Podcast #128 Show Notes: Resident Physician Financial Mistakes
There are some aspects of finances that are unique to resident physicians. It is really during this time that you are putting on the training wheels and learning to manage your finances before the big money comes in. We interview a resident in this episode and discuss cashflow/budgeting, filling out a W-4, doing Roth or tax deferred retirement accounts when going for PSLF, seeking student loan management advice, disability insurance for a two resident couple, and dealing with an HSA when switching between programs after your intern year. Luckily most of the mistakes you make during this time are relatively low cost to fix but the better choices you make now can set you up for great financial success down the road. Keep in mind, at this stage of residency, I was completely financially illiterate. So if you are listening to this podcast as a resident you are way ahead of where I was.
In This Show:
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The Principals at DI4MDS have collectively been advising physicians, business executives and other professionals for over 40 years, utilizing knowledge and resources to take care of their life & disability insurance needs. Experience and relationships enable them to secure specialty specific disability and practice overhead insurance policies for residents, fellows and practicing physicians with special discounts and favorable underwriting. They have established numerous guaranteed approved disability plans for residents and fellows and high earning specialists with disability benefits up to $250,000/mo. Their expertise extends to military physicians and are honored to assist those who serve our country. They have guided physicians through the claim process enabling them to collect over $1M in benefits in 2019. They can be reached at [email protected] or 888-934-4637.
Quote of the Day
Our quote of the day today comes from Tom Nowak, CFP. He said,
“We do not all need to hire a full time driver if we only need directions.”
That is the truth. Some investors prefer having a full time driver, a financial advisor that handles everything, and other people just need a little bit of direction. Eventually, once they figure it out, they can drive themselves wherever they need to go as far as portfolio management goes.
Cashflow and Budgeting
Kyle and his wife don't track every dollar spent. But they have a primary checking account where their paychecks are deposited and then auto drafted out for their 403B contributions and Roth contributions. They each get a grand a month as “allowance” that they use to pay for eating out, gas, travel, etc. If the other person is not going over their thousand dollars, the other partner doesn't ask questions. That has worked well for them.
Our budgeting process was initially an Excel spreadsheet and every month we recorded what we spent. We were really strict in the beginning because money was pretty tight. Katie worked my intern year and after that, she was a stay at home mom. That was the only real decrease in income we ever had. But it certainly made things tighter. We watched every dollar for years and years and years and the budget served as training wheels in many respects. Once we learned how to ride the bike, the budget probably doesn't matter as much anymore. Now it's mostly just keeping track of the cash flow.
It is really hard to keep track of it if you're not doing some sort of meeting every month or some sort of planning process. We have specialized a little bit in the last couple of years. Katie does most of the buying and she does a much better job of it. As that relates to our budgeting process, she keeps track of the spending. She goes over the credit card statements and the bank account statements and makes sure it's all legit and adds it all up and then feeds that into one line on our spreadsheet. That's literally as close as we look at our spending. It is one number.
I am in charge of moving the money around between the accounts and adding up the income. At the beginning of the month or whenever we get around to doing this process, I go through all of our sources of income. We look at all our investing accounts and we take the income and add all that up. Then using our effective tax rate, we take 34% of what that number is and we set it aside. This is our tax money, so we don't spend that or invest that because we know we're going to need it within the next few months to pay taxes with. Then we give to charity based on that total as well. Then we decide what we're going to do with the rest. Right now, we're making much more than we spend. So the main thing we do at our monthly meeting is talk about what do we want to do with the rest? It turns out to be either invested or the last few months we've been saving up for this home renovation. That is what our monthly budget meeting is about. She brings one number to it, I bring another number to it and we talk about the difference, really, and what we're going to do with it. And that's our current cash flow budgeting process.
As far as that tax money, we set aside the 34% because we know we're going to need that eventually, but that's not necessarily what we pay in taxes. As an S corp for White Coat Investor, we're obligated to pay a certain amount of taxes every time we pay ourselves a salary. I calculate that out and send that in as required by federal law. Then we make quarterly estimated payments. We calculate those as 110% of one quarter of last year's tax burden. That's what our quarterly estimated payments are. Basically just enough to stay in the Safe Harbor. If we owe more next April, which we usually do, we write that check out of this money that we've been setting aside for taxes. So that's our cash flow and budgeting.
That tax money is sitting in a Vanguard money market account. I think this month it's in the prime money market account. For some reason, the municipal money market account yields have dropped enough that it actually makes more sense despite our high tax bracket to just be in a taxable money market account for now. But that's a calculation you have to run. You take the yield of the taxable money market account and you multiply it by one minus your marginal tax rate. And if that's higher than the yield on the municipal money market account, you do that. If it's lower, then you put your money in the municipal money market account. Every few months I do that calculation just to make sure I'm in the right one, but we just let it sit there until it's time to write a check to the IRS.
Filling Out a W-4
The W-4 is a form that an employee fills out for their employer. You select your number of exemptions. One for you and one for your spouse and one for dependents, etc. The idea is just to estimate how much tax you're going to owe at the end of the year. That's the whole point of the form. The employer then withholds that from your paycheck and sends it to the IRS on your behalf. But that amount of money that's withheld actually has very little to do with the amount of taxes that you owe, which is calculated on your return. The goal isn't necessarily to minimize the amount of money withheld on the W-4. If you want to minimize the amount of money withheld on the W-4, you put 10 exemptions on there. Because then they're going to hardly withhold anything.
Now that's probably not even legal to do, nor is it advisable. What you should try to do is just get the amount withheld about right. If you are not in the safe harbor at the end of the year, you'll not only owe the taxes that you would otherwise owe and the interest that you may owe on that, but you also owe penalties. So the goal is to be in the safe harbor. What is the safe harbor? Well, the safe harbor is that you have either paid all the tax you owe. That will obviously keep you in the safe harbor. If you've had that all withheld or paid it is in quarterly estimated payments, that'll keep you in the safe harbor. Or if you have paid, at least for a high income earner, 110% of what you owed last year, you're in the safe harbor and won't have to pay any penalties.
The third way you can be in the safe harbor is if you owe less than a thousand dollars. There's a $1,000 difference between what was withheld on the W-4 or what you paid in your quarterly estimated payments and what you actually owe in taxes. If that's less than a thousand dollars, you're in the safe harbor and don't owe any penalties. So the goal is just getting into the safe harbor and the W-4 is a tool to help you do that.
A lot of people don't realize there are a few strategies you can do using the W-4. For example, with quarterly estimated tax payments, it matters when you make the money and when you pay the taxes. If you made all your money in the first quarter but you didn't pay the taxes until your fourth quarter estimated payment, you can get dinged. But with a W-4 and money that's been withheld by an employer, the IRS doesn't care.
Money withheld in December is exactly the same as money withheld in January. So what some people have done to game the system a little bit is have a few more exemptions on their W-4 earlier in the year and less late in the year. And thus more is withheld from the paycheck late in the year. I don't know that I'd recommend it, I just try to estimate it correctly. If you find you're getting huge tax returns every year, well, you probably need to claim more exemptions so you're having less withheld from every paycheck. If you find you're writing big checks every April, you probably need to have more withheld from your paycheck and that's the whole point of the W-4.
HSA Issues as a Resident
Kyle had an HSA because he had a high deductible health plan as an intern, and now his residency program for the next four years does not have a high deductible health plan. So he has a few thousand dollars in that HSA. What should he do with it? He basically has two choices.
- Spend it on health care. They come with a debit card and or a checkbook. As you spend money on healthcare, write the check out of the HSA. That's a totally legitimate use of an HSA.
- Leave it in the HSA. He can invest it within the HSA. He doesn't have to leave it in the employer's HSA. You can roll it over to a good one, like Lively, that I've got an affiliate relationship with, or you can roll it over to Fidelity. That's where my HSA is at. Those are both great places, low fees to invest your HSA and just let it grow for the long term.
What you probably shouldn't do is pull all the money out of the HSA and pay taxes and penalties on it. There's a pretty good penalty if you pull it out and spend it on something besides healthcare, at least up until age 65.
Kyle also has another issue that other residents may run into. He put too much money in his. HSAs have a cool rule called the last month rule, which basically says if for the last month of the year you're eligible for an HSA, you can make a whole year's contribution for that HSA. He took advantage of that for last year and maxed out his HSA. Even though he was only an intern for six months of that year, he got to make a whole year's contribution. But there's a catch. You also have to stay eligible for the next year, which he did not because when he left his internship at the end of June, he is now in a program without a high deductible health plan.
He needs to look at the regulations to see exactly how much he has to now pull out of it. I suspect he can probably still leave a significant amount of that money in there because he should still be eligible for contributions for that last six months of 2018, as well as the first six months of 2019. So he may not actually have to withdraw that much and pay penalties on that much. But a careful reading of the rules surrounding the last month rule would definitely be in order for him. As a general rule, people should be aware of that, that if you're not going to have an HSA for the whole next year, that last month rule has a special provision that nails you. So something to be careful about.
Kyle ran the numbers and he has to pay a 10% fee on half of $3750 that wasn't supposed to be in there plus 10% fee on all the earnings of that. He has to fill out part three of the form 8889. But how was he supposed to know? He didn't know his new employer didn't have an HSA-eligible plan until he went through the match as an intern.
If you are going to a new employer anytime soon, it's definitely worth getting in touch with the HR department of the new employer to make sure you're not going to get burned by this. But in the end, he will owe a couple hundred bucks, so no big deal. He will be able to handle that, even on a resident income.
Roth IRA Contributions with Re-Invest Option
Kyle and his wife do autodraft contributions to their Roth IRA at Vanguard every month and wonder about the re-invest option. Before I answered that question, I caution about doing autodrafts. It is great to automate your finances. Don't get me wrong. The problem with this is he and his wife are eventually going to need to do their Roth IRA contributions through the back door and it may not be clear exactly which year they have to start doing that.
It could even be during residency if they start doing significant amounts of moonlighting. Once you get that modified adjusted gross income up over, I think it's about $190,000 a year right now, you're no longer eligible to make direct Roth IRA contributions. You have to keep an eye on that, and before that year starts for whatever year you're going to be over that amount, they will have to stop this autodraft Roth IRA contribution because those are direct Roth IRA contributions.
The re-invest option is just about reinvesting dividends. I'm a big fan of reinvesting your dividends and your capital gains distributions as long as you're inside a retirement account. In a taxable account, what that does is it gives you a whole bunch of different tax lots to keep track of and they might be really small tax lots. They might only be a few dollars, even. And while the brokerage will keep track of those for you, I prefer to just have all my dividends and other distributions in a taxable account go into my sweep account or my money market account and then I reinvest them with the next month's investments. So I'm still reinvesting the money, but I'm doing it manually rather than automatically into the same investment. But inside a Roth IRA, I see no reason not to just reinvest and automate your finances in that respect.
Disability and Life Insurance for Two Physician Resident Couples
Generally, federal student loans and refinanced student loans go away at death. There are a few that don't, so when you refinance your loans, read the fine print and make sure that the company is not going to apply that to your estate. If it is, it's definitely worth buying some life insurance to cover that risk. That's a heck of a lot cheaper than paying the higher interest rate on non-refinanced student loan. But just be aware when you're refinancing your loans to look into that provision.
There are a lot of dual physician couples that have struggled with this question and the responses and decisions basically range from what Kyle is doing, no insurance at all to both partners being fully insured. For a dual physician couple, he is married to a gynecologist, she is married to a radiologist essentially. You can have a very nice life on a radiologist income, just one without being married to another doctor. So it is totally reasonable to buy no insurance at all. But what I see most dual physician couples do is pick something in the middle. They realize, well, if one of us becomes disabled, I might not want to work as much, we might not want our income to drop as much. And so they both get partially insured. That keeps the premiums down, so they're not spending quite so much money but also provides something coming in if one of them were to get disabled.
Same with life insurance. There are a lot of costs that come up when one person is having to do all of the bread winning. Maybe hiring a housekeeper or hiring out child care. So they choose to buy some smaller life insurance policy. The other thing you have to keep in mind is there's always a possibility that you both become disabled or both die at the same time. And if you have kids relying on you, there is a certain risk there. The benefit of buying at least a small policy on each of you is you're insuring against that possibility, as well. So lots of different ways to slice that. I don't think there's a right answer. I think you just need to think through: what is the plan if I die, what is the plan if she dies, what is the plan if I get disabled, what is the plan if she gets disabled, what is the plan if we both die, what is the plan if we both become disabled? Work through the possibilities and if those are not acceptable to you without buying disability or life insurance, well, buy the insurance. At least enough until the plan becomes acceptable in the event of those relatively rare but catastrophic financial outcomes. If you need life or disability insurance contact the sponsor of this episode DI4MDs at [email protected] or 888-934-4637.
Public Service Loan Forgiveness and Retirement Account Contributions as a Resident
Both Kyle and his wife have not taken public service loan forgiveness off the table. Now, how should that affect your retirement account contributions as a resident? The general rule is that residents and other people that are in lower income years should use Roth accounts and those in their peak earnings years should use tax-deferred accounts. But Kyle's situation is essentially one exception to that general rule. If during residency you're going for public service loan forgiveness, if you use a tax-deferred retirement account, it lowers your income, and with a lower income, you have a lower income driven repayment program payment due. The lower the payments you make, the more that is left to be forgiven after 10 years in the public service loan forgiveness program.
Now you have these two factors weighing against you. You have the extra taxes you're probably going to end up paying by virtue of not using the right retirement account, but you're weighing that against the possibility of getting more money forgiven. It actually becomes a very complex calculation to decide exactly what to do. But if you go to the student loan advice people I recommend, they can help you run the numbers for those. Someone in Kyle's situation is the ideal person to go spend $300-$500 with these student loan advisors and help work out what exactly the right plan is for you. Because the plan could very well be tax-deferred contributions to keep those payments down. But it's possible to put too much in there. If you have your payments down to zero dollars already, more tax-deferred contributions are not going to help lower that payment any further. So you can go too far, too. You really just have to run the numbers. I wish the government hadn't made the rules for these programs so complicated, but unfortunately, they have, and there's no way around it. If you're in a complex student loan situation, you have to look at how you file your taxes, what IDR program you're in, and what retirement accounts you're using because it all goes into the calculation of what exactly is right in your situation. It can be pretty complex, unfortunately. So that is a noted exception to the “Roth is for residents” rule. If you thought you were almost surely going for public service loan forgiveness, I would say, okay, lean toward the tax-deferred accounts. If you're like, well, we might but we probably won't, then I would still lean toward the Roth accounts even if it made your payments bigger just because in the end, I think you'll be glad you got more money into a Roth account in relatively low tax bracket years.
Roth IRA Contributions vs 403B Contributions
“I think I have a fundamental confusion on the retirement accounts. So I maxed out my Roth IRA. That has nothing to do with my max contribution for 403b. Correct? Because in my institution, we're actually able to do traditional tax-deferred and then we're also able to do Roth 403b contributions. So I actually could maybe put a little bit more into it. Is that correct?”
That's right. They're completely separate contribution limits. So you can put $6,000 into each of your Roth IRAs each year and you can put $19,000 into each of your 403bs each year. That's a heck of a lot of savings for a resident couple. Even a dual resident couple. That is pretty close to half of your income as a resident, pretty impressive. But it's the same question whether you do Roth or whether you do tax-deferred. Now, the truth is, for your IRA, you should almost surely do Roth because the presence of that retirement account at work and your income are going to make it such that you are not eligible to deduct a traditional IRA contribution. And if you can't deduct that, you might as well do the Roth IRA contribution. That one's probably a no brainer for Kyle, but he would have to do have a little bit of debate deciding whether to do the Roth or the tax deferred 403b. This is when a student loan professional would be helpful.
When Should You Meet with a Student Loan Professional?
Kyle asked when is the best time to talk to a student loan professional. Earlier or later in residency? Obviously from the last two questions, you can see that these questions come up earlier in residency. The sooner you speak to a student loan professional the better. I know 400 or 500 bucks is a lot of money to an intern, but this could mean the difference in tens of thousands of dollars to some doctors in how much you have forgiven, how much you pay in interest, how much you make in your retirement accounts.
I think it's really being penny wise and pound foolish. If you're in any complex student loan situation, hire that advice early on in residency. It doesn't need to be an annual meeting, necessarily. For a lot of people, a one time meeting to set up the plan would be fine, but it's probably a good idea to meet early in residency and then again late in residency and put together that plan of what you're going to do as an attending.
I think most of the people I have on my recommended list give you some discount on a repeat or a second meeting anyway. So it's not like that second one is super expensive, but most people probably don't need an annual meeting. But if you're in a complex enough situation, stuff is changing and one spouse's income is moving around, or you start moonlighting or something, you might need to look at this again annually. But again, that's way cheaper than anything else you hire in financial services.
Other Types of Insurance
Kyle asked about getting new insurance when you move states for residency. As I move state to state, I've had the same insurance policies through USAA, which is available to military members and they're used to people moving around all the time. So it's no big deal. My premiums may go up or down when I go to a new state. But I basically keep the same policy. You may be able to even keep the same agent or broker that you've been using for your home and renters and auto policies and umbrella policies. Usually, they're licensed to sell in more than one state. If they're not, they can refer you to somebody else. But it's not that big of a deal to shop this out.
You can call two or three companies and just get quotes and as long as you're okay with the service that company offers, you just take the lowest price. A lot of people are surprised just how much they can save by shopping it around. Oftentimes you can cut your costs significantly in this department. They're also surprised when they find out that these costs are much more expensive in some states than others. It's like disability insurance. If you're going to buy disability insurance and at some point, this is going to involve California, buy it in the other state. If you're going to move to California, buy it before you go. If you're moving from California, buy it after you leave, just because it's much more expensive to buy in California.
But as far as those policies, what are absolute needs? Well, I think the liability is really a big need, especially for a doctor. That's the main reason you're buying these policies and your state likely has a minimum amount of liability you have to carry on your auto policy. It's probably only 50 or 100,000, which is not nearly enough. No, when you think about people out there driving around $130,000 Teslas, just totaling their car is going to get you over your liability limit. So you need to increase those limits to several hundred thousand dollars and then typically stack an umbrella or a personal liability policy on top of that. You can buy that from the same person you get your auto or your homeowners or your renters insurance from most of the time.
As far as other absolute necessities, there aren't a lot. Some people prefer having collision and comprehensive coverage on the car, especially if it would be a major financial burden to replace it. We typically carry it on our newer cars and not necessarily on our older cars. A lot of people wonder about uninsured and underinsured coverage, that can be a good idea as well. For example, let's say an occupant of your car is injured in an accident that is not your fault, but the other person who caused the accident doesn't have any insurance. Well, they may turn to you and sue you for their losses and that's where the uninsured and under insured coverage would kick in. You have to be aware that there's a lot of umbrella policies out there now that don't cover that risk. So make sure you read the fine print carefully.
As far as renters policy goes, just make sure everything's covered. There's a lot of fine print in there and it's worth going through it and seeing what is and what isn't covered. A lot of times people are surprised to find that firearms above a certain dollar amount or jewelry above a certain dollar amount is not covered by their homeowner's or renter's policy. Actually, you have to buy a special additional rider with an additional premium to get those sorts of things covered. Also, flood insurance has to be purchased separately and earthquake insurance has to be purchased separately, as well, if you want those things covered.
It's interesting because a lot of people think they have coverage from hurricanes and they don't realize that their policy only covers wind damage. It doesn't cover water damage. Even though it's all one weather event, the insurance adjusters are out there trying to decide whether it was wind or water that caused the damage. And so, if you're in an area where you could see those storms, you have to be careful to know exactly what you have covered. It may not be adequate. Those are my general rules for getting new auto and renter's insurance.
You can get a broker for these insurances. The broker essentially functions as an independent insurance agent and they can find you the best policy. It generally doesn't cost you any more to use a broker because the commission would just be kept by the company if it wasn't paid to the broker. That's probably what I would do if I was going to a new place. I'd find essentially an independent, automobile and homeowners insurance broker and have them shop it around for me, tell them what you want and find the best deal for you in that state. If you live in these states: AL, AR, AZ, CA, FL, IL, KS, LA, MS, ME, NC, ND, NY, OH, OK, TX, TN, and VA we have an advertiser that can assist you, Jared Rossi of StoneBriar Insurance Group. He is an independent insurance broker that can help readers and listeners in those states with their auto and home owners insurance.
Transitioning to Attending
Kyle and his wife have different length residencies so she will finish a year before him. This probably isn't atypical for dual physician couples. He wanted to know what he should be aware of during this transitional time period.
I think there are a few things to think about during that unique year. The first one is jobs. Chances are unless they are going to stay in the same geographic area, then she will only have a job for a year, presumably, unless they are going to separate for a year while she goes to a new geographic area and works. As she negotiates that position, it's more about the short term than it is about the long term. Things like student loan repayment programs may matter more than the total dollar amount of a contract. Partnership doesn't really matter to her. She's looking for the highest paycheck. So the employer that she takes a job with for that year may be very different than it would be if it was more likely to be a long-term situation.
Consideration number two is housing. They don't want to get into a permanent house yet. Job situations are not stable, not with one of them coming out of residency. So it's probably a year to continue renting. Ideally, they just stay in the same place they are in now. That would be living like a resident. They are now earning as one attending and one resident and still living like a resident. That will allow them to pay a massive amount towards student loans, max out retirement plans, save up a down payment, save up a big emergency fund. They don't have any, but for a lot of doctors, paying off personal loans and credit card loans and those kinds of things and just really getting on top of finances that year. It is really a big financially focused year in that respect.
The only other real consideration aside from those two factors, I think is the opportunity to still use Roth accounts. That might be different if you were still going for public service loan forgiveness at that point. You may still want to be in tax-deferred accounts in order to maximize the amount forgiven. But someone who was not going for public service loan forgiveness, this is a good year to use Roths because while yes, one of you is an attending, you are still not in your peak earnings years. So if you had any tax-deferred accounts left over from residency or fellowship, that would be a good year to convert them. It's even better the year that she leaves residency rather than the year that he leaves residency. But both are lower than your peak earnings years.
But that's a good time to do Roth conversions, do Roth IRA contributions, do Roth 403b contributions, etc. It's just a great year to be able to take advantage of your lower tax bracket to get a little bit more money into Roth accounts.
Ending
Kyle is going to be very successful given how much attention he is paying to his finances already. Keep in mind, at his stage of residency, I was completely financially illiterate. So any resident reading this blog and listen to the podcast is way ahead of where I was and I'm sure will be even more successful. If you are one of those residents, tell your colleagues about the blog and podcast so they can join you in managing their finances well from the beginning.
Full Transcription
Dr. Jim Dahle: Welcome to The White Coat Investor Podcast number 128, resident finances. We have a lot of big changes around here at The White Coat Investor household. I came home from a trip to Lake Powell earlier this week to find that our entire lot had been deforested. I had no idea that I had 125 trees on the property. We now have two. We have had them all chopped down, so we get rid of them in bulk trash pickup day in preparation for upcoming home renovation. But we're also packing boxes like crazy. We're moving to another house in the neighborhood. We're going to be renting for about seven months as we move out of here in order to do this home renovation. It's going to be a pretty major deal. You know how these things are. You get started and then you start asking, well, while we're doing that, let's do this. And that just snowballs until now we're knocking out all four walls of our home and having a real major home renovation.
Dr. Jim Dahle: It should be an interesting time, but it's going to mean a few changes around here. You may notice a few, I don't think you will, but you might. We're moving from our basement podcasting studio here to basically recording this podcast out of a bedroom at the new place. So maybe the sound will be a little bit different in future podcasts. We'll have to see. Hopefully, we can still keep it high quality. We're excited though, when we move back into the house, we're going to have dedicated studio space and so hopefully that will even improve the quality of the podcast. But if you've ever been through a home renovation, you know what we're going through in the next six or seven months. So we appreciate your patience with that.
Dr. Jim Dahle: We're always getting feedback about the podcast and apparently, I'm not funny or entertaining or cool enough. I'm told by my staff that I'm going to have to be a little bit cooler, but we'll see if I can manage that. It seems highly unlikely given the history of my life. If you go back to junior high, I certainly wasn't cool then and I'm not sure I was ever cool in high school or since then, so at least people appreciate that the podcast is pretty information heavy and useful information even if it isn't super entertaining. But if you can think of ways that we can make this a little bit more entertaining and funnier, then we're all ears for your suggestions. If we can help 50,000 of you at a time instead of 25,000 of you at a time, that's much better.
Dr. Jim Dahle: Speaking of feedback, we're going to be sending out a survey or at least giving you a link on the podcast to a survey for ways to improve the podcast. So watch for that coming up. Our sponsors today are DI4MDs, Disability Insurance for MDs. The principles at DI4MDs have collectively been advising physicians, business executives and other professionals for over 40 years utilizing knowledge and resources to take care of their life and disability insurance needs. Experience in relationships enable them to secure specialty specific disability and practice overhead insurance policies per residents, fellows and practicing physicians, the special discounts and favorable underwriting. They have established numerous guaranteed approved disability plans for residents and fellows and hiring specialists with disability benefits up to $250,000 per month. Their expertise extends to military physicians and they're honored to assist those who serve our country. They guided physicians through the claims process enabling them to collect over one million dollars in benefits in 2019. They can be reached at [email protected], 888-934-4637 or at www.di4mds.com.
Dr. Jim Dahle: Thanks for what you do. Being a doc like most of you are, at least I think so, I guess we don't know until we actually survey you, is difficult work. It's a long training period, it's competitive, it's high risk. It happens 24/7, 365, it's not easy and there are a lot of difficult things that you have to deal with, but it's also rewarding. Well, I was at Lake Powell as I mentioned recently, and my wife cut her finger just chopping vegetables. First time she'd ever had stitches. She got them at Lake Powell. It's nice to be able to not only have the stuff to do that, but the skills to do it and to do it competently. So there are a few advantages to being a doc.
Dr. Jim Dahle: On a second trip to Lake Powell I had recently, I was Canyoning with a friend and he tore his calf muscle, is what the injury ended up turning out to be in the end, but had been on a blood thinner. So ended up with a big hematoma and a ton of swelling and a ton of pain. We actually ended up evacuating him, getting him out off the Lake earlier to get him into a medical care. He went in and saw an emergency doc and had an MRI read by a radiologist and had an orthopedist consulted. And you know what, that's you guys. So I appreciate you being out there. I think this was 11 O'clock on Friday night by the time he left the ER. Spending your Friday evening and taking care of my friends. So thanks for what you do. It is appreciated. And even if your patients forget to say thanks, I want you to hear it from somebody today.
Dr. Jim Dahle: Our quote of the day today comes from Tom Noakes, CFP. He said, “We do not all need to hire a full time driver if we only need directions.” And that's the truth. Some investors prefer having a full time driver, a financial advisor that handles everything and other people just need a little bit of direction. Eventually, once they figure it out, they can drive themselves wherever they need to go as far as portfolio management goes. If you are not aware, we have negotiated special deals for you with all of the main student loan refinancing companies. You can find out about these deals by going to the page under the recommendations tab on our site. It's the first one under the recommended tab, student loan refinancing and consolidation guide. And you can find that at whitecoatinvestor.com/student-loan-refinancing. And most of these deals, if you go through the links on the site, we'll give you something like $300 cash back. That is in addition to getting a lower rate on your loan.
Dr. Jim Dahle: You're saving thousands in interests, you get $300 cash back right at the beginning, and you can actually serial your refinance. You can go from one company to another as long as you can get a lower rate each time. So every time rates go down, you should refinance. Just remember that if you want the lowest possible interest rates, you're probably going to need a five year term and a variable interest rate. That's what will get you these rates down under the 2% and 3% range. But if you're sitting there with six, seven, eight, nine percent student loans and you are not going for public service loan forgiveness on them, and you do not need the protections of an income driven repayment program, go refinance your loans. There's no reason to be carrying these things around and paying thousands more each year in interest with money that could be going to our principal and getting you out of debt sooner.
Dr. Jim Dahle: All right. We've got a special guest on today. Let me get him on the phone and we'll introduce him. Okay. Our special guest today is Kyle. Kyle is a resident and I'm going to give him a chance to introduce himself a little bit, but he took up my invitation that I gave a while back to listeners of this podcast that if they want to come on the podcast, I've got a long list of questions that we can answer and discuss on the podcast that we will do so. So welcome to The White Coat Investor Podcast, Kyle.
Kyle: All right. Thanks for having me.
Dr. Jim Dahle: So tell them a little bit about where you're at in your training, your family situation, et cetera.
Kyle: All right. Well, me and my wife are in our second years of training. I'm in radiology. I completed my intern year and I'm an R1 and she is a second year OB-GYN residents.
Dr. Jim Dahle: Very cool. And you guys have been married how long?
Kyle: We've got married our fourth year of med school, right before the March show, is a little hectic March and April. But we got married fourth year, so two years.
Dr. Jim Dahle: Okay. Maybe not quite newlyweds anymore, but pretty close to it. Congratulations on that, by the way. What was your background financially before you ended up in the medical pipeline? Did you come from a family that was relatively well to do or middle-class or relatively poor upbringing? What messages did you get about money from your parents?
Kyle: I think I had a transition throughout my life. I have a brother and a sister and we grew up on the lower side of the scale. My dad worked hard and my mom worked hard, but I think we were living a little bit paycheck to paycheck. But through their hard work ethic, they worked themselves up and by the time always going to late college and medical school, we're in the upper middle class. But during college, they were in the housing industry and that was right through the '08, '09 era. So I was a little bit on my own to get through undergrad.
Dr. Jim Dahle: And how about your wife? What was her upbringing like?
Kyle: Her mother is an emergency medicine physician and she grew up on the West coast. I'm from the East coast. Similar, she was a couple of classes up above me, but still she has a very good sense of money. Her parents made her work hard, just how my parents made me work hard and we were able to get a good value of a dollar.
Dr. Jim Dahle: Very cool. So you've been listening to the White Coat Investor Podcast for quite a while. Pretty much all of them, was the impression I got. But how long have you been following the White Coat Investor? Since what point in your training?
Kyle: I don't quite know what tipped me onto you. I was always interested in money and just, like I said, my dad was very frugal and I was frugal myself and just gravitated towards you. I didn't quite get hooked on WCI until the podcast came out. I have probably listened to every podcast one, two, three times. Just in passing, working out, traveling to interviews during fourth year med school and stuff like that. I don't read the blog as much, if you've referenced something, I try and read the start here, but I'm more of a passive listener certainly. And my wife wants nothing to do with finance. She says that's my job. I enjoy it. So she does other things. She's a heck of a cook.
Dr. Jim Dahle: Awesome. Before we go too much further, tell us a little bit about your financial situation that you're at now. I mean, you guys are basically PGY2s. I presume you both have a big old student that burden or maybe, maybe not.
Kyle: Yeah. I think we're a little bit above average, so I think it's right at 200 is the national average. We're both at around 230 each. We knew what we were getting into. We moved it up a little bit. It's probably too much in med school, but we went to a state school and the tuition wasn't too high. After I hear some horror stories on this and reading, I think we're doing better than others.
Dr. Jim Dahle: Yes, you certainly are doing better than the others, but you've got a pretty big hole there. You owe almost half a million dollars in student loans. Do you have other debts that you're carrying around?
Kyle: No, just those. Both our cars are paid off. We're just living in an apartment. So rent and monthly to dos, but no debts, no car payments, no deep credit card payments or anything like that.
Dr. Jim Dahle: In the assets so far, do you got anything saved for retirement or anything?
Kyle: Yeah. Since we became employed, we maxed out our Roth in intern year and maxed out an HSA last year. Well, maxed it out. That's a question for later. I messed that up a little bit. And then we're just saving. I'll try and do the 20%. I want to max out a Roth. And now in our new program we're doing a 403b and I'm doing traditional to try and take advantage of the PSLF a little bit, but that's only just kicked in since it's from the August paycheck. So not too much has been deposited into that. I think 11,000 each in the Roth, around 6,000 each in the HSA and then very minimal on the 403b.
Dr. Jim Dahle: So your plan for now is public service loan forgiveness or your loans?
Kyle: Yes. Well, at least we're setting ourselves up for it. It's still 50, 50, just because the job market changes so much and it depends on where do we want to go and if it's available. But I've truly enjoyed teaching and I think the hospital environment is where I'll be. My wife is not as interested in the PSLF, but we're still setting her up for that.
Dr. Jim Dahle: So what income driven repayment programs are you in right now?
Kyle: We're both in repay. We did actually the intern guide from your website, I forget the individual that wrote it, but we did the consolidation right with the zero payments. So we had zero payments throughout our intern year and I actually all qualified for PSLF. If I did my paperwork along those lines and got 12, zero dollar qualified payments. Actually, just made my first direct debit payment last month, I believe.
Dr. Jim Dahle: Awesome. Well, all right. Let's get into some of these questions you sent me. The first few of which are actually about me. I occasionally do get these from listeners, so let's hit them. The first one is, what does a typical day or week like for The White Coat Investor? As an emergency doc, I never really had a typical day or a week. I was always working, rotating shifts and so every day the week was different and that really hasn't changed. My typical day and week just doesn't exist. For example, last week I spent the whole week canyoneering in Southern Utah. A bunch of people that they go to the financial blogger and podcast or conference called FinCon. They're like, “Where is he?” And I'm like, “Dude, if you're going to plan FinCon when I could be off canyoneering, I'm probably not going to go.” So I didn't go, I went canyoneering. I spent the whole week, late Sunday night until Saturday basically at Lake Powell. Totally incommunicado, not doing any blogging or podcasting or working shifts or anything, just on vacation.
Dr. Jim Dahle: But this week, yesterday was Sunday, went to church in the morning, checked a few emails, spent some time working on some chores around the house, visited some other people. That was kind of Sunday. Today we had a White Coat Investor staff meeting. That went for about three hours this morning. Now we're recording this podcast. After this is done, I got to do my taxes unfortunately for the year. Yes, I know it's September, but we filed an extension this year and I finally, finally just got my last K1, so I get to do my taxes and that's probably what I'm going to spend the afternoon doing. Then in the evening, going to visit some friends.
Dr. Jim Dahle: Tomorrow I've got a shift in the morning. I've got a day shift, go and see patients at the hospital. I think there's a trauma meeting I've got. Tomorrow evening, I've got a webinar I'm doing and this will have already taken place by the time you hear this podcast, but it's a webinar that ACEP is putting on. Then I'll be doing for emergency positions. On Wednesday. I've got a podcast I'm on. That's about the only event I've got on my calendar for Wednesday, so I'll probably be writing a blog post or two as well as spending some time in the Facebook group this week. Where our staff has decided to take big focus on the Facebook group and try to see if we can help a bunch of people in there and see how much of that ends up coming to the blog. That's one of our projects for the week, so I'll probably be working on that on Wednesday.
Dr. Jim Dahle: On Thursday, as I mentioned at the beginning of the podcast, we are moving out of our house because we're renovating. So Thursday I'm planning to spend the whole day packing stuff up and putting them in boxes. Friday I've got another shift. This one's also a day shift in the ER and then I've got some friends coming into town, some high school buddies. They will become into town that evening and I'll be spending time with. On Saturday, we'll be going to the BYU Washington football game. That's our big plan for Saturday. That's my week. Relatively easy week.
Dr. Jim Dahle: Next week I've got four shifts and I'm going to spend one day moving in addition to that and also recording a podcast with the physician on fire next week. That's a week in the life of the White Coat Investor. It's wonderful because I'm not working any night shifts, so I really actually enjoy almost all aspects of both of my jobs now that I'm not doing that. I basically eliminated the things I didn't like about my work. That's typical day in a week in the life for the White Coat Investor. Any other questions about that, Kyle?
Kyle: That sounds pretty busy. That canyoneering and a football game, sounds fun. I really enjoy when you and the other WCI folks like physician and fire do a podcast. Those are some of your best ones I believe.
Dr. Jim Dahle: Yeah. So it should be the one that runs after this one for those who are keeping track. Next week we'll have the physician on fire on. Canyoneering is an interesting sport. It's basically descending slot canyons, is what it is. There's some climbing, there's some repelling, there's some swimming. There's a lot of problem solving and use of some cool technology as well as exploring some wild places. So it's a lot of fun. I usually spend at least a couple of weeks a year doing that.
Dr. Jim Dahle: All right. How do I maintain balance? It was your next question. I don't think I do. I think my life is incredibly unbalanced, but where the balance is swings around the places. You can tell just from a typical day in the life schedule. I may have a week off every month. That's actually probably pretty typical. I usually go on vacation for a week every month. So I guess that helps me to maintain balance. But it feels the rest of the time that I'm just keeping balls in the air. Just trying to juggle and not letting anything hit the ground. As far as all your other responsibilities between family and White Coat Investor work and my clinical work and those kinds of aspects. I think we all struggle with this. I think we try to prioritize what's most important. About a lot of times, we get in trouble in that we take stuff that's urgent but not important.
Dr. Jim Dahle: I don't know if you've ever seen one of these graphs. You divide all the things in your life into urgent and non urgent and important and not important. And what happens is we tend to prioritize the urgent things even if they're not important over the more important things that may be less urgent. So I'm trying to spend a little bit more time on the non urgent but important aspects of my life, most of which involve my family and community service and that kind of stuff.
Kyle: I think that's from Seven Habits, I believe. The only reason I read that book was you suggested on one of your earlier podcasts.
Dr. Jim Dahle: Yeah, it is a great book. I read a long time ago, it was given, Oh, I don't know. I must have read it in my early twenties, I'll bet. And then when I got married, we had the Seven Habits of Healthy Families or productive families or something given to us as a wedding present. I don't know if I ever read that one, but I was just adapting the original Seven Habits to Families, I think. But there's a lot of truth to that. If you've never read this book, it's worth your time. It really helps you to put first things first. I think that's one of the habits and sharpen the saw, I think is the seventh habit. I can't remember what all the other ones are, but they're definitely worth applying in your life.
Dr. Jim Dahle: All right. Your next question also to me is, I know you've said you prefer forums, but what podcasts do you listen to or is it all music in your car? It's interesting, I just had a discussion about this on the White Coat Investor forum. People were talking about what podcasts they listen to and how there's so many physician financial podcasts out there now. The truth is, I'm not a huge, not podcast, blogs rather. I'm not a huge podcast listener. I'm not a huge blog reader. A lot of people are surprised by this because I have a podcast and I have a blog. But the way I actually prefer financial information is I prefer books and forums. The books give you the evergreen material, they have it set up in a format that's easy to understand and allows you to hang things on a framework. Then forums are about as up to date as things get. As news articles come out and tax law proposals come up, they get discussed on forums and I like the give and take there and the interaction with the other people that you get on a forum.
Dr. Jim Dahle: So those are actually my two favorite ways of learning about financial information. But what I have learned from this White Coat Investor enterprise is everybody is not like me. Some people are like, I'm not going to a forum, I'm going to do a Facebook group, or I'll watch YouTube videos or read it or I'll read a blog or I'll read email newsletters or books or whatever. Everybody's a little bit different and I've been surprised, not so much anymore, but initially just how many people a new medium reaches that weren't paying any attention whatsoever to The White Coat Investor message in the old median. And you sound like you were that way. You said you don't even read the blog, right?
Kyle: That was definitely me. I'm a podcast person for life now. You're really the only one I listen to.
Dr. Jim Dahle: Yeah. So let's see. What podcasts do I listen to when I listen to podcasts? Because I do sometimes. Let me just go to my podcast library and see what's in it. I have got Cycling News. I listen to that one. [inaudible 00:21:04] News, also a cycling podcast. I've got ER Cast on there. I've got Risk Management Monthly, that's aimed at emergency docs as well. I've got Ted Business on there. I've got Hidden Brain from NPR. I've got Freakonomics, I've got Planet Money. I've got the Dave Ramsey Show.
Dr. Jim Dahle: How I Built This by Guy Raz, is an entrepreneur podcast. It's become much more popular since I started listening to it. But it's also great if you're interested in entrepreneurial stuff. I keep track on some of my competitors out there as well. Physicians doing podcasts, at least somewhat relevant to money. Doctors Unbound, Docs Outside the Box. Hippocratic Hustle, Kerry Jenkins over there, Married to Doctors. I've had Lara McElderry on this podcast. She does that one. Financial Residency was one of my advertisers. Ryan Inman, I've got his podcast on my list. A lot of different podcasts I listen to. I don't know if that's a recommended list for anybody, but that's what's on my phone right now as I look at it. So I guess those are the podcasts I do listen to, but I confess there's a lot of music in my car and not podcasting.
Dr. Jim Dahle: All right, let's get into a little bit more financial stuff. So you want to talk a little bit about cashflow and budgeting. Why don't you tell us what you guys are doing as far as your budgeting process now. You said your wife's not super interested in it, so let's hear about how the two of you have worked out a system.
Kyle: She's not into money, but she's really good at budgeting, and she doesn't spend a bunch of random stuff. But what we have is we sat down like you suggested it and had a little bit of a meeting and built up an actual budget. Now I don't track my dollar to dollar by no means. I don't see the utility of too much in that, but we have a primary checking account where our paychecks are directly deposited. And then from there everything is auto drafted out.
Kyle: Before we see anything, the 403bs are already been taken out, the Roth is taken out to go to our Vanguard Roth account and then we each actually get a grand a month as “allowance.” With that allowance we spend everything. So food comes from there, eating out, gas, any type of travel or anything like that. So it's a rollover. And if you're not going over your thousand dollars, the other partner doesn't ask questions. So it's just along that line. More for, I'm real big penny pincher. But more for her she likes to spend some money on some random stuff that of course as a guy I don't understand. But that's just how we have set it up, and it's actually worked out pretty well.
Dr. Jim Dahle: Yeah, our budgeting process, I think I've talked about before on the podcast and on the blog and we just started using initially just a spreadsheet, a Microsoft Excel spreadsheet, and I've literally got all spreadsheets from our entire marriage. The last 20 years of spreadsheets. One every month of what we spent. And the first few were hilarious. I did a blog post on one of these ones. I found one and it talks about our long distance phone bill. Who has one of those these days? But we were really strict in the beginning because money was pretty tight. I remember when we were living on in med school and residency and it was pretty tight. Katie worked my intern year and after that she was a stay at home mom. That was the only real decrease in income we ever had. But it certainly made things tighter. We watched every dollar for years and years and years and the budget served as training wheels in many respects. Once we learned how to ride the bike, the budget probably doesn't matter as much anymore. Now it's mostly just keeping track of the cash flow.
Dr. Jim Dahle: It's really hard to keep track of it if you're not doing some sort of meeting every month or some sort of planning process. You just got money flying everywhere and you're not sure where it's coming from, where it's going. So we've specialized a little bit in the last couple of years to our strengths. And what Katie's strength is, this is a little bit traditional. Traditionally, the man makes the money in the woman's spends the money, but in our house, that's the way it works out. And the reason why is because she's better at spending money. She actually shops for stuff and compares prices and gets a better deal on it. Whereas I shop like a hunter. Go out, kill the beast, drag it home, and whatever price you got on it, you've got it. You've now got the item. I'm not much into comparing prices. When I buy something, I don't care. I want to get it as fast as I can, not necessarily get the very best deal I can.
Dr. Jim Dahle: Because of that, we let her do most of the buying and she does a much better job of it. If we're buying airplane tickets or whatever, she buys them. As that relates to our budgeting process, she keeps track of the spending. She goes over the credit card statements and the bank account statements and make sure it's all legit and adds it all up what it was and then feeds that into one line on our spreadsheet. That's literally as close as we look at our spending. It is one number. All the gas, all the groceries, all the kids' activities, all this stuff, it's one line on our spreadsheet because we just don't care anymore. We don't care what it was spent on, we just care what the total was. That's our tracking that we do now.
Dr. Jim Dahle: I am in charge of moving the money around between the accounts and adding up the income. At the beginning of the month or whenever we get around to doing this process, I go through all of our sources of income, and that's the White Coat Investor profit for that month. That's what I made with my clinical work that month. We look at all our investing accounts and we take the income from that and so on and so forth and add all that up. Then we take our effective tax rate, is in the 33%, 34% range. We take 34% of what that number is and we set it aside.
Dr. Jim Dahle: This is our tax money basically, so we don't spend that or don't go invest that because we know we're going to need it within the next few months to pay taxes on it. Then we give to charity based on that total as well. And then we decide what we're going to do with the rest. Because right now, we're making much more than we spend. So this is the main thing we do at our monthly meeting. We just talk about what do we do with the rest? And the rest turns out to be either invested or the last few months we've been saving up for this home renovation. And so all the rest has been going toward this home renovation account lately. But that's what our monthly meeting is about. She brings one number to it, I bring another number to it and we talk about the difference really and what we're going to do with it. And that's our current cash flow budgeting process.
Dr. Jim Dahle: As far as that tax money, we set aside the 34% because we know we're going to need that eventually, but that's not necessarily what we pay in taxes. As an S corp for White Coat Investor, we're obligated to pay a certain amount of taxes every time we pay ourselves a salary. I calculate that out and send that in as required by federal law. And then we make quarterly estimated payments. The way we make those is we just calculate it as 110% of one quarter of last year's tax burden. That's what our quarterly estimated payments are. Basically just enough to stay in the safe Harbor. That's what we do with our tax money. And then if we owe more next April, which we usually do, we write that check out of this money that we've been setting aside for taxes. So that's our cash flow and budgeting.
Kyle: Do you just keep it aside in a money market or?
Dr. Jim Dahle: Yeah, it's just sitting in a Vanguard money market account. I think this month it's in the prime money market account. For some reason the municipal money market account yields have dropped enough that it actually makes more sense despite our high tax bracket to just be in a taxable money market account for now. But that's a calculation you have to run. You take the yield of the taxable money market account and you multiply it by one minus your marginal tax rate. And if that's higher than the yield on the municipal money market account, you do that. If it's lower, then you put your money in the municipal money market account. Every few months I do that calculation just to make sure I'm in the right one, but we just let it sit there until it's time to write a check to the IRS.
Dr. Jim Dahle: All right. Your next question though was not for people like me that are self-employed, it's for people like you that are employees. About the W-4, you had a question about how to fill it out in order to minimize the amount of tax with health. What's your big concern there as far as the W-4 goes?
Kyle: I think when I originally wrote this question, it was a couple months ago. Actually, I believe you talked about on the podcast and it got me a little bit interested in it and I did my own Googling and I came across what you just discussed, how you have to pay out a certain amount of taxes within a grand or however much you made last year. I just don't think I had a firm enough grasp on what the W-4 entailed. I had briefly heard of somebody paying their tax bill on a credit card in order to obtain points and stuff. But I just think they were working with a different process than me as a W2 employee.
Dr. Jim Dahle: Yeah. So the W-4, this is a form that an employee fills out for their employer and you basically pick up how many, mark off a number of exemptions. One for you and one for your spouse and one for dependence, et cetera. And the idea is just to estimate how much tax you're going to owe at the end of the year. That's the whole point in the form. The idea is that the employer then withholds that from your paycheck and sends it to the IRS on your behalf. But that amount of money that's withheld actually has very little to do with the amount of taxes that you owe, which is calculated on your return. The goal isn't necessarily to minimize the amount of money withheld on the W-4. If you want to minimize the amount of money withheld on the W-4, you put 10 exemptions on there. Because then they're going to hardly withhold anything.
Dr. Jim Dahle: Now that's probably not even legal to do, nor is it advisable. What you should try to do is just get the amount withheld about right. Because if you are not in the safe Harbor at the end of the year, you'll not only owe the taxes that you would otherwise owe and the interest that you may owe on that, but you also owe penalties. So the goal is to be in the Safe Harbor. What is the Safe Harbor? Well, the Safe Harbor is that you have either paid all the tax you owe. That will obviously keep you in the Safe Harbor. If you've had that all withheld or paid, it is in quarterly estimated payments, that'll keep you in the Safe Harbor. Also, if you have paid at least for a high income earner, 110% of what you owed last year, you're in the safe Harbor and won't have to pay any penalties.
Dr. Jim Dahle: Then the third way you can be in the safe Harbor if you owe less than a thousand dollars. There's $1,000 difference between what was withheld on the W-4 or what you paid in your quarterly estimated payments and what you actually owe in taxes. If that's less than a thousand dollars, you're in the safe Harbor and don't owe any penalties. So the goal is just getting a safe Harbor and the W-4 is a tool to help you do that. But what a lot of people don't realize is there's a few strategies you can do using the W-4. For example, with quarterly estimated tax payments, it matters when you make the money and when you pay the taxes. If you made all your money in the first quarter but you didn't pay the taxes until your fourth quarter estimated payment, you can get dinged. But with a W-4 and money that's been withheld by an employer, the IRS doesn't care.
Dr. Jim Dahle: Money withheld in December is exactly the same as money withheld in January. So what some people have done to gain the system a little bit is have a few more exemptions on their W-4 earlier in the year and less late in the year. And thus more is withheld from the paycheck late in the year. There's a few ways you can gain it there. I don't know that I'd recommend it, I just try to estimate it correctly. And if you find you're getting huge tax returns every year, well, you probably need to claim more exemptions and so you're having less withheld from every paycheck. If you find you're writing big checks every April, you probably need to have more withheld from your paycheck and that's the whole point of the W-4.
Dr. Jim Dahle: Now, you also mentioned paying your tax bill on a credit card, and this can also be pretty slick. A lot of people don't realize this, but the IRS allows you to pay your taxes with a credit card. Let me see if I can find the URL here that it has there, so I give you the right information. It is irs.gov/payments/pay-taxes-by-credit-or-debit-card. And they give you one, two, three processors you can use there. However, there's a fee, and that's what you need to realize. The lowest fee there is 1.87%. So if you're getting 1% back in cash for using the credit card but you're paying 1.87%, this is not a good strategy for you. So you really need a credit card that's paying you at least 2% cash back in order to come out ahead doing this. Whether those are points, whether those are miles, whether that's cash back, you need a pretty good credit card and a pretty good cash back credit card to make anything doing this.
Dr. Jim Dahle: It is convenient. It's nice to not have to mail the check. You could've saved yourself the stamp there. But there's not a huge arbitrage here. Even if you've got a 2% card, like the fidelity card, you're earning 2%, you're paying 1.87%, you're probably not going to get wealthy on this arbitrage. But it certainly is something that can be done and it gives you a few more weeks before the money actually comes out of your bank account. And of course, you can get a little bit of cash or points back, but for most people, this is not a huge strategy that y'all spend a lot of time trying to figure out.
Kyle: Yeah, I blame our physician on fire for that one. He wrote a couple of articles on credit card churning, I think got me too excited about it.
Dr. Jim Dahle: Yeah, I think you are a lot of those credit card folks that are really into these credit cards. You know they have 20 credit cards at a time. They got a spreadsheet to keep track of them all. What they have found is the money is not in the cash back. It's not in getting 2% back after spending 1.87%. The money's in the signup bonuses. That you got to spend $3,000 on the card in the next three months and then you get 50,000 miles. That sign up bonus is obviously at a much higher rate in the ongoing use of the card.
Dr. Jim Dahle: So if you're into credit card churning and credit card, what do they call it? Arbitrage. I can't remember what the term is right now. Credit card farming, whenever you want to call it. But you need to come up with a way to spend a few thousand dollars on a card. Yeah, paying your taxes with it is a pretty good way to do it. For most employees, it's not going to work though because most of your taxes are withheld from your paycheck by your employer. I guess you could do it if you owe money come April. But otherwise, that one's mostly for the self employed that are making quarterly estimated tax payments.
Kyle: Yeah, I think that's where my original question came from. Bring it down so I had something to pay in April.
Dr. Jim Dahle: Yeah, exactly. Well, that would give you an option if you had less money withheld from each paycheck and owed money in April and you could pay that with a credit card. But you got to keep in mind if you don't have enough withheld to stay in the Safe Harbor, it's going to cost you some penalties and that's going to reduce the amount that you're getting from the credit card churning. I worry about people that get into this credit card game, I think it's relatively easy to screw it up and end up paying a bunch of interest. You don't have to pay a lot of interest on a credit card to eliminate all the benefits you got in the previous year from your careful tracking of your credit cards. Nobody ever gets rich off this. This is definitely a little bit on the side, a little bit of a side hustle. It's not something that's gonna make a dramatic difference in your financial life. Maybe you get a few trips to Europe for free, and that's about it.
Kyle: I think when I did the math, it was just more trouble than it's worth.
Dr. Jim Dahle: Yeah. Okay. So let's talk a little bit about your HSA woes now. You mentioned you had an HSA because you had a high deductible health plan as an intern and now it's going to sit because your new program, your residency program is four year program, does not have a high deductible health plan. So you've just got a few thousand dollars in that HSA. So what should you do with it? Well, you basically have two choices. Your first choice is you can just spend it on your health care needs-
Kyle: All right. Jim, one sec.
Dr. Jim Dahle: Yes.
Kyle: Actually, since writing these questions, I actually developed another problem with it. I've maxed it out intern year under the last month rule. And then when I came to my new program without a high deductible health insurance program, I now will have to do pay, I believe a 10% fee on my next, on my 2019 income taxes due to over-funding that account. That was another question I was leading to.
Dr. Jim Dahle: Yeah, let's address that too. But basically, the two questions, as far as the money you have in there, you can certainly just leave it. You can leave it in the HSA. If you haven't done a good HSA, you can invest it. You don't have to leave it in the employer's HSA. You can roll it over to a good one, like Lively that I've got an affiliate relationship with, and you can roll it over to Fidelity. That's where my HSA is at. Those are both great places, low fees to invest your HSA and just let it grow for the long term. That's option number one, is just leave it there. Option number two is to just spend it on your health care needs. They come with a debit card, they come with a checkbook. As you spend money on healthcare, write the check out of the HSA. That's a totally legitimate use of an HSA.
Dr. Jim Dahle: What you probably shouldn't do is pull all the money out of the HSA and pay taxes and penalties on it. There's a pretty good penalty if you pull it out and spend it on something besides healthcare. At least up until age 65. You've got a separate issue though. Your issue is that you put too much money in there. Now, they have a cool rule called the last month rule, which basically says if for the last month of the year you're eligible for an HSA, you can make a whole year's contribution for that HSA. And that's what you took advantage of for last year. Even though you were only an intern for six months of that year, you basically got to make a whole year's contribution. But there's a catch. You also have to stay eligible for the next year, which you did not because when you left your internship at the end of June, you're now in a program without a high deductible health plan.
Dr. Jim Dahle: So I'd have to look at the regs to see exactly how much you're going to have to pull out of there. I suspect you're probably can probably still leave a significant amount of that money in there because you should still be eligible for contributions for that last six months of 2018, as well as the first six months of 2019. So you may not actually have to withdraw that much and pay penalties on that much. But a careful reading of the rules surrounding the last month rule would definitely be an order for you. And then of course, you're probably going to end up having to pull some of that money out and paying at least a little bit in penalties, but it's not going to be the whole thing. It's not like you're going to be just nailed on it. You should still get significant benefit out of using that HSA. So I wouldn't beat yourself up too much about it.
Dr. Jim Dahle: But as a general rule, people should be aware of that, that if you're not going to have an HSA for the whole next year, that last month rule has a special provision that nails you. So something to be careful about.
Kyle: Certainly.
Dr. Jim Dahle: Have you actually run the numbers yet to see how much you have to take out of that account?
Kyle: I did run numbers. Actually me and you, I've had a discussion, I don't know if it was through email or some other form. I had contact with the WCI through multiple outlets and it comes down to I have to pay a 10% fee on the overdrafts and the earnings on my 2019 income taxes for that. It's a little bit fishy. I haven't looked at it in a while, but I'm pretty sure it comes down to a 10% fee on everything that was put in there that wasn't supposed to be there.
Dr. Jim Dahle: Right. The question is how much wasn't supposed to be in there?
Kyle: Oh, it's half. So six months I maxed it out, so I was able to do the six months. I believe it was like 3750 that year. So half of 3750 wasn't supposed to be in there.
Dr. Jim Dahle: Right. That sounds right.
Kyle: I have to pay 10% on that plus 10%, I believe on all the earnings of that.
Dr. Jim Dahle: But you should be eligible to make contributions for part of 2019 as well, correct?
Kyle: Yes, and I did. I made the full six months and that'll be fine.
Dr. Jim Dahle: Okay. So you're basically taken out 1800 bucks or whatever and paying a 10% penalty on it and the earnings.
Kyle: I have to fill out part three of the form 8889 and it'll do my math from a me on there. It's probably part of the HSA. That's where you fill in every year for the HSA.
Dr. Jim Dahle: So it'll calculate it for you there. You say So you're going to owe a penalty of a couple of hundred bucks, something like that?
Kyle: Yup.
Dr. Jim Dahle: But not the end of the world.
Kyle: You live and you learn.
Dr. Jim Dahle: But how were you supposed to know, right?
Kyle: Actually, you taught me.
Dr. Jim Dahle: Well, I guess, but did you know your new employer wasn't going to have an HSA eligible plan?
Kyle: No, I did not.
Dr. Jim Dahle: When did you find that out? I guess when you go through the match really, right?
Kyle: Exactly. Yeah. I went through the maths as an intern.
Dr. Jim Dahle: Yeah. So if you are going to a new employer anytime soon, it's definitely worth getting in touch with the HR department of the new employer to make sure you're not going to get burned by this. But in the end, as you can see, it's not like you got to pull, you don't owe thousands to the IRS, you owe a couple hundred bucks, no big deal. You're going to be able to handle that even on a resident income.
Kyle: Yeah.
Dr. Jim Dahle: Okay. Your next question was about your Roth IRA contributions. So you and your wife auto draft your Roth IRA contributions to Vanguard every month and there's a re-invest option. Should you do that or should you not? Well, first of all, I'd caution you about the auto drafts. What happens with these is, it's great to automate your finances. Don't get me wrong. You know the book, The Automatic Millionaire has a lot of truth to it where they're basically advocate for automating everything. The problem with this is you and your wife are eventually going to need to do your Roth IRA contributions through the back door and it may not be clear exactly which year you have to start doing that.
Dr. Jim Dahle: It could even be during your residency if you start doing significant amount of moonlighting. Once you get that modified adjusted gross income up over, I think it's about $190,000 a year right now, you're no longer eligible to make direct Roth IRA contributions. So you've got to keep an eye on that and before that year starts for whatever year you're going to be over that amount, you got to stop this auto draft Roth IRA contribution because those are direct Roth IRA contributions. That's one thing to be aware of there. They're great, but you just got to realize that at some point you got to start doing these through the back door. But the re-invest options is just about reinvesting dividends. And I'm a big fan of reinvesting your dividends and your capital gains distributions as long as you're inside a retirement account.
Dr. Jim Dahle: In a taxable account, what that does is it gives you a whole bunch of different tax lots to keep track of and they might be really small tax lots. They might only be a few dollars even. And while the brokerage will keep track of those for you, I prefer to just have all my dividends and other distributions in a taxable account go into my sweep account or my money market account and then I reinvest them with the next month's investments. So I'm still reinvesting the money, but I'm doing it manually rather than automatically into the same investment. But inside a Roth IRA, I see no reason not to just reinvest and automate your finances in that respect. Does that make sense?
Kyle: Yeah. There was a little option on it and I again, I've done a little bit of reading on it since then, but yeah, you perfectly sums it up. Thank you.
Dr. Jim Dahle: Yeah. So you guys are a two physician resident couple who decided not to get insurance at. You guys don't have disability insurance or life or has that changed since you sent these questions to me?
Kyle: No disability or life.
Dr. Jim Dahle: Yeah. Tell us about your reasoning when you went through that because it's not necessarily unreasonable. There's a lot of different things people choose when there are two physician couple. But tell us about your reasoning to do it that way.
Kyle: Originally, I was planning on doing that and I think I actually reached out on the forums and a couple of people on the forums convinced me otherwise of like, hey, you need to look into getting disability insurance. And I reached out to a couple people through the conditions that both me and my wife have had previously. It was not the perfect definition of disability insurance and it was just not going to cover what was needed. It wasn't the typical disability insurance. I'm sure most people are obtaining. So we just decided to basically self insurance. I'm her disability insurance and she's mine.
Dr. Jim Dahle: And the same for your life insurance.
Kyle: Life insurance, basically, the only debts we had was student loans. So on my understanding that we won't be liable for each other's student loans. So we'd be able to obtain or basically take care of ourselves with the income, our physician income.
Dr. Jim Dahle: Yeah. So that's generally the case for federal loans as well as most refinance loans. They just go away at death. There are few, when you refinance your loans, you've got to read the fine print and make sure that the company's not going to apply that to your estate. If it is, it's definitely worth buying some life insurance to cover that risk. That's a heck of a lot cheaper than paying the higher interest rate on an unreal finance student loan. But just be aware when you're refinancing your loans to look into that provision. But there are a lot of dual physician couples that have struggled with this question and the responses and decisions basically range from what you guys are doing. No insurance at all to both partners being fully insured. But you guys are in a very different situation than my wife and I was.
Dr. Jim Dahle: When I came out as an attending physician, we had no assets. This was long before we were financially independent. My wife was a teacher, and I was a physician. What if I became disabled? Our financial life was going to be dramatically different without that disability insurance. And so it was a really important part of our financial plan. For a dual physician couple, you're married to a gynecologist, she's married to a radiologist essentially. You have a very nice life on a radiologist income, just one without being married to another doctor. And so it's totally reasonable to go to the complete other extreme and say, we're not going to insurance at all. But what I see most dual physician couples do is pick something in the middle. They realize, well, if one of us became disabled, I might not want to work as much, we might not want our income to drop as much. And so they both get partially insured. That keeps the premiums down, so they're not quite spending so much money but also provides something coming in if one of you were to get disabled.
Dr. Jim Dahle: Same with life insurance. There are a lot of costs that come up when one person is having to do all of the bread winning. You've got to go out there and you got to maybe work a little bit more than you were, or you got to hire a housekeeper, or you got to hire out more child care, whatever it might be. So they choose to buy some smaller life insurance policy. The other thing you got to keep in mind is there's always a possibility that you guys both become disabled or both die at the same time. And if you've got kids relying on you, especially there is a certain risk there, it might be pretty low.
Dr. Jim Dahle: There's a certain risk there, and the benefit of buying at least a small policy on each of you is you're insuring against that possibility as well. So lots of different ways to slice that. I don't think there's a right answer. I think you just need to think through what is the plan if I die, what is the plan if she dies, what is the plan if I get disabled, what is the plan if she gets disabled, what is the plan if we both die, what is the plan if we both become disabled? Work through the possibilities and if those are not acceptable to you without buying disability or life insurance, well, buy the insurance. At least enough until the plan becomes acceptable in the event of those relatively rare but catastrophic financially outcomes. Does that make sense?
Kyle: Yeah, it makes perfect sense. We don't have any kids currently, but we did discuss possible obtaining more insurance when that was in the horizon. Also, when I actually approached the forums, they brought up another good point, unspeakable, not really polite way, but they also brought up the divorce rate where that could mess up your whole finances as well. So I just wanted to put that out there. Of course, that's not on anybody's plans, but-
Dr. Jim Dahle: Yeah, for sure.
Kyle: … you have to mention it.
Dr. Jim Dahle: Yeah. Well, it's actually pretty good for dual physician couples. They always say docs are always getting divorced, but if you actually look at the data for a dual physician couple, the divorce rates only about 10%. So it's much lower than the 50% that it is in the general population. You've got that going for you, but it certainly isn't zero and it's a pretty significant risk that you should do what you can about for sure.
Kyle: Yes. And you can get through step one, you can get through the maths together. It's pretty taxing on anybody.
Dr. Jim Dahle: For sure. It's like I tell people all the time, your best asset protection move is probably date night because that really is your biggest, biggest risk of loss, is getting divorced.
Kyle: Oh man. Now my wife's going to pressure me into date night. Thanks a lot.
Dr. Jim Dahle: All right, well let's talk this next question, which is a very good question. It relates to your guys a student loan plans. You're both, at least for now, at least keeping public service loan forgiveness on the table. Now how should that affect your retirement account contributions as a resident? Is basically what you're asking. Because the general rule is that residents and other people that are in lower income years, they're not in their peak earnings years, should use Roth accounts and those in their peak earnings years should use tax deferred accounts. But you are noting essentially one exception to that general rule. And the reason why is if during residency, if you're going for public service loan forgiveness, if you use a tax deferred retirement account, it lowers your income and with a lower income, you have a lower income driven repayment program, payment due. And the lower the payments you make, like the zero dollar payments you made last year, the more that is left to be forgiven after 10 years in the public service loan forgiveness program.
Dr. Jim Dahle: Now you've got these two factors weighing against you. You've got the extra taxes you're probably going to end up paying by virtue of not using the right retirement account, but you're weighing that against the possibility of getting more money forgiven. And so it actually becomes a very complex calculation to decide exactly what to do. But if you go to the recommended student loan and vice people I have on my website, that's again under the recommended tab under student loan advice, they can help you run the numbers for those. And this situation like the one that you're in where you're thinking about going for public service loan forgiveness, it's a dual physician couple. You're contributing to retirement accounts but you're not sure which ones, this is the ideal person to go spend three or four or $500 with these student loan advisors and help work out what exactly the right plan is for you. Because the plan could very well be tax deferred contributions to keep those payments down.
Dr. Jim Dahle: But it's possible to put too much in there. If you got your payments down to zero dollars already, more tax deferred contributions are not going to help lower that payment any further. So you can go too far too. You really just have to run the numbers. And I wish the government hadn't made the rules for these programs so complicated, but unfortunately, they have and there's no way around it. If you're in a complex student loan situation, you've got to look at all these things.
Dr. Jim Dahle: You've got to look at how you file your taxes, you got to look at what IDR program you're in, you got to look at what retirement accounts you're using because it all goes into the calculation of what exactly is right in your situation. And it can be pretty complex unfortunately. So that is a noted exception to the Roth is for resident's rule. If you thought you were almost surely going for public service loan forgiveness, I would say, okay, lean toward the tax deferred accounts. If you're like, well we might but we probably won't, then I would still lean toward the Roth accounts even if it made your payments bigger just because in the end, I think you'll be glad you got more money into a Roth account in relatively low tax bracket years.
Kyle: I've taken similar thoughts to that and I maxed out my Roth just IRA every year. That's the plan. I think I have a fundamental confusion on the retirement accounts as well. So I maxed out my Roth IRA. That has nothing to do with my max loan contribution for 403b. Correct? Because in my institution, we're actually able to do traditional tax deferred and then we're also able to do Roth 403b contributions. So I actually could maybe put a little bit more into it. Is that correct?
Dr. Jim Dahle: That's right. They're completely separate contribution limits. So you can put $6,000 into each of your Roth IRAs each year and you can put $19,000 into each of your 403bs each year. That's a heck of a lot of savings for a resident couple. Even a dual resident couple. I mean, what's that work out to be, 50 grand? That's got to be pretty close to half of your income as a resident is pretty impressive. But it's the same question whether you do Roth or whether you do tax deferred. Now, the truth is for your IRA, you should almost surely do Roth because the presence of that retirement account at work and your income are going to make it such that you are not eligible to deduct a traditional IRA contribution. And if you can't deduct that, you might as well do the Roth IRA contribution. That one's probably a no brainer for you, but you do have a little bit of debate there deciding whether to do the Roth or the tax deferred 403b.
Kyle: Currently we are doing the Roth IRA and then just a tax deferred 403b.
Dr. Jim Dahle: Yeah, that's probably not a bad way to go. But to know whether that's right for you, you honestly got to sit down and run the numbers. And if you need help doing that, I'd get one of those student loan professionals and get some, pay for some formal advice. Which segues us well into your next question, which is when is the best time to talk to a student loan professional? Earlier or later in residency? Obviously, you guys are pretty early in residency, and you've got all these questions, you're not sure what to do. So the answer is early. Because you want to do it sooner rather than later. Now I know 400 or 500 bucks is a lot of money to an intern, but this could mean the difference in tens of thousands of dollars to some doctors and how much you have forgiven, how much you pay in interest, how much you make in your retirement accounts.
Dr. Jim Dahle: I think it's really being penny wise and pound foolish. If you're in any complex student loan situation, do not hire that advice early on in residency. It doesn't need to be an annual meeting, not necessarily. For a lot of people, a one time meeting to set up the plan would be fine, but it's probably a good idea to meet early in residency and then again late in residency and put together that plan of what you're going to do as an attending. Because maybe by now you know you're not going for public service loan forgiveness and as time to refinance, or you know, you want to make sure you're in the right plan as you become an attending, and you want to know, well what retirement accounts should I be using as I become an attending. And so probably a couple of meetings during residency are worthwhile.
Dr. Jim Dahle: I think most of the people I have on my recommended list give you some discount on a repeat or a second meeting anyway. So it's not like that second one is super expensive, but most people probably don't need an annual meeting. But if you're in a complex enough situation, stuff is changing and one spouse's income is moving around, or you start moonlighting or something, you might need to look at this again annually. But again, that's way cheaper than anything else you hire in financial services. You go hire an investment manager, and you're probably going to spend five grand a year, you go talk to these guys for 300 or 400 bucks and it's just not nearly as expensive. Okay. Your next question, you're now in a new state I understand, right?
Kyle: Yeah, we switched.
Dr. Jim Dahle: And you need some new insurance. So I assume you've already got the insurance now. Right?
Kyle: There was a little bit of a leeway from my previous state that I've able to keep those policies for a little bit as I'm pricing it out and getting used to the new program and use a new moving everything like that, and it's just get bumped further and further down on the to do list. So I actually have not obtained it.
Dr. Jim Dahle: Okay. You go to a new state, a lot of times you just modify the insurance policy you have. As I move state to state, I've had the same insurance policies minor through USAA, which is available to military members and they're used to people moving around all the time. So it's no big deal. My premium is may go up or down when I go to a new state. But I basically kept the same policy. You can even keep the same agent or broker that you've been using for your home and renters and auto policies and umbrella policies. You can keep the same person. Usually, they're licensed to sell in more than one state. If they're not, they can refer you to somebody else. But it's not that big of a deal to shop this out.
Dr. Jim Dahle: You can call two or three companies and just get quotes and as long as you're okay with the service that company offers, you just take the lowest price. A lot of people are surprised just how much they can save by shopping it around. Oftentimes you can cut your costs significantly in this department. They're also surprised when they find out that these costs are much more expensive in some states than others. It's like disability insurance. If you're going to buy disability insurance and at some point this is going to involve California, buy it in the other state. Whether you're going to move to California, buy it before you go. If you're moving from California, buy it after you leave just because it's much more expensive to buy in California.
Dr. Jim Dahle: But as far as those policies, what are absolute needs? Well, I think the liability is really a big need, especially for a doc. That's the main reason you're buying these policies and your state likely has a minimum amount of liability you've got to carry on your auto policy. It's probably only 50 or 100,000, which is not nearly enough. No, when you think about people out there driving around $130,000 Teslas just totally in their car is going to get you over your liability limit. So you need to increase those limits to several hundred thousand dollars and then typically stack an umbrella or a personal liability policy on top of that. When you buy that from the same person you get your auto or your homeowners, your renters insurance from most of the time.
Dr. Jim Dahle: As far as other absolute necessities, there aren't a lot. Some people prefer having collision and comprehensive coverage on the car, especially if it would be a major financial burden to replace it. We typically carry it on our newer cars and not necessarily on our older cars. A lot of people wonder about uninsured and underinsured coverage, that can be a good idea as well that will cover. For example, let's say an occupant of your car is injured in an accident that is not your fault, but the other person who caused the accident doesn't have any insurance. Well, they may turn to you and sue you for their losses and that's where the uninsured and underinsured coverage would kick in. You got to be aware that there's a lot of umbrella policies out there now, it don't cover that risk. So make sure you read the fine print carefully.
Dr. Jim Dahle: I was talking to an advisor on the podcast not that long ago, who pointed out that USAA umbrella policy no longer covers that. So I may be shopping for a new policy myself soon too. But those are the main things. As far as renters policy goes, just make sure everything's covered. There's a lot of fine print in there and it's worth going through it and seeing what is and what isn't covered. A lot of times people are surprised to find that firearms above a certain dollar amount or jewelry above a certain dollar amount is not covered by their homeowner's or renter's policy. Actually, you got to buy a special additional rider with an additional premium to get those sorts of things covered. Also, flood insurance has to be purchased separately and earthquake insurance has to be purchased separately as well if you want those things covered.
Dr. Jim Dahle: It's interesting because a lot of people think they have coverage from hurricanes and they don't realize that their policy only covers wind damage. It doesn't cover water damage. Even though it's all one weather event, the insurance adjusters are out there trying to decide whether it was wind or water that caused the damage. And so if you're in an area where you could see those storms in the Southeast, you've got to be careful exactly what you have covered. It may not be adequate. Those are my general rules for getting new auto and renter's insurance. Do you have any specific questions about them?
Kyle: No. Just the process or if you had a specific process that you went through. The people that covered me in my previous state are not qualified in the state I moved to, so I'm not going to have to do the shopping. But I was just wondering if there's an easier way to do it. But now it sounds like I'm going to have to-
Dr. Jim Dahle: No, you just got to shop it. I mean, you can get a broker. Just like if you're buying health insurance on your own, you can go to a broker and then shop it around for you. That's not a bad idea because the broker essentially functions as an independent insurance agent and they can go out there and find you the best policy. It generally doesn't cost you any more to use a broker because the commission would just be kept by the company if it wasn't paid to the broker. That's probably what I would do if I was going to a new place and had to really shop it around is I'd find essentially an independent, automobile and homeowners insurance broker and have them shop it around for me, tell them what you want and find the best deal for you in that state.
Kyle: There we go. There's the tip I wanted. My last question I think I have for you, I've taken up a bunch of your time and I appreciate you talking with me, was me and my wife where she's OB-GYN and she only has a four year program. She's got three more years and I have four more years. And what to do in the transition from fellowship to attending hood to possibly moving and all that on top of, I've heard several of you discuss about Roth conversions during that time too. So just how everything's timed if there's any certain principles that need to be followed during that time as well.
Dr. Jim Dahle: Sure. Well, I think there's a few things to think about during that unique year that you've got. The first one is jobs. Chances are, unless you were going to stay in the same geographic area, then she'll only have a job for a year presumably, unless you guys are going to separate for a year while she goes to a new geographic area and works. As she negotiates that position, it's more about the short term than it is about the long term. Things like student loan repayment programs may matter more than the total dollar amount of a contract. Partnership doesn't really matter to her. She's looking for the highest paycheck. So the employer that she takes a job with for that year may be very different than it would be if it was more likely to be a long-term situation. I think that's consideration number one.
Dr. Jim Dahle: Consideration number two is housing. At this point, you probably don't want to get into a permanent house yet. Your job situation is not stable, not with one of you coming out of residency. So it's probably a year to continue renting. Ideally, you guys just stay in the same place you're in now. That would be living like a resident. You're now earning as one attending and one resident and still living like a resident. That will allow you to pay a massive amount towards student loans, max out retirement plans, save up a down payment, save up a big emergency fund. You don't have any, but for a lot of docs, pay off personal loans and credit card loans and those kinds of things and just really get on top of your finances that year. So it's really a big financially focused year in that respect.
Dr. Jim Dahle: The only other real consideration aside from those two factors, I think is the opportunity to still use Roth accounts. That might be different for you guys if you were still going for public service loan forgiveness at that point. You may still want to be in tax deferred accounts in order to maximize the amount forgiven. But someone who was not going for public service loan forgiveness, this is a good year to use Roths because while yes, one of you is an attending, you are still not in your peak earnings years. So if you had any tax deferred accounts left over from residency or fellowship, that would be a good year to convert them. It's even better the year that she leaves residency rather than the year that you leave residency. But both are lower than your peak earnings years.
Dr. Jim Dahle: But that's a good time to do Roth conversions, do Roth IRA contributions, to do Roth 403b contributions, et cetera. It's just a great year to be able to take advantage of your lower tax bracket to get a little bit more money into Roth accounts. Those are about the only considerations I can think of for that year. Is there anything else specifically you had a question about what to do that year?
Kyle: No, I think you summed it up. It's going to be a hectic, cool time, but we'll just take one step at a time.
Dr. Jim Dahle: Yeah. But it's so wonderful. Because you're finally at the light at the end of the tunnel and if you have got your financial ducks in a row coming out and then you start getting attending paychecks, it feels like you've got money coming out your ears. Yes, you've got all these great things to do with it and you still got lots of debt, but it's like finally we're there. We're actually being paid for all this work we put in for a decade and we can actually start really making progress toward our financial goals. That's really the most important year in your financial life, is that year that you leave residency. It's really a wonderful time too. So maybe it makes you a little bit anxious, but I assure you is much better than getting resident paychecks.
Kyle: Money coming out your ears sounds like a good problem to have.
Dr. Jim Dahle: Yeah, it's wonderful. I think we've addressed all the questions, unless you've come up with more while we've been talking?
Kyle: No, none specifically. You answered a ton of them. I appreciate everything.
Dr. Jim Dahle: Well, you've got an opportunity here. You've got 20 or 25,000 docs here that you can say anything you want to. Any messages you have for them?
Kyle: I just would repeat the same old stuff that you said, save a good chunk, live like a resident for the first five years and that's my goal.
Dr. Jim Dahle: I'm sure you guys will be very successful given how much attention you're paying to this. Keep in mind, at your stage of residency, I was completely financially illiterate. So you are way ahead of where I was and I'm sure you'll be even more successful. I wish you both a lot of success both in your careers and in your finances, and I'm sure you will have a financially wonderful life given how much attention you're paying to this stuff early on in your career.
Kyle: Thank you so much. I owe a lot of it to you.
Dr. Jim Dahle: Well, thanks for coming on the podcast, Kyle. I'm sure a lot of other residents will find your questions very useful and interesting.
Kyle: Oh, that'd be awesome.
Dr. Jim Dahle: Okay, that was great. It's always fun to have a real live listener on, they are always worried that they might sound silly or that they're not at a professional podcaster, but you know what, you guys seem to love those episodes. So if you are one of these folks that would like to come on and talk about your finances and your struggles and maybe your mistakes, let us know and we'll see if we can get you on the podcast.
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Dr. Jim Dahle: Thanks for subscribing and leaving us a five star review. Doing those things actually helps spread the word and get financial literacy out to doctors and other high income professionals. So thanks to those of you who have left us five star reviews. We appreciate that. 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 is not 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.
Thanks for visiting us in Michigan. You are WAY cooler in person!
It was a fun trip and all the Michiganders (correct term?) sure were cool to meet.
In the discussion, contributing to a Roth IRA was brought up and WCI mentioned the backdoor contribution method at some point in the for for the OP. I don’t know what the OP and his wife file their taxes as but they stated they both have loans and are potentially trying for PSLF. In that case, it makes since that they should be filing as married filing separately (MFS). If you file MFS, then the assisted gross income limit to contribute directly to a Roth IRA is 10K combined (with the stipulation that you have to be living together). So they probably need to be utilizing the backdoor contribution method.
Thanks for coming forward to talk about your story, lots of it sounds familiar.
Excellent point and a good reminder for those filing MFS.
Kyle, thanks for the shout out regarding my “Intern Year Finance Article” on WCI! I’m glad you found it useful.