Roth IRAs, 457(f)s, and Other Retirement Account Questions

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 408.

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All right, as you're listening to this, as this podcast drops, we're all in San Antonio at the conference. I'm guessing all the people at the conference aren't listening to this podcast. Maybe they'll listen to it on the way home or something. But this is for those of you who aren't at the conference, I suppose, you got to get your dose of White Coat Investor in this week as well. But we're all busy down there and having a lot of fun.

It's always great to be at a conference to talk to you personally, and hear about your challenges, hear about your triumphs. I love it. It's one of my favorite parts. I talk about the speaking gigs I go around and do from time to time at med schools or residencies or county medical societies or whatever. And I hate to travel. Being in the airports and the hotels and all that don't like it one bit.

But I do like being there with you. Just because it helps me keep that personal connection. I spend so much of my time hanging out in this podcast studio with Megan. And Megan's great, don't get me wrong. But it's not the same as having 30,000 of you there together with us. So, it's good to keep it real sometimes.

Thanks for what you're doing out there. Those of you on your way home. Those of you who are working out or on your way into work or walking the dog or whatever. If you had a bad day, I've been there. And it's rough. It's rough. If no one told you thanks for all the sacrifices you made in your life, let me be the first today.

NEW POSSIBLE BILL CUTTING CREDIT CARD INTEREST RATES

Before we get into your questions, I wanted to talk about something that came across the news this morning. We're recording this in early February. We got to get all this knocked out before we go to the conference. It's actually February 6th as we're recording this. And yesterday, the news came out that Senators Josh Hawley and Bernie Sanders are trying to pass a bill in the Senate, which is interesting.

These two are not on the same side of the political spectrum. But they're trying to pass a bill in the Senate that cuts credit card interest rates to 10%. They basically are like, “Hey, it's highway robbery. You're charging people 24% and 29% on credit cards.” And at first glance, you think, “Oh yeah, yeah, lower interest rates, that's good. Now people aren't getting hosed on their interest rates and going into terrible credit card debt.”

But you have to keep in mind that changes like this aren't all positive. The downside is that you may not be making much money, loaning unsecured debt at 10%. And so those who are in this business, get out of this business. It takes loaning money at 16% to make a profit because of the number of defaults you see in a particular segment of the population. You basically say, “Well, I'm only going to loan to the most credit worthy people if I can only charge 10%.” And all of a sudden there's a lot less credit available.

I'm not a fan of loan sharking or anything like that. But I do recognize that there are risks when it comes to unsecured debt. And some people don't pay you back. Years and years ago, I had some investments in peer-to-peer loans. And a lot of those ended up being in the 19% range. And people thought it was a great deal because they were going from 29% to 19%. But it was interesting to watch those notes over the years and how many of them defaulted.

I ended up having acceptable returns. I think I had returns of around 10%. But I think the average interest rate on the loans that were made in that peer-to-peer lending portfolio was more like 20%. And there's just so many people that defaulted on their loans. That's what it took. You had to charge those sorts of interest rates.

So if this sort of a bill passes, you're going to see less credit out there. Maybe you'll see more origination fee type stuff where they can make it up on the fees that they're not making on the interest. But you won't see as many people with 25%, 30% debt out there. There's pluses and minuses both ways. It'll be interesting to see if that passes Congress this year.

All right, let's get into your questions. This one is coming from John, who's a military doc. Thanks for your service, John.

BACKDOOR ROTH AND THE PRO RATA RULE

John:
Hello, Dr. Dahle. This is John from the Southeast. I appreciate the opportunity to get help with the question that I have. Thank you for all that you do. I am an active duty military surgeon. I am one and a half years out from training.

My question is about the backdoor Roth IRA and the pro-rata rule. I currently max out my Roth IRA and a spousal Roth IRA every year through Vanguard, as I am under the income limit for a direct Roth IRA as a military physician. My wife currently has no earned income. However, I plan to exit the military when I finish my commitment in another two and a half years.

I anticipate an increase in income that will put us over the income limit for a direct contribution to a Roth IRA, which will mean performing a backdoor Roth IRA every year. My concern is that I also already have money in a Vanguard traditional IRA. This money is rollover money from previous 401(k)s. Most of it is a rollover from my civilian residency 401(k). I rolled this over because I preferred to have the investment options at Vanguard. I now have $64,000 in this traditional IRA actively invested.

I read your blog post on backdoor Roth IRAs. If I understand that blog post correctly, in order to avoid the pro-rata rule when performing a backdoor Roth IRA, the traditional IRA needs to have a balance of $0 by the end of the year of the conversion. Is this correct? If so, what should I do with this traditional IRA money now planned for my eventual need for the backdoor Roth IRA?

My thought is that I could do a Roth conversion now and convert this amount in my traditional IRA to my Roth IRA over the next two years using cash to pay the taxes on that conversion. Alternatively, could I roll this traditional IRA money to my federal TSP? I currently max out my yearly Roth contributions to my TSP as well.

Would this fix my issue with my current traditional IRA balance and allow me to perform a backdoor Roth IRA when I need it? Perhaps I could do a combination of the two options to get rid of this traditional IRA balance. Any help is greatly appreciated. Thank you.

Dr. Jim Dahle:
Okay, good question. A lot of people have to deal with this pro-rata issue. The backdoor Roth IRA concept itself is very simple. You can't contribute directly to a Roth IRA, so you stick it in a traditional IRA. You don't get a deduction because you make too much and you have a retirement plan at work. Then the next day you move it to a Roth IRA. It's an indirect Roth IRA contribution, a backdoor Roth IRA contribution.

If that's the only thing you had to worry about, it would be a whole lot more simple to explain to people. But because of the way the IRS taxes Roth conversions, and this is demonstrated in the IRS form 8606, conversions are prorated. The balance of all of your SEP IRAs, SIMPLE IRAs, and traditional IRAs is considered when you do a conversion and it's prorated.

In essence, in order to do what you're trying to do, which is an indirect Roth IRA contribution, you got to do something with all your SEP, SIMPLE, and traditional IRA money first, or at least by the end of the year that you do your conversion step in.

There's really three options. Option one is don't do a backdoor Roth IRA. You got some $600,000 traditional IRA and you want that traditional IRA. Okay, well, the backdoor Roth IRA process really isn't for you.

The second option is to just roll it into a 401(k). And the TSP is essentially a 401(k). They do accept IRA rollovers. You can roll this into the TSP, no problem. You can wait until you get out of the military and you can roll it into your new 401(k). Just be aware there might be a year before you're eligible to use it. You can roll it into a 401(k) or a 403(b) at a new employer, no problem at all. So, that's one option.

The nice thing about that option is the paperwork is a little bit of a pain and it might take two or three weeks or something like that to complete the rollover. But there's no taxes due on it. That's the nice thing about rolling a traditional IRA or a SEP IRA into a 401(k) or solo 401(k) or 403(b).

The third option and the one I think you should take as a military doc, if you can afford the tax bill at all, is to convert it all to a Roth IRA. That's what I would do if I were you, John. And I could come up with the taxes to pay on that $64,000 of income.

Now especially in a year you deploy or something, your taxable income is even lower. That'd be a great year to do a Roth conversion. You might be able to do this Roth conversion at 12% or something like that. And that's a no-brainer. You're going to be a surgeon making lots of money when you get out of the military. You're going to be in high brackets for most of your career and probably a moderate bracket even in retirement.

So, if you can do a conversion at 10, 12, 22% while you're in the military, this is going to be a great move for you. That's what I'd try to do. I'd try to do a Roth conversion of it. And starting next year, you can do Roth conversions in the TSP, but I'd probably just do it in your Roth IRA. Move a little bit over there every year, maybe $20,000 or $30,000 a year, do $20,000 or $30,000 next year and whatever's left the year after that, and you're there. You've done the Roth conversion and you won't regret having another $64,000 in your Roth IRA.

You're doing the right thing, by the way, making Roth contributions in the TSP. Those are almost always the right thing to do for anybody in the military. You will usually be at a higher tax bracket down the road. And even if you stay in the military your whole career, you're going to have a pension or something filling up those lower brackets when you get into retirement. And so, you're going to want that Roth money anyway. Military folks, Roth is almost always the right move. Great time to do a Roth conversion though.

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Now they're not all going to read it, but a lot of them will. And even if only half of them read it, you've probably saved each of those classmates something like $2 million over the course of their career. And that really adds up in a hurry. That's $100 million dollars of value you've provided to a typical med school class. That's a lot for just signing up and passing out a few books.

If you send us a picture with you and some of your classmates in the books, we'll even send you some WCI swag. You can apply for this whitecoatinvestor.com/champion. The deadline is coming up. March 16th is the deadline. We just need time to print the books and get them shipped out to you before the class ends. Otherwise you're going to be a second year and you're no longer going to be eligible for this free giveaway. This free giveaway is for first years only.

If nobody has handed you a copy of the White Coat Investor's Guide for Students yet this year, there probably isn't a champion in your class. So, sign up, be the champion. We'll send you the books. You'll be a hero. You'll provide literally $100 million dollars worth of value to your classmates. That's pretty awesome. So, sign up to that at whitecoatinvestor.com/champion.

Okay. Let's talk some more about retirement accounts.

SELF DIRECTING YOUR 401(K)

Speaker:
My question is, if you do decide to self-direct your solo 401(k), should you have three sub-accounts? If you're going with a traditional brokerage like Fidelity, would you recommend or should you have an after-tax account? Obviously you're going to have the Roth component. You're going to have the pre-tax/traditional component. But should you also have an after-tax that then you convert to Roth? Is that an essential step or can you just do directly to Roth?

Dr. Jim Dahle:
Okay. This might be the easiest question I've gotten on this podcast so far this year. The answer is yes. You want three accounts. Now you might not need three accounts depending on what you want to do with that solo 401(k). But we've got a bunch of employees here at the White Coat Investor and it's not a solo 401(k). Because we've got employees. It's a regular ERISA 401(k).

But we have set it up such that everybody in the company has three sub-accounts. Your traditional or tax-deferred account, your Roth account, and your after-tax employee account. Now, last I checked, I think Katie and I are the only ones using that after-tax employee account.

My entire contribution for 2025, $70,000, went into that after-tax employee contribution account. And then the next day, it was moved to the Roth account. This is known as the mega backdoor Roth IRA. And it's unfortunate that's the name because it has nothing to do with an IRA.

The backdoor Roth IRA process has to do with IRAs. The mega backdoor Roth IRA process has to do with 401(k)s. But it's basically a way to put a whole bunch of money into a Roth account in your 401(k). And if you're using a solo 401(k), why not have a setup so you can do a mega backdoor Roth IRA? I don't understand why anybody would not want some features in their 401(k) that they could have.

Our 401(k)s also has a loan provision. I don't know anybody's actually taken a loan out of their 401(k), but you could if you wanted to. And there's no harm in having that feature, just like there's no harm in having the mega backdoor Roth IRA feature in your solo 401(k).

Now, that's not usually what it's called when you're talking to the 401(k) provider. You basically want to ask, “Can I make after-tax employee contributions, number one? And number two, can I do in-plan conversions?” That process is called the mega backdoor Roth IRA process, but that's kind of an informal name.

But yeah, no reason not to do it. I have three accounts. If you want to do a mega backdoor Roth IRA contribution, you can't just stick it directly into the Roth sub-accounts. You need all three of those sub-accounts to do it. So yes, make sure it has those.

If you're going just straight to Schwab or straight to Fidelity, you're trying to get this out of a cookie cutter plan, that might not be the best route. The longer I do this, the more I think it's worthwhile hitting up one of the companies on our recommended retirement account and HSA page. These people are used to doing this. They have people come to them every day, White Coat Investors every day that they're setting up solo 401(k)s for that have these features.

And yes, getting a customized solo 401(k) is probably going to cost you a few hundred dollars the first year and $100 or $200 every year after that. That is nothing compared to the benefits you're going to have from having this customized 401(k) instead of the cookie cutter plan you're going to get at Schwab or Fidelity.

You used to be able to go to Vanguard. Vanguard's basically sent all this business to Ascensus. I'm not hearing great things about that. I think if you must have a cookie cutter plan, probably Fidelity or Schwab is a place to go. If you just can't stand to spend a hundred or $200 a year on fees in this account, then I guess that's what you got to do. But I think you're probably better off getting a customized plan from some of the people on our list.

Okay. We're going to talk some more about 457(f) accounts, which I think we've mentioned before on this podcast, but let's listen to the question.

457(f)s

Anthony:
Hey Jim, this is Anthony. I'm a sports med doc calling from the Midwest. I'm calling to see if you could shed light on details of 457(f) plans. I had a 457(b) previously, but my hospital is no longer a 501(c)(3) and the new option is a 457(f) in addition to a 401(k). The limit with the 457(b) was $23,000. The new limit for the 457(f) is $50,000.

I don't have all the details of the plan other than that. And just from doing a little bit of research, it sounds like 457(f) plans can be quite variable. And some of the rules of them are basically almost up to the employer and how they want to set up the plan.

But anyways, I just wanted to see if you might be able to speak generally about 457(f) plans. Again, I thought the 457(b) that I contributed to before was a good idea, but it sounds like the 457(f) may be a little bit different. I thought about possibly just taking that money and putting it in a taxable account instead. But any information you might have or any insights you have would be greatly appreciated and thanks for everything that you do.

Dr. Jim Dahle:
Yeah, great question. You can always invest more in taxable. That's always an option. Some people run into this or they're like, “Oh, I maxed out my retirement accounts. I guess I got to buy a whole life insurance now.” No, you can always invest more in taxable. If you don't like your retirement accounts or you've already maxed them out, a taxable account is a perfectly reasonable way to invest. It's our largest investing account. We obviously think it's fine. It does have some tax benefits of it. It's obviously very flexible, which is nice.

Okay, but we're going to talk about 457(f) plans. Now, as a general rule, this is for all you podcast listeners out there, particularly what I call exclusive podcast listeners. Now here at the White Coat Investor, we offer all kinds of stuff. There's a blog, there's newsletters, there's podcasts, we have a conference, we've got online courses, we've got these online communities. There's all these things out there.

But as a general rule, if you have something complicated, if you have something that's completely new to you that you've never heard of, the White Coat Investor resource you want to look at is the blog. It's just easier in the blog format to include lots of details with lots of links and really get into the weeds on it.

You can check that out by going to whitecoatinvestor.com. And if you're on a laptop or you're on a regular computer or desktop, the box is in the upper right and just type in 457(f) and you'll be surprised what will pop up. Chances are very low that you have a question that I've never written a blog post about. And that is the case for 457(f) as well.

The blog post is called Deferred Compensation Plans, 457(b), 457(f), and 409A. Now lots of you are familiar with 457(b)s. They're either governmental or they're non-governmental. The governmental ones are better because you can roll them into an IRA when you leave or into another 401(k). The non-governmental ones you got to be more careful about. You got to make sure the employer's stable and the investment options and fees and the distribution options are okay, but those are deferred compensation plans.

However, there is a less well-known cousin of the 457(b), and this is called a 457(f) plan. It is also a non-qualified deferred compensation plan. However, it's a plan where all the contributions are technically made by the employer and none by the employee. It's usually just for a select management group or for highly compensated employees like docs. It involves money that is paid to the employee at the time of retirement. It's sometimes called a Supplemental Executive Retirement Plan or SERP.

With the 457(f) plan, the benefits are taxed when they vest, not when they're paid out. And this makes it an ineligible 457 plan. And 457(f) plans may have higher contributions than a 457(b) plan, like you mentioned yours does, it has a $50,000 limit. In fact, it's possible to defer 100% of your compensation into a 457(f) plan, where I don't think you can do that with a 457(b).

The taxation is a little bit different too. When each tranche of your 457(f) plan is vested, you're taxed on it at ordinary incomes tax rates, and also usually including payroll taxes. Although gains on that money can still be deferred. The vesting occurs whenever, and I quote from the IRS, substantial risk of forfeiture goes away. That means the benefits are no longer conditioned upon the future performance of substantial services. That's when the tax bills do, not when the money is actually received.

That can be a bit of phantom income. That's hard to deal with tax-wise if you don't have enough other income or assets to pay the bill. The plan is also required by the IRS to carefully define retirement. And that usually means naming an age or a date, not just a vague whenever they leave employment.

These plans can actually be set up as a defined contribution plan, which is most common, or as a defined benefit plan. And sometimes academic institutions will use a 457(f) to restore benefits to a highly compensated employee that it cannot provide in a qualified retirement plan due to non-discrimination testing.

There's a lot of concern that these plans were going to be changed by Secure Act 2.0. But as near as I can tell, the final version of the Secure Act 2.0 didn't change these plans at all. Like 457(b)s, every 457(f) is unique. You need to read your plan document. They typically allow the highly paid employees to defer this compensation until they retire, die, or are disabled. But exactly how and when it is distributed is highly variable, and may or may not work for your life and your financial plan.

It's got a lot of cool benefits. It's got low costs than many other plans. It's easier to administer than many other plans. It can help attract and retain executives and highly compensated employees. It gets pre-tax treatment and tax-protected growth, similar to 401(k)s. There may be a potential tax arbitrage between the tax rate at contribution and when it vests and you pay the taxes, etc.

So, should you use it? Well, read the details. Read your plan document. Every one of these is unique, and the devil's in the details. Go get the details. I can't tell you any more about your particular plan, but as a general rule, chances are good you're going to want to use this thing. This is probably going to work out better for you than investing in taxable, but it depends on the details of the plan. Go get the plan document and read it.

QUOTE OF THE DAY

Our quote of the day today comes from Franklin D. Roosevelt. Not our usual investment authority that we have on this podcast, but he said, “Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” That's pretty cool to hear that quote from him.

Okay, let's take another question. This one is from Whitney about 457(b)s.

457(B) DISBURSEMENTS

Whitney:
Hi, Dr. Dahle. I just wanted to start off by thanking you for all that you do. I grew up in a family that wasn't so great with money, and I've learned almost all that I know from you and references to others who are very knowledgeable in this financial space.

I'm currently a mid-career pathologist and previously separated from a state university where I invested in a 457(b) for three years. At the time of separation, I had two options. One was to start dispersing the investment, and the other was to kick the can down the road and delay that disbursement. I chose the latter option and kicked the can down the road to 2046 when I'll be 60 years old.

Our current financial goals are to be financially independent by the time I'm 55, and I'm trying to figure out what to do with that account. The options would be to disperse it now over an infinite time period. They said that there's no upper limit at which I can disperse that money. The current balance is about $82,000, or to kick the can further down the road and wait until it's about to be dispersed, and decide then if I wanted to delay that disbursement until the age at which I would be required to take money from that account. I would love to hear your thoughts, and thanks so much for all that you do.

Dr. Jim Dahle:
All right, Whitney, good question. I don't think I heard anywhere in it the most important piece of information I needed, which is whether this is a governmental or non-governmental 457(b).

This is the first thing you need to go find out if you don't know already. If it's a governmental 457(b), you have all kinds of options. Not only can you roll it into another 457(b), you can roll it into a 401(k) or an IRA or whatever. There's lots of choices. The only reason you might not want to roll it into another retirement account is if you want to spend it before age 59 and a half.

The beautiful thing about a 457(b) is it's really awesome for early retirees because there's no age 55 or age 59 and a half rule. If you retire at 50 and your 457(b) gives you access to the money, you can spend it at 50, no penalty whatsoever. That's a real benefit of 457(b)s.

Now, non-governmental 457(b)s can't be rolled into an IRA or a 401(k). You're stuck with whatever options they give you. Those options aren't always good. Sometimes the only option is the year you separate, you have to take all the money out of the 457(b). It's this big, huge income tax bomb. That's obviously not ideal.

Most of them offer at least something besides that, and I can't quite tell what your options are. It sounds like you've got an option to annuitize it forever, which maybe isn't the best thing, especially since it's not actually your money and it's available to the creditors of your employer. Maybe you don't want to stretch this thing out until you're 85 or whatever.

Generally, you want to get this money relatively early in case something happens to your employer. 457(b)s tend to be money that you spend relatively early in retirement. I don't like that option, but if you're going to retire early, it sure would be awesome if you could get to some or all of it relatively early before age 59 and a half so you don't have to worry about all the exceptions to the age 59 and a half rule.

I think you really need to dive into the details on this 457(b). Is it governmental or not? What are your options really? When will you spend this money if you can get access to it in the way you would like? For example, if you could spread it out over five years from age 53 to age 58, boy, that sounds like a great way to take 457(b) money out.

Now, yours is only like $80,000, I think you said, and so maybe you'd spend the whole thing in a year. So maybe taking it all out the year you go into retirement's fine, and that's just the first money you spend of your retirement money. But you got to dive into the details of all of those options and make a decision.

The principles are you want to get the money relatively soon because it's not your money, it's technically your employer's. That governmental 457(b)s and non-governmental 457(b)s are treated differently, and that you can get to it before age 59 and a half without any penalties. And so, when you know those principles, you can probably choose from the available options, the one that's best for you and your particular situation. I hope that helps.

Our next question comes from Mike.

SOLO 401(K) CONTRIBUTION LIMITS IF YOU HAVE A W-2 JOB

Mike:
Hey, Jim, this is Mike from the Midwest. I've got a question about solo 401(k) contribution limits when you have a 403(b) at your W-2 job. I know you've addressed this before, and I apologize for bringing it up again, but I'm getting conflicting answers from various CPAs, both of which actually are recommended on your website. And I just wanted to hear from you what exactly the rule is.

I do well, I make about $400,000 in a W-2 job and about $400,000 in a 1099 job. And my former CPA was under the impression that because my 1099 income was so high, I could contribute beyond $46,000 into my solo 401(k), which I have done in years past. My current CPA seems to think, no, those limits are still combined, even though your employer contribution at roughly 20% would exceed $46,000. I'm not sure what the rule is on that and I would very much appreciate your clarification. Thanks so much.

Dr. Jim Dahle:
Okay, good question. First of all, a few comments on our sponsors and our recommended lists and those sorts of things. If you have a situation like this, where two people that we recommend are telling you different things, we'd love to get an email about it. We're probably not getting rid of that sponsor. What we're probably doing with them is educating them. And yes, sometimes we have to teach CPAs things. Sometimes we have to teach financial advisors or insurance agents things.

That's okay. We don't mind doing that. We want you to get a fair shake on Wall Street. And the truth is so many of these little rules that affect high earners are not that well known. We're not just teaching you as the end user, consumer, doctor, whatever. We're also teaching your advisors. There's lots of advisors that listen to this podcast. And I'm not claiming I know everything or I always get everything right. If you've been listening to this podcast for a while, you've heard me do corrections. We do corrections a lot because I screw lots of stuff up.

But this is something we've been looking at very carefully for many, many years because it affects a lot of docs. It doesn't affect a lot of non-docs, but it affects lots of docs. And these are the rules when you have multiple 401(k)s. And the place to go to really read these, again, go to the blog, go to the search box, whitecoatinvestor.com, says search WCI and put in something like multiple 401(k). And the post will pop up that will give you all these rules of how all these 401(k)s work together.

But here's the basics of the rules. The first one is that you only get one employee contribution. This is often called an employee deferral, even though it can be either Roth or tax deferred. And in 2025, if you're under 50, that amount is $23,500. You get one of those, no matter how many employers you have, no matter how many 401(k)s and 403(b)s, et cetera, that you're eligible for, you get one of those. And you can split it among multiple 401(k)s if you want, but you only get $23,500 total.

The second rule you got to know is that each of these 401(k)s at a different employer, an unrelated employer, including if one of those employers is you. You're self-employed, you're paid on 1099, it's you and your solo 401(k), each of those gets a separate 415(c) limit. In 2025, for those under 50, that limit's $70,000. That's the total of contributions, employee or employer contributions, is $70,000 total. That limit is separate in each 401(k).

However, there's a unique rule when it comes to 403(b)s in this regard. Your solo 401(k) and the 403(b) that your employer offers you actually share the same 415(c) limit, the same $70,000 limit. If you put $23,500 in your 403(b) and your employer matches another $6,500, so you put $30,000 in there, you can only put $40,000 into your solo 401(k). Even if you make $400,000, self-employed, that's all you can put in there.

I'm sorry, I don't write the rules, I just tell you what they are. And if you want more details on all of that, you can go to Multiple 401(k) Rules, which is our blog post. There's links to IRS sites. Yes, I understand that sometimes you have to teach this to your CPA, and that's okay. We've got the links there that'll help you teach that to them. But that's the way the rules work. So, you can use multiple 401(k)s, but when there's a 403(b) in the mix, you got that additional weird little rule that might limit how much total you can put in there.

Don't forget though, you can always invest more in taxable. You don't have to stop saving for retirement just because you maxed out all your retirement accounts. You don't have to go buy some crappy index universal life insurance policy. You can just invest in a taxable account. And if you do that tax efficiently, it's not that bad.

Okay. Next question. Let's talk about the Roth IRAs for kids.

CAN A CHILD’S ROTH IRA GET AUDITED?

Speaker 2:
Hey, Dr. Dahle, thanks to you and the WCI team for all that you do for our community. I've read and heard posts about how parents are trying to get Roth IRA money for their children. And sometimes they get a bit creative about what counts as earned income. Do you know if children can get audited by the IRS? And if they do, are parents going to be ensnared by the process as well? Thanks.

Dr. Jim Dahle:
Any taxpayer can be audited. There certainly is no rule that says if you're under 18, you can't be audited. I think that answers the question you asked. But let's talk about this a little bit. One of the hardest things to do at White Coat Investor is to turn down money. There are people that come and offer us money. They want to buy an ad from us and pay us. And after we pay our business expenses, that becomes either bonuses for employees or profit for the owners. It's a beautiful thing. We like it when people offer us money.

But despite that, we sometimes turn their money down. And the reason why is because we don't agree with what they're doing. We don't feel like they're a good match with our community. We don't really support how they do business. I had to recently do that with a company that helps parents set up Roth IRAs and do tax paperwork for their kids.

And the problem I had with how the company did business was that they tried to push their clients to claim their children's chores were earned income. Kids do the dishes, okay, we're going to pay them for that. So they set up a W-2 and a W-3 and W-4 and an I-9 and an employment contract and a time card and pay them for dishes or pay them for cleaning the room or whatever.

Well, that's really not how the IRS views that. They've got to do real work and not household chores. Now, maybe there's a little bit of gray there. If you were paying somebody else to do that work first, you're paying a housekeeper and now your kids are taking over for the housekeeper. Maybe there's a little gray there, but certainly as a general rule, you shouldn't go pay your kids for chores and claim that's earned income that can then go into a Roth IRA.

Now, if they're going over to your neighbor's house and cleaning their house, if they're raking leaves or they're mowing lawns or they're shoveling driveways or whatever for the neighbors, I think that's fine. Your general household employee income is usually below the amount that the neighbors have to file a Schedule H on, so babysitting money and lawn mowing money, that sort of stuff, that's earned income, but not watching your kid, not mowing your lawn. That's chores. That's just the expectation for the kids to be living there. So I would not claim that as earned income.

Now, does this get audited very often? I doubt it. Maybe it never gets audited. I don't know. It can be audited. It's still cheating on your taxes, but how often it actually gets audited, I don't know.

But the cool thing about hiring your kids to do legitimate work, whether they're models for your business or whether they come and file paperwork at your clinic or clean up the clinic or whatever, those sorts of things, you do all the official paperwork, W-2, W-3, W-4, I-9, employment contract, time card, all that stuff.

As long as your business is not a corporation and the only owners of the business are their parents, they do not pay payroll taxes on those earnings. They don't pay Social Security or Medicare tax. And they're probably not earning enough that they're going to owe any income tax, either federal or state on that money. And it is earned income. So, it can then go into a Roth IRA and never get taxed again.

It's an awesome deal to hire your kids, but you have to pay them a fair price, and they have to do real work. You can't pay them $400 an hour to come in and file paperwork in your clinic. You have to pay the going rate for filing paperwork in your clinic, what you can hire somebody else for to do that work. And you have to do all the paperwork.

I hope that's helpful. I think it's great for kids to leave home with some money in a Roth IRA. They might have five decades for that money to compound before it actually gets spent, maybe even longer. It's a great thing to do. Just follow the rules. The rules aren't that complicated. Don't bend them too much. I wouldn't spend a lot of time worrying about audits on that topic, but still, you should follow the rules. You're not supposed to be cheating on your taxes.

Okay, the next question comes from Zach.

ROTH IRA CONTRIBUTIONS IN A LOW TAX YEAR AND SHORT-TERM RENTAL TAXES

Zach:
Hi, Jim. This is Zach from the Northeast. Thanks for all that you do. I have two questions for you today. The first, my wife and I are both residents graduating this spring and starting a one-year fellowship before we start our attending jobs. We're taking about a 25% pay cut from our residents to our fellow salaries. We've done a good job saving on our 403(b)s, putting about 10% of our income away, as well as maxing out our Roth IRAs.

I'm wondering if in this low tax year, it would make sense to roll over our 403(b)s into our Roth IRAs. I know you've talked about this a little bit before, but I was kind of unclear on the general recommendation. Of note, we will be able to handle the tax burden as we're selling a house that we purchased at the beginning of residency that has about $200,000 in equity. I just want to make sure that I'm maximizing my growth long-term in these accounts.

The second question is in regards to short-term rental tax loopholes. I'm very interested in real estate and will be moving to a high-cost living area in which we'll unfortunately probably have to buy a fairly expensive house. My question is, can I purchase a house and use it as a short-term rental, do a cost segregation study in order to lower my tax burden, but then plan on moving into it as a primary home the following year? Are there any rules or laws against this? I can't find anything online about it. Thank you. I really appreciate your advice.

Dr. Jim Dahle:
Sometimes I'm amazed how much that can be put into a 90-second Speak Pipe. That's like three podcasts worth of material that you just wedged into a 90-second Speak Pipe. Very impressive.

First of all, I'm amazed that you're taking a pay cut going from a residency to fellowship. Usually, fellows get paid a little more than a resident or at least it's pretty similar. 25%, that's pretty huge. I'm sad for you to see your salary dropping so much as you're going to a higher level of training.

Anyway, as a general rule, yes, Roth for residents, Roth for fellows, Roth that year that you leave fellowship. These are good times to do Roth contributions and do Roth conversions because theoretically, you'll be in a higher tax bracket throughout your peak earnings years and maybe even in your retirement years as well.

The main exception to that is if you're playing games with your student loan payments. You're trying to keep your income low, to keep your student loan payments low, to try to get more forgiven, that sort of a thing. That might be an exception to this general rule, but the general rule is Roth.

Yeah, I'm super supportive of this idea of you doing Roth conversions. It's kind of a bummer that you're having to convert it because you couldn't do a Roth 403(b) contribution in the first place. Maybe double check that and maybe you could do that and make it so you don't have to convert quite as much.

But yeah, try to do a conversion while you're still in these low earnings years. It sounds like you've got the cash to pay the taxes, which can be an issue for some people, not an issue for you.

I'm glad your home purchase worked out well. A lot of times that doesn't in residency. I'd guess historically over the long term, it only works out that people make money about a third of the time in a three-year residency and maybe half the time in a five-year residency. And so, that's why the general rule is if you're going to be someplace for five years or longer, you buy and less than that, you rent.

Obviously, there are times when housing just goes crazy and you can make money in one year in a place or two years in a place. And so, it's just a general rule. Other times, you buy a house in 2006 and you sell it in 2015 at a loss like we did. There's no guarantee that you’ll make money in five years either. It's just a general rule of thumb. But I'm glad it worked out for you.

Obviously, in a one-year fellowship, if you're only going to be in that town for one year, that's probably not a great time to buy a house no matter how much you love real estate and real estate investing. Maybe you're going to stay in that city long-term or maybe that's where you're going to start your rental empire or whatever. Maybe it works out in your case because of some sort of different circumstance.

But in general, someplace you're going to be a year, it's not the time to be investing in real estate. It just takes longer than a year for appreciation to make up for the transaction costs with normal appreciation rates.

You wanted to talk a little bit as well about the short-term rental loophole. And we're getting into the weeds here when we're talking about this. Basically, the loophole is being able to use the depreciation on that property against your ordinary income.

Now, as a general rule, a real estate investor that is a doctor and is practicing as a doctor can't do this. The depreciation only offsets the passive income, the real estate income, the rental income. It doesn't offset your earned income.

One way that people get it to offset the earned income is they qualify for real estate professional status or REPS. And that basically says that you're doing more work in real estate than anything else. You can't be practicing medicine more than you're doing real estate and that you're spending at least 750 hours a year doing real estate. That works out to about 16 hours a week. So, it's not an insubstantial commitment to real estate to acquire this real estate professional status.

A lot of times it ends up being the spouse of the doctor that acquires this. And then they use depreciation from the rental properties to offset the physician's clinical income. And so, that can be a really powerful combination of a real estate professional and a highly paid professional like a physician. It can be a really good combination.

But there is this other way, and there's actually a few other ways that you can use to get depreciation to actually be used against your ordinary income. But the most common one besides REPS is the short-term rental loophole. And it's just a much lower bar you got to get to, to claim it. I think it's 100 hours during the year instead of 750. And if it's a short-term rental, that's all you got to put in. You can use it to offset ordinary income.

Now that may be recaptured down the line when you sell the property, but if you exchange and exchange and exchange and never sell until that step up in basis takes place for your heirs, maybe it's never recaptured, but that's basically what the short-term rental loophole is.

Now, you also asked about taking advantage of this in a situation in which you're not going to be in the house very long, or you're going to turn into a residence after a year. Boy, now you're way out there into the weeds.

And do I know the answer to this? I'm not sure I know the answer for sure, but I don't see why you couldn't take it. Your idea here is a pretty cool one. You go and you get the study done on it. And the reason people get these segregation studies on the house is they're trying to say, “Well, these contents of the house depreciate faster than the property as a whole. And so we're going to depreciate this over five years because they're couches or whatever, even though we can't depreciate the whole property, except over 27 years.” And then there's all this bonus depreciation stuff that lets you speed some of that up.

But the idea is that you just get a big fat piece of the depreciation early on right at the beginning. And if you can take that and use it against your clinical income, all the better. So, you're wanting to take a whole bunch of this depreciation that first year, and then somehow turn the thing into a residence after that.

I think the way the rules are written on this is that you would be able to do that. There's no rule that says you can't, but in one year, boy, that's going to be spread over two tax years. Because you're starting this fellowship in July and you want to move into it the next July. Either one of those is a full tax year.

I don't know that I'd try this. I don't think this is going to be as big of a benefit to you as maybe you think it is. Maybe you ought to run the numbers and just see how big of a benefit it would be to you, given that you're on these relatively low fellow salaries anyway, that you're trying to offset. I think you're just making your financial life a little too complicated.

And I appreciate the attempt at optimization, but I don't know that I'd try to do this. Give it a second. You're married to another doctor. You clearly have a high level of financial literacy. You're going to be very wealthy eventually, and probably pretty quickly, given your desires to run this real estate empire on the side of your clinical incomes.

You're probably hitting financial independence in something between five and 10 years out of training. You don't need to speed this up anymore. You don't need to optimize this anymore. Spend your year learning your subspecialty. Yeah, do a Roth conversion, take care of your finances, continue to boost your financial literacy, make plans for your real estate empire. Don't try to do all this at once, and don't try to do it all while you're in residency or fellowship.

This is going to work out just fine for you. You're going to die a very wealthy person and make your heirs very happy and have an awesome financial life, but it feels like you're trying to rush it a little bit too much. Take a step back, take a deep breath. This is going to work out fine for you, and I'd probably not try to do this super complicated thing with one year in a short-term rental that you're then moving into.

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A recent one said, “Awesome. Where was this when I was in college? This is a much-needed resource, doctor or not, to get smart with money. I thank Dr. Dahle and his team for putting this together and writing this book. I have a much better grasp on money and the road to financial independence, and I hope to continue growing this knowledge. Every resident medical student needs to do this without exception”. Five stars. Well, thanks for that kind review and endorsement.

All right, we've come to the end of another great episode of the White Coat Investor podcast. 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.

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 211 – Psychiatrist gets back to broke.

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All right, welcome back to the Milestones podcast, the podcast that's all about you. If you want to be on this podcast, we'd love for you to come on and share your milestone, whatever milestone it might be, with others and inspire them to do the same. You can apply at whitecoatinvestor.com/milestones.

By the way, as this drops, this drops on Mondays, these Milestones podcasts drop on Mondays. I'm probably already in San Antonio by the time you're listening to this. This week is WCICON, it's the Physician Wellness and Financial Literacy Conference. It starts up on the 27th with our opening social and then 28th and the first and second, I got the dates right, are the days of the actual content at the conference.

Your schedule might not allow you to now come in person. If you're down there in San Antonio, come on in person, you can register the day of the event. But the 27th, 28th, 1st are the days of the content at the conference.

You can still come virtually. We have a virtual option for this conference and it's awesome because you get to watch not only the content that's streamed during the conference, but you also get all the content, just like the people that attend live. I tell them sometimes when they come, don't come to every session, go sit at the pool for one of them. You can log in and watch it from the pool, or you can just wait until you go home and listen to a podcast style on your commute.

You can do this virtually as well. The content also goes home with you when you attend virtually. You're going to learn how to turn your income into lasting wealth, achieve financial freedom, to spend without guilt, support your loved ones, retire comfortably, and give back to the causes you care about, all from the comfort of your home.

Obviously, you spend a little less time traveling, which I'm not a huge fan of traveling, when you're attending virtually. It's obviously cheaper because you don't have any travel expenses, but it still qualifies for CME. You can use your CME money to buy the virtual version of this. We'd love to have you attending virtually. You can go to wcievents.com and sign up to attend the conference virtually, if you would like.

Here's a code, VIRTUAL100. We'll give you a $100 discount off the conference. Only a few days left now to save until the 27th. I think that code expires. I guess you could register for the conference even on its last day. We're going to catch you up with the content, the online course we put together after it, so you can sign up even the last day if you wanted to. This code, VIRTUAL100, ends on February 27th. I suggest you sign up by then. We'd love to have you. wcievents.com.

All right. We have a great interview today. It went a little longer than most of our interviews because we were really having a good time. That's okay. Stick around afterward, and we're going to talk for a few minutes about the dangers of performance chasing and just how much performance chasing I'm seeing going on out there right now.

INTERVIEW

Our guest today on the Milestone to Millionaire podcast is Andrew. Andrew, welcome to the podcast.

Andrew:
Great to be here, Jim.

Dr. Jim Dahle:
Let's introduce you to the audience. Tell us what you do for a living, how far you are out of training, what part of the country you live in, and your family situation.

Andrew:
Sure. I'm a child and adolescent psychiatrist. I am about seven, seven and a half years out of training now. I live in New Jersey, actually on the Jersey Shore, not as raucous as all that. Some parts are, but usually not. In terms of family, I have a wife and a 19-month-old daughter now.

Dr. Jim Dahle:
Congratulations on both of those. That's pretty awesome. We're celebrating a milestone today. It's a net worth milestone. What's your net worth the last time you added it up?

Andrew:
Last time I added up, which was December 2024, it was about $140,000. My wife promised me she wouldn't listen to this, so I can say the number of my student loans was $371,000. I'm back to broke.

Dr. Jim Dahle:
Very cool. Student loans are one of those things that is a big piece of the financial life of a lot of doctors out there. Back in med school, you decided you're going to pay for med school by borrowing the money. Do you remember how you felt about that back then?

Andrew:
My mother is so proud of where I am in my financial journey. I feel almost a little bit of, I guess, shame. My mom would probably be proud that I feel shame about it now. I honestly had no sense of it. I was lucky in that I went to a state school in California, Cal State Northridge, where my parents saved up the money and were able to pay for my undergrad, which is great. After that, though, medical school and everything after that had to be financed.

I had read things. I had understanding of it, friends who were in med school a couple of years ahead of me, but I had no real sense. I had no real sense of how it would impact my life in the future. I was just taking the money out. I was like, “Okay, you have to pay for things. Okay, that's fine.” All these zeros and all these things are adding up and adding up. I think it wasn't until fourth year where I was like, “I've never seen this much money attached to my name and it's negative. I've got to come up with a plan.”

I was really lucky to have met my wife. We started dating in medical school. I went to medical school in Chicago. We met in first year. She's a teacher. She just had a really good sense on her shoulders financially. I learned a lot from her. There were some really financially conscientious students in medical school who introduced me to you, introduced me to the White Coat Investor, the book, the website, and everything. I realized I have dug myself a hole and I need to get myself out of it.

As soon as I got out of medical school, I was like, “Okay, I can do flow sheets. I can do algorithms.” So, I started saving up for my emergency fund and opened up a Roth IRA. I'm doing conversions. I just went through all that.

Dr. Jim Dahle:
Very cool. How much did you owe in student loans when you finished school?

Andrew:
I want to say off the top of my head, I think it was like $280,000. I'm trying to remember that now. I know the interest is quite significant over time, but it was probably around there.

Dr. Jim Dahle:
When you finished your residency, how much had that gone to?

Andrew:
I think it had to have gotten to $320,000, $330,000 or so.

Dr. Jim Dahle:
Quite a bit higher, at least $50,000 higher.

Andrew:
Yeah, yeah.

Dr. Jim Dahle:
You're how far out now? Did you say you're seven years out?

Andrew:
Seven years out from medical school. Then when I finished training, because I did three years as my general psychiatry residency and then two years as a child and adolescent fellowship.

Dr. Jim Dahle:
Okay. You're really a couple of years out of training.

Andrew:
Correct.

Dr. Jim Dahle:
Okay. This makes a little more sense now. I was going to say, “Well, maybe you're not making that much progress on your student loans.”

Andrew:
No, no.

Dr. Jim Dahle:
What do you owe now in your student loans?

Andrew:
Now it's $371,000. Now, obviously it's been very up and down considering the various things that have gone on with student loans. I'm currently doing PSLF, so I have about…

Dr. Jim Dahle:
Okay. So you're not trying to pay the loans down. It's okay that the balance is going up.

Andrew:
No. I don't mind it per se. Again, I'm very focused. I started calculating my net worth as a sort of a backstop that if everything kind of went south, I could cash everything out and pay it off immediately. And that was actually a little bit of the agreement my wife and I had, because she's very anti-debt.

Dr. Jim Dahle:
Yeah. I bet she's thrilled to be carrying almost $400,000 in debt around, huh?

Andrew:
I can't even tell her the number. Sometimes I'll joke around with it. Like, “Oh, I checked my service there.” And she's like, “Not another word. Do you want to eat tonight?”

Dr. Jim Dahle:
How many years of PSLF payments do you have in now?

Andrew:
It's hard to say because it's been very up and down, but I want to say I have to have about seven that are counted because I did it all through training. Five years and then two years. And I think the pause has been about a year now.

Dr. Jim Dahle:
Okay. So you got about three years left and you're done, which is pretty awesome. That's exciting. That's going to be a big boost in your net worth all at once.

Andrew:
We talked about it just because it was actually a discussion between us. Do we actually want to pay this? Because we have goals in terms of getting a house and financing other things. And is this going to be a big drag? And I know that's a very common thing we've discussed at this level of loan burden. But we're in the process right now. We got a pre-approval, so it doesn't seem to be the worst thing in the world. But yeah, this was a long conversation about, “Is it okay in terms of our other financial goals to have this on us while we wait for PSLF?” And I think right now, again, it seems to be working out in our favor.

Dr. Jim Dahle:
Yeah. Your money, what you can carve out of your budget is going toward investments mostly. I think the numbers I'm looking at here on my notes is like $190,000 retirement savings. You saved up $120,000 for a house down payment. You had another $60,000 in miscellaneous stuff. It sounds like you've been in kind of a live like a resident period for the last couple of years.

Andrew:
Oh, yes.

Dr. Jim Dahle:
Tell us about that.

Andrew:
We're a really good team. Again, I tell people I married up. I married far up. I don't know how this happened that I met my wife. I'm the one who goes into the investments, looking at obviously the various index funds, expense ratios, going to Vanguard, all that sort of stuff. She was very much kind of the nitty-gritty, the sort of concrete day-to-day thing. And this woman can get blood from a stone.

I'll admit, this is the best time to do it. I racked up a significant amount of credit card debt trying to impress her, actually, trying to do nice things. And she was able to save. I don't know where she got this money. She was able to save. We've structured our budget in such a way that I was starting to do some side gig stuff while in medical school to help pay off. And she was able to make it work. There'll be expenses that kind of come out of nowhere. And she's like, “Give me like 30 minutes.” And then she'll be on the computer. And then boom, boom, boom, boom, boom. “Okay, nothing's changed in our finances, even though we have this $10,000. It's fine. Don't worry about it. Just keep working.”

Her perspective has always been, she loves numbers. She loves calculate, kind of making things work, puzzles. And she's always been like, “All right, we can kind of construct this and do this and we're going to live like residents. If we could live like medical students, let's do that.” I'll joke with her. I'm like, “Do you want me to wear a barrel going to work?” And she's like, yeah, as long as it’s not a professionalism issue.

Honestly, I will say for us, we've never been particularly big spenders of things. We like experiences. We love travel. It's one of the things. We'll do our typical sort of millennial, “Have a latte every day.” We have our little things here and there. But my interests, my hobbies are more like podcasts and books and things of that nature, a couple of streaming services, but nothing big.

Dr. Jim Dahle:
There's no wake boat.

Andrew:
Correct. Yeah. I'll go on a charter with my friends and I'll pitch in, but as a general rule? Nah, I don't have that. I don't have that drive. It honestly hasn't been too bad for us in that way. We've lived the way we've always lived and it hasn't like hurt us too much.

Dr. Jim Dahle:
Yeah. How would this conversation be different if we were interviewing her today instead of you?

Andrew:
I think she'd be a bit more like “We have so much more to go. We've gotten through a hill. We've climbed a tiny hill and there's this Mount Everest is upon us, in terms of all this stuff.” I try to “This is really good.” I'm the typical psychiatrist. I'm like, “Let's look at the strengths that we have. We were back to broke and now we're looking at getting a house and even with the baby and our daughter, she'll spend money on her. She was like me, whatever. We're going to buy some spam from the shop right for you. But for the baby, oh, she gets pasture raised eggs and all that.

Dr. Jim Dahle:
Yeah, nothing but the best for the baby. You guys are going to eat ramen, but you're going to feed her baby food.

Andrew:
I do the same thing. I'm not better. I'm happy to give her everything I've got. But even with her and all the expenses of a baby, we've still been able to save at the same rate or about the same rate I'd say as before. I think she'd still be a bit more like “We have so many things to go for”, but I think when we look on it and she admits this as well, she's like, “Even with this expensive, a baby and saving for a house and all this sort of stuff, we're making progress. We're making a good amount of progress.” And now we're starting to see some of the money start to work for us. In terms of the investments, things are building a little faster than I expected them to.

Dr. Jim Dahle:
Yeah, it doesn't hurt that the stock market went up 25%.

Andrew:
I know. My wife was like, “What's the purpose of it? It's gone up 10% over the last two, three, is this really doing anything?” I was like, wait, wait. I talked about the history of it, like some years you get like 10 years’ worth of growth and you've got to wait. Time in the market beats time in the market for a thing. And I think this was the year, this last year was like, “See, sometimes I'm right about things.” It does happen.

Dr. Jim Dahle:
Now I want to explore something else that's a little bit unique about you guys. Very early in your live like a resident period, you guys put your heads together and decided we're going to work our finances in such a way that she could stay home with the baby. Tell me about that conversation and those calculations.

Andrew:
Exactly that. We started talking about this as soon as we found out she was pregnant and we discussed it. My wife is a preschool teacher. She made about $50,000 to $60,000 at the time. We discussed what are the pros and cons of her working versus her staying at home. And we calculated out, if she had continued to work, we'd have to pay for daycare. It'd be five days a week daycare because we don't have any family nearby. It would increase our adjusted gross income, which would increase my loans and just the general tax burden that we have.

As a teacher, it's a pension system. There's no pre-tax retirement vehicle that we could put into and increase our tax burden. And so, when we all calculated it out, we're making maybe about an extra $500 a month. And then it was just the added stress of also she's a baby. She's going to be around other babies. The kids can get sick all the time. And my wife knows as a preschool teacher kids were out for a variety of reasons all the time. And so, we're going to end up taking our PTO days anyway. What's really the value here?

And so, my wife said, “All right.” She talked about it anyway. She said let's try it. Let me stay home with her and let's see what happens there. We've been lucky in the sense that it's been a really good experience. My wife is a professional and she loves her job, but she said being with her, it's also kind of going in with being a mother, but it's been an amazing experience and we've been able to make it work.

Now, admittedly, I do call, I do have opportunities for moonlighting and doing call, extra call for the hospital system I work at. And that's been good, especially for saving up for the big purchases. But in general, we found that we've made ends. We've done really well with it.

And then just our quality of life has been better. If our daughter is sick, my wife can take care of her. The relationship between them has been really good. I'm very much like number two, number three or number four when grandma or our grandpa is in the house. It's like, “No, daddy goes to work.” She'll cry every time anybody else's leaves, but me, “Oh no. Bye. Give me my toys next time.”

Dr. Jim Dahle:
Yeah. Yeah. Well, that comes around with time, but we made a similar calculation. I think I wrote a blog post about it once. Katie was a teacher when I was an intern.

Andrew:
Yeah, that's right.

Dr. Jim Dahle:
At the end of my intern year, she stayed home with our oldest who's now 20 in college. But I think we calculated it out at $2 an hour is what she was being made. Once we ran all the numbers on everything and it just made sense. It made sense to do the traditional for lack of another word, a thing. There were a lot of financial benefits to doing it. I think for lots of families, that is what ends up being the right thing.

All right. We've been talking for a long time, because this is an awesome conversation, but I wanted to give you a chance to give some advice to people like you. There's somebody else out there that's an MS4 clueless about their student loans, wondering if there's any hope for them whatsoever. Give them some hope.

Andrew:
Well, I think the best financial decision, I'm going to tell my wife to listen to this because I think I've talked a lot about her. The best financial decision I ever made was finding a partner with the same perspective I had on finances. I think number one, that was the biggest one. And I think that's fairly underrated.

I think number two, in terms of helping us stick together is make yourself knowledgeable. I think that was the biggest thing because when you're a resident and everything, money comes in. And if you're able to understand and have a plan and know even if this goes South, you're building those habits. Things may go South in the stock market or expenses may come up, but as long as you continue to work and you have a pretty concrete, reasonable plan and you're knowledgeable about it, it works out.

I'd say the first thing we saved for was the emergency fund. And then after that we went to the stock market and so on. It's pretty, I guess, foolproof. It's a very reasonable plan to go through. Keep yourself knowledgeable and then have a partner who thinks the same way you do about money. Because I think that really eliminates a lot of the stress around finances.

Dr. Jim Dahle:
Good advice. Andrew, congratulations to both of you on what you've accomplished. Your daughter does not yet appreciate what you were doing here. But she will with time when in 18 years, she's going to be 20, she's going to be in college and she's going to have conversations with you.

Like this text I had with my daughter the other day who said, “I didn't know you were a student body president in med school.” And I'm like, “There's a lot of things you don't know about me.” And there'll be a lot of things she doesn't know about you, like the sacrifices you've been making the last two or three or four years in order to give her this awesome life that she's going to enjoy.

So, congratulations to you. Well done. And thanks so much for coming on the podcast and inspiring others to also get back to broke.

Andrew:
Thank you so much. Thank you for your time, Jim.

Dr. Jim Dahle:
All right. I hope you enjoyed talking with Andrew as much as I did. It's always fun to see somebody relatively early in their career and just killing it. Like our situation, Andrew's blessed with a wonderful spouse who is really helping him to have success with this new high income. But they're managing it well and they're making massive progress. And in a few more years, they're going to get PSLF and probably be millionaires not long afterward because they are really doing great. What a lucky daughter to come into that family.

FINANCE 101: THE DANGERS OF PERFORMANCE CHASING

All right. I said, we're going to talk a little bit about performance chasing at the top of this podcast, and I'm seeing a lot of it out there. And I think it's just because stocks, particularly U.S. large growth tech stocks have done so well the last two years. 2023 and 2024 both had returns of like 25% a year.

And a lot of people are looking at that and I don't know how much of it's conscious and how much of it isn't and saying, “Oh, that's what I should invest in. I should invest in U.S. large growth tech stocks because they return 25% a year.”

Well, I got news for you. The U.S. stock market does not return 25% a year every year. If you are thinking this is normal, I've got news for you. This is not normal. In fact, in a lot of ways, the last couple of years have felt an awful lot like the late 1990s felt. Now, for those of you that are in your fifties or sixties, you know this because you were investing in the late 1990s when we all got excited about anything with dot-com after its name.

And people started saying, “Well, shoot, I'll just have this big tech allocation in my portfolio. I'm going to invest in QQQ. Who needs all these other things? Who needs real estate and who needs bonds and who needs small stocks and who needs international stocks? I'm just going to invest in this stuff that does great.”

Well, what happens? In about March, 2000, it began. It was a pretty nasty bear market, lasted two years plus in the overall market as the tech stocks took a tumble. But what a lot of people don't realize, especially if they're relatively young in their investing careers, they don't realize that the U.S. stock market is measured by something like the S&P 500, basically had no return from 2000 to 2010.

Now that's a cherry pick time period, that decade, because obviously 2000 is when that tech bust started. And by ending it in 2010, you include the entire global financial crisis as well. But the return on S&P 500 stocks, even with dividends reinvested was barely positive for that decade. It was not 25% a year, it rounded to 0% a year. And that is something that can and does happen relatively regularly.

If you look at long-term returns for the U.S. stock market, it's about 10% a year. But that includes a number of years like the last couple of years where you're making 25 or 30% a year. And it includes years like 2008. It includes years like 2000 and 2001 and 2002. It includes episodes like what we saw in March of 2020. It includes episodes like we saw in 2022 when interest rates went up 4% in a year and both stocks and bonds got pummeled. This is not normal to get 25% on stocks every year.

Now my crystal ball is cloudy. I can't tell you what stocks are going to return in 2025. But if I had to make a bet on what returns are going to be going forward from right now over the next 10 years compared to the last 10 years, I would expect much lower returns on U.S. large growth stocks in the next decade than we have seen in the last decade.

I want to discourage you from performance chasing. And here's some of the ways I'm seeing people doing performance chasing. I see people abandoning what are very reasonable diversified portfolios in order to put more money into large growth tech stocks. They're leaving international stocks. They're abandoning small value stock tilts. They're saying, “Well, why do I need bonds anyway when stocks always go up? In the long run, I'm going to make more money with stocks. I'm just going to put it all in stocks.”

They're abandoning real estate. They're borrowing money to put more money into stocks. They're not paying off debt in order to have more money in stocks. This probably doesn't end well. I don't know when it ends. It's hard to say whether we're now sitting in 1996 and I'm the chairman of the Fed saying there's irrational exuberance in the markets or whether this is 1999 and it really is about to crash in a few months. I have no idea.

But I want you to be a student of financial history. I want you to realize that trees do not grow to the sky, that your stocks will not have a 25% return every year, and that diversification is important even when it works. It's disappointing to have your diversification work. If you compared your portfolio to the S&P 500 last year, you probably underperformed it dramatically.

My portfolio return was something like 10% last year. The S&P 500 made 25%. Why did mine underperform? Well, I own small value stocks. I own real estate. I own bonds. I own international stocks. And none of those made 25% last year. Yes, I rejoice that 25% of my portfolio is invested in a Vanguard total stock market fund and did awesome last year. Then, of course, you kick yourself that you didn't have all your money in it.

Well, that's the way diversification works. Diversification matters not necessarily in years like 2024. It matters in years like 2022, years like 2020, years like 2008, years like 2000. Then, having all your money in US large growth stocks may not look so good as it did the last couple of years.

Be careful. Don't get sucked into performance chasing. Pick a reasonable plan that you can stick with for decades and stay the course with it. Whether the market goes down or the market goes up, stay the course with your plan. It was a reasonable plan when you set it up, fund it adequately, and you'll be able to reach your financial goals with it. Don't get sucked into performance chasing.

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Keep your head up, shoulders back. We'll see you next time on the Milestones to Millionaire 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.