: Additionally, the 401K cash balance plan management fees will increase to 5,300 from 1,960 last year. The TPA explains that the 401K cash balance plan will allow for 2019 year tax reduction for me of just over $40,000. In October, I have a third employee who will be eligible for the plan I choose, which will increase employee contributions I pay, and slightly increase the plan management fees. I feel like I’ll be paying out even more in employee contributions and fees if I choose a cash balance plan. I do like the idea of more tax differed money.

Amy: Is it worth it to do the cash balance plan on top of the 401K or just use a taxable account after I max out my 401K in ROTH? Thank you for all that you do.

WCI: She’s asking, I’m trying to move my practice 401K to Vanguard. Should I pay my employees more in order to do a defined benefit plan? This is a lot like the question from the ophthalmology group earlier of when it’s worth it to pay the extra fees, and the extra match money, and the extra profit sharing et cetera to your employees in order to be able to tax differ more money for yourself. What you got to keep in mind is you can’t just look at the tax deduction you get this year. Just because you saved $40,000 in taxes this year, that’s not necessarily worth paying $35,000 in fees in match for, because some of those taxes you’re going to pay back in the future.

WCI: You have to look at the difference in what you are paying in taxes now versus later, and the time value of that, as well as the value of the tax differed growth in that account, as well as what your employees think about having this benefit available to them, and how much they view that as a big benefit if they’re willing not be paid as much for. You have to look at all of that together, and make a decision as to whether it’s worth it.

WCI: When you’re starting to talk about paying 10 or $15,000 in fees to get a $40,000 tax deduction of which in reality is probably only a $20,000 tax deduction, because you eventually do have to pay taxes on that money, then I start wondering if that’s really worth it, and if I should be investing in a taxable account instead. There’s no necessarily a right answer there as to whether to put it in a defined benefit plan or not. A lot of it comes down to a study of your practice, and how much you’re going to have to pay in additional fees, and additional match for the employees in order to get that deduction and that additional asset reduction for yourself.

WCI: No great formula there, but certainly as the fees get higher, you really got to take a closer look at whether that’s really worth it to you. Remember, the goal is not to pay the least amount in taxes, it’s to have the most available after the taxes are paid. Okay, this question comes from Nick on SpeakPipe.

Nick: Hi, Dr. Dahle. My name is Nick. I’m a physician in a Midwestern City. I have a private practice, but in addition I do medical legal consulting. After listening to your podcast and reading your blog, I obtained an employer identification number, so I can open an individual 401K. Thus far, my W9 for my side business is under my name, and my social security number. Must I begin my employer contributions from now July of this year and move forward after changing my W9 to my new employer identification number and contribute only on future earnings under this W9, or can I catch up on my contributions from the first six months of the year even though the agreement at that point was under my name and my social security number? Thanks a lot.

WCI: Nick is asking, can I only contribute to an I-401K with new money after getting an EIN? No, you should be able to use all the money you earned this year for a couple of reasons. One, nobody’s looking that closely, okay? So just report it all under the EIN when you file your schedule C at the end of the year, and it’ll be fine. Nobody’s going to have a big problem with this. You reported all the income, you paid all the tax you’re due, it’s not a big deal.

WCI: Second, if you were going to report there’s two separate businesses, two schedule Cs, one for your business that was in your name, and one for your business that’s in your new business with an EIN, it’s not going to be that big of a deal, because they’re basically related businesses. You got to look at all the income together when it comes to doing a retirement plan anyway. It’s not like you get a retirement plan for each one, so I would use all the income from a year, obviously make sure the tax paperwork is in order when you do that. Also, another question on that from Nick.

Nick: Hi, Dr. Dahle. I am a physician in the Midwestern City, and I have a child with special needs. My wife and I have a 529 able account for him, and are contributing to that on a monthly basis, but I would be interested to know any recommendations you have in addition to that that apply to this kind of more unique situation. Right now, our plan would be to open a special needs trust to fund the 529 able. My understanding is that up to $100,000 in that account would not disqualify him for income-based services.

Nick: So the plan would be to put assets in his special needs trust that will in the future keep that account funded up to that $100,000 threshold but not over, so that he would not in the future lose Medicaid or any other services that would be needed. Any other ideas that you have or guidance will be appreciated. Thanks.

WCI: Okay, this is a little bit more interesting, a little bit more difficult to sort out. A 529 able account. Able accounts are like a 529 account. There is a combination of the two when you’re basically moving money from a 529 to an able account. The point of an able account is to provide for disabled child. Money in there doesn’t count toward your Medicaid funding in most states, and so you can see why some people might try doing some Medicaid planning around it. This is really no different than the people who are trying to do Medicaid planning for their impoverished parents.

WCI: Trying to get Medicaid to pay for the nursing home by hiding the assets that they have, or spending down the assets that they have or whatever. I think people come from a motive to do this, but sometimes we forget what the whole point of Medicaid is, right? It’s to provide for people that don’t have assets. If you leave your kid $3 million in life insurance, your kid has assets that he can live off of. He doesn’t need the state to provide for him. So you got to ask yourself a little bit about the ethics of doing Medicaid planning in the first place.

WCI: Obviously, the laws are there and if you’re allowed to do it, you’re allowed to do it. The place to get that advice is a Medicaid planning attorney in your state. These are all state specific laws. You want to talk to someone in your state that knows your state laws, and exactly how Medicaid rules are written in order that you can maximize those benefits. If you’ve got a large enough trust that it is able to keep that able account topped out over the years, you probably have too much assets to be getting state services anyway. So, I wouldn’t spend a lot of time doing Medicaid planning. I would just assume that you’re not going to have it if you’re leaving a seven-figure amount to your child.

WCI: All right, I got one question in on the Facebook live group before it unfortunately went kaput. Thanks a lot Facebook for ruining my day that way. The question was basically, what do I think of hard money loans? I’ve got about 5% of my portfolio invested in that. I like the fact that they’re backed by a hard asset. If the person defaults on the loan, you got to reposes the property and sell it. I prefer owning this via a fund rather than owning them myself.

WCI: The last thing I want to do is spend a bunch of time and money, and hassle trying to repossess and sell a property. I generally own this via a fund that provides diversification. I do have to pay fees for it, but for that lack of hassle, that additional diversification I think is worth it. I do like the asset class. If you look at my returns on it, I had a post published in early July. I think I’m making 8% or 9% over the years on these hard money loans. I think it’s a great asset class. I think it has low correlation with the rest of my portfolio, and I plan to continue to invest in it in the years to come.

WCI: Have you ever considered a different way of practicing medicine, whether you are burned out, need to change a pace, or want to see the world? Locum Tenens might be that option for you. Not sure where to start? Locumstory.com is the place where you can get real unbiased answers to your questions. They answer basic questions like, what is locum tenens? To more complex questions about pay ranges, taxes, various specialties, and how Locum Tenens works for PAs, and NPs. Go to whitecoatinvestor.com/locumstory and get the answers.

WCI: If you haven’t signed up for our newsletter, please do so. You can find that sign-up at whitecoatinvestor.com/free-monthly-newsletter, head up, shoulders, back, you’ve got this. We can help. We’ll see you next time on the White Coat Investor podcast.

Disclaimer: My dad, your host, Dr. Dahle is a practicing emergency physician, blogger, author, and podcaster. He is not a licensed accountant, attorney or financial advisor, so this podcast is for your entertainment and information only. It should not be considered official personalized financial advice.