WCI #25: Military and 1099 Physicians

This is the White Coat Investor Podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dali.

Welcome back to the White Coat Investor Podcast. This is podcast number 25 where we'll be talking about military docs and 1099.

Docs at some point in our financial lives, it Will Be Time to Buy a Home A physician mortgage can be a good vehicle for a young doctor who's just out of school and has a more effective place to use their money than on a big down payment. These loans allow doctors to secure a mortgage with fewer restrictions and a lower down payment than a conventional mortgage. But if you're further advanced in your career or deeper into your journey to financial freedom, buying a home with a conventional mortgage and then later on potentially refinancing that loan to a better rate with a shorter time frame could be a great move. Wherever you are in your financial journey, make sure you use the mortgage that will be most financially beneficial for you. Hop over to our recommended tab to learn more about all of your mortgage and refinancing options@whitecoatinvestor.com mortgage you can do this and the White Coat Investor can.

Help I wanted to talk briefly a little bit about the recommendation pages on the website. If you go over to the website, you'll notice that we have recommendations for books and websites and student loan refinancing companies and and physician mortgage loan companies and insurance agents and financial advisors and even jobs and realtors and student loan focused advice, contract negotiation review practice loans, private medical school loans and tax strategists. Under that recommendations tab you can find all kinds of businesses that can assist you with your financial needs, but in particular I wanted to focus on one our student loan refinancing page. Here. I have listed eight different companies that will refinance your student loans and these are the best available bonuses available out there for you to refinance your student loans. Now this is essentially a no brainer. If you are an Attending and you're not going for public service loan forgiveness, you can get a lower rate than the 6.8% you're likely carrying with your student loans through any one of these lenders. But they all have a little bit different focuses and can offer you some unique features with each different lender. For instance, the first one listed on that site is First Republic Bank. They offer some of the lowest rates I've ever Seen, they do require you to become their banking client and they want to have a long term relationship with you. That relationship is really important for them. And in order to get the $200 special deal from White Coat Investor, you need to be referred by us. Now you can either email cindyhitecoatinvestor.com and we'll shoot an email over there or you can email K Berchtold, that's K B E R C H T O l d@firstrepublic.com and let them know that White Coat Investor. White Coat Investor referred you to get that $200. The downside of First Republic bank is you have to live near their branches. That means California, New York City, Boston, Greenwich, Connecticut, Portland, Oregon or Palm Beach, Florida. If you're not in those areas, you can't refinance your loans there. Unfortunately. Earnest is the next one listed on our page. Earnest is great. The really cool thing about Earnest is that you can choose custom terms that fit your budget. You can pick your exact monthly payment and you can select fixed or variable rates and they will match that custom term basically with a custom interest rate. This saves you even more money when you're refinancing. So if one company offers a five year and a ten year, well with Earnest you can get a six and a half year if you want. So I really like that flexibility. It's pretty cool with that. They also protect you with loan forgiveness in case of death and dismemberment. You get $300 back when you refinance through the Earnest links found on that White Coat Investors student loan refinancing page. Our next one listed there is Link Capital. Link Capital is pretty exciting. They offer a couple of programs, one of which is designed uniquely for residents. And so if you've already decided that refinancing as a resident is the right move for you, rather than being in the repay program or something like that, you can do that through Link Capital, which is a pretty awesome thing. They also basically allow you to defer your payments during your training periods, which is helpful. The next one listed there is LendKey. They used to be known as CU student loans. And the cool thing about these guys is they fund your loan through community lenders. So they basically kind of function as a marketplace to allow you to refinance with a whole bunch of different lenders. They have actually over 300 options there and you can get $300 back if you go through our links on that page. The next one on the list is Common Bond. They actually offer $500 back to you if you refinance your loans. Now, why is that? It's because you have big loans, right? You're not typically refinancing $20,000. You're refinancing $200,000. And so that's why you're able to get those nice bonuses back and why I'm able to negotiate those for you. Common Bond is a common one used by many White Coat Investor readers. They do both federal and private loans. And you can get 5, 7, 10, 15, and even 20 years. Please don't take the 20 years, don't take 20 years to pay off your student loans. But you can also, with Common Bond, you can do parent plus loans, which is kind of unique. Most of the other lenders won't allow you to do that. The next one on the list is SoFi or Social Finance. This is a company out in California and probably the most popular one among White Coat Investor readers. They offer great service and great rates and $300 back to you if you apply through the loans on that White Coat Investor page. Next on the list is credible. Think of these guys as like the kayak of student loan refinancing, meaning when you apply through them, you're really applying to eight different lenders with a single application. They've had success getting docs refinanced who are really striking out with a lot of other lenders. And they even have an interest only option that might work for some residents in their last couple years of residency. Finally, we have Laurel Road or drb. The original. These guys were refinancing student loans when nobody else was. And so I think we all owe a great debt of gratitude to them for bringing on, you know, this wonderful product they recently rebranded as Laurel Road. But it's not just a name change. It's a difference in philosophy and it's certainly a greater commitment to customer service. And so I think now they're matching the rates that have always been quite low with top notch customer service as well. And they're offering $300 back to you again if you go through these loans. So if you have student loans and you haven't refinanced them yet, I encourage you to make a stop by that page@whitecoatinvestor.com student-loan refinancing and see what options are available for you. I'd apply with several of them and take the one that gives you the lowest rate. All right, today's podcast, we're going to be talking about both military physicians and about 1099 physicians. But first, our quote of the day, which comes from David Swensen, who runs the Yale portfolio extremely successfully, in fact, perhaps the most successful of the endowment portfolios in the country. He says, ironically, upon acquiring sufficient information to assess the skill of an investment service provider, individuals end up empowered to take control of their portfolios and make their own decisions. Okay, a reader writes in and asks me to talk a little bit about the unique experiences that military physicians and their families have with regards to saving for retirement. It wants me to cover different retirement accounts such as the tsp, smaller student loans, smaller income post training, Tricare retirement plans and benefits, etc. Okay, well, let's start with the big one, which is the TSP, the Thrift Savings Plan. This is perhaps the best 401k in the country. It really is very good. And unfortunately it's gotten dramatically better since I got out of the military seven years ago. But it still preserves the same low cost index funds that have been in there for years. There's basically five of them. The C fund is an S&P 500 index fund. The S fund, which stands for small stocks, is really more of a mid cap fund. I mean, it's an extended market index fund, essentially equivalent to Vanguard's extended market index fund, but with slightly lower costs. They also have the I fund, which is an international fund. It only includes developed markets such as Japan and Europe. It doesn't include any emerging markets that you might get in a total international stock market index fund. They also have the F fund, which stands for fixed income. That's basically a total bond market fund. And then they have the rather unique G fund, which is a pretty cool little thing. It basically has the risk of a money market fund, meaning the principal never goes down with the yield of a government bond fund. And so it takes basically the average yield of all the outstanding government bonds and pays you that without no risk of losing principal. So I think in the last year it's been paying 1%, 1 1/2 percent, something like that. Whereas in a typical money market account, you know, even a good one, you might be making, you know, almost 1%. And so you get a little bit more money there, but it allows you to take a very low level of risk. And then of course they have their, you know, life cycle funds, which are a blend of these different funds that you can basically just set and forget. You basically pick your, you know, just like a target retirement fund at Vanguard, you pick your date of retirement and they adjust the mix as you move closer toward that, so that you're both diversified as well as have decreasing risk as you approach retirement. And so the TSP is great. They did not have a Roth TSP when I was in the military, but they now do, which is good because almost everybody in the military should be using the Roth tsp. And that's because your tax rate is so low in the military. I mean, you probably aren't paying any state tax. At least if you're smart, you've arranged to be a resident of a state that doesn't have a state income tax. You don't have to pay tax your money on a lot of your earnings while you're deployed. A good chunk of your regular earnings isn't taxed because it's an allowance. Your basic allowance for housing, your basic allowance for subsistence, are basically tax free. And so not to mention, you know, if you're a physician and plan to have a post military physician career, you're going to be paying a lot more in taxes once you get out of the military. And so while you're in the military, you want to be using that Roth option almost surely. I mean, you've got to have a pretty unique situation before you don't want to be using the Roth TSP while you're in the military. The TSP also has a unique feature. When you're deployed, you're allowed to put in tax exempt money. Now, this is a little bit like the mega backdoor Roth ira, if you've ever heard of that. But basically, while you're deployed, you can not only put in your $18,000 a year of either tax deferred or Roth money, but you can put additional money in there up to $54,000 a year. And that is a pretty good benefit. It's not that great if you just leave it in there as tax exempt money. Because while that money will come out tax free, its earnings will not. They will be fully taxed at your regular marginal income tax rate. And so the secret is, once you get out of the military, you want to figure out a way to isolate that basis and move it into a Roth IRA so that neither the principal nor the earnings will ever be taxed again. And you can do that through a few rollovers that I've written some blog posts about if you're interested in that. But the bottom line, if you've done that, is you want to try to get that money out shortly after separation. Another great feature of being in the military is while you're deployed, you can use the savings deposit program and what this is is basically a savings account that pays 10%. That's pretty awesome. 10% risk free. The downside, they only let you put 10 grand in it. So if you're only deployed for six months, you're only going to earn like 500 bucks in interest. So it's not a huge benefit, but it's pretty cool one. And so while you are in the military and if you get deployed, you should check that out and use the savings deposit program in general, that money is taken out of your paychecks while you're deployed. But I found a way to work around it while I was deployed. I actually wrote him a check for the full 10,000. So I got, you know, that benefit of the 10% for the entire time I was deployed. I think you can leave it in there for about three months after you come home and have it, still earn interest, but that's about it. At that point, you need to get it out and invest it in something else. One of the biggest issues that military physicians have is the stay versus go decision. And they want to know what the financial ramifications are of separating prior to getting to 20 years. The issue is there's this awesome pension you get if you stay in the military to 20 years. Not only does it pay a pretty good chunk of money, it's about 40% of your base pay, I think your last three years that you're on active duty if you retire at 20 years, and 60% of that pay if you stay till 30 years with it prorated in between those, those time periods. And so it's a pretty awesome benefit, especially when you throw in the fact that you get all these other benefits like being able to shop on base and being able to have access to tricare for really quite a low cost. And so that retirement is very valuable. And so if you're getting close to 20 years, you don't want to punch out before then because you miss out on that entire benefit. You don't get the pension, you don't get the tricare. You know, it's just gone. And so obviously if you're at 18 years, it makes sense to stay two more. And you know, that's not necessarily the case, however, if you've only got four years toward retirement, so. So somewhere in the middle, you cross that line where it makes more financial sense to stay in than it makes to get out. And that varies by how much money you'll make when you get out and how good of a saver you are. You know, if you get out and you start getting paid three times as much, but you spend three times as much, it's not going to do you a lot of good to get out. But in general, as a general rule, when I've calculated it out, that break even happens a lot sooner than most people think, probably around the eight year mark. Once you've got eight years toward retirement, there's a very good chance, even as a physician, that it makes sense for you to stay in the military and finish your 20 years. This is probably a good opportunity to talk a little bit about the new military retirement plan. They've made a few changes recently. I think they go into effect in 2018. And some people who've been in for a while will have the option to change to the new plan or stick with the old one. You know, I think the real benefits of the new plan are for those who separate prior to 20 years, whereas I suspect that those who are in the new plan who actually stay a full 20 are actually going to end up getting less benefits than they used to. But if you think you're separating early, it makes a lot of sense to get into the new retirement plan. And the reason for that is basically that you get a match on your thrift savings account. That's another thing I never got while I was in the military. There was no match. In fact, I've never actually had an employer match in any retirement account I've ever had. But bottom line is the match under this new plan is that the military will put 1% of your base pay into the thrift savings plan account. And then they automatically enroll you to have 3% of your base pay put in there and you can raise or lower that. Automatic enrollment is a great feature. I think all 401ks ought to have it, because the normal thing that we do is we don't enroll. And so behaviorally, it helps us to have to actually make a conscious decision to say, I don't want to be enrolled in the retirement plan. And I think a lot fewer people will do that than people that will be motivated to sign up for it if they actually have to take that step. So far, better to opt out than to opt in. And that's the way the new TSP is. But here's the really cool thing. After two years of service, the military will match up to 5% of your contribution. So if you put 5% of your pay in there, they'll match another 5%. Even if you separate after, you know, four years, five years, 10 years, whatever, you get to keep all those matching contributions. So that's a cool new feature for those of us who weren't interested in putting in a full 20 years. There's also a bonus as part of the new plan. It's basically two and a half months of base pay if you commit to four more years at 12 years of service. So that's probably something a few of those docs going for 20 years are going to see. But typically the medical sign on bonuses are quite a bit higher than that anyway. So I don't know that this is going to be a real game changer for doctors, but it's a nice benefit for those who are sticking around to serve the country in the military. All right, my next question I had was from a writer who wanted me to talk a little bit about 1099 doctors said, I was wondering if you can give a podcast talk about employees such as myself who are strictly 1099. I think you have mentioned before that a portion of Your income is 1099, if not all. Could you go through some of the differences we have compared to our W2 counterparts? For instance, I know I can contribute more to my individual 401, but I don't have to have malpractices. The hospitals I work for take care of that for me. Besides that, could you expound on any different tax breaks we could have or should be taken advantage of? Also, I've never gotten a straight answer about this, but since I am a self employed sole proprietor, should I incorporate or not? I have been told that if I do incorporate it will not protect my personal assets regardless and it would just be extra fees to pay and could get rather expensive down the road. Well, there's a lot wrapped up in that question, so let's spend some time unfolding it and looking at each of those issues individually. First, let's talk a little bit about a survey I did a few years ago of my readers on the blog asking how are you paid? And 51% said they were paid on a W2 they were employees. 15% said they were paid on a 1099 meaning they were independent contractors. 8% said they were paid on a K1 meaning their partners. And then about 25% of you said I'm paid on more than one of the above. It was a little scary that 2% said I'm not sure how I'm paid, which I thought was interesting. But that was the survey results. You know, it's interesting that you know this doc writing in use the word employee who is strictly 1099 well, you're not an employee if you're paid on a 1099. You are self employed. You are an independent contractor. You are not an employee. And so I think it's important to understand the difference. We're talking about employees and self employed. If you're self employed, you're running your own business, you contract with another business and they pay you for your services. In this case, for most docs, the business is you as a physician services provider and the company you're contracting with is the hospital. And so they send you a 1099 that they also send to the IRS to report that they paid you some amount of money. And then you're responsible for doing your own taxes as a business. Now, if you don't go any further than that, you just get paid on 1099, you report it on your taxes, you do that on Schedule C and your business form is a sole proprietorship. And that's fine for the vast majority of docs that are paid on 1099. Sole proprietorship is a perfectly fine business entity to use. You don't have to form an llc. You don't have to form an S Corp or a C Corp. You know, being a sole proprietor is cheap and easy. And guess what? You can still deduct all those business expenses. They all go on Schedule C. Anything that you use for your business, you know, whether it's a white coat or your scrubs or your stethoscope or your CME costs, all that stuff goes on Schedule C and can be deducted right off the bat. The problem for an employee is that they don't get to use Schedule C. They can still deduct all the work expenses they have that aren't reimbursed by their employer. The problem is they have to do it on Schedule A and it's subject to a floor. That floor is 2% of your adjusted gross income. So if your adjusted gross income is $200,000, the first $4,000 worth of business expenses are not deductible to you. And so that is why when you're an employee, you're far better off having some sort of fund, like a CME fund provided by the employer that you can use to pay those business expenses, because then they are deductible essentially because the business pays them. And so that's why a lot of times you see that set up for an employee. So it isn't that, you know, business expenses aren't deductible to an employee, is that it's difficult to deduct them and you're likely not to get the full deduction. If you can get any deduction at all just because of the way you're required to take it, you're a lot better off having the employer pay that. One of the great things about being an independent contractor or self employed is that you get to select your own benefits companies. You don't have to use some crappy health insurance company. You don't have to use some crappy hsa. You don't have to use a lousy retirement plan with low contribution limits and high expense ratio funds. You can pick your own and so you should and pick the best of the bunch. I've been self employed for quite a while now and you know, I go and I buy health insurance on the open market and I choose the cheapest one that offers good quality and good availability in my area. Same thing with a 401k. You know, I'm not stuck with what, you know, an employer offers me. I can go and I've opened up an individual 401k at Vanguard. I get excellent Vanguard index funds with low expense ratios and, you know, and it's not filled with a bunch of crummy funds. Of course, there's also nobody giving me any matching dollars. So any match in there is really just my money. But I am allowed to put up to $54,000 per year into that account. And if your wife works for the business as well, or your husband works for the business as well, or even, well, I guess you do have to technically be married. If you're just cohabitating, you can't actually both use the same individual 401k. You have to technically be married. But if you are and your spouse is working for the business, you can, they can also put in another $54,000 a year into that individual 401. And it's really very little work, very little paperwork and a huge tax benefit. If you really want to save a lot of money, you can do a personal defined benefit cash balance plan. And you know, if you're approaching 60, you could put as much as a couple hundred thousand dollars into that. And so you really have a lot of great options for retirement accounts. Same thing with an hsa. You know, you can go to the HSA that offers you the lowest fees and the best service and the easiest way, invest the money for the long term. If you want to use your HSA as a stealth ira, you're not stuck with whatever your employer offers. You don't have to use their disability insurance you don't have to use their life insurance, you can go out and get your own. Now that's not always a good thing. If you have a hard time qualifying for life or disability insurance due to risky hobbies or bad health, you might be better off getting some of that through an employer. But for the most part, you're usually able to get better deal if you don't have to use your employer's chosen provider. Now it's not unusual, even if you're a 1099, for the hospital to pick up the cost of malpractice. Mostly because they have a big policy, they've got a lot of docs on it and they can often add you for cheaper than you can go out and buy it on your own. And so that just needs to be part of the contract between you and the hospital that they will cover the malpractice costs. Obviously read the contract, make sure that you know who's going to pay the tail insurance if it's a claims made policy or that it's an occurrence policy. Now this question about incorporation. A lot of docs wonder if they should incorporate, should I incorporate? And they think there's this huge tax savings they're going to get and that there's this huge liability savings they're going to get. Well, your main liability as a physician, malpractice and incorporating yourself does not protect you at all from malpractice. Malpractice is always personal. So buy malpractice insurance to protect you from that. There are other asset protections you can use in the very rare event that you're sued for more than policy limits. But incorporating yourself as a physician is not one of them. So don't expect any huge liability benefit there by incorporating. Now if you have some business related liability, you got a bunch of employees or something, then sure, incorporating can provide some additional liability there. But the truth of the matter is. Or additional liability protection there. The truth of the matter is you can get most of that just by forming an llc, which is way easier than incorporating. So now let's turn to the tax angle. Is there a big tax benefit to incorporating? Well, the main tax angle used by a physician who incorporates is to reduce his payroll taxes. And what I mean by that is when you are an S corporation, meaning you've incorporated and you've filed an S declaration with the irs, then basically the way it works is you have some of the money that you are paid come out as a salary, meaning the corporation pays you a salary and you pay your regular income taxes on that, and you pay your Social Security taxes on that, and you pay your Medicare taxes on that. And then part of your income comes as a distribution or a dividend. And that money you still have to pay your regular income taxes on, but you don't have to pay those payroll taxes like Social Security and Medicare on. Now, for most docs, they're paying themselves a high enough salary that they've already maxed out their Social Security taxes for the year. So they're really just saving the Medicare taxes, which is basically 2.9% the amount you call a distribution instead of salary. And so if you're getting paid 400,000 and you take 200,000 as salary and 200,000 as a distribution, well, you just saved yourself about $5,800 in taxes. And so that's the reason some doctors do choose to incorporate is in order to lower the amount of money they pay in Medicare taxes. Now, there's obviously some costs and hassle. For most docs, it involves, you know, hiring an accountant and paying them a few hundred dollars a year to file those returns and to keep track of that stuff. But, you know, if it's worth the cost and hassle to save a few thousand in taxes, then that would be a good reason to incorporate. As a physician, just don't expect any additional malpractice protection from it and don't expect some dramatically different ability to deduct your business expenses on it. Really, the main benefit is getting rid of that Medicare tax. A couple other things to consider when you are comparing two jobs. One of them is a W2 job and one is a 1099 job. Remember that there are a few additional expenses you're going to have. If you're an independent contractor, not only do you have to pay all the benefits yourself, but you also have to pay both halves of the payroll taxes. When you're an employee, your employer pays half of your Social Security taxes and half of your Medicare taxes. That's not a small amount of money for a physician. And so if you're going to be an independent contractor, you need to make sure you're getting paid more so that you can cover those expenses. How much more? Well, it varies. You've really got to do the math in order to compare apples to apples. But as a general rule, for a typical physician, I would expect to be paid about 10% more on a 1099 than what I was being offered on a W2 in order to have them come out about the same. You know, really the best of both worlds is to have a little bit of 1099 income and some employee income that allows you to write off all your work expenses that are required for your independent contractor job but may be used for both jobs. You know, like CME uniforms, licensing fees, DEA fees, specialty society dues, etc. You write those off against your 1099 income, but then you have your employer provide your benefits, at least the employer portion of the Social Security taxes, which are the lion's share of the payroll taxes for a doctor with a median physician income. The other cool thing about having, you know, both an employee job and an independent contractor job is you get two 401ks. You can have that 401k through the employer, and then you can open your own individual 401k, which allows you to protect even more of your money from Uncle Sam and potential future creditors, because those accounts usually get pretty good asset protection in most states.

At some point in our financial lives, it Will be Time to Buy a Home. A physician mortgage can be a good vehicle for a young doctor who's just out of school and has a more effective place to use their money than on a big down payment. These loans allow doctors to secure a mortgage with fewer restrictions and a lower down payment than a conventional mortgage. But if you're further advanced in your career or deeper into your journey to financial freedom, buying a home with a conventional mortgage and then later on potentially refinancing that loan to a better rate with a shorter time frame could be a great move. Wherever you are in your financial journey, make sure you use the mortgage that will be most financially beneficial for you. Hop over to our recommended tab to learn more about all of your mortgage and refinancing options@whitecoatinvestor.com mortgage. You can do this and the white coat investor can help.

Head up. Shoulders back. You can do this. We can help. See you next time.