WCI #118: How Do I Claim a Foreign Tax Credit?

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dali. Welcome to White Coat Investor Podcast 118, the foreign tax credit. The White Coat Investor is proud to introduce our no Hype Real Estate Investing course which will provide the framework for developing further knowledge and experience as you progr in your real estate investing career. We call it an introductory course because there's always more to learn. But this is no short, superficial course. There are over 200 lectures and videos adding up to more than 27 hours of content by over 15 different instructors. We think it just might be the best real estate course on the planet. Continue your wealth building journey today with the no Hype Real Estate Investing course@whitecoatinvestor.com courses. You can do this and the White Coat Investor can help. Thanks for what you do. The work you do is meaningful. It matters. I just came off a long rafting trip on the Salmon River. We rafted the main fork of the Salmon river for about the last week. So I'm just coming in now. You can see my scruff that I haven't bothered shaving yet and starting to catch up here on podcasts. But one of the other people on the trip with me was an orthopedic surgeon, also financially independent basically, but still practicing because he wants to make a difference in the world. And I know there's a lot of you out there doing that and I want to thank you so much, especially those of you that don't have to work anymore, who are still there seeing patients and making a difference in their lives. We're doing something new today here and it looks like a handful of people are watching us here recording this. But we are actually recording the recording of the making of the White Coat Investor podcast. This is actually live on Facebook right now and so we're going to do a few cool things about it. I really like this technology. It's fascinating all the cool stuff you can do with it. Obviously the real podcast is going to be a little bit more edited than this and we'll have the actual questions from the speak pipe that get asked on the podcast as usual. But in addition, I'm going to be taking questions from you guys in the Facebook group who are live right now and want to ask your questions and get them answered here today both on the Facebook Live and on the podcast so you can Put those in if you like, as a question question, just as a comment. In addition, I have opened up the guest requests here and so you can actually request to come in on this Facebook Live and ask your questions live. So that will be awesome to bring you in here. Your voice will actually be on the White Coat Investor podcast and it's a great way to ask questions. So if you'd like to do that, just request to join. I'm going to bring you right into the podcast and we'll answer your questions. Those of you who have tried to sign up for our newsletter lately, I'm really sorry. We had a big technical snafu. There was a problem with a plugin on the website and at any rate, anybody who tried to sign up for our newsletter in the last month or two wasn't able to, that's now fixed. If you'd like to get the monthly newsletter, please come sign up. You can find that@whitecoatinvestor.com free monthly newsletter. And if you've never seen the newsletter, this thing's awesome. It's great. We put a market report in it, we update you on all the cool things things going on at the White Coat Investor. We give you links to all the best stuff that's come out for doctors and other high income professionals on finances in the last month. And we also have a super secret special blog post. Basically I call it the Monthly Tip, but it's a blog post that isn't published anywhere else. The only way you can get it is by signing up for the free monthly newsletter. So I encourage you to do that@whitecoatinvestor.com free monthly newsletter as soon as you can. You can also leave Speak Pipe questions for the podcast. Just like those of you watching this live can leave questions today in the comments section or actually request to come on this Facebook Live and ask me your questions directly. But you can record those@speakpipe.com whitecoatinvestor we have a couple of really funny questions today because apparently when doctors pick up the phone and start talking to it with nobody on the other end, they think they're dictating. So a couple of the questions we have today have period at the end of every sentence and so it's kind of funny, you'll get a kick out of listening to it. I certainly did, but the questions are good so we're putting them on. All right, our first question here we're going to plug in from the Speak pipe. Hey there, Dr. Dalle. First off, thank you for everything that you Do. I'm a second year emergency medicine resident currently living in the Midwest. My question for you is about the subject of physician loans. One of my wife and I's financial goals has been to save up enough money for a down payment on a home for when I've completed residency. We plan to relocate to Colorado after residency and plan to buy a home soon afterwards. This may be immediately or we may rent a house for the first couple of years depending on the situation. To this end, we have put $20,000 in a 14 month CD yielding 2.66% through our credit union. Our goal originally was to put down 20% to avoid private mortgage insurance, but since learning a little bit about physician loans, I'm starting to question this. My understanding is that the primary benefit of physician loans is being able to secure a loan with less than 20% down payment without having to purchase private mortgage insurance. But what are the drawbacks? Is there a lower limit of down payment percentage required for most physician loans? Is there any reason that we, or anyone for that matter should be putting aside more than $20,000 plus any growth from RCD for a down payment? Right now we are both contributing very little to our Roth IRAs. Should we be working towards that end with our money rather than purchasing another CD to go towards an eventual down payment? Basically, I'd really appreciate some information about the limitations and benefits of physician loan and if the money that makes the difference between a 15 and 20% down payment could be better used elsewhere. Thanks again, I really appreciate your work. Those of you on the Facebook live, obviously you're not able to see this and so the question is basically an emergency medicine resident wondering about physician loans. This couple is saving up $20,000 in a CD and plans to save more toward the down payment of the house they want to buy when they finish residency and is really asking what's the point of physician loans? What's the minimum you have to put down on them and should we be maxing out Roth IRAs or saving up a down payment? Well, a physician loan as you'll learn on the website. In fact, if you're interested in these special doctor loans which are available not only for doctors like physicians and dentists, but also for lots of other high income professionals, you can find that under my recommended tab on the website where it says physician mortgage loans and you can learn all about them. But basically the point of these loans is allow you is to allow you to put down less than a 20% down payment and still not pay PMI which is private Mortgage insurance. This is the insurance you have to buy in order to protect your lender from you defaulting on your loan. So if you don't want to buy that, which obviously there's no real benefit to you buying it, you can avoid doing so by doing two things. One is put 20% down and get a conventional mortgage. Two is go to these lenders that do doctor loans and they allow you to put down as little as 0%, although sometimes as much as 10% of the price of the home in order to avoid that. Private mortgage insurance. Now, it's usually not a free lunch. They want your business. They sometimes make you open a bank account at the bank. They're hoping you'll stay with them for the next 30 years and use all kinds of their other products. But mostly they just charge you a little bit higher fees and interest rate in order to not put down quite as much of a down payment. So it's not a terrible thing. If you've got a better use for your money than saving up a down payment, like maxing out Roth IRAs or paying off 8% student loans, you should probably do that and use a physician mortgage loan. If you don't, I think saving up a down payment is still a good use of your money. It teaches you to save, it teaches you to be disciplined. I think you probably buy a little bit smaller house, which is usually a good thing when you use a regular conventional mortgage. But if I had to choose between maxing out a Roth IRA as a resident and saving up a down payment, I'd do the Roth IRA every day and twice on Sunday. You know, it's just a much better use of your funds for a typical resident. Even if that meant I bought the house with a physician mortgage loan, I'm not against using a position mortgage loan. In fact, I take money from obviously lots of banks that advertise these. And so I don't have a problem with them. I think you just need to be wise about it. Make sure you don't buy too much home, make sure you actually are using that money for a better purpose, and make sure you're not buying a house too soon. I generally recommend even when you become an attending, that you rent for a little while, usually a 6 to 12 month period. Basically just long enough to make sure your personal and your professional life are stable. You know that you're not about to get a divorce, you're not about to have triplets, those kinds of things. But also that you are in a job that you like and that the job likes you because most physicians change jobs within the first couple of years of coming out of residency. And so it's really a tragedy if you just forked out a ton of money for a big home and now you gotta move to go get another job. So make sure the job likes you before you put down roots and buy a home. Those of you watching this on Facebook Live, you can put your questions in as well. If you put them in as a comment, I will also answer them during this podcast. In fact, we'll even bring you on the podcast live if you'd like. Just request to join and we'll bring you on. Our next question comes from my email box. This is about the foreign tax credit. The doc says hi Dr. Dali, I know you received an email, so I'm going to make this short. I do appreciate that. I've listened through all of your podcasts. That's impressive. However, there's a topic I've yet to hear about, and this is the foreign tax credit. Yep. I don't think we've ever actually talked about this on the podcast, so you got me there. Do you have a blog post describing what this is and the various intricacies? As someone who will soon invest in the Vanguard Total International Stock Market Index, I'm interested in getting a better understanding come tax time. From what I understand, as long as one's foreign taxes paid are less than $300 single or $600 married, it's a rather straightforward process. However, once that threshold is breached, a more complicated form is required come tax time. That's all true. The good news is, if you're doing your own taxes, you're probably using tax software and it does this all automatically in the background. In fact, I had to go look at my taxes for the last two years to actually see how this is handled, because it was all done in the background. You download the forms from Vanguard and it goes right into TurboTax's forms wherever it needs to be. For example, two years ago I'm looking at my 2017 taxes. Let me try not to show my Social Security number on this video here, but if I go and look in 2017 it was line 48 on the 1040 I had a foreign tax credit of $178. And so because that was less than $600, we filed married filing jointly. Then I didn't have to do form 1116. It just goes straight on to line 48. No big deal. This year my tax credit is a little bit larger. If I pull up TurboTax and I'm still looking at it in the software because I haven't filed my taxes yet. Still waiting on some K1s actually. So we filed an extension this year. But this year it looks like I actually do have to file form 1116, which TurboTax is very con filled out for me from the data it downloaded directly from Vanguard where I have my taxable account. And I see here that I had almost $12,000 in dividends paid to me from Vanguard Total International Stock Index Fund, this exact fund that the reader is thinking about buying. And it looks like that fund on my behalf paid $877 in foreign income taxes. And so that comes on this form back to me as a credit of $877. It's very straightforward. You know, there's lots of lines on this form, but the bottom line is I paid $877 in foreign taxes to various sources and I get a credit of $877 on my taxes as the foreign tax credit. So maybe this sounds complicated. It really isn't. Your tax preparer can certainly handle it using the forms that your brokerage will provide and obviously TurboTax is handling it very well automatically. I've never fill out this form by hand or anything like that. All right, our next question comes in from Mike by email. Thank you for all you do. I have your books. I'm a fan of your podcasts and blogs. That's very kind of you, Mike. My wife is a physician. I'm a stay at home dad who handles the finances. I've been working on our investment policy statement. That's great. I think everybody needs one of those. And it occurred to me that it might be wise to have a document that leaves instructions regarding what to do should she survive me. Of course we have wills in place, but other than them stipulating that everything goes to her or me if she passes first, there are no real specifics. My suggestion is might it be beneficial for your readers or listeners if you had something available that spoke to the priority of actions to be taken should either the primary earner or the non primary earner pass away? I realize the answer is case specific, but was wondering if some general guidance could be drawn. In our case. We're about a year away from retiring all the student loans and anticipate paying off the mortgage with the debt snowball before attempting to contribute heavily towards retirement and fund our kids. Kids. Three kids, 529s to some degree. I have a $1 million term policy. I'd like to draw up an if I pass document that provides priority for steps to be taken should my wife find herself opening a check from my term insurance company. For example, should I pay off the mortgage first or maybe not, depending on the mortgage interest rate, which is fixed at 3.5%. Should I max the state tax deduction for 529? Should I lump sum the investments? We're maxing her a hospital's 401 now and two backdoor roths and are barely contributing to the 529s for now. $50 per child per month. That's actually not terrible. Okay, so the question is, should you have some instructions for your spouse in the event of your death? Well, if you're the one who handles all the finances and you never talk about it, you're probably gonna need more than instructions. You're probably gonna need a financial advisor. So that's something you ought to have in mind, you know, that you probably need somebody that you can actually send them to. Now if you're doing it all together and your spouse really knows what's going on with the finances and he or she can take them over what you've been doing without hiring a professional, then instructions can be helpful, at least a plan that you've worked on together about what's going to happen. I'm actually a little more concerned about some other things here. I'm hearing a young doc, it sounds like, with three kids and a mortgage that only has a one million dollar term policy, that's probably not enough. I think a typical doc in your situation will probably be carrying two or three million dollars in term life insurance. So the first thing I do is buy more insurance. There's a lot less for your wife in this case to worry about if there's more money. You know, I mean, bear in mind that $1 million only produces, according to the 4% rule, about $40,000 in income a year. And that's usually dramatically less than a physician family is living on. And so I'd bump that up to start with, but yes, I think it's a good idea to have some sort of plan for that money when it comes in. I mean, you know, you're probably going to want a little bit less aggressive retirement portfolio than you have now that they're going to be living off it somewhat. If it was 75% stocks, maybe you want it to be 50% stocks now. You know, if you want some of that money to go to the kids college funds, you can pretty much lump sum that into the 529s. I mean, you're allowed to contribute up to $15,000 per year per kid and that's per spouse. And so you can put up to five years worth of that in. So that's $150,000 per kid that you can put in all at once. So you could basically, if you wanted to just front load those educational costs if that's your goal. But frankly, most of it's probably going to go towards supporting the spouse if not for the rest of their life, at least for a period of time until they can be earning. In the case of you dying, in this case, you're probably going to have to replace some of the functions you're performing now as a stay at home dad. And that's going to cost your spouse some money. And so it's a good idea to, to have, you know, some money on that, you know, larger term policy on that. You mentioned that you have $1 million term policy. You don't mention what your wife has on her. I hope it's larger than a million, given that she is the physician. But yeah, you want to think through all those things. Whether you then go and put that money into backdoor Roth IRAs, or into a 401k or into a taxable account. I mean, obviously you max out retirement accounts first and everything else is going to have to go into a taxable account. And if you get a two or $3 million lump sum all at once, obviously most of it's going to be invested and taxable. It's also important to keep in mind that anytime you get a lump sum of money like this, especially in an emotionally difficult time like the death of a partner, you probably shouldn't do anything quickly. You know, a lot of people advise, don't do anything with the money for a year. Just let it sit in a bank account, you know, earning two or two and a half percent, something like that. And don't go crazy picking new investments all at once. Give yourself a little bit of time to mourn first. So I think those are the main considerations. There's apologies to those of you watching this on Facebook Live. We're obviously having technical difficulties. Facebook keeps dropping this connection, which is a real bummer. Alright. Unfortunately, the Facebook Live has pooped out, so I'm giving up on it after five tries. I think Facebook's just not working well today, which is unfortunate. It was a lot of fun. We'll try doing that again later. Our next question is unfortunately or fortunately, depending on how you want to look at it, Gonna have to come from the speak pipe rather than Facebook Live. This one comes from Greg and here's his question. Hi. What coat Investor. Thank you for all you do, period. I'm an orthopedic surgeon living in a very high cost of living with an average salary of about a million dollars, period. I just turned 40 years old but fortunately had no medical school loans or college loans due to HPSP scholarship and college scholarship. At this point I'm looking to get a foothold on security and figure out when I can retire as well as what discretionary funds I can use for vacations, et cetera, period. I have three children aged one, three and five and I'm looking to seek a financial advisor, period. I've been recommended to somebody who charges 1.2% for the first 500,000 and then lower as you go up, period. There's a cap of 18,000 no matter how many assets you have. Is this a reasonable structure, period? Should I do it myself with a robo advisor, period? I feel like I'd be better served having somebody to handle all this for me that I can just cut a check on a regular basis, have them distribute the money appropriately. I feel like it would be a large burden lifted off my plate and I could rest easy. Is this just naive or is this something that you feel someone in my position should do? Thank you very much. Appreciate all of your help. Okay. I love this question, especially because it sounds like Greg has been dictating earlier today and is in the same mode every time he talks into the phone. So excuse the period at the end of each question, but it just shows that. It goes to show that this is real, this is live, this is, you know, doctors who have real issues that we're answering and helping with. You know, this is your show, really. I'm just sitting here giving my opinion about your life and your money. But basically Greg is asking, should I hire an advisor charging 1.2% on the first $500,000 in assets. That's capped at $18,000 a year. Well, that's certainly a little on the expensive side. You can hire lots of advisors for 1% of your assets under management or less. They often have a minimum. They might require you to have $500,000 or a million dollars as a minimum, but certainly there are plenty of advisors that take doctors with less than $500,000 and charge less than 1.2% per year. The going rate for high quality financial advice is a four figure amount per year. That's something between $1,000 and $10,000 a year. So if you're only paying 1, 2, 3, $4,000, I think you're paying a fair price. If you're paying $18,000, I think you can get just as good of advice for half the price. And so if I were hiring somebody that, you know, didn't cap my fees until I hit $18,000, I'd either negotiate with them as my assets grew and my fee went toward $18,000, or I would simply move on to a different advisor. So I think that's a little bit high. It's fine to start with. You know, obviously if you only have $100,000 and you're paying 1.2%, that's only 1,200 bucks a year. That's a good deal for financial advice. But 18,000 is a little bit on the high side. And so I think, you know, you want, you're looking for good advice at a fair price. I keep a list of recommended advisors on the White Coat Investor website. You can find that under the recommended tab that then says Best Financial Advisors. And we've just rebooted that page, revamped it, and there are all kinds of videos on there and other great resources for you to really get to know these advisors before you reach out to them. But I highly recommend everybody on that list, they all charge a fair price, at least a certain amount of assets and give good advice. And so that's what I recommend you do if you feel like you need an advisor. Certainly don't feel bad about it. I think probably 80% of doctors want and need a good financial advisor. So if that's not something you want to do and you don't want to spend your time doing it, it can be outsourced, it's going to cost several thousand dollars a year. But for a doc making several hundred thousand dollars a year, that may be a good use of your money. All right, our next question comes from Kevin on the Speak pipe. Hello, my name is Kevin and I'm an orthodontist. And thank you Dr. Dali for all the great content you put out for us to learn from. My question pertains to managing my parents money. Basically I talk to them about all that I've learned, the books, I read mostly White Coat investor content and recommended a reading and talk to them about the 0.8% that they're paying their financial advisor. This discussion ended with them asking me to help manage their money. And while I feel completely comfortable managing my own portfolio, I don't know much, if anything about required Minimum distributions and other issues that affect retirees. So my first question is, do you recommend potentially managing your parents money? The second question is in your course, fire financial Advisor, do you address managing retirees, portfolios and required minimum distributions? And third, if you don't address that in your course, do you have a book that you would recommend for me to help tackle this? Really appreciate all, all that you do. Thanks so much. Okay, so Kevin is being asked to do something that I helped my parents do about 15 years ago. He's being asked to help them manage their money, which is a very precarious situation to be into, especially if you don't have any clue what you're doing. Just because you know they've been getting ripped off, it doesn't mean you can do a better job than a financial advisor can. So the best thing you might be able to do for them is help them get a good financial advisor. As mentioned on the previous question, it's not that hard to find. And then go with them to make sure that they understand what they're being told and that the advisor's giving them good advice. That's one of the best things you could do for your parents. You can also help them manage their own money. This is the way I look at what I'm doing for my parents. Right. They understand their financial plan. They have a written financial plan. They've been following it now for over a decade. It's worked out very well for them. The advisor I rescued them from was charging them over 2% a year in advisory fees. And so it didn't take much. And the worst part it was they were still underperforming the market by more than that 2%. You know, it was bad advice at a bad price, but it didn't take much of demonstrating what the difference would be in their returns and how large their portfolio was. If we just move them over to some simple basic index funds before they realized, oh yeah, you're right, let's do that. I helped them move it over. It's no big deal to do a rollover here and there and to make a few purchase orders into some mutual funds and then rebalance it once a year. And now it takes me literally less than an hour a year. Basically we rebalance at some point in the spring and we take an RMD at some point in the fall. A required minimum distribution or an RMD is not particularly complicated. When you turn 70 is 3.6% of your portfolio. The percentage goes up over time, but it doesn't necessarily mean the Dollar value that you'll be taking out goes up over time, but it's really not that complicated. But you do want to make sure you take out the RMD every year because the penalty for not doing so is 50% of what you should have taken out. So don't leave that money in that IRA when it's supposed to come out. What can you do to learn more about investing in retirement? I don't cover a lot of that in the fire your financial advisor course. I do make a few references to required minimum distributions and those sorts of things, but clearly the course is a little bit more aimed at people at an earlier stage of their career, you know, early to mid career. I don't know of any really great books that focus solely on that stage of life other than James Lang's Retire Secure, which deals with quite a bit of stuff in the withdrawal phase, which is a little bit more complicated than the accumulation phase. So I would recommend reading that book, James Lange, Retire Secure and that should give you a great handle on a lot of issues relevant to a retiree. All right, our next question comes from Jim on the speak pipe. Hello, my name is Jim Lusk and we have a three MD ophthalmology practice with three part time optometrists, probably two full time equivalents and we have a very busy practice with 35 employees. Our overhead unfortunately is very high at 65%. Our interest is to develop some sort of retirement plan. I was fortunate in having done this for 39 years. I have a top heavy plan in distant past and was able to accumulate significant money which has been transferred to a Roth period. However, my two sons, both ophthalmologists are only able to give put in the minimum into a simple ira. We have a simple IRA for the practice. We'd love to have something bigger. We're afraid that anything like a 401k would impact our bottom line so much that it would not be worthwhile. I was asking if you have any ideas of how we might structure this to allow them better investments for the future, period. They would like to build a stronger tax deferred retirement plan. All right, so Jim's basically saying we have a simple for our ophtho practice and would like to save more but are worried about planning putting it in a 401k. What can we do to structure this to make it better is basically what he's asking. Okay, well here's the problem. In a small practice, once you have employees, this is no longer a do it yourself project. You really need professional Advice, and preferably from somebody who sets these up all the time. Because the truth is, for any given practice, the right plan might be a simple IRA, it might be a SEP IRA, it might be a 401K, and there's several different styles of 401Ks that can be set up for a practice, and it might be no plan at all. It might be just investing in a taxable account. There's a lot to consider here. For example, you want to look at how your employees view this money. If the employees don't view the match you're giving them and you're providing them this 401k for which you're paying the fees as a great benefit that they're willing to give up some salary for, well, it's just an expense to you, right? Because you still got to pay them a full salary and you got to provide this benefit for them. But if they look at it the way they should, and hopefully they will, if you provide the proper amount of education, that this is part of their salary, this 401k benefit, and any match you've got to provide, then theoretically you can pay them less than you otherwise would and it becomes a wash to you or at least reduces the cost of it to you. And so I think you really have to look at your employees. The other thing you have to look at is how much they're going to contribute, right? If they don't contribute a lot, you don't have to match a lot. But on the other hand, if they don't contribute a lot, you may not be able to put all that much in because there's all these actuarial rules on how much profit sharing you can put in there if your employees aren't putting anything in. And so the best thing to do is to have a study done of your practice, the ages of each employee, the ages of the doctors, how likely they are to contribute, how much they're going to contribute, how much they make, and then make a determination of which of these various types of plans, if any, is best for you. So I've got a few advisors on my recommended advisor page that specialize in these practice retirement plans and I recommend you call one up and ask them do a study of your practice and make a recommendation. And it's interesting, little changes in these assumptions and you know, the ages of your employees can completely change which plan is appropriate for you. And so get some professional help on that. Unfortunately, there's no general guideline that I can give that tells you what's right for you all right? Our next question comes from Alex on the Speak pipe. Hi, Jim. Thanks for everything that you do. I'm an attending in my second year in private practice and ophthalmology and I'm trying to keep things simple. Thanks to your advice, I'm utilizing the three fund portfolio in my 401k and I suspect this will be a reasonable part of my retirement account. However, the taxable will also be a large part and I'd like to mirror that same three fund portfolio in my taxable account. However, I know that a bond fund is not particularly tax efficient. What would you recommend as a tax efficient bond fund? To be placed in my taxable account. The goal here is so that when I rebalance annually, I can limit the amount of transactions I do and just make things easier. Thanks for all your help. Bye Bye. So Alex likes the three fund portfolio. The three fund portfolio is fine. It's not like it's something I recommend over everything else. As you will notice if you've ever read my post called 150 Portfolios Better Than Yours, in which I discuss the three fund portfolio and 149 other great portfolio. But the issue Alex is having here is that he wants to mirror his asset allocation in each investment account. And that's not necessary. You don't have to have the same asset allocation in your 401k as in your taxable account as in your Roth IRA. Your Roth IRA could be 100% US stocks, your taxable account could be 100% international stocks, and you could have international stocks, US stocks, and US bonds in your 401, for instance, and do all your rebalancing. There's. And so the general approach is to look at each account and what goes well in that account. And while still maintaining your desired percentages, your desired asset allocation, you put what goes best in each account in there. For instance, in most 401s, there's at least a halfway decent S&P 500 index fund or total stock market fund, and often a good bond fund as well. If you're lucky, you'll get a good international fund in there. But that's usually the first one that doesn't show up in a 401k. If you're trying to put together a three fund portfolio there. And so where would you put that? Well, you'd put in your Roth IRA or you'd put in your taxable account and look at all of your accounts as one big portfolio. And just make sure you have your overall asset allocation. When you look at all the accounts together rather than trying to make each account look exactly alike. So what tax efficient bond fund can you use in your taxable account? Well, the one I use is the Vanguard Intermediate Tax Exempt bond fund. I like that one because it's not too long of a duration like the long term. It's not too short of a duration like the short term. It's intermediate and it's obviously tax exempt because it invests only in muni bonds. So if you're going to hold bonds in taxable, as a high income professional, you usually want muni bonds. So that's a good bond fund for that. There are obviously other tax exempt bond funds. Pretty much all of the ones from Vanguard are quite good and I wouldn't have any qualms about you using any of them in a taxable account. How should you do rebalancing? Well, in general, try to avoid selling things with a gain in a taxable account. If you have a loss, obviously sell that. Anytime it's in a taxable account, you're basically tax loss harvesting that. But in general you try to do your rebalancing inside your tax protected accounts like your 401k or Roth IRA. Okay, our next question comes from Matt on the speak pipe. Hi Jim. My wife and I are both CRNAs. She's in her late 30s, I'm in my early 40s. Combined we make a little over $500,000. We have about a million dollars in traditional retirement account savings. We're about to be debt free by the end of the year and we're looking at the possibility of purchasing a vacation property. The area we're looking to purchase the vacation property in is a year round resort area that's pretty recession resistant. However, it is a plane flight from our house. So we really like the idea of a real hands off kind of arrangement such as like one of these condo hotels. Now we're not primarily doing this for income so much as to have the property, but ideally it would be paying for itself with rental income. Do you have any specific thoughts on condo hotels or do you see any problems with this plan as I've described it to you? I'd love to hear your thoughts. Thank you. Matt's part of a 2crna family. They're almost debt free and they're considering buying a vacation property in a resort area. These are not great investments and the reason why is you're mixing work and pleasure, right? You're trying to get an investment, but you also are looking at a property that you actually want. To use, and that's the main reason you're borrowing it. And so you don't actually look at it as an investment when you buy it. You're looking at it to use it. And so you're buying it like a consumption item and then trying to treat it kind of like an investment. And it often doesn't work out well. When you're looking at investment real estate, you really want something where the numbers work. The numbers are what you care about. You want something that's going to appreciate, you want something that is going to cash flow. Well, you want something that's going to rent easily, you want something that's going to have low maintenance costs. You know, all these things that you care about when you're buying an investment that are totally different from when you're buying something that you're actually going to use. And so I would be hesitant to do something like this in the first place. Right. I mean, the alternative is go rent a place every time you go out there. It's not that big a deal. Right. People are afraid to do it, and so they end up buying timeshares and end up buying second homes that every time they go out there, they got to mow the lawn and they got to do repairs. You know, that's not my idea of a vacation. I don't want to go up someplace that I got to do all kinds of repairs on. In general, they say it takes 12 weeks a year in a second home before buying it. Works out better than just renting it. So most people are not spending 12 weeks on vacation in a year, much less in one place. So I think most people probably shouldn't be buying second homes unless they just have all kinds of money and want to fritter it away. Right. If you can afford it as a consumption item, knock yourself out. Right. It's like driving a Tesla or anything else that'll get me some hate mail from Tesla drivers, like usual. But you know, the truth is we all buy luxuries. If you can afford it, it's fine. Buy the luxury, enjoy it. But don't think this is going to be like some awesome, especially if it's a plane flight away. You know, if I was going to invest in direct real estate again, which I probably am not, I want it to be something I can drive by in 10 minutes and take a look at. Doing it across the state or in another state is just too much of a pain. What do I think of condo hotels? Well, the benefit of it is at least you can pay somebody else to maintain the grounds. And maybe there's somebody else keeping an eye on the building. And maybe there's a few less hassles so you don't have to do as much maintenance when you go there on vacation. But boy, I started thinking about condo hotels and vacation properties. It sure sounds like a timeshare to me. You know, I don't think I want to be in there with a bunch of other timeshare owners, for instance. So I'm not a huge fan. If that's the only way you can go on vacation there and it's just someplace you love going and you can afford to do it, okay, fine. But I think I'd probably avoid doing that sort of a thing given the opportunity. All right, our next question comes from an anonymous asker. Hi Jim, I'm a married W2 physician with single income. My spouse and I are extremely aggressive savers. We maximize our backdoor Roth IRAs and our HSA and we invest heavily in a taxable brokerage account using Vanguard index funds. My question involves a mega backdoor Roth and whether it makes sense to make after tax contributions. When we're very deep in the 35% married filing jointly marginal bracket, we take the standard deduction. My employer provides a 401k profit sharing contribution of 37,000 each year. I could elect to take the profit sharing as taxable income, but I don't. I invest that in the 401k. I have the ability to do a mega backdoor Roth conversion, but I am not doing so because intuitively it seems like a bad idea from a current tax opportunity cost perspective. But I'm not sure if my gut feeling is correct. I can see why someone who does not receive profit sharing contributions would want to do a mega backdoor Roth by making after tax contributions followed by an immediate in service distribution to a rollover Roth ira. But for the rest of us, over the course of investing lifetime, does it ever make sense to take the profit sharing as taxable income and then do a mega backdoor Roth? Thanks for your time. All right, so this is a rather complex question actually from a super saver. He's basically asking does the mega backdoor Roth IRA make sense for us in the 35% bracket or should he do the $37,000 profit sharing contribution? Well, if you have no idea what we're talking about, a mega backdoor Roth IRA is for somebody who can put a whole bunch of after tax money, not Roth money, but after tax money, into their 401 and most of the time that means you're self employed. But sometimes employer 401 s will allow this. In general, people do it because they're not allowed. They don't get a match that takes them all the way up to the $56,000 limit. And so if the employer allows them to put in even more money and allows them to convert that to a Roth IRA either within the plan or by taking it out of the plan into a separate Roth ira, then it can make a lot of sense. In this case, however, the doc is wondering if it makes sense basically to make more Roth contributions instead of tax deferred contributions. So this is really the same old, same old question of whether you make Roth 401k contributions or whether you make tax deferred 401k contributions. And in general, during your peak earnings years, the rule of thumb is to use tax deferred contributions. But obviously one of the exceptions to that is if you're a super saver, if you're going to have some $10 million portfolio in retirement and you're in the 24% bracket now, it probably makes sense for you to be making Roth contributions. So how much of a super saver do you have to be to be a super saver? I've actually got a blog post coming up on this in the next few months. It should actually put some numbers to it and make the decision a little bit easier. But in this case, I think you're probably not there yet. I think I'd just do the tax deferred profit sharing contribution in this situation, at least until I had a tax deferred account that was 2 or $3 million, which is likely still a few years away for these super savers. Katie and I are actually doing mega backdoor Roth IRA contributions this year, but we are doing it for a very specific reason, because of the 199A deduction, which would not apply to this doctor's case because he is an employee. And so, you know, we'll do that just because instead of comparing it to a 37% tax bracket that we're in right now, we're really only getting a deduction of about 29% on it. And that's not nearly as attractive. I'd rather do the mega backdoor Roth IRA contributions than take a tax deferred contribution at only 29%. All right, our next question comes from Parker. Hi, Dr. Dali. My name is Parker. I'm a general surgeon in Texas, about three years out of training. And my question for you is about factor investing. After listening to the most recent podcast with Alan Roth, it seems that he's currently not a big fan of the small value tilt. I currently am doing a small value tilt where I have about 5% of my total portfolio in a small value index fund. I just want to know what your thoughts are, if this is a fad that has come and gone or if we should continue factor investing. Of note, I'm 34 years old and plan on holding this for about 30 years with a long term outlook, but just want to get your thoughts on that. Thanks again for everything you do. Look forward to your answer. Okay, Parker's talking about factor investing, so we're talking about tilting the portfolio to things like small and value. This was super popular about 10 years ago, and that's because small and value stocks had outperformed not only over the long run since 1927, which is about as long as our data set is when it comes to the publicly traded markets, but in the more recent past. At that point, small value had really outperformed large and growth stocks. That is not the case today. Over the last five or ten years, large growth has outperformed small value. And so a lot of those people that have a small value tilt, including myself, have started to go, man, is this really worth it? Is this really a good idea? Should I stick with this or should I bail out of my plan and go to a more traditional large growth focused investing strategy, you know, such as just buying a simple total market fund like a three fund portfolio. And so there's no surprise to see people doubting it, given the performance recently. We all tend to chase past performance, especially recent past performance. And so you want to be careful that you're not just bailing out because performance has been bad in the last few years, right? I mean, you expect, even if small value stocks outperform in the long run, 20, 30, 40, 50 years, you expect there to be periods of time of 5 or 10 or even 20 years where small value does not outperform the overall market. So you expect that to happen. So the question is, is this just one of those periods of underperformance and in the long run you're still going to be better off with the small value tilt, or were we just data mining to start with? Is small value really not going to provide higher returns in the long run? Is it really not riskier to invest in small stocks and in value stocks and thus they provide an additional premium in the long run? And I think obviously the jury's still out and we've only got 100 years of data. It's just not that large of a data set. But I think that it is likely that in the long run that both small value, both small stocks and value stocks are riskier than their large growth compatriots and that they will likely outperform large growth over the long run. And I'm talking decades is the long run. So I continue to maintain a small value tilt. I view this as one of those periods of time that I knew would happen where small value would underperform large in growth. My tilt is actually larger than Parker's. I have about a 15% of my portfolio in small value stocks and so obviously I believe in it. I don't have 50% of my portfolio in there, but I do have a larger tilt than you do. So if you thought it was a good idea for the long run five years ago, I think you ought to stick with it. But if you can't stick with it, well, I guess you might as well bail out now. You might just realize you might be buying high and selling low with regards to that asset class okay, our next question comes from Amy on the Speak pipe. I work as a solo private practice urologist. I am working to move my current 401k to Vanguard. After becoming an avid WCI follower last year I was able to contribute the max of $55,000 in my 401k plus I had to contribute a total of $5,315 to my two employees 401k through Safe Harbor Profit Share and Match contribution. This year the TPA of my plan offered a cash balance plan on top of the existing 401k where I could contribute a total of $116,000 annually. In order for this to happen I would have to increase employee contributions to total $9,734. Additionally, the 401 cash balance plan management fees will increase to $5,300 from $1,960 last year. The TPA explains that the 401k cash balance plan will allow for a 2019 year tax reduction for me of just over $40,000 in October. I have a third employee who will be eligible for the plan I choose, which will increase employee contributions I pay and slightly increase the plan management fees. I feel like I'll be paying out even more in employee contributions and fees if I choose a cash balance plan, but I do like the idea of more tax deferred money. Is it worth it to do the cash balance plan on top of the 401k or just use a taxable account after I max out my 401 in Roth. Thank you for all that you do. She's asking. I'm trying to move my practice 401 to Vanguard. Should I pay my employees more in order to do a defined benefit plan? This is a lot like the question from the ophthalmology group earlier of when it's worth it to pay the extra fees and the extra match money and the extra profit sharing, etc. To your employees in order to be able to tax defer more money for yourself. And what you got to keep in mind is you can't just look at the tax deduction you get this year just because you saved $40,000 in taxes this year, that's not necessarily worth paying, you know, $35,000 in fees and match for because some of those taxes you're going to pay back in the future. And so you have to look at the difference in what you are paying in taxes now versus later and the time value of that, as well as the value of the tax deferred growth in that account, as well as what your employees think about having this benefit available to them and how much they view that as a big benefit that they're willing to not be paid as much for. And you have to look at all of that together and make a decision as to whether it's worth it. When you're starting to talk about, you know, paying 10 or $15,000 in fees to get a $40,000 tax deduction, of which in reality is probably only a $20,000 tax deduction because you eventually do have to pay taxes on that money, Then I start wondering if that's really worth it, if I should be investing in a taxable account instead. But there's no necessarily a right answer there as to whether to put in a defined benefit plan or not. A lot of it comes down to a study of your practice and how much you're going to have to pay in additional fees and additional match for the employees in order to get that deduction and that additional asset protection for yourself. And so no great formula there, but certainly as the fees get higher, you really got to take a closer look at whether that's really worth it to you. Remember, the goal is not to pay the least amount in taxes. It's to have the most available after the taxes are paid. Okay, this question comes from Nick on speak pipe. Hi, Dr. Dali. My name is Nick. I'm a physician in a Midwestern city. I have a private practice, but in addition, I do Medical legal consulting. After listening to your podcast and reading your blog, I obtained an employer identification number so I can open an individual 401k. Thus far, my W9 for my side business is under my name and my social media security number. Must I begin my employer contributions from now July of this year and move forward after changing my W9 to my new employer identification number and contribute only on future earnings under this W9? Or can I catch up on my contributions from the first six months of the year even though the agreement at that point was under my name and my Social Security number? Thanks a lot. Nick is asking can I only contribute to an i401K with new money after getting an EIN? No. You should be able to use all the money you earn this year for a couple of reasons. One, nobody's looking that closely, okay? So just report it all under the EIN when you file your Schedule C at the end of the year and it'll be fine. Nobody's going to have a big problem with this. You reported all the income you paid, all the tax you're due. It's not a big deal. Second, even if you were going to report it as two separate businesses, you know, two Schedule Cs, one for your business that was in your name and one for your business that's in your new business with an ein, you know it's not going to be that big of a deal because they're basically related businesses. And so you got to look at all the income together when it comes to doing a retirement plan anyway. It's not like you get a retirement plan for each one. So I would use all the income from the year. Obviously make sure the tax paperwork is in order when you do that. Also, another question on that from Nick. Hi Dr. Dali. I am a physician in a Midwestern city and I have a child with special needs. My wife and I have a 529 able account for him and are contributing to that on a monthly basis. But I would be interested to know any recommendations you have in addition to that that apply to this kind of more unique situation. Right now. Our plan would be to open a special needs trust to fund the 529 able. My understanding is that up to $100,000 in that account would not disqualify him for income based services. So the plan would be to put assets in a special needs trust that will in the future keep that account funded up to that $100,000 threshold, but not over so that he would not in the future lose Medicaid or Any other services that would be needed, but any other ideas that you have or guidance would be appreciated. Thanks. Okay, this is a little bit more interesting, a little bit more difficult to sort out a 529 able account. Well, able accounts are like a 529 account. There is a combination of the two. And you're basically moving money from a 529 to an able account. But the point of an able account is to provide for a disabled child. And so you know, you can. The money in there doesn't count toward your Medicaid funding in most states. And so you can see why some people might try doing some Medicaid planning around it. This is really no different than the people who are trying to do Medicaid planning for their impoverished parents. You know, trying to get Medicaid to pay for the nursing home by hiding the assets that they have or spending down the assets that they have or whatever. And so I think people come from a noble motive to do this. But sometimes we get, we forget what the whole point of Medicaid is, right? It's to provide for people that don't have assets. If you leave your kid $3 million in life insurance, your kid has assets that he can live off of. You know, he doesn't need the state to provide for him. So you got to ask yourself a little bit about the ethics of doing Medicaid planning in the first place. Obviously the laws are there and if you're allowed to do it, you're allowed to do it. But the place to get that advice is a Medicaid planning attorney in your state. These are all state specific laws. And so you want to talk to someone in your state that knows your state laws and exactly how Medicaid rules written in order that you can maximize those benefits. But if you've got a large enough trust that it is able to keep that able account topped out over the years, you probably have too much assets to be getting state services anyway. And so I wouldn't spend a lot of time doing Medicaid planning. I would just assume that you're not going to have it if you're leaving a seven figure amount to your child. All right, I got one question in on the Facebook Live group before it unfortunately went kaput. Thanks a lot, Facebook, for ruining my day that way. But the question was basically, what do I think of hard money loans? Well, I've got about 5% of my portfolio invested in them. I like the fact that they're backed by a hard asset. You know, if the person defaults on the loan you get to repossess the property and sell it. You know, I prefer owning these via a fund rather than owning them myself. The last thing I want to do is spend a bunch of time and money and hassle trying to repossess and sell a property and so I generally own this via fund that provides diversification. I do have to pay fees for it, but for that lack of hassle and that additional diversification, I think it's worth it. I do like the asset class if you look at my returns on it. I had a post published in early July and I think I'm making 8 or 9% over the years on these hard money loans. So I think it's a great asset class. I think it has low correlation with the rest of my portfolio and I plan to continue to invest in it in the years to come. The White Coat Investor is proud to introduce our no Hype Real Estate Investing Course which will provide the framework for developing further knowledge and experience as you progress in your real estate investing career. We call it an introductory course because there's always more to learn, but this is no short, superficial course. There are over 200 lectures and videos adding up to more than 27 hours of content by over 15 different instructors. We think it just might be the best real estate course on the planet. Continue your wealth building journey today with the no Hype Real Estate Investing course@whitecoatinvestor.com courses. You can do this and the White Coat Investor can help. If you haven't signed up for our newsletter, please do so. You can find that sign up@whitecoatinvestor.com free monthly newsletter. Head up, shoulders back. You've got this. We can help. We'll see you next time on the White Coat Investor podcast. My dad your host, Dr. Dahl, is a practicing emergency physician, blogger, author and podcaster. He is not a licensed accountant, attorney or financial advisor. So this podcast is for your entertainment and information only and should not be considered official personalized financial advice.