Solo 401(k), TSP, Employer Match, and Converting from Pre-Tax to Roth Questions

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 372.

Today's episode is brought to you by SoFi, helping medical professionals like us bank, borrow and invest to achieve financial wellness. SoFi offers up to 4.6% APY on their savings accounts, as well as an investment platform, financial planning and student loan refinancing, featuring an exclusive rate discount for med professionals and $100 a month payments for residents. Check out all that SoFi offers at whitecoatinvestor.com/sofi.

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Welcome back to the podcast. As you hear this, I am rafting. I'm in Idaho, in the boondocks, trying to negotiate my way down the Middle Fork of the Salmon with my family and friends. So, I hope all is going well as you listen to this. I'm sure it will be and will have been a fun adventure.

But whatever you're up to this week, I assume you're not in the boondocks if you're listening to this. I hope it's going well for you. Thanks for dedicating your life to your profession and your family. And if you're feeling underappreciated today, know there's somebody out there that greatly appreciates what you're doing.

I've had to see doctors lately. I hate seeing doctors. As much as I like you guys, I don't want to go see you. I'd rather not spend my time doing it. I have a nasty case of tennis elbow though. So, I got it injected. Not sure that's helping much, but I'm doing lots of PT. And hopefully by the time you hear this, it will be feeling a lot better and it won't be bothering me as I row on the Middle Fork of the Salmon.

Hey, one of my friends, Mitra Sadhu, saw a need out there. And this lady is awesome. She is just a fantastic doc and has done guest posts at White Coat Investor. She spoke at the conference before. And I love this. She told me in an email recently, she said, “I'm just not willing to give up on private practice despite these trying times and doing my little bit to make it a tad easier. I believe lean private practice is one viable way out of physician burnout, letting us practice the way we see fit.”

And I totally agree with her on that. But this cool thing she started is a business. It's called linkmedicalspaces.com. And I think it's awesome what she's done here, but this is what it does. This is a business that lets you rent out some of your medical office. So, let's say you got two office locations. You're at one Monday, Wednesday, Friday. You're at one Tuesday and Thursday. Well, those other days that space is sitting unused. What if you could rent it to a different doctor? Maybe it's a nephrology clinic, but you could rent it to an internal medicine doc that's working part-time. And they can have clinic Tuesdays and Thursdays or whatever.

It's a pretty slick idea. The service basically connects buyer and sellers. If you want to rent out some of your space, somebody else wants to rent your space, this website puts you together and obviously they get paid. It's a business. But it's a valuable service. So, check that out, linkmedicalspaces.com. Thank you, Mitra, for starting that business.

All right. A little bit of promotion. I got to tell you about something that is really awesome. It's what we do here at the White Coat Investor. We try to help you to become more financially literate, more financially disciplined. And part of the way we do that is by putting together some paid products. We have some stuff that we sell.

Yeah, we got some swag, we got some t-shirts and some mugs and stickers and those sorts of things, but we sell books. I've written four books. The White Coat Investor: A Doctor's Guide to Personal Finance and Investing. The White Coat Investor's Financial Bootcamp. The White Coat Investor's Guide for Students. The White Coat Investor's Guide to Asset Protection.

And we've put together courses. We've got this sweet real estate course, whether you want to invest directly, whether you want to invest in syndications and funds, this covers it all, the whole spectrum. We call it the No Hype Real Estate Investing Course.

We've also put together our flagship offering, which we call Fire Your Financial Advisor. Our financial advisor advertisers don't like that name, but the truth is the first module of this course teaches you how to work with financial advisors. So, they know very well that there's plenty of docs that are still going to want a financial advisor despite the name of this course.

But what the course helps you do is write a financial plan. And starting this year, we have four versions of this course. We have a student version that's very inexpensive and perfect for students. We have a resident version, we have an attending version, and we have a CME version that you can use your CME dollars to buy. And you can upgrade from one to the next without having to pay the full price of it. You get credit for what you've already bought. So it's a pretty cool lineup now.

We also have a Continuing Financial Education courses. We put this together using the material from the conference we do each year. And it's usually like 50 hours of stuff in the course. And it usually qualifies for something like, I don't know, 15 hours or so of CME. So you can use your CME money to buy that.

At any rate, all that stuff we sell is going to be on sale. Now I'm not supposed to tell you this. Because it actually doesn't go on sale for three days. Don't buy anything for the next three days. So you can get the 20% off discount. The code is SUMMER20 but it doesn't start working until June 24th. The sale is June 24th through July 3rd.

You can go to whitecoatinvestor.com/courses to buy the courses. You can go to whitecoatinvestor.com/store to buy the books and swag. That's all 20% off in celebration of the start of the medical year. Not my birthday. Yes, my birthday is a few days before the medical year, but it is not in celebration of my birthday.

This is in celebration of the start of the medical year. Students become interns, interns become residents, residents become attendings. It's a date that ought to be celebrated. So, happy July 1st. May you not have to go to the hospital on this day, but if you're looking for a discount and you've been waiting for one, now's your chance. SUMMER20 is the code.

Okay. We have to do some follow-up. I think this is a really cool thing. You guys remember episode 368 with Dr. Ian Storch. The DO guy. And I asked him, “Why are all the new medical schools being opened DO schools?” And he went and did some research. And this is what he said. He said, “Here's what I found out about why there've been more DO schools opening than MD schools in the past 10 years. I actually have an interview coming up to discuss it with an expert”, he says, on his podcast, if you want to check that out.

He says, “One of the biggest hurdles for starting a new LCME/MD school is the requirement that the maximum amount of revenue that can come from tuition is 50%. DO schools do not have this requirement.” MD schools, they have to get no more than 50% of the revenue from tuition. And so if you're opening a for-profit medical school, that's not going to have a huge hospital associated with it, that's kind of a non-starter. That's why they're opening DO schools instead of MD schools.

He goes on to say, “The second important distinction between osteopathic and allopathic requirements was that although both required an institutional accreditor, i.e. a pre-existing university with other offerings, historically, COCA itself could serve as an institutional accreditor. Those who wanted to start a standalone medical school could.”

COCA is the Commission on Osteopathic College Accreditation. They could be the institutional accreditor so you didn't need a separate university to be associated with if you wanted to be a standalone medical school.

He goes on to say, “This is going to change as of March 1st, 2024, as COCA will no longer serve as an institutional accreditor for those applicants that applied after the March 1st, 2024 date. Those that are in the pipeline now are safe, but it seems likely we'll see a decline in new osteopathic medical schools opening going forward.

COCA has also added other requirements. One example is that in order to ensure that there is an expansion of postgraduate medical education to support new students, COCA has instituted requirements such as the need for new schools to create GME spots for residencies that are at least 30% of its class size.” Thank goodness. Thank you, COCA, for doing that. “This is not required by the LCME for MD schools, as I understand it, but it was an important need, which the DO community felt should be required.”

But overall, I think this is going to make it more likely for new MD schools to be opened and less likely for DO schools. But mostly, I think this is going to mean fewer medical schools get opened altogether, for better or for worse. Maybe that'll give the residency slots a chance to catch up to all the medical school slots that have been opened in the last few years. I'd sure like to see the match rate go up a little bit.

I worry about all these doctors who have been graduating from medical school but not matching, and having that number go up over the last decade has been pretty concerning to me. That's a tough spot to be in, and I want to see as few docs as possible in that spot.

I wish the states would do more of these, what do they call them, APs, Associate Physicians, more spots for these docs that don't match. Whether they're trying to match next year, in two years, or whether this is becoming their career now, I'd like to see some sort of career option for those docs be more widely available. It is available in some states as an associate physician, but not in most states.

Okay, this podcast is all about you. It's driven by what you want, what you need, so let's get to some of your questions. Our first one comes from Kate.

CHANGES IN VANGUARD SOLO 401(K)

Kate:
Hi, Dr. Dahle, this is Kate in the Northwest. Thanks for all that you have done over the last five years to support my family's financial security. Reaching out about the changes in solo 401(k) administration from Vanguard, which is switching over to Ascensus. I’m hoping that you might be able to update your June 2023 article on solo 401(k)s and give us some guidance on account choices. I'm particularly interested in accounts that are going to be easy to use for a solo entrepreneur and offer a Roth option. Thank you so much.

Dr. Jim Dahle:
Okay, yeah, the landscape changed a little bit. Vanguard actually improved their solo 401(k) offering not long ago to the point where I think a lot of people were going there to open their solo 401(k)s. The big problem with the Vanguard solo 401(k) was that they weren't allowing rollovers into the plan. People that needed a rollover so they could do backdoor Roth IRAs, need to roll over a SEP IRA or a SIMPLE IRA or traditional IRA, couldn't go to Vanguard. Well, when Vanguard fixed that, I didn't have a lot to complain about with Vanguard solo 401(k) offering, but business being what business is, they decided to get out of that business recently.

I wrote a blog post, it ran May 8th, 2024, about a company called Ascensus that has essentially bought the Vanguard small business division. If you didn't do anything with your Vanguard solo 401(k), it became an Ascensus 401(k), which has a few downsides, a few more fees and different people offering the service.

When changes like this happen, there's usually not a big rush that you need to do anything. You've got usually at least months to think about any changes you want to make. And those who have stuck with Ascensus, I haven't heard a lot of complaints. I've heard a few complaints about some of the changes, mostly people who's complained that now they have a few more fees to pay each year.

But the other offerings at other companies aren't like no-brainers. They have problems. If you go to Fidelity, there's some issues. If you go to E-Trade, there's some issues. If you go to Schwab, there's some issues.

Another option that might be better for people is to just get what I call a customized solo 401(k). Now, these aren't free like the one at Vanguard was, like the one at Schwab is, like the one at Fidelity or E-Trade. They basically charge no fees at these companies. If you get a customized one, there are fees. It's usually something like $500 to set it up initially and maybe $150 a year. So they're low. They're not all that different from what you'd pay to Ascensus.

But you get dramatically better service, in my opinion, and you can get a better product. You can get all the bells and whistles available on a 401(k). You can get Roth contributions, you can get loans, 401(k) loans, if you need those. You can make mega backdoor Roth IRA contributions if those are right for you. They're right for Katie and I. We do that in our 401(k).

You can get just all the bells and whistles. You can get great investments. You can get a brokerage window. You can get self-directed investments if you want to invest in some private real estate fund or something. You can do all that for basically $500-ish to set up and maybe $100 or $150 or $200 a year in fees.

I think that's probably worth it. I really do. I'm as cheap as anybody out there. Don't get me wrong. I don’t like spending money I don't have to spend. But I don't know that it's worth dealing with a cookie cutter plan at Schwab or Fidelity or E-Trade when you can get this for just a little bit of money.

If you're interested in the people that can offer those plans to you, some of them advertise with us, some of them don't. We just didn't make much money on this product line. And so, I've got a few companies listed there that we don't actually get reimbursed from.

But if you go to the recommended page at whitecoatinvestor.com/recommended, or you go to the main site and you go on the recommended tab and you scroll down to Retirement Accounts, you will see that we have a list of small business 401(k) advisors. These are for people that have employees.

But below that, we have a list of self-directed customized individual 401(k) and self-directed IRA providers. And there's like six of them on the list right now. I think they're all pretty darn good and they're all super cheap and not free. Not a free one. We're talking about Fidelity and Schwab and E-Trade, but I think it's probably worth spending a few dollars there. I hope that's helpful to you. Make sure you read that post again that ran on May 8th on the blog. So, check that out.

Okay. Let's take our next question. This one's about another solo 401(k) question.

CAN YOU HAVE MULTIPLE 401(K) ACCOUNTS AT DIFFERENT COMPANIES?

Speaker:
Hi, Dr. Dahle. Thank you very much for what you're doing. I am an independent contractor 1099er and I have a solo 401(k), which I am maxing out. I also have a couple of backdoor IRAs, one for myself, one for my wife, which I'm also maxing out. My question to you is, I am in the Army Reserves and would like to contribute to my TSP. Is that okay? Is that possible? Thank you. Have a great day.

Dr. Jim Dahle:
Okay. The question is, can you have retirement accounts at separate companies, more than one 401(k)? The answer to that is yes. All the rules for this are explained in a blog post on the website. That blog post is titled Multiple 401(k) Rules, What to Do with Multiple 401(k) Accounts. And if you search on the website, “Multiple 401(k)”, you will come upon that blog post. I think the most recent update on that was 2020, but it is completely up to date. It's got 1300 comments on it. And I go through all these rules in detail, but the bottom line is, yes, you can have more than one 401(k). You can have a solo 401(k) and a TSP.

There are two main rules to keep in mind. The first one is that you get one employee contribution, no matter how many companies you work for, no matter how many 401(k)s you have, you get one employee contribution. This year for those under 50 it is $23,000. So you only get to use that in one place.

But you can make employer contributions or after tax employee contributions up to the maximum limit per plan. And this year for those under 50, that limit is $69,000. So you can make employer contributions at your solo 401(k), and you can use your employee contribution as much of it as you could in the TSP, and then get any match that they give you there, as well.

Now, to make employer contributions, these tax deferred contributions, although soon they may be able to be Roth contributions, thanks to the Secure Act 2.0, you have to make a certain amount of money. Basically five times what you want to contribute in there is what you have to make as a self-employed person.

If you don't make that much, you might want to consider making some employee after tax contributions. You have to have 401(k) that allows that. Usually a customized solo 401(k), like we were talking about with the previous question, but you can do that. So, those are the two main rules.

Now there's a little quirk with 403(b)s that's kind of interesting. 403(b)s and solo 401(k)s actually share that $69,000 limit. So if your other account is a 403(b) at your academic job, and you have a solo 401(k), those actually share one $69,000 limit. It's a weird quirk of 403(b)s, but you should be aware of that.

Interestingly, we had a post recently after doing some research from a doc who actually had access to four 403(b)s. This one ran on the blog, but it turns out it's not actually a limit on contributions you make to these 403(b)s. You can contribute more than $23,000 if you have more than one 403(b). The limit is on deductions. So you can only deduct that $23,000.

If you're trying to maximize your match, and it takes more than $23,000 to maximize your match at two or three or four different 403(b)s, you can contribute more. You just won't get a tax deduction on it. That may or may not be worth it to you. It’s something to look into.

All right, we've gotten into the weeds on that enough. The next question comes from David. Let's take a listen.

401(K) MATCHING WHEN YOU LEAVE YOUR EMPLOYER

David:
Thank you, Dr. Dahle, for everything that you do. I'm a current fellow. I have a question about 401(k) matching. My question is, if you leave your employer and lose your 401(k) matching funds because you haven't vested, do you lose out on any gains that those matching funds may have made while you were there?

For example, if last year I received a total of $1,000 in matching funds, but over the course of the year that those funds were invested, that total has increased to $1,200 through stock market gains. If I leave that employer and lose those funds, do they remove $1,000 from my account or $1,200 from my account? Thanks again.

Dr. Jim Dahle:
Good question. Bad news, you lose the $1,200. You lose not only their contribution, but any returns made on their contribution. Of course, if you lost money, you lose less. It could be $800 you lose instead of 1,000, but that's the way it works. Sorry. That money basically sits in a separate account until it's vested and returns on that money sits in that separate account as well. It may show in your account, but the employer's keeping track of it, I assure you.

I don't really like the vesting thing. I think it makes 401(k)'s confusing, makes people less likely to use 401(k)s. We actually don't have vesting requirements in the WCI 401(k). The match our employees get is vested immediately because I don't like that. When you can design your own 401(k), you can design it the way you like, but I understand why employers do it. They're trying to put some golden handcuffs on you and make you stick around for a while.

We use non-competes to do that around here. Just kidding. We just treat people well. We do have non-competes, but most of them are about to be invalidated, I think by the FTC. We won't be able to use those for much longer. We'll have to be even nicer to people.

All right. Megan's over here laughing in the corner. I don't think she's planning on quitting anytime soon. If she is, she's hiding it well.

WHAT TO DO IF YOU ARE CONCERNED ABOUT LOSING YOUR NON-GOVERNMENTAL 457(B) MONEY DUE TO EMPLOYER BANKRUPTCY 

Okay. Let's take a question out of the email box. This one says, “I work at a community system that has about 12 hospitals plus outpatient clinics. Currently, I have about $62,000 in a non-governmental 457(b) through this employer. The plan states the earliest distribution is 180 days after the end of employment. The plan doesn't have any distribution options while I'm still employed, at least no options that apply to me.

We recently sent an all-employee email saying we need to have $150 million margin improvement by the end of the year or the system won't be able to meet its debt requirements. They're expecting about $150 million in losses for the first six months of the year. The email mentioned concern that independent parties could step in to direct operations. I haven't been able to meet with leadership yet to understand how attainable this $150 million improvement is.

Of course I have a lot of concerns right now. The top concern is if the company doesn't make the needed improvement, does this mean my 457(b) savings is going to the creditors? And if that is the likely outcome, what actions can I take to protect that money?

One solution I was considering is to quit, form an LLC and work as a locums at the same hospital at similar pay. My assumption is if I were an independent contractor working for the hospital system, that would not preclude me from taking the 457(b) distribution.

Simple option of course is to work somewhere else, which I'm looking into. I also don't know if the system went bankrupt prior to 180 days after me leaving the job with the 457(b) gets seized by the creditors anyway. Any thoughts on this situation would be appreciated.”

Wow. Sorry you're having to deal with this. Obviously don't contribute more to the 457(b) now that you know the employer is in trouble. Short of quitting and taking all the money out now, there isn't anything you can do. Now doing that might cost you more than you're going to gain by doing so. So I don't know that I would quit the job.

Console yourself with the fact that if you end up losing your 457(b), you'll be the very first doctor I've ever heard of this happening to. That means it's still probably unlikely that you lose it. Yes, that money is available to your employer's creditors, but you also become one of those creditors and probably one that the court would look very favorably upon. My guess is that you still will get your money, even if your hospital declared bankruptcy. But good luck with your decision. Maybe get some legal advice from a health care contract attorney in your state before quitting for this reason.

Something to keep in mind with non-governmental 457(b)s, part of the reason it provides such great asset protection to you is that it's not your money. It's deferred compensation. The downside is it's still available to the creditors of your employer. So, there’s some risk there.

Not a risk with governmental 457(b)s. Governmental 457(b)s are better in almost every way than a non-governmental 457(b). When you leave, you can just roll it into an IRA. You're unlikely to lose it to a creditor. You often have better distribution options in addition to that IRA rollover. It's almost always better.

But there are non-governmental 457(b)s out there. You need to know what kind you have and evaluate that, take that information into consideration when deciding how much money you want to put in there.

And it's only $62,000. This is not a lot of money. I don't think I'd quit a job over $62,000. It might take you a couple of months to get a new job. And in that time, you'd turn through that much money that you would have earned had you kept working. It seems a little bit extreme for $62,000. Now, if you had $620,000, maybe that sort of a strategy would actually be worth the hassle and downside, but probably not for $62,000.

Okay. The next question comes from William.

MISTAKES DAY TRADING

William:
Back in 2021, I did a conversion from a 401(k) pre-tax to a Roth IRA. I paid the taxes and everything at that point. Forward to 2023, I decided to do a distribution, pull all my money out of my Roth IRA, probably should not have done that, and put it into a brokerage account as I was trying day trading.

With that being said, I received a 1099-R for the full amount that I pulled out of my Roth IRA. However, the 1099-R only shows a distribution code of J, which is a non-qualified distribution. So how do I figure out my basis and earnings for the 8606 form? Thanks.

Dr. Jim Dahle:
Wow. Well, first of all, William, yes, this was a mistake. This was a bad idea. If you really wanted to day trade, why in the world would you not want to do it inside a tax-protected account? That's the ideal place to be day trading. Not that day trading is a good idea, but if you're going to day trade, don't do it in a taxable account, do it in a Roth IRA if you can. Because then all your gains you don't have to pay taxes on. Presumably you're doing this because you're smoking the market and having all kinds of awesome gains in that account.

But yeah, basically that entire distribution is taxable, plus a 10% penalty. It's really bad. Whatever your marginal tax rate plus 10%, that's what you're losing on that money you pulled out of that Roth IRA, put into a taxable brokerage account. And if your experience was like most day traders, you then lost a big chunk of that money day trading, not to mention a whole bunch of your time and energy and emotional energy from the worry of losing money.

As far as the 8606 form, if you go to form 8606, and I usually deal with this mostly with people doing backdoor Roth IRAs, not withdrawals from a Roth IRA, but part three of form 8606 has distributions from Roth IRAs. You're supposed to complete that part if you take a distribution from a Roth, a Roth SEP, or Roth Simple. So you have to fill that section out. It's got like six or seven lines on there. The first one's your total non-qualified distributions. The 1099-R tells you the whole thing was a non-qualified distribution. So you put that on line 19.

20 is for first-time home buyer expenses. Sounds like that doesn't apply to you. 21 is just a sum. On 22, you enter your basis in the Roth. What basis is, is money that's already been taxed. I guess what they're talking about here is money that you put in the Roth that is not gains while it's in the Roth. I guess that's probably the amount you converted when you went from the pre-tax to the Roth. I'd go back and look at your records for that Roth conversion. And that's what I'd put on that line.

23 is another sum. You do subtraction to get that. Then you enter your basis and conversions. Okay. So it sounds like that's where you put your basis because yours came from a conversion. That's where your basis would go. The amount you converted on 24, not 22.

And then 25 is just a subtraction there. And it tells you what the taxable amount is, but the taxable amount is going to be the entire amount you pulled out of your Roth IRA. And the downside is you're going to end up paying a 10% penalty on that, as well.

So, all bad for you. Not a good move. That's going to cost you some money. Hopefully not as much as it probably cost you to be a day trader, but who knows? Maybe you're a brilliant day trader and you made all kinds of money, but for the vast majority of people who try that, that is not the case.

Okay. The next question comes from Michael.

HOW TO VIEW AND USE AN INHERITED IRA

Michael:
Hi Jim. This is Michael from California. Your work with WCI continues to improve my financial literacy, something I'm so grateful for. My question involves the use of an inherited IRA and how we should view it. This is my wife's account of a bit more than $100,000 now from 10 plus years ago, pre-secure act. We tentatively plan to stretch it out over her lifetime, only taking MRDs to maximize growth and minimize tax burden. Right now it's mostly in US stocks. In terms of asset allocation, would you group this together with our retirement portfolio?

My wife and I are both young career physicians with a lot of good uses for cash. The MRDs just don't seem to be moving the needle much for us. We're currently maxing out our retirement accounts and saving up slowly for our first home down payment and the municipal money market fund. Instead of saving a cash emergency fund as well, we thought we can maybe view this account as an emergency fund, but maybe shift the allocation into bonds or something more conservative.

Another thing we're considering is using this for a home down payment in one to two years. We're both expecting to be in high tax brackets for the foreseeable future. What are your thoughts? Thanks again for all your insight.

Dr. Jim Dahle:
First of all, sorry for your loss. Anytime we're talking about inherited IRAs, you have to remember where those things come from because you lost somebody that you presumably care a lot about because they care a lot about you and not to leave you six figures. So I'm sorry to hear about that.

It's been a while though for you, and the nice thing about having been a while is that you're under the old plan for inherited IRAs, which is much more generous than the new plan. Basically in the new plan, it's really complicated, but you have basically 10 years to get the money out of the inherited IRA.

Under the old plan, if you're young in an inherited IRA, you can stretch it out for decades and enjoy that additional tax protection, that additional asset protection, those additional estate planning benefits of having money in a retirement account. Those are really valuable. They're even more valuable for people like you that are in a high tax bracket.

Like any retirement account, it's best to use that for long-term needs, for retirement. You don't want to necessarily be raiding your retirement accounts for short-term and stuff you want to buy right now. That said, the nice thing about an inherited IRA is you can get to the money without paying a 10% penalty. If it's a tax deferred IRA, you got to pay taxes when you pull the money out. If it's a Roth IRA, you don't have to pay taxes when you pull it out. So, that's really convenient.

Could you use an emergency fund? Yes, you could do that once. Once you take the money out, you can't put it back in the inherited IRA. That's not the way most emergency funds work. You can take money out and then put money back. In that respect, it wouldn't be an ideal emergency fund. Certainly, if you're going to use it as that, I would yes, invest it less aggressively. Cash, short-term bonds, that sort of a thing.

That said, the point of money in our lives is to buy things that improve our lives or to give to people who can buy things that improve their lives. The point isn't to amass this huge sum of money and die the richest guy in the graveyard. This person gave you money. I don't know if they gave you any instructions on how to use the money they were giving you, whether they said this is for your retirement, whether they said this is for your house down payment, whether they said this is for your education, whatever, or just didn't put any strings on it at all so you can do whatever you want with it.

If you want to use it to buy a house, I think that's a good use of cash. You're going to lose those tax protection, asset protection benefits for the next 50 years or whatever. But there's also benefits to owning your own home and putting down a bigger down payment. It's not like you're trading it for zero sum.

I think you guys need to think and project out your numbers and have a financial plan. And I can go either way on this. If you want to use it for a house down payment, I don't think that's crazy. If you want to leave it in there just as long as you can and reap every last dollar of tax benefit out of this inherited IRA that you can, I don't think that's wrong either.

I hope that's helpful to you as you're making decisions, you guys counsel together and make sure you have a written investing plan and implement it. And if you decide to use it for an emergency fund or for house down payment or for long-term investing, I think that's all reasonable.

QUOTE OF THE DAY

Our quote of the day today comes from Seth Klarman, who said, “Investing is the intersection of economics and psychology.” I love that. They say personal finance is 90% personal and 10% finance, 90% behavioral, 10% math. People don't get into massive amounts of credit card debt because they can't do math. They know 28% interest is bad. They do it because they have some bad financial habits, bad financial discipline, bad financial psychology. And that's a big part of personal finance. So be sure you're working on that while you're becoming more financially literate.

Let's take a question from Josh.

SIMPLE IRA vs. SOLO 401(K)

Josh:
Hi, this is Josh from Florida, long time listener, first time caller. My question is regarding retirement accounts. I have a SIMPLE IRA that was initially set up and recommended by my accountant a couple of years ago for several 1099 generating side gigs that allowed me to essentially contribute all of these earnings because they are near the contribution max of around $16,000.

I now know of your preference for solo 401(k)s for these types of retirement accounts for various reasons, including the backdoor Roth to avoid the pro-rata rule. As I've had this SIMPLE IRA for over two years, I understand I can transfer without penalty these funds to my main gig 401(k).

In this situation, does it make sense for me to continue to utilize the SIMPLE IRA as I'm able to contribute more than I would in a solo 401(k), even taking into account the missing out on the backdoor Roth? Or is it possible to get the best of both worlds here? Could I, before the end of each year, just transfer the balance from the SIMPLE IRA into my 401(k) that would allow for the backdoor Roth without the pro-rata rule? I'd like to hear your thoughts, hoping to get some insight. Thank you.

Dr. Jim Dahle:
Thanks for calling into that question, Josh. I can't think of really just about any situation where for a sole proprietor, a 1099, it makes sense to use a SIMPLE IRA instead of a solo 401(k). You mentioned that you can contribute more to it. I don't think that's true at all. I'm not sure why you think that's true. It certainly is not true with a customized solo 401(k). Plus the loss of the backdoor Roth IRA.

I think you got terrible advice from the accountant to open a SIMPLE IRA. Yes, it's simple. I guess that's one thing I was going for it, but it's really not that much more simple than a SEP IRA, which is better than a SIMPLE IRA. And it's only slightly more simple than a solo 401(k).

I would quit messing with the SIMPLE IRA. I'd roll that thing into your workplace 401(k). I'd roll it into your solo 401(k) that you're going to open for your 1099 income going forward. And I'd forget about the SIMPLE IRA and quit dealing with it. Unless I'm missing something, that there's some way you can contribute more to a SIMPLE IRA than you could do a good customized solo 401(k) plan. But I can't think of why that would be.

So, it might depend on exactly how much income you have in this side gig. Maybe if it's a really small amount of side gig, it actually does work out that way. But maybe I would just do a little more side gig. So you get paid a little more and it makes sense to have a solo 401(k). I don't know. But I wouldn't mess around with that.

Certainly if your contribution is that low, the benefit of being able to do a backdoor Roth IRA is much larger in comparison. So I'd get rid of that SIMPLE IRA. I understand there's a few dental practices and medical practices out there where a SIMPLE IRA is the right plan because of the employees you have and how much they want to contribute, etc. But I just don't think that's the case for anybody that doesn't have employees. I see no reason not to go get a solo 401(k) instead.

I think we've advertised enough for solo 401(k)s on this particular podcast, but they're great. They're great retirement accounts and you're much better off investing in them than you are a taxable account. And they're better than just about any other retirement account out there. Who doesn't want to put $69,000 a year? It can be Roth, can be tax deferred into an account that you've totally controlled and that you can borrow against and you can control the investments in and you can have self-directed investments in. I don't know. It's a great plan. It's a great plan. And anybody who's eligible for one ought to get one.

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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.

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 175 – Pharmacists pays off over $200,000 in student loans in 15 months.

At PKA Insurance Group Inc., Pradeep Audho and Matthew Pedersen are independent brokers focusing on disability and life insurance. They excel in securing coverage for physicians, including those on visas like J-1, H-1B, etc.

Protecting your family in the event of a disability or death is important. There is now an A-plus rated carrier offering up to $10 million of life insurance without labs. If you're very healthy with limited or no medical issues, approval is likely in five minutes.

Reach out to PKA Insurance to discuss your disability or life insurance needs at whitecoatinvestor.com/pka or by calling 1-(800) 258-1018 or emailing [email protected].

All right, we're going to be talking today about making money. It's a fun subject, right? Here we are on a financial podcast. Of course, we're going to talk about making money. Stay tuned after our interview today. Not only are we going to talk about making money during the interview, but I want to talk a little bit about the benefits of working longer at the end of this podcast. So, stay tuned after the interview. You're going to love this interview though. Let's get Jeremy on the line.

INTERVIEW

Our guest today on the Milestones to Millionaire podcast is Jeremy. Jeremy, welcome to the podcast.

Jeremy:
Hey, I’m happy to be here. Thank you.

Dr. Jim Dahle:
Tell us what you do for a living, how far you are out of school, and what part of the country you live in.

Jeremy:
Sure. I'm a pharmacist. I work mainly at a small biotech and also work at CVS, a retail pharmacy, evenings and some weekends. About seven years out of school now, and I live in Alexandria, Virginia, just outside of DC.

Dr. Jim Dahle:
Very cool. Well, thanks for being willing to come on the podcast. We'd like to celebrate with our guests something they've accomplished and use it to inspire others to do the same. So tell the audience what we're celebrating today.

Jeremy:
Absolutely. I just paid off $286,000 in student loans a couple months ago.

Dr. Jim Dahle:
Holy crap. $286,000 for pharmacy school. My goodness. That is just incredible. And the thing that's pretty remarkable about your story, I understand though, is that you did most of this quite recently.

Jeremy:
Yeah.

Dr. Jim Dahle:
Tell me about that.

Jeremy:
Right. I refinanced November, right before the very last extension of the payment pause. And then the bulk of the payoff was $215,000 in about a year and a half, just under a year and a half.

Dr. Jim Dahle:
All right. I'm vaguely aware of what pharmacists make, but $215,000 in a year and a half sounds kind of impossible. How did you do that?

Jeremy:
The main thing was going from my previous job to the one I have now was about a $50,000 difference in pay when I jumped from one to the other. And then working retail evenings and weekends on the side was really the biggest factor because I made up a big chunk of that doing the CVS work too. That was really helpful for me.

Dr. Jim Dahle:
The way you did this was by doubling your income?

Jeremy:
Yeah.

Dr. Jim Dahle:
I have made this comment many times before on this podcast, that the vast majority of Americans overestimate the difficulty of doubling their income. You're somebody that's done it. What do you think about that phrase? Do you think that's true? Do you think that people really can dramatically increase their income if they want to?

Jeremy:
In the White Coat Investor sphere of things, definitely. And I'll speak for pharmacists, especially those in the pharmaceutical industry. It is possible if you're building the skills and looking for the opportunities. And definitely a lot of pharmacists who go into the pharmaceutical industry, they tend to not want to do the retail, the CVSs, Walgreens of the world. A lot of us shy away from working in hospitals on the weekends on the side. But that really was one of the main factors, at least, in me being able to pay off that debt so quickly. It's definitely doable if you want to, I should say.

Dr. Jim Dahle:
So, what happened a year and a half ago that you decided, “I'm going to do something different?” What got you fired up to do this?

Jeremy:
It was a mix of a lot of Dave Ramsey, a lot of White Coat Investor, a good friend of mine, Prince, actually introduced me to WCI. But then once I got the job offer and I saw how much of a difference it was from my previous job, I had a decision right there. I said, “Okay, this can either be lifestyle creep or it can be, let me get this almost $300,000 pound gorilla off my back.” Obviously I chose the student loans.

It's something I had wanted to get off a long time ago. And I think it was at some point, roughly a year or so after graduation from pharmacy school, when everything started to just settle in and you see all your finances in one place. And then there's this big, glaring $286,000 sitting there. It just hits you for the first time and you don't really know how to do that. What do I do about this? A mixture of those, but a lot of personal finance education, too, led me there.

Dr. Jim Dahle:
So, how does it feel? You got the gorilla off your back. How does it feel?

Jeremy:
I'll tell you this. It took a while because it didn't really feel real at first, but it feels amazing now because I have all of that income that was going towards loans is now just going towards whatever I wanted to. So, it's an amazing feeling for sure.

Dr. Jim Dahle:
Yeah. You were sending these guys for the last 15 months, you were sending them $10,000 or $12,000 a month.

Jeremy:
Yeah, just under $10,000 a month for the last seven months or so. But I would say the best feeling is not having to be at my side hustle, which is CVS, as much. That I'm loving the most. But all things considered, it's wonderful, I got to say.

Dr. Jim Dahle:
Yeah, it's pretty cool. Did this turn out to be easier or harder than you thought it was going to be 15 months ago?

Jeremy:
I'll say it was easier. What I didn't anticipate was just the tiredness from working extra. That was probably the most challenging thing. But over the course of time, a few months into it, you get motivated by seeing the balance go down. So, I'll say it's easier. But if I could go back, I would do it all over again if I had to, to be in this place, to be debt-free.

Dr. Jim Dahle:
Is there anybody else involved? You single, partnered, married, kids, anyone?

Jeremy:
I'm married. We just got married. That was a good question. We got married about two years ago, me and my wife. But the debt pay down was all me. I will say having two incomes definitely helps with other things around the house. And during that year and a half, we got married, destination wedding, went on honeymoon, bought a couple of investment properties. So, it's not like we were just, what Dave Ramsey say, beans and rice, rice and beans. But as far as the pay down, yeah, it was just me.

Dr. Jim Dahle:
Pretty awesome. Let's go back. What did she think marrying you, finding out you owed $300,000 in student loans?

Jeremy:
She did the same thing I did when I first graduated, which was just sweeping under the rug. And because it wasn't stopping us from doing anything, we still travel as much or as little as we want to, still go out to dinner whenever, because it wasn't stopping anything from happening. It really wasn't an issue. But I also knew it was something that I could handle on my own. So, it wasn't a big deal for us starting out.

Dr. Jim Dahle:
How much of that did you have to cut out over the last 15 months in order to do this?

Jeremy:
A little bit. But again, it's not like we just completely stopped living. Let's say if we normally travel three nice vacations or three big vacations a year, hey, let's cut that down to one or two. Worst things that could happen in the world. I definitely started eating at home, cooking more just to save on the eating out budget.

But like I said, we still were able to do all of the things that we really enjoyed. And over the course of this, you find out what you really want to spend time on and what you don't. And for both of us, luckily, that was spending time with friends and family, being present in those moments for a lot of our younger nieces, nephews, cousins, things like that. Yeah, we had to cut out a little bit, but it didn't have to change our lives drastically from doing what we really wanted to spend time on.

Dr. Jim Dahle:
Yeah. It sounds like you made up a lot of it just by boosting income. You got your income up that you could dedicate so much more income toward this goal. Do you remember back in pharmacy school, when you're taking out these loans, what were your thoughts about how you were going to pay them back back then? And how did that compare to what actually happened later?

Jeremy:
To be honest with you, because I wasn't really financially literate, it didn't really register, to be honest. It seems like monopoly money. I knew I wanted to go to pharmacy school. I had that goal. I knew I wanted to accomplish it. And parents could only pay for so much. The rest, I had to supplement with loans.

And you have the attitude of, “I'm going to figure out however to make the best salary I can to pay this off and get started with investing and everything.” But it was just a jumble of ideas and thoughts. There really wasn't a plan when I was in pharmacy school. But then you get out, you get the financial education, and you have to reset your mind to what makes sense, which for me was paying the debt off.

Dr. Jim Dahle:
I think that's pretty normal, actually. I think most people are in that situation when they're in school. All right, well, you've been incredibly successful now, financially, in crushing these student loans. What's next for you in your financial goals?

Jeremy:
I'm saving up for a down payment of a home. Hopefully looking to expand our family, become a part of the three in the next year or so. So, that's the main thing. And then just focusing on real estate investments.

Dr. Jim Dahle:
Cool. You said you had a couple doors under management already?

Jeremy:
Yeah, a couple doors, single families in my hometown in Louisiana. And then a good friend of mine from pharmacy school, we have a duplex in Wisconsin that we bought recently. I'm just trying to expand from there.

Dr. Jim Dahle:
Very cool. Does your family know you paid off your student loans in this sort of a manner?

Jeremy:
They do, definitely. Mom was the number one supporter, definitely. And then I have some cousins who said I was crazy. But it's a good crazy. I would not trade that feeling of that last submission of $10,000 going down the drain. I wouldn't trade that feeling for anything. I'm really excited to just be able to do other things that I want to focus on, as opposed to, I have to work to pay this debt down. It's a very different experience.

Dr. Jim Dahle:
Some who are listening to this podcast as a pharmacist who's working one job and they're getting paid, I don't know, $120,000, $130,000, $140,000. And they're sitting on a quarter million dollars of student loans going, “I wonder if I can do that. I wonder if I could get a better paying job. I wonder if I could spend my evenings at CVS or Walmart.” What advice do you have for that person?

Jeremy:
You miss all the shots you never take. If you have this goal of paying the debt down, it's possible. Other people have done it. People with less resources than you have done it. The opportunities are definitely there. If you're in the industry and you're thinking about it, we have these pharmacy degrees for a reason. We are well-equipped to go into the hospital, into community pharmacies, and be very effective and make money on the side. So, the opportunities are definitely there. Take the jump. What's the worst that can happen?

Dr. Jim Dahle:
Yeah. Jeremy, you're a fantastic person, a fantastic American, a fantastic pharmacist. You should be very proud of what you've done. I know that we are here at the White Coat Investor, and we're super grateful you came on to tell people about your experience, because I think it will inspire others.

We're always being asked for people that aren't doctors that did something like this. And here you are. A doctor-like student loan debt, you paid it off in an allied health profession, and now the world is your oyster. You've got $10,000 a month to do whatever you want with. If this is all going into real estate investments, you are not that far away from financial independence. And that's pretty cool.

Jeremy:
Thank you.

Dr. Jim Dahle:
All right. Wasn't that great? $286,000, $215,000 in 15 months on a pharmacist income. And those of you out there telling me it can't be done, right? It can be done. It takes a lot of work. You got to get a better job than the one you've got. You got to negotiate. You got to do some overtime, put in some extra time, get another job. You can make more money.

No matter what's your income level, you can boost it. Whether you're in business for yourself and you make the business more efficient or hire people to work in the business, whether you are negotiating a better job or changing jobs, whether you're getting better education or more certification. I'm confident that most people think they can't increase their income, but actually most people have a pretty dramatic increase in income if they really want it.

FINANCE 101: WORKING LONGER

I told you at the beginning, we're going to talk about working longer, which sounds terrible, right? Who wants to work longer? But the truth is working longer is the solution to the financial problems of many people.

What happens when your career becomes longer? Well, a number of really good things happen. For example, your social security benefit goes up. Not only are you not taking it early, but you're continuing to put more money into social security and your benefit goes up.

You also have less of life ahead of you to pay for. And so you don't need as much money going forward. The more you work, the longer you work, the less money you need because you're not going to live forever. You're not invincible, you're going to die eventually of something. And the older you get, the more likely that becomes. And so, the longer you work, the less of a time period you're going to have in retirement.

But you also have more time to save for retirement. And especially as people tend to get in the latter half of their career, often they're making more money than they've ever made before, especially on a nominal basis. And so, they're saving tons of money. And you get catch-up contributions in your HSA and your IRA and your 401(k) and your 403(b) and your 457(b). You can actually put more money in there. So more of your savings is growing in a tax protected way.

It gives your savings that you already have more time to compound, compound interest works. And so, a lot of times people that don't really have enough to retire, just a few more years of work and all of a sudden they do have enough to retire. It can really solve a lot of problems.

The issue, of course, is that your retirement date is not 100% in your control. I saw a survey recently. I think it said 52% of retirees are retiring kind of against their will, not at the date they would have chosen to retire, whether that's from disability, whether that's from job loss, whether it's just because their back hurts or whatever. 52%. There's age discrimination. There's all these other things that can happen to people.

So, don't assume that this is the solution to your lack of ability to invest properly, your lack of ability to save enough money. It may not work for you. But if it can, if you're trying to solve an issue of not having enough for retirement, consider working longer. Another year, two years, three years, it can make a dramatic difference.

We became financially independent somewhere around 2018. And now it's 2024. We've been working for six years after financial independence. And I'll tell you, we're in a heck of a lot better financial situation than we were in 2018. Things only get better. It's like I'm telling docs all the time, if you're doing this right, you're getting richer every month of your life. And there's occasionally an exception, there's a big bear market or something. But for the most part, that's true. You become in a better and better and better financial situation. And so, consider working longer in order to reach your financial goals. You may find that that is the very solution you need.

I got an email this week from a doc that's 54, in residency and not much in assets at all, but wants to be able to retire by 70. 16 years. That's enough time to get the financial independence. You do have to have a pretty good savings rate and you can't make a lot of mistakes with your money. You got to do just about everything right when you're working on that sort of a timescale. But so long as he's able to work to age 70, I think he can still do it and have a very dignified retirement. But can you retire at 58? Probably not. Probably not going to be able to retire at 58. Just not going to be an option for him.

But if you're 35 and you're listening to the White Coat Investor podcast out there, boy, 58, I'd be surprised if you couldn't be financially independent by 58. Applying the knowledge you're getting on this podcast to your high income and your life, it's like having a superpower. You'd be amazed how quickly your wealth starts compounding, how rapidly your debt disappears. Like Jeremy's today that we talked about in the podcast when you're dedicating significant chunks of change to it every month.

All right. If you're interested in coming on the podcast, you can do so. Apply at whitecoatinvestor.com/milestones. We're always looking for people that can inspire others through what they've accomplished. Whether your milestone is something small, maybe you got back to broke. Whether your milestone is something big, maybe you paid off a mortgage or student loans or maybe you became a decamillionaire. We'll celebrate with you and use your experience to inspire others to do the same.

SPONSOR

Our sponsor for this episode was PKA Insurance Group where Pradeep Audho and Matthew Pedersen are independent brokers focusing on disability and life insurance. They excel in securing coverage for physicians, including those on visas like J-1, H-1B, etc.

Protecting your family in the event of a disability or death is important. There is now an A-plus rated carrier offering up to $10 million of life insurance without labs. If you're very healthy with limited or no medical issues, approval is likely in five minutes.

Reach out to PKA Insurance to discuss your disability or life insurance needs at whitecoatinvestor.com/pka. You can call 1-(800) 258-1018 or just email [email protected].

Keep your head up, shoulders back. You've got this, we're here to help. See you next week on the Milestones to Millionaire 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.