Today we are answering your solo 401(k) questions. We tackle topics like what to do when you change from W-2 to K-1, when to create an S Corp, how to convert old IRAs to solo 401(k)s, and so much more. We also have one of our new recommended financial advisors on the podcast for a few minutes to help answer some of your questions about financial advisors.


 

Converting an Old IRA to a Solo 401(k)

“Hi Dr. Dahle. I'm so glad I found your podcast. I am not the target demographic at all. In fact, I'm a former teacher and now I'm a stay-at-home mom, but I found so much value in the podcast. So, thank you. I would like to open up a Backdoor Roth because my husband now makes too much. We're Married Filing Jointly. My husband makes too much for us to have Roths anymore—to contribute to them, I should say.

I know from you that not being employed right now to roll over my old IRAs from previous employers, I would need to open up an individual 401(k). I can get an EIN. I have kind of a little side hustle, so I can do that. But my question is when I eventually move my old IRAs over and then open up with a new one, I know I can have a spousal Roth IRA. But I just wanted to know if there was anything I needed to do so that the IRS knows that it's a spousal Roth once I finally open it and convert it. Because I don't have much earned income technically, but we're Married Filing Jointly, so I'll be using our shared income to fund my Backdoor Roth. I hope this makes sense and I appreciate your help.”

First of all, personal finance, as you probably realized at this point, is 95% the same for everybody. Yeah, there's another 4% that may be specific to high earners, and there's maybe 1% that's doctor-specific. If you like the podcast, listen to the podcast. I don't care if you make $20,000 a year selling balloons. There's probably still a lot of useful stuff on this podcast for you. You're welcome to be here. Don't feel like this is for doctors only or even for high-end earners only. We absolutely aim our information at high-income professionals and basically all we talk about here are first-world problems, but there's still lots of useful stuff for everybody.

I think you're worrying about something that you don't need to be worrying about. You understand the situation well. If you want to do Backdoor Roth IRAs, you can't have money in an IRA. You've got a side hustle—a business—you can get an EIN for and you can open a solo 401(k) for and you can put your IRA money in there. No problem. Just make sure when you open it that they actually accept IRA rollovers. Vanguard didn't used to do that. They do now. But there are other places that will take those rollovers. If you're going to go through the trouble of opening a solo 401(k), make sure it's going to work for the main purpose you're opening it for.

But as far as the spousal IRA, there's no such thing really. It's just your IRA. It's an IRA with your name on it. Both the traditional you have to have money in for a few days or whatever as well as the Roth IRA. They're just your IRAs, and you can contribute to them using money that your spouse is making. No big deal. You don't have to do anything special. You don't have to tell the IRS or you don't have to tell Vanguard that this is a spousal IRA. Open the IRA, and move money from your checking account into it. The next day, move it to a Roth IRA. That's it. Just like anybody else, just as though you are earning the money, this is no big deal. You don't need to worry about this.

More information here:

Solo (Individual) 401(k)s – What You Need to Know

 

Geo Arbitrage and Opening a New Solo 401(k)

“Hi Jim. Thanks for all that you do. I had my financial awakening recently thanks to you. I work in California and need to relocate for geographic arbitrage. Thanks to your continued advice, I just created a Vanguard solo 401(k) for my S corp. However, when I relocate, I have to terminate my S Corp because having an S Corp in California costs $800 a year.

Questions: What do I do with my solo 401(k) after I terminate my business? My Vanguard rep said, ‘Nothing needs to be done.' Or I can roll it over into an IRA, but I'm not going to do that. Second question: am I able to roll over my funds into a second solo 401(k), which I'll probably create as soon as I relocate? See, when I relocate, I can create a new EIN number as the sole proprietor and transfer funds into my second solo 401(k), or is there an easier way?”

Congratulations on your financial awakening. It's exciting to think about all the benefits you're going to have from geographic arbitrage. Leaving California typically lowers your tax rate dramatically. It typically lowers your cost of living dramatically and often gives you a raise. Your actual after-tax income could be 50% more, depending on where you're going to be. That's exciting for you. Those of you who live in Manhattan and the Bay Area and Southern California and Washington DC kind of areas, this is an option. You have to ask yourself, “Well, what do I want out of my life?” It's not always all about the money, but this is huge to leave these areas as a doctor, particularly as a physician, and go somewhere else. It's amazing how much that will help your finances. If you're not wedded to being in San Diego or LA or Washington DC or some other areas in the northeast, consider this because it really can make a big difference.

As far as your questions, this is not as complicated as you're making it out to be. Go to the new state, start your new business, and get your new EIN for it. EIN is free and takes 30 seconds to get from the IRS online. Then call up Vanguard and say, “Do I need a new one? Can we transition this one to the new business?” And they'll walk you through the steps, and you just transfer all the assets into this new 401(k). I have been through several iterations of this. We started a solo 401(k) at Vanguard and basically, I think it's the same 401(k) technically that we've used—even now that we have employees at The White Coat Investor. But basically, they had to redo it. My assets that I put into this solo 401(k) are all still in the same place. All of those things are now held at Fidelity. It's all basically the same money. It's never had to go anywhere else.

The problem with rolling it over to an IRA, which is what a lot of people recommend mistakenly for high earners, is that it keeps you from doing a Backdoor Roth IRA. Now, your conversions are getting prorated each year. You generally don't want to do that. You want to roll into your new solo 401(k) or if you're going to a job that has its own 401(k) or 403(b), you can roll it in there. Just simplify your life. You don't want to have a bunch of these. Keep in mind if you do have multiple solo 401(k)s for whatever reason, you have to add them all together for that $250,000 limit. If, added together, they are worth more than $250,000, you do have to do a 5500 EZ for them. But in general, just roll this into the new solo 401(k). It's probably going to look an awful lot like the old one. But the folks at the Vanguard Small Business Retirement Account Department can help you do that. I’d just call them up once you set up a new LLC or S Corp or sole proprietorship or whatever you're going to do at the new job.

If all of this is totally over your head, by the way, we have a lot of resources for you. You can go to the Start Here page on the website. We also have an email series you can sign up for, which sends you a bunch of emails over a number of months. They're all short, but they're about the basics of finance to get you up to speed so you can be financially literate, so you can be financially woke. You can sign up for that at whitecoatinvestor.com/basics. It's totally free.

You might also notice if you listen to the Milestones to Millionaire podcast—those are the ones that drop on Monday, whereas these ones drop on Thursdays—I'm trying to include some basic beginner level financial info with each episode of that. Those don't show up in the show notes. We don't do show notes on the blog for the Milestones podcasts so you have to listen to the podcast to get that information. But since you're listening to this podcast, you probably like podcasts. I'd make sure you catch those. Even if you don't like the interviews with the people who've hit the milestones, fast forward and get to the basic information at the end of each episode.

More information here:

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

 

Can You Have 2 Solo 401(k)s? 

“Hello, Dr. Dahle. I'm a longtime listener, first time caller. Thank you so much for what you do. You have really helped me. I am a nurse anesthetist. I am a career locum. I've been in practice for 13 years. I've been in locums for 12. I've worked all over the country, and I'm planning to retire in five years.

I also write novels. I've been writing novels for about the same length of time, or I've been publishing novels about the same length of time as I've been doing anesthesia. The books and the anesthesia business both had their own solo 401(k)s. And this has been true for a while with Vanguard. Recently, because of you, I set up a cash balance plan and figured out how to do that through Emporium. That kind of led inevitably to realizing that you want a Mega Backdoor Roth. And then you realize that you can't do it with Vanguard.

Now, I'm trying to set up a 401(k) that I can do a Backdoor Roth through. I contacted my solo 401(k) people because of you. Again, thank you. When they heard I had two solo 401(k)s, they're like, no, no, no, that's an audit flag. We recommend that you consolidate them. The problem with that is that I'm going to retire at 51 and I’m trying to write books. That's what I'll be doing. The books business will never retire. I was hoping to get to my anesthesia 401(k) at 55 and giving up that option is kind of scary. I talked to my CPA, and he did not think I was that likely to be audited. What do you think? Should I give it up?”

That's a great question. Apparently, a minute and a half on the speak pipe was not long enough for you because you also sent us an email noting a few additional pieces of information that you think you're going to have enough money in your brokerage account to get to age 59 1/2 without the retirement accounts and, of course, that you could tap your principal from your Roth accounts and that the books are wildcard. Some years, they make lots and lots of money. Other years, almost nothing. But you are worried about losing this option of tapping at least one of those 401(k)s by age 55. I think you're getting pretty good advice from the 401(k) provider. I don't think having two solo 401(k)s is generally a good idea. It's not like you get two contributions. You still are limited to $66,000 [in 2023 and $68,000 in 2024]. A little bit more if you're 50+. You're not getting any real benefit there. I think I'd probably just use the same EIN for both businesses and use one solo 401(k).

The IRS could argue that just because you stopped doing anesthesia but you're still working as a self-employed person, you can't really tap that at 55 anyway. I don't think having a separate 401(k) automatically makes it so you can. I think I would consolidate the 401(k)s. If nothing else, it'll make your life easier. Besides, as you mentioned, there are other sources of income. You've got a brokerage account and that's generally what you want to spend first anyway before retirement accounts. You can go through that. Then, you can hit your Roth IRA principal.

Remember, there are all these exceptions to getting into your retirement accounts before age 59 1/2 anyway. There are all these options to get into your IRA without having to pay that 10% penalty. Even if you had to pay the 10% penalty on a little bit, it's not the end of the world. I'd probably keep this simple. I would probably consolidate your solo 401(k)s, especially since you're making things complicated by doing a Mega Backdoor Roth IRA option in the 401(k), by having a cash balance plan. All that stuff makes the situation even more complicated. You need to simplify where you can. I think going from two solo 401(k)s to one is a great way to simplify it. Just like your accountant told you. They don't have any other clients with two solo 401(k)s; there's a reason for that. I don't think you ought to have two either. I would definitely cut back to one.

 

If you want to learn more about the following topics, check out the WCI podcast transcript below. 

  • Are there circumstances when you should definitely hire a financial advisor?
  • When is the best time to set up an S Corp if you are moving from W-2 to K-1 income?
  • A warning from a listener about filing Form 5500 for your solo 401(k)
  • Asset allocation

 

Milestones to Millionaire Podcast

#138 — Doc Helps Change His 401(k) Plan and Finance

We loved hearing from this doc about how he advocated for changes to be made to his employer 401(k) plan. After a few years of requests, he was happy to find they had added an option to have some after-tax contributions and in-service distributions that allow for Mega Backdoor Roth contributions. We love to see you making educated and positive changes in your workplace!

Finance 101: Tax Brackets

Tax brackets can be a source of confusion for many people, leading to unnecessary worries about moving into higher tax brackets. Understanding how they work can help you make informed financial decisions. Tax brackets are progressive, meaning you only pay the higher tax rate on the income within that bracket. For example, if you're married and taking the standard deduction, the initial portion of your income—roughly up to the standard deduction amount—is essentially taxed at a 0% rate. This means you don't pay any income tax on this portion of your earnings.

Moving up the tax bracket ladder, there are various thresholds where the tax rate increases, such as 10%, 12%, 22%, and so on. Even with substantial earnings, you may not pay the highest tax rate on your entire income. The top tax bracket applies only to income above a specific threshold. This results in an effective tax rate that's typically lower than the marginal tax rate. Keep in mind that other factors, such as deductions and credits, can also impact your overall tax liability.

It's important to differentiate between taxes withheld from your paycheck and your actual tax liability. Withholding amounts may vary, but what you ultimately owe the IRS depends on your total income, deductions, and credits. Not all paycheck deductions are taxable, including contributions to retirement accounts and insurance premiums. Understanding these nuances can help you better manage your finances and plan for taxes more effectively. In most cases, the effective tax rate for physicians—including federal and state income taxes, payroll taxes, and other deductions, typically falls between 18%-30%.

 

To learn more about tax brackets, read the Milestones to Millionaire transcript below.

 


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WCI Podcast Transcript

Transcription – WCI – 335
INTRODUCTION

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

Dr. Jim Dahle:
This is White Coat Investor podcast number 335 – Solo 401(k) questions.

Thousands of doctors have trusted Pattern to help them understand and obtain disability insurance. They trust us because we know their time is valuable, and that doctors have more important things to do than worry about insurance. We gather quotes from the top 5 providers to deliver options unique to your situation.

Here's how we do it:
1. Request your quotes
2. Compare your options in a short meeting with one of our expert sales advisors.
3. Buy risk-free.
So, request your quotes today at http://www.patternlife.com/wcipodcast

All right, let's start the podcast with our favorite thing to do here. Corrections. I got an email about our last podcast, not our last one probably you heard, but last one that was heard before we recorded this one on September 8th.

But apparently I made a mistake. I know, it's hard to believe, but it does happen from time to time. I mentioned on a previous podcast that you can contribute to your IRAs, your traditional and Roth IRAs after April 15th. If you file an extension to file your taxes in October, you could do it as late as October. That is not actually true.

While you can do that for SEP IRA, for a solo 401(k), you cannot do that for an IRA. The deadline for an IRA is the tax filing deadline for that year, usually April 15th. Sometimes if there's a weekend a few days later. Sorry about getting that one wrong. I got a couple of messages about that.

I also apparently said the extension deadline was in September. It's September for businesses. It's October for individuals. October 15th, September 15th. If you have a partnership or whatever, that return has to be filed by March 15th. You can extend it six months to September 15th. If you're filing as an individual, you have to file by April 15th, which can be extended six months to October 15th.

Also, somebody corrected me on something that changed in between the time I recorded the episode and when it ran. The Roth contributions, these new mandatory catch-up contributions that have to be Roth for new earners, it was supposed to take place starting in 2024, is not going to take place until 2026. So, if you've been worried about that at all, you have a couple of years of reprieve for that.

I also had something pointed out to me that I didn't know, and I'm still not 100% sure it's true, but this correction, this message I got said that mandatory catch-up Roth contributions only impact W2 earners contributing to an employer 401(k) plan. So, if you're using a solo 401(k), you can still make catch-up contributions even after 2026 to a traditional Roth 401(k).

And the commenter said “I believe the logic decided upon by the Congress is that self-employed individuals are still calculating their net business income for the prior tax year after the current tax year has started. So, it'd be unfair and difficult to impose an income cutoff for mandatory catch-up contributions to a Roth account only for self-employed individuals.”

I don't have confirmation that that's the way the new rule is, but be aware of that possibility, at least. We have two years to confirm this still, since it doesn't go into effect until 2026.

All right, our scholarship, the WCI scholarship, had a banner year. We had 990 applicants for the scholarship this year, which is pretty wild. The problem is we were recruiting judges, thinking we'd have 600 or 700 or 800 applicants instead of 1,000. So we tried to get a few judges in the last minute. We got a few more to help.

But for those of you who volunteered to judge thinking you'd only be reading 10-ish essays or so and ended up reading closer to 15 to 20, thank you so much for going above and beyond what you're expecting. It really does help make the process fair to have these dozens and dozens of judges looking at the scholarship application essays. So, thank you so much for doing that.

And for the rest of you, thanks for what you're doing. Your job is not easy, that's why they pay you so much to do it, and I appreciate what you do each day.

 

SETTING UP AN S CORP WHEN BEING PAID K-1 INCOME QUESTION

All right, let's get into some of your questions since the content on this show is driven by you. I do have a few more announcements I'll make later in the podcast. But hey, let's talk about what you guys want to talk about. Our first question comes from Ben, who's apparently becoming a partner.

Ben:
Hi, Jim. My name is Ben. I'm an anesthesiologist in Arizona. On October 1st of this year, I'll become a partner in my small practice and I'll be paid K-1 income instead of W2. I plan to create an LLC for the money to go into and ultimately file as an S Corp to save on Medicare taxes by paying myself a minimal salary, and taking the rest as a distribution. I'll become a partner on October 1st. Should I try and set up and file as an S Corp this year or just wait until next year to avoid problems? Thanks for all you do.

Dr. Jim Dahle:
Great question, Ben. First issue is don't pay yourself a minimal salary. Pay yourself a fair salary. If you cannot hire an anesthesiologist to do your job, even an employee, an associate, whatever, to do your job for what you're paying yourself as a salary, it's probably not a fair salary. And you cannot go out there and pay yourself a salary of $30,000 as an anesthesiologist, save a bunch of social security and Medicare tax and expect that to fly with the IRS. It's not going to work.

How much do you have to pay yourself? Well, you can look at salary surveys for anesthesiologists. You can look at MGMA data but as a general rule, kind of a rule of thumb, you want at least half of that income coming in from your clinical work to be salary and somewhat argue it needs to be even higher than that.

Certainly for an anesthesiologist that needs to be more than the social security wage limit. I think that's around $144,000 this year. Don't quote me on that, but it's usually something around that number.

So if you're thinking of paying yourself a salary under $150,000, I think you're making a mistake. But the way this works, if you're going to make $600,000 or $700,000 as an anesthesiologist, you pay yourself a salary of, I don't know, $300,000 or $400,000 and then you pay yourself a distribution of $200,000 or $300,000 and basically you save the Medicare taxes on that $200,000 or $300,000. That might save you $7,000 or $8,000, $10,000 maybe in Medicare taxes.

It's well worth doing but don't get too aggressive with that sort of a thing. S Corps do not get audited very often but you need to follow the rules. You need to pay yourself a reasonable salary, not a minimal salary.

But yeah, I think if I were you, I'd wait till the first of the year. It's only three months. It's not that much in Medicare tax. And then you can have your corporate tax start date be January 1st, keeps everything really clean moving forward. I think that's what I would do is to form that LLC.

Obviously you got to do an S election to make that into an S Corp as far as the IRS is concerned, but I think I'd go with the January 1st start date on that. For all the companies we've started that are S Corps, it's really only White Coat Investor, that's what we've done. We've tried to just line it up with the calendar year.

 

SOLO 401(k) AND FORM 5500 WARNING

Our next question isn't really a question, it's more of a story. It comes in via email. Let me read it to you. “I thought your listeners could learn from a near miss I had with my solo 401(k). I don't mind if this is read on the email, told in an interview or published as a guest post.” How about we just read it on the podcast?

“A few years ago, I opened a solo 401(k) when I started to receive enough 1099 income from side hustles. I was so excited to have my own solo 401(k). I even transferred money from an old employer, regular 401(k) into it. This transfer put my account over $250,000. So, I had to submit the 5500 form annually to the IRS.

Each year I submitted the required 5500 form and I received the AVS account valuation statement on the solo 401(k). However, we moved in 2021 and that statement was sent to our old address in 2022. I waited a while for it to come, then called and found out it went to the old address.

We ended up submitting our 5500 form 39 days late. It was an option on the 5500 form asking if we wanted to pay a $500 late fee thinking we did not owe the fee because our ABS was sent to the wrong address, we did not pay it. A few months later, we received notice from the IRS that we owed a $9,750 late fee, $250 per day. This fee was increased from $25 per day as part of the Secure Act 2.0.

We submitted copies of the AVS with the wrong address on them, as well as other documents from the investment company with the right address to show that we had every reason to think the AVS form would be coming when it was ready.

After several months and some worry, anger over what seemed like a large fee for an information only form, the late fee was eventually dismissed. I would advise everyone with a solo 401(k) to get the 5500 form in by the July 31st deadline, if possible, to move any investments out of their solo 401(k) to keep the account under the reporting amount of $250,000.”

It's not a hard form to file. Put a note on your calendar sometime in July to make sure you file the 5500 form. It's not that hard to do. And if you're not getting the data you need to file it, get in touch with your solo 401(k) provider to make sure you have it.

But here's the deal. This is a big fee. It's kind of an unfair fee. It ranks right up there, in my view, with the ridiculous penalty on failing to take a required minimum distribution, which used to be 50% of the RMD you didn't take. It's now down to 25%, which is still this huge penalty for an easy mistake to make, especially as you become more elderly, considering this soon only going to apply to people who are 75 plus years old.

Anyway, here's the deal. I have run into a lot of White Coat Investors who screwed this up and then begged for mercy from the IRS and got it. So if you've gotten some notice that you owe $10,000 or $20,000 or $30,000 penalty for not filing your 5500 for your solo 401(k) that has more than $250,000 in it, go through the process and try to appeal it. And most people are getting this waived as near as I can tell. Certainly if you've only made the mistake once, you had a good reason to do it. People are getting this waived.
So take advantage of that.

We also have a blog post talking about filing your 5500 EZ late, and I would check that out as well if you're in that sort of a situation. But this is something you just need to know if you have a solo 401(k). If you have a solo 401(k), there is an informational return that you have to send to the IRS every year. It's due on July 31st called a 5500 EZ. And you just know that you got to file it. That's the main thing to know.

All right, I'm going to Orlando next February. I hope you're coming with me. It's February 5th through 8th. It’s WCICON24. The weather is probably going to be awesome. It usually is in February in Florida. It's not hurricane season. It's wintry everywhere else and in Florida it's super nice. Not too warm, not too humid. Nice. You ought to come down and join us.

But the early bird registration for this conference ends on October 12th. By the time you're hearing this, you've only got a week left or so, and you can register for that at wcievents.com. The early bird registration is $300 off for in-person registrants. So, it's a pretty good discount. You should definitely sign up before then. Assuming it's not full already. I guess it could be sold out by the time you hear this, but we haven't sold out the last couple of years, so I'm assuming there's still going to be room for you.

But not many of us have people we can discuss our financial challenges with. People who can relate to having student loans hanging over your head, paying what seems like too much to the tax man or feeling burned out of doing something that you've wanted to do since eight grade.

We've crafted the conference so you can invest dedicated time to focus on how to move closer to your ideal life financially, professionally and personally. I've found that spending time with those who truly understand is one of the most important parts of our conference.

The content is going to be top tier. Paula Pant from the Afford Anything podcast, and Tarryn MacCarthy, who's a happiness and transformational mindset coach for high achieving professionals are going to be joining me as keynotes.

We're also going to have 30 plus other amazing breakout speakers, but don't worry, we're going to knock off the academics by 4:00 PM each day to make sure you actually take the time to relax and enjoy activities.

Yes, it is the Physician Financial Literacy conference, but it is also the Physician Wellness and Financial Literacy conference. And if you haven't been getting wellness content during the conference, you're certainly going to get wellness activities starting at 4:00 PM each day.

This is a great conference, people love it. I think our first one, 99% of attendees recommended you come to the conference. It's truly an awesome conference. It's docs from all kinds of specialties. It's going to be fun. You're going to enjoy it. You're going to learn a lot. If you're like many people, it will change your life.

Come to this conference. It's the White Coat Investor conference, Physician Wellness and Financial Literacy Conference. You don't have to be a doctor. You can get both physician and dentists continuing education credit for it. You can sign up at wcievents.com.

 

GEO ARBITRAGE, S CORP AND SOLO 401(k) QUESTION

Okay, let's take a question from Tom. He wants to talk about geographic arbitrage, S Corp, solo 401(k)s. Let's have a listen.

Tom:
Hi Jim. Thanks for all that you do. I had my financial awakening recently thanks to you. I work in California and need to relocate for geographic arbitrage. Thanks to your continued advice. I just created a Vanguard Solo 401(k) for my S corp. However, when I relocate, I have to terminate my S Corp because having an S Corp in California costs $800 a year.

Questions. What do I do with my solo 401(k) after I terminate my business? My Vanguard rep said “Nothing needs to be done.” Or I can roll over into an IRA, but I'm not going to do that.

Second question, am I able to roll over my funds into a second solo 401(k), which I'll probably create as soon as I relocate? See, when I relocate, I can create a new EIN number as the sole proprietor and transfer funds into my second solo 401(k) or is there an easier way? Thank you.

Dr. Jim Dahle:
All right. Well Tom, congratulations on your financial awakening. It's exciting to think about all the benefits you're going to have from geographic arbitrage. Leaving California typically lowers your tax rate dramatically. It typically lowers your cost of living dramatically and often gives you a raise. So, your actual after tax income could be 50%, could be doubled, depending on where you're going to. So that's exciting for you.

Those of you who live in Manhattan and the Bay Area and Southern California and Washington DC kind of areas, this is an option. You have to ask yourself, “Well, what do I want out of my life?” It's not always all about the money, but this is huge to leave these areas as a doctor, particularly as a physician and go somewhere else. It's amazing how much that will help your finances. So if you're not wedded to being in San Diego or LA or Washington DC or some other areas in the northeast, consider this because it really can make a big difference.

Tom, as far as your questions, this is not as complicated as you're making out to be. Go to the new state, start your new business and get your new EIN for it. EIN is free and takes 30 seconds to get from the IRSs online and then call up Vanguard and say, “Do I need a new one? Can we transition this one to the new business?” And they'll walk you through the steps and you just transfer all the assets into this new 401(k).

I have been through several iterations of this. We started a solo 401(k) at Vanguard and basically, I think it's the same 401(k) technically that we've used even now that we have employees at the White Coat Investor. But basically they had to redo it. And so, my assets that I put into this solo 401(k), what was a solo 401(k) are all still in the same place. And so, all of those things now held at Fidelity, it's all basically the same money. It's never had to go anywhere else.

The problem with rolling it over to an IRA, which is what a lot of people recommend mistakenly for high earners, is that it keeps you from doing a backdoor Roth IRA. Because now your conversions are getting prorated each year. So, you generally don't want to do that. You want to roll into your new solo 401(k) or if you're going to a job that has its own 401(k) or 403(b), you can roll it in there. Just simplify your life. You don't want to have a bunch of these.

Keep in mind if you do have multiple solo 401(k)s for whatever reason, you have to add them all together for that $250,000 limit. And if they all added together are worth more than $250,000, you do have to do a 5500 EZ for them. But in general, just roll this into the new solo 401(k). It's probably going to look an awful lot like the old one.

But the folks at the Vanguard Small Business Retirement Account Department can help you do that. I’d just call them up once you set up a new LLC or S Corp or sole proprietorship or whatever you're going to do at the new job.

If all of this is totally over your head, by the way, we have a lot of resources for you. You can go to the Start Here page on the website. We also have an email series you can sign up for, which sends you a bunch of emails over a number of months. They're all short, but they're about the basics of finance to get you up to speed so you can be financially literate, so you can be financially woke like Tom. You can sign up for that at whitecoatinvestor.com/basics. It's totally free.

You might also notice if you listen to the Milestones to Millionaire podcast, those are the ones that drop on Monday, whereas these ones drop on Thursdays. I'm trying to include some basic beginner level financial info with each episode of that. Those don't show up in the show notes. We don't do show notes on the blog for the Milestones podcasts for the most part. Are we doing those now, Megan? We're still not doing those. So you got to listen to podcasts to get that information.

But since you're listening to this podcast, you probably like podcasts. So I'd make sure you catch those. Even if you don't like the interviews with the people who've hit the milestones, fast forward and get to the basic information at the end of each episode.

 

CONVERTING AN OLD IRA TO SOLO 401(k) QUESTION

All right, the next question is from Jen. She wants to talk about Roth and solo 401(k)s and converting an old IRA. All kinds of fun questions.

Jen:
Hi Dr. Dahle. I'm so glad I found your podcast. I am not the target demographic at all. In fact, I'm a former teacher and now I'm a stay at home mom, but I found so much value in the podcast. So thank you.

I would like to open up a backdoor Roth because my husband now makes too much. We're married filing jointly. My husband makes too much for us to have Roths anymore to contribute to them, I should say.

I know from you that not being employed right now to roll over my old IRAs from previous employers, I would need to open up an individual 401(k). I can get an EIN, I have kind of a little side hustle, so I can do that.

But my question is when I eventually move my old IRAs over and then open up with a new one, I know I can have a spousal Roth IRA. But I just wanted to know if there was anything I needed to do so that the IRS knows that it's a spousal Roth once I finally open it and convert it. Because I don't have much earned income technically, but we're married filing jointly, so I'll be using our shared income to fund my backdoor Roth.

I hope this makes sense and I appreciate your help. And again, thank you for all you do. This is a very valuable resources. Take care. Thanks.

Dr. Jim Dahle:
All right, great question Jen. Here's the deal. First of all, personal finance, as you probably realized at this point, is 95% the same for everybody. Yeah, there's another 4% that may be specific to high earners and there's maybe 1% that's doctor specific. So, if you like the podcast, listen to the podcast. I don't care if you make $20,000 a year selling balloons. There's probably still a lot of useful stuff on this podcast for you. So you're welcome to be here. Don't feel like this is for doctors only or even for high end earners only.

Now, we absolutely aim our information at high income professionals and basically all we talk about here are first world problems, but there's still lots of useful stuff for everybody.

I think you're worrying about something that you don't need to be worrying about. You understand the situation well. If you want to do backdoor Roth IRAs, you can't have money in an IRA. You've got a side hustle, a business, you can get an EIN for and you can open a solo 401(k) for and you can put your IRA money in there. No problem. Just make sure when you open it that they actually accept IRA rollovers. Vanguard used to not do that. They do now. But there's other places that will take those rollovers. Just make sure if you're going to go through the trouble of opening a solo 401(k), make sure it's going to work for the main purpose you're opening it for.

But as far as the spousal IRA, there's no such thing really. It's just your IRA. It's an IRA with your name on it. Both the traditional you'll have, to have money in for a few days or whatever as well as the Roth IRA. They're just your Roth IRAs and you can contribute to them using money that your spouse is making.

So, no big deal. You don't have to do anything special. You don't have to tell the IRSs or you don't have to tell Vanguard. This is a spousal IRA, open the IRA, move money from your checking account into it. The next day, move it to a Roth IRA. That's it. Just like anybody else, just as though you are earning the money, this is no big deal. You don't need to worry about this.

 

QUOTE OF THE DAY

All right, our quote of the day today comes from Mark Twain which is kind of disappointing because it's not funny. Most quotes by Mark Twain are funny, but this one is not. It's still good advice though.

He said “The secret of getting ahead is getting started. The secret to getting started is breaking your complex overwhelming tasks into small, manageable tasks and then starting on the first one.”

I think that's really good advice. And a lot of us, especially as we become financially awakened, are just overwhelmed. It's overwhelming to realize, “Ah, crap, I got the wrong insurance. I don't have the right insurance. I don't have a plan for my student loans. I don't really even know what my investments are. Am I even investing?”

You're totally overwhelmed. Fine. This is a lifelong process. You don't have to do it all the first week. Start breaking those tasks into small, manageable tasks, ticking them off one by one.

People overestimate how much they can accomplish in a day, but generally underestimate how much they can accomplish in a year. And if it takes you a year to really get your finances under control, great. That's okay for most of us. That's faster than most people do it in but get started.

 

CAN YOU HAVE TWO SOLO 401(k)s?

Okay. Next question is about another solo 401(k) question from a career locums nurse anesthetist.

Speaker:
Hello, Dr. Dahle. I'm a longtime listener, first time caller. Thank you so much for what you do. You have really helped me. I am a nurse anesthetist. I am a career locum. So I've been in practice for 13 years. I've been in locums for 12. I've worked all over the country and I'm planning to retire in five years.

I also write novels. I've been writing novels for about the same length of time, or I've been publishing novels about the same length of time as I've been doing anesthesia. And the books and the anesthesia business both had their own solo 401(k)s. And this has been true for a while with Vanguard. And recently because of you, I set up a cash balance plan, figured out how to do that through Emporium and then that kind of leads inevitably to realizing that you want a mega backdoor Roth. And then you realize that you can't do it with Vanguard.

And so, now I'm trying to set up a 401(k) that I can do a backdoor Roth through. I contacted my solo 401(k) people because of you. Again, thank you. When they heard I had two solo 401(k)s, they're like, no, no, no, that's an audit flag. We recommend that you consolidate them.

And the problem with that is that I'm going to retire at 51 and I was hoping to be able to get to, I’m trying to write books. So, that's what I'll be doing. The books business will never retire. I was hoping to get to my anesthesia 401(k) at 55 and giving up that option is kind of scary. I talked to my CPA, he did not think I was that likely to be audited. What do you think? Should I give it up?

Dr. Jim Dahle:
All right, that's a great question. And apparently a minute and a half was not long enough for you because you also sent us an email noting a few additional pieces of information that you think you're going to have enough money in your brokerage account to get to age 59 and a half without the retirement accounts. And of course, that you could tap your principle from your Roth accounts and that the books are wildcard. Some years they make lots and lots of money. Other years almost nothing. But you are worried about losing this option of tapping at least one of those 401(k)s by age 55.

Well, I think you're getting pretty good advice from the 401(k) provider. I don't think having two solo 401(k)s is generally a good idea. It's not like you get two contributions. You still are limited to $66,000. A little bit more if you're 50 plus. So you're not getting any real benefit there. I think I'd probably just use the same EIN for both businesses and use one solo 401(k).

The IRS could argue that just because you stopped doing anesthesia, but you're still working as a self-employed person that you can't really tap that at 55 anyway. And I don't think having a separate 401(k) automatically makes it so you can. I think I would consolidate the 401(k)s, if nothing else, it'll make your life easier.

And besides, as you mentioned, there are other sources of income. You've got a brokerage account and that's generally what you want to spend first anyway before retirement accounts. And so, you can go through that. Then you can hit your Roth IRA principle.

And remember, there's all these exceptions to getting into your retirement accounts before age 59 and a half anyway. You can get in there and pay health insurance, you can get in there if you get disabled. You can get in there if you die. Well, not you, but your heirs.

There's a few more from secure Act 2.0. Like if you're the victim of domestic abuse, you can get in there and first home for you or your kids. And that means a home when you haven't had one for a couple of years. There's all these options to get into your IRA without having to pay that 10% penalty. And even if you had to pay the 10% penalty on a little bit, it's not the end of the world.

And so, I'd probably keep this simple. I would probably consolidate your solo 401(k)s, especially since you're making things complicated by doing a mega backdoor Roth IRA option in the 401(k), by having a cash balance plan. All that stuff makes the situation even more complicated. So you need to simplify where you can. And I think going from two solo 401(k)s to one is a great way to simplify it.

Just like your accountant told you, he doesn't have any other clients with two solo 401(k)s, there's a reason for that. And I don't think you ought to have two either. I would definitely cut back to one.

 

INTERVIEW WITH STEPHAN SHIPE OF SCHOLAR FINANCIAL ADVISING

On the podcast with me now is Stephan Shipe of Scholar Financial Advising. He's one of our recommended financial advisors, one of our premium recommended financial advisors. There's a short list of those if you go to the recommended page under whitecoatinvestor.com/recommended.

And he's here to be introduced to you as an audience, but also to help us to answer your questions. I think we've got a couple of great questions that we'll be going over together from the audience here that I think his input will be very valuable on.

But before we get into that, can you tell the audience why you decided to become a financial advisor in the first place?

Stephan Shipe:
Yeah, I’m happy to do that. Thank you for having me on today. It started a while ago. I've always been a finance guy kind of through and through even back into middle school, high school, I had interest in the markets and naturally led into a finance degree. And that led into graduate school.

So, I went to get my PhD in finance and had a focus from a dissertation research area on executive compensation and conflicts of interest. And so, I was dealing a lot in that area of that realm. And I had the unfortunate experience of being pitched whole life insurance as a grad student, which made no sense to me, but really started to make me question how much this person had to disclose about how much they were going to get paid on me being pitched this policy.

And that caused me to switch around my research interest a little bit to still focusing on compensation and conflicts of interest, but on investment advisors and really looking at investment advisor disclosures and conflicts of interest that arise because of different fee structures.

I ended up writing a couple papers on it. I worked with the state of Massachusetts on new regulation related to fee structure disclosures, and had the unfortunate experience there of having to explain to 300 investment advisors in Boston how I thought it was a great idea that their clients knew more clearly how they were being charged for investment advice. And that kind of rubbed me the wrong way. That something that seems so obvious to me was taken as a negative. That people should be hidden somewhere from a fee structure.

I wanted to start my own firm and focused a lot on trying to start a firm that minimized conflicts of interest as much as possible. And I knew I didn't want to take AUM. There would be absolutely no commissions. And what we have today is the culmination of that. It's a growing firm. We have five advisors, staff, all past professors or current professors and finance also holding PhDs.

It's very like-minded on the academic side of whether things are being pitched right to you and what really is the truth of what's going on in those investments and acting as true advisors since there's no skin in the game there of how we're managing assets or anything like that. We don't manage them, you still maintain control of your accounts. I don't want your passwords, I don't want to have anything like that, but we show up as advisors instead of wealth managers.

Dr. Jim Dahle:
Yeah, it's a pretty unique approach. And it's interesting when I look at who your ideal client is. You say it's a do-it-yourself investor who doesn't want to pay asset under management fees, but wants advice and he's getting it from professors. Five PhDs are the people giving the advice at the firm. That's pretty unique. So, all this talk is about fee structures. What is your fee structure?

Stephan Shipe:
Yeah, I’m happy to go into that. It was a long way to get there because it's so unique. In the sense that a lot of firms, and I've put the paper on it, 99% of advisors are going to charge an AUM fee and they'll charge you the 1%, maybe they give you a little break, get you down to 70, 80 BPS.

The way we charge, we have two kinds of paths depending on what the client's looking for. The first is where the bulk of our clients work is on an hourly structure. We charge $350 an hour and when a client comes in, one of my worries of an hourly fee structure is I didn't want to be associated with these runaway costs where somebody starts talking to me and then they find out that they get a call and say, “Well, that 401(k) is taking us another 10 hours” or anything like that.

It's so the clients know upfront what the project cost would be. Client calls, we walk through kind of what they're going through, what issues they're running into, what they need advice on, and we build out custom plans for them.

There's no kind of boiler plate plans that we deal with for everybody and general recommendations. A lot of the advice we're giving are answers and questions that are non-googleable when they come in.

Everybody is unique and there's a lot of different unique facets of people's finances. So we build out a proposal and it is exactly as you said, it's for do-it-yourself investors. They're managing their accounts and we're providing the shopping list for each of the accounts of what they need to buy, the recommendations, and they get a flat fee upfront of this is how much time it's going to take us and the fee associated with it. That would be the first and the bulk of the clients there.

What we found is that there was a need for more. We had a lot of clients come back and say, “That's great, we're doing our semi-annual meetings or annual meetings.” But there's a lot of complexity going on here, whether they have their own business. Right now we're dealing with accountants multiple times a year and attorneys multiple times a year. Because it's like really a team effort.

When you're dealing with somebody's finance, especially after a certain level, and we normally see that around the $10 to $15 million in assets level and above is when things start getting a little weird out there. And taxable accounts become a significant part of the portfolio, which has its own tax consequences. Obviously real estate starts to become a bigger factor. Both direct investments or indirect investments.

Many of those clients are entrepreneurs. We're dealing with things like succession planning, legacy goals, issues related to picking 401(k) providers for their employees. Lots of issues that come in. We essentially have a family office set up for those clients where there's no more us sending you a bill for a project and back and forth every single month. We're your family office. We act as your personal CFO and any finance issue whatsoever that shows up is just a forward button to us. And we handle all that on the back end.

So, that's our retainer model. We do have minimums for that one because we frankly don't believe that everyone needs that in many cases. A minimum of $10 million in assets or a million dollars in income. It’s generally where that starts to be a concern. And those are tiered at $3,000, $6,000 and $10,000 a month for ongoing fees.

 

ASSET ALLOCATION QUESTION

Okay. All right, well, let's get into some of the audience's questions. Our first one comes in by email. This doc says “I'm five years out of training. I paid off my primary home and a rental property. I've been maximizing my 403(b), 457 for a year and 529 for a year. No debt due to getting my medical education in India.

I have a few questions. I'm trying to copy your asset allocation, having a hard time due to some options in our 403(b). We don't have small cap value funds in our 403(b) or 457. We do have a Vanguard small cap index fund and a Vanguard Equity Index fund.

I'd like to know your thoughts on small cap value index versus small cap index funds. I'd also appreciate your opinion on mid cap value and large cap value funds. Is it okay to invest in mid cap value instead of small cap value?”

Well, there's a lot of underlying questions there about asset allocation. Where would you start with somebody like this that's got asset allocation questions?

Stephan Shipe:
Yeah. You said a lot to unpack, so maybe we start from the top there that it's a common issue. All asset allocations look really great until you actually have to implement them in a 401(k) or 403(b), and then you find out that not all of the Vanguard funds exist. And some of them are horrible. There's some really bad 401(k)s out there when it comes to investment options.

So, I think it's good. I guess from the onset it's fantastic that they're going through this already that they already have the 403(b), 457 filled up. My next step or probably pre-step would be a backdoor Roth and then taxable accounts are next. And that's really where you have a lot more flexibility on the choices.

Now getting into the small cap versus mid cap discussion. This is something that comes up regularly. It's a distinction without a difference really is what it comes down to. Because if you run correlations on these funds, a small cap value fund is going to be correlated to a small cap index fund, 98%.

If you have the option for a small cap index fund and you're trying to get that exposure, you're going to be just fine doing that. And even mid cap value versus small cap values would be around 97% as well.

The important part is actually having the exposure. I wouldn't worry too much about do you have the exact fund that gets you that exact issue rather than that exact exposure. It does start to open up a bigger question, which is growth versus value, and where those are at because the value funds are highly correlated.

The growth versus value side are not as correlated. They're very different in how they're structured. And one of the things that you’re going to likely see is once they start going into taxable accounts and everything, that asset allocation is important, but asset location is going to start becoming even more important because we have to start thinking about if you don't have great options in the 403(b) or the 401(k)s or anything, maybe we can make up for that with holding those assets outside in the taxable account and Roth accounts and doing so from a tax efficient manner.

That's the issue that I see a lot of people run into is they see this asset allocation, they try to replicate that asset allocation in every single account. And that is a huge mistake because all of these accounts are going to be taxed differently. They grow differently. There's R&D differences, there're legacy differences, there's a lot of issues there.

And when you look at the literature, you're talking 20, 25 basis points a year in value just in making sure the right stuff is in the right account, not only the asset allocation side.

And from the value perspective is one that commonly comes in as everyone wants to buy the S&P 500 or buy the market, which I completely agree with. I'm all for that idea. The issue is it's more efficient though if you split that total market into value and growth, because together they are the market. But the big distinction is when you look at something like growth stocks or value stocks, they're not stagnant. They move every year, they get rebalanced as value or growth.

A good example of this is over the past years Facebook. Facebook was a growth stock, and then it became a value stock because it lost 80% of its value and then it became a growth stock again because it gained afterwards.

These aren't concrete definitions of who is a value stock and who is a growth stock. Now there's some that stay pretty similar, but a lot of people miss the definition that happens is that if you took every stock in the S&P 500, and you ranked them on market to book ratio is what's happening and they cut it and they said these stocks over here have a lot of growth in the past year. Their market to book ratios are really high. So they're growing. They're typically not paying a lot of dividends, which is the key part from a tax efficiency standpoint. There's a lot of growth happening over here.

On the value side, you end up with this weird mix of these boring companies that aren't growing at a high pace. These are your Procter & Gambles, your Bank of America. Procter & Gamble is not reinventing toothpaste and toilet paper anytime soon, right?

So you have these which pay a really high dividend and you also have this combination of stocks or companies that have dropped in value. And that's really where you get the upside potential on the value funds. It's not the Procter & Gambles and JP Morgans and Berkshires. Those give you a consistent return. It's the stocks that have fallen so much that they're no longer considered growth, they're considered value that have added risk and had added potential reward.

When it comes to the tax efficiency side, that's why we really need to start thinking about instead of thinking about the market or total exposure to equities, it's exposure to value and exposure to growth.

Because if we take those value stocks that are throwing off 3% in dividends, the last thing a client in their earnings years need is more income. Being thrown off from their portfolio. It's going to be taxed at the highest rates. Those are the stocks we want to keep in the Roth, or we want to keep in the 403(b) if we had the option of the 401(k)s.

And we can take the growth component of those and keep that in the taxable so they can just continue to rise and you're not having all that income thrown off of those accounts, but you get step up in basis for estate planning. Capital gains is going to be much lower.

So, there's a lot of different options that start to open up for this person whether they're thinking about this whole value growth distinction because it is something that people miss. And they fall too much in the weeds of allocation to small cap and mid cap and large cap, which is absolutely important but once that's set, it's a tax game. And it's trying to allocate this stuff in the right location.

Dr. Jim Dahle:
Yeah. And it varies for everybody that allocation because their ratios of the various accounts are different. Some people are mostly taxable, some people have a tiny little taxable account. But here's the deal. Choose your asset allocation and don't choose an asset allocation just because it's my asset allocation. Choose one that you can stick with in the long term.

But there's lots of reasonable asset allocations out there and then try to implement it as best you can looking at all of your accounts, implementing it across all of your accounts. Take what's good in your 403(b) and use that.

But the more complex your asset allocation, the harder it's going to be to implement that in your 403(b) or 457(b). If you got two or three funds in your asset allocation, two or three asset classes, that's probably not very hard to implement. There's probably an international fund, there's probably a bond fund, there's probably a US stock fund there and you can implement it just fine.

If you have 10 asset classes, almost surely you can't put them all in your 403(b) because it just won't be available. It's got to be in your Roth IRA, it's got to be in a taxable account, it's got to be somewhere else.

And sometimes you just kind of get stuck. You're like, “Well, I can't. I can’t have exactly what I want.” And you get as close as you can and deal with it and recognize that investment options change as the years go by and the ratios of the amounts in these various accounts change as the years go by.

So, do the best you can and implement your plan as much as you can and then follow it. I think that's kind of the key when it comes to portfolio construction.

Stephan Shipe:
Absolutely.

 

WHEN DO YOU REALLY NEED A FINANCIAL ADVISOR QUESTION

Dr. Jim Dahle:
All right. The next one, this Speak Pipe, this question is teed up for a financial advisor on the show for sure. But let's listen to this and then we're going to talk about who needs a financial advisor, what are maybe some thoughts or some uses for a financial advisor that maybe one hasn't had. Let's take a listen.

Matthew:
Hi, Dr. Dahle. This is Matthew, an internist from California. You often talk about either literally or figuratively, someone firing their financial advisor. However, commonly in a marriage, only one of the two individuals is significantly interested in managing their investment portfolio and finances personally, and has taken the extraordinary step of becoming financially savvy enough to manage their own high net worth portfolio.

My concern with foregoing the services of a fee-only financial advisor is that if I was to die early or unexpectedly, my wife would not be interested or currently competent to take on the responsibility of managing a seven or eight figure net worth portfolio.

She has no interest now or in the future of spending months to years developing that investment management competency while she could upon my death go find a fee only financial advisor. It seems like this would not be top of her list of things to have to deal with, and there could be significant costs involved in potentially moving the investment portfolio.

Wouldn't you agree that since having one spouse more interested in investment management than the other, is probably more the rule than the exception, should then most couples be using a fee-only financial advisor from the beginning as somewhat of an insurance policy, so to speak, to make things easier on the surviving non-financially savvy spouse?

Dr. Jim Dahle:
All right. Well, I think the first thing to say about this is kind of reiterate my position on advisors. My estimate is that about 80% of docs need and want, quite frankly, a good financial advisor that gives them good advice at a fair price. I throw that number out to Dr. Bill Bernstein and he tells me that's way too low. He thinks the number is 99% of docs ought to be used in a financial advisor.

But this brings up when should someone get a financial advisor? Who needs one? Does everyone need one? What should you do if you like being a do-it-yourselfer but your spouse really has no interest in it? What are your thoughts on who actually needs an advisor?

Stephan Shipe:
Yeah, this is an interesting question because when I first started my firm, I was not expecting this question. This wasn't the thing that you're expecting as starting a financial advisory firm. You're ready for the 401(k) questions and the asset allocation. And I've got to say this is probably one of the most common questions I get, if not the most common question that I get from potential clients.

I think the distinction really comes down to, do you need a wealth manager or do you need an advisor? And unfortunately those fall under the same definitions a lot. And I would obviously be under the opinion that most people don't need a wealth manager, but they need the advice.

Because especially in today's age, the ability to place trades and access accounts, it's not like you have to call a broker and have trades placed over the phone and days to clear and you could easily hop online and place account trades in Fidelity or Vanguard or any of these things very easily.

I'd say most people do need some sort of advice. The question is the level of advice that they need. And that's usually where people I think split on whether or not they need it because they go into a traditional advisory firm and they say, “I need advice.” And they say, “Well, that's great. We're just going to take 1% of your eight figure portfolio for that advice.”

And that's not really what they're looking for. They're looking for exactly what this caller mentioned, is that they know and which is very common. I agree that it is the rule opposed to the exception that generally in a relationship there's one person what I would consider the family CFO. And they're watching the investments, they understand the pitfalls of hiring an advisor. If they had to pick an advisor, they would pick a good one, they would know what background research they'd have to do.

But in the back of the mind, the problem is exactly this. If something happens to them, and they die, who does the spouse call? And the worst part is it's very easy to call bad advisors, and that's also the issue. That is almost like a fear problem as well. If something happens and you've accumulated this wealth and you have a great financial plan, it doesn't take long for someone to really screw that up with the wrong advice going forward.

A lot of the times we'll have clients come in for exactly this reason. Say, listen, I think we're doing okay. We just like that to build that relationship and we spend a lot of time from a relationship perspective with our clients. We're not really into somebody coming in, build you a plan, throw it at you as you're walking out the door and we'll see you in 10 years, 20 years, if ever.

We want to build that rapport and that relationship because things come up. It's like finding a doctor. In the sense of the time to find a doctor is not when you need one, you should have a relationship built. You should have that understanding and they should understand what your needs are.

Because finance and health go hand in hand, they're very personal. And the last thing that those people want is your spouse having to go in the midst of a horrible event in their life, now they have to go interview financial advisors on something that they have absolutely no interest in doing. And that is not a good scenario to be in.

I would agree, I think the number is high for the need for a financial advisor, for someone to provide that advice. And more importantly, to build the relationship. That's there and when events come up, you have someone to call and someone to bounce ideas off of.

That's a big thing with us is we don't dictate what needs to be done. We're here to provide what we think you should do, and then provide floors and ceilings around it of saying “This is what we think you should save or this is what we think you should do, but if you didn't do that and you decided to do this, this is what the impact's going to be.”

Lay out all the risks and potential kind of returns there. And then this is the floor. You can't go below this number. That's not going to end up being good. And ultimately then the client is in control of where that falls.

But this is a big one and it's a tough one to have. I would say no matter who somebody works with in the meetings with an advisor, both of you should be in attendance. You should both be in there. They don't have to be the one uploading documents and dealing with the accounts and all of that kind of stuff.

But I think there's a big benefit of at least the other spouse who is not the CFO to spend that hour or two of a year of at least knowing who the advisor is, knowing that they have met them before they have to call them. And at least they have the idea of general strategy. What's going on? Where are assets held? What does it look like?

Because I see that a lot too. If somebody will come in and say, “I didn't even know we had that account.” And they're looking at their spouse saying, “Did you know?” And it's like, “Well, yeah.” One of you know but the other has no idea you had a safety deposit box or that you have this account over here, what the strategy is and who this account is saved for.

Even just the awareness of having somebody else involved. That way all that can be brought together is a big benefit. But yeah, this is a credit to him to thinking about this because it is something that generally doesn't show up for a while before people start wondering, “Well, what would happen if something were to happen to me?”

Dr. Jim Dahle:
Yeah. I think the bare minimum, the bare minimum even for a hardcore do-it-yourselfer, if your spouse is not really that interested, the bare minimum is to select the financial advisor they should go to should the worst happen to you.

Stephan Shipe:
Absolutely.

Dr. Jim Dahle:
I think that's the bare minimum. And put a letter together to your spouse and that financial advisor that includes these are the assets we have, here's what we've been doing and here's where you can find everything. I think that's the bare minimum.

Stephan Shipe:
I completely agree.

Dr. Jim Dahle:
Ideally both spouses would be participating, be at least a little bit more interested than maybe as being described in this case. But that isn't always the case. A lot of times it is very much one spouse that's been doing this and it's often the man and men often marry a younger woman and don't have as long of a life expectancy anyway.

And so, for almost every couple there's going to come a time when the less experienced person is responsible for the finances. And I think it's great to have a backup plan in some way, shape or form that might involve someone you've been doing checkups with every year or two. It might involve just a name to call. It might involve having a formal financial advisor, but I think you're right. Every couple, every family is going to have to choose what level of advice they need and are willing to pay for.

Stephan Shipe:
Absolutely.

Dr. Jim Dahle:
All right. We've been talking with Stephan Shipe with Scholar Financial Advising. You can get more information about that firm at scholarfinancialadvising.com. Thanks so much for being on the WCI podcast and for sponsoring us.

Stephan Shipe:
Yeah, thanks for having me.

 

SPONSOR

Dr. Jim Dahle:
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Don't forget as well. Early bird registration for WCICON only goes through October 12th. After that, it costs you more. Sign up by October 12th, wcievents.com.

Thanks for those of you leaving us a five star review and telling your friends about the podcast. A recent review came in from Tom from St. Louis, who also says “Go Cards.” Big Cardinals fan, I guess. He says, “Jim helped me drop my financial advisor. Great show for anyone wanting to take control of their finances. I’m a stay at home dad. My wife is a surgeon. I’ve learned so much from this show. We dropped our adviser, and now have low cost broad based diversified index funds. My adviser never told us about tax loss harvesting, or the back door Roth IRA. I’ve learned how to employ these strategies and much more by listening to Jim’s podcasts. Thanks Jim!” Five stars.

Thanks for that kind review, and I hope the Cardinals finish the year strong.

All right. Well, the time has come to end the podcast once more. I hope you keep your head up, your shoulders back. You really do have this. You can do this. It's not that hard. And if you need help, the entire WCI community is here to help you. We'll see you next time on the podcast.

 

DISCLAIMER
The hosts of the White Coat Investor 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.

 

Milestones to Millionaire Transcript

Transcription – MtoM – 138
INTRODUCTION
This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 138 – Family Doc changes his 401(k).

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To learn more about Build-to-Rent, visit www.southernimpressionhomes.com or call (904) 831-8017.

All right, welcome back to the podcast. This is Milestones to Millionaire where we celebrate your successes and use them to inspire others to do the same. You can come on this podcast. I don't care what your milestone is, we'll celebrate it with you. You can apply at whitecoatinvestor.com/milestones. We've got a great guest today and new milestone we've never had before. And afterward we're going to talk a little bit about tax brackets. So stick around.

 

GUEST INTERVIEW

Our guest on the Milestone to Millionaire podcast today is Dr. Brian Reichenbach. Welcome to the podcast.

Dr. Brian Reichenbach:
Thank you.

Dr. Jim Dahle:
Let's start with telling us what you do for a living and how far you're out of training.

Dr. Brian Reichenbach:
I'm a family doc, still doing some obstetrics in Northern Indiana and I finished medical school in 2004 and residency in 2007.

Dr. Jim Dahle:
Okay, very cool. And we've got a unique milestone we're going to celebrate today. I don't think we've done this one on the podcast. We're what? 138 episodes into this podcast and never done this one. Tell us what you managed to do.

Dr. Brian Reichenbach:
Well, what I managed to do was I watched my 401(k) new policy changes every year and for a number of years now, we kind of get surveys or our CEO will ask, “Well, is there anything we could do?” And I've been responding for years “Hey, it'd be nice if we had an after-tax option in the 401(k) to utilize a mega backdoor Roth.” I'd made the request to him and our survey people for a number of years.

I'm not on the 401(k) committee and I'm not sure if that played a role or not, but sure enough, this year in January when they gave new 401(k) rules, I noticed, “Oh, there's an after tax option.” I took advantage of that and am able to max it out. It allows a 10% contribution and with the $22,500 limit this year and then they max out at a $3,500 match. That gets me up to $40,000 that I can put in.

Dr. Jim Dahle:
Awesome.

Dr. Brian Reichenbach:
So, I’m being able to max that out, $400,000 income on 10%.

Dr. Jim Dahle:
Pretty cool. Pretty cool. All right, well, this is not insignificant. This is something lots of people have come to me over the years complaining about their 401(k) and I give them some tips on how to maybe get some changes in it. And most of the time I suspect they're not successful, but you have managed to actually get your 401(k) changed, number one, number two, max it out. So, congratulations to you on that. That in and of itself is no small feat. It was just surveys. They just send you annual surveys and you just said, “Hey, after tax options.” That's it?

Dr. Brian Reichenbach:
Well, again, I'm not on the committee. I responded to these surveys and then when I'd have a meeting at least annually with our local administration folks, I said, “Well, gosh, that'd be a nice option. If you have anything you can do.” I was a little bit of a squeaky wheel. I'm not sure if it made any difference or not, but sure enough, it's there whether I contributed or not. I did recognize it.

Dr. Jim Dahle:
The bigger change I see some people trying to make is sometimes they're just in a terrible 401(k). It's not that they don't have a Roth option or they don't have a mega backdoor Roth option. They just have terrible funds, terrible fees, et cetera, and they go in and try to get it changed. And what they discover is that the plan is put in place by the best friend of the practice owner or one of the senior partners. And their job starts becoming maybe not as stable as they thought it was because they're becoming the squeaky weak wheel and messing up that relationship. It doesn't sound like you had any of those problems.

Dr. Brian Reichenbach:
No, we've had index funds available for a number of years and it's had S&P 500 fund and a mid cap fund and a small cap fund and international fund that kind of looked to be index funds. So, since I started with the organization, the options have been reasonable. It's with the principal, which is kind of a bigger group.

Dr. Jim Dahle:
Very cool. I got put on my 401(k) committee. They actually invited me onto the 401(k) committee. It was just a few months ago. And one of the things I brought up in our last meeting was, hey can we get an after tax contribution option? Because right now I'm not making enough to max out our 401(k) just based on employer. And when I say employer, I'm talking about me self-matching options up to the $66,000. The only way I can get there is by doing after tax contributions these days. And so, I finally got them to actually, “Hey, we can do this.” You might be the only one using it in this 400 doc mega group we are now.

But hey, things can change. It's worthwhile if you can get onto 401(k) committees. They are not intensive committees. It's way easier than being on MEC or some quality committee in the hospital. These things tend to meet a couple of times a year for an hour and that tends to be it. But you'd be surprised. You can make a big difference. If it's a big organization and even small changes, when they're multiplied by many people can make a big change.

All right, let's talk a little bit about how you're able to make as much money as you are as a family doc. Because when I look at the averages, when I look at these salary surveys, you are making significantly more than the average family physician in the country. Tell us what you've done to boost your income during your career.

Dr. Brian Reichenbach:
Yeah, mostly being busy. I think somebody on your show some time ago said there's kind of three keys that I kind of liked. To be affable, able and available. I had not heard that before, but I think I've been those three things over the number of years since I've started. Part of it's just being available and willing to listen to folks and try to work people in if they want to be seen. And mostly boost by volume is how I've done it.

Dr. Jim Dahle:
How many patients do you see in a typical day?

Dr. Brian Reichenbach:
Anywhere between typically 30 and 40 on a day.

Dr. Jim Dahle:
What's your payer mix look like? You're in private practice, I assume.

Dr. Brian Reichenbach:
You know what? I am employee of an organization. I've got an RVU based contract, although when I started I was in private practice and then we sold to our local hospital entity. I've been an employee for the last 14 years of my career or so.

Dr. Jim Dahle:
You may not know what your payer mix looks like then?

Dr. Brian Reichenbach:
I actually do a little bit, but not as much as I used to. So, it's about 50 to 60% private insurance I think, which is pretty high, I believe. And then maybe 5% cash pay and probably about 20% each Medicare and Medicaid.

Dr. Jim Dahle:
Okay. So not that atypical from lots of places. Obviously, my emergency department's got a higher cash percentage than that, but I don't think that's all that unusual. Well, you mentioned you do OB. Do you do anything else unusual, procedures or something that you think that boost your income compared to the average?

Dr. Brian Reichenbach:
No, not enough to make a difference. OB would be the most unusual thing. I did do inpatient medicine for a number of years. My first 11 years out of training I did inpatient medicine and staffed a nursery and did some deliveries. And it's not high volume obstetrics, it's probably between 30 and 40 a year on average with a range of 24. In my busiest year I think it was maybe 57 or 58.

Dr. Jim Dahle:
How much of your ability to negotiate do you think had something to do with your income?
Dr. Brian Reichenbach:
It is a big organization. They kind of have a standard contract. I don't know that I had all that much negotiating power against their standard contract.

And you're living in a state that most people consider a pretty good state to practice in, Indiana. What do you think your decision to live there and move to there to practice there, how much impact do you think that had on your income?

Dr. Brian Reichenbach:
I think Indiana is a great place to practice medicine. We've got some favorable malpractice climate in our state and I think that allows me to do some procedures in the office and still do some deliveries and was able to do some inpatient medicine for a number of years. I think that's played a big role. Plus I'm kind of in a smaller community. In a smaller community a lot of docs, at least coming out, they want to be in the bigger towns, so there's lots of available patients. And it so happened when I came in, there were a couple of docs retiring and a pediatrician left town. It was pretty easy to grow a practice.

Dr. Jim Dahle:
So you were busy right from the beginning?

Dr. Brian Reichenbach:
Pretty busy from the beginning.

Dr. Jim Dahle:
How about your family situation? Married, kids? Does your spouse work?

Dr. Brian Reichenbach:
Married. She's not currently working. She's a teacher by training, and worked while I was in medical school. And she is a very community involved volunteer. She's the president of our school board and serves on our university board of trustees and runs another couple other committees in town. Currently it's mostly volunteer work. She gets a little stipend here and there, but not a lot. And then I have two kids, one who's a sophomore in college and a senior in high school this year.

Dr. Jim Dahle:
What kind of impact do you think having a stay at home spouse has had on your ability to earn?

Dr. Brian Reichenbach:
It's actually had quite a big impact, I think. If I've got a delivery in the middle of the night, I know the kids are taken care of. I don't have to arrange childcare. And she was home almost completely the first several years before they were in kindergarten and school, she was kind of home full-time. So, it allowed for me to focus on the practice and getting patients bill and worked in and still let me do my deliveries and inpatient medicine when needed.

Dr. Jim Dahle:
Very cool. What advice do you have for a doc who would like to increase their income 50% or even double their income? What advice would you give to them?

Dr. Brian Reichenbach:
Well, I think what I said earlier and you said before. Be available, affable and able. I think just being competent and friendly helps. Another big thing for me, and I don't know if anybody's said it on the show or not, but I think the value of a good nurse is underrated. I've got two fantastic clinic nurses and if one of them is gone, the clinic is not nearly as efficient. I can't work people in because they don't know how I want to do things.

I think the value of a great nurse, especially in a clinic setting, is overlooked. I've got two nurses who've been with me for a number of years. They know how I like things, I know how they work. There's something to be said for continuity and a competent staff around you. I would say be kind to your staff. I recognize the superstars and treat them particularly well.

Dr. Jim Dahle:
Any advice for employees that would like to have a better 401(k) than the one they're currently offered?

Dr. Brian Reichenbach:
You know what? I don't have any grand advice on that. Again, I was a little bit of a squeaky wheel and since I'm not on the committee, I don't know that it made the change but I did recognize that there was a change. Our 401(k) sends out new rules every year, what the new guidelines are, so pay attention. You might notice, “Oh, there's a new Roth option or after tax option or something like that.” I would say just watch.

Dr. Jim Dahle:
Yeah, pay attention, read your plan document. Good advice. All right. Well, Dr. Reichenbach, congratulations on your new 401(k) changes. Congratulations on your income. Thank you for being so willing to come onto the podcast and share your story with us and inspire others to do the same.

Dr. Brian Reichenbach:
Great. Thanks so much.

Dr. Jim Dahle:
All right. I hope you enjoyed that interview. It’s always fun to get something new to talk about on here, although I'll celebrate people paying off their student loans or paying off their mortgage or becoming millionaires till the cows come home. It's always inspiring to me and I think to most of you out there, but it's good to mix it up every now and then and get something unique.

Man, do not be afraid to be a little bit of a squeaky wheel at your 401(k). You just have to be a little bit careful in a small partnership and actually know what's going on behind the scenes, why you have that 401(k) in place. It might be that your boss's best friend has really suckered him and you could cause some real problems by pointing that out sometimes.

So be careful, be a little bit politically savvy as you bring up your employer's fiduciary duty to you with regards to your 401(k). But this is a big piece of your retirement savings. Fees make a big difference. Quality of the investments makes a big difference. The options for contributions like Roth and after tax contributions and in plan conversions, those sorts of things can make a big difference. So, lobby for those changes, try to get the best possible 401(k) you can in place.

 

FINANCE 101: TAX BRACKETS

All right, I promised you we're going to talk about tax brackets, so let's do that. There's a huge misunderstanding out there about how tax brackets work. People fear being knocked into or jumping up into the next tax bracket. And that's completely inappropriate. You should not worry about that. And I'll tell you why. It's because you only pay that higher tax rate on the money in that bracket.

So, if you think about this, if you're married taking the standard deduction, you've got a tax bracket, for lack of a better term, of something like $25,000, $26,000, $27,000, whatever the standard deduction is this year. That's essentially the 0% tax bracket. That first $26,000 you earn is not taxed. Yes, it's taxed for social security taxes and Medicare taxes, but you don't pay income taxes on it. You probably aren't paying state income taxes on it either. So, it's essentially the 0% bracket. If you're giving more to charity or you have a bunch of tax and mortgage interest write-offs that you have even more than that, that 0% bracket might be even bigger than that.

Well, after the 0% bracket comes the 10% bracket. And if you are single, that bracket's not very big. It's only $11,000. If you're married, it's twice that. But basically for married people, it's another $22,000 you can earn on top of your standard deduction that only gets taxed at 10%. So, now you've made something close to $50,000 and only paid like $2,000 in tax. That's awfully good. That's a very low tax rate. What's that work out to be? That works out to be like 4% as an effective rate. Yes, your marginal tax rate was 10%, but your effective tax rate was only like 4%.

The next bracket is a much larger bracket. For single people, it goes from $11,000 to $44,000. For married people, it goes from $22,000 to $89,000. That's the 12% bracket. That's hardly different from 10%. So, another huge bracket. People can be earning six figures a year and have a marginal tax rate of only 12%.

Pretty awesome. Very favorable. We have a progressive tax system as far as the income tax system goes. When you look at social security, that part is actually regressive. And of course, the Medicare tax is mostly a flat tax, but the income tax system itself is very progressive. So, you can earn quite a bit of money and still pay very, very little in taxes.

And that's why it's so surprising when people go from being a resident to being an attending. Residents think that they're paying taxes. They actually aren't paying very much in taxes at all. And so, it's a huge surprise when they become attendings and all of a sudden they're now paying more than they were earning as a resident in taxes.

Well, after the 12% bracket comes, the 22% bracket. That's again a pretty decent sized bracket. It's about $100,000 for married filing jointly folks.

And then the 24% bracket. Again, another huge bracket. It's about $160,000 bracket that you're still in the 24% bracket. So, the bottom line is you can be earning as a married couple filing jointly close to $400,000 a year, and not have any of it taxed at more than 24%.

Then there's a pretty big jump after that. You go to the 32% bracket, the 35% bracket, and then the 37% or the top bracket right now starts at $578,000 for singles and $694,000 for married filing jointly. And so, above that, you're paying maximum tax rates.

That's the way the tax brackets work. It's important to understand how they work so you can make smart decisions as you go along. For example, you don't want to turn down a raise because it's going to knock you into the next bracket. That would be a huge mistake just because you don't understand how brackets work.

Now, there's other things that go into your marginal tax rate. There's some phase outs on some of the deductions and things like that. There are a few cliffs in the tax code such as those associated with IRMAA for those of you getting ready to be paying for Medicare. But for the most part, most phase outs are gradual. And of course, the tax brackets are relatively gradual as well. But that's how they work and it's important to understand that.

Another thing you ought to understand about taxes is there is a difference between taxes that are withheld and taxes that are actually paid. People, for example, make a comment to me all the time. Bonuses are taxed higher than regular pay. Well, that's not true. Bonuses are taxed exactly like regular pay, but the withholding is often different.

And the only rules about withholding are that you have to stay in the safe harbor. You have to have enough withheld or paid in quarterly estimated taxes, which is what those who are self-employed typically do is send in a check each quarter. It's not actually every quarter. You send them in April and June just two months later and then in September, and then four months later in January. But it's quarterly estimated taxes.

You have to get into the safe harbor, which basically means you got to either pay within $1,000 of what your tax bill is this year, or you got to pay 10% more than what your tax bill was last year to get in that safe harbor. Otherwise you may end up paying some penalties and interest when it comes time to settle up with the IRS.

Because that's what tax time is. You're just settling up. If you had more withheld or paid more in estimated quarterly taxes than you owe, they send you a check. If you didn't have enough withheld and didn't pay enough in quarterly estimated taxes, you send them a check in April. But these are two different things. Don't misunderstand the difference between what is withheld and what you actually owe because they're often very different things.

Also it's surprising a lot of people don't really look at their paychecks, their pay stubs very carefully and think everything coming out of their paycheck is taxed. That is not the case.

There's lots of other things that come out of your paycheck. It might be court ordered child support. That's not taxed. It might be your life or health insurance premiums if you're buying it through the employer. It might be 401(k) contributions, et cetera. That's not all taxed.

You can't say, “Whoa, Uncle Sam is taking 40% of my paycheck.” Well, no, you're using it to buy health insurance. You're using it to buy retirement savings, that sort of stuff. So, make sure you understand what's actually coming out of your paychecks before you complain too much about your tax burden.

A typical effective tax rate for most White Coat Investors is probably between about 18% and 30%. That's what you're probably paying if you're an attending physician. That's how much of your income is actually going toward taxes. That includes payroll taxes, Medicare and social security. That includes state income taxes, that includes federal income taxes.

This idea that you're paying 50% of your money in tax is probably not correct. I make a pretty good income and I'm not paying 50% of my money in tax. It works out to be about 33% in my case.

I've definitely run into docs that are paying a little bit more than me. Most of them live in places like New York and California. But for the most part, most docs are paying less than I am in tax because their income is lower.

 

SPONSOR

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It's a wonderful experience. You'll learn about finance. You will learn techniques to reduce burnout and improve your own wellness, and you'll have a great time. Best of all, it qualifies for CME. So you can use any dedicated CME funds you may have, you can write it off as a business expense if you're self-employed. It's a great time. You can sign up at wcievents.com.

All right, that's the end of our podcast today. I hope you're enjoying it. It's driven by you and what you want to hear on the podcast. Send us feedback if you don't like something. Send us feedback if you do like something and we'll try to do more of that sort of thing.

Keep your head up and shoulders back. You've got this. We're here to help. We'll see you next time on the Milestones to Millionaire podcast.

 

DISCLAIMER

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