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White Coat Investor Podcast
WCI #465: How to Make Smarter Investment Decisions (Taxes, Fees, Risk)
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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
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income professionals stop doing dumb things with
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their money since 2011. This is White Coat Investor podcast number 465. 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. 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 WhiteCoinInvestor SoFi student loans are originated by SOFI bank and a member FDIC. Additional terms and conditions apply and MLS 696891 all right, welcome back to the podcast. By the way, if you're listening to this the Day it drops, today's your last day. If you're interested in coming to WC icon 27 at the lowest possible price, this is the end of our pre sale. Is today the day this podcast is dropping and that gets you $500 off the conference. This is the biggest discount we will offer all year. Don't worry, it's not going to pop back up in a month or two or six. And nobody else is going to get this price except you if you act today. We're going to the Rose and Shingle Creek in Orlando, right? East coast. WC icon. For all of you out there on the east coast, this is a great chance, you know, short flight, maybe even a drive for you to come to WC icon. See what you've been missing out on all these years. This is only the second time we've ever had it on the east coast and I'm looking forward to meeting more of you, Floridians in particular. A whole bunch of Floridians came the last time we were in Florida. It's February 24th through 27th, 2027, and if you go to wcievents.com you will find that the price is $500 off the regular price. The lowest price you will ever see for this conference. So I hope to see you there. All right, let's get into your questions. Hi Dr. Dali.
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Thanks for all that you do. I'm an ear, nose and throat surgeon that's been in practice for about 13 years now and we've recently reached a milestone of a net worth over $10 million, which includes investments and real estate. And I've been considering firing my financial advisor and taking on a more central role and managing this stuff myself, but haven't quite gotten it done yet as it's a bit scary to do, to be honest. But recently the advisor had recommended selling a few of my funds, which are ETFs, in favor of a lower cost fund. However, the capital gains tax would be significant as there's been millions in gains in these accounts. And my question is, does the gain that I would get from a lower cost fund outweigh the significant taxes I would be paying in capital gains? I feel like the funds I would have to spend to pay the taxes would be significantly more than the small amount I would gain in a more cost effective fund. I certainly feel that future funds going into a more tax advantaged or rather a lower cost fund would be beneficial, but I'm concerned.
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Okay, well remember on the speak pipe you only get 90 seconds, so that's where it cuts you off. There was plenty in that 90 seconds for us to talk about. First of all, don't necessarily ever feel like you need to fire your financial advisor quickly, right? I mean, you became a DECA millionaire working with this person. Maybe they're not doing so bad, right? Plus, I think anytime you move to fire your advisor, you should have the new plan in place first. If you're going to use a different advisor, which is fine, have the new advisor first before you fire the old one. If you're going to do it yourself, have your written financial plan created before you fire the advisor. It should only take a matter of weeks either one of those things. So there is no super rush to do that. A lot of times I have people fire an advisor without any plan whatsoever and maybe that's not a great move. I guess if the advisor is really bad, it's a good move. The bigger issue I see with people who have $10 million is they made the mistake not of hiring a commission salesperson masquerading as an advisor, that's usually a lower net worth problem. But hiring somebody that charges an asset under management fee while charging 1% a year is probably a fair price. With somebody with a million dollars, you'd be paying $10,000 a year in advisory fees. For someone with $10 million, if you're paying 1% a year, that's that's $100,000 a year in asset under management fees. And that's way beyond the going rate. The going rate right now for kind of a full service financial planner and investment manager is 7,500 to $15,000 a year. That's the going rate. So if you're paying 30, 40, 50, $100,000 for that service, know that we can help you find someone who will do as good of a job, probably better for a much lower price. And we've got a recommended page for financial advisors thewhitecoatinvestor.com that you should check out. Okay, but the question you have, and it's a little weird for you to have an advisor that you're presumably paying thousands of dollars a year to for advice and yet feeling like you gotta call up some podcaster to get confirmation of what they're recommending to you. Maybe that tells you that moving on from the advisor maybe is a good move for you because you don't trust them. But the question is what to do about what we call legacy investments. Legacy investment is something you own in a taxable account, right? You can't have a legacy investment in a Roth IRA. You can't have one in a 401, you can't have one in a 457 or an HSA or a 529. You can just swap your investments in those accounts with no tax consequences whatsoever at any time. So you shouldn't have any legacy investments in a tax protected account. This is only in a taxable account. So it's an investment you would not buy today, but that you feel like maybe you shouldn't sell because the capital gains hit would be too large. So let's talk about what options you have for these legacy investments. All right, the first one is to sell it. You always have the option to sell it. Yes, you'll have to pay capital gains taxes. Hopefully you've owned it for at least a year. So at least you're paying long term capital gains taxes. But I'll tell you what, the only thing worse than having to pay taxes is not having to pay taxes, right? You have to pay taxes cause you had a great gain. That's a good thing. And the long term capital gains rates are probably lower than your ordinary income tax rates. And so that will help reduce the cost of that. But that is always an option to sell it. Option number two is to just sell it later. Later maybe you'll have more money to pay the taxes. Maybe you'll be in a Lower tax bracket later. Maybe between now and later you'll have the opportunity to tax loss harvest, right? And have some of these capital losses you can use to offset some of these gains. I think this is a great reason why it's good to acquire capital losses when it's convenient as you go along throughout your investing career, because maybe later you'll have an investment you don't actually want to hold onto and the capital losses can allow you to sell it without having to pay any capital gains taxes. Okay, Option number three is to give the money away to a family member or a friend with a low income, right? You give it to your kid, your kid's in maybe the 0% capital gains tax bracket, right? So you give them, you know, maybe you give them $200,000 worth of mutual fund shares and it only had $50,000 in gains and you know, they were able to basically sell that without actually having to pay any taxes or anyway having to pay a lot less in tax than you would if you wanted to give something to that family member or that friend anyway. Why not give them appreciated shares if they're in a much lower bracket than you are? On that same note is number four, which is what I do with legacy investments. I use them for my charitable donations instead of cash. Right? After you've owned it for a year, we transfer it to a donor advised fund. You can give it to a charity directly. We find it better, more convenient, more anonymous to give it to the charity via a DAF or donor advised fund. But you put it in there and you use cash to buy whatever investment you would rather have than that. So if you're charitably minded and you have a taxable account, you should pretty much never give cash to charity ever again. You should be using appreciated shares to do so. Trust me, the charity knows how to turn those appreciated mutual fund or ETF shares into cash. And usually if you're going through a daf, you're giving them cash anyway, that's all they're going to receive. It's all the same as if you'd given them cash out of your checking account. And yet neither you nor the charity pay the capital gains taxes and you get the full value donated to use as a tax deduction on your taxes. Okay? The fifth option is to build around this legacy investment, not to sell it, right? And the idea behind not selling it is that you die with it. Leave it to your heirs or maybe charity when you die, but either one gets a step up in basis at your death, right? So Nobody pays those capital gains taxes. But you have to build your portfolio around it. So maybe it's not the ideal fund. Maybe you own an s and P500 index fund. You'd rather have a total stock market index fund. Fine, you can deal with an S&P 500 fund, right? You can deal with that. You can build around it. Yeah, it doesn't have the mid caps and the small caps in it. Fine. Add a little bit of a mid cap or a small cap fund to it, you can build around it. Likewise, maybe it's, maybe it's a growth stock fund. You jumped into it, you were maybe chasing a little performance back in 2023, and now it's got huge gains. Okay, Fin, well, maybe you just hold a little bit more of a value index fund in your portfolio with future purchases and use that to offset this growth index fund and the two of them together make something like a 500 index fund or a total stock market index fund. The bottom line is there's a lot of investments, as long as they're not too huge of a chunk of your portfolio that you can just build around. Let's say you have a bunch of individual stocks, right? You got a bunch of Tesla stock and some Ford stock and some Exxon stock. Okay, well, those are kind of large cap stocks. And if you got enough of them, well, maybe you just include them in your large cap allocation, right? So instead of selling them paying a bunch of capital gains, you just own a little bit less of a 500 index fund. Instead of owning 30% of your portfolio in that 500 index fund, maybe you have 26% of your portfolio in that 500 Index Fund and those other stocks make up 4% of your portfolio. I don't think anybody would argue that that's crazy to do. Now, of course, if 80% of your portfolio is in Ford stock and the other 20% is in Bitcoin, you're probably going to have to bite the bullet and sell some of it. But if it's a smaller amount, it's a little bit easier to build around. Another thing to consider is what's called a 351 exchange. This is a relatively new option where you swap a diversified portfolio of appreciated individual stocks in a taxable account for shares of a newly created etf. That exchange defers taxes, but hopefully provides you a better investment. So that would be the advantage of doing that. You'd get rid of the individual stocks. You might not have your ideal etf, but maybe you then have one that you feel comfortable building around. So obviously you'd rather own a different investment. Maybe it has a lower expense ratio or is more diversified, or it's just a better investment for whatever reason. And you've got to ask yourself, is it worth paying those capital gains taxes to get the better one? Well, if it's only a little bit better, probably not. If it's dramatically better or your portfolio is way out of whack from what it ought to be, then maybe you ought to just bite the bullet. But consider these other options. Even if they can't completely solve the problem for you, you ought to be able to reduce the size of the problem for you somewhat. Congratulations on your success, by the way. Only something like 10% of doctors become penta millionaires and you become a DECA millionaire. You ought to be very proud of that. And of course, make sure that you're also learning to spend and give well in your life. Okay, our quote of the day today comes from Tony Robbins, who said, working because you want to, not because you have to, is financial freedom. It's a good definition. I like that. Thanks everybody out there for what you're doing. By the way, it's not easy work. We know that here at White Coat Investor. We we talk to you all the time in person, at speaking gigs, at the conference, in the speak pipes, on the podcast and interviews when we're doing Milestone to Millionaire by email every single day in the comments section on the blog and in our online communities. We know what you're struggling with. We know your jobs are not easy. Thank you for what you're doing. Your work truly matters. Okay, let's talk a little bit about taxes now for a while. Actually, we just got done talking about taxes, but we're going to talk about them some more.
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Hi Dr. Dali. My question is about sequence of withdrawals from taxable brokerage accounts. If you've been saving in these accounts for any amount of time, you're going to have different lots that have different amounts of cap gains relative to their basis. So in retirement or whenever you pull money from these accounts, how do you pick which lots to pull from? It might be tempting if you needed a certain amount of money to pull from relatively recent lots that have smaller cap gains, lowering your tax exposure. But then you're kind of kicking the tax can down the road, and those older lots that have presumably had more appreciation are just going to grow in their relative proportion of cap gains. Or might it be better to maybe spread your withdrawals evenly among all the lots to kind of mitigate or Even this out over time. I'm just wondering what kind of strategies you would recommend for this. Thank you very much.
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Okay, you win. Okay. When you're worrying about stuff like this, you have won this game, right? When you've got a taxable account that's so large and has been growing so much that you got all these capital gains in it, and you're like, I wonder which one of these lots I ought to take first. You won. You know how many of your peers are not worrying about stuff like this? Right? They're worrying about, oh boy, how am I going to, you know, fund my retirement? Here I am at 58 and wow, I've only got 20 grand in a Roth IRA from years ago and I've got $250,000 in my 401k and what am I going to do about my disability insurance? It's really expensive to buy now. There are so many of your peers that are just not worrying about these issues because they're not even close to being in the financial position where this is their biggest concern. Much less financially literate enough to know they should worry about this stuff. So it's a great question. Congratulations that you have it. Okay, let's talk about the question. You're trying to balance your taxes throughout your retirement. As a general rule, your money will grow faster inside tax protected accounts. Because of that, you should generally spend taxable accounts before spending tax protected accounts. That's a principle you ought to understand that makes sense hopefully to you just, you know, right. At first glance. So as a general rule, taxable comes before Roth. Taxable also comes before tax deferred. But you do have the ability to kind of drive your own tax situation in retirement, right? You can set your tax rate essentially by deciding how much comes out of that tax deferred account, how much comes out of a Roth account, which of your tax slots you choose to sell. Right? You can kind of decide exactly how much each year you want to pay in taxes. But I'll tell you what, none of those accounts except the taxable account has the benefit of a step up in basis at death. So kind of a dumb move would be to sell shares that you're otherwise not going to have to sell before death. Right? So in that respect, I think most people probably ought to start with their high basis shares stuff they bought not that long ago, but at least a year ago, so they get long term capital gains treatment on it and spend that money first and as they go along spend lower and lower basis shares. And yes, that will Increase your tax bill as you go throughout retirement, but it will prevent the problem of paying taxes that nobody would have ever had to pay, which I think is the biggest concern. Now the question here really is how do you spend in retirement? And remember that the first thing you spend is all the money you have to pay taxes on anyway, right? So if you're getting pension payments, you're going to spend that money first. If you're getting Social Security payments, you're going to spend that money first. If you're of RMD age required minimum distributions, you're going to spend that money first. If you have a taxable account that's spitting out, you know, taxable dividends or distributing capital gains to you even though you didn't sell anything, spend those first, right? And for many of us, that takes care of our spending needs. We don't actually have to withdraw anything from our traditional ira, from our Roth IRA, or sell anything in our taxable account. And then it becomes more complicated after that. But in general, the first thing most people try to tap in that situation is often a 457 account, if you have one, especially a non governmental one where it's subject to the accreditors of your employer. But even before age 59 and a half or 55, in the case of a 401k, you know, you can get into that 457 money without any sort of 10% penalty. So it's often, you know, one of the first accounts that you go after. And after that, most people go after their taxable account, right? Because you want that Roth money, you want that tax deferred money to grow as long as possible because it's growing faster. Everybody worries about, oh, but then I'm going to have huge RMDs. Oh, heaven forbid you have huge RMDs. What a wonderful problem to have a $10 million traditional IRA. It's a great problem to have, yes. Maybe it's worth doing a few Roth conversions to minimize that. But it's a great problem to have. Trust me, there are a lot of people that would love to have that problem out there. But the truth of the matter is what a tax deferred account is, is when you're thinking about this question is it's a two owner account, right? You own part of it and Uncle Sam owns part of it, but wants you to invest it on his behalf for a few decades. And all an RMD is is Uncle Sam saying you've maxed out the benefit of this account. So why don't you give me my account and you're going to have to reinvest your account in taxable. That's all an RMD is. So it's okay to grow that traditional IRA as well as best you can because you're growing your account right alongside Uncle Sam's account. It's not a bad thing to have Uncle Sam's account get bigger too. So I hope that's helpful as you decide what to sell. It's a challenging thing to do, but truthfully, when you get to this problem, you often have enough of retirement savings that you're only spending the dividends anyway. You, you're only spending your stock and bond real estate dividends that are coming to you each month anyway, especially when you combine it with Social Security. And especially, especially by the time you get to age 73 or 75 and the RMDs start coming in right, you might not have to sell any of those shares. So if you do have to or do want to sell some of them, I think for the most part you ought to be selling the high basis shares that you've owned for at least a year first. Obviously we can concoct some sort of a scenario where it would make sense for you to sell lower basis shares because you're in a low income year. You're not of Social Security age yet, or you're not of RMD age yet. Maybe it makes sense to sell lower basis shares because you know you're totally going to clean out that taxable account. But as a general rule, I think the high basis shares you've owned for at least a year is probably where to go with that. All right, we've been talking about a lot of taxes. Let's get a tax expert on the line. Talk a little bit more about tax strategizing, what else you can do to lower your tax bill. My interview is going to be with WCI podcast sponsor Eric Wright, and I want you to be aware that they've got a Tax Doctors podcast, the 1099 Tax Doctor podcast. You can hear that on your favorite podcast app. Let's get into the interview. My guest today on the White Coat Investor Podcast is Eric Wright, who is an emergency physician as well as the founder of 1099 Tax Doctor, one of the tax strategizing firms that we've partnered with here at the White Coat Investor. Eric, welcome to the podcast.
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Hey Jim, thanks for having me.
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So, I mean, you're a doc like so many of the people listening to this podcast. What made you decide you wanted to start a company like this to help docs reduce their taxes.
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E
Like anything else in entrepreneurship, I just kind of stumbled into it along the way. So I knew from an early age I wanted to be a doctor, but I also was very entrepreneurial. I started a lawn care company when I was 11 years old and hired my 9 year old neighbor to be my employee and made enough money to buy a few Super Nintendo games. When I went to medical school, I started day trading because I went to a state subsidized school and of course you could get a lot of subsidized loan money and I didn't need it all because the tuition was pretty cheap actually. But I said, well heck, I have access to it and it's cheap. So I just took it all and I started day trading. And this was back in, gosh, 2005, 2006, it was Ameritrade, I think was the platform I was on before they merged with TD Waterhouse. $10 a trade. I actually had the scheme where I organized a lot of students in my med school class. So there was, you know, first and second years, all lectures, right? So it was seven to 12, five hours a lecture, five days a week. You need 25 students to commit to an hour to take notes for you. And then you can miss the lectures and you can day trade and then you get a nice compiled note sent out to you and read the text and you're all prepared for the test. You know, so third year, you know, kind of cut that out because of rotations. And then fourth year I got really, really lucky. You know, September of 2008 happened when the market crashed. I think a lot of people that were around remember that. And I remember I, I kind of parked all, all my day that I had made in this little company. Secure Computing I think was the name of it. A company out of California does antivirus software or something. I thought they were really undervalued and I just kind of parked a lot of money there. And I was doing a rotation with a family doc up in northeast Georgia and an older guy close to retirement. And I remember that day the market crashed. He was just kind of ignoring his morning patience and just focused on cnn, just, you know, watching his accounts take, take a big hit. Poor guy. And I was thinking, wow, I made a really big mistake. This was not a white coat investor approved trading strategy. I was involved in it. But wouldn't you know it, that day Norton Antivirus announced they were buying this company for a 20% over the stock price. And so I got bailed out by sheer luck. But then so it went to residency and finished residency. And I loved being an ER doctor, but I also knew that statistically I was not going to love being an ER doctor forever. In fact, in five or ten years I might not like it so much as is kind of the case with a lot of ER doctors find themselves in. And so I decided what I really need is some passive income. I need to build some, I want to open a business so I can build some passive income. And then you know, sometime down the road, if I'm not enjoying the job as much anymore, I can cut back or even maybe retire early. And so I got out of residency and I was in Augusta, Georgia with my, my lovely wife Jenna. And the problem with starting a business is I'm a full time doctor. I can kind of put some capital into it from the money I'm making. But my wife is also a full time. She was an on air meteorologist for one of the affiliates in Augusta and she actually got offered a promotion to go down to Miami and do the morning weather at one of the major networks down there. And so we had a choice to make. We can move to Miami, I can be ER doctor in Florida. Sounds great, glamorous in Miami, live it up. But you know, she would have to be up at 2am every morning getting her hair and makeup done, getting down to the station, being on air by six, have her graphics ready. And that's just not the kind of lifestyle if we, we both wanted to have a big family, we wanted to have kids, you know, and it's not the best lifestyle to try and raise a family. And you need a full time overnight childcare person. And so we decided she would actually quit. And she said, yep, I'm just going to quit TV and we are going to open a company. And we had some friends in Augusta that owned a payroll company and it was an interesting business model. Payroll is easy to easy startup costs, low capital, low overhead. And we had friends that did it and they said, you know, we'll teach you how to do it. Just you can't do it here, you got to go somewhere else. So we moved to Charleston and opened a payroll company. And then Jenna actually kind of got it off the ground and hired the people and got the people in place. And that company did really, really well in Charleston. We wound up having hundreds of clients, small business clients, some that had as many as 800 or 1,000 employees. And then sometime around 2017, you know, when you get into entrepreneurship and you get into Business, you start seeing where the demand is in the market. You start seeing where the demand is and you start thinking like, well, heck, I could supply that demand and make some money doing that. And so you start to see these things. And that's why I tell people, like, if you're thinking about business, just take the plunge and just go with an idea and try it out and you're going to see things. You might not succeed in this idea, but you might find another area where you can, you can kind of see where the market's going. But, you know, I. Around 2017 or so, I was an ER doctor working full time. I was 1099, I think I was making out of residency. I was making around 420,000, you know, typical ER doctor kind of, kind of salary and paying 125ish thousand dollars in income taxes, pretty common. And then I started working some more shifts and I was making more money. And I finally met with an accountant friend who was just a buddy, and he was like, why don't you have an S Corp set up? And I was like, I had a couple tax preparers tell me it just wasn't worth it. He was like, well, look at your return. It's going to save you like $7,000 a year. It's like, well, you don't like money? I'm like, no, I do like money. And he's like, why don't you have a cash balance plan? I'm like, I've never heard of that. And he's trying to explain it and it's just like in one ear, out the other. Like, I don't know what this is. It sounds really complicated and expensive, but, you know, I kind of sat down and figured this stuff out and put it all in place. And next thing you know, making more money, I was paying half the tax bill and I figured out, oh, wow, when you're at 1099, you can pay a lot less in taxes using very vanilla stuff. Like you don't have to get crazy aggressive or do anything fancy. But it is kind of hard to set all this stuff up. And I kind of helped several other docs at my hospital in Charleston get their S Corps and cash balance plans. And 199, a deduction in 2017 had just come out, set that all up and they saved a bunch of money. And I realized, well, I shouldn't do this for free, right? If you're good at something, don't never do it for free. So I can start a business this way. And so at that Point. I was working with a really good tax attorney of a very stable firm and real whiz with taxes. And I was working with a good TPA third party administrator for my cash balance plan and they were really good. And I had a fiduciary SEC registered wealth manager, very familiar with pension plans and overfunding and underfunding and how to handle rates of return and that sort of stuff. And so I had kind of all the pieces in place and we owned a payroll company so you can have the S Corp payroll component. I said what if I just kind of combined all this together and made it like a one stop shop. So I can take a 1099 doc, a higher earning 1099 er and without charging them an arm and a leg, I can just set up their LLC and do their S election or even a retro S election if they need that. And then we can get their withholding accounts and handle their payroll and just do it as a single annual payroll. Simple. Set up their cash balance plan and get that done and have someone manage it for a robo advisor level fee and just kind of make it kind of like affordable and like easy and just flat price and just save a lot of money on taxes. And so that's what, that's what we did. That's what 1099 taxdoctor came out of. Kind of a joint venture of several different financial professionals that were all basically the people I use personally like to manage all my money until I can handle all my taxes. And I've seen the results and I know they're good people and so I can kind of just negotiate prices and kind of, you know, get a good deal and kind of make sure people aren't getting overcharged or ripped off. And so that's kind of what it, that's what it came out of.
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A
So when somebody wants to hire a 1099 tax doctor to help them lower their tax bill, do they talk to you? Who do they talk to?
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E
Yeah, I do a consultation. I kind of ask people, please go to our website, there's a little more information link. If you fill that out, it goes right to me and that gives me all the information to know if it would be a good fit. We typically take clients that make at least 100k of 1099. We don't really do taxes, so to speak. We don't just crank out tax returns. If someone needs that done and they're sufficiently complicated, I can refer them just directly to the cpa, the tax attorney that I work with. Of course, if you're straight W2, you don't need that. But for, for folks that have like a lot of 1099, yeah, they come right to me. I'll kind of go over everything, kind of explain everything, answer any questions, make sure it's a good fit. So yeah, I talk to everyone that signs up with this and we kind of focus on taking people that we kind of know we can save on taxes.
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A
And I've seen some of the, you know, some of the marketing material for 1099 tax doctor and you talk about saving people on average about $40,000 a year.
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E
Yeah, I mean it's obviously different for everybody, but you can look at it and say, well for the average doc, let's say you're to $600,000. That's kind of the sweet spot. A lot of my clients are ER doctors because that's typically the salary range. And you know, private equity is now in emergency medicine and a third of ER doctors are 1099s. But if you take a, you know an S corp is going to save you somewhere between 5 and $10,000 in self employment tax. You take a cash balance plan, you plop 100k into it, that right there is going to save you 30 to $40,000 in income tax. You optimize the 199A deduction by getting your adjusted gross below the limit using the cash balance plan. That's another deduction right there. So it's when you know how kind of how someone, how they make their money and how much they're making and how much 1099 they have. It's actually pretty straightforward to be like, yep, here S Corp Cash Balance Plan 199A. That's going to save you. Yeah, you know, ballpark X. It's a pretty simple thing to kind of look at and be like, yep, it's straightforward.
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A
Now obviously with the cash balance plan, that's tax deferred money. That's correct. You're in the end you're only going to save some fraction of that amount. But the rest of it, of course the 199A, that's yours to keep.
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E
Absolutely.
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A
So are the payroll savings, payroll tax savings, right? Yeah, absolutely. Okay, well, I'm not sure we recommend your pathway. Right. I don't know that we should be investing money where we told the government we're going to use for school on the promissory note or day trading. We're big fans of saving money on taxes and we've been talking about cash balance plans and S Corps and 199A deductions for a long, long time time here at the White Coat Investor. And a lot of people do, they just need someone to walk them through the process, through their specific situation. So that's pretty awesome. All right, well, a lot of people that hire tax strategists start hearing about, you know, interesting techniques. You know, I don't want to necessarily call them gray or borderline or whatever techniques, but there's lots of interesting tax saving techniques out there that sometimes end up being a little bit of an audit lottery. How does your firm feel about these sort of techniques? Whether they're land conservation easements or whether, you know, the one I got an email about today was somebody that was going to be doing some sort of an options technique to try to generate some losses, etc. Do you guys look into those? Do you help people with those? Do you advise against those? What's the thought for you guys?
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E
Not our bag. I don't advise it one way or the other. People have different levels of risk tolerance and so I would look at it that way. If you have, you know, if you have a high level of risk tolerance and it makes sense in your financial situation to try something like that, you know, go for it. Not our bag. Basically, I kind of really limit working with clients that kind of using, you know, things that carry a substantial majority opinion, let's put it that way. So you know, S Corp. For payroll taxes, tax deferred retirement plans, maximizing your 199A deduction. And then, you know, if you're making 4, 5, $600,000 just, just with that alone, you're getting your effective tax rate down close to single digits. I did it myself, you know, so you don't need to get anything crazy exotic. If you're making a million plus, you can still do what we're talking about and save, you know, a bunch of money, but probably not a good fit for our firm. We stay away from kind of stuff like that and just use kind of simple, proven strategies that are going to work for anyone that has a, you know, the same kind of financial situation.
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A
Very cool. Okay, so if someone wants to get in touch with 1099 taxdoctor, what's the easiest way to do that?
- [34:08]
E
Easiest way, just go right on the website, 1099 taxdoctor.com and there's a request, more info. You just fill that out, it's going to ask you a bunch of questions that allows me to see if, hey, would this be a good fit for our company? That does not put you, I swear it does not put you on any sort of mailing list. The only thing I'm using this for is I'll shoot you a text message and be like, hey, it's me. Really me. It's not a bot. Like, I looked at your stuff and like, hey, you'd be a good fit, I think. Let's schedule a time to talk.
- [34:33]
F
Very cool.
- [34:33]
A
Eric, thank you so much for your time for being willing to come on, for doing what you're doing for doctors.
- [34:38]
E
Thanks, Jim. Appreciate it.
- [34:40]
A
All right. Hope you enjoyed that interview. Hopefully that's helpful to you. You know, we obviously have conflicts when we want to introduce you to our sponsors, but we hope you're getting some valuable content out of those introductions as well. We're aiming to kill two birds with one stone there. Okay, let's talk a little bit about mygas, and many of you might not know what that is. It's one of the good annuities out there. But let's hear the question.
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B
Hi Jim, thanks to UNWCI for all that you do. Can you please discuss the pros and cons of mygas in depth and give any recommendations for companies that you would use and maximum amount you would consider investing? I've heard you mention them on the podcast and read about them in the blog, but wonder if I'm missing something. For instance, Gainbridge, I have zero personal interest in this company, I just happen to be looking at them, is currently offering a no fee, no commission, guaranteed 5 plus percent return and a no tax deferred option that can be taken out before 59 and a half. This seems better than most bond funds and CDs at least for the last decade. So why wouldn't I use a MYGA in lieu of a bond fund for diversity from stocks in a taxable account or for a retirement ladder? From what I can tell, there seem to be four main illiquidity from early withdrawal penalties, which is not that much different from any retirement account, inflation risk. But bonds have that too. Taxes, which is true of any taxable account, investment and loss of principal. But mygas are at least guaranteed by the state up to a point. And that's better than my taxable account. So other than these four risks, what am I missing and need to look for when vetting potential companies? Thank you.
- [36:08]
A
Okay, good question. Let's talk for just a minute about annuities. Okay. What is an annuity? An annuity is a financial instrument that's typically used to protect you from longevity risk, the risk of Living too long, risk of having more time than money. Running out of money before you run out of time. That's what an annuity is. But like cash value life insurance, there are so many different ways to structure these things that the vast majority of annuities are products designed to be sold, not bought. And if your first meeting with a financial planner, financial advisor of some kind involves a sale of an annuity, you are probably mistaking a financial salesperson for a financial advisor. So with that caveat in place, let's talk about some of the good annuities that you might find useful for various purposes in your life. The classic annuity is the SPIA Single Premium Immediate Annuity. You're giving an insurance company a lump sum of money in exchange for a promise to pay you every month for the rest of your life, no matter how long you live. Okay. You're essentially buying a pension from the insurance company. Okay. Single premium Immediate Annuity. The second type you might want to consider is what is called a deferral Deferred Income annuity, or a dia. And this is like true longevity insurance. This is an annuity you buy now, but it doesn't start paying you immediately. Those payments are deferred, and you could Defer them for five years, you could defer them for 20 years. Right. The longer you defer them, the bigger they are. So you might want to take some chunk of your money, buy one of these things, let's say at age 40 or age 65, and have it not start paying you until you're 85, if you're still alive. And if you're still alive, it's going to pay you a lot of money, far more money than an immediate annuity would pay you because it has to start paying out immediately. So it's essentially gives you permission to spend the rest of your money as you go throughout your retirement. But because if you live a long time, you've got this thing that starts kicking in at age 85 or 90 or 95 or whenever you want that's going to take care of you after that. So some people find that an attractive annuity to buy. Obviously, there's all kinds of different versions of that that you buy at different times in your life that start paying out at other times of your life. But it's something worth looking into. You might have heard of a qlac, a Qualified Longevity Annuity Contract. That's just a DIA inside a retirement account. That's all that is. QLAC is a dia. All right, which brings us to the third kind of reasonable annuity to buy, which is a multi year guaranteed annuity or a myga. This is what the question was about was how to buy mygas, should I buy MyGas, etc. And the way to think of a MYGA is as the insurance industry's answer to certificates of deposit CDs sold by banks, right? You pick the term, you put the money in, the insurance company pays you a guaranteed income as you go along and you get your principal back at the end of the term. That's a Myga, okay? The CDs are backed by the bank and the FDIC. Mygas are backed by the insurance company and maybe a state guarantee fund, which of course is generally considered inferior to the fdic. So maybe a CD is a little bit safer than a myga, but mygas are pretty safe investments, especially if you don't buy them in larger amounts than your state guarantee fund will back. But it has a couple of advantages over a cd, right? With the cd, interest is paid out and taxed as you go along. Okay? MYGA interest can be paid out in tax or you can just let it compound inside the annuity. At the end of the term, a CD is the money's given back to you. But one thing you can do with a MYGA is you can exchange it into another myga, further deferring taxation. So in this respect, it's growing in a tax protected way, similar to a 529 or an HSA or a retirement account, right? As it grows tax protected, that means it grows a little bit faster. Now, if you bought this with taxable money, not in some sort of a retirement account, you had to use after tax money to buy it. It's not as good as using a Roth IRA or using a 401k, but it's similar to using a non deductible IRA, right, in that respect. But it does help boost the return a little bit, especially if you exchange these exchanges, exchange these as the terms come up until you're at the point in life when you actually want to start spending that income. So that's the advantage. Now, given that advantage of a MYGA over a cd, you'd expect them to pay lower yields, right? Well, that's not always the case, especially for longer time periods when you're getting to five, seven, ten years, that sort of thing. When I wrote a post about it, and this was a few years ago, this was in like 2021, when rates were really low, I saw that you could buy CDs that were paying 0.67 for one year. And the equivalent Myga was only paying 0.1%. But as you got to five years, that CD was only paying 1% and the Myga was paying 3.1. So a lot of times for these longer time periods, the MYGA actually pays a higher rate than the CD would. Now another alternative might be buying a bond. Let's say I know I don't want the money for five years, so I'm just going to buy a five year treasury bond. Well, the problem is every month that treasury bond pays you interest. You got to pay taxes on that just like the cd, and then the money is returned to you in five years. You can't defer it like you can a MYGA by exchanging from one MYGA to another or just having the interest stay inside the MYGA and be reinvested. So that's the downside of using a cd, the downside of using a Treasury bond, et cetera, for that particular purpose. So that's the benefit of myga. So what's the downside? Well, you got to deal with an annuity salesperson. That's a downside in my view. I don't really like talking to those guys because they usually try to sell me something else, something with more bells and whistles and a higher profit margin. And there's a lot of annuities out there and most of them are designed to be sold, have all kinds of bells and whistles and have high profit margins. But that doesn't mean if you're willing to be a careful consumer, you can't just buy the good ones. Right? Most mutual funds are crappy too. If you don't know how to pick a low cost, broadly diversified index fund, you could end up with a 1% plus a year expense ratio on some crappy actively managed mutual fund. And lots of us have 401s that are filled with those kinds of funds. So if you pay attention and only buy the good ones, there's a good chance you can do better with it than you can with a CD or even a Treasury bond. Now one thing you can't do with a myga, at least I haven't seen one yet. Someone will write in, I'm sure, if one's been invented. But you can't really get insurance protect or not insurance inflation protection with it, right? One thing you could do is you could buy a 5 or 10 or a 30 year tips, a treasury inflation protected security, or you get similar inflation protection in a US Government I savings bond. You can't do that with a myga. You're not going to get insurance or inflation protection. So it shares that downside with the CD or typical treasury bond. But it's possible that, yes, you can get a higher yield and it's possible that yes, you can have some tax savings in the long term using these MyGas instead of a CD or that sort of thing. Now, should you be buying them instead of stocks or real estate? No, this is kind of a bond equivalent. So you should be buying this in place of money you would have in a money market fund, the money you would have in a cd, money you would have in a Treasury bond, that sort of a thing. That's what it's replacing in your portfolio, maybe a bond fund as well, that sort of thing. Although they act a little bit differently, I would expect fairly similar returns out of all of those products in the long run. The fourth kind of annuity that's sometimes reasonable buy is a variable annuity. Most variable annuities are terrible, but a low cost one does have a place for some people. Typically it's when they realize they bought a whole life insurance they shouldn't have and they're way underwater on it. If you exchange the cash value in that policy into a low cost variable annuity, you can let it grow back to your basis, the amount of the payments you made and that insurance policy and that growth back to basis is totally tax free. So it might be worth paying a little bit of extra cost like you would in that low cost variable annuity in order to get that tax free growth and then you can cancel the annuity and walk away from it. So some people do that with variable annuities. Maybe if you have a very tax inefficient asset class and you can't put it into a retirement account, but you have to invest in it, maybe you could use that in a low cost variable annuity to come out ahead. But most of the time those are investments that are probably better avoided, designed to be sold rather than bought. There's all kinds of annuities out there that really aren't that reasonable. You probably shouldn't be buying. This includes most variable annuities, fixed index annuities, and any sort of complex annuity. Avoid those sorts of things. But Mygas is totally reasonable. Now, have I bought any MyGas? No. Have I been out shopping for them? No. And so I can't tell you that this company you mentioned is any better than any other company at offering them. But if I were going to buy one, if I was going to put substantial money into one like it sounds like you were going to. I would do that research and I would look at a few things. I would look at how stable the insurance company is. Is it likely to be able to keep its promise to keep and fulfill its contract. Right. What is the financial stability of this company? I would look at the yield. I would compare it to alternatives for my particular use. I'd be looking at buying treasury bonds. I'd be looking at a money market fund. I would be looking at CDs. Is it really going to pay me enough more that it's worth it to me to deal with the hassles of the annuities? Because it's pretty darn easy to put your money into a money market fund compared to buying a myga. And if the answer is yes, then knock yourself out. Go buy a myga. Totally reasonable. There's a fair number of people on the Bogleheads forum. They tend to be relatively conservative investors who are into MyGas. If you search MyGas, my G A on that forum, you'll see lots of discussion about it and get connected to the best deals at the current time period as far as mygas go. Okay, let's take another question. Different topic.
- [47:29]
F
Hi Jim, thanks for your work as always. This is Dr. B. A surgeon in the Northeast. I have a unique question I'm hoping you can offer some help with. I sit on the board of a upscale community, about 100 homeowners within it, and we have a private road network that's about 4 miles that needs to be replaced every 15 to 25 years. Our most recent estimates show that we should plan on a budget of three and a half to $4 million in about 20 years to replace the roads the next time they need it. Historically, the majority of our HOA dues are placed into this road cost sharing fund, though we have an annual budget that provides for some other landscaping and snow removal as well. The investment plan for this road cost fund has traditionally been in mostly cash and bond assets, but my question for you is with the investment timeline and location of assets within an hoa, is it legal and also recommended to have a certain portion of this fund in other asset classes like stocks? This seems to be a little bit outside of the typical descriptions of investors in your Recommended Advisor page, so any help is greatly appreciated. Thanks so much. Our next HOA meeting is March 8th.
- [48:57]
A
Well, I want you to know that I'm recording this question, this answer this question on March 23rd, but I don't think you're going to hear it before March 8, I think. This podcast is scheduled to drop on April 2, so I'm real sorry about that, but there is a lag time between getting these Speak Pipe questions and getting them answered on the podcast. We just don't record podcasts the day before they drop. I'm far too busy, you know, seeing patients in the ER and going skiing and traveling and doing other stuff to run that stuff out at the last minute. So if you have very time limited questions, you're far better off posting them in our communities. The White Coat Investor Forum, the White Coat Investors Subreddit, White Coat Investors Facebook Group, the Financially Empowered Women's Group, or shoot me an email@editorwhitecoatinvestor.com if you've got a time crunch on your question. We might still answer it on the podcast later. But if you record a speak by pushing, chances are you're probably not hearing the answer in the time period that you need it. Okay, so your HOA is essentially an institutional investor might not have that much money. Maybe we're only talking about a few tens of thousands or hundreds of thousands, maybe a few million dollars. This isn't exactly Harvard or Yale or some huge church or something like that. But you've got an expense coming, you know, more or less when it's coming. And you know, so if you're in year two of 20 with these roads, it seems reasonable to take on some risk, right? You could probably even take on some illiquidity and hopefully grow that money so the HOA dues don't have to be as high as they otherwise would have to be because your money's doing some of the heavy lifting. But I'll tell you, there are people in your community that are not as comfortable with investing risk as you might be. And when they find out that you invested 60% or 90% of the HOA money into the stock market and then the market dropped 40%, or maybe it had a lost decade like the 2000s in the US stock market where it barely had any sort of a positive return, they might not be very happy with you. And so lots of institutional investors, and I suspect lots of organizations like hoas and school districts and those sorts of things tend to invest very conservatively. They keep a lot of it in cash, maybe a little bit of treasury bonds, and because of that they end up having to pay more money for the stuff they buy on average. But they don't have to answer to taxpayers. They don't have to answer to HOA members when the investments do poorly. So you're having this meeting and presumably maybe you're going to volunteer to be on the investment committee. And there probably needs to be a committee of people making these decisions so it's easier to defend yourself when the inevitable pitchforks and torches come out after a market downturn in year seven of these 20 years and again in year 14 of these 20 years and the money takes this huge hit. But what I would advocate for if I was on that committee is a balanced approach. Maybe for the first 10 years you can have a 60, 40 portfolio. Maybe for the last 10 years you can have a 4060 portfolio. And then when you go, okay, we're going to buy this a year from now, we're going to buy this two years from now, we're going to redo all the roads, let's move it into a money market fund so we don't have to worry about volatility. That seems like a reasonable way to approach it to me. I think I could defend that, in fact, front of a crowd full of people with torches and pitchforks. But whether your investment committee can or not, I'm not sure. Now, would I recommend you volunteer to be on this committee? Maybe not. You might be the savviest person in the whole community, though, so might be a big benefit to the community if you were on it. But bear in mind that there is some not only reputational risk there for you. You know, now maybe nobody in the community is going to choose you as their surgeon because they think you're not very smart or, you know, there's also some financial risk there. Typically an organization like this would choose, would choose to purchase some errors and omission insurance of some kind to protect you as a board member, as an investment committee member from those sorts of lawsuits as a personal person. But be aware that that would be a risk. Hope that's helpful for you. As I mentioned at the beginning of the podcast, SOFI could help medical residents like you save thousands of dollars with exclusive rates and flexible terms for refinancing your student loans. Visit sofi.comwhitecodeinvestor to see all the promotions and offers they've got waiting for you. One more time, that's sofi.com whitecoatinvestor SoFi student loans are originated by SOFI bank and a member FDIC. Additional terms and conditions apply and MLS 696891 all right, don't forget about our real estate opportunities list. If you go to whitecoatinvestor.com reopportunities. You can sign up for that and what do you get? You get some real estate specific education. You get introductions to our partners that help you to invest in real estate. And if this is a significant part of your portfolio or something you're interested in maybe adding to your portfolio, it's totally free and you can unsubscribe at any time. You can also just go to whitecoatinvestor.com to our newsletter link at the top in the menus and sign up for that or add that to your current WhiteCodeInvestor.com subscription list, but the direct link is WhiteCodeInvestor.com re opportunities thanks for leaving us 5 star reviews thank you for telling friends about the podcast. This recent one comes in from Econo PNW said 10x my retirement. Thanks to Dr. Dali and the entire team at WCI for the useful, helpful and inspiring advice. Divorced with a small nest egg of $300,000 at age 50, I now 13 years later have 3 million and can retire anytime I wish, travel, donate to good causes and know my future is secure. The pitch of the podcast is perfect. From basic to technical to downright geeky material. I've benefited greatly from your counsel. Sorry I'm too shy to sign up for Milestones to Millionaire. Thanks again. Five stars. Wow. What a nice review. Thanks for sharing that and congratulations on your success. That's awesome. You know, so many people think that a financial setback is forever and you've shown that it's not. All right, everybody. Keep your head up, 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 White Coat Investor Podcast is for your entertainment and information only and should
- [55:47]
B
not be considered financial, legal, tax or investment advice.
- [55:51]
A
Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for
- [55:57]
B
specific advice relating to your situation.