← White Coat Investor Podcast
White Coat Investor Podcast
WCI #435: Becoming a Millionaire by Reducing Your Taxes
00:47:17
Today we are answering your tax questions and hopefully helping you learn how to hang on to more of your money by reducing your taxes where you can. We answer a few questions about capital gains taxes and Dr. Dahle explains how to limit those taxes...
Loading summary
Transcript15 lines
- [00:00]
The White Coat Investor Host
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. Jim Dahle
This is White Coat Investor podcast number 435 becoming a millionaire by reducing your taxes 2025 is coming to a close, making now the perfect time to tighten your tax plan so you don't overpay the IRS when 2026 tax season arrives. Cerebral Tax Advisors, the white Coat Investor recommended firm trusted by physicians nationwide, uses court tested IRS approved strategies to reduce personal and business taxes. Over the past 10 years, Cerebral clients have seen an average of 453% return on investment in their tax planning services. Founder and lead tax strategist Alexis Galati, author of Advanced Tax Planning for Medical Professionals, comes from a family of physicians and has over 20 years of experience in high level tax planning strategies. To schedule a free consultation, visit www.cebraltaxadvisors.com thanks and welcome back to the podcast. We're thankful to have you here. Without you, there is no podcast. It's just me spewing information into the void. It's great to have you here. We just did our I can't call it a webinar, I got to call it a crash course or I get in trouble. Our crash course. Last night we were up late presenting that. So for those of you who were able to participate in that, it was wonderful to have you. We hope that was super. Help those who have no idea what I'm talking about, this is actually going to be available. I think it's going to be on YouTube, isn't it Megan? Yes, I think it's going to be on YouTube by the time you hear this. It's probably already on YouTube, but we spent about an hour and 15 minutes, myself and Andrew Paulson with student loan advice presenting material and then we spent about 45 minutes answering questions from the audience. So great time. I think we were able to help a lot of people. Unfortunately, my hockey team tournament for the end of the summer season, our first game ended up being scheduled at the exact same time as the webinar. So unfortunately my team lost the game by two goals so I don't actually get to play in the playoffs this year. Very unfortunate. But it was a great session so I think it's worthwhile. Lots of other people made sacrifices to be there as well, but I think we ended up having a great presentation and some great discussion afterwards. So check that out. It's on YouTube. By the way, a lot of you out there are new to the white coat investor world. You may not know about boot Camp. If you go to whitecoatinvestor.com Bootcamp, you're basically signing up for a free email course. It's 12 emails. One comes a week for 12 weeks, and each of them gives you some information and a task to do. Now, some of them you've probably already done, some of them you may not have. So it's information plus something you need to do to get your finances lined up. Like the first one's about disability insurance. If you don't have disability insurance and you need disability insurance, you need to go get disability insurance. Each of them has one of these items, but you can sign up for this, get yourself on a fast track to being debt free within five years, out of residency, and becoming a millionaire down the road. So sign up for that. Whitecoatinvestor.com Boot Camp. You know, it's interesting to create the titles for these podcasts. And the number of people who listen to a podcast is actually highly dependent on on what the title is. It turns out. Talking about things like your income, how much you're making, especially if we're comparing it to other doctors. Very popular. Talk about being a millionaire. Very popular. Reducing taxes. Very popular. If we talk about helping, you know, your special needs kid, or if we talk about, you know, reducing your burnout, not as popular. It's very interesting. So all my titles from now on are going to be things like becoming a millionaire by reducing your taxes through Roth conversions or something like that. So be prepared for that. Although, as you know, on this podcast we hit lots of different subjects today. We are gonna focus quite a bit on taxes though, because those are the questions you guys are asking and you really drive the content behind this show. If you want to leave questions, the best way to do that is the speak pipe. So you go to whitecoatinvestor.com speakpipe and you can record up to 90 seconds of a question and we'll try to answer it on the podcast. We do them by email too. You can always email editorwhitecoatinvestor.com or podcastcoatinvestor.com and we'll get your emailed questions answered as well. I don't think we're quite popular enough that we can run this as just a call in show every time we do it, but this is the closest thing we can get to that. Let's take the first question here today. This one's about the 401 and Social Security taxes.
- [04:45]
Matt from Florida
Hi, this is Matt from Florida. I am a fellow and finishing up my fellowship. Going to be finishing in fall of 2026. For the last six years I've been making mandatory 401A contributions by our employer, which is a large academic hospital. As far as I understand, this has been in lieu of our Social Security taxes. So as instead of having Social Security tax come out of a paycheck, instead that money would be then funneled into this 401A. It's going to end up having about 15, $20,000 in it by the time I'm done. As far as I understand this is going to be pre tax money and therefore treat it kind of like a 401k. I was thinking in the first six months of my fellowship in my attending rather that I'd then be able to roll this over into my Roth IRA and pay the taxes on that or roll it over into my 401k just making sure I'm understanding the 401A correctly. Thank you for all you do. Have a Good day. Bye.
- [05:38]
Dr. Jim Dahle
Okay, 401 as are relatively common retirement accounts among academic docs like the local university here in Utah, they offer their employees a 403 and a 401A and a 400A governmental 457B. So it's not uncommon for university docs to have this. In some governmental employers you actually pay into a state kind of pension system in lieu of Social Security. And I don't know that I know all the ins and outs of exactly who does that and who doesn't do that. And maybe your employer does that. I don't know that the 401A is necessarily a replacement for paying Social Security taxes. Most retirement account contributions you are paying Social Security taxes and Medicare taxes on the money going into those accounts. I guess it's possible that you're not on the money going into your 401A or you're not on any of what you're earning because your employer somehow opted out of the Social Security system in favor of some sort of pension system. And maybe that's the form of a 401 for you. I don't know that I know enough to really talk about that. But that's not really your question. That's not what you're curious about. You're finishing your training, you have a tax deferred account and you're trying to decide whether to convert it to a Roth or not. And the answer is yes, you should convert it because this is a Relatively low income year for you, right? The rule of thumb for Roth contributions and conversions is that you don't do them in your peak earnings years and you do do them in anything that's not a peak earnings year. So a year that you're leaving training, you're leaving your fellowship, so you got half a year of fellow income and half a year of attending income is by definition not your peak earnings years. So per the rule of thumb, that would be a good time to do a Roth conversion. There's lots of exceptions to that rule of thumb. Don't write in hating me for talking about the rule of thumb. I know there are exceptions. I've written about them extensively. One of the main ones that applies to people in training is often if you're trying to keep your student loan payments low so that you can get more forgiven via public service loan forgiveness. That's a real common exception among docs, especially early in their career. And there are other exceptions, right? If you go to the website whitecoatinvestor.com in the search box in the upper right and you search Roth contributions, you will find my latest blog post talking about just how difficult this decision can be whether to do a Roth conversion or not, or whether to make Roth contributions or tax deferred contributions. It can be really complicated. But the rule of thumb works most of the time for most people. So if you can do a Roth conversion, great. It sounds like you got 15,000 or $20,000 in there. The problem with that is you're going to get a tax bill for this, right? Maybe it's a 5,000 DOL tax bill and you're going to have to pay it at least by next April, right? Maybe you ought to pay a little bit of it a little sooner and avoid some penalties and interest. But you're going to have to pay the lease by April. And the question for you is, is that the best use of your money at this point in your career? And maybe it is, maybe it isn't. Maybe you need to pay off some 15% credit cards. Maybe you want to get going on your student loans because that's a really high priority for you. Maybe you've got some other retirement account available to you that offers the sweet match you're not going to be getting and those sorts situations. Maybe this isn't the best use of your dollars, right? The problem being a new attending is you have so many good uses for your money and only so much money to go around. So you've got to decide that whether that's A good use for your money. But if you can come up with the money, yes, this is a good idea to do. The worst thing you can do with tax deferred money coming out of training is put it in a traditional IRA while that's convenient, and you can sometimes lower your investing costs and you have a few more investing options doing that, you mess up the possibility of doing backdoor Roth IRAs going forward because that traditional IRA gets calculated in when they do the pro rata calculations on the conversion step of your backdoor Roth IRA process. So that's what you don't want to do. It's okay to roll that 401A into your next retirement account. They're not going to demand you do it the day you walk out of the old job, but eventually you're probably going to want to move it out of there. You can just roll it into the 401 at the new job or the 403 at the new job. So that's a reasonable option too, if you can't come up with the cash to pay the taxes on the conversion. But I do think a Roth conversion of any tax deferred money you have before school, during school, during residency, as soon as you leave residency and are able to do it, that's usually a good move. It's a good idea to get more money into Roth accounts for the most part. But complicated question when you really dive into the details sometimes. Okay, our quote of the day today comes from Carlos Slim Hilu who said, with a good perspective on history, we can have a better understanding of the past and present and thus a clear vision of the future. And I think financial history is very worthwhile to learn because then when things happen in the markets and you're like, oh, this has never happened before, the world's blowing up, I got to sell everything or I'm going to short the market or whatever you realize, oh, I've seen this movie before and I know how it ends. Now, history might not repeat, but it definitely rhymes. Every few years something terrible seems to be happening in the world. Markets have a huge dive and if you just stay the course almost all the time in almost all places, you're rewarded for doing so. So come up with a long term plan that acknowledges history, acknowledges that you're going to have these challenges going forward and, and then you can stay the course with that plan and reach the financial goals you're trying to reach. Okay, our next question comes from Eric. Another speak pipe question. Let's take a listen.
- [11:25]
Eric from the Midwest
Hi, this is Eric from the Midwest. Can you explain in detail about different strategies on using tax losses in retirement? Do tax losses affect the order of retirement accounts to draw from? For example, would it make sense to draw from tax deferred accounts to fill up the lower brackets up to a certain bracket, let's say 24%. Then, if you want more income, sell assets for a capital gain that would otherwise push you into the next tax bracket, which can have significant consequences for Social Security taxes, irmaa, and obviously income taxes. But since you have tax losses, this can offset those gains and thus keep you in the 24% tax bracket, essentially. Can tax losses behave as a stealth Roth IRA in this sense? A second strategy I've been thinking of would be for Roth conversions. I've read it's more beneficial to pay the taxes on the conversion with taxable money rather than from the tax deferred account. If you sell an asset for a capital gain to pay for a Roth conversion, but also use tax losses simultaneously, could this essentially be a tax free Roth conversion? Am I thinking about this correctly? Thank you.
- [12:30]
Dr. Jim Dahle
Okay, Eric, you've gotten to a level of financial literacy where you're starting to understand how things work. Yes, all these are viable strategies. Tax losses are generally a good thing to have. I mean, you don't wanna lose the money, right? If you can avoid losing the money, that's even better than having tax losses. But presumably you're gonna lose some money at least temporarily along the way. Markets go up, markets go down, et cetera. You don't wanna deliberately ever invest in something that's going to lose money, but you know you're going to lose money as you go a long way. So when you lose money in a taxable account, you can do what's called tax loss harvesting, in which you do not really change what you're investing in, but you book that loss and then you have that loss you can use to reduce your taxes. So tax loss harvesting, let's say you buy VTI, the Vanguard Total Stock Market Index ETF, right? And it goes down in value two months after you bought it. It's down 20% already. Bummer. Very unfortunate timing, right? What you can do at that point though, in taxable accounts, right? You're not doing this in retirement accounts is you can sell BTI and 18 seconds later you can buy ITOT, the iShares Total Stock Market Index ETF. Okay? And what you've done is you've now booked that 20% loss that you can use in various ways, but you didn't really Change what you're investing in. You're not selling low. I mean, you are selling low, but you're also buying low at the same time. So you're not changing your investments. That's a key aspect of tax loss harvesting is you don't want to change what you're investing in. You're not trying to sell low. That's not the goal. The goal is to keep your portfolio the same, but grab a tax loss that you can use. So once you have these tax losses, there are all kinds of ways that you can use them. Okay, for example, you can use $3,000 per year. And unfortunately, this has never been indexed to inflation. It's been this the whole time I've been investing that. You can use $3,000 a year against your ordinary income. So if you made $300,000 this year, you're only paying taxes on $297,000 of it. So that saves you like, I don't know, 1,000 bucks of tax, right? So that's a good thing. But there's a limit. You can only use $3,000 a year. So if you booked a $30,000 loss and this was the only way you're using it, it's going to take you 10 years to use up that $30,000 loss, $3,000 at a time. So people start going, well, what other ways can I use these losses? Well, Eric mentioned a couple of ways, right? A few other ways that I think about, and the reason why I continue to acquire tax losses despite the fact that I've got enough tax losses that I could live for hundreds of years at $3,000 a year and not run out of them. The reason I keep doing it is the potential to really have big gains in the future. For example, if we ever sold White Coat Investor, right, we'd have a big capital gain because our basis in it is pretty darn close to zero. If we sold our house after it had more than a $500,000 gain, $500,000 married, 250 single. Right. Then you pay capital gains taxes on anything above and beyond that amount of a gain. So that's how a lot of people end up using tax losses, is when they sell something really valuable. But even if you're just in retirement spending money from your taxable account, those tax losses can be useful. For example, the shares. If you're spending the money, the shares you tend to use up first in retirement are the ones with the highest basis, especially if you've owned it for at least a year. And there's Only a little bit of a gain. Well, you might be able to spend $100,000 and only generate $10,000 in gains. And if you've got $30,000 in tax losses hanging around, you don't have to pay any taxes at all to spend that $100,000 because the tax losses will cover that $10,000 in gains. And the rest of it was just basis is money you put in there in the first place, your principal. So that's a way that people will use tax losses pretty effectively. But the strategies you mentioned, Eric, work fine, right? If you're doing a Roth conversion and you want to pay for that Roth conversion using taxable money, well, you can sell appreciated shares, offset those gains with losses you've been carrying forward each year, and offset the tax cost of coming up with that money in your taxable account to pay the tax bill on the Roth conversion. Be aware though, that the tax bill from Roth Conversion is ordinary income. It is not a capital gain. So you can only use up to $3,000 a year against ordinary income. So you got to be, yes, it can help, but it's helping on the sale of the taxable assets to pay the tax bill. It's not helping on actually reducing the tax bill of the Roth conversion. But yeah, you're thinking about things, right? Once you have these tax losses, you start going, oh, these are pretty useful. It's particularly powerful technique if you combine it with donating appreciated shares to charity. If you're a charitable person, I encourage you to be a charitable person. I think there's lots of great things that happen to you when you give money away. But if you're going to give money away, you are far better off giving away appreciated shares that you've owned for at least a year than you are donating cash. And maybe the easiest way to do that is through a donor advised fund. Then you just have one big donation once a year or whatever of appreciation, and then you can dole the money out willy nilly throughout the year without having to worry about keeping track of 100 different charity receipts. You just have to keep that one for when you put the money into the donor advised fund. Plus it lets you give a little more anonymously, which is really good. I hate getting glossy pamphlets in my mailbox three times a week from charities we've donated to asking us to give you more. I want you to use the donations I'm making to do some good, not to just solicit more donations. So I call that charity porn that shows up in my in my mailbox. I don't want my money being used for that. So I try to donate anonymously to avoid that problem. But anyway, when you donate appreciated shares, if you've owned them for at least a year, you get the full value of the share at the time of donation as a charitable deduction that you use on schedule A, your itemized deductions. So that reduces your tax bill. And neither you nor the charity have to pay the capital gains taxes. So I'm continually acquiring losses when the market goes down on stuff I've recently bought. And I'm never paying capital gains because I'm donating the appreciated shares to charity. So you're flushing capital gains out the top of the account, you're tax loss harvesting at the bottom of the account. You combine the two. It's very, very powerful, reduces how much is going to the tax benefit, which means you keep more, your after tax return is higher, you become a millionaire sooner, etc. But yeah, there's lots of different ways you can use the tax losses. You've identified a couple of them, Eric, and I think both of those methods would work just fine. Okay, let's take our next question from Nate, who's also finishing his training. It sounds like. I wonder if he's done now. You might be done now given that this might have been recorded before July 1st.
- [19:46]
Nate, MD PhD student
Hey Dr. Dali, I hope you're doing well. My name is Nate and I'm a final year MD, PhD student, currently applying for anesthesiology residency. I wanted to ask you a few questions. I'll break it up into different recordings. I've been Investing for about 10 years now thanks to having a father who got me started early on. I have a Roth IRA that consists of the Vanguard Target Retirement 2065 fund and a taxable Vanguard brokerage account that consists solely of vtsax. I've been fortunate in that I haven't had to take out any loans due to the MD PhD, and that with the stipend and the fellowship grant that I have, I've been making about 48k per year. By living relatively frugally, I'm able to max out my Roth IRA contribution within the first three to four months of the year. What I've been doing is just putting my extra income into the taxable account for the rest of the year. Since I don't have a spouse IRA or an employer 401k that I can contribute to, my first question is whether this is the right move for me or whether there's another more Tax efficient use of my money that I'm missing. I suppose I'll have a 403 as a resident and I should have asked this question several years ago, but just theoretically, is there anything I could have or could be doing differently? Thanks for everything you do. I've learned an insane amount by listening to the podcast. I really appreciate it.
- [20:52]
Dr. Jim Dahle
All right, good question. Nate, congratulations on your success. You know, finishing your schooling is no small feat, right? It's not just college and medical school for you. It's college and medical school and a PhD. So it's great that you are accomplishing all this. And you're not even that old yet, so this is going to work out very well for you. Plus, somebody taught you about investing early in your life. I mean, you're coming out of school and you've already been investing for 10 years. I mean, you're at least a decade ahead of the rest of us, right? So this is fantastic. You're going to do great. Recognize this, that you have a fantastic start. And you are, you know, you've got the X factor, for lack of a better term. You're going to be very wealthy someday because you've become so financially literate so early in your career. You've already got, you know, no student loans and you've already got money put away and you're not even done with school yet. So recognize where you're at in stacking up against your peers. You're way ahead of most people. It's great the stuff you're worrying about. But recognize that a much more likely problem for you down the road is you're going to be one of those people who has just got more money than you know what to do with. And so it's okay to stop, smell the flowers a little bit along the way, maybe spend a little bit of money on something that's going to bring you joy. There are things that are going to make you happy that you can do in your 20s and 30s that you cannot do in your 70s and 80s. So maybe consider using some of this money along the way to do some of those things. That's all I'm saying. I'm not saying spend it all. You got to balance future you and current you. So, you know, find that right balance for you. But, you know, optimizing things so you can die. The richest doc in the graveyard is not the ideal pathway, right? So find the balance there. You're not wealthy yet, obviously, but I can see you're headed there and so be thinking about these things as you go along. There is nothing wrong with what you're doing. This is essentially your first question. Your first question is, am I doing good? Yeah, you're doing great. You're killing it. All right? Yes. As much as you can put into a Roth IRA if it's considered earned income. And it sounds like your stipend being paid for your MD PhD is being considered earned income. Right. If you're paying payroll taxes on it, it's earned income and it can go into a Roth ira. If you had any tax deferred money, you should do Roth conversions on that. That would be another good use for your money. And if you want to save and invest more above and beyond what you can put into a Roth ira, and you don't have any employer provided accounts. Yeah. The rest has to go into taxable. Right. There's no limit on how much you can invest in taxable. And so you're doing a good job. You've also chosen good investments. Right. I've said before, if I had it all to do over again, I'd just stick it all into a target retirement fund, at least inside retirement accounts. And that's basically what you did. So perfect. Nice work. And then of course, once you're starting a taxable account, you gotta think a little bit more about the future. You know, asset location comes into effect and there's a great blog post all about it. It's super long, tons of detail. Go to the blog, search asset location and you will find it. And it'll walk you through all the ins and outs of choosing what funds go in taxable versus elsewhere. But the way to think about this is not to go, okay, I have international stocks. What account should they go in? That's not how you think about it. When you're doing asset location properly, the way you think about it is by what should go into taxable Next. I think I'm actually answering your second question. I got to be a little bit careful doing this. Let's play your second question first and then I'll answer that.
- [24:25]
Nate, MD PhD student
Hey, Dr. Dali, it's Nate again. The final year MD, PhD student applying for anesthesiology residency. I wanted to continue and ask a couple of additional questions about my portfolio. I've been a bit overwhelmed with all the information about optimizing the tax efficiency and diversity of asset allocation. First, how important is it for me at 30 years old to diversify beyond BTSax and the 2065 retirement fund? Second, if it is important, I think I'd like to start by diversifying into international stocks and domestic bonds? Would it be better for me to start doing this in my Roth IRA where I can contribute only a limited amount per year, or in my taxable account where the additional funds carry the con of capital gains tax? Am I even thinking about all this correctly? Thank you again.
- [25:06]
Dr. Jim Dahle
Okay, now you know why people know why I was talking about asset location. Okay. Do you need to diversify away from a target retirement fund? No, you don't have to do that. Right. A target retirement fund has international stocks in it in a reasonable percentage. You know, I don't know which one you're in and what that percentage exactly is. But if it's 10% or 20% or 30% or 40% international whatever, that's fine. You've already got international stocks in that target retirement fund. But the problem is, once you kind of are at the point where you're starting a taxable account, a target retirement fund, super simple solution that works great. When all you've got is a Roth IRA or all you've got is your 401k really starts to break down, it's kind of time to start rolling your own asset allocation. So the fact that you've got a taxable account now it's time to probably be thinking about what does my asset allocation really look like? How much is going to go into US Stocks? How much is it going to go into international stocks? How much, if any, do I want in bonds or real estate or Bitcoin or whatever. Right. And actually write down a written investing plan of how much you want in each of these types of assets. And then you look at your portfolio, what you have, and you divide it up so that your total asset allocation across all of the accounts, at least of your long term money, matches your desired asset allocation. So yes, I think it's worthwhile having international stocks. I mean, 2025 was a good example of a year, and it's been a while since we had one of these years, but a year in which US stocks did great in 23 and 24, and then international stocks did much better in 2025. So if you own them, they're going to have their day in the sun. And I think it's worthwhile setting that static asset allocation as you go along so that when international stocks or US Stocks or bonds or real estate or whatever you decided to include in your portfolio has its day in the sun, you own it and you're happy that you own it. But being diversified means you always own something you're not happy about owning. And that's the way it is, right? If it's a year where stocks are going crazy, you're bummed that you have some money in bonds. If it's a huge market dive, you're bummed you put so much money in stocks. Right. You always have some regrets when you have a diversified portfolio. But yes, I think it's worth diversifying into international. Okay, so that brings us back to this asset location issue, right? So you're asking yourself, okay, I've got $20,000 in a Roth IRA and I got $10,000 in a taxable account. And I want to have one third of my portfolio be international stocks and the other 2/3 be US stocks. What should go in that taxable account? And there's basically two factors to think about when it comes to international stocks versus domestic stocks being the first thing that goes into the taxable account. This is assuming you're using a very tax efficient low turnover index fund to start with for each of the asset classes. But the first question is, well, which one has a higher yield? And the reason why is that yield is dividends being paid out every year. And the more dividends that are paid out, the more you gotta pay taxes on those dividends. So you kind of want a lower yielding investment in the taxable account. It's a more tax efficient asset class. And when you're comparing vti, the US Stock Market Index, to the EX us, the International Stock Market Index ETF of Vanguard, the US One has much lower yield, so it's a more tax efficient fund. So for that reason, a lot of people will put their U.S. stocks into taxable first. And I think that's probably the way to go. But there's a compounding factor and it's called the foreign tax credit, which is ridiculously complicated. There's a blog post on it on the website search Foreign Tax Credit. You'll find it. It's super complicated, but the bottom line is it reduces the tax cost a little bit of that higher yield of international stocks. I don't think it's enough that it's worth putting international stocks preferably into taxable before you put the US stocks in there. But that's probably the second asset class most people move to the taxable account. So once you've got all, you know your taxable account has all of your US stocks in it. Well, and you need something else to move in there. The international stocks are perfectly fine to move in there next. Hope that's helpful as you set up and manage your portfolio in an Ongoing way moving forward. Congratulations. You're doing fantastic. You should be super proud of yourself and thanks for doing, you know, an MD, PhD. It's important work that you're qualified to do now and look forward to you making contributions to your field. Okay, let's spend some time talking a little bit more about capital gains and capital gains taxes.
- [29:46]
Andy, Surgical Subspecialist
This is Andy in the Midwest. I'm in a surgical subspecialty in a 10 man private group which merged with another private group. This would be great for a long term future. We had a surgery center which the other group bought into which resulted in a big check after the merger was complete. I'm expected to pay a significant amount of taxes before the end of the year. Almost $300,000. The accountant gave me a financial flyer about a tax loss harvesting strategy fund that might minimize or decrease my taxes. I'd also thought about buying a short term rental property and trying to depreciate the Property quickly in 2025 to decrease my capital gains. Do you know of any good strategies that could decrease my taxes or eliminate them? I've been tax loss harvesting throughout the years, but only have maybe $10,000. So there's a significant amount of money left over. I appreciate your response. Thanks for all that you do.
- [30:47]
Dr. Jim Dahle
Okay, great question. First of all, to all of you out there in white coat investor land who have no idea what Andy's talking about, don't worry, you're going to pick up on this stuff eventually. He's actually asking a pretty high level question here and it's going to take a lot of background information to even explain what he's asking for those of you out there to understand it. So recognize that that just totally went over your head. That's pretty normal. And don't worry about it. You're going to figure this stuff out as well. Andy, the first thing I'm going to tell you is welcome to being a successful professional. Welcome to being a successful investor. The of making a lot of money is paying a lot of money in taxes, okay? The only thing better than having to pay six figures in taxes is having to pay seven figures in taxes. It's a wonderful thing. It means you made a ton of money and that's a good thing. So don't get too crazy trying to reduce your tax bill. The easiest way to reduce your tax bill is to lose money or not make any money, right? That'll reduce your tax bill, but that's probably not what you're really trying to do. So be careful not to let the tax Tail wag, the investment horse, or the income horse, or the job horse, the professional horse, whatever you want to call it, your goal in life is not to pay the least amount in taxes that you can. The goal is to have the most after paying taxes that you can. I mean, truthfully, in life, there are more important things than money anyway. But as far as money goes, your goal is to have the best after tax outcome that you can. So if that means making more money and paying more in taxes, that's not a bad thing. So don't go too crazy trying to reduce your tax bill. You'll quickly find that the techniques that really work well don't necessarily result in you having more money after tax. Okay, so that said, there's nothing wrong with doing a little bit of tax planning, right? A little bit of tax strategizing and trying to do what you can to reduce your tax bill. You're already doing something that does this. As we talked about earlier in the podcast, harvesting those losses as you have them. That usually only means selling stuff you bought in the last year or two or three. When it goes down in value after that, it's never underwater anymore. You know, grabbing those losses as you go along because somewhere down the road you might have some sort of capital gain like this. And if you had $300,000 in, you know, losses, you could use that to offset $300,000 in gains and you wouldn't have to pay taxes on them. So that will help, you know, a great deal. You can use an unlimited amount of those capital losses against capital gains. It's only $3,000 a year against ordinary income, but it's an unlimited amount against capital gains. So knowing that there are smart people out there who are doing strategies of investing that try to get you even more losses than you would get just using a normal buy some ETFs and when they go down in value, swap them for a similar ETF every couple of months, you know, kind of strategy that I use. These are funds that are specifically trying to harvest as many losses as they can. Now, you got to pay a little extra for these most of the time, right? It's going to cost you more in an expense ratio. So if these losses are not very useful to you, that might not be a great thing to do. But if you see yourself down the road as getting a lot of benefit out of these losses, it might be worth paying extra to get them. Perhaps the greatest way to do this, if this is really important to you, and we talked about on the podcast a few Months ago ago is direct indexing. And the price for that has gotten low enough that I think you can justify doing it. If tax losses are particularly helpful to you in your financial life, if you have lots of uses for these tax losses going forward that you're willing to deal with some hassle and complexity and additional expense in order to get more, that might be a good way to do it. And all direct indexing is is buying all the stocks individually. Because the problem with mutual fund law is when a mutual fund has a loss, it can use it to offset its own gains, but it can't pass that loss through to you. So by direct indexing, it can pass that loss through to you. And these other tax loss harvesting strategy funds or advisors work in a similar way. Right. So the idea is every time one of those stocks goes down in value, they have tax loss harvest. It's a little trickier with stocks to get, you know, a good tax loss harvesting partner, but as long as they can track the index return relatively well and grab those losses, that's great. It can be a mess if you ever decide you don't want to do this anymore and you got to unwind it. Now you own 400 individual stocks instead of, you know, one ETF or two ETFs rather. But it can get you more losses now. Can you get very many of them between now and the end of the year? Well, probably not that many. I'm not sure this is going to really offset this one capital gain that you're staring in the face that's going to occur in 2025. I don't know if this is a great way to do it. Another option, depending on what you want to invest in, is there are these funds out there, these real estate funds that are called opportunity zone funds that kind of reduce the blow of capital gains as well. They allow you to kind of defer them and not pay on any additional gains. There's some benefits there. You might want to look into that, but you don't want to let the tax tail wag the investment dog. You have to want to invest in real estate before you should go buy into a real estate opportunity zone fund. Right? You shouldn't invest in that just for tax purposes. In fact, you pretty much shouldn't invest in anything primarily for tax purposes. You should be looking at the investment return first. And if it comes with a few tax advantages, great. That's cherry on the top. If you are interested in real estate. I've told people many times I think the fastest way to Financial independence for a documentary. Fastest way out of medicine, if you hate your job, is probably to build an empire of short term rentals. There are significant aspects of a second job. There's significant risk here, including leverage risk. But I think it's a pretty fast way out of medicine if you do it well. But it's not nearly as simple as just throwing your extra money into vti. Maxing out your retirement accounts, that's way easier. But yes, one of the things you can do, as you alluded to Andy, is you can use the short term rental loophole to decrease capital gains. And all you're doing here is you're basically able to accelerate your depreciation. So the combination of bonus depreciation and the short term rental loophole that allows you to use that depreciation against your income, not just the income from the rental, but your income from these other capital gains that you're facing will allow you to reduce the tax blow there. And you could do that if you got a short term rental before the end of the year and you did a cost segregation study and you use bonus depreciation to get as much of that depreciation that you're going to get from this rental over the years up front and use that to offset these capital gains that would reduce the tax bill this year. Whether that's worth doing or not really comes down to whether you want to be running a short term rental empire or not. If you do great, this is a great time to do it. If you don't, it feels to me like the tax tail wagging the investment dog. It's okay to just pay the taxes on this great windfall you've got and enjoy the windfall, right? Save some of it, give some of it, spend some of it. It's wonderful to have a windfall, pay your taxes, be glad you have it. Don't beat yourself up that maybe there was some way you could have perfectly optimized your finances to reduce your tax bill a little more. But it's worth exploring some of these other options. The opportunity Zone funds, starting a short term rental business, looking into direct indexing or other tax loss harvesting strategies and seeing if those are worthwhile. But be careful, right? There's a lot of people selling you stuff mostly out of your fear or disdain of paying taxes. Don't make a bad investment just to reduce your tax bill. Okay, next question's from Darrell.
- [38:53]
Darrell from Dallas
Hey, Jim. This is Darrell in Dallas. So my wife, who's a doctor, originally found the white coat investor a couple years ago. And even working on our path to financial independence ever since. I actually come from the tech world and I've got a bit of a unique situation. So my first job outside of college was at Amazon. And as part of that comp package, I got a bunch of restricted stock units or RSUs. I've held on to most of them over the years, except for a portion that we sold to buy our house back in 2015. And in that time, they've more or less 15x in value. So we've got about 140,000 worth of holdings, of which the capital gains equivalent is almost 131,000. And of course, it's also our largest single holding in that one stock. So as we're thinking about preparing for retirement over the next 20 years or so, I'm really wondering what to do to try and mitigate the capital gains liability that I'll have and really just kind of de risk our portfolio. I know it's a good problem to have, but better start thinking about it sooner rather than later.
- [39:52]
Dr. Jim Dahle
Thanks. Okay, Darrell, good question again. A little bit like Nate's question, right? You're looking at these capital gains as a bad thing. This is not a bad thing. You made money. Awesome. Wow, right? You made all this money. This is great. Your investment, 15x. This is a good thing, right? Paying your taxes and moving on with the rest of the gain left over after paying taxes is a beautiful thing. You do get to take advantage of long term capital gains rates, which are lower than ordinary income rates. So that'll help soften the blow a little bit. But you don't have to look at this as a problem. It needs to be solved. This is a win to be celebrated, not a problem to be solved. So I think it's important to start from that perspective. Now, what can you do to reduce the impact of these capital gains? Well, there's two things that work really, really well. Well, three things that work well. But you don't want the third one. The third one is just losing money. You know, the stock goes to zero and now it's worth nothing. Now you have no gains. You don't have to pay any taxes on it, but you don't want that. So the two things that you might want that work really, really well to reduce this bill. This tax bill is one. If you give money to charity, stop doing that. I don't want you to stop giving to charity. I want you to stop giving cash to charity. I want you to use these shares for your charitable gifts. You've owned them for at least a year. So you get the full value when you donate it as a charitable deduction. So no point in donating cash anymore. You should be donating these appreciated shares. So that's a great thing to do if you're a charitable person. If you're not a charitable person, shame on you. No, I'm just kidding. If you're not a charitable person, though, that doesn't work. The other thing you can do, which works really, really well, which you might not like all that much, is die. If you die, your heirs get the step up in basis of death. So that works really well for them. Doesn't work so well for you if you were hoping to actually spend this money at some point. But it works really well for them. So that gets you out of the capital gains as well. Otherwise, your options come down to some of the stuff I was talking to Andy about. Who has got a big capital gain they've already realized this year, and he's scrambling to figure out how to reduce it somewhat. If you've got tax losses because you've been tax loss harvesting your other investments as you go along, you can use those losses to sell some of these shares and come out with no tax bill and be able to diversify your account, especially since this is your largest holding. That's what I worry about more than anything is that it might be worth realizing these gains just so your portfolio isn't all in one stock, especially if that's your employer. Still, that's a terrible lack of diversification where your daily income and your portfolio are all tied up in the fortunes of one company. That makes me nervous right there. I mean, it might be worth just paying some taxes in order to improve your diversification in your portfolio. Don't let the tax tail wag the investment dog. Other things you can do though, as you go along, right? You can. Well, first of all, you ought to stop once you find yourself in a hole. Stop digging, right? Are you reinvesting your dividends into this stock? Stop that. If you are right, make sure you're not buying more of it. And if you have any tax lots with a loss or not much of a gain, you can sell those right now and kind of decrease the impact of that legacy holding on your portfolio. But what I would expect over the years is you add money to other investments that this will become a smaller and smaller portion of your portfolio. It doesn't bother me to hear that someone's got $100,000 or $140,000 in a single company stock. If they've got a $4 million portfolio. Right. I can live with that. Lack of diversification. When you've got a $200,000 portfolio and $140,000 of it is in one stock, that's a bit more of a problem. So you're weighing tax costs versus getting more diversified now. So I hope that's helpful in discussion of what to do about those capital gains you've got. The legacy investment problem is what we call this. If you search legacy investment on the website, you'll find a discussion of the various methods you have to deal with this issue that you've got without just selling and paying all the capital gains on. So capital gains are good things, they're not bad things, but they're worth planning for. Doing some tax strategizing a little bit to minimize the impact of that stuff. If you need professional help with these sorts of strategies, we keep a list of tax strategies on the website. If you go to the website recommended tab, go down to tax professionals. I think it's called tax Services. You'll find a list of tax strategists. And these are people that can help you deal with issues like this. They're not all that cheap, right? A lot of them charge as much as a good financial advisor, but they can help you come up with strategies that can help you reduce tax bills like this. And often those strategies will more than reduce your tax bill by more than the cost of paying the tax strategist. So if you really get into a complicated situation with a lot of money and you're looking for a professional to really help you walk through the impacts of various strategies, those are some people that can help you. All right, I think our time is now short. I got to get on an interview here, so we need to wrap up this podcast and our sponsor has been Cerebral Tax Advisors, which is one of those tax strategists I mentioned to you earlier. 2025 is coming to a close, making now the perfect time to tighten your tax plan so you don't overpay the IRS when 2025 tax season arrives. Cerebral Tax Advisors White coat investor recommended firm trusted by physicians nationwide uses court tested IRS approved strategies to reduce personal and business taxes. Over the past 10 years, Cerebral clients have seen an average of 453% return on investment in their tax planning services. Founder and leading tax strategist Alexis Galati, author of Advanced Tax Planning for Medical Professionals, comes from a family of physicians and has over 20 years of experience in high level tax planning strategies. To schedule a free consultation, visit www.cebraltaxadvisors.com all right, don't forget about that boot camp, right? That 12 week email course. It's totally free to you. Bytecodeinvestor.com Bootcamp is where you sign up. Get yourself on the fast track to being debt free and becoming a millionaire. Thanks for those of you leaving us five star reviews and telling your friends about the podcast. Recent one from Ben came in saying the best finance podcast for doctors. I'm so grateful to Dr. Dali for providing so much financial knowledge at zero cost. I've been maxing out tax protected accounts with index funds for years, but listening to these episodes has helped me see that there's so much more to personal finance than that. Applying this knowledge will enable me to work less and spend more time with my wife and four kids who I did not see very much during residency. Thanks for creating something that is such a blessing my whole family. Five stars. Well, thanks so much. That's a kind review. Ben. We appreciate your kind words and more importantly, we appreciate the review because it's going to help other people just like you find this podcast. All right, we're going to see you next time. Keep your head up and shoulders back. You've got this. The White Coat Investor community is standing behind you. We're here to help you. We'll see you next time on the podcast.
- [46:57]
The White Coat Investor Host
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.