Today we are answering questions about investment taxes. There are several things that you can do to reduce your investment taxes including the use of retirement accounts and buying and holding tax-efficient investments. We cover six ways to help with reducing those taxes. We talk about when (or if) you should rebalance your portfolio and what to do if you have to recharacterize from a Roth IRA to a traditional. We discuss if it is ever a good idea to do tax-gain harvesting and go over what opportunity zone investing is and what type of investors are participating in it. We also interview Dr. Cory Fawcett who will be delivering two fascinating talks at WCICON 22.

 

6 Ways to Reduce Taxes on Your Investments 

There are a few ways you can reduce your taxes on investments, and you should be familiar with all of them. The first one is to use retirement accounts. If you use tax-protected accounts, it dramatically reduces the amount of taxes you pay on your investments. Basically, you can buy and sell with no capital gains taxes. You don't have to pay taxes on any dividends or other distributions from the investments as you go along, and you get a tax break upfront for a tax-deferred account. If it's a tax-free account, the money is never taxed as it grows. For most people using tax-deferred accounts, there will be an arbitrage between their tax rate at the time they are contributing the money and the tax rate at which that money is effectively withdrawn from the account later. It is just a great way to reduce your investment-related taxes. So you need to max those out.

Aside from the tax benefits, in almost every state, you get excellent asset protection for those accounts. Your 401(k) is protected federally. In most states, your IRAs are also protected or receive at least some protection. You should be aware of your state asset protection laws, of course, in that regard. But it is a very easy asset protection strategy to just max out your retirement accounts.

The second way you can reduce your investment-related taxes is by buying and holding tax-efficient investments. If you are not churning your investments, you're not having to pay short-term capital gains taxes. You're not even having to pay long-term capital gains taxes because you are holding the investment. It helps if the investment doesn't spit off a lot of income. That makes it more tax efficient. If it does spit off income, hopefully that income is taxed at a lower rate. In real estate property, it may be covered by depreciation. In the stock realm, by qualified dividends. If you hold the stock or the fund for at least 60 days around the time of the dividend, then it should qualify for lower qualified dividend and long-term capital gains rates. Those rates are likely to go up with the tax bill currently in Congress, maybe it's even passed by the time you hear this. I'm recording this on October 21, but it doesn't run till November 18, but even so, even with the proposed changes, it's going to be significantly less than your ordinary income tax rates.

The third way you can reduce your investment-related taxes is by using municipal bonds. If you are investing in bonds in your taxable account and you're a high earner, like most of you listening to this podcast, you should give serious consideration to using municipal bonds for at least some of that bond allocation. The interest from municipal bonds is tax-free. If there are bonds from your state, it may be state and local tax-free as well. That helps it to be even more tax efficient. Now, obviously, the yields on those are lower than they would be on a taxable bond. But if you're in a high bracket, generally you come out ahead using a municipal bond or a municipal bond fund. I have to invest in bonds in my taxable account. I use the Vanguard Intermediate-Term Tax-Exempt Fund, and that's treated us well over the years.

Number four: you can tax-loss harvest. This is where you have a loss with something you bought. Usually something you bought in the few months previously, maybe a year or two previously, and the value goes down. Well, there's no reason to hold on to a losing investment in a taxable account. And at minimum, you should swap it for a very similar investment, but, in the words of the IRS, not substantially identical. A good example is swapping from a total stock market fund to an S&P 500 fund. These are substantially different investments, but the correlation between them is roughly 0.99. When you do that, you book that loss and you can use it on your taxes. It can offset up to $3,000 a year of ordinary income, and it can be carried forward indefinitely. And it can offset an unlimited amount of capital gains. If you expect to have some capital gains in the future, it's great to book these losses as you go along.

The fifth one is to take advantage of depreciation. This is particularly important for the real estate investors out there. Using depreciation, you can often offset the entire taxable income of a real estate property—or a fund or syndication, however you've chosen to invest in real estate. It's pretty cool to get $10,000 a year in income and get no tax bill at all, or maybe only pay taxes on $2,000 of it. That's a result of depreciation. Even when that depreciation is recaptured, if and when that property is sold, it's recaptured at a lower tax rate than what you got upfront. It's a great deal. Take advantage of it.

Finally, a great benefit and a good way to get rid of appreciated shares, whether it's stocks or whether it's funds or ETFs, is to donate them. If you're going to give to charity anyway, if you've owned these shares for at least a year and they've appreciated, donate the shares instead of cash. And then you can basically flush those capital gains out of your portfolio, and you can buy those shares back the same day or the next day. There's no 30-day wait period like with tax-loss harvesting. You can do it right away. There's no reason not to use that opportunity to flush capital gains out of your portfolio.

You should also take advantage of the step-up in basis at death. It looks like there's been some talk in Congress about changing this, but it doesn't sound like it's actually going to change in this tax bill coming up. Obviously, that is subject to change until the bill becomes law. But with a step-up in basis of basically your heirs, their tax basis on the investments they inherit from you is the same as though they had bought them on the day of your death. That is a great way to save on a lot of capital gains taxes for them.

Those are the general ways in which you can save money on investment-related taxes.

 

Rebalancing Your Investment Portfolio 

“What do you do in a bull market like this if you have no carry forward losses to apply? If your written investment plan calls for 60% U.S. stocks, 20% international stocks, and 20% bonds, what do you do to rebalance? U.S. equity has had a huge run, and to rebalance, one might need to take profits. That would not be very advantageous tax-wise if you don't have any losses to apply.”

Whenever possible, you should rebalance with new money. For the first 10 years-plus of your investment career, you should be able to do that because your new contributions are such a significant percentage of your total portfolio value. If you're putting $50,000 or $100,000 this year into your portfolio, just make sure that money is going preferentially to the assets that have been lagging behind, and that will help you to stay rebalanced. And there's no tax cost. If you don't sell appreciated shares, there's no tax cost to that rebalancing.

You can use dividends the same way. We always have our dividends in taxable, paid into cash so that they can be reinvested into whatever asset class is lagging. Try not to sell shares whenever possible. It's also ideal, if you do have to sell to rebalance, to try to do it inside your retirement accounts, because in your 401(k) or your Roth IRA, there are no consequences to selling appreciated shares.

If you do have to sell something in a taxable account, it's great if you have some losses that can offset it. But if not, don't let the tax tail wag the investment dog and just bite the bullet. Sell it, pay the taxes, and get back to where you ought to be balance-wise. But keep in mind that the data on rebalancing suggests that you really don't need to do it more often than every one to three years. So, don't do this frenetically every month. You don't need to be rebalancing all the time. You can rebalance once a year, once every couple of years, and that's perfectly fine.

I've never had to sell appreciated shares in a taxable account in order to rebalance my portfolio, because I pay attention to where I'm putting new money. I pay attention to which appreciated shares I donate to charity, and I try to keep things balanced that way. And of course, I can do some rebalancing inside the tax-protected accounts.

I've been investing now since 2004. In 17 years, I haven't had to sell shares in a taxable account in order to rebalance. But if you find yourself forced into that situation, well, it's better than not rebalancing at all.

 

Recharacterization from Roth IRA to Traditional

“Hey Jim, this is Scott from Philadelphia. I'm an EM resident and a dual physician couple and after careful consideration, my wife and I elected to use married filing separately as our tax status for her student loans. The problem is that married filing separately has max earnings for a Roth IRA contribution of $10,000. My IRA servicer is allowing me to recharacterize my 2020 and 2021 contributions from Roth IRA to traditional, a reverse backdoor IRA, I suppose. Due to some processing fatigue from the servicer, my allocation has been growing for months and I'm concerned that all of these gains will be useless when it gets recharacterized.

My questions are what happens to a year of unrealized gains during recharacterization and what are the long-term implications of having a Roth and a traditional IRA account? Thank you for your time in being a cornerstone of my financial education.”

I really like this question. You are correct. You cannot contribute directly to a Roth IRA, but that's no different from most attendings listening to this podcast. The only way they can contribute to a Roth IRA is indirectly i.e., via the Backdoor Roth IRA process.

Now you screwed this up, it sounds like. It sounds like you contributed directly to a Roth IRA and you are correct that the fix for this is to recharacterize the contribution. You basically are telling the IRA manager that you didn't want to make a Roth contribution. You wanted to make a traditional contribution. They basically just take that money you put in the Roth IRA along with everything it's earned, since you put it in there, and put it in a traditional IRA.

And as far as the IRS is concerned, assuming you recharacterize quickly enough, it's like you just contributed to a traditional IRA in the first place. Basically, at this point, you have some gains there. Maybe you put $6,000 in there. Maybe it's grown to $7,000. You can now do a Backdoor Roth IRA with it. You can do a Roth conversion and move it into a Roth IRA. You can recharacterize this Roth IRA contribution to a traditional IRA contribution. At that point, you can do it just like everybody else does their Backdoor Roth IRA. You can do a Roth conversion. At least until that tax bill in Congress goes through, you can do a Roth conversion on that traditional IRA.

You move that now $7,000 to a Roth IRA. Now, because $1,000 of that is gain, you're going to pay taxes on $1,000 now. You'll have to pay it at your ordinary income tax rate. It's very unfortunate. That's the price you pay for screwing this up. You're going to pay $250, $300 in taxes, or whatever on that money. I'm really sorry about that. But you can still do it. It's just going to cost you a little bit in tax money for not doing it correctly the first time.

No big deal, though. I've certainly made much bigger financial mistakes than that one. And it's good to learn it as early as possible, but you certainly don't have to leave that money in a traditional IRA. It can be converted. Now next year, that might be different depending on how this tax bill ends up shaking out. But for now, that's the law.

Recommended Reading:

IRA Recharacterizations (I Should Have Backdoor Rothed!)

 

Inheritance and Taxes 

“Hey Dr. Dahle. I was hoping to get some advice regarding my wife's inheritance. My wife inherited a variety of actively managed Fidelity mutual funds and a few individual stocks—Apple, Pfizer, Merck, to name a few—about 20 years ago from a grandparent long before we met. It's been managed by a wealth managing firm from the beginning. Since then, it's grown to over seven figures. I don't have the exact numbers in front of me, but let's say it's grown from $600,000 to $1.2 million. I finally convinced her to consider cutting ties with her wealth management firm. But now I'm not quite sure how to proceed. Would you advise her to simply convert these managed mutual funds and stocks to index funds, according to our written financial plan, with the 20% capital gains tax given our tax bracket on the large step-up in basis?

This inheritance was not included in our written financial plan initially and was just seen as extra. To follow our financial plan and to keep the tax tail from wagging the investment dog, as you would typically advise, should we just transfer everything into index funds in a taxable account and pay the capital gains now? We've maxed out all available tax-advantaged retirement accounts.

Do you think this is even the right approach, considering the presumably six-figure tax bill in the short term? How do you even cut ties with the money manager anyway? Is there any fine print, fees, legal hassles, or landmines to be aware of? What do you do if you're not sure of the tax basis of inherited funds? How can you find that information out and what happens if you can't figure it out?”

Well, congratulations. And I'm sorry. It's wonderful to get an inheritance. Think of all the wonderful things you're going to be able to do with this. It's going to advance your pathway to financial independence. Even if you're going to get there anyway, it's more money that you can leave to heirs or give to charity. But I'm sorry, this has been royally screwed up from the beginning.

First of all, it's screwed up by the grandparents for investing in actively managed mutual funds and picking stocks. It’s screwed up by the financial advisor who's been collecting an AUM fee or commissions or something off this for the last several decades. A few decades with the grandparents and at least two decades with you guys. And then it's been screwed up by you guys for leaving it there for 20 years.

The day you inherited this, when your grandparents died, you could have swapped out all of it with low-cost index funds and ETFs, and diversified it and reduced your costs and gotten that step-up in basis of death and not had any capital gains taxes due at all. Putting this off has made a pretty good mess. It's still going to be good that you get an inheritance, but it's a mess. These are what we call legacy investments. They're investments in taxable that have such a low cost basis that you're hesitant to sell them, even though you wouldn't buy them today. And so, by definition, this is the tax tail wagging the investment dog. The idea here is to try to reduce the implications of this on both your tax bill and your investment portfolio. That usually means some sort of a balanced approach weighing those two goals against one another.

If you have a whole bunch of tax losses from your other investments, if you've been tax-loss harvesting, you can use those to offset gains when you sell these other stocks. If you give to charity, instead of giving cash, donate these other legacy investments instead. That's a great way to flush the capital gains out of your portfolio. But the first thing you should do is write down every investment, what its current value is, and what your cost basis in it is. And that will allow you to calculate, “Well, what's really the tax hit? If I sell this, what's it going to cost me in taxes?” And you can multiply that by whatever your capital gains rate is. You said yours is 20%. It might be 23.8% if you consider that Obamacare tax that's added on there.

That said, these taxes are scheduled to go up next year if this bill in Congress passes. So, you may want to do this before the end of the year. You've got to figure out what the bill would actually be to just sell it all. And sometimes you find out it really isn't that bad, so you just do it. But it sounds like in your situation, with a seven-figure inheritance that's been growing for 20 years, that seems unlikely. You're probably going to have pretty significant taxes if you just sell all of this off. But figure out what they're actually going to be.

As far as getting the basis, you should be able to get that from the broker. It should go back to whatever the value was of those investments on the day your grandparents died. If the manager can't tell you that, you ought to be able to look up the historic prices of these funds and these stocks. Chances are that this financial advisor has been churning the account over the years. So, you may not be able to go back to that basis. It may be that you've only owned these things for a year or two, if he's really churning that account, you don't know. You just have to get the basis from the advisor.

You also asked about how to fire a financial advisor. Well, the most important step is before you fire the financial advisor, you put a written plan in place. You've got to have a plan for what you're going to do once that advisor is gone and then you can fire them at will. It's very easy. It might be as little as an email. You may want to look at the contract and see what contract you have with them. Maybe you have to give them some notice. There are probably some fees you're going to have to pay on the way out the door. But if they have it at one brokerage and you want to move it to Fidelity or Schwab or Vanguard or whatever, that's not a problem. You can transfer it all in kind without selling anything into whatever your preferred brokerage is and then decide from there what you're going to sell.

You may want to keep some of these legacy investments and build your portfolio around them. Especially if they're a relatively small part of the portfolio. You don't want to have 15% of your portfolio in Tesla or something like that. But if it's a small part of your portfolio, you just lump it in there with your U.S. stocks, for instance, and not necessarily feel like you have to sell it. If you own the U.S. total stock market index fund, you've got Tesla stock in there. So, it's OK to own a little extra Tesla stock just so long as it's not throwing your portfolio way out of whack and making you terribly undiversified.

When you want to fire your financial advisor, just make sure you have a plan and you know where the money's going to go and what you're going to do with it, etc. If you're having a hard time coming up with that plan, you probably still need an advisor. Just maybe not this one. Hire a good advisor. Go to whitecoatinvestor.com. Look under our recommended list. We've got a whole list of great people that can help you for a fair price and help you with this problem.

In fact, it's not a bad idea if you're really struggling with this process to hire somebody just to help you move this money away from the other advisor and into your brokerage account and decide what to keep, what to sell, etc. It's not like you have to do this alone. And it's not like just because you hire a financial advisor, you have to use them forever. There are people that do work on an hourly basis for a project kind of basis. If you told them this is the project, they might charge you a couple grand to help you unwind it all.

But chances are good they can save you more than that in taxes, if you screw it up. If you don't feel confident in doing it, go get some help. It's OK to get help when it comes to your investments.

Recommended Reading: 

What You Need to Know About Estate Planning

 

Capital Gains Diversification – Tax Gain Harvesting 

“With the market being bullish and possibly a bear market around the corner in the next one to two years, would you agree with capital gains tax diversification by selling my long-term gains in the taxable accounts now, and then buying the same ones, increasing their cost basis? This is to save capital gains taxes based on Biden's tax plan. My annual income is roughly $425,000, and I might fund some of my kids' education with taxable accounts in 12 years or so.”

This is called tax-gain harvesting. And when you have an income of $425,000, I think this is generally a terrible idea for a number of reasons. One, Biden's plan may never come to pass. Although I think it's likely capital gains rates are probably going up at the end of this year, that's not guaranteed. It's just a bill in Congress still. Plus, it may be that in a few years it goes right back down. Tax rates tend to swing up and down depending on who's in power.

Number two, there's a time value of money inherent in paying taxes later. If you are given the choice, most of the time, the right answer is to pay taxes later. One of the few exceptions to that is a lot of times in life it can make sense to do a Roth conversion. But chances are, paying taxes later is going to be a good idea. If there's really a bear market coming—and there always is a bear market coming, I don't know when, and you don't know when, neither does anybody else—chances are good during that bear market, you'll be able to get some tax losses. You can offset some of these gains if you sell later. Not to mention some of those long-term gains might just disappear in a bear market. So, you don't have to worry about them quite so much.

Finally, maybe you never pay those gains. If you die and get a step-up in basis at death or if you leave those appreciated shares to charity, you're never going to pay on those gains. It would be a real shame to do tax-gain harvesting, basically prepay your taxes and update that basis on shares that you are never going to pay taxes on anyway. That would be a real shame. And maybe something happens in your life. Maybe you'll be in a lower capital gains tax bracket later, maybe the Obamacare 3.8% tax goes away or something in the future. I think as a general rule, tax-gain harvesting is not a good idea.

I make one exception. If you're in the 0% bracket, I think it's OK to do some tax-gain harvesting. But for the most part, I would not do it just based on fear of this tax bill in Congress going through. I might accelerate some of my plans if there were a few things I was going to do in the next year or two. I might accelerate those and try to get them done before the end of the year in between the time of that bill passing and when it takes effect, but I probably would not go beyond there in this regard.

Recommended Reading: 

How to Use Tax Diversification to Reduce Taxes Now and in Retirement 

 

Opportunity Zone Investing 

“Hi Jim, I'm a physician here in Southern California. I have a question about investing in opportunity zones. I just had my offer accepted for a triplex in Southern California in the Los Angeles area, which happens to fall in the opportunity zone. I'm trying to see if I can get rid of some of my appreciated stocks and utilize the capital gains deferment through opportunity zones.

What should be the right approach to do that? Should I sell stocks I've had the longest for long-term capital gains? Or the stocks that I've had the shortest to get rid of those short-term capital gains?

Also, as you know, the IRS law says that some of these gains’ issues would expire in 2026. So, at the most I would only be able to hold this opportunity zone for five years to get a 10% step-up in basis for those capital gains. Is it worth doing all this and all the paperwork to sell those stocks? Or should I try to stick to just conventional funding through my savings account and so forth? I would appreciate your feedback on all this stuff and any advice on such opportunities in investing.”

For those who aren't aware, opportunity zones are a new real estate tax law that basically is to encourage wealthy investors to invest money into rundown communities. The idea is to give them some extra tax breaks, if they will do that. I don't know that in reality that's been the actual result of the law. It's done some good things, but mostly what's happening is real estate investors are looking at all their options out there. And if an investment makes sense in the opportunity zone, why not use it? But I don't think a lot of investors are going, “Let's go revamp this downtrodden area just because of the tax breaks that we're getting.”

At any rate, basically the idea is that you take something you have with big capital gains, whether they're in stocks or real estate or whatever, and you take that money and you move it into an opportunity zone investment, whether it's a syndication or a fund or whatever. And then you get some benefits, especially if you leave the money invested there for 10 years. But it's fairly complicated what benefits you get, etc.

But the bottom line is if you are going to buy this property anyway and you're choosing between using appreciated shares and cash, you should use the appreciated shares. Even if you don't get the full opportunity zone benefit from being in it for 10 years, you're still going to get enough benefit that it's probably worth it.

Now, there is a hassle factor inherent in that. So, you should be aware of the hassle and you have to look at, “Well, how much is my savings in taxes for that hassle?” And it may not be worth your hassle because your time is worth more than that. I don't know. Only you can calculate what that's at. But as far as financially, you're going to come out ahead if you use those appreciated stocks instead of cash.

Now I think we have another question from the same caller.

 

Investing in Opportunity Zones — What Stocks to Sell? 

“Hi Jim, this is my follow up question for information regarding the investing in opportunity zones. I forgot to tell you that most of my brokerage investment is in Vanguard Total Stock Market mutual fund. I have some total stock market ETF in there, but I think they're the same asset class, as you say, in Vanguard.

I don't know if that would make a difference or if I decide to sell either the oldest stocks for long-term capital gains or the short-term held funds, can Vanguard help me sort that out based on the basis? And how can I figure out which stocks I should sell based upon your advice–if I decide to sell either the stocks I've held long term or the stocks I've held short term? Thank you so much.”

It doesn't matter so much if you use the ETF shares or if you use the fund shares. That's not a big deal. But in general, you're looking for the biggest capital gains. That's what you want to put in here, right? You're trying to take advantage of this opportunity zone investment to minimize your capital gains taxes. Usually, that's your longer-term capital gain, something you've owned for years. Those are the ones you want to put in there.

I'm not 100% sure on the law, whether you can use an investment that only has short-term gains, but in general, you don't want to do that, anyway. You want to use whatever you have that has the most gains. I hope that's helpful.

 

Beneficiaries and Charitable Remainder Trusts

“Jim, if the beneficiary of an IRA is a charitable remainder trust, will that be included in the estate tax computation? Thanks.”

All right, great question. You win the stumper of the day award for that one. Luckily this thing isn't live. I actually get to pause the recording in between listening to the question and go look up the answer. In this case, I had to. I didn't know the answer to this one. But here's the way it works.

First of all, let's talk about why somebody might want to do this. A lot of people are talking about charitable remainder trusts (CRT) in response to the SECURE act. Now, one of the provisions in the SECURE act was that IRAs can no longer be stretched indefinitely. They can only be stretched for 10 years.

But what if you want to provide income for an heir for a period longer than 10 years? What they say you should do is make the beneficiary of the IRA this charitable remainder trust, and it can be set up if the beneficiary is old enough, to have it pay out for the rest of their life. You can't really do this for a 10-year-old because it fails some of the testing it has to pass, but if you're leaving it for a 50-year-old, you can do it.

What happens with a charitable remainder trust is you put money into this trust and it pays out a return for a set period of time or for life to a beneficiary. And then when that beneficiary dies, whatever's left goes to the charity. That has to be at least 10% of the value of what was originally left there. But the bottom line is you're splitting the asset. You're splitting it between the charity and the beneficiary. And so, that's an interesting way for somebody who wants to support charity, but also wants to provide income for an heir—who doesn't want to give them a lump sum, but wants to give them income—to do it is to use this charitable remainder trust.

So, your question is the estate tax consequences of doing this, right? The idea is to get money out of your estate so your estate size is smaller than the estate tax exemption, which this year for a married couple is $23.7 million or something like that, close to $24 million. Likely next year, it's going to be half that. And if you're single, again, it's half of that. So, it's only going to be $6 million next year, and that's within reach of lots of white coat investors.

But here's the way it works. If you have this beneficiary designation being the CRT, the charitable remainder trust, only part of that is not counted toward your estate tax exemption. What part? The part that goes to the charity. It's a calculation of how much of this benefit is going to the charity and how much is going to the heir. But the part that does go into the charity is exempt from the estate tax. The part that's going to your heir is not.

How to do that calculation? I don't know. I think software is typically used by estate planning attorneys as they run these numbers. But that's the way the law is set up. So, it may help with your estate tax problem, but it may not be enough to eliminate that asset completely from estate taxes.

 

Dr. Cory Fawcett — Speaker at WCICON 2022 

Our guest is Dr. Cory Fawcett. You may know him from his blog financialsuccessmd.com. You may also know him from his books. He's got a lengthy book series, all of them begin with “The Doctors Guide To.” He's got one on starting your practice, eliminating debt, smart career alternatives, retirement, real estate investing for busy professionals, and navigating a financial crisis.

For those who don't know, Dr. Fawcett is a retired general surgeon. And when I say retired, I mean he's not practicing general surgery, but he doesn't seem very retired to me. He's doing lots of work on the blog and books and so on and so forth, helping people to become more financially literate.

Dr. Fawcett is speaking at the upcoming Physician Wellness and Financial Literacy Conference, aka. WCICON22. This is in Phoenix, February 9-12. It's going to be a great time. We're really looking forward to getting the community back together in person.

He is giving two talks there. He's going to be speaking about your most important investment, making time for your family, and he's going to be giving another talk that I actually asked him to give that he's calling implementing systems for direct real estate investing.

Let's talk about the first one of those, making time for your family being your most important investment. What caused you to think about that and submit that as a potential talk for the conference?

“Well, doctors somehow think that they're different from everybody else. We have it worse than everybody else—but everybody works for a living and they have to figure out how to work and have time for their family. We just work a few more hours and our hours are a little different, but we still have that same problem. And every time I talk to doctors in coaching sessions about how to improve their lives and we make a suggestion, I often hear, ‘Oh, well my employer won't let me do that.' Well, we're not interested in what your employer won't let you do. Those are the things you can't control. We're interested in the things you can control. What are you doing about the things you can do to make your life better? And that's something that doctors don't tend to think about.

There are things I can do. Hey, the clinic ends at 5:00. There's no reason I can't be home for dinner at 6. Even if I've got two hours’ worth of paperwork to do, I could do some of it now, get home, have dinner with the family and then do the rest later. I don't have to say, ‘Oh, hey, I can't make it home for dinner because I've got this other thing.'

Doctors just tend to let their job take over. And we work in a profession where there's a neverending supply of people who want us. They want our time. You could work 24/7 seeing patients. So, you have to draw the line somewhere.”

What consequences do you think you've seen among colleagues, peers, etc., from people who didn't do this? Who didn't make time for their family?

“Well, I've seen problems with kids. Kids who've become unruly because dad or mom is just not there to help them. And then sometimes they just become unruly because that's how they get attention. I've seen problems with marriages. There was a time when my wife said to me, ‘You are too busy. You've got to cut back on some stuff.' My answer should have been ‘You are right, hun. If you think I'm too busy, I must be too busy.' That's what I should have said. That's not what came out of my mouth. It was ‘No, I'm not. I'm not too busy. – Yes, you are. – No, I'm not.'

We had a discussion about that and I said, ‘Well, let's just write it all down.' And I wrote down everything I was doing. Now, she wasn't complaining about my job. She was complaining about all the other things I was doing. I was the president of this and I'm on this committee. And then I’m the vice president here, I'm a treasurer in this other group, and I'm on this board and that board.

And I wrote down this list and I'm staring at that list thinking, ‘Oh my goodness, I'm too busy.' Guys, if your spouse tells you you're too busy, you need to cut back. You are, don't argue about that. Just realize you are too busy because they are the ones who determine if you're there enough.

And so, if you just pay attention a little bit, they know you've got a tough job. They also know you could have been at my ballgame today, but you chose not to. And I think it's those things that hurt them. If you have an emergency to do, they can understand that. If you just stuck around, because you had a pile of paperwork to get done and you skipped their game, that one is not going to go over so well. They know the difference.”

Awesome. Sounds like it’s going to be an awesome talk. Your second one is about implementing systems for direct real estate investing, I think is going to be a little bit more nuts and bolts than that one. But why is it so important for doctors to have systems?

“Doctors know how to do this. They do it every single day. You're an ER doc. I mean imagine what your life would be like in the ER if you didn't have systems in place. Because right now all you have to do if somebody comes in, you see them, looks like they got a broken wrist. A bunch of stuff happened before you even saw them. But what do you do? You write on a piece of paper, get a wrist X-ray series and then you don't see them again for a while. And pretty soon here they are with their wrist X-ray series.

Imagine what it would be like if you had to personally wheel them down to X-ray, then you got to take the X-rays and you got to develop the film and you got to check them to see that it all worked right. And all I need now is a different view. Take another view, develop another film, read the film, wheel the guy back to the room. You couldn't get any work done if you had to do all of these things that you've already developed through a system. Now, usually in the ER, you didn't develop the system, you walked into an already running system.

And maybe that's why doctors don't get it with real estate. Because when they walked into their medical practice, often the system's already running. They just stepped into it. But when you buy your first piece of real estate, you're going to need to set up all those same systems to take care of everything. And if you don't, then you end up doing everything and you're pushing the guy down to X-ray to get his X-ray done and you don't need to do that.

And then what happens about two properties into this you say, ‘Oh, real estate just takes up too much of my time. This is ridiculous. I'm spending so much time. This is stupid. I'm going to get rid of this stuff.' Well, the thing is real estate doesn't take all that time, but you are sure to spend a lot of time on it. So, why are you spending so much time doing something you don't want to do that takes very little time to do? Why are you doing that? And here's the place, if you just didn't catch it. ‘Oh, I have systems that work. Why don't I use those in my real estate? I could make this super easy.'

I was the manager while I was a general surgeon of 64 rental units. And it only took a couple hours a week. So, why is it taking you six hours a week to take care of your two little houses? Setting those same systems up that you already know how they work, changes everything.”

Awesome. It's going to be a great talk for anybody who's already doing direct real estate investing or for anybody interested in getting into it. I think a lot of people would love to have the control and the tax benefits of direct real estate investing, but they fear that work. They fear having it take over their lives. And so, I think that talk is going to be a great addition to the conference. I really appreciate you coming out to it.

We're looking forward to having you Cory Fawcett—Financial Success MD at WCICON22. You can sign up for that at whitecoatinvestor.com/wcicon22.

 

If you are finding our podcasts informative and helpful, check out our website! Since 2011 we have been working hard to provide valuable personal finance and investing information through thousands of blog posts written by an array of authors. You can find information on how to manage your student loans, fix and avoid common financial mistakes, understand your retirement accounts, optimize your investments, find professional help at a fair price, get started investing in real estate, and so much more, all at no cost to you. You can find out more about the courses we offer, the conferences we put on, the newsletters we provide, and interact with other WCI readers through our online forum. Head over to whitecoatinvestor.com to start learning today.

You can do this and The White Coat Investor can help.

 

White Coat Investor Champion Program

If you want to be a champion for The White Coat Investor and you are a first-year medical or dental student, sign up here. We will send a copy of “The White Coat Investor's Guide for Students” to you and every person in your class. As the champion, you will receive a Lifetime WCI T-shirt and, if you send us a picture of your class with the book, a WCI Yeti Tumbler.

 

WCICON 2022

Registration is open for The Physician Wellness and Financial Literacy Conference. The conference is in Phoenix on February 9-12, 2022. Register by December 1 to get one of our amazing swag bags! If you cannot attend the in-person event, we are also offering a virtual component. Get your tickets today!

 

Milestones to Millionaire Podcast

#40 – Dual Family Doctor Couple Pays Off $400K+ in 3 years

Following the outline for financial priorities in the WCI book, this couple was able to invest while paying off the debt for Brad’s medical school. Racquel used the National Health Service Corps to pay for school and owed them a couple of years of service after. This episode we discuss the pros and cons of paying for medical school this way. Be inspired by this couple’s success and then go learn more about financial “waterfalls” to set your priorities.

 



Sponsor: WCI YouTube Channel 

 

Quote of the Day

Our quote of the day comes from John Montgomery, who said,

“Looking at individual stocks is mildly entertaining, but ultimately irrelevant to long term investment success.”

 

Full Transcript

Transcription – WCI – 237

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 White Coat Investor podcast number 237 – Q&A on investment taxes.

Dr. Jim Dahle:

If you are finding our podcasts informative and helpful, check out our website! Since 2011 we have been working hard to provide valuable personal finance and investing information through thousands of blog posts written by an array of authors. You can find information on how to manage your student loans, fix and avoid common financial mistakes, understand your retirement accounts, optimize your investments, find professional help at a fair price, get started investing in real estate, and so much more, all at no cost to you. You can find out more about the courses we offer, the conferences we put on, the newsletters we provide, and interact with other WCI readers through our online forum. Head over to whitecoatinvestor.com to start learning today. You can do this and The White Coat Investor can help.

Dr. Jim Dahle:
Welcome back to the podcast. Thanks for what you do. I hope I'm not the only one that's thanked you lately for your hard work. I know sometimes patients aren't very likely to thank you.

Dr. Jim Dahle:
I took care of one the other day, who was high as a kite, enroute to jail. And I was fixing some lacerations from a pistol whipping that I was never going to be paid for much less thanked for. And you know what? After about 20 minutes of being berated by the patient while repairing the lacerations, I just decided, you know what? That's enough. You can just go to jail. And off she went with the cops. Your job's not easy all the time too. And that's partly why you get paid so well. And we're here to help you turn that high income into a high net worth.

Dr. Jim Dahle:
Reminders, our champion program is still going. If you are a first year medical or dental student, or you know one, pass this on to them. We're trying to give away the White Coat Investors guide for students to every first year medical and dental student in the country. You can help us do that by signing up at whitecoatinvestor.com/champion.

Dr. Jim Dahle:
Also, don't forget about the deadline for WCI con 22. You can sign up for that whitecoatinvestor.com/wcicon22. The deadline, if you want to get the awesome swag bag is December 1st, you got to sign up by then. We got to print the books. We need time to print the books. And so, we can't give you the swag bag all the way to the end if you sign up the day before. You got to sign up in advance in order to get it.

Dr. Jim Dahle:
All right, let's talk for a few minutes about investment taxes. That's what this whole episode is supposed to be about – investment taxes. So, let's talk about it.

Dr. Jim Dahle:
There are a few ways you can reduce your taxes on investments and you should be familiar with all of them. The first one is to use retirement accounts. If you use tax protected accounts, it dramatically reduces the amount of taxes you pay on your investments.

Dr. Jim Dahle:
Basically, you can buy and sell no capital gains taxes. You don't have to pay taxes on any dividends or other distributions from the investments as you go along and you get a tax break up front for a tax deferred account. If it's a tax-free account, the money is never taxed as it grows.

Dr. Jim Dahle:
For most people using tax deferred accounts, there will be an arbitrage between their tax rate at the time they are contributing the money and the tax rate at which that money is effectively withdrawn from the account later. It is just a great way to reduce your investment related taxes. So you got to max those out.

Dr. Jim Dahle:
Aside from the tax benefits, in almost every state, you get excellent asset protection for those accounts. Your 401(k) is protected federally. In most states, your IRAs are also protected or receive at least some protection. You should be aware of your state asset protection laws, of course, in that regard. But it is a very easy asset protection strategy to just max out your retirement accounts.

Dr. Jim Dahle:
The second way you can reduce your investment related taxes is buying and holding tax efficient investments. If you are not churning your investments, you're not having to pay short term capital gains taxes. You're not even having to pay long term capital gains taxes because you are holding the investment. It helps if the investment doesn't spit off a lot of income. That makes it more tax efficient. If it does spit off income, hopefully that income is taxed at a lower rate.

Dr. Jim Dahle:
In real estate property, it may be covered by depreciation. In the stock realm, qualified dividends. If you hold the stock or the fund for at least 60 days around the time of the dividend, then it should be qualified and qualified for lower qualified dividend and long-term capital gains rates.

Dr. Jim Dahle:
Now, those rates are likely to go up with the tax bill currently in Congress, maybe it's even passed by the time you hear this. I'm recording this on October 21st, but it doesn't run till November 18th, but even so, even with the proposed changes, it's going to be significantly less than your ordinary income tax rates.

Dr. Jim Dahle:
The third way you can reduce your investment related taxes is by using municipal bonds. If you are investing in bonds in your taxable account, and you're a high earner, like most of you listening to this podcast, you should give serious consideration using municipal bonds for at least some of that bond allocation.

Dr. Jim Dahle:
The interest from municipal bonds is tax free. If there are bonds from your state, it may be state and local tax free as well. And so, that helps it to be even more tax efficient. Now, obviously the yields on those are lower than they would be on a taxable bond.

Dr. Jim Dahle:
But if you're in a high bracket, generally you come out ahead using a municipal bond or a municipal bond fund. So, I do have to invest in bonds in my taxable account. And so, what do I use? I use the Vanguard intermediate municipal bond fund, and that's treated us well over the years.

Dr. Jim Dahle:
Number four. What can you do? You can tax loss harvest. This is where you have a loss with something you bought. Usually something you bought in the few months previously, maybe a year or two previously, and the value goes down.

Dr. Jim Dahle:
Well, there's no reason to hold on to a losing investment in a taxable account. And at minimum you should swap it for a very similar investment, but not in the words of the IRS substantially identical.

Dr. Jim Dahle:
A good example is swapping from a total stock market fund to an S&P 500 fund. These are substantially different investments, but the correlation between them is like 0.99. When you do that, you book that loss and you can use it on your taxes. It can offset up to $3,000 a year of ordinary income, and it can be carried forward indefinitely. And it can offset an unlimited amount of capital gains. And so, if you expect to have some capital gains in the future, it's great to book these losses as you go along.

Dr. Jim Dahle:
The fifth one is to take advantage of depreciation. This is particularly important for the real estate investors out there. Using depreciation, you can often offset the entire taxable income of a real estate property, or a fund or syndication, however you've chosen to invest in real estate. And so, it's pretty cool to get $10,000 a year in income and get no tax bill at all, or maybe only pay taxes on $2,000 of it. And that's as a result of depreciation.

Dr. Jim Dahle:
Even when that depreciation is recaptured, if and when that property is sold, it's recaptured at a lower tax rate than what you got upfront. And so, it's a great deal. Take advantage of it.

Dr. Jim Dahle:
Finally, a great benefit and a good way to get rid of appreciated shares, whether it's stocks or whether it's funds or ETFs is to donate them. If you're going to give to charity anyway, if you've owned these shares for at least a year, and they've appreciated, donate the shares instead of cash. And then you can basically flush those capital gains out of your portfolio and you can buy those shares back the same day or the next day. There's no 30-day wait period like with tax loss harvesting, you can do it right away. There's no reason not to use that opportunity to flush capital gains out of your portfolio.

Dr. Jim Dahle:
And you should also take advantage of the step up in basis at death. It looks like there's been some talk in Congress about changing this, but it doesn't sound like it's actually going to change in this tax bill coming up. Obviously, that is subject to change until the bill becomes law.

Dr. Jim Dahle:
But with a step up in basis of basically your heirs, their tax basis on the investments they inherit from you is the same as though they had bought them on the day of your death. And so, that is a great way to save on a lot of capital gains taxes for them.

Dr. Jim Dahle:
Those are the general ways in which you can save money on investment related taxes. Let's take some of your questions about investment taxes that we've gotten recently on the Speak Pipe.

Dr. Jim Dahle:
If you would like to leave us questions on the Speak Pipe, you can go to whitecoatinvestor.com/speakpipe, and we'll get your questions on the podcast and get them answered.

Dr. Jim Dahle:
Our first one, however, is not off the SpeakPipe. This one's from an email. This questioner asks, “What do you do in a bull market like this if you have no carry forward losses to apply? If your written investment plan calls for 60% US stocks, 20% international stocks and 20% bonds, what do you do to rebalance? US equity has had a huge run and to rebalance, one might need to take profits, that would not be very advantageous tax wise if you don't have any losses to apply”.

Dr. Jim Dahle:
Well, here's the deal with rebalancing. Whenever possible rebalance with new money. And for the first 10 years plus of your investment career, you should be able to do that because your new contributions are such a significant percentage of your total portfolio value.

Dr. Jim Dahle:
If you're putting in $50,000 or $100,000 this year into your portfolio, well, just make sure that money is going preferentially to the assets that have been lagging behind, and that will help you to stay rebalanced. And there's no tax cost. If you don't sell appreciated shares, there's no tax cost to that rebalancing.

Dr. Jim Dahle:
You can use dividends the same way. We always have our dividends in taxable, paid into cash so that they can be reinvested into whatever asset class is lagging. So, try not to sell shares whenever possible.

Dr. Jim Dahle:
It's also ideal if you do have to sell the rebalance, try to do it inside your retirement accounts, because in your 401(k) or your Roth IRA, there are no consequences to selling appreciated shares. And so, try to do that as much as possible.

Dr. Jim Dahle:
If you do have to sell something in a taxable account, it's great if you have some losses that can offset it, but if not, don't let the tax tail wag the investment dog and just bite the bullet. Sell it, pay the taxes and get back to where you ought to be balanced wise.

Dr. Jim Dahle:
But keep in mind that the data on rebalancing suggests that you really don't need to do it more often than every one to three years. So, don't do this frenetically every month. You don't need to be rebalancing all the time. You can rebalance once a year, once every couple of years, and that's perfectly fine.

Dr. Jim Dahle:
I'd be pretty hesitant. I've never had to sell appreciated shares in a taxable account in order to rebalance my portfolio, because I pay attention to where I'm putting new money. I pay attention to which appreciated shares I donate to charity, and I try to keep things balanced that way. And of course, I can do some rebalancing inside the tax protected account.

Dr. Jim Dahle:
I've never had to do it. And I've been investing now since 2004. In 17 years, I haven't had to sell shares in a taxable account in order to rebalance. I just don't think if you pay attention to this and you do it intelligently that you will have to do that very often. But if you find yourself forced into that situation, well, it's better than not rebalancing at all.

Dr. Jim Dahle:
All right, let's take one off the Speak Pipe here. This one's from Scott.

Scott:
Hey Jim, this is Scott from Philadelphia. I'm an EM resident and a dual physician couple and after careful consideration, my wife and I elected to use married filing separately as our tax status for her student loans.

Scott:
The problem is that married filing separately has max earnings for a Roth IRA contribution of $10,000. My IRA servicer is allowing me to recharacterize my 2020 and 2021 contributions from Roth IRA to traditional, a reverse backdoor IRA I suppose.

Scott:
Due to some processing fatigue from the servicer, my allocation has been growing for months and I'm concerned that all of these gains will be useless when it gets recharacterized.

Scott:
My questions are what happens to a year of unrealized gains during recharacterization and what are the long-term implications of having a Roth and a traditional IRA account? Thank you for your time in being a cornerstone of my financial education.

Dr. Jim Dahle:
All right, Scott from Philadelphia. I hope things are well with you out there. Great question by the way, I really like this one. You are correct. If you are doing married filing separately in order to keep your IDR payments small, which is the main reason a resident would do this is because they're going for public service loan forgiveness.

Dr. Jim Dahle:
You cannot contribute directly to a Roth IRA, but that's no different from most attendings listening to this podcast. The only way they can contribute to a Roth IRA is indirectly i.e., via the backdoor Roth IRA process.

Dr. Jim Dahle:
Now you screwed this up it sounds like. It sounds like you contributed directly to a Roth IRA and you are correct that the fix for this is to recharacterize the contribution. You basically are telling the IRA manager that I didn't want to make a Roth contribution. I wanted to make a traditional contribution. They basically just take that money you put in the Roth IRA, along with everything it's earned, since you put it in there and put it in a traditional IRA.

Dr. Jim Dahle:
And as far as the IRS is concerned, assuming you recharacterize quickly enough, as far as they're concerned, it's like you just contributed to a traditional IRA in the first place. And so, basically, at this point, you got some gains there. Maybe you put $6,000 in there. Maybe it's grown to $7,000. You can now do a backdoor Roth IRA with it. You can do a Roth conversion and move it into a Roth IRA.

Dr. Jim Dahle:
You can recharacterize this Roth IRA contribution to a traditional IRA contribution. And at that point you can do it just like everybody else does their backdoor Roth IRA. You can do a Roth conversion. At least until that tax bill in Congress goes through, you can do a Roth conversion on that traditional IRA.

Dr. Jim Dahle:
So, you move that now $7,000 to a Roth IRA. Now, because $1,000 of that is gain. You're going to pay taxes on $1,000 now. You'll have to pay it at your ordinary income tax rate.

Dr. Jim Dahle:
It's very unfortunate. That's the price you pay for screwing this up. You're going to pay $250, $300 in taxes or whatever on that money. I'm really sorry about that. But you can still do it. It's just going to cost you a little bit in tax money for not doing it correctly the first time.

Dr. Jim Dahle:
No big deal though. I've certainly made much bigger financial mistakes than that one. And it's good to learn it as early as possible, but you certainly don't have to leave that money in a traditional IRA. It can be converted. Now next year, that might be different depending on how this tax bill ends up shaken out. But for now, that's the law, that's the rules.

Dr. Jim Dahle:
All right, let's take our next question off the Speak Pipe. This one's from Tom.

Tom:
Hey Dr. Dahle. I was hoping to get some advice regarding my wife's inheritance. My wife inherited a variety of actively managed Fidelity mutual funds and a few individual stocks, Apple, Pfizer, Merck, to name a few, about 20 years ago from a grandparent long before we met.

Tom:
It's been managed by a wealth managing firm from the beginning. Since then, it's grown to over seven figures. I don't have the exact numbers in front of me, but let's say it's grown from $600,000 to $1.2 million.

Tom:
I finally convinced her to consider cutting ties with her wealth management firm. But now I'm not quite sure how to proceed. Would you advise her to simply convert these managed mutual funds and stocks to index funds according to our written financial plan with the 20% capital gains tax given our tax bracket on the large step up in basis?

Tom:
This inheritance was not included in our written financial plan initially and was just seen as extra. To follow our financial plan and to keep the tax tail wag from the investment dog, as you would typically advise, should we just transfer everything into index funds in a taxable account and pay the capital gains now? We've maxed out all available tax advantaged retirement accounts.

Tom:
Do you think this is the right approach even, considering the presumably six figure tax bill in the short term? How do you even cut ties with the money manager anyway? Is there any fine print, fees, legal hassles, or landmines to be aware of? What do you do if you're not sure of the tax basis of inherited funds? How can you find that information out and what happens if you can't figure it out?

Dr. Jim Dahle:
Well, congratulations. And I'm sorry. It's wonderful to get an inheritance. It’s seven figure inheritance, think of all the wonderful things you're going to be able to do with this. It's going to advance your pathway to financial independence. Even if you're going to get there anyway, it's more money that you can leave to heirs or give to charity. Buy Teslas with, whatever, it's wonderful to inherit this money.

Dr. Jim Dahle:
I'm sorry about your grandparents. It sounds like that's been 20 years since then, but inheritance isn't a bad thing even if you got to pay a ton of taxes on it. But I'm sorry, this has been royally screwed up from the beginning.

Dr. Jim Dahle:
First of all, it's screwed up by the grandparents for investing in actively managed mutual funds and picking stocks. It’s screwed up by the financial advisor. And I put that in “financial advisor” who's been collecting an AUM fee or commissions or something off this for the last several decades. A few decades with the grandparents and at least two decades with you guys. And then it's been screwed up by you guys for leaving it there for 20 years.

Dr. Jim Dahle:
The day you inherited this, when your grandparents died, you could have swapped out all of it and below cost index funds and ETFs, and diversified it and reduced your costs and gotten that step up in basis of death and not had any capital gains taxes due at all.

Dr. Jim Dahle:
And so, putting this off has made a pretty good mess. It's still going to be good that you get an inheritance, but it's a mess. These are what we call legacy investments. They're investments in taxable that have such a low-cost basis that you're hesitant to sell them, even though you wouldn't buy them today.

Dr. Jim Dahle:
And so, as by definition, this is the tax tail wagging the investment dog. The idea here is to try to reduce the implications of this on both your tax bill, as well as your investment portfolio. That usually means some sort of a balanced approach weighing those two goals against one another.

Dr. Jim Dahle:
Now, if you have a whole bunch of tax losses from your other investments, if you've been tax loss harvesting, you can use those to offset gains when you sell these other stocks. If you give to charity, instead of giving cash, donate these other legacy investments instead, that's a great way to flush the capital gains out of your portfolio.

Dr. Jim Dahle:
But the first thing you should do is write down every investment, what its current value is and what your cost basis in it is. And that will allow you to calculate “Well, what's really the tax hit? If I sell this, what's it going to cost me in taxes?” And you can multiply that by whatever your capital gains rate is. You said yours is 20%. It might be 23.8% if you consider that Obamacare tax that's added on there.

Dr. Jim Dahle:
That said these taxes are scheduled to go up next year if this bill in Congress passes. So, you may want to do this before the end of the year but, you've got to wait for that. You got to figure out what the bill would actually be to just sell it all. And sometimes you find out it really isn't that bad so you just do it.

Dr. Jim Dahle:
But it sounds like in your situation with a seven-figure inheritance, it's been growing for 20 years, that seems unlikely. You're probably going to have pretty significant taxes if you just sell all of this off. But figure out what they're actually going to be.

Dr. Jim Dahle:
As far as getting the basis, you should be able to get that from the broker. It should go back to whatever the value was of those investments on the day your grandparents died. And so, if the manager can't tell you that you ought to be able to look up the historic prices of these funds and these stocks, you should be able to look that up historically.

Dr. Jim Dahle:
Now chances are this financial advisor has been churning the account over the last years. So, you may not be able to go back to that basis. It may be that you've only owned these things for a year or two, if he's really churning that account, you don't know. And so, you just got to get the basis from the advisor.

Dr. Jim Dahle:
Now you also ask about how to fire a financial advisor. Well, the most important step is before you fire the financial advisor, you put a written plan in place. You've got to have a plan for what you're going to do once that advisor is gone and then you can fire them at will. It's very easy. It might be as little as an email. You may want to look at the contract and see what contract you have with them. Maybe you got to give them some notice.

Dr. Jim Dahle:
There are probably some fees you're going to have to pay on the way out the door. But if they have it at one brokerage and you want to move it to Fidelity or Schwab or Vanguard or whatever, that's not a problem. You can transfer it all in kind without selling anything into whatever your preferred brokerage is, and then decide from there what you're going to sell.

Dr. Jim Dahle:
Because you may not want to sell everything. You may want to keep some of these legacy investments and build your portfolio around them. Especially if they're a relatively small part of the portfolio. You don't want to have 15% of your portfolio in Tesla or something like that.

Dr. Jim Dahle:
But if it's a small part of your portfolio, you just lump it in there with your US stocks, for instance, and not necessarily feel like you have to sell it. It's not like you don't own Tesla stock. If you own the US total stock market index fund, you've got Tesla stock in there. So, it's okay to own a little extra Tesla stock just so long as it's not throwing your portfolio way out of whack and making you terribly undiversified.

Dr. Jim Dahle:
But anyway, when you want to fire your financial advisor, just make sure you have a plan for it, you know where the money's going to go, what you're going to do with it, et cetera. If you're having a hard time coming up with that plan, you probably still need an advisor. Just maybe not this one.

Dr. Jim Dahle:
So, hire a good advisor. Go to whitecoatinvestor.com. Look under our recommended list. We got a whole list of great people that can help you for a fair price and help you with this problem.

Dr. Jim Dahle:
And in fact, it's not even a bad idea if you're really struggling with this process to hire somebody just to help you basically move this money away from the other advisor and into your brokerage account and decide what to keep, what to sell, et cetera. It's not like you have to do this alone.

Dr. Jim Dahle:
And it's not like just because you hire a financial advisor, you have to use them forever. There are people that do work on an hourly basis for a project kind of basis. If you told them this is the project, they might charge you a couple grand to help you unwind it all.

Dr. Jim Dahle:
But chances are good they can save you more than that in taxes, if you screw it up. If you don't feel confident of doing it, go get some help. It's okay to get help when it comes to your investments. All right, I hope that's helpful.

Dr. Jim Dahle:
Our next question comes from email. “With the market being bullish and possibly a bear market around the corner in the next one to two years, would you agree with capital gains tax diversification by selling my long-term gains in the taxable accounts now, and then buying the same ones increasing their cost basis? This is to save capital gains taxes based on Biden's tax plan. My annual income is roughly $425,000 and I might fund some of my kids' education with taxable accounts in 12 years or so”.

Dr. Jim Dahle:
This is called tax gain harvesting. And when you have an income of $425,000, I think this is generally a terrible idea for a number of reasons. One, Biden's plan may never come to pass. Although I think it's likely capital gains rates are probably going up at the end of this year, that's not guaranteed. It's just a bill in Congress still. Plus, it may be that in a few years, it goes right back down. Tax rates tend to swing up and down depending on who's in power.

Dr. Jim Dahle:
Number two, there's a time value of money inherent in paying taxes later. If you are given the choice, most of the time, the right answer is to pay taxes later. One of the few exceptions to that is a lot of times in life it can make sense to do a Roth conversion. But chances are paying taxes later is going to be a good idea.

Dr. Jim Dahle:
If there's really a bear market coming, and there always is a bear market coming. I don't know when, and you don't know when, neither does anybody else, but if there is a bear market coming, chances are good during that bear market, you'll be able to get some tax losses. You can offset some of these gains if you sell later. Not to mention some of those long-term gains might just disappear in a bear market. So, you don't have to worry about them quite so much.

Dr. Jim Dahle:
Fourth, maybe you never pay those gains. If you die and get a step up in basis of death, or if you leave those appreciated shares to charity, you're never going to pay on those gains. It would be a real shame to do tax gain harvesting, basically prepay your taxes and update that basis on shares that you are never going to pay taxes on anyway. That would be a real shame.

Dr. Jim Dahle:
And maybe something happens in your life. Maybe you'll be in a lower capital gains tax bracket later, maybe the Obamacare 3.8% tax goes away or something in the future. And so, I think as a general rule tax gain harvesting is not a good idea.

Dr. Jim Dahle:
I make one exception. If you're in the 0% bracket, I think it's okay to do some tax gain harvesting. But for the most part, I would not do it just based on fear of this tax bill in Congress going through. I might accelerate some of my plans if there were a few things I was going to do in the next year or two. I might accelerate those and try to get them done before the end of the year in between the time of that bill passing and when it takes effect but I probably would not go beyond there in this regard.

Dr. Jim Dahle:
All right. We got a question now about opportunity zone investing. Let's take a listen.

Speaker:
Hi Jim, I'm a physician here in Southern California. I have a question about investing in opportunity zones. I just had my offer accepted for a triplex in Southern California in the Los Angeles area, which happens to fall in the opportunity zone. I'm trying to see if I can get rid of some of my appreciated stocks and utilize the capital gains, deferment, through opportunity zones.

Speaker:
What should be the right approach to do that? Should I sell stocks I've had the longest for long term capital gains? Are the stocks that I've had the shortest to get rid of those short-term capital gains?

Speaker:
Also, as you know the IRS law that some of these gains’ issues would expire in 2026. So, at the most I would only be able to hold this own opportunity zone for five years to get a 10% step up in basis for those capital gains.

Speaker:
Is it worth doing all this and all the paperwork to sell those stocks? Or should I try to stick to just conventional funding through my savings account and so forth? I would appreciate your feedback on all this stuff and any advice on such opportunities on investing.

Speaker:
Thank you so much for everything you do. I happened to attend your conference in Las Vegas, and I must congratulate you that you did an excellent job despite the challenges of being in the pandemic and the start of the pandemic. So, thank you for everything you do.

Dr. Jim Dahle:
All right. Good question. For those who aren't aware, opportunity zones is a new real estate tax law that basically is to encourage wealthy investors to invest money into rundown communities. And so, the idea is to give them some extra tax breaks, if they will do that.

Dr. Jim Dahle:
I don't know that in reality, that's been the actual result of the law. It's done some good things, but mostly what's happening is real estate investors are looking at all their options out there. And if an investment makes sense in the opportunity zone and it's in an opportunity zone, why not use it. But I don't think a lot of investors are going, “Let's go revamp this downtrodden area just because of the tax breaks that we're getting”.

Dr. Jim Dahle:
At any rate, basically the idea is that you take something you have with big capital gains, whether they're in stocks or real estate or whatever, and you take that money and you move it into an opportunity zone investment, whether it's a syndication or a fund or whatever. And then you get some benefits, especially if you leave the money invested there for 10 years. But it's fairly complicated what the benefits you get, et cetera.

Dr. Jim Dahle:
But the bottom line is if you are going to buy this property anyway, and you're choosing between using appreciated shares and cash, you should use the appreciated shares. Even if you don't get the full opportunity zone benefit from being in it for 10 years, you're still going to get enough benefit that it's probably worth it.

Dr. Jim Dahle:
Now, there is a hassle factor inherent in that. So, you should be aware of the hassle and you got to look at “Well, how much is my saving in taxes for that hassle?” And it may not be worth your hassle because your time is worth more than that. I don't know. Only you can calculate what that's at. But as far as financially, you're going to come out ahead if you'll use those appreciated stocks instead of cash.

Dr. Jim Dahle:
Now I think we have another question from the same caller. Let's take a listen to that one.

Speaker:
Hi Jim, this is my follow up question for information regarding the investing in opportunity zones. I forgot to tell you that most of my brokerage investment is in Vanguard total stock market mutual fund. I have some total stock market ETF in there, but I think they're the same asset class, as you say in Vanguard.

Speaker:
I don't know if that would make a difference or if I decide to sell either the oldest stocks for long term capital gains or the short term held funds, can Vanguard help me sort that out based on the basis? And how can I figure out which stocks I should sell based upon your advice – if I decide to sell either the stocks I've held long term or the stocks I've held short term? Thank you so much.

Dr. Jim Dahle:
All right. Yeah. It doesn't matter so much if you use the ETF shares or if you use the fund shares. That's not a big deal. But in general, you're looking for the biggest capital gains. That's what you want to put in here, right? You're trying to take advantage of this opportunity zone investment to minimize your capital gains taxes. Usually that's your longer-term capital gain, something you've owned for years, years. Those are the ones you want to put in there.

Dr. Jim Dahle:
I'm not a hundred percent sure on the law, whether you can use an investment that only has short term gains, but in general, you don't want to do that anyway. You want to use whatever you have that has the most gains. I hope that's helpful.

Dr. Jim Dahle:
We're going to bring a guest on here that is going to be one of our speakers at WCI con 22, the Physician Wellness Financial Literacy conference. Let's get him on the podcast.

Dr. Jim Dahle:
Our guest today is Dr. Cory Fawcett. You may know him from his blog financialsuccessmd.com. You may also know him from his books. He's got lengthy book series, all of them begin with “The Doctors Guide to”. He's got one to start your practice and eliminating debt and smart career alternatives and retirement, to real estate investing, for busy professionals and navigating a financial crisis, I think is the most recent one. Isn't it?

Dr. Cory Fawcett:
Yes. That's the most recent one.

Dr. Jim Dahle:
Did I miss any?

Dr. Cory Fawcett:
No, that sounds like you got all of them.

Dr. Jim Dahle:
For a while there you're pounding these books out two or three a year, I think.

Dr. Cory Fawcett:
Yeah.

Dr. Jim Dahle:
It was quite an effort.

Dr. Cory Fawcett:
I have another one that was ready to go last year and has to do with the travel industry. And the travel industry had completely shut down. So, this is the wrong time to put this book out. So, it’s just sitting on the back burner, waiting until things open up again and people would actually read something that has something to do with travel. But that one will be controversial, I think.

Dr. Jim Dahle:
Yeah. We'll look forward to seeing that. We like controversy in this space. Everybody seems to enjoy a good controversy. But for those who don't know, Dr. Fawcett is a retired general surgeon. And when I say retired, I mean, he's not practicing general surgery, but he doesn't seem very retired to me. He's doing lots of work on the blog and books and so on and so forth, helping people to become more financially literate. So, thank you, Dr. Fawcett, for what you do in that regard.

Dr. Cory Fawcett:
Well, thanks for thanking me.

Dr. Jim Dahle:
You're welcome. For those who are not aware, Dr. Fawcett is speaking at the upcoming Physician Wellness and Financial Literacy conference, a.k.a. WCI con 22. This is in Phoenix, February 9th through 12th. It's going to be a great time. We're really looking forward to getting the community back together in person.

Dr. Jim Dahle:
But he is giving two talks there. He's going to be speaking about your most important investment, making time for your family, and he's going to be giving another talk that I actually asked him to give that he's calling implementing systems for direct real estate investing.

Dr. Jim Dahle:
Let's talk about the first one of those, making time for your family being your most important investment. What caused you to think about that and submit that as a potential talk for the conference?

Dr. Cory Fawcett:
Well, doctors somehow think that they're different from everybody else. We got it worse than everybody else, but everybody works for a living and they got to figure out how to work and have time for their family. We just work a few more hours and our hours are a little different, but we still have that same problem.

Dr. Cory Fawcett:
And every time I talk to doctors in coaching sessions about how to improve their lives and we make a suggestion, I often hear, “Oh, well my employer won't let me do that”. Well, we're not interested in what your employer won't let you do. Those are the things you can't control. We're interested in the things you can control. What are you doing about the things you can do to make your life better? And that's something that doctors don't tend to think about.

Dr. Cory Fawcett:
There are things I can do. Hey, the clinic ends at 05:00. There's no reason I can't be home for dinner at six. Even if I've got two hours’ worth of paperwork to do, I could do some of it now, get home, have dinner with the family and then do the rest later. I don't have to say, “Oh, hey, I can't make it home for dinner because I've got this other thing”.

Dr. Cory Fawcett:
Doctors just tend to let their job take over. And we work in a profession where there's never ending supply of people who want us. They want our time. You could work 24/7 seeing patients. So, you have to draw the line somewhere.

Dr. Cory Fawcett:
I remember at my office when they always asked me, “Hey, we got to work in a new patient. Can you be here or stay a little extra afterwards?” I said, “Well, why don't we work him in at 6:00 AM? When none of my staff are there. Why don't we all come in at 6:00 AM and let's work him in?”

Dr. Cory Fawcett:
Well, that was never one of the options because that's not when they work. They work him in when they want to work. And so, you should treat your family the same way. Put them first.

Dr. Cory Fawcett:
Simple things, little things like getting home for dinner or getting into your kids' soccer games. These are easy to do. And if you plan to do them, you can. One of the things I liked to do, we made our call weekends a year in advance. I always booked my vacations a year in advance and then handed my vacation schedule to the person who's going to make the call schedule. And they made the call schedule around my plans with my family for next year.

Dr. Cory Fawcett:
We didn't just let them randomly make a call schedule and put me on random weekends and then try and work in our vacations around that. We proactively got involved and handed them, “This is our plan for our family for next year. I'm free to take any call on any of the other weekends”. And they didn't have a problem with that, but most people just don't think to do it.

Dr. Jim Dahle:
Yeah. I think we are notorious for not planning that far ahead, but, yeah, huge benefit. What consequences do you think you've seen among colleagues, peers, et cetera, from people who didn't do this? Who didn't make time for their family?

Dr. Cory Fawcett:
Well, I've seen problems with kids. Kids who've become unruly because dad or mom is just not there to help them. And then sometimes they just become unruly because that's how they get attention. I've seen problems with marriages.

Dr. Cory Fawcett:
There was a time when my wife said to me, “You are too busy. You got to cut back on some stuff”. My answer should have been “You are right, hun. If you think I'm too busy, I must be too busy”. That's what I should have said. That's not what came out of my mouth. It was “No, I'm not. I'm not too busy. – Yes, you are. – No, I'm not yet”.

Dr. Cory Fawcett:
We had a discussion about that and I said, “Well, let's just write it all down”. And I wrote down everything I was doing. Now, she wasn't complaining about my job. She was complaining about all the other things I was doing. I was the president of this and I'm on this committee. And then I’m the vice president here, I'm a treasurer in this other group, and I'm on this board and that board.

Dr. Cory Fawcett:
And I wrote down this list and I'm staring at that list thinking, “Oh my goodness, I'm too busy”. Guys, if your spouse tells you, you're too busy, you need to cut back. You are, don't argue about that. Just realize you are too busy because they are the ones who determine if you're there enough.

Dr. Cory Fawcett:
And so, if you just pay attention a little bit, they know you got a tough job, but they also know you could have been at my ball game today, but you chose not to. And I think it's those things that hurt them. If you have an emergency to do, they can understand that. If you just stuck around, because you had a pile of paperwork to get done and you skipped their game, that one is not going to go over so well. They know the difference.

Dr. Jim Dahle:
Awesome. Sounds like it’s going to be an awesome talk. Your second one about implementing systems for direct real estate investing, I think is going to be a little bit more nuts and bolts than that one. But why is it so important for doctors to have systems?

Dr. Cory Fawcett:
Doctors know how to do this. They do it every single day. You're an ER doc. I mean imagine how your life would be like in the ER if you didn't have systems in place. Because right now all you have to do if somebody comes in, you see them, looks like they got a broken wrist. A bunch of stuff happened before you even saw them. But what do you do? You write on a piece of paper, get a wrist x-ray series and then you don't see them again for a while. And pretty soon here they are with their wrist x-ray series.

Dr. Cory Fawcett:
Imagine what it would be like if you had to personally wheel them down to x-ray, then you got to take the x-rays and you got to develop the film and you got to check them to see that it all worked right. And all I need now is a different view. Take another view, develop another film, read the film, wheel the guy back to the room.

Dr. Cory Fawcett:
You couldn't get any work done if you had to do all of these things that you've already developed through a system. Now, usually in the ER, you didn't develop the system, you walked into an already running system.

Dr. Cory Fawcett:
And maybe that's why doctors don't get it with real estate. Because when they walked into their medical practice, often the system's already running. They just stepped into it. But when you buy your first piece of real estate, you're going to need to set up all those same systems to take care of everything. And if you don't, then you end up doing everything and you're pushing the guy down to x-ray to get his x-ray done and you don't need to do that.

Dr. Cory Fawcett:
And then what happens about two properties into this you say, “Oh, real estate just takes up too much of my time. This is ridiculous. I'm spending so much time. This is stupid. I'm going to get rid of this stuff”.

Dr. Cory Fawcett:
Well, the thing is real estate doesn't take all that time, but you are sure to spend a lot of time on it. So, why are you spending so much time doing something you don't want to do that takes very little time to do? Why are you doing that? And here's the place, if you just didn't catch it. “Oh, I got systems that work. Why don't I use those in my real estate? I could make this super easy”.

Dr. Cory Fawcett:
I was the manager while I was a general surgeon of 64 rental units. And it only took a couple hours a week. So, why is it taking you six hours a week to take care of your two little houses? Setting those same systems up that you already know how they work, changes everything.

Dr. Jim Dahle:
Awesome. It's going to be a great talk for anybody who's already doing direct real estate investing or for anybody interested in getting into it. I think a lot of people would love to have the control and the tax benefits of direct real estate investing, but they fear that work. They fear having it take over their lives. And so, I think that talk is going to be a great addition to the conference. I really appreciate you coming out to it.

Dr. Cory Fawcett:
I think I can put them to sleep for them by the end of the talk.You don't have to fear all this time that it'll take. It's like everything else in life. I learned this when I retired. I had all day, so that's how long it took me to do whatever project I was doing.

Dr. Cory Fawcett:
When I was working, if I only had two hours to do it, I got it done in two hours. Once I retired, that could expand all day. There's no end to how much time you can spend on something.

Dr. Jim Dahle:
Awesome. Well, we're looking forward to having you Cory Fawcett – Financial Success MD at WCI con 22. You can sign up for that at whitecoatinvestor.com/wcicon22. And we'll see you in Phoenix in February.

Dr. Cory Fawcett:
I'll see you in Phoenix. In fact, I'm going to be snowbirding for the whole month of February right in Phoenix.

Dr. Jim Dahle:
Awesome.

Dr. Cory Fawcett:
I'm just going to pop over to the conference.

Dr. Jim Dahle:
Cool. It'll be super enjoyable to see you again.

Dr. Cory Fawcett:
I'll see you there.

Dr. Jim Dahle:
All right. It’s always great to hear from Cory Fawcett. I've known him for a number of years. I think he stopped in Salt Lake a few years ago on one of his long-distance motor home trips and we shared a breakfast. But he gives some great talks. He's going to be a great addition to the conference. I hope you're looking forward to it.

Dr. Jim Dahle:
Our quote of the day today is from John Montgomery. “Looking at individual stocks is mildly entertaining, but ultimately irrelevant to long term investment success”. And I believe that is true just as he does.

Dr. Jim Dahle:
All right, let's take another Speak Pipe question. This one is from David.

David:
Jim, if the beneficiary of IRA is a charitable remainder trust, will that be included in the estate tax computation? Thanks.

Dr. Jim Dahle:
All right, great question. You win the stumper of the day award for that one. Luckily this thing isn't live. I actually get to pause the recording in between listening to the question and go look up the answer. And in this case, I had to, I didn't know the answer to this one. But here's the way it works.

Dr. Jim Dahle:
First of all, let's talk about why somebody might want to do this. A lot of people are talking about charitable remainder trusts in response to the secure act. Now, one of the provisions in the secure act was that IRAs can no longer be stretched indefinitely. They can only be stretched for 10 years.

Dr. Jim Dahle:
But what if you want to provide income for an heir for a period longer than 10 years? What they say you should do is you make the beneficiary of the IRA, this charitable remainder trust, and it can be set up if the beneficiary is old enough, you can't really do this for a 10-year-old because it fails some of the testing it has to pass, but if you're leaving it for a 50-year-old, you can do this, to have it pay out for the rest of their life.

Dr. Jim Dahle:
What happens with a charitable remainder trust is you put money into this trust and it pays out a return for a set period of time or for life to a beneficiary. And then when that beneficiary dies, whatever's left goes to the charity. That has to be at least 10% of the value of what was originally left there.

Dr. Jim Dahle:
But the bottom line is you're splitting the asset. You're splitting it between the charity and you're splitting it between the beneficiary. And so, that's an interesting way for somebody who wants to support charity, but also wants to provide income for an heir, who doesn't want to give them a lump sum, but wants to give them income to do it is to use this charitable remainder trust.

Dr. Jim Dahle:
So, your question is the estate tax consequences of doing this, right? The idea is to get money out of your estate so your estate size is smaller than the estate tax exemption, which this year for a married couple is $23.7 million or something like that, close to $24 million. Likely next year, it's going to be half that. And if you're single again, it's half of that. So, it's only going to be $6 million next year, and that's within reach of lots of White Coat Investors.

Dr. Jim Dahle:
But here's the way it works. If you have this beneficiary designation being the CRT, the charitable remainder trust, only part of that is not counted toward your estate tax exemption. What part? The part that goes to the charity.

Dr. Jim Dahle:
So, it's a calculation of how much of this benefit is going to the charity and how much is going to the heir. But the part that does go into the charity is exempt from the state tax. The part that's going to your heir is not.

Dr. Jim Dahle:
How to do that calculation? I don't know. I think software is typically used by estate planning attorneys as they run these numbers. but that's the way the law is set up. So, it may help with your state tax problem, but it may not be enough to eliminate that asset completely from estate taxes. I hope that's helpful.

Dr. Jim Dahle:
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Dr. Jim Dahle:
Don't forget about the conference, whitecoatinvestor.com/wcicon22. If you're coming live, you need to sign up as soon as possible before that hotel block of rooms is filled up. Once those are gone, they're gone and you'll be staying at an off-site hotel.

Dr. Jim Dahle:
Whether you come in live or virtual, the deadline for the swag bag is December 1st. So, make sure you register by then.

Dr. Jim Dahle:
Thanks to those leaving us a five-star review and telling your friends about the podcast. A recent one came in from D. Upton. “We call the podcast an excellent resource. Dr. Dahle has created a fantastic financial resource for the high-income professional. Easy to listen to during a commute or workout. Dr. Dahle has even taken the time to respond to my financial questions by email which demonstrates his generosity and commitment to educating others on the world of personal finance”.

Dr. Jim Dahle:
Thanks for your kind words and thanks for your five-star review. It does help spread the word to other White Coat Investors out there that need this information.

Dr. Jim Dahle:
Keep your head up, your shoulders back. You've got this and we can help. 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’s not a licensed accountant, attorney or financial advisor. So, this podcast is for your entertainment and information only and should not be considered official personalized financial advice.