Alejandro (8:03)

Hello Jim, this is Alejandro from Chicago. First of all, thank you so much for everything you do. So after eight long years of residency and fellowship, I'm going to start my new attending job as cardiac electrophysiology next year. And of course the question is regarding how to optimize the retirement accounts or the tax benefits. So beside the IRA, the employee contribution for the 401k or 403, this institution does not offer a megabat door rod. So I'm trying to look other options to maximize retirement account and they offer a 457 plan. It's a non governmental. So my first question is what should I look for? What are the things that I should consider before contributing to a 457? Also because I think you can put a big chunk there. And also the other question is I was thinking what happened if I decided to do it? I make that account grow and then later on maybe I separate or not from that institution. My understanding is eventually that money gets available to you to move on or to move it around. So the question is can you then later somehow take a sabbatical year, half a year without zero capital gains and do a Roth conversion of that money?

Jim Dahle (9:25)

Okay, great question Alejandro. Let's go over the basics of retirement accounts for new docs starting jobs. First of all, there's the Backdoor Roth IRA for you and your spouse. Typically, doctors make too much money to make direct Roth IRA contributions, and they typically have some sort of a retirement plan available to them at work, so they can't deduct their traditional IRA contributions. So they do the backdoor Roth IRA process for themselves and if married, for their spouse. So that's, you know, 7ish thousand dollars. It varies each year. It's $1,000 more if you're 50 plus, but you can put some money in there and that's real money, you know, especially when you double it with the spouse. So that's often the first thing people invest in each year. Although the first thing is if you're offered a match by your employer, you ought to make sure you get that. Another thing that's usually a pretty high priority for people is if their only health insurance plan is a high deductible health plan, they want to fund their hsa. And sometimes the employer will give you some money toward that. If you fund it through payroll, you can often save some payroll taxes on it. But you can just go to Fidelity or Lively or whatever and open up an HSA and write them a check. Transfer money from your bank account or whatever and you can invest it. Right? HSAs can be invested for decades. Our HSA now is up over a quarter million dollars. It can be invested and it can grow and it can pay for all your healthcare for the rest of your life, including Medicare premiums. And so it can be very useful that way. So if you've got access to an hsa, you should definitely fund it. It doesn't necessarily mean you should take a plan that qualifies you for an HSA when another plan is a better deal for you. But if you do qualify for an HSA by virtue of your plan, please fund it. Please invest the money. Please pay attention to where it is. If you don't like the HSA that your employer is offering you, you can transfer the money out periodically to another one. The next step is to figure out what your employer is offering you. Go into hr. Ask for all the retirement plan documents for the plans that you're eligible for. Typically in most employers, that's going to be either a 401k or a 403. Now, there's rules on these things and the amount you can contribute each year changes. Go to whitecoatinvestor.com numbers to get the amounts for this year or next year whenever you're listening to this podcast. But in general, you can make an employee contribution which is something like 24,000 ish dollars currently. Okay, so that can be a tax deferred contribution, that can be a Roth contribution, meaning it's either pre tax or it's after tax. It's your choice. Then the employer can put in some additional money. This is usually referred to as a match. And often you have put some money in to get the match, not always. Read the document, figure out how your match, if any, works. Sometimes like in my partnership, since I'm one of the owners, I'm allowed to self match my money. So you're allowed to put in a total of $70,000 ish. And again, this goes up each year with inflation and that includes the employer and the employee contributions. So if you're allowed to make those for yourself, put those in. This is a great place for money. Not only does it now give you a tax deduction if it's pre tax or it gives you tax free gains forever if it's a Roth account, but that money grows in a tax protected way. It grows faster than if you invest it in a non qualified taxable brokerage account. It's also asset protected if heaven forbid, you get sued for a massive amount above policy limits and it's not reduced on appeal and you gotta declare bankruptcy, you get a keep in every state in this country what's in the 401 and 403. So Max those things out. You've done your backdoor Roth IRAs, you've done your HSA, you've got maybe as much as $70,000 into your 401 or 403, plus whatever your spouse might be able to put into their 401 or 403. And now you start looking at other options. If you want to save more for retirement, maybe that's plenty for you. Maybe you don't need or want to save any more for retirement. But if you do, you might look at some of these other plans that your employer might offer you. In your case, Alejandro, there is a non governmental, also known as a tax exempt 457 plan. Okay, so this is not the same as a governmental 457. It is dramatically worse for several reasons. One, the money is not held in trust, meaning it's not held in a separate account like your 401 would be or your 403 would be. And it's subject to your employer's creditors. So while it's not subject to your creditors, you know, it gives you some asset protection. There's, it is subject to your employer's creditors. So if Your employer has to declare bankruptcy. There is a theoretical risk that you could lose the money. Now there is a hospital corporation by the name of Steward that used to own my hospital, that it looks like some doctors that worked for them and funded A non governmental 457 through them might be losing some or all of the money they had in that plan. So it doesn't feel so theoretical to them anymore. I'm not aware of any other instances when Doctors have lost 457 money, but it is a risk. So if your employer doesn't look so financially stable, don't put a lot of money into their 457. Maybe don't put any in there. I know at least one doc that has written me that regretted putting money into his 457 plan. Not because he lost any of it. In the end he got it all. But he said the hassle of worrying about it, laying awake at night worrying about losing whatever it was, a couple hundred thousand dollars that he had in the 457 was enough that he wished he'd never used it at all. So keep that in mind. Certainly, if you have any doubts about it or you're worried about it, maybe don't fund it to the max every year, maybe just fund it for a year or two, whatever. But that's a serious risk with a non governmental 457. The other big problem with a non governmental 457 is you can't just roll it into an IRA when you separate or into another 403 or a 401k or whatever. You can only roll it into another non governmental 457 plan if that plan accepts it. And your new job, if you have one, probably isn't going to offer one or it might not accept it or whatever. So you're kind of stuck with the money in that 457 until you take it out. Pay taxes on it if due, because these can be Roth 457s as well. But.

Jim Dahle (16:05)

You'Re stuck with it. So you better make sure the distribution options are something you're okay with. Because a lot of them are not. A lot of them are terrible. For example, a common one is that you got to take all the money out in the year you separate from the employer and pay taxes on it. So imagine you're putting in 24ish thousand dollars into this thing every year and it's growing for like 10 years now. You got, I don't know, four or $500,000 in there and now you change jobs now you got to pay taxes on that 400 or $500,000, probably all in the highest tax bracket, all at once. Not awesome, right? Not a great distribution option. On the other hand, if it lets you take it out over 10 years, starting at an age you're allowed to name, maybe that's not such a bad deal. 457 money, especially non governmental 457 money, because it's not technically your money yet, is probably the best money to spend in early retirement. So if you can start spending it in your 50s, or at least by your late 50s or early 60s when you retire, that's probably a great distribution option. If you don't have to take it out all at once, that's a great distribution option. Just make sure you're okay with the distribution options for whatever amount of money you're likely to put in there and what it's likely to grow to. You also need to make sure the fees are okay and the investment options are reasonable before using a non governmental 457. So whether you use that or not, if you want to save even more money for retirement, your last option is a taxable account. There's no limit on how much money you can invest in a taxable account. For many investors, including me, my largest investing account is a taxable account. You just pay taxes on it. Usually you get a little better tax rates, right? You pay qualified dividend tax rates, you pay long term capital gains tax rates. And that's assuming you can't offset those gains with losses from tax loss harvesting. As you go along, you can do all kinds of cool tricks like donating appreciated shares you've owned for at least a year instead of cash. When you give to charity, right? So you're continually increasing the basis in your portfolio. You're flushing those capital gains out of your portfolio, making it more tax efficient. And of course, anything you don't sell before you die gets a step up in basis at death, which helps decrease income taxes for your heirs. That's a good thing. So taxable accounts aren't all bad. They are more accessible to creditors if you get sued above policy limits. They do grow slower because you have to pay taxes on them as they grow. But there's a lot of ways you can invest tax efficiently and make it really not too bad at all. Your other question, Alejandro, was whether you should do Roth conversions. Well, Roth conversions are a good idea in years in which you have lower income. Now, for most people, that's early retirement years. They're retired, they're not yet taking Social Security. Those are pretty good years for Roth conversions. If you go back to fellowship or you take a sabbatical, that's a pretty good year for a Roth conversion. But for the most part, in your peak earnings years, you gotta think long and hard before making a Roth contribution or conversion. It's often the wrong move that pre tax money does have its benefits, but you just gotta run the numbers and make estimates of what your future tax rates are going to be, if you're going to be the one spending that money, or the future tax rates or whoever is likely to be spending that money. But in general, you want to be doing your backdoor Roth IRAs. You want to be doing your HSA. You want to be maxing out your 401 or 403 with a profit sharing plan. Take a look at other plans being offered by your employer. It might be 457, it might be some sort of cash balance plan. Take a look at them, understand how they work, decide how much of them you want to use, and then you can always invest an unlimited amount in a taxable account. Hope that answers your question. Alejandro, a great question. Let's move on to what's next. Oh, I was supposed to tell you about our Black Friday sale. It ends tomorrow. If you're listening to this the day the podcast drops, or hopefully by the day after it drops, you can get 20% off. Oh, 20% or 29%? Megan? 20. Okay, it's 20. I've got a typo in my notes here for this podcast. It's 20% off, not 29% off. All our books, all our courses through tomorrow. We'll even give you 200 bucks off WC icon. You should totally come to that, by the way. It's going to be awesome. We're down in Las Vegas, but not on the Strip. Close to the Strip if you want to go there, but not on the Strip. And if you use this code at checkout for thanks 20, you can get either 2,200 bucks off WCicon or you can get 20% off all our books and courses through tomorrow. Happy Black Friday. Okay, next question off the speak pipe is about cash balance plans.

Wayne (20:43)

Hi Dr. Dali, this is Wayne. I am a radiologist in the Pacific Northwest. My private practice group is considering adopting a cash balance plan. The obvious pros of this are increased pre tax savings. In my case, I could probably save up to $200,000 if I desire. However, because of wanting to be good stewards of the plan and so on, they are maintaining a very Conservative investment strategy, no more than 30% equity. So my question is, do you think that this is a good idea or would I be better if I want to take a more aggressive investment approach to just do that in my taxable account? The third option is I could take the cash balance plan, but then skew my 401k much more aggressively to hopefully get the whole investment portfolio more in line with my desires, which is probably in the range of 70 to 75% equity. Thanks very much for any advice you can provide.

Jim Dahle (21:44)

Okay, great question. I choose option 3. It's just a great option. Let's talk about this for a minute though. They're probably doing the right thing managing this cash balance plan. You generally don't want to take too much risk in it. If you take too much risk and it really underperforms the crediting rate for the year. Remember, this cash balance plan is a, a pension masquerading as.

Jim Dahle (22:09)

Another 401 masquerading as a pension. But it has to look like a pension to the irs, and so it's got to play by pension rules. So if it underperforms the crediting rate, the employer, which is probably you, has got to put more money in there. It's not necessarily a bad thing. You get an additional tax deduction for more money you put in there. But that's a problem for lots of doctors, right? They just don't have the cash flow to do it. And you really do have to do it. Like when I fell off the mountain last year, remember, and I wasn't working for a few months, I still had to put money into the cash balance plan I still had to make. I had cut checks from other savings that I had to fund the cash balance plan. They're not kidding when they say you got to make the payments. And so keep that in mind. And if it underperforms, you got to make even larger payments. The other downside of taking lots of risk is if this thing does really, really well and you're way above the possible crediting rate, you actually end up paying an excise tax if that hasn't been made up for by the time you close the plan. So in general, the right answer is take your risk in the 401k or 403b or whatever, not in the cash balance plan. Invest the cash balance plan relatively conservatively. I think ours is 40, 60 years at 30, 70. That's probably in the right place. Some people put them all in bonds, right? The return you're looking for in these cash balance Plans is primarily in the single digits. You're doing it for the tax break and the asset protection and the tax protected growth later. Not necessarily because the investments are expected to blow everything else out of the water. That's just not the way they work. So keep in mind, cash balance plans are usually not left open forever. It's an extra 401k masquerading as a pension. So what you tend to do is every five to ten years or so you find an IRS approved reason to close the plan and you roll all the assets into your 401. We've done this now three times in my partnership in the 15 years we've been in it. And so we're on cash balance plan number three that I've participated in. I think now I'm allowed to put quite a bit more in it. I don't make that much anymore in the partnership because I'm only practicing part time. But I think I'm putting $60,000 a year in it. I think the most somebody can put into this particular plan is $120,000. Previously I was limited to significantly less than that. So you can often put a lot of money in there. And when it's a pre tax contribution, that can really reduce your tax bill during your peak earnings years. So it's mostly a tax play rather than an investing play. So in general, it's worth using. Yes, but what you do is you at least first adjust your 401. Take the risk in the 401. Right. If you know that 70% of this cash balance plan is going to be in bonds, well, maybe your 401k is 100% stock. Fine. The overall asset allocation is what matters. Right. So that's fine. If you really can't get to the asset allocation, you're looking for that stock bond mix you're looking for just by doing that, then maybe you don't put as much money into the cash balance plan. Some that goes into your taxable account as invested in stocks. There's. Either approach is probably fine. It sounds like you've got a substantial 401. So you can probably, at least for a few years, just make the adjustment in there and get to where you want to be. All right, let's talk about target retirement funds. Is investing in a target retirement fund in a taxable account ever a good idea? Is there a better alternative in case you don't want to spend too much time rebalancing your portfolio every year? Okay, good question. As a general rule, I am a fan of target retirement funds. I think if I had it all to do over again, that's probably all I'd use. At least for the first hundred thousand or something that I invested. Your asset allocation just doesn't matter that much in the beginning years. When you're investing, it's all about your income and how much of it you're saving and putting in those accounts. If you really want more money in your retirement accounts, the secret is to put more money in your retirement accounts. And of course, when we first start investing, we get all excited about our asset allocation and investments because they're sexy and we make our portfolios all way too complicated. In reality, it's probably fine to use a target retirement fund. Certainly if you are a resident, your only investment is your Roth IRA, or maybe there's a little money in the 401 at the university hospital or whatever. That's fine. Just choose the target retirement fund in each one and move on with life. Right? Worry about it again when you become an attendant. But there are a few issues with putting a target retirement fund in a taxable account. The first one is an asset location issue. For most people, they're actually a little better off by putting some types of assets and some types of accounts and other types of assets and other types of accounts. Often a typical interest rates. That means putting your bonds in a tax protected account. Like maybe your bonds go in your 401k and stocks go in a taxable account. So if all you're using is a target retirement fund, you've got a little bit of a tax inefficiency there. Now maybe it's outweighed by the fact that this is a simpler solution for you and you can spend less time managing your investments or less money paying somebody else to do it. So it might be worth it even with that tax inefficiency. There is another issue, and Vanguard is guilty of it. I wrote a blog post about this debacle they had a few years ago. Basically, they upgraded their target retirement funds what their target retirement funds were investing in, and that resulted in a massive capital gains distribution to people who own these accounts. Well, no big deal if you own the account in a traditional IRA or if you owned it in a 401k or something, right? No big deal. But if you owned it in a taxable account, you got this massive capital gains distribution. Now Vanguard, I think eventually has had to pay some sort of a penalty which was distributed to the investors, but I don't know that it made them whole. So that's Another risk of why you might not want to use one of those accounts in a taxable account. But I'm a big fan of simple solutions. You know who else is? Mike Piper, who blogs at the Oblivious Investor. He's spoken at multiple WCI Cons. He's speaking this year in March. He should totally come. Just to hear Mike speak. It's totally worth it. But he uses one fund and he has for, I don't know, 10 or 15 years, all of his investments are in one fund. It's the Life Strategy Moderate Income fund, It's a Vanguard fund. It's a fund of funds. It's a balanced fund. It's literally one investment. That's all he owns. And Mike is one of the most sophisticated investors I know. But he recognizes what really matters in investing, which is how much you make, how much you put in there, that you have a reasonable plan and that you stick with it. And a moderate life strategy, Life Strategy, moderate growth, I think it's called a moderate growth fund is reasonable. So that's literally all he does. But he does admit all of his retirement assets are in tax protected accounts. He does not have a taxable account. And I suspect if he did, maybe he'd opt for a little more complexity to try to get his asset allocation or his asset location just right. So is it ever a good idea? I mean, it's really simple. But I think by the time you're a typical doctor with a taxable account, you've now got backdoor Roth IRAs, you've now probably got a 403 and a 457 or something at your employer, your spouse has got some retirement accounts, maybe you've got an HSA in the mix and you've got a taxable account. It's probably time to roll your own fund, selection your own asset allocation rather than just opting for the ultra simple target retirement solution. Could you still do it? You could. It would be simple. Especially if those funds are available in every type of account you have. But you still got that risk of Vanguard or whoever's running that target retirement fund giving you some crazy capital gains distribution you may not like. I suppose that risk does exist with other types of funds as well, but it seems a little higher with the target retirement fund, especially since it has happened in the past. So not a great idea. Not a fan of target retirement funds in a taxable account, but it's not crazy. You could do much worse things investing wise. Our quote of the day today comes from Jonathan Swift, who said a wise person should have money in their head but not in their heart. I love it. Okay, next question. Also off the speak pipe. This one comes from Emily. Let's take a listen.

Jim Dahle (30:59)

Hi, this is Emily from the Northeast. My question is what should I do about retirement savings over the next year when I don't have access to my workplace profit based sharing until the end of 2026? For context, I'm a dental provider, W2 Worker, fairly new attending. I just paid off about $100,000 of student loans and we're working on paying off my husband's last $20,000 of student loans. No other debt. I have an old 403B with 115,000. My husband has a 401K with 145,000 and we both have Roth IRAs of about 50,000 each. I don't have access to an HSA unfortunately. So my plan is backdoor Roth IRA for both of us. Max out my husband's 401K, but I don't see any other options for myself besides a taxable brokerage account. Any advice is appreciated. Thank you so much, Emily.

Jim Dahle (31:58)

It's a great question. I think you just need me to say it's okay to invest in taxable because you clearly have an understanding of the issues involved here, right? Typically when people are in this situation, they're starting their first job, they're usually relatively young. Sometimes it's later in their career when they change jobs, but they just, they're not eligible for the 401k or whatever. Or maybe they're not making enough money to really make contributions to a retirement account. It's fine, right? Putting this off for six months or a year is not the end of the world. Keep in mind, especially when we're young attendings, when we have a lot of really great uses for money. You know, maybe you have some credit cards to pay off or you got an auto loan to pay off or you've got a beater you need to replace or you've got some student loans to pay off or you owe some money to your parents. Right? All of that is a great thing to do this year, right, While you're waiting until you're eligible for your retirement accounts so you can just take advantage of some of the other uses for money that you might have. Maybe you want to get your kids college savings started so you can open a 529 or you know, there's lots of uses for money. Maybe you're saving up a house down payment, I don't know. So look at all that stuff first. Then of course you can look at what is an option for you. If you have earned income, you can make a contribution to an ira. Now typically for most white coat investors, that's a backdoor Roth IRA process you're going through to make a Roth IRA contribution. So make sure you do that. But if that's all you have available to you and your spouse is already maxing out their available accounts and you're sure that you want to invest this money for retirement, well, the only thing left is taxable. There's not some magic retirement account out there we haven't told you about. Well, there might be one. If you have some self employment income, you can go open an individual 401. This is another great benefit of being self employed, right? You don't have to wait until the employer unless you use their retirement account, you can just open your own. But if you are an employee, that's not an option. You got to wait until they let you into their retirement account or you just invest in taxable. Now investing in taxable is not the end of the world. Most of my money is invested in a taxable account. You can invest very tax efficiently. You can tax loss harvest, right? We've saved up lots and lots of tax losses over the years. So any capital gains distribution I might get or choose to take, I don't have to pay taxes on. Very tax efficient. You can flush out the appreciated gains by giving to charity. You can give them to people in a lower tax bracket and they can sell them maybe at 0%. Lots of things you can do that are cool. It's a taxable account, but it's better to invest in retirement accounts for retirement anyway, all else being equal. But I think in your case, Emily, it sounds like you want to save more for retirement and you filled up everything available to you. It's time to invest in taxable. Don't beat yourself up about it. All right? This podcast was brought to you by Laurel Road for Doctors. Laurel Road is committed to helping residents and physicians take control of their finances. That's why we've designed a personal loan for doctors with special repayment terms. During training. Get help consolidating high interest credit card debt or fund the unexpected with one low monthly payment. Check your rate in minutes plus white coat. Investors also get an additional rate discount when they apply through LaurelRoad.com WCI. For terms and conditions, please visit www.l Laurelroad.com WCI that's www.l LaurelRoad.com WCI. Laurel Road is a brand of KeyBank and a member FDIC. Don't forget about our Black Friday sale. It ends tomorrow. Go to our store, all our swag, our books, our courses, et cetera. It's 20% off. Or if you go to wcievents.com you can buy a ticket to WCICON today. $200 off use thanks 20 at checkout. All right, thanks. For those leaving five star reviews and helping us get the word out about the importance of financial literacy and financial discipline among high income professionals like doctors, a recent one came in said the gold standard. Listen to this. Read his blog profit 5 stars. Doesn't take much to leave a 5 star review. Thank you for that one. The rest of you keep your head up, shoulders back. You've got this. We're all here to help you along the way. See you next time on the White Coat Investor Podcast.

Jim Dahle (36:12)

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.