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:
Hello, WCI listeners. I’m still taking some time off to rest and recover from my accident. But don’t worry, I’ll be back in a few weeks. Until then, enjoy this episode from one of our friends of WCI.

Tyler Scott:
Hello, everyone, and welcome to episode 384 of the White Coat Investor podcast. Today, we’re going to be mostly talking about ways to help out and optimize your kids.

First, let me start by saying I am incredibly honored to be here. My name is Tyler Scott. I am a friend of WCI. I’ve been a guest on the podcast before. I’m a columnist on the blog. My wife, Megan, is the podcast producer. I used to be a dentist for some of you that know my story. To be here hosting the very podcast from the very website that changed my entire personal and professional life is a surreal honor.

I am so sad for the reason that I am here. We are all rooting for Jim to make a full recovery. We know he’s going to bounce back quickly. To be here to stand in his place for one episode, I am tremendously grateful. Thank you for tolerating me in this liminal space while we wait for Jim to come back to us.

Today’s episode is brought to you by SoFi, helping medical professionals like us bank, borrow and invest to achieve financial wellness. SoFi offers up to 4.6% APY on their savings accounts, as well as an investment platform, financial planning and student loan refinancing, featuring an exclusive rate discount for med professionals and $100 a month payments for residents. Check out all that SoFi offers at whitecoatinvestor.com/sofi.

Loans are originated by SoFi Bank, N.A. NMLS 696891. Advisory services by SoFi Wealth LLC. This brokerage product is offered by SoFi Securities LLC, member FINRA/SIPC. Investing comes with risk, including risk of loss. Additional terms and conditions may apply.

Next, let me just say, thank you for what you do. Whether you are in the operating room, the courtroom, the classroom, the dental clinic, the engineering lab, or anywhere else you are working today to make the world a better place. If no one else has told you today, please hear me when I say, thank you. Thank you for what you are contributing to bring joy, health, justice, learning, and goodness to this life we are all leading together. I am grateful for you, as are all of us here at the White Coat Investor.

CLARIFICATION

First, we have a clarification. Here’s an email that came in after a recent podcast episode.

“Hey, Jim, on a recent episode, I heard you mention that property, such as a house held in trust, does not receive a step-up in basis at death. To your knowledge, does this occur only within irrevocable trust, or does this apply to revocable trust as well? This was the first time that my wife and I had heard of this. We were considering moving our house into a revocable trust, but if we’re going to lose the step-up in basis, we would reconsider.”

Okay, good. Thanks for sending in that clarification. The answer is, you only lose the step-up in basis in death if you place the house in an irrevocable trust. No problem with revocable. Jim wanted to make sure we clarified this, as more than one person had emailed about it. So, thanks for that clarification.

CAN A BROKERAGE ACCOUNT ACT AS A HIGH-YIELD SAVINGS ACCOUNT?

Okay, let’s start by taking your questions. We’ve got the first one from the Speak Pipe. Suzanne is looking to use a brokerage account as a high-yield savings account, and then when we’re done with that, she has a question via email about HSAs for her kids. Let’s start with that first question.

Suzanne:
Hey, Dr. Dahle, I have a national bank checking and savings account. The savings account right now is making less than 1% interest, and I wanted to take advantage of the higher interest rates that other banks are offering in their savings account without having to open an entire other account.

I heard you discuss on a previous podcast that you were keeping your savings or cash emergency fund in your Vanguard settlement fund via your brokerage account. If I do this, do I just transfer the funds over to the settlement fund in my brokerage account and then transfer them back out when needed? Are there any tax implications to this if I never invest in any funds? I certainly assume you would not do this with an IRA account or any other account other than a brokerage account.

What’s the difference between this option using the settlement fund or the cash plan option that Vanguard just rolled out? I read on the Bogleheads forum that some individuals are moving their savings to this account and paying bills out of that account, which is better as a savings vehicle and potentially easier without having to open another account with a separate bank.

I also thought about doing this for my college-age dependents with their accounts, but assumed they would each need to open a brokerage account with Vanguard. Thanks for any help you can provide.

Tyler Scott:
Great question, Suzanne. Several parts there. First, to move money to Vanguard, you can just link your checking account to a new Vanguard brokerage account for those that are 18 and over, or if they’re minors, then you would need to open a UTMA account, which I’ll mention more in a moment.

Once the money is in the Vanguard account, it’ll start earning 5.25% in the federal money market fund, which is also known at Vanguard as the sweep fund or the settlement fund. The tax implications are exactly the same as any other savings account. All the earnings will be taxed as ordinary income at your marginal tax rate.

Be aware that kiddie tax rules kick in if your minor children are receiving more than $2,500 a year in unearned income. If you don’t know what I mean by that, just go to the blog, type into the search bar, “Kiddie tax”, and Jim’s got a really good article that explains what that means.

Now, you mentioned you would only do this in a brokerage account, not in an IRA. I get what you’re saying there, that in an IRA, most people would choose to invest the money more aggressively in a stock or bond fund, and that is true in most cases. However, just for clarity, the same money market fund is available in IRAs as the ones available in a taxable brokerage account. Cash can be a reasonable part of someone’s asset allocation, and while unusual, that cash could theoretically be held in an IRA in any of the various money market funds available.

One important distinction, though, is that you can only put earned income into retirement accounts like an IRA or a 401(k), whereas you can put unearned money or like gifted money into a taxable brokerage account.

Now, the new cash account that you mentioned at Vanguard that you read about on Bogleheads, that only recently rolled out, and it pays 4.5%, so a lower rate, but in exchange, you get FDIC insurance, if that matters to you.

Interestingly, Vanguard works with banks so that up to $1.25 million is FDIC insured for an individually held account or $2.5 million is insured for a jointly held account. That is meaningfully higher than normal FDIC limits, which are $250,000 for an individual or half a million for joint account owners. Other places like Wealthfront and SoFi do this expanded FDIC insurance thing as well.

For most people, FDIC insurance above $250,000 or $500,000 is not relevant, but occasionally, I have clients sitting on large amounts of cash after the sale of a business, or they’re saving up for a big down payment on a house, or maybe they’ve got a big balloon payment coming up on a loan.

If you’d rather get 5.25% than you’d hold the cash in a brokerage account, either the cash or the brokerage account is notably better than what you’re doing now, Suzanne. So, both are good. In the brokerage account, the settlement fund defaults to the federal money market fund. In the cash plan, you must actively elect the federal money market fund.

The cash plan, you can get a routing number and an account number for direct deposit and auto pay and use it like a checking account, but at present, there is no check writing or debit card. You can’t deposit or withdraw physical cash. The only way to move money is via online transfers.

Now, regarding your kids, once the kids are 18, which I presume they are because they’re in college, you said, you cannot open accounts for them. You have to have them open their own accounts. You can help them.

For minors, you can open a custodial account, often referred to as a UTMA or UGMA, depending on what state you live in. It is within these custodial accounts you need to be mindful of the kiddie tax I had mentioned earlier.

HSAS FOR ADULT KIDS
Okay, that takes care of part one. Suzanne then sent a follow-up question via email regarding HSAs for adult kids, and that question reads like this. “I heard you mention on a previous podcast that you can open an HSA account for your dependent children, 19 to 26, if you have a high deductible health insurance plan. Can you provide more details about this? Do you open it in their name with your HSA company? I assume with post-tax dollars. Any details or specifics would be appreciated. Thanks as always for all you, Katie, and your staff do.”

Okay, this came up when I was a guest on the podcast a few months ago as Jim and I were answering another question regarding HSAs. He was skeptical at first and understandably so. This sounds like one of those too-good-to-be-true hacks, kind of like the first time you learn about the backdoor Roth IRA. After taking some time to do his own research, Jim has now written a blog post that is waiting to be published. It’s called Give Your Kid a Seven-Figure HSA. So, keep an eye out for that, and that’s going to be a wonderful resource on this topic going forward.

To try to give you some help now, first the kids have to open their HSAs. It doesn’t matter where they open the HSA, Fidelity, Lively, HealthEquity, Optum Bank, HSA Bank, lots of options. If they have an employer, the employer has an HSA, then that’s where they open it up.

HSA contributions are pre-taxed to the HSA owner, so each kid will get to lower their taxable income by $8,300 in 2024 if they max it out. It’s fine if you want to gift them $8,300 of your own post-tax dollars in order for them to fund their HSA. They’re just the ones that are going to be getting the tax deduction for making the HSA contribution.

Okay, so who qualifies? You mentioned in your question for your dependent children. That is exactly the opposite. Children who cannot be claimed as a dependent qualify. Importantly, it’s not whether or not the parent does claim the child as a dependent, it’s whether or not the parent can claim the child as a dependent.

When I was on the podcast, we didn’t have time to get into the weeds on this, but I’m here now, so let’s do it. First, in the name of good citation and credit where credit is due, the information I’m providing here and where I learned about this strategy in the first place is from an article by Jared Winkers on the Michael Kitcis blog that is intended to provide quality continuing education for financial planners.

In order for an adult child to open an HSA, they cannot be claimed as a dependent on another person’s tax return. This means parents need to be aware of what actually makes a child eligible to be claimed as a dependent. There are five tests that must be met for a child to be considered a qualifying child for parents to claim them as a dependent. Those tests are described in IRS Publication 501 if you want to look it up.

They must all be met for a child to be considered a qualifying child. Now, normally when we’re talking about dependents, we do hope to pass all five tests so that we can claim the kid and get a discount on our taxes. In the case of the HSA hack we’re discussing here, we’re hoping to not pass one or more of these tests so that the kid can open their HSA.

The five tests are relationship, age, residency, support, and filing status. Listen for and be rooting for which test your kid fails so that you can give them a million dollar tax-free HSA at age 65. Okay, test one. Relationship. The child must be the taxpayer’s biological or adopted son or daughter, foster child, or descendant of any of these. Most kids pass this test.

Test number two, age. As of December 31st, the child must be younger than 19 or younger than age 24 if they are a full-time student. They must also be younger than the taxpayer and the taxpayer’s spouse if filing a joint tax return. There is no age limit if the child is permanently disabled, totally and permanently disabled.

Test three, residency. Generally, the child must have lived with their parents for more than half of the year. Note, children who are away at college are considered temporarily absent and will still be considered to have lived with their parents while away at school.

Test number four, support. The child may not have provided more than half of their own support for the year to claim them as a dependent. That means you, the parent, must have paid more than 50% of their food, shelter, transportation, education, medical, dental care, etc. to claim them. So, if the kid works enough to provide half of their own support or if grandma or a UTMA or some other source combines for half of their support, they fail the support test.

Test five, filing status. The child may not file a joint tax return unless the purpose is to claim a refund of withheld or estimated paid taxes. If you have a kid that is in this age range who is married and filing a joint tax return with their spouse, awesome news. They are not a qualifying dependent and they can stay attached to your high deductible health plan and take advantage of this HSA strategy.

Okay, to recap, this means that just failing one of these tests will preclude the child from being considered a qualifying child and therefore avoid dependent status for the purposes of HSA eligibility. This could be the age test, maybe they’re age 24 to 26, or the residency test, they don’t live with parents for the requisite amount of time, not counting time away at college, or maybe they fail the support test at any age or time based on their own financial autonomy.

Okay, one last weed in this fun, if not occasionally confounding weed garden. A taxpayer’s child who is not a qualifying child, which we just talked about, can still be considered a qualifying dependent if they can be considered a quote qualifying relative. There are two tests that must be met for parents to claim a child as a qualifying relative when they would otherwise not be considered a qualifying child.

First test, the gross income test. The child’s gross income must be less than a certain amount for the year. That amount for this year, 2024, is $5,050. If the kid makes less than $5,050, the child can still be claimed as a dependent.

Second test, the support test, parents must provide more than half of the child’s total support during the year. The determination of whether a child is a qualifying relative is primarily relevant when the child is at least 19 years old and not a full-time student, therefore failing the age test, which means they cannot be a qualifying child, but may still be a qualifying relative because they still depend on their parents for more than half of their support, and they earn less than $5,050 annually.

I know that’s confusing. We’re doing our best here at WCI to provide clarity. I think Jim’s article will help a lot. Your CPA should be able to help you. Your financial advisor should be able to help you if you have one.

If you cannot claim your young adult child as a qualifying dependent or a qualifying relative, good news, you can keep them on your high deductible health plan until their 26th birthday, have them open their own HSA, have them make maximum family contribution each year. This can lead to a seven-figure HSA balance by the time they’re in their mid-60s, even if they never contribute another dollar after they turn 26.

QUOTE OF THE DAY

Time for quote of the day by Margaret Bonanno. I’m so sorry if I said your last name wrong, Margaret. “Being rich is having money. Being wealthy is having time.” And I think that’s so true. Money can be thought of in many ways. One of the ways I think about it is as a medium by which I turn work units into happiness units. I want that conversion to be as efficient as possible, and one metric by which I measure my happiness is the ability to use my time in whatever way I choose. So, I love that quote. “Being rich is having money. Being wealthy is having time.”

CUSTODIAL ROTH IRAs

Okay, time for our next question. Nicolette is trying to save up some tax-free money for her kids. Let’s get that question.

Nicolette:
Hi, I’m Nicolette. I’m a new attending physician in Texas, and I had a question about custodial Roth IRAs. My question is that if my husband and I have to do backdoor Roths due to our income, do I need to do a backdoor Roth for my child?

My assumption and from my reading is that no, I can just directly contribute since they themselves will be under the income limit, but I don’t want to make a mistake here. Thank you for all that you do. I’m a longtime listener and have learned so much from your podcast and your blog.

Tyler Scott:
Great question, Nicolette. So, do the kids have to use the backdoor loophole to get money into their Roth IRA if the parents have to use the backdoor loophole? No. The parent’s income has nothing to do with whether or not the kid has to use the backdoor loophole. The rule is if the tax filer has income above a certain limit, they cannot make direct Roth IRA contributions.

Now let’s define that further and put some specificity to the numbers. In 2024, if a single person has a modified adjusted gross income more than $161,000, they cannot make a direct Roth IRA contribution of any amount. If they make between $146,000 and $161,000, they can make a partial contribution. Married folks filing a joint return in 2024, those numbers are any income above $240,000 of MAGI, you cannot make any direct Roth contributions. And between $230,000 and $240,000, you can make a partial contribution.

Nicolette, maybe your kids are actors or they hit it big on Shark Tank and make more than $161,000. I hope so. That’d be awesome. But if we’re talking about normal kids doing normal work, then no, they don’t have to use the backdoor Roth IRA loophole. They can make direct Roth IRA contributions.

Now, just as a reminder to everyone listening, for your kids to make Roth IRA contributions, they must have earned income. That means they’re making money from legitimate work, not for folding laundry or vacuuming their room. They must have a job. We’re going to talk more about this on a question coming up. But for now, I will just say that the money going into the Roth IRA must be connected to a legitimate source of earned income that is supported by clear documentation.

Now, the dollars going into the Roth IRA don’t have to come directly from the kid’s lawn mowing business, neighborhood babysitting duties, or flipping burgers. A popular source of the funds that actually go into the kid’s Roth IRA are from the so-called parental match, formerly known as the daddy match. But it’s 2024, so we’re going to call it the parental match.

This simply refers to the idea that the parent says, “Hey, for every dollar you earn up to the annual Roth IRA contribution limit, so $7,000 in 2024, I will put a dollar into your Roth IRA for you.” This allows the kid to keep their earnings to put gas in the car, buy Pokemon cards, or spend at the mall, while still enjoying the myriad benefits of funding a Roth IRA early in life. Those benefits include 50-plus years of tax-free growth and eventual tax-free withdrawals.

But also, having a Roth IRA at a young age invites a child to learn about investing, index funds, expense ratios, and to experience the thrill of compounding interest, a lesson whose long-term value is difficult to quantify. So, thanks for the question, Nicolette. Lots of people have the same question. I hope that was helpful.

EMPLOYING KIDS UNDER LLC TO MAKE 529 CONTRIBUTIONS

Let’s go next to Dave, who is looking to optimize for his kids by employing them in his LLC and making 529 contributions.

Dave:
Hi, Jim. Thanks for all you do. I’ve got a couple questions about employing children under an LLC. If my kids use the money they receive from our LLC payroll to put into their 529s, can my wife and I claim the state tax benefits from their contributions? Utah allows $4,260 per year to get a 4.85% tax credit per child. Do we need to contribute that or can we use their contributions or can each of us contribute and use the full amount?

Second, I’m wondering what your thoughts are on employing a minor over the age of 18 under our LLC. It looks like it’s better to employ them versus just giving them a lump sum gift. Our marginal tax rate is 32%, but I realize that for children over 18, we have to pay their Social Security Medicare tax, which totals 15.3%. Wondering what your thoughts are on that. Thanks again.

Tyler Scott:
Good questions, Dave. Okay, lots to unpack there. Let’s take those one at a time. First, the 529 question, then the LLC question. As a fellow finance nerd living here in Utah, I can’t help but point out that 529 contributions here are eligible for a 4.55% deduction on up to $4,820 per beneficiary in 2024. That’s a tax savings of $219.31 per beneficiary. I mentioned that not to quibble on the details. I just want you to get as much as you can in the 529 if you are using the tax deduction as your guide.

I also want to make the broader point that while there is some tax savings for using your own state’s 529, it’s usually pretty small potatoes. The more profound mathematical benefit of a 529 is the tax-free growth and tax-free withdrawals when used for qualified educational expenses. Most listeners to this podcast do not have a financial plan that hinges on saving $219 per 529 beneficiary.

Now, Jim and Katie have 812 529 accounts or something like that for all their legions of nieces and nephews. $219 per kid may add up for them, but that’s not where we’re winning and losing generally. So, don’t overemphasize the value of the year-to-year tax deduction, even if you get one.

Many of you listening live in one of the nine states with no income tax or in one of the states that do not provide a deduction for contributing. I’m looking at you, California and New Jersey. California does not provide a deduction to anyone, and in New Jersey, you only get a deduction if you make less than $200,000.

So, to your question, Dave, about if the kids can open their account and get their own deduction of $219 by contributing $4,820 to their 529. Well, in Utah, you have to be at least 18 to open a 529. Some states, like Virginia, they allow you to open a custodial 529, but I don’t know many states that do that. Utah’s not one.

Theoretically, I suppose if the kid makes contributions from their earned income, they get the tax break. You could also, as the parent, make a contribution and get your own tax break as well, but I’d run that by your CPA based on whatever state you live in. Either way, it’s probably not worth it for the kid to give up almost $5,000 of their earnings to get the $200 off their state taxes, assuming they even owe any state taxes at all, that is a point we’ll talk about next as it relates to your LLC question.

Now, you said a minor over the age of 18 in your question. I think you mean one of your children over the age of 18. You also mentioned your marginal tax rate is 32%. I think you mean your federal marginal rate is 32%, and if you live in Utah, your overall marginal tax rate is 36.55%. Now, it doesn’t make that big of a difference, but just as an FYI, 36.5% is the rate I used in the math I’m about to describe to try to answer your question.

To zoom out first and set the stage here, if you’re a business owner in a high tax bracket, hiring your kids is a potentially awesome way of reducing your family’s taxable income. The wages you pay to your child will be deductible to business and won’t be subject to income tax unless the kid earns more than the annual standard deduction.

In 2024, the standard deduction for a single tax filer is $14,600, meaning your child could earn about $1,200 a month and not be subject to any income taxes at all. If your child earns more than the standard deduction, they’ll only owe tax on wages above that standard deduction threshold.

For a single filer in 2024, the 10% federal tax bracket goes up to an additional $11,600 of earnings. For 2024, a child could earn up to $26,200 and only pay 10% federal income tax on $11,600 of it. A total federal tax of $1,160 on $26,000 of income, that’s an effective tax rate of 5.5% on the federal level. Not bad.

Now, in Dave’s case, we need to add that 4.5% Utah flat income tax on that last $11,600. So, the total income tax of the child would be roughly double that, about $2,300, if the kid made $26,000.

Now, as Dave mentioned, this may cost you 15.3% in payroll taxes. More on that in a moment, but for now, let’s assume payroll taxes are required. For $14,600 of income, that’s like $2,200 of FICA taxes. Now, let’s compare that to the deduction, to the business. $14,600 in wages is a deductible expense to the business. If that business is a pass-through entity, like an LLC, then the tax savings to the business is based on the filer’s marginal tax rate, in this case, 36.5%. Now, that competes to a tax savings of like $5,300.

Now, there’s a lot more complexity to this when you start thinking about all the reasons the actual tax rate can be lowered with QBI deductions, retirement plan contributions, accelerated depreciation, charitable contributions, etc. But for now, we’re just assuming the rate is 36.5%.

So, you paid $2,200 in FICA taxes to save $5,300 on income tax. This is a net positive of $3,100, and now your kid has $14,600 of earned income that is tax-free because it’s all subject to the standard deduction.

However, there is a “but”, and there’s a pretty big “but.” Theoretically, you would be paying someone else to do this job, so there really ought not to be any savings to you because if the kids aren’t doing a job that is legit, the whole thing is illegal.

To keep it legal, you must follow the rules. Those rules are legitimate work, reasonable pay, keep payment records, so you got to fill out an I-9 and a W-4 and time cards and a W-2, and it cannot be for personal services. This must be done in a business setting. They got to mop the floors in the waiting room. They got to clean windows at the clinic. They got to run the autoclave in the dental office. This got to be real work or you’re just running a scam. The IRS hates this scam, and they watch out for this scam.

Okay, as promised, let’s revisit the payroll tax thing quickly. If the business entity is a sole proprietorship, single-member LLC, or partnership, and you are the sole owner, you don’t have to pay Social Security or Medicare tax a.k.a FICA tax a.k.a payroll tax for the child if the kid is under the age of 18.

Similarly, payment done for work by your child under the age of 21 is exempt from federal unemployment taxes, so that gets really sweet. Now we don’t have this arbitrage between $2,200 of FICA taxes and the deductibility. We just don’t pay any FICA taxes at all. These advantages are only for an unincorporated business entity. Corporations, including S-Corps, do not qualify for these payroll exemptions.

Now, back to our example with Dave, even if we are paying the payroll taxes, I think that $3,100 net tax win is nice. It’s a lot better than our $219 529 tax win. But the real value of this whole exercise, in my opinion, is that employing the kids means they get earned income, and now they can contribute to a Roth IRA.

I did a presentation for my old dental pals in Southern Oregon about the ways to optimize their finances and their dental practices and showed them the long-term value of paying the kids enough to max out the Roth IRAs each year. If the employed kids from ages 14 to 19 maxed out the Roth IRA every year, assuming a modest 6% annualized return on their investments, the kid would have nearly $700,000 in their Roth IRA at age 65. All of that is tax-free.

Now combine that with maxing out the kid’s family contribution to their own HSA from ages 19 to 26, like we talked about earlier, that can lead to another $800,000 at least. In total, that is conservatively $1.5 million of tax-free withdrawals available to your kids at retirement by combining both of these strategies while they’re young. So I’m with you, Dave, on wanting to make the most of this chance to employ your kids in your LLC. I hope this conversation was helpful in some way.

MANDATORY 403(b) CONTRIBUTIONS

Okay, next question. I think the last question is about mandatory 403(b) contributions. Let’s get that one over the Speak Pipe.

Brett:
Hi, Jim. This is Brett from the Midwest working in academia. I have a question regarding 403(b) contribution limits that I’m struggling to wrap my head around. Our university offers a defined contribution 403(b) plan with mandatory 5% employee contributions and 10% employer matching contributions. They also offer a voluntary 403(b) retirement plan in addition to the mandatory program.

My question is this. Does my 5% mandatory employee contribution also count towards my individual $23,000 per year limit in 2024, or does this just factor into the overall $69,000 per year in 2024 415(c) limit? Basically, can I throw $23,000 early in the year into my voluntary 403(b) plan and not screw up my ability to receive the 10% employer matching dollars in the months that follow me maxing out my individual 403(b) contributions? HR here is telling me that my mandatory 5% employee contributions do not count towards my $23,000 per year limit on elective salary deferrals. Does this sound correct to you? As an addition, I am under age 50 with less than 15 years of service, so catch-up rules do not apply. Thanks in advance.

Tyler Scott:
Brett, great question. Totally understandable question. Your HR department is correct. The mandatory 5% contribution does not count against your $23,000 elective deferral limit. Emphasis on elective deferral limit. If something is mandatory, it is by definition not elective.

As it relates to your question about throwing $23,000 into your 403(b) early in the year and not messing up your 10% match, that answer is a little more complex. Let me tell you a story from the trenches that just came up for us with a client a couple weeks ago, actually.

The company I work for is based in Little Rock. Even though we serve clients nationwide, we have a disproportionate number of clients that live and work in Arkansas. While my colleague was preparing for an annual review meeting with a client that works at UAMS, University of Arkansas for Medical Science, he noticed something kind of weird on the client’s pay stub.

UAMS has also, like you Brett, has a 5% mandatory 403(b) contribution with a 10% employer match. And like many such employers, they also provide a 457(b). I wouldn’t be surprised if that were true for you as well, Brett, that you have a 457(b) deferred compensation plan available at your job as well.

Apparently last year, UAMS changed their payroll system in some way that made it harder to ensure high earners making over the income matching limit, which is $345,000 in 2024. They changed it to make it harder to not accidentally contribute a dollar to the 403(b) that otherwise would have been received as a match.

In the past, UAMS would stop all individual contributions to leave enough room to ensure the worker got their full match as long as their combined and voluntary contributions were 10%. The mandatory contribution rate is 5%, so that means the voluntary contribution rate had to be at least 5%.

But now, you have to use the 5% voluntary contribution until you reach the income matching limit if you want to receive your full match. You then have to increase your voluntary contribution rate for the rest of the year to make sure you max out the 457(b) as well. That’s especially important for those over 50.

My colleague discovered this when looking at the client’s pay sub and observed that he had crossed over the income matching limit on his July paycheck and that his match was $31,000, not the $34,500 we expected at that point. So, he knew something was up. The client called UAMS HR after the meeting and discovered what had happened.

In summary, anyone at UAMS who makes over the income matching limit should be using a 5% voluntary contribution rate until they hit the income matching limit, and then they have to take it up for the rest of the year to max out the 457(b) and 403(b) both. You can imagine this would cause some cash flow timing issues for someone who makes, say, $400,000. They would have to contribute well over 25% of their final two paychecks of the year to the 403(b) and 457 to hit both contribution limits. And if they’re over 50, they’d have to put nearly half of their paycheck in.

Now, the last piece of this puzzle is after they get their December paychecks, they have to go back into the system and decrease the voluntary contribution rate back to 5% so they get their full match the following year. Yikes.

Brett, the moral of this story is when you have the added complexity of a mandatory contribution, I think it makes sense to go sit down with HR and or the custodian of the 403(b) to be crystal clear about how all of this works within their payroll system and within the language of your given retirement plan documents.

Selfishly, I think this story serves as an example of the possible value add of having a financial advisor. It can be useful to have a second set of eyes to help you ensure your plan is organized and optimized. Now, admittedly, all of this was to make sure the client gets like $3,000 of match he otherwise would have missed out on. So, not a ton of money, but that is still less than this client is paying in fees to my colleague each year. So that catch alone is a net win. Sometimes if we just find one little thing, usually we find more than one big thing.

One other element I want to touch on here is what Brett mentioned about catch-up contributions and one area where 401(k)s and 403(b)s can differ in this regard. Both 401(k)s and 403(b)s enjoy the 50 plus catch-up contribution. So, after you’re turned 50 or the year that you turn 50, you can put in an extra $7,500 into your 401(k), and that amount goes up with inflation each year.

However, 403(b) plans can, but are not required to, offer a second type of catch-up contribution, the so-called 15 years of service catch-up contribution. If you’ve been working for the employer for 15 years and the plan allows for it, your elective deferral limit can be increased by the lesser of three variables.

First one, it can be increased by $3,000 or $15,000 reduced by any amount of additional elective deferrals made in prior years because of this rule, or $5,000 times the number of the employee’s years of service for the organization minus the total elective deferral limits made for earlier years.

Clear as mud. I know it’s kind of complicated, but the point is most people aren’t aware of this additional 403(b) catch-up, and Brett did well to allude to it. That was smart, high financial intelligence by Brett.

Most people are only going to get $3,000 a year over five years, so $15,000 is really the total extra catch-up for the 403(b). So, it’s not that much, but it’s nice. You might as well take advantage of it if you’re eligible. If you want to see even weirder catch-up contribution rules, go check out the ones for 457(b)s. So great question, Brett, on a commonly misunderstood topic. Thanks for asking.

Okay, that’s it, you guys. We did it. I did it. I’m not Jim. Can’t be Jim. Didn’t try to be Jim. Thanks for listening to my voice anyway. Thanks for being here and putting up with me for a minute. We certainly wish our fearless leader a quick recovery. We want him to bounce back after bouncing off the Teton. I say that to laugh only to keep me from crying. It was really scary when we learned about this, and to be here in his house today and to see him in good spirits. It’s been a pleasure to be here with you.

SPONSOR

As we mentioned at the top of the podcast, SoFi is our sponsor for today, and they’re helping medical professionals bank, borrow, and invest to achieve financial wellness. Whether you’re a resident or close to retirement, SoFi offers medical professionals exclusive rates and services to help you get your money right. Visit their dedicated page to see all that SoFi has to offer at whitecoatinvestor.com/sofi.

Loans are originated by SoFi Bank, N.A. NMLS 696891. Advisory services by SoFi Wealth LLC. The brokerage product is offered by SoFi Securities LLC, member FINRA/SIPC. Investing comes with risk, including risk of loss. Additional terms and conditions may apply.

Now I don’t dare take Jim’s catch phrase about “Head up, shoulders back” and all that. So, I’ll just repeat the wisdom of my high school teacher after we got out of class each day. He’d say on our way out the door, “Have your pets spayed and neutered and don’t take any wooden nickels.” Thanks for listening and have a great day.

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 187 – Pediatrician pays off $330,000 in student loans in seven years.

Step away from the volatility of the markets and put your money back to work with MLG Capital series of private real estate investment funds. For over 35 years in the real estate industry MLG Capital has the experience to provide investors with substantial returns and the track record to back it up with more than doubling every dollar invested through multiple investment cycles.

Their series of private investment funds target an 11 to 15% rate of return net to investors through tax efficient quarterly distributions. The fund structure prioritizes generous returns to investors first for MLG can share in any profits demonstrating their culture of absolute integrity.

Experience and peace of mind that comes with investing in diversified private real estate with MLG Capital. Learn more about investing by visiting www.mlgcapital.com/wci.

All right, don’t forget, we’re still doing early bird sales, WCICON. We are going to San Antonio. Actually, it’s Hill Country, just outside of San Antonio. It’s a beautiful resort and we’re doing some awesome wellness activities. We have incredible content there. This is eligible for you to use your CME funds or to write off if you’re self-employed, write off the cost of this.

The ticket sale, though, ends tomorrow, the day after this podcast drops. You can still buy tickets, but you can’t get the early bird pricing. It’s $300 off the regular price. Go to wcievents.com.

You’re going to love this conference. It’s my favorite conference I go to every year. Admittedly, I’m biased, but most people come and tell us it’s the best conference they’ve ever been to. It’s all specialties, it’s all professions. If you’ve been stuck going to the same conference with the same people year after year after year after year, this is a great way to mix it up and do something different. You’ll come back with some great burnout beating techniques. You’ll come back relaxed with a new mindset. You are going to learn how to make your financial plan better and be inspired to continue your financial success.

You probably don’t have anybody in your life that you can talk to about finances that understands the unique financial challenges that doctors and other high-income professionals face. But you know what? Everybody there does. Come and find your people, make some new friends, have a great time, learn some great stuff, and get out of wherever cold place you’re living in the middle of the winter. Come on down to San Antonio and have a great time with us. Sign up at wcievents.com.

All right, stick around after today’s interview. I think you’re going to love it. But if not, stick around anyway. We’re going to talk a little bit about the basics of asset protection afterward.

INTERVIEW

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

Dan:
Thank you for having me.

Dr. Jim Dahle:
Tell the audience what you do for a living and how far you are out of your training and what part of the country you’re in.

Dan:
I am a pediatrician, seven years at the same place that I started out of residency. I did residency in Philadelphia but grew up in Wisconsin and I practiced in a medium-sized town in southern Wisconsin.

Dr. Jim Dahle:
Okay, very cool. Tell us what we’re celebrating today. What have you accomplished?

Dan:
I was of the great fortune to be able to pay off my med school loans in one big lump check a couple of months ago.

Dr. Jim Dahle:
Pretty cool, pretty cool. Okay, let’s go through the process. You came out of med school 10 years ago. Came out of residency seven years ago. How much did you owe when you came out of med school and residency?

Dan:
It was $330,000.

Dr. Jim Dahle:
About the same when you came out of residency?

Dan:
Yeah, about the same. I was working in a low-income, food-poor zip code so I was able to defer payments and I was set up to do the forgiveness if that were to apply to my future job so I didn’t really make any payments during residency at all.

Dr. Jim Dahle:
Okay. And you said it was $330,000?

Dan:
Yeah.

Dr. Jim Dahle:
Wow, that’s a lot of debt to pay off. What was your average income over the last seven years?

Dan:
Thankfully, over the last seven years, income’s done pretty well. I’ve been part of two comp redesigns for my employed large health group and they try their best to emphasize and prioritize primary care but I knew that as a pediatrician it wouldn’t be as good as a lot of my other colleagues and that it would take a while.

I kind of expected to just have these med school loans for decades. I think last year was probably the best year I’m going to have. I did a little bit of moonlighting additionally at a nearby hospital and I was over $350,000 last year.

Dr. Jim Dahle:
What do you think was the lowest year you had since you got out of residency?

Dan:
My first couple years they gave me a floor, a basement production. It’s an RVU model, and on those years I did okay but it was I think like $280,000.

Dr. Jim Dahle:
$280,000. Okay, so $280,000 to $350,000 is pretty good. That’s all above the average pediatrician. The last time I looked at a salary I think the average was under $275,000 as I recall. So you’ve done well income-wise. Do you attribute that to good negotiating or just being in a good area of the country or why do you think you made more than typical pediatrician?

Dan:
I think a little bit of both. Good area of the company, good organization that like I said, tries to prioritize primary care with incentive models. And then I’ll admit working my butt off. It’s an RVU based model so I was always seeing patients above my FTE, squeezing in patients, doing my best to bill and code appropriately and yeah just working really hard.

Dr. Jim Dahle:
Okay. Is there a partner or kids in the picture here or is this all a solo effort?

Dan:
I met my wife about a year into this job and we got married about two years into this job so we’ve been living together and growing our family for the last five years.

Dr. Jim Dahle:
Okay. And she works or doesn’t work?

Dan:
I’ve supported her as well. So when we met we got pregnant and the timing was right for her to stay home with the baby and go back to school. She’d always wanted to be a clinical mental health counselor so I supported her in online master’s program and was able to help pay for that tuition without any loans. She is now, thankfully, it’s a long process to do online master’s, starting her own business and has a rented office and building a client base and all that stuff just as of this year.

Dr. Jim Dahle:
Very cool, very cool, but most of the paying off this debt was all based on your income for the most part.

Dan:
Correct, yeah.

Dr. Jim Dahle:
Okay. So, how did you decide how much money was going to go toward the debt, how much you were going to live on, how much you were going to invest? How did you make those decisions?

Dan:
Yeah, I have a friend, shout out to Dr. Matt, he’s a urologist that I went to med school with. He got me and all my buddies on this big group chain we’ve been working on for 10 years, group tax chain. He gives us little plugs from White Coat Investor all the time.

And the number one thing that I tried to live by my first couple years out before the necessary expenses of a growing family was to live like a resident. I replaced my beater car with something reasonable, my first home with something reasonable, I traveled domestically when I had vacation and not big international trips outside of maybe one and got nice clothes for work but didn’t go nuts. The little things I think add up over time.

Dr. Jim Dahle:
Very cool. All right, tell us about the debt pay down process. How did you work it, how much did you send in, what’d you do when you went through the student loan holiday? Did you refinance? Did you pay it all off in one big lump sum? Tell us about how you did it.

Dan:
Yeah. Then I refinanced in fall of 2019 to Mohela Laurel Road, got a good interest rate. And then for five years or so I was making more than minimum payments and when the opportunity presented itself, throwing more at it. That served paycheck in a month or the incentive bonus at work or the tax return, try to throw in an extra $5,000 or $10,000 here and there when I could.

And then what happened next was that I just got really lucky. Our growing family required us to move to being a bigger home, closer to my older daughter’s future school, closer to work for commutes and I moved out of a very popular hot market and paying off a good portion of that home’s mortgage. And then seeing that home’s value increase a lot, little did I know that moving to a bigger home with a higher mortgage and a future bigger home would actually be such a wonderful financial move by me.

Dr. Jim Dahle:
Did that free up cash or why was it such a good move?

Dan:
Yeah, the check given to me at closing of my old home was enough to pay off the remainder of the med school debt and then some. Yeah, it was a humongous blessing in disguise.

Dr. Jim Dahle:
Very cool, very cool. That wipes the rest of it out. That check was, I think I saw on my notes here, $118,000 or something, paid off the rest of that?

Dan:
Yeah, I had paid down in those five years over half or about half of the original med school loan. And so, I was feeling pretty proud of the fact that I’d done that in seven years. But still, of course, expecting it to be another seven plus years. This was a real big sudden weight off my shoulders.

Dr. Jim Dahle:
Very cool. So how’d that feel to make that last payment?

Dan:
It was something else. First walked into the bank and deposited that check after closing, then got on the phone and made the phone call to Laurel Road. Yeah, it was a pretty cool feeling.

Dr. Jim Dahle:
Yeah. Is that the biggest check you’ve ever had in your hand?

Dan:
By far, yeah.

Dr. Jim Dahle:
Yeah, very cool. Well, what’s next? You paid off your student loans, you’ve built some equity, you’re now in your second home. What’s your next for financial goals?

Dan:
The one thing, I think I heard this from my dad, is the expenses grow to meet the income. Things just change. I’ve come to learn after the last couple months that money does just kind of go other places. We’re going to try to do some things. New cars, finally, get rid of the 200,000 mile cars. My daughter’s tuition is now here that she’s in daycare. Supporting my wife as she’s growing her business, doing some things that we’ve been wanting to do for a while. We’re going to try to go solar and get the solar panels installed in the home. And so, there’s a couple of little things that we’re going to do here and there, and money’s just moving other places, essentially.

Dr. Jim Dahle:
Yeah, there’s plenty of good uses for money. That’s why it’s so important to front load this financial stuff early on, because later on, almost everybody wants to spend more money.

Dan:
Yeah, and we’re going to do some fun stuff too. We met right before the pandemic, married during it, never got to go and do our honeymoon. So we’re finally doing that, which is going to be really nice. I’m looking forward to those kind of opportunities that I intentionally put off for all those years.

Dr. Jim Dahle:
Yeah, it’s awesome to be able to take advantage of this income you have. Very cool. Well, congratulations to you. Well done on this. Any advice you have for somebody else that’s maybe in a low to medium paying specialty and has substantial student loan debt and has been at it for a while and is feeling a little discouraged? What encouragement do you have for them?

Dan:
Yeah, I’ll pass along the advice that I received from colleagues, both in and out of the medical field, some people with financial background. They would give me the advice like I had, which is try to make more than minimum income payments, throw a little bit more at it whenever you can.

Really great piece of advice I heard is when you get the opportunity to do something like that, celebrate those moments. So, if you’ve got an extra $10,000 that you can finally decide, can leave your check and come go to this, celebrate with a glass of wine too that night. Celebrate those moments because it is a long and hard road. And more so than the money, it’s the burden of all of it. And it feels like it’s just never going to end. So, celebrating those little things will help with morale over the years of all that. And I thought that was really good advice too.

Dr. Jim Dahle:
Yeah, I agree. I haven’t celebrated enough in my life. We should definitely be celebrating every milestone we get. You don’t have to go crazy, but do something and reward yourself as you go along, because it can be a long, hard road. Just like learning to become a doctor is, getting your financial ducks in a row can be a long and hard road. For some people, it comes very easily. We’ve had people in this podcast that make a gazillion dollars, and it seems like they’re instantly successful. That’s not the way it works for most doctors. Most doctors, this takes some work and sacrifice to be financially successful.

Dan:
Right.

Dr. Jim Dahle:
All right. Well, congratulations to you, Dan. Thanks so much for being willing to come on the podcast and inspire others to do what you’ve accomplished.

Dan:
I appreciate it. Thank you very much.

Dr. Jim Dahle:
Okay. It’s fun to hear Dan’s story. We get people on here that have become millionaires a year out of training, or three years out, they’re multi-millionaires and they pay off all their student loans in one year. Let’s be honest, though. That’s not the pathway for most doctors.

For most doctors, the pathway is far more like Dan’s. You muddle through, you eventually get back to broke, get your student loans paid off in four or five or seven years. You have to budget carefully, you have to make sacrifices, you’ve got to balance your different financial goals, and it takes a lot of work and sacrifice. And so, I love bringing people on here that are very real in that regard, and that I think many, many of you can relate to. So I hope you enjoyed that.

FINANCE 101: ASSET PROTECTION

I mentioned at the beginning, we were going to talk about asset protection, and there is all kinds of stuff that can be done in asset protection that is complicated, that is expensive, that may or may not work. But the basics are super simple, they’re extremely reliable in their effectiveness, and they’re cheap. So, let’s talk about what the basics of asset protection are.

First of all, what is asset protection? Asset protection is not losing everything you have, usually to a lawsuit. Mostly doctors listening to this podcast, the main liability they think about is malpractice. Malpractice is always personal, you can’t just incorporate your practice and somehow get rid of your malpractice risk. It’s always personal. That means that your personal assets are at risk. If you hurt somebody from malpractice, you got to pay for the damage. The damage in their pain and suffering, the damage in their lost earnings, those sorts of things, additional medical expenses they have.

So, what do you do to help protect against that? Well, the first line of defense and liability is insurance. For malpractice, that’s professional liability insurance. For personal stuff, that is personal liability insurance. And there is a component of your homeowner’s or renter’s insurance that is liability coverage. There is a component of your auto insurance that is liability coverage.

What you should do in addition to that though, is stack an umbrella policy on top of those. This is an additional personal liability policy, it’s not very expensive. You buy $1 million or $2 million or $5 million of additional liability coverage that sits on top of your homeowners and your auto policy and can be used in the event that you hurt somebody and it’s really expensive to make them whole.

And that’s the whole point of insurance coverage. Not only does it make them whole, so it’s not just good for you, it’s good for whoever you hurt, but also pays for your defense. The insurance company is on the hook to pay lawyers to defend you for some ridiculous claim you might have against you. And in the event that they do have a claim against you and you need to settle or you go to court and lose, the insurance covers the payout. So, you’re not losing personal assets. First line of defense.

If that fails, and it’s not reduced on appeal, you have some above policy limits judgment, and it’s not reduced on appeal, and indeed you are liable, you got a few options. One, you can pay them. You can pay the judgment. And it turns out if you look historically at the very few above policy limit judgments that are out there, most of them are actually not that much money. It’s like a little bit of a zinger given to the doctor to say, “Hey, you really need to be more careful with your patients or you’re going to have to pay $100,000 out of pocket.”

Well, that’s often doable. You can do that. And so you pay them. If that’s just impossible, you got some crazy huge judgments against you, it’s $5 million, you don’t have it. Even if you had it, you don’t really want to pay it. You feel like you got hosed. Well, you do have another option. You can declare bankruptcy in this country. And most asset protection rules and techniques and law is what happens when you declare bankruptcy. What do you get to keep? And these laws are all state specific. So you want to understand your state laws.

If the first line of defense is to buy insurance, the second line of defense is to know what your state laws are, because that’s going to matter what you do next. But in every state, maxing out your employer-provided ERISA retirement accounts is a great asset protection move because you declare bankruptcy, but guess what you get to keep in every state? You get to keep your 401(k). All the more reason to max that thing out. You get to keep it. And in most states, you get to keep your solo 401(k) and your IRA.

So, maxing out these retirement accounts is an extremely effective asset protection technique. Not only does it reduce your taxes, boost your investing returns, make your estate planning easier, it gives you these great asset protection benefits. So that’s kind of a no brainer first move asset protection technique.

Another thing you want to do is you want to make sure you’re titling your property properly. In many states, you can title your property as tenants by the entirety. This is for a married couple. If it’s titled tenants by the entirety, that means both of you own the entire house, for instance. If you get sued and you have big judgments against you, they can’t take your house because your spouse owns the entire house.

It’s kind of a cool trick. It doesn’t work in Utah, but it works in many states. In fact, in some states, you can apply it to your brokerage account too. And if this doesn’t protect you if they sue both of you because they slipped on your sidewalk and got hurt out there, buy the umbrella insurance for that. But it’s very effective against malpractice in the states where it takes place.

Obviously, some states have different rules about how much of your homestead, your home equity you get to keep. It’s not much in many states. In some states, it’s your entire home. Every state has these unique laws. You get to keep two shotguns and 12 cattle and 120 sheep. And there’s all kinds of weird rules all over the country as far as what you get to keep in a bankruptcy kind of situation.

But those are the main states. Main states are buy insurance, max out your retirement accounts, title properties, tenants by the entirety, if you’re allowed to. When you get beyond that, now we’re starting to talk about spending significant time, significant money, losing out on benefits of what you’d rather do with your money and your assets. And it becomes less and less likely to actually work.

Sometimes people buy annuities. In some states, some of your annuity is protected from creditors. Cash value life insurance, like whole life insurance. In some states, it’s protected from creditors. You get to keep it if you declare bankruptcy. And then we start talking about different types of trusts. There are asset protection trusts. There are overseas trusts. There’s obviously irrevocable trusts. If you just give the money away to somebody else long before there’s any claim against you, it’s no longer your money. They can’t get it.
Dr. Jim Dahle:
And so, a lot of asset protection techniques deal with ways you can give the money away and yet still somehow get some sort of benefit from it. And these are more complex techniques when the ones we’ve already talked about aren’t adequate for your situation. But for many, many docs, just buying insurance, maxing out your retirement accounts, understanding your state-specific laws, and titling property properly is going to be the mainstay of your asset protection plan.

SPONSOR

All right. Our sponsor has been MLG Capital. Step away from the volatility of the markets and put your money back to work with MLG Capital series of private real estate investment funds. For over 35 years in the real estate industry MLG Capital has the experience to provide investors with substantial returns and the track record to back it up with more than doubling every dollar invested through multiple investment cycles.

Their series of private investment funds target an 11 to 15% rate of return net to investors through tax efficient quarterly distributions. The fund structure prioritizes generous returns to investors first for MLG can share in any profits demonstrating their culture of absolute integrity.

Experience and peace of mind that comes with investing in diversified private real estate with MLG Capital. Learn more about investing by visiting www.mlgcapital.com/wci.

All right. Thanks so much for listening to the podcast. Without you, there is no podcast. You must have a host, yes. You must have guests. But you must have an audience. So thanks for playing your part in this role.

If you’d like to change your role and like to be a guest on the podcast, you can sign up whitecoatinvestor.com/milestones. We’d love to celebrate your milestones with you. And no matter how insignificant they seem to you or how awesome they seem to you, you can use your wonderful accomplishment to inspire somebody else to do the same. Thanks so much for being here. We’ll 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.