Mistaking a Salesman for a Financial Advisor – Podcast #104

Intro: This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stopped doing dumb things with their money since 2011. Here's your host, Dr Jim Dahle.

WCI: Welcome to White Coat Investor podcast number 104, mistaking a salesman for an advisor. This episode is sponsored by Set for Life Insurance. Set for Life Insurance was founded by President Jamie K. Fleischner, CLU, ChFC, LUTCF in 1993, which she started while attending Washington University in St. Louis. They specialize in individual term life, disability, and longterm care insurance. They work on the client's behalf to shop around to find the most suitable products at the most cost effective rate. Set for Life is first and foremost a client-centric company. They listen carefully to the needs of clients. Because of the volume and exceptional reputation of Set for Life Insurance, as well as the relationships they have developed over the years, set for Life clients have access to special services not available elsewhere in the industry. This includes special discounts, gender neutral policies (saving women significantly), priority underwriting and handling, and on some occasions, exceptions in the underwriting process. For more information, visit setforlifeinsurance.com.

WCI: Our quote of the day today comes from Benjamin Graham who said, “The investor's chief problem and his worst enemy is likely to be himself. In the end, how your investments behave is much less important than how you behave.”

WCI: Thanks so much for what you do. I know you're on your way into work or your way home or whatever other time you happen to listen to podcast, it's probably not time dedicated to nothing else. You're probably multitasking like most busy docs. But what you do is important. I've got a couple of cancer patients in my neighborhood right now, one doing pretty well, but having some complications, and one not doing well at all. They're seeing different docs all the time. It's amazing when you talk to them about their experiences and how much it's affecting their life and their family. We forget that what we do on a daily basis is super, super important.

WCI: I talk to my dad all the time. He's having some trouble with a frozen shoulder right now and complaining about it a lot. It's interesting, I talked to him, he's 73 now and he says that he wishes he retired at 55. That was when he first became eligible for retirement with a pension from the state of Alaska that he worked for. I ask him, “Well, you say and I should retire now,” and he says, “Yesterday.” Because he just feels like his health kind of took a turn after he retired and wishes he'd done it a few years earlier. So don't forget your patients really are affected by your daily work and what you can do for them really makes a huge difference in their lives.

WCI: Today we're just going to go over a bunch of questions that have been left on the speak pipe. Now you can leave your questions for us here on the White Coat Investor podcast, but if you want them answered on air, chances are you're going to have to record your voice and get them on now. I still get lots of email questions, but I'm getting enough of these, that these are most of the questions were answered on the podcast these days. Now you can leave those at www.speakpipe.com/whitecoatinvestor, and we'll get them in and most of them we use, so you'll get a chance to hear your own voice on the White Coat Investor podcast. Our first question today comes from Harvey.

Harvey: My question for you is what my wife and I should do with the condo that we purchased six years ago at the beginning of residency. We rented it out for two years during fellowship in North Carolina and then moved back in and my wife took her attending job here in Maine. After living in it for the last six months and taking our time with the house home hunt, we found the dream home and we'll close on it later this month. Should we sell the condo now and use the equity to increase our down payment on the dream home from 10 to 20% or should we rent it out again and put the profits towards extra payments on our new mortgage? It has a positive cash flow and a 5.4% cap rate. I've modeled the two scenarios and found that selling now would save us more on interest in PMI over 30 years, but we would obviously miss out on any appreciation of the condo. So far we have seen a 35% increase in its value. We are fully funding our 403(b), 457, HSA and Roth accounts and have no student loans. Thanks again.

WCI: Basically saying, “I bought this condo in residency, should I keep it as an investment or should I sell it and use the down payment for my next house?” Well, the general rule is that you should use it as a down payment. I mean, the reason why is because most of the time if you were given the question of would you buy this condo as an investment at this point in your life, the answer is no. So the only advantage this has is that you don't have the initial acquisition costs of that condo. So that does save you a little bit of money. It does make your return a little bit better. It makes it a little better as an investment because the transaction costs to buy it are already water under the bridge. But for the most part, a doc in the early years of her career is going to have a lot of uses for cash and not a lot of cash.

WCI: So typically what I would do is I would just sell the place and roll that money into your next home and have the mortgage paid off that much sooner or have it costs you less as a monthly payment each month. Our next question comes from an anonymous orthopedic surgeon.

Surgeon: I'm an orthopedic surgeon who is two and a half years out of training and planning within the next year to start buying into a single specialty orthopedic surgery private practice group. I'm in an interesting situation where my group has not taken a new partner in eight years, so the group does not have an established partnership track and is open to establish in one. My questions for you are ones that I understand are difficult to answer. My questions are; how would you approach the process of becoming a partner in a single specialty private practice group? Would you recommend an accountant or health care attorney or both to help to do the due diligence on whether the buy in to the practice is a good investment? What are your thoughts on how a fair buy in value to becoming a partner is calculated? What factors should be considered in the number for the buy in to the group?

Surgeon: I know that I have really enjoyed when your podcast feature a group discussion with Physician on Fire and Passive Income MD. Perhaps you could consider a podcast with a group discussion of docs sharing their experiences buying into a private practice group. Thank you for considering like questions.

WCI: Basically this doc is in a partnership without an established partnership track and wondering, “How would you approach that process?” Well, yeah, you need a health care attorney for this. For sure, you should have that contract reviewed with an attorney so you know exactly what it says. You ought to have your account reviewed as well. But really, he's asking, “How should this be constructed?” Well, that's really up to the partnership, not you joining it. I mean, it's a mutual negotiation, but you shouldn't have to write your own partnership agreement. That's ridiculous. You just want to make sure you're being treated fairly. In these sorts of scenarios, the people you're dealing with actually matter a lot more than the contract. I mean, joining a physician partnership is in a lot of ways a lot like a marriage. Some people's partnerships last much longer than their marriages.

WCI: So, you want to make sure you're roped in with the right kind of people, the kind of people you don't mind interacting with and being partners with for decades. So that's the first thing to do is, trying to decide if these are people you want to be in business with. There's not really a standard here. You talk about how should a fair buy in be calculated? Well, it depends on the partnership. In emergency medicine, there's really no equipment, there's no building, there's no land, there's basically the accounts receivable and whatever goodwill there is. So the typical structure is a sweat equity buy in. You basically work for less as an employee for a year or two and then you become a partner. The main benefit of being a partner is you get to keep what you earn rather than having some of it skimmed off the top and taken to the partnership.

WCI: That's the way a lot of specialties work. I'm sure anesthesia and a lot of radiology, kind of the same sort of a deal. If you are in a practice, buying into a practice that owns stuff, there's a building, there's land, there's equipment, you've got to put a value on that. And it basically has to be assessed just like a house does, and you should only be paying your share of it. Just like when you die, you should be paid out based on your share of it. Now determining how much the practice is worth above and beyond those material things is a little bit trickier. But there are people who actually specialize in doing this and the best thing to do is just to have that practice appraised so you know what it's worth and then you look at what percentage of it you're buying into. That's how much you should pay for it, the idea being that if you leave in a couple of years, you can essentially get your money back out of it or maybe even make a profit.

WCI: Those are the main things. But obviously, you want to consider everything else that goes into a physician contract too, like how much call you're going to have to take, how the vacations are split up, how the money is split up and all that kind of stuff as well. Hopefully, that's helpful. Our next question comes from an anonymous Midwest physician.

Physician: Hi Dr. Dahle. I am a physician working full time in the Midwest. I'm about 10 years out of residency and my only debt is my mortgage. I'm working on building and catching up on my retirement assets and plan. I'm calling with a suggestion that I wonder if you would consider it. I wonder if you might be interested in doing a series of interviews or shows with physicians or high income professionals who are actually retired or recently became retired. Most people don't talk about the details of their finances, so anonymous would be fine. I find that most things in life you can't actually understand until you are doing or living them.

Physician: I would like to learn the nuts and bolts of what it is like to actually be retired so that it can better inform my retirement planning. What happened to your taxes for new retirees? What are the funds that you actually live on? How much are you spending now compared to pre-retirement? Are you living off investments, pensions, social security, or a combination of passive income strategies? What are both positive and negative surprises that you didn't expect about being retired? I think that your listeners and audience would be highly engaged with learning more about this topic. Thanks.

WCI: Well, that's a really good suggestion for a podcast or for a series of podcasts. Honestly, it sounds like an opening for a new physician blog. Here's the problem though. This isn't standardized at all. Everybody is going to be a little bit different. What good does it do to hear about what someone who retired with 10 million did when they retired if you're only going to retire with one and a half million. It's just such a dramatically different scenario to go over those financial specifics that you almost can't compare it. Likewise, it doesn't help to hear about someone with a pension if you don't have a pension. But anyway, if someone in this situation wants to apply to come on the podcast, we'll take a look. Just go to our podcast guests policy you find under the main page, under the about column and you'll see a way to apply to be on the podcast and we'll take a look at it.

WCI: But here's the deal. I'm not going to make more than one podcast a week. I just don't have the bandwidth to do it. Cindy would go crazy if I told her we're going to do more than one podcast a week. I have two or three people a week asking to come on the podcast as a guest. So in order to do one thing, something else has to be left undone on the podcast. If we bring on a retired doctor to talk about their nuts and bolts of their life, that means we can't bring on somebody like Rick Ferri or Bill Bernstein and that sort of person. If we bring on a doc who wants to promote their business, I can't spend the episode answering all your questions. So it's all a balance and we'll try to get it sorted out and meet that need for sure. Our next question comes from John who's entering dental school
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John: Hey Dr. Dahle. I'm about to enter U Penn Dental on HPSP scholarship. I'm trying to decide if I should buy or rent an apartment. With the monthly stipend from the navy, I can comfortably afford a mortgage on a one bedroom apartment with plenty of leftover money for expenses and this is after a 20% down payment. I'm looking at this as a possible investment property and maybe I can rent it after I finish my four years at Penn. Does this sound like a good idea or do you think I should rent with a few roommates and keep my money in the stock market? I'd love to hear your opinions on this. Thanks.

WCI: He's basically on the health professions scholarship program and wondering if he should buy a place or rent a place. Well, here's the deal. I often tell people until they are through school, an attending physician or a practicing dentist to just rent, because it's easier. These sorts of decisions you make during school or during residency or fellowship just are not going to move the needle enough to make you rich. You're not going to become rich as a dental student. So quit trying to optimize your finances in a way that you're going to somehow become rich during that time period. What you really need to do is concentrate on building your earning power to become a good dentist so you can earn as much as you can later rather than focusing on whether you're buying or renting. But let me tell you my experience.

WCI: I actually bought a home during medical school on an HPSP scholarship. We looked at it and said, “Hey, let's buy a house because that's what successful people do. It's the American dream.” We had a realtor that it was encouraging us to do it and of course everybody wanted to lend us money. I think mortgages were at 8% at the time back in 1999. Our parents were encouraging, “You got to want to buy your house as soon as you can in order to make money on it.” So we bought a Condo. It was an $80,000 condo. We sold it four years later for $83,000. It sat vacant for a couple of months after we left to go to residency before it finally sold. When you add in the transaction costs, which in general are round trip about 15,000… or 15% of the cost of the place, we came out behind. There's no way we came out ahead.

WCI: It just didn't make any sense. So what should we have been doing? We should have been renting, if I was single with roommates, if I was married, obviously not. But it really is not the best time to buy a house. Even if you're getting an HPSP stipend, do what you want. It's your life. You got to deal with the consequences. It's not that it's impossible to make money over four years of dental school. You probably have, I don't know, 40, 45% chance of doing it, but it's just not the time in your life to really be doing that. Wait until your professional career and your family situation is a little bit more stable to buy. I have another question about buying a home. This one comes from an anonymous New York two doc couple.

podiatrist: My wife and I are near the end of paying down my student loans and we'll begin saving for a home or shall I say apartment. We live in New York City, which has a pretty high real estate margin. Currently, we're enjoying the freedom of renting and projecting that we'll be ready to buy in about five to seven years. My question is, where do you recommend we put our savings for a down payment. Instead of holding money in a savings account, I was thinking of starting a taxable index fund, mimicking an asset class allocation of someone nearing retirement. In other words, leaning heavier on the bond index fund. We're both in our mid thirties. I'm a hospital based podiatrist and my wife is a psychiatrist in private practice. I thank you in advance for your response.

WCI: Okay. So this podiatrist and psychiatrist say they're going to be ready to buy in five to seven years and want to know what to do with down payment money. Well, it's not entirely clear to me why they're waiting five to seven years. I mean, the time to buy is when your social situation and your professional situation are stable. The likelihood of that being five to seven years from now for a two doctor couple, even in an expensive location like New York seems pretty low. Rather than trying to save up a huge down payment in that sort of situation, I might give a little bit more serious consideration to use a doctor loan, and be able to cut some time off that, because if you're going to be in this home for a long time, getting in it earlier does make sense. Even if you got to use a doctor loan, there's no PMI associated with that and you can put down less than 20%.

WCI: But let's assume that this couple actually does need to wait for five to seven years or want to wait for whatever reason. Here's the thing. I would probably invest that money in some way. The reason why is if you change your mind, you can just liquidate it and use it for a down payment. For example, if you decide you want to buy in two years instead of five years, then you've got the money sitting there. So I'd just invest it in a taxable account in some way. If it's really five years out, I'd probably use a balanced portfolio, maybe half stocks, half bonds and then as I move closer toward the date when I want the money, make it a little bit less aggressive to where the last year before I was going to buy the house I'd have it in something very safe, like a money market fund. Okay. Our next question comes from Doko.

Doko: Hi Dr. Dahle. This is Doko from Maryland. I just want to say thank you for everything that you do. You are a personal hero of mine. I used to think that I am Batman, but actually, you are really Batman in my life. Anyways, I live in a high tax state county. We have a tax rate of approximately 50% with combined with federal rates, which is very, very high. My question to you is, we are trying to come up with tax strategies to try to shelter more of our income and this is after we've maxed out our deferred retirements, our backdoor Roths, the stealth IRA, HSA accounts. Now I've heard from friends about strategies like hiring your nonworking spouse as an employee to do your finances and then paying them, allowing them to contribute to 401(k)s and whatnot, or potentially putting accounts in your children's name to try to shelter more of your income. Can you talk a little bit about some other strategies that you've heard of or do yourself to try to shelter more of this and try to avoid this high tax rate of 50%. Thank you very much.

WCI: Thanks for your kind words. I'm not sure how much I deserve them, but I appreciate them anyway. That's pretty brutal, a 50% marginal tax rate. I guess the first thing I'd consider if that were my marginal tax rate would be to move. But your questions are different. So let's talk about each of those. Should I hire my nonworking spouse for another 401(k)? I see this question a lot among docs? Here's the deal. You can't just hire somebody that's not doing anything, have them not do anything and pay them a bunch of money. That's not legit with the IRS. You cannot do that. You have to find something for them to do. So if you have a business and you have a legitimate need for an employee or for a partner in that business, then sure you can hire your spouse to do something there.

WCI: Katie works in my business. She does some legitimate work. She gets paid a legitimate paycheck. She is actually a half owner of the business. We figured that was the best way for us to do it. But if there was nothing for her to do, it would be very difficult to convince the IRS that paying her is a legitimate thing to do. The other thing to keep in mind when you hire somebody who is not previously working is, you've got to pay another set of social security taxes. For the self employed, that's 12.4% of her earnings up to 132,800 or something like that this year. That's a very real cost. Just to get another 401(k), you're going to pay 12.4% of that. I mean, that's like 15 grand. That's money you would not pay if that money were all coming to you instead of going to your spouse.

WCI: So you've got to weigh that factor against the benefit of having an additional 401(k). In addition, in order to really max out of 401(k), you have to pay somebody quite a bit of money in order for them to have enough income to max out a 40(k) at $56,000. The other question is about UGMAs, these kids accounts. Yes, you can put some money into an UGMA or in some states an UTMA, UGMA or a UTMA. These are Uniform Gifts to Minors Accounts or Uniform Transfer to Minors Accounts. What these are is basically a taxable account for your kid. What that gives you is basically the first thousand dollars in income that it kicks out every year is not taxed, and the next thousand dollars is taxed at their tax rate, usually 10%, or in the case of longterm capital gains are qualified dividends, zero.

WCI: That's a huge benefit. But the problem is anything above and beyond that $2,000 a year is just taxed at your rate anyway. It's okay to do that, but you can't put a ton of money in there or else it's going to be kicking out all these dividends that are going to be taxed at your rate anyway. You're not saving anything. The other thing to keep in mind is this is truly a gift to them. It is no longer your money. You cannot take it out and spend it on whatever you want. When they turn 18 or 21 depending on the state, they could use it for whatever they want. They can go use it for cocaine and hookers if they want. They could blow it on a sports car. So it really is their money when you give it to them? That's very different from a 529 account, which remains your money.

WCI: So what else could you do to lower your tax rate? Well, the basics; invest in tax efficient mutual funds when you're invested in a taxable account, invest in real estate to shelter the income from depreciation and you can move, go live in another state that's not so expensive. You can earn less money. You can hire your kids, again, if you own a business and you have a legitimate work for them to do. This is something I do for my kids. They all have Roth IRAs because they have earned income. They're paid to be models to provide images that are used on my blog. That's one thing that reduces the taxes that I pay all the business because when I pay them, that is a business expense. It's totally written off as a business expense. Because they don't make much money, they don't pay any income tax on it. Because the business they work for is completely owned by their parents, and is not a corporation, they pay no payroll taxes since they're under 18.

WCI: So, then we take that money, we put it into a Roth IRA where it's never taxed again. It's a great tax break. Tax breaks are all around. But you can only pay your kids so much and have it be legitimate and fly with the IRS. What else could you do? You can do tax loss harvesting. When you sell an appreciated share or when you sell something that has a loss, you can use up to $3,000 of that a year against your ordinary income on your taxes. You can also use appreciated shares for charitable donations that neither you nor the charity has to pay taxes on those capital gains. So lots of things you can do to lower your tax rate. There's not any one magical trick. If there were one, it would be maxing out your retirement accounts, but it sounds like you're already doing that. So good job. You could probably tweak a few other things to lower your taxes a little bit, but mainly just be grateful that you have that problem. They're worse problems than having to pay too much in taxes. Our next question comes from Robert.

Robert: Hi Dr. Dahle. My name is Robert and I'm a current resident in my last year of training and will be accepting a position at a large state academic institution where I trained and would like to get your thoughts on a defined benefit plan or pension verse a defined contribution plan. I feel financially literate thanks to your work, so thanks for all that you do. I'm having a hard time though deciding between the two as to which one makes more financial sense. I've been making in the mid 300,000 range initially and to give you some of the details about the choices, the defined benefit plan calculates my base pay around 100,000 as an assistant professor based on the university way of limiting calculation for pension payouts, I assume. I invest 7% and they match 8% of my base salary and invests after five years. To designate my wife as a contingent annuitant, there's a slight reduction in the payout.

Robert: Alternatively, in the defined contribution plan, there's a pretax account that gets the same contribution and employer matching. However, I manage them and invest immediately. Both choices have the addition of 403(b) and 457 accounts with excellent investment options that beat Vanguard's expense ratios for building a Three-Fund Portfolio. On one hand the defined benefit seems like a nice way to diversify my retirement portfolio and feels “safe”, but it seems like it could become unnecessary golden handcuffs when I have excellent alternative options available to me without providing significant additional financial benefits through the pension. I appreciate your thoughts.

WCI: Question kind of got cut off at the end there, but I think we got the gist of the question. It's basically a defined contribution versus defined benefit plan. Well, if this pension matches 8%, invests over five years and you get the same match in the defined contribution plan and invest immediately, I think I'd rather have the control. I'd just take the defined contribution plan. A defined benefit plan, the risk is actually on the employer if the investments don't perform. In a defined contribution plan, the risk is on you. I'm not afraid to run that risk in my life. I'd rather have the control, particularly with the immediate matching, or the immediate investing of the match. I think that's worth a lot. So in this situation, I'd probably just go all defined contribution. The other thing you don't have to worry about when you do that as the employer going under.

WCI: That'd be terrible if you lost your job and that ended up… or rather the employer lost the pension, which happens all the time if they're not managed well or the employer goes out of business, et cetera. The devil's always in the details, but I think in this one it's pretty obvious. All right. Our next question comes from Mike.

Mike: Hi Jim. Thanks for all you do with a White Coat Investor. It's extremely helpful to all of us. I couldn't help but notice in your last podcast the dry by comment you made about heli-skiing. Come on, Jim. You can't just drop a comment like that and passing without elaborating. I know this is a financial podcast, but this listener for one would like to hear more about this trip. If it pleases the crowd, go ahead and break down the numbers by comparing the value of heli-skiing versus cat skiing or which outfit provides the best value because I'm sure you did your homework. But your fellow powder hounds out here craving some details about this trip of a lifetime. Thanks a lot and keep up the great work.

WCI: Okay, Mike wants to hear about Heli-skiing. It's interesting. I kind of had a blog post planned all about Heli-skiing. The reason why is when I was up there last, I tried to convince the company that I went with to advertise on the blog, and I said, “Let's set up an affiliate deal. I've got all these high income people, many of them like to ski, who I could send to your business and you give me a cut, and this works out great for everybody. They get a great deal. You get more business and I make money.” I haven't yet been able to talk them into doing that, so I haven't written that blog post. But heli-skiing is a lot of fun if you are into skiing and you love the ski powder, is particularly good.

WCI: These are usually people that like to do backcountry skiing, the people that go out there with their avalanche, beacons and their shovels in case they get caught in an avalanche and really enjoy ski in the bottomless powder, because that's what you get when you're Heli-skiing. The only difference is you don't have to walk to the top of the mountains. Instead of being able to do one or two or three runs a day, you get to do 10 of them a day. It's a ton of fun that way. Is it an expensive luxury? Absolutely. What does it cost? Well, you should probably plan just for the helicopter and guide somewhere between 1000 and 1500 a day. Now that's a lot of money is definitely more than you pay for a lift ticket. Even at an expensive place, you go up to Deer Valley or Park City around here and a lift ticket, I think if you just walk up to the window and buy it, it's probably 180 bucks.

WCI: So, it's a much more expensive obviously than going to the ski resort. The difference, of course, is that the skiing is dramatically different. Once you've been Heli-skiing, going back to the resort feels like rock climbing in a gym. Yeah, it's good practice, but it's just not the same thing as climbing outside. And so heli-skiing is basically that chance to ski an entire mountain, top to bottom, never crossing somebody else's track in thigh deep powder, and then do it again and again and again. If you go to Canada and do this, you typically fly in some places like Calgary and then you drive into the Rockies, and you stay in a hotel and eat great food and you fly out every day for five or six hours with a guide and you get dropped off on the top of every mountain.

WCI: What does it typically run for the whole week? I think we kind of had a… this last time we went, we did it a little bit more of a premium away. We rented out the whole helicopter and just fill it ourselves. So it costs a little bit more money than the last time we did it in kind of the cattle car helicopter, if you will. I think the last time the whole trip was about $4,500. That was four days of skiing. This time I think our whole trip was closer to six a piece, and totally worth it. For a trip in a lifetime, if you are a skier and you enjoy skiing powder, this should be on your bucket list. It's a lot of fun. Obviously, you need to take care of your business first. This isn't for somebody who owes $400,000 in student loans and it's two months out of residency. This is something you do to reward yourself for getting your financial ducks in a row. All right, our next question comes from Brett.

Brett: Hi Dr. Dahle. Thank you for all that you do. I am a surgeon with a W-2 income of approximately $400,000 per year. I max out my 401(k) which is matched by my employer. This amounts to them contributing $13,500 per year. I also max out of 457(b). I do locums work on the side, which amounts to approximately $75,000 per year of additional 1099 income. I have heard that I can open an individual 401(k) because of this, but I'm having troubles calculating how much of my 1099 income I can contribute. Are there any other considerations? Can you also provide some guidance where you would suggest opening this account? I do have a Vanguard taxable account. Thank you so much for your time.

WCI: Okay. This one's an easy one. Brett's got $75,000 in moonlighting income. Can he open an individual 401(K)? Absolutely. That's the perfect person to open an individual 401(K). How much can you put in there? You can put in 20%. Since you already used your employee contribution in the main 401(k), you can put 20% of what you earn in moonlighting income in there. Where should you open it? Well, there's lots of places you can open it. You can open it at Vanguard, you can open it at Fidelity or E-Trade or TD Ameritrade. There's all these places, Charles Schwab, that will allow you to open a solo 401(k). Most of those are basically free. They don't really have any fees associated with them. The downside is they're kind of these cookie cutter 401(k) plans that can't do a lot of that kind of bells and whistles you can get if you go to an individual 401(k) provider.

WCI: As I record this podcast, in the process of moving my individual 401(k) from Vanguard to a different firm called My Solo 401k, just got off the phone with their principal, Mark Nolan this weekend actually and worked out an agreement with them. This is actually an affiliate deal, so if you go through our links, you get a special discount if you use My Solo 401k. I'll be writing a blog post about this coming up. But I encourage you if you need some of these special features that you can't get going to Vanguard or Fidelity or et Cetera, that you consider My Solo 401k to do that. That feature I was interested in, well really two of them, that made me decide to actually pay a little bit of money rather than using what was basically a free individual solo 401k of Vanguard, was first the opportunity to do a mega backdoor Roth IRA. Because of the one 99 a deduction this year, it makes sense for Katie and me to be doing after tax contributions to a 401(k).

WCI: Basically after our employee contribution, the rest of it is all after tax, which is then converted immediately to a Roth IRA. Well, Vanguard basically doesn't allow us to do that and so we had to go someplace else in order to do that. The other feature you can do is, this is a self directed 401(k). I mean, you can use it to invest in any sort of a credit investor kind of investments like real estate funds. That's why we're moving our 401(k). There'll be a blog post about that, watch for that, but that's a great place to go. If you just want to buy mutual funds and you don't need any special features, you can just go to Vanguard. Be aware they have one significant limitation there, that you cannot do an IRA rollover into a Vanguard individual 401(k).

WCI: If you need that feature, you've got to go somewhere else. Fidelity allows that, E-Trade allows it. Of course, My Solo 401(k) allows that, but you do have to pay a little bit of money there, I think. With a special deal, I think it's $700 initially to set it up and then $125 a year. But you get an expert on the phone for that. That's worth an awful lot. When I'm talking to somebody on the phone and I'm learning about retirement accounts, I think that's a good side. Go through the links in the show notes if you would like the special deal that we've negotiated for you. Next question comes from Travis.

Travis: I am a first year medical student. I did not apply for a military scholarship and I'm taking loans at an expensive private medical school. I did not want to commit to the multi match or give up control of where I lived after residency. I'm interested in the army reserves and specifically the MDSSP and STRAP program. This program isn't as generous as the HPSP scholarship, but it does provide more than enough for living expenses. Also, operational type medicine is very appealing to me. The reserves seem like a good way to go. You get to go through a civilian match, live in whatever state you want to afterwards and serve part-time. Could you please give me your opinion on practicing medicine as a reservist based on colleagues that you know or practice with. Was continuing military services reservists a thought for you or did you find that your four years was enough? Lastly, does being in the reserves limit my future employment options, especially in rural areas? Thank you.

WCI: Travis is basically a medical student at an expensive private medical school. He's wondering about the STRAP program. Well, this is a reservist program. We've had a guest post on the blog about this, just such the blog for strap or for reserves and that'll pop right up. Like the HPSP program, I think this is great if you want it to be a military doc. But it's not primarily a financial question. The military is great if you want to be a military doc. It's terrible if you don't want to be a military doc. Likewise, the STRAP program is great if you want to be a reserve doc. It's terrible if you don't want to be a reserve doc. It's really that simple. So don't try to make it into a financial question. There'll be financial benefits and downsides either way. But don't make it into a financial question.

WCI: To answer your question, I did not consider going into the reserves after my active duty service. I was kind of done. I'd had enough with the military at that point and I just wanted to move on with my civilian life. Four years was plenty for me. But I haven't found that limited my career in any significant way, and I don't think being a reserve doc really would as well. If you live in a very small rural town, it's just going to make travel to your reserve duty station a bit of a pain. But I know lots of reservists who go to a different state to do their duty. So it's not like that is an insurmountable object that would keep you from doing what you want to do. Our next question is actually where the title of this podcast comes from.

Rikki: Hi Jim. Thank you for all that you do. I am definitely a disciple of yours, as a previous podcast listener had said. I have a bunch of questions because for the past seven years I've been with a financial advisor that's definitely taking me for a ride from a well known company. This includes the usual whole life to pay the 65 as well as the Term 80 policy. The whole life insurance, we are now transferring to a variable annuity to Fidelity, me and my wife, make up to $25,000 loss costs basis. However, I'm not sure if you have any recommendations of what assets within the variable annuity in Fidelity to invest in. Also, is it worth re-evaluating our term life insurance policies as well as disability policies.

Rikki: We do have Term 80 as I said. We are six years older but not really any more health problems. I am not sure of where we should really look into that, but you probably say yes for the Term 80. Disability, I'm not so sure if you would recommend rebounding that. Also, my advisor had set up a Virginia529 plan where he does various fees of 0.5% to 1.39%. Should I reinvest it or roll that over to a different 529 plan? Finally, I also don't know what to do with this individual retirement annuity that we have with Northwestern Mutual. This is about $25,000 and it was rolled over for when I was a resident from my 401(k). Any help that you can give is great.

WCI: Okay. Rikki basically fell in with Northwestern Mutual. All right, let's just tell it like it is here. We all know who this company is because most of us have been propositioned by them to invest in their products by their insurance products, et cetera. Unfortunately, it often is not ending well the way people would like it too. Let's go through your questions. First, what should I invest in within the variable annuity until it gets back to basis and I can surrender it? Well, it just depends. The idea is to invest in something that you would otherwise invest in. I usually send people to Vanguard to do this because their variable annuity is very low cost. I don't know much about the Fidelity one. I would look at the costs there very carefully and compare that to Vanguard where I would probably go if I was doing this sort of thing while surrendering a whole life policy.

WCI: The idea is to pick something that's not terribly tax efficient, but that would be in your portfolio anyway. Something like a TIPS fund if you're interested in that investment or maybe a Real Estate Investment Trust fund if you're interested in that. That's a good thing to put in there. But you can put in total stock market too and that would be fine as well. It just depends on what's in your portfolio. I'd probably pick one of the least tax efficient things and put that into the variable annuity where least it would be sheltered from those… that tax drag as it grows, at least until it gets back to basis. Should you reevaluate your life and disability insurance? Almost surely. It's very rare that a disability life insurance sold to somebody by Northwestern Mutual agents is what they really want.

WCI: Now, six years into it, you may be better off with it then what you can now buy. But you're still healthy. So what I do is I'd call up an independent insurance agent and just price things out and compare what you have to once you can now buy, both with term life insurance as well as with disability insurance. In fact, I just called the sponsor of this podcast, Jamie Fleischner and have her go over it with you and show you your options. Why not? Just go to setforlifeinsurance.com and get it sorted out. Make sure you're in the very best thing you can get into today. You may find that's what you already own, but there's a good chance it's not. As far as that 529 plan, Virginia has two plans. One is basically an advisor-sold plan and the other one is the one do-it-yourself, investors buy with lower costs and better investment options.

WCI: So, at a minimum you need to switch from the crappy plan to the good plan. You may find as well that you can roll that money over to Utah or Nevada or California or New York, these places with these top-notch 529 programs and save yourself some fees and get better investments. Just take a look at what the Virginia rules are first. Sometimes if you roll money out of the plan, you lose some of that state tax break that you got on contributions. So just make sure you read the Virginia rules on what happens with that. Now, what to do with this individual retirement annuity. All this is, is it's an annuity inside of an IRA. The bigger problem here is probably the presence of an IRA. What you really needed to do was convert that to a Roth IRA when you left residency. If you didn't contribute to a Roth 403(b) in residency, the best thing you can do is to convert it to an IRA the year you leave or to a Roth IRA the year you leave.

WCI: That allows you to continue to do backdoor Roth's going forward and allows you to get some money into a Roth IRA at a relatively low tax rate. In this case, you've got an annuity inside of an IRA, which is kind of silly. You already had the tax protection and you just paid extra to get more tax protection. But with any annuity, particularly those that are sold by people who sell annuities, they tend to have surrender charges. So, there's probably going to be some cost to getting rid of this annuity. But what I would do with it at this point is I would probably get rid of the annuity inside of it and then figure out what to do with the IRA, whether if it's small, maybe convert it to a Roth IRA, if it's large, maybe roll it into a 401k, et cetera so you can keep doing backdoor Roth IRAs each year. Our next question comes from Tuscher.

Tuscher: I am now almost 12 months out of residency and I've been fortunate enough to pay off my student loans. In addition to maxing out this year's backdoor Roth IRA and maxing out my employer's 403(b) and governmental 457(b). I'm still living comfortably like a resident and at this point, my paychecks are just collecting my checking account, not doing anything. With this excess money, should I be placing some into a high yield savings account, money market account, CDs, or just a regular stock market account. For some context, I'm not yet married and I'm not planning to buy a home anytime soon, but these are endeavors for which I feel like I should be saving up for instead of letting the money just sit in my checking account.

WCI: Okay, my savings is stacking up, what should I do with it? This is kind of a classic question. I get this a lot. Well, at a minimum you have to take it out of the checking account and put it into a high yield savings account. You can make all those two and a half percent these days just doing that. That's a no brainer. But really this question is all about a written financial plan. When you have a written financial plan, you know what to do with your extra money. You've got to plan for it. You've got your goals written out, and for each goal you have an asset allocation. You've chosen which accounts you're going to invest in for that goal, and then you just have to choose the investments to fill out that asset allocation. It's really pretty easy once you have a written financial plan in place.

WCI: When you don't have a written financial plan in place, it just stacks up in your checking account like it has for Tuscher. There's basically three ways to get a financial plan in place. One, you can write it yourself by reading books, asking questions on internet forums, reading blogs, listening to this podcast, that sort of a thing. That's the most time consuming, but also the cheapest way to do it. The second way you can do it is you can take our Fire Your Financial Advisor course. This is a seven, eight hour online course where I basically walk you through writing your own written financial plan that you can follow. So that costs $499, and takes seven or eight hours of your time. But basically, it's a shortcut. It cuts off a lot of book reading and a lot of time on the internet looking to figure out what you're supposed to do.

WCI: The third way is the most expensive, but perhaps the least time consuming, which is to hire a financial advisor. We've got a whole list of recommended financial advisors at the White Coat Investor. Just hire one of those, help them write you up… have them help you write up a written financial plan. That's going to cost you two to $5,000 but at least then you'll know what to do with your money and you won't be just letting it stack up in the checking account. All right, our last question today comes from an anonymous fourth year medical student.

Medical student: Good Morning Dr. Dahle. I'm a fourth year medical student who recently started listening to your podcast. I had a quick question regarding whether I should max out Roth IRAs or do a 403(b) contribution to max. I know you usually recommend residents that do a Roth, but is there any certain advantages to doing a 403(b) to max contribution assuming that my employer will pay a certain amount? Thank you very much and I enjoy your podcast.

WCI: Okay. Basically, we're asking here about a Roth IRA versus a 403(b). Of course, anytime an employer is going to give you a match, you want to make sure you're getting that match. Not getting it is like leaving part of your salary on the table. So be sure you get that. If you use a 403(b) in residency, be sure to check and see if there is a Roth 403(b) option. As a general rule, you want to be using Roth accounts as a resident because you're in a relatively low tax bracket. But beyond that I prefer a Roth IRA to a Roth 403(b) once I've got the match. So if you can't max out both, do the Roth IRA first. Usually, you'll have better investment options and lower expenses. There is one exception, and that's for those going for public service loan forgiveness.

WCI: If you use a tax deferred account instead of a Roth account, you can lower your income, which lowers your monthly payments, which in turn increases the amount of money left in the loan after 10 years of payments to be forgiven. That's one possible exception to when you might want to use a tax deferred account instead of a Roth account. But as a general rule, Roth accounts are for residents.

WCI: This episode is sponsored by Set for Life Insurance. Set for Life Insurance was founded by Jamie K. Fleischner in 1993. She started it while attending Washington University in St. Louis. They specialize in individual term life, disability and longterm care insurance. They work on the client's behalf to shop around to find the most suitable products at the most cost effective rate. Set for Life is first and foremost a client-centric company. They listen carefully to the needs of clients. Because of the volume and exceptional reputation of Set for Life Insurance as well as the rapid relationships they have developed over the years, Set for Life clients have access to special services not available elsewhere in the industry. This includes special discounts, gender neutral policies, priority underwriting handling and on some occasions exceptions in the underwriting process.

WCI: For more information, visit setforlifeinsurance.com. Be sure to check out the communities we have both on Facebook, our Subreddit on Reddit, as well as on the White Coat Investor site itself, the White Coat Investor forum. Head up, shoulders back, you've got this. We're here to help you. We'll see you next time on the White Coat Investor podcast.

Disclaimer: My Dad, your host, Dr. Dahle is a practicing emergency physician, blogger, author and podcaster. He's not a licensed accountant, attorney or financial advisor. So this podcast is for your entertainment and information only. It should not be considered official personalized financial advice.