WCI #49: Tales From my Email Box

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. Here's your host, Dr. Jim Dahli. Welcome to episode 49, Tales from My Email inbox.

No more wading through dozens of books at the library, scrolling through hundreds of blog posts on dozens of blogs, or checking in daily with online forums to gain a financial education the way the hobbyists do. For a fraction of the price of hiring a professional financial planner, the Fire your financial advisor online course will take you from feeling anxious and having no plan to having a written financial plan. You can follow the rest of your investing career as a professional and a retiree. This course is the material that should have been taught to you in college, medical school or residency, but never was. Fire your financial advisor also has a version eligible for CME credit. Get your financial life in order today. Go to whitecoatinvestor.com courses to sign up. You can do this and the White Coat Investor can help.

Our quote of the day today comes from Benjamin Graham who said the individual investor should act consistently as an investor and not as a speculator. That kind of reminds me of something from the conference in March where Jonathan Clements, I believe it was, was asked about Bitcoin and basically he said something about speculation and that was where he left it. And pretty much the answer was, yeah, that's speculation. You should just avoid it. You know, the conference was a lot of fun. This is our first day recording podcast since we had the conference up in Park City. Had a great time. I think I met every single attendee individually, all 300 of you, and it was awesome to hear your stories and get to shake your hand and look in the eye and hear about how we've been able to help you and what else we can do for you. It was really quite a fun three days. Took a long time to get ready for it and a lot of effort, but the actual conference itself was awesome and we really enjoyed ourselves. We had great speakers, it was a great community. Even the skiing was pretty good. It was really fun to ski with a few of you and we cut that off at, you know, black diamond skiing level. And so we actually skied some pretty hard stuff those two days. But it was fun to talk to people about what they're doing with their lives and all their financial successes, as well as other challenges. We're going to try to get some audio from the conference onto the podcast and get you a chance to kind of get a taste for it and get some of the wonderful messages that we heard from the conference and give you a chance to hear those. We're also going to package most of the conference up into a video online course and make that available for purchase both for those who attended as well as for those who didn't get the chance to attend. I know a lot of people were interested in coming and weren't able to, unfortunately, because it simply just sold out too fast. I mean, I had people asking me if they could sign up for it the week before the conference and had to tell them it sold out in six days nine months ago. And so hopefully those people get a chance to participate through the video aspect of it. So today I thought what we do is just take a dive into my inbox. It's really fun to do interviews on this podcast and to get some other people and some other voices on here, and I hope you've been enjoying that. We've been trying to do a lot more interviews this year. I also am enjoying getting into your questions and the questions people are sending in via Twitter or via Facebook or via email is probably most common. And to actually answer those here on the podcast and give you a chance to hear what other people are concerned about. And I know a lot of you have the same questions because honestly, this whole white coat investor thing is, is mostly just answering the same 50 questions over and over again. I don't mind the dumb questions. I kind of like them because I already know the answers to those ones. But occasionally I do have to do some research when somebody comes up with a pretty unique question. So let's get into some of these today. Here's our first one who writes in and says, are there any lifetime limits on retirement accounts and 529 plans? Well, for the first one, there are no lifetime limits. You can have as much as you want in a Roth IRA or, or a 401K or whatever the limits are on how much you can put in there each year. For example, for somebody under 50, a Roth IRA only allows you to put in 5,500 per year. It's 6,500 per year if you're 50 or older. Likewise with a 401K, there are limits on how much you can put in each year, but there's no limit on how much you can have in there in aggregate. So if you contribute for many years and you put in the maximum amounts and you invest well, you could have very large retirement accounts. Another Trick you sometimes see people do is that they can get some sort of a business into their Roth ira. And then when the business becomes big, they end up with this monstrously huge Roth ira, which is obviously pretty cool considering all the income that comes out of it is completely tax free. But for the most part it's just what you contribute and its earnings. And that can grow over a lifetime to to millions of dollars in retirement accounts. And that's usually plenty for even a high spending physician to be able to have a nice retirement. 529 plans, on the other hand, not only have annual contribution limits, but they have total limits that you can have in the plan. Those limits typically range from around 300,000 to about $450,000. It varies by the state. So whatever state plan you're using, you need to take a look at what the limits are in your state. Sometimes there's a limit that looks at all 529 accounts for a particular beneficiary in that state. And sometimes there's a different limit for how much per account. For example, in Utah I think it's around $350,000 per account. But total per beneficiary you can get actually about another hundred thousand in there. But here's the truth of the matter. These are state limits. So if you want to save more on a 529 for your kids education than $450,000 or all you got to do is go cross state lines, go open one in another state and you can put another 300 or $400,000 into that. There really is no practical limit for how much money you can get into a 529. And if you're getting up to the limit for your single state, you got to start wondering if maybe you're putting a little too much in there to start with. Next question. I'm a W2 employee with a SEP IRA and I'm wondering if I should attempt to do a backdoor Roth IRA for myself or my wife or both. Our household income this year will be over $300,000. Currently we both have Roth IRAs that were funded when our adjusted gross income was much lower. Neither of us have a traditional IRA. My wife has a typical 401k through her employer. If it matters, my SEP IRA should come out to roughly $30,000 per year. So what we're getting at here is the pro rata rule. Remember with the backdoor Roth IRA on December 31st of the year, you do the conversion step for the Roth IRA. You need to have balances of $0 in your simple IRA, your SEP IRA, your traditional IRA and your rollover IRA. You can't have money in there or you end up having a pro rata calculation applied to your Roth conversion step on the backdoor Roth ira. So if you have some old ira, what you usually do is you roll it into a 401k or if it's a small IRA, you just convert it to a Roth IRA and then it goes away and isn't counted into that pro rata calculation. But this doc has a separate issue. His employer is using a SEP IRA as the company retirement plan instead of putting in a 401. And there are some various reasons why an employer may do this. But the problem is this doc's going to be putting in money into that SEP IRA every year and so it makes it difficult to avoid that pro rata calculation. So this stock has a few options. One would be just don't do a backdoor Roth IRA and just keep his life simple and use the SEP ira. And that's great. And anything else he wants to invest, he can invest in a taxable account. Another option is to talk the employer into using a Force 401K instead of the SEP IRA, which makes this problem go away. Sometimes you might be able to roll money out of that SEP ira into a 401k somewhere else. And if you can do that before December 31st of every year, well you have nothing in the account on December 31 and thus no pro rata calculation. So that's another option for this doc. Yet another one would be to just convert the SEP IRA money to a Roth IRA every year. Now that's going to be kind of expensive if you're in your peak earnings years because you'll be paying taxes on that conversion at your marginal tax rate. But that would be an option to allow you to continue to do a backdoor Roth ira. So lots of options there. None of which are really great options. But remember that when it comes to IRAs, the I stands for individual. Just because he has this SEP IRA keeping him from contributing easily doesn't mean that his wife cannot have a backdoor Roth ira. So even if you're in these kinds of a situation, your practice is using a simple IRA or a SEP IRA for your retirement account. You can still do a backdoor Roth IRA for your spouse. Alright, next question. I love your show and even have my daughter and son in law listening and reading now. That's great. And I love when you answer questions from followers. Great. So here's your question. I would love to hear your thoughts on refinancing to capture the equity in your house or a rental property. That is when is it smart to refinance down to 20% equity or maybe 25% and use the money to move towards other investments? In my case, I own a single family home that I rent out which has roughly $275,000 in equity on a $405,000 total value. And I net $295 per month after the management fee, HOA and property taxes. I have 10 years left on the 30 year mortgage, so I'm starting to lose out on interest benefits. Maybe it's time. And I've been thinking that the more equity I have, the lower my return. But maybe I'm just making a bad doctor decision or maybe I should just keep it as is and have a house which is cash flow positive in a big way once paid off. Well, I think this is a great question. What you're really weighing here are the benefits of adding more leverage to your investments. The more leverage you take, the higher your potential return is going to be. Of course, that also introduces higher risk. If you leverage investment too much, particularly something like a rental property, you may also become cash flow negative in which you get into a situation where you're starting to feed the beast and you're having to take money from your earned income and use it to make up for the lack of cash flow in the investment property. So when should you take additional money out of the investment property? Well, I think most of the time you probably shouldn't. You should just gradually pay it down on the mortgage or even pay it off rapidly and then enjoy the cash flow from it. It's amazing how wonderful it is to have a property where you are able to get substantial cash flow from it every month because you are no longer dependent on that property appreciating and you are no longer dependent on absolutely having that income every month in order to make the payments. You just have much less risk with the property. In that sort of a situation, do you have a lower return to. Absolutely. So if your goal is to buy a whole bunch of properties and, and your goal is to maximize your return, well, introducing some leverage risk is a good way to do that. It's also a good way to go bankrupt. So you only want to take out a limited amount. In general, what I've found when I've looked at properties is you've got to have 25, 30, maybe 33% in the property in order to be cash flow neutral. So when you're starting to talk about going back to 25% equity in there or 20% equity in there, you're getting into a situation where it's highly likely you're going to have to be feeding that beast. And I think that's probably too much. But if you have a paid off property and you want to buy another property and you want to take some of the equity out of that to buy this new property and you're only going to be at 50% loan to value in both of them, well, I think that's probably a reasonable risk to take and over the long term is probably likely to increase your investment return. So let's not get too dogmatic about avoiding the debt in this situation. A lot of times it can help. Certainly a professional real estate investing fund or a professional real estate investor is going to use some leverage. The question is how much are they going to use, knowing that there are certain risks and certain rewards to doing that. But personally, if I was trying to acquire a handful of properties to help pay for my retirement, what I would probably do is I'd probably try to put about a third down on each of them and then try to pay them off at least within 15 years or so and take the cash flow from those properties as I pay them off and use them to pay off the next properties and then be able to use that cash flow with, you know, in order to pay my living expenses. Alright, next question. I had a question about saving for short term large purchases such as a house or a pool. I use a Fidelity account to invest in a New Jersey municipal bond fund that is both state and federal tax free. Have the Fidelity visa card with 2% cash back on everything that goes directly into that account. How do you feel about using that instead of a savings account for short term large purchases? Well, I like that credit card. I actually use that credit card as well. That's the one we use to pay our taxes. And so we use, you know, a 2% back card for just about everything we buy. So I have no problem with using that as long as you're paying it off every month. I also think that it's reasonable to use a municipal bond fund for some of your savings. But you got to keep in mind that there are risks to bonds. When it comes to bonds and money market funds and savings accounts, you can have one of two things, but not both. You can either have the principal held constant or you can have the interest held constant, but you can't have Both with a money market fund or a savings account, your interest is variable. You know, as the interest rates change month to month, you earn more or less interest than you did the month before. But the principal stays constant. With a bond your principal actually varies month to month, but the coupon or the amount of interest the bond pays stays constant. And so there's a certain amount of risk to moving to a bond fund rather than a money market fund or a short term or a savings account. And so you got to be comfortable with that risk. I mean, if it's going to be a big deal, if you lose 5 or 10% of that money just before you need it, then you probably should be keeping the money in cash. If that's not a big deal and you don't mind delaying or saving for another month or two or three, or hoping the market comes back, then I think it's okay to take a little bit of risk like a short term bond fund or maybe even an intermediate term bond fund for some of that savings that's a year or two or three years out there. But you just got to realize that you're taking additional risk as you're reaching for yield there. And if you reach for too much, there's a decent chance that the principal that you want to have in order to buy this short term purchase is not going to be there when you need it. Certainly I wouldn't put money into stocks that you need in the next year or two or maybe even as much as five years because sometimes half your money in stocks disappears very suddenly. And if that's going to affect your life financially in some way, that money should be in something much safer. Alright, this one comes in from medical student. A medical student, a big fan of the work you do at wci. Thanks to my parents personal finance skills, I'll be graduating from medical school with no debt. That's pretty awesome and congratulations on that. I'm in the process of planning my budget and financial plan for the first year of residency and I have a question I'd like to get your feedback on. This is a medical student that's thinking way ahead of the approximately $50,000 I'll be paid in the first year of residency. My goal is to save half or about $25,000. I plan on making the maximum contribution of 5,500 to a Roth IRA, the max contribution of 3,450 to an HSA and a contribution to a 401 that at least meets my employer's level of matching. I already have an emergency fund of $15,000 established. And that leaves me $10,000 a year and savings that I need to decide how to invest. In your opinion, what's the best way to invest the additional savings? Should I contribute more to the 401k, put the rest in a taxable investment account or save for a house down payment? Well, this doc is going to be so far ahead of peers that it really doesn't matter much. I mean, not only are you starting out with a positive net worth, which is way ahead of your peers, but you're already planning on a 50% savings rate. I mean, this is a doc that's going to be very wealthy very quickly. And so the first thing I would say is consider spending a little more of that money. I mean, $25,000 is not a lot of money to live on. And there is a good chance when you're living on that amount of money that there's something you can spend a little more on that will actually make your life happier. So I would caution you to maybe even spend a little bit more. Nobody needs to save quite that much money unless your goal is really to hit financial independence very early your career. That said, now that I've answered the question you should have asked, I'm going to answer the question you actually asked. So your priorities in residency for somebody that doesn't have any debt are Roth accounts. So Roth IRAs, Roth 403BS, Roth 401KS. So if you get an employer match, be sure to put enough into your 401k or 403 to get that. And if you have a Roth option available to you, put it in the Roth option. Once you've done that, I would go to a Roth IRA, $5,500 a year. And if you have a spouse, you can put 5,500 into a spousal Roth IRA. So I think those are great initial moves. Now, if you have a health savings account available to you, that should also be a priority for funding. But chances are, as a resident, you probably won't. I haven't seen very many resident health insurance plans that are true high deductible plans. They're usually better health insurance than that. And so you're not eligible for an hsa. But sure, if you're eligible for an hsa, that's also a great place to invest money. Now, if once you've done all that, if you want to save more and you do have that Roth 401 or Roth 403 available to you, that's where I would put additional savings. Now, if you don't have that available to you, what I would probably do is put it into the tax deferred 401k or 403b, and then the year you leave residency and separate from the employer, I would convert that to a Roth ira. While that year you'll have half your income be at an attending level and half of it be at a resident level, you'll still likely be in a lower bracket than you will be in the long term and maybe even in retirement. And so I think that's probably where your priorities ought to be when you're a resident and trying to save, you know, a large quantity of money for retirement. Obviously if you have other things you want to buy, like a house down payment, that's money you shouldn't be putting into a retirement account. Although truthfully, you actually can take a certain amount out of your IRAs and use for a house down payment, although I really don't recommend that. I also wanted to share a cautionary tale that came in by email. I was able to give this physician couple some advice that hopefully helped their situation, but I mostly just kind of want to share the story for some lessons learned for listeners today. This couple are two fairly high, high power specialists, two well paid specialists, one of whom has been in practice for about five years and the other one of whom is just coming out of fellowship now and basically they're going to be going into academics. The one who's been out of practice for about five years has no student loans left, but says this regarding the spouse's loans. My spouse has $500,000 in loans. I was not aware of the extent of my spouse's loan debt and was under the wrongful assumption my spouse was continuing to make minimum income based repayments throughout residency. We got married 1.5 years ago and I obviously should have looked more closely into the loan situation at that time. We recently had our first child and are buying a home and it only came to my attention over the past few weeks when my spouse's credit was checked for the home purchase. It turns out that my spouse was alternating between repayment and forbearance throughout residency, but completely lost track of the loan situation a couple of years ago. Thus no payments have been made and all of the loans are in default totaling about $500,000 before any penalties. So we're purchasing the home on my credit and income. This hasn't hindered that process, but we're in the process of contacting the loan servicer to determine the current state of the student loan situation. I've been exploring the options of loan rehabilitation versus loan consolidation and I'm working with a financial planner on this but wanted to get your thoughts on what we should do going forward. We'll be working at a large state academic institution and I've inquired about Public Service Loan Forgiveness as well. My spouse may have made some qualifying payments during training, but I'm going to assume that these were sparse and we might essentially be starting from scratch with this process. We'll have a combined salary of 700 plus thousand when we start our new jobs and also some extra earning potential from some side work. Any thoughts on how to begin tackling this process? Boy, you hate getting emails like that because you think what could have been this is a doc that not only did a residency but did a fellowship and is now going to work at an academic center and has a high student loan burden. I mean, you can't write a more perfect scenario for Public Service Loan Forgiveness. But the key to getting a bunch of money forgiven through the Public Service Loan Forgiveness program is making all those tiny income driven payments during your residency and fellowship. So if you make these payments for three years as a residency of 100 or 200 bucks a month and you make payments for three years of fellowship at 100 or 200amonth, then you make full payments as an attending at this academic institution for another four years and poof. The rest of the debt is gone. I mean this doc probably stood to have four or five hundred thousand dollars forgiven through Public Service Loan Forgiveness. I mean that might be a year or two of gross earnings that is just gone from making bad decisions on how to manage student loans. So my cautionary tale here is twofold. Number one, know what you owe and make sure you're managing your loans properly for your situation while you're in your training. And number two, you've got to be on the same page with your spouse before you get married and even after you get married. Really, you got to talk about finances. You got to know how much each other owe. Because when you get married, it's not his money and her money. It's not his debt and her debt. It's our money and our debt. And you really want to be able to pool your resources to best manage your finances as best you can.

No more wading through dozens of books at the library, scrolling through hundreds of blog posts on dozens of blogs, or checking in daily with online forums, trying to gain a financial education the way the hobbyists do for a fraction of the price of hiring a professional financial planner. The Fire your Financial Advisor online course will take you from feeling anxious and having no plan to having a written financial plan. You can follow the rest of your investing career as a professional and a retiree. This course is the material that should have been taught to you in college, medical school, or residency, but never was. Fire your financial advisor also has a version eligible for CME credit. Get your financial life in order today. Go to whitecoatinvestor.com courses to sign up. You can do this, and the White Coat Investor can help.

Head up, shoulders back. You've got this, and the White Coat Investor community can help. If you've got questions you'd like answered on the podcast, email them to me. Or if you want more opinions from the community, join the free White Coat Investor forum and post them there. I'll see you next time.