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White Coat Investor Podcast
WCI #442: Questions About Taxes
00:54:40
Today we are answering a handful of tax questions. We start out talking about how to help your kids do their taxes and how to educate them along the way. We also discuss how much they can put into a Roth IRA. We talk about mitigating capital gains...
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This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011. This is White Coat Investor podcast number 442. 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, but that's where SoFi can help. They have exclusive low rates designed to help medical residents refinance student loans. And 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. And 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. I had a glorious morning. I was out for a run this morning and the sun rose. This time of year rises right between the walls of Little Cottonwood Canyon. And some beautiful clouds up there, beautiful lighting, incredible morning. I hope you're having a good day as well as you listen to this. Looks like we're recording this only about a week in advance, so that's a short period of time for us. You know, we're not making these things a day before you hear them for sure. Mostly because I'm trying to do so many other things in my life. I just have to do things out in advance. I think between yesterday and today we recorded about two months worth of Milestones podcast. That's just the way we tend to do our work around here. But thanks for what you're doing out there, everybody. It is not easy work. That's why you're a high income professional. That's why you're a white coat investor, right? Because you do hard work that usually pays pretty well. Can make for a pretty awesome financial life as long as you manage it well. So a couple of things I wanted to bring up today. Our first one is a quote of the day. This one's from Shelby Mc Davis who said, invest for the long haul. Don't get too greedy and don't get too scared. I love that quote because it reminds us that the investor matters more than the investment. Okay, first thing we gotta do is we got to. I don't know if it's a correction or a clarification or a rebuttal or what, but somebody wrote in about something I said. Somebody had called in that was moving to a small town in Minnesota, I think, and I was asking about where they should bank and where they should get their mortgage, those sorts of questions. And I probably told them, you can get a better rate from somebody that's not a small town, credit union, bank, et cetera. If you go to Physician Mortgage, one of the big national companies or something like that. Well, that did not make this particular listener happy. So he wrote in an email and said, today on your podcast, a resident asked you about his plan to move to rural northern Minnesota and where to put his money. Being semi rural in Utah, I was surprised by your answers. If you expect patients to stay in town and support you, the local pharmacy, the local ER, then you better not drive 40 miles or 100 miles to open your bank accounts. You and your family need to shop local whenever possible. Does not mean you cannot go into the bank or SNL or credit union with details about a doctor's mortgage and offer them an opportunity to match that. If you're already running your paychecks into their bank, they'll often do what it takes to keep you there. Doing otherwise is how smaller towns die. It may be the perfect town for them now, but when the most prosperous businesses, including the young doctors in town and best elsewhere, your own dreams may be crushed. So I thought that was a pretty good rebuttal. There's some truth there, right? Small town America has got a lot of problems. Just like health care is being consolidated, our cities are being consolidated, our population is being consolidated, and there's a lot of people in small towns that are struggling for various reasons. And it's true, if you don't support the small town businesses, the small town businesses go away. So I guess you've got to find some balance in your life and some moderation in your life. Thank you for the correction and the rebuttal. All right. Also, thank you. This particular person also does a lot for the docs that they work with helping spread financial literacy. So thank you for that as well. Okay. I think we need to also go over an email exchange where I didn't know the answer and I had to get some help from my friend Mike Piper. Mike Piper is one of the most humble people I know, but he's brilliant, especially about really niche stuff in the tax code. So when I get some really tough questions that I don't know the answer to Mike is often a resource that I use. If you don't know about Mike, he's run a blog called the Oblivious Investor for at least the last 20 years. He basically monetizes it by selling his short little inexpensive books. But he was one of my inspirations for getting into blogging 15 years ago. So Mike's great. But I get this email. It says my 22 year old college student has an Etsy business where she makes a net income of $8,000 per year after business expenses. This is the first year so hopefully it will grow over time. I am planning to gift for the following 2025 contributions 8550 for an HSA family contribution as she's filing independent and is on our high deductible health plan. I've talked about that elsewhere. If you're not aware of that, if your kid's under 26 on your family HDHP and financially independent of you, not your dependent, not being claimed on your taxes, they can make a family contribution to an hsa. Something we're doing for our kids as well. Let me go on with the email also $8,000 a Roth IRA is allowable based on income. She's self employed without W2 income and then whatever she can into a Roth Solo 401 in addition to the Roth IRA. I'm having trouble finding information about the total she can do or not for the Roth ira and Roth solo 401k. Some of this is to educate her how to structure retirement savings with long term tax planning. I'm very proud she's doing well as a full time college student and running a profitable business at the same time. So I thought you probably can't put you're earning $8,000. I figured you probably can't put that $8,000 into a Roth IRA and another $8,000 into a Solo 401K. It seems against the spirit of these rules for retirement accounts, but the truth is I'd never actually seen anything from the IRS that says you can't do it. And I'll bet there's people out there doing it accidentally all the time. So I'm like Mike, I bet you can cite chapter and verse on this. I'll bet it's not allowed, but I don't know for sure. Can you tell us for sure? And so Mike writes back and says both the Roth IRA contribution limit from IRC219 and the relevant contribution limit for a Roth Solo 401 from IRC415 are a function of compensation. That is the contributions to each must not exceed taxable compensation and they are separate limits. So with $8,000 of compensation for 2025, a $7,000 Roth IRA contribution could be made. Right, because she' and an $8,000 Roth Solo 401 contribution could be made. A key point here is that the contributions must be Roth. If either were a pretax contribution, the contribution itself would reduce compensation and thus reduce the other contribution. For example, an $8,000 pre tax solo 401 contribution would reduce compensation to zero, thus reducing the Roth IRA contribution limit to zero. Important note, in addition to the fact that deductible contributions reduce compensation, we also have to note that compensation for a sole proprietor is defined as accounting for the deduction for a half of self employment tax. In other words, if her profit from business is $8,000, she makes no deductible contributions. Her compensation would be $8,000 minus half of the amount she pays as self employment tax if it's of any interest. I wrote an article about this way back in 2016 and he provides a link to that we'll put into the show Notes. So that's very interesting. Right? Separate limits. So, you know, Obviously there's a $7,000 limit for the Roth IRA could be made and an $8,000 solo 401 contribution could be made, but they have to be Roth. Very interesting that it gets so complicated. Right. So it's not necessarily against the spirit of the law. Right. I mean, I think the IRS looks at it and goes, well, if someone only makes $8,000, of course they're not going to be able to put $7,000 into a Roth IRA and $8,000 into a Solo 401. Where's it going to come from? So they don't put things like this out there explicitly into the rules that we look at most of the time when we look this stuff up because they think no one would bother. But if you're getting money from somewhere else or you got savings, you could move that into a retirement account in that sort of a situation. So super interesting, very in the weeds kind of a question, but we do a lot of those here at White Coat Investor. Sorry if we lost anybody with that explanation. Okay, we've got another one that references. This one's a speak pipe a references a question I answered on another podcast a few weeks ago. So let's listen to that one. Hello, Jim, I'm a retired physician who is a longtime listener and first time caller. A recent podcast call regarding a Large, concentrated position in Apple stock piqued my interest, as I too have a large position in Apple from my purchase 25 years ago. My basis is $0.58 per share. So selling would generate a large capital gains tax bill. I would appreciate your thoughts on mitigating this problem utilizing either a charitable remainder trust or what's known as a exchange or swap fund. Thank you. All right, great question. So the problem we're dealing with here is a problem we usually refer to as a legacy investment. I've got some legacy investments right now I'm actually dealing with this week as I record this. And so you know, this is near and dear to my heart. There are lots of ways to deal with legacy investments. And if they're not a big part of your portfolio, one of the easiest ways to deal with them is to just ignore them. Okay, so this is a legacy investment is something with very low basis in your taxable account. It doesn't matter if it's In a Roth IRA or 401k, you can just sell it, right? No tax consequences for that. But in a taxable account, if you have very low basis, meaning you paid very little for the investment and now it's worth a lot. So it's all capital gains. You're going to pay lots of taxes if you sell it, but you don't actually want to own it anymore, usually because you bought individual stocks or something and you want to own index funds. Or in my case, I've changed from one index fund to another as my preferred holding for a couple of asset classes. And so you have something you don't really want, but there's a big tax cost to sell. So one option, especially if it's a tiny piece of your portfolio, is to just hold onto it, right? Lots of us are not going to spend everything we have. We're going to leave something behind, whether it's to charity, whether it's to our heirs or whatever. And the beautiful thing about leaving that behind is it eliminates those tax consequences if it's left to a charity. Charities don't pay taxes anyway. If it's left to your heirs, they get a step up in basis to whatever the value was when you died. And so holding onto it is an option. Another option, and this is probably a better one, if this is a huge part of your portfolio, right? If Your portfolio is 95% Bitcoin or it's 95% Apple stock or Tesla stock or something, yeah, selling is probably the right move. Just bite the bullet, pay the taxes. The only thing Worse than having to pay taxes is not having to pay taxes. So recognize your good fortune, pay the taxes, move on. The other thing you can do is you can hold it for a little while and sell it later when maybe the tax consequences aren't so bad. Maybe after you stop working, you drop out of the 20% long term capital gains bracket into the 15% or even the 0% capital gains tax bracket. Or maybe you move from California to Nevada or from New York to Florida, right? And so you're reducing the tax cost later. So why not hold onto it for two or three or four years until you move or until you quit working or your income goes down, or you go part time or you go on the parent track or whatever and you sell it at that point. Another option, especially if you give money away, is you can give it to a family member or a friend that has a lower income, right? They might be in the 0% capital gains tax bracket. So if you had $100,000 and you got to pay 25% of that in taxes, if you sold it and then gave them cash, you could just maybe give them the $100,000 worth of stock. They sell it, they don't pay anything in taxes, and they get the full $100,000. So that might be an option as well for charity. You know, charity is always in a 0% tax bracket. So this is the method we're using to get rid of our legacy investments. We give lots of money to charity every year. So instead of giving cash, we give appreciated shares. Which shares? The shares we don't want. Those are the ones we give. As long as you've owned them for at least a year, you get to take the full charitable deduction for the full value of it. If you've owned it for less than a year, you only get to take your basis as deduction. But as long as you've owned it for at least a year, you get to take the full value at the time of the donation as a charitable deduction. Then the charity sells it. They don't pay any taxes. Nobody ever pays the capital gains taxes. It's a beautiful thing, but obviously you're not coming out ahead giving money to charity, right? You've got to actually want to give money to charity. Another option is to just build around it. Okay, so building around it is if you've got a bunch of large cap stocks, you just say you've got 10 of them and you're like, well, that's an awfully similar allocation to S&P 500 fund and maybe you just go, okay, so we're gonna call this stuff part of our large cap US stock allocation. And we're just going to build around it our new money. We're going to put into vti, the Vanguard Total Stock Market Index etf. We're not going to reinvest any of the dividends from those stocks, but we're not going to sell them. We're just going to build around it. And that is an option. And as time goes on, presumably most of those stocks become a smaller and smaller percentage of your portfolio. So the risk you have, this concentration risk becomes less and less and less over time. Another option is what was mentioned in the question from the listener. This is often called a swap fund or an exchange fund. It's referred to as a 351 exchange. This is a relatively new option out there, but basically you're swapping a diversified portfolio of appreciated individual stocks in a taxable account for shares of a newly created etf. And that defers taxes, but hopefully provides you with a little bit better investment. And this can be called an exchange fund, it can be called a swap fund. You tend to have to be at least an accredited investor to use these, sometimes a qualified purchaser, which means you've got 5 million in investable assets and the minimum investments are often half a million or a million dollars. So that puts us out of reach of vast majority of white coat investors, just not wealthy enough to deal with these swap and exchange funds. But if you've done particularly well, this might be an option for you. There's some out there from Eaton Vance and Goldman Sachs and cash. Some of the minimums are as little as 100,000. So there's some requirements for it. Right. To get this tax deferred exchange into it, it needs to hold at least 20% of its money in illiquid assets like real estate or commodities or something like that. And once it's in there, you can redeem your portfolio without triggering taxable gains after it's in there for seven years. So a seven year holding period, if you take it out before then, you can redeem your own stock back, but basically at the lower the value of the contributed stock or their fund ownership. So in exchange for tying up your money and being really illiquid, maybe you get out of some capital gains taxes. Is it an option worth looking into? Sure, unless one of the options works better. Right. Because I think the other options for dealing with legacy stocks are probably better most of the time. Right. If you, if you give to Charity, give it to charity, right? Or if you don't think you're going to need it during your life, well, just hold on until you die. Leave it to your heirs, right? They'll get the step up in basis of death. So I don't think it's an awesome, you know, option there. The other thing that Koller mentioned was a charitable trust. And there's, you know, basically four kinds of charitable trusts, right? These are called Kratts, Cruts, Klats and Klutz. So it's a charitable remainder annuity trust, charitable remainder unit trust, charitable lead annuity trust, and charitable lead unit trust. Okay? So four different types, four different terms, okay. But they're all split interest gifts, meaning you get some benefit and the charity gets some benefit. Okay. UT or unitrust is where the income payments vary with how well the investment in the trust is doing. So it's kind of a variable payment thing. With the annuity trust, the payments get fixed. So no matter how well the investments are doing, they're based on a percentage of the original amount that you put in there. Now, a lead trust and the remainder trust refers to what the charity gets. If the charity gets the income from the trust, it's a lead trust. If the charity gets the principal at the end, it's a remainder trust. So a charitable remainder trust is a split interest gift, right? You put it into this trust and the charity gets whatever's left in there after a certain period of time until you die, maybe or 10 years maybe. And you get the income from it. So you get some benefit, the charity gets some benefit. And maybe it helps you save some capital gains taxes along the way. Right? Cause you're putting it into this charitable trust. I don't know exactly how that saves a lot of capital gains trust. I don't think this is usually a great method for people to get rid of legacy investments. It's more of a way to support charity while at the same time getting something for yourself. Obviously, the benefit of just giving the whole thing to charity is usually more. And doing some sort of a charitable trust. So this is just a way to kind of split it a little bit and get some benefits for both. So I don't know that that's the thing you want to look into if you're really trying to get rid of a bunch of shares of Apple stock. I'd probably look more into the exchange or the swap fund or some of the other methods of getting rid of your legacy investments that I mentioned. Personally, I'm a big fan of giving to charity. If you've got enough money that you're eligible for some of these swap and exchange funds, you probably have enough money that you're not going to spend it all yourself. And chances are good you want to give some to charity. Well, this is the asset to give to charity, the one you don't want, the one that's appreciated highly with a massive tax bill. Hope that helps. Okay, let's take another question, this one from Mike, not Mike Piper. And it's kind of one of the classic questions that lots of docs have as they become self employed. Hi Jim, I'm a radiologist who is transitioning from a standard W2 job to 1099 independent contract at work. I'll be practicing 100% remotely from my home. Are there significant benefits to forming an LLC versus practicing as a sole proprietor in this situation? I understand the liability benefits to an LLC when there is a physical office people come and go from, but as a remote radiologist practicing from my home, I'm not sure there would be substantial liability benefits. Do you foresee any which I'm overlooking? And second question, are there substantial tax benefits to forming an LLC versus practicing as a sole proprietor? Thanks so much. Love it. Great question. It's such a good question. It's been asked about 10 billion times by white coat investors, right? So if you have a question out there, there's a good chance that someone else has that question. And people have been asking me these questions for 15 years and when I get on more than once or twice, I write a blog post that answers them. So this blog post was written years and years and years ago, Right? And you're asking exactly the right questions. First, is there some other benefit besides tax benefits? Is there a liability benefit? And the second question, is there a tax benefit? So let's go through both of these. First on the liability. Malpractice liability, which is your main work related liability, if you're a doc, is always personal. Becoming an llc, becoming a corporation does not reduce your malpractice liability. It's always personal. So the only reason to form a business entity for liability reasons is if you have some other source of liability out there. Now, the white coat investor does have some other sources of liability, right? We've got employees that work for us. We've got all kinds of business relationships and contracts and things like that. So not very long after the white coat investor started, we went from a sole proprietor to an llc, a limited liability company to help. In part the reason we did that was to help reduce that liability. So if, heaven forbid, something terrible happens and we have massive liability that's upheld in court. At worst, all we lose is the value of the white coat investor. So that's the benefit of putting something into an LLC like that. And that can make sense for some businesses. It probably doesn't make sense for a single DOC business, right? If you're just a 1099 independent contract or doing your doctor work from home or wherever, it probably doesn't make sense for you to form an LLC or a corporation to get that additional liability protection. There's no real benefit there because you just don't have any liability. Right? If you're not even going to bother buying liability insurance, forming an LLC or a corporation probably is not worthwhile. I don't know any independent contractor docs with no employees whatsoever that bother buying business liability insurance. They just don't because liability just isn't there. You got lots of liability, but it's all malpractice. So buy professional liability insurance rather than business insurance and don't bother forming an LLC or a corporation for that reason. Okay, so that's the first aspect of this question. The second one is tax benefits. Okay? And the thing you should know about limited liability corporations is they are pass through entities. So if you are one doc and you go form an LLC in your state, how do you pay taxes as a sole proprietor? So it's exactly the same as if you're a sole proprietorship. If there's two of you and you form a partnership and you decide, oh, we should probably do an llc. How is that LLC taxed? It's taxed as a partnership. Okay? Now there is an option for your LLC to choose to be taxed as a corporation. That is an option to you. And if it's a corporation, you can make an S and election and basically have it taxed as an S corporation or an S corp. The benefit of doing that is it allows you to kind of split the revenue, split the profit, whatever you want to call it, from this business into salary and distributions. They're not dividends, they're distributions. They're still taxed at your ordinary income tax rate. But the difference between your salary and the distribution is you don't pay payroll taxes on the distribution. And for most docs, they've got to pay themselves enough of a salary, they're already paying the maximum Social Security tax. So you don't save any Social Security tax. If you're a typical 1099 doc, you end up saving Medicare tax. So how much is Medicare tax? Well, 2.9%. Before you count on the additional 0.9% for the Obamacare tax, maybe 3.8%. And some of that's deductible, right? So it's really not 3.8%, it's something less than that. That's what you're saving by forming an llc, having it taxed as a corporation, making an S election, and now having this business of yours as a sole proprietor taxed as an S Corp, you're saving 3.8% or something less than 3% probably on your taxes for whatever you call distribution. But there's a little bit of a hassle associated with forming an LLC and corporation. Now you got a corporate tax return. It's a pain, right? There's some hassle there. You're probably paying a little more to an accountant. So you gotta ask yourself, well, how much tax savings does it take for this to be worth it? And my rule of thumb is if your distributions aren't at least six figures, right, you're not saying I'm going to pay myself 400,000 in salary and take a $200,000 distribution. You know, it's probably not worth it. It's probably more hassle, more accounting expenses than you're really saving in taxes. All the other deductions, for the most part, there's a few very minor exceptions. But all your other business deductions are totally deductible to you as a sole proprietor. You don't have to form an LLC to deduct your CME costs or your licensing costs or that computer on your desk you're reading films from. None of that stuff. Do you need to form an LLC to deduct? You can deduct it as a sole proprietor, you just put it on schedule C when you do your taxes every year. It's no big deal. So this urge people have to form corporations and LLC is when they're a one person business and their only liability is malpractice is kind of silly. Now maybe it helps change your mindset a little bit or something like that. Now you think like a business owner a little more than you did before. Fine. But you know, I can think like a business owner as a sole proprietor just fine. I didn't need to form a micro corporation or anything like that to do that. Hope that helps. Okay, our next question comes by email. I'm an ophthalmology fellow and will be joining a private practice. After fellowship. My wife and my combined income will be approximately $470,000 before taxes. Awesome. Congratulations. That's pretty awesome. To be raking that kind of dough in the practice is a wonderful opportunity and after two to three years, I hope to be able to enter partnership via buy ins as well as buy into the asc, the surgical center and real estate. As of now, my wife and I have no debt and been putting some money into our 401s and maxing out our Roth IRA while putting the rest of our savings in a high yield savings account. Since we were trying to save up for a down payment for a house, my question is, looking ahead to the next two to five years with many large purchases coming up, is it smart to try to max out our 401 contributions and lower our taxable incomes to try to save up our money to put towards the house and buy insurance, or should we keep trying to invest at all and when time comes, take out a loan to buy into the practice or asc? Thanks for your insights over the years. Okay, this is classic early attending year stuff, right? You come out of residency and you realize you got 12 great uses for your money and you don't have enough money to do them all. Maybe you want to do Roth conversions on tax deferred contributions you made during fellowship. You want to buy that doctor house, you got student loans to pay down, you got to replace your car, your emergency fund stinks and you need to make it bigger. You got to save up for a buy in for your partnership or for your, you know, to, to buy a practice as a dentist or whatever, right? You got all these great uses for money and you don't have enough money to do them. So you prioritize them. Make a list, top to bottom of what's most important to you and use a waterfall concept, right? So think of it as one pool flowing into the next pool, flowing into the next pool, flowing to the next pool. So once one pool is full, you know, maybe that's your first pool is maybe credit card debt you have, right? It's at 29%, so super high priority. Everything's going toward that until it's paid off. And once it's paid off, money flows over into the next pool. And I don't know what that is. Maybe it's boosting up your emergency fund, right? Or maybe it's the down payment on a house, or maybe it's saving up for the buy in for a partnership, or maybe it's maxing out your retirement accounts or paying off student loans. It just has to be your priority. But I can't tell you what your priorities are, right? Some things are pretty clear, should be really high priorities, like credit card debt or if your car's dead, right. You need a new car. So the question here is, should I borrow to get my buy in? Well, if you have a better use for your money, yes, you should borrow to get the buy in. The buy in is almost surely worth making. It's going to boost your income long term. The assets you're buying are probably going to appreciate the value of the practice and the value of the ASC and the value of the real estate. You get to manage this sort of stuff. And when you talk to docs, a lot of times they tell you their best investment they ever made was the surgical center they bought into. So I don't want to tell you, don't buy that stuff if you got to buy it with some debt. But try to get the best debt you can, try to save up some of it. If you can pay cash for it, great. But I don't know that it's your best use of money because I don't know what your other uses for money are. This is part of the financial planning process. When you meet with a financial planner, they go over these things. They talk to you about your goals, they talk to you about your priorities. They help you weigh one of these against another, help you decide what to go after first. Right. I would say this, though, as a general rule, I'm a much bigger fan early in your career of buying stuff that are going to make you money rather than stuff you kind of consume. So I'd rather see a dentist come out and take a big loan out to buy the practice rather than to buy the big doctor house. Right. Because the practice is going to double or triple their income, especially over time. Buying the house is just going to make you pay more in property taxes and more in insurance and more in upgrading costs. You know, it's a consumption item mostly. Yeah, it'll probably appreciate, yes, it pays you some dividends in the form of saved rent, but it's not like buying into a practice. It's going to double your income. Right. So those become pretty high priorities for me. But if I had to, you know, if I had to borrow that money to get the buy in, I would. Now, maybe the practice will loan it to you, maybe your partners will loan it to you. Maybe you got to go to a bank and do it. You try to get the best debt you can, but it's probably still worth doing. I'm not a big debt guy. I don't love debt. We don't have any debt. We paid off our last debt, which was our mortgage back in 2017, and don't plan to take any more out. But I'm not fanatic about debt. I recognize that debt can be a useful tool. And if you're thinking about using debt in your life, I encourage you to think about it systematically. Okay? To actually intentionally decide how much debt you're going to take out and when you do that, using the best possible debt available to you. When I mean best debt, I'm talking about lowest interest rate, best terms, right. Longest term, you can get not callable, fixed interest rates better than variable interest rates. Right? So you think about all these things that make one debt better than others. It's also probably worth reading a book from the series called the Value of Debt Debt. And the author just, it's probably the best debt on best book on the best books. Actually, there's multiple of them on the use of debt in your life that I've ever seen. And he certainly starts out the books with tons of cautions going, this probably isn't right for a whole lot of people. They shouldn't be using debt at all. They should go, you know, Dave Ramsey, ask, pay it all off, be done with it. Because most people just don't handle debt very well. And that probably includes you. You're probably in that most people category. But if you decide you want to use it, he recommends that you limit it to about 15 to 35% of your assets. So if you add up all your assets, all your savings and retirement accounts and investing accounts and your investment properties and your house and all your assets, add all that up and then try to keep your debt to less than 15 to 35% of that amount. The truth is, most docs coming out of training, they've got way more debt than 15 to 35% of their assets. They're already at 400% of their assets in debt. So most people actually need to reduce their debt to get into that range rather than increase the amount of debt they have to get into that range. But it's well worth a read if you're interested in using debt. If you're interested in taking on some leverage risk to either supplement the market risk you're taking or to reduce your market risk and substitute leverage risk for it. I don't think that's a crazy thing to do, but be intentional about it. Be systematic about it. Don't just go, oh, my student loans are at 3%, so I'm not going to pay them off? No, because what happens is you just spend that money. The investor matters more than the investment. Your behavior matters. And most people's financial behavior is not awesome. When you recognize that in yourself, you start going, oh, maybe I should pay off even 2 or 3 or 4% interest rate debt because I'm just spending the money anyway. And you wouldn't go out and take out a 4% loan just to buy a boat or something. But in effect, you're doing the same thing because your behavior is not working. You're not investing the difference like you anticipated you would. Okay. We made an announcement on the blog a little while ago and I thought it's probably worth talking a little bit about it on the podcast as well. For a long time, I have spent some time thinking about financial advisory firms. Maybe I've spent more time than most other people on the planet thinking about financial advisory firms. We've been referring people to financial advisors for most of the last 15 years because I recognize that there's a whole bunch of white coat investors out there who are not interested in being DIY investors. They are not do it yourselfers. They want some help. They barely find this stuff mildly interesting. Right? They can stand to listen to a podcast once a month, maybe. And I know this is appalling to those of you that are do it yourselfers. I can't believe anybody would pay a financial advisor or anything for something they could do themselves. But it's true. There's lots of people that not only want, but probably need a good financial advisor. So our mantra here is we've referred people to financial advisors over the years is good advice at a fair price. And so we've worked very hard to determine what a fair price is. And the way you do that is you go around to the good advisors and you see what they're charging. And that's what a fair price is. Right? It might be more than you want to pay. But if you're not willing to learn enough about this to be a do it yourself financial planner and a do it yourself investment manager, that's the going rate. That's just what it is. So we spent some time educating white coat investors as to what a fair price is. Because a lot of people are paying way too much. If you can get something for $10,000 a year and you're paying $60,000 a year, you're getting ripped off. You're not paying a fair price. And the other thing, of course, is you want people to get good advice. So we Spend a lot of time focusing on making sure that the financial advisors we ref too, are talking about the same things we talk about here on the podcast, the same things we talk about on the blog, the same stuff we've been teaching to white code investors for the last 15 years. If they're not using index funds, they probably haven't kept up to date on the data on the best way to invest in stocks. If they're out there trying to time the market and pick stocks and do all these sort of things that just aren't a great idea, that's not good advice. The truth is, good advice is mostly focused on planning. Financial planning, okay? Not just picking investments. That's what everybody thinks they're paying for. I'm going to hire somebody and they're going to help me beat the market. That's not why you hire a financial advisor. You hire a financial advisor to help you draw up a good financial plan and help you follow it. That's the point, right? I don't even like the term financial advisor. It doesn't actually mean anything. There's no legal meaning to financial advisor. I kind of like financial planner a little bit better because it emphasizes the real value they're providing. Once you realize that the investment management is not that hard to do, especially once you recognize that index funds are probably the way you should be investing in stocks, the investment management piece actually gets pretty easy. And so it's the financial planning. It's hard. It's helping you learn to manage your cash flow. It's hard. It's helping you deal with taxation issues. It's helping you sort out the 12 different retirement accounts you're having to deal with. It's helping you prioritize those 12 different things you need to do in those first few years as an attendee. It's helping you deal with estate planning issues and asset protection issues. It's helping make sure you've got adequate insurance, that you're insuring financial catastrophes, but not buying too much insurance or buying the wrong kinds of insurance. It's helping you avoid, you know, products that are designed to be sold, not bought. It's helping you stay the course in a nasty bear market. This is the value of a financial advisor. This is what they provide for you. You want to get that at a fair price, but you want to make sure you're getting good advice. A lot of times people walk into somebody they think is a financial advisor, someone who calls themselves a financial advisor, but in reality they are just a financial salesperson. And that Is not the same thing. So probably the best differentiator is the way that person gets paid. Okay? A financial advisor, a real financial advisor, is paid fees. Just like you pay your attorney, Just like you pay your accountant, just like you pay your doctor. They give you a service, you pay them a fee. That's called a fee only advisor. There are also fee based advisors. Fee based is not the same thing as fee only. And a lot of people mistake those terms. I did as well, 20 plus years ago. And I made the mistake of hiring a fee based advisor. Now what does fee based means? It means they charge you fees. Yes, but they also charge you commissions. So I was paying mutual fund loads and I was paying a fee for the crummy advice I was getting. I wasn't very happy about it. So I started educating myself. After a few years, I realized I was teaching more people than I was learning in that process and decided to start the White Coat Investor. If I'd just been put in with a good advisor to start with, there might not be any White coat investor. So maybe some good came out of that. Bad, some lemonade out of those lemons. But that's the truth, is you want a fee only advisor. So we've been referring people to financial advisory firms for years. And I try to find the best ones we can. And sometimes they're not perfect. I don't love everything about the firm, but it's way better than all the other ones out there. And so we put them on our list. We refer people to them. We refer a lot of people to financial advisors over the years. But that page has given me more angst than anything else we've done at the White Coat Investor over this time period. And so we've thought from time to time, well, what if we could make a difference in this space? What if we could bring this, for lack of a better term in house? Then instead of having to worry about this person that maybe charges a little more than I think they should, or maybe somebody that doesn't, you know, maybe they do a little bit of market timing on the side or something. What if we just created the firm that we want to see, that we want to refer people? What if we just created it from the ground up? What would it look like? And so over the last couple of years, we've been working toward this, talking to different financial advisors and talking to different people and trying to put this in place. And we're now building it. We're building the firm. I've always dreamed I could refer White Coat Investors to. It's not quite ready for you to join as a client, but if you want to be on an email list that's just for people who are interested in this, we can put you on an email list and let you know what's going on with it. And eventually we're going to take clients. But right now we're still more in a preparation phase. We are hiring high quality financial planners. If you're an experienced planner, cfp, et cetera. Especially if you have a CFP and a cslp, right. Some expertise in student loans, you're highly attractive to us and we'd like you to come and help us in this important mission. What can we offer these financial planners? Well, we offer you a job where you don't have to go looking for new clients. You're not coming into a sales job. You know, most people trying to hire financial planners, they want them to sell. I don't want you to sell products, right? I don't want you to be out there trying to hawk, you know, loaded mutual funds or commissioned insurance products. That's not what we want you to be doing and it's not what you want to be doing likewise. We don't want you out there beating the bushes trying to find new clients. We've got plenty of clients, okay? There's hundreds of thousands of white coat investors and a significant percentage of them want a good financial advisor that will charge them a fair price. What we need is people to serve those good folks, okay? So if you're interested in planning, if you're interested in helping, and if you're interested in meeting with people and helping them to manage their money and to do their financial planning, we want you. If you're interested in selling stuff, if you're interested in prospecting for new clients, you're probably not the person we're looking for. But what we find is the best financial planners have no interest in prospecting. They have no interest in selling. They just want to help people. Those are the kind of people we like. So if you're interested in that, we want you to get in touch with us. Here's how to do it. If you're a financial planner, you're interested in helping us fulfill this mission, you're interested in doing this the right way, you're interested in a job, okay? Go to whitecoatinvestor.com planner, get the job description and information about how to apply. If you're just, you know, this might work for me or this might be the backup plan for me. I'm A do it yourselfer. But I want somebody to send my spouse to. I'm just interested in learning more about this. When you start taking clients, et cetera. I'd like to know about that. I'm just interested. Go to whitecoatinvestor.com interest. Put yourself on the list. We'll keep you advised of what's going on with the firm. Obviously, we're going to be talking about this more going forward. At some point, we're going to open the doors and we're going to bring on clients and it's going to be awesome. But we can't serve all the white coat investors at once. There's no way. So we're going to continue to refer people to the firms that we've been trusting for years, and we're going to continue to work with them to help meet this need for white coat investors. I don't know that this firm can ever get big enough to serve all the white coat investors, but we're going to do the best we can to scale it and grow it while still treating you the right way, while still doing financial planning the way it should be done, which is planning first and good advice at a fair price. Thanks for your support in this effort. Obviously, some people don't like us doing anything different from what we've been doing over the years, but change is inevitable. And we think this is a change for the better. And we're excited to be offering this sort of a service to our community because you guys are awesome and you deserve it. Okay, let's take another question. This one's off the speak pipe. Hi, Dr. Dali. My name is Ellie. I'm a resident from the Northeast. I have a question about revenue credits. My residency program provides a 4.3B plan through fidelity. I was going through my records and saw that there was a revenue credit to a money market fund from about six months prior to. And I'm wondering, what is revenue credit? What do I do with it? If I do sell it to buy my original investment from my 403, would it be a taxable event or do I leave it where it is at this point? Thank you. Okay. We had to listen to this one a few times to figure out what you were asking about, but it sounds like you're asking about a revenue credit, meaning you looked in your 401 account online or on a statement or something. There was a line on there that says revenue credit. Okay. This is not an investment in your account. This is an accounting term. Okay, so it's a line on There probably in addition to the account. So now there's more money in the account than there was before. I think that's what we're talking about. You know, if you look at the definition for a revenue credit, it's the revenue from the plan's investment funds, if any, that are held in the revenue credit account within the plan and that remain after the payment of plan expenses. So periodically, all revenue credits remaining, if any, after the payment of plan expenses will be reallocated to all eligible plan participants existing accounts on an ongoing basis. So what I think is going to happen is that this money that's listed there as a revenue credit at some point is going to be lumped in with the rest of your money. Okay. And I think it's just, you know, an accounting term basically in your retirement plan. I don't think this is an investment you can sell, and I don't know that it's yet money that you can invest, but I think that's what it is. It's just an accounting line in there. And I expect that money is eventually going to be added to your account, but may not quite be there yet due to various reasons of how this plan runs. I don't have any more information from you than that on it, but I think that's give you an idea of what this thing is and why you see it on your statement. If somebody's an expert out there in revenue credits, feel free to shoot me an email and we'll update this in a future podcast. But as near as I can tell, that's what you're seeing and that's what we're talking about here. Okay, next question is about stocks. Hello. I'm a family medicine doctor in the Southwest. I recently transferred my wealth front direct investing into my banker account. And now I have approximately about 500 individual stocks in my banger account. I like to simplify things and I was wondering what's the best way to go about doing this transfer from that direct investing wealth run to Vanger, and this was a few months ago. Any suggestions would be great. Thank you. Okay, well, this is a little bit like the legacy investment issue. We began this podcast with direct indexing. What is direct indexing? What are its benefits and what are the problems with it? Okay. Direct indexing is a result of the fact that mutual funds can't pass losses through to you. So when a mutual fund sells something at a loss, it retains that loss. It can use it to offset the fund's gains, but it can't send you the loss. You can't use that loss against your ordinary income. You can't use it against your other capital gains that you might have. It is just kept in the fund and the fund uses it. And that's a downside of the mutual fund structure. So what some smart people have been thinking about and doing the last few years is what's called direct indexing. And the goal of direct indexing is to give you an index fund return or as close to it as they can get while passing through those losses to you. So you can use those losses essentially turbocharging your tax loss harvesting that you would do at the fund level. Now they're doing it at the stock level within the fund. And so that's cool, right? Who wouldn't want more losses that they can use against capital gains and a little bit against ordinary income every year? So it's not necessarily a bad thing. But there are a couple of downsides. One, they usually don't track the index perfectly. Sometimes they're a little ahead of it, sometimes they're a little behind it. But it's not a perfect index fund, right? So keep that in mind. Another downside is they gotta charge you something for it. They're doing all this work, right? You got 500 stocks there. They're basically running a mutual fund for you and you gotta pay them to do that. Now when this first came out, people were paying 1% or 0.7% or 0.6% for this. I don't think it's worth that just to get a little bit of extra tax losses. I get plenty of tax losses just by tax loss harvesting at the fund or ETF level. But lately they've gotten the price down to about 10 basis points, 0.1% at that level. I think you can make a case for it for lots of people, especially if you have a really good use for additional loss. Like if you're going to sell business like your practice or the white coat investor at some point in the future, right. Maybe more losses will help offset those capital gains and maybe you can justify the price. The other downside about direct indexing is if you ever decide you don't want to do it anymore, in a lot of ways it's a little bit of a whole lifelike commitment, right? You're committing to it for the rest of your life because it's a mess to clean up if you decide you don't want to do it anymore. So you were having this done at Wealthfront and decided you didn't wanna have em do it anymore. So now in your brokerage account, you got the 500 stocks they bought for you. Cause they were trying to, you know, create an s and P500 index fund for you. So they're like, here you go, here's your stocks. You don't want us to do this anymore. You deal with it. So they have created a very complicated portfolio for you. And guess what? Now you're the portfolio manager. So if you want to clean it up and you want to put it all into a single index fund, you're going to have to sell 500 positions. I'm sorry, that's the way it works. And of course, a lot of these positions, because they've been tax loss harvested as you go, and they've had gains, they have capital gains. You're going to have to pay. So instead of just having one or two legacy investments that you're dealing with like I have, you got 500 of them. Yeah, it's a big mess. So how do you do it? Well, the easy way to do it is just bite the bullet, sell them all, get in there, start putting in sell orders. You know, most of them are probably pretty liquid. If they're, you know, s and P500 kind of stocks, you can just put in market orders. Sell, sell, sell, sell, sell. As you go along, you buy, buy, buy, buy, buy. VTI or VOO or whatever your, you know, large cap US ETF of choice is. And you're swapping them, right? And every time you do that with the capital gain, you're gonna pay capital gains taxes. That's the easy way, is just sell. I say easy. You still got to put in 500 sell orders, right? And a certain number of buy orders, unless you're going to sell them all before you buy anything, and then you're kind of out of the market for a little bit. But you may want to build around some of them. You may want to lessen the tax cost of doing this. So if that's the case, what do you want to do? Well, first of all, write them all down, 500 of them. I'm sorry you got so many of these, but write them all down, right? And all the ones that you have a loss on currently, well, you can sell those. There's no capital gains tax due on those. Anything that's very close to its basis that you have minimal gains on, you can sell those as well. Now look at how many losses you have, right? You can use up some of those losses to sell some of the things with gains without any new tax bill due. And maybe you can get rid of 450 of these 500 stocks, right, just by selling the losers, those who haven't gained much, and selling enough of the winners that you can offset with the losses that you have. Presumably you've got a bunch of losses. If Wealthfront's been doing this for you for a while, that can help offset some of these gains. Then you can look at the last 25 or 50 or whatever of these things and decide whether you're gonna build around them, whether you are going to sell some of them, whether you're gonna use some of them for gifting to charity or to heirs or other people in lower tax brackets. And you can whittle your way down through those as best you can. Obviously turn off any dividend reinvestment. If you have any drip programs going, you want to shut those down because you don't want to make this problem any worse than it already is. But that's the way you deal with this. You've got a legacy investment issue, you got 500 of them, and it's going to be a mess to clean up. So a warning for those of you who are interested in direct indexing that you may have this issue if you ever decide you don't want to do direct indexing anymore. But it is one of the downsides of doing it. It might be beneficial to you, especially now that costs have come down on it. But you better be sure you want to do it long term in your taxable account. Our sponsor for this episode that I mentioned at the beginning of the podcast is SoFi. They could help medical residents like you save thousands of dollars with exclusive rates and flexible terms for refinancing your student loans. Visit sofi.comwhitecodeinvestor See all the promotions and offers they've got waiting for you one More time@sofi.com Whitecoatinvestor SoFi student loans are originated by SoFi Bank NA member FDIC. Additional terms and conditions apply. NMLS 696891 all right, don't forget, if you're interested in learning more about white coat planning, you can sign up for that@whitecoatinvestor.com Interesting. If you are interested in working with us. Whitecoatinvestor.com Planner thanks for those of you leaving us a 5 star review and telling your friends about the podcast, a recent one came in from Dr. Surfer said millionaire. With his help, I'm a millionaire. Because of this podcast. I developed a plan and stuck to it. Easy and straightforward advice. Evergreen yet still love hearing it. Five stars. Appreciate that review. Those reviews actually really help get the word out about a podcast. And so we appreciate you leaving them. Not because we necessarily need to hear nice things about ourselves, but because we know it puts the podcast in front of other people and it can make a difference in their lives, just like it has in your life. Keep your head up, your shoulders back. You've got this. We're here to help you. We'll see you next time on the White Coat Investor Podcast. The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. 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