Podcast #59 Show Notes: Is Dr. Mike Meru Crazy?
In this episode Dr. Dahle talks about Dr. Mike Meru and his student loan balance of over $1 million dollars. Is he crazy? Or crazy like a fox? Listen to get Dr. Dahle's take on the situation and how best to manage large student loan debts. You can listen to the podcast here or it is available via the traditional podcast outlets, ITunes, Overcast, Stitcher, Google Play. Or watch the video here or on YouTube. Or ask Alexa to play it for you. Enjoy!
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Quote of the Day[00:04:31] “I was raised to have value for money, to have respect for money, even though you have a lot of it.” – Jennifer Lawrence
Intro[00:01:15] Thank you to those who purchased the online version of the WCI conference. We are leaning toward doing another conference probably in 2020. [00:01:55] Thanks to all of you who follow us on social media. We are closing in on 10,000 Twitter followers and we are also looking to get a Facebook group together in the next few weeks. [00:02:21] Remember that it is summer time. Here at WCI, that means we are running the scholarship program. We will be giving away over $60K in cash and prizes this year. So if you’re a professional student, be sure to apply before August 31. Thank you for supporting the scholarship sponsors who make this possible, especially our Platinum Sponsors:
Larry Keller (Physician Financial Services) – Disability and Life Insurance
CommonBond – Student Loan Refinancing
Laurel Road – Student Loan Refinancing
Bob Bhayani (Dr Disability Quotes) -Disability and Life Insurances
Physician Home Loans at Fairway Mortgage – Doctor Mortgage Loans
Main Topic[00:04:39] We talk about the most famous orthodontist in all of the doctor finance world today, Dr. Mike Meru, who owes more than one million dollars in student loans. He let a Wall Street Journal reporter into his home along with a photographer and let them comb through all of his financial documents. [00:10:25] This is why I think Dr. Meru is crazy like a fox. He became so frustrated with the high interest rates that he helped start a national dental student movement to lobby Congress to lower rates on grad students. The effort went nowhere. Clearly he has some interest in helping other docs avoid this same issue. And maybe that is what motivated him to let a reporter into his home. [00:19:19] There are two solutions to Dr. Meru's problem.
Q&A from Readers and Listeners
- [00:23:58] “I moonlight at a hospital that provides a W-2. I now have the option of working in another hospital which will provide a 1099. All other things being equal, which moonlighting job should I favor, the one that pays me a W2 or this new one which will pay 1099?
- [00:26:23] “If I choose the 1099 job, will that allow me to contribute more retirement money to an additional 401k or IRA without jeopardizing the Backdoor Roth pro-rata rule?”
- [00:26:43] “This past year I'm able to start building a portfolio. I want to start an HSA and I'm trying to figure out how to do a backdoor Roth IRA. I'm self-employed and my CPA had me set up a SEP IRA. Every year I should empty my SEP into a Roth? In terms of the HSA, people I've talked use HSA bank and love it but I just learned that you can no longer invest in Vanguard funds through them. Is that a deal breaker in your opinion?”
- [00:30:03] “I start looking for jobs next year. I owe $400,000 in student loans. I'm interest in doing research and taking a research year. I'm on public service loan forgiveness. I only have about 27 payments so far. I'm not sure the program will be around for that long. I think the better financial decision is probably going into private practice or hybrid practice and trying to pay it off but I just wanted to run it by you and see what you had to say.”
- [00:32:27] “With the recent law allowing a longer time to repay a 401K loan in the event of separating from the company, I've been considering taking a 401k loan to pay down some of my student loans. Thoughts on that idea?”
- [00:35:08] “I'm in my final year residency. I had a traditional 4O3b which I recently switched to a Roth 4O3b. The balance is just under $10,000. I have the ability to max out the 403b this year given some savings I have. I will be graduating in a year and converting this 403B to my Roth IRA. Does it make sense to max out my 403b this year given I'll be converting soon?
Full Transcription[00:00:00] 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.
[00:00:21] Welcome to podcast number 59. Is Dr. Mike Meru crazy? If you're like many of your peers your heart probably drops. Each time you see how much you owe in medical school loans but it doesn't have to be that way. You don't want to live life with high payments or high interest. by simplifying all student loans into one loan at a lower rate. Doctors say fifty thousand six hundred fifteen dollars on average and common bond is here to help you do it. But the straightforward commitment free application you'll get your new interest rate in two minutes. CommonBond is also the leader in borrower protections versus other options because they know how unpredictable life is and their award winning service team has your back every step of the way. As a member of the WCI community you'll get a five hundred dollar bonus when you refinance with common bond. Apply today at W WW Whitecoat investor dot com slash common bond to lock in your rates before they go up. Common bonds a licensed lender NMLS number 1 1 7 5 9 0 0.
[00:01:15] Welcome back to the podcast. Thank you so much to those who bought the online version of the conference. The feedback has been tremendous. Nearly 500 of you bought it. You always wonder the first time you'd do anything if anyone is going to be interested in it.
[00:01:28] We're leaning toward doing another conference probably in 2020. This time we gave attendees a huge discount on the online course but got a few complaints for charging them at all. So I think next time we'll just charge more for the conference and roll that into the course. Free is really a funny price though, psychologically we prefer all inclusive pricing because it is less painful even if it were cheaper ala carte. By rolling it in I guess we will reduce your pain and will make more money. That's a win win if I ever heard of one.
[00:01:55] Thanks to all of you who follow us on social media we're closing in on 10000 Twitter followers and we're also looking to get in a Facebook group together at some point in the next few weeks. We know there's lots of you out there who prefer your information in ways other than a blog newsletter or a book. some like a forum, some like Facebook, some like podcast. So we're trying to adapt the WCI message to every medium we can find in hopes of reaching as many high income professionals as possible.
[00:02:21] Also remember that now it's summertime. That means we're given money away here WCI we're running our scholarship program again and it's bigger than ever. We'll be giving away over 60000 dollars in cash and prizes this year. So if you're a professional student and by that I mean you're in a professional program like a PA or an NP or M.D. or DO or a pharmacist or a dentist any type of professional you are eligible for this. The deadline for your applications is August 31st and this isn't like going into medical school. Applying early doesn't improve your chances. Feel free to wait until August 29 to send it in. That's not going to affect your chances of winning.
[00:03:02] I also want to thank you for supporting the scholarship sponsors and make this possible especially our platinum sponsors. We've got five of them. You'll be seen sponsored posts on the blog from each of them this summer. But I wanted to mention them here on the podcast as well. Larry Keller has sponsored this every year. He is a life and disability insurance agent. He almost always pays more than the minimum required to be a platinum sponsor and has really been a huge supporter of the scholarship over the years.
[00:03:30] A Commonbond, Who is sponsoring today's podcast and has some awesome options for student loan refinancing is another one of our platinum sponsors.
[00:03:38] Laurel road used to be known as DRB is probably the first company out there really doing student loan refinancing. They are sponsoring our scholarship this year.
[00:03:48] Bob Bhayani who's one of the recommended insurance agents on our site. Also a great resource for disability and life insurance is another one of the platinum sponsors.
[00:03:59] And our final platinum sponsors Physician homeloans at Fairway mortgage. That's Josh Mettle's company. For those who have read some of his blogs or listen to his podcast or read his book. In fact I just talked to him a couple of days ago I called him up with a question about a commercial loan for an investment I'm involved with.
[00:04:17] Thanks to all those sponsors for really sponsoring our scholarship this year without their help it would be a much smaller amount that we were giving away. But thanks to their help we're really going to affect dramatically the financial lives of our winners.
[00:04:31] The quote of the day today is from Jennifer Lawrence who said I was raised to have value for money. I have respect for money even though you have a lot of it.
[00:04:39] Well today we're going to talk about the most famous orthodontist in all of physician finance Doctor Mike Meru is an orthodontist who lives just a few miles away from me. It seems everyone has an opinion about Dr. Meru these days. Some feel pity others contempt still others simply wonder. Mike let a Wall Street Journal reporter into his home along with a photographer and let them comb through all of his financial documents. The end result was an article in The Wall Street Journal titled Mike Meru has 1 million in student loans. How did that happen? That article will be one of the first hits. Every time one of his future patients googles his name for the rest of his career. At first I thought Mike must be crazy for talking to this reporter but after thinking about it for a while I think he might just be crazy like a fox. Let me tell you what I mean.
[00:05:30] Let's talk about the article I think at least 20 of you sent it to me by e-mail or on social media. And clearly people are talking about this. I was at a conference for orthodontists last week and everybody knew about this article. Everybody knew about this doc and what he was going through.
[00:05:47] Before we get into the article itself I want you to know. I've already reached out to Dr. Meru. I sent him a copy of my book. I sent him free coupon codes for our two online courses. I offered to buy him and his wife dinner and that offer also goes to any other docs out there who over a million dollars in student loans individually. Although you're gonna have to come to Utah to get your free dinner. Apparently there are a hundred other people out there besides Mike that over a million dollars in student loans.
[00:06:13] So let's get into this article it's in the Wall Street Journal. It's you know obviously behind their paywall but if you get there from Twitter or if you have a subscription you can read it. says from Draper Utah just down the road from me Mike Meru a 37 year old orthodontist made a big investment in his education. As of Thursday he owed one million sixty thousand nine hundred forty five dollars and 42 cents in student loans. Mike Meru pays only one thousand five hundred eighty nine ninety seven a month not enough to cover the interest so his debt from seven years. The University of Southern California grows by 130 dollars a day in two decades as loan balance will be two million. His wife Melissa had become numb to the burden. Focus instead on raising their two daughters. If you thought about it every single day Mrs. Meru said you'd have a mental breakdown. While I can understand that. Due to escalating tuition and easy credit the U.S. has 101 people who owe at least a million dollars in federal student loans according to the Education Department.
[00:07:08] Five years ago only 14 people owed that much, more could join that group. While the typical student borrower owes 17000 I think that's probably a little low the number of those who owe at least 100000 has risen to around 2.5 million nearly 6 percent of the borrowing pool. It's pretty much all doctors at least those who had to borrow for their education. For graduate school especially, there's little incentive for universities to help put the brakes on big borrowing. The government essentially allows grad students to borrow any amount to cover tuition of living costs with few guardrails on how the final sum will be repaid. You can kind of see a little bit of that paragraph the angle that the journalist is taking with this. This is kind of you know these people are taking advantage of the government taking advantage of the taxpayer kind of bend to the article. more than a third of borrowers from one of the government's main graduate school lending programs have enrolled in some form of federal loan forgiveness plan. OK. These are choices we're not coercing said the dean of the USC Herman Austro School of Dentistry where Mr. Meru went to school and one of the most expensive in the US, you know exactly what you're getting into. I'm not sure that's necessarily the case for most docs I'm not sure they realize just what it means to borrow the entire cost of your education and your living expenses and then try to pay that back on a typical physician or dentist salary. It goes on to say even the best planners might not have anticipated the sharp increases in tuition and student loan interest rates from 2005 to 2012. I certainly didn't anticipate that while you could get a mortgage at 3 percent your student loans were still at 8.
[00:08:42] While the Federal Reserve was reducing interest rates to near zero to combat the recession rates for grad students were as high as eight point five percent and I've seen them higher that I've seen them as high as 10 percent especially as you get into the private world particularly for physicians that attend Caribbean medical schools. It says dental schools the costliest higher education program in the U.S.. I think that's true. Private nonprofit schools during the 2015 2016 school year charged an average of seventy one thousand eight hundred twenty dollars a year. USC now costs 91000 a year 137000 and living expenses are included. Turns out it's not that cheap to live in Southern California. For Mr. Meru tuition at USC first went up during the second year. Interest rates followed halfway through dental school he said he started to worry about the soaring cost of education. I'm sitting here saying HOLY CRAP should I really be doing this. Should I drop out. I think that's a familiar sensation for most of the doctors listening to this podcast. His wife said she and her husband decided it is too late to turn back. Well how are you going to pay them back unless you can get that high income at the end of the tunnel? His financial records that he provided to the Wall Street Journal show he borrowed a total of 601506 dollars of debt. A debt that swelled to more than 1 million by fees and interest.
[00:09:54] The USC education helped him earn 225 thousand dollars last year working for a corporate practice in Draper Utah 20 minutes from Salt Lake City. That compares with 158 thousand Median income for Dennis according to the Labor Department. I have no idea why they're comparing that to other dentists. The average orthodontist according to the data I recently looked up was making two hundred eighty three thousand dollars. Obviously there's some making much more than that but that really is the average that the ADA is reporting these days. Even so he's making below average.
[00:10:25] It's kind of interesting here. Reporter says Mr. Meru and the why they are so opposed to saying Dr. Meru is beyond me, but became so frustrated with the high interest rates that he helped start a national dental student movement to lobby Congress to lower rates on grad students. The effort went nowhere. And I think that's the paragraph that really gives you a clue that maybe Dr. Meru is not clueless about this that he's not crazy that he's crazy like a fox. Clearly he has some interest in this in helping other docs avoid this same issue.
[00:11:01] The article goes on to say Dr. Meru was the eldest of three boys raised in California an affluent suburb west of Los Angeles. His father didn't finish college owns a small construction business his mother works mostly as a secretary. He found his calling while still a teenager, says he was insecure overs crooked teeth and irregular jaw line. I was embarrassed talk to girls, orthodontists changed my life. He spent two years on a Mormon mission.
[00:11:29] Then got an undergrad degree at Brigham Young University, a very inexpensive undergraduate institution by the way, paid his college tuition with money from his parents and by waiting tables. So basically he got out of undergrad debt free. This million dollars is all dental school and orthodontics residency. His mother said help him pay for college was the agreement we made all our boys graduate school wasn't part of the deal we couldn't afford it were middle class.
[00:11:56] He married his wife well at BYU that graduated debt free in 2005. They picked USC for its prestige and to be close to his parents. The financial aid director estimated that the program would require 400 to 450 thousand dollars in student debt including interest. They concluded it was a good investment. Given the salary that he expected to earn. Okay that makes sense. You got to borrow 400000 you're going to make at least 283 thousand. That makes sense. So they said we can make this work and felt like it was OK to go into debt for that education. Part of their issue was that their calculations and those of the financial aid guy were based on lower interest rates and what they ended up having to borrow the money at. And then of course the increases in tuition didn't help.
[00:12:44] They note the law that was passed in 0 1 took effect in 0 6 that severed the link between student loan interest rates and Treasury rates. And I do recall that that is why tuition rates ended up being so high for a lot of us in the last decade or so. So the financial aid guys in 2007 emailed out a flyer to everybody that warned of large debt balances encourage students to cut back on rent and lattes.
[00:13:13] I'm not sure there's a lot you can do at that point once you're into the middle of it. I mean it's tuition. That's the big thing is tuition it's not the lattes that are killing you. But you know he got a few warnings I suppose in that respect from the school as well as from his lender. So he graduated in 2009 his loans were three hundred forty thousand dollars At that time and then graduated from dental residency and began orthodontists. Now remember for those who aren't aware of this and the dentist certainly are but a lot of physicians aren't. a physician in a medical residency Not only doesn't pay tuition but gets paid a reasonable salary. Yes it doesn't work out too much when you consider your working 80 hours a week but you're getting paid about the median American household income of fifty or sixty thousand dollars. In a dental residency that is not the case. In fact most of the time you're paying tuition in those residency so you're still taking out student loans not only to cover that tuition but to cover your living expenses. And so the article says for the next three years Meru continued his studies at USC and continue to borrow for tuition of his growing daddy said I just wouldn't look. The only thing looking did was create stress. I think we've all been in that situation. After finishing the orthodontics residency in 2012 he went into forbearance because he earned little in his first year out of school and needed all of it to support his family. Interest continued to accrue.
[00:14:41] They bought a home in Draper used a 400 thousand dollar mortgage in 2012 that was actually one of the smartest things he's done. Those homes have doubled in value since that time. She took it out in her name using inheritance for the down payment. And her mother co-sign the loan. He then entered into a government sponsored repayment plan based on income. he doesn't actually specify the program but he says any balance remain after 25 years forgiven effectively covered by taxpayers and that he agreed to monthly payments at 10 percent of his discretionary income. What's being described as the revised pay as you earn program so I'm assuming that's what he's in. Says without the government help the monthly payment Ten thousand five hundred forty one 91. His current monthly income after taxes is roughly thirteen thousand three hundred thirty three. You can imagine why somebody might not want to pay, What is that 75 percent or more of their monthly net income toward their student loans.
[00:15:41] So since refinancing is dead with the federal government 2015 lowering the rate to seven point to five percent the balance has grown by almost another 150000. It'll keep drawing throughout the 25 year life of the repayment plan till it reaches 2 million, that sum will be forgiven at current tax rates could cost Mr. Meru more than 700000 income tax payments. So this is the way these income based repayment, The Pay As You Earn and the revised Pay As You Earn programs work. Remember it's not like public service loan forgiveness when you get that forgiveness is totally taxable. So says by then Mr. Meru will have paid one point six million. That would be about the same as repaying 600000 student loans at a rate of 4 percent over twenty five years.
[00:16:28] All right. That says the Government repayment plan affords the Meru family a comfortable life. Their homes on a mountain with panoramic views of the snowcapped peaks surrounded Salt Lake City they take vacations including a recent trip to Havana. He drives a used Tesla. on a recent spring day commuting to the suburb of Clinton, Working out it was one of his company's five offices with in a room with views of the mountains and the strip mall parking lot. He saw a procession of teenage patients and for lunch he went to the Panda Express next door.
[00:16:53] Now there's been some ridiculous stuff going around on social media and the Internet about this blaming him for going to Panda Express for lunch. Give me a break. Go into Panda Express is neither the cause of this problem nor really keeping him from solving it. Have you been to Panda Express lately is not exactly an expensive place to eat. But let's talk about this article a little bit and really talk about the situation right. He's making two hundred twenty five thousand dollars. He owes one million sixty thousand dollars. That is a debt to income ratio of four point seven. In general I try to recommend people to keep that student loan to gross income after school ratio to one or less that can be difficult to do especially for a dental specialist and especially as the cost of tuition continues to skyrocket and incomes don't keep pace.
[00:17:48] But as you get up to two that's probably still doable but will require you to live like a resident for about five years in order to get on top of that as you get out to a ratio of three of your student loans to your income. That starts requiring some extreme solutions. It requires you to live like a resident for more than five years maybe as many as 10 or requires you to receive some forgiveness or requires you to do some other more extreme kinds of solutions to get rid of it. As you get out about fourX it becomes basically impossible to pay back your student loans on your income. It just doesn't work. Dr. Meru is at four point seven X. He's well beyond that. I mean basically if you calculate out what he's got to be paying is just not going to happen. It's just not going to happen. And while his student loan burden is a huge problem without a doubt and his lifestyle may be a little bit of a problem. The main problem here is low income. If you double or triple his income this all goes away and he's at less than a 2 x ratio on the student loans the home makes a ton of sense. The car is not a big deal and he certainly doesn't need to worry about eating at panda express. And so that is one option. Many orthodontists do make double or triple his income. He's still below the average for his specialty. The average is two hundred eighty three thousand and that was a couple of years ago and he's making 225. Just getting back to average would improve that ratio significantly.
[00:19:19] So really there's two solutions to this problem. You know he was featured on the Dave Ramsey program, really this article was featured he didn't have Dr. Meru on there. And of course Dave Ramsey gave his usual solution right, scorched earth sell everything sell the house sell the Tesla stop eating out a Panda Express and put everything you have toward the debt. But at these sorts of ratios that kind of thing doesn't really work as well.
[00:19:44] So what is the other solution. Well the other solution is exactly what Dr. Meru who is doing, enrolling in pay or repay or IBR depending on what you qualify for and what makes the most sense for you. And eking it out for almost your whole career and then paying the tax bill at the end and being free of the loans. I hate to see somebody in debt for 20 or 25 years after medical or dental school. It really it I feel terrible about it because I know what having that debt hanging over your head does to you. But at a certain point when you compare it to the alternative it's hard to say that it doesn't make sense. It also I think part of the reason that Mike did this that he let this journalist write all about him and his family and his financial life and took all this flack on the Internet and on social media I mean the Wall Street Journal article itself had 1800 comments which is huge and a good portion of them were not particularly sympathetic. So I think part of the reason he did this is for the same reason he was trying to lobby to change things when he was a dental student.
[00:20:53] I think he's an advocate for change within the student loan system and what better way to cause change than to get an article like this into the Wall Street Journal showing a real person with a million dollar student loan. I can't think of a better way to really get this issue out in front of people. Now I'm not sure I would have the guts to do this with my financial situation if I was in there. And so in that respect I think he's pretty brave. Mostly I just hope and this is part of the reason I'm reached out to him. I just hope the rest of the financial life of his financial life is in order. You know that this actually is the plan that he's planning to go through repay that he's planning to go through pay and that he you know is saving toward that tax bill because he does have to save some money to get that tax bill paid off in 20 or 25 years and that he's saving for retirement on the side and has a plan to get the house paid for and all that kind of stuff. And assuming that's the case I think he's just crazy like a fox.
[00:21:52] It's important to understand these forgiveness programs though right these are not public service loan forgiveness and public service loan forgiveness you get forgiveness after 10 years of payments including those you make during residency and fellowship. And so it's really pretty awesome if you do a long residency and fellowship you might only make full payments for four years before everything's forgiven. The other great thing about public service loan forgiveness is the forgiveness is totally tax free.
[00:22:19] Now there's a couple of catches there. You have to work for a 501 c3 or a nonprofit to be directly employed and you have to work full time. Neither one of those applies to the other forgiveness programs. The IBR program that forgives loans up to 25 years. The pay program that forgives loans after 20 years and their revised pay as you earn program which forgives loans for professional students after 25 years. You know none of those require you to work for a 501 C3. None of them even require you to work full time so you can actually game the system have a relatively low income make relatively low payments and the rest gets forgiven at the end. Now of course the more you get forgiven the higher the tax bill gets. And so you've got to be saving on the side. But for what they're anticipating his tax bill is going to be at the end of this. He's really only got to be putting away about ten or twelve thousand dollars a year over that 25 years in order to be able to pay that tax bill. So so long as he's doing that and he's making the payments. This is not a crazy way to deal with his student loan burden. Personally I think I'd hate to be in debt for that long. But when you start getting to these really extreme debt to income ratios maybe that's what it takes.
[00:23:48] At any rate if you're hearing this Dr. Meru the offer still stand. I'll come buy you and your wife lunch and we can chat about finances if you want. If you don't want to I'm not going to hunt you down.
[00:23:58] All right let's do some questions from readers. This one comes from a 50 year old academic emergency physician who maxes out as 4O3b 457 and backdoor Roth says my spouse hasn't worked in two years. I moonlight at a hospital that provides a W-2. I now have the option of work in another hospital which will provide a ten ninety nine. My group has been contracted to work at this other hospital for several years but this relationship is now ending. I like working there and they're allowing interested attendants to continue to moonlight their malpractice is covered through my academic medical center. So I have two questions Assuming 25K/year moonlighting. All other things being equal which moonlighting job should I favor the one that pays be a W2 or this new one which will pay via ten ninety nine.
[00:24:41] Well when evaluating a W-2 versus a ten ninety nine situation you got to compare apples to apples. And remember when you were an employee i.e. you're paid on a W-2. Your employer is paying half your payroll taxes. That's Social Security and that is Medicare tax. And so that's a very real benefit. So if it's the exact same amount but you're both being paid but in one of those situations the employer is covering part of your taxes.
[00:25:08] Well that makes sense for you to be the employee instead of the independent contractor in order to compare apples to apples. They actually have to pay you more as an independent contractor to make up for that fact that's even more the case. If being an employee would make you qualify for some benefits then they also have to pay you to make up for the fact that they're not paying you benefits. That said if all else truly is equal and they've made adjustments for that so you're really comparing apples to apples. I like being self-employed especially when you've already got an employee gig on the side because it allows you not only write off a lot of medicine related expenses but it allows you to open individual 401k and essentially have multiple 401k. Granted this docs only going to be able to do the employer contributions into that individual 401k which would work out to be about 5000 of his twenty five thousand dollars that he made there. But it's better than a kick in the teeth whereas if he was an employee he probably wouldn't qualify for their 401K at the other hospital and probably wouldn't have any other real option for protecting that money from taxes so if all else is equal and the adjustment is made for those payroll taxes and benefits, I like the idea being an independent contractor and opening that individual 401K.
[00:26:23] His second question was if I choose the ten ninety nine hospitals that somehow allow me to contribute more retirement money like an additional 401k or IRA without jeopardizing the Backdoor Roth pro-rata rule. The answer is yes of course an individual 401k is not counted toward that pro-rata calculation that you do on Form 86 06 where you report the Backdoor Roth IRA.
[00:26:43] All right next question I finished a specialty residency. This is a dentist. This past year I'm now working finally able to start building a portfolio I want to start an HSA and I'm trying to figure out how to do a backdoor Roth IRA. I'm a little confused on what you said on the website in terms of the ways to set one up. I'm self-employed and my CPA had me start to set by Ira. There's problem number one due to my income I'm ineligible for a Roth IRA. The way I understand is I need to move money from my Sep to a Roth IRA. Sounds like he's a little confused about how these backdoor other works. And so he wants to know how he's supposed to do that and go back and pay the tax on this money. Every year I should empty my SEP into a Roth. I'm just confused. Also in terms of HSA I was wondering if those top five are based on being an active trader or someone who just lets the money sit. People I've talked to most use HSA bank and love it which after reading your article seems like a good fit. But I just learned that you can no longer invest in Vanguard funds through them is that a deal breaker in your opinion.
[00:27:45] Well let's do the last question first. HSA bank invests at T.D. Ameritrade and so T.D. Ameritrade made a change that you no longer can buy Vanguard ETF commission free there you can still buy them. Who's got to pay five or six bucks in commission to do it.
[00:28:04] So I pay one commission every year to max out my HSA all in one fell swoop in January and it cost me five or six bucks. It's not that big a deal if you like the Vanguard funds. They also offer some other funds that are just fine if you want to use those other low cost index funds there but I'm still buying the Vanguard ETF there.
[00:28:22] Yes HSA bank is a fine place for your HSA. There are other good places for HSA the differences between them are pretty minimal. But you can check out my article on the best HSA is just search that on the Web site if you want to see some of the options are if you're an active trader you really got to be careful, number one because you're probably not making money without active trading but number two can really increase the costs of your investing due to all those commissions. And so if you're actively trading you may not want that particular HSA and you'll have to look with a little different criteria than what I was looking for.
[00:28:58] But his main question here is just a misunderstanding of how a SEP IRA and a Roth IRA worked together. Now a SEP IRA is counted in the pro-rata calculation. So that means on December 31st every year you need to have zero balance in that SEP IRA. Just like you wouldn't a simple IRA or any other tax deferred IRA like a traditional IRA. And so that's why I tell most people that are self-employed that are independent contractors to use an individual 401k instead so they can continue to do that backdoor Roth IRA without any complications.
[00:29:31] Now I suppose if you really wanted to a big huge Roth conversion every year you could put all that money into the SEP IRA and convert the whole thing to a Roth IRA every year. But in general during your peak earnings years you want that tax deferral. You want that tax break now while you're in a high bracket. And so you don't want to be doing a bunch of Roth conversions every year with your retirement contributions. And so in general this doc needs to go in and start using individual 401k instead of a SEP IRA and that will likely clear up all those issues.
[00:30:03] This next question comes in from a second year pulmonary critical care fellow. I started looking for jobs next year I owe 400000 dollars in student loans. I'm interest in doing research and taking research year. I'm on public service loan forgiveness I only have about 27 payments so far I'm not sure the program will be around for that long. I think the better financial decision is probably going into private practice or hybrid practice and trying to pay it off but I just wanted to run it by you and see what you had to say.
[00:30:27] This sounds like a perfect person for Public Service Loan Forgiveness. Been in residency a long time been in Fellowship going to do a research year. I mean how much longer you got to stay in academics. The public service loan forgiveness three or four years doesn't seem like that big of a deal. Now I'm kind of disappointed that the doc is already a second year fellow and only has 27 payments. That means the doc did not make a bunch of payments during residency.
[00:30:54] I mean if you start make payments right away in three year residency you got 36 by the time you're done. If you do a three year fellowship after that that's another 36 you've already got 72 of your 120 payments made and you get you a lot closer to the time when you get public service loan forgiveness so you think this is your plan. Start making those IBR, pay, or repay payments just as soon as you can during your residency to start counting up those tiny payments because that's really what ends up being forgiven. Now it sounds like this is another one of those people who is worried the program's going to change. There's going to be limited in how much you can have forgiven or just going to go away completely. And while I think those who are currently enrolled would be grandfathered in to any changes. If this is a serious concern for you I recommend what you do is rather than leave the program. Refinance your loans and go work in a private setting. If you're at all interested in doing academics they stay in academics. They keep making these payments through the government programs and you make additional payments that would pay off your student loans over two to five years. But make them to yourself make them into a side fund aside investing account that you could then raid to pay off your student loans should something happen to the program and you can invest it aggressively because most likely you're going to get forgiveness and this is really money or just invest for retirement.
[00:32:17] And so if you're worried about the status of the program just save the money on the side to pay off your loans and then worst case scenario you just pay them off
[00:32:27] OK. Next question with the recent law allowing a longer time to repay a 401K loan in the event of separating from the company. I've been considering taking a 401k loan to pay down some of my student loans one to run my thing in buy to make sure my logic is on solid ground and there's nothing I'm overlooking. My thinking was to take thirty thousand dollar 401K loan to pay the variable student loan off and he notes his student loans are 240000 two point seventy five fixed thirty five thousand one point nine five fixed and thirty thousand three point four variable and he lists some pros and cons that he sees of doing that. His 401k loan would be five point seventy five percent interest which is higher than all of his student loans. So I'm not a big fan of 401k loans. It used to be they had to pay him back within 60 days of separating from the employer so there were really a tax timebomb. If you didn't pay them back in that time period which is incredibly hard to do if you just lost your job right now you have more time to pay them back. With the recent changes in the tax law so there's slightly more attractive as a borrowing option. But I have no idea why it would be wise to borrow at five point seventy five percent to pay off a loan that is three point four percent more concerningly I think is the attitude behind the question.
[00:33:46] I mean this is a doc that owes Looks like a little over three hundred thousand dollars and we get this idea sometimes that if we refinance our loans or restructure them with a mortgage or a home equity line of credit or a 401k loan that we're doing something about our student loans. In reality you're not doing much. You're making little changes around the edges maybe you lowered your interest a little bit but the way you get rid of your student loans is by living like a resident making a big difference between what you're earning what you're living on and drop in these huge payments off to your lender every month. You know when you're thrown ten thousand dollars a month at your student loans they go away very quickly unless you're in a situation like Dr. Meru. But for most of us you can wipe out your loans and well less than five years. By throwing 10000 dollars a month at him. And so don't kid yourself that that messing around with them messing with the interest rates or who you owe money to is really the solution because the solution is to take it out of your lifestyle and pay off those loans.
[00:34:47] All right. Here's a question from another resident. I'm in my final year residency. Have you questions about my retirement accounts. I had a traditional 4O3b which I recently switched to a Roth 4O3b. Wish you'd done that a little earlier. The balance is just under 10000 I have the ability to max out the 4 O3b this year given some savings I have will be graduating in a year and converting this 403B to my Roth IRA.
[00:35:08] Not sure if my switch to a Roth midway complicates this. No it really doesn't use want to pay taxes later on that part of the transfer. And this. Any advice on this will be appreciated as it makes sense to max out my 403b this year given I'll be converting soon.
[00:35:23] Okay in general if you're in residency you should be contributing to Roth accounts means a Roth IRA and maybe a ROTH 4O3b or 401k especially if your employer is matching any of those contributions to the 4 O3b or a 401k. So if you've got a retirement account offered by your hospital and it has a Roth option in general you should be using that as a resident. There are a few exceptions like if you're trying to minimize your income in order to maximize how much you can get forgiven under public service loan forgiveness. You might want to choose the tax deferred option but in general especially for anybody who expects to pay off their student loans themselves they should be using the Roth options. Now it's also a great idea and the year you leave the hospital you leave the employer. You know the year where you're a resident for half the year and you're an attending for half the year to just convert anything this tax deferred to a Roth account because you'll be in a higher tax bracket after that.
[00:36:20] You know it's not quite as low as you were in a medical school or in those years where you are a resident for the entire year but it's better than what you'll be in as an attendee and so I just convert the whole thing to a Roth IRA the year I left if I were you.
[00:36:32] All right that brings us to an end of these questions. This podcast was sponsored by CommonBond, Speaking of student loans. With a straightforward commitment free application you'll get your new interest rate in two minutes common bond is also the leader and borrower protections versus other options because they know how unpredictable life is and their award winning service team has your back every step of the way as a member of the WCI community. You'll get a five hundred dollar bonus when you refinance with common bond applied today at W WW dot white coat investor dot com slash common bond to lock in your rates before they go up. Common Bond is a licensed lender and NMLS number 1 1 7 5 9 0 0 head up shoulders back. You've got this we can help. We'll see you next time on the white coat investor podcast.