WCI #51: Another Visit to Whole Life Insurance Land

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 Podcast 51, another visit to whole life insurance Land.

Getting quality disability and life insurance should be the first financial chore for a doctor to complete. Most docs don't have the ideal policy for their gender, specialty, state or health status, and one in seven doctors get disabled at some point during their career. Because these policies can only be purchased through brokers, we put together a list of vetted agents who are experienced with working with the specific needs of medical professionals and who have your best interest at heart. If you have questions about insurance and what kind of policies would be the best fit for you, check out our insurance recommended list@whitecoatinvestor.com insurance and feel the peace of mind that comes with knowing you have the optimal policy in place. You can do this and the White Coat Investor can help Our quote of.

The day today comes from Margaret Bonanno, who said being rich is having money, being wealthy is having time. I hope you're enjoying the podcast. We're trying to do one a week this year and it takes a fair amount of work to be consistent at anything. Took years really to get into the habit of blogging often as often as I do. And we're trying to get into the habit of making podcasts as well. We're trying to make half of them interviews and I hope you enjoy those. I've found the interviews tend to go about twice as long as the ones I do myself. I don't know if that's because I'm just not that wordy by myself or whether it's just the effect of having two people on a podcast. You end up having twice as much to say, but I hope you're enjoying those. Give us feedback on them. We have a lot of great guests coming up over the course of the summer that I think will be a lot of fun. Be sure to check out the YouTube channel. We actually record quite a few of these podcasts and put them into a video format. So if you want to take a look at what we're doing down in the basement here at White Coat Investor headquarters, making this podcast come on over to YouTube. One look and you might flee back to the podcast, but I'll leave that up to you. So I'm going to rant a little bit today about whole life Insurance. I asked Cindy, as we're preparing this podcast, when the last time I touched whole life insurance was, and she said it was our second podcast. So we're now on 51. It's been a long time. Let's talk about it again a little bit. I wish I could just say, don't ever buy whole life insurance and leave it at that, that it's always evil, that it's always bad, and that's not necessarily the case. I can say it's almost never right for you to buy it. That's easy enough to do, but there's always a few niche reasons. And if you want to be intellectually honest, you got at least talk about it and help people to understand it a little bit. And so we're going to do that today. And then we're going to answer a whole bunch of questions that I've had sent in from readers and listeners, and I think you'll enjoy that as well. So whole life insurance is really a combination product. It's a combination of a lifelong insurance policy along with a cash value account that you can borrow against for various different reasons. Because of this investment quality of it, it's often sold as an investment. Now, legally they're not allowed to call it investment, but they, you know, go basically right up to that line and lead you to believe that you're buying an investment investment. And so we're going to go through a few questions about whole life insurance. First, should you buy it? Well, the answer is probably not. You probably shouldn't buy. Does four things, right. It gives you a death benefit in case you die when someone else is dependent on your income. But it's a very expensive way to get that protection. It might be 10 times as much as pure life insurance, which is term life insurance, and it's about twice as much even for a lifelong death benefit. If you buy a guaranteed universal life, it provides this death benefit even if you die in your 70s, 80s, or 90s. And the problem is that's unnecessary insurance. It's a financial catastrophe if you die when you're 35 and you got three kids and a spouse depending on you. It's not a financial catastrophe to die at 83. It's an expected event. And so that's not something you should be necessarily insuring against. That cash value account that it provides is a financial asset. You can borrow against it, just like you can borrow against your house or your boat or your car or your investment portfolio. But while there are a number of uses for this cash value, it's generally inferior to most of the other options that are given to you to meet those financial needs that you have during your life. And then, of course, Whole Life has some unique business and estate planning uses that, frankly, you're unlikely to need unless you're in a very small percentage of listeners to this podcast. So of course your insurance agent thinks I'm wrong, right? They love this stuff. And the problem is that most insurance agents get all of their financial training from their company. So of course it's all huge on insurance. They think insurance is the answer to all of life's problems. And so you got to realize that their training is mostly in sales. It's not in financial advice. It's not an investing, it's not in portfolio construction. And so they find these lines and these ways to sell whole life insurance because it pays a huge commission. I mean, the commission on a whole life insurance policy is 50 to 110% of the first year's premiums. So if you're paying $20,000 a year for this thing, that person selling it may make $20,000 from the sale. Now you know why they're calling you so much. Now you know why they're so persistent. The truth of the matter is, you cannot sit in the office of a whole life insurance salesman and argue with them about whole life and win the argument because they just go in circles. They bounce from one argument for it to another, to another to another until you're so worn down and out of objections that you buy it. Truly, the only way to win that argument is to stand up and walk out of the room. And that's what you should do. If you find yourself in an argument with someone who sells whole life insurance, it's a bad idea. Most of the time you have better uses for your money. So many of the docs I run into who own whole life insurance owe money on credit cards or student loans or a mortgage. Those are far better uses than buying whole life insurance to pay off that debt. They might not even know about retirement accounts available to them, like a backdoor Roth IRA or a stealth ira, AKA a health savings account. If you're not maxing out your retirement accounts, you you're making a terrible mistake buying whole life insurance instead. They might not even be maxing out their 401k. Maybe they don't have an individual 401k for their moonlighting gig. Those sort of mistakes happen all the time. And so I run into doctors who have purchased whole life insurance, or really, probably better said, been sold whole Life insurance inappropriately. I started keeping a log of this back in the beginning of 2017. And so every time I have a doc, email me. And I forget all the time, but most of the time when I have a doc email me about their whole life insurance policy or when they post a comment on the blog or on the forum, I copy and paste it into this thread on the White Coat Investor forum. And the thread is called Inappropriate Whole life Policy of the Week. And on average, about once a week I post a story in there of a doctor who has sold whole life insurance for a terrible reason. This is usually a doctor that has student loans or a doctor who doesn't know about retirement accounts. And of course, now the doc's stuck, usually with an underwater policy that they paid more in premiums than the stupid thing is worth in its cash value and they're wondering what to do with it. I mean, that's the usual case. And you just realize that to doctors, at least, it looks to me like 98% of the time this stuff is sold inappropriately. And that shouldn't be surprising considering that most people don't actually keep their whole life insurance policies. I mean, it's a whole life insurance policy. You're supposed to hold it your whole life. If you don't want to have it for your whole life, don't buy it. It's a lot like marriage that way, right? Till death do you part. And if you want to part with it before death, it's going to be very expensive. And so when you go into a cash value life insurance policy like whole life insurance, you really need to spend a lot of time understanding it, understand exactly how it works, make sure it's exactly the right policy for you, and realize that this is something you're either going to be stuck with for decades, or it's going to cost you a lot of money to break up with. So be very sure before you buy one. Now, if you understand how it works and you like its features and you find it attractive to you and your financial situation, knock yourself out. I don't get paid anymore. If you don't buy whole life insurance. I really don't have a dog in this fight, but I do know that I run into dozens and dozens and dozens of doctors every year who regret their decision to purchase this product. And so if you haven't bought it, consider that maybe you shouldn't. And if you really still want it, make sure you understand exactly how it works and how it's going to play into the rest of your Finances and be committed to making all the required payments, whether that's for seven years or 10 years or for the rest of your life. Realize that this really is a long term commitment. There's a lot of different ways in which life insurance is sold to physicians, high income professionals and really everybody else. I call them the myths of whole life insurance. And I originally wrote a post, I think back in 2013, it was actually four posts that detailed out these myths of how it's sold. And it basically takes these statements that are made by whole life insurance salesmen and, and talks about why they're misleading, half truths or flat out wrong and kind of gives you the explanation because they're very convincing when they come up with these explanations for why you need to buy it. And this series of posts really just gives you the other side of the story. It gives you the rest of the information that you need to know to understand what they're talking about and what they really should be saying if they were giving you impartial advice instead of just selling you a product. A year after that I added a few more of these myths as I had insurance agents come by the website and give me additional reasons why they thought people ought to be buying whole life insurance. Well, I just updated that series again. That post will run sometime this summer, part number six, this time with four more myths that people are using to sell this stuff. I thought the craziest one was, well, you don't get any 1099 income from it. I thought that was just totally insane. I mean, how much trouble is it to deal with the 1099? It takes me about 30 seconds to enter it into TurboTax every year. It's really not a big deal. If that's the reason you're buying whole life insurance, you're about to get hosed. So let's talk a little bit about some of the exceptions for a minute. What these appropriate uses of whole life insurance could be. Well, I mean, there's a few of them, right? Some people like to use it inside a irrevocable life insurance trust. Basically this is something that you're using to pass money on to your heirs. You're buying it for the death benefit. You really do want a permanent death benefit. And for example, if you want to make sure you're given about the same amount to your heirs no matter when you die, whether it's in your 60s or whether it's in your 90s, whole life insurance is a pretty good vehicle for doing that. You basically open up a trust and the money you put into the trust is an irrevocable gift and so your creditors can't get to it. It has excellent asset protection features that way. And then when you die, the money goes to your heirs. Trusts are taxed pretty heavily. You're pretty readily with a relatively small amount of income, you get to the highest tax brackets. And so a lot of people decide not to put put very tax inefficient stuff into a trust. I mean, there's no reason you can't put some tax inefficient, you know, index funds in there or some municipal bond funds, that sort of a thing. But it's probably more common that people put something like a whole life insurance policy in there and use that as an estate planning vehicle to try to pass money to their heirs. With the new higher estate federal estate tax limits that passed with the recent tax code change, that's not nearly as big of an issue for the typical physician. I mean, a married physician has got to have an Estate over 22 million before they're subject to federal estate taxes. So it's really not nearly as useful a technique as maybe it used to be not that many years ago. I mean, it hasn't been that long since that exemption was only 1 million and lots of doctors fell into that category. But at 22 million, it's just not that necessary. It can provide some liquidity at death. However, if most of your estate is tied up in some illiquid asset like a farm or, you know, know, a small business like the White Coat investor, then you can start looking for reasons to get some liquidity at death. And that can help you to split up your estate. For example, if you want to leave your farm to one kid, but you want to give another kid, you know, a certain amount of money, an equal amount of money, well, you can use life insurance to kind of provide that liquidity. If you're going to have trouble paying estate taxes, it can also or income taxes at death for some reason, then it can also be useful to provide that source of liquidity. Some people want to have a permanent life insurance because they have a disabled child and they're worried they're not going to be financially independent. Now that's not totally necessary. I mean, here's the deal. Right up until you're done working, it's cheaper to get term life insurance, you know, in your 30s, 40s and 50s, and that functions just as well as whole life insurance to provide a lump sum of money for your disabled heir in the event of your untimely death. And after that point, you can leave them, your portfolio to function for the same purpose. It's really no different from you needing to live on that money the rest of your life to needing to leave a lump sum behind for an heir. But if you want to have a specific amount of money set aside no matter when you die, then that's not an unreasonable use for whole life insurance. But notice you're not buying it as an investment, you're, you're buying it for the permanent death benefit. And so that's usually when it makes sense to have a whole life insurance policy. Some people use it for a business reason, for key man insurance, which is basically, you know, if somebody dies in a small business and it would be a big deal for them to die, well, that money provides a way for, you know, the business to continue on. Basically it allows the, you know, other partners in the business to buy out the spouse or other heirs of that business owner. You can do that early on in life using term insurance. But if you're working in this business in your 70s or 80s, it may make more sense to have a permanent policy. Occasionally in their estate planning and in their retirement planning, people will decide to buy a single life annuity. Basically this is an annuity that pays until that person dies. But if you have a spouse, that's a problem, right? If your spouse outlives you now, they don't have any money to live on after you die. So some people solve that problem by buying, taking a little bit of that payout, that higher payout from having a single life annuity instead of a basically double life annuity, both on you and your spouse, and use the difference to buy an insurance policy. Now you have to price them out most of the time. I think it's probably going to make sense to just buy annuity that is on your joint lives rather than on just a single life, and then buy life insurance. But if it prices out to work out better that way, sure, why not? Some people are really into this banking on yourself thing, sometimes called infinite banking. This is the idea that you buy a whole life insurance policy, you try to get it to break even relatively early rather than the 10 or 15 years that it takes to break even for a lot of whole life insurance policies. You try to get it to break even in about four, five, six years. And you do that by buying a bunch of paid up additions and buying a specific kind of whole life policy. And the people that do this want to be able to borrow money readily from the policy throughout their life. And so the idea is that you get all this cash value in there early and then you borrow against it when you want to buy an investment property or when you want to buy your car or whatever. And so you borrow against the policy. So in this sort of respect, what you're trading is all the upfront commissions and the fact that it doesn't break even for half a decade. You're trading that for the opportunity to have your money growing at 3, 4, 5% instead of 1% in a savings account at today's low interest rates is really what you're trading it in for. And can that work out okay? Sure. If you really understand how the policy works, you and you look at it and you say, yeah, that's a benefit I really want to use and that I value highly, then sure, knock yourself out, go for it. Really high earners, and I'm not talking about the typical doctor, I'm talking about a really high earner that stop caring as much about their investment return as they do about asset protection, can also find some benefit from a whole life insurance policy in some states. In about 31 of the 50 states, whole life insurance is basically protected against your creditors. That means in the incredibly unlikely event that you're sued above your insurance policy limits, whether it's a malpractice policy or whether it's an umbrella, you know, personal liability policy, then basically the strategy is to declare bankruptcy. And whatever's protected in your individual state, you get a keep through the bankruptcy proceeding. In most states, that includes retirement accounts. In some states, it includes a significant amount of your home equity. Not in my state. In Utah, it only protects about $40,000 of home equity. But in 31 states, it does protect whole life insurance cash value. And so if that was something that you valued highly for some reason, then that could be a reasonable reason to buy whole life insurance. But the truth of the matter is, most doctors don't need this product and they're going to end up with much lower returns than they thought they were going to get from it. And chances are very good that within a few years of buying it, they're going to regret it and be trying to figure out the best way to get out of it. It's interesting that whole life insurance is often sold to people on their children. It's crazy to buy insurance of any kind on your child. Number one, because the child doesn't have an income, there's nothing you're actually insuring against. It's not a financial catastrophe when your four year Old dies. It's a terribly sad event, don't get me wrong. But it's not a financial catastrophe. You're not depending on their income. So you insure people whose income you're depending on. That's the point of life insurance. The other problem is this gets sold to people for their children on the idea that, oh, if you buy this, you'll lock in their insurability. But typically you're not getting a policy that actually locks in any significant amount of insurability. If you bought a policy that's $100,000 by the time they get to be 30, that's going to be worth like $50,000 in today's money. And that's not enough insurance for a young adult with family dependent on them. It just, it's almost like a drop in the bucket. When you need insurance, you need a lot of it. And the way to get a lot of it in an inexpensive way is to buy term life insurance. So now you, probably some of you listening to this podcast are going, oh, crap, I own whole life insurance. Why did I buy that? And you're kicking yourself and you're upset and, you know, you look, you go home after listening to this podcast and you pull out your statements and you realize that your cash value is less than you paid into the thing for the last seven or eight or ten years. And you feel kind of dumb, you feel kind of duped. And I've been there, man, I've been there. I was seven years into my whole life policy when I looked at it and realized, shoot, I've got a 33% loss on this thing after seven years. And you got a few options. If it's a tiny policy like mine, just cash it out, take the money and put it somewhere else. Make sure you have adequate term life insurance in place before you do that, of course. But you really don't have to mess with it if it's just small policy. If it's a large policy and you've got a big loss on it, you got a different issue that is probably worth sharing that loss with Uncle Sam. And the way you do that is you exchange the cash value from your whole life insurance policy into a very low cost variable annuity, such as those available at Vanguard. And what that allows you to do is that allows you to preserve that loss. And then you leave the money in that variable annuity until it grows back to your basis to the amount you paid in premiums into that whole life insurance policy. And then you can cancel the variable annuity and in essence, what you got was tax free growth on that money for a number of years. And that can be pretty valuable. It's not nearly as good as a deduction that you could take in the year you had the loss, but that's just not the way you're allowed to take this sort of a loss anymore. And in fact, if you just cash out whole life insurance with a loss, that's not a deduction you can take at all. It's just money gone. So I hope that's helpful if you are considering buying whole life insurance or if you find yourself already owning a policy. Let's get to some reader questions here. I've got some really great ones here, all from all kinds of different subjects. So let's, let's go into them here. Here's the first one. I love your podcast. Listen to it regularly. Could you discuss how you incorporate giving to nonprofits, etc. Into your financial plan? Yeah. Giving is an important part of our lives. There are a lot of important financial parts of our lives. We want to do them all well. We want to earn money well, we want to save money well, we want to invest it well, we want to spend it well, and we want to give it well. And if you want to do any of those, it's going to take a little bit of time and effort. And giving money is surprisingly hard to do if you're interested in it doing as much good as you can. And so in our family, we give money away in two different categories. One's to nonprofits or charities and the seconds to people we care about. And the second one's a little bit easier. Lately, what we've been doing is we've been putting money into 529 accounts for our nieces and nephews as we are able to and as we have more than we need, we try to look at our life from a point of abundance and realize that we've got enough. And chances are, if we continue to earn as we do both in my practice and with the White coat investor, that we're going to have far more than enough. And so we figure, why not start giving some of it away now? We think it's good for us. It's good for us to not become attached to our money and to realize that in many ways it's not ours. You know, we're just the stewards of it. It belongs to family, it belongs to God, it belongs to society and our community. And so we're trying to use it to do as much good as possible. The other half of the money goes to charities. And that includes both our church as well as charities that we select when we sit down and have a family giving meeting once a year. And we literally let every family member choose a charity that we're going to give the money to. We support both local charities such as the local food bank and the local homeless clinic and the local homeless shelter and soup kitchen, those kinds of charities, kind of the traditional ones, as well as international organizations that we've supported over the years, things like Doctors Without Borders, for instance. And so we, we feel a real need to give both to charity and to non charities. When it comes to charities. However, there's a tax play here, right? As long as you're itemizing your deductions, you get to deduct money given to charity. And that really wasn't changed much with the current or with the recent change in our tax code. And so you kind of want to be a little bit careful how you do that. For example, if you're taking the standard deduction this year, it might make sense to hold off until January 1st of next year to give that money to charity. Is it really all that different whether they receive it on December 30 or January 1? No, the charity doesn't count. Care much, but Uncle Sam does. And when you can reduce your tax bill, not only does that allow you to pay less taxes, but in reality what it does is it allows you to give more to charity. And so you can do more good if you pay attention to the tax consequences of doing it. But how do we do it? Well, usually we just stick it on the credit card and then pay off the credit card. But you can also, if you want to save the charity the credit card fees, you can cut them a check and you know, they save the 2 or 3% they would have been paying to the credit card company. So it's really up to you exactly how you want to do the giving. You can even use a donor advised fund if you like. There's some additional expenses involved there. But if you want the deduction now and aren't quite sure what charity you want to give it to quite yet, and that's also a great option that you can use. All right, next question. This one comes from a self employed orthodontist who's structured as an independent contractor in a large group practice. So he's basically the sole employee of his own S Corp. That contracts with another company to provide orthodontic services. He says, I've got a company sep ira through Vanguard that I've been using for 10 years, I'd like to get more retirement money into a post tax Roth account without running afoul of the pro rata rules. And he asks, besides rolling all the SEP IRA money into a solo 401k first, is it not possible to just open a Solo Roth 401 and make contributions as well as keep and contribute to the SEP IRA in the same year? Well, the question here is, can you use Both the SEP IRA and a Solo 401K in the same year? That's probably a bad idea, particularly for the same business in general, you really only want one. And in this situation, especially with the goal to get more money into Roth accounts. But Almost for any doctor, the right answer is a solo or an individual 401k, not a SEP IRA. The truth of the matter is this doc has been doing it wrong for a number of years and so he needs to fix that mistake. And the way you fix that mistake is you open an individual 401k, you roll the SEP IRA into it. Now, you can't do that at Vanguard. Vanguard doesn't allow IRA rollovers into its individual 401k, but you can do it at E Trade or Fidelity. And then if you really want your individual 401k at Vanguard, you can then transfer it over there. They do allow that, but they don't allow IRA rollovers. But once you've done that, you can make your contributions into the individual 401k and you can max it out on a lower amount of income than you can a SEP ira. That's probably not an issue for an orthodontist. He can probably get the $55,000 max in there either way. But it does allow you to put 18,500, assuming you're under 50, into the Roth Individual 401k option, which you can't do in a SEP IRA. There's no such thing as a Roth SEP IRA. The other thing it allows you to do is to do a backdoor Roth IRA every year, which is basically making a contribution to a traditional ira. And because that's not deductible due to your high income and your other retirement plan, and because you make too much to contribute directly to a Roth ira, then you just take that money that you contributed to a traditional IRA and the next day move it to a Roth ira. It's the same thing as contributing to a Roth ira, but it's actually legal to do. Congress has recently clarified that there's no need to wait between the Steps. I mean, they put their rubber stamp on this thing and said it's okay for you guys to do backdoor Roth IRAs. So don't feel like you're doing something that's under the table or the IRS or Congress doesn't know you're doing. They know you're doing it. You report it to them every year on your tax forms and it's totally legal. All right, here's another series of questions I get. And this was a huge deal. The White Coat Investor conference we had, the Physician Wellness and Financial Literacy conference in Park City. People were really curious about this. But people know that I've hired my kids to be models, that all these great looking pictures on the website they're paid to take. And so they have lots of questions about that. They want to use their kids on their own website for their practice or their blog or whatever. And so I get lots of questions about it. So this one actually came in from another blogger. He, he said, I'm planning to hire my kid as a photographer and child model for my blog. I knew that you hired your kids. So I'm checking in to see if you have any tips. They're part time employees, right? Well, yes, that is correct. They are employees and they're certainly not working full time. So they're part time employees. From what I gathered, this is what I need to do. I need to fill out a W4 and an i9 and keep that on file. Yes, that's true. I mean, if you're going to hire an employee, you got to treat them like an employee. They got to have a W4, they got to have an I9, they got to. You got to keep a timesheet. Right? If the IRS comes knocking and goes, what are you doing? You got to be able to show them, hey, these are my employees. They're doing legitimate work. And here's the records, just like any other employee would have. And I think you, you got to be real careful when you're doing something like this to check all the boxes because it does look squirrely to a lot of people that you hired your 2 year old to be a model for your blog. But you know what? I got a timesheet. And the IRS does send you a form every year going, what are you doing? What does this employee do for you? They're three years old and all you got to do is fill out the form, put their date of birth on it, put their Social Security number, and write what they do for you. I put one word on there, model and I send it back to the IRS and they're fine with it. And then of course, at the end of the year, you got to file a W2 and a W3 and you, you know, you got to give the W2 to the kid and the kids got to file taxes. You know, it's just like anything else. And of course, the kid has to do real work for a reasonable rate of pay. You know, you can't pay your kids to do household chores. That just doesn't cut it. But can you pay them to be a model? Sure. The going rate for child models is about a hundred bucks an hour. If you look around on the Internet, that's what it, that's what you can pay them. And so you got to make sure that you've got some justification for the rate you're paying them. If you're paying them to, you know, help paint a rental property that you're turning for the next tenant, well, you got to pay them the going rate for a, you know, a painter. And so you can look that up and see what that's worth. And you pay them that amount now. So what's the real benefit of hiring your kids? Well, the real benefit is it's a tax deduction to your business. Your business doesn't have to pay taxes on that money. If the only owners of the business are you and your spouse, there's no other owners. And it's not a corporation or an LLC filing as a corporation, you don't have to pay Social Security or Medicare taxes on their earnings. There's no payroll taxes and up to 6,000 something a year. They don't have to pay any federal income taxes. So this money is not taxed by anybody. It's not taxed to your company, it's not taxed to you, it's not taxed to the kids. And the cool part is it's earned income. So you can take it and you can put it into a Roth IRA and it's never taxed again. So it's a great tax play. There is really no better way, no better investing account or retirement account you can use than this. As far as the tax play goes. In fact, if they hold onto it for 70 years, then leave it to their 5 year old heir, the heir could then stretch this Roth IRA out for another 70 years. And so this could really go for a long, long time. If your kids are can do some reasonable work for your business, I suggest you hire them and pay them. It's great on another angle too, besides just the tax Angle. You're teaching them about work, you're teaching them about investing. It's all a good thing. Okay, next question. This one says, thanks for all the work you do. You've really helped me aim my wife and me in the right direction for a financial future. My wife and I met in medical school. Couples matched together got married about a year ago. We're both currently interns in a low cost of living area without extravagant taste and live a happy and comfortable life. You know what's interesting? Nobody thinks they have extravagant tastes, so I assume these guys are right that they don't. But it's pretty interesting that I've never met a doc yet that thinks he has extravagant taste. As Residents, we earn $108,000 a year together, and the only debt we have is from the cost of med school. We got about $500,000 in loans. We're in repay. We have very low monthly payments. They'll be going up a little bit soon, but they're very low. Interest rates are 6%. We figure our effective rate under repay is around 3%. Maxed out our Roth IRAs for 2017, we'll easily be able to do the same for 2018, but we figure we got about $20,000 of extra money at the end of the year that we need to do something with. So this is the classic pay down debt or invest question. I get this, like every day, and everyone's got a little variation on it, but it's really all the same question, do we pay down our debt or do we invest? But their concern, and the reason why I put this one in the podcast, is that they are concerned that by putting the money toward their student loans, they will lose the repay interest subsidy. And instead of their effective rate under repay being 3%, it would be 6%. And they have a misunderstanding here that that is not. Because this is not the way it works. If you pay extra on it, that does not eliminate the subsidy you get from the government through repay. You still get the subsidy. So that subsidy is basically 50% of the interest you're not paying on the loan. So if you had a $200,000 loan and your interest rate were 6%, that's $12,000 a year of interest. And let's say you're making, you know, $200 a month payments. Well, if you have $1,000 of interest accumulated in a month and you're paying $200 a month, that leaves you $800 of interest left. And the government is subsidizing half of that. So they're paying $400 or forgiving $400 of your interest and $400 of it is being tacked on to the loan as the loan grows. So if you pay extra money toward the loan every month, that doesn't reduce the amount of subsidy that comes from the government. And so that's not a fear. Now, you may not want to pay down that interest because you got a better investment available to you. Maybe a 401k with a match from the employer, maybe a Roth 401k, maybe a Roth IRA, or maybe you are going for public service loan forgiveness. Obviously it doesn't make sense to pay down a debt that somebody else is going to forgive. So there's lots of good reasons why you wouldn't want to pay extra on your loans during residency. But if you did want to pay extra on your loans, this is not a reason why you shouldn't do it. You're not going to lose your repay subsidy, not at least in any meaningful way. Okay, next question. This one comes in by email. I've read a few of your posts on the Student Doctor Network and talked with colleagues about cold calling for jobs. I'm in emergency medicine, PGY3 in a four year program. I'm starting to look around and I'm wondering what you would want to hear someone say if you got a call like this during your shift from someone looking for a job. And so he's asking, what do you say when you cold call for a job? Well, I mean, this is the way you get the best jobs in emergency medicine. If you want a job in Portland or Boise or Flagstaff or Denver or Salt Lake City or any of these places that are, you know, they don't have to advertise their jobs. This is the way you get it. You got to call them up and find out who's in charge of hiring. You got to give them a CV and you got to let them know you're interested because they don't advertise. They don't have to put these big ads in the back of the journals. And it's probably that way for lots of great jobs in good partnerships in desirable cities. What you do when you're calling an ER up and just trying to get a job there is you got to make sure you get in touch with the right person. So the first question you should be asking is what's the email address of the person in charge of hiring? Because that's who you want to send your CV to. That's who you want to send Your letter of interest to the person that you can get on the phone, assuming they're not too busy and you can actually get a doc on the phone, is probably not the person who's in charge of hiring. And so that's what you want to do, is get that information so you know who you should be talking to. Everything else is purely secondary after that. And I think your goal at this point is just to not come across as a total jerk or a, or an idiot. You know, I mean, you can ask them about the job, about what it's like to work there, about what the volume is like and that kind of stuff, but truthfully, the information you need is who do I need to contact? And so I think your goal is just to, you know, come across as being pleasant and interested and desirable and, but mostly to get that information so you know who to contact without calling the front desk of the ER to find that doctor. Obviously your first question shouldn't be how much does this job pay? That's probably not the impression you want to give as your first impression. Okay, here's another question. How does the spouse contribution to a solo 401k work? I'm strictly a 1099 contractor. I'll make around $470,000 this year. How much would I have to pay? And they put pay in quotation marks. My wife assuming through a W2 for her to be able to contribute the max of $55,000 as well, would it just be 18,500 and she would put 100% of this income into the employee contribution and then the company matched the rest. If this is the case, it seems almost too good to be true. Well, it is a little bit too good to be true. Here's the deal. If you know this is a little bit like hiring your kids. If you go to hire your spouse, it has to be a real job. It's not some flaky thing that doctors do on the side. They say, I'm going to send some of my income to my spouse. Even though they're not doing anything, you can't do that. They have to actually do some work and you have to pay them the going rate for that work. But here's the other thing. A lot of people don't realize there's some additional expense that you're not going to get back if you hire your non working spouse. For example, if you hire them, you're going to have to pay Social Security tax on them. The first 127 or $130,000 a year. Or so that somebody makes, you have to pay 12.4% towards Social Security. This doc who's making $470,000 has already maxed that out. So any money that is shunted from his earnings to a spouse's earnings, you have to pay the tax again, and that tax doesn't come back. It's not like there's some great benefit there, right? Especially for a spouse married to a high earner. I mean, chances are very good that 50% of the high earners benefit from Social Security is going to be more than their own benefit. And so you're paying taxes with literally no benefit for it. And so you've got to weigh the ability to have an extra retirement account against that tax cost, because the tax cost is very real. And so if your goal is to kind of thread that needle to figure out where it's worth it to get a bunch of money into an extra retirement account, you know, that is probably Most attractive around 20 or $25,000 being paid to the spouse. That's not too hard to find something for your spouse to do that you can justify paying them that much to do. And what that allows you to do is basically allows them to max out the employee contribution with a little bit of match there and use that as an extra retirement account. If you actually want to get your spouse to $55,000, you're going to have to pay them closer to $200,000, and you're going to pay that entire Social Security tax, which is not insignificant. And the truth is that even if you have a pretty good arbitrage rate between the tax rate at which you're contributing the money into the 401k and a lower rate that you're taking it out, it may not make up the difference for all those extra Social Security taxes that you're paying. So you've really got to think carefully. It's got to be legitimate work. You've got to weigh, you know, the extra payroll taxes that you're paying in order to get more money into a retirement account. Okay, a couple more questions here. We're starting to run a little bit long, so we'll cut it off. This one says, thanks for such a detailed explanation on the backdoor Roth ira. I use a tax consultant to file my taxes. How can I convince him the backdoor Roth IRA is known to Congress and can be done? I don't know. It's not my job in life to teach accountants about the tax code. I would send them perhaps one of the articles from Forbes or the Wall Street Journal that discusses the backdoor Roth ira. And if they're not willing to do the research to realize that this is totally legit, I'd go find a new tax accountant. Okay, I'm currently in training and wanting to moonlight for a locum firm that provides medical malpractice insurance of 1 million per incident and 3 million in the aggregate. Would you say I still need to get my own? No, you don't need to go get your own insurance if they're going to provide it for you. Malpractice insurance is expensive. If they if they're going to buy it for you, that's good enough. Just make sure that it's either an occurrence policy or if it's a claims made policy that they're buying the tail. You don't want to be stuck buying a $50,000 tail for a job that only paid you $20,000 to start with.

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