← White Coat Investor Podcast
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This is the White Coat Investor Podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011. This is White Coat Investor Podcast. This episode is brought to you by SoFi. Helping medical professionals like US bank borrow and invest to achieve financial wellness. SoFi offers up to 4.6% APY on their savings accounts as well as an investment platform, financial planning and student loan refinancing featuring an exclusive rate discount for med professionals and $100 a month payments for residents. Check out all that Sofi offers@whitecoatinvestor.com SoFi loans originated by SoFi Bank NA NMLS 696891 advisory services by SoFi Wealth LLC. The brokerage product is offered by SoFi Securities LLC, member of FINRA SIPC Investing comes with risk, including risk of loss. Additional terms and conditions may apply. Thanks so much for what you do out there. It is wonderful work you do. By the time this podcast drops, we are nearly at the end of the medical year. So many of you are about to make an exciting transition. I'm super excited for you. You're gonna become an intern, you're gonna become a PGY2 or a senior resident, or a chief resident or a fellow, or you're gonna become an attending for the first time. It's exciting. Congratulations on where you're at. You have worked very hard. You should be proud of yourself. And we, and not only as the White Coat Investor community, but as society, are proud of what you've done. We're thankful for what you've done. And we recognize that it's entirely possible that we will need your abilities, your knowledge, all this. That you have spent a great deal of time and effort and heartache and taken risk in order to do. We may need you and someone will need you. And that someone might be each of us individually. So thank you for taking the time to dedicate yourself toward that wonderful thing that medicine is. The longer I do this, especially after becoming financially independent, the more beautiful it becomes, the more of a privilege it feels like it is. At this point, I'd probably practice medicine as much as I'm doing, completely for free. And it's an incredible thing. Is it a calling? Some of it is for most of us. It's interesting. I do some surveys of physician groups all the time and ask them if I wrote you a check for more money than you'd ever spend in your Life. You know, $10 million $20 million, whatever it is, what would you do tomorrow? And a third of them would say, I wouldn't show up at work, they're done. If they had the money, they'd be done. But you know what? 55%, and this has been reproduced multiple times when I've asked this question anonymously, 55% say I just cut back someone, right? I'd take Wednesdays off and go golfing, or I would stop taking as much call, or I wouldn't do this procedure, I really don't like doing. Or, you know, I'd stop working night shifts, that sort of a thing. And then the rest of them, you know, 8 or 10% say they'd make no changes at all. I think a lot of those people are already working part time, quite honestly. But you know, it's interesting that a certain amount of your motivation to practice medicine or dentistry or whatever your profession might be is you feel called to do it. And as I consider, well, should I leave medicine, I'm able to leave medicine, should I leave medicine? That part of it speaks to me all the time. So thank you for doing that. And it really does make a difference in the lives of a lot of people. We'd love to have you speak at the next Physician Wellness and Financial Literacy conference or or WCICON27. This next one is in Orlando at the Rose and Shingle Creek, February 24th to 27th, 2027. If you want to speak, you have to apply before June 15. But the cool thing about this experience is you don't just speak, you experience WCICON with your full registration included, right? Not only do we pay you something to come out and speak, we pay for you to come out and you get to experience the conference. And we want you to experience the conference and be of the conference. One of the things the guests and the speakers love about it is the possibility of interacting with the people who've been teaching with the faculty for the conference over the course of the conference. And so expect to have lots of informal conversations about what you did and to be able to hold court in the hallway afterward with all kinds of people fascinated by your niche knowledge. So come and be a part of that three day experience. You'll have the opportunity to make a difference in the lives of literally thousands of physicians and their families. We're continually looking for unique and varied content about finances and personal wellness. Speaking, of course, is a competitive thing here. Not you don't compete with other people once you get there, but it's competitive as to whether you're actually invited to speak. We do have a lot of people that apply and we want the very best speakers we can get. So be aware of that. But in order to apply to be a speaker, you should go to wcievents.com and right at the top, you'll see a link apply to speak, and that's where you do it. If you really want to come, I would suggest you apply for more than one talk. And we might not need your first idea, but your second idea might be exactly what we need at the conference. Thanks so much for being willing to apply for that. And for those of you who have spoken in the past, we're so grateful. You have taught us so much and helped us to have better careers and better financial situations than we have now. Okay, let's get into you. Let's start getting into your questions here. We got a few other things I need to tell you about. I'll do it later in the podcast. This one's a little bit of a correction, clarification, maybe even a bit of a debate. I had a fellow by the name of John write in after a podcast. I don't even know which podcast it was that I recorded, but he said you had a call about an S Corp and running payroll at the end of the year. And he is an accountant who pointed out that maybe that's not a great idea to just run your S Corp payroll once a year. And so we went back and forth for three or four emails arguing back and forth about this particular topic, and by the end, he had mostly convinced me that he was right, that you probably shouldn't run your S Corp payroll just once a year. And the reason for that is because there are some requirements out there that are admittedly vague. And so what you got to recognize, though, is there are some rules about how often you have to run payroll, right? Clearly, an S Corp needs to run payroll at least once a year. No doubt about that. If you are taking an S corp and you are paying your entire, you know, income from that S corp out as a distribution, not salary, that's not okay, right? You got to pay yourself a salary as an owner employee greater than 2% owner of an S corp. Guess what? You got to pay yourself a salary. And the irs, almost everything they write about this is all about saying you have to pay yourself a fair salary. Because the temptation when you have an S Corp is to minimize your salary and make as much of the profit as much of the income from this business. Make it distribution because you save on payroll taxes, right? You save on the Medicare taxes, and if the income's low enough from it, you might even save on Social Security taxes as well. And when you're paying both halves of those because you're the employer and the employee, that's like 15%. So if you can get out of paying that 15%, well, you get to keep more of your money instead of paying in taxes. So the temptation is always to pay yourself less salary. So everything the IRS writes about this is talking about, no, you have to pay yourself the going rate for what you'd have to pay somebody else to do this work for. And basically telling people they can't say, my salary for full time doctoring is $10,000 a year, you can't do that. And the IRS is very careful to point out that just the 5050 rule, where 50% of what you generate is salary and 50% is distribution, is not okay. Just setting your salary at the upper limit of the Social Security wage limit, I think it's about $180,000 in 2026. Something around there is not okay. Right. It has to be a reasonable salary for the amount of work and your expertise that you're doing. And so that's what most of what the IRS spends their time and effort. And I think the very rare times when they actually audit S Corps, I think that's the sort of thing they're looking at. They're not super focused on how often you ran payroll.
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Right.
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But it's interesting when you actually read the regulations, the IRS does say you're supposed to pay the wages before you make a distribution. So I guess if you're only making one distribution a year the last week of December, you could run payroll once a year, and that's probably okay, you could justify that. But the truth is, most of us with S Corps are taking distributions more often than once a year. It would be unusual to not at least be taking distribution quarterly. And I suspect most people are doing it monthly. Well, if you're taking distribution monthly, you probably ought to be running payroll monthly. Now, having done payroll by hand with White Coat Investor as an S Corp, it's actually an LLC filing. As an S Corp, I've done payroll. I know exactly how to do payroll. I did it by hand and I didn't want to do it very often. I actually think we did it quarterly. I think when I was doing it by hand, I was doing it quarterly. And it's not that big a deal. It's a form or two. If you're really into this personal finance Stuff you could probably do that. But most people are going to hire somebody to help them run payroll with their S Corp. The cost for that's probably something like $50 to $100 a month is what it's going to cost to hire someone to do a payroll service. And the more employees you have, the more complex it gets and the more worthwhile it probably is to hire that out. But that was the bottom line of this discussion that John and I had by email over a week or so. And he pointed out something else. He said if S Corp earners start running their payroll solely on 1231 of each year, they may also have an issue with preparers agreeing to accept them as clients. So it's not just keeping the IRS happy, but you also got to keep your CPA happy. Right? And if they're like, no, if you're going to do this squirrely stuff, I'm not going to be your cpa. And now you're having trouble finding somebody to do your corporation taxes. And I know most of you are not going to do your own corporate income tax. A few of you are going to try it. And I did it for a few years. It is possible to do. And I was mostly successful doing it as well. I wasn't making any big mistakes or anything like that. But be aware that your accountant may have a problem with you doing that, might not be willing to be your accountant because they're worried they're going to get in trouble with the IRS, even though the S Corp audit rate is like 0.1% a year. Something between 0.1% and 0.2%. Right. So that's like 1 out of 500 to 1000 S Corp tax returns gets audited. You're just very unlikely to get audited with an S Corp. It's also if you want to go back and run payroll, John pointed out it's very difficult to find a payroll provider who will run a back payroll from a prior year. So that could be an issue as well. You got to run payroll at least once a year, probably at least quarterly. And for a lot of you, frankly, you ought to be doing it monthly, which means you're probably hiring that out. I invited John to write a guest post on the topic. We'll see if he does. I don't know if he's going to, but the regulations do say that you're required to be compensated as the owner employee with reasonable wages. And that has to be done before making distributions. And of course that deductible compensation must directly correspond to services provided. So if you did all the work in January and February, but you paid all the wages in December, that's probably not okay either. You're almost surely not going to get caught given how rarely S Corps are audited, but that is the right way to do it. Okay, next topic. Let's oh, we got to do the quote of the day. This is from Samuel Johnson who said every man is rich or poor according to the proportions between his desires and his enjoyments. Not income and spending, but between your desires and your enjoyments. So if what you want is making you happy, that's going to make you feel pretty rich. Okay, let's talk about reverse mortgages for a minute. Here's a call on the Speak pipe from Reverse Mortgages about Reverse Mortgages Hey
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Jim, this is Scott in Colorado. I'd like to talk about a subject that we haven't discussed much on this podcast in the past. My mom currently has a reverse mortgage and I'd like to figure out what to do with it long term. She bought the house back in the 80s for $85,000 and has a present market value of about $450,000. This has been her principal residence the entire time. A few years ago she got a reverse mortgage when the principal value was $188,000 and since then it's accumulated $133,000 worth of interest, leaving us with a current bill of $323,000 if we were to start to pay off the loan again. My mom has had some health problems and I don't expect that she'll be living in the house long term and we may need to seek specialized care before then. So I'm trying to figure out what to do with the house in the long term. It's a good value in a good neighborhood even though the value has been declining for the last couple of years. I wouldn't mind being a long distance landlord, but I understand that we won't get a step up a basis if she has to move for other health related reasons. Just looking to get your thoughts.
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Thanks. Bye. Okay, let's dive into reverse mortgages. Reverse mortgages are on that list of financial products you hope you never need. Maybe you throw it on the list with whole life insurance. Maybe you throw it on the list with long term care insurance. There's all kinds of things that you hope you never need or want or don't even want to have to consider. And the problem is reverse mortgages in a lot of ways are product designed to be Sold. Like the vast majority of the annuities out there, there's reasons to buy an annuity. Maybe you're buying a multi year guaranteed annuity, essentially the insurance industry's equivalent of a cd. Or you're buying a single premium immediate annuity, essentially buying a pension from an insurance company. Or you want some longevity insurance. Say you buy a delayed inc. Annuity of some kind, right? There are annuities you can buy, but most of them, they put a bunch of bells and whistles on them and the product's designed to be sold. Well, that's the same thing with reverse mortgages. Products designed to be sold, not bought. Because the vast majority of financially savvy people don't get reverse mortgages because the fees tend to be high. The deal's often not that good for the person getting it. But are there uses for it? Sure. What is a reverse mortgage? Well, a reverse mortgage is when you own a home and you're essentially house poor, right? Most of your net worth is in your home. For whatever reason. You were able to buy a home years ago and you were able to get it paid off or almost paid off or significantly paid down or whatever. But you never acquired a whole lot of other wealth or you ended up having your expenses go through the roof maybe due to long term care issues, and used up all your money and really all you have left, or almost all you have left is that home equity and you got some life left and you're like, well, maybe I can't leave this great inheritance to my kids because I need the money, but the money I have is home equity. Well, how can I get that? Well, you have a lot of options, right? You can sell the house. There might be some capital gains taxes associated with it. Often not for people that need a reverse mortgage, but you could. Especially since that exemption on those capital gains is not really adjusted for inflation. It certainly hasn't been adjusted for the housing crisis the last five or ten years. So you could owe capital gains. That'd be a downside of selling. Plus it's a hassle to sell. You got to pay the realtor. Typically 6% ish is what you lose of the value of the house when you sell it. That's going to the realtor selling it. There's other closing costs. The total cost to get out might be closer to 10% and so you lose some value there and it's a hassle and you got to find a buyer and you might have to put some money into it to fix it up so somebody will actually buy it for a reasonable price. Well, the beautiful thing about a reverse mortgage compared to that. Well, there's other options too. You can just take out a home equity loan, for instance, right. And you can pledge the home and basically take out home equity line of credit and you can spend that for a while. You could also have a family member, you know, get some sort of a situation with a family member that's going to inherit the house and say, hey, you know, I need some money. All I've got is a house. I know you're planning to inherit this house. If you'll support me for, you know, the years I've got left, a year or two or three or whatever, then you get the house. And that can work out really well. But if none of those solutions work and you really need the money, you might consider a reverse mortgage. And they typically, you know, every product's a little bit unique, but typically the way they work is that you get paid. Instead of paying on your mortgage, you're getting paid. That's why it's a reverse mortgage, right? You're getting paid. And so that's cool, right? They're basically distributing your home equity to you some so much every month, or it could even work as a line of credit that you could take more out or less out over time. And you're basically spending down an amount they give you. Okay. And then when you die, you know, this is a classic reverse mortgage. They can put some bells and whistles and other features on it. When you die, the mortgage company gets the house. That's it. So you were guaranteed never to run out of money while you lived in the house when you die or you have to be moved into a permanent long term care kind of situation, nursing home or whatever, they get the house. So obviously there can be times when this does not work out very well financially for you. Yes, you had that guarantee that you could stay in your house as long as you were able to, you wouldn't run out of money. But a great deal of the time, the majority of the time, that company offering the reverse mortgage is coming out ahead financially on this deal. So I'd encourage you to look at some of those other solutions including selling the house and renting, you know, selling the house, putting the money in an immediate annuity and then using that to pay rent. You know, there's lot just so many other options that I would consider those before buying a reverse mortgage. All right, that's my spiel on reverse mortgages. Lots of fees, lots of shady characters in the. In that sales industry, lots of deals that aren't that great, you really have to shop around if you're sure this is what you need. And the problem is that people that need versus mortgages tend to be not that good at shopping for financial products. And so they often end up buying something maybe they shouldn't have. And maybe that's the case with your family member in this situation. But that's not what you're asking. You're not asking whether she should get a reverse mortgage. This reverse mortgage was already bought years ago. She's already gotten some benefits from it, and now you're trying to decide what to do about it. At this point, well, you can just let it play out the way she expected it to, which is that the mortgage company gets the home when she has to move into a SNF or whatever. And you can just let that play out. It's fine. That was the whole point. At some point, she made a conscious decision that that's what she was going to do. And this is one where maybe there's some cash that she gets back or something. That's what she chose. Another option is often to pay off the loan. Right when she took this thing out, it was worth less than $200,000. Now she. She would have to pay off $320,000 to get this, whatever it was, $450,000 home that may or may not be worth it. You just got to run the numbers. You got to look at it and go, okay, we get to keep it. If we put this much in and you might say that actually makes sense, I can get a $450,000 house. It's only going to cost me $320,000. That might make a lot of sense. That's a great deal for you, even if you turned around and sold it the next day. Because if it only costs you 10% to sell it, it's $450,000. That's $400,000. If you got it for only $330,000, well, that's $70,000 in profit. So you could sell it. You could also rent it out as an income property, if that makes sense. To do so, you got to ask yourself, though, of all the properties in the country, why would I buy this one as an income property? It's not in your state. You haven't evaluated it as an income property. It doesn't make sense. By its cap rate and potential rent and potential future return, it probably doesn't make sense to do that. You're just going Wow. I can get the good deal on this house, so maybe I'll buy it. I mean, if you want to be a landlord, fine. If you can find a good property management in that state, fine. Right. This could be the start of your rental property empire, but it sounds a lot more like a kind of accidental landlord situation. And people often regret that that often doesn't work out nearly as well as a very intentional focus on buying properties as income properties from the very beginning. So run the numbers. Maybe it makes sense to buy and then just sell it. Or maybe it makes, you know, pay off the mortgage and then sell it. Or maybe it makes sense to incorporate this into your rental property empire, but try to be intentional about that. If you need more help deciding if you want to get into direct real estate investing, I encourage you to take our no hype real estate investing course. It's relatively inexpensive compared to what you're talking about buying a rental property, especially these days, and that'll help you get the knowledge to decide if that's something you want to do and how you might go about doing it. But I think you just got to get the numbers right. What's it going to take to be clear for the home to be free and clear of this mortgage and does it make sense for you to pay it off or should you just let what was going to happen happen, which is that the company gets the home when she moves out of it. So I hope that's helpful to give you a framework to think about your decision. Okay, next question comes in by email titled refinancing a mortgage as a resident. Okay, that's interesting. The emailer says appreciate you continuing to take time read through listeners questions. My name is. Well, we'll leave that out. I'm a PGY3 Ortho resident. I'll leave out where I have a question about if it's worth refinancing my mortgage when we're roughly two and a half years away from graduating residency. We purchased our home in 23 with a physician loan. With 0% down it was $245,000. Interest rate was 6.125%. My spouse had a credit score around 750. Mine was around 700. Just limited credit until graduating from medical school. We've increased our score substantially since then. Spouse is 800 plus the docs is in the 760s. We have a lot more collateral in our name. Combined incomes are now $110,000. We got serious about our savings, had some small financial windfalls with an early inheritance and have about $25,000 in our emergency fund and $34,000 in our retirement accounts. And we feel like we've taken a big step up in our financial stability since our original purchase. Is there an advantage now to refinancing our home to a better interest rate? And how would you go about this? Is it worth the hassle with such a short lifespan left for when we'll be living in the home? And will the lender even entertain the thought of refinancing when they do not stand to gain anything from the deal and in fact will lose out on it? Okay, let's talk about refinancing in general. Let's talk about buying homes in residency. Let's talk about refinancing. Okay, first of all, be aware that my general advice to people in residency and fellowship, etc. Is that renting ought to be the default option. And the reason for that is that it typically requires you to be in a home for three to five plus years to come out financially on owning instead of renting. And the reason why is because the home needs to appreciate enough to overcome the transaction costs of buying the home and selling the home, right? Everyone talks about, oh, you're throwing money away when you're renting. That's not true. You're exchanging money for a place to live. And if it feels like you're throwing money away when you pay rent, I assure you you're also throwing money away when you pay mortgage interest, when you pay property taxes, when you pay realtor fees, when you replace a water heater. That feels like throwing money away too, just as much. So you're throwing money away either way, whether you own or whether you rent. So be aware of that. And it just takes time for the house to appreciate, right? Typically, on average, it's going to take about five years for a home to appreciate enough that owning it made more sense than renting. And obviously there's time periods when you don't have to own it. Five years to come out ahead, right? In a really hot real estate market, you might come out ahead after two years. That's possible, right? And in a really bad market, if you bought a home like I did in 2006, you might still be selling at a loss nine years later, you know, much less getting enough appreciation to overcome the transaction cost. I still lost money nine years later when I sold that property. So it can go either way. But you know, historically, at five years, it's about a 50, 50 proposition. You'll make money half the time you'll lose money half the time. Just be aware that selling it for a little higher price than you bought it for three years earlier or five years earlier when you started your residency does not mean you came out ahead. You got to include all the costs that went into it, not to mention the hassle of your time. It's just more hassle to be a homeowner than it is to be a renter. Now obviously some people have come out ahead, especially the last few years during the housing crisis when homes went through the roof. But if your crystal ball is cloudy like mine, you don't know what housing is going to do for the next three to five years. You ought to be pretty hesitant to buy a house that you're only going to be in for a few years. I still have a very hard time talking residents out of buying homes. Right. People just want to do it. They have this pent up desire. They feel like that's the American dream. Even though that's probably messaging from the mortgage industry and the realtor industry. And especially if they have a spouse or partner that's been hanging on for four years of undergrad and four years of medical school. And maybe it's a little hard to find what they want to live in to rent. Although you can rent homes with backyards, with fences for your dog, doesn't mean you have to live in an apartment just cause you're renting. But people are still gonna buy. I can't talk you out of it. I understand that. And the good news is, even when you lose money, which is probably 2/3 of the time in a three year residency and half the time in a five year residency, even when you lose money, you can usually make up for it. Because what happens when you leave residency? You get a huge raise, right? Your income goes up 3x4x5x8x when you come out of residency. And so you can afford that financial mistake even if you lost $20,000, who cares? Somebody's dropping $30,000 off into your checking account every month going forward. So you can afford to make that mistake. So if you really want to buy, knock yourself out, right? I'm not going to die on this hill. But be aware that it's probably not the ideal financial move and you'll probably be better off delaying a little bit. You should probably delay even for a little bit after becoming an attending. Especially if you're changing towns, right? You're going from the town you did your fellowship in to the town you're going to be an attending in. You don't know the neighborhoods, you don't know the schools. Swooping in for three days and buying a house is a good way to not get a great deal on a house and maybe feel like you have to move after a few more years. You're probably better off renting for another six to 12 months once you get there. Figuring out what you really want, what you can really afford, what your financial goals really are, which neighborhoods you really want to be in, which school districts you really want to be in, and then buying. Yes, you'll have to move twice. That's a downside. And there's some expense and opportunity cost there, but I think it's probably worth it. Consider it anyway. That's all I'm asking. Consider renting during residency. Consider renting for 6 to 12 months when you change towns, when you become an attending. And I think you won't regret it the vast majority of the time. Okay, but that's not what the question. This stock's already bought a house and it's an orthoresidency, so it's five years. So, you know, 50, 50 chance of coming out ahead there. Fine. He wants to know, should he refinance? Well, the classic refinancing calculation is are you going to recoup the cost of the refinance in lower interest payments between now and when you get out of the home or when you refinance it Again, that's the classic calculation. And it's hard to do in just two and a half years because you're only getting saved interest for two and a half years. So if the cost of refinancing is $5,000 and you're only saving 50 bucks in interest a month or 100 bucks in interest a month, well, two and a half years, that's 30 months. So $3,000 in saved interest, it cost you $5,000 to refinance, not including the value of your time. That's probably not worth it. Right? That's the classic calculation. But there is a possibility you can do a no cost refinance. What is that? Well, that's when the lender pays all the closing costs. Note that that is different from a no cash refinance. A no cash refinance, they just put those closing costs into the loan. They tack them onto the size of your loan. I'm talking about a no cost, true, no cost refinance when they're paying everything. And if you can get a no cost refinance for a lower interest rate, then the break even is one month. Right. Because it cost you nothing. You paid less in interest that month and then you sell a month later. It's fine. You saved a hundred bucks in interest, you came out 100 bucks ahead. And so that is an option for short time periods. If you're considering refinancing and if rates drop dramatically, you can usually do that. If rates have gone down 1%, 2%, 3%, or whatever since you bought, you can often do a no cost refinance. That makes sense, even if you're only going to be in there for a year. But if you're paying something for it, it's a lot harder. There's a rule of thumb out there saying if you can get a rate that's 1% lower, it's worth it. But really you just got to run the numbers because it's dependent on the difference in interest rates. It's dependent on how long you're going to be in the home. It's dependent on how much money you got to bring to the table to refinance. Do be careful of something I ran into when I tried to refinance the home we shouldn't have bought during medical school. We refinanced it twice. And at least one of the times, maybe both of the times, the lender tried to slip in a penalty, a prepayment penalty. We knew we were only going to be in that home another couple of years because I was going to graduate from medical school and go somewhere else for residency. We knew we weren't going to be in there long term. And having a prepayment penalty was stupid. And I wouldn't have even found it if I hadn't read the mortgage paperwork very carefully and noticed that that box was checked that showed there would be a prepayment penalty. So be careful of that. If there's a prepayment penalty, it almost surely is not worth it. You almost never want a mortgage with any sort of a prepayment penalty on it, especially for a personal house that you're buying or a condo or whatever. So don't do that anyway. So could this make sense to refinance now that you're in a little better financial situation? Maybe now that rates went down a little bit, could you do better than 6.125%? Maybe you'd get 5.5%. If you get that as a no cost mortgage, I think that's fine to do. But otherwise, 2.5 years interest rates haven't changed that much to get you something dramatically below 6.125%. This is probably a don't do it kind of situation. I'm guessing it's worth running the numbers and taking a look and talking to somebody. We have all kinds of mortgage lenders that can do refinancing in the white coat investor community. If you go to whitecoatinvestor.com home loans, you can see all of those resources. We've got six or 10 people that'll do these loans in every state that you can call up and they'll help you run the numbers and know if this makes sense. But I'm guessing you're probably going to decide in this situation not to do it. But if you could knock off even a quarter interest point, it might be worth it for you if you can do it as a no cost mortgage, but you're not going to save a lot, right? It's a little bit of savings. One thing you should be aware of when you refinance is that you generally start over as far as the number of payments you make. So if you've been paying on it for a couple of years and you now have 28 years left in a 30 year mortgage, but you refinance it, it's now a 30 year mortgage again. So instead of paying for 30 years, if you stayed in there the whole time, you're now paying for 32 years. And if you refinance it again in four more years, now you're paying for 36 years instead of 30 years. So be aware of that. If you want to keep the length of time it's going to take you to pay it off, you got to pay extra every month once you refinance, which is fine, you're still coming out ahead because you have a lower interest rate. Be aware you have to do that because what they tend to do is they put these numbers in front of you. They say if you refinance Instead of paying $2,200 a month, you're now only going to pay 1,750. And you're like, well, that looks good. I could really use $450 a month. But be aware that only some of that is from the lower interest rate. Some of it is from the fact that you agreed to pay for two extra years. You're going to pay for 30 years now instead of 28. So be aware of that. Don't just shop based on how much per month. This is the classic saying that wealthy people don't ask how much per month, they ask how much. And people that never build wealth ask how much per month. Don't be one of those people that just asks how much per month. Okay, let's talk about brokerage accounts.
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B
Hi Dr. Dali, this is Ishan from Georgia. My question is regarding brokerage accounts and llc. Georgia's yearly cost to start maintain an LLC is pretty low. And Georgia is classified as a charging order state, thereby protecting the assets of an MM llc. What is your take on placing a brokerage account within the multi member LLC for high income earners to protect those assets from personal liability? What amount of the brokerage portfolio would you consider doing so? And since it doesn't allow naming beneficiaries, how would you recommend structuring the estate planning for it? The only downside I see is more complex federal and state tax forms. Is there something else I should be considering? Thank you for all you do.
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I get this question pretty frequently. It's an asset protection question, right? We're talking about asset protection here. What is asset protection? Asset protection for the most part is trying to stiff your creditors. You owe somebody money and you don't want to pay them. That's what asset protection is. And so there's all kinds of ways you can do that, right? But the primary one, well, first of all, you got your first line of defense, which is to buy insurance, which works very well almost all of the time, right? So now you're not paying your creditor. You know, the classic example is a malpractice lawsuit. And somebody gets a judgment against you and they're supposed to get $400,000. You're not paying them. Your insurance policy is because you bought insurance against that event. Okay, so that's the first line of defense, right? You buy yourself a malpractice policy to protect you against professional liability. You buy a personal liability policy. Now that's included in your homeowners or renters insurance. It's included in your auto policy. Then you buy usually a seven figure umbrella to sit on top of those policies to protect you if there's an additional liability. Somebody sues you for a million dollars because your teenage kid hit them or they slipped and fell on your property or whatever, then the insurance pays for the defense, the insurance pays for the settlement, the insurance pays the judgment, at least up to policy limits, and that's your first line of defense. Your second line of defense is to declare bankruptcy. So let's say somebody gets a $10 million judgment against you, right? You got $1 million in insurance and you appeal it, it gets reduced, but only to $8 million, right? So now you've got, after the insurance pays out policy Limits. You got a $7 million judgment against you. Okay, well, you don't have $7 million sitting around. So you're going to declare bankruptcy. Okay? That is your second line of defense in asset protection is to declare bankruptcy. And now you go to the federal and state bankruptcy laws to see what you get to keep in bankruptcy because you don't lose everything. We don't have debtors court anymore, or we don't have debtor's prison anymore. Rather, we do have debtors court. I guess that's bankruptcy court, but we don't have debtors prison. You're not going to jail for this, right? It's like malpractice. It's not a criminal act, it's a civil act, right? It's all about the money. So you're not going to jail because you owe people money. You just declare bankruptcy. And in every state in this country, and there are some federal laws that apply as well, you get to keep a pretty significant amount of stuff in bankruptcy. Okay, let me give you some examples. This is the Utah law, right? The Utah law allows you to keep all kinds of stuff. It allows you to keep the clothing you wear, you know, an inexpensive car. I think you get to keep three firearms and 1,000 rounds of ammunition, right? And you also get to keep any money you have in the cash value of a whole life policy. You get to keep anything you have. And here's the big one in retirement accounts. 401s, 403s, 457s, 401s, solo 401s, IRAs, Roth IRAs, cash balance plans. You get to keep all that in Utah. In Utah, you don't get to keep any of your money in annuities. You don't get to keep any of your money in your brokerage accounts, right? Your non qualified taxable brokerage account. You don't get to keep any of that. That all goes to your creditor, right? If you got an expensive car, you got to sell that. I think in Utah we get something like, if you're married, something like $80,000 in home equity. The rest of your home equity you lose. Other states have better laws. Some states have worse laws than Utah. In Texas and Florida, you have an unlimited home. You get to keep your whole house. There are some other things that people do sometimes, sometimes they put assets into trusts. For instance, Utah offers a domestic asset protection trust. So we put our home into a domestic asset protection trust. Maybe it works, maybe it doesn't. When we declare bankruptcy, theoretically we get to keep the house because we don't own it. This asset protection trust owns it. The case law on those is not extensive. You don't really know for sure if it's going to work, particularly if you used a trust from out of state. But maybe it'll work. And it doesn't cost very much to put your home into an asset protection trust. So it's something that you can try in the very unusual event they have one of these above policy limits judgments and have to declare bankruptcy, maybe this allows you to keep the home. Okay, so those are kind of the techniques people use. LLCs are a business structure. And so people often put their business into a format as an LLC or a corporation to provide some additional liability protection. And that provides two types of liability protection. One is from internal liability, right? So this is why you put your rental property into an llc, or if you have a property where you rent out, or where you have a business where you rent out Jet skis, right? And you don't want, if somebody gets hurt by one of the jet skis, them to come sue you personally and lose your personal assets. So you form it as an LLC and if the worst happens, well, you just lose the business, you lose everything in the llc. Right. So that's your internal liability protection. It also can provide some external liability protection. This is very state specific and often there's significantly more protection provided when there is more than one owner for that llc, particularly when those owners aren't related to each other like husband and wife. And the idea there is, if one of the owners gets sued for a gazillion dollars, they can't force the business to close because it would hurt the other owners. And so all that person gets, all that creditor gets against that business is a charging order. What a charging order is, is when that business distributes money to the owners. Well, the creditor can take the money that was going to the person they have a judgment against. Okay, so that's the idea of an LLC being limited to a charging order. So now let's get to that background information. Let's get to the question. The question is, should you put your brokerage account, which really isn't protected in any state from your creditors, in an LLC and hopefully get some, you know, there's not going to be any internal liability. It's a brokerage account, right. There's no liability from your mutual funds in there. But the hope is to get some external liability protection by having it in there. And that's the idea behind putting it in the business. But what I always think about with this is this just feels so screwy, borderline fraudulent. Right to put your brokerage account in an llc. Because an LLC is a business, it's a limited liability company. What business are you in? Right. You're not in business. You're not selling anything, you're not buying anything, you're not offering a service or a product or anything. You're not in business. All you're doing is trying to shelter your brokerage account from some external creditor in the unlikely event that you get sued for an above policy limits judgment not reduced on appeal. That's a little squirmy, right? Especially when you're the only owner. Right. When you're the only owner of this business or the only owner is you and your spouse. Right. I think there's a significant portion of the time when you really do have an asset protection situation. You get this huge judgment against you and insurance can't cover it and you got to declare bankruptcy, that they are going to go, no, this LLC is screwy and the court is going to order you to take the assets out of the LLC and give them to the creditor. I think that's probably what's going to happen most of the time. That is very state dependent. That is very situation dependent. That is probably attorney dependent. And so maybe it works. I put it in the category of those domestic asset protection trusts. It doesn't cost much to do. It's a little bit of extra hassle. Maybe it'll help. But I would encourage you to step back for a minute and consider the overall philosophy here. And what I find is that a lot of people are trying to protect every dime they have from this very unlikely situation of an above policy limits judgment not reduced on appeal. And it turns out it's really easy to protect with high level of confidence with very little expense and very little hassle to protect a large percentage of your assets. For most white coat investors, a huge percentage of your assets are in retirement accounts. They're already protected. You get to keep those in bankruptcy. And depending on your state, maybe you get to keep a huge chunk of your home equity or all of your home equity. Okay, well, what percentage of your assets are your retirement accounts and your home equity? For most white coat investors, we're probably talking 80% plus. Right? So in this very unlikely event, it's not like you're going to be eating Alpo, right? You still have 80% of your assets and you get to start over, right. And that debt is wiped out and you move on so this thing we fear that we're going to lose everything we've worked so hard for is not very realistic. Okay? Now if you have a lot of your assets, large amount of assets that are not protected in any other way, then you can consider some of these more complex asset protection techniques, like putting your brokerage account in an llc. But you got to ask yourself in that sort of a situation, is there a better method? Because when you're talking about those levels of wealth where you've been maxing out retirement accounts for years and you still have a brokerage account that makes up 75% of your net worth, well, you're probably pretty wealthy, right? And you probably need to do some estate planning. And maybe it makes some sense to have some sort of an irrevocable trust or some sort of asset protection trust, or some sort of a charitable trust. These other things that would solve some of your other problems like estate taxes or distributing your money in the way you want to your heirs in a way that also gives you significant asset protection. That's what we ended up doing. Yeah, we have a lot of money in a brokerage account. Guess who owns a brokerage account? An irrevocable trust. Okay, so we don't need to put that in an llc. That'd be silly, right? And so I think this is not a very practical solution. And I think if you start your taxable account now, you got $50,000 in there, and you're like, oh, I don't want to lose this. I'm going to put in an llc. I think you're making your life overly complex. I think you're over optimizing to be doing that sort of a thing. But if you want to start a business, say that business's purpose is to buy and sell mutual funds. And I'm going to try to convince a court of that. In the event that there's an above policy limits judgment against me, I think you're going to have a hard time winning. But you can do it. This doesn't cost much to start an LLC in Utah. It's 70 bucks and $15 a year. It doesn't cost much. You'll have a little more hassle transferring assets in there. You'll have a little more hassle managing them. And down the road it's going to be a little bit annoying because guess what? When you die, there's a step up in basis on the value of the llc, but maybe not the shares. It starts getting complicated. So I don't think most white coat investors should put their brokerage account in an llc. But if you want to try it, you're really paranoid about asset protection for some reason. You want to do this sort of a thing, knock yourself out, Let us know how it goes, send us a guest post about it it and we'll go from there. But I think when you're starting to ask questions like these about asset protection, you've probably jumped the shark. You've probably jumped the shark. Make sure you're at least doing the basics first. What are the basics? The basics are buy insurance, right? We're talking plenty of malpractice insurance, plenty of personal liability insurance. If you haven't even bought an umbrella policy and you're now putting brokerage accounts in an llc, you're screwing this asset protection thing up. Max out your retirement accounts, right? Even consider Roth conversions, because that's a way of getting more of your money on an after tax basis into retirement accounts. Make sure you're titling your property properly. If you're in a state that allows tenants by the entirety titling and you're married, you might be able to do that for both your home and also your brokerage account. That way, if only you get sued, they can't take your brokerage account because your spouse also owns the entire thing. That's far more likely to work than putting an llc. Do those basics first and then decide if you want to spend thousands of dollars and some additional hassle doing more advanced asset protection techniques. And I think you'll arrive at the right place for you. While it's very hard to protect everything, it's not that hard to protect a whole lot of your assets in a bankruptcy kind of situation. All right, appreciate you leaving that on the speak pipe. If you'd like to leave your questions for the podcast, you can do so go to whitecoatinvestor.com speakpipe and you can record up to a 90 second question. You don't have to use all 90 seconds. Leave a 90 second question, we'll get it answered on the podcast. Thanks so much. This is driven by you, your questions, what you want to talk about. And so we're thrilled to be able to have another voice on the podcast and answer your questions. Okay, our next one comes in by email. Says I'm a longtime devotee. Thanks for providing honest and understandable financial education. Education. My parents each bought a Vanguard variable annuity now administered by Transamerica, though luckily they have never needed to annuitize and don't need the cash value for living expenses. Okay, my mom recently received a letter saying that she's about to reach the change of income date and ask for a decision on how to go forward. Her options are to surrender the annuity policy and receive the policy value, which I believe would be completely taxable and not desirable. The second choice is to annuitize the policy and receive regular scheduled payments. They don't need this cash value for their living expenses and we're planning on having this as a part of their estate to three surviving children. The third option is to continue the annuity policy and defer the change of income date to my mom's 99th birthday. Hope she gets there. The letter states that they would still be able to take partial withdrawals, surrender the annuity, or annuitize the policy and begin receiving payments at any time for the new change of income date. So those are just punching or punting, not making a decision. I remember reading a blog post where you discussed annuities with an expert. I wonder if you could share that person's contact info with me. I'm happy to pay someone smarter than me to advise us on the best route for it. Well, I don't know if that Service exists like annuityadvisor.com. i don't think it's out there. The people who will talk to you about annuities sell annuities. I think the only annuity agent I've ever had on this podcast was Stan the Annuity Man. It's been years since we had him on there and he'll talk to you about annuities, but he gets paid by selling you annuities. So it's not exactly unbiased education, unbiased advice. If you want unbiased advice about your annuity or about your whole life insurance policy or whatever, you need to pay a fee. Only financial advisor to get that. And we've got a whole list of those. If you go to our recommended page@whitecoatinvestor.com scroll down there, you'll see financial advisors. You can come to White Coat Planning and you can get advice about your annuities, you go directly to our list@whitecoatinvestor.com financial advisors. Hire somebody there. They can help you with your annuity. If you want to talk to a professional and kind of run the numbers that would help you do so, you can often do exchanges between insurance products. You can exchange from a life insurance policy to an annuity. That's called a 1035 exchange. You can't do it in reverse, though, which is unfortunate because if it's money you're for sure leaving behind to somebody. Putting a life insurance policy is not a terrible way to do it. Right? It's a death benefit. And the nice thing is if you die tomorrow, you still leave them a whole bunch of money, even if that money hasn't had a lot of time to grow in cash value in the policy because of that death benefit. Now, if you live to your life expectancy, you might have been better off just investing that money in a brokerage account than putting it in a life insurance policy. But the bottom line is they already own an annuity. They can't exchange that to a life insurance policy. So that's not an option if she really doesn't want the money. For her, the best option to me sounds like just pushing that decision date, that annuitization date back to 99 and then it'll all be sitting in the annuity still when she dies, probably at an age younger than 99. And that can be split up among the heirs. And they're probably going to have to pay some taxes on that, right? Because a fair amount of that is going to be taxable. Now this question, they did not mention whether this annuity is inside a retirement account or not. I'm guessing it's not. Those have a little bit different rules, right? If it's inside a retirement account, well, RMDs have to come out. Essentially that's the annuity payment. So if you put an immediate annuity into a retirement account, you could do that and you just pay taxes on what comes out of the immediate annuity because that's the amount that comes out of the retirement account. Essentially that's called a qualified annuity. But I think this one's probably a non qualified annuity. So when you start taking income from it, some of the income is taxable at ordinary income tax rates and some of it is basically a return of your principal and is not taxable. I think it's called an exclusion ratio, if I recall correctly, of determining how much is taxable and how much isn't taxable. The nice thing about an annuity is like a retirement account, the money grows inside it in a tax protected way. So that's a benefit. Especially if the money stays in there for decades and decades. It's possible that that tax protected growth feature can overcome the two downsides for annuities. The first downside, of course, is the fees. You know, you got to pay somebody, some insurance company for this annuity may have paid a big commission upfront to buy it as well, so there's a cost to the annuity, you got to overcome that. And it takes time for the tax protected growth to do that, especially if the fees are relatively high. You may never overcome it. The other downside of the annuity, of course, is when you take money out of it, you pay on the growth at ordinary income tax rates, not long term capital gains rates, not qualified dividends rates. And so it has to be in there for a long time to get that tax protected growth to overcome that difference in taxation when it comes out. So it's entirely possible, if you're investing it relatively tax efficiently, that it will never provide enough benefit, enough tax protected growth to overcome the fees and to overcome that difference in tax treatment. And the other upside of just using a regular brokerage account is your heirs get the step up in basis of death. So you die with a brokerage account, that inheritance is totally tax free to your heirs. Right? Assuming there's no estate taxes involved. You're under $30 million, married, and whatever that goes up over the years due to the, that's indexed to inflation now. But it's a significant downside. If it's in the annuity, it's still coming out and you're still paying taxes on it, whereas you wouldn't have been if it had been in a taxable account. So given that your mom wants to leave this money to the heirs, I think the variable annuity was probably not the right choice. So you have to entertain the possibility that maybe getting the money out, paying the taxes on it and investing it tax efficiently in a brokerage account is the right move. Now, as I mentioned earlier in the podcast, there are some asset protection concerns there. Most brokerage accounts are accessible to creditors. They're certainly accessible when you start doing Medicaid planning, those sorts of things. Whereas an annuity might not be in your state, might not be as accessible to Medicaid, might not be as accessible in a lawsuit or something like that. So there might be other reasons why you'd keep the annuity. But it wouldn't surprise me if you run the numbers that pulling this money out of the annuity, paying the taxes on it, reinvesting it in a taxable account, could possibly come out ahead. Or pulling it out and buying a life insurance policy, you could even buy a single premium one, a modified endowment contract. This is like a whole life policy that you can't borrow against, just a death benefit, that's all it provides. That might be a better way to go. So some things to think about. But I don't think that for money you're planning to leave behind that these annuities are really the best way to do it. I mean, most annuities are products designed to be sold, not bought. It's entirely possible. This one is not awesome. I am reassured by the fact that they bought it from Vanguard. I don't have all the details on that one ahead of me in front of me, but it's probably better than most annuities. Why they used it in the first place, I am not clear. Maybe they had a good reason for it. Maybe they're investing all that money in relatively tax inefficient assets. Maybe it's all in bonds and REITs or something like that and it made sense, but it feels like they just got sold a policy or sold an annuity that they really don't really want or don't have purpose for. The overall financial planning here is a little bit of a mystery to me. So I think sitting down with your mother's financial planner, if your mother doesn't have a financial planner, maybe getting her one would be well worth it. And again, you can do that on our recommended list for financial planners. All right, as I mentioned at the top of the podcast, SoFi is helping medical professionals like US bank borrow and invest to achieve financial wellness. 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