MtoM #232: Med Student Graduates Debt Free with Limited Parental Help and Finance 101: The Pennies Issue with the Backdoor Roth IRA

This is the White Coat Investor Podcast Milestones to Millionaire Celebrating stories of success along the journey to financial freedom.

This is Milestones to millionaire podcast number 232 medical student graduates from med school debt free with limited parental help. This podcast is sponsored by Bob Bayani at Protuity. He's an independent provider of disability insurance planning solutions to the medical community in every state and a longtime White Coat Investor sponsor. He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. If you need to review your disability insurance coverage or to get this critical insurance in place, contact bob@whitecoatinvestor.com Protuity today by emailing infoorotuity.com or by calling 973-771-9100 all right, welcome back to the podcast. This is the Milestones to Millionaire podcast. We try to celebrate your accomplishments, congratulate you and use them to inspire others to do what you have accomplished. You can apply to come on the podcast@whitecoatinvestor.com Milestones something I wanted to make sure you knew about was this company we partnered with called Boldin B O L D I N. You can learn more@whitecoatinvestor.com Boldin it's considered a perfect companion for DIY investors, especially if you want to use it alongside something like our Fire your financial advisor course. You can empower yourself as a DIY investor to take control of the variables that impact your wealth, retirement timing and long term financial security. For example, some of the features they have on there It's a calculator that you can use to run the numbers for your retirement, but they've got custom withdrawal orders so you can define the sequence in which accounts are tapped for retirement income and and enable some more effective task strategies and personalized planning. They've recently redesigned their overview page so it's an improved layout, gives you a better insight to key numbers and highlighting your next steps and helping you understand the impact of decisions on your projected net worth. It's got some enhanced Roth conversion modeling, it's got some better rate customization so some flexible objects for options for setting rates for inflation appreciation returns. It's also got a new enhancement called the Summary of Changes tools that allows you to identify the variables in an alternate scenario. If you want to run the numbers with a different assumption, you can now do that more easily than you used to be able to. There's also some long term care assumptions that have been updated in it as well. So lots of cool updates to Bold in you can learn more about it. Whitecoininvestor.com Boldin like any software, it often has free versions and a cheaper version, a premium version with more features. So I don't know which one's going to be right for you. But start low and add on features as you need to. It's not particularly expensive. You can check it out. Whitecodeinvestor.com Boldin all right, stick around. After this interview, we got a great interview with a med student. Actually, stick around. Afterward, we're going to talk about what I call the pennies problem with the backdoor Roth ira. Maybe it ought to be called the dollars problem now, but when I first started talking about it, it was a pennies problem, but it's a common problem you guys are having out there. So let's talk a little bit about it and what you can do to take care of it and to avoid it. Our guest today on the Milestones podcast is Sophia. Welcome to the podcast and congratulations to you on your recent milestone.

Thank you.

Okay, tell us where you're at in your career and what you are accomplishing now.

Yeah, so I am starting my fourth year of medical school and I am accomplishing the goal of becoming debt free throughout medical school and having enough saved to basically make it through without debt.

Okay. Pretty cool. So you are going to graduate from medical school debt free?

Yes.

Now, when I look at the statistics, about one out of four medical students does this, but the vast majority of those got a whole bunch of money from their family to pay for medical school. It doesn't sound like that's the case for you.

So I did, I did get some money. You know, I was bringing it down the other day, you know, and I want to be completely upfront. Obviously, they, they definitely helped me. They gave me about 36k over the course of 4 years. It was primarily in the first year. They helped me pay for tuition and a little bit of living expenses. My funds were tied up in a high yield savings account. So, yeah, they still did help me, but the rest I did myself.

Okay, so you got a little bit of family help, but obviously 36,000 compared to the cost of medical school is not that big of a chunk. Tell us the other methods you use to pay for medical school.

Yeah, so I guess it started during my gap year. I worked full time and then I had a second job. So I was working. I mean, I was working a lot, like, you know, 60, 70, 80 hours a week.

You figured you might as well try it out if you have to do it during residency. Right, right.

I was like, oh, this is not so bad. But after you get to the third month of that, you're like, okay, I'm. I'm tired. And I was from home for some of it, so it was a lot easier to balance. Residency is going to be a lot harder.

Okay, so you had some jobs during your gap year. You saved up a little bit of money. How much money did you save up, you think, before you started med school?

So I came into school with about $80,000.

80,000 of your money, plus the 36 of your parents, or including the 36 from your parents, plus. Wow, you saved up $80,000 in a year.

No. So I think I came into college with about, like, 20K.

Okay.

And so I've been working since I was 12.

So your net worth went up during undergraduate?

Yes.

That's pretty cool.

From my gap year, too, but, yes, I've been working. I worked throughout undergrad.

And where's my kids? I got to get them in here to listen to this. This interview. I tell them all the time, you know, where money comes from. Money comes from work. And you've just proved it. You know, saved up a bunch of money for med school. You got a little bit of help from your parents. Okay. What else?

So that's what I did. Before med school. Before med school, I was considering joining the Army. I was going to do the hpsp, which I believe is what you did. And I was really considering it. I was, you know, going through the pros and cons and seeing how it would work in with my life. And I got to the point where I kind of decided that, you know, I couldn't commit to something at the age of 24, 25, for a contract that I would have to start at the age of 32. I definitely want a family. I didn't want to put that at risk. So it entered my mind, but I put it on the sidebar for the time, and so I just planned to work during medical school, and then the rest would go on loans. So I started doing. I continued waitressing one day per week. They were okay with decreasing my hours, and then I just picked up whenever I could. I also worked like, my parents have an Airbnb, so I did the calendar and the messaging for them. It wasn't a lot of time, and it wasn't a lot of money, but it still contributed. And then I started doing work study at the library, too. You know, the first two years, I had those three.

Okay. And then what happened after that.

So then I was hanging out with a friend, and he was telling me, you know, I knew he was in the army, and. And he was telling me about it, and he's in the National Guard. And he was saying how basically all of the fears that I had had and all of the qualms that I had had weren't an issue for him. So his contract begins as soon as he signs. He drills every month. And I said that was fine. I'm already working. You know, I can work two days per month. That would be fine. And the contract begins right away. So you have the option to resign if you want, at the end of, you know, six years, and then two years in the irr, but you don't have to. And so I kind of like that flexibility where I can reevaluate when the time comes. So I said, great. And I applied, and I've been in for about two years now.

Okay, so you're doing the Guard, and what are the benefits? The Guard pays for your medical school?

Yes. So in New Jersey, which is where I am, and if you are in a public institution, they will waive your tuition 100%.

Okay, so no tuition. Your tuition's gone. Which. What's the tuition at your medical school? What does it cost?

So it's about, like 25k per semester, maybe a little bit less. So maybe like 43 per year. And so, yeah, I paid for my first year in cash, and then after that, they waived. They've been waiving the rest.

Okay, and what about. Do they give you a stipend, or do they pay for your books or your supplies or equipment or anything like that?

No. So that's the magic. I mean, you can, you know, sign on to more years and get a monthly stipend. But again, I kind of decided that I prefer the flexibility of deciding, you know, how long I want to be in and reevaluating as I go. And so I. I didn't accept that. And I've just been working. In addition to doing the military, they do pay for the drilling. So you make like, 400amonth? Yeah, a month per weekend.

Okay, so you're getting paid a little bit of money when you. When you go work, essentially, and you don't have to pay tuition. And what's your commitment to them?

Yeah, so it's six years of drilling. So every month, Saturday, Sunday, you show up, you're there for, like, you know, 10, 12 hours. They really try to squeeze the time out of you, but it's been great. We, like, We See soldiers, you know, it's been great. So you do that once a month for six years, and then after that you're in the irr, which is like. It's basically a reserve component. And I believe you don't drill, but you could be called if you need it.

Yeah, IRR is this theoretical thing that almost never gets used. You know, a lot of HPSP people have a little IRR commitment hanging over them when they leave and usually never have to do anything for that. But, I mean, theoretically, you could be deployed during your six years. Right.

So in theory. But you're protected during medical school and.

Residency, which is all the time you're going to be in.

Yes. Unless, you know, again, I want to continue, and then, yes, most likely I'll be deployed as soon as I'm attending.

Okay. Do they have any influence whatsoever in your specialty choice?

No. So you do your own residency program. So that was another issue, you know, issue that I had had with the HPSP was I didn't know what I wanted to do, so I, you know, I felt uncomfortable with the risk. And so this. Yeah, you just go to a normal residency. You can do military if you want.

Okay. Do you expect this to cause any problems with your residency, that they're going to expect you to still drill while you're a resident?

My unit has been great throughout school. Their goal is to have you become.

A doctor, even though your commitment's up by the time you become a real doctor.

Right. Yeah. So just during residency, I would, you know, my days off, obviously you don't have a lot of days off as a resident, so my days off will be drilling.

Yeah, it's a bit. It's a bit of a gamble for the guard. They don't know if you're going to sign up for more time, do they?

No, it's kind of a loophole. But I think that, I mean, they've treated me very well. I've had a great experience, so I think that's maybe their win. But, yeah, and then residency programs, I think, you know, you always have to kind of think about how they view it, and I guess we'll see when I apply.

Okay. So what do you think your net worth is going to be when you walk out of school? Are you going to be flat broke or where are you going to be at, you think?

No. So right Now I'm at 40K.

Okay.

And I mean, I. I'm not going to slow down on the working. You know, all of a sudden I have more time.

You'll have more time as an MS.4 than you had as an MS.3, for sure.

Right. So I don't really foresee that going down, but it's enough to get me through the rest of school and beyond, if that's what I want.

How is working, including drill time, how has that affected your ability to study and get good grades in med school?

Yeah, so there's definitely been mistakes, you know, where you took on too much and then you have to dial it back. But, I mean, it's been, it's been okay. You know, school is tough. I kind of argued that, you know, when I was working as a waitress, I'm not going to study at 5 o' clock on a Friday, you know, so I kind of counted that as free time. And then working at the library, I can study while I'm working, you know, technically. So that was an easy decision. And then with the military, you can study in between patients a little bit. But I think it's okay. I think I'm okay with giving up two days per month now.

What are you doing now when you drill? As a medical student, what are you doing for patient care?

Yeah, so it's a little bit tough for my first, basically two years even still. I do all the pregnancy tests. So we work at medical command. We see all the soldiers in the New Jersey Guard for their annual exam and then for. If they're going to deploy. And so, you know, I do all the females pregnancy tests. I sit in a hallway by myself. You know, it's okay. I love talking to the soldiers, but.

So kind of a. Kind of a tech position. You're a tech?

Yeah, it's very. It's kind of mundane. You know, I input records. I think the residents are doing vitals, you know, so they're not doing too much. So I'm sure they're a little bit bored. But, you know, we have a good. We have good co workers, you know, we have a good unit, so it's fun.

Any threats to any of that, with all these changes in Washington Doge and all that? Any worries that, you know, this, this loophole, for lack of a better word, is going to be closed?

I don't know. I have no idea. I'm very not well versed in the military as it is. I'm the first person in my family, so I'm not sure. But it's been around for a while, I think.

Very cool. Very cool. All right. Why was it important to you to graduate debt free? I mean, you're fairly financially literate, you know, you're certainly willing to work hard. You probably knew that you could live like a resident for a few years and pay off all your student loans. Why did you go this route instead?

Yeah, I definitely think I could have honed it back. I definitely think that maybe I'm a little bit more, like, sensitive to the financial, you know, burden of loans and things like that. You know, growing up, my dad lost his job when I was in middle school, and I think ever since then, I just kind of saw the stress of, you know, finances, and I. I don't know. And I like working, so it's kind of like, it's, you know, if you just keep working and doing what you like, you know, then it kind of worked out. So I don't know. But I think I definitely, like. I don't think everybody has to come out debt free. I think it's absolutely overkill.

It was right for you. Okay, Now, a big worry when you work a lot is getting burned out. Right. As I often tell undergraduates, you can do two or three things during school. You can work, you can play, and you can study, but you can only do two of the three, not all three. And so presumably, you've lost some opportunities to play. Is it worth it?

Yes. I think my secret and what I would recommend to everybody is that my jobs, for the most part, are dual, you know, whatever result. So, you know, at the library, I have the community, and I can study, and I'm working. So I'm basically, you know, tackling a couple things at the bar. It was super fun. And so, you know, it was a break from the studying and a little bit, like, diversity added, and then same thing at drill. You know, I have good friends, so, you know, having the right work environment and maybe the right type of job is probably the most important for achieving that balance.

What special do you anticipate going into, and do you think you'll have any trouble at all matching?

Yeah. So I'm applying into psychiatry. I mean, you know, obviously psychiatry is getting a lot more competitive, and applying in general is really tough, but I think I have a good application. I've been writing my personal statement, and I just got my step two score, like, a week ago. So I'm sure there's a program out there for me, and it's fine.

You didn't get some terrible step two score?

No. I was shocked. Oh, my gosh. Yeah, I was very proud. And I do think, like you said, kind of, that I'm working a lot. And so it does take a toll on my academics, and it can. So I was very proud that I was able to, in my book, do well and still handle all this extra stuff.

Very cool. Well, congratulations to you. You have been very financially successful for a medical student, maybe one of the most financially successful medical students I've ever talked to.

Oh, wow.

And you should be very proud of what you have accomplished and are accomplishing. Thank you for your service. I don't know what that's going to look like going forward, but we appreciate people being willing to serve, whether it's guard or reserve or active duty. And thanks for being willing to come on the podcast and share your story with others to inspire them to do the same.

Yeah. Thank you. Thank you for having me.

All right. I hope you enjoyed that interview. It's fun to talk to a medical student. This one's going to be very successful financially. I mean, tons of hard work, tons of financial literacy there. It's pretty awesome to come out of medical school debt free, but let's be honest, most of the time, why do people come out debt free? Because their parents gave them $300,000. Right. And don't get me wrong, it's wonderful if your parents do that. Congratulate your parents on that. You know, when white coat investors save up those sorts of 529s, I definitely congratulate them. But it's not nearly as hard as what our guest has been doing. Right. Made some commitment to our country, did a lot of hard work both before school and during school, found a way to balance that with the rest of life. It's pretty impressive and it demonstrates just what can be done to get out of school debt free or with very limited debt. Obviously, if you're willing to live like a resident after residency, you can pay off substantial student loans in one, two, three years afterward. Right. You don't have to graduate debt free to be financially savvy, be financially successful. But I also don't want you to have student loans in mid career. Right. These things live in your basement, never go away the whole time you're in your career. There's no reason you should be in your 50s still with medical school student loans, if that's the case, probably reflects maybe some decisions you haven't made that were optimal. It's still time to clean it up. Don't get me wrong, don't hang up the podcast, turn off the podcast and quit listening. There is still lots and lots of hope for you, but I hope most white coat investors don't end up in that situation. Okay, I Promised you. At the top of the hour, we were going to talk about the pennies issue. And that's what I called it when I first wrote about this in 2017, I think I wrote a blog post called Pennies and the Backdoor Roth ira. And here was the issue. The issue is people were putting, remember, the backdoor Roth IRA is a two step process. You put the money into the traditional IRA and then you do a Roth conversion on that money in the traditional IRA into the Roth IRA Two step process, right? And what would happen is while that money sat in the traditional IRA for a day or a week or whatever, it made money. Hopefully you weren't dumb enough to invest it into stocks and mutual funds and that sort of thing. Hopefully it just sat there in cash. That causes more problems when you put it into stocks. But it'd make a little bit of money. And back in 2017, interest rates were super low, so it didn't make very much money. It was literally pennies. People would be like, ah, I got 42 cents in my traditional IRA. Am I going to get prorated? What's going to happen? I'd get these frantic emails, right? Well, technically you get prorated, but you know, it was on 42 cents. That rounds down to zero. So you're really not getting prorated. But people worried about it. The solution to it was to just go do a second Roth conversion. Whether that was 42 cents or whether that was a buck 50 or whether that was $25 or $400 or whatever it was, you just convert that. You already did the big Roth conversion of your $7,000 or whatever. Now you're converting the $18 in interest that are earned while money. Now that $18 is going to be taxable, right? That doesn't come over tax free like the rest of the backdoor Roth IRA, but you got to pay taxes on that $18. But the best way to clean it up is to just do a second Roth conversion that same year. And the sooner you do it, the better, the less it's going to cost you. So do that second conversion. Go back and look after you do your backdoor Roth ira, see what money is still in the traditional IRA and convert it over to the backdoor Roth. Now if you don't do that, it's not the end of the world, right? Yes, you're going to be prorated, but what are you getting prorated? Well, in essence, you're paying tax on $18. It's not a big deal. And next year when you do a Roth Conversion, you can just convert that $18 with your next $7,000 that you did with your backdoor Roth IRA the next year. It's not a big deal, okay? So don't stress about money that either gets left behind in there or money that you subsequently realize is left behind and move before the end of the year with another Roth. Conversion is not a big deal either way. You don't want to have thousands and thousands of dollars in a traditional IRA that's going to cause you a pro rata problem, makes it maybe not even worth doing a backdoor Roth IRA every year. But if you got five bucks in there or 42 cents or $20, it's really not that big of a deal no matter what you do. Okay? Now what you don't want to do is invest that money in the traditional Iraq, because one of two things is going to happen. Either you're going to make a whole bunch of money in the day or week or month or whatever in between your contribution to the traditional IRA and your conversion to the Roth ira, and you're going to have to pay a bunch of taxes on that money, or what often happens is you lose money. You invested the money in something that can go down in value, and it went down in value, and then now you're like, well, what do I do? Do I convert it? Well, if you convert it, you're going to be carrying that loss forward on the paperwork on Form 8606 every year, which is kind of a pain. Eventually it may be eaten up by these 5 or $10amounts that people have to convert as a second conversion every year. Maybe you can eventually use up your loss doing that, but it's just a pain, right? Don't invest the money in the traditional ira. Just leave it in cash. A money market fund or whatever the cash account is, the sweep account, wherever you're doing the IRAs, just leave it in cash until you convert it, then invest it, because otherwise it's kind of a pain to deal with. So the process is put cash into your traditional ira, convert it as soon as possible to the Roth ira, and then invest it. Okay? Do it in that order. I promise it'll make your life a little easier, it'll make your paperwork a little bit easier, and you won't have to write me frantic emails about it. So thanks for paying attention to the proper way to do a backdoor Roth IRA. It's worth doing, right? I mean, $7,000 for you, $7,000 for your spouse, whether they're working or not. And all that money, after compound interest applies to it over decades is a substantial amount of money in that Roth account. It's worth doing. You just got to understand the little bit of nuances to doing it. All right. Our sponsor for this podcast is Bob Baiani at Protuity. One listener sent us this review. Bob had been absolutely terrific to work with. Bob's always quickly and clearly communicated with me by both email and or telephone, with responses to my inquiries usually coming the same day. I have somewhat of a unique situation and Bob has been able to help explain the implications and underwriting process in a clear and professional manner. Contact bob@whitecoatinvestor.com Protuity P R O T U I T Y. You can email infoorotuity.com you can call 973-771-9100 but the bottom line is the biggest problem with disability that doctors have disability insurance is they don't buy it. Okay? You almost surely need disability insurance, especially if you're a young doctor, if you're a sole earner, if somebody else is dependent on your income, if you're not already financially independent, you're depending on your income. You need to get disability insurance in place. Bob can help you do it. Whitecoatinvestor.com Protuity all right, thanks for listening to this podcast. We're glad you're here. It's not much of a podcast without an audience and we're grateful for you. We're grateful for the work you do day to day. You know, every time I go see a doctor for myself or somebody else, I'm reminded just how important the work that you do is. It really does matter. Thanks for doing it. Let's help you be financially successful and help you do well while you're doing good. Let's see you next time on the Milestones to Millionaire podcast.

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