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White Coat Investor Podcast
WCI #410: Taxes in Retirement, Tax Gain Harvesting, and Avoiding Probate
00:51:42
Today we are answering your tax questions. We discuss tax liability in retirement, social security tax limits, tax gain harvesting in UGMA accounts and maximizing tax in retirement. Then we answer a few estate planning questions. The first is around...
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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.
- [00:16]
Dr. Dali
This is White Coat Investor podcast number 410 brought to you by Laurel Road for Doctors. Laurel Road is committed to serving the unique financial needs of residents and doctors. We help to make your money work harder and smarter. If credit card debt is weighing you down and you're struggling with monthly payments, a personal loan designed for residents with special repayment terms during training could help you consolidate your debt check if you qualify for a lower rate. Plus, White Coat Investors also get an additional rate discount when they apply through LaurelRoad.com WCI for terms and conditions, please visit www.l Laurelroad.com WCI. That's www.l LaurelRoad.com WCI. Laura Rodez Brand KeyBank NA Member FDIC all right, welcome back to the podcast. This one we're recording in February 20th. This is going to run out March 13th, so it's almost a month, three plus weeks in between recording and publication. And usually what happens when we do this is something dramatic. Changes in the world, right? Who knows? There seems like there's something new coming out of Washington every week. So if you feel like this podcast is totally out of touch with what's going on in the world, that's why, right, we got to work a little bit ahead of time. Especially as we get close to our conference, which is the very end of February, we tend to get a little further out in recording these podcasts. So please forgive us if something huge just happened this week and I'm not even talking about it today. All right, let's get into some of your questions. This is interesting. The first one's about forecasting your tax liability in retirement.
- [01:53]
Tricia
Hey Dr. Dali, hope that your healing is going well. Thanks to you and your team for keeping things going during your recovery. I'm trying to do some forecasting for my tax liability in retirement and specifically looking at my after tax brokerage account. When we think about an average market return of say 8 or 9 or 10%, that calculation is easy to do in a pre tax or Roth account because you can just use the compound growth calculator. But in an after tax account, how do I calculate the tax drag on the non qualified or qualified dividends and use an accurate growth rate to account for that? And also how do I know at the end of the period, let's say 10 or 20 years, how much of the value of that account is going to be in gains versus an increased basis due to reinvesting my dividends. Thanks.
- [02:48]
Dr. Dali
Okay, great question. First of all, my healing is going well. Those of you on YouTube, you can check out my wrist here, right? That's pretty good range of motion compared to what I had a couple of months ago when I started my physical therapy. This is the only thing I'm really recovering from right now. I mean, I went skiing up at Snow Basin the other day and I went with one of my adventure buddies, actually the fellow who saved my life when we were climbing on the Grand Teton together and we hit it hard, there was a lot of new snow and it was pretty thick and boy, I felt like a pretty lousy skier. So maybe I'm not completely recovered everywhere else, but mostly it's just about doing three times a day physical therapy on this wrist and hoping to get as much range of motion and strength back there as I can. But I appreciate your kind words. Okay, tax liability in retirement. This is pretty complicated, okay? Your desire to forecast is commendable but not realistic. There's only so much forecasting you can do here, right? You have no idea what your returns in the future are going to be. You don't know what the dividend yields are going to be. You don't know what the tax brackets are going to be, right? So you can only do this in like a vague way anyway, so don't try to get too crazy about it. Yes, you know, the money in your taxable, AKA your non qualified or your brokerage account is going to grow slower than the money in your Roth IRA or the money in your tax deferred accounts, right? It's going to grow at a slower rate because of tax drag as it kicks out dividends every year as it distributes capital gains, or heaven forbid you're selling and buying and making capital gains, that's going to take some of your return away. That's just the way it works. It works the same way when you pay a financial advisor, you pay too expensive mutual fund fees and those sorts of things. Your return's lower because that's the only place that money can come from is your return. How much lower is it going to be? 1 to 2% is probably a fair estimate. Truthfully, if you're getting 10%, which you may or may not get, obviously if you're getting 10% and you're in the top tax bracket, your tax drag is going to range somewhere between 1.5% and 4.5%. So instead of earning at 10, you're going to be earning at something between 5.5% and 8.5%. And that depends on the tax efficiency of the investment, right? If it's a totally tax inefficient investment. Now I use as an example for this I use real estate debt funds. There's no depreciation in a debt fund and the entire return is paid out every year and taxed at ordinary income tax rates. So it makes 10%. If your marginal tax rate is 45%, you're paying 45% on your entire return every year. It's completely tax inefficient. That's why it's a good asset class to have inside a retirement account. Let's say you have it in a taxable account. Well, that's a tax inefficient asset. Now the most tax efficient asset out there might be bitcoin, right? There's no distributions whatsoever and you don't pay anything on it until you sell it. And when you do sell it, you get long term capital gains treatment. So it's as tax efficient as anything gets. No, no promises. You're gonna have a positive return by any means. You can even tax loss, harvest Bitcoin without having to worry about wash sales, right? You can sell your Bitcoin and buy more bitcoin two seconds later and book that loss and you don't have to wait 30 days like you would if you were doing this with stocks or mutual funds. So super, super tax efficient asset. Not my favorite investment. I don't have any in my portfolio, obviously. But you gotta give it up for its tax efficiency. It's pretty awesome. And so that's as tax efficient as it gets. But Even so, after 30 years, when you sell it, assuming it had a gain, you're going to pay out your capital gains rate. Now in my case, that's like 28% plus, right? Because I got to pay state taxes on it. I got to pay the 3.8% Obamacare tax and I got to pay a 20% long term capital gains rate. So that adds up to over 28%. I think it's 28.6% or something. So you got to pay that out at the end on all the gains. So that's going to take away from your return anyway. But there's tons more that go into this, right? Because you don't have to sell your stuff evenly in retirement. You can sell the stuff that has the high basis, right? If there's an investment, you just bought a couple of years ago and you bought it for $90,000 and now it's worth $100,000 and you sell it. Well, guess what? 90,000 of that you don't pay any taxes on at all. So you get $100,000 to spend and maybe you only gotta pay 2 or $3,000 in taxes to get it right, so you've got some control over your tax situation in your taxable account there. The other thing I think a lot of people don't realize is there's a whole bunch of people that are retired that just aren't selling stuff at all. They're living off the income. If the dividend yield on your investments is 1% or 2% or 3% and you're only taking 4% out anyway, well, you're getting most of that out of just the income. So you don't have to sell to get that. Yeah, you're going to pay qualified dividends, tax rates on a lot of that and maybe some ordinary income rates on some of that. But there's a lot of variability there. And the truth is there's a lot you can do to keep your tax bill down. Now. Some people are Even in the 0% long term capital gains and qualified dividend bracket. You might be surprised how high that goes. If your only income in retirement is some Roth withdrawals and selling some high basis shares, you might find you can spend $200,000, $300,000, $400,000 a year and still be in the 0% long term capital gains bracket. It's pretty amazing in just the right situation just how little tax you can pay in retirement. And of course, some people are constantly flushing their capital gains out of their accounts with big charitable contributions and that helps them to reduce their future tax liability as well. So there's all these factors out there. I don't think there's some easy rule of thumb where you can just forecast what your return is going to be after tax in your taxable account. I think it's highly, highly variable. And the more you understand about taxes, the more you can optimize that as you go along and when you start withdrawing in retirement. So I hope that's a helpful discussion on the topic. I don't think it's the answer you were looking for. I think you were looking for something much more concrete. And I just don't think it exists out there. And I'm sorry for that, but that's just the way it is. You know, Einstein said make things as simple as possible, but not simpler. I think I've made things about as simple as possible. We make it any simpler, and I'm going to get a whole bunch of people calling in to complain that what I said doesn't apply to their situation. And they'll be right. It won't apply to their situation because they're in a different tax situation. All right, quote of the day today comes from Warren Buffett. He said games are won by players who focus on the playing field, not by those whose eyes are glued to the scoreboard. I like that quote. You know, one thing I really like about Warren Buffett, he's a stock picker, obviously pretty successful one. I'm not a stock picker. I just buy all the stocks, which is actually what he recommends people do. But I love his focus on businesses. And when you buy stocks, even if you buy them all like I do, using index funds, you are buying profitable businesses. And the way you make money on businesses in the long term is just by owning them. When Apple makes money, I make money. When Exxon makes money, I make money. When Nestle makes money, I make money. Hey, it's not by trying to buy and sell them and trade them. You own them. When you own them, you make money over the long run. So quit worrying about the prices so much that you're buying them at. Quit worrying about timing the market. Concentrate on time in the market, and you'll be successful as an investor. Okay, let's take a question from Alex, who's a new Attending and has some questions about how Social Security works.
- [11:02]
Jim Dahle
Thank you for all you do. I'm a newly minted Attending. I started about six months ago. I have my income from residency and now I have my Attending income. My Attending income alone will not surpass the Social Security tax limit. So when you combine the two, I think it should surpass it pretty substantially from my residency income and my Attending income. I guess I was curious. Is there anything I need to do other than just file that during tax time and then if I do wait until tax time to do that, do I just receive a refund on my tax bill? Is there any forms I need to fill out? Thanks again for all you do. And hopefully it's a pretty clear question to be able to answer.
- [11:44]
Dr. Dali
Thank you for your question, Alex. No, it's not a clear question to answer, but it's a good question because it's a question you have. And the reason you have it is because you don't really understand how taxes work yet. And you're going to understand a whole lot more In a year or two, how taxes work. So I think the best way I can explain this is just by talking about how taxes work. Okay, let's start with Social Security. Social Security is a tax that is used to fund a government benefit program for the disabled and the elderly. The way it's currently set up is that you and your employer, and you might be your employer too, right? But you and your employer pay. What does it work out to be? 6.2% apiece of your earnings. So 6.2% for you, 6.2% for your employer. Okay, so 12.4% total of your earnings go towards Social Security. But the cool thing about this is, at least for us who are high earners, is you don't have to pay that on all of your earnings for 20, 25. You only pay it on the first $176,100 in earnings. Now, if you have two jobs, that is paid from each job, okay, you and your first employer pay that. You and your second employer pay that. Now when you file your taxes, you get back your half of Social Security. That's over this wage limit, but the employer doesn't. And so it's possible that you could end up paying way more Social Security tax than you really need to if you're in a not ideal dual income situation. For example, an S corp does not work very well with W2 income because of this reason. Because you end up with your S corp paying this other set of employer Social Security taxes that you're not getting any benefit for because that's your situation as your setup. So typically when you are an employee, when you're an employee attending or your employee resident, your employer takes care of all this and you don't have to deal with it at all. They take the Social Security tax out of your paycheck and they give you what's left, right? They probably withholding some other stuff. They're probably withholding maybe some 401k contributions, some premiums for your health insurance, your income taxes, as well as your Medicare taxes, the other big payroll tax. So they take care of this for you and you don't have to worry about it. They'll send their portion in, they'll withhold your portion out of your paycheck and they'll give you the rest. And that's how it works for most people. I don't think you're in that situation based on your question. I think you're self employed in some way. Maybe you're a partner and you're getting paid on a K1 maybe you are self employed and you're getting paid on 1099, right? You're an independent contractor. When you're an independent contractor, you are the employer too. So it's your job to pay both halves of that Social Security tax or both halves of Medicare tax. Medicare works the same way. It's a little bit lower tax rate, it applies to all your income, but it basically works the same way. You pay half and your employer pays half. So if you're self employed, you gotta pay both halves of the Social Security tax, but it all gets lumped in with your other taxes. If you're just an independent contractor paid on a 1099, this is called self employment tax. But all it is is those same payroll taxes that the employees are having withheld on their behalf. And so you file Schedule SE with your taxes and that totals up the amount of payroll taxes you should have paid or would have been paid if you were employed. And they go in with your other taxes. And so when you are paid on a 1099, right, there's nobody withholding your income taxes. There's nobody withholding your payroll taxes. The, the expectation in our pay as you go tax system is that you will pay them as you go along. And the way you do that is quarterly estimated payments. The first one's due on April 15th, second one on June 15th. Yes, I know there's only two months between April and June, but that's the way it works. The third one on September 15th and the fourth one on January 15th. So you get four months for that last one. You only get two months for the second one. I don't know, man. I didn't make the system. This is the way it works. It's really actually a pain for those of us who have big quarterly estimated payments to come up with that just two months after the first one. But that's the system we're stuck with. So that includes your Social Security tax. When you send in those quarterly estimated payments, that amount should include the amount you're going to need to pay for your payroll taxes as you go along. So I think that's the answer to the question you asked is that it just goes in with your quarterly estimated taxes. As far as calculating how much that's going to be, that's really hard the first year. It's a big guess, right? But yes, you're going to owe some of those. It's hard to know exactly how much you're going to owe when you've never had this income before. And maybe You've never done your own tax return. You don't know how to calculate taxes. If you know exactly what you're going to make, you can calculate this all in advance. But most of us don't know exactly what we're going to make. So it's a guess. And it's okay to guess, because here's the deal. If you guess a little high and you pay too much in taxes, when you settle up with the IRS come April 15, you get whatever you overpaid back as a tax refund. No big deal. They don't keep it, you get the money back. If you underpay, you have to settle up with the IRS on April 15, okay? So you got to write a check. That's fine as long as you have the money. The only problem is if you spent the money on something else and now you don't have it because you don't want the IRS as a creditor, they are not a good creditor to have. They can garnish your wages. They can pull money out of your bank accounts. They can do all kinds of things that other creditors can't do. You don't want to owe the IRS money long term, so pay them. When you owe them in April, and you've underpaid your taxes, find some way to pay them. If not immediately, just as soon as you can. Now, you can get penalties if you underpay too much. There's a concept called a safe harbor, right? And the first year, you really get quite a bit of slack. After that, you can be in the safe harbor as a high earner by making sure you have withheld at least 110% of what you owed in taxes last year. That's how most people make sure they're in the safe harbor. Now, that still means you're getting 10% of your taxes back. If your income didn't change, you're getting 10% of your taxes back as a refund. And that might be a lot of money that you loaned to the IRS for free that year. But the truth is, the penalties are really just kind of the interest you earned on the money while you had it. Anyway, if you paid money seven months after, you should have paid money to the irs, well, theoretically you earned interest on that money over those seven months. And that's about what the penalty is. So it's not like some crazy egregious penalty. Now every year we're either way over or way under. We don't get it right. Our income is highly variable, and we end up either Having to write a check or having loaned the IRS way too much money. It's actually better to write the check, I think, because I at least got to earn something on that money in the meantime and sometimes in the safe harbor and I don't even have to pay a penalty for it. Whereas if I underpaid them or if I overpaid them, well, they're not going to pay me interest on the amount I paid over what I should have paid. And so I would rather write a check in April. But you've got to make sure that you have the money to be able to write the check or you really end up in a situation you don't want to be in. I hope that's helpful, Alex. I hope that explains the situation. And trust me, this is going to get way easier as the years go by. It's only tricky the first year or two, especially if your income's relatively stable. All right, let's take a question from Tricia.
- [19:21]
Tricia
Hi, Dr. Dali, my name is Tricia. I'm a dermatologist in Texas. I've heard you speak all about tax loss harvesting, but I've never heard anything about tax gain harvesting if that's such a thing. Thanks to you, we opened up UGMA accounts for our kids years ago and they've grown really well. We want to keep all the same investments, but I'm thinking that it would be best for them to pay any long term capital gains while they have such little income. Does it make sense to sell the stocks and buy them back immediately in order to pay less in capital gains before they finish college and start making money? I'm assuming this would reset their basis for how much they will owe when it's time to cash it in for their first home purchase. Are my assumptions correct? Does this make sense? Thank you for all you do.
- [20:15]
Dr. Dali
Yes, Tricia, tax gain harvesting can make sense. The concept as you've outlined it absolutely works. The idea is that you're realizing capital gains while you're in the 0% long term capital gain bracket and then you have higher basis whenever you sell those shares later. However, this is pretty far out there on the optimizing scale, right? If backdoor Roth IRAs are 2% on this scale, this is like a 10, right? You're really trying to get things optimized when you are tax gain harvesting your UGMA account. And let me explain why, right? Most people are using these UGMA accounts kind of like we are, you know, some sort of a 20s fund. This is money we're putting away for our kids to use for something in their 20s. Maybe it's a house down payment or maybe it's some money to spend a summer in Europe or you know, go on a mission or you know, maybe supplement their 529 for their education, those sorts of things. But the truth is most of our kids are going to be using this money while they're in the 0% long term capital gain bracket anyway. So you can go through all this effort every year to tax gain harvest all these gains and file taxes for them over the years and try to optimize it perfectly so that they don't have any significant gains on these UGMA accounts when they go to sell the assets. And in the end, you might not save anything in taxes anyway because they're taking it out at 0%. Now, that might not be the case, but you really know, you really don't know. If they're six years old right now and you're trying to tax gain harvest their uniform gift to minors accounts, you know, these are custodial taxable accounts essentially. So I wouldn't spend a lot of time doing this. I don't do this for my kids. UGMA accounts, they all have significant UGMA accounts now they have six figure UGMA accounts. I don't do any tax gain harvesting. I did quit tax loss harvesting them though. The first year or two I had one. I tax loss harvested it and I'm like, why am I carrying this forward? And I've been carrying losses forward in that account. I still don't think they've been used by my 20 year old, but this year they'll probably get used in 2025. These losses I harvested in like 2008. So tax loss harvesting probably isn't worth it. Tax gain harvesting probably isn't worth it, but it could be. And if you want to do it, go ahead. But just make sure you're doing everything else financial that you need to be doing first. Most people out there, even most white coat investors, there's something out there that's going to give them more on a net basis than tax gain harvesting their custodial accounts. But the idea as you've outlined it certainly works. It just might not be worth much. All right, reminder to all of the first year medical, dental and other professional students out there, if nobody has handed you a copy of the White Coat Investors Guide for Students yet this year, that's because there is not a champion in your class that has volunteered to do so. Please volunteer. You can do so@whitecoatinvestor.com Champion. You don't have to pay any money. You get a free book and everybody else in your class gets a free book. You'll even get a little bit of swag. This is not hard to do. All you have to do is walk up to the dean's office and they have to sign a paper saying, hey, there's 105 students in the class, so send us 105 bucks. And then you have to give us your mailing address so we can send the books to you. We'd love to send these out individually. It's too expensive and it's too much of a pain. We don't have the staff to send them out individually, but we'll send them out to your entire class in bulk if you're willing to pass them out. That's what the White Coat Investor Champions program is. And this knowledge earlier in your career is worth millions. Multiply those millions by the hundred or 200 people in your class and that's a lot of value you provided to your classmates. So thank you for doing that. Sign up@whitecoatinvestor.com Champion okay, let's take a question from Casey.
- [24:12]
Jim Dahle
Hi Jim, this is Casey from Texas. Here's a hypothetical situation using hypothetical numbers to make the math easy. Let's say I plan to retire next year at age 50 with a portfolio of $2.5 million and I'll need about $100,000 per year in today's dollars for my family's spending needs. I might also choose to work for fun after retirement in a relatively low paying teaching job such as teaching AP Chemistry at a high school or something like that. Let's say this job would pay me $50,000 per year. Which is the more tax savvy way to work this? A invest the bulk of the $50,000 salary in our IRAs and 401 and then withdraw the entire $100,000 of living expenses from from my taxable brokerage account. Or B use the $50,000 salary to satisfy roughly half of our living expenses and then withdraw the other $50,000 from our taxable brokerage account. In short, if I use the $50,000 salary to satisfy half of our living expenses, am I missing out on a golden opportunity to save more in our 401 and IRA, although I'd have to withdraw more from my taxable brokerage? Or does the math work out roughly the same either way? Admittedly, I think I know the answer to this, but I'm curious to Glean your wisdom on it as well. Thank you kindly.
- [25:33]
Dr. Dali
Well, this is really fun to be out in the weeds. This is fascinating. I recorded two episodes of the White Coat Investor podcast today. The last one ran a week ago and then this one today, a week ago, I've got questions from doctors who were being swindled by people selling them whole life insurance and selling them annuities they shouldn't have bought. And I'm just trying to get people into the realm of reasonable, right? I'm just trying to save doctors so they're not in that 25% of doctors who get to retirement age and they're not even millionaires Then. This week I've got these questions from super optimizers, right? And we're talking about tax gain harvesting their custodial accounts and who are talking about trying to figure out how to live their lives during those fire years in the most tax optimal way. I mean, this is way out there. On the optimization scale is probably not as far out as tax gain harvesting on your UGMA accounts, but it's gotta be an 8 on that scale anyway, right? It's way up there. So what would I do? Well, most people that fire have a substantial taxable account, right? Because if you save enough money to get to financial independence by age 50, it's probably not all in your retirement account. Some of it is in your taxable account. But the truth is, money grows faster in retirement accounts than it does in taxable accounts. Most of the time, someone's going to write in and talk about exceptions. And yes, there are exceptions, but most of the time your money grows faster in retirement accounts than it does in a taxable account because of tax drag. And so the idea is the more of your money is in retirement accounts, the better as far as your taxes go. So if you fire at 50 and you go from your doctor job to your AP chemistry job, maybe we should make an AP bio job. I don't know how many of you are out there watching AP Bio on Netflix, but I've certainly enjoyed that show on tv. So if you want to enjoy a show that I'm enjoying, you can check that out. But anyway, what should you do? Well, so you should be living on the taxable account while putting as much money into retirement accounts as you can. Essentially, what you're doing is you're moving money from taxable into retirement account. So that's a good thing. That's almost surely going to be the right answer in this sort of a hypothetical situation. If the school district is letting you put 23,500 into your 401, especially if you get a max, some sort of match in there, well, that's clearly going to be the right thing to do. Number one, it helps you get your entire salary. That match, if you leave it on the table, is like not taking your entire salary. So, yeah, put the Money in the 401 or 403 and live on the taxable money in the meantime. I think that's pretty clearly the right answer mathematically, and that's what I do. The other benefit of having more money in retirement accounts is you get better asset protection. Now, I don't know that most AP chemistry teachers have a lot of asset protection concerns, but it never hurts to have a little bit more asset protection if it's also giving you tax benefits at the same time. So I think that's what I would do in your situation, Casey. All right, we're going to bring on one of our sponsors. This is a company called Mortar and they do real estate syndications out of New York. And we're going to talk for a few minutes about the current real estate market. Our guest today on the White Coat Investor podcast is Anthony Marina, the principal of the Mortar Group and a longtime White Coat Investor sponsor. Anthony, welcome to the podcast.
- [29:00]
Anthony Marina
Thank you for having me. Appreciate it.
- [29:02]
Dr. Dali
You know, people are bailing. They're bailing out of bonds, they're bailing out of a small cap stocks, they're bailing out of international stocks. They don't want anything to do with real estate. Everybody wants large cap US Growth stocks these days. It seems like what are people forgetting about as they do this performance chasing when it comes to investing in other asset classes?
- [29:27]
Anthony Marina
That is the million dollar question. I think everyone needs just to look at things in the long term. Stocks, bonds, real estate, everything is going to go have its fluctuations, its ups and downs. Right now the stock market is doing well. It's fantastic. My indexes are doing well. Everyone's happy. Real estate is more about a steady approach to investing in the longer term where it's not a quarter by quarter asset. It's a year by year asset where you slowly grow your wealth, your income, your savings over a three to five year horizon. And when you annualize it out, you shoot for those high teens low 20% returns, which I think compound and really kind of help build a solid base for investors.
- [30:08]
Dr. Dali
Now your focus, your expertise for the last quarter century has been in the New York City multifamily real estate market. And what do you see that's particularly unique about that market. I mean, we've talked earlier and you mentioned for instance, a vacancy rate of like 1.5%, which is like, you know, one sixth of what you see in other areas of the country. What other things are unique about New York real estate?
- [30:38]
Anthony Marina
You know, New York is scary sometimes to investors or just people in general because of the high price points. Once you remove the price points aside to what you were saying, inventory is low. The last time inventory has been significantly high has been probably 15 years ago, prior on the Lehman crash, or right before. Rental rates are high, rents are high, it costs a little bit more to do business, but it's a stable market. Ultimately. New York has 8, 8 million people. And for mortar for us, we work in multifamily development in established neighborhoods that are not the edges of gentrification in some outskirts of town. We are in the areas where people want to be, where there's schools, retail galleries, bars. Where you've got a demographic from 20 to 50 is probably the most fluid and most growing. Where there's jobs, there's tech hubs. Those are kind of the places you want to work. And when you work in those kind of areas and you bring a product to market, a rental project or a condominium development, the inventory is low and we lease up quick, we lease up at high prices. And you execute and you deliver quickly. For us, we try to do deals in about a three year term. It's a 30 month turnaround on average that we try to shoot for. Because once you understand the parameters working in New York, the ins and outs and, and how to navigate it, it's really about finding good deals in good locations, executing, and then exiting as quickly as possible. And that's kind of the goal and the main principle behind what we do.
- [32:10]
Dr. Dali
Yeah, yeah. Eight million people's not that many. I mean, we got eight million people out here. As long as you count all of Montana and Idaho and Wyoming and Utah and Nevada and Arizona and New Mexico, that's like 8 million people. So I don't see, I don't see why you think New York City's so special. There's.
- [32:25]
Anthony Marina
Yeah, it's a little crowded at times, but it works for real estate.
- [32:30]
Dr. Dali
Yeah, for sure. Now the two kind of approaches you've taken to these syndications you've done have been kind of ground up construction, where you build it from the ground up. And this is one of the unique things about your firm. You're vertically integrated, including your architecture background and then others that are the classic value add you go in, you buy a property, you renovate all the units, you increase the rent substantially and fill the units and then sell it for a significantly higher price. Which of those two do you think is most attractive in 2025?
- [33:07]
Anthony Marina
In 2025, there's the deals that we do are kind of a syndicated portfolios fund hybrid where we'll buy usually vacant assets that are prime for rehab and rehabilitation. You'll take smaller assets basically to what you were saying, gut the inside of that building, we'll add on, usually a small extension, maybe add on to the rear, but we'll do these in small tranches and pools of assets that we bring to the market at the same time and then exit. But I think that's where the efficiency is. The efficiency in New York is, you know, because there's so many people. You're buying a 25 by 100, a piece of land with a 10 by 10 piece of grass in the backyard. That's, that's, that's, that's all we're getting in New York as far as greenery, maybe one tree, but, but the goal is to buy a few of these assets, pull them together, renovate them and max them out for what zoning allows us in New York. You know, understanding the rules of, of the game and how to really maximize your price per square foot that you're building for and you're really being able to squeeze out of an asset. And that's kind of become our specialty. Like you were saying. My background is architectural. So when I started in my career, finding the missing links in development was easier because I understood zoning, I understood the technical aspect of it and I knew construction. Whereas, okay, traditionally everyone's doing X, but if I did Y and I just tweaked something here, I can get an extra 5 to 10% of square feet on a deal, which 5 to 10% of extra square footage on an asset, boost the exit by 10 to 15%. So that was kind of the game that we started to play. It's like really kind of leaning into that. And with these rehab, renovation, value add types deals, you can really maximize it. And I think it's, that's kind of become the formula for what we do and where we could do it well, where we have the construction teams, the in house teams to kind of be move in as quickly as possible. You know, with any deal that we start, you know, the minute we sign a contract to buy an asset, our office is running at full steam to get that place fully fermented. So the day Investors money is put to work on acquisition and the bank interest meter starts running. We are ready to start work. So the day we close, we've got a bulldozer coming through the front of that building. Ideally it doesn't always work as close, but that's kind of the objective, just to be efficient. And that's what we try to really do.
- [35:37]
Dr. Dali
Well, yeah. Now private real estate's available generally only to accredited investors who often have substantial non retirement account account money. But you've been seeing an increase in people using retirement account money to invest with you. Not just self directed to IRAs. I mean, there's also self directed 401s which have the additional bonus of not having to deal with unrelated business income tax that the IRAs do.
- [36:02]
Anthony Marina
Sure.
- [36:03]
Dr. Dali
The nice thing about that is you don't have to worry about exchanges to avoid capital gains taxes because it's all inside a retirement account. But what do you see as the main driver behind so much interest among retirement account investors in, you know, private real estate? Syndication? Sure.
- [36:19]
Anthony Marina
No, I think over the last few years it's gotten more and more popular as word has kind of gotten out. You know, earlier on, I would say four or five years ago, there were, there were just a handful of people that would do it, a handful of companies that would offer it to be third party administrators. But now it's kind of, it's one of those issues that comes up in conversation quite often with every investor, whether they're asking about which third party administrators we've worked with, who we feel comfortable with it. Just because it allows an investor that kind of ease where it's like, okay, if I have $10 in my IRA, I can allocate one or two dollars towards private real estate to really blend my portfolio a little bit. They put that one or two dollars into with a third party administrator. They invest in one of our offerings. The project goes full cycle over the two or three years. The initial investment plus the returns go back, goes back to the ira, the self directed Iraq, navigating the taxes. And then they have an option where they can roll and do it again or they can take it and just kind of keep their portfolio more conservative. So it gives you a chance to really grow it in a unique way.
- [37:23]
Dr. Dali
Very cool. And so anybody who's interested in learning more about MORTAR and what they do with multifamily real estate in New York City, you can, you can go to whitecoatinvestor.com Mortar minimum investments currently is $50,000. And the current projects tend to be two or three property syndications, really. It's almost kind of a mini fund model is what you're doing these days. But that's nice because it gives you a little bit of diversification. A couple different neighborhoods, couple different properties, and so you're not dependent on just one for your return, but you still have that control of being able to evaluate the properties and the individual deals here, rather than just giving it to a fund manager and hoping they do a good job picking properties.
- [38:10]
Anthony Marina
Exactly. You have a little bit more of a blended portfolio where you're investing in New York City, but you're spreading your risk across a few different assets, which is nice and gives you a little bit more comfort. The idea is to have a blended portfolio where each one of these deals does well on similar timeframes with a similar exit, but you're spreading your risk about, which I think is good and investors seem to enjoy.
- [38:34]
Dr. Dali
Well, very good. Thank you, Anthony, for what you do and we appreciate your sponsorship of the podcast.
- [38:40]
Anthony Marina
All right, thank you.
- [38:42]
Dr. Dali
All right, I hope that was helpful to you. Let's take a question from Tim. I don't know if this is Tim from Salt Lake City. It sure is. Megan tells me. All right, Tim, well, it's good to have you back. You might be our most frequent questioner on this podcast. Everybody likes a good question from Tim, so let's take a listen.
- [38:59]
Jim Dahle
Hi, Jim, this is Tim in Salt Lake City. You've talked about how sometimes you want to avoid probate.
- [39:05]
Dr. Dali
Why is that? How much does it cost?
- [39:08]
Jim Dahle
Does it really make sense for the average high earner to go through the trouble and complication of making an estate.
- [39:14]
Dr. Dali
Plan that avoids probate? Thank you. That's a great question, Tim. Probate is a state specific process. Right. So there's really three purposes of estate planning. The first one is to make sure your stuff and your kids go where you want them to go. Your minor kids, of course, goes where you want to go when you die. That's mostly done with a will. It can be done with trust as well, but it's mostly done with a will. Right. You're naming a guardian, you're naming the person that's going to manage the money on their behalf and you say who your stuff's going to go to. The second purpose is to avoid probate. Probate is the process whereby the will is, I don't know what the phrase is, adjudicated or something, where they go through the will and they read it and they determine what's going to happen with your stuff. Okay. This process can take as long as a year, I suppose, potentially even longer. It can be expensive, but it's very state specific. How painful it is, right? In some states it's really painful. In some states it isn't. I understand California is pretty bad. I'm told in Alaska, it's not bad at all. When I ask my parents, a state planning attorney, about this, they're like, oh, probate in Alaska is no big deal. Don't. You don't need to put together a revocable trust to try to avoid probate. Just go through probate. It's going to be way easier for you. And I'm the executor of their will, so that was the advice I got. So I think it does vary by state. It varies by how wealthy you are and how complicated your estate is. The third purpose of estate planning is to minimize taxes. Those might be estate taxes, federal estate taxes. Most of us aren't going to be rich enough that we have to worry about those, at least not under the current law, which is scheduled to change at the end of 2025. But I think it's probably going to be extended given the party controlling Congress and the White House. But there's also state estate taxes, there are state inheritance taxes, and there are some income tax implications to your estate planning as well. So those are the purposes of estate planning. But probate is this process. It can be timely, it can be expensive. I mean, it could cost 20 grand. And it might be dramatically less expensive to just put a revocable trust in place. That's going to distribute those assets faster and with less overall cost than putting a will together and then having that will go through probate later. I can't tell you exactly how expensive probate is going to be for you or how long it's going to take to go through it. I don't know. I didn't even look all that much into Utah's laws, despite living here, of how painful our probate is. But is it worth the cost and trouble to do something to avoid probate? I think so. It's just not that hard to put a revocable trust in place. That's all you have to do to avoid probate, right? It's revocable, so you can take your money out anytime you like. You can take your assets out anytime you like. You pay taxes on all of it anyway. So there's no trust tax return or anything. It's pretty simple and straightforward to use a revocable trust. And I think most white coat Investors are probably going to want one by the time they pass away. You probably don't need to put it in place at age 32, though, you know, just to avoid probate 50 years later. But I think it's probably worth it for most people. But you might want to talk with your estate planning attorney about how bad it would be for your estate to go through probate and whether it's worth trying to avoid it. You may find it's really not worth it in your case. That's basically what my parents found. So we'll be going through probate with their estate, and hopefully that's not anytime soon. But if it is, I'm sure you'll hear about it on the podcast. Hope that's helpful, Tim. But I think most people are going to want to do a little bit of estate planning to avoid probate. And the typical method of doing that is anything that's not in some sort of irrevocable trust for other purposes. You try to put as much of it as you can into a revocable trust because none of the stuff in the trust has to go through probate. That's all distributed according to the terms of the trust. All right, another estate planning question we've got from Ken. My name is Ken. I'm from New York. I'm a longtime listener. I have a question about which financial institution to use for slat trust. Spiceful Lifetime Access Trust, whether or not you'd recommend using Fidelity, Swab, Vanguard, or some other institution. Which one offers the best service. Have you encountered any difficulties in dealing with the institution? I am basically going to invest the money in an index, but just more in terms of the paperwork needed to run the trust. Any advice would be appreciated.
- [43:47]
Jim Dahle
Thank you for all your work.
- [43:48]
Dr. Dali
Okay, Ken, let's talk about this for a minute. First of all, I'm not an estate planning attorney and I'm not in New York. Estate laws are state specific. You need to see an estate planning attorney in New York if you want to do this. All I ever do in New York is watch a few Broadway shows and go up to the Shewan Gunks and go climbing. Right? I don't know anything about finances in New York. So go see an estate planning attorney in New York and discuss this with them if you think you want to use this sort of a trust. He's talking about a slat trust. This is a spousal lifetime access trust, which is a type of intentionally defective grantor trust. And trust law varies by state as well. So you need to understand your state's laws as to whether this type of a trust would accomplish the purposes you wish to accomplish with your estate plan. Now, I happen to know a lot about slats because it is the mainstay of our estate plan. And the purpose for most people who use this type of a trust is to get appreciating assets out of their estate as early in their life as possible. So what's in our slat trust? Well, the white coat investor is in our slat, as is our taxable brokerage account. So these are assets we expect to grow substantially that produce substantial income every year, and they're now out of our estate. So our estate, what will be subject to estate taxes at the time of our death, does not include the assets that are now in this trust, nor any appreciation that occurs in them or any income that comes from them between now and the time that we die. And that was very attractive to us. It's not awesome for income taxes. I mean, as it grows, we just pay the income taxes on our personal return. Basically passes through for our personal return. And in fact, our heirs won't get a step up in basis on all of the assets that are in this trust. So we're basically betting that the estate tax savings is going to be worth the loss of that step up in basis at death on those assets. So that's kind of how a slat works. But when you ask about what financial institution to use for it, I'm not sure exactly what you're talking about. I'll tell you why. Because I don't have a financial institution running my slat trust. The trustees of this trust are Katie and I. We're the investment trustees. And we have a distribution trustee that is another family member. That's it. We are the financial institution running this trust. We run it. Okay. Now, where do the assets sit? Well, our taxable brokerage account sits at Vanguard, and it's under the name of the trust, but they're not running the trust by any means. The other big asset in this account, now we have a few real estate assets in the account as well, but the other big asset in the account is the white coat investor. Well, the white coat investor is run by the white coat investor staff. It's not run by some trust fund person, whatever, at a bank or something. So I think you're mistaking the idea that you have to use a financial institution to run your trust. You do not have to do this. And now if you want a trustee, a professional trustee that works for a bank to be the trustee for your trust, then I guess you'll have to choose a financial institution. I have no idea if Fidelity is a good choice for that. I think shopping it around is probably a good idea. And I'd be very careful if you're wealthy enough to need a slat not to pay some egregious asset under management fee for the contents of that slat. That would be my big concern in hiring some sort of professional trustee. But I think most people using this, the trustees are themselves, at least until the time that they die. And obviously we've got a family member that stands there in case we die to take care of that, and he would probably hire some professional help and that's okay. I think a typical financial advisor, I shouldn't say typical. I think a good financial advisor can probably help dramatically with running this sort of a thing with a few consultations with an estate planning attorney as needed. I don't think you have to go to some financial institution, some big bank, and hire their trust department to run this thing. You certainly don't while you're alive and competent to run it yourself. I hope that's helpful. This podcast is brought to you by Laurel Road for Doctors. Laurel Road is committed to serving the unique financial needs of residents and attending physicians. We want to help make your money work harder and smarter. If credit card debt is weighing you down and you're struggling with monthly payments, a personal loan designed for residents with special repayment terms during training could help you consolidate your debt check if you qualify for a lower rate. Plus, White Coat leaders also get an additional rate discount when they apply through LaurelRoad.com WCI for terms and conditions, please visit www.l LaurelRoad.com WCI that's www.l LaurelRoad. Laura Road is a brand of KeyBank NA Member FDIC. Don't forget about our Champions program, right? This is where we try to give a copy of the White Coat Investors Guide for students to every first year in the country. Sign up to be the champion for your class and pass these out@whitecoatinvestor.com Champion. Thanks. For those of you leaving us five star reviews and telling your friends about the podcast, a recent one came in from Ireview who said grateful I can't recommend the podcast and other WCI resources more highly. I'm amazed at what I have learned from the podcast, blogs and books. I have transformed from financially illiterate to actually identifying mistakes financial advisors were making with family. I owe a tremendous degree of my financial success to Dr. Dali. And I'm very grateful for everything he has done. Truly is helping high income professionals achieve financial independence. 5 stars. Thanks for the great review. All right. I hope that has been helpful to you. We've talked about lots of stuff today. We've been out in the weeds and we've gotten into some basics as well. Wherever you are in your financial journey, please, please, please become financially literate, be financially disciplined. The combination of those two things in our current society is like a superpower. When they do surveys of physicians and ask them, what is your net worth? Everything you own minus everything you owe. And they ask this to Doctors in their 60s, 25% of them say they have a net worth of less than a million dollars. 11% to 12% of them have a net worth of less than $500,000. I think this is a tragedy. I think it's terrible to get through 30 years of physician level paychecks and have less than a million dollars of it left. So I want to help you not have that happen to you. And that's what we do here at the White Coat Investor. We teach you how money works and try to give you some inspiration to help you be disciplined, to manage it well. And the truth is, you really only have to save about 20% of your gross for retirement. If you'll do that, you can spend the other 80%. I mean, granted, some's got to go to taxes, so less taxes. You can spend the other 80% on anything you like. And you can have a very nice life on 80% of a physician's income. You can go on some awesome trips. You can see this incredible world we live in. You can have a beautiful house. You can't have it all at once. You can have all this stuff eventually and still be financially secure and have a comfortable retirement at a time of your choosing. That's what we want for you. Keep your head up, keep your shoulders back. You've got this. We're here to help you. See you next time on the podcast.
- [51:22]
Jim Dahle
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.