WCI #279: Roth Options and Questions

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This is White Coat Investor podcast. 279 Roth options and questions did you know that the White Coat Investor not only has a podcast and a blog, but several books that will help you on your way to financial independence. These books cover topics such as asset protection and minimizing your taxes to keep more of your hard earned money. They discuss plans for insurance, housing spending, student loan elimination, investing and estate planning. You can learn how to become a millionaire within five to 10 years of leaving residency and how to invest in a sensible, low cost and effective manner with or without the assistance of a financial advisor. There's even a book geared directly toward medical and dental students so you can start optimizing your finances or early in your professional journey. Find the book that is right for you at the WCI store, at shop.whitecoatinvestor.com or on Amazon. You can do this and the White Coat Investor can help welcome back to the podcast. I just got back from Wyoming. I was in the Wind River's backpacking and climbing Gannett Peak. It was quite an experience. You actually get to hear about it if you're a blog reader. I wrote up a blog post about it with some financial lessons that can be applied to our lives from the trip. Watch for that coming out in the next few weeks or months. Great trip though. Feeling very relaxed and happy to be back here at work at WCI headquarters. Wherever you're working today, if you're on your way in or on your way home, or whether you're relaxing afterward or working out or whatever listening to this, let me be the person who thanks you today for what you're doing. Your job is not easy. That's why you're a high income professional and I know you don't get thanked as much for it as maybe you ought to be. You know, those of us who go into medicine, we tend to be more people pleasers than the average person. And a lot of us truly are working for the thank yous. So if you didn't get any today, let me give you one. All right, let's talk about Roth. Roth comes from Senator William Roth. You know, I think it was 97 when they came up with the Roth IRA. In subsequent years they came up with Roth options in qualified retirement accounts. What is a Roth option? Well, it's basically when you put money into an account after it's been taxed. So then it grows in a tax protected way, just like it would in a tax deferred account. But when the money comes out, typically in retirement after age 55 or 59 and a half, depending on the account, it doesn't get taxed at all. So it's tax free forever. And if you leave it to your heirs, they don't pay taxes on it either. And so it's cool in that it's been taxed, it's not going to get taxed again. In fact, sometimes if you can get money in there without it being taxed in the first place, it never gets taxed. You know, for example, if you have a business and it's not a corporation, but it's a business where the only owners are their parents and you pay them, that money is typically not taxed. They typically don't earn enough to pay income taxes on it. You don't have to pay payroll taxes on it. And then if they use it to make Roth IRA contributions, it never gets taxed. So everybody's into tax free. Tax free is great. Tax drag is a major expense, perhaps the largest expense when it comes to investing. And eliminating that boosts your returns. You simply end up with more money. Your money grows faster by not paying taxes. And so there are Roth options in all kinds of accounts. If you want to contribute to a Roth option ira, however, your income has to be below a certain amount. I think if you're married, filing separately, it's just over a couple hundred thousand dollars. I think if you're single, I think it's around $135,000. These are modified adjusted gross incomes and those go up each year with inflation. But you can still contribute to a Roth ira. You just have to do it indirectly, AKA via the backdoor Roth IRA process, which is basically a two step plan. First, you contribute the money to a traditional IRA and you probably don't get a tax deduction for that. So it's kind of non deductible traditional IRA money. And then the next day you convert it to a Roth ira. Since you got no deduction, there's no tax cost on the conversion. And in the end it's just like you had contributed it directly into a Roth ira. Now obviously there's a few little things to pay attention to, otherwise you wouldn't see so many questions about the process. You got to be aware of the pro rata rule, which means you can't have money in other IRAs, SEP IRAs, or simple IRAs at the end of the year, when you do a Roth conversion during that year or that conversion gets prorated, you don't want that. And you know that's the main thing to avoid. Of course, you got to make sure you report it right on IRS Form 8606 with your tax return. And IRAs are individual, so there's one of those for each spouse if you're filing a married filing jointly return. But other accounts can also have Roth options. You can have a Roth option in your 401, 401, you can have a Roth option in your 403, you can have a Roth option in your 457. All of those can have Roth options. And the nice thing about that is you get the choice. And in fact, even if you don't like the choice you made, many plans will even allow you to do an in service conversion, meaning you move money from the tax deferred portion of the account into the Roth account, paying the taxes on that. And so look for those options in your plan. It's plan dependent. The IRS lets them do in service conversions, it lets them do Roth contributions, but the plan may not have that option. So you got to get the details on that from your HR folks and figure out what your plan allows. The nice thing about making Roth contributions as opposed to tax deferred contributions is the government lets you make a contribution of the exact same size. For example, the employee 401k 403 contribution, which is precisely the same size as the 457 contribution, at least when you don't take catch ups into consideration, is $20,500 this year for those under 50. So you can put $20,500 into your Roth 401, or you can put $20,500 into your tax deferred 401. But the truth is, if you're like me in a relatively high bracket, you're actually putting more money in on an after tax basis if you're making the Roth contribution. So really what you should be comparing is putting $20,500 into a Roth account or putting something like $13,000 into a tax protected account and investing another $7,000 or so into a taxable account. So the idea is that you can actually put more money in when you're putting it into a Roth account. And so that's why if the tax rates are the same upon contribution as upon withdrawal, Roth actually comes out ahead. However, that's not actually the case for most docs in their peak earning years. Most stocks in their peak earning years are in the 32%, 35%, 37% bracket. And when they take that money out during retirement years, they're going to be able to withdraw it, filling the brackets as they go. You know, if they don't have any other taxable income, you know, before they start getting Social Security or there's no rental property income or some pension or something, you basically take out, you know, the standard deduction amount tax free. So if you got a 37% deduction when the money went in and you pull it out at 0%, that's a huge arbitrage. And, and that's why tax deferred accounts work really well during your peak earnings years. And then you can take out a certain amount more. 20,000 or so out at 10%, another 50,000 or so out at 12%, and another 75,000 out at 22%. And so the idea is you put money in there saving 32, 35, 37%, whatever when the money goes in, and then only have to pay 0, 10, 12, 22% when you take the money out. So that's a huge arbitrage. And that's the best argument against using a Roth contribution. It's just because the tax savings, the additional tax savings, aside from having decades of tax protected growth that you get from using a tax deferred account. But if, for whatever reason, you're going to be filling those brackets with other income, a pension from the military or you know, a bunch of retirement of rental property income, or, you know, Social Security contribution or Social Security payments, et cetera, if you're going to be filling all those low brackets with other income, then Roth starts making a lot more sense. Also makes lots of sense if you're a super saver, right? If you're going to end up with $20 million in retirement, you're going to have some huge tax deferred IRA eventually. You know, those sorts of reasons are reasons why you may want to do more Roth. Now it also can help save you on estate taxes, because the stupid irs, they look at a dollar in a Roth account as exactly the same as a dollar in the tax deferred account. So if you're knocking on the door of the estate tax exemption, doing Roth conversions or preferentially making Roth contributions can help you avoid estate taxes as well. So lots of benefits there. So those are things to keep in mind when you're trying to decide whether to do Roth contributions or tax deferred contributions. Honestly, these are too good for things, right? You're choosing between two winning ideas here. It's not like one is dramatically better than the other, but in some situations it's better to use one. In some situations it's better to use the other. Keep in mind your employer match is always tax deferred money, even if you make a Roth contribution. All right, I think that's about all I can tell you about Roth options right now. Hopefully that was useful to you. Hey, big news this week. I think this drops on September 8th. So two days ago, we launched our newest online course here at the White Coat Investor. And it's awesome. This course is four times as long as our flagship course, fire your financial advisor. As you'll recall, fire your financial advisor helps you get a written financial plan in place, right? It helps you go from zero to hero. And it's a great course. Right? We've been helping White Coat investors with it now for several years. This new course is about real estate. We call it no hype real estate investing. And it is literally four times as long as fire your financial advisor. It is packed with information and we've discovered over the years that people are very interested in real estate investing, including white coat investors. That ranges everywhere from direct real estate investing, you know, might be short term rentals, long term rentals, fix and flips, turnkey investing, et cetera, to more passive stuff, you know, syndications, funds, REITs, even publicly traded REITs. And people go out and try to get information on it and they end up all they can find is really, really expensive courses or people with real conflicts of interest giving them information or worse, just a bunch of hype, you know, and people making it sound like it's super easy, there's no risk in it. And that's not the case. And so we wanted to put together a course with just the facts, ma'. Am. A course that's not going to blow any smoke, that's not going to give you all the hype. It'll still get you excited about real estate investing. It's going to give you the information you need, but it's not going to give you false expectations. You're still going to understand there's a lot of work to do here, but that the rewards are probably worth it. And we'll talk about each of those different types of real estate investing and give you a framework on which to place additional knowledge you may acquire down the road about real estate investing. So we think it's a really great course. We've been working on it now for like 10 months. We put a ton of effort into this. There are actually 19 instructors. It's not just me behind the camera here. Great slides. We've got a great AV team now. So it's well thought out and well presented and it's a great, great course. We think you should check it out. If you have any interest whatsoever in real estate investing, if you've been dabbling in it, if you've been doing it for a while, if you're just thinking about getting into it, this is a great course. You can get more information@whitecoatinvestor.com realestate. If that's too much to remember, do no hype. Either one of them works. And you can check out that course. Like all of our courses, it comes with a money back guarantee. There is no risk to you. If you buy it and you look at it and you're like, I don't really want this. Shoot us an email. Coursesitecodeinvestor.com, we give you all your money back. You got a week to check it out. As long as you take less than 20% of it and you bought it less than a week ago, we give you every dollar back. It is literally no risk to you. Okay, so these courses, if you have looked around physician space, physician real estate space, or even the non physician real estate space, you've seen that these courses cost thousands of dollars. This course is longer and more detailed than many of the courses out there. Plus it doesn't include all that hype that you're trying to avoid. And yet we sell it for dramatically less. Okay, the retail price, $2,200. Okay, $2,199. But we're going to give you $400 off through September 26th. Through September 26th, it's just $17.99. So a real discount there. Here it's basically four times as big as fire your financial advisor. We're only selling it at two and a half times the price. So we think it's a great course. We think it's already a discount. We consider this the resident PA military at center price. But obviously, if you're scraping by and you're having to choose between this course and buying groceries, we want you to go buy the groceries. But if you've got some capital to invest and you're interested in getting into either active or passive real estate investing, we think you should take this course. Again, that's whitecoatinvestor.com realestate and by the way, if you want to learn more about it, totally Free webinar. I'm going to do September 20th at 7pm Mountain. 7pm Mountain. And you can sign up for that at whitecoatinvestor.com nohypewebinar and I'll answer all your questions about the course. We'll talk to you about what's in it, give you some more information about real estate that's totally free, and that'll be on September 20th. But the sale goes through September 26th. Then it goes to regular price. It's still a deal at regular price, quite honestly. And you can check that out. All right, let's talk some more about Roth stuff. We got some questions on Speakpipe about Roth accounts, but before we get there, Cindy tells me we're running a little low on Speak Pipe questions. So if you've wanted to get your questions on the White Coat Investor podcast, you can do so go to whitecoatinvestor.com speakpipe and we'll get your questions on the show, get them answered. In the meantime, let's take this one from Raj about a backdoor Roth IRA issue. Hi, Jim. Call me Raj. Hey, my question is my tax guy, he filed my 1040 without knowing that I converted that into Roth. So he used 4B and he he had 6,000 in the 4B, which is taxable. Now I'm trying to file 3,000, 8,606 and an amendment. Maybe a quick help from you to understand, can I do that? Can I claim it again, or what's the right process to do it? Thank you. Hey, Raj, sorry you're having to deal with this. I couldn't quite tell if you have an incompetent tax guy or if you didn't actually give him all the information that he needed to do his job. I mean, typically when you do a roth conversion, your IRA custodian will send you a 1099 of some type A1099R or whatever that shows the conversion and whether you gave that to him or not. I don't know whether it wasn't clear on there what happened to him or not, because a lot of those, especially from Vanguard, they don't necessarily tell you how much of that is taxable. So if you don't know how much is taxable to put into your tax form, you might mistakenly claim it all. But what's happened here is that you claimed a Roth conversion and told the IRS that the money had not yet been taxed. If you're doing a backdoor Roth ira, that's not the case. So basically, you filed Your taxes wrong and paid too much in taxes. So what you need to do is file your taxes again and that is called an amended tax return. You use IRS form 1048 X and you don't have to fill out the whole tax thing, you just fill out what was changed. So basically you'll change that line 4B and you'll include Forms 8606 that you didn't send in earlier, that document, why you shouldn't have to pay taxes on that $6,000 conversion. Your tax guy ought to be doing that. I mean, that's why you're paying a tax guy to do this stuff. You shouldn't have to do it one way or the other. Either hire someone to do your taxes or do it yourself, but you shouldn't have to do both. So go ahead and get that cleaned up. It's no deal. I've filed lots of 1040xs over the years because for many years I did my own taxes and make lots of mistakes. And guess what? When my tax preparer does them, she also makes mistakes and has to file 1040xs. So this is not a big deal. If you've never filed a 1040X, consider yourself lucky. Some of us do it almost every year for some little thing like this that gets messed up. It's not a big deal. It doesn't mean they're going to come audit you and knock down your door at night. It's a normal thing when it comes to paying taxes, especially as you get more and more complicated tax returns. Alright, next question is via email. If I partially contribute roth to a 403, I do 50, 50 traditional Roth contributions. This should not affect my ability for the backdoor Roth IRA, right? Well, here's the deal. Why would somebody do 5050 contributions? Well, it's because they're not sure. They're not sure of what they should be doing with their contributions. And that's not a bad thing. Lots of people aren't sure because it's not clear, right? In order to know for sure, you have to know a bunch of information that is not only unknown but is unknowable. Like what tax rates are going to be in the future, what other sources of income you might have, how wealthy you're going to be, how long you work. Those sorts of questions affect that decision. So what a lot of people choose to do is they just split the difference. They're like, eh, I don't know what's right. I'm going to minimize regret. I'm going to do half traditional and half Roth. And that's fine. It's a totally reasonable approach. Obviously you're going to be wrong with half your money, but at least you're going to know for sure you're not wrong with all of it. But at any rate, to answer your question, money in a 403 or a 401 or a 457 or a defined contribution cash balance plan or defined benefit cash balance plan, none of that counts toward the pro rata calculation for the backdoor Roth IRA process. If you will look at IRS Form 8606, line 6, you will see that it asks for the balance of your traditional IRAs, your SEP IRAs, and your simple IRAs. That includes rollover IRAs. It does not include inherited IRAs, it does not include Roth IRAs, and it certainly doesn't include any qualified retirement plans from your employer like 401K, 403, 457B, 401A, et cetera. Okay, so you're fine. You can make Roth contributions, you can make traditional contributions in your 403 or your 401 has nothing to do with your backdoor Roth IRA process. All right, here comes another question off the speak pipe about mega backdoor roth conversions.

Hi Dr. Dahl, this is Tom from California. I have a question on mega backdoor Roth conversions. I work for an organization that has a 403 that allows for both pre tax and post tax contributions from the employee as well as the 403 plan allows for in plan conversions. Can you please go over in greater detail the strategies behind one? When one would want to do a mega backdoor Roth conversion, is it based simply on your marginal tax rate at the time that you are considering to do this? In my case, I'm in the late late 50s. Would it make sense to do this or would it make more sense to do it after I retire, say at age 63 or 65 when I would have lower, in theory, lower marginal tax rates and do the mega backdoor conversion at that point? Question one and question two. Is it possible for you to specify which portion of the 403 plan of the contributions that you would like to have moved over through the mega backdoor Roth? Could you specify to say I only want my Roth contributions to the 403B to be converted over to the Roth?

All right, so that got really confusing at the end. I think most listeners would agree and I think the reason why you've got questions is because you're confused about what's going on here. So let's talk about the mega backdoor Roth IRA in general here. Okay? We've talked about the backdoor Roth IRA process. This is something you do with IRAs, right? You put money in a traditional IRA then you convert it to a a Roth IRA because you didn't get the deduction. There's no tax cost on the conversion. In the end, it's as though you put $6,000 or $7,000 if you're 50 plus directly into a Roth IRA. Just got to be aware of that pro rata rule. The mega backdoor Roth IRA has nothing to do with an ira, despite the name, despite the fact that it shares backdoor Roth IRA with that other thing. It's different. Okay? The mega backdoor Roth IRA is something you do typically in a 401k. Maybe it can be done in a 403, but typically it's done in a 401. This is a 401 thing, despite the fact that it's called the mega backdoor Roth ira. Okay? There is also a thing called a Roth conversion. Okay? A Roth conversion is anytime you take money that is not Roth and you move it into a Roth account and you may or may not have to pay taxes on that conversion, depending on how much of that money has been taxed previously. Okay? A Roth conversion is a step in the backdoor Roth IRA process. It is also a step in the mega backdoor Roth IRA process. Okay, so now we got the terminology straight. There are three types of contributions that you can make to a qualified plan, like a 401 or to a 403, et cetera. Those types of contributions are a tax deferred contribution. That's one type where the money has not been taxed. You got a big tax deduction. You put $10,000 in there. Your marginal tax rate is 40%. You just save $4,000 in taxes by putting that money in. It's a great thing. There are also Roth contributions. This is money you pay tax on now. You put in there and it never gets taxed again. And then there are after tax contributions. Note that this is not the same as Roth contributions. After tax contributions are money on which you will not pay taxes when you withdraw it, but you will pay taxes on any gains. And you don't pay them at long term capital gains rates. You pay them at ordinary income tax rates. If you just made a contribution to a traditional IRA and were not allowed to take a deduction for it, that's what you would have in there. You would have after tax money the basis or the money you put in there would come out tax free, but any earnings that were put in there would later come out taxed at your ordinary income tax rates. Same thing inside a 401k. If you just put that money in there as after tax Money, because your 401k allows you to, and lots of 401ks do, then when you take it out, the basis comes out tax free. All the earnings are taxed, just like your tax deferred contributions. And that's not an awesome thing, right? You don't really want to pay on those earnings at your ordinary income tax rates, especially if there's another option. And that other option that is available in many plans is to convert that money to Roth money. So the mega backdoor Roth IRA process is step one, contributing to a after tax portion of a 401. And depending on the employer and the plan, you may be able to put a lot of money in there. You may be able to put, you know, $37,000 in there a year. I guess, you know, $61,000 is the limit this year. So what would that be? You know, $40,500. I suppose some people might be able to put in there of after tax money, but step two is then converting it inside the plan into Roth money. So there's no cost to that conversion, no tax cost, because it has already been taxed. And now the earnings, instead of being taxed at your ordinary income tax rate, are never taxed again. So that's an awesome thing. It's just like you just put, you know, $20,000, $30,000, $40,000 into a Roth IRA. That's why it's called the Mega BackDoor Roth IRA, because you are putting a ton of money in there that is now Roth money and will now grow tax free going forward. So that's what the mega backdoor Roth IRA process is. And depending on the plan, you may or may not be able to put any at all in there. And how much goes in there may depend on how much of an employer match you get, right? Because there's this limit, $61,000 limit this year on how much can go into that account total between all of your contributions and all of your employer's contributions. And so if you put in $20,000 as your regular contribution, $20,500 is probably what you put in. And then your employer matched another $10,000, right? And they say, well, you can go up to $61,000 total. So maybe you chose to put in another $30,000 as an after Tax contribution. So if they allow you to do that, that's a great thing. If they also allow you to then convert that money to a Roth account, that's an even better thing because now you've got a bunch of money in Roth instead of just after tax. And that's much, much better. So that's great if you can do that. Now, what if you have a choice between that and something else? You know, lots of us do have that choice. We have that choice in the White Coat Investor 401K. We set it up that way. I mean, when you get to Design your own 401, you get to do whatever you want. So that is what Katie and I actually do these days. We make all that contribution after tax contribution, then we immediately convert it to Roth money. And the reason why has to do with the 199A deduction, et cetera. It's not right for everybody, but it is right for us. And so those are the contributions we make to our 401 these days. If your plan allows it, it might be right for you. Only you can decide if the other option is $61,000. That's all tax deferred. That could very well be the right option for you, especially during your peak earnings years. You just have to weigh those factors and that's going to be different for everybody. Again, if you're a super saver or you expect a whole bunch of other sources of income in retirement, or you expect to be in the exact same bracket or even a higher bracket than you are now in retirement, then you want to lean more toward Roth money. If you're a more typical doc and you're going to retire with just a few million dollars and you're not going to even have enough tax deferred withdrawals each year to fill up the first three or four brackets, then you're probably going to want to do tax deferred contributions and not do the mega backdoor Roth contributions. You just have to evaluate the plan that you're offered, put it in place with your overall financial plan and decide on the right thing to do. Hope that's helpful. It's actually a fairly complicated question. A lot goes into answering that question. But I hope that gives you a little bit more clarity to what you're actually dealing with. All right, next question about a Roth IRA from John. Let's take a listen to that.

Hi, Dr. Dali. I'm a new grad and have questions about my Roth IRA. I've been contributing via backdoor for the last two years and put in my 6K this year, but was actually enrolled in a simple IRA through work in about June. So I didn't think about it until I saw a post recently. But I'm wanting to figure out the best way to move forward again. I don't have much, I'm a new grad, but I have around 15k in the Roth and only about 2k which will probably be closer to 4 to 5k at the end of the year. Would it be best to call Vanguard and recharacterize my Roth back into a traditional IRA to see if I can roll over the Simple IRA into the Roth, if that's possible, or something else? Also, if I were to roll it over, would it not be over the limit of the 6k in one year? And then I was reading that that would lead to a 6% excise tax year after year until that was resolved. So I didn't fully understand that, but I would appreciate any insight. So thanks again for all you do. I truly appreciate all the work that you've put into making white coated investors such a great resource for all of us. Thank you for your help.

All right, well, sorry, you have a Simple IRA at work. To those of you who are employers, if you employ docs and your retirement plan at your company is a simple ira, you suck. I hate you. Why would you do that for doctors? That's really lame. Now I get it. If you're in a small dental practice or something, right? Sometimes a Simple IRA makes sense to be what you offer to your employees. And if that's the case and you just happen to have one associate dentist or one associate physician or whatever. Okay, I get it. It was the best you could do. If you're putting in a plan into your business, you ought to get a study of the business and how much employees are likely to contribute and how many of them are highly compensated employees versus non highly compensated and figure out what the right plan is for the business. It might be a simple IRA, it might be a SEP IRA, it might be a 401k, it might be no plan at all. But boy, if you make a Simple ira, you're not helping your docs very much and you're probably not helping yourself very much. So keep that in mind. The contributions are on a simple IRA. What are they this year? Like $14,000 or something like that? It's dramatically less than the $61,000 you can put in a 401. So for you and your docs, you are really limiting how much money you can get into A tax protected and asset protected account if you're putting a simple IRA in place. And aside from that, you're also screwing their ability to do a backdoor Roth IRA. Remember what I said earlier about that form 8606, line six, right. It asks for the balance at the end of the year of all the money you have in a traditional ira, a simple IRA and a SEP ira. And if you have money on that line in those accounts, your conversion for your backdoor Roth IRA process is going to be prorated. Now, being prorated isn't the end of the world, but it kind of defeats the purpose of doing the backdoor Roth IRA process. And so it's really lame. Not only are you not letting people put much into retirement, but you're basically keeping them from being able to do this $6,000 in an effective way. So you didn't know this, John. You've just been plodding along doing the right thing, and you got ambushed by an employer that for whatever reason has a simple IRA in place. So what's going to happen this year if you don't do anything is you're going to get your conversion prorated. Okay? However much money you got in that simple IRA, plus the $6,000 that you did the conversion on, you know, some portion of that conversion you did is going to be basis, meaning it's not taxable. And some portion of it is going to be simple IRA money that you got a tax deduction for. And so there's going to be a cost for your Roth conversion this year. It's not at the end of the world, right? Because that money that you're paying to convert is never going to be taxed again. And you've still got some basis in that ira. But it sure does make things more complicated. So as a general rule, if the plan at work is a simple IRA, you just don't do backdoor Roth IRAs going forward. If you think you're only going to be there a few years or the employer might change the plan, well, you can keep doing the contribution step of the backdoor Roth IRA process and just have that money sit in the traditional ira and then you can do a conversion at a later date. Obviously, you'll have to pay taxes on any gains that you convert, but the original basis can still be converted tax free down the road. So that's not a bad thing to do. But if it looks like you're going to be in this job for 15 years and that this plan is not going to change, this is going to be your retirement plan at the job? Well, it may not be worth messing around with the backdoor Roth IRA at all. You're one of those few people that probably shouldn't be doing a backdoor Roth IRA each year because it's just going to get prorated. And not only is that not as beneficial as you expected it to be, but it's also a pain tax wise. Now would I go back and try to undo my backdoor Roth IRA for this year? Probably not. I probably wouldn't. You know, they may not even let you contribute to the Simple IRA this year. And so that would also solve the problem for this year. You'll just have to use that money for something else to pay off your student loans or beef up your emergency fund or invest in taxable or whatever. You know, that might be an option. Just pull any contribution you've made to the Simple IRA out this year and start using it next year instead of doing a backdoor Roth ira. But you really probably choosing between the two going forward and you'll just have to do the rest of your savings and taxable. Sorry about that. It stinks to have your retirement plan be a simple ira. And no, you can't just convert it every year. You can do that with a SEP ira, but a simple ira, you have to leave the money there for two years. So it's just a really lame retirement account. It's simple to set up, it's cheap to set up, that's why employers use it. But it's not a very good account. So I hate simple IRAs. Okay, let's take a question via email. I'm curious for your thoughts of why seemingly more physicians are looking for side hustles or fire than before. Is medicine worse now than 20 or 30 years ago? Is it just that options like fire are more known now? I'm fascinated. Why? It seems like so many physicians think about these options and I wonder if it stems from a desire to leave medicine or. Or something else. Well, everybody thinks it was way better in the past, right? The golden age of medicine always seems to be about five years before you entered medical school. And everything's been going downhill ever since. People were saying that in the 80s and the 90s and the 2000s and the 2010s and they're still saying it in the 2020s, right? That everything used to be really good. Well, if you look at it objectively, that's not necessarily true. There are lots of docs that are doing better now than they ever were and so there may not have been a golden age of medicine. And this is, you know, regional dependent, especially dependent. So realize that. Are there some unique stresses now? Yes. Is burnout higher than ever before? Yes. Is that just because we're looking for it more? It's hard to say. I think one thing that does make burnout worse these days is docs have a lot less control over their practices. A much larger percentage of doctors are employees now versus owners of their practice. They don't have the ability to say who works for them. They don't have the ability to pick their own partners. They don't have the ability to hire and fire those they work with to choose which EMR to use to, you know, determine how many patients per hour they're going to see. All those things that maybe they used to have or many of them used to have a lot more control over. And I think losing control, especially when the person who now has control, might be private equity backed, primarily profit motivated and really flogging the whip to get you to move people through as quickly as possible. The radiologists talk about this a lot, that it has just become such a productivity based business. How many CTs can you read in an hour? They don't care about quality. How many can you pump through? You know, in that respect, I think medicine is probably worse in a few ways than it used to be. How much of it is simply that people know more about it now? Well, I guess I'm partially responsible for that. I started the White coat investor in 2011. I've definitely noticed a change in physician financial literacy over the last decade. More of us are smarter now with our money than we used to be. I think that's a good thing. To know about your options is not a bad thing. Has fire been more popularized over the last five or six or seven years? Sure. Do millennials hate to work? You know, they probably have more of a focus on lifestyle than maybe the baby boomers did. And so, you know, I think there's some cultural changes, I think there's some changes in medicine, I think there's some financial literacy changes that have contributed to this. But most likely I think the biggest factor is that you're simply seeing a subset of doctors, those who are maybe not as satisfied with their practice, those who are more interested in changing to non clinical options or some other sort of side hustle or more interested in fire. They're concentrated in the places you're hanging out. They're concentrated in the audience of a podcast like this, on the forums of the white Coat Investor or a subreddit about fire. And so you're just seeing a selection bias there among doctors. I assure you that there are plenty of doctors out there that are planning to work a full career that aren't saving all that much of their money, that are not going to have an option to fire. There are plenty of them out there. And so I suspect a big portion of what you're seeing is simply where you're hanging out. If you go hang out somewhere where people aren't talking about finances, you're not going to see nearly as much of that. But yeah, I think burnout's higher now than it's ever been. I think more docs would like to leave medicine now than perhaps in the past. But I also think more docs actually have that option and because they have that option, they consider it and talk about it. All right, let's do our quote of the day. This one from Alfred Rapaport. Cash is a fact. Profit is an opinion that one gets dragged out every now and then when people are talking about dividend stocks, you know. All right, moving away from financial advisor. Let's take a listen to this one on the Speak pipe.

Hi, I've just discovered White Coat Investor during my recent quest to become more engaged in investing. I'm a surgical pathologist in upstate New York and I anticipate working for at least 20 more years. I've had a financial advisor for about 10 years who really helped me get my house in order. I maximize my 403B and Roth IRA contributions and I've been saving about 2000amonth to a taxable account at Schwab. My hospital also has a pension plan. Believe it or not, my advisor designed my portfolio for both my Roth and taxable accounts at Schwab. Now that I've educated myself more about the wisdom of indexing and wisdom and simplicity of indexing, I'm looking at it with a more critical eye. In my Roth account, I have about 17 funds. In my taxable account I have 15 funds. Some funds in both accounts are actively managed with an expense ratio of over 1%. Two questions. 1. Does this portfolio sound excessively complex to you? 2. If so, would it be unwise for me to consider eventually managing it on my own to at least avoid my advisor's fee? I've read lots about designing a simple, tax efficient portfolio, but what's a person to do with a portfolio designed by someone else? When I was a financial neophyte just out of residency, wouldn't selling the actively managed Funds have a huge tax wallop. In the spirit of buy and hold, am I better off just staying the course? I realize it may be difficult for you to answer these questions without seeing my portfolio, but I'd appreciate any advice you have. Thanks so much.

I get accused a lot of being anti financial advisor. That's not actually the case. I like financial advisors. I have friends that are financial advisors. I think there's a lot of really good financial advisors out there who give good advice at a fair price. This person that you have engaged to function as your financial advisor is not a good financial advisor. They suck at what they do. I don't know if they are a mutual fund salesman, if that is how they're being paid. If you're paying on commissions. If these are loaded or commissioned mutual funds, that's the mistake you've made. You have basically hired a commissioned sales agent masquerading as an advisor. If that's not the case, and this is just a terribly untalented, unknowledgeable, ignorant advisor, I guess the end result is the same. This person needs to be fired. They're terrible. They really are. And if this is your portfolio, if you're this poor doc's advisor, you suck. Why did you do this? Why are you in this profession if this is the kind of work you're going to do? This is basically financial malpractice to set up a portfolio with 15 funds in one, 17 funds in another, 1% plus ERS. I mean, come on, you're not doing this person a service. You're ripping them off. Most likely this advisor is not doing it deliberately, that they're not a bad person. It's that they're ignorant. They don't know how to construct a portfolio properly. They don't know about index funds. They don't know about the importance of keeping costs low. They don't know about the importance of having a reasonably simple portfolio. All right, so this is an advisor that needs to be fired. So step number one is to figure out what are you going to do going forward. You have two good options. One is to get a real financial advisor that offers good advice at a fair price. You can find a list of these folks@whitecoatinvestor.com go into the recommended tab for financial advisors. We can. You got a lot of great people, they do charge money. Financial advice isn't cheap. You got to expect to pay a four figure amount a year. But they give good advice. They're not going to put you into this crappy portfolio and if they do, I want to hear about it because I'm taking them off my list. But we ask them about this sort of stuff when we vet them to put them on that list. Do you use a bunch of actively managed funds? Do you use a bunch of high expense ratio funds? We ask them these questions, are you trying to time the market? And we actually make that application with those questions available to you. You can read their answers before you hire them. So that's one option. The second option is to do what lots of white coat investors do, and that is manage your own money. There's some real advantages to managing your own money. Number one, you save the fees. So even if you're not exactly quite as good as a professional talented financial advisor, as long as you are no worse than the amount it costs to hire that person, then you're still coming out ahead. So that's one option. The other thing is, you know, you're not going to rip yourself off and you don't have to, you know, schedule a bunch of time to meet with yourself. And so there's some advantages to, you know, doing it yourself in that way. I've been a do it yourself investor for a couple of decades now and I intend to do that continuing forward. I don't find it complicated. I find the price to hire somebody to do this to be dramatically more than the value I get from having them do it. So I think that's a perfectly reasonable option. Either way, you've got to choose what you're going to do going forward. And I wouldn't do anything until you've made that decision. So that's step one. If the plan is to hire a good advisor, you dump this in their lap and have them sort it out. That's their job. That's why you're hiring them. And that's perfectly acceptable to do. In fact, you can just hire somebody to help you sort it out and then going forward, manage it yourself. We have lots of people on that list that specialize in doing that sort of a thing where they just do it on an hourly base or on a flat fee base and help you get your portfolio set up properly. Assuming, and you sound like you're probably going to be a do it yourself investor going forward, then you got to figure out how to do this on your own. So again, don't do anything until you have the plan in place. Get a written financial plan in place. If you need to hire an advisor to do that, hire an advisor to do that. If you need to take our fire Your financial advisor online course to learn how to do that. Do that. If you feel like you're now competent to do it, then do it. But get the plan in place first. Then it's just a question of going from here to there. With the tax protected accounts. It's very, very easy, right? There's no tax cost to selling any of that crap. You just sell it all. You put it in the portfolio that you want in a taxable account. It's a little more complicated and you may end up with some legacy investments. Legacy investments are investments you wouldn't buy now, but you don't want to sell because the tax cost to selling is too high. And you got some options of what to do with that. But step one, when you look at a taxable account that's in 15 or 17 different funds or whatever the crap that was, first thing you do is you figure out the cost basis for each of those tax lots. And you may find, especially with the performance of the market this year, that you've actually got a bunch of those lots with losses. So if you were underwater on any of that, great, sell it and buy what you should actually be investing in in the first place, you're actually going to tax loss harvest at the same time. This is a good thing. If the basis is about the same as what you bought it at, great, no tax cost. You can sell it and buy what you'd rather own. If you were able to pick up a bunch of tax losses in this process, you can now sell some of those things with gains and use the losses to offset the gains and again get invested into that sort of stuff that you actually want. Then if you've got a few things left that have a very low basis compared to their current value, well, you may want to build around those in your portfolio. You may want to say, well, these are mostly large cap blend funds, so I'll just own a little bit less of the total stock market fund in order to account for the fact that some of my portfolio is going to sit in the these, at least for a while. If you end up gifting something to your children or something, you can gift those appreciated shares. If you give to charity. Those are great things to give to charity, these appreciated shares that you don't actually even want. And you can do that with no tax cost. Obviously don't be reinvesting dividends into those funds, but they've just become legacy investments for you and you just have to deal with them in that way. But most people that go into this process that have only been doing this for a couple of years, you're probably going to be able to change 95% of your portfolio to what you actually want to be invested in, no problem. You might have a little bit of legacy investments going forward, and that's not a big deal to deal with going forward. Every time you look at it, it'll remind you of the importance of being financially literate. All right, so next question comes via email. In terms of achieving passive cash flow sources, what are your thoughts on annuity vs dividend stock investing vs syndicated real estate? Pros and cons. Also, your thoughts in general of discussing fee structure for syndications and why something like a 2 in 20 fee structure is seen with syndications and thought to be okay while investing in stocks is too high of a fee. All right, let's do the first one. Passive cash flow sources. You know, passive is one of those things that it's a continuum. Some things are more passive than others. You want something that's really passive? Well, put your money into a mutual fund, put it into the total stock market mutual fund, and it'll pay you a dividend every quarter for the rest of your life. Extremely passively. You'll never do a thing with it again. That's really passive. On the other hand, if you write a book that's also passive income, that comes in after that, the royalties. But you had to do a whole bunch of work up front. And there are all kinds of other passive opportunities where maybe you're getting paid out of proportion to the amount of work you're putting in. Maybe that's running a direct real estate property. You know, that might be considered passive by lots of people, but obviously there's some work there. Some of that is kind of active income, if you will. But anyway, we're comparing annuities versus dividend stocks versus syndicated real estate. Well, let's divide this annuity on one side and dividend stock investing and syndicated real estate on the other. Bear in mind there are lots of terrible annuities that you should avoid. Right. But when we're talking about an annuity here, I'm assuming you're talking about a good annuity, something like a spia, a single premium immediate annuity. And what you're doing with that sort of a thing is you're buying a pension, you're going to an insurance company, you're giving them a lump sum of money in exchange, they are promising to pay you a certain amount every month as long as you live. That's obviously very passive. As A passive cash flow source. But it's really, you should think about that as a way to spend your money, not a way to invest. Invest your money. So, you know, if you're looking for something very safe and a way to spend your money, that's where an annuity comes in. These other two stocks and real estate have much more risk. Right. I would expect higher returns in the long run from both of those than I would from an annuity. And the main difference from a cash flow perspective is that with a stock, a relatively small portion of the return of the total return from the investment comes as income. With real estate, a relatively larger percentage of the return comes from income. So if the goal is income, then real estate tends to be a better option than stocks. Dividend stocks pay slightly higher dividends than the overall stock market. And so instead of getting 2%, maybe you're getting 3% or 4%. And the rest of the return, if the return's 8% total, the rest of the return comes as appreciation. Whereas with real estate, you might get 3% in appreciation and 5% in income. And so a larger percentage of the return is coming as income with real estate. So I think they're both great. I own stocks, I own real estate, I own all the dividend stocks. People think I'm anti dividend stocks. Nope, I own them all. I own all the international ones, I own all the US Ones. That's what you get with total market index funds. And so that's great. It's nice income. But if the goal is more of your return coming in as income, you may prefer to have a little bit more in real estate than in stocks. But it's not like you can't declare your own dividend. You can sell stocks anytime you want and declare your own dividend. It's no big deal. In fact, paying dividends is not ideal from a tax perspective. Right. All this time you're accumulating money and reinvesting it. Getting paid dividends, at least in a taxable account, is just creating tax drag on the growth on that money. So it's not necessarily a good thing. All right, so let's talk about fee structures for syndications. So most syndications, most private real estate funds, are set up with fees, and they're set up with a waterfall structure. Okay. And a typical waterfall, you know, you'll have to pay some sort of fee before we get to the waterfall, maybe 1%. That's pretty typical. And then what happens is there's usually a preferred return. That's usually something in the 6 to 8, 10% range, let's say 8%. So you pay those guys 1% a year. That's pretty typical. And that's for running the investment, for running the fund, for running the syndication, whatever. Right. Any business has expenses and that's how they pay the expense expenses. And then you get your preferred return. So you get all your money back, you get all the principal back, and then you're guaranteed the first 8% and that is the preferred return. And that goes to the investors preferentially. But in order to incentivize that manager to do really well, they actually get a promote, which is where most of their money comes from. Most of their income and profit from this deal comes from the promote. And the promote is how the money is split up beyond the preferred return. So a typical one might be, you know, you get the first 8% as the investor, and above there you split it 80%, 20%. Okay, so that would be, you know, if this thing makes, let's say it makes, you know, 18%, right? Does really well. Okay, you get the first 8% and then there's another 10% of return and that gets split 80% to you. So another 8% to you and 2% to the manager. So they get 2%, you get 16%. It's pretty good, right? Not too bad. Now, some of those have a catch up, meaning that on the overall return, if it makes enough money, eventually the manager of that fund gets 20%. So if there were a catch up system, whether it catches up 50, 50 or it catches up 100% to the manager, or it's 80, 20 on the catch up, what, however the catch up works, if it makes enough money, eventually they're going to get 20% of the entire return. So let's say again, this one smashes it out of the park. It makes 20%. So you're going to get 16%, they're going to get 4%. Okay? And that's how it works with this sort of promote structure. Now, is this the same thing as a hedge fund charging 2 and 20? In some ways it is. In some ways it isn't. Number one, the hedge fund typically isn't giving you a promote. Number two, the hedge fund is charging 2%. And typically most of these syndication deals charge a 1% fee. So that's one way in which is different. It's actually lower. Right? Especially if there's no catch up. Then you get 8% where they don't get any of it. And if this thing only makes 10%, well they're not getting 2%, they're only going to be getting like 0.4%. So significantly lower fees than what you'd see in a hedge fund. Number two, we're in the real estate space here. It's significantly less liquid, it's significantly less transparent, it's significantly less efficient than the stock market. If your hedge fund manager is just picking stocks and taking 2 and 20, that's a pretty big fee for picking stocks. You can go to an active mutual fund manager, a Vanguard, and pay 0.25% instead of 2 and 20. So if that hedge Fed manager is truly talented and is really going to beat the market, it's worth paying them 2 and 20. But there are very few people out there that have that much talent. And Certainly with a 2 and 20 fee structure, a significant portion of whatever talent they may have is going to flow to their pocket and your returns are going to be much more similar to the market returns you would get in an index fund. Probably more likely is they just had a few really good years. All the investors pile in, are willing to pay 2 and 20, and then the manager ends up underperforming the market anyway. And you're paying 2 and 20 to underperform. So now you're really underperforming after paying that high level of fees. So, you know, here's the deal. If you want to keep your fees rock bottom, super cheap, as cheap as you can, and that is your primary concern, you probably should not invest in any sort of private real estate. No syndications, no private real estate. If, however, you're willing to take a little bit broader view and say, okay, this is the cost of doing business in this space, and what I really care about is my after fee return. Really, your after fee, after tax, after inflation return, then that's what you ought to judge it based on. Yes, every dollar you pay in fees is a dollar that has to come out of your return. But you're not going to get someone to run some sort of real estate syndication on a, on a little $20 million syndication deal. They're not going to be willing to do it for 0.03% like Vanguard's willing to run a trillion dollar index fund. You're going to have to pay more if you want to play in that space. So your choice is if you want to have expenses of less than 10 basis points, all you're going to be able to do is invest in publicly traded investments. And you know what? I think there's probably a premium for being willing to be a little bit illiquid. There's probably a premium for getting out of that space and this is how you access it. So pay attention to fees, but realize that comparing a syndication fee to a mutual fund fee is apples and oranges, right? The syndication has expenses, things that have to be done. Right? Those expenses for the companies in your index fund do not show up in your expense ratio of that mutual fund. Okay? They're in the profit and loss statements of the underlying companies. So those have to be paid by somebody. And when it comes to the syndication, that's where they get paid. So hope that makes sense. If you're interested in those sorts of private real estate investments, I'd recommend you check out our new course, this brand new course, no Hyper Real Estate Investing. You can sign up for that@whitecoatinvestor.com realestate you can come to the webinar whitecoatinvestor.com nohype webinar is where you sign up for that. That's on the 20th at 7pm and learn more about it. And then that way you'll know how to evaluate these deals. You'll know how to recognize what's a fair waterfall structure, what is not a fair waterfall structure, and you'll be able to make better decisions. With respect to private real estate. You may decide you'll just stick with publicly traded real estate. Lots of people do. Other people decide, you know what? I'm not interested in paying syndicators or fund managers. I'm just going to do it myself. I'm going to go buy the property down the street and rent it out and manage it. And that's fine too. But you just got to match your desires and the amount of work and capital you're willing to put into the deal and how much control you want to have over it and decide where you fit on that real estate spectrum. We'll talk about that more at the webinar. Did you know that the White Coat Investor not only has a podcast and a blog, but several books that will help you on your way to financial independence? These books cover topics such as asset protection and minimizing your taxes to keep more of your hard earned money. They discuss plans for insurance, housing spending, student loan elimination, investing and estate planning. You can learn how to become a millionaire within five to 10 years of leaving residency and how to invest in a sensible, low cost and effective manner with or without the assistance of a financial advisor. There's even a book geared directly toward medical and dental students so you can start optimizing your finances early in your professional journey. Find the book that is right for you at the WCI store, at shop.whitecoatinvestor.com or on Amazon. You can do this and the White Coat Investor can help. All right, thanks. For those of you leaving us reviews, our most recent five star review came in said Exceptional Podcast. Jim has a wealth of knowledge and provides us with exceptional guidances with what I call no bias. Your podcast made huge impact on my financial life. It is needed for many high income professionals. I highly recommended. Thank you so much. Jav 20155 stars. All right, for the rest of you, keep your head up, shoulders back. You can do this and we can help. We'll see you next time on the White Coat Investor Podcast.

The hosts of the White Coat Investor Podcast are not licensed accountants, attorneys or financial advisors. This podcast is free entertainment and information only. It should not be considered professional or personal. Personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.