Podcast #151 Show Notes: How to Pick a Charity

Choosing which charities to give to is important. It takes just as much effort to give well as it does to earn, save, invest and spend well. We all know that some charities are better than others so how do you choose a charity to give to? What should you look for in that charity? For me, the most important thing is to begin with choosing a cause that you want to support. Once you know the cause you want to to support, there are resources to identify the best charities for that cause. In this episode, we discuss how to pick a charity to donate your money to as well as using a donor-advised fund and donating shares to charity. Besides discussing charitable giving, we answer listener questions about getting disability and life insurance outside of the United States, asset location, how to balance Roth conversions against ACA subsidies, PLLC vs LLC, resources to use for budgeting, and more.

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Quote of the Day

Our quote of the day today comes from Jack Bogle,

“If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.”

If you didn’t learn that lesson in the last month, the market is going to teach it to you.

How to Pick a Charity

Giving to charities is important to my family and I. We all know that some charities are better than others so how do you choose a charity to give to? What should you look for in that charity?

For me, the most important thing is to begin with choosing a cause that you want to support. In my family, we use a scripture to guide us to what causes we think are worth supporting. The scripture reads,

“But before you seek for riches, seek ye for the kingdom of God. After you’ve obtained a hope in Christ, you shall obtain riches if you seek them.”

This is the key part.

“You will seek them for the intent to do good, to clothe the naked and to feed the hungry and to liberate the captive and administer relief to the sick and the afflicted.”

Those are the four causes we try to support with our charitable giving. We support causes that provide shelter, food, medical care and liberation. That might include our local homeless shelter, or something like Salvation Army which provides clothing. The local food pantry or the soup kitchen which obviously feed the hungry. The homeless clinic is one of our favorite things to support. It administers relief to the sick and the afflicted. You might choose something like Doctors Without Borders. We’ve given to them in the past, that would meet those criteria for us. Of course, the little bit more complicated one is liberating the captive. One of our favorite charities that we support that does that is called the Underground Railroad. They work to free people who have been sold into sex trafficking in various countries.

I’m sure your favorite charitable causes are not going to be the same as ours. Whether you want to support an environmental cause or whether you want to support the homeless in your local area or war-torn refugees or whatever you want to support, I would start with the cause. What kind of cause do you want to support? Once you have that, then go out and find the best charity to support that particular cause. In my view, the most important metric or statistic is what percentage of the donated money is used in administration and fundraising. If I’m giving them $1, I don’t want to find out that 25¢ went toward them trying to raise more money. I want it to be 5¢.

Doctors Without Borders spends about 10% of its money fundraising. I’d love to see it be half that. In fact, I hate getting charity fundraising mail in my mailbox. Once you donate to a charity, not only do you get something from them every few months, but they then sell your mailing address to a bunch of other charities and they start sending you stuff. Once they know you’re charitable, you start just having a mailbox full of this stuff. The glossy pictures are fun to look at, but that’s not where I want my money going. I want my money actually going to the people that the charity is trying to help.

So I pay a lot of attention to that number. The lower it is, the better in my view, but there are some rating organizations out there that rate charities. Some of the big well-known ones are Charity Navigator, Charity Watch and the Better Business Bureau Wise Giving Alliance. I would recommend you look up the charities you’re considering supporting, using one or more of those resources and actually find out how good they are at doing what they say they are trying to do.

We look at that each year and we also try to let the kids get involved in this process. We actually sit around the kitchen table while we choose which charities we are going to support that year. Everyone gets input into where the money goes. What the kids choose to give money to, that’s where we give money. I think that it is good for them to learn how to give at such an early age. The bottom line is it takes just as much effort to give well as it does to earn, save, invest and spend well.

Reader and Listener Q&A

International Applicability for Disability and Life Insurance

“What if I wanted to move back to my home country or a different country other than the US? Are there certain companies or brands for disability insurance or life insurance that I should be considering where, if I get disabled and I decide that I don’t want to stay in the US anymore, the company will continue to pay me while I live outside of the US? Are there international policies that I can purchase right now that are applicable across nations? Similarly, for life insurance as well, what if, after my death, my family wants to move back to, say, India or Europe or some other country, what’s the situation?”

Basically, does your disability insurance still pay if you leave the United States? Yes, it does. No problem. You just have to buy it while you’re in the United States and working in the United States. Even your Social Security Disability will pay when you leave the United States, but if you are overseas now trying to buy disability insurance, that’s going to be a bigger problem. Most companies require you to spend at least six months per year in the US to get it, but once you have it, you can do what you want.

 

Asset Location

“I’ve been investing in my employer 401(k)/403(b) for the last five years. I’ve been maxing out the retirement fund and have about $240,000 in that fund. However, I’ve only been investing in a target date fund while I was focusing mainly on paying off my student loans. Now that that is done, I’m ready to follow my investment plan and I want to invest around 80% stocks with 60% in US funds and 20% in international funds. However, my employer 401(k) only offers a total stock market fund, a bond fund and a small market cap fund in Vanguard low-expense accounts. The only international funds they offer have expense ratios of point 0.9% to 1%. My question is, should I go ahead and stick to my investment plan with those high expense ratios and invest in their foreign accounts or should I just invest in only the Vanguard funds in that account and fill up the international funds in my Roth Vanguard account/taxable accounts.”

I’ve often said to myself in the past if I was going to do this all over again, I’d just use a target date fund or a target retirement fund, a lifecycle fund, whatever you want to call it, until my portfolio hit $100,000. It’s a totally reasonable approach. It’s diversified. It’s a one-stop-shop. It automatically rebalances. It’s very convenient, but now he wants to start managing his own asset allocation, which is fine, too. That’s what I do. He wants to go 80% stocks, 60% of those in the US and 20% of those international and the rest in bonds, but he’s stuck in a 401(k) that doesn’t offer a great international option. He’s got a high-cost option in there like lots of 401(k)s do.

Should he use it or should he do something else? Well, you have a few options. One is just stick with a target date fund. It usually includes an international holding and it may even be a cheaper international holding than the one you can buy separately. For example, if you have Vanguard target retirement funds in the 401(k), you’re getting a Vanguard cost, so a low cost international fund as part of that target retirement fund. Another option is just to use the high cost one, understanding that the benefits you’re getting from the 401(k) are better than the costs and so go ahead and use it.

What most people would do in this situation is they would pick the best offerings out of the 401(k), which is often an S&P 500 index fund and some sort of reasonable cost bond fund and then put their other holdings that they desire in their asset allocation, whether it’s international stocks or small value stocks or real estate investment trusts or whatever it might be, put those in their Roth IRAs and/or taxable accounts and you just build around what’s good in the 401(k). I would probably lean toward that third option in this case.

How to Balance Roth Conversions Against ACA Subsidies

“Once we’re both retired, we’ll be living off our taxable account that has a fairly high tax basis. I, therefore, anticipate our federal taxes to be zero. I’m looking for some help to figure out how to best optimize our MAGI, taking into account ACA subsidies and Roth conversions. I understand the tradeoff is on one hand a low MAGI would qualify us for better ACA subsidies, whereas on the other hand, doing more Roth conversions would lead to lower ACA subsidies but also lower taxes later in life.”

This is a little bit of a complicated question. How to balance Roth conversions against ACA subsidies? Remember they don’t care about wealth, that’s the funny thing about your taxes as well as most of these subsidies that are based on your taxes, they don’t care how much money you have. They care about how much income you make. The way the Patient Protection Affordable Care Act subsidy works is the more money you make, the less of a subsidy you get. It’s based on your percent of the federal poverty level and your household size.

Now if that sounds familiar to you, that’s probably because that’s what your student loan payments are based on as well. The more people in your household, the lower your student loan payments, the higher your ACA subsidy. For example, if you’re making up to 133% of the federal poverty level for your household size, your expected contribution to your health insurance to your PPACA health insurance plan is about 2% of your income. That goes up to almost 10% of your income if you’re between 300% and 400% of the federal poverty level.

What’s the federal poverty level? Well, if your family size is four people, two parents, two kids, the federal poverty level is about $25,000. Up to an income of about $100,000, that’s a modified adjusted gross income, not a total income, 400% of that federal poverty level of $25,000, then you can get some sort of a subsidy. Once you get above there, you’re not going to get a subsidy. Obviously, if you’re going to FIRE on not that much money and you’re going to have a pretty low taxable income at that point, you can qualify for these subsidies. The less income you have, the higher your subsidy.

The problem is a lot of people that retire early also want to take advantage of Roth conversions. You’re now in a low tax bracket. It’s lower than you were during your peak earnings years. It’s probably even lower than what you’re going to be in retirement once you start receiving Social Security. It’s a good time normally during early retirement to do Roth conversions. The problem with Roth conversions is they generate taxable income. They increase your modified adjusted gross income and thus decrease your ACA subsidy. The more Roth conversions you do, the less you are going to be getting from the government to pay for your health insurance.

How do you balance those two factors? Well, quite frankly, if you’re down there to the point where you are getting a significant ACA subsidy, I think you ought to just hold off on the Roth conversions. Just lower that income as much as you can to maximize the ACA subsidy. Whether that’s ethical or not, you can answer that question yourself. It’s certainly the way the law is written. Even if you got $3 million or $4 million saved away, if your taxable income is only $50,000, you’re probably getting your health insurance subsidized by the government. The lower your income, the more it’s going to be subsidized.

There will likely be time later, especially if you’re retiring at 35 or 40, before you take social security at 70, to do some Roth conversions. The laws will probably change. The ACA subsidy will probably change. Something else will happen in your life and maybe you make more money and you don’t get the subsidy anymore. Well, then, you can start doing Roth conversions and that sort of a thing. It’s really difficult to really run the numbers on this without knowing exactly what tax bracket you’re going to be in every year of the rest of your life. That information is not only unknown, but it’s probably unknowable because it just depends on too much other stuff. I would lean toward getting the lower health insurance costs and put off the Roth conversions.

 

PLLC versus LLC

“My question is pertaining to PLLC, which is professional LLC, versus LLC and how that could make a difference while working through locum companies. I have a PLLC in North Carolina and it turns out that to work as a locum provider or any healthcare provider in the State of North Carolina, cannot do it through an LLC company. Now, I wanted to change my PLLC to an LLC, so that I could add my wife also to the company, as that helps from a tax standpoint, but I cannot do that since she does not have active North Carolina medical license. My question is, do you know what could be done in this situation and do you think this law applies in locum situations where the physician is working through a middle company which is the locum companies?  Since the physician works for a hospital doing locum shifts through a middle entity, does this restrict being able to change the PLLC to an LLC?”

If you’re a doctor or an attorney or similar high-income professional, in some states, you’re required to be a professional limited liability company, a PLLC. If you have to do that, if your state mandates it, do it, but legally, it’s basically the same thing. You should still be able to hire your spouse, but they may not be able to be a PLLC member. At any rate, if you really want your spouse to be a member of an LLC, you could form a second LLC where your spouse is a member and contract with it for the services that your spouse is providing.

Just remember, anytime you’re hiring your spouse that your spouse has to do real work. You can’t just make something up and say they’re doing it and you have to pay them a reasonable wage, a reasonable amount of pay in order for them to be employed. Of course, you have to do all the required paperwork. You have to file W-2s, W-3s, and I-9, prove that your spouse isn’t an illegal immigrant. You have to do all those things that you have to do for any other employee. You can’t just put your spouse on your LLC and have another retirement account.

If your spouse isn’t actually doing any work, that’s not actually legal. Make sure they’re doing some work and that you’re not dramatically overpaying them for what they’re doing. The other thing to keep in mind is that, assuming your spouse has no other work, whatever you pay them is going to be subject to payroll taxes, particularly Social Security taxes, which is fine if you’re trying to get your spouse their 40 quarters, but that often negates the benefit of another retirement account. You have to really run the numbers.

If you’re going to pay another $10,000 in social security taxes in order to put $20,000 into a retirement account, that might not be an awesome deal for you because those social security taxes are gone forever, especially if your spouse is going to be taking 50% of your benefit instead of their own benefit, you’re really not even getting any benefit for all those Social Security taxes that you’re paying, much less than Medicare taxes that you’re paying. You have to really run the numbers there to decide whether it’s worth paying additional payroll taxes in order to have the advantage of another retirement account with its tax protection and its asset protection.

Backdoor Roth IRA

“I have a question regarding backdoor Roth IRAs. I did my conversion in 2018 after I moved my IRA to my 401(k), but then realized in 2019, that I still had another IRA. At that time, I moved that IRA to the 401(k) as well and paid taxes according to their pro-rata rule in filing 2018 taxes. Now, it’s 2019 and I did some more conversion. I’m wondering if I made a mistake because I have moved the IRA with basis into my 401(k). I was wondering if you had any thoughts about that or any suggestions on what to do next. As to whether or not it matters, I’ve had one accountant tell me that it doesn’t really make a difference in the long run because if anything, you’re just going to pay taxes twice on that money and the IRS won’t care. I’ve had another accountant tell me that I may need to start thinking about doing a partial rollover from my 401(k) to remove that basis.”

Remember the process for a backdoor Roth IRA, you put money in the traditional IRA, and then, you move it all into the Roth IRA. If it makes a buck or two, while it’s in the traditional IRA, move that into the Roth IRA as well. You owe taxes on that dollar, but you won’t owe taxes on the rest of it because you didn’t get a deduction when you put the money into the traditional IRA.

What trips a lot of people up is that they forget about the pro-rata rule, meaning if you have some money sitting around in another traditional IRA, tax-deferred money or a SEP IRA or a simple IRA, you have to get rid of that by the end of the year that you do the conversion step of the backdoor Roth IRA. You either roll it in your 401(k) or you convert the whole thing to a Roth IRA and pay the taxes on. Those are really your two options, but try to do all that in the same calendar year and your paperwork will be much, much easier.

In this case, the screw up is they had an IRA with some basis in it, meaning money they did not get a tax break for when they put it in the IRA. That’s the money you want to convert to a Roth IRA tax-free, right? That’s the whole point of the backdoor Roth IRA, but instead, in this case, it was rolled into a 401(k) and the 401(k) didn’t notice because they usually don’t allow you to do that. They didn’t notice that this had basis. What you’ve done is you’ve told this 401(k) that this is all pretax money. When you take it out of the 401(k), you’re going to have to pay taxes on it again and those dollars are going to be double taxed.

You’re not really benefiting from using retirement accounts if you’re now paying taxes twice on the money you put in there. The worst-case scenario in this situation is you’re going have to pay taxes twice on that basis. The 401(k) shouldn’t have let you do it.  I don’t know if they’re going to let you reverse this. The first call I would make is to the 401(k) and I’d say, “Hey, here’s what I did. I accidentally rolled money with basis in there. Can you roll it back out? Can we just reverse this transaction?” and they may be able to help you fix it, but I wouldn’t hold my breath.

This is probably not a bad time to get the advice of a real experienced CPA or accountant.  We have some recommended tax strategists and this is probably a bad enough screw up that it’s worth getting some formal professional advice, but first, check to see if you can reverse that transaction somehow. Even if it means modifying your taxes for a year or two, it’s probably going to be worth it just to save a few thousand dollars in taxes.

 

Federal Student Loan Repayment

“I am seven years into an eight year training program and have around $200,000 in medical school debt. I’ve been making payments since day one of residency and therefore planning on going for PSLF in a couple of years. My base salary is around $70,000, but I fortunately can supplement my salary significantly with moonlighting and typically ended up with a yearly AGI around $200,000. As you know, there are two ways that my fed loan calculates monthly IDR payments. One is calculated using yearly taxable income from your previous year’s tax return and the other is calculated with a single one month snapshot of your income. I believe the latter was designed for people who have had a significant change in their income warranting a new monthly payment amount. My two questions are as follows. First, is it legally sound to pick up fewer moonlighting shifts in a given month, thus reducing that month’s income dramatically for the purposes of applying for a lower IDR loan payment for the following year? Second, even if this is legally sound, I’m curious as to your opinion on the ethics of this strategy. Should I feel obligated to recalculate my monthly payment every month if my income changes from month to month or increases substantially? You can easily see how this could quickly turn into a slippery slope.”

You’re trying to minimize your payments during residency while you’re in these income-driven repayment programs by minimizing your income. The lower your income, the lower your payments, the more that’s left to be forgiven under Public Service Loan Forgiveness. Apparently, there is a way in which you can update them during the year when you don’t have your taxes back yet when your income changes. The idea behind this was if somebody loses their job or they are forced to go quarter time or something and their income is dramatically reduced, that they can reduce their payments.

This is a mercy rule from the government program. That’s the idea behind it, but of course, like with any rule, there are unintended consequences and people start wondering, “Is there a loophole that I can work here, something I can use to get my income low, something I can use to get my subsidy higher if you’re in revised Pay As You Earn or just get my payments lower and maybe get more money forgiven in the end?” You can see why people are starting to scheme and look at these sorts of things. Question number one, is this legal? Is it legal to reduce your income this way? Use one month where he had really low income and tell them that’s what your income is, whether that’s stopping moonlighting to get your income down or whatever.

Well, here’s the guidance that comes from the program. It says if your income hasn’t changed much since you filed your last federal tax return, your monthly payments will be calculated using your adjusted gross income. If you had a significant change in income that is not reflected in your most recent tax return, i.e. you lost your job or got a large raise, you will be asked to provide documentation of your current income and your monthly payment will be calculated based on that amount. As you can see, the intention here is pretty clear. The idea is that if you lose your job, you can show that your income has gone down and you can lower this payment.

Yes, they want you to do it if you get a large raise too, but let’s be honest, most people probably aren’t doing that. What it’s asking is if you had a significant change in income that is not reflected in your most recent tax return. Now, just because you moonlight a little bit less one month and you moonlight more the next month, that’s not really a significant change in your income that’s reported on your taxes. I think maybe it’s a little bit gray, but I think this probably is not super legal to do. I think you’re pretty close to fraud here.

Obviously, the second question, is it ethical? Well, if you’re that close to fraud, it’s probably not ethical. This is not a bad time to get advice from recommended student loan experts. Now a lot of them are more willing to tread into the gray area than I am on student loans. I wouldn’t be surprised to see one or two of them actually recommending this strategy, but I’m not sure I would feel right about it.

If you’re making $200,000 as a trainee and you only have $200,000 in student loans and it’s almost all going to be forgiven anyway, do you really need to squeak out a little more forgiveness out of that? Maybe not. I have some ethical problems with that one. Is it legal? It may very well be.

Resources to Use for Budgeting

“I’m a fee-only financial planner. One thing that I have found a lot of younger physicians struggle with is getting a budget or spending plan together. My question to you is, one, how much would you expect a financial planner to dive into a budget with a client? Then two, what resources do you recommend or have had success with as far as budgeting goes?”

What does the client need? If the client is not bringing new money each month to invest and save, if they’re not paying down their student loans rapidly, if they’re just spending up the wazoo, then this is what they need. As their financial advisor or financial planner, you have to meet them where they’re at. Yes, I think it’s totally appropriate for a financial planner to get into the nitty-gritty of your budget if they need to.

On the other hand, if you walk in there and you have a 20% savings rate, and you’re like, “well, here’s the money. I need to figure out what to do with it each month.” Maybe that financial advisor doesn’t need to get into your budget at all. Clearly, you’ve learned how to budget, you’re living on less than you earn. I think it depends on the client, but I suspect that is a real value add for many financial advisors, even for high-income professionals like doctors. If you’re having trouble controlling your spending on your own, but you can do it with the help of an advisor, they’re adding value to your life. I think it depends on the client to answer the question.

The second question is what are the best resources to use? Well, it just depends on the person. Some people do just fine with paper and pencil and an envelope system for their budgeting. They write all their expenses down at the beginning of the month on a piece of paper. They withdraw cash from the bank account, put it in envelopes, and live out of the envelopes. When the envelopes are empty, you can no longer buy that stuff until the end of the month. Maybe that’s all the help you need.

I think most people at least use a spreadsheet, Google Sheets or Microsoft Excel, and have a budget they can copy and paste to the next month. It makes it a little bit easier because it’ll do the math for you, and you can just copy it into the next month. That’s how Katie and I have always budgeted. There are some fancy new apps out there that you can use to help you with your budget. You’ve probably heard of Mint. You probably heard of Dave Ramsey’s Every Dollar. That’s free. You Need A Budget, it charges just a few bucks a month, but it’s also a very popular one among my readers and listeners. Whatever works well for you.

The bottom line is if you are not saving enough money to reach your goals, you need the budget and whatever it takes for you to budget, whether it’s getting an advisor to help you, whether it’s using an app, or whether it’s just scheduling a meeting every month with your significant other, whatever it is, you have to do it. Otherwise, you’re going to wake up in 20 years and you’re not going to have anything saved for retirement, You’re still going to have student loans and you’re going to be in a world of hurt.

Figure it out. Start budgeting unless you’re already an expert budgeter and then you can probably take off the training wheels and just track your spending or just take money off the top every month and save that.

Donor Advised Funds

“My question relates to donor-advised funds. I’m trying to see if I’m understanding this correctly. With a donor-advised fund, if I have, say, $10,000 to donate to my church, could I transfer $10,000 in appreciated shares from my taxable account at Vanguard into a new donor-advised fund, thus flushing out the capital gains and receiving the charitable donation tax write-off and then also on the same day purchase $10,000 in new identical funds in the same taxable account at the new higher cost basis? In essence, I’d end with roughly the same overall investments in my taxable account with the new portion at the higher cost basis, and then, I’d still get the tax write-off for the donation. I then cap it all off by transferring the funds from the donor-advised fund to my church. Am I looking at this correctly? Is that how it works? “

This idea gets people confused because sometimes they confuse donating to charity with tax-loss harvesting and it’s probably my fault because I talk about them together all the time. This makes my taxable account very, very tax efficient because I tax-loss harvest all the losses and I donated all the appreciated shares to charity because we donate substantial amounts to charity each year. This is really a pretty slick way to have a very, very tax efficient, taxable investing account. But in tax-loss harvesting, there’s such a thing as a wash sale, meaning after you sell some shares, you can’t buy them back for 30 days. You have to wait a month.

In fact, you can’t buy them the day before you sell them and then sell them. Does that make sense? You can’t do this in reverse either. Basically, you can’t buy shares within 30 days, either before or after selling those shares and still count that tax loss on your taxes. That’s a good rule. It’s a fair rule. Don’t get confused with charity because that does not apply to a charitable donation. If you donate money to a charity, you can buy back those shares on the exact same day at the exact same time. There is no waiting period. There is no wash sale.

You have basically flushed out the appreciated shares to the charity, which is awesome because they don’t have to pay taxes on it, you don’t have to pay taxes on it and you get the full deduction, assuming you itemize for the complete charitable contribution. Meanwhile, you have the exact same portfolio because you basically just swapped cash for stocks and stocks for cash in two different accounts that way. That’s a great way to do it. I might not do it the exact same day. I might wait one day, so nobody gets confused about what I’m actually donating, but yes, legally, you can. There is no wash sale on donations to charity. It doesn’t matter if you’re using a donor-advised fund or if you’re giving directly to the charity. Same thing, same situation.

Paying Cash for Medical School vs Student Loans and PSLF

“I’ll be graduating from fellowship in June and I’m fortunate not to have any student loans, probably making around $500,000 per year as an attending. My wife is currently a first year med student at an expensive medical school. If she continues taking out the maximum amount of student loans, she’d have close to $500,000 in loans by the time she graduates. She’s considering family medicine and is open to the idea of student loan forgiveness. We’re considering three different options regarding student loans. I would love to hear your thoughts. Option number one, should we continue taking out the maximum amount of student loans while she is in medical school. This would allow us to save a huge $500,000 student loan forgiveness side fund by the time she graduates. If she received student loan forgiveness, this money would be ours to keep. Of course, if we were to pursue this option, we would pull out all the stops to maximize student loan forgiveness such as enrolling in PAYE, filing taxes separately while she’s in residency but also amending the tax return to filing married after the fact and maximizing her pretax retirement contributions.

Option number two, I simply pay off all her student loans and her tuition so she graduates debt-free.

Option number three is to do something in between. Maybe she only takes out enough student loans to cover the cost of tuition. This would decrease the student loan burden when she graduates, but it would also reduce the amount that would be forgiven. I would definitely be open to hiring a student loan advisor, but I want to hear your thoughts first.”

What a great situation to be in. How many of us wish as an MS1 that we were married to a doctor making $500,000 a year? That sure would have made medical school a lot easier financially, but you have a few options here. It’s reasonable to ask these questions. The first option, do you pay for it all out of loans and go for Public Service Loan Forgiveness, meaning that the whole time during residency and after residency, you’re going to be filing as married filing separately on a Pay As You Earn plan in order to minimize your taxable income to minimize those payments to try to maximize how much is forgiven under PSLF.

Option number two is to just cashflow it. You’re making $500,000 a year. You can certainly afford to pay tuition. Then, of course, the third option is to do something in between. Well, I’ll tell you what, if I was in this situation, I would not be monkeying around with income-driven repayment programs or with Public Service Loan Forgiveness. I would just cashflow this thing. I think one of the best investments you can make is in yourself and your future earning potential, and so I would take some of that $500,000 income and use it to pay medical school tuition and expenses.

This is a great example of the moral hazard that shows up with our current system. The fact that anyone would even ask this question shows that there’s a lot of loopholes in the system that people could potentially take advantage of, but this is not one that I would go looking for, for a few reasons. One is the ethical ramifications of using taxpayer money when you don’t really need it. Suffice to say, people are going to feel different ways about that, but I don’t really feel good about that. If I don’t need the money, I’m not going to take a loan.

There’re other issues here. For example, there’s some risk. Maybe Public Service Loan Forgiveness changes somehow. You borrowed all this money at 6% or 7% and now you’re not going to get it forgiven, so you paid a whole bunch of interest that you didn’t really need to pay. Most importantly, when you cashflow something, you get freedom. Now, for example, if your spouse wants to drop out of medicine, if she doesn’t match at all, she quits school, she decides to go part time right out of residency, she decides not to work for a 501(c)(3), she doesn’t have the pressure to do this because this is a 14-year scheme.

You borrow money for four years in med school, then you have to make 10 years of payments, including those in residency and fellowship in order for Public Service Loan Forgiveness to pay off. That’s 14 years where you’re giving up at least some flexibility. You’re giving up some of your financial freedom which seems really silly for a family that’s making at least $500,000 a year. Then, of course, the last factor is when you file married filing jointly, you generally save a lot of taxes, particularly when your spouse is in medical school and not making any money.

When you start filing married filing separately, you end up paying more in tax. Yes, maybe you get more money forgiven, but the fact that you’re paying more in tax reduces the benefit of that. Not a great option I don’t think. If you have the money, just pay for medical school. Don’t start trying to game the government programs. You’re likely to get burned. I don’t think there’s a big free lunch there.

Ending

Hopefully, you find these questions and answers helpful.  If you want your questions answered on the podcast, you can leave them at White Coat Investor speakpipe. 

 

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.
Dr. Jim Dahle:

This is the White Coat Investor Podcast #151. How to Pick a Charity. Laurel Road has helped thousands of medical professionals across the country refinance federal and private school loans. In addition to offering a $300 bonus for WCI readers and listeners who refinance student loans with Laurel Road, they also offer those in residency or fellowship the ability to make reduced payments throughout their training and up to six months after. Terms and conditions apply. For more information, to submit an application, simply visit whitecoatinvestor.com/laurelroad.

Dr. Jim Dahle:
Thanks for what you do. Medicine isn’t easy, especially when we have pandemic coming and you’re going to be asked at times to put the lives of yourself and even your family at risk taking care of other patients. Thanks for what you do. It is not an easy work. There’s a reason you get paid as much as you do. Our quote of the day today comes from Jack Bogle, “If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks. If you didn’t learn that lesson in the last month, the market is going to teach it to you.”
Dr. Jim Dahle:
Now, we just finished WCI Con a couple of weeks ago and we’ve got an e-version of the course out. If you come to whitecoatinvestor.com, it’s very prominently displayed and you can check that out. It gives you all 27 or really 29 hours of the conference. You can watch it in the privacy of your own home at your own time that you desire. You can even listen to it in your car just like you would this podcast. Check that out. It’s going to be great. You’ll love it. You’ll feel like you were right there with us and hopefully get you those pearls of wisdom that were dispensed by many awesome speakers that we had at the conference.

Dr. Jim Dahle:
Today, we’re going to be answering listener questions off the SpeakPipe. Now, if you don’t know what the SpeakPipe is, you just need to go to speakpipe.com/whitecoatinvestor or whitecoatinvestor.com/speakpipe. Either one will take you to the same place and you can record a question there that will play on the podcast and I’ll answer for you. Go ahead and leave those for us and we’ll get your questions on the podcast. So far, we’ve been able to keep up with them. Anybody that’s left any reasonable question has gotten it answered on the podcast. I don’t know how long we’ll be able to keep up with that, but so far, so good.

Dr. Jim Dahle:
Let’s take our first question. Now. This one comes from Dr. Prashant.
Dr. Prashant:
Hello, this is Dr. Prashant. I just had a question about international applicability for disability and life insurance. What if I wanted to move back to home country or a different country other than the US? Are there certain companies or brands for disability insurance or life insurance that I should be considering where if I get disabled and I decide that I don’t want to stay in the US anymore, will the company continue to pay me while I live outside of the US? Are there international policies that I can purchase right now so that is applicable across nations?
Dr. Prashant:
Similarly, for life insurance as well, what if, after my death, my family wants to move back to, say, India or Europe or some other country, what’s the situation? Thank you so much.
Dr. Jim Dahle:
Basically, does your disability insurance still pay if you leave the United States? Yes, it does. No problem. You just got to buy it while you’re in the United States and working in the United States. Even your Social Security Disability will pay when you leave the United States, but if you are overseas now trying to buy disability insurance, that’s going to be a bigger problem. Most companies require you to spend at least six months per year in the US to get it, but once you have it, you can do what you want. That’s not an issue to move away later. Let’s take our next question from Paul.
Paul:
Dr. Dahle, I’m currently investing in my employer 401(k)/403(b) for the last five years. I’ve been maxing out the retirement fund and have about $240,000 in that fund. However, I’ve only been investing in a target date fund while I was focusing mainly on paying off my student loans. Now that that is done, I’m ready to follow my investment plan and I want to invest around 80% stocks with 60% in US funds and 20% in international funds. However, my employer 401(k) only offers a total stock market fund, a bond fund and a small market cap fund in Vanguard low-expense accounts.
Paul:
The only international funds they offer have expense accounts of point 0.9% to 1%. My question is, should I go ahead and stick to my investment plan with those high-expense ratios and invest in their foreign accounts or should I just invest in only the Vanguard funds in that account and fill up the international funds in my Roth Vanguard account/taxable accounts. Thanks for all that you do. I’ve been following you since 2011 and you’ve helped me immensely.
Dr. Jim Dahle:
All right, so Paul has done a great job. I’ve often said to myself in the past, if I was going to do this all over again, I just use a target date fund or a target retirement fund, a lifecycle fund, whatever you want to call it until my portfolio hit $100,000. It’s a totally reasonable approach to make. It’s diversified. It’s a one-stop-shop. It automatically rebalances. It’s very convenient, but now he wants to start managing his own asset allocation, which is fine, too. That’s what I do. He wants to go 80% stocks, 60% of those in the US and 20% of those international and the rest in bonds, but he’s stuck in a 401(k) that doesn’t offer a great international option. He’s got a high-cost option in there like lots of 401(k)s do.
Dr. Jim Dahle:
Should he use it or should he do something else? Well, you got a few options. One is just stick with a target date fund. It usually includes an international holding and it may even be a cheaper international holding than the one you can buy separately. For example, if you got Vanguard target retirement funds in the 401(k), you’re getting a Vanguard cost, so a low cost international fund as part of that target retirement fund. Another option is just to use the high cost one, understanding that the benefits you’re getting from the 401(k) are better than the costs and so go ahead and use it.
Dr. Jim Dahle:
What most people would do in this situation is they would pick the best offerings out of the 401(k), which is often an S&P 500 index fund and some sort of reasonable cost bond fund and then put their other holdings that they desire in their asset allocation whether it’s international stocks or small value stocks or real estate investment trusts or whatever it might be. They put those in their Roth IRAs and/or taxable accounts and you just build around what’s good in the 401(k). I would probably lean toward that third option in your case, Paul. Our next question comes from Alex in Washington, DC and this is the one we named the podcast for.
Alex:
Hey, Jim. This is Alex from Washington, DC. Thanks for all that you do. I just wanted to say that I really appreciate how you and so many others in the physician financial space promote charitable giving. We all know that some charities are better than others, however, and I was hoping you’d consider spending some time on how to best pick a charity. What should we look for? Are there particular metrics, certifications that might be of particular importance? Any light you could shed on this topic would be greatly appreciated. Thanks.
Dr. Jim Dahle:
How do you pick a charity? Well, I think the most important thing is to begin with choosing a cause that you support. Now, in my family, we use a scripture to guide us to what causes we think are worth supporting. A scripture reads, “But before you seek for riches, seek ye for the kingdom of God. After you’ve obtained a hope in Christ, you shall obtain riches if you seek them.” This is the key part. “You will seek them for the intent to do good, to clothe the naked and to feed the hungry and to liberate the captive and administer relief to the sick and the afflicted.”
Dr. Jim Dahle:
Those are the four causes we try to support with our charitable giving. We support causes that provide shelter, food, medical care and liberation. That might include our local homeless shelter, which provides the shelter, right? Something like Salvation Army which provides clothing. The local food pantry or the soup kitchen which obviously feeds the hungry. The homeless clinic is one of our favorite things to support. It administers relief to the sick and the afflicted. You might choose something like Doctors Without Borders. We’ve given to them in the past, but that would meet those criteria for us.
Dr. Jim Dahle:
Then, of course, the little bit more complicated one is liberating the captive. One of our favorite charities that we support that does that is called the Underground Railroad. Basically, they go out flying underneath the radar of local law enforcement and try to free people who have been basically sex trafficked into various countries. They try to free these people, usually, young girls who are basically sex slaves in various countries and they basically try to free them. That’s one of the charitable causes we support, but whatever you support. I’m sure your favorite charitable causes are not going to be the same as ours.
Dr. Jim Dahle:
Whether you want to support an environmental cause or whether you want to support the homeless in your local area or war-torn refugees or whatever you want to support, I would start with the cause. What kind of cause do you want to support? Once you have that, then go out and find the best charity to support that particular cause. In my view, the most important metric, the most important statistic is what percentage of the donated money is used in administration and fundraising. If I’m giving them $1, I don’t want to find out that 25¢ went toward them trying to raise more money. I want it to be 5¢. That would be a really great number if you can get it up into the less than 10 percentile.
Dr. Jim Dahle:
For example, Doctors Without Borders spends about 10% of its money fundraising. I’d love to see it be half that. In fact, I hate getting what I call charity porn in my mailbox so much which is once you donate to a charity, not only do you get something from them every few months, but they then sell your mailing address to a bunch of other charities and they start sending you stuff. Once they know you’re charitable, you start just having a mailbox full of this stuff which is great. The glossy pictures are fun to look at, but that’s not where I want my money going. I want my money actually going to the people that the charity is trying to help.
Dr. Jim Dahle:
I pay a lot of attention to that number. The lower it is, the better in my view, but there are some rating organizations out there that rate charities and a lot of it is based on this number and transparency and some other good things that they look at to rate these charities. Some of the big well-known ones are Charity Navigator, Charity Watch and the Better Business Bureau Wise Giving Alliance. I would recommend you look up the charities you’re considering supporting, using one or more of those resources and actually find out how good of a charity they are, how good they are at doing what they’re saying they’re trying to do.
Dr. Jim Dahle:
We look at that each year and we also try to let the kids get involved in this process. We actually sit around the table. In fact, one year, I think we were watching Cindy’s kids at the time. We let them sit around the table with us while we chose what charities we were going to support that year. Everybody got input into where the money went. It really does. What the kids choose to give money to, that’s where we give money to. I think that’s good for them to learn how to give at such an early age. The bottom line is it takes just as much effort to give well as it does to earn, save, invest and spend well. Alright, our next question comes from an anonymous listener. Let’s take a listen.
Speaker 6:
Hi, Dr. Dahle. I’ll be firing next month and my husband will be following in a year or two so after me. That means I’ve got a little time left to figure out some tax optimization calculations I’m struggling with. I’m hoping you can help me out. Once we’re both retired, we’ll be living off our taxable account that has a fairly high tax basis. I, therefore, anticipate our federal taxes to be zero. I’m looking for some help to figure out how to best optimize our MAGI, taking into account ACA subsidies and Roth conversions. I understand the tradeoff is on one hand a low MAGI would qualify us for better ACA subsidies, whereas on the other hand, doing more Roth conversions would lead to lower ACA subsidies but also lower taxes later in life.
Speaker 6:
More details in case it helps out, we’ve got about $2.5 million invested. About half of that is in the taxable accounts, a quarter in Roth and about a quarter in tax-deferred retirement accounts. We’re married, filing jointly, have three kids and we’re in our late 30s. Thanks for your help figuring this out.
Dr. Jim Dahle:
This is a little bit of a complicated question. These guys are going to fire. Well, she’s going to fire in a month or her husband a year or two. I always find that phrasing funny. Obviously, one member of a couple firing or retiring is a little bit odd, right? When I was an intern, our oldest daughter was born at the end of my intern year. Katie had been teaching school and we decided that she was going to be a stay-at-home mom, but we didn’t tell anybody that Katie retired, that she was firing. One of us was still working and supporting the family and the other one was doing, frankly, more important stuff at that point. I always found that was funny way to phrase it, but whatever, it doesn’t really matter. I’m not going to be the internet retirement police.
Dr. Jim Dahle:
The question here really is, how to balance Roth conversions against ACA subsidies? Remember, the less money that you have, the less income you have rather because they don’t care about wealth, that’s the funny thing about your taxes as well as most of these subsidies that are based on your taxes, they don’t care how much money you have. They care about how much income you make. The way this Obamacare or Patient Protection Affordable Care Act subsidy works is the more money you make, the less of a subsidy you get. It’s based on your percent of the federal poverty level and your household size.
Dr. Jim Dahle:
Now if that sounds familiar to you, that’s probably because that’s what your student loan payments are based on as well. The more people in your household, the lower your student loan payments, the higher your ACA subsidy, but for example, if you’re making up to 133% of the federal poverty level for your household size, your expected contribution to your health insurance to your PPACA health insurance plan is about 2% of your income. That goes up to almost 10% of your income if you’re between 300% and 400% of the federal poverty level.
Dr. Jim Dahle:
What’s the federal poverty level? Well, if your family size is four people, two parents, two kids, the federal poverty level is about $25,000. Up to an income of about $400,000, that’s a modified adjusted gross income, not a total income or not $400,000, sorry, about $100,000, 400% of that federal poverty level of $25,000, then you can get some sort of a subsidy. Once you get above there, you’re not going to get a subsidy. Obviously, if you’re going to fire on not that much money and you’re going to have a pretty low taxable income at that point, you can qualify for these subsidies. The less income you have, the higher your subsidy.
Dr. Jim Dahle:
The problem is a lot of people that retire early also want to take advantage of Roth conversions. You’re now in a low tax bracket. It’s lower than you were during your peak earnings years. It’s probably even lower than what you’re going to be in retirement once you start receiving Social Security. It’s a good time normally during early retirement to do Roth conversions. The problem with Roth conversions is they generate taxable income. They increase your modified adjusted gross income and thus decrease your ACA subsidy. The more Roth conversions you do, the less you are going to be getting from the government to pay for your health insurance.
Dr. Jim Dahle:
How do you balance those two factors? Well, quite frankly, if you’re down there to the point where you are getting a significant ACA subsidy, I think you ought to just hold off on the Roth conversions. Just lower that income as much as you can to maximize the ACA subsidy. Whether that’s ethical or not, you can answer that question yourself. It’s certainly the way the law is written. Even if you got $3 million or $4 million saved away, if your taxable income is only $50,000, you’re probably getting your health insurance subsidized by the government. The lower your income, the more it’s going to be subsidized.
Dr. Jim Dahle:
There will likely be time later, especially if you’re retiring at 35 or 40, there’s probably going to be time later still before you take social security at 70 In order to do some Roth conversions. The laws will probably change. The ACA subsidy will probably change. Something else will happen in your life and maybe you make more money and you don’t get the subsidy anymore. Well, then, you can start doing Roth conversions and that sort of a thing. It’s really difficult to really run the numbers on this without knowing exactly what tax bracket you’re going to be in every year of the rest of your life. That information is not only unknown, but it’s probably unknowable because it just depends on too much other stuff.
Dr. Jim Dahle:
I would lean toward getting the bird in the hand now which is lower health insurance costs and put off the two birds in the bush which is the Roth conversions. Alright, our next question comes from anonymous. Let’s take a listen.
Speaker 7:
Hey, Jim. Thank you very much for what you do. Your podcasts have been very helpful. My question is pertaining to PLLC which is professional LLC versus LLC and how that could make a difference while working through locum companies. I have a PLLC in North Carolina and it turns out that to work as a locum provider or other any healthcare provider in the State of North Carolina, you cannot do it through an LLC company. Now, I wanted to change my PLLC to an LLC, so that I could add my wife also to the company, as that helps from a tax standpoint, but I cannot do that since she does not have active North Carolina medical license.
Speaker 7:
My question is, do you know what could be done in this situation and do you think this law applies in locum situations where the physician is working through a middle company which is the locum companies such as ComHealth or whether it be MD locums, etcetera? Since the physician works for a hospital doing locum shifts through a middle entity, does this restrict being able to change the PLLC to an LLC? I know it’s a complicated question and maybe it’s pretty specific, but if we can throw any light into this matter, that would be appreciated. Thank you again.
Dr. Jim Dahle:
We’re going to talk about professional limited liability companies versus just a regular old limited liability company. If you’re a doc or an attorney or similar high-income professional, in some states, you’re required to be a professional limited liability company, a PLLC. If you have to do that, if your state mandates it, do it, but legally, it’s basically the same thing. You should still be able to hire your spouse, but they may not be able to be a PLLC member. At any rate, if you really want your spouse to be a member of an LLC, you could form a second LLC where your spouse is a member and contract with it for the services that your spouse is providing.
Dr. Jim Dahle:
Just remember, anytime you’re hiring your spouse that your spouse has to do real work. You can’t just make something up and say they’re doing it and you have to pay them a reasonable wage, a reasonable amount of pay in order for them to be employed. Of course, you have to do all the required paperwork. You got to file W-2s and W-3s and do I-9, prove that your spouse isn’t an illegal immigrant. You got to do all those things that you have to do for any other employee, but a lot of times, doctors are doing this just going, “Oh, I’m going to put my spouse on my LLC and that way we can have another retirement account.”
Dr. Jim Dahle:
Well, if your spouse isn’t actually doing any work, that’s not actually legal. It’s fraud. Make sure they’re actually doing some work and then you’re not dramatically overpaying them for what they’re doing. The other thing to keep in mind is that assuming your spouse has no other work, whatever you pay them is going to be subject to payroll taxes, particularly Social Security taxes which is fine if you’re trying to get your spouse their 40 quarters or something, but that often negates the benefit of another retirement account. You got to really run the numbers here
Dr. Jim Dahle:
If you’re going to pay another $10,000 in social security taxes in order to put $20,000 into a retirement account, that might not be an awesome deal for you because those social security taxes are gone forever and especially if your spouse is going to be taking 50% of your benefit instead of their own benefit, you’re really not even getting any benefit for all those Social Security taxes that you’re paying, much less than Medicare taxes that you’re paying. You got to really run the numbers there to decide whether it’s worth paying additional payroll taxes in order to have the advantage of another retirement account with its tax protection and its asset protection. All right, our next question is also from an anonymous listener.
Speaker 8:
Thank you, Dr. Dahle, for your wonderful podcast and your website. I have a question regarding backdoor Roth IRAs. I did my conversion in 2018 after I moved my IRA to my 401(k), but then realized in 2019, that I still had another IRA. At that time, I moved that IRA to the 401(k) as well and paid taxes according to their pro-rata rule in filing 2018 taxes. Now, it’s 2019 and I did some more conversion. I’m wondering if I made a mistake because I have moved the IRA with basis into my 401(k). I was wondering if you had any thoughts about that or any suggestions on what to do next.
Speaker 8:
As to whether or not it matters, I’ve had one accountant tell me that it doesn’t really make a difference in the long run because if anything, you’re just going to pay taxes twice on that money and the IRS won’t care. I’ve had another accountant tell me that I may need to start thinking about doing a partial rollover from my 401(k) to remove that basis. Any information would help. Thanks.
Dr. Jim Dahle:
Here’s a backdoor Roth IRA screw up. There are so many of these. I’m not sure why people screw this up so badly, but they sure do. Remember the process for a Roth IRA, a backdoor Roth IRA, you put money in the traditional IRA, and then, you move it all into the Roth IRA. If it makes a buck or two, while it’s in the traditional IRA, move that into the Roth IRA as well. You owe low taxes on that dollar, but you won’t owe taxes on the rest of it because you didn’t get a deduction when you put the money into the traditional IRA.
Dr. Jim Dahle:
What trips a lot of people up is that they forget about the pro-rata rule, meaning if you have some money sitting around in another traditional IRA, tax-deferred money or a SEP IRA or a simple IRA, you got to get rid of that by the end of the year that you do the conversion step of the backdoor Roth IRA. You either roll it in your 401(k) or you convert the whole thing to a Roth IRA and pay the taxes on. Those are really your two options, but try to do all that in the same calendar year and your paperwork will be much, much easier.
Dr. Jim Dahle:
In this case, the screw up is they had an IRA with some basis in it, meaning money they did not get a tax break for when they put it in the IRA. That’s the money you want to convert to a Roth IRA tax-free, right? That’s the whole point of the backdoor Roth IRA, but instead, in this case, it was rolled into a 401(k) and the 401(k) didn’t notice because they usually don’t allow you to do that. They didn’t notice that this had basis. What you’ve done is you’ve told this 401(k) that this is all pretax money. When you take it out of the 401(k), you’re going to have to pay taxes on it again and those dollars are going to be double taxed.
Dr. Jim Dahle:
That’s a big problem, right? You’re not really benefiting from using retirement accounts if you’re now paying taxes twice on the money you put in there. The worst-case scenario in this situation is you’re going have to pay taxes twice on that basis. The 401(k) shouldn’t have let you do it. They probably only did it because you lied to them. Not on purpose, but you lied to them on your paperwork and said this was all pretax money. I don’t know if they’re going to let you reverse this. The first call I would make is to the 401(k) and I’d say, “Hey, here’s what I did. I accidentally rolled money with basis in there. Can you roll it back out? Can we just reverse this transaction?” and they may be able to help you fix it, but I wouldn’t hold my breath.
Dr. Jim Dahle:
This is probably not a bad time to get the advice of a real experienced CPA or accountant if you need help with that. We’ve got some recommended tax strategists on the White Coat Investor website under the recommended tab and this is probably a bad enough screw up that it’s worth getting some formal professional advice, but I’m pretty sure the first thing to check is going to be seeing if you can reverse that transaction somehow. Even if it means modifying your taxes for a year or two, it’s probably going to be worth it just to save a few thousand dollars in taxes. Our next question comes from Jared from Massachusetts. Let’s take a listen.
Jared:
Hey, Jim, two quick questions for you about federal student loan repayment. I am seven years into an eight-year training program and have around $200,000 in medical school debt. I’ve been making payments since day one of residency and therefore planning on going for PSLF in a couple of years. My base salary is around $70,000, but I, fortunately, can supplement my salary significantly with moonlighting and typically ended up with a yearly AGI around $200,000. As you know, there are two ways that my fed loan calculates monthly IDR payments. One is calculated using yearly taxable income from your previous year’s tax return and the other is calculated with a single one month snapshot of your income.
Jared:
I believe the latter was designed for people who have had a significant change in their income warranting a new monthly payment amount. My two questions are as follows. First, is it legally sound to pick up fewer moonlighting shifts in a given month, thus reducing that month’s income dramatically for the purposes of applying for a lower IDR loan payment for the following year? Second, even if this is legally sound, I’m curious as to your opinion on the ethics of this strategy. Should I feel obligated to recalculate my monthly payment every month if my income changes from month to month or increases substantial? You can easily see how this could quickly turn into a slippery slope. Thanks so much for your time and advice on this tricky situation.
Dr. Jim Dahle:
Here’s a complex question, right? You’re trying to minimize your payments during residency while you’re in these income-driven repayment programs by minimizing your income. The lower your income, the lower your payments, the more that’s left to be forgiven under Public Service Loan Forgiveness. Apparently, there is a way in which you can update them during the year when you don’t have your taxes back yet as to your income changes. The idea behind this was if somebody loses their job or they are forced to go quarter time or something and their income is dramatically reduced, that they can reduce their payments.
Dr. Jim Dahle:
This is a mercy rule from the government program. That’s the idea behind it, but of course, like with any rule, there are unintended consequences and people start wondering, “Is there a loophole that I can work here something I can use to get my income low, something I can use to get my subsidy higher if you’re in revised Pay As You Earn or just get my payments lower and maybe get more money forgiven in the end?” You can see why people are starting to scheme and look at these sorts of things. Question number one, is this legal? Is it legal to reduce your income this way? Use one month where he had really low income and tell them that’s what your income is, whether that’s stopping moonlighting to get your income down or whatever.
Dr. Jim Dahle:
Well, here’s the guidance that comes from the program. It says if your income hasn’t changed much since you filed your last federal tax return, your monthly payments will be calculated using your adjusted gross income. If you had a significant change in income that is not reflected in your most recent tax return, i.e. you lost your job or got a large raise, you will be asked to provide documentation of your current income and your monthly payment will be calculated based on that amount. As you can see, the intention here is pretty clear. The idea is that if you lose your job, you can show that your income has gone down and you can Lower this payment.
Dr. Jim Dahle:
Yes, they want you to do it if you get a large raise too, but let’s be honest, most people probably aren’t doing that. What it’s asking is it’s asking if you had a significant change in income that is not reflected in your most recent tax return. Now, just because you moonlight a little bit less one month and you moonlight more the next month, that’s not really a significant change in your income that’s reported on your taxes, meaning your annual income. I think maybe it’s a little bit gray, but I think this probably is not super legal to do. I think you’re pretty close to fraud here.
Dr. Jim Dahle:
Obviously, the second question, is it ethical? Well, if you’re that close to fraud, it’s probably not ethical. This is not a bad time to get advice from student loan experts. I recommend some student loan experts at the whitecoatinvestor.com. Again, go to the recommended tab, go down there to student loan advice and they’ll talk to you about this. Now a lot of them are more willing to tread into the gray area than I am on student loans. I wouldn’t be surprised to see one or two of them out actually recommending this strategy, but I’m not sure I would feel right about it.
Dr. Jim Dahle:
If you’re making $200,000 as a trainee and you only have $200,000 in student loans and it’s almost all going to be forgiven anyway, do you really need to squeak out a little more forgiveness out of that? Maybe not. I got some ethical problems with that one. Is it legal? It may very well be. Our next question comes from a financial planner, Matt, the planner. Let’s take a listen.
Matt:
Dr. Dahle. My name is Matt. I’m a fee-only financial planner and really appreciate all the work that you do and recommend that my clients or prospects take advantage of a lot of the resources you have available. That being said, one thing that I have found a lot of younger physicians struggle with is getting a budget or spending plan together. My question to you is, one, how much would you expect a financial planner to dive into a budget with a client? Then two, what resources do you recommend or have had success with as far as budgeting goes? Thank you.
Dr. Jim Dahle:
What he’s asking is how much would you expect a financial planner to dive into budget with a client? Well, what does the client need? If the client is not bringing new money each month to invest and save, if they’re not paying down their student loans rapidly, if they’re just spending up the wazoo, then this is what they need. As their financial advisor or financial planner, you got to meet them where they’re at. Yeah, I think it’s totally appropriate for a financial planner to get into the nitty-gritty of your budget if they need to.
Dr. Jim Dahle:
On the other hand, if you walk in there and you got a 20% savings rate, and you’re like, “Well, here’s the money. I need to figure out what to do with it each month.” Well, maybe that financial advisor doesn’t need to get into your budget at all. Clearly, you’ve learned how to budget you’re living on less than you earn. I think it depends on the client, but I suspect that is a real value add for many financial advisors, even for high-income professionals like doctors. If you’re having trouble controlling your spending on your own, but you can do it with the help of an advisor, they’re adding value to your life. I think it depends on the client to answer the question.
Dr. Jim Dahle:
The second question is what are the best resources to use? Well, it just depends on the person. Some people do just fine with a paper and pencil and an envelope system for their budgeting. They write it all their expenses down at the beginning of the month on a piece of paper. They withdraw cash from the bank account, put it in envelopes, list this for rent and this for utility and this for food and this for restaurants or whatever and live out of those budgets. When the envelopes empty, you can no longer buy that stuff until the end of the month. Maybe that’s all the help you need.
Dr. Jim Dahle:
I think most people at least use a spreadsheet, Google Sheets or Microsoft Excel and have a budget they can copy-paste to the next month. It makes a little bit easier because it’ll do the math for you and you can just copy it into the next month. That’s how Katie and I have always budgeted. There are some fancy new apps out there that you can use to help you with your budget. You’ve probably heard of Mint. You probably heard of Dave Ramsey’s Every Dollar. That’s free. You need a budget, it charges just a few bucks a month, but it’s also a very popular one among my readers and listeners. Whatever works well for you.
Dr. Jim Dahle:
The bottom line is if you are not saving enough money to reach your goals, you need the budget and whatever it takes for you to budget, whether it’s getting an advisor to help you whether it’s using an app or whether it’s just scheduling a meeting every month with your significant other, whatever it is, you got to do it. Otherwise, you’re going to wake up in 20 years, you’re not going to have anything saved for retirement, You’re still going to have student loans and you’re going to be in a world of hurt.
Dr. Jim Dahle:
Figure it out. Start budgeting unless you’re already an expert budgeter and then you can probably take off the training wheels and just track your spending or just take money off the top every month and save that. Okay, our next question comes from Casey, the periodontist.
Casey:
Hi, Dr. Dahle. My name is Casey and I’m a periodontist in the Airforce. My question relates to donor-advised funds and I can’t seem to find the answer to my question online. I’m trying to see if I’m understanding this correctly. With a donor-advised fund. If I have, say, $10,000 to donate to my church, could I transfer $10,000 in appreciated shares from my taxable account at Vanguard into a new donor-advised fund, thus flushing out the capital gains and receiving the charitable donation tax write-off and then also on the same day purchase $10,000 in new identical funds in the same taxable account at the new higher cost basis?
Casey:
In essence, I’d end with roughly the same overall investments in my taxable account with the new portion at the higher cost basis, and then, I’d still get the tax write-off for the donation. I then cap it all off by transferring the funds from the donor-advised fund to my church. Am I looking at this correctly? Is that how it works? Thanks so much for the help, Dr. Dahle.
Dr. Jim Dahle:
This is a really easy question and it gets people confused because sometimes they confuse donating to charity with tax-loss harvesting and it’s probably my fault because I talk about them together all the time. This makes my taxable account very, very tax efficient because I tax-loss harvest all the losses and I donated all the appreciated shares to charity because we donate substantial amounts to charity each year. This is really a pretty slick way to have a very, very tax efficient, taxable investing account, but in tax-loss harvesting, there’s such a thing as a wash sale, meaning after you sell some shares, you can’t buy them back for 30 days. You got to wait a month.
Dr. Jim Dahle:
In fact, you can’t buy them the day before you sell them and then sell them. Does that make sense? You can’t do this in reverse either. Basically, you can’t buy shares within 30 days, either way before or after of selling those shares and still count that tax loss on your taxes. That’s a good rule. It’s a fair rule, but that’s the way it’s written. Don’t get confused with charity because that does not apply to a charitable donation. If you don’t donate money to a charity, you can buy back those shares on the exact same day at the exact same time. There is no waiting period. There is no wash sale.
Dr. Jim Dahle:
You have basically flushed out the appreciated shares to the charity, which is awesome because I don’t have to pay taxes on it, you don’t have to pay taxes on it and you get the full deduction, assuming you itemize for the complete charitable contribution. Meanwhile, you have the exact same portfolio because you basically just swapped cash for stocks and stocks for cash in two different accounts that way. That’s a great way to do it. I might not do it the exact same day. I might wait one day, so nobody gets confused about what I’m actually doing what I’m actually donating, but yeah, legally, you can.
Dr. Jim Dahle:
You could do it at the exact same time. There is no wash sale on donations to charity. It doesn’t matter if you’re using a donor-advised fund or if you’re giving directly to the charity. Same thing, same situation. Alright, the next question is from an anonymous listener. Let’s take a listen.
Speaker 12:
Hi, Dr. Dahle. Thanks for everything you do. I’m a huge fan. I had a question regarding student loans. I’ll be graduating from fellowship in June and I’m fortunate not to have any student loans, probably making around $500,000 per year as an attending. My wife is currently a first year med student at an expensive medical school. If she continues taking out the maximum amount of student loans, she’d have close to $500,000 in loans by the time she graduates. She’s considering family medicine and is open to the idea of student loan forgiveness.
Speaker 12:
We’re considering three different options regarding student loans. I would love to hear your thoughts. Option number one, should we continue taking out the maximum amount of student loans while she is in medical school. This would allow us to save a huge $500,000-student loan forgiveness side fund but by the time she graduates. If she received student loan forgiveness, this money would be ours to keep. Of course, if we were to pursue this option, we would pull out all the stops to maximize student loan forgiveness such as enrolling in pay, filing taxes separately while she’s in residency but also amending the tax return to filing married after the fact and maximizing her pretax retirement contributions.
Speaker 12:
Option number two, I simply pay off all her student loans and her tuition so she graduates debt-free. Option number three is to do something in between. Maybe she only takes out enough student loans to cover the cost of tuition. This would decrease the student loan burden when she graduates, but it would also reduce the amount that would be forgiven. I would definitely be open to hiring a student loan advisor, but I want to hear your thoughts first. Thank you very much.
Dr. Jim Dahle:
What a great situation to be in. How many of us wish as an MS1 that was married to a doc making $500,000 a year? That sure would have made medical school a lot easier financially, but you got a few options here. It’s reasonable to ask these questions. The first option, do you pay for it all out of loans and go for Public Service Loan Forgiveness, meaning that that whole time, you’re going to be filing during residency and after residency, you’re going to be filing as married filing separately on a Pay As You Earn plan in order to minimize your taxable income to minimize those payments to try to maximize how much is forgiven under PSLF?
Dr. Jim Dahle:
Option number two is to just cashflow it. You’re making $500,000 a year. You can certainly afford to pay tuition. Then, of course, the third option is to do something in between. Well, I’ll tell you what, if I was in this situation, I would not be monkeying around with income-driven repayment programs or with Public Service Loan Forgiveness. I would just cashflow this thing. I really would. I think one of the best investments you can make is in yourself and your future earnings, potential, and so I would take some of that $500,000 income and use it to pay medical school tuition and expenses.
Dr. Jim Dahle:
This is a great example of the moral hazard that shows up with our current system. The fact that anybody would even ask this question shows that there’s a lot of loopholes in the system that people could potentially take advantage of, but this is not one that I would go looking for, for a few reasons. One is the ethical ramifications of using taxpayer money when you don’t really need it, all right? Suffice to say, people are going to feel different ways about that, but I don’t really feel good about that. If I don’t need the money, I’m not going to take a loan.
Dr. Jim Dahle:
There’s other issues here. For example, there’s some risk. Maybe Public Service Loan Forgiveness changes somehow. You borrowed all this money at 6% or 7% and now you’re not going to get it forgiven, that you’re planning on doing, so you paid a whole bunch of interest that you didn’t really need to pay. Most importantly, when you cashflow something, you get freedom. Now, for example, if your spouse wants to drop out of medicine, if she doesn’t match at all, she quits school, she decides to go part time right out of residency, she decides not to work for a 501(c)(3), she doesn’t have the pressure to do this because this is a 14-year scheme, right?
Dr. Jim Dahle:
You borrow money for four years in med school, then you got to make 10 years of payments, including those in residency and fellowship in order for Public Service Loan Forgiveness to pay off. That’s 14 years where you’re giving up at least some flexibility. You’re giving up some of your financial freedom which seems really silly for a family that’s making at least $500,000 a year. Then of course, the last factor is when you file married filing jointly, you generally save a lot of taxes, particularly when your spouse is in medical school and not making any money.
Dr. Jim Dahle:
When you start filing married filing separately, you end up paying more in tax. Yes, maybe you get more money forgiven, but the fact that you’re paying more in tax reduces the benefit of that. Not a great option I don’t think. If you have the money, just pay for medical school. Don’t start trying to game the government programs. You’re likely to get burned. I don’t think there’s a big free lunch there. Hope those questions were helpful to you. If you want to get your questions on the White Coat Investor Podcast, go to speakpipe.com/whitecoatinvestor and leave them for us.
Dr. Jim Dahle:
This podcast was sponsored by one of my favorite student loan refinancing companies Laurel Road, who have helped thousands of medical professionals across the country refinance federal and private school loans including hundreds of you every year. In addition to offering a $300 cashback bonus to you, if you go through the White Coat Investor links, you also get lower rates and you get way better service than you had with your previous loan-servicing company. A lot of benefits there. If you don’t need the protections of an income-driven repayment program, if you’re not going for Public Service Loan Forgiveness, Laurel road is a great option for refinancing your student loans. Terms and conditions apply of course, but for more information and to submit an application, visit whitecoatinvestor.com/laurelroad.
Dr. Jim Dahle:
Alright, so we have the e-version of the White Coat Investor Conference out. Be sure to check that out. It should be available on the website by the time you hear this. If you are getting into home buying mode and you need a mortgage this year, be sure to check out our Physician Mortgage page even if you don’t need a true doctor mortgage. Those are people who are used to working with docs and the unique aspects of their financial lives and can help you get a great deal out of a mortgage, even if it’s a standard mortgage.
Dr. Jim Dahle:
Thank you for leaving us a five-star review and telling all your friends about the podcast. It really does help spread the word and you’re doing them truly a favor. If people have never heard this information before, it could be worth millions to them over the course of their investing career. Keep your head up, shoulders back, you got this and 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. This podcast is for your entertainment and information only and should not be considered official personalized financial advice.