Today is another Friends of WCI episode. Tyler Olson of Olson Consulting joins Dr. Jim Dahle to answer your questions. They talk about paying taxes and if you should use a professional or do them yourself. They discuss medical loans and how taxes work with those. Then, they get into what to do with an old SEP-IRA, if it is ever a good idea to over-contribute to a 403(b), and the difference between average cost basis and actual cost basis.


 

 

Do Your Own Taxes, Hire a Professional, Or Both?

“Hi Dr. Dahle. Thanks for all you do. This year I plan to do my own taxes, then send them to a professional tax provider to double-check. Is there any tax software you recommend? I am doing this because every year I found mistakes in my taxes worth thousands of dollars. I feel pretty confident but still want the backup of a tax preparer double-checking my work.”

Dr. Jim Dahle:

That's an interesting approach. I don't think there are a lot of people out there who are doing their entire tax return and then sending it to someone else. I don't think any tax firms offer this service to double-check your tax return. They do it themselves. You're paying the full freight price if you're going to an accountant and saying, “Hey, I want you to do my taxes.” You don't know of anybody that'll look over your taxes, do you?

Tyler Olson:

I do in the flat-fee financial-planner-turned-tax-professional space, which is relatively small. It's not an easy service to find. I think about this question a lot because of all the services that I think physicians should outsource, I tend to think that taxes are one of them because they can be so impactful. But they keep running into problems where people can't find the right person. There's not an easy answer to this, but if this person found that their tax preparer made a bunch of mistakes and now they're going to do it on their own, they must be going to someone else, presumably.

Dr. Jim Dahle:

Either that or they're finding the mistakes themselves. I've kind of been in all ends of this camp. I did my own taxes for many years. It's only been the last two or three years that I actually paid somebody else to do my tax return. First, we went with the corporate tax return and then my personal return. But the straw that broke the camel's back was because I couldn't figure out which states I had to file in with the number of my real estate syndications. That's what eventually pushed me to actually hire it out. But I definitely catch mistakes. My tax preparer messes up my 8606 most years. I don't want to send them my blog post for it, but I do point out that, “Hey, you have to fix this” when it's costing me something. Half the time the mistakes people make on 8606, it doesn't matter because they get the bottom line right and I don't really care beyond that.

But I've definitely found mistakes. Last year was the first year we had to file for our trust. It's an intentionally defective grantor trust. Essentially, the taxes all end up on my returns. On the initial run-through on the taxes, my tax preparer wasn't using up a bunch of the tax losses that I had been harvesting. She thought that I was basically selling this into the trust from a tax perspective and that I would have to realize all the gains on the stuff I'd put into the trust. But that's not the way it works with the intentionally defective grantor trust. After going around with her and with the estate planning attorney, essentially I got all my tax losses that I'd been carrying around for a few years back because they just weren't used.

Absolutely, the pros make mistakes, and the more complicated your return becomes, the more mistakes you should expect to see on them. I'm actually really excited that you know anybody that offers this service, Tyler. When we get done with this call, I'm going to get some names from you. We're going to reach out and see if they're interested in advertising, because I bet there's a whole bunch of white coat investors that would love that service.

Tyler Olson:

I think one of the problems here is the management of expectations. Actually, there was a post on Twitter just a few days ago about this guy. He said he pays a decent fee to his tax professional. He was troubled because he keeps bringing ideas to the tax preparer. He’d be like, “Hey, maybe I could save money this way.” But then it made him think, “Why am I bringing the ideas? Why isn't he bringing the ideas to me?” I get that. But I think that the problem lies in that there is an incongruent location of expectations and services because if you're just paying someone to file your tax return and you're paying them less than $1,000, I wouldn't expect any sort of proactive tax advice. Because this person, he's saying, “I'm going to do my taxes and then have them review it to make sure there's no mistakes.” That's one end of it. But a lot of the mistakes can occur during the tax year, and that's already done. Having someone at your side can be helpful, but it's a lot more expensive.

Like this person that you mentioned with the trust work. I would hypothetically ask, “Are they checking in with you on these sorts of things? Do they really know your situation, they know your thinking, they know why you're doing A, B, and C? Because if they're just coming reactively and it's like February or March, these people are slammed with returns and pressure to get stuff done within a finite period of time. And to get someone's proactive attention and that they know what you are trying to do, you have to pay them more because they're working with you throughout the year. You know what I'm saying?

Dr. Jim Dahle:

Yeah, absolutely. This is something I think is related to a point I make often, which is that you don't save taxes really on the return. It's not about the preparation of the return. It's not about finding the right accountant who can find the right loophole and the right form to fill out. Yeah, there's a little bit of savings there maybe in getting the forms right. You save taxes by living your financial life differently—by saving for retirement, by owning a home, by having kids, by owning a business. That's where the savings is. By the time you get to the end of the year, all you can change is the return. You can't change the way you live your financial life.

Tyler Olson:

Yeah, I agree. But to answer this person's questions, I think it's a good idea. If it's kind of like a hybrid method, you're kind of taking ownership and advocacy for your own situation but also getting some advice on the side to make sure that things are correct. I think the viability of this decision, though, changes relative to the complexity of his return. I'm really curious to know how thousands of dollars were screwed up. What's happening with this person's situation? Did they not max out their 401(k) and they were looking for someone to tell them? That's not necessarily in the purview of most tax professionals. They're looking at tax law, they're looking at quarterly tax payments and business management and bookkeeping. That merger of financial planning and tax pro is growing because of that—because it's like tax advice knowledge coupled with proactive and accessible planner advice.

Dr. Jim Dahle:

I love the idea of people doing their own taxes, though, because I think you learn a lot about the tax code, particularly if you start right in the beginning. When your tax return is super simple and you have a resident W2 and that's it—that's your only source of income—that's an hour job on TurboTax at most. It's not that complicated. And you learn a lot about the tax code. What I found as I did my own taxes for many years is I was generally adding one form a year that I had to learn. Doing my own taxes caused me to live my financial life differently. I made different decisions because I knew the tax ramifications.

I'm very encouraging if people want to do their own taxes or at least understand their own tax return. I get that sometimes it's not worth your time. It's a chore. It's not fun for most people. It's like mowing your lawn. As soon as you have the money, you tend to hire that sort of thing out unless you like it. But I do like to encourage people to at least be knowledgeable about their own taxes. I don't want to discourage them from doing that, but I've just found it's really hard to find very many people to just look things over, which seems like the service that he wants. The other thing I find is people who are willing to do things like this themselves are extremely fee-sensitive. When this accountant comes back to him and says, “Yeah, I'll look it over, that's going to be $2,000.” He might say, “I think I'd rather have $2,000.” I suspect that probably happens with a lot of do-it-yourselfers.

More information here:

You Should Do Your Own Taxes at Least Once – Here's How I Do Mine

Should I Do My Own Taxes or Pay Someone? 

 

Is It Ever a Good Idea to Over-Contribute to a 403(b)?

“I have a question about whether over-contributing to a 403(b) could ever be a smart decision. I'm an academic otolaryngologist in the Midwest. I have four different W2 employers from a university physician group, the university itself, the VA, etc. Each of them have a one-to-one or a two-to-one match for 403(b) contributions up to about 5%-6% of my salary. If I contribute the maximum amount to receive all of these matching contributions, I would potentially go over the 403(b) limit of $22,500 [in 2023]. I understand that I would be double-taxed on excess contributions, but I feel like losing the one-to-one match may make up for this tax penalty. I'm wondering what would you do in this situation if you had the potential of either sacrificing a match or paying the penalty.”

Dr. Jim Dahle:

This is a super interesting employment situation, that he has got multiple W2 employers and qualifies for multiple 403(b)s from each of them. Let's review just right upfront what the rules are. For every unrelated employer, you have a different 415(c) limit. For 2024 it is $69,000. For every unrelated employer, that's the total limit of contributions for your employee deferral contributions. Those can be tax-deferred or Roth. That's the $22,500 a year for those under 50, for your after-tax contributions, if your employer plan allows those—whether they're profit-sharing contributions or matching contributions or whatever. That's the total limit per unrelated employer.

Separate from that, you have a rule that says your employee deferral, whether that's tax-deferred or Roth—no matter how many of these plans you have—is $23,000 if you're under 50. But if you've got four employers and they're all offering you a match, you have to be careful how you allocate that $23,000 to maximize how much of those matching dollars that you can get. It sounds like you've tried to do that and you can't get all of your match with only $23,000 going into those plans. I don't know. What do you do in that situation, Tyler? Did you ever run into this? Have you ever had a client that had this issue? I don't think I've ever been asked this question before.

Tyler Olson:

I have encountered this a couple of times. It's a function of several numbers. Their top tax rates at the moment are a factor because they're going to pay taxes on that over-contribution. On the other hand, they're going to get a match, which is effectively a 100% return on whatever this dollar amount is, which is great. Of course, then it's all going to be taxed upon withdrawal. The question is what is that amount from the employer and is it worth it to then pay the taxes again? The other option for this person is to not over-contribute and put it into a taxable investment account. Presumably, he doesn't need the money so he could invest it on his own. What if he invests the money in a taxable investment account, uses tax efficiency as in low-turnover ETFs, buys and holds, and lets it ride?

Depending on how he manages his retirement income strategy however many years from now—and we don't know what capital gains rates will be at that time—for most people, you're maxing out at 15% on that. If you don't buy high-dividend, high-yield funds, you're mitigating much of that ongoing tax liability. The question is, would it be worth it to just do that so that you're not paying the higher income tax rates in the future vs. paying the slightly lower 15%?

Dr. Jim Dahle:

I just want to dive into all the numbers of this. I want to know what each employer is offering and how much he's making there and trying to figure out the way that he can use $6,000 here and $9,000 here and $4,000 here and get as much of the match as he possibly can. Here's the question. Let's say you put in too much to one of these 403(b)s. Maybe we ought to step back first and talk about the unethical option. The truth is the IRS is not looking at this very carefully. They're probably not going to notice if you max out all four 403(b)s and get the complete match. They're probably not going to notice. It is against the rules. I'm not going to recommend you do that. But I don't get the impression that this is a particularly frequently audited part of the tax code.

But aside from that, there's a penalty on over-contributing. I think it's 6% for an IRA. It's 6% a year. The longer you leave that over-contribution in, the higher that penalty gets. It's all the money you over-contributed—all of its earnings plus 6%—is what the penalty is on over-contributions. But my question is if you make the contribution and you pull the contribution out in six months or whatever to pay that penalty and to minimize future penalties, does the employer take the match away? And my guess is they don't because I don't think HR is looking at that very closely. I think there's a good chance you could over-contribute and maybe that involves putting 16 into this 403(b), pull six of it back out in three months or whatever, and maybe they don't pull the match back out. I don't know. You'd have to talk to HR and see how they would treat that to see if that would be an option to get a few more of those matching dollars.

Tyler Olson:

That's an interesting scenario.

Dr. Jim Dahle:

Because the match rules, that's a plan-specific rule on how the match works. That's not an IRS rule. The IRS rule is all about that maximum personal contribution.

Tyler Olson:

You're saying this in the context of making ongoing matching contributions, not after the tax year is over. Right?

Dr. Jim Dahle:

Right. And of course, every plan is different. Some of them wait until the end of the year to give you any matching dollars.

Tyler Olson:

And a vesting schedule. With these listeners, when they pose questions, is there a means to follow up with them to get more detail? Because I agree with you. I would love to, just for the math. That would be really cool to figure this out.

Dr. Jim Dahle:

This would be a great blog post. As you're listening to this—I’m assuming you're listening to this answer since you bothered to leave it on the speak pipe—why don't you send us the details? Shoot me an email with the actual details, how much you're making at each of these businesses, what the match is at each of them, how it works, and how much you can contribute. Maybe we'll make this into a blog post. Blog posts are always better when you're really crunching the numbers than talking on the podcast. But it's a pretty interesting optimization problem to try to get as many matching dollars as you can.

Tyler Olson:

The other option would be to change up how he's compensated or the employee relationship vs. subcontractor.

Dr. Jim Dahle:

Oh yeah. That can be pretty awesome. Maybe you go to one of these folks and say, “Hey, I'm only working here 25 hours a month. Why don't you make me an independent contractor and then I'll get a solo 401(k) and I'll get a customized one that I can make after-tax contributions into. Even though you're only paying me $70,000 this year, I could get almost all of it into that solo 401(k).” That would be one option and would probably increase overall how much you make. Just remember you have to ask for more money if you're going to 1099 because now the employer is not only not giving you that match, they're not giving you any other benefits and they're not paying your half of the Social Security and payroll taxes, Medicare taxes. You just have to run the numbers to know for sure. That's a good idea. I like that thought.

Tyler Olson:

Just level with them. Say, “Hey, I can't get this match.” You are willing to make the contribution if only I could legally do it. Make that matching portion a part of the compensation in addition to making it worth it for all the other reasons. It is more expensive to be a subcontractor.

Dr. Jim Dahle:

I'm actually surprised and maybe you ought to go back and check this, maybe you're wrong. Maybe you're not eligible to contribute to all these different plans. You usually have to be someplace a certain length at the time and you have to work a certain number of hours before you're actually eligible. They've decreased those with the Secure Act 2.0. I think it's only 1,000 hours total now. It could be 750 before the employer has to make you eligible for a 401(k) once you're 21+. But you may not actually be eligible to use all these 403(b)s you have. The other thing to keep in mind, if you change one of them to a 1099, there's a weird quirk with 403(b)s that you don't see with 401(k)s. The 403(b) and your solo 401(k) actually share the same 415(c) limit which is really kind of a bummer about 403(b)s. It's a really obscure rule, but it's different from 401(k)s in that respect. That could also play a factor in your situation.

Tyler Olson:

Yeah, I hope he gets in touch with you. Another consideration is evaluating how to read through those benefits pages. They send you the link and there's just countless paragraphs and links. It'd be cool if he could send you all that and then just deep dive into how to make the most of a not-common academic physician situation.

Dr. Jim Dahle:

Honestly, it doesn't sound like a very stable employment situation. Who has four W2 employers? I can't imagine this isn't going to change in the next year or two.

Tyler Olson:

I've seen it more and more with university jobs that are tied in with state employment. They get paid by the VA, and they get paid by the hospital. They get paid by the medical school. It's very, very frustrating to say the least. I wish it could just be one, but I'm seeing this a lot.

More information here: 

The 2024 Retirement Plan Contribution Limits 

 

Average Cost Basis vs. Actual Cost Basis

“Hi Dr. Dahle. This is Ryan, a military dentist in California. My question is about the use of average cost basis vs. actual cost basis. Recently while trying to do some tax-loss harvesting in my Fidelity brokerage account, I noticed that all stocks and ETFs use actual cost basis, but the mutual funds in my brokerage account utilize average cost basis. First, is there any reason why Fidelity would default to using average cost basis for mutual funds in a brokerage account? And then secondly, it seems to me from a tax-loss harvesting perspective, actual cost basis lists each individual tax lot, making it easier to harvest. My understanding is Fidelity will let me change the cost basis for future purchases but won't change the basis retroactively. Would there be any disadvantages to using the actual cost basis moving forward?”

Dr. Jim Dahle:

I wish Fidelity would use the same term for this as everybody else. I think when Fidelity says actual, what they mean is what Vanguard and Schwab mean when they say specific identification of those shares. That's my understanding. Is that your understanding of what he means when you say an actual?

Tyler Olson:

Yes.

Dr. Jim Dahle:

I can't think of a good reason to use average. Can you?

Tyler Olson:

No, not in a taxable account. It’s moot for retirement accounts, of course. But yeah, I always opt for making this specific identification so that if tax-loss harvesting is an opportunity that presents itself, then you can isolate those lots and you can sell those. The average is just kind of a wash.

Dr. Jim Dahle:

All of my holdings in a taxable brokerage account are specific identification as far as the basis goes. First of all, let's step back. Basis, remember, is what you pay for shares. And these brokerages will track your basis in several different ways depending on how you want to track them. Why they offer all these, I don't know because I can't think of a good reason why specific identification isn't always the best choice. But you usually have to actually say that. You have to actually choose that from the options. The default almost always seems to be average cost basis and you need to change that in a dropdown menu for that holding in the brokerage account to specific identification.

That way when it comes time to sell shares, particularly if you're trying to book some losses because you're doing tax-loss harvesting, you can look at each share's basis or each lot. I'm saying share; I should be saying lot. Each lot's basis and sell the one with the loss. The highest basis is the one you're trying to sell usually. Likewise, if you're in retirement and you're just spending this money and you say “Well, which one should I spend first?” You spend the one with the high basis because it costs you the least amount of tax when you sell it. Because there's less of a difference between the basis and the actual value. It gives you a lot more tax planning opportunities to use specific identification, aka actual basis. I don’t know, I don't think there's a lot of debate on that.

Tyler Olson:

No, it's pretty straightforward.

Dr. Jim Dahle:

On a related note, dividends in a taxable account. You've got a bunch of ETFs, VTI, VXUS, whatever, in your taxable account. I tend not to reinvest my dividends so that I can use them to rebalance so I don't create a whole bunch of little tax lots to keep track of. What do you do with your dividends in taxable accounts for yourself and your clients?

Tyler Olson:

It goes to cash. They go to the money market because of what you just mentioned. They're going to be taxable whether you reinvest or not. There's no downside to putting it in cash, but there would be a downside with looking at an unbalanced portfolio. You have to decide: is it worth it for me to create tax liability in order to rebalance this when it might have less tax liability if you had the cash to do it, to just reinsert it into the position that needs to be brought up to level?

Dr. Jim Dahle:

I'd push back on that. I think there is at least one downside—that you can't automate it. Those dividends, they might sit there for two or three months before you get around to, “Oh, I need to reinvest those dividends.” If you're not watching it, you could get some cash drag from that. I think there's a lot of value in automating things. Behavior trumps math sometimes when it comes to personal finance and investing. I think automating things creates good investment behavior. The problem is that automation does not play well with things like tax-loss harvesting. It doesn't play super well with taxable accounts. I think it's great to automate things in your 401(k) and your Roth IRA and so on and so forth. But in your taxable account, I just prefer having more manual control. I think it's worth the downside of losing that automaticity that is helpful to lots of people in their investing.

Tyler Olson:

What I recommend is, where you can't automate with software, you automate with your planner. You make yourself a note that says, “Hey, every two months or every three months, I'm going to check the values of my taxable account.” Once you learn how to do it, it doesn't take much time. It's mainly just about not forgetting and putting the reminder in whatever system works for you. Just make it happen so that it's in the schedule and then you'll do it and then the cash drag is much less of an issue.

Dr. Jim Dahle:

My system is that I invest once a month. I count up all the income we had, whether it's dividends in a taxable account, whether it's clinical income, whether it's WCI income, count it all up and look and decide what we're going to invest and then invest once a month. But if it's been three or four weeks since those dividends were paid, I'm getting tax drag or cash drag on those dividends. Now, that's not so bad at Vanguard. At Vanguard, my cash is sitting in the federal money market fund earning 5.3%. That's not much drag.

But some of these brokerages, the way they make money is your sweep account, the account where those dividends go into pays zero. It reduces your returns. That's one of the reasons people complain and moan about Vanguard not picking up the phone very well and not offering great service and so on and so forth. Definitely people are nicer and pick up the phone faster a lot of times at Fidelity or Schwab but not having that cash drag is worth something. I do appreciate that.

Tyler Olson:

Fidelity has a good option for their money market fund too.

Dr. Jim Dahle:

Do they?

Tyler Olson:

Yeah. Right now, it's right up there with the one that Vanguard offers. I don't know the exact rate right now, but it's around 5%.

Dr. Jim Dahle:

You can have your dividends swept right into there?

Tyler Olson:

Yeah.

Dr. Jim Dahle:

What about Schwab, though? Schwab is still like a 0% one, isn't it?

Tyler Olson:

I don't use them much because their tech is terrible in my opinion. But I've last heard that was the case, that their default sweep is into like a low-interest-bearing account. You do have to be a bit more nimble about that. I recommend Vanguard or Fidelity over Schwab any day anyway because I find the user experience is better. As far as cash drag, when you're talking about a couple of months of money sitting in cash, I also come from the angle of let's not stress about all this too much because we want to be able to enjoy our life and time too. Everyone's a little bit different and I guess it depends on how much money we're talking about, but we want to be balanced and not stress too much about the minutiae.

More information here:

Tax-Loss Harvesting Pairs and Partners

 

To learn more about the following topics, read the WCI podcast transcript below: 

  • Medical loans and taxes
  • Retirement account contributions

 

Milestones to Millionaire

#152 — Neuroradiologist Hits a Net Worth of Half a Million Dollars Upon Exiting Training

This Neuroradiologist is growing his net worth much faster than you might expect. He discovered WCI in training and educated himself on how to reach financial independence. He and his wife had many discussions about how they wanted their financial journey and savings plan to look before getting married. They followed their plan with discipline and had a serious amount of savings by the time he finished training. They lived like a resident and have had a 25%-40% savings rate. This guest shows us what can happen if you apply the WCI principles and stick with them.

Finance 101: Schedule A Tax Return

Schedule A, aka itemized deductions, is an essential part of your annual tax return. When filing your taxes, you have a choice between itemized deductions and the standard deduction. For the 2024 tax year, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly. This means you can earn up to these amounts without paying federal income taxes.

However, if your itemized deductions exceed these standard deduction amounts, you can fill out Schedule A to claim a higher deduction. Itemized deductions include various categories, and the first one is medical and dental expenses. You can deduct the amount spent on medical and dental expenses that exceed 7.5% of your income. Taxes—including state, local, and real estate taxes—are another category on Schedule A. There's a $10,000 limit on these deductions, but some states offer workarounds for business owners to maximize this deduction. Mortgage interest is also deductible. However, there is a limit of $750,000 on the mortgage amount for which the interest is deductible.

Gifts to charity can be deducted if you itemize, but there are limits based on your gross income. These deductions are added together and subtracted from your adjusted gross income to determine your taxable income, ultimately impacting your tax bill. Whether you choose to itemize or take the standard deduction depends on which option provides you with a greater tax benefit.

To learn more about Schedule A, read the Milestones to Millionaire transcript below.

 


 

As the new year starts, it's crucial to take a proactive approach toward tax planning to ensure that you're leveraging all available money-saving strategies. Cerebral Tax Advisors, a White Coat Investor-recommended tax firm trusted by physicians nationwide, specializes in court-tested and IRS-approved strategies, helping medical professionals lower both their personal and business taxes. Their services are flat-rate, focusing on the client's return on investment. Alexis Gallati, founder of Cerebral Tax Advisors, comes from a family of physicians and has over two decades of experience in high-level tax planning strategies and multi-state tax preparation. To schedule a free consultation, visit www.cerebraltaxadvisors.com.

 

WCI Podcast Transcript

Transcription – WCI – 349
INTRODUCTION
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.

Dr. Jim Dahle:
This is White Coat Investor podcast number 349.

Our sponsor for this podcast is Cerebral Tax Advisors. As the New Year starts, it's crucial to take a proactive approach towards tax planning to ensure that you're leveraging all available money saving strategies.

Cerebral Tax Advisors is a White Coat Investor recommended tax firm, trusted by physicians nationwide. It specializes in court-tested and IRS approved strategies, helping medical professionals lower both their personal and business taxes. Their services are flat rate, focusing on the client's return on investment.

Alexis Gallati, the founder of Cerebral Tax Advisors, comes from a family of physicians and has over two decades of experience in high level tax planning strategies and multi-state tax preparation. To schedule a free-consultation visit www.cerebraltaxadvisors.com.

All right, welcome back everybody. It's good to have you here. We're recording the week before Christmas. This won't run until a couple of weeks into January, but we hope by the time you hear this, you had a great holiday season and you are looking forward to another awesome year. I hope you've set some goals for yourself, both financial and non-financial and that you just have a great time.

If you have not already signed up, by the way, to come be with us in Florida at the Physician Wellness and Financial Literacy Conference, or WCICON, you can still come. In fact, here's a little incentive just for podcast listeners today. $200 off in person, $100 off virtual. That's good through January 24th. And you just got to put in the discount codes. If you're coming in person, the discount code is ORLANDO. If you're coming virtually, it's VIRTUAL. Super easy to remember.

If you still want to come to that, you totally should. It's good for CME. You can use your CME dollars to do it. It's great for your wellness. It's obviously great for your financial literacy. And it's awesome because you get all these cool things that happen there.
You can customize your experience. If you want mostly wellness content, you can do that. If you want mostly finance content, you can do that. If you want a mix, you can do that.

But you build a community with like-minded professionals and money enthusiasts. You refresh and you return home equipped with practical approaches that you can apply that week to create a better life. Not just a better financial life, but a better practice and a better personal life.

You can get up to 16 AMA PRA category one credits or dental CE credits, and you can enjoy all kinds of fun activities. We knock off the talks and that academic crap about 4:00 o'clock each day. You have time for pickleball and yoga and wine tasting and runs much more, golf, whatever. It's a high end resort. Fine dining spa. Our first one we did didn't have a spa, and everyone's requested a spa since then. We have a spa and as well as a pretty sweet golf course. So, looking forward to seeing you there. You can still sign up, get those discounts through January 24th. Again, the codes are ORLANDO in person, VIRTUAL for virtual.

All right. We are doing another friends of WCI episodes. In these friends of WCI episodes, we bring somebody on. Maybe it's someone that's spoken at conferences or somebody that we've partnered with, or someone that does WCI columns.

Our friend of WCI today is none other than Tyler Olson. If you don't know Tyler, you're clearly not on Twitter. Tyler has, I believe, the biggest following in this space. I think at some point in the last year or two, you passed WCI and actually have more Twitter followers than WCI, which is I think extremely impressive. And the reason why is because he's so good at helping so many people on there. Clearly has a servant mentality at helping others. At any rate, Tyler, welcome to the podcast and thank you for being here with us.

Tyler Olson:
Well, thanks for inviting me, Jim. I'm glad that we'll get to bat around some finance questions. I could do it all day, so I'm looking forward to it.

Dr. Jim Dahle:
Cool. As far as conflicts of interest, Tyler used to advertise at the White Coat Investor. He hasn't for a year or two now. Mostly because he was getting so many clients off Twitter and frankly has slowed down taking clients. And so, I actually have no financial conflicts of interest with Tyler right now, although maybe we ought to get him to come out and speak at one of these WCICONs one of these years.

But what we do with these friends of WCI episodes is we're just answering your questions together and hopefully you won't get the same answer from both of us if it's a really good question. And that makes for a little more interesting listening for those of you out there in podcast land.

 

Do Your Own Taxes, Hire a Professional, Or Both?

But let's take our first question here and this one's a little bit about taxes and how to interact with the tax professionals. So, let's take a listen.

Speaker:
Hi Dr. Dahle. Thanks for all you do. This year I plan to do my own taxes, then send them to a professional tax provider to double check. Is there any tax software you recommend? I am doing this because every year I found mistakes in my taxes worth thousands of dollars. I feel pretty confident, but still want the backup of a tax preparer double checking my work. Thank you.

Dr. Jim Dahle:
Well, that's an interesting approach. I don't think there's a lot of people out there doing that, that are doing their entire tax return and then sending it to someone else. Because I don't think any tax firms offer this service, to double check your tax return. They do it themselves. So you're paying the full freight price if you're going to an accountant and saying, “Hey, I want you to do my taxes.” You don't know of anybody that'll look over your taxes, do you?

Tyler Olson:
I do. In the flat fee financial planner turned tax professional space, which is relatively small. It's not an easy service to find. I think about this question a lot because of all the services that I think physicians should outsource, I tend to think that taxes is one of them because it can be so impactful, but they keep running into problems where people can't find the right person.

There's not an easy answer to this, but I don't know if this person, if they've found that their tax preparer made a bunch of mistakes and now they're going to do it on their own, they must be going to someone else. Presumably.

Dr. Jim Dahle:
Either that or they're finding the mistakes themselves. I've kind of been in all ends of this camp. I did my own taxes for many years. It's only been the last two or three years that I actually paid somebody else to do my tax return. And mostly because my staff was saying, “Why are you spending all your time doing this stuff?” First we went with the corporate tax return and then my personal return. But the straw that broke the camel's back is because I couldn't figure out which states I had to file in with the number of my real estate syndications. And I'm like, I don't know. Am I filing in 15 or am I filing 8? I can't tell. And so, that's what eventually pushed me to actually hire it out.

But I definitely catch mistakes. My tax preparer messes up my 8606 most years, and I don't want to send them my blog post for it, but I do point out that, “Hey, you got to fix this” when it's costing me something. Half the time the mistakes people make on 8606, it doesn't matter because they get the bottom line right and I don't really care beyond that.

But I've definitely found mistakes. Like this last year, it was the first year we had to file for our trust. It's an intentionally defective grantor trust. Essentially the taxes all end up on my returns. And she had used with the initial run through on the taxes, she wasn't using up a bunch of the tax losses that I had been harvesting. Because she thought that I was basically selling this into the trust from a tax perspective and that I would have to realize all the gains on the stuff I'd put into the trust. But that's not the way it works with the intentionally defective grantor trust. After going around with her and with the estate planning attorney, essentially I got all my tax losses that I'd been carrying around for a few years back because they just weren't used.

Absolutely the pros make mistakes and the more complicated your return becomes, the more mistakes you should expect to see on them. I'm actually really excited that you know anybody that offers this service, Tyler. When we get done with this call, I'm going to get some names from you. We're going to reach out and see if they're interested in advertising because I bet there's a whole bunch of White Coat Investors that would love that service.

Tyler Olson:
Yeah, I think one of the problems here is the management of expectations. Actually, there was a post on Twitter just a few days ago about this guy. He said he pays a decent fee to his tax professional. And he was troubled because he keeps bringing ideas to the tax preparer. He’d be like, “Hey, maybe I could save money this way.” But then it makes him think, “Why am I bringing the ideas? Why isn't he bringing the ideas to me?”

And I get that. But I think that the problem lies in that there is an incongruent location of expectations and service because if you're just paying someone to file your tax return and you're paying them less than $1,000, I wouldn't expect any sort of proactive tax advice. Because this person, he's saying, “I'm going to do my taxes and then have them review it to make sure there's no mistakes.” That's one end of it. But a lot of the mistakes can occur during the tax year, and that's already done. And so, having someone at your side can be helpful, but it's a lot more expensive. So, I don't know.

Like this person that you mentioned, with the trust work that you mentioned. I would hypothetically ask, “Are they checking in with you on these sort of things? Do they really know your situation, they know your thinking, they know why you're doing A, B and C? Because if they're just coming reactively and it's like February, March, these people are slammed with returns and pressure to get stuff done within a finite period of time. And to get someone's proactive attention and that they know what you are trying to do, you got to pay them more because they're working with you throughout the year. You know what I'm saying?

Dr. Jim Dahle:
Yeah, absolutely. This is something I think related to a point I make often, which is, you don't save taxes really on the return. It's not about the preparation of the return. It's not about finding the right accountant that can find the right loophole and the right form to fill out. Yeah, there's a little bit of savings there, maybe in getting the forms right.

You save taxes by living your financial life differently, by saving for retirement, by owning a home, by having kids, by owning a business. That's where the savings is. And so, by the time you get to the end of the year, all you can change is the return. You can't change the way you live your financial life.

Tyler Olson:
Yeah, yeah. I agree. But to answer this person's questions, I think it's a good idea. If it's kind of like a hybrid method, you're kind of taking ownership and advocacy for your own situation, but also getting some advice on the side to make sure that things are correct.

I think the viability of this decision, though, changes relative to the complexity of his return though. Because I don't know, I'm really curious to know how thousands of dollars were screwed up. What's happening with this person's situation? Did they not max out their 401(k) and they were looking for someone to tell them? And that's not necessarily in the purview of most tax professionals. They're looking at tax law, they're looking at quarterly tax payments and business management, bookkeeping. And so, that merger of financial planning and tax pro is growing because of that. Because it's like tax advice knowledge coupled with proactive and accessible planner advice.

Dr. Jim Dahle:
Yeah. I love the idea of people doing their own taxes though, because I think you learn a lot about the tax code, particularly if you start right in the beginning. When your tax return is super simple, you got a resident W2 and that's it. That's your only source of income. You know what? That's an hour job on TurboTax at most. It's not that complicated. And you learn a lot about the tax code.

Now what I found as I did my own taxes for many years, is I was generally adding one form a year that I had to learn. And doing my own taxes caused me to live my financial life differently. I made different decisions because I knew the tax ramifications.

I'm very encouraging if people want to do their own taxes or at least understand their own tax return. I get that sometimes it's not worth your time. It's a chore. It's not fun for most people. It's like mowing your lawn. As soon as you have the money, you tend to hire that sort of thing out unless you like it.

But I do like to encourage people to at least be knowledgeable about their own taxes. I don't want to discourage them from doing that, but I've just found it's really hard to find very many people to just look things over, which seems like the service that he wants.

And the other thing I find is people who are willing to do things like this themselves are extremely fee sensitive. When this accountant comes back to him and says, “Yeah, I'll look it over, that's going to be $2,000.” He might say, “I think I'd rather have $2,000.” And I suspect that probably happens with a lot of do-it-yourselfers.

All right, if we beat this one to death, should we go on to the next question?

Tyler Olson:
Yeah, let's do it.

Medical Loans and Taxes

Dr. Jim Dahle:
All right. This one's also a tax related question, but more about some loans. Thank you Angel for this question. Let's take a listen.

Angel:
Hi Dr. Dahle. My name is Dr. C and I live in the southeast. I'm a general surgeon, three years out of training. I was hired by a private practice and brought to a rural hospital with an income guarantee. This income guarantee was for the first year and was paid by the hospital. The practice, the hospital and me were involved in this transaction. This loan was forgiven 50% on the second year and the other 50% on the third year after the start date. The practice received the checks and paid me a fixed salary. Every year I paid my taxes for my W2 income.

Once the third year concluded, I received a 1099-C as a cancellation of loan. The question is, is this considered income that I have personally to pay taxes to the IRS or my employer is responsible for this? All the research that I did involve real estate, but nothing about medical loans. Thank you for everything that you do for our community.

Dr. Jim Dahle:
All right. The easy answer here is yes, it's taxable income. I don't know who it's taxable income to though. What do you think about that, Tyler?

Tyler Olson:
Well, it depends on how it was characterized when he received the money at first. If it was purely paid to him as loan money and there was no expedient forgiveness of it that then creates the taxable nature of it, then all that money earned accrued taxes, kind of like interest. And now he's got to pay the piper. So, it would be him because it's his debt that's being forgiven.

Dr. Jim Dahle:
That's the usual setup. This happens all the time. This is the incentive. This is the golden handcuffs when you come into the practice. Okay, well, we're going to give you some compensation and we're going to say it's for your student loans. It probably could be for anything. Or we'll pay your student loan lender directly, but we're going to forgive that loan. We're going to forgive this money we're giving you over time.

Well, when it's forgiven, that's when it becomes taxable income. So it's all forgiven in the third year and that's when it's all taxable income, it’s in the third year. If it's gradually forgiven, then you'd get some of it forgiven in each year. But I don't think a lot of people realize that that is taxable income to them. I think that's the bigger problem.

Tyler Olson:
Yes. And if they've been living as if the money that they received was after tax, not only do they have to now pay a tax bill that they weren't expecting, but their lifestyle might be in for a shock. And I know I could go two ways because obviously, at least in my experience from what I've seen, the idea is we're going to give you something to live on while you build up your panel and then maybe the compensation would be much higher than that. So, maybe it would be okay.

But anyone who gets this sort of offer as they're finishing their training and they're trying to figure out what to do, I tell people to look at it like, this is 1099 income that you're getting right now and even if it's not due the taxes, you got to shuttle it away into an account that doesn't belong to you.

Dr. Jim Dahle:
Yeah. 25 or 30% of it anyway. You got it saved for the taxes. Yeah. It wasn't clear to me what the money was used for. It sounded like it may have been used to pay off student loans. I'm not sure if he actually got all the cash himself. Was that clear to you?

Tyler Olson:
It was not clear. But yeah, there have been some scenarios where employers, they send money directly to the lender to help to pay it off. But that's not a great idea because the doctor doesn't even have the chance to grab at that 25% and say, “No, I'm not going to use that to pay off the debt because that's taxes.” He's stuck.

Anyone that is approached with this sort of arrangement, I highly suggest having a really thorough conversation about what's going to happen with the compensation and when so that they can plan.

Dr. Jim Dahle:
A couple of points that are crystal clear to you and me and hopefully most of our listeners, but maybe not all the listeners that we ought to make at this point, is a lot of you have only ever had a W2 job. You've only ever been an employee and it's hard for you to tell the difference between taxes that are withheld from your paycheck and your actual tax due.

These are two very different things. You have to understand that those are related but not the same thing. You don't pay taxes when your employer withholds them. Well, you do pay taxes because it’s a pay as you go system, but you still got to settle up come April 15th. If you've had too much withheld, you get a tax refund. If you haven't had enough withheld, you got to write a check in April.

But once you're getting any other sort of income, self-employment income, K-1 income, 1099 income, whatever you want to call it income, forgiven loan income, nobody's withholding for you. Nobody is conveniently helping you to pay your taxes as you go along and it becomes your responsibility to pay those taxes. And they can be somewhat lenient in the first year. But I'd get started right off the bat. Anytime you're getting paid money in that sort of a situation, take out 20 or 25 or 30 or 35% of it, put it into a savings account that's solely used to pay your tax bills.

And then each quarter you got to make a quarterly estimated tax payment with about a quarter of what that amount is going to be for the year, which is total guesswork for a lot of us. But do the best you can. And those are due on April 15th and June 15th and September 15th and January 15th. And yes, I got those dates right. It's not every three months. Those dates are correct. You got to make the second quarter payment after only two months.

Tyler Olson:
I hate that so much.

Dr. Jim Dahle:
But you have to do that. So, if you're coming into any sort of a self-employment or partner situation, just recognize that this is a new thing for you and you got to figure it out now. It's time to be a financial adult and take care of your own taxes.

Tyler Olson:
Another thing too to add to what you're saying is the percentage. You said 25, 30 or 35%. That's a pretty big range. And what it's based upon are three numbers. One, your state income tax rate. If you live in a state that charges income tax. Plus the full board social security tax, which is just north of 15%. Normally as an employee you'd only pay 7.65% of that, and your employer would pay the other half. But in this scenario, you're going to pay all 15.3%.

And then you have to add the federal tax rate. And that's the one that's kind of unclear because it's a marginal tax system. Your effective tax rate, which is the average across the board of your total income, it could be in that range. But what you have to do first is add 15.3 plus your state income tax and then go from there at least 10%. But if you're in the $400,000 or $500,000 range, your effective tax rate could easily get over 25%. And of course, social security tax stops. I know it's not an easy thing, but I tend to tell people to say do 35%, and if you're in California, 40%.

Dr. Jim Dahle:
Yeah, that's good. It probably applies to those of you in New York as well.

Tyler Olson:
Yeah.

Dr. Jim Dahle:
Yeah, that's good advice. But here's the deal. If your financial situation is about the same each year, you just do what you needed last year. This is pretty easy for me now. I know I'm going to pay about 35% or about 33% of what I make in taxes. And so, I make sure I'm paying that. It's pretty easy.

But if you have no idea what your effective tax rate is, it's a total guess. And so, guess a little high. Worst case scenario, you got a little extra money in that account that you can now put into savings, you can invest it, you can use it to pay down your debt, whatever.

Whereas it might be tough for you if you said, “Ah, I'm just going to put 20% in there” and you're a little short come April and you're kind of scrambling trying to figure out where to get that money from.

Better be a little high in the first year or two or if you've just had a change in your tax situation. But once you've been doing this for a few years, for most physicians, their incomes are fairly stable, fairly similar to the prior year. And estimating shouldn't be nearly as hard once you're into that sort of a stable situation.

Tyler Olson:
Another point I wanted to make about this sort of loan arrangement is to make sure that your employer is taking this seriously because the IRS does want it to be a bona fide loan. This cannot just be a handshake agreement and there has to be very clear rules and communication. There has to be an actual contract. And they need to treat everyone with whom they have this arrangement the same because while the employer is much more exposed to liability here in this situation, you do not want to get dragged into any sort of audit. At the best case scenario, you'd be wasting a lot of your time. Just make sure that they're crossing their T's and dotting their I's on this.

Dr. Jim Dahle:
Yeah, good advice. I think the general concept is worth understanding as well, that forgiven debt is taxable income. I only know of one exception for that and that's public service loan forgiveness. That's the only forgiveness I know of that is tax free. Even if you do these IDR programs like the newest greatest one, SAVE. I can't remember what it stands for. Saving on a Valuable Education. Even that, if you go the 20 or 25 years of making payments and you get the rest of your federal student loans forgiven, that forgiveness is taxable. So, you better be saving up for that tax bomb down the road if that's your student loan plan. But if you get bad debt forgiven, if you get a car loan forgiven for some reason, any of that, that's all taxable income. So, keep that in mind just as a general rule.

All right, our quote of the day today comes from Socrates who said, “Enjoy your time in improving yourself by other men's writings so that you shall gain easily what others have labored hard for.”

 

Is It Ever a Good Idea to Over Contribute to a 403(b)?

All right, let's take our next question. This one's kind of interesting about over-contributing. I’m curious to see what this is all about.

Speaker 2:
I have a question about whether over-contributing a 403(b) could ever be a smart decision. I'm an academic otolaryngologist in the Midwest. I have four different W2 employers from a university physician group, the university itself, the VA, etc. And each of them have a one-to-one or a two-to-one match for 403(b) contributions up to about 5 to 6% of my salary.

If I contribute the maximum amount to receive all of these matching contributions, I would potentially go over the 403(b) limit of $22,500. I understand that I would be double taxed on excess contributions, but I feel like losing the one-to-one match may make up for this tax penalty. I'm wondering what would you do in this situation if you had the potential of either sacrificing a match or paying the penalty. Thanks.

Dr. Jim Dahle:
Well, this is a super interesting employment situation, that he has got multiple W2 employers and qualifies for multiple 403(b)s from each of them. So, let's review just right up front what the rules are. For every unrelated employer you have a different 415(c) limit. At here in 2023 when we're recording this, that’s $66,000, $67,000. I don't even remember what it is, I think it's going to $69,000 next year. Does that sound right to you? I think it's $69,000 for 2024.

Tyler Olson:
It is.

Dr. Jim Dahle:
For every unrelated employer, that's the total limit of contributions for your employee deferral contributions. Those can be tax deferred or Roth. That's the $22,500 a year for those under 50. For your after tax contributions, if your employer plan allows those. And for any employer contributions, whether they're profit sharing contributions or matching contributions or whatever. That's the total limit per unrelated employer.

Separate from that, you have a rule that says your employee deferral, whether that's tax deferred or Roth, no matter how many of these plans you have is $22,500 if you're under 50 in 2023. I think it goes to $23,000 for 2024. But if you've got four employers and they're all offering you a match, you got to be careful how you allocate that $22,500 to maximize how much of those matching dollars that you can get. And it sounds like you've tried to do that and you can't get all of your match with only $22,500 going into those plans. I don't know. What do you do in that situation, Tyler? Did you ever run into this? Have you ever had a client that had this issue? I don't think I've ever been asked this question before.

Tyler Olson:
I have encountered this a couple of times. It's a function of several numbers. Their top tax rates at the moment is a factor because they're going to pay taxes on that over contribution. Now on the other hand, they're going to get a match, which is effectively a 100% return on whatever this dollar amount is, which is great. Of course, then it's all going to be taxed upon withdrawal.

The question is what is that amount from the employer and is it worth it to then pay the taxes again? Because the other option for this person is to not over contribute and put it into a taxable investment account. Because presumably he doesn't need the money so he could invest it on his own. What if he invests the money in a taxable investment account, uses tax efficient as in low turnover ETFs and buy and hold, let it ride?

Depending on how he manages his retirement income strategy however many years from now, and we don't know what capital gains rates will be at that time, but for most people, you're maxing out at 15% on that. And if you don't buy high dividend, high yield funds, you're mitigating much of that ongoing tax liability. The question is, would it be worth it to just do that so that you're not paying the higher income tax rates in the future versus paying the slightly lower 15%?

Dr. Jim Dahle:
Yeah. I just want to dive into all the numbers of this. I want to know what each employer is offering and how much he's making there and trying to figure out the way that he can use $6,000 here and $9,000 here and $4,000 here and get as much of the match as he possibly can.

Here's the question. Let's say you put in too much to one of these 403(b)s and maybe we ought to step back first and talk about the unethical option. The truth is the IRS is not looking at this very carefully. They're probably not going to notice if you max out all four 403(b)s, get the complete match. They're probably not going to notice. It is against the rules. I'm not going to recommend you do that. But I don't get the impression that this is a particularly frequently audited part of the tax code.

Tyler Olson:
The IRS is hiring a lot of people.

Dr. Jim Dahle:
If they can get the funding for it, which is extremely politically dependent.

Tyler Olson:
That's true.

Dr. Jim Dahle:
That's one option. I don't recommend it, but the truth is I don't think people at the IRS really are looking at these contributions very closely, but aside from that, there's a penalty on over-contributing. I think it's 6% for an IRA. And so, it's 6% a year. The longer you leave that over contribution in, the higher that penalty gets. And it's all the money you over contributed, all of its earnings plus 6%, is what the penalty is on over contributions.

But my question is, if you make the contribution and you pull the contribution out in six months or whatever to pay that penalty and to minimize future penalties, does the employer take the match away? And my guess is they don't because I don't think HR is looking at that very closely. I think there's a good chance you could over contribute and maybe that involves putting 16 into this 403(b) pull six of it back out in three months or whatever and maybe they don't pull the match back out. I don't know. You'd have to talk to HR and see how they would treat that to see if that would be an option to get a few more of those matching dollars.

Tyler Olson:
That's an interesting scenario.

Dr. Jim Dahle:
Because the match rules, that's a plan specific rule how the match works. That's not an IRS rule. The IRS rule is all about that maximum personal contribution.

Tyler Olson:
You're saying this in the context of the making ongoing matching contributions, not after the tax year is over. Right?

Dr. Jim Dahle:
Right. And of course, every plan is different. Some of them wait till the end of the year to give you any matching dollars.

Tyler Olson:
Yeah. And a vesting schedule. With these listeners, when they pose questions, is there a means to follow up with them to get more detail? Because I agree with you. I would love to, just for the math. That would be really cool to figure this out.

Dr. Jim Dahle:
Yeah. This would be a great blog post. As you're listening to this, I’m assuming you're listening to this answer since you bothered to leave it on the Speak Pipe. Why don't you send us the details? Shoot me an email with the actual details, how much you're making at each of these businesses, what the match is at each of them, how it works and how much you can contribute. And maybe we'll make this into a blog post. Because blog posts are always better when you're really crunching the numbers than talking on the podcast. But it's a pretty interesting optimization problem to try to get as many matching dollars as you can.

Tyler Olson:
Yeah. The other option would be to change up how he's compensated or the employee relationship versus subcontractor.

Dr. Jim Dahle:
Oh yeah. That can be pretty awesome. Maybe you go to one of these folks and you're like, “Hey, I'm only working here 25 hours a month. Why don't you make me an independent contractor and then I'll get a solo 401(k) and I'll get a customized one that I can make after tax contributions into. And even though you're only paying me $70,000 this year, I could get almost all of it into that solo 401(k).”

That would be one option and we'll probably increase overall how much you make. Just remember you got to ask for more money if you're going to 1099 because now the employer is not only not giving you that match, they're not giving you any other benefits and they're not paying your half of the social security and payroll taxes, Medicare taxes.

That's one option is to change one or two or three of these four employers to 1099 employer and that may work out a little bit better for you. You just have to run the numbers to know for sure. That's a good idea. I like that thought.

Tyler Olson:
And just level with them. Say, “Hey, I can't get this match.” You are willing to make the contribution if only I could legally do it. Make that matching portion a part of the compensation in addition to making it worth it for all the other reasons. It is more expensive to be a subcontractor.

Dr. Jim Dahle:
I'm actually surprised and maybe you ought to go back and check this, maybe you're wrong. Maybe you're not eligible to contribute to all these different plans. You usually have to be someplace a certain length at the time and you have to work a certain number of hours before you're actually eligible. They've decreased those with the Secure Act 2.0. I think it's only a thousand hours I want to say total now. It could be 750 before the employer has to make you eligible for a 401(k) once you're 21 plus. But you may not actually be eligible to use all these 403(b)s you have.

The other thing to keep in mind, if you change one of them to a 1099, there's a weird quirk with 403(b)s that you don't see with 401(k)s. That the 403(b) and your solo 401(k) actually share the same 415(c) limit which is really kind of a bummer about 403(b)s. It's a really obscure rule, but it's different from 401(k)s in that respect. That could also play a factor in your situation.

Tyler Olson:
Yeah, I hope he gets in touch with you.

Dr. Jim Dahle:
Yeah, this would be a great blog post.

Tyler Olson:
Evaluating how to read through those benefits pages. They send you the link and there's just countless paragraphs and links and trying to figure out “What am I eligible for? What am I not eligible for?” It'd be cool if he could send you all that and then just deep dive into how to make the most of a not uncommon academic physician situation.

Dr. Jim Dahle:
Yeah. Honestly, it doesn't sound like a very stable employment situation. Who has four W2 employers? I can't imagine this isn't going to change in the next year or two.

Tyler Olson:
I've seen it more and more with university jobs that are tied in with state employment. They get paid by the VA, they get paid by the hospital. They get paid by the medical school. It's very, very frustrating to say the least. I wish it could just be one, but I'm seeing this a lot.

Dr. Jim Dahle:
Yeah. Well, when you run for congress, you can simplify our retirement account system.

Tyler Olson:
No, I respectfully decline.

Dr. Jim Dahle:
All right. By the way, for those of you out there who are financially empowered women or would like to be a financially empowered woman, you can join us at the next FEW event. It's coming up in just a few days. I think this podcast drops on January 11th. The next event is on January 17th, 2024. And it is going to be finding your unique work-life balance with Dawn Baker. She's been a WCICON speaker several times. She's awesome. You'll love her. You can sign up for that at whitecoatinvestor.com/few.

 

Retirement Account Contributions

All right, let's take another question. This is another one about retirement accounts. So, let's see if we can get these multiple questions answered here.

Speaker 3:
Hello, Dr. Dahle. Happy holidays. Thank you for the end of the year financial checklist. Recently, I’m a sole physician practice owner with one employee. I stopped contributing to our office SEP IRA in 2022 calendar year and opened a business 401(k) for 2023.

My questions. 1A, in order to do a backdoor Roth this year, what should I do with the SEP IRA money? Transfer it into the business 401(k), which has an AUM of 0.08%? It's about $200,000.

1B. I also have a traditional IRA with non-deduction contributions in it. Can I convert that entirely into the Roth IRA too? Of course, I would need to do something with it in order to avoid the pro-rata rule.

And number two, I maxed my employee contribution of $22,500 for 2023, but I was told that I need comparability testing at the year end to max the $66,000 for 2023 via PSP, which my income will allow for. But was I able to contribute this money throughout 2023 rather than having to wait for this testing to confirm that number? Thank you very much and be well.

Dr. Jim Dahle:
All right. Well, I hope you had a happy holidays too. We heard your greeting before the holidays, but you're hearing our response afterward. All right. Do you want to take a first stab at some of those?

Tyler Olson:
The SEP IRA, it can play a role, but because of its impact on backdoor Roth contributions, I tend to give it second place to not a solo in this case, but a 401(k). He could just roll it into a new 401(k) and there's no reason not to do that. But yeah, he's just got to clean it up. That's my first thought is, “Okay, what sort of setting is he wanting for his business going forward? What's the end game?” Then he can start to figure out how to get there.

Dr. Jim Dahle:
It sounds to me like he had a SEP IRA. And I don't know if he's coming from self-employment or didn't have employees before and now does, so he has to have a 401(k) now. I don't know exactly what happened, but clearly the practice he's working for and I think owns now has a 401(k) in place.

There's no point in having this SEP IRA. You just put this 401(k) in place, roll the SEP in there. It'll probably have better asset protection. In most states it does. It certainly it's going to reduce one of your accounts or reduces the complexity of your portfolio. It now doesn't get counted in any pro-rata calculations if you want to do a backdoor Roth IRA each here.

I see no bad reason to roll it in other than there's an additional fee on the money. But it's small, it's 0.08%. You're going to have to pay those guys somehow to run your 401(k). I prefer flat fees but if there's not a lot of money in the 401(k), a small AUM might be smaller than the flat fees you'd be paying. I'm not terribly against AUM fees, you just got to run the numbers if you have an AUM fee.

And so, that's what I do with the old SEP. I don't think there's any question. If you had some solo 401(k) somewhere, I guess you could roll it in there, but I wouldn't keep it in a SEP IRA. That seems kind of foolish when you have another option.

Tyler Olson:
Yeah, there’s no reason to keep it at that point. The other matter is, with SEPs, it's pretty straight across the board. If you have an employee, if you give yourself a contribution, you have got to give the employee a contribution. The 401(k) gives you more flexibility, but with the 401(k), as long as you're making the minimum non-highly compensated employee contribution, you don't have to wait.

Some people like to lump it all together. I've worked with a few practices with their 401(k) plans and they just like to, because it kind of brings all the administrative work together in one time per year and then they're just done. But you don't have to. But you do want to make sure that your employee is getting that minimum requirement, which I believe is, it's 5%. It has to be at least 5% of their employment compensation in order to overcome that test.

Dr. Jim Dahle:
Yeah, these rules are super complicated. The fairness rules, the rules to make sure you're basically not just taking all the benefits for you and the highly compensated employees. The docs aren't getting all the benefits of the 401(k), but the nurses and the techs and the front office staff, they're also getting benefit from the 401(k).

Dr. Jim Dahle:
That's what these testing rules for retirement plans are. And they're totally required, they're very strict to the point that when you have employees, this is no longer a do-it-yourself project. You don't run your own 401(k) for your practice. You go get a professional and we've got a list of them at whitecoatinvestor.com, people we refer you to. It's under the retirement plans tab that can help you with this.

The first thing you do is you have your practice studied. You have this person actually come in that's going to be designing this retirement plan and they talk to your employees and then they can do it virtually obviously, or by email or whatever, but they come in, they talk to your employees and they're like, “How much do you want to save for retirement?” And they talk to the owners, “How much do you want to save for retirement? And how much does it bother you to give a match? And how much do the employees value money that you're putting into the retirement plan?”

You do these studies and you figure out what's the right plan for the practice. It might be a SIMPLE IRA. And remember, that's a SIMPLE in caps, that's not just an IRA. That's a SIMPLE IRA or SIMPLE 401(k) to make things even more complicated. It might be a SEP IRA. Most of the time it's probably a 401(k) and it might be no plan at all. It might not make sense for you to have a plan if you've got a whole bunch of employees that you'd have to make huge contributions into their accounts and they don't value them and it's just not worth it to you.

You might not have a plan. You might just invest in taxable and your Roth IRA. That's certainly an option that a lot of practice owners have chosen in the past. And the classic situation is a single doc in practice or a dentist that has a practice and they may choose not to have a retirement plan at all.

That's step one is figure out what retirement plan you're going to do. It sounds to me like you've already done that and decided, “Okay, we're going to have a 401(k). I used to have this SEP IRA, whether it was part of the practice or whether it was separate because I was self-employed. Now we're going to do a 401(k).” That's step one.

But just recognize that once there are employees, you don't do this by yourself. There's got to be somebody running the plan. There's actuaries, there's TPAs. They keep you in compliance and they have to run these numbers.

And if you have contributed too much into the plan or you want to contribute too much that you're not allowed to because it discriminates against the lowly paid employees, you have got two options.

One, you got to pull your contributions back out, or two, you have to pay the “penalty.” And if you're watching this on YouTube, I'm putting the “penalty” in quotes because what the penalty is, is a pretty awesome thing that we take advantage of here at WCI in our 401(k). The penalty is putting money into the account for the less highly paid employees, the non-highly compensated employees.

That's your penalty, is to make contributions into their retirement accounts. And we do that every year. That penalty doesn't bother me one bit. And so, the highly compensated employees can max out their accounts. And you know what? It comes back and it's a few thousand dollars per employee and we're like, “Thanks for working here, we appreciate it. Here's some few thousand dollars more into your 401(k).”

Those are kind of your options. But yeah, that testing is very real. You got to pass the testing, but there's no reason you can't make contributions as you go along. You just have to pass the testing at the end or pull a bunch of money back out.

Tyler Olson:
Yeah. On the note of contributing to employee accounts, it is a business expense, but if you're looking to create longevity for your business, you've got to build genuine loyalty with your employees. When you do that, even though it's a cost, sure, you're investing in your people. And the better you all work together, the better that they think that you care about them and value their work, the better the workdays will go.

I think that people get this idea. I know one doc, he had a solo 401(k) and it was just max it out every year. And it was very easy, but then it was necessary to hire some employees and he was able to see that, yeah, he could still do that. It is going to cost him more, but it's why he hired employees in the first place because it generates greater revenue. So, all around, it's a good thing. You just got to count the cost and surround yourself with the right people.

Dr. Jim Dahle:
Yeah, absolutely. I can't emphasize this enough. People that work at the White Coat investor, they know we're talking about finance, we're talking about saving for retirement, we're talking about FIRE, we're talking about retirement accounts all the time. And so, there's a big heavy emphasis here about financial education, financial literacy, high savings rates and that sort of thing.

But the more of that you can do with your employees, the more they're likely to contribute to the 401(k). And the more they contribute to the 401(k), the more you can contribute to the 401(k) without having to pay a penalty. And so, encouraging this mentality towards saving toward retirement, talking about the 401(k) and giving them the 401(k) information and having an awesome 401(k) instead of a crappy one, all that sort of stuff goes a long way to you being able to max out your own retirement account contributions.

It's probably worth talking about Safe Harbor as well. A lot of people have heard this term when they're learning about practice 401(k)s. How do you explain the concept of Safe Harbor when it comes to a 401(k) or a profit sharing plan to docs?

Tyler Olson:
Safe Harbor, it's a term referring to ensuring that the plan is meeting the very bare minimum requirements regarding employee contributions. In this scenario, if you're concerned about being able to pass tests, any non-highly compensated employee that receives the typical 3% Safe Harbor contribution, in order for them to actually be able to pass all the tests and max out everything, they also have to receive that other minimum contribution, which is either a third of the highest contribution rate given to one of the highest paid highly compensated employee or 5% of the participants gross compensation, whichever is less. Even as I say this out loud, I have to look at it again and again, this is not easy stuff. Do not DIY this please.

Dr. Jim Dahle:
Good advice. Yeah. I think the idea is the IRS has said, “Hey, this one's going to pass. If you just follow these rules, it'll pass.” But I think you can get higher contributions for yourself by not going for the Safe Harbor option.

Tyler Olson:
Agreed.

Dr. Jim Dahle:
It may not be worth it to you because you may find, “Geez, I got eight employees and now I got to put in $5,000 for each one of them, and I'm only putting $35,000 in there for myself. It costs me more in matches than I'm even able to put in the plan.” And you may decide you don't want to do that, and that's fine, but run the numbers and see what the options are and see what you and your employees value most.

Tyler Olson:
And when that happens, it's time to entertain the cash balance plan.

Dr. Jim Dahle:
Yeah, exactly. Start looking at the cash balance plan, which has some advantages. Although I think it still has to go into some of the testing, as far as what the employees get, don't they? It's not like you can just, “Oh, we'll just put it all in the cash balance plan and screw the low paid employees.”

Tyler Olson:
Oh yeah. No, it's not. It's not just an easy option for stowing away a bunch of money without going through the hoops. Even so, I know a urology practice out east that they have a few dozen employees and they hired an actuary firm to figure it out, if it would be worthwhile. And it really is.

The owners, they can all put in $75,000, $80,000 a year into that thing. They do have to put money into the employee accounts, but it's more worth it for them because they have enough compensation that they don't need all of it, the owners. And because the maximums on the cash balance plan are so much higher, it's worth it on that ratio basis how much they have to do for the employees versus what they get out of it.

Dr. Jim Dahle:
Especially if these practice owners, these highly compensated employees are older. If you're into your 50s or 60s, you can make pretty huge contributions to some of these cash balance plans just because of the way they're actuarially determined.

We're actually going to be closing our cash balance plan in my physician partnership. Those 400 or 500 of you out there who know you're in my physician partnership, we're going to be closing that cash balance plan next year, and end up opening a different one which is pretty cool. We've made a few changes on it. A couple of negative changes, but that allow us to make a huge positive change, which is dramatically larger contributions for everybody.

My contribution is going to go from under the old plan. I think I'm going from $17,500 to $120,000 is going to be the max contribution. I'm not sure I see enough patients these days to actually make that entire contribution, but we'll see how it stacks up.

Average Cost Basis Versus Actual Cost Basis

All right, we've got a question from Ryan on the Speak Pipe about cost basis. Let's listen to that.

Ryan:
Hi Dr. Dahle. This is Ryan, a military dentist in California. My question is about the use of average cost basis versus actual cost basis. Recently while trying to do some tax loss harvesting in my Fidelity brokerage account, I noticed that all stocks and ETFs use actual cost basis, but the mutual funds in my brokerage account utilize average cost basis.

First, is there any reason why Fidelity would default to using average cost basis for mutual funds in a brokerage account? And then secondly, it seems to me from a tax loss harvesting perspective, actual cost basis set lists each individual tax lot makes it easier to harvest.

My understanding is Fidelity will let me change the cost basis for future purchases, but won't change the basis retroactively. Would there be any disadvantages to using the actual cost basis moving forward? Thanks for all you do.

Dr. Jim Dahle:
I wish Fidelity would use the same term for this as everybody else. I think when Fidelity says actual, what they mean is what Vanguard and Schwab mean when they say specific identification of those shares. That's my understanding. Is that your understanding of what he means when you say an actual?

Tyler Olson:
Yes, yes.

Dr. Jim Dahle:
I can't think of a good reason to use average. Can you?

Tyler Olson:
No, not in a taxable account. It’s a moot for retirement accounts of course. But yeah, I always opt for making this specific identification so that if tax loss harvesting is an opportunity presents itself, then you can isolate those lots and you can sell those. Because the average, it's just kind of a wash.

Dr. Jim Dahle:
Yeah. All of my holdings in a taxable brokerage account are specific identification as far as the basis goes. First of all, let's step back. Basis, remember is what you pay for shares. And these brokerages will track your basis in several different ways depending on how you want track.

Why they offer all these, I don't know because I can't think of a good reason why specific identification isn't always the best choice, but you usually have to actually say that. You have to actually choose that from the options. The default almost always seems to be average cost basis and you need to change that in a drop back down menu for that holding in the brokerage account to specific identification.

And that way when it comes time to sell shares, particularly if you're trying to book some losses, because you're doing tax loss harvesting, you can look at each share's basis or each lot. I'm saying share, I should be saying lot. Each lot's basis and sell the one with the loss. The highest basis is the one you're trying to sell usually.

Likewise, if you're in retirement and you're just spending this money and you're like, “Well, which one should I spend first?” Well, you spend the one with the high basis because it costs you the least amount of tax when you sell it. Because there's less of a difference between the basis and the actual value. And so, it's good. It gives you a lot more tax planning opportunities to use specific identification a.k.a. actual basis. I don’t know, I don't think there's a lot of debate on that.

Tyler Olson:
No, it's pretty straightforward.

Dr. Jim Dahle:
Why do you think they have average as the default?

Tyler Olson:
I suspect it has something to do with the software development and what was easier for them to make the default because I was trying to think. They make money on cash, the platforms. So, it wouldn't seemingly matter to them financially except if it takes a little bit more computing power on their part, that could be it. And it's minuscule on an individual basis, but if they're looking at it from a wide picture, maybe it draws more power for them and that's the only thing I could think of.

Dr. Jim Dahle:
Maybe it's tradition. Maybe it's as simple as average comes before specific ID in the alphabet. I don't know. But it doesn't make sense to me that they use that. I can't think of a reason why they would. Yeah.

On a related note, dividends in a taxable account. You've got a bunch of ETFs, VTI, VXUS, whatever, in your taxable account. I tend not to reinvest my dividends so that I can use them to rebalance so I don't create a whole bunch of little tax lots to keep track of. What do you do with your dividends in taxable accounts for yourself and your clients?

Tyler Olson:
Go to cash.

Dr. Jim Dahle:
All go to cash.

Tyler Olson:
Yeah, they go to the money market because of what you just mentioned. They're going to be taxable whether you reinvest or not. There's no downside to putting it in cash but there would be a downside with looking at an unbalanced portfolio and you have to decide is it worth it for me to create tax liability in order to rebalance this when it might have less tax liability if you had the cash to do it, to just reinsert it into the position that needs to be brought up to level.

Dr. Jim Dahle:
I'd push back on that. I think there is at least one downside, that you can't automate it. Those dividends, they might sit there for two or three months before you get around to, “Oh, I got to reinvest those dividends.” If you're not watching it, you could get some cash drag from that.

And I think there's a lot of value in automating things. Behavior trumps math sometimes when it comes to personal finance and investing. And I think automating things creates good investment behavior. The problem is that automation does not play well with things like tax loss harvesting. It doesn't play super well with taxable accounts.

I think it's great to automate things in your 401(k) and your Roth IRA and so on and so forth. But in your taxable account, I just prefer having more manual control. I think it's worth the downside of losing that automaticity that is helpful to lots of people in their investing.

Tyler Olson:
What you do is, where you can't automate with software, you automate with your planner, like your written planner and say, “Hey, every two months or every three months, I'm going to check the values of my taxable account.” And once you learn how to do it, it's not much time. It's mainly just about not forgetting and putting the reminder, whatever system works for you, just make it happen so that it's in the schedule and then you'll do it and then the cash drag is much less of an issue.

Dr. Jim Dahle:
Yeah. My system is, I invest once a month. I count up all the income we had, whether it's dividends in a taxable account, whether it's clinical income, whether it's WCI income, count it all up and look and decide what we're going to invest and then invest once a month.

But if it's been three or four weeks since those dividends were paid, I'm getting tax drag, or cash drag on those dividends. Now that's not so bad at Vanguard. At Vanguard, my cash is sitting in the federal money market fund, it's earning 5.3%. That's not much drag.

But some of these brokerages, the way they make money is your sweep account, the account where those dividends go into pays zero and that's how they make money. And it reduces your returns. That's one of the reasons people complain and moan about Vanguard not picking up the phone very well and not offering great service and so on and so forth. Definitely people are nicer and pick up the phone faster a lot of times at Fidelity or Schwab, but not having that cash drag's worth something. And I do appreciate that.

Tyler Olson:
Fidelity has a good option for their money market fund too.

Dr. Jim Dahle:
Do they?

Tyler Olson:
Yeah. Right now, it's right up there with the one that Vanguard offers. I don't know the exact rate right now, but it's around 5%.

Dr. Jim Dahle:
And you can have your dividends swept right into there.

Tyler Olson:
Yeah.

Dr. Jim Dahle:
What about Schwab though? Schwab is still like a 0% one, aren't they?

Tyler Olson:
I don't use them much because their tech is terrible in my opinion. But I've last heard that that was the case. That their default sweep is into like a low interest bearing account. So you do have to be a bit more nimble about that. I recommend Vanguard or Fidelity over Schwab any day anyway because I find the user experience is better.

As far as cash drag, when you're talking about a couple of months of money sitting in cash, I also come from the angle of let's not stress about all this too much because we want to be able to enjoy our life and time too. Everyone's a little bit different and I guess it depends on how much money we're talking about, but we want to be balanced and not stress too much about the minutiae.

Dr. Jim Dahle:
Yeah, for sure. It's interesting. My taxable account, it's actually mostly a trust account, is at Vanguard, but I also have an account at Fidelity. I have multiple accounts at Fidelity. That's where our 401(k) is, that's where my HSA is. And then my practice 401(k) and cash balance plan are at Schwab. I get to use all of these brokerages all the time, but I'm able to just reinvest everything in my 401(k)s. The only one I actually had this issue with, of course, is at Vanguard just because that's where the taxable account is.

I think we missed a question from our last person that was asking what to do with this IRA they have leftover about they have an IRA with some basis in it. It sounds like they never actually set it, but it sounds like they want to be able to do backdoor Roth IRAs. They're rolling the SEP IRA into the 401(k) and you got to get rid of obviously the traditional IRA too.

Hopefully it's relatively small or a large amount of it is basis meaning after tax contributions and hopefully you can just convert the whole thing to a Roth IRA. If you can afford the tax bill on that, that's definitely the easier setup.

But there is one other option. If it's a big IRA you might consider trying to isolate the basis in it, rolling some of the money into the 401(k). The tax deferred portion of the money into the 401(k) because it probably only accepts tax deferred rollovers. And then that would leave all of the basis in the Roth IRA, which would now be isolated or in the IRA, which would now be isolated and could be converted to a Roth IRA. For completing the sake, I wanted to go back and mention that. Do you have any thoughts on that process? Do you run into a lot of people with IRAs they're trying to clean up?

Tyler Olson:
Every once in a while, but usually it's small enough that the profit on it is small enough that we just roll it into their Roth IRA, especially if you're in your transition year and you're still in a low income tax bracket, because you're not earning your full board post training compensation. It's not too expensive to just roll it in there. And then it's now after tax, tax-free growth here on out. So, that's usually what we do. I have not run into a scenario where there's a big IRA with a substantial profit. It's just not very common in the physician space.

Dr. Jim Dahle:
Well, very cool. This has been great. Anything else people ought to know as we're going into the beginning of 2024? Any tips you think that are particularly timely people ought to hear?

Tyler Olson:
Just to keep thinking about how they can make the most of their financial decisions early on. We've got only got so much time in our life. And so, being able to save intentionally, spend intentionally and keeping up with financial education through what you're doing at White Coat and everything I'm trying to do, and there's lots of other folks who are sharing free information too.

I think it's really important for anyone who's early in their career to just focus on investing as early as you can and getting rid of that debt one way or another. I see all the things that have been happening with public service loan forgiveness. I tell you, two years ago I was such a PSLF hater. I was like, “I hate this thing.” It's so uncertain and maybe you're not going to get it, but paying careful attention to it and following the rules, millions of dollars have been forgiven in front of my eyes. So, it's valuable to pay attention to the details of this.

Dr. Jim Dahle:
Yeah, we have had people at studentloanadvice.com. Andrew's over there working his butt off this fall giving people advice, but I think our record so far is $700,000. $700,000 we've had people forgiven in public service loan forgiveness and it's life changing to have $200,000 or $300,000 or $400,000 or $500,000 forgiven.

I was always a PSLF believer, although there were a couple of years there, 2017, 2018, maybe 2019 as well, when it was a fight. People had to hire an attorney to get their public service loan forgiveness that they were owed. Had to argue with the companies that couldn't count the 120. It was a fight. I feel like it's not a fight anymore. I feel like people are used to it. The systems are working now. If you've made your 120 payments, you otherwise qualify. You're getting your PSLF these days.

 

SPONSOR

All right. Our sponsor for this podcast is Cerebral Tax Advisors. As the New Year starts, it's crucial to take a proactive approach towards tax planning to ensure that you're leveraging all available money saving strategies.

Cerebral Tax Advisors is a White Coat Investor recommended tax firm, trusted by physicians nationwide. It specializes in court-tested and IRS approved strategies, helping medical professionals lower both their personal and business taxes. Their services are flat rate, focusing on the client's return on investment.

Alexis Gallati, the founder of Cerebral Tax Advisors, comes from a family of physicians and has over two decades of experience in high level tax planning strategies and multi-state tax preparation. To schedule a pre-consultation visit www.cerebraltaxadvisors.com.

Don't forget WCICON. You can still sign up $200 off in person if you use code ORLANDO. $100 off virtual if you use code VIRTUAL. Don't forget about the FEW events coming up. It's January 17th, sign up at whitecoatinvestor.com/few. Thanks for those of you leaving us five star reviews, telling your friends about the podcast.

Our most recent one comes in from EyeReview1117 who said, “Grateful. I can’t recommend the podcast and other WCI resources more highly. I am amazed at what I have learned from the podcast, blogs, and books. I have transformed from financially illiterate to actually identifying mistakes financial advisors were making with family.

I owe a tremendous degree of my financial success to Dr. Dahle and am very grateful for everything he has done. He truly is helping high income professionals achieve financial independence.” Five stars. Thanks so much for that great review. We really appreciate it.

And Tyler, it has been wonderful to have you on this podcast. If people have decided they're sick of listening to me, they want to listen to you, how can they best follow you?

Tyler Olson:
Two things come to mind. They could come to Twitter or now known as X apparently. My handle there is @olsonplanner. And the other area is my YouTube channel. Same handle, @olsonplanner. It's a growing library of financial education for medical students and early career physicians.

Dr. Jim Dahle:
Awesome. Well, Tyler, I want to also take this opportunity from the community of physicians, White Coat Investors, people who have never found the White Coat Investor, people who don't like the White Coat Investor, whatever. I want to thank you for what you've done for doctors.

You have helped, I don't know, thousands, tens of thousands of doctors through your work on Twitter. Whether it's directly in DMs or indirectly, people just following your feed, you've helped a lot of people and I thank you for that and the community at large thank you for that. So, we appreciate your time and effort and the work you've put in these last few years.

For the rest of you, keep your head up, shoulders back. You've got this, and we can help. We'll see you next time on the White Coat Investor podcast.

DISCLAIMER
The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.

 

Milestones to Millionaire Transcript

Transcription – MtoM – 152
INTRODUCTION
This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 152 – Neuroradiologist hits a net worth of $500,000 upon exiting training.

Our sponsor for this particular episode is The White Coat Investor. Do you ever find yourself wishing there was somewhere to go to ask your finance, insurance, or investing questions? The White Coat Investor Community is a great place to turn. We have a thriving community across all of our social channels, Facebook, Twitter, Instagram, Reddit, and our WCI Forum. We've been discussing solutions to your money problem since 2011.

Join the conversation with thousands of other White Coat Investors. Follow WCI on your favorite social media platform for financial resources, tips, and strategies. Just head to your platform's choice and search for the White Coat Investor. You can do this and the White Coat Investor can help.

All right. If you're listening to this podcast, you may or may not be aware of our WCI 101. If you go to whitecoatinvestor.com/basics, you can get connected with WCI 101. And if you're feeling overwhelmed or uncertain about managing your money, your investments, or your insurance, this is a way for you to review and learn the basic principles and concepts of finance for high earners. You've had years of school, finance was not part of the curriculum and high income alone is not enough to build the life you've envisioned. So, you should subscribe to WCI 101 and learn how to turn your income into wealth.

What is WCI 101? This is a free email series that will help you gain the confidence to make informed decisions about your money and start taking steps toward achieving your financial goals. Basically, it's a long series of emails, short emails, each of them on one little topic that you'll get in your email box.

Our mission is to empower you, make well-informed financial decisions, avoid getting ripped off and learn how to transform your high income into lasting wealth. There are two things you need to do to do that. The first one is become financially literate. That's what this series is for, to help you understand the language of finance, like you understand the language of medicine or dentistry or law or whatever your profession is.

The second thing requires you to become a little bit different person, to become financially disciplined, if you will. But that combination of financial literacy and financial discipline is so rare that it's like a superpower if you have both of them in our society. Because there are so many people out there that don't know anything about finance, and even if they did, they can't maintain the discipline to do it.

INTERVIEW

Our guest today on the Milestones podcast has both of these, both financial literacy and financial discipline. He's super nervous to come on the podcast, but volunteered to come on and share your story because he wants to be able to help you. And it is an inspiring story what he is done, but you'll recognize that he is a little bit nervous on it and that's okay. What better way than to have somebody that can basically show you that he's just like you, and what he did is completely reproducible. There's no reason anybody else can't do it. And so, let's take a listen to this podcast. And stick around afterward, we're going to talk a little bit about a really important part of your tax return Schedule A.

My guest today on the Milestones Millionaire podcast is Jun. Welcome to the podcast.

Dr. Jun Lee:
Thank you. Thank you. I’m glad to be here.

Dr. Jim Dahle:
All right. Well, tell everybody what you do for a living and where you're at in your career.

Dr. Jun Lee:
I'm a neuroradiologist. I’m about one and a half years out of fellowship, and I work overnight as emergency for emergency radiology.

Dr. Jim Dahle:
Cool. And we took a little while to get you on here. You applied a while back and the milestone you applied for I think was hitting a net worth of half a million, actually not very far out of training. Obviously things continue to grow for most people if they're doing things right. But tell us about this. This is unusual for somebody to have even a positive net worth coming out of training. Tell us how you managed to do so well really during your training.

Dr. Jun Lee:
Yeah. There was a combination of things. First I didn't have any school debt. My parents and family paid for my medical school education. That helped. And learning about WCI about this whole community just before I started internship. And then applying the lessons throughout my residency. I had a saving rate of close to 50 to 60% during residency, and that's how I did it, along with a very cooperative wife.

Dr. Jim Dahle:
A very cooperative wife. Does your wife work?

Dr. Jun Lee:
Yes. She is in real estate property management and she made about $50,000 every year. She brought in that sort of income into the family, right from the get go.

Dr. Jim Dahle:
Okay. Any kids?

Dr. Jun Lee:
One.

Dr. Jim Dahle:
All right. And how long was your training? You're a neuroradiologist. Radiology residency plus a neuro fellowship. How long total?

Dr. Jun Lee:
Total is six years.

Dr. Jim Dahle:
Six years. So for six years you guys made something like $100,000 a year more or less. Is that right? Or was there a bunch of moonlighting or something?

Dr. Jun Lee:
There's actually a bunch of moonlighting. Our income range from, I think it was from $85,000 to at my peak was about $166,000 a year.

Dr. Jim Dahle:
For the household?

Dr. Jun Lee:
Yeah, for the household. For the household.

Dr. Jim Dahle:
$85,000 to $166,000 a year for six years during training. You say you saved maybe half of it. Is that right? Half of the gross?

Dr. Jun Lee:
Yes.

Dr. Jim Dahle:
Okay. That means you were living on something like $40,000 to $80,000. You were living like a resident.

Dr. Jun Lee:
Exactly, yeah. It was a combination of being able to do as much more learning as I can and then budgeting well and following the budget, and also packing lunch and dinner every day.

Dr. Jim Dahle:
You mentioned that you've kind of found out about WCI, kind of got interested in finance about the time you started training. Do you remember back then what was it that made you come into contact with WCI or got you interested in this stuff?

Dr. Jun Lee:
It was right after the match. My thought process of I've matched, I'm just waiting so time to start learning about financial education, like how I'm going to deal with my financial life going forward.

One thing when I started learning, I started learning about stocks, bonds, REITs, all that. And then when I started looking for a well diversified portfolio, that's when I stumbled on WCI 150 Portfolios Better Than Yours.

Dr. Jim Dahle:
That was your first contact with WCI, huh?

Dr. Jun Lee:
Yeah, and that led into everything. From there I just went down the rabbit hole and I've been listening to your podcast ever since.

Dr. Jim Dahle:
Cool. Cool. And now you're on the podcast. This is a fun little turn of events.

Dr. Jun Lee:
Yeah.

Dr. Jim Dahle:
Okay. At some point you had a conversation with your wife that being a little bit unusual financially was something you wanted to do. How did that conversation go?

Dr. Jun Lee:
When we first started dating, we were very open with each other and I told her I'm learning all this and this is the plan going in that I want to save as much as we can. Because if we hit the 50% saving rate, you hit 5 to like 10 to 15 years, at least that's what the number is given, as long as you don't increase your lifestyle.

With that conversation, she was in agreement with it and I built in some slack into the budget, so I then allocate every single dollar. Even though I save 50 to 60%, that's probably like 5 to 10% probably that's not allocated. That gives the slack to when you want to have fun, you want to do something out of the ordinary, you can still have the fund. So it doesn't make it a chore when you're trying to save that much money.

Dr. Jim Dahle:
What part of the country do you guys live in? Is it an expensive place or not really?

Dr. Jun Lee:
When I was in residency, it was in Connecticut.

Dr. Jim Dahle:
Okay. That's not a cheap place.

Dr. Jun Lee:
No. But we got a regular size apartment for rental. She has a paid off car. I had a loan for my car for like $15,000 going into residency. But we didn't buy a new car. We didn't buy expensive furniture. We just shop at Ikea, so you get regular price furniture instead of a couple thousand dollars furniture. Small, small things like that help keeps the budget in check.

Dr. Jim Dahle:
Now you mentioned that your parents paid for your medical school. Clearly that means they had at least a pretty good income or pretty good savings or made massive sacrifices for you. What lessons did you learn from them about managing money?

Dr. Jun Lee:
My parents were pretty frugal, but at the same time they made sure that as a family we had everything we need. It's not like we don't have enough items around us or enough things that we want. We have everything we need, but not an excessive amount. And that model is how I think about how I spend money to this day. I would get just the right level of price to come in, but I would never spend the excessive amount to get just slightly higher in quality or slightly more stuff.

Dr. Jim Dahle:
Other than them paying for school. That was all you got from them? You haven't had a big inheritance or anything like that?

Dr. Jun Lee:
No, but my wife did bring in. She saved about $50,000 before coming into the relationship. Her net worth started a lot higher than mine. Mine was about minus $15,000, hers was about $50,000 something.

Dr. Jim Dahle:
Okay. And you got married about the end of school or what?

Dr. Jun Lee:
No, no. Actually somewhere in the middle of residency. Even when we were boyfriend and girlfriends and when she was my fiancé, we were pretty open with this and I was helping her manage her money too at the same time.

Dr. Jim Dahle:
Okay. Very cool.

Dr. Jun Lee:
Managing both sides of budgets.

Dr. Jim Dahle:
All right. Let's say there's somebody else out there that's just like you were a few years ago. Maybe they have some student loans, maybe they don't, but they're starting their residency and they're like, “I don't want to wait until I'm an attending to start building wealth. I want to start doing this in residency.” What kind of tips do you have for them?

Dr. Jun Lee:
The main thing I think about and how I think I was successful in doing this is creating that budget and also having that early conversation with your spouse because it takes two to make this budget a success.

And the other thing that I looked at is without trying to compromise education, I was looking at the right kind of internship, the right kind of residency and the right kind of fellowship.

For example, I chose an internship in a high well paid location, but with a relatively lower cost of living. Staten Island was where I did my internship at. While pay was a New York rate, the rental was not New York apartment rentals costs. That helped.

And then for residency, in my residency I offered moonlighting, which I took big advantage of, and that's how I helped supplement the income and it would've save that much money.

Dr. Jim Dahle:
Yeah. You're now a year and a half out. It's December now. What's happened in the last year and a half to your net worth? I assume you haven't dramatically increased your lifestyle given your philosophy on this stuff. What changed when you became an attending?

Dr. Jun Lee:
Actually I just closed on a house. My net worth is right now, give or take around $800,000. We did increase our cost of living, but to what I am comfortable with. And given the current inflation rate and all that, I think we're going to be aiming for saving rates of somewhere between 25 and 40%. And that's because I felt that it is appropriate to increase to a certain degree and then keep it at that.

But the additional cost nowadays comes from the mortgage, all the insurance that you put into it and setting aside what I considered fun money for both my wife and me, where it's no question asked, you can spend whatever you want, just to keep the lifestyle good.

Dr. Jim Dahle:
2023 is going to be the first year when you were an attending for the full year. What do you think about your new tax bill?

Dr. Jun Lee:
Oh, that new tax bill is heavy. I actually made a mistake for the first, I want to say seven months of being an attending. I checked off the wrong box at the W-9 and I realized they're taking way too much money from me.

Dr. Jim Dahle:
So you're looking at a big refund for this year, huh?

Dr. Jun Lee:
Yes, I am.

Dr. Jim Dahle:
Well, I'm sure you'll plow that right back into savings. And instead of 25%, it may be 40%. How's your net worth broken down? You provided some of this in your notes and I think it's kind of an interesting breakdown. Tell us what your net worth is composed of now.

Dr. Jun Lee:
Because I did a whole bunch of 401(k) rollover and convert a lot of the money into Roth, I have about $400,000 in Roth right now. $120,000 in emergency fund, $65,000 in HSA, about $83,000 in brokerage accounts and about $90,000 in 401(k).

Dr. Jim Dahle:
That's a big HSA for somebody a year and a half out. You had a high deductible plan the whole way through training and maxed out the HSA contribution every year, or how'd you get that?

Dr. Jun Lee:
Yeah, I maxed it out the moment I got access to, which is actually the starting of second year of residency. It became available and I just been maxing it out ever since. And I have not touched a single penny of it yet. I’ve been saving a lot of the receipts.

Dr. Jim Dahle:
Yeah. And you're investing it too. It's invested in mutual funds.

Dr. Jun Lee:
Yes, it is.

Dr. Jim Dahle:
Yeah. Well, June, you've done awesome. This is really impressive actually. At the rate you're building wealth, you are going to be financially independent really quickly, and then you're going to face the same existential dilemma that many of us face of what you want to do with the rest of your life. Have you given any thought to how your ability to accumulate wealth is going to affect your career?

Dr. Jun Lee:
Yes. Right now, I'm doing the overnight shift where I get a lot of free time. I work one week on, two weeks off. My idea is to allow myself to enjoy the seasons, as they say, the seasons of life with my family. Right now I have a young one that's about two years old. To me, the greatest joy is being able to spend more time at home. I think with financial independence, I would be able to schedule my life as I see fit with my family. Maybe when they go to school, I would probably switch to a day job without working the weekend so that I get more time with family.

Dr. Jim Dahle:
Well, Dr. Lee, congratulations on your success. Thank you so much for coming onto the Milestones podcast to share it with others and inspire them to do the same.

Dr. Jun Lee:
Thank you. Thank you. I’m glad to be here. I'm happy to share.

Dr. Jim Dahle:
All right. I loved that interview. It's pretty powerful in that it shows you what can happen if you apply these principles and don't have student loans. 75% of medical students come out with student loans. And the average is $200,000. There's plenty of people with $300,000 or $400,000 and we encourage them, hey, try to get these student loans paid off within two to five years of coming out of training. And that tends to be a big piece of your financial life for those first few years as an attendee.

But what if you didn't have those? What if you're in that 25% whose parents paid for school or you had some other method of paying for school? Then what could happen, especially if you really get started as soon as you start earning as an intern. He's accumulated, what'd he say, $60,000 or something in an HSA basically in training.
That's pretty awesome.

And it just goes to show you that the earlier you start, the higher your savings rate, the fewer mistakes you make, the better off you're going to be. Now, I don't want someone that's 45 and just starting to learn this stuff to feel like they're way behind the curve because they've heard Jun Lee and his success. The truth is, most of us have a high enough income that even with a late start, we can still do just fine.

But it is pretty powerful to see what happens when you start that early. You've seen all those compound interest charts of what it means to have an extra five or 10 years to compound your wealth throughout your career. It's just pretty incredible what can happen.

Whether you have student loans or you don't have student loans, become financially literate, become financially disciplined, and you'll be surprised how quickly you can get your financial ducks in a row, how quickly you can build wealth and how quickly you can get into a position of strength where you can help those around you, where you can help your kids not have student loans, where you can help your family members when they can't afford something and it's easily affordable for you, or whatever the case might be.

FINANCE 101: SCHEDULE A ON YOUR TAX RETURN

All right. I promised you we were going to talk a little bit about Schedule A. Schedule A is your itemized deductions. Every year when you do your tax return, you have a choice between itemized deductions and the standard deduction. For 2024, the standard deduction if you are filing single is $14,600. That means you can earn $14,600 and not pay any federal income taxes. If you are married filing jointly that amount is $29,200. Anybody with an income of under $29,200 does not pay income tax, at least federal income tax. That's what the standard deduction means.

However, if you have enough itemized deductions that it is more than that $14,600 or $29,200, you can fill out Schedule A and take that higher itemized deduction instead. What are itemized deductions? Well, all you got to do is go to Schedule A and you will see the first category is medical and dental expenses. And this is limited to the amount above 7.5% of your income. If you're making $300,000, only the amount above $21,000 that you spent on medical and dental expenses or $22,500 that you spent on medical and dental expenses can go on Schedule A as an itemized deduction.

For most high earners, they usually don't get much here, but you know who might? People who are paying for in vitro fertilization. You might drop $30,000 or $40,000 or $50,000 in a year on in vitro. And that'll get you into the category where you can deduct some of that as a medical and dental expense on your Schedule A.

All right, the next category is taxes. That is state and local taxes, and that can be sales taxes as well and real estate taxes. The problem here is this is limited to $10,000 and many of you pay far more than $10,000 in state and local taxes. There are some workarounds in some states. If you pay your state taxes through your business, a lot of times you can get around this $10,000 limit. It becomes a deduction to your business, and of course, your business then passes less income onto you, then you get a credit on your personal taxes for that. That's the way it works. Now in Utah, and I don't know, it might be 30 states or something now that will allow you to deduct more taxes than that $10,000. But on Schedule A it's $10,000.

The next category is interest paid. And the main type of interest on here is mortgage interest. You've heard buying a house is a tax break. It's a tax deduction. Well, what's deductible? The property taxes are deductible under the tax section and the mortgage interest is deductible. There is a limitation on how large of a mortgage you can get and still have it be deductible. Don't quote me on this, I think it's $750,000. Once the mortgage is bigger than that, the interest is not deductible. Well, the interest on the first $750,000 is, but not above and beyond that.

But these days, if you got a new mortgage and you got an interest rate of 7 or 8%, that's a lot of money. The interest on a $700,000 mortgage at 8% is $56,000 a year. That's a big old tax deduction. Now, it doesn't necessarily mean you're coming out ahead because it's deductible. You still got to pay the $56,000, but at least you can do it with pre-tax money.

The next category on Schedule A is gifts to charity. You've heard the gifts to charity are tax deductible. That is not true unless you itemize. If you're not itemizing, you can give hundreds or even thousands of dollars to charity and it's not helping your tax situation at all. It's helping the charity, it's probably helping your soul, but it's not helping your tax bill.

There's no real limit on that. That's not entirely true. I think there is a limit that it's different for cash and securities. I want to say it's 30% of your gross income for securities and 60% for cash or something like that. It's a pretty big number. If you're making $200,000 or $300,000 or $400,000 and you're giving away even tens of thousands of dollars to charity each year, it is all going to be deductible. But if for some reason you give away like a million dollars to charity, it might all not all be deductible that year. I think you can carry it forward and use it in future years, but the point is, there is a limitation on that. It's just pretty high. It's not like the tax limitation.

Casualty and theft losses go on there. If you had your bicycle stolen, you can add that onto your Schedule A and a few other minor things. But that's basically Schedule A. It's mostly $10,000 in taxes, your mortgage interest and gifts to charity. If that amount is more than $14,600 or $29,200, then you itemize. If not, you take the standard deduction and considered a nice little gift from the IRS.

Either way, those deductions plug in on line 12, which is near the bottom of the first page on your 1040 and are subtracted from your adjustable gross income. And then you get your taxable income and that's what your tax bill is calculated on, is your taxable income. I hope that's helpful for those who don't really understand how that itemized deduction thing actually works.

SPONSOR

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All right, it's been another great episode of the Milestones to Millionaire podcast. If you'd like to come on, you can apply at whitecoatinvestor.com/milestones. We'll celebrate anything with you. Whether you're nervous, whether you're not nervous, whether you want to stay relatively anonymous, whether you do not, it doesn't matter. We'll celebrate your milestone with you. There is somebody else working on that milestone in our community, and you will inspire them to reach that goal of theirs.

Investing is a one person game. Or one family game. It's you against your goals. It's not you competing with anybody else in the community. It's you reaching your goals, and we want to help you to get there. See you next time on the podcast.

DISCLAIMER
The hosts of the White Coat Investor podcast are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.