WCI #78: Cash Balance Plans

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 White Coat Investor podcast 78 Cash Balance Plans.

As a white coat you have valuable knowledge. Various companies want that knowledge and they're willing to pay you for it. That's why we've put together a list of recommendations for companies that pay you to take surveys. If you're looking for a profitable side gig for not too much effort, getting paid for surveys could be the perfect solution for you. You can make extra money, start a Solo 401 and use your medical knowledge to impact new products. One of the WCI columnists makes an extra $30,000 a year just doing these surveys. Sign up today and use a fraction of your downtime to make extra cash. Go to whitecoatinvestor.com mdsurveys you can do this and the White Code investor can help.

Our quote of the day today comes from Morgan Housel who said good investing is about earning pretty good returns that you can stick with for a long period of time. That's when compounding runs wild. If you've got questions for us for the podcast, you can record them@speakpipe.com whitecoatinvestor that link is also found on the podcast page on the main website, but it'd be awesome to get some other fresh voices on the podcast. If you can leave us a message that would be great and we'll pipe it into the podcast. Our first question today comes from Steve on Twitter. He says, I have a three month old son. What is 100% legal and unlikely to trigger and audit ways for him to earn income so I can contribute to a Roth IRA to start his retirement savings. Let's say with and without access to an llc. Well, here's the deal. Earned income must be earned. That means you have to do some sort of work to do it. There's very little work that a three month old can do. Now as your kids get to be 8, 10, 12, 15, you can hire them to work in your business. Maybe if you are renting apartments, you can hire them to turn the apartment, to clean it, to paint it, that sort of thing. If you've got some other business, you know, in your practice, maybe you can hire them to do some clerical work. But here's the deal. You got to have a business. If you're just a W2 employee, this isn't going to work. You have to actually have some legitimate needs and some legitimate work that is done, and you have to pay them a legitimate price to do it. And so when you get down to something like a three month old, the only thing I can think of is modeling. That's what I pay my kids to do, to be models. That's why their pictures are all over the White Coat Investor website. And I actually keep a time card. They fill out, you know, all the paperwork. They get W2s and W3s and fill out everything that has to be filled out, including immigration kind of stuff that shows that they are legitimately in this country. You know, you got to treat them like any other employee. And then of course, you have to pay them a reasonable amount. Now, luckily, child models command a very good hourly salary. If you look at surveys and you look at stuff on the Internet, you see that child models get paid up to a hundred dollars an hour. So that's what I pay them. I pay them $100 an hour. But you're not going to be able to pay your 3 month old to clean your office. You know, it's just not going to work. So you got to be a little bit careful with that. And I wouldn't go crazy with it either. You know, you start trying to pay your kid $30,000 a year for modeling, that might not fly with the IRS. Next question comes from Dr. Mulic, also on Twitter, who says, I do a podcast for high school and college students. I have a huge stack of their questions on my desk, and over 95% of them said they wish they were taught more about money and taxes. What are three important tips for young people age 13 to 22 to know about money and taxes? You know, when I hear young people, I was thinking like, you know, my 9 year old, my 3 year old, you know, people that are 13 to 22, they got to know it all. I mean, by the time you're 22, you've been an adult for four or five years. You got to know this finance stuff if you're going to win at adulting, right? But I think the things to do is to teach people the basics early on. And the best way to do that is by example. If they see you managing money well and not having financial stress, they're likely to make similar decisions. If they see you not spending all your money, they're likely to make similar decisions. If they hear you talking about taxes and investments and savings, they're likely to become financially literate and So I think the best thing you can do is model good behavior for them. Other things that you probably ought to focus on. One, help them to understand where money comes from. And I'm not talking about, you know, our fractional banking system where you put your money into a bank and the bank lends out even more money based on your deposit. I'm talking about the fact that if you want to get paid, you need to put in some work. Teach them the connection between work and money, alright? And that might be by paying them commission as some sort of allowance, might be by getting them a job, encouraging them to work and those sorts of things. So I think that's the number one lesson. Number two lesson that I think young people should get is about debt. It's just hard to understand these sums of money. I mean, think about a medical student that's borrowing $400,000 for their education and they've never made more than $20,000 in their entire life. That $400,000 is like monopoly money. They don't understand just how much work and sacrifice it's going to take to pay off $400,000 after tax money. It's going to take years, years of their life that really is going to exact a price from them. And so I think it's important to help them understand that debt is not mandatory, it is not normal, and it is not something that has to be done in all but extreme circumstances. And so I think giving them a realistic understanding of how debt works is helpful. But you can teach kids about all kinds of things and they learn best by doing. My kids all have retirement accounts and bank accounts. They've got a bank account at the local credit union. They've got a 529 account for their college, they've got UTMA account, which is money that I'm putting together for their twenties. They've also got Roth IRAs for any money they earn. If they go shovel for the neighbor, they shovel off their porch, they do some babysitting, that money goes into a Roth ira. I give them a daddy match. So they get the same amount of money from me to spend. But anything that's a legitimate earned income goes into the Roth ira. And then when those statements come every month or every quarter, I hand them to them and they look at them and they realize that they're not making much money in the credit union savings account and that their 529s are doing pretty well. And so they get to learn about asset allocation, they get to learn about savings, they get to learn about investments, they get to learn about mutual funds. And I'm still talking about my 9 and 11 year old here. I'm not talking even about my teenager. And by the time they walk out of the house, they're going to know more about money than most adults do. And so I think that's the way you teach young people about money and taxes. It all starts at home. You know, you can do it as well with other family members or other friends. You know, I do some volunteer work with a youth group and you know, I talk to them about money and investing and jobs and those kinds of things as well. And started some investment accounts for nieces and nephews, 529accounts for them and try to use those to teach them about investments and about match and about money and about those sorts of things. Lots of things you can do there. All right, speaking of loans, make sure you've checked out our student loan refinancing resources. We have the best links on the Internet, the best deals on the Internet for refinancing student loans. They can be found on the main website. If you go to the tabs at the top under recommending, the first link is student loan refinancing. So go check that out if you need to refinance student loans and you're looking for a good deal from a highly regarded company. Also if you need advice, if you're in a complex situation with your student loans, for instance, you have really large student loans, you're thinking about going to public service loan forgiveness. You're married to another decent earner, you're not sure which income driven repayment plan you should be in, or how you should file your taxes, or whether maybe the 20 year or 25 year forgiveness programs available under pay or repay might actually work for you. You're the type of person that ought to get advice about your student loans. And I've got three or four people listed there on the student loan advice page under that same tab, that recommendations tab that can help you with your student loans. So check that out if you're dealing with student loans. Alright, next question. This one comes in by email. I love your website, great work. I found it two years ago but was already frugal and had some financial savvy. That's great. I was an army pathologist, but a civilian now I'm nine years out of residency with no debt and with savings. So that's great. I have an excellent credit score. Don't care. Hope you don't either. And I could put down 20% on a home if I chose. Okay, so maybe the credit score does matter for his doc since he's going to buy a home. My question is, what do you think would be the best home loan in that situation? A conventional home loan, a physician loan, or a VA loan? I have a disability rating that absolves me of the finance charge. Thanks for all your guidance. We've messed up many things financially, but are now moving in a better direction. Okay, well, here's the deal with mortgages, right? The best deal is almost always going to be a conventional. That's because it has a stricter guidelines. You have to put 20% down to get a conventional loan if you don't want to pay private mortgage insurance. And so because you're willing to meet all those requirements, you usually get the best deal on the loan. So a conventional mortgage loan is almost always better than a physician mortgage loan. Now, these physician mortgage loans are for docs who don't want to put 20% down because they have a better use for their money, like maxing out retirement accounts or for, you know, paying off student loans, that sort of thing, without having to pay PMI. So you get to put down 5% or 10%. You don't pay PMI and you get a halfway decent loan. It's not as good as what you can get with a conventional loan, though. If you're willing to put 20% down, there are lots of people that are competing for your loan, and you can get the very best rates and terms on that loan. And so that's almost always best. A VA loan is generally not that good of a loan. You'd think it'd be this great service for our veterans, but it's got a pretty high fee associated with it. The terms aren't always that good. Kind of like a physician loan. You don't have to put 20% down on it, though in this doc's case, because he was disabled in the military, he gets out of that finance charge. So it's possible the VA loan is a better loan for him than it is for most people. But it's easy to compare. Just compare it to the conventional loan. If the rate's dramatically better, the terms are dramatically better, then, sure, go with the VA loan. But otherwise, in this situation, with a 20% down payment, I'd probably just do a conventional mortgage loan. Next question pertains to 529 accounts. We have an infant. We're currently contributing to a 529 account in Rhode Island. The account has achieved 2% growth over the last year it's been open and which, given the larger growth in other investing spaces, seems poor. I realize the short term is not the focus point for this type of investment, but the account does allow for asset exchange to other funds and I'm wondering if there's any guidance or experience on the best way to reallocate this type of investment. The best course is let it ride. That's great. Less work for me, but if we're losing out on gains, it could be realized with a simple change in allocation that I would prefer not to be looking forward to any advice. Thanks for all the great content. Don't use my name alright? Well, I usually don't use names on people that email me questions, but this is an interesting question, right? This doc is like I want higher returns. Okay? I can't promise you higher returns. I can give you a more aggressive or less aggressive asset allocation than what you're in and if the market does well, the more aggressive one will give you higher returns. If the market does poorly, the less aggressive one will give you higher returns than what you'll get in what you're in. Now, without a crystal ball, I just can't answer that question. But we can do a few things we can talk about. First of all, keep in mind that Rhode island has two 529 plans. This is not unusual. A lot of states have two 529 plans and when they do, there's one that's basically got no load funds in it and low expenses. This is the one that do it yourselfers use and there's one that's sold by commissioned salesmen masquerading as financial advisors. And Rhode island is the same way. They have two 529s. I think the one that is is bought rather than sold. The one the do it yourself investors use is called College Bound Saver. The one that is sold by financial advisors or rather salesmen masquerading as advisors is College bound 529. I couldn't tell from what this doc posted in the first email which one he was using, but it turns out he was in the right one anyway, thanks to a follow up email. A couple other things to keep in mind. Number one, expenses matter. So know what the expenses are in your investment accounts. Understand what your expense ratios are on those mutual funds and and understand what you're actually invested in. Each mutual fund invests in different types of asset classes. In this stock's case he was basically in a target retirement or a life cycle type investment which is A reasonable thing to do. However, it sounds like he wants to take on a little bit more risk and be a little bit more aggressive. If he's frustrated that he didn't get the market returns in the last year, I suggested a little change in the allocation. Rather than being in this target retirement type mutual fund of funds, I suggested you might want to put a third into a total stock market fund that he has there, a third into a small mid cap fund and a third into an international fund. That would then be 100% stock portfolio in that 529. Now obviously there's risk there. The market turns down, he's going to lose money. But in a 529, I feel like you can take a lot more risk than you can with your retirement money, even though the time horizon is shorter. The reason why is because the consequences are so much less. There are other ways to pay for college. They can take out loans, they can go to a less expensive school, they can work during the summers. And while they're in school you can cash flow some of it from your current earnings. There's just so many other ways to pay for college. I don't feel like you got to be super careful with it because if you take a big loss right as they enter college, it's just not that big a deal. Cash flow the first year or two, give the market a couple of years to recover and then use the money to pay for their third and fourth year or keep cash flowing if it's a long bear market and use that money for their sibling. There's just so many options and so much flexibility with college. I feel like you can take a little bit more risk there. And it sounds like this doc wants to anyway. The other thing to keep in mind is just because you live in a state doesn't mean you have to use their 529. Look at the 529 carefully, see what kind of tax benefits it offers you. In Rhode island, you only get a deduction for the first thousand dollars you put into a 529 per kid. So if that's the case and you want to save $10,000 a year, why not put $1,000 into the Rhode island plan, max out your tax benefit there and put the other 9,000 into a better plan like the one in Utah or Nevada or California or New York. You know those ones that are known for rock bottom expenses and nice Vanguard or DFA mutual funds. So that's something to consider as well, especially if you're in a higher cost State plan. Get whatever your state's going to give you as a tax deduction and go elsewhere with the other money. All right, next question. Can you talk about cash balance plans on the podcast? What is a cash balance plan? A cash balance plan is a defined benefit plan. Remember, there's two basic types of retirement plans. There are defined contribution plans, like your typical 401k, your Roth IRA, that sort of stuff is considered a defined contribution plan because you put a certain amount of money, a certain contribution into it and that's the part that's fixed. And however the investments perform, that's what you get out of it. With the defined benefit plan, this is like a classic pension that your father had or your grandfather had when he worked in the mill. And basically all the investment risk is on the company. Yes, you have to put in money in. It's taken out of your paycheck, but they promise you a certain amount after 20 or 30 years working there. And so all the risk is on the employer. What a cash balance plan is, is a type of defined benefit plan, but in reality it's a defined contribution plan masquerading as a defined benefit plan. It's another IRA masquerading as a pension. That's what it is. So you got to follow all the pension rules and those determine how much money you can put into it. And that depends on how many employees you've got in the company, how many partners you have, how much money they're putting in, how old you are. All those kinds of things dictate exactly how much money can be put into a defined benefit cash balance plan. But if you are a very high earner, you know, you're a ophthalmologist making $600,000 or a plastic surgeon making $800,000, and especially if you're in the last half of your career, 50 plus, you can really put a lot of money into these things, like maybe $200,000 a year. And that is all tax deferred, just like a 401k contribution and you don't have to pay taxes on it. Now it goes into that tax protected and asset protected account and can be pulled out later in retirement when you have a lower marginal tax rate and spent at that point point. It's a great way to catch up on retirement savings. But because it has to masquerade as a pension, there's some rules with it. For example, you know the amount you can put into it is heavily regulated by lots of complicated rules. That's why it's not really A do it yourself project, you're going to have to hire somebody to do it for you. But other rules are if there's a shortfall, the employer has to make it. And in a typical Dr. Cash balance plan, you're not only the beneficiary of the plan, but you're the owner of the business. And so you have to make it up when there's a shortfall. And so that might mean in a down market year, you actually have to contribute more into the plan than your typical annual amount. So you want to make sure you have the income flexibility to be able to do that even in an economic downturn. So you don't want this plan to be committing you to make huge amounts of contributions, although there's some flexibility there. And you can close the plan and there's some things you can do if you really get in a fix there. But that's the general rule. Now that's not necessarily a bad thing because it forces you to buy low, right? The market's down, you got to put more money into the plan. That's a good thing. Just like rebalancing, it's something that helps you in the long run. But be aware that that's an issue. What happens if the market is doing particularly well? Typically these things only credit you 4 or 5 or 6% a year. And so if a market does really well, the extra earnings in the plan actually go into a side fund within the plan. And so that money is available for the first part of a downturn. You know, you start losing money. The first thing you do before you have to contribute extra dollars into the account is you take it out of the side fund. Now this is all kind of a masquerade because you own the side fund, you own the, the regular fund, and you're the guy who is responsible for making the up the shortfalls. And so it's all kind of a game played within the pension system. But that's the bottom line, that's how it works. And so what most stocks do is they combine it with a 401k profit sharing plan. You put $55,000 into the 401k, maybe you can put another 30, 50, $200,000 into the cash balance plan. And that allows you to, you know, really defer a lot of money. The cash balance plans do cost more than a 401k. There's additional expenses associated with associated with them. Might cost twice as much. For instance, you have to pay an actuary every year to run some calculations on it and do Some paperwork for the irs. You can even get a solo defined benefit plan, a personal defined benefit plan. I know Schwab offers that. I think some other places do as well. I don't think Vanguard does. But those are the basic options for a defined benefit plan. So if you save a ton of money into a taxable account and you'd rather get some tax protection and some asset protection for some or all of that, then I think it's worth looking into a cash balance plan. For a typical doc making $200,000, $300,000 and maxing out Roth IRAs and a Solo 401 or the 401 at their employer and maybe investing a little bit of money in a taxable account, I don't think it necessarily makes sense to go looking for a cash balance plan. All right, next question. I thought that if you were to convert retirement account money to a Roth that you had to convert the whole account. Is it possible to convert variable sums each year as you wish? Yes, you only have to convert as much as you want. You can spend 10 years converting one IRA to a Roth IRA if you want. And a lot of people do that in those years between retirement or when they cut back and when they start taking Social Security to move money into a Roth IRA so you don't have to pay required minimum distributions on it and to give them some tax diversification in retirement, you certainly do not have to convert the whole account. Next question. I'm a child psychiatrist, one year out of fellowship with $350,000 in student loans and I've been planning on applying for public service loan forgiveness when I qualify. I'm five and a half years in. My husband is another DOC with slightly less loans refinanced at 2.5% that will paid off in about five years. I am deeply, deeply unhappy in my nonprofit job. I've looked endlessly at other nonprofit jobs and I can't find anything better. I've even looked into nonprofit non clinical opportunities, but they pay significantly less than I make now around $200,000. I've been toying with the idea of going for profit, at least temporarily, to see if private practice is a better fit for me. I don't want to keep the loans pending at such a high interest rate, but I am afraid to refinance if I am unhappy in the private sector as well. What would you do? Wait it out in the non profit, try for profit and potentially lose out on some public service loan forgiveness years, Go for profit and never look back. I'm so Sorry you're in this situation. It sucks to have a job you don't like and feel like you're stuck there with the handcuffs on because you really need the public service loan forgiveness. But you only make $200,000 a year and you owe $350,000 in student loans. That's a lot of money. And you have the possibility of getting that all forgiven in just four and a half more years of working. There's. It reminds me of the job I had when I came out of residency. I would see up to six patients an hour. I did little of what I was trained to do. I worked the equivalent of 1.5 full time equivalents for $120,000 per year, nights, weekends, holidays and evenings. My employer dictated I live in a state I didn't want to live in. My employer sent me for up to five months at a time to a country where people were trying to kill me, didn't let me off a half mile by half mile compound and forced me to do exercise dumb training and wear a camouflage uniform when I came home. My second child didn't know who I was. Deeply unhappy. Described how I and most of my colleagues felt about that job. A great percentage of the time by the end of my four years, my student loans were forgiven. So when I look at $350,000 as a child psychiatrist, I think it may just be worth sucking it up and staying in a job you don't like for another four years. Would I get out as soon as I had that public service loan forgiveness? I probably would. And I'd go try a private sector job. I'd go try something else and see if I can find something else that's going to make me happy. You do have the benefit of having a husband that's a physician, I think an anesthesiologist who makes pretty good money and is going to wipe out his student loans. And certainly you ought to be looking at all your money together. You know, it's our money. Once you get married, it's loans, it's our income. And maybe it's not that big a deal given that other income to pay off that $350,000 in student loans. But I think in this sort of a situation I'd try to stick with it and stick with the plan and try to get those loans paid off. It's just a lot of money. Of course, keep in mind, you could also check with some other options for, you know, public service loan forgiveness eligible jobs, military jobs, VA jobs, those kind of contract positions are usually also eligible as long as you're directly employed by them. I wouldn't do something I was unhappy doing for 20 years, but I might do it for four, especially if they were basically giving me the equivalent of six years of pay. I mean, think about it. If you're making $200,000 a year, you know, for four years, and they're going to forgive $350,000 in loans because of it, that's like a pretty significant boost to your pay. It's a pretty good raise. So, you know, it's a difficult situation you're in. I empathize with you a great deal, but I think in, in my case, I'd really be considering sticking it out, especially since there's a decent chance that you're not going to like it any better in the private sector.

As a white coat, you have valuable knowledge. Various companies want that knowledge and they're willing to pay you for it. That's why we put together a list of recommendations for companies that pay you to take surveys. If you're looking for a profitable side gig for not too much effort, getting paid for surveys could be the perfect solution for you. You can make extra money. Start a Solo 401 and use your medical knowledge to impact new products. One of the WCI columnists makes an extra $30,000 a year just doing these surveys. Sign up today and use a fraction of your downtime to make extra cash. Go to whitecoatinvestor.com mdsurveys. You can do this and the White Coat Investor can help.

Head up, shoulders back. You've got this. We can help. We'll see you next time on the White Coat Investor podcast. My dad, your host, Dr. Dahl, is a practicing emergency physician, blogger, author and podcaster. He is not a licensed accountant, attorney, or financial advisor. So this podcast is for your entertainment and information only and should not be considered official personalized financial advice.