Get Your Tax Bill Down

Transcription – WCI – 418

INTRODUCTION

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.

Dr. Jim Dahle:
This is White Coat Investor podcast number 418 – Get Your Tax Bill Down.

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All right, welcome back to the podcast. It's great to have you here. Thanks for what you're doing out there. It's important work you're doing, and it really does matter. I spent the weekend working in the emergency department, and there are unpleasant things that happen in the emergency department, like fecal disimpactions. Not my favorite, not going to lie, but you know what? The patient was so grateful, and it's nice to be able to serve sometimes even if the work isn't particularly pleasant.

I'm actually doing a whole bunch of White Coat Investor work today. We're recording a bunch of webinars and podcasts, etc., and usually that's a good thing when I have a whole bunch of work stacked up, because it means I'm heading off to do something fun. Indeed I am.

Tonight I'm headed to southern Utah to do some canyoneering, really my first big canyoneering trip since falling off a mountain last summer, so I'm excited about that. Then I'm coming to see a bunch of people in Milwaukee. I think I'm speaking to some OMFS folks out there. I'm looking forward to meeting you guys, and then going directly from there to Istanbul. Three fun trips in a row for me this week, and I hope you're able to have some good times this spring as well.

By the way, we mentioned before on the podcast, but we're having a sale just for you, the podcast listeners, 20% off all of our online courses. Whether that is one of the versions of Fire Your Financial Advisor, whether that is the Continuing Financial Education 2025 course, whether that is the No Hype Real Estate Investing course, they're all 20% off. That ends tomorrow, though, if you're listening to this on the day this podcast drops. It ends on May 9th. Use the code PODCAST20 at checkout, go into whitecoatinvestor.com/courses to get that discount.

All right, I'm not going to tell you about anything else until we answer some of your questions. We're going to talk about taxes today, a whole bunch of tax stuff, and it's a little bit unfortunate. Because this runs on May 8th, I'm recording it on April 22nd. Tax day is come and gone.

But the way our workflow works here is you guys call in, leave Speak Pipe questions, and we prep them and get them into an episode and record them, then it doesn't go live for a couple of weeks. And by the time you hear them, tax day is come and gone, maybe you're not thinking about taxes anymore.

But hopefully, you can apply these things in your life. Because really, tax day is not when you reduce your taxes. You reduce your taxes throughout the whole prior year by living your financial life differently. That's what reduces your taxes for the most part. It's not about just filing your taxes differently. It's about living differently and doing different things. But at any rate, we're going to talk about taxes, and I hope it's a great episode today. The first question is about gift taxes.

GIFT TAXES

Speaker:
Hi, Dr. Dahle. I'm a new attending on the East Coast. I'm considering opening a 529 account for myself as beneficiary. My question is, does the gift tax limit apply if I am both the owner and beneficiary of my own 529 account? Second part to my question is, if in a few years I have a child, I decide to make them the beneficiary of that account, does that gift tax limit apply at this point? Thank you so much for what you do.

Dr. Jim Dahle:
Okay, great questions. First of all, I'm going to answer the questions you asked. Then I'm going to answer the question you should have asked. The question you asked is, does the gift tax apply? No, it doesn't. You're the beneficiary, you're the owner of the account, there's no gift tax. You can put gobs of money in there, enjoy, have a good time.

When you change the beneficiary, the gift tax applies, particularly if you're going to a new generation. You're going to your child or you're going to your grandchild. Yeah, gift tax limits apply.

Now there's still this thing you can fund one of these 529s, you can put five years of funding in up front. The gift tax limit normally is $19,000 a year, but you could put in five years’ worth. There's some additional paperwork to do that. I'm not a huge fan of doing that because of the additional paperwork.

And frankly, if you're in a position that you can put $100,000 into a 529 right now, do you really think paying for college is going to be that hard that you have to start now and do this for 18 years in order to have enough in there for college? No, you don't.

Now the question you maybe should have asked is, “Should I do this? Should I start funding 529s before I even have kids?” And my answer to that is no. People go crazy on 529s. They hear about 529s, they're like, “Oh, what a great thing. I want to start so early. I don't even have a partner yet, much less a kid. I'm not even pregnant yet and I'm going to start 529s. And then we'll get more years of tax-free compounding. I just want to max out the benefit of 529.”

Well, here's the deal. You cannot max out the benefit of 529. You're not wealthy enough. Because you could do this in every state. For you and your partner, you could each open a 529 for every kid in every state. You could put a billion dollars into 529. So you're never going to max out the benefit of a 529.

The question to really ask yourself is, “How do I want to pay for my kids' college?” And you don't have to save it all up in advance. You can select a school that's not that expensive. My first two kids are going to a school where tuition's like $6,000 and one of them has got a full ride. You don't have to go to a super expensive school to get a top notch education.

So, that's one thing. You can just choose less expensive options. You can go places you get scholarships. Lots of the kids of White Coat Investors are very smart and get good scholarships. And so that reduces the cost as well.

Two, you can cash flow it. If you're listening to this podcast, you're probably a doctor or somewhat similar professional. You're still in your 50s when your kids are going to college. My kids started college when I was in my 40s. And you know what? I'm still making money. I don't actually need any of the college savings I put away over the years. I could just cash flow it out of my earnings now. So, that may not be the case if you've got to come up with $80,000 a year because you're sending your kid to the most expensive college in the country. But you can probably cash flow something.

The third pillar I talk about when I'm talking about paying for college is their contribution. That might be scholarships they get. It might be working during the summers. It might be working during the school year. It might be a TA or an RA or something at the college, but they can make a contribution and have some skin in the game. I'm not a huge fan of them taking out big old student loans as their contribution, but they can do something. My kids all work. And they put away money. They have some savings. It's all theirs. And they have earnings they can use to help pay for their college as well.

And then, of course, the fourth pillar is savings that you do in advance. I think it's probably good for you to save something for college for your kids. It's probably best to do that in a 529 rather than in your taxable account or in some crazy whole life insurance policy or some other method of saving for it. But I think it's good to put something away.

But you don't have to start before they're born. You don't even have to put $19,000 a year in there. Run out a future value calculation. $19,000 a year for 18 years. This is going to be a massive 529. I've got low six-figure 529s for all four of my kids. And they're almost surely going to be overfunded. I've got no kids talking about medical school or dental school. And for the most part, going to school here in Utah is pretty cheap. And so, I've surely got at least two overfunded 529s already. And that's with Whitney doing everything she can to blow her 529. Trust me. She's going on this study abroad round-the-world trip this spring. I don't know how many countries. It's 12 countries or 15 countries to learn about business, international business. She's trying to spend her 529 money. She's not going to be able to do it.

And so, you may be dealing with the overfunded 529 issue. And there's a pretty good outlet for $35,000 in a 529. You can roll that into Roth IRA for the beneficiary in lieu of their own contributions. You still have to have earnings. And it's not like an addition to the regular amount you can put in every year. But that's an outlet for a little bit of an overfunded 529. But if you put an extra quarter million dollars in there that they're not going to spend, well, you're going to have to come up with another option. And that option is usually changing the beneficiary to their kids, which isn't a terrible thing.

So if that's your plan, I think that's fine. But make sure you're at least got your retirement taken care of before you start going crazy on these super-duper 529s people are doing. If you don't want to have a bunch of money in 529s that you actually need for your retirement.

Okay, let's take the next question. And this one's about withholding taxes.

TAX WITHHOLDINGS

Speaker 2:
Hey, Jim, thanks for all you do. I have a question regarding tax withholdings. This year was my first full year of attending income and I have a five-figure tax bill. After speaking with HR and my CPA, I've discovered that per IRS Schedule 15, my bonuses, which make up approximately 50% of my income are taxed at 22%. This is an institutional policy and cannot be changed, despite my marginal tax rate being 35%.

I've spoken with my CPA who's given me a nominal amount that can be withheld from my paychecks moving forward that should cover the taxes, assuming my production bonuses stay the same, which they are typically.

However, my question is, would there be any downfall to putting this nominal amount in a high-yield savings account moving forward? I could enjoy the accrued interest as well as having flexibility should unforeseen circumstances arise, thus not having to have overpaid my taxes.

Are there any things that I'm missing as far as penalties and or accrued interest on the owed taxes? I know that as a 1099 employee, underpaying your taxes has such penalties, but I can't find any information for W-2 employees. Any insight or recommendations would be appreciated. Thanks.

Dr. Jim Dahle:
Okay, let's talk about this because people worry about this, in my opinion, way too much, particularly the first time they have to start making estimated quarterly payments, etc.

First of all, all you residents and fellows out there, you're about to pay as much in taxes as you used to earn. When you become an attending, in general, your tax bill is going to be more than what you were paid as a resident or as a fellow, so be prepared for that.

You talk about a five-figure tax bill and a whole bunch of people listening to this are like, “That'd be nice.” Because they've got a six-figure tax bill. And if you're making $400,000, $500,000, $600,000 plus, you probably do have a six-figure tax bill. Both of those, of course, are maybe better in some ways than a seven-figure tax bill too.

But I'll tell you what, big tax bills are not necessarily terrible because it generally means you're making a lot of money. So, don't beat yourself up too much that you have a big tax bill.

The U.S. federal income tax system is a pay-as-you-go system. You can't do what I do here in Utah on my state taxes. In Utah, it is not a pay-as-you-go system. Not a dollar of my Utah state income taxes are due before April 15th, and they're all due on April 15th. It's not pay-as-you-go, and many states are like that. Some states are pay-as-you-go, some are not.

But the federal system is pay-as-you-go. The way that works is they mandate, they pass laws that employers have to withhold a certain amount of taxes from your paychecks. And so, that's how most people pay-as-they-go.

Now, if you're the employer, if you are paid on the 1099, meaning you're in business for yourself, there's really no such thing as a 1099 employee. You're not an employee if you're getting paid on 1099, you're an independent contract. Then you're responsible for withholding those taxes yourself and sending them to the IRS on a quarterly basis. And I say quarterly, but it's not actually quarterly. It's April 15th, June 15th, September 15th, and January 15th. You'll notice one of those quarters is only two months long, and another one is four months long, but that's when they're due. That's the system.

So, anybody can make quarterly estimated payments, whether you're an employee, whether you're living off your investment portfolio, whether you're in business for yourself, anybody can do that. Some people have to do it, but anybody can do it.

One thing you ought to be aware of though, is it's almost always more beneficial to you to just increase your withholdings rather than making those quarterly estimated payments. Because withheld money is treated the same, whether it's withheld in January or December. And so, a really kind of savvy little trick, if you know this, is you have more withheld at the end of the year than you do at the beginning.

Now you can't do this when you're making quarterly estimated payments, or you got to fill out this form and you may end up getting some penalties, et cetera, because you did that, because it's supposed to be pay as you go, but nobody's checking to make sure you're paying as you go, if you're paying via withholdings.

And that includes withholdings by your employer, that includes withholdings from RMDs you're taking out or Roth conversions you're doing. You can just have more of that sort of stuff withheld at the end of the year, if you would like to.

In fact, this pretty savvy way for retirees to pay their taxes is just to use a big chunk of their RMD to pay taxes. There's no rule that you can only have 10% or 20% withheld. You can have the whole RMD withheld, if you like, for taxes and just send it to the IRS and take care of your tax bill for the year.

The other thing to learn, this is your first time doing this, is that withholding is not paying taxes. Your tax bill and what is withheld are not the same things. They're totally different things. And you've got to understand that.

You're talking about your bonuses, for example, being taxed at 22%. They're not taxed at 22%. The employer has no idea what they're being taxed at because they don't know your situation. They don't have your return at the end of the year. And trust me, if your marginal tax rate is 35%, you're probably paying 35% on those bonuses, even if the employer is withholding 22%. They're trying to do you a favor by withholding some money so you don't have to come up with money on April 15th to pay your taxes.

But the truth is, so long as you can pay the tax bill come April 15th and you haven't spent the money or given the money away, it's okay not to pay it. Now, there's a penalty if you don't pay money as you go or have it withheld. There is a penalty for doing that. But that penalty, for the most part, basically works out to be about the interest you would have earned on the money in your high yield savings account. That more or less is the penalty.

And so, it's not like they're going to throw you in jail for making too low of a first quarter estimated payment. You got to really cross a pretty big threshold to be committing any sort of tax fraud or tax evasion type of stuff. You just underpaid your quarterly estimates, you're going to pay a penalty. And that's mostly just the interest you earned on the money in the meantime, because you were supposed to have paid it to the IRS.

So, don't spend a lot of time worrying about it. Try to pay as you go, but don't worry about it too much. Worry about it enough to make sure you didn't spend the money. If you think your effective tax rate is going to be 28%, for instance, that 28% of what you earned is going to go to the taxman. Well, make sure that 28% of what you earned has either been withheld or paid in quarterly estimated payments, or that you still have it, because you're going to be writing the check come April 15th.

And that's okay. You might pay a little bit of interest/penalty on that. But is that any worse than giving the IRS a free loan for 10 months by having more withheld than you really needed to, or making too big of quarterly estimated payments?

I can tell you this. I have paid too much and gotten massive tax refunds come April 15th. I have paid too little and paid penalties. I have not had the right amount withheld every quarter. It's really actually pretty hard to estimate all these if you have highly variable income, like I do.

If you have the same income every year, sure, it's not that hard of a game. Just basically look at what you paid last year and make sure you're in the safe harbor, which is typically by withholding or paying this quarterly estimated for you high earners, 110% of what you owed last year. And then if you have the exact same financial situation, you get 10% back as a tax refund.

Alternatively, you can really try to guess what you're going to owe this year and just pay 100% of what you owe, and that'll get you in the safe harbor as well. So that avoids your penalties, but the penalties aren't that big a deal.

So, don't lay awake at night worrying about this because you might have to pay some penalties. Lay awake at night if you've spent the money that you're going to have to pay in taxes, but not just if you got to pay a little bit of penalties, because theoretically you made that an interest on the money in the meantime.

Learning all this stuff is pretty important. And we're trying to get this information into your hands as best we can. We have a blog, we have this podcast, we have a YouTube channel, we have online courses, we have a live conference we'd love to meet you personally at. But we also do webinars from time to time. I think I'm lined up to do four webinars this year. I've already done a student webinar.

Well, guess what's coming up? The Resident webinar. May 22nd, it's at 06:00 P.M. Mountain. It's live, which is always fun because you never know what questions you guys are going to ask, but I tend to hang around after this webinar for an hour or two answering your questions.

I'm going to drag Andrew in from studentloanadvice.com. I think he knows more about managing physician student loans than anybody else in the country. And I'm going to drag him along and do a little bit of the presentation as well and stick around and answer your questions afterward.

This thing's totally free to you. It's aimed at residents. We had attendings come to the student webinar. You can come if you're attending too, you can come if you're a student too, but the material is aimed at residents. We're going to try to answer questions that apply to residents.

You can sign up for this at whitecoatinvestor.com/resident. And even if you can't make it that night, or you can only make part of it, we'll record it. We'll send it to you. We want you to get this information. We're not trying to hose you from it. It's going to be May 22nd at 06:00 P.M. Mountain.

We're going to talk about a smooth transition to hit the ground running as an attending, understanding what to do with your student loans to minimize their cost, ensuring you have the right insurance protection in place, and nothing more. Make sure you're saving and investing your money to reach your goals so you can spend the rest on whatever you like, guilt free. We want you to be able to understand the basics of investing so you can start building wealth ASAP.

And to bribe you to come to the webinar, to bribe you to be concerned about your financial future and be wealthy someday, we're going to give away five free copies of the resident version of our flagship Fire Your Financial Advisor course. That's a $2.99 value for each of those. And everyone who registers for the course automatically, or for the webinar, is automatically entered to win. Again, whitecoatinvestor.com/resident.

Okay, next question comes in via email. This one is about the home office deduction. Good times. People want to talk about their cars. People want to talk about the home office deduction. These are the two favorite deductions out there.

HOME OFFICE DEDUCTION

Dr. Jim Dahle:
This email says, “My wife is an attorney who works from home and is a sole proprietor. We're currently deducting her home office space on taxes. We're contemplating buying a one-bedroom apartment, which we use by her as full-time office space. From a tax perspective, what is the best way to go about this? Should her practice buy the apartment and deduct costs? Should we buy the apartment and then rent to her practice? In the latter case, would that just be a wash? Rental expense divided by rental income. Any guidance would be appreciated. I don't believe I've heard this question in prior podcasts.”

That might be true. We're only on podcast 418. We might not have ever covered this. I guess that's possible, but I'm not going to go back and listen to 417 podcasts to find out, plus another whatever, 100, 200 of the Milestones to Millionaire episodes. There goes my memory. Maybe that was the head injury or maybe I'm just getting old, but here we go.

Okay, good question. Let's talk about this. There are actually a lot of options. You can continue to just do the home office deduction. There's two options for that. There's the easy option, the simplified version where you can deduct up to 300 square feet of space used regularly and exclusively for the business at $5 a square foot. That's a $1,500 deduction maximum.

Alternatively, especially if you've got more than 300 square feet or you have a particularly expensive house, you might want to use the actual expenses method where you actually include all the expenses of your house, your utilities and your mortgage interest and property taxes, and you can even depreciate it, although that depreciation has to be recaptured when you sell.

It's not the simplified method, but it might be a much bigger deduction. That's also an option. Same rules, regular and exclusive use for the business. If your kids are doing their homework in that space, that's not a home office. Regular and exclusive. How regular is regular? Well, if you're not using it every month, I'd say maybe even every week, it's probably not really a home office, but if you meet the rules, take the deduction.

One of my favorite ways to get a great tax break for using your home office for your business is to rent out your home or even a second home to your business. For legitimate business purpose, you can do that up to 14 days a year and not pay taxes on that income. It's still a deduction to the business. It's not income to you though. It's really awesome if you're qualified.

It's called the Augusta Rule most of the time, and it's for up to 14 days a year. The reason it's called the Augusta Rule is that's where the Masters is, the Masters golf tournament. People would rent their house out. People come into this relatively small town to watch the Masters, they'd rent their house out and not have to pay taxes on the income from renting their house out. Some people even still do that with Airbnb or Vervo or whatever. If you do it less than 14 days a year, you don't have to pay taxes on that rental income. It's pretty cool.

Oftentimes, that's dramatically larger than the home office deduction. If you're doing the simplified version, that's only $1,500. Well, my house, if it were being rented out on Vervo, may rent for $1,500 a night times 14 nights. It could be a much, much bigger deduction.

Okay, now the things you were thinking about. Buying a condo, either personally or via a separate business or LLC, which is probably the way most people do it, and rent it to your business year round. That's mostly a wash. It's deduction for your business, taxable income to you. Yeah, you're probably saving some payroll taxes there because that rental income, you don't pay payroll taxes on it. And you might be able to shelter some of that income with depreciation, so that might help as well. But mostly, at least in theory, it's a wash because what you're paying as a deduction on one side, you're taking as income on the other side.

Another option is you don't have to own the stupid condo. You can just go rent somebody else's condo and pay them rent. It would be deductible to your practice. It's a business expense. It's a legitimate business expense and would be a deduction to your practice.

Now, there's no offsetting rent. It's just an additional expense compared to when you're running the business out of your own home, but it would be an option. That's kind of it. It's those four options.

Which is best for you is hard for me to say. The reason we run WCI out of our home is because I like the really short commute of just going up the stairs, but the secondary reason is it's way cheaper than paying rent to have something else.

But we do take advantage of the Augusta rule. We have meetings here 14 days a year. And guess what? We rent the place out. I think that's the biggest free lunch out there, but you may also be able to take the home office deduction in addition, that sort of a thing. But if you need the space, you can't do it in your home anymore. Maybe buying a condo would work out great, especially if that condo also appreciates a bunch while you own it. I hope that's helpful. And maybe it'll be another 418 episodes before we talk about that again. I don't know, but at least now we've covered on the podcast at least once.

TAX LOSS HARVESTING

Dr. Jim Dahle:
Okay. Andy is on the Speak Pipe. He's got a question about tax loss harvesting, which is a hot topic in the last month, because the markets have been pretty exciting. I was looking yesterday, as I said, we're recording this on the 22nd. I think we lost 3.4% on our US stocks yesterday, and I'm sure international stocks and small value stocks didn't do so awesome either.

There was one day in April where I made more money than I've ever made in my entire life. I think it was April 9th. The market went up after President Trump's announcement about pausing the tariffs, it went up like 10%. Multiply 10% by all the money you have in stocks, and it was probably the most profitable day of your life as well. So, lots of volatility in the markets out there.

Good time to be careful about tax loss harvesting, because you don't want the market to move on you while you're out of the market tax loss harvesting. But it can be an opportunity. Obviously, when markets are really volatile in the bear market or correction or whatever, we're going to end up calling this thing when it's all over. That is usually the best time to tax loss harvest too. Let's see what Andy's question is though.

Andy:
Hi, Jim. This is Andy from Texas. Because of this dip in the stock market, I've decided to try my hand at tax loss harvesting for the first time. I have already sold shares of VFIAX at a loss and bought shares of VTSAX in my Vanguard brokerage account. Does this mean that I cannot do the reciprocal of this, meaning I cannot sell my losing shares of VTSAX and buy shares of VFIAX within that 30-day window? Does this also mean that I cannot buy any shares at all of VFIAX, even if I am funding this purchase from my checking account? Thanks for your clarification.

Dr. Jim Dahle:
Okay, what Andy is referring to is the concept of a wash sales. The whole point of tax loss harvesting is to acquire some losses. And they're real losses, but hopefully they're not permanent losses. Stock market goes down, you're swapping one investment for one that's a lot like it, but not in the words of the IRS, substantially identical. And you're grabbing that tax loss, and then hopefully the market goes back up.

You're just taking advantage of the market's volatility to grab some tax losses you can use to offset some of your other income. You can use $3,000 a year to offset ordinary income, which is cool. Although that number has not been indexed to inflation nor increased in the entire time I've been investing. You can use an unlimited amount against capital gains. And even a short-term loss is useful because it can be put against either a short-term gain or a long-term gain.

So getting these is pretty helpful as long as it doesn't really cost you anything. As long as you don't screw it up and you're out of the market and the market went up 10% because Trump made an announcement and you lost 10% of all the money you had out of the market. That's not worth it if you're doing that tax loss harvest. The idea is that you try to stay in the market as best you can, that you don't lose any money while you're tax loss harvesting. You basically own the same portfolio afterward and you have the tax loss.

Now, if you end up just using that tax loss for when you sell these shares later in retirement, you really only deferred the taxes. That's not nearly as beneficial. But for a lot of us, we use them to offset other things. It gives us opportunities to rejigger our portfolio or get rid of a legacy holding in the portfolio or offsets the sale of a home or a business. And there's always that $3,000 a year of ordinary income you can use it against.

But don't screw up your portfolio just in order to tax loss harvest. This is a very minor point when it comes to portfolio management. There's companies out there that want to sell you services that are primarily just, “Oh, we're going to add all this value by tax loss harvesting your stuff.” Well, how much value are we actually getting from those tax losses? You probably ought to calculate that before you determine it's worth paying thousands and thousands of dollars in fees to get more tax losses.

But the basics of the wash sale rule, the point of the wash sale rule, and it's interesting because this applies to stocks and mutual funds. It doesn't apply to cryptocurrency. So, anytime you have a loss in your Bitcoin or some other crypto asset, just sell it and buy it back two seconds later. No big deal. You get that loss and you still own the same thing, but you can't do that with stocks and mutual funds because of the wash sale rule. In fact, you can't buy it back for 30 days afterward, or it becomes a wash sale and you don't get to have that tax loss. In fact, you can't buy it in the 30 days before that and then sell other shares with a loss and get that tax loss.

That's the way the wash sale rule works. And the IRS says you can't buy a substantially identical investment. Now you would think that that would count selling a total stock market fund from Vanguard and buying a 500 index fund from Vanguard or a total stock market fund from Fidelity or Schwab or iShares or whatever, but it really doesn't. The IRS doesn't seem to care. As long as you're not buying the same thing back, they don't care.

And you can make an argument if some auditor really got crazy about this, which I've never heard of any of them doing, by the way. They really got crazy about this and said, “Oh, you're using the Fidelity one and that's substantially identical.” Well, you could point out “Well, there's a different number of stocks. The stocks entered are different. It's managed by a different company. The expense ratio is different.”

There's all these arguments you could make if you're in that situation that it really is different, even if the correlation between the two is pretty much 99.9%. And in fact, the correlation between a 500 index fund, BFAIX, and the total stock market fund, BTSAX, that you're using, the correlation is 0.99.

Basically, you haven't changed what you own in your portfolio. You're just harvesting the tax loss. And I think that's a completely reasonable way to go about it. But no, you can't turn around and buy it back. You can't buy it back in an IRA. You can't buy it back in a different taxable account. You can't buy it back in the same account. Your brokerage is definitely going to flag that as a wash sale.

Interestingly enough, though, this doesn't apply to HSAs or 401(k)s or 403(b)s or 457(b)s. Those are different. You can sell it in your taxable account and buy it in your 457(b) and the IRS doesn't seem to care. Yes, you've broken the spirit of the law, but you haven't broken the letter of the law. But your IRA, they do specifically mention in the regulations, you can't sell it in your taxable account and buy it in your IRA. That would be a wash sale. I think that explains the rules behind the wash sale.

What happens to a lot of people is they do this for the first time or the first few times and they start getting a little crazy. They start doing this frenetic tax loss harvesting. And they go from the Vanguard total stock market fund to the Vanguard 500 index fund. And then two days later, they go to the Vanguard large cap index fund. And they're like, “Oh, where do I go now? I'll change the ETFs and I'll buy the ITOT ETF of iShares.”

And you know what? You don't have to tax loss harvest that much. In fact, I basically don't do it more frequently than every couple of months. That totally eliminates the wash sale issue for me, number one. I never own more than two funds for every asset class that I have in my taxable account. And two, the other thing waiting a couple of months does is it eliminates the 60-day rule issue, which is that if you own a stock or a mutual fund for fewer than 60 days around an ex-div date, you've turned that dividend from a qualified dividend into an unqualified dividend. And that's going to cost you something too.

My point of tax loss harvesting is yeah, grab the losses when you can, but don't let it cost you anything. You don't want to be paying big commissions to do this. You don't want to be out of the market and miss a run-up while you're doing this. You don't want to turn qualified dividends into unqualified dividends.

So, don't go crazy tax loss harvesting. Yes, you should probably do it when the market goes down 13% or whatever it has this year. Stuff you bought at any point in most of the last year can probably be tax loss harvested right now. It's probably worth doing. Those tax losses are useful, but don't go crazy about it and don't screw it up. I've had a couple of blog posts on the blog to try to help keeping you from screwing it up. One's titled 13 Ways to Screw Up Tax Loss Harvesting. The other one is literally screenshots of how to do this at Vanguard now with ETFs. We hadn't had that on the blog before. We had it with some mutual funds and then Vanguard changed their interface.

And so, when I tax loss harvested a little bit last month, I took some screenshots. There's 24 new screenshots there. I literally take you by the hand and show you how to do this tax loss harvesting stuff if you have ETFs in your portfolio at the Vanguard brokerage.

We have another post that shows how to do it at Fidelity. If somebody sends us screenshots from Schwab, we'll put that sort of a post together. I don't have a taxable account at Schwab, so I can't take those. But don't screw this up. It's not that hard to screw it up.

I've gotten a couple of emails from people this month who have screwed it up. One of them ended up selling and buying, put in an order for the end of the day, and then the market went up 10% that day. And so they ended up selling for a gain instead of a loss. There's lots of ways you can screw this up. Don't do that, but it's worth learning how to do this. It'll save you a little bit of money on taxes.

QUOTE OF THE DAY

Dr. Jim Dahle:
All right. I think that's enough on tax loss harvesting unless we have some other questions about it. Our quote of the day today comes from Benjamin Franklin. He said, “If you would be wealthy, think of saving as well as getting. It's not just about earning. It's what you get to keep, not what you earn.”

Okay. Let's talk about another 529-related tax question.

TAX CONSEQUENCES FOR CHANGING 529 BENEFICIARY

Eric:
Hi, Jim. This is Eric from Ohio. Are there any tax consequences when changing the owner of a 529 plan? For context, my father has an Ohio 529 plan with leftover money. The original beneficiary is my sister, but she did not end up using the money. After years of compounding, it has a value of $100,000. He wants to simplify his own finances and change the beneficiary to my daughter, his granddaughter, and the owner to me, his son. Thank you.

Dr. Jim Dahle:
Okay. This is a great question. And I don't think when they put 529 law in place that anybody thought this through very carefully. Because technically a 529 belongs to the owner. If you're the owner, you can take the money out at any point and buy a sailboat with it.

But the way they have set up the gift tax laws around 529s is all about the beneficiary. For instance, if he changed the owner from him to you and kept the beneficiary your sister, no consequences. And in fact, if he changed the beneficiary to somebody in your sister's generation. Now you become the owner and the beneficiary, no tax consequences.

But by changing the beneficiary from your sister to your kid, now there's a gift tax consequence. And since it's more than $19,000, it's $100,000 he said, unless the market has really tanked, that's gift tax consequence. Sorry, there's going to be a gift tax return filed on that.

Now, that doesn't mean he has to pay any gift taxes. Unless he's got an estate tax problem, and he might have an estate tax problem at a much lower amount, but I think it's $28 million for 2025 if you're married. It's $14 million if you're single. If his estate is way smaller than that, which I'm guessing it probably is, most people's estate is much smaller than that, then there's not going to be any gift tax that has to be paid, just has to file a gift tax return.

And that's not the end of the world. I had to file a gift tax return when we funded our trust. Actually, I didn't do it, the attorneys did it. So you can pay somebody else to do this. You don't have to file it yourself. You can get your tax person to file it, but one will have to be filed. And if you pay somebody else to do it, that'll cost you some money. If you do it yourself, that'll cost you some hassle, but it's not the end of the world. It just uses up some of your estate tax exemption as well.

OPTIMIZING TAX BENEFITS IN A MARRIAGE

Dr. Jim Dahle:
Okay, next question comes in via email. The title is “Optimizing tax benefits in a marriage.” Well, this should be interesting. Hopefully this isn't somebody that wants to get divorced to save money on taxes, but I get those emails all the time.

This says, “How should the two partners in a marriage spread funds between the spouses to optimize tax benefits when it comes time to withdraw that money? Does it matter how much and which type of asset is held by the older or younger person or the person with the larger proportion of the funds?” That sounds like you're managing money separately between spouses, not always the best way to do it, often not the best way to do it.

Goes on, “I'm a 36 year old, started my first attending job a few months ago. I'm married to a 42 year old engineer. We have about $300,000 between an IRA, the TSP and a 401(k). In his name, we have about $250,000 between a 401(k) and IRA. His money's all Roth currently, 60% 500 index funds and 40% target retirement funds.” That's interesting to partially roll your own.

“Starting in 2025, we'll be in our peak earnings years and plan to switch over to traditional contributions.” That sounds reasonable. “My husband has a 401(k) and a family HSA available to him. I have a 401(k), 403(b) and 457(b) available to me.” Congratulations. You have lots of places you can save money.

“We plan to save $80,000 per year for retirement by filling both 401(k)s as these have good options and low fees, the HSA due to its triple tax benefit and at least 5K of the 403(b) to get my employer match.” Okay, that all sounds very intelligent. Good job. “The 403(b) and 457(b) have good options, but moderate fees at 0.3%. Do you agree with this plan? What would you do with the other $20,500?”

Okay. How do you spread funds between the spouses? Well, in general, I like to look at money as one big pot. Now, there are times when maybe you have separate finances in marriage. I understand some people like to do it that way for whatever reason. Certainly a second marriage or one person is dramatically more wealthy than the other, or you have different heirs. You want your money to go to your kids from your first marriage. Those are times that prenups tend to be wise and managing money separately might be wise as well.

But for the most part, when you're young and poor and you're doing this together, kind of where you guys are, you just manage it all together. Now you start looking at each account, which accounts offer the best investments, which accounts offer the best matches, which accounts have the lowest fees, et cetera.

You mentioned that the spouse has a 401(k) and the HSA, and the writer has a 401(k), a 403(b), and a 457(b). Surely you can get $80,000 into all those together. Especially when you include matches. Even just looking at those four accounts, 401(k), 403(b), 457(b), there's actually two 401(k)s. Maybe one of those is a 401(a), I don't know. But that's going to be more than $80,000 right there. Plus you've got backdoor Roth IRAs.

I suspect this couple, if they wanted to, could put $110,000, $120,000 away all in tax protected accounts. And they only plan to save $80,000. So, no problem. No reason to use a taxable account here if this is all retirement money. That's the nice thing is you don't have to deal with the additional costs and hassles and risks, asset protection risks, of investing outside of retirement accounts. But you're having to choose between which accounts to use because you have so many available to you.

Well, rule number one is get all the matches. Don't leave any matching money on the table. So make sure enough is going into each of the accounts that you get all the money that the employer is going to give you. Not getting your match is like leaving part of your salary on the table.

And it sounds like you're also opting to do tax deferred money as much as possible this year, whether that's the right decision for you or not is a totally separate question. And the one we've talked about ad nauseum on this podcast and on the blog, lots of details there. Search Roth 401(k) or Roth contribution or Roth conversion on the website and you can get lots of detail about that.

But we're assuming you want to do tax deferred money as much as you can this year. In that case, I wouldn't necessarily do a backdoor Roth IRA for each of you. That'd be $14,000 you're not going to be doing. And I would look at these tax deferred options through your employer provided retirement accounts. And of course, the HSA you get a tax break when you make a contribution, but it's also tax free when you take the money out.

I do the HSA. That's where our first money goes every year. That's $8,300. That's your first $8,300. And then to get whatever matches are available, you probably have to put some money into the 401(k)s or 403(b). So make sure you put enough into those to get that. That's step two. You're probably up to, I don't know, $15,000, $20,000 in there now.

Then in general, you want to use 401(k)s and 403(b)s before you use 457(b)s. Now, maybe there's some exceptions out there. 457(b) is really helpful if you want to spend money before age 55 or age 59 and a half, because you can get to that money without any additional penalties. Maybe you want to use a 457(b) if you're really looking to be an early retiree.

But in general, that's the last money you put into tax protected accounts because it's your employer's money. There's some risk that something could happen to the employer. This is less of a risk with a governmental 457(b), and you have a lot better distribution options out of a governmental 457(b) than a non-governmental one. But in general, you use 401(k)s and 403(b)s before 457(b)s.

You're probably looking at maxing out the HSA, him maxing out his 401(k), you maxing out the 401(k) or 401(a), whatever it is, and the 403(b) as much as you're allowed to there. And then talk to HR because if it's really a 401(k) and a 403(b), at the same employer, they likely share the same employee contribution.

And then see how much you have left. If you still got $20,000 to save, well, put it into the 457(b). That's what I'd do as long as it has reasonable distribution options and reasonable investments and reasonable fees. Yeah, 0.3% stinks, but your money's probably not there forever. Eventually, it'll be rolled into a better 401(k) or an IRA. So, 0.3%, it wouldn't keep me from using a retirement account.

I hope that's helpful to you. But the exact mix doesn't matter. If there's a little more in the 403(b) and a little less in the 401(k), that's not a huge deal. The truth is you're not going to become wealthy because you made this decision exactly right or had exactly the right asset allocation.

The way you end up with a lot in your retirement accounts is by putting a lot of money in your retirement accounts. And you guys are putting $80,000 in there this year. So that's probably a lot of money. Now, it says you're an attending. Presumably, you've got an income of $250,000, $300,000, $400,000, $500,000. $80,000 is probably at least 20% of that. That's probably enough to be saving for retirement.

But if you really want to have a lot of money in there, figure out a way to put $100,000 in there or $120,000 or $140,000 in there. And that's how you can really get your retirement accounts to grow quickly. Now, you do that by increasing your income. You do that by increasing your savings rate. And that'll make a much bigger difference than trying to figure out exactly what dollars go into what plan.

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Thanks for those of you leaving us five-star reviews. Those do help us to spread the word about the podcast. Just telling your friends helps spread the word as well. But a recent review came in. Really nice review. Lengthy one.

It said, “WCI has laid the groundwork for my financial success. I was given a copy of the original book by a co-resident back in 2018. I'd always been interested in personal finance. That book opened up a whole new world to me. The entire platform, website, forum, blog, and podcast truly contributed to my financial success and well-being.

I started my first job as an attending with over $500,000 in student loan debt. With the principles espoused by Dr. Dahle, I was able to pay off all my debt in a little over three years and been working towards financial independence ever since.” Three years. Awesome. We'll have to bring you on a milestone podcast.

“I assumed FI would allow me to retire early, but now I enjoy my job so much that I think FI will just allow me to continue practicing until 65 on my own terms. Thank you, Dr. Dahle and everyone at WCI for everything you've done and continue to make high-income health professionals thrive with personal finance. I truly do agree with you that we are better doctors when we have our financial house in order.” Five stars.

Nice review. Preach it. Pay it forward. Pass it on to the next person. The books. Tell people about the podcast. Tell them about the blog. We're here because we really do believe that doctors with their financial ducks in a row are better doctors, better parents, better partners, better physicians, better dentists, whatever they do. You just are not always worried about money and you're doing a better job. Thanks for doing what you're doing. Congratulations on your success. That was really awesome to pay that off in three years.

For the rest of you, you can do that too. Keep your head up and your shoulders back. You've got this. We're here to help. We'll see you next time on the White Coat Investor

DISCLAIMER

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.

Transcription – MtoM – 221

INTRODUCTION

This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 221 – Pharmacist builds a real estate empire and punches out in eight years.

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All right, welcome back to the podcast. As you know, this is the Milestones to Millionaire podcast. If you've accomplished a milestone, we want to highlight it and use it to inspire others to do the same. You can apply at whitecoatinvestor.com/milestone.

All right, our annual survey ends tomorrow. We use this to guide our content for the next year. We use it to determine who we partner with and where we refer you to. So please fill out the survey. It's at whitecoatinvestor.com/wcisurvey. We'll bribe you to do it. If you fill out the survey, you can enter yourself into a competition, win some t-shirts, or even free White Coat Investor online courses. These have a value of as much as four figures.

So, go ahead and fill out the survey. I think you have to give us your email address if you want to enter the contest, but we probably already have it anyway if you're filling out the survey. Thanks so much for filling that out. We do use the results. They really are important to us. I think last year, 1,900 people or something filled out the survey, and the entire team went over it. We made a lot of changes based on that survey. Thanks so much for those of you doing it.

All right, we got a great interview today. A pretty impressive accomplishment actually by a pharmacist. But stick around afterward. We're going to talk for a few minutes about 529s.

INTERVIEW

Dr. Jim Dahle:
My guest today on the Milestones to Millionaire podcast is Ryan. Ryan, welcome to the podcast.

Ryan:
Hi, thanks for having me on, Jim.

Dr. Jim Dahle:
Tell us a little bit about you, what part of the country you're in, what you do for a living, how far you are out of school, et cetera.

Ryan:
Yeah, I'm in Sacramento, California. I used to work at the Kaiser in Roseville as a pharmacist, and I slowly built up this rental portfolio on the side of doing that full-time job. I did that for about eight years. At first, I just bought one property a year, and after four years, it was making $10,755 a month. Then I scaled further. I bought some properties out of state, and now it's making over $50,000 a month in rental income.

Dr. Jim Dahle:
That's pretty exciting. What has that done to your pharmacy career?

Ryan:
I was able to retire actually in August of 2023. I worked pharmacy for eight years and then was able to retire from the rental income, being able to replace the full-time pharmacist pay.

Dr. Jim Dahle:
Yeah, presumably you're financially independent at this point. So, congratulations on that. Let's talk about your journey. Were you always interested in being a real estate investor, or what turned you on to this initially side gig/investment, now lifestyle? How did you get interested?

Ryan:
Yeah, that's a great question. I actually had a grandpa who got into real estate investing back in the 1950s. He bought a couple of properties in the San Francisco Bay Area, and he was not only able to retire early, but also help cover part of my college tuition and that of my brother's as well.

I realized that real estate is the best way to create generational wealth. I wanted to get started as soon as possible. At the age of 23, I graduated pharmacy. And then one year later, I bought my first property for $262,000 in Stockton, California, where I went to pharmacy school.

And what was cool was I rented out by the bedroom. I kind of did what my college buddy did. He lived nearby the college and rented out each bedroom. He lived for free and was able to make cash flow on top of that. So I kind of just copied that model. And obviously, I optimized it and everything. And usually, I am able to double or triple the typical rental income on a property by doing that. In fact, my top property makes about $6,550 a month.

Dr. Jim Dahle:
Yeah, very cool. Okay, there's some risk of being a house hacker. There's a risk that you're doing it at a time when you don't have a lot of other income, particularly if you're still in school. How do you deal with that risk? Did you just get lucky? Or did you have some family money to put down to have a lower mortgage? How do you deal with that risk?

Ryan:
Well, I started at $0. I didn't have any money prior to that. I did do some tutoring in high school. I saved that up and put that into stocks. But it was all my own money. I worked actually a lot of overtime, like 07:30 AM or 08:00 AM until pretty much 11:00 PM at night. I was working these double shifts at the hospital at Kaiser. And I just saved up a whole bunch of money. And actually, I lived with my parents for the first, I think, four or five years of investing. I bought these all as investment properties.

My debt to income ratio was pretty much zero because again, the student loans were covered partially by my grandpa and partially my parents helped out. After that, I was starting from zero though. I just continued to just buy one property a year. And I guess a lot of people are worried about the privacy aspect of renting by the room. I actually live at a house hack right now.

I guess the most important thing is really having the right tenants. I rent out to graduate students, typically. People in like medicine and pharmacy, dentistry, because that's where I started. They're my alma mater college. And because I rent out to those high quality tenants, it really minimizes the conflict. Because you have to think these students are really studying for the midterms or the finals. They're there throughout the whole year. And they're very serious students and also a lot more responsible compared to, let's say, freshmen and sophomores.

Dr. Jim Dahle:
Did you consider doing a more traditional apartment complex, duplexes, etc. or getting into industrial or retail or anything else? Or were you always student housing is the way I'm going to do it.

Ryan:
It was always student housing for me. I do have some duplexes. I do have a quadruplex. But mainly single-family homes.

Dr. Jim Dahle:
Very cool. What's the worst thing or the scariest thing that happened to you while you were building this portfolio?

Ryan:
There's definitely a couple of things I would say. The first thing that happened was, I think it was only four months after I bought my first property. That first property was 100 years old. And it had a broken sewage line, which I didn't know about. As you can imagine, I got this call at 11:00 P.M. at night saying, “Oh my God, there's sewage coming out of the kitchen sink. It's all over the kitchen floors. It's packing out into the showers, into the bathrooms.” It obviously smells like what it is.

I had to call out a sanitation crew to go out there, clean up the whole place. And I had a plumber stick a camera down the sewage line. And it turns out the whole line was broken because the roots from the trees in the backyard were sticking into it. I had to replace the whole line. It cost about $9,000 to clean it up, replace the line with PVC pipes. And that was just the first thing that happened to me.

I also had to replace the AC system because California is like 100 degree summers and our AC was not working. That one broke down too. So it cost $15,000 to replace that. And there was just all these problems that happened on the first property, just by virtue of me not doing my due diligence, really looking through all the inspection reports. And it cost me over $30,000.

Since then, obviously, I've learned to do the due diligence for the sewage line. For example, you can get a sewage lateral line inspection on the house before you buy it so that you can negotiate with the seller if you find any breaks in the pipes, which is actually very common. I would say about 50% of the houses I bought had breaks in the sewage line or some sort of cracking or something that had to be repaired.

Dr. Jim Dahle:
Yeah, almost a little bit of a negotiation technique anyway.

Ryan:
Yeah, definitely.

Dr. Jim Dahle:
Okay, tell us a little bit about how you've managed debt. How much have you typically put down on these properties? Are you doing cash out refinances to buy another one? Are you trying to pay these off? Are you trying to deliberately maintain a certain debt to value ratio? Tell us how you're managing debt.

Ryan:
I do a 20% down typically. I do have some houses on a 15 year mortgage and I have other houses on a 30 year mortgage. The ones for the 30 year mortgage, they're more of a cash flow play. I obviously will maximize the cash flow there. And the ones on the 15 year mortgage, well, they're all going to be paid off by time I'm in my 40s basically because I bought the first one while I was 23 or 24. 15 years from there is actually the first one would be paid off when I'm 38. I have those cooking in California and then I have a bunch in Ohio that are on 30 year mortgages.

As far as debt, they're all conventional financing, except for when I hit my 10th property, I couldn't use conventional financing anymore. I started using DSCR financing, which is a debt service coverage ratio loans, which actually don't require you to have a W-2 income. You can buy those as long as you have the down payment. And as long as the estimated rental income on the appraisal report covers the estimated mortgage payment. The ratio usually has to be 1.25 times the coverage, but yeah, you'll be able to get qualified even if you don't have a W-2 for that.

Dr. Jim Dahle:
Yeah. I'm curious, now this is what you do. I presume now you would qualify for real estate professional status. Did you ever qualify for that while you were practicing pharmacy and use that to offset your earnings?

Ryan:
Yeah, I only qualified that the last year because I retired in August. I basically had four months where I was just full on real estate. The tricky part about the real estate professional status is you have to work more hours in the real estate than the W-2. So if you're working 40 hours as a W-2, you have to be working 41 hours as your real estate professional. I was only able to qualify for it in the last year, but I was able to get a $40,000 check on the 2023 because I qualified for it.

Dr. Jim Dahle:
Yeah. Now let's talk a little bit philosophical. You spent years in college and then in pharmacy school, learning how to be a pharmacist. And then eight years into your career, you're kind of done, you're kind of out. Were you happy about that? Were you a little bit bummed about that? Did you stop enjoying what you were doing? Tell us a little bit about how this success you've seen with real estate has meshed with what's more of a traditional career.

Ryan:
Sure. I got into real estate investing because I wanted financial freedom, financial independence, the ability to do what I want, where I want, with whomever I want to do it with. And just having those options available and that freedom is really what drove me to doing real estate.

I saw all of these pharmacists who are in their 50s or 60s and they were just not liking their job anymore. They're like, “I wish I could have quit 10 years sooner, but I have to pay the bills. I have a mortgage payment. Maybe I have children to cover and pay for.” And so, they're just working nonstop and they were kind of tired of it. And I didn't want to be in that position where I'm in my 50s and 60s and looking back saying, “Wow, I could have done a lot more than just stick with the same thing every day for 30 years.”

And so, that's kind of where I was at, at least my headspace. And having financial freedom, it allowed me, when I wake up in the morning, I get to set my own schedule. I get to decide what I do. If I want to work one day or two days as a pharmacist, I could, but it's not necessary. In fact, I haven't been working since August. I haven't been practicing since August of 2023 so far. But yeah, I can always go back to it if I want to pick up a couple of shifts here and there.

I did enjoy the aspect of always being able to help people in that sense by improving their health and optimizing healthcare and all that. But I also help in a different sense by providing really good quality student housing. And that's one of my passions as well because when I first started out, I was recently removed from being a student and I really could understand what the students struggle with and relate to that.

I've even helped some of the students and given them advice for pharmacy school. My goal is to provide the best housing so that they can just be stress-free, just focus on their studies.

Dr. Jim Dahle:
Yeah. And you must not miss it too much. It's been 18 months and you haven't gone back to it. You must be okay with being retired essentially at this point.

Ryan:
Right, right.

Dr. Jim Dahle:
I'm curious if you have defined what enough looks like in your world or do you expect to have 2,000 doors under management in another 15 or 20 years?

Ryan:
Sure, that's a really good question. I would say if you're making maybe $25,000 or $30,000 a month or so, it's pretty much you'll cover everything you ever need. With that being said, I don't see any reason not to grow. The more we grow, the bigger the reputation I get in that local market as being one of the best student housing providers.

My goal is to eventually get to 100 houses. I'm at 14 right now. It's just a goal. I'm not really attached to it to necessarily have to hit it. But I do like to reinvest the gains that I make or the cashflow that I make from the real estate to continue to grow.

Dr. Jim Dahle:
Now, it doesn't sound like you've inflated your lifestyle all that much despite bringing in $50,000-ish a month of what ought to be pretty tax sheltered income, I presume. You're still sharing a place with others, house hacking, you said. You lived with family for five years while doing this. Do you anticipate increasing your spending at some point?

Ryan:
Not too much until I have children, I suppose. I'm very frugal. Well, I guess it depends on your definition of frugal. But last year, I think I maybe spent less than $40,000 for the whole year in personal expenses. And that includes travel and everything. So I'm not a big spender or anything like that.

Dr. Jim Dahle:
Any regrets about going to college and pharmacy school and starting your career that way?

Ryan:
No, no, definitely not. This is what helped me. That high income is kind of what allowed me to build up so much capital to be able to invest in this vehicle. Real estate is, as you probably know, capital intensive. You generally need to have a 20% down payment unless you're going to choose to live at the property. Once you get started, you can use leverage. You can use HELOCs, cash out refinances to really expand a little bit quicker. But with that being said, I think it's very important to have a baseline high income or a decent income, I would say, to invest into real estate.

Dr. Jim Dahle:
Yeah, awesome. Well, Ryan, congratulations to you on your success. I have often talked about, particularly with short-term rentals, that this is likely, especially with a healthy dose of leverage, the fastest route to financial independence out there. And I think your experience demonstrates that particularly well. Thank you so much for being willing to come on the podcast, share your experience and inspire others that want to do something similar.

Ryan:
Yeah, of course, no problem. I do have a website for anybody interested, www.newbierealestateinvesting.com/guide.

Dr. Jim Dahle:
All right, that was fun to hear somebody that just smashed it out of the park. It may not be the classic thing for somebody who wants to have a full career as a doctor, a lawyer, a pharmacist, or a veterinarian or whatever, because he was basically out in eight years. He does a little bit of real estate coaching now, but mostly just kind of builds his real estate empire. And it sounds like he's just kind of getting started, despite already having far more income than he needs.

The reason I asked him that last question about regrets about coming there through a pharmacy door is he spent a lot of time learning how to do that. I don't know that that's the most efficient way to do it, but it certainly does make it easier to be a real estate investor when you have a great source of capital, such as the income that you can have in a high income profession like pharmacy or medicine or whatever.

So, it's pretty cool. If you want to try doing something like that, I certainly encourage you to do it. Be careful with your risks, learn how to manage leverage, learn how to do due diligence, all those things that it takes. This is not as simple as just dumping money into mutual funds and forgetting about it, but it can also be very, very effective.

Some of you may know this, but one of the things I told myself 15 years ago was if I couldn't get White Coat Investor to take off as a business, I was going to start a real estate empire. And luckily White Coat Investor did, so I didn't end up doing that. Our real estate investments now are all totally passive, but we certainly considered it. I don't think it's some crazy route to financial independence. I met lots and lots of docs and other high income professionals that have gone down that route.

FINANCE 101: 529s

Dr. Jim Dahle:
Okay, I told you at the beginning we're going to talk a little bit about 529s. 529s are the premier savings vehicle for college savings. It's not the only thing you can use. It's possible to save up for college using just a taxable account. You can do it using a custodial account, a UTMA account. You can save for college via real estate. And if you have the real estate paid off by the time they get to college, they could just use the cashflow to cashflow their way through college. Or you can sell the real estate and use that cash to pay for college.

There's lots of different ways to pay for college. One of the more common ones, of course, is encourage your kid to get scholarships and to work during the summers and during the school year, and you help to cashflow. It's actually not a requirement that you save up for college in advance, especially if you're a high income professional. I could easily cashflow my children's college education, but they're at a relatively cheap school.

School selection is so important, which brings us to the first point about 529s. 529s are the most tax efficient way to save up for college. Once you put the money in the account, as long as it's only used for legitimate educational expenses, which is basically everything but their transportation, it comes out tax free. Everything it earns for the 18 years or whatever you're putting money in there comes out tax free. And it's got much higher limits than Roth IRAs. In fact, it's basically unlimited how much money you can put in the 529s.

The gift tax rules apply. I think this year it's $19,000 a year, each of you can give to your child before you got to file a gift tax return. But you can open a 529 in every state and you can get as much as like a half a million dollars into each of these. And your spouse can as well. Literally you could probably leave a billion dollars to your kid for college. And thankfully college doesn't cost that much these days.

I'm actually surprised how much some White Coat Investors are trying to get in the 529s. I don't know what their plans are. It's like finding the most expensive school in the country and paying full freight there and then having their kids go to dental school. I don't know what their plan is when they're saving up $400,000 and $600,000 and $800,000 into each 529 for their kids. But for most people out there, just putting something in there is probably a good idea.

I think what we anticipated when we were first starting to save for colleges, we probably anticipated giving them something like $20,000 or $30,000. And we were able to be a little more financially successful than we expected. So we ended up having bigger 529s than that. But by the time they're done with school, given where they're going and how they're spending from it, I've got really two into college now. One of them graduates from high school this year. They're going to have significant 529s left over.

There's lots of things you can do with overfunded 529s like that. Probably the best thing to do is to just change the beneficiary to their kids. That gives you another 30 years or so for that money to compound tax-free. And you may have some gift tax implications there as you change generations. But the interesting thing is those gift tax implications are going to your kid, not to you. So, if you're the one with the estate tax problem, that's okay. This is not your problem, it becomes their problem.

Now, I guess if you're wealthy enough that they're going to have an estate tax problem too, that might not really be a fix. But for most of us, it's probably a one-generation issue. Very cool.

How should you invest your 529? There's a lot of schools of thought on this. Some people treat it kind of like retirement, take less risk as they go on through the years and try to have it mostly in cash by the time they start college.

I've looked at it differently because I figure I could cashflow college if I needed to. So there's really little downside when the market's tanking as they start to spend that money. I've invested aggressively the whole time, including while they're in college. I've got 529s for each of my nieces and nephews. I think we have like 35 529s or something. And I've got eight or 10 of them withdrawing from it right now. And they're all still fully invested. They're 100% stock 529s. And that worked out really great in 2023 and 2024. Because obviously whatever's still in there after those two years was 50% more than what it was when they started.

It didn't work out so great in 2022. Wouldn't have worked out that great in 2020 either. So you've got a considerable possibility of a decrease in value in the 529 as well as the consequences of decrease in value in the 529.

As a general rule, you should use the 529 in your state, at least up to the limit of whatever your state's going to give you as a tax break, as a deduction or as a credit. But above and beyond that, you can use a good 529. And the good news is there are more and more good 529s every year. There's probably 10 or 15 of them now.

Some of the classic ones tend to be New York's and Michigan, I think, is where I ranked number one the last time I did this. Utah's always in the top five. Nevada's always in the top five. These are good 529s. And if your state's not giving you any benefit or they don't care which state you use to get the benefit, you can just open one up at Utah. Utah's is my529.com or Nevada, especially if you already have a Vanguard account and you see the 529 when you log in to your Vanguard account.

But there's plenty of other good 529s out there. Don't feel like you have to use a Utah one or a Nevada one or a Michigan one. Probably a third of them now are pretty darn good. So that's a nice benefit of the 529 system where the states compete against each other to provide the best possible 529 out there. Maybe we ought to do this with 401(k)s have them run through the state instead of individual employers where people often get kind of a bum deal.

SPONSOR

Dr. Jim Dahle:
All right, our sponsor for this episode is locumstory.com. And this is obviously a sponsor promotion for them. But the weird thing here is there's nothing they are trying to sell you. locumstory.com is a free, unbiased educational resource about locum tenants. It’s not an agency. They simply exist to answer your questions about the how-tos of locums on their website, podcast, webinars, videos, and even have a Locums 101 Crash course.

Learn about locums and get insights from real life physicians, PAs and NPs at locumstory.com.

All right, our time is up. Hope you enjoyed the episode. Keep your head up, shoulders back. You've got this. We're here to help you. See you next time on the podcast.

DISCLAIMER

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.