A (8:42)

Hi Dr. Dali and the rest of the WCI team. Thank you so much for the quality content you produce. It's definitely helped my family's financial future and I really appreciate it. Today my question is on balancing the risk of retirement savings being held in employer owned accounts versus the risk of significantly over saving for retirement. Every year. About 55% of our tax advantaged retirement savings would be held in accounts belonging to our employer, namely in a pension and a 457. Obviously both of those account types are not guaranteed and could technically be lost. Is that too risky? We could try to mitigate the risk by not using the 457 and going taxable or by saving as though the pension doesn't exist. However, this seems like losing out on a big upside of both of those accounts. I'd love to hear your opinion on this, and I sent an email with the specific numbers for you. Thanks.

B (9:32)

Okay, great question. I don't actually have the email in front of me. I don't think we need it to answer your question, though I suspect I already responded to the email anyway. I'm pretty sure I've responded to every email that any listener has sent to me in the last 15 years. So let's talk about this though, because this is a great question. It's not really out in the weeds, but a lot of people probably haven't spent much time thinking about this. It's true. Something can happen to your pension. Pensions are great, especially if you want a guarantee of some kind. The beautiful thing about a pension is the employer is taking the risk. You're not taking the risk with your investments. They're saying, I'm going to give you this benefit every month from now until when you die. And they take the investment risk. If investment performance is poor, they got to come up with the money, right? They got to put more into the pension. If investment performance is great, maybe they can put less in there and still meet their obligation to you. But they're taking the risk. That's the nice thing about it. So it provides you a guaranteed income. Now, the guarantee is only as good as the employer is. There is a pension guarantee corporation essentially out there, but typically only protects a certain amount of a pension. So it is true that at least some of it is probably at risk to something happening to your employer. That said, would I not use it at all or get my money out of it just as soon as I can? I probably wouldn't. Just like a single premium immediate annuity, that guarantee has some value. And of course the tax protection and the asset protection has value. So I think a balanced approach is the correct answer. Now, where you make that balance is going to be kind of a little bit of an individual decision. Before we get to that, though, let's talk specifically about 457. And the problem is there are two kinds of accounts, and they're both called 457Bs, but they're very different accounts. The first one is generally called a governmental 457B. And in that type of an account usually offered by a government employer, your money is actually held in trust. Just like with a 401k or a 403. They may say it's the employer's money because it's a 457 and it's deferred compensation that hasn't been paid to you yet, but it really isn't. It's your money. And you have the option, when you separate from the employer of just rolling it into another 401 or into your traditional IRA. It's a pretty darn nice retirement account and you ought to look at it as just another 403 or 401k and have no qualms whatsoever about using it. The other type of 457, often called a non governmental 457 or a tax exempt 457, is a different beast altogether. This is not held in trust. It still belongs to your employer. It is subject to your employer's creditors. Now, up until about a year ago, I would say I've never heard of a doc ever losing non governmental 457B money. But right now Steward Health, which used to own my hospital and I'm not terribly fond of, is apparently saying at least some 457money of some physicians is at risk. You know, they went bankrupt and maybe some of that is going to other creditors besides those docs who put money in the 457. So I cannot say that it's impossible to lose money there. It's always been a theoretical risk and it looks like it may be showing up. Obviously that hasn't gone round trip yet, but it's a risk, right? So you start going, well, I don't want all my retirement money in a 457, a non governmental 457 anyway. And the other thing to think about is on the back end, right? What money do you want to spend first? Well, the money that maybe you won't get, right? So the non governmental 457 money is early retiree money, right? Spend that money first, right? Before you get into your taxable account, certainly before you get into your retirement accounts, withdraw and spend that 457 money, you generally have some limited distributions options, so you gotta pick one that's reasonable. You may not want it all in one lump sum, especially if you have hundreds of thousands of dollars in there. But taking it out over the first five years or something after you separate might not be a bad option. The other nice thing about it is there's no age 55 rule, like with a 401k. There's no age 59 and a half rule, like with an IRA, right? There's no penalty for Taking money out of the 457, just pay the taxes and if any due on it and you spend it, that's it. So it's a great early retiree account. But we've got to differentiate between governmental and non governmental 457bs. While having this discussion of how much money you're leaving at risk, I do not think it should be ignored. Some people do this with Social Security too. They're like, oh, I'm going to ignore Social Security. Well, what that means is that you're working in your 60s when you don't have to. You have enough money with Social Security, you don't have enough money without Social Security. So now you're working four or five more years that you didn't need to work. So I don't think that's the right approach. I mean, if you want to discount it a little bit or work a little longer because you're worried something might happen to your Social Security or your pension or, or Your non governmental 457, I think that's okay. But totally ignoring it, that seems not a great idea. The other approach, of course, investing in taxable instead of funding your pension or funding A non governmental 457 has its downsides too, not the least of which is asset protection concerns, right? If you're sued above policy limits, whether it's a personal injury lawsuit from your kid hitting somebody with the car, or whether it's a malpractice lawsuit, if it's big judgment above policy limits, it's upheld on appeal and you got to declare bankruptcy, you're probably losing your taxable account, you'll keep your 401s in most states, you're going to keep your IRAs, you might keep some home equity, but the taxable account's probably going away. And so that's the reason why you might want to prefer to save for retirement and pensions and a non governmental 457 rather than a taxable account. The other problem is the money grows slower, right? It's got tax drag on it every time it pays out a dividend or every time you realize a capital gain because you got to make some adjustments in the portfolio, you're paying some taxes and so it grows slower in the taxable account. So I don't think that's a good option either. Now, if I was worried about my non governmental 457, I might not fund it more than just a little bit, right? Maybe you want to put $50,000 total in there, but you don't want to put $500,000 total in there. Or maybe you want to put $5,000 a year in there instead of $23,000 a year in there. You know, use it a little bit if you're a little worried about it disappearing. But I've certainly had wciers write to me that they were worried they were going to lose their 457B and it was kind of. There was a couple of years where they're worried the hospital was going to go under and something was going to happen to it. And they told me they wished they'd never invested in the 457B in the first place. Now, this is a doc who got the money, didn't lose anything in the end, but wished he'd just done it in a taxable account to avoid that worry and hassle. And so keep that in mind, if you're making that decision, find the balance there. Now, in this particular case, you're talking about 55% of your savings going into the pension and presumably a non governmental 457. That feels like a lot to me. I think if I were in that situation, maybe I wouldn't use the 457 and I'd invest in taxable instead. Or maybe I'd limit how much I'd put in the 457 or just use it for two or three years or something like that in order to maybe decrease that ratio. Because it does make me a little uncomfortable that 55% of your savings is going into accounts that are subject to your employer's creditors. It's probably fine. If the employer was the state, for instance, I wouldn't worry about it nearly as much, but it does make me think about it a little bit. So moderation and all things. Maybe dial it back a little bit and maybe build yourself a little bit larger taxable account than you would otherwise because of that concern. All right, our next question came in by email a couple of weeks ago. You talked about setting up the backdoor Roth 401. You mentioned there had to be three sub accounts, a pre tax, a post tax, and a Roth. Then you outlined the steps to contributing to the post tax and converting to the Roth for 1099 people who set up their 401s through an outside party. This person used my solo 401 and you just write a check from the business to the Roth 401sub account and not have that after tax subaccount. I met with my accountant and she said you can contribute employee and employer contributions directly to the Roth 401, she said that it's not a mega backdoor Roth when you do this. So I guess my question is, what's the difference with why do you need the extra sub account and the extra step? What's the difference between mega backdoor Roth and just contributing directly to the Roth 401? Okay, let me go over this and see if I can make it crystal clear. You can make Roth employee contributions. Okay. The employee contribution, sometimes called an employee deferral for 2025 is $23,500. For those under 50, it's gonna go up in 2026 and later years. Obviously, it goes up with inflation every year. That thing can be Roth. It can also be tax deferred. The employer contributions, 20% of net income can also now be Roth employer match, for lack of a better term, is what that is. And that can be Roth, too. So if you can get to $70,000 between the employee contribution and the employer contribution, $70,000 is the maximum 415c limit for the 401 for 2025. It'll go up a little bit in 2026. But if you can get to your $70,000 just from those two, then you don't need to do mega backdoor Roth. So that's possible that that's what this person's accountant is telling them. More likely, the accounting is just a little bit confused because not very many of their clients ask questions like the ones white coat investors tend to ask. For most of us, you don't make enough at the side gig. You don't make enough at the 1099 to be able to get to your $70,000 just with employee and employer contributions. Especially if this is just a side gig. Right? You've got a W2 job somewhere with its own 401, because a lot of times you've already burned the employee contribution in the employee job 401. You only get one of those employee contributions. It's a $70,000 limit for every 401 you're eligible for for unrelated employers. But it's only one $23,500 employee contribution, no matter how many you're eligible for. So if you burn that already at the main gig, you can't use it in your solo 401. Well, that's going to make it harder for you to use the $70,000. The other limitation is that employer contribution is 20% of net income, net business income. So you got to make a certain amount of money. If you got to put all 70 in as employer contribution, well that's 70 times 5 you got to make in that gig, right? That's $350,000. That's a pretty good side gig you got going. I guess if that's the only thing you're doing, maybe a doc can get there. But most stocks, when we're Talking about a second 401k and a side gig, you're not going to get to 70,000 just from the employer contributions. But if you make, you know, 80 or $100,000 this side gig, you can still max out. That 401k is $70,000. You can still hit the 415c limit, but it's going to involve doing some or all of your contributions as mega backdoor Roth contributions. This is a two step process, just like the regular backdoor Roth. It's an after tax contribution into the after tax sub account in the 401. And yes, it has to have an after tax sub account for you to do this and then a Roth conversion. So the plan has to allow you to make after tax employee contributions, not Roth after tax employee contributions. And it has to allow for in plan conversions. Or maybe you could roll it out of the plan if the plan allows that, and put it into a Roth ira. But usually it's an in plan contribution in order to get to that $70,000. So I hope that's helpful for this particular question. It's not a big deal to have a third sub account. It's not like these 401 providers charge you extra for that other account. I mean, every employee at WCI has three sub accounts, right? And nobody ever has any money in that sub account for longer than a day. That third sub account just kind of sits there with $0 or 2 cents or whatever in it until it gets used again next year? For anybody doing a mega backdoor Roth, I think it's mostly just Katie and I doing them, but that's how the process works. Hope that's helpful to you. All right, next question. This one comes from John. Another question about side gigs.

C (23:00)

Dr. Dali, I am a surgical subspecialist in the Southwest. I have a solo private practice and have been practicing for over 20 years. Through my practice, LLC, I maximize all retirement savings. As my practice has matured, I have taken on several side gig positions, serving as a medical director for a hospital and as a consultant for different companies. For this side gig work, do you recommend establishing a separate LLC which is independent from my medical practice? If so, would you also recommend obtaining an insurance policy for this new company such as an Umbrella policy. I do not plan on employing anyone through this new company anytime soon. Thank you for your recommendations.

B (23:47)

Great question. You know, there's a little bit of gray area here of what you need to do, what you want to do, what some people would recommend you do, et cetera. A few things to think about as you make this decision. Forming LLCs and buying insurance policies are primarily all about assets protection, right? You're trying to prevent some terrible liability situation from causing you to lose money. So for this reason, when you're practicing medicine, you get malpractice insurance. Right? For this reason, when you're building a rental property empire, you put those rental properties inside LLCs. It provides both internal and external liability protection. By external, you're protected from some liability in another part of your life. For example, you get sued for a gazillion dollars for malpractice and it's not reduced on appeal. And you happen to own some LLC with some other partners. Well, they can't just go take the LLC because it's a totally separate entity. Now if you are distributed money from the LLC that could be used to meet your judgment. But they can't just go form the LLC to sell whatever the LLC owns cause it'll hurt the other 15 partners in your LLC. And so it provides some external liability protection there. It also provides internal liability protection. Let's say whatever that LLC is doing, let's say it's a rental property and somebody slips and falls in the rental property and sues the LLC for a gazillion dollars. Well, the nice thing about it is, at worst, you're only going to lose what's owned in the llc. So that's internal liability protection. Now the first line of defense to any of those liability situations, of course, is insurance. Right? On the personal side, you buy homeowners or renters insurance, you buy an auto policy. Hopefully if you're a good little WCI or you've stacked an umbrella on top of that, that's for additional personal liability. Most physicians probably ought to have a seven figure umbrella policy. The good news is that usually only costs a few hundred dollars a year. It's much cheaper than your malpractice policy. Whether that LLC will cover any business liability is a totally separate question. It's certainly not going to cover any of your malpractice liability, I can tell you that. Maybe some little tiny amount of business liability it will cover. But in general, do not expect your personal umbrella policy to do much for your business liability. So now we get to John's question, which is, do I need some additional asset protection? Do I need some additional liability coverage here? Well, I guess it comes down to what liability do you have? Right? You're serving as a medical director. Okay, well, I guess there could be some liability there. You're doing it for a hospital. Are they providing you some sort of malpractice or liability insurance coverage for that? If not, I'd look into getting it added to my malpractice policy or looking at a personal, or rather a business liability policy for that work. I think there's probably enough liability doing that now, the consulting. I don't know exactly what you're doing, how much liability there is there. You might look into a business liability policy for that. Maybe there's just not that much liability there. Lots of things I've done in my life, there's just not much, much liability. It's probably not worth buying a policy for, but it sounds like there might be. So maybe it's worth looking into a business liability policy. The good news again is generally a lot cheaper than malpractice insurance. Now, should you put that business in an llc? Well, everybody wants to put every business in an LLC all the time, it seems like. Which isn't the end of the world, right? In Utah, it costs me $70 to form an LLC and then $15 a year and one page of paperwork. It's not a big deal. I formed LLCs. It's not hard to do if you want to go form an llc, form an llc. But keep in mind that it doesn't, like, do a lot of magic stuff. In a lot of situations. A lot of people want to form an LLC or a corporation because they think they're going to save a bunch of taxes. Well, in the end, it doesn't end up saving them any taxes and maybe even increases your taxes, depending on exactly how it's formed. So keep in mind, you need to know specifically what taxes are you going to save on that you couldn't do as a sole proprietor. The other reason, of course, is liability. And theoretically, if there was some liability that only applied to this company, to this consultant you're doing for the company, all they could get if they successfully sued you is what the company owns, maybe the business, bank account, that sort of thing. But when you're the only member of the LLC in a lot of states in particular, it really doesn't provide a lot of extra asset protection there because the court goes, what are you talking about? This isn't hurting anybody else to sell what's in the LLC other than you, and you're the one who has the liability. So we're going to force you to pull that out of the LLC or whatever. And so it really doesn't provide the same protection that a multi member LLC might. Now, is it worth separating this business from your main business? I can't really tell. I don't know that I have enough information there what the downsides might be to just lumping it all in together to your main practice. You might consider doing that. It might save you some hassle or it might make things more complicated. Maybe it's better to have it simpler, have its own bank account, its own credit card, its own llc. It's not that expensive or that complicated to do all that. So maybe if you want to treat this as a separate business, you can do that. Chances are if you own the practice and you own this other LLC, you're not going to qualify for another 401 though. So don't think just forming an LLC gives you another 401. That's not the way it works. Because those businesses are probably related. You probably have 80% ownership of both of them, so they're related businesses, only 1401 for those. So sure, go form an LLC. You can look into an insurance policy as well. But consider how much liability you actually have. It might not actually be that much, depending on what you're consulting on. And the main liability from being the medical director is probably provided by whatever you're being the medical director for. So I don't know that you need a separate business liability policy for that. All right, let's take another question, this one from Chris.

C (30:08)

Hi, Jim, this is Chris from California. My partners and I have questions about 1099s with our finance manager in our office. 1099 has become a bit of a four letter word. We have a hospitals group that has about 60 physicians and a few administrative staff. And we cover three separate hospitals. We're structured as a C corp and we do control the employees in that we make their schedule, their hours, quality metrics, expectations, etc. So the way we interpret the law is that these Doctors should be W2 employees and they are with our group. However, there's a lot of groups that do 1099s or give people the option to be a W2 or 1099. And that does make it a little bit difficult to recruit people. Even though we've explained to them that you can't deduct all the things they think they can deduct are These groups that are doing these options of W2 or 1099 or just doing 1099s, breaking the law and they'll get caught at some point, or is this something that is so unlikely to get audited they don't care, or is there some exemption for physicians? We can't find any input on? This would be greatly appreciated. Thanks for all you do.

B (31:16)

No, I think you actually understand the issues here. There are a lot of docs who do not understand the issue. They think this is just a choice they can make. It is not a choice you can make. The IRS gives guidelines on what an independent contractor is and what an employee is. And there's a whole long list of what these guidelines are. Right. There's a little bit of gray in this area, but not nearly as much as most doctors think. Right. If the company is telling you how to do your work and where to do it and providing new benefits and, you know, and there's a bunch of employees and, you know, all this stuff that goes into this long list of factors that the IRS tells you to consider when deciding if somebody is an employer, employee, or a independent contractor, you gotta. You gotta be the employee. That's just the way it is. And the accountants are usually pretty good at pointing that out. Now, sometimes people kind of turn a blind eye to it. And let's be honest, people get away with it a lot. But the truth is, most of the risk here is actually not on the doc. It's not on the employee, 1099 person. It's on their employer. Because what can happen to them is that you decide you're going to be a 1099 or they decide you're going to be a 1099. They don't withhold any taxes for you as they pay you. And then a few years later, you come back to the IRS and say, I was basically an employee. They should have been withholding taxes. Go to them and get the taxes, and the IRS goes to the employer and gets the taxes. That's the risk. Right. These payroll taxes are not withholding. And so the actual risk to the employee is pretty minimal. Right. They don't come after them for the taxes. So that's kind of the issue there. So if you are the employer, if you're this group, that's the employer. Yeah, you've got risk. If you hire all these docs and tell them they can be 1099 and really they're employees, and the IRS comes back in a few years and say, really, they're employees, you Owe us the payroll taxes, then you got to pay the payroll taxes and so that's your risk. So you really do have to classify people properly. There's a little bit of leeway there, but not as much as most people think. You can go there and, you know, you can look these up. If you go to irs, independent contractor or employee, I'm sure that'll find us, you know, a good long list of how to tell one apart from another. Here we go. IRS.gov it says independent contractor or employee and it gives all kinds of things you ought to be thinking about here. Right. So it says the common law rules. Well, there's behavioral. Does the company control or have the right to control what the worker does and how the worker does his or her job? Well, if so, they're an employee. Financial. Are the business aspects of the worker's job controlled by the payer? These include things like how the worker is paid, whether expenses are reimbursed, who provides tools and supplies, etc. Third one is a type of relationship. Are there written contracts or employee type benefits, I.e. pension plan insurance, vacation pay, etc. Will the relationship continue and is the work performed a key aspect of the business? The idea is an independent contractor is somebody that comes in for a limited time and does a limited amount of work and takes care of all their own benefits and all their own tools and expenses and decides when and how they're going to work. Well, that's not the case if you're a doc working in an emergency department. Right. They're scheduling you on a shift, they're providing all of the assistance to you, all the nursing staff, et cetera. All the tools you work with are provided by the employer. And now you want to call yourself a 1099? Really? That's not probably gonna fly. Do people get away with it all the time? Absolutely. Is it an awesome thing to be a 1099? Well, it depends. If you get paid enough more that you can cover your taxes, your additional payroll taxes, and you can cover the loss of all those benefits that now you're paying for, it's fine to be a 1099, but the risk is really with the employer. So that sounds like it's you and your partnership is who the risk is with. And, you know, so if people want to be 1099, you can't let them just be 1099 just because they want to be. You might get away with it and maybe they won't come back and tell the IRS about what you're doing, but maybe they will. So I don't think it's a risk. I would do. You know, we don't have 1099 employees or whatever in our group. They're employees. You know, they get a W2 and that's the way it works. You're either a partner or you're an employee. That's it. So if you don't want to be one of those things, maybe your group is not for those docs. But no, you guys are probably doing it right. If you're looking at those IRS factors and deciding these are not independent contractors, they're employees, you're probably doing it right and they are doing it wrong. Whether they get caught doing it wrong or not. Totally different question. I don't think this is a super frequently audited item, but I can tell you exactly how often it gets audited. As I mentioned at the beginning of the podcast, SoFi could help medical residents like you save thousands of dollars with exclusive rates and flexible terms for refinancing your student loans. Visit sofi.comwhitecodeinvestor to see all the promotions and offers they've got waiting for you. One more time, that's sofi.com WhiteCodeInvestor SoFi student loans are originated by SOFI bank and a member FDIC. Additional terms and conditions apply. NMLS 696891 all right, don't forget about our real estate webinar. Go to whitecoatinvestor.com Rei that's November 20th 6pm Mountain thanks for those of you leaving 5 star reviews and those of you telling your friends about this podcast, a recent one came in that said, excellent. I'm a clinical pharmacist and I've listened to almost all of the podcasts since I subscribed. I've recommended the book to my relative who is a physician resident. These podcasts are informative, confirm what I've been doing right, what I need to change, and help me expand my knowledge. I particularly enjoyed the episode on Cryptocurrencies. What got me started was the book recommended to me by a colleague and the down to earth, easy to understand and honest podcasts. Thank you from Ben. 5 stars. Thanks for that podcast or that review, Ben. That does help us get the word out to other people that need this information just as much as you and I did before we got it. Keep your head up, shoulders back. You've got this. We're here to help. See you next time on the White Coat Investor Podcast.

A (37:36)

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.