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 356.

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Welcome back to the podcast. By the time you hear this, I think we're at the end of February, but as I'm recording it, just before Christmas, we just passed 20 million all time podcast downloads. Thank you to all of you for being loyal listeners and of course the new ones too.

You should know that we have launched the new CFE 2024 course. That is the online course that contains the content from WCICON last month. And we're having a sale because of it. All of our courses are $100 off until March 8th. Get the latest in physician wellness and financial literacy in the new Continuing Financial Education online course. You can watch my two keynotes on the unsung benefits of index investing and advanced estate planning, and Paula Pant on how to reengage and remotivate when burned out. Plus presentations from 30 plus other experts from WCICON24.

Whether you're interested in boosting your personal wellness, fine tuning your financial plan, investigating tax reduction strategy, living a more intentional life or planning for retirement, this CME eligible course has something for everyone. Go to www.wcicourses.com and take $100 off until March 8th. So, if you're hearing this on the day it drops, that gives you just over a week.

HOW TO MAXIMIZE THE MEGA BACKDOOR ROTH CONTRIBUTIONS

All right, we're doing a lot of your questions today. So, let's get into them. The first one comes in by email. “I'm a tech worker and through my employer have access to a 401(k) plan, which allows me to perform a mega backdoor Roth. Unfortunately, the after tax contributions are payroll deductions and my base pay compensation is such that it takes many, many pay cycles to contribute my target amount while I live off RSU investings.

It is likely in the not too distant future, I will leave this employer by choice or layoff and my next employer may not offer a 401(k) with the same features. Is there any downside to scaling back my tax withholding with my employer to leave more after tax funds for contribution towards my mega backdoor Roth? This would allow me to reach my target sooner and I can make estimated tax payments to ensure I reach the tax withholding safe harbor.

It's not all gloom and doom as I could land with another employer with a great 401(k) where I could utilize the $66,000 limit. It's more this year, obviously, twice in a single tax year while observing the $22,000 voluntary contribution limit. Hopefully this question isn't too specific. I enjoy the podcast. I really need to give my doc a copy of your book as she has a whole life insurance plan.”

Okay. Yeah, that's fine. The other thing you could do, you could talk to HR and ask “Can I fund this thing with just a check?” That's what I do with my mega backdoor Roth each year. I fund it in January. I write a check for the $66,000 or $69,000 or whatever and put it into the plan that way in one big lump sum. So you may not need to mess with the tax withholdings to do this. You might be able to just walk in there and fund it.

But talk to HR, see if that's an option. If not, this would work fine. The IRS does not care exactly how those taxes are paid. If you want to do quarterly estimated payments, that's perfectly fine. They don't have a problem with that. I guess everybody could withhold nothing from their employer. As long as they're making quarterly estimated payments that should be okay. The employers, of course, are required to withhold a certain amount and that's their rule to follow, not your rule to follow. But yeah, this would work fine. It's fine.

Keep in mind, when you go to a new company, you're often not able to use the 401(k) for the first year, though. It's generally a better idea to max out the one from the employer you're leaving, if at all possible, when you're making changes in midyear.

HOW TO KNOW IF YOU ARE A SUPERSAVER

The next question, also from the email box, says, “I like your explanation of doing traditional contributions to 401(k) or 403(b) and Roth if one is a supersaver. I know you don't know future tax brackets, but is there a quantifiable net worth or annual income used to label one as a super saver, and thus one who should consider Roth over traditional? If one is investing primarily in non-cash producing investments or where cash flow is not the primary point, such as an S&P 500 index fund or total US stock market fund over cash flow and real estate, if one doesn't plan on spending a ton of it, but is a super index fund investor saver, would this change things?

Maybe I'm overthinking this and all that needs to be done is consider how much annual cash flow you plan on having in retirement, whether from real estate or selling down index fund holdings. What actually happens inside of 401(k) or 403(b), if you change your type of contribution, i.e. change from traditional Roth or change actual investments.”

All right, there's a lot wrapped up in that question. The main question you're asking is “How do I know if I'm an exception?” to the rule of thumb that in your peak earnings years you should make tax deferred a.k.a. traditional 401(k) contributions. It's basically a matter of comparing tax rates. It's all about your tax rate now versus your tax rate when you pull money out later. It's entirely possible that even though you're in the 22 or 24% bracket or higher, that when you pull money out in retirement, you'll be in an even higher bracket. We're not talking about the brackets changing up, although that would have an effect. We're talking about you just having more income later.

So, if you're saving enough money now that your taxable income later is actually going to be higher, then you should do Roth contributions now, you should do Roth conversions when given the chance. That's not a lot of people. It's a small number of people. Maybe they're concentrated a bit more in the White Coat Investor audience, but it's still not the majority of White Coat Investors.

So, no, there is no rule of thumb. You got to run the numbers and you got to do it with assumptions that you don't know if they're right or not. You don't know exactly how long you're going to work. You don't know exactly what your returns are going to be over time, how big that 401(k) or 403(b) is going to be. You don't even know what the RMD age is going to be when you get there. It could change again. So, it's basically a general sense.

If you're building a real estate empire, that's going to kick off all kinds of cash flow, right now, maybe it's tax sheltered, but later, maybe not. You'll have used up all your depreciation. That's going to push you into a higher bracket. You might have a big pension coming, if you're in the military or something like that, that would get you into a higher tax bracket. Or maybe you just have millions and millions of dollars that are going to fill up those lower brackets from the income on them.

The other question is what actually happens inside a 401(k) or 403(b) if you change your type of contribution? Well, there's sub accounts in there. My 401(k) at White Coat Investor has three subaccounts. One is tax deferred, one is Roth and one is after tax. And so, when I'm doing a mega backdoor Roth contribution, it goes into the after tax bucket and then I convert it into the Roth bucket. You could convert if your plan allows it from a tax deferred bucket into a Roth bucket, but when you change your type of contribution, it basically starts going into this other subaccount. It's no big deal. You'll see it right there on the website. You'll have so much money in tax deferred, so much money in Roth, no big deal.

And obviously, if you change your actual investments, those will be reflected there as well. But that really has little to do with the accounts. You can put a total stock market index fund in the tax deferred side. You can put it in the tax free side. You can put any investment in any account for the most part.

HOW DO I KNOW IF MY CPA IS GOOD?

Okay. The next question is from Reddit. “How do I know if my CPA is good? For context, I'm a new attending here. I would say that I sit squarely in the bottom trough of the Dunning-Kruger curve in regard to my financial knowledge. For the past four years, I go on TurboTax and I fill out my own taxes. Every year I see their estimate, which is usually for me to pay $1,000 to $4,000 back, which I do intentionally when adjusting my withholding.

And then I get scared that I'm messing up and then call my CPA. He has consistently been able to cut the money I have to pay back by 25 to 50%. I've never found a reason to think I can do this on my own. He also charges me $150 to file my taxes and he is a good guy. I really can't complain. He is also a kind of a family friend, although he has been nothing but professional. This year, however, I'm a new attending, so my income quadrupled in August. I also have a new kid and a 1099 job that made me about $60,000 this year. Things are a little more complicated, but not too crazy, I'm sure.

So, how do I know that my CPA is doing a good job? How do I know if he's missing things or if he is making mistakes? My TurboTax estimates have consistently been worse than what he gets me. I thought of actually asking another CPA to do my taxes and comparing their estimates before filing. Is that smart? Am I overthinking this?”

All right. Well, the first thing to understand is what did you miss? What is he claiming that you're not claiming when you do your own taxes by TurboTax? What is that deduction? Because most people's tax situation is the same from one year to another. This year you're going to have some big changes, granted, but the year after that is probably pretty similar to next year.

And so, figure out what you're missing. It's not a magic box. What is he doing differently than what TurboTax is doing? Dive into the forms and look there and maybe you can start doing whatever it is that he's doing that you're not.

But here's the deal. $150 is like dirt cheap for tax prep. That's basically free. So, if you feel like this person is doing a great job for you and it only costs you $150 a month, just keep using them. It seems like you feel like you have to do your own taxes or something. You don't. I don't even do my taxes anymore. I haven't done them for the last two or three years. I've been hiring them out. Just got too complicated for me, number one, and it's good to have some time back.

But as I'm going around looking at what tax preparation costs, $150 is nothing for tax prep. I have paid dramatically more than that for tax preparation. I'm in the process of shopping actually for a new CPA. I got fired by my CPA or by my accountant. She basically just said “Your return is too complicated for me. And even though I make good money off it, you'd be better served going somewhere else.” That's one way to know. If your tax preparer says you need somebody else that has expertise in some different stuff, I think it was the trust return that pushed her over the edge. That's one way to know.

But other ways to know if your CPA isn't doing a good job, well, there is not a lot. When you change, they'll usually go back and look at your last return and tell you what they think of the last tax preparer. I had that happen as I was looking for a new tax preparer and it was nice to hear that he thought that she'd been doing a good job. That's always good to hear. He had a few suggestions that I might save some taxes on, but they were changes in how I live my tax life and how I live my financial life, not how I fill out the forms. Those weren't the suggestions he had. So, that's a good sign. If they look at your forms and they're like, “Dude, they totally screwed up your forms”, then that's a problem.

Yeah, you could go get a second opinion, but you're going to pay for the second opinion and at a certain point you got to ask yourself, “How much is that worth?” At any rate, if you need some help with tax preparation, tax strategizing in particular, we've got a list on our recommended page for that. whitecoatinvestor.com/recommended and you can check some of those folks out.

But it sounds to me like you're overthinking this. If you don't really love preparing your own taxes and don't want to learn more about them, you've got somebody that seems to be doing a pretty good job for you and isn't charging you much. So, I'd suggest you use them.

FORM 8606 AND ROTH CONTRIBUTIONS

Our next question also comes off Reddit. It's titled “Only one year of backdoor Roth conversion.” We sold our rental in late 2022, which pushed us over the income limits for Roth IRAs. It wasn't planned, so we contributed to our new traditional IRAs 2022 contributions in March of 2023 and converted to Roth IRA that same month. We each filled out an 8606 for the traditional IRAs 2022.

This year we'll be under the married MAGI income limits. I'd like to switch back to Roth IRA contributions for 2023. I reviewed the WCI articles with the examples for doing a back to back backdoor Roth conversion. How do I fill out the 8606 for 2023 if we decide to go all Roth IRA for 2023?”

I find it fascinating that people find the 8606 to be this terrible form to fill out. Compared to other tax forms, this is not that difficult. Let's walk through the form today. The first question, enter your non-deductible contributions to traditional IRAs for 2023, including those made for 2023 from January 1st, 2024 through April, 15th, 2024. Okay, that's just how much did you contribute that was not deductible to your traditional IRA in that year. If you could take the deduction, that's fine. You don't put it in there. If you can't take the deduction, then it goes on this line. Pretty straightforward question though. I'm not sure if anybody gets confused about that.

The next question, which is line two is the one that sometimes confuses people. Enter your total basis in traditional IRAs. And you can often get that from 8606 from the prior year. But basically basis is money that's non-deductible. It's after tax money that was in there before this tax year started. And then you add those two lines together.

It asks if you take a distribution from traditional, traditional SEP or traditional SIMPLE IRAs or make a Roth conversion. And if you did, you got to go to line four. If you don't, you get to skip a whole bunch of questions and go all the way down to line 14. Most of you doing Roth IRAs for the year, of course, or backdoor Roth IRAs have done a conversion. So, you got to keep going.

Four, enter those contributions on line one that were made after the end of the calendar year. Easy. Next line five is just a math problem. Line six is where the pro-rata rule comes in. They're asking you what you've got in your traditional IRAs, SEP IRAs, SIMPLE IRAs, rollover IRAs, whatever, on line six. Whatever is in there at the end of the year, 1231, that's the balance. That's line six.

Line seven is any distributions you took. Most people are putting zero on this line if they're just doing backdoor Roth IRAs. Line eight is the amount you converted. So you add, line nine and 10 is just math. Line 11 is just math. Line 12 is just math, math line 13 is just math. I don't think you guys need help with the math on these things. Just follow the directions. It's all fourth grade math.

And then line 14 of course gives you your basis. That's what we'd go forward to line two next year if you had some basis. Your situation, it sounds like, is not particularly difficult. Basically you're saying you didn't have to do a backdoor Roth. Okay, well, everybody can do a backdoor Roth as long as you have the income for it. Even if you're below the income limits, you can still do your Roth IRA contribution through the backdoor.

If your income is low enough and you don't have another 401(k), those contributions into the traditional IRA are deductible. It's fine, it works out the same either way. You get the deduction and then you pay tax on the conversion or you don't get the deduction and you don't pay tax on the conversion. It works out exactly the same. That part is not hard. I'm not seeing where the difficulty is. If you're still having trouble with this, shoot me an email and I'll help walk you through line by line. But mostly you just follow the form. The only thing that really screws people up is they don't understand what basis is on line two. So, most of the mistakes I see on 8606 is getting the basis wrong.

If you want to have your 8606 be really clean, make the contribution during the calendar year, do the conversion as soon as you can in that calendar year, and your 8606 is pretty darn easy. I don't know why everybody wants to do this the hard way and start making contributions after the first of the year or worse, make a contribution in one calendar year and the conversion in the next calendar year or not actually go through the backdoor process. Stop doing these the hard way. They're not that hard to do.

14 years now, I've done the backdoor Roth IRA each year. I've never screwed it up. It's not that hard. Make your contribution, do the conversion, do it all in the calendar year and you won't run into all these problems people have with their 8606 forms.

403(B) ROLLOVER

Okay, another question. This one coming from Reddit is about a 403(b) rollover. “I have a Roth 403(b) from a past employer. Am I able to roll that over into my Roth IRA and also contribute to a backdoor Roth IRA in the same year?

Easy question. The answer is yes. A lot of people don't understand what a contribution limit is. This is the amount you can contribute into the plan, whether it's a 401(k) or whether it's an IRA, whatever. Any sort of rollovers into that plan do not count toward your contribution limit. Any conversions into that plan do not count toward your contribution limit. They are not contributions. That limit is just for contributions. So, you could roll over $300,000 from a rollover IRA or from a $300,000 401(k) into a traditional IRA, that does not count towards your contribution. You could do a million dollar Roth conversion, you'll still get your contribution into an IRA that year. Totally separate thing.

Thanks everybody for what you do, by the way. I know you are not tax preparers. I know you're not financial advisors. Most of you are just docs trying to make your way in this crazy financial world and you spend 98% of your time helping people out there, seeing patients, doing surgeries, whatever it is that you do. So, thanks for that. I love the fact that you're doing that instead of financial stuff. You still got to pay some attention to your finances, but just because you don't know how to do an 8606 or you have questions about what an IRA contribution is, that's a good thing because you're spending your life and your time doing stuff that probably matters more.

If I sound like I don't want to answer more 8606 questions, I've been answering them for many, many years, I'll continue to answer them for many, many years. I just like serving you guys because of what you've chosen to do with your lives. But a lot of you're making your financial lives more complicated than they need to be, and you should simplify when you're able to do so.

Okay, another question off Reddit. By the way, if you haven't checked out our subreddit, it is one of the fastest growing parts of WCI. I know the folks on the forum, they think they're the only WCI community out there. They're actually one of the smallest ones. We've got four communities. We've got the Facebook group. It's got 100,000 people in it. The subreddit’s got over half of that many in it. We've got the FEW – Financially Empowered Women. That's a group that by the time you hear this, it's probably at 2,000 or so. And then we've got the forum which we never take people out of the forum even if they stop posting there. But that's dramatically fewer people than we have on the subreddit. So, check out those communities, the Reddit one in particular. Younger docs, students, residents, they love the Reddit. r/whitecoatinvestor is where you find our community on Reddit.

SOLE PROPRIETORSHIP AND SOLO 401(K) QUESTION

Okay, this question, “Sole proprietorship and solo 401(k). I am a hospital based employee with W2 and have maxed my 403(b) employee contribution. I make a small supplemental salary from consulting about $10,000 for 2023 with 1099s. This may grow in the future.”

Then there's a series of questions. The first one is, “Do I have to file any paperwork to become a sole proprietor? I currently hold the consulting fees in a separate bank account. Do I have to file for an EIN in the future?”

Do you have to have an EIN to be a sole proprietor? No. Do you have to file any paperwork? No. If you get a 1099, you will fill out Schedule C on your taxes, you are a sole proprietor. There is nothing else you have to do to be a sole proprietor. Now, in some businesses, you have to register with your state or your county or your city or whatever and go get a business license, but that'd be it. That sort of a thing.

An EIN however is useful. It helps you to separate your financial life, your personal one from your business one. So, I do recommend an employer identification number or EIN. It literally takes 30 seconds and it's free to get an EIN. I recommend you get that and you use that number when you're giving paperwork to companies you contract with to pay you as a 1099 or when you're opening bank accounts or those sorts of things. I would use an EIN. You do not have to. The only thing you have to use an EIN for is when you open a solo 401(k). As far as I know, they always require an EIN for your business. You probably want to do that. So, you might as well go get the EIN.

Okay, the second question. “Is it worth creating a solo 401(k) with a mega backdoor option or just stick to a free Vanguard solo 401(k)? I don't think consulting fees will ever hit six figures.” Well, the nice thing about getting a customized solo 401(k) plan instead of one of the cookie cutter ones off the shelf at Vanguard or Fidelity or Schwab, is that you can get it set up such that you can make after tax contributions and in plan conversions a.k.a. the mega backdoor Roth conversion option.

This is allowed in our 401(k) here at WCI. That's basically my entire contribution every year. I do mega backdoor Roth contributions. Do I think it's worth it? Yeah, it's certainly worth it, but I'm also making more at WCI than you are in this consulting gig.

But here's the difference and you can decide if it's worth it for you or not. If you just get a standard off the shelf cookie gutter plan and you make $10,000, you're going to be able to put $2,000 as a tax deferred contribution into that solo 401(k). If you make $10,000 in net income from this 1099 gig, that's net of expenses, including the employer half of the payroll taxes, not net of your personal taxes on it, you could put $10,000 in there as an after tax contribution, then convert it to a Roth.

So, you'd get $8,000 more in there each year. It would be in Roth instead of tax deferred, but it would be five times as much money. Is that worth paying somebody $500 to set this thing up and $200 a year to maintain it? Only you can decide. Certainly if you start making more money, I think it's worth it. If you're making $40,000 or $50,000, I definitely think it's worth it. At $10,000, maybe I'll just take that $10,000 and spend it on a really nice vacation each year. It's not the end of the world to invest in a taxable account either. You just want to minimize the hassle in your life. Invest that $10,000 each year in taxable instead of trying to get it into another retirement account.

All right, the next question. “If I do a mega backdoor Roth, do I roll it over into my existing personal Roth IRA or a new separate Roth IRA?” Well, most of the time it actually stays in the 401(k), just into the Roth subaccount. A plan can allow you to do an in-service withdrawal and bring it into your Roth IRA. If you're going to do that, you can just use your regular one, you don't need a new one, but most of the time you keep it in the plan actually, and that'll maybe give you a little more asset protection in your state, although solo 401(k)s tend to have about the same asset protection as Roth IRAs.

All right. The fourth part, the maximum contribution can only be 20%. Only $2,000 to the solo 401(k). That's right if you're doing tax deferred contributions. You can do more if they're after tax contributions or you could do a combination of the two. You could do $2,000 in pre-tax and $8,000 in after tax. You could do that.

“How do I pay taxes on the remaining $8,000 of income of the sole proprietorship? Do I file taxes for it separately or on an added form?” Well, you could pay quarterly estimated payments on that I guess, but what most people would do if they're only making $10,000 there is they would just have a little more withheld from their W2 job. In your case, you're going to have $8,000 more in taxable income. If you put $2,000 into a tax deferred solo 401(k), what's the tax on that going to be? I don't know, maybe $3,000. Divide that by 12, have that much more withheld by your employer each month.

But for that small of an account, I don't know that I'd even worry about it. Certainly if you get to the point where you're having to write big checks come April and you're getting penalties and interest and that sort of thing, maybe you want to go through the trouble to actually send in quarterly estimated payments or change your withholding. But a lot of people with that low of a side gig income, just settle it all up with the IRS come next April.

QUOTE OF THE DAY

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.” And that is the truth. Time in the market matters more than timing the market.

SUPPORTING YOUR PARENTS FINANCIALLY

Okay, here's a question off Instagram. This is great. “Hello doc. Thanks for everything you do for us doctors. I wanted to give an update and also ask a question. We recently got out of student loan debt, $197,000.” Congratulations. “After I finished my chief residency in my first year of fellowship.” Wow. Paid that all off in your training. I'm impressed. Should have brought you on the Milestones podcast.

“Big blessing for us. Now, onto the question. Do you have any advice for those of us young folks caught in an early sandwich generation situation? Both my husband and I come from Asian immigrant backgrounds. Unfortunately, my in-laws are financially illiterate and retired without any plans other than relying on social security and expecting their children, in reality, just their eldest son to care for them.” I think the eldest son is this doc's husband.

“While my husband and I make decent money, we give my in-laws $3,400 a month, leaving us with not as much to save and invest. And while they do help us by watching our daughter, I recently realized that we are crippling our financial future. Unfortunately, due to cultural obligations, it's not as simple as ‘Don't give them any money.’ Right now, I'm still in fellowship, so things will get better once I graduate in pulmonary critical care, but I'm at a loss for how to handle it. Any advice you give would be greatly appreciated.

Also, for some context, the reason we were able to pay off my loan so early was because my husband used to have a much higher paying job and I worked for a year as a chief and basically got paid as a junior attending. Going back to fellowship, my pay significantly dropped and my husband took a pay cut.

For some final context, the $3,000 plus we're giving has been going on for four years, expected to continue for at least three, and most likely indefinitely. For as long as my husband has worked, he's given a minimum of $1,000 a month to his parents. And with that number always going up, never down.

A lot of Korean American physicians, dentists are expected to give their parents money as a payment for all the sacrifice the parents made for immigrating to the states. I just recently realized I'm giving away my early investment years and it cost me a ton of anxiety.”

Wow, there's a lot going on here. Let's talk about some of it. First of all, the most important relationship you have here is between you and your spouse. That has got to come first. More than the relationship between you and the in-laws, more than the relationship between your spouse and his parents. You got to build that relationship and you guys have to be on the same page.

Also, in general, when dealing with in-laws, you guys decide what you're going to do together, and the person whose parents they are is the one who presents it to them. So, it doesn't seem to be coming from the other spouse that's now becoming the bad guy. Whatever you guys decide to do, it needs to be presented by your spouse.

I don't think it's realistic to tell you not to give anything to your in-laws. I think you're probably right. You are indefinitely going to be helping them financially. And whether that is a check you send every month, whether you pay their expenses, whether they live in your house, whatever, you're going to be helping them unless they do something terrible and you decide you're going to cut off contact with them and cast them to the curb. But almost surely that's not what's going on here, and you're going to be spending some of your money to help them. So, get used to it. I don't think it's going away.

The only question here is how much and in what form it comes. And I think it's perfectly fine to sit down with them and say, “Hey, we don't have the income we had a year ago. We can't help you as much. Instead of paying $3,400, we're going to have to go back to $1,500 a month. Sorry about that. We all have to tighten our belt a little bit, but we can only help you from a position of strength. That means we need to be able to have enough money to pay off our loans, to save for retirement, save for our kids' college, and do these other things.”

Figure out how much that amount is. Sit down, have your spouse do the talking and tell them that they're getting a pay cut basically. Because you can't just give them all your money. If you're not saving anything for retirement, basically you're going to be the equivalent of house poor. You're in-law poor because all your money went to your in-laws.

So, you just got to have that conversation. And I get that some cultures are different. My culture is very different here. It's much more “You go out of the house when you're 18, you're on your own and that's it.” The good news is you don't have that obligation down the road to help your parents. But the bad thing is they probably don't help you as much as your parents helped you. So, pluses and minuses to every culture, but it certainly has an effect on our finances.

Financial planning is really about making sure your money goes toward what you value. It sounds to me like you value this relationship, you value these people. Some of your money is probably going to go there, but you've got to decide how much. It may be when you are a full attending, maybe your husband gets a higher income that you can go back and pay them $3,400 a month, maybe even more, and still be able to save 20% plus for retirement, still reach all your other financial goals.

I wouldn't say you got to stop giving them anything, but you definitely need to evaluate that amount year to year and maybe even month to month. And they need to understand that. And they'll probably understand a little bit better if you share a little more about your financial situation. You don't have to share everything, but when they understand that your pay went down by 75% or whatever it was, they're going to understand that their part of that is also going to be lower than it was. Hopefully that's helpful.

SPONSOR

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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(k), and use your medical knowledge to impact new products.

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Maybe I should have used that ad as the answer to the last question. Maybe what you can do is do some surveys. If you make $30,000 on surveys, well, you can afford to pay $3,400 to your in-laws every month. Higher income definitely makes everything easier in personal finance and investing.

All right, we got something new coming out. It's our CFE 2024 course. It's $100 off through March 8th. And this is the course we put together from WCICON each year. But we're not just giving you a discount on this course. We have a discount on all our courses. You want to take Fire Your Financial Advisor, you want to take the version of that with CME, you want to take the real estate course, all of these, $100 off through March 8th.

This is a big course sale for us. So, if you've been waiting to get a good price on our online courses, now is the time to buy them. You don't have to take them now, they're evergreen, and you can take them in a couple of months, but you can buy them now and get a great price.

What's in that course? Well, you got my keynotes from the conference. One's on the unsung benefits of index fund investing, one's on the advanced estate planning, Paula Pant’s keynotes in there, how to reengage and remotivate when burned out. There's presentations from 30 or more other experts in there as well.

Whether you're interested in boosting your personal wellness, fine tuning your financial plan, investigating tax reduction strategies, living more intentional life or planning for retirement, this CME eligible course has something for everyone. And if you got an Apple device, you can stream this in the car just like you would a podcast. At any rate, if you're interested, go to www.wcicourses.com and take $100 off until March 8th.

Thanks for those of you leaving us five star reviews, that helps spread the word. Here's one from GreenMed051 who said, “Terrific no-hype resource. His podcast is great for commutes but make sure you combine it with the fantastic WCI webpage. He’s got concise clear articles on nearly any question you have. This is one of the single best financial literacy sources I’ve found in years.” Thanks for that kind review.

Head up, shoulders back. You've got this, and we can help. We'll see you next time on the White Coat Investor podcast.

DISCLAIMER

The hosts of the White Coat Investor 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.

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 159 – Surgeon gets PSLF via the waiver.

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 1 in 7 doctors get disabled at some point during their career.

Because these policies can only be purchased through brokers, we have 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 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. You know what we do need help with though? We need help with champions. WCI champions. These are the folks that pass out copies of the White Coat Investors Guide for Students to their classmates. These are first year students, mostly medical and dental students MD, DO, DDS, whatever. But also, if you have a US based school, we will even send these out for PA, NP and pharmacy schools this year. All you have to do is volunteer to pass them out. That's it. That's what makes you a champion. We send you a few boxes of books, you pass them out to your classmates, you get some swag. That's the whole deal.

But by getting this information to the hands of your classmates early, you can change their lives. You can help them be financially literate, become financially disciplined, and when you apply that to the high income that they're going to have, eventually it will make all the difference in the world.

Hundreds of millions of dollars of value that you can provide to your classmates by being a WCI champion. You can sign up at whitecoatinvestor.com/champion. We only need one for each school, but we do need one. So, please sign up. By the way, you're running out of time. We need time to print the books and get them out to you. So, the deadline on this is March 15th. You've only got a couple more weeks.

INTERVIEW

All right, we've got a great guest today. I don't know if it's an unusual milestone. We've had so many different milestones. We've certainly had somebody on before that got public service loan forgiveness, but I don't think we've ever had somebody who got it in this particular way. It's a very interesting story, and I think particularly if you're going for public service loan forgiveness, you will find this one absolutely fascinating. Stick around afterward, we're going to talk about probate, and why you might want to try to avoid it.

All right, our guest today on the Milestones to Millionaire podcast is Shauna. Shauna, welcome to the podcast.

Shauna:
Thank you. I'm happy to be here.

Dr. Jim Dahle:
Tell us what you do for a living and how far you are out of training.

Shauna:
I am an acute care surgeon and I've been out of residency for about five years now.

Dr. Jim Dahle:
Five years out. Okay. So, this is all adding up correctly. Five years in training as a surgeon, five years out, 10 years total. Tell us about the milestone we're celebrating today with you.
Shauna:
The big one is public service loan forgiveness. Student loans are paid off and then I've been thinking about signing up for milestones for a while because we hit back to broke and now close to half a million in net worth also. So, a couple other milestones there.

Dr. Jim Dahle:
Awesome. Congratulations. You've been knocking them down just like you're supposed to one at a time here. You mentioned we, who's we? Is there a partner or something?

Shauna:
Yeah, I have a husband. We've been married for going on 12 years now.

Dr. Jim Dahle:
Okay, so halfway through med school or so? Does that sound about right?

Shauna:
We got married right after medical school. Training was six years for residency with a research year thrown in and almost six years out from training.

Dr. Jim Dahle:
Very cool. What does your husband do?

Shauna:
He's a mechanic.

Dr. Jim Dahle:
A mechanic, okay. All right, let's start with public service loan forgiveness. How much did you get forgiven?

Shauna:
In total it was about $245,000.

Dr. Jim Dahle:
Wow.

Shauna:
That was almost all medical school loans. I had about, I don't know, probably $18,000 of undergrad loans that I graduated with that were in payment basically from the time I finished undergrad, with the exception of being in medical school.

Dr. Jim Dahle:
Tell us about the journey. Some people are particularly going for public service loan forgiveness, maybe not as much nowadays as a few years ago. It wasn't that easy to get public service loan forgiveness. Tell us what kind of problems you had getting it.

Shauna:
My story is very unusual. I basically did everything wrong every step of the way and then really lucked out with the waiver that they released a couple years ago. I didn't actually ever sign up for income driven repayment. During training we were in a very high cost of living area. I didn't feel like we could even make income based repayments. And so, I just sort of put my loans in deferment that whole time for six years, which is horrifying to think of now, but I just buried my head in the sand and figured it would all work out one day.

Dr. Jim Dahle:
It turns out you were right, of course.

Shauna:
It worked out, but I wouldn't necessarily recommend it, but I would like to make sure that people know that sometimes things do work out even if you don't make the right decisions starting from day one. I wish that the White Coat Investor had been around from the time I was in medical school. I think it started around the time I finished medical school and started training, but I wasn't aware of it. But certainly the last five years I've done a lot of education and would do things differently if I were going back. But that's okay.

I was about to refinance my loans when COVID interest pause was announced. In fact, I fielded a phone call from the person I was working with to refinance, maybe a month into that 0% pause and I said, “I'm going to wait just a little bit and see what happens rather than refinancing.” And then a little bit later they announced the waiver, and as sort of details about the waiver came out, I thought, “Oh, maybe I can just get my undergrad loans forgiven. I've paid on those for 10 years.” And then more information came out that they would consolidate everything together and credit the longest payment history, and with that, all of my loans would get lumped together. And so, it was a pretty painless process for me because I was quite close to that 10 year mark of payments by the time I even applied. I applied for consolidation in November or December of 2021. Submitted the PSLF application in January, and then six or nine months later, something like that, everything was forgiven.

Dr. Jim Dahle:
Wow. This is pretty wild. How many years did you actually make payments on your medical school loans? You're talking about being in deferment for five or six years and the student loan holiday was like three and a half years. How many years of payments did you actually make on those student loans?

Shauna:
I only ended up making payments from about December of 2019 to whenever the pause went into effect, March of 2020.

Dr. Jim Dahle:
March. Yeah, like four months.

Shauna:
Well, like a year and four months. But yeah, not a lot of time. And at the time we moved, we bought a house when I moved for my attending job, which is also not the right move for everybody. It was the right move for us, but it's not the right move for everybody. And so, I put everything on the lowest payment possible, that 30 year extended graduated repayment, which would not fit for everybody but it worked out in my favor. So, I really paid very minimal on my loans at the end of the day. I think when I went back and did the math, I was paying my undergrad loans the whole time I was in residency.

Dr. Jim Dahle:
And that's what enabled you to get the rest forgiven, you had all these payments that counted.

Shauna:
Exactly.

Dr. Jim Dahle:
It's an interesting loophole that really worked out well for you.

Shauna:
Right. It worked out great for me. It's worked out well for other people that I've tried to encourage to look into this. I have many friends who I've reached out to and said, “Hey, see if this will work for you.” And for most people it has, which has been huge. And I think from what I understand, they've extended the consolidation waiver. I think that there are still some people if you are listening to the podcast, who might still have federal loans, look into whether they might still qualify for that.

Dr. Jim Dahle:
Yeah, I think currently it's going through April is my recollection, and by the time this runs at the end of February, that still gives people at least all of March to still basically qualify in this way.

Shauna:
Yeah. And my understanding is as long as they apply to consolidate before that deadline, everything else should apply. So, that might help some people.

Dr. Jim Dahle:
Yeah. Did you have any private loans or anything?

Shauna:
I had maybe like a $10,000 or $15,000 private loan that I paid minimum payments on through residency and then paid off. I prioritized paying that off earlier rather than my federal loans because that was at a higher interest rate after I started working. And then actually, the medical school that I went to did institutional loans. Those were all subsidized at a lower interest rate than my federal loans. And so, those I knocked out after the public service loan forgiveness. They were on just an auto-payment.

Dr. Jim Dahle:
Very cool. Do you remember back when you were in medical school, how'd you feel about all this debt? You're borrowing hundreds of thousands of dollars, you remember how that felt?

Shauna:
There's part of me that wants to say it felt horrifying, but really, it didn't, it just didn't feel real.

Dr. Jim Dahle:
It's monopoly money.

Shauna:
Yeah, it just felt like monopoly money and I certainly was not extravagant as a medical student. I had friends who went on ski vacations. I never did any of that. It was a big deal that I went to a friend's wedding one year and that was it. But I also probably could have done a little bit more to be more frugal looking back. It turns out it worked out. It didn't really matter all that much, but it was definitely a head in the sand, felt overwhelming and I just had to trust that one day I was going to come out and make enough money that it would all get paid off. And that was the case if I hadn't been eligible for loan forgiveness, I would've refinanced and aggressively paid loans off and probably still be paying them for another year or two, but I was sort of going to look at a five year maximum term to do that.

Dr. Jim Dahle:
Yeah. Well, you've been doing a lot of other stuff. Let's turn now to some of these other things you've accomplished. When you came out of medical school, it sounds like your net worth was what? Minus $250,000 or so?

Shauna:
Sadly, it was more than that. It was probably closer to $350,000 total between other student loans. We had loans on our cars. Yeah, probably closer to negative $350,000.

Dr. Jim Dahle:
And you've gone from that to a positive $500,000 over the last five years.

Shauna:
Yeah. I was doing bad math when I said $500,000. It's a little bit more than that now. From appreciation on our primary house and then also obviously aggressively investing over the last few years, we're actually even over the half a million mark. So, it's quite a swing from negative $350,000 to over positive $500,000.

Dr. Jim Dahle:
Yeah, that's almost a million dollar swing in five years. How'd you guys manage to do that?

Shauna:
Well, we had a big shovel. Surgeon’s salaries are pretty reasonable. I worked a lot extra as well. We did a pretty reasonable job of automating savings, trying to save 20% of our net income, prioritizing paying off of any debts and then also trying to enjoy life as we went along. We've had a rough few years family wise. Both my and my husband's fathers have passed away. And so, we've taken some time and money to spend time with family to prioritize taking trips with family, making memories and doing some things that if we were only focused on wealth accumulation, we probably wouldn't. But both of our dads died fairly young. And so, we sort of try to find that balance of enjoying things while we have it and while we can and while we have the people around to enjoy it with and prepare for the future.

Dr. Jim Dahle:
When did you and your spouse decide, “We're going to take this money stuff seriously, we're going to try to get rid of our debts, we're going to try to build wealth?” When did you guys really decide this is something we're going to do?

Shauna:
It was really after I came out of training and we started what felt like real life with a real job. My spouse is well compensated, but I think especially in residency, you're just so focused on working and learning. He was focused on working hard, worked very hard, and long hours too. And we were just treading water, and once we got that some time to breathe and to learn, I started devouring all the financial content I could. I have read the White Coat Investor book, a lot of the blog posts on the Reddit community. I listen to every podcast probably.

Dr. Jim Dahle:
Very cool. Did you guys ever have a major disagreement about your finances or have you been on the whole same page the whole time?

Shauna:
The only disagreement we had really was the very early on disagreement where I was told by my medical school, financial aid counselor, “Really look into this loan forgiveness thing. It's a new program, but try to make these payments.” And my husband was like, “I just don't think we can swing it, with the cost of living. We just don't have the money to do it.” And that was probably the only thing that we had a disagreement on early on. Otherwise, we've been on the same page, we work together.

Dr. Jim Dahle:
What's next for you guys in your financial goals? At the rate you're building wealth, you're going to be millionaires in a year or two.

Shauna:
Gosh, that's wild to think about. Millionaire doesn't mean as much today as it did 20 years ago, which is notable. We're currently building a house that will have space for my mother-in-law. So, that's the biggest project right now. And that's more of a personal than a financial investment, but I think there will be some sort of positive financial implications there.

And I would like to get to a point where I feel secure that I have enough saved that I can decide how and when I want to work. I don't anticipate really cutting back anytime soon, but I would like to have the power to say, “I don't want to do X, Y, Z and I don't need to.” So, that's the next target. I don’t know what dollar amount that's going to be. It's certainly more than $1 million. It's probably closer to five, which will take some time.

Dr. Jim Dahle:
Yeah. Very cool. Well, you guys are off to a great start. Congratulations on getting public service loan forgiveness. Some of that obviously due to some of the relatively recent rule changes in that, but congratulations on that. It must feel good to be rid of those student loans.

Shauna:
Life changing.

Dr. Jim Dahle:
And you guys also have a great start on building wealth and really getting off on the right foot. So, congratulations to you both.

Shauna:
Thank you very much. We couldn't have done it without your help, the WCI, the whole team's help. And going back to the “live like a resident”, make some reasonable decisions and remember that you have a big shovel. And even if you have a big hole, you can dig out of it fairly easily.

Dr. Jim Dahle:
Awesome. Good advice. Well, thanks so much for coming on the podcast.

Shauna:
Thank you very much.

Dr. Jim Dahle:
All right, I’m glad you enjoyed that interview. It's interesting. We talk a little bit about moral hazard, and this isn't talking about people being moral and immoral. This is an economic term that when incentives maybe aren't exactly what they should be, people make different choices. That's the first law of economics that people do what they're incentivized to do.

And so, there's a lot of people out there that feel like they played by the rules, they did the right thing, they refinanced their student loans in February of 2020 before the pandemic related student loan holiday happened. And now they're kind of bitter. They didn't get those $0 payments for three and a half years. Well, it's the same way for those who were really on top of their finances with their student loans. Maybe they paid off their student loans in two or three years, and then they're not so happy when they see somebody who maybe didn't manage their student loans properly and ended up getting more benefit than they did.

As I always say, when we talk about these rules that are laid out by Congress and by the IRS, “Hate the game, but don't hate the player.” If this is the way the laws are written, if medical students are allowed to be on Medicaid, if they're allowed to get food stamps, these are for low income people. Medical students have low income just like PSLF is not just for social workers, it's not just for firemen and cops. PSLF is for anybody that works for a 501(c)(3). Whether you're making $800,000 a year as a surgeon or whether you're making $24,000 a year as a social worker, it's all for you.

So, if you are going to work for a nonprofit, if you're going to be an academic doc, if you're going to work at the VA and you have federal student loans, you ought to become an expert in all the rules regarding public service loan forgiveness.

Now, remember this waiver thing, this thing that allowed this doc to get public service loan forgiveness. This thing expires in like six weeks. So, if you are one of these people that qualifies because you've been making payments on undergrad and you can consolidate your loans and these sorts of things, you really need to get on it this month because it may not be extended again. It's been extended a few times, but it may go away, particularly if the administration changes. That wouldn't surprise me at all, this fall that this sort of expanded public service loan forgiveness benefit would go away.

FINANCE 101: PROBATE

All right, I promised you at the top of the hour we are going to talk about probate. Probate is the legal process for reviewing the assets of a deceased person and determining who the inheritors are. It generally focuses on a will. If there's a will, probate is all about making sure that the assets are passed out in accordance with the will.

States also have laws of what's going to happen if you don't have a will. And this happens in most states like you would expect. It all goes to your spouse. If there is no spouse, it goes to your kids and then so on and so forth to other family members. But probate is one of those processes that a lot of people would rather avoid. It varies by state, but in some states can be pretty expensive. And it's a public process so other people can find out what you own, what you were worth when you died. And it can be time consuming. It might take as much as a year for the heirs to really get what's coming to them.

And so, for those reasons, a lot of people do what they can to avoid probate for parts or all of their estate. It's interesting though, in some states it's not as big of a deal. When my parents went in and do their estate planning, they were basically told, “No, this isn't worth trying to avoid probate. Probate is not too bad in Alaska. We think you ought to just go through probate. Just get a will and go through probate. It's no big deal.” And so, I had some questions about that because I'm the executor, but yeah, that was the way it worked out in Alaska. But that's not the case in all states.

Some ways in which you can avoid probate. Well, one thing is you can give stuff away before you die. Particularly if you're nowhere near the estate tax exemption, you can give things away. It's very effective. Anything you give away before you die doesn't go through probate. There is a downside to doing that. You lose the step up in basis of death. It's sometimes better for you to die and your heirs to get it with that step up in basis then for you to give it to them before they die. This is a big mistake a lot of people make. They put their house in their kid's name, or they have both names on it and they think they're going to facilitate things. Well, what happens is that step up in basis of death goes away. That's not so good.

All right, here's another way you can avoid it. If you're just not wealthy, you don't end up having to go through probate. In my home state of Utah, the limit is $100,000 dollars, not including vehicles registered in the state. If your net worth is less than that, you don't go through probate. And so, that probably isn't going to work for most White Coat Investors. I hope it's not. But that is one option.

Here's another option. You can have joint ownership in community property states. There's a few of those. Most of them in the southwest, but also Louisiana and Wisconsin. Anything that's acquired during the marriage is considered to be owned equally by both spouses 50/50. And both spouses may pass on their share of property, their chosen heirs, similar to tenancy in common titling.

You can have community property with rights of survivorship, you can have joint tenancy with rights of survivorship. This stuff isn't going through probate because there's a right of survivorship. It goes to the person who has that right of survivorship. Tendency by the entirety, you've probably heard of. This is usually something used from an asset protection standpoint but it also obviously keeps it out of probate if it's going to that married couple. Basically leaving something to your spouse keeps it out of probate. Obviously, it's a much bigger deal when the second spouse dies, but that works fine for keeping things out of probate.

For a lot of things, you just need to designate beneficiaries. You retirement accounts, annuities, life insurance policies, designated beneficiary, and that passes to them outside of probate. It doesn't have to go through probate. Even for taxable accounts, brokerage accounts and bank accounts, a lot of times you can title them with a payable on death designation. So, it just automatically goes to that person rather than having to go through probate. Sometimes it's called a transfer on death account.

Another commonly used technique is a revocable trust. In a revocable trust you can put stuff in, you can take it out, no problem. You can use it however you like. Taxes on that asset are payable on your personal tax return. But the point of a revocable trust is it helps avoid probate. So, anything that is in the trust is distributed in accordance with the instructions in the trust rather than going through probate. So, it's a good way you can get some privacy, maybe reduce costs and distribute it probably most importantly faster after the time of death.

Obviously, any other trust, an irrevocable trust, is just like giving money away. It's no longer yours. It's no longer in your estate. It doesn't go through probate. It's distributed in accordance with the rules of the trust. Now, you can get into more big ticket items to avoid probate. A little bit more complexity in your financial life, but you could use a family limited partnership or a family limited liability company. These sorts of structures also help to avoid probate. A lot of times they can facilitate estate planning. They may be able to help with estate taxes. They have some asset protection benefits as well. But those are all the ways to avoid probate.

When you think about estate planning, there's really three reasons to do it. One is to make sure your stuff goes to who you want it to go to, and make sure your minor children are taken care of. You designate somebody to take care of them as well as somebody to manage the assets.

The second thing is to, of course, avoid probate, particularly if it's expensive or onerous or you really want that privacy. And lastly, of course, is to avoid taxes. Estate taxes, but also potentially income taxes. Those are the purposes of estate planning. And avoiding probate is often a motivation for people to do some estate planning.

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All right, this has been the Milestones to Millionaire podcast. If you'd like to apply to come on this, you can do so at whitecoatinvestor.com/milestone. We'd love to have you. We want to celebrate your milestones with you and use them to inspire others to do the same.

Till the next time, keep your head up, shoulders back. You've got this. We'll see you next time on the Milestones 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.