We have a special guest on the podcast today, Dr. Disha Spath. She is an internist and works both clinic and hospitalist medicine and is from the East Coast. She is not just a guest today; she is what we're calling a WCI ambassador. What does that mean? That means she's going to be helping to host the podcast, providing written content on the blog, and helping with speaking engagements. She is also the host at WCICON22, which is happening this week. Today, we will be answering questions together about primary residences, retirement accounts, crypto savings accounts, and more.

Disha, tell us a little bit about yourself, where you're at in life and your career, so they can get to know you a little bit?

 

Meet WCI Ambassador — Disha Spath

“I am a practicing physician in New York, as you said, and I'm about 10 years out of medical school. So, I would call myself mid-career.”

We've been having this debate this morning, whether she's mid-career, early. But hey, 10 years out, OK, you can argue that's mid-career. I'm feeling late-career now with her calling herself mid-career.

“Late early-career physician. It's a pleasure to be here. The White Coat Investor literally changed my life when I first came out of med school and residency. In my very early career, I was totally lost financially. I had been looking for the answers all throughout my college and medical school training. I just somehow never got to the right thing to read. Then, when I finally read Jim's book, it changed my life and my perspective. I was like, this is what I've been looking for. It was so hard to find the answers to our situation. It just laid it out for me, showed me exactly what I was doing wrong, and then showed me the way forward. Since then, it's completely turned mine and my family's financial life around and has made things so much better for us. So, I'm so excited to be here at the White Coat Investor.”

We're excited to have her here. She makes it sound from her story like she just found it, but she's actually been working in this space for a long time. Blogging, speaking, helping doctors become more financially literate. We're excited to have another voice on the podcast, and I hope that those who have trouble relating to me can relate to her.

We may both be mid-career physicians, but we're on either side of that. Our skin colors are different. Our genders are obviously different. Our specialties are different. We live on opposite ends of the country. The goal is to try to provide a diverse selection of voices for you so that you can understand that all doctors can be financially successful. Let's get into our first questions about primary residences.

 

Primary Residences and Asset Allocation 

“Hi, Jim, before I get to my question, I wanted to say that you have been tremendously helpful in improving my financial literacy and making me feel empowered to steer my financial future. Thank you for taking my question and for all that you do. I'm an ophthalmologist in California, and I'm calling with a question on how to account for a primary residence when considering asset allocations. I own my home outright and thankfully do not have a mortgage, but real estate is expensive here. So, its value accounts for about 50% of my total portfolio. I realize that I'm already outside of standard guidelines that suggest I should not have more than 30% of my net worth in my primary residence, but because I'm just beginning my career as an attending, I do expect this to balance out in the coming years. My current investment plan says to keep 20% of my assets in real estate. If I were to include my home in these calculations, then I would be dramatically overinvested in real estate and shouldn't be making any additional investments in that asset category for some time. How do you account for the value of your primary residence in your portfolio? Should I avoid investing in REITs, syndications, or other passive real estate until my home value is less than 20% of my total net worth? Even if that means waiting several years? Thank you again.”

Disha, do you want to take that one?

“Yeah, that's a great question. How to account for primary residence in your asset allocation is something that a lot of people struggle with. I'll tell you what I do. When I look at my primary residence, I do account for the equity in my home in my full net worth calculation, but I don't look at it when I am figuring out my asset allocation. I look at my house as an expense that happens to appreciate. I don't look at it as an investment, as a lot of people do. When I'm looking at investing in real estate, I'm thinking about buying cash-flowing rental property that's also going to be giving me income, or REITs, or investing in the stock market.”

Yeah, I think that's exactly right. There's a lot of stuff that I own that is not in my asset allocation. In fact, the elephant in our financial room is The White Coat Investor. This small business is totally risky. It's one website, basically, and it's a huge part of our net worth. If I tried to account for that in my asset allocation, there would be no way to have an asset allocation. That's the same way your house is. I feel for you being in California because housing is expensive there. It's not unusual at all to see not very impressive houses that have seven-figure values. In fact, it's hard to get anything under seven figures in some areas of California. So, it is a huge part of your financial life. It should be counted in your net worth. It should not be counted in your asset allocation. Leave it out.

I leave my 529s out of my asset allocation. I leave all my kids' savings accounts out of my asset allocation, our day-to-day cash accounts, checking, savings, etc. That's not in our asset allocation. Our house, the boat, it's not in our asset allocation, leave all that stuff out. Asset allocation for retirement is the money that's set aside for retirement, and that's it. So, leave the home out. Don't account for it. If your plan calls for 20% real estate, you need 20% of real estate, not including your home. That's how I would look at it, and I think that's how the vast majority of people would consider it. Otherwise, it's just a little bit too funny.

More information here:

Should Your Primary Home Count Toward Your Net Worth? 

How to Build and Manage an Investment Portfolio for Long-Term Success

 

Purchasing a Home Near Retirement 

“Hi Jim. This is Casey, the Air Force periodontist. My question relates to purchasing a home at or near retirement, particularly if someone has no prior equity, presumably because they've always rented homes in the past. If a person retires and then moves to their desired post-retirement location and wants to purchase a home for say $400,000, I believe I've learned from you and others that it would almost always be mathematically smarter to purchase the home outright. Let's assume by selling $400,000 in bonds, rather than having both a mortgage and maintaining the bond allocation. Because, after all, a mortgage is a negative bond and with a higher interest rate. But it seems to me, this would immediately push the person's portfolio into a more risky asset allocation with a much higher stock allocation and a much lower, or perhaps even fully eliminated, bond allocation.

If an unfortunate sequence of returns then occurs when this person is just beginning their retirement, they'd have to live off their stocks with few or no remaining bonds to sell instead. Although I understand the math regarding not having both bonds and a mortgage, I'm not sure how the ‘better solution' i.e., using bonds to purchase a home outright, actually helps prevent sequence of returns risk. And on a related note, if someone were to do what I'm describing—buying a home outright by using their bonds to pay for the home—should the person then re-establish their asset allocation by rebalancing back to the original stock-bond allocation that they had prior to the purchase of the home. I hope I asked that right, and I hope it makes sense. Thanks so much for the help, Jim.”

All right, Disha. What do you say to Casey about this? This is really good actually that we had the prior question just before this one, because it set us up perfectly for it.

“I think I would go back to the same thing. You're overcomplicating it. Leave your personal home out of your asset allocation calculations. That would be my take.”

Exactly. You have the money in there. It's in your portfolio now, and you're deciding I'm going to spend some of this money buying a house. At that point, it comes out of your asset allocation, and you're no longer trying to figure it into your asset allocation. If you go to buy a house—let's say you have a $2 million portfolio—you're going to pull $400,000 out to buy a house. You now have a $1.6 million portfolio. Now, a house in a lot of ways is a consumption item. I mean, think of all the expenses, property taxes, insurance. And that's assuming you have it paid off. You may get renovations, you have maintenance, you have the lawn care, and the snow removal.

But the truth is a home is, in some ways, also an investment because you're getting dividends from it. What are the dividends? Saved rent. You're no longer paying rent. You're getting some sort of cash out of this in that you're not paying rent, but aside from that, a house is a consumption item. Don't get lost in the weeds of whether it's a bond or stock. It's neither. Just take it out of the portfolio. Now, there is a concept we've talked about when it comes to fixed income. And that is the idea that any sort of debt is a negative bond, and mathematically, that's the way it works, right? If you pay off a 6% debt, you get a 6% guaranteed return. And if your bonds in your portfolio are paying 2%, well, maybe it makes more sense to put that money toward a 6% debt than buy more bonds paying 2%.

But that's a concept. It's not something I'd actually try to work into my asset allocation. If I wanted to go down that pathway and be 100% stocks for now and have all the money, I would put it in bonds, put that toward my debt until I had my debt paid off. Then, maybe change your asset allocation to be 70% stocks and 30% bonds or something like that. I don't think that would be an unreasonable thing as long as you put that in your written financial plan. But it sounds to me, Casey, you're just getting kind of lost in the weeds here of all that stuff. You just have to get the house out of your asset allocation. Then, it all starts making a lot more sense.

“I think it might make it easier if you thought about it from a cash-flow perspective. Because if you had a mortgage on the house and that mortgage was a huge hit on your cash flow, it was a huge percentage greater than 30% of your cash flow, then I might think about maybe mortgaging less and putting out more.

But if that mortgage is going to be easily affordable on that fixed income and the income that you have coming in from your investments, then I guess it wouldn't be a bad deal to have it. Or if you wanted to just go ahead and purchase it into cash, you wouldn't have that cash flow hit monthly, but then you would have less in your investment accounts making money.”

Yeah. The secondary question is really interesting actually: should you have a mortgage in retirement or as you're approaching retirement? This is something that a lot of people make super simple. A sound bite or two, and it's almost dogmatic. But debt is something that's really complicated and you have to think about it pretty deeply. The way I like to think about it at that stage of life is, “Do you need the debt to reach your financial goals? Do you need to be leveraging your house in order to build your nest egg fast enough to retire when you want to retire?” And what I would hope for most white coat investors as they are entering retirement is that you don't need to do that anymore. That's one risk that you can eliminate from your life by going into retirement debt-free.

We paid off our mortgage in 2017. We've been debt-free now for five years; we like it. We think it's pretty cool. We feel a lot less guilty about everything we buy because we know we're not buying it on leverage. Because money is fungible, debts are fungible. If you have a 6% student loan, essentially everything you buy that isn't 100% necessary, not essential—every vacation, every car, every appliance, whatever—you're basically buying at 6% debt because you have the debt, and you could be paying it off instead of buying. So, it's really the same thing. I would think about that as you decide whether to carry debt into retirement. I think most people will probably decide they don't really want to do that. What are your thoughts on that? Do you plan on carrying debt into retirement or being done at that point?

“Not mortgage and not my primary residence mortgage debt, for sure. Maybe investment properties.”

The more money you put down, the more the cash flow. But there's no doubt that paying off something like that lowers your expected return. You expect to have a higher return because it's leveraged. There's no doubt about it. The math works very well that way. You can make a strong argument, even in retirement, particularly with a rental property that you're not signed personally for, to have it partially leveraged. But it will cash flow better if you pay it off. There's no doubt about that.

More information here:

Benefits of Paying Off Your Mortgage — Evaluating the ROI

How to Use Leverage and the Differences Between Good and Bad Debt

 

Where to Allocate Extra Savings 

“Hello, Dr. Dahle. This is John, and I'm a pediatrics intern. Thank you for all that you do. My question is about where to allocate the additional savings we have that we intend to use on a down payment seven years from now when I am done with my training. We currently have the money sitting in a high-interest savings account in an online bank. A few options we are considering are investing the money in a taxable brokerage account and low-cost index funds or investing the full amount we can each year from our Roth IRA contributions, since we are married, filing separately, and I am going for PSLF. And then withdrawing the value of these contributions tax- and penalty-free as our down payment.

To my naïve eyes, it seems like the Roth IRA withdrawal option would enable us to retain our down payment while adding a small amount of tax-free gains to our account, but I'm likely missing something. My first question is whether seven years is enough of a time horizon to consider investing this money. If it is, do you feel like it would make more sense to use the taxable brokerage account or the Roth IRA withdrawal option? Thank you in advance for your time and all your efforts on behalf of white coat investors.”

All right. This is a complicated question, and it's even more complicated. John actually sent an email in follow-up saying,

“Just so that you know, I wanted to add that the down payment savings is money we're fortunate to have left after maxing out my 403(b), family HSA, Backdoor Roth IRA, a fully-funded emergency fund, and purchasing all the types of insurance you've outlined in your books and podcast episodes. As a result of that, we're willing to take some risk with this money, with the goal of hedging inflation. I just want to make sure you have this information as you consider the question.”

John is a pediatric intern, but clearly, there's some other money here somewhere. I assume this is being made by a spouse or something, because if you are saving all this money as a pediatric intern, I'm not sure what you're eating—if you're maxing out a 403(b) and an HSA and two Backdoor Roth IRAs and emergency funds and you already have all the insurance you need. But here's the general deal with retirement accounts. You can raid Roth IRA contributions. If it is just regular direct contributions to a Roth IRA. You can take those out at any time. You can also take out up to $10,000 of earnings tax-free, penalty-free to use on a house down payment. That's one of the acceptable uses of a Roth IRA that's not subject to a penalty.

However, it gets a little more complicated when you are doing Backdoor Roth IRAs, like you are doing because you're filing married, filing separately. So, you have to do it through the Backdoor. And so that brings in, as you mentioned earlier, the five-year rule. You have to have money in there for five years. But the truth is, I mean, come on here. You've got enough money here that you're maxing out a 403(b). So, in 2022, that's $20,500, a family HSA that's $7,300, two Backdoor Roths, that's another $12,000 and you already have an emergency fund. Why would you need to go through that Roth IRA for a down payment?

“I just don't like the sound of that.”

Right. You've got enough that you probably have savings on the side, because somebody's making money here more than a typical pediatric intern salary. You have seven years to get there. Plus, then there's the option of doctor mortgages.

“Yeah. You don't need a down payment necessarily to buy a house and it's not a good habit to start raiding your retirement accounts just because you need them to grow. You'll in general do a lot better if you just let them sit.”

Yeah. I like the idea of having a down payment, don't get me wrong. But if there's a better use for your money paying down a 6% student loan—not the case for you because you're going for public service loan forgiveness—or saving in a Roth IRA, I think that's a better use for your money than a down payment. So, in your situation, if there wasn't additional money above and beyond those retirement accounts, above and beyond that HSA, then I would just use a doctor's mortgage. But in your case, you're an intern, you're already maxing out 403(b) Roth IRAs. I mean, come on. You're doing awesome. The chances of you not having a down payment seven years from now seems really low to me. I think you'll do just fine. It sounds like you guys are doing fantastic. I wish I knew as much as you do about finances when I was an intern. I certainly did not.

“Follow up question. If he was to put it in a brokerage account, what would you invest it in?”

Oh, this is a good question. For seven years? I don't think I'd want to leave it sitting in a savings account.

“Agreed, it's too long.”

This is above and beyond your retirement accounts, and you're putting something extra in there for a down payment. But do I put it all in equities for the whole seven years? It really comes down to what happens at the end. How big of a deal is it for you to have all this money right at that specific date. If that's a big deal, then you don't want to take that much risk with it. If it's not a big deal, whether you had $50,000 or $100,000, or if that date that you buy is actually pretty flexible, then I think that allows you to take more risk. But for seven years, I guess I'd like to see him taking some risks.

“I would like to see that, too. I mean, that's too long to sit in a high yield savings account.”

Seven years in a high yield savings is too much. Now, do you put it in like a Vanguard Wellesley Fund? What's that—15% or 25% stocks? Or do you put it in a Wellington Fund? It's like 60% stocks. Do you leave it all in stocks for five years and then dial it back to 50% stocks-50% bonds? There's a lot of ways you could dress this up. But as you get closer to the date and it seems like you're going to need the money—an exact amount of money on an exact date—that's when you're transitioning into savings. I think you can take some risk with it and help hedge some inflation that way.

 

Emergency Funds 

“Hi, Dr. Dahle. This is Craig from Atlanta, and I was interested in getting your perspective about a different spot to house my emergency funds. Most savings accounts and short-term bonds list interest rates that are far outpaced by inflation charging a mint for the privilege of liquidity. Investing in Stablecoins on websites, such as BlockFight, provides interest rates that are 10 times higher than what you could traditionally obtain with monthly interest paid out in whatever currency you want.

For a little higher risk, you can buy a crypto coin commodity and use it to provide liquidity on some sites for a 5% expected interest rate, or you can stake Ethereum-based crypto coins on other sites for an expected 10% interest, acknowledging that you now own a commodity whose values could fall. Purchasing Stablecoins on the other hand for a 10% interest rate seems to be a sweet spot, as their value is tied to fiat currency removing the volatility concerns. I'd love to hear your perspective. Thanks for all you do.”

This is a great question. And the one I've gotten by email enough times that I've actually written a blog post about it that will run a few weeks after this podcast goes live. Let's talk a little bit about crypto savings accounts. I totally understand the attractiveness. You can get a crypto savings account that's paying anywhere from 3%-12% right now. And if I go to my Ally bank account, it's paying 0.5%. Of course, that's a heck of a lot more attractive. But there's a truism that Larry Swedroe said. He said basically when it comes to any sort of fixed-income investment, if one has a higher yield than another, it's because it's higher risk, whether you can see that risk or not.

In the case of a crypto savings account, you are taking additional risk in order to make 3%, 6%, 9%, up to 12%. Perhaps the biggest risk is these are not savings accounts, as you think of savings accounts. It's really the wrong word to be using to describe it. For instance, you go down to the bank and you open up a savings account and you put your $40,000 in there. You get FDIC insurance. If you go to a credit union, you get NCUA insurance. There's somebody backing that. That is not the case in a crypto savings account. That's one risk right there. You would expect to be paid a higher yield in addition to that. And there are a few other things you should know about these crypto savings accounts. In general, the interest is simple interest rather than the compound interest you get in a typical bank. The interest is also paid in whatever type of cryptocurrency you're using, whether it's a Stablecoin or a more additional crypto asset of some kind.

There's an additional risk if you're not using a Stablecoin. For example, if it is a Bitcoin savings account, you've got the additional risk, this exchange rate risk between a dollar and a Bitcoin, which when the price of Bitcoin goes up, that doesn't seem like such a big thing. But in the last few weeks, and remember we're recording this on January 29, Bitcoin's down like 50%. That's a serious risk. You put your money into a Bitcoin savings account, hoping to make 10%, and then you lose 50% of the principle. That's a pretty significant risk. That would argue that if you're going to do this, you do it using a Stablecoin.

What are some other risks? Well, there are often withdrawal restrictions. You can't just pull your money out at any given time. There are often restrictions and you have to look at each of these as you go along. There is a risk, even with the Stablecoins, of breaking that peg. A Stablecoin is pegged to the dollar, but there's a risk that it won't stay pegged to the dollar. If you look back at history, you see that there are a lot of currencies in the world that have been pegged to the dollar. And then all of a sudden, they come unpegged and you got all kinds of crazy inflation going rampant, and all of a sudden, that currency is not worth very much. That's an additional risk of using a Stablecoin. You've noticed a lot of these custodians, crypto exchanges, or whatever have had hacks. And so, that's a risk. Remember, these guys often buy some sort of insurance, but read the fine print carefully. It is not the same as FDIC insurance. You've got to keep that in mind.

There is smart contract risk that you're taking on when you're using these Stablecoin investment accounts. There is the illiquidity risk. Remember in times of crisis, things become very illiquid and something like this is going to be far less liquid than the money in your savings account or something in treasury bonds. That sort of a thing. That's why it's paying more. And then, of course, there's all kinds of regulatory risk. State and federal governments are trying to figure out how to deal with crypto assets. That's all still relatively new. The institutions are new, the ecosystem is new. In fact, it was interesting. I went through and looked at each of these places that are offering crypto savings accounts. If you look at them, most of them are new since 2017, 2019. You're putting your money with an institution that's only 2 years old. You've got to keep that in mind, that's a risk as well.

Then of course, why are these guys offering you such a high-interest rate? Well, it's because they're loaning money out and making good money on it. They're doing fractional banking. All the money's not actually in the account because it's fractional banking, and these people that they are loaning to, they can default on it as well. And if there's enough of those defaults, well, you're not going to get your money back either. So, there's a lot more risk you're taking on.

The other thing that I thought was really interesting about a lot of these accounts is you'll see that they pay a really pretty good interest rate on the first little bit you put in there. But then after a while, they lower the interest rates. So, you can't put a whole bunch of money in there and make that 10%. You can only put a little bit in there. For example, looking at BlockFi. On the first 10th of a Bitcoin, which right now as we're talking about this, Bitcoin's about $37,000. For the first $3,700, they'll pay you 4.5%. But after that, they pay 1% and then after a third of a Bitcoin. So, after $12,000 or so, they're only paying 0.1%. They just want your money in there, and they want you to start trading and generating other fees. They don't actually want a whole bunch of your money. They just want you to start an account there. But even on the USDT, they pay a lower amount after $40,000, even on Stablecoin. I found that really interesting. You look at most savings accounts, they pay you more the more money you put in there. That's not the case with most of these crypto savings accounts.

So, can you use this? Yes. You can use this. I would look at it as an investment. Of all the things you can do with crypto assets, I think a Stablecoin savings account may be the least stupid. Eight percent, 10% on some percentage of your money, that's pretty good. You're taking a risk for it, but are you being compensated adequately? Probably. But one thing this is not for is your emergency fund. This is not emergency fund money. If this thing is taking on enough risk that they can pay you 8% or 9% or 12% on it, that is not an emergency fund, sort of liquidity and safety that you need. Remember with an emergency fund, it's about return of your capital, not the return on your capital. This is the money you need to eat if something happens to your job. This is the money you need to buy plane tickets across the country for grandma's funeral. This is not money you should be taking significant risk with.

If you want to put some small portion of your money into a Stablecoin savings account, I don't think that's crazy. If you've already decided you're going to invest in Bitcoin, you might as well have it in something that's paying you some interest. I don't think that's crazy. But limit the amount of your investment in this, because there are times when it drops dramatically. Like the last month, you lost 50% of your Bitcoin if you've been investing in the last month, and there is no guarantee that it doesn't go a whole lot farther and stay there for a long time. That's my thoughts on Stablecoin savings accounts. Great question. Obviously very tempting anytime you see those sorts of yields. But that's where we're at.

“That's such good information. I'm so glad to hear. I hate to see people taking risks or trying to optimize their emergency fund, because honestly, it's really about peace of mind and that money being there when you need it. And things happen, life happens and you're going to need it at some point.”

I absolutely agree. All right, let's go on to our next question.

More information here:

What You Need to Know About Cryptocurrencies Like Bitcoin

 

What to Do When You Mess Up Your Backdoor Roth IRA

“White Coat Investor, good afternoon, good sir. My name is Daniel. I just finished watching, ‘I screwed up my Backdoor Roth IRA. How do I fix it?,' as well as your ‘Backdoor Roth IRA (How to fill out IRS form 8606).' Very informative, outstanding information. My dilemma, I have been consistently contributing to a traditional IRA, a traditional IRA with Schwab. I currently make well over $170,000 a year, shame on me for not knowing about a Backdoor Roth IRA. However, with that, I am looking to convert that money that I've already invested around $1,000—so not much—to the Roth IRA.

I also heard your wisdom and advice on making sure I save up the additional $6,000 first prior to investing or depositing the money into the traditional IRAs before making the conversion. But I wanted to get your thoughts on what steps should I take to minimize the tax implications from converting the money that I've already invested to a Roth IRA. Again, I have about $1,000 already actively invested in stocks and mutual funds in a traditional IRA. I would love to convert that to a Roth IRA. I do not mind paying the taxes associated with that, but I want to ensure there are no mitigating or lingering circumstances or consequences, if you will, other than the stupid tax that I'll have to pay from converting that money.”

All right, Daniel, good on you for trying something new, for trying to do a Backdoor Roth IRA. A lot of people are just so paranoid about making a mistake that they don't do anything. And that's worse than screwing things up sometimes. Sometimes it's just important to get moving. I applaud your efforts to get going on a Backdoor Roth IRA. But it sounds like maybe you didn't understand the whole process from the beginning. So, let's go over the whole process. Disha, do you want to talk about a Backdoor Roth and how to do it?

“The whole point is the IRS won't actually let us do it directly, but that's OK. All you do is, you put it in a traditional IRA and then you roll it and convert it into a Roth IRA. The yearly maximum is $6,000 per person as long as you have some earned income. You save up that $6,000. You put it in all at once so it doesn't grow in the traditional IRA. And then you convert it the next day into a Roth IRA. That's it. And then you choose your investments there and then it grows tax-free.”

Yeah, but the key is while sitting in the traditional IRA, you don't invest it because what happens when you invest it is the value of the money changes. It either goes up—in which case, when you convert it to a Roth IRA, you owe taxes on the gains—or it goes down, which when you convert it to a Roth IRA does not cause you to have taxes. It causes you to have to carry forward a loss on your form 8606 every year, which is a pain. I think it might be worse than paying the taxes. First thing I'd do is check your $1,000. See if you actually have a loss. If you have a loss, maybe let it sit for a little bit until you have a slight gain and then convert it to a Roth IRA. Maybe put your other $5,000 in at that point and convert the whole thing to a Roth IRA.

You've definitely made the process more complex than it needs to be, but this is still doable. You haven't done anything terrible that's not going to be fixable. You can fix this. But I would actually let it earn a little bit more, because as we record this on January 29, you're probably down in that account. Most assets have gone down in the last month. And so, chances are, if you invested that into a stock index fund or something, you're down 10%. I might let that sit in that traditional IRA for a little bit, get closer, maybe even a little bit over the original $1,000 before I did that conversion. Hopefully, we're not down for the next three years—that this is the start of some huge bear market. But paperwork-wise, this will be more straightforward if you have a slight gain than if you have a slight loss in your account. And then of course I'd put the other $5,000 in there and just have it be clean. But in general, put it in the traditional IRA, leave it in the money market fund or the settlement fund or the cash fund or whatever kind it is, then convert it to a Roth IRA, then invest it, and you'll save yourself a lot of hassle.

More information here:

How to Do a Backdoor Roth IRA [Ultimate Guide & Tutorial]

Should You Still Do Your Backdoor Roth Conversion for 2022? The Experts Weigh In

 

Laser Funds

“Jim, there's a guy on the radio here that keeps touting what's he calls a laser fund. It sounds to me an awful lot like an annuity, although he never uses that word. That makes me a bit suspicious. What do you know about that? Thanks.”

There's a guy who does something similar here in the Salt Lake area on the radio that has a Saturday morning show. He goes for two hours every Saturday and never actually names the product that he's selling. It's amazing. You know why they don't name it? Because if they just said, this is Whole Life Insurance, or they said, this is Universal Life Insurance, or they said, this is an annuity, you wouldn't be interested. But if they called it laser fund, then all of a sudden it sounds neat and new and exciting. This is marketing. This is marketing for insurance-based investing products.

Now this particular one, I haven't gone through the details of understanding how the laser fund works. But what these guys typically do is they recommend you start pulling money out of other places. It might be your home equity. It might be your retirement accounts.

They scare you that you're going to have these huge required minimum distributions, and you have to pay all this tax. You should get that money out right now and put it into this cool universal life insurance product. It's often an index universal life product, and they tell you you'll get the returns of stocks with none of the downside and all of these half-truths add up to a terrible idea. I would steer clear, number one, of something you have to spend two hours on the radio trying to sell to somebody. Number two is something you can't call by its actual name, or you wouldn't be able to sell it.

But you're right, the hairs on the back of your neck are standing up. There's a reason because somebody's selling you something you probably don't want. Steer clear of these sorts of things. Now, that doesn't mean you can never use an insurance product for something that's designed for that it makes sense. It doesn't mean you can never buy an annuity. An annuity often makes sense for some people in some situations, but it's usually not the one they're selling on Saturday morning infomercials.

“My rule with most financial products is if someone can't explain it to me in five minutes in clean and simple terms and tell me exactly what it is, I'm being sold something that's going to make them a profit. And I walk away from it.”

Yeah, the general rule is don't mix insurance and investing. If you stick with that, the chances of you regretting it are very, very low. If you don't stick with that, there's a high chance of regret. You look at the statistics on whole life insurance, for instance. When I poll doctors, doctors who have actually purchased a whole life insurance policy, 75% of them regret it. If you look at the data from the society of actuaries on the whole life insurance, 80% of policies are surrendered within 30 years. This is a policy that's designed to be held until death, and four out of five people that bought it don't hold it until death. It really tells you how the people actually buying these things feel about them. But the bottom line is until you completely understand what's going on, you shouldn't be interested. But as a general rule, once you understand it, you're not going to be interested.

 

Where to Save If Your Employer Doesn't Offer a Retirement Plan

“Hi, Dr. Dahle. My name is Annie, and I'm in my first year out of residency. My employer does not offer a retirement plan, like a 401(k) or 403(b), but I am a W-2 employee. Therefore, I'm not considered an independent contractor, and as my understanding, I cannot open an individual 401(k). I was considering opening a traditional IRA. I believe the income limit is $6,000 and converting that to a Roth IRA through the Backdoor method, since this may be the last year to do so. But since my employer does not offer a retirement plan that I'm contributing to, I believe I will receive the tax deduction from the traditional IRA. So, I'm not sure if it makes sense for me to convert it to a Roth IRA, and then pay the taxes on that. Or if I should just not do it for this year and any subsequent years, if the new tax bill goes through. I would also like your advice on what options there are for retirement plans if your employer does not offer one, but you are a W2 employee and not an independent contractor. Thank you for all that you do. I'm very new to the WCI community and I'm so grateful for your guidance.”

All right. Disha, do you want to take this one?

“As I understand it, the question is where do you invest for your retirement when you don't have an employer-sponsored 401(k) available? Which sounds like a pretty terrible situation, but OK, you don't have that many tax advantaged accounts. However, you do have the IRA, the traditional IRA available. So yes, you can contribute $6,000 there and that would be tax-deductible because you don't have any other space. You could convert it to a Roth. And then it would be Roth money.

If you, down the road, get an employer that has a 401(k) available or get a contracting job where you can start a solo 401(k), then you could always roll that traditional IRA in there. But what you need to know is that traditional IRA money is going to be somewhat of a problem if your situation changes and then you want to do a Backdoor Roth, because then you would be subject to the pro rata rule. You'd want to clear out that traditional IRA, if your situation changes, and I hope it does.”

Yeah. I hope it does, too. First of all, I'm not sure I totally believe you. Maybe that you just can't use the 401(k) for a year. So, look into that. It might be that you'll be able to use it a year from now, in which case I wouldn't get into a traditional IRA. I would make sure you did the conversion and got into a Roth IRA. It may be that you're part-time. A lot of part-time people are excluded from the employer’s retirement plan. If you're going to go full-time in a few years, you may be really glad you don't have that traditional IRA so you can start doing Backdoor Roth IRAs. But the bottom line is if you don't have anything else, you can always invest more in taxable.

You might have an HSA available to you. Look into that. If your only healthcare plan is a high deductible health plan, you could use an HSA. Also, if your spouse is working, look at your spouse's retirement accounts. Maybe all your savings gets done on that side, and you live off your earnings. Lots of options there, but it's never a bad thing to just invest in a taxable. For a lot of docs, their taxable is their biggest account. You look at dentists and people who own small practices, a lot of times they look at the cost of putting a 401(k) in place and all the matching dollars they'd have to do for their employees in order for them to max it out. They just choose not to do it. They just invest in taxable. It's OK to do that. You can invest for retirement in a taxable account. You just don't get quite as many tax advantages of doing so, but it doesn't mean you can't save for retirement. You can still save for retirement.

You can start a side gig and then open a solo 401(k). You can also lobby HR, your boss, your partners, whoever. Because you're not the only one getting hosed here. Everybody working at this company is getting hosed by the fact that there is not a retirement account there. I might start making a little bit of noise in that respect and saying, ‘Why don't we have a retirement account? Everybody else has a retirement account.' And seeing if you can get something put in place. But I wouldn't just accept that this is not an option. I would look into it and make sure absolutely there's no way you have access. Then lobby for changes. A company can put in a 401(k) at any time. The White Coat Investor put one in last year. It's not that hard to start. It can be done when there is a will to do it.

More information here:

Retirement Savings Without a Retirement Account 

 

Old 401(k) to New 401(k) with a Different Custodian 

“Hi, doctor. I love the show. And thanks for all that you do for the community. This is Matt from Pennsylvania. I just started a new job and I'm trying to figure out what to do with my old 401(k) that contains traditional and Roth contributions. Both old and new job use Fidelity for the 401(k) while all of my other investment assets are at Vanguard, managed under their personal advisor service. Do I roll my old 401(k) to the new 401(k), sticking with Fidelity as a custodian? The new 401(k) has reasonable investment options and fees. Or do I roll to Vanguard? Get the assets managed under personal advisor service and at my preferred brokerage, but lose the ability to do the Backdoor Roth because of the pro rata rule. I understand this decision gets easier if Congress ends the Backdoor Roth, but as the law stands today, what are your thoughts on what to do? Thanks so much.”

All right, Matt, you got two questions here. We're going to answer the question you asked, and then we're going to answer the question you should have asked. Disha, do you want to take the question he asked?

“Your question is, ‘Should I roll my old 401(k) into my new 401(k)? Or should I roll it into my IRA? Which would give me the pro rata rule, and I wouldn't be able to do a Backdoor Roth.' I would say definitely, roll it into your new 401(k). Why would you eliminate the option of doing a Backdoor Roth when you didn't have to?”

Yeah, for sure. New 401(k), it's good, it's got good investment options. You know how to use Fidelity. Fidelity's a good place. It might not be Vanguard, but I got half my accounts at Fidelity and half at Vanguard. I like Fidelity just fine. It works great. There are great low-cost options there. In some ways, the service is sometimes better at Fidelity than it is a Vanguard. That's not a bad place to have your money. So, no brainer for now. Backdoor Roth is still legal. I would put the money into your Fidelity 401(k).

Now the underlying question, which is more interesting I think, is why is half your money managed by a financial advisor? Basically, the money you have at Vanguard, you're paying 0.3%, which is admittedly a low AUM fee. But it is a fee to get advice and asset management services. Here's the thing, though. If half your money you're not getting advice on and half your money you are getting advice on, it makes it really hard to manage your portfolio all together. If you're competent to manage your own money, half of your own money, you're competent to manage all of your money. And if you're not competent to manage half of your money, then you need advice and management services on all of your money.

It doesn't make a lot of sense to me for you to have an advisor, even a low-cost advisor, for half your money. Unless they're providing significant assistance on the other portion of your money that's in your 401(k), I think you ought to consider either going 100% DIY or going and getting an advisor that can advise you and manage all of your assets together. So, keep that in mind.

 

What to Do with All Your Old Retirement Accounts 

“Hi, Dr. Dahle, I'm a primary care internist in New York and living with my fiancé. We just got engaged. We’ve been listening to your podcast for years. It's really great. We really appreciate all of your help. We just reached our own milestone of about half a million after two years of working. She's a big law attorney. We plan on getting married this year. She has a lot of old accounts I was looking for some advice on. She has a 401(k) with Merrill Lynch, both a Roth and non-Roth component, a second 401(k) with her new job through Fidelity, which is all non-Roth. She has a SIMPLE IRA with Ameritrade of about $2,000, a SIMPLE IRA with Vanguard with $12,000. And she has about $14,000 in Backdoor Roth as well as two HSAs.

We have a few questions. Should we roll over the Ameritrade SIMPLE IRA, or leave it in anticipation of trying to do another Backdoor Roth in 2022 this year? Should we leave the old HSA as it is, or try to combine them with the new one? And should we roll over the old 401(k) into an IRA? And what do we do with the Roth component? We are looking for the most tax-efficient way to handle these accounts. We do anticipate some higher earnings in the coming years. I really appreciate any advice on this and thanks so much.”

All right, this is a mess. Let's get this cleaned up. I don't think it's going to be too bad to clean it up, but it is a mess. First of all, usual advice applies. It doesn't sound like it's necessarily an issue in this case, but congratulations on your engagement. That's wonderful. I would not combine finances yet. I would not combine finances until you actually get married. That's not the case here. Because we're just talking about cleaning up her accounts. But in general, that's my advice there.

But this is all not too bad. This is relatively easy to clean up if what you're telling me is true. I don't think what you're telling me is true, though. I think you have messed up your Backdoor Roth IRAs, and the reason why is you've got these two SIMPLE IRAs hanging out there—a $2,000 one and a $12,000 one. SIMPLE IRAs count on line 6 of form 8606. They cause a proration, a pro rata thing that you're trying to avoid when you do a Backdoor Roth IRA. If you have a SIMPLE IRA hanging out there, chances are these Backdoor Roth IRAs you did the last couple of years, you didn't report correctly. You probably actually should be prorated on those. If you're right, what you say is that you actually did the Backdoor Roth IRAs right. And you just now came up with two SIMPLE IRAs, then you're fine. You can just roll those into a 401(k), no big deal. That 401(k) at Fidelity will probably take the SIMPLE IRA rollovers.

But I don't think that's what happened. I think you did Backdoor Roth IRAs and didn't realize that a SIMPLE IRA would cause proration. So, you might have to go back for the last couple of years and resubmit your 8606s, or if you didn't do an 8606 at all, maybe do it for the first time. Maybe even then send in a 1040X with that. But the way to clean that all up is to just convert the SIMPLE IRAs. It's only $14,000. So you will owe what, $4,000 or $5,000 in tax on it? Just put it all into the Roth IRA. Pay the conversion tax, and you're good to go there. Then you've got $28,000 in your Roth IRA.

Now, that old 401(k) has a Roth portion, and it has a traditional portion. So, I’d just roll the Roth portion into that same Roth IRA. No big deal, no taxes due, nothing. And I'd take that traditional IRA, and unless you want to do an extra Roth conversion, you don't have to do it. I would roll that into the new Fidelity 401(k). No tax will be due on that. And then you're down to one 401(k). You're down to your Roth IRA and you can do Backdoor Roth IRAs going forward, and then you've got your one HSA. So, super simple.

“She has two HSAs.”

Oh, she has two HSAs? I didn't realize she had two HSAs. Yeah, you can combine HSAs. That's no problem either. I don't think once you get married, if you each have an HSA that you can combine them. I think they have to stay separate. But you could always spend one, or you could just manage two either way. It'll get even more complicated when you get married, but for the most part, this is pretty easy to clean up. I think the main thing is you just have to look back at the last couple of Backdoor Roth IRA years and see if you actually did screw those up. Because I think there's a really good chance you did.

“I've done things like rollovers and stuff, and it's a pain in the butt. It's a lot of phone calls and a lot of paperwork and she's going to have to do it herself, but it'll get done eventually. It's going to be a few months.”

A rollover seems really hard the first time you do it. They send you this form; it's six pages. You got to sign it. Maybe you got to go get it notarized. Or heaven forbid, a medallion signature guarantee or who knows. There are some painful parts about it and you send it in and they screw it up and you have to call them and whatever. But after you've done this a few times, a rollover is no big deal. You can move money back and forth around these retirement accounts all the time. It's not that bad. Sometimes you can even do it online. But most of the time it involves printing something out, filling it out, mailing it in, waiting two weeks, and then they mess around with it for another week. Then they screw it up for another week. It can be a pain to do rollovers, but once you've done one or two and you realize what's supposed to be happening, it's not too bad.

 

At some point in our financial lives, it will be time to buy a home.

A physician mortgage can be a good vehicle for a young doctor who’s just out of school and has a more effective place to use their money than on a big down payment. These loans allow doctors to secure a mortgage with fewer restrictions and a lower down payment than a conventional mortgage. But if you’re further advanced in your career or deeper into your journey to financial freedom, buying a home with a conventional mortgage and then, later on, potentially refinancing that loan to a better rate with a shorter time frame could be a great move.

Wherever you are in your financial journey, make sure you use the mortgage that will be most financially beneficial for you. Hop over to our recommended tab to learn more about all of your mortgage and refinancing options at whitecoatinvestor.com/mortgage

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

 

Student Webinar — Planning for Success — What Medical and Dental Students Need to Know About Money 

White Coat Investor and studentloanadvice.com is hosting a webinar for medical and dental students. The webinar is on February 23 at 6pm Mountain Time. It will stream on YouTube, the WCI Facebook group, the WCI Facebook page, Twitter, and on LinkedIn. We will be talking about:

  • Why your patients need you to be financially literate
  • The secret to being a financially successful doctor
  • How to not worry about student loans
  • How to save money during residency interviews
  • Why buying a house during residency may not be a great idea

For more information and to register, go to whitecoatinvestor.com/student-webinar.

 

Milestones to Millionaire Podcast

#52 — Multimillionaires 5 Years Post Residency

Put your nose to the grindstone at the beginning and reap the benefits. This dual-career couple had the income to make a difference quickly. To keep their relationship solid while they were busy with their careers, they hired help. Make sure you are taking care of things at home to keep your marriage and family strong. That is your best investment.


Sponsor: WCI Financial Advisor Recommended List

 

Full Transcript

Transcription – WCI – 249
Intro:
This is the White Coat Investor Podcast, where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dahle.

Dr. Jim Dahle:
This is White Coat Investor Podcast number 249 – Q&A: What to do with old retirement accounts?

Dr. Jim Dahle:

At some point in our financial lives, it will be time to buy a home. A physician mortgage can be a good vehicle for a young doctor who’s just out of school and has a more effective place to use their money than on a big down payment. These loans allow doctors to secure a mortgage with fewer restrictions and a lower down payment than a conventional mortgage. But if you’re further advanced in your career or deeper into your journey to financial freedom, buying a home with a conventional mortgage and then, later on, potentially refinancing that loan to a better rate with a shorter time frame could be a great move. Wherever you are in your financial journey, make sure you use the mortgage that will be most financially beneficial for you. Hop over to our recommended tab to learn more about all of your mortgage and refinancing options at whitecoatinvestor.com/mortgage.  You can do this and The White Coat Investor can help.

Dr. Jim Dahle:
All right, it is February 10th. Now, we're recording this on January 29th, but when we're dropping it is February 10th and we're all at WCICON22. If you're not there, it's not too late. You can still sign up, because it is a hybrid conference. You can attend both in-person, too late by the time you're hearing this, and virtually, not too late by the time you're hearing this. You can actually still sign up and come, whitecoatinvestor.com/wcicon22.

Dr. Jim Dahle:
The 10th is basically the first day. All we did last night was have a reception. And so, you still got three days of conference ahead of you if you're listening to this as soon as it drops.

Dr. Jim Dahle:
But you can sign up on the last day if you want. You're still going to get all the content, whether you get it during the conference or what we put together after the conference for everybody who attends you're at all the content. So, feel free to still sign up. We're having a good time there right now, I promise. And you can still come if you like.

Dr. Jim Dahle:
All right, we have got a very special person here with us today. We have Dr. Disha Spath. She is an internist, works both clinic and hospitalist medicine from the East Coast.

Dr. Jim Dahle:
And she is not just a guest today, she is what we're calling a WCI ambassador. What does that mean? That means she's going to be helping to host the podcast, providing written content on the blog, helping with speaking engagements, as well as what you'll notice this week, especially, she's working very hard at the conference as the host. And so, welcome to the podcast, Disha. It's great to have you here.

Dr. Disha Spath:
Thanks for having me. I'm honored.

Dr. Jim Dahle:
Tell us a little bit about yourself, where you're at in life and your career so they can get to know you a little bit?

Dr. Disha Spath:
I am a practicing physician in New York, as you said, and I'm about 10 years out of medical school. So, I would call myself mid-career.

Dr. Jim Dahle:
We've been having this debate this morning, whether she's mid-career, early. But hey, 10 years out, okay, you can argue that's mid-career. I'm feeling late-career now with her calling herself mid-career.

Dr. Disha Spath:
Late early-career physician.

Dr. Jim Dahle:
Yeah, that's exactly it. I was talking to somebody I was skiing with yesterday who retired in his 40s. He was an executive and he's been retired about a year and we were talking about it and the pluses and minuses. It's really interesting to talk to someone who's retired so early and all the thought processes that you go through.

Dr. Jim Dahle:
But if you retire in your 40s or 50s, by the time you get to my age, as my family reminds me, I now round to 50, it starts feeling late career when you start seeing all these people retiring in their 40s. So maybe I am late career. I don't know.

Dr. Disha Spath:
Well, it's a pleasure to be here. The White Coat Investor literally changed my life when I first came out of med school and residency. In my very early career, I was totally lost financially. And I had been looking for the answers all throughout my college and medical school training. And I just somehow never got to the right thing to read.

Dr. Disha Spath:
And then when I finally read Jim's book, it changed my life and my perspective. I was like, this is what I've been looking for. This completely puts that for me in my situation, which was so hard to find the answers to our situation. And it just laid it out for me, showed me exactly what I was doing wrong, and then showed me the way forward. And since then, it's completely turned mine and my family's financial life around and has made things so much better for us. So, I'm so excited to be here at the White Coat Investor.

Dr. Jim Dahle:
And we're excited to have her here. She makes it sound from her story like she just found it, but she's actually been working in this space for a long time. Blogging, speaking, helping doctors become more financially literate. And so, we're excited to have another voice on the podcast that I hope that those who have trouble relating to me can relate to her.

Dr. Jim Dahle:
We may both be mid-career physicians, but we're on either side of that. Our skin colors are different. Our genders are obviously different. Our specialties are different. We live on opposite ends of the country. And the goal is to try to provide a diverse selection of voices for you so that you can understand that all doctors can be financially successful.

Dr. Jim Dahle:
A few other things I want you to know about, the first one is that we have a student webinar coming up. Now, what is a student webinar? Well, it turns out that I get invited to come to speak to student groups all the time. And I speak in two places for free. One is down the road in one direction at my alma mater. The other one is down the road in the other direction, which is where I went to medical school. Other than that, I don't speak for free. And the problem with medical student groups is they don't have any money. Most of them couldn't even afford a plane ticket for me to come out, much less to actually pay me to come speak.

Dr. Jim Dahle:
And so, this is a way for us to give back and actually provide a webinar directly for medical students, medical and dental students. We are calling it “Planning for Success”, and it's going to be awesome. I'm going to be doing it with Andrew, from studentloanadvice.com, and we're going to be presenting all those subjects that medical students think about.

Dr. Jim Dahle:
This is the sort of presentation I give when I go talk to medical students. Yes, it's going to be heavy on student loans because that's what you guys care about, but we're also going to be talking about how to be successful, as you move into residency, insurance, budgeting as a medical student, just making sure you're starting out on the right foot.

Dr. Jim Dahle:
And to give you some perspectives, as you make these critical decisions that are going to affect the rest of your career, like specialty choice, where you go for residency, those sorts of things.

Dr. Jim Dahle:
We encourage you to tune in for that. It's going to be on February 23rd at 6:00 PM Mountain. That's 5:00 on the West Coast, 8:00 on the East Coast, and it'll be recorded. We'll try to get you access to that afterward, but if you're coming live, you can actually ask questions. We're going to present for 45 minutes. We're going to answer questions for about 15 minutes and it's going to be on every platform that our new software lets us put it on.

Dr. Jim Dahle:
It’s going to be on YouTube. And that's actually where I recommend you tune in. Because I think the experience is the best on YouTube, but it's also going to be in the WCI Facebook group, on the WCI Facebook page, on Twitter, and on LinkedIn. So, we're hoping to get a lot of participation there and really see if we can help a lot of medical students get started off on the right foot.

Dr. Jim Dahle:
Sign up at whitecoatinvestor.com/student-webinar, and we'll send you some email reminders so you don't forget, and we'll send you all the links. All you got to do is remember this one whitecoatinvestor.com/student-webinar.

Dr. Jim Dahle:
One other thing I want you guys to know about is that we have a partnership with Dr. Green, who does an expert witness course. If you are interested in this side gig and being an expert witness, this course takes you soup to nuts on how to do that. Whether you want to be a witness for the defense, be a witness for the prosecution. Most people do both quite honestly, so they can just give their straight opinion. You can sign up for that at whitecoatinvestor.com/expertwitness.

Dr. Jim Dahle:
Enrolment for this course only goes a few more days though. It closes romantically on Valentine’s Day on February 14th. So, if you want to sign up, you got to do it by then. And then the course goes live at 7:00 AM, on February 14th. The course is $3,000. But that is a small amount compared to what you can make, being an expert witness over the years.

Dr. Jim Dahle:
We are also going to sweeten the pot a little bit. We are going to throw in an online course with a $779 value. This is our CFE 2021 course. Now, our CFE 2022 course isn't out yet. And so, this is our most recent one as of right now, and we'll throw that in absolutely for free. If you buy the course through our link here, you'll be able to get it. What's the link? whitecoatinvestor.com/expertwitness. And you'll get not only an expert witness course, but we'll throw in CFE 2021 for free.

Dr. Disha Spath:
Sounds like a great Valentine's Day present.

Dr. Jim Dahle:
Great Valentine's Day present. Yes. Okay. Let's get into your questions here. We've got a great one to start with talking about primary residences when figuring your asset allocation.

Speaker:
Hi, Jim, before I get to my question, I wanted to say that you have been tremendously helpful in improving my financial literacy and making me feel empowered to steer my financial future. Thank you for taking my question and for all that you do.

Speaker:
I'm an ophthalmologist in California, and I'm calling with a question on how to account for a primary residence when considering asset allocations. I own my home outright and thankfully do not have a mortgage, but real estate is expensive here. So, its value accounts for about 50% of my total portfolio.

Speaker:
I realize that I'm already outside of standard guidelines that suggest I should not have more than 30% of my net worth in my primary residence, but because I'm just beginning my career as an attending, I do expect this to balance out in the coming years.

Speaker:
My current investment plan says to keep 20% of my assets in real estate. If I were to include my home in these calculations, then I would be dramatically overinvested in real estate and shouldn't be making any additional investments in that asset category for some time.

Speaker:
How do you account for the value of your primary residence in your portfolio? Should I avoid investing in REITs, syndications, or other passive real estate until my home value is less than 20% of my total net worth? Even if that means waiting several years. Thank you again.

Dr. Jim Dahle:
Disha, do you want to take that one?

Dr. Disha Spath:
Yeah, that's a great question. How to account for primary residence and your asset allocation is something that a lot of people struggle with. I'll tell you what I do. When I look at my primary residence, I do account for the equity in my home, in my full net worth calculation, but I don't look at it when I am figuring out my asset allocation.

Dr. Disha Spath:
I look at my house as an expense that happens to appreciate. I don't look at it as an investment, as a lot of people do. When I'm looking at investing in real estate, I'm thinking about buying cash-flowing rental property, that's also going to be giving me income or REITs, or investing in the stock market.

Dr. Jim Dahle:
Yeah, I think that's exactly right. There's a lot of stuff that I own that is not in my asset allocation. In fact, the elephant in our financial room is the White Coat Investor. This small business is totally risky. It's one website basically, and it's a huge part of our net worth. If I tried to account for that in my asset allocation, there would be no way to have an asset allocation. And that's the same way your house is.

Dr. Jim Dahle:
I feel for you being in California because housing is expensive there. It's not unusual at all to see not very impressive houses that have seven-figure values. In fact, it's hard to get anything under seven figures in some areas of California. And so, it is a huge part of your financial life. It should be counted in your net worth. It should not be counted in your asset allocation. Leave it out.

Dr. Jim Dahle:
I leave my 529s out of my asset allocation. I leave all my kids' savings accounts out of my asset allocation, our day-to-day cash accounts, checking, savings, etc. That's not in our asset allocation. Our house, the boat, it's not in our asset allocation, leave all that stuff out.

Dr. Jim Dahle:
Asset allocation for retirement is the money that's set aside for retirement and that's it. So, leave the home out. Don't account for it. If your plan calls for 20% real estate, you need 20% of real estate, not including your home. That's how I would look at it, and I think that's how the vast majority of people would consider it. Otherwise, it's just a little bit too funny.

Dr. Jim Dahle:
All right. Let's talk about purchasing a home at or near retirement. We got another from Casey on the SpeakPipe. Let's take a listen.

Casey:
Hi Jim. This is Casey, the Air Force periodontist. My question relates to purchasing a home at or near retirement, particularly if someone has no prior equity, presumably because they've always rented homes in the past.

Casey:
If a person retires and then moves to their desired post-retirement location and wants to purchase a home for say $400,000. I believe I've learned from you and others that it would almost always be mathematically smarter to purchase the home outright. Let's assume by selling $400,000 in bonds, rather than having both a mortgage and maintaining the bond allocation. Because after all a mortgage is a negative bond and with a higher interest rate.

Casey:
But it seems to me, this would immediately push the person's portfolio into a more risky asset allocation with a much higher stock allocation and a much lower, or perhaps even fully eliminated bond allocation.

Casey:
If an unfortunate sequence of returns then occurs when this person is just beginning their retirement, they'd have to live off their stocks with few or no remaining bonds to sell instead. Although I understand the math regarding not having both bonds and a mortgage, I'm not sure how the “better solution” i.e., using bonds to purchase a home outright actually helps prevent sequence of returns risk.

Casey:
And on a related note, if someone were to do what I'm describing, buying a home outright by using their bonds to pay for the home, should the person then re-establish their asset allocation by rebalancing back to the original stock-bond allocation that they had prior to the purchase of the home. I hope I asked that right, and I hope it makes sense. Thanks so much for the help, Jim.

Dr. Jim Dahle:
All right, Disha. What do you say to Casey about this? This is really good actually that we had the prior question just before this one, because it set us up perfectly for it.

Dr. Disha Spath:
Yeah. Yeah. I think I would go back to the same thing. You're overcomplicating it. Leave your personal home out of your asset allocation calculations. That would be my take.

Dr. Jim Dahle:
Yeah. Exactly. You got the money in there. It's in your portfolio now, and you're deciding I'm going to spend some of this money buying a house. At that point, it comes out of your asset allocation and you're no longer trying to figure it into your asset allocation.

Dr. Jim Dahle:
And so, if you go to buy a house let's say you got a $2 million portfolio, you're going to pull $400,000 out to buy a house. You now have a $1.6 million portfolio. Now, a house in a lot of ways is a consumption item. I mean, think of all the expenses, property taxes, insurance, and that's assuming you have it paid off. You got renovations, you got maintenance, you got the lawn care and the snow removal like they're doing at your house right now, as you're getting hammered. No one will remember this by the time this podcast runs, but they're dumping like two feet of snow on your house right now, back on the East Coast.

Dr. Jim Dahle:
But the truth is a home is in some ways also an investment because you're getting dividends from it. What are the dividends? Saved rent. You're no longer paying rent. You're getting some sort of cash out of this in that you're not paying rent, but aside from a house is a consumption item. Don't get lost in the weeds of whether it's a bond or stock. It's neither. Just take it out of the portfolio.

Dr. Jim Dahle:
Now, there is a concept we've talked about when it comes to fixed income. And that is the idea that any sort of debt is a negative bond, and mathematically that's the way it works, right? If you pay off a 6% debt, you get a 6% guaranteed return. And if your bonds in your portfolio are paying 2%, well, maybe it makes more sense to put that money toward a 6% debt than buy more bonds paying 2%.

Dr. Jim Dahle:
But that's a concept. It's not something I'd actually try to work into my asset allocation. If I wanted to go down that pathway and be 100% stocks for now and have all the money I would put in bonds, put that toward my debt until I had my debt paid off. And then maybe change your asset allocation to be 70% stocks and 30% bonds or something like that. I don't think that would be an unreasonable thing as long as you put that in your written financial plan. But it sounds to me, Casey, you're just getting kind of lost in the weeds here of all that stuff. And you just got to get the house out of your asset allocation, then it all starts making a lot more sense.

Dr. Disha Spath:
I think it might make it easier if you thought about it from a cash flow perspective. Because if you had a mortgage on the house and that mortgage was a huge hit on your cash flow, it was a huge percentage greater than 30% of your cash flow, then I might think about maybe mortgaging less and putting out more.

Dr. Disha Spath:
But if that mortgage is going to be easily affordable on that fixed income and the income that you're having coming in from your investments, then I guess it wouldn't be a bad deal to have it. Or if you wanted to just go ahead and purchase it into cash, you wouldn't have that cash flow hit monthly, but then you would have less in your investment accounts making money.

Dr. Jim Dahle:
Yeah. The secondary question is really interesting actually, is should you have a mortgage in retirement or as you're approaching retirement? This is something that a lot of people make super simple. A sound bite or two, and it's almost dogmatic. But debt is something that's really complicated and you have to think about it pretty deeply.

Dr. Jim Dahle:
Actually, as you guys are listening to this on February 10th, which is ironic because I'm giving a talk today on February 10th about debt, how to think about debt and how to use debt and when not to use debt, when to use debt, what to think about, what factors there are when deciding whether to pay down debt or invest.

Dr. Jim Dahle:
But the way I like to think about it at that stage of life is “Do you need the debt to reach your financial goals? Do you need to be leveraging your house in order to build your nest egg fast enough to retire when you want to retire?” And what I would hope for most White Coat Investors as you're entering retirement is that you don't need to do that anymore. And so that's one risk that you can eliminate from your life by going into retirement debt-free.

Dr. Jim Dahle:
We paid off our mortgage in 2017. We've been debt-free now for five years, we like it. We think it's pretty cool. We feel a lot less guilty about everything we buy because we know we're not buying it on leverage. Because money is fungible, debts are fungible. If you have a 6% student loan, essentially everything you buy that isn't 100% necessary, not essential. Every vacation, every car, every appliance, whatever, you're basically buying in 6% debt because you have the debt, you could be paying off instead of buying that. And so, it's really the same thing.

Dr. Jim Dahle:
I would think about that as you decide whether to carry debt into retirement. And I think most people will probably decide they don't really want to do that. What are your thoughts on that? Do you plan on carrying debt into retirement or being done at that point?

Dr. Disha Spath:
Yeah. Not mortgage and not my primary residence mortgage debt, for sure. Maybe investment properties.

Dr. Jim Dahle:
The one benefit of having your investment properties paid off too, is they cash flow better.

Dr. Disha Spath:
That's true.

Dr. Jim Dahle:
The more money you put down, the more they cash flow. But there's no doubt that paying off something like that lowers your expected return. You expect to have a higher return because it's leveraged. There's no doubt about it. The math works very well that way. And so, you can make a strong argument, even in retirement, particularly with a rental property that you're not signed personally for, to have it partially leveraged. But it will cash flow better if you pay it off. There's no doubt about that.

Dr. Jim Dahle:
Okay. Let's go on to our next question here.

John:
Hello, Dr. Dahle. This is John and I'm a pediatrics intern. Thank you for all that you do. My question is about where to allocate the additional savings we have that we intend to use on a down payment seven years from now, when I am done with my training.

John:
We currently have the money sitting in a high-interest savings account in an online bank. A few options we are considering are investing the money in a taxable brokerage account and low-cost index funds or investing the full amount we can each year from back to our Roth IRA contributions, since we are married, filing separately, and I am going for PSLF. And then withdrawing the value of these contributions tax and penalty-free as our down payment.

John:
To my naive eyes, it seems like the Roth IRA withdrawal option would enable us to retain our down payment while adding a small amount of tax-free gains to our account, but I'm likely missing something. My first question is whether seven years is enough of a time horizon to consider investing this money. If it is, do you feel like it would make more sense to use the taxable brokerage account or the Roth IRA withdrawal option? Thank you in advance for your time and all your efforts on behalf of White Coat Investors.

Dr. Jim Dahle:
All right. This is a complicated question and it's even more complicated. John actually sent an email in follow-up saying, “Just so that you know, I wanted to add that the down payment savings is money we're fortunate to have left after maxing out my 403(b) family HSA backdoor Roth IRA, as a fully-funded emergency fund and purchasing all the types of insurance you've outlined in your books and podcast episodes. As a result of that, we're willing to take some risk with this money, with the goal of hedging inflation. I just want to make sure you have this information as you consider the question.”

Dr. Jim Dahle:
John is a pediatric intern, but clearly, there's some other money here somewhere. I assume this is being made by a spouse or something, because if you are saving all this money as a pediatric intern, I'm not sure what you're eating. If you're maxing out a 403(b) and an HSA and two backdoor Roth IRAs and emergency fund and you already have all the insurance you need.

Dr. Jim Dahle:
But here's the general deal with retirement accounts. You can raid Roth IRA contributions. If it is just regular direct contributions to a Roth IRA, you can take those out at any time. You can also take out up to $10,000 of earnings tax-free, penalty-free to use on a house down payment. That's one of the acceptable uses of a Roth IRA that's not subject to a penalty.

Dr. Jim Dahle:
However, it gets a little more complicated when you are doing backdoor Roth IRAs, like you guys are doing because you're filing married, filing separately. So, you have to do it through the backdoor. And so that brings in, as you mentioned earlier, the five-year rule. You have to have money in there for five years.

Dr. Jim Dahle:
But the truth is, I mean, come on here. You've got enough money here that you're maxing out a 403(b). So, in 2022, that's $20,500, a family HSA that's $7,300, two backdoor Roth’s, that's another $12,000 and you already have an emergency fund. Why would you need to go through that Roth IRA for a down payment?

Dr. Disha Spath:
I just don't like the sound of that.

Dr. Jim Dahle:
Right. You've got enough that you probably got savings on the side, because somebody's making money here more than a typical pediatric intern salary. And you got seven years to get there. Plus, then there's doctor mortgages.

Dr. Disha Spath:
Yeah. You don't need a down payment necessarily to buy a house and it's not a good habit to start raiding your retirement accounts just because you need them to grow. You'll in general do a lot better if you just let them sit.

Dr. Jim Dahle:
Yeah. I like the idea of having a down payment, don't get me wrong, but if there's a better use for your money paying down a 6% student loan, not the case for you because you're going for public service loan forgiveness, or saving in a Roth IRA, I think that's a better use for your money than a down payment.

Dr. Jim Dahle:
So, in your situation, if there wasn't additional money above and beyond those retirement accounts, above and beyond that HSA, then I would just use a doctor's mortgage. But in your case, you're an intern, you're already maxing out 403(b) Roth IRAs. I mean, come on. You're doing awesome. The chances of you not having a down payment seven years from now seem really low to me. I think you'll do just fine. It sounds like you guys are doing fantastic. I wish I knew as much as you do about finances when I was an intern. I certainly did not.

Dr. Disha Spath:
Follow up question. If he was to put it in a brokerage account, what would you invest it in?

Dr. Jim Dahle:
Oh, this is a good question. Seven years.

Dr. Disha Spath:
Seven years.

Dr. Jim Dahle:
Seven years, I don't think I'd want to leave it sitting in a savings account.

Dr. Disha Spath:
Yeah, it's too long.

Dr. Jim Dahle:
This is above and beyond your retirement accounts. And you're putting something extra in there for a down payment. But do I put it all in equities for the whole seven years? It really comes down to what happens at the end. How big of a deal is it for you to have all this money right at that specific date. If that's a big deal, then you don't want to take that much risk with it. If it's not a big deal, whether you had $50,000 or $100,000, or if that date that you buy is actually pretty flexible, then I think that allows you to take more risk. But for seven years, I guess I'd like to see him taking some risks.

Dr. Disha Spath:
Yeah. I would like to see that too. I mean, that's too long to sit in a high yield savings account.

Dr. Jim Dahle:
Yeah. Seven years in a high yield saving is too much. Now, do you put it in like a Vanguard Wellesley Fund? What's that? 15% or 25% stocks. Or do you put it in a Wellington Fund? It's like 60% stocks. Do you leave it all in stocks for five years and then dial it back to 50% stocks – 50% bonds? There's a lot of ways you could dress this up.

Dr. Jim Dahle:
But as you get closer to the date and it seems like you're going to need the money, an exact amount of money on an exact date, that's when you're transitioning into savings. I think you can take some risk with it and help hedge some inflation that way.

Dr. Jim Dahle:
All right. I don't know if we've said it yet, but thanks for what you do. I was super happy the other day. I looked up the COVID cases and we are down to 6,000 cases as of today in Utah, which is huge. It was 14,000 a couple weeks ago. By the time you hear this, maybe it's a 1,000 I'm hoping, and this COVID wave will have passed. Those of you who have been hanging in there on the front lines, thanks for what you do.

Dr. Jim Dahle:
All right, let's talk about emergency funds. This question comes from Craig.

Craig:
Hi, Dr. Dahle. This is Craig from Atlanta and I was interested in getting your perspective about a different spot to house my emergency funds. Most savings accounts and short-term bonds list interest rates that are far outpaced by inflation charging a mint for the privilege of liquidity, investing in Stablecoins on websites, such as BlockFight, provides interest rates that are 10 times higher than what you could traditionally obtain with monthly interest paid out in whatever currency you want.

Craig:
For a little higher risk, you can buy a crypto coin commodity and use it to provide liquidity on some sites for a 5% expected interest rate, or you can stake Ethereum based crypto coins on other sites for an expected 10% interest, acknowledging that you now own a commodity whose values could fall.

Craig:
Purchasing Stablecoins on the other hand for a 10% interest rate seems to be a sweet spot, as their value is tied to Fiat currency removing the volatility concerns. I'd love to hear your perspective. Thanks for all you do.

Dr. Jim Dahle:
All right. This is a great question. And the one I've gotten several times by email enough times that I've actually written a blog post about it. I don't think it's run yet though. It'll run probably a few weeks after this podcast goes live.

Dr. Jim Dahle:
Let's talk a little bit about crypto savings accounts. I totally understand the attractiveness. You can get a crypto savings account that's paying anywhere from 3% to 12% right now. And if I go to my Ally bank account is paying 0.5%. Of course, that's a heck of a lot more attractive. But there's a truism that Larry Swedroe said. He said basically when it comes to any sort of fixed-income investment, if one has a higher yield than another, it's because it's higher risk, whether you can see that risk or not.

Dr. Jim Dahle:
And in the case of a crypto savings account, you are taking additional risk in order to make 3%, 6%, 9% up to 12%. Perhaps the biggest risk is these are not savings accounts, as you think of savings accounts. It's really the wrong word to be using to describe it.

Dr. Jim Dahle:
For instance, you go down to the bank and you open up a savings account and you put your $40,000 in there. You get FDIC insurance. If you go to a credit union, you get NCUA insurance. There's somebody backing that. That is not the case in a crypto savings account. That's one risk right there. And you would expect to be paid a higher yield in addition to that.

Dr. Jim Dahle:
And there's a few other things you should know about these crypto savings accounts. In general, the interest is simple interest rather than the compound interest you get in a typical bank. The interest is also paid in whatever type of cryptocurrency you're using, whether it's a Stablecoin or a more additional crypto asset of some kind.

Dr. Jim Dahle:
There's an additional risk if you're not using a Stablecoin. For example, if it is a Bitcoin savings account, you've got the additional risk, this exchange rate risk between a dollar and a Bitcoin, which when the price of Bitcoin goes up, that doesn't seem like such a big thing. But in the last few weeks, and remember we're recording this on January 29th, Bitcoin's down like 50%.

Dr. Jim Dahle:
And so, that's a serious risk. You put your money into a Bitcoin savings account, hoping to make 10%, and then you lose 50% of the principle. That's a pretty significant risk. And so, that would argue that if you're going to do this, that you do it using a Stablecoin.

Dr. Jim Dahle:
Okay, what are some other risks? Well, there are often withdrawal restrictions. You can't just pull your money out at any given time. There's often restrictions and you have to look at each of these as you go along.

Dr. Jim Dahle:
There is a risk, even with the Stablecoins of breaking that peg. A Stablecoin is pegged to the dollar, but there's a risk that it won't stay pegged to the dollar. If you look back at history, you see that there's a lot of currencies in the world that have been pegged to the dollar. And then all of a sudden, they come unpegged and you got all kinds of crazy inflation going rampant and all of a sudden that currency is not worth very much. That's an additional risk of using a Stablecoin.

Dr. Jim Dahle:
You've noticed a lot of these custodians, crypto exchanges or whatever have had hacks. And so, that's a risk. Remember, these guys often buy some sort of insurance, but read the fine print carefully. It is not the same as FDIC insurance. And so, you've got to keep that in mind.

Dr. Jim Dahle:
There is smart contract risk that you're taking on when you're using these Stablecoin investment accounts. There is the illiquidity risk. Remember in times of crisis, things become very illiquid and something like this is going to be far less liquid than the money in your savings account or something in treasury bonds. That sort of a thing. That's why it's paying more.

Dr. Jim Dahle:
And then, of course, there's all kinds of regulatory risk. State, federal governments are trying to figure out how to deal with crypto assets. That's all still relatively new. The institutions are new, the ecosystem is new. In fact, it was interesting. I went through and looked at each of these places that are offering crypto savings accounts. And if you look at them, most of them are new since 2017, 2019. You're putting your money with an institution that's only two years old. And so, you got to keep that in mind, that's a risk as well.

Dr. Jim Dahle:
Then of course, why are these guys offering you such a high-interest rate? Well, it's because they're loaning money out and making good money on it. They're doing fractional banking. All the money's not actually in the account because it's fractional banking and these people that are loaning to, they can default on it as well. And if there's enough of those defaults, well, you're not going to get your money back either. So, there's a lot more risk you're taking on.

Dr. Jim Dahle:
The other thing that I thought was really interesting about a lot of these accounts is you'll see that they pay a really pretty good interest rate on the first little bit you put in there. But then after a while they lower the interest rates. So, you can't put a whole bunch of money in there and make that 10%. You can only put a little bit in there.

Dr. Jim Dahle:
For example, looking at BlockFi. On the first 10th of a Bitcoin, which right now as we're talking about this, Bitcoin's about $37,000. For the first $3,700, they'll pay you 4.5%. But after that they pay 1% and then after a third of a Bitcoin. So, after $12,000 or so, they're only paying 0.1%. They just want your money in there and they want you to start trading and generating other fees. They don't actually want a whole bunch of your money. They just want you to start an account there. But even on the USDT, they pay a lower amount after $40,000, even on Stablecoin.

Dr. Jim Dahle:
I found that really interesting. You look at most savings accounts, they pay you more, the more money you put in there, that's not the case with most of these crypto savings’ accounts.

Dr. Jim Dahle:
So, can you use this? Yes. You can use this. I would look at it as an investment. Of all the things you can do with crypto assets, I think a Stablecoin savings account may be the least stupid. 8%, 10% on some percentage of your money, that's pretty good. You're taking a risk for it, but are you being compensated adequately? Probably. But one thing this is not for is your emergency fund. This is not emergency fund money. If this thing is taking on enough risk that they can pay you 8% or 9% or 12% on it, that is not an emergency fund, sort of liquidity and safety that you need.

Dr. Jim Dahle:
Remember with an emergency fund, it's about return of your capital, not the return on your capital. This is the money you need to eat if something happens to your job. This is the money you need to buy plane tickets across the country for grandma's funeral. This is not money you should be taking significant risk with.

Dr. Jim Dahle:
If you want to put some small portion of your money into a Stablecoin savings account, I don't think that's crazy. If you've already decided you're going to invest in Bitcoin, you might as well have it in something that's paying you some interest. I don't think that's crazy. But limit the amount of your investment in this, because there are times when it drops dramatically, like the last month you lost 50% of your Bitcoin if you've been investing in the last month, and there is no guarantee that it doesn't go a whole lot farther and stay there for a long time. That's my thoughts on Stablecoin savings accounts. Great question. Obviously very tempting anytime you see those sorts of yields. But that's where we're at.

Dr. Disha Spath:
That's such good information. I'm so glad to hear. I hate to see people taking risks or trying to optimize their emergency fund, because honestly, it's really about peace of mind and that money being there when you need it. And things happen, life happens and you're going to need it at some point.

Dr. Jim Dahle:
I absolutely agree. All right, let's go on to our next question.

Daniel:
White Coat Investor, good afternoon, good, sir. My name is Daniel. I just finished watching, I screwed up my backdoor Roth IRA, how do I fix it, as well as your backdoor Roth IRA, how to fill out IRS form 8606. Very informative outstanding information.

Daniel:
My dilemma, I have been consistently contributing to a traditional IRA, a traditional IRA with Schwab. I currently make well over $170,000 a year, shame on me for not knowing about a backdoor Roth IRA. However, with that, I am looking to convert that money that I've already invested around $1,000, so not much, to the Roth IRA.

Daniel:
I also heard your wisdom and advice on making sure I save up the additional $6,000 first prior to investing or depositing the money into the traditional IRAs before making the conversion, but I wanted to get your thoughts on what steps should I take to minimize the tax implications from converting the money that I've already invested to a Roth IRA.

Daniel:
Again, I have about $1,000 already actively invested in stocks and mutual funds in traditional IRA. I would love to convert that to a Roth IRA. I do not mind paying the taxes associated with that, but I want to ensure there are no mitigating or lingering circumstances or consequences, if you will, other than the stupid tax that I'll have to pay from converting that money.

Dr. Jim Dahle:
All right, Daniel, good on you for trying something new, for trying to do a backdoor Roth IRA. A lot of people are just so paranoid about making a mistake that they don't do anything. And that's worse than screwing things up sometimes. Sometimes it's just important to get moving. I applaud your efforts to get going on a backdoor Roth IRA. But it sounds like maybe you didn't understand the whole process from the beginning. So, let's go over the whole process. Disha, do you want to talk about a backdoor Roth and how to do it?

Dr. Disha Spath:
Yeah, sure. The whole point is the IRS won't actually let us do it directly, but that's okay. All you do is, you put it in a traditional IRA and then you roll it, and convert it into a Roth IRA. The yearly maximum is $6,000 per person as long as you have some earned income. You save up that $6,000. You put it in all at once so it doesn't grow in the traditional IRA. And then you convert it the next day into a Roth IRA. That's it. And then you choose your investments there and then it grows tax-free.

Dr. Jim Dahle:
Yeah, but the key is while sitting in the traditional IRA, you don't invest it because what happens when you invest it is the value of the money changes. It either goes up, in which case, when you convert it to a Roth IRA, you owe taxes on the gains or it goes down, which when you convert it to a Roth IRA does not cause you to have taxes. It causes you to have to carry forward a loss on your form 8606 every year, which is a pain. I think it might be worse than paying the taxes.

Dr. Jim Dahle:
First thing I'd do is check your $1,000. See if you actually have a loss. If you have a loss, maybe let it sit for a little bit until you have a slight gain and then convert it to a Roth IRA. Maybe put your other $5,000 in at that point and convert the whole thing to a Roth IRA.

Dr. Jim Dahle:
You've definitely made the process more complex than it needs to be, but this is still doable. You haven't done anything terrible that's not going to be fixable. You can fix this. But I would actually let it earn a little bit more, because as we record this on January 29th, you're probably down in that account. Most assets have gone down in the last month.

Dr. Jim Dahle:
And so, chances are, if you invested that into a stock index fund or something, you're down 10%. I might let that sit in that traditional IRA for a little bit, get closer, maybe even a little bit over the original $1,000 before I did that conversion. Hopefully, we're not down for the next three years, that this is the start of some huge bear market. But paperwork-wise, this will be more straightforward if you have a slight gain than if you have a slight loss in your account. And then of course I'd put the other $5,000 in there and just have it be clean.

Dr. Jim Dahle:
But in general, put it in the traditional IRA, leave it in the money market fund or the settlement fund or the cash fund or whatever kind it is, then convert it to a Roth IRA, then invest it and you'll save yourself a lot of hassle.

Dr. Jim Dahle:
All right. Our next question is about laser funds. It sounds like something from Dr. Evil here. I don't know what a laser fund is. Let's find out.

Speaker 2:
Jim, there's a guy on the radio here that keeps touting what's he calls a laser fund. It sounds to me an awful lot like an annuity, although he never uses that word. That makes me a bit suspicious. What do you know about that? Thanks.

Dr. Jim Dahle:
Okay. There's a guy who does something similar here in the Salt Lake area on the radio that has a Saturday morning show. He goes for two hours every Saturday and never actually names the product that he's selling. It's amazing.

Dr. Jim Dahle:
You know why they don't name it? Because if they just said, this is Whole Life Insurance, or they said, this is Universal Life Insurance, or they said, this is an annuity, you wouldn't be interested, but if they called it laser fund, then all of a sudden it sounds neat and new and exciting. And so, this is marketing. This is marketing for insurance-based investing products.

Dr. Jim Dahle:
Now this particular one, I haven't gone through the details of understanding how the laser fund works. But what these guys typically do is they recommend you start pulling money out of other places. It might be your home equity. It might be your retirement accounts.

Dr. Jim Dahle:
They scare you that you're going to have these huge required minimum distributions and you have to pay all this tax. And so, you should get that money out right now and put it into this cool universal life insurance product. And it's often an index universal life product. And they tell you you'll get the returns of stocks with none of the downside and all of these half-truths add up to a terrible idea.

Dr. Jim Dahle:
And so, I would steer clear, number one, of something you got to spend two hours on the radio trying to sell to somebody. And number two is something you can't call by its actual name, or you wouldn't be able to sell it. But you're right, the hairs on the back of your neck are standing up. And there's a reason because somebody's selling you something you probably don't want. Steer clear these sorts of things.

Dr. Jim Dahle:
Now, that doesn't mean you can never use an insurance product for something that's designed for that it makes sense. It doesn't mean you can never buy an annuity. An annuity often makes sense for some people in some situations, but it's usually not the one they're selling on Saturday morning infomercials.

Dr. Disha Spath:
Yeah. My rule with most financial products is if someone can't explain it to me in five minutes in clean and simple terms and tell me exactly what it is, I'm being sold something that's going to make them a profit. And I walk away from it.

Dr. Jim Dahle:
Yeah. The general rule is don't mix insurance and investing. And if you stick with that, the chances of you regretting it is very, very low. If you don't stick with that, there's a high chance of regret. You look at the statistics on whole life insurance, for instance. When I poll doctors, doctors who have actually purchased a whole life insurance policy, 75% of them regret it.

Dr. Jim Dahle:
If you look at the data from the society of actuaries on the whole life insurance, 80% of policies are surrendered within 30 years. This is a policy that's designed to be held until death, and four out of five people that bought it, don't hold it until death. It really tells you how the people actually buying these things feel about them.

Dr. Jim Dahle:
But that's the bottom line. We're just mixing insurance and investing products together and they are being sold to you. You're probably ought to stay away. Certainly, until you completely understand what's going on, you shouldn't be interested. But as a general rule, once you understand it, you're not going to be interested. Okay, let's hear a question from Annie now.

Annie:
Hi, Dr. Dahle. My name is Annie and I'm in my first year out of residency. My employer does not offer a retirement plan, like a 401(k) or 403(b), but I am a W2 employee. Therefore, I'm not considered an independent contractor, and as my understanding I cannot open an individual 401(k).

Annie:
I was considering opening a traditional IRA. I believe the income limit is $6,000 and converting that to a Roth IRA through the backdoor method, since this may be the last year to do so. But since my employer does not offer a retirement plan that I'm contributing to, I believe I will receive the tax deduction from the traditional IRA. So, I'm not sure if it makes sense for me to convert it to a Roth IRA, and then pay the taxes on that. Or if I should just not do it for this year and any subsequent years, if the new tax bill goes through.

Annie:
I would also like your advice on what options there are for retirement plans if your employer does not offer one, but you are a W2 employee and not an independent contractor. Thank you for all that you do. I'm very new to the WCI community and I'm so grateful for your guidance.

Dr. Jim Dahle:
All right. Disha, do you want to take this one?

Dr. Disha Spath:
Okay. As I understand it, the question is where do you invest for your retirement when you don't have an employer-sponsored 401(k) available?

Dr. Jim Dahle:
Yeah. When your employer hates you, what do you do?

Dr. Disha Spath:
Which sounds like a pretty terrible situation, but okay, you don't have that many tax advantage accounts. However, you do have the IRA, the traditional IRA available. So yes, you can contribute $6,000 there and that would be tax-deductible because you don't have any other space. You could convert it to a Roth. And then it would be Roth money.

Dr. Disha Spath:
If you, down the road, get an employer that has a 401(k) available or get a contracting job where you can start a solo 401(k), then you could always roll that traditional IRA in there. But what you need to know is that traditional IRA money is going to be somewhat of a problem if your situation changes and then you want to do a backdoor Roth, because then you would be subject to the pro rata rule. You'd want to clear out that traditional IRA, if your situation changes and I hope it does.

Dr. Jim Dahle:
Yeah. I hope it does too. First of all, I'm not sure I totally believe you. Maybe that you just can't use the 401(k) for a year. So, look into that. It might be that you'll be able to use it a year from now, in which case I wouldn't get into a traditional IRA. I would make sure you did the conversion and got into a Roth IRA.

Dr. Jim Dahle:
It may be that you're part-time. A lot of part-time people are excluded from the employer’s retirement plan. If you're going to go full-time in a few years, you may again, be really glad you don't have that traditional IRA so you can start doing backdoor Roth IRAs. But the bottom line is if you don't have anything else, you can always invest more in taxable.

Dr. Jim Dahle:
You might have an HSA available to you. Look into that. If your only healthcare plan is a high deductible health plan, you could use an HSA. Also, if your spouse is working, look at your spouse's retirement accounts. Maybe all your savings gets done on that side and you live off your earnings. Lots of options there, but it's never a bad thing to just invest in a taxable.

Dr. Jim Dahle:
For a lot of docs, their taxable is their biggest account. You look at dentists and people who own small practices, a lot of times they look at the cost of putting a 401(k) in place and all the matching dollars they'd have to do for their employees in order for them to max it out. And they just choose not to do it. They just invest in taxable. And so, it's okay to do that. You can invest for retirement in a taxable account. You just don't get quite as many tax advantages of doing so, but it doesn't mean you can't save for retirement. You can still save for retirement.

Dr. Disha Spath:
And if by chance you like this job, you want to stay here in this current situation, think about starting a side gig.

Dr. Jim Dahle:
Yeah. You can start a side gig and then open a solo 401(k). You can also lobby HR, your boss, your partners, whoever. Because you're not the only one getting hosed here. Everybody working at this company is getting hosed by the fact that there is not a retirement account there. I might start making a little bit of noise in that respect and saying, “Why don't we have a retirement account? Everybody else has a retirement account”. And seeing if you can get something put in place.

Dr. Jim Dahle:
But I wouldn't just accept that this is not an option. I would look into it and make sure absolutely there's no way you have access. Then lobby for changes. A company can put in a 401(k) at any time. The White Coat Investor put one in last year. It's not that hard to start. It can be done when there is a will to do it.

Dr. Jim Dahle:
All right. Next question is what to do with old retirement accounts. And I think we've got a couple different versions of these. Let's listen to the first one. This one's from Matt from Pennsylvania.

Matt:
Hi, doctor. I love the show. And thanks for all that you do for the community. This is Matt from Pennsylvania. I just started a new job and I'm trying to figure out what to do with my old 401(k) that contains traditional and Roth contributions. Both old and new job use Fidelity for the 401(k) while all of my other investment assets are at Vanguard, managed under their personal advisor service.

Matt:
Do I roll my old 401(k) to the new 401(k), sticking with Fidelity as a custodian? The new 401(k) has reasonable investment options and fees. Or do I roll to Vanguard? Get the assets managed under personal advisor service and at my preferred brokerage, but lose the ability to do the backdoor Roth because of the pro rata rule. I understand this decision gets easier if Congress ends the backdoor Roth, but as the law stands today, what are your thoughts on what to do? Thanks so much.

Dr. Jim Dahle:
All right, Matt, you got two questions here. We're going to answer the question you asked, and then we're going to answer the question you should have asked. Disha, do you want to take the question he asked?

Dr. Disha Spath:
Yeah. Your question is, “Should I roll my old 401(k) into my new 401(k)? Or should I roll it into my IRA?” Which would give me the pro rata rule, and I wouldn't be able to do a backdoor Roth. I would say definitely, roll it into your new 401(k). Why would you eliminate the option of doing a backdoor Roth when you didn't have to?

Dr. Jim Dahle:
Yeah, for sure. New 401(k), it's good, it's got good investment options. You know how to use Fidelity. Fidelity's a good place. It might not be Vanguard, but I got half my accounts at Fidelity and half at Vanguard. I like Fidelity just fine. It works great. There are great low-cost options there. In some ways, the service is sometimes better at Fidelity than it is a Vanguard. That's not a bad place to have your money. So, no brainer on for now. Backdoor Roth is still legal. I would put the money into your Fidelity 401(k).

Dr. Jim Dahle:
Now is the underlying question, which is more interesting, I think, is why is half your money managed by a financial advisor. Basically, the money you have at Vanguard, you're paying 0.3%, which is admittedly a low AUM fee, but it is a fee to get advice and asset management services.

Dr. Jim Dahle:
And here's the thing though, if half your money you're not getting advice on, and half your money you are getting advice on, it makes it really hard to manage your portfolio altogether. If you're competent to manage your own money, half of your own money, you're competent to manage all of your money. And if you're not competent to manage half of your money, then you need advice and management services on all of your money.

Dr. Jim Dahle:
So, it doesn't make a lot of sense to me for you to have an advisor, even a low-cost advisor for half your money. Unless they're providing significant assistance on the other portion of your money that's in your 401(k), I think you ought to consider either going 100% DIY or going and getting an advisor that can advise you and manage all of your assets together. So, keep that in mind.

Dr. Jim Dahle:
All right, let's take our next question about what to do with old retirement accounts.

Speaker 3:
Hi, Dr. Dahle, I'm a primary care internist in New York and living with my fiancé, we just got engaged. We’ve been listening to your podcast for years. It's really great. We really appreciate all of your help. We just reached our own milestone of about half a million after two years of working. She's a big law attorney. We plan on getting married this year.

Speaker 3:
She has a lot of old accounts I was looking for some advice on. She has a 401(k) with Merrill Lynch, both a Roth and non-Roth component, a second 401(k) with her new job through Fidelity, which is all non-Roth. She has a simple IRA with Ameritrade of about $2,000, a simple IRA with Vanguard with $12,000. And she has about $14,000 in backdoor Roth as well as two HSAs.

Speaker 3:
We have a few questions. Should we roll over the Ameritrade simple IRA, or leave it in anticipation of trying to do another backdoor Roth in 2022 this year? Should we leave the old HSA as it is, or try to combine them with the new one? And should we roll over the old 401(k) into an IRA? And what do we do with the Roth component? We are looking for the most tax-efficient way to handle these accounts. And we do anticipate some higher earnings in the coming years. I really appreciate any advice on this and thanks so much.

Dr. Jim Dahle:
All right, this is a mess. Let's get this cleaned up. I don't think it's going to be too bad to clean it up, but it is a mess. First of all, usual advice applies. It doesn't sound like it's necessarily an issue in this case, but congratulations on your engagement. That's wonderful. I would not combine finances yet. I would not combine finances until you actually get married. That's not the case here. Because we're just talking about cleaning up her accounts. But in general, that's my advice there.

Dr. Jim Dahle:
I imagine the tragedy of somebody paying off their fiancé’s $250,000 in student loans and then turn around and they break up. That's not a good thing. There are some protections that come with marriage and you probably shouldn't combine finances until then.

Dr. Jim Dahle:
But this is all not too bad. This is relatively easy to clean up if what you're telling me is true. I don't think what you're telling me is true though. I think you have messed up your backdoor Roth IRAs. And the reason why is you've got these two simple IRAs hanging out there, a $2,000 one and a $12,000 one.

Dr. Jim Dahle:
Simple IRAs count on line six of form 8606. They cause a proration, a pro rata thing that you're trying to avoid when you do a backdoor Roth IRA. If you have a simple IRA hanging out there, chances are these backdoor Roth IRAs you did the last couple of years, you didn't report correctly. You probably actually should be prorated on those. And so, if you're right, what you say is that you actually did the backdoor Roth IRAs right. And you just now came up with two simple IRAs, then you're fine. You can just roll those into a 401(k), no big deal that 401(k) at Fidelity will probably take the simple IRA rollovers.

Dr. Jim Dahle:
But I don't think that's what happened. I think you did backdoor Roth IRAs and didn't realize that a simple IRA would cause proration. So, you might have to go back for the last couple of years and resubmit your 8606s or if you didn't do an 8606 at all, maybe do it for the first time. Maybe even then send in a 1040X with that.

Dr. Jim Dahle:
But the way to clean that all up is to just convert the simple IRAs. It's only $14,000. So you will owe what? $4,000 or $5,000 in tax on it, just put it all into the Roth IRA. Pay the conversion tax, and you're good to go there. Then you've got $28,000 in your Roth IRA. Now, that old 401(k) has a Roth portion and it has a traditional portion. So, I’d just roll the Roth portion into that same Roth IRA. No big deal, no taxes due, nothing.

Dr. Jim Dahle:
And I'd take that traditional IRA, and unless you want to do an extra Roth conversion, you don't have to do it. I would roll that into the new Fidelity 401(k). No tax will be due on that. And then you're down to one 401(k). You're down to your Roth IRA and you can do backdoor Roth IRAs going forward, and then you've got your one HSA. So super simple.

Dr. Disha Spath:
She has two HSAs.

Dr. Jim Dahle:
Oh, she has two HSAs? I didn't realize she had two HSAs. Yeah, you can combine HSAs. That's no problem either. I don't think once you get married, if you each have an HSA that you can combine them. I think they have to stay separate. But you could always spend one, or you could just manage two either way. It'll get even more complicated when you get married, but for the most part, this is pretty easy to clean up.

Dr. Jim Dahle:
I think the main thing is you just got to look back at the last couple of backdoor Roth IRA years and see if you actually did screw those up. Because I think there's a really good chance you did.

Dr. Disha Spath:
Yeah. And I don't know, simple. I've done things like rollovers and stuff and it's a pain in the butt. It's a lot of phone calls and a lot of paperwork and she's going to have to do it herself, but it'll get done eventually. It's going to be a few months.

Dr. Jim Dahle:
A rollover seems really hard the first time you do it. They send you this form, it's six pages. You got to sign it. Maybe you got to go get it notarized. Or heaven forbid a medallion signature guarantee or who knows. There's some painful part about it and you send it in and they screw it up and you got to call them whatever.

Dr. Jim Dahle:
But after you've done this a few times, a rollover is no big deal. You can move money back and forth around these retirement accounts all the time. It's not that bad. Sometimes you can even do it online. But most of the time it involves printing something out, filling it out, mailing it in, waiting two weeks, and then they mess around with it for another week. And then they screw it up for another week.

Dr. Disha Spath:
And then you're on conference calls with two different banks and they'll talk to each other.

Dr. Jim Dahle:
It can be a pain to do rollovers, but once you've done one or two and you realize what's supposed to be happening, it's not too bad.

Dr. Jim Dahle:
At some point in our financial lives, it will be time to buy a home. A physician mortgage can be a good vehicle for a young doctor who’s just out of school and has a more effective place to use their money than on a big down payment. These loans allow doctors to secure a mortgage with fewer restrictions and a lower down payment than a conventional mortgage. But if you’re further advanced in your career or deeper into your journey to financial freedom, buying a home with a conventional mortgage and then, later on, potentially refinancing that loan to a better rate with a shorter time frame could be a great move. Wherever you are in your financial journey, make sure you use the mortgage that will be most financially beneficial for you. Hop over to our recommended tab to learn more about all of your mortgage and refinancing options at whitecoatinvestor.com/mortgage.  You can do this and The White Coat Investor can help.

Dr. Jim Dahle:
Don't forget about that student webinar. That's whitecoatinvestor.com/student-webinar to sign up. That's February 23rd, 6:00 PM Mountain. Also don't forget, you can still sign up for WCICON22. That's at whitecoatinvestor.com/wcicon22.

Dr. Disha Spath:
It's going to be a blast.

Dr. Jim Dahle:
It is going to be a blast. We're totally looking forward to it. Thanks for those who are leaving us a five-star review and telling your friends about the podcast. Do you want to read our most recent podcast review here, Disha?

Dr. Disha Spath:
Yeah. “Must listen, must-read. More nonphysician guests” is the title of this review. “This podcast is a must listen, and Dr. Dahle's information is a must-read. I'm immensely grateful to his hard work and applaud his deserved success. I particularly love the episode discussing the finance of professional cycling. I'm also an avid cyclist, but the principles most certainly apply to other professions in the sport. Please consider additional non-physician high earners, such as athletes.”

Dr. Jim Dahle:
All right. Five-star review. Thanks for that one. It's interesting. Some people said, “Oh, why you got a cyclist on there? We just want to hear doctor stuff.” And other people are like, “Hey, thanks for branching out.” We've had lots of different guests on. We've had veterinarians, we've had APCs. We've had attorneys and we thought, “Hey, let's try an athlete.” And some people liked it, some people didn't. But hey, it's like anything else. Take what you find useful. Leave the rest. There'll be something new next week.

Dr. Jim Dahle:
But until then, 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:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney, or financial advisor. So, this podcast is for your entertainment and information only, and should not be considered official personalized financial advice.