WCI #349: Is Over Contributing to Your 403(b) Ever a Good Idea?

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 349. The White Coat Investor is proud to introduce our no Hype Real Estate Investing course, which will provide the framework for developing further knowledge and experience as you progress in your real estate investing career. We call it an introductory course because there's always more to learn. But this is no short, superficial course. There are over 200 lectures and videos adding up to more than 27 hours of content by over 15 different instructors. We think it just might be the best real estate course on the planet. Continue your wealth building journey today with the no Hype Real Estate Investing course@whitecoatinvestor.com courses. You can do this and the White Coat Investor can help. All right, welcome back everybody. Good to have you here. We're recording the week before Christmas. This won't run until a couple of weeks into January, but we hope by the time you hear this, you had a great holiday season and looking forward to another awesome year. I hope you've set some goals for yourself, both financial and non financial, and that you just have a great time. If you have not already signed up, by the way, to come be with us in Florida and at the Physician Wellness and Financial Literacy Conference, or wcicon, you can still come. In fact, here's a little incentive just for podcast listeners today. 200 bucks off in person, 100 bucks off virtual, and that's good through January 24th. And you just got to put in the discount codes. If you're coming in person, the discount code is Orlando. If you're coming virtually, it's virtual, super easy to remember. So if you still want to come to that, you totally should. It's good for cme. You can use your CME dollars to do it. It's great for your wellness, it's obviously great for your financial literacy and it's awesome because you get all these cool things that happen there, right? You can customize your experience, right? You want mostly wellness content, you can do that. You want mostly finance content, you can do that. You want a mix, you can do that. But you build a community with like minded professionals and money enthusiasts. You refresh and you return home equipped with practical approaches that you can apply that week to create a better life. Not just a better financial life, but a better practice and a better personal life. You can get up to 16AMA PRA Category 1 credits or dental CE credits. And you can enjoy all kinds of fun activities. Right. We knock off the talks and that academic crap about four o' clock each day, so you have time for pickleball and yoga and wine tasting and runs much more golf, whatever. Right. It's a high end resort, fine dining spa. You know, our first one we did didn't have a spa and everyone's requested spa since then. We have a spa as well as a pretty sweet golf course. So looking forward to seeing you there. You can still sign up, get those discounts through January 24th. Again, the codes are Orlando in person. Virtual for virtual. All right, well, we are doing another Friends of WCI episode. So these Friends of WCI episodes, we bring somebody on. You know, maybe it's someone that's spoken at our conferences or somebody that we've partnered with or someone that does WCI columns. So our friend of WCI today is none other than Tyler Olson. If you don't know Tyler, you're clearly not on Twitter. Tyler has, I believe, the biggest following in this space. I think at some point in the last year or two you passed WCI and actually have more Twitter followers on wci, which is, I think, extremely impressive. And the reason why is because he's so good at helping so many people on there, clearly has a servant mentality at helping others. At any rate, Tyler, welcome to the podcast and thank you for being here with us.

Thanks for inviting me, Jim. I'm glad that we'll get to bat around some finance questions. I could do it all day, so I'm looking forward to it.

Cool. As far as conflicts of interest, Tyler used to advertise at the White Coat Investor. He hasn't for a year or two now, mostly because he was getting so many clients off Twitter and frankly, it slowed down taking clients. And so I actually have no financial conflicts of interest with Tyler right now. Although maybe we ought to get him to come out and speak at one of these WC icons one of these years. All right. But what we do with these Friends of WCI episodes is we're just answering your questions together and hopefully you won't get the same answer from both of us if it's a really good question. And that makes for a little more interesting listening, I think, for those of you out there in podcast land. But let's take our first question here, and this one's a little bit about taxes and how to interact with the tax professional. So let's take a listen. Hi, Dr. Dali. Thanks for all you do? This year I plan to do my own taxes, then send them to a professional tax preparer to double check. Is there any tax software you recommend? I am doing this because every year I found mistakes in my taxes worth thousands of dollars. I feel pretty competent, but still want the backup of a tax preparer double check in my work. Thank you. Well, that's an interesting approach. I don't think there's a lot of people out there doing that that are doing their entire tax return and then sending to someone else. Because I don't think any tax firms offer this service. Right. To double check your tax return, they do it themselves. So you're paying the full freight price. If you're going to an accountant and saying, hey, I want you to do my taxes, I to want. You don't know of anybody that'll look over your taxes, do you?

I do in the flat fee financial planner turned tax professional space, which is relatively small, so it's not an easy service to find. I think about this question a lot because of all the services that I think a physician should outsource, I tend to think that taxes is one of them because it can be so impactful. But I keep running into problems where people can't find the right person. So there's not an easy answer to this. But I don't know if this person has been. If they've found that their tax preparer made a bunch of mistakes and now they're going to do it on their own. Are they going. They must be going to someone else, right? Presumably.

Well, either that or they're finding the mistakes themselves. I mean, I've kind of been in all ends of this camp, right? I did my own taxes for many years. It's only been the last two or three years that I actually paid somebody else to do my tax return. And mostly because my staff was saying, why are you spending all your time doing this stuff? You know, first we went with the corporate tax return and then my, my personal return. But the straw that broke the camel's back because I couldn't figure out which states I had to file in with the number of my real estate syndications. And I'm like, I don't know, am I filing a 15 or am I filing an 8? I can't tell. And so that's what eventually pushed me to actually hire it out. But I definitely catch mistakes. My tax preparer messes up my 8,606 most years. I mean, I don't want to send them my blog post for it, but I do point out that, hey, you got to fix this when it's costing me something half the time. The mistakes people make on 8606, it doesn't matter because they get the bottom line right. And I don't really care beyond that. But I've definitely found mistakes like this last year was the first year we had to file for our trust. And it's an intentionally defective grantor trust. So essentially the taxes all end up on my returns. And she had used with the initial run through on the taxes, she was using up a bunch of the tax losses that I had been harvesting because she thought that I was basically selling this into the trust from a tax perspective and that I would have to realize all the gains on the stuff I'd put into the trust. But that's not the way it works with an intentionally defective grantor trust. So after going around with her and with the estate planning attorney, essentially I got all my tax losses that I'd been carrying around for a few years back because they just weren't used. So, absolutely, the pros make mistakes and the more complicated your return becomes, the more mistakes you should expect to see on them. So I'm actually really excited that you know anybody that offers this service, Tyler. So when we get done with this call, you know, I'm gonna get some names from you, we're gonna reach out and see if they're interested in advertising. Cause I bet there's a whole bunch of white coat investors that would love that service.

Yeah, I think one of the problems here is the management of expectations. Actually, there was a post on Twitter just a few days ago about this guy. He. He said he pays a decent fee to his tax professional, and he was troubled because he keeps bringing ideas to the tax preparer. Be like, hey, maybe I could save money this way. But then it makes him think, why am I bringing the ideas? Why isn't he bringing the ideas to me? And I get that. But I think that the problem lies in that there is, there is an incongruent location of expectations and service. Because like, if you're just paying someone to file your tax return and you're paying them less than $1,000, I wouldn't expect any sort of proactive tax advice because that, like this person, he's saying, I'm gonna do my taxes and then have them review it to make sure there's no mistakes. That's one end of it. But a lot of the mistakes can occur during the tax year, and that's already done. And so Having someone at your side can be helpful, but it's a lot more expensive. So, I don't know, like, this person that you mentioned, like, you know, with the trust work that you mentioned, I would hypothetically ask, like, are they checking in with you on these sort of things, like, where they really know your situation? They know you're thinking. They know why you're doing A, B and C. Cause if they're just coming reactively and it's like February, March, these people are slammed with returns and pressure to get stuff done within a finite period of time and to get someone's proactive attention and that they know what you are trying to do. You got to pay them more and you got to. Because they're working with you throughout the year. You know what I'm saying?

Yeah, absolutely. This is something I think, related to a point I make often, which is you don't save taxes really on the return. It's not about the preparation of the return. It's not about finding the right accountant that can find the right loophole and the right form to fill out. Right. I mean, yeah, there's a little bit of savings there. Maybe in getting the forms right. You save taxes by living your financial life differently, by saving for retirement, by owning a home, by having kids, by owning a business. That's where the savings is. And so by the time you get to the end of the year, all you can change is the return. You can't change the way you live your financial life.

Yeah, yeah, I agree. Yeah. But to answer this person's questions, I think it's a good idea. Like, if it's kind of like a hybrid method, you're kind of taking ownership and advocacy for your own situation, but also getting some advice on the side to make sure that things are correct. I think the viability of this decision, though, is changes relative to the complexity of his return, though. Cause, like, I don't know, like, I'm really curious to know how thousands of dollars were screwed up. Like, what's happening with this person's situation. Like, did they, like, not max out their 401k and they were looking for someone to tell them? And that's not necessarily in the purview of most tax professionals. They're looking at tax law, they're looking at quarterly tax payments, at business management, bookkeeping. And so that, like, merger of financial planning and Tax Pro is growing because of that. Because it's like tax advice knowledge coupled with proactive and accessible planner advice.

Yeah, I love the idea of people doing their own Taxes, though, because I think you learn a lot about the tax code, particularly if you start right in the beginning when your tax return's like super simple. You got a resident W2 and that's it. That's your only source of income. You know what, that's an hour job on TurboTax at most. You know, it's not that complicated and you learn a lot about the tax code. Now what I found as I did my own taxes for many years is I was generally adding one form a year that I had to learn. And, and doing my own taxes caused me to live my financial life differently. You know, I made different decisions because I knew the tax ramifications. So I'm very encouraging. If people want to do their own taxes or at least understand their own tax return. I get that sometimes it's not worth your time. It's a chore. It's not fun for most people. It's like mowing your lawn right? As soon as you have the money, you tend to hire that sort of thing out unless you like it. But I do like to encourage people to at least be knowledgeable about their own taxes. So I don't want to discourage him from doing that. But I've just found it's really hard to find very many people to just look things over, which seems like the service that he wants. And the other thing I find is people who are willing to do things like this themselves are extremely fee sensitive. You know, when this accountant comes back to him, says, yeah, I'll look it over, that's going to be $2000. You might say, you know, I think I'd rather have the $2,000. And I suspect that probably happens with a lot of do it yourselfers. All right, we beat this one to death. Should we go on to the next question?

Yeah, let's do it.

All right, this one's also a tax related question, but more about some loans. So thank you, angel, for this question. And let's. Is it angel or angel? One or the other? Let's take a Listen. Hi, Dr. Dally. My name is Dr. C and I live in the Southeast. I'm a general surgeon. Three years out of training. I was hired by a private practice and brought to a rural hospital with an income guarantee. This income guarantee was for the first year and was paid by the hospital. The practice, the hospital and me were involved in this transaction. This loan was forgiven 50% on the second year and the other 50% on the third year. After the start date, the practice received the checks and paid me A fixed salary. Every year I paid my taxes from my W2 income. Once the third year concluded, I received a 1099 C as a cancellation of loan. The question is, is this considered income that I have personally to pay taxes to the irs or my employer is responsible for this. All the research that I did involve real estate, but nothing about medical loans. Thank you for everything that you do for our community. All right, well, I mean, the easy answer here is yes, it's taxable income. I don't know who it's taxable income to, though. What do you think about that, Tyler?

Well, it depends on how it was characterized when he received the money at first. So if it was purely paid to him as loan money and there was no expedient forgiveness of it, that then creates the taxable nature of it, then all that money earned, accrued taxes, kind of like interest, and now, now he's got to pay the piper. So it would be him because it's his debt that's being forgiven.

I mean, that's the usual setup. This happens all the time, right, people? This is the incentive. This is the golden handcuffs when you come into the practice. Okay, well, we're going to give you some compensation and we're going to say it's for your student loans. It probably could be for anything, or we'll pay your student loan lender directly, but we're going to forgive that loan. We're going to forgive this money we're giving you over time. Well, when it's forgiven, that's when it becomes taxable income. So it's all forgiven in the third year, and that's when it's all taxable incomes in the third year. If it's gradually forgiven, then you get some of it forgiven in each year. But I don't think a lot of people realize that that is taxable income to them. I think that's the bigger problem.

Yes. And if they've been living as if the money that they received was after tax, not only do they have to pay now pay a tax bill that they weren't expecting, but their lifestyle might be in for a shock. And I know I could go two ways because, obviously, well, at least in my experience, from what I've seen, the idea is we're going to give you something to live on while you build up your panel, and then maybe the compensation would be much higher than that, so maybe it would be okay. But anyone who gets this sort of offer as they're finishing their training and they're trying to figure out what to Do I tell people to look at it like this is 1099 income that you're getting right now, and even if it's not due the taxes, you got to shuttle it away into an account that doesn't belong to you.

Yeah, 25 or 30% of it anyway. You got to save for the taxes. Yeah. It wasn't clear to me what the money was used for. It sounded like it may have been used to pay off student loans. So I'm not sure if he actually got all the cash himself. Was that clear to you?

It was not clear, but yeah. There have been some scenarios where employers, they send money directly to the lender to help to pay it off. But that's not a great idea because the doctor doesn't even have the chance to grab at that 25% and say, no, I'm not going to use that to pay off the debt because that's taxes. He's just kind of like he's stuck. So anyone that is approached with this sort of arrangement, I highly suggest having a really thorough conversation about what's going to happen with the compensation and when so that they can plan a couple.

Of points that is crystal clear to you and me and hopefully most of our listeners, but maybe not all the listeners that we ought to make at this point is a lot of you have only ever had a W2 job, you've only ever been an employee, and it's hard for you to tell the difference between taxes that are withheld from your paycheck and your actual tax due. These are two very different things. You have to understand that those are related but not the same thing. Right. You don't pay taxes when your employer withholds them the taxes. Well, you do pay taxes because it's a pay as you go system, but you still got to settle up come April 15, if you've been over, if you've had too much withheld, you get a tax refund. If you haven't had enough withheld, you got to write a check in April. But once you're getting any other sort of income, self employment income, K1 income, 1099 income, whatever you want to call it, income, you know, forgiven loan income, nobody's withholding for you, nobody is conveniently helping you to pay your taxes as you go along. And, and it becomes your responsibility to pay those taxes. And they can be somewhat lenient in the first year, but I'd get started right off the bat. Anytime you're getting paid money in that sort of a situation, take out 20 or 25 or 30 or 35% of it. Put it into a savings account that's solely used to pay your tax bills. And then each quarter you got to make a quarterly estimated tax payment with about a quarter of what that amount is going to be for the year, which is total guesswork for a lot of us. But do the best you can. And those are due on April 15 and June 15 and September 15 and January 15. And yes, I got those dates right. It's not every three months. Those dates are correct. You got to make the second quarter payment after only two months.

I hate that so much, but you.

Got to do that. So if you're coming into any sort of a self employment or partner situation, just recognize that this is a new thing for you and you got to figure it out now. You know, it's time to be a financial adult and take care of your own taxes.

So another thing too to add, what you're saying is the percentage we say, I mean, you said 25, 30 or 35%. It's a pretty big range. And what it's based upon are three numbers. One, your state income tax rate. If you live in a state that charges income tax plus the full board Social Security tax, which is just north of 15%. So normally as an employee, you'd only pay 7.65% of that and your employer would pay the other half. But in this scenario, you're going to pay all 15.3% and then you have to add the federal tax rate. And that's the one that's kind of unclear because it's a marginal tax system. Your effective tax rate, which is the average across the board of your total income, it could be in that range. But what you have to do first is add 15.3% plus your state income tax and then go from there at least 10%. But if you're in the 4 or $500,000 range, your effective tax rate could easily get over 25%. And of course Social Security tax stops. So I know it's not an easy thing, but I tend to tell people to say do 35%. And if you're in California, 40.

Yeah, that's good. Probably applies to those of you in New York as well. Yeah, yeah, that's good advice. But here's the deal, right? I mean, if your financial situation is about the same each year, you just do what you needed last year. Like this is pretty easy for me. Now I know I'm going to pay about 35% or about 33% of what I make in taxes. And so I make sure I'm paying that, it's pretty easy. But if you have no idea what your effective tax rate, you know, it's a total guess. And so guess a little high. Worst case scenario, you got a little extra money in that account that you can now put into savings. You can invest it, you can use it to pay down your debt, whatever. Whereas it might be tough for you if you said, I'm just going to put 20% in there, and you're a little short come April, and you're kind of scrambling, trying to figure out where to get that money from. So better to be a little high in the first year or two, or if you've just had a change in your tax situation. But once you've been doing this for a few years, for most physicians, their incomes are fairly stable, fairly similar to the prior year. And estimating shouldn't be nearly as hard once you're into that sort of a stable situation.

Another point I wanted to make about this sort of loan arrangement is to make sure that your employer is taking this seriously because the IRS does want it to be a bona fide loan. This cannot just be a handshake agreement, and there has to be very clear rules and communication. There has to be an actual contract. And they need to treat everyone with whom they have this arrangement the same. Because while the employer is much more exposed to liability here in this situation, you do not want to get dragged into any sort of audit. At the best case scenario, you'd be wasting a lot of your time. So just make sure that they're crossing their T's and dotting their I's on this.

Yeah, good advice. I think the general concept is worth understanding as well, that forgiven debt is taxable income. I only know of one exception for that, and that's public service loan forgiveness. That's the only forgiveness I know of that is tax free. Even if you do these IDR programs, like the newest, greatest one, Save, Right. I can't remember what, what it stands for. Saving on a valuable education. I think even that if you go the 20 or 25 years of making payments and you get the rest of your federal student loans forgiven, that forgiveness is taxable. So you better be saving up for that tax bomb down the road if that's your student loan plan. But you know, if you get bad debt forgiven, if you get a car loan forgiven for some reason, any of that, that's, that's all taxable income. So keep that in mind. Just as a general rule, all Right. Our quote of the day today comes from Socrates who said, enjoy your time in improving yourself by other men's writings so that you shall gain easily what others have labored hard for. All right, so let's take our next question. This one's kind of interesting about over contributing. Curious to see what this is all about.

I have a question about whether over contributing to A403 could ever be a smart decision. I'm an academic otolaryngologist in Midwest. I have four different W2 employers from a university physician group, the university itself, the VA, et cetera. And each of them have a 1 to 1 or a 2 to 1 match for 403 contributions up to about 5 to 6% of my salary. If I contribute the maximum amount to receive all of these matching contributions, I would potentially go over the 403 limit of $22,500. I understand that I would be double taxed on excess contributions, but I feel like losing the one to one match may make up for this tax penalty. I'm wondering what would you do in this situation if you had the potential of either sacrificing a match or paying the penalty?

Thanks. Well, this is a super interesting employment situation that he's got multiple W2 employers and qualifies for multiple 403s from each of them. So let's review just right up front what the rules are. Right. For every unrelated employer, you have a different 415C limit. You know, here in 2023, when we're recording this, that's 66,000, 67,000. I don't even remember what it is. I think it's going to 69 next year. Does that sound right to you? I think it's $69,000. For 2024 it is. So for every unrelated employer, that's the total limit of contributions. For your employee deferral contributions, those can be tax deferred or roth. That's the $22,500 a year for those under 50 for your after tax contributions, if your employer plan allows those. And for any employer contributions, whether they're profit sharing contributions or matching contributions or whatever, that's the total limit per unrelated employer. Separate from that, you have a rule that says your employee deferral, whether that's tax deferred or Roth, no matter how many of these plans you have, is 22,500. If you're under 50 in 2023, I think it goes to $23,000 for $24,000. But you know, if you've got four employers, and they're all offering you a match. You got to be careful how you allocate that $22,500 to maximize how much of that, those matching dollars that you can get. And it sounds like you've tried to do that and you can't get all of your match with only 22,500 going into those plans. I don't know. What do you do in that situation? Tyler, you ever run into this? You ever had a client that had this issue? I don't think I've ever been asked this question before.

I have encountered this a couple of times. It's a function of several numbers. You know, their top tax rate at the moment is a factor because they're going to pay taxes on that over contribution. Now, on the other hand, they're going to get a match, which is effectively a 100% return on whatever this dollar amount is, which is great. Of course, then it's all going to be taxed upon withdrawal. So the question is, what is that amount from the employer and is it worth it to then pay the taxes again? Because the other option for this person is to not over contribute and put it into a taxable investment account because presumably he doesn't need the money so he could invest it on his own. So what if he invests the money in a taxable investment account, uses tax efficient, as in low turnover ETFs and buy and hold, Let it ride. I mean, depending on how he manages his retirement income strategy, however, many years from now, we don't know what capital gains rates will be at that time. But for most people, you're maxing out at 15% on that. And if you don't buy high dividend, high yield funds, you're mitigating much of that ongoing tax liability. So the question is, would it be worth it to just do that so that you're not paying the higher tax income tax rates in the future versus paying the slightly lower 15%?

Yeah, boy. I just want to dive into all the numbers of this. I want to know what each employer is offering and how much he's making there and trying to figure out the way that he can use $6,000 here and $9,000 here and $4,000 here and get as much of the match as he as he possibly can. So here's the question, right? Let's say you put in too much to one of these 403s and maybe we ought to step back first and talk about the unethical option, right? The truth is the IRS is not looking at this very carefully. Right. They're probably not going to notice. If you max out all four 403s get the complete match, they're probably not going to notice. It is against the rules. I'm not going to recommend you do that. But I don't get the impression that this is a particularly frequently audited part of the tax code.

The IRS is hiring a lot of.

People if they can get the funding for it, which is extremely politically dependent.

That's true.

So that's one option. I don't recommend it. But the truth is I don't think people at the IRS really are looking at these contributions very closely. But aside from that, I mean there's a penalty on over contributing. Right. I think it's 6% for an IRA and so it's 6% a year. So the longer you leave that over contribution in, the higher that penalty gets. And it's all the money you over contributed all of its earnings plus 6% is what the penalty is on over contributions. But my question is, if you make the contribution and you pull the contribution out in six months or whatever to, you know, pay that penalty and to minimize future penalties, does the employer take the match away? And my guess is they don't because I don't think HR is looking at that very closely. So I think there's a good chance you could over contribute, you know, and Maybe that involves putting 16 into this 403, pull six of it back out in three months or whatever. And maybe they don't pull the match back out. I don't know. You'd have to talk to HR and see how they would treat that to see if that would be an option to get a few more of those matching dollars.

That's an interesting scenario because the match rules aren't the.

I mean that's a plan specific rule, how the match works. That's not an IRS rule. The IRS rule is all about that maximum personal contribution.

You're saying this in the context of them making ongoing matching contributions, not after the tax year is over.

Right, right. And of course, every plan's different. Right. Some of them wait till the end of the year to give you any matching dollars. Yeah.

And a vesting schedule.

Right.

So yeah, I. Do you like with these listeners, when they pose questions, is there a means to follow up with them to get more detail? Because I would. I agree with you. I would love to. Just for the math, it would be really cool to like figure this out.

Yeah, this would be a great blog post. So as you're listening to this. I assuming you're listening to this answer since you bothered to leave it on the speak pipe. Why don't you send us the details? Shoot me an email with the actual details. How much you're making at each of these businesses, what the match is at each of them, how it works, and how much you can contribute. And maybe we'll make this into a blog post. Because blog posts are always better when you're really crunching the numbers than talking on the podcast. But it's a pretty interesting optimization problem. Try to get as many matching dollars as you can.

Yeah, the other option would be to change up how he's compensated. Or like the employee relationship versus subcontractor, right?

Oh yeah, that can be pretty awesome. So maybe you go to one of these folks and you're like, hey, I'm only working here 25 hours a month. Why don't you make me an independent contractor and then I'll get a solo 401k and I'll get a customized one that I can make after tax contributions into. And. And even though you're only paying me $70,000 this year, I could get almost all of it into that solo 401k. So that'd be one option and would probably increase overall how much you make. Just remember, you gotta ask for more money if you're going to 1099. Cause now the employer's not only not giving you that match and not giving you any other benefits and they're not paying your half of the Social Security and payroll taxes, Medicare taxes. So that's one option is change one or two or three of these four employers to 1099 employer. And that may work out a little bit better for you. You just have to run the numbers to know for sure. That's a good idea. I like that thought.

Well, I mean, and just level with them like say, hey, I can't get this match. You are willing to make the contribution. If only I could legally do it. Make that matching point portion a part of the compensation. In addition to making it worth it for all the other reasons, it is more expensive to be a subcontractor.

I'm actually surprised. And maybe you ought to go back and check this. Maybe you're wrong. Maybe you're not eligible to contribute to all these different plans. You know, you usually have to be someplace a certain length of time and you have to work a certain number of hours before you're actually eligible. They've decreased those with the Secure Act 2.0. I think it's only 1000 hours. I want to say total now. It could be 750 before the employer has to make you eligible for a 401k once you're 21 plus. But you may not actually be eligible to use all these 403s. You have the other thing to keep in mind. If you get one of those 1099, if you change one of them to a 1099. There's a weird quirk with 403s that you don't see with 401s that the 403 and your solo 401 actually share the same 415C limit, which is really kind of a bummer about 403s. It's a really obscure rule, but it's different from 401s in that respect. So that could also play a factor in your situation.

Yeah, I hope he gets in touch with you.

Yeah, this would be a great blog.

Post and evaluating how to read through those benefits pages. They send you the link and there's just countless paragraphs and links and trying to figure out what am I eligible for, what am I not eligible for? It'd be cool if he could send you all that, you know, and then just deep dive into how to make the most of a not uncommon academic physician situation.

Yeah, it doesn't. Honestly, it doesn't sound like a very stable employment situation. I mean, who has four W2 employers, right? I can't imagine this isn't going to change in the next year or two. Right.

I've seen it more and more with university jobs that are tied in with state employment. They get paid by the va, they get paid by the hospital, they get paid by the medical school. It's very, very frustrating to say the least. I wish it could just be one, but I'm seeing this a lot.

Well, when you run for Congress, you can simplify our retirement account system.

No, I respectfully decline.

All right. By the way, for those of you out there who are financially empowered women or would like to be a financially empowered woman, you can join us at the next Few event. It's coming up in just a few days. I think this podcast drops on January 11th. The next event is on January 17th, 2024. And it is going to be finding your unique work life balance with Don Baker. She's been a WC Icon speaker several times. She's awesome. You'll love her. You can sign up for that@WhiteCoinInvestor.com Few all right, let's take another question. This is another one about retirement accounts. So let's see if we can get these multiple questions answered here.

Hello, Dr. Dalle.

Happy holidays. Thank you for the end of the year financial checklist. Recently I am a sole physician practice owner with one employee. I stopped contributing to our office SEP IRA in 2022 calendar year and opened a business 401k for 2023. My questions 1a. In order to do a backdoor Roth this year, what should I do with the SEP IRA money? Transfer it into the business 401k which has an AUM of 0.08%. It's about 200,000. 1b. I also have a traditional IRA with non deduction contributions in it. Can I convert that entirely into the Roth IRA too? Of course, I would need to do something with it in order to avoid the pro rata rule. And number two, I maxed my employee contribution of $22,500 for 2023. But I was told that I need comparability testing at the year end to max the 66k for 2023 via PSP, which my income will allow for. But was I able to contribute this money throughout 2023 rather than having to wait for this testing to confirm that number? Thank you very much and be well. All right, Well, I hope you had happy holidays too. We heard your greeting before the holidays, but you're hearing our response afterward. All right, you want to take a first stab at some of those.

So the SEP ira, it can play a role, but because of its impact on backdoor Roth contributions, I tend to give it second place to like a solo. Well, not a solo in this case, but a 401k. He could just roll it into a new 401k and there's no reason not to do that. But yeah, I mean, he's just gotta clean it up. That's my first thought is like, okay, what sort of setting is he wanting for his business going forward? What's the end game? Then you can start to figure out how to get there.

It sounds to me like he had a SEP ira and I don't know if he's coming from self employment or didn't have employees before and now does. So he has to have a 401k now. I don't know exactly what happened, but clearly the practice he's working for and I think owns now has a 401 in place. So there's no point in having the SEP IRA. You just put this 401 in place, roll a step in there, it'll probably have better asset protection in most states it does. It certainly is going to reduce one of your accounts or reduces the complexity of your portfolio. It now doesn't get counted in any pro rata calculations. If you want to do backdoor Roth IRA each year, I see no bad reason to roll it in other than there's an additional fee on the money. But it's small, it's 0.08%. You're going to have to pay those guys somehow to run your 401. I prefer flat fees, you know, but if there's not a lot of money in the 401k, a small AUM might be smaller than the flat fees you'd be paying. So I'm not terribly against a ump. You just got to run the numbers if you have an AUM fee. And so that's what I do with the old SAP. I don't think there's any question. I mean, if you had some solo 401k somewhere, I guess you could roll it in there. But I wouldn't keep it in a SEP ira. That seems kind of foolish when you have another option.

Yeah, there's no reason to keep it at that point. The other matter is like with seps, it's pretty straight across the board. Like if you have an employee, if you give yourself a contribution, you got to give the employee a contribution. The 401k gives you more flexibility. But with the 401, as long as you're making the minimum non highly compensated employee contribution, you don't have to wait. I mean, it's not like you, like some people like to lump it all together. I've worked with a few practices with their 401k plans and they just like to. Because it kind of brings all the administrative work together in one time per year and then they're just done. But you don't have to, but you do want to make sure that your employee is getting that minimum requirement, which I believe is, I think it's 5%. It has to be at least 5% of their employment compensation in order to like overcome that test.

Yeah, these, these rules are super complicated. You know, the, the fairness rules, the, the rules to make sure you're basically not just taking all the benefits for you and the highly compensated employees that the docs aren't getting all the benefits of the 401k, but the nurses and the techs and the front office staff, they're also getting benefit from the 401. That's what these testing rules for retirement plans are. And they're totally required they're very strict to the point that when you have employees, this is no longer a do it yourself project. Right? You don't run your own 401 for your practice. You go get a professional and we've got a list of them. At whitecoatinvestor.com, people we refer you to. It's under the retirement plans tab that can help you with this. The first thing you do is you have your practice study. You have this person actually come in that's going to be designing this retirement plan and they talk to your employees. I mean, they can do it virtually obviously, or by email or whatever, but they come in, they talk to your employees and they're like, how much do you want to save for retirement? And they talk to the owners, how much do you want to save for retirement? You know, and how much does it bother you to give a match? And how much do the employees value money that you're putting into the retirement plan? You do these studies and you figure out what's the right plan for the practice. It might be a simple ira. And remember, that's a simple in caps, that's not just an IRA, that's a simple IRA or simple 401. To make things even more complicated, it might be a SEP IRA most of the time it's probably a 401 and it might be no plan at all. It might not make sense for you to have a plan if you've got a whole bunch of employees that you'd have to make huge contributions into their accounts and they don't value them and it's just not worth it to you. You might not have a plan. You might just invest in taxable in your Roth ira. That's certainly an option that a lot of practice owners have chosen in the past. And the classic situation is a single doc in practice or a dentist that has a practice. And they may choose not to have a retirement plan at all. So that's step one is figure out what retirement plan you're going to do. It sounds to me like you've already done that and decided, okay, we're going to have a 401k. I used to have this SEP IRA, whether it was part of the practice or whether it was separate because I was self employed, you know, now we're going to do a 401k. That's step one. But just recognize that once there are employees, you don't do this by yourself. There's got to be somebody running the plan. There's actuaries, there's TPAs they keep you in compliance and they got to run these numbers. And if you have contributed too much into the plan or you want to contribute too much that you're not allowed to because it discriminates against the lowly paid employees, you got two options. One, you got to pull your contributions back out, or two, you have to pay the penalty. And if you're watching this on YouTube, I'm putting the penalty in quotes because what the penalty is, is a pretty awesome thing that we take advantage of here at WCI in our 401. The penalty is putting money into the account for the less highly paid employees, the non highly compensated employees. That's your penalty is to make contributions into their retirement accounts. And so we do that every year. That penalty doesn't bother me one bit. And so the highly compensated employees can max out their accounts. And you know what, it comes back and it's a few thousand dollars per employee and we're like, thanks for working here. We appreciate it. Here's some few thousand dollars more into your 401. So those are kind of your options. But yeah, that testing is very real. You got to pass the testing. But there's no reason you can't make contributions as you go along. You just have to pass the testing at the end or pull a bunch of money back out. Yeah.

On the note of contributing to employee accounts, it is a business expense. But if you're looking to create longevity for your business, you've got to build genuine loyalty with your employees. So when you do that, even though it's a cost, sure, you're investing in your people. And the better you all work together, the better that they think that you care about them and value their work, the better the work days will go. So I think that people get this idea that when they had a. Maybe they had. I know one doc that he had a solo 401k and it was like just max it out every year. And it was very easy. But then it was necessary to hire some employees and he was able to see that like, yeah, he could still do that. It's just, it is going to cost him more, but it's why he hired employees in the first place, because that generates greater revenue. So it's all around. It's a good thing. You just got to count the cost and. And surround yourself with the right people.

Yeah, absolutely. And the other. I can't emphasize this enough. Right. I mean, people that work at the White Coat Investor. Right. They know we're talking about finance, we're talking about saving for retirement, we're talking about fire, we're talking about retirement accounts all the time. And so there's a big heavy emphasis here about financial education, financial literacy, high savings rates and that sort of thing. But the more of that you can do with your employees, the more they are likely to contribute to the 401. And the more they contribute to the 401, the more you can contribute to the 401k, which without having to pay a penalty and so encouraging this mentality towards saving toward retirement, Talking about the 401k and giving them the 401 information and having an awesome 401 instead of a crappy one, all that sort of stuff goes a long way to you being able to max out your own retirement account contributions. It's probably worth talking about safe harbor as well. A lot of people have heard this term when they're learning about practice 401 s. How do you explain the concept of safe harbor when it comes to a 401 or a profit sharing plan to docs?

Safe harbor is a term referring to ensuring that the plan is meeting the very bare minimum requirements regarding employee contributions. So like in this scenario, if you're concerned about being able to pass tests, any non highly compensated employee that receives the typical 3% safe harbor contribution, in order for them to actually be able to pass all the tests and max out everything, they also have to receive that other minimum contribution which is either a third of the highest contribution rate given to one of the highest paid highly compensated employee, or 5% of the participants gross compensation, whichever is less. So even as I say this out loud, I have to look at it again and again. This is not easy stuff, so do not DIY this please.

Good advice. Yeah. I think the idea is the IRS has said, hey, this one's going to pass. If you just follow these rules, it'll pass. But I think you can get higher contributions for yourself by not going for the safe harbor option.

Agreed.

It may not be worth it to you because you may find, geez, I got eight employees and now I got to put in five grand for each one of them and I'm only putting 35,000 in there for myself. It cost me more in matches than I'm even able to put in the plan. And you may decide you don't want to do that and that's fine, but you know, run the numbers and see what the options are and see what you and your employees value most.

And when that happens, it's time to entertain the cash balance plan.

Yeah, exactly. Start Looking at the cash balance plan, which has some advantages, although I think it still has to go into some of the testing as far as what the employees get, don't they? It's not like you can just, oh, we'll just put it all in the cash balance plan and screw the low paid employees.

Oh yeah, no, it's not just an easy option for stowing away a bunch of money without, without going through the hoops. But even so, like, I know, I know a urology practice out east that they have a few dozen employees and they hired an actuary firm to figure it out, like if it would be worthwhile. And it really is, the owners, they can all put in like 75, $80,000 a year into that thing. And they do have to put money into the employee accounts, but it's more worth it for them because they have enough compensation that they don't need all of it, the owners. And because the maximums on the cash balance plan are so much higher, it's worth it on that ratio basis how much they have to do for the employees versus what they get out of it.

Especially if these practice owners, these highly compensated employees are older. If you're into your 50s or 60s, you can make pretty huge contributions to some of these cash balance plans just because of the way they're actuarially determined. We're actually going to be closing our cash balance plan in my physician partnership. So those four or five hundred of you out there who know you're in my physician partnership, we're going to be closing that cash balance plan next year and end up opening a different one, which is pretty cool. We made a few changes on it, a couple of negative changes, but that allow us to make a huge positive change, which is dramatic. Dramatically larger contributions for everybody. I think my contribution's going to go from under the old plan. I think I'm going from 17 and a half thousand dollars to $120,000 is going to be the max contribution. I'm not sure I see enough patients these days to actually make that entire contribution, but we'll see how it stacks up. All right, we've got a question from Ryan on the speak pipe about cost basis. Let's listen to that. Hi, Dr. Dali, this is Ryan, a military dentist in California. My question is about the use of average cost basis versus actual cost basis. Recently, while trying to do some tax loss harvesting in my Fidelity brokerage account, I noticed that all stocks and ETFs use actual cost basis, but the mutual funds in my brokerage account Utilize average cost basis. So first, is there any reason why Fidelity would default to using average cost basis for mutual funds in a brokerage account? And then secondly, it seems to me from a tax loss harvesting perspective, actual cost basis that lists each individual tax lot makes it easier to harvest. My understanding is Fidelity will let me change the cost basis for future purchases, but won't change the basis retroactively. Would there be any disadvantages to using the actual cost basis moving forward? Thanks for all you do. I wish Fidelity would use the same term for this as everybody else. I think when Fidelity says actual, what they mean is what Vanguard and Schwab mean when they say specific identification of those shares. That's my understanding. Is that your understanding of what he means when you say an actual?

Yes, yes.

I can't think of a good reason to use average, can you?

No, not in a taxable account. I mean, it's moot for retirement accounts, of course, but yeah, I always opt for making this specific identification so that if tax loss harvesting is an opportunity presents itself, then you can isolate those lots and you can sell those because the average, I mean, you're just kind of. It's just kind of a wash. Yeah.

All of my holdings in a taxable brokerage account are specific identification as far as the basis goes. Right. First of all, let's step back. Basis, remember, is what you pay for shares. Right. And these brokerages will track your basis in several different ways depending on how you want tracked. Why they offer all these, I don't know, because I can't think of a good reason why specific identification isn't always the best choice. But you usually have to actually say that. You have to actually choose that from the options. The default almost always seems to be average cost basis. And you need to change that in a drop down menu for that holding in the brokerage account to specific identification. And that way when it comes time to sell shares, you know, particularly if you're trying to book some losses because you're doing tax loss harvesting, you can look at each share's basis or each lot. I'm saying share. I should be saying lot, each lot's basis and sell the one with the loss. The highest basis is the one you're trying to sell, usually. Likewise, if you're in retirement and you're just spending this money and you're like, well, which one should I spend first? Well, you spend the one with the high basis because it costs you the least amount of tax when you sell it because there's less of a difference between the basis and the actual value. And so it's good. It gives you a lot more tax planning, opportunities to use specific identification, AKA actual basis. I don't know. I don't think there's a lot of debate on that.

No, that's. It's pretty straightforward.

Why do you think they have average as the default?

I suspect it has something to do with the software development and what was easier for them to make the default because there'd be. No, I was trying to think like they're not. They're not making any money on, you know, they make money on cash, you know, the platforms. So it wouldn't seemingly matter to them financially, except if it takes a little bit more computing power on their part, that could be it. And if we're talking, I mean, it's minuscule on an individual basis, but if they're looking at it from a wide picture, you know, maybe it draws more power for them. And that's the only thing I could think of. But even that seems.

Maybe it's tradition, maybe it's as simple as average comes before specific ID in the Alphabet. I don't know. But it doesn't make sense to me that they use that. I can't think of a reason why they would. On a related note, dividends in a taxable account, you've got a bunch of ETFs, VTI, VXUS, whatever in your taxable account. I tend not to reinvest my dividends so that I can use them to rebalance so I don't create a whole bunch of little tax lots to keep track of. What do you do with your dividends and taxable accounts for yourself and your clients?

Go to cash.

I'll go to cash. Yeah.

They go to the money market because of what you just mentioned. They're going to be taxable whether you reinvest or not. So there's no downside to taking it, to putting it in cash. But there would be a downside with looking at an unbalanced portfolio. And you have to decide, is it worth it for me to create tax liability in order to rebalance this when it might have less tax liability? If you had the cash to do it, to just reinsert it into the position that needs to be brought up.

To level, I'd push back on that. I think there is at least one downside that you can't automate it. Right. Those dividends. They might sit there for two or three months before you get around, oh, I gotta reinvest those dividends. If you're not watching it, you could get some cash drag from that. And I think there's a lot of value in automating things. Behavior trumps math sometimes when it comes to personal finance and investing. And I think automating things creates good investment behavior. The problem is that automation does not play well with things like tax loss harvesting. It doesn't play super well with taxable accounts. I think it's great to automate things in your 401 and your Roth IRA and so on and so forth, but in your taxable account, I just prefer having more manual control. I think it's worth the downside of losing that automaticity that I think is helpful to lots of people in their investing.

What you do is where you can't automate with software. You automate with your planner, like your written planner, and say, hey, everybody, two months or every three months, I'm going to check the values of my taxable account. And once you learn how to do it, it's not much time. It's mainly just about not forgetting and putting the reminder whatever system works for you, just make it happen so that it's in the schedule and then you'll do it. And then the cash drag is much less of an issue.

Yeah, my system is I invest once a month. I count up all the income we had, whether it's dividends in a taxable account, whether it's clinical income, whether it's WCI income, count it all up and look and decide what we're going to invest and then invest once a month. But if it's been three or four weeks since those dividends were paid, I'm getting tax drag or cash drag on those dividends. Now that's not so bad at Vanguard. At Vanguard, my cash is sitting in the federal money market fund. It's earning 5.3%. That's not much drag. But some of these brokerages, the way they make money is your sweep account. The money where those dividend. The account where those dividends go into pays zero. And that's how they make money. And it reduces your returns. So that's one of the reasons, you know, people complain and moan about Vanguard not picking up the phone very well and not offering great service and so on and so forth. Definitely people are nicer and pick up the phone faster a lot of times at Fidelity or Schwab. But, you know, not having that cash drag is worth something. And so I do appreciate that Fidelity.

Has a good option for their money market fund, too. Like you can. Yeah, no, right now it's Right up there with the one that Vanguard offers. I don't know the exact rate right now, but it's around 5% and you.

Can have your dividend swept right into there. Yeah. What about Schwab though? Schwab's still like a 0% one, aren't they?

I don't use them much because their tech is terrible in my opinion. But I've last heard that that was the case. Like that their default sweep is into like a low interest bearing account. So you do have to be a bit more nimble about that. So I recommend Vanguard or Fidelity over Schwab any day anyway because I find they're. The user experience is better. And I mean, as far as cash drag, when you're talking about a couple of months of money sitting in cash. I also come from the angle of let's not stress about all this too much because we want to be able to enjoy our life and time too. So it's. I mean, everyone's a little bit different on. And we're. I guess it depends on how much money we're talking about, but want to be balanced and not stress too much about the minutiae.

Yeah, for sure. It's interesting, my taxable account, it's actually mostly trust account, is at Vanguard, but I also have an account at Fidelity. I have multiple accounts at Fidelity. That's where our 401k is. That's where my HSA is. And then my practice 401k and the cash balance plan are Schwab. So I get to use all of these brokerages all the time. But I'm able to just reinvest everything in my 401s. So the only one I actually have this issue with, of course, is at Vanguard because that's where the taxable account is. You know, I think we missed a question from our last person that was asking what to do with this IRA they have leftover about. They had an IRA with some basis in it. And it sounds like they never actually said it, but it sounds like they want to be able to do backdoor Roth IRAs. I mean, they're rolling the SEP IRA into the 401 and you got to get rid of obviously the traditional IRA too. Hopefully it's relatively small or a large amount of it is basis, meaning after tax contributions. And hopefully you can just convert the whole thing to a Roth ira. If you can afford the tax bill on that, that's definitely the easier setup. But there is one other option. If it's a big ira, you might consider trying to Isolate the basis in it, rolling some of the money into the 401, the tax deferred portion of the money into the 401 because it probably only accepts tax deferred rollovers. And then that would leave all of the basis in the Roth IRA which would now be isolated or in the ira which would now be isolated and could be converted to a Roth ira. So for completeness sake, I wanted to go back and mention that. Do you have any thoughts on that process? Do you run into a lot of people with IRAs?

They're trying to clean up every once in a while, but usually it's small enough that the profit on it is small enough that we just roll it into their Roth ira. Especially if you're in your transition year and you're still in a low income tax bracket cause you're not earning your full board post training compensation. It's not too expensive to just roll it in there and then it's set. You know, it's now after tax, tax free growth there, here on out. So that's usually what we do if it's a big. I have not run into a scenario where there's a big IRA with a substantial profit. It's just not very common in the physician space.

Well, very cool. Well, this has been great. Anything else people ought to know as we're going into the beginning of 2024? Any tips you think that are particularly timely? People ought to hear just to keep.

Thinking about how they can make the most of their financial decisions early on. I mean, we've only got so much time in our life and so being able to save intentionally, spend intentionally and keeping up with financial education through what you're doing at White Coat and everything I'm trying to do. And there's lots of other folks who are sharing free information too. I think it's really important for anyone who's early in their career to just focus on investing as early as you can and getting rid of that debt one way or another. I see all the things that have been happening with public service loan forgiveness. I tell you, like two years ago I was such a PSLF hater. I was like, I hate this thing. It's so uncertain and maybe you're not going to get it. But paying careful attention to it and following the rules, millions and millions of dollars have been forgiven in front of my eyes. So it's valuable to pay attention to the details of this.

Yeah, we have had people at, @studentloanadvice.com Andrew's over there working his butt off this fall giving people advice. But I think Our record so far 700,000. 700,000 we've had people forgiven in public service loan forgiveness and it's life changing to have two or three or four or $500,000 forgiven. You know, I was always a PSLF believer, although there were a couple of years there, 2017, 2018, maybe 2019 as well, when it was a fight. I mean, people had to hire an attorney to get their public service loan forgiveness that they were owed. Had to argue with the companies that couldn't count the 120. It was a fight. I feel like it's not a fight anymore. I feel like people are used to it. The systems are working now. If you've made your 120 payments, you otherwise qualify, you're getting your PSLF these days. The White Coat Investor is proud to introduce our no Hype Real Estate Investing course, which will provide the framework for developing further knowledge and experience as you progress in your real estate investing career. We call it an introductory course because there's always more to learn. But this is no short, superficial course. There are over 200 lectures and videos adding up to more than 27 hours of content by over 15 different instructors. We think it just might be the best real estate course on the planet. Continue your wealth building journey today with the no Hype Real Estate Investing course@whitecoatinvestor.com courses. You can do this and the White Coat Investor can help. Don't forget WCICON. You can still sign up $200 off in person if you use code ORLANDO $100 off virtual if you use code Virtual. Don't forget about the few events coming up. It's January 17th. Sign up@whitecoatinvestor.com Few thanks for those of you leaving us five star reviews telling your friends about the podcast. Our most recent one comes in from iReview 11:17 said Grateful I can't recommend the podcast and other WCI resources more highly. I'm amazed at what I've learned from the podcast, blogs and books. I have transformed from financially illiterate to actually identifying mistakes financial advisors were making with family. I owe a tremendous degree of my financial success to Dr. Dali and I'm very grateful for everything he has done. Truly is helping high income professionals achieve financial independence. Five stars. Thanks so much for that great review. We really appreciate it. And Tyler, it has been wonderful to have you on this podcast. If people have decided they're sick of listening to me, they want to listen to you. How can they?

Best follow you two things come to mind. They could come to Twitter or now known as X. Apparently my handle there is olsonplanner. O L S O N P L A N N E R and the other area is my YouTube channel, same handle, Olson Planner. It's a growing library of financial education for medical students and early career physicians.

Awesome. Well, Tyler, I want to also take this opportunity from the community of physicians, White Coat investors, people who haven't ever found the White Coat Investor, people who don't like the White Coat Investor. Whatever. I want to thank you for what you've done for doctors. You have helped, I don't know, thousands, tens of thousands of doctors through your work on Twitter. Whether it's directly in DMs or indirectly, people just following your feedback. You've helped a lot of people and I thank you for that. And the community at large thanks you for that. So we appreciate your time and effort and the work you put in these last few years. For the rest of you, keep your head up, shoulders back. You've got this and we can help. We'll see you next time 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.