WCI #146: The 5-Year Rule for Roth IRA Conversions

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. This is White Coat Investor podcast number 146, the five year rule for Roth Conversions. Welcome back to the podcast. Hopefully we're giving you some useful information here. Common sense stuff, a lot of it. But sometimes we really get into the wee when it comes to financial matters. If you feel like we're getting out there in the weeds a little bit too much, just give us a couple of minutes and we'll get back to the basics. We don't spend too much time talking about that sort of stuff. We try to focus on the real issues that real doctors and other high income professionals are dealing with. 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. All right. Our quote of the day today comes from Benjamin Franklin who said, taxes are indeed very heavy. But we are taxed twice as much by our idleness, three times as much by our pride, and four times as much by our folly. And that's especially the case I think for most doctors out there. They're making so many financial mistakes that the sum total of their financial mistakes is probably bigger than the sum total of their taxes. Speaking of taxes, it's kind of tax time right now. If you need help with your taxes, we have a great resource for you. If you go to the whitecoatinvestor.com website and you go up under our recommended page, you can go under that menu and you will find at the bottom, tax strategists. And it's been years we've spent trying to build this list up because I'm always being asked by people who can I go to for help with my taxes. But now we finally got, oh, it looks like 1, 2, 3, 4, 5, 6, 7, 8, 9 firms there that you can check out and get help preparing your taxes and coming up with a strategy to lower your taxes. So a great option there. Check it out at whitecoatinvestor.com/tax-stragists thanks for what you do. Medicine is not always easy. Sometimes it's boring, sometimes it's chaotic, sometimes it's difficult, and sometimes it's just heart wrenching. But if nobody's told you, thanks today. Let me be the first okay, I got to do a mea culpa to start with here. Apparently I did not answer a question a couple of weeks ago. And in fact, not only did I not answer it, but I titled the entire podcast according to the question that I didn't actually answer. So I got some not hate mail. I got some feedback on it. What's interesting though is apparently Cindy caught this just before we went to press and she just let it go. So she has to share the blame with me for this one. Apparently the question I thought they asked was how to send money from the United States to India, when reality the question was how to send money from India to the United States. So here's one of the emails I got. I'm a big fan of your podcast. Just listen to your podcast today, Money to India. The caller asked you about how to manage the money they get from his dad in India, and I think you answered as if the caller wants to send money to India. I'm pretty sure there are a lot of legal issues with that. Could you elaborate on that on your future podcast? And remember, there are some rich parents in India who can give $500,000 or more to their kids in the US and I got another one. I just listened to this podcast. I think you misunderstood the question from Prashant based on which you have titled the podcast. I think what he was asking is his parents waiting to send $500,000 worth of money from India to the U.S. i think that's what he was asking about. How can he park that huge sum here? Well, it turns out that it's actually even easier to send money from India to the US during any given financial year, which in India is April to March. You can send $250,000 from India to the U.S. no questions asked. There are no regulations on it. There are no taxes due on it. So if you wanted to send half a million dollars to the US you could do it. You just have to split it between two different financial years. No big deal. Although it's not incredibly difficult to send money to India as well. That wasn't really what they were asking in the U.S. it's interesting. The U.S. has a gift tax on the person who gives the gift and India taxes the person who receives the gift, which makes it even easier to bring money from India to the US because you are doing neither of those things. You are neither giving the gift in the US Nor receiving the gift in India. So it's pretty easy. Okay, let's go on to our next question. This one from Michael.

Hi, Dr. Dali. My name is Michael. I'm a first year medical student in Kentucky. I'm married to a physician assistant who has about 110, 115 somewhere in that thousand dollars of debt from all of her schooling combined. I currently have no debt from undergrad thanks to my father, who's also a physician, who suggested I start thinking about finances now and try to learn from some of his failures. He's actually paying for my education, so I will graduate medical school with no debt. I'm very fortunate because I'm so fortunate. I've been thinking a lot and listening to a lot of things and I've been on your podcast for a while now and I have your book and I would just like to know if you had any specific advice for a youngin like me. I know a lot of my classmates haven't even thought about that. They just kind of write it off as well. I'm in debt anyway, so who cares, But I don't want to be that way. But especially since I'm not in debt or I won't be in debt from medical school. I do have some family debt, like I said with my wife. But I would just like to know if you had any advice for getting a jump on the game because I don't. I don't want to be the average person who's got a lot of debt. I want to capitalize on my blessings, which is being debt free. So any advice you have would be great. Thank you. And I really appreciate your podcast. Thanks.

All right, what advice do I have for a medical student with no debt at all? First of all, congratulations. There are a lot of very bitter people who just heard that who were frustrated with their student loans and can't believe that you are so fortunate as not have any. But the truth is about 1/4 of medical students don't have any debt at graduation and that oftentimes comes from them getting a lot of support from their family. I mean, remember that the population of medical school definitely skews toward the higher income quintiles. I think something like 70 or 80% of medical students come from the top 20 to 40% of the population. And so it's not surprising, I guess, that a fair number of medical students don't have any debt at all. But a significant chunk of those just have contracts like what I had. You know, I had a military contract. And when they asked me that question on the exit survey as an Ms. 4, I put no debt because I didn't have any financial debt, but I owed time debt. And so I think a significant chunk of those folks are also military docs and people with other sorts of contract style debt rather than financial debt. But what do you do if you don't have debt? Well, I think you're basically just starting two or three hundred thousand dollars ahead of everybody else. You know, rather than having to focus on those student loans and coming up with a student loan management plan during residency and a plan to wipe them out after residency, you just get to skip all of that hassle. So your financial life just became a lot more simple. But it does allow you to focus on a few other things. You know, you can save up an emergency fund. If you have any earned income, you can put that into a Roth ira. You can even get the savers credit for doing that. Because you'll be at such a low income level, you should be able to get a pretty significant savers credit. You may also start looking a little bit earlier into getting things like disability insurance. A lot of times you actually can buy that. As a medical student, I have a hard time telling people to buy it using borrowed money. But I suppose if you're not living on borrowed money, maybe you can justify buying that as a med student rather than waiting until you're an intern. If you are not in debt because you saved up a bunch of money before medical school, maybe you had another career or something like that. Medical school is a great time to do some things with your retirement plans. If you have a bunch of tax deferred money, you can do Roth conversions during medical school for free. And so as long as you keep your income below the minimum taxable income, you know, and take advantage of that standard deduction or any other deductions you may have, you might be able to convert tens of thousands of dollars during four years of medical school without paying any taxes on it at all. So a lot of people wonder if they should cash out of their retirement accounts that they saved before medical school in order to pay for medical school. But I think a better use of that money is just to do free Roth conversions in medical school for the most part. I like the idea of using up your personal assets and any family assets you have before you borrow, but if it's inside a retirement account, I kind of feel a little bit differently about that. All right, let's go on to our next question from Christian this time.

Hey Jim, this is Christian and I'm a second year cardiology fellow. First, thanks for everything you do. My question revolves around Roth versus traditional 401 contributions. I know your traditional advice is that residents go Roth. After going through the numbers, I'm thinking I may be better off doing predominantly tax deferred, but wanted to get a second opinion. So through my employer I can do either roth or traditional 401 contributions. As stated, I'm a fellow so I can do a fair amount of moonlighting. My gross pay is around 150,000. My wife is a resident who makes around 55,000. I'm going for PSLF as I owe about 250 in loans and I'm already five years through and have at least two and a half more years of fellowship at the time I should theoretically qualify for forgiveness. My loan balance will still be around 200 assuming I continue to make my pay as you earn payments based off my projected income. So I'm in pay as you earn, so my loan payments are based on my taxable income and we're filing separately. I max out my employer sponsored 401. In my tax deferred 401 I get a 1.75% match which tops out after I put more than 4% in and no match for Roth contributions.

Okay, always getting lots of questions about Roth versus traditional 401 contributions and they're difficult to answer. It would be easy to just say, oh, always use Roth all the time, you know, as some other podcast hosts sometimes do. But the problem is that's not always right and it's difficult to come up with a really good rule of thumb that always works every day time. The basic rule of thumb is use tax deferred accounts during your peak earnings years. But there are exceptions to that, particularly for super savers. If you're going to have $20 million in retirement, you may want to favor using Roth contributions, for example, even during your peak earnings years. And then of course the rule of thumb when you're not in a peak earnings year is to use a Roth account. But there are exceptions to that. For example, if you are in residency and you want to lower your IDR payments and hopefully get more forgiven through public Service Loan Forgiveness, you use a tax deferred account instead of a tax free account. And so there's exceptions in every respect. But this doc is wondering if he's an exception as a fellow who's moonlighting, making $150,000, whose spouse is making $50,000 as a resident and is going for public service loan forgiveness. Well, you may be just because you're going for public service loan forgiveness, right? The lower your taxable income, the less you're going to pay in IDR payments and the more that will be left to be forgiven. But that requires doing what you're doing, which is being enrolled in the pay as you earn program and filing your taxes, married filing separately. And that sounds like that's what you're doing. So that's a reasonable exception to use a tax deferred account, at least for her. Now, since you're married filing separately, you don't actually need to do that, but those are really the considerations to take in there. You know, the truth of the matter is if you're saving something during residency or fellowship, you're winning here. You know, so even if it's a tax deferred account, that's not the end of the world. But the general rules during residency use a Roth account unless you have a really good reason not to, which usually means going for public service loan forgiveness. He also mentions that he's not getting a match for Roth contributions, but is getting a match for tax deferred contributions. That doesn't make any sense at all. I wonder if there's some confusion on that point. I don't think you can legally match one kind and not the other. Obviously, if that is somehow the case, that would be an argument against a Roth account. But mostly the reason why this stock would be an exception is because of the pay as you earn and married filing separately in the public service loan forgiveness plan, not so much the fact that your income is a little bit higher than a typical fellow. All right, for those of you who have heard about Alpha Investing Fund, one that's closing here at the end of the month. If you're still interested in investing in that, go to www.whitecoatinvestor.com AlphaInvesting if you have no idea what I'm talking about, but you're interested in learning more about private real estate syndications or funds, be sure to sign up for our Real estate oper Opportunities email list@whitecoatinvestor.com Newsletter. All right, our next question comes from Andrew.

Hi Jim. I have a somewhat unique question regarding HSA Contributions. I'm a partner in a medium sized private practice radiology group. We use Health Equity for our partners and employees. The practice funds each partner's HSA in full in January of each year. For example, $7,100 one time contribution for 2020 to be made in January. Last year I transferred the entirety of my health equity balance into a personally held Fidelity HSA account for its lower fee structure. All of my other partners continue to hold their assets with Health Equity and are not interested in switching for various reasons. Well, I need to continue to have our bookkeeper deposit my funds into my empty Health equity account each year going forward and then transfer it to my Fidelity account every year, which requires some paperwork. Or am I allowed to have her deposit it directly into my personally held Fidelity account? Our benefits manager seems stumped when I ask this and I cannot seem to find a good answer online. Thank you for your time and all that you do.

Okay, he wants to know if his employer can contribute directly to the HSA he's opened on the side. Well, I guess they could, but they generally won't. It typically has to go to the employer's designated HSA in order to get those employer dollars contributed or for you to save payroll tax on it. Now you're allowed to put HSA money anywhere you like, but if you want to save the payroll taxes, the Social Security and Medicare taxes on it, it's got to go through payroll and that usually means it's at least going to stop in your employer's designated HSA for a while. Now you can do a rollover once a year and move that to your preferred HSA location, whether that's Lively or Fidelity or whatever. But otherwise you either got to not get those payroll tax savings or you've got to go through employer's designated hsa. If you're self employed, of course, it doesn't really matter. You know, if you're a partner, you're on a 1099, you might as well contribute directly to Fidelity. But I couldn't tell from this question whether Andrew was an employee or not. So I had to be a little bit more general in the answer. If you need a self directed 401k, you can check out whitecoatinvestor.com my 401k to learn more about how you can use your 401k to invest in more than mutual funds. All right, next question comes from Phil.

Hi Jim, my name is Phil and I'm a software engineer in the Bay Area with a arcane question about mega backdoor 401ks and 5 year waiting periods. I got into a bit of an argument with a colleague about this and I was hoping that you could help settle it. For background, everyone at my company can put up to 15% of each paycheck into a 401k after tax bucket and from there they can roll it over directly to a Roth IRA or use an automatic feature which will convert it to the Roth 401K. And the advantage of this feature is that it does so automatically after each paycheck, so you don't have to call Fidelity, which is nice. And because it's done immediately, there are never any earnings and therefore no tax due on the conversion, which is also nice. So I figure most people just use this feature. But my friend is a big proponent of continuing to do these direct rollovers to his Roth IRA every time, and his argument for it surprised me. He said by doing it this way he was getting the clock started on the five year minimum waiting period to be able to withdraw these contributions without a penalty. He said that if you instead convert it to the Roth 401K and then in the future you leave the company and roll that money over to the Roth IRA from there, that starts the timer then, which is undesirable. I thought initially that he was just plain wrong. But after some googling about this, specifically with how it works for the mega backdoor 401 and going through some very long Boglehead threads, I realized this is much more confusing than I thought. So I was hoping that you could shed some light on the subject. Which one of us is right?

Thanks. All right, here's the question I named the podcast after. And this is a very complex question, but the first thing we got to get to here is that the man's name is Jack Bogle is not Jack Bogle. And so his followers are the Bogleheads, not the Boggle heads. And if you've only ever read the word, I suppose I can forgive you for mispronouncing that. But once you've met the man, it's hard to mispronounce his name. So I think it's important to correct that. But remember, with regards to the five year rules that there are two five year rules regarding Roth IRAs. The first five year rule applies to Roth IRA contributions and determines whether the earnings will be tax free. The second rule applies to Roth conversions and applies to whether or not the principal that was converted will be penalty free when it comes out. So what we're talking about, this question, is the Second five year rule, the five year rule for Roth conversions. And if you want to learn an unbelievable amount of information about this particular rule, I would refer you to a excellent blog post@kitchees.com it was dated January 1, 2014, but it talks about both five year rules in great depth in that podcast, so I would recommend checking that out. And he talks about in that podcast that in the case of conversions, each conversion amount actually has its own five year time period. So with multiple conversions, there may be multiple different five year periods underway at once. When withdrawals occur from the conversion amounts, they're deemed to come out on a first in, first out basis. So that means that the oldest conversions, the ones most likely to have finished their five year requirement, come out first and the most recent conversions come out last year. And so that's a good thing. But to understand the purpose of this rule, why do we have this rule? Why does it have to be in there for five years before we can get it out penalty free? Well, imagine one of these scenarios. Okay, let's say somebody's 40, they want to get into their traditional IRA money. And if he took a withdrawal at this point, he would be subject to not only ordinary income taxes, but a 10% early withdrawal penalty. But if he converted his IRA to a Roth IRA, he would have to obviously pay taxes on that conversion. But he could now take out the after tax principal without paying any penalties. So by doing the Roth conversion, you would be able to get around paying the 10% penalty, which obviously would be tapping it before you got to age 59 and a half. And so that's why they have to have the five year rule in there. So you can't just do that, it just would allow you to get around the IRA withdrawal penalty. Same thing. If this person completed their conversion, they waited five years. And if you are at that point only 45 years old, then your five year conversion rule keeps you from dodging the early withdrawal penalty from the ira, although it does allow you to potentially gain access before age 59 and a half. You just have to wait the five year period. The gains, of course, on that conversion would still be taxable. And that's basically how the five year rule works. So for a conversion, you got to wait five years before you can tap that principal, but principal you can take out at any time without having to pay a penalty. It's only earnings on a Roth IRA that you have to pay penalty on if you take them out before age 59 and a half. So in general, the strategy is Start the clock as soon as you can so you can get your money tax free and penalty free as early as possible. So this sort, this sort of planning is really important for fire types, right? Financially independent, retire early. Someone who's going to retire in their 30s or 40s or maybe even early 50s. But as you get close to age 59 and a half retirement, this becomes much less of an issue. At that point you've probably got other resources you're going to be tapping. Before you get into your Roth IRAs, you can use the substantially equal periodic payment rule to get to your money before age 59 and a half without paying any penalties. It's really only the really early retirees that mess with this sort of planning. Let's get to the question now. The question was not necessarily about IRAs, but about 401ks. So when a designated Roth account from an employer retirement account is rolled into a Roth ira, the years in the Roth employer account do not count toward the five year rule. You get your own five year rule once it goes into the Roth ira. So all accounts is that original five year rule for the Roth ira. So if there was no existing Roth IRA and the rollover from the Roth 401k created the account for the first time, that starts a new five year clock for the IRA. Even if the old Roth 401 had satisfied its own five year rule, they just don't carry over. So basically, in answer to the question, your friend is right. If this matters to you because you're going to fire soon and you plan to use that money long before age 59 and a half, you should go through the hassle of doing the Roth IRA rollovers like your friend is doing. But for many, many people, this just doesn't matter because they're either not going to retire early or they have other funds to spend first rather than the Roth IRA principal. I mean, that would be one of the last things I would be wanting to spend in retirement. I'd be going through my taxable money and any 457 plan money I had and that sort of stuff before trying to go after my Roth IRA money. So if that's your situation, then you're right too. So both you and your friend are right depending on what your situations are for getting money out of there. He actually called back and left this.

Hi Jim, this is Phil again and I just have a couple of follow up details for my last question in case they'd be useful. So I called Fidelity to try to get an answer on this and they gave me one that surprised me. They said that when the conversion is done either to the Roth IRA or the Roth 401K, if there were any earnings and therefore tax due on them, then there is also a five year waiting period. But if there weren't any earnings, then there isn't. And since the automatic feature always runs before earnings can accrue, then there is never a five year period. And that answer surprised me. I didn't know what to make of it. The other aspect that's interesting is that in addition to being able to roll over to a Roth IRA and the Roth 401, there is also the ability to do a split rollover where you send the contributions to a Roth IRA and the earnings to a traditional ira, if there are any. And so maybe that option has different tax consequences or if all three have different. The other thing I thought was interesting was that my last employer, the setup was identical to this one, except that we also had the ability send money from the Roth 401K to a Roth IRA at any time. Obviously only converted money had this feature, not direct Roth contributions. And I thought that was interesting. And I asked the Fidelity rep why the old employer had it and the new one did not. And he said that Fidelity charges a lot of money for that feature and my new employer wasn't ponying up. So I thought that was funny. It's weird to think how some of these procedures have costs associated with them and some don't. So thanks again for all that you do and for answering my questions.

Okay. I think it's hard to tell, right? All I have is a snippet of information here, but I think the Fidelity rep is probably wrong about the conversion five year rule, I.e. that the converted earnings are treated the same as converted contributions. But he might be talking about the other five year rule, the one that applies to Roth contributions. That five year rule is about whether the earnings can come out tax free, not whether the principal can come out penalty free. But again, all of this is pretty easily avoided. As a general rule, you want to be burning through your tax bill Money and your 457 money as an early retiree and save your retirement account money, especially Roth money to be used later in retirement. In my case, I'll bet my taxable portfolio right now makes up about 60% of my portfolio. Tax deferred money is probably 30% and Roth money is probably 10%. And I'll bet those ratios are pretty similar for most fire types. You're just saving too much money to be able to save it all inside retirement accounts. And so I think if you're an early retirement kind of person, this probably is a non issue for you. You're probably not going after your Roth money anyway in retirement. Do you still have student loans at way too high of an interest rate? If you're going to be paying them off yourself, you might as well refinance them and get a lower rate. Check out whitecoatinvestor.com splash today to see how much lower of a rate Splash Financial can offer you. If you refinance through them after getting there through that link, they'll give you $500 cash back as a bonus. No application or prepayment fees. Again, whitecoatinvestor.com/ all right, our next question comes from an Anonymous listener.

Hi Dr. Dolly. Thanks for everything you do for us and giving us information. We need to take control of our finances and become financially independent. It is much appreciated and it's made a big difference. My question Today relates to 401 s in my situation. I am currently set up as an S corporation. I work at a few different offices and I have an individual 401k that I took out last year. I started contributing to and maxed out now. This summer in about six months I will have the opportunity to buy into one of those offices that I've been working at and I'm planning to do so now. It's my understanding that once I buy in, I cannot contribute to my individual 401k as I will have to contribute to the company's 401 or that practices 401k that's available to all employees. Am I still able for these first six months before I buy in, am I still able to max out my individual 401k or come as close to maxing it out as possible? If I am, I would love to do that. Also, once I have bought into that practice, I will still have other 1099 income from other practices. Can I use that income to contribute to my solo 401k and contribute to that in many years to come? I would love your insights there. I'm planning on meeting with an accountant to talk about this with, but I would love to hear what you have to say. Thanks again.

Okay, so sounds like we've got somebody that's buying into a practice and now can't use his individual 401k. I can't tell exactly what's going on here, but it sounds like you are currently an independent contractor and you're becoming a partner in a multi partner group while still functioning as an independent contractor for at least some of your income. So you'll soon be able to use two 401s since those two employers are totally unrelated. That gives you $257,000 per year maximum for the employee plus employer contribution limits one for each 401k as dictated by the rules of each 401. But between the two of them you only get one $19,500 employee contribution. So use that one wisely. The way most people in this situation use it is they max out the employer 401 employee contribution or at least put in enough to max out the match and then just put 20% of their self employed earnings into the individual 401k. If you didn't use your whole employee contribution in your employer's 401k, you can put that into your individual 401k. But usually you only do that if your employer's 401k is really terrible and you're just trying to get the match out of it and that's it. So I hope that helps. Our next question comes in via email. I was wondering if you could do a podcast about defined benefit plans states this type of plan would be beneficial for me. I'm paid around $430,000 yearly. As a 1099 contractor I have an S corp with a solo 401k which I max out each year. I also max out my backdoor Roth IRA. According to my accountant I'm able to put away $134,000 a year into a defined benefit pension plan. A little background about me I'm 37. My husband is a physician and W2 employee. He makes about $375,000 a year and maxes out his retirement plans, a KEO plan and a backdoor Roth. We have no student loans. We paid $550,000 in three and a half years. Congratulations on that. Very well done and have a home that is less than 1x our income and no other debt. We're trying to save as much pre tax money as possible given our large dual physician income. Yes it is a large income but it was also a large debt. So very very well done and I'm happy to see you saving so much money. You're going to become wealthy very quickly doing so. But $134,000 a year into a defined benefit cash balance plan seems awful. 37 year old? I'm a little bit skeptical but if that's what the actuary says it works out to be, I suppose it could be true, certainly. I know docs in their 50s that can put up to $200,000 or so into a defined benefit cash balance plan. Unfortunately, my stupid plan only lets me put in seventeen and a half thousand dollars as a 44 year old. That used to be $30,000 a year, but now it just kind of goes up every five years as you get older. But it's really not until you're in your 50s that you get to put a big chunk of money into there. So I'm a little bit jealous. If you really can put quite that much money into a defined benefit plan, given your goal to put away more tax deferred money, it sounds like it would be a good idea for you to do it. Even if you can only put in $20,000 a year, which is kind of what I expected you to say, I'd still go for it. I think that's probably giving your goals a good idea. Are you doing your own taxes? If you are, use the software that I use, TurboTax. They're the industry leader for a reason. Check out whitecoatinvestor.com TurboTax. And if you need more help than that, check out our list of recommended tax preparers and strategists@whitecoatinvestor.com taxes. All right, our next question comes from Eyal. Let's take a Listen.

Hi, Dr. Dali. I'm an emergency medicine resident in Washington, D.C. i'm a New listener to your podcast and keep hearing that keeping too much money as cash in the bank is not a great idea because it's not doing anything for you. My question is, how much money should you keep cash in the bank, and how much is too much? So 1,000, 5,000, 10,000? At what point after saving would you consider moving it to investments? Thank you very much.

All right, so how much money should you keep in cash in the bank? How much is too much? You know, is 1,000 too much? Is 10,000 too much? It's really difficult for me to answer this question because I'm in such a different situation than most doctors these days. You know, we keep much, much more money than that in cash. And it's mostly just for cash flow needs. You know, we have payroll to make and we got business expenses coming out, and, you know, we got to make our 401k contributions and all that kind of stuff. And so we end up with lots of money in cash compared to those amounts that you're talking about in this. How much is too much? Well, I think most people try to Keep an emergency fund, three to six months of expenses placed away somewhere, whether that's in a short term bond fund or whether that's in I bonds or whether that is in a high yield savings account or a money market fund or CDs or whatever, you know, I think that's really all you have to keep in cash. Above and beyond that, I think it's mostly just for your own cash flow needs. And if your cash flow needs aren't very significant, then you don't have to keep very much in cash. But if you're spending $15,000 a month, well, you might need $15,000 in that checking account just to keep from bouncing checks, keep from bouncing your automatic credit card payments and that sort of a thing. It really depends on how closely you're going to watch that account and be moving money in and out, knowing when the expenses are coming in and going out. If you just don't want to deal with that, you tend to do what I do and just leave more cash in there. If you are willing to watch it really close that you can obviously earn a little bit more money on that cash. And so it's a constant weighing game of hassle versus a little bit of extra interest. And depending on how much that interest is worth to you, you might be willing to deal with the hassle a little bit more. All right, our next question comes via email. I'm a dentist. Six years out of school. I paid off all of my wife and my student loans, which were $350,000. Now that we are debt free, I max out my employer 401k and opened a backdoor Roth. I make $300,000 as a general dentist, but not get a lot of enjoyment at my job. I would love to go back to residency for orthodontics, but residency for three years costs $300,000. Yes, that's different for you physicians who aren't aware of this. But residency for many dental specialties, you still have to pay tuition. You're not even getting a salary. I'm not sure how much more I would make as an orthodontist, but I would enjoy the job more. Am I committing financial suicide by going back into student debt to be an orthodontist? Well, it sounds like it's time to do some more research to decide whether the investment is worth it or not. For example, I know an orthodontist making $225,000 a year, and I know orthodontist making seven figures. If it's going to make you happier and it's going to make you enough additional money to justify the investment of time and money. I'd go for it. If not, well, I'd just figure out ways to optimize your practice to get you to fire as soon as possible. But I think those are the decisions to make. If you expect you're going to go into a halftime practice in a tiny town that doesn't have very many patients to do orthodontics, well, it's probably not worth paying $300,000, not to mention the opportunity cost order to do that. But if you're really committed that you're going to do this for 20 or 30 years and you have a pretty good business mind, you're going to open a practice and you're going to run it as efficiently as my kids orthodontist, you're probably going to make a killing. And so it would be a good financial move. But the truth is you only get one life. And if being an orthodontist is going to make you happy and being a general dentist is not making you happy, maybe it's worth it. Even if it doesn't work out perfectly well financially. Certainly most orthodontists are not going to have trouble knocking down an extra $300,000 in student loans. They generally make enough more than a typical dentist to be able to take care of that. That assumes you do a good job and get a nice high income as an orthodontist. All right, next question. Also via email I love the blog. I just had a quick question about my backdoor Roth IRA. I opened it in January 2019, contributed to my traditional Iraq for 2018 and 2019, did the conversion of my Roth IRA the same month through Vanguard. I'm going to fill out my Form 8606 for my 2019 taxes as per your tutorial, which you can find just by googling Backdoor Roth IRA Tutorial for late contributions my 20191099 R for Vanguard says my contributions are 11,500 as it should. But TurboTax is saying I contributed 5,500 excess to my IRA for 2019 resulting in a 6% penalty until it is correct. Since this was for my 2018 contribution, I don't think it is correct that I am in excess, but will filling my Form 8606 correctly resolve this issue? Well, remember when you do late contributions, meaning you're contributing for 2018 in calendar year 2019 or you're contributing for 2019 in calendar year 2020, that the contribution goes on the 8606 for the tax year year. So it would go if it was a 2018 contribution made in 2019, it goes on your 20188606 and the conversion goes on the tax form for the year, the calendar year that you did the conversion in. So if you made a contribution in January of 2019 for 2018 and then converted it in 2019, the contribution would go on your 20188606 and the conversion would go on your 2019 8606. And if you keep that straight, usually the paperwork won't be screwed up. This is why it's so much easier to just do the contribution conversion during the same calendar year. But that's basically what the problem is. If you go back and you realize that you didn't file a 20188606 or you filled it out wrong, you need to go back and correct that. File a 1040x with it and then it should be correct for this year. Do you still need disability insurance? Get a policy from an experienced independent agent@whitecoatinvestor.com doctordisability all right, our next question also via email. I've been listening to your podcast for 1.5 years. I am a physician graduate in 2006 and working as a psychiatrist in the southwest. I own two triple net properties worth 3.5 million with a corporate tenant. The 15 year triple net lease with around 15% return per year with depreciation. I've never heard any of your guests talking about the benefits of triple net properties with the peace of mind and still being able to build up your real estate with no overhead expenses as long as you have the right corporate tenant like Dollar General or Starbucks. One drawback is I have a $2 million loan on it which might be not to everyone's. Like some of this position on this forum might have cash flow to buy this property for cash and fixed rent for those timelines. And still this tenant has four options to renew for five years each with a rent increase. I hope this topic can be added to one of your podcasts as a question from Anonymous well, a triple net lease is not a specific asset class or an investment. It's just the way the rental contract is written. A triple net property is net of taxes, net of maintenance costs and net of insurance. So the landlord doesn't pay any of that stuff the tenant does. So you're transferring some risk from the landlord to the tenant in exchange for a lower rent. So lots of landlords like this because it's a little bit decreased risk and a little bit decreased hassle. But it's not some sort of extra special investment. It's just basically a different type of contract to put in place on the property. I suppose you could do it on a residential property, but almost always these are commercial, especially retail and industrial properties in which the tenant's responsible for all that sort of stuff. But if you're looking for even less hassle in direct real estate ownership, a triple net lease can be a way to do that. If that sounds like too much hassle to you, you might try taking some physician surveys from Corizon. They're especially looking for oncologists, neurologists and rheumatologists, and you can find more information on that@whitecoatinvestor.com Curizon C U R I Z O N Our next question is coming off the Speak pipe. Let's take a listen.

Dr. Dali, thanks for all that you do. I've been a longtime listener of the podcast. I have a question about the timing of when to contribute to a traditional IRA versus doing a backdoor Roth ira. Currently my wife and I have only been doing backdoor Roths. We're both in our early 30s but we have a marginal tax rate of 35%. I'm a private practice urologist and she's a CRNA and I understand the advantage of doing a traditional IRA contribution for the pre tax rhythm. But my issue is that the fact that we are still in our early to mid-30s and we're not going to touch this money until we are at least 59 and a half and hopefully much later, would it be more wise to take advantage of the long term gains with the Roth IRA being tax free versus taking the pre tax break right now? I understand that later in our career when the money doesn't have as long to compound, it would make sense to do a traditional Just curious on your thoughts on this and about what age would you definitely start switching to traditional contributions in your peak earning years? I appreciate all that you do again and I definitely don't think you're boring. Thanks.

Okay, well Most urologists and CRNAs have a retirement plan at work and they make too much money so they cannot deduct traditional IRA contributions at all. They also cannot contribute directly to a Roth ira, so their only option there as far as their IRA accounts go is a backdoor Roth IRA. Regarding a Roth versus a tax deferred 401k, it's a lot more complicated question. The usual answer is tax deferred during your peak earnings years and Roth at all other times. But there are lots of exceptions. In your case though, this is really straightforward. A backdoor Roth IRA is what you ought to do if you are interested in Airbnb, we have a partner that has put together a course that teaches you everything you need to know to run a profitable Airbnb. Some doctors have found this to be a exceptionally good side hustle, especially if they can put their spouse or partner in charge of it. But if you're interested in Learning about that whitecoatinvestor.com Airbnb in fact, we have about almost a dozen courses put together by ourselves or by our partners there that you can find under the courses menu@whitecoatinvestor.com or just going directly to whitecoatinvestor.com online courses. All kinds of stuff that you can learn from these courses. Real estate stuff, billing stuff, financial management and planning. All kinds of courses there that you probably ought to check out if you like learning stuff from online courses. Next question comes from Denny off the Speak pipe.

Hi Danieli, I had a quick question about people with individual LLCs. I am in the process of trying to start a solo 401k versus a SEP IRA for 2020 and the question I had is what is the difference between a self directed solo 401k versus a not self directed? I know the versatility is a little bit more for the self directed and to my understanding you can invest in honestly whatever you want with some limitations. So why aren't every solo 401k and SEP IRA self directed then? Thank you so much for your guidance and I look back to hearing from you.

Okay, I often hear lots of questions about solo 401ks vs Sep IRAs, but the question here is really what is the difference between a self directed 401k and a regular one? Why aren't they all self directed is really the question. Well, it's a little bit more of a hassle to be self directed. And the classic example of self directed 401k or IRA is a checkbook account where basically you can write a check and invest it in any allowed investment. And usually this means real estate. You know, you can write a check out of this and you can put it into a private real estate fund or a syndication or something like that and use that 401k or IRA money in order to invest in that sort of thing. But there's a little bit more of a hassle to running the account. Someone's got to keep track of the checks. They got to provide you checks to start with. And so it's usually the big brokerage houses, the big mutual fund houses don't have this feature. You usually have to go to a separate company, usually a smaller company like one of our partners that you can find@whitecoatinvestor.com mysolo401k or whitecoatinvestor.com RocketDollar and they will help you set up an account like this. Now what's it going to cost you? Well, it's going to cost you a few hundred dollars in fees to set up and then 100 or $200 a year to maintain it. And so it costs more than going to E Trade or going to Vanguard or going to Fidelity and just opening a solo 401k and investing in mutual funds there. But you won't have quite as many investment choices. There's not a right answer or a wrong answer. I've had a standard solo 401k at Vanguard. I've had a self directed 401k. And you know, they both have their pluses and minuses. It's just a matter of whether you're willing to pay a little bit more in fees in order to have some other investment options. Okay, I got some feedback via email. Here it is. I wanted to provide some feedback since you often ask for it on the blog and podcast. I refinanced my $275,000 medical school loans through your link with SoFi and per their email response below, they're not honoring the referral credit. Apparently I should have requested the credit within 30 days of refinancing my loan. I was not aware of this time frame and assume many other readers or listeners are not either. I just wanted to make you aware to potentially prevent this from happening to others. That's not exactly the way it works. If you went through the links on the site or in the podcast show notes, you get these cash back bonuses automatically. You don't need to request it specifically, but you can't just go to sofi.com and refinance and then months later ask them to send you a few hundred dollars. They're not going to do it. If that were allowed, they might have to pay me for customers that didn't even bring them, which is obviously not great for them. I mean, I can always ask for exceptions there. If you're just caught in some sort of snafu, which does occasionally happen about once a month. We have somebody that's just for whatever reason didn't get what they should have gotten and we can always fix that up. So what I want to do in the podcast is emphasize the importance of actually going through the White Coat Investor links if you want those special White Coat Investor negotiated deals. And so I got a response on this email. I actually did use your link, but I read the fine print at the very bottom and it says for new customers only. I forgot I'd refinanced and subsequently paid off a small private med school loan while in residency with with sofi. So I bet that's why I didn't get the bonus. Yeah, that's why you didn't get the bonus. You know, they're basically putting these deals together to try to get new people introduced to the business. So if you refinance 12 different loans at SoFi, you're not going to get the cash bonus each time you do it. Now, if you go from one company to another to another, you could get additional bonuses, but at the same company you only get a one time. I'm sorry about that. I only get paid one time and you only get paid one time. That doesn't mean it's not worth refinancing if you can get a lower rate, but that's the way the cash bonuses work. If you are interested in getting a cash bonus for refinancing your student loans, you can find out which companies are offering those@whitecoatinvestor.com student loan refinancing all right, I think we're getting along on the questions here, so let's cut it off here and we'll push our other questions out to the next podcast. 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 need help with your taxes during this tax season, be sure to check out our recommended strategist page. Thank you for leaving us a five star review and for telling your friends about the podcast. Keep your head up, your 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. Daly, 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. Facebook.