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White Coat Investor Podcast
WCI #418: Get Your Tax Bill Down
00:47:53
With tax season just ended we have gotten a lot of questions about taxes. Today we are tackling those questions. We talk about tax loss harvesting, tax implications for changing your 529 beneficiary, gift tax rules, tax withholdings, the home office...
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- [00:00]
Dr. 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]
This is White Coat Investor podcast number 418. Get your tax bill down. Today's episode is brought to us by SoFi, the folks who help you get your money right. Paying off student debt quickly and getting your finances back on track isn't easy, and that's where SoFi can help. They have exclusive low rates designed to help medical residents refinance student loans that could end up saving you thousands of dollars, helping you get out of student debt sooner. SoFi also offers the ability to lower your payments to just $100 a month while you're still in residency. If you're already out of residency, SoFi's got you covered there too. For more information, go to sofi.com whitecoatinvestor SoFi student loans are originated by SoFi Bank NA member FDIC. Additional terms and conditions apply. NMLS 696891 all right, welcome back to the podcast. It's great to have you here. Thanks for what you're doing out there. It's important work you're doing and it really does matter. I spent the weekend working in the emergency department and there are unpleasant things that happen in the emergency department like fecal disinfections. Not my favorite, not going to lie. But you know what? The patient was so grateful and it's nice to be able to serve sometimes, even if the work isn't particularly pleasant. I'm actually doing a whole bunch of White Coat Investor work today. We're recording a bunch of webinars and podcasts, et cetera. And usually that's a good thing when I have a whole bunch of work stacked up because it means I'm heading off to do something fun. Indeed I am. Tonight I'm headed to Southern Utah to do some canyoneering. Really my first big canyoneering trip since falling off a mountain last summer. So I'm excited about that. And then I'm coming to see a bunch of people in Milwaukee. I think I'm speaking to some OMFS folks out there, so I'm looking forward to meeting you guys and then going directly directly from there to Istanbul. So three fun trips in a row for me this week and I hope you're able to have some good times this spring as well. By the way, we mentioned before on the podcast, but we're having a sale just for you. The podcast listeners, 20% off all of our online courses, right? Whether that is one of the versions of fire your financial advisor, whether that is the continuing Financial Education 2025 course, whether that is the no hype real estate investing course, they're all 20% off. That ends tomorrow, though. If you're listening to this on the day this podcast drops, so it ends on May 9th, use the code PODCAST20 at checkout. Go into whitecoatinvestor.com courses to get that discount. All right, I'm not going to tell you about anything else until we answer some of your questions. We're going to talk about taxes today. A whole bunch of tax stuff. And it's a little bit unfortunate, right, because this runs on May 8th. I'm recording it on April 22nd, right? Tax Day has come and gone. But the way our workflow works here, right, is you guys call in, leave, speak, pipe questions, and we prep them and get them into an episode and record them. Then it doesn't go live for a couple of weeks. And by the time you hear them, tax day's come and gone. Maybe you're not thinking about taxes anymore, but hopefully you can apply these things in your life. Because really, tax day is not when you reduce your taxes. You reduce your taxes throughout the whole prior year by living your financial life differently. That's what reduces your taxes for the most part. It's not about just filing your taxes differently. It's about living differently and doing different things. But at any rate, we're going to talk about taxes, and I hope it's a great episode today. The first question is about gift taxes.
- [03:38]
Caller
Hi, Dr. Adali. I'm a new attending on the East Coast. I am considering opening a 539 account for myself as beneficiary. So my question is, does the gift tax limit apply if I am both the owner and beneficiary of my own Lifeline account? Second part to my question is if in a few years I have a trial, I decide to make them the beneficiary of that account, does that gift tax limit apply at this point? Thank you so much for what you do.
- [04:12]
Dr. Jim Dahle
Okay, great questions. First of all, I'm going to answer the questions you asked. Then I'm going to answer the question you should have asked. The question you asked is, does the gift tax apply? No, it doesn't. You're the beneficiary. You're the owner of the account. There's no gift tax. Right. You can put gobs of money in there. Enjoy. Have a good time. When you change the beneficiary. The gift tax applies, particularly if you're going to a new generation, you're going to your child or you're going to your grandchild. Yeah, Gift tax limits apply. Now there's still this thing. You can, you know, fund one of these 529s. You can put five years of funding in up front, right? The gift tax limit normally is $19,000 a year, but you could put in five years worth. There's some additional paperwork to do that. I'm not a huge fan of doing that because of the additional paperwork. And frankly, if you're in a position that you can put 100 grand into a 529 right now, do you really think paying for college is going to be that hard? That you got to start now and do this for 18 years in order to have enough in there for college? No, you don't. All right, now the question you maybe should have asked is, should I do this? Should I start funding 529s before I even have kids? And my answer to that is no. People go crazy on 529s. They hear about 529s, they're like, oh, what a great thing. I want to start so early. I don't even have a partner yet, much less a kid. I'm not even, you know, we're not even pregnant yet. And I'm going to start 529s and then we'll get more years of tax free compounding. I just want to max out the benefit of 529. Well, here's the deal. You cannot max out the benefit of 529. You're not wealthy enough, okay? Because you could do this in every state, right? For you and your partner could each open a 529 for every kid in every state. You could put a billion dollars into 529. So you're never going to max out the benefit of a 529. So the question to really ask yourself is, is how do I want to pay for my kids college? And you don't have to save it all up in advance, right? You can select a school that's not that expensive. My first two kids are going to a school where tuition's like six grand and one of them's got a full ride, right? You don't have to go to a super expensive school to get a top notch education. So that's one thing. You can just choose less expensive options. You can go places, you get scholarships. Lots of the kids of white Coat investors are very smart and get good scholarships, and so that reduces the cost as well. Two, you can cash flow it, right? If you're listening to this podcast, you're probably a doctor or somewhat similar professional. You're probably still in your 50s when your kids are going to college. My kids started college when I was in my 40s. And you know what? I'm still making money. I don't actually need any of the college savings I put away over the years. I could just cash flow it out of my earnings now. So that may not be the case if you gotta come up with 80 grand a year because you're sending your kid to the most expensive college in the country, but you can probably cash flow something. The third pillar I talk about when I'm talking about paying for college is their contribution, right? That might be scholarships they get. It might be working during the summers, it might be working during the school year. It might be a TA or an RA or something at the college. But they can make a contribution, right? Have some skin in the game. And I'm not a huge fan of them taking out big old student loans, their contribution, but they can do something. My kids all work and they put away money. They have some savings that's all theirs and they have earnings they can use to help pay for their college as well. And then of course, the fourth pillar is savings that you do in advance, right? And I think it's probably good for you to save something for college for your kids. And it's probably best to do that in a 529 rather than in your taxable account or in some crazy whole life insurance policy or some other method of saving for it. But I think it's good to put something away, but you don't have to start before they're born. You don't even have to put $19,000 a year in there. I mean, run out of future value calculation on $19,000 a year for 18 years, right? This is going to be a massive 529. I've got low six figure 529s for all four of my kids, and they're almost surely going to be overfunded. So I've got no kids talking about medical school or dental school. And for the most part, going to school here in Utah is pretty cheap. And so I've surely got at least two overfunded 529s already. And that's with Whitney doing everything she can to blow her 529. Trust me, she's going on this Study abroad, round the world trip this spring. I don't know how many countries it is. 12 countries or 15 countries to learn about business. International business. Right. She's trying to spend her 529money. She's not going to be able to do it. And so you may be dealing with the overfunded 529 issue. And there's a pretty good outlet for $35,000 in a 529. Right. You can roll that into Roth IRA for the beneficiary in lieu of their own contributions, you still have to have earnings. And it's not like in addition to the regular amount you can put in every year. But that's an outlet for a little bit of an overfunded 529. But if you put an extra quarter million dollars in there that they're not going to spend well, you're going to have to come up with another option. And that option is usually changing the beneficiary to their kids, which isn't a terrible thing. So if that's your plan, I think that's fine. But make sure you're at least got your retirement taken care of before you start going crazy on These Super Duper 529s people are doing right. If you don't want to have a bunch of money in 529s that you actually need for your retirement. Okay, let's take the next question. This one's about withholding taxes.
- [09:43]
Caller
Hey Jim, thanks for all you do. I have a question regarding tax withholdings. This year was my first full year of attending income and I have a five figure tax bill. After speaking with HR and my CPA, I've discovered that per IRS Schedule 15, my bonuses, which make up approximately 50% of my income, are taxed at 22%. This is an institutional policy and cannot be changed. Despite my marginal tax rate being 35%. I've spoken with my CPA who's given me a nominal amount that can be withheld from my paychecks. Moving forward, that should cover the taxes, assuming my production bonuses stay the same, which they are typically. However, my question is, would there be any downfall to putting this nominal amount in a high Yield savings account? Moving forward, I could enjoy the accrued interest as well as having flexibility should unforeseen circumstances arise, thus not having to have overpaid my taxes. Are there any things that I'm missing as far as penalties and or accrued interest on the owed taxes? I know that as a 1099 employee, underpaying your taxes has such penalties, but I can't find any information for W2 employees. Any insight or recommendations would be appreciated. Thanks.
- [10:53]
Dr. Jim Dahle
Okay, let's talk about this, because people worry about this, in my opinion, way too much, particularly the first time they have to start making estimated quarterly payments, et cetera. First of all, all you residents and fellows out there, you're about to pay as much in taxes as you used to earn, okay? When you become an attending in general, your tax bill is going to be more than what you were paid as a resident or as a fellow. So be prepared for that. You talk about a five figure tax bill and a whole bunch of people listening to this are like, that'd be nice, right? Because they've got a six figure tax bill. And if you're making 400,500, $600,000 plus, you probably do have a six figure tax bill. Both of those, of course, are maybe better in some ways than a seven figure tax bill too. But I'll tell you what, big tax bills are not necessarily terrible because it generally means you're making a lot of money. So don't beat yourself up too much that you have a big tax bill, okay? The US Federal income tax system is a pay as you go system. You can't do what I do here in Utah on my state taxes in Utah. It is not a pay as you go system. Not a dollar of my Utah state income taxes are due before April 15th, and they're all due on April 15th. It's not pay as you go. And many states are like that. Some states are pay as you go, some are not. But the federal system is pay as you go. So the way that works is they mandate, they pass laws that employers have to withhold a certain amount of taxes from your paychecks. And so that's how most people pay as they go. Now, if you're the employer, if you are paid on the 1099, meaning you're in business for yourself, there's really no such thing as a 1099 employee. Employee, right. You're not an employee. If you're Getting paid on 1099, you're an independent contractor, then you're responsible for withholding those taxes yourself and sending them to the IRS on a quarterly basis. And I say quarterly, but it's not actually quarterly. Right. It's April 15, June 15, September 15, and January 15. You'll notice one of those quarters is only two months long and another one is four months long, but that's when they're due. That's the system, okay? So anybody can make quarterly estimated payments, whether you're an employee, whether you're living off your investment portfolio, whether you're in business for yourself. Anybody can do that. Some people have to do it, but anybody can do it. One thing you ought to be aware of, though, is that it's almost always more beneficial to you to just increase your withholdings rather than making those quarterly estimated payments, because withheld money is treated the same whether it's withheld in January or December. And so a really kind of savvy little trick, if you know this, is you have more withheld at the end of the year than you do at the beginning. Now, you can't do this when you're making quarterly estimated payments, or you got to fill out this form and you may end up getting some penalties, et cetera, because you did that. Because it's supposed to be pay as you go, but nobody's checking to make sure you're paying as you go. If you're paying via withholdings, and that includes withholdings by your employer, that includes withholdings from RMDs you're taking out or Roth conversions you're doing. You can just have more of that sort of stuff withheld at the end of the year if you would like to. In fact, it's a pretty savvy way for retirees to pay their taxes, is just to use a big chunk of their RMD to pay taxes. There's no rule that you can only have 10% or 20% withheld. You can have the whole RMD withheld, if you like, for taxes, and just send it to the IRS and take care of your tax bill for the year. Okay? The other thing to learn this is your first time doing this, is that withholding is not paying taxes, Right? Your tax bill and what is withheld are not the same things. They're totally different things. And you've got to understand that, right? You're talking about your bonuses, for example, being taxed at 22%. They're not taxed at 22%. The employer has no idea what they're being taxed at because they don't know your tax situation. They. They don't have your return at the end of the year. And trust me, if your marginal tax rate is 35%, you're probably paying 35% on those bonuses. Even if the employer is withholding 22%, they're trying to do you a favor by withholding some money so you don't have to come up with money on April 15th. To pay your taxes. But the truth is, so long as you can pay the tax bill come April 15, that you haven't spent the money or given the money away, it's okay not to pay it. Okay? Now there's a penalty if you don't pay money as you go or have it withheld, right? There is a penalty for doing that. But that penalty, for the most part, basically works out to be about the interest you would have earned on the money in your high yield savings account. That more or less is the penalty. And so it's not like they're going to throw you in jail for making too low of a first quarter estimated payment, right? I mean, if you got to really cross a pretty big threshold to be committing any sort of tax fraud or tax evasion type of stuff, you just underpaid your quarterly estimated, you're going to pay a penalty. And that's mostly just the interest you earned on the money in the meantime, because you were supposed to have paid it to the irs. So don't spend a lot of time worrying about it. Try to pay as you go, but don't worry about it too much. Worry about it enough to make sure you didn't spend the money. If you think your effective tax rate is going to be 28%, for instance, that 28% of what you earn is going to go to the tax man. Well, make sure that 28% of what you earned has either been withheld or paid in quarterly estimated payments or that you still have it because you're going to be writing the check come April 15th, and that's okay. You might pay a little bit of interest penalty on that. But is that any worse than giving the IRS a free loan for 10 months by having more withheld than you really needed to, or making too big of quarterly estimated payments? I can tell you this. I have paid too much and gotten massive tax refunds come April 15. I have paid too little and paid penalties. I have not had the right amount withheld every quarter. Right? It's really actually pretty hard to estimate all these if you have highly variable income like I do. If you have the same income every year, sure, it's not that hard of a game. Just basically look at what you paid last year and make sure you're in the safe harbor, which is typically by withholding or paying as quarterly estimated for you high earners, 110% of what you owed last year. And then if you have the exact same financial situation, you get 10% back as a tax refund. Alternatively, you can really try to guess what you're going to owe this year and just pay 100% of what you owe. And that'll get you in the safe harbor as well. So that avoids your penalties. But the penalties aren't that big a deal. So don't like lay awake at night worrying about this because you might have to pay some penalties. Lay awake at night if you've spent the money that you're going to have to pay in taxes, but not just if you got to pay a little bit of penalties because theoretically you made that in interest on the money. In the meantime, learning all this stuff is pretty important, and we're trying to get this information into your hands as best we can. We have a blog, we have this podcast, we have a YouTube channel. We have online courses. We have a live conference we'd love to meet you personally at. But we also do webinars from time to time. I think I'm lined up to do four webinars this year. I've already done a student webinar. Well, guess what's coming up. The resident webinar. Okay. May 22nd. It's at 6pm Mountain. It's live, which is always fun because you never know what questions you guys are going to ask. But I tend to hang around after this webinar for an hour or two answering your questions. I'm going to drag Andrew in from studentloanadvice.com I think he knows more about managing physician student loans than anybody else in the country. And I'm going to drag him along, do a little bit of the presentation as well and stick around and answer your questions afterward. This thing's totally free to you. Okay. It's aimed at residents. You know, we had attendings come to the student webinar. You can come if you're an attending, too. You can come if you're a student, too. But the material is aimed at residents. We're going to try to answer questions that apply to residents. You can sign up for this@whitecoatinvestor.com resident and even if you can't make it that night or you can only make part of it, we'll record it, we'll send it to you. Right. We want you to get this information. We're not trying to hose you from it. It's going to be May 22nd at 6pm though, 6pm Mountain. We're going to talk about a smooth transition to hit the ground running as an attending, understanding what to do with your student loans to minimize their cost, ensuring you have the right insurance protection in place and nothing more. Make sure you're saving and investing your money to reach your goals so you can spend the rest on whatever you like, guilt free. We want you to be able to understand the basics of investing so you can start building wealth asap and to bribe you to come to the webinar to bribe you to be concerned about your financial future and be wealthy someday. We're going to give away five free copies of the resident version of our flagship Fire your Financial Advisor course. That's a 299 value for each of those and everyone who registers for the course for the webinar is automatically entered to win. So again, whitecoatinvestor.com resident okay, next question comes in via email. This one is about the home office deduction. Good times. People want to talk about their cars. People want to talk about the home office deduction. These are the two favorite deductions out there, right? Okay. This email says my wife is an attorney who works from home and is a sole proprietor. We're currently deducting her home office space on taxes. We're contemplating buying a one bedroom apartment which we use by her as full time office space. From a tax perspective, what is the best way to go about this? Should her practice buy the apartment and deduct costs? Should we buy the apartment and then rent to her practice? In the latter case, would that just be a wash rental expense divided by rental income? Any guidance would be appreciated. I don't believe I've heard this question in prior podcasts. That might be true. I mean, we're only on podcast 418. We might not have ever covered this. I guess that's possible, but I'm not going to go back and listen to 417 podcasts to find out. Plus another whatever, 100, 200 of the milestones to Millionaire episodes. There goes my memory. Maybe that was the head injury, or maybe I'm just getting old. But here we go. Okay, good question. Let's talk about this. There are actually a lot of options. You can continue to just do the home office deduction, right? There's two options for that, right? There's the easy option, the simplified version where you can deduct up to 300 square feet of space used regularly and exclusively for the business at $5 a square foot. So that's a $1,500 deduction maximum. Alternatively, especially if you've got more than 300 square feet or you have a particularly expensive house, you might want to use the actual expenses method where you Actually include all the expenses of your house, your utilities and your mortgage interest and your property taxes. And you can even depreciate it, although that depreciation has to be recaptured when you sell. It's not the simplified method, but it might be a much bigger deduction. So that's also an option. Same rules, regular and exclusive use for the business. So if your kids are doing their homework in that space, that's not a home office, Right? Regular and exclusive. How regular is regular? Well, if you're not using it every month, I'd say maybe even every week, it's probably not really a home office. But if you meet the rules, take the deduction. One of my favorite ways to get a great tax break for using your home office for your business is to rent your business or not your business. Rent out your home or even a second home to your business for legitimate business purpose. You can do that up to 14 days a year and not pay taxes on that income. It's still a deduction to the business. It's not income to you, though. So it's really awesome if you qualify. It's called the Augusta Rule most of the time, and it's for up to 14 days a year. And the reason it's called the Augusta rule is that's where the Masters is, Right? The Masters golf tournament. And so people would rent their house out. People come into this relatively small town to watch the Masters, they'd rent their house out and not have to pay taxes on the income from renting their house out. And so some people even still do that with Airbnb or VRBO or whatever. And you know, if you do it less than 14 days a year, you don't have to pay taxes on that rental income. It's pretty cool. And oftentimes that's dramatically larger than the home office deduction. Right. If you're doing the simplified version, that's only 1,500 bucks. Well, my house, if it were being rented out on Vrbo, may rent for 1,500 bucks a night times 14 nights. Right. It could be a much, much bigger deduction. Okay, now the things you were thinking about buying a condo, either personally or via a separate business or llc, which is probably the way most people do it, and rent it to your business year round. But that's kind of mostly a wash, right? It's deduction for your business. Taxable income to you. Yeah, you're probably saving some payroll taxes there. Cause that rental income, you don't pay payroll taxes on it. And you might be able to shelter some of that income with depreciation. So that might help as well. But mostly, at least in theory, it's a wash, because what you're paying as a deduction on one side, you're taking as income on the other side. Another option is you don't have to own the stupid condo. You can just go rent somebody else's condo and pay them rent. It would be deductible to your practice. It's a business expense. Right. It's a legitimate business expense and would be a deduction to your practice. Now, there's no offsetting rent. It's just an additional expense compared to when you're running the business out of your own home. But it would be an option. And that's kind of. It is those four options. Which is best for you is hard for me to say. I mean, the reason we run WCI out of our home is because I like the really short commute of just going up the stairs. But the secondary reason is it's way cheaper than paying rent to have something else. But we do take advantage of the Augusta rule. We have meetings here 14 days a year, and guess what? We rent the place out. And I think that's the biggest free lunch out there. But you may also be able to take the home office deduction in addition, that sort of a thing. But if you need the space, you can't do it in your home anymore. You know, maybe buying a condo would work out great, especially if that condo also appreciates a bunch while you own it. So I hope that's helpful and maybe It'll be another 418 episodes before we talk about that again. I don't know, but at least now we've covered on the podcast at least once. Okay, Andy's on the speak pipe. He's got a question about tax loss harvesting, which is a hot topic in the last month because the markets have been pretty exciting. I was looking yesterday. As I said, we're recording this on the 22nd. I think we lost 3.4% on our US stocks yesterday. And I'm sure international stocks and small value stocks didn't do so awesome either. There was one day in April where I made more money than I've ever made in my entire life. I think it was April 9th. The market went up after President Trump's announcement about pausing the tariffs. It went up like 10%, right? Multiply 10% by all the money you have in stocks and it was probably the most profitable day of your life as well. So lots of volatility in the markets out there. Good time to be careful about tax loss harvesting because you don't want the market to move on you while you're out of the market. Tax loss harvesting. But you know, it can be an opportunity. Obviously when markets are really volatile, in a bear market or correction or whatever we're going to end up calling this thing when it's all over. That is usually the best time to tax loss harvest too. Let's see what Andy's question is though.
- [26:18]
Caller
Hi Jim, this is Andy from Texas. Because of this dip in the stock market, I've decided to try my hand at tax loss harvesting for the first time. I have already sold shares of vfiax at a loss and bought shares of VTSAX in my Vanguard brokerage account. Does this mean that I cannot do the reciprocal of this? Meaning I cannot sell my losing shares of VPSAX and buy shares of VFIAX within that 30 day window? Does this also mean that I cannot buy any shares at all of vfiax even if I am funding this purchase from my checking account? Thanks for your clarification.
- [27:00]
Dr. Jim Dahle
Okay, what Andy is referring to is the concept of a wash sale. The whole point of tax loss harvesting is to acquire some losses. And they're real losses, but hopefully they're not permanent losses. Right. Stock market goes down, you're swapping one investment for one that's a lot like it, but not, in the words of the irs, substantially identical. And you're grabbing that tax loss and then hopefully the market goes back up. Right. You're just taking advantage of the market's volatility to grab some tax losses you can use to offset some of your other income. You can use $3,000 a year to offset ordinary income, which is cool, although that number has not been indexed to inflation nor increased in the entire time I've been investing. You can use an unlimited amount against capital gains and even a short term loss is useful because it can be put against either a short term gain or a long term gain. So getting these is pretty helpful. As long as you don't. As long as it doesn't really cost you anything. Right? As long as you don't screw it up and you're out of the market. And the market went up 10%. Cause Trump made an announcement and you lost 10% on all the money you had out of the market. Right. That's not worth it if you're doing that tax loss harvest. So the idea is that you try to stay in the market as best you can, that you don't lose any money while you're tax loss harvesting. You basically own the same portfolio afterward. And you have the tax loss right now. If you end up just using that tax loss for when you sell these shares later in retirement, you really only deferred the taxes. That's not nearly as beneficial. But for a lot of us, we use them to offset other things. It gives us opportunity to rejigger our portfolio or get rid of a legacy holding in the portfolio or offsets the sale of a home or a business. And there's always that $3,000 a year of ordinary income you can use it against. But don't screw up your portfolio just in order to tax loss harvest. This is a very minor point when it comes to portfolio management. You know, there's companies out there that want to sell you services that are primarily just, oh, we're going to add all this value by tax loss harvesting your stuff. Well, how much value are you actually getting from those tax losses? You probably ought to calculate that before you determine it's worth paying thousands and thousands of dollars in fees to get more tax losses. All right, but the basics of the wash sale rule, the point of the wash sale rule, and it's interesting because this applies to stocks and mutual funds. It doesn't apply to cryptocurrency. Right? So anytime you have a loss in your Bitcoin or some other crypto asset, just sell it and buy it back two seconds later. Right. No big deal. You get that loss and you still own the same thing. But you can't do that with stocks and mutual funds because of the wash sale rule. In fact, you can't buy it back for 330 days afterward or it becomes a wash sale and you don't get to have that tax loss. In fact, you can't buy it in the 30 days before then and then sell other shares with a loss and get that tax loss. So that's the way the wash sale rule works. And the IRS says you can't buy a substantially identical investment. Now, you would think that that would count selling a total stock market fund from Vanguard and buying 500 index fund from Vanguard or a total stock market from Fidelity or Schwab or Ishares or whatever, but it really doesn't. The IRS doesn't seem to care. As long as you're not buying the same thing back. They don't care. And you can make an argument if some auditor really got crazy about this, which I've never heard of any of them doing, by the way. They really got crazy about this and said, oh, you're using the Fidelity one and that's substantially identical. Well, you could point out, well, there's a different number of stocks. The stocks in it are different. It's managed by a different company, the expense ratio is different. Right. There's all these arguments you could make if you were in that situation that it really is different, even if the correlation between the two is pretty much 99.9%. And in fact, the correlation between a 500 index fund BFAIX and the total stock market fund BTSAX that you're using, I mean, the correlation is 0.99. So you're basically, you haven't changed what you own in your portfolio. You're just harvesting the tax loss. And I think that's a completely reasonable way to go about it. But no, you can't turn around and buy it back. You can't buy it back in an ira. You can't buy it back in a different taxable account. You can't buy it back in the same account. Your brokerage is definitely going to flag that as a wash sale. Interestingly enough though, this doesn't apply to HSAs or 401s or 403s or 457bs, right? Those are different. So you could sell it in your taxable account and buy it in your 457 and the IRS doesn't seem to care. Yes, you've broken the spirit of the law, but you haven't broken the letter of the law. But your ira, they do specifically mention in the regulations you can't sell it in your taxable account and buy it in your ira. That would be a wash sale. So I think that explains the rules behind the wash sale. What happens to a lot of people is they do this for the first time or the first few times and they start getting a little crazy. They start doing this frenetic tax loss harvesting and they go from the Vanguard Total Stock Market Fund to the Vanguard 500 index fund. And then two days later they go to the Vanguard Large Cap Index Fund. And then like, oh, where do I go now? I'll change the ETFs and I'll buy the ITOT ETF of iShares. And you know what? You don't have to tax loss harvest that much. In fact, I basically don't do it more frequently than every couple of months. That totally eliminates the wash sale issue for me, number one. So I never own more than two funds for every asset class that I have in my taxable account. And Two, the other thing wait in a couple of months does is it eliminates the 60 day rule issue, which is that if you own a stock or a mutual fund for fewer than 60 days around an ex div. Date, you've turned that dividend from a qualified dividend into an unqualified dividend. And that's gonna cost you something too. And my point of tax loss harvesting is, yeah, grab the losses when you can, but don't let it cost you anything. You know, you don't want to be paying big commissions to do this. You don't want to be, you know, out of the market and miss a run up while you're doing this. You don't want to turn qualified dividends into unqualified dividends. So don't go crazy. Tax loss harvesting, yes, you should probably do. And the market goes down 13% or whatever it has this year. Stuff you bought at any point in most of the last year can probably be tax loss harvested right now. And it's probably worth doing. Those tax losses are useful, but don't go crazy about it and don't screw it up. I've had a couple of blog posts on the blog to try to help keeping you from screw it up. One's titled 13 Ways to Screw It Up Screw Up Tax Loss Harvesting. The other one is literally screenshots of how to do this at Vanguard now with ETFs, we hadn't had that on the blog before. We had it with some mutual funds and then Vanguard changed their interface. And so when I tax loss harvested a little bit last month, I took some screenshots. There's 24 new screenshots there. I literally take you by the hand and show you how to do this tax loss harvesting stuff. If you have ETFs in your portfolio with the Vanguard Brokerage, we have another post that shows how to do it at Fidelity. If somebody sends us screenshots from Schwab, we'll put that sort of a post together. I don't have a taxable account at Schwab, so I can't take those. But don't screw this up. It's not that hard to screw it up. I've gotten a couple of emails from people this month who have screwed it up. One of them ended up selling and buying, putting an order for the end of the day. And then the market went up 10% that day. Right. And so they ended up selling for a gain instead of a loss. So there's lots of ways you can screw this up. Don't do that, but it's worth learning how to do this. It'll save you a little bit of money on taxes. All right, I think that's enough on tax loss harvesting, unless we have some other questions about it. Our quote of the day today comes from Benjamin Franklin. He said, if you would be wealthy, think of saving as well as getting. Right. It's not just about earning. It's what you get to keep, not what you earn. Okay, let's talk about another 529 related tax question.
- [35:07]
Caller
Hi, Jim, this is Eric from Ohio. Are there any tax consequences when changing the owner of a 529 plan? For context, my father has an Ohio 529 plan with leftover money. The original beneficiary is my sister, but she did not end up using the money. After years of compounding, it has a value of $100,000. He wants to simplify his own finances and change the beneficiary to my daughter, his granddaughter, and the owner to me, his son. Thank you.
- [35:36]
Dr. Jim Dahle
Okay, this is a great question. And I don't think when they put 529 law in place that anybody thought this through very carefully because technically a 529 belongs to the owner. If you're the owner, you can take the money out at any point and and buy a sailboat with it. Right. But the way they have set up the gift tax laws around 529s is all about the beneficiary. So for instance, if he changed the owner from him to you and kept the beneficiary your sister, no consequences. Right. And in fact, if you change the beneficiary to somebody in your sister's generation, right now, you become the owner and the beneficiary, no tax consequences. But by changing the beneficiary from your sister to your kid, now there's a gift tax consequence. And since it's more than $19,000, you know, it's $100,000. You said unless the market's really tight, that's gift tax consequence. Sorry, there's going to have to be a gift tax return filed on that. Now, that doesn't mean he has to pay any gift taxes. Right. Unless he's got an estate tax problem. And he might have estate tax problem at a much lower amount. But I think it's $28 million for 2025 if you're married. It's $14 million if you're single. So if his estate is way smaller than that, which I'm guessing it probably is, most people's estate is much smaller than that, then there's not going to be any gift tax that has to be paid. Just has to file a gift tax return and that's not the end of the world. I had to file a gift tax return when we funded our trust. Actually I didn't do it. The attorneys did it. So you can pay somebody else to do this. You don't have to file it yourself. You can get your tax person to file it, but one will have to be filed. And if you pay somebody else to do it, that'll cost you some money. If you do it yourself, that'll cost you some hassle. But it's not the end of the world. It just uses up some of your estate tax exemption is all. Okay, next question comes in via email. The title is Optimizing Tax Benefits in a Marriage. Well, this should be interesting. Hopefully this isn't somebody that wants to get divorced to save money on taxes, but I get those emails all the time. This says how should the two partners in a marriage spread funds between the spouses to optimize tax benefits when it comes time to withdraw that money? Does it matter how much and which type of asset is held by the older or younger person or the person with the larger proportion of the funds? That sounds like you're managing money separately between spouses. Not always the best way to do it. Often not the best way to do it. Goes on. I'm a 36 year old, started my first attending job a few months ago. I'm married to a 42 year old engineer. We have about $300,000 between an IRA, the TSP and a 401 in his name. We have about $250,000 between a 401 and IRAs. Money's all Roth. Currently 60% 500 index funds and 40% target retirement funds. That's interesting to partially roll your own. Starting with 2025 we'll be in our peak earnings years and plan to switch over to traditional contributions. That sounds reasonable. My husband has a 401 and a family HSA available to him. I have a 401K, 403 and 457 available to me. Congratulations. You have lots of places you can save money. We plan to save $80,000 per year for retirement by filling both 401 s as these have good options and low fees. The HSA due to its triple tax benefit and at least 5k of the 403 to get my employer match. Okay, that all sounds very intelligent. Good job. The 403 and 457 have good options, but moderate fees at 0.3%. Do you agree with this plan? What would you do with the other 20,500? Okay. How do you spread funds between the spouses? Well, in general, I like to look at money as one big pot. Now, there are times when maybe you have separate finances in marriage. I understand some people like to do it that way for whatever reason. Certainly a second marriage or one person is dramatically more wealthy than the other, or you have different heirs. You know, you want your money to go your kids from your first marriage. Those are times that prenups tend to be wise. And managing money separately might be wise as well. But for the most part, when you're young and poor and you're doing this together kind of way you guys are, you just manage it all together. Okay, so now you start looking at each account. Which accounts offer the best investments, which accounts offer the best matches, which accounts have the lowest fees, et cetera. Right. So you mentioned that the spouse has a 401 and the HSA and the rider has a 401K, a 403B and a 457. Surely you can get $80,000 into all those together. Right? Especially when you include matches. I mean, even just looking at those four accounts, 401, 403, 457, there's actually two 401s. Maybe one of those is a 401A, I don't know. But that's going to be more than $80,000 right there. Plus you've got backdoor Roth IRAs, right? So I suspect this couple, if they wanted to, could put 110, $120,000 away, all in tax protected accounts. And they only plan to save $80,000. So no problem. No reason to use a taxable account here if this is all retirement money. Right. So that's the nice thing is you don't have to deal with the additional costs and hassles and risks. Right? Asset protection, risks of investing outside of retirement accounts. But you're having to choose between which accounts to use because you have so many available to you. Well, rule number one is get all the matches. Don't leave any matching money on the table. So make sure enough is going into each of the accounts that you get all the money that the employer is going to give you. Not getting your match is like leaving part of your salary on the table. Okay. And it sounds like you're also opting to do tax deferred money as much as possible this year, whether that's the right decision. For you or not? It's a totally separate question and one we've talked about ad nauseum on this podcast and on the blog. Lots of details there. Search Roth 401k or Roth contribution or Roth Conversion on the website and you can get lots of detail about that. But we're assuming you want to do tax deferred money as much as you can this year. So in that case, I wouldn't necessarily do a backdoor Roth IRA for each of you. That'd be $14,000 you're not going to be doing. And I would look at these tax deferred options through your employer provided retirement accounts. And of course, the HSA is not only tax, you get a tax break when you make a contribution, but it's tax free and you take the money out. So I do the hsa. That's where our first money goes every year. So that's $8,000, $8,300. So that's your first $8,300. And then to get whatever matches are available, you probably have to put some money into the 401s or 403. So make sure you put enough into those to get that. So that's step two. You're probably up to, I don't know, 15, $20,000 in there. Now then in general, you want to use 401s and 403s before you use 457. Now, maybe there's some exceptions out there. You know, 457 is really helpful if you want to spend money before age 55 or age 59 and a half because you can get to that money without any additional penalty. So maybe you want to use a 457 if you're really looking to be an early retiree. But in general, that's the last money you put into tax prot Accounts because it's your employer's money, there's some risk that something could happen to the employer. This is less of a risk with a governmental 457. And you have a lot better distribution options out of a governmental 457 than a non governmental one. But in General, you use 401S and 403S before 457. So you're probably looking at maxing out the HSA, him maxing out his 401, you maxing out the 401K or 401A, whatever it is, and the 403 as much as you're allowed to. There now talk to HR, because if it's really a 401 and a 403 at the same employer, they likely share the same employee contribution. And then see how much you have left. Right. If you still got $20,000 to save, well, put it into the 457. That's what I do. As long as it has reasonable distribution options and reasonable investments and reasonable fees. Yeah, 0.3% stinks, but your money's probably not there forever. Eventually, it'll be rolled into a better 401 or an IRA. So 0.3% wouldn't keep me from using a retirement account. So I hope that's helpful to you. But the exact mix doesn't matter. If there's a little more in the 403 and a little less in the 401, that's not a huge deal. The truth is, you're not going to become wealthy because you made this decision exactly right or had exactly the right asset allocation. The way you end up with a lot of money in your retirement accounts is by putting a lot of money in your retirement account accounts. You guys are putting $80,000 in there this year, so that's probably a lot of money. Now, it says you're an attending. Presumably you've got income of 250, 300, 400, $500,000. So $80,000 is probably at least 20% of that. So that's probably enough to be saving for retirement. But if you really want to have a lot of money in there, figure out a way to put 100 in there or 120 or 140 in there. That's how you can really get your retirement accounts to grow quickly. Now, you do that by increasing your income. You do that by increasing your savings rate. And that'll make a much bigger difference than trying to figure out exactly what dollars go into what plan. As I mentioned at the beginning of the podcast, SoFi could help medical residents like you save thousands of dollars with exclusive rates and flexible terms for refinancing your student loans. Visit sofi.comwhitecodeinvestor to see all the promotions and offers they've got waiting for you. One more time. That's sofi.com whitecoatinvestor SoFi student loans originated by SoFi bank and a member FDIC. Additional terms and conditions apply. NMLS 696891 all right, don't forget we got cool things going on. The podcast sale ends on the 9th. Okay. Whitecoatinvestor.com courses use code podcast20. That's good for 20% off all of our courses. That includes the $99 student version of the Fire your financial advisor. I guess now it's 79 bucks, so maybe the cheapest course we've ever sold. The cheapest price we've ever had. If you're a resident, don't forget the resident webinar. That applies to fellows too. May 22, 6pm Mountain Time. Sign up at whitecoatinvestor.com resident. It's free and there's no commitment. If you don't show up, I'm not gonna hunt you down. You'll learn how to have a good smooth transition so you can hit the ground running as an attendee. Thanks. For those of you leaving us five star reviews, those do help us to spread the word about the podcast. Just telling your friends helps sp the word as well. But a recent review came in Nice. Really nice review. Lengthy one said WCI has laid the groundwork for my financial success. I was given a copy of the original book by a co resident back in 2018. I had always been interested in personal finance. That book opened up a whole new world to me. The entire platform from website, forum, blog and podcast truly contributed to my financial success and wellbeing. I started my first job as an attending with over $500,000 in student loan debt. Wow. With the principles espoused by Dr. Dahlia, I was able to pay off all my debt in a little over three years and been working towards financial independence ever since. Three years. Awesome. To bring you on the Milestones podcast, I assumed FI would allow me to retire early, but now I enjoy my job so much that I think Fi will just allow me to continue practicing until 65 on my own terms. Thank you Dr. Dali and everyone at WCI for everything you've done and continue to do to make high income health professionals thrive with personal finance. I truly do agree with you that we are better doctors when we have our financial house in order to 5 stars. Nice review. Preach it, pay it forward, pass it on to the next person. You know the books. Tell people about the podcast, tell them about the blog. You know we're here because we really do believe that doctors with their financial ducks in a row are better doctors, better parents, better partners, better physicians, better dentists, whatever they do right. You just are not always worried about money and you're doing a better job. So thanks for doing what you're doing. Congratulations on your success. That was really awesome to pay that off. And in three years for the rest of you, you can do that too. Keep your head up and your shoulders back. You've got this. We're here to help. We'll see you next time on the White Coat Investor Podcast.
- [47:32]
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.