Podcast #110 Show Notes: How Does the US Tax Foreign Investment Income?

med school scholarship 2019

How does the US tax foreign investment income? Foreign income is taxed as ordinary income on your US tax return. No free lunch here, sorry. The places that are paying higher interest rates are generally expected to depreciate against the dollar.  So should you invest in foreign currency trading? I don’t recommend it. I don’t think it is worth the currency fluctuation risk or the political risk. I discuss this in more detail in this episode as well as answering a lot of listener questions.

WCICON20 is coming, our second Physician Wellness and Financial Literacy Conference. I hope you’re ready for it. I hope you’re excited because we are.  Whether you are a beginning investor or whether you are a very advanced investor, there’s going to be stuff for you.

But the sign-up for it might go pretty quickly. I don’t really know how fast it’s going to go. Last time when we took 300 people at the conference, it filled in six days. By the next day I had 180 people on the waiting list. Since that time, the blog is much bigger, we have a Facebook group with 22,000 people in it, and obviously, we have the podcast going now. We’re seeing 20-25,000 downloads per episode of the podcast.  I think it’s going to fill very quickly. I recommend you get on right when registration opens and sign up for the conference. Mark your calendar for 7:00 PM Mountain Time on Monday, July 8th. That is when we’re going to open up registration.

This episode is sponsored by Set for Life Insurance. Set for Life Insurance was founded by President, Jamie K. Fleischner, CLU, ChFC, LUTCF in 1993 which she started while attending Washington University in St. Louis. They specialize in individual term life, disability and long term care insurance. They work on the client’s behalf to shop around to find the most suitable products at the most cost-effective rate. Set for Life is first and foremost a client-centric company. They listen carefully to the needs of clients. Because of the volume and exceptional reputation of Set for Life Insurance, as well as the relationships they have developed over the years, Set for Life clients have access to special services not available elsewhere in the industry. This includes special discounts, gender-neutral policies (saving women significantly), priority underwriting handling and on some occasions exceptions in the underwriting process. For more information, visit Set For Life Insurance.

How Does the US Tax Foreign Investment Income?

One listener asked if you are working in the States but have a high yield savings account abroad, how it is treated tax wise?

Some countries have higher interest rates than the United States. So why wouldn’t you take advantage of that? Why wouldn’t you take your money to India where CDs pay six or seven percent, instead of the two or three percent you can make in the US? What you have to realize is that there’s more to it than that. There’s a reason these other countries pay a higher amount. It might be that there’s more risk in that particular investment. Maybe it’s not insured by the equivalent of the FDIC.

Also, there might be higher inflation in that other country. If the inflation of that other country is eight percent and they’re paying you six percent, well, maybe that’s not working out very well for you. Keep in mind that there is a foreign exchange rate here as well. If a currency is weakening against the dollar, even if they’re paying you a higher interest rate, the end result, at least in dollars, is that you’re not coming out ahead. You have to be careful about that stuff.

But to answer his question foreign income is taxed as ordinary income on your US tax return. There’s not really a free lunch here. Bear in mind, the places that are paying higher interest rates are generally expected to depreciate against the dollar. For example, you can go to Argentina. Interest rates are 20%. Sounds awesome, right? Go buy a 20% CD at an Argentina bank. Except they had 27% inflation last year. Ukraine’s interest rates are 15%, but they had 49% inflation last year. There’s some risks there. There’s political risks and currency risks.

I’m not a huge fan of foreign currency trading. When you’re taking money and putting it overseas without any sort of a hedge, that may be a significant part of your return, both positive or negative. It seems kind of silly. If you’re looking for a safe return, i.e. you’re putting money into CDs or bonds, you’re looking for a safe low-volatility return, it seems kind of silly to me to add on the additional risks politically and of currency fluctuation. I’d be pretty careful of doing that.

US tax on foreign incomeIf you’re going to go back to India when you’re done practicing maybe you want to put some of your money there and you can invest it in those sorts of investments. But I think for the typical person who’s in the US, who’s going to stay in the US, I think this is probably not a great idea most of the time. That doesn’t mean you can’t come out ahead doing it, but I think there’s a fair bit of a gamble there to do so.

Reader and Listener Q&A

No Good Funds in Your Work Retirement Plan

What do you do if your employer retirement plan doesn’t have any funds that you want to invest in? What are your choices?

This doc does not like his 403(b), his 457, or his 401(a) options. The investment choices are crummy. They are high-cost, they’re actively managed, et cetera. Lots of people have had this issue with their retirement plans. But when you are an employee, you’re stuck with what your employer offers. You cannot go open a 401(k) elsewhere. You can’t open a solo 401(k). You can’t just use Fidelity if they’ve chosen to use Vanguard. You have to use what is offered. That’s one of the wonderful things about self-employment. Yes, you’ve got to pay for your own match. Yes, you’ have to pay all the expenses of the retirement plan, but at least you get to choose what the retirement plan is. But if you are employed you’re kind of stuck with it.

You have a few options, however.

  1. One option is to lobby your employer to change the plan. Especially when you help your employer understand that they have a fiduciary duty to you and the other employees. They will be much more likely to pay attention to this when they start realizing they can be sued for having a crappy 401(k). I would subtlety remind them of that fact. Be careful not to lose your job, of course. Remember, lots of practices have their retirement plans set up by the practice owner’s golfing buddy. Those friendships might carry more weight than their desire to keep you employed. So tread carefully when trying to get your retirement plans changed, but lots of doctors have had success at least adding some other options to the retirement accounts. If you can just get them to add a low-cost total market index fund, maybe a total bond market fund, that sort of a thing, then usually you can get the 401(k) good enough that you can use it.
  2. The second option is just to pick the least bad funds in there and build your portfolio around that. In this doctor’s case, they have an old 403(b). They can leave that there and invest it. They’ve already have some taxable retirement savings. They’ve also have a TIAA retirement account at another job. So there are some other funds. You have your backdoor Roth IRAs, and your taxable account, and your HSA, where you can choose better fund options. If all your 401(k) or your 403(b) offers is a single S&P 500 index fund that’s reasonable, put your US stock allocation into that 403(b). Put your international stocks, your bonds, your real estate, your small-value stocks, whatever else you have in your portfolio into the other accounts. Just use that account for your US stock allocation. You basically are building around the best of the bad options you have.

Real Estate Crowdfunding Nuts and Bolts

A reader asked for help understanding the internal rate of return, equity returns, how to monitor how the funds are doing, etc.

First of all, this is totally optional. If you feel overwhelmed by this, if you don’t feel like you can understand it, you don’t have to invest in it. You do not have to invest in real estate at all. You certainly don’t have to invest in crowdfunded real estate. You don’t have to invest in syndicated real estate or private real estate funds. You can buy the Vanguard REIT index fund. That’s a very simple way to get into real estate. But just realize that you shouldn’t feel anxious because you’re not doing what somebody else is doing. There’s a lot of fear of missing out in investing, but the truth is you can’t invest in everything. You can’t invest with all of the crowdfunding companies. You can’t invest in every asset class that somebody can come up with, at least not in any meaningful way. Nor would you want to because your portfolio would be so complex that nobody could keep track of it. You just become an investment collector. You’d have a collection of investments without any underlying plan. Realize that to start with.

The IRR, internal rate of return,  applies to stock market and mutual fund investing just as much as it does to real estate. If you want to learn how to calculate that, I think the best way is using Excel’s XIRR function. Here is a tutorial on how to do that.  Basically, all that does is calculate your investment return taking into account cashflow in and cashflow out. In an equity deal, as far as real estate goes, your return comes from four places. It comes from income, the rent that exceeds the amount of expenses. It comes from appreciation of the property. It comes from the pay down of the mortgage, assuming you don’t have an interest-only mortgage on it. And it comes from the tax shelter provided by depreciation. That’s basically where your return comes from in equity real estate.

The problem, or the benefit, of a syndicated real estate deal is you’re basically locked in. You have to do all your due diligence up front, and then you’re generally locked in for a period of one to 10 years. At that point, it doesn’t really do you a lot of good to monitor the fund or the investment because you can’t get out. It’s illiquid. That’s a big downside of it, unless you feel like you’re being paid a high enough return that you’re compensated for your illiquidity. There’s no real need to monitor this because you can’t do anything about it anyway. So I wouldn’t feel like you have to do that. Sometimes these deals outperform the pro forma, which is their estimate of what they’re going to earn over the time period of the deal. Sometimes they don’t. But most of the time you don’t know until the deal is complete.

If it’s a debt deal and you loaned money out for a house flipper, you’re not going to know what your return is until you get your money back a year or two from now. If it’s an equity deal, you’re not going to know what your return is until you know what the property was sold for. Early on it may not seem like it’s very high. For instance, I had this property down the street from me. I went in on a crowdfunded deal and bought a tiny chunk of it. The returns didn’t look awesome for the first two or three years. I think it was paying me five or six percent a year. Then when they sold the property I got the rest of the return. I ended up with 17% returns overall, so that’s great.

If you really want to get into crowdfunded real estate, I would recommend you start slowly with the minimum amounts. Diversify among types of deals. Diversify among platforms. With a relatively small amount of money you’ll be able to diversity well enough that you can watch for a year or two or three and kind of get a sense of how these deals work. If you read through all the memorandums that they send you, and you follow their updates, and you look around on their website, you’ll pretty quickly gain an understanding of how the deals work.

Now, that doesn’t mean you’re going to become an expert at choosing them. In fact, I still don’t feel like I’m particularly good at choosing them, although I’ve made a profit on every one of them. But honestly, I’m not particularly good at this. I’ve decided I’m moving toward funds rather than selecting the investments myself. The difficulty with that, of course, is that a lot of these funds have relatively high minimums. It might be 50,000, 100,000, 250,000, a million, 10 million, it just depends on the fund. Obviously, most of us are going to be priced out at some point from those funds.

When Should a Self Directed IRA be Considered?

A reader asked about self-directed IRAs and Roth IRAs and when they should be considered. You use them to invest in stuff that you can’t buy at a Vanguard or a Fidelity type IRA. What does that usually mean? Well, that usually means real estate, hedge funds, alternative investments, those sorts of things. Now, the benefit there is that you can invest in anything you want. The downside is there’s almost always additional fees. It might just be a few hundred dollars a year, but you might be surprised how quickly they add up. In fact, the fees are usually substantial enough that this is not worth doing for a small IRA. If your IRA is only 10- or 15- or $20,000, this is probably not worth doing. It needs to be a larger IRA.

Keep in mind that you can also do this with the solo 401(k). You can have a self-directed 401(k). In fact, when it comes to real estate, there are actually some types of taxes that you avoid in a self-directed 401(k) that you have to pay in a self-directed IRA. That is the basic reason why people use those. I actually have a self-directed individual 401(k) now. It just happens to be a feature that came along with the one I needed in order to do the Mega Backdoor Roth that I started doing this year. But I suspect I’ll probably eventually use it to do some of my real estate investing.

Understanding the REPAYE subsidy

“I have a question regarding the REPAYE program. Will the subsidy from the government get added to my loan balance if I withdraw from the program prior to completion? I am interested in the program because my effective interest rate will be about half of my current interest rate. However, I do not anticipate completing Public Service Loan Forgiveness.”

This listener is worried that if he doesn’t complete the program that he’s not going to get the subsidy. But there is no program to complete with REPAYE. When you’re in REPAYE, it lowers your payments in accordance with your income. It’s based on your family size and your income, that is it.  A lower payment is the main benefit of being in any of those income-driven repayment programs like IBR or PAYE or REPAYE. But the main benefit of REPAYE over those other programs is this interest rate subsidy.

Imagine you have a $200,000 student loan at six percent. It requires $12,000 of interest be paid every year. That’s how much interest accumulates in a year whether you pay it or not. But the way REPAYE works is instead of that $1,000 a month of interest, let’s say your payments are $200. So you pay $200, that leaves $800 of interest, and half of that is wiped out by REPAYE. The other half is added onto your loan. So instead of your loan going up by 800 bucks a month, it’s now going up by $400 a month.

Effectively, what that does is lowers your interest rate. That’s very beneficial, but you don’t have to complete the program. All you have to do is be in the program and that’s applied each month. It doesn’t get applied down the line somewhere or after you get forgiveness. It gets applied as you go along.

Wealthfront and Betterment

“I max out my 401(k) and both of our Roth IRAs. We put the rest in a taxable brokerage account with Wealthfront, which has the robo tax-loss harvesting. We only have about 100k in there now, but the more I learn, I’m tempted to just put it in Vanguard where I have more flexibility on funds and lower fees. I think I saved probably about $400 on the tax-loss harvesting this past year, maybe $500. I’m just thinking, “Hey, if I’m paying that much more in fees, is it really worth it?” I wanted to get your take on Wealthfront and Betterment.”

I get a lot of questions about Wealthfront for this reason. They really push this tax-loss harvesting thing. But the truth is you only need so much tax-loss harvesting. At a certain point, more tax-loss harvesting is not really beneficial. If you have $700,000 in taxable losses, you don’t need more tax-loss harvesting. You can only claim $3,000 a year against your ordinary income. Obviously, it’s unlimited how much you can apply against capital gains, but until you have a significant amount of capital gains, you don’t need that many losses. Be careful what you pay for just for tax-loss harvesting. I’ve found being at Vanguard I can do plenty of tax-loss harvesting for my tax-loss needs.

But what’s my take on Wealthfront and Betterment? Well, these are good in that they put you into a reasonable portfolio for a relatively low price. I think Betterment is significantly lower than Wealthfront. But I think the niche for whom this is the right way to go is actually pretty small.  I don’t think it’s a very big jump to go from using Wealthfront or Betterment to just doing it yourself. I think there’s a lot of people that just need more help than they’re going to get from Wealthfront and Betterment. For instance, these guys aren’t going to manage your 401(k). If you have a 403(b) and a 457(b) and a 401(a), and you have a taxable account, and a couple of Roth IRAs, and some 529s, well, what are you going to do with those other accounts?

All that Wealthfront and Betterment are going to manage are your IRAs and your taxable accounts. Who’s going to manage those other accounts? If you can manage them yourself, why can’t you just do the IRA and the taxable account? If you need a financial advisor to help you manage those accounts, well, why don’t you just have that person also do the IRAs and the taxable accounts? So I think the actual niche for whom these make sense is pretty small. Maybe a resident that only has one single retirement account it makes sense to have that at Betterment. Obviously, you’re not going to get any tax-loss harvesting benefits there. But I just don’t think there’s a big niche for whom these are the right things to do.

I think that’s not necessarily the case for the general public. I think a lot higher percentage of the general public can use these financial services a lot more profitably than a typical doctor can. I just don’t think they work all that great for high income earners.

Traditional TSP vs Roth TSP

A listener who is a VA doc is wondering whether to do the Roth or the traditional TSP. He is in the 35% tax bracket, with a high state tax at 10%, expecting a pension and maxing out everything else.  The general rule is if you’re in a relatively low-income year, you’re a resident, or you’re a resident for half the year, or you’re in fellowship, or you took a sabbatical, or you’re going part-time, or you took a bunch of maternity leave or whatever, that’s a good year to do Roth contributions. Most of the time in your peak earnings years, you want to be doing tax-deferred contributions. That’s the general rule.

What are exceptions to the general rule is really what we’re looking at here. Is this doctor an exception? He probably is, for a couple of reasons.

  1. He saves a lot of money it sounds like, maxing out all the tax advantage retirement savings.
  2. The second reason is there is a pension. Remember, the reason why you do tax-deferred during your peak earnings years is when you pull that money out you can use it to fill up the tax brackets. I think this year the standard deduction for a married couple is $24,400. If your only taxable income is what you’re pulling out of your tax-deferred retirement accounts, the first 24,400 comes out totally tax-free. The next 19,000 or so comes out at 10%. The next $50,000 comes out at 12%. The next $75,000 comes out at 24%.  If you’re putting the money in and saving 35% or 37%, you can take a big chunk of the money out later in these lower tax brackets. But he will have those lower brackets filled by social security and the pension.

People with a pension to fill those lower tax brackets or lots of rental income or super savers should consider doing Roth 401(k) contributions even in their peak earnings years. The more you have saved, the less beneficial a tax-deferred account is going to be, and the more beneficial a Roth or tax-free account is going to be.

 

Finances in Training

insurance score

A premed student asks, “do I need to do anything other than try to minimize my debt burden while in training? I often hear of M4s after they match, talking about buying homes instead of renting, refinancing loans, getting life insurance, etc, Does this apply to me?”

His main focus needs to be on minimizing debt. The other thing to worry about is what specialty you’re going to choose. It’ll obviously have a dramatic impact on your finances whether you decide to be a family practitioner or a plastic surgeon. That’s another big area where a medical student can have a big impact on their future finances. But for the most part, there’s not a lot you can do in medical school. Nobody’s going to get rich based on what they did in medical school.

For the most part, that’s true during residency as well. It’s really about what you do with that attending income the first few years. I think the very best thing you can do is get a financial education foundation under you, become financially literate during medical school and especially residency, and have a written investment plan for those first 12 paychecks as you come out of residency. That’s probably way more important than anything you do during medical school or residency.

Do you need to buy a home? No, you don’t need to buy a home in med school or residency. The truth is you probably won’t make money on it. There’s a pretty decent chance you’ll lose money on it. It’s mostly just going to be a distraction financially from you. It doesn’t mean you can’t come out ahead. Obviously, in a real estate boom, you’re going to come out ahead, even if you only own for two or three or four years. But on average, most of the time, you need to own something three, four, five plus years just to break even on it due to the high transaction costs. Wait until your professional and personal situations are a little bit more stable to buy a home.

Should you refinance your loans? When you come out of medical school you might as well refinance all your private loans. No reason not to as an intern because they’re not going to be eligible for the income-driven repayment programs and they’re not going to be eligible for Public Service Loan Forgiveness. You might as well get them refinanced to a lower rate. There are a couple of companies that have a resident refinancing product. They basically limit you to $100 per month payments.

You want to be a little bit more careful as to whether you refinance your federal loans. You don’t want to refinance them if you need the income-drive repayment protections, these lower payments. Although you can still get those $100 a month payments, which aren’t all that much different. If you are going to be collecting a significant REPAYE subsidy, you don’t want to refinance those federal loans as an intern. If your effective rate after the subsidy is lower than what you can refinance to, obviously you don’t want to refinance. Then, of course, if you’re going for Public Service Loan Forgiveness, as soon as you refinance your loans you’re turning federal loans into private loans, and you are no longer going to be able to get those forgiven in the Public Service Loan Forgiveness program. Now, given the trouble people seem to be having with that program, I don’t blame you for bailing out of it as soon as you can. But if you’re still trying to keep your options open, don’t refinance your federal loans until you’re sure that you’re ready to close that door.

He also asked about buying insurance. You should buy insurance if you need it. If someone else is depending on your income, you need term life insurance. It’s a good idea to buy disability insurance. Should you buy it as a med student? I don’t know. That might be a little bit early. There are some med schools that offer it. I think there’s at least one that even requires it. But for the most part, people buy this as they start residency. If you don’t have it by the end of residency you’re kind of behind the game. But I think it’s probably reasonable to wait until you’re an intern before you buy it. I mean you’re not even going to have an income before that.

You’re going to want to maintain some sort of health insurance coverage. If you have an expensive property you’re going to want to insure that. Of course, liability insurance. Your malpractice insurance is usually taken care of by your medical school or residency, but at a certain point, you need to add on personal liability coverage, an umbrella policy, on top of your auto and homeowners policy.

15 Year Mortgage vs a 30 Year Mortgage

The classic 15- versus 30-year mortgage question. This really comes down to whether you want to borrow to invest. That is really the question. Do you want to drag out your debt as long as you can because it’s at a relatively low interest rate, and hope you’re earning more on your investments than you’re paying in debt? Obviously, that’s not guaranteed. If you adjust for risk, maybe it doesn’t look quite as favorable as you think it might at first glance. Personally, one of our goals was to pay off our house and pay it off relatively early. One nice thing about a 15-year mortgage is, at a minimum, it’s gone in 15 years.

Given how late doctors start their careers, I think that’s about the time that you’re going to be sending your kids to college. It’s nice to take one big expense out of the budget about the time that another big expense comes into the budget. I think that’s pretty helpful. The other nice thing about a 15-year mortgage is it is a  little bit of mandatory savings.  You force yourself to build some wealth rather than fritter away all your money. Behaviorally, I think it’s more difficult to borrow and invest than a lot of people make it sound. I think a lot of people just borrow and spend, rather than borrowing and invest. Plus you get a lower interest rate on a 15-year mortgage than you do on a 30-year mortgage.

What a lot of people end up doing though, is they get a 30-year mortgage because they just can’t afford the 15-year mortgage. That’s because they bought too much house. I think if you’re in that situation, maybe you ought to be looking at how much house you’re buying.

Ending

Remember to mark your calendar for 7:00 PM Mountain Time on Monday, July 8th. That is when we’re going to open up WCICon20 registration.

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 is your host, Dr. Jim Dahle.

WCI: This is White Coat Investor Podcast number 110: Foreign Interest Taxation and Other Questions. This episode is sponsored by Set for Life Insurance. Set for Life Insurance was founded by President Jamie K. Fleischner, CLU, ChFC, LUTCF, in 1993, which she started while attending Washington University in St. Louis. They specialize in individual term life, disability and long-term care insurance. They work on the clients’ behalf to shop around to find the most suitable products at the most cost effective rate. For more information visit SetForLifeInsurance.com.

WCI: Thanks for what you do. Medicine isn’t easy work. There’s no doubt about it. You go to work and sometimes you have to give terrible news. Sometimes you have to deal with uncertainty. Sometimes you have to deal with difficult family members, difficult patients, difficult situations, difficult consultants. It’s not an easy way to make money. So if nobody’s said thank you to you today, I wanted to be sure that you heard it.

WCI: WCICON20 is coming. I hope you’re ready for it. I hope you’re excited. We’re excited about it. We’ve got an awesome line-up. We got a ton of stars coming. There’s going to be 27 hours of content, including some big names you might have heard of like Rick Ferri and Morgan Housel, Phil DeMuth, Paul Merriman, Harry Sit, and just about anybody you can think of that has any sort of an audience in physician financial topics. Whether it’s a blog or a Facebook group or a podcast, those folks are all going to be there. It’s going to be awesome. We’re going to have panel discussions, we’re going to have some great presentations, and the networking is going to be fantastic. Whether you are a beginning investor, whether you are a very advanced investor, there’s going to be stuff for you.

WCI: But the sign-up for it might go pretty quickly. I don’t really know how fast it’s going to go. Last time, a couple of years ago, when we took 300 people at the conference, it filled in six days. By the next day, I had 180 people on the waiting list. Since that time, the blog is much bigger, we have a Facebook group with 22,000 people in it, and obviously, we have the podcast going now. We’re seeing 20- or 25,000 downloads per episode of the podcast. I think this is going to fill and I think it’s going to fill very quickly. I don’t know whether that’s going to happen in weeks, or days, or hours, or maybe minutes, but it’s going to fill pretty quickly.

WCI: I recommend you get on right when registration opens and sign up for the conference. That is going to be at 7:00 PM Mountain Time on Monday, July 8th. So 6:00 on the West Coast, 9:00 on the East Coast, that’s when we’re going to open it up. Hopefully, it doesn’t all fill in 12 minutes. I’ll really feel bad if that happens because that’ll mean a lot of people that want to come aren’t able to come. But I wouldn’t be surprised at all if it fills in the first day or two. So be sure to put that reminder in your phone so you can remember to sign up for the conference if you would like to come. It’s going to be really awesome.

WCI: If you haven’t checked out the subreddit on Reddit, we have a White Coat Investors subreddit. We also have on the White Coat Investors site a forum. These are great places to ask questions, especially if you like asking anonymous questions. We have requests to ask anonymous questions in the Facebook group two or three or four times a day. We publish those and we post them for you, but it’s really hard to have a back-and-forth with the person asking the question when they’re trying to stay anonymous, and they’re using your name like you are on Facebook. So if you’d like to have that type of anonymous interaction, I’d recommend you go over to the White Coat Investor forum. In a lot of ways, it’s an easier format to have more detailed discussions because people aren’t just typing it in with their thumbs on their phone.

WCI: You may also want to check out the subreddit, especially if you’re already on Reddit and you like their format, the way you can vote up good content and down bad content. There’s a lot of benefits there as well. Of course, Reddit’s very non-promotional. I can’t put any ads up on Reddit like I can in the Facebook group or on the White Coat Investor forum. Be sure to check those out if you haven’t yet and you’re looking to interact with the White Coat Investors community.

WCI: Today we’re going to be going through mostly questions. I’m going to take a couple here just from my email box to start with. This doc asks, “I recently started a new physician job. The retirement accounts offered are a 403(b), a 401(a) with employer match after one year and a six-year graded vested schedule, and a 457(b). I was very excited about the opportunity to put money pre-tax into a 457 for this job. However, today I found out my job uses VALIC for retirement services. I looked through the list of available funds and it’s only about 30 total. Strangely, there is no total market index fund, no S&P index fund, and only three or so bond funds to choose from. There are a few Vanguard funds, but most are target retirement funds only. I’m not sure how much I want to slice and dice my portfolio, but I do want more choices in available funds. What options do I have to use a different company other than VALIC?

WCI: I’ve heard it’s possible to change companies but also the companies will make it difficult to do so or you may end up losing money if you have an outside company do it because the match may not work correctly. I read some investment books that say you can invoke some kind of IRS law that mandates you must be given the choice to set up your account with a different company. I’m interested in hearing your thoughts. I am 33. I have one and a half years of pre-tax savings in a TIAA retirement account from my previous job, some money invested in a taxable brokerage account at Vanguard, an old Fidelity retirement 403(b). Should I approach TIAA, Vanguard, or Fidelity to see if they can take over my 457 and 403(b) and make this easier? Is that even possible? Or am I just worrying too much about this?”

WCI: All right. I think you’ve got the gist of the question here. This doc does not like his 403(b), his 457, his 401(a). The investment choices are crummy. They are high-cost, they’re actively managed, et cetera. Lots of people have had this issue with their retirement plans. But when you are an employee, you’re stuck with what your employer offers. You cannot go open a 401(k) elsewhere. You can’t open a solo 401(k). You can’t just use Fidelity if they’ve chosen to use Vanguard. You got to use what is offered. That’s one of the wonderful things about self-employment. Yes, you’ve got to pay for your own match. Yes, you’ve got to pay all the expenses of the retirement plan, but at least you get to choose what the retirement plan is. But if you are employed you’re kind of stuck with it.

WCI: Now, you’ve got a few options, however. One option is to lobby your employer to change the plan. Especially when you help your employer understand that they have a fiduciary duty to you and the other employees, they will be much more likely to pay attention to this when they start realizing they can be sued for having a crappy 401(k). I would subtlety remind them of that fact. Be careful not to lose your job, of course. Remember, lots of practices have their retirement plans set up by the practice owner’s golfing buddy. Those friendships might carry more weight than their desire to keep you employed. So tread carefully when trying to get your retirement plans changed, but lots of doctors have had success at least adding some other options to the retirement accounts. If you can just get them to add a low-cost total market index fund, maybe a total bond market fund, that sort of a thing, then usually you can get the 401(k) good enough that you can use it.

WCI: The second option is you just pick the least bad funds in there and build your portfolio around that. In this doc’s case, they’ve got an old 403(b). They can leave that there and invest it. They’ve already got some taxable retirement savings. They’ve also got a TIAA retirement account at another job. So there’s some other funds here. You got your backdoor Roth IRAs, and your taxable account, and your HSA, you usually have something else where you can choose better fund options. If all your 401(k) or your 403(b) offers is a single S&P 500 index fund that’s reasonable, well put your US stock allocation into that 403(b). Put your international stocks, your bonds, your real estate, your small-value stocks, whatever else you have in your portfolio into the other accounts. Just use that account for your US stock allocation. You basically are building around the best of the bad options you have. Hope that’s helpful.

WCI: Our next question comes from Pat who asks, “Have you ever done a blog or podcast about crowdfunding nuts and bolts? Understanding the internal rate of return, equity returns, how to monitor how the funds are doing, et cetera? I find this stuff very overwhelming personally. Frankly, it’s not something I have the background financially to understand well. I’ve decided to get off the sidelines related to real estate. I just entered the space with a REIT through Vanguard. Likely I’ll invest through CrowdStreet or CityVest soon as well, maybe Equity Mobile based on stuff from you and Physician on Fire. I thought a primer on understanding crowdfunding returns, et cetera, would be a nice addition to your podcasts.” He has one other question that we’ll get to in a second, but let’s talk for a minute about crowdfunding.

WCI: First of all, this is totally optional. If you feel overwhelmed by this, if you don’t feel like you can understand it, you don’t have to invest in it. There are no called strikes in investing. You do not have to invest in real estate at all. You certainly don’t have to invest in crowdfunded real estate. You don’t have to invest in syndicated real estate or private real estate funds. You can buy the Vanguard REIT index fund. That’s a very simple way to get into real estate. But just realize that you shouldn’t feel anxious because you’re not doing what somebody else is doing. There’s a lot of fear of missing out in investing, but the truth is you can’t invest in everything. You can’t invest with all of the crowdfunding companies. You can’t invest in every asset class that somebody can come up with, at least not in any meaningful way. Nor would you want to because your portfolio would be so complex that nobody could keep track of it. You just become an investment collector. You’d have a collection of investments without any underlying plan. Realize that to start with.

WCI: IRR, internal rate of return, this applies to stock market and mutual fund investing just as much as it does to real estate. If you want to learn how to calculate that, I think the best way is using Excel’s XIRR function. There’s a tutorial on the blog for how to do that. Just google XIRR and White Coat Investor and it’ll pop right up, if you want to learn how to calculate those returns. But basically, all that does is calculate your investment return taking into account cashflows in and cashflows out. In an equity deal, as far as real estate goes, your return comes from four places. It comes from income, the rent in that exceeds the amount of expenses. It comes from appreciation of the property. It comes from the pay down of the mortgage, assuming you don’t have an interest-only mortgage on it. And it comes from the tax shelter provided by depreciation. That’s basically where your return comes from in equity real estate.

WCI: The problem, or the benefit, of a syndicated real estate deal is you’re basically locked in. You have to do all your due diligence up front, and then you’re generally locked in for a period of one to 10 years. At that point, it doesn’t really do you a lot of good to monitor the fund or the investment because you can’t get out. It’s illiquid. That’s a big downside of it, unless you feel like you’re being paid a high enough return that you’re being compensated for your illiquidity. There’s no real need to monitor this because you can’t do anything about it anyway. So I wouldn’t feel like you have to do that. Sometimes these deals outperform the pro forma, which is their estimate of what they’re going to earn over the time period of the deal. Sometimes they don’t. But most of the time you don’t know until the deal’s complete.

WCI: If it’s a debt deal and you loaned money out for a house flipper, you’re not going to know what your return is until you get your money back a year or two from now. If it’s an equity deal, you’re not going to know what your return is until you know what the property was sold for. Early on it may not seem like it’s very high. For instance, I had this property down the street from me. It’s actually the grocery store that we shop at. I went in on a crowdfunded deal and bought a tiny chunk of it. I don’t know, maybe I owned three parking spaces in the parking lot. I don’t know what my portion was. The returns didn’t look awesome for the first two or three years. I think it was paying me five or six percent a year or something like that. Then when they sold the property I got the rest of the return. I ended up with 17% returns overall, so that’s great.

WCI: If you really want to get into crowdfunded real estate, I would recommend you start slowly with the minimum amounts. Diversify among types of deals. Diversify among platforms. With a relatively small amount of money you’ll be able to diversity well enough that you can watch for a year or two or three and kind of get a sense of how these deals work. If you read through all the memorandums that they send you, and you follow their updates, and you look around on their website, you’ll pretty quickly gain an understanding of how the deals work.

WCI: Now, that doesn’t mean you’re going to become an expert at choosing them. In fact, I still don’t feel like I’m particularly good at choosing them, although I’ve made a profit on every one of them I’m made. But honestly, I’m not particularly good at this. I’ve decided I’m more moving toward funds than I am selecting the investments myself. The difficulty with that, of course, is that a lot of these funds have relatively high minimums. It might be 50,000, 100,000, 250,000, a million, 10 million, it just depends on the fund. Obviously, most of us are going to be priced out at some point from those funds.

WCI: Pat also had another question. “Ever consider polling your listeners related to their financial situations anonymously? You can get basic info like their age groups and how much they save for retirement in various accounts. People might enjoy that and get an idea where they stand in their retirement planning and success.” The problem with these sorts of surveys is that those doing well are much more likely to answer the survey questions. What ends up happening is you have these hyper-successful people, these super-savers talking about their savings rates of 80%, and their nest eggs of six million dollars at 40, that have just done awesome financially. It starts making the average person feel inadequate and anxious. I’m not sure it’s super helpful to compare yourself to the people willing to answer those surveys.

WCI: It’s interesting, when you look at the surveys that poll doctors across the broad spectrum, doctors are not that well-to-do financially. 25% of doctors in their 60s are not millionaires. Those are the surveys I think you’d be much better off if you want to compare yourself to docs in general, rather than one I could put together of White Coat Investor listeners, or that you might find in the Facebook group, or on the WCI forum, et cetera. Remember that investing is a single-player game. It’s just you against your goals. So don’t be concerned so much with what another doctor has or doesn’t have. Concentrate on your goals. Concentrate on your own income, your own savings rate, and your own investment returns, and how they are moving you toward your financial goals. All right. Let’s take some questions off the SpeakPipe here. Our first one comes from Riz.

Riz: Hi, Dr. Dahle. Thank you for the White Coat Investor, as it’s put our physician family on very solid financial footing. While we’re both W2, my question is more theoretical in that I’ve been curious about self-directed IRAs and Roth IRAs. Is this an investment vehicle a high-income earner should ever consider, say, if they have ownership in their own practice or another business? Is it something you could ever see yourself using? Thanks.

WCI: Okay. Riz is asking about self-directed IRAs and Roth IRAs and when they should be considered. Well, basically, you use them to invest in stuff that you can’t buy at a Vanguard or a Fidelity type IRA. What does that usually mean? Well, that usually means real estate, hedge funds, alternative investments, those sorts of things. Now, the benefit there is that you can invest in anything you want. The downside is there’s almost always additional fees. It might just be a few hundred dollars a year, but you might be surprised how quickly they add up. In fact, the fees are usually substantial enough that this is not worth doing for a small IRA. If your IRA is only 10- or 15- or $20,000, this is probably not worth doing. It needs to be a larger IRA.

WCI: Keep in mind that you can also do this with the solo 401(k). You can have a self-directed 401(k). In fact, when it comes to real estate, there are actually some types of taxes that you avoid in a self-directed 401(k) that you have to pay in a self-directed IRA. That’s the basic reason why people use those. I actually have a self-directed individual 401(k) now. It just happens to be a feature that came along with the one I needed in order to do the Mega Backdoor Roth that I started doing this year. But I suspect I’ll probably eventually use it to do some of my real estate investing. Okay. Our next question comes from Robert.

Robert: Hey, Jim. I’m a fourth-year medical student and about to begin an orthopedic surgery residency. I have a question regarding the REPAYE program. Will the subsidy from the government get added to my loan balance if I withdraw from the program prior to completion? I am interested in the program because my effective interest rate will be about half of my current interest rate. However, I do not anticipate completing Public Service Loan Forgiveness. Thanks for your help.

WCI: Okay. Robert is an MS4 who’s wondering how the REPAYE subsidy works. He’s worried that if he doesn’t complete the program that he’s not going to get the subsidy. Well, there’s no program to complete with REPAYE. When you’re in REPAYE, it lowers your payments in accordance with your income. It’s based on your family size and your income, that’s it. So it lowers your payments. That’s the main benefit of being in any of those income-driven repayment programs like IBR or PAYE or REPAYE. But the main benefit of REPAYE over those other programs is this interest rate subsidy.

WCI: Imagine you have a $200,000 student loan at six percent. That kicks off or requires $12,000 of interest be paid every year. That’s what a $200,000 loan at six percent, that’s how much interest accumulates in a year whether you pay it or not. But the way REPAYE works is instead of that $1,000 a month of interest, $12,000 a year is $1,000 a month. Let’s say your payments are $200. So you pay $200, that leaves $800 of interest, and half of that is wiped out by REPAYE. The other half is added onto your loan. So instead of your loan going up by 800 bucks a month, it’s now going up by $400 a month.

WCI: Effectively, what that does is it lowers your interest rate. That’s very beneficial, but you don’t have to complete the program. All you have to do is be in the program and that’s applied each month. It doesn’t get applied down the line somewhere or after you get REPAYE forgiveness or Public Service Loan Forgiveness. It gets applied as you go along. All right. Our next question is anonymous.

Anonymous: Hey, Jim. Thanks for your podcast and for the blog. I’ve been learning a lot. My wife and I are young. She stays at home with our two boys. I’m becoming a high-income professional in the technology industry. I max out my 401(k) and both of our Roth IRAs. We put the rest in a taxable brokerage account with Wealthfront, which has the robo tax-loss harvesting. We only have about 100k in there now, but the more I learn, I’m tempted to just put it in Vanguard where I have more flexibility on funds and lower fees. I think I saved probably about $400 on the tax-loss harvesting this past year, maybe $500. I’m just thinking, “Hey, if I’m paying that much more in fees, is it really worth it?” I wanted to get your take on Wealthfront and Betterment, and I really appreciate all you do. Thank you.

WCI: Okay. I get a lot of questions about Wealthfront for this reason. They really push this tax-loss harvesting thing. “We do tax-loss harvesting. You should go with us. We’re really good at doing it.” Well, maybe they are really good at doing it, but the truth is you only need so much tax-loss harvesting. At a certain point, more tax-loss harvesting is not really beneficial. If you’ve got $700,000 in taxable losses, you don’t need more tax-loss harvesting. You can only claim $3,000 a year against your ordinary income. Obviously, it’s unlimited how much you can apply against capital gains, but until you have a significant amount of capital gains, you don’t need that many losses. Be careful what you pay for just for tax-loss harvesting. I’ve found being at Vanguard I can do plenty of tax-loss harvesting for my tax-loss needs.

WCI: But what’s my take on Wealthfront and Betterment? Well, these are good in that they put you into a reasonable portfolio for a relatively low price. I think Betterment’s significantly lower than Wealthfront. But I think the niche for whom this is the right way to go is actually pretty small. Because I don’t think it’s a very big jump to go from using Wealthfront or Betterment to just doing it yourself. I think there’s a lot of people that just need more help than they’re going to get from Wealthfront and Betterment. For instance, these guys aren’t going to manage your 401(k). If you’ve got a 403(b) and a 457(b) and a 401(a), and you got a taxable account, and a couple of Roth IRAs, and some 529s, well, what are you going to do with those other accounts?

WCI: All that Wealthfront and Betterment are going to manage are your IRAs and your taxable accounts. Who’s going to manage those other accounts? If you can manage them yourself, why can’t you just do the IRA and the taxable account? If you need a financial advisor to help you manage those accounts, well, why don’t you just have that person also do the IRAs and the taxable accounts? So I think the actual niche for whom these make sense is pretty small. Maybe a resident that only has one single retirement account, all they have is a Roth IRA, well maybe it makes sense to have that at Betterment. Obviously, you’re not going to get any tax-loss harvesting benefits there. But I just don’t think there’s a big niche for whom these are the right things to go.

WCI: I think that’s not necessarily the case for the general public. I think a lot higher percentage of the general public can use these financial advisors, these services, a lot more profitably than a typical doctor can. I just don’t think it works all that great for doctors. Based on my experience having an affiliate partnership with them over the years, you guys all agree with me. I just don’t have a lot of conversions on those deals. You guys simply realize it’s not right for you. All right. Our next question comes from North.

North: Hi. I’m a long-time reader and this is my first time on the podcast. I’m a VA physician and my question today is whether I should be contributing to the traditional TSP or the Roth TSP. A little bit about myself, I’m married, filed jointly, in the 35% federal tax bracket, and I live in a state with 10% income tax. If I remain at my current job for 25 years, I’ll retire with FERS pension of approximately a third of my salary. My wife and I are currently maxing out all of our tax advantage retirement savings, and trying to figure out what’s best in this case. Thank you for your time.

WCI: North is a VA doc wondering whether to do the Roth or the traditional TSP, in the 35% tax bracket, with a high state tax at 10%, expecting a pension and maxing out everything else. All right. Let’s talk a little bit about Roth versus traditional 401(k). The general rule is if you’re in a relatively low-income year, you’re a resident, or you’re a resident for half the year, or you’re in fellowship, or you took a sabbatical, or you’re going part-time, or you took a bunch of maternity leave or whatever, that’s a good year to do Roth contributions. Most of the time the other years, in your peak earnings years, you want to be doing tax-deferred contributions. That’s the general rule.

WCI: What are exceptions to the general rule is really what we’re looking at here. Is North an exception? Well, North probably is, for a couple of reasons. One, North saves a lot of money it sounds like, maxing out all the tax advantage retirement savings. The second reason is there’s a pension. Because remember, the reason why you do tax-deferred during your peak earnings years is when you pull that money out you can use it to fill up the tax brackets. I think this year the standard deduction for a married couple is $24,400. If your only taxable income is what you’re pulling out of your tax-deferred retirement accounts, the first 24,400 comes out totally tax-free. The next 19,000 or so comes out at zero percent, or at 10%, sorry. The next $50,000 comes out at 12%. The next $75,000 comes out at 24%. You see? If you’re putting the money in and saving 35% or 37%, you can take a big chunk of the money out later in these lower tax brackets. You can use them to fill the brackets.

WCI: Who should not be going for that plan? Well, people who are already going to have those lower brackets filled by some other source of income. Social Security will fill some of those brackets. If you have a big pension, that’s going to fill a lot of those brackets. If you got a bunch of rental income, that’s going to fill some brackets too. Those are the people that might want to go, “Hmm. Maybe I ought to be doing the Roth 401(k) contributions, even though I’m in my peak earnings years.” The other people that should consider doing this are the super-savers. If you’re 45 and you got a five million dollar IRA, I mean that thing’s going to be huge by the time you retire. You’re a super-saver. The more you have saved, the less beneficial a tax-deferred account is going to be, and the more beneficial a Roth or tax-free account is going to be. If you’re a super-saver, you may want to consider doing Roth 401(k), or 403(b), or TSP contributions, even during your peak earnings years. All right, our next question comes from Josh.

Josh: Hi, Dr. Dahle. Thank you for everything that you do. I’m one of your listeners who hasn’t even begun medical school yet. I’ve recently decided to attend a much cheaper state school in an affordable area, as opposed to a private school in a large metropolitan area. Even more recently, I was accepted to a three-year MD program at that state school, where I’d then go on for three years of emergency medicine training at the same place, and I’d be there for six years total. My question is hopefully a simple one. Do I need to do anything other than try to minimize my debt burden while in training? I often hear of M4s after they match talking about buying homes instead of renting, refinancing loans, getting life insurance, et cetera. Does this apply to me or is the answer for the next three years still to well, “Keep it simple, stupid”? Thanks for everything.

WCI: Okay. Josh is a premed, accepted to medical school, wondering what else he should be worrying about besides minimizing debt. Well, I agree that that’s the main thing to be worrying about. The other things to worry about are what specialty you’re going to choose. It’ll obviously have a dramatic impact on your finances whether you decide to be a family practitioner or a plastic surgeon. That’s another big area where a medical student can have a big impact on their future finances. But for the most part, there’s not a lot you can do in medical school. Nobody’s going to get rich based on what they did in medical school.

WCI: For the most part, that’s true during residency as well. It’s really about your first few years out as an attending what you do with that attending income. I think the very best thing you can do is kind of get an educational foundation under you, become financially literate during medical school and especially residency, and have a written investment plan for those first 12 paychecks as you come out of residency. That’s probably way more important than anything you do during medical school or residency.

WCI: But Josh is specifically asking about some of this other stuff. “Do I need to buy a home?” No, you don’t need to buy a home in med school or residency. The truth is you probably won’t make money on it. There’s a pretty decent chance you’ll lose money on it. It’s mostly just going to be a distraction financially from you. Doesn’t mean you can’t come out ahead. Obviously, in a real estate boom you’re going to come out ahead, even if you only own for two or three or four years. But on average, most of the time, you need to own something three, four, five plus years just to break even on it due to the high transaction costs. In general, not the time of you life to be buying a home. Wait until your professional and personal situations are a little bit more stable.

WCI: Should you refinance your loans? Well, when you come out of medical school you might as well refinance all your private loans. No reason not to as an intern. Because they’re not going to be eligible for the income-driven repayment programs, they’re not going to be eligible for Public Service Loan Forgiveness. So you might as well get them refinanced to a lower rate. There’s a couple of companies that do this. SoFi has a resident product. Laurel Road has a resident product. They basically limit you to $100 per month payments. It’s kind of like an IDR that way, they give you a very affordable payment. You can afford that even as a resident. So I do recommend you refinance all your private loans as you come out.

WCI: You want to be a little bit more careful as to whether you refinance your federal loans. You don’t want to refinance them if you need the income-drive repayment protections, these lower payments. Although you can still get those $100 a month payments, which aren’t all that much different. If you are going to be collecting a significant REPAYE subsidy, you don’t want to refinance those federal loans as an intern. If your effective rate after the subsidy is lower than what you can refinance to, obviously you don’t want to refinance. Then, of course, if you’re going for Public Service Loan Forgiveness, as soon as you refinance your loans you’re turning federal loans into private loans, and you are no longer going to be able to get those forgiven in the Public Service Loan Forgiveness program. Now, given the trouble people seem to be having with that program, I don’t blame you for bailing out of it as soon as you can. But if you’re still trying to keep your options open, don’t refinance your federal loans until you’re sure that you’re ready to close that door.

WCI: He’s also asking about buying insurance. Well, I think insurance is great. You should buy insurance if you need it. If someone else is depending on your income, you need term life insurance. It’s a good idea to buy disability insurance. Should you buy it as a med student? I don’t know. That might be a little bit early. There are some med schools that offer it. I think there’s at least one that even requires it. But for the most part, people buy this as they start residency. If you don’t have it by the end of residency you’re kind of behind the game. But I think it’s probably reasonable to wait until you’re an intern before you buy it. I mean you’re not even going to have an income before that.

WCI: So yes, you do need to buy some disability insurance. You’ll eventually need to buy some term life insurance if someone else depends on you. You’re going to want to maintain some sort of health insurance coverage. If you have an expensive property you’re going to want to insure that. Of course, liability insurance. Your malpractice insurance is usually taken care of by your medical school or residency, but at a certain point, you need to add on personal liability coverage, an umbrella policy on top of your auto and homeowners policy. Hope that helps. Next question is from Omar.

Omar: Hi. This is Omar. I’m a pulmonologist. I have a very, I think, commonly asked question, whether to go with a 15-year mortgage or a 30-year mortgage. I’ve been getting two opinions. Most people are saying, “Well, in 15 years you’ll get a better rate of interest and you’ll end up paying the loan faster.” But then there’s some group of people who say, “If you go from a 30-year loan, the difference, you will end up paying less per month, although eventually, you’ll end up paying more interest. But the amount that you pay less per month, if you invest it wisely, you may overall end up making more to cover for the cost of the extra interest that you pay for a 30-year loan.” Could you throw some insight into this and how to make that calculation to know what would be the best choice? Thank you.

WCI: Okay. The classic 15- versus 30-year mortgage question. I mean this really comes down to whether you want to borrow to invest. That’s really the question. Do you want to drag out your debt as long as you can because it’s at a relatively low interest rate, and hope you’re earning more on your investments than you’re paying in debt? Obviously, that’s not guaranteed. If you adjust for risk, maybe it doesn’t look quite as favorable as you think it might at first glance. Personally, one of our goals was to pay off our house and pay it off relatively early. One nice thing about a 15-year mortgage is you know, at a minimum, it’s gone in 15 years.

WCI: Given how late doctors start their careers, I think that’s about the time that you’re going to be sending your kids to college. It’s nice to take one big expense out of the budget about the time that another big expense comes into the budget. I think that’s pretty helpful. The other nice thing about a 15-year mortgage is it’s kind of a little bit of mandatory savings that way. You kind of force yourself to build some wealth rather than fritter away all your money. Behaviorally, I think it’s more difficult to borrow and invest than a lot of people make it sound. I think a lot of people just borrow and spend, rather than borrowing and invest. Plus you get a lower interest rate on a 15-year mortgage than you do on a 30-year mortgage.

WCI: The advocates of a 30-year mortgage say, “Shoot, you got money at three or four percent. Why in the world would you pay that back early?” I can certainly understand the math behind that. I think a lot of people don’t actually invest the money, but if you do, if you’re sure you are, then I think that’s a reasonable thing to do. What a lot of people end up doing though, is they get a 30-year mortgage because they just can’t afford the 15-year mortgage. That’s because they bought too much house. I think if you’re in that situation, maybe you ought to be looking at how much house you’re buying.

WCI: Maybe you’re in the Bay Area. Maybe you’re in Washington DC. Maybe you’re in New York City and there’s just absolutely no way you can possibly make the payments on a 15-year. Well, you’ve got some bigger questions to ask yourself about whether you want to stay there, and how much wealth you want to build during your life, et cetera, before you got to tackle the 15- versus 30-year mortgage question. All right. This question from Joe is the one that we named the podcast after. He’s basically asking how does the US tax foreign income. Here’s his question.

Joe: Hey, this is Joe. I have a quick question regarding abroad or international income tax. Let’s say you are living in the States, working here, everything as per usual, and you have a high-yield saving account abroad. Let’s say at five or six percent. How is it treated tax-wise? Is there anything specific or special about it? And is it a smart idea to do that? Thank you, Dr. Dahle.

WCI: I think the strategy Joe is referring to here is that some countries have higher interest rates than the United States. So why wouldn’t you take advantage of that? Why wouldn’t you take your money to India where CDs pay six or seven percent, instead of the two or three percent you can make in the US? Now, what you’ve got to realize here is that there’s more to it than that. There’s a reason these other countries pay a higher amount. It might be that there’s more risk in that particular investment. Maybe it’s not insured by the equivalent of the FDIC.

WCI: Also, there might be higher inflation in that other country. If the inflation of that other country is eight percent and they’re paying you six percent, well, maybe that’s not working out very well for you. Keep in mind that there is a foreign exchange rate here as well. If a currency is weakening against the dollar, even if they’re paying you a higher interest rate, the end result at least in dollars is that you’re not coming out ahead. You got to be careful about that stuff.

WCI: But at any rate, to answer your question, that foreign income is taxed as ordinary income on your US tax return. There’s not really a free lunch here. Bear in mind, the places that are paying higher interest rates are generally expected to depreciate against the dollar. For example, you can go to Argentina. Interest rates are 20%. Sounds awesome, right? Go buy a 20% CD at an Argentina bank. Except they had 27% inflation last year. Ukraine’s interest rates are 15%, but they had 49% inflation last year. There’s some risks there. There’s political risks. There’s currency risks. There’s other stuff going on.

WCI: I’m not a huge fan of foreign exchange, foreign currency trading. When you’re doing this, when you’re taking money and putting it overseas without any sort of a hedge, that may be a significant part of your return, both positive or negative. It seems kind of silly. If you’re looking for a safe return, i.e. you’re putting money into CDs or bonds, you’re looking for a safe low-volatility return, it seems kind of silly to me to add on the additional risks politically and of currency fluctuation. I’d be pretty careful of doing that.

WCI: If you’re going to go back to India when you’re done practicing or you’re going to go back to Argentina or something, maybe you want to put some of your money there and you can invest it in those sorts of investments. But I think for the typical person who’s in the US, who’s going to stay in the US, I think this is probably not a great idea most of the time. That doesn’t mean you can’t come out ahead doing it, but I think there’s a fair bit of a gamble there to do so. Okay. Next question comes from Gerardo.
Gerardo: Hi. I appreciate your books and your effort. I got a question. My new advisor possible, he’s recommending that my investment be put in a Vanguard as my wishes, but all in index ETF based on something that is called CRSP index or report from Chicago. I thought on my later understanding in investment that the majority of investment be put in an index mutual fund and a little on ETFs, index ETFs. I just want to appreciate your comment of that. Anything input would be appreciated. Thank you.

WCI: Okay. I think what Gerardo’s referring to here is that their financial advisor is recommending index ETFs from Vanguard that follow the CRSP indices. This is The Center for Research in Security Prices indices. It’s based out of Chicago, as I recall. But the Vanguard total stock market fund follows a CRSP index. So this is not a concern. This doesn’t bother me at all. These are low-cost index funds that follow a reasonable index and should give you the market return. I wouldn’t worry at all about an advisor that’s recommending that sort of an investment. I think they’re probably doing a good job. They just confused you with a lot of the terminology.

WCI: All right. That’s all our questions for today. This episode was sponsored by Set for Life Insurance. Set for Life is first and foremost a client-centric company. They listen carefully to the needs of clients. Because of the volume and exceptional reputation of Set for Life Insurance, as well as the relationships they have developed over the years, Set for Life clients have access to special services not available elsewhere in the industry. This includes special discounts, gender-neutral policies, saving women significantly, priority underwriting handling, and on some occasions, exceptions in the underwriting process. For more information visit SetForLifeInsurance.com. Be sure to sign up on July 8th, 7:00 PM Mountain Time for the Physician Wellness and Financial Literary Conference. 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, and should not be considered official personalized financial advice.