How to Rebalance Your Portfolio – Podcast #125

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, Doctor Jim Dahle.

Jim Dahle: Welcome to White Coat Investor Podcast number 125, how to rebalance. Welcome back. We're glad to have you here on the White Coat Investor Podcast. We're trying to provide a lot of value for you. We try to give you the content you're looking for. If you have feedback for us, stuff you'd like to see on the podcast, stuff you hate about the podcast, go ahead and send me an email, editor at White Coat Investor Podcast dot com. I want to hear about it.

Jim Dahle: Our quote of the day today comes from Warren Buffett, who said “After all, you only find out who's swimming naked when the tide goes out”. That's sure the truth. Make sure that you know about the other opportunities available through the White Coat Investor. For example, we have online courses. You can find those if you go to the main website and you go to the top, under the tab called courses, you will see a link for all our courses. That lists both the White Coat Investor online course, Fire Your Financial Advisor, which helps you to write your own financial plan that you can follow to financial success. As well as some of our other online courses that we've either put together, sometimes from our conferences, or from some of our partner or affiliates. But if we think there's a great course for physicians and other high income professionals that you can take online, we put it on that page.

Jim Dahle: Also, be sure to sign up for our email list. You can sign up for all the cool emails we send out at White Coat Investor dot com slash email. And there's a lot of great things. There's a monthly newsletter which includes a blog post that isn't even published on the blog. There's a weekly summary digest, that gives you a very quick blurb and a link to each post published in the last week. There is also a link where you can sign up to get every podcast, notes and blog post that we publish sent directly to your email box. We also have a new list we're putting together for people interested in real estate opportunities. So if you're interested in private real estate opportunities with syndicators, funds, et cetera, and you want to learn more about those and when webinars talking about them are going on, be sure to sign up for that one. All of these you can unsubscribe from with one click. There's no commitment, it's totally free. But if you're not getting those you're missing out on a lot of the stuff we are creating each month.

Jim Dahle: Our sponsor today is Earnest, one of the student loan refinancing companies. Save money on your student loans by refinancing with Earnest. Choose custom terms to fit your budget. Like pricing your exact monthly payment or selecting fixed and variable rates. Earnest precision pricing matches your custom term with a custom interest rate, saving you even more money when refinancing. You won't be passed off to a third party servicer, nor penalized for making payments early. Your family is always protected with loan forgiveness in cases of death and dismemberment. The minimum amount to refinance is five thousand dollars and the maximum is five hundred thousand dollars. So the chances of you being outside those two limits is pretty low. That's pretty broad as these companies go.
Jim Dahle: But there's more. If you sign up to refinance your loans, and actually complete a refinance, after going through this link, White Coat Investor dot com slash refi, that's R-E-F-I, you will get $500 cash back. Seriously, $500. Use it for whatever you want, you can go by Wendy's and buy a little, what are they called? Blizzards, is that what they are?
Cindy: Frosties.
Jim Dahle: Frosties, at Wendy's. Once a day for the next year and a half if you want. But I would encourage you to take that $500, put it towards your loans and pay them down a little bit faster. So, refinance your loans today with Earnest, White Coat Investor dot com slash refi, R-E-F-I.

Jim Dahle: Thanks for what you do. Medicine is not easy. A lot of you aren't doctors. We've got other healthcare professionals. We have attorneys, we have business owners, we have engineers, we have tech workers, all kinds of people listen to this podcast. And what you're doing is likely difficult, that's why it pays so well. But it's also important, and you're contributing to society, you're helping people, and I want to thank you for what you do, because chances are nobody said thanks at work today.
Jim Dahle: We have a special guest today, one of our feature financial advisor partners, Marty Watkins, from True North Wealth, that we'll be getting on the phone here and talking to for a few minutes, and answering some questions together.

Jim Dahle: Okay we have a guest today. One of our feature financial advisors, this is Marty Watkins from True North Wealth, where they say, “Integrity and our commitment to our clients come first. We stay true to our clients' direction and wealth, not ours, and we pride ourselves in being a fee only firm in fiduciary on every relationship. We advise on our client's entire financial picture true comprehensive planning by coordinating investment, retirement, estate tax, insurance, small business planning. We ensure every financial aspect of your life works in synchrony to your best interest.

Jim Dahle: Regular reviews of financial plans allow us to foresee potential problems, give advice based on the current economic climate, and plan for any major life changes. Now there are actually two offices to True North Wealth. The first one is in Utah. It's in Salt Lake City and in Logan, actually. There's two in Utah, but there's also an office in Boise, Idaho that does business as the Idaho Medical Association Financial Services.

Jim Dahle: So, for all you Idahoans, that's the firm we're talking about today. But these guys will work with clients across the country, like all of our recommended financial advisors. They are used to working with people by phone and email and video conference, so you can reach them at truenorthwealth.com or 8-0-1-3-1-6-8-1-7-5.
Jim Dahle: I actually first became aware of Marty through one of my neighbors who was one of his clients, a doc on the verge of retirement, and he'd hit me up at church each week to see if the advice he was getting was good, and it always was. Although it was interesting that he always came to these questions that were controversial, those things that never have a right answer in financial planning and investment, and so we'd talk about those, but I think he was very reassured when he realized he was getting good advice. Thank you for taking care of my neighbors, Marty, and welcome to the podcast.

Marty Watkins: Well, thank you. I'm delighted to be here, and I am delighted to help your neighbor, as well.
Jim Dahle: So, let's start with a little bit about you and why'd you become a financial advisor?

Marty Watkins: Well, I started off college in mechanical engineering. In my first drafting class, I frankly hated it and got a B and thought, I can't do this the rest of my life. And I happened to be enrolled in a personal financial planning course at BYU with a Dr. Pierce. I loved it. It came natural to me, was very enjoyable, and I thought, this is really the direction I want to head. So, from really that first semester at BYU on, I knew what I wanted to do.
Jim Dahle: Now what is it that makes your firms so unique, both at True North Wealth, as well as Idaho Medical Association Financial Services? What's unique about your firm?

Marty Watkins: Well, we have an extensive physician and search and background, in that when I finished at BYU, I immediately started the firm with the Utah Medical Association called UMA Financial Services. I wanted to be a fee only planner. I couldn't quite accomplish it there because they felt like they needed some insurance products, but trying to be a fee only planner at 24 years old, when primarily who you deal with is people your parents age or older, was difficult.
Marty Watkins: And so I approached them about the idea of them providing somebody that would give their doctors financial counsel and help them avoid the big mistakes that they can so often make. I approached them. They loved the idea. I created UMA Financial Services in the fall of '93. That grew to be very large and very successful, and we ended up not agreeing on compensation, so I went out on my own and created True North Wealth and IMA Financial Services.

Marty Watkins: I worked with the Medical Association up in Idaho and primarily in my career served physicians and surgeons, probably now over 1600 of them. We're a unique firm in that we really only have four major areas that we help in. We do institutional consulting. We advise on over 14 billion in institutional dollars, including our largest client actually, my529, the Utah 529 Plan, that I've been a consultant from an investment content standpoint since 1998.
Marty Watkins: We also have a 401k division. We help some family offices, and course, private clients like our physicians and surgeons in generally the business owner iteration of those, and more complex circumstances are the type of clients that we've attracted over the years.

Jim Dahle: Your ad on the White Coat Investors says you do academically sound financial planning. What do you mean by that term?
Marty Watkins: Well, much like medicine, you're striving to always go out and find the data that supports why you would do a certain thing, and there is a lot of research that's been done, much of it during my lifetime that supports some methods over another. We strive to follow what makes sense. Usually, that means a pretty boring portfolio that's quite cost effective.

Jim Dahle: A lot of times when people talk about academics, they also get into factor investing. Does factor investing play a large part in the portfolios of your clients?
Marty Watkins: They do. Primarily for our individual clients, we use DFA, our dimensional for the equity component part of our portfolio. We also, of course, use Vanguard and they happen to be the single largest component part of our portfolios. Across the institutional to retail space.
Marty Watkins: We do use factor investing and think that the work that Dimensional and Ken French and Eugene Fama have done is spectacular work.
Jim Dahle: Now tell us about your fee structure at True North and why you decided to do it that way.

Marty Watkins: So we actually have a fairly flexible fee schedule. We've just recently, actually we're working on right now amending our ADV to a thousand dollar planning fee to help our early professionals have an opportunity to get things set up right from the beginning and try to be as cost effective in delivering that counsel as we possibly can. So that they can avoid the early mistakes that, well if they make them they just compound over time. And if they can get it right at first, whether it's dealing with student loans, etc., we really want to make sure they make the right choices from the beginning.
Marty Watkins: So we have a platform that we can charge a thousand dollar fee to early professionals trying to make sure that they get their affairs in order, and then we have an assets under management fee. We start at 78 basis points for the first 250 thousand and to point 72 or 72 basis points on the next 1.75 million. Then point 58 on the next two million, then point 48 on the next million and then it goes to point 43 to ten million and then 33 basis points ten million and above.
Marty Watkins: Really, we end up being flexible on our fee schedule, largely because the complexity of the client can vary dramatically and the amount of time that we spend with them. If they have multiple business entities and we're coordinating with attorneys and accountants regularly, just is a ton more work. So we try to just make sure that we're adding value in every circumstance and are cost effective in every circumstance, and that clients are getting good outcomes and being charged fairly.

Jim Dahle: All right, let's move on to some questions from our listeners. This first one came in to me via email, there's actually two questions here. He says, “I am a full time anesthesiologist in Northern Virginia. For the past two years I have significant student loan debt, 377 thousand that I refinanced to a rate of 4.375%. I'm a W-2 employee with Kaiser and I'm maxing out my 401K and Backdoor Roth IRA and I was just wondering if I should pay off my loans before I put some extra money in an index fund. I already have an emergency fund in place and pay off my credit card debt each month. Do you think I should wait to buy a place until after I pay off my student loans?”
Jim Dahle: So two questions there, should I pay off my loans or invest in index funds and a taxable account and should he wait to buy before paying off his student loans. What would you say to him Marty?

Marty Watkins: Most people end up using a bifurcated approach where they will work hard on paying down their debt quickly, make sure they're getting all the matching and if they have an HSA of course funding that first. Do some after tax investing particularly if they're paying charitable contributions so that they can have some tax benefits there and they'll be paying off their debt early on a schedule methodology at the same time.
Marty Watkins: I will say that I have had a number of clients that really focus in on paying down their debts as quickly as possible and will only put money in a pre-tax account or an after-tax account above the emergency fund, just to get the match or the HSA contribution. Everything else, they throw at debt and usually because of that display of discipline, those are clients that really build wealth quickly and are very successful.
Marty Watkins: Most of our clients have done kind of a two pronged approach where they try to pay down the debts early and also maximize their pre-tax contributions and the Backdoor Roth, etc.

Jim Dahle: You know it's interesting that you mention that. That's kind of the approach I take. There's obviously a spectrum here, all of which is reasonable, you know? Some people feel like they get their student loans to two or three or four percent, and well geeze am I not going to beat that? You know, investing? If I'm not then I might need a new investing approach. At least over the long term. So I don't think it's unreasonable to carry a little bit of debt for a while.
Jim Dahle: But what I've found is docs really don't want to have student loans five years into their career. That they really feel tied down by them and if they can get rid of them in the first five years, that they feel like they can make different career choices, different family choices, that they just don't have this huge weight hanging over their head anymore.

Jim Dahle: So I've kind of told them to live like a resident and that way they can do both. They can both max out all their retirement accounts, and they can pay off their debt within five years. Now the really aggressive ones might pay it off in two, the less aggressive ones might pay it off in five. I think people dragging it out for fifteen years often regret it and often become kind of unfocused and undisciplined. I think that's probably similar to the experience you've had with your clients.
Marty Watkins: That's exactly right. The disciple displayed to say five years, put it on an amortization schedule and get through it and be done with it and move on, is a great indicator of future success financially.

Jim Dahle: It's like a dry run for financial independence. If you can pay off your student loans in five years, you can become financially independent in fifteen or twenty.
Marty Watkins: Right and those that go out and buy an 800 thousand dollar home right when they're done, and are struggling with student loan debt and making that payment, their building of wealth is hampered significantly.

Jim Dahle: How about the second question from this anesthesiologist about waiting to buy until the student loans are gone. Do you think that's overly conservative? Do you think that's a good idea? What do you think about that approach?
Marty Watkins: Well if he's in a stable situation, I'm all for owning and buying and paying off the home that he would live in. If he's not resolved to be in that community for an extended period of time, or hasn't made partner if it's that type of group or comfortable with the employment situation, maybe he should wait. But I wouldn't just put off a home because he still has student loan debt. It would be the other factors.
Jim Dahle: Yeah, I mean if you're just one of these people that is just piling the money on student loans and you expect to pay them off in thirteen months, well maybe it's not crazy.

Marty Watkins: Right.
Jim Dahle: For the most part I agree with you. If you're in a stable, personal and professional situation, it's time to buy. In the long run, buying usually works out a lot better. So the sooner you get on that, the better. But you also don't want to be one of the 50% of docs that change jobs in their first two years and now have a big mortgage payment hanging around your neck, keeping you from being able to do that.

Marty Watkins: I've been doing this for 31 years now. You get to watch scenarios where people purchased a home in an area, let's say even somebody that buys a home during residency, and that marketplace happens to go down during their training, they have to write a big check before they can sell that house. But if your situation's stable and you're earning a good income, just fast forward as much as you possibly can getting rid of the debt and buying a reasonable house is fine.
Jim Dahle: Okay so our next question comes in off the speak pipe from Mike.

Mike: Hi, Dr. Dahle. My question is about portfolio rebalancing. Rather than sell from the oversize asset, and transfer the proceeds to the undersized one, I've always just invested additional funds out of pocket and purchased more of the smaller one. Am I making a mistake by not locking in those returns? By proceeding in this manner I've always used it as an incentive to invest even more. And I'm still theoretically buying low. Thanks so much for any insight you can give.
Jim Dahle: So to summarize, Mike's kind of asking should I rebalance with new investments or do I have to sell assets that have done well to do it properly. I thought this was such an important question I actually named the podcast after this, How to Rebalance.

Jim Dahle: I think there's a lot of people who get a little confused about this. What would you say to Mike about that?
Marty Watkins: I think it is a great question and it's easy to do if you would globally look at your portfolio. The qualified, Roths, etc. and your after-tax account, you can essentially not create tax ramifications and rebalanced you're looking at more than just an after-tax account. But if that account is sequestered for a specific purpose, that say predates 59 and a half unless you're going to do some other techniques that would make retirement plan dollars available at that point, if it needs to have a specific allocation then I wouldn't let the tax ramifications drive it. I certainly would identify tax slots and make sure you do it efficiently.
Marty Watkins: There's also an opportunity if you're donating to charity to keep raising your basis and these securities as you go forward. By donating the shares, and you talk about this, that you purchased at the lowest price or the highest margin, when you put the money that you would've paid in cash to the charity if you pay that then to your account and use that to rebalance with the dividends and other new cash going into your after-tax account, usually you can do this in a very tax efficient way. Even in an after-tax account, particularly those that give to charity.

Jim Dahle: Yeah I think that's exactly right. I think most people will find in the first half of their career at least, that it is very rare that they have to sell an appreciated asset in a taxable account in order to rebalance. I've now been investing for fifteen years, fifteen years I've been investing. I have never sold a taxable asset at a gain. Period. I haven't done it. And I haven't had to do it to rebalance, haven't had to do it for any other reason. And so I think that what most people will find, is that they can just most of the time rebalance with just the new contributions. Especially in their first decade of saving.
Jim Dahle: Secondly, even after that most of the time especially if you've been reading the White Coat Investor blog or listening to this podcast, you've probably been maxing out some significant retirement accounts and you can do a lot of your rebalancing inside those accounts.
Marty Watkins: Right and avoid it all together.

Jim Dahle: I think at the other end of life, if you're 85 years old and thinking about selling taxable assets, you've got to start going, well shoot how much longer am I going to be around before my heirs get a step up in basis. I think there's really only a few decades there in the middle where people are finding they have to deal with this issue. That they actually have to keep their portfolio balanced, they have to sell something that's appreciated in a taxable account.
Marty Watkins: Right, right. That's been my experience as well and we try to algorithm our portfolios as much as possible. That's part of what helps us keep our fees low. And it's very rare that there isn't enough cash flowing into the account that it would trigger rebalance on an after-tax portfolio. So even on a systematically rebalancing portfolio, if it has cash flow going into it and if we're doing charitable contributions into it wisely, experiencing a taxable capital gain that's extremely rare.

Jim Dahle: Well speaking of charitable contributions, let's take our next question off the speak pipe. This one comes from an anonymous listener and tithe payer, as are probably many of your clients in Utah and Idaho but let's listen to this one.

Speaker 3: Hey Dr. Dahle, I've heard you talk a lot about tax loss harvesting and also donating appreciated gains. I'm at a position where I am maxing out my retirement accounts now, but I give about 20 thousand dollars a year to charity, religiously as a tithe. As of right now my taxable accounts only generate about one to two thousand dollars in gains a year, which I do try to donate. I was wondering what you thought about using leveraged ETFs or a broad diversity of more volatile stocks to maximize tax loss harvesting and to maximize the appreciated gain donations. For instance, if you were in more volatile stocks. Some of them would go a lot, those ones you could donate since we're donating anyway, and then the ones that go down you could sell for a tax loss harvesting. Or is just completely too risky and too complicated of a strategy?
Speaker 3: Obviously when I get to the point that my taxable accounts are large enough to cover all of the donations, I won't even be in this issue. Would love your thoughts on this, thanks.

Jim Dahle: So to summarize it sounds like he's asking what do you think about leveraged ETFs or funds or particularly volatile assets classes in order to maximize the tax loss harvesting benefits and the donation of appreciated shares to charity benefits. Do you think that's worth having a different asset allocation than you might otherwise have?
Marty Watkins: I do think it's an interesting question and an important one to be raised, I wouldn't go that direction at all. I'd prefer a long boring game plan that is cost effective and if you're just patient and have a good portfolio, you'll have plenty of opportunity to give away gains and donate to charity that way. What you might find is, in that type of a leveraged technique, is that you have a whole bunch of losses that you at least get some tax benefit by writing off some income. But it's a long road to go down if it goes against you.

Marty Watkins: I'm not a big fan of letting the tax tail wag the dog. You should invest in something because it's a good long term investment and generally speaking, boring is better and those certainly are not boring. So in short in the long run it's wiser to buy kind of a boring, inexpensive, I think factor based portfolio and donate the appreciated shares within that. Rather than an exotic, expensive and volatile portfolio that might have some dramatic gains that you could give away and magnify your donation in certain years.
Marty Watkins: To me it doesn't fit within the overall idea of being a wise investor.

Jim Dahle: I think that's exactly the right answer. However, I also have a confession to make that I considered this question a few years ago and chose what in retrospect was probably the wrong answer. I didn't choose leveraged ETFs, I think those are pretty lousy investments, but I did put some stuff in my taxable account primarily knowing that I was going to donate any gains and if I had any losses I would tax loss harvest them. I had more asset classes than I probably would've put in there otherwise, I think I put my small value in there a little bit. I had some emerging markets which I don't actually break out my portfolio these days. And I had I think Vanguard's precious metals mining fund and a couple of others like that. That weren't terrible investments overall, it wouldn't have killed me to hold them for a few years and I knew I'd eventually be able to flush out any gains anyway.

Jim Dahle: What I found is exactly what Marty said. After a few years, you have so many losses anyway that you have booked just using regular boring old total stock market, total international stock market, kind of funds. You've got plenty to get your three thousand dollars in tax losses a year and make up for any possible capital gains distributions you have.

Jim Dahle: So why mess with your asset allocation? If you thought this asset allocation was good, why are you adding other stuff to it, just for as you say, to let the tax tail wag the investment dog. I don't think those benefits are large enough and I think after a few years, your portfolio will be big enough that you get all those benefits without having to use any sort of exotic leveraged ETFs doing it.

Jim Dahle: So I confess I tried it. It didn't hurt me particularly badly by any means because I donate a lot to charity, cheer and so I was able to flush out the gains no problem and rearrange my portfolio without difficulty. But I can't pretend it was a good idea and I certainly can't advocate it. So I think Marty gave exactly the right answer on that.

Jim Dahle: All right well thanks so much for coming on the White Coat Investor podcast. For those who would like to ask Marty more questions, you can find him True North Wealth dot com. Also can be found as the Idaho Medical Association Financial Services and you can call at 8-0-1-3-1-6-8-1-7-5. Thank you for coming on the White Coat Investor podcast.

Marty Watkins: Thank you so much, I appreciate it very much. I would like to express my gratitude to the physicians and surgeons that spend so much time and effort being trained properly and late nights that they spend to care for those that are injured and sick. I happen to be a person that, my wife she teases me, I've burned through my nine lives if I were a cat and more. It's doctors that have saved my life on multiple occasions and I'm very grateful to your commitment to excellence and dedication to helping those even when you might not feel the best or it's the end of a long day and the next person that comes in really needs your care. I've been that guy and I'm very thankful to those that have served me and I just want to express my gratitude to you for all that you do in the profession.
Jim Dahle: Thank you very much, Marty and thanks again for being on the podcast.

Jim Dahle: Well it was great to have Marty on the podcast, you know after we stopped recording we actually had a discussion about a recent change in umbrella policies. Apparently a lot of the major issuers of umbrella personal liability policies have made a change in the last few years. Such that they no longer cover excess liability for uninsured and underinsured motorists.
Jim Dahle: Which if you look into umbrella policies, about 80% of the claims on umbrella policies are auto related. So when you actually use the policy, which doesn't happen very often, that's why they're so cheap. It usually comes from related to your auto use. So that's a pretty significant change, to have something that they are no longer covering there.
Jim Dahle: Now that's never been my favorite type of auto coverage to start with, but there could be a need there for that. You need to look into it and understand how it works and you may need to reshop your umbrella policy if you want that additional coverage.

Jim Dahle: All right let's take another question off the speak pipe. This one's anonymous from a Pacific Northwest hospitalist.
Speaker 5: I have a tax deduction question. I'm an independent contractor and I live in Seattle. I travel seven days a month to Southern Oregon and travel seven days a month to Central Washington for hospitalist shifts and I travel to these sites on a recurring basis. I'm wondering if I can deduct the travel expenses with the standard mileage deduction for the trips between Seattle and these locations. I also wonder if I were to fly to these locations, if I could deduct the airline price. Thank you.
Jim Dahle: Okay, so can you deduct your travel expenses when you're working away from your home. Work related expenses are deductible as long as you incurred the cost for a taxi, plane, train, or car while working away from home on an assignment the last one year or less. So those are all deductible.

Jim Dahle: You could also deduct the cost of laundry, meals, baggage, telephone expenses, and tips while you're on business in a temporary setting. So you have a choice about how to deduct the cost of your meals that are business related or eaten while you're on an un-reimbursed travel excursion. You can either deduct 50% of the actual meal cost or you can take 50% of the per diam rate for the location of your travel. And you can find a list of those cities on the IRS website and figure out exactly what is the better option there.
Jim Dahle: But yeah, your work related travel expenses are deductible. You know, you've got to keep in mind that the real thing people get in trouble with is they try to deduct their commute. Your commute is not deductible. But if you're going to another city and staying overnight and working shifts, those are work related travel expenses.
Jim Dahle: All right our next one comes from an anonymous person on the speak pipe.

Speaker 6: Hey Dr. Dahle, thanks for all that you do. I'm a long time reader and listener and I've benefited greatly from your work. I'm a thirty year old ER doctor working in a community hospital in a rural part of the Western United States. I'm engaged to my partner and we are set to be married next year. We currently have no children, our financial plan is to max out pre-tax retirement account using individual 401K through Fidelity and to fully fund Backdoor Roth IRA and HSA. I have approximately 200 thousand dollars in student loans with an interest rate less than 3% and may be eligible for significant loan forgiveness next year given the rural location of my practice. I make around approximately 360 thousand dollars a year as a 10-99 independent contractor. The only other debt we possess is approximately 30 thousand dollars in car loans.
Speaker 6: My partner is a teacher but currently only working part-time making a small annual salary. She suffered the unexpected loss of her father a few years ago and inherited money as a result. She has more or less ignored this money since his passing as she feels obvious complicated emotions surrounding it. We were hoping to address it prior to our marriage next year. Let me preface this by saying that we are in a very stable relationship having been together for over 11 years and I know she shouldn't give me any access to any of this money prior to being officially married, which she hasn't.

Speaker 6: That being said, she has the following accounts: she has a myMutual fund account with New York Life worth approximately 180 thousand dollars, an inherited IRA worth approximately 50 thousand, and a separate taxable account through Morgan Stanley worth approximately 160 thousand. What would you recommend we do with these accounts? She is currently in the lowest income tax bracket, will making any changes before we get married have large tax implications? Can we use some of the funds from the taxable accounts to fund pre-tax retirement funds in the future?
Speaker 6: Thanks for your time and all the work that you do.

Jim Dahle: Basically asking, what should my fiancé do with 350 thousand dollars in taxable assets she's been ignoring before we get married and our tax bracket goes up dramatically.
Jim Dahle: Well I was pretty impressed with that call. That was an impressive amount of information conveyed in 90 seconds. You know usually, you don't have enough information to really give good answers, but that was really a pretty impressive summary.
Jim Dahle: Chances are a lot of those taxable holdings are less than ideal holdings and should be swapped out for what you really want, some decent index funds now that she's in the 0% long-term capital gains bracket. While you're in a low bracket, take advantage. This is a great time to realize gains. This is a great time to change your portfolio around even if it costs you a little bit of money, it's probably still a great time.

Jim Dahle: In this case, you usually don't want to mess with the other person's finances until you're truly married. I recommend against people paying off someone's student loans until they're truly married, for instance. But in this case, boy it sure makes a lot of financial sense to make some changes before the marriage occurs and the tax bracket goes up dramatically.
Jim Dahle: All right the next one comes from Chris on the speak pipe. Let's take a listen.
Chris: Hey Jim, I'm wondering if you have tips about how to start transitioning from all tax protected accounts to opening a taxable account. I've been maximizing contributions to a 401K, a 457B, HSA, Backdoor Roth for my wife and I since finishing residency and everything else has gone towards my loans, which I just paid off. Now that extra money is going to a Vanguard money market account towards a down payment on a house. But after we buy the house, I'll start putting those savings into a taxable account, but I'm struggling to figure out the best approach for this.

Chris: So my five of four mentioned tax protected accounts have about a 100 thousand dollars between them, and each of them has a basic three fund portfolio of total stock market index, international stock index, and total bond index. Each one at my desired asset allocation. I know however, that my new taxable accounts should preferentially contain tax efficient funds, like the total stock market index and the tax free accounts should preferentially have tax inefficient funds like the bonds.
Chris: Well anyway, this throws off my system of just having the same asset allocation in all of my accounts. So I'm envisioning putting all my extra savings into a total stock index fund in the taxable account and then adjusting my allocations to my other five accounts to be more bond heavy, but how do you do this and maintain your asset allocation across the board? Any tips or resources would be helpful.
Jim Dahle: So he's basically asking, how do you start a taxable account. Well unlike a 401K or a Roth IRA where if you kind of botch it a little bit in your investment selection, there are actually consequences to changing your investments in a taxable account, as we learned on that last call.

Jim Dahle: If you have capital gains, it's going to cost you some money to change investments. Most people inside a taxable account try to stick with pretty tax efficient kind of investments. So if you're investing in bonds in your taxable account, you want to be using Unibonds if you're in one of the higher tax brackets. If you're investing in stocks, we're usually looking for something like a total market index fund, you know? The total U.S. market, the total international market, those are kind of the holdings you have there.
Jim Dahle: If you're investing in real estate, rather than put your hard money loans there, your debt kind of investments, you should instead put your equity real estate investments in there because you can shelter some of that income by depreciation. Some of it, of course, is going to come in the form of capital gains, and so that's better than the ordinary income you'd be getting from most debt deals.
Jim Dahle: You want to set it up right the first time if you can. Then of course as time goes on, one of your accounts generally gets bigger than the others. Whether it's your taxable account, whether it's your tax protected account, you will find that you are moving portions of your asset allocation from one account to another. You're essentially buying more of small value stocks or total international stocks in one account than you had in the other one.

Jim Dahle: In general, what you want to do is avoid realizing capital gains as you do that, and stack them into the taxable account if necessary, in order of tax efficiency. You don't want to necessarily take your real estate investment trusts and put them into the taxable account first because that tends to be a very tax inefficient asset class. You generally try to avoid putting tips, treasurally inflation protected securities into a taxable account as well. For the phantom tax issue, where basically they're sending you a tax bill for appreciation that you're not actually getting on that investment. That's generally how in a tax protected account, as well to avoid that complexity.
Jim Dahle: All right, our next question comes off the speak pipe question, this one not from a doc but from a doctor's wife.
Speaker 8: Hi Dr. Dahle, first I would like to thank you for all you do. It is so reassuring to know that you're out there helping doctors and their families navigate through the world of personal finance. I'm a doctor's wife. My husband is currently in a one-year fellowship and has asked for me to help him with the search for his first attending job.
Speaker 8: After reading your blog and listening to the podcast, I know how important that first job really is. However, I can't help but worry that we're so unprepared for this whole process. Between recruiters, compensation reports, and few of our physician friends willing to talk about money, how do I ensure my husband gets fair pay for his work? What is your opinion on compensational reports, like the MGMA? Further, we've never had to negotiate a contract before, worry about restrictive covenants, or ensure that we had proper benefits.

Speaker 8: I was wondering if you had any advice on how to get a sound first attending job that sets us up for financial success. Thank you.
Jim Dahle: Okay she's asking how do I make sure my husband's paid fairly, what's your opinion of MGMA, how should we negotiate a contract. All good questions, it's wonderful to have somebody else in your corner helping take care of this stuff while you're busy learning how to practice medicine. But these are obviously pretty important questions as you come out of residency.
Jim Dahle: So how do you make sure you're paid fairly? Well, the only way to do so is to know what you're worth. And the way you know what you're worth is by finding out what other docs that do similar work to you are getting paid. Now you can do that in some ways by calling up all your residency mates that graduated last year, find out what they're doing at their jobs, where they're at, and what they're getting paid. That'll give you a pretty good sense for what your value is.

Jim Dahle: If you want more specifics particularly for local geographic areas, it can make sense to look at more fine tuned data. Now MedScape every year will publish some information about salary surveys, a lot of specialties have their own salary survey. For example in emergency medicine, Daniel Sterns does a fairly complex survey of salaries each year. But I don't know that something like that is available at every single specialty.
Jim Dahle: So that leaves people to go to MGMA. This is a company that compiles data. Salary data for doctors and similar professionals. It uses this to make a profit, right? They sell the data. They sell this data to hospitals and other people who are hiring docs, they sell it to docs who want to know what they're worth. But it's going to cost you several hundred dollars, sometimes seven or eight hundred dollars to get access to that data. It's not super cheap.
Jim Dahle: One of the best ways to get ahold of it however, is to hire a contract negotiation firm or a contract review firm. Most of these including the ones I put on my website, like Contract Diagnostics, will provide this data to you as part of their service. So they're going to review your contract for you, go over it, help you understand the terms and which ones might not be that good. They can help you negotiate it if you need to and they will also tell you if you are being paid fairly.

Jim Dahle: I think that's totally worth spending a few hundred dollars on your last year of residency or fellowship, as you're getting ready to move on to your adult job. To not only understand what could happen with this contract if you're not happy with them or they're not happy with you. But also just to know you're not getting hosed, that you're getting a fair price. You'd think it wouldn't be that hard, but it is. You don't get paid what you're worth, you get paid what you negotiate.
Jim Dahle: So you can check out our recommended firms at White Coat Investor dot com slash contract dash negotiation dash and dash review. It's under the recommended tab on the main website.
Jim Dahle: All right our next question comes from an anonymous employee doc with a simple IRA.
Speaker 9: Hi Dr. Dahle, I'm an employee at two physician practice, the only retirement package available to me through my employer is a simple IRA. I've been maxing this out for the last two years. My understanding is in the reading when I signed up for it, I have to leave the money in this particular financial institution for two years from the start date. The day the account was opened.

Speaker 9: I believe I'm not able to roll this over into another financial institution or another retirement product until I hit that two year mark, which will be December of this year. My question is, is it worth it to me to go ahead and do all the necessary paperwork and roll it over into another institution as soon as I'm eligible to do so, so that I can take advantage of the Backdoor Roth IRA. I know I have to get all of my money out of other IRA accounts because of the pro-rata rule.
Speaker 9: Because I plan on continuing to stay with this employer and use this simple IRA again next year, is that even something that is an option to me? Can I actually once eligible in December, roll it over into a 401K at another institution, take advantage of the Backdoor Roth IRA and then contribute again next year to this simple IRA plan. Or is that just going to open up a whole can of worms?
Speaker 9: Thanks I appreciate your help.

Jim Dahle: And he is basically asking is it worth it to do a roll over as soon as I am eligible to do a Backdoor Roth IRA. Well here's the deal, if you have some old simple IRA, it's pretty easy to get rid of it. If you are making ongoing contributions to a simple IRA every year, that's not super compatible with a Backdoor Roth IRA.
Jim Dahle: You basically have to choose between the two. You can either do a Backdoor Roth IRA and not use your employer plan or especially if you're getting a match from the employer of any kind, use the employer simple IRA plan and just not do a Backdoor Roth IRA. It's not the end of the world to not do a Backdoor Roth IRA. You can invest in a taxable account and be just fine.

Jim Dahle: I would also spend some effort trying to talk the employer out of that stupid retirement plan though. I do not like simple IRAs, they are not great plans for docs. The contribution limits are not very high and they keep you from doing a Backdoor Roth IRA. They have this funky rule that you've got to leave the money in there at least two years as well, which you don't see with most retirement accounts.
Jim Dahle: I'd try to talk your employer out of doing that. In this scenario, if you're going to be making ongoing contributions every year, you can't roll it all out of there you're always going to have something in there. So it's really not a great option.
Jim Dahle: Okay, this question comes from the White Coat Investor forum where they ask, “Should I over fund my 529 plans on purpose for tax reasons as personal investment and estate planning tool?”
Jim Dahle: So this question is getting at a separate use of an educational savings type of account called a 529, besides for college. She's talking about saving for retirement in the 529, and a lot of people think about this. They're like, well all that tax protection over the years must be worth more than the penalty when I take the money out. And the truth of the matter is that it is not. Not without a dramatic decrease in your tax brackets between your working years and when you retire.

Jim Dahle: And most people considering probably doing this won't have as large of a drop as the average person there. And the reason why is two fold. One, when you pull that money out and don't use it for education, you've got to pay a 10% penalty. And two, when you pull that money out and don't use it for education, you've got to pay taxes at your ordinary income tax rate, not the lower capital gains rates. And so in that respect, it's like an annuity but a bad annuity because there's an additional 10% penalty.
Jim Dahle: So yes, you get protected while it grows but when you pull it out you end up paying such higher tax levels that this is not going to come out ahead. You're going to end up better off investing just in a taxable account and you also get the other benefits of a taxable account, right? You get the ability to tax loss harvest any losses, you can donate appreciated shares to charity, you get to step up in basis of death, you can gift the shares to family members and they can sell them at their lower tax bracket. There's lots of different things that can be done in a taxable account that can't necessarily be done in a 529.

Jim Dahle: So use your 529s for education, don't use them for retirement and just stick with standard retirement accounts plus a taxable account there. The only one that I think you can really use for a purpose that's not designed for, effectively, is a health savings account. But even there, the best use of it is to spend it on health care eventually.
Jim Dahle: Okay, another one also coming from the White Coat Investor forum, if you'd ever join this forum it's great. It's found on the main website, there's some very knowledgeable people there, I think there's six or seven thousand members. You'd be surprised how quickly and how high quality of answers you get to rather complex questions. You're getting them from docs and you're getting them from financial professionals. Unlike the Facebook group, we let financial pros on the White Coat Investor forum. That's a real benefit there, check that out if you get a chance.

Jim Dahle: Here's the last question we're going to do here. “I'm an orthopedic fellow currently until July 2020. Our situation is a current stay at home wife, not a physician. We stand to make about 90 thousand dollars gross in 2019, accounting for my fellow salary and stipend from my next job that I've already signed with. 2019 will be our lowest earning year hopefully for probably the next twenty to thirty years. We both had 403B accounts at our previous job, residency and this amounts to about 30 thousand dollars combined. We recently sold our home where I did residency and we were fortunate enough to sell it and make a decent profit after nine years,”
Jim Dahle: That's a long residency, they must've had it before residency. “We do have about 60 thousand dollars saved from the home sale to one max out 2020 Roths at the beginning of the year, and two a decent chunk for a down payment on our next house following fellowship. My current plan is to roll over these 403Bs into our Roth account since we are no longer employed and intend to pay the tax burden out of that 60 thousand. Would you have any cautions in this regard?”

Jim Dahle: No I think that's a great plan. You know, the idea is you don't want to pay the taxes for a Roth conversion out of the account that you're converting. When you have some money on the side to pay for that like most people do when they come out of residency, come out of fellowship, that's usually a pretty good use for your money.
Jim Dahle: Now this is even better, because he's doing it the year before he comes out of fellowship. He's doing it in 2019, comes out of fellowship in 2020. This is really a great opportunity to do some Roth conversions. Now bear in mind, if you're still at the employer, they usually won't let you roll that money out to a Roth IRA and convert it until you actually separate from the employer. So for most people you're trying to do this the year before you leave residency. But if you can do it earlier in residency or heck, do it as a medical student, that can really be a great tax move.

Jim Dahle: So our sponsor for this episode was Earnest. Earnest is really great because you can choose custom terms to fit your budget. You can pick your exact monthly payment or you can select your interest rate, or you can select the term which is what most people do. They decide how long they want to pay and then Earnest tells you what the interest rate for that term is going to be. You can get fixed and variable rates, they don't pass you off to third party servicers, they don't penalize you for making payments early, they protect your family in the event of your death or disability, and the minimum amount to refinance is super low, five thousand. The max amount is pretty high, five hundred thousand. So if you have debt between five and five hundred thousand, you can refinance with Earnest.
Jim Dahle: If you go through the link I'm about to give you, you can get 500 dollars cash back as well, and please put that toward your loans and pay them off even faster. That link is WhiteCoatInvestor.com/refi, R-E-F-I. Refinance today with Earnest.

Jim Dahle: Also be sure to sign up for our email list. You can find that at White Coat Investor dot com slash email and thanks to those of you who are giving us a five-star review on the podcast and telling your friends about it. It really does help us spread our message of financial literacy for docs and other high income professionals.
Jim Dahle: Head up, shoulders back. You've 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 so this podcast is for your entertainment and information only. It should not be considered official, personalized financial advice.