WCI #357: Roth IRAs, Conversions and Backdoor Contributions

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This is White Coat Investor podcast number 357. Roth IRAs, conversions and backdoor contributions. Love what you hear on the podcast. Looking for more great White Coat Investor content? Head over to our YouTube channel where you can watch video recordings of our podcast, short snippets of financial tips explained succinctly by me and others, and deep dives into topics for more in depth learning. You can even learn all about real estate with webinars from our real estate partners. Check out all this and more@YouTube.com thewhitecoatinvestor you can do this and the White Coat Investor can help. All right, this is a Friends of WCI episode and our friend today is Chad Shub. Welcome to the episode, Chad.

Thanks, Jim. Excited to be here. Always excited to chat with the WCI nation. So I'm excited to get into it.

Yeah, it's good to have you here. For those who don't know, Chad's been a speaker at wcicon before. He is. As a profession, he's a financial advisor. He's advertised with us for I don't know how many years. Do you know how many years, Chad? How long has it been?

We started in 2016.

Yeah. So, wow, eight, nine years by now. So he's been around a long time. He knows White Coat investors well. And we're gonna work together to answer some of your questions today. Okay, let's start with a question I think we'll begin with. You guys have asked a lot of questions lately about Backdoor Ross. It's that kind of a season. I don't know how many Backdoor Ross questions come into me every day here at the White Coat Investor. Certainly tons of people. On our articles about Backdoor Roth, Chad mentioned he's got a video on his website that has had 15,000 views on it about Backdoor Roth in the last month. So there are plenty of people out there trying to sort this out. Let's take our first question from Steven.

Hey, Jim, I have a question about backdoor Roth IRAs. I contribute to mine annually and my wife is no longer working, but we filed taxes jointly. So I was going to contribute to my own Roth IRA through the back door and then also to hers as well, since we're finally jointly. I believe this is legal, but I wanted to pick your brain just to see what your thoughts were. I look forward to hearing your response. Appreciate it.

All right, well, normally on this podcast, when we have a Friends of WCI episode, we love controversial topics that don't have a right answer. I don't think this is one of those. Chad, you want to knock this one out of the park? This one served up pretty well.

Yeah, this, you know, I was looking, I wanted to fight. I wanted to get into it right away. So we're just, we're going to take it easy to start. Yeah, this one, this one was an easy one. Nothing too crazy here. But yes, this all passes. Go. I would say the official name is the spousal ira. There's no such account as a spousal ira.

Right.

You just open up a traditional ira, but you are able to do this. So if you are the primary income earner, you have a spouse that is not earning income, you can still do the backdoor Roth ira, one of those really good financial planning topics that you don't want to miss. So that's an easy one. That's an all clear.

Yeah. You have to have enough income not only for your own IRA contribution, but their IRA contribution. Not usually a problem for white coat investors. All right, what kind of issues are there if they're not married filing jointly, if they're doing married filing separately?

Yeah, this is the big one. We'll always say, you know, the student loan issues come in real quick here in terms of when you use that married filing separately. And your income limit is. Is smashdown on this one. So that's the one where the late income limit is now $10,000. So anytime you get into married filing separately, we pretty much say it opens up. You're guaranteed to do a backdoor Roth. Now, you know, it's one where you don't even have to really think about it, at least in the physician community. But that's the main one that we want you to keep an eye on, is once you do merit filing separately, usually in terms of student loan planning, the backdoor Roth is going to come in here as your main go to. Because that income limit is so low now.

But you can still do a spousal ira, right, based on your spouse's income?

Well, we were saying here the spouse doesn't have income.

I'm saying if you're doing married filing separately and you don't have much income, maybe you don't have enough to make a full contribution, but you can still make it off your spouse's income, can't you?

So the spouse does not have any income in this example. But you're still doing married filing separately.

Yeah, exactly.

That would still be your $10,000 limit, right?

Well, the 10,000 limit is what it phases out at. The deductibility of the contribution phases out over $10,000, right?

Correct.

But I'm saying you can still make the contribution even without both spouses having income.

Yeah.

Yeah.

Correct.

Yep. It's just not deductible. Yeah. So you can still do it. Yeah. Yep. Okay. Our quote of the day today comes from Mary Callahan Rhodes, who said, investing is not as complicated or as daunting as we make it out to be. The simplest approach can be the most effective, I find. Often is the most effective, especially when you consider that 90% of personal finance is behavioral and not financial. Simplicity is underrated. It's underrated when it comes to managing an investment portfolio. All right, let's take another backdoor Roth question. This one from JC.

Hey, Dr. Dali. My wife and I are both physicians who recently finished residency. My question is about backdoor Roths. My wife currently has about 30k in a traditional and about 5k in her Roth. I've been told that I could open another traditional IRA and then be able to backdoor Roth from there, but that doesn't make any sense to me as she would still have 30k in her first IRA at the end of each year. My other thought was convert it all into the Roth and then take the hit over the 7k this year. But I would love to hear your thoughts on what you would recommend. I know you said in your podcast that anything small would be just simple, just take the hit. But anything higher, just keep the ira. But I feel like I'm kind of in the middle. Would love to hear your thoughts. Thank you.

All right, well, there's a little controversy here. This one's not quite as cut and dried. One thing I think we ought to point out at the beginning is that IRAs are all individual. Right. That's what the I in IRA stands for is individual. So this is always separate. Right. You have your own ira, your spouse has their own ira. When you do backdoor Ross, you each have your own Form 8606 in your taxes. So you file a married filing jointly tax return. There are two 8606 is on it if you're doing two backdoor Roth IRAs. So I think that's important to keep in mind. But I think the question that's really being asked here is when is an IRA with pre tax money in it? Too big to convert. When you should you be looking at trying to roll it into a 401k or maybe not doing a backdoor Roth IRA for that person. What do you think? How would you advise on that? Jedi?

Yeah, yeah, this one. You know, it's actually crazy to me, Jim, how often we do hear bad advice on, oh, just open up another ira. So there must be some source out there that is not giving good advice. So JC nailed it. That is that it's not as simple as that. You don't want to do that. You know, the number could really be argued about in numerous contexts in terms of where they are. The first item I got out of JC notes too was, you know, sounds like you finished training in 2023. So, you know, to the listeners, remember that that last year of training is a really good year to think about making that conversion because that's your, you know, your last low income year to make that, that conversion in there. So from our side of it, we're always looking at it, the number we use is actually usually around 20,000. It's not perfect, but we say less than 20,000. Usually you don't have to think about it more than 20,000. So, you know, getting that range of 30,000 for JC's wife here was right in that area where you'd want to run the numbers. A lot of times it's do you have the cash to cover the tax bill?

Right?

So if you convert, you know that, that 30,000 number over there, and let's just assume we're saying, you know, 30% tax bracket, there's a $10,000 tax bill there. You know, do you have the cash to cover that? Now it's not going to be this individualized bill that the IRS sends you, right? It's going to kind of come out in the wash with your tax return. But you don't want to withhold when you do that conversion because one, it affects compounded interest. But two, kind of a sneaky little tax penalty in there is you actually do get that 10% penalty for pulling that out to actually pay the taxes. So it depends on the situation, on the income, but they'd be right around that number where I think it's really worth a conversation, an analysis of do they actually convert it, Take the tax hit now and move on. Obviously we can talk too on the other options they have in there. But for us it's right in that sweet spot where it depends. But it's, it's, you could actually do the math compared to if it's like 100 grand, you know, heck, even 50 grand, you're probably always leaning towards, you know, getting into more qualified money and not triggering that tax hit.

Right. I think it's important that we point out it's, you know, tax. It sounds bad, right? You're just prepaying the taxes. The taxes are going to get paid. You're just basically doing a Roth conversion. So it's not all bad. Yes, you have to pay taxes this year, but you also now have a bigger Roth ira. That's not a bad thing most of the time. And so I think conversion's a great option for just cleaning stuff up, you know, and just having it be real simple, wiping it out. But you gotta be able to afford the taxes. If you don't have ten grand sitting around to pay taxes on a $30,000 conversion, this isn't an option for you. So somebody right near the beginning of their career, this might not be a very attractive way to clean it up. On the other hand, if you're 58 and you're a multimillionaire and you got a, you know, $400,000 in cash sitting around in your money market fund, what's another 10 grand in taxes? Just do the Roth conversion. No big deal, right? Knock it out. In fact, you might feel that way about a $200,000 Roth conversion to clean it up. But at a certain point, you got to keep in mind the benefit of being able to do backdoor Roths is not that big. Right. You don't want to do an inadvisable Roth conversion. You wouldn't otherwise do just to be able to do that for a few more years. Because the other factor is, well, how many years are you going to be able to do a backdoor Roth for by cleaning this up? You know, if you're cleaning it up when you're 33, you know, you might get 30 years worth of a backdoor Roth contributions out of this. Whereas if you're 63, well, maybe it's, you know, you're not willing to do a lot of hassle and not willing to pay a lot of. Of taxes that you otherwise wouldn't pay. So lots of factors that go into it. I think it's more than just, I mean, people would love it if I could just say, yeah, $35,000 or less, convert it, $36,000 or more, don't convert it. But it's just not that simple. The right answer is going to be different for everybody.

Always comes back to it depends in personal finance, which always Bothers me. But unfortunately, a lot of times it is. It depends because there's so many unique factors that go in to their situation on how that affects things. But yeah, that, that knowing the tax bill, I think is half the battle. And you can even argue too, with them just, just finishing up training. You know, ideally, they're still in the lower income years of their accumulation years coming. So, you know, there's, there's a lot of good things that would lean towards. It could be a good time for a Roth conversion. But you still, you still want to run the numbers?

Yeah, yeah, it's a great time to do it the year you're coming out. And a lot of times people only have a little tiny IRA or 403 they're trying to clean up. It's two or three thousand dollars and they can probably afford that tax hit. But there's so many good things to do with your money. Right. When you come out of training, you just don't have enough money to do them all. And this might be one of those things that just doesn't become a high priority for you. So you got to do what you can do there. Okay. I don't think I told everybody at the beginning that we got a new course launching, right, our CFE 24 course. This is the course we put together after WC Icon every year that is on sale until March 8th. In fact, we're putting everything on sale right until March 8th, which is the day after this podcast drops. All of our courses are $100 off, but you can get the latest in physician wellness and financial literacy in this course for $100 off until tomorrow. So check that out. Whether you're interested in boosting your personal wellness or fine tuning your financial plan or investigating tax reduction strategies, or living a more intentional life, planning for retirement, whatever, this CME eligible course has something for everyone. Check it out. WCICourses.com all right, well, a lot of our questions that we have on the Speak Pipe for this episode are not terribly controversial. So we've decided to add a few topics into this Friends of WCI episode that hopefully we can get some controversy on. And this next Speak pipe Megan was about to throw away. She's like, hey, you got your first troll comment on the Speak pipe. And I said, you know, I actually really like that. Let's play that. And there's a few topics I'd like to talk about with this one. So let's go ahead and play this one. I don't think Chad's heard this one. I gave him some of the other speak pipes, but he hasn't heard this one. So here we go. Chad. Hey, Dr. Dali.

Why does a blogger need an F250?

Thanks. All right. Why does a blogger need an f250? I think this is a reference to my new car. My Sequoia finally was on its last legs at 278,000 miles. And so the car, the truck I had ordered about 20 months before, finally came in with pretty good timing to the time I needed to get rid of the Sequoia. So I sold the Sequoia to somebody that came by the house and bought it. And indeed, I do now have an F250. And he's asking, why does a blogger need an F250? Well, I think the implicit criticism there is that a blogger does not need an F250. But I thought this would be a great launching point to talk about wants and needs and the importance of taking care of the planet. So, Chad, why does a blogger need an F250?

I was going to say, listen, what I know about you, I know you're an outdoorsy guy. I know you're skiing, you're rock climbing. So to me, I mean, slam dunk, you need an F250. Next question. Let's move on. Yeah, you know, trying to bring in the soft side of money with, you know, the hard numbers. You know, while I can't answer the exact question for you in terms of why you need the F250, you know, I think it comes down to the question that we get quite a bit with, you know, especially, you know, knowing that Match week is literally coming up next week. By the time this goes live, you know, that conversation of like, hey, finally got my big kid paycheck. You know, I want to go get something fancy. And, you know, from our side of it, we usually say, especially early on, you know, you'll have that time, that day will come. It's probably just not yet.

Right?

Especially referring to, you know, our younger physicians just getting fired up and finding that proper balance of, yes, you're a physician, yes, income is skyrocketed, but these are decisions that can have longer term effects. So for us, it's always finding that that sweet spot where it's reliable can make you happy, safe, and then we always will come back to and say, you know, it's a deeper goals and values conversation. You know, the advisor that I think does great with this is Daniel Ren, where he always loves to kind of go a little bit deeper in those Goals and values. If you love cars and you are a car collector and that's something that you love, you know, that could be a number that grows as we go forward. And that's okay. But the beauty about money is, and numbers in general is right, they're true. Right? That's the number that we have. This is the money coming in, this is the money going out, and this is what we're going to build around. So Whether it's your F250, a brand new Toyota Camry, whatever it would be, I think everything has a reason for it. You just got to make sure that you understand the deeper goals and values behind it.

Yeah, we do have needs down in my garage. And this studio is over my garage. So directly below me, we have four vehicles. We have a Wakeboat, lives inside the garage during the winter. We have a 2009 Honda Civic that my daughter drives to high school. Drives her and my son to high school. We have a 2016 Sequoia, and we have a 2023 F250 down there. That's what's in my garage. What does my family actually need? Well, we probably need a 2005 Honda Civic. That's probably what we need. And if it had 200,000 miles on it, that's fine. That is our need. Everything else is a want. We don't need three cars. My son and daughter can ride the big yellow limo when I go to the hospital. It's only six days a month. My wife can get by. She could Uber, she could ride her bike. She could walk to the places she needs to go the other days of the month. We could share that 2005 Honda Civic. It's not a need. Let's not kid ourselves. The vast majority of the things we purchase in our lives now are not needs. And it's important that we don't let yesterday's luxuries become today's necessities. They don't have to. At the same time, you can't take it with you when you go. Right? There's no benefit in being the richest guy in the graveyard, right? So if you want something and you can afford that thing, you want, not just afford the payments on it, but actually afford it, you can walk in there and pay cash for it. Knock yourself out. I'm perfectly fine with it. Spend your money on what you want. Now, why did I buy an F250? Well, I've always wanted a truck. And this is the first truck I've ever bought, number one. Number two, I've always Wanted a new car and I've never driven a new car. I'm 48 years old and I'm driving a new car for the first time in my life. So that's pretty cool. It's got all these great features, you know, as I'm coming up to the curb to park it, it slams the brakes on even when I don't want it to. It's got these great safety features, right? It's got all this cool stuff. It's got satellite radio and it's got all this other cool stuff, right? I put some fancy shocks on it. It's got this cool off road package, right? So it's something I've always wanted to have is to have a truck. What am I actually going to use it for? The reason I need the truck is because I need to be able to put the raft in it. I don't have a trailer and I couldn't put the raft inside and on top of my Sequoia and take everybody going rafting with it. That's the closest thing to a need of why I have a pickup truck. I also happen to drag a wake boat five to seven hours one way over multiple mountain passes when I go to the lake. And this is going to work a lot better than that Sequoia is to tow that wake boat full of camping gear and other stuff. So those are the main reasons I bought it, are they needs? No, that's all totally recreational stuff I don't need to do. I think the other consideration with spending and particularly when you're wealthy as we now are, is that you can have a pretty significant impact on the planet. You can afford to have a big impact on the planet. And I think an undercurrent sometimes in the fire community, financially independent, retire early community is that maybe we have some responsibility there. So Chad, how do you weigh in your responsibility to the planet which with your want?

Yeah, you know, it's. It's a unique example to plug in there. But we were a one family car for almost an entire decade now. We got to Tampa, Tampa's a little bit more spread out. We were in Philly before, but it was easy. And we bought the Jeep Wagoneer. I call it the Tank because it keeps my three young boys that are all in car seats safe. And I never thought of anything else besides being safe. And I don't know if you saw this on Twitter, I think it was last week. But essentially a guy had a Wagoneer, his wife and son were in a car crash and the cops pretty much Said if it wasn't for a Wagoneer of that mag, a car of that magnitude, not just a Wagoneer, that, you know, they were pretty much unharmed. And it was amazing though because when you read through the Twitter comments, it actually, it started to take this kind of evil turn to it where everyone was more about, well, environmentally, you know, if everyone buys these larger cars, is that the offset now? And it's kind of weird because there's those moments where you're not even thinking that way and then it kind of has that effect and you know, bringing it back, that was kind of just a personal example of the car. But also to your deeper question in there and you know, from our side of, at least in the financial planning realm, we try to spend a lot of time getting into our clients, you know, deeper goals and their values in particular. Their values. Goals is kind of one of those things that we build together. Right. And I think as a financial planner, our goal is to always guide our clients. So if their goal is to be extremely conscious of environmental issues, even, you know, we can even get into portfolio builds. Right. In today's world, whether that's from a car perspective or, you know, they want to be the next Taylor Swift and they're flying private jets all over the place, our goal is to really just meet them at their values and then help them build their plan. I don't think personally in 12 years of doing this I've ever told a client or brought up environmental factors and maybe that's my fault as an advisor, personally, I've never kind of thought of that. And even coming into this question when you said that, it's something that I never thought about in terms of the advisor side, obviously from our personal family side, we think about it. So I don't have the best answer or the best response to say, hey, we've changed anyone's viewpoint, good or bad on that topic. Because as the advisor, we just want to guide them to their points of concern, goals, values, and then from there build. So I think you have given me something to think about though, as we build these plans going forward.

Yeah, I mean the world is becoming wealthier, right? Even people we would call the lower class in the United States, you know, they have a life that kings of 200 years ago would envy. They have the world's accumulated knowledge on a 6 inch device in their pocket. Right. They live in an air conditioned house or apartment or whatever, you know, so as the world becomes more wealthy, as it will presumably continue to do, and more and more people are able to drive F250s because they can afford them. More and more people are able to get a NetJet subscription and fly around the planet. There are consequences to this. We can't all have six cars and be driving and burning up all the gasoline the world has ever produced. There are limits and you have to consider what responsibilities you do have to the planet. I obviously love to spend a lot of time outdoors and probably lean more toward the environmental issues and am a big fan of saving this planet that I care about so much. But it's definitely something that is worth thinking about, worth talking about and worth considering and applying that value to your decisions. But guess what? An electric truck was not going to get me five hours towing a boat. The technology just isn't there yet. So it was either going to be something like another Sequoia or. Or an F250. So that's what you get. I'm not quite willing to get rid of the wake boat and not willing to not travel around this wonderful American west that we have and see cool stuff. So I guess we'll deal with that as it comes. All right, let's get back into something less controversial. Let's talk about this question from Steve about Make it backdoor rods.

Hi Dr. Dali. I was wondering if you could clarify the mega backdoor Roth vs Roth conversions for me. I think I'm missing the big picture on the difference between the two. I have pre tax solo 401k money that I can convert to Roth 401k money in my solo 401k plan that I have through E Trade. And my company this year just amended our retirement plan to allow for mega backdoor Roth contributions. So I was wondering why I would do one versus the other. It seems that I can just do the Roth conversions with my E trade, switch a 401k account and if I start to do the mega backdoor Roth contributions through my company, then I would have a separate account and have to track that. And it just seems like it would be some added work without any difference. But I might be missing something regarding the difference between the two. Thanks for any input you have and thanks for all you do.

I actually think this is a place where there's a lot of people confused out there. They get there. There's a backdoor Roth ira, there's a mega backdoor Roth ira. There are Roth conversions. Help us here, Chad. Help us build a framework that will allow people to understand the differences between these things.

Yeah, I actually had to go through Steve's speak pipe A few times there just to make sure, like I was following everything he said. Because even the wording, when someone is saying, hey, these are my options, you want to make sure that you're hearing them properly. In short, one of those is a tax neutral event. One of them is a taxable event. Roth conversions are the taxable event, right? And this is the confusing part, right? Because backdoor Roth IRA is technically a Roth conversion, but you're doing it ideally with after tax dollars, which then makes it the basis over. So it's a tax neutral event. So with the Roth conversion inside. So I'm going with this first point. So the first point is the current 401 plan that allows for Roth conversions that is going to be fully taxable. So if you have $50,000 in your 401k and then you convert it over that 50,000 over to your Roth 401k, that's $50,000 of taxable income. That is maybe that, maybe that is a good plan. Ideally, you know, it's not perfect. There's a lot that comes into it. It depends. But we love Roth conversions. We love Roth conversions with all of our heart. And they can become one of your biggest tax savings. But usually that doesn't get exciting until you are just about retired or income stop. Right up until about those RMD years. There's a really beautiful time in there where you can really take advantage of Roth conversions. On the other side of it, the true mega backdoor Roth, which when I, when I saw this question Jim come in, I got super excited. You probably do not remember this, but my first guest post to White Coat Investor 2017, the Mega BackDoor Roth IRA. So this is one of my favorite topics. I was excited to get this one. But on that actual conversion there inside of it. So we're doing the actual after tax 401k. That's where it's different. So when you have a plan that truly allows after tax contributions inside of your 401k, this is not a tax deduction, right? It's after tax dollars going in. And then they allow the feature to either convert it to a Roth 401 or ideally they'll let you actually transfer it out to a Roth ira. In this example, that conversion for the most part is tax neutral. And that's where there's a big difference. Because a Roth conversion, completely taxable, a true mega backdoor Roth IRA, if your 401k plan allows it, for the most part, we'll call it a tax neutral event. So while they can easily get confused. Drastically different game plans and tax consequences that come with them.

Yeah, well said. I think what people don't get, okay, A backdoor Roth IRA is something you do with your IRA. A mega backdoor Roth IRA is something you do with your 401k. Right. Terrible name. I didn't come up with that name, by the way. It was there before I got to it. But basically it's something you do with your 401k, even though it says IRA. It's a 401k thing. All right. So if you can keep that much straight, that will help you a great deal. A Roth conversion is just a movement from one account to another account. The destination account is always going to be a Roth account. The originating account kind of depends a little bit. Most of the time, you know, when it's an ira it's going to be, you know, a traditional IRA rollover ira, some sort of mostly pre tax IRA that can also have after tax money in it. Within a 401, you often have three sub accounts. My 401k here at the White Coat Investor has three sub accounts. It has a pre tax account, it has a Roth account and it has an after tax account. And so the Roth conversion there, when I'm doing a mega backdoor Roth, as I do every year in that 401 is I move money out of that after tax account into the Roth account. Because remember, an after tax, it's great that when you take it out, you don't pay taxes on the original contribution, but you gotta pay taxes on all the earnings. If you get it into a Roth account, then you don't pay taxes on the earnings either. So that's the real benefit there of doing that. So keeping all that straight I think is a little bit tricky. If you don't talk about this stuff and write about this stuff every day. I'm not surprised that people are getting confused about it. And the rules are different for mega to backdoor Roth IRAs and the contributions there and how it works as opposed to a regular backdoor Roth ira. It's hard to keep it all straight. So we try to have tutorials up that'll walk you through it every time you need to do it. And it helps if you're doing it in one fell swoop every year too. But I know that can be hard for people to make all the contributions at one time during the year. What else can we say about mega backdoor Roth Chad that hasn't been said?

Yeah, I think unique opportunity in there because Steve did Note that there was a solo K. So keep an eye on your solo K platform too because there are some solo K platforms that are much more flexible than we use. Fidelity quite a bit. Fidelity's solo K model is a real cookie cutter model. So if you really want to customize it, you can. But you can even get into there where you're doing a mega backdoor Roth through your Solo K. So there's a lot of unique things to do in there. If you get clients cranking up, if that 1099 income's really high and you are doing a mega backdoor roth like full 69,000 for this year, if the 1099 income is really good because you're giving up when you don't. If you do all that is after tax rate. If you wanted pre tax contributions, well, we lost them. Now we get Roth dollars. You know, if you can kind of layer in a cash balance plan that can get you some more tax dollars in depends on your situation too. Like, you know, our docs in California, you know, we're trying to do as many pre tax things as we can, so that's one thing to keep an eye on. And I think 401ks are getting so much better, whether it's just from the actual investment lineup or now us seeing more and more after tax options. And with that we're seeing even auto Roth conversion features. So pretty much saying as soon as you put the money into the after tax, it'll convert it automatically. Which as Jim noted there, that's ideal because you want the growth to occur on the Roth side. You don't want to put it in the after tax and then it's growing and then you do the conversion because that growth is still taxable. We've seen this with some of the Kaiser groups where they're now putting in that automatic Roth conversion feature. So if the 1099 income is there, really keep an eye on customizing a really neat solo K for yourself. But if you do have the option through work, see if they have that auto conversion feature because that can take one thing off your to do list and also probably give you a little bit extra tax arbitrage in there with the auto conversion.

Yeah, this is definitely a part that trips some people up because the cookie cutter off the shelf, Vanguard, Fidelity, Schwab, Solo 401Ks generally don't allow these. You have to get a customized one. And we've got a list of people under the retirement accounts tab at White Coat Investor that can help you do this. It's not that expensive for a Solo 401. It might be a few hundred bucks to set it up and like one or two hundred bucks a year to maintain it. So it's well worth it if you want to do mega backdoor Roth contributions. But it's not typically a feature from the typical places you would go to to open a solo 401k and not want to pay fees on it. It's going to cost you something to add this feature. And if you have employees and it's no longer a do it yourself 401k situation, it introduces some additional testing to your 401. And so we not only have testing to make sure we're not discriminating against our lowest paid employees when it comes to the employer match stuff. We also have additional testing when it comes to the mega backdoor Roth IRA contributions that Katie and I are doing. We're the only ones at the company doing these. But there's an additional test that sometimes requires us to make additional contributions to our other employees. So it can get really complicated. I've even heard it argued that make a backdoor Roth, even in a solo 401k is not a do it yourself project. I think if you're really into this stuff, you can still do it as a do it yourself project. But if this isn't your hobby, you probably need some professional help to do this. Okay, let's do some pre tax versus Roth questions. This one comes from Kim.

Hi, Dr. Dali. My white coat is actually just a lab coat. However, my husband is the MS.4 who's applying to residency this year. We were wondering if it might actually make sense for us to make pre tax contributions to our retirement accounts in the coming years instead of doing Roth as we traditionally have. In 2023, I was able to do a Roth conversion to get our entire retirement savings into Roth. And now with the save plan, we are wondering if it actually makes sense to try to reduce our taxable income a little bit by contributing pre tax rather than Roth. Curious to hear your thoughts on this. Thanks for everything you do.

All right, we're getting more and more of these questions on the Speak pipe. We can't answer your question. We don't have enough information. It's impossible to answer that question. In fact, even if I had 10 minutes with you on a call, I might not be able to answer your question. This is the whole reason we started studentloanadvice.com is to help people like you get the right answer to the question. This is going to take an hour to sort out with someone that has full access to your financial information to give you the right answer on whether you should do married filing separately, whether you should contribute pre tax. Obviously the benefit of contributing pre tax and doing married filing separately is to make your income as low as possible. That makes your save payment as low as possible, makes your save subsidy as big as possible, leaves the amount that could potentially be forgiven via PSLF or via save after 25 years as big as possible. But whether that's worth any additional tax you might pay, which you probably will by doing pre tax in a year when you'd normally do Roth and which you'd normally do by filing married filing separately instead of married filing jointly. You know, it's hard to say. You got to run the numbers and compare it. You getting this question as often as we are, Chad?

Yeah, yeah. And that's, you said it perfectly right. It's one of those ones where you need all the documents and an hour plus with Andrew to walk through it because there are so many moving parts. You know, when we, when we speak on this topic, we usually try to come back to keeping it simple on, hey, if you're going for pslf, there's likely a good chance that doing pre tax is a good call. If you're not going for pslf, usually in those lower income years, you know, the Roth is going to make a lot of sense. My biggest takeaway from Kim's question was especially again kind of coming into Match week and you know, a whole new group of physicians entering their intern year. There is, you know, married filing separately is a whole new ball game and there's analysis. You know, we asked, we look at our clients tax drafts that are going for student loan forgiveness. You know, we want to see that comparison every year from the accountant, married filing jointly versus married filing separately. We want to see the tax number and then we want to compare that to the savings on the student loans and then we'll let their tax filer know, hey, married filing separately by a long shot or married filing jointly works here. And it's amazing how so many similar situations you think on paper the tax bill wouldn't vary that much, but then the tax bill varies quite a bit. So you said it perfectly. It's not as simple. You know, I try to work up some basic numbers trying to compare like the 24% to the 22% tax bracket. But even there you're making high level assumptions where I'm just trying to compare that if you had that 23,000 like you only had 23,000 that you would have picked to which bucket you were going to move to. Or I always say teamwork makes a dream work in those early years. Right. And then comparing it to the SAVE program, you know, if the tax, if it was that simple, it's a 2% versus a 10% savings. But it's not that simple. And that I was just trying to figure out how can I make this digestible to a large audience on a very complicated topic? And that's, that's as close as I could get.

Yeah, I used to have lots of rules of thumb that were very helpful things like, you know, Roth is for residents when you're in residency, you should contribute to a Roth account. Well, the federal student loan policy has changed such that that's not true for a pretty significant number of people. And it's not just those going for forgiveness programs. Right. Just because this subsidy for SAVE can be so big, it's all the interest that is unpaid, that can be, you know, $1,000, $2,000 a month. It's not a small amount of money. But you also have to consider the difference between, you know, what that Roth's going to grow to over the next 20, 30, 40, 60 years, maybe 10 more as it's stretched by your heirs. I mean, there's a ton of moving parts here, and it's very hard to get it right. The good news is I don't think you have to get it all right here. Right. So let's say you did a Roth contribution instead of a pre tax contribution, right? Yeah. Now your saved payment's going to be a little higher, maybe you get a little less forgiven, but you also got money into a Roth account when you were in a very low tax bracket, and that's really beneficial. So I think we actually run the numbers here. The amount of difference. These little sorts of decisions where you're trying to optimize a make are not as big as I think we fear they are. And I think for a lot of docs, you know, down the line, they're going to have more than enough money than they need. And this sort of thing just doesn't matter that much. Let me give you an example from my own life. When I was in the military, 2006-2010, my retirement plan was a thrift savings plan. And there was no Roth option. It was tax deferred only. And I was in a pretty low tax bracket. Right. I was only making about $120,000 a year, and about 30 or 40 of that was Tax free. One year. I think I paid $3,000 in taxes. It was a year I was deployed. And meanwhile, I'm saving money in a tax deferred account. Right. I'm in. I don't know what it was. A 15% bracket, maybe the 10% bracket. I don't know what it was. It was really low. I'm never going to be in that bracket again. Clearly this was not the optimal thing. If I could have done Roth, maybe I would have even been better off saving in a taxable account than that tax deferred account, because it's like this reverse arbitrage of tax rates. But it doesn't matter. I'm going to have enough money. And I've decided that's just, you know, the money sitting in those tax deferred accounts is going to be used for charitable contributions. So it doesn't matter that much for most of you out there. You're going to end up with more than enough. You don't have to optimize every single little thing. And some things are really difficult to optimize, and this is one of them.

Yeah, I mean, it's one of those ones where. Just listen to Kim's note. She's financially savvy, she's thinking through it. She's putting money towards savings. That's probably the most important part of all, that she cares about her financial situation for her and her husband, she's saving. And while there might be, you know, well, we could have saved a little bit here, made a little bit here. As long as she keeps that foundation, keeps it growing, we're probably never going to look back to this episode and say, Kim, if you would have changed it by that much, I retired 15 years earlier. We should have changed that. I think. Take those victories, let those continue to compound. There's always going to be, well, we could have did this or did that. Personal finance is a lot of keep getting those small victories year after year after year, and you'll be in a good spot.

And for sure, Kim, you're paying attention to this. Your husband's an Ms. 4. You're going to win. Right? Just the fact that you're asking this question, do you realize how much financial sophistication and education it takes to get to the point where you can ask this question? You're a winner. You guys are going to be so rich. I can tell that just now from the fact that you're asking this question at this stage of life. So congratulations on that. All right, let's introduce a little bit More controversy to this episode. Just because the speak pipes, I don't think naturally do it today. Let's talk for a minute about live like a resident. Right? This is a mantra I've had and I've been throwing out there since probably the first month of the blog. Since 2011, I've been telling people, live like a resident. This is a huge key to building wealth. Front load your wealth building activities when you come out of residency, keep a lifestyle that's about like what you had as a resident and use that difference between your resident lifestyle and your attending income to do all these great things like pay off your student loans or save up a big down payment or max out your retirement accounts, do a Roth conversion, build an emergency fund. All that stuff you have to do, you now have more money to do it with if you'll just live like a resident. People don't like to be told to live like a resident. And the truth is lots of docs can still be successful without living like a resident. What do you think about this phrase, Chad? Where's this bad advice? Are there people that shouldn't live like a resident? Should we make it less dogmatic somehow? What do you think the merits of that phrase are and how beneficial is it to doctors if they'll do this?

Yeah, and again, I'd love to fight you on this one, but since I quote this line and quote you in almost, whether it's blog posts, speaking engagements, YouTube videos, I think we put you in all of them with this sentence that you've created. I don't know if you copyrighted this one, but I hope you did. Yeah, we always come at it in a little bit of a different way in the sense of tell your money where to go first and we call it top down budgeting. I didn't come up with that term, but I've always liked the idea where, hey, if you get your new attending salary, obviously we have the mortgage and expenses. We got to eat food so we have groceries. But if you're maxing out your 401, you're doing your backdoor Roth, you're getting, you know, X dollars into your joint taxable account every year. You're putting some money away for the kiddos in the 529 plan and the longer term outlook looks good because again, we're sitting here in our 30s. There's a lot of assumptions to say, hey, does that plan sick or not? We're going to have a lot of course corrections. There's a lot of life in there. I almost like to force that upon our new attendings as opposed to trying to nitpick the budget. Because we're all humans, right? You know, if it sits in our bank account long enough, we're all going to go buy F250s because it sits there and you want to spend it. We're humans, right? We want to go spend that money. So we try to say, hey, put that money to good use at the start so that you almost don't see it. And some things are easier said than done, right? The 403B, the 457B, they literally won't hit your actual bank account. But then the joint account, the 529 plan, those are things that they sit there. So the sooner you can get them out, the better. I wish I could argue with you on live like a resident, but I think it's important, and I think it brings in the importance, too, of just understanding your cash flow and budgeting. You know, talk about one of the best foundational pieces of advice you can give, you know, both today, but also for decades to come. Whatever you're spending is just knowing what you're spending money on, money coming in and where it's going. That puts you so far ahead of so many individuals in this world, just knowing that. And that's where I think living like a resident is so powerful. Because, you know, if you go up to $300,000 of salary, but you're still trying to live like you were at 60 or 65, that's really powerful. And there's always going to be some lifestyle creepy. And we'll tell our clients that, too. That's normal. It's okay. Now we just. This is where we don't want you to have the biggest house in the neighborhood. We don't want you to have the most expensive car yet, and always come back and say you'll have that day, right? If that's something you value and you really want to put time and effort to the biggest house because your family creates all the memories in the kitchen, in the backyard, we'll make that work. But you got to understand that today is your chance to get ahead on a lot of things, whether that's student loans, whether that's just getting the market going, the stock market going, in terms of compounding interest. So I think the term is beautiful. It's straightforward, it's easy. But I think the deeper meaning to that is, too, is just understanding how to even live like that, which comes back to the word that not many of us love. But budgeting is so vital.

And so.

And that's where I think live like a resident has such a profound effect on.

Okay, so how can I mean live like a resident is not a prescription for your entire career. The idea is not that you're a 56 year old attending spending $70,000 a year. A few people, I think get that wrong. They leave a lot of money to their heirs. But when is enough enough? How do you know it's time to exit your live like a resident phase?

You know, probably the simplest way to look at it would probably be, you know, bad debts. You know, did you build up any credit card debt throughout your training years because, you know, you just needed some extra wiggle room? You know, PSLF makes it a little. We work with a lot of academic physicians, so PSLF is a big part of the financial plan. So that's a number built in there. But I can tell you, for our physicians with private loans, you know, that is one where in a perfect world, we either know when you come out of it, we either know we're going for PSLF or we know we're going for aggressive payoff. And if we're going for a five year, I mean even a ten year or coming back to that five or even shorter, that would be a time where, if you can get that bad debt out of your way, I think that would be a good time where you can open it up a little bit. That would be probably the easiest description of when can you kind of loosen it up a little bit? And I also agree with your last note there on. You can also take it too far. Right? I joke with our clients the day that I tell you you don't need to actually max out the 457B plan because now we're starting to hit some like serious RMD issues down the road because it's too much pre tax or hey, we can actually maybe turn back some of the risk because we don't need grand slams anymore. We're okay with singles and doubles the rest of the way out. You know, those are all really good signs coming from your financial planner. So I think it, it depends on a case by case basis, but I'd say, you know, at the very onset, the sooner we can get any bad debts out of the way, that probably gives a lot more wiggle room on the, the discretionary spending.

Yeah, I've always thought of it, you know, generically as a two to five year period. But the only real thing that I can think of out there that kind of marks the end of it for lots of people is to have the student loans gone. And that's not necessarily a five year thing. Some of those it's a seven year thing for most of them. It shouldn't be longer than that, though. And if you were in training for six years, it might only be a four year thing before you get pslf. But, you know, I think there's very few docs that won't benefit from doing it for a year or two and that will regret that you're only putting things off for a little bit longer. And it just makes everything else the whole rest of your life so much easier to front load all those financial activities. Plus, I'll promise you this, it's cool. There's still time to do fun stuff with your money in your 40s and 50s. It's not like you're an old dried up fogey at 51. All right? I'm still doing lots of cool stuff. I'm almost 49 years old. It's not like you can't do stuff that you can only do at 32 when you're 45, right? That stuff's still gonna be available to you. All right. By the way, we have a Physician Freedom Summit coming up. This is put on by Dr. Param Balandandapani. I always have trouble with her last name, but Param's putting this on, okay? And I participated in it. It's a three day summit, it's free, it's online. She's calling it the Physician Freedom Summit. It's March 7th through 9th, which means it's starting today, right? You can sign up for that whitecoatinvestor.com Freedom totally free to you. My talk in it is about common mistakes wrecking your finances. So check that out. All right, let's take another question off the speak pipe. Chad.

Hi, Dr. Dali. I was wondering, is it still possible to do a backdoor Roth for 2023 if I haven't made my contribution yet? I am planning to make my contribution this month in February, 2024. Thank you.

Okay, I think this one's actually got a correct answer to it. Let's talk about that. And let's also talk about, you know, the merits of doing it late and whether you should do it late and all that stuff because there's an awful lot of people out there doing these contributions late.

Yeah, not much to fight over here. In short, yes, you can still do it up until your tax filing deadline. So April 15th of this year, you can still make the contribution. You know, I always say that the contribution is the important part. You know, that's the deadline you're trying to follow. The conversion has no deadline. Right. You can do the conversion wherever you'd want. You know, it brings in our 8606. So we say when you start to do backdoor Roths, either, you know, do the Google search, Jim, I think you have a great one where you're walking through the 8606 or make sure your accountant knows that you did that. Probably one of the most commonly missed tax forms we see, even with accountants. And I think it's because we do the backdoor Roth and we assume it doesn't trigger any tax documents. So in defense of your accountant, if they didn't know that they're not going to file the 8606, they didn't see that 1099R coming out of the back door or out of our IRA to the Roth. So 8606 comes into play. You can still do it up until April 15th of this year. And then we can even get into next to. On the merits of do you do it first thing in the year or you do it later in the year?

One thing to keep in mind, right? Even if you do a tax extension, which I'm having to do with my taxes these days, now that I've got all these private, private real estate investments that send me a K1 in July, even if you do your tax extension and you're not filing your taxes until October 15th, your deadline for your IRA contribution is still April. It's April 15th. You can't do it in August for the prior year. Now, this drives me nuts, though, that so many people don't do it in the calendar year and then get confused when it comes time to get their 8606s done. You know, I do mine the first week of January of the year. You're doing it for. Right. This is like the first money I save for retirement every year is my HSA and my, my Roth IRAs. Why do so many people do this late, Chad?

You know, it's funny too, because we, we actually have a day that we call backdoor Roth IRA day for our practice, and it's usually January 3rd. Depends on where the holiday falls, right? And it's actually amazing. We have a pretty equal split of about half our clients. We'll get it done within a few days right there. But then the other half, we're checking in again right now because we don't want them to miss that opportunity because you said I would say there's no extension on that extension. So we're checking now with a lot of clients to make sure they get them done if they haven't done it yet for 2023. And it's amazing. It's truly split between the two. Ideally, we try to aim earlier in the year. We tell our clients this too, because we want the extra year of compounding growth with that tax free money. Your team just had that great post on where things can go wrong. So they're. There are certain years where waiting till later in the year might make sense so you don't have to clean anything up. But I think in most circumstances, especially when you've hit your rhythm and you're, you know, you're in your attending phase, you know, hopefully nothing divorce wise or anything comes into play there early in the year is where we try to aim for it. But, you know, I think there's an asterisk there on my favorite word of the day. Again, you know, it depends where it might make sense a little bit later in the year.

Yeah, I love your phrase hitting your rhythm. Because what happens is you come out of training and you got all these great things to do with your money, right? You haven't done an IRA contribution for that year yet. And you're like, ah, what do I do first? And you're like, well, I got this $13,000 credit card debt at 28%. Well, let's do that first, right? So that's what you're doing in July and August and now it's September and you're like, well, I don't really have an emergency fund. Well, let's build that up. So that's September and October and now it's November. And you're like, oh, if I don't get money into the 401k they're letting me use, I'm not gonna be able to use it. They probably don't let you use the first year anyway. But maybe you put Money in the 401 in November and December and then January you're like, oh, there's an hsa. Maybe I should do the hsa. So you put some money in the HSA that month and now money's all of a sudden now you're starting to make student loan payments. So now you're doing the student loan thing and before you know it, it's February or March or April and you still haven't done your IRA for the year. So that year you make a late contribution. Well, the next year you're like, Well, I don't want to do that again. The 8606 was a pain. So now you do it in December, and maybe the year after that, you're doing it in July, and the year after that, you're finally getting it to January because you're in your rhythm. So I like that phrase you use in your rhythm. And I think this happens to a lot of people where they move their IRA and their HSA and their 401 contributions earlier and earlier and earlier in the year because they've become wealthier, they got better control of their income. They're making more. They have fewer good uses for their money. There's no more 28% credit cards to pay down. And they can do it earlier and earlier in the year. And I definitely encourage people to do it during the calendar year. I think the worst time to do it, though, is not after the first of the year. The worst time to do it is the last week of the year. Because so often people get burned. They get the contribution in, they don't get the conversion done, and now they've got this. Especially if they've been doing them for a number of years now, they get a prorated transaction. And that really makes your paperwork complicated. You can still clean it up the next year most of the time, but if you want to keep your paperwork straight, do it all in the calendar year. And it just makes it a lot easier. Yeah.

And you always hit that backlog with the custodians at the end of the year. So even if you're thinking like, oh, there's enough time there, there's always a backlog because everyone else is doing it at the vanguards, the fidelities, the Schwab. So you get that in there, which is why it's more likely to have that small delay. And it's always just enough that it pushes to, like, the first or second. So. Yeah. And you know, one thing to note, too. I always call this the. The golden window for Backdoor Ross, because you do have the opportunity if. If cash is, you know, available where you can take care of a 23 and a 24 at the same time. So if you are playing catch up and trying to get into that rhythm, you know, you do have that sweet spot right now where you can. Can really get both of them going at one time here.

Yeah. And I think it's important to emphasize what you said at the beginning. The contribution has a deadline. The conversion does not. As a general rule, you should do the conversion as close to the contribution as you can, but there's no deadline on a conversion. You can do a conversion at any time. It just ends up on the paperwork for whatever year you do the conversion in, so. But the contributions are where the deadlines are. All right, well, we're getting toward the end of this episode. Chad, what have you been thinking about? You got 30,000 docs out there listening to you. What pearl of wisdom do you feel is most important to distill upon them at this moment? What's been on your mind lately?

Yeah, you know, this, this time of year just with again match season. So it's a lot of just getting that foundation and I, you know, I think you're one of the best advocates for it. I think in the physician world in particular, and adding other high income professionals as well. We think that we have to overcomplicate things because I make so much money, I have to do something more complicated. It can't be this simple, right? I just, I just have a qualified account through work, a backdoor Roth in this massive taxable account. I got to overcomplicate, I got to add something in there. And you can be extremely dangerous over a very long time by just keeping it simple. And that can venture out. I know real estate's always near and dear to your heart too. And with a lot of our clients it is as well. But it's amazing on how you can just keep it simple, build that foundation. I think in terms of financial advisors, you always think of investing where I come back all the time and say, ideally our biggest value add is on the tax planning side, but also why asset protection is so important and risk management is so important. And yes, no one likes to do estate documents, but they're still really important. I often make the joke, you know, I'm honored that my clients usually have their estate documents done before their parents. So it's just getting the foundation in place and then building up automate, automate, automate. And keep it simple. Keep it simple and you will. I know we've kind of even made the joke, just kind of going through some of the different speed plays. But if you're paying this much attention right now, you're tuning into the White Coat Investor podcast and reading the blogs and you're collecting all this knowledge. You are going to be in a very good spot if you're implementing a fraction of the things out there. So keep it simple, keep working hard, and you'll be very happy with the outcome in the end.

Good advice. Chad. Love what you hear on the podcast. Looking for more great White Coat Investor content. Head over to our YouTube channel where you can watch video recordings of our podcast, short snippets of financial tips explained succinctly by me and others, and deep dives into topics for more in depth learning. You can even learn all about real estate with webinars from our real estate partners. Check out all this and more@YouTube.com thewhitecoatinvestor you can do this and the White Coat Investor can help. All right, don't forget about our course sale. It ends tomorrow. All courses are $100 off, including our new CFE 2024 course. That's at wcicourses.com don't forget about Param's Physician Freedom Summit March 7th through 8th. You can sign up for that at whitecoatinvestor.com freedom thanks for those of you leaving us five star reviews and telling your friends about the podcast, a recent one comes in from Doug Said Great podcast. WCI should be required reading and listening in medical school and residency. I started listening around 2016 and I've listened to every episode since and I've learned so much. I'm now retired from medicine and still enjoy listening, reading and learning from both the WCI podcast and blog. Thanks for the great work in helping us docs get our finances on track. Five stars. Thanks for that great review Doug and congratulations to you on your retirement. For the rest of you, keep your head up, your shoulders back. You've got this and we can help. Thanks again to Chad Chubb for being on here and helping us to do this great Friends of WCI episode. We hope you like these. Send us an email, tell us what you like, what you don't like, and we'll try to make this podcast as useful as we can for the time you're investing in it. Thank you so much for your confidence and faith in us and the time you're willing to spend with us. Bye bye. See you next time.

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