WCI #164: Why You Should Max Out Your Retirement Accounts

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 164 why you should max out your retirement accounts I estimate that 80% of doctors need, want and should use a financial advisor and or an investment manager. Some investment gurus such as Dr. William Bernstein think my estimate is way too low. At any rate, if you want to use an advisor temporarily or for your entire life, there's no reason to feel guilty about it. Just make sure you are getting good advice at a fair price. If you need help updating your financial plan or just getting one in place, check out our list of recommended financial advisors@whitecoatinvestor.com financial advisors. You can do this and the White Coat Investor can help. All right. Our quote of the day today comes from author Robert Dorigozzi, MD, who said considering the average physician's income, all that is required to live comfortably and retire when you wish is a little fiscal discipline and the avoidance of stupid mistakes. I certainly agree with that. Thank you very much for what you do. These are difficult times. They're difficult times in hospitals. Some of you are fighting the pandemic pretty hard. Some of you are out of work, Some of you are struggling with lower volumes than usual and trying to rebuild your businesses. It's not easy. I appreciate what you're doing. We have a number of courses available at the White Coat Investor. We'll be talking a little bit about these in upcoming podcasts but be sure to check them out. If you go to the white coat investor.com we have an entire drop down menu at the top entitled courses and many of you have had your conferences that you were planning on using your CME dollars for canceled due to the pandemic. And so if you have CME money that you need to use and you don't want it to go to waste, we have one course offering currently and hope to have more soon that offers CME and It is the 2020 Continuing Financial Education course. This consists mostly of presentations from our conference back in March, but also has up to six hours in additional material. But it's eligible for CME so you can purchase it with your CME dollars so be sure to check that out if you are interested. Speaking of interesting stuff, I saw an article in the Wall Street Journal recently. It demonstrated that over 30% of investors over 65 sold out of all of their equities at some point between February and May. If you look at all investors, not just the older ones, that was about 18%. So a number of people that basically completely liquidated their stocks in that time period. So in case this needs to be said, stocks are not instruments for short term investments or speculation. Okay, none of the money that you need in the next five years should be in stocks. So if the stock market drops 20 or 30%, that is not a reason to sell your stocks. If anything, it's a reason to buy more. But most importantly, those the times for which you need a written financial plan to help you and to help you stay the course in those time periods. Now, another benefit of having a written financial plan is the act of putting it together not only points out where your deficiencies and knowledge are, but it also helps you and your partner get on the same page. And so there's not one of you saying let's sell when stocks go down and the other one saying no, let's buy more. You've already decided in advance what you are going to do. If you need help doing that, we have a list of recommended financial advisors that can help you. We also have the fire your financial advisor online course, which is obviously less expensive than a financial advisor and can help you learn to put that plan in place. I'd be most interested to know what percentage of those who got out of the market, what percentage of them ended up buying back in at a lower price, what percentage bought back in at a higher price than what they sold at, and what percentage may never buy in. That data unfortunately was not in the article. You know, from time to time I get feedback about the podcast. For example, this came in by email recently asking us to do dedicated podcasts to a subject area. Perhaps once a quarter or once every other month you could do a deep dive into an area like whole life insurance OR BackDoor Roth IRAs, or disability insurance or asset allocation or rebalancing. Maybe it could be 20 minutes of didactics followed by answering questions and maybe even announce ahead of time the topic in order to collect questions from listeners. Well, we did that recently with our disability insurance podcast. I hope you enjoyed that. And we do plan to do this sort of a thing from time to time. Going forward, it's always a question of whether you guys would rather hear kind of a dedicated podcast dedicated to a certain subject, or whether I just let your questions and your interest drive the podcast. Certainly on the blog we tend to do A lot of dedicated subjects. So if there is something that you want to learn a lot about one subject, you know, 457 plans or backdoor Roth IRAs, or the 199A deduction or something like that. The blog is far more focused in that respect, whereas the podcast tends to be a potpourri of your questions and what you're interested in. Now, obviously, if you guys all ask the same questions over and over again, there's some repetition on the podcast. I hope that's useful as you go along listening to them. I'm hoping that as you hear these questions, you are more able to give the answer yourself, because these are the same questions you're going to get from your colleagues, your peers, your trainees in the hospitals and in your clinics. And so I hope that you'll be able to help answer their questions because you've heard the questions so many times on the podcast. The truth is, there's probably only 50 or 100 questions out there that white coat investors ask over and over again. We're not as unique as we think we are. We all kind of have the same questions. At any rate, we've debated back and forth for years what format to do the show in. As those who've listened to the first few episodes know, in the beginning we did a lot of episodes dedicated to a single subject, but kind of transitioned away from that for the most part to interviews about half the time and answering your questions almost all off the Speak pipe now, in fact, I'm not even able to get to all of them on the Speak pipe lately. So I appreciate the feedback. Keep it coming. If you want more questions, let us know. If you prefer a more focused episode, let us know. But barring some overwhelming response from you, we'll probably continue mostly with questions and then from time to time throw in a more dedicated episode or portion of an episode. Before we get to questions today, I thought we'd do a little bit more of a focused discussion about why you should max out your retirement accounts. Retirement accounts are awesome. If you talk to people, they're all interested in some sort of an account that will give them easier estate planning, better asset protection, pay less in taxes, get their investments to grow better, and facilitate rebalancing. But what they don't realize is they already have this account available to them. It's a tax protected retirement account. They come in a couple different flavors, right? Obviously you have 401ks which are tax deferred, and you have Roth 401s and Roth IRAs which are tax free accounts, meaning you put after tax money in there and then the earnings are never taxed again. Those are the two main flavors of them. But whichever one you choose to use either way, you are almost always better off than investing in a taxable account. Now, a taxable account isn't all bad. Most of my investments now are actually in a taxable account. That's been a transition for us over the last three or four years as we've gradually moved things out of our tax protected accounts into our taxable account just because its proportion of our overall investments has grown. It's not all bad, right? You get the lower capital gains rates on long term capital gains. If you get qualified dividends out of there, those are also taxed at a lower rate. You can donate appreciated shares to charity instead of cash and flush those capital gains out of your portfolio. You can tax harvest, as we've discussed. But overall, these benefits pale in comparison to the benefits of using a retirement account for your investing. So whenever you can use a retirement account, please do so. The downsides are not very big. For example, there's the age 59 and a half rule, but honestly, there's so many exceptions to that rule, including using the SEP, SEPP rule, substantially equal periodic payments rule. To get that money out penalty free before age 59 and a half, you just have to basically take out the same percentage of it every year for at least five years and you're allowed to do that. So even early retirement in that respect is an exception to the age 59 and a half rule. So really not many downsides at all to using these accounts. Now granted, sometimes an employer offers a crappy account, it's got crappy investments in it, the fees are super high, but even then you're still usually better off using it for the tax breaks. And so we're seeing fewer and fewer of those. I think people are getting the picture. The employers are getting the picture that they are legally responsible to not have a crappy 401k plan, that literally they can be sued by their employees because they have a fiduciary responsibility to them in that respect. And so I think those accounts are actually getting better over time. But you need to understand, particularly for a typical doctor who, why your 401k is so awesome. We're all worried about getting sued above policy limits. It rarely happens, but we're all worried about it. Well, you can actually keep what's in your retirement accounts after declaring bankruptcy. So say you get sued successfully, you know, chances happening are super super low. But say this happens and there's a $10 million judgment brought against you, and what do you do? You declare bankruptcy and you get to keep what's in your retirement accounts. So that's a great reason to max them out. But beyond that, a 401k gives you a tax break up front. If your marginal tax rate, meaning the rate at which your next dollar is taxed, is, let's say, 40% between state and federal. If you put $10,000 into a tax deferred account, you just knocked $4,000 off your tax bill for that year. It's a wonderful benefit right now, the skeptics will say, well, you're just deferring those taxes. But that's not entirely true because you get a couple of other benefits in there. The first is that while that money grows, it is not taxed as it spits off capital gains and dividends each year like most investments do, or spits out interest. You don't pay taxes on that as it grows, so the money actually grows faster inside the retirement account. And the second benefit? Well, there's another benefit. I mean, you can rebalance in it. It costs you nothing to buy and sell in the account, right? There's no tax consequences of doing so. So it's easier to rebalance your portfolio as well or switch investments if you didn't do a very good job selecting them or if you just need to move things around. I mean, when I have to make changes in an account, I try to always do them in my tax deferred accounts. But the last benefit is one that a lot of people don't understand, and that's the fact that you will almost surely, if you are a typical doctor, you will almost surely take that money out of the account at a lower tax rate than you put it in. And that is not a prediction of future tax rates. Right? If tax rates go up, that doesn't mean you're taking that money out at a higher tax rate. And the reason why is that taxes fill the brackets. So as you have taxable income in retirement, you know a certain amount. If you're married, I think it's 24,800 or 24,600 this year is the married standard deduction. So if your only source of income in retirement is this tax deferred retirement account, your only source of taxable income Anyway, obviously Roth IRAs and that sort of stuff doesn't count. But if your only source of taxable income is this traditional tax deferred retirement account, the first 24,000 plus comes out tax free. So if you saved 40% when you put it in and you took it out at 0%, that is a huge arbitrage between those rates. And it's a great benefit of that 401k. Now beyond that, the next 19,000 or so comes out at 10%. The next 50,000 after that comes out at 12%. The next 75,000 after that comes out at 22%. So all of this is coming out out at a much lower tax rate than when you put the money in. So this benefit of being able to fill the brackets is a huge benefit of being able to use a tax deferred retirement account like a 401k or a cash balance plan during your peak earnings years. Now, there are some exceptions. They're typically super savers that have multimillion dollar IRAs and you know, all this other income coming in from their side businesses and these side gigs they've got and, you know, a bunch of investment properties and that sort of stuff. It is possible to actually have a higher marginal tax rate when you pull this money out than when you put it in. But for the typical physician that saves up a 2 or $3 million portfolio to retire on, that is not going to be the case. You're going to take that money out at a lower tax rate than you put it in. I think it's important to understand that that tax deferred retirement account is likely your biggest tax break. It is absolutely huge. If you're in private practice and you've got, you know, a setup like mine, for instance, my current setup at my partnership is I can put up to $57,000 into our solo 401 or our 401k profit sharing plan. And right now I can put another 17,500 into a defined benefit cash balance plan. For most doctors, a deduction like that being able to deduct $70,000 or more, $75,000 off your income is huge. That's probably your biggest tax deduction. It's bigger than your interest deduction. It's bigger than your charitable contributions. It's bigger than your mortgage interest deduction. It's your biggest deduction these days. Some docs that are in business for themselves might have a substantial 199A deduction. This is the pass through business deduction. But those are basically the two biggest tax breaks out there. So it's important to understand if you're looking to pay lower taxes, the best way you can lower them is saving more money for retirement and doing so in a tax deferred account now, there are different types of retirement accounts for different types of people. If you're an academic, chances are good you were offered some combination of accounts like a 403, which is very, very similar to a 401k as well as a 457, which is a little bit different. It's actually deferred compensation. It's technically your employer's money, which has asset protection implications in that it's protected from your creditors, but not your employer's creditors. You might also have a 401, that's typically an account where it's only employer money going into it, or they have a mandatory contribution from you, but works similarly. And so if you are an academic, you really need to understand the accounts that are being offered to you, how they work and how you can maximize their benefits. If you're in private practice, you probably have something more similar to what I have. A 401k with a profit sharing plan plus minus a defined benefit cash balance plan. Remember, if you're in a partnership, you have to use the partnership plan. You can't just go open your own plan. If you're getting paid on a K1, you can't go open a solo 401k with that. Even if you incorporate your business, right? Even the partner is actually your corporation. You can't just go open your own solo 401k, which is kind of interesting because the way this recent PPP loan, this forgivable loan that they were given out in response to the pandemic, that actually didn't work that way. If you had your own corporation, you could actually apply for your own, which was separate from the partnership plan. Remember that a true independent contractor, right? You're paid on a 1099. You can use an individual 401k, which takes a lot of the hassle and expense out of running a 401k program. You can go to E Trade or Vanguard or Fidelity or whoever you want and open those up. You can even get self directed ones if you have two types of income. For example, if you're a W2 employee at a hospital and you also do some moonlighting, you can have more than 1 401. You just need to make sure you stay within the rules, right? If they're completely unrelated employers though, you can have a 401k for each one. But despite having multiple 401ks, you still only get one employee contribution this year, it's $19,500. For those under 50, there's a catch. Up contribution for those who are 50 plus. However, you can make up the rest of that $57,000 per 401 per employer limit with employer contributions and also with after tax employee contributions, if the plan allows it. So the way this typically works if you have a couple of 401 s, is you put in your maximum employee contribution at the Hospital 401, they give you some sort of match, a few thousand dollars, maybe $10,000. And that's what goes in that 401. And then in your individual 401, it's 100% employer contributions, which works out to be about 20% of the net earnings for your side business. So if your side business made 50 grand, you put about $10,000 into there, and that's how you use more than one 401. Just keep those two contribution limits in mind. The first one is total for all the 401 s is your employee contribution. The second one is your per 401k contribution. That's the $57,000 limit I mentioned, employee after tax contributions to 401s. And this is getting to be a more and more common feature in a 401. This is what we call the mega backdoor Roth IRA. Because what you end up doing, assuming the plan allows it, is even above and beyond your $19,500 employee contribution. You can put in after tax money. And some plans allow you to convert that within the plan to a Roth 401. And obviously you didn't get a deduction. So there's no tax cost to converting it to a Roth 401. Some plans require you and allow you to take the money out of that account, put it in a Roth ira, and obviously do a Roth conversion. That again, has no tax cost because that limit is so much higher than what you can typically put into an IRA each year. They call it the Mega BackDoor Roth IRA. But that can be a good option for a number of people. There are a lot of complex uses of it. But the bottom line, if you're trying to get more money into retirement accounts, that might be a good option for you. There's always a backdoor Roth IRA for yourself and your spouse. If you're under 50, it's $6,000 a year for each of you. You put it into traditional ira. You then convert it to a Roth IRA with no tax cost because you weren't allowed to take a deduction for the original contribution. And then, of course, one of my favorite retirement accounts isn't even labeled a retirement account. It's the health savings account, or what I call the Stealth ira, which is a wonderful account. It's a triple tax free account. You get a tax break. When the money goes in, it grows tax protected. When you pull it out, it comes out tax free as long as you spend it on health care. If you take the money out and spend it on something else, you have to not only pay the taxes, but you have to pay a penalty. And that penalty lasts until age 65. After age 65, if you pull the money out and spend it on whatever you want, you just have to pay the taxes on it. So in that respect, it's no worse than your 401k. Thus we call it stealth IRA. So if you have access to an HSA because you use a high deductible health plan, be sure to use that as well. As a general rule, that benefit of that money growing in a tax protected way is so advantageous that you don't really want to take money out of a retirement account until you have to. So anybody that's telling you pull money out of your retirement account, they're usually going to cause you to make a mistake. If you follow that advice, you know, usually if the answer is you're worried about having a whole bunch of taxes down the road, the usual solution to that is not to pull the money out of the retirement account now so that doesn't happen. The solution is to do Roth conversions so that money isn't taxed when it comes out of the retirement accounts. So I hope that's all very helpful to you. I hope that was kind of a deep dive into retirement accounts. I hope you're using that. I hope you see the benefits of maxing them out. All right, let's take some questions from you guys. I've got 10 questions lined up here off the speak. Pipe it as many as we've got. I had to leave some in reserve and I'm not sure we're even going to get to all 10 of these with the time we have. But let's give it a try. Our first one comes from Matt. Let's take a listen.

Hey, Jim, my name is Matt and I'm an ENT in Portland, Oregon. I've recently been looking at real estate funds like CityVest, Alpha Investing, MLG and others. It seems like fund offerings come with many different structures on both the debt and equity side. I was wondering if you could speak to the tax advantages of choosing one fund type over another. For instance, Citivest just posted a house flipping fund which seems to be taxed all through current income without allowing for any of the depreciation benefits. How do you account for the tax inefficiency when evaluating these types of funds? Additionally, I was thinking about setting up a Rocket Dollar self directed IRA to use for backdoor Roth contributions. Do you still like their platform for self directed Roths? And are there certain fund types that are better suited for Roth IRAs than taxable accounts? Thanks again for all that you do.

All right, first of all, Matt, thanks for plugging all of our sponsors. I'm sure they really appreciate that. Can I talk about the various tax benefits of private real estate funds? Well, yes, there are some tax benefits. Some funds are very beneficial tax wise. For example, if it's an equity fund that passes through the depreciation to you, especially if it's bonus depreciation, that you kind of get a whole bunch of it up front, that can be used to offset other real estate income that you have and it makes even more of your income be tax free. And so that's a huge benefit. And that generally comes with equity investments, whether it's a single syndication, meaning a single apartment building that you bought with a bunch of other investors, or whether it is a fund that owns 10 or 15 different, you know, apartment buildings or retail buildings or whatever, 15 different properties. You know, either way, if they're passing through that depreciation, that's a big tax benefit. But there are other funds. For example, a typical debt fund that loans money out to real estate developers. All of the income, all of the return from that is basically ordinary income. So it comes out to you every year. You pay your ordinary income tax rates on it. It's not very tax efficient. So if you're going to put one of those types of investments inside a retirement account, it would obviously be the debt fund. And you can put that into a self directed IRA or a self directed 401k if you would like. And it would be much more tax efficient. Obviously you mentioned the JKV fund. I think when you guys hear this podcast, they're actually still raising money for that for another week. You can contact Citivest about that. But that's a fix and flip fund. So what that fund is is it takes the money. It buys houses from distressed sellers. You know, people that need out of their house can't make the mortgage payment. What? And they don't want to lose everything. They want to get this thing sold. So it buys houses from people like that, it fixes them up. Because obviously if these people can't make the mortgage payment, they're not maintaining the house, so they fix it up and then sell it within about six months for a much higher price. And the profit goes to you as an investor in the fund. You know, obviously after any fees that you pay the people managing that fund to do. And so that sort of investment, nobody's held this thing long term. So there's really no significant depreciation that is passed through to you on that sort of investment. It's not tax efficient at all. And so if you were going to put again a real estate investment into a retirement account, this would not be a bad one to do it with. You mentioned Rocket dollar. Rocket Dollar is one of our recommended self directed IRA companies. You can find all of those recommended companies@whitecoatinvestor.com under the Retirement accounts recommended list. So that's a place where you can find that sort of thing. As far as how tax efficiency impacts my decision to invest, it mostly does not. I mostly try not to let the tax tail wag the investment dog. I'm also very limited on retirement account space and becoming more limited each month over the last three or four years. As I mentioned earlier in the podcast, as my taxable account to retirement account ratio has grown, I've gradually moved asset classes after asset class to the taxable account. And it's not that I'm moving money out of the retirement accounts, it's simply that I have to start investing the money that's in the retirement accounts more into the investments that I'm leaving in those retirement accounts because they're not that tax efficient and buying the more tax efficient investments in the taxable account. So for example, I've transitioned out Total International Stock Market Fund. The Total Stock Market Fund. Most of my private real estate is out there. My international small is now outside my retirement accounts. A significant portion of my bonds are now outside of retirement accounts. They're invested in a municipal or tax free bond fund at Vanguard. And so what gets left behind? Well, the least tax efficient stuff, things like my TIPS fund is in there. Things like real estate investment trusts, you know, that Vanguard REIT index fund, you know, that sort of stuff stays behind in the retirement accounts. I think I've got small value stocks inside the retirement accounts as well, but they're probably the next thing to come out. If that ratio continues to worsen as I expect it will, at some point I may have the opportunity to move my debt real estate back into retirement accounts. But since it isn't an available investment in two of our four 401ks and soon in all four of our 401ks. That basically just leaves our Roth IRAs, which are only about 5% of our portfolio and are dropping rapidly. So I'd love to have them inside a tax protected account, but it's not really a good option for us right now. It doesn't look like it will be. So do I not invest in that asset class? No, I go ahead and still invest in it. Just realizing that, you know, that's part of the, part of the price of being a member of our society is you got to pay taxes. And better to make the money and pay the taxes than not to make the money at all. So I try not to let the tax tail wag the investment dog. I try not to let the tax efficiency of the investments necessarily dictate my asset allocation. If you're interested in these sorts of private investments, and they're totally optional, right? You don't need these to become financially independent or to reach your financial goals. But if you're interested in this sort of thing, you can learn about more of them by signing up for our Real Estate Opportunities newsletter. You can find that@whitecoatinvestor.com newsletter. Let's take our next question. This one comes from Daphne Hi Jim.

I'm a mid career physician who's doing very well financially speaking, but I have decided that I'd like to start formally keeping a budget. My question is recommended. Savings rates that are commonly suggested by you and others are in the approximately 20% range. Where do entrepreneurial endeavors and alternative investments fit within this framework? Here are some examples. Say I invest $25,000 into a real estate syndication. Does that fall into the 20% savings investment category? It's outgoing money. And while I anticipate seeing a return on the investment down the road, there is also the possibility that I could lose it all. Another example would be personal seed money invested in a startup or a side business or personal capital that is used to fund an LLC for real estate investment purposes, rehabs or repairs. These are all investments that I hope will succeed, but they could also fail for budgeting purposes. How would you categorize these various things? Are they expenditures only or are they part of the 20% savings investment category when the success or failure of such ventures will not be known until some point in the future? Thank you for your thoughts on this.

Okay, I think this is a pretty easy question. I mean, you want to formally budget. Where do your investments and alternative investments fit? Well, they fit into your savings rate. That's where they go, they're savings just because they're higher risk or you're not sure exactly what's going to happen with them. It's not money you saved and invested for your future. So that would all go toward my 20% savings rate. All right, let's take our next question. This one comes from Abena. I hope I'm pronouncing that right. Let's take a listen.

Hi White co investor. I recently read your book and I found it really helpful. I also recently started listening to the podcast, which is also great. I'm about to start residency in a few weeks and I'm looking into getting disability insurance. I'm wondering if there's a reason you recommend buying the policy from an independent insurance agent. My residency program just started offering individual policies this year in addition to their typical group policies. The individual policy looks good on the surface to me. It's ameritas, so Big six and includes an own occupation, definition of disability, and partial disability. It's portable so I can bring it with me when I graduate residency and it's non cancellable. I'm wondering if there's a big catch that I should be looking out for with a policy offered through my university residency program and I should be definitely looking for an independent agent or if this policy through my program is reasonable. Thanks for your help.

Okay, this and our next couple of questions are on disability insurance. I don't think they came in in time for us to include it in our disability insurance discussion a couple of weeks ago, but this one's why do I recommend an independent agent? Well, I think that's where you're going to get the best advice. Now obviously any advice you get from anybody who sells anything is going to be biased. So the bias of an independent agent who isn't going to be paid if you just stick with your residency policy is to sell you a new policy. So be aware of that. That is their bias. But I think the best way to do this is to take the policy offered by your residency program. And in this case it sounds like maybe you have a halfway decent one that's an individual policy you can even take with you when you go and have it be compared to the ones you can buy from the big five or six companies, have the agent point out the weaknesses in the policy, and there probably are some, you know, how the definition might be weaker, what riders aren't there, how the price might go up, et cetera. So you understand and you may still make the decision to go with a weaker policy that costs you a lot less money and that's okay, but at least you're then making an informed decision. So I still think you need to go see an independent insurance agent even if you don't buy a policy from them and they understand that they're trying to do the right thing for you. If it's one of these people on my list, they do so many hundreds of policies a year, losing a little bit of income is not going to change their life dramatically and they're mostly focused on just doing the right thing for you. Our next question comes in from Josh. Let's take a listen.

Hi Jim, I have a simple question that I've always wanted to know the answer for but I've never asked. When I graduated from residency in 2012, I joined a private practice and I followed the advice of a very new physician personal finance blog at that time and purchased a high quality own occupation disability insurance policy. Since then I've changed jobs and am currently employed. I kept my original disability insurance policy which I have always paid for with after tax dollars because it was of such high quality and was purchased when I was younger. My employer buys a disability insurance policy for me that is not as generous. My question is, in the event I were to become disabled, are you aware of any reason I could not collect on both policies? Are there laws about this or fine print in some policies that would try to deny payment for dual coverage? I'm just curious.

Okay, so basically Josh is asking can I collect on both my individual and group policy if I get disabled? And yes, you generally can. You're certainly not going to have any trouble collecting on a good individual policy that you bought from one of the big five or six companies. These are not cheap policies, but they're very good policies and they're going to pay out no matter what the group policy. You better read the fine print and you can go over that with your independent insurance agent when you buy or when you meet with them when you have your options evaluated or. But you got to be a little bit careful. Sometimes they do decrease the benefits based on what you're getting on another policy. But most of the time the way it works is the individual policy just will not sell you a whole bunch more insurance if you already have a group policy in place and they'll both still pay out. So I would say in general you're going to get the payout from both of them. But read the fine print on that group policy. Sometimes they might be limited. Okay, our next question comes from Jay.

Hi Jim, thanks for all you do. You're a great help to doctors and medical professionals. I have a question about disability insurance. I'm a mid career sports doc in the Southeast. I've had disability insurance since finishing residency almost 15 years ago. I pay about $200 a month for a $9,000 own occupation policy. I've been fortunate with good health and I'm pretty close to financial independence. I do have three children and a non working spouse. My oldest child is starting college in the fall. My question is, how long should I continue my disability policy? It's not breaking the bank, but it is pretty expensive. Does it make sense for a healthy, financially independent doctor to consider discontinuing his disability insurance? I guess the same question could be asked about term life insurance as well, though it's so much cheaper that it's not as big a financial concern. Thank you for all that you do.

All right, Jay. Well, congratulations, number one, if you're getting that close to fi that you're starting to think about dropping your disability insurance, you are winning the game. So I've already dropped my disability insurance. It's not a cheap policy. This stuff's really expensive. If you have a good policy, it costs a lot of money even if you buy it when you're super young and healthy in residency. And so as you become financially independent, the idea is that you then drop it. You save the premiums, you use them to buy something else you want or invest the money for your kids or give it away to charity or whatever you want to do with the money. And so in general, you should drop it when you become financially independent. Maybe you keep it another year or two until you're sure or whatever. But mostly when you become financially independent, you don't need disability insurance because disability is no longer a financial catastrophe in your life. Another time you might want to consider dropping it is as you move toward and into your 60s. Because keep in mind how long these policies pay for. As a general rule, they will pay the maximum of two years or until you hit age 65 or 67 with some policies. So if you get disabled at 35, you're going to get 30 years of payments out of this sucker. But if you become disabled at 63, you're only going to get two years out of it. And maybe it's not worth paying the same premium for two years of benefit versus the 30 years of benefit. And so even if you're not totally financially independent by the time you're getting into your 60s, you might consider dropping that disability Insurance policy anyway, I'll leave that in your hands. Some people feel less comfortable doing that, whereas other ways other people go, this really isn't a good deal for me anymore. I'm going to drop it and save that money, but I'll leave that up to you. Term life, similar story, right? When you're financially independent, you don't actually need it, but you're right, it's a lot cheaper. And so I think a lot of people kind of do what I have done where I dropped my disability and kept that term policy around. You know, it would provide a little bit of liquidity in the event of my death. I've even considered maybe changing ownership of it so the business owns it. The white coat investor business would actually be hurt a whole lot more by my untimely death than my family would be. And so we haven't exactly decided what we're going to do with that. But you're right, it's relatively cheap, and so it's not as big of a deal to keep it around. All right, let's take some questions that aren't about disability insurance. Now this next one comes from Jackie.

Hi, Dr. Dali. I am calling with a question about a late contribution for a backdoor Roth IRA that I ended up making as I realized that we are married. Filing separately for the first time this year as I'm ending my residency year as a PGY3, rolling into an attending salary for the second half of the year. And I will be going for pslf and in anticipation for that, wanted our income to look less given that we are in Washington and Washington is a community property state. I have a spouse who was not working last year, so we thought this was going to be a luxury, that splitting my residence salary between the two of us for our community property would make my income look less. But the side effect is that when you file separately, your Roth cap for income is 10k, which is significantly below what the income was last year. So now having made Roth re characterization to a traditional IRA and now conversion back to a Roth in May 2020 for the 2019 tax year, I'm now trying to figure out how to do a late conversion through TurboTax with the idea that I need to fill out this 2019 form 8606, but then also need to fill out a 2020 form as well. Thank you for all you do and I appreciate any advice you have. Thanks.

Okay. Jackie introduces a pretty cool technique which for the right person, it can actually help. In a community property state, you are actually allowed to split your income between the two spouses. And if you do this right, it's possible you can decrease your pay as you earn payments and thus increase the amount left to be forgiven under the Public Service Loan Forgiveness Program. And so that's a pretty cool trick to look into if you're one of those couple of handfuls of states that allow you to do that. But if you combine that community property aspect with filing married filing separately, that could be a way you can get a little bit more money forgiven under the Public Service Loan Forgiveness Program. But in Jackie's case, the question is really about backdoor Roth IRAs and late contributions to a backdoor Roth IRA, especially when you already kind of screwed up your IRA contributions for the year and actually have to recharacterize them. So yes, Jackie, you need to recharacterize the Roth IRA to a traditional IRA and then as soon as you're allowed to reconvert it to a Roth ira. But you can't do a late conversion. The conversion is always reported on the tax form for the year in which it is actually done. So if you do the conversion step in 2020, it gets reported on your 2020 taxes. But if the contribution is for the 2019 tax year, even if you do it in 2020, it still goes on your 2019 tax form, that 8606 form that you report your backdoor Roth IRA contributions. But a recharacterization is basically going back and telling the IRS that I didn't really do a Roth IRA contribution, I really did a traditional IRA contribution. So it's reported on your taxes exactly the same as if it were just a simple IRA contribution in the first place. So it's not really a big deal there. If you need help with these subjects, take a look at my backdoor Roth IRA tutorial on the blog. Just Google Backdoor Roth IRA Tutorial. It'll pop right up. There's also a post about late contributions to the backdoor Roth ira, which will walk you through what you need to put on the tax forms if you do your contribution for the previous year in the next year. So if you're making contributions for 2019 in May of 2020, then you'll want to fill that out according to that late contribution to the backdoor Roth IRA tutorial. And if you need help with TurboTax, one of my favorite backdoor Roth IRA TurboTax tutorials is done by the finance buff Harry Sitt, who spoke at the White Coat Investor Conference last March. So check that out too. And if you're still stuck. We've got a bunch of recommended tax folks on the site. Just go to whitecoatinvestor.com look at the recommended tab and go down to tax strategists. Those guys will help you sort out your taxes. All right, let's take our next question from Gene, who is a relatively fortunate resident.

Hello Dr. Dali. First of all, I just wanted to thank you for all that you do and the tremendous resource you've offered to all of us working towards and learning how to effectively don our white coat. Many, many thanks. I'm a fresh internal medicine intern trying to determine how best to allocate my income over the course of residency. I have a Roth IRA and will be enrolled in a 457 plan through my employer and will have the option of enrolling into a 403 plan as well with matching contributions. The 457 plan is attractive as it's essentially free money. My employer will contribute 3% of my gross income per year into the plan regardless of my own contribution. Additionally, I have an old 403 plan from an employer predating medical school. I was initially planning to roll this over into my new 403 plan offered with my new employer. This seems like the simplest solution to ensuring the money I've previously invested continues to grow with matching contributions, but I'm unsure if there's a more efficient option I have not considered. For example, even if I incur taxes on the rolling over of this 403 into my Roth, would I not have greater overall growth potential in the Roth compared to rolling this over into another 403? Thank you.

Okay, so what should you do? Your money in residency? Well, if they're going to give you 457 money, obviously take that. If they're going to give you a match, make sure you're putting enough in the 403 to get the match. That's basically part of your salary. You don't want to leave part of your salary on the table, so make sure you get that match. It's generally great to roll your old 403 into your new 403 unless you have the money to convert it to a Roth ira. That can be a great move as well, especially when you're in a low tax year like you often are in during residency. Bear in mind though, that a Roth conversion will increase your income and thus your income driven repayment program payments, and possibly decrease any subsidy you might get under the repay program and any future forgiveness you might get, such as that available through public Service loan forgiveness. But in general a low income year is a great time to do a Roth conversion. All right, let's take a question from a serviceman. This is Justin in Germany.

Hello Dr. Dali. Thanks for all that you do. My name is Justin. I am a family medicine active duty physician in Germany. I wanted to go over my financial plan with you after reviewing your article as well as the physician on fire's article about your respective asset allocations. My current I have written a financial plan currently since I'm just a few years outside of residency, I decided to do a more aggressive plan. And I'm also in the military so I'm low paying. So currently I have a Roth TSP and I'm with a blended retirement system. So I have 70% in the C common fund as well as 30 in the S fund. The small cap fund with the blended retirement system match also with my asset total asset allocation. Since I'm in my 30s, I decided not to go with bonds until I'm in my 40s. But I wanted to do an 80% stock which is split up between 50% total VTSAX or equivalent 15% small value and 15% international and then eventually 20% into real estate with half being REITs and half being syndications once I'm an accredited investor. A couple questions for you. Does that seem like original plan and second question with the REITs, would you recommend putting those into the Roth IRA given their tax drag? Thank you for your time.

Okay, that's a lot of stuff that just went by you there. I know when I listened to this speak pipe I had to listen to it three or four times to actually figure out what was going on. But it sounds like Justin is a family medicine doc in Germany looking for feedback on his asset allocation. He's currently got 70% of his TSP which is the government 401k funds in the C fund which is basically an S&P 500 index fund. And he's got 30% in the S fund which is basically an extended market index fund. You know, it's the rest of total stock market. So basically he's got it all in total stock market. His planning to add bonds in his 40s. I think that's reasonable. I think you really need to watch your own risk tolerance to make sure you're not going to panic sell. But certainly if you don't need money for 30 years, it's not crazy crazy to have none of it in bonds. But you know, as you get into your 40s, I think it's Wise to probably start adding some bonds or at least some less risky investments to the mix. He's talking about going to 80% stock and 20% real estate. For now. I think that's a reasonable mix. You could probably reverse those numbers and I would still think it was a reasonable mix. You know, 80% real estate and 20% bonds. If you're really into real estate, the key is to pick something reasonable and stick with it so that whenever that investment has its day in the sun, you're still invested in it. But it sounds like his desired asset allocation, at least until he adds bonds, is 50% in total stock market, 15% in small value, 15% in international, 10% in REITs, and 10% in private investments is a reasonable. Sure, sure, it's a reasonable asset allocation. It's a pretty good tilt, though. So you really need to make sure you are committed to both holding small value stocks and REITs in the long run. Remember, over the last decade, a decision to do that has not paid off. You would have been better off in large growth stocks because large growth stocks have outperformed small value stocks over the last decade. But in the long run, the data suggests that the riskier small and the riskier value stocks do pay a premium. You earn more money in them in the long run. But bear in mind that that data is not, you know, this isn't physics, it's finance. And there's not nearly as much data in finance as there is in physics. Your international tilt is fairly small, in my opinion. I wonder if some of that is performance chasing. For instance, Vanguard is trying to look into their crystal ball and predict returns for the next decade, and they're suggesting that they think international stocks are going to make 9.5% to 6.5% for US stocks, and that's worth about what you paid for it. Obviously, they don't know any more than you do what's going to do well in the future. But there is this idea that the pendulum swings back and forth between these two, and domestic stocks have certainly outperformed international stocks over the last 10 years. It would not surprise me one bit to see international stocks now outperform domestic stocks over the next 10 years. So I don't know. It feels like a 15% tilt to international. It feels pretty small to me. I might bump that up a little bit, but otherwise I think it's a reasonable asset allocation. You're asking, where should your REITs go? They should probably go on the Roth IRA. Obviously they're not an available asset class. In the TSP, you may not have a taxable account. They're not a very tax efficient asset class anyway. So that, what does that leave? That leaves the Roth IRA and that's where my REITs are. They're still in my Vanguard Roth IRA. They've been there for, shoot, 15 years. I just haven't had any other place that I really could put them. Okay, let's take our next question. This one comes from Anthony.

Hey, Dr. Dalle, this is Anthony with a question about asset allocation. In my own portfolio, I've always tried to model the three fund portfolio to an extent, roughly, and I like to keep it simple. And I've always tried to stick to my desired asset allocation. And I was recently going through my portfolio and I realized what a tiny percentage I have in small cap stocks. I know some people prefer to have a small value till. And this got me thinking too. Is it a problem that I'm so overweighted in large cap stocks? If I wanted to have some kind of small value tilt, would it just be as simple as selling a portion of the total stock market index that I have in my Roth IRA and buying, you know, a smaller percentage of a small cap index? Any thoughts you have would be greatly appreciated and thanks for all that you do.

All right, so Anthony's basically asking, should I add small caps to my three fund portfolio? Well, it certainly hasn't been a problem lately to not have small caps in your portfolio. Large cap stocks or big stocks have outperformed small stocks over the last decade or so. But yes, you could certainly add a small cap tilt by swapping some total stock market for a small cap index fund that would achieve your goal. Historically, there has been a premium for small stocks, meaning you got paid more, they earned more over the long run. But of the factor premiums out there, like value size and momentum, small or the size of the company is generally recognized as the weakest or the smallest of the premiums. It's the worst of the factors. Yes, it's still a factor, but it has the smallest benefit. The academics would tell you if you're only going to add one tilt, add a value tilt to your portfolio. You can get both a small and a value tilt with just the addition of one more fund to your portfolio. You just add a small value fund instead of a straightforward small cap index fund. All right, let's take our last question from Richard. I think it's a really good one. Good morning.

Appreciate all of your hard work. I recently sold my practice and moved from South Carolina after practicing for 30 years, I did a large real estate deal prior to leaving and received a large state and federal historic preservation tax credit. My question is how to sell my greater than $160,000 state tax credit it as I will no longer be earning any income in South Carolina. Many thanks.

Okay, so this is interesting. A lot of you may not be aware, but there are tax credits out there, both state and federal, primarily state, that can actually be bought and sold. Right. These are transferable tax credits. And so there's a few brokers out there who for a fee, will sell these sorts of things at a discount. Of course. That discounts about 10 cents on the dollar to willing buyers. So I don't have a recommended broker for this. I just haven't had enough white coat investors ask me for this particular service. We haven't gone out and found somebody that we tried to vet who does a good job with this. But if you do a quick Google search of tax credit brokers, you'll bring up some names. I'd call up two or three of them and go with the one that seems the least slimy. You know, you get into this field and sometimes things can be a little bit interesting. You know, it's a little bit like the conservation credits that you've been seeing go around from time to time where people are using these, this technique of buying a property, deciding it's worth more than what they paid for it, transferring it to a charity basically, or dedicating it to conservation, and then ending up with a tax credit that's bigger than your cost of buying the property in the first place. And there's a lot of gray there. You need to really make sure you're working with somebody reputable and not being crazy on how large of a tax credit you're taking for it. I estimate that 80% of doctors need, want and should use a financial advisor and or an investment manager. Some investment gurus, such as Dr. William Bernstein, think my estimate is way too low. At any rate, if you want to use an advisor temporarily or for your entire life, there's no reason to feel guilty about it. Just make sure you are getting good advice at a fair price. If you need help updating your financial plan or just getting one in place, check out our list of recommended financial advisors@whitecoatinvestor.com financial advisors. You can do this and the white coat investor can help. Be sure also to check out those white coat investor courses, especially if you have some CME money you need to use up pronto. That can be a great option for you. You can find those@whitecoatinvestor.com underneath the courses menu. Thanks to those of you who have left us a five star review. Remember, positive feedback goes on the five star reviews and negative feedback comes to me by email. Thanks Also for those of you who told your friends about the podcast, keep your head up and your shoulders back. You've got this and we can help stay safe out there. 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.