Retirement Account Q&A – Podcast #241

Transcription – WCI – 241

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

Dr. Jim Dahle:
This is White Coat Investor podcast number 241 – Retirement accounts Q&A.

Dr. Jim Dahle:
It’s story time, brought to you by locumstory.com. Today we'll be reading “One job, two jobs”. One job, two jobs, red blob, no job. Elective doc, emergency doc. Someone overstock, someone out of stock. This doc is too abused, this doc is underused. This doc can't get sick. Say let's try a brand-new trick.

Dr. Jim Dahle:
For all the docs about to cry, here's an idea you can try. Look into a locum tenens assignment, a really great option you might find it. With all this new info trapped up in your thinker, go to locumstory.com and use your mouse to tinker. It's here you'll find the unbiased answers you are after so you can decide if locum tenens is your next chapter.

Dr. Jim Dahle:
Locums is a good way to extend your career. I was talking to one of my partners last night at sign-out. He is actually going from the Salt Lake area down to Moab a few times a year, working a few shifts down there. He goes and works a shift. He's doing nights down there, I think. He goes and sleeps in the hotel they rent for him and then goes for a long bike ride before going back to a shift.

Dr. Jim Dahle:
But it has just rejuvenated his career and his excitement about medicine. And I think part of it is just to be in a new practice environment. But part of it is it's like a vacation away from some of the bigger stresses in his life, which include raising kids sometimes. And so, you never know how mixing it up might help with your burnout and extend your career, optimize for longevity in everything you do.

Dr. Jim Dahle:
Speaking of what you do, thank you so much for what you do. We're recording this on November 29th. I know it's not going to run until December 16th, but I'm recording it the day after the Thanksgiving break.

Dr. Jim Dahle:
This year I decided to try something new, something I haven't been able to do for the last two decades, which is to actually go somewhere for the Christmas and New Year's break. My wife wanted to go travel to take the kids somewhere. So, we decided we were going to put together a trip to Greece.

Dr. Jim Dahle:
However, I've never been able to get all that time off because somebody's got to work the holidays. And the way our group divides them up, we have the biggest holidays, which are New Year's and Christmas and Thanksgiving. And then we have the other holidays and we track them separately. And so, I just couldn't have all those days off because I had to work my share. And we have a great group. We've set it up so that we can buy our way out of night shifts, but we still have to work whatever our share is of weekends and holidays.

Dr. Jim Dahle:
Anyway, the way I'm paying for this trip figuratively, not necessarily literally is by working through Thanksgiving. And so, I worked a shift every day of the Thanksgiving break Thursday, Friday, Saturday, Sunday.

Dr. Jim Dahle:
And that's a tough weekend to work every day because as the shifts go on, especially in this COVID pandemic, you start running out of beds. And so, by Sunday, I can't find a psychiatric bed in the entire state. We don't have any ICU beds at our hospital. We don't have any telemetry beds that our hospital.

Dr. Jim Dahle:
Almost everybody I've got to admit has to go to some other hospital, which makes for a really unpleasant shift when you're having to make all these transfer calls and everybody's backing up in the ER and your length of stays are super long and the patients and their families aren't happy.

Dr. Jim Dahle:
I know a lot of you also worked that Thanksgiving break and other similar times like some of you had the night shifts over Thanksgiving break. At least I didn't have that. But it's not easy to do the jobs we do, right? We've got people screaming at us. We got people banging on the walls. We got family members that are unhappy with waits or whatever.

Dr. Jim Dahle:
Sometimes it's a really hard job. It's a stressful job. And there's a reason if you are listening to this podcast, you're likely a high income professional or soon will be, there's a reason they pay you a high income for what you do. It's hard. But even so we work for more than money. Even the most money hungry of us works for more than money. So, if no one said thank you today, let me be the first. It is important work you're doing, and I appreciate you doing it.

Dr. Jim Dahle:
All right. We should not do a correction, but a follow-up. About six weeks ago in episode 235, I talked about somebody who had said they don't have to certify their income for a long period of time in the public service loan forgiveness program. And I said “That sounds a little funny. You're the first one to mention that to me”.

Dr. Jim Dahle:
So, I asked the podcast listeners if this has happened to them to write in. And since that time, I've had a dozen people write in and say, “Yep, this is the way it is”. And if you go to studentaid.gov, there's a page on there that talks about some of the changes with the COVID pandemic.

Dr. Jim Dahle:
And under recertification guidelines, it says this. “You will not have to recertify your income before the end of the COVID-19 emergency relief period, which goes through January 31st, 2022 even if your recertification date would have happened prior to the end of the relief period. As part of the payment suspension, your recertification date has been pushed out from your original recertification date. You'll be notified for your new recertification date before it is time to recertify. Update your contract information with your loan servicer”.

Dr. Jim Dahle:
What this means for some people is that they're assuming you're still making resident income or that you're still on medical student income for an extra year, two years basically saving you even more that's going to be forgiven instead of you paying it back. This is a good thing for borrowers under the public service loan forgiveness program but it is a legitimate thing. This is what the servicers are saying. And certainly, what many White Coat Investors are hearing.

Dr. Jim Dahle:
All right, today, we're going to be talking a lot about retirement accounts and some of your questions about retirement accounts. I want you to be aware of a couple of things. We have some resources. If you've never been to the whitecoatinvestor.com website you should go there. We have a tab. We call it the recommended tab. And underneath that, we have a whole bunch of people that can help you.

Dr. Jim Dahle:
If you need a financial advisor, for instance, you can go to that tab and find the financial advisors that have been vetted by us. You can read the application we gave them there as well as by White Coat Investors in an ongoing way. If we get complaints about somebody, we take them down. And so, these are people you can trust to give you good financial advice.

Dr. Jim Dahle:
But specifically, as we're talking about retirement accounts today, we have a separate page there. You will see it, it's called “Retirement Accounts & HSAs” under that recommended tab.

Dr. Jim Dahle:
And if you go there, you will see that we have HSA providers that we recommend and people that can help you with retirement accounts, whether that's a self-directed IRA or 401(k) or whether that is setting up a retirement account for your practice or your group.

Dr. Jim Dahle:
We've got people that can help you do that. They can give you a second opinion on whatever you're hearing from your group, people that I recommend and the people we called when we set up the white coat investor 401(k). Be sure to check that out.

Dr. Jim Dahle:
All right, let's talk about the TSP. That's the federal Thrift Savings Plan, basically the 401(k) for military docs, VA docs, civil service workers, et cetera. And this question is from Dusty. Let's take a listen.

Dusty:
Hi, Dr. Dahle. This is Dusty from San Diego. I’m a military doc with a TSP question in regards to the new proposed backdoor Roth and mega backdoor Roth questions. I'm sure you're going to get a ton of these types of questions this week. Appreciate any insights you would have.

Dusty:
As of right now, about 25% of my TSP is in traditional from prior to when we have the ability to convert to contribute to Roth in the TSP. I was considering pulling all of my TSP money out, doing a mega backdoor Roth conversion of the traditional money before the end of the year if these new rules do go into effect and then putting all the money back into TSP.

Dusty:
I want to get your thoughts on whether or not that would be a prudent move, or if that'd be a classic situation of letting the tax tail wag the investment dog. Thank you so much for everything you do for investors like myself.

Dr. Jim Dahle:
Alright, Dusty. First of all, thanks for your service. It’s meaningful, it’s helpful. We're grateful for it as a nation. I'm grateful for it personally. I've got a lot of family members still in the military, and I'm grateful for those who take care of them.

Dr. Jim Dahle:
I think you're confusing a few things. A mega backdoor Roth is when you are putting after tax money, after tax employee contributions. Now these are not Roth contributions. There are tax deferred contributions, Roth contributions, and after-tax employee contributions. Three different types.

Dr. Jim Dahle:
And with a mega backdoor Roth IRA strategy, what you're doing is you're putting in after tax employee contributions above and beyond your usual $19,500 that goes into a plan. And then if the 401(k) plan allows it, you are then converting that money to Roth money, either inside the plan or by an in-service withdrawal and putting it into a Roth IRA. That's a mega backdoor Roth IRA.

Dr. Jim Dahle:
Just converting tax deferred money to Roth money is not a mega backdoor Roth IRA. It's just a Roth conversion. And maybe your plan allows that, maybe it doesn't. You have to check with the plan. There are some plans that do it, and some plans don’t. However, when it comes to the TSP, you really can't take money out of it while you're still working for the government. There are two circumstances under which you can.

Dr. Jim Dahle:
There are two types of in-service withdrawals. The first is age-based. In order to take that, you've got to be 59 and a half. I don't think you're going to qualify for that. Maybe I'm wrong, but I don't think you are. And you can take out up to four of those in a year. It's considered a rollover distribution for income tax purposes.

Dr. Jim Dahle:
The other type is a hardship withdrawal, which again, as a military doctor, you probably don't qualify for it. There are basically four reasons – negative cash flow, legal expenses related to separation and divorce, unpaid medical expenses, not covered by insurance. Good luck with that with TRICARE. And unpaid casualty losses that are not covered by insurance. Hope that hasn't happened to you.

Dr. Jim Dahle:
Basically, you can't take money out and do whatever you want with it until you leave the military. Now, I did something similar to what you're talking about when I separated from the military. I had some after tax money that I put in there during a deployment, and I was able to isolate that basis and convert it to a Roth tax-free and then put all the tax deferred money back into the TSP. So, you can do that sort of thing after you separate, but not while you're in service. And I don't think in the TSP, you can do Roth conversions. Let me double check here, but I don't think you can, while you're still in service. Yeah, it doesn't allow for Roth conversions. So, you are out of luck.

Dr. Jim Dahle:
What you want to do, may be a good idea, I like seeing military docs that expect to be in higher brackets later do Roth contributions and conversions. I think you're thinking the right way, but I don't think you can do what you want to do. I don't think the plan is going to let you. I'm sorry to give you that news.

Dr. Jim Dahle:
Let's do our quote of the day. This one's from Tim Ferris. He says “Retirement is a worst-case scenario insurance. It should be viewed as nothing more than a hedge against the absolute worst-case scenario. In this case, becoming physically incapable of working and needing a financial reservoir to survive”.

Dr. Jim Dahle:
That's easy for Tim to say, right? He's the author of the book called “The 4-Hour Workweek”. If you're only working four hours, well sure, maybe you don't ever want to retire either. But I think there's a lot of docs that don't necessarily agree with that quote.

Dr. Jim Dahle:
But I liked the perspective where the point is to find meaningful work in your life that you would do, even if you weren't being paid for it. And that retirement is just in case you can't find that. I like that perspective on life.

Dr. Jim Dahle:
All right, let's take another question. This one's about old retirement accounts.

Kyle:
Hi, Dr. Dahle. My name is Kyle. I'm from California. I had a question for you regarding what to do with our old retirement accounts. I'm just finishing out residency and fellowship and have multiple retirement accounts from that, including a 401(k) with about $8,000 DCP, which I think was kind of like a 403(b) through the UC system about $37,000. And my wife's prior 403(b) plan at about $123,000.

Kyle:
My question to you is we're trying to consolidate our accounts and wondered whether it'd be worth it to put these into a rollover IRA at Fidelity, and then transfer these into a Roth. Is that a reasonable goal given especially if this backdoor Roth may go away soon with the new legislation? And is it worth paying a significant amount of taxes now, since I believe that would count as income? Thank you again for all you do. I appreciate your help.

Dr. Jim Dahle:
Okay. This is a tough question to answer. And the reason why is that it is November 29th when I'm answering it. And it is at least December 16th when you were listening to it. And right now, in Congress is a bill that could affect the answer to this question.

Dr. Jim Dahle:
So far, the bill that has passed the house is basically making it so you can't do Roth conversions of after-tax money, after the end of this year. And that above a certain income, you can't do Roth conversions at all. And so, this could play into it down the road if this bill passes in the same form in which it passed the house. And maybe by the time you listen to this, it will have passed. And so, pay attention to the blog. I'll obviously be writing on the blog about this and on social media as this passes. I just have to record podcasts a little bit earlier. I can't be quite as up to date. So, be aware of that change

Dr. Jim Dahle:
As a general rule, I like this idea of doing Roth conversions the year you leave training. You're still in a relatively low tax bracket. And so, Roth conversions are great. I like seeing residents and fellows unless they're playing games with trying to maximize their public service loan forgiveness. I like seeing them use the Roth accounts during their training, and sometimes that's not available to them. The next best thing of course is to convert that money when they leave training.

Dr. Jim Dahle:
You've actually got pretty substantial tax deferred accounts between you and particularly your spouse. And so, the tax cost of doing those Roth conversions, even though it's probably still the right thing to do, might keep you from doing it. I don't know how much cash you have laying around that you can pay for those Roth conversions with.

Dr. Jim Dahle:
Obviously, you don't want to pull money out of the retirement accounts to pay the tax bill, but if you can convert some or all of that, I think you will not regret doing so. And so, I would try to do some Roth conversions as you are able to. If you can't convert at all, that's okay.

Dr. Jim Dahle:
Keep in mind though if the backdoor Roth IRA still exists at all next year, if you have any money in a traditional IRA, not a Roth IRA, but a traditional IRA, that's going to cause your backdoor Roth IRAs going forward to be prorated. Be aware of that. It’s a really hard question to answer at this moment. Give me a couple of months and the answer will be a heck of a lot more clear.

Dr. Jim Dahle:
All right, the next question comes from John. This one's about setting up a retirement account.

John:
Hi Jim. Thanks so much for all you do to support me and the other physicians and other medical professionals learning personal finance from you. I recently have been tasked with setting up a retirement plan for my cardiology practice. We are transitioning from an employed model into a PSA or professional service arrangement, which means we'll be a private business that's contracting with a health system.

John:
We're interested in developing a 401(k) as well as a cash balance plan. We'd like to be able to maximally contribute to the 401(k) and potentially have the opportunity for mega backdoor Roth IRA conversions. We'd also have to maximize cash balance plan opportunities.

John:
I have reviewed your website and found some recommendations for third party administrators. I'd like to know specifically if I can work directly with a brokerage like Vanguard or Schwab or some other similar company to establish these accounts, or if I have to work through third-party administrator or perhaps, I should set up the 401(k) directly with the brokerage house and then set up the cash balance plan with the third-party administrator? Any help would be very helpful. I'm obviously outside of my scope and trying to set this up. Thank you so much. Bye-bye.

Dr. Jim Dahle:
All right. Thank you for your endorsement of our recommended page. We indeed do have a recommended page that I mentioned earlier on the podcast. The URL is whitecoatinvestor.com/retirementaccounts.

Dr. Jim Dahle:
Right now, we’ve got five companies listed there. We've got Litovsky Asset Management, Emparion, CarsonAllaria Wealth Management, FPL Capital Management and Wellington Retirement Solutions.

Dr. Jim Dahle:
Each of these companies are experienced with doing exactly what you want to do. Typically, when you set these up, there are three companies involved. A TPA – third-party administrator. A custodian, the person who actually holds the assets. And an advisor. Those three things. And typically, you have one of each of those. Sometimes it's the same company serving in more than one of those capacities, but those are basically the three people that you need.

Dr. Jim Dahle:
Now there's debate out there, whether you can get by without an advisor by simply filling the 401(k) with really low-cost index funds, target retirement funds, et cetera, that nobody's ever going to sue you over for breaching your fiduciary duty to them. But the other two are pretty much mandatory.

Dr. Jim Dahle:
In general, going to Vanguard, Fidelity, Schwab to do this is probably not the way to go. Now they are often the custodian for the plan. For example, in the White Coat Investor 401(k) plan, Fidelity is where the assets are held. All our employees’ assets are held at Fidelity, which works out great because I got my HSA there and I got a credit card there. The old white coat investor 401(k) was there. Fidelity is great. No problem whatsoever with that.

Dr. Jim Dahle:
But in general, I think you're better off working with one of these smaller firms that can help you with the TPA and advisor functions. And I don't think you're going to get ripped off by doing it. You're certainly going to get better service than you are from some of the bigger companies. Particularly if you try to go to Vanguard. Vanguard is known for low costs. They are not known for great service.

Dr. Jim Dahle:
Really what you're dealing with here, especially if you're trying to really maximize the benefit of this. And I can tell you are because you're talking about a 401(k) profit-sharing plan, you're talking about a defined benefit plan. You're talking about wanting to make a backdoor Roth IRA capability, assuming that's still allowed after the first of the year.

Dr. Jim Dahle:
Pay attention to what's going on in Congress right now, that might not even be allowed. Because this is what we were looking for when we were setting up the White Coat Investor 401(k). We wanted to have as much of those features in there as we possibly could. And it took a lot of work actually, with the TPA and doing calculations and getting an actuary involved in calculating how we could set this up so that everybody in the company who wanted to could get a full $58,000 into the 401(k) profit-sharing plan.

Dr. Jim Dahle:
And the bottom line is there's complex rules involved in these any time that there are employees. Particularly if there are employees that are not highly compensated employees.

Dr. Jim Dahle:
The bottom line is most of the time in order to max out the benefits for you, you're going to have to give thousands of dollars to each employee. It might not be that much. It might be $4,000 or $5,000 a year that you've got to put in their retirement plan for them, basically as a penalty. It's a penalty because you've set the 401(k) up so you're getting all the benefits of it. You got to give them a few thousand dollars to make up for that.

Dr. Jim Dahle:
Now the company can be set up. So that's to your advantage, right? Especially if you explain to these employees that this is a great benefit. It's not a penalty, it's a benefit to them that you're going to put thousands of dollars into their 401(k), right? And once they appreciate that, well, maybe they'll be willing to accept a little bit less than salary or other benefits in order to get that.

Dr. Jim Dahle:
And so, I don't necessarily see that as a bad thing, but keep in mind that this is a complex situation. Once there's employees involved, sometimes the right plan is a 401(k). Sometimes the right plan is a simple IRA. Sometimes the right plan is a SEP IRA and sometimes no plan at all is the right plan.

Dr. Jim Dahle:
There are a whole lot of dental practices in this country that have decided not to offer a 401(k) plan at all because the dentist ran the figures and realized in order to get $58,000 in there for the dentist, he had to spend another $58,000 in employee penalty contributions in order to be able to have a viable 401(k).

Dr. Jim Dahle:
It’s actually studying the group, studying the practice, figuring out how much people want to put in, how many highly compensated employees, how many owners, how many non-highly compensated employees there are. This is a complex process. This isn't something you whip out in three days. It's probably going to take weeks to months to get it all set up and get it set up right.

Dr. Jim Dahle:
But yeah, those are the ones I recommend. The ones that you've gone through there. Get one or two or three of those and you'll quickly figure out what the going rate is for setting up those plans. They all charge a fair price, but they don't all charge the same price and you get varying levels of service. And so, that's what I would go do. I would go to those recommended advisers. That's literally what we did when we set up our 401(k).

Dr. Jim Dahle:
And so, I would not try to go directly to Vanguard, or even Schwab or Fidelity and try to set this up through them. They're likely to not only offer you less service, but you're probably not going to get all the bells and whistles you really want in the plan. Hope that's helpful.

Dr. Jim Dahle:
All right, let's talk some more about retirement plans. This one comes from Mike.

Mike:
Hi Jim. This is Mike from New York. I came across a presentation about EQRPs, which is a type of retirement account written out of the 401(k) tax-code. And I guess it was started and promoted by Damion Lupo. I have a question if you had any time to investigate or vet this product and any comments on it. Thanks so much.

Dr. Jim Dahle:
I know Damion Lupo, I'm familiar with EQRP. Damion sponsored the White Coat Investor conference in 2020 in Las Vegas. This is not a mystery to me whatsoever. I've read his book. We passed out his book to everybody that came to the conference.

Dr. Jim Dahle:
Damion describes this on the website as the Ferrari of retirement accounts. It says ultimate flexibility, control and protection to optimize your investments. What you're really getting here is a self-directed individual 401(k) combined with a Wyoming LLC.

Dr. Jim Dahle:
Damion takes care of all the paperwork and coordinates these two accounts and then charges you for it. When you combine all this together, it's not free. There is no self-directed individual 401(k) provider out there that is going to do this for free. And when you start adding in an LLC in another state in order to make it a little more complex and perhaps a little bit better asset protection, obviously it's going to cost you a little more.

Dr. Jim Dahle:
The EQRP is not the low-cost leader for individual 401(k)s out there. You got to be aware of that right now. But if you are, for example, investing in real estate inside your 401(k), and you want to figure out a way to get a little bit more asset protection around it, or you're feeling particularly sensitive to lawsuits and you want as much asset protection as you can, you might want to look into this.

Dr. Jim Dahle:
But that's basically what it is. It's not a scam. It's not the cheapest thing out there, but it does provide a pretty unique scenario compared to most self-directed individual 401(k)s. I hope that answers your question about EQRP.

Dr. Jim Dahle:
Obviously, Damion's a big fan of it. I don't have any EQRP, so I can't speak from personal experience. But that's basically the deal with it. It may be the Ferrari of retirement accounts, but it's also not the cheapest of retirement accounts, just like Ferrari is not the cheapest car out there.

Dr. Jim Dahle:
But if the benefits to you outweigh the costs, then it may be something you want to look into. I hope that's helpful. Let's take another question here. This one on Roth conversions from Mihud.

Mihud:
Dr. Dahle. I am a mid-career physician who rolled over a 401(k) to an IRA back in the mid-2000s. It's now worth a considerable amount and converting it to a Roth would cost me a lot in taxes while I'm in my peak earning years.

Mihud:
I've been contributing to a non-deductible IRA for much of this time for asset protection and tax deferment. I have a cost basis of about $102,000 on my form 8606. I have a solo 401(k) for my 1099 side hustle.

Mihud:
I was wondering what you would recommend for me to do to try to get more of my assets into Roths as I feel the taxes now might be less than taxes I pay in the future. Any advice you can give me, I would appreciate it. And thank you for all you do.

Dr. Jim Dahle:
Once more, remember, I'm recording this on November 29th and will not run until December 16. There is a bill in Congress that affects Roth conversions right now. And we don't know what it's going to look like when it comes out the other end of the congressional pipeline.

Dr. Jim Dahle:
This might be the last year that you can do Roth conversions at all, at least before retirement. A few things that you ought to consider though. You've got a non-deductible IRA where most of the money in it is non-deductible. And then you've got a bunch of money that is tax deferred money in IRAs.

Dr. Jim Dahle:
The good news is you have a solo 401(k). So hopefully your solo 401(k) will accept IRA rollovers, but it probably is not going to accept after tax money into there as a rollover into the 401(k).

Dr. Jim Dahle:
What I would do is roll over as much money as you don't want to pay the taxes on to convert into your solo 401(k). Let's say you got $150,000 of a basis in there, and maybe you got another $600,000. If you don't want to pay any taxes at all, you roll $600,000 into the solo 401(k), you convert what's left, which is equal to the basis, and that costs you nothing in taxes. You have another $150,000 in a Roth IRA. So that's wonderful.

Dr. Jim Dahle:
If, however, you're like “I think taxes are going to go up” or “I'm a super saver” or for whatever reason, you go, “I’d never again be able to do a Roth conversion because Congress is changing the rules”, whatever reason, you want to pay for a Roth conversion in your peak earnings years, well leave that money behind.

Dr. Jim Dahle:
Let's say you want to convert another $100,000. Leave that behind in the IRA, just roll $500,000 or whatever into your 401(k) and convert what's left. You'll get the $150,000 of after-tax money, the basis. That conversion won't cost you anything, then you'll pay ordinary income tax rates on the other $100,000 that you decided to convert. So maybe that cost you another $40,000 in taxes.

Dr. Jim Dahle:
You just have to decide how much of that you're willing to pay taxes on now for whatever reason and move forward with your plan. But any Roth conversions you think you want to do, I’d try to do them before the end of 2021, because you may not be allowed to after that.

Dr. Jim Dahle:
All right. Here's the question on the backdoor Roth IRA from, I'm hoping I'm pronouncing this right, Zeegay. Well, we're going to find out, I think.

Zeegay:
Hi, Dr. Dahle. My name is Zeegay. I am starting a new hospitalist job in Minnesota. My question today is about the backdoor Roth IRA. I have a sub account about $8,000 that I created when I was moonlighting as a chief resident last year to reduce my taxable income. This is invested. I am now starting a hospitalist job like I said, and we'll need to think about doing a backdoor Roth.

Zeegay:
I am now learning that I need to get rid of the SEP to avoid the pro-rata calculation. What do you think is the best way to get rid of the SEP? I also have a 401(k), a 401(a) and a 457(b) from my chief residency.

Zeegay:
I am no longer at the institution where I did my chief residency. Should I transfer these to my new employer or Vanguard? Of note, I do have a Roth IRA with Vanguard. And my SEP is also with Vanguard.

Zeegay:
I am really confused about what I should do about the SEP and just how to basically avoid the pro-rata calculation. Thanks for your help and thanks for all you do.

Dr. Jim Dahle:
All right. Sorry for butchering your name. Thanks for what you do. Hospitalist is very important work. I call hospitalists all the time and I'm sure glad there's somebody there picking up the other end of the phone.

Dr. Jim Dahle:
This is a hard question to answer on November 29th, 2021, because I don't know what Congress is going to do. So, let me give you two answers. The first answer is what you should do if Congress does not change the rules on the backdoor Roth IRA.

Dr. Jim Dahle:
If Congress does not change the rules in the backdoor Roth IRA, you'll probably want to do backdoor Roth IRAs every year going forward. That means you need to avoid having any money in a traditional IRA. Traditional IRA, SEP IRA, simple IRA, all of that gets prorated in the backdoor Roth IRA process and the calculation on line six, a form 8606.

Dr. Jim Dahle:
The idea is that you can either convert money into a Roth IRA, which no longer counts on that line, or you can make sure it stays inside 401(k)s, 403(b)s et cetera, because that money does not count on line six of form 8606. It will not cause you to be pro-rated.

Dr. Jim Dahle:
What you don't want to do is move the money out of a 401(k), 403(b), whatever, and put it into an IRA. Also, although it’s water under the bridge for you, you don't really want to use SEP IRAs. You want to use solo 401(k)s because again, that money doesn't cause proration to occur.

Dr. Jim Dahle:
At this point, assuming Congress does not change the rules, what you'd want to do is do as much Roth conversion as you can afford to do. Paying the taxes with money that's not inside retirement accounts. If you got some money sitting around that you can earmark toward this, and I know that sounds a lot in the year you're leaving training, then sure, do some Roth conversions.

Dr. Jim Dahle:
Convert anything that's after-tax money. Convert as much pretax money as you can afford to do, and then move the rest into a 401(k) at your new employer. And then you won't get pro-rated on your backdoor Roths. You can do a backdoor Roth for this year if you need to, you might be able to just contribute directly to a Roth IRA for this year, quite honestly, depending on your income. But that'll take care of that.

Dr. Jim Dahle:
Now, if Congress changes the rules this month, such that nobody will be able to convert after tax money anymore, well, the backdoor Roth IRA goes away after 2021. There is no backdoor Roth IRA in 2022. And so, you don't have to worry about the pro-rata calculation in 2022. You can have money in a traditional IRA or a SEP IRA or whatever you want going forward, because you're no longer going to get prorated on it.

Dr. Jim Dahle:
In that sort of a situation, well, it's perfectly fine to take your 401(k) money or your 403(b) money and put it into a traditional IRA and invest it that way. Now maybe somewhere down the line, backdoor Roth IRAs will be allowed again. It's hard to say, but it really depends on what happens.

Dr. Jim Dahle:
Certainly, I think I would hold off until the new year to roll any money that you're not planning to do a Roth conversion on. Go ahead and just leave it in the 401(k) where it's at, and then you won't be prorated on anything you did in the calendar year tax year 2021.

Dr. Jim Dahle:
But if you want to do Roth conversions, now is the time. Because you want it done in the year in which you had half of a resident salary and half an attending salary rather than a year in which you had a full attending salary. And essentially you were at your peak earnings years.

Dr. Jim Dahle:
Any money you want to get converted, get it converted in the next month. Well, the next two weeks after you listen to this, and any money that you are okay with leaving in a tax deferred state, try to keep that inside a 401(k), at least until we figure out what Congress is doing later this month.

Dr. Jim Dahle:
These retirement account questions are really tough this month. They're not usually this hard, Cindy.

Dr. Jim Dahle:
All right. Let's bring on a guest. We've got somebody that's going to be speaking at WCI con, Dr. Altelisha Taylor. Let's bring her on the podcast for a few minutes.

Dr. Jim Dahle:
Our special guest on the white coat investor podcast today is Dr. Altelisha Taylor, ‘Lisha’ Taylor, who is the brain behind careermoneymoves.com. Welcome to the White Coat Investor podcast.

Dr. Altelisha Taylor:
Thank you for having me, Jim. I’m so happy to be here.

Dr. Jim Dahle:
Now, Dr. Taylor is a senior family medicine resident. She is also going to be a speaker at WCI con 22 in Phoenix. That's the 9th through 12th of February in Phoenix. And we hope as many of you as possible can come to that.

Dr. Jim Dahle:
She will be giving a talk called finance one-on-one to the graduating resident and new attending. I believe right now we have that slated as one of our virtual talks. But we are excited to have you as part of the conference.

Dr. Altelisha Taylor:
I'm so happy to be here. So excited to give the talk. As a senior resident myself, I feel like there's a lot of issues that me and some of my co-residents are going through. So happy to talk about that and some different things that we can do finance wise to kind of set us up for the careers that we desire.

Dr. Jim Dahle:
I have watched, I don't know, 80 or 100 physician financial blogs come and go over the last decade, but I bet I've only seen two or three that were started by a resident. What made you decide to get started in finance as a resident?

Dr. Altelisha Taylor:
Yeah. Well, to be honest with you, Jim, it was when I was in medical school and I was trying to decide what specialty to go into. I knew I wanted to do sports medicine, but I didn't know if I was going to do orthopedic sports medicine or primary care sports medicine.

Dr. Altelisha Taylor:
And then when I realized that, my personality and my interests aligned a lot better with family medicine and primary care sports medicine. I thought, “Oh my goodness, I think I'm going to go into a specialty that doesn't pay very well. That might be on the lower end of physician salaries. And I have like $200,000 in student loan debt. Did I just make the biggest mistake of my life?”

Dr. Altelisha Taylor:
And so, it was that revelation that kind of sparked my interest that allowed me to find your book, that allowed me to find other podcasts that were very similar, and really sparked my interest in personal finance. And then once my med school classmates realized that I had this interest, I kept getting asked the same questions over and over again. And I thought maybe I should write this down.

Dr. Jim Dahle:
That sounds familiar. We got a bunch of MS-4s out there. Hearing only $200,000, that sounds pretty good. These days it feels like half of them have $300,000, $350,000, $450,000 plus. But what issues do you think people need to hear? Graduating residents, first year attendings, what are you going to be talking about in your talk to these people?

Dr. Altelisha Taylor:
Well, I think the first thing is to figure out what you want in your life and in your career. That's one thing that my father told me when I was choosing a specialty is “Up until this point, you've kind of done what's expected. You passed the test. You've done well in the classes and you've chosen a specialty. But once you get into residency, especially as an attending, now is the time to really figure out what you want in your life”.

Dr. Altelisha Taylor:
What kind of career do you see yourself having? And once you figure that out, then you can really clearly identify some goals that you want in your life. Is your goal to buy a large house? Is your goal to work part-time? Is your goal to have memorable international experiences? Once you figure out the goals that really matter to you, then you can kind of set up your finances in a way to achieve those goals.

Dr. Altelisha Taylor:
And so, for me, as a senior resident myself, I am applying for fellowship, but it's only one year. But as a senior resident myself, I think there are a few things that I see my colleagues have questions about and things that I think that we could do a little bit differently.

Dr. Altelisha Taylor:
Number one is like I said, identifying some financial goals. The second thing is coming up with a spending plan and an investment plan that they can use to kind of guide them as they start making more money.

Dr. Altelisha Taylor:
There is also this need to protect your income through disability insurance and life insurance if you have a family or someone that you support financially. Those are some of the big ones.

Dr. Altelisha Taylor:
And then of course, student loans. For me as I'm coming out of residency, and when I come to a fellowship, it will be what kind of job do I want? Does this job qualify for public service loan forgiveness? Is it worth it for me to maybe take a little pay cut on the salary so that I can still qualify for this loan forgiveness program and get my loans forgiven in five or six years after I finish training?

Dr. Altelisha Taylor:
The student loan plan that I'm in right now, is that the appropriate plan for me when I finish residency and the common attending? Should I switch plans? Should I hire someone that can maybe help me make that decision?

Dr. Altelisha Taylor:
Those are some of the things that we're going to talk about in the talk. And then I think there's things such as buying a house, how to go about doing that. I think a lot of residents and new attendings are starting families. And so, there's this question of how do I set my family up for success? How do I build the kind of generational wealth that can last and how do I really teach my children those values that I had growing up?

Dr. Altelisha Taylor:
Those are some things that we're going to get into during the talk. I'm super excited that you're having me.

Dr. Jim Dahle:
Yeah, it's interesting. Coming out of residency is such a tough time. You get this huge increase in income, of course, and you want to not blow it all. If you've read anything on the White Coat Investor site at all, you do not want to grow right into that all at once.

Dr. Jim Dahle:
But even if you manage to not grow into it all at once and you have cash now, you've got some money to do something with. You never have enough to do everything you want to do.

Dr. Jim Dahle:
People are like, “Should I max out my retirement accounts? Should I do Roth conversions? Should I beef up my emergency fund? Should I pay my student loans? What about that credit card I've still got a balance on? I got this crappy old car I've been driving for seven years that the wheels are falling off”. Are you going to give any guidance on how to prioritize those things?

Dr. Altelisha Taylor:
Yeah. I'm certainly going to try, but I think that how you prioritize those things in my opinion is really based on your goals and what are the things that you want most. We're going to talk about how to prioritize based on goals. But yeah, I certainly agree with you.

Dr. Altelisha Taylor:
As I'm thinking about my co-residents who are getting their attending jobs, they're like, “Okay, do I buy a house now? Do I max out retirement accounts now? Or do I try to pay off my debt?” And we're going to help people figure out which pathway to go through based on their own unique situation so they can make a choice that might be best for them. But yeah, I'm really excited about that.

Dr. Altelisha Taylor:
And one other thing that I realized is now that I'm here and helping other co-residents here in Atlanta, I realized that we needed a way to kind of engage. That a lot of the questions and the topics that we're having as senior residents, fellows and new attendings are unique and maybe a little bit different from some of the questions that our more experienced colleagues have.

Dr. Altelisha Taylor:
I recently started a Facebook group called Financial Grand Rounds that I'm hoping can be one of the central hubs for financial information for doctors in training, and new attendings. And so, I'm hoping that we can kind of get together and discuss these issues on an ongoing basis just in case people have questions even after the talk.

Dr. Jim Dahle:
Cool. Sounds like a great resource. All right. Well, Dr. ‘Lisha’ Taylor is going to be at WCI con 22. If you have not yet registered for that, you still can at whitecoatinvestor.com/wcicon22. We would love to see as many of you there as we can fit into the hotel. And if not, register virtually because it's going to be an awesome virtual conference.

Dr. Jim Dahle:
I was astounded at how awesome the interaction was that our virtual conference we had to do in 2021 for COVID reasons. Now that we're kind of moving out of that and we have a hybrid conference is still going to be an awesome virtual conference. It's just going to be coupled with a live conference too, or an in-person conference too.

Dr. Jim Dahle:
Thank you for being willing to be a participant in that. And thank you for all the work you do out there in Atlanta.

Dr. Jim Dahle:
Now, people listening to this, they'll hear this a few weeks after we're recording it, but Dr. Taylor is super excited that the Braves just won the World Series last night. She is wearing her Braves shirt if you're watching this on video. Congratulations to you and your team, may Atlanta not burn down today. Wonderful celebration out there. Congratulations.

Dr. Altelisha Taylor:
Thank you so much. I'm going to thank you for all that you do.

Dr. Jim Dahle:
All right. It’s always great talking with Dr. Taylor. Let's take another Speak Pipe question. This one's about traditional IRAs and Roth IRAs.

Speaker:
Hey, Dr. Dahle. I have an idea I'd like to run by you. When we compare traditional versus Roth 401(k)s, the conclusion seems to be if you're in your peak earning years, you should be contributing to a traditional 401(k).

Speaker:
I'm of the thought that that isn't quite showing enough respect to the power of compound interest and your time from retirement or withdrawal. And that if I'm doing the numbers right, it looks like most people who are making $500,000 or less and are greater than 20 years from retirement should be prioritizing a contribution to a Roth 401(k) over a traditional 401(k). Is this something you can help me confirm?

Dr. Jim Dahle:
Okay, sorry, that question wasn't necessarily about Roth and traditional IRAs. It's about Roth and traditional 401(k)s. All right, here's the deal with this. It's your money. You get to do whatever you want. If you want to put all your money in Roth, if you want to convert everything to Roth, you can do that, knock yourself out.

Dr. Jim Dahle:
But if you are running the numbers and finding that they are telling you in your peak earnings years, that this is the right move to make, there's a very good chance that you are not running the numbers correctly.

Dr. Jim Dahle:
Let me explain what I mean. If you convert all your money now, all your tax deferred money now at 35% or 37% to Roth, it is true that in the future you will pay less dollars in tax. However, it is not necessarily true that you will have more money left after tax.

Dr. Jim Dahle:
And the reason for that is that it does not matter whether you use a tax deferred account or a tax-free account if the rate of withdrawal is precisely the same as the rate at contribution. Even though with the tax deferred account, you pay more in tax at withdrawal then you would've paid before you contributed the money. You end up with the same amount of money after tax. It's just math. That's the way it works.

Dr. Jim Dahle:
And the reason why most people should use tax deferred accounts during their peak earnings years is because most people will be withdrawing that money at a lower tax rate in retirement than their tax rate during their peak earnings years. And that is because most people don't save all that much money.

Dr. Jim Dahle:
If you are in the 35% bracket right now, chances are very good you are not going to have enough retirement income, income during retirement, whether it's from social security, or income properties, or 401(k) withdrawals, or dividends from your taxable account. You're not going to have more than you have now.

Dr. Jim Dahle:
Some of that money coming out of your 401(k) is going to be withdrawn to lower the tax rate. You fill up the tax bracket as you go – 10%, 12%, et cetera. And so, for most people, you'll be pulling it out at a lower rate than what you contributed at.

Dr. Jim Dahle:
Now, if you are a super saver, if you're going to have a $15 million IRA in retirement, that might not be true for you. You are an exception to this general rule. But most of the time, this works out for most people. You use a Roth account during anything that's not a peak earnings year. Medical school, residency, fellowship, the year you leave your training. If you have an extended maternity or paternity leave, a sabbatical, or part-time in the last years of your retirement, those are all good years for Roth. And the other years, good years for tax deferred accounts.

Dr. Jim Dahle:
I hope that's helpful to you. Just be careful when you are running those numbers that you are looking at the amount of money you have left after tax, not just the total amount of tax paid. That is a very common error people make, and it causes them to put money in a Roth when maybe they shouldn't.

Dr. Jim Dahle:
But on the other hand, depending on your assumptions, maybe you're saving so much money that you're still going to be in the top tax bracket in retirement. In which case you can make a much better case for making Roth 401(k) contributions right now. I hope that is helpful.

Dr. Jim Dahle:
Those of you who have been reviewing the podcast, I want to let you know that we really appreciate that. It helps. It helps when you tell your friend about the podcast and the blog, certainly it helps them because they can become financially literate too, but it helps us as well to spread this word.

Dr. Jim Dahle:
Thanks to those who give us five-star reviews like this one from Dewbert05.

Dr. Jim Dahle:
“5 stars. WCI is an informative, entertaining, easy to consume podcast hosted by Jim Dahle, MD, an emergency medicine doctor and financial guru. Jim has a no nonsense, simple, consistent message that he weaves into his podcast through a variety of means: listener Q&As, guests with a wide variety of interests, expertise and philosophies, and occasional short monologues. Jim comes across as down to earth and approachable, and has a dry sense of humor that keeps the podcast entertaining”. I don’t know how true that is.

Dr. Jim Dahle:
“As soon as the podcast concludes, I look forward to the next episode. His writings, blog, podcast should be mandatory learning for any medical school student, yet the lessons and messages are applicable to high income professionals in all phases of their careers. 5 stars”.

Dr. Jim Dahle:
Thanks for your great review. We appreciate that.

Dr. Jim Dahle:
All right. The next question is from Andy. This one's about solo 401(k)s.

Andy:
Hi, Dr. Dahle. This is Andy from the Midwest. I can't thank you enough for your work with the White Coat Investor. Wealth cannot buy happiness or the Kingdom of God for that matter, but I can say that financial literacy does improve quality of life and career options.

Andy:
My question is about the solo 401(k). I have a solo 401(k) for some expert witness work, and also, I've rolled over some previous TSP and 403(b) accounts into this account. My current W2 employer bans any expert witness or consulting work, and the account has not received contributions for almost two years. Does the IRS limit the duration the account can be active without penalty or closure of the account? Should I be thinking about doing some medical surveys soon for example? Thank you.

Dr. Jim Dahle:
Andy, this is a really good question. Also, one I've wondered over the years and one I've looked up several times, including in the last few minutes. I've yet to define a definitive answer to this question. Here's a few guidelines though.

Dr. Jim Dahle:
First of all, the IRS cares far more about whether you're making legitimate contributions than when you actually close a plan, because they know when you close it, you're just rolling it into another 401(k) or an IRA or whatever. It's really not a big deal what account it is in.

Dr. Jim Dahle:
And so, as long as the company exists, I think it's perfectly fine to have the company 401(k) exist. It might even be fine for it to exist after the company no longer exists. But the truth is your company still exists. It just hasn't made a profit in the last couple years. And that's perfectly allowed.

Dr. Jim Dahle:
Now the IRS doesn't like it when you're claiming losses year after year after year. They are likely to reclassify your company as a pass time, essentially as a hobby if you don't make a profit in the company eventually. But this is not the case with you. You've made a profit in the past and now you're not making a profit, but you're not really trying to claim losses either.

Dr. Jim Dahle:
So, I don't think the IRS is going to look very carefully at your company and its 401(k). I really don't think they care too much at all if you leave that there for a while. Now, if you make a little money this year doing surveys or whatever, sure, you can use that to make a contribution. You can use that to show that you're still having some income. That's probably not a terrible idea. It might keep the IRS from looking too closely, but I don't think in just two or three years, they're going to have a big problem with that.

Dr. Jim Dahle:
Now if you leave the thing open for a decade, it makes me worry a little bit more. But who knows? You may change companies. Your company may change your policy. You might find something else that you do that you can use that income for your company and contribute to your 401(k) with it. So, I wouldn't necessarily close it just because you haven't made any money with the business in the last couple of years.

Dr. Jim Dahle:
If it really makes you uncomfortable, you can always just roll it into your 401(k) at your current employer. No big deal, unless it's a terrible 401(k). But I wouldn't worry too much about this.

Dr. Jim Dahle:
Now for anybody out there listening, that actually knows the answer to this question, shoot me an email at [email protected] We'll get a definitive answer if anybody knows it. And I'll give that in an upcoming podcast, but this is one I don't know for sure and I haven't been able to find it in the looking I've done over the years about it. But that's what I think is probably the case with it.

Dr. Jim Dahle:
For doctors, the story has changed. Visit locumstory.com to see if a locum tenens assignment is right for you. It's here you'll find the unbiased answers you're after so you can decide if locum tenens is your next chapter.

Dr. Jim Dahle:
Keep your head up, shoulders back. You've got this and we can help. Come by the White Coat Investor website anytime, if you need some recommended financial professionals and we will get you hooked up with somebody that will give you good advice at a fair price. See you next time on the White Coat Investor podcast.

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