Today, we are tackling all of your retirement account questions. We dig into questions about 403(b)s, 457(b)s, Mega Backdoor Roths, defined benefit plans, and retirement account contributions. Plus, we discuss if now, during this down market, is a good time to fix some mistakes in your investment accounts. We also hear from WCICON23 keynote speaker, Christine Benz. We get to learn a little bit more about her and her career and hear about what she will be presenting at WCICON. She is a wealth of knowledge, and you won't want to miss meeting her in person. Sign up for WCICON at wcievents.com.

 

Mega Backdoor Roth IRA

“Hi Jim, this is Sam from the Pacific Northwest. Thank you for all you do in educating high-income professionals about matters of personal finance. My question is about Mega Backdoor Roth IRA contributions. I currently max out a 401(k) at my W2 employer—$20,500 in 2022 with pre-tax income. I also have some 1099 income that I'd like to put into a solo 401(k) and then convert that into a Roth IRA as a Mega Backdoor Roth IRA contribution.

I've heard conflicting things about how much I can actually put into that solo 401(k). This would all be post-tax money, and I've heard that can either be 25% of my total income as basically an employer contribution through profit sharing. But I also thought it could be upward of $40,500 to bring my total 401(k) contributions for the year from the $20,500 that I put into my W2 employer's 401(k) up to the total cap on 401(k) contributions of $61,000. I’m interested to hear your thoughts on this.”

A lot of people get confused about this, and the reason why is because it's confusing. It takes a while to wrap your head around all this because most people don't have access to two 401(k)s. They don't make enough money to make contributions to 401(k)s anyway, and a lot of advisors and accountants don't realize you can have more than one 401(k). Let's go over the rules about multiple 401(k)s to start with and then specifically talk about Mega Backdoor Roth IRA contributions.

Here are the rules. You can make one employee contribution no matter how many 401(k)s you have access to. That is a total for 2022 of $20,500. For 2023, that's going up to $22,500. If you have two 401(k)s you have access to, you can split it: you can put some into Roth if the plan allows it; you can put some into tax-deferred. You can put it all in Roth, all in tax-deferred, whatever you want. As long as you make $20,500, you can put it all into a 401(k). If you have more than one 401(k), you cannot put $20,500 into one, then put $20,500 into a second, and $20,500 into a third. You only get one employee contribution. That's rule No. 1.

Rule No. 2 is that each 401(k) you have access to, that means each 401(k) you have at an unrelated employer can have a total contribution of $61,000. This is for somebody under 50, just like the other amount was for those under 50. Once you're 50+, there's some catch-up contributions both for the employee and the total contribution. But if you're under 50, you can put in $61,000 total, or a total of $61,000 can be put into each 401(k) that you have. That goes up to $66,000 for 2023. There's obviously a big difference between $20,500 and $61,000. That gap can be made up with two kinds of contributions. It cannot be made up with employee contributions. We already talked about those. It can be made up with employer contributions. Depending on the employer and the plan, that can be a small amount, it can be zero, or it can be the whole rest of the amount. It could be a total of $40,500 if your employer loves you. If they don't love you, it might be nothing. Most people, it's something in between. For a typical doc, it might be, I don't know, $5,000 or $10,000 is kind of an employee match, might be what they give you. If they're generous, maybe they give you $20,000 or $30,000 more. But very few will actually take you all the way up to the $61,000 limit.

The other type of contribution that can be made into that account beyond employer contributions is what is called after-tax employee contributions. These are not the typical Roth or tax-deferred contributions you make for the first $20,500. They are different. There are three kinds of contributions here, and you can make those if your plan allows them. Many plans do not, but if your plan does, you can make that sort of contribution into the plan. Let's say you put in $20,500, and your employer put in $10,000. That leaves you $30,500 that you could put in as an after-tax contribution. An after-tax contribution is not awesome. It's good, I guess. You get some asset protection from it. You get tax-protected growth on it. But when the earnings on that come out, you're going to pay taxes on it at your ordinary income tax rates. and you're not getting a tax deduction when you put the money in.

By itself, after-tax is not awesome. If it's there for a long time, that tax-protected growth can overcome the fact that you're paying ordinary income tax rates on withdrawals. But if it's a short time period, you're probably better off in a taxable account. You're getting no tax break for either one upfront, and in the taxable account, the earnings come out at long-term capital gains rates and at qualified dividends rates, assuming you invest wisely there.

However, if there is another feature that the 401(k) offers, this can be a really great move. That feature is essentially an in-service Roth conversion or an in-service withdrawal where you can withdraw to an IRA and convert that to a Roth IRA. This process of making after-tax contributions into your 401(k) and subsequently converting them to a Roth IRA or within the plan to a Roth 401(k) is a great move. This allows you to make additional Roth contributions that you wouldn't be able to make if the plan did not allow this. For example, if there were a couple, and each of them had access to this and they're doing Backdoor Roth IRAs and they're doing this Mega Backdoor Roth IRA and they're making Roth 401(k) contributions for their employee contribution. In 2022, a couple under 50 can put $134,000 into Roth accounts in a single year never to be taxed again. It can be pretty powerful. Now, it's not necessarily a better move if you can put in all kinds of tax-deferred money in your peak earnings years. That's usually the right move. But if you can't do that or for some reason you're a super saver and you just want to do more in Roth, it gives you another option.

This brings us to where the rubber meets the road; the typical situation that doctors have. Typical doctors have a W2 job at the hospital or at the clinic or in the physician practice or as a partner or whatever. There's one 401(k) there. That doctor uses the employee contribution there, gets some sort of match, some employer dollars there, whatever, and then does some moonlighting and has some 1099 income. What can you do with that?

You open a solo 401(k). You've already burned your employee contribution, so you can't use that. The easy thing to do, and the thing that's easily allowed at any old solo 401(k) that you open at Vanguard or Fidelity or Schwab or whatever is to just do the employer contribution, which is basically 20% of your net self-employment earnings, net of the employer half of payroll taxes, and of course, all business expenses. You make $50,000 as 1099; you put $10,000 into the solo 401(k). However, if you get a solo 401(k) that allows these two steps that are required for the Mega Backdoor Roth IRA process, you could put in even more. Let's say you made $50,000 at this 1099 job and you wanted to put it into Roth and you went out and got kind of a customized solo 401(k).

You can go to the White Coat Investor website and you can go under our “Recommended” dropdown menu. You go to “Retirement Accounts & HSAs” and there are companies that can set these up for you. You can set it up so that you get a solo 401(k) that allows a Mega Backdoor Roth IRA. If you do that, you could put pretty much all of that $50,000 you made as an independent contractor, as a 1099, as a moonlight, into a Mega Backdoor Roth IRA. What's the total limit? In 2022, it's $61,000. In 2023, it's $66,000. If you make $100,000, you can't put $100,000 in there, but you could put $66,000 in there next year. That's certainly way better than a kick in the teeth.

A lot of people look at that and go, “Well, I would much rather put in $66,000 into Roth than put $20,000 into a tax-deferred account.” So they do that. As long as you get a solo 401(k) that allows that, you can do it. But don't expect it from the cookie-cutter, off-the-shelf 401(k) that you get at Vanguard or Fidelity. I don't think they allow that yet. But hopefully soon.

More information here:

Understanding the Mega Backdoor Roth IRA

What to Do with Multiple 401(k) Accounts

 

403(b)s and 457(b)s

“Hi, this is Alex from Salt Lake City. I just finished a fellowship this summer and will be starting employment at the same institution later this fall. During residency and fellowship, I was able to save up some money in my employer-sponsored Roth 403(b) and Roth 457(b) accounts. For the short period where I'm separated from my employer, I have the option to move all that money over to my personal Roth IRA, but once I start as an attending, that option will go away. My employer plan through TIAA allows me to invest in all the index and Vanguard funds I would be using in my personal IRA anyway. And the fees are pretty low. It'd be nice to have the option to invest in individual stocks, which my employer plan does not allow, but that's a pretty minor factor.

My question is, which account would give more flexibility and security? It seems like IRAs have way more freedom with regard to the investment types and it would be nice to have the money somewhere that I get to make the plan rules or at least I can pick a plan with rules that I like. But I've been told that 403(b) and 401(k)s have some additional bankruptcy protections that IRAs don't have, depending on what state I'm in. Not that I plan to go bankrupt. Where would you rather have your money? Anything else I should be aware of if I go forward with the transfer such as the five-year seasoning before transferred money can be taken out?”

I would not go to a Roth IRA just to be able to invest in individual stocks, because as a general rule, investing in individual stocks is a bad idea. That would not be a big motivation for me. If you wanted to invest in something that your 401(k) doesn't allow, whatever that might be—some private real estate investment or precious metals or Bitcoin or whatever—one benefit of going out to a Roth IRA is you can roll it out to a self-directed Roth IRA and invest in that sort of stuff. Obviously you're going to have more flexibility. There's no doubt there's more flexibility in an IRA than there is in any 401(k). That said, your 401(k), 403(b), 457(b), if it's at the institution I know of in town, is a pretty good plan. It's not the end of the world to leave it there. However, in Utah, the asset protection is the same. IRAs are 100% protected in Utah—at least everything except what has been contributed in the last 18 months.

Money that's rolled over from a 401(k) should be completely protected from creditors in the event that you had an above-policy limits judgment and had to declare bankruptcy. You'd get to keep that IRA. No real asset protection benefit for you to leave it in the employer plans. In some states, that's not the case. Some states have a little bit weaker protection for IRAs. As far as the five-year rule, the likelihood of that five-year rule actually applying in your life seems really, really low. I mean, you're at the beginning of your career; you're a great saver. I think the likelihood of you actually wanting to tap into this money in the next five years is such a non-issue. It shouldn't come into this discussion at all.

What would I do if I were you? I'd probably roll it out to my Roth IRA. You're doing a Backdoor Roth every year anyway, so you've already got a Roth IRA. It's not like you're opening a new account or introducing new complexity. Most of the time when I have the opportunity to get money out of an employer account into my IRAs, I usually take it. It’s not always the case. Several times, I've rolled money into the TSP so I could take advantage of the G fund. TIAA accounts have a unique real estate fund you might want to look at and see if you want to use that. That would be one reason to keep it in an account that has access to that fund. Your IRA probably does not. But if you don't want to invest in that, then I'd probably roll it out to your Roth IRA. Good thought and congratulations on saving so much money during residency. Most residents are not able to do that and just shows you are kind of ahead of the game. So, thanks for being an example for other white coat investors.

More information here:

Asset Protection for Doctors

 

Defined Benefit Plans

“I have a defined benefit plan that requires a 5% return annually. It currently has a 60/40 stock-to-bond ratio. I'm considering purchasing treasury notes from treasurydirect.gov for investments within this plan. Current notes are yielding 4.25%, and it's very possible that those notes could go up to and or exceed the 5% threshold that I'm looking for. Is this a logical thought process? I'd love to hear your insight.”

The type of retirement plan that we're talking about here is a defined benefit cash balance plan. It sounds like you're in quite a bit of control of your plan. That's not always the case. When this is put together by a partnership or by an employer, that's not usually the case that you have much control over the investments in there. This is either a personal defined benefit plan or one in which you're the employer and you've got significant control over it. Yes, treasuries are a reasonable investment to have in a defined benefit cash balance plan. These plans are typically invested less aggressively than your 401(k) for various actuarial reasons. But the truth of the matter is you can set them up pretty flexibly, and most of them are actually able to credit you what the investments have actually earned.

Often, there's a floor that you can't lose money in it. If it's losing money, you have to add more money to the plan. Not that that's a bad thing if you're the employer. It just forces you to buy low. That's a good thing. I don't see that as a problem, but some doctors do for cash flow reasons. All of a sudden, the market is down, and they've got to come up with more money to put into the plan and that bothers them. I think the bottom line is don't have a plan that's so huge you have to make a huge contribution that you can't afford in the event that happens. I would say most plans probably use mutual funds, though, rather than buying individual treasuries directly.

But I don't see any reason you couldn't do that. I own some individual TIPS I bought directly through TreasuryDirect. I suppose you could do that in a defined benefit plan, just buy them through the brokerage or whatever that the plan is through. It's not an unreasonable thing to do. I don't know that I'd bother, but it's certainly OK for you to do that if that's what you want to invest in. I would not feel like you have to somehow do it because you're aiming for this 5% return in the defined benefit plan and they're yielding 4% or 5%. I'd just do it because they're a reasonably safe, reasonably good long-term investment. I hope that makes sense.

 

Retirement Account Contributions 

“Dear, Dr. Dahle. Thank you for everything that you do. My wife and I are both physicians about three years out from training, and we had a question about retirement account contributions that we would like to hear your expertise on. Specifically, my wife and I already max out on the pre-tax contributions to my 401(k) account and my wife's 403(b) part of her retirement account. I also received the maximum employee matching pre-tax funds, which goes into my 401(k) account and the 401(a) part of the retirement account for my wife. We also max out the Backdoor Roth IRA.

In addition, my wife can contribute after tax money into the 401(a) part of her retirement account, but it is unclear whether there is a possibility of an immediate in-plan Roth conversion or rollover to a Roth IRA while with the same employer. I know that you recommend maximizing all retirement accounts before investing in a regular brokerage account, but if no immediate in-plan Roth conversion or rollover is possible, would you still recommend taking advantage of this after-tax contribution to her 401(a)? Ignoring the potential asset protection of 401(a), how do you value tax-deferred growth from an after-tax contribution that will eventually be taxed at ordinary income rates vs. gains in a regular brokerage account that would be taxed at long term capital gain rates but has tax drag on the growth. I don't know if there's a breakeven point. So, I was wondering what your thoughts would be. As an aside, is your recommendation on non-governmental 457(b) accounts still to maximize those despite the theoretical risk of losing that money if the employer ever bankrupts? Have there been any reports of people losing their 457(b) money due to employers going bankrupt?”

Let's take the last question first. If you have lost 457(b) money out of a non-governmental 457(b), please email me [email protected]. Even if you just know somebody that actually lost 457(b) money. I have yet to meet anyone that's lost it. It is a theoretical risk. It's possible to lose that money because it's not your money; it's deferred compensation. It actually still belongs to the employer and is subject to their creditors. If your employer looks like they're on a really shaky ground, maybe you don't want to max that out for years and years and years and years. But I'd still use it most of the time just because I think that risk is pretty darn low. Assuming the investments are good, the fees are reasonable, the withdrawal options are fine, go ahead and use that 457(b).

As far as retirement accounts where you are not sure of the rules, go find out the rules. They're required to give you a plan document. There's somebody in HR who's required to explain them to you. It should not be a mystery what your plan allows and what it does not. Keep pushing there. Go to HR. If they don't know the answer, have them get you in touch with whoever designed the plan or the actuary or whoever. Somebody knows the answer to your question. Go get the answer to your question. Don't just operate in the dark. Because if it does allow in-plan conversions or if it does allow in-plan withdrawals, in-service withdrawals, then that's probably something you're going to want to take advantage of, it sounds like. If it does not allow it, it's a lot harder question.

Obviously, if you're going to leave this employer in the next one, two, maybe five years, this is no big deal. When you leave, you roll the 401(a) over, you convert whatever is after-tax money, and you now have a bigger Roth IRA. No big deal there. You can even separate out the basis there most of the time. By shifting money around, you roll it out to an IRA, you roll back in what you can into a 401(k), and they usually don't let you roll in after-tax money. That allows you to kind of separate out your basis, and then you can convert that tax-free. I did that with the TSP money that I put in when I was deployed many years ago. That was after-tax money. I isolated my basis after getting out of the military and was able to do a tax-free Roth conversion of all that money. But if that's not going to be an option, if you're going to stay with this employer for 20 or 30 years, you're never going to be able to convert that money to Roth. Now, you've got a different question.

Are you better off in taxable where all those gains will be taxed at qualified dividends? Those will be as they go along. There'll be some tax drag there or when you eventually sell at long-term capital gains rates. This is all assuming you invest it very tax efficiently. Or would you be better off getting that tax-protected growth? It turns out that it takes time for the benefit of the tax-protected growth to overcome the benefit of paying at the lower long-term capital gains rates on the gains. How much time? It depends on what fees are charged in the account, what you plan to invest in, your investment behavior. All those things matter. If it's a very tax-inefficient investment, maybe it's REITs or TIPS or something, well, you're probably going to be better off inside the retirement account even with after-tax money. If it's going to be a total stock market index fund that's super tax-efficient, then you're probably going to be better off inside that, or in a taxable account for a long, long time. Maybe after 20, 30, 40 years, it will make up the difference. But it's not going to do it in the first five or 10, that's for sure—unless you're investing in something relatively tax-inefficient.

I'm sorry to give you that answer that there's not a straightforward rule of thumb. You've just got to run the numbers with some assumptions and all that. But for the most part, if your money's going to be in there for a short period of time, it's fine to use the after-tax money and just do a Roth conversion when you leave the employer. If it's going to be in there for a very long period of time, that's fine, too, because the tax-protected growth will overcome the difference in tax rates that you pay upon withdrawal. Plus, you get some additional asset protection. But in between, there's probably a number of years there where you would've been better off in a taxable brokerage account. You've got to also ask yourself, “Do I want a little more flexibility with what I spend this money on? Is it possible I won't use it for retirement? I'll use it for a Tesla, or I'll use it for a second home, or I'll use it for a boat or whatever.” In that case, obviously, you would favor the taxable account. Sorry there's no right answer to that one, but I think I gave you all the factors that you should be thinking about as you decide which of those to use.

More information here:

Should You Invest in a Roth or Traditional 401(k)?

 

Fixing Mistakes When the Market Is Down

“Hi, this is Richard from Texas. I’m a family medicine doctor in the Southwest area. I have a couple of questions. No. 1 is, I did make the mistake of having a Vanguard REIT fund in my taxable, which I understand is a mistake because it's very tax-inefficient. And No. 2 is I've made the mistake of having a retirement fund in taxable, which I understand also is very inefficient. I've tried to tax-loss harvest both of those in this current bear market. But my question is, what's the best way to try to get rid of those funds in this bear market? They're both significantly down, and I'm reluctant to sell them right now when they're down. Thanks for all the help. I'm a big fan of all your podcasts.”

The truth is, a bear market is a great time to fix mistakes that you've made because the tax consequences are so much less. It's also a great time to do Roth conversions if you have the cash for it because your conversion costs you less than taxes because you're converting less money even though you're converting the same number of shares. In your case, it sounds like you are kind of regretting some of the stuff you put into a taxable account, and that's probably right. You're probably right that you should be regretting it. REITs have this reputation of being terribly tax-inefficient. I think this comes from the Bogleheads. They're not that bad for a couple of reasons. One, depreciation covers some of the income in a real estate investment. In a REIT, the way that's passed on to you is as a return of capital or return of principal distribution. You don't pay taxes on those. The other distributions, you will pay your ordinary income tax rates; that's why they're relatively tax-inefficient.

But at least through 2025, that distribution is eligible for the 199A deduction. You don't pay taxes on 20% of it. It makes it a little less tax-inefficient than it used to be. But for the most part, you've usually got something in your portfolio that's more tax-efficient than a REIT index fund. You should put that in taxable preferentially, whether that's a total stock market fund, total international stock market fund, a muni bond fund, those sorts of things. REITs are usually one of the last things that people bring out of tax-protected space into taxable space. If you've got a portfolio that's 98% taxable, you're probably going to have your REITs in a taxable account. But if you're 50/50 or something, your REITs are almost never going to be in a taxable account.

As far as target retirement funds, which I think is what you're talking about, I agree with you. It is a bad idea to have this in taxable. See the debacle from Vanguard last year where they basically made some changes in their share classes for the target retirement funds. A bunch of institutional investors left one and went to another, and all the retail investors stuck in the old one got hammered with capital gains. No big deal if you're investing in a retirement account. But if you're in a taxable account, you could have gotten some capital gains you really didn't want to get last year. A bunch of people are upset about it. Some people are suing Vanguard about it. You don't want target retirement funds in taxable for a number of reasons, not least of which is that sort of thing could happen again. I like your idea of getting that out of taxable as well.

How would I do it? If you have a loss on them, just sell them. You don't want to own them in taxable, you've got a loss. It's great you get to book that loss, and there's nothing bad happening here. Just sell them. Presumably, you want to invest in REITs in your portfolio. You also need to buy REITs in your tax-protected accounts somewhere. Essentially what you're doing is you are selling your REIT index fund in taxable. You are buying something else you'd rather have in taxable like total stock market fund, and you are selling some total stock market fund in a tax-protected account somewhere and buying a REIT index fund in a tax-protected account somewhere—whether that's a Roth IRA or 401(k) or whatever. You have to be aware of the wash rules. They technically don't apply to 401(k)s, and really, nobody's even looking at the IRAs all that hard. You may want to use a different fund than the one you're selling to avoid a wash sale, if you care about that. But in this case, I would probably get both of those out of taxable. I'd just move them into a tax-protected account.

If you are picking your own funds, it's kind of silly to have a target retirement fund. A target retirement fund is a one-stop shopping solution. It's great for a resident whose investments are in the Roth IRA. Great, put it in Target Retirement 2060, forget about it, go learn medicine. But once you're an attending, you have five different investing accounts. Target Retirement funds don't really work very well, because it's probably not available in all of your accounts. One of your accounts is probably a taxable account where you don't want it. They're just great solutions for people who are not doctors. It just doesn't work well for doctors long term. Fine for a doctor to use short-term inside a tax-protected account. But I think very few doctors use them as their only investment long term and it doesn't make any sense to really combine it with other investments—especially if you got four or five or six other asset classes and then you have a target retirement account, that doesn't make any sense at all.

More information here:

Vanguard Capital Gains Distributions 2021 – Lessons Learned

 

SIMPLE IRA

“Hi Jim, this is Nick from the Midwest. I had a question for you. I have a SIMPLE IRA offered through my employer, and it is through Fidelity Services. The only options available through Fidelity are the Fidelity Advisor funds where the expense ratios are all extremely high. So, my question is, what do you choose between all these terrible investment options? Do you plan to diversify, or do you plan to choose something with the lowest expense ratio?”

First of all, Nick, my condolences. I'm sorry to hear that your employer hates you. Because that is the message they are sending. Not only by the fact that all they're offering you is a SIMPLE IRA—which has dramatically lower contribution limits than a typical 401(k)—but also, they have stuck you with a crappy one. You might put a little bit of effort into trying to change this plan. The tone to take with this is that you're doing your employer a favor. You're pointing out to them that they have a lot of liability here because they have a fiduciary responsibility to their employees. If they ever had a disgruntled employee, that employee could actually sue them for having such a crappy retirement plan. You don't exactly want to go, “It’d be a real shame if something happened to your business here because you got sued for your SIMPLE IRA.” But that's kind of what you're pointing out to them to get them thinking, “Maybe I ought to change this.” Maybe even introduce them to some of our recommended resources. You go to whitecoatinvestor.com, “Recommended” tab, go down to “Retirement Accounts & HSAs” and we've got four or five people there that specialize in doing studies of what are usually small dental practices, small medical practices, partnerships, etc., and trying to help you figure out what the right retirement plan is for that practice. It might be a 401(k). It might be a SIMPLE IRA. It could be a SEP IRA. It might be no plan at all, but have them actually study the practice and figure out what the best solution is.

The other thing that will help you do is even if the right plan for that practice is a SIMPLE IRA, you're not going to end up with a crappy SIMPLE IRA like the one that you have. The reason you have this is because the person who went to set it up doesn't know what they're doing. They went to a commission salesman and mistook them for a financial advisor and they were really happy they didn't get charged any fees. The reason why is because the participants, which likely include the owner who's probably the biggest participant, are paying all these huge ongoing fees as they go on. When we designed The White Coat Investor plan, we did not pass any of those fees onto our employees. We pay them all as a business. That's a good thing in that we can pay for them pre-tax, but it also makes it a much more attractive benefit for our employees. Here at The White Coat investor, you can imagine our employees understand that and view it as a real value.

There are lots of employees out there that don't see much value in a retirement plan at all. They don't understand the difference between a crummy one and a good one and don't care. That's why employers can get away a lot of times with offering these crummy ones where they're actually paying all the fees. Assuming your employer will not change this plan—that you are stuck with it—you are only left with the dilemma of, “Do you use it and how do you use it?” Well, do you use it? Probably, because chances are the plan will change in two or three or five or 10 years, or you'll go somewhere else in two or three or five or 10 years and can roll it over and then you'll have more tax-protected space. You'll only pay the fees for a few short years, and you'll have more tax- and asset-protected space down the road.

I'd probably still use the account unless you're certain you are going to be at your job for the next 30 years. For most people, you're probably still going to want to use it even if you're constantly pushing for change to the plan. What do you do with it? Well, it depends on the rest of your portfolio. If this is a tiny little piece of your portfolio, then you can, yes, just pick one fund in there. Hopefully, there's one index fund, probably an S&P 500 index fund. You just put a portion of your US stocks into that SIMPLE IRA and you build out the rest of your asset allocation with your Roth IRA with any other 401(k)s you might have. Maybe there's a solo 401(k), if you do some moonlighting. Maybe there's a taxable account.

But if this is like the main piece of your retirement savings, this is 90% of your money, you don't want to just invest in one asset class, even if you have to pay a little bit higher fees. Look at all of the options. Ask, ask, ask, ask for access to the cheaper Fidelity funds, because Fidelity does have some dirt-cheap index funds. But if you can't get them, do the best you can, muddle through, and know that it'll probably change at some point in the next few years.

More information here:

FSKAX vs. FXAIX: Which Fidelity Fund Is Best?

 

Roth IRA and UTMA Accounts for Children 

“Hi, Dr. Dahle. This is Jenna in Dallas. My 8-year-old son recently earned several thousand dollars recording the voice for a cartoon character. After listening to your podcast, I think the smartest thing to do would be to open a Roth IRA with his earned income. However, I'm in a predicament as his twin brother has no earned income and it doesn't seem equitable to start a Roth IRA for one and not the other since it could compound substantially over time. I'm willing to match the funds for his brother, but I'm not sure the best way to invest since he doesn't qualify for a Roth IRA. Their 529 accounts are fully funded. How do you suggest we invest the money?”

How exciting to be the voice of a cartoon character. That would be fun to look back on and do that. What should you do? Put it in a Roth IRA. The question is, are you putting your money in the Roth IRA, or are you putting their money in the Roth IRA? In the eyes of the IRS, it's always their money because you can only put in earned income into a Roth IRA. But the question is, are you going to let him spend his $2,000 or whatever he made and put your $2,000 in there? It's actually the reverse of that. He's going to spend your money, and you're going to put his money into the Roth IRA. Or are you just going to encourage him to save his money for retirement?

If that's the case, I would say he earned the money, and if he wants to save it for retirement, you don't have to match that for his twin. He earned it. But if you're going to let him keep that $2,000—or your $2,000 technically—and spend it or use it for whatever he wants and still get the Roth IRA, well then, I would do something for his twin brother just out of trying to be fair. I'm always telling my kids life isn't fair, and I truly mean that. For the most part, when I say life isn't fair, it means their lives are better than they should be. But it's true that sometimes you don't get everything everybody else gets.

But there's a great option here. The option is an UTMA account—Uniform Transfer to Minors Account. This is essentially a taxable account for a minor. It's custodial, so you're in charge of it until they hit a certain age. In most states, that age is 21, but it does vary by state. You can put $2,000 in a UTMA for one kid, the $2,000 in the Roth IRA for the other kid, and you can tell them, “Hey, let's learn about investing. You guys are getting started as investors.” They can go over their statements every year.

You can even point out as you go along the benefits that one of them is having from having money in the Roth IRA vs. the taxable account. But the truth is, if you don't have very much money in there, UTMA is very, very tax-efficient. On the first $1,100 or so a year of income out of that account, they pay 0% on that anyway. It's almost as tax-efficient as a Roth IRA for very small amounts of money. Don't beat yourself too much up about it, but that's probably what I would do.

 

WCICON23 Keynote Speaker — Christine Benz

We are going to bring on one of my favorite people in the world, Christine Benz. Christine Benz is the director of personal finance at Morningstar. She is the author of the 30-Minute Money Solutions book. We gave that out with the 2021 WCICON when she was a keynote speaker. She is also on the board of directors of the Bogle Center. I worked with her as well in our recent Bogleheads conference. She's always wonderful to work with. She is a genius when it comes to personal finance and investing and knows a great deal. She's going to be one of our keynote speakers at WCICON23. We're excited to have her back and introduce her face to face to The White Coat Investor community. Let's get her on the line, talk with her a little bit about her life and career, and what she's going to be talking about at the conference, and we'll go from there

Christine, welcome back to The White Coat Investor podcast.

“Hi, Dr. Dahle. It's great to be here. It’s always great to see you.”

I think a lot of our listeners may not have heard you before when you're on the podcast. Why don't we introduce you a little bit to them? Why don't you tell us a little bit about how you got interested in all this personal finance stuff to the point that you're now the director of personal finance at Morningstar?

“I started at Morningstar almost 30 years ago. I was part of what at the time we called our analyst research group—now we call it manager research—but we're doing fund research, mutual fund research. I was focused on funds for many years. Eventually came to head up our US fund analyst team, but along the way, began to become aware of how we weren't really speaking to a lot of the central challenges that investors face. How do they allocate their assets, how do they set their savings targets, how do they decumulate during retirement? I wanted to focus on those sorts of topics. I went through the CFP program, the Certified Financial Planner program, just to get a good basic download of information on all of those topics and began to focus on research in those areas in earnest probably 10 years ago.

My work is mainly focused on individual investors who are sorting this out for themselves. But we also have a fair number of financial advisors who read my work. We've since established a small team focused on portfolio construction, retirement planning, and financial planning matters because we found not only do individual investors need the help, but financial advisors need the help too.”

I've had a lot of individual investors ask me if I thought them going and getting a CFP or taking the CFP classes was worthwhile. What would you say to someone who's not professionally working in the field? Is it worthwhile for an individual investor?

“Possibly. I think if you intend to be the main manager, the main financial planner for your household, it's not a bad use of time and money. The thing that I encountered in the CFP program was that there were a lot of people who were just sort of in the program to earn the credentials. They really just wanted to pass the test. I remember feeling a little bit of a disconnect because I actually wanted to know everything. I didn't even really care that much about earning the credentials. I wanted to make sure that I really understood the concepts vs. just being able to pass the test. My guess is that people going through the program may encounter a little bit of that, where their classmates may be very attuned to just kind of earning those credentials and getting in and getting out. But I think it's a good basic download. I wouldn't dissuade people from doing it.”

I don't know that I've ever asked you this question: how did you fall in with the Bogleheads? When did you make that connection? When did you become a Boglehead?

“I think it was very early in my career within our fund research group. Mr. Bogle came into the office one day, and I had the opportunity to listen to him. I certainly knew about index funds prior to that point, but I had the chance to spend some time with him. He spoke to our fund research team. He was a friend of Don Phillips, who was our first mutual fund analyst at Morningstar. He just spent a lot of time talking to us about why he believed that Vanguard's mutual ownership structure was the right structure for shareholders, certainly why he believed in index funds. I had read his books prior to that point as well. That was my first kind of steeping of Vanguard evangelism.”

Was that in the 1990s or so?

“That was in the 1990s. Then in the 1990s also, I had the chance to do an investment cruise. Maybe this was in the early 2000s. Morningstar started an investment cruise, and Jack Bogle was good enough to take part in this cruise. It was for financial advisors to give them some educational resources. Jack and his brother came on the cruise. My husband and I had some opportunities to spend some real quality time with him at that point. So, just several points along the way, getting to meet him and then subsequently attended some of the Bogleheads events and began interviewing Mr. Bogle every year at the conference. I still consider it one of the great privileges of my career that I had the chance to say I knew him and to even say he was a friend in this industry.”

I only got a chance to meet him once of the three Bogleheads conferences I've been to. He missed one for health issues. And of course, this most recent one, he's already passed on, but I did get to meet him at one of the conferences, and it was a rare pleasure for sure.

Let's talk a little bit about what you're going to be talking about at WCICON, at the Physician Wellness and Financial Literacy conference.

“My planned talk is going to be about retirement withdrawal rates, which is such a hot topic, perennially, in the area of retirement planning. How much can people safely withdraw from their portfolios during retirement? I think it's arguably the hardest question in financial planning, because you're planning around so many unknowables. You don't know your own life expectancy. You don't know the trajectory of your own spending necessarily, even though you might give it a good guess about what you might spend. Long term care expenses are a big wild card for many households. You don't know what the markets will do over your retirement time horizon, which could stretch 25 or 30 years or even longer. One thing that's top of mind today is that you don't know what inflation will be over your in-retirement time horizon. All of those things make it very difficult to estimate how much you can safely withdraw. But I'll be sharing some of our research on the topic about safe withdrawal rates to help people get in the right ballpark.”

This whole edition of the conference is going to have a much higher focus on retirees, pre-retirees, what to do in retirement, the decumulation phase, if you will. One of my two keynote talks is about it. Yours and one of mine are going to be really a one-two punch on this topic, but we also have several other workshops that are going to be talking specifically to retirees.

I think it's going to be a little bit of a change. A lot of our materials are aimed at accumulators, and we're trying to make sure we're covering material for everybody. In a lot of ways, the decumulation phase is a lot more complicated than the accumulation phase.

“Absolutely. In fact, that is why I have wanted to focus on decumulation, because there's just so much more to talk about and so much more to research. People typically are bringing multiple assets into retirement. Not just assets that are siloed in different tax pools, but people might have pensions. Most of us will be bringing Social Security into retirement. Figuring out how to extract cash flows across this range of instruments is complicated. It's challenging and it's interesting, I think.”

The fun part about it is, a lot of it doesn't have a right answer. It's really great that way. There are a lot of things in personal finance and investing that do have a right answer, but there are plenty of topics in retirement that actually don't. It's been a very interesting year in the markets. Stocks are down, bonds are down, publicly traded real estate is down pretty dramatically, which is impressive given that private real estate seems to be holding. Inflation is way up, higher than we've seen in decades. What's different now about retiring compared to somebody that might have retired a year or two ago?

“It's super counterintuitive in that when you come through a challenging period like this and investors' portfolios generally have declined—as you said, the big constituents of most of our portfolios have suffered declines so far this year—but the good news from a retirement decumulation standpoint is that that sets us up for arguably likely better returns in the future for a couple of key reasons. One is that stock valuations are depressed, so stock prices are depressed. That tends to point to better return potential in the decades ahead, certainly in the next decade. Then, another really important variable is that yields are up, and that is what has been causing a lot of the dislocation that we've seen in the market so far this year.

The fact that interest rates have been climbing, that has had negative impacts, certainly for bond prices. But that is super good news for people getting close to retirement decumulation because we know that current yields, starting yields are a really good predictor of what the fixed income asset class is likely to return in the next decade. If we're looking at yields more in the neighborhood of 3%, 4%, potentially even higher for some corporate type bonds, that portends better returns from that asset class than perhaps we've had in the recent past. I would say for people who are looking forward into retirement, it's largely a good news story. Inflation, I think, is the big wild card. We don't know the trajectory of inflation. It does appear to be cooling a little bit. The inflation rate appears to be cooling off. But I would say that that is the big sort of question mark in terms of the scenario for people embarking on retirement decumulation today.”

It's interesting, our friend Allan Roth put out an article in the last month or two arguing that now real rates, after inflation interest rates, have gone up so much in the last year that you can use a retirement portfolio of nothing but TIPS and have a better than a 4% withdrawal rate very, very safely even considering inflation. What do you think about the role of TIPS in retirement? Should they have more of a role now than maybe we thought they did a year or two ago?

“Potentially so. I saw Allan's piece as well. I continue to believe that most investors probably want to be a little more diversified than an all-TIPS portfolio. Maintaining equity exposure I think is important for most of us as we move through our decumulation years, especially to fund bequests that we probably want our portfolios to be able to grow a little bit in addition to simply aiding us with our in-retirement cash flows. But certainly, when we look at real yields today, that is an attractive piece of the puzzle for retirees. I think it's an encouraging note for people to think about all of our research points to the value of balance in portfolios as people approach decumulation. That it's not all dividend paying stocks, it's not all bonds, it's a combination.”

The big elephant in the room when it comes to spending in retirement is the sequence of returns risk. Can you explain to the listeners what that is and what some of the options are to deal with it?

“Sure. A lot of the retirement research does point to the importance of what specific market elements are in place at the point when you retire in the years just before your retirement date and in the years just after. That if the market suffers a steep decline during that period and you're withdrawing too much during that period, you are leaving less in place in the portfolio to repair itself and recover when the market eventually does, if you're overspending during those years. So much of the research around retirement withdrawal rates points to the value of being able to be variable, being able to reduce your spending at least a little bit if a difficult market environment materializes during the early years of your retirement.”

Some of the material I believe you're planning to present at the conference talks about different valuations across the Morningstar-style box. For those who don't know what this is, it basically ranks stocks from value stocks on the left to growth stocks on the right and from large stocks at the top to small stocks at the bottom. This is the Morningstar basically nine square-style box.

But you argue that there's more undervaluation for small and value stocks than for large and growth stocks right now. Do you think one should be more likely to tilt a portfolio during the decumulation years less likely or about the same?

“Well, it's an interesting point. One point in favor of perhaps putting in a little bit of a tilt is that small cap stocks and value stocks in particular have gone through kind of a long dark night relative to growth stocks over the past decade. Value stocks have held up a little better than growth so far in 2022, but they still have vastly underperformed over the past decade. I don't think it's unreasonable for retirees who are situating their portfolios to shade a little bit toward value stocks. If they haven't looked at their portfolios composition recently, I would take a look at that because the contents of the portfolio may have shifted around simply because of the outperformance of growth stocks.”

I think this is all fascinating stuff. It's interesting to look at, and it has a real impact on people's lives. People spend a lot of time worrying about this stuff in the last few years before retiring, their first few years after retiring. One of the things I find most fascinating though, is kind of the hockey stick curve, if you will, that you see with retirement spending. People spend less in retirement after the first few years, which I'm not sure most people understand. Can you explain why that is, why they spend less and then maybe a little bit more in the last few years of life?

“This is such an interesting dimension. My former colleague, David Blanchett, did some path-breaking research where he looked at the trajectory of retiree spending and identified exactly that pattern that you mentioned. He called it the Retirement Spending Smile. Basically, spending tends to be higher in those early years of retirement, kind of the pent-up demand go-go growth years where people are typically in good health, they have things they want to do. Some of those things cost money, like travel. So, they're spending more in that period from roughly age 65-75. But then spending tends to trail off pretty significantly in those mid-70s years into the 80s, and then trends up a bit toward the end of life. That's largely to pay unfunded healthcare expenses, largely long-term care expenses. The good news story in this is that when we look at this data on actual retiree spending, it suggests that for retirees who are comfortable with that bargain, with this idea that ‘Well, at some point I'll probably spend less,' that that could support a higher initial spending rate with the knowledge that spending would eventually trail down.”

Interesting stuff. Well, our time is short. I want to let you get back to what you're doing today, but I am so looking forward to having you out at an in-person conference, because it really is dramatically different than the last experience you had when we had to do our conference completely virtually in 2021. While that was pretty awesome for a virtual conference and it was great to have you out there, I think you're going to find yourself much more of a rock star and being mobbed by the crowd at this in-person WCICON in Phoenix. I'm looking forward for the white coat investors to get to know you as I have in person there. We're so appreciative for you coming.

“Well, I just can't wait. Thank you so much for inviting me.”

Always great talking with Christine. You can sign up still to come to WCICON. You sign up at wcievents.com. You can come in person. You can come virtually. We would love to have you. It's going to be a great event. It's in sunny Phoenix the first week of March, which is the very best time to be in Arizona. And you can sign up again, wcievents.com. I'd love to meet you personally and have you get to meet Christine, which is even better than meeting me.

 

This episode is sponsored by First Republic Bank. When you own a professional service business, client satisfaction is your number one priority. So when it’s your turn to be the client, shouldn’t you get the same kind of treatment? At First Republic, you’ll be paired with a dedicated business banker who understands the unique needs of your company and industry. This is the banking partnership you and your team deserve. Visit First Republic.com today to learn more. Member FDIC, Equal Housing Lender.

 

Real Estate Master Class

If you're not sure you want to take the full No Hype Real Estate Investing course, if you are not even sure you want to be a real estate investor, this is your chance to dip your toe in and check it out with no commitment and no cost. We are offering a totally free three-class series that you get by email when you sign up. These are video classes similar to our real estate course, but it's a briefer version. You can sign up at whitecoatinvestor.com/remasterclass. Once you reach the end of the class, if you want to learn more, there will be a discount for the full No Hype Real Estate course.

 

Quote of the Day

Carlos Slim Helu said,

“With a good perspective on history, we can have a better understanding of the past and present, and thus a clear vision of the future.”

 

Milestone to Millionaire 

#95 — Emergency Doc Is Back to Broke

This doc shows us that there is more than one way to go about getting back to broke. He has focused on saving, building some wealth, and investing in those retirement accounts rather than putting everything he has toward student loans. He is also celebrating paying cash for a new car rather than taking on a big payment.

 

Sponsor: DrDisabilityQuotes.com

Full Transcript

Transcription – WCI – 292

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.

Dr. Jim Dahle:
This is White Coat Investor podcast number 292.

Dr. Jim Dahle:
This episode is sponsored by First Republic Bank. When you own a professional service business, client satisfaction is your number one priority. So, when it's your turn to be the client, shouldn't you get the same kind of treatment?

Dr. Jim Dahle:
At First Republic, you'll be paired with a dedicated business banker who understands the unique needs of your company and industry. This is the banking partnership you and your team deserve. Visit firstrepublic.com today to learn more. Member FDIC and Equal Housing Lender.

Dr. Jim Dahle:
Hey, you may not be aware, but last month we put out a Real Estate Masterclass. And this is totally free. It's a three-class series that you get by email when you sign up. And they're video classes similar to our real estate course, but it's like a briefer version. It's almost like a teaser version of the real estate course. Totally free to you. No commitment at all.

Dr. Jim Dahle:
You can sign up at whitecoatinvestor.com/remasterclass. If you're not sure you want to take the full No Hype Real Estate Investing course, if you are not even sure you want to be a real estate investor, this is a chance to kind of dip your toe in, check it out, no commitment, no cost.

Dr. Jim Dahle:
And the beautiful thing is if you get to the end of it and you're like, “Yeah, I want to learn more”, you may find a little discount for the No Hype Real Estate course at the end of the class. So, go check that out. You can do so at whitecoatinvestor.com/remasterclass.

Dr. Jim Dahle:
All right, let's get into your questions today. I think we're going to talk about a lot of things about retirement accounts today. So, let's get started with a question from Sam about the mega backdoor Roth IRA.

Sam:
Hi Jim, this is Sam from the Pacific Northwest. Thank you for all you do in educating high income professionals about matters of personal finance. My question is about mega backdoor Roth IRA contributions. I currently max out a 401(k) at my W2 employer, $20,500 in 2022 with pre-tax income. I also have some 1099 income that I'd like to put into a solo 401(k) and then convert that into a Roth IRA as a mega backdoor Roth IRA contribution.

Sam:
I've heard conflicting things about how much I can actually put into that solo 401(k). This would all be post-tax money, and I've heard that can either be 25% of my total income as basically an employer contribution through profit sharing. But I also thought it could be upwards of $40,500 to bring my total 401(k) contributions for the year from the $20,500 that I put into my W2 employer's 401(k) up to the total cap on 401(k) contributions of $61,000. I’m interested to hear your thoughts on this. Again, thank you for all that you do.

Dr. Jim Dahle:
Great question, Sam. A lot of people get confused about this and the reason why is because it's confusing. It takes a while to wrap your head around all this because most people don't have access to two 401(k)s. They don't make enough money to make contributions to 401(k)s anyway, and a lot of even advisors and accountants don't realize you can have more than one 401(k).

Dr. Jim Dahle:
So, let's go over the rules about multiple 401(k)s to start with and then specifically talk about mega backdoor Roth IRA contributions. Here's the rules. You can make one employee contribution no matter how many 401(k)s you have access to. That is a total for 2022 of $20,500. For 2023, that's going up to $22,500.

Dr. Jim Dahle:
If you have two 401(k)s you have access to, you can split it, you can put some into Roth if the plan allows it, you can put some into tax deferred. You can put it all in Roth, all in tax deferred, whatever you want. As long as you make $20,500, you can put it all into a 401(k).

Dr. Jim Dahle:
But you cannot, if you have more than one 401(k), you cannot put $20,500 into one, then put $20,500 into a second and $20,500 into a third. You only get one employee contribution. That's rule number one.

Dr. Jim Dahle:
Rule number two is that each 401(k) you have access to, that means each 401(k) you have at an unrelated employer can have a total contribution of $61,000. This is for somebody under 50, just like the other amount was for those under 50. Once you're 50 plus, there's some catch-up contributions both for the employee and the total contribution. But if you're under 50, you can put in $61,000 total, or a total of $61,000 can be put into each 401(k) that you have. That goes up to $66,000 for 2023.

Dr. Jim Dahle:
So, there's obviously a big difference between $20,500 and $61,000. There's a big gap there. That gap can be made up with two kinds of contributions. It cannot be made up with employee contributions. We already talked about those. It can be made up with employer contributions.

Dr. Jim Dahle:
And depending on the employer and the plan, that can be a small amount, it can be zero or it can be the whole rest of the amount. It could be a total of $40,500 if your employer loves you. If they don't love you, it might be nothing. Most people, it's something in between. For a typical doc, it might be, I don't know, $5,000 or $10,000 is kind of an employee match, might be what they give you. If they're generous, maybe they give you $20,000 or $30,000 more. But very few will actually take you all the way up to the $61,000 limit.

Dr. Jim Dahle:
The other type of contribution that can be made into that account beyond employer contributions are what are called after tax employee contributions. These are not the typical Roth or tax-deferred contributions you make for the first $20,500. They are different.

Dr. Jim Dahle:
So, there's three kinds of contributions here, and you can make those if your plan allows them. Many plans do not, but if your plan does, you can make that sort of a contribution into the plan.

Dr. Jim Dahle:
Let's say you put in $20,500, let's say your employer put in $10,000. That leaves you $30,500 that you could put in as an after-tax contribution. Now, an after-tax contribution is not awesome. It's good, I guess. You get some asset protection from it. You get tax protected growth on it. But when the earnings on that come out, you're going to pay taxes on it at your ordinary income tax rates and you're not getting a tax deduction when you put the money in.

Dr. Jim Dahle:
So, by itself, after-tax is not awesome. If it's there for a long time, that tax protected growth can overcome the fact that you're paying ordinary income tax rates on withdrawals. But if it's a short time period, you're probably better off in a taxable account. You're getting no tax break for either one upfront and the taxable account, the earnings come out at long term capital gains rates and at qualified dividends rates, assuming you invest wisely there.

Dr. Jim Dahle:
However, if there is another feature that the 401(k) offers, this can be a really great move. And that feature is essentially an in-service Roth conversion or an in-service withdrawal where you can withdraw to an IRA and convert that to a Roth IRA.

Dr. Jim Dahle:
This process of making after-tax contributions into your 401(k) and subsequently converting them to a Roth IRA or within the plan to a Roth 401(k) is a great move. This allows you to make additional Roth contributions that you wouldn't be able to make if the plan did not allow this.

Dr. Jim Dahle:
For example, if there were a couple and each of them had access to this and they're doing backdoor Roth IRAs and they're doing this mega backdoor Roth IRA and they're making Roth 401(k) contributions for their employee contribution. In 2022, a couple under 50 can put $134,000 into Roth accounts in a single year never to be taxed again. So, it can be pretty powerful.

Dr. Jim Dahle:
Now, it's not necessarily a better move if you can put in all kinds of tax deferred money in your peak earnings years. That's usually the right move. But if you can't do that, or for some reason you're a super saver and you just want to do more in Roth, it gives you another option.

Dr. Jim Dahle:
This brings us to where the rubber meets the road. The typical situation the doctors have. Typical doctors got this W2 job at the hospital or at the clinic or in the physician practice or as a partner or whatever. And there's one 401(k) there. That doctor uses the employee contribution there, gets some sort of match, some employer dollars there, whatever, and then does some moonlighting, has some 1099 income for call or whatever.

Dr. Jim Dahle:
And he starts wondering, “Well, what can I do with that?” Well, you open a solo 401(k). You've already burned your employee contribution, so you can't use that. The easy thing to do, and the thing that's easily allowed at any old solo 401(k) that you open at Vanguard or Fidelity or Schwab or whatever, is to just do the employer contribution, which is basically 20% of your net self-employment earnings, net of the employer half of payroll taxes, and of course, all business expenses.

Dr. Jim Dahle:
That's the easy thing to do. So, 20%. You make $50,000 as 1099, you put $10,000 into the solo 401(k). However, if you get a solo 401(k) that allows these two steps that are required for the mega backdoor Roth IRA process, you could put in even more. Let's say you made $50,000 at this 1099 job and you wanted to put it into Roth and you went out and got kind of a customized solo 401(k).

Dr. Jim Dahle:
And you can go to the White Coat Investor website and you can go under our “Recommended” dropdown menu. You go to “Retirement Accounts & HSAs” and there are companies that can set these up for you. And you can set it up so that you get a solo 401(k) that allows a mega backdoor Roth IRA. If you do that, you could put pretty much all of that $50,000 you made as an independent contractor, as a 1099, as a moonlight into a mega backdoor Roth IRA.

Dr. Jim Dahle:
So, what's the total limit? Well, in 2022 it's $61,000. In 2023, it's $66,000. So, if you make $100,000, you can't put $100,000 in there, but you could put $66,000 in there next year. So, that's certainly way better than a kick in the teeth.

Dr. Jim Dahle:
And a lot of people look at that and go, “Well, I would much rather put in $66,000 into Roth than put $20,000 into a tax deferred account.” So, they do that. And as long as you get a solo 401(k) that allows that, you can do it. But don't expect it from the cookie cutter off the shelf 401(k) that you get at Vanguard or Fidelity. I don't think they allow that yet. But hopefully soon.

Dr. Jim Dahle:
All right. You like these questions, this Q&A format? I like it. Most of the time I know the answers. Every now and then I got to look one up and that's easy to do on the podcast. We just hit pause on recording and I look it up. But most of the time I don't need to do that.

Dr. Jim Dahle:
And some of the staff wants to do an event at the WCI conference that we're going to call “Stump the Chump.” And basically, it's going to be a chance to ask me questions where I can't hit pause, where I can't look up the answer. And if you can stump the chump, the chump being me, then you're going to get a prize.

Dr. Jim Dahle:
So, we're trying to work that into WCICON23. If you're going, watch for that and be thinking about the question you're going to use to stump the chump and win your prize.

Dr. Jim Dahle:
All right, here's Alex's attempt to stump the chump with a question on 403(b)s and 457(b)s. Let's take a listen.

Alex:
Hi, this is Alex from Salt Lake City. I just finished a fellowship this summer and will be starting employment at the same institution later this fall. During residency and fellowship, I was able to save up some money in my employer sponsored Roth 403(b) and Roth 457(b) accounts.

Alex:
For the short period where I'm separated from my employer, I have the option to move all that money over to my personal Roth IRA, but once I start as an attending, that option will go away.

Alex:
My employer plan through TIAA allows me to invest in all the index and Vanguard funds I would be using in my personal IRA anyways. And the fees are pretty low. It'd be nice to have the option to invest in individual stocks, which my employer plan does not allow, but that's a pretty minor factor.

Alex:
My question is, which account would give more flexibility and security? It seems like IRAs have way more freedom with regard to the investment types and it would be nice to have the money somewhere that I get to make the plan rules or at least I can pick a plan with rules that I like. But I've been told that 403(b) and 401(k)s have some additional bankruptcy protections that IRAs don't have, depending on what state I'm in. Not that I plan to go bankrupt.

Alex:
Where would you rather have your money? Anything else I should be aware of if I go forward with the transfer such as the five-year seasoning before transferred money can be taken out?

Dr. Jim Dahle:
All right. Great question, Alex. A few things to think about. One, I would not go to a Roth IRA just to be able to invest in individual stocks, because as a general rule, investing in individual stocks is a bad idea. That would not be a big motivation for me.

Dr. Jim Dahle:
If you wanted to invest in something that your 401(k) doesn't allow, whatever that might be, some private real estate investment or precious metals or Bitcoin or whatever, well, one benefit of going out to a Roth IRA is you can roll it out to a self-directed Roth IRA and invest in that sort of stuff. And obviously you're going to have more flexibility. There's no doubt there's more flexibility in an IRA than there is in any 401(k).

Dr. Jim Dahle:
That said, your 401(k), 403(b), 457(b), if it's at the institution I know of in town, is a pretty good plan. So, it's not the end of the world to leave it there. However, in Utah, the asset protection is the same. IRAs are 100% protected in Utah, at least everything except what has been contributed in the last 18 months.

Dr. Jim Dahle:
Money that's rolled over from 401(k) should be completely protected from creditors in the event that you had an above policy limits judgment and had to declare bankruptcy, you'd get to keep that IRA. So, no real asset protection benefit for you to leave it in the employer plans. In some states that's not the case. Some states have a little bit weaker protection for IRAs.

Dr. Jim Dahle:
As far as the five-year rule, the likelihood of that five-year rule actually applying in your life seems really, really low. I mean, you're at the beginning of your career, you're a great saver. I think the likelihood of you actually wanting to tap into this money in the next five years is such a non-issue. It shouldn't come into this discussion at all.

Dr. Jim Dahle:
So, what would I do if I were you? I'd probably roll it out to my Roth IRA. You're doing a backdoor Roth every year anyway, so you've already got a Roth IRA. It's not like you're opening a new account or introducing new complexity. Most of the time when I have the opportunity to get money out of an employer account into my IRAs, I usually take it. It’s not always the case. Several times I've rolled money into the TSP so I could take advantage of the G fund.

Dr. Jim Dahle:
TIAA accounts have kind of a unique real estate fund you might want to look at and see if you want to use that. That would be one reason to keep it in an account that has access to that fund. Your IRA probably does not. But if you don't want to invest in that, then I'd probably roll it out to your Roth IRA.

Dr. Jim Dahle:
Good thought and congratulations on saving so much money during residency. Most residents are not able to do that and just shows you are kind of ahead of the game. So, thanks for being an example for other White Coat Investors. And thank you to all the White Coat Investors out there. Your jobs are not easy. That's why you get paid so well, because you spent a lot of time in school because you're taking on a lot of risk.

Dr. Jim Dahle:
I just wrote a blog post about why doctors get paid more in the US. And it's true that doctors do get paid more in the US than most, but not all other countries. It turns out Luxembourg is the best place to go for doctors. But the truth is that most professionals are paid more in the US. And so, it shouldn't be that unusual that doctors get paid more in the US. Besides, our schooling is far more expensive than medical school is in most other countries, and we take on far more liability risk than people do in most countries.

Dr. Jim Dahle:
So, if no one's told you thank you for doing all that, for borrowing all that money, for taking on that liability to heal the sick and the injured, let me be the first today. Thank you.

Dr. Jim Dahle:
All right, let's talk about defined benefit plans.

Speaker:
I have a defined benefit plan that requires a 5% return annually. It currently has a 60/40 stock to bond ratio. I'm considering purchasing treasury notes from the treasurydirect.gov for investments within this plan. Current notes are yielding 4.25%, and it's very possible that those notes could go up to and or exceed the 5% threshold that I'm looking for. Is this a logical thought process? I'd love to hear your insight. Thank you.

Dr. Jim Dahle:
All right. The type of retirement plan that we're talking about here is a defined benefit cash balance plan. It sounds like you're in quite a bit of control of your plan. That's not always the case. When this is put together by a partnership, or by an employer, that's not usually the case that you have much control over the investments in there. So, this is either a personal defined benefit plan or one in which you're the employer and you've got significant control over it.

Dr. Jim Dahle:
Yeah, treasuries are a reasonable investment to have in a defined benefit cash balance plan. These plans are typically invested less aggressively than your 401(k) for various actuarial reasons. But the truth of the matter is you can set them up pretty flexibly and most of them are actually able to credit you what the investments have actually earned.

Dr. Jim Dahle:
Often there's a floor that you can't lose money in it. If it's losing money, you have to add more money to the plan. Not that that's a bad thing if you're the employer. It just forces you to buy low. That's a good thing. I don't see that as a problem but some doctors do for cash flow reasons. All of a sudden, the market is down, they got to come up with more money to put into the plan and that bothers them.

Dr. Jim Dahle:
I think the bottom line is don't have a plan that's so huge you have to make a huge contribution that you can't afford in the event that happens. But yeah, treasuries are a reasonable thing to have on the plan. I would say most plans probably use mutual funds though rather than buying individual treasuries directly.

Dr. Jim Dahle:
But I don't see any reason you couldn't do that. I own some individual tips I bought directly through TreasuryDirect. And so, I suppose you could do that in a defined benefit plan, just buy them through the brokerage or whatever that the plan is through. It's not an unreasonable thing to do. I don't know that I'd bother, but it's certainly okay for you to do that if that's what you want to invest in.

Dr. Jim Dahle:
I would not feel like you got to somehow do it because you're aiming for this 5% return in the defined benefit plan and they're yielding 4% or 5%. I'd just do it because they're a reasonably safe, reasonably good long-term investment. I hope that makes sense.

Dr. Jim Dahle:
All right, another question here about retirement account contributions.

Speaker 2:
Dear, Dr. Dahle. Thank you for everything that you do. My wife and I are both physicians about three years out from training, and we had a question about retirement account contributions that we would like to hear your expertise on.

Speaker 2:
Specifically, my wife and I already max out on the pretax contributions to my 401(k) account and my wife's 403(b) part of her retirement account, and also received the maximum employee matching pre-tax funds, which goes into my 401(k) account and the 401(a) part of the retirement account for my wife. We also max out the backdoor Roth IRA.

Speaker 2:
In addition, my wife can contribute after tax money into the 401(a) part of her retirement account, but it is unclear whether there is a possibility of immediate inn plan Roth conversion or roll over to a Roth IRA while with the same employer.

Speaker 2:
I know that you recommend maximizing all retirement accounts before investing in a regular brokerage account, but if no immediate in plan Roth conversion or rollover is possible, would you still recommend taking advantage of this after-tax contribution to her 401(a)?

Speaker 2:
Ignoring the potential asset protection of 401(a), how do you value tax deferred growth from after-tax contribution that will eventually be taxed at ordinary income rates versus gains in a regular brokerage account that would be taxed at long term capital gain rates, but has tax drag on the growth. I don't know if there's a brick even point. So, I was wondering what your thoughts would be.

Speaker 2:
As an aside, is your recommendation on non-governmental 457(b) accounts still to maximize those despite the theoretical risk of losing that money if the employer ever bankrupts? Have there been any reports of people losing their 457(b) money due to employers going bankrupt? Thank you again for all that you do.

Dr. Jim Dahle:
All right. Well, that was impressive how many questions you packed into a minute and a half. Let's take the last question first. If you have lost 457(b) money out of a non-governmental 457(b), please email me [email protected] Even if you just know somebody that actually lost 457(b) money. I have yet to meet anyone that's lost it.

Dr. Jim Dahle:
It is a theoretical risk. It's possible to lose that money because it's not your money, it's deferred compensation. It actually still belongs to the employer and is subject to their creditors. So, if your employer looks like they're on a really shaky ground, maybe you don't want to max that out for years and years and years and years, but I'd still use it most of the time just because I think that risk is pretty darn low. Assuming the investments are good, the fees are reasonable, the withdrawal options are fine, go ahead and use that 457(b).

Dr. Jim Dahle:
All right, as far as retirement accounts where you are not sure of the rules, go find out the rules. They're required to give you a plan document. There's somebody in HR who's required to explain them to you. So, it should not be a mystery what your plan allows and what it does not. Keep pushing there. Go to HR. If they don't know the answer, have them get you in touch with whoever designed the plan or the actuary or whoever.

Dr. Jim Dahle:
Somebody knows the answer to your question. So, go get the answer to your question. Don't just operate in the dark. Because if it does allow in plan conversions, or if it does allow in plan withdrawals, in service withdrawals, then that's probably something you're going to want to take advantage of it sounds like. If it does not allow it, it's a lot harder question.

Dr. Jim Dahle:
Obviously, if you're going to leave this employer in the next one, two, maybe five years, this is no big deal. When you leave, you roll the 401(a) over, you convert whatever is after tax money and you now have a bigger Roth IRA. So, no big deal there.

Dr. Jim Dahle:
You can even separate out the basis there most of the time. By shifting money around, you roll it out to an IRA, you roll back in what you can into a 401(k) and they usually don't let you roll in after tax money. So, that allows you to kind of separate out your basis and then you can convert that tax free. I did that with the TSP money that I put in when I was deployed many years ago. That was after tax money. And I isolated my basis after getting out of the military and was able to do a tax-free Roth conversion of all that money.

Dr. Jim Dahle:
But if that's not going to be an option, if you're going to stay with this employer for 20 or 30 years, you're never going to be able to convert that money to Roth. Well, now you've got a different question. Are you better off in taxable where all those gains will be taxed at qualified dividends?

Dr. Jim Dahle:
Now those will be as they go along. So, there'll be some tax drag there or when you eventually sell at long term capital gains rates. This is all assuming you invest it very tax efficiently. Or would you be better off getting that tax protected growth? And it turns out that it takes time for the benefit of the tax protected growth to overcome the benefit of paying at the lower long term capital gains rates on the gains.

Dr. Jim Dahle:
How much time? Well, it depends. It depends on what fees are charged in the account, what you plan to invest in, your investment behavior. All those things matter. If it's a very tax inefficient investment, maybe it's REITs or TIPS or something, well, you're probably going to be better off inside the retirement account even with after tax money.

Dr. Jim Dahle:
If it's going to be a total stock market index fund that's super tax efficient, then you're probably going to be better off inside that, or in a taxable account for a long, long time. And maybe after 20, 30, 40 years it will make up the difference. But it's not going to do it in the first 5 or 10, that's for sure, unless you're investing in something relatively tax inefficient.

Dr. Jim Dahle:
So, I'm sorry to give you that answer that there's not a straightforward rule of thumb. You just got to run the numbers with some assumptions and all that. But for the most part, if your money's going to be in there for a short period of time, it's fine to use the after-tax money and just do a Roth conversion when you leave the employer.

Dr. Jim Dahle:
If it's going to be in there for a very long period of time, that's fine too because the tax protected growth will overcome the difference in tax rates that you pay upon withdrawal. Plus, you get some additional asset protection. But in between, there's probably a number of years there where you would've been better off in a taxable brokerage account.

Dr. Jim Dahle:
You got to also ask yourself, “Do I want a little more flexibility with what I spend this money on? Is it possible I won't use it for retirement? I'll use it for a Tesla, or I'll use it for a second home, or I'll use it for a boat or whatever.” In that case, obviously you would favor the taxable account.

Dr. Jim Dahle:
Sorry, there's no right answer to that one, but I think I gave you all the factors that you should be thinking about as you decide which of those to use.

Dr. Jim Dahle:
All right, let's do our quote of the day today. This one comes from Carlos Slim Halo who said, “With a good perspective on history, we can have a better understanding of the past and present, and thus a clear vision of the future.”

Dr. Jim Dahle:
I think that really applies to financial history. I'm amazed how many people panic when stocks drop 10%, 20%, 25%, 30%. Did you not expect this? I mean, look at financial history. This happens every three or four years. It's not like this is an unexpected event. So, when stocks go down, you should say, “Oh yeah, this is what they do. This is why I get paid more to invest in stocks.”

Dr. Jim Dahle:
And the key is understanding history. That's why it's one of the four pillars in William Bernstein's “The Four Pillars of Investing” is financial history. You really need to understand where we've been because it probably provides about the best estimate of where we're going to be, where we could be, etc.

Dr. Jim Dahle:
For example, if you didn't know about the Great Depression, you might not know the stocks can lose 90% of their value. That can happen. It is a risk. It has happened before, it could happen again. And if you only look back 30 years or 40 years or 50 years, you might not realize that that's a significant risk in the stock market.

Dr. Jim Dahle:
Okay, question from Richard. I think I like this question about fixing mistakes in the down market.

Richard:
Hi, this is Richard from Texas. I’m a family medicine doctor in the Southwest area. I have a couple of questions. Number one is, I did make the mistake of having a Vanguard REIT fund in my taxable, which I understand is a mistake because it's very tax inefficient. And number two is I've made the mistake of having a retirement fund in taxable, which I understand also is very inefficient.

Richard:
I've tried to tax loss harvest both of those in this current bear market. But my question is, what's the best way to try to get rid of those funds in this bear market? They're both significantly down and I'm reluctant to sell them right now when they're down. Thanks for all the help. I'm a big fan of all your podcasts.

Dr. Jim Dahle:
Thanks Richard. Great question. The truth is, a bear market is a great time to fix mistakes that you've made because the tax consequences are so much less. It's also a great time to do Roth conversions if you have the cash for it because your conversion costs you less than taxes because you're converting less money even though you're converting the same number of shares.

Dr. Jim Dahle:
In your case it sounds like you are kind of regretting some of the stuff you put into a taxable account and that's probably right. You're probably right that you should be regretting it.

Dr. Jim Dahle:
REITs have this reputation of being terribly tax inefficient. I think this comes from the Bogleheads. They're not that bad for a couple of reasons. One, depreciation covers some of the income in a real estate investment. And in a REIT, the way that's passed on to you is as a return of capital or return of principle distribution. You don't pay taxes on those. Now, the other distributions, you pay your ordinary income tax rates, that's why they're relatively tax inefficient.

Dr. Jim Dahle:
But at least through 2025, that distribution is eligible for the 199A deduction. So, you don't pay taxes on 20% of it. So, it makes it a little less tax inefficient than it used to be. But for the most part, you've usually got something in your portfolio that's more tax efficient than a REIT index fund. And you should put that in taxable preferentially, whether that's a total stock market fund, total international stock market fund, a muni bond fund, those sorts of things.

Dr. Jim Dahle:
And so, REITs are usually one of the last things that people bring out of tax protected space into taxable space. If you've got a portfolio that's 98% taxable, you're probably going to have your REITs in taxable account. But if you're 50/50 or something, your REITs are almost never going to be in a taxable account.

Dr. Jim Dahle:
As far as target retirement funds, which I think is what you're talking about. I agree with you, this is a bad idea to have this in taxable. See the debacle from Vanguard last year where they basically made some changes in their share classes for the target retirement funds. A bunch of institutional investors left one and went to another and all the retail investors stuck in the old one got hammered with capital gains.

Dr. Jim Dahle:
No big deal if you're investing in a retirement account. But if you're in a taxable account, you could have gotten some capital gains you really didn't want to get last year. Bunch of people are upset about it. Some people are suing Vanguard about it. You don't want target retirement funds in taxable for a number of reasons, not least of which is that sort of thing could happen again. So, I like your idea of getting that out of taxable as well.

Dr. Jim Dahle:
How would I do it? If you have a loss on them, just sell them. Just sell them. You don't want to own them in taxable, you've got a loss. It's great you get to book that loss and there's nothing bad happening here. So, just sell them. Now presumably you want to invest in REITs in your portfolio. So, you also need to buy REITs in your tax protected accounts somewhere.

Dr. Jim Dahle:
So, essentially what you're doing is you are selling your REIT index fund in taxable. You are buying something else you'd rather have in taxable like total stock market fund and you are selling some total stock market fund in a tax protected account somewhere and buying a REIT index fund in a tax protected account somewhere, whether that's a Roth IRA or 401(k) or whatever.

Dr. Jim Dahle:
Now you got to be aware of the wash rules. They technically don't apply to 401(k)s and really nobody's even looking at the IRAs all that hard. So, you may want to use a different fund than your one you selling to avoid a wash sale, if you care about that. But in this case, I would probably get both of those out of taxable. I'd just move them into a tax protected account.

Dr. Jim Dahle:
Now if you are picking your own funds, it's kind of silly to have a target retirement fund. A target retirement fund is a one stop shopping solution. It's great for a resident who's all their investments are in the Roth IRA. Great, put it in Target Retirement 2060, forget about it, go learn medicine.

Dr. Jim Dahle:
But once you're an attending, you got five different investing accounts. Target Retirement funds don't really work very well because it's probably not available in all of your accounts. One of your accounts is probably a taxable account where you don't want it. They're just great solutions for people who are not doctors. It just doesn't work well for doctors long term. Fine for doctor to use short term inside a tax protected account.

Dr. Jim Dahle:
But I think very few doctors use them as their only investment long term and it doesn't make any sense to really combine it with other investments, especially if you got four or five or six other asset classes and then you have a target retirement account, that doesn't make any sense at all. All right. Hopefully that's helpful.

Dr. Jim Dahle:
All right, let's take a question from Nick about a SIMPLE IRA. Poor guy. He’s not only got a SIMPLE IRA but it sounds like it's kind of a crummy one.

Nick:
Hi Jim, this is Nick from the Midwest. I had a question for you. I have a SIMPLE IRA offered through my employer and it is through Fidelity Services and the only options available through Fidelity are the Fidelity Advisor funds where the expense ratios are all extremely high.

Nick:
So, my question is, what do you choose between all these terrible investment options? Do you plan to diversify or do you plan to choose something with the lowest expense ratio? Thanks for all you do. I look forward to hearing from you.

Dr. Jim Dahle:
All right, first of all, Nick, my condolences. I'm sorry to hear that your employer hates you. Because that is the message they are sending. Not only by the fact that all they're offering you is a SIMPLE IRA which has dramatically lower contribution limits than a typical 401(k), but also, they have stuck you with a crappy one.

Dr. Jim Dahle:
You might put a little bit of effort into trying to change this plan. And the tone to take with this is that you're doing your employer a favor. You're pointing out to them that they have a lot of liability here because they have a fiduciary responsibility to their employees.

Dr. Jim Dahle:
So, if they ever had a disgruntled employee, that employee could actually sue them for having such a crappy retirement plan. You don't exactly want to go “It’d be a real shame if something happened to your business here because you got sued for your SIMPLE IRA.”

Dr. Jim Dahle:
But that's kind of what you're pointing out to them to get them thinking, “Maybe I ought to change this.” And maybe introduce them even to some of our recommended resources. You go to whitecoatinvestor.com, “Recommended” tab, go down to “Retirement Accounts & HSAs” and we've got four or five people there that specialize in doing studies of what are usually small dental practices, small medical practices, partnerships, etc, and trying to help you figure out what the right retirement plan is for that practice. It might be a 401(k), it might be a SIMPLE IRA, it could be a SEP IRA. It might be no plan at all, but to have them actually study the practice and figure out what the best solution is.

Dr. Jim Dahle:
The other thing that will help you do is even if the right plan for that practice is a SIMPLE IRA, you're not going to end up with a crappy SIMPLE IRA like the one that you have. And the reason you have this is because the person who went to set it up doesn't know what they're doing. So, they went to a commission salesman and mistook them for a financial advisor and they were really happy they didn't get charged any fees. And the reason why is because the participants, which likely includes the owner who's probably the biggest participant, are paying all these huge ongoing fees as they go on.

Dr. Jim Dahle:
So, when we designed the White Coat Investor plan, we did not pass any of those fees onto our employees. We pay them all as a business. That's a good thing in that we can pay for them pre-tax, but it also makes it a much more attractive benefit for our employees. And here at the White Coat investor, you can imagine our employees understand that. And so, they view it as a real value and they should.

Dr. Jim Dahle:
There's lots of employees out there that don't see much value in a retirement plan at all. Don't understand the difference between a crummy one and a good one and don't care. And so, that's why employees can get away a lot of times with offering these crummy ones where they're actually paying all the fees.

Dr. Jim Dahle:
Now, assuming your employer will not change this plan that you are stuck with it, you are only left with the dilemma of “Do you use it and how do you use it?” Well, do you use it? Probably because chances are the plan will change in two or three or five or 10 years, or you'll go somewhere else in two or three or five or 10 years and can roll it over and then you'll have more tax protected space. You'll only pay the fees for a few short years and you'll have more tax and asset protected space down the road.

Dr. Jim Dahle:
I'd probably still use the account unless you're like, “I'm definitely going to be here for the next 30 years and the fees are 2% plus. I'm just going to invest in taxable. Okay, fine.” But for most people you're probably still going to want to use it even if you're constantly pushing for change to the plan.

Dr. Jim Dahle:
Now what do you do with it? Well, it depends on the rest of your portfolio. If this is a tiny little piece of your portfolio, then you can yes, just pick one fund in there. Hopefully there's one index fund, probably an S&P 500 index fund. And so, you just put a portion of your US stocks into that SIMPLE IRA and you build out the rest of your asset allocation, whatever it might be with your Roth IRA with any other 401(k)s you might have. Maybe there's a solo 401(k), if you do some moonlighting, maybe there's a taxable account.

Dr. Jim Dahle:
But if this is like the main piece of your retirement savings, this is 90% of your money, you don't want to just invest in one asset class, even if you have to pay a little bit higher fees. So, look at all of the options. Ask, ask, ask, ask for access to the cheaper Fidelity funds because Fidelity does have some dirt-cheap index funds. But if you can't get them, do the best you can, muddle through and know that it'll probably change at some point in the next few years.

Dr. Jim Dahle:
All right, we are going to bring on one of my favorite people in the world. This is Christine Benz. Christine Benz is the director of Personal Finance at Morningstar. She is the author of “30-Minute Money Solutions” book.

Dr. Jim Dahle:
We gave that out with the 2021 WCICON when she was a keynote speaker. This was our virtual WCICON. It was 100% virtual. We did it in this little hotel conference room in Salt Lake City. And everybody had to get a COVID test every day that was in this room for the conference. None of them ever came back positive, but we literally only had four of our speakers that were there in person. And this was basically a TV studio. We made a TV show for WCICON that year. Christine Benz was one of them. It was great to see her there.

Dr. Jim Dahle:
She is also on the board of directors of the Bogle Center. And so, I worked with her as well in our recent Bogleheads conference. I was in charge of a segment called Bogleheads University, which was about three hours. It was supposed to be a pre-conference event. It ended up being really just the first day of the conference.

Dr. Jim Dahle:
She's always wonderful to work with. She is a genius when it comes to personal finance and investing and knows a great deal. And she's going to be one of our speakers at WCICON23. She's going to be one of our keynote speakers. So, we're excited to have her back. We're excited to introduce her face to face to the White Coat Investor community and have her experience how awesome it is to come off the stage and be surrounded by 20 or 30 people who ask questions to you for the next hour or two and to really be treated like the rock star that you are at that sort of an event.

Dr. Jim Dahle:
So, let's get her on the line, talk with her a little bit about her life and career and what she's going to be talking about at the conference, and we'll go from there.

Dr. Jim Dahle:
All right, Christine, welcome back to the White Coat Investor podcast.

Christine Benz:
Hi, Dr. Dahle. It's great to be here. It’s always great to see you.

Dr. Jim Dahle:
Yeah. Now, I think a lot of our listeners may not have heard you before when you're on the podcast. Why don't we introduce you a little bit to them? Why don't you tell us a little bit about how you got interested in all this personal finance stuff to the point that you're now the director of Personal Finance at Morningstar?

Christine Benz:
Sure. I started at Morningstar almost 30 years ago. I was part of what at the time we called our analyst research group, now we call it manager research, but we're doing fund research, mutual fund research. And I was focused on funds for many years. Eventually came to head up our US fund analyst team, but along the way began to become aware of how we weren't really speaking to a lot of the central challenges that investors face.

Christine Benz:
So, how do they allocate their assets, how do they set their savings targets, how do they decumulate during retirement? And I wanted to focus on those sorts of topics. And I went through the CFP program, the Certified Financial Planner program, just to get a good basic download of information on all of those topics. And began to focus on research in those areas in earnest probably 10 years ago.

Christine Benz:
My work is mainly focused on individual investors who are sorting this out for themselves. But we also have a fair number of financial advisors who read my work. And we've since established a small team focused on portfolio construction, retirement planning and financial planning matters because we found not only do individual investors need the help, but financial advisors need the help too.

Dr. Jim Dahle:
I've had a lot of individual investors ask me if I thought them going and getting a CFP or taking the CFP classes was worthwhile. What would you say to someone who's not professionally working in the field? Is it worthwhile for an individual investor?

Christine Benz:
Possibly. I think if you intend to be the main manager, the main financial planner for your household, it's not a bad use of time and money. The thing that I encountered in the CFP program was that there were a lot of people who were just sort of in the program to earn the credentials. They really just wanted to pass the test.

Christine Benz:
And I remember feeling a little bit of a disconnect because I was like, “I actually want to know this.” I didn't even really care that much about earning the credentials. I wanted to make sure that I really understood the concepts versus just being able to pass the test.

Christine Benz:
So, my guess is that people going through the program may encounter a little bit of that, where their classmates may be very attuned to just kind of earning those credentials and getting in and getting out. But I think it's a good basic download. I wouldn't dissuade people from doing it.

Dr. Jim Dahle:
So, tell us, I don't know that I've ever asked you this question. How did you fall in with the Bogleheads? When did you make that connection? When did you become a Boglehead?

Christine Benz:
I think it was very early in my career within our fund research group. Mr. Bogle came into the office one day and I had the opportunity to listen to him. And I certainly knew about index funds prior to that point, but I had the chance to spend some time with him. He spoke to our fund research team. He was a friend of Don Phillips, who was one of our first mutual fund analysts, or was our first mutual fund analyst at Morningstar.

Christine Benz:
He just spent a lot of time talking to us about why he believed that Vanguard's mutual ownership structure was the right structure for shareholders, certainly why he believed in index funds. I had read his books prior to that point as well. So, that was my first kind of steeping of Vanguard evangelism.

Dr. Jim Dahle:
Then that's what? The 1990s or so? When was that?

Christine Benz:
That was in the 1990s. And then in the 1990s also, I had the chance to do an investment cruise, or maybe this was in the early 2000s. Morningstar started an investment cruise and Jack Bogle was good enough to take part in this cruise. It was for financial advisors to give them some educational resources. And Jack and his brother came on the cruise. And then my husband and I had some opportunities to spend some real quality time with him at that point.

Christine Benz:
So just several points along the way, getting to meet him and then subsequently attended some of the Bogleheads events and began interviewing Mr. Bogle every year at the conference. And I still consider it one of the great privileges of my career that I had the chance to say I knew him to even say he was a friend in this industry.

Dr. Jim Dahle:
Yeah. I only got a chance to meet him once of the three Bogleheads conferences I've been to. He missed one for health issues. And of course, this most recent one, he's already passed on, but I did get to meet him at one of the conferences and it is a rare pleasure for sure.

Christine Benz:
Absolutely.

Dr. Jim Dahle:
All right. Well, let's talk a little bit about what you're going to be talking about at WCICON, at the Physician Wellness and Financial Literacy conference.

Christine Benz:
Right. My planned talk, and you and I discussed whether maybe it's too wonky and we decided that it's not. We're going to be talking about in retirement withdrawal rates, which is such a hot topic, perennially in the area of retirement planning. How much can people safely withdraw from their portfolios during retirement?

Christine Benz:
I think it's arguably the hardest question in financial planning, because you're planning around so many unknowables. You don't know your own life expectancy. You don't know the trajectory of your own spending necessarily, even though you might give it a good guess about what you might spend. Long term care expenses are a big wild card for many households. You don't know what the markets will do over your retirement time horizon, which could stretch 25 or 30 years or even longer.

Christine Benz:
And one thing that's top of mind today is that you don't know what inflation will be over your in-retirement time horizon. And so, all of those things make it very difficult to estimate how much you can safely withdraw. But I'll be sharing some of our research on the topic about safe withdrawal rates to help people get in the right ballpark.

Dr. Jim Dahle:
Yeah. Awesome. This whole addition of the conference is going to have a much higher focus on retirees, pre-retirees, what to do in retirement, the decumulation phase, if you will. One of my two keynote talks is about it. And so, yours and one of mine are going to be really a one two punch on this topic, but we also have several other workshops that are going to be talking specifically to retirees.

Dr. Jim Dahle:
I think it's going to be a little bit of a change. I think a lot of our materials are aimed at accumulators, and we're trying to make sure we're covering material for everybody, because in a lot of ways, the decumulation phase is a lot more complicated than the accumulation phase.

Christine Benz:
Absolutely. In fact, that is why I have wanted to focus on decumulation, because there's just so much more to talk about and so much more to research. And people typically are bringing multiple assets into retirement. So, not just assets that are siloed in different tax pools, but people might have pensions. Most of us will be bringing social security into retirement. So, figuring out how to extract cash flows across this range of instruments is complicated. It's challenging and it's interesting, I think.

Dr. Jim Dahle:
Yeah. And the fun part about it is, a lot of it doesn't have a right answer.

Christine Benz:
That's right. It's so individual specific.

Dr. Jim Dahle:
Yeah. Yeah. It's really great that way. There's a lot of things in personal finance and investing that do have a right answer, but there's plenty of topics in retirement that actually don't.

Dr. Jim Dahle:
It's been a very interesting year in the markets. Stocks are down, bonds are down, publicly traded real estate is down pretty dramatically, which is impressive given that private real estate seems to be holding. Inflation is way up, higher than we've seen in decades. What's different now about retiring compared to somebody that might have retired a year or two ago?

Christine Benz:
Well, it's super counterintuitive in that when you come through a challenging period like this and investors' portfolios generally have declined, as you said, the big constituents of most of our portfolios have suffered declines so far this year.

Christine Benz:
But the good news from a retirement decumulation standpoint is that that sets us up for arguably likely better returns in the future for a couple of key reasons. One is that stock valuations are depressed, so stock prices are depressed. That tends to point to better return potential in the decades ahead, certainly in the next decade.

Christine Benz:
And then another really important variable is that yields are up, and that is what has been causing really a lot of the dislocation that we've seen in the market so far this year. The fact that interest rates have been climbing, that has had negative impacts, certainly for bond prices.

Christine Benz:
But that is super good news for people getting close to retirement decumulation because we know that current yields, starting yields are a really good predictor of what the fixed income asset class is likely to return in the next decade.

Christine Benz:
So, if we're looking at yields more in the neighborhood of 3%, 4%, potentially even higher for some corporate type bonds, that portends better returns from that asset class than perhaps we've had in the recent past.

Christine Benz:
I would say for people who are looking forward into retirement, it's largely a good news story. Inflation, I think, is the big wild card. We don't know the trajectory of inflation. It does appear to be cooling a little bit. The inflation rate appears to be cooling off. But I would say that that is the big sort of question mark in terms of the scenario for people embarking on retirement decumulation today.

Dr. Jim Dahle:
Yeah. It's interesting, our friend Allan Roth, put out an article in the last month or two arguing that now real rates after inflation interest rates have gone up so much in the last year, that you can use a retirement portfolio of nothing but TIPS and have a better than a 4% withdrawal rate very, very safely even considering inflation. What do you think about the role of TIPS in retirement? Should they have more of a role now than maybe we thought they did a year or two ago?

Christine Benz:
Potentially so. I saw Allan's piece as well. I continue to believe that most investors probably want to be a little more diversified than an all-TIPS portfolio. And maintaining equity exposure I think is important for most of us as we move through our decumulation years, especially to fund bequests that we probably want our portfolios to be able to grow a little bit in addition to simply aiding us with our in-retirement cash flows.

Christine Benz:
But certainly, when we look at real yields today, that is an attractive piece of the puzzle for retirees. And I think it's an encouraging note for people to think about all of our research points to the value of balance in portfolios as people approach decumulation. That it's not all dividend paying stocks, it's not all bonds, it's a combination.

Dr. Jim Dahle:
The big elephant in the room when it comes to spending in retirement is the sequence of returns risk. Can you explain to the listeners what that is and what some of the options are to deal with it?

Christine Benz:
Sure. A lot of the retirement research does point to the importance of what specific market elements are in place at the point when you retire in the years just before your retirement date and in the years just after. That if the market suffers a steep decline during that period and you're withdrawing too much during that period, you are leaving less in place in the portfolio to repair itself and recover when the market eventually does, if you're overspending during those years.

Christine Benz:
So much of the research around retirement withdrawal rates points to the value of being able to be variable, being able to reduce your spending at least a little bit if a difficult market environment materializes during the early years of your retirement.

Dr. Jim Dahle:
Some of the material I believe you're planning to present at the conference talks about different valuations across the Morningstar style box. For those who don't know what this is, it basically ranks stocks from value stocks on the left to growth stocks on the right, and from large stocks at the top to small stocks at the bottom. This is the Morningstar basically nine square style box.

Dr. Jim Dahle:
But you argue that there's more under valuation for small and value stocks than for large and growth stocks right now. Do you think one should be more likely to tilt a portfolio during the decumulation years less likely or about the same?

Christine Benz:
Well, it's an interesting point. One point in favor of perhaps putting in a little bit of a tilt is that small cap stocks and value stocks in particular have gone through kind of a long dark night relative to growth stocks over the past decade.

Christine Benz:
Value stocks have held up a little better than growth so far in 2022, but they still have vastly underperformed over the past decade. So, I don't think it's unreasonable for retirees who are situating their portfolios to shade a little bit toward value stocks. If they haven't looked at their portfolios composition recently, I would take a look at that because the contents of the portfolio may have shifted around simply because of the outperformance of growth stocks.

Dr. Jim Dahle:
Awesome. I think this is all fascinating stuff. It's interesting to look at and it has a real impact on people's lives. People spend a lot of time worrying about this stuff in the last few years before retiring, their first few years after retiring.

Dr. Jim Dahle:
One of the things I find most fascinating though, is kind of the hockey stick curve, if you will, that you see with retirement spending. People spend less in retirement after the first few years, which I'm not sure most people understand that. Can you explain why that is? Why they spend less and then maybe a little bit more in the last few years of life?

Christine Benz:
Right. This is such an interesting dimension. My former colleague, David Blanchett, did some path-breaking research where he looked at the trajectory of retiree spending and identified exactly that pattern that you mentioned. He called it the Retirement Spending Smile.

Christine Benz:
Basically, spending tends to be higher in those early years of retirement, kind of the pent-up demand go-go growth years where people are typically in good health, they have things they want to do. Some of those things cost money like travel. So, they're spending more in that period from roughly age 65 to 75. But then spending tends to trail off pretty significantly in those mid-70s years into the 80s, and then trends up a bit toward the end of life. And that's largely to pay unfunded healthcare expenses, largely long-term care expenses.

Christine Benz:
The good news story in this is that when we look at this data on actual retiree spending, it suggests that for retirees who are comfortable with that bargain, with this idea that “Well, at some point I'll probably spend less”, that that could support a higher initial spending rate with the knowledge that spending would eventually trail down.

Dr. Jim Dahle:
Yeah. Interesting stuff. Well, our time is short. I want to let you get back to what you're doing today, but I am so looking forward to having you out at an in-person conference because it really is dramatically different than the last experience you had when we had to do our conference completely virtually in 2021.

Dr. Jim Dahle:
And while that was pretty awesome for a virtual conference, and it was great to have you out there, I think you're going to find yourself much more of a rockstar and being mobbed by the crowd at this in person WCICON in Phoenix. I'm looking forward for the White Coat Investors to get to know you as I have in person there. And we're so appreciative for you coming.

Christine Benz:
Well, I just can't wait. Thank you so much for inviting me.

Dr. Jim Dahle:
All right. Always great talking with Christine. You can sign up still to come to WCICON. You sign up at wcievents.com. You can come in person. You can come virtually. We would love to have you. It's going to be a great event. It's in sunny Phoenix the first week of March, which is the very best time to be in Arizona. And you can sign up again, wcievents.com. I'd love to meet you personally and you get to meet Christine, which is even better than meeting me.

Dr. Jim Dahle:
All right, let's take another question. This one's from Jana.

Jana:
Hi, Dr. Dahle. This is Jenna in Dallas. My eight-year-old son recently earned several thousand dollars recording the voice for a cartoon character. After listening to your podcast, I think the smartest thing to do would be to open a Roth IRA with his earned income.

Jenna:
However, I'm in a predicament as his twin brother has no earned income and it doesn't seem equitable to start a Roth IRA for one and not the other since it could compound substantially over time.

Jenna:
I'm willing to match the funds for his brother, but I'm not sure the best way to invest since he doesn't qualify for a Roth IRA. Their 529 accounts are fully funded. How do you suggest we invest the money? Thanks for all you do.

Dr. Jim Dahle:
Hey, great question, Jenna. How exciting to be the voice of a cartoon character. That would be fun to look back on and do that. I have a brother-in-law that was Pete's dragon at one of the theme parks and looks back on the experience fondly. So, I imagine this would be something similar.

Dr. Jim Dahle:
Okay, so what should you do? Yeah, put it in a Roth IRA. Now the question is, are you putting your money in the Roth IRA or are you putting their money in the Roth IRA? Now, in the eyes of the IRS, it's always their money because you can only put in earned income into a Roth IRA.

Dr. Jim Dahle:
But the question is, are you going to let him spend his $2,000 or whatever he made and put your $2,000 in there? It's actually the reverse of that. He's going to spend your money and you're going to put his money into the Roth IRA. Or are you just going to encourage him to save his money for retirement?

Dr. Jim Dahle:
If that's the case, I would say he earned the money and if he wants to save it for retirement, you don't have to match that for his twin, he earned it. But if you're going to let him keep that $2,000 or your $2,000 technically, and spend it or use it for whatever he wants, bicycle, whatever, and still get the Roth IRA, well then, I would do something for his twin brother just out of trying to be fair.

Dr. Jim Dahle:
I'm always telling my kids life isn't fair and I truly mean that. For the most part when I say life isn't fair, it means their lives are better than they should be. But it's true that sometimes you don't get everything everybody else gets.

Dr. Jim Dahle:
But there's a great option here. The option is a UTMA account – Uniform Transfer to Minors Account. This is essentially a taxable account for a minor. It's custodial, so you're in charge of it until they hit a certain age. In most states that age is 21 but it does vary by state. And so, you can put $2,000 in a UTMA for one kid, the $2,000 in the Roth IRA for the other kid, and you can tell them, “Hey, let's learn about investing. You guys are getting started as investors.” And they can go over their statements every year.

Dr. Jim Dahle:
And you can even point out as you go along the benefits that one of them is having from having money in the Roth IRA versus the taxable account. But the truth is, if you don't have very much money in there, UTMA is very, very tax efficient because on the first $1,100 or so a year of income out of that account, they pay 0% on that anyway. It's almost as tax efficient as a Roth IRA for very small amounts of money. So, don't beat yourself too much up about it but that's probably what I would do.

Dr. Jim Dahle:
This episode was sponsored by First Republic Bank. When you own a professional service business, client satisfaction is your number one priority. So, when it's your turn to be the client, shouldn't you get the same kind of treatment?

Dr. Jim Dahle:
At First Republic, you'll be paired with a dedicated business banker who understands the unique needs of your company and industry. This is the banking partnership you and your team deserve. Visit firstrepublic.com today to learn more. Member FDIC and Equal Housing Lender.

Dr. Jim Dahle:
Don't forget about the Real Estate Masterclass. If you think you might be interested in real estate, this is free. No commitment. whitecoatinvestor.com/remasterclass to sign up.

Dr. Jim Dahle:
Thanks for those of you leaving us five-star reviews and telling your friends about the podcast. They really do help. Here's a review from Opinion Machine who said “Real deal. This guy knows what he’s talking about. No hyperbole, no scams, just a common sense, evidence based, and rational guide to personal finance and investing. I’ve been listening for 2 years. It would have saved me literally six figures had I discovered him earlier. Oh well, better late than never. Definitely geared toward high income earners, but anyone will be wiser and smarter with their money by listening to this one.”

Dr. Jim Dahle:
Thank you for your kind review and for helping others to find this podcast.

Dr. Jim Dahle:
For the rest of you, keep your head up, shoulders back, you've got this, and we can help. Thanks for being a White Coat Investor.

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