WCI #232: Investing Q&A - The Dragon Portfolio, 457(b)s, 403(b)s And Individual Stocks

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 is your host, Dr. Jim Dahli. This is White Coat Investor podcast 232 investing Q&A, the Dragon portfolio, 457Bs, 403Bs and individual stocks. As a white coat, you have valuable knowledge. Various companies want that knowledge and they're willing to pay you for it. That's why we put together a list of recommendations for companies that pay you to take surveys. If you're looking for a profitable side gig for not too much effort, getting paid for surveys could be the perfect solution for you. You can make extra money, start a Solo 401 and use your medical knowledge to impact new products. One of the WCI columnists makes an extra $30,000 a year just doing these surveys. Sign up today and use a fraction of your downtime to make extra cash. Go to whitecoatinvestor.com mdsurveys you can do this and the White Coat Investor can help. Thanks so much for what you do out there. It's not an easy job and it sometimes doesn't even pay that well. It's amazing what I find many doctors are working for now. I'm all for you to negotiate the best possible job you can get. Sometimes that doesn't work for people. And and many of you, obviously half of you are working for less than the median salary in your specialty. And I want to tell you that I do appreciate what you're doing.

Okay.

It often means you're in academia, you're in the military, you're in some sort of public service position or you're juggling a lot of things at home and maybe you're working part time or avoiding as much call as maybe your peers have. Whatever the case may be. Thank you. Thank you so much. Especially the last couple of years when we've all been super burnt out on the COVID pandemic. It does look like it's getting better. Trends are looking good as I'm recording this on September 28th. The total number of cases have been trending down now for about 10 days. So I'm hoping that this is our last peak of coronavirus. I'm looking forward to going and getting my booster shot here pretty soon. Next few days probably, but it's been a long road. I know it's been hard and thanks for being there with me as we go through it. We have a special event coming up. You hopefully have already heard about it, but I want to tell you a little bit more about it. On February 9th through 12th, 2022, the white coat Investor community is going to get together both in person and virtually. We call this WCICON 22, but when we're talking to people that approve CME, we call it the Physician Wellness and Financial Literacy Conference. And it includes both of those components. We have a of wellness content. We are going to help you to overcome the burnout you've experienced in the last couple of years. We're going to help you maintain career longevity. We're going to help you make friends. You're going to form contacts and associations that are going to be lifelong associations at this conference. It's going to be a fantastic event. Not only are you going to get the education you need to help with your wellness, but we're actually going to have wellness events there. It's this great resort in northeastern Phoenix and it's February in Phoenix. It's going to be sunny and beautiful. There's pickleball and golf and there's a nice spa and I think there's going to be some hikes and stuff and it's going to be great. We hope you will join us. However, if you're not interested in wellness, it's also the Financial Literacy Conference. So all that great stuff that you come to White Coat Investor to learn is also going to be at the conference. But the best part about it is this qualifies for CME up to 17 credits of AMA CME for docs, 18 credits of AGD or 17 credits of AGD PACE approved CME for dentists. So for both of you, you can pay for this with pre tax dollars. You can use your CME funds if you get some. It's going to be great. We're going to have content in the morning and the afternoon. We're going to provide you a great lunch and there's even talks you can listen to at lunch if you would like from our sponsors. And some of those are going to be some of the best at the conference. If you are coming virtually, you'll have access to all those talks as they are happening as well as afterward. In fact, everybody will have access to them afterward because you get free access to it. And so that allows you to spend your time there if you want, doing the wellness stuff, doing the networking stuff, and you can get the content after you go home. If you really want to do it that way. It's really up to you. You'll have lots of options and lots of choices. We're going to give you a sweet swag bag. It includes books in it. I mean, when's the last time you had a bunch of sweet books in a swag bag? Our conference is known for its swag bags. Much better than some of the conferences I have been to lately. They either don't give you one at all, or there's really nothing good in it, or it's just a bunch of advertisements. That's not the way ours are. We give you good stuff and so we hope you will come to that. Keep in mind, though, that there are some deadlines. Early bird pricing ends five days from when this podcast drops October 19th. The price goes up. Now, that's only for in person. The virtual price doesn't actually go up. The next deadline, you need to be aware of December 1st. On December 1st, you have to have registered by then or you do not get a swag bag. We got to print the books. We got to ship the books out to all the virtual attendees. Okay? It takes some time. So you've got to register by December 1st to allow us time to do that. And then, of course, the conference itself, February 9th through 12th, 2022. Well before most spring breaks, but after the kids have been back in school for a, you can bring a spouse. We actually have a partner track one afternoon at the conference that your partner can get a ticket and they can come to all the meals and they can come to these special partner track presentations. And those are going to be topics that are appropriate for both partners to come to. In fact, Katie and I are going to be speaking at one of those talks together. So that should be fun. All right, let's get into our questions today. We're going to be talking about investing a lot today. Lots of investing questions. We've grouped them all together, and we're going to be talking about investments and investing and some interesting portfolios and stuff like that. Our first question comes from Russell. Let's take a listen.

Hi, Dr. Dali, this is Russell from Connecticut. I've recently become more interested in investing in real estate through some of these more passive methods, such as syndications and crowdfunding. But I was wondering whether the rate of return that you might expect from these passive methods of investing might be lower than, you know, owning your own rental units, for example, and managing it yourself. And I was thinking that if you put in the work yourself, you probably should expect a higher return overall over the long term. But on the other hand, you know, crowdfunding and syndications might give you the advantages of scale and, you know, obviously professional management. So me being a busy professional, I would love to sort of, over the long term, just continue to invest in real estate through these passive methods. But I just didn't want to sort of sacrifice some amount of return if that, you know, seems to be the trend as compared to more active investing. And then also, you know, if you compare syndications versus crowdfunding, I would think that the crowdfunding platforms would also want to take a cut out of these deals. But, you know, the numbers that I've sort of been seeing and the advertised, you know, rates of return doesn't really seem to vary in any consistent basis when you compare, you know, direct syndications versus their crowdfunding platforms. So I was just wondering if there were any consistent differences in the rates of return that you might expect depending on how you sort of invest in real estate. Of course, you know, taking into account that most of what affects return would be, you know, the specifics of the deal or the sponsor. So I hope that question was clear. Thank you again so much for giving us this opportunity to ask these questions here and thank you for everything that you do.

All right, Russell, so let me make sure I understand here. You want to have your cake and eat it too, is that right? You don't want to put any work in, but you still want the same returns? Well, I agree with you. That's probably unlikely. I think if done well, you are probably going to come out with better returns investing directly in real estate than if you are going to invest via a private real estate fund, private reit, you know, the Vanguard REIT index fund, syndications, whether bought directly or via crowdfunding portal, I think you're probably going to come out ahead investing directly, but you could easily come out behind, right? Not only because you suck at investing, but also because it's entirely possible to just have bad luck because it's very difficult to diversify when you're a direct real estate investor.

Right.

You can only buy so many properties on a physician income. And so until you get to a level where you have a whole bunch of different properties in a whole bunch of different areas, which is hard to do. Again, when you're direct investing, you've got some significant risk from lack of diversification. So, yeah, I think the potential is there to earn more. But part of the reason why you get paid more for direct real estate investing is because it's not just your money you're putting into the project. You're also putting your time and effort and worry and hard work into that project. And so part of your compensation is pay for that.

Right.

It's paying you for your time. It's got aspects of a second job which you don't have. When you go to a private real estate fund, you basically just send them a check. And so if you want another way to earn some money, that is a way to earn some money. If you would rather concentrate on building your practice and working hard at that and just send your money to be invested, well, passive real estate investing is for you. And this is kind of a big dichotomy. And I don't think anybody has to get too far into this before they realize which road they prefer to go down. You know, there are very few people that go down both roads. One of the few I know is Peter Kim over at Passive Income md Right. He does both. He has some direct real estate investing and does lots of passive real estate investing. But I do almost entirely passive real estate investing. I say almost entirely. I have one syndication where I'm the manager of the syndication. So I guess that's not entirely passive. But you know, it's just my time is better off spent on white coat investor or it's better off spent at my practice or is better off spent floating the Grand Canyon, quite honestly than managing rental properties. And so I don't really do that and I think that's fine. Now are there some benefits there that maybe help more than you might think? Yeah, I think you benefit from having professional management, particularly as you get to these bigger properties. Right. We're talking about a 200 door apartment complex. You're never going to be able to buy that yourself if you're like most docs. And so the only way you're going to get into that is by syndicating. And of course you're going to use a professional manager to do that. And so if you want to invest in that asset class instead of just duplexes and single family homes, well, that's probably what it's going to take. And so keep that in mind. You also get to benefit from, you know, not only the professional management and that diversification. So overall I think it's entirely possible that passively you could end up with a better return. Especially since half of direct real estate investors are less than average as far as their skills go. So if you're not particularly good at it, and I don't personally feel like I'm particularly good at direct real estate investing, particularly managing tenants is not My strong suit. I tend to be too nice to them. I guess it's the doctor in me coming out. But, you know, if you're not going to do a great job running it, then you're probably not going to be better off direct real estate investing. So you got to figure this out, you know, different strokes for different folks. Some people are definitely, they should be direct real estate investors. The rest of us, thankfully, there's plenty of passive real estate investments out there. And you shouldn't feel guilty like you're leaving something on the table by using them because you're getting significant benefits for those fees that you are paying. You're getting more diversification, you're getting, you know, the expertise and you're getting more time back in your life. So you can just invest your money instead of investing your money and your time. All right, our next question is about 457 plans. Let's take a listen.

Hi, Dr. Dali, this is Russell from Connecticut. I had a question about investing through 457 plans. Considering the downsides and positives of these non qualified tax deferral plans, I wanted to get a better sense of what the difference might be in investing a certain amount of money over a certain amount of time in a taxable account versus the 457 plan. And I think if I could figure that out, it would sort of help me decide. I do fall in the highest tax bracket. So if I, let's say invested 20,000 over the next 20 years in a taxable account, what would the accumulated money be versus what I might expect from the tax referral level? 457. So if you could go through some type of math assessment, I would just find that really, really helpful. Thank you for this opportunity to ask questions here as well as, you know, everything else that you do with White Coat Investor. I've found this to be extremely helpful for a very long time. Thank you so much.

Bye. All right, good question, Russell. There's a lot that goes into this question. First thing we ought to talk about is 457 plans. 457 plans are not the same as 401s in that it's not your money. Okay, that's good. In an asset protection situation involving you because it's not your money so the creditor can't get it. It's bad in an asset protection situation involving your employer because it's not your money, it's the employer's money. Still, a 457 plan is deferred compensation. It's money you haven't yet been paid for work you've already done. The benefit is that you don't pay taxes on it. Now most of these are tax deferred. There are Roth 457s, but most of them are tax deferred, meaning you get to not pay taxes now at presumably a relatively high tax bracket. And you get to take that money out later, presumably during retirement when you can spread it over the lower tax brackets if you're like most doctors. And so the biggest benefits of using a retirement plan, whether it's a 457 or a 401k or whatever, are the tax benefits.

Okay?

You got this arbitrage between your high tax rate now and probably a little bit lower tax rate later. You also have this tax protected growth as it grows, right? And that's getting worse. If Congress passes this bill, they've got in there right now, right, because the capital gains and qualified dividends taxes are going up from, from 15 or 20% to as high as 25%. And so that tax drag on a taxable account is going to get a little bit worse. And so, you know, that makes a retirement plan even more valuable in that respect, especially since some of our retirement plans are going away. The bill as it was originally came out of committee in the House. There wasn't going to be any more bank of backdoor Roth IRAs or backdoor Roth IRAs. So you know, you got more limited options. So something like a 457 plan becomes even more valuable. Now, any 457 plan, you want to make sure the employer is stable. You want to make sure the investments are good, you want to make sure the fees are acceptable. And most importantly, you want to make sure the withdrawal options are going to work for you. You know, if they make you take the whole thing out the year you leave the employer, that's probably bad. They let you spread it out over 5 or 10 years or let you wait until 65 to take it out or something like that. Or if It's a governmental 457, they just let you roll it over into an IRA or another 401k. Those are all great options. But if the only options are crummy ones, you may not want to put that much in there. So your real question though is at what point is it worth skipping the $457,000 and just investing in taxable? Now remember, there's a few benefits of retirement accounts, right? You got estate planning benefits. You can just name beneficiaries instead of Having that money go through probate. There's asset protection benefits. They're generally protected from creditors, whereas a taxable account receives no protection at all. And there's the tax benefits. So you got to put a value on each one of those. And of course, that tax deferral is worth a lot, and that tax protected growth is worth a lot of money. So in general, people worry about this when they have really lousy 401s with really high fees, like 1% or 2% fees, and they wonder, should I still use the 400? And the answer is usually yes, because the value of that 401 is more than 1% or 2% a year, especially if your money's not in there that long and then can be put into A lower cost 401 or IRA in a few years when you change employers. So it's got to be a pretty darn good investment in order for me to pass up on a retirement plan. In fact, I never have actually passed up on maxing out a retirement plan that I could max out in order to invest in a taxable account. I only invest in taxable once I've maxed out all my other options. But I would need to have an investment that I expect is going to earn at least a couple percent more a year after tax before I'm going to pass on the other benefits of a retirement plan in order to invest in it. And so maybe some highly leveraged piece of real estate or some small business that you have some control over meets those requirements. But just investing in taxable in a total stock market account instead of investing in a four feet in a total stock market plan or fund? No, that doesn't make any sense.

Right?

It's got to be a significantly better investment for you to pass on retirement accounts. Sometimes people want to pass on a defined benefit cash balance plan. Those are naturally usually less aggressive investments. And sometimes people are willing to pass on that a little more readily to invest in taxable. But unless your whole portfolio is 100% stock or 100% stock in real estate, I wouldn't necessarily do that. If there's room for bonds somewhere in your plan, why not have them be what's in that cash balance plan? So in general, I wouldn't pass up options that you have in order to invest elsewhere. Likewise, I would not raid your 401 or 457 in order to go invest in something else unless it's a really good opportunity because you can't go back, you can't go put that money back into those accounts and you lose those asset protection and estate planning and tax benefits forever once you pull that money out. So keep that in mind. Good luck with your decision, Russell. All right. A quote of the day today comes from William Bernstein said the real risk to your portfolio, the long term failure to meet your future consumption needs comes from just four sources. Inflation, depression, confiscation and devastation. It is not the day to day volatility of your portfolio that is the real risk. The real risks are are the things that cause permanent loss of capital. And you can do that by buying high and selling low. But the ones you should really worry about, right? Inflation, depression, confiscation and devastation. All right, let's talk about the Dragon portfolio. Here's a speak pipe question.

Hi Dr. Dali, I want to ask you what you think about the Dragon portfolio offered by Chris Cole at Artemis Capital. Obviously this is actively managed fund and it is very interesting because he had talked about having a diversified portfolio management strategy, having equity that contains domestic, international as well as other strategies such as trend following, commodity, physical gold holding and obviously US Treasury. The aim is to protect from deflationary, inflationary or severe volatility to preserve principle and take advantage of the equity on the upside. I know it's actively managed fund and it has a higher managed fee. I just want to get your opinion on that. And I'm currently a passive investor only in investing in the index funds. So I. Once you learn more about what you think about this fund particularly. Thank you.

Okay. The most important thing in investing is that you pick a reasonable asset allocation, a reasonable portfolio and that you fund it adequately and that you stick with your plan over the long term. That's the most important thing.

Okay.

I've got a post on the blog called 150 portfolios better than yours and it's a list of now 200 different portfolios and what I think of them. And every one of them is reasonable, right? You know, reasonable people can disagree on how much you ought to have in stocks or bonds or whatever else in your portfolio, but you want to avoid having anything really crazy. Okay, that's the idea, is to avoid crazy portfolios. And I occasionally even give examples of what crazy portfolios look like. So let's talk about this Dragon portfolio. What is the Dragon portfolio? Well, it's 24% stocks, 18% bonds, 19% physical gold, 18% commodity trend following. So basically market timing of commodities and 20% long volatility, actively managed long volatility. So I'm not necessarily against you having any of that in your portfolio. But when you get into the more weird stuff, the more alternative types of investments. When I'm talking about alternatives, I'm talking about anything but stocks, bonds and real estate.

Okay.

When you're getting into those sorts of things, whether it's cryptocurrency, whether it's gold, whether it's long volatility, whether it's commodities, whether it's Beanie babies, whatever, you're getting something a little weird. I think you ought to limit how much of that you have in your portfolio. And the typical amounts I give are 5 to 10%.

Okay.

I think the rest of your portfolio ought to be in stocks and bonds and real estate in some combination. Those are long track record proven assets. Okay. Where does a portfolio like the Dragon portfolio come from? Well, it comes from somebody doing a bunch of back testing, right. Then presuming the future is going to look like the past, which it usually doesn't. That's how these sorts of portfolios get built. And these ones that are trying to be every market kind of portfolios are particularly concerning to me. You know, there's a Dalio, I think he had a. What do you call it, all weather portfolio. There is the permanent portfolio. And each of these comes with this idea that even in terrible market situations, the they'll do okay. The problem is most of the time in history, it is the triumph of the optimists. It feels so smart to be a pessimist. But most of the time the optimists are right. And so you want most of your portfolio geared to do well in good times. So what assets do well in good times? Well, stocks and real estate tend to do well in good times. If you put most of your portfolio into stuff that doesn't do well in time. Good times. The drag from the good times is so much that overall you do poorly. So let's look at this particular portfolio. It's got basically 24% of the portfolio in stuff that does well in good times. I don't think that's enough, you know, not for anybody who's actually trying to grow their assets and trying to let their portfolio do some of the heavy lifting of saving for retirement.

Right.

I mean, I've got quite a bit more than that in portfolios that do well or in assets that do well in good times. My portfolio is 60% stock, 20% bonds, 20% real estate.

Okay.

And in good times, 80% of that portfolio is doing very well. The last 10 years, it has really rewarded me. It's made really good money and maybe in the next 10 years it doesn't do as well. But you know what, the 10 years after that it probably will do well again. Now I don't know exactly what the markets are going to do in the coming decades, but when I see a portfolio that has this much of it, over three quarters of the portfolio dedicated to weird environmental situations, I say that's kind of a crazy portfolio. So I wouldn't recommend the Dragon portfolio. I don't think it's a reasonable portfolio. A few other things that I don't like about it, aside from the fact that More, more than 5 to 10% is in these unusual asset classes, Right. This thing's recommending, it looks like 58% of the portfolio into these weird asset classes, right. Physical gold, commodity trend following and actively managed long volatility. It makes me wonder, well, who's recommending this? And you mentioned Artemis and Chris Cole. Well, guess what they manage. Guess how they make a living. That's right. They make a living by collecting assets under management that invest in funds like long volatility and commodity trend following.

Right.

This is how they make their money. So of course they think you ought to have a whole bunch of your portfolio into this stuff. They've got this volatility fund and so they say put 21% of your portfolio into it because they know that no smart investor is going to put the whole portfolio into it. So they sit around a table and go, well, how much of it do you think we can talk people into putting in? Well, let's put 21%. That sounds smart. And so that's where you get something like the Dragon portfolio and then you attach a whole bunch of marketing to it so people like you find out about it and start going, well that sounds pretty smart. Well, if you really dig into the details, you start asking questions, right? For example, how is a retail investor supposed to implement the active long volatility component of the portfolio?

Right.

Well, the only way is through these Artemis run hedge fund. So it makes you go, well maybe this is just, you know, a Trojan horse for Artemis to get you into the, into their fund. But you know, even the back testing, you got to wonder about this because there wasn't any sort of an ETF that invested in volatility until 2009. Right? That's the Vix. And so you really can't even back test this adequately. It's basically a guess that it would have done well over the last hundred years. And so I don't have a lot of faith in such a biased back tested investing method. I don't have a lot of faith in active management and I think this is probably a portfolio filled with investments that are sold, not bought, and so I wouldn't give a big recommendation for it. If you're totally convinced by Chris Cole and his explanation, knock yourself out. You can invest in his funds and you can adopt the Dragon portfolio. But like any other portfolio, keep in mind you're going to have to stick with this thing through thick and thin for the next 30 to 60 years. There are going to be long periods of time like the last 10 years when US stocks, international stocks, whatever, are doing really well and you're going to look at them and go, man, I only got 24% of my portfolio in those. Wish I had more instead of all this money I've got in in long volatility and commodities trend following. Hope that's helpful to you. All right, let's take our next question off the email. This past year my partner made a career change, is spending most of her time working on our real estate investment property and thus will not have any earned income this year. I'm looking for ways to take advantage of her being in her lowest earning years, especially since we will likely get married in the future. All money will be pooled on her tax return. She has a solid chunk of money saved from her years of working, has over $40,000 in her taxable account of Vanguard. I was thinking about trying to take advantage of selling at least some or all of her holdings there in order to pay 0 or minimal capital gains on these and avoid having to pay those in the future when married. That's called tax gain. Harvesting can be smart anytime you can harvest a gain of 0%, why not? No reason not to do it. She has over $20,000 in gains in Apple stock, $4,000 of gains in Berkshire stock, and $4,000 of gains in the S&P 500 index fund. Well, none of those are my favorite investment, so if I could sell any of those at 0%, I probably would and get them into investments I actually want to own. But again, this is like the telephone game, right? This is not even this emailer's portfolio. It's this emailer's girlfriend or partner's portfolio. Another best value would be in getting married and helping to decrease the tax brackets on my income of over $500,000. Well, congratulations on that. Certainly that's going to make a big difference, but I do not feel comfortable rushing to the altar just to have more money. This year I Agree, you definitely should not get married for money. Thus, I am trying to think of all the ways we can take advantage of not being married. Well, you know, if this tax bill in Congress passes, it's going to make being married even less fortuitous for somebody in your tax bracket. And so if you really want to do what is going to decrease your maximum tax bill, you may be better off not getting married, quite honestly. But at the same time, you got to ask yourself, hey, what's life all about? It's not always about all the money. All right, so the emailer asked, would it be wise to sell these stocks, realize the gains and then reinvest them in index funds? Probably that's what I would do, especially if I could do it at 0%. Would there be some capital gains tax owed on this that I'm not thinking about? Just look at the basis. If the basis and the gain adds up to less than the 0% tax bracket, which I think for capital gains is up to about $40,000, then you should be okay. What about state capital gains tax? You'd have to look that up. I'm not familiar enough with all of the states and whether they also would charge capital gains on that. That should be pretty easy to look up for your state though. Just Google your state and the capital gains tax. A lot of times they'll mirror the federal laws, but not necessarily. I think in Utah you'd probably be paying on that tax gain. Harvesting. What are other ways you can think of for an unmarried couple to take advantage of a situation like this where there's a high earner and one low or non earner? Yeah, I mean, this is a situation lots of people are in. I was in this for years when I was married. Right. Katie wasn't working, it was just my income. And of course that gives us the advantage of lower tax brackets for a significant chunk of our income. The downside when both people are working, of course, is that you're both paying Social Security taxes and you know, other expenses that working people have. So based on what you said, it doesn't sound like your partner is going to qualify for real estate professional status with just one property that's got a 750 hour annual requirement and you can't do anything more. You can't spend more hours than that on any other job. But if she can qualify for real estate professional status, that can help a great deal because you can use losses on the real estate to offset some of your income. So maybe that's an option. One of you doing clinical work for $500,000 a year, the other one getting real estate professional status and doing a whole bunch of real estate investing stuff. And that might work out very well. I'm not sure about capital gains taxes. Without more information and really looking at your brokerage account, I'm guessing she's not going to owe capital gains taxes. But run the numbers and see, it's not like you got to tax gain, harvest all of it or you have to do it all in this year. If it's going to cost you money, just stop at that point. But that is a great way to get rid of legacy holdings with gains that you may not want to have long term. Hope that's helpful for you. All right, let's take this next question from Alex.

Hey Jim, this is Alex from Texas. I've heard you mention that the White Coat investor retirement plan is one of the best ones out there. I was hoping you could elaborate on that. What makes the WCI retirement plan so good? How did you go about making such a great plan for yourself and your employees? As a physician who's about to leave his academic job to start a private practice, I'd appreciate any advice you have on creating a great retirement plan. Thanks for everything. Your book, blog, podcast and fire your financial advisor course have been tremendously helpful.

All right, Alex, thanks for plugging all our products. We appreciate that now we don't have to promote them ourselves, but our retirement plan we're pretty happy with, right? We sat down and said, well, what is the thing that's going to help Katie and I as owners and all of our staff to have the best possible retirement? And we designed it from that perspective, not necessarily from the perspective of trying to get people to come work for the company. Not necessarily from perspective of trying to keep our costs as low as possible, but from perspective of what's actually going to help people to retire. And so the easy part is putting the investments in, right? It's really easy to get low cost investments like the ones we recommend all the time. You know, things like low cost Vanguard index funds. Super easy to put into your retirement plan, right? It's a little bit harder if you want to put in investments that require self direction, you know, things like private real estate funds. We were also able to get those into the plan though, as an option for people who want them. I think thus far I'm the only one who's taken advantage of it and that's probably the way it's going to be and that's perfectly fine. But that is one thing that we're also able to get in there investment wise. So that's number one, is to get good investments in there. Number two, get the fees super low.

Right.

It doesn't have to be like there's these 401ks out there that are charging, you know, participants 2%. And the reason that happens is because these companies come in and promise the employer that they're not going to have to put any of their money into it, that it's all going to come from their employees that are going to pay the cost of the plan. And I think that's kind of dirty pool. That is the role of the employer to cover those costs. It's the role of the employer to help those employees. Right. The employer has a fiduciary duty to the employees. And if you've got a really crappy 401, you might want to remind your employer of that. They can actually be sued for putting together a crappy 401 plan. Now, obviously we didn't want to be sued, but that's not the main motivation behind putting together a good plan. So WCI pays all of the costs, right? All the fees associated with it. And we do have fees. You know, it's not super cheap like when you have an individual 401 and it costs pretty much nothing if you're a Vanguard or Fidelity or Schwab or E Trade. You know, we've actually got fees on the plan every year. And if you have employees, you're not going to be able to avoid that. But we cover them. The good news is they get be paid with business expenses. Right? They're pre tax dollars. We don't have to pay any sort of taxes on those fees. The downside is, yeah, we got to pay them. We also took a lot of time to talk to employees before putting it in place. We want to know what they wanted out of the plan, how much they wanted to put in there.

Right.

Because how much the highly compensated employees and how much the owners can put in is highly dependent on how much all the other employees put in. So we have set up a lot of our contract structures, our employment contrast the whole business such that people get paid a little bit less and they get much bigger matches.

Right?

Because for 20, 21, you can put $58,000 into a 401 if you're under 50. However, a significant chunk of it, anything over $19,500 has to come from the employer. Well, how do you talk the employer into putting more money in there? Well, you take a Lower salary, that's how. And so we really make sure people understand how the plan works, what a great benefit it is. And, and then, you know, and most of them are more than willing to max that plan out because they all want to retire. And so we make that as a benefit as much as we can. Now if there is somebody that decided they weren't going to max that out, you know, we might have to put in what we call non voluntary, I think, I can't remember what they're called, but they're basically non voluntary contributions that we as an employer have to put in so the plan doesn't get penalized. And that can be several thousand dollars a year. That's enough to keep a lot of people that have a bunch of low paid employees at a clinic or something, a bunch of mas or desk workers or whatever in their clinic from wanting to put in a plan like this because, oh, I might have to put in a few thousand dollars more for everybody. Well, I don't see that as a problem. I actually want my employees to do well and I want them to have money for retirement. So heaven forbid that the bonus I give them this year is money that goes into the 401.

Right.

I get to decide how much I pay them as a bonus at the end of the year. I can pay them $0 as a bonus and I can put this non voluntary contribution into the 401. Perfectly legit.

Right.

And so we set it up such that everybody could get as much money into it as they wanted to. We also wanted to have various options. Now one of these might go away with this new tax bill in Congress. But you can put in pre tax, you can put in Roth and you can put in after tax money and then you can do an in plan Roth conversion of that money to the Roth 401K. And so that's a great option. I think the only people taking advantage of it are Katie and I. And the reason we do that is because the 199A deduction, which is probably changing with the new tax bill anyway. So maybe we're going back to tax deferred contributions, but that's another story for another day. The reality is why not have options? If you're allowed to put them in, put them in. You know, we put in an option that you can borrow against your 401. You know, any option that you are allowed to put in a 401. 401 we tried to put into the 401. And our friends at FPL Capital who's been a long term WCI advertiser and sponsor were willing to sit with us, listen to our concerns and bend over backwards and twist the arms of the actuaries and really figure out everything we could possibly do with this plan. It was really fun for the actuaries too. They're like, wow. I've never had anybody actually request to try to figure out how to get everybody to the max. And you know, so it was a fun puzzle for them to try to figure out as well. And obviously we have a lot of complicated testing that has to happen with the plan each year, but we were able to do it. And so part of that is that we don't work for this big huge company. Part of it is everybody works here, gets paid pretty well and has saving for retirement is a pretty big priority. But we were able to do it and hopefully you'll be able to find the best option for you. But I definitely recommend spending time educating your employees about the value of retirement plan, particularly any employer matches and when they come to value that you can oftentimes get a pretty good 401 in place. All right, here's a question about a related plan, the 403 as well as 457s. Hi Dr. Dali. I work for a teaching hospital and I have a 403B. I'm also considering part time VA hospital job. My question to you is can I contribute the maximum to 403B and a maximum to 457 count? Thank you for all your help. Yes, you can max both of those out. They have totally separate limits. A 403 like a 401 if you're under 50 has a $19,500 contribution limit. If you're 50 plus there's a catch up amount that you can add on top of that. And of course next year in 2022 that amount's going to go up. The total that can go into that 403 between you and your employer is $58,000. For those under $50,000 in 2021 that amount goes up. If you're over $50,000 also goes up in 2022. The 457B limit for this year is $19,500. There are some catch up that works a little bit differently than a 403 or 401 if you're, you know, in your last few years of working or there's various regulations that are actually kind of complicated about 457B catch ups. But there can be a catch up there as well. But the bottom line is totally separate limits. The $19,500 and the $58,000 limit in the 403 are completely separate from the $19,500 limit and the $457,000. So you can max both of those out. Hope that's helpful. All right, let's take another question about traditional versus Roth contributions.

Hi Jim. First and foremost, thank you for all that you do. I listen to all your podcasts over the past few years and I've learned a lot and feel much more comfortable with personal finance Now. My question is regarding traditional versus Roth contributions to retirement accounts. Is there a difference between Roth and traditional contributions in terms of paying taxes for the growth in accounts? Are you taxed on growth for a traditional account and not for a Roth account? For example, if Dr. A invested $100,000 pre tax into a 401k that has grown and is now valued at 200,000, will he or she pay taxes on just 100,000 when withdrawing the money or on the entire $200,000? Say the above case occurs with Dr. B, but he or she invested 100,000 withdraw contributions. Is withdrawal from the entire $200,000 portfolio all tax free? If you are taxed on the growth in a traditional account, but not in a Roth account, and are young and have hopefully decades of growth ahead of you, wouldn't Roth contributions then make more sense as the growth portion of your account will be significant upon retirement? Thank you.

When you pull money out of a tax free account or a Roth account, whether it's an ira or a 401, it all comes out tax free. When you pull money out of a tax deferred account such as a 401 or a traditional IRA, it all is taxed at ordinary income tax rates. Whether it was an original contribution or whether it's earnings on that contribution, it it's taxed the same. That's the way it works. So you are correct in that if you put money into a tax deferred account and let it grow for 30 years and then paid taxes on it, you are going to pay more money in taxes. However, if tax rates are exactly the same at the time you contribute as at the time you withdraw, if that marginal tax rate is precisely the same, you will have the exact same amount of money after tax. So it doesn't matter. So really the traditional versus Roth question is all about tax rates. It's about your tax rate now versus your tax rate at which you withdraw the money at later. Hope that makes sense for you. But that's the important thing is that you're not fixated on the amount of taxes paid, because it really doesn't matter. Keep in mind too, that $100,000 put into a Roth account is a lot more money than $100,000 put into a tax deferred account when you look at it from an after tax point of view. So really what you should be comparing is perhaps putting $65,000 into a Roth account versus $100,000 into a tax deferred account, because that's really the same amount of money after tax going into each of those accounts. And you'll find if you run the numbers on it, that you'll see it doesn't matter which one you use if the tax rates at contribution and withdrawal are the same. But the reason why most people in low earnings years should preferentially use Roth accounts is because they will likely be in a higher bracket at withdrawal. And the reason why most attending physicians in their peak earnings years should use a tax deferred account is because they are likely to withdraw that money at a lower tax rate later. And so hopefully that's helpful as you try to decide whether to use traditional or Roth contributions in those accounts in which you have a choice. A lot of times you don't have a choice and you just use whatever you're offered. But if you have a choice, then it can become a complicated question. But for the most part, the way to think about it is to think about tax rates, not total tax paid. Hope that's helpful for you. All right, let's talk about the Mega Backdoor Roth ira.

Hi Jim, I've been listening to your podcast for a while now and I've taken some advice and started a 1099 contracting gig. I find myself in a little bit of a pickle because I'm looking for a solo 1k custodian that would allow a Mega backdoor Roth conversion. The one that you've posted on a white coat investor site, Rocket$. While it does allow for the Mega backdoor conversion, it doesn't support it. Do you know of any other custodians that would have this option? Thank you.

All right, keep in mind that the Mega backdoor Roth IRA may be going away. There is a bill in the house right now that would eliminate it. So you may want to pay a little bit of attention to that bill. If it's eliminated, maybe you don't want to bother with this hassle. Otherwise. The Mega backdoor Roth IRA is a great way to get more money into a Roth account. It's a great way to get more money into a retirement account if you don't earn that much at the 1099 gig. Because by putting in after 10 tax dollars into that 401k, you don't have to earn as much at the 1099 gig in order to get all $58,000 in there. And so it can be a great move. Katie and I have been doing the mega backdoor Roth IRA and our 401s for at least the last couple years. So I'm obviously a fan of it. Now when we set up our 401, as I mentioned earlier, we made sure we had that option in it. But this was a customized 401 for which we paid lots of money to get it set up. And we, we pay a fair amount of money each year to maintain it.

Right.

You can't just walk into a, you know, cookie cutter off the shelf Vanguard Solo 401k or Fidelity or Schwab or E Trade and get this feature. Usually it has to be a customized plan. So you can have a customized plan made. It's going to cost you a little bit more.

All right.

Now there are some places that are cheaper than others for sure on our list right now. The only advertiser we've got there that is providing self directed individual 401ks is rocket$. They do do self directed 401ks and self directed IRAs. Apparently they don't support the mega backdoor Roth IRA option, which is unfortunate. Now are there others out there that do? Yes, the one I had prior to putting in the WCI 401. Actually it was the old WCI 401 but it was an individual 401k, was mysolo401k.com and they do a nice job. They're not free. You know, they charge you hundreds of dollars to get set up and a few hundred dollars a year. They're not particularly expensive, but they can support that particular function. And so you might try there, but there's a handful of others that will do it as well. But like I said, I think this business has a real possibility of really getting whacked by these changes in Congress. Because without the ability to put in after tax dollars, these start becoming much less attractive. And I worry that someone may go out of business. So be real careful with that. But there's at least one person you can, you can check with and I'm sure there's a bunch of others. I would just call them up and ask if they support that and you can see which one you want to go with. But I was pretty happy with one we had for. I think we had them for a couple of years. They just didn't Support a real 401k with employees and so we had to move on to fpl. As I mentioned to you earlier, FPL can also do a customized plan for you there. And I've got a number of other people that can do a customized plan there. Wellington, I think can do it. Latovsky Asset Management can do it. Imperion, I think can do it. Carson Ellaria, I think can do it. But keep in mind that you know you're not going to get super cheap. You're gonna have to have some sort of a customized 401K. Even if it's just an individual 401K. As a white coat, you have valuable knowledge. Various companies want that knowledge and they're willing to pay you for it. That's why we put together a list of recommendations for companies that pay you to take surveys. If you're looking for a profitable side gig for not too much effort, getting paid for surveys could be the perfect solution for you. You can make extra money. Start a solo 401k and use your medical knowledge to impact new products. One of the WCI columnists makes an extra $30,000 a year just doing these surveys. Sign up today and use a fraction of your downtime to make extra cash. Go to whitecoatinvestor.com mdsurveys you can do this and the White Coat investor can help. Don't forget about WCICON 22. You can sign up for that@whitecoatinvestor.com WCICON 22 this week's the last time you can get early bird pricing. You gotta buy by October 19th to get that. If you want to come to the In Person conference in Phoenix. We hope you do. I'm looking forward to meeting you in person. Thanks. For those who are leaving us five star reviews and telling your friends about the podcast, one of our recent reviews comes from Dr. Lindsay, who said this is an invaluable resource. This podcast is a must for every physician, dentist, et cetera. This is where I started my financial education, where I come back with specific questions. Only wish it had been around when I was in medical school. School, me too, doctor. Me too. And I wouldn't have had to start it. All right, keep your head up, shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor podcast. My dad, your host, Dr. Dahl, is a practicing emergency physician, blogger, author and podcaster. He is not a licensed accountant, attorney or financial advisor. So this podcast is for your entertainment and information only and should not be considered official personalized financial advice.