WCI #346: Roth IRAs are NOT a Bad Investment

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This is White Coat Investor podcast number 346. Roth IRAs are not a bad investment. Getting quality disability and life insurance should be the first financial chore for a doctor to complete. Most docs don't have the ideal policy for their gender, specialty, state or health status, and one in seven doctors get disabled at some point during their career. Because these policies can only be purchased through brokers, we put together a list of vetted agents who are experienced with working with the specific needs of medical professionals and who have your best interest at heart. If you have questions about insurance and what kind of policies would be the best fit for you, check out our insurance recommended list@whitecoatinvestor.com insurance and feel the peace of mind that comes with knowing you have the optimal policy in place. You can do this and the White Coat Investor can help. By the way, it's that time of year again when we're doing our annual survey. 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All right, I gotta address this. I almost feel bad about doing it. I was trying to avoid it, but then my email box filled up with people writing me, telling me I had to address this. The WCI forum had a big thread on it. I think it was in the Facebook group. I think it was on the subreddit. It certainly was in the comments section on Doximity where it ran. There was an article that was written by a fellow named Derek Saul. Derek founded a website called Life and My finances back in 2010. It's kind of a typical for profit affiliate marketing website. Right. So it makes money the same ways we do, by selling stuff. In their case, they tend to connect people with credit cards. They connect people with bank accounts and that's how they make money. Their editorial team consists of five people who look by their pictures to be in their 20s and have the title Financial Writer. But it sounds like Derek Sall, the founder, is the one who actually wrote this particular article. And we'll put a link to it in the show notes. If you didn't see this thing. But the content of this website is geared at people who are looking for credit cards and bank accounts. It's certainly not written with a target audience of physicians and other high earners in mind. However, despite that, the folks over at Doximity that send out that I don't know what it is every couple of weeks or every month newsletter with financial topics in it. They pick up some White Coat Investor articles from time to time as well. But they picked up this article and sent it out in this email and they've got a big mailing list. Right. I don't know where they get all the emails from. Probably from Am I on? I think they own Am I on these days. But anyway, they send it to a lot of doctors. And so a lot of doctors got this article in their email box that was called why a Roth Ira is a bad idea. Yes, you can lose money. And the introduction to this article was just as Clickbaity said, I lost nearly 400,000 to a Roth. It's not just me. The average person is losing $163,000. Nearly everyone says a Roth IRA is a great investment. Nearly everyone is wrong. And there are so many problems with that introduction. You may have heard about this if you read my monthly newsletter for December. I talked about this and that. But there's so many problems with that introduction that's hard to know where to start. I mean, the first one is that first of all, the Roth IRA is not an investment at all, right? It's an account. And it's important not to confuse accounts and investments. And it's hard for me to take somebody seriously or you know, at least a title maker that made the title for this article seriously, who doesn't know the difference between the two, right? You should think about investing accounts as types of luggage, right? There's backpacks, there's carry on bags, there's suitcases, there's trunks. And each of those might be the proper type of luggage for a given type of trip. But you can put any kind of clothing into any kind of luggage. You can put a tux in there, you can put a bathing suit, you can put some shorts, you can put hiking pants, whatever. All that goes into any kind of luggage. So think of your investment accounts, your Roth IRA, your 401K, your 529, your HSA, whatever, as luggage. And think of your investments, your mutual funds, your investment properties, your stocks, your bonds, your crypto, whatever, as clothes. You can put any type of clothes into any type of luggage. You can put any type of investment into any type of account. But a Roth IRA is not an investment. Also, a Roth IRA by itself really can't ever be a good idea or a bad idea. It's only a good idea or a bad idea in comparison to something something else. For example, when you're saving for retirement and you're comparing your Roth IRA to a taxable account or to a non deductible ira, a Roth IRA is pretty much always the better option. It's pretty much always the good idea, at least in the long run. I guess if you're losing money in the account, you're better off with a taxable account where you can tax loss, harvest it. But for a low earner who can actually deduct IRA contributions, which is almost nobody in the audience to which Doximity sent this article, it's entirely possible that a traditional IRA is a better option for the retirement savings than a Roth ira. For most of us in our peak earnings years, it actually makes sense to defer taxes rather than pay them upfront, which is what you do with Roth contributions, whether they're made to an IRA or a 401. That's another problem with this article. Shortly into the article, the author rapidly flips from talking about IRAs to 401s. And while the logic and tax treatment may be similar, it's in the author's financial situation. There are different things and get different tax treatments for many people, such as high earners. And if you can't tell these two apart again, maybe you really shouldn't be writing about them for large audiences. Frankly, if it took you 13 years from the time you started a financial blog until you realize that tax deferred contributions are the way to go during pre earnings years, I'm not sure I want to take your advice anyway. However, despite the problems in the article, and there are problems in the article, the main point of the article is actually good. It's absolutely correct. The point of the article, if you really read the whole thing, is that most people should make tax deferred contributions to their 401, not Roth contributions. The amazing thing here is that most people, 92%, according to a survey the article talks about, think they should be making Roth contributions. But actually only about 9% of them, according to the survey cited in the article. Should be. I kind of blame Dave Ramsey for some of this. He's not helping, right? He's pretty much an all Roth, all the time kind of guy. He's not really into nuance, as you've noticed, if you ever listen to him. But you know, there's lots of people out there that talk about Roth, Roth, Roth. It's so great. It's tax free. You never pay taxes again, Right? But it's not always the right thing to do. And the article makes that point and he's right about that. But there's a chart in that article that's even dumber than some of its pros. It talks about who's in that 9% that should be doing Roths. Does it mention high earners who can't deduct a traditional IRA contribution? Nope. It says the following people are in that 9% if you're under 33 years old, which is almost irrelevant. Your age is almost irrelevant. I mean, more time does slightly tilt the calculation toward Roth. For those who are maxing out their accounts, it says those who contribute more than $5,000 a year, which is basically irrelevant to the Roth versus tax deferred discussion. And those who plan to withdraw $100,000 or more in retirement, which again is pretty much irrelevant. The Roth vs tax deferred decision is a complex one, there's no doubt about that. The first question though, that one should ask is whether you even have both options for that particular account. For most wciers, a tax deferred contribution to a traditional IRA is not even an option. Clearly the Roth ira, likely via the backdoor Roth IRA process, is better than a non deductible IRA contribution. Many people don't have a Roth option in their 401, 401, 403 or 457. For them, it's an easy decision to go with the tax deferred option. When I was in the military, there was no Roth tsp, so I made tax deferred contributions. However, if both options are available, the main factor determining which is the better option for you is to compare your marginal tax rate now to the rate at which you will be withdrawing money from that account, say rate or rates, because you fill the brackets as you go with income in retirement. Now, those tax rates involve a lot of unknowns, which is why this is a difficult decision and many people choose to just split the difference. So Derek doubles down on his argument later in the article and says that a Roth IRA is only worth it for about 10. 0.2% of the population says the 9% figure came from that survey with people who were entirely too optimistic about their future finances. And he goes on to argue that this is all some sort of weird government conspiracy to get the money now instead of later. Now, if you've listened to me for a while, you know I don't put much stock into government conspiracy theories. Mostly because I've been in government. Right? Conspiracy theorists ascribe way too much competence to shady government officials. Just watch Congress for a while and your estimate of the likelihood of those people running an effective long term conspiracy will go way down. I used to watch a bunch of government workers try to day trade their tsp. It would have been hilarious if it wasn't so sad. So no, I don't think there's some vast government conspiracy trying to get people to use Roth accounts instead of tax deferred accounts. Honestly, I'd be happy with people doing Roth accounts rather than nothing, which is what most people are doing. So I think if the government's encouraging people to save in a Roth ira, that's probably a net Good thing. But at any rate, I kind of hate this article and the message it's sending out there, which is that Roth contributions are wicked and you should always stay away. Even if the message actually in the article is basically correct, that those in their peak earnings years should generally prefer tax deferred retirement accounts. And lots of people don't realize that. Derek eventually got the reasoning right. Late in the article he said most people will earn less in retirement than they do today, or which is true for most people. You'll be paying a higher tax rate now than you will in retirement if you do Roth accounts. That is true. And many retirees today pay nearly nothing in taxes, which is also true. You know, I mean, what are most retirees living on Social Security? If you have less than a certain amount on that, you don't pay taxes at all on it. At most, you're paying taxes on 85% of your Social Security. Lots of people won't be paying anything on money they're withdrawing from Roth accounts. You probably won't be in very high bracket on what you're taking out of tax deferred accounts. Lots of people will be in the 0% qualified dividend and long term capital gains brackets in retirement. I mean, there's just, you know, retirees don't actually pay that much in taxes most of the time. Now you might be in a different situation. You might be a super saver. It might make sense for you to do Roth contributions, but the general rule is still going to be tax deferred during your peak earnings years. So despite the fact that I think he mostly got the idea right, I just wish he'd done it in the much less flashy manner that Harry Sitt, AKA the finance buff did in his article that he published like 15 years ago when Roth 401s showed up on the scene. He's recently updated the article. He calls it the Case against the Roth 401. I just wish Derek had read that article when it first came out in 2008. He would have saved a lot of money if he lost $400,000 by using Roth instead of a tax deferred account. You really should have been paying more attention to the discussion online when those accounts came out. Okay, so what lessons can white coat investors take from this debacle with this article? Number one, read more than the title of an article. If all you had read was the title, you'd think Roth IRAs are terrible. Obviously they're not. So read more than the title of an article. Two, recognize that most Financial information out there is not written specifically for you, even if it came to you via Doximity. 3. You better have a good reason to make Roth contributions when tax deferred contributions are an option. And finally, yes, keep doing your backdoor Roth IRA each year. Alright? I think we've beaten that. Subject to death. A Roth is not a bad idea. It is certainly not a bad investment. It's not an investment at all. All right, let's get to your questions. This one's coming off the speak pipe. Let's talk about mortgages.

Hi Dr. Dali, longtime listener here in Chicago. I'm a radiologist currently making around $500,000 without profit sharing included, plus anywhere around 20 to 40,000 per year in moonlighting. My soon to be wife is a nurse and makes around $75,000 per year. She will also be starting NP school in the fall and will be eligible for a full tuition waiver after the first year for working within the same health system. My question is this. You frequently said that you recommend a mortgage not exceed two times your annual income. However, this was said in times of significantly lower mortgage rates. Now that we're seeing rates closer to 6 or 7%, would that advice change? We currently own our condo which is worth around 400,000 to $450,000 and plan to have an additional $200,000 in cash towards a down payment and closing costs when we buy a house next year. 600,000 total down payment houses in our city cost around 1.3 to 1.5 million for a home we can grow and have children in while also being in a good public school district. I think these numbers sound reasonable until I realized that if we bought our house last year, our monthly would have been closer to 5,000 rather than it now being over 7,000 on a 30 year mortgage. What are your thoughts given these changing times of mortgage rates? Period. Thanks again for what you do. Thank you.

Okay, this is a rule of thumb I use that you should keep your mortgage to less than two times your gross income. The point of that rule of thumb is so you don't become house poor, that your house does not become such a big part of your financial life that it keeps you from reaching your other financial goals like saving for retirement or college or going on cool vacations or driving a Tesla or whatever your financial goals are that the house won't keep you from doing that. That's the point of the rule of thumb. Like any rule of thumb, you can find an exception to it. It's not perfect. It doesn't work in every situation. Lots of people are in less expensive parts of the country. They don't feel like they got to buy a house that's two times their gross income. They buy one that's one times their gross income or less. I've met lots of docs like that. Guess what? They build wealth even faster. It works great. Other people live in the Bay Area, they live in Miami, they live in D.C. they live in Manhattan, they live in San Diego, maybe Salt Lake. Soon the rate real estate's going up around here. And sometimes they have to stretch it a little bit. Sometimes they go to 2.5, three times, maybe even four times. But the point of that rule of thumb is you can't stretch it indefinitely. Right. You can't get a 10x mortgage and expect this to work out well. Now, as interest rates have gone up, yes, that makes it more difficult to afford a mortgage. A mortgage that might have been a 30 year mortgage that might have been $1,200 might now be $2,200 because you've gone from 2.5% to 7.5% in some cases. And so, yeah, you've got to work that into your calculation. But does that mean I would be less likely to stretch if I was in San Diego? Probably. Does that mean I might not buy quite as expensive of a house if I lived in Indianapolis or Oklahoma City or something like that? Probably not. It's probably not going to affect me much. Let's be honest. The shorter your mortgage term, the less the interest rate matters. If you get a 15 year, it matters a lot less than a 30 year. If you pay the thing off in 5, the interest rate doesn't matter nearly as much because you're just not paying interest for nearly as long. So it's just a rule of thumb. Yeah, houses are less affordable when interest rates go up. But I'm not going to change the rule of thumb every time interest rates change. You know, I came up with it before interest rates were 2.5%. You know, when I got my first mortgage it was 8%. My second one was six and a quarter. I think. So, yeah, I'm familiar with these interest rates. I think the 2x rule is still pretty good at these interest rates. Maybe it should have been 2 1/2 or 3x when interest rates were 3%. But like I said, I'm not going to change the rule of thumb. That's all it is. You got to know enough to apply it to your situation. It's just a general guideline. But Be careful. Don't become house poor. The one advantage of picking up a mortgage now at 7%, 8%, whatever you're paying now for your mortgages is you may not be stuck there forever. It wouldn't surprise me at all if interest rates went down. Maybe they go down 6% or 5% and you can refinance. You're not necessarily stuck at 7% or 8% forever. Are they going back to 2.5%? My guess is no, but they probably won't be back there. Maybe not anytime in our lifetimes, but who knows? There's some terrible recession. Maybe rates will be cut right back down there and you'll be able to refinance at 2.5%. But don't count on that. Don't count on that saving you from becoming house poor now. I don't think you can rely on interest rates going down. They're just too hard to forecast in the future. Okay, this next one is a long question comes in via email. Dr. Daly, I hope you get a chance to see this, maybe speak about it on your podcast. I love your book and listen to your podcast frequently. I wanted to get your advice because essentially every young doctor I speak to is in this predicament. I live in a high cost of living area, northern New Jersey. I started working as a hospitalist last year, and prior to starting, we deeply considered purchasing a home with a physician loan. We're looking at homes that sold for $450,000 in 2018, so listed it for 620 in 2022, and the house would go for 700 for a house that needed $100,000 of work today. Given this, we decided to rent, which has been working out decently, but we'd much rather be homeowners after a year of working and living like a resident. Despite our high rent, we've been able to save about $200,000. Wow. Very impressive, Dr. Dali. At this point, there's not a reasonable home in our area that is listed for less than $800,000, which would mean an enormous monthly payment. We feel lost. Right now there is a deadlock because most homeowners aren't selling because they would be trading a low interest rate for a rate around 8%. We're worried that as soon as their interest rates begin to drop, it's going to be just like 2020 where there are 20 offers on a home after it's listed for 24 hours. Is there a question there? No question. That's the email. Okay, so I guess the question is, what do you do with this? Yeah, it's an issue, right? Everybody wishes they could buy a home in 2009, but guess what? You can't buy a home in 2009. I mean, I bought one in 2010, but I also bought one in 2006. That one didn't work out nearly as well as the one I bought in 2010. And so we can't necessarily time our life with the real estate market, right? I mean, we'd all love to buy our house after houses have gone down 50% in value and interest rates have gone to 2.5%. But if you sit around renting hoping for that to happen, you're probably never going to get in the game. And that's fine for some people. If their life is such that they want to rent their entire life, that is an additional risk in retirement that you don't have as much control over your housing costs. But that can work out for some people. However, I'm a big fan of ownership. I like seeing docs own their jobs. I like seeing them owning stocks and real estate in their portfolios. I like seeing them own their homes because I think in the long run, most of the time, it works out to own your home. In the long run, I'm talking five plus years. Most of the time, you're going to come out ahead having owned the home. But you do have to be able to get into the home. Now, I mentioned earlier in the podcast, a rule of thumb is 2x. You know, so, you know, I don't know what you're making as a hospitalist. Let's guess 250,000. $300,000. 2x would be $600,000. Add on your 200,000 down payment, that's $800,000. You're saying there's not a reasonable home in your area listed for less than $800,000. Well, that puts you in a high cost of living area. Or you need to adjust what reasonable looks like. I mean, bear in mind, even as a hospitalist, even in Illinois, you're still in the top 3 or 4% of incomes in that area, right? So if you can't afford a home, who can? So maybe you need to lower your view of what a reasonable home is. And maybe you need to do what people have done for decades, which is start with a starter home rather than a big, fancy doctor home. And that's okay to do. But here's the deal. Sometimes you have to stretch a little bit in these high cost of living areas, and stretching is going to 3 to 4x not going to 10x. Okay, that'll kill you. Realize there are consequences for stretching. It means you're going to drive a crappier car, you're going to work longer. Maybe you won't have as much for college savings, maybe you won't go on as nice of vacations. There are financial consequences. You don't get a pass on math, but you'll probably have to do it if that's important to you. To live in a high cost of living area, you're going to have to put more of your budget toward that. And yeah, it's going to be an enormous monthly payment. That's the way it works, especially at high interest rates. Maybe you'll be rescued when interest rates go down and you can refinance. But you know, the time is right for you to buy a home. And it sounds to me like the time is right. You know, you want to stay there. You've been there for a year, you've saved up a down payment. You got your financial ducks in a row. I'd go buy if I were you. And if $800,000 doesn't work, well, maybe go see what you can find for $1,200,000, continue saving that down payment. Recognize this is going to be a big part of your financial life for a while and go get the home. Hope that's helpful. All right, let's take a question off the speak pipe about 401 loans. Hi, Dr. Dawley, thank you for all you do. Had a question about 401 loans. If you find yourself in a situation where you need to access your retirement money, is that an option that you would suggest or advise for or against? And just want to hear your thoughts on those. Thank you. Okay, 401 loans, the way they work, you can borrow money out of your 401. You can borrow up to $50,000 or 50% of the balance, whichever is less. Some of the changes, I think it was with Secure Act 2.0. It might have been with a different law, you now don't have to pay them back within like two months of leaving your employer. That used to be a real bad downside of 401k loans. I think you have until your next tax day or something like that. You got more time to pay it back now. So they're not quite as onerous as they used to be. The interest rate, you'll have to check with the plan. But these are not a terrible source of borrowed money. I mean, I guess technically you're borrowing it from yourself, right? It's your 401k. And so maybe it's even better than a lot of sources of borrowed money. But in general, I don't like to see people using borrowed money when they need extra money. The first thing to do when you need extra money is figure out why you need extra money. What are you doing wrong in your financial life that you need extra money? If you're listening to this podcast, this should either be a very temporary situation or you are doing a terrible job managing your finances. That's God's honest truth. Because most of the people listening to this podcast are, are doctors, similar high income professionals, small business owners. They're making 200, 300, 400, $500,000 a year. So on a monthly basis, you're making 10, 20, 30, 40, $50,000 a month, right. That's a lot of money. If you don't have any of that left over at the end of the month, you are doing something terribly wrong. And if very many months have gone by that you had significant leftover at the end of the month, you should have money. One of the first things you should put together is an emergency fund. An emergency fund's typically three to six months worth of your monthly expenses. So if you're spending $5,000 a month, this is $15,000 to $30,000. If you're spending $10,000 a month, this is 30 to $60,000. You can take care of a lot of emergencies, a lot of things that you need extra money for. With 30 grand, it goes a long way, I promise you, unless your spending is completely out of control. So now some people, you know, bad things have happened to them. They become disabled, they're out of work, they're still in residency. I don't know if that's a bad thing that happens to you, but if you're still in residency, you might not have much money. Maybe you're a student, maybe you're not one of the high income professionals. That's the typical member of this audience. And I get it. Sometimes you need extra money. So where should you get it from? Well, the first place is your emergency fund, right? That's a good place to go if you need money. Secondly, of course, this time you're working at fixing the problem that got you into this place in the first place. But maybe a little extra work, right? I teach my kids. Where does money come from? It doesn't come from the money tree, it doesn't come from dad, it doesn't come from the government, it comes from work. Go do some More work, pick up some shifts, do some moonlighting, pick up a side gig, see if you can earn some extra money. You can sell stuff. Might be a whole bunch of stuff in your garage that's valuable. You know, I'll bet most of us could go down to our garage and find $1,000 worth of stuff that we could sell within three or four days on Craigslist or whatever the local classifieds is and actually get some cash if you need extra money. Other places you can get money from, you can get it from your portfolio, right? Roth IRA contributions, they can come out at any time, tax and penalty free. There's some rules on that. If you funded it via the backdoor Roth ira, there's some five year rules that apply to Roth conversions. But as a general rule, you can get to your Roth IRA money relatively easily. What if you've got an hsa? If you've got HSA money and you've got some healthcare receipts sitting around that can cover those withdrawals, they come out tax and penalty free. Another great place to tap when you need extra money, sometimes you can get it from family members. Maybe you have a parent that cares about you a lot and can take care of you throughout whatever this emergency that you need extra money for is. You can borrow money from other places, right? If you have a whole life insurance policy, you can borrow against that. That might have better terms than your 401k. You can borrow against your car. You can take out a home equity loan, you can get a margin loan against your taxable account. When interest rates were really low, that was actually a pretty good place to get a loan. You can sell investments if you have a taxable account. Find your highest basis investment. You probably won't have to pay much tax on that. You can sell that and use the funds. So lots of places you can use for extra money. A 401k loan is not a terrible place. It's probably not the best place. But if you got money in your 401 and you don't have money in any of those other places, well, maybe that's where you go. It certainly beats starving. Certainly beats. Listen, your mom's funeral because you can't buy an airplane ticket, but I certainly wouldn't be raiding it to buy a little bit nicer car. I wouldn't be rating it to go on vacation. So define for me what you need extra money for. Then I'll tell you if it's okay to use your 401k for it. All right, a quote of the day today comes from Henry David Thoreau. And if you think I'm cheap, you should read some of Thoreau's writings. And he said the price of anything is the amount of life you exchange for it. And that's the truth. We all have a limited amount of time, a limited amount of life, limited amount of life energy. We'll be talking more about this on next week's podcast. But that's really what the price is. You know, time and money are interchangeable in a lot of ways. All right, let's take a question about a Roth conversion. This one's off the speak pipe.

Hi, Dr. Dali. Thank you for everything that you do. This is Victor from Ohio. I have a question about Roth conversion. I've been in practice for five years and saved some money in my 401k plan. I've matched into a one year fellowship that starts in July 2024. Should I try to convert my entire 401k into a Roth IRA? Given the upcoming lower tax bracket? Will the conversion of my 401k money be counted toward my income and bump me into a different tax bracket? What are the steps for this conversion process and when should I do the conversion? In 24 or 2025? Thank you for your help.

Okay, great question, Victor. Thanks for what you're doing. Thanks for going back to fellowship. We need fellowship trained docs, so I appreciate you doing that. Here's the deal. With Roth conversions, like Roth contributions, the time to do them is in years when your income is a little bit lower than your peak earnings years. So a year in which you go back to a residency, or a year in which you go back to do a fellowship, or a sabbatical year, or a year you take off for parental leave. And those are great years to think about doing Roth conversions. In fact, one of the best tricks is for people who are non traditional students, right, they come into medical school with a 401, do a little Roth conversion each year. By the time they leave, they've basically done a tax free conversion of their entire 401. By the time they leave medical school. It can be a great move. And so I think you're thinking about the right thing. I think if I were you, I would try to do a Roth conversion of that 401 money. You didn't say how big it is. I, I don't know if this is a $15,000 401k or if it's a 1.5 million 401k. A typical fellow is not going to be able to afford the taxes on a huge Roth conversion. So the first thing is you got to figure out how you're going to pay the taxes, because you will owe taxes on a Roth conversion. Are you going to be able to pay that out of your current earnings? Do you have some taxable savings on the side that you can use to pay for that Roth conversion? Where's that money going to come from? Because if it's coming out of the 401 itself, the conversion might not work out quite as well as it otherwise would. But if you can afford the conversion, I would encourage you to convert some or all of that 401 during the time that you're in fellowship. Now, the problem with the medical world is our fellowships in our residency tend to go June 30, July 1, whatever, to the next June 30. And so that's half in each year. So you don't really have a full year of fellow income. So it sounds like you're going to have half a year of attending income and then half a year of fellow income, then the next year, half a year of fellow income and probably half a year of even higher attending income. So in that case, I'd try to do as much of it as possible in 2024 rather than 2025. But it might be advantageous to you to split that between 2024 and 2025. Or maybe you're moonlighting by 2025, or, you know, by the time you pay the tax bill, you'll be an Attending, have been an Attending for quite a while for 2025. So maybe you'll have more money to be able to afford to pay in 2025 if you do the conversion, then. So you just got to run the numbers and see which is going to work out best for you. But in general, it'd be cheaper to do it sooner. You just might have more money later to pay the bill. Yeah. So this money gets added to your taxable income. It gets added on top. You're paying for that conversion at your marginal tax rate. So if on a fellow's income, especially if you got half a year of attending income, you might be converting this at 22%, 24%, maybe even 32% federal, plus your state tax rate. So it won't be the cheapest conversion in the world, but it still will probably be a good idea for you. So look into it carefully and figure that out. How do you do it? It's pretty easy, right? It's just a transfer. It's a transfer from the 401 to a Roth IRA. The way to do transfers for most financial accounts is to go to the place where it's going to go where it's going to end up and have them initiate the paperwork and they pull the money over. So if you're going to have your Roth IRA at Vanguard and your 401s at Fidelity, you're. You go to Vanguard, not Fidelity, and you fill out some paperwork and say, I want to bring this money from the 401k. I want it to go into a Roth IRA. When it gets to the Roth IRA, you've done a Roth conversion. That's a taxable event, but you only need to fill out one six page piece of paperwork at Vanguard to get that done. Hope that's helpful. And if you need help with that, you don't have to do it online. You can call somebody up on the phone, they'll walk you through it. They do this all day long. It's a Roth conversion. It's an account transfer. I know it's terrifying the first time you do it, but after you've done it 15 times, I promise you it won't be terrifying. It'll just be annoying. Because of the paperwork and how long it takes, don't wait till the end of the year either. This can often take three, four, five, six weeks. It takes time to send this paperwork back and forth and get notary publics to sign it and whatever else has to be done with it. So don't delay. When you're ready to do it, get it done. All right, here comes another question about being in Dubai. I hope I can actually answer this one. It might be hard.

Hi, Dr. Dali. Thanks for everything you do. A longtime podcast listener. My wife and I are both American physician and nurse living and working in Dubai. Our Dubai employer pays us via a tax minimization strategy. So my payment each year is less and her paycheck is more. Combined, we receive $120,000 each. So $240,000, which is under the exclusion for foreign income, so is tax free. My employer also provides us housing, a benefit that if we paid for on our own, we estimate would be worth about $40,000. My question is, in this situation, how do we contribute to our U.S. retirement accounts that have been open before we moved here from prior employers? Our Dubai income falls under foreign exclusion rules. But does this mean that we are unable to use it to contribute to these accounts? Is it after tax income? Would it go into Roth? Would it go on a regular ira? Would it be taxed later, even though it's excluded now from tax. Or can we just not attribute to the retirement accounts if we only have foreign income? I can't seem to find a clear answer to this. Thanks for all you do, and thanks for any help.

All right, great question. Thanks for being a doc in Dubai. I'm sure they need docs at first. I hear this scheme your employer's doing, it sounds illegal, so I'll make sure that's actually legal. I mean, I guess it's fine. $120,000 isn't crazy to pay a nurse. Seems a little low for a doc, but maybe that's okay in Dubai. All right, so let's see if we can learn together a little bit about the foreign earned income exclusion. This is relatively new to me, so I'm looking at an IRS page about the Foreign Earned Income exclusion. It says if you meet certain requirements, you may qualify for the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction. To claim these benefits, you must have foreign earned income. Your tax home must be in a foreign country, and you must be one of the A US Citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. A U.S. citizen or U.S. resident alien who's physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. So that sounds like you probably qualify for that. If you're a U.S. citizen or resident alien, you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude your foreign earnings from income up to an amount that is adjusted annually for inflation. So that's $120,000 for 2023. In addition, you can exclude or deduct certain foreign housing amounts. Okay, so that's cool. Maybe you're getting paid more than $120,000. I don't know. But that's an amount that can be excluded, so that's pretty cool. You can exclude that from income. You can also exclude from income the value of meals and lodging provided to you by your employer on their premises and for their convenience. That's pretty fun, too. It's exciting. Okay, so it sounds like you can exclude it from your US Income. I don't know if you have to pay income on it in Dubai. I am not familiar with Dubai tax code. You might have to, and that might be why the US Is excluding it. So look into that. I'm sure the other people you're working with can help you answer that question I don't know about Dubai tax rules, but it sounds like you can exclude it from your US Income. Now. Can you still use it to contribute to retirement accounts? Boy, that's a great question. I don't know the answer for sure. It's earned income, which is what you have to have to contribute to retirement accounts. So I would guess you could. Obviously, since you're not paying taxes on it, you want to use Roth accounts this year, right? So it's tax free later too. I'm going in at 0% and coming out at 0%. That's a win. Does it allow you to do that? Well, I don't really know where on your tax form you take this exclusion, so I don't know the answer to your question. You know what, I bet we're going to hear about it though, from somebody who knows the answer to this question listening to the podcast. So let's do this. I'm going to avoid answering this question. I'm going to put it out there to the WCI community and I'll bet somebody will send me an email within a week or two of this running and tell me the answer and I'll share it on the next time we record a podcast after that. But I am going to bet that you can make the contribution and of course you'll want to do a Roth one. So it's pretty cool. Now, there's some other stuff on this page that's interesting too. It talks about self employment income. Doesn't talk about payroll taxes though, which is my other question. I don't know if you have to pay payroll taxes on it. You might have to, certainly if you're paying payroll taxes on it, you know, Social Security and Medicare, I think you're almost certainly going to be able to make retirement account contributions with it. But I don't know whether that exclusion also includes payroll taxes or not. That might be another good question to find an answer for and I'll look for it. In the meantime, it'll be a couple of weeks before this thing runs and hopefully somebody will help me to find the answer, because I don't know and I can't find it with a quick Google search. Congratulations, you've stumped the chump. All right, thanks everybody, by the way, for what you're doing, whether you're in Dubai, whether you're in Connecticut, whether you're in rural Alabama, whether you're serving, you know, as a missionary of some kind in Guatemala or Timbuktu or wherever. Thanks for what you're doing it really does matter. You don't realize it until you go to the doctor yourself, but it really does matter that there are people trained and available and willing to take care of you when you get sick or injured. All right, let's take a question about donor advised funds. We just talked about that last week on the podcast. Hopefully I can actually answer this question.

Hi Dr. Dali, my question is, in your opinion, what amount of annual donations justifies having a donor advised fund? A follow up question to that is we currently do the standard deduction for our taxes and I'm wondering if we should use a donor advised fund in order to alternate between standard and itemized deductions each year. We currently donate about $13,000 a year and we have a brokerage account with about $15,000 in appreciation. Thank you.

Okay, first of all, I think I might have found the answer to the last question while I was listening to that one. This is a website called brighttax.com and it says the foreign earned income exclusion can limit your IRA contributions. The foreign earned income exclusion is the maximum income a US Expat can earn abroad without paying tax to the irs. This amount can be excluded from US taxation whether or not you paid tax in your country of residence. For 2023. The maximum amount is $120,000. To contribute to an IRA, an expat must have earned more foreign income then the exclusion amount. You must have earned income to make IRA contributions. And apparently that excluded income is not earned. So that's the best answer I can find googling it on the Internet is that you're not going to be able to do that unless you have them pay you a little bit more. I don't think it's worth it. I would just invest in taxable if I were you. Alright, on to this question. Donor advised Fund when does it make sense to use a donor advised fund? Well if you want to use Vanguard's, your minimum amount to open the Vanguard Charitable Donor advised fund is $25,000. So you can't use that one unless you're going to put in quite a bit at Fidelity, it's as low as $5,000. Daffy, the company we were talking about on the podcast last week, $10 minimum. So they even have a specific category for people with less than $100 in their donor advised fund. So there's really no minimum. But you have to be careful which donor advised fund you select. When would I start bothering with it? Well it depends on what you want to do with it. If you're Just trying to anonymize your donations and maybe get a little bit of convenience there with them. And you're going to use dafi, or you can use Fidelity or something and start it with 5,000 and maybe not have that much in there after a while. Then I think it's fine to just do it with $1,000 or $2,000 or a few hundred dollars or whatever. And that'll help you stay anonymous with your donations. Only have one receipt to keep track of. I think that would be perfectly fine. Now, if your strategy is to donate appreciated shares, that means you're going to. If you're going to donate more than 25 to 50,000 worth of shares, not gains, but shares, the actual whole share value. If you're going to donate more than that in your lifetime, you're going to be at the top tier of DAFI, which is $240 a year, which is about the minimum amount you can pay at Vanguard as well. And so it seems like you ought to have enough in there to make sense to have a donor advised fund to do that. What's that amount? I don't know, $10,000 maybe. You probably got enough if you're planning on donating appreciated shares to open a donor advised fund. You know, this is not a private charitable foundation where you need millions of dollars for this to make sense. A donor advised fund can make sense with just a few thousand. So, you know, it sounds to me like you're there, you're a charitable person. You got appreciated shares in your taxable account. It's time for you to open a donor advised fund. If this is something that's important to you, if you got $25,000 plus, you can consider Vanguard. If you don't and you have 5,000 plus, you can consider Fidelity. If you don't have that look at Daffy. All right, next question. That's the last question. That's a bummer. You guys need to send us more questions. You can do that. Whitecoatinvestor.com Speakpipe this podcast is run by you, believe it or not. We answer your questions, we bring on the guests that you request or you suggest. We try to produce it in a way that's agreeable to you. 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