WCI #370: Communicating with Your Spouse About Finances When You Don't See Eye to Eye

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 370 getting quality disability and life insurance should be the first financial chore for a doctor to complete. Most docs don't have the ideal policy for their gender, specialty, state or health status and one in seven doctors get disabled at some point during their because these policies can only be purchased through brokers, we've put together a list of vetted agents who are experienced with working with the specific needs of medical professionals and who have your best interest at heart. If you have questions about insurance and what kind of policies would be the best fit for you, check out our insurance recommended list@whitecoatinvestor.com insurance and feel the peace of mind that comes with knowing you have the optimal policy in place. You can do this and the White Coat Investor can help all right, don't forget tomorrow's the last day to get the discount on all of our fire your financial advisor courses. There's four of them now. There's a student version. It's $99 regularly at 20% off until tomorrow. Residents normally 299 20% off until tomorrow. The attending regular version for normal working professionals or people just coming out of residency 799 and the one that qualifies for CME because it includes eight hours of burnout, prevention and financial wellness material is 1099. Again 20% off until tomorrow. The FYFA course grows with you now so you can upgrade to the next course as you move into the next career phase. You just pay the difference between the courses so as you go along and become a resident, you pay the difference between the student course and the resident course. You don't have to pay for the entire resident course, so check that out. You can go to wcicourses.com, use discount code launch20 to get that discount and get your financial plan in place. The point of the fire your financial advisor course is to help you get a written financial plan in place that you can follow to investing success. So we hope you have that in place. If the course is helpful, that's great. If not, we have the same guarantee we have on all of our courses, right? One week, 100% money back, no questions asked guarantee. As long as you watch 25% or less of the course, we'll give you your money back so you can check it out, there's no risk to you. Launch 20 is the code. WCICourses.com is the URL. Okay, we're going to have a couple of speak pipe questions today from people who are not seen eye to eye with their partner, especially on things that they see as being incredibly important. And the truth is, when you're trying to figure out how to talk to your partner about this, ideally you talk to them before you get married, right? In the past, people considered five big subjects, right? Five big subjects that can be a problem in marriages that you should try to be aligned with on as many of those five as possible. What are they? Well, religion, relationships with in laws, sex, money, and kids. Okay. These days, a lot of people are adding a sixth one to the list, which is politics. A lot of people are having trouble being married to someone who, you know, leans to the right when they lean to the left. And so all six of those subjects are worth discussing before you get married. Try to get on the same page on as many of them as possible. Can a marriage survive? You guys having serious disagreements? With one or two of those, maybe, but four or five of them, probably not, right? You're just not compatible. And so have those discussions before you get married. Interview your future spouse and try to get those things ironed out. As far as unmarried partners go, as a general rule, I recommend you don't combine finances, right? That's incredibly risky to pay off your boyfriend's $300,000 in student loans and then your boyfriend walks out a month later. There's no protection that you get from the legal institution of marriage in those sorts of situations. So as a general rule, my recommendation is separate finances until you get married. Combine finances once you are. If you want your own money, that's fine. Set up an allowance system, right? You can have each get an equal allowance. You can have them be different, whatever you want to set up. That's what I would recommend you do. Rather than having separate money and trying decide who pays what bills from their income. That sort of thing is messy. And plus, if you end up having separate investments as well, it's hard to manage it all as one portfolio when you're managing it as two portfolios. All right, now that information out of the way, let's get to our first speakpipe question. This one comes from Ben.

Hi, Dr. Dali. I'm an orthopedic surgeon in the Midwest. I have been a longtime listener and reader of the White Coat Investor. And thank you for all you do since getting rid of my financial advisor who was a commission free advisor during residency. I've been very happy with my financial progress. I have a high savings rate, 35 to 40%. I have about half a million in savings now, two and a half years into practice, I have disability insurance, term life insurance. I always max out my 401 and backdoor Roth IRA. I have no debt outside of a house at about 2.99% loan. That's roughly the size of one year of income and a very small car loan. My problem is my wife, who's an ER doc, keeps bugging me about whether I'm missing something or more specifically, whether we're leaving money on the table by not investing it in the right places. I've always been a firm index fund believer and that's where I keep my money. She trusts me, but she doesn't trust me. If you understand, I've shared my written financial plan with her. I wish I could get her to take your course or read your material, but that's a long shot. She wants to get a financial advisor now, but to me that's a huge waste of cash. Do you have any suggestions? Thank you.

What a great question, Ben. Thanks for sending that one in. Congratulations to you on all your progress. You're obviously doing great. You have a house you can afford, you're saving great, you got your debt under control, you got your insurance in place, you have a written financial plan. You're doing awesome. So maybe you can share that with your wife. But there's a couple of issues here that I think we ought to talk about. The first one is your reference to my written financial plan. Right. I'm pretty sure you said wife. Right. He's married to this person. Yeah. Okay. There's no more my plan and my money after you're married. There's our plan and our money. And the problem here is is that she hasn't bought into the financial plan yet. So you guys need to put together our plan. Now, there's basically three ways to do that. If you're capable of doing it, which you likely are, you can write up our plan together. You can take fire your financial advisor. You said that's probably not going to happen for her. You can also hire a financial professional, help draft up the plan, but either way, it needs to be our plan. Right? It doesn't do any good if she just sees it as your plan. Okay, so that's the issue number one. Issue number two, and it sounds like you've at least started this, is to find out what her concerns are. You can't resolve the concerns until you discover what they are. Let's get them out in front of us, set them on the table. We can walk around the table and look at the concerns and say, okay, let's address each of these one by one. Whatever the worry is you mentioned, she fears leaving money on the table or missing something, particularly with the investments. Like there's some investment out there that the financial advisor will know about but you don't know about. That can give you higher returns and speed your way toward financial independence. Now, those of us who have looked at the data on index investing versus picking stocks versus trying to find an actively managed fund manager versus hedge funds, we're pretty confident that nobody really knows what the best thing out there is and that no one can really time the market. Nobody can really select securities better well enough to beat an index investing plan. She's not convinced of that yet. Okay, so what will it take to convince her? Well, if she doesn't want to read anything and she doesn't want to take any online courses, your best bet, and I think money well spent, is going to see a financial planner. A good fee only, probably an hourly rate or a flat fee financial planner. You need to go sit in a room with a professional and your spouse. And your spouse needs to hear that. Yeah, this plan you've got is great here. I'd tweak this little thing and this little thing and that's it. Otherwise, come back and check in with me in a year or two. That does a couple of things. One, it establishes you as actually knowing what you're doing. Number two, it gets rid of her concerns that something is missing, that you're leaving money on the table. She can learn from somebody else besides you that index fund investing is actually a pretty darn smart way to invest. And number three, it gives her the connection with somebody that she would need if you became terribly disabled or died. Right. It does not sound like she is nearly as comfortable managing a portfolio as you are. She needs a plan. What am I going to do if something happens to you and this advisor, somebody you pay an hourly rate, you check in with every couple of years, whatever. Somebody that helped you draft up our financial plan, that's what she needs. And even if it costs you $2,000 or $3,000, that is money well spent to get the two of you on the same page. I mean, they say you don't have to be on the same page, but you definitely need to be reading from the same book. Right? You guys just aren't right now. So, you know, a lot of what financial advisors do is actually like couples counseling, you know, with a financial spin on it. And I think that'd be pretty beneficial to you guys. So I would go meet with somebody. We've got several people on our list that do that sort of a thing. They provide kind of second opinion or flat, you know, creation of a financial plan for a fee. And I think that'd be beneficial to you. So I'd go to the recommended page, whitecoatinvestor.com recommended and click on the financial advisors and and go meet with one. Now that doesn't necessarily mean you got to pay them 1% of assets under management going forward for 30 years and have, you know, lose some huge percentage of your assets. But you're an orthopedic surgeon. You can afford 2,000 or $3,000 to get the two of you on the same page, and I think it'd be money well spent. All right, here's another question we have on the Speak Pipe also deals with.

Partners hi Dr. Dali, thank you for all that you and your team do for the White Coat investor community. I've been listening to your podcasts and have been reading your blogs for the past three years now. My name is Giovanni and I live in the Northeast. My partner is a second year IM resident and plans to work for a private practice after residency. I recently explained the significant benefits of owning a true own occupational disability policy. He has bought into the benefits of owning such a policy in theory. However, in practice, he struggles to wrap his mind and checkbook around paying such a high monthly premium for a benefit that he believes has a low probability of actually collecting the monthly benefit. Furthermore, he wonders if there are docs out there that regret purchasing a similar policy. For some context, he's a super saver, has maxed out his Roth IRA and is currently on track to max out his 403 this year. I'm stumped. Have any words of advice or tips for him or me? Thank you again.

I can't tell if you guys are married or not. If not, my usual advice is separate finances. If you are, combine finances. But that's not really what you're asking. What you're asking is for me to convince your partner that he needs disability insurance. I don't know that I can do that. I can tell you this. I don't regret buying disability insurance. I no longer have disability insurance. I've canceled it. But I paid premiums for many years of disability insurance and if something had happened to my ability to earn money. We would have been in a terrible position without that disability insurance. So I guess the question for your partner is, what position would he be in if he became disabled without disability insurance and is he perfectly fine being in that position? He might be. They say, that's fine, I'll live off your income, or I'll just hope I can get some Social Security disability, and if not, just live on what I have saved so far. Maybe he's fine with that. You got to run the numbers right? You don't necessarily need disability insurance as you need a plan in the event someone gets disabled. And for some to doc income families, they decide we're each going to be each other's disability insurance. If something happens, we will just live on the other person's income. Now, obviously it's possible for both to become disabled. The numbers suggest something like 1 out of 7 docs uses their disability insurance at some point during their career. So the likelihood of both docs needing it at the same time is obviously significantly lower than one out of seven. But lots of other couples decide, well, let's just buy smaller policies or let's fully insure both of us, because I don't want to worry about this. And frankly, we spend both of our incomes. It's not like we got a 70% savings rate here. It would be a big deal to cut our lifestyle back to what we can afford on just one of our incomes. So they buy disability insurance on both people. But you've got to decide what the plan is for you. But as far as it is sticker shock, when you go price this stuff out, even when you're young and healthy, you're looking at paying 2 to 6% of the benefit you're gonna get. So if you're buying a $10,000 a month benefit, you're going to pay $200 to $600 a month for that. That's what it costs. And as you get older or develop medical problems so you're not in perfect health anymore, it can cost even more. Disability insurance is not cheap. And the reason it's not cheap is because people use it, use it all the time. Let me give you another example here. I mean, we had episode 365. What was that? Five episodes ago? So five weeks ago, we had Tyler Scott on here, right? Disabled doc living on disability insurance proceeds. Right benefits. But here's another one. I got an email after that episode from an anesthesiologist. Let me read it to you. Says I became hearing disabled at age 55 after working as an anesthesiologist for 14 years. Considering my hearing, I doubt I'd be good for an interview. But I can write my story. I got a personal disability insurance policy with inflation rider during my last year of residency. The payout was $9,200 a month. With our lifestyle, that was plenty to get by. I worked for a small group in the South. They had some financial difficulties. So once our kids graduated, I moved to a large group in a different state. Neither of these groups provided disability insurance. About a year after starting the new job, I needed to start wearing hearing aids. After two to three years with this group, there was a hostile takeover as a group by the hospital. Two years after the takeover, I noticed my hearing declined dramatically. Went to see an ENT to see if anything could be done. He said, you're still working? Not anymore you're not. That, shockingly, was my last day as an anesthesiologist. I really enjoyed my job, so I hated to stop. But financially I hoped I was fine. Since I had the disability policy. I called my boss to tell him the news. And this is when I found out how lucky I was. If everything is approved, I had my personal policy that started after three months and runs to age 67 tax free. I did not know but the hospital had two policies. One group policy through the standard that maxed out at $15,000 per month and one personal through Unum for $5,000 per month. Both policies started after six months of disability and run age 65. Both are taxed as ordinary income, not inflation adjusted. The hospital covered short term disability for six months by leaving me on the payroll as an employee with benefits. The hospital also had a group life insurance policy that covers through age 65 if you become disabled. So now the stressful waiting period began. Will I be approved? I'd listened to your previous podcast about disability and the problems people had getting approved. So I was definitely worried. I didn't want to quit working, so I was happy to try anything that might help. I took steroids, consulted for cochlear implants, none of which helped or would help. The implants only bring word recognition to 70%. Not good enough for a physician. So after several phone conversations with the insurance companies, my wife is interpreter, all the while hoping I wouldn't say something that would get me canceled. I was approved for all the policies. The approval was for permanent hearing loss. Permanent. This is where we learned about the details. My inflation rider starts after I start receiving payments. That original 9200 was not inflation adjusted. All along. That's the way those work. The adjustment doesn't start until one year after you start getting payments. The hospital policies are not inflation adjusted. But even though my disability is permanent, I still have to fill out paperwork yearly for each policy. The standard policy required me to apply for Social Security disability benefits, which I got, but they deduct that benefit from their payout. Still, it's a win for me because I get to keep the yearly cost of living adjustment. I think the disability insurance company is supposed to pay for required doctor visits for the policy. This is not the case for the life insurance policy. This company requires doctor visits yearly at my expense. So that's my story. I was very lucky to have almost my entire income replaced age 65 due to a hostile takeover. Now I spent a lot of time traveling and still saving for retirement. That would not have been possible with the original insurance policy. This is a very important point that I missed with the original personal policy. I also didn't increase my policy as my income increased. I apparently should have. I was in a group with 80 anesthesiologists in the last five years. Three went out on disability that I know of. Yes, it's expensive, but if you need it, you really need it. This is an important topic. Thanks for covering it. So this does happen to people. They do get disabled all the time. It's not everybody, obviously, Right? But that's the way insurance works. You don't hope your house burned down so you can use your fire insurance. You don't hope you die young so you can use your term life insurance. You don't hope you get your money's worth out of your auto policy. You hope that you pay for it and nothing ever happens. Right. Same with your malpractice and every other policy you buy. You don't actually want to have to use it. Not only can it be a pain to use it, but it means something terrible happened. So that's the way disability insurance works. The sooner you become fi, the sooner you can dump it. You can also get a graduated premium policy. I think it might be just Guardian offering those, but I'm sure someone will correct me if I got that wrong. But basically, in the first few years, you pay lower premiums. In later years, you pay higher premiums. Well, that works out really well. If you're a super saver and you hit fi, you know, halfway through your career and can dump the policy, then you only ever paid the cheaper premiums. So I guess I would encourage your partner to either buy a policy and just Recognize it's one of the costs of doing business, or to actually write down what his plan is in the event that he becomes disabled. And I think that will help. Obviously, you guys may not completely agree on it, but try to come to a compromise that works for both of you. All right, let's take a question now on Roth. It's now June by the time you're hearing this. So we're a little bit out of the backdoor Roth period when we're inundated with backdoor Roth questions. But people still manage to struggle with this and screw it up from time to time. So let's hear about this one. Hello, Mr. Dali, thank you for all the work you do. I am a high income bracket technology worker. I have a backdoor IRA question. I contributed for my 2022 backdoor IRA into a traditional IRA in 2023, but I forgot to move the money and recharacterize it. Now it's 2024, and I want to know if I can still do the recharacterization one year later or I just cannot do anything with that money. And so I cannot contribute anymore for 2023. Any help is greatly appreciated. Thank you. Okay. It's important when learning about finance, when asking questions, et cetera, to understand the terms. All these terms have very specific meanings, and if you use them incorrectly, you get bad advice. So let's go through the terms to start with. Anybody that earns money or whose spouse earns money can make an IRA contribution. That's when you put money into the account. The limit for 2024 is $7,000 for those under $50,000. If you're 50,000 plus, it's $8,000. Okay? That's the contribution. Some people can make a contribution directly into a Roth ira, but once you earn too much, you lose the ability to do that. So you have to contribute to the traditional ira, which any earner can contribute to. However, if they have a plan at work and their income's above a certain amount, which really isn't all that high, they can't deduct that contribution to a traditional ira. They can just put the money in there in the traditional ira, and when it comes back out, assuming you keep careful track of that money you put in, which is called basis, which is after tax money, it will come out tax free. Any earnings it has in that traditional IRA will come out fully taxable income. Right? So you got to pay taxes on all the earnings. So rather than having that non deductible traditional ira, what most people do, that are high earners in this situation is do a Roth conversion. All a Roth conversion is, is moving money from the traditional IRA to, to the Roth ira. That's all a conversion is. And once you do that, if it's not deductible money in the first place, there's no tax cost to converting it. If it was pre tax money in the traditional ira, you have to pay taxes as you convert it to a Roth ira. But the beautiful thing about the Roth IRA is when you take that money out in retirement, not only do you pay taxes on the principal, the original contribution, but you don't pay taxes on any of the earnings. So that's way better than having money in a non deductible traditional ira. So that's what most people do. That's the backdoor Roth IRA process. And essentially it allows you to put money into a Roth IRA like a lower earner would be able to. But you have to go through this extra step, right? You have to put it into the traditional IRA and then move it to the Roth ira. That's a Roth conversion. Now, you use a phrase, recharacterization, that I don't think, as they say in the movie the Princess Bride means what you think it means. Okay, I think you're meaning to say conversion, but you're saying recharacterization. Now, what a recharacterization is, is what a high earner does who accidentally puts money directly into a Roth ira. They have to recharacterize that contribution. And when you recharacterize it, it's as though you put the money originally into the traditional ira. That's all a recharacterization is. Years ago, you could recharacterize conversions. You can no longer do that, but you can recharacterize contributions. So if you accidentally didn't realize you needed to do your Roth IRA contribution indirectly or through the back door, you can recharacterize the contribution later. And there's a period of time in which you have to get that done to a traditional IRA contribution and then you can convert it back into a Roth ira. Okay, so the question you're asking is, can you still do the recharacterization? Well, if you still needed to do a recharacterization for 2022, I think that ship has sailed. Right? It's too late for you to do that. But that, I don't think is what you actually want to do. What I think you want to do is do a Roth conversion. I think you're asking, can I still do a Roth conversion? And the answer to that is yes, because while there's a deadline on an IRA contribution tax day of the next year, usually April 15, there is no deadline on conversions. You can do a conversion anytime you like. Now, we recommend you do it as soon after the contribution as you can because you're going to have to pay taxes on anything that contribution earned in between the contribution and the conversion. But you can do it anytime. You can do it the next year, the year after that, 10 years from then, you can do the Ross conversion. So no problem with that. I think that's what you're asking. I think you're asking is can I still do the roth conversion in 2024? And the answer is yes, you can still do the roth conversion in 2024 and almost surely should do the Roth conversion in 2024 for that 2022 contribution that you made in early 2023. Hope that's helpful. All right, our quote of the day today comes from Yogi Berra, who said a nickel ain't worth a dime anymore. And that is obviously a reference to inflation. All right, let's talk about another issue with backdoor Roth. This question's coming in from John.

Hi there, my name is John. I've been watching your videos from a white coat investor on YouTube to do the backdoor Roth IRA conversion. I'm asking a question because in the last year I made the full contribution to an empty traditional IRA of $6500 and that was rolled over to my Roth IRA for that amounting $6500, which is showing on my 10 with CO distribution 2. So that looks fine. But however, after that backdoor Roth IRA finished, I actually had to roll over my previous 401k traditional pre tax 401k and those funds got moved over to my traditional IRA. I made the mistake of not being able to move that money away by the end of the year 2023, December 31st. So on December 31st, 2023, I actually had a balance in my traditional IRA which triggered the pro rata rule, in which case, out of my $6500 and I contributed to my Roth IRA, only about 10% of it was non taxable and tax deferred. And then the 90% I actually had to pay taxes on again. So Moving forward to 2024, that means I do have a basis of around $6,000 in my traditional IRA. Does that mean I can go ahead and make that conversion to the Roth IRA with that $6,000 plus the additional contribution that I'll make in the next year of 2024. I'm just curious what to do in this situation, how they handle this given that I have basis right now in my. By the end of the year, I am planning on rolling over my traditional IRA to the new 401 to empty out the traditional IRA.

Good question, John. This is probably the easiest thing to screw up with the backdoor Roth IRA process. Turns out that there's a calculation done on IRS Form 8606. And because of that calculation you need to make sure you don't have any money In a traditional IRA, simple IRA or SEP IRA. On December 31st of the year you do a conversion or that conversion will be prorated. And while proration is not illegal, it kind of defeats the purpose of doing the backdoor Roth IRA process. You basically end up essentially with a traditional non deductible ira. So John, this happened to you. It doesn't matter whether you do the conversion first in the year and then have money in the traditional IRA or have money in the traditional IRA and then do the conversion. All that matters, all that gets put on Form 8606. Line six is your balance in an IRA on the 31st of December. And John, as you know, you screwed that up and now you're having to deal with consequences which is getting prorated. So your question is, how do you fix this situation? And the way you fix this situation is by isolating the basis. So what does that mean? Well, you go to your 401 and you go, hey, can I do a rollover of my IRA into your 401? And they say yes, because almost every 401 or 403 will allow you to do this. Your second question is, do you only accept pre tax money into that traditional 401k account? And the answer to that is almost always yes. Okay, and that's what you want, right? Because what you want to do is just move the pre tax money in there, the $60,000 or whatever it is, you want to leave the basis behind in that traditional ira, because once you've done that, you can convert it tax free to a Roth ira. So you figure out exactly how much is basis, you roll everything else into your 401, you convert the basis and you're good to go moving forward. And obviously watch this so this doesn't happen to you again. Now if for some bizarre reason your 401 doesn't take rollovers at all, that's a problem. Or if for some bizarre reason they take rollovers of basis, which they probably don't that could be a problem because then your rollover would have to be prorated, but for the most part they don't. And so this gives you an opportunity to isolate the basis, convert the basis to a Roth IRA and it cleans up your mistake. So that's what I would do if I were you. Okay, our next question also related to a Backdoor Roth.

Hi, Dr. Dali. My name is Marcy. I'm a PA from the Midwest. We've been using a CPA to file our taxes for the last two years because we have some short term rental investment properties and we've been doing the backdoor Roth IRA for six plus years now, as my husband and I both make over the limit. My question is the accountant. We didn't notice last year that he did not file an 8606. However, the numbers were correct on the 1040. And this year when I caught that he didn't file the 8,606, I asked about it and he specifically said that he did not need to file the 8606. When I look up the rules on the IRS website, it says that there's a $50 or $100 fine if you are supposed to file and don't. So my question is a shoulder. We have filed a 8606 or is he correct, as long as the numbers play out that it shouldn't be a problem and can we back file on our own if we have to, or do we have to do an amended return? We will likely be using a different CPA next year due to the lack of communication with this one that we have. But that's my question. Basically. Thank you for all you do.

All right. The bottom line is your accountant is wrong. You do need to file 8606 and you can go back and just file that. There's a question of whether you have to Send in a 1040x an amended return with that or not since it's not going to change what you owe in your taxes. Maybe you do, maybe you don't. I probably would send in a 1040X with it. It'd be really easy to fill out since nothing's actually changing on your tax bill. You can probably get your new accountant to help you file that as well. But I would definitely send in the 8606s for each of the years that that accountant did not do it. If you need chapter and verse, I would encourage you to go to the Form 8606 instructions. Scroll down to page 2 says who must file file form 8606 if any of the following apply. You made nondeductible contributions to a traditional IRA for 2023. I mean, it's the first line. Also, if you receive distributions from a traditional SEP or simple in 2023 and your basis in these IRAs is more than zero and you got to do an 8606, you or your spouse transferred all or part of their traditional SEP or simple IRA in 2023 to the other spouse under a divorce or separation agreement. You converted an amount from a traditional SEP or simple IRA to a Roth in 2023. Or you received distributions from a Roth Roth SEP or Roth simple IRA in 2023. Or you received a distribution from an inherited traditional SEP or simple IRA that has basis. Or you received a distribution from an inherited Roth, Roth SEP or Roth Simple IRA that wasn't a qualified distribution. I mean, it's pretty clear you have to file it. I don't know why your accountant isn't. I think they're wrong and maybe you'll get fined for it, maybe you won't. I don't know about that, but you certainly are expected to file it by the irs. So get them filed. Obviously you have three years to fix your tax returns, so get them fixed and hopefully you don't end up having to pay any penalties. Okay, let's take a question. This one comes from is related to our recent episode where we had Chris Davin as a guest and we talked about making pre tax versus Roth contributions, whether to do Roth conversions. If you recall that episode, this question is about that.

Hey Dr. Dali, this is Joe from North Carolina. My wife is a psychiatrist and I run a mobile game studio. And your podcast episodes have been really helpful. We've been listening to you for many years now. I have two questions. The first, regarding the Chris Davin Roth versus Pre Tax podcast. You guys didn't touch on qbi. And my wife and I, we both have QBI income which would be a 20% write off. And the way I understand it is you might not necessarily want to defer income in that case because you're not going to get that write off once you're retired, but you would get it if you were taxed on that income, even if you used it as Roth. And then the second question is regarding S Corp. How much to pay yourself as a W2? I told my accountant that I wanted to max out my 401k and what they ended up doing was giving me a huge W2 because of that, which then increased all my payroll taxes and I think kind of defeated the whole purpose of running the S Corp for the most part. So curious your advice on QBI and then also how much W2 income to give when planning for retirement.

Thanks.

Okay, Joe, great question. Thanks for what you do too. You know, without you, I guess we wouldn't have video games to play. So we all have different jobs and we appreciate what you do. Let's talk first of all on the section 199A deduction or the QBI deduction and retirement accounts. This is a big issue for Katie and I. Basically the bottom line is if we made tax deferred retirement account contributions as employers, we would not get a 37% deduction on that. We would only get about a 29% deduction on that because we would lose QBI deduction because of that. Now the QBI deduction only is scheduled to go through 2025, so after that it doesn't matter. But until then it does matter. Basically the problem is when you make employer tax deferred contributions into the 401, you are lowering your ordinary business income. And the QBI deduction is basically one of the limitations on it. And there are several. But one of the limitations is 20% of your ordinary business income. So if you lower your ordinary business income, you're also lowering the size of that qbi or section 199A deduction. That's a bad thing for us. So what did we decide to do? Well, we decided instead of doing that, we're going to make mega backdoor Roth IRA contributions. What these are is despite the name doesn't take place in an IRA. It takes place in a 401k. So we have a customized 401k. We had a customized solo 401k before, but when we got employees at WCI instead of contractors, we now have a regular ariza, you know, 401k provided by an employer worthy employer. But we customized it such that we can still make after tax contributions after tax employee contributions. So we don't get any employer contributions. We put in our. Actually Katie does. I make all after tax contributions but she puts in her employee contribution. And then the rest up to the $69,000 limit is after tax employee contributions. And my entire $69,000 contribution is after tax employee contributions. So those are like a non deductible traditional ira. It's after tax money but the earnings on it would be fully taxable. So as step two of the mega backdoor Roth IRA process. We then convert those contributions to Roth. So I call up Fidelity and I say, move from this account to that account. It's a Roth conversion. There's no tax cost on it because I got no tax deduction on the original contribution. But basically it allows me to put $69,000 a year into a Roth 401. And that's what I choose to do for various reasons, one of which is the fact that if I made it as tax deferred, I would only get a 29% deduction instead of a 37% deduction due to the loss of that QBI deduction. So hopefully that helps flesh out that question for you. Your second question was paying yourself as an S Corp employee owner. Okay? Now, when you have an S Corp, part of your income is salary and part of your income is a distribution from that S Corp. You pay payroll taxes on the salary. You don't pay payroll taxes on the distribution. Payroll taxes include both Social Security up to a certain amount. I think it's $160,000 something this year you have to pay Social Security tax on. Once you make more than that, you don't pay Social Security tax on that. Obviously, you pay Medicare taxes and some various Affordable Care act taxes on all your income, right? Above a certain level for the Affordable Care act taxes, but on all income for your Medicare taxes. So the idea behind setting up an S Corp is to try not to pay payroll taxes on all of your income. So maybe you say my salary is going to be $100,000 or my salary is going to be $200,000. Then I'm going to take another $100,000 or $200,000 as distribution. And so for a typical doc, they're going to have a salary that's higher than that $160,000 limit. And all they're going to be saving is the Medicare taxes, right? Because that ACA tax is going to get you either way. So you're saving the 2.9% a little less than that once you include the employer deduction portion of that. But basically you're saving 2.9% on whatever you call distribution instead of salary if your salary is lower. You know, if you can justify a salary of $80,000 or $100,000, you can save a significant amount of Social Security taxes as well. That's the whole point of an S Corp. Now, I get that you want to max out your 401. That's a great thing, right? Maxing out your 401 is a great thing. Saving on Medicare taxes and possibly Social Security taxes is also a great thing. But the problem is, in order to max out your 401 with employer tax deferred contributions and probably soon employer Roth contributions once they're allowed, you've got to have a big old salary, right? I think it might have to be more than $300,000 this year. I'd have to go back and see exactly how big it'd have to be for you to max out a 401. And obviously the more you do that, the more you're going to pay in payroll taxes. And particularly with Medicare tax, you're not getting anything additional for paying that tax. You pay a little more in Social Security at least. You know, it increases your Social Security benefit down the way. You may still not want to pay it, but at least there's a benefit for your Medicare tax. There's really no benefit, right? You make 10 years of Medicare tax payments, you're going to qualify for Medicare and it really doesn't matter if you pay, you know, tens of thousands of dollars in Medicare tax. My benefit for Medicare is going to be exactly the same as someone that hardly paid any. That's just the way Medicare tax works. It's a social program, it's a social insurance. That's the way it works. So no real benefit to paying additional Medicare tax. So a known tax cost, and all you're getting on the 401 side is tax deferral. Now that can be valuable, especially if you pull the money out at a lower tax rate. And of course you get tax protected growth for a number of years. But you don't have to pay a lot of extra payroll taxes to completely eliminate that benefit. So one workaround that may be very good for you is to basically do what Katie and I did. Go get a customized 401 plan, probably a solo 401 plan. I don't know if you have employees or not. Get a customized one. And we keep a list of those folks on our recommended page that can offer that for you. And instead of making employer tax deferred contributions, you can make employee after tax contributions. And if you do that, you don't need $300,000 of W2 income to max out the 401. Right? You can do it for a six figure amount or a five figure amount, rather less than a six figure amount and max out that 401. So that's pretty cool trick, right? So maybe that's what you ought to be doing. The downside of course is you're now doing Roth contributions instead of tax deferred. That might not be the best for you, but it is an option if you really want to maximize how much goes into the retirement account. The other option, of course, and a lot of people forget this for whatever reason, you can always invest in taxable. You don't have to max out the 401 if it doesn't make sense otherwise. Right? You don't have to go buy whole life insurance because you ran out of retirement accounts. You can just invest in taxable brokerage account. You can put as much in there anytime you want. You can take it out anytime you want. You can use it for anything. You can get some tax benefits in there like qualified dividends and long term capital gains tax rates. You can do tax loss harvesting. There's lots of benefits of a taxable account and there's no limit on how much you can put in there. So that would be another option for you. Hope that's helpful.

Hi Dr. Dally, my question is about the Solo 401K and Mega BackDoor Roth IRA conversion. I have a full time position that's paid as a employee on a W2 but also have a small side gig taking call for another practice for which I'm paid as an independent contractor and.

Receive a 1099 each year.

The yearly income for that side job is about $10,000 per year. I've heard you talk about setting up solo 401ks that allow for mega backdoor Roth conversions in the past for independent contractor jobs, but I'm wondering, does it make sense to go ahead with the setup and yearly expenses of a solo 401k with this amount of side income or is it better to just invest it in some index funds in a taxable account? For context, I already maxed out my Roth IRA 403 and 457 each year.

Thank you. Good question. I guess it comes down to whether you're an optimizer or a satisficer, right? You got two options. If you do go through the hassle of opening a Solo 401, you can put about $2,000 a year in there as an employer tax deferred contribution. So I'll assume you're maxing out your 401403 contribution limit at $23,000 a year for those under $50,000 in 2024 at the regular gig. So you're limited to two things on the side gig solo 401, you can put $2,000 in there of your $10,000 as an employer tax deferred contribution or you put in basically all of your $10,000 that you earn as an after tax employee contribution and then if the plan allows it, convert that to a Roth 401. You'll need a customized plan. So that'll cost you something. Maybe something like 500 bucks to set up and one or $200 a year to maintain. You know, it's not super expensive, but it'll cost you something. But that'll allow you to have $10,000 growing in a Roth account versus $2,000 growing in a tax deferred account. Is it worth it? Well, I mean, I guess we could run the numbers over 30 years and see what the difference is, but I think most people would conclude that that is probably worth it in your case. But it would not be wrong to just say, I'm not going to bother, it's only $10,000. I'm just going to invest in taxable. And I think that's perfectly acceptable. You do not have to optimize every single little detail of your finances. When you are a higher earner who is paying attention to your finances, you can still reach your financial goals without using a solo 401 that you're putting 2,000 to $10,000 a year in and just investing that money in taxable instead. You can still be plenty financially successful. So if you don't want to go through that hassle, I think that's a very reasonable decision. But if you do, it'll probably be worth enough to justify the small amount of hassle that it would be to deal with the Solo 401. Getting quality disability and life insurance should be the first financial chore for a doctor to complete. Most docs don't have the ideal policy for their gender, specialty, state or health status, and one in seven doctors get disabled at some point during their career. Because these policies can only be purchased through brokers, we've put together a list of vetted agents who are experienced with working with the specific needs of medical professionals and who have your best interest at heart. If you have questions about insurance and what kind of policies would be the best fit for you, or check out our insurance recommended list@whitecoatinvestor.com insurance and feel the peace of mind that comes with knowing you have the optimal policy in place. You can do this and the white coat investor can help. Don't forget student and resident. 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