Today, Dr. Dahle and Dr. Spath are getting into the weeds with all things Tax-Loss Harvesting. This has clearly been a topic on all of our minds due to this bear market we are in. They answer questions about the wash sale rule, what swapping out nearly identical funds when you tax-loss harvest means, when to buy back the original holding you took the loss on, and discuss if it can ever be a good thing to add complication to your taxable account to create more opportunities to tax-loss harvest. There are many more questions in this episode, so hopefully, you learn something new. Dr. Dahle also interviews WCICON23 keynote speaker, Ashley Whillans. She has fascinating and important knowledge about the power of managing your time and how that will bring more happiness to your life. We hope you get to meet her in person at WCICON in March.


 

Swapping Out Nearly Identical Funds When Tax-Loss Harvesting 

“Hey, Dr. Dahle. Thanks for all you do. This is Richard from the Southwest again. I had a question about tax-loss harvesting. I did read your blog and saw your YouTube video, and thank you for that. That was very informative. My question is about tax-loss harvesting. The idea, I believe you're supposed to swap out one fund nearly identical to the other fund. The problem I'm running into is I'm having some funds that I'm having trouble finding identical funds for. For example, I have the VEUSX fund (Vanguard European Stock Index funds) that I’d like to tax-harvest loss in this bear market. But I'm having trouble finding something similar. Is there any resource that you go to or are you just looking online? How closely identical do these tax-loss harvesting swap out funds need to be?”

Dr. Jim Dahle:

Disha, do you want to explain just the basics of tax-loss harvesting? And I'll see if I can answer his question about this European index fund that he's looking for a partner for.

Dr. Disha Spath:

Tax-loss harvesting, it's a little bit more advanced financial technique where you can take your capital losses in your brokerage account and have Uncle Sam share in those losses. You can take up to $3,000 if you're married filing jointly or $1,500 if you're married filing separately and deduct it from your regular income, your ordinary income. You take the losses from your brokerage account against that, and you pay less in taxes. A typical physician in a high tax bracket, it's worth about $1,000 in cold hard cash to you if you are able to do this correctly. Remember, this is $3,000 of losses in your brokerage account that you can deduct against your regular ordinary income. This can be pretty valuable for high-income professionals, can be very valuable, but it's a little bit tricky, which is why we get a lot of questions about it.

There are a few things we need to watch out for. The first one is, what this gentleman is trying to find, something that's not substantially identical to the fund that he currently has. What he needs to do is sell this current fund and buy it back around the same time. He's trying not to sell low and then buy high. He's trying to sell low and then buy low on the same day. But it has to be a fund that's not substantially identical, according to the IRS rules. He can't buy back the same thing. He basically needs to find a fund that is similar to what he's already invested in.

Dr. Jim Dahle:

You actually can buy back the same thing. You've just got to wait 30 days. The risk, of course, is that it goes up in those 30 days. That's why most people try to swap, they try to find a partner, a tax-loss harvesting partner. A lot of people worry about this substantially identical thing. Here's the truth of the matter. The IRS doesn't care. They don't care about this issue. I have heard of nobody that has had a problem from the IRS coming back, going, “I don't know. Those two funds look pretty similar.” It doesn't happen. If this has happened to you, send me an email. You will be the first in 12 years of telling people this at in-person events, on the podcast, on the blog, etc., who actually had a problem. If your brokerage firm does not have a problem, the IRS is not going to have a problem. They have got much bigger fish to fry that they just don't worry about this. So, what does substantially identical mean? It basically means the same CUSIP number. If it's the same fund, yeah, that matters. If it's not the same fund, you're good. I don't care if it's the Vanguard Total Stock market fund swap for the Fidelity total stock market fund and it has a correlation of 0.999. It doesn't matter. They don't care. It's a different fund. Quit worrying about that aspect of it that a lot of people worry about.

Here's another tip for you. The simpler your portfolio, the easier this is. If you've got 25 holdings in your taxable account, this is a pain. Some people think, “Oh, I'll be more diversified if I split my international holdings into European stocks and Pacific stocks and emerging market stocks, and then maybe I'll get some sort of rebalancing bonus.” Well, as soon as you go to start tax-loss harvesting all that crap, you realize “Maybe I don't want it this complicated.” Because now instead of having three or four or five partners, you've got 25 and you've got a bazillion funds that you're having to keep track of. I would caution you, particularly in your taxable account, try to keep your investing plans relatively simple. I don't own an allocation of European stocks. I own an allocation of international stocks, like the Vanguard Total International Stock Market Fund. It's way easier to tax-loss harvest one fund than it is three funds.

If you want to persist and do that sort of a complex portfolio, you will find that you will have a lot more tax-loss harvesting partners if you use exchange traded funds instead of traditional mutual funds. The reason why is there's just more ETFs out there for each of these asset classes. The fund you mentioned, VEUSX, is the Vanguard European Stock Index Fund. Vanguard only has one European Stock Index Fund. I think they only have one European stock fund period. If you're in a Vanguard taxable account and you're looking to make a swap, you're going to have to go outside of Vanguard to another fund company, which isn't awesome. But if you were in the ETF version of that fund, you could swap it for the iShares European Stock Index Fund, which is ticker symbol IEV. I'm sure it has a very high correlation. iShares is almost always my tax-loss harvesting partner when I'm going from a Vanguard ETF to another partner. I usually go back and forth between the Vanguard one and the iShares one.

For example, for VTI, the total stock market index, my tax-loss harvesting partner is ITOT, which is the iShares Total Stock Market Index. For the Vanguard Total International Stock Market Index, ticker VXUS, my partner is the iShares Total International Stock Market Index, ticker IXUS. Very easy. Because I never do swaps more than about every couple of months, I don't need a third partner. I'm always able to go back to the original partner. It keeps it really simple. This way I only have, at a maximum, two funds for each asset class in my portfolio in that taxable account. I hope that makes it easier for you. You may want to consider going to the ETF versions, and you'll find you have more partners. Maybe keep things simpler to swap out. You probably have a Pacific ETF, too, and you probably have an emerging markets ETF, too, I assume. You could swap all three of them for the Total International Stock Market fund and just keep it really simple rather than just trying to swap out the European one.

Dr. Disha Spath:

Jim, that was a really good explanation. Thank you so much. Which resource do you go to when you're looking for tax-loss harvesting partners?

Dr. Jim Dahle:

I guess I've been doing it so long, I don't really look things up. But there are resources out there. Leif Dahleen, the Physician on FIRE published a blog post about tax-loss harvesting partners called “A Big List of Tax-Loss Harvesting Partners.” It was published this year, and indeed, it is a big list. But honestly, if you only swap them out every couple of months, you only need two partners. You don't need six for each asset class.

Dr. Disha Spath:

I find myself going Morningstar, too, a little bit.

Dr. Jim Dahle:

Morningstar's always great. Anytime you want to look up any fund or ETF, Morningstar is the go-to resource. That's an excellent point, Disha.

More information here:

Tax-Loss Harvesting at Vanguard

Tax-Loss Harvesting with Fidelity: A Step-by-Step Guide

 

Wash Sale Rule

“Hi, this is Bethany in Florida, and I have a question about tax-loss harvesting. I want to sell a fund with some losses, but I purchased some of this fund with our regular monthly investment within the past 30 days. So, if I sell those specific lots that were recently purchased, will this avoid the wash sale rule, or do I have to sell the entire holding? I have some of this fund that I purchased in 2020 that still has a gain on it, so I would like to hold onto those lots and just sell the more recently purchased ones that have a loss.”

Dr. Jim Dahle:

What advice would you give her, Dr. Spath?

Dr. Disha Spath:

The wash sale rule stresses all of us out. That's the easiest way to screw up a tax-loss harvest. Basically, the rule is that you can't sell the security and then turn around and buy the same security within 30 days after you sell it. But you also can't buy it within the 30 days before you sell it unless you also sell the shares that you just bought. I think you'd be OK if you just sell the shares that you just bought and don't buy it again for another 30 days after that.

Now, her question about whether she has to sell the previous holdings in the same thing that she bought before 30 days, what do you think about that, Jim?

Dr. Jim Dahle:

Basically the key is, as you mentioned, anything you just bought needs to be sold, too, or it's going to be a wash sale. You can't buy it five days before, then turn around and sell, unless you're selling what you just bought. I know this sounds kind of complicated, and the way you avoid this problem is you realize upfront that tax-loss harvesting does not play well with automated investing. Automated investing is awesome. We put it on autopilot, things just happen in the background. It comes out of your paycheck, it gets invested. There are lots of benefits to automated investing, but it does not play well with tax-loss harvesting. You are almost forced to choose one or the other. Now, that's not entirely true. You can kind of work around it, but it works a lot better if you choose one or the other. If you just forget tax-loss harvesting and put everything on autopilot, that's fine. If you decide you want to tax-loss harvest, it tends to be better if you're a little more deliberate in your investing.

That's what I do. I'm very deliberate in my investing. Every month, we make money, we pay our expenses, we decide how much we're going to give to charity, we put some aside to pay in taxes, and the rest we invest, no matter where the income came from. We say, “OK, well, we're behind on international stocks and we're behind on real estate this month, so we're going to put all this money into international stocks and real estate.” I put a big huge lump sum into a Total International Stock Market Index fund, and that's my whole investing for the month. Maybe I will put a little bit into a real estate fund or something like that. The nice thing about that is I haven't bought any international stocks in any account for three or four months. I never get burned on these wash sales because I'm just not doing it very often. I don't invest in a particular asset class all that often.

If you're trying to buy everything in your portfolio every two weeks, you're always going to have this wash sale concern every time you go to do it because you're always buying. That's not a bad thing, but it just doesn't work very well with tax-loss harvesting. Because tax-loss harvesting isn't just about the $3,000. If it was just the $3,000, I don't know that I'd bother doing it at all. But you can use tax losses in an unlimited way against all of your capital gains. If you get out of a private real estate fund and you have some capital gains there, guess what? Those losses you harvest can offset those. If you're selling your home and it appreciated more than $250,000 or $500,000 if you're married, you can offset those gains from selling your house. If you sell a business, like if I sold The White Coat Investor, I could use any extra tax losses I had in order to offset that sale. There are lots of things that you can use those losses for besides just $3,000 a year. Of course, these losses can be carried forward indefinitely. It's never a bad thing to have these tax losses. It's bad to lose money, don't get me wrong. You're better off if you never lose money, but if you lose money, you might as well get some tax losses to help you make some lemonade out of the lemons.

Dr. Disha Spath:

Another thing that messes people up is reinvesting their dividends because you have that 60-day dividend rule. If you don't hold a security for at least 60 days around the dividend date, you will turn that dividend from a qualified dividend that's taxed at a lower amount into a non-qualified dividend. That eliminates a lot of the benefits of that tax loss.

Dr. Jim Dahle:

It could be more than the benefits you're getting from it.

Dr. Disha Spath:

Right. Really, it's a tough choice for me specifically. I've thought about tax-loss harvesting, but I really value the automation. I'm one of these that I take the extra that I have at the end of the month, I put it in a high yield savings account, and then I have auto investments into my Vanguard brokerage from the savings account. I don't have to think about it. I'm way too busy to think about it every month. I know you are, too, but for some reason I just don't have the mental space.

Dr. Jim Dahle:

The dividend problem is twofold. One, you have to be careful selling a security within 60 days of a dividend date. So, you need to hold it for at least 60 days so that dividend is qualified. I've made this mistake where I turn dividends that should have been qualified into nonqualified dividends just to get some more tax losses. That is not smart. That is dumb. Do not do that. But the other issue, of course, if you're reinvesting those dividends is that's a little purchase. The amount of that purchase gets washed if you then have a sale. You have to be careful there.

But the bottom line is, if you just bought something two weeks ago, you can sell that and take a tax loss. That's OK. You just need to make sure you sell everything that you bought, not shares of that fund that you bought months ago, but the ones you just bought within the last 30 days. Those have to be sold with whatever you're selling in order for it not to be a wash sale. Otherwise, it will count as a wash sale. A wash sale isn't illegal. It's not like you did something bad. You just have your basis basically reset in that security. Its not the end of the world. You can turn around and tax-loss harvest them again next month most likely, but you don't get the loss that you're counting on getting if you have a wash sale.

Dr. Disha Spath:

She has to sell that security in her brokerage and her IRA. The question that I had in my mind was, “What accounts count for this?” Because the IRS looks at you as an investor, you and your spouse as one investor. Technically it's supposed to be that you are not supposed to be buying that security or something similar in any of your accounts. The IRS really hasn't clarified that. What they have said is that you can't buy the same security in your brokerage or your IRA. We know that for sure. The 401(k) is a somewhat gray area. They haven't really said it. Some people avoid buying it in the 401(k) just in case. Oher people don't care. How are they even going to know? It's not like the 401(k) is reporting to the IRS what you're buying every month. The two accounts that you really need to watch out for are accounts that are in your name or your spouse's name—IRA and brokerage.

Dr. Jim Dahle:

That's the letter of the law is brokerage and IRAs. Basically, they don't want you to sell something in taxable, take that loss, and at the exact same time buy it back in your IRA. That's no bueno. They've never specified that for a 401(k), though. They've never specified that for an HSA, for a 529. Of course, your kids' accounts, a UTMA account, that's not your money. So, that doesn't count. That's a different investor. There is room to do that, but this is so easy. To do this right you don't have to bend over backward to avoid these problems. Just pick two things in your taxable account that you're going to invest in for that asset class. Like in my case I mentioned earlier, I use VTI and I use ITOT and that's it. I go back and forth no more often than every 60 days. I never get burned on the dividend rule.

You don't have to eke out every 10 cents of losses that you ever have. If you just get the big ones in a bear market, that will be plenty, I assure you, for your whole life. You don't have to go and hire a robo advisor to do this for you 25 times a day. You just don't need that many losses. You can just take them all in a big bear market. If you don't tax-loss harvest for two years after that, it's fine. There will be another big bear market. That's when you do some tax-loss harvesting. I looked at my taxes the other day. I just did my 2021 taxes. Yes, almost at the end of the year. I had no losses from 2021. You know why? Because everything went up in 2021. Everything did great. I basically didn't do any tax-loss harvesting in the whole year. In 2022, I've done it three or four times just because that's when the losses are.

Dr. Disha Spath:

Can you turn off your auto reinvesting the dividends? Do you go in four times a year and reinvest those dividends into the same security or different security that you're buying?

Dr. Jim Dahle:

Yes. I reinvest dividends in retirement accounts. No reason not to in a retirement account. I do not do it in my taxable account. Every month when we add up all our income from all sources, that includes the dividends in that taxable account. Let's say September just ended, and I got dividends from total stock market, total international stock market, and small value index fund and small international index fund. All those come in to my money market fund, this settlement fund I have. I see those come in, I add those in with my clinical income, I add those in with my WCI income. Maybe I got some real estate income that month, and I add it all up and say, “OK, we're going to reinvest this much of it.” It all goes into usually one or two investments. It happens every month. It might sit there in cash for a couple weeks, but it doesn't sit there for months. Because that causes a cash drag. Another nice thing about automated investing is you avoid that cash drag. There are benefits of just automating things and forgetting all about tax-loss harvesting. There are some people out there that are like, “This is the biggest waste of time and people are hurting themselves more than they're helping themselves.” There's some merit to that criticism.

More information here:

Is Tax-Loss Harvesting Worth It?

 

When to Buy Back the Original Holding That You Booked a Tax Loss From? 

Dr. Jim Dahle:

Our next question comes from Diana. We're back into tax-loss harvesting. Obviously, a topic of interest in 2022. We've had lots of losses. Stocks are down this year, bonds are down this year, publicly traded real estate is down this year. Even precious metals are down this year. Certainly, crypto assets are way down this year. They have a cool benefit by the way, that we probably ought to mention since we're talking about tax-loss harvesting. No wash sales. There are no wash sales with any sort of cryptocurrency or crypto asset. Why that is, I have no idea. But you can sell it and buy it back eight seconds later and count the loss. So, if you have a loss in Bitcoin or Ethereum or whatever and you decide you actually want this for the long-haul, tax-loss harvest it. It’s totally worth it.

“Hi, Dr. Dahle. I have another question on my favorite obscure topic, tax-loss harvesting. My question is, when do you buy back the original holding that you booked the tax loss from? For example, do you just wait the 30 days and buy back, say VTI, if that's what you sold for a loss? Do you wait until the new holding also has a loss and then book that loss when you buy back your original holding? Or because the new holding is similar to what you had in the first place, can you just hold onto it and continue to reinvest into it indefinitely? I would love your thoughts.”

Dr. Jim Dahle:

This one's super easy. What I do is have two partners for each asset class. That's it. VTI, ITOT; VXUS, IXUS. I am perfectly happy to hold either or both of those until the day I die. Perfectly happy. Doesn't bother me. Now, when I have a choice, I tend to put it in the Vanguard ETF. I tend to buy VTI. I tend to buy VXUS. But it does not bother me to hold ITOT or IXUS. They're also excellent, excellent ETFs, excellent funds. In some ways, they have some advantages over the Vanguard fund. In other ways, the Vanguard fund has some advantages. The bottom line is, I don't feel this urgency to get back into the original holding because I'm perfectly fine with the other one. But let's say we do tax-loss harvesting and the bear market continues, it drops some more. Now you have a loss on what you just sold 30 days, 60 days, 90 days ago. I'll swap it back to the other one. Because I'm perfectly fine with either one and I'm going to grab another loss.

The only tricky part comes in when you've got both of those and you have money to invest into that asset class, and you're not sure which one to put it in. Now that gets a little bit tricky. It doesn't matter that much, but I tend to choose the one that I'm less likely to tax-loss harvest soon. I just look at the various tax lots I have for each of those. If there's one that almost has a loss I won't buy that one and will buy the other one. Or I do it in combination. I sell a bunch of ITOT that has a loss and exchange that for VTI and also put some new money into VTI at the same time. That's probably the more likely scenario. But I don't feel like after 30 days I have to get back to the original holding because I only exchange into stuff that I am OK investing in for the long run.

Dr. Disha Spath:

Let me add a little bit more complication to that question. When you are looking at the tax lots in Vanguard, it shows short-term capital losses and long-term capital losses. How does that work when you're doing tax-loss harvesting? Does that change the scenario for you at all?

Dr. Jim Dahle:

Not really. Here's where all these get totaled up. They all get totaled up on Schedule D of your Form 1040, and they get totaled up differently. There's a column for short-term, there's a column for long-term. Your short-term losses are put against your short-term gains, and your long-term losses are put against your long-term gains. Then if you have leftovers, they can kind of be used in the other category. In some ways, you can use a short-term loss to offset a long-term gain. I don't know that you can do it vice versa, but you can do it that way. It doesn't matter so much. If you have a loss, grab the loss. Especially if you're going to still be invested in something you're perfectly fine with. This is yet another reason why individual stocks are not awesome. Because let's say you got a loss in Tesla. What are you going to exchange to? There's nothing out there that's exactly like Tesla. Do you exchange that for Ford? Do you exchange it for Facebook? What do you exchange that for? There's really nothing that has 99% correlation like you would between two ETFs. You can still tax-loss harvest, but you have a lot more risk of having the security you exchange into performing differently from the security you just exchanged out of.

 

Can Adding Complication to Your Taxable Be a Good Thing? 

“Hi, Dr. Dahle. My question pertains to tax-loss harvesting. I recently stumbled across a post you made back in 2017 about the asset allocation of your portfolio. You disclose that the stock portion, which comprises 60% of the portfolio, is made up of only four types of funds. Total US, small value, total international, and small international. I have a lot of appreciation for the simplicity of this portfolio as it feels to me an investor can easily be fully diversified without owning a lot of different positions through the use of total market funds. My retirement accounts have a similar level of simplicity. However, for my taxable portfolio, it seems to me at least conceptually that there could be more opportunity for tax loss harvesting if a larger number of different positions are held.

I'm of the belief that investors shouldn't seek to complicate things just for the sake of complexity. When at all possible, it's better to be simple. But is this perhaps an area where embracing some additional complexity could be advantageous? For example, if an investor owned 10 taxable positions instead of four, would it create more frequent tax-loss harvesting events? So, my question is, do you actually only hold four different stock funds in your taxable portfolio? And if so, do you feel it limits your ability to tax-loss harvest? I love listening to your podcast over the years and greatly appreciate all the free knowledge you share. I’m looking forward to hearing your insights on this topic.”

Dr. Jim Dahle:

I like your question because there's no right answer to it, and that's the best kind of question. You are correct that having more holdings gives you more tax-loss harvesting opportunities. You've heard of direct indexing. Direct indexing is when you don't buy an index fund, but you actually buy all the underlying stocks that are in the fund. You're basically making your own index fund. This way, you can tax-loss harvest within the fund between those stocks all day long, have a maximum number of tax losses. That's one benefit of direct indexing. You can hire companies to help you do this for a fee. Does it make sense? Well, I guess it could if you have a gazillion dollars, but for the most part, that level of complexity has so many costs, including the value of your time, that I'm skeptical that it's worth it.

Here's the deal. You are kind of letting the tax tail wag the investment dog. You're choosing your investments based on some ephemeral tax benefit. This is the classic 80/20 rule. You can get 80% of the benefit very, very easily with just having a few basic funds that you tax-loss harvest in a big bear market, grab these huge losses, you can carry them forward for a few years, use them until another bear market, and then you grab some more. You don't have to get every dime of possible loss out of your investments to offset gains later. I wouldn't feel like you have to do that sort of a thing. I think that's the bottom line on it.

But there's one other thing that I thought about and actually did very briefly with my portfolio a few years ago. I started thinking the same way you're thinking going, “Wow, wouldn't it be great to have really volatile asset classes in that taxable account? If they go down, I get a big huge loss. If they go up, I get a big huge gain, and then I just donate those gains to my charitable account without having to pay taxes on that.” I actually did. I added a few really volatile asset classes. I think at one point I owned the Vanguard Precious Metals and Mining fund, things like that. After about six months, I got smart and realized maybe this isn't such a great idea. I shouldn't be doing something just for the tax benefits. Actually, all the winners I had, I donated to charity. All the losers I had, I ended up tax-loss harvesting and getting into a more sensible portfolio. I think the bottom line here is when you start doing this sort of stuff, you're letting the tax tail wag the investment dog. I think the merits of simplicity are many—not just for you and freeing up your time and your life to do the things that you care about most. But also think about what if something happened to you and your partner has to take over this portfolio, or it gets so complex that now you have to hire a financial advisor to unwind it all. Then you're asking yourself, “Did I get more benefits than I'm actually paying in financial advisory fees?” Maybe you're not. But I like the way you're thinking. When you're starting to ask questions like this, it means you're winning the finance game. You've gotten into the weeds here and I would caution you that maybe you don't need to be into the weeds quite that far.

What do you think about this, Disha? Do you want 300 holdings in your taxable portfolio just to get a few more tax losses?

Dr. Disha Spath:

I'm definitely on the simplicity side of things. If it's going to take more than 30 minutes for me to do it, then I'm not doing it.

Dr. Jim Dahle:

I think that's the way most people feel. But you know what? There are some of us out there that are hobbyists. And I suspect Jeff is one of them. But I'll bet Jeff's spouse is not one of them. You ought to consider that.

Dr. Disha Spath:

There's nothing wrong with that. I think there are just different personalities. Some people enjoy the complexity and thinking about it and other people don't. That's OK.

More information here:

The Case Against Tax-Loss Harvesting

 

Taxes When You Leave Your Practice 

“Hey Dr. Dahle. I have a somewhat complicated question and part of me wonders if the answer will just be to check with my accountant. At any rate, I left my practice a few months ago in which I was an owner. My buy-in amount was around $50,000. We signed a stock buyback agreement in the amount of around $100,000. Rather than take the money at the time I separated, we signed a separate promissory note whereby I'll get two installments of $50,000 each plus interest. The first installment will be this December, and the second installment next December. I'm trying to figure out how much and what type of tax I will owe on this. Will it be counted as capital gains or ordinary income? Should I subtract the buy-in amount from the buyback amount when making the calculation? And finally, do I need to pay an estimated quarterly tax for either of these scenarios?”

Dr. Disha Spath:

Interesting. Her capital gain would be about $50,000, but then she's also getting simple interest on top of that, which is taxed at her ordinary income. Is that correct?

Dr. Jim Dahle:

Yes, that's absolutely right. You don't have to pay tax on basis. You pay $50,000 for something, you sell it for $100,000. You don't have to pay taxes on that first $50,000. If you've owned it for at least a year, you pay taxes on those capital gains at long-term capital gains rates. If you had done some tax-loss harvesting and you had $100,000 in tax losses out there, you could offset the sale of your practice with those tax losses. Hopefully, you have a few of those, and that'll make it even more tax efficient. The interest you're going to pay ordinary tax rates on, that's ordinary interest. You don't have to pay payroll taxes on it, but you do have to pay your ordinary income tax rates on that. It's pretty straightforward. That's the way a sale works. This is a stock sale; it's not an asset sale. An asset sale becomes a little more complicated because you end up still owning your entity, your company, whatever it was, and it just got some money for something that's sold. But it kind of works out the same way on your tax forms. Chances are you're probably not doing these taxes yourself. It sounds like you have an accountant. It's probably a good idea for a year in which you have something like this anyway, to make sure you get it all right. You're going to pay capital gains on $50,000 and whatever the interest is, you'll pay ordinary income taxes on.

As far as the quarterly estimated taxes, I don't know. I don't have enough information. That's dependent on how much you're having withheld from your other income, how much you are paying already in the estimated quarterly taxes. The thing with estimated quarterlies is you've got to get into the safe harbor, essentially. The safe harbor is basically you have to pay the amount you owe. You've got to pay 110% of what you paid last year, what you owed last year. That's another safe harbor you can get into. Those are the two that most people try to get into with their quarterly estimated tax payments. If you're having enough withheld from a W2 job, you don't have to pay estimated quarterly taxes at all. But in general, the IRS views the federal income tax system as a pay-as-you-go system. If you get a big bolus of income in the fourth quarter, because you're getting paid in December, you just have to make that fourth quarter estimated quarterly tax payment a little bit bigger to make up for that.

But remember, it's totally different what you pay as you go along vs. what you actually owe. That's what you're reconciling when you file a tax return, is you're reconciling those two things. A lot of times you have way too much withheld and you get a tax refund. Sometimes you don't have enough withheld and you have to write a check. Those both have their pluses and minuses, obviously.

Dr. Disha Spath:

I would definitely just let my accountant know that this is happening and make sure that they're prepared to account for that at the end of the year or now.

Dr. Jim Dahle:

This one's not about tax-loss harvesting, but if I had this gain coming, I would sure be looking at my brokerage account going, “Is there a $50,000 loss I can grab to offset this gain?” Because this would be a great opportunity to use it, right? Plus, you get to offset $3,000 in that interest. That might be all the interest you're getting. I don't know.

 

Minimizing Taxes as a 1099 Employee 

“Hi, Dr. Dahle. I'm a W2 employee and I’m in the 35% tax bracket. My wife, who stayed home with the kids, just took two 1099 jobs, and we expect her to make about $10,000. The 1099 employment is new to us. So, we're looking for advice on how best to utilize this income and pay minimal taxes. We don't depend on the money and are happy to put it all in our retirement plan. And she has no other income. When she worked as a W2, we were able to put essentially all of it in her 401(k). I assume we should open up a solo or individual 401(k), maybe at Fidelity, but I'm not sure exactly how to fund it. Can we put her entire $10,000 income in the 401(k)? Do we have her paychecks deposited into our bank account and then just send that from our bank account to the 401(k)? Do we owe any self-employment or other taxes or have to pay the IRS quarterly? Do we contribute the whole amount of her biweekly paycheck every two weeks? Do we leave it all in cash and then contribute a certain amount at the end of the year? Her job will just be on the computer at home. Is there anything else we can do to take advantage of this? Like deduct a home office, one room of our house?”

Dr. Jim Dahle:

That was a lot of questions. Why don't we split them up? Do you want to take the solo 401(k) ones and I'll talk about the home office, Disha?

Dr. Disha Spath:

The solo 401(k)s: your wife, this is her only job, so she can do 100% of her compensation as her employee contribution into the solo 401(k) up to $22,500 in 2023 or $20,500 in 2022. You could put 100% of that $10,000 into an elected deferral, into the employee portion of the solo 401(k). And if there's any more on top of that, you can also do employer contributions, which is 25% of the compensation. So, 25% of the profit that she's making. There's definitely plenty of room there. You can certainly set it up at Fidelity. How do you fund it? Fidelity has some funky rules about how you fund solo 401(k)s. They don't always allow for direct bank-to-bank transfers depending on the bank. You would have to work with them and figure out which bank you're using to set up her accounts for her income and how you would be able to fund that. But in any case, as long as you are keeping track of it and accounting for it, you should be OK. I think that's a great idea, and I think you should definitely be investing for her future there. Make sure you go in and actually choose the investments in the account. Don't just put the money there without investing it.

Dr. Jim Dahle:

That's actually a common problem in 401(k)s across the country. Lots of people have money taken out of their paycheck, and six years later, they look and realize it's still sitting in the money market fund. It happens all the time.

Dr. Disha Spath:

Especially with HSAs too. A lot of times you have to go in and actually invest it, and a lot of people don't know that. The fact that the account is just a shopping cart or just a holding place for your investments that's tax-protected is not well taught.

Dr. Jim Dahle:

A lot of those settlement funds are paying 0%, too. It is literally just sitting there doing nothing. As far as where to open it, Fidelity is fine. Schwab is fine. TD Ameritrade is fine. My preference with most of these sorts of things is Vanguard. I tend to go to Vanguard with this sort of stuff. The thing I like about Vanguard is all my other accounts are there. It's easy for me to look at it all together. But one thing you should keep in mind with these solo 401(k)s, these business retirement accounts, is that it's a different website. It's not the main Vanguard website. That's not where you make your contributions. You actually have to log into Vanguard's small business website, and that's where you make the contributions. At least with Vanguard, you can make them automatically from the bank account. You don't have to write a check or mail it in or anything like that.

Obviously, she's running a business now. That business needs its own bank account just to keep the finances nice and straight. If she needs a credit card for that business, the business should have its own credit card. Don't get in the habit of mixing your personal and your business finances together. That's just bad business practice. What else can you do to take advantage of that 1099 income? Just make sure you're deducting all your business expenses. If there's something she's using— printers, computers, paper, some sort of microphone or headset, all those sorts of things that a lot of times you use for a home business—make sure you're deducting those. If she has to drive to the post office to mail something, those miles are deductible. Make sure you deduct those.

As far as the home office, here are the two rules with the home office. You have to use that space regularly and exclusively for the business. That means you can't just use it once a year. That's not going to cut it. You have to be using it regularly, and they don't exactly define that. But if you're not in there, I don't know, once a month, it's pretty hard to justify it as a regular use and exclusively. If you're using that space for something else, if the kids are doing their homework in there, if you're using it to store your lawn mowing equipment, whatever, that is a no-go. It's regular and exclusive use. The easy way to take this deduction is to take the simplified version. This is $5 a square foot up to 300 square feet of your home. It's a deduction of no more than $1,500 a year if you take the simplified version.

With the complicated version, you have to add up all the expenses associated with your home and then multiply them by a ratio. The ratio is the numerator of the square footage of the home office, and then the denominator, the square footage of the entire home. You multiply them out and that's what you get. But you can also use depreciation of the home as one of those expenses. It can be a bigger deduction. I don't think you're limited to just 300 square feet either. If you have a really big home office, you may want to go ahead and use the direct or the more complex calculation. The one downside of that, aside from its complexity, is that you have to recapture that depreciation when you sell the home. Any depreciation that you deducted as a business has to be recaptured later, just like a real estate investment would. Keep that in mind. Most people just take the $1,500 and keep it nice and simple.

There's also another really great option out there, which is renting your house to your business. You can do that 14 days a year. It counts as a deduction for the business. The income does not count for 14 days a year. If you rent it to yourself for 15 days a year, it counts. But up to 14 days a year, it does not count. It's basically just pre-tax income that you get and can spend without ever having to pay taxes on it. That's a cool trick, even better than the home office for most people. Plus, you don't have to use it exclusively for that business. If you only use it for the house for 14 days a year, you can still take that. The IRS doesn't require you to make good business decisions. They do not require that. If you want to rent your house out to yourself so you can have a little meeting that you didn't really need the whole house for, they don't really call you on that. You've just got to keep good records and have a purpose for why you rented the house to your business and go from there. We have lots of meetings at my house for The White Coat Investor, and it's a far better deduction for us to just rent the house to us for those meetings than it is to take the home office deduction.

Dr. Disha Spath:

What about utilities? Can you deduct the amount of utilities?

Dr. Jim Dahle:

Yes, the utilities are all part of the cost. It's your utilities, it's your depreciation, it's maintenance, lawn mowing, snow removal. You get to multiply it by that percentage, that is the home office of the house. It can be really complex to figure it all out. If this is not a big deduction, it might not be worth going through all the trouble to maximize it. But for some people, if you have like an 800-square-foot office in your house for some reason that all you're using for is your small business, it's probably worth going through the calculations.

More information here:

SEP-IRA vs. Solo 401(k)

 

ROBS Program 

“Hey Jim, thanks for all you do. Recently, I've become interested in purchasing a small business. One of the options for financing such an endeavor is the ROBS program. It's my understanding this acts as a loan from your 401(k) that can be used as the basis for an SBA loan or other financing to actually purchase the business. I don't think I've heard you discuss this on the podcast, and a quick search of your website hasn't turned anything up. Do you know anything about this program? Perhaps you could share some useful information before I go down this road.”

Dr. Disha Spath:

I looked the program up on Investopedia. Here's what I found. ROBS program is an IRA-sanctioned process for retirement savings to invest in a business startup. What this is basically doing is the ROBS provider facilitates converting your retirement account into a separate IRA. That ROBS provider works with separate custodians to house your IRA and the business then needs to be structured as a C Corp so it can purchase stock. The program can purchase stock in the new company from its retirement account. It's not exactly a loan. You're completely restructuring your retirement account into an IRA that will now purchase stocks from your new company that you're investing in, which is structured as a C Corp. It sounds like a lot of expense to me.

Dr. Jim Dahle:

I worry a little bit more about it than that. I'm looking at it here on irs.gov. They have a page on ROBS, essentially. They say what is a rollover as a business startup or ROBS. ROBS is an arrangement in which prospective business owners use their retirement funds to pay for new business startup costs. ROBS plans, while not considered an abusive tax avoidance transaction, are questionable because they may solely benefit one individual—the individual who rolls over his or her existing retirement funds to the ROBS plan in a tax-free transaction. The ROBS plan then uses the rollover assets to purchase the stock of the new C Corp business. Promoters aggressively market ROBS arrangements to prospective business owners. In many cases, the company will apply to the IRS for a favorable determination letter as a way to assure their clients that the IRS approves the ROBS arrangement. The IRS issues a determination letter based on the plan's terms meeting IRC requirements. The determination letters do not give plan sponsors protection from incorrectly applying the plan's terms or from operating the plan in a discriminatory manner. When a plan sponsor administers a plan in a way that results in prohibited discrimination or engages in prohibited transactions, the plan can be disqualified, which can result in adverse tax consequences to the plan’s sponsor and its participants.

Who would think about this? Someone who wants to start a small business and all their money is in retirement accounts. This is the sort of person that would have to consider this. There are a couple other options. One is just don't use retirement plan money to start your small business. I think that's the right thing to do for almost everybody. Try to get some other money. Whether it's from your taxable account or whether it's your savings or money that you're earning as you go along or loan money or whatever, try not to mess with your retirement accounts in this sort of a way. I think that's one option.

The second option is you can borrow against your 401(k). You can borrow $50,000, the lesser of 50% or $50,000 from every 401(k) you have. If you have two 401(k)s, your spouse has a 401(k), you can take a $50,000 loan from all three of those. That gives you $150,000. Maybe you can start your business with that without having to mess around with a rollover or ROBS plan or anything like that. I think I would rather see somebody doing either of those rather than this sort of thing. Owning a small business in a retirement account, that sounds like a mess, right? Because when you own it there, the retirement account owns the business. All the income from the business has to go back into the retirement account. All the spending from the business has to come out of the retirement account. If you need to recapitalize it, how are you going to do that? Now, you have to form an entity with your retirement account as a partner and you're a partner or you're both stockholders, I guess in this case, because it's a C Corp. That sounds like a mess.

I would not structure a small business this way if I were starting one. I guess if I was desperate and I had to have the money and the only possible way I could get the money was out of my retirement accounts, I might think about it. But I suspect there's a bunch of people running around selling these things. It sounds like a product made to be sold, not bought, to me.

 

WCICON23 Keynote Speaker – Ashley Whillans

Let's bring in an interview here that we recorded with Ashley Whillans. Ashley is an assistant professor at the Harvard Business School. She happens to be married to an emergency physician, but she teaches negotiation and motivation and incentives courses to MBAs and executives. She's going to be one of our keynote speakers at WCICON. She's speaking on Time Smart: How to Reclaim Your Time and Live a Happier Life. I did a short little interview with her. I wanted to bring her on the podcast and introduce her to you, and hopefully a lot of you will be able to also meet her in person at the conference this spring. Welcome to the podcast, Ashley.

“Thanks for having me.”

You have a pretty fascinating career. You have your doctorate, your Ph.D. is in social psychology, but you're working at Harvard Business School. Tell us about your career in education and how you ended up where you're at now.

“As a social psychologist by training, I became really interested in this fundamental question of how we should spend our money and our time to promote happiness. As it turns out, organizations want to keep their employees around, so they also care about keeping employees happy. And I guess that's a short way of how I ended up at the Harvard Business School. I also have a past background in acting, and it is true that MBA classrooms are a bit of a performance. So, I think it helps me that I have an acting background as a business school professor.”

Now, you wrote a book called Time Smart: How to Reclaim Your Time and Live a Happier Life. We're planning on giving this book away in the swag bags at the conference. Why'd you write the book?

“I wrote the book because as a time and happiness researcher who is a time nerd, self-professed, I was struggling with time and time and money tradeoffs in my own personal life. First year on the tenure track, first serious relationship I ever was in for 10 years of my life. Three weeks into moving across the country for my job, this person leaves me in this new city because they said, ‘Why would I even be here? There's nothing for me to do here. All you do is work. I don't even feel like I'm in a relationship with you at all, because you are in a relationship with work that doesn't make any time for me.' It hurt, but it was true. I became inspired on a mission to figure out how we can both succeed at work and outside of work and become more intentional with our time and happier as a result.”

You say there's an 80% chance that you're poor, time poor that is. You're saying four out of five adults report feeling that they have too much to do, not enough time to do it. Why are we so time poor?

“Oh, there's so many reasons, and I'll definitely go and unpack those in my keynote talk. But one of the reasons that we have control over is that we focus on money more than we focus on time. Money, we like to maximize measured mediums, especially high achievers, like those listening. We go after something we can quantify and track. We go after money. Time is amorphous. ‘What am I going to do with three days off, five weeks from now? What is the value of 30 minutes of additional leisure?' Because we're not very good at making these decisions between time and money, many of us, ourselves probably included, end up spending too much time working and not enough time and ways that promote happiness, like spending time with our friends and family.”

Now, us reaching out to you to speak at the conference was not your first encounter with The White Coat Investor. Tell us about your introduction to The White Coat Investor and our community.

“My now husband is a White Coat Investor fan fanatic. He's an ER physician. You might be interested to know and he wanted me to share with you, that he put my ideas into practice to change his career. He is an ER physician. As you know, he's working shifts and he was working for a for-profit company after med school that made more money but came at the cost of his time. Thinking about time and money tradeoffs and happiness, we were dating, I was writing this book, he decided to move to a nonprofit and work slightly less, make less money, so that we can have more time together.”

You talk about people answering work emails during family events, taking calls while on vacation. These sorts of things make a company very productive, make a company much more successful at its goals when everybody's available, even if they're not actually working all the time. What is the problem with this trend that's been exacerbated by the COVID pandemic and so many of us working from home where we've now kind of blended our work lives and our home lives?

“If you feel like you're busier than ever, you are. Microsoft data suggests meetings and emails have gone up 250% since before the pandemic, and 30% of knowledge workers are now additionally working a third shift between 7-10pm. I want to push back a little bit on something you said. We think that constant responsibility will make us more productive, but the research suggests that being constantly available pulls us out of the present room moment, reminds us of all the other things we could or should be doing. It makes us less efficient in our jobs.

From a happiness perspective, constant responsivity has a dramatic cost, too. In one of my studies, we randomly assigned working parents hanging out with their kids on a Saturday to either have the alerts on their phone on or to have the alerts on their phones off. Parents who had the alerts on their phones on felt significantly less meaningful and remembered fewer details of the event. They also felt guiltier because when you have your work email on your phone while you're trying to enjoy your leisure, you feel like a bad parent and a bad spouse because you're checking your phone while you're trying to have quality time with your friends and family. When you see emails come in, then you feel like a bad colleague if you don't get to them right away. I think it's really important. A lot of our time poverty is driven by this digital distraction. A key strategy is figuring out how to manage those constant pings that we get all day every day.”

What else can we do to draw boundaries between our work life and our real life, if you will, besides just turning the notifications off on our phone when we're not at work.

“We have to be as intentional with our time as we are with our finances. When people are thinking about, ‘How can I become more financially well?' you have to think about where your money is going. When it comes to time, the same principles apply. We have to do a time audit and see where our time goes missing on an everyday basis and begin to get rid of things that make us stressed out and unproductive. Then, spend more time, more active time in ways that make us happy, that feel meaningful and productive. I'm going to talk about this more in my keynote, so I don't want to give away too many secrets. But there are some strategies that I talk about in my book and that I'll also share with attendees at your conference.”

You've talked a little bit about how employees get paid, how they're incentivized, whether they get bonuses or percentages of profits or whatever, and that can actually have some effects that maybe we never think about and that these are not necessarily good effects. Can you talk a little bit about how bonuses maybe cause people to make bad decisions when it comes to time management?

“Yes. I love this question. I'm going to start with how you are paid. Many physicians bill by the hour. Just knowing the economic value of your time makes you feel like your time is extremely scarce. People who receive hourly compensation, regardless of what profession they work in, feel more time stressed, because they feel the opportunity costs of wasting one second more strongly. This means that people who bill tend to forgo leisure because it doesn't feel worthwhile. They're less likely to volunteer because it doesn't seem worth the time cost. In some of my data, they're even less likely to make small environmental decisions unless those decisions are framed as a financial benefit. Because giving up a bit of time just doesn't seem worth it when your time seems so scarce and valuable.

We also see in another project that bonuses or cash compensation, having that carrot dangled in front of you to work harder toward a goal, can come at the cost of spending time with friends and family. We find in six studies with over 70,000 employees in North America, that being paid largely due to performance incentives can make you focus surprisingly more on money and see your relationships in a more instrumental way. So, you start to look at your colleagues, even your friends, as either a path to achieving that goal of making more money or not. What we found is that people who get performance bonuses at work and are heavily compensated through bonus comp are less likely to spend time with friends and family and more likely to spend time with colleagues who seem instrumental or helpful for them getting that financial bonus, which looms so large in their minds.

This goes back to what we were talking about at the beginning of the conversation. We're already wired that way. As human beings, we already gravitate toward money and work hours and moving up in our organizations because we like to track our progress against concrete goals. Performance incentives and billing just highlights or dials up some of those tendencies we already have.”

I'm sure you present this material to companies all the time. How do they react to this? I imagine there might be a little bit of pushback from management when you're telling employees to maybe spend less time working and not be as available and trying not to be incentivized so much by work. What experience have you had in that regard?

“I have almost got kicked out of a top management consulting firm for suggesting that the leadership should change their revenue per partner credits so that people are less focused on running a million projects and more focused on running sustainable teams. I think a lot of what I talk about when I consult for companies is thinking about how to change microculture micro moments. It might be a lot harder to change a compensation system. It might be a lot easier for a small team to get together and decide collectively that they're going to take one hour of focus time between 5-6pm or between 12-1 where there's no expectation of constant responsivity, and that that team is going to decide together that they're going to try to break away from their phones to catch up on work, catch up on notes, catch up on billing, see their spouse, whatever it is.

I think there's a lot of room to move in organizations on the small decisions we can all make together to help each other protect our time. Honestly, it's a little bit harder to go in and say, ‘I think you should dramatically change your paperwork system so that you reduce paperwork burdens for physicians.' That's going to be way harder. It is something that makes time for us, but there are many things that I'm going to share with audience members that they can do on a personal basis to take more control over their time that doesn't involve their boss or the CEO changing the way they're paid.”

Speaking of physicians, medicine in America—like lots of professions but perhaps to a worse degree—suffers from pretty severe burnout. Surveys are showing anywhere between 40%-60% of docs are burned out at any given time. The physicians' suicide rates are about twice that for the rest of society. You've done a case study at France Telecom related a little bit to this. Can you tell us a little bit about that study?

“This was a case study, which for listeners who aren't familiar, we investigate management issues and we use one single case or one company as an example to investigate issues that are relevant more broadly to society. In France Telecom, my colleague and I became very interested. This is a firm that underwent a major reorganization, major restructuring. They were this monolithic old encumbered legacy company, and they were trying to streamline and keep up with the Googles of the world in a very difficult market economy. Actually, what ended up happening is things went really bad. They didn't downsize in a way that protected autonomy and competence, relatedness, all these psychological features which are so important for employee’s mental health. They disenfranchised employees, they moved employees, they made employees change jobs with no notice, they demoted employees. They were trying to get their employees to quit, and in the process, they ended up having employees commit suicide and unfortunately experience a whole host of mental health challenges.

But we use the case as an example of what not to do. The company was eventually sued for millions of dollars and the CEO got fired, all of that stuff. But also, to unpack the psychology of what can lead individuals within organizations that are high performing, high demand to feel psychologically unsafe and unwell in the first place. A couple of things to keep in mind from that case that I think come out really nicely is employees need to feel like they have a say in the policies and practices that an organization is implementing. Part of what we talk about is that learned helplessness played a role in the negative employee outcomes in that situation. Employees didn't know where some of these decisions were coming from. There were immense silos within the organization. They didn't understand why they were getting their jobs changed, or they got no training once they were on the job. Now that was a little bit by design because France has really strict labor laws and can't actually lay off employees. And so, they were trying to get employees to leave.

But the take-home message is that there's things that we can all do as managers, as leaders in our organizations, to think about what we can do on an everyday basis to support these fundamental needs that workers have around feeling like they have choice and control, that they have transparent decision making, and that they feel appreciated for the hard work that they're doing on an everyday basis.”

Dr. Ashley Whillans, we are super excited to have had you on the podcast. We're even more excited to have you in person at the Physician Wellness and Financial Literacy conference coming up in Phoenix the first week of March. Best time of the year in Phoenix, actually, is that first week of March. I'm looking forward to you being treated like a rockstar among The White Coat Investor community. I'm sure they're all going to be excited to meet you in person and hear from you personally on this insight that you've gained in your career.

“I can't wait to attend. And I will say one of the best things for happiness is social connection. So, I hope to see a lot of you there.”

What a great interview. I hope you get a chance to meet her at WCICON coming up in March.

 

At some point in our financial lives, it will be time to buy a home.

A physician mortgage can be a good vehicle for a young doctor who’s just out of school and has a more effective place to use their money than on a big down payment. These loans allow doctors to secure a mortgage with fewer restrictions and a lower down payment than a conventional mortgage. But if you’re further advanced in your career or deeper into your journey to financial freedom, buying a home with a conventional mortgage and then, later on, potentially refinancing that loan to a better rate with a shorter time frame could be a great move.

Wherever you are in your financial journey, make sure you use the mortgage that will be most financially beneficial for you. Hop over to our recommended tab to learn more about all of your mortgage and refinancing options at whitecoatinvestor.com/mortgage

You can do this and The White Coat Investor can help.

 

Champion Program 

We want to give a copy 0f our White Coat Investors Guide for Students to every single first-year medical and dental student! If you want to help make that happen for your class, please sign up to be a Champion at www.whitecoatinvestor.com/champion. This is only for first-year students. If you are accepted, we will mail a copy of the book for every single student in your class. Plus you get some cool WCI swag. Everyone in your class will be forever grateful for helping them start down the path to financial freedom so early in their careers.

 

Quote of the Day

Warren Buffett said,

“I will tell you how to become rich. Close the doors, be fearful when others are greedy, and be greedy when others are fearful.”

 

Milestones to Millionaire Podcast

#94 — ER Doc Pays Off Student Loans In 18 Months

This ER doc paid off his student loans in just 18 months! How did he do it? He gave himself a 10% raise and continued to live like a resident and didn't feel like he was giving anything up despite living on a relatively small portion of his income.

Full Transcript

Transcription – WCI – 291

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.

Dr. Disha Spath:
Hi, and welcome to another White Coat Investor podcast. I'm your host, Dr. Disha Spath. I'm here with Dr. Jim Dahle and this is episode number 291.

Dr. Disha Spath:

At some point in our financial lives, it will be time to buy a home.

A physician mortgage can be a good vehicle for a young doctor who’s just out of school and has a more effective place to use their money than on a big down payment. These loans allow doctors to secure a mortgage with fewer restrictions and a lower down payment than a conventional mortgage. But if you’re further advanced in your career or deeper into your journey to financial freedom, buying a home with a conventional mortgage and then, later on, potentially refinancing that loan to a better rate with a shorter time frame could be a great move.

Wherever you are in your financial journey, make sure you use the mortgage that will be most financially beneficial for you. Hop over to our recommended tab to learn more about all of your mortgage and refinancing options at whitecoatinvestor.com/mortgage

You can do this and The White Coat Investor can help.

Dr. Disha Spath:

Our quote of the day today is by Warren Buffet. He said, “I will tell you how to become rich. Close the doors, be fearful when others are greedy, and be greedy when others are fearful.”

Dr. Disha Spath:
Really being a contrarian in the financial circles can be a little scary, but it can pay off in the long run. And I think this is what this quote is talking about.

Dr. Disha Spath:
I'm so glad you're here today. Thank you for what you do. What you do isn't easy. So let me be the first to thank you. All right, Jim, how are you today?

Dr. Jim Dahle:
I'm doing great. I just got out of the ER. I had a shift yesterday. And it's one of those shifts where you just don't feel like you're winning. I had a lady come in, super hypotensive, like 65 over 35 or something, and it seemed like everything I did wouldn't fix it. Four bags of fluid, two units of blood later, starting pressors and giving antibiotics. I'm talking to the intensivist on the line and I'm like, “I'm just not winning here. The lactate is still 19. She's sitting here talking to me though with a pH of 7.0 and it's not getting better. I need some help.”

Dr. Jim Dahle:
And you know how wonderful it is to be able to call somebody and get some help in a situation like that. So, thanks to all of you who spent years in an ICU fellowship and at learning to take care of those very, very ill patients. I know they appreciate it. I know their families do, and I know I did yesterday. So, thank you very much to Dr. Hammond who came in to help me as well as to all you other intensivists out there.

Dr. Disha Spath:
That's amazing. Seriously. And I have to send a thank you to intensivists and ER doctors for putting those central lines. Thank you so much.

Dr. Jim Dahle:
Yeah. Well, I did get the central line in. I'll give myself that credit.

Dr. Disha Spath:
Yeah, there you go. Thank you for that.

Dr. Jim Dahle:
Which is terrifying, right? With an INR of more than 10 to put a central line in. I'm like, “One stick man. I got to hit this one.” Ultrasound, perfect stick went right in, no big deal. But you know what? There's a reason lots of people don't do procedures with INRs at 10, but sometimes you're forced to do it.

Dr. Jim Dahle:
At any rate, let's talk about something a little happier than that. Let's talk about the Physician Wellness and Financial Literacy Conference. This podcast we're recording on November 14th, but it's going to drop on December 1st. So, as you're listening to this, your time is very limited for a very specific deadline.

Dr. Jim Dahle:
Through December 5th when you come to the conference, you get a sweet swag bag. I think our swag bugs are the best swag bags of any conference I've ever been to. You get multiple books in this swag bag, you get t-shirts, you get cool stuff. It's not just junk from sponsors. This thing's worth a hundred dollars or more.

Dr. Jim Dahle:
So, you want to register before the swag bag deadline. Now, that goes for both in person and virtual. And the reason we have to have the swag bag deadline so early is we literally have to print the books. We have to print the books. We have to have them shipped to us. And in the case of virtual people, we have to ship them out to you. We want you to have the swag bag before the conference starts. And of course, we got to put a whole bunch of them on a big pallet and ship them to Arizona. So, they're there for those of you coming in person.

Dr. Jim Dahle:
We have to put this swag bag deadline out there. I think you ought to register before December 5th because it is a sweet deal to get that swag bag. But we're going to bribe you even more to come and register before December 5th, and that's by giving you a discount.

Dr. Jim Dahle:
Don't tell anybody. This is just for the podcast listeners. We're not posting this particular discount in the Facebook group. We're not putting it on the blog. This is for you. This is your free Benny here for listening to all these podcasts.

Dr. Jim Dahle:
Because I know a lot of you, I'm amazed when you guys tell me this, that you've listened to every podcast. Anybody that's listened to every podcast, I am totally impressed. I can't even listen to my own voice. So, if you can listen to the podcast, you're awesome.

Dr. Jim Dahle:
But here's your discount code. When you go in there if you put in code PODCAST200, you get $200 off until December 5th. This is on in person only, not guest, not the guest registration, because you can register your guest already for a dramatic discount. This is just for regular registrations and premium registrations in person until December 5th. PODCAST200 is the code. Where do you go to do that? You go to wcievents.com.

Dr. Jim Dahle:
But this conference is awesome. Even if you're not able to register by December 5th, you should still come because it is a great facility. We're going to the JW Marriot just north of Scottsdale in Phoenix the first week of March, which is the best week of the year.

Dr. Disha Spath:
The weather is great. Yeah, so nice.

Dr. Jim Dahle:
I've lived in Arizona for five years. I lived two years in the Phoenix area, three years in the Tucson area. Trust me when I tell you, the first week of March is the very best time to be in Phoenix all year. We have events outside. The weather is perfect. You don't even have to check the forecast.

Dr. Jim Dahle:
We're going to be doing cool stuff. We knock off the conference about 04:00 o'clock each day so you can get out and actually do something fun. Because remember, this is a wellness conference. So, we do like Five Ks. We do golf. There's usually some sort of wine tasting event. There's pickle ball and I'm going to beat you. Even though you beat me last year. I'm practicing up. I'm going to be better. That is a lot of fun.

Dr. Disha Spath:
Tennis.

Dr. Jim Dahle:
And that's aside from all the content.

Dr. Disha Spath:
Yes, yes. And I have to remind people, guys, if you're like me and you like stuff your bag full up to the limit of the weight of your bag as you're coming out, make sure you don't do that this time because the swag bag needs some room. It's all really good stuff. You got to have room in your luggage to take it back. So, make sure you bring an extra suitcase or some extra space in your suitcase because this is really a wonderful swag bag. And you're going to want to keep these books and read them. I know, I have them on my bookshelf and I'm going through them slowly. So, definitely do that.

Dr. Disha Spath:
And I totally agree. All my friends were super jealous last year when I was in frigid upstate New York and then flew over to Arizona, and the weather was just glorious. And the pools. You forgot to mention the pools. They have Lazy River, for the kids too.

Dr. Jim Dahle:
Yeah, they've got a great facility and it really is a great place. The feedback we got off our first few conferences, we went to a little hotel in Park City for our first one, and we went to Paris in Vegas for our second one. The feedback we kept getting was “It's nice, the conference itself is great, but sure, it'd be nice not to be in such a dumpy hotel.”

Dr. Jim Dahle:
So, we are not in a dumpy hotel. We're in a really nice place. It just makes for a great vibe. You go home refreshed. You go home with more financial knowledge. You have a better sense of how to make your career longer, better, more enjoyable, more effective. You get career longevity out of something like this. Enough talking about it, wcievents.com. Your special code through December 5th is PODCAST200.

Dr. Jim Dahle:
All right. Well, let's answer some questions here. I think we're going to be talking about some tax loss harvesting. We got a question off the Speak Pipe from Richard. So, let's take a listen to it.

Richard:
Hey, Dr. Dahle. Thanks for all you do. This is Richard from the Southwest again. I had a question about tax loss harvesting. I did read your blog and saw your YouTube video, and thank you for that. That was very informative.

Richard:
My question is about tax loss harvesting. The idea, I believe you're supposed to swap out one fund nearly identical to the other fund. The problem I'm running into is I'm having some funds that I'm having trouble finding identical funds.

Richard:
For example, I have the VEUSX fund at Vanguard European Stock Index funds that I’d like to tax harvest loss in this bear market. But I'm having trouble finding something similar. Is there any resource that you go to or are you just looking online? How close identical do these tax loss harvesting swap out funds needs to be? Thank you.

Dr. Jim Dahle:
All right, great, great question, Richard. Disha, do you want to explain just the basics of tax loss harvesting? And I'll see if I can answer his question about this European index fund that he's looking for a partner for.

Dr. Disha Spath:
Sounds good. Yeah. Tax loss harvesting, it's a little bit more advanced financial technique where you can take your capital losses in your brokerage account and have Uncle Sam share in your losses. You can take the lesser of $3,000 if you're married filing jointly, or $1,500 if you're married filing separately to be deducted from your regular income. So, your ordinary income, you get to take that. You take the losses from your brokerage account against that, and you pay less taxes.

Dr. Disha Spath:
A typical physician in a high tax bracket, it's worth about a thousand dollars in cold hard cash to you if you are able to do this correctly. Remember, this is a $3,000 of losses in your brokerage account that you can deduct against your regular ordinary income. This can be pretty valuable for high income professionals, can be very valuable, but it's a little bit tricky, which is why we get a lot of questions about it.

Dr. Disha Spath:
There are a few things we need to watch out for. The first one is, that this gentleman is trying to find something that's not substantially identical to the fund that he currently has. What he needs to do is sell this current fund and buy it back around the same time. He's trying not to sell low and then buy high. He's trying to sell low and then buy low at the same day. But it has to be a fund that's not substantially identical according to the IRS rules. So, he can't buy back the same thing. He basically needs to find a fund that is similar to what he's already invested in.

Dr. Jim Dahle:
Yeah. You actually can buy back the same thing. You just got to wait 30 days.

Dr. Disha Spath:
Oh, right.

Dr. Jim Dahle:
And the risk, of course, is that it goes up in those 30 days. And so, that's why most people try to swap, they try to find a partner, a tax loss harvesting partner. And a lot of people worry about this substantially identical thing.

Dr. Jim Dahle:
And here's the truth of the matter. The IRS doesn't care. They don't care about this issue. I have heard nobody that has had a problem from the IRS coming back, going on, “I don't know. Those two funds look pretty similar.” It doesn't happen. If this has happened to you, send me an email. You will be the first in 12 years of telling people this at in-person events, on the podcast, on the blog, et cetera, who actually had a problem.

Dr. Jim Dahle:
If your brokerage firm does not have a problem, the IRS is not going to have a problem. They have got such bigger fish to fry that they just don't worry about this. So, what does substantially identical mean? It basically means the same CUSIP number. If it's the same fund, yeah, that matters. If it's not the same fund, you're good. I don't care if it's the Vanguard Total Stock market fund swap for the Fidelity total stock market fund and it has a correlation of 0.999. It doesn't matter. They don't care. It's a different fund. So, quit worrying about that aspect of it that a lot of people worry about.

Dr. Jim Dahle:
Okay, here's another tip for you. The simpler your portfolio, the easier this is. If you've got 25 holdings in your taxable account, this is a pain. Some people think, “Oh, I'll be more diversified if I split my international holdings into European stocks and Pacific stocks and emerging market stocks, and then maybe I'll get some sort of rebalancing bonus.”

Dr. Jim Dahle:
Well, as soon as you go to start tax loss harvesting all that crap, you realize “Maybe I don't want it this complicated”. Because now instead of having three or four or five partners, you've got 25 and you've got a bazillion funds that you're having to keep track of.

Dr. Jim Dahle:
So, I would caution you, particularly in your taxable account, try to keep your investing plans relatively simple. I don't own an allocation of European stocks. I own an allocation of international stocks, like the Vanguard Total International Stock Market Fund. And it's way easier to tax loss harvest one fund than it is three funds. So, keep that in mind.

Dr. Jim Dahle:
But if you want to persist and do that sort of a complex portfolio, you will find that you will have a lot more tax loss harvesting partners if you use exchange traded funds instead of traditional mutual funds. And the reason why is there's just more ETFs out there for each of these asset classes.

Dr. Jim Dahle:
The fund you mentioned, VEUSX, is the Vanguard European Stock Index Fund. Vanguard only has one European Stock Index Fund. I think they only have one European stock fund period. So, if you're in a Vanguard taxable account and you're looking to make a swap, you're going to have to go outside of Vanguard to another fund company, which isn't awesome.

Dr. Jim Dahle:
But if you were in the ETF version of that fund, you could swap it for the iShares European Stock Index Fund, which is ticker symbol IEV. I'm sure it has a very high correlation. iShares is almost always my tax loss harvesting partner when I'm going from a Vanguard ETF to another partner. I usually go back and forth between the iShares one.

Dr. Jim Dahle:
For example, for VTI, the total stock market index, my tax loss harvesting partner is ITOT, which is the iShares total stock market index. For the Vanguard Total International Stock Market Index, ticker VXUS, my partner is the iShares Total International Stock Market Index. Ticker IXUS. Very easy.

Dr. Jim Dahle:
And because I never do swaps more than about every couple of months, I don't need a third partner. I'm always able to go back to the original partner. It keeps it really simple. This way I only have at a maximum two funds for each asset class in my portfolio in that taxable account.

Dr. Jim Dahle:
So, I hope that makes it easier for you. You may want to consider going to the ETF versions and you'll find you have more partners. Maybe keep things simpler to swap out. You probably have a Pacific ETF too and you probably have an emerging markets ETF too I assume. You could swap all three of them for the Total International Stock Market fund and just keep it really simple rather than just trying to swap out the European one.

Dr. Disha Spath:
Jim, that was a really good explanation. Thank you so much. Which resource do you go to when you're looking for tax loss harvesting partners?

Dr. Jim Dahle:
I guess I've been doing it so long, I don't really look things up. But there are resources out there. Leif Dahleen, the Physician on FIRE published a blog post about tax loss harvesting partners. If you Google “Tax loss harvesting partners Physician on FIRE”, it pops right up. He calls the post “A Big List of Tax Loss Harvesting Partners.” It was published this year, October 4th. And indeed, it is a big list.

Dr. Jim Dahle:
But honestly, if you only swap them out every couple of months, you only need two partners. You don't need six for each asset class.

Dr. Disha Spath:
I find myself going Morningstar too, a little bit.

Dr. Jim Dahle:
Yeah, Morningstar's always great. Anytime you want to look up any fund or ETF, Morningstar is the go-to resource. That's an excellent point, Disha.

Dr. Disha Spath:
Thank you.

Dr. Jim Dahle:
All right. Oh, boy, we're going to talk about wash sales some more. We got a question from Bethany. Let's take a listen to this one.

Bethany:
Hi, this is Bethany in Florida, and I have a question about tax lost harvesting. I want to sell a fund with some losses, but I purchased some of this fund with our regular monthly investment within the past 30 days. So, if I sell those specific lots that were recently purchased, will this avoid the wash sale rule or do I have to sell the entire holding?

Bethany:
I have some of this fund that I purchased in 2020 that still has a gain on it, so I would like to hold onto those lots and just sell the more recently purchased ones that have a loss. I'd appreciate your help. Thanks.

Dr. Jim Dahle:
All right. What advice would you give her, Dr. Spath?

Dr. Disha Spath:
Yeah. The wash sale rule stresses all of us out. And that's the easiest way to screw up a tax loss harvest. Basically, the rule is that you can't sell the security and then turn around and buy the same security within 30 days after you sell it. But you also can't buy it within the 30 days before you sell it unless you also sell the shares that you just bought. So, I think you'd be okay if you just sell the shares that you just bought and don't buy it again for another 30 days after that.

Dr. Disha Spath:
Now, her question about whether she has to sell the previous holdings in the same thing that she bought before 30 days, what do you think about that, Jim?

Dr. Jim Dahle:
Yeah, basically the key is, as you mentioned, anything you just bought needs to be sold to, or it's going to be a wash sale. You can't buy it five days before, then turn around and sell, unless you're selling what you just bought.

Dr. Jim Dahle:
And I know this sounds kind of complicated, and the way you avoid this problem is you realize up front that tax loss harvesting does not play well with automated investing. Automated investing is awesome. We put it on autopilot, things just happen in the background. It comes out of your paycheck, it gets invested. There are lots of benefits to automated investing, but it does not play well with tax loss harvesting.

Dr. Jim Dahle:
So, you are almost forced to choose one or the other. Now, that's not entirely true. You can kind of work around it, but it works a lot better if you choose one or the other. If you just forget tax loss harvesting and put everything on auto pilot, that's fine. If you decide you want tax loss harvest, it tends to be better if you're a little more deliberate in your investing.

Dr. Jim Dahle:
And that's what I do. I'm very deliberate in my investing. So, every month we make money, we pay our expenses, we decide how much we're going to give to charity, we put some aside to pay in taxes, and the rest we invest, no matter where the income came from. And we say, “Okay, well, we're behind on international stocks and we're behind on real estate this month, so we're going to put all this money into international stocks and real estate.”

Dr. Jim Dahle:
I put a big huge lump sum into a total international stock market index fund, and that's my whole investing for the month. And maybe put a little bit into a real estate fund or something like that.

Dr. Jim Dahle:
And the nice thing about that is I haven't bought any international stocks in any account for three or four months. And so, I never get burned on these wash sales because I'm just not doing it very often. I don't invest in a particular asset class all that often.

Dr. Jim Dahle:
If you're trying to buy everything in your portfolio every two weeks, you're always going to have this wash sale concern every time you go to do it because you're always buying. And that's not a bad thing, but it just doesn't work very well with tax loss harvesting.

Dr. Jim Dahle:
Because tax loss harvesting isn't just about the $3,000. If it was just the $3,000, I don't know that I'd bother doing it at all. But you can use tax losses in an unlimited way against all of your capital gains. So, if you get out of a private real estate fund and you have some capital gains there, guess what? Those losses you harvest can offset those. If you're selling your home and it appreciated more than $250,000 or $500,000 if you're married, you can offset those gains from selling your house.

Dr. Jim Dahle:
If you sell a business, like if I sold the White Coat Investor, I could use any extra tax losses I had in order to offset that sale. So, lots of things that you can use those losses for besides just $3,000 a year. And of course, these losses can be carried forward indefinitely.

Dr. Jim Dahle:
And so, it's a good thing to have them. It's never a bad thing to have these tax losses anyway. It's bad to lose money, don't get me wrong. You're better off if you never lose money, but if you lose money, you might as well get some tax losses to help you make some lemonade out of the lemons.

Dr. Disha Spath:
Yeah. Another thing that messes people up is reinvesting their dividends because you have that 60-day dividend rule. If you don't hold a security for at least 60 days around the dividend date, you will turn that dividend from a qualified dividend that's taxed at a lower amount into a non-qualified dividend. And that eliminates a lot of the benefits of that tax loss.

Dr. Jim Dahle:
Yeah. It could be more than the benefits you're getting from it.

Dr. Disha Spath:
Yeah. And so, really, it's a tough choice for me specifically. I've thought about tax loss harvesting, but I really value the automation and I'm one of these that I take the extra that I have at the end of the month. I put it in a high yield savings account, and then I have auto investments into my Vanguard brokerage from the savings account. And I don't have to think about it. I'm way too busy to think about it every month. I know you are too, but for some reason I just don't have the mental space.

Dr. Jim Dahle:
Yeah. The dividend problem is twofold. One, you got to be careful selling a security within 60 days of a dividend date. So, you need to hold it for at least 60 days so that dividend is qualified. I've made this mistake where I turn dividends that should have been qualified into nonqualified dividends just to get some more tax losses. That is not smart. That is dumb. Do not do that.

Dr. Jim Dahle:
But the other issue, of course, if you're reinvesting those dividends is that's a little purchase. And the amount of that purchase gets washed if you then have a sale. So, you got to be careful there.

Dr. Jim Dahle:
But the bottom line is, if you just bought something two weeks ago, you can sell that and take a tax loss. That's okay. You just need to make sure you sell everything that you bought, not shares of that fund that you bought months ago, but the ones you just bought within the last 30 days. Those have to be sold with whatever you're selling in order for it not to be a wash sale. Otherwise, it will count as a wash sale.

Dr. Jim Dahle:
And a wash sale isn't illegal. It's not like you did something bad. You just have your basis basically reset in that security. So, it's not the end of the world. You can turn around and tax loss harvest them again next month, most likely, but you don't get the loss that you're counting on getting if you have a wash sale.

Dr. Disha Spath:
So, she has to sell that security in her brokerage and her IRA, right?

Dr. Jim Dahle:
Yeah. Why don't you talk about IRAs and 401(k)s?

Dr. Disha Spath:
Yeah. The question that I had in my mind was “What accounts count for this?” Because the IRS looks at you as an investor, you and your spouse as one investor. And technically it's supposed to be that you are not supposed to be buying that security or something similar in any of your accounts.

Dr. Disha Spath:
But the IRS really hasn't clarified that. What they have said is that you can't buy the same security in your brokerage or your IRA. We know that for sure. The 401(k) is a somewhat gray area. They haven't really said it. Some people avoid buying it in the 401(k) just in case. And other people don't care. How are they even going to know? It's not like the 401(k) is reporting to the IRS what you're buying every month.

Dr. Disha Spath:
So, the two accounts that you really need to watch out for are accounts that are in your name or your spouse's name, IRA and brokerage.

Dr. Jim Dahle:
Yeah, for sure. That's the letter of the law is brokerage and IRAs. Basically, they don't want you to sell something in taxable, take that loss and at the exact same time buy it back in your IRA. That's no bueno. They've never specified that for a 401(k) though. They've never specified that for an HSA, for a 529. And of course, your kids' accounts, a UTMA account, that's not your money. So that doesn't count. That's a different investor.

Dr. Jim Dahle:
And so, there is room to do that, but this is so easy. To do this right you don't have to bend over backwards to avoid these problems. Just pick two things in your taxable account that you're going to invest in for that asset class. Like in my case I mentioned earlier, I use VTI and I use ITOT and that's it. I go back and forth no more often than every 60 days. So, I never get burned on the dividend rule.

Dr. Jim Dahle:
And you don't have to eke out every 10 cents of losses that you ever have. If you just get the big ones in a bear market, that will be plenty, I assure you, for your whole life. You don't have to go and hire a robo-advisor to do this for you 25 times a day. You just don't need that many losses. You can just take them all in a big bear market. And if you don't tax loss harvest for two years after that, it's fine. And then there's another big bear market. That's when you do some tax loss harvesting.

Dr. Jim Dahle:
I looked at my taxes the other day. I just did my 2021 taxes. Yes, almost at the end of the year. And I had no losses from 2021. You know why? Because everything went up in 2021. Everything did great. And so, I basically didn't do any tax loss harvesting in the whole year. 2022, I've done it three or four times just because that's when the losses are.

Dr. Disha Spath:
Can you turn off your auto reinvesting the dividends? Do you go in four times a year and reinvest those dividends into the same security or different security that you're buying?

Dr. Jim Dahle:
Yeah. I reinvest dividends in retirement accounts. No reason not to in a retirement account. I do not do it in my taxable account. So, every month when we add up all our income from all sources, that includes the dividends in that taxable account. So, let's say September just ended, and I got dividends from total stock market, total international stock market, and small value index fund and small international index fund. And all those come in to my money market fund, this settlement fund I have.

Dr. Jim Dahle:
And so, I see those come in, I add those in with my clinical income, I add those in with my WCI income. Maybe I got some real estate income that month, and I add it all up and say, “Okay, we're going to reinvest this much of it.” And so, it all goes into usually one or two investments. And it happens every month. It might sit there in cash for a couple weeks, but it doesn't sit there for months. Because that causes a cash drag.

Dr. Jim Dahle:
And that's, like I said, another nice thing about automated investing is you avoid that tax drag or that cash drag. So, there are benefits of just automating things and forgetting all about tax loss harvesting. There are some people out there that are like, “This is the biggest waste of time and people are hurting themselves more than they're helping themselves.” And there's some merit to that criticism. I think there's some truth there.

Dr. Jim Dahle:
All right, let's bring in an interview here that we recorded with Ashley Whillans. Ashley is an assistant professor at the Harvard Business School. She happens to be married to an emergency physician, I believe, but she teaches negotiations and motivation and incentives courses to MBAs and executives.

Dr. Jim Dahle:
And she's going to be one of our keynote speakers at WCICON. She's speaking on Time Smart: How to Reclaim Your Time and Live a Happier Life. I did a short little interview with her. I'm going to bring that in here and let you guys listen to it, give you a break from tax loss harvesting. Then we're going to come right back to it in a few minutes.

Dr. Disha Spath:
I would love to hear what she has to say about tax loss harvesting, and if it's worth the time.

Dr. Jim Dahle:
Our guest today on the White Coat Investor podcast is Dr. Ashley Whillans. She's an associate professor of business administration at the Harvard Business School and will be a keynote speaker at WCICON23, the Physician Wellness and Financial Literacy Conference coming up in March in Phoenix.

Dr. Jim Dahle:
I wanted to bring her on the podcast and introduce her to you, and hopefully a lot of you'll be able to also meet her in person at the conference this spring. Welcome to the podcast, Ashley.

Dr. Ashley Whillans:
Thanks for having me.

Dr. Jim Dahle:
So, you have a pretty fascinating career. You got your doctorate, your PhD is in social psychology, but you're working at Harvard Business School. Tell us about your career in education and how you ended up where you're at now.

Dr. Ashley Whillans:
As a social psychologist by training, I became really interested in this fundamental question of how we should spend our money and our time to promote happiness. As it turns out, organizations want to keep their employees around, so they also care about keeping employees happy. And I guess that's a short way of how I ended up at the Harvard Business School. I also have a past background in acting, and it is true that MBA classrooms are a bit of a performance. So, I think it helps me that I have an acting background as a business school professor.

Dr. Jim Dahle:
Now, you wrote a book called “Time Smart: How to Reclaim Your Time and Live a Happier Life.” We're planning on giving this book away in the swag bags at the conference. Why'd you write the book?

Dr. Ashley Whillans:
I wrote the book because as a time and happiness researcher who is a time nerd, self-professed, I was struggling with time and time and money tradeoffs in my own personal life. First year on the tenure track, first serious relationship I ever was in for 10 years of my life. Three weeks into moving across the country for my job, this person leaves me in this new city because they said, “Why would I even be here? There's nothing for me to do here. All you do is work. I don't even feel like I'm in a relationship with you at all, because you are in a relationship with work that doesn't make any time for me.”

Dr. Ashley Whillans:
It hurt, but it was true. And I became inspired on a mission to figure out how we can both succeed at work and outside of work and become more intentional with our time and happier as a result.

Dr. Jim Dahle:
Now you say there's an 80% chance that you're poor, time poor that is. You're saying four out of five adults report feeling that they have too much to do, not enough time to do it. Why are we so time poor?

Dr. Ashley Whillans:
Oh, there's so many reasons, and I'll definitely go and unpack those in my keynote talk. But one of the reasons that we have control over is that we focus on money more than we focus on time. Money, we like to maximize measured mediums, especially high achievers, like those listening.

Dr. Ashley Whillans:
And so, we go after something we can quantify and track. We go after money. Time is amorphous. “What am I going to do with three days off, five weeks from now? What is the value of 30 minutes of additional leisure?”

Dr. Ashley Whillans:
And so, because we're not very good at making these decisions between time and money, many of us, ourselves probably included, end up spending too much time working and not enough time and ways that promote happiness, like spending time with our friends and family.

Dr. Jim Dahle:
Now, us reaching out to you to speak at the conference was not your first encounter with the White Coat Investor. Tell us about your introduction to the White Coat Investor in our community.

Dr. Ashley Whillans:
My now husband is a White Coat Investor, fan fanatic. He's an ER physician and you might be interested to know, and he wanted me to share with you that he put my ideas into practice to change his career. So, he is an ER physician. As you know he's working shifts and he was working for a for-profit company after med school that made more money, but came at the cost of his time.

Dr. Ashley Whillans:
And so, thinking about time and money tradeoffs and happiness, we were dating, I was writing this book, he decided to move to a non-profit work slightly less, make less money so that we can have more time together.

Dr. Jim Dahle:
You talk about people answering work emails during family events, taking calls while on vacation. These sorts of things make a company very productive, make a company much more successful at its goals when everybody's available, even if they're not actually working all the time.

Dr. Jim Dahle:
What is the problem with this trend that's been exacerbated by the COVID pandemic and so many of us working from home where we've now kind of blended our work lives and our home lives?

Dr. Ashley Whillans:
Yeah. So, if you feel like you're busier than ever, you are. Microsoft data suggests meetings and emails have gone up 250% since before the pandemic, and 30% of knowledge workers are now additionally working a third shift between 07:00 to 10:00 PM.

Dr. Ashley Whillans:
Now, I want to push back a little bit on something you said. We think that constant responsibility will make us more productive, but the research suggests that being constantly available pulls us out of the present room moment, reminds us of all the other things we could or should be doing. It makes us less efficient in our jobs.

Dr. Ashley Whillans:
From a happiness perspective, constant responsivity has a dramatic cost too. So, in one of my studies, we randomly assigned working parents hanging out with their kids on a Saturday to either have the alerts on their phone on or do they have the alerts on their phones off.

Dr. Ashley Whillans:
Parents who had the alerts on their phones on felt significantly less meaning remembered fewer details of the event. And they also felt guiltier because when you have your work email on your phone while you're trying to enjoy your leisure, you feel like a bad parent and a bad spouse because you're checking your phone while you're trying to have quality time with your friends and family. And when you see emails come in, then you feel like a bad colleague if you don't get to them right away.

Dr. Ashley Whillans:
So, I think it's really important. A lot of our time poverty is driven by this digital distraction. A key strategy is figuring out how to manage those constant pings that we get all day every day.

Dr. Jim Dahle:
What else can we do to draw boundaries between our work life and our real life, if you will, besides just turning the notifications off our phone when we're not at work.

Dr. Ashley Whillans:
We have to be as intentional with our time as we are with our finances. So, when people are thinking about “How can I become more financially well?” you have to think about where your money is going. When it comes to time, the same principles apply. We have to do a time audit and see where our time goes missing on an everyday basis and begin to get rid of things that make us stressed out and unproductive. And then spend more time, more active time in ways that make us happy, that feel meaningful and productive.

Dr. Ashley Whillans:
I'm going to talk about this more in my keynote, so I don't want to give away too many secrets, but there are some strategies that I talk about in my book and that I'll also share with attendees at your conference.

Dr. Jim Dahle:
Cool. You've talked a little bit about how employees get paid, how they're incentivized, whether they get bonuses or percentages of profits or whatever, and that can actually have some effects that maybe we never think about and that these are not necessarily good effects. Can you talk a little bit about how bonuses maybe cause people to make bad decisions when it comes to time management?

Dr. Ashley Whillans:
Yes. I love this question. I'm going to start with how you are paid. So, many physicians bill by the hour. Did you know billing? Just knowing the economic value of your time makes you feel like your time is extremely scarce. People who receive hourly compensation, regardless of what profession they work in, feel more time stressed because they feel the opportunity costs of wasting one second more strongly.

Dr. Ashley Whillans:
This means that people who bill tend to forgo leisure because it doesn't feel worthwhile. They're less likely to volunteer because it doesn't seem more at the time cost. And in some of my data, they're even less likely to make small environmental decisions unless those decisions are framed as a financial benefit. Because giving up a bit of time just doesn't seem worth it when your time seems so scarce and valuable.

Dr. Ashley Whillans:
We also see in another project that bonuses or cash compensation, having that carrot dangled in front of you to work harder toward a goal can come at the cost of spending time with friends and family.

Dr. Ashley Whillans:
We find in six studies with over 70,000 employees in North America, that being paid largely due to performance incentives can make you focus on surprisingly more on money and see your relationships in a more instrumental way. So, you start to look at your colleagues, even your friends as either a path to achieving that goal of making more money or not.

Dr. Ashley Whillans:
So, what we found is that people who get performance bonuses at work and are heavily compensated through bonus comp are less likely to spend time with friends and family and more likely to spend time with colleagues who seem instrumental or helpful for them getting that financial bonus, which looms so large in their minds.

Dr. Ashley Whillans:
This goes back to what we were talking about at the beginning of the conversation. We're already wired that way. As human beings, we already gravitate toward money and work hours and moving up in our organizations because we like to track our progress against concrete goals and performance incentives and billing just highlight or dial up some of those tendencies we already have.

Dr. Jim Dahle:
I'm sure you present this material to companies all the time. How do they react to this? I imagine there might be a little bit of pushback from management when you're telling employees to maybe spend less time working and not be as available and trying not to be incentivized so much by work. What experience have you had in that regard?

Dr. Ashley Whillans:
I have almost got kicked out of a top management consulting firm for suggesting that the leadership should change their revenue per partner credits so that people are less focused on running a million projects and more focused on running sustainable teams.

Dr. Ashley Whillans:
So, I think a lot of what I talk about when I consult for companies is thinking about how to change microculture micro moments. It might be a lot harder to change a compensation system. It might be a lot easier for a small team to get together and decide collectively that they're going to take one hour of focus time between 05:00 and 6:00 PM or between 12:00 and 01:00 where there's no expectation of constant responsivity, and that that team is going to decide together that they're going to try to break away from their phones to catch up on work, catch up on notes, catch up on billing, see their spouse, whatever it is.

Dr. Ashley Whillans:
I think there's a lot of room to move in organizations on the small decisions we can all make together to help each other protect our time. And honestly, it's a little bit harder to go in and say, “I think you should dramatically change your paperwork system so that you reduce paperwork burdens for physicians.”

Dr. Ashley Whillans:
That's going to be way harder. It is something that makes us time for, but there are many things that I'm going to share with audience members that they can do on a personal basis to take more control over their time that doesn't involve their boss or the CEO changing the way they're paid.

Dr. Jim Dahle:
Speaking of physicians, medicine in America, like lots of professions, but perhaps to a worse degree, suffers from pretty severe burnout. Surveys are showing anywhere between 40% and 60% of docs are burned out at any given time. The physician's suicide rates about twice that for the rest of society.

Dr. Jim Dahle:
Now you've done a case study at France Telecom related a little bit to this. Can you tell us a little bit about that study?

Dr. Ashley Whillans:
Yeah. This was a case study, which for listeners who aren't familiar, we investigate management issues and we use one single case or one company as an example, to investigate issues that are relevant more broadly to society.

Dr. Ashley Whillans:
In France Telecom, my colleague and I became very interested. This is a firm that underwent a major reorganization, major restructuring. They were this monolithic old encumbered legacy company, and they were trying to streamline and keep up with the Googles of the world in a very difficult market economy.

Dr. Ashley Whillans:
Actually, what ended up happening is things went really bad. They didn't downsize in a way that protected autonomy and competence, relatedness all these psychological features which are so important for employee’s mental health. They disenfranchised employees, they moved employees, they made employees change jobs with no notice, they demoted employees. They were trying to get their employees to quit. And in the process, they ended up having employees commit suicide and unfortunately experience a whole host of mental health challenges.

Dr. Ashley Whillans:
But we use the case as an example, both of what not to do. The company was eventually sued for millions of dollars and the CEO got fired, all of that stuff. But also, to unpack the psychology of what can lead individuals within organizations that are high performing, high demand to feel psychologically unsafe and unwell in the first place.

Dr. Ashley Whillans:
And so, a couple of things to keep in mind from that case that I think come out really nicely is employees need to feel like they have a say in the policies and practices that an organization is implementing.

Dr. Ashley Whillans:
Part of what we talk about is that learned helplessness played a role in the negative employee outcomes in that situation. Employees didn't know where some of these decisions were coming from. There were immense silos within the organization. They didn't understand why they were getting their jobs changed, or they got no training once they were on the job. Now that was a little bit by design because France has really strict labor laws and can't actually lay off employee. And so, they were trying to get employee to leave.

Dr. Ashley Whillans:
But the take home message is that there's things that we can all do as managers, as leaders in our organizations to think about what we can do on an everyday basis to support these fundamental needs that workers have around feeling like they have choice and control, that they have transparent decision making, and that they feel appreciated for the hard work that they're doing on an everyday basis.

Dr. Jim Dahle:
Awesome. Well, Dr. Ashley Whillans, we are super excited to have had you on the podcast. We're even more excited to have you in person at the Physician Wellness and Financial Literacy conference coming up in Phoenix the first week of March. Best time of the year in Phoenix, actually, is that first week of March.

Dr. Jim Dahle:
And I'm looking forward to you being treated like a rockstar among the White Coat Investor community. I'm sure they're all going to be excited to meet you in person and hear from you personally on this insight that you've gained in your career.

Dr. Ashley Whillans:
I can't wait to attend. And I will say one of the best things for happiness is social connection. So, I hope to see a lot of you there.

Dr. Jim Dahle:
All right, that was a great interview. I hope you get a chance to meet her at WCICON coming up. Our next question comes from Diana. We're back into tax loss harvesting. So, obviously a topic of interest in 2022. We've had lots of losses. Stocks are down this year, bonds are down this year, publicly traded real estate is down this year. Even precious metals are down this year.

Dr. Jim Dahle:
Certainly, crypto assets are way down this year. They have a cool benefit by the way, that we probably ought to mention since we're talking about tax loss harvesting. No wash sales. There are no wash sales with any sort of cryptocurrency or crypto asset. Why that is, I have no idea. But you can sell it and buy it back eight seconds later and count the loss. So, if you have a loss in Bitcoin or Ethereum or whatever and you decide you actually want this for the long-haul, tax loss harvests it. It’s totally worth it.

Dr. Jim Dahle:
All right, let's take this question from Diane.

Diane:
Hi, Dr. Dahle. I have another question on my favorite obscure topic, tax loss harvesting. My question is, when do you buy back the original holding that you booked the tax loss from?

Diane:
For example, do you just wait the 30 days and buy back, say VTI, if that's what you sold for a loss? Do you wait until the new holding also has a loss and then book that loss when you buy back your original holding? Or because the new holding is similar to what you had in the first place, can you just hold onto it and continue to reinvest into it indefinitely? I would love your thoughts.

Dr. Disha Spath:
I love it.

Dr. Jim Dahle:
Okay. Great question. This one's super easy. What I do, two partners for each asset class. That's it. VTI, ITOT. VXUS, IXUS. I am perfectly happy to hold either or both of those until the day I die. Perfectly happy. Doesn't bother me.

Dr. Jim Dahle:
Now, when I have a choice, I tend to put it in the Vanguard ETF. I tend to buy VTI. I tend to buy VXUS. But it does not bother me to hold ITOT or IXUS. They're also excellent, excellent ETFs, excellent funds. In some ways, they have some advantages over the Vanguard fund. In other ways, the Vanguard fund has some advantages.

Dr. Jim Dahle:
So, the bottom line is, I don't feel this urgency to get back into the original holding because I'm perfectly fine with the other one. But let's say we do tax loss harvesting and the bear market continues, it drops some more. Now you have a loss on what you just sold 30 days, 60 days, 90 days ago. Well, I'll swap it back to the other one. Because I'm perfectly fine with either one and I'm going to grab another loss. right.

Dr. Jim Dahle:
And so, the only tricky part comes in when you've got both of those and you have money to invest into that asset class, and you're not sure which one to put it in. Now that gets a little bit tricky. It doesn't matter that much, but I tend to choose the one that I'm less likely to tax loss harvest soon.

Dr. Jim Dahle:
I just look at the various tax lots I have for each of those. And if there's one that I'm like, “Oh, that one almost has a loss. Let's not buy that one, we'll buy the other one.” Or I do it in combination. I sell a bunch of ITOT that has a loss and exchange that for VTI and also put some new money into VTI at the same time. That's probably the more likely scenario.

Dr. Jim Dahle:
But I don't feel like after 30 days I got to get back to the original holding because I only exchange into stuff that I am okay investing in for the long run. I hope that's helpful, Diana.

Dr. Disha Spath:
Let me add a little bit more complication to that question. When you are looking at the tax lots in Vanguard, it shows short-term capital losses and long-term capital losses. How does that work when you're doing tax loss harvesting? Does that change the scenario for you at all?

Dr. Jim Dahle:
Not really. Here's where all these get totaled up. They all get totaled up on Schedule D of your form 1040, and they get totaled up differently. There's a column for short-term, there's a column for long-term. And your short-term losses are put against your short-term gains, and your long-term losses are put against your long-term gains. And then if you have leftover, they can kind of be used in the other category. In some ways you can use a short-term loss to offset a long-term gain, for instance. I don't know that you can do it vice versa, but you can do it that way.

Dr. Jim Dahle:
And so, it doesn't matter so much. If you have a loss, grab the loss. Especially if you're going to still be invested in something you're perfectly fine with. And this is yet another reason why individual stocks are not awesome. Because let's say you got a loss in Tesla. Well, what are you going to exchange to? There's nothing out there that's exactly like Tesla. Do you exchange that for Ford? Do you exchange it for Facebook? What do you exchange that for? There's really nothing that has 99% correlation like you would between two ETFs.

Dr. Jim Dahle:
And so, you can still tax loss harvest, but you got a lot more risk of having the security you exchange into performing differently from the security you just exchanged out of.

Dr. Disha Spath:
Okay.

Dr. Jim Dahle:
All right. Jeff's got a question. Holy smokes. People have been really thinking about tax loss harvesting this year. We got a lot of tax loss harvesting questions. I like this one, Jeff. This is a good question.

Jeff:
Hi, Dr. Dahle. My question pertains to tax loss harvesting. I recently stumbled across a post you made back in 2017 about the asset allocation of your portfolio. You disclose that the stock portion, which comprises 60% of the portfolio, is made up of only four types of funds. Total US, small value, total international and small international.

Jeff:
I have a lot of appreciation for the simplicity of this portfolio as it feels to me an investor can easily be fully diversified without owning a lot of different positions through the use of total market funds.

Jeff:
My retirement accounts have a similar level of simplicity. However, for my taxable portfolio, it seems to me at least conceptually that there could be more opportunity for tax loss harvesting if a larger number of different positions are held.

Jeff:
I'm of the belief investors shouldn't seek to complicate things just for the sake of complexity and where at all possible it's better to be simple. But is this perhaps an area where embracing some additional complexity could be advantageous? For example, if an investor owned 10 taxable positions instead of four, would it create more frequent tax loss harvesting events?

Jeff:
So, my question is, do you actually only hold four different stock funds in your taxable portfolio? And if so, do you feel it limits your ability to tax loss harvest? I love listening to your podcast over the years and greatly appreciate all the free knowledge you share. I’m looking forward to hearing your insights on this topic.

Dr. Jim Dahle:
All right. That's a good question. I like your question because there's no right answer to it, and that's the best kind of question. You are correct that having more holdings gives you more tax loss harvesting opportunities.

Dr. Jim Dahle:
You've heard of direct indexing. Direct indexing is when you don't buy an index fund, but you actually buy all the underlying stocks that are in the fund. You're basically making your own index fund. And this way you can tax loss harvest within the fund between those stocks all day long, have a maximum number of tax losses. And that's one benefit of direct indexing. And you can hire companies to help you do this for a fee.

Dr. Jim Dahle:
Does it make sense? Well, I guess it could if you have a gazillion dollars, but for the most part, that level of complexity has so many costs, including the value of your time that I'm skeptical that it's worth it.

Dr. Jim Dahle:
Because here's the deal. You are kind of letting the tax tail wag the investment dog. Now you're choosing your investments based on some ephemeral tax benefit. This is the classic… What's the principle? The Pareto principle. Is that what it's called? The 80/20 rule.

Dr. Jim Dahle:
You can get 80% of the benefit very, very easily with just having a few basic funds that you tax loss harvest in a big bear market, grab these huge losses, you can carry them forward for a few years and use them till another bear market, and then you grab some more. You don't have to get every dime of possible loss out of your investments to offset gains later. And so, I wouldn't feel like you have to do that sort of a thing. I think that's the bottom line on it.

Dr. Jim Dahle:
But there's one other thing that I thought about and actually did very briefly with my portfolio a few years ago. I started thinking the same way you're thinking going, “Wow, wouldn't it be great to have really volatile asset classes in that taxable account? If they go down, I get a big huge loss. If they go up, I get a big huge gain, and then I just donate those gains to my charitable account without having to pay taxes on that.”

Dr. Jim Dahle:
And so, I actually did. I added a few really volatile asset classes. I think at one point I owned the Vanguard precious metals and mining fund, things like that. And after about six months, I got smart and realized maybe this isn't such a great idea. I shouldn't be doing something just for the tax benefits. Actually, all the winners I had, I donated to charity. All the losers I had, I ended up tax loss harvesting and getting into a more sensible portfolio.

Dr. Jim Dahle:
But I think the bottom line here is when you start doing this sort of stuff, you're letting the tax tail wag the investment dog. I think the merits of simplicity are manyi, not just for you and freeing up your time and your life to do the things that you care about most.

Dr. Jim Dahle:
But also think about what if something happened to you and your partner has to take over this portfolio, or it gets so complex that now you got to hire a financial advisor to unwind it all. And then you're asking yourself, “Did I get more benefits than I'm actually paying in financial advisory fees?” And you got to ask yourself. Maybe you're not.

Dr. Jim Dahle:
But I like the way you're thinking. When you're starting to ask questions like this, it means you're winning the finance game. So, you've gotten into the weeds here and I would caution you that maybe you don't need to be into the weeds quite that far.

Dr. Jim Dahle:
What do you think about this, Disha? Do you want 300 holdings in your taxable portfolio just to get a few more tax losses?

Dr. Disha Spath:
I'm definitely on the simplicity side of things. And if it's going to take more than 30 minutes for me to do it, then I'm not doing it.

Dr. Jim Dahle:
Yeah, exactly. I think that's the way most people feel. But you know what? There's some of us out there that are hobbyists. And I suspect Jeff is one of them.

Dr. Disha Spath:
Yeah.

Dr. Jim Dahle:
But I'll bet Jeff's spouse is not one of them. You ought to consider that.

Dr. Disha Spath:
Yeah. There's nothing wrong with that. I think there's just different personalities. Some people enjoy the complexity and thinking about it and other people don't. That's okay.

Dr. Jim Dahle:
Yeah. All right. We got some more complicated questions, tax questions, but not tax loss harvesting. So, let's talk about something besides tax loss harvesting. Let's take a listen to this question.

Speaker:
Hey Dr. Dahle. Thanks for all that you do and for taking the time to share your knowledge with the rest of us. I have a somewhat complicated question and part of me wonders if the answer will just be to check with my accountant.

Speaker:
At any rate, I left my practice a few months ago in which I was an owner. My buy-in amount was around $50,000. We signed a stock buyback agreement in the amount of around $100,000. Rather than take the money at the time I separated, we signed a separate promissory note whereby I'll get two installments of $50,000 each plus interest. The first installment will be this December and the second installment next December.

Speaker:
I'm trying to figure out how much and what type of tax I will owe on this. Will it be counted as capital gains or ordinary income? Should I subtract the buy-in amount from the buyback amount when making the calculation? And finally, do I need to pay an estimated quarterly tax for either of these scenarios? Thanks in advance for your help.

Dr. Disha Spath:
Interesting. Her capital gain would be about $50,000, but then she's also getting simple interest on top of that, which is tax at her ordinary income. Is that correct?

Dr. Jim Dahle:
Yeah, that's absolutely right. You don't have to pay tax on basis. You pay $50,000 for something you sell it for $100,000. You don't have to pay taxes on that first $50,000. If you've owned it for at least a year, you pay taxes on those capital gains at long-term capital gains rates. And if you had done some tax loss harvesting and you had $100,000 in tax losses out there, you could offset the sale of your practice with those tax losses.

Dr. Jim Dahle:
So, hopefully you got a few of those and that'll make it even more tax efficient. The interest you're going to pay ordinary tax rates on, that's ordinary interest. You don't have to pay payroll taxes on it, but you do have to pay your ordinary income tax rates on that.

Dr. Jim Dahle:
But I don't know, it's pretty straightforward. That's the way a sale works. This is a stock sale, it's not an asset sale. An asset sale becomes a little more complicated because you end up still owning your entity, your company, whatever it was, and it just got some money for something that's sold. But it kind of works out the same way on your tax forms.

Dr. Jim Dahle:
And chances are you're probably not doing these taxes yourself. It sounds like you have an accountant. It's probably a good idea for a year in which you have something like this anyway, to make sure you get it all right. But yeah, that's how it's going to work. You're going to pay capital gains on $50,000 and whatever the interest is, you'll pay ordinary income taxes on.

Dr. Jim Dahle:
As far as the quarterly estimated taxes, I don't know. I don't have enough information. That's dependent on how much you're having withheld from your other income, how much you are paying already in the estimated quarterly taxes.

Dr. Jim Dahle:
The thing with estimated quarterlies is you've got to get into the safe harbor, essentially. The safe harbor is basically you got to pay the amount you owe. You've got to pay 110% of what you paid last year, what you owed last year. That's another safe harbor you can get into it. And those are the two that most people try to get into with their quarterly estimated tax payments.

Dr. Jim Dahle:
If you're having enough withheld from a W2 job, you don't have to pay estimated quarterly taxes at all. But in general, the IRS views the federal income tax system as a pay as you go system. So, if you get a big bolus of income in the fourth quarter, because you're getting paid in December, you just have to make a fourth quarter a little bit bigger estimated quarterly tax payment to make up for that.

Dr. Jim Dahle:
But remember, it's totally different what you pay as you go along versus what you actually owe. And so, that's what you're reconciling when you file a tax return, is you're reconciling those two things. And a lot of times you have way too much withheld and you get a tax refund. Sometimes you don't have enough withheld and you got to write a check. But those both have their pluses and minuses obviously.

Dr. Disha Spath:
Yeah. I would definitely just let my accountant know that this is happening and make sure that they're prepared to account for that at the end of the year or now.

Dr. Jim Dahle:
And this one's not about tax loss harvesting, but if I had this gain coming, I would sure be looking at my brokerage account going, “Is there a $50,000 loss I can grab to offset this gain?” Because this would be a great opportunity to use it, right?

Dr. Disha Spath:
Yeah.

Dr. Jim Dahle:
Plus, you get offset $3,000 in that interest. That might be all the interest you're getting. I don't know.

Dr. Jim Dahle:
All right. Champion program. We're doing the champion program again. Do you guys know what the champion program is? This is for first year medical and dental students. We are trying to give away a million dollars’ worth of books.

Dr. Disha Spath:
Cool.

Dr. Jim Dahle:
Seriously, we're going to give away the White Coat Investors Guide for Students to every first year medical and dental student in the country. All you have to do is have one person from your class volunteer to pass out the books. We'll bribe you. We'll send you some WCI swag to pass them out.

Dr. Jim Dahle:
Not only do you get a book for yourself, you get a little bit of swag. You get to be a hero to all of your classmates who are going to now save millions of dollars over the course of their careers because they got this information early in their career.

Dr. Jim Dahle:
I think the best we've done is about 75%. We've gotten into about 75% of first year medical and dental students. It would be awesome to get it to 90%, 95% or 100% this year. We're serious, we're giving these away. It's hundreds of thousands of dollars’ worth of books. And obviously we get them at a little cheaper price than you would if you went and bought them one at a time off Amazon.

Dr. Jim Dahle:
But we are trying to get these out there. It is a great way to spread the message of financial literacy. If you would like to sign up for that, and if not you, encourage some first year medical or dental student you know to sign up, all you have to do is go to whitecoatinvestor.com/champion. Literally all we need to know is your mailing address and how many people are in your class, and we'll send you boxes of books to pass out to them. WCI champions program, whitecoatinvestor.com/champion is where you sign up.

Dr. Disha Spath:
What I wouldn’t do to be able to rewind the clock and be able to read your book first year of medical school instead of first year of attending hood, or second year of attending hood. There are so many ways you can do things better than I did that are in that book. And you can set yourself up for success.

Dr. Disha Spath:
And I know first year of med school is like a fire hose and you have 5,000 books to read and you're probably not going to get to it right now, but you have that book anytime you get downtime, you're at the beach and you read a finance book. Hey, you can be that nerd. I've been that nerd. But it's so great to learn this stuff early so that you can really set yourself up for success. I mean, millions of dollars. We're talking millions. Absolutely, don't miss this chance.

Dr. Jim Dahle:
Yeah, I don't blame people for not wanting to read finance books. I don't like reading finance books either. That's not what I pick up when I'm looking for some pleasure. But think of it this way. If I told you this book I was going to hand you was going to be worth $2 million to you over the course of your career and it was only going to take you four or five or six hours to read it, would you read it? Yeah. You are getting paid like a quarter million dollars an hour to read this book. Read the book.

Dr. Jim Dahle:
And the best part about it, this book is not the original White Coat Investor book, which I think is a halfway decent book. This book was deliberately written just for students. It's our longest book. In a lot of ways, it's our best book. It has got the whole end of section. It's all about making you financially literate. It's terms, it’s the stuff you need to know. There's an entire section geared just at students. An entire section geared just at young residents. Man, I agree with you. I wish someone had handed me this book when I was an MS-1. I would've made a lot fewer errors.

Dr. Disha Spath:
Absolutely.

Dr. Jim Dahle:
Okay, more tax questions. Can we take any more tax questions today? We got another one from Chris here.

Chris:
Hi, Dr. Dahle. I'm W2 employee and I’m in the 35% tax bracket. My wife, who stayed home with the kids just took two 1099 jobs and we expect her to make about $10,000. The 1099 employment is new to us. So, we're looking for advice on how best to utilize this income and pay minimal taxes. We don't depend on the money and are happy to put it all in our retirement plan. And she has no other income.

Chris:
When she worked as a W2, we were able to put essentially all of it in her 401(k). I assume we should open up a solo or individual 401(k), maybe at Fidelity, but I'm not sure exactly how to fund it.

Chris:
Can we put her entire $10,000 income in the 401(k)? Do we have her paychecks deposited into our bank account and then just send that from our bank account to the 401(k)? Do we owe any self-employment or other taxes or have to pay the IRS quarterly? Do we contribute the whole amount of her biweekly paycheck every two weeks? Do we leave it all in cash and then contribute a certain amount at the end of the year?

Chris:
Her job will just be on the computer at home. Is there anything else we can do to take advantage of this? Like deduct a home office, one room of our house. Thanks so much for your help.

Dr. Disha Spath:
That was a lot of questions.

Dr. Jim Dahle:
That was a lot of questions. Why don't we split them up? Do you want to take the solo 401(k) ones and I'll talk about the home office?

Dr. Disha Spath:
Yeah, sure. The solo 401(k)s. Your wife, this is her only job, so she can do 100% of her compensation as her employee contribution into the solo 401(k) up to $22,500 in 2023 or $20,500 in 2022. So yeah, you could put 100% of that $10,000 into an elected deferral, into the employee portion of the solo 401(k). And if there's any more on top of that, you can also do employer contributions, which is 25% of the compensation. So, 25% of the profit that she's making.

Dr. Disha Spath:
So, there's definitely plenty of room there. You can certainly set it up at Fidelity. How do you fund it? Fidelity has some funky rules about how you fund solo 401(k)s. They don't always allow for direct bank to bank transfers depending on the bank. So, you would have to work with them and figure out which bank you're using to set up her accounts for her income and how you would be able to fund that. But in any case, as long as you are keeping track of it and accounting for it, you should be okay.

Dr. Disha Spath:
So, yeah. I think that's a great idea and I think you should definitely be investing for her future there, and make sure you go in and actually choose the investments into the account. Don't just put the money there without investing it.

Dr. Jim Dahle:
Yeah, that's actually a common problem in 401(k)s across the country. Lots of people have money taken out of their paycheck and six years later they look and realize it's still sitting in the money market fund. It happens all the time.

Dr. Disha Spath:
Yeah, especially HSAs too. A lot of times you have to go in and actually invest it, and a lot of people don't know that. The fact that the account is just a shopping cart or just a holding place for your investments that's tax protected is not well taught.

Dr. Jim Dahle:
A lot of those settlement funds are paying 0% too. So, literally it's just sitting there doing nothing. As far as where to open it, Fidelity is fine. Schwab is fine. TD Ameritrade is fine.

Dr. Jim Dahle:
My preference with most of these sorts of things is Vanguard. I tend to go to Vanguard with this sort of stuff. In fact, we've been trying to get Vanguard to be an advertiser with us for years now. I think they're finally actually coming on. So, we'll put an affiliate link into the show notes, and you can go through our affiliate link and help support the site if you sign up with Vanguard.

Dr. Jim Dahle:
But the thing I like about Vanguard is all my other accounts are there. And so, it's easy for me to look at it all together. But one thing you should keep in mind with these solo 401(k)s, these business retirement accounts, is that it's a different website. It's not the main Vanguard website. That's not where you make your contributions. You actually have to log into Vanguard's small business website, and that's where you make the contributions. And at least with Vanguard, you can make them automatically from the bank account, directly from bank account. You don't have to write a check or mail it in or anything like that.

Dr. Jim Dahle:
But obviously, she's running a business now. That business needs its own bank account just to keep the finances nice and straight. If she needs a credit card for that business, the business should have its own credit card. Don't get in the habit of mixing your personal and your business finances together. That's just bad business practice.

Dr. Jim Dahle:
What else can you do to take advantage of that 1099 income? Well, just make sure you're deducting all your business expenses. If there's something she's using, printers, computers, paper, some sort of microphone or headset, all those sorts of things that a lot of times you use for a home business, make sure you're deducting those.

Dr. Jim Dahle:
If she has to drive to the post office to mail something, those miles are deductible. So, make sure you deduct those. Those sorts of things. Make sure you're getting what you can out of it.

Dr. Jim Dahle:
As far as the home office, here's the two rules with the home office. You have to use that space regularly and exclusively for the business. That means you can't just use it once a year, that's not going to cut it. You have to be using it regularly, and they don't exactly define that. But if you're not in there, I don't know, once a month, it's pretty hard to justify it as a regular use and exclusively.

Dr. Jim Dahle:
So, if you're using that space for something else, if the kids are doing their homework in there, if you're using it to store your lawn mowing equipment, whatever, that is no go. It's regular and exclusive use.

Dr. Jim Dahle:
And the easy way to take this deduction is to take the simplified version. This is $5 a square foot up to 300 square feet of your home. So, it's a deduction of no more than $1,500 a year if you take the simplified version.

Dr. Jim Dahle:
The complicated version, you have to add up all the expenses associated with your home and then multiply them by a ratio. The ratio in the numerator of the square footage of the home office, and then the denominator, the square footage of the entire home. And you multiply them out and that's what you get. But you can also use depreciation of the home as one of those expenses.

Dr. Jim Dahle:
And so, it can be a bigger deduction. And I don't think you're limited to just 300 square feet either. If you have a really big home office, you may want to go ahead and use the direct or the more complex calculation.

Dr. Jim Dahle:
The one downside of that, aside from its complexity, is that you have to recapture that depreciation when you sell the home. Any depreciation that you deducted as a business has to be recaptured later, just like a real estate investment would. So, keep that in mind. Most people just go, “Oh, I'll just get that $1,500.” And they keep it nice and simple.

Dr. Jim Dahle:
There's also another really great option out there, which is renting your house to your business. And you can do that 14 days a year. It counts as a deduction for the business. The income does not count for 14 days a year. If you rent it to yourself for 15 days a year, it counts. But up to 14 days a year, it does not count.

Dr. Jim Dahle:
So, it's basically just pre-tax income that you get and can spend without ever having to pay taxes on it. That's a cool trick, even better than the home office for most people. Plus, you don't have to use it exclusively for that business. If you only use it for the house for 14 days a year, you can still take that.

Dr. Jim Dahle:
The IRS doesn't require you to make good business decisions. They do not require that. If you want to rent your house out to yourself so you can have a little meeting that you didn't really need the whole house for, they don't really call you on that. And so, you've just got to keep good records and have a purpose for why you rented the house to your business and go from there.

Dr. Jim Dahle:
We have lots of meetings at my house for the White Coat Investor, and its far better deduction for us to just rent the house to us for those meetings than it is to take the home office deduction.

Dr. Disha Spath:
Cool. What about utilities? Can you deduct the amount of utilities?

Dr. Jim Dahle:
Yeah, the utilities are all part of the cost. So, it's your utilities, it's your depreciation, it's maintenance, lawn mowing, snow removal. You get to multiply it by that percentage, that is the home office of the house. It can be really complex to figure it all out. If this is not a big deduction, it might not be worth going through all the trouble to maximize it. But for some people, if you got like a 800 square foot office in your house for some reason that all you're using for is your small business, it's probably worth going through the calculations.

Dr. Jim Dahle:
All right, let's take our next question. This one's from Peter about the ROBS program. This is interesting. I don't know what the ROBS program is, so we may have to look this one up.

Peter:
Hey Jim, thanks for all you do. Recently, I've become interested in purchasing a small business. One of the options for financing such an endeavor is the ROBS program. It's my understanding this acts as a loan from your 401(k) that can be used as the basis for an SBA loan or other financing to actually purchase the business. I don't think I've heard you discuss this on the podcast and in a quick search of your website hasn't turned anything up. Do you know anything about this program? Perhaps you could share some useful information before I go down this road. Thanks.

Dr. Disha Spath:
Well, I looked it up on Investopedia. Here's what I found. ROBS program is an IRA sanctioned process for retirement savings to invest in a business startup. And what this is basically doing is the ROBS provider facilitates converting your retirement account into a separate IRA. And that the ROBS providers work with separate custodians to house your IRA. And the business then needs to be structured as a C Corp so it can purchase stock.

Dr. Disha Spath:
So, the program can purchase stock in the new company from its retirement account. It's not exactly a loan. You're completely restructuring your retirement account into an IRA that will now purchase stocks from your new company that you're investing in, which is structured as C Corp. It sounds like a lot of expense to me.

Dr. Jim Dahle:
Yeah. Well, I worry a little bit more about it than that. I'm looking at it here on irs.gov. They've got a page on ROBS essentially. They say what is a rollover as a business startup or ROBS. ROBS is an arrangement in which prospective business owners use their retirement funds to pay for new business startup costs.

Dr. Jim Dahle:
ROBS plans, while not considered an abusive tax avoidance transaction, are questionable because they may solely benefit one individual – the individual who roles over his or her existing retirement funds to the ROBS plan in a tax-free transaction. The ROBS plan then uses the rollover assets to purchase the stock of the new C Corp business.

Dr. Jim Dahle:
Promoters aggressively market ROBS arrangements to prospective business owners. In many cases, the company will apply to the IRS for a favorable determination letter as a way to assure their clients that IRS approves the ROBS arrangement.

Dr. Jim Dahle:
The IRS issues a determination letter based on the plan's terms meeting IRC requirements. The determination letters do not give plan sponsors protection from incorrectly applying the plan's terms or from operating the plan in a discriminatory manner.

Dr. Jim Dahle:
When a plan sponsor administers a plan in a way that results in prohibited discrimination or engages in prohibited transactions, the plan can be disqualified, which can result in adverse tax consequences to the plan’s sponsor and its participants.

Dr. Jim Dahle:
All right. So, who would think about this? Someone who wants to start a small business and all their money is in retirement accounts. This is the sort of person that would have to consider this.

Dr. Jim Dahle:
There are a couple other options. One is just don't use retirement plan money to start your small business. And I think that's the right thing to do for almost everybody. Try to get some other money. Whether it's from your taxable account or whether it's your savings or money that you're earning as you go along or loan money or whatever, try not to mess with your retirement accounts in this sort of a way. I think that's one option.

Dr. Jim Dahle:
The second option is you can borrow against your 401(k). You can borrow $50,000, the lesser of 50% or $50,000 from every 401(k) you have. So, if you have two 401(k)s, your spouse has a 401(k), you can take a $50,000 loan from all three of those. That gives you $150,000. Maybe you can start your business with that without having to mess around with a rollover or ROBS plan, or anything like that.

Dr. Jim Dahle:
I think I would rather see somebody doing either of those rather than this sort of thing. Owning a small business in a retirement account, that sounds like a mess, right? Because when you own it there, the retirement account owns the business. So, all the income from the business has to go back into the retirement account. All the spending from the business has to come out of the retirement account.

Dr. Jim Dahle:
If you need to recapitalize it, how are you going to do that? Now you got to form an entity with your retirement account as a partner and you're a partner or you're both stockholders, I guess in this case, because it's a C Corp. That sounds like a mess.

Dr. Disha Spath:
It sounds like you're paying a lot of people.

Dr. Jim Dahle:
Yeah, I would not structure a small business this way if I were starting one. I guess if I was desperate and I had to have the money and the only possible way I could get the money was out of my retirement accounts, I might think about it. But I suspect there's a bunch of people running around selling these things. It sounds like a product made to be sold, not bought to me.

Dr. Disha Spath:
Agreed.

Dr. Jim Dahle:
All right. I guess we're running out of time, huh? Maybe we ought to wrap this up a little bit.

Dr. Jim Dahle:

At some point in our financial lives, it will be time to buy a home.

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You can do this and The White Coat Investor can help.

Dr. Disha Spath:
All right. Don't forget about the swag bags at WCICON23. So, start planning your suitcases, buying those suitcases if you need to. If they're bigger, you need a big suitcase or an extra suitcase to take this swag bag with you. And remember, you can get that $200 off until December 5th at www.wcievent.com.

Dr. Disha Spath:
And don't forget about our champion program as well. If you want to get some free books for your medical school class, go to whitecoatinvestor.com/champion.

Dr. Disha Spath:
Please leave us a five-star review and tell your friends about the podcast. This is free information, free entertainment. It’s a great thing to put on when you are driving to work. I'd usually do it as well, usually not the podcast that I'm on because I can't stand hearing my voice either.

Dr. Disha Spath:
But yeah, please, please, spread the word. All of this information is so important to all doctors to learn how to get their financial house in order so they can create their ideal future and use money as a tool to do that.

Dr. Disha Spath:
Head up, shoulders back, you've got this and we can help at the White Coat Investor.

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