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Inherited IRAs – Podcast #189

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Podcast #189 Show Notes: Inherited IRAs

If you are fortunate enough to inherit an IRA there are some things you should know. Inherited IRAs, also known as stretch IRAs have changed this year. You can no longer leave it to your great-grandchild and have them stretch it over the next 80 years. They have to withdraw all the money in year 10. But a listener asked how this affects the backdoor Roth IRA, when it makes sense to roll the IRA over, and whether you can roll these over in the same way as you would other accounts. We delve into these questions in this episode for those looking forward to an inherited IRA.

For the rest of you, we talk about whether you should do Roth or tax-deferred 401(k) contributions when looking at the Qualified Business Income (QBI) deduction, rebuilding your practice during COVID, rebalancing your accounts, whether a medical student should buy disability and umbrella insurance, and what to do if you should have done your Roth IRA through the backdoor but you didn’t.

 

Sponsor

This podcast is sponsored by Bob Bhayani at drdisabilityquotes.com. He is an independent provider of disability insurance planning solutions to the medical community in every state and a long-time White Coat Investor sponsor. He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. If you need to review your disability insurance coverage to make sure it meets your needs or if you just haven’t gotten around to getting this critical insurance in place, contact Bob today by email [email protected] or by calling (973) 771-9100.

Quote of the Day

Our quote of the day comes from Phil DeMuth PhD, who said,

As we seek the financial advisory help when questionably needed, these helpers like 18th century doctors are just as likely to harm us. The simile is apt because the prescribed treatment inevitably will entail the application of leeches.

Always a good quote from Phil.

 

Inherited IRAs

If you are fortunate enough to inherit an IRA, there are some things you should know.

Do inherited IRAs screw up your backdoor Roth IRA pro rata calculation?

No. That line, the pro rata calculation, comes from IRS form 8606. On line six of that form, it asks you what your balance was on December 31st in all of your traditional, SEP and Simple IRAs. Now that would include a rollover IRA, but it would not include an inherited IRA. You don’t have to put that amount on that line. So, an inherited IRA does not screw up your backdoor Roth IRA contribution.

Can you roll over an inherited IRA?

Not really in the sense that most people think about it. You can’t roll it into your 401(k) or you can’t roll it into your own IRA. You could move it from Fidelity to Vanguard if you wanted to or something like that, but you can’t really combine it with yours, except in a very special situation. When your spouse is the one who died, so that you inherited their IRA, then you have a time period in which you can combine your account with your spouse’s.

One of the cool things about inherited IRAs, though, is that you can stretch them. What that means is you can take that special tax and asset protection that you get in an IRA and enjoy it. Now you cannot do this indefinitely. You used to be able to until the day you died, but now you can only do it for 10 years.

If you inherit a Roth IRA, the very best thing you can do with it is not touch it for 10 years. Let it continue to compound tax-free, asset-protected, for 10 years, and then take the money out. Essentially, the inheritance has a 7% or so rate of return. It’ll double. You’ll inherit twice as much money if you leave it there for a decade. So that is a great thing to do.

If it’s a traditional IRA, and it’s a little one, you inherit $5,000 or $10,000 or $50,000, maybe you do the same thing. You just let it ride the whole 10 years then you take the money out in the 10th year. Of course, because it’s a traditional IRA, it’s tax-deferred, you have to pay taxes on everything you take out of there.

But if it’s a huge traditional IRA that you inherited, maybe it’s $500,000 or $1 million dollars or $2 million, who knows, then you probably want to be a little more careful and not take the whole thing out in one year. That would be quite a tax bomb if you did that. Almost the whole thing, or probably the whole thing if you’re a physician, would be taxed in the highest tax bracket. So you might want to be a little bit more careful with that.

If you have a larger IRA, maybe you want to leave it there for five or six or seven years, and then start taking out a certain amount each year so it doesn’t necessarily get taxed at the highest tax bracket. You’ll have to look at your tax situation. Certainly, if there’s one year when you went on sabbatical for the year and didn’t earn anything, that’d be a great year to take a pretty big withdrawal out of an inherited traditional IRA. But that part of it is going to be different for everyone.

With a Roth IRA, you can just wait the 10 years and take it out. A tiny little traditional IRA, you can wait 10 years and take it out. If it’s a big traditional IRA, you probably ought to do some tax planning around it. I hope that is helpful for you if you find yourself in this situation.

Recommended Reading on the Blog:

New Stretch IRA

 

Listener and Reader Q&As

QBI and the Solo 401(k)

A listener is cutting back on their shifts in the ER and said this was putting a wrench in their financial planning surrounding the QBI and their 401(k). He gave me three different scenarios he wanted advice on.

Here are the three scenarios. Scenario one, we make $150,000 combined. Minimal if any income over the 12% tax bracket after business expenses, HSA contributions, and the standard deduction are applied. Does it seem financially smartest to contribute max to our Roth solo 401(k)s and not contribute to the employer solo 401(k) bucket in this scenario? Instead, we would just keep the cash for expenses and taxable brokerage investments.

Here is part two of my question. We are on scenario two. My wife’s business takes off for some unforeseen 2020 pandemic unpredictable life-like event, and we make $450,000 right up to the limit of still qualifying for the QBI. Is it best to avoid Roth contributions and rather to max out employee and employer portions of our solo 401(k)s?

And finally, scenario three, we make well below the max amount to qualify for the QBI, but it is not a low earning year. Let’s say about $275,000. Should we contribute that all to the Roth solo 401(k)s? Or should we max out the employee and employer non-Roth solo 401(k) options? Which would obviously decrease the QBI.

Or does this scenario not have a right answer? Instead, it depends on our age, mostly in regards to how long the Roth money will grow, in addition to our cloudy crystal ball predictions of what the tax brackets will be like in the future during our Required Minimum Distribution (RMD) phase of financial life. Is it accurate to think that the money not contributed to the solo 401(k)s, is like getting a 20% tax deduction on that money? So, within the 22% tax bracket then would it really be like a 17.6% marginal tax on that money, if deciding to just pay taxes and keep the money rather than contributing to a solo 401(k)? And likewise, the money contributed to the solo 401(k)s would be like avoiding paying tax at 17.6% instead of actually avoiding a 22% tax on those monies.

What this really boils down to is should he do Roth or tax-deferred 401(k) contributions? The general rule for this is to do tax-deferred contributions during your peak earnings years, and to do tax-free contributions in any sort of lower earning years like residency or the year you leave residency, when you go part-time or do a sabbatical or you’re on parental leave or you retire early. Those sorts of years are good for Roth contributions.

One of the big exceptions, of course, is if you’re a super saver. If you’re putting all kinds of money away, such that you’ll be in a higher bracket when you pull that money out in retirement, you may want to favor Roth contributions.

Also, if you’re going to have a bunch of other taxable income, like a pension or real estate income, that’ll push you into higher tax brackets, then you might want to favor Roth contributions now as well.

But the real answer, once you move away from the rule of thumb, is to compare your tax rate. What you are saving when you contribute the money versus the tax rate or rates at which you pull money out in retirement.

Most good planners, if you plan well, could probably spend $150,000 or $200,000 in retirement without having an effective withdrawal tax rate that is anywhere near what you were saving when you put that money in during your physician career. But if you’re going to have $200,000 a year in unsheltered rental property income, or an $80,000 pension and $40,000 in dividends and $100,000 required minimum distribution every year, then sure, making Roth contributions now starts making a lot of sense, even if you’re at a typical physician income level.

You gave me three scenarios. One of which is when you’re making $150,000 combined, should you be doing Roth individual 401(k)s? Probably. I mean, if you’re only making $150,000 combined, and you’re already at lean FIRE, presumably that means you have hundreds of thousands of dollars, if not millions, already put away—you are kind of in a relatively low bracket compared to your peak earnings. That’s a good time to use Roth.

In your second scenario, you’re making $450,000, but still qualifying for the QBI deduction. Should you do a Roth or traditional there? Well, it gets a lot more complicated when you have to look at the qualified business income deduction, also known as the pass-through income deduction, also known as the 199A deduction.

Because at that sort of an income level, the deduction is based on your taxable income, not your gross income. But as you are in that sort of an area, $450,000, it’s possible that you would want to do a tax-deferred contribution because that would lower your taxable income and maybe make it so less of that deduction is phased out or allow you to qualify for the whole thing.

So, at that sort of an income level, you have to start running numbers with the 199A deduction. Because if you can possibly qualify for it by making a tax-deferred contribution, but not a tax-free contribution, then you want to do the tax-deferred contribution. But if you’re going to get a big deduction and it’s not going to make a difference, maybe your third scenario is not going to make a difference in whether you qualify for the QBI deduction or not. Then Roth becomes more of an option.

The other thing to keep in mind is for the employer contributions to an individual 401(k), that comes out of your ordinary business income. It lowers your ordinary business income. This is the scenario Katie and I ran into, and that’s why we make our WCI 401(k) contributions, 100% Roth. A $19,500 Roth employee contribution and then a $38,500 mega backdoor Roth contribution.

But the reason why is if we did tax-deferred contributions, instead of getting a 37% break on it, we’d only get like a 29% break on it. And that’s just dumb. If you’re only getting a 29% break and you expect to pull it out at 37%, that’s not a good move to make. That is why we’re doing entirely Roth contributions at this point.

But if your tax-deferred employer contributions are reducing your QBI, then, yes, that’s just like a 20% reduction in the value of your deduction. Same problem if using a Roth account. If it pushes your taxable income up, such that you phase out or lose your QBI deduction altogether, then you’re really paying more than your marginal tax rate to do a Roth contribution. So that’d be a bad idea.

So, for sure, as you get into that $300,000 – $400,000 taxable income range, you have to be looking really carefully at the 199A deduction if you otherwise qualify for it.

Recommended Reading on the Blog:

Section 199A and Retirement Accounts

Rebuilding Your Practice During Covid

Many of you can relate with this listener’s question. He is a private practice surgical sub-specialist whose practice got rocked by the COVID pandemic, which hit during his first year out of training. He is struggling to rebuild his practice. Like a lot of us he has learned how to treat patients surgically but has not learned a thing about how to build a business, manage a team of employees, develop and implement a marketing strategy, get overhead down, drive more patients into his clinic and increase his overall productivity. He loves what he does but wants to run the practice better. What resources are available to someone in this situation?

  • Talk to private practice doctors, both in person and online. If you are an ENT, don’t talk to the ENT down the road but talk to the orthopedist across the hall. He is running a similar practice. He has no competition with you whatsoever. Or band together on an online forum with other ENTs across the country. Talk to them about what they’re doing in their practices; bounce your questions off them. You’d be surprised if you just start adopting best practices, how much more efficient your practice becomes. Your expenses go down, your income goes up. Your life becomes happier. Everything gets better.
  • Check out the WCI forum. You can ask your questions there. You can go to your specialty forum or to the doctors in a practice forum, a Student Doctor Network.
  • If you’re not actively practicing medicine or doing something that has to be done in the practice, be marketing the practice. If you’re a surgical subspecialist, who should you be marketing to? You should be marketing to primary care docs, emergency doctors, etc. Have you been to the office of every family doc within 10 miles of your practice? Are you taking ED call? Do you actually ever go into the ED and see a patient when you’re called? Because if you do that, that doc may very well send you every referral in your specialty for the next 10 years. We’re just so excited to finally see someone in the ED because, in community practice, few people actually come to the bedside when they’re consulted.
  • Keep the practice as lean as you can. Try to keep your expenditures variable rather than fixed. That way they can be cut back in the event that something like this happens. Make sure that your billing practices are being done well. Have a clear no-show policy. Collect your copays at the time of service. Those sorts of things. Know whether you ought to hold onto a claim, and send it in a few weeks or months after the patient’s co-insurance has been collected or whether it’s better to send it in right away and get your bill the first one in front of their eyeballs. Experiment with those things and you may find out that you make more money one way than you do the other.

These sorts of things are not that hard, and if you are not as busy because Covid has crushed the practice, it is a great time to pick up some of those things. You might be surprised how much of a difference it makes over the long run. Honestly, it’s not that hard to distinguish yourself from the other doctors in the area. Most doctors don’t do any marketing at all. So, you only have to do it a little bit of this stuff to really distinguish yourself from all of your peers.

Backdoor Roth IRA

A listener asked if they max out their 401(k) through their employer can they take a tax deduction on a standard IRA contribution. Yes, you can, but not if you’re a doctor. Doctors make too much to be able to deduct those sorts of contributions. That’s why we do backdoor Roth IRAs, because we can’t deduct a traditional IRA anyway.

Basically, if your modified adjusted gross income is above the phase-out range of $64,000 to $74,000 single, or $103,000 to $123,000 married, you can’t deduct an IRA contribution. So, in that case, you’re usually better off using the 401(k) at work and then doing a backdoor Roth IRA.

Another listener already contributed to his Roth IRA, but now his modified adjusted gross income will definitely be above the $198,000 limit with no way for him to bring the adjusted gross income down. He asked,

Can I remove the $6,000 contribution then place it in a traditional IRA and then do a backdoor Roth IRA conversion? Or do I have to remove the $6,000 contribution, which means I will have to pay taxes on the gains and the 10% fee for early withdrawal.

You should have done your Roth IRA via the back door. It’s okay to do it via the back door, even if you don’t have to. But if you have to, and don’t, it creates a bit of a mess. The way you fix that mess is by recharacterizing the contribution.

You can still do this. Starting in 2018 you couldn’t recharacterize conversions, but you can still recharacterize contributions. So, you contributed directly to a Roth IRA, but you should have contributed to a traditional IRA.

So, you basically call up your IRA provider, whether it’s Vanguard or Fidelity or whoever, and say, “I want to recharacterize this contribution”. You move it into a traditional IRA. Everything goes in there. Not only the principal, but any gains you had on that goes into the traditional IRA. Then at that point, you are free to convert it to a Roth IRA.

Now you will owe taxes on all of the gains because you basically let it sit in that traditional IRA making money, and you have to pay taxes on the money it made while it was in there when you do the Roth conversion.

Recommended Reading on the Blog:

How to Fix Backdoor Roth IRA Screw Ups

Backdoor Roth IRA Tutorial

403(b) Investing

I’m a fourth-year medical student and thus will soon be going into residency and I just had some questions on nuts and bolts of 403(b) investing. My understanding is that it’s employer dependent as to if you can move money from your 403(b) into your IRA while you’re still employed at that same institution. I’ve done it in the past, but not while I’ve actually been employed still. So, I was curious on that. More concerning, though, to me, are any limitation issues that might come into play if you do so? Specifically, you put $6,000 into your IRA and then $19,500 into your 403(b). If you then move that $19,500 into that IRA, is that fine? Or does that actually count as a contribution, putting you above that $6,000 limit? If that isn’t a concern, I would think everyone would want to do this in order to be able to pick better options than maybe the 403(b) or 401(k) may provide, which I don’t really hear about a lot of people doing that. So, if there are any other concerns that I’m not thinking of, I would really appreciate hearing about them.

Can you move money from a 403(b) to an IRA while you’re still employed? The IRS doesn’t tell you that you can’t do that. They have no rule against that whatsoever. However, in practice, most plans don’t let you do that. Most of them require you to separate from the employer before you can roll any money out of that plan.

It’s interesting. We’ve been putting a 401(k) plan in place, and I’m looking at all the cool features that it can have and trying to implement as many as you can have. I’m surprised how many things you can do with a 401(k) that a lot of employers just don’t do, or their advisors sometimes recommend against, because it means money coming out of a pool of money that they can charge AUM fees on.

But plans are allowed to offer you in-service rollovers. It’s not illegal, but the plan has to allow it. The plan document has to specify you can do it. Honestly, most don’t.

Do rollovers count towards your contribution limits? No, they don’t. You can roll money into an IRA and that has nothing to do with your $6,000 per year IRA contribution amount.

Rebalancing a Roth IRA

I was also curious how often you recommend rebalancing within Roth IRA. To my understanding, there aren’t really taxes or fees that come into play, but for momentum sake, I’ve heard to maybe still just do it every 12 to 18 months.

How often should you rebalance? Well, if you look at the data, it suggests that the optimal interval is between every one to every three years. You certainly don’t have to be rebalancing every day or every month or every quarter or something like that. Every couple of years is probably fine.

If you don’t want to do it on a time-based interval, some people do it using a rule that says, when it gets a certain amount out of whack, you rebalance everything. For example, the 525 rule. What that says is that if any asset class becomes either an absolute 5% higher than it’s supposed to be, so if you’re supposed to have 25% of your portfolio in that asset class, and it hits 30%, then you rebalance the whole portfolio.

The 25% portion is applied to smaller allocations within the plan. For example, if your plan calls for a 10% allocation to an asset class, and it falls to 7.5%, meaning a 25% relative reduction in that asset class, then that triggers you to rebalance the whole portfolio.

So those are kind of the two main methods of doing it. Let me tell you how I do it. I just direct new money at whatever is lowest. I have my desired asset allocation with all of these percentages. For example, part of that is I keep 25% in a total US stock market fund. If that is falling, and the stock market really fell hard, and it’s time for me to invest my monthly amount, and the total US stock market has done the most poorly of all the asset classes in my portfolio, then that’s where I direct the new money.

Most of the time, at least for the first 10 or 15 or 20 years of your investing career, that’s enough to keep the portfolio rebalanced enough. You don’t need exact, to-the-dime rebalancing, because the next day it’s all going to be screwed up anyway, as different asset classes have different returns. So those are kind of the ways most people rebalance.

Buying Disability and Umbrella Insurance in Medical School

My question for you today concerns disability insurance and umbrella insurance policies. Last week, our medical school hosted a professional development series, which included a personal finance session. The CFP who gave the presentation suggest that medical students should think about getting disability insurance and an umbrella policy while they were in medical school. He suggested students lock in some cheap plans now, which can be increased when you start making real money. I believe that in our tuition and fees we pay for required liability insurance for students providing coverage in the course of their responsibilities as a student. However, the gentleman who gave the presentation said that the umbrella policy is really for liabilities outside of the course of your work and education. Do you think it’s valuable to have a disability coverage and an umbrella policy as a medical student? Even if it’s not necessary in medical school, do you think there’s benefit to starting a policy now and increasing it as your net worth grows? And, if it is recommended, what’s the reasonable amount? $2,000 a month from disability insurance and a million-dollar umbrella insurance policy?

Should a medical student buy disability and umbrella insurance? My general answer is no. The reason why is most medical students are living on loans. I’m not a big fan of buying these types of insurance on loans. Does that open you up to some risks? Yes, I suppose there is some risk that someone could come up with a personal lawsuit. You could run over somebody’s daughter and be sued for millions and go over your auto policy limits without an umbrella policy. It’s entirely possible, but it’s probably not that likely. And you don’t quite have the target on your back that you will have with an MD or a DO behind your name.

I think it is okay to wait on that until you actually start making money. Now, I wouldn’t wait long. When you’re an intern and you start getting that first paycheck, that first month, it’s time to call up your auto insurance company, your homeowners insurance company, and get an umbrella policy in place. It’s not that expensive. A million-dollar policy is probably $200 a year or something like that. It’s just not that expensive.

As far as the disability insurance, there are companies that sell disability insurance to medical students. Usually, the benefit is $2,000 a month. So, it’s not going to be enough for your whole career. It’s probably not even enough for a resident, but it’s something. Medical students can get disabled, and it’d be nice to have $2,000 a month the rest of your life if that happened to you.

But for the most part, again, I generally recommend you wait until you start making money before you buy this. Not attending money, intern money is fine. That July of your intern year, you start getting a paycheck, it’s time to go get your disability insurance in place.

You want to buy it young. When you buy it young, you get a better price on it, number one. Number two, you’re still pretty unlikely to have developed a medical condition or picked up some hobby that’s going to keep you from being able to buy it. And so, it’s a good time to go buy it as an intern. Certainly, if you really are worried about getting disabled as a medical student, you can buy it, but you can’t buy much of a benefit anyway.

Usually, as a resident, they’ll sell you at least a $5,000/month benefit, but as a medical student the most they are going to give you is $2,000 a month. So, you have to buy it again as an intern anyway. Especially if I was living off loans, I would probably wait to get it until I was an intern.

But I’m a little bit of a risk-taker that way. So, you do have to evaluate how willing you are to run that risk, that you could get disabled as a medical student and never be able to really work as a physician.

Recommended Reading on the Blog:

What You Need to Know about Disability Insurance

Umbrella Insurance

 

Ending

If you would like your question answers on the podcast, you can leave it here. Remember if you buy the Zero to Freedom real estate course through our link you will also receive a signed copy of the Financial Bootcamp Book and the Physician Wellness and Financial Literacy Course – Park City for free. Buy the course before December 20th or wait for another 4–6 months for the opportunity to participate.

 

Full Transcription


Intro:
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. Here’s your host, Dr. Jim Dahle.
Dr. Jim Dahle:
This is White Coat Investor podcast number 189 – Inherited IRAs.
Dr. Jim Dahle:
Let’s start with our quote of the day today. This one comes from Phil DeMuth PhD, who said, “As we seek the financial advisory help when questionably needed, these helpers like 18th century doctors are just as likely to harm us. The simile is apt because the prescribed treatment inevitably will entail the application of leeches”. Always a good quote from Phil.
Dr. Jim Dahle:
Thanks for what you do. You’re hanging in there. We’re in a pandemic. It’s going to get better eventually. I hope you’re looking forward to a good holiday season. I hope you have some time off maybe to spend at least with your immediate family, if you can’t get out and see any extended family, of course. But thanks for what you’re going through and for the difficult work that you do day to day.
Dr. Jim Dahle:

Our sponsor for this podcast is Bob Bhayani at drdisabilityquotes.com. An independent provider of disability insurance planning solutions to the medical community nationwide, and a long-time sponsor. He works with residents and fellows and young attendings to set up sound financial and insurance strategies.
Dr. Jim Dahle:
If you need to review your disability insurance coverage, to make sure that it still meets your needs, or if you just have never gotten it in place to start with, give them a call today at (973) 771-9100 or email him [email protected]
Dr. Jim Dahle:
All right, let’s start with another question. Let’s take this one from Bill from Wisconsin. And this is the one I named the podcast episode after. We’re going to talk about inherited IRAs after this question.

Bill:
Hi, Jim. This is Bill from Wisconsin. My question is in regards to inherited IRAs. I’m not planning an inheritance in my financial plan, but I may get a small inheritance sometime in the future. This would be from a parent or grandparent. I am curious, do inherited IRAs affect backdoor Roth IRA? And when does it make sense to roll these over versus not? And can you roll these over in the same way as you would other accounts? Thanks again for all that you do.
Dr. Jim Dahle:
All right. So inherited IRAs. Do inherited IRAs screw up your backdoor Roth IRA pro rata calculation? No, they really don’t. That line, the pro rata calculation comes from IRS form 8606. And on line six of that form, it asks you what your balance was on December 31st in all of your traditional, SEP and simple IRAs. Now that would include a rollover IRA, but it would not include an inherited IRA. You don’t have to put that amount on that line. So, an inherited IRA does not screw up your backdoor Roth IRA contribution.
Dr. Jim Dahle:
So, can you roll over an inherited IRA? Well, not really in the sense that most people think about it. You can’t roll it into your 401(k) or you can’t roll it into your own IRA. You could move it from Fidelity to Vanguard if you wanted to or something like that, but you can’t really combine it with yours, except in a very special situation. When your spouse is the one who died so that you inherited that, then you have a time period in which you can combine the account with your spouses.
Dr. Jim Dahle:
One of the cool things about inherited IRAs though, is that you can stretch them. And what that means is you can take that special tax and asset protection that you get in an IRA and enjoy it. Now you cannot do this indefinitely. Like you used to be able to do, until the day you died, but now you can only do it for 10 years.
Dr. Jim Dahle:
So, if you inherit a Roth IRA, the very best thing you can do with it is not touch it for 10 years. Leave it for another 10 years, let it continue to compound tax-free asset protected for 10 years, and then take the money out. Essentially, the inheritance has a 7% or so rate of return. It’ll double. You’ll inherit twice as much money if you leave it there for a decade. So that’s a great thing to do.
Dr. Jim Dahle:
If it’s a traditional IRA and it’s a little one. You inherit $5,000 or $10,000 or $50,000, maybe you do the same thing. You just let it ride the whole 10 years then you take the money out in the 10th year. And of course, because it’s a traditional IRA, it’s tax deferred, you have low taxes on everything you take out of there.
Dr. Jim Dahle:
But if it’s a big, huge traditional IRA that you inherited, maybe it’s $500,000 or $1 million dollars or $2 million, who knows, then you probably want to be a little more careful and not take the whole thing out in one year. That would be quite a tax bomb if you did that. Because almost the whole thing, or probably the whole thing if you’re a physician would be taxed in the highest tax bracket. So you might want to be a little bit more careful with that.
Dr. Jim Dahle:
If you have a larger IRA, maybe you want to leave it there for five or six or seven years, and then start taking it out and take out a certain amount each year so it doesn’t necessarily get taxed at all at the highest tax bracket. You’ll have to look at your tax situation. And certainly, if there’s one year when you went on sabbatical for the year and didn’t earn anything, that’d be a great year to take a pretty big withdrawal out of an inherited traditional IRA. But that part of it’s going to be different for everybody.
Dr. Jim Dahle:
With Roth IRA, you can just wait the 10 years and take it out. A tiny little traditional IRA, you can wait 10 years and take it out. If it’s a big traditional IRA, you probably ought to do some tax planning around it.
Dr. Jim Dahle:
All right, one promotion we have going on right now. And you only have a few more days on this one actually is a course called “Zero to Freedom”. And what this is, this is a course put together by some of our affiliate partners, two doctors actually, Dr. Letizia Alto and Dr. Kenji Asakura, who will put together a course that is designed for doctors who want to be direct real estate investors.
Dr. Jim Dahle:
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Dr. Jim Dahle:
But that is enrolling right now. You’ve only got a few more days for it. It closes what day, Cindy?
Cindy:
The 20th.
Dr. Jim Dahle:
The 20th is the last day you can enroll in this and then it’s going to be closed for months and you won’t be able to enroll in it. So, they call it an incubator program for physicians and high-income professionals that guides you start to finish through the entire process of finding, selecting and ultimately purchasing your first rental property.
Dr. Jim Dahle:
It’s not the cheapest course in the world. It’s a fairly expensive course. It’s a significantly more expensive than for example, our Fire Your Financial Advisor course that is designed to help you get a written investment plan in place, a written financial plan in place really.
Dr. Jim Dahle:
I always tell you guys that I priced that at the resident price, and maybe you don’t believe me, but when you see what other courses sell for, you realize that it is a relatively inexpensive course.
Dr. Jim Dahle:
This is not an inexpensive course, but it’s really focused on results. And a lot of people already own properties by the time they’re done with this eight-week course. That is the goal. It’s not a theory course. It’s a hands-on “here’s what you do, let’s go do it” kind of course. And you have people there to do it with you. So, check it out. It does come with some guarantees. Obviously most online courses do. So, take a look at those and check it out. You can do so at whitecoatinvestor.com/rental.
Dr. Jim Dahle:
If you go through that link to buy the course, we will throw in WCI con Park City. That gives you 13 hours of awesome financial literacy and wellness material from the conference. We had a Park City a few years ago. It includes a material from people like Bill Bernstein and Jonathan Clements, Mike Piper, et cetera. But we’ll also throw in a signed copy of the White Coat Investors financial bootcamp books.
Dr. Jim Dahle:
So, you get those two freebies for going through our links, but probably the most important thing, if this is something you’re interested in, you’ll get the confidence and the knowledge needed to start being a direct real estate investor. Whether you want to transition completely to a real estate career, whether you just want to have a kind of a side gig there, or whether this is just the way you want to invest some of your money. It’s a great course to check out to get those sorts of results.
Dr. Jim Dahle:
All right. Let’s take another question off the Speak Pipe. It’s actually two Speak Pipe messages. I decided to go ahead and run this this time. I don’t want you guys to get in the habit of leaving me two, three, four, five Speak Pipe messages all at a minute and a half a piece to leave your questions, but I thought this one was worth answering. So, we’re going to listen to Steve’s two Speak Pipes here, and then we’re going to talk about his questions.
Steve:
Hi Dr. Dahle. Unfortunately, I cannot ask the question in 90 seconds, so I’ll have to do two different Speak Pipe submissions. I’ve happily cut back on my shift load recently. I’m not ready to throw in the towel yet. However, it’s much more tolerable to work at N95 shifts in the ER, half a dozen times a month versus 15 plus, which is what I was doing before.
Steve:
However, this has put a wrench in the financial planning, which I do myself and I thought I’d reach out to you for some words of advice on three different scenarios involving the QBI and the solo 401(k) trap.
Steve:
For background knowledge to potentially help guide your answers to these scenarios. We are married filing joint with 1099 income. Assume we each make about 50% of the total income. We are no mortgage debt-free, with about $60,000 a year in expenses, enough investments split 50/50 pre- and post-tax for us to live comfortably for more than a decade. Somewhere near lean FIRE currently, and without desires to actually retire, but certainly wanting to be at financial independence.
Steve:
Here are the three scenarios. Scenario one, we make $150,000 combined. Minimal if any income over the 12% tax bracket after business expenses, HSA contributions, and the standard deduction are applied. Does it seem financially smartest to contribute max to our Roth solo 401(k)’s and not contribute to the employer solo 401(k) bucket in this scenario? Instead, we would just keep the cash for expenses and taxable brokerage investments.
Steve:
Here’s part two of my question. We’re on scenario two. My wife’s business takes off for some unforeseen 2020 pandemic unpredictable life-like event, and we make $450,000 right up to the limit of still qualifying for the QBI. Is it best to avoid Roth contributions and rather to max out employee and employer portions of our solo 401(k)s?

Steve:
And finally, scenario three, we make well below the max amount to qualify for the QBI, but it is not a low earning year. Let’s say about $275,000. Should we contribute that all to the Roth solo 401(k)s? Or should we max out the employee and employer non-Roth solo 401(k) options? Which would obviously decrease the QBI.
Steve:
Or does this scenario not have a right answer? Instead, it depends on our age, mostly in regards to how long the Roth money will grow. In addition to our cloudy crystal ball predictions of what the tax brackets will be like in the future during our RMD phase of financial life.
Steve:
So, is it accurate to think that the money not contributed to the solo 401(k)s, is like getting a 20% tax deduction on that money? So, within the 22% tax bracket than what it really be like a 17.6% marginal tax on that money, if deciding to just pay taxes and keep the money rather than contributing to a solo 401(k)?
Steve:
And likewise, the money contributed to the solo 401(k)s would be like avoiding paying tax at 17.6% instead of actually avoiding a 22% tax on those monies. Stay safe. And as we all know, eventually all pandemics will end.
Dr. Jim Dahle:
Okay. So, what this really boils down to is should Steve do Roth or tax deferred 401(k) contributions? Now there are far more variables that go into this, this thing can really be discussed even in two Speak Pipe messages, much less one.
Dr. Jim Dahle:
The general rule for this is to do tax deferred contributions during your peak earnings years. And to do tax-free contributions in any sort of lower earning years like residency or the year you leave residency, when you go part time or do a sabbatical or you’re on parental leave or you retire early. Those sorts of years are good for Roth contributions.
Dr. Jim Dahle:
One of the big exceptions of course, is if you’re a super saver. If you’re putting all kinds of money away, such that you’ll be in a higher bracket, when you pull that money out in retirement, you may want to favor Roth contributions.
Dr. Jim Dahle:
Also, if you’re going to have a bunch of other taxable income, like a pension or if you decide to buy that course and get into direct real estate investing and a bunch of real estate income, that’ll push you into higher tax brackets, then you might want to favor Roth contributions now as well.
Dr. Jim Dahle:
But the real answer, once you move away from the rule of thumb is to compare your tax rate. What you are saving when you contribute the money versus the tax rate or rates at which you pull money out in retirement.
Dr. Jim Dahle:
For most docs, if you’re only going to have $50,000 or $100,000 in taxable income in retirement, and remember taxable income, we’re not just talking about money you can spend because your basis and your taxable account or anything you pull out of a Roth IRA and any borrowed money. Of course, that all spends in his tax free. We’re talking about taxable income in retirement.
Dr. Jim Dahle:
And if you’re a typical doc, maybe you’ll have $50,000 or $100,000 of that in retirement. And of course, stacking on some tax deferred contributions or tax deferred withdrawals there is not going to be the end of the world as far as tax breaks. But if you have a ton of money and for whatever reason you’re going to have these other sources of income, then you may want to favor Roth contributions.
Dr. Jim Dahle:
Honestly, most good planners, if you plan well, you could probably spend $150,000 or $200,000 in retirement without having an effective withdrawal tax rate that’s anywhere near what you were saving when you put that money in during your physician career. But if you’re going to have $200,000 a year in unsheltered rental property income, or an $80,000 pension and $40,000 in dividends and $100,000 required minimum distribution every year, then sure. Making Roth contributions now it starts making a lot of sense, even if you’re at a typical physician income level.
Dr. Jim Dahle:
So, Steve, in this Speak Pipe question, you gave me three scenarios. One of which is when you’re making $150,000 combined, should you be doing Roth individual 401(k)s? Probably. I mean, if you’re only making $150,000 combined, and you’re already at lean FIRE, presumably that means you have hundreds of thousands of dollars, if not millions already put away, you are kind of in a relatively low bracket compared to your peak earnings. That’s a good time to use Roth.
Dr. Jim Dahle:
In your second scenario, you’re making $450,000, but still qualifying for the QBI deduction. Should you do a Roth or traditional there? Well, it gets a lot more complicated when you got to look at the qualified business income deduction, also known as the pass-through income deduction, also known as the 199A deduction.
Dr. Jim Dahle:
Because at that sort of an income level, the deduction is based on your taxable income, not your gross income. But as you are in that sort of an area $450,000, it’s possible that you would want to do a tax deferred contribution because that would lower your taxable income and maybe make it so less of that deduction is phased out or allow you to qualify for the whole thing.
Dr. Jim Dahle:
So, at that sort of an income level, you got to start running numbers with the 199A deduction. Because if you can possibly qualify for it by making a tax deferred contribution, but not a tax-free contribution, then you want to do the tax deferred contribution. But if you’re going to get a big deduction and it’s not going to make a difference, maybe your third scenario is not going to make a difference in whether you qualify for the QBI deduction or not. Then Roth becomes more of an option.
Dr. Jim Dahle:
The other thing to keep in mind for the employer contributions to an individual 401(k), that comes out of your ordinary business income. It lowers your ordinary business income. This is the scenario Katie and I ran into, and that’s why we make our WCI contribution, WCI 401(k) contributions, 100% Roth. Whether that’s a $19,500 Roth employee contribution, and then a $38,500 mega backdoor Roth contribution.
Dr. Jim Dahle:
But the reason why is if we did tax deferred contributions, instead of getting a 37% break on it, we’d only get like a 29% break on it. And that’s just dumb. If you’re only getting a 29% break and you expect to pull it out at 37%, that’s not a good move to make. And so that’s why we’re doing mostly entirely Roth contributions at this point.
Dr. Jim Dahle:
But if your tax deferred employer contributions are reducing your QBI, then yes, that’s just like a 20% reduction in the value of your deduction. Same problem if using a Roth account. It pushes your taxable income up, such that you phase out or lose your QBI deduction altogether, then you’re really paying more than your marginal tax rate to do a Roth contribution. So that’d be a bad idea.
Dr. Jim Dahle:
So, for sure, as you get into that $300,000 – $400,000 taxable income range, you’ve got to be looking really carefully at the 199A deduction if you otherwise qualify for it. So pretty complicated question. I hope you found that helpful, Steve.
Dr. Jim Dahle:
All right. Let’s take our next question from Carl from out West.
Carl:
Hi Jim. This is Carl from out West. Happy Thanksgiving. I’m so thankful for you and all the wisdom you’ve shared through your blog, books and podcast. You’ve provided a wealth of knowledge on the topics of personal finance, and there’s also been a lot of content recently on developing a side hustle.
Carl:
What I really need help on though is my front hustle or whatever you want to call your main job. I need help running my primary job of being a doctor. I’m a private practice surgical sub-specialist and my practice got rocked by the COVID pandemic, which hit during my first year out of training. And now I’m struggling to rebuild my practice.
Carl:
I spent the last 10 years learning how to treat patients surgically, but I haven’t learned a thing about how to build a business, manage a team of employees, develop and implement a marketing strategy. Get my overhead down, drive more patients into my clinic and increase my overall productivity.
Carl:
Don’t get me wrong. I love doing it this way. And I get a lot of fulfillment out of being a part of a small group and building my own practice, especially in a world that’s shifting more and more toward hospital employment. I just want to know how to run my own practice better.
Carl:
So what resources are there out there to help me? Do you know of any good books, podcasts, blogs, et cetera, that I can turn to for help? What’s the one thing I can do right now to generate more business for myself? Thanks again for all you do. I hope you and your family have safe and happy holidays.
Dr. Jim Dahle:
Okay, Carl, I’m sorry you’re dealing with the scenario. No, you’re not alone. Shoot. I think all of us have had a decrease in income. If you’re a physician and your income went up this year, count your lucky stars because most of ours did not. At one point I think our volumes were down in the ED about 40%. I think we’re still about 10% down from where we were in February.

Dr. Jim Dahle:
So, I know you’re a private practice surgical sub-specialist a year out of training who’s struggling to rebuild your practice due to COVID. But realize we’re all in this scenario. So, some things you consider. You’re looking for resources.
Dr. Jim Dahle:
So, let’s talk about a couple of books here that might help you. One of which is called “Secrets of the Best run Practices”. This is by Judy Capco. And this is really what it’s all about. You can only do so much to improve your practice, but chances are, if you’re like most docs, you haven’t done any of these things and you can make your practice far more efficient than it otherwise is. So, read that book, it’ll probably be worth its weight in gold to you as a private practice owner.
Dr. Jim Dahle:
Another one, that may be worth looking at is Tom Harbin’s “The Business Side of Medicine”. And a little bit more of that is personal finance kind of stuff, but it does have some good practice management stuff. I think he’s an orthopedist, as I recall. And he does talk about some things you can do to make your practice more efficient and just run it better.
Dr. Jim Dahle:
But this is an area as a practice owner, you’ve got to spend some time on. You’re running a business, and if you just spend all your time focusing on the medicine, don’t be surprised when the business doesn’t do very well.
Dr. Jim Dahle:
Okay, another thing you can do. You can talk to private practice doctors, as much as you can, both in person and online. A lot of people think, “Oh, nobody’s going to help me”. Well, if you’re an ENT doc, don’t go to the ENT doc down the road and ask them for tips, go to the orthopedist across the hall, right? He’s running a similar practice. And and he has no competition with you whatsoever or band together on an online forum with other ENTs that are across the country.
Dr. Jim Dahle:
You’re not competing with an ENT from Florida if you’re in Tennessee. That’s just the way it is. And so, talk to them about what they’re doing in their practices, bounce your questions off them. And you’d be surprised if you just start adopting best practices, how much more efficient your practice becomes. Your expenses go down, your income goes up. Your life becomes happier. Everything gets better.

Dr. Jim Dahle:
You can check out the WCI forum. You can ask your questions there. You can go to your specialty forum or to the doctors in practice forum, a Student Doctor Network. That’s another place where I’ve seen a lot of questions like that. You might find it to be helpful. You can try the Sermo forums asking questions like that. There can be a little bit of negativity on that forum a lot of times, but if you can get specific answers to your questions, that’s not a bad place to go either.
Dr. Jim Dahle:
Okay. Here’s another tip for you. If you’re not seeing patients, if you’re not actively practicing medicine or doing something that has to be done in the practice, be marketing the practice. So, if you’re a surgical subspecialist, you should be marketing to who? You should be marketing to primary care docs, emergency doctors, et cetera.
Dr. Jim Dahle:
Have you been to the office of every family doc within 10 miles of your practice? Are you taking ED call? Do you actually ever go into the ED and see a patient when you’re called? Because if you do that, you introduce yourself to the doc on call. That doc may very well send you every referral in your specialty for the next 10 years. We’re just so excited to finally see somebody in the ED because in community practice a few people actually come to the bedside when they’re consultant.
Dr. Jim Dahle:
And that sort of stuff is not that hard if you’re not that busy because COVID has crushed your practice. It’s a great time to pick up some of those things. And you might be surprised how much of a difference it makes over the long run. Honestly, it’s not that hard to distinguish yourself from the other doctors in the area. Most doctors don’t do any marketing at all and they’re certainly not out there hustling like crazy. And they’re probably not all that good at running a business.
Dr. Jim Dahle:
So, you only have to do it a little bit of this stuff to really distinguish yourself from all of your peers. And it’s pretty amazing. I can tell you I’ve called doctors of every specialty and there’s some of them who are glad to have my business and there are some that not, and you can guess which ones I send my patients to. And so, keep that in mind.
Dr. Jim Dahle:
It helps if you keep the practice as lean as you can. Of course, it’s no margin, no mission. If you don’t stay in business, you can’t help anybody. And so, keep the practice lean, try to keep your expenditures variable rather than fixed. That way they can be cut back in the event that something like this happens.

Dr. Jim Dahle:
And make sure that your billing practices are being done well. Have a clear no-show policy. Collect your copays at the time of service. Those sorts of things. Know whether you ought to hold onto a claim, and send it in a few weeks or months after the patient’s copay has been, or their co-insurance has been collected or whether it’s better to send it in right away and get your bill the first one in front of their eyeballs.
Dr. Jim Dahle:
It just depends. Sometimes we try to race the hospital with our bill and sometimes we let the hospital send their bill first. But experiment with those things and you may find out that you make more money one way than you do the other.
Dr. Jim Dahle:
All right, let’s take another question. This one’s from Andy from New York.
Andy:
Hi, Dr. Dahle. Quick question from Andy from New York. Just wondering if you max out your 401(k) through your employer with the full $19,500 employee contribution, can you also take a tax deduction on a standard IRA contribution or does a tax deduction not work in that scenario? And therefore, you should just stick to a Roth IRA. Thanks.
Dr. Jim Dahle:
Okay. Pretty basic question here. Can you take a tax deduction on a standard IRA contribution if you have a 401(k) at work? Yes, but not if you’re a doctor. You see, doctors make too much to be able to deduct those sorts of contributions. That’s why we do backdoor Roth IRAs because we can’t deduct a traditional IRA anyway.
Dr. Jim Dahle:
Basically, if your modified adjusted gross income is above the phase out range of $64,000 to $74,000 single, or $103,000 to $123,000 married, you can’t deduct an IRA contribution. So, in that case, you’re usually better off using the 401(k) at work and then doing a backdoor Roth IRA.
Dr. Jim Dahle:
And if you don’t know what a backdoor Roth IRA is, check out the tutorial on the whitecoatinvestor.com website. Just Google “Backdoor Roth IRA tutorial”, it’ll pop right up.
Dr. Jim Dahle:
All right. Our next question comes from an MS-4. Let’s take a listen.

Student:
Hi, Dr. Dahle and thank you for all that you do. I’m a fourth-year medical student and thus will soon be going into residency and I just had some questions on nuts and bolts of 403(b) investing.
Student:
My understanding is that it’s employer dependent as to if you can move money from your 403(b) into your IRA while you’re still employed at that same institution. I’ve done it in the past, but it’s not while I’ve actually been employed still. So, I was curious on that.
Student:
More concerning though to me are any limitation issues that might come into play if you do so? Specifically, you put $6,000 into your IRA and then $19,500 into your 403(b). If you then move that $19,500 into that IRA, is that fine? That roll over, or does that actually count as a contribution putting you above that $6,000 limit?
Student:
If that isn’t a concern, I would think everyone would want to do this in order to be able to pick better options than maybe the 403(b) or 401(k) may provide, which I don’t really hear about a lot of people doing that. So, if there are any other concerns that I’m not thinking of, I would really appreciate hearing about them.
Student:
I was also curious how often you recommend rebalancing within Roth IRA. To my understanding, there aren’t really taxes or fees that come into play, but for momentum sake, I’ve heard to maybe still just do it every 12 to 18 months. So, any thoughts you have I would appreciate. Thank you.
Dr. Jim Dahle:
Okay. Can you move money from a 403(b) to an IRA while you’re still employed? The IRS doesn’t tell you that you can’t do that. They have no rule against that whatsoever. However, in practice, most plans don’t let you do that. Most of them require you to separate from the employer before you can roll any money out of that plan.
Dr. Jim Dahle:
It’s interesting. We’ve been putting a 401(k) plan in place and I’m looking at all the cool features that it can have and trying to implement them as many as you can have. And I’m surprised how many things you can do with a 401(k) that a lot of employers just don’t do, or their advisors sometimes recommend against, because it means money coming out of a pool of money that they can charge AUM fees on.

Dr. Jim Dahle:
But plans are allowed to offer you in service rollovers. It’s not illegal, but the plan has to allow it. The plan document has to specify you can do it. And honestly, most don’t.
Dr. Jim Dahle:
Do rollovers count towards your contribution limits? No, they don’t. You can roll money into an IRA and that has nothing to do with your $6,000 per year IRA contribution amount.
Dr. Jim Dahle:
All right, let’s talk about rebalancing for a minute. How often should you rebalance? Well, if you look at the data, it suggests that the optimal interval is between every one to every three years. You certainly don’t have to be rebalancing every day or every month or every quarter or something like that. Every couple of years is probably fine.
Dr. Jim Dahle:
If you don’t want to do it on a time-based interval, some people do it using a rule that says, when it gets a certain amount out of whack, you rebalance everything. For example, the 525 rule. What that says is that if any asset class becomes either an absolute 5% higher than it’s supposed to be. So, if you’re supposed to have 25% of your portfolio in that asset class, and it hits 30%, then you rebalance the whole portfolio.
Dr. Jim Dahle:
The 25 portion is applied to smaller allocations within the plan. For example, if your plan calls for a 10% allocation to an asset class, and it falls to 7.5%, meaning a 25% relative reduction in that asset class, then that triggers you to rebalance the whole portfolio.
Dr. Jim Dahle:
So those are kind of the two main methods of doing it. Let me tell you how I do it. I just direct new money at whatever is lowest. So, for example, I have my desired asset allocation with all of this percentages. For example, part of that is I keep 25% in a total US stock market fund. And if that is falling and the stock market really fell hard and it’s time for me to invest my monthly investment amount and the total US stock market has done the most poorly of all of my investments of all the asset classes in my portfolio, then that’s where I direct the new money.
Dr. Jim Dahle:
And most of the time, at least for the first 10 or 15 or 20 years of your investing career, that’s enough to keep the portfolio rebalanced enough. You don’t need exact, the dime rebalancing, because the next day it’s all going to be screwed up anyway, as different asset classes have different returns. So those are kind of the ways most people rebalance.
Dr. Jim Dahle:
All right, let’s take a question from another medical student. This one comes from Jack.
Jack:
Hey, Dr. Dahle. My name is Jack Harris. I’m a second-year medical student here in Kansas City. I want to thank you for all that you do for the physician community, including medical students like myself.
Jack:
My question for you today concerns disability insurance and umbrella insurance policies. Last week, our medical school hosted a professional development series, which included a personal finance session. The CFP who gave the presentation suggest that medical students should think about getting disability insurance and umbrella policy while they were in medical school.
Jack:
It suggested students walk in some cheap plans now, which can be increased when you start making real money. I believe that in our tuition and fees we pay for required liability insurance for students providing coverage in the course of their responsibilities as a student. However, the gentleman who gave the presentation said that the umbrella policy is really for liabilities outside of the course of your work and education.
Jack:
I’ve read through the White Coat Investor articles concerning disability and umbrella insurance policies and I found it very useful, but I have not seen and it’s possible I just missed it, an answer to the question of when you should get these policies.
Jack:
Do you think it’s valuable to have a disability coverage and an umbrella policy as a medical student? Even if it’s not necessary in medical school, do you think there’s benefit to starting a policy now and increasing it as your net worth grows? And if it is recommended, what’s the reasonable amount? $2,000 a month from disability insurance and a million-dollar umbrella insurance policy?
Jack:
I greatly appreciate your input here. And I know that some other students will as well want to figure out the best way to be smart with our money in this way. Thank you.
Dr. Jim Dahle:
Okay. So, should a medical school buy disability and umbrella insurance? My general answer is no. And the reason why is most medical students are living on loans. I’m not a big fan of buying these types of insurance on loans. Does that open you up to some risks? Yes, I suppose there is some risk that someone could come up with a personal lawsuit. You could run over somebody’s daughter and be sued for millions and go over your auto policy limits without an umbrella policy. It’s entirely possible, but it’s probably not that likely. And you don’t quite have the target on your back that you will have with an MD or a DO behind your name.
Dr. Jim Dahle:
So, I think it’s okay to wait on that until you actually start making money. Now, I wouldn’t wait long, when you’re an intern and you start getting that first paycheck that first month, it’s time to call up your auto insurance company, your homeowners insurance company, and get an umbrella policy in place. It’s not that expensive. A million-dollar policy is probably $200 a year or something like that. It’s just not that expensive.
Dr. Jim Dahle:
As far as the disability insurance, there are companies that sell disability insurance to medical students. Usually, the benefit is $2,000 a month. So, it’s not going to be enough for your whole career. It’s probably not even enough as much as y’all to have as a resident, but it’s something. Medical students can get disabled and it’d be nice to have $2,000 a month the rest of your life if that happened to you.
Dr. Jim Dahle:
But for the most part again, I generally recommend you wait until you start making money before you buy this. Not attending money, intern money is fine. That July of your intern year, you start getting a paycheck, it’s time to go get your disability insurance in place.
Dr. Jim Dahle:
You want to buy it young. When you buy it young, you get a better price on it, number one. Number two, you’re still pretty unlikely to have developed a medical condition or picked up some hobby that’s going to keep you from being able to buy it. And so, it’s a good time to go buy it as an intern. I generally don’t recommend the medical students buy it. Certainly, if you really are worried about getting disabled as a medical student, you can buy it, but you can’t buy much of a benefit anyway.
Dr. Jim Dahle:
Usually as a resident, they’ll sell you at least a $5,000 month benefit, but as a medical student the most are going to give you is a $2,000 a month. So, you got to buy it again as an intern anyway. And especially if I was living off loans, I would probably wait to get it until I was an intern.

Dr. Jim Dahle:
But I’m a little bit of a risk taker that way. So, you do have to evaluate how willing you are to run that risk, that you could get disabled as a medical student and never be able to really work as a physician.
Dr. Jim Dahle:
Okay. Let’s take a question that came in via email. “I recently opened and started investing in my Roth IRA. I started in contributed the max Roth contributions for 2018, 2019 and 2020. I contributed to the Roth at the end of the year and have gone from around $15,000 to $60,000 this year.
Dr. Jim Dahle:
The problem is this year my modified adjusted gross income will definitely be above the $198,000 limit. There will be no way for me to bring my adjusted gross income down as a good portion of my taxable income is from stock market gains and my individual account already realized.
Dr. Jim Dahle:
Can I remove the $6,000 contribution then placed it in a traditional IRA and then do a backdoor Roth IRA conversion? Or do I have to remove the $6,000 contribution non-profits which means I will have to pay taxes on the gains and the 10% fee for early withdrawal. I appreciate all feedback. Thank you”.
Dr. Jim Dahle:
Okay. So, here’s the way it works. You should have done your Roth IRA via the back door. It’s okay to do it via a bit of a back door, even if you don’t have to. But if you have to, and don’t, it creates a bit of a mess. The way you fix that mess is by recharacterizing the contribution.
Dr. Jim Dahle:
You can still do this. Starting in 2018 you couldn’t recharacterize conversions, but you can still recharacterize contributions. So, if you contributed directly to a Roth IRA, you should have contributed to a traditional IRA.
Dr. Jim Dahle:
So, you basically call up your IRA provider, whether it’s Vanguard or Fidelity or whoever, and say, “I want to recharacterize this contribution”. You move it into a traditional IRA, not back into a traditional IRA. Everything goes in there. Not only the principal, but any gains you had on that goes into the traditional IRA. And then at that point, you are free to convert it to a Roth IRA.

Dr. Jim Dahle:
Now you will owe taxes on all of the gains because you basically let it sit in that traditional IRA making money, and you got to pay taxes on the money it made while it was in there when you do the Roth conversion. But so what? Say you got to pay taxes on $500 or $1,000. No big deal, right? In your case, it sounds like you only got to do this for one year. It sounds like 2018, 2019 we’re fine. So, no big deal. You just got to do a backdoor Roth IRA for 2020, and you can do that by recharacterizing and reconverting that.
Dr. Jim Dahle:
I have a blog post out there called “How to fix backdoor Roth IRA, Screw ups” Not only do I walk you through the six steps to successfully contribute to a backdoor Roth IRA, but I go through a number of errors that are connected to each of those six steps where people screw them up and show you how to do it.
Dr. Jim Dahle:
I also talk about how to do this with the tutorial and how to fill out the IRS forms and all that kind of stuff as well. So, check out that blog post, if you have screwed up your backdoor Roth IRA, or even if you’re just worried that you screwed up your backdoor Roth IRA.
Dr. Jim Dahle:
All right. This podcast was sponsored by Bob Bhayani at drdisabilityquotes.com. An independent provider of disability insurance planning solutions to the medical community nationwide, and a long-time sponsor. He works with residents, fellows, and young attendings to set up sound insurance strategies.
Dr. Jim Dahle:
If you need to review your disability insurance coverage to make sure it’s still right for you, or if you just need to buy it for the first-time, call Bob at drdisabilityquotes.com. The number is (973) 771-9100 or you can just email him at [email protected]
Dr. Jim Dahle:
If you’re interested in that real estate course, you’ve only got a few more days to purchase it for it closes for months. Again, that’s whitecoatinvestor.com/rental.
Dr. Jim Dahle:
Thanks for those of you who have left us a five-star review and told your friends about the podcast. Our most recent review came in on the 26th who said, “LOVE THE WHITE COAT INVESTOR! Jim is the real deal! Fantastic content and actionable information in every podcast and blog post! I’ve been an avid listener/reader for years and WCI has truly increased my investing knowledge exponentially savings me tremendous dollars in fees and dramatically increasing my returns! 5 STARS!” Thank you for that kind review.
Dr. Jim Dahle:
All right. Head up, shoulders back. You’ve got this and we can help. We’ll see you next time on the White Coat Investor podcast.

Disclaimer:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney or financial advisor. So, this podcast is for your entertainment and information only and should not be considered official personalized financial advice.

The post Inherited IRAs – Podcast #189 appeared first on The White Coat Investor – Investing & Personal Finance for Doctors.

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