Podcast #140 Show Notes: Solving Your Financial Mistakes

As you become more financially literate, you realize all the financial mistakes that you were making. Some of those mistakes are more challenging to fix than others. This is particularly true within your taxable accounts. In this episode, we help a couple of readers solve their financial mistakes by getting out of poor investments like expensive mutual funds and individual stocks. We talk about whether it is worth it and what it will cost you and ways to lower that cost. We play a bit of catch up with listener speakpipe questions. Questions in this episode include: the 199 deduction for S Corps, contract negotiation from the employer side, disability insurance from Principal, strategies to avoid exit taxes if leaving the USA, value vs growth funds, joining a private equity group, recharacterizing Roth IRA contributions, Roth IRAs for your children, and paying down your mortgage as a PSLF side fund.

 

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Quote of the Day

Our quote of the day today is from Christopher Davis who said,

“a 10% decline in the market is fairly common. It happens about once a year. Investors who realize this are less likely to sell in a panic, and more likely to remain invested, benefiting from the wealth building power of stocks.”

That is true. I think it’s really important to have a knowledge of the history of investing in finances. A bear market, a 20% plus drop, happens about once every three years on average, and a correction or a 10% drop in the level of the stock market happens about once a year, on average. You should expect this to happen. When stocks drop 10 or 20% this should not be an unexpected event that causes you to do something. Your plan should incorporate the fact that you’re going to have to go through 60 corrections and 20 bear markets during your investing time period. So be prepared for that.

Solving Your Financial Mistakes

Making financial mistakes in your taxable account can be a little complicated to fix but it isn’t impossible.  One listener just fired their financial advisor who had them investing in expensive mutual funds. Now they want to know if it is worth it to sell the 1-1.2% expense ratio mutual funds and pay capital gains to get lower cost funds. They still have a 20 year investing career ahead of them in the highest tax bracket with $300K in these expensive mutual funds with $50K in taxable gains. Should they pay the capital gains tax or stay invested in the current funds and just invest new money in better funds?

This is a question a lot of people have. It is really one of those unfortunate things about taxable accounts. If you screw it up at the beginning, you’re kind of stuck with it in a lot of ways, or it’s going to cost you some money to get out, unless the funds are really terrible. If the funds are really terrible, you’ll get a capital loss when you get out of them. But here is the way you should look at this as far as whether to have some legacy holdings in your portfolio, or whether to just get invested into what you actually want to own.

  1. Step number one is figuring out the basis on everything in your taxable account. If you have something with a loss, sell it now. You want to change investments, and you have a loss, it is going to cost you nothing, and in fact lower your taxes to get rid of that investment. So sell that. The commissions on selling these things are usually pretty low, and so it makes a lot of sense to sell anything with no gains. In fact, I’d sell anything with only minimal gains. If it doesn’t cost you much, you might as well get into your preferred investments, especially if the costs are much lower because those costs are going to compound. Now, hopefully, you were able to snag a few losses, and you can use those losses to offset any additional gains that you have in selling from the account, use up as many capital losses you have, either carried over from prior years or that you acquired while liquidating this portfolio.
  2. Now you can either build your portfolio around those holdings with gains as legacy holdings, or you can bite the bullet, and pay the taxes. If you are going to bite the bullet, you probably ought to wait until you’ve at least had the investment for a year. That way you’re paying longterm capital gains taxes, instead of short term capital gains taxes. If you are older, you should be more likely to hold on to the investment as a legacy holding. If you’re 90, you probably don’t need to reform your portfolio, and pay a bunch of taxes to do it. You’re better off just waiting and leaving that money to your heirs to get the step up in basis. Likewise, if the basis is really low, it may be more worthwhile to hold on to the investment.
  3. Another great thing to do with these assets if you are charitably inclined at all, is to use these assets to make your charitable contributions. You still get the same deduction you would get otherwise, but you’re basically flushing these capital gains out of your portfolio. Even if you turn around the next day and buy the exact same investment. There is no wash sale here like there is with tax loss harvesting. You can just donate it to charity and buy back the same number of shares if you like, and voila, you basically got a step up in basis. Now, it doesn’t make sense if you’re not charitably inclined, you’re not going to come out ahead by giving money to charity, but if you are going to give money to charity anyway, use appreciated shares, especially appreciated shares you don’t want instead of cash, to make those contributions.

Another listener wants to lower his investing fees as well but his fees are coming from the AUM fee he is paying his advisor. He doesn’t want to continue to pay that fee as his taxable account grows. Use a recommended financial advisor for as long as you need. That may be just for setting up a financial plan or that may be managing your assets for your entire career. It will all depend on you. Just make sure you are getting good advice at a fair price. This listener is ready to move on without the advisor. He wants to move the funds away from the funds his advisor has them into a more simple portfolio.

“Can I transfer those assets in kind to another account without realizing capital gains, and two, what should I do with those funds once I have them in my own account and don’t want them anymore? Should I sell them for simplicity’s sake, and pay the taxes on the gains, which now is about $2,500 in a mix of short and longterm gains, or wait for them to lose value first so I can count the losses against my taxes?

You can transfer in kind without paying capital gains taxes. For example, if you have mutual funds in a Fidelity brokerage account, just a taxable account, you can just say, “Hey, let’s transfer these in-kind over to Vanguard.” Nothing’s sold, nothing’s bought, there’s no tax consequences. Those holdings are just moved to Vanguard, and at that point, you can then sell them if you want. A lot of people do this when they’re at a brokerage with particularly high commissions or high costs and where it’d be cheaper to move it to Fidelity, E-Trade, Vanguard, or one of these low cost discount brokerages to sell those investments. A lot of times that makes sense, but be sure you look into the cost of that particular investment at the first place, and the second place.

Sometimes it makes sense to sell it in the first place, and then transfer cash, but you just have to look into that, and understand what the costs are. Then at this point, this listener is in the same spot as the person before, stuck with legacy holdings. So it’s the same process. Sell the ones with losses, sell the ones without any gains, sell the ones with minimal gains, sell up to the amount of losses that you have, and then take a deep breath and look at the other ones and your timeline, and how much you’re going to owe in taxes, and decide whether to keep them and build your portfolio around them as legacy holdings, or get rid of them and actually own what you want to have, and biting the bullet on the taxes.

A third listener has a similar question but with a Canadian twist.

“I’m now switching over to ETFs based on the Boglehead approach. I’ve previously held stocks through an investment company which specialized in buying a collection of 25 to 30 blue chip stocks, but because of the high MERs I have transferred those stocks to my current brokerage account. Should I sell those stocks and pay capital gains on them, which will be around $25,000 of tax, or should I just keep them, and continue to invest in broad-based ETFs going forward? I have another 20 years before I retire, so a relatively long time horizon. My concern is that I do not have the time nor the skills to research these individual stocks that I have, and I will probably do better investing in broad-based ETFs, although I won’t continue to pay the high MERs because I have those stocks within my brokerage account now.”

In Canada, an MER is a common abbreviation for management expense ratio. We don’t really use that term in the US but it is an annual fee charged to your portfolio. It consists of a mix of management fees, operating expenses, and trailing commissions. You can look at the prospectus of the fund and figure out what that is. For a mutual fund, we have an expense ratio, same kind of thing, but for a separate account, this would be like what we call a wrap fee in the US. So this demonstrates again that you have to be careful what you buy in a taxable account, because you might be stuck with it for the rest of your life unless you’re a tither, or some other person that gives a bunch of money to charity each year, and then you can just flush out those capital gains.

I have a multimillion-dollar taxable mutual fund account, and I don’t pay capital gains taxes on it, period.  I mean, I guess we get the distributions whenever they distribute to me each year. The qualified dividends and the longterm capital gain distributions, I pay taxes on that, but I don’t sell them. The ones that have appreciated, I use for my charitable contributions, and I hold the rest. Obviously, the only time I sell them is when I have a loss in them, and I tax loss harvest the loss, so I’m getting these tax losses, and then I’m never paying the gains because I’m using those for my charitable contributions. It’s really a pretty slick trick with a taxable account.

Listener and Reader Q&A

S Corp and the 199A Deduction

“I wanted to maximize my tax deduction, and trying to decide if I should elect for an S-Corp taxation given the 199A deduction. From my understanding, it appears to be a balance between saving on self-employment taxes for an S-Corp, yet reducing 199A deduction, but with just an LLC there was more self employment taxes, yet more of a 199A deduction. So how do I figure out the right balance of salary to pay myself if I decide to elect for an S-Corp, and how do I even decide if I should elect to be in tax as an S-Corp? I get there is no set formula, but if you can just run through the numbers of how I figure this out by trial and error, it would really help me.”

“Do I count accounts receivables in my calculations for this 199A deduction, and also from my employer contribution, or is it money that is just deposited and received in my bank account for the year? I know accounts receivables are supposed to be an asset, but being in business on my own for the first time, it doesn’t seem right to count them when that money has just not been paid to me yet.”

Counting accounts receivable in your books really depends on how you do your bookkeeping. If you do it on a cash basis like I do, then accounts receivable are nothing. They’re neither income, nor an expense. Employer contributions to 401(k)s are business expenses, so they decrease your ordinary business income, or profit, and thus your 199A deduction, which is the pass through business deduction for pass through businesses like partnerships, and sole proprietorships, and S-Corps.

So if this listener is below the phase out limits for 2020, married filing jointly, those phase out limits start at $326,600. But if you’re below that limit, you don’t have to deal with the salary. You don’t need an S-Corp like people above the upper limit do in order to pay yourself a salary to maximize your 199A deduction. If you’re below those limits, you don’t need that salary. So there’s really no reason to form an S-Corp for that issue. The deduction is just 20% of your qualified business income. So if your qualified business income is $100,000, your deduction is $20,000. So if you’re in the 40% bracket, that’s worth maybe $8,000 off your taxes. But the only reason to form an S Corp in this situation is to try to save on Medicare tax by declaring some of your income salary, and some distribution. But remember that whatever you call salary reduces your qualified business income amount, and thus your 199A deduction.

So if I were in this situation, I’d just be a sole proprietor. That way, that would max out with my 199A deduction. I wouldn’t have to hassle with form 941 each quarter. For an S-Corp, your taxes would be a lot simpler. You’d save those costs. You wouldn’t save anything on Medicare taxes, but you would certainly be able to maximize your 199A deduction. Another thing that you could do in this situation is rather than using a standard individual 401(k), and making tax deferred employer contributions, which would reduce your 199A deduction, you could do mega backdoor Roth IRA contributions. Obviously, you have to get a solo 401(k) that allows those contributions, but we’re really getting off into the weeds now. You can see there’s just no way to dumb this stuff down.

If you don’t want to dig into it, and really wrap your head around it, reading some of the blog posts that have been written about it, and maybe even buying a book about it, it’s probably worthwhile getting a good accountant or advisor to help, because if you make a lot of qualified business income, there’s a significant amount of money here to get that 199A deduction. Katie and I basically revamped our entire financial lives in order to maximize this deduction over the last couple of years. We have new 401(k)s, we’ve changed how much we pay ourselves in the business. We’ve changed the contributions we make into those 401(k)s. It’s really a big deduction for us, and so we go way out of our way to try to maximize it, and if you’re in that situation as well it is probably worth it. Although if you are below the lower income limit for the 199A deduction, it’s probably not that big of a deduction for you. It may not be worth rearranging your entire financial life, but do what you can to maximize that deduction. It’s worth understanding if you are self employed.

Contract Negotiation from Employer Perspective

“I’m a young physician with a thriving practice in South Florida, and I am thinking about bringing on a new physician to help with the continual growth. I know we are offering a very strong compensation package, but I feel like all the candidates only care about becoming partners as soon as possible. I’m not opposed to sharing in the practice’s success, but feel that this has to be earned, and proven over time. Do you have any suggestions about how to go about this, and how to successfully and fairly bring onboard a new physician to a small growing practice?”

His concern is that all the candidates only care about becoming partners as soon as possible. You can’t blame them for that. A lot of them have $400,000 in student loans. They need to make some money and get those suckers paid off. But the key to any longterm partnership is to try to make it longterm. Treat each other fairly, come to an agreement that works for both people. Now, obviously if there’s significant value in this business, they either need to buy into it with cash, or buy into it with sweat equity and if they don’t think that is worth doing, then don’t bring them on as a partner. If they just want the best of everything with you getting hosed, they’re not going to make a great partner anyway.

Sometimes you have to talk to them about that, because a lot of doctors, particularly young doctors coming out of training, don’t actually have much understanding of business. They don’t understand what it took for you to build a business to that size, and what it would take for them to piggyback off that, to stand on the shoulders of giants, and to take advantage of the hard work you’ve done in order to have a higher income throughout their career. You have to teach them about that because they don’t realize the benefit. Sometimes they forget the other big benefit, aside from getting paid more, which actually isn’t even guaranteed these days, especially with what some employers and hospitals are willing to throw at a physician. But the big benefit I see is control: control over your practice, control over your business, control over your daily life, no one telling you how to practice medicine.

I would encourage you to sell that aspect of partnership just as much as you do the higher income that you eventually get. People who are business oriented and longterm focused, they should realize the benefit of a partnership. But, at the same time if you got an eight year partnership track, don’t be surprised when people say, “Hey, I don’t want to tie up eight years without even a guaranteed partnership.” You have to keep that partnership relatively short, a reasonable buy-in, and go from there. I think in emergency medicine, there is not a big practice to buy into. So it’s very rare that somebody brings money to buy into the practice. It’s almost always sweat equity. And typically that’s between one and three years. Occasionally, there’s a group that has a five year pre-partner track, but it better be a heck of a group.

The only people I know who’ve ever made that work, were in a very high income town and it was really a profitable practice, so people were willing to put up with being a pre-partner for five years. But even so it was kind of a graduated salary throughout those five years. So they got a big raise each year until they became a partner at the end of five years. But truthfully, I think your partnership tracks got to be shorter than that if you really want to attract good candidates. Think about what the big point of a partnership track is? It is to try before you buy. It is to make sure you actually want to be in business with these people in the long term. You want to not make it any longer then you really need to find that out.

Then if it is still a financial hit for you,  you just have to either pay him less during that time period, or he has to bring cash to the table in order to buy in at the end of that period. But I think that would eliminate a lot of your issues if you can just shorten the partnership track where they’re exposed to that risk of you just deciding, “Hey, I don’t want you as a partner.” Doctors are worried about this. They’re worried that you’re just taking advantage of them. They’re worried that you’re just using them as slave labor during the pre-partner period, paying them half of what they’re generating and then you’re just going to let them go, and repeat the cycle again.

But truthfully, having been on the hiring side, it is a pain to hire. Nobody likes to hire. When we are hiring new partners, we are trying to do it for the longterm, we only want to do it once for 30 years. We certainly don’t want to churn and burn every year. It’s just too much of a pain to hire, so I think just having a frank and open conversation about how that works, and sometimes even providing the education that maybe they don’t have, is the way to go about it.

Disability Insurance Through Principal

A listener was concerned when an insurance agent told him that he has to buy regular occupation disability insurance and request an own occupation rider to be placed on it. This is a Principal thing, and I run into this all the time. The Principal contract has some funny wording. The base contract by itself is not true own occupation; you have to buy a rider to make a true own occupation. But if you buy that rider, it is true own occupation insurance. So you just have to make sure that you get that rider if you’re buying insurance from Principal, then the policy is fine.

I recommend you go to someone on my recommended insurance agent list. These folks have been used by hundreds of white coat investors. They write hundreds of physician disability policies a year. They know the ins and outs of these policies. They’re not going to sell you a whole life insurance policy, so these are people that you can trust, and that know what they’re talking about. But that Principal thing isn’t an agent thing. That’s a Principal company thing. The insurance company has just decided to word their contracts that way.

That doesn’t mean it’s not the right contract for you. At one point, I looked into getting an additional disability insurance contract. I actually ended up exercising my future purchase option for the one I had through The Standard, but the one I was looking at, because it made sense for me as an emergency physician in Virginia, which is where I was living at the time, the right contract was the Principal contract with that rider, and so if I would have bought another one, that was the one I would have bought. So I don’t think it’s a bad contract; you just have to make sure you get the true own occupation rider that goes with it.

Roth IRAs or 529s for your Children

Frequently I receive questions about children making money. This listener’s daughter earned money and they are wondering whether to put it into a 529 to help pay for her private school or a Roth IRA. This money should all go in a Roth IRA if you can possibly afford it. This is an awesome tax break, and this is the reason why my kids are models for the White Coat Investor site. If the only owners of your business are you and your spouse, and the business is not a corporation, and your minor children are your employees, you don’t have to pay payroll taxes on them. There is no social security or Medicare tax on the money they earn. In addition, they don’t generally make enough earned income to actually have to pay any federal or state income taxes. They are usually below those amounts. So there is no tax up front when they make the money, but it is earned income that can be used to go into a Roth IRA. And at that point, it’s never taxed again. It can grow for 50, 60, 70 years before they tap it all tax free. So it’s pretty awesome. It is the best possible tax break for your business and for your children. If you can hire your children and take the earnings and put them in a Roth IRA, I highly encourage that.

The 529 to help pay for private school is not a terrible idea. It is great to put money in a 529. It is certainly great to save up for a big chunk of what you’re planning to spend on their college, and that’s a reasonable place to put it. But if you have the money, I’d try to put it in a Roth IRA, and come up with a 529 money somewhere else.

Exit Taxes

Another Canadian question today from a Canadian citizen who is a physician in the US currently but planning to return to Canada for retirement. He wanted to know any specific considerations they should have for investing given this possible departure from the US.

So if you’re planning to go back to Canada after practicing in the US, yes, that is going to affect a bunch of the ways you save for retirement. Let’s talk just for a minute about covered expatriate status. So an expatriate is someone who’s given up their US citizenship, or green card through the official US government procedures. They generally have to file form 8854 with your final US tax return. And now notice this is not someone that is just living overseas. This is someone who’s actually given up their US citizenship. So if you meet one of the three requirements here, you are a covered expatriate. What that means is you’re going to have to pay an exit tax on all your assets in that final year. So here’s the three requirements.

  1. The first one is an average annual net income tax, for the period of five tax years ending on the date before relinquishing citizenship, or residency,  greater than $168,000. If you are paying more than $168,000 in taxes on average, then you fall into this covered status.
  2. Number two, if your net worth is at least 2 million on the date of expatriation, I think that’s the one that would get a lot of people in this situation.
  3. The third one is if you fail to certify that you’ve met the requirements of the US tax law for the five proceeding tax years, or failed to submit evidence of your compliance, that’s what form 8854 is for.

So could doctors stay under these limits and not be covered? Absolutely. So the sooner you go before you hit any of those limits, it’s probably better so you can avoid that exit tax.

But realize about this exit tax, the way this works is when you leave the country, you’re basically taxed on everything. So if you have a taxable account, you’re basically updating your basis in that to what the value is on the date of expatriation. Obviously, you want those to be longterm capital gains taxes, but it’s unfortunate you have to pay them at all. If you just stayed in the US you wouldn’t have to pay those taxes. Bear in mind that this also applies to IRAs. If you are a covered expatriate, you pay taxes if your IRA was fully distributed to you on the day you expatriate. It’s interesting, though, that you don’t have to actually get rid of the IRA. You can leave the money in the IRA, you don’t have to pull it out, but you do have to pay taxes on it. So essentially what you’ve done is turned your IRA from being tax deferred money, to being a nondeductible IRA, which now has basis. And so that basis now when you pull it out, you won’t pay taxes on it cause you’ve already paid taxes once, but all the earnings, will be fully taxable going forward when you pull them out of the account.

What are the strategies that you can use if you’re in this situation? Well, I think the first strategy is to try to avoid covered status at all. That involves not making too much money, and leaving before you have too much net worth. And frankly, that’s probably the main strategy. Another strategy may be to not actually give up your US citizenship. That means all these assets, of course, are going to be taxed under US tax laws, going forward, but that’s not necessarily a terrible thing. Especially if you’re going into a country in Scandinavia or even Canada, where the tax rates may be a little bit higher.

But here’s the deal. I think if this were my plan to leave the US for Canada, I think I would lean toward making Roth contributions, and Roth conversions. I’d be doing Roth 401(k)s, backdoor Roth IRAs, anything I had that was tax deferred, I would probably do Roth conversions on for a couple of reasons.

  1. Number one, those Roth conversions will lower your net worth. Because they’re not giving you a tax adjustment for tax deferred dollars when they’re calculating up your net worth. So it might keep you out of covered status.
  2. Number two, there is not going to be any change in that Roth IRA. You’re not going to have to pay a big old exit tax on it because you’ve already paid taxes on it. It just goes forward being a Roth IRA, rather than a nondeductible traditional IRA.

I think that’s probably the way to go on this, but you just need to be a little bit careful about doing it, and planning for it, and it might be worth talking to both a US and a Canadian based accountant, and/or financial advisor to make sure you have all your ducks in a row with regards to this. I suspect it is probably easier going to Canada than going anywhere else, just because it happens so frequently, and the countries are so similar.

Paying off your Mortgage as a PSLF Side Fund

A listener with $300K in student loans and going for Public Service Loan Forgiveness recently started a PSLF side fund in a Vanguard money market account but now wonders if he should put the money towards his mortgage instead since he lives in Texas, which has favorable homestead laws. If PSLF fails, he could take out a home equity line of credit with a lower interest rate to pay down the student loans instead of using cash from the money market account. And if it doesn’t fail, then he will have paid down a significant chunk of his mortgage. He wanted to know what I thought of this strategy.

I do recommend a public service loan forgiveness side fund. The idea behind this side fund is that if you decide you don’t like your job at a 501C3 and you want to go do something else, you can take this money and pay off your student loans,. It gives you the career freedom to do that. It also provides some protection from legislative risk. If, for whatever reason, you’re not going to be grandfathered into the program, and I think this is a very low risk, but if that happened, you’d also have the side fund to pay off your student loans, and move on with your life. Obviously, if you receive public service loan forgiveness, that would just boost your nest egg; you’d just be that much better off.

So these folks are in Texas, they apparently have some asset protection concerns, and they know about the very generous homestead exemption in the bankruptcy provisions in Texas. I mean basically, you can get all kinds of stuff exempted in bankruptcy in Texas. I think it’s different whether you’re in the city or whether you’re in the country, but I think it’s a million dollar home that’s exempt in bankruptcy. So even if you get sued above policy limits, and it wasn’t reduced on appeal and you had to declare bankruptcy and they took everything they could from you. Not only would you get to keep things like your retirement accounts, but you would also get to keep up to a million dollars in home equity.

So their idea is rather than just investing this in a taxable account, what if we use it to pay off our mortgage since that money is asset protected? I think that’s fine. The nice thing about paying down a mortgage is its guaranteed rate of return. It’s usually not a very high rate of return, it’d only be three or four or 5%, but it’s guaranteed, and that’s a pretty good guaranteed return these days when you’re looking at treasury bonds paying 2%. That is certainly fine if that is what you would like to do. Are you likely to come out ahead investing it in the market, because you’ll likely make more than three or four or 5% in the long run? Yeah, probably, that is an easy argument to make. But once you add in the guaranteed nature, and the asset protection nature, this is not an unreasonable decision to make. So go ahead and use that to pay down your mortgage. And then if something happens to public service loan forgiveness, you can borrow against the mortgage if you’d like to pay off the student loans, or you can just cash flow it going forward, but you have options.

401(K) Contribution

“I have a 401(k) question for you. I understand the IRS will be increasing the employee pretax contribution limit for 401(k)s to 19,500 in 2020, as well as increasing the overall defined contribution plan limit to 57,000. My physician’s salary is high enough, and employer match percentage is in the double digit percentages, such that I plan to reach this $57,000 limit in 2020. I am wondering if I contribute less than $19,500 for my employee contributions, do the IRS rules allow an employer contribution amount above $37,500 to reach the annual total limit of 57,000, or is there a limit on the employer contribution amount of $37,500, and thus will I still need to contribute the full $19,500 in order to reach the 57,000 total maximum?”

Are the employers allowed to contribute more than 37,500 a year? The answer is yes, they can. They can contribute the whole $57,000 if they’re willing to do so, but you need to really make sure you understand the 401(k) plan you’re in, and what you have to do in order to maximize the match on that, and get as much employer money as possible.

Value Funds vs Growth Funds

“I would like to ask you about the selection between value funds and growth funds. From my understanding, the best option for a physician in the peak earning years is growth funds. There are a few reasons for that. Number one, historically speaking, the growth ETFs have a much higher average annual performance. Number two, the growth ETFs do not pay much dividends, something that decreases the tax burden. And number three, the growth ETF does not provide income to someone who does not need it in the short term, but would rather have higher savings 30 years later. However, after looking at your asset allocation, as well as the asset allocation of the Physician on FIRE, I was surprised to see that both of you have invested in value stocks. Could you please tell us more about your decision?”

First of all, his first point is that growth funds, or growth stocks, growth ETFs, have a higher return. Now that’s not actually true in the long run. If you look at the longterm data, value stocks have higher returns than growth stocks. However, that’s not the case for the last 15 years or so. If you go back all the way to 2000, value stocks slightly outperformed growth stocks, but over the last 15 years growth has beaten value. Now, there is a pretty significant body of data out there put together mostly by a couple of fellows at the University of Chicago, Fama and French, who basically showed that there is a premium for value stocks, meaning they have higher returns in the long run, and no one is really sure whether that is simply a behavioral story, meaning people don’t like these stocks, and so they don’t bid them up like they would an Apple or a Netflix, or whether it is a risk story.

I lean more toward it being a risk story, that these stocks are turned more, because the riskier stocks are more likely to go out of business. If Walmart is a growth stock, Kmart’s a value stock. It’s just not as good of a company, and so people aren’t as willing to pay for it. And so because you can get it as such a good price, it makes for a good value. So realize that the data you have, this is pretty recent, and there may be some recency bias in what you’re looking at. Keep in mind Bogle’s attitude toward these things as well. He looked at them as a phenomenon of returning to the mean, and he points out that growth stocks beat value stocks for a while. Then value stocks beat growth stocks, and then growth stocks win again, and given that we have been in a trend of 15 years of growth meeting value, maybe pretty soon the pendulum’s going to swing back, and value is going to start creaming growth again.

Keep that in mind as you decide on your asset allocation. Now the second point Jack makes is that growth is more tax efficient. Absolutely that is true. They have a lower yield. So more of the return comes in the form of longterm capital gains than it does in dividends. So you don’t have to realize the longterm capital gains until you sell. They are slightly more tax efficient. That is a fair point. So then he asked, why do I and the Physician on Fire tilt to value? And I think the reason we do that is based primarily on that longterm data put together by Fama and French that there is a value stock premium, even if it hasn’t shown up for the last 15 years.

Backdoor Roth IRA

What do you do if you contributed to a Roth IRA but now find that you are over the income limit?

This happens to a lot of people. If you think you’re going to be anywhere near the Roth IRA direct contribution limit, you need to do your Roth IRA contribution indirectly, through the backdoor.  I did this mistakenly in 2010. I thought I was going to have to do it through the back door, and in the end my income was low enough that I didn’t have to do it through the back door. But there’s no penalty for doing it through the backdoor. Anybody can do a backdoor Roth IRA, it’s just that high earners have to do it through the backdoor. So that’s the way you prevent this mistake,  if you think you could be anywhere close, just do it through the backdoor. But the good news is this isn’t particularly difficult to fix. All you have to do is recharacterize the contribution from a Roth IRA contribution to a traditional IRA contribution. And then you just convert it back to a Roth IRA. No big deal. Remember starting in 2018 you can’t recharacterize Roth conversions, but you can still recharacterize Roth contributions.

Working for a Private Equity Group

Private equity is consolidating groups and taking them over. One listener was curious to know what that means for the future of medicine, what that means for his finances, moving forward should he join one of these groups?

It is an unfortunate trend. We see private equity taking over all kinds of practices. They’re buying up physician practices, they’re buying up hospitals, hospitals are buying up physician practices. This consolidation of medicine that’s been going on for the last 10 or 20 years doesn’t seem to be about to reverse anytime soon, to me. I suppose it’s always possible, and I’ve talked to a few people that think this trend is going to reverse somewhat, but if it does, it’s going to be a slow thing and I think that’s still a number of years away.

The issue here is that doctors are at different stages in their financial life. If you are 60, and you are a partner in a practice, a buyout from private equity looks very good. It is a great way for you to sell your practice, and boost your nest egg, and really capitalize on what you’ve built over the years.

But if you’re that doctor’s 32 year old partner, now it doesn’t look so good, because you might not even be a partner yet. They might sell it out from under you while you’re still pre-partner and then you’re kind of hosed. You got hosed for being in that pre-partnership track and they ended up not being able to really deliver what you thought you were going to get, because they ended up selling the practice. This is one of those things that doctors look at differently depending on where they are financially and what stage of life they are in.

Obviously, it can be a good thing, you have a buyer now, and maybe you don’t have any other buyers, and so that’s great if you need a buyer, but obviously the reason they are buying your practice, or they’re buying your group, or your partnership or whatever is because they think they’re going to make profit off it, and where is that profit going to come from?

It is going to come from the clinical income that you generate. So you cannot, by definition, keep all of your clinical income if you’re going to sell that practice to somebody else, and they’re going to skim some certain percentage of that off. It’s the same issue with contract management groups, really. It’s the same issue when you’re a hospital employee. If you’re not going to own your business, you don’t get to keep the profit. And obviously physician practices can be profitable, or these private equity groups wouldn’t be buying them.

But that is a different question. The question he is asking is should you join a private equity-owned group? Well, I don’t know. Is it a good job?  It really comes down to what you want out of your job. For me, when I went looking for a group in 2010, when I came out of the military, it was really important to me to own my job. I wanted to be in a small democratic group, so I only looked at jobs that were small, democratic groups. I didn’t look at any employee jobs so this would be a deal breaker for me because I don’t want to be an employee. If you feel the same way I do, you probably want to avoid these jobs. But you know what? I think the majority of doctors actually want employee jobs this year. I mean, we heard from somebody earlier, they can’t find anybody that wants to be his partner because everybody wants guaranteed income, they want to be partner immediately. While partner immediately is an employee job, and so realize that it is just another employer, and it comes down to the contract, and what they’re paying, and what the benefits are, etc.

You compare it to the hospital employers, the large group employers, the private equity employers. It’s really not dramatically different, except maybe there’ll be a little bit more focused on profitability because I assure you those who run private equity funds are very much focused on the bottom line.

Ending

I answer a couple of questions about my boat purchase at the end of the podcast but you’ll have to listen to the podcast or read the transcript below if you want to learn whether I’d do it again or what I would do different! If you find the Q&A sessions helpful share the podcast with your colleagues. With your assistance we can spread the message of financial literacy to more high income earners.

Full Transcription

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

Dr. Jim Dahle: This is White Coat Investor podcast number 140, solving your financial dilemmas, and as this podcast goes live, it is our mother’s birthday. I say our because Cindy, my podcast manager is my sister, and our mother turned 75 today. So happy birthday mom. I don’t think she listens to the podcast, but maybe somebody will pass this on to her.

Dr. Jim Dahle: This is really been pretty overwhelming the last few weeks. You guys have just been sending in all kinds of questions on the SpeakPipe, and to make matters worse, you’re sending in hard questions, so we’re going to have a fun time today answering some of the hardest questions you guys have ever sent in on the podcast.

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Dr. Jim Dahle: Our quote of the day today is from Christopher Davis, who said a 10% decline in the market is fairly common. It happens about once a year. Investors who realize this are less likely to sell in a panic, and more likely to remain invested benefiting from the wealth building power of stocks. And that is true. I think it’s really important to have a knowledge of the history of investing in finances. A bear market, a 20% plus drop, happens about once every three years on average, and a correction or a 10% drop in the level of the stock market happens about once a year, on average. And so you should expect this to happen when stocks drop 10 or 20%, this should not be an unexpected event that causes you to do something. Your plan should incorporate the fact that you’re going to have to go through 60 corrections and 20 bear markets during your investing time period. So be prepared for that.

Dr. Jim Dahle: Thanks for what you do. Work is not always easy. Just the other day I sat through a five hour meeting with my partnership, and we’re asked to do a lot of things like that as a doctor. It’s not always very easy work, and the truth is that there are very few jobs that are easy to do that pay really well. And so most of you who are high-income professionals of some type have a difficult job, and sometimes a thankless job. And so let me be the first to tell you that there are people that appreciate your work, your patients do appreciate you, even if they sometimes forget to say it. So let’s see if we can catch up a bit on our SpeakPipe questions today. But first, let’s take one out of my email box. So this one comes in, says, “My physician husband and I have been following you for a few years now, and fired our financial advisor last month.”

Dr. Jim Dahle: Now the hard part, “Is it worth it to sell the 1-1.2% expense ratio mutual funds, and pay capital gains to get lower cost funds.” Sounds like a great financial advisor they had, right, that’s putting them in 1% plus expense ratio mutual funds. All right they say, “We are fortunate in that we’re able to max out all our tax advantaged accounts, and have well into the six figures in taxable accounts, 20 plus year time horizon in the highest tax brackets with the state income tax, $300,000 taxable account all in 1-1.2% ER mutual funds.” They’re actually excited they’re only paying one to 1.2%, now that they got rid of the financial advisor and they’ve got $50,000 in taxable gains on the 300 and looking forward to reinvesting in 0.1% or less expense ratio, Vanguard funds, and potentially paying the capital gains on that 50,000, or staying invested in the current funds and just investing new money in the Vanguard funds. What do we do?

Dr. Jim Dahle: Well, this is a question a lot of people have, and it’s really one of those kind of unfortunate things about taxable accounts. If you screw it up at the beginning, you’re kind of stuck with it in a lot of ways, or it’s going to cost you some money to get out, unless the funds are really terrible. If the funds are really terrible, you’ll get a capital loss when you get out of them. But here’s the way you should look at this as far as whether to have some legacy holdings in your portfolio, or whether to just get invested into what you actually want to own. Step number one is figuring out the basis on everything in your taxable account. If you have something with a loss, sell it now. You want to change investments, and you’ve got a loss, it’s going to cost you nothing, and in fact, lower your taxes to get rid of that investment.

Dr. Jim Dahle: So sell that. Anything with no gains, easy, no brainer, right? That costs you nothing in taxes, you might as well get rid of it. The commissions on selling these things are usually pretty low, and so that makes a lot of sense to sell anything with no gains. In fact, I’d sell anything with only minimal gains. If it doesn’t cost you much, you might as well get into your preferred investments, especially if the costs are much lower because those costs are going to compound. For these folks, it sounds like they’re going to compound for another 50 years, and so good option to get out of anything that you only have a minimal gain.

Dr. Jim Dahle: Now, hopefully, you were able to snag a few losses, and you can use those losses to offset any additional gains that you have in selling from the account, and so you ought to sell on, and use up as many capital losses you have, either carried over from prior years, or that you acquired while liquidating this portfolio. And then you’re left with a dilemma, the holdings that have a significant capital gain, so you’ve got to decide what you want to do at that point.

Dr. Jim Dahle: You can either build your portfolio around those holdings as legacy holdings, or you can bite the bullet, and pay the taxes. If you are going to bite the bullet, you probably ought to wait until you’ve at least had the investment for a year. That way you’re paying longterm capital gains taxes, instead of short term capital gains taxes. If you are older, you should be more likely to hold on to the investment as a legacy holding. If you’re 90, you probably don’t need to reform your portfolio, and pay a bunch of taxes to do it. You’re better off just waiting and leaving that money to your heirs to get the step up in basis. Likewise, if the basis is really low, it may be more worthwhile to hold on to the investment. Another great thing to do with these assets if you are charitably inclined at all, is to use these assets to make your charitable contributions.
Dr. Jim Dahle: You still get the same deduction you would get otherwise, but you’re basically flushing these capital gains out of your portfolio. Even if you turn around the next day and buy the exact same investment, right?. There’s no wash sale here like there is with tax loss harvesting. You can just donate it to charity and buy back the same number of shares if you like, and voila, you basically got a step up in basis.
Dr. Jim Dahle: Now, it doesn’t make sense if you’re not charitably inclined, you’re not going to come out ahead by giving money to charity, but if you are going to give money to charity anyway, use appreciated shares, especially appreciated shares you don’t want instead of cash, to make those contributions.
Dr. Jim Dahle: All right, let’s take a question off the SpeakPipe. This one comes from anonymous.

Speaker 3: hygiene. I am an attending physician three years out of residency and I’ve been working with my financial advisor for the last five years. I currently have a taxable investment account that’s being managed by his firm. We’ve only been contributing to it for the last 12 months, or so as our advisor wouldn’t even let us think about opening up a taxable account until all of my loans were paid off, that being about $160,000 in two years. We were maximizing our retirement accounts and had purchased, and have been settled in our new house.
Speaker 3: He currently has about $40,000 in it, and we contribute $2,500 per month. The AUM fee is pretty standard 1%, and all of the funds are Vanguard funds, which range from three to 35 basis points for their expense ratio. I want to put the investments into a more simple Boglehead style portfolio, which mirrors my retirement assets, because I don’t like the complexity of having these other 12 funds, some of which I don’t really understand, and don’t want to take the time to learn.
Speaker 3: I also don’t want to continue to pay that 1% fee as it gets larger every year. For context, we pay our financial advisor about a hundred dollars per month flat rate. So can I transfer those assets in kind to another account without realizing capital gains, and two, what should I do with those funds once I have them in my own account and don’t want them anymore? Should I sell them for simplicity’s sake, and pay the taxes on the gains, which now is about $2,500 in a mix of short and longterm gains, or wait for them to lose value first so I can count the losses against my taxes. Thanks for everything you do, Jim.

Dr. Jim Dahle: Okay, so this advisor sounds a little bit better than the last advisor that the last doctor had. So really here, yes, you can transfer in kind without paying capital gains taxes. For example, if you have mutual funds in a Fidelity brokerage account, just a taxable account, you can just say, “Hey, let’s transfer these in-kind over to Vanguard.” Nothing’s sold, nothing’s bought, there’s no tax consequences. Those holdings are just moved to Vanguard, and at that point you can then sell them if you want. A lot of people do this when they’re at a brokerage with particularly high commissions or high costs and where it’d be cheaper to move it to Fidelity, or E-Trade or Vanguard, or one of these low cost discount brokerages to sell those investments. And so a lot of times that makes sense, but be sure you look into the cost of that particular investment at the first place, and the second place.
Dr. Jim Dahle: Sometimes it makes sense to sell it at the first place, and then transfer cash, but you just have to look into that, and understand what the costs are. And then at this point, this listener is in the same spot as the person before, stuck with legacy holdings. So it’s the same process. Sell the ones with losses, sell the ones without any gains, sell the ones with minimal gains, sell up to the amount of losses that you have, and then take a deep breath and look at the other ones and your timeline, and how much you’re going to owe in taxes, and decide whether to keep them and build your portfolio around them as legacy holdings, or get rid of them and actually own what you want to have, and biting the bullet on the taxes.

Dr. Jim Dahle: All right, our next question comes in off the SpeakPipe.
Speaker 4: I’m calling from Canada where I am a doctor there. Thank you for all your advice. I’m now switching over to ETFs based on the Boglehead approach. I’ve previously held stocks through an investment company which specialized in buying a collection of 25 to 30 blue chip stocks, but because of the high MERs I have transferred those stocks to my current brokerage account.
Speaker 4: So my question is should I sell those stocks and pay capital gains on them, which will be around $25,000 of tax, or should I just keep them, and continue to invest in broad-based ETS going forward? I have another 20 years before I retire, so a relatively long time horizon. My concern is that I do not have the time nor the skills to research these individual stocks that I have, and I will probably do better investing in broad-based ETFs, although I won’t continue to pay the high MERs because I have those stocks within my brokerage account now. The stocks themselves have done reasonably well, although there is a wide degree of variation because some have done extremely well such as Alphabet and Amazon, whereas others have not done so well. Thank you so much.
Dr. Jim Dahle: Okay, we’ve got a theme going today or what? Here’s another person wondering what to do with stocks they bought before they knew what they were doing. And this has a little bit of an interesting twist, right? I’ve got a couple of questions today from Canadians, because you guys think I’m not challenged enough by your US tax questions, so you started giving me Canadian tax and investing questions.

Dr. Jim Dahle: In Canada, an MER is a common term, and what that means is a management expense ratio. We don’t really use that term in the US, but they do in Canada, and that’s an annual fee charged to your portfolio. It consists of a mix of management fees, operating expenses, and trailing commissions. You can look at the prospectus of the fund and figure out what that is. I guess the best thing to think about for a mutual fund, we have an expense ratio, same kind of thing, but for a separate account, this would be like a wrap fee is what we would call it in the US. So this demonstrates again that you’ve got to be careful what you buy in a taxable account, because you might be stuck with it for the rest of your life unless you’re a tither, or some other person that gives a bunch of money to charity each year, and then you can just flush out those capital gains.
Dr. Jim Dahle: I have a multimillion dollar taxable mutual fund account, and I don’t pay capital gains taxes on it, period. I don’t pay it. I mean, I guess we get the distributions whenever they distribute to me each year. The qualified dividends and the longterm capital gain distributions, I pay taxes on that, but I don’t sell them. The ones that have appreciated, I use for my charitable contributions, and I hold the rest. Obviously, the only time I sell them is when I have a loss in them, and I tax loss harvest the loss, so I’m getting these tax losses, and then I’m never paying the gains because I’m using those for my charitable contributions. It’s really a pretty slick trick with a taxable account.
Dr. Jim Dahle: All right, our next question comes from Sam. Let’s take a listen

Sam: Hi Jim, I wanted to maximize my tax deduction, and trying to decide if I should elect for an S-Corp taxation given the 199A deduction. From my understanding, it appears to be a balance between saving on self-employment taxes for an S-Corp, yet reducing 199A deduction, but with just an LLC there was more self employment taxes, yet more of a 199A deduction. So how do I figure out the right balance of salary to pay myself if I decide to elect for an S-Corp, and how do I even decide if I should elect to be in tax as an S-Corp? I get there is no set formula, but if you can just run through the numbers of how I figured this out by trial and error, it would really help me. Please dumb it down as much as possible. Breaking down exactly how much Medicare and social security tax I would pay for each scenario.
Sam: It would really help me out. My specific situation, I am a full time W2 and part-time 1099. For my 1099 income, I am the only employee married, filing jointly, and under the phase out limits. My 1099 may vary from 70,000 per year to 200,000 per year. Finally, a secondary question but somewhat related. Do I count accounts receivables in my calculations for this 199A deduction, and also from my employer contribution, or is it money that is just deposited and received in my bank account for the year?

Sam: I know accounts receivables are supposed to be an asset, but being in business on my own for the first time, it doesn’t seem right to count them when that money has just not been paid to me yet. Thanks so much for your help.

Dr. Jim Dahle: Oh boy. You guys are really giving me the hard questions now. Should you choose an S-Corp to try to get at a 199A deduction? How do I figure out what the right balance of salary to pay myself is? How do I even decide whether to go S-Corp? I mean, this is like a two hour discussion I could have with Sam over dinner about all the implications of these decisions, and he’s asking me to dumb it down on the podcast. No, I really can’t dumb it down, and let’s remember that I’m a blogger, not an accountant, so it’s hard enough for me to get all these details right when I’m writing a blog post, and I can sit down and pour over it, and double check it, and check my resources. But to do it off the cuff for a podcast is really tough. I’m going to try though, but it’s possible I may botch it a little bit.

Dr. Jim Dahle: So if you hear something that doesn’t sound right, make sure you double check it. So this particular person, Sam, is married, filing jointly, and under the phase out limits, and making somewhere between 70 and $200,000 in 1099 income, plus has a W-2 income on the side. He wants to know, do I count the accounts receivable and the employer contribution? Well, accounts receivable really depend whether you count those in your books, it depends on how you do your bookkeeping. If you do it on a cash basis like I do, then accounts receivable are nothing. They’re neither income, nor an expense. Employer contributions to 401(k)s are business expenses, so they decrease your ordinary business income, or profit, and thus your 199A deduction, which is the pass through business deduction for pass through businesses like partnerships, and sole proprietorships, and S-Corps.
Dr. Jim Dahle: So if Sam is below the phase out limits for 2020, married filing jointly, those phase out limits start at $326,600. But if you’re below that limit, you don’t have to deal with the salary. You don’t need an S-Corp like people above the upper limit do in order to pay yourself a salary to maximize your 199A deduction. If you’re below those limits, you don’t need that salary. So there’s really no reason to form an S-Corp for that issue. The deduction is just 20% of your qualified business income. So if your qualified business income is $100,000 your deduction is $20,000. So if you’re in the 40% bracket, that’s worth maybe $8,000 off your taxes. But the only reason to form an S Corp in this situation is to try to save on Medicare tax by declaring some of your income salary, and some distribution. But remember that whatever you call salary reduces your qualified business income amount, and thus your 199A deduction.
Dr. Jim Dahle: So if I were in this situation, I’d just be a sole proprietor. That way, that would max out with my 199A deduction. I wouldn’t have to hassle with form 941 each quarter. For an S-Corp, your taxes would be a lot simpler. You’d save those costs. You wouldn’t save anything on Medicare taxes, but you would certainly be able to maximize your 199A deduction. You know what another thing that you could do in this situation is rather than using a standard individual 401(k), and making tax deferred employer contributions, which would reduce your 199A deduction, you could do mega backdoor Roth IRA contributions. Obviously, you have to get a solo 401(k) that allows those contributions, but we’re really getting off into the weeds now. You can see there’s just no way to dumb this stuff down.

Dr. Jim Dahle: If you don’t want to dig into it, and really wrap your head around it, reading some of the blog posts that have been written about it, and maybe even buying a book about it, it’s probably worthwhile getting a good accountant or advisor to help because, if you make a lot of qualified business income, there’s a significant amount of money here to get that 199A deduction. Katie and I basically revamped our entire financial lives in order to maximize this deduction over the last couple of years. We’ve got new 401(k)s, we’ve changed how much we pay ourselves in the business. We’ve changed the contributions we make into those 401(k)s. It’s really a big deduction for us, and so we go way out of our way to try to maximize it, and if you’re in that situation as well is probably worth it. Although if you are below the lower income limit for the 199A deduction, it’s probably not that big of a deduction for you. It may not be worth rearranging your entire financial life, but do what you can to maximize that deduction. It’s worth understanding if you are self employed.
Dr. Jim Dahle: All right. Our next question comes from Miguel. Let’s take a listen.
Miguel: Hey Dr. Dahle, I just heard your interview with John Appino . While I thought it was very insightful, I had some questions from the employer’s point of view. I’m a young physician with a thriving practice in South Florida, and I am thinking about bringing on a new physician to help with the continual growth.
Miguel: I know we are offering a very strong compensation package, but I feel like all the candidates only care about becoming partners as soon as possible. I’m not opposed to sharing in the practice’s success, but fill that this has to be earned, and proven over time. Do you have any suggestions about how to go about this, and how to successfully and fairly bring onboard a new physician to a small growing practice?

Dr. Jim Dahle: Okay, so here is contract negotiation from the other side, right? His concern is that all the candidates only care about becoming partners as soon as possible. Well, duh. I mean you can’t blame them for that, right? A lot of them have $400,000 in student loans. They need to make some money and get those suckers paid off. But the key to any longterm partnership is to try to make it longterm. Treat each other fairly, treat each other well, come to an agreement that works for both people. Now, obviously, if there’s significant value in this business, they either need to buy into it with cash, or buy into it with sweat equity and if they don’ think that’s worth doing, then don’t bring them on as a partner, right? Because if they’re just want the best of everything with you getting hosed, they’re not going to make a great partner anyway.
Dr. Jim Dahle: So sometimes you have to sit there and talk to them about that because a lot of doctors, particularly young doctors coming out of training, don’t actually have much understanding of business. They don’t understand what it took for you to build a business to that size, and what it would take for them to piggyback off that, to stand on the shoulders of giants, and to take advantage of the hard work you’ve done in order to have a higher income throughout their career. A lot of docs, you just have to teach them about that because they don’t realize the benefit. And sometimes they forget the other big benefit aside from getting paid more, which actually isn’t even guaranteed these days, especially with some employers and hospitals are willing to throw at a physician. But the big benefit I see is control. Control over your practice, control over your business, control over your daily life, nobody telling you how to practice medicine.
Dr. Jim Dahle: And so I would encourage you, Miguel, to sell that aspect of partnership just as much as you do the higher income that you eventually get. And people who are business oriented and longterm focused, they should realize the benefit of a partnership. But, at the same time if you got an eight year partnership track, don’t be surprised when people say, “Hey, I don’t want to tie up eight years without even a guaranteed partnership.” So you got to keep that partnership relatively short, a reasonable buy-in, and go from there. I think in emergency medicine, there’s not a big practice to buy into. So it’s very rare that somebody brings money to buy into the practice. It’s almost always sweat equity. And typically that’s between one and three years. Occasionally, there’s a group that has a five year pre-partner track, but it better be a heck of a group.
Dr. Jim Dahle: The only people I know who’ve ever made that work, we’re in a very high income town and it was really a profitable practice, so people were willing to put up with being a pre-partner for five years. But even so it was kind of a graduated salary throughout those five years. So they got a big raise each year until they became a partner at the end of five years. But truthfully, I think your partnership tracks got to be shorter than that if you really want to attract good candidates, and think about well what’s the big point of a partnership track? Well, it’s to try before you buy. It’s to make sure you actually want to be in business with these people in the long term. And so what you want to do is not make it any longer, then you really need to find that out.

Dr. Jim Dahle: And then if it’s still a financial hit for you while you just have to either pay him less during that time period, or they got to bring cash to the table in order to buy in at the end of that period. But I think that would eliminate a lot of your issues if you can just shorten the partnership track where they’re exposed to that risk of you just deciding, “Hey, I don’t want you as a partner.” Because doctors are worried about this. They’re worried that you’re just taking advantage of them. They’re worried that you’re just using them as slave labor during the pre-partner period, paying them half of what they’re generating, or whatever, and then you’re just going to let them go, and repeat the cycle again.
Dr. Jim Dahle: But truthfully, having been on the hiring, and it’s a pain to hire. Nobody likes to hire, and so really when we’re hiring new partners, we’re trying to do it for the longterm, we only want to do it once for 30 years. We certainly don’t want to churn and burn every year. It’s just too much of a pain to hire, so I think just having a frank and open conversation about how that works, and sometimes even providing the education that maybe they don’t have is the way to go about it.
Dr. Jim Dahle: All right. Our next question comes from Jay.
Jay: Hi, Dr. Dahle, I’m a nurse anesthetist from the upper Midwest. 43 years old, and I’m looking to buy disability insurance through Principal. The salesman is trying to sell me regular occupation while I’m requesting own occupation rider to be placed on it. He is stating the regular occupation is better than own occupation, even though I believe that own occupation is the type of policy I would want. Could you give me some input as to helping me clarify this, own occupation versus regular occupation? I do not want a policy that if I would become disabled, and I find a different job that would pay me $1 million a year, that I would not get full payments from the benefits of my disability insurance.
Jay: I’m a little bit concerned that the salesman is lost as he has also tried to sell me whole life insurance within these meetings, so I have a little bit of a red flag being put up. Could you please help clear my mind with this, and see which is the right pathway to go, as I don’t mind paying more for own occupation if that’s the best way to go. Again, thanks for what you do, and have a great holiday season.

Dr. Jim Dahle: Okay, so Jay is confused by this Principal thing. This is a Principal thing, and I run into this all the time. In fact, I occasionally get complaints from even my recommended financial advisors, from people who have used them, that they’re confused by this point on Principal. So the Principal contract has some funny wording. The base contract by itself is not true own occupation, you have to buy a rider to make a true own occupation. But if you buy that rider, it is true own occupation insurance. So you just got to make sure that you get that rider if you’re buying insurance from Principal, then the policy’s fine. But in this case, this is an insurance agent that’s trying to sell you a whole life insurance policy. So if somebody tried to sell me a whole life insurance policy when I was there shopping for disability insurance, I’d fire him.
Dr. Jim Dahle: I’d certainly do it if they tried to do it twice. So I recommend you go to somebody on my recommended insurance agent list. These folks have been used by hundreds of white coat investors. They write hundreds of physician disability policies a year. They know the ins and outs of these policies. They’re not going to sell you a whole life insurance policy, so these are people that you can trust, and that know what they’re talking about. But that Principal thing isn’t an agent thing. That’s a Principal, that’s the company thing. The insurance company has just decided to word their contracts that way.
Dr. Jim Dahle: That doesn’t mean it’s not the right contract for you. At one point, I looked into getting an additional disability insurance contract. I actually ended up exercising my future purchase option for the one I had through the standard, but the one I was looking at, because it made sense for me as an emergency physician in Virginia, which is where I was living at the time, the right contract was the Principal contract with that rider, and so if I would have bought another one, that was the one I would have bought. So I don’t think it’s a bad contract, you just got to make sure you get the true own occupation rider that goes with it.
Dr. Jim Dahle: All right. Our next question comes from somebody who calls themselves team 529, let’s listen.
Speaker 8: Dr. Dahle, you are the man. Hey, I wanted to thank you again for your help with our office 401(k) problems. I had emailed you, and within about two days you had responded, and I thought that was pretty cool considering you’re such a busy guy. I honestly didn’t even expect a response, and you not only responded pretty quick, but the advice was very sound, and we’re in a much better position now two years later. But it sounds like the cool thing to do now today is to send in SpeakPipe questions so I thought I’d give it a try.
Speaker 8: We have a daughter who was able to generate some income through the office this year. We have another child on the way. We are unsure how many children we will be able to have, but we hope to send them all to private school. If you could give us some advice on what we should do with the money, that would be much appreciated. Initial thoughts were a 529, or a Roth IRA. Not sure if there’s something else we didn’t think of, or maybe a combination of those two. Thank you in advance, and keep up the good work. We really appreciate everything that you do.

Dr. Jim Dahle: Okay, so we’re talking about money the kids earn the business. This money should all go in a Roth IRA if you can possibly afford it. This is an awesome tax break, and this is the reason why my kids are models for the White Coat Investor site. If the only owners of your business are you and your spouse, and the business is not a corporation, and your minor children are your employees, you don’t have to pay payroll taxes on them. There’s no social security or Medicare tax on the money they earn. In addition, they don’t generally make enough earned income to actually have to pay any federal, or state income taxes. They’re usually below those amounts. And so there’s no tax up front when they make the money, but it is earned income that can be used to go into a Roth IRA. And at that point, it’s never taxed again.
Dr. Jim Dahle: It can grow for 50, 60, 70 years before they tap it all tax free. So it’s pretty awesome. This is money that’s never taxed. It’s the best possible tax break for your business, and for your children. It’s great. So if you can hire your children and take the earnings and put them in a Roth IRA, I highly encourage that. In this case, you’re thinking about putting in a 529 because you’re planning to go to private school, and you’ll need a lot of money to go to private school.
Dr. Jim Dahle: Well, that’s not a terrible idea. I mean, it’s great to put money in a 529. It’s certainly great to save up for a big chunk of what you’re planning to spend on their college, and that’s a reasonable place to put it. But if you have the money, I’d try to put it in a Roth IRA, and come up with a 529 money somewhere else.
Dr. Jim Dahle: I mean, you could even tap the Roth IRA money for education up to a certain point. I think you can take out your contributions, and you can also take up, I don’t even know if there’s a limit. I know the first house limits $10,000 worth of earnings, but I’m not even sure there is one for education. I’d have to look it up. But anyway, there’s some provisions that you can get into a Roth IRA tax and penalty free in order to pay for education. So worst case scenario, they could tap that for education, but obviously I’d encourage them not to, so you can benefit from decades and decades of tax free compounding. I mean that’s really a fantastic tax break, if you do it right. The problem is you have to justify what you’re paying your kids, right? And how much can you really justify that?

Dr. Jim Dahle: I mean, how much money is really reasonable to pay a six year old? And that’s the nice thing about modeling, is you can pay them a pretty high hourly rate, but if they’re just shuffling papers or sweeping the floor, they’re going to have to work for a long time to come up with any significant Roth IRA contribution amount.
Dr. Jim Dahle: All right, let’s do a mea culpa. In a recent podcast a few weeks back, I said that the TSP I fund had transitioned from a Developed International Index Fund to a Broad International Market Index Fund, that included emerging markets and Joel Schofer wrote in to tell me I was wrong, and he is correct. I was wrong. Despite the fact that the TSP has been trying to do this, or planned to do this since 2017 they haven’t actually done it yet. The idea was for the I Fund in the TSP, the Federal Thrift Savings Plan, the one for federal employees, and VA employees, and military employees.
Dr. Jim Dahle: The idea was to switch that I Fund from the MSCI EAFE index to the MSCI All Country XUS Investible Market Index, which is one of the broadest markets out there. So basically, they were turning it from the Vanguard developed markets index fund to the Vanguard total international stock market fund, is what they were doing. It’s a great idea. I mean, why skip Canada? Why skip the emerging markets country, right? You might as well get a little bit more complete exposure even though it’s still going to be highly driven by Europe and Japan, it does give you a little bit more diversification there.
Dr. Jim Dahle: However, along came Senator Marco Rubio who has announced plans to introduce legislation that would block the I Fund from changing its index. The goal? Well, the goal is to keep US dollars from investing in China, even though the new I Fund index would put less than 10% of its assets into Chinese stocks, that apparently has some political ramifications in Washington. And I think it basically comes down to this multi-year trade war that’s ranged from intellectual property rights, to trade imbalances, to accounting standards, and even human rights.

Dr. Jim Dahle: And so it’s interesting, this isn’t even a particularly partisan issue in Washington. Several members of both the Republican and the Democratic party have adopted some hard line approaches towards China, and so in the meantime, the TSP I Fund is still a developed markets index. I apologize for getting that wrong.
Dr. Jim Dahle: Okay. Our next question comes from anonymous, an anonymous Canadian citizen practicing in the US. Let’s hear it.
Speaker 9: Dear Dr. Dahle, Thanks for what you do. I’m a Canadian citizen who’s a physician in the US. My wife and I are considering returning to Canada for our retirements. Are there any specific considerations we should have for investing in Roth accounts versus traditional accounts given this possible eventuality?
Speaker 9: Also, is there any way that we should be structuring our investments differently in a 403B, individual 401(k), private, 457, or 529 accounts? Thirdly, what should we be considering as we invest in different things such as ETFs, mutual funds, direct real estate, crowdfunded real estate, and fourthly, how should we split our investments between my wife, my kids, and I specifically with regards to the covered expatriate status? Thank you so much.
Dr. Jim Dahle: Okay, another hard question. You guys are really trying to stump me now. I had to look this one up. So if you’re planning to go back to Canada after practicing in the US, yes, that is going to affect a bunch of the ways you save for retirement. Let’s talk just for a minute about covered expatriate status. So an expatriate is someone who’s given up their US citizenship, or green card through the official US government procedures. They generally have to file form 8854 with your final US tax return. And now notice this is not somebody that’s just living overseas, this is someone who’s actually given up their US citizenship. So if you meet one of the three requirements here, you are a covered expatriate. And what that means is you’re going to have to pay an exit tax on all your assets in that final year. So here’s the three requirements.
Dr. Jim Dahle: The first one is an average annual net income tax for the period of five tax years ending on the date before relinquishing citizenship, or residency is greater than 168,000. So of you’re paying more than 168,000 in taxes on average, then you fall into this covered status. So number two, if your net worth is at least 2 million on the date of expatriation, I think that’s the one that would get a lot of people in this situation. And the third one is if you fail to certify that you’ve met the requirements of the US tax law for the five proceeding tax years, or failed to submit evidence of your compliance, that’s what form 8854 is for. So could doctors stay under these limits and not be covered? Absolutely. So the sooner you go before you hit any of those limits, it’s probably better. So you can avoid that exit tax.

Dr. Jim Dahle: But realize about this exit tax, the way this works is when you leave the country, you’re basically taxed on everything. So if you got a taxable account, you’re basically updating your basis in that to what the value is on the date of expatriation. And so obviously, you want those to be longterm capital gains taxes, but it’s unfortunate they have to pay them at all. If you just stayed in the US you wouldn’t have to pay those taxes. Bear in mind that this also applies to IRAs. If you are a covered expatriate, you pay taxes if your IRA was fully distributed to you on the day you expatriate. It’s interesting though, you don’t have to actually get rid of the IRA. You can leave the money in the IRA, you don’t have to pull it out, but you do have to pay taxes on it.
Dr. Jim Dahle: So essentially what you’ve done is you turned your IRA from being tax deferred money, to being a nondeductible IRA, which now has basis. And so that basis now when you pull it out, you won’t pay taxes on it cause you’ve already paid taxes once, but all the earnings, will be fully taxable going forward when you pull them out of the account. And so what are the strategies that you can use if you’re in this situation? Well, I think the first strategy is to try to avoid covered status at all. And that involves not making too much money, and leaving before you have too much net worth. And frankly, that’s probably the main strategy. Another strategy may be to not actually give up your us citizenship. That means all these assets, of course, are going to be taxed under US tax laws, going forward, but that’s not necessarily a terrible thing.
Dr. Jim Dahle: Especially if you’re going into a country in Scandinavia or even Canada, where the tax rates may be a little bit higher. Maybe that’s not such a bad thing. But here’s the deal. I think if this were my plan to leave the US for Canada, I think I would lean toward making Roth contributions, and Roth conversions. I’d be doing Roth 401(k)s, I’d be doing backdoor Roth IRAs, anything I had that was tax deferred, I would probably do Roth conversions on for a couple of reasons. Number one, those Roth conversions will lower your net worth, right? Because they’re not giving you a tax adjustment for tax deferred dollars when they’re calculating up your net worth. So it might keep you out of covered status. Number two, there’s not going to be any change in that Roth IRA. You’re not going to have to pay a big old exit tax on it because you’ve already paid taxes on it.

Dr. Jim Dahle: So it just goes forward being a Roth IRA, rather than a nondeductible traditional IRA. And so I think that’s probably the way to go on this, but you just need to be a little bit careful about doing it, and planning for it, and it might be worth talking to both a US, and a Canadian based accountant, and/or financial advisor to make sure you have all your ducks in a row with regards to this, and I suspect it’s probably easier going to Canada than going anywhere else, just because it happens so frequently, and the countries are so similar. You could try to go some other country, it may be a dramatically worse consequences to moving your finances around.
Dr. Jim Dahle: All right. Our next question is anonymous. Let’s take a listen.
Speaker 10: Hey Jim, my wife and I are both physicians, and we have about $300,000 in student loans. We are going for public service loan forgiveness, and we have about two and a half years left of payments to have our loans forgiven. I recently set up a PSLF side fund in case the program does fail. Right now, we’re putting about 5,000 a month in a Vanguard money market account. But after hearing your podcast about asset protection, I’ve been starting to think about putting that money towards my mortgage instead, since I live in Texas, which has favorable homestead laws. So if PSLF fails, I could take out a home equity line of credit with a lower interest rate to pay down the student loans instead of using cash from the money market account. And if it doesn’t fail, then I want to pay down a significant chunk of my mortgage. Does this strategy make any sense? Thanks.
Dr. Jim Dahle: Okay, so these are two docs, $300,000 left and their student loans going for public service loan forgiveness in two and a half years. Awesome. Almost there, right? They’ve been in this program for a long time already, and they’ve decided they want to do what I recommend, which is a public service loan forgiveness side fund. So the idea behind this side fund is that if you decide you don’t like your job at a 501C3, at a nonprofit employer, and you want to go do something else, you can take this money and pay off your student loans, and it’ll give you the career freedom to do that. It also provides some protection from legislative risk. If for instance, something happens with Congress or the IRS, and they decide for whatever reason, you’re not going to be grandfathered into the program, and I think this is a very low risk, especially for somebody with almost eight years of payments already in the program.

Dr. Jim Dahle: But if that happened, you’d also have the side fund to pay off your student loans, and move on with your life. And obviously if you receive public service loan forgiveness, that would just boost your nest egg, you’d just be that much better off. So these folks are in Texas, they apparently have some asset protection concerns, and they know about the very generous homestead exemption in the bankruptcy provisions in Texas. I mean basically, you can get all kinds of stuff exempted in bankruptcy in Texas. I think it’s different whether you’re in the city or whether you’re in the country, but I think it’s a million dollar home that’s exempt in bankruptcy. So even if you got sued above policy limits, and it wasn’t reduced on appeal and you are totally, you know, I had to declare bankruptcy and they took everything they could from you.
Dr. Jim Dahle: Not only would you get to keep things like your retirement accounts, but you would also get to keep up to a million dollars in home equity. The Texas laws are actually really interesting. You get to keep all kinds of stuff. That’s something like 12 head of cattle, and 120 chickens, and a couple of firearms. There’s all kinds of things that are exempted under the Texas law, and so it’s pretty cool, even though you’ll probably never need that.
Dr. Jim Dahle: But so their idea is rather than just investing this in a taxable account, what if we use it to pay off our mortgage since that money is asset protected? I think that’s fine. The nice thing about paying down a mortgage is it’s guaranteed rate of return. It’s usually not a very high rate of return, but it’d only be three or four or 5%, but it’s guaranteed, and that’s a pretty good guaranteed return these days when you’re looking at treasury bonds paying 2%, and so that’s certainly fine if that’s what you would like to do. Are you likely to come out ahead investing it in the market, because you’ll likely make more than three or four or 5% in the long run?
Dr. Jim Dahle: Yeah, probably that’s an easy argument to make. But once you add in the guaranteed nature, and the asset protection nature, this is not an unreasonable decision to make. So go ahead, that’s what you’d like to do, and use that to pay down your mortgage. And then if something happens to public service loan forgiveness, you can borrow against the mortgage if you’d like to pay off the student loans, or you can just cash flow it going forward, but you’ve got options.
Dr. Jim Dahle: Okay. Our next question comes from Zach in Boston. Let’s take a listen.

Zach: Good evening, Dr. Dahle, I have a 401(k) question for you. I understand the IRS will be increasing the employee pretax contribution limit for 401(k)s to 19,500 in 2020, as well as increasing the overall defined contribution plan limit to 57,000. My physician’s salary is high enough, and employer match percentage is in the double digit percentages, such that I plan to reach this $57,000 limit in 2020.
Zach: I am wondering if I contribute less than $19,500 for my employee contributions, do the IRS rules allow an employer contribution amount above $37,500 to reach the annual total limit of 57,000, or is there a limit on the employer contribution amount of $37,500, and thus will I still need to contribute the full $19,500 in order to reach the 57,000 total maximum? Thank you in advance for your answer, and all that you do.
Dr. Jim Dahle: Okay, so the question here is are the employers allowed to contribute more than 37,500 a year? The answer is yes, they can. They can contribute the whole $57,000 if they’re willing to do so, but you need to really make sure you understand the 401(k) plan you’re in, and what you have to do in order to maximize the match on that, and get as much employer money as possible.
Dr. Jim Dahle: All right, our next question is from Jack. Let’s take a listen.
Jack: Dear White Coat Investor, thanks for being a great mentor to all the do it yourself investors. There’s a question I would like to ask you about the selection between value funds, and growth funds. From my understanding, the best option for a physician in the peak earning years is it growth fund. There are a few reasons for that. Number one, historically speaking, the growth ETFs have a much higher average annual performance. Number two, the growth of ETFs do not pay much dividends, something that decreases the tax burden.

Jack: And number three, the growth ETF does not provide income to someone who does not need it in the short term, but would rather have higher savings 30 years later. However, after looking at your asset allocation, as well as the asset allocation of the Physician on fire, I was surprised to see that both of you have invested in value stocks. Could you please tell us more about your decision?
Dr. Jim Dahle: Okay, so Jack wants to talk about value versus growth funds. First of all, his first point is that growth funds, or growth stocks, growth ETFs, whatever, have a higher return. Now that’s not actually true in the long run. If you look at the longterm data, value stocks have higher returns than growth stocks. However, that’s not the case for the last 15 years, or so. If you go back to all the way to 2000, 19 years, value stocks slightly outperformed growth stocks, but over the last 15 years growth has beaten value. Now, there is a pretty significant body of data out there put together mostly by a couple of fellows at the University of Chicago, Fama and French, who basically showed that there is a premium for value stocks, meaning they have higher returns in the long run, and nobody’s really sure whether that is simply a behavioral story, meaning people don’t like these stocks, and so they don’t bid them up like they would an Apple or a Netflix, or whether it’s a risk story.
Dr. Jim Dahle: I lean more toward it being a risk story that these stocks are turned more, because the riskier stocks are more likely to go out of business. If Walmart’s a growth stock, Kmarts a value stock. It’s just not as good of a company, and so people aren’t as willing to pay for it. And so because you can get it as such a good price, it makes for a good value. So realize that that data you have, that you’re looking at the growth beats value. This is pretty recent, and there may be some recency bias in what you’re looking at there. Keep in mind Bogle’s attitude toward these things as well. He looked at them as a phenomenon of returning to the mean, and he points out that growth stocks beat value stocks for a while. Then value stocks be growth stocks, and then grow stocks when again, and given that we’re been in a trend of 15 years of growth meeting value, maybe pretty soon the pendulum’s going to swing back, and value’s going to start creaming growth again.

Dr. Jim Dahle: So keep that in mind as you decide on your asset allocation that it may be time for that to swing back the other way. Now the second point Jack makes is the growth is more tax efficient. Well, absolutely that’s true. They have a lower yield. So more of the return comes in the form of longterm capital gains than it does in dividends. And so you don’t have to realize the longterm capital gains until you sell. And so they are slightly more tax efficient. That’s a fair point. So then he asked, why do I and the Physician on Fire tilt to value? And I think the reason we do that is based primarily on that longterm data put together by Fama and French that there is a value stock premium, even if it hasn’t shown up for the last 15 years.
Dr. Jim Dahle: All right. Our next question is an anonymous question. Let’s take a listen.
Speaker 12: Hey Jim. I’m a podiatrist a year out of residency in a private practice in the Southeast. A large part of my salary is a production based bonus. I was anticipating earning about 150,000 my first year out as I built up my patient base. However, I got busy sooner than expected, and it looks like I’ll be just above the 203,000 mark for the year.
Speaker 12: The problem is I’ve been contributing to my Roth IRA that I started in residency, and now I am realizing I’ll be above the income limit for 2019. I was wondering if you could offer a little guidance on how to correct the issue, as I’ve been about unable to locate a post on the blog about the topic. Any advice wouldn’t be great. I appreciate you what you’re doing. Thanks so much.
Dr. Jim Dahle: Okay, so here’s the deal. This happens to a lot of people. If you think you’re going to be anywhere near the Roth IRA direct contribution limit, you need to do your Roth IRA contribution indirectly. You need to do it through the back door. I did this mistakenly in 2010. I thought I was going to have to do it through the back door, and in the end my income was low enough that I didn’t have to do it through the back door. But there’s no penalty for doing it through the backdoor. Anybody can do a backdoor Roth IRA, it’s just that high earners have to do it through the backdoor.

Dr. Jim Dahle: So that’s the way you prevent this mistake that this caller has made, is if you think you could be anywhere close, just do it through the backdoor. So the good news is this isn’t particularly difficult to fix. All you have to do is recharacterize the contribution from a Roth IRA contribution to a traditional IRA contribution. And then you just convert it back to a Roth IRA. No big deal. Remember starting in 2018 you can’t recharacterize Roth conversions, but you can still recharacterize Roth contributions, and that’s what we’re talking about here.
Dr. Jim Dahle: All right. Our next question comes from Sammy E. Let’s take a listen.
Sammy E.: Hi, Dr. D., thank you for taking my question. I’m a urologist practicing in the Northeast, and one phenomenon that we’re finding here is private equity taking over a lot of groups. Private equity is consolidating groups, and taking them over. I’m curious to know what that means for the future of medicine, what that means for our finances, moving forward should you join one of these groups? Thank you, and have a good day.
Dr. Jim Dahle: Okay. Private equity. Everybody’s boogeyman, right? Yeah, it’s, it’s an unfortunate trend. We see private equity taking over all kinds of practices. They’re buying up physician practices, they’re buying up hospitals, hospitals are buying up physician practices. This consolidation of medicine that’s been going on for the last 10 or 20 years doesn’t seem to be about to reverse anytime soon, to me. I suppose it’s always possible, and I’ve talked to a few people that think this trend is going to reverse somewhat, but if it does, it’s going to be a slow thing and I think that’s still a number of years away.

Dr. Jim Dahle: The issue here is that doctors are at different stages in their financial life. If you are 60, and you are a partner in a practice, a buyout from private equity looks very good. Here’s a great way for you to sell your practice, and boost your nest egg, and really capitalize on what you’ve built over the years.
Dr. Jim Dahle: But if you’re that doctor’s 32 year old partner, now it doesn’t look so good, because you might not even be a partner yet. They might sell it out from under you while you’re still pre-partner and then you’re kind of hosed, right? You got hosed for being in that pre partnership track, and you know they ended up not being able to really deliver what you thought you were going to get, because they ended up selling the practice. But if you’re older, this is a great deal. And so this is one of those things that, you know, doctors look at differently depending on where they are financially, and where they are in that the stage of their life.
Dr. Jim Dahle: Obviously, it can be a good thing, you’ve got a buyer now, and maybe you don’t have any other buyers, and so that’s great if you need a buyer, but obviously the reason they are buying your practice, or they’re buying your group, or your partnership or whatever is because they think they’re going to make profit off it, and where’s that profit going to come from?
Dr. Jim Dahle: Well, it’s going to come from the clinical income that you generate. So you cannot, by definition, keep all of your clinical income if you’re going to sell that practice to somebody else, and they’re going to skim some certain percentage of that off. It’s the same issue with contract management groups, really. It’s the same issue when you’re a hospital employee. If you’re not going to own your business, you don’t get to keep the profit. And obviously physician practices can be profitable, or these private equity groups wouldn’t be buying them.

Dr. Jim Dahle: So that’s a different question. The question he’s asking is should you join a private equity owned group? Well, I don’t know. Is it a good job? Is that where you want to be when you work for a different employer anyway? It really comes down to what you want out of your job. For me, when I went looking for a group in 2010, when I came out of the military, it was really important to me to own my job.
Dr. Jim Dahle: I wanted to be in a small democratic group, so I only looked at jobs that were small, democratic groups. I didn’t look at any employee jobs, and so yeah, this would be a deal breaker for me because I don’t want to be an employee. If you feel the same way I do, you probably want to avoid these jobs. But you know what? I think the majority of doctors actually want employee jobs this year. I mean, we heard from somebody earlier, they can’t find anybody that wants to be his partner because everybody wants guaranteed income, they want to be partner immediately. While partner immediately is an employee job, and so realize that it’s just another employer, and it comes down to the contract, and what they’re paying, and what the benefits are, and so on and so forth.
Dr. Jim Dahle: You compare it to the hospital employers, and you compare it to the large group employers, and you compare it to the private equity employers. It’s really not dramatically different, except maybe there’ll be a little bit more focused on profitability because I assure you those who run private equity funds are very much focused on the bottom line.

Dr. Jim Dahle: All right. Our next question comes from an anonymous caller.
Speaker 14: Dr D., Thank you for taking my question. I’m a urologist practicing in the Northeast, and my wife is basically a stay at home mom. She works just a few hours a week, and does not get any health insurance as part of her work arrangement. I currently have regular traditional PPO insurance, but as I’m changing jobs soon, I’m considering getting an HSA for all the tax benefits outlined in the blog, and in your books. I’m curious to know, does it make sense to have an HSA with three young kids who are often heading to the pediatrician and or emergency room for all sorts of illnesses and injuries. Thank you, and have a good day.
Dr. Jim Dahle: Okay, so this is a classic mistake of mistaking the HSA for the high deductible health plan. The first decision you make when it comes to your health insurance is which health plan is right for you. Is a low deductible, or a PPO plan right for you and your family, or is a high deductible health plan right for you? For my family, a high deductible health plan is right, because we’re pretty healthy, nobody has any particularly expensive medical conditions, and we’re very comfortable taking care of small things ourselves. I don’t take my kids to the ER for sutures. Well, actually I might, but I’m not going to have to pay the ER for sutures. So we use a high deductible health plan. Now, because we’re doing that, we also use the HSA that comes with a high deductible health plan, the right to use an HSA.
Dr. Jim Dahle: And so we think that’s great. It’s a triple tax free account. It’s a stealth IRA. All the benefits of having an HSA. But if I was forking out thousands of dollars a year for health care, it might be better for me to have a low deductible plan. And so the first question is which plan is right for you? And if the low deductible plan is right for you, because your kids really are getting sick and injured a ton, and you’re just churning through the money with premiums, and deductibles, and copays and you’re hitting your out of pocket max every year. Well, maybe a high deductible health plan is not right for you, in which case, you don’t get to use an HSA. So I wouldn’t let the HSA make this decision. I would make the decision first based on your healthcare needs, on average.
Dr. Jim Dahle: And obviously you can’t predict things, that’s why you buy insurance. But if the high deductible health plan is right for you and be sure to use a good HSA, and invest any money you’re not spending any given year.

Dr. Jim Dahle: All right. Let’s end with a couple of questions from Ed from Michigan, and these would be a little bit more lighthearted questions. Finally, some questions I can actually answer. Let’s listen to the first one.
Ed: Jim, this is Ed from Traverse City, Michigan. I have been a regular WCI reader since 2015. Your work has helped my family’s finances immensely. Thank you for all your work, and help. My question pertains to your love of the outdoors, leisure, travel, and your family. For a guy that goes on so many trips, and outdoor adventures, especially with your kids, what is your perspective on owning and using an RV or camper? I would have expected you to be an RV and camper enthusiast, and would like to hear your thoughts. Why don’t you own one yourself? Thank you for all that you do.
Dr. Jim Dahle: Okay. Let’s talk about land yachts, or RVs. Katie and I are not really RV kind of people, because RVing isn’t exactly a wilderness experience. You tend to stay pretty close to the beaten path, and I got to be pretty aggressive to get it into a lot of the places that we like to go. So that’s kept us from buying an RV. It’s a fairly expensive item that’s kept us from buying an RV. We didn’t have any place to park it, and that’s something that’s kept us from getting an RV. But the bottom line is we’re just not RV kind of people. That said, we went on a trip for fall break this year in a friend’s RV and it was great. We used it as our base camp for a canyoneering trip rather than hanging out in tents.

Dr. Jim Dahle: But I still slept in the tent outside the RV because all the kids wanted to stay in the RV, and so no big deal. But we’re just not RV kind of people. So we don’t own one. You know with the new addition we’re putting on the house, we actually probably do have space to put an RV next to the house, but that’s kind of where I’m putting the boat, which is the next question. Let’s listen to it from Ed.
Ed: Jim, this is ed from Traverse City, Michigan. I appreciate all your resources and help on serious financial matters, but I have more of a lighthearted financial question. Can you please elaborate on the process you went through when purchasing your wake boat? I have read your blog posts about your wake boat and its expenses, but they do not focus on your process or reasonings why you chose a specific brand, the model, the boat size, the engine, your original intended use for wakeboarding versus wake surfing, et cetera.
Ed: I presume your boat is an Axis based on the pictures in the blogs. Do you have any regrets from your purchase? Would you do the purchase again? What would you do the same, or differently, if you were to buy another weight boat? Thank you for all that you do.
Dr. Jim Dahle: Okay. Ed wants to talk about my boat. All right. Well, our first boat we bought in 2010, as I was getting out of the military, it was kind of a beater boat, a starter boat. I think it cost us $6,000. We brought it out, learned how to boat, learn how to put it on the trailer, explored all over Lake Powell, and other places and really had a good time. But the problem with the boat is we couldn’t take very many people, and we couldn’t surf behind it. So in 2015 we sold that boat, actually at a profit. After beating it up for five years, I sold it for $1,500 more than I bought it for, and we bought an Axis T23.

Dr. Jim Dahle: The Axis T23 is a wake boat. It’s a much more expensive boat, lots of moving parts on it. But I basically bought it for three purposes. The first purpose was to surf. We like surfing behind the boat. You’ve got to have a boat that’s safe to surf behind. And not only one was my other boat too little, it just didn’t make a big enough wave to surf on. But it was an inboard, outboard, and so it wasn’t safe to be behind that boat on a surf surfboard. So that was the first reason. The second reason was we wanted to be able to take more people when we went camping out of our boat. We might not camp in an RV, but we camp a lot out of a boat. And so this allows us to take more stuff, and more people when we go and do that. So that was another purpose we had with the boat.
Dr. Jim Dahle: But knowing that what we were going to be doing with it is kind of different from what a lot of wake boat owners do, in that we’re going to beach it. We’re going to pull it up on a beach and scratch up the bottom on the sand, and we’re going to be bringing camping gear in and out of it all the time, and beating it up a little bit. And then the third purpose that I was going to use it for was as transportation for canyoneering trips. And if you thought you beat it up camping out of it, you really beat it up canyoneering out of it, because every time a canyoneer gets in there with their boots on, and a bag full of sand, and a harness full of carabiners, and you start beating the boat up, and so I’m pretty hard on my boat.

Dr. Jim Dahle: And knowing that I decided, one of the reasons we decided not to get the highest end, fanciest finish boats like a Mastercraft, or a Malibu, or a Nautique, or whatever was that I knew how I was going to use it. That, and I just wanted something that was a little bit more utilitarian. So an Axis is a price point boat. It’s a little bit like a Toyota versus a Lexus. If a Malibu’s a Lexus, and Axis is a Toyota. Same innards, same performance, not as nice of finishes. And so that was why we ended up with an Axis. The other reason was it was much cheaper. I think it was probably two thirds of the price of what a Malibu was going for at the time. And so I think some of the things you got to think about when you’re buying a boat is what does this primary use going to be?

Dr. Jim Dahle: For most people these days it’s surfing. So you want a boat that surfs well, so check that out. If you’re into wakeboarding more, obviously check out the wakeboarding wake. Engine size, this is probably my biggest regret on the boat. I thought for a long time about getting the next engine size up. There were four sizes that were being sold the year I bought the boat. There’s a 350 horsepower, and a 409 horsepower, and a 450 horsepower, and a 550 horsepower engine that you could buy. And I ended up buying the 409, and kind of wish I’d bought the 450, and mostly just because we almost always boat at altitude, and I could use a little bit more power. And so that was a regret. I wish I’d bought a bigger one. It’s interesting, within a couple of years, the base level ended up being the 409 I think they just realized that everybody needed a little bit more power for what they’re using the boat for.

Dr. Jim Dahle: But yeah, I’d do the same again. We’ve certainly had some problems with the boat. We’ve had it in the shop a fair amount. Some people I go with sometimes refer to it as my lemon, but the truth is I’m putting way more hours on that boat than most other people in this area. Considering our boating season for some people here is only two months long, I stretch it out to about five months, maybe even six months, and I just use it a lot harder than they do, with all the camping and canyoneering I do out of it. And so I think that’s the cause of some of the problems we’ve had, but part of it was it was kind of a brand new boat that year, a new model.
Dr. Jim Dahle: I think they’d just come out with it that year, and so we got the first year of that model, and I think that may be why there were a few issues with it. I think that most of them have been resolved. We had some fuel pump issues. We had some surf gate ram issues, but it worked out pretty well. I’m still happy with it, and not planning to swap it out, even though I have the money to do so at this point. I don’t expect to even be in the market for at least another five years. So I’m pretty happy with it.
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Speaker 18: My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He is not a licensed accountant, attorney or financial advisor. So this podcast is for your entertainment, and information only, and should not be considered official, personalized financial advice.