Roth Investment Accounts Q&A – Podcast #234

Transcription – WCI – 234

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

Dr. Jim Dahle:
This is White Coat Investor podcast number 234 – Roth Q&A.

Dr. Jim Dahle:

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

Dr. Jim Dahle:
Thanks so much for what you do out there. It is difficult work. You are a high income professional. You are a high earner. There is a reason they pay you all that money because you have a hard job, probably with a lot of liability, and you probably spent a long time in school and training working up to this income.

Dr. Jim Dahle:
I know from personal experience that many of you are working primarily for the “thank you’s” and you don't get them nearly as often as maybe you should. So, if nobody said thank you to you today, let me be the first.

Dr. Jim Dahle:
Let's talk for a minute about inflation. As I record this on October 4th, inflation was just reported for the last month. It's up to 5.25%. Now to put this into historical perspective, the last time inflation was this high, I was a sophomore in high school back in early 1991.

Dr. Jim Dahle:
This is pretty high inflation. Now the Fed seems to be of the belief that this is going to be temporary and that this is going to come down on its own. And that they don't necessarily need to dramatically raise interest rates, which is what they did back in the 1980s to curb inflation that was over 10% at that time.

Dr. Jim Dahle:
And so, they're still signaling that they're not necessarily in a big hurry to stop printing money and raise interest rates. They think that we've still got lots of inflationary forces in our economy. We'll see what happens. Nobody really knows what's going to happen, whether they're right or whether they're wrong.

Dr. Jim Dahle:
But let's talk for just a minute about what you can do about inflation in your life. Inflation is a very common economic risk. Your portfolio should have already been positioned to do well in the event of unexpected inflation. But let's talk for a minute about those things that do well in inflation

Dr. Jim Dahle:
One of the best inflation hedges is low interest rate fixed debt. You got a 2% or 3% mortgage, guess what? They're paying you to own it right now, because money's becoming less valuable at 5.25% a year. And it's only costing you 2% or 3% to have that mortgage. If you refinance your student loans to that rate, again, they're paying you to use their money. So that's a great inflation hedge to those of you who still have debt.

Dr. Jim Dahle:
On the other side, those poor suckers who own that debt in the form of long-term bonds, especially low interest rate long term bonds are the ones who are primarily hurt by inflation. They're locked in to only earn 2% or 3% over the course of 10 or 30 years. Meanwhile their money is losing value at 5.25% per year. So, that's a really bad place to be in inflation. You don't want to have too much of your portfolio exposed to that risk. It's okay to have some exposed, but you don't want it all exposed.

Dr. Jim Dahle:
Another bad place to be? Cash. Now that doesn't mean in a market downturn that cash isn't better than stocks, right? Better to lose 5.25% a year than to lose 40%. But for the most part, cash does not do well in an inflationary environment.

Dr. Jim Dahle:
Now there are a couple of types of fixed income that tend to do pretty well in an inflationary environment, especially unexpected inflation. And these are federal savings bonds. The I type bonds. I stand for inflation.

Dr. Jim Dahle:
Those are indexed to inflation. As inflation goes up, the rate paid on I bonds goes up and they're actually becoming a pretty good deal these days. The downside, you can't buy a lot of them without jumping through a bunch of hoops. There are some people out there who are forming trusts just so they can buy more I bonds, because you're only allowed to buy up to 10,000 a year of them.

Dr. Jim Dahle:
There are various ways you can buy a little more by buying some with your tax refund and those sorts of tricks. But for the most part, you're limited in how much you can buy unless you open multiple trusts to do so.

Dr. Jim Dahle:
TIPS – Treasury Inflation Protected Securities are the other type of fixed income that helps with inflation. And you can buy as many of those as you want. You can buy them directly at TreasuryDirect. You can go to Vanguard or Schwab or Fidelity and buy them via a mutual fund or ETF if you like. And they tend to do better in an inflationary environment. And just as you would expect this year, they have done better than similar nominal treasuries.

Dr. Jim Dahle:
The other approach to inflation is to simply earn more than the inflation. And so, to beat inflation, you end up taking more investment risks. That argues for things like stocks. These companies can raise the price of their goods and services when inflation goes up and thus increase the value of the company.

Dr. Jim Dahle:
Same thing with real estate. Not only is real estate a lot of times leveraged with low interest rate fixed debt, that is a good thing in inflation, but it also tends to be a hard asset that tends to increase with inflation. And of course, as inflation goes up, you can increase the rent charged for your real estate properties. Also, a good inflation hedging asset.

Dr. Jim Dahle:
Then you get off into things like precious metals and cryptocurrencies and commodities. And the idea is that these are not in dollars and so theoretically they should do better in inflationary times. That's quite a bit more variable. They are speculative assets. Be careful how much of your portfolio you put into those.

Dr. Jim Dahle:
But if we're talking about a single digit percentage of your portfolio to put in any of those assets or all of them together, I think that's fine too as a bit of an inflation hedge. But that's about it. Other than that, we just deal with inflation. It has its pluses it has its minuses. There are times in life when it helps you, times in life when it hurts you. So, hopefully the Fed can get back to their previously stated goal of keeping inflation around 2% a year, which seems to be somewhat ideal for growing the economy.

Dr. Jim Dahle:
All right, let's get into some of your questions today. Our first one is a question about Roth 401(k)s. We're actually going to be talking about a lot of retirement accounts, a lot of Roth accounts and Roth items today. But our first question comes in from Ryan. Let's take a listen.

Ryan:
Hey Jim, this is Ryan, a resident from Columbus, Ohio. I've been following the blog and podcast since 2014. And I don't know much about the Roth 401(k). From what I've read, the annual contribution is $19,500 and the Roth IRA limit is $6,000 for under age 50. Can I contribute to each in the same calendar year for a total of $25,500?

Ryan:
I read the case against the Roth by Harry Sit. And it seems like the conclusion is it's a good account for residents and it varies for others. When I leave the residency institution, should I roll the Roth 401(k) into the Roth IRA, or leave them as two separate accounts? Thanks for all that you do.

Dr. Jim Dahle:
All right, Ryan. That's a great question to start the podcast off with. In many 401(k)s, there is a Roth option for the employee contribution. If you are under 50 in 2021, the contribution limit for the employee contribution is $19,500. That can go either into a tax deferred subaccount, a traditional 401(k) if you will, or it can go into a tax-free subaccount, essentially a Roth 401(k), or you can actually mix and match it. You can put $9,500 into the traditional and $10,000 into the Roth if you like.

Dr. Jim Dahle:
You only get one employee contribution, no matter how many 401(k)s you have. If you got six employers and they all offer you a 401(k), you only get one $19,500 contribution. There is another limit that has to do with 401(k)s. That is $58,000 per year for those under 50 in 2021.

Dr. Jim Dahle:
That is the sum total of all employee and employer contributions. Employer contributions include things like a match or a profit-sharing contribution or various other types of actually, penalty contributions for the employer if they're favoring their highly compensated employees and owners.

Dr. Jim Dahle:
But the total there is $58,000 and that total is actually per 401(k) per unrelated employer. So, it's entirely possible that you can put $58,000 as a combination of your contributions and the employer's contributions into one 401(k). And if you have a totally separate job, you can put another $58,000 in there as employer contributions.

Dr. Jim Dahle:
Now you have to have enough income over there to do that. Because you only get to put in about 20% of your income as an employer contribution if that's an individual 401(k) or something like that. But the employer contributions are never Roth contributions. They're always tax deferred.

Dr. Jim Dahle:
To make things even more complicated, there is a way at least under current law, although this is on the chopping block in Congress right now, but there's a way under current law to actually get $58,000 of Roth contributions into a 401(k) each year. And that consists of your $19,500 employee along with another, let's see, what is it? It works out to be another $30,000, $29,000, whatever it is in after tax employee contributions.

Dr. Jim Dahle:
Some plans allow that. And so, you can put money in there after tax and then if the plan allows it, you can immediately convert that money to Roth. If you just leave it as after tax, the earnings are fully taxable, but if you convert it to Roth, then the earnings are not.

Dr. Jim Dahle:
So, lots of cool tricks you can do with a Roth 401(k) if the plan allows it. Now, some plans suck. They don't even let you do Roth contributions, much less do a mega backdoor Roth process where you're putting an after-tax money and then doing an in-plan Roth conversion. But many plans now at least offer a Roth 401(k) option.

Dr. Jim Dahle:
You are correct that this is generally a better option in low income years, whether that is residency or fellowship or the year you leave your training or the year you take a sabbatical or an extended maternity or paternity leave or the years after you cut back as you head into early retirement, whatever.

Dr. Jim Dahle:
And then other years as a general rule, you're better off getting the tax deferral. As discussed in Harry Sit’s famous post as well as a number of times on the White Coat Investor blog and on this podcast. So, I hope that's helpful to you.

Dr. Jim Dahle:
Now there is also a completely separate account called a Roth IRA. And many high earners have to fund that through the backdoor, meaning indirectly. The money first goes into a traditional IRA. They don't get a deduction for it, but then they can convert it to a Roth IRA at no tax cost.

Dr. Jim Dahle:
Unfortunately, that process is also on the chopping block in Congress. We'll see what happens with that, but those contribution limits, the 401(k)-contribution limit $19,500 and the IRA contribution limit of $6,000 for those under 50, or $7,000 for those who are 50 plus are completely separate. So, you can do both. You can put $19,500 in your Roth 401(k). You can put another $6,000 into your Roth IRA. I hope I answered all your questions there, Ryan.

Dr. Jim Dahle:
Let's take our next question off the Speak Pipe. This one's from Phil about Roth conversions.

Phil:
Dr. Dahle, thanks for taking my question and for everything you do. This is Phil from Ohio. Actually, recently I received a hardcover copy of Beating the New Death Tax by James Lange from listening to your podcast a month or two ago. I also re-listened to that episode several times.

Phil:
He seems to be a big proponent of Roth IRA conversions. I understand that the best time to do Roth conversions are during low-income years like before your attending years or after you retire but before you collect on social security and required minimum distributions kick in.

Phil:
Having said that, could you see yourself doing Roth conversions during your peak income years? Here's my situation. I'm in my mid to late 30s, emergency physician and I max out pre-tax contributions as well as a backdoor Roth.

Phil:
Each month, I set aside a monthly amount to invest in a taxable brokerage account. I also have a 401(k) from a previous employer. Instead of investing in a brokerage account, would it make sense instead to use that money to convert some of my 401(k) into my Roth IRA account and pay those taxes perhaps enough to get me to the next tax bracket? Does that make sense or am I complicating things too much and should I just continue my current plan? Thanks again for everything. And I really appreciate your advice.

Dr. Jim Dahle:
Okay, great question. The answer is long and complicated. The truth is however, by the time you get to this stage in life, in your financial life, when you are asking this question, you've already won the game.

Dr. Jim Dahle:
You now know enough by virtue of having asked this question, you now know enough, that you know everything you need to know and become ridiculously wealthy when combined with your physician income. And so, congratulations on that. It really doesn't matter in the long run which of these you do. Both are perfectly fine, both have their advantages and disadvantages.

Dr. Jim Dahle:
As a general rule, you don't want to do Roth conversions during your peak earnings years though. That can change if you are a super saver. If you're the kind of person that's going to have $5 or $10 million in an IRA, and have big, huge RMDs, and you got all these other sources of income and retirement from all these rental properties you own or whatever, then it can make sense to do Roth conversions and Roth contributions even during your peak earnings years.

Dr. Jim Dahle:
But for the typical physician that's going to retire with $2 to $5 million, that really doesn't make sense. You want to take advantage of those tax deferred contributions during your peak earnings years and you don't want to do Roth conversions then.

Dr. Jim Dahle:
However, naturally everything gets more complicated, right? There's now a tax bill in Congress that is not only talking about raising tax rates, which makes you go, “Well, maybe I should do the Roth conversion now”, but is also talking about outlying Roth conversions for people who make over a certain amount of money. This is the way the rules were prior to 2010. And so, you're going to be faced if this bill passes with this decision, do I convert before the end of the year or not? And that's a difficult decision to make.

Dr. Jim Dahle:
But there are also some additional things in this bill. For example, for super savers, they're going to put a 50% required minimum distribution on any IRAs or 401(k)s, a total sum that is over $10 million. You basically have to take 50% of the amount over $10 million out every year. And if you are so fortunate as to get more than $20 million there, and again, I don't see any talk about indexing these amounts to inflation.

Dr. Jim Dahle:
But if you're lucky enough to get $20 million in there, you're going to be required to take out everything above $20 million or the entire Roth account, which ever one is less. So, they don't want you to have $25 million Roth IRAs anymore apparently.

Dr. Jim Dahle:
So, keep that in mind that these bills are all in Congress and they may change the rules. And that the answer to your question depends on how these rules are changed and if they're changed and what your future looks like.

Dr. Jim Dahle:
The only general rule of thumb I can give you is don't do Roth conversions and make tax deferred contributions during your peak earnings years and do Roth conversions and Roth contributions in other years. That's the only general I can really give you. The rest of those require you to run the numbers on your own personal situation and decide whether it's worth prepaying your taxes.

Dr. Jim Dahle:
Of course, there's also the other risk, that Congress somewhere down the road decides “Well, just because you paid taxes on this money before it doesn't mean we can't make you pay taxes on it again” in the form of who knows? A wealth tax or a second income tax on Roth accounts who knows.

Dr. Jim Dahle:
A lot of people that are not very trusting to the government want their tax break now. And so, they favor a tax deferred contribution. Likewise, money inside retirement accounts gets more asset protection than money outside retirement accounts. That would argue for you doing Roth conversions, which you are in essence, moving money from a taxable account into your Roth account.

Dr. Jim Dahle:
Now, as you can see, this is a really complicated question, a really complicated issue. And if it's not super clear what to do, it's probably because it doesn't matter very much in your situation. But if you really want to sort it out, you're going to have to make some assumptions. Some which might turn out to be wrong and run the numbers yourself.

Dr. Jim Dahle:
But I've got blog posts on the White Coat Investor blog, “Roth versus traditional 401(k) contributions”. You can read up on all these factors there and try to make a decision that is right for you in your situation.

Dr. Jim Dahle:
But you're thinking about the right things. I just wish there was an easy, quick answer I could give you that is definitely do the Roth conversion or definitely don't do the Roth conversion, but it's just not that simple. It's not that easy. And so, I'm going to tell you the truth and tell you it depends.

Dr. Jim Dahle:
Our quote of the day today comes from Peter Adeney AKA Mr. Money Mustache, who said, “It is not an exaggeration to say that a bicycle is a money printing fountain of youth, probably the single most important and highest yielding investment a human can possibly own. Not only is it good for your health, but it turns out it is good for your pocketbook”.

Dr. Jim Dahle:
All right, let's take the next question. This one's coming from Casey who's got some questions about the backdoor Roth IRA and especially this tax bill currently in Congress.

Dr. Jim Dahle:
Remember as I'm recording this, this thing is going to be dropped on October 28th, but I'm recording on October 4th. It is entirely possible in the next 24 days that something happens in Congress that makes what I'm saying right here completely wrong. So, keep that in mind. You got to be watching the news if you want to keep up to date on this stuff.

Casey:
Hi Jim, it's Casey, your friendly neighborhood Air Force periodontist. My question is if the backdoor Roth IRA does indeed go away in 2022 and my married filing jointly modified adjusted gross income is too high to receive a tax deduction for a traditional IRA contribution, it leaves me wondering what is the best plan for investing the money that I would've otherwise put into a Roth via the backdoor approach?

Casey:
Is it smarter to put that $6,000 into a traditional IRA in a non-tax deductible manner or to simply forgo the IRA altogether and invest that $6,000 in my taxable brokerage account? Thanks for the help.

Dr. Jim Dahle:
All right. This one is a little bit like our last question in that you're asking the right questions. It's really a good question. The problem is there's no definite answer. Let me talk a little bit about the factors that go into your decision.

Dr. Jim Dahle:
We mentioned before about the asset protection issues, right? If your options are to invest in a non-deductible IRA versus a taxable account, the non-deductible IRA gets better asset protection in nearly every state. Taxable accounts don't get very much at all. So, there's that consideration.

Dr. Jim Dahle:
The other thing to keep in mind is the earnings on a non-deductible IRA are fully taxable at withdrawal. And they're taxable at ordinary income tax rates, not the lower capital gains rates.

Dr. Jim Dahle:
Ordinary income tax, as well as long term capital gains rates are both going up with this tax bill as proposed. And so, that's relatively equal there that you will end up paying more taxes either way.

Dr. Jim Dahle:
But the truth is the long-term capital gains rates are much lower than the ordinary income tax rates and will be even after this particular bill goes through. That's one factor, and that works against the non-deductible IRA. So, we got one factor working for it, one factor working against it.

Dr. Jim Dahle:
And then the third factor is the non-deductible IRA does not have the tax drag on it. As it grows, it grows in a tax protected way. It's not until withdrawal that you pay the taxes on it. Whereas in a taxable account, you are paying taxes every year on any distributed capital gains. If you buy or sell in there, you're going to pay those capital gains taxes. And as it spits out dividends, you're going to pay qualified and unqualified dividend tax rates on those dividends.

Dr. Jim Dahle:
And so, now it's coming down to the tax efficiency of the investment. The more tax efficient it is, the more fine it is to leave it in a taxable account. The less tax efficient it is, the better off it is in a non-deductible IRA.

Dr. Jim Dahle:
That's yet another factor, but there are some other things you can do in a taxable account that allow you to reduce your tax bill. You can tax loss harvest. You can't do that in a non-deductible IRA. And you can donate appreciated shares to charity. Again, you can’t really do that in a non-deductible IRA. Although I suppose after age 72, you can do a qualified charitable distribution, but that's not really what we're talking about here.

Dr. Jim Dahle:
As you can see, there are factors that lean more toward using a non-deductible IRA and there are factors that lean more toward using a taxable account. So, there's no right answer here.

Dr. Jim Dahle:
But here's some guidelines I can tell you. If you donate a lot of appreciated shares to charity, you're probably better off in a taxable account, because you can do tax loss harvesting, and you can donate those appreciated shares and you can invest very tax efficiently in a taxable account.

Dr. Jim Dahle:
The shorter the amount of time this money's going to be invested, the better off you are in a taxable account. Because you need a long period of time for that tax protected growth to overcome the difference between ordinary income taxes and long-term capital gains taxes on those earnings.

Dr. Jim Dahle:
The shorter the period of time, the more it favors a taxable account instead of a non-deductible IRA. The more you are concerned about asset detection, the more it favors a non-deductible IRA over a taxable account.

Dr. Jim Dahle:
So, you've got a weight which matters the most to you and then make a decision. Keep in mind that non-deductible IRA does have the age 59 and a half rule. We talked about it at the top of this podcast, that will apply there. It won't apply to a taxable account.

Dr. Jim Dahle:
But really there's no right or wrong answer here. Truthfully, what matters is how much money you put away toward retirement, whether it's in a non-deductible IRA or whether it's in a taxable account matters not very much at all.

Dr. Jim Dahle:
And as you can see there are advantages either way. So, feel free to do either one, feel good about it. Don't worry about it too much. Obviously, a tax deferred account or a Roth account is going to be way better than a non-deductible IRA. But once you're looking at your options as a non-deductible IRA or a taxable, they're both fairly equal in my opinion.

Dr. Jim Dahle:
All right, let's take another question. This one's about 403(b) when you leave your employer.

Speaker:
Hi Dr. Dahle. Thanks for all that you do. I am in my final year of residency and have been contributing a very small amount to my 403(b), which has not had an employer match. I also have been maxing out my Roth IRA.

Speaker:
Next year I know that I will have to do a backdoor Roth and I know that my employer for next year will not allow for 401(k) contributions for 12 months. That leaves me unsure about what to do with my 403(b). I know that I can convert it to a Roth, but I am unsure if I can also do a backdoor Roth in the same year.

Speaker:
I'm pretty sure from my reading that I cannot do both, but I just wanted to have confirmation on this. If that is indeed the case, does it make better sense to contribute additional money to my 403(b) so that I have a larger Roth conversion in 2022? Thanks for your input. And again, I really am grateful for all of the effort that you and the White Coat Investor put forth to advance my financial education. Thanks so much.

Dr. Jim Dahle:
All right. What do you do with this little 403(b) you accumulated in residency? Well, what I would do, especially if it's small, it's just convert it to your Roth IRA. Just move it into your Roth IRA as soon as you're out of residency, you'll owe taxes on that money. So, if it's $1,000 or $2,000 or whatever, that will be added to your taxable income that year, but you should be able to afford that.

Dr. Jim Dahle:
That does a couple things for you. It simplifies your financial life. You have one fewer financial account to keep track of. And number two, it gives you a little bit more in Roth in a year in which you're not yet at your peak earnings.

Dr. Jim Dahle:
Those are both good things, especially if this tax bill goes through and that backdoor Roth IRA next year is not an option for you. In fact, depending on your income, even Roth conversions of any kind going down the road may not be an option. So maybe it's a good idea for you to do as much of it this year as you can. And maybe you'll be really glad you maxed out that Roth IRA during your training.

Dr. Jim Dahle:
So, I hope that's helpful to you. This is a common situation when people leave their residency or fellowship training. They have lots of uses for cash. And sometimes it's a little bit easier when the new employer won't let you contribute to the 401(k), because you got so many other things to do with your cash.

Dr. Jim Dahle:
Building up your emergency fund, paying off student loans or a car loan or credit card loans or building up a down payment on a house or doing Roth conversions. There are so many great things to do with your money when you come out of training that most people can't do them all. They just don't have the money to do it.

Dr. Jim Dahle:
Speaking of people that don't have money, medical students and dental students are among the poorest people in the world, especially by the time they graduate. Their net worth might be minus $400,000 by then.

Dr. Jim Dahle:
We want to reach people with the White Coat Investor message as early as possible in their training pipeline. And so, that is why this spring, we had a giveaway of my new book I published last winter. We published the White Coat Investors Guide for Students. It is completely aimed at medical and dental students. A lot of it of course is applicable to other professional students, those going into high income professions but it's specifically written for medical and dental students.

Dr. Jim Dahle:
And so, we attempted to give away a hard copy of this book. And it's the longest book I've ever written. A hard copy of this book to every first year medical and dental student in the country. And we were pretty successful. We got it to about 75% of them. And there are various reasons why we didn't get the other 25%.

Dr. Jim Dahle:
There were a few schools that didn't want us to give that book to their students. They actually made a big stink about it and didn't want their students to become financially literate. I won't call those schools out by name, but they ought to be pretty embarrassed and ashamed of themselves for what they did.

Dr. Jim Dahle:
More likely there was simply no champion willing to come forward from the class to distribute the books. Now this is not a difficult job to be the champion for your class, to be the WCI champion. All you have to do is carry a box of books into school and pass them out to your classmates.

Dr. Jim Dahle:
Yep, that's it. You don't have to pay anything for them. We will ship them to you. They'll arrive at your house and you just got to take them in and pass them out. You can put them in people's boxes. You can pass them out by hand, whatever. And if you're willing to do that, not only do you get a copy of the book, one for you and one for everybody in your class, we also send you a WCI t-shirt.

Dr. Jim Dahle:
And in fact, if you'll take a picture of you and members of your class that we can share on social media and on the blog, and you send that to us, we'll send you a WCI Tumblr, which I think has a $50 value, isn't it? Those Yeti Tumblr, how much do those cost? $50?

Dr. Jim Dahle:
So, some free swag for you, free books for everybody, everybody likes you. And plus, most importantly, you just gave them the information they need that's honestly going to be worth a couple million bucks to each one of them over the course of the next 30 years. And so, you will do your class a huge favor if you will be willing to be the White Coat Investor champion for your class.

Dr. Jim Dahle:
Now we only need one per class and most of the time, we're just picking the first one that applies. But occasionally we have to replace them and get a second one. So even if you know somebody's emailed from your class, go ahead and send us an email as well. Or actually we're having you sign up on a Google form I believe. If you go to whitecoatinvestor.com/champion, you can be a champion for your class and we're going to distribute that to you.

Dr. Jim Dahle:
Now here's the rules. First year class. If you are in your second year, it's too late. You missed out. Third year, fourth year, same thing, go buy the book. It’s only $9.99 on Kindle. Even if you want to buy the hard copy, I think it's a $30 book that Amazon's usually selling for $20 or $25. It's not that expensive. Go buy it yourself. It'll be well worth the price and you've got to be in a medical or dental school in the United States.

Dr. Jim Dahle:
Those are the rules. First year in the United States, only one champion per class. And we'll give you a book for everybody in your class. We gave away almost a million dollars’ worth of WCI books this spring, and we're going to do it again this fall, because this information is that important to you and it really aligns with our mission to help doctors get a fair shake on Wall Street.

Dr. Jim Dahle:
Those of you out there listening to this podcast that didn't find out about the White Coat Investor until you're 35 or 45 or 55, imagine if you had all this information as an MS1. How powerful would that be in your life? Very powerful. So, that's why we're doing this. But we need some champions to distribute the books.

Dr. Jim Dahle:
We're not going to mail them to the schools. I don't know what happens to them if you do that. They probably get thrown out. It's too much money for us to spend to have them just thrown out. But if you're willing to distribute them, we're willing to send them to you. So, sign up at whitecoatinvestor.com/champion.

Dr. Jim Dahle:
All right, our next question comes from Chris. He wants to talk about his 457 plan.

Chris:
Hi Jim. This is Chris in Oregon. My question concerns my non-government 457 plan and the available plan options within it. I've started using the 457 plan to satisfy a portion of my bond allocation, but I have some concerns.

Chris:
The best available bond fund in the plan has an expense ratio of 0.41. And it is significantly riskier than say the Vanguard total bond market fund. Specifically, it is made up of almost all corporate bonds with at least 20% of those in the junk bond category. I'm concerned about the riskiness of this bond fund, as it might be defeating the purpose of trying to balance my portfolio with a portion of the classic lower risk fixed income assets.

Chris:
Should I discontinue contributing to the 457 and instead contribute to my after-tax money to Vanguard muni bonds? In doing this I'd then be missing out on the tax deferred option. Or is it reasonable to contribute some portion to this higher risk bond fund in my 457 plan and then some portion to the taxable account muni bond funds? For example, half to the 457 plan and half to the taxable account muni bond fund. Thanks in advance for your answer.

Dr. Jim Dahle:
All right, Chris, you're confusing two questions here. So, let's separate them out and answer them both individually. The first question is whether you should use the 457 or not. And that boils down to the characteristics of the 457 for the most part. This is assuming you're saving enough to max out all the better accounts and still put money into the 457s. And now we're just choosing between a 457 and a taxable account.

Dr. Jim Dahle:
If the 457 has reasonable distribution options and you don't have to take it all out the year you leave the employer, you can leave it in there until you're 65 or take it out over 5 years or 10 years or whatever, then it's okay to use. If it has reasonable investment options, then it's okay to use.

Dr. Jim Dahle:
If the employer is stable, and this is particularly important with yours because it's a non-governmental 457, the employer needs to be stable. Because remember this is deferred compensation. It's not actually your money yet.

Dr. Jim Dahle:
The money in a 401(k) or 403(b) is your money. The money in a 457 is your employer's money. So, while that's great for asset protection from you, it's not very good if your employer goes bankrupt and their creditors then have the money in the 457 plan. So, keep that in mind. If that's all okay, then go ahead and use the 457 plan.

Dr. Jim Dahle:
Our next question comes down to one of asset allocation and asset location, what assets you put in which plan. Chances are this bond fund is not the only option near 457. There is probably something else. There's probably an S&P 500 index fund in there. Most plans have that as a minimum if there's not any other better index fund.

Dr. Jim Dahle:
So, you could put your US stocks in the 457 plan and put your bonds elsewhere in your 401(k), your 403(b), your Roth IRA, even taxable accounts. Usually, you use a muni bond fund there, if you want to put them there, but it's okay to put them elsewhere in the portfolio that does not have to go into the 457 plan if there is no decent bond option in there.

Dr. Jim Dahle:
That said, is this bond option really that bad? I mean, it's only 20% junk. The ER's only 0.41%, right? This isn't a total bond market but is there anything really magic about the total bond market anyway? There are people who actually want a high yield or junk bond fund in their portfolio. So, you've got a little bit of one in there.

Dr. Jim Dahle:
One fifth of the bonds in this portfolio or junk bonds. Is that okay? Probably. Is 0.41 outrageous as an expense ratio for a mutual fund? No, it's dramatically less than average. The average is 1%. Now it's a lot more than 0.04% that you might get at Vanguard or Fidelity or Schwab in their index funds but it's not terrible. And so, I wouldn't necessarily feel bad about using that fund. But I might look at the other funds and see if there's a better one to put in there.

Dr. Jim Dahle:
But this is a dilemma a lot of people have. Especially if they don't have a very good 401(k) or 457 as they got to pick the least bad fund in there and then build the portfolio around that. And if you wish you could put REITs in your 457, but there's no REIT fund, well, you're just out of luck. They're going to have to go somewhere else. Your Roth IRA or somewhere. That's just how you got to deal with it when you're dealing with the employer offerings for your retirement accounts.

Dr. Jim Dahle:
But I wouldn't necessarily say, “Oh, this bond fund's not perfect. I'm not going to use the 457 at all”. That's probably a mistake because keep in mind, you may not have that money in there that long to start with, although with a non-governmental 457, it may be in there longer than most accounts. A typical 401(k), when you leave the employer, you can roll it over somewhere else. That's usually not an option with a non-governmental 457. So, you do have to keep that in mind as you make your analysis.

Dr. Jim Dahle:
I hope that's helpful to you. Hard to give you any better advice without knowing the rest of your portfolio, what's available in the other accounts, what else is available in that 457. But hopefully, those guidelines give you some assistance.

Dr. Jim Dahle:
All right. Our next question is about lump sum investing. This one comes from Justin. Let's take a listen.

Justin:
Hi Dr. Dahle. This is Justin from Seattle. Thank you for all that you do. The question I have is about timing. Currently, I have first of the month dollar cost average into my retirement account, but I was curious about your opinion on a January 1st lump sum investing strategy.

Justin:
Doing some reading, it appears historically lump sum is more profitable because the 11 extra months of growth on some of that money outweighs the market volatility benefit that you make it. That being said, I was very thankful to capitalize on the gains of March 2020 from my monthly dollar cost averaging strategy.

Justin:
In the end, I doubt that there is a right or wrong answer with the cloudy crystal ball, but I was curious about your thoughts if at the beginning of the year you have the money in cash to invest for the entire year, would you recommend investing that entire amount or would you recommend dollar cost averaging over the course of the year? Thank you very much.

Dr. Jim Dahle:
All right. This is a pretty minor question. It doesn't matter that much. If you feel strongly doing it one way or the other, go ahead and do it, but it does have an effect. I once wrote a blog post on the White Coat Investor blog called “Dollar-Cost Averaging (DCA) Is For Wimps” and I mean it. It's for wimps.

Dr. Jim Dahle:
The main benefit of dollar cost averaging is psychological. Now keep in mind, dollar cost averaging is not the same thing as periodic investing. If you don't have a lump sum, if lump summing the money all at once is not an option, then there's no option to dollar cost average. All you can do is periodically invest.

Dr. Jim Dahle:
When I say periodically invest, I mean you are investing as you earn the money. So, if you make some money, you put in say $5,000 a month. Well, next month you make $5,000 that you can invest. Great, you invest it then. And the next month you make $5,000 and you invest. That's not dollar cost averaging.

Dr. Jim Dahle:
It has the same benefits. That sometimes when the market's down, you get to buy more shares for the same amount of money, but it's really not dollar cost averaging. It's just what the rest of us do throughout our lives, because we don't have all the money we're going to invest at the very beginning of our life. So, we invest it as we make it.

Dr. Jim Dahle:
Dollar cost averaging is what you do when you get an inheritance, a million-dollar inheritance. And you're like, “Should I put it all in the market tomorrow? I'm scared it might go down after that”. So, you dollar cost average over six months and you make yourself feel better. So, if the market went down right after that first date, then you're like, “Oh, at least I got to buy some shares at a lower price”.

Dr. Jim Dahle:
But it's really psychological because on average, the right thing to do is to lump sum, most of the time the market goes up. Two of three years, the market goes up. So you're better off getting your money in there as early as possible.

Dr. Jim Dahle:
As a general rule, you want to invest as soon as you get the money, right? If you know this money is for retirement, for your long-term investments, invest it when you get it. Don't hold onto it for six months and then invest it hoping the market goes down, because most of the time it doesn't and you'll come out behind doing that.

Dr. Jim Dahle:
So, your question is really a variation on this theme. It's “Well, should I invest more in retirement accounts at the beginning of the year and more in taxable at the end of the year?” Well, yes. Because most of the time that's going to work out well. Most of the time the market's going to go up during the year and you'll be glad you got that money into these tax protected accounts where it grows a little bit faster and put money into your taxable accounts later in the year.

Dr. Jim Dahle:
So, I try to do exactly what you're suggesting. I try to max out my 401(k), my Roth IRA and my HSA and my 529s and everything as early in the year as I can. That doesn't mean I stop investing. I'm still periodically investing every month as I make money, except now it's going into the taxable account. And then come January, well, the money I invest that month is going to go preferentially into retirement accounts.

Dr. Jim Dahle:
And maybe it takes you until April or May to max out their retirement accounts, and then you start investing in your taxable account. Some people don't even max out their retirement accounts throughout the year. But if you're one of those that will max them out and can max them out earlier, yes, it's probably a good idea to do it.

Dr. Jim Dahle:
Are there going to be years where the market goes down sometime during the year to lower than what it was on January 1st? Absolutely. But if you wait around for that, you're going to get burned more often than you really score doing it.

Dr. Jim Dahle:
And in fact, what happened to you? What happens to you might be what happened to me in 2020. If you recall, I think the nature of the market was around the 20th of the month. And naturally, when did I invest? Well, I tend to invest around the 5th of the month or so, on average. That's when I've added up all my income from the previous month and I get around putting it into the market.

Dr. Jim Dahle:
In March, 2020, I invested on the 5th well before the bottom and the next time I had money to invest was about April 5th, at which point the market had recovered significantly. So, even if you are investing as you go along and you're dollar cost averaging, it might be that you still don't hit the very bottom of a very rapid bear market like that one.

Dr. Jim Dahle:
The only way you can try to do that is guess that you're at the bottom number one, and number two, leave a whole bunch of money in cash and have that cash drag on it as you go along, neither one of which is really a good idea.

Dr. Jim Dahle:
I simply recommend that you automate it as much as you can, that you have a written investment plan that says you're going to invest as you make the money. And so, every month as you make money, invest it. Sometimes you'll get more shares, sometimes you'll get less shares but over the course of your lifetime, it's going to average out and you're going to do just fine.

Dr. Jim Dahle:
And even if one year it doesn't work out well to max out those retirement accounts early in the year, most years it's going to, and you're going to be fine. So, yes, I try to do that. I'd try to invest in tax protected accounts first during the year, and then go to your taxable account, but I wouldn't get too dogmatic about it.

Dr. Jim Dahle:
All right. The next question comes from Angele. Let's take a listen to it.

Angele:
Hi, Dr. Dahle. This is Dr. Angele. I have greatly benefited from the White Coat Investor and can't thank you enough for all that you do. I have been hearing that social security will dry out in the next 12 years. If in fact this actually happens, how should one think differently about preparing for retirement? Does one increase the amount that they save or invest or something else? Thank you again, and I look forward to hearing your thoughts.

Dr. Jim Dahle:
Okay. Let's break this into two parts. First, let's talk about what dry up means. When you say dry up, it makes it sound like there's going to be no social security whatsoever. Let me explain what's actually going to happen under current law and current projections.

Dr. Jim Dahle:
Under current projections in approximately 2033 or 2034, the social security trust fund is going to run out. At that point, if there are no changes to social security law, they will only be able to pay out 77% of promised benefits. Now 77% is not the same as a 100%, but I would not use the term dry up to refer to it.

Dr. Jim Dahle:
That's still the vast majority of the benefits you're expecting that you are going to receive and that's if they do nothing about social security. That's if they don't raise the social security age, if they don't raise the social security tax percent, if they don't increase the amount of income that social security is applied to, if they don't mess with how social security inflation adjustment is done.

Dr. Jim Dahle:
If they do any or all of that in some portion, it's pretty darn easy mathematically to save social security. Also keep in mind that social security might be the most popular government program ever instituted in the United States. Try to come up with 51 senators that are going to vote against social security. You can't do it.

Dr. Jim Dahle:
You'll be lucky to come up with 5 or 10 of the most extreme on the right side of the political spectrum. It's just too popular, right? Their constituents want it. Whether the constituents are liberal or conservative, this program is not going anywhere.

Dr. Jim Dahle:
Is it going to change? Probably. There's probably going to be some adjustments to it. I think they're going to be pretty minor. I think it's a really likely one in our current environment and I'm kind of surprised it wasn't in the tax bill actually, is simply applying social security taxes to a larger percentage of your income instead of the first $144,000 or so, whatever it is this year, maybe it's the first $300,000. That by itself, more than saves social security.

Dr. Jim Dahle:
So, it wouldn't surprise me to see a fix like that go through in the next few years. But Congress, as it usually does, is going to wait until the last possible moment and play a bunch of political brinkmanship and then they're going to save social security. So, I wouldn't worry about it too much.

Dr. Jim Dahle:
If you are really worried about it and you don't think they're going to do anything to save it, and you think you're only going to get 77% of your benefit, well, for most doctors, that's not going to be the big chunk of your retirement income anyway.

Dr. Jim Dahle:
So, instead of getting maybe $40,000 from social security, maybe you're getting $30,000. Well, you're still going to need a pretty sizable nest egg or other sources of income in retirement in order to cover your retirement income needs. Instead of getting 60,000 from your portfolio, maybe now you need $70,000, so you got to work one more year or something like that.

Dr. Jim Dahle:
But if you really think social security is completely going away, as far fetched as that sounds to me, then yeah, you got to save more money or you got to work longer, or you got to live on less retirement. You don't get a pass on math. Those are the consequences of not having that guaranteed income source in retirement.

Dr. Jim Dahle:
I've told docs for a long time to save 20% of their gross income for retirement if social security's not going to be there. Well, maybe it needs to be 25%. So yeah, you can solve that problem by saving well.

Dr. Jim Dahle:
In fact, for most FIRE folks, these financially independent retire early folks, they've already had to solve this problem without social security. Because if you're going to retire at 50 and you're not planning on taking social security until you're 70, you basically have to run your numbers like it's not coming at all. And the difference between a portfolio that counts on it and a portfolio that doesn't count on it is trivial if you're going to retire that early.

Dr. Jim Dahle:
Now, if you're going to retire at 60 or 65, you just got to get through a few years before social security starts paying off. But for those early retirees, yeah, they basically overcame it by just saving like crazy. And that's what everyone would have to do if social security went away.

Dr. Jim Dahle:
But again, I think it's very unlikely. I would not lay awake at night worrying about that, but do expect to see some changes as we approach the 2030s that are probably going to cost you a little bit more money in tax or decrease the amount of benefit you get from social security a little bit. But it's just not that hard of a problem to save social security.

Dr. Jim Dahle:
Now if you want a problem that's difficult to solve, solve the Medicare problem. That is a far bigger issue to solve. And rather than being worried about not getting your social security, you should worry about not getting your Medicare. That's a big deal, especially with the rate of healthcare inflation that we've had. And there are no easy fixes to that problem. So, I would spend nights lying awake worrying about getting your Medicare coverage rather than your social security coverage.

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

Dr. Jim Dahle:
All right, if you want to be a champion for the White Coat Investor, if you are a first year medical or dental student, sign up at www.whitecoatinvestor.com/champion and we'll send you a box of books for you and everybody in your class, as well as a t-shirt. And if you take a picture, a Tumblr.

Dr. Jim Dahle:
Thanks for those who have left us a five-star review and told your friends all about the White Coat Investor podcast. You are doing them a favor and you are helping others you don't even know to find this podcast.

Dr. Jim Dahle:
Our most recent review comes in from JDPIPES who says, “Thanks! Been following WCI for about 5 years now, very grateful for Jim and this podcast for the education over that time. I can’t imagine where I would be on my financial journey had I not invested early on when I came to WCI to set my financial compass in the right direction. The journey continues, the education continues, and this resource is essential. Thanks, Jim, for all your time and commitment to your fellow White Coat Investors!”

Dr. Jim Dahle:
It's interesting, I get all the accolades. It's like when we were talking last week with Laura McElderry. The doctor gets the accolades and those behind the scenes get nothing. We've got 25 people working at the White Coat Investor now, and they're all working very hard and many of them are working more hours than I am.

Dr. Jim Dahle:
And so, it certainly is not all my effort that's doing this, but we do appreciate the kind words and we're planning to keep going, because we feel strongly about our mission to help White Coat Investors get a fair shake on Wall Street.

Dr. Jim Dahle:
Keep your head up, your shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor podcast.

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