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.

This is White Coat Investor podcast number 331 – 401(k) and IRA limits are totally separate.

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All right. Welcome back to the podcast. It's been a little while since we recorded some. Part of that is because I flaked out last week when I was supposed to record a bunch of podcasts. Turned out I had gone to the local amusement park, it's called Lagoon here in Utah. And I was standing in line for a ride when Megan texted me and said, “Aren't we recording today?” So sorry about those of you who I was supposed to record a Milestone podcast with that day and we had to reschedule. I need to look at my calendar a little more closely before heading out.

It's really unfortunate too because about 30 minutes after that call I wished I was at home recording podcast. I get a little bit of motion sickness on those rides and I made the mistake of writing three rides in quick succession that I probably shouldn't have been on and I ended up laying down in the pavilion for about 45 minutes to keep from vomiting. So, if you have that same experience at amusement parks, know that I have great empathy for you.

This doesn't run for a while. It's July 31st and we're not running this till September 7th, so that must mean I've got some fun trips coming up. And indeed I do going to the Wind Rivers in the morning backpacking trip with my son. And then the week after that, Katie and I are taking him up to the Grand Teton. It's his turn. His older sisters have both climbed it and it's his turn to go climb that. We're going to do the Middle Teton as well. So lots of fun scheduled in August for us. Hope you're having a great summer as well.

For those of you who are working hard and nose to the grindstone know that we appreciate what you're doing. Granted, we're off in the Tetons and that's very great for us, but I know a lot of you are not there. You're on the wards. You are in clinic. You are in your law office. You are grinding with your new entrepreneurial company. Whatever. You're working a million hours. What you're doing is important, and if no one said thanks, let me be the first.

401(K) CONTRIBUTIONS ARE SEPARATE FROM IRA CONTRIBUTIONS QUESTION

Okay. Let's get into the content today. I got like six emails or blog comments left in a 48-hour period and I said we just got to address this on the podcast because this is confusing a lot of people. So, I got this email. Let's just take the email here.

George says, “I heard on a Wall Street Journal podcast that the Secure Act 2.0 plans to change high-income earners 401(k) catch-up contributions to Rothify them. I read your blog post on the Secure Act 2.0 changes, but what does it mean if you're already doing the backdoor Roth IRA and you're concerned about the pro-rata rule about holding multiple Roth accounts? What's the priority? How would you go about setting up such a Roth account with your bank, Vanguard or whoever?

What about the solo 401(k)? I read somewhere that this is exempt from this rule, but information is scant. I'm concerned for 2024. Some of the details are unknown, of course. Until the government implements the tax code changes this I expect will affect many of your subscribers. I'm waiting for your detailed blog post on this matter, many of which have saved me so much time and headaches.”

All right, there's a lot of confused stuff in that question and a lot of them had similar amounts of confusion when I get this question. The underlying principle though that you need to understand is that your 401(k) contributions are completely separate from your IRA contributions. Completely separate.

They do not overlap in any way, shape, or form, whether they are tax-deferred, whether they are tax-free, whether they are traditional, whether they are Roth, whether they are after-tax, whatever they are, separate limits for 401(k)s and separate limits for IRAs. 457s also have their own separate limits.

I have a few kind of pillar blog posts out there that if you listen to this podcast, even if you don't like reading blog posts, you ought to go read these blog posts. Here are a few of them.

One of them is our backdoor Roth IRA tutorial post. It has every piece of information I could think of putting into a blog post on the backdoor Roth IRA process. And below it is like 3,000 questions from White Coat investors, mostly just wanting confirmation that their understanding of the post is correct. But for anything having to do with the backdoor Roth IRA, you ought to check that out.

We have another blog post on multiple 401(k) rules. The rules when you have more than one 401(k) available to you and you ought to take a look at that as well if you've never seen it.

Another important blog post I published around the beginning of 2023 is all about the Secure Act 2.0, which kind of snuck up on me a little bit. I didn't realize quite how much was in that that would change what we do here at the White Coat Investor. It had all kinds of changes. So, I wrote a blog post and I think I did it on Christmas Eve or something.

I did this for you so you would understand it, but of course, people are off doing other stuff around the end of the year holidays. And so, a lot of people missed that post, but it's called “What You Should Know about the Secure Act 2.0.”

And you really do need to go look at that post. It talks about this subject that this emailer is discussing, which is that starting in 2024, that catch-up contribution, which I think the catch-up is $7,500 this year, if you're 50 plus in your 401(k) as part of the employee contribution.

That starting next year for high earners, like most of you listening to this podcast has to be Roth. And so, all the 401(k)s in the land are still trying to figure out how to deal with that because that's a totally new change. It used to be that all catch-up contributions for 401(k)s, 403(b)s, et cetera, were tax deferred.

Well, now it's going to be optional for those under… I think it's around $140,000, $145,000 in modified adjusted gross income. But certainly most of you, at least those who are done with their training have got an income above that. And so, below that, you're going to have the option Roth or tax deferred. Above that, it's got to be Roth.

And why they did that, I don't know. They want your tax money now maybe. For whatever reason it's fine. It's a good thing. It's not like this is bad that you got to have Roth. It's another good thing. Anyway, be aware that that change is coming.

Okay. So, the questioner, this emailer asked about, “Well, what does this mean? What does this mean for my backdoor Roth IRA?” Well, it doesn't mean anything for your backdoor Roth IRA. It has nothing to do with it. It's a totally separate contribution limit.

Your pro-rata rule has nothing to do with what's in your 401(k) or your 403(b). The only things that count toward the pro-rata rule have IRA in them, SEP IRA, SIMPLE IRA, traditional IRA, rollover IRA. Those ones count. Inherited IRAs don't count. Roth IRAs don't count. Everything else goes into the pro-rata rule for the backdoor Roth IRA process. So, this is no big deal.

Now, how do you set this up? Well, you don't set this up. Your employer sets this up. Their 401(k)s problem specifically has to figure out how it's going to do Roth contributions into the 401(k). You don't have to go to the bank, you don't have to go to Vanguard, you don't have to do anything else to set this up.

Now if you are self-employed, that may not be the case. You have to pay a little more attention to it since you're in charge of your 401(k) and you've got to make sure you're complying with the rules and that the contributions that go in there, these catch-up contributions are Roth.

There's other changes in the Secure Act 2.0 you should be aware of and I can't go through. It's like 80 of them. There's a whole bunch of changes. And so, go through that post on the Secure Act 2.0, make sure you understand those changes. I hope that's helpful.

All right. Let's take another question. This one off the Speak Pipe. This is Cody who's got a question about 401(k)s. I love 401(k)s. So, let's hear his question.

401(K) QUESTION

Cody:
Hey Dr. Dahle, this is Cody from the Midwest. I have a question about 401(k)s. A specific question revolves around converting traditional 401(k) contributions to Roth after graduation.

A little background. I recently completed a three-year residency program. During the first year of residency, I used exclusive traditional 401(k) contributions and then transitioned over to Roth contributions afterwards.

I was wondering, is it possible to convert those traditional 401(k) contributions and the match that the employer provides, which is 5% to a Roth even though I am taking a attending position at the same institution?

Dr. Jim Dahle:
Okay. Great question Cody. Thanks for being in the Midwest. Midwest needs doctors too. Everybody else might call it a fly-over country but those of us who have been there and spent significant time there, I know there's some pretty awesome people in the Midwest.

All right. Here's the deal. You got basically three options. One, if your current plan allows it, you can do in-plan Roth conversions of that tax-deferred money. The plan may not allow it though.

When you leave the employer, and I'm not sure if you're leaving or staying in the same place, but if you're leaving you can take the money out of that 401(k) and roll it into the new 401(k), wherever you're going. Your new 403(b), wherever you're going. And that plan might allow you to do an in-plan Roth conversion.

Finally, you have the option of taking the money out of the plan and rolling it into your Roth IRA, which is probably what most people do and probably what you should do if you can afford the taxes on the conversion of that money from your intern year.

Because you just roll the entire thing into your Roth IRA, everything that's already Roth you don't owe taxes on again, and everything that's tax-deferred you'll pay taxes on. And then you'll have this big fat Roth IRA coming out of residency, which is probably your goal and probably should be your goal because those are relatively low-income years.

And the rule of thumb there is when you are not in your peak earnings years, you use tax-free or Roth accounts. And when you are in your peak earnings years and have a choice, you don't always have a choice but when you have a choice, you favor tax-deferred contributions. There's lots of exceptions to that rule of thumb, but that's the general rule of thumb. So I hope that's helpful to you Cody.

403(B) AND 401(K) ACCOUNTS WHEN LEAVING RESIDENCY QUESTION

All right. Next Speak Pipe question about some 403(b) and 401(k) accounts also leaving residency. So, I think a similar question. Let's take a listen.

Encore:
Hey, Dr. Dahle. This is Encore from Florida. First off, I'd like to thank you for answering my anonymous questions several months back about engagement rings. My now fiancé loves the ring and we're happily together. So I thought you'd like to know that your advice was well received.

My question today is about 403(b) and 401(k) accounts when transitioning from residency. I'm going to graduate residency in summer of 2024 and I'm currently on track to max out my Roth 403(b) for 2023 through my residency program. I'm looking for jobs currently and most jobs have either a 403(b) or 401(k) option that I can invest in when I start my job in summer of 2024.

My understanding is that between 401(k) and 403(b) accounts, no matter how many these accounts one has from different employers across all plans, the total that one could contribute over a year is still only $22,500. Based off this assumption, what I plan on doing is halting all my contributions to my Roth 403(b) come January, 2024 and then saving that money I otherwise would have contributed until I graduate for moving expenses, licensing fees and other expenses upon graduation and transitioning from residency to my new job.

The reason why is that at my new job, I presume that I'd be able to max out my new 403(b) or 401(k) very easily within the last few months of the 2024 calendar year. And I feel like there's not much point in contributing money in early 2024 that's otherwise more valuable to me at this stage of my life as a resident, given that I should be able to easily max it out later in the year when I start my attending job. Is this a reasonable plan and is my understanding of 403(b)s and 401(k) limits correct? Thank you so much.

Dr. Jim Dahle:
All right. Good question. Well, let's talk more about engagement rings because that's a lot more interesting subject to all of you it turns out. We just had a staff meeting and our most significant post on social media last month was a survey about engagement rings. People were very interested in the cost of engagement rings.

So, we had this survey. We surveyed White Coat Investors what they spent on engagement rings. And the interesting thing is almost exactly the same data across all the platforms Twitter, Facebook, Reddit, whatever, it was almost exactly the same.

But there are plenty of you that are not spending that much on an engagement ring. I don't remember the exact percentages, but I think it was 20%-ish or so were spending less than $3,000 on an engagement ring, which is what I spent 24 years ago was like $2,500.

And so, there's lots of you out there if you're feeling like you don't want to spend a lot, there's plenty of White Coat Investors that are not spending a lot on engagement rings. Now some of those might be older and it was many decades ago that they bought that engagement ring and haven't adjusted for inflation. But just so you're aware, there's plenty of people not spending that much.

The majority seem to be in the $3,000 to $10,000 range though. And only about 25% had spent more than $10,000 and an even smaller percent had spent over $20,000. So for those of you interested in what people actually spend on engagement rings in this community, that's what they spent.

All right. Now what were we talking about? We were talking about 401(k)s and 403(b)s. Let's see if I can remember what the question was here. Oh, yeah. I remember the question now.

Okay. So, here's the deal. You got this great plan, but the plan is not going to work and the reason why your plan is not going to work is because there's a very good chance your new 401(k) or new 403(b) at this new place you're going is not going to let you contribute to it for 6 to 12 months after you get there. And so, you're planning to defer all your contributions for the year and then you get to the new job and they won't let you contribute.

So, you better make sure before you put this plan in place, that you can actually contribute in this calendar year to the new job’s 401(k) or 403(b), because most won't let you. So, be aware of that. Sometimes they just don't give you a match that first year, but a lot of times they won't let you use the 401(k) at all.

If you're going to use one in a year that you change jobs, you're almost surely you want to max out the one from the job you're leaving because you might not have a new one at the new place. Now, as a resident that's hard because you don't have any money. And so, you got to do the best you can.

Honestly, if people are saving something in residency, I'm happy. And most people's retirement savings IN residency is going to be less than a Roth IRA contribution. So, the fact that you're getting into a 401(k) or a 403(b) at all, kudos to you and great job.

I certainly was not saving that sort of money as a resident and I turned out okay. And I think that's the case for most White Coat Investors. I'm amazed when I meet these people that are maxing out his and her Roth IRA and a 457(b) and a 401(k) and they're living off one resident salary and they have two kids at home. And I'm like, “How are you eating?” But some people are very, very good savers, better savers than I am. But keep in mind this plan of yours may not work. So you need to call HR at the new job and find out what the rules are on their new 401(k).

This is also a good moment to talk about that pillar post I mentioned earlier. Multiple 401(k) rules. Go to the blog and read it. Understand those rules because yes, while a 401(k) and 403(b)s, etC, share the employee contribution, for those under 50, that's $22,500 this year. They share that contribution. The total contribution into the 401(k) is different for unrelated employers. This is the $66,000 if you're under 50 this year.

And so, theoretically you could max it out at your current employer, go to a new employer later in the year and they could put a bunch of employer money in there up to $66,000 even though you maxed out your 401(k) at the other job.

Now they may not be willing to, most big employer 401(k)s won't do that, but be aware that that is an option. And how this usually works out is if you have some 1099 income on the side and you have a solo 401(k), then you can really start taking advantage of that.

All right. It's scholarship time. It's a little late to apply now. By the time you hear this, it'll be September 7th. We are in the judging process. So, thanks to those of you who volunteered to judge this year, thanks to all of you who sent in an application essay. Without you there wouldn't be a WCI scholarship.

You know who else is necessary though, are our sponsors, our contributors, our advertisers that support this scholarship and 100% of the money they give to this scholarship goes to the winners. None of it goes to us.

And then Katie and I via the White Coat Investor throw a big chunk in as well. And that's basically where the money comes from. It's not like there's an endowment fund for the scholarship. It's just money that people put in every year and a few White Coat Investors usually contribute a little bit as well.

But we should recognize our platinum-level contributors. These folks donated $8,000 a piece to this White Coat Investors scholarship this year. And they are Larry Keller with Physician Financial Services. He has been with us for a long, long time helping White Coat Investors to get particularly disability insurance.

Another one who's been with us even longer than Larry is Michael Relvas at MR Insurance. And I think he might've been top first two or three advertisers on the blog. And so, thank you to Larry and Michael for continuing to sponsor that. They have sponsored the scholarship for many years and we appreciate that.

SoFi has also been a long-time sponsor of the White Coat Investor scholarship. They do a lot of things in the financial services realm, probably most significantly for you folks, student loan refinancing. So, thank you for supporting those who support what we're trying to do here.

All right. Let's take a question from Maria who wants to talk about taxes and Roth conversions.

TAXES AND ROTH CONVERSIONS QUESTIONS

Maria:
Hello. I'm an internal medicine doctor and I didn't put in the money in my traditional IRA last year and converted how it's supposed to do. I kind of delayed it and put in the $6,000 together on December 30th of 2022 in my traditional IRA and then I wasn't able to convert it the same day or the next day because it was the weekend so it wasn't like showing up on Fidelity.

I ended up converting from the traditional to Roth IRA down in January on I think 12th or 13th January. And now I'm doing taxes on TurboTax and I am not sure how to answer the questions there. When I put in some ways that I'm answering questions there, it deducts a lot of money because it shows how much a federal tax refund I will get and there's like a difference of a couple of hundred of dollars. So, I don't know what to do about this.

Dr. Jim Dahle:
Okay. Maria, thanks for calling in. This is a very common issue among White Coat Investors. I'm going to use you a little bit as an example here for everybody else listening. Mostly because I think you probably resolved this already, given where we are in the year by the time this comes on the podcast first week of September. Even if you filed an extension, your personal taxes are due by September 15th. So I suspect you've already filed your taxes and gotten this question answered somewhere else, but it's a good question to talk about.

Here's the deal. Don't do your backdoor Roth IRA the last week of the year. Just don't do it. It's fine to do it in the new year, but it makes things really complicated when you try to squeeze it in before the end of the year.

There is only one deadline in the backdoor Roth IRA process and that deadline is for contribution to the traditional IRA. The deadline for that is when you file your taxes, typically April 15th, but if you file an extension September 15th of the next year. So, you don't have to get it in on December 30th or you won't be able to make it. You can do it the next year. That's the only deadline. The only true deadline in the whole process.

Now, if you want to keep your paperwork simple, I recommend you do your traditional IRA contribution and your Roth IRA conversion. So you're contributing to the traditional IRA, then you're converting it to a Roth IRA during the calendar year. I do mine now in January, like the first or second week of January, we put money in the traditional IRA. It takes a couple of days to settle maybe, and then we move it into the Roth IRA and then it's done for the year and it keeps the paperwork really simple.

Every year I'm reporting a contribution. Every year I'm reporting a conversion. There's very little growth on the money in between those two events. It makes for really simple paperwork. When you don't do that, you get complicated paperwork and that's what you're dealing with now, Maria, is you are dealing with complicated paperwork.

Now it sounds like this may be the first time you did this, and so when you fill out your form 8606 for the current year, which sounds like it would've been 2022, you just report the contribution because the conversion was not done in that year. And then the conversion goes on your 2023 taxes because you did it in 2023. You're probably also reporting another contribution and another conversion for the 2023 tax year when you do that. But that's okay.

If you wait a while between those two time periods, your money may grow, you might lose money too if you've got it invested, which you shouldn't do in between the contribution and the conversion. You should just leave it in cash and then you don't have to deal with $2 or $3 or $5 in gains between the contribution and the conversion. You should just roll that $5 in afterward into the Roth IRA and pay to convert that $5 as well. So, you'll owe taxes on $5, no big deal. And then you just make sure you report exactly the amount you contributed and the exact amount that you converted, work your way down the form.

Now, as far as the pro-rata rule goes, they care about the amount in a traditional IRA, SEP IRA, a SIMPLE IRA, rollover IRA, etC on December 31st of the year you do the conversion. In your case, Maria, this does not apply to you because you didn't do a conversion in 2022. So you get off from getting prorated, no problem. You just take care of it in 2023.

It's not the end of the world to be prorated, it's not illegal to be prorated. Often you can just clean it up with your next year's tax return if you do get prorated, but it does make your paperwork kind of complicated where you have a few hundred dollars here and a few hundred dollars there.

But as far as helping you with why your form 8606 is off, I do help a number of people with this every year. Typically they post on that backdoor Roth IRA tutorial comment and we try to work through their particular 8606 issue. But read that post first. It should answer all your questions about how to fill out form 8606.

All right. Our quote of the day today comes from Morgan Housel who said, “Doing well with money isn't necessarily about what you know. It's about how you behave. And behavior is hard to teach even to really smart people.”

Isn't that the truth? I talked to our student loan advice folks who are absolutely swamped right now giving advice to people as we come out of this student loan holiday we've been in for the last three and a half years and heard a story of a doc who had many hundreds of thousands of dollars of student loans. If you go back through it all, it's kind of accumulation of bad financial decision after bad financial decision after bad financial decision.

Basically, when you are wanting to be a doctor above anything else and there is no price too high to do that, you can end up with terrible, terrible student loan situations that the only way to get out of is to get a portion of those forgiven via public service loan forgiveness, which requires full-time work and then working full-time to pay off the rest of the student loans. The private ones, the ones that don't qualify for public service loan forgiveness.

But it's not an option to decide you want to be a doctor no matter what the cost. Spend many years doing so, rack up all kinds of student loans doing so and then decide to go part-time. It just doesn't work. You don't get a pass on math.

And so, behavior matters and it matters a lot in personal finance and we need to be smart with our decisions from the beginning and that's why I've tried to write books and material for students, reach people as pre-meds so we can be making smart financial decisions from the beginning of our career and not end up in those sorts of situations.

If you are in that sort of a situation, I highly recommend our service studentloanadvice.com. Yes, they're booked out a little ways right now. But the truth is if you're in that bad of a situation, your student loans aren't going anywhere anytime soon. And even if you got to wait a month or two for advice, it's still going to be well worth it.

If those volumes of course stay high, we'll have to figure out how to hire more people to help you folks, but I think it might just be a big influx due to the change in the student loan holiday. We'll find out soon.

All right, next question. This one from Jeff on the Speak Pipe.

MAXING OUT ROTH 403(B) AND ROTH IRA QUESTION

Jeff:
Hello, Dr. Dahle. Thank you for everything you do. I have been drinking from the fire hose of your books and website during the downtime of my fourth year of med school and have loved every bit of it.

My question is if I want to maximally contribute to a Roth 403(b) and a Roth IRA, how would I go about doing so? I'll start residency this July and earned a round $30,500, maybe a little more when they re-announced stipends for a half year of pay.

My residency offers 403(b) contribution, I assume as a withholding from my W2 paychecks after taxes. I have a Vanguard UTMA account that will become my brokerage worth in total of about $150,000 and can live off of that for the half year while most of my paycheck goes towards the Roth accounts.

My state for income tax purposes will be in Nebraska and I also have the option to open an HSA account, but I think that would reduce my post-tax income and thus how much I can contribute to Roth accounts at least for this year.

Dr. Jim Dahle:
All right. Well, my first question to you, Jeff, you answered, which was how are you going to eat if you're maxing out these accounts and it seems you have a sum of money. So, congratulations to you on that and be sure to thank whoever put together that UTMA or UGMA account for you.

I know many of us White Coat Investors are doing that sort of thing for our kids or for nieces or nephews or grandkids or whatever and here's the other end of it. You got this wonderful opportunity that you can use to continue to build wealth. You've become more financially savvy than probably most people at your age, and your state of training. And so it's wonderful what they've done for you. Be sure to thank them for that.

All right. So, how would I do this if I were you? Well, exactly what you're talking about. You defer as much as you can into that Roth 403(b) account and get as much in there as you can and you live off your savings. You can only put in as much as you have earned income to cover.

Now, let's be honest, nobody's looking very carefully at HSAs and your taxable income and how much went into a Roth 403(b) and how much went into a Roth IRA. I'm not even sure there's a rule against using the same earned income to go into a Roth 403(b) and a Roth IRA and an HSA.

Now they each have the rule, you have to have enough earned income to cover the contribution, but I'm not sure that it can't be the same earned income. I don't think anybody really looks at that very closely, number one, so you're not going to get caught on it. Number two, I don't think there's a rule that I know of.

Now, there's 40,000 of you out there and someone may know about one. Please send it to me by email, [email protected] if I'm wrong on this point, but I don't think there is.

So, I think you could max out your HSA, max out your Roth 403(b), and max out your Roth IRA in one-half year of intern earnings. It'll be close though. Because your Roth 403(b) contribution will be $22,500. Your Roth IRA is going to be what? $7,000 this year. Is that what it is for people under 50? And the HSA would be $3,000 something if you're not married.

And so, you're right about what you're making as an intern, so you should be able to do it. Because you got this $150,000, you're basically converting from a taxable account to a Roth account, which is pretty cool. Whoever put that in there many years ago almost no taxes have been paid on in the meantime and now no taxes are going to be paid on it ever again. It's really extending that tax-free growth on that money for you.

So, I'd try to do it all. You're in the position to do so. One problem you may run into that I mentioned earlier on the podcast is they might not let you contribute to that 403(b) this year. Wouldn't surprise me at all. Check with HR.

Okay. If that one wasn't in the weeds enough, let's take this question from James who wants to talk about Roth versus traditional.

ROTH VS TRADITIONAL QUESTION

James:
Hey, Jim. This is James from Kentucky. I just want to say thanks for all that you do. I came across your stuff early in residency and it's paid significant dividends for me and my family moving forward as I've gone through residency training now as a young attending.

My question is kind of an in-the-weeds question for the age-old argument of Roth versus traditional 401(k) or 403(b) contributions, but mine specifically has to do with younger attendings like myself under the age of 40.

When considering Roth versus traditional, if you put in the maximum $22,500 even if you're at a marginal 40% tax rate, you'd be taxed effectively at $9,000 in taxes paid the year of the contribution. And that's going to grow over let's say a 25-year period if I retire a little bit early around in the late 50s to $96,500, if you factor in roughly 6% interest.

And even if I pull that out at 10% tax rates after it's grown, you're going to end up paying $9,600 worth of taxes roughly. And if you get a better return, let's say 7%, or leave it in there for a little bit longer and retire in your early 60s at a more traditional age, that tax difference grows to about $3,000 if you achieve both the 7% return and retire at a traditional age, it's more like $8,000 on taxes saved for that contribution.

To me, it seems like if you're under age 40, the advantage of tax regrowth with Roth are so significant that that would be the preferred landing spot for your contributions. And before you suggest that you should be investing the difference, let's say for my written financial plan, which I'm contributing towards my retirement a fixed percentage of my income each year, and that any tax savings would be above and beyond my contribution limit for my family's goals this year from the traditional.

Dr. Jim Dahle:
James, did you hack our system? Because that is the longest Speak Pipe message anybody has ever left us. That was almost two and a half minutes. We're supposed to have this thing set to cut you off at a minute and a half, but you got it all in so let's answer it and we'll figure out what happened in the background that our Speak Pipe was not working properly.

At any rate, here's the mistake it sounds to me like you're making. Remember it's not about the total taxes paid. It's about the tax rates. It doesn't matter if you're paying more taxes later, what matters is how much you have after paying taxes.

And so, if you're in the 45% bracket now and you're going to be in the 15% bracket later, I assure you tax-deferred is the right move. The math will work out if you calculate how much you'll have left after paying taxes. Now, if you do tax-deferred, you will pay more in taxes because you're paying it later. And so, that money's grown in that tax-deferred account over many decades. But that's okay. It's okay to pay more in taxes. That's not a bad thing. What you want to do is have the most after you pay the taxes.

Now, Roth versus traditional is a very complicated discussion. Sometimes it doesn't even matter. As if we're talking about an IRA contribution for high-income earners, really your only choice most of the time is a Roth IRA via the backdoor Roth IRA process. And some employers from time to time haven't offered Roth in their 401(k) or 403(b). So your only option has been tax deferred. And so, you don't have to make a decision when that is the question.

But when you do have a choice, the rule of thumb is peak earnings years tax-deferred, other years tax-free. Lots of exceptions to that. Super saver is an exception to that. If you're going to have a lot of other income in retirement, social security and pensions and retirement or income property income and those sorts of things, that's going to fill up your lower brackets, then you may be better off with Roth now.

It's not like putting money in a Roth is a bad thing. It's never taxed again. There just might be a better option for you. But you got to run the numbers and you don't have all the numbers you need to truly run them because you don't know what your income will be later. You don't know what phase-outs and the Irma cliffs will be in retirement. You don't know exactly what the tax brackets will look like. And so, there's a lot of guesswork involved. You have to make some assumptions when making these decisions.

Here's the deal though. If the decision is really hard for you, it probably doesn't matter much. And if it's a really easy decision, well, it will matter a lot. If you're obviously going to be in a much higher tax bracket later or you're going to be in the highest tax bracket your entire life or if you're obviously going to be in a much lower tax bracket later, it's an easy decision, it makes a big difference.

But if you're not sure, it probably doesn't matter all that much. So, don't worry about it too much. I've got one partner, he just splits his contributions. Half of them go in Roth, half of them go in tax deferred and he knows that one of those is wrong. He's not sure which one it is but he'll have plenty of tax diversification when it comes time to retire. All right. Thank you for the question.

All right. I just got done reading a book that I don't know if it's a blog reader or a podcast listener who asked me to read and actually review. I don't know if I'm going to review the book. It's a fiction book. It's by an author called Lionel Shriver. The title is The Mandibles: A Family, 2029-2047. And what it is, is it's kind of in the apocalyptic fiction genre except it's not a zombie apocalypse. It's not caused by AI, al la Terminator or those sorts of post-apocalyptic worlds.

It's an economic apocalypse, maybe a little bit in the tradition of Atlas Shrugged. Maybe not quite as heavy of a political focus on it, but there's definitely some politics in there. If that offends you don't read it. But it's kind of an interesting thing to think about.

Basically what happens in this book is that the dollar stops being the reserve currency of the world. It's replaced by something apparently Vladimir Putin came up with, even though it shares the name of something that Keynes came up with many decades ago. The Bang core, basically a currency that's set to the price of some commodities.

At any rate, the US president is so mad that the dollar has been replaced as the world's reserve currency that he causes the US to default on its debt. And so, anyone who owned any treasuries, most of which are owned by US citizens, just lost all that wealth and then they start printing money and massive inflation ensues.

And the book follows this family through the economic circumstance from 2029 to 2047 as the US kind of implodes due to this massive inflation. And it takes all kinds of funky turns, who knows if they'll happen. The government basically takes everybody's gold and takes everybody's guns and Bitcoin becomes worthless and people have piles and piles of dollars that aren't worth anything.

And Nevada forms its own free state, the United States of Nevada where they don't have any social programs, no social security, no Medicare, and everybody gets a chip lodged in their head that communicates with satellites that keeps your bank account balance on it.
Dr. Jim Dahle:
Anyway, it's kind of an interesting read and a thought about what might happen if the dollar stops being the world's currency. It's interesting that this comes up because lots of people worry about this. And one of the most interesting parts of the book, of course, is at the end after the book is over the author talks about why she wrote it.

And in a lot of ways, she says, “Well, I see my own frailties, that my body is getting older and I just kind of transfer those to the United States and imagine what it would be like if it was wearing out like I am.” And that's kind of the way it goes.

Now, the lessons to learn there, well, bad things can happen. Inflation is bad. That ought to be a pretty good takeaway. And that when the economic system breaks down nobody's really all that safe from society itself.

For example, in one scene, the family, this is an extended family and one of their houses burns down and they go to live in this apartment that's already stuffed to the gills with other family members. And after they've been there for a couple of hours is all they let in a neighbor and the neighbor holds them up at gunpoint and throws them out of the apartment and basically takes that apartment from the family and they're homeless and go on a trek to a farm. Some family member that's acquired a farm out in the boondocks.

And so, an interesting read, you may want to check it out. I don't know that I would change my portfolio or anything based on this. It was very interesting. I expected something about Bitcoin or something about some other crypto asset come into it. It was only mentioned once in the book and very dismissively. And you know what happened to Bitcoin as though it all imploded and I'm sure the Bitcoin fanatics out there would argue, “Well, this is exactly what Bitcoin is for.” But it's interesting to think that just like all the gold was seized, maybe something happened to all the Bitcoin as well. Interesting read. Check it out. The Mandibles: A Family, 2029-2047.

All right. Enough with that tangent, let's talk about SIMPLE IRAs. This one is from Alan.

SIMPLE IRA TWO-YEAR RULE QUESTION

Alan:
Hi, Dr. Dahle. I have a question related to the SIMPLE IRA two-year rule. In September of 2021, I joined up with a start-up company that only offered a SIMPLE IRA with a match for a retirement option.

I began contributing with the first employer deposit completing on November 17th, 2021. This plan was with Capital Group and only offered American funds with high fees. So I chose to open a Vanguard frozen SIMPLE IRA and move all the funds to that account to take advantage of lower fees.

While the account was open in 2021, the first transfer into that account completed on January 10th, 2022. Of course, the company was acquired in January of 2022 and now I have a 401(k) option with Fidelity with my employer.

I'd like to roll over all the funds in the Vanguard SIMPLE IRA as soon as possible so I can take advantage of a backdoor Roth IRA conversion going forward without dealing with pro-rata.

For the SIMPLE IRA two-year rule, when would I be allowed to roll over all of the remaining funds in the SIMPLE IRA without incurring a penalty? Is it based on the first deposit in the employer-sponsored account or based on the first deposit into my Vanguard frozen SIMPLE IRA? Thanks.

Dr. Jim Dahle:
Wow, Alan, you have stumped the chump. I don't know the answer to your question. The good news is these dates aren't very far apart. So even if you waited for the second one, it's no big deal. You're not going to pay that much more in higher expense ratios than you would.

So, I think to be safe, I would wait. I would wait until two years from the time you rolled all that money into the Vanguard SIMPLE and then just roll that into the 401(k). No big deal. Should be nice and clean and I think that's the way I would do it.

Now, what is the answer? I think if we look at the IRS regulations here, okay, here it is on irs.gov. “What are the tax consequences when I withdraw money from my SIMPLE IRA?” Generally the same tax results apply to distributions from a SIMPLE IRA as to distributions from a regular IRA. However, a special rule applies to a distribution received from a SIMPLE IRA during the two-year period beginning on the date on which you first participated in your employer's SIMPLE IRA plan.

Under this special rule, the additional income tax on early distributions applies to a distribution within this two-year period. And the rate of additional tax under this special rule is increased from 10% to 25%. One of the exceptions to application of the early distribution tax under Section 72(t) applies. The exception also applies to distributions within the two-year period and the 25% additional tax does not apply.”

Okay. So it says, “If the additional income tax on early distributions applies to a distribution within this two-year period, then the rate of additional tax is increased.” It sounds like it starts on the date on which you first participated in your employer's SIMPLE IRA plan, but you then opened a second one at Vanguard.

And so, I would say the participation date is when you opened that Vanguard account. I don't know if that's 100% right, but that's my interpretation of this because that's the SIMPLE IRA you're now withdrawing from and I think that's the safest thing to do. It won't cost you a lot more to do that. So I'd just wait a few more months and do that.

All right. Next question. This one from Luke about the mega backdoor Roth.

MEGA BACKDOOR ROTH QUESTION

Luke:
Hi, Jim. This is Luke, a physician spouse from Northern California. As a University of California academic with lots of retirement savings vehicles, my wife and I use my income for retirement savings and live off of her physician income.

Currently, I max out my pre-tax accounts, a 457(b) and a 403(b). There is no employer match. My wife and I are in the 24% marginal tax bracket where we will likely be for the remainder of our careers. I could alternatively use this same amount of savings through a mega backdoor Roth IRA, available through my employer.

I'm thinking I should switch to this mega backdoor option because if I have a full career and retire at 65, I will have an annual pension of 100% final salary that would put us in today's 22% bracket before Social Security, pre-tax account withdrawals, real estate, etc.

With brackets expected to be higher in our retirement years, 30 to 60 years from now, it seems like locking in the 24% marginal rate now is a good deal. Do you agree or have any cautions? Thank you.

Dr. Jim Dahle:
Yeah. You're the classic example of people for whom Roth may be better even during peak earnings years. You got a pension coming that's going to fill up a whole bunch of brackets and it sounds like you're kind of a super saver too. So, two good reasons may be for you to favor Roth now. 24% isn't a terrible percentage to be paying on a Roth conversion. Man, if I could do Roth conversions of 24% today, I'd give serious consideration to that, given the situation I'm in now.

It's funny to think back to when I was in the military. I think I was in the 15% bracket and I was doing tax-deferred contributions. So obviously some of my money I have not optimized over the years. I didn't think I would be in the situation I'm in now. You couldn't do Roth TSP contributions back then anyway, so I really didn't have a choice, but I probably would've even been better off contributing to a taxable account in that year given that I only saved 15% and probably going to be paying at some higher rate later. Although maybe it doesn't matter so much if that money ends up going to charity anyway.

But yeah, you're an exception. There are exceptions to the rule of thumb for traditional versus Roth contributions and you are one of them. You got a big pension coming by. Another one is military folks. They're generally not paying state income tax, relatively low tax bracket. Probably going to have a higher income when they get out. They've got a pension coming many times. It just makes sense for almost every military member to be doing Roth TSP contributions. You got to really be an exception if you're in the military and you're doing tax-deferred contributions.

Hey, by the way, if you could use a little bit of extra money and you have a little bit of extra time, you ought to check out our paid surveys at whitecoatinvestor.com/mdsurveys. We just added a couple of new companies there. They want to pay you for your opinion. And it's possible if you do these in any sort of a dedicated way to make tens of thousands of dollars a year doing so. So, check those out, whitecoatinvestor.com/mdsurveys.

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All right. Let's take a question from James about 457 accounts.

457 ACCOUNTS QUESTION

James:
Hey, Jim. This is James from Kentucky. I had a question about 457 accounts that I don't believe has been asked before on the podcast. I plan to use a 457 for my early retirement runway in my 50s as my plan that my employer offers, offers a 10-year distribution plan.

My question is, since this is a deferred compensation and technically owned by the employer and I've not taken the compensation prior to that separation, can I use the income from the 457 distributions to count towards earned income in those years in my 50s to be able to do a Roth IRA or backdoor Roth IRA depending on my income amounts during those years? Let's say for the argument of this, I don't have any other sources of active or earned income during those years other than my 457 distributions. Thanks.

Dr. Jim Dahle:
All right, good question. Easy one to answer. No, it's not earned income. Sorry. That earned income was counted when you earned it for retirement plan purposes. It's not counted now that you're getting it later.

The way you can tell this is because you pay the payroll taxes when the money goes in the 457. Your Social Security and Medicare taxes, you pay that on your 457 contribution just like you would on a 403(b) or a 401(k).

As soon as that money is yours, when you provide them the services to get that money, and when that money is no longer subject to risk of forfeiture, that's when you pay the FICA taxes on it. And so, that's essentially when it's earned income, is in that year. When you take it out 20 years later, that's not earned income. Sorry. It'd be very convenient if it was, but it's not.

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All right. Thanks for that review. Those five-star reviews do help us to spread the word about this important information for you and your colleagues. You can do this. It's not that hard. Tens of thousands, hundreds of thousands of White Coat Investors have figured out this financial literacy stuff. And you can too.

If all these rules about retirement accounts went over your head today, don't worry. The second or third or fifth or eighth time you hear them, they're going to gel and you're going to understand them.

And occasionally you'll have to look something up like I do because you can't keep all the rules straight. But that's okay. Understanding the basics will pay dividends quite literally in your life and give you the freedom to practice like you've always wanted to, to live your life, to take care of your family, to support your favorite charities. Whatever. However you define the good life, taking care of your finance is going to help you to get there.

Keep your head up and your 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.

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 134 – Primary care doc becomes a millionaire and pays off student loans in four and a half years.

We estimate that 80% of doctors need, want and should use a financial advisor and or an investment manager. Some investment gurus, such as Dr. William Bernstein, think my estimate of 80% is way too low. But at any rate, if you want to use an advisor temporarily or for your entire life, there's no reason to feel guilty about it. Just make sure you're getting good advice at a fair price.

If you need help updating your financial plan or just getting one in place, check out our list of recommended financial advisors at whitecoatinvestor.com/financial-advisors. You can do this and the White Coat Investor can help. By the way, we have a new page where we have all of our recommended services on one page. You can go to whitecoatinvestor.com/recommended and check that out.

All right, we got a great interview today. My interview today is someone who found a financial Nirvana early in his career, basically as a medical student, read the White Coat Investor book, and that has made all the difference over the next eight years or so and has now had a relatively high amount of financial success, just knocking off milestones left and right. So let's get them on the line and you'll get to hear the story.

Let's stick around afterward. I'm going to talk a little bit about that most important year in your financial life and how important it is to hit the ground running for that. All right, our guest on the Milestones to Millionaire podcast today is what I call a true believer in the WCI way. This is Dr. Chris Wolfe. Dr. Wolfe, welcome to the podcast.

GUEST INTERVIEW

Dr. Chris Wolfe:
I’m glad to be here.

Dr. Jim Dahle:
Congratulations on your recent milestone. Can you tell us what it is?

Dr. Chris Wolfe:
Yeah, it was a trifecta milestone, really. It was earlier this year, probably four and a half years out of residency. About the same time I hit a net worth of $1 million over half a million dollars in investments in the stock market, and I paid off my student loans all at about the same time.

Dr. Jim Dahle:
All right, you have accomplished three awesome milestones, and we're going to try to cram all of those into one episode. But why don't you start kind of at the beginning when you first became exposed, if you will, to financial literacy, to the White coat investor and bring us up to speed. Tell us the story.

Dr. Chris Wolfe:
Yeah. It really all started in my fourth year of medical school. I can't remember how I was introduced to your book, but it was towards the end of the fourth year of med school when someone mentioned your book. And I had read Dave Ramsey and had some basic fundamental information about investing.

But once I read your book, right when I started residency, I really started to take personal finance serious because I hadn't made any significant income up to that point. Almost immediately once I started residency, I opened up my wife and Roth IRA, and started investing in the Roth IRA, knowing that one day I'd probably do a backdoor Roth IRA. And that's really when it all got started.

Dr. Jim Dahle:
So, where were you at in your financial life at this point? Were you like most medical students? You owed a few hundred thousand dollars?

Dr. Chris Wolfe:
Yes. I believe when I finished medical school I had roughly $207,000 in medical school debt and my wife and I purchased kind of a fixer upper house my last year of medical school before I started residency. And so, really our only debt, we had no assets, our only debt was my student loan and our house we purchased before starting residency.

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

Dr. Chris Wolfe:
I'm currently in western Kentucky between Louisville and Nashville. A smaller town, it's definitely something that you would consider. We definitely did some geographical arbitrage. It's a smaller town, lower cost of living, still good schools and a good hospital system. The pay is definitely higher than it would be in a larger city. And we're closer to family too, which has helped with childcare.

Dr. Jim Dahle:
So, what do you do? What does your spouse do?

Dr. Chris Wolfe:
My wife was a teacher up until my first year of residency when she had our first child. And ever since then, she's been at home and we now have three children and she's at home with them. And I'm an internal medicine physician, five years out of training today.

Dr. Jim Dahle:
All right. So, you got started with the Roth IRAs in residency. She's teaching, you're making a resident income. How much did you invest during residency?

Dr. Chris Wolfe:
Well, we maxed out both Roths. And actually when she quit teaching, she had a little bit of a pension that was not going to amount to anything in the long run because she was probably not going to go back to teaching. So, I actually took your advice and pulled the pension out and had it taxed placed inside of a Roth IRA knowing that we were in a lower tax bracket during residency.

I actually knew I was going to be coming back to this town. So I took a stipend from the hospital here, which helped a lot during residency and allowed us to max out those backdoor Roth. Well, at that time it wasn't a backdoor Roth, it was just investing in the Roth IRAs because our income wasn't high enough. We couldn’t do the backdoor Roth. That was most of it at that time, during those three years, was just maxing out the Roth IRAs for both of us. Taking that stipend really helped do that during that time of lower income.

Dr. Jim Dahle:
So you came out of residency, what? $30,000, $40,000, $50,000 worth of retirement savings? Something like that?

Dr. Chris Wolfe:
Yeah, I think that's fair to say.

Dr. Jim Dahle:
Okay. And what was your student loan plan during residency? What were you doing with those?

Dr. Chris Wolfe:
Well, I refinanced and got a really low interest rate during residency. I made pretty small payments on those during residency, but I had a very low interest rate, and that was about 2018, 2019 when I finished. I kept refinancing them to lower and lower variable rates and made minimum payments during residency.

And then as I became an attending I got a sign on bonus, I put all of that towards student loans. I would put a big chunk of my paycheck into paying off those student loans. Every time I would receive a bonus at work, a good chunk of that would go towards the student loans. They were at a lower interest rate at one point, they were below 1%, and then I wouldn't be in such a hurry to pay them off.

But then as the interest rates started to creep up, I had more of an urgency to pay them off, which is why they coasted for some period because rates were so low it didn't make sense to pay them off. But inflation was higher than the 0.9% or I think they even got down to 0.4% at one point variable rate. But yeah, the rates went up over the last year. I aggressively started to pay them off more as they crept up to 4% and 5%.

Dr. Jim Dahle:
Well, clearly paying off debt, building wealth is important to you. But you are married, there are two people in this decision. Tell us about your conversations and how you work together as spouses to become so financially successful.

Dr. Chris Wolfe:
We had a lot of conversations about finances. She trusts me, I trust her and she kind of lets me do my own thing with the investing. It's obviously pretty expensive to have three kids and a lot of our income goes towards paying for child expenses, but when I tell her that, “Hey, we're going to max out this or that retirement account” and she kind of gives me full reign to make those decisions. And I'm maxing out her backdoor Roth IRA every year and maxing out my retirement accounts every year and paying off debt. And we kind of have an agreement that we trust each other with all those things.

Dr. Jim Dahle:
So, let's talk a little bit about what you're invested in. Tell us about your asset allocation, what your investments are.

Dr. Chris Wolfe:
Yeah. Obviously every year I max out every available retirement account, 403(b) with my current employer, the HSA, the backdoor Roth IRAs. I'm contracted as the medical director for a local nursing home. And that allows me to open up an individual 401(k) and invest a little bit into that. But you can probably explain this better than I can, but even if you max out your 403(b) or 401(k), if your primary employer, you're still able to put in, is it 20% of your income as the contractor into the individual 401(k)?

Dr. Jim Dahle:
That’s certainly usually what it about works out to.

Dr. Chris Wolfe:
Yeah, I'm doing that, which isn't a whole lot of money, but every little bit helps. I have a taxable account. And actually in the end of residency I started listening to BiggerPockets and we bought a fixer upper house in residency. Flipped it during residency, medical school, and walked away with a nice chunk of tax-free income from selling that property.

So, that kind of gave me the itch to buy some local rental properties. And in 2019, 2020, 2021 and 3.22, every year we've purchased one rental property and go in and fix it up. I manage it myself and rented out. And so far that's given us quite a bit of equity in those properties over the years as the home values have increased over the last few years.

Dr. Jim Dahle:
Yeah, it sounds like you got about half your money in kind of stocks, bonds, et cetera, retirement accounts, and half your money in real estate. Is that about right?

Dr. Chris Wolfe:
Yeah, that's a fair statement. If you look at the value of these homes and the loans we have on them, it's hundreds of thousands of dollars. And then we've got over what the market doing so well the last few months now over half a million in stocks.

Dr. Jim Dahle:
Cool. And there's a lot of people out there that say, “Oh, real estate, it's too much hassle. I don't want people calling me when the toilet is clogged up.” And then you got all the real estate folks going, “Eh, don't invest in paper assets. Those retirement accounts are a scam.” Yet you've decided to do both. What would be your response to those people who say you still only do one or the other?

Dr. Chris Wolfe:
I think all things in moderation in general. I have friends that would never actively manage these places. They just don't want to deal with anything and I respect that. And as our net worth grows, I'm leaning more towards that. So, when you're just starting out to learn, it wouldn't hurt to manage them yourself for a little bit to learn the ins and outs and what's important and screening tenants.

This is a generalization, but we purchased A class properties in nice neighborhoods with good schools and we fixed them up and put new flooring, painted and screened our tenants really well so that we do not get called. I don't want to jinx myself, but I might get called once or text once every few months about a minor issue. We, knock on wood, had nothing major happen, but as our net worth grows, it does sound nicer to offload the management to someone else. So, that's something we're looking into just because you'd like it to become more passive in the long run.

Dr. Jim Dahle:
But in your experience, the 3:00 AM toilet call is a myth.

Dr. Chris Wolfe:
I've never had that in the four years now that we've owned a property. But again, I would just stress the importance of screening your tenants very well because it's a lot harder just from listening to BiggerPockets, other podcasts. It's a lot harder to get somebody out once they're in there. If you can screen and do a really good job, get somebody, a solid tenant in there. We've had people there for three or four years and we've not had anyone miss a payment. Again, knock on wood.

Dr. Jim Dahle:
Yeah. All right. Well, let's say there's somebody that's just like you were a few years ago. Maybe they started figuring this stuff out in medical school or residency or fellowship and they're getting ready to get out and they want to do what you've done. They want to be a millionaire in four or five years. They want to invest in real estate, they want to max out their retirement accounts. They want to pay off their student loans. What advice do you have for that person that wants to have this kind of success?

Dr. Chris Wolfe:
Well, most importantly is absorb everything that you can. Read, read your book, read other books, listen to podcasts. I was reading your book in med school. I've been listening to the podcast since it was first released. I've learned a lot through your channel. And work hard upfront.

When I finished residency, I was doing the traditional model. I was rounding at the hospital, admitting patients in the office, following up in the afternoons, back to the hospital to readmit, on call over the weekends. And that helped me get a headstart and a jumpstart on paying off debt, investing. That's really helped jumpstart things. So, those would be my biggest recommendations is read, read, read. Absorb everything you can. Surround yourself with like-minded people and work hard up front.

Dr. Jim Dahle:
Awesome. Well, Chris, you've done a fantastic job. You’re now a millionaire, it's pretty awesome, and obviously on track to have far more than that in the future, reach relatively early financial independence and just have all kinds of options in your life. So congratulations to you and thank you so much for coming on the podcast to inspire the next generation to do the same.

Dr. Chris Wolfe:
Well, thank you very much. It was an honor to be on here.

Dr. Jim Dahle:
All right. I hope you enjoyed that interview. It's great to hear that this stuff works. If you live like a resident, you become financially literate, you work hard, you save a bunch of money, you invest it smartly, yes, you become successful. You pay off your student loans, you become a millionaire, you max out your retirement accounts, you build a real estate empire. All this stuff works. I promise it works. You just have to do it.

The combination of financial literacy and financial discipline is so rare in our country that if you have them both, it's like having a superpower. But look what happens when you do. He's four and a half years out, he's not financially independent yet. How long is that going to take for him? Less than five more years he's going to be financially independent. He'll be able to do whatever he wants with his career. Stop admitting, stop taking call, work part-time, go on a medical mission trip, whatever. You have options. And it's wonderful to have options by mid-career.

FINANCE 101: HITTING THE GROUND RUNNING

All right. I mentioned at the beginning we're going to talk about that most important year of your financial life. What is the most important year of your financial life? It is the first year out of your training. You do your medical school or whatever, if you're a lawyer or an engineer or whatever the equivalent.

And then you go to residency, you got to fellowship, and then you're out making the real paycheck. That's the most important financial year. And if you will get that year right, you can screw up almost everything else for the rest of your financial career. Just by getting that first year right, everything falls into place.

And I can assure you the Wolfs got everything right that first year. And the way you do that is by having a written plan for your first 12 monthly paychecks. This allows you to hit the ground running. That first attending paycheck comes in, it's $15,000, $20,000, $30,000. Whatever it is, most money you've ever made in a month in your life, you've already got a plan for where that money's going.

Now, your plan might be different from my plan, might be different from someone else's plan. The problem with being a brand new attending is you have so many great uses for money and not enough money to do them all.

But think about these things that you probably want to be considering in that first year out. Beefing up your emergency fund. Maybe you had a little piddly emergency fund as a resident. Maybe you're spending a little bit more money now or you just want more months of emergency fund. You might want to beef that up with a few thousand dollars more or if you never had one establish an emergency fund.

A surprising number of docs graduate with credit card debt. 15 to 30% guaranteed return from paying off your credit cards. This is a good thing to do. It's probably your best investment out there. If you've got any credit card debt that's been hanging out for whatever reason, take it in a corner, drop an anvil on it with that first paycheck or two, get rid of it, have it be gone.

You maybe have a car loan or two, get those paid off too. This is something that from now on you're going to be paying cash for. So, once you have a car paid off, keep making those payments to yourself so you can pay cash for the next car.

Maybe you need a new car. You've been driving a beater now since you were a second year sophomore in college and that 2003 Corolla's got 240,000 miles on it and the check engine lights on and the tires are bald and it's starting to smoke. You know what? It is still okay to get a new car. If you need it, get a new car.

How about a down payment? Once you know the job likes you and you like the job, you might want to save up for a down payment. Now you might want to use your money for something else and buy a house with a doctor mortgage loan. That's okay. Check out our recommended list for people who offer that. But that might be on your list just to save up a down payment.

Getting your student loan plan right. Maybe it's time to get some student loan advice from our affiliate studentloanadvice.com. Maybe it's time to refinance your student loans, but just make sure you have a plan in place. And if the plan is to pay them off, well, shoot, start making those big extra payments.

Student loans do not last very long. When you send $10,000 a month to the lender, they just don't last that long. Let's say you have $200,000 in student loans, that's about the average for an MD student. Hey, how many months does that last if you send them $10,000 a month? Less than two years.

Even if you're a dentist with twice the average amount of debt, which would put you in the $500,000 range, a little more maybe. How long does it last if you're sending $10,000 a month? Less than five years. You can pay off those student loans, but you got to have a plan to do so.

Maxing out retirement accounts is another great thing to do that first year out. You might not be eligible for your new 401(k) and you might not have the income as a resident or fellow to max those out. But look at what options you have. Remember, you have till April to do your backdoor Roth IRA. You have time. Yes, the paperwork will be a little more complicated, but you have until tax day to make the contribution.

If you had tax deferred dollars from residency or fellowship, you might want to do a Roth conversion on those. You got to make sure you have the money to pay the taxes. This is probably the lowest bracket you're going to be in for a long, long time. And a pretty good use for money right out of the gate.

Now, you're not going to be able to do all of these probably in that first year, but you can do a lot of them. The only way to do a lot of them though is to keep living something like a resident and live like a resident. Boy, you wouldn't believe how much blowback I get for those four words. People think I'm crazy to tell them that living like the average American household for a year or two or three is insane. But it's amazing how well it works.

Let's say you've been making $60,000 a year. Maybe you're living on $50,000 a year. Now you're making, who knows, let's say $300,000. You're making $300,000. If you are willing to still spend $50,000, maybe you're paying $75,000 in taxes now, but that leaves you a lot of money. $175,000 in the next year that you can use to build wealth.

If you can send $10,000 a month to your student loans and still be able to save another $55,000 toward retirement or toward a down payment or toward an emergency fund. That's just the first year. And then every month of your financial life gets better and better and better. Less debt, more wealth, maybe even more income. Month after month after month, it just gets better and easier.

And so, while it feels like you can't do it all at once and you want to, be a little bit patient, realize that this starts really steamrolling, really snowballing as time goes on. And within five or 10 years, if you're doing things right, you're going to have a pretty awesome financial life, be living in your dream home, have your dream job and be able to buy anything you want that makes you happier as well as be able to help those that you care about most.

This really does work, I promise. We bring people on the Milestones podcast all the time who are doing this. They're in the process somewhere or they've already accomplished it and you can too.

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If you need some help, as we mentioned at the beginning, we estimate that something like 80% of doctors need, want and should use a financial advisor. Dr. Bernstein tells me that number should be 99%. I think that's a little high since I've met so many of you who are very good at “do it your selfie.”

But if you want to use a financial planner, if you want to use an investment manager temporarily or even for your entire life, that's okay. My mantra is get good advice at a fair price. So if you need help writing a financial plan, updating a financial plan, managing your investments, getting a plan in place, check out our list. These are recommended financial advisors, carefully vetted, whitecoatinvestor.com/financial-advisors. Or just go to the main page, whitecoatinvestor.com/recommended and find someone that's a perfect fit for you. You can do this and the White Coat Investor can help.

If you want to come on the Milestones podcast, you can apply at whitecoatinvestor.com/milestones. Thanks for those of you who are leaving great five star reviews of the podcast. We do appreciate that. It helps us to get the word out.

We are anxious for you to be successful. We want to produce high quality content that you find useful. Please send us feedback if we're not doing that, let us know what's working well, what isn't working well, and know that even if no one else told you thank you today for whatever you did, I appreciate what you're doing out there. Thanks so much. We'll see you next time on the 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.