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White Coat Investor Podcast
WCI #397: Roth, Mega Backdoor Roth, Solo 401(k)s and IRAs
00:49:50
Today we are answering your retirement account questions. We answer questions about the mega backdoor Roth, Roth conversions, solo 401(k)s, individual IRAs and what to do with an inherited IRA. Today’s episode is brought to you by , helping medical...
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- [00:00]
Jim Dahle
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. This episode is brought to you by SoFi. Helping medical professionals like US bank borrow and invest to achieve financial wellness. SoFi offers up to 4.6% APY on their savings accounts as well as an investment platform, financial planning and student loan refinancing, featuring an exclusive rate discount for med professionals and $100 a month payments for residents. Check out all that SoFi offers at whitecoatinvestor.com SoFi loans originated by SoFi Banknote and MLS 696891 advisory services by SoFi Wealth LLC. The brokerage product is offered by SoFi Securities LLC member Finra SIPC investing comes with risk, including risk of loss. Additional terms and conditions may apply. Welcome back to the podcast. Today's a really special day here at wci. This is what we call the swag bag deadline today. And what am I talking about? Swag bags? I'm talking about WC Icon, the Physician Wellness and Financial Literacy Conference. Part of this conference, for the whole time we've been running ever since 2018 in Park City, we tried to give out these sweet swag bags, right? We give books in them, you know, financial books and cool swag and stuff that you actually take home, not just a bunch of garbage. And, you know, so the swag bag actually has some real value at wcicon, but it takes a little bit of time to order all the books and put it all together. So if you want to get a swag bag when you come to WC Icon, you actually have to register by today, the day this podcast is dropping. December 12th is the swag bag deadline. Now, obviously that's a relatively small part of the conference. It's still worth registering early so you can get it. But it's a small part of the conference. Even if you're listening to this after the 12th, it's still worth coming to. WC icon. The fun thing about this conference for me is getting to meet you. I like meeting you and talking to you about your challenges, your successes. And for many of us, there's no one else in our financial life we can talk about money with and you can actually openly discuss it. Money and investing and estate planning and asset protection with people. At this conference, it's normal to just have these random financial conversations and volunteer all this information about yourself to someone. You just Met and you're eating lunch with @wci icon. These are your people that you can be comfortable with. And so that's one of the coolest parts about the conference. Now, obviously it's a conference, it's got a bunch of content, the content's great. We've got top notch speakers. We always have a mix of people that have spoken before and people that have never spoken at the conference. And so there's always new stuff. There is always great stuff, both on wellness and on personal finance and investing. And when I first started the conference, I thought, well, we'll throw the wellness stuff in so we can get some CME credit for this. So people needed their CME funds to come. I had no idea how important that was going to be to people, especially over the coming years. Over the last six or seven years, since 2018, burnout rates in medicine in particular have gone through the roof. And the wellness part is actually really important now and probably even more popular at the conference than the finance stuff. And so we've got top notch wellness folks, we've got top notch finance folks. It's just really great stuff. But it's a lot of fun too. We knock off all this serious crap at about 4:00, right? And then we go have fun, right? It's a wellness conference. You're supposed to go home more well than when you left for the conference. And so we go do lots of cool stuff, you know, golf and pickleball and whatever, all this stuff, these activities we have planned, you know, we usually even have a 5K one morning. You know, there's wine tastings and there's all these sponsored events and stuff. And so the evening is, you know, making friends, networking and just relaxing. Relaxing. And that's what doctors need to do a lot of times is just relax a little bit. So come to WC icon. You can learn from those that are ahead of you. You can collaborate with those that are in a similar stage. And you can pay it forward by sharing your knowledge with those who are just starting out. The White Coat investor community members are your people. Come meet some more of them in person rather than online. You can sign up@wcievents.com and if you sign up today, you get the swag bag. You still come, even if you don't get the swag bag, of course. But hey, you know, today's the day. Sign up. Did I mention? It's in San Antonio, by the way. So it's going to be sunny and warmer than wherever you're living most Likely. I mean, I guess some people might be coming from Puerto Rico or something, but for most of you, it's a nice break in the middle of the winter. It's February 26th through March 1st in San Antonio. Sign up again. WCI events. Okay, let's get into some of your questions. Let's talk about Mega backdoor Roths. That's what Keith wants to talk about.
- [04:59]
Keith
Hello, Dr. D. I'm Keith from California. Thank you for all you do. I have a question about the mega backdoor Roth 401K. My employer is a small business of around 20 employees. My issue is that while my boss was able to negotiate and implement a mega backdoor raw 401k with our 401k administrator, this wasn't well communicated to the decision makers that selected our new payroll provider. I've had multiple conversations with this provider and while they're happy to support the processing of pre or post tax withholding, they won't do it over the traditional $23,000 limit. Thus, I'm kind of stuck. Have you heard of any payroll providers refusing to do this sort of account or withholding? I have to imagine there are others in the business that do support it, but I'm not sure where to start. Thank you again.
- [05:45]
Jim Dahle
Wow, what a dilemma. I've not heard of anybody having this problem before. Obviously you can get a new payroll provider that can do this. My payroll provider, who happens to be not a payroll provider. Our payroll provider supports it just fine. But the person who actually makes these transfers is our COO here at wci. Our business is about the same size as yours. It sounds like there's 18 of us working here and we're very deliberate about setting up our 401. So this was an option. I think Katie and I are the only ones using it is my recollection. Everybody else wanted to do something else, which is fine. But the mega backdoor Roth is a great option for those who have no idea what we're talking about. We're talking about making after tax employee contributions to A401. This is not Roth contributions. This is not tax deferred contributions. They are a third type of contributions called after tax employee contributions. So if the plan allows you to contribute those to it, you can do so. Typically, a plan that will allow. That will also allow you to do an in plan Roth conversion of those dollars. And so that's the mega backdoor Roth IRA, right? You put maybe $40,000 in there as an after tax employee contribution and then you convert it the next day. To a Roth 401k or 403, whatever. It's like you made a big, huge Roth contribution in the end. Kind of like the backdoor Roth IRA process. It's the mega backdoor Roth IRA process. It doesn't happen in the IRA. It happens in a 401K. Keith. I bet you've got a workaround, though. Talk to the 401k plan provider. I bet you can just send them a check. I bet you can just send them a check. Now, you're going to pay payroll taxes on that money either way. So it's not like it has to come out of payroll to somehow save you those like an HSA contribution. But you can just send them a check. I mean, that's all I do for my partnership plan when I send them my money at the beginning of the year, my $23,000 in 2024 contribution. I just wrote a check for $23,000 and sent it to them at the beginning of the year and they deposit it and it's in the account. You could do the same thing with after tax employee contributions. So first thing you ought to try is just skip the payroll person and see if you can just send the money into the 401. And I bet you can, and that'll be a great workaround. If that's not the case, you got to keep kicking the door on these guys. I mean, this is ridiculous for support it, but payroll, not to support it and talk with the boss. It's not a big company. There's only 20 of you. And if they can't make them start doing it, then maybe start talking about a new company. But, boy, I guess it's possible if they're not willing to change that and your 401k won't take your check, which seems crazy to me. Maybe you're stuck not being able to use it and you're just like everybody else that doesn't have this option in their 401k. Our quote of the day today comes from Eckhart Tolle, who said, acknowledging the good that you already have in your life is the foundation for all abundance. You know, there's a lot of truth to the mindset school of thought, right? Whether you think you're rich or think you're not, you're right. You know, there's some truth to that. All right, let's do another backdoor Mega backdoor Roth issue here. This one's from Ben. Hi, Dr. Dali. How should I go about convincing my.
- [08:57]
Ben
Employer to offer a mega backdoor Roth 401k plan.
- [09:00]
Jim Dahle
Currently we have a safe harbor 401k.
- [09:03]
Ben
With a 4% match. Is there groundwork I can do first to verify that we can add after tax contributions While keeping the 401k plan compliant?
- [09:12]
Jim Dahle
Thanks for all that you do. Okay. Now this is a much bigger issue than the last one when it comes to the mega backdoor Roth ira that your employer just doesn't want to put it in place and they might be right to stop you. This is an issue for the employer. This isn't just like totally free to them. Okay. And the reason why is that 401ks have to pass non discrimination testing. What does that mean? That means that they can't just give all their benefits to the owners and the highly compensated employees of the business. Right. They've got to spread it out with all the employees of the business. Otherwise the IRS says no, we're not going to let you have this great tax benefit, this great asset protection benefit just for the owners. That's not the way it works. And there are actually two different non discrimination tests, one of which is applied to the regular contributions, the other of which is applied specifically to these after tax employee contributions. And the plan's got to pass them. So if not enough people are saving a bunch of money in this plan, it's entirely possible that you making these after tax employee contributions is going to hose the employer that they are going to have to make penalty payments for all the employees in the company because they gave you too many benefits in this plan. You know, even though they didn't give you anything. Right. They just let you contribute your own money to it. It still counts against them. So they may end up, you know, there's 50 people working at this company and you're the only one using this make it backdoor Roth IRA option. It's possible. They got to turn around and put $1,000 each into those other 49 people's employee accounts. So it's a legitimate concern for the employer. And that might be why your employer does not want to offer it. Now, a lot of times other people that are going to benefit from this is the owner of the company. So talk to them about it. Because if they want to save more money too, this might work out very well for them. But bear in mind, they might run the numbers, they might Talk to the 401 provider and decide, even though it really doesn't cost a lot more to implement this feature, they might decide not to do it just because of the non discrimination testing issue. So that's the reason why lots of people don't have these in their plans. Even if the employer knows about it and knows it could be added and the 401 provider is willing to add it to the plan, they may decide not to just because it costs too much. Now here at WCI we tried to put the world's best 401k in place and we have to go through non discrimination testing every year. And guess what? We fail it every year because too many benefits are going to the owners of the company and the highly compensated employees of the company. And so what do we have to do? We have to pay the penalty. What's the penalty? Money into our employees retirement accounts. Does that bother us here at wci? It does not. But I get that it bothers lots of employers out there. Most of the time when somebody that owns a dental practice or a medical practice or whatever goes to get a 401 in place, they're not thinking about their employees. Their employees might not even care that much about saving for retirement and they end up having to pay all these penalties that are even more than the benefits they're getting from investing in a 401k anyway. I get it. Sometimes the right answer for those folks is just invest in taxable. And that's okay. You can save for retirement primarily in taxable accounts. Our largest investing accounts are taxable accounts. It's okay. You don't have to save for retirement in the retirement account. There are other places you can save for retirement, primarily non qualified brokerage, taxable, whatever you want to call it, account at Schwab or Fidelity or Vanguard or whatever. All right. So I hope that gives you some insight into why you may not have this at your business. And some things to keep in mind is you talk to your employer to try to talk them into offering it. I'm on the 401 committee at my physician partnership right now it's like 400 docs over two states. It's a big partnership now, even though my division of it is still a relatively small democratic group. But I talked to him about this and in the end we decided I might be the only person in that group of 400 docs who would actually make those contributions. There just were not that many people out there interested in it. And we can see how much people are contributing to their 401ks. And it's sobering sometimes to realize that there are lots of docs out there that are not even saving $23,000 a year, much less $69,000 a year in their 401. We also have a pretty generous defined benefit cash balance plan available in our partnership. And I think fewer than 10 docs put their maximum contribution into it every year. Out of those hundreds and hundreds of docs, most docs are not saving that much money. So you got to recognize, Ben, that you're actually pretty rare among your peers to be looking for these sort of ways to get more money saved for retirement in a tax advantaged way. Most people are not doing this. We're trying to spread the word here at wci, but it takes time to get it out there, number one. And number two, sometimes people just have other priorities. Okay, let's talk now about issue Dan is having. Not with a mega backdoor Roth IRA, but with a regular backdoor Roth IRA. Right, the one you do in an IRA, not a 401K. So let's listen to what Dan's issue is.
- [14:30]
Ben
Good morning, Jim. Thank you for doing what you do and hopefully you're feeling better. I had a question about our backdoor Roth conversion. Normally we do this every year. It's not a big deal. It's pretty easy and straightforward. But we recently moved to Fidelity. I'm not sure if that's the issue, but we try to do the conversion in the process of transferring the money from the traditional IRA to the Roth ira, but it wouldn't let me do it. And it basically said the funds are on hold for another three weeks. I logged on and chatted with one of the representatives and they basically, you know, said this is due to, and in quotes, high volume of fraudulent activity. We've been forced to take drastic measures on certain transactions. Whole days are a security precaution that protect people in response to an industry trend of increased fraud, et cetera, et cetera. My question is specifically the 7,000 that I put in the traditional IRA is going to now accrue some interest. And I wasn't entirely sure how to handle that. When I fill out 8,606, do I transfer only a 7,000 to the Roth or do I do the 7,000 and a couple bucks to the Roth? And then I just wasn't sure what to do about that. Thank you.
- [15:44]
Jim Dahle
Okay, Dan, good question. People run into this all the time. I've had to deal with this at Vanguard from time to time. I don't think I've ever had a three week hold, but I've had a one week hold before. Sometimes they tell you it's a week or maybe three weeks and then it's only four days. That does Happen. Financial institutions have to worry about fraud. There's always people trying to scam them for money. And so they try to put things in place that keep that from happening. You know, banks, brokerage firms, whatever. One way you can minimize this happening when you do your backdoor Roth IRA process is have the money already there, right? Have the money already at Vanguard or Fidelity or Schwab or whatever. Now they're not having to worry that you're transferring it in from a bank. And they're like, oh, is this real money? Is this not real money? If it's already at Vanguard, if it's already sitting there in your money market account, they're going to be much less likely to feel like it's fraudulent. That's the first thing to do. If this super annoys you, then do that. It shouldn't annoy you that much, though. This isn't that big a deal. Ideally, you could do your backdoor Roth IRA all in 10 minutes. For most of us, we got to log in twice to do it. If we're lucky, it's only twice. You put your money in your traditional ira, you wait a day, you go back, you convert it to a Roth ira. Not a huge deal. I would say more often than not, I can't do it the next day. I've got to wait a few more days to do it for whatever reason because of the brokerage. And that's fine. It's not the end of the world. What happens? Well, when you put it in the traditional ira, hopefully you just left it in cash. It's in a money market account or a sweep account of some kind. So it's not going down in value because that really makes a mess on 8606. But it'll go up a little bit. It used to be when interest rates were zippo, it used to be that people would make a few pennies and they'd send me an email and say, what do I do about this 8 cents in my traditional IRA now. So I actually wrote a blog post a decade ago or whatever called Pennies in the backdoor Roth IRA. And you can go to whitecoininvestor.com and Google this or search this on the search bar in the upper right. And pennies in the backdoor Roth IRA will come up. You can probably just put that into your browser and it'll come to our blog post on it. And there's, I don't know, a thousand questions from people in comments on this post asking how they deal with their $0.08 or their $1.20 or their $29 now that interest rates are higher that their traditional IRA made in between the time of contribution and the time of conversion to a Roth ira. Here's the easiest way to deal with this. Convert it all, empty out that traditional IRA, and you might have to actually make two conversions. You might have to make one of $7,016. Then you may have to go back a month later and do another one of a buck 20. But empty it out is the easiest way to deal with it then for sure. When you got to answer line 6 on form 8606, the answer is 0. Money was in your traditional IRA at the end of the year, on December 31st of that year. That eliminates any pro rata issue with the conversion step of the backdoor Roth ira. So just convert it all. Yes. That money, your money made while it sat in the traditional IRA is going to be taxable. So you'll owe taxes on 8 cents, which rounds to zero, or buck 75, which rounds to $2, or $29, which is $29, you gotta pay tax on. That's okay. It's no big deal. Okay, so what? You gotta pay $6 in tax. Who cares? Right? But that cleans it up nicely. And if you do all that during the calendar year, it makes your 8606 very clean and nice. My 8606 these days has always got a few dollars there, right? Because it made a little bit of money in the two days before Vanguard. Let me convert it or whatever. It's fine. No big deal. Just recognize that that happens and don't let it confuse you. It's not a bad thing to make money and have to pay tax on it. It's just a little bit confusing because you got to jump through these hoops just to make a Roth IRA contribution for the year. Because you're such a high earner. Congratulations. You have to do a backdoor Roth ira. That's a good thing, not a bad thing. All right, let's take our next question from Ricardo.
- [19:54]
Ricardo
Hey, Jim, good morning. I was calling you regarding a question for an individual 401. So I have an old 401 from a previous job. I want to roll that over to an IRA for two reasons. First, because it's located at Schwab, and since the majority of my accounts are at Vanguard, I want to simplify my portfolio. Keep most of my accounts at Vanguard. Second, I like the investment options better at Vanguard. However, since I plan on doing the backdoor Roth IRA conversion. My question is, can I transfer that individual 401 at Schwab to a Vanguard Traditional IRA, which I understand this will be pre tax to pre tax, then convert this traditional IRA contribution to a Roth IRA. Just for information, I already made my traditional IRA contribution of $8,000 earlier this year since I turned 50 this year and already converted that to a Roth earlier this year. Also for information, the amount in the individual 401 is in the neighborhood of about $30,000. Thanks and I appreciate your helping this matter.
- [20:59]
Jim Dahle
All right. We got to be careful with our terms, right? When you use the wrong terms, it confuses people. Okay. Finance has a very specific terminology, just like medicine does, Right. You need to be precise when you use these words. Right? An individual 401k for instance, is not your 401k account from a prior employer. An individual 401 is a separate 401k for self employed people, also called the solo 401k sometimes. So when you're self employed, you can start an individual 401k. I don't think that's what you have, although you use that word. I think you have a 401k from another employer that's sitting there at Schwab. And you're asking if you can move that to a Roth IRA at Vanguard. Yes, you can. That is called a Roth conversion. Anytime you go from pre tax money to Roth money and you have to pay taxes on the amount you convert. So if there's $30,000 in there and you convert it to a Roth IRA, no matter where the Roth IRA is, whether it's at Schwab or Vanguard or whatever, no matter how many steps you go through to get to that Roth ira, whether you stop in an individual IRA or not, it's a Roth conversion and you're going to pay taxes on those pre tax dollars. So if you're like most docs, you know, you convert $30,000, you're going to pay like $10,000 in tax. Not a big deal if you have $10,000. If you don't have the $10,000 sitting around to pay that tax bill, I'm not sure I'd do that conversion this year. But sure, that's fine to do. Whether that's the right thing to do or not, I don't know. Without knowing more about your situation, you may be rolling it into your current 401k or 403 is a smarter move for you. I don't know. But I can tell you this. What you don't want to do if you're doing a backdoor Roth IRA each year, you don't want to take this money out of the 401k at Schwab and put it into a traditional IRA at Vanguard and leave it there. Because if you do that, you will cause your backdoor Roth IRA conversion step to be prorated. Because what they do is they add up at the end of the year all the value you have in traditional IRAs, rollover IRAs, SEP IRAs, simple IRAs, and they prorate the amount that you converted from that. And you don't want that proration to happen. You want that balance to be zero at the end of the year. 401ks don't count toward that. IRAs do. So whatever you do, don't move the money into an IRA and leave it there. But if you want to stop an IRA on your way to a conversion, as long as you get the conversion completed before the end of the year, that's fine to do. I hope that's helpful. You're like asking if a Roth conversion is allowed. A Roth conversion is allowed. It costs you tax money, but then that money's never taxed again. That's a different question as to whether it's smart for you to do that. I don't have enough information to know if that's smart for you to do. If you have another way to get rid of that 401k, like rolling it into a 401k, that might be a smarter move for you. As a general rule, when the balance is small, when it's $10,000 or $4,000 or maybe even $30,000, and you can afford the tax on the conversion, that's often a good way to clean up that pro rata issue that you have with your backdoor Roth IRA process. If you got $600,000 sitting there in an IRA, that's probably not a great way to clean it up. Most people don't have the cash sitting around to pay that tax bill. And so you'd choose to roll it into a 403B or your current 401K or a solo 401K from some self employment work or something like that. But this sounds like it would work just fine for you. You would have fewer accounts, you'd have more Roth money. But whether it's actually right for you to do, I'd have to know a lot more information about you. But you can certainly do it. It's allowed. All right, all of you out there that are doing hard jobs, thanks for doing them right. You're on your way into work, it's 5:30 in the morning or whatever. When you're listening to this, I have no idea what time it is and you're going in to do something hard and you drug yourself out of bed and it's not an easy job, but it is an important job. And having had lots of interaction with the medical establishment this year and benefited from your hard work and from your dedication, your years of training, your years of practice, your patients do appreciate it, even if they forget to tell you. Thank you sometimes. So thanks for what you do. All right, to More IRA questions. We've talked about the mega backdoor Roth ira. We've talked about Roth conversions. We've talked about the backdoor Roth IRA process. Now let's talk about an inherited IRA.
- [25:29]
Charles
Dr. Dali, thank you for all that you do and I hope that you're recovering well from your injury. I have a question about an inherited ira. My girlfriend's father passed away and left her as one of several beneficiaries in his inherited Iraq. This is a multiple six figure amount and is currently sitting in her father's IRA brokerage account. From my reading it seems that she needs to have this account liquidated by 10 years. Her father was already taking RMDs at the time of his death and now she needs to take these annually as well. My girlfriend's considering getting a financial advisor to help figure out how to manage this money. She's a public school teacher and we have not combined finances yet. How would you recommend she manage her inherited IRA over the next 10 years? Should she invest more aggressively in the first five years and then more conservatively in the last five years before she has to have it all liquidated? Also, how would you suggest you do direct versus backdoor Roth IRAs? I work as a physician so I've always done backdoor Roth IRAs. From what I'm reading, the income limit for her to do direct Roth IRAs is $161,000. Anything over that and she would have to do the backdoor Roth. If she's not sure at the beginning of the year if her income is going to be under or over this limit, what should she do? Should she try as hard as she can to control the income and the RMDs to keep her below the limit to do direct Roth iras? Or should she just do a backdoor Roth IRA if she's not sure she's going to be under or over the limit? Any help you can give would be much appreciated. Thanks a Lot.
- [26:42]
Keith
Bye.
- [26:43]
Jim Dahle
Well, that was impressive. That recording was 1 minute and 15 seconds. I don't know how many questions you got in there, but it was an impressively large number. First of all, thank you for your kind wishes for me and my recovery. By the time people hear this, it's going to be mid December, Right? I fell off a mountain in mid August. And although people just heard last month, you know, the podcast episodes we recorded telling this story, you know, as I record this, I'm over 11 weeks out from my fall. I'm still in a splint. Those of you watching this on YouTube can see the splint of my wrist, but that comes off next week and I'll be doing rehab. Now, I might not be playing ice hockey games by the time you hear this podcast, but I'm certainly back on the ice with the teams I'm coaching, and hopefully I'm skiing by the time you hear this. So my recovery has gone well. Thank you so much, everybody who sent us emails and well wishes and all that kind of stuff. I feel lucky to be alive. I'm a little bit humbled and wondering in some ways why I'm still alive and not brain damaged. But maybe part of that reason is so I could record this podcast and help some of you out. So thank you for your kind words. I'm doing good, by the way, in case you're wondering, all of you out there in podcast land, if you look really closely on YouTube, you might be able to see some new scars on my face. But otherwise, doing good. Okay, first of all, a few comments about girlfriends. And it's not about girlfriends. It's about boyfriends. It's about anybody you're not married to. Okay, as a general rule, the right thing to do when you're not married to somebody is to keep your finances separate. That doesn't mean you can't talk about them. It doesn't mean you can't coordinate. Right. But paying off your girlfriend's $400,000 in student loans might not be the best move if she dumps you afterwards. So keep that in mind as you manage money with partners that you're not married to. As a general rule, I think it's wisest to keep your finances separate till you get married. And then I think it's wisest to combine them. But obviously, there are exceptions to every general rule out there. Okay, let's talk about RMD rules for inherited IRAs. And they're complicated. It matters when you inherited them. It matters whether that person was taking their RMDs already, right? There's all these things that matter. And one of the better resources that I found out there is a page put out by Fidelity and they call it Inherited IRA Withdrawals Beneficiary RMD Rules and Options. That's the SEO title that you see when you search on Google and they go through all the terms and you can find your category. Right. In this case, the category for this questioner is, I am a non spouse, family member or friend whose name is, as beneficiary, the original IRA owner. Okay, so that's the one we want to go to. So you go in there and you find out, well, did they. Was the person taking their RMDs already? In this case they were. So what do you have to do? What does the girlfriend have to do in this situation? She has to transfer the money to an inherited IRA and take required minimum distributions based on the longer of the destined life expectancy or the beneficiary's life expectancy. So the 10 year rule doesn't actually apply to you because they were already taking RMDs. So that's kind of cool. Of course, Fidelity puts two superscript numbers on that and the person says multiple beneficiaries may require the calculation in some cases to be based on the oldest beneficiary's options for distribution. Unless an inherited IRA is established by December 31, the year following the original IRA owner's death. Over that day, all other beneficiaries had either taken their share from the IRA or had discarded their interest in the IRA. That's a big caveat. The other one is Roth IRAs do not require original owners to take RMDs as such. Original depositor Roth IRA owners always pass away pre required beginning date. A non spouse beneficiary would take required minimum distributions under the five year rule or based on single life expectancy. One other superscript that applies in this situation is post required beginning date when the original owner passed away on or after April 1, the year following the year they reached age 73 or age 72 prior to January 1, 2023. Just to give you a sense of how complicated those are, I read all of those this is complicated rules and I'm sorry it's so complicated. I did not make this rule. Please do not blame me, Blame Congress, blame the irs. This is a mess, right? And it's hard to sort out. But that is the best page I know of to help you sort it out. I know of no better resource on the Internet about inherited IRAs. In fact, I think this page is even more useful than the blog post I did on inherited IRAs. But I do recommend that as well. Just search inherited IRAs on the WCI blog and it'll come right up. But this page from Fidelity, which we'll put in the show notes, let me send it to Megan right now. Before I forget. We'll make sure it's in the show notes and you can check that out. It's great. And when I have a question about inherited IRAs for somebody, that's where I go to answer it. Okay, so get that sorted out now. Do you need a financial advisor to read that page to you? I don't know. Go read the page first and find out, because a financial advisor can be really expensive. Now, it's possible to get a financial advisor that serves validators, people that just have a couple of questions and really want to do this on their own. We have some of them on our list, our recommended list at White Code Investor. But that's a question to ask them. Is this what you do? Can I come in and pay you for a couple of hours of work while you answer some inherited IRA questions for me? Because a lot of advisors, that's not what they do. They might say, come on in, but they're trying to hire you or trying to get you to hire them to manage your assets, all of your assets for the rest of your life. And maybe you need that. Maybe you're a delegator and that's a good thing for you. And that's okay for you to hire a financial advisor to do that. But bear in mind that what most financial advisors do is serve delegators. They don't serve people that come in with a question or two. We call those people validators. And most advisors are not set up to do that. So keep that in mind as you try to hire an advisor to get this sorted out. You can also ask the question for free in some of our communities, right? We've got a white coat investor subreddit. We got a white code investor forum. We've got a white coat investor Facebook group. There are other good forums out there like the Bogleheads forum. You can ask these sorts of questions there. And if you give all the relevant answers, the right answer is probably in there somewhere. There's no guarantee, right? Anybody can answer a forum question. They might answer them wrong, but you can try that. At least the price is right on that. Hope that helps you decide if you need a financial advisor for this question or not. Maybe you need an advisor anyway, I don't know. But if you do, maybe get the advisor. Okay, your girlfriend is a teacher, so that typically means she doesn't get paid that much. That usually means you can contribute directly to a Roth ira. Now, there's some situations where low earners get burned. On this one is they make more money than they thought they were going to make. Now, if you make more than the limit, the Roth IRA contribution limit for direct contributions, which for 2024 and 2025, let's look at what those are. For single people for 2024, it's less than $146,000. Okay. Between $146,000 and $161, you can make a partial direct contribution. And above $161,000 in modified adjusted gross income, you cannot make a direct Roth IRA contribution. You got to go through the backdoor Roth IRA. If you're married filing joint returns, that's $230,000, and it phases out between $230,000 and $240,000. Above $240,000, you can't make any contribution at all. But if you're doing married filing separately, it's like $10,000 and the phase out is less than that. And so if you are married filing separately, or you think you're going to cross that limit this year, or you're getting married to a high earner this year, just do it through the backdoor Roth IRA process, I promise you won't regret it. Anybody can contribute to a Roth IRA via the backdoor Roth IRA process. As long as you don't have some IRA out there that's going to make you get prorated. And in that year that you think you might have to, you better do it or you're going to regret it. I contributed to a backdoor Roth IRA or contributed to my Roth IRA indirectly in 2010. That was the first year it was allowed. It turned out we didn't make enough money that year to have to do it this year. I was coming out of the military and I was a pre partner in my group for the second half of the year. We just didn't make enough. We didn't have to. Nobody cares, right? Low earners can do backdoor Roth IRAs. High earners have to do it. So I hope that's helpful in answering that question. Okay. The other question you had was how to invest the money. Well, here's the deal, right? You don't invest differently. Really, you don't invest differently based on where the money is for Example, my parents, My parents are of RMD age. They're elderly. No surprise, right? I turn 50 next year. So no surprise. My parents are elderly and they have to take RMDs out of their IRAs every year. They don't tend to spend them. Try to get them to spend more every year, but they're kind of in their slow go years and so they don't spend that much money. And most of the time what we're doing with those RMDs is we're taking them out. We have Vanguard withhold a little bit of money from it to pay the taxes on them and we reinvest the money in taxable. So your investing plan doesn't need to change based on where the money is. Their asset allocation is the same whether it's in the IRA or in the taxable account. Yes, there's tax considerations. You try to keep the most tax efficient assets in your taxable account and the least tax efficient assets in your tax protected accounts. But your asset allocation overall is the same. And for your girlfriend it should be the same. How you invest that money in your time horizon for that money in the inherited IRA isn't one year or five years or ten years or whatever, right? That's not the time horizon for it. The time horizon is when she's going to spend the money. Just because at some point you got to take the money out of the inherited IRA and invest it in the taxable account shouldn't change the way you invest it. You're investing this money for 30 years from now, okay? So you don't put it in cash until you take it out of the inherited IRA and then invest it in stocks in six years or whatever, right? That doesn't make any sense at all. Just invest in what you want to be invested into. Now the nice thing about an IRA is if your investment does terribly right, everything tanks. There's a terrible bear market and everything goes down 45%. Guess what? It costs you less in tax to take that money out and reinvest in taxable. So that's not necessarily a bad thing if it goes up. Well, yeah, you'll end up having to pay more tax on that money when it comes out of the inherited ira. But you also have more money. That's not a bad thing either. So just invest the money in the inherited IRA like it's long term money. Don't leave it in cash because there's a withdrawal coming up shortly. It sounds like she's going to be able to withdraw this money over A relatively long period of time though. So, yeah, you definitely want to be getting this money invested and you know, probably relatively aggressive. I hope that's helpful. I hope we answered all of the questions in that, in that one minute, 15 second recording. If I didn't call back and leave me one question and maybe I'll get it answered better. All right, here's a question about Robinhood. People love Robinhood and I think Robinhood's given out money to convince people to move money to Robinhood. But it makes me laugh. Right, Robinhood. Really? You're going to put your life savings in a company that decided to call itself Robinhood? I don't know. It makes me laugh. Let's listen to this question though.
- [38:37]
Keith
Hello, Dr. Dali? Charles from Texas here. Earlier this year I took advantage of the Robinhood 3% IRA match and got tens of thousands of dollars to transfer money over. Almost everything was a Roth IRA. But I did happen to have an old 401 that I hadn't moved to my current employer or my tsp. I moved this over knowing that it would prevent me from being able to do the backdoor Roth the five years that I must remain at Robinhood without forfeiting the bonus. My plan was to simply do non deductible IRAs and fidelity for the next five years and then cover all of it at once after clearing out the traditional IRA of Robinhood. To come out ahead, the gains over the five years of investing in the non deductible account and the taxes I pay on those would have to be less than the amount of money that I got for Robinhood in the bonus. I could increase the odds of this happening if I invest in something low yielding like bonds and the non deductible IRA and adjust the rest of my portfolio to compensate. This would actually make the plan the same as simply using a taxable account for those same low yielding bonds since they get the same tax treatment either way. Does this sound right? Am I missing something? My primary alternatives would be simply investing in taxables or sending even more money into my 529 and to be able to wind down those investments earlier than currently planned. Either way, both of these alternatives come at the cost of less money in the Roth IRA over time. What do you think?
- [40:02]
Jim Dahle
What do I think? Well, investing doesn't have to be this complicated, folks. You don't have to do this stuff and run these numbers to be successful. Make a bunch of money, carve a big chunk of it out, invest it in some reasonable way and you're Going to be financially successful. It really is that simple. You don't have to figure out who's offering the biggest transfer bonuses and play this transfer bonus game. Going to Robinhood this year and going to Wells Fargo next year and going to whatever new brokerage has been invented the year after that. You don't have to do this crap to be successful. It took me a while to learn that. I am not criticizing you. I went through this phase in my life where I played these stupid little games to try to make a little bit more money. I remember PGY3, we were a little short on cash. We wanted to make sure we got our Roth IRA contributions in for that year. So we actually took out a 0% credit card, whatever it was, for a few months so that we could make sure we maxed out our Roth IRAs that year. Not a big deal. Does it really move the needle on our lives now? Absolutely not. So what if I didn't get all. Whatever it was, $3,000 or whatever we were allowed to contribute to a Roth IRA way back then, and I only got $2,000 and who cares? It doesn't matter. You don't have to play these games to be successful. All right? When you do play the games, you want to make sure you're actually coming out ahead. First of all, you got to deal with Robinhood. And I've had a few people that invest in Robinhood and tell me they really like it. Maybe it's fine as a brokerage and it's cool. You get balloons and confetti when you put a trade in. I mean, maybe that makes you feel better about what you're doing. I have no idea. But if you like Robinhood and you think it's awesome, use Robinhood. I really don't care. For most people, I think you probably feel better when you're using a company that is called something like Charles Schwab, which is a person who really looked out for the individual investor, or Fidelity. Doesn't that make you feel good to have a company that's called Fidelity or a company called Vanguard? It's an important naval ship in England's history. But at any rate, if you want to use Robinhood, go ahead. You do not have to play these games. If you want to play these games, make sure you're not, at least not coming out behind for playing them. You got some interesting ideas on how you can come out even further ahead on this? Yes. If you decide to do this, which sounds like you already have, you're mostly coming out ahead right they're going to give you whatever a bunch of money says, $10,000 or $20,000 or whatever, that you're going to get from moving all this money over to Robinhood. The problem is to get that you're messing up your backdoor Roth IRA process. They're not going to just let you roll a 401 in there and have it be a 401. When you roll it over, it's IRA and it sounds like it's too big that you can't afford to convert it to a Roth ira. So now you're getting prorated for the next five years on your backdoor Roth IRA process. It's not the end of the world. You can keep doing it and just get prorated. But I think the way you're thinking about it is probably the right way in that you just keep it in a separate ira, this non deductible contributions you're making at Fidelity or whatever, and you put your $7,000 a year in there. You know, so after five years you got, I don't know, 35 or $40,000 worth of contributions and maybe you have another $20,000 worth of gains in there, and that's cool. And then at that point you do a Roth conversion. Now you're going to have to do it. You're going to have to pay the taxes on the conversion there. Okay, so let's say you got $20,000 worth of gains. Your taxes on that are probably $8,000. You're now eating up most of that bonus you got for putting your money at Robinhood. If you got $10,000 for moving your money in there, and it's going to cost you $8,000 extra in taxes down the line. Okay, you came out $2,000 ahead. Is it worth this hassle for the next five years? I don't think it is. I don't think it's worth it. I suspect you are doing pretty well financially when you're worrying about things like this. And I think you're making your life more complicated than it has to be. But it sounds like you've already done it. The money's already at Robinhood. What do you do now? Well, yeah, I would keep that money separate. I wouldn't contribute to that IRA at Robinhood. That's definitely going to be mixing the coffee and the cream in your backdoor Roth IRA pro rata issue. So leave it there for five years at Robinhood. Invest it like you normally would invest it. Don't do this craziness you were talking about. Oh, the craziness was, I guess, at Fidelity, it wasn't at Robinhood, it was deliberately trying to get low returns on that money so that you wouldn't have to pay as much in tax on that money. Well, you're going to own bonds somewhere, you might as well own them there, right? No big deal. I guess that's reasonable. And own your stocks in the Roth IRA and own your bonds in this 7 to 35, $60,000 IRA you're creating over the next five years of fidelity. That's fine to do that. Maybe you come out a little bit ahead doing that, and that's great. But keep in mind, when we do this, when we put bonds in tax deferred accounts, when we put stocks in Roth accounts, we're mostly just fooling ourselves. Yes, the expected return is higher, but the expected return is higher because you have a more aggressive asset allocation on an after tax basis. After tax, there's more money in the Roth IRA than there is in the traditional Iraq. So you just took on more risk is all. So of course you expect a higher return. It's fine to do that. Most of us do that. And we don't tax adjust our retirement accounts when we're setting our asset allocation. Just recognize that's what's going on here and that's kind of the game you're playing here, but I think it's smart. Fine, put your bonds in that account. But you rolled over hundreds of thousands of dollars to Robinhood in order to get this $10,000 plus bonus. Probably not going to be all of your bond allocation. If you don't want bonds anyway. Would I put this money in bonds? No, I would invest it along with your otherwise prudently thought out written investing plan and asset allocation. But if bonds are part of that, sure, put the bonds in here. That's no big deal and seems reasonably intelligent. But I don't want anybody out there in WCI podcast land to think you got to play these games to be successful. The $10,000 you get from Robinhood for leaving your money there five years is not what is going to make you retire as a multimillionaire at 53 years old and have financial freedom in your life. Okay, every little bit helps, I guess. But don't complicate your life too much. For all this hassle, you probably just go work an extra shift and that's probably going to compound to that $2,000 over time anyway. All right, as I mentioned at the top of the podcast, SOFI is helping medical professionals like us bank Borrow and invest to achieve financial wellness. Whether you're a resident or close to retirement, SoFi offers medical professionals exclusive rates and services to help you get your money right. Visit their dedicated page to see all that SoFi has to offer at. Whitecodeinvestor.com SoFi one more time. That's whitecodeinvestor.com SoFi loans originated by SoFi Bank N A NMLS 696891 Advisory Services by SoFi Wealth, LLC. The brokerage product is offered by SoFi Securities, LLC, Member FINRA SIPC. Vesting comes with risk, including risk of loss. Additional terms and conditions may apply all right, thanks. For those of you out there who share these episodes, I think it's particularly powerful if you send a link to the episode and you can just send a YouTube link or whatever to friends when we're talking about some situation they're dealing with. If you got a friend out there chasing Robinhood bonuses, maybe you send them this episode. Or you got somebody trying to convince their employer to put a bigger backdoor Roth IRA in, maybe you send them this episode. Thank you for those of you who are doing that. White Code Investor this community has grown over the last 13 years primarily from white coat investors doing that for one another and I thank you for the assistance you've given. Some of you are out there giving talks at your medical schools, at your residencies, to your partners in your medical groups. Thank you for those of you out there doing it, if you've got a podcast or a blog or you've written a book to help your peers to be financially literate, thank you for doing that. All right. It is important work and all together we are going to help doctors to be smarter about their money in this century than doctors were in the last century and quit being taken advantage of by the financial services industry. Let's get good advice at a fair price for our colleagues. Let's make sure people aren't doing stupid stuff with their money because doctors that have their financial ducks in a row are better physicians. They're better parents, they're better partners. I truly believe that and so let's help our peers as best we can. Thanks. For those of you doing that by sharing this podcast, it also helps if you leave five star reviews and we had one of these come in from Grtsho recently who said excellent and thorough. This podcast is an example of a motivated physician gaining substantial knowledge on a non medical topic and sharing it with everyone. He's altruistic and thoroughly engaged in this material. I find when he lacks information on topic, he's not afraid to admit it and research it thoroughly to provide an accurate and actionable answer. His staff should be given significant credit for the success of this podcast as it clearly must take more effort than just one man can muster. Isn't that the truth? A great combination for a podcast knowledgeable, altruistic host who surrounds himself with intelligent guests and hardworking staff all. Keep up the great work. Five stars. Wow. Great review. That's very kind. We should definitely share that with the staff. Okay, keep your head up, shoulders back. You've got this. We're here to help. We'll see you next time on the White Coat Investor Podcast. 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.