WCI #187: How Much Should You Put in a Roth?

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 187. How much should you have in Roth accounts? Welcome back to the podcast. We're recording this on the 23rd of November just before Thanksgiving. It's going to run on the 3rd of December. So for those of you out there in Covid land, thanks for what you do. I know our ICU is full. We've got an extra one built up that's full and occasionally we're boarding patients in the er, which we almost never do in our shop. So I know you're all seeing it and doing what you can to stay healthy. Those of you who are doing the right thing are starting to get really sick of seeing people not doing the right thing, public health wise. It's amazing to go through my Twitter feed and see how mad people are getting about it. You know, this is one of the things in America, you know, you got the freedom to make bad decisions. It's a lot like what we've been dealing with for years and years and years, right? We've got people that still smoke, still do drugs, still don't exercise, still eat too much, still don't do any preventive health and there's sometimes not much we can do about it other than keep taking care of them as best we can. However, usually their choices don't affect our health and the health of other patients as well. So it's a little bit different this time, you know, and a lot of us are kind of getting sick of our western culture, if you will. When we look around at other countries who are doing an awesome job, everybody's wearing masks and they stamp it out and have very little disease burden, it seems. But you know what, there are plus sides too to that culture. I mean, look at where all the vaccines are coming out of, for instance. So upsides and downsides everywhere you go. Stay safe, it's just a few weeks more. They're talking about starting vaccination for healthcare workers on the 11th of December now. So stay safe, just a few weeks more and hopefully the cases will start dropping, the healthcare workers will be protected and we'll get through this together. If you're finding our podcast informative and helpful, we would encourage you to sign up for our monthly newsletter. It is totally free and includes useful, actionable information not available on the regular blog posts or this podcast. It's almost like being in a secret club. The kind of club that can boost your knowledge and enhance your wealth at the same time, with no strings attached. Sign up today@whitecoatinvestor.com newsletter. You can do this and the White Coat Investor can help. All right, let's do a few corrections to start with today I got this email. I listened to the latest podcast this morning. You had mentioned that you believe that you can't roll over a Simple ira into a 401 until two years from the last contribution to the Simple IRA. I always thought it was two years from the first contribution. This would change things for me since I thought I could roll it over this January. The writer is correct. You can roll over a Simple IRA once it's been two years from the first contribution, not the last contribution. So that's good for those who need to do that. I'm not a big fan of simple IRAs, but sometimes it is the plan that makes sense for a particular practice or business. All right, another correction I've got actually comes in from a fellow by the name of Galen Nuttall, cfp, an advisor who actually says I'm an expert on cross border financial planning and Canadian planning because I've had to do it myself. My dad's a doctor, so when I became a financial planner naturally I was attracted to helping doctors take control of their finances, not worry how they were going to retire. And he said your program was a great in depth analysis of Canadian retirement programs. A few things to note. Having a tfsa, that's the tax free account, right? That's like the Roth IRA is not dependent upon earning an income. Someone was 18 when the TFSA was started. Even if they haven't worked, they still have the room in there to do catch up contributions. He also notes that TFSAs don't make sense for dual citizens. Unfortunately it doesn't make sense for him to use one because he'd have to pay taxes on the growth because he's a US citizen. He said the RESPs, which are like their 529s, they're the kids education funds are similar. Mine is in my wife's name because she's a Canadian. If it were in my name I would lose lots of the benefits. It sounds like he says there's a lot of differences with estate planning up there as well. He says it's not uncommon to see someone lose 50% of their estate to 10 taxes. For example, the RRSP all comes out as taxable income in the final year of the last surviving spouse. So no stretch IRAs in Canada, apparently. He says also that TFSAs actually make next to no sense for incorporated Canadian physicians because there's no tax credit for putting money in there. He says, I've run the number six ways to Sunday and it rarely makes sense. All right, let's take a question off the speak pipe. This is a really good one. Comes from Denny. Let's take a listen. Hi Daddy.

Dali, got a quick question about Roth versus pre tax assets. Is there a percentage of Roth assets.

You recommend having when you retire?

Would you say roughly 20%? From my simple search, Majority recommends investing in pre tax retirement accounts at the moment simply in hopes of being in a lower tax bracket when you retire. I really appreciate your guidance on this and again, thank you for everything that you do.

All right, so is there a percentage of Roth assets that you recommend when you retire? I get this question a lot. A lot of people are like, there must be an optimal mix. It's 23% Roth and 17% tax deferred and the rest taxable or something like that. No, there really isn't an optimal mix. And even if there was, it probably wouldn't be worth the cost to get there. The general rule, and it's only a general rule because there are exceptions, is to use pre tax contributions as much as you can during your peak earnings years and post tax for all your other years. Years you're in med school, years you're in residency, the year you come out of residency. In a year you take a sabbatical or a lot of paternity or maternity leave or early retirement when you've cut back. Those are all good years for Roth contributions. Super savers are one of those exceptions. You know, if you are going to have this $10 million IRA later in your life, you probably want to put a little bit more of that into Roth than you otherwise would. But for most people, whatever this works out to be is what you're going to get. But the one rule that I think is pretty close to being a rule is when you have an option to use a retirement account versus a taxable account, you're usually going to be better off in the retirement account. And even if you think taxes are going up or whatever, you can always do a Roth conversion of that retirement account and have tax free withdrawals later. But there's lots of ways to get more Roth money into your account. For example, you can contribute To a Roth IRA or Roth 403 during residency, you can do Roth conversions. In med school, if you're a non traditional student, you can take that money that you brought into med school, do a Roth conversion of it during medical school when you leave residency, anything you made that was a tax deferred contribution, you can do a Roth conversion when you leave, you can do backdoor Roth IRAs throughout your career. Some of you have retirement plans that allow you to do a mega backdoor Roth ira, which is essentially putting in after tax contributions into your 401k to get you up to that 57, or in 20, 21, $58,000 per year, and then taking it out and immediately converting it to a Roth, you can do Roth 401k contributions. Your 457 might also have a Roth option. And of course, a lot of people, between the time when they retire and the time they start taking Social Security at age 70, do a number of Roth conversions there at a relatively low tax rate. All of that's going your Roth to tax deferred ratio. And of course, most people try to spend the Roth money last. And that also has the effect of increasing the ratio. Of course, There are no RMDs required on Roth IRAs. There are on Roth 401s, but you can just always roll that money into a Roth IRA. And so, of course, if you have to take RMDs out of a tax deferred account, but not a Roth account, again, that increases your ratio later in life. And that's usually a good thing for your heirs, because your heirs would much prefer to inherit a Roth ira, if for no other reason than the fact that you can easily stretch that out a full 10 years, pull the money all out at once and not have to play any tax games with it because it comes out tax free. So lots of good ways to get more Roth money in there. When it makes sense, do Roth conversions or do Roth contributions. When it doesn't make sense, don't do them. But don't aim for some arbitrary percentage that you got to have 20% in Roth or something like that. If you can get 20%, that's great. But you know what? 40% might be right for you too. So it just varies. So keep that in mind. All right, our next question comes from Trent from Arizona. Let's take a listen.

Hi, this is Trent. I'm a resident in Arizona. I had a question about something that I came across last week and I've never heard of before. It's in regards to 401ks and 403bs. There's an IRS rule about annual compensation limits that's noted to be $285,000 for 2020. I read a couple of IRS explanations online and I did some Googling, but I still don't really understand what it means. As a resident, this doesn't apply to my current financial situation, but I was wondering if you could give an explanation what this rule really means in plain English. Can you also give an example of when it would apply? Thanks so much.

Okay, I like this question. This is a figure that gets thrown around out there all the time. It's the maximum compensation that can be used to calculate how much goes into your retirement accounts. And it's right now it's in the 285 to $290,000 limit. It goes up each year with inflation. But basically that's what it comes down to. And what is that limit, really? That limit is $58,000 times five. That's what it is. And so it works out to be $290,000 starting in 2021 and $5,000 less in 2020. And that's all it comes down to. And the reason why it comes down to that is basically you got to be able to put in 20% of what your earned income is in order to max out that $58,000 contribution. So it's not something you have to spend a lot of time worrying about. There really is no big benefit to paying yourself a salary bigger than that if you can justify having a salary lower. This is for those who are doing S corporations so they can split their income between salary and distributions. Ideally, there's no real point to getting your salary much higher than this. As far as trying to get more money into a retirement account, you're just ending up paying more in Medicare taxes by doing that. So I suppose that's one way that you could take a look at it. The exception, of course, is the 199A distribution. If you need to get more money into your payroll in order to not be limited by that 50% of payroll limitation on the 199A deduction, then you might want to pay yourself a little bit more salary. That's why I pay myself more salary here at the White Coat Investor. But, you know, we have a pretty specific reason to do that. That doesn't necessarily apply to most physicians. All right, let's do our quote of the day. This one comes from Phil DeMuth, who spoke in as part of the CFE 2020 course that we have here at the White Coat Investor. He said people benchmark their spending by their shoulders. When your peers are living beyond their means, as yours almost certainly are, this creates a dangerous feedback loop. So be very careful adjusting your spending according to what the people around you are doing with their spending. All right, let's take a question from Hawaii.

This is Dr. N. Dr. Dalley, thank you for all your work with the White Coat Investor. My financial situation is so much better after listening and learning from you. My question has to do with paying off a mortgage. We're currently debt free except for the mortgage on our primary home. It's worth about 1.1 million and we owe about 700,000. Our combined income is 400,000 and we save around 30%. This savings includes all of our retirement accounts, backdoor Roths, and then a taxable investment account for the remainder. We're in the military and we'll likely move in two years, and at that point we'll have owned the place for six years. The problem is that there's a lot of what ifs. We might not move in two years or we might move and then come back here in two years. And the point is, I don't know yet if we will sell or rent the place when we move. Either way, we're almost certainly not going to be able to pay it off quickly. So the question is, is there any benefit to making extra payments on a mortgage if there's almost no chance of paying it off and most likely the property will be sold in the next few years? I know one argument is if you don't use the extra money to pay down the mortgage, you might just spend it. But we're actually pretty disciplined in that respect. The extra money would either go to the mortgage or it would go to the taxable account. Thank you for your advice.

So this is a question we hear a lot about from military people. They've got a expensive Hawaiian home, right? $1.1 million house, $750,000 mortgage. They're making $400,000 and saving a whole bunch of it. So good job there in the military. Thank you for your service. Great military income, by the way. That's far more money than I was making when I was in the military. So you're doing something right. As far as the house goes, I probably wouldn't keep it as an investment. I really am not a big fan of owning rental properties in other states. When you're owning them directly and you can't drive by and check on them, everything gets more expensive. And I can't imagine how much more expensive it is when you are located in Guam and the house is in Hawaii, or you are located in Florida or England and the house is in Hawaii. Right. I mean this is just a massive, massive hassle. I'm not sure why military people think this is a good idea. I'm not sure who's passing it around that you should buy a house every two years and have rental properties in 12 different basis. I don't think it's a great plan. I think you're probably better off most of the time not even buying until you get out of the military. And that's fine. It's okay to rent. You can rent houses, but you're just unlikely to come out ahead when you're moving every two or three or four years throughout your career. It's very interesting. I talked to my father in law who spent 26 years in the military, right. And he thinks he only made money on one or two of those houses. All the other ones that he had from all those duty stations, they didn't work out. Some of me rented, some of me didn't. But it was not like some huge way to make tons of money. I don't know who's telling military people that. So I'd quit buying until you get out. But that's not what the question is. Now I've answered the question. Maybe you should have asked but didn't ask. Let's answer the question you actually asked. Should you make extra payments? Well, here's the deal. As long as it doesn't cause you a cash flow issue, it's basically just a fixed rate investment. It's going to give you a guaranteed return at your effective after tax interest rate. So if the mortgage is at 4% and you pay, you know, your marginal tax rate is 25%. Well, really you're getting a 3% investment by paying that mortgage down. If that's attractive, pay it off. If it's not attractive and you have better use for your money, you know, you got 8% student loans or something, put the money there. But when you sell the house, you get the money back. It's not like it's locked in the house forever. If you don't sell, more of each payment that you make goes toward principal instead of interest. So that's a good thing too. This is not something that you have to do one way or the other. You can do it either way. Both are reasonable things to do if you want to deleverage your life a little bit. If a fixed 2 or 3% return is attractive to you at this point in your life, then go ahead and pay it down. If it's not, that's okay to use that money to max out your retirement accounts or even invest in other real estate or investors mutual funds. All right, let's take another question, this time from a Philadelphia anesthesiologist.

Hi Dr. Dali, thank you for all that you do. I am a new attending anesthesiologist who found myself fortunate to be working in a group that is quite generous with vacation time. I have 10 weeks off in 2020 and I project that I will have the same or more next year. Since my husband is out of work due to Covid and we can't travel very far or fly, I have been looking for locum opportunities within driving distance from where we live in Philadelph. My husband and our puppy will come with me wherever I go and we plan on making it an adventure. I'm calling because I still value my free time and I keep thinking about where is the balance between the financial benefit of locums and giving up my time off. To answer this somewhat personal question, I need your help in laying out how and how much I can shelter my 1099 locum income from taxes. I make about 430,000 in W2 and 30,000 bonus every April that I am projected to receive. My husband and I have no other income. I maxed out my 401k which previously was matched at 4% but currently is postponed since July due to Covid. I also have a Roth IRA, a taxable and a 403B with Vanguard and a taxable account with financial advisor that I plan to fire. After going through your fire your financial advisor course, I would really appreciate you sharing your financial knowledge and any sage advice you can give me. Thank you.

Okay, interesting question. Is it worth giving up more free time to get more income? And I found it interesting that you thought this was somehow connected to how much of that income you could shelter from taxes. As a general rule, when you make more money, you're going to have more money. There are very few rare places in the tax code where that isn't true. Yes, you'll lose some of that money to taxes. Yes, as you make more money, you lose more of it to taxes. That's just the way your marginal tax rates work. You can't shelter that income from additional payroll taxes. And if you are for some reason, you're not. But if you are below the limit for the Social Security wage limit, then that can be a lot of payroll taxes. If you're still paying both halves of Social Security income on your moonlighting income. I fell into that when I was in the military. It was amazing. I think I was had a marginal tax rate of like 5, 45% on an income of like $70,000. It was bizarre. But that was, that was the way it was. But basically, here's the story, right? If you go get another job, you've already maxed out your 401k, your W2 job, you can go get another job, you can use an individual 401k and basically put 20% of what you make into it. So that shelters 20% of the income that you make. So that's a nice little benefit. I would certainly do it. If you're going to moonlight, should that be the thing that makes you decide whether to moonlight or not? Probably not. You should look at your financial goals and see if you need more money to reach them or not. On an income, I think you said $460,000. You probably don't need additional income. At that level of income, you probably start looking around wondering if you need a few more trips in your life or a few more days off with the kids or partner or whatever. Naturally, there are some other things you can do if you make more money, right? If only 20% is going to that individual 401k, there are other things you can do. You can go get a personal defined benefit cash balance plan and the fees on that are a little bit higher than an individual 401k, but it does give you another option for a tax deferred account. And of course you can always invest more in taxable. That usually means investing it into low cost, broadly diversified, very tax efficient index funds like a total stock market fund, a total international stock market fund. Maybe you invested into a muni bond fund. Remember, the interest on muni bonds comes out totally tax free. Other people like to invest in real estate and the nice thing about equity real estate is you can shelter some of that income using the depreciation from the property. So that can be pretty tax efficient as well. Especially if you never actually sell the property. Alright, let's take a question out of my email box. The writer says I think this would be a good question to address in podcast format. My mid size radiology group is starting a cash balance plan for 2021. I'm a younger member, 35 years old. I'll be able to put 86,000 pre tax into the cash balance plan next year and 58,000 into my 401k. Profit sharing. That's pretty impressive cash balance plan contribution for a 35 year old, but if that's what the actuaries are saying, I guess that's what they're saying. In the last podcast, while discussing asset allocation with your guest, you mentioned something in passing which I think you could explore more to the benefit of your followers. You said Every few years we seem to roll it over into our 401s for some IRS approved reason, this hit me like a truck driving to work. I've been pondering my exit plan from the cash balance plan whenever my group winds the plan down, as it will likely still be the youngest plan participant. My previous understanding was that I would be able to roll it over into an IRA and from there redirect money into my own chosen investments. It has left a slightly sour taste in my mouth that this would preclude me from doing backdoor Roth conversions due to the pro rata rule. I just assumed the tax arbitrage was probably worth it. How is it that you were rolling your cash balance plan money over into a 401k every few years? That sounds like the best thing since sliced bread. Well, that's just the way it works. If you close the plan, you can roll it anywhere you want. If your 401k takes rollovers of tax deferred money, you can roll the money in there. No big deal. Some people obviously roll it into an IRA. If you have some old 401, you could roll it in there. When we closed ours, I rolled mine into my military tsp. Absolutely. It's allowed now. You have to have a reason to close it. You can't just close it willy nilly. It has to be a reason that the IRS is okay with. You know, usually there's been some change in the business or you want a different plan and so you close that plan. You know there's but you can't just close it every year. But if you've had it open for three or four or five or 10 years, you can probably come up with an IRS approved reason to close the plan and roll that Money into your 401k, where your fees are a little lower and you have a little more control over the investment. Okay, so we have two special guests on the podcast. They've been here before. They should be no mystery to you. We have Dr. Letizia Alto and Dr. Kenji Azakur. Pronouncing that right.

That's right.

Every time I'm like, I'm going to get it wrong. I'm going to get it wrong.

Thanks for having us, Jim.

They are the designers and instructors in a course that is called Zero to Freedom. It basically will teach you how to be a direct real estate investor. They blog at Semi Retired md. They have a lot of email newsletters they send out there as well. But their goal is to help others find this particular path to freedom that they have enjoyed from medicine to basically real estate. So welcome back to the podcast.

Thank you.

Now, you guys have a sale going on right now. Can you tell us about what's coming up?

Sure. So yeah, we're selling our Zero to Freedom course, which is a course that really helps people start from knowing nothing about real estate investing to buying their own cash flowing rentals. And we actually sell this twice a year, maybe potentially three times a year next year. So it's really only in limited time because we like people to go through the course together with a community that's learning it. And we find that people are able to make most progress if they have people around them kind of keeping them accountable, keeping them motivated. And so that's why we run this as kind of a live course with live Q&As every single week.

So what is the course? Can you describe what the course is? I mean, it's how many hours of instruction, office hours, community stuff. What is the course?

Yeah, so as latey said, it's got a lot of live components to it, but it's also got some self learning online components as well. So it's a total of eight modules of online courses and we supplement that with really two major pieces. One is this online community where all the folks that are taking the course and their spouses are invited to participate. And it's a really amazing forum for people to ask questions, post deals and just kind of share their experiences as they kind of go through the course. And then the other major piece of it is live Q and A's where we do weekly live Q and A's where we spend a couple hours each week answering questions that come up about that week's modules.

All right, so tell us about this cohort from six months ago, what their experience was like, what their feedback is like, what their accomplishments have been since then. Give us some hope that we can think about as we're considering this course.

Yeah, that's a great question. Our students are amazing. So a majority are physicians. And so I think they're just used to learning and putting things into action right away. Right. Because they've gone through internship where they're learning and then they're Treating patients all the time.

So see one, do one, teach one, huh?

Exactly. Exactly. So actually we have a lot of students who will even put in offers during our course and then purchase properties. I remember we had one, one student who put in six offers at once and was just kind of like, you know what? I'm going to learn through the process. I'm going to just grow and be a better real estate investor. And so we have students who are taking a ton of action. We've had students who within three months bought 40 units. I actually just saw a post a couple days ago. So our students go into a membership site after the course and I saw a posted our membership site of somebody who took our last cohort. So that ran in June and they just signed for their 10th unit just now. And it was just like, it was great. Everyone's congratulating them. So with students doing long term rentals, which is a primary part of what we teach, but we have people doing short term rentals, going out and buying vacation homes that they're, that they're able to harvest a lot of tax savings even if they don't have this real estate professional status. And then we have students who are just leveraging money they have, but they didn't know they had like maybe a HELOC on their primary residence and going out and going big right from the beginning.

So if they sign up now, when does the course run? It's running in January, is that right?

Yeah. So really, actually as soon as you sign up and signups for the wait list starts on December 12, and as soon as you sign up, you actually get something called a pre course. So it's something that you can just get immediately started with. And we did that because, you know, the signup period is long. So somebody who signs up on day one doesn't have to wait to get started. They can just get started immediately. And so really the course is going to run eight weeks after that. The first module actually opens up on Christmas Day, December 25, and then eight weeks after or seven weeks after that is when the course runs.

Okay. So if they sign up right now, they get on the wait list, then they're eligible for the wait list sale, which happens the 12th and 13th of December. Right. And that's 300 bucks off. So you save some money. Also, if you sign up through the White Coat Investor links, we're throwing in a couple of freebies. The first one is a signed copy of the White Coat Investors Financial Bootcamp. And the second one is our online course, WCICON Park City, which is basically 13 hours of awesome financial literacy stuff, some from Jonathan Clements, Mike Piper, Bill Bernstein, et cetera. So we're throwing both of those in. If you sign up through our links, if you do it by the 13th, you get $300 off. But they have more time after that to sign up. When's the latest they can sign up?

December 20th.

December 20th. So the sale ends December 20th and then they gotta wait another four, six months, whatever, before this course opens again. So there's a ticking, ticking clock on this one. You've got to sign up by then, otherwise you got to wait. So if you're interested in doing this, if you are interested in transitioning toward real estate out of medicine or just out of having it be, you know, a side gig or just the way you invest your money, this course is for you. Any of those scenarios. Anything else they should know about the course?

Well, I think I wanted to kind of add. Build on what you just said, which is that, you know, we actually done polls on, on people why they, why they took our course. And the primary reason was, you know, given all the uncertainty out there, you know, they wanted to have an alternative income stream. And that was really the number one reason why people wanted to join the course is not that they wanted to necessarily quit, even quit medicine or it was more to supplement what they have to kind of add that extra layer of security. And of course you can invest in cash flowing rentals to semi retire like we have. But I think the majority of people were really looking for that additional income stream.

Yeah, especially in 2020.

Yeah, for sure.

All right, so that Link is@WhiteCoatinVestor.com rental. That's WhiteCoatinVestor.com Rental. You can sign up today and check it out and take the first step on your way to financial freedom. Thanks for being on the podcast.

Thanks, Jim.

Thank you.

Okay, let's take our next question off the speak pipe. This one's from Hasan and I really like this question. I think this one's a really interesting one. Let's take a listen.

Hi Dr. Dali, I love your work and I've recently completed your fhir year financial advisor course and I've come up with my initial financial plan. My question is about joint family household systems and how to become a millionaire in this kind of system. Currently I'm a medicine PGY3 going for palm crit next year, so I'll be a trainee for another three years. I live with my parents and my wife will be immigrating to the US next month to live with us. She won't be an earner for at least a few years. My dad runs an Airbnb business with two rental properties with combined pooled money together from all of us, including myself. And my sister was also a resident and my dad as well. And all of our bank accounts have our parents and our siblings names on them because of our Pakistani culture of sharing money and spending money as a family rather than individually. The problem here is trying to determine net worth. My goal is to become a millionaire by 40. I'm not sure what I can truly call mine or not. I have a Roth 403B and a Roth IRA with about 5k in total, which is probably the only asset I can truly call my own. With the real estate, it's unclear who's the true owner. The mortgage and deed on one rental property is on my name and the other is on LLC, of which I hold 25% of the shares along with my siblings. Is there a good way to be able to calculate my net worth when assets and liabilities are commingled in this way?

Okay, so this is fascinating. It sounds like this family is putting all of their names on all of the bank accounts and all of the properties that they own. It's definitely not the typical thing we do here in the US and certainly our tax and estate planning laws are not written with this sort of a scenario in mind. Now, there's a lot of really cool things that you can do when you do your financial planning together with the generation above you and or the generation below you. This is probably not the way to go about that though, because the U. S. Tax and estate planning laws and asset protection laws, they don't care about what your family culture is or what Pakistani culture is. They're very specific about who owns what and what that means. Now, you can obviously count your net worth any way you want. I just encourage you to be consistent about it year to year so you can kind of track your progress. And I would also caution you that if there are family disagreements, what this is going to come down to is really what the US Legal system says about ownership, not what Pakistani culture says. Obviously, your retirement accounts are yours. They can't be jointly named. They're always in your name, depending on the titling of the bank accounts and properties. And it sounds like they all have multiple owners. That means any one person whose name is on it can go in and clean it out at any time and put it into their own account with just their name on it. So in reality, you kind of own part of those accounts, you kind of own all of those accounts, and you kind of own none of those accounts and properties. They're also likely to be accessible to all of your creditors. So if I were your family and I own something jointly with you, who's about to come out of residency and have significantly more liability risk than most people in this country, I might want to do something about that. Because if, you know, it's admittedly rare, but if you get sued successfully above policy limits, they could take away all those houses and all those bank accounts from all of your family. So I think you've got to be pretty careful about that. It's not like you can do tenants by the entirety with your, with your father or your sister either. You can only do that with your spouse, and that's assuming you can actually do it in your state at all. So I think you got to be pretty careful about this. The other thing you got to watch out for, when you own a home with your parent and that parent dies, the house just kind of goes to you, but your basis is what your parent paid for it. Whereas if your parent owned the property and then died and left it to you in the will, you would get a step up in basis what it was worth on the day they die. That's much, much better from a tax perspective. And so you're losing those sorts of benefits when you title all these things in your own in everybody's name. So most US based financial advisors, estate planning attorneys, asset protection attorneys, etc, are not going to recommend what you guys are currently doing. I think there's a lot of good ways that you can work together as multiple generations and accomplish the goals you want want to do. But I think you're going to need some different structures than what you're doing now. So I would encourage you guys to go in and meet with an estate planning attorney, meet with, you know, a real estate attorney in your state, meet with a financial advisor and figure out the best ways for this to actually work out. And if that's not something your family is willing to do and you're interested in building wealth, I think you could probably need some accounts on the side at a minimum that are just in your name. So I'll let you work that out with your family. Maybe you'll need a family therapist to work through all of it. I don't know. I'm not as familiar with the culture as you are, obviously, but I think there's some real red flags in what you're doing right now, that is probably going to cause some problems down the road. All right, our next question comes from Sundar. Let's take a listen.

I recently discovered Acre Trader from an ad and I'm feeling pretty enthusiastic about it. It sounds like a great way to have some diversification in my long term investments as I believe farmland can be uncorrelated with the stock markets. I saw a couple of blog posts on WCI and Physician on Fire and so far the reviews seem positive. However, I thought I'd take a step back from the euphoria and ask whether I'm better off just investing in REIT ETFs. Thank you very much for all the work that you have done on your websites, blog post and podcast. I am immensely grateful.

Okay, Acre Trader. Acre Trader is one of our sponsors here at the White Coat Investor. We'll put our affiliate link in the show notes. Obviously, if you invest with them through our links, we get some marketing fees and they're basically an investing platform. They make it easy to buy shares of farmland and then earn passive income. Only takes a few minutes to buy them. Their claim is that farmland has really outperformed most asset classes, has very little correlation with the stock market, and honestly with a lot of parts of the real estate market, it's even had some positive returns during economic downturns. That doesn't mean it'll always do well, right? Farmland, like anything else, can have a period of very poor returns. But Acre Trader makes it pretty easy to invest in farmland. So if that's something you want to do and you want to do it passively, you want to be pretty hands off with it and you want to, you know, be able to do it in other locations or whatever that you're not going to be able to drive, drive by and take a look at all the time. Yeah, acortrader is a great option, but that's not your question. Your question is should I do that or just use a real estate investment trust exchange traded fund like a Vanguard REIT index fund? The question really comes down to you and what you want out of the real estate in your portfolio. If you want to have a little bit more control and be able to pick the investments and really want to, you know, have a big chunk in farmland, I think this is a good option. If you want to set it and forget it portfolio, you don't have to think about that. You can just rebalance once a year. You know, that's very, very diversified. That's very low cost. You know, the REIT Index fund is a very good choice. I own the REIT index fund. It's 5% part of my portfolio, and I've owned it for many, many years. And you know what? It got whacked pretty bad in 2008, but if you held on, it's had pretty good returns since and more than made up for it. So I think it's a good investment. But I also own some privately traded real estate, you know, syndications, private funds. I like the fact that that depreciation gets passed down to me. I like the fact that I have access to some asset classes that are a little bit harder to get. You know, like these private loans that are given to developers. It's not unusual for these to be paying 6 or 8 or 10 or 12% a year to loan money that's backed by a real asset. And so, you know, I think there's some, some value there. But what you want to do with your real estate portfolio really comes down to you and where you find yourself on that spectrum of real estate. From the people who buy the house down the street and rent it out and manage it themselves to the people who don't want to do anything other than rebalance their portfolio once a year. You know, everybody else is somewhere in between. The REIT index fund is way out here on this side with the people that don't want to do much and want maximum diversification, maximum liquidity. Acre Trader is obviously somewhere in the middle. All right, let's take another question. This one comes from Kevin from the East Coast.

Hey, Jimmy. Has anyone ever called you Jimmy? This is Kevin from the east coast in all serious. Thanks for all you do. I have a question regarding over contributing to an hsa. My wife and I plan to use the account as a retirement account and cash flow our healthcare expenses. My question is, for the first half of the year, we were both covered under a joint account by my employer, which we maxed out. Then my wife got a new job, so she now uses her own HSA with a new employer. Her new employer generously made a contribution, which is great. However, it pushes us over the max. So how the heck do we remedy this situation? Thank you again for all you do. Have a great day.

All right, Kevin. No, nobody calls me Jimmy. Not if they want to have any help from me anyway. So my sister would laugh pretty loudly at that because she knows that nobody calls me Jimmy or they might get get punched in the nose. We actually do have a Jimmy around here, though. Dr. James Turner @ the Physician Philosopher goes by Jimmy So most of the time when we're talking about Jimmy around here, that's who we're talking about. All right, let's talk about your over contribution to your hsa. You know, you would think that because a family for an HSA is defined as a parent and either a child or a spouse, that you could somehow work this so that you could have two HSA limits. Right? You put each kid with one spouse and now you have two families. Right. So you should be able to do two contributions. Well, the IRS is on to you. They don't let you do that. You know, they've got this set up such that you only get the family contribution even if you guys have two HSAs. Basically, the IRS gives married couples two options. Three options. You can split the family contribution evenly between the spouses, you can put it all in one spouse's account, or you can allocate it unevenly as long as it's a division that both parties agree on. Now, if you're married and living together, you're probably going to agree on it. If you're divorced or separated, maybe you don't agree quite so much. So you got to keep in mind there might be some issues with that, deciding who gets to claim the kid for the hsa. Right. But in any case, the IRS treats married couples as a single tax unit. So they share one family HSA contribution limit. In 2021, that's $7,200. But in cases where both spouse have spouses have self only coverage, they can each contribute up to 3,600 a year in separate accounts. That's the 2021 limit. So why would someone bother having two HSAs if you don't get any bigger of a contribution? Well, there's a couple of reasons. Obviously it's a little more burdensome, so you want to have a good reason to do it. If you're both over. If one or both of you are over 55, you can be eligible to add $1,000 in catch up contributions. So if you're all in one account, you only get $1,000 catch up contribution. If you have two accounts, you each get $1,000 catch up Contribution. So that's pretty cool benefit. And you also might have an employer that contributes to the hsa, which can help increase your overall savings as well. So those are the only really two reasons to have two separate HSAs, to either get that employer match or to take advantage of catch up contributions. But for most people that's not an issue and they just use one hsa. So what should you do about an excess contribution? Well, you got to get it out of there or else you'll pay end up paying a 6% excise tax. You just have to have it out before the tax deadline for the year. So for most people that's April 15th, so I'd get it out there as soon as you can. Just call up the HSA people, tell them you made an excess contribution, fill out whatever form they want you to fill out, and you're done. Okay, let's take our next question from Sam Shelby on the podcast or on the Speak Pipe. And if you want to leave us a Speak Pipe question, you can do this too. It's whitecoatinvestor.com speakpipe and you can record a question of up to a minute and a half. Don't feel like you have to use the whole time, but you can record up to a minute and a half and we'll get it answered on the podcast.

Hi Jim, thanks for everything you do. I was going to make a comment that this may be a particularly good year to make a backdoor Roth conversion. Given that the CARES act allows for the 10% penalty to be waived for those making an early withdrawal, this may give some investors a little bit more reassurance that even if they make a mistake here or there, they may not get hit with the next trip tax penalty.

All right, Sam, that wasn't a question, that was a suggestion. Yeah, it might be a good year to do a backdoor Roth ira. It usually is a good year to do a backdoor Roth ira, no matter what Congress is doing with the CARES Act. You know, the CARES act does allow for a penalty free early withdrawal in 2020 of up to $100,000. That's true. But just don't screw up your Roth IRA. Your backdoor Roth IRA is not that hard. You can do it. You know, you basically put money into a traditional IRA, $6,000 a year, $7,000 if you're 50 plus you can do a separate one for your spouse and then move it the next day over to a Roth ira. The only thing people really screw up routinely is the pro rata issue. So you don't want to screw that up. That just means to avoid that, all you got to do is by the end of the year in which you do the conversion, you have to have a balance of $0 in your traditional IRA, SEP IRA, SIMPLE IRA, etc. And it's not that hard to do. You can roll it into your 401k if it's just Small, you can just pay the taxes and convert it to a Roth IRA as well. But that's the main screw up people do. And, and this CARES act provision isn't going to help with that. So yeah, I think you guys ought to be doing backdoor Roths whenever possible. But I don't know that this really gives you, you know, a much better reason to do it this year than otherwise. All right, our next question comes from Colton from Utah.

Hi Dr. Dali, this is Colton from Utah and just have a question. My wife is a recently graduated PA and I will soon graduate from dental school. We both have a Roth ira. One at Vanguard and one at Fidelity. And she has through her work, a 401k at Schwab. In our Roth IRAs, we are both 100% total market index. And the Schwab 401k has a mixture of 60% total market, 20% total international, and 20% bonds. We are both 27 years old. My question is how do you balance your portfolio between several different accounts? Would you consider a three fund portfolio and having one different fund in each of those or would you try to shoot for a three fund portfolio in all of those accounts? Thank you so much for all you do.

All right, first of all, Colton, thanks for reviewing the book. Colton's one of our new white coat investor book reviewers. So we've got a book coming out aimed at students. It should be out soon. And I appreciate your help reviewing that, Colton. So here's a question. How do you rebalance your portfolio between accounts? Do you put the same asset allocation in every account or do you spread it around? Well, I spread it around. And the reason why is that some accounts have better investing options than others. For example, I think in 1401 we've got our TIPS, another 401 we've got our nominal bonds. Still another 401 has got small value in it. I think my Roth IRA has got REITs in it. I think Katie's Roth IRA has small value in it. And then in our taxable account, which is now our biggest account, we've got total and stock market index, Total international stock market index. We've got all of our private real estate in taxable. We've got, now we're starting to put small value into taxable. Our entire small international is now intaxable. And so we're slowly, as our ratio of taxable to tax protected accounts grows, we're slowly having to move asset classes out of tax protected accounts into the taxable account. And so that if you're in that sort of a situation, obviously you want to take advantage of the savings you can get from asset location by having your really taxable tax inefficient assets, you know, like TIPS and real estate investment trusts, that sort of a thing in the retirement accounts and preferentially putting the tax efficient asset classes like a total international stock market fund or a total stock market fund or equity real estate or municipal bonds etc into taxable. And so I'm not a big fan of having the same asset allocation in every account because of those issues. I think you can build a better port portfolio by spreading it around. But I understand some people want to do it the easy way. And the easy way is to put the same asset allocation in every account. If you have a really easy asset allocation like a three fund portfolio, you can probably do that. The only change you might have to make is just use a muni bond fund in taxable instead of a total bond market fund. And it's not the end of the world if you want to do it that way. But I think it's a little bit slicker to do it in this way such that you are maximizing the use of all of those accounts as best you can. And it's not that hard to keep track of. You just build a little spreadsheet to do it. And as I've kind of said before, if you don't have the capability of using a spreadsheet, you might want to think twice about managing your investments yourself. It might be worth going to get a financial advisor. If you need help finding a good one. Go to the recommended tab@whitecoatinvestor.com we got a page there with some excellent financial advisors that can help you set up a plan. They can help manage your investments if you want them to. If you don't want to do it yourself, that's okay. Just make sure you're getting good advice at a fair price. But if you can build a spreadsheet, you can manage a portfolio. It's just not that hard to do. The math you're using is percentages and fractions and multiplication and addition and subtraction. It's certainly no calculus or trigonometry required to do it. All right, let's take our last question today. This one comes from Sherene from Florida.

Hi Jim. This is Shereen from Florida. After doing a lot of reading and research, I did a 10:35 exchange of my variable universal life insurance policy into a low cost variable annuity at Fidelity. The total cost for this annuity is 0.25% per year. My understanding is that the money will grow tax free until it reaches the cost basis. For reference, the cost basis is 360,000 and the current value is 275,000. I currently also invest $5,000 each month into a taxable account invested in low cost index funds. Since the money grows tax free in the annuity, but not in the taxable account, does it make more sense to contribute this monthly $5,000 into the annuity so it reaches cost basis sooner? Or should I contribute nothing to the annuity and let it grow on its own until it reaches the cost basis while continuing to contribute the 5,000 per month into the taxable account? Just wondering which option leads to me paying less taxes in the long run. Thank you for what you do. It's amazing and somewhat troubling to me that a year ago, although I was invested in index funds and was doing a backdoor Roth, I had actually never heard those words before. I am much more on top of things now and it feels great. Happy Thanksgiving to you and your family.

Well, Happy Thanksgiving to you too, Sherene. By the time you hear this, I think Thanksgiving will be over. But I appreciate those wishes because I heard them before the holiday. So. Well, what Sherene is doing here is exchanging the cash value in a variable universal life policy into a variable annuity. And the reason why people do this is because they want to get tax free growth back up to the basis. So essentially, she's put a bunch of money into this variable Universal Life Policy, $360,000. And the cash value in that policy is only $275,000. So there's a difference there. There's an $85,000 difference between those figures. So essentially what she can do is invest this money inside a variable annuity until it gains $85,000, and then she can surrender the variable annuity and walk away paying no taxes on any of that money that $360,000 she can have. And so that's the benefit. Whereas if she just took the cash value and invested in taxable, she would have to pay taxes on that $85,000 in gain. So this is all about trying to avoid the Capital gains on $85,000. But she has a question of, well, now that I have this variable annuity, should I maybe be putting more money into it? And the answer is probably no. Probably no. Will it get you back to your basis faster? Yeah, because not because of the contributions that adds to the basis, but the earnings on the contributions will get get you that $85,000 in gains faster. But the main issue with a variable annuity is once you have gains, once you're making money in this account, then they are taxed when you take the money out at ordinary income tax rates, they're not taxed at the lower qualified dividend rates, they are not taxed at the lower long term capital gains rates. You cannot tax loss, harvest these assets. You cannot, you know, donate your appreciated assets to charity and flush those capital gains out of the account. You can't do any of that. And so as a general rule, I'm not a big fan of investing inside a variable annuity. In some states you get a little bit of asset protection from it. But for the most part, the fact that you get tax protected growth year to year does not overcome the ability to use those lower qualified dividend long term capital gains rates. And the other benefits of investing in a taxable account. Now that's different from a Roth IRA. That's different from a 401K. Remember, with a 401K, you get a big tax break when the money goes in. With a Roth ira, it comes out totally tax free. So I'm not talking about retirement accounts, I'm talking about a variable annuity. You put money in a variable annuity, you don't get a tax break going in. You get tax protected growth and then you pay ordinary income taxes when the money comes out, at least on the gains. So that is not an awesome way to invest. For the most part, I would avoid a variable annuity unless you have a really good reason to use one like Sherene does, at least for the first $85,000 in gains. But in her case, I'd keep putting the $5,000 a month into a taxable account. When that variable annuity eventually gains $85,000, I'd surrender it and move that money into my taxable account too. And just be glad that, you know, Uncle Sam basically shared some of the losses from your bad decision to buy a cash value life insurance policy. All right, as we mentioned earlier in the podcast, if you want to buy that real estate course, it is available now. You can get on the wait list and be eligible for the wait list special price of 300 off if you go through our links in the show notes. Then you can also get access to our white Coat Investor Park City course as well as a signed copy of our financial boot camp book. So take a look at that if you're interested in doing direct real estate investing. If you're finding our podcasts informative and helpful, we would encourage you to sign up for our monthly newsletter. It is totally free and includes useful, actionable information not available on the regular blog posts or this podcast. It's almost like being in a secret club. The kind of club that can boost your knowledge and enhance your wealth at the same time with no strings attached. Sign up today@whitecoatinvestor.com newsletter. You can do this and the White Coat Investor can help. Thanks to those of you who have left us a five star review and those of you who tell your friends about the podcast. It really does help get the word out. I have a review here from Hugh Reman who said not enough words. I started listening to this podcast having minimal knowledge about investment stocks and managing money. Great resource for all the professionals to understand the importance of money and how to utilize it in the best possible way. Thanks to Dr. Dali. Five stars. Well, thank you for that five star review. I appreciate that. Keep your head up, shoulders back. You've got this. We can help. Stay safe out there. That vaccine's coming and we'll see you next time on the White Coat Investor Podcast. My dad, your host, Dr. Dali, is a practicing emergency physician, blogger, author and podcaster. He is not a licensed accountant, attorney or financial advisor.

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