Podcast #49 Show Notes: Tales from My Email Box
In this episode we take a dive into my inbox. I enjoy getting your questions and answering those on the podcast. It gives you a chance to hear what other people are concerned about and I know a lot of you have similar questions. You can listen to the podcast here or it is available via the traditional podcast outlets, ITunes, Overcast, Stitcher, Google Play. Or watch the video here or on YouTube. Enjoy!
Podcast # 49 Sponsor
Quote of the Day
[00:00:53] “The individual investor should act consistently as an investor and not as a speculator.” -Benjamin GrahamIntroduction
[00:02:15] We are still working on package most of the conference up into a video online course and plan to make that available for purchase, for those who attended as well as for those who didn't get the chance to attend. I know a lot of people were interested in coming and weren't able to because it simply sold out too fast. Hopefully those people will get a chance to participate through the video aspect of it. [00:03:00] In this episode I thought we would just take a dive into my inbox. I enjoy getting your questions and answering those on the podcast. It gives you a chance to hear what other people are concerned about and I know a lot of you have similar questions.
Q&A from Readers and Listeners
- [00:03:47] “Are there any lifetime limits on retirement accounts and 529 plans?”
- [00:06:16] “I'm a W2 employee with a SEP IRA and I'm wondering if I should attempt to do a backdoor Roth IRA for myself or my wife or both? Our household income this year will be over three hundred thousand dollars. Currently we both have Roth IRAs that were funded when our adjusted gross income was much lower. Neither of us have a traditional IRA. My wife has a typical 401k through her employer. If it matters my SEP IRA should come out to roughly 30 thousand dollars per year.”
- [00:09:21] “I would love to hear your thoughts on refinancing to capture the equity in your house or a rental property. When is it smart to refinance down to 20 percent equity or maybe 25 percent and use the money to move towards other investments?”
- [00:13:14] “I had a question about saving for short term large purchases such as a house or a pool. I use a Fidelity account to invest in a New Jersey municipal bond fund that is both state and federal tax free. I have the Fidelity Visa card with 2 percent cashback on everything that goes directly into that account. How do you feel about using that instead of a savings account for short term large purchases?”
- [00:15:43] “I'm a medical student and thanks to my parents personal finance skills, I'll be graduating from medical school with no debt. I'm in the process of planning my budget and financial plan for the first year of residency and I have a question I'd like to get your feedback on. Of the approximately fifty thousand dollars I'll be paid in the first year of residency, my goal is to save half, for about twenty five thousand dollars. I plan on making the maximum contribution to a Roth IRA, the max contribution to an HSA, and a contribution to a 401K to at least meets my employer's level of matching. I already have an emergency fund of 15,000 dollars established and that leaves me ten thousand dollars a year in savings that I need to decide how to invest. In your opinion what's the best way to invest the additional savings?”
Ending
If you have questions you would like answered on the podcast e-mail them to me or if you want more opinions from the community, join the free White Coat Investor Forum and post them there.
Full Transcription
[00:00:00] 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.[00:00:20] Welcome to episode 49 tales from my email inbox. This episode is sponsored by Bob Bhayani at doctor disability quotes.com. They are a truly independent provider of disability insurance plans and solutions to the medical community nationwide. Bob specializes in working with residents and fellows earlier in their careers to set up sound financial and insurance strategies. Contact Bob today by email at info at Dr Disability quotes dotcom or by calling 9 7 3 7 7 1 9 1 0 0.
[00:00:53] Our quote of the day today comes from Benjamin Graham who said the individual investor should act consistently as an investor and not as a speculator.
[00:01:03] That kind of reminds me of something from the conference in March where Jonathan Clements I believe it was was asked about bitcoin and basically he said something about speculation. And that was where he left it and pretty much the answer was yeah that's speculation. You should just avoid it.
[00:01:35] And it was awesome to hear your stories and get to shake your hand and look in the eye and hear about how we've been able to help you and what else we can do for you. It was really quite a fun three days. took a long time to get ready for it and a lot of effort. But the actual conference itself was awesome and we really enjoyed ourselves. We had great speakers. It was a great community. Even the Skiing was pretty good. It was really fun to ski with a few of you. And we cut that off at you know Black Diamond skiing level and so we actually skied some pretty hard stuff. Those two days but it was fun to talk to people about what they're doing with their lives and all their financial successes as well as other challenges.
[00:02:15] We're going to try to get some audio from the conference onto the podcast and get you a chance to kind of get a taste for it and get some of the some of the wonderful messages that we heard from the conference and give you a chance to hear those. We're also going to package most of the conference up into a video online course and make that available for purchase. For those who attended as well as for those who didn't get the chance to attend. I know a lot of people were interested in coming and weren't able to unfortunately because it simply just sold out too fast. I mean I had people asking me if they could sign up for the week before the conference and had to tell him it's sold out in six days nine months ago. And so hopefully those people will get a chance to participate through the video aspect of it.
[00:03:00] So today I thought what we do is just take a dive into my inbox. It's really fun to do interviews on this podcast and get some other people and some other voices on here and I hope you've been enjoying that. We've been trying to do a lot more interviews this year. I also am enjoying getting into your questions and the questions people are sending in via Twitter via Facebook or via email is probably the most common. And to actually answer those here on the podcast and give you a chance to hear what other people are concerned about and I know a lot of you have the same questions because honestly this whole white coat investor thing is mostly just answering the same 50 questions over and over again. I don't mind the dumb questions I kind of like them because I already know the answers to those ones. But occasionally I do have to do some research when somebody comes up with a pretty unique question.
[00:03:47] So let's get into some of these today. Here's our first one who writes and says Are there any lifetime limits on retirement accounts and 529 plans. Well for the first one there are no lifetime limits you can have as much as you want in a Roth IRA or a 401k or whatever the limits are and how much you can put in there each year for example for somebody under 50. A Roth IRA only allows you put in 5500 per year, 6500 per year If you're 50 or older. Likewise with a 401k there are limits on how much you can put in each year. But there's no limit on how much you can have in there in aggregate.
[00:04:25] So if you contribute for many years and you put in the maximum amounts and you invest well you could have very large retirement accounts.
[00:04:34] Another trick you sometimes see people do is that they can get some sort of a business into their Roth IRA and then when the business becomes big they end up with this monstrously huge Roth IRA which is obviously pretty cool considering all the income that comes out of it is completely tax free. But for the most part it's just what you contribute and it's earnings and that can grow over that over a lifetime to take millions of dollars in retirement accounts and that's usually plenty for even a high spending physician to be able to have a nice retirement.
[00:05:07] 529 plans on the other hand not only have annual contribution limits but they have total limits that you can have in the plan. Those limits typically range from around 300000 to about 450000. It varies by the state. So whatever state plan you're using you need to take a look at what the limits are in your state. And sometimes there's a limit that looks at all 529 accounts for a particular beneficiary in that state and sometimes there's a different limit for how much per account. For example in Utah I think it's around 350000 dollars per account. But total per beneficiary you can get actually about another hundred thousand in there.
[00:05:47] But here's the truth of the matter. These are state limits. So if you want to save more on a 529 for your kids education and four hundred fifty thousand dollars all you've got to do is go cross state lines go open another state and you can put another 300 or 400 thousand dollars into that. There really is no practical limit for how much money you can get into a 529 and if you're getting up to the limit for your single state you've got to start wondering if maybe you're putting a little too much in there to start with.
[00:06:16] Next question. I'm a W2 employee with the SEP IRA and I'm wondering if I should attempt to do a backdoor Roth IRA for myself or my wife or both our household income this year will be over three hundred thousand dollars. Currently we both have Roth IRAs that were funded when our adjusted gross income was much lower. Neither of us have a traditional IRA. My wife has a typical 401k through her employer. If it matters my SEP IRA should come out to roughly 30 thousand dollars per year.
[00:06:45] So what we're getting at here is the pro-rata rule. Remember with the Backdoor Roth IRA on December 31 of the year you do the conversion step for the Roth IRA. You need to have balances of zero dollars in your simple IRA, your SEP IRA, your traditional IRA and your rollover IRA. You can have money in there or you end up having a pro-rata calculation applied to your Roth conversion step on the Backdoor Roth IRA. So if you have some old IRA what you usually do is you roll it into a 401k or if it's a small Ira you just convert it to a Roth IRA and then it goes away and isn't counted into that pro-rata calculation. This doc has a separate issue. His employer is using a SEP IRA as the company retirement plan Instead of putting in a 401k.
[00:07:40] There are some various reasons why an employer may do this but the problem is this Doc is going to be putting in money into that SEP IRA every year. And so it makes it difficult. To avoid that pro-rata calculation. So this doc has a few options. One would be just don't do a backdoor Roth IRA and just keep his life simple and use this up Ira and that's great. And anything else he wants to invest he can invest in a taxable account. Another option is to take the employer into using a 401k instead of the SEP IRA which makes this problem go away. Sometimes he might be able to roll money out of that sep IRA into a 401k somewhere else and if you can do that before December 31 of every year while you have nothing in the account on December 31 and thus no pro-rata calculation. And so that's another option for this doc. Yet another one would be to just convert the SEP IRA money to a Roth IRA every year. Now that's going to be kind of expensive if you're in your peak earnings years because you'll be paying taxes on that conversion at your marginal tax rate. But that would be an option to allow you to continue to do a backdoor Roth IRA. So lots of options there none of which are really great options. But remember that when it comes to IRAs the I stands for individual just because he has this SEP IRA keeping him from contributing easily. Doesn't mean that his wife cannot have a backdoor Roth IRA.
[00:09:10] So even if you're in these kinds of a situation you're practices using a simple IRA or a sep Ira for your retirement account. You can still do a backdoor Roth IRA for your spouse.
[00:09:21] All right. Next question. I love your show and even have my daughter and son in law listening and reading now. That's great. And I love when you answer questions from followers. Great. So here's your question. I would love to hear your thoughts on refinancing to capture the equity in your house or a rental property that is when is it smart to refinance down to 20 percent equity or maybe 25 percent and use the money to move towards other investments. In my case I own a single family home that I rent out which has roughly two hundred seventy five thousand dollars in equity on a four hundred five thousand dollar total value and I net two hundred ninety five dollars per month after the management fee away in property taxes. I have 10 years left on the 30 year mortgage so I'm starting to lose out on interest benefits. Maybe it's time and I've been thinking that the more equity I have the lower my return but maybe I'm just making a bad doctor decision or maybe I should just keep it as is and have a house which is cash flow positive in a big way once paid off.
[00:10:20] Well I think this is a great question. What you're really weighing here are the benefits of adding more leverage to your investments the more leverage you take the higher your potential return is going to be, of course that also introduces higher risk. if you leverage our investment too much particularly something like a rental property. You may also become cash flow negative in which you get into a situation where you're starting to feed the beast and you're having to take money from your earned income and use it to make up for the lack of cash flow in investment property. So when should you take additional money out of the investment property? Well I think most of the time you probably shouldn't you should just gradually pay it down on the mortgage or even pay it off rapidly and then enjoy the cash flow from it. It's amazing how wonderful it is to have a property where you are able to get substantial cash flow from it every month because you don't you're no longer dependent on that property appreciating and you no longer are dependent on absolutely having that income every month in order to make the payments you just have much less risk with the property in that sort of a situation, you have a lower return too, absolutely. So if your goal is to buy a whole bunch of properties and your goal is to maximize your return well introducing some leverage risk is a good way to do that. It's also a good way to go bankrupt so you only want to take out a limited amount.
[00:11:49] In general what I've found when I've looked at properties is you've got to have 25 30 maybe 33 percent in the property in order to be cash flow neutral. So when you're starting to talk about going back to 25 percent equity in there or 20 percent equity in there you're getting into a situation where it's highly likely you're going to have to be feeding that beast and I think that's probably too much but if you have a paid off property and you want to buy another property and you want to take some of the equity out of that to buy this new property and you'll you're only going to be at 50 percent loan to value and both of them well I think that's probably a reasonable risk to take. And over the long term is probably likely to increase your investment return. So let's not get too dogmatic about avoiding the debt in this situation. A lot of times it can help. Certainly a professional real estate investing fund or a professional real estate investor is going to use some leverage. The question is how much are they going to use knowing that there are certain risks and certain rewards to doing that. But personally if I was trying to acquire a handful of properties to help pay for my retirement what I would probably do is I'd probably try to put about a third down on each of them and then try to pay them off at least within 15 years or so and take the cash flow from those properties pay them off and use them to pay off the next properties and then be able to use that cash flow with you know in order to pay my living expenses.
[00:13:14] All right next question I had a question about saving for short term large purchases such as a house or a pool. I use a Fidelity account to invest in a New Jersey municipal bond fund that is both state and federal tax free. I have the Fidelity Visa card with 2 percent cashback on everything that goes directly into that account.
[00:13:31] How do you feel about using that instead of a savings account for short term large purchases. Well I like that credit card actually use that credit card as well that's when we used to pay our taxes. And so we use a 2 percent back card for just about everything we buy. So I have no problem with using that as long as you're paying it off every month. I also think that it's reasonable to use a municipal bond fund for some of your savings but you gotta keep in mind that there are risks to bonds when it comes to bonds and money market funds and savings accounts. You can have one of two things but not both. You can either have the principal held constant or you can have the interest held constant but you can't have both. With a money market fund or a savings account your interest is variable. You know that the interest rates change month the month you earn more or less interest than you did the month before. But the principle stays constant with a bond your principal actually varies month to month but the coupon or the amount of interest the bond pays stays constant and so there's a certain amount of risk to move into a bond fund rather than a money market fund or a short term or a savings account. And so you've got to be comfortable with that risk. I mean if that's going to be a big deal if you lose five or 10 percent of that money just before you need it then you probably should be keeping the money in cash.
[00:14:56] If that's not a big deal and you don't mind delaying or saving for another month or two or three you're hoping the market comes back then I think it's OK to take a little bit of risk like a short term bond fund or maybe even an intermediate term bond fund for some of our savings that's a year or two or three years out there but you just got to realize that you're taking additional risk as you're reaching for yield there and you reach for too much. There's a decent chance that the principle that you want to have in order to buy this short term purchase is not going to be there when you need it. Certainly I wouldn't put money into stocks that you need in the next year or two or maybe even as much as five years because sometimes half your money in stocks disappears very suddenly. And if that's going to affect your life financially in some way that money should be in something much safer.
[00:15:43] All right this one comes in from medical student. I'm a medical student a big fan of the work you do with WCI. Thanks to my parents personal finance skills I'll be graduating from medical school with no debt. That's pretty awesome. And congratulations on that. I'm in the process of planning my budget and financial plan for the first year of residency and I have a question I'd like to get your feedback on this. This is a medical student think and way ahead. Of the approximately fifty thousand dollars I'll be paid in the first year of residency. My goal is to save half for about twenty five thousand dollars.
[00:16:12] I plan on making the maximum contribution of five thousand five hundred to a Roth IRA, the max contribution of three thousand four hundred fifty two an HSA and a contribution to a 401K at least meets my employer's level of matching, already have an emergency fund of 15000 dollars established and that leaves me ten thousand dollars a year in savings that I need to decide how to invest. In your opinion what's the best way to invest the additional savings should I contribute more to the 40 1 k but the rest into a taxable investment account or save for a house down payment?
[00:16:42] Well this Doc's going to be so far ahead of peers that it really doesn't matter much. I mean not only are you starting out with a positive net worth which is way ahead of your peers but you're already planning on a 50 percent savings rate. I mean this is a doctor's going to be very wealthy very quickly and so the first thing I would say is consider spending a little more of that money. I mean twenty five thousand dollars is not a lot of money to live on and there is a good chance when you're living on that amount of money that there's something you can spend a little more on that will actually make your life happier. So I would caution you to maybe even spend a little bit more. Nobody needs to save quite that much money unless your goal is really to have financial independence very early in your career. That said now that I've answered the question you should have asked I'm going to answer the question you actually asked.
[00:17:32] So your priorities in residency for somebody that doesn't have any debt are Roth accounts so Roth IRAs Roth 403B Roth 401 ks. So if you get an employer match be sure to put enough into your 401k or 4O3b to get that. And if you have a Roth option available to you put it in the Roth option. Once you've done that I would go to a Roth IRA five thousand five hundred dollars a year and if you have a spouse you can put five thousand five hundred into a spousal Roth IRA. So I think those are great initial moves. Now if you have a health savings account available to you that should also be a priority for funding. But as a resident you probably won't. I haven't seen very many resident health insurance plans that are true high deductible plans. They are usually better health insurance than that and so you're not eligible for an HSA but sure if you're eligible for an HSA that's also a great place to invest money. Now once you've done all that if you want to save more and you do have that Roth 401k or Roth 403 be available to you. That's where I would put additional savings. Now if you don't have that available to you what I would probably do is put it into the tax deferred 401k or 403 b. And then the year you leave residency and separate from the employer I would convert that to a Roth IRA. While that year you'll have half your income be at an attending level and half be at a resident level. You'll still likely be in a lower bracket than you will be in the long term and maybe even in retirement.
[00:19:07] And so I think that's probably where your priorities ought to be when you're a resident and trying to save you know a large quantity of money for retirement. Obviously if you have other things you want to buy like a house down payment that's money you shouldn't be putting into retirement account although truthfully actually can take a certain amount out of your IRAs and use for a house down payment although I really don't recommend that.
[00:19:30] I also wanted to share a cautionary tale that came in by e-mail. I was able to give this physician couple some advice to hopefully help their situation. But I'm also just kind of want to share this story for some lessons learned for listeners today.
[00:19:46] This couple are two fairly high powered specialists two well-paid specialists one of whom has been in practice for about five years and the other one of whom is just coming out of fellowship now. And basically are going to be going into academics the one who's been out of practice for about five years has no student loans left but says this regarding the spouse's loans.
[00:20:15] My spouse has five hundred thousand dollars in loans. I was not aware of the extent of my spouse's loan debt and it was under the wrongful assumption that my spouse was continuing to make minimum income based repayments throughout residency. We got married one point five years ago and obviously should have looked more closely into the loan situation at that time. We recently had our first child and are buying a home and it only came to my attention over the past few weeks when my spouse's credit was checked for the home purchase.
[00:20:44] It turns out that my spouse was alternating between repayment and forbearance throughout residency but lost completely lost track of the loan situation a couple of years ago. That's no payments have been made and all the loans are in default totaling about five hundred thousand dollars before any penalties. So we're purchasing the home on my credit and income. This hasn't hindered that process but we're in the process of contacting the loan servicer to determine the current state of the student loan situation I've been exploring the options of loan rehabilitation versus loan consolidation and I'm working with a financial planner on this but wanted to get your thoughts on what we should do Going forward. We'll be working at a large state academic institution and have inquired about public service loan forgiveness as well. My spouse may have made some qualifying payments during training but I'm going to assume these were sparse and we might essentially be starting from scratch with this process. We'll have a combined salary of 700 plus thousand When we started a new jobs and also some extra earning potential from some side work. Any thoughts on how to begin tackling this process.
[00:21:51] Boy I hate getting emails like that because you think what could have been. This is a doc that not only did a residency but did a fellowship and is now going to work at an academic center and has a high student loan burden. I mean you can't write a more perfect scenario for Public Service Loan Forgiveness. But the key to getting a bunch of money forgiven through the public service loan forgiveness program is making all those tiny income driven repayment payments during your residency and fellowship.
[00:22:26] So if you make these payments for three years as residency of 100 or 200 bucks a month and you make payments for three years of fellowships a fellowship at 100 or 200 a month then you make full payments as an attending at this academic institution for another four years and poof the rest of the debt is gone. I mean this doc probably stood to have four or five hundred thousand dollars forgiven through a public service loan forgiveness. I mean that might be a year or two of gross earnings that is just gone from making bad decisions on how to manage student loans.
[00:23:00] So my cautionary tale here is twofold. Number one know what you owe and make sure you're managing your loans properly for your situation while you're in your training. And number two you've got to be on the same page with your spouse before you get married. And even after you get married you really got to talk about finances. You've got to know how much each other owe. Because when you get married it's not his money and her money it's not his debt and her debt. It's our money and our debt. And you really want to be able to pool your resources to best manage your finances as best you can.
[00:23:38] This episode was sponsored by Bob Bhayani at Dr. disability quotes dot com. An independent provider of own occupation disability insurance for medical professionals. He has levers decades worth of relationships with top insurance companies to deliver discounts to all eligible applicants. If you do not yet have disability insurance or just need a review of your existing coverage contact Bob by email at info at Dr disability quotes dot com or by calling 9 7 3 7 7 1 9 1 0 0 .
[00:24:08] Head up shoulders back. You've got this and the white coat investor community can help. If you've got questions you'd like answered on the podcast e-mail them to me or if you want more opinions from the community, Join the free White coat investor forum and post them there. I'll see you next time.
I can’t do a backdoor Roth easily because vanguard converted my 401(k) into an IRA a decade or so ago, so my IRA account is pretty high sort of like the sep IRA problem. Of course now I am retired for the moment anyway so I’m just doing Roth conversions. However you can do these during your working years and all you need to do is properly complete IRS form 8606 every year. Just a little bit of math and make sure you don’t lose the forms so you can do next years properly. Yes, it means I’m paying taxes on almost all of my conversion since my basis in the 8606 is about 7% of my total IRA amount, but if one can’t do back door just go on and do the math. It isn’t as simple but it still gets money into a Roth IRA.
All right WCI, I have probably missed some reason not to do what I’m talking about or why it’s different, please educate us! Oh, and I guess now for our higher salary docs I think there is an income limit for Rorh conversions.
No, Roth conversions after retirement, especially before taking Social Security, make sense for many and the fact that you have a little after-tax money in there lowers the price and makes them an even better idea.
Obviously, converting ALL your tax-deferred accounts probably wouldn’t be a good idea.
You might be missing something obvious here though. You say you “can’t do a Backdoor Roth easily.” You’re retired and have no earned income. You can’t do a Backdoor Roth at all because you can’t make IRA contributions without earned income (unless spouse is working.)