Backdoor Roths, Solo 401(k)s, and the Safe Harbor Rule Q&A

Dr. Jim Dahle:
This is White Coat Investor podcast number 260 – Self-employed retirement accounts Q&A.

Dr. Jim Dahle:
This podcast is sponsored by Bob Bhayani at drdisabilityquotes.com. He is an independent provider of disability insurance planning solutions to the medical community in every state and a long-time White Coat Investor sponsor.

Dr. Jim Dahle:
He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. If you need to review your disability insurance coverage, or if you just need to get this critical insurance in place, contact Bob at drdisabilityquotes.com today. You can email [email protected] or you can call (973) 771-9100.

Dr. Jim Dahle:
All right. In today's episode, we're going to be going over a whole bunch of your questions. On the blog I write what I want to write about. On the podcast, it's directed almost completely by you, by what you've asked for, by interviews with you as the audience. A lot of times some of our interviews, of course, are with other people.

Dr. Jim Dahle:
But we answer a lot of your questions. So, what you guys want to hear about, let us know, and we will cover it. But if you'd like to leave us a question to use on the podcast, you can leave those at whitecoatinvestor.com/speakpipe.

Dr. Jim Dahle:
All right. Today, we're going to be talking about self-employed retirement plans. There are lots of questions about these. I don't find them particularly complicated. This is pretty straightforward. If you are self-employed, go get yourself a solo a.k.a. an individual 401(k). If you make a lot of money, you might consider a personal defined benefit plan. But for most people it's an individual 401(k). It's a backdoor Roth IRA plus minus a health savings account. Those are your retirement plans for a self-employed doc.

Dr. Jim Dahle:
If you've got a W2 gig as well, and you have some self-employment income, then you have a 401(k) or a 403(b) at the main employer. And then if you've got a solo 401(k) for your self-employment income, again, with a backdoor Roth IRA plus minus an HSA. And that's the basic setup for most docs. Anything you want to save above and beyond that goes in a taxable account. So, the basic setup is not that complicated. When you get into all the details, sometimes there's a lot more questions.

Dr. Jim Dahle:
All right, let's take our first question from Sarah.

Sarah:
Hi, Dr. Dahle. This is Sarah from Boston. I was curious about doing the backdoor Roth IRA. If I make a contribution in January of 2021, is that contribution for the previous year or is it meant to be for the present year that I file it in, meaning 2021 as to 2020?

Sarah:
And then secondly, if I choose to open a SEP IRA for some consulting income that I have in order to have a tax benefit, where do folks usually roll that SEP IRA into to ensure that total amount is zero at the end of the calendar year to avoid the backdoor IRA from having a tax penalty? I'm just a bit confused about this process. I would love some more clarity if you are able to. Thank you so much.

Dr. Jim Dahle:
All right. Great question, Sarah. Let's take the first one first. When you're contributing to an IRA, whether this is a Roth IRA, whether this is a traditional IRA, whether this is a traditional IRA as part of the backdoor Roth IRA process. You can contribute during the calendar year and up until the time you file your taxes the next year.

Dr. Jim Dahle:
So, in January, you could make a contribution either for the previous year or for the current year. And when you make the contribution, it typically has you specify which year it is for. It'll do that at Vanguard, Fidelity or wherever you have your IRA opening. It'll ask, “Is this a 2021 contribution or is this a 2022 contribution?” And you can do either or you can do them both in the same day. If you're under 50, it's $6,000 for 2021. It's $6,000 for 2022. You just tell them which year you want it to go to. No big deal.

Dr. Jim Dahle:
Okay. Your second question. Let's address this. And I want everyone to be really clear about it. Don't use a SEP IRA. Was I clear enough? Okay. Don't use it. It screws up your backdoor Roth IRA. When you go to do the conversion step on your backdoor Roth IRA, line six of IRS form 8606 asks for the balance of your traditional IRAs. That includes any rollover IRAs, but not any inherited IRAs. Simple IRAs and SEP IRAs. You want to be able to answer that line or put on that line $0. So, you don't want any money in a SEP IRA at the end of the year if you were doing a backdoor Roth IRA process each year.

Dr. Jim Dahle:
So why would you use the SEP IRA in the first place? Why would you want to put money in a SEP IRA and then have to do another step, have to do a rollover somewhere else? I mean, you could do that. You could roll it over every year into a 401(k) or 403(b) or a solo 401(k), but do yourself a favor and never open the SEP IRA to start with. Open a solo 401(k), an individual 401(k). You can open it at Vanguard. You can open it at Fidelity. You can open at E-Trade. Wherever you want to open it. And then you never have to deal with this issue at all.

Dr. Jim Dahle:
The only reason to really use a SEP IRA is if you kind of drug your feet, got behind the eight ball and didn't get a 401(k) open and funded in time. You really have to have it open before the end of the calendar year. You really don't have a lot of time into the new year to make the employee contribution. You get a little more time to make the employer contribution.

Dr. Jim Dahle:
But the bottom line is you can open a SEP IRA the day you file your taxes and make a contribution. So, it's easier to make a SEP IRA contribution later than it is a solo 401(k) contribution. That's the only real reason to use a SEP IRA in my opinion.

Dr. Jim Dahle:
Then of course, you open the solo 401(k) for the current year, roll the SEP IRA in there and never do the SEP IRA again, because you're not going to make that mistake again. But for the most part, just avoid the SEP IRA completely. Use a solo 401(k).

Dr. Jim Dahle:
All right, let's do our quote of the day. This one's from Jonathan Clemons. He says “There are those who think the goal of investing is to beat the market and amass as much wealth as possible, that street smarts and hard work ensure investment success, and that the road to happiness is paved with more of everything. And then there are those who get it.” I love that quote from Jonathan.

Dr. Jim Dahle:
All right. Let's take a question from Bob off the Speak Pipe. Here we go.

Bob:
Hi Jim. This is Bob from Pennsylvania. I appreciate all the work you do. And I had a quick question regarding, with prior podcasts, something you had stated. You had said that you had converted a lot of your 1099 independent contractor employees to W2 employees at the White Coat Investor. And I'm just curious about your decision behind that decision, if it was a tax related decision, if one of your tax advisors recommended you do that.

Bob:
We're in a similar situation here. We have a number of doctors and a few of them are independent contractors on 1099. And I'd heard that there are some criteria in which you would exclude them from being independent contractors and they have to be mandated as W2 employees. So, I’m wondering if you knew anything about that or if that was behind your decision or not. And again, I appreciate everything you do. And thanks for taking my question.

Dr. Jim Dahle:
Great question. In our personal situation, we didn't have any employees except for Katie and I up until a certain point. And as we decided to expand the business, rather than really shrink it at the end of 2019, we needed to bring on some full-time people. Some seriously qualified experienced employees. At that point we were going to have employees.

Dr. Jim Dahle:
And here's the deal when you're running a business. The first employee, that's not you anyway. The first employee is a big, huge hassle. To add an employee, the paperwork is a pain, it kind of stinks. You don't really want to do it if you don't have to. But once you have one employee, it's not hard to add more employees. You've already got all the systems set up to do it. You got payroll and 401(k)s and all that kind of stuff. But once you have one, it's no big deal to have more.

Dr. Jim Dahle:
Up until that point, we had some part-time people, most of whom did something else, and worked very independently. They might have done it for another business and we were able to more or less justify that they were independent contractors and we didn't have to make them employees.

Dr. Jim Dahle:
Once we had some employees that we couldn't justify as independent contractors, it was relatively straightforward to convert the other ones from independent contractors to employees.

Dr. Jim Dahle:
Now the truth, on this, is that you're not supposed to just decide what they're going to be. You don't get a choice. You're supposed to treat them as what they really are. If they're an independent contractor, treat them as an independent contractor. If they're an employee, treat them as an employee. But the truth is there's a fair amount of gray here. But here's some of the guiding principles that the IRS will give you in deciding whether somebody is an independent contractor or an employee.

Dr. Jim Dahle:
Now keep in mind a lot of employers like we did err on the side of calling them independent contractors for various reasons. One, they've got how to pay both halves of the payroll taxes, social security, and Medicare when they're independent contractors. So, it might save you some money if they're not smart enough to realize that.

Dr. Jim Dahle:
Another reason is that they have to set up their own benefits, their own 401(k) plans, because they're self-employed and you're paying them on a 1099. Lots of people like that. This was the biggest problem we had, moving some people from independent contractors to employees.

Dr. Jim Dahle:
They're like “I'm putting $58,000 into a solo 401(k) now, I want to keep doing that. How are you going to be able to make it so I can do that in your 401(k)?” And so, we spent a lot of time trying to put together the world's best 401(k) to allow all those people that wanted to max out those 401(k)s, to allow them to be able to do that in the new WCI 401(k). And so, that was a big concern that they had.

Dr. Jim Dahle:
But basically, the IRS gives you these guidelines. There are behavioral guidelines, financial guidelines, and a type of relationship guidelines. For behavioral, they asked, “Does a company control or have the right to control what the worker does and how the worker does his or her job?” If the company does, they are employees. If the company doesn't, they are contractors.

Dr. Jim Dahle:
Financial: Are the business aspects of the worker's job controlled by the payer? These include things like how the worker is paid, whether expenses are reimbursed, who provides tools and supplies, etc. So, if they're buying their own computer, if they're buying their own supplies, then they're more likely an independent contractor. If you are providing that for them, then they're more likely an employee.

Dr. Jim Dahle:
Then there is the type of relationship. “Are there written contracts? Are there employee type benefits, like a pension plan, insurance, vacation pay, etc?” If so, they're employees. “Is the work that they're performing a key aspect of your business?” If so, then they're likely employees.

Dr. Jim Dahle:
There's lots of docs out there that are being called independent contractors that really probably ought to be employees. But the IRS says businesses must weigh all of these factors when determining whether a worker is an employee or independent contractor.

Dr. Jim Dahle:
Some factors may indicate that the worker is an employee while other factors indicate that the worker is an independent contractor. There's no magic or set number of factors that makes the worker an employee or an independent contractor. No one factor stands alone in making this determination. And factors which are relevant in one situation, may not be relevant in another.

Dr. Jim Dahle:
The keys are to look at the entire relationship and consider the extent of the right to direct and control the worker and then document each of those factors used in coming up with the determination. When we did that after we brought on our full-time employees we realized that the contractors we had were probably more employee-like than they were contractor-like. So, we converted them to employees. I suspect you may need to do the same thing.

Dr. Jim Dahle:
All right. Let's take a question from Nita off the Speak Pipe.

Nita:
Hello, Dr. Dahle. This is Nita. I'm recently out of residency and working as a nocturnist full-time. In my W2 job I already have a 401(k) as well as an after-tax account, which is basically a mega backdoor Roth IRA.

Nita:
I maxed out both of those accounts. I have started to work locum gigs on my off week to try to pay off my loans quickly. And I'm looking for ways to save in a tax advantaged fashion. There is a SEP IRA and a defined cash balance plan. And I read your blogs as well as listen to your podcast regarding those two.

Nita:
What I'm running into is the three-year rule. It says that I cannot contribute to either of those accounts unless I work for the company for at least three years. So, it would be sole proprietor for at least three years before I can contribute. If that is true, then can I not contribute to a SEP IRA or a defined cash balance plan within the first year of me doing the locum gigs and being a 1099 employer?

Nita:
If again, this is true, what other options do I have to save money in a tax advanced fashion if I cannot do those until three years being a 1099 contractor? Once again, thank you so much for all that you do, and the wealth of knowledge that you share with us.

Dr. Jim Dahle:
Okay. Great questions. I'm presuming that you are the only person at this side gig, that there's not employees there. All right. Let me be really clear about this in case anybody missed it earlier in the podcast. Don't use a SEP IRA! There. Hopefully that's clear. Use a solo 401(k).

Dr. Jim Dahle:
It avoids some of these issues, but most importantly, it allows you to keep doing a backdoor Roth IRA each year. Plus, if you don't make all that much money and you don't have a plan at work, you may be able to max it out on a lower income.

Dr. Jim Dahle:
What should you do in your situation? Well, you're talking about the three-year rule. Now this three-year rule really doesn't apply to the owner. You can write your SEP IRA plan as the owner so that you can participate immediately. And then if you have employees, you can establish actually different set plan eligibility requirements for future employees.

Dr. Jim Dahle:
But you don't have to deal with that if you just use a solo 401(k), which is what you should be using anyway. So, I hope that's helpful. But the three-year rule is essentially, let me give it to you straight from irs.gov.

Dr. Jim Dahle:
What is the three of five rule? The three of five eligibility rule means you must include any employee in your plan who has worked for you in any three of the last five years as long as the employee has satisfied the other plan eligibility requirements.

Dr. Jim Dahle:
This is the most restrictive eligibility requirement allowable. You can choose to use less restrictive participation rules in your plan, such as allowing employees to participate immediately after they start work or after a shorter period of employment. For example, after working for only one year.

Dr. Jim Dahle:
If you use the three of five rule, you must count any work, no matter how little, in each of the prior five years. Use plan years, often the calendar year, not years based on the date the employee started working for you.

Dr. Jim Dahle:
All right. So, that's the three year rule. Just use a 401(k). But if you decide for whatever reason, you're going to use a SEP IRA anyway, that's like the most restrictive you can be, not the least restrictive. So, I hope that's clear. Just be less restrictive and then you can use a SEP IRA right away.

Dr. Jim Dahle:
All right. I think I answered all your questions. Let's take the next question from Andy.

Andy:
Hi, Dr. Dahle. This is Andy in the Midwest. My wife is in an interesting employment situation in which she works part-time within your favorite low paying specialty. She works as a W2 employee for a small private practice, which has mostly a handful of part-time providers.

Andy:
Other than malpractice insurance, they really don't offer any benefits. No health insurance, no dental, no baseline disability or life insurance, but there's no retirement plan. We've been pestering the financial people to try to get a 403(b) started. Even if it didn't have a match, just to get access to the tax deferred retirement contributions.

Andy:
I'm wondering if it would make more sense for her to be a 1099 contractor instead of being employed. This would give us access to the employee and employer portions of the individual 401(k) and potentially save us like $5,000 or $7,000 in taxes while preserving the backdoor Roth.

Andy:
Aside from having to negotiate a salary increase to compensate for payroll taxes, what would be the downsides from her standpoint to become a 1099 employee? And then what would be the downside to her employer if she converted to a contractor such that they might decline to do this. Thank you.

Dr. Jim Dahle:
Okay. As I mentioned earlier in the podcast, it's not technically a choice. You don't get to choose whether you want to be 1099, or whether you want to be W2. You have to qualify. Now, granted, the IRS criteria are pretty gray. And there are lots of situations for docs where you can probably justify it either way.

Dr. Jim Dahle:
If she is in one of those situations where it can be justified either way, then you're absolutely right. If they will pay her enough more to make up for any benefits they're providing, malpractice, whatever. Plus, the employer pays half of the social security and Medicare taxes, then there is no downside. And you're right. She could go and open a solo 401(k) plus minus a cash balance defined benefit plan if she wanted and actually have retirement accounts. So that could be a great option if it can be justified. No downside to you.

Dr. Jim Dahle:
The downside to the employer is that they've got to make some changes, which isn't the end of the world, but they also might get burned if the IRS comes in and says, “These guys are not independent contractors. They are employees. Now pay us all those payroll taxes you should have paid us.” So that's the risk for them. And that's probably the main reason why they may not want to do it.

Dr. Jim Dahle:
But it's worth a try in this situation. Ask them, “Hey, can I be 1099? Just pay me 10% extra so I can cover my payroll taxes and buy my own malpractice or whatever and we go from there.”

Dr. Jim Dahle:
But it's worth a try. Go ahead and talk to them and see what they say. It might show them just how serious you are about the need to have a retirement plan, and they might get a little more serious about putting a retirement plan in. That wouldn't be a bad option at all.

Dr. Jim Dahle:
One thing you ought to keep in mind when your employer does not offer you any sort of retirement plan is that your traditional IRA contributions are deductible, no matter what your income is. So, keep that in mind. That's a bit of a unique thing about it.

Dr. Jim Dahle:
Actually, I think if your spouse is making money, there may actually still be some limits on that. The rules get really complicated in that situation. So double check there. But keep that in mind as you're preparing your taxes, even if you did a typical backdoor IRA, it may show up a little bit differently on the paperwork as a deductible contribution and then a taxable conversion. The end result is the same, of course, but keep that in mind. I hope that's helpful for you.

Dr. Jim Dahle:
All right. Let's take another question. This one is from Wilson.

Wilson:
Hi Jim. I’m a long-time reader of the blog, but this is my first year listening to the podcast. So, I figured, I'd submit a question. My wife, this is the first year she'll be an independent contractor with the practice and thus we set up a professional corporation taxed as an S Corp. And so, we'll be paying her a reasonable salary and processing through payroll. So, FICA taxes on both sides, as well as the federal income tax will be taken out of there.

Wilson:
I just had a question around additional taxes as a pass-through entity. My understanding is that other taxes aren’t being paid by the S Corp, but personally, for example, owner distributions that I assume will still have income taxes, but no FICA taxes will need to be paid.

Wilson:
So, does that need to be added to estimated payments quarterly? Or can it be done at the end based on what you'll be withdrawing eventually? Because I'm not sure if we know exactly how much she'll be getting every year in this manner. I figured you might be able to answer that question for me. Thank you.

Dr. Jim Dahle:
Okay. The answer is yes. When you are self-employed you are responsible for paying your own taxes. Now, if you are the employee of your S Corp, some of those taxes are paid by withholdings. The S Corp has to withhold taxes from you as the employee just like it would from any other employee. On your wages, those taxes have to be withheld and sent in according to IRS prescribed rules.

Dr. Jim Dahle:
You'll obviously also have to pay income tax, but not payroll taxes on any owner distributions. That's the whole point of owner distributions, of course, of forming an S Corp as a doc is to not pay payroll taxes on a certain part of your income. That's why you formed the S Corp most of the time, if you're a doc.

Dr. Jim Dahle:
But do you have to pay estimated taxes? Well, probably. It depends on how big those distributions are. If you just reduce whatever they're calling them exemptions or whatever, so more is withheld from your salary, from your wages, then maybe you won't have to pay quarterly estimated taxes. It really depends on your other sources of income.

Dr. Jim Dahle:
What determines whether you have to pay quarterly estimated taxes is what's called the Safe Harbor. And if you're in the Safe Harbor, you don't have to pay those. You can pay it all at the end.

Dr. Jim Dahle:
There are a few ways you can be in Safe Harbor. One is if you owe less than a thousand dollars, when it comes time to pay taxes, then you're considered in the Safe Harbor. You don't owe any penalties. You just owe whatever tax you owe come April 15th.

Dr. Jim Dahle:
Another way you can be in the Safe Harbor as a high-income earner is to have paid 110% of the taxes that were due last year. If last year you had to pay $100,000 in taxes, and this year you have paid $110,000 in taxes, you are in the Safe Harbor and you don't have to make quarterly estimated taxes.

Dr. Jim Dahle:
Usually, you're not. And usually, you make those quarterly estimated payments on April 15th and June 15th and September 15th and January 15th. And yes, I know that the second quarter is only two months long, not three months long. It's really a cash flow nightmare for all of us doing this, but you've got to make the payments.

Dr. Jim Dahle:
And so, you calculate them out based on what that Safe Harbor is. You look at last year's taxes, you multiply them by 110% and divide by four. And that's what you send in for your quarterly estimated payments. But if you are also having money withheld, then you subtract that out before you divide by four.

Dr. Jim Dahle:
And so, it can be complicated. And frankly, it's a guess a lot of times. I often end up paying tens of thousands of dollars more than I need to pay throughout the year just to be sure I'm in Safe Harbor and I don't have to pay any penalties. And I'm essentially given the IRS a tax-free loan.

Dr. Jim Dahle:
The alternative is to underpay and then pay taxes and penalties come April 15th and try to make something with the money in the meantime. But I wouldn't recommend that. I'd probably try to pay a little over, little err on the side of paying a little too much than err on the side of not paying enough. I hope that's helpful.

Dr. Jim Dahle:
All right. Let's take a question from Justin who's in the Marine Corps.

Justin:
Hi, Dr. Dahle. My name is Justin. I'm a lieutenant colonel in the Marine Corps, currently with 19 years of service. I’m not a doctor, since we get all our doctors from the Navy, but a pilot. I’m starting to look at retirement and one of the options available is a survivor benefit plan that's supposed to supplement our income should we pass away for our wife.

Justin:
I’m looking at the cost benefit analysis of it. It seems like it's pretty expensive for what you could buy for term life insurance, but all the flyers seem to be pointing towards it being a good thing for you. I’m curious to get your thoughts on it.

Justin:
Most of the guys I've talked to that have retired already tend to say, “Well, I had to get a notarized letter signed by my wife to opt out of it.” They tend to take the easy road and just let it happen and opt in, which happens automatically.

Justin:
My second question is, what are your thoughts on not investing very much in the G Fund for someone who's going to have a retirement with the military, since we already have a pension coming? One of my friends says he sees the pension as a G Fund and uses everything else instead. I just wanted to get your thoughts. Thank you very much.

Dr. Jim Dahle:
Okay. Great questions. Thanks for your service by the way. You're getting close to that 20-year mark. So, that's pretty exciting. Here is the truth. This survivor benefit plan is what the military calls it, but just about everybody who gets a pension, which isn't that many people anymore, but government workers, etc a, have this option to have it pay the surviving spouse something.

Dr. Jim Dahle:
Now that money has to come from somewhere. So, what happens? While they pay you less, they pay you less while you're alive in order for there to still be something when your spouse outlives you. And that has happened a lot of times because a lot of time, it's the guy getting the pension and maybe the guy is two or three or five years older than the spouse. And then guys don't live as long, right? And so, on average, I think wives probably live 5 to 10 years longer than their husbands.

Dr. Jim Dahle:
And so, the idea behind this sort of a system with a pension is to provide for them. Now this particular system, that they call the survivor benefit plan, will pay your spouse 55% of the benefit after you pass until they die. Essentially, it's a kind of longevity insurance for them in that respect.

Dr. Jim Dahle:
The question is, “Should you buy it?” Well, you need a plan. Whatever the plan is when you die, it needs to be enough money, enough income for your spouse to really not have to change their lifestyle. Now you probably don't need quite as much money when one of you is gone as you needed beforehand. But it's probably not that much less, right? Because some things, you still got to pay for one house, right? And that's the same, whether there's two of you living there or one of you living there.

Dr. Jim Dahle:
Also keep in mind that you are going to the single tax brackets after your spouse dies. So, you may have more expenses as far as taxes go. But some of your expenses probably go down. But bear in mind, you got to do something for the spouse outliving the pension holder.

Dr. Jim Dahle:
My parents, they were faced with this decision. My dad got a pension from the state of Alaska where he was an employee for a long time. And they chose to have to take the option where the pension pays my mom, my surviving mom, 75% of the pension if my dad dies first. That reduces the amount they're paid each month now while they're both alive. And so, there was a cost to it.

Dr. Jim Dahle:
Now you mentioned as an alternative plan in term life insurance. I think that works for a few years, but I don't think that works if you die at 80 and she lives to be a 100. Because term life insurance in your 70s is not cheap. The whole point of buying term and investing the rest is so you can quit buying any insurance by the time you're 50, 60, 65, etc. You don't want to be buying term insurance in your 70s and 80s.

Dr. Jim Dahle:
A reasonable plan might be to buy a permanent life insurance policy. If that happens to be cheaper than this SPP but it probably isn't. It probably isn't cheaper. And so, I think that's probably why most people pay for this sort of an option on their pension, especially if that pension is a significant source of the retirement income. And it sounds like it probably will be in your case.

Dr. Jim Dahle:
I think most people are probably right to buy it quite honestly. Run the numbers, but I'll bet that's where you end up once you look at everything and really consider what the plan is going to be.

Dr. Jim Dahle:
Okay. As far as whether you can be more aggressive. Well, a pension is not bonds. If your plan calls for bonds, buy bonds. If your plan does not call for bonds, then don't buy bonds. If you don't have a plan, get a plan.

Dr. Jim Dahle:
The easiest way I know of to get one, if you don't have one yet, and don't feel qualified to write at yourself is to take our Fire Your Financial Advisor online course. It's cheaper than any financial advisor's going to be and it'll take you step by step and help you to write your own financial plan. But you can pay a few thousand dollars and have a financial planner or help you draft up a financial plan. Either way, you need a plan.

Dr. Jim Dahle:
Now, can you be a more aggressive investor if your spending needs are completely covered or mostly covered by a pension? Sure. You have more ability to take risk. Maybe you have less need to take risk. But rather than trying to incorporate the pension into your asset allocation, just subtract it from your spending needs and use the portfolio to make up any shortfall.

Dr. Jim Dahle:
But certainly, it sounds like you have a need in the ability to invest aggressively. So, it certainly seems reasonable to not put as much money into bonds like the G Fund or the F Fund in the TSP. I hope that's helpful.

Dr. Jim Dahle:
Hey, if there's someone that's been helpful to you, someone that has been educating their peers, their colleagues, their trainees about financial literacy, if they are a practicing physician or dentist, we'd like to recognize them.

Dr. Jim Dahle:
Please nominate them for our financial educator award. You can do that at whitecoatinvestor.com/educator. The deadline is May 2nd. We're going to give away $1,000 and a nice certificate and give them a lot of recognition. Even those who don't win, usually get some recognition. So please nominate those that you see out there spreading the good word of financial literacy to their peers.

Dr. Jim Dahle:
All right. We've got a question from a Navy doc. Let's take a listen to that.

Speaker:
Hi, Dr. Dahle. I'm a Navy doc about to graduate residency. I'm a member of the Navy Federal Credit Union and I received a letter stating that I have up to $2,000 of no cost accidental death and dismemberment coverage with the option to sign up for more coverage at fairly low cost. Being in the Navy, I have SGLI, but do you think something like this on top of that is worth it? Thanks for all that you do.

Dr. Jim Dahle:
Okay. You'll see these deals all the time from your bank and credit union. That they'll give you a thousand dollars of free term life insurance or accidental death and dismemberment insurance. Or $2,000 in this case.

Dr. Jim Dahle:
Recognize these for what they are. They are a marketing scheme. They are giving you a tiny piddly amount of insurance in exchange for all of your financial information. I mean, what does term life insurance cost? A million dollars of it. If you're a healthy 30-year-old female, probably $600 a year. So, what is $1,000 of it? That's what? A dollar? A dollar a year? Something like that.

Dr. Jim Dahle:
So, this is not a hugely great benefit they're offering you. Is it worth your time to sign up for it? Maybe me, maybe not. I'll leave that up to you, but recognize it for what it is. This is just a marketing scheme. The idea is they get you $1,000 of free insurance or $2,000 of free insurance and then they try to sell you other products. Maybe you need those other products. Maybe you don't. If it's coming from a bank, chances are you don't. But that's what that is. So, recognize that.

Dr. Jim Dahle:
You're talking about SGLI, you're talking about term life insurance. You're talking about this free $2,000 in insurance. It doesn't sound to me like you have a plan for insurance. You need an insurance plan. If anybody else is depending on your income, besides you, you need term life insurance.

Dr. Jim Dahle:
May SGLI be part of that plan? Sure. It may be. But last time I looked, SGL was limited to $400,000. And chances are, if there is someone else depending on your income, the $400,000 is not enough.

Dr. Jim Dahle:
The other downside to SGLI is it's fairly cheap now, but it goes up in price every five years. It's not like a level premium term life insurance policy. And so, what most people do if you're a Navy doc, is they go out and buy real life insurance policy from an independent agent, like those on the list at whitecoatinvestor.com under the insurance agent tab. And they go buy a real policy for $1 million, $2 million, $3 million, whatever.

Dr. Jim Dahle:
Maybe they buy $400,000 less via that and fill the gap with SGLI. Maybe they keep VGLI, veterans group life insurance, once they leave the military. But that's the only part of their plan. When I was in the military, I think I had about $2.3 million of insurance. I had a million-dollar policy with MetLife. I think I had $750,000 with USAA, and then I had SGLI. And so, that was our insurance plan. This was part of the plan. But if that's your entire plan, it's probably inadequate. So, keep that in mind.

Dr. Jim Dahle:
People die all the time. Yesterday I was at the hospital. Yesterday morning. It's a community hospital. It's a decent sized community hospital. But at that time of morning, it's single coverage in the ER. In fact, it feels like a single coverage in the entire hospital. At six o'clock in the morning, there's usually not a hospitalist. There's usually not an intensivist. There's usually not an anesthesiologist, etc, in the hospital.

Dr. Jim Dahle:
So, we go to the codes. And there's a code on the floor or the ICU or somewhere else. We go and see if we're needed. And that time of day we usually are. And the big fear when you're an emergency doc, when you're a group of emergency physicians, is if you got to leave the ER to do a code somewhere else. Well, what happens if somebody really sick comes into the ER? And that usually doesn't happen. You can usually roll the dice and you win. And the ones who come into the ER can wait, no big deal, while you go and take care of trying to bring that patient back to life.

Dr. Jim Dahle:
Well, yesterday we got a little bit burned on it. We got called to a code in an OR. And it was not an anesthesiologist managing the case. And it was a really sad case, a young patient, trying to bring that person back, getting the pulse back, losing the pulse, getting the pulse back, losing the pulse. This was a fairly extended code as we moved that patient to the ICU and was still waiting for the intensivist to come in.

Dr. Jim Dahle:
So, what happens naturally? We have a STEMI patient come into the ER. Well, no big deal. STEMI is pretty bread and butter emergency medicine. Our nurses know how to take care of it pretty well. We rush them out of there to the cath lab about as quickly as we can. And most of them do fairly well.

Dr. Jim Dahle:
Well, this one was not doing well and actually coded in the ER. As I'm coding a patient in the ICU, one of my patients is now coding in the ER. I ran back down there and thankfully that was a ventricular fibrillation arrest, responded well to a dose of electricity, went off to the cath lab and had 100% occlusion reopened. And of course, help eventually arrived to help with the other code as well.

Dr. Jim Dahle:
But the truth is our jobs are hard. There's a lot of risk there. There are important things happening. Sometimes it is life and death. That's a reason why you get paid so well to do what you do is because it's hard, because it's risky, because it takes a lot of training and because everybody can't do it. Everybody doesn't even want to do it.

Dr. Jim Dahle:
So, if nobody has told you thank you for going through a decade, a decade and a half of training to do what you do today, let me be the first. Thanks for what you do.

Dr. Jim Dahle:
All right, let's take our next question. This one is from Jason.

Jason:
Dr. Dahle, I had a question about real estate proponents out there. Why does it always feel like people who love real estate are always trying to sell me something? It's almost kind of like those in the insurance industry selling whole life policies.

Jason:
Don't get me wrong. I truly believe in real estate and I’m using it as a part of our investment portfolio in the long term, but I just don't like the way proponents of real estate love to evangelize all the benefits of real estate in general.

Jason:
And I understand the tax benefits and the returns and liquidity premium but I just don't like the way many real estate professionals or proponents try to compare it to investing in the stock market and how it is so much better. I’m just curious about your thoughts and I love the work you do. Thanks.

Dr. Jim Dahle:
Jason, this is a good question. And I agree with you. There's a lot of hype. There's a lot of sales in real estate and it makes you feel like multi-level marketing. It makes you feel like whole life insurance sometimes. And part of the reason that it's like that is because people actually are selling you something. They're selling you their services, whatever they might be. Maybe it's a mortgage, maybe it's realtor services, maybe it's turnkey services, maybe it's a private real estate fund or a syndication or something.

Dr. Jim Dahle:
People are making money on it. So yeah, they want you to come in and invest along with them and pay them some fees. They are selling something to you. That's why it feels like they're selling something to you because they are. It's a lot harder to sell somebody an index fund with an expense ratio of 0.03%. There's not a lot of sales coming out of that investment. It's an investment that is bought, not one that is sold. So that's part of it.

Dr. Jim Dahle:
I've never really been a big fan of the rah-rah-rah “you can do it” kind of stuff. Why do they have that in real estate besides the sales aspect? Well, part of it is because it takes work to be successful in real estate. Even if you are investing passively through private funds and syndications, it takes a fair amount of work just to evaluate those. Not to mention doing your taxes on them when you start getting fifteen K-1s a year from multiple states. But it does take work. And so, it takes some motivation to do it. And that's part of the reason why there's that rah-rah-rah aspect to it.

Dr. Jim Dahle:
But I don't like it any more than you do. I don't think you or I are going to change it. That's the way it is. And keep in mind people are trying to make money off you, whether they're selling you a real estate course or access to a real estate community. Those are some of the things we sell here at the White Coat Investor. We've got partners that do lots of real estate. And so, it feels like rah-rah-rah do real estate all the time.

Dr. Jim Dahle:
But keep in mind, we're also running a business. We sell ads, we got to bring a certain amount of money in the door to make payroll like anybody else. This is a for profit business. And so, if it feels like it's rah-rah-rah real estate, well, chances are we're getting paid for it and we try to have full disclosure on how we get paid.

Dr. Jim Dahle:
And if you don't see our state of the blog posts every year, we make that very clear. But I think that's probably the best way to think about it. There certainly is an aspect of sales, an aspect of hype, an aspect of cheerleading associated with it. And it's probably not going away anytime soon. It's been there for at least the last 30 or 40 years.

Dr. Jim Dahle:
All right. Let's take a question now on some student loans, it sounds like. This one is from Sam.

Sam:
Hey, Dr. Dahle. It’s Sam, the intern. Quick question for you about student loan refinancing. I'm in the process of refinancing my student loans as the federal student loan holiday is coming to a close. And going through one of your sponsored links, all of the fixed rate loans for every timeframe I can look at, have a lower interest rate than the variable rate loans, which to my knowledge is the opposite of how it's supposed to be. Am I missing something here? Is this just because the loan servicer expects interest rates to lower in the future? I appreciate any thoughts you have. Thanks so much.

Dr. Jim Dahle:
Great question. That's really weird. That's usually not the way it is. Usually, you are offered a discount for being willing to take the variable rate loan and running that interest rate risk yourself. It might be a half a percent less. It might be 1% less.

Dr. Jim Dahle:
In the last few years, people have really made out like bandits taking variable rates. Because then as rates went down, some of them were paying like 0.1% on their student loans. So, it's not like interest rates always go up. Everyone's convinced interest rates must go up and must go up quickly. And maybe they will this time. And eventually they probably will go a little bit higher than they have been lately. But sometimes they don't. Sometimes they stay right where they are. Sometimes they go down and, in those situations, you certainly come out ahead with a variable rate loan.

Dr. Jim Dahle:
In fact, if it doesn't go up for a while, even if it does go up or it doesn't go up substantially, you still come out ahead with a variable rate loan. But given inflation is now over 8%, I think from the last report I saw, there certainly is going to be some impetus to raise some rates at the federal reserve this year. I think they've announced they expect to raise them six times this year. So, I would expect by next year rates would be at least 1.5% higher.

Dr. Jim Dahle:
Why are you running into this situation now? I have no idea. But what would I do in that situation? I'd take the fixed. It's a lower rate. Chances are good rates are going to go up. Why would you take the variable? Especially if they're not giving you some sort of a discount on it. Why are they doing that? I have no idea. But if that is what they're offering you, all you can do is apply and take the best thing they're offering you.

Dr. Jim Dahle:
Now keep in mind, if you're not aware of this, that they have extended the student loan holiday yet again for another three months. And frankly, I think it's highly unlikely that it will not be extended again. Because what's going to be right around the corner in three months? Well, congressional elections are.

Dr. Jim Dahle:
And in an election year, I can't imagine that it's going to be super popular to start charging people that you haven't charged student loan interest to in the last two and a half years. So, it wouldn't surprise me to see this get extended one more time, two more times into the new year. Maybe forever. Who knows the way things are going now? If you have federal student loans, you might not quite want to refinance them yet. Wait and see what they do in Congress. Wait and see what the Biden administration does.

Dr. Jim Dahle:
But if you have private student loans and still haven't refinanced them, boy, you should get that done right away, especially with concerns for rates going up. And of course, if rates go back down, refinance again. You get the cash back through the links. If you go through the WCI links, you get hundreds of dollars of cash back.

Dr. Jim Dahle:
We're still giving away Fire Your Financial Advisor to anyone who refinances a certain amount on there. And so, you get a better deal going through our links than you do going directly to the companies.

Dr. Jim Dahle:
So, if you are going to refinance, please do go through the White Coat Investor links. They're very prominently displayed at whitecoatinvestor.com. If you go to the recommended tab, it's the first link there. But I wouldn't necessarily take a variable rate loan if they're charging you more than a fixed rate loan. Why should you be paying to run the risk? They should pay you to run the risk.

Dr. Jim Dahle:
This podcast was sponsored by Bob Bhayani at drdisabilityquotes.com. He's been a long-time sponsor at the White Coat Investor. One listener sent us this review, “My experience with drdisabilityquotes.com was great! They were very quick to respond and answer all of my questions. I appreciated how easy the process was to get quotes and the fact that there was no pressure as I took my time to decide which plan I wanted to go with.”

Dr. Jim Dahle:
You can contact Bob at drdisabilityquotes.com today. You can email [email protected] or you can just call (973) 771-9100 and get your disability insurance in place today.

Dr. Jim Dahle:
All right. Don't forget to nominate anybody that you want to win our financial educator award at whitecoatinvestor.com/educator. The deadline is May 2nd. Thanks for those of you leaving us five-star reviews. That helps spread the word about the podcast.

Dr. Jim Dahle:
Our most recent one came in and said, “WCI isn't just for docs. I’m not a MD, but Jim Dahle’s advice has been invaluable to me, my family and our employees. As a consultant and spouse of a small biz owner, I’ve learned not only about financial pitfalls and scams, but how to use the system to our and my wife’s employees benefit. The podcast, blogs and website resources provide clear, simple and specific information on a wide-range of topics.

Dr. Jim Dahle:
In an industry beset with scammers scheming to get your money, WCI provides you with evidence-based information, much of which has been field-tested by Jim. Not to mention hundreds of thousands of other White Coat Investors.” Thanks, Sam, for that great five-star review.

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

Disclaimer:
The host 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.