White Coat Investor Podcast #417: Get Rich Fast as a Millionaire with Roth Conversions
Release Date: May 1, 2025
Hosts:
- Dr. Jim Dahle – Practicing Emergency Physician and Founder of the White Coat Investor Blog
- Chris Davin – Financial Expert and Frequent Collaborator
Introduction
In episode #417 of the White Coat Investor Podcast, Dr. Jim Dahle and Chris Davin delve deep into the intricacies of Roth conversions, debating their efficacy in building wealth for medical professionals. This episode is particularly rich in content, offering advanced insights into tax strategies, retirement planning, and business deductions tailored for high-income professionals.
Notable Quote:
"This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street."
– Dr. Jim Dahle [00:00]
Roth vs. Pre-Tax Contributions
The podcast opens with a discussion on the fundamental differences between Roth and pre-tax (traditional) retirement contributions. Dr. Dahle emphasizes the complexity of deciding between the two, noting that it involves predicting future tax situations over decades.
Key Points:
- Complexity of Decision: Roth conversions require considering future income, tax brackets, estate planning, and investment performance.
- Engineering Mindset: Chris highlights how an engineering approach can benefit investing but also warns against overcomplicating portfolios.
Notable Quotes:
"I think Roth conversions are like the most complicated thing in personal finance."
– Dr. Jim Dahle [21:47]
"Sometimes people start getting fixated on ratios, percentages of money they want in Roth versus pre-tax. That doesn't matter so much though. It's really about the dollars."
– Chris Davin [34:03]
Roth Conversions
A significant portion of the episode is dedicated to the debate between Dr. Dahle and Chris Davin on the utility of Roth conversions. Dr. Dahle advocates for systematic calculations to optimize Roth conversions, especially for those nearing retirement or wanting to avoid high marginal tax rates in retirement.
Key Points:
- Early Career Strategy: For medical professionals in low-income years (e.g., residents), Roth conversions can be advantageous due to lower tax rates.
- Tax Bracket Considerations: The decision hinges on comparing current tax rates with expected future rates.
- Optionality: Roth accounts provide flexibility, allowing for tax-free withdrawals in retirement.
Notable Quotes:
"You're basically making a bet on having future income, right? Because if you're not going to have any future income, pre-tax is the right choice because you get to fill up those lower brackets in the future when you're withdrawing it."
– Dr. Jim Dahle [23:31]
"Roth is almost the best choice [in certain scenarios]."
– Dr. Jim Dahle [33:44]
Social Security Tax Torpedo
Dr. Dahle introduces the concept of the "Social Security tax torpedo," a complex aspect of retirement income planning where additional taxable income can push Social Security benefits into higher tax brackets.
Key Points:
- Taxation of Social Security: Up to 85% of Social Security benefits can become taxable depending on total retirement income.
- Impact on Roth Conversions: Proper Roth conversion strategies can help manage taxable income to minimize taxes on Social Security benefits.
Notable Quotes:
"Nobody thinks they can get disabled. We all think we're Superman."
– Dr. Jim Dahle [19:31]
"If you are a single doc and you're not, you don't have a huge pre-tax account, you're going to be in or around the spike."
– Dr. Jim Dahle [40:25]
Independent Contractors and Roth Contributions
The episode explores how Roth and pre-tax contributions interact for independent contractors, especially in the context of self-employed individuals managing Solo 401k plans and the impact of the 199A deduction.
Key Points:
- Employer vs. Business Contributions: Contributions made through a business (employer) may have different tax benefits compared to employee contributions.
- Mega Backdoor Roth: Strategies to maximize Roth contributions while navigating limitations imposed by business deductions.
Notable Quote:
"If you're affected by the 199A deduction, this is absolutely something to pay attention to."
– Chris Davin [43:12]
PTET Deduction
Dr. Dahle and Chris discuss the Pass-Through Entity Tax (PTET) deduction, a strategy for business owners in high-tax states to mitigate the limitations imposed by the SALT (State and Local Taxes) deduction cap.
Key Points:
- SALT Deduction Limitation: The IRS caps SALT deductions at $10,000, affecting high-income earners in high-tax states.
- PTET as a Solution: Business owners can pay state taxes through their business entities to turn these into deductible business expenses, effectively bypassing the SALT cap.
Notable Quotes:
"Most states at this point, I don't know if there are any that don't. If they have an income tax, they have an option where if you are a business owner, you can pay some of your personal income tax liability through the business."
– Dr. Jim Dahle [59:05]
"This is part of the rebellion against the limitation of the SALT deduction."
– Chris Davin [62:21]
Listener Questions
1. Mega Backdoor Roth and Solo 401k: A listener inquires about the ability to perform Mega Backdoor Roth contributions across multiple 401k plans, especially after changing employers.
Key Points:
- Contribution Limits: The $70,000 overall limit is per person, not per plan, but can be utilized across unrelated employers.
- Plan Restrictions: Not all 401k plans permit Mega Backdoor Roth contributions. Verification with HR is essential.
- Controlled Group Rules: Contributions are limited if multiple businesses are owned by the same individual or related parties.
Notable Quotes:
"You absolutely can do it in two 401k's if both 401k's allow it, which is usually the issue."
– Dr. Jim Dahle [56:16]
2. Rolling Over 401k to IRA or Roth IRA: Another listener seeks advice on rolling over a spouse’s prior 401k, considering options between traditional IRA and Roth IRA, and the implications for spousal contributions.
Key Points:
- Rollover Options: Rolling into the new employer’s plan, traditional IRA, or leaving it where it is.
- Spousal IRA: Allows a non-working spouse to contribute to an IRA based on the working spouse's income.
- Pro Rata Rule: Pre-tax balances in IRAs can complicate Backdoor Roth strategies due to the pro rata calculation.
Notable Quotes:
"If the money is already Roth, rolling it out into a Roth IRA is probably the best choice because there's no downside for that."
– Dr. Jim Dahle [70:03]
"A spousal IRA is not a separate type of account. It's just the person's IRA. It's in this case the wife's IRA."
– Dr. Jim Dahle [68:00]
Business Tax Deductions
Home Office Deduction: The hosts clarify the stringent requirements for the home office deduction, emphasizing the need for regular and exclusive use as a principal place of business.
Key Points:
- Eligibility Criteria: Significant and legitimate business use of a dedicated space within the home.
- Simplified vs. Actual Cost Method:
- Simplified: Deduct $5 per square foot up to 300 square feet.
- Actual Cost: Pro-rate expenses based on the proportion of the home used for business.
- Depreciation and Recapture: Potential complexities with depreciation deductions and the need to recapture them upon selling the home.
Notable Quotes:
"The IRS phraseology is regular and exclusive use."
– Chris Davin [72:32]
"If your kids are doing homework in it, that's not a home office."
– Chris Davin [73:53]
Vehicle Deduction: Dr. Dahle explains the limitations on vehicle deductions, debunking myths about deducting high-cost vehicles like Ferraris for business purposes.
Key Points:
- Business Miles: Only mileage between distinct business locations is deductible.
- Depreciation Limits: Annual depreciation for vehicles is capped (e.g., $20,200 for the first year).
- Hummer Loophole: Limited availability for high-depreciable vehicles, now restricted under current tax laws.
Notable Quotes:
"The IRS treats a car as a mode of transportation."
– Dr. Jim Dahle [81:06]
"You can't deduct a huge room or multiple rooms and call that your office."
– Dr. Jim Dahle [72:33]
Closing Remarks
Dr. Dahle and Chris wrap up the episode by reiterating the importance of informed financial planning and the value of applying knowledge to achieve financial stability. They encourage listeners to utilize available resources, such as online courses and financial tools, to enhance their understanding and implementation of effective tax and retirement strategies.
Notable Quote:
"Knowledge is not power. It's only potential power. It only becomes power when we apply it and use it."
– Jim Quick [53:30]
Listener Feedback
The episode highlights positive feedback from listeners, acknowledging the podcast's role in improving financial confidence and stability among medical professionals.
Notable Review:
"Should be required listening for all college students... The relief from this stress has improved my quality of life immensely."
– Tiff Siegels
Conclusion
Episode #417 of the White Coat Investor Podcast offers a comprehensive exploration of Roth conversions and related financial strategies, tailored specifically for medical professionals. Through detailed discussions, practical examples, and expert insights, Dr. Jim Dahle and Chris Davin provide listeners with actionable knowledge to optimize their retirement planning and tax efficiency.
For more information and to access resources mentioned in this episode, visit White Coat Investor and consider enrolling in their online courses with a 20% discount using the code PODCAST20.
Disclaimer: The hosts of the White Coat Investor Podcast are not licensed accountants, attorneys, or financial advisors. This podcast is for entertainment and informational purposes only and should not be considered professional or personalized financial advice. Consult appropriate professionals for advice relating to your specific situation.