WCI #291: Tax Loss Harvest Before Year End

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. Hi and welcome to another White Coat Investor podcast. I'm your host, Dr. Disha Spath. I'm here with Dr. Jim Dali and this is episode number 291.

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Our quote of the day today is by Warren Buffett. He said, I will tell you how to become rich. Close the doors, be fearful when others are greedy, and be greedy when others are fearful. I mean, really, being a contrarian in the financial circles can be a little scary, but it can pay off in the long run. I think this is what this quote is talking about. I'm so glad you're here today. Thank you for what you do. What you do isn't easy, so let me be the first to thank you. All right, Jim, how are you today?

I'm doing great. I just got out of the er, had a shift yesterday, and, you know, it's one of those shifts where you just don't feel like you're winning. You know, I had a lady come in, super hypotensive, like 65 over 35 or something, and it seemed like everything I did wouldn't fix it. Four bags of fluid, two units of blood later, you know, starting, you know, pressers and giving antibiotics and. And I'm talking to the intensivist on the line and I'm like, I'm just not winning here. You know, the lactate's still 19. She's sitting here talking to me, though, with a ph of 7.0, and it's not getting better. I need some help. And you know how wonderful it is to be able to call somebody and get some help in a situation like that. So thanks to all of you who spent years in an ICU fellowship and learning to take care of those very, very ill patients. I know they appreciate it. I know their families do, and I know I did yesterday. So thank you very much to Dr. Hammond, who came in to help me, as well as to all you other intensivists out there.

That's amazing. Seriously. And I have to. I have to send a thank you to intensivists and ER doctors for putting those central lines. And thank you so much.

Well, I did get the line in. I'll. I'll give myself that credit.

Yeah.

There you go.

Thank you for that.

Which is terrifying, right? With an INR of more than 10 to put a central line in. Yeah, I'm like one stick, man. I got to hit this one ultrasound. Perfect. Stick went right in. No big deal. But you know what? There's a reason lots of people don't do procedures with INRs of 10, but sometimes you're forced to do it. So. Yeah. At any rate, hey, let's talk about something a little happier than that. Let's talk about the Physician Wellness and Financial Literacy Conference, this podcast we're recording on November 14th, but it's going to drop on December 1st. So as you're listening to this, your time is very limited for a very specific deadline through December 5th, when you come to the conference, you get a sweet swag bag. And I think our swag bags are the best swag bags of any conference I've ever been to. You get multiple books in this swag bag. You get T shirts, you get cool stuff. Right. It's not just junk from sponsors. It's, you know, I mean, this thing's worth a hundred dollars or more. So you want to register before the swag bag deadline. Now, that goes for both in person and virtual. And the reason we have to have the swag bag deadline so early is we literally have to print the books. We have to print the books. We have to have them shipped to us. And in the case of virtual people, we have to ship them out to you. We want you to have the swag bag before the conference starts. And, of course, we got to put a whole bunch of them on a big pallet and ship them to Arizona, so they're there for those of you coming in person. So we have to put this swag bag Deadline out there. I think you ought to register before December 5th because it is a sweet deal to get that swag bag. But we're going to bribe you even more to come and register before December 5th, and that's by giving you a discount. Don't tell anybody. This is just for the podcast listeners, okay? We're not posting this particular discount in the Facebook group. We're not putting it on the blog. This is for you. This is your free Benny here for listening to all these podcast. All right? Because I know a lot of you. I'm amazed when you guys tell me this, that you've listened to every podcast. Anybody that's listened to every podcast, I am totally impressed. I can't even listen to my own voice. So if you can listen to the podcast, you're awesome. But here's your discount code. When you go in there, if you put in code podcast 200, you get $200 off until December 5th. This is on in person only. Not guests, not the guest registration. Because you can register your guest already for a dramatic discount. This is just for regular registrations and premium registrations in until December 5th. Podcast 200 is a code. Where do you go to do that? You go to wcievents.com but this conference is awesome. You know, even if you're not able to register by December 5th, you should still come because it is a great facility. We're going to the JW Marriott just north of Scottsdale in Phoenix the first week of March. Just like the best week of the year.

The weather is great.

Yeah.

So nice.

I've lived in Arizona for five years. I lived two years in the Phoenix area, three years in the Tucson area. Trust me when I tell you the first week of March is the very best time to be in Phoenix. All year we have events outside. The weather's perfect. You don't even have to check the forecast. We're going to be doing cool stuff. You know, we knock off the conference about 4 o' clock each day so you can get out and actually do something fun. Because remember, this is a wellness conference. So we do like 5Ks. We do golf, we have, you know, there's usually like some sort of wine tasting event. There's pickleball. And I'm going to beat you. Even though you beat me last year. I'm practicing up. I'm going to be better. This is a lot of fun, you know, and that's a lot from all the content, you know?

Yes, yes.

And I have to remind people, guys, if you're like Me and you, like, stuff your bag full up to the limit of the weight, you know, of your bag as you're coming out. Make sure you don't do that this time because the swag bag needs some room. It's all really good stuff. You got to have room in your luggage to take it back. So make sure you bring an extra suitcase or some extra space in your. In your suitcase because this is really a wonderful swag bag and you're going to want to keep these books and read them. I know I have them on my bookshelf and. And I'm going through them slowly, so definitely do that. And I totally agree. All my friends are super jealous. Last year when I was in, you know, frigid upstate New York and then flew over to Arizona and the weather was just glorious. And the pools, you forgot to mention the pools had. And they have a lazy river. Right. For the kids too, if they need.

Yeah, they've got a great facility and it really is a great place. The feedback we got off our first few conferences, we went to a little hotel in Park City for our first one and we went to what's it called, Paris in Vegas for our second one. The feedback we kept getting was, it's nice. The conference itself is great, but it sure would be nice not to be in such a dumpy hotel. So we are not in a dumpy hotel. We are in a really nice place. It just makes for a great vibe. You go home refreshed. You go home with more financial knowledge. You have a better sense of how to make your career longer, better, more enjoyable, more effective. You get career longevity out of something like this. So enough talking about it. Wcievents.com your special code through December 5th is podcast 200. All right, well, let's. Let's answer some questions here. I think we're going to be talking about some tax loss harvesting month. Yeah, we got a question off the speak pipe from Richard, so let's take a listen to it. Hey, Dr. Dali, thanks for all you do. This is Richard from the Southwest again. I had a question about tax loss harvesting. I did read your blog and saw your YouTube video and thank you for that. That was very informative. My question is about tax loss harvesting. The idea, I believe, is you're supposed to swap out one fund nearly identical to the other fund. The problem I'm running into is I'm having some funds that I'm having trouble finding identical funds. For example, I have the Veusx fund, Vanguard European stock index funds that elected tax Harvest loss in this bear market, but I'm having trouble finding something similar. Is there any resource that you look go to or you just look online or. I mean, how close identical do you want these tax loss harvesting swap out funds to be? Thank you. All right, great, great question. Richard Fisher, you want to explain just the basics of tax loss harvesting and I'll see if I can answer his question about this European index fund that he's looking for a partner for.

Sounds good. Yeah. So tax loss harvesting, it's a. A little bit more advanced financial technique where you can take your capital losses in your brokerage account and have Uncle Sam share in your losses. You can take the lesser of $3000 if you're married filing jointly, or 1500 if you're married filing separately to be deducted from your regular income. So your ordinary ordinary income, you get to take that, you take the losses from your brokerage account against that and you pay less taxes. So a typical physician in a high tax bracket, it's worth about $1,000 in cold hard cash to you if you are able to do this correctly. So remember, this is $3,000 of losses in your brokerage account that you can deduct against your regular ordinary income. So this is, this can be pretty valuable for high income professionals. Can be very val. But it's a little bit tricky, which is why we get a lot of questions about it. There are a few things we need to watch out for. And Jim, the first one is that this gentleman is trying to find something that's not substantially identical to the fund that he currently has. What he needs to do is sell this current fund and buy it back around the same time. He's trying not to sell low and then buy high. He's trying to sell low and then buy low at the same day. But it has to be a fund that's not substantially identical according to the IRS rules. So he can't buy back the same thing. So he basically needs to find a fund that is similar to what he's already invested in.

Yeah, I mean, you actually can buy back the same thing. You just got to wait 30 days.

Oh, right.

And the risk, of course, is that it goes up in that 30 days. And so that's why most people try to swap. They try to find a partner, a tax loss harvesting partner. And a lot of people worry about the substantially identical thing. You know, and here's the truth of the matter. The IRS doesn't care. They don't care about this issue. I have heard nobody that has had A problem from the IRS coming back going, I don't know, those two funds look pretty similar. It doesn't happen. If this has happened to you, send me an email. You will be the first in 12 years of telling people this at in person events, on the podcast, on the blog, et cetera, who actually had a problem. If your brokerage firm does not have a problem, the IRS is not going to have a problem. They have got such bigger fish to fry that they just don't worry about this. So what does substantially identical mean? It basically means the same Q SIP number. If it's the same fund, yeah, that matters. If it's not the same fund, you're good. Okay, I don't care if it's the Vanguard Total Stock Market Fund swap for the Fidelity Total Stock Market Fund and it has a correlation of 0.999. It doesn't matter. They don't care. It's a different fund. So quit worrying about that aspect of it that a lot of people worry about. Okay? Here's another tip for you. The simpler your portfolio, the easier this is. If you've got 25 holdings in your taxable account, this is a pain, right? Some people think, oh, I'll be more diversified if I split my international holdings into European stocks and Pacific stocks and emerging market stocks and then maybe I'll get some sort of rebalancing bonus. Well, as soon as you go to start tax loss harvesting all that crap, you realize, maybe I don't want it this complicated because now Instead of having three or four or five partners, you've got 25 and you got a bazillion funds that you're having to keep track of. So I would caution you, particularly in your taxable account, try to keep your investing plans relatively simple. Like, I don't own an allocation of European stocks. I own an allocation of international stocks like the Vanguard Total International Stock Market Fund. And it's way easier to tax loss harvest one fund than it is three funds. So keep that in mind. But if you want to persist and do that sort of a complex portfolio, you will find that you will have a lot more tax loss harvesting partners if you use exchange traded funds instead of traditional mutual funds. And the reason why is there's just more ETFs out there for each of these asset classes. The fund you mentioned, V E U S X is the Vanguard European Stock Index Fund. Okay, Vanguard only has one European stock index fund. I think they only have one European stock fund, period. So if you're in a Vanguard Taxable account and you're looking to make a swap, you're going to have to go outside of Vanguard to another fund company, which isn't awesome. But if you were in the ETF version of that fund, you could swap it for the Ishares European Stock Index Fund, which is ticker symbol iev. I'm sure it has very high correlation. Ishares is almost always my tax loss harvesting partner. When I'm going from a Vanguard ETF to another partner, I usually go back and forth between the iShares one. For example, for VTI, the total stock Market Index, my tax loss harvesting partner is itot, which is the Ishares Total Stock Market Index. For the Vanguard Total International Stock Market Index Ticker vxu, my partner is the Ishares Total International Stock Market Index Ticker ixus. Very easy. And because I never do swaps more than about every couple of months, I don't need a third partner. I can. I'm always able to go back to the original partner. It keeps it really simple. This way I only have at a maximum two funds for each asset class in my portfolio in that taxable account. So I hope that makes it easier for you. You may want to consider going to the ETF versions and you will find you have more partners. Maybe keep things simpler and swap out your you probably have Pacific ETF 2 and you probably have an emerging markets ETF too. I assume you could swap all three of them for the Total International Stock Market Fund and just keep it really simple rather than just trying to swap out the European one.

Jim, that was a really good explanation. Thank you so much. Which which resource do you go to when you're looking for tax loss harvesting partners?

I mean, I guess I've been doing it so long I don' really look things up. But there are resources out there. Leaf Dahleen, the Physician on Fire, published a blog post about tax loss harvesting partners. If you Google tax loss harvesting partners Physician on Fire, it pops right up. He calls the post a big list of tax loss harvesting partners. It was published this year October 4th and indeed it is a big list. But honestly, if you only swap them out every couple of months, you only need two partners. You don't need six for each asset class.

I find myself going to Morningstar too, a little bit.

Yeah, Morningstar is always great. Anytime you want to look up any fund or etf, Morningstar is the go to resource. That's an excellent point, fisha.

Thank you.

All right, let's oh boy. We're going to talk about Wash Sales some more. We got a question from Bethany. Let's take a listen to this one.

Hi, this is Bethany in Florida, and.

I have a question about tax loss harvesting. I want to sell a fund with some losses, but I purchased some of this fun with our regular monthly investment within the past 30 days. So if I sell those specific lots.

That were recently purchased, will this avoid.

The wash sale rule or do I have to sell the entire holding? I have some of this fund that.

I purchased in 2020 that still has.

A gain on it. So I would like to hold on.

To those lots and just sell the.

More recently purchased ones that have a loss.

I'd appreciate your help.

Thanks. All right. What advice would you give her, Dr. Spath?

Yeah, so, you know, the wash sale rule stresses all of us out, and that's the easiest way to screw up a tax loss harvest. Basically, the rule is that you can't sell the security and then turn around and buy the Same security within 30 days after you sell it. But you also can't buy it within the 30 days before you sell it unless you also sell the shares that you just bought. So I think you'd be okay if you just sell the shares that you just bought and. And, you know, don't buy it again for another 30 days after that. Now, her question about whether she has to sell the previous holdings in the same thing that she bought before 30 days. What do you think about that, Jim?

Yeah, basically, you know, the key is, as you mentioned, anything you just bought needs to be sold to or it's going to be a wash sale. You can't buy it five days before, then turn around and sell is basically, unless you're selling what you just bought. And I know this sounds kind of complicated, and the way you avoid this problem is you realize up front that tax loss harvesting does not play well with automated investing. Right? Automated investing is awesome. We put it on autopilot. Things just happen in the background. It comes out of your paycheck, it gets invested. There are lots of benefits to automated investing, but it does not play well with tax loss harvesting. So you are almost forced to choose one or the other. Now, that's not entirely true. You can. You can kind of work around it, but it works a lot better if you choose one or the other. If you just forget tax loss harvesting and put everything on automatic pilot, that's fine. If you decide you want to tax loss harvest, it tends to be better if you're a little more deliberate in your investing. And that's what I do. I'm very deliberate in my investing. So every month we make money, we pay our expenses, we decide how much we're going to give to charity, we put some aside to pay in taxes, and the rest of the we invest no matter where the income came from. And we say, okay, well, we're behind on international stocks and we're behind on real estate this month. So we're going to put all this money into international stocks and real estate. So I put a big, huge lump sum into a total international stock market index fund, and that's my whole investing for the month. You know, maybe put a little bit into a real estate fund or something like that. And the nice thing about that is I haven't bought any international stocks in any account for three or four months. And so I never get burned on these wash sales because I'm just not doing it very often. I don't invest in a particular asset class all that often. If you're trying to buy everything in your portfolio every two weeks, you're always going to have this wash sale concern every time you go to do it, because you're always buying. And that's not a bad thing. But it just doesn't work very well with tax loss harvesting, because tax loss harvesting isn't just about the 3,000 bucks. If it was just the 3,000 bucks, I don't know that I'd bother doing it at all. But you can use tax losses in an unlimited way against all of your capital gains. So if you, like, get out of a private real estate fund and you have some capital gains there, guess what? Those losses you harvest can offset those. If you're selling your home and it appreciated more than $250,000 or $500,000 if you're married, you can offset those gains from selling your house. If you sell a business like if I sold the white coat investor, I could use any extra tax losses I had in order to offset that sale. So lots of things that you can use those losses for besides just $3,000 a year. And of course, these losses can be carried forward indefinitely. And so it's a good thing to have them. It's never a bad thing to have losses, these tax losses, anyway. I mean, it's bad to lose money. Don't get me wrong, you're better off if you never lose money. But if you lose money, you might as well get some tax losses to help you make some lemonade out of the lemons.

Yeah. Another thing that messes people up is reinvesting their dividends because you have that 30, the 60 day dividend rule. If hold a security for at least 60 days around the dividend date, you will turn that dividend from a qualified dividend that's taxed at a lower amount into a non qualified dividend. And that eliminates a lot of the benefits of that tax loss.

So yeah, could be more than the benefits you're getting from it.

Yeah. And so yes, really it's a, it's a tough choice for me specifically. I mean I also, you know, I've thought about tax loss harvesting, but I really value the automation. And you know, I'm one of these that I take the extra that I have at the end of the month, I put it in a high yield savings account and then I have auto investments into my Vanguard brokerage from the savings account and I don't have to think about it. I'm way too busy to think about it every month. I know you are too, but for some reason I just don't have the mental space.

Yeah. So the dividend problem is twofold. One, you gotta be careful selling a security within 60 days of a dividend date. Right. So you need to hold it for at least 60 days so that dividend is qualified. I've made this mistake where I turn dividends that should have been qualified into non qualified dividends just to get some more tax losses. That is not smart, that is dumb. Do not do that. But the other issue, of course, if you're reinvesting those dividends is that's a little purchase. Right. And so that the, the amount of that purchase gets washed if you then have a sale. So you got to be careful there. But the bottom line is if you just bought something two weeks ago, you can sell that and take a tax loss. That's okay. You just need to make sure you sell everything that you bought. Not shares of that fund that you bought months ago, but the ones you just bought, you know, within the last 30 days. Those have to be sold with whatever you're selling in order for it not to be a wash sale. Otherwise it will count as a wash sale. And a wash sale isn't illegal. Right. It's not like you did something bad. You just have your basis basically reset in that security so it's not the end of the world. You can turn around and tax loss harvested again next month most likely. But you don't get the loss that you're counting on getting if you have a lost sale.

So she has to sell that security in her brokerage and her IRA, right?

Yeah. Why don't you talk about IRAs and 401s?

Yeah. So the question that I had in my mind that was what accounts count for this? Because the IRS looks at you as an investor, you and your spouse as one investor. And, and technically it's supposed to be that you're not supposed to be buying that security or something similar in any of your accounts. But you know, the IRS really hasn't clarified that what they have said. So you can't have the same, same security, you can't buy the same security in your brokerage or your IRA. We know that for sure. The 401k somewhat gray area, they haven't really said it. Some people, some people avoid buying it in the 401k just in case and other people don't care. I know. You know, how are they even going to know? It's not like the 401k is reporting to the IRS what you're buying every month. So the two accounts that you, the accounts that you really need to watch out for are accounts that are in your name or your spouse's name. IRA and brokerage, right?

Yeah, for sure. That's the letter of the law is brokerage and iras. Basically they don't want you to sell something in taxable, take that loss and at the exact same time buy it back in your IRA. That's no bueno. They've never specified that for a 401k though. They've never specified that for an HSA or a 529. And of course your kids accounts, a UTMA account, that's not your money, so that doesn't count. That's a different investor. And so there is room to do that. But this is so easy, right? To do this right. You don't have to like bend over backwards to avoid these problems. Just pick two things in your taxable account that you're going to invest in for that asset class. Like in my case I mentioned earlier, I use VTI and I use itot. That's it. I go back and forth, no more often than every 60 days. So I never get burned on the dividend rule. And you don't have to eke out every 10 cents of losses that you ever have. If you just get the big ones in a bear market, that will be plenty, I assure you, for your whole life. You don't have to get, you know, you don't have to go and hire a robo advisor to do this for you 25 times a day. You just don't need that many losses. You can just take them all in a big bear market, and if you don't tax loss harvest for two years after that, it's fine. Right. And then when there's another big bear market, that's when you do some tax loss harvesting. Like I looked at my taxes the other day for I just did my 2021 taxes. Yes. Like almost at the end of the year. And I had, like, no losses from 2021. You know why? Because everything went up in 2021. Everything did great. And so I basically didn't do any tax loss harvesting in the whole year, 2022. I've done it three or four times just because that's when the losses are all right.

If you turn off your auto reinvesting the dividends, do you go in four times a year and reinvest those dividends into the same security or different security that you're buying?

Yeah, so I reinvest dividends in retirement accounts. No reason not to in a retirement account. I do not do it in my taxable account. So every month when we add up all our income from all sources, that includes the dividends in that taxable account. So I may get dividends. Let's say it's, you know, September just ended, right? And I got dividends from Total Stock Market and Total International Stock Market and Small Value Index Fund and, you know, Small International Index Fund. And all those come in to my money market fund, the settlement fund I have. And so I see those come in, I add those in with my clinical income. I add those in with my WCI income. Maybe I got some real estate income that month. And I add it all up and say, okay, we're going to reinvest this much of it. And so it all goes into usually one or two investments. And so I don't, I don't, you know, it happens every month. It might sit there in cash for. For a couple of weeks, but it doesn't sit there for months because that causes a cash drag. And that's, like I said, another nice thing about automated investing is you avoid that tax drag or that cash drag. So there are benefits of just automating things and forgetting all about tax loss harvesting. There are some people out there that are like, this is the biggest waste of time and people are hurting themselves more than they're helping themselves. And there's some merit to that criticism. I think there's some truth there. All right, let's bring in an interview here that we recorded with Ashley Willins. Ashley is an assistant professor at the Harvard Business School. She happens to be married to an emergency physician, I believe, but she teaches negotiation and motivation and incentives courses to MBAs and executives. And she's going to be one of our keynote speakers at wcicon. She's speaking on Time Smart, how to reclaim your time and live a happier life. I did a short little interview with her. I'm going to bring that in here and let you guys listen to it, give you a break from tax loss harvesting. Then we're going to come right back to it in a few minutes.

I would love to hear what she has to say about tax loss harvesting and if it's worth the time.

Our guest today on the White Coat Investor podcast is Dr. Ashley Willins. She's an associate professor of Business Administration at the Harvard Business School and will be a keynote speaker at WCICON 23, the physician wellness and Financial Literacy Conference coming up in March in Phoenix. And so I wanted to bring her on the podcast and introduce her to you and hopefully a lot of you will be able to also meet her in person at the conference this spring. Welcome to the podcast, Ashley.

Thanks for having me.

So you have a pretty fascinating career. You got Your doctorate, your PhD is in social psychology, but you're working at Harvard Business School. Tell us about your career and education and how you ended up where you're at now.

So as a social psychologist by training, I became really interested in this fundamental question of how we should spend our money and our time to promote happiness. As it turns out, organizations want to keep their employees around, so they also care about keeping employees happy. And I guess that's a short way of how I ended up at the Harvard Business School. I also have a past background in acting, and it is true that MBA classrooms are a bit of a performance. So I think it helps me that I have an acting background as a business school professor.

Now you wrote a book called Time Smart how to Reclaim youm Time and Live a Happier Life. We're planning on giving this book away in the swag bags at the conference. Why did you write the book?

I wrote the book because as a time and happiness researcher who is a time nerd, self professed, I was struggling with time and time and money trade offs in my own personal life. First year on the tenure track, first year serious relationship I ever was in for 10 years of my life. Three weeks into moving across the country for my job, this person leaves me in this new city because they said, why would I even be here? There's nothing for me to do here. All you do is work. I Don't even feel like I'm in a relationship with you at all because you're in a relationship with work. That doesn't make any time for me. It hurt, but it was true. And I became inspired on a mission to figure out how we can both succeed at work and outside of work and become more intentional with our time and happier as a result.

Now you say there's an 80% chance that you're poor. Time poor, that is, you're saying four out of five adults report feeling that they have too much to do, not enough time to do it. Why are we so time poor?

Oh, there's so many reasons and I'll definitely go and unpack those in my keynote talk. But one of the reasons that we have control over is that we focus on money more than we focus on time money. We like to maximize measured mediums, especially high achievers like those listening. And so we go after something we can quantify and track. We go after money. Time is amorphous. What am I going to do with a 3 days off 5 weeks from now? What is the value of 30 minutes of additional leisure? And so because we're not very good at making these decisions between time and money, many of us, ourselves probably included, end up spending too much time working and not enough time. And ways that promote happiness, like spending time with our friends and family.

Now, us reaching out to you to speak at the conference was not your first encounter with the white coat investor. Tell us about your introduction to the white coat investor and our community.

So my now husband is a white coat investor. Fan, fanatic. He's an ER physician and you might be interested to know, and he wanted me to share with you that he put my ideas into practice to change his career. So he's an ER physician, as you know, he's working shifts and he was working for a for profit company after med school that made more money but came at the cost of his time. And so thinking about time and money, trade offs and happiness, we were dating, I was writing this book, he decided to move to a non profit, work slightly less, make less money so that we can have more time together.

You know, you talk about people answering work emails during family events, taking calls while on vacation. These sorts of things make a company very productive, make a company much more successful at its goals when everybody's available, even if they're not actually working all the time. What is the problem with this trend that's been exacerbated by the COVID pandemic and so many of us working from home, where we've now kind of blended our work lives and our home lives.

Yeah. So if you feel like you're busier than ever, you are. So meeting Microsoft data suggests meetings and emails have gone up 250% since before the pandemic. And 30% of knowledge workers are now additionally working a third shift between 7 and 10pm Now, I want to push back a little bit on something you said. We think that constant responsivity will make us more productive. But the research suggests that being constantly available pulls us out of the present moment, reminds us of all the other things we could or should be doing, and makes us less efficient in our jobs. From a happiness perspective, constant responsivity has a dramatic cost too. So in one of my studies, we randomly assigned working parents hanging out with their kids on a Saturday to either have the alerts on their phone on or do they have the alerts on their phones off. Parents who had the alerts on their phones off on rather felt significantly less meaning, remembered fewer details of the event, and they also felt guiltier. Because when you have your work email on your phone while you're trying to enjoy your leisure, you feel like a bad parent and a bad spouse because you're checking your phone while you're trying to have quality time with your friends, family. And when you see emails come in, then you feel like a bad colleague if you don't get to them right away. So I think it's really important. A lot of our time poverty is is driven by this digital distraction. So a key strategy is to figuring out how to manage those constant pings that we get all day, every day.

What else can we do to draw boundaries between our work life and our real life, if you will, besides just turning the notifications off our phone when we're not at work?

So we have to be as intentional with our time as we are with our finances. So when people are thinking about how can I become more financially? Well, you have to think about where your money is going when it comes to time. The same principles. We have to do a time audit and see where our time goes missing on an everyday basis and begin to get rid of things that make us stressed out and unproductive and then spend more time, more active time in ways that make us happy, that feel meaningful and productive. I'm going to talk about this more in my keynote, so I don't want to give away too many secrets, but there are some strategies that I talk about in my book and that I'll also share with Attendees at your conference.

Cool. You've talked a little bit about how employees get paid, how they're incentivized, whether they get bonuses or percentages of profits or whatever. And that that can actually have some effects that maybe we never think about and that they can, you know, these are not necessarily good effects. Can you talk a little bit about how bonuses maybe cause people to make bad decisions when it comes to time management?

Yes, I love this question. I'm going to start with how you are paid. So many physicians bill by the hour. Did you know billing? Just knowing the economic value of your time makes you feel like your time is extremely scarce. People who receive hourly compensation irregardless of what profession they work in, feel more time stressed because they feel the opportunity cost of wasting one second more strongly. This means that people who bill tend to forego leisure because it doesn't feel worthwhile. They're less likely to volunteer because it doesn't seem more the time cost. And in some of my data, they're even less likely to make small environmental decisions unless those decisions are framed as a financial benefit, because giving up a bit of time just doesn't seem worth it when your time seems so scarce and valuable. We also see in another project that bonuses or cash compensation, having that carrot dangled in front of you to work harder toward a goal can come at the cost of spending time with friends and family. So we find in six studies with over 70,000 employees in North America that being paid largely due to performance incentives can make you focus unsurprisingly more on money and see your relationships in a more instrumental way. So you start to look at your colleagues and even your friends as either a path to achieving that goal of making more money or not. So what we found is that people who get performance bonuses at work and are heavily compensated through bonus comps are less likely to spend time with friends and family and more likely to spend time with colleagues who seem like instrumental or helpful for them getting that financial bonus which looms so large in their minds. This goes back to what we were talking about at the beginning of the conversation. We're already wired that way as human beings. We already gravitate toward money and work hours and moving up in our organizations because we like to track our progress against concrete goals and performance incentives and billing. Just, just highlight or dial up some of those tendencies we already have.

You know, I'm sure you present this material to companies all the time. How do they react to this? I mean, I imagine there might be a little bit of Pushback from management when you're telling employees to maybe spend less time working and not be as available and, you know, try not to be incentivized so much by work or what experience have you had in that regard?

So I have almost got kicked out of a top management consulting firm for suggesting that the leadership should change their revenue per partner credits so that people are less focused on running a million projects and more focused on running sustainable teams. So I think a lot of what I talk about when I consult for companies is thinking about how to change micro culture, micro moments. It might be a lot harder to change a compensation system. It might be a lot easier for a small team to get together and decide collectively that they're going to take one hour of focus time between 5 and 6pm or between 12 and one where there's no expectation of constant responsivity, and that that team is going to decide together that they're going to try to break away from their phones to catch up on work, catch up on notes, catch up on billing, see their spouse, whatever it is. So I think there's a lot of room to move in organizations on the small decisions we can all make together to help each other protect our time. And honestly, it's a little bit harder to go in and say, I think you should dramatically change your paperwork system so that you reduce paperwork burdens. For physicians, that's going to be way harder. It is something that makes us time for. But there are many things that I'm going to share with audience members that they can do on a personal basis to take more control over their time that doesn't involve their boss or the CEO changing the way they're paid.

Speaking of physicians, I mean, medicine in America, like lots of professions, but perhaps to a worse degree, suffers from pretty severe burnout. Surveys are showing anywhere between 40 and 60% of docs are burned out at any given time. The physician suicide rate is about twice that for the rest of society. Now, you've done a case study at France Telecom that related a little bit to this. Can you tell us a little bit about that study? Yeah.

So this was a case study which, for listeners who aren't familiar, we investigate management issues and we use one single case or one company as an example to investigate issues that are relevant more broadly to society. So in France Telecom, my colleague and I became very interested. This is a firm that underwent a major reorganization, major restructuring. They were this monolithic, old, encumbered legacy company, and they were trying to streamline and keep up with the Googles of the world in a very difficult market economy. Actually what ended up happening is things went really bad. So they didn't downsize in a way that protected autonomy and competence relatedness, all these psychological features which are so important for employees mental health. So they disenfranchised employees, they moved employees, they made employees change jobs with no notice. They demoted employees, they were trying to get their employees to quit. And in the process they ended up having employees commit suicide and unfortunately experience a whole host of mental health challenges. But we use the case as an example both of what not to do. The company was eventually sued for millions of dollars and the CEO got fired, all of that stuff. But also to unpack the psychology of what can lead individuals within organizations that are high performing, high demand to feel psychologically unsafe and unwell in the first place. And so a couple of things to keep in mind from that case that I think come out really nicely is employees need to feel like they have a say in the policies and practices that an organization is implementing. So part of what we talk about is that learned helplessness played a role in the negative employee outcomes in that situation. Employees didn't know where some of these decisions were coming from. There was immense silos within the organization. They didn't understand why they were getting their jobs changed or they got no training once they were on the job. Now that was a little bit by design because France has really strict labor laws and can't actually lay off employees. And so they were trying to get employees to leave. But the take home message is that there's things that we can all do as managers, as leaders in our organizations to think about what we can do on an everyday basis to support these fundamental needs that workers have around feeling like they have choice and control, that they have transparent decision making and that they feel appropriate, appreciated for the work, the hard work that they're doing on an everyday basis.

Awesome. Well, Dr. Ashley Williams, we are super excited to have had you on the podcast. We are even more excited to have you in person at the Physician Wellness and Financial Literacy Conference coming up in Phoenix the first week of March. Best time of the year in Phoenix actually is that first week of March. And I'm looking forward to you being treated like a rock star among the white coat investor community. I'm sure they're all going to be excited to to meet you in person and hear from you personally on this insight that you've gained in your career.

I can't wait to attend. And I will say one of the best things for happiness is social connection. So I hope to see a lot of you there.

All right, that was a great interview. I hope you get a chance to meet her at wcicon. Coming up, our next question comes from Diana. We're back into tax loss harvesting. So obviously a topic of interest in 2022. We've had lots of losses. Stocks are down this year. Bonds are down this year. Publicly traded real estate is down this year. Even precious metals are down this year. Certainly crypto assets are way down this year. They have a cool benefit, by the way, that we probably ought to mention since we're talking about tax loss harvesting. No wash sales. There are no wash sales with any sort of cryptocurrency or crypto asset. Why that is, I have no idea. But you can sell it and buy it back eight seconds later and count the loss. So if you have a loss in Bitcoin or Ethereum or whatever, and you decided you actually want this for the long haul, tax loss harvesting. All right. Totally worth it. All right, let's take this question from Diane.

Hi, Dr. Dali.

I have another question on my favorite.

Obscure topic, tax loss harvesting. My question is, when do you buy back the original holding that you booked.

The tax loss from?

So, for example, do you just wait the 30 days and buy back, say, VTI? If that's what you sold for a.

Loss, do you wait until the new holding also has a loss and then book that loss?

When you buy back your original holding.

Or because the new holding is similar to what you had in the first place, can you just hold on to it and continue to reinvest into it indefinitely? Would love your thoughts.

Okay, great question. This one's super easy. Okay, what I do two partners for each asset class. That's it. Okay. Vti, itot, vxus, ixus. I am perfectly happy to hold either or both of those until the day I die. Perfectly happy. Doesn't bother me. Now, when I have a choice, I tend to put it in the Vanguard etf, right? I tend to buy vti. I tend to buy vxus. But it does not bother me to hold ITOT or IX US. They're also excellent, excellent ETFs, excellent funds. In some ways, they have some advantages over the Vanguard Fund. In other ways, the Vanguard fund has some advantages. So the bottom line is I don't feel this urgency to get back into the original holding because I'm perfectly fine with the other one. But let's say we do tax loss harvesting and the bear market continues. It drops some more. Now you Have a loss on what you just sold, you know, 30 days, 60 days, 90 days ago. Well, I'll swap it back to the other one, right? Because I'm perfectly fine with either one and I'm going to grab another loss. Right. And so the only tricky part comes in when you've got both of those and you have money to invest into that asset class and you're not sure which one to put it in. Now that gets a little bit tricky. It doesn't matter that much, but I tend to choose the one that I'm less likely to tax loss harvest soon. So, you know, I just look at the various tax lots I have for each of those and if there's one that I'm like, oh, that one's almost has a loss, you know, let's not buy that one, we'll buy the other one. Or I do it in combination. I sell a bunch of ITOT that has a loss and exchange that for VTI and also put some new money into VTI at the same time. That's probably the more likely scenario. But I don't feel like after 30 days I got to get back to the original hold holding because I only exchange into stuff that I am okay investing in for the long run. I hope that's helpful.

Let me, let me add a little bit more complication to that question. So this is something. So when you are looking at the tax lots in Vanguard, it shows short term capital losses and long term capital losses. How does that work when you're doing tax loss harvesting? Does that change the scenario for you at all?

Not really. I mean, here's where all these get totaled up. They all get totaled up up on schedule D of your form 1040 and they get totaled up differently, right? There's a column for short term, there's a column for long term. And your short term losses are put against your short term gains and your long term losses are put against your long term gains. And if you have leftover, they can kind of be used in the other category. In some ways, you know, you can use a short term loss to offset a long term gain. For instance, I don't know that you can do it vice versa, but you can do it that way. And so it doesn't matter so much if you have a loss. Grab the loss, right? Especially if you're going to still be invested in something you're perfectly fine with. And this is yet another reason why, you know, individual stocks are not awesome, right? Because let's say you got a loss in Tesla. Well, what are you going to exchange to? There's nothing out there that's exactly like Tesla, right? I mean, do you exchange that for Ford? Do you exchange it for, you know, Facebook? What do you exchange that for? You know, there's really nothing that has 99% correlation like you would between two ETFs. And so you can still tax loss harvest, but you got a lot more risk of having the security you exchange into performing differently from the security you just exchanged out of. Okay, all right. Jeff's got a question. Holy smokes. People have been really thinking about tax loss harvesting. We got a lot of tax loss harvesting questions. I like this one, Jeff. This is a good question. Hi Dr. Dali, my question pertains to tax loss harvesting. I recently stumbled across a post you made back in 2017 about the asset allocation of your portfolio. You disclosed that the stock portion, which comprises 60% of the portfolio, is made up of only four types of total US small value, total International, and Small International. I have a lot of appreciation for the simplicity of this portfolio as it feels to me an investor can easily be fully diversified without owning a lot of different positions through the use of total market funds. My retirement accounts have a similar level of simplicity, however, for my taxable portfolio. It seems to me, at least conceptually, that there could be more opportunity for tax loss harvesting if a larger number of different positions are held. I'm of the belief investors shouldn't seek to complicate things just for the sake of complexity. And where at all possible it's better to be simple. But is this perhaps an area where embracing some additional complexity could be advantageous? For example, if an investor owned 10 taxable positions instead of four, would it create more frequent tax loss harvesting events? So my question is, do you actually only hold four different stock funds in your taxable portfolio? And if so, do you feel it limits your ability to tax loss harvest? I've loved listening to your podcast over the years and greatly appreciate all the free knowledge you share. Looking forward to hearing your insights on this topic. All right, that's a good question. I like your question because there's no right answer to it. And that's the best kind of question, right? You are correct that having more holdings gives you more tax loss harvesting opportunities. You've heard of direct indexing? Direct indexing? Direct indexing is when you don't buy an index fund, but you actually buy all the underlying stocks that are in the fund. You're basically making your own index fund. And this way you can tax loss harvest within the Fund between those stocks all day long, have a maximum number of tax losses. And that's one benefit of direct indexing. And you can hire companies to help you do this for a fee. Does it make sense? Well, I guess it could if you have a gazillion dollars. But for the most part, that level of complexity has so many costs, including the value of your time, that I'm skeptical that it's worth it. Because here's the deal. You're kind of letting the tax tail wag the investment dog. Now you're choosing your investments based on some ephemeral tax benefit where you can get. This is the classic. What's the principle? The Pareto principle? Is that what it's called the 8020 rule. You can get 80% of the benefit very, very easily with just having a few basic funds that you tax loss harvest in a big bear market, grab these huge losses, you carry them forward for a few years and use them until another bear market and then you grab some more. More. You don't have to get every dime of possible loss out of your investments to offset gains later. Right. And so I wouldn't feel like you have to do that sort of a thing. I think that's the bottom line on it. But there's one other thing that I thought about and actually did very briefly with my portfolio a few years ago. I started thinking the same way you're thinking, going, wow, wouldn't it be great to have really volatile asset classes in that taxable account? If they go down, I get a big huge loss. If they go up, I get a big huge gain. And then I just donate those gains to my charitable account for, you know, without having to pay taxes on that. And so I actually did. I added a few kind of really volatile asset classes. I think at one point I owned like the Vanguard Precious Metals and Mining fund, you know, things like that. And after about six months, I got smart and realized, maybe this isn't such a great idea. I shouldn't be doing something just for the tax benefits. And I actually, all the winners I had, I donated to charity. All the losers I had, I ended up tax loss harvesting and getting into a more sensible portfolio. But I think the bottom line here is when you start doing this sort of stuff, you're letting the tax tail wag the investment dog. I think the merits of simplicity are mini, not just for you and freeing up your time and your life to do the things that you care about most, but also think about what if something happened to you and your partner has to take care, take over this portfolio. Or it gets so complex that now you got to hire a financial advisor to unwind it all. And then you're asking yourself, did I get more benefits than I'm actually paying in financial advisory fees. You got to ask yourself, maybe you're not. But I like the way you're thinking when you're starting to ask questions like this, it means you're winning the finance game. So you've gotten into the weeds here, and I would caution you that maybe you don't need to be into the weeds quite that far. What do you think this show you want 300 holdings in your taxable portfolio just to get a few more tax losses?

I am definitely on the simplicity side of things. And if it's going to take more than 30 minutes for me to do it, then I'm not doing it.

Yeah, exactly. I think that's the way most people feel. But you know what, there's some of us out there that, that are hobbyists and I suspect Jeff is one of them. But I'll bet Jeff's spouse is not one of them. So you ought to consider that.

Yeah, there's nothing wrong with that. I think there's just different personalities. You know, Some people enjoy the complexity and thinking about it and other people don't. That's okay.

Yeah. All right, we got some more complicated questions. Tax questions, but not tax loss harvesting. So let's talk about something besides tax loss harvesting. Let's take a listen to this question.

Hey, Dr. Dali, thanks for all that you do and for taking the time to share your knowledge with the rest of us. I have a somewhat complicated question and part of me wonders if the answer will just be to check with my accountant. At any rate, I left my practice a few months ago in which I was an owner. My buy in amount was around 50k. We signed a stock buyback agreement in the amount of around 100k. Rather than take the money at the time I separated, we signed a separate promissory note whereby I'll get two installments of 50k each plus interest. The first installment will be this December and the second installment next December.

I'm trying to figure out how much.

And what type of tax I will owe on this. Will it be counted as capital gains or ordinary income? Should I subtract the buy in amount from the buy back amount when making the calculation? And finally, do I need to pay an estimated quarterly tax for either of these scenarios? Thanks in advance for your help. Interesting. So her capital gain would be about 50k. But then she's also getting simple interest on top of that, which is taxed at our ordinary income. Is that correct?

Yeah, it's absolutely right. You know, you don't have to pay tax on basis. You pay $50,000 for something, you sell it for 100,000. You don't have to pay taxes on that first 50,000. If you've owned it for at least a year, you pay taxes on those capital gains at long term capital gains rates. And if you had done some tax loss harvesting and you had $100,000 in tax losses out there, you could offset the sale of your practice with those tax losses. So hopefully you got a few of those and that'll make it even more tax efficient. The interest you're going to pay ordinary tax rates on, that's ordinary interest. You don't have to pay payroll taxes on it, but you do have to pay at your ordinary income tax rates on that. But I don't know, it's pretty straightforward. That's the way a sale works. This is a stock sale. It's not an asset sale. An asset sale becomes a little more complicated because you end up still owning your entity, your company, whatever it was, and it just got some money for something it sold. But it kind of works out the same way on your tax forms. And you know, chances are you're probably not doing these taxes yourself. Sounds like you have an accountant. It's probably a good idea for a year in which you have something like this anyway to make sure you get it all right. But yeah, that's how it's going to work. You can pay capital gains on 50k and whatever the interest is you'll pay ordinary income taxes on. As far as the quarterly estimated taxes, I don't know, I don't have enough information. Right. That's dependent on how much you're having withheld from your other income, how much you are paying already in the estimated quarterly tax. The thing with estimated quarterlies is you've got to, you know, get into the safe harbor essentially. The safe harbor is basically you got to pay the amount you owe. You've got to pay 110% of what you paid last year, what you owed last year. That's another safe harbor. You can get into it. And those are the two that most people try to get into with their quarterly estimated tax payments. If you're having enough Withheld from a W2 job, you don't have to pay estimated quarterly taxes at all. But in general, the IRS views the federal income tax system as a Pay as you go system. So if you get a big bolus of income in the fourth quarter, because you're getting paid in December, you just have to make a fourth quarter a little bit bigger estimated quarterly tax payment to make up for that. But remember, it's totally different what you pay as you go along versus what you actually owe. And so that's what you're reconciling when you file a tax return is you're reconciling those two things. And a lot of times you have way too much withheld and you get a tax refund. Sometimes you don't have enough withheld and you gotta write a check. But those both have their pluses and minuses, obviously.

Yeah, I would definitely just let my accountant know that this is happening and make sure that they're prepared to account for that at the end of the.

Year or now, you know, and this one's not about tax loss harvesting, but if I had this gain coming, I would sure be looking at my brokerage account going, is there a $50,000 loss I can grab to offset this gain? Because this would be a great opportunity to use it, right?

Yeah.

Plus, you could offset $3,000 of that interest. That might be all the interest you're getting. I don't know. All right. Okay. Champion program. We're doing the Champion program again. You guys know what the Champion program is? This is for first year medical and dental students. We are trying to give away a million dollars worth of books.

Cool.

Seriously. We're going to give away the White Coat Investors guide for students to every first year medical and dental student in the country. All you have to do is have one person from your class volunteer to pass out the books. We'll bribe you. We'll send you some WCI swag to pass them out. Not only do you get a book for yourself, you get a little bit of swag. You get to be a hero to all of your classmates who are going to now save millions of dollars over the course of their careers because they got this information early in their career. I think the best we've done is about 75%. We've gotten into about 75% of first year medical and dental students. It would be awesome to get it to 90%, 95%, or 100% this year. We're seriously, we're giving these away. It's hundreds of thousands of dollars worth of books. And obviously we get them a little cheaper price than you would if you went and bought them one at a time off Amazon. But we are Trying to get these out there. It is a great way to spread the message of financial literacy. If you would like to sign up for that and if not, you encourage some first year medical or dental student, you know, to sign up. All you have to do is go to whitecoatinvestor.com champion. Literally all we need to know is your mailing address and how many people are in your class and we'll send you boxes of books to pass out to them. WCI Champions Program Whitecoatinvestor.com Champion is where you sign up.

What I wouldn't do for to be able to rewind the clock and be able to read your book first year of medical school instead of first year of attending hood or second year of attending hood. I mean, there's so many ways you can do things better than I did that are in that book and you can set yourself up for success. And I know first year of med school is like a fire hose. You have 5,000 books to read and you're probably not going to get to it right now. But you know, you, you have that book anytime you get downtime, you know, you're at the beach and you read a finance book. Hey, you can be that nerd. I've been that ner. You know, it's so great to learn this stuff early so that you can, you know, really set yourself up for success. I mean, millions of dollars. We're talking millions. Absolutely. Don't miss this chance.

Yeah, I don't blame people for not wanting to read finance books. Right. I don't like reading finance books either. Right. That's not what I pick up. And I'm looking for some pleasure reading. But think of it this way. If I told you this book I was going to hand you was going to be worth $2 million to you over the course of your career and it was only going to take you four or five or six hours to read it. Would you read it? Yeah. I mean, you're getting paid like a quarter million dollars an hour to read this book.

Read the book.

And the best part about it, this book is not the original White Coat investor book, which I think is a halfway decent book. This book was deliberately written just for students. It's our longest book in a lot of ways, it's our best book. It has got. The whole end section is all about making you financially literate. You know, it's terms, it's, you know, the stuff you need to know. There's entire section geared just at students. An entire section geared just young residents and it's. Man, I agree with you. I wish someone had handed me this book when I was in MS.1. I would have made a lot fewer errors.

Absolutely.

Okay. More tax questions. Can we take any more tax questions today? We got another one from Chris here. Hi, Dr. Dolly. I'm a W2 employee in the 35% tax bracket. My wife, who stayed home with the kids, just took two 1099 jobs and we expect her to make about $10,000. The 1099 employment is new to us, so we're looking to for advice on how best to utilize this income and pay minimal taxes. We don't depend on the money and are happy to put it all in our retirement plan. And she has no other income. When she worked as a W2, we were able to put essentially all of it in her 401k. I assume we should open up a solo or individual 401k maybe at fidelity, but I'm not sure exactly how to fund it. Can we put her entire $10,000 income in the 401k? Do we have her paychecks deposited into our bank account and then just send that from our bank account to the 401k? Do we owe any self employment tax or other taxes or have to pay the IRS quarterly? Do we contribute the whole amount of her biweekly paycheck every two weeks? Do we leave it all in cash and then contribute a certain amount at the end of the year? Her job will just be on the computer at home. Is there anything else we can do to take advantage of this? Like deduct a home office, one room of our house? Thanks so much for your help.

That was a lot of questions.

That was a lot of questions. Why don't we split them up? You want to take the solo 401k ones and I'll talk about the home office?

Yeah, sure. Okay. So the Solo 401K is really. So your. Your wife doesn't have. This is her only job. So she can do 100% of her compensation as her employee contribution into the solo 401k up to 22,500 in 2023 or 20,500 in 2022. So yeah, you could put, you know, 100% of that $10,000 into an elected deferral into the employee portion of the Solo 401K. And if there's any more on top of, also do employer contributions, which is 25% of the compensation. So 25% of the profit that she's making. So there's definitely plenty of room there. You can certainly set it up at Fidelity. How do you fund it? Fidelity has some funky rules about how you fund solo 401ks that they don't always allow for direct bank to bank transfers, depending on the bank. So you would have to work with them and figure out which bank you're using to set up her accounts for her, her income and how you would be able to fund that. But any case, as long as you are keeping track of it and accounting for it, you should be okay. So yeah, so I think that's a great idea and I think you should definitely be investing for her future there and make sure you go in and actually choose the investments into the account. Don't just put the money there without investing it.

Yeah, that's actually a common problem in 401s across the country. Lots of people have money taken out of their paycheck and six years later they look and realize it's still sitting in the money market fund.

Happens all the time, you know, especially HSAs too. You know, a lot of times you have to go in, you know, and actually invest it. And a lot of people don't know that. And it's the fact that the account is just a shopping cart or just a holding place for your investments that's tax protected is not well taught.

So always worth mentioning, a lot of those settlement funds are paying 0% too. So literally it's just sitting there doing nothing as far as where to open it. Fiddle is fine. Schwab's fine. TD Ameritrade's fine. My preference with most of these sorts of things is Vanguard. I tend to go to Vanguard with this sort of stuff. In fact, we've been trying to get Vanguard to be an advertiser with us for years now. I think they're finally actually coming on. So we'll put a, an affiliate link into the show notes and you can go through our affiliate link and help support the the site if you sign up with Vanguard. But the thing I like about Vanguard is all my other accounts are there. And so it's easy for me to look at it all together. But one thing you should keep in mind with these solo 401ks, these business retirement accounts is that it's a different website. It's not the main Vanguard website. That's not where you make your contributions. You actually have to log into like a Vanguard small business website and that's where you make the contributions. And at least with Vanguard you can make them automatically from the bank account, directly from the bank account. You don't have to write a check or mail it in or anything like that, that. But obviously she's running a business now. That business needs its own bank account just to keep the finances nice and straight. If she needs a credit card for that business, the business should have its own credit card. Don't get in the habit of mixing your personal and your business finances together. That's just bad business practice. What else can you do to take advantage of that 1099 income? Well, I mean, just make sure you're deducting all your business expenses. If there's something she's using, you know, printers, computers, paper, you know, some sort of, of microphone or headset, all those sorts of things that a lot of times you use for a home business, make sure you're deducting those. If she has to drive to the post office to mail something, those miles are deductible. So make sure you deduct those. Those sorts of things. Make sure you're, you know, getting, getting what you can out of it. As far as the home office, here's the two rules. With the home office, you have to use that space regularly and exclusively for the business. So that means you can't just use it once a year. That's not going to cut it. You have to be using it regularly. And they don't exactly define that. But, you know, if you're not in there, I don't know, once a month, it's pretty hard to justify it as a regular, you know, use and exclusively. So if you're using that space for something else, if the kids are doing their homework in there, if you're using it to store your lawn mowing equipment, whatever that is, no go. It's regular and exclusive use. And the easy way to take this deduction is to take the simplified version. This is five bucks a square foot up to 300 square feet of your home. So it's a deduction of no more than $1,500 a year. If you take the simplified version, the complicated version, you have to add up all the expenses associated with your home and then multiply them by a ratio, the ratio in the numerator of the square footage of the home office and the denominator, the square footage of the entire home, and you multiply them out and that's what you get. But you can also use depreciation of the home as one of those expenses. And so it can be a bigger deduction. And I don't think you're limited to just 300 square feet either. If you have a really big home office. You may want to go ahead and use the direct or the more complex calculation. The one downside of that, aside from its complexity, is that you have to recapture that depreciation when you sell the home. Any depreciation you deducted as a business has to be recaptured later, just like a real estate investment would. So keep that in mind. Most people just go, I'll just get that 1500 bucks and. And they keep it nice and simple. There's also another really great option out there, which is renting your house to your business. You can do that 14 days a year. It counts as a deduction for the business. The income does not count for 14 days a year. If you rent it to yourself for 15 days a year, it counts, but up to 14 days a year, it does not count. So it's basically just, you know, pre tax income that you get and can spend without ever having to pay taxes on it. So that's a cool trick. Even better than the home office for most people. Plus you don't have to use it, you know, exclusively for that business. Right. If you only use it for, you know, the house for 14 days a year, you can still take that. The IRS doesn't require you to make good business decisions. They do not require that. If you want to rent your house out to yourself so you can have a little meeting that you didn't really need the whole house for, they don't, you know, really call you on that. And so you've just got to keep good records and have a purpose for why you rented the house to your business and go from there. Like when we have lots of meetings at my house for the white coat investor. And it's far better deduction for us to just rent the house to us for those meetings than it is to take the home office deduction. Cool.

What about utilities? Can you deduct the amount of utilities?

Yeah, the utilities are all part of the, of the cost. So it's your utilities, it's your depreciation. It's, you know, maintenance, lawn mowing, snow removal, you know, you get to multiply it by that percentage that is the home office of the house. So it's, it can be really complex to figure it all out. If this is not a big deduction, it might not be worth, you know, going through all the trouble to maximize it. But for some people, if you got like a 800 square foot office in your house for some reason that all you're using for is your small business, it's probably worth going through the calculations. All right, let's take. Let's take our next question. This one's from Peter about the Robs program. This is interesting. I don't know what the Robs Program is, so we may have to look this one up. Hey Jim, thanks for all you do. Recently I've become interested in purchasing a small business. One of the options for financing such an endeavor is the Robs Program. To my understanding, this acts as a loan from your 401 that can be used as the basis for an SBA loan or other financing to actually purchase the business business. I don't think I've heard you discuss this on the podcast and a quick search of your website hasn't turned anything up. Do you know anything about this program? Perhaps you could share some useful information before I go down this road. Thanks.

Well, I looked it up on Investopedia. Here's what I found. Robs Program is an IRS sanctioned process for retirement savings to invest in a business startup. And what this is basically doing is the Robs provider facilitates converting your retirement account into a separate IRA and that the Robs providers work with the separate custodians to house your ira. And the business then needs to be structured as a C Corp so it can purchase stock. So the program can purchase stock in the new company from its retirement account. So it's not exactly a loan. You're completely restructuring your retirement account into an IRA that will now purchase stocks from your new company that you are that you're investing in, which is structured as C Corp. Sounds like a lot of expense to me.

Yeah, well, I worry a little bit more about it than that. I'm looking at it here on IRS.gov they've got a page on Robs essentially. So they say what is a rollover as business Startup or Robs? Robs is an arrangement in which prospective business owners use their retirement funds to pay for new business startup costs. Robs plans, while not considered an abusive tax avoidance transaction, are questionable because they may solely benefit one individual. The individual who rolls over his or her existing retirement funds to the Robs plan in a tax free transaction. The Robs plan then uses the rollover assets to purchase the stock of the new C Corp. Business promoters aggressively market Robs arrangements to prospective business owners. In many cases, the company will apply to the IRS for a favorable determination letter as a way to assure their clients that IRS approves the Robs arrangement. The IRS issues a determination letter based on the plan's terms meeting IRC requirements. Determination letters do not give Plan sponsors protection from incorrectly applying the plan's terms or from operating the plan in a discriminatory manner. When a plan sponsor administers a plan in a way that results in prohibited discrimination or engages in prohibited transactions, the plan can be disqualified, which can result in adverse tax consequences to the plan sponsor and as participants. All right, so who would think about this? Someone who wants to start a small business and all their money is in retirement accounts. This is the sort of person that would have to consider this. There are a couple other options. One is just don't use retirement plan money to start your small business. And I think that's the right thing to do for almost everybody. Right. Try to get some other money, you know, whether it's from your taxable account or whether it's, you know, your savings or money that you're earning as you go along or loan money or whatever. Try not to mess with your retirement accounts in this sort of a way. So I think that's one option. The second option is you can borrow against your 401. You can borrow $50,000 the lesser of 50% or $50,000 from every 401 you have. So if you have two 401s, your spouse has a 401k, you could take a $50,000 loan from all three of those. That gives you $150,000. Maybe you can start your business with that without having to mess around with a rollover or, or a robs plan or anything like that. I think I would rather see somebody doing either of those rather than this sort of thing. I mean, owning a small business in a retirement account, that sounds like a mess. Right? Because when you own it there, the retirement account owns the business. So all the income from the business has to go back into the retirement account. All the spending from the business has to come out of the retirement account. If you need to recapitalize it, it. How are you going to do that? Right now? You got to like form an entity with your retirement account as a partner. And you're a partner or you're both stockholders. I guess in this case, because it's a C corp. That sounds like a mess.

It sounds like you're paying a lot of people.

Yeah, I would not structure a small business this way if I were starting one. I guess if I was desperate and I had to have the money and the only possible way I could get the money was out of my retirement accounts, I might think about it, but I suspect there's a bunch of people running around selling these things. It Sounds like. Like a product made to be sold, not bought to me.

Agreed.

All right. I guess we're running out of time, huh? Maybe we ought to wrap this up a little bit. 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 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 timeframe 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.

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