401(k)s, IRAs, 403(b)s, and other Retirement Account Questions - WCI Podcast #411

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.

This is White Coat Investor podcast number 411. Today's episode is brought to you by SoFi. Helping medical professionals like US bank borrow and invest to achieve financial wellness. SoFi offers savings accounts as well as an investment platform, financial planning and student loan refinancing featuring an exclusive rate discount for med professionals and $100 a month payments for residents. Check out all that Sofi offers@whitecoatinvestor.com Sofi loans originated by Sofi Bank NA NMLS 696891 advisory services by Sofi Wealth LLC. The brokerage product is offered by Sofi Securities LLC. Member FINRA SIPC investing comes with risk, including risk of loss. Additional terms and conditions may apply. All right, we're back from the conference. This is the first podcast we're recording since we got back. I literally just came home two days ago and so while you won't hear this till like three weeks after the conference is over, we just got home and the conference is awesome every year. So nice to meet everybody in person right at this point. Our staff is great. I think we only had two people, one of which was our intern, one of my nieces that's going through college with the assistance of the cousin 529s we put together. She is actually majoring in putting on events like our conference, so I even brought her up on stage and she did a little part about the 529 for the conference attendees. So that was one person. Then we had one of the spouses of one of our or partners of one of our employees that came and other than that, it was the same staff we had the year before. So people really have the drill down. They're very good at running this conference. It's a very well run conference and the beautiful thing about them all being so good at it is it reduces how much time I have to do things. Just running the conference. I'm not building the pallets anymore, I'm not unloading the pallets, I'm not doing the swag bags. All I do is I give a couple of presentations, do a panel and a few interviews on stage with the keynote speakers and I talk to you. I literally spent four days talking to White Coat investors almost all the time. Is that a little exhausting? I guess a little bit, but it's awesome. Right after the premium dinner. We sat around the pool until they took the lights away. The hotel staff was coming to me going, you guys can stay if you want. But we got to take the lights in. And so it was awesome. We were up till I don't know what hour of the night, just talking finance and life in general with white coat investors. So it was a lot of fun. Yes. I got to play a little bit of pickleball. I almost won the 5k fun run this year, by the way. I mean, it's obviously not a race, but don't tell that to the three or four people in the front. Right. We're definitely racing. And I came close. I did not win, but I came very close. And I actually got to try to sprint for the win at the end, which I was feeling pretty good about, considering I've spent the last six months trying to get into shape. I did get to unwind afterward. You know, we stayed for a day or two, even almost two days afterward, at the resort property. Did endless laps around the lake. Lazy River. Spent some time on the Flowrider, which is not the same, by the way, as surfing behind a boat. Have you ever gotten on a flow rider? It's a little bit different, but it was still a lot of fun. So we loved meeting so many of you that came to the conference. It is the most people we've ever had show up to the conference in person, and we expect that continue to grow, to continue to grow in coming years. Some of you have been to every conference, and it's pretty awesome when I see people that have been there for three, four, five conferences before and just get to catch up on you and what's happened in the last year. Obviously, I had a pretty eventful year, and hopefully most people this year was not quite as eventful as mine, but some of the people were. I mean, we had one couple that we highlighted who had left the conference the prior year, still owed $94,000 on their student loan burden and paid it off like the day the conference started. And so they were celebrating at the conference. A couple other people had just reached milestones as well. I think I could have recorded 25 milestones to millionaire episodes in the hallway just chatting with people. But it was pretty awesome experience and awesome to meet you guys all in person. So thanks for coming. And I want to say a special thank you to the young lady who's been forced to listen to my voice for the last year and now has a face at least to put with a voice. It was great to meet you in person and shake your hand and take a picture with you. All right, let's do a correction. Somebody sent this in and it is true and it's a good clarification. We talked a little bit about about I bonds and how the interest works before and they emailed in to let me know that TreasuryDirect reports updated interest on the 1st of the month, doesn't show any interest for the first 3 months. It doesn't add any interest because you would lose that three months interest if you withdraw. But on the fourth month it'll show one month of interest and after five years you get a three month interest jump. They noted that Empower doesn't cooperate well with TreasuryDirect and doesn't refresh automatically. Like most financial accounts, it requires a forced refresh or you enter the Treasury Direct two Factor Authentication code that gets emailed to you. So if Empower is still showing you only have $10,000 in your I bonds, it's because the caller entered it once and never forced it to refresh. Thank you for that very complicated but very helpful clarification. Let's talk for a few minutes before we get into your questions about some of the stuff I've been thinking about. I don't know if these are pet peeves or things that annoy me. They're just things I've been thinking about a lot lately and maybe arguing with people about online and in person about lately. So I'm going to run through a few of those. I wrote a blog post about them this morning. It won't run for months. And the truth is, lots of you that listen to the podcast don't read the blog and vice versa. Anyway, so I'm going to go through some of those today. The first one is Hyper Conservative withdrawal rates. You know, if you spend a lot of time on financial forums, you start running into people that are like, oh, 4% isn't safe. In fact, 3% might not even be safe. I'm withdrawing 1.75% of my portfolio a year, and the truth is, a lot of this gets pretty nutty. Quite truthfully, studies using historical data are pretty darn clear. Spending about 4% of your portfolio, adjusted upward for inflation each year, was highly likely to result in the portfolio surviving at least 30 years. In fact, on average, in the past, after 30 years, the portfolio was 2.7 times the size of the original portfolio. Obviously, the future is not necessarily the past, and anxious people can be found dialing that 4% number down to 3.5% 3% or even lower. I think the lowest I've seen is 0.8% somebody was advocating for as a withdrawal rate, which is just nutty, right? I mean, part of it comes down to you fight over what safe means. Well, the truth is 4% is safe. 3 to 3.5% is pretty much bulletproof. Now I'm seeing arguments out there, people saying, oh well, I didn't run out of money in this scenario, but the drawdown was quite a bit. It was too much drawdown and that would have made me anxious. Well, it's your money, do what you want with it. If you decide it's just too much stress to spend any more than 2.5%, you probably ought to put a whole bunch of your nest egg into very sure things. Things like single premium, immediate annuities, buying a pension from an insurance company, a TIPS ladder, and definitely you should delay Social Security to age 70, at least for the high earner. And you probably ought to let your heirs know they've almost surely got a big fat inheritance coming their way. Okay. The second thing is a lot of people these days have kind of under diversified portfolios. They're worried about tracking error, right? They're like, oh, The S&P 500 made 25% in 23 and 25% more in 24. I just want to invest everything in the S&P 500. They don't want the other 3500 stocks in the US much less international stocks or bonds or small value stocks or real estate. Nobody seems to remember 2000-2010 when the S&P 500 had a return of about 0% per year for 10 years. Trees don't grow to the sky. The pendulum's gonna swing back at some point. I mean, why stop at just investing in the S&P 500, put it all in the S&P 100 or a tech ETF or just buy the individual Mag 7 stocks directly or put it all into Nvidia. Right? Now, obviously the performance of an S&P 500 fund really isn't all that different from a total stock market fund. I get that the correlation between them is very high, but there's a reason that my favorite mutual fund, and that of Jack Bogle as well, is the total Stock Market fund. Okay, the next soapbox I want to get on is about massive 529s. And I say this as someone who's almost surely sitting on overfunded 529s that are barely into the six figure range. 529s are a tax break for the wealthy. But some people really go to extremes. All of a sudden they think they need enough money in there that at the time, junior graduates from high school, there's enough in there to go to the most expensive college in the country. All paid for from the 529/dental school, right? And maybe throw in some private K12 as well. So they start getting these 529s that are half a million dollars or $800,000, despite the fact that that they received scholarships, they worked during school, and they have a high income now, which they could help with. But somehow they think they have to have everything sitting in cash on the day their kid turns 18. Or they think they have to max out a 529, which you really can't do anyway, right? I mean, that's more than a billion dollars if you want to max out the amount of money that can be in 529s. So it's funny, when I talk to people about this, I'm like, oh, what did your parents give you? And they tell me nothing. And I'm like, okay, so you did okay despite getting no help from your parents. But you think your kidneys, they get $100,000 in a 529 or they're going to fail in life. Guess what? Most of your kids are not going to attend the most expensive college in the country. Most of them aren't going to dental school. Most of them are going to get some sort of a scholarship. They're smart like you were, and you probably have a better use of your money than a super duper hyper funded 529. College costs what you're willing to pay, but paying 10 times as much does not result in an education 10 times as good. Most of the time just results in an education that's different. And you better value that difference highly if you're going to spend that much money on education. But even if you do decide to spend a lot of money on education, it doesn't all have to be saved up in advance in the 529, okay? Your kid's probably going to get some scholarships, they can do a little bit of work, you can cash flow some of it. And heaven forbid if they go to dental school and they have to have a little bit of a student loan. Okay, next topic. Stocks suck. At least if you talk to some real estate investors, they think stocks are terrible, right? It's like putting it all on red in the casino. They're just paper assets or they're super Volatile. Well, I'm shocked to learn there are some real estates out there that don't own stocks at all. It's super easy, super convenient. They're very liquid and practically free. Now to own diversified portfolio of the most profitable corporations in the history of the world. I don't care how much you love real estate. Put 20% of your serious money into stock index funds and it's almost surely going to improve your portfolio on the other side. A lot of people who invest in traditional investments, mutual fund or index fund investors, seem to think that real estate just sucks. It's impossible to own real estate without having to plunge toilets at 3am Nobody's ever become financially independent, primarily via real estate. All leverage is incredibly risky and the only people who were ever successful were just lucky anyway. I mean, these people can talk at length about mutual fund correlations and withdrawal rate studies, but couldn't tell a cap rate from a triple net lease, right? Yes, real estate is optional. You don't have to have it, but I don't see any reason to avoid it like the plague, right? Solid long term returns, low correlation with stocks and bonds. What's not to like? Sometimes people are like, oh, I own real estate, I own the total stock market fund. Well, or I own the S&P 500. Well, did you realize that there's twice as much Nvidia in the S&P 500 index fund as there is real estate, right? It's not very much real estate, nowhere near the amount of real estate in the country. So if you want to have anywhere near the market amount of real estate, you're going to have to have something beyond what's just in the publicly traded markets. And the idea that your home is a real estate investment rather than a consumption item is another crazy idea as well. So stocks are good, real estate is good. How much of each you want to use is completely up to you, but the idea that either of them is a bad investment is probably a little bit ridiculous. Okay? Another soapbox worth getting on is that minutia matters, okay? Minutiae doesn't matter. Here's what matters. You want to get rich? Here's the secret. Everybody listen up. All right? All you kids in the car, your parents are making you, listen to this. Here's the secret to getting rich, okay? Make a whole bunch of money so your income matters. Save a big chunk of it, right? That's your savings rate. That really does matter. Choose some sort of reasonably risky portfolios, right? Don't stick it all in gold, don't Stick it all in CDs, but don't put it all in Bitcoin either, right? Reasonably risky, diversified portfolio. And then stick with it. As you stick with that for 5, 10, 15, 20, 30 years, whatever, you will become very wealthy. Wealthy beyond your wildest dreams. Everything else, though, is icing on the cake at best. At worst, it's a giant distraction. So what are these? You know, what's this minutiae I'm talking about? I'm talking about, you know, credit card hacking, travel hacking, frequent or complex rebalancing of your portfolio, chasing brokerage transfer bonuses, trying to get your, your expense ratio down even more when it's only seven basis points, adding another three asset classes to a perfectly adequate portfol, buying the dips. All those sorts of minutiae kind of things that get talked about on Internet investing forums don't matter very much. What matters is how much you make, how much of it you save, that you're investing it in some reasonable way, that you stick with the plan. Okay, Another thing I see out there is people seem to think that you have to do Roth conversions, right? It should almost be automatic, especially after you retire and before you start taking Social Security. Well, that can be a good move for lots of people, but at a minimum, right? At a minimum. Take a few moments to think about and at least guess who's going to be spending that money and what tax bracket they're likely to be in when they do. So if you're my age or younger, you've probably had Roth accounts accessible to you your entire career. And one of the greatest mistakes out there is making Roth contributions or doing Roth conversions while you're in a high tax bracket. And then having money end up in the hands of a charity or an heir in a low tax bracket. Even if you expect to spend the money yourself, there's a very good chance if you're like most people, that you're going to be able to withdraw at a substantially lower marginal tax rate than your rate at the time when you made the initial contribution. Right? People say pay taxes on the seed, not the harvest. That's terrible advice. It's not about the amount of tax you pay, it's about the tax rates. That's how you decide whether you should be doing Roth or traditional contributions. That's how you decide if you should be making Roth conversions. But particularly for those of us that are probably not going to be spending most of the money we have, you'd be thinking about who is going to spend it. What tax bracket are they going to be? For example, we have substantial tax deferred accounts. We're not converting any of them because they're all going to charity. And that charities tax bracket is 0%. It'd be stupid to do a Roth conversion on money. You're leaving a charity anyway. Here's another dumb thing. Buying accredited investor investments when you're not really an accredited investor, right? What is an accredited investor legally is somebody who has at least $1 million in investable assets or at least $200,000 in income each of the last two years. So that's almost all white coat investors, at least eventually. But a real accredited investor has the following two attributes. One, they can evaluate the merits of a private investment without the assistance of an advisor, accountant or an attorney. And two, they can afford to lose their entire investment without it affecting their financial life in any meaningful way. Right. That's a much smaller subset of white coat investors and many people will never get into that category. And that's okay because all the investments that require you to be an accredited investor are optional anyway. And there's plenty of bad deals out there among private investments, and there's certainly far more scammers and fraudsters in that space than there are in the highly regulated public markets. If you can't afford to build a diversified portfolio of investments with $100,000 minimums, or you have a strong preference for simplicity in your portfolio, or you'd be devastated to see an investment go to zero, just stick with index funds or at least buy your rental properties directly. You know, if you invest in the private world long enough, eventually something you buy is going to go to zero, no matter how much due diligence you do. All that said, a lot of people consider their private investments to be their best performing investments. That might be a real estate fund, it might be an ambulatory surgical center, a dialysis center or whatever. Each of these investments are unique and have to be evaluated on their own merits. I think they're a worthy addition to the portfolios of people as they're building wealth and getting to substantial sums. You know, certainly seven figure kind of sums, but you know, they're not for everybody at every stage of their career. Okay? Another soapbox is the ridiculous fear of required minimum distributions or RMDs. People are paranoid about these things, which is bizarre to me, right? If you had $600,000 in taxable income as a 50 year old doctor, you'd be rejoicing, but heaven Forbid you have $600,000 in taxable income as a Retiree, that's somehow a problem. It's not a problem to have huge tax deferred accounts. Not a bad problem anyway. It's a great problem to have. You know what's really bad is when people start doing dumb things in order to avoid having this excellent problem to have, such as pulling money out of your retirement accounts early, or not putting money in them in the first place, or deliberately trying to have low returns, or even losing money in a retirement account, or again as I mentioned earlier, doing Roth conversions at very high tax rates. And that money's likely to be withdrawn at lower rates. In fact, far more retirees than do should spend their RMDs with zero guilt. If you really don't need them or want them, consider giving them to charity. That's called a qualified charitable distribution. And if you're 72 plus, that is the best, best way to give to charity. You can give up to $108,000 per year via a QCD. But an RMD doesn't have to be spent. All an RMD is is the IRS telling you, all right, you've maxed out the benefits of investing in a tax deferred account. You now got to give the IRS their chunk and just hopefully a smaller chunk. You get to keep some of their portion due to that arbitrage between tax rates at contribution and withdrawal. And you gotta reinvest your portion in your taxable account, right? Heaven forbid. That's all an RMD is. You take the money out of the ira, you pay the taxes on it, reinvest it in taxable, and if you do that and you're leaving it to your heirs anyway, cause you don't need the money, there's not gonna be all that much loss as long as you invest it tax efficiently between the day you take the rmd at age 80 or 85 or whatever, and the day your heirs get a step up in basis on those assets anyway. Okay, some other dumb things I still see people doing out there picking stocks, right? I'm amazed that people are out there picking stocks. Look, think about this for a minute. If you're sufficiently talented that you can pick stocks well enough to beat an index fund when adjusted for risk and the value of your time, you shouldn't just be managing your own money, you should literally be managing billions and charging very high fees to do so. Okay, well, maybe you're just doing it because it's fun. At least calculate how much your fund is likely to cost you. Is that fun to lose that much money? Or would you rather spend those millions on an around the world cruise this summer with your Grandkids or a NetJet subscription or a home renovation. Once compound interest does its thing with your likely lower returns from trying to pick your own stocks, those are the kinds of expenses that are equivalent to your stock picking hobby. Market timing is just as dumb as it's ever been. I mean, we all think we should be able to time the market or that somebody should be able to tell us how to time the market. Well, if you think you can predict the future, start keeping a journal of your predictions. Go back and look at them. Look at them in three months, look at them in three years, see how you did. And if you're like most people, you're going to convince yourself pretty quickly that you really shouldn't invest your serious money in a way that requires you to be able to accurately predict the future. It's really hard to do likewise if you're still using actively managed mutual funds. What are you doing? I hope you're locked into those with really high capital gains or something and that's why you still have them. Spiva, the S and P comes out with a report every six months and the latest one came out at the end of 24. It's just as damning as all the other ones before it. And those numbers are before tax. And the cost of advice, right? I mean just going down through the latest report. Over 20 years, 94% of US stock funds underperform the index. Right. Among large caps it was 92%. Among mid caps is 91%, small caps, 91%. All multi cap funds, 93%. Right? You got a 1 out of 10, 1 out of 20 chance of picking the winner. Is that really the bet you should be making? Just buy the index fund. It's way less work. Your expenses are lower. And all those numbers are before tax anyway, right? Once you apply taxes, if you're investing in a taxable account, the percentages get even worse. Okay. Another problem out there is people that just have a huge allocation to a speculative investment. And what do I mean by speculative? I mean it doesn't produce earnings, dividends, interest, rents or any other stream of finance. No financial money coming from it in any way, shape or form. Okay, so what are we talking about? We're talking about things like precious metals, talking about Beanie Babies. We're talking about empty land and cryptocurrencies and art and NFTs. So I sometimes get in arguments with people about Bitcoin especially. It went up like 100% last year. So lots of people talking about it these days or some other investment. And then I find out at the end of a long exhaustive argument that they only have 1% of their portfolio in it anyway. Fine. If you want to put 1% or even 5%, I talked some people into going. If you're going to bet on this, at least make a reasonable bet. If you're keeping it to a single digit percentage of your portfolio, I don't have any problem with that whatsoever. Do you want 4% in gold and 4% in Bitcoin? Knock yourself out. But if you're putting 50% of your portfolio into Bitcoin and the other 50% into Nvidia, you're really betting the farm. That's probably a mistake. Don't take risk you don't need to take in order to make money you don't need so you can buy things you don't want to impress people you don't even like. Okay, enough ranting. Let's get to your questions. This one comes from Paul.

Hi, Dr. Dali, my name is Paul. I am currently in my last year of medical school and I have a question about taxable accounts. I got interested in investing when I was in high school and my parents opened an investment account for me with Edward Jones. Now it is a joint with rights of survivorship account with my spouse and has about $130,000 in it. What should I do with that taxable account? How can I maximize its usage? I would love to get it into a tax protected account somehow, but not.

Sure where to start.

Thanks for all your help.

Great question, Paul. First of all, this is a wonderful gift. Be sure to thank your parents profusely for this. I mean, $130,000 would have been huge for me in my 20s. That would have made a dramatic difference in my life and how I lived it. It's a ton of money right at your stage of life. Some people, you know, with regular Joe jobs, you know, they come out of college and they don't get to that level of wealth until they're 30. Right. It's a lot of money. So what should you do with it? Well, first of all, I don't love hearing that it's an Edward Jones. That makes me worry not just about, you know, what your money is actually invested in, but that's probably where your parents are invested as well. And that is not usually an awesome low fee index fund kind of place to invest. It's often a lot of actively managed funds, substantial fees and commissions, loaded mutual Funds, that sort of thing, kind of place to invest. The best financial planners I know do not work at Edward Jones and would not work at Edward Jones. So it may be worth talking to your parents as you become more financially literate and helping them. But what should you do? Well, you can move everything in kind to wherever you actually want to invest your money, whether that's Vanguard or Fidelity or Schwab or whatever. Places with low commissions and low cost index funds and places where you're not having someone constantly trying to sell you stuff. You're probably going to want to move the money in kind to one of those places. Then you've got to figure out what your investing plan is. You need a written investing plan. Now I tell lots of people they're maybe need this until they're resident or even toward the end of residency, but you've already got money, so you need one now, even as a medical student, what you're going to invest in, what your asset allocation is, what your goals are, right? And then once you have your asset allocation, you can decide what investments to use. And maybe if you're really lucky, you can keep some of those investments you have. But chances are good you're not that lucky that these are not awesome investments you want to hold long term. But here's the good news. You're in med school, right? Your tax bracket is probably very, very low. You're probably in the 0% capital gains bracket. So if you act quickly, meaning before the end of the year, you can probably do a bunch of, even if you're realizing gains, you can rearrange this whole portfolio for very little tax cost. So you can probably get out of that stuff. You don't want to own long term without having to pay much in tax on it. So I would recommend, yeah, getting educated and looking at it this year before the end of the year and making all the changes you need to in this account, even if they are good investments, you might be able to do a little bit of tax gain harvesting. Be a little bit careful as you get toward the end of med school. If you have federal student loans and you think you're going to want some benefits, the income driven repayment plans, or you want to go for public service loan forgiveness. You kind of want a really low income that last year of med school, meaning the end of your third year, beginning of your fourth year. So that's what you have to show when you go to certify your student loans. So be a little bit careful about that. It may not matter to you if you've gotten $130,000 from your parents, hopefully they paid for med school too. And you don't have any student loans, but that's something to be aware of. Now, you mentioned trying to get some of it into retirement accounts. And you can do some of this as well as you have earned income. You or your spouse has earned income. You can live on the taxable assets while deferring or making Roth contributions equal to as much as you're making an earned income. Right. So as a resident, now you're maxing out your Roth via the back door if necessary, and your spouse's retirement accounts and anything the residency program is offering you as a retirement account and you're living on the taxable account. So it's kind of, in a way, you're moving taxable assets into retirement accounts and that's a smart thing to do as well. Again, most med students don't have earned income, so you can't really do move money into a retirement account until there's some earned income to justify that contribution. Hope that's helpful. Congratulations to you, Paul, on your success and your family for giving you such a great gift. Please help them get a real financial advisor if they need them and at least making sure they're in low cost, diversified investments. Okay? Speaking of student loans, I would be remiss if I didn't mention a promotion going on right now. And this only goes through the 25th. We call it the match week promotion. But it's available to anyone who schedules a meeting with student loan advice between 3:17, March 17 and March 25. The consult doesn't have to occur during that time period. You just have to schedule it. If you do that, you will get the resident version of our Fire your financial advisor course absolutely free. After you have your meeting with the student loan advice guru. Residency match day is the 21st, where med students find out where they've been accepted to. So that's a common time to start thinking about what they should be doing with their student loans. Why not let a professional guide you through the best options to manage your loans? Our experienced staff have consulted with more than 2,300 borrowers on over $720 million in student loan debt. Potentially save hundreds to thousands of dollars with your custom student loan plan. The Average client saves $160,000 on their student loans. Go to studentloanadvice.com to book it. As long as you book it before the 25th, you will get that Fire your financial advisor resident course for free with that consult. Okay, next question comes from Joy off the Speak Pipe. By the way, if you want to leave a Speak Pipe question, just go to whitecoatinvestor.com speakpipe we'd love to answer it on the podcast.

Hi Dr. Dali, thanks for everything you do. I've been a longtime listener, but this is my first time asking a question. I'm rebalancing our portfolio through purchase some additional funds and do this about once a year. When we do backdoor Roth IRAs and a brokerage contribution, our 401ks are on auto invest. Some of our accounts are traditional and others are Roth. For purposes of rebalancing, do you recommend taking into account the relative higher value of the Roth money? And if so, how would you go about doing that? I'm thinking about multiplying the Roth values by 1.3 when I figure out the percentage of those investments relative to the overall portfolio. I chose 30% arbitrarily. Thinking about general tax brackets, this could be way off base. I would appreciate your thoughts.

Hey, awesome question. This is a great question. I think this is the first time this has been asked on the Speak pipe. This is true. If you are going to do everything technically correctly, you should adjust all of your accounts for the taxes and you should look at them on an after tax basis. That seems relatively simple for Roth and tax deferred accounts and your method seems reasonable for that. But it gets a lot more complicated for a taxable account. Right, because everyone has a different amount of basis on each investment and your capital gains tax bracket can change as time goes on. And so it's actually, practically speaking, really hard to do. And so most people don't do it. Even if they know it's the technically correct thing to do, they don't do it. I don't do it. I look at it all on a pre tax basis. I count Roth money exactly the same as tax deferred money. When I'm rebalancing my portfolio, when I'm looking at percentages in my portfolio, is that wrong? Yes, it's wrong. It's technically wrong to do, but the other way is just so complicated I don't know that it's worth it. The only place this really comes into play in my experience is is people that think it's somehow smarter to put the highest returning assets into the Roth account because the Roth account is all yours. Well, the truth is if you adjusted it all for taxes, it wouldn't matter whether you put those assets in a tax deferred account or the Roth account. But since we don't do that, then yes, there is an advantage there. It's not a free lunch though. You're really just taking on more risk because your after tax asset allocation is more aggressive if you put the high expected return investments into the Roth account. So no free lunch there. Your method seems reasonable, but I don't know that I would go to that much trouble, Joy. I don't. I love messing around with spreadsheets. I've got a long, complicated investment spreadsheet that includes every distribution, every contribution to not only our retirement accounts, but our taxable accounts for the last 20 years. And I don't do this. That should tell you something that it might not be worth the pain of doing. Just acknowledge that yes, Roth money is worth more than tax deferred money. Keep that in mind as you build your portfolio. But I don't know that I'd try to do what you're trying to do if you decide you want to do it anyway. Yeah, I think 0.3 is enough of an adjustment. It seems reasonable, but is that going to be the exact amount for you? No, it's not going to be the exact amount for you. It's going to be something different from that, but probably in that neighborhood. Okay, our quote of the day today comes from Larry Swedro who said anyone who says active managers can win should wear a T shirt that says I can't add. Love it. Okay, next question is about a closed solo practice.

Dr. Dali, thanks for all your work on our behalf. I close my solo practice and 2020 and since I was no longer in business, I rolled my 401k money into an IRA account where most of the money is at Vanguard index funds and some is invested through an SDIRA account into real estate debt funds that are currently illiquid. In my new position, I'm in a group and have a 401k account. The 401k administrator will allow me to roll my Vanguard fund into my new 401k. However, I do prefer to manage my retirement account myself if possible. My goals are being able to do a backdoor Roth yearly as well as getting better asset protection with a 401 versus an IRA? Would I violate the pro rata rule if I do not roll over the SD IRA account money? Should I try to start some business that can land me a 1099 and roll the IRA into that 401k? I am currently in Pennsylvania but moving to New Jersey. Your thoughts would be welcomed. Thank you in advance.

Well, the first thing I think about when I hear about people moving to New Jersey is how much New Jersey hates their residents. You know, between the taxes and things like HSAs not being a tax protected account really for state income taxes in New Jersey and California. But I don't know that I'm going to talk you out of moving to New Jersey. And folks in New Jersey certainly need good docs. So thanks for going there. Alright, here's the deal. Your goals are not congruent. You cannot have everything you want. You cannot invest in these private investments and do a backdoor Roth every year and have control, complete control over your investments like you can in an Iraq. You can't do it all. So you've got to choose what you want. Yes. If you opened a Solo 401K and got a customized one that allowed you to have those real estate debt funds in the plan, you could pull this off. You got to start a business to do that. Obviously. Now I guess you could do that with some relatively minimal business. Some people have done it with nothing more than doing a bunch of, you know, surveys. If you go to white coatinvestor.com medicalsurveys you can see some of the people we have that offer these sorts of surveys. And I guess you could open a business that takes surveys, a sole proprietorship, but that's enough. If you get an EIN to open a Solo 401 and you could roll all the money in there that would allow you to do everything you're wanting to do. You get all the IRA money into a Solo 401 where you can control it. And if you design it right, you can do things like these private real estate debt funds in there and you can still do a backdoor Roth IRA each year. The alternative is just leave it the way it is. Use your new 401, leave your money in the IRA and just don't do a backdoor Roth every year. You can still do your spousal backdoor Roth every year. Right. Because these are only your IRAs we're talking about. And just don't do your own. Just invest that 7,000 or $8,000 a year in taxable. It's not the end of the world to not do a backdoor Roth IRA every year. So those are kind of your two options. I don't know how much hassle I would go through just to be able to do a backdoor Roth IRA each year. This is something for people to think about. When you leave a practice, close your own practice or go somewhere else, you don't always have to take that money out of the 401 immediately. You can leave it there until you have another 401 available to you, and you can just roll the money into the new 401k and not have a pro rata issue with the backdoor Roth IRA process. But you can't have money in an ira. Any ira, whether it's self directed or not, at the end of the year in which you do a Roth conversion or that conversion will be prorated. That's just the way the Roth conversions are reported on Form 8606. Take a look at line 6 on that form and you'll see what I mean. So those are kind of your options. Good luck with your decision. Let's take the next question from Ben.

Hi, this is Ben from Lakeville, Minnesota. On January 17, 2023, your blog published an article called Can a 403B be rolled over into a 457? It links to a handy IRS table showing which types of retirement accounts can be rolled over into a governmental 457. It notes 403s, unlike 401s, can be rolled over into a governmental 457. But the governmental 457 plan has to have two sub accounts, one to differentiate between your direct 457 contributions and another for your 403 rollover funds. While you're working for an employer that offers the governmental 457, you can't take those funds out penalty free. Once you separate from the employer, you can access those funds penalty free before age 59 and a half. Unlike an IRA 401 or 403, I have a few thousand bucks sitting in an old governmental 457 from a previous employer. I called recently to ask their phone rep whether I could roll over $403 into the plan, then take distributions of those particular funds for my governmental 457 account. Penalty free. The phone rep said if that were true, she'd be seeing a lot more people doing that, considering it'd be an excellent early retirement loophole. So can you answer once and for all whether 403 rollover funds can be distributed from a governmental 457 plan, penalty free after separating from the employer?

Okay, this might be one of the more complicated questions we've had asked on the podcast in a while. I had to listen to it a couple of times. I had to go find the post you were referring to, which, by the way, ran on January 17, 2023, so it's more than two years old at this point. It was written by a guest contributor, but indeed it does link to the chart you described, which is found@irs.gov, and I have no reason to not believe that chart is true. So can you roll over money into a governmental 457 from a 403? Yes, you can. Can you access money from a 457 before age 59 and a half, penalty free? Yes, you can. As long as you're separated from the employer, you can take that money out as long as the plan allows it. Right. So this 457 you're trying to roll money into has to allow you to roll money into it, and it has to allow you that distribution option that you're looking for. It may or may not, and based on what that person on the phone's saying, sounds like they may not allow you to even if the IRS allows it. So, yes. Would a few people do that if they knew about it? Yes. Does a lot of people know about this? No, not very many people know about it at all. In fact, there's a whole bunch of people listening to this speak pipe question in their car going, what is that guy talking about? I mean, we are way out in the weeds on retirement accounts here at this point. So most people don't know this is an option, but it would be an option for someone who wants to retire early. 457 money is great money for an early retiree. Not only do you want to spend 457 money as early as you can, particularly if it's a non governmental plan, because it's not yet your money, so it's technically subject to the employer's creditors. But it doesn't have that pesky 10% penalty that your IRA does, nor does it have the 10% penalty your 401 has if you try to access it before separation. Before age 55. Right. 59.5 for IRAs, 55 for 401s plus separation and 457, there is nothing an age limit on that. 457s get to decide their own distribution options and it's got to offer you a distribution option that you are actually happy with. One nice thing about governmental 457bs is one of the distribution options is always just to roll it over into an IRA, which is what lots of people do with governmental 457. Obviously that brings the age 59.5 rule into play and it sounds like that's what you're trying to avoid in your situation. Hope that's helpful. I mean, the IRS says you can do this. If you go to IRS.gov, you look at that table. Same table you're looking at, I looked at. And yes, it says separate accounts. So no reason you couldn't do that. Go for it. All right, everybody. As we dive into the weeds here, you realize that sometimes finance can feel about as complicated as medicine, but what you do out there is complicated. It's hard, and it gets done. 24, 7, 365. So thanks. For those of you out there who are doing that, next question comes from Joe. I guess we're going to get into politics here based on this question.

Hey, Dr. Dalli, we've been listening to you for a long time. Thanks for all the info. A topic that I don't think I've heard you talk about. Well, especially now that the political situation in the US Is up in the air. We don't know kind of how stable a government we're going to have. What's the best practice in terms of diversifying where your net worth is in terms of government access? Should we keep some of our net worth in foreign exchanges, or should we own property internationally, or should we have international bank account? How do you mitigate risks of political instability with the country you live in? It's crazy that we have to ask about this, but I think it's probably a good time to start thinking about this type of thing. Thank you.

Okay. The reason I don't talk about this sort of stuff on the podcast very often is because I don't want to tick off half of you. Right? Because no matter what I say, half of you are going to be mad about it. I mean, I have pretty good idea, Joe, what political candidate you voted for in the last election? Just from the question you're asking, right? Because members of one political party are thrilled with the current political situation in our country, and members of the other political party are crying in their tea and think this is the worst thing could ever possibly happen. You'll notice the opposite thing happened four years ago. Right. Everybody in one party was terribly upset. Everybody in the other party was thrilled. Right. Well, this happens every four years. Welcome to America. Now, has it been particularly interesting watching what's been going on in Washington the last few weeks? Absolutely. It has. It makes for absolutely fascinating tv. What am I doing with my portfolio in the meantime? Absolutely nothing. A few weeks ago, I published a blog post. It ran on February 4th. I wrote it, I think, the day before because our content director said, dude, you got to write something about this. It was called Staying the course despite the Trump tariffs. And he said, probably all you're going to say in this post is stay the course. And I'm like, yes, I am. I'm going to stay the course. Because here's the deal. I don't know exactly what's going to happen. My crystal ball is cloudy now. I have built a portfolio that I think hedges my risks about as best as I can. And there's lots of risks in the world, right? Some of the big ones, if you ask William Bernstein, are hyperinflation, deflation, or depression, devastation and confiscation. And maybe you feel one or more of those risks is higher now than it was a few months ago when there was a different administration in the White House. But you ought to be thinking about those risks all the time when you're designing a portfolio. For example, the most common one is inflation. So I take inflation very seriously. When I build my portfolio, a big chunk of it's in stocks, a big chunk of it's in real estate. Half my bonds are in inflation index bonds. I keep the duration short on the rest of them because inflation's a real risk. Deflation's not as likely. Confiscation, devastation are even less likely, but they are possible. So no, I don't wait until one party wins the White House and then run out and decide to move all my money to Switzerland or invest in new property in Costa Rica or put it all in Bitcoin or anything crazy like that, you ought to have a reasonably diversified plan beforehand. And if you do have a reasonable plan, stick with it. Stick with it, and 5, 10, 20 years from now, you'll be glad you did. This too shall pass. I think that's about all I can say without making half of you mad at me and stop listening to the podcast. I'm not here to promote one particular political point of view. I do hope that of all the craziness that seems to be happening in Washington the last couple of months, and some good things come out of it, but we'll see, we'll know in a few months, in a few years, but don't do anything crazy in the meantime, right? Don't make some dramatic change in your student loan management plan. Don't realize a bunch of capital gains to change from one type of investment to another because you think this one's going to tank because of the change in policies in Washington. The markets are very good and our economy is very good at withstanding whatever happens by whatever branch of government. And we tend to muddle through Regardless. So make sure your portfolio will muddle through regardless. Hope that's helpful. Next question is about private practice and a 401k.

Hello Dr. Dell, this is Rick from the Northeast. I've been enjoying your content material for the last few years and thank you very much for your expertise. I work for a private equity owned physician practice. We have a 401k provided by the company with about a $10,000 per year match. For the last two years my employer's plan has failed the non discrimination testing and they have refunded me a check for about 2 to 3,000 of my original contribution each year as well as forfeited a portion of the employer match. I've had to file that refunded amount in the following year as income. I heard you talk about non discrimination testing in the past and I mentioned that in that scenario your company has potentially added Funds to the 401k accounts of your less compensated employees to pass the testing. Is there any requirement that our company needs to do the same? Are you just doing this because it is the right thing to do and not because it is required by the rules? Do you think we physicians have any recourse in this situation or have any advice on how we should handle it? We've grumbled about it to management but haven't gotten anywhere. Thanks again for your thoughts on this matter.

Okay, let's talk about non discrimination testing. Okay. The point of a 401 is to help your employees to save for retirement. That's the point. The point is not to make you rich as the owner is to help your employees to save for retirement. So in order to have access to this great tax benefit, be able to defer taxes and have your money grow in a tax protected way and potentially take it out later at a lower tax rate. In order to qualify for that, your plan has to pass non discrimination testing. And there's several different types of tests. It's very complicated. We're way out in the weeds if we're going to actually talk about how this testing is done. But it has to pass the testing and basically you can't have the plan just benefit the owners and the highly compensated employees like physicians, too much and not the regular folks using the 401k. So what typically happens is the docs want to put all kinds of money in there. They want to put $70,000 a year in there. And Joe Blow, that works at the front desk, it doesn't want to put any money in it. So at the end of the year the plan fails the Non discrimination testing because it's not helping Joe to save for his retirement. It's only helping the doc in the back to save for his retirement. And so the employer, which is often the doc, is faced with a question. The question is you can either contribute enough into the lower paid employees accounts that it then passes the discrimination testing or you can take your contributions out until it passes the testing. Those are your two options. Now, you are private equity owned apparently now. And guess what? They don't care as much about Joe's retirement. They don't want to put extra money in there. And granted, I mean, a doc that's got 48 people working in his or her practice might feel the same way, right? But if you only have a couple of employees, you might be fine throwing another three or four thousand in there in order for you to be able to put 70,000 into your 401. But if you had 20 employees and you had to put 5,000 a piece into there, now you're putting $100,000 into their accounts in order for you to be able to put $70,000 into your account, well, maybe that's not worth it. Maybe you ought to just invest in taxable instead. And so that's why lots of docs with practices, lots of dentists out there, they decide not to offer any sort of retirement plan at their practice. There's no 401, there's no SEP IRA, there's no SIMPLE IRA. They just invest in taxable. Some of them get suckered into buying some sort of whole life insurance or something, but most of them just invest in taxable instead because it's just too much money, it's too expensive for the benefit they're trying to get. So no, you cannot force your employer to make those contributions to the low paid employees instead of returning your contributions. That is well within their rights. They can legally do that. And then of course, you got to declare it on your taxes and you got to pay taxes on it because it's no longer in a tax deferred account. Kind of stinks that they don't have to pay you the match though. That feels pretty dirty. Seems like it'd be better if they just returned to you the contributions. But I'm sure they're legally allowed to do that. I mean, they're no dummies when they write these sorts of contracts. So they're probably perfectly within their legal rights to do that. Does it feel dirty? Yes, it does. Now what can you do about it? Well, here's what I would do about it. If I were you, I would start running classes on saving for retirement for all the employees at the company and start encouraging all those low paid employees to put money into their 401ks, point out the match, right? Tell them they're leaving part of their salary on the table, show them compound interest charged and how much their money is going to grow to and point out how much they don't want to live on just Social Security in retirement because if they put more into the 401k and they get more of a match, well guess what happens? You're allowed to put in more, right? And it'll still pass the non discrimination testing. So that's the approach I would take. I mean you can go bicker and moan to the, to the employer and say, hey, why don't you just send me back my money rather than taking the match away. I might do that too. But in reality the problem here is the non discrimination testing is not going to allow you to do something that the lower paid employees are not doing. So get them to do it with you, go start teaching them financial literacy and you might be impressed what happens right? At our company, people know about retirement accounts, they know about their benefits, right? And so that helps it not be some crazy amount that we have to match into account so we have to pay as a penalty on the non discrimination testing. But I guess if it got too ridiculously outrageous, we'd stop doing it and we'd tell the highly compensated employees, including Katie and I, that we just can't put as much into the 401 as we used to. Or maybe we close the 401 altogether, right? But for now it seems to be working well with the group of employees we have. But most of them contribute quite a bit of money to their 401ks. They're all interested in retiring someday. None of them are going to be working here at the White Coat investor when they're 75. As I mentioned at the top of the podcast, SoFi is helping medical professionals like US bank borrow and invest to achieve financial wellness. Whether you're a resident or close to retirement, SOFI offers medical professionals exclusive rates and services to help you get your money right. Visit their dedicated page to see all that SoFi has to offer at. Whitecoatinvestor.com SoFi one more time, that's whitecoatinvestor.com Sofi loans originated by SoFi Bank NA NMLS 696891 Advisory Services by SoFi Wealth LLC. The brokerage product is offered by SoFi Securities LLC. Member Finra SIPC investing comes with risk, including risk of loss. Additional terms and conditions may apply. All right, don't forget about that Match Week promotion, okay through the 25th. If you book a consult with Student Loan Advice and complete the consult, you get a free copy of the Fire your Financial Advisor Resident Course now through the 25th. Thank you for sending this episode to a friend that it might help. Thank you for leaving a five star review and telling your friends about the podcast. A recent one came in saying my Go to Financial podcast. I've been listening to this podcast since its inception. The more I listen, the more I learn and am inspired. I appreciate the diversity of invited guests and the positive message and celebrations of those who were interviewed on milestones to millionaire. Dr. Dali and his staff are providing an invaluable service. Thank you for all you do. Five stars. Appreciate that kind review. All right, it was a long podcast today. I hope it was worth it. I guess I'm feeling very wordy after going to WC Icon. Hope some of you that weren't able to make it this year are able to make it next year. If you didn't hear, it was announced that it's going to be in Las Vegas next year at the end of March. It'll go on sale at the, you know, in September ish or so, but you'll want to book it. You know, the last time we were in Las Vegas we sold out and hopefully we do it again. Keep your head up, shoulders back. You've got this. We're here to help. We'll see you next time on the White Coat Investor Podcast.

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