← 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 the White Coat Investor Podcast. This podcast is sponsored by Bob Baiani at Protuity, an independent provider of disability insurance planning solutions to the medical community in every state and a longtime White Coat Investor sponsor. He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. If you need to review your disability insurance coverage or to get this critical insurance in place, contact Bob at 973-771-9100. Email infoorotuity.com or just go to whitecoatinvestor.com Protuity okay, it's scholarship time. We're already into July. People have been submitting scholarship applications for the White Coat Investor Scholarship since the first. I mean, in reality, everybody submits them the last week of August. At least half of you do because, you know, we're all procrastinators. But you have until the end of August to submit them. I don't recommend you wait that long. Things happen. So if you want to apply for the scholarship, get it in before then. You go to whitecoatinvestor.com scholarship not only to submit it, but to learn all the rules about it. You have to be a full time student in an in person school, a US school, and in good standing. Generally you're in medical school, dental school, et cetera. But we'll accept other high income professions. They're listed there on the scholarship page. And we're going to give out 10 of these scholarships like we do every year. It's literally just a cash payment. So the idea is twofold. One, to reduce your indebtedness, reduce the cost of your education, directly help docs, et cetera, coming out to, you know, not be in as much debt as they otherwise would be. And two, to kind of spread this message of financial literacy throughout these schools, these professional schools. So it's something we've been doing for a long time. It's a good way for us to give back to a community that's given us so much. And it's a lot of fun as well. If you want to participate in the fun, you can help judge. Just email scholarshiphitecoatinvestor.com, put Volunteer Judge in the subject line. That's about all we need. And come September, you're gonna read a few of these thousand word essays and Help us pick the winners. None of the WCI staff picks the winners. We need the WCI community to do that. We just want to remove that conflict of interest completely. We'll write the checks, but you guys got to pick the winners. And so you can write about anything you want in those essays. Right? But if there's a financial angle, you do get bonus points. So it is a financial website. And throw something financial in there and you'll be glad you did most of the time. Okay, so you can write about anything but bonus points for financial stuff. This year you have till the end of August. Whitecoatinvestor.com scholarship email scholarshipcoatinvestor.com to be a judge. Okay, we gotta start with a correction on episode 474. I think that dropped on June 4th. Somebody had asked a question about having more than one 401 for the same business. And I think my answer said something like, this is a dumb idea. You're going to have the same contribution limit. You're going to have more hassle. You probably shouldn't do this, but I think you can, is what I said. Well, apparently you can't. So that's the correction. I got a note put on the YouTube episode saying that some of our knowledgeable forum participants would chew me out for saying that. But you really shouldn't be opening a second 401 for your business or a second solo 401. End the first one or just amend it. Turn the first one into the second one and then go on to the next one. Right. You don't want to be dealing with it anyway. And apparently you can't even do it. You don't need trouble with ERISA for this, okay? It's a big red flag for compliance purposes. Just have one plan. It's a good idea. And when you close a plan and move on to the next one, do it at year end. It's going to save you a lot of hassle. Okay, let's take one of your questions off the speak pipe. This one from Angela.
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Hi there.
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I've got some questions regarding rule of 55, period. I'm 58 years old and after seeing some of my family, both health challenges and interested in retiring earlier than I anticipated, period. Can you explain a little bit about the rule of 55 and how it fits into a withdrawal strategy once you retire?
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Thanks for all you do, Dr. Dolly.
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Okay, when I heard the rule of 55, I thought this was a real estate ratio. Right. A lot of people say, you know, never have more than 45% of the income coming into your, coming from your real estate investment and going toward the mortgage because you have so many other expenses, you need to have profits and you need to have, you know, some vacancies and that sort of stuff added in there. And of course there's insurance and those sorts of things. So when I heard rule of 55, that's what I thought we were talking about. But what we're really talking about is when you can raid your 401 without paying a penalty. Okay, most of you probably know that for an IRA or a Roth IRA, the rule is age 59 and a half. Once you're 59 and a half, you can pull your money out of there. If it's tax deferred, you got to pay taxes on it, but no penalties. If it's Roth and assuming you've met all the relevant five year rule restrictions, you can pull that money out tax free and penalty free. Well, what a lot of people don't realize is if you don't move the money out of your 401 or 403 into an IRA, you might be able to get to that money four and a half years earlier, penalty free. If you have separated from the employer and you are at least 55 and the money's still in that 401 or 403, you can pull it out and spend it penalty free. Okay, so what does that mean for your withdrawal strategy? Well, a lot of times people spend certain accounts first and that makes sense. I've written many blog posts about this over the years. For example, one of the first accounts that people often spend in retirement is their 457 money. Especially if it's a non governmental 457B. Right, because that's not actually your money is still exposed to the creditors of your employer. So of course you want to spend that first because you have the possibility of losing it to your employer's creditors. Even a governmental 457 though has this nice benefit that there is no 59 and a half rule or 55 rule for your 457. So that's often what people spend first in retirement. If you have a taxable account, right, it makes sense to maybe spend from the taxable account first and allow your money to continue to grow inside tax protected and asset protected retirement accounts. Your money grows faster inside 401s and Roth IRAs because it's not being taxed as it grows. So that makes sense to maybe you want to spend taxable accounts first, but there are people out there who have Almost all of their retirement savings in 401 s and IRAs. And so these age 59 and a half rules, these age 55 rules, they matter. You got to pay attention to them now. There's so many exceptions to these things. I mean, the loopholes are so big, you can drive trucks through them. If you go to the website, you'll find lots, lots of blog posts about this. If you just search 59 and a half, you'll probably see the main one. It's called the 59 and a half rule. How to get to your money before retirement age. And I list all kinds of ways you can get to those. A lot of people don't realize about all these exceptions, right? Disability is an exception. Death's an exception. A first home doesn't even have to be your first home. If you just haven't bought a home in the last couple of years or it's a first home for your kids, you can get some money out of there. That's an exception to the age 59 and a half rule. Paying for medical insurance is an exception. You don't have to pay a penalty if you're using the money for that. Unreimbursed medical expenses are an exception for that disability. I mentioned inherited IRAs. Of course, these rules don't apply to if you're spending the money on college for your kids or grandkids. Right. Qualified higher education expenses are an exception. The first home exception. $10,000 for that. If you have a new child or an adoption, there's a $5,000 limit to how much you can pull out. If you're paying an IRS levy.
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Right.
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That comes out penalty free as well. So does a reservist distribution. You don't even have to be dead. You can just have a terminal illness. And that gives you an exception. A new one that came up with Secure Act 2.0. If you've been the victim of domestic abuse, you can take out the lesser of $10,000 or 50% of the balance out of that IRA and get to it before 59.5 penalty free. But the main one is early retirement, and that's called the SEP rule. Substantially equal periodic payments. And if you just take out the same amount each year for at least five years and to age 59 and a half, you've got to do both of those. You can get your money out and it works out to be about as much as you should be taking out anyways, like 3% or 4% that you can take out. And you can do that Penalty free. So even early retirement is an exception. Okay, but there is this difference between 401 s and IRAs and 401 s. You can get to it at 55, not 59 and a half. So would that make sense? If you have 401 money and IRA money and you're in that age between 55 and 59 and a half, what should you spend first? Well, the 401 money. And this is maybe a good reason to leave your money when you leave the employer in the 401, at least until you're age 59 and a half before you move it to an IRA. Now, lots of WCRs have learned they don't want to move it to an IRA anyway while they're still earning money and contributing to their Roth IRA via the indirect backdoor Roth IRA process. It can give you a pro rata issue if you got a bunch of money sitting in a traditional IRA. So most WCIers have learned that you go 401 to 401 to 401 to 401 when you're doing rollovers throughout your career. But once you're done earning, once you're retiring, it's okay to have that money in an ira. It might get slightly less asset protection in your career in your state, but the truth is, after the end of your career, your malpractice risk is dramatically lower. And so most people don't care quite as much about asset protection once they're no longer practicing medicine anyway. So, yeah, the bottom line is, you know, leave it in that 401k, at least until you're 59 and a half and you can pull that money out and use that for your spending. Now, there's two questions, of course. How much of your money should you spend in early retirement and then where that money should come from? Totally separate questions. Right? And just because you have money in a 401 doesn't mean you should spend 12% of your money in a year. You've still got to do the 4% ish kind of thing. But which money you raid and win does matter. And so you want to have a smart strategy for that. If you need help sorting that out, get help from a financial planner. This is the sort of thing they specialize in helping you with. And we've got a list of recommended planners on the website. Obviously, we've started White Coat planning. They're ramping up just as fast as they can, and you can only bring clients in so quickly. You can only hire more planners so quickly. So we still have lots of good firms we referred people to for years that are still on our list. If we can't get you into white coat planning, go see some of them and get your financial planning done. We're not terribly partial to our own firm. We think it's a great firm. But we also know that we can't serve every single doctor in the country right now. Just the numbers don't work that way. And so get some help if you have questions like these and it's a great time as you're approaching retirement to really make sure you have an updated comprehensive financial plan. Okay, let's go on to the next question here. This one comes by email and the title is the Risks of Linking Brokerage Account to youo Need a Budget. That app so many people use for budgeting. It says thanks for the wcicon and all the work you do. My spouse and I are trying to shore up our processes of our household balance sheet based on some of the talks from wcicon in Vegas. In that vein, we wonder about the risks of linking our brokerage account info at Fidelity with youh Need a Budget. When we initiate the process of linking them, Fidelity spits out a crazy amount of legalese about the risks of linking the accounts and says in so many words they'll not be held responsible for any negative outcomes. And this has stopped us from actually linking the accounts we do use. You need a budget to track our expenses, but the balance sheet gets messy when we don't have ynab. You Need a budget. See the complete picture of all our transactions. Are there any real risks to linking these systems that are concerning enough to happen? And how do you handle tracking your balance sheet personally? And how do other high net worth individuals at WCI handle this process? Well, look at the gray hair, right? If you're watching this on YouTube, I'm old, right? By the time you hear this, I will have turned 51. When we started budgeting, we used a pencil. Yeah, our first budgets had a pencil on them. And then we started using Excel because my handwriting wasn't very good. And so we'd put it in Excel and we'd print it out and then we'd write on it with a pencil. Right? I mean, I've got these budgets from 1999, 2001, when I'm in medical school and we're married and they're really fun to go back and look at, but that's literally how we still do it. We still do it manually. We don't have any of these apps. We don't have every dollar or you need a budget or mint or any of these budgeting apps. We've never used them. We literally just went through and looked at our credit card statements and our bank card statements and put it in on the computer and then printed it out on a spreadsheet. So if you're really worried about these apps linking to your accounts, you don't have to do it. You can do this manually. It's going to take a little more work and you're going to have a little less convenience and maybe you'll have a little less data and a little less help making decisions than you otherwise would. But there is a very secure way to do this if you're terribly worried about security. Now, my impression is that most white coat investors using these apps are not that worried about this security and that these connections are very secure. I mean, you think about everything you've already linked, right? I mean, I use Venmo, right. I use PayPal. Well, those are linked into your bank account, right? I've got my bank accounts linked to brokerage accounts and 401ks and things like you're linking accounts all the time. And all of these apps, all of these accounts have all kinds of safety features, right? This is a big deal for them. Yes, there are breaches of security and they try to deal with those as best as they can. But it's not like these things have no security whatsoever. Right? They're doing everything they can to be secure, because that's their entire business is to be secure. You know, there's a great article on Yahoo actually that I was looking at when I sent to this person that sent this email question in. And it's called is it safe to link your bank accounts to financial tools and apps? This is written by a lady by the name Emily Batdorf. And I thought it was a pretty good argument or a pretty good article. And she talks about what it means to link your bank accounts to financial tools and apps and she talks about whether it's safe. That's like the number two question in the article. And she goes through all the different security systems and features that these apps use. They use encryption and tokenization and multi factor authentication and third party security reviews and liability protection and biometric verification and transport layer security. I don't even know what that is. As well as payment confirmation notifications. Right? So every time money comes in or out, sends you an email or a text or whatever. So I mean, use reputable apps, of course, and review its security features. Take a look at complaints and reviews and ratings online. But recognize that these have come a long way and they're pretty darn secure. Not perfectly secure, but they're pretty secure. So I don't think I'd spend a lot of time laying awake at night worrying about you need a budget being linked to Fidelity. I've already got all kinds of things linked to Fidelity or to Vanguard or whatever. And you've got to be smart about online stuff. You don't click on links in your email and you don't give out random information to people that don't need to know it. And you use third party authentication and you have complex passwords and hopefully you're using some sort of a password manager like lastpass and you're using 15 digit nonsense password kind of passwords and, and you're doing these good online security kind of things that you should be doing. But so long as you're doing all that, I don't think I'd worry about you need a budget being linked to Fidelity. Fidelity obviously has to cover their butt. They're going to put a page of legalese up every time you, you link those. But I think I'd probably go ahead and do it. If you've decided this is how we're going to budget and this would be a lot easier if we link it to our Fidelity account. I'd go ahead and link it to your Fidelity account. I don't think I'd spend a lot of time worrying about that, but maybe I'm a little more risk tolerant than others. If you're not that risk tolerant, recognize that paper and pencil still works. I guess somebody can break into your house and steal your paper and pencil too, but this isn't that hard to do. Okay, our quote of the day today comes from Benjamin Graham who said successful investing is about managing risk, not avoiding it. And the longer I invest, the more I realize that investing is about risk management, not returns. And yet so many of us in the beginning, we select our investments by looking at returns, focus more on the risk, and I think you'll be more happy in the long run. All right, we've got a question on the Speak pipe about Trump accounts. Hey, Dr. Dally, question about the Trump accounts. If I employ my children and I'm going to do a business contribution of 2,500 into the account and use it as a business deduction and then put in 2500 of parent money, can you walk us through exactly how to do this so that down the line when we do a Roth conversion that Somehow the basis is isolated. And I'm not paying tax on money I've already put in after tax. Many thanks for all that you do. Okay, this is what I would characterize as a super optimizer question. Okay? Remember, optimizing is trying to get everything perfectly right with your finances, to get maximum benefit out of everything you do with your money. Satisficing is what you do once you realize that you don't have to optimize everything. And most of us, as we move throughout our financial lives, we become less of an optimizer and more of a satisficer. But this question is definitely way out there on the optimizer spectrum. Okay. And so we're going to have to spend a lot of time just bringing everybody else in the audience up to speed on what's being asked here before we can really answer the question. Okay, so maybe the first place to start this discussion is saving for your children. A lot of us want to give our children a leg up in life, and we can do that with inheritances, whether they're given before you're dead. Technically, it's not an inheritance somebody's going to write in. I'm not doing a correction on this early inheritance. We'll call it a gift. All right? It's not actually inheritance to your debt, but a lot of us want to give money before they're gone, and so we try to take advantage of some of the tax breaks that have been set up in order to give money to our kids. And there's lots of cool accounts out there that you can use to help your kids. There are 529s, there are 530As, there are Roth IRAs, there are HSAs, there are Utmas, there are annuities, there's taxable accounts, there's able accounts, there's all these accounts. And you might be wondering what you should be using to save for your child. Well, the first question to ask yourself is what the money is going to be used for. If you're saving for their education, use an education account. Right. Typically a 529, often the 529 in your state. But if your state doesn't give you a special tax break for it, maybe you just use a good one from another state, like Utah or Nevada or New York or Michigan or something. If you're saving for something else, though, you don't want to use a 529 account. It's not a great place to save for their retirement. It's not a great place to save for a house for them, it's not a great place to save for health care for a 20s fund or whatever. Right. And so if the purpose of the money is something different, you might want to look at some different types of accounts, Right? If you're saving for the retirement, a Roth IRA might be where you want to do it, or a Trump account might be where you want to do it. The Trump account is also known as a 530A, by the way, for those who aren't aware of that. If you're saving for health care, you might want to use an hsa. But there's all these rules about when and how much you can contribute to all of these accounts. For example, a Roth ira, it has to be earned income. If they didn't earn any money, they can't put any money in a Roth ira, an hsa, you really can't fund for them unless they're on a high deductible plan and they're no longer your dependent. So we're usually talking about kids that are in between the ages of 19 and 26, no longer your tax dependent, but they're still on your health insurance. And if it's a family health insurance plan, you can fund a family size contribution to their hsa. Don't write in with a correction about this. I'm right about this, right? You can put in a family size contribution because it's based on what plan they're on. If they're on a family plan, they can put in a family size contribution. And because they're independent of you, it's their own. And you can do your own full family size contribution into your hsa. Right. So there's all these different rules about how to use these accounts. So Specifically about the 530A account, this Trump account, these are brand new and when they came out, we didn't necessarily have all the details about them. And now we have probably most of the details about how these are going to work. These are baby bonus accounts in the kids born for a period of about four, three years, I think starting in 2025 get $1,500, $1,000, I think it's $1,000 from the government put into the account. And these accounts, it seems, are all getting open to. Robinhood, I think, is who the government has chosen to run these things, which is kind of an interesting choice. But they get $1,000 from the government. But the rest of us, I'm not going to have any kids from 2025 to 2028. The rest of us can still Fund accounts. And you can put up to $5,000 per year in there. And it's really cool because once they turn 18, these 538 accounts basically become traditional IRAs. And if your kids are like most kids, they won't have all that much income in their 20s. So at some point in their 20s, when they're no longer your dependent, maybe it's right as they finish college, or maybe they're not your dependent during college. If you're like my kids, you can do Roth conversions on those traditional IRAs and do a relatively inexpensive Roth conversion. So if you put $5,000 a year in there from the time they're zero until the time they're 18, and then convert that in their 20s for relatively small amount of money, you basically paid for their retirement, if they'll just leave that alone until they're 65, you've paid for their retirement already. And so that's a pretty exciting thing to do. And people get really excited about that. It's a baby bonus account. It's a way to pay for your kid's retirement and they don't have to have earned income like a Roth ira. And so in a lot of ways, this is a better thing to use than a utma, although UTMA is far more flexible if they're going to spend the money before retirement than a Trump account is. But it really just comes down to the purposes of the money and what you want to do with it. So lots of white coat investors are trying to wrap their heads around this. I haven't yet funded Trump accounts for my two kids at the time of this recording, but I probably will in the next month or two. One of them is only going to get one year's contribution because he's now going to be a senior in high school. The other kid will get six or seven years. And the old ones, well, tough luck for them. As I've been telling them since they were three years old, life isn't fair. And they'll still get plenty of money from us, but they're not going to get Trump accounts from us. So we are planning to fund those, and that's a good thing. But what the questioner is asking about here is this cool other feature about these Trump accounts. Okay, so it turns out that lots of different people can contribute to these 530A accounts. Parents, guardians, relatives, friends, the kid can all contribute to the account. The total annual contribution is $5,000, not counting that $1,000 government contribution. And that's supposed to actually start being indexed to inflation starting in 2028. But the employer can also contribute to a 530A account, which is really exciting. Right. It's up to $2,500 per year per employee, not per employee's child, but per employee. $2,500 per year, not $1,500 is $2,500 per year that the employer can put in. And that is a deduction to the employer. Right. So that's cool. And of course, it also become they have to keep track of this basis in these accounts. I'm sure Robinhood will figure out how to keep track of all the basis in these accounts. But money you put in there, that's post tax money, that's basis that won't be taxed when you go to do the Roth conversion in their 20s, but money that comes from the employer I don't think counts toward basis. So that $2,500 isn't basis, but presumably they're going to convert it at a much low rate than you're paying right now as a doctor. So it can still make sense. And so all these white coat investors that are super duper hyper optimizers are going, oh, well, what If I put 2,500 of that 5,000 in personally and I put 2,500 in there as an employer contribution. So I hire my kid to do something and now I'm making an employer contribution for them. Or you don't even have to hire them. Actually, I misspoke because they're your kit. And so it's your business, you're the employee and it's your kid with the 530A account, and so your business can fund it. And there's a little bit of a tax arbitrage there on 2,500 bucks. And so this person calling in on the speak pipe is just trying to figure out how to optimize this situation. And you absolutely can do this, whether it's worth the hassle or not. You have to ask yourself how much of an optimizer you are. But that's the idea is that yes, you can put money in there from your business. If you're 1099, independent contractor, you have a business and you have a Solo 401 and you can open a trump account for them. Okay, the question was all about basis and how to not screw up the basis. Well, that's apparently Robinhood's problem now. They got to keep track of the basis. But it's probably a good idea to keep it in mind. Your basis for these employer contributions you don't get basis for that because that's pre tax money. Right. But the parental contributions you have basis for. So you got to keep track of that. When you do the Roth conversion in their 20s, you don't have to pay taxes on that. Again, but you're not trying to isolate basis. Probably. I think most people are just converting the whole thing. That's the idea is convert the whole thing, whatever it is, 100,000, 200,000, you're trying to convert the whole thing. Maybe you spread it out over a few years to do it, but the idea is not to just isolate the basis and just have that go into a Roth IRA and then leave the tax deferred money in a traditional ira. The idea is to convert it all, the Roth, and then you don't have to worry so much about the basis. I mean, somebody's got to keep track of the basis, how much has to be paid in tax on the conversion. But I don't think trying to isolate the basis is a great idea. I think most people are just trying to convert the whole thing. So I hope that's helpful. I hope I've answered the question. It's a little bit of a complicated topic we're all still kind of wrapping our heads around because these are new accounts this year. Like I said, I've never actually even funded a Trump account at the time we're recording this. And so how it's going to work out, I think will be a little more clear over the next few years, but maybe not until your kids are in their 20s and we actually start doing these Ross conversions. We'll be entirely clear what to do. But I don't think your plan should be to isolate the basis. I think your plan should be to convert the whole thing at some point, once they're independent of you, but still not in a very high tax bracket. All right, everybody out there, I know some of you had a rough day today. You're on your way home from work, you're walking the dog, you're going for a run, whatever. Nobody said thanks today. Maybe somebody died on you, I don't know. Somebody yelled at you. I don't know. But if nobody said thanks for what you do, let us be the first. Thank you. Okay, let's take another question out the speak pipe. This one's about some sort of inherited taxable account.
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Hey, Dr. Dally, this is Kyle. I'm a surgeon in the Southeast. I have a question about a taxable account my wife inherited from her parents. It's composed of Individual stocks, the value is around $700,000. The cost basis is about $250,000. So about of capital gains. Currently it's being managed by a financial advisor. They're harvesting losses to offset gains. We're paying 0.8% of assets under management, so about six grand per year. So I'd like to start managing this account ourselves to save on the fees. We donate about $50,000 per year to our church. So my plan is to sell the stocks with the highest gains. Not sell, but transfer them into a donor advised fund and then sell them, donate the cash to the church and then say we sell and we do $150,000 a year in the donor advised fund. We can over time buy back just a low cost index and then any we can harvest any losses out of that count as well. Kind of slowly transition into a low cost index fund. Do you see any problems with this plan? It seems like an efficient way to donate and offset the gains over time and you know, diversify it so it's not as chopped up and messy with individual stocks. Thanks very much again, Dr. Dali, for all you do. All the best to.
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All right, Kyle, thanks for what you do. You said you're a surgeon in the South. It's not easy work. Thanks for doing that. However, I'm going to use you as an example for everybody else listening to this podcast. Okay, so those of you who leave questions on the speak pipe, we love your questions. If you go to whitecoatinvestor.com speakpipe or you go to speakpipe.com whitecoatinvestor either one, you can record questions. Well, I answer them on the podcast. Okay, but for the sake of your fellow listeners, wait until you get where you're going. Maybe pull into a parking lot. So we don't have quite so much road noise to listen to to hear your questions. But I think we could make out everything you said. I think it's fine. I think it's a great question you've asked and actually there's a lot to talk about here. So the first thing we're going to talk about is inheriting a taxable account, you know, from your parents or whoever you talk about basis, the basis being low in this account. And I got news for you. When you inherit an account, you get a step up in basis. Okay? So if your wife's parents died this year and gave you some nasty Messy portfolio with 200 individual stocks in it, you can sell them all tomorrow and there are no capital gains and you can put all the money into an index fund and be done. It's wonderful. The step up in basis is awesome policy. And neither your parents nor you will ever pay any capital gains on any capital gains taxes on those capital gains because they just get wiped out of debt. It's the step up in basis at death. Okay, so that's issue number one. Be aware of that. It sounds to me like you inherited an account and then went to a financial advisor or your wife went to a financial advisor or whatever and, and they invested it for a while and now there are a bunch of capital gains. So this really has nothing to do with the fact that this money came from your parents or from her parents originally. It's basically your taxable account and you got a bunch of gains in it, and now you got to decide what to do with them. So this is a problem we call a legacy investment problem. You own an investment in a taxable account and you don't want to own it anymore, but you're hesitant to pay the capital gains taxes that it would be required to change to the investments you actually want. So I've got lots of blog posts out there about legacy holdings in your taxable account. Maybe the best one is a blog post called six options for legacy holdings in your taxable account. And so I basically listed six ways to deal with those. Let's go through those. The first one is to sell it. Okay? You always have that option. You can just sell it. Yeah, you might pay some capital gains taxes, but you know what? The only thing worse than having to pay capital gains taxes is not having to pay capital gains taxes. Besides, some of those shares probably have losses. Some of those shares don't have much of gains. And maybe you're carrying forward some capital losses that can offset some gains. So selling it is always an option. That's one way you can get rid of these things. The second option is to just plan to sell the stock later or the investment later. Maybe you'll have more money to pay the taxes later. Maybe you'll be in a lower tax bracket later. Maybe you'll be able to get some tax losses to offset those gains in the meantime, but eventually you're going to sell it. Okay. Another option is to give the money away to a family member or a friend with a low income. This is a great way to gift money to people with lower incomes because a lot of them are in the 0% federal capital gains tax bracket. Right? If they're in the low, if they're in the 0% long term capital gains bracket, they can sell it and not pay any taxes on it. Now it's obviously it's not your money anymore. And I don't know that I'd get into a game where you give them the appreciated asset, they sell it and then magically gift you some money back. I think you might run into some step transaction doctrine problems doing that with the irs. But you can certainly use it to give them money. So it's a good option, especially if they're in a much lower tax bracket than you. The fourth option is the one you're kind of alluding to to donate it to charity. If you give money to charity anyway, you should quit giving cash. If you have a taxable account, all your charitable giving should be appreciated. Shares you've owned for at least a year. Actually, I think it's more than a year. It's not just one year. It's 366 days, not 365 days if you really care. But that's a great way to give to charity. So if you're a charitable person anyway, this is a great way to get rid of legacy investments. But if you've kind of gone through those things and you don't want to pay the capital gains taxes and you're going to hold onto this investment, you can build around it and this can make sense if it's not that bad of an investment at all. Maybe it's an S&P 500 index fund and you would rather own a total stock market index fund. But they're basically the same thing. You can just build around it in your portfolio and you just have it there in the portfolio and build your portfolio around that holding so you hold less VTI because now you have some Voorhees, right? You're talking about the ticker symbols for these various funds and that's an option. Or maybe if you end up owning a whole bunch of Nvidia and Google and Facebook, maybe you tilt the portfolio against tech stocks elsewhere. You short those stocks or you buy some puts on those stocks, but you do something fancy with your portfolio to build around those holdings and you just hold them long term, hopefully until the day you die and you're heirs get a step up in basis. There is another option. This is a relatively new option. It's called a 351 exchange where you swap a diversified portfolio of appreciated individual stocks in a taxable account for shares of a newly created etf. Okay. That exchange defers the taxes, hopefully provides you with a little bit more diversified investment. This is particularly attractive to People who might exercise some stock options and they now have a huge percentage of their net worth in just one stock and it happens to be their employers anyway. Exchange can be a good option there. Okay, so we've covered the step up in basis at death. We've covered what you do with legacy holdings in your taxable account, right? The first thing you do, of course, is you list them all and you list the basis on them and then becomes more obvious what to do with each of any of them with a loss, you just sell any of them without gains, you just sell. Then you look at how many losses you have to offset gains and you sell enough to use those up and then you start thinking about what you want to do with the other ones that are actually going to cost you you some tax money. Unfortunately, your question is even more complicated because apparently this advisor you hired is into direct indexing and is charging you 0.8% to do the management as well as the direct indexing. We have a sponsor here at White coat investor called FREC and they charge 0.09% for direct indexing. Now, direct indexing is not right for all White Coat investors. It's probably not even right for the majority of White Coat investors. But if it's right for you don't pay 0.8% for it when you can pay 0.09% for it. So if nothing else, maybe I'd look into changing who's going to do your direct indexing and that would save you 71 basis points a year in fees, which would boost Your return by 71 basis points per year. That's a good thing. But whether you should be doing direct indexing at all is a totally separate question. I think the first question you got to ask yourself if you're considering direct indexing is can you really use more losses than you're going to get from just tax loss harvesting at the fund level? That's what Katie and I do is we just tax loss harvest at the fund level. So if I bought some stocks in 2019 and 2020 using VTI or ITOT or VXUS or IXUS or whatever, and then the market goes down in 2020, right? March 2020, there's a big pandemic, everybody freaks out, the market goes down. So I did a bunch of tax loss harvesting, I swapped VTI for itot, I swapped BXUS for ixus, and we booked those losses and then we're carrying them forward. Same thing in 2022, anything you'd bought in the year or two before you could book those losses. And you carry them forward until you can use them. You can use $3,000 a year of those losses against ordinary income and you can use an unlimited amount against capital gains. So it's useful to have some losses. But do you need a lot of losses? Well, it depends. Are you going to be selling something with a lot of capital gains down the road? I mean, are you going to sell a practice or you going to sell a business or something where millions and millions of dollars of losses would be useful to you? If so, then maybe you should consider direct indexing. If not, and you can probably get enough losses just from tax loss harvesting at the fund level because there's obviously that additional expense to direct indexing. Maybe they don't do a great job, as good a job following the index as Vanguard might with their index funds. You know, there are some downsides to direct indexing as well. And if you're not going to get a lot of benefit from those losses because those losses go away at death, right? If you're not going to use them, there's no benefit to them. So you ought to be pretty cautious before you start doing direct indexing. You got to make sure it's actually right for you because it's kind of a lifelong commitment. It's like buying a whole life insurance policy, right? This thing's not going to work out well if you dump it before death. A lot of times it's not going to work out well even if you hold it to death. But it certainly isn't going to work well if you dump it before death, still might be the right move to get rid of your whole life insurance policy you never should have bought. But these are things that are designed to be held the rest of your life. If you go into direct indexing, the idea is you're going to pay this advisor to do it for the rest of your life because it's a pain to change. And you're demonstrating that right now you have hundreds of individual stocks you own, all with different basis. And you want to can the financial advisor you hired to do this a year or two ago, well, this is going to be a pain because now you've got a serious legacy investment problem. So you got to go through all the stocks and list them, which ones have gains, which ones have losses. And it sounds like you have a whole bunch of them with gains. If you're, you know, you got $800,000 in value and only $200,000 in basis, you've got a lot of gains in that portfolio. So if you don't want to do direct indexing anymore, then yeah, move away and bring all these stocks into a brokerage account. And now you've got your brokerage account with 200 individual stocks or whatever. So you go through, list them all, look at the basis, sell all the ones with the loss or without much of a gain, see how many losses you're carrying forward. Maybe you can wipe out a lot of the other holdings. Maybe you can get that 200 stocks down to 20 stocks. And now maybe you've got 20 stocks and maybe it's, I don't know, $300,000 of value. You've already freed up half a million dollars and you can invest that into your ETFs that you're planning to invest in. And that $300,000, maybe that's going to be your charitable giving for the next two, three, four, five years. Right. That's a great way to flush those out of your portfolio. So yeah, I think you're thinking about this right way. I think your plan is good. It sounds like maybe you shouldn't have been doing direct indexing in the first place. I'm not entirely clear about that based on the the question, but I think you've identified a great way to get out of those capital gains since you're a charitable giver anyway. Okay, I think I answered that question. Complicated question. So it got a long answer. This episode was sponsored by Bob Bayani at Protuity. One listener sent us this review. Bob has been absolutely terrific to work with. 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