WCI #338: Is It Ever a Good Idea to Over Fund a Roth IRA?

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.

This is White Coat Investor podcast number 338. No more wading through dozens of books at the library, scrolling through hundreds of blog posts on dozens of blogs, or checking in daily with online forums trying to gain a financial education the way the hobbyists do for a fraction of the price of hiring a professional financial planner. The Fire your financial advisor online course will take you from feeling anxious and having no plan to having a written financial plan. You can follow the rest of your investing career as a professional and a retiree. This course is the material that should have been taught to you in college, medical school or residency, but never was. Fire your financial advisor also has a version eligible for CME credit. Get your financial life in order today. Go to whitecoatinvestor.com courses to sign up. You can do this and the White Coat Investor can help. All right, welcome back to the podcast. It has been podcast marathon this morning here at White Coat Investor headquarters. This is the sixth podcast we've recorded today, which is pretty good considering I'm on two days in between canyoneering trips. Just got back from one, leaving for another one tonight. While you're out there working hard, I'm canyoneering. So sorry about that, but thank you for what you do. It does matter. I stopped by the ER last night, needed to get an X ray on one of my kids who got check from behind. Luckily it turned out to be fine. But you know, it's true, this goes on even when we're on vacation or trips or adventuring. The medical system continues to function and I thank you for that. All right, we've got something special just for you podcast listeners. We've got a sale at the WCI store on two of our most popular T shirts. This is the BT Sax and relax T shirt and the lifetime member of the White Coat investors T shirt. These make great gifts for the holidays or you can get one for yourself, but it's 25% off through October 28th. You go to whitecoatinvestor.com store and use the code T shirt because it's gotta be easy to remember, right? This is a podcast, so a nice easy to remember code t shirt@whitecoatinvestor.com store and get 25% off either or both of those. All right, let's get into your questions. Our first one is not Coming from a doc, it's coming from a firefighter. Good afternoon. My question is simply this. I was a firefighter for a government township position and had a 457B which now I own. I have retired and I have use of it. It's in the $400,000 range. And I was wondering, at age 58, I do have a pension if you think it's a good idea to use any of it for my children's college tuition. Taking disbursements over a period of time to help them with their burden and keep their loans lower, but still maintain a balance that I can invest in as I've left it with the township that originated to $457,000 with. I have not rolled it anywhere. That's my question. Let me know what you think. All right, good question. I need more information to really give the best answer. But let me just talk generally about this. First of all, with 457s, you can have a lot of different options for distributing that money when leave. One of which is often just rolling it into an IRA where you have a little bit better control of it. It's not under the control of that township anymore. Maybe your expenses go down, your investment options are probably better. So that's generally what people do. Now, if you're still working and trying to fund a backdoor Roth IRA each year, you wouldn't want to do that. You'd want to use a different option. But leaving it there is probably not the right move unless you're just still under 59 and a half and trying to avoid that rule or some other reason like that. So maybe consider rolling that over, number one. Number two, whether you should use that money to help your kids or different money really doesn't matter all that much. It's all kind of the same. If you had a big taxable account, maybe I'd tap that first rather than getting into the 457 money just because it doesn't grow tax protected. But if you don't have other money, then sure, there's nothing wrong with using the 457 money. Now, whether you should help your kids with their college is a different question. And that depends on how wealthy you are. If you have enough and to spare, sure, help them out. But in general, you need to take care of your retirement first and then help your kids with their college. So I don't really get a sense for where you're at, whether you can afford to help them a lot. If you can, sure help them. And if you want to use the 457 money to do that, that's okay too. What's the alternative? The alternative is them taking out loans or going to a cheaper school, or them working themselves or applying for scholarships. Well, obviously encourage all of stuff, but it's okay to use 457 money to pay for college. There's nothing wrong with that. Next question comes from Mike. Hi Jim, this is Mike in New York. Thanks for all your content. We really appreciate it. It's mid August now and I'm in the midst of a 401k rollover slash rebalancing process. Currently I have a chunk of money sitting in Vanguard Settlement Fund or Federal Money Market fund that per my investing plan should be invested in a total bond fund. Currently, however, the money market yields are higher than those of the bond fund and the risk is lower. Do you see any problem in this environment leaving this quote unquote safe money in a money market fund rather than bond fund? Thanks for all you do and take care. The question I have for you Mike is what does your written investing plan say? Does it say look at the yields between cash and bonds and choose the one that yields the highest and put your money in there? Or does it say put your money in a total bond fund? Whichever one it is, that's what I'd do. I think it's far more important that you follow your plan than what the plan necessarily is. Now right now we're operating under an inverted yield curve, meaning that the shortest term fixed income securities have higher yields than the medium and longer term securities. And so that's why cash is paying more. Now when that happens, basically the market is telling you that this is not a long term situation. It doesn't make sense in the long run for you to be able to get paid more on cash than to take more term risk, lock your money up for 10 years in a 10 year treasury bond or something. That doesn't make sense. And so the market is basically saying we don't expect this situation to last very long. So how can it resolve? Well, it can resolve in two ways. One, short term yields can go down and long term yields can go up. One or the other is going to happen eventually because this isn't a normal situation. Now which of those is going to happen? I don't know. But the answer to your question requires knowing that if the short term yields are going to go down or if bond yields in general are going to fall, interest rates are going to fall, then you're better off being in bonds Just before they do. Right, because you get a little kicker increasing the value of your holdings when interest rates fall and you own bonds, that doesn't happen with cash. So that's one reason why you might want to own bonds. On the other hand, if it's going to resolve the other way in that long term yields are going to go up, that's going to hurt the value of bonds, you would be better off sitting in cash. I don't know which one of those things is going to happen. I'm really not sure. And so that's why I tend to stick to my plan. Sometimes it's going to work out well for me, sometimes it's not. But over the long term it's going to work out just fine. I don't try to time that little sort of stuff. Now, as far as your cash goes, money that you have in short term accounts, for whatever reason, whether it's an emergency fund or short term savings or whatever, I'm perfectly fine with you bouncing that around. If you can make more in a Vanguard money market market fund, stick it there. If you are going to come out ahead after tax using a municipal money market fund, fine, stick it there. If you're better off at a high yield savings account at a Ally bank or Discover bank or those sorts of places, fine, put the money there. That's all. Okay. But now we're talking about changing your investment plan and going from bonds to cash. They're not the same thing. They don't act the same. And while you might be able to time the market fine and get into cash when cash does better and get back into bonds when bonds are doing better, chances are you're not going to be able to do that and shouldn't bother spending the time trying. And that's what you're talking about doing. So I would follow your plan. If you want a different plan, rewrite your written financial plan. But I thought your plan was fine, so I'd probably just stick with that one. I am not taking all my money out of bonds and putting it in cash right now, I can tell you that. Alright, our quote of the day today comes from Robert Kiyosaki who said financial freedom is available to those who learn about it and work for it. While I don't agree with everything Robert Kiyosaki's ever said, I certainly agree with that. Our next question comes off the speak pipe. By the way, if you'd like to leave a question on the speak pipe, you can do so. Whitecoatinvestor.com speakpipe you can leave a question of up to a minute and a half on there. Don't feel like you have to use all the time and we'll get it answered on the podcast, but this one comes from Sarah.

Hi Dr. Dali, thank you so much for your generosity in teaching. My family is first generation and we didn't know anything about financial planning in the states. You have changed our lives. My partner and I are Both physicians on W2 income without state income tax and with a very low cost of living. We slave invest 75% of our post tax income every year and we are in the highest federal tax bracket. If our intention is to retire early and move to New York near family, does it make sense to make Roth contributions now to our 401s during our peak earnings years to avoid state tax later with Roth conversions while living in New York? Thank you so much for the opportunity to ask my questions and for all you do.

All right. Well, the tax deferred versus tax free contribution thing can be incredibly complicated, right? You've all heard the rule of thumb, which is peak earnings years you use tax deferred money and in non peak earnings years you do tax free. Right? Roth contributions. But there are lots of exceptions to that, right? The main one white coat investors run into is if they're super savers, if they're just saving a ton of money, they're going to work a long career, they're going to be in a higher tax bracket in retirement than they ever are during their career. Well, those people probably ought to be doing more Roth contributions and Roth conversions as they go along. But there's lots of exceptions, right? I mean, maybe they're planning to leave a bunch of money to charity. Well, tax deferred money is the best money left to charity in this situation. Sarah's got kind of a unique situation. Not only do they save a ton of money, but they're also planning to retire early and they're planning to go from a tax free state, let's say Florida, to a pretty heavily taxed state, let's say New York in that case. That would make you want to do a little bit more Roth than you otherwise would because you're getting out of that state tax, you're getting a state tax arbitrage. And I agree with that. I think I would do more Roth in that sort of a situation if I knew I was going to go live in New York later when I was withdrawing that money. Certainly when you're saving 75% of your income, that also makes an argument Put lots of savings into Roth. That makes you more like a super saver. But retiring early is just the opposite. That is a factor that should make you do more tax deferred because you're going to have more time that is not a peak earnings year. More time to do Roth conversions later in a low tax bracket. And so there's multiple factors we're weighing here, but I suspect that they won't regret doing a pretty high percentage of their money into tax free accounts by making Roth contributions. Let's take a question from Andrew. I have a question about deliberately overfunding a Roth IRA. I hear there is a 6% excise tax on any Roth funds over the contribution limit. Yet if that tax is only on the over contributed money the year it is contributed, then the tax free growth of that money should overcome that penalty and do better in a few years than the same money if it was just put in an after tax brokerage account. Am I missing something, Andrew? Good thought. I appreciate you calling in with this question. Yes, you are missing something. It is a 6% tax every year. Every year you leave the money in there, you got to pay 6%. So somehow you've got to magically outperform your taxable account by 6% a year in order for this to work out well for you. You're almost surely not going to be able to do that. So don't over contribute to your Roth ira. Bad idea. Just do the regular contribution. If you want to save more for retirement, just do it in a taxable account. Good question. All right, for those of you who are not aware, you can be a white coat investor champion, but only if you're a first year medical or dental student. Okay. This is our White Coat Investor Champions program. Basically, we're trying to give away a free copy of the White Coat Investors Guide for Students to every first year medical and dental student in the country. Now, we've had 407 different schools participate in this program since its inception in 2021. We have distributed 56,718 copies of that book so far. That's over a million dollars worth of books that we have given away. And we think it's a worthwhile thing to do because it contributes to our mission to help those who wear the white coat get a fair shake on Wall street to help you stop doing dumb stuff with your money. We figure what better time to give you this information than right at the beginning? But we need people to help us with this program. We cannot afford to send out books individually to every Single one of these students, we must send them out in bulk and have somebody in the class distribute them to the rest of the class. That person is the champion. All you have to do is pass out books. It's super easy. You'll get two or three boxes of books on your doorstep. You take them to class, you pass them out, that's it. If you'll do that, not only will you be a hero to your classmates because you probably on average save them like 2 million apiece over the course of their career, but we'll also send you some swag. We'll send you some WCI specific items and you'll get some cool stuff. You'll be the champion for that year. So thanks so much. For those who have already volunteered to do it, for those who have not yet volunteered to do it and don't have another champion in their class, please apply whitecoatinvestor.com champion once this year goes by, you've missed your chance. We're not sending them to second year and third year students. We're only doing this for first years. So somebody in your class needs to do it this year. Why not you? If you know a first year student, please forward this to them. Encourage them to be their classes champion as well. I think last year we got it to like 70% of medical students and we'd sure love to get that number up closer to 100%. So let's do the best we can this year and help boost financial literacy throughout medical and dental schools. And do the best we can. All right, next question comes from Shereen. Again off the speak pipe. Let's take a listen.

Hi Jim, this is Shereen from Florida. My 18 year old daughter had about $1500 in a Roth 401k plan from her high school job at a chain restaurant. She is now in her first year of college and is not working at this time. I helped her roll the Roth 401k money into a rollover IRA at E Trade. I chose E Trade because of their low fees. She also has a Roth IRA with Vanguard that she contributed earned income to before she was eligible for the 401k through her previous job. I would have liked to transfer the Roth 401k money directly to her Roth IRA, but I couldn't find an option online at Vanguard to do that. Assuming that she'll eventually be a high income professional and assuming the backdoor Roth process is still around when she gets there, what do we do with the rollover IRA money now to avoid a future Pro rata problem. It's a small amount now, but since she's only 18, I imagine if we just left it in the rollover IRA account at eTrade, it will eventually have significant gains and the account will grow. Since the money in the ETrade account is after tax Roth money, can I simply transfer to her Roth IRA at Vanguard? Should we do something else with it? Your help and advice is appreciated. Thank you.

All right, good question. I think you've unnecessarily complicated your life by getting etrade involved here. I think you said it was a Roth 401K. The money was in. So this is already post tax money. If somehow that ended up in a traditional ira, there's a problem. There's been a mistake made and it needs to be corrected. Even if you rolled that money into E trade, it should be in a Roth ira, not a traditional ira. So get that problem fixed first. And of course you can then transfer that over to Vanguard. You mentioned you like the low fees at E trade. Well, shoot. Vanguard basically doesn't have any Roth IRA fees and their expense ratios are super low. If you like low fees fees, Vanguard's usually where most people end up. But in this case, I would put those accounts together just for simplicity's sake. Who wants to have some random $1,500 retirement account sitting out there? Get it combined. Just get it into that Roth IRA at Vanguard. If you can't figure out how to do it online, pick up the phone. Yes, sometimes there's a bit of a wait on the phone at Vanguard, but I think they've done a pretty good job hiring over the last year. They seem to be picking up the phone faster and faster and have them show you exactly how to do it. There'll be some paperwork to fill out. You might have to fill it out and send it back in by snail mail or something. That's no big deal. But get that money all together. You don't want to be managing these multiple retirement accounts all over the place. And if for some reason I was wrong and that wasn't Roth 401 money, it's all tax deferred money. This is a great time to do a Roth conversion. So I'd still move it into that Roth IRA at Vanguard. Probably not going to be any tax due anyway. Your daughter probably doesn't have enough income that she has to pay tax. So a great time to do a Roth conversion. Hope that's helpful. All right, our next one comes from Kalyan. I hope I'm saying that right. We're going to find out, I guess. Hi Jim, this is Kalyan from Illinois. My question is regarding rolling over my prior employer retirement accounts to my individual 401K. I have a governmental 457A 403 and 401A with my previous employer which I plan to roll over into my individual 401k. My question is asset protection wise or employer owned retirement accounts any different from an individual 401k in regards to asset protection? My other question is is it state dependent? To give you context, I plan on moving to California. Okay, good question. Yes, there are asset protection concerns here. The first one is that you live in Illinois. Second one is you're thinking about going to California. Those are asset protection concerns above and beyond anything you do with your retirement accounts. There are other places to practice that might be a little kinder on the malpractice side than those two particular locations. But yes, this sort of stuff is state dependent. And as a general rule you will have less asset protection on assets that are in an individual 401 than you will in an Ariza retirement plan. Of course that 457 plan is accessible to your employer's creditors, but not to any of yours. That's deferred compensation. But the 403 and 401 get some pretty serious asset protection. Basically they're 100% protected. If you had declared bankruptcy, you get to keep everything in that 403 and in that 401. Now IRAs and individual 401ks, these non Ariza protected retirement accounts also get pretty good protection in most states. And so it's not necessarily in your state where you have less protection. But this is a state by state thing. So you need to look things up. And personally, the place I look this stuff up is what I consider to be the best book on asset protection for doctors out there. It's called the White Coat Investors Guide to Asset Protection. Yes, I wrote it mostly to answer questions like these. So when I get these questions I open the book and about half the book is a list of state specific asset protection laws. So I get in there and I scroll down to Illinois. So let's go to Illinois and see what it says about asset protection with regard to non ARISA retirement accounts. And it says here that IRAs as well as individual 401 s get 100% protection in Illinois. So no big deal there as far as Illinois is concerned. I wouldn't think twice. Go ahead and roll that over into your individual 401. Obviously your individual 401 needs to allow these rollovers, so check on that first. All right, but you're going to California, so we're also going to care about California law. So let's turn to California. Scroll down to that, and what do we find? We find that IRA protection is not as good as as in Illinois. It is to the extent necessary for support and actually no protection for Roth IRAs. So IRA protection in California is kind of poopy as far as asset protection goes. So what does that mean to you if you're going to California? Maybe you don't want to move the money into that individual 401 because it'll have less asset protection. The extent necessary for support could be a very small amount, probably less than most doctors end up with in their retirement accounts. So if asset protection is a big concern to you, you may want to leave that money right where it is right now or move somewhere besides California. Hope that's helpful to you. All right, a couple of things I mentioned at the beginning of the podcast. Don't forget the T shirt sale. A couple of our T shirts, 25% off. You can pick them up through October 28th. They make great gifts and they're great to show that you're a white coat investor. It's our VT Saxon Relax T shirt which is our most popular, as well as the lifetime member T shirt that are both on sale through October 28th. For podcast listeners only. Use the code T shirt. Pretty simple code, but easy to remember because hey, this is the podcast. It's gotta be easy to remember. No more wading through dozens of books at the library, scrolling through hundreds of blog posts on dozens of blogs, or checking in daily with online forums, trying to gain a financial education the way the hobbyists do, for a fraction of the price of hiring a professional financial planner. The Fire your financial advisor online course will take you from from feeling anxious and having no plan to having a written financial plan. You can follow the rest of your investing career as a professional and a retiree. This course is the material that should have been taught to you in college, medical school, or residency, but never was. Fire your Financial Advisor also has a version eligible for CME credit. Get your financial life in order today. Go to whitecoatinvestor.com courses to sign up. You can do this and the White Coat Investor can help. All right. Don't forget I mentioned the Champions program. If you want to be a champion, whitecoatinvestor.com champion is where you can apply for that. Thanks. For those of you who have left us five star reviews and told your friends about the podcast. A recent one came in in September from Body by Brisket. I don't know what to make of that, but I do like Brisket. This person says save me thousands. Says Lord knows how many millions. Dr. Dali and his team have saved physicians with Zinsight into finance Personally, his advice helped my family get rid of a financial advisor who was charging high AUM fees and also develop a solid financial plan. I also started listening to other finance podcasts. Found he's well thought of in the investing community. 5 stars. Thanks so much for that. We appreciate those reviews. They do help get the word out about this important mission we have at the White Coat Investor to help you be financially successful so you can be a better parent, so you can have better wellness, so you can be a better practitioner. Really? Truthfully, getting your financial ducks in a row will help you be better at lots of things in your life. All right, our time is now up. Keep your head up, your shoulders back. We'll see you next week on the White Coat Investor podcast.

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