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 346 – Roth IRAs are not a bad investment.

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All right, I have to address this. I almost feel bad about doing it. I was trying to avoid it, but then my email box filled up with people writing me, telling me I had to address this. The WCI forum had a big thread on it. I think it was in the Facebook group, I think it was on the subreddit. It certainly was in the comments section on Doximity where it ran.

There was an article that was written by a fellow named Derek Saul. Derek founded a website called Life and My Finances back in 2010. It's kind of a typical for-profit affiliate marketing website. It makes money the same ways we do by selling stuff. In their case, they tend to connect people with credit cards, they connect people with bank accounts, and that's how they make money. Their editorial team consists of five people who look by their pictures to be in their twenties and have the title financial writer. But it sounds like Derek Saul, the founder, is the one who actually wrote this particular article. And we'll put a link to it in the show notes if you didn't see this thing.

But the content of this website is geared at people who are looking for credit cards and bank accounts. It's certainly not written with a target audience with physicians and other high earners in mind.

However, despite that, the folks over at Doximity that send out that, I don't know what it is, every couple of weeks or every month, newsletter with financial topics in it. They pick up some White Coat Investor articles from time to time as well, but they picked up this article and sent it out in this email and they've got a big mailing list. I don't know where they get all the emails from, probably from Amion. I think they own Amion these days.

But anyway, they sent it to a lot of doctors. And so, a lot of doctors got this article in their email box that was called “Why a Roth IRA Is a Bad Idea (Yes, You Can Lose Money).”

And the introduction to this article was just as clickbaity. It said, “I lost nearly $400,000 to a Roth. It's not just me. The average person is losing $163,000. Nearly everyone says a Roth IRAs is a great investment. Nearly everyone is wrong.”

And there are so many problems with that introduction. You may have heard about this if you read my monthly newsletter for December. I talked about this in that. But there's so many problems with that introduction that it's hard to know where to start.

The first one is that, first of all, the Roth IRA is not an investment at all. It's an account and it's important not to confuse accounts and investments. And it's hard for me to take somebody seriously or at least a title maker that made the titles of this article seriously who doesn't know the difference between the two.

You should think about investing accounts as types of luggage. There's backpacks, there's carry-on bags, there's suitcases, there's trunks, and each of those might be the proper type of luggage for a given type of trip. But you can put any kind of clothing into any kind of luggage. You can put a tux in there, you can put a bathing suit, you can put some shorts, you can put hiking pants, whatever. All that goes into any kind of luggage.

Think of your investment accounts, your Roth IRA, your 401(k), your 529, your HSA whatever, as luggage and think of your investments, your mutual funds, your investment properties, your stocks, your bonds, your crypto, whatever, as clothes. You can put any type of clothes into any type of luggage. You can put any type of investment into any type of account. But a Roth IRA is not an investment.

Also a Roth IRA by itself really can't ever be a good idea or a bad idea. It's only a good idea or a bad idea in comparison to something else. For example, when you're saving for retirement and you're comparing your Roth IRA to a taxable account or to a non-deductible IRA, a Roth IRA is pretty much always the better option. It's pretty much always the good idea, at least in the long run. I guess if you're losing money in the account, you're better off with the taxable account where you can tax loss harvest it.

But for a low earner who can actually deduct IRA contributions, which is almost nobody in the audience to which Doximity sent this article, it's entirely possible that a traditional IRA is a better option for the retirement savings than a Roth IRA.

For most of us in our peak earnings years, it actually makes sense to defer taxes rather than pay them upfront, which is what you do with Roth contributions, whether they're made to an IRA or a 401(k). And that's another problem with this article. Shortly into the article, the author rapidly flips from talking about IRAs to 401(k)s and while the logic and tax treatment may be similar in the author's financial situation, there are different things that get different tax treatments for many people such as high earners. And if you can't tell these two apart, again, maybe you really shouldn't be writing about them for large audiences.

Frankly, if it took you 13 years from the time you started a financial blog until you realize the tax deferred contributions are the way to go during per earnings years, I'm not sure I want to take your advice anyway.

However, despite the problems in the article and there are problems in the article, the main point of the article is actually good. It's absolutely correct. The point of the article, if you really read the whole thing is that most people should make tax deferred contributions to their 401(k), not Roth contributions.

The amazing thing here is that most people, 92% according to a survey the article talks about, think they should be making Roth contributions. When actually only about 9% of t

I kind of blame Dave Ramsey for some of this. He's not helping. He's pretty much an all Roth all the time kind of guy. He's not really into nuances even though he used to be if you ever listened to him. But there's lots of people out there that talk about “Roth, Roth, Roth is so great, it's tax free, you never pay taxes again.” But it's not always the right thing to do and the article makes that point. And he's right about that.

But there's a chart in that article that's even dumber than some of its pros. It talks about who's in that 9% that should be doing Roths. Does it mention high earners who can't deduct a traditional IRA contribution? Nope. It says the following people are in that 9%. If you're under 33 years old, which is almost irrelevant, your age is almost irrelevant. More time does slightly tilt the calculation toward Roth for those who are maxing out their accounts.

It says those who contribute more than $5,000 a year, which is basically irrelevant to the Roth versus tax deferred discussion, and those who plan to withdraw $100,000 or more in retirement, which again is pretty much irrelevant. The Roth versus tax deferred decision is a complex one. There's no doubt about that.

The first question though that one should ask is whether you even have both options for that particular account. For most WCIers a tax deferred contribution to a traditional IRA is not even an option. Clearly the Roth IRA likely via the backdoor Roth IRA process is better than a non-deductible IRA contribution.

Many people don't have a Roth option in their 401(k), 401(a), 403(b) or 457(b). For them it's an easy decision to go with the tax deferred option. When I was in the military, there was no Roth TSP, so I made tax deferred contributions.

However, if both options are available, the main factor determining which is the better option for you is to compare your marginal tax rate now to the rate at which you will be withdrawing money from that account. Say rate or rates because you fill the brackets as you go with income in retirement. Now those tax rates involve a lot of unknowns, which is why this is a difficult decision and many people choose to just split the difference.

Derek doubles down on his argument later in the article and says that a Roth IRA is only worth it for about 0.2% of the population. It says the 9% figure came from that survey with people who were entirely too optimistic about their future finances. And he goes on to argue that this is all some sort of weird government conspiracy to get the money now instead of later.

Now, if you've listened to me for a while, you know I don't put much stock into government conspiracy theories, mostly because I've been in government. Conspiracy theorists ascribe way too much competence to shady government officials. Just watch Congress for a while and your estimate of the likelihood of those people running an effective long-term conspiracy will go way down.

I used to watch a bunch of government workers try to day trade their TSP. It would've been hilarious if it wasn't so sad. So no, I don't think there's some vast government conspiracy trying to get people to use Roth accounts instead of tax deferred accounts.

Honestly, I'd be happy with people doing Roth accounts rather than nothing, which is what most people are doing. I think if the government is encouraging people to save in a Roth IRA, that's probably a net good thing.

But at any rate, I kind of hate this article and the message is sending out there, which is that Roth contributions are wicked and you should always stay away. Even if the message actually in the article is basically correct, that those in their peak earnings years should generally prefer tax deferred retirement accounts. And lots of people don't realize that.

Derek eventually got the reasoning right late in the article. He said most people who earn less in retirement than they do today, which is true for most people, you'll be paying a higher tax rate now than you will in retirement if you do Roth accounts. That is true. And many retirees today pay nearly nothing in taxes, which is also true.

What are most retirees living on? Social security. If you have less than a certain amount on that, you don't pay taxes at all on it. At most you're paying taxes on 85% of your social security. Lots of people won't be paying anything on money they're withdrawing from Roth accounts. You probably won't be in a very high bracket on what you're taking out of tax deferred accounts. Lots of people will be in the 0% qualified dividend and long-term capital gains brackets in retirement. Retirees don't actually pay that much in taxes most of the time.

Now, you might be in a different situation, you might be a super saver. It might make sense for you to do Roth contributions, but the general rule is still going to be tax deferred during your peak earnings years.

Despite the fact that I think he mostly got the idea right, I just wish he'd done it in the much less flashy manner that Harry Sit a.k.a. The Finance Buff did in his article that he published like 15 years ago when Roth 401(k) showed up on the scene. He recently updated the article. He calls it The Case Against the Roth 401(k). I just wish Derek had read that article when it first came out in 2008. He would've saved a lot of money. If he lost $400,000 by using Roth instead of a tax deferred account, he really should have been paying more attention to the discussion online when those accounts came out.

Okay. So, what lessons can White Coat Investors take from this debacle with this article? Number one, read more than the title of an article. If all you had read was the title you'd think Roth IRAs are terrible. Obviously they're not. Read more than the title of an article.

Two, recognize that most financial information out there is not written specifically for you. Even if it came to you via Doximity. Three, you better have a good reason to make Roth contributions when tax deferred contributions are an option. And finally, yes, keep doing your backdoor Roth IRA each year.

All right, I think we've beaten that subject to death. A Roth is not a bad idea. It is certainly not a bad investment. It's not an investment at all.

All right, let's get to your questions. This one is coming off the Speak Pipe. Let's talk about mortgages.

SHOULD YOU HAVE A SMALLER THAN 2X YOUR INCOME MORTGAGE WITH THESE HIGH INTEREST RATES?

Speaker:
Hi Dr. Dahle. Longtime listener here in Chicago. I'm a radiologist currently making around $500,000 without profit sharing included, plus anywhere around $20,000 to $40,000 per year in moonlighting. My soon-to-be wife is a nurse and makes around $75,000 per year. She'll also be starting NP school in the fall and will be eligible for a full tuition waiver after the first year for working within the same health system.

My question is this. You frequently said that you recommend a mortgage not exceed two times your annual income. However, this was set in times of significantly lower mortgage rates. Now that we're seeing rates closer to 6 or 7%, would that advice change?

We currently own our condo, which is worth around $400,000 to $450,000 and plan to have an additional $200,000 in cash towards a down payment and closing costs when we buy a house next year, $600,000 total down payment.

Houses in our city cost around $1.3 to $1.5 million for a home we can grow and have children in while also being in a good public school district. I think these numbers sound reasonable until I realized that if we bought our house last year, our monthly would've been closer to $5,000 rather than now being over $7,000 on a 30 year mortgage. What are your thoughts given these changing times of mortgage rates? Thanks again for what you do. Thank you.

Dr. Jim Dahle:
Okay, this is a rule of thumb I use that you should keep your mortgage to less than two times your gross income. The point of that rule of thumb is so you don't become house poor. That your house does not become such a big part of your financial life, that it keeps you from reaching your other financial goals like saving for retirement or college or going on cool vacations or driving a Tesla or whatever your financial goals are. That the house won't keep you from doing that. That's the point of the rule of thumb.

Like any rule of thumb, you can find an exception to it. It's not perfect, it doesn't work in every situation. Lots of people are in less expensive parts of the country, they don't feel like they got to buy a house that's two times their gross income. They buy one that's one times their gross income or less. I've met lots of docs like that. Guess what? They build wealth even faster. It works great.

Other people live in the Bay Area, they live in Miami, they live in DC, they live in Manhattan, they live in San Diego, maybe Salt Lake soon. The real estate is going up around here. And sometimes they have to stretch it a little bit. Sometimes they go to two and a half, three times, maybe even four times. But the point of that rule of thumb is you can't stretch it indefinitely. You can't get a 10X mortgage and expect this to work out well.

Now as interest rates have gone up, yes, that makes it more difficult to afford a mortgage. A 30 year mortgage that might've been $1,200, it might now be $2,200 because you've gone from 2.5% to 7.5% in some cases.

And so, yeah, you've got to work that into your calculation. But does that mean I would be less likely to stretch if I was in San Diego? Probably. Does that mean I might not buy quite as expensive of a house if I lived in Indianapolis or Oklahoma City or something like that? Probably not. It's probably not going to affect me much. Let's be honest.

The shorter your mortgage term, the less the interest rate matters. If you get a 15 year, it matters a lot less than a 30 year. If you paid the thing off in five, the interest rate doesn't matter nearly as much because you're just not paying interest for nearly as long. So, it's just a rule of thumb.

Yeah, houses are less affordable when interest rates go up. But I'm not going to change the rule of thumb every time interest rates change. I came up with it before interest rates were 2.5%. When I got my first mortgage it was 8%. My second one was 6.25% I think. So, yeah, I'm familiar with these interest rates. I think the 2X rule is still pretty good at these interest rates. Maybe it should have been 2.5X or 3X when interest rates were 3%. But like I said, I'm not going to change the rule of thumb. That's all it is. You got to know enough to apply it to your situation. It is just a general guideline. But be careful. Don't become house poor.

The one advantage of picking up a mortgage now at 7%, 8%, whatever you're paying now for your mortgages is you may not be stuck there forever. It wouldn't surprise me at all if interest rates went down. Maybe they go down 6% or 5% and you can refinance. You're not necessarily stuck at 7% or 8% forever.

Are they going back to 2.5% percent? My guess is no, but they probably won't be back there. Maybe not anytime in our lifetimes, but who knows. There's some terrible recession. Maybe rates will be cut right back down there and you'll be able to refinance at 2.5% percent. But don't count on that. Don't count on that saving you from becoming house poor now. I don't think you can rely on interest rates going down. They're just too hard to forecast in the future.

SHOULD YOU BUY A HOME IN THIS REAL ESTATE MARKET?

Okay, this next one is a long question. It comes in via email. “Dr. Dahle, I hope you get a chance to see this. Maybe speak about it on your podcast. I love your book and listen to your podcast frequently. I wanted to get your advice because essentially every young doctor I speak to is in this predicament.

I live in a high cost of living area, Northern New Jersey. I started working as a hospitalist last year and prior to starting, we deeply considered purchasing a home with a physician loan. We're looking at homes that sold for $450,000 in 2018. It’s now listed for $620,000 in 2022 and the house would go for $700,000 for a house that needed $100,000 of work today.

Given this, we decided to rent, which has been working out decently, but we'd much rather be homeowners. After a year of working and living like a resident despite our high rent, we've been able to save about $200,000.” Wow. Very impressive.

“Dr. Dahle, at this point, there's not a reasonable home in our area that is listed for less than $800,000, which would mean an enormous monthly payment. We feel lost. Right now there's a deadlock because most homeowners aren't selling because they would be trading a low interest rate for a rate around 8%. We're worried that as soon as the interest rates begin to drop, it's going to be just like 2020 where there are 20 offers on a home after it is listed for 24 hours.”

Is there a question there? No question. That's the email. I guess the question is what do you do with this? Yeah, it's an issue. Everybody wishes they could buy a home in 2009. But guess what? You can't buy a home in 2009. I bought one in 2010, but I also bought one in 2006. That one didn't work out nearly as well as the one I bought in 2010.

And so, we can't necessarily time our life with the real estate market. We'd all love to buy our house after houses have gone down 50% in value and interest rates have gone to 2.5%. But if you sit around renting, hoping for that to happen, you're probably never going to get in the game. And that's fine for some people if their life is such that they want to rent their entire life, that is an additional risk in retirement, that you don't have as much control over your housing costs. But that can work out for some people.

However, I'm a big fan of ownership. I like seeing docs own their jobs. I like seeing them owning stocks and real estate and their portfolios. I like seeing them own their homes because I think, in the long run, most of the time it works out to own your home. In the long run, I'm talking five plus years. Most of the time you're going to come out ahead having owned the home. But you do have to be able to get into the home.

Now, I mentioned earlier in the podcast, a rule of thumb is 2X. I don't know what you're making as a hospitalist. Let's guess $250,000, $300,000. 2X would be $600,000. Add on your $200,000 down payment, that's $800,000. You're saying there's not a reasonable home in your area listed for less than $800,000. Well, that puts you in a high cost of living area or you need to adjust what reasonable looks like.

Bear in mind, even as a hospitalist, even in Illinois, you're still in the top 3% or 4% of incomes in that area. If you can't afford a home, who can? So maybe you need to lower your view of what a reasonable home is and maybe you need to do what people have done for decades, which is start with a starter home rather than a big fancy doctor home. And that's okay to do.

But here's the deal. Sometimes you have to stretch a little bit in these high cost of living areas. And stretching is going to 3X to 4X, not going to 10X. That'll kill you. Realize there are consequences for stretching. It means you're going to drive a crappier car. You're going to work longer. Maybe you won't have as much for college savings. Maybe you won't go on as nice of vacations. There are financial consequences. You don't get a pass on math, but you'll probably have to do it.

If that's important to you to live in a high cost of living area, you're going to have to put more of your budget toward that. And yeah, it's going to be an enormous monthly payment. That's the way it works, especially at high interest rates. Maybe you'll be rescued when interest rates go down and you can refinance.

But if the time is right for you to buy a home. And it sounds to me like the time is right. You want to stay there. You've been there for a year, you've saved up a down payment. You got your financial ducks in a row. I'd go buy if I were you. And if $800,000 doesn't work, well, maybe go see what you can find for $1.2 million. Continue saving that down payment. Recognize this is going to be a big part of your financial life for a while. And go get the home. I hope that's helpful.

401(K) LOANS

All right, let's take the question off the Speak Pipe about 401(k) loans.

Speaker 2:
Hi Dr. Dahle. Thank you for all you do. I had a question about 401(k) loans. If you find yourself in a situation where you need to access your retirement money, is that an option that you would suggest or advise for or against? I just want to hear your thoughts on those. Thank you.

Dr. Jim Dahle:
Okay. 401(k) loans. The way they work, you can borrow money out of your 401(k). You can borrow up to $50,000 or 50% of the balance, whichever is less. Some of the changes, I think it was with Secure Act 2.0, it might've been with a different law. You now don't have to pay them back within like two months of leaving your employer. That used to be a real bad downside of 401(k) loans. I think you have until your next tax day or something like that. You got more time to pay it back now.

They're not quite as onerous as they used to be. The interest rate, you'll have to check with the plan. But these are not a terrible source of borrowed money. I guess technically you're borrowing it from yourself. It's your 401(k). And so, maybe it's even better than a lot of sources of borrowed money.

But in general, I don't like to see people using borrowed money when they need extra money. The first thing to do when you need extra money is figure out why you need extra money. What are you doing wrong in your financial life that you need extra money?

If you're listening to this podcast, this should either be a very temporary situation or you are doing a terrible job managing your finances. That's God's honest truth. Because most of the people listening to this podcast are doctors, similar high-income professionals, small business owners. They're making $200,000, $300,000, $400,000, $500,000 a year.

On a monthly basis you're making $10,000, $20,000, $30,000, $40,000, $50,000 a month. That's a lot of money. If you don't have any of that leftover at the end of the month, you are doing something terribly wrong. And if very many months have gone by that you had significant leftover at the end of the month, you should have money.

One of the first things you should put together is an emergency fund. An emergency fund is typically three to six months’ worth of your monthly expenses. If you're spending $5,000 a month, this is $15,000 to $30,000. If you're spending $10,000 a month, this is $30,000 to $60,000. You can take care of a lot of emergencies, a lot of things that you need extra money for. With $30,000, it goes a long way, I promise you, unless your spending's completely out of control.

Now some people, bad things have happened to them. They become disabled, they're out of work. They're still in residency. I don't know if that's a bad thing that happens to you, but if you're still in residency, you might not have much money. Maybe you're a student, maybe you're not one of the high income professionals that's the typical member of this audience. And I get it, sometimes you need extra money.

Where should you get it from? Well, the first place is your emergency fund. That's a good place to go if you need money. Secondly, of course, at this time you're working at fixing the problem that got you into this place in the first place. But maybe a little extra work. I teach my kids where does money come from? It doesn't come from the money tree, it doesn't come from dad, it doesn't come from the government. It comes from work. Go do some more work. Pick up some shifts, do some moonlighting, pick up a side gig, see if you can earn some extra money.

You can sell stuff. Might be a whole bunch of stuff in your garage that's valuable. I'll bet most of us could go down to our garage and find thousand dollars’ worth of stuff that we could sell within three or four days on Craigslist or whatever the local classifieds is and actually get some cash if you need extra money.

Other places you can get money from. You can get it from your portfolio. Roth IRA contributions, they can come out at any time tax and penalty free. There's some rules on that if you've funded it via the backdoor Roth IRA as there's some five year rules that apply to Roth conversions. But as a general rule, you can get to your Roth IRA money relatively easily.

What if you've got an HSA? If you've got HSA money and you've got some healthcare receipts sitting around that can cover those withdrawals, they come out tax and penalty free. Another great place to tap when you need extra money.

Sometimes you can get it from family members. Maybe you have a parent that cares about you a lot and can take care of you throughout whatever this emergency that you need extra money for is.

You can borrow money from other places. If you have a whole life insurance policy, you can borrow against that. That might have better terms than your 401(k). You can borrow against your car. You can take out a home equity loan. You can get a margin loan against your taxable account. When interest rates were really low, that was actually a pretty good place to get a loan.

You can sell investments. If you have a taxable account, find your highest basis investment. You probably won't have to pay much tax on that. You can sell that and use the funds.

Lots of places you can use for extra money. A 401(k) loan is not a terrible place. It's probably not the best place. But if you have money in your 401(k) and you don't have money in any of those other places, well, maybe that's where you go. It certainly beats starving. It certainly beats missing your mom's funeral because you can't buy an airplane ticket. But I certainly wouldn't be raiding it to buy a little bit nicer car. I wouldn't be raiding it to go on vacation. Define for me what you need extra money for then I'll tell you if it's okay to use your 401(k) for it.

All right. The quote of the day today comes from Henry David Thoreau. And if you think I'm cheap, you should read some of Thoreau's writings. And he said “The price of anything is the amount of life you exchange for it.” And that's the truth. We all have a limited amount of time, a limited amount of life, limited amount of life energy. We'll be talking more about this on next week's podcast. But that's really what the price is. Time and money are interchangeable in a lot of ways.

ROTH CONVERSION

All right, let's take a question about a Roth conversion. This one is off the Speak Pipe.

Victor:
Hi Dr. Dahle. Thank you for everything that you do. This is Victor from Ohio. I have a question about Roth conversion. I've been in practice for five years and saved some money in my 401(k) plan. I've matched into a one year fellowship that starts in July, 2024.

Should I try to convert my entire 401(k) into a Roth IRA given the upcoming lower tax bracket? Will the conversion of my 401(k) money be counted toward my income and bumped me into a different tax bracket? What are the steps for this conversion process and when should I do the conversion? In 2024 or 2025? Thank you for your help.

Dr. Jim Dahle:
Okay, great question Victor. Thanks for what you're doing. Thanks for going back to fellowship. We need fellowship trained docs, so I appreciate you doing that. Here's the deal with Roth conversions. Like Roth contributions, the time to do them is in years when your income is a little bit lower than your peak earnings years. A year in which you go back to a residency or a year in which you go back to do a fellowship or a sabbatical year or a year you take off for parental leave. Those are great years to think about doing Roth conversions.

In fact, one of the best tricks is for people who are non-traditional students. They come into medical school with a 401(k), do a little Roth conversion each year. By the time they leave, they've basically done a tax-free conversion of their entire 401(k) by the time they leave medical school. It can be a great move.

And so, I think you're thinking about the right thing. I think if I were you I would try to do a Roth conversion of that 401(k) money. You didn't say how big it is. I don't know if this is a $15,000 401(k) or if it's a $1.5 million 401(k). A typical fellow is not going to be able to afford the taxes on a huge Roth conversion.

The first thing is you have to figure out how you are going to pay the taxes because you will owe taxes on a Roth conversion. Are you going to be able to pay that out of your current earnings? Do you have some taxable savings on the side that you can use to pay for that Roth conversion? Where's that money going to come from? Because if it's coming out of the 401(k) itself, the conversion might not work out quite as well as it otherwise would.

But if you can afford the conversion, I would encourage you to convert some or all of that 401(k) during the time that you are in fellowship. Now the problem with the medical world is our fellowships and our residency tend to go June 30th, July 1st, whatever, to the next June 30th. And so, that's half in each year. So you don't really have a full year of fellow income. It sounds like you've going to have half a year of attending income and then half a year of fellow income. Then the next year, half a year of fellow income and probably half a year of even higher attending income. In that case, I'd try to do as much of it as possible in 2024 rather than 2025. But it might be advantageous to you to split that between 2024 and 2025 or maybe you're moonlighting by 2025 or by the time you pay the tax bill, you have been an attending for quite a while for 2025. So maybe you'll have more money to be able to afford to pay in 2025 if you do the conversion then.

You just have to run the numbers and see which is going to work out best for you. But in general it'll be cheaper to do it sooner. You just might have more money later to pay the bill. Yeah, this money gets added to your taxable income. It gets added on top. You're paying for that conversion at your marginal tax rate. So, on a fellow's income, especially if you got half a year of attending income, you might be converting this at 22%, 24%, maybe even 32% federal plus your state tax rate. So, it won't be the cheapest conversion in the world, but it still will probably be a good idea for you. Look into it carefully and figure that out.

How do you do it? It's pretty easy. It's just a transfer. It's a transfer from the 401(k) to a Roth IRA. The way to do transfers for most financial accounts is to go to the place where it's going to go, where it's going to end up and have them initiate the paperwork and they pull the money over. If you're going to have your Roth IRA at Vanguard and your 401(k) is at Fidelity, you go to Vanguard, not Fidelity, and you fill out some paperwork and say I want to bring this money from the 401(k), I want it to go into a Roth IRA. When it gets to the Roth IRA, you've done a Roth conversion. That's a taxable event. But you only need to fill out one six page piece of paperwork at Vanguard to get that done. I hope that's helpful.

And if you need help with that, you don't have to do it online. You can call somebody up on the phone, they'll walk you through it. They do this all day long. It's a Roth conversion, it's an account transfer. I know it's terrifying the first time you do it, but after you've done it 15 times, I promise you it won't be terrifying. It'll just be annoying because of the paperwork and how long it takes.

Don't wait till the end of the year either. This can often take 3, 4, 5, 6 weeks. It takes time to send this paperwork back and forth and get Notary Publics to sign it and whatever else has to be done with it. So, don't delay. When you're ready to do it, get it done.

CAN YOU CONTRIBUTE TO U.S. RETIREMENT ACCOUNTS IF YOU WORK ABROAD?

All right, here comes another question about being in Dubai. I hope I can actually answer this one. It might be hard.

Speaker 3:
Hi Dr. Dahle. Thanks for everything you do. I'm a longtime podcast listener. My wife and I are both American physician and nurse living and working in Dubai. Our Dubai employer pays us via a tax minimization strategy. My payment each year is less and her paycheck is more. Combined we receive $120,000 each. $240,000, which is under the exclusion for foreign income, so is tax free. My employer also provides us housing, a benefit that if we paid for on our own we estimate would be worth about $40,000.

My question is, in this situation, how do we contribute to our US retirement accounts that have been opened before we moved here from prior employers. Our Dubai income falls under foreign exclusion rules. But does this mean that we're unable to use it to contribute to these accounts? Is it after tax income? Would it go on a Roth? Would it go on a regular IRA? Would it be taxed later even though it's excluded now from tax or can we just not contribute to the retirement accounts if we only have foreign income? I can't seem to find a clear answer to this. Thanks for all you do and thanks for any help.

Dr. Jim Dahle:
All right, great question. Thanks for being a doc in Dubai. I'm sure they need docs. At first I hear this scheme your employer is doing. It sounds illegal so make sure that's actually legal. I guess it's fine. $120,000 isn't crazy to pay a nurse. It seems a little low for a doc, but maybe that's okay in Dubai.

All right. Let's see if we can learn together a little bit about the foreign earned income exclusion. This is relatively new to me, so I'm looking at an IRS page about the foreign earned income exclusion and it says “If you meet certain requirements, you may qualify for the foreign earned income exclusion, the foreign housing exclusion and the foreign housing deduction.

To claim these benefits, you must have foreign earned income. Your tax home must be in a foreign country and you must be one of the following. A US citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. A US citizen or US resident alien who's physically present at foreign country or countries for at least 330 full days during any period of 12 consecutive months.” That sounds like you probably qualify for that.

“If you're a US citizen or resident alien, you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude your foreign earnings from income up to an amount that is adjusted annually for inflation.” That's $120,000 for 2023. “In addition, you can exclude or deduct certain foreign housing amounts.”

Okay, so that's cool. Maybe you're getting paid more than $120,000, I don't know, but that's an amount that can be excluded. That's pretty cool. You can exclude that from income.

“You can also exclude from income the value of meals and lodging provided to you by your employer on their premises and for their convenience.” That's pretty fun, too. It's exciting.

Okay, it sounds like you can exclude it from your US income. I don't know if you have to pay income tax on it in Dubai. I am not familiar with Dubai tax code. You might have to, and that might be why the US is excluding it. So look into that. I'm sure the other people you're working with can help you answer that question. I don't know about Dubai tax rules, but it sounds like you can exclude it from your US income.

Now, can you still use it to contribute to retirement accounts? Boy, that's a great question. I don't know the answer for sure. It's earned income, which is what you have to have to contribute to retirement accounts. I would guess you could. Obviously, since you're not paying taxes on it, you want to use Roth accounts this year, so it's tax free later, too. I'm going in at 0% and coming out at 0%. That's a win.

Does it allow you to do that? Well, I don't really know where on your tax form you take this exclusion. So, I don't know the answer to your question. You know what? I bet we're going to hear about it, though, from somebody who knows the answer to this question listening to the podcast.

So, let's do this. I'm going to avoid answering this question. I'm going to put it out there to the WCI community and I'll bet somebody will send me an email within a week or two of this running and tell me the answer and I'll share it the next time we record a podcast after that. But I'm going to bet that you can make the contribution. And of course, you'll want to do a Roth one. So, it's pretty cool.

Now, there's some other stuff on this page that's interesting too. It talks about self-employment income. It doesn't talk about payroll taxes, though, which is my other question. I don't know if you have to pay payroll taxes on it. You might have to.

Certainly if you're paying payroll taxes on it, Social Security and Medicare, I think you're almost certainly going to be able to make retirement account contributions with it. But I don't know whether that exclusion also includes payroll taxes or not. That might be another good question to find an answer for and I'll look for it in the meantime. It'll be a couple of weeks before this thing runs and hopefully somebody will help me to find the answer because I don't know and I can't find it with a quick Google search. Congratulations, you've stumped the chump.

All right. Thanks everybody by the way, for what you're doing. Whether you're in Dubai, whether you're in Connecticut, whether you're in rural Alabama, whether you're serving as a missionary of some kind in Guatemala or Timbuktu or wherever. Thanks for what you're doing. It really does matter. You don't realize it until you go to the doctor yourself, but it really does matter that there are people trained and available and willing to take care of you when you get sick or injured.

WHAT AMOUNT OF ANNUAL DONATIONS JUSTIFIES A DONOR-ADVISED FUND?

All right, let's take a question about donor-advised funds. We just talked about that last week on the podcast. Hopefully I can actually answer this question.

Speaker 4:
Hi Dr. Dahle. My question is, in your opinion, what amount of annual donations justifies having a donor-advised fund? A follow-up question to that is we currently do the standard deduction for our taxes and I'm wondering if we should use a donor-advised fund in order to alternate between standard and itemized deductions each year. We currently donate about $13,000 a year and we have a brokerage account with about $15,000 in appreciation. Thank you.

Dr. Jim Dahle:
Okay, first of all, I think I might've found the answer to the last question while I was listening to that one. This is a website called brighttax.com and it says the foreign earned income exclusion can limit your IRA contributions.

The foreign earned income exclusion is the maximum income a US expat can earn abroad without paying tax to the IRS. This amount can be excluded from US taxation whether or not you paid tax in your country of residence for 2023. The maximum amount is $120,000 to contribute to an IRA.

An expat must have earned more foreign income than the exclusion amount. You must have earned income to make IRA contributions and apparently that excluded income is not earned.

That's the best answer I can find Googling it on the internet is that you're not going to be able to do that unless you have them pay you a little bit more. I don't think it's worth it. I would just invest in taxable if I were you.

All right, onto this question. Donor-advised fund. When does it make sense to use a donor-advised fund? Well, if you want to use Vanguard's your minimum amount to open the Vanguard charitable donor-advised fund is $25,000. You can't use that one unless you're going to put in quite a bit. At Fidelity it's as low as $5,000.

Daffy, the company we were talking about on the podcast last week, $10 minimum. They even have a specific category for people with less than $100 in their donor-advised fund. So, there's really no minimum. But you have to be careful which donor advised fund you select.

When would I start bothering with it? Well, it depends on what you want to do with it. If you're just trying to anonymize your donations and maybe get a little bit of convenience there with them and you're going to use Daffy or you can use Fidelity or something and start it with $5,000 and maybe not have that much in there after a while, then I think it's fine to just do it with $1,000 or $2,000 or a few hundred dollars or whatever and that'll help you stay anonymous with your donations. Only have one receipt to keep track of. I think that would be perfectly fine.

Now, if your strategy is to donate appreciated shares, that means if you're going to donate more than $25,000 to $50,000 worth of shares, not gains, but shares, the actual whole share of value. If you're going to donate more than that in your lifetime, you're going to be at the top tier of Daffy, which is $240 a year, which is about the minimum amount you can pay at Vanguard as well. And so, it seems like you ought to have enough in there to make sense to have a donor-advised fund to do that.

What's that amount? I don't know. $10,000 maybe. You probably got enough if you're planning on donating appreciated shares to open a donor-advised fund. This is not a private charitable foundation where you need millions of dollars for this to make sense. A donor-advised fund can make sense with just a few thousand.

It sounds to me like you're there, you're a charitable person, you got appreciated shares in your taxable account. It's time for you to open a donor-advised fund if this is something that's important to you. If you got $25,000 plus you can consider Vanguard. If you don't and you have $5,000 plus you can consider Fidelity. If you don't have that, look at Daffy.

All right, next question. Wait, that was the last question. That's a bummer. You guys need to send us more questions. You can do that at whitecoatinvestor.com/speakpipe. This podcast is run by you, believe it or not. We answer your questions. We bring on the guests that you request or you suggest. We try to produce it in a way that's agreeable to you because we want you to become financially literate, we want you to become financially disciplined.

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I didn't hear what the complaint was. Maybe it's that he has to commute every day. I'm sorry about that. Oh, that you listen to them all and we don't have more. Well, we just recorded another one today. This is for you, just for you. I was thinking about you. That's why I sat in here for five hours today recording podcast episodes.

We did last week's and next week's and had a couple of Zoom meetings as well today. I've been sitting at this desk for a while, but I do it because I truly do care about you. No, I don't need the money anymore. That's fine. We'll still save some money. It'll increase our legacy. We'll give a whole bunch of it away. We'll certainly pay a whole bunch of it in taxes.

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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 149 – Doctor gives away $1 million.

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All right, welcome back to The Milestones podcast. This is the one where we celebrate your financial milestones and use them to inspire others to do the same. If you'd like to come on this podcast, you can do so, you apply at whitecoatinvestor.com/milestones, and whatever you've done, we'll celebrate it with you.

I don't care if it seems like a tiny little milestone or whether you've become the next Warren Buffet. We'll celebrate your milestones because there's somebody out there just like you who can relate to you and who will be able to take your experience and apply it in their lives and achieve the same levels of success and happiness, et cetera, that you have through those financial accomplishments.

INTERVIEW

We have a great guest today, a new goal that we haven't actually talked about much on this podcast. So let's get Pete on the line. Our guest today on The Milestones to Millionaire podcast is Pete. Pete, welcome to the podcast.

Pete:
Thanks, Jim. Thanks for having me. I appreciate it.

Dr. Jim Dahle:
Tell us what you do for a living, how far you are out of training, and what part of the country you live in.

Pete:
Sure, yeah. I'm a subspecialty surgeon. I live in Indiana. I finished training in 2012, so I'm practicing here for about 11 years now.

Dr. Jim Dahle:
Awesome. And what milestone are we celebrating with you today?

Pete:
My wife and I have been able to, over a period of years, give a million dollars to charity.

Dr. Jim Dahle:
Awesome. Congratulations.

Pete:
Oh, thank you. Thanks so much.

Dr. Jim Dahle:
We're at almost 150 episodes and you are the first person who's come on with a milestone that involves giving to charity. This is pretty awesome to talk about today. I definitely do not have a script or a set list of questions for this particular milestone, so we're just going to talk about it a little bit conversationally.

Let's start with some numbers though. Tell us about your wealth level. In broad terms, how wealthy are you?

Pete:
Well, I guess from a net worth standpoint, we're about $4 million in net worth. Income, it's kind of has peaked here and maybe will plateau here, maybe even go down in coming years, but just reached about a million dollars in income annually. But starting in 2012 was probably closer to $300,000 to $400,000. It's kind of gradually increased up to this level and probably at a peak and maybe plateauing or even going down perhaps in the coming years if we work a little bit less. But yeah, I think it's kind of divided into equities, retirement, and some real estate type things.

Dr. Jim Dahle:
Okay, very cool. All right. When did you start giving to charity?

Pete:
Yeah. We started giving when my wife and I got married shortly before… Actually, no, in my second year of medical school. Our income at the time was my student loans. And then she worked at a nonprofit. And so, we started giving as soon as she started making. So that was a very small amount because we had a very small income, but it was kind of more of a principle that we kind of aspire to give at a minimum of a tithe. Just from something that had been taught to me and modeled by my dad. And so, we thought, let's start early. Yeah, ever since. I guess that would be 2004, we probably gave about $1,500 that year. And then thankfully it's gotten more each year.

Dr. Jim Dahle:
All right. What's the most you've ever given to charity in a single year?

Pete:
I think it was about $110,000 last year. And about the same the year before. Those are our two peak years, and hopefully we'll be able to continue at that rate and increase.

Dr. Jim Dahle:
Very cool. All right. Well, why was it so important to you? You mentioned your father modeled it to you. Well, our parents model lots of things to us that we don't actually do ourselves. What was it about this that you decided this is important to us, this is something we're going to do with our finances, and that got you in that habit? It's been 20 years almost now that you've been given to charity. Tell us about that.

Pete:
Yeah. It did come from a conviction of my Christian faith that that was kind of maybe a good guideline for giving. I thought, “Hey, that's a decent general guideline.” And so, my kind of goal was like “Let's just do the minimum of that much.” I saw the fruit of it in my parents' life, how they lived below their means. I think the discipline of that giving also was a discipline of saving. And then they were able to build wealth and have a very, very generous life.

And so, I think it was number one, probably a personal religious conviction, but then also seeing the fruit of it in the generation before. And then honestly I think there was a lot of satisfaction and even in those really lean years to say we're still doing this. I think there was a lot of personal satisfaction and I guess a lot of us physicians are just goal oriented, and that was just a simple concrete goal that I think has carried us through and has given us capacity to do more since we were able to start out early.

Dr. Jim Dahle:
Can you tell us about some of the charities you've supported over the years?

Pete:
Yeah, yeah. One of our favorites is World Vision. It's kind of helping people in poverty. A lot of them have a Christian focus, Christian mission focus, compassion international. Local church that we attend. Medical School Foundation. There's an organization that we like called the Christian Medical and Dental Association.

There's a local homeless shelter that we like to support, Young Life Ministry. And then a handful of missionaries who work in various countries, Southeast Asia, Africa, some local and some in impoverished areas in the United States, and even some kind of in more Parachurch ministries in the US.

It's expanded and I think it grows every year that list that we're supporting. And so, it's kind of fun. Honestly, I don't know that we're making changing the lives of World Vision or Compassion International, but we're able to help our local church significantly, we're able to help a lot of missionaries. Our gifts mean a lot to them, and that part has been fun as well.

Dr. Jim Dahle:
How do you evaluate a new charity? If you hear about one, you think you might want to support it, what do you do to evaluate and make that decision?

Pete:
Yeah, that's a great question. Probably, we learn about them through word of mouth and maybe from people who are also similarly minded who will tell us about, “Hey, this is someone you should consider supporting, or this is a ministry that might be close to the heart of what you're doing.”

But I think one of the main focal points is helping people in need. I think poverty is having a global look at things. We realize that we're in America, so therefore we're very fortunate. And then we're having this type of income so we're exceedingly fortunate.

And I think the ones that are focused on helping people in need, and then also because I have a conviction that God is real and the Bible is true, the ministries that offer an eternal hope as well, while also helping their material and physical needs. I think those are the ones that really get me the most excited. If there's a component where, hey, we're helping someone either physically, medically, financially, but also we're also helping them spiritually and giving them a message that I think may have an eternal value.

Dr. Jim Dahle:
Let me share some statistics with you and get your take on them. It turns out if you look at the average American, they give something like 3% to charity. And in fact, the percentage falls as people's income goes up. It can be as much as 13% for people in the poverty range. And then as low as 3% for those in the $200,000 plus range. What do you think about that when you hear that so many people out there, even those doing pretty well, are really given a very small percentage of their income to charity?

Pete:
Well, Jim, it's funny because when I was young and naive, I'd be a lot more judgmental about it than I am now as a man in my forties who has a high income. And ironically, it's probably easier to give. Okay, I got to be careful when I say that. When we made $40,000 my first year in residency, giving those $4,000 hurt more than maybe giving $110,000 last year because that was a little bit more of a challenge.

But I think as your income goes up, I think not only does your spending capacity go up, but your curiosity with how to create wealth goes up. You've learned more about these opportunities with different real estate investments and syndications. And so, as income goes up, I think it's just human nature to want more and try to create more. And you do have more opportunities when you make more.

I think we're all susceptible to materialism, and we spend a lot of money on travel and ourselves now. And so, way more than we ever thought that we would. I think it says something about human nature and it says something about the world that we live in that I think the more you have, the more access you have to get more or make more or invest more and get more creative.

Dr. Jim Dahle:
Yeah. It's interesting. If I just look at your numbers, you've given away a million dollars, you're worth about $4 million. About 20% of your wealth you've given away. Now, over time, obviously. If I look at those percentages for some very well-to-do people that are known to be pretty charitable, your percentage is way higher.

Let's take a look at somebody like Warren Buffett. He's worth $120 billion. I guess that's not necessarily true. He has given away $50 billion. That's a pretty good percentage. He has given away 30% or so. So, it's a little bit better percentage than you. But a lot of these people, you look at, and they really don't plan to give until after they die. How come you decided to give while you're still alive?

Pete:
Well, it's a great question. Again, I think it started with a religious conviction, but also has evolved into a philosophy that I think life is much richer when you start to give away. I got a quote, a classic Warren Buffet quote and I've come up with my own base on his. He said, “Do not save what is left after spending, but spend what is left after saving.” And that's a great mantra. And I think that's one that's off repeated and a really good one.

I've kind of come up with my own that come following his lead is “Do not give what is left after saving and spending, but save and spend what is left after giving.” And I also break it down like this. You give first, you save second, you spend third, and this is the best part, and you alluded to this as well, you're giving after you die, you give last. In other words if you have the discipline to save for spending, then you'll likely be able to save a lot as well if you're giving before you save, then you save before you spend, and then you're going to continue to grow that wealth, and that way you get to give first and you get to give last.

How cool is that? The idea that, okay, the discipline that allowed you to give is the discipline that allowed you to save. And so, I'm seeing that as the wealth grows, my capacity to give grows. And I've heard you say this and I've heard other people that I listen to and respect, say, “Hey, give it while you're alive and enjoy the fruit of that.” Seeing people's gratitude and knowing even people you don't see knowing that you're helping them. There is a great sense of satisfaction to know that you're helping other people.

Dr. Jim Dahle:
Yeah. One of the most vocally anti charity folks I've ever met is a fellow by the name of Phil DeMuth, who you may be familiar with or not. And he really gives two reasons. One, he thinks lots of people can't afford to give to charity. He says “Americans love giving to charity. I wish they didn't because charity is a luxury they cannot afford. With 30 years of retirement coming at them like a freight train and pennies in the piggy bank, their charity had better begin at home.”

And the second reason is he just doesn't feel like charity spend money very well. He feels like we'd be better off giving half as much directly to people who need it. If you had Phil in your house and you could sit him down for 10 minutes and try to convince him to give to charity, what would you say?

Pete:
Great question. Wow, that's a challenging one. I'm sure he would outsmart me, and he would win that argument, but I would certainly tell him Phil, just speaking from my own personal experience, giving has actually created a remarkable amount of discipline in our household. And that was a starting point. And I think it actually has significantly impacted our ability to build wealth because of that discipline, because of that concept of delayed gratification.

The personal satisfaction from knowing that I'm helping other people is actually helped me feel rich. In fact, there's a really good sermon series and book by Andy Stanley called How To Be Rich. And the concept is, if you have enough to give to others, then you're rich. And so, don't a lot of people want to feel rich? Well, I'll tell you, when my wife and I were in residency in the later years making $60,000, $70,000, $80,000 when I was doing some moonlighting, and we were giving $6,000, $7,000, $8,000, $9,000, $10,000 away a year, we felt rich at that income.

And I don't think without giving, I would've felt rich. I would argue that the American dream is probably one of them is wealth and security. And in some ways I think giving helps philosophically to get a concept that I have enough. Not many Americans have enough. Whether that's a salary of $50,000, $500,000, $5 million or $50 million. I really do believe the concept of having enough is, you've seen the surveys. If you ask someone what type of income do you need to be rich? And a person will usually say about 20% more than they make, whether they make $60,000 or $600,000 or $6 million. And so, I feel like by God's grace, I really believe that I've found a way to feel rich, and that's by having more than enough.

Dr. Jim Dahle:
Yeah, I absolutely agree with you. This is a great way to feel wealthier is giving money away. It sends that message to your psyche. That you have enough. And I think that's a good thing. I think it's good for the causes you're supporting. I think it's good for your soul.

Well, lots of people want to be millionaires, or at least that's what they think they want. In reality, what they want is to spend a million dollars. Not only have you accumulated enough to be a millionaire, a real millionaire, not just someone who spent a million dollars, which is obviously the polar opposite of a millionaire, but you've also given away a million dollars. Congratulations to you. Thank you for doing that.

Pete:
Thank you.

Dr. Jim Dahle:
And thanks for being willing to come on the podcast and inspire others to do the same.

Pete:
Well, I appreciate it. Thanks so much for your time and keep up the good work. I appreciate all you're doing.

FINANCE 101: CHARITABLE GIVING

Dr. Jim Dahle:
All right. I hope you enjoyed that podcast as much as I did. Let's talk for a few minutes about charitable giving. Charitable giving is awesome. There's lots of ways to do it. You can just give money away. That's okay. You're actually allowed to give $17,000 away to anybody you like without I'm going to tell anybody about it. And your spouse can do the same.

Between the two of you, if you're given to another married couple, you could give $68,000 in 2023 without having to tell anyone. If you give more than that, you have to file a gift tax return. And that can be a pain. It doesn't actually cost you any taxes unless you end up with a very large estate. But it does involve filing a return, which can be a little bit of a pain. But if you give away $68,000 at the end of the year and $68,000 at the beginning of the year, you could pretty easily double that amount.

But if you want a tax break for giving money away, you can't just give it to anybody you like. You can't give it to the kid of your pastor to go to college. That was an email I got yesterday that somebody wanted to know how best to do that, the most tax efficient way to do that. And maybe you can give some appreciated shares to somebody in a very low tax bracket. They get your tax basis on those shares but they still might be in the 0% long-term capital gain bracket. Maybe no one pays taxes if you give something like that.

But for the most part, if you want a tax break, we're talking about given to charities that have registered with the IRS, these are 501(c)(3)s. If you do that and you itemize on your taxes, you don't take the standard deduction. If you itemize, you can take the amount you gave away to charity as a deduction, meaning you're basically giving with pre-tax dollars.

If you're like many docs and your marginal tax rate is 30, 40, or even 50%, you can basically do an extra 50% to 100% amount of good with the dollars you give by running them through some sort of charitable organization. Obviously, if you don't itemize, you're very limited and how much of that you can deduct. They did pass a law a few years ago that doesn't allow you to deduct something though.

Let's see what the limit is for 2023. It looks like you can give $300 if you're single, $600 a year if you're married filing jointly. You can give that away without even itemizing and be able to deduct that on your taxes. Obviously, you got to keep records. You can't receive anything in return from the charity other than very non-specific stuff. But if they give you a dinner or something, you have to subtract out the cost of the dinner from the amount that you can deduct.

All right. What's the best way to give? Well, there's a couple of ways that you ought to be thinking about. One, if you are 70 and a half or older, I'm convinced the best way to give to charity is what's called a qualified charitable distribution. This takes the place of your required minimum distribution from your IRA or 401(k) so you don't have to pull it out, pay the taxes on it, or give it to charity and then take the deduction. It just goes straight from your IRA to the charity. Nobody pays taxes on it. It's great. And lowers the amount you have to take as an RMD or can be your entire RMD up to $100,000 per year.

Another really slick way to give to charity is to use a donor advised fund. Now, some people use this to do what I call the jerk move, which is put a bunch of money into it and leave it in the donor advised fund because you get the deduction when you put the money in, even if you don't actually give it to a charity. But when you take it out of the fund, that's when the charity actually gets the benefit.

But you don't get an additional deduction at that point. The money can grow while it's in the donor-advised fund. There's usually some fees, but you can invest it just like you could in any other tax protected account. It grows in a tax protected way. It's tax free growth in a donor-advised fund. So you could put $100,000 in it and a couple decades away, give away $300,000 and none of that would be taxable income to you or the charity.

But the nice thing about DAF, a couple of nice things about it. You can put the money in all at once and then distribute it to multiple charities without having to keep track of all those receipts, all the charities you gave it to. One big receipt from the DAF. That's it. That's all you have to keep track of. And so, it's very easy to show in an audit that you legitimately deserve that deduction.

But the reason I really like it is it eliminates what I call charity porn. If you've given to charity, like multiple charities, and put your name and address on that gift, you know what happens next. Over the next five to 10 years, your mailbox is filled with glossy brochures from whatever the charity might be.

It might be the greatest charity in the world, but it still probably spends 5 to 15% of its money trying to get more donations. And you can leave the money in the charity where it does more good rather than being used to market to you some more by not telling them who you are. And the donor-advised fund is a great way to do that. You can basically give anonymously. And so, I really like that because it got rid of all that charity porn out of my mailbox and I feel like my dollars go a little bit further when I do that.

As we talked about in the podcast itself, I think it's great to give while you're still alive, you get to see the benefits of it. But lots of people prefer to do all or most of their giving after they die.

So, what should you leave to charity? Well, there's a few types of accounts which are better than others. For example, a health savings account, an HSA is a terrible account to inherit, but it's a great account for a charity to get. If you inherit one, it's all taxable income in that year at your ordinary income tax rates. But is it taxable to the charity? Not at all. It's just like getting cash to them. It's all the same.

Same thing with an IRA. Now, the benefit of an IRA, if you inherit one is you can at least stretch it out over 10 years. But the charity, they don't pay any taxes at all on that, whereas it's taxable or ordinary income tax rates to your heirs.

First best account to leave to a charity is an HSA. The second best account is some sort of tax deferred account, like an IRA or 401(k). Keep that in mind when choosing what to leave to who. If you have a big charitable desire at your death, those are certainly the accounts that ought to go to the charities first.

Thanks to all of you who do give to charity this holiday season. For a lot of us our minds and hearts turn to others. And we realize that there are a lot of people that our dollars can help. And many of us truthfully have enough, have enough income, sometimes even have enough wealth already, and we can afford to give away some money.

Give some away if you've never tried it. See how it goes. Give to somebody you care about. Give to somebody in need. Give to a charity that supports a cause that you support and you'll be surprised what it does to your psyche. I think it's not only good for your soul, I think in the long run, it's actually good for your finances.

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All right, that's it for the podcast. I sure appreciate you guys listening. Without you, it's not much of a podcast, but we want you to keep coming on and keep listening. So let us know what we're doing well, what we can maybe improve on, and we'll keep producing this great content for you and inspiring you to reach your goals.

Keep your head up and shoulders back. You've got this, and we're here to help. See you next time.

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.