Transcription – WCI – 315

INTRODUCTION: 

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.

Dr. Jim Dahle:
This is White Coat Investor podcast number 315.

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SECURE ACT 2.0 and 529s QUESTION:

All right, let's get right into your questions today. Our first one comes from Bob.

Brian:
Hi, my name is Brian from the East Coast. My question pertains to the new Secure 2.0 changes to 529 plans. Specifically I understand that now $30,000 of unused education expenses can be rolled into the beneficiaries Roth IRA. I also understand that the account needs to be open for 15 years, and another premise here is that my state allows $10,000 per year to be deducted from income tax. My question is, can I open a 529 on my own name with myself as the beneficiary funded up to $35,000 in a way that maximizes the tax deduction, and then 15 years later, roll that into a Roth IRA? And a follow up question would be whether there's any meaningful benefit here, whether this is worth my time at all. Thank you.

Dr. Jim Dahle:
All right. Your name might be Brian, but we're going to call you Bob today. Actually, I'm not sure why that happened. Megan and I are trying to figure out how we got the wrong name assigned to that one. But Brian, great question. It's a question I've been getting ever since the Secure Act 2.0 came out, and it's exciting to hear about this new way to take advantage of 529s and Roth IRAs. But the truth is, we don't have any more details today about this and how it's going to work and how the IRS is going to implement it and how Roth IRA and 529 providers are going to implement it than we had back in December. Nothing's changed yet.

And so, my recommendation is that you don't do anything about this yet. Just considered another option for an overfunded 529. If you put too much in there for your kids, this is another way you can get some money out of it without having to pay any penalties or having to pay any taxes on it. I would not make a 15 year scheme based on this by getting a bunch of money in your own 529 and then trying to roll into your Roth IRA. Essentially, if this works out and when more details are available, I'll do a blog post, probably talk about on the podcast too, about how to do this. But there's a lot of years that this has to work out just right for this to be a good plan for you and a little tiny tweak in the rules could torpedo your whole plan. So, I would not do this.

What we do know about this is that these contributions are going to take the place of your regular contributions, but presumably you're still going to have to have some earned income to justify those contributions. So, this is not an extra $35,000 you can put in a Roth IRA. It's a different $35,000 that you can put in a Roth IRA like $6,500 at a time or whatever your contribution limit is for that year. It's like five or six or seven years of contributions that you can take from the 529 and make your Roth IRA contribution. We don't know that this is going to work for high earners though. Maybe it won't be allowed and you'll still have to do it via the backdoor Roth IRA. So, there's a lot we just don't know about this. I wouldn't recommend you do it.

While there's the potential to get tax-free growth for an extra 15 years on $35,000, whether that's really worth it when there's potential for this to not work for you, I wouldn't advise anybody to do it yet, but it wouldn't surprise me if by this fall we know more about this and we can start recommending this as a strategy. It's not going to make a huge difference. This isn't going to be the difference between a comfortable retirement and eating Alpo or anything, but it might make a little bit of a difference at the margins.

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USING 529S IN FOREGIN COUNTRIES

The next question is a great one. Also about 529s from Sarah. Let's take a listen.

Sara:
I'm a primary care physician in my 30s, and my partner is from a European country. We may decide to move to that country at some point in the nearest future, and we have a young child. Do you have any advice about whether we should save for our child's education in a 529 or in some other sort of investment account instead? We don't know what country our child will choose to go to college in and are nervous about the restrictions on use of 529s funds overseas, but it otherwise seems like the clear best way to save for college. Thank you so much.

Dr. Jim Dahle:
Okay, the devil is in the details here. Good question. Can a 529 be used to study in an international school? Yes, it can, but it has to be on the list. So, there's a list out there of which schools qualify and which ones don't. If you have no idea what country you're going to be in, maybe you just want to save in a taxable account for college. If you have a pretty good idea where you're going and even better, if you know what schools may be going, you should look at it and see if your school is on the list.

If it's on the list, go ahead and use a 529. If not, just invest in UTMA or your own taxable accounts to take care of that. But we will include the link to this list in the show notes. It's basically on studentaid.gov is where it's at, but it includes all kinds of things like American University of the Caribbean, McGill University up in Canada, Medical University of Dublin, University of Lancaster, University of Queensland. There are lots of schools that are on the list, but it's not that long of a list. It only looks like there's about 30 schools on it, so there's plenty of international schools that aren't going to qualify. So, the devil is in the details. You got to do a little more research or give me a little more information to give you good advice on that. Great question though.

SECURE ACT 2.0 AND 529 TO ROTH ROLLOVER QUESTION

All right, let's take another one from Casey. I think this one is about that 529 to Roth IRA rollover we talked about earlier.

Casey:
Hi Jim, this is Casey with a question about Secure Act 2.0 new 529 to Roth rollover capability. We currently have 529s for our four young children invested through Utah's plan. Each kid having their own sub-account in which I can transfer between them as needed. I've done that once or twice. My question is, if I were to open two new 529 sub-accounts in my and my wife's names, could I A) invest dollars that we otherwise would have put into, say, our taxable brokerage account, and then B) use those dollars if needed for our children's college. But then C) if our kids don't need that money for college, can we then D) roll over that money into our own Roth IRAs at a later date since after all those two 529 accounts were in our names.

If this is doable, it seems it would add some nice flexibility allowing us to eventually either use those dollars for our kids’ college or for our own Roth IRAs, but without having to lock in that choice right now before we really know how much our kids' college will actually cost. I do realize the limitations of the eventual rollover, that is the rollovers can't exceed the annual max Roth IRA limits, and that the annual earned income must equal or exceed the rollover amount. I got that part. Thank you for the help, Jim.

Dr. Jim Dahle:
All right. That's very similar to our first question with the caveat of an additional use of changing the beneficiary to your kids. This isn't that valuable, right? It's only $35,000, it's only 15 years. It's only the difference between investing tax efficiently in a taxable account and investing in a tax-free environment. Is that worth something? Yes, that's worth some thousands of dollars over the course of that time period.

But it's not like this is life changing money. You don't have to do this now before we know how this is really going to work out. This is like a brand new thing. And when brand new things come out, you may not want to be the earliest adopter of them. I probably would not do this. If you want to do it, you can. I think it's probably going to work out in a way that's acceptable to you. If nothing else, you can change the beneficiary to your kids and then their grandkids like you would normally with a 529. But this isn't like the super scheme to get a mega backdoor Roth IRA. There's usually much better places to be spending your limited time and brain power that will help your finances more than doing this.

Honestly, I just give it a few more months, maybe one more year, and see how this is shaking out, what kind of guidance we're getting from providers, from the IRS on how these rollovers are going to work. It’s like the new Roth SEP IRAs. This year we're supposed to have Roth SEP IRAs. Well, guess what? If you go to Vanguard, you're not going to find a Roth SEP IRA. You're not going to find it through Fidelity or Schwab. It takes time to implement all this stuff. And so, just because the law was passed allowing for this thing it doesn't mean it's a good idea yet to start doing it. But if you want to be the earliest adopter, let us know how it goes.

QUOTE OF THE DAY

Our quote of the day today comes from Anne Sweeney, who, if you don't know who she is, she's a former co-chair of Disney Media. And she said “Define success on your own terms, achieve it by your own rules, and build a life you're proud to live.” You only get one of these. And it's true that if you are just itching for the day you can retire, that's probably a sign that you're not living your life in the best way that you could. So, try to find ways to be happy throughout your career, throughout your retirement. Find happiness in all that you do, not just in some distant date when you can stop work. If your job is really that bad, you're probably in a toxic job and need to change jobs or in a career that's not quite right for you. And maybe you need to change careers. But see if you can get it figured out because it's really sad to spend 20 or 30 or 40 years of your life doing something that you don't actually love doing.

529S AND FAFSA

All right, here's another question. This one is also about 529s as well as how they interact with the FAFSA.

Tim:
Hi Jim, this is Tim in Salt Lake City. I heard that recently FAFSA rules have changed such that grandparental 529 plans, that's 529s owned by grandparents, no longer impact their financial aid eligibility. Parental owned 529s do at a rate of about 5%. So, does it make sense for the primary 529s for kids to be owned by their grandparents? I can imagine a setup in which parents might just transfer money to the grandparents so the grandparents can fund the 529 and therefore there would be less financial aid impact on down the road. What do you think? Thanks.

Dr. Jim Dahle:
Tim, yeah, you're absolutely right about that. I think if you have gotten as many questions on the Speak Pipe as Tim has, and you live in Salt Lake City, maybe I should buy you dinner or something. We may have to arrange this, Tim, but I do appreciate the question. It's a great observation. Yes, this is a strategy that would work. Grandparent 529s don't count on the FAFSA parental and the students 529 does count on the FAFSA.

Yeah, it's a great strategy. There's a lot of great ways that multiple generations can work together to build wealth. The problem is there has to be a great deal of trust between the generations for this to work. Because remember, if the grandparent owns the 529, it's the grandparent's money. They can take it all out and blow it on Teslas and cocaine. So, be aware of that. If you put it all in the name and they have a creditor and your state doesn't protect 529s from creditors, you could lose all that college money into the grandparents' creditors. So, there's some risks to doing this. Honestly, this is probably unnecessary for most White Coat Investors out there.

If you're not aware of this yet, let me just tell you the honest truth about the FAFSA, about paying for college, about your kids. If you're listening to this podcast, you're probably a physician or a dentist or a CRNA or a pharmacist or an attorney, and you're probably married to somebody else that does something similar. Guess what? Your kids aren't getting any need-based aid for college. They almost surely aren't. If you think you might be an exception, maybe you have two or three kids going to college at once and they're all going to really expensive schools in a year that your income is a little lower than usual, maybe you're an exception. But for the most part, if you go fill out the FAFSA, you will see that the Expected Family Contribution, I think they just changed the name of what that is this year. But that's what they used to call it, the Expected Family Contribution, EFC, is greater than the cost of attendance at any school you're considering for your kids.

It was pretty eye-opening for me to fill out my first FAFSA last year for my daughter who went to her first year of college. I didn't know there was a maximum on the expected family contribution, but it turns out there is a maximum and it's far more than any college in this country costs. And so, the truth is, your kids aren't getting need-based aid. You don't need to do FAFSA planning. Plan to pay for college is what you ought to be planning for. And between their scholarships and their work and your savings and your cash flow, that's how college is going to be paid for. It's not going to be paid for with need-based loans, much less Pell Grants. Your kids aren't going to get them. I'm sorry. But the people who that strategy would work for are people that aren't listening to this podcast.

20s FUNDS FOR YOUR KIDS QUESTION

All right, the next question is from Cameron and this sounds like a little more of a personal question, but does have something to do with 529s.

Cameron:
Hey, Dr. Dahle. This is Cameron from the Midwest. First of all, I want to say thank you for all you do. I just started listening to this podcast earlier this year and the book has been extremely informative about finances and really helped shape a lot of my short term and long-term goals as I'm in residency now, but looking forward to attending. So I just want to say thank you for that. My question relates to that 20s fund you were talking about in an earlier podcast for your children. Kind of your view how having money in your 20s would be very, very valuable because you have the time and flexibility to go and do things. I have a toddler at home and I was just kind of curious how you set up that kind of fund for your children and if there's any changes you made along the way and what you would do different or what would you do the same. I guess the other question I had was more recently in the blog, there was kind of updated inheritance blog post. You mentioned maybe giving a third of the inheritance money to your kids in their 40s and 50s and 60s. Is that kind of outside of that 20s fund or is there something that you did to kind of change the distribution of inheritance? Thank you again. Bye.

Dr. Jim Dahle:
All right. So, this question is just about our estate plan basically. Here's the deal. Katie and I feel like money in your 20s is probably the most useful time to get an inheritance. We think back to our lives and think about when money was most useful. And the 20s have a lot of expenses. You think about all the stuff you're buying around your 20s. College, a car, maybe you get married, maybe you got to pay for a honeymoon or maybe you buy your first house. Maybe you go on a mission or something. Maybe you go do Peace Corps or maybe you do whatever, study abroad.

You have all these expenses. But you know what you don't have in your 20s? You don't have any sort of an income, you don't have any sort of assets, you don't have any money. And so, you have all these expenses and no money and it's really a financially stressful time of life. And so, if ever there were a decade of life when an inheritance is most useful, it's your 20s. We were fortunate enough that we're well to do enough that we were able to save money for each of our kids to get in their 20s. And this is actually kind of divided into three categories. One is a Roth IRA and we do the daddy match there. They have earned income from shoveling driveways, mowing lawns, babysitting, summer job, whatever. We give them the daddy match. And essentially, they get to spend my money in an equivalent amount to what they earned and their money goes into a Roth IRA.

And so, they've all got Roth IRAs. By the time they get out of the house, they've got multiple tens of thousands of dollars in IRA money. So, that's part of it. Part of it is the 529. Their college savings. We've been saving for college for them. They're not going to get any money from any sort of need based aid. So, it's up to them. Their scholarships and their work and this 529 savings that we have put together for them to help pay for college and any graduate or professional school they may choose to do. But there's also this third pot of money and the account we put it in is a UTMA account called in some states AUGMA account, Uniform Transfer to Minors account or Uniform Gifts to Minors account. And what that is, it's a taxable account in the kid's name. While they're a minor, you only can have a certain amount of income in there before it starts getting taxed at your rate. Once you get beyond that limit, then it gets taxed at your rate. But the first $1,100 or $1,200 of income is basically tax free. The next $1,100 gets taxed at 10% and then after that it gets taxed at your rate. So, if you invest tax efficiently, you could probably put up to about $100,000 in there before any of us is getting taxed at your tax rate.

What you have to keep in mind about a UTMA account though is when they turn in most states 21, it's their money. They can do whatever they want with it. It's not 529 money where you own the account. So, they can do whatever they want. But that's part of their inheritance is they get this chunk of money in a UTMA. They can use it to start a business. They can use it to buy a car, they can use it for a house down payment. They can use it for a summer abroad, whatever. And then we're watching to see how they use it, to make sure they use money wisely. But that's basically what their inheritance is for their 20s. It’s these 20s funds, it's these three accounts to help them get through the 20s, get started in life, get that hand up that I really didn't get coming out of a more modest upbringing.

As far as our estate plan goes though, we're talking about the rest of the inheritance. And a good chunk of our wealth is going to go to charity. It's not going to go to our kids. We have plans for basically a foundation that our kids will have some say in where it goes, but the money's not going to them. It's going to charity. However, it seems really rude to put it all in there and then ask them to manage it. They are going to get an inheritance. It will be a substantial inheritance. It'll be enough money that they can do whatever they want, but not so much that they can't do nothing. They can do anything they want, but not nothing. Kind of Warren Buffett's philosophy about that.

And the way we ensure that is they don't get any of it. Even if we're hit by a bus tomorrow, they don't get any of it until they're 40. And then they get a third of it at 40, a third at 50, a third at 60. And that should ensure that they don't live lives of poverty but also ensures that they got to do something on their own in their 20s and 30s. Yes, they get a 20s fund. That's not enough money to live for 20 years, I assure you. And so, they're going to have to have careers and they're going to have to have jobs and start businesses and do their thing for 20 years and develop financial habits, develop some amount of financial success before they get the first third of their inheritance at 40 years old. And we hope by then that they'll have developed some maturity and some financial skills and be able to take that money in the proper perspective.

And what will they use it for at that point? Well, I imagine they're going to use some to pay for their own kids' college educations, to pay off some mortgages, to start businesses, to boost their nest eggs, that sort of a thing. And then of course, when they get more at 50 and 60, that will further boost their own retirement savings and presumably they will be wealthy enough to do the same sort of thing for their kids and pass that on creating some generational wealth. But that's our estate plan. There's nothing right or wrong about that. Yours has to be personal to you. I know plenty of people that are leaving nothing to their kids. I know plenty of people that are leaving everything to their kids. We're splitting it between charity and between our kids and we're trying not to ruin them with our money.

PUTTING KIDS ON PAYROLL TO FUND ROTH IRAs QUESTION 

All right, next question comes from Angelo. Let's take a look at that.

Angelo:
Hi Dr. Dahle, this is Angelo from the Midwest. I'm a physician and my wife is a psychologist with a private practice. We have 10 and 12 year olds and have just recently put them on payroll for various business tasks they have completed for her business. The plan is to use their payroll earnings to fund their individual Roth IRAs for the next six to eight years or as long as they're employed. I have set up minor Roth IRA using Fidelity as a custodian of their accounts. I'm looking for a low cost index fund that covers a broad market for their investments with the “set it and forget it” mindset.

I know what you're going to say. I know you're a big fan of the Vanguard Total Market Index Fund or VTSAX, however, how about Fidelity Total Market Index Fund or FSKAX? Are there any significant differences between the two? Or since Roth IRA is a non-taxable account, should I be considering another index fund that cares less about being tax efficient with better overall returns? Have you hired your own kids? And which fund would you choose for Roth IRA for your kids and why? Thanks for all you do. I appreciate your time.

Dr. Jim Dahle:
Okay, great question. As I mentioned before, our kids do all have Roth IRAs. Some of that is money they earned working for somebody besides their parents, but a significant chunk of it is money they earned as models for the White Coat Investor over the years. You may have noticed if you've been a long-term blog reader, there's lots of pictures of my kids. And you know what? Child models get paid pretty well.

And so, money they earn from working for White Coat Investor has gone into their Roth IRAs over the years and continues to compound there today. The investment we selected for that is the furthest date out target retirement fund. I don't know what it is right now, 2060, 2065, 2070, something like that. And it's basically 90% stock, 10% bonds. It's got US stocks, it's got international stocks. That's what's in it. It's pretty darn low cost. Set it and forget it. It rebalances itself, and it makes sense for them to have that in there when they take it and start using it on their own. It's a great default investing strategy.

And that's available at Vanguard. If you didn't want to go to Vanguard, that's fine. There's nothing wrong with investing at Fidelity. Fidelity also has some of these life cycle or target retirement funds. You have to be aware of a couple of things. They have one set that's kind of actively managed, kind of sold through advisors, and then they have another set that's index funds. I think it's called the Freedom Index fund or something like that. But they do have that. If you're looking for that sort of an option, you can have essentially a target retirement fund at Fidelity that's also low cost.

But FSKAX, which is just the total stock market index fund at Fidelity, is perfectly fine to use. It's very low cost. It essentially produces exactly the same returns as VTSAX or VTI. I've got my VTSAX shirt on today for those of you watching on YouTube. But that's the Vanguard version of the total stock market index fund. Also a great choice. Yes, it's tax efficient and yes, this is a Roth IRA, but it's also a great choice. 25% of our retirement portfolio is in a total stock market index fund. We obviously think it's a great investment and so, it's perfectly fine to use. I would not feel bad at all about using that. As far as hiring your kids goes, I don't think this sort of thing gets audited a lot, but if it did, you need to be legit. You really need to hire them and treat them like any other hire you have. There needs to be a contract, there needs to be a time cards. You got to fill out an I-9, they got to fill out a W-4. You got to issue W-2s and W-3s every year. My kids are legitimate employees.

The other thing to keep in mind is the business should be owned only by their parents and it should not be a corporation. If it's a partnership between the parents or sole proprietorship by one of the parents, that's fine. The benefit of that is while they're under 18, no payroll taxes are paid. And because they don't make enough, they don't pay any income taxes on it. And you can still take that money and put it in a Roth IRA. The money is essentially never taxed. It's a business deduction for the business, never taxed. It's great. Huge tax break, great opportunity, but you need to be legit. You got to pay them a fair rate. They have to do actual work and you have to document it all properly. But yeah, you can absolutely do that.

All right. Some of you may be on your way home from work. Some of you might be on your way into work. Some of you might be working out or walking, going around the neighborhood trying to stay in shape with these crazy lives that we live. Your life is hard and I get it because I'm there with you. Last week I had four shifts in the ED and they were hard. We had lots of patience, lots of volume. Yesterday I spent three hours on a partnership meeting with my group trying to deal with threats to our business and changes in practice and trying to keep hospital administrators happy and all these sorts of things that you deal with being a physician. It's a hard job. And if no one said thanks for putting up with it all in order to help heal the sick and the injured, let me be the first today.

HOW MUCH TO SPEND ON AN ENGAGEMENT RING QUESTION 

All right, we got a question here that I don't know if there's a right answer to. I'm kind of curious to hear what your answer is though. Maybe we ought to do a poll on this, but let's take a listen.

Speaker:
Hi, Dr. Dahle. My girlfriend and I are talking about getting engaged and that typically means you need to buy a diamond. As you can imagine, diamonds are not a financially sound decision. Horrible investment. I am not a doctor. I have an engineering background. I've currently make around $215,000 depending on the year, plus or minus a little bit. My girlfriend is finishing up her last year in dermatology residency. She has about $90,000 in student loans. I have about $430,000 saved up. We're talking about buying this diamond and we're trying to figure out how much money is a reasonable amount of money to spend on a diamond. We initially had some thoughts at about $15,000 or so, but looking for your thoughts on how much money you would spend on this at this stage in your financial journey.

Dr. Jim Dahle:
All right, great question. Maybe we ought to put this poll out there on social media. I think we should and just see what people say you should spend on a diamond. But it's very circumstantial, the circumstances you're in. I got married the summer between college and medical school. I was broke. I pretty much spent every dime I had on a diamond. It was $2,500. Far less than you're talking about spending. Now, granted we've been married for quite a while now, not quite a quarter of a century, but getting close to that. And $2,500 today doesn't go as far as it perhaps did a long time ago.

But the bottom line is, it was a significant sacrifice to buy that. And I think that's what mattered was that it represented a commitment and a sacrifice and it was meaningful. Actually, I let Katie pick it out. And so, we did that together. It was not a big surprise that I popped it to her. I think where I asked her the question was a bit of a surprise. It was at Center Ice in the middle of a college hockey game. But I will tell that story sometime at WCICON. At any rate, the answer to your question is that you're in a very different situation than I was in back then. I was flat broke. You're worth almost half a million dollars. You're making over $200,000 a year. Yes, you say you're not a doctor, but you have a doctor-like income plus you're marrying a dermatologist and she's very soon going to have a pretty awesome income. Between the two of you, you're going to be making half a million dollars or more a year.

So you're not borrowing for this thing. And you can afford to have a pretty nice diamond. I think $15,000 is certainly well within what you can afford. And I wouldn't feel bad one bit if that's how much you want to spend, that you're wasting money or something like that. I think it's perfectly fine for you to spend that much. If you want to spend a little bit more even, I wouldn't say that's crazy. On the other hand, if you told me you only want to spend $5,000 or $10,000, I think that's fine as well. You probably shouldn't buy her a $2,500 ring though. That would probably look kind of cheap in your situation. So, I'll give you that advice right now. Here's the deal with diamonds these days. You can get a truly mined diamond. And that's going to cost you a little bit more than what is actually probably more sparkly and prettier that was grown in a lab. The lab grown ones are cheaper for some crazy reason, but probably actually look better.

So, you guys got to talk about what matters to you when it comes to that. Some people are traditionalists and would be offended by being given a lab grown diamond. For them it'd be like being given a cubic zirconia. While other people are like, “No, let's spend this money on a great trip to Europe and I want a very inexpensive ring. I don't even want a diamond.” So, everybody's a little bit different in that regard. Keep in mind there are some bad things going on in the world in some of the places where diamonds are mined. So maybe there's something to think about there as far as your own ethical feelings about supporting that industry. But this whole idea that you have to spend two months’ salary or something on a diamond, that's just coming from the diamond industry. You don't have to listen to that sort of thing.

So, do what you want, figure out what's meaningful to each of you. If you decide to go on the less expensive side, remember that in five years or 10 years or whatever, you can give another diamond ring as a gift. You can upgrade it if you want. You're not stuck with that forever. But at the same time this is something that gets shown off to your friends and you want it to be something that you can also be proud of. Given your financial status, I would probably buy a pretty nice ring. And congratulations on this upcoming engagement. I hope you guys have a wonderful engagement, marriage and life together.

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SIGN OFF

Don't forget it's mortgage season. Check out the White Coat Investor recommended mortgage list at whitecoatinvestor.com/mortgage.

Thanks for those of you leaving us five star reviews. This helps us to spread the word about the podcast and help your peers and colleagues and trainees get this valuable information. We have a recent one in from SarahAMK1. She titled it Physician, Mom, first generation high earner. “I recently graduated residency with a high burden of student loan debt and I find the Milestones to Millionaire episodes so inspiring. Beyond that, the White Coat Investor is my most trusted source for financial information. (Don’t tell my dad). Thank you.” Five stars.

Thank you so much for that great review. I won't tell your dad, but it's wonderful to be of service. We will try to always be worthy of your trust.

For the rest of you, be sure to check out our new Milestones to Millionaire podcasts. We are putting a lot more information on those. So, if you've been thinking all this stuff on the regular podcast is over your head, check out the Milestones podcast. I'm trying to keep it more basic there, covering one topic at a time on that podcast. So, check that out.

You've got this, this stuff is not that hard. You can figure out finance. You got through medical school, you got through dental school, you got through law school, or you're an engineer or whatever. You are smart enough to understand this stuff.

It does take a little bit of time. It does take a little bit of effort. It will require discipline even after you become financially literate. But if you can get the combination of financial literacy and financial discipline, it's like having a superpower. It's so rare in today's world. And after a few years of applying those two things to your high income, you'll look around and wonder why everybody else isn't doing this.

I hope you're enjoying the podcast. Let us know what you enjoy about it, what you don't like about it. We will modify it, we will improve it. We will make it useful to you. We'll make it something that you're proud to be a part of this White Coat Investor community. We'll see you next time on the White Coat Investor podcast.

DISCLAIMER

The hosts of the White Coat Investor podcast are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.

Transcription – MtoM – 118

INTRODUCTION:

This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 118 – Cardiologist becomes a millionaire.

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 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 at whitecoatinvestor.com/insurance and feel the peace of mind that comes with knowing you have the optimal policy in place. You can do this and the White Coat Investor can help.

All right, we got two great things today on the podcast. The first is an interview with a cardiologist who's recently become a millionaire. And then the second is I'm going to be talking a little bit about one of my favorite investing accounts, the triple tax free stealth IRA. And if you don't know what that is, stay tuned after the interview and I'll give you a clue.

GUEST INTERVIEW: 

Our guest today on the milestone, the Millionaire Podcast is Mike. Mike, welcome to the podcast.

Mike:
Thank you, sir. I appreciate it.

Dr. Jim Dahle:
Now, you recently became a millionaire. Congratulations on that.

Mike:
Thank you.

Dr. Jim Dahle:
But tell us a little bit about yourself, what you do for a living, how far you're out of your training.

Mike:
Sure. I'm a cardiologist. I am at this point about seven years out of training and I was a military provider for 14 years. My training path was pretty circuitous as you can imagine. It sort of was broken. I was in the navy, so I did my internship and then I did a general medical officer tour as a flight surgeon for a few years. I came back to training for residency and then went right into fellowship. And then I finished my time in the military as a cardiologist. And so, I was a little late finishing fellowship training. And that's how I came to be six years out at 43 as opposed to my early mid-30s.

I'm married. I have four children all under 10 years old, including two one-year-old twins. My wife is also a physician. She's a psychiatrist actually. And we live in a multi-generational home. My wife's mother lives with us and she actually helps care for the children as well. And so, that's kind of me in a nutshell.

Dr. Jim Dahle:
And what part of the country are you in?

Mike:
The DC area.

Dr. Jim Dahle:
Okay. So, a fairly expensive cost of living area.

Mike:
But better than where I was in San Diego.

Dr. Jim Dahle:
Yeah. And you are no longer in the military, correct?

Mike:
That's right. Yeah, I got out in 2021.

Dr. Jim Dahle:
All right. There were a few other years that probably contributed to your wealth building and presumably given your military commitment, you probably didn't have that much in financial student loans anyway. But over the last six or seven years since you got done with your training, what's your household income been?

Mike:
While we were still in the military, our total gross income, because remember in military you have allowances, which are untaxed pay, but are usually a significant portion of your pay. So, it’s probably approaching somewhere in the threes, mid threes, but really only in the last couple years have we been over five, between the two of us.

Dr. Jim Dahle:
Okay. Is she a doc as well?

Mike:
She's a psychiatrist, yes.

Dr. Jim Dahle:
Okay. All right. A bunch of money coming in as an inheritance or a trust fund for one of you, or is this pretty much everything you've built has been from your own earnings?

Mike:
It's been from our own earnings. And it's funny you mentioned we didn't have much debt coming out of the military, which was not true at all, actually. I joined the military through HPSP after I finished my first year, so I definitely had a significant amount of debt. And so did my wife. We ended up taking a little bit of Stafford beyond our military scholarship for a lot of reasons but it was necessary.

And so, we ended up leaving training with about $220,000 in debt, which we paid off in 2019, which was a big deal for us. That was a big milestone as well as you can imagine. But since that time, the wealth building has been, as you can imagine, a lot easier.

Dr. Jim Dahle:
It's amazing how much easier it is to save money when you don't have payments, huh?

Mike:
Yeah. Much easier.

Dr. Jim Dahle:
All right. So, tell us how you did this. Becoming a millionaire is no small feat. There's a lot of people in America that think they can't do it at all, but yet you managed to do it about six years out despite starting out a couple hundred thousand dollars in a hole. So, really it's a swing of $1.2 million in net worth. How did that happen? What'd you guys do to make that happen?

Mike:
There wasn't any specific magic thing that happened. And that's where, like I said, with the FIRE movement, it was really just steady investment, regular savings, certainly pursuing the match and maxing out retirement accounts and things like that. And the rest was just doing it consistently over time and then returns in the market. And then eliminating our debt. That was the other big thing as well. And just over time you watch the balance go up and eventually it just reached a point where it's over a million now. So that's how we did it. It was no magic, no special thing here or there. Just slow and steady and consistent up to this point.

Dr. Jim Dahle:
What percentage of your income do you think has gone toward building wealth since you got out of your fellowship?

Mike:
That's certainly varied over time. It probably started out somewhere between 30%, 35%. But now just with our income being what it is, it's closer to 25%.

Dr. Jim Dahle:
Of course, you're also paying a lot more in tax, which makes it a little harder.

Mike:
True. Yeah, very true. Yes.

Dr. Jim Dahle:
Yeah. How'd that feel to come out of the military and start making an attending cardiologist's salary and see your tax bill be more than you used to make as a fellow?

Mike:
It's interesting. Because of the tax benefits that you get in the military, you can choose your state of residency essentially, which means most people in the military unofficially live in Texas or Florida or someplace that doesn't tax personal income. And then between that and your allowances, which again are untaxed, our income really didn't change a ton. It certainly went up, but I'd be lying if I said it went up by six figures. It really didn't go up that much.

I actually changed jobs in the last 12 months, so now our take home is closer to what we made when we got out in the military. Still a little bit higher, but it's roughly the same. Part of that is too, my wife works part-time. So, when she goes back to full-time, that'll change of course. But right now we make a little bit more than we did when we were in the military from our take home.

Dr. Jim Dahle:
Now we were talking before we started recording a little bit about FIRE and how you guys have kind of taken a little bit of a different approach, maybe a little more patient approach to building wealth. Tell us why you made that decision.

Mike:
Yeah. It's one of those things where my wife and I both feel as physicians, the training and the time that's been put into our careers, I don't want to say that we owe anything to anybody, but we have a sense of obligation for service with that. And the concept or the idea about retiring early, even if that was something we were able to do, it's not something we're pursuing, I guess. And once that's off the table, the timeline becomes a lot longer as you can imagine. And so, if you intend to work to 60 or 65 or even in your 70s because you like what you do, all of a sudden you don't need to have a huge nest egg when you retire to support you to whatever age you're going to live to.

That takes a lot of pressure off. You don't feel the need to put away 40%, 50%, 60% of your income when really if you're looking at 25, 30, 35 years of retirement, you probably only need to put away 20% or 25%. And again, that's with the understanding that we make much more than the vast majority of people in this country and in the world for that matter. But it helps to feel, if I'm not planning to retire until I'm 60, I don't need to have several million dollars in a nest egg. I'm going to end up having that anyways. But I don't need $10 million to live comfortably for 25, 30 years in retirement.

Dr. Jim Dahle:
Yeah. It's interesting, I made that point in a blog post in, I don't know, must have been the end of 2015 or so, that basically life gets a lot easier if you're actually going to work a full career as far as finances go. And it turned out that was the blog post that led to the birth of the Physician on FIRE blog because he disagreed so much with that post that it inspired him to start blogging. But it's true. It is a big sacrifice to save enough to put it together enough, get it all sorted out to be financially independent five or 10 or even 15 years out of your training.

Mike:
True.

Dr. Jim Dahle:
And you can have a lot more flexibility during your career if you're planning on having a full career for sure. Now some people have their career cut short for whatever reason, health problems or disability or other issues. But for most docs it is an option to work until you're 60, 65, 70. And that sure makes the finances easier for sure.

Mike:
Yeah. Particularly if you're in a job that you enjoy and isn't extremely burning you out to a place where you need to get away from it or cut back or anything like that. And my wife and I, fortunately we work for organizations and work in situations which are extremely beneficial and the work life balances in our opinion, ideal. That's really what it comes down to.

I think if we were working like dogs and we're having trouble spending time at work and then with family, appropriate amounts of time for those two things, it would be a lot harder to say, “Yeah, I can stick around and do this until I'm in my 60s or whatever.” But I don't know. We found magic jobs I guess, but we both are very happy with what we're doing and where we're at. And hopefully if it remains the case, we'd stay here for the foreseeable future.

Dr. Jim Dahle:
Yeah. And plans change of course too. I have a partner who just turned in his six months’ notice, he's going to retire in his early 50s. And that was never his plan. His plan was to work well and do his 60s and he kind of put himself on a very sustainable plan, one that he could have longevity in his career. He was working day shifts and not too many of them. And he's a pretty frugal person anyway. He just got to the point where he was like “I'm kind of done. I think I want to do the retired thing.” And he ran the numbers and was willing to maybe be a little more frugal in his retirement. And now he's heading out of the career and not heading to another job. But it's interesting how things change. We think we know what we want 10 years from now and we really don't.

Mike:
True.

Dr. Jim Dahle:
And I think when we get there, we find out things are different and we adapt as we always have and it works out fine. All right. Well, what advice do you have for somebody that is like you were six, seven years ago? They're like, “I'd like to build some wealth, but I want some balance in my life. I'm not actually planning to punch out at 50.” What advice do you have for that person as they embark on this process?

Mike:
Yeah, sure. It's like you said, you don't know what you're going to want in five years, 10 years, sometimes even in a year. I got out of the military, I had one job that I was happy with and then another one that was better for me and better for my family presented itself within a year. And I left the other job, which again was a good job for what ultimately turned out to be the perfect job for me.

And so, I guess my advice would be just expect that your plans may not be seen through to fruition as they are when you initially make them. And that's okay. It's really mostly about as the FIRE movement always teaches and just general investing teaches is be persistent, be consistent, make sure you're putting something away. For us the priority is ensuring that we're getting our full match from our employers. We max out our Roth IRA conversion. But every time we crunch the numbers and look at what we're probably going to need conservatively and retirement, whatever we don't need beyond that becomes money that we can spend today for things that we want today. Whether it's travel or a certain kind of vehicle disclosure. I have a Tesla.

Dr. Jim Dahle:
No, it's funny you mentioned that because I just saw a survey today that we put out on social media. This is fun about social media because I actually don't get on social media basically at all. It’s run by totally other people here at the company. But we put this survey out and it turned out that more doctors are driving Mercedes than Teslas. I couldn’t believe it. I thought that the Tesla was the doc car of choice, but apparently dock are still driving more Mercedes than Teslas.

Mike:
All luxury vehicles though, right? At the end of the day.

Dr. Jim Dahle:
Well, no. Actually the top ones were Toyotas and Hondas, but I think Tesla and Mercedes were fifth or six.

Mike:
Gotcha. But it's slow and steady, consistent, persistent, and then patience really. Ultimately I feel like most physicians that are working full-time, if they are diligent with their finances will reach at least millionaire status, if not multimillionaire status by the time they retire certainly. We all have that capacity and potential, but I feel like we potentially get in our own way in the long term.

Dr. Jim Dahle:
Yeah, for sure. Avoiding the big errors goes a long ways and just a reasonable investing plan, a reasonable savings rate, and it works out. You multiply the numbers out, it works out. It's a very reliable plan to becoming a multimillionaire as a retiree saving 20% of a physician income invested in some boring index funds, and it's amazing what happens with it over a couple of decades.

Mike:
I agree.

Dr. Jim Dahle:
Awesome. Well, what's next for you in your financial goals?

Mike:
Oh, boy. I don't know. We're in pretty good shape with regards to estate planning and saving for the kids' education and emergency savings. And so, just continuing to build general wealth and just enjoying the money that we have that's available for spending for travel and the things that we want and the things that we want to enjoy. And yeah, just really focusing more on how we can give back and what ways we can serve our community and serve our friends and family.

I'd love to tell you some big long-term goal, but once you get to this point, I'm sure you have experienced this. At least financially there's less to worry about, I guess it's what it comes down to.

Dr. Jim Dahle:
You start becoming more philosophical.

Mike:
Exactly.

Dr. Jim Dahle:
What trip do you have planned with the kids this summer?

Mike:
We are going back to my hometown for a family reunion. We rented a house there and then we're going to spend time with family. The big thing next year is we're probably going to try and do a Disney cruise though.

Dr. Jim Dahle:
Cool. Well, I'm sure the kids will love that, and hopefully you can tolerate it as well.

Mike:
Yeah. One way or the other.

Dr. Jim Dahle:
All right, Mike. Well, thank you so much for coming on the Milestones to Millionaire podcast, sharing your success and helping us use it to inspire others to do the same.

Mike:
Thanks for having me. I appreciate it.

Dr. Jim Dahle:
All right. I hope you enjoyed that interview as much as I did. It's interesting to talk to people and to see all the different pathways that doctors have taken to acquiring wealth, to being financially successful. I meet the people that crush their student loans in six months or are financially independent in five years. I meet the people who get a late start and are salvaging a retirement in the last few years of their career. And I meet people that kind of put it on autopilot and just let it happen over the course of two or three decades. There's lots of different roads to Dublin. You just got to pick the one that works for you and stick with it because it takes some time to achieve wealth. No matter how you choose to do it, you have to stick with the plan for a while.

FINANCE 101: HSAs

Now, it may be the case that your plan should include the triple tax free stealth IRA. And what is that? That is a health savings account. First thing you got to do when it comes to health insurance, health savings accounts, is figure out what the right health insurance is for you and your family. It might be because you have a lot of costs each year, a lot of healthcare expenses that it doesn't make sense for you to have a high deductible plan, in which case you should get a lower deductible plan, a more standard plan if you will, and not one of those high deductible health plans. But if you're like a lot of docs, you can take care of some things yourself, you're in reasonably good health, maybe none of your family members have significant health problems, it can make sense for you to have a high deductible health plan.

And if your only health plan is a high deductible health plan, you are eligible to contribute to an HSA, a health savings account. Whether your employer provides one for you or not, you are eligible to contribute to one. You can contribute to the one your employer provides for you, or you can contribute to your own that you open at a place like Fidelity or Lively or one of those sorts of companies. The benefit of going through your employer, having this run through payroll is that you don't end up having to pay payroll taxes on the money that goes into the HSA, but sometimes your employer's plan stinks. It requires you to keep a bunch in cash, it requires you to pay a bunch of fees, the investments in it aren't so good, et cetera. If that's the case, you can transfer it periodically into your own HSA that you've opened at some other institution. And that's what I would recommend you do if you got a crummy plan.

Now, you don't need to transfer it every month, maybe you do it once a year, once every six months, and then you can invest it from there. Yes, these accounts can be invested. They don't have to just sit there in cash. You can leave it in cash if you want, but most of the cash accounts are basically like checking accounts and you're not making much money there. So, you probably want to have it someplace where you can invest it so the money is growing. Now if you're spending from it each year and you've only got $5,000 in there, well, you may want that in cash. But if you've been putting money in there and you're not spending from it, now you got $50,000 in there, you probably want to be investing that money and typically into low cost broadly diversified index funds.

And so, that's what we do with our HSA. I think we've been using an HSA since I got out of the military in 2010. And so, we've made a contribution to it every year. The maximum family contribution this year in 2023, that contribution, I believe is $7,750. If you're single, it's basically about half of that. Bear in mind a family plan can be you and a kid, you and a spouse, you and a spouse and three kids, whatever. As long as there's one other person in the family, you can make the family contribution for the HSA. And so, this works out sometimes when one spouse has a job that provides a low deductible health plan and the other spouse has a job with a high deductible health plan and if they put one kid on that high deductible health plan, now they can use a family contribution for the HSA.

Now these are great accounts because they're triple tax free. Just like when you contribute to your 401(k), you get an upfront tax deduction. All that money that goes in there is money. I don't pay taxes on this year. So, when I max out my HSA every January, I don't pay tax on $7,750 of income. Then as the money grows in those investments, it grows in a tax protected way, just like in your 529 or your Roth IRA or in an ABLE account, if you have a disabled kid, it all works the same way. It grows tax protected. When it spits out dividends, when you buy and sell stuff in there, you don't pay capital gains taxes, you don't pay taxes on dividends or interest or anything, it grows tax protected.

When the money comes out so long as you spend it on an approved healthcare cost, which is just about anything in healthcare related, including Medicare premiums, I might add. That money comes out tax free. So it's triple tax free. It’s tax free going in, grows tax protected, it comes out tax free. That's better than your 529. That is better than your Roth IRA, that's better than your 401(k). It's your only triple tax free account.

Now, let's say you got a huge one. This big old HSA, it's $300,000. You think you're never going to spend that on healthcare and you decide you want to take some of that money out in retirement. Well, you can do that. After age 65 there's no penalty associated with taking money out of your HSA no matter what you spend it on, but you do have to pay taxes on it at your ordinary income tax rates. At its worst, the HSA is essentially functioning as another 401(k), another IRA, thus my name for it, the stealth IRA. So, these are great. You shouldn't get a health plan you don't want just to get an HSA, but if you have a high deductible health plan, of course, fund the HSA, invest the money, take advantage of that tax protected growth.

You do want to spend this during your life though. This is not a great inheritance. People that inherit an HSA, basically it's all taxable income to them in the year that it's inherited. So, if you're not going to spend it yourself and you have any charitable inclination at all, this is the first account to leave to charity and you can do that with an HSA. I hope that's helpful.

Getting quality disability and life insurance should be the first financial chore for a doctor to complete. Most docs don't have the best policy for their gender, specialty, state or health status. And plenty of doctors get disabled at some point during their career, thankfully most for not too many years, but some for the rest of their career. These policies have to be bought through agents. That's the way they have to be bought. Somebody's going to earn a commission on it. So, you might as well get a lot of great information and a lot of great education in exchange for that commission you're paying. We've put together a list of vetted agents. These are people who have sold literally hundreds if not thousands of policies to White Coat Investors over the years. They are experienced, they know what they're doing, they know the ins and outs of all these policies and they can help you get the right one for you. Where do you find them? You go to whitecoatinvestor.com/insurance. They will answer your questions. They'll review old policies you have, they'll explain what kind of policy would be a best fit for you.

Yes, they're going to make a commission, so don't feel bad asking them questions. Take advantage of the fact that they probably spend an hour or two educating those who are buying these policies every time they sell a policy. But do get it in place. It is an important type of insurance.

All right, I think that's the end of our episode today. I hope you're enjoying these new longer Milestone to Millionaire podcasts. Send us feedback as always and let us know how you're liking what we're doing.

But in the meantime, pass these along to others. Keep your head up, your shoulders back, you've got this. We'll see you next time on the White Coat Investor or the Milestone to Millionaire podcast.

DISCLAIMER:
The hosts of the White Coat Investor podcast are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.