Today, we walk you through what changes are coming with Secure Act 2.0. We will take you step by step with a high level explanation and hopefully make sense of all of the changes. We also tackle your questions about the Backdoor Roth, estate planning, tax-loss harvesting, and more. Our guest today is one of our recommended financial advisors, Bradley Clark. He will tell us about his firm and help answer some of your Speak Pipe questions.
In This Show:
- Secure Act 2.0
- Backdoor Roth IRA Process
- Tenancy by Entirety and Estate Planning
- Tax-Loss Harvesting
- Reporting Tax Loss Harvesting on Tax Returns
- Using Your Losses from Tax Loss Harvesting
- Interview with Bradley Clark of Clark Asset Management
- Long-Term Care and Self-Insuring
- Retirement Plans
- Taxable Accounts
- Sponsor
- Milestones to Millionaire Podcast
- Full Transcript
Listen to Episode #300 here.
Secure Act 2.0
I wanted to spend some time talking about Secure Act 2.0 because we haven't yet talked about it on the podcast. I did a big blog post about this recently. This was an act that was rushed through, and I think it was signed by President Biden on December 23. There was a lot in the omnibus bill that he signed. There's around $45 billion in aid for Ukraine and $40 billion for natural disasters and $773 billion for domestic programs and $858 billion for the military. They overhauled the Electoral Account Act. They banned TikTok on government devices. A whole bunch of stuff was in this bill, one of which is this retirement reform bill that's been bouncing around in Congress for the last year. It's named the Secure Act 2.0, because as you recall from a few years ago, there was the Secure Act.
I had no idea Secure Act 2.0 was as big as it is. It has made a ton of changes to saving for retirement, and they all phase in in different years over the next 15 years. It affects all kinds of things. At first, when I realized how big it was, I was kind of disappointed because I realized, “We're going to have to update 100 pages on the White Coat Investor.” Obviously, a whole bunch of stuff I've said on podcasts in the past is now out of date, and you just can't keep that much stuff up to date when they make these big changes. So, I'm going to tell you about them. I'm not going to go into as much detail as I did in the blog post. If you want all the details, go check out that post.
We're just going to go through the highlights today with the details you really need to know. There are six or seven sections to go through. They called them titles, and there's six titles. Title I is the longest one, I think. In the first one, they talk about basically retirement savings. I'm just going to talk about some highlights in this section. The first one is that all new 401(k)s starting in 2025 are going to have to start automatically enrolling participants to contribute at least 3%—not more than 10%, but at least 3% and automatically increase those contributions 1% per year up to 10%-15%, which is pretty awesome, I think. You can still opt out. If you don't want to save for retirement, you don't have to, but now it's opt-out instead of opt-in. I think that's going to get a lot more people saving for retirement.
In sections 103 and 104, they change the retirement saver's credit to the saver's match. I'm not sure exactly how this is going to work, but basically the government is going to give you a match and there may be a few residents and medical students that qualify for this. Most people make too much money. If you're listening to this podcast, you make too much money to qualify for the saver's credit or this saver's match. But basically, for those who don't have a high income who save up to $2,000 for retirement in a retirement account, the government's going to give them $1,000 as a match instead of just a tax credit. I guess that's a little better.
The RMD age is going up. It has been 72 since the original Secure Act passed. Now, it's going to be 73 starting in 2023. If this is your year that you were going to have to start doing RMDs, you get one more year reprieve and then it's going to go to 75 starting in 2033. For those of you in your 40s like me, you're not going to have to take RMDs until you're 75. Obviously, you still can and you can take that money out at any time starting at 59 1/2, but you don't have to start taking any money out until 75. That's another 15 1/2 years of tax-protected compounding that you can enjoy beyond age 59 1/2.
The IRA catch-up contribution used to be just $1,000. If the IRA contribution was $6,000, the catch-up was $1,000, the total was $7,000 for those who are 50+. Now, that's going to be indexed to inflation. So, it'll theoretically go up as time goes on. That starts in 2024. You also get this new special catch-up, and this is Section 109 of the law. If you are 60, 61, 62, or 63, your catch-up contribution into a 401(k) isn't just going to be $7,500 that those who are 50+ can make. It's going to be the greater of $10,000 or 50% more than the current catch-up contribution. For four years there, you get to put an extra amount into your 401(k) to make sure you're ready to retire. I guess they think retirement age is 64, but that will also apply to SIMPLE IRAs. You'll have increased catch-up contributions in your 60s then. It doesn't start until 2025, by the way.
Another important change is employers are allowed to match your student loan payments. They don't have to, but they're allowed to. This is a possible benefit you might start seeing in employment contracts. The employer obviously has to put this program in place for all the employees. This is not just going to be you. But basically, they can allow you, if you're going to put a bunch of money and pay off your student loans, they can put money into your 401(k) for you for that. Just like they used to match employee contributions to the 401(k), they can match your student loan payments into the 401(k). That's pretty cool. 403(b), SIMPLE IRAs, even governmental 457(b)s are going to be able to do this. There is going to be a new non-discrimination test to make sure it's not just the highly paid employees that are getting this benefit, but you may start seeing those starting in 2024.
Section 112 says small employers get a tax credit when they make military spouses immediately eligible for defined contribution plans. In most 401(k)s, you have to wait a year before you can use it. If you're a military spouse, you're moving roughly every three years. That means one-third of the time you're not able to use a 401(k). You are kind of getting hosed. This allows employers to get a tax credit if they will make those military spouses immediately eligible for the 401(k) match and to use the 401(k). That's pretty cool.
Section 115 says emergency 401(k) and IRA withdrawals are now allowed without penalty. Actually, not now, but starting in 2024. Basically, you can take $1,000 out of your retirement account without paying the 10% penalty. You can put it back in if you want. If you do that, if you put it back in later in the year, you can take another $1,000 out next year and do the same thing. This kind of function is a little bit of an emergency fund that way. If you don't repay it back in, you have to wait three years before you do it again. I like this because it encourages low earners to put money into a retirement account, knowing that if it really gets bad and the excrement hits the ventilatory system, then you can get a little bit of money back out and that you shouldn't feel like you can't save for retirement because you might need that money.
Section 116 says employers are allowed to put more into SIMPLE IRAs. Basically, the possible match goes from 2% to 10%. Again, it's up to the employer. It can't be more than $5,000 indexed to inflation. That starts in 2024. If, for some reason, you're using a SIMPLE IRA, maybe that's something you may want to look into doing. SIMPLE IRA and 401(k) contribution limits are increasing. The contribution limits go up by 10% for the SIMPLE IRA and the SIMPLE 401(k). So, that's pretty cool.
Section 118 says if you have a nanny, you can now provide a SEP IRA for them, which is another cool new thing. That starts this year. A new account that has been created is Starter 401(k) plans. If you don't have a 401(k) or other employer plan, you can start one of these Starter 401(k)s for your practice. It's a little weird, though. The contribution limit for it is exactly the same as the IRA contribution limit. That's a big downside because that's obviously dramatically less money than you can put in a real 401(k). But it default-enrolls employees. It starts in 2024. I don't really understand why an employer would choose this, but I assume it's going to be less costly to start. That may encourage some people to get started with offering something for their employees. It's got the same limit as the IRA. It's not the same contribution limit, but it's equal to it. The employees would be able to put $6,500 into their IRA and $6,500 into this Starter 401(k).
Section 124 talks about the ABLE account disability age. If you've got a disabled kid, you're probably paying attention to ABLE accounts. These are great. They're now available in almost all states. It used to be you had to be disabled before age 26 to have an ABLE account. Now, as long as you get disabled before age 46, you can have an ABLE account. There are many physicians on disability that might qualify for one of these accounts. It’s something worth looking into.
Section 125 says part-time employees are now eligible for the 401(k) after two years. It used to be three years.Section 126 is one everybody's talking about. Everybody loves this benefit. We don't understand exactly how it's going to work, but it is exciting. This is the 529 to Roth IRA rollover. Essentially, let's say you save a little too much in a 529 for Junior. They go to a cheaper college, they work harder than expected, they get a scholarship, whatever. You have too much money in the 529, and Junior is now graduated from college. As long as that 529 has been established for at least 15 years, you can roll over up to $35,000 total out of that 529 into the beneficiary's Roth IRA. Now, this takes the place of their own contribution for that year. If they're allowed to contribute $6,500 that year, this takes the place of that—$6,500 each year until that $35,000 is used up. It gives you another option of what you can do with an overfunded 529. It encourages people to maybe save a little more in their 529s and to save better for retirement. I think this is a pretty good policy. It starts in 2024. I still think my kids' excess 529 contributions are just going to have the beneficiary change to their kids. But this gives you another option.
Here is another thing that's really exciting. Section 127 is about a pension-linked emergency savings account. This is cool. Employers don't have to but can establish tax-free accounts for their non highly compensated employees. These are called pension-linked savings accounts. You can opt employees in automatically with 3% of their compensation. The first $2,500 a year that comes out of their compensation sits in there as an emergency fund that they can raid anytime they want for emergencies, for whatever purpose they want. Once that account has at least $2,500 in it, anything extra goes into the employee's Roth 401(k), and you can match their contributions as the employer 1:1 up to $2,500. You can withdraw from the account up to four times a year, totally penalty-free. When you leave the employer, you can just take the money out as cash penalty-free. You can roll it into a Roth IRA, or you can roll it into a Roth 401(k). That starts in 2024. I think it's pretty awesome. I hope lots of employers adopt this. It's a little bit complicated for people to understand, but once they understand it, this thing is cool. It basically allows people to have an emergency fund but have it growing tax-free, and if they don't need it, it just goes into the 401(k). It really encourages people to save for retirement.
Title II of the Secure Act 2.0 is all about annuities and retirement income. I am not super excited about anything in Title II. Basically, it makes it easier to put annuities into retirement plans, and I don't know that's necessarily a good thing. There is sometimes a use for an annuity inside an IRA, SPIA, or a delayed income annuity, those sorts of things. There can be a role for it. However, the vast majority of annuities, like the vast majority of mutual funds, are terrible, and I don't want them in 401(k)s. I think this is going to provide a little door for them to slip into a 401(k). I'm not thrilled about it. Section 201 makes it a little easier to put annuities into retirement plans. There are a few other sections there in that section that are basically kind of pro-annuity sections.
Title III is all about retirement plan rule changes. There's a lot in this section, but we're only going to touch on a few points. The first one, section 302, the RMD penalty. If you didn't take out your required minimum distribution, the penalty on that is one of the biggest penalties in the entire tax code. It’s 50% of the amount you should have taken out. If your RMD this year was $50,000 and you forgot to take it out, you literally have to write a check to the IRS for $25,000. That's the penalty. This section, starting in 2023, cuts that penalty in half. It's still a terrible penalty at 25%, but it's not as bad as it was.
Section 307 changes qualified charitable distributions a little bit. This is a great way for older retirees to give to charity. You're only allowed to put $100,000 of your RMD directly to charity, but that $100,000 is now indexed to inflation. That's new with Secure Act 2.0. You can also do a one-time $50,000 charitable distribution, be it a charitable trust or a charitable annuity. That's pretty cool, I think, for QCDs.
Section 314 is a new penalty-free withdrawal, a new reason you can get to your retirement account money before age 59 1/2. It's an exception to that 10% penalty. Domestic abuse—if you have been the victim of domestic abuse, you can take out up to $10,000 or 50% of the balance, whichever is less, out of an IRA or a 401(k) without having to pay that 10% penalty. You can also repay the money for a period of three years. That starts in 2024. I don't know when the abuse has to have occurred, but the withdrawals can start in 2024.
Section 317 is another cool one. A lot of people are like, “Oh, it's the end of the year. I don't have time to start a solo 401(k), so I'm going to do a SEP IRA this year and then I'm going to roll it into the solo 401(k).” Well, this makes it easier to not have to do that. Solo 401(k)s that are started after the calendar year can now get employee contributions, and that starts this year. You were able to do employer contributions after the end of the calendar year, but now you can do the employee contributions, as well, up until your tax day. That's pretty cool that you can establish a solo 401(k) for 2022 in March 2023, still make employee and employer contributions, which takes away one of the reasons why people were using SEP IRAs instead of solo 401(k)s.
Section 324 is going to standardize rollover paperwork. If you've ever done rollovers with their seven or eight or nine pages of paperwork, you will think this is a pretty cool thing to only have one piece of paper to deal with that's the same for every institution. I think that's a good thing. It doesn't start until 2025. Section 325 corrects what I see as an error that they've had. It used to be that Roth 401(k)s had required minimum distributions and Roth IRAs did not. No more. Neither one of them have required minimum distributions starting in 2024. Section 326 is another exception to the 10% early withdrawal penalty. Terminal illness: if you get diagnosed with cancer at 55, you can now take everything out of your IRA without paying that 10% penalty.
Section 331 says if you prepare your own taxes, you're always seeing this stuff about disasters and being in a disaster area and how you get benefits for being in a disaster area. Well, here's another one of those. If you're in a disaster area, you can take money out of your retirement plan up to $22,000 penalty-free in the event of a federal disaster, and then you can spread the taxes on that withdrawal over three years. You can also repay the money into your retirement account. In fact, if you bought a house and then it was in a disaster area, if you bought a house using $10,000 you pulled out of your IRA, you can repay that, too, once it's been in a disaster area. Employers are actually allowed to allow a larger amount to be borrowed out of the 401(k) in a disaster. This one's interesting. I think it's the only change in Secure Act 2.0 that's retroactive. It's actually retroactive to January 26, 2021. That made me curious, that it's this weird date, January 26, 2021. I was trying to figure out what the disaster was on January 26, 2021 and I couldn't figure out what it was. But anyway, any disaster you've had since then, you've now got the ability to withdraw from your retirement accounts.
Section 334 is another exception to the 10% early withdrawal penalty. Long-term care premiums: you can use up to $2,500 per year to pay long-term care premiums without paying the 10% early withdrawal penalty. That one doesn't start until 2026, though. Section 337 is for special needs trusts. You can have a charity as the remainder beneficiary. That's new. Basically, it can provide for your disabled kid or whatever for years and years and years. When they die, whatever is left, it can go to your favorite charity.
Section 348 says if you have a hybrid cash balance plan, which lots of docs out there do, there's a technical adjustment made to it that basically prohibits the backloading of benefit accruals and allows plan sponsors to provide larger pay credits to older, longer service employees. If you've got a hybrid cash balance plan, this is a conversation you ought to have with your plan provider this year. Titles IV and V have nothing very interesting in there, just some technical stuff. Title VI, though, has got some really interesting stuff.
In section 601, there are now going to be Roth SIMPLE IRAs and Roth SEP IRAs. Those start this year in 2023. You're going to be able to have a Roth SEP IRA, which is one of the main reasons I've been telling people that they have to get a solo 401(k) instead of a SEP IRA. That traditional tax-deferred SEP IRA balance screws up their Backdoor Roth IRA pro rata calculation. Well, a Roth SEP IRA isn't going to screw that up because that is not going to show up on line 8 of Form 8606. This is an option that allows people to use a SEP IRA instead of a slightly more complicated solo 401(k) and still do their Backdoor Roth IRA each year.
Section 603: I call this the ratification of catch-up contributions for high earners. No longer will catch-up contributions for high earners, those making $145,000+ this year and that's indexed to inflation, be allowed to be tax-deferred. The catch-up contributions are going to have to be Roth for you doctors and other high earners out there. That starts in 2024. I don't know why they did that. Maybe they want to make more money. They don't want you to defer so much tax to later, but it's all going to be Roth starting in a year. All catch-up contributions are Roth.
Section 604 says the match can now be Roth, too. Any matching dollars you get from your employer can be Roth. This is going to cause people to, of course, have lots of decisions to make about whether they want it to be Roth or tax-deferred. As an employer, whether you want to offer Roth matching contributions is not required, but your employer can offer it. That includes those matches on any student loan payments that you made. This one starts on the day the Act was passed, which was in 2022. So, your employers can now do Roth matching contributions if they want.
We've got a discussion here at The White Coat Investor now. We've got to decide which of these features we're going to add to our 401(k). If it's going to be the world's best 401(k), we have to have all the features, right? So, that's one we're probably going to add. How that's going to work exactly is not entirely clear, but it sounds like anything that goes in there as a matching contribution is going to show up on your W2 as taxable income. The employer is not going to pay the tax on it. You're still going to pay the tax on that matching contribution.
Section 605: Finally, finally, they're putting some teeth into these charitable conservation easem*nt deductions. They've been warning they're going to do this for years. Conservation easem*nts have been a special category that the IRS says, “We're watching you if you're doing these.” Basically, they've made it so you can't abuse them quite as much. The limit here is that the deduction can only be 2.5 times each partner's relevant basis. Why is that significant? Because people were taking like a seven or eight or 10X deduction before. And of course, it makes sense to spend $100,000 to get a $1 million deduction. But it does not make sense to spend $100,000 to get a $250,000 deduction. Because how much tax are you going to save on a $250,000 deduction? Oh, about $100,000 which is about what you spent. It's a little bit more fair, and I think people are going to start using conservation easem*nts a lot less than they have in the past, which is probably a good thing because they were widely abused.
Title VII is just about how the tax court judges get a little bit better retirement plan. And that's it. That's the Secure Act 2.0. There's a ton in there. Listen to all those changes. Think about how many things I've told you in the past on this podcast that are now out of date. And I'm sorry, I don't change the rules, I don't make the rules, I just tell you what they are. But there are going to be a lot of changes to rules that are going to affect the way you save for retirement.
More information here:
Secure Act 2.0 – Here's What You Need to Know
Backdoor Roth IRA Process
“I know you get endless questions about the Backdoor Roth IRA process. I'm going to try to spice it up and ask a new question for you, or at least I believe it is new. As I'm a faithful reader and listener, I haven't read heard this addressed to my knowledge. I believe that I know the answer to this question. My research only answered it generally and not specifically. So, I figured I would get confirmation from you since you've probably read and looked into more of these details than almost anyone alive. If you inherit a retirement account, tax-deferred as a non-spouse, my understanding is that unless you want to withdraw the entire amount and pay taxes on it during the year, which isn’t ideal in many of our situations given our income level, the retirement account can be transferred to an inherited IRA. The amount in this inherited IRA needs to be withdrawn by the end of a 10-year period, but could be done over time, pushing your income to just below the next tax bracket.”
OK, that's true.
“My question is does this inherited IRA count in the pro rata calculations in the same way as a SIMPLE or SEP IRA would or is it an exception since it came from another individual source? Obviously if it does, that would make doing a Roth IRA through the back door unlikely to be worth it.”
This isn't a new question to me. Maybe I never talked about it on the podcast, but no, it doesn't count. Roth IRAs don't count in the pro rata calculation. Inherited IRAs don't count in the pro rata calculation. 401(k)s, 403(b)s, 401(a)s, 457(b)s, none of those count. What counts? Traditional IRAs including rollover IRAs, SIMPLE IRAs, and SEP IRAs count. And now that we're going to have Roth SEP and SIMPLE IRAs, only the tax-deferred versions are going to count, I'm sure, toward that pro rata calculation done on line 8 of Form 8606.
Tenancy by Entirety and Estate Planning
“We are in a tenancy by entirety state and are looking at estate planning. Is it true that a joint trust with myself and my spouse as the trustees carries the same level of asset protection as a tenancy by the entirety designation? Since the Fed has raised interest rates, CD rates have improved dramatically. Ally is offering 4.25% interest on an 18-month CD with a two-month interest penalty for an early withdrawal. Are there any other considerations I should be looking at?”
Let's do the tenancy by entirety state. There is no such thing as levels of asset protection, that I know of. It's not clear to me what kind of trust you're actually talking about. A revocable trust provides zero asset protection. An irrevocable trust where you're just the grantor provides a massive amount of asset protection at least after a few years. A domestic asset protection trust provides at least some asset protection, but how much is only becoming clear in case law over the years. Tenancy by the entirety provides zero asset protection if you're both sued, such as a slip and fall on your property, but massive asset protection if just one of you is sued since the other person also owns the entire property. I hope that clarifies your asset protection tenancy by the entirety question.
About the CDs, I find it hard to get excited about locking up my money for 18 months in a CD when I can get the same rate with the Vanguard Federal Money Market Fund. Unless you're expecting rates to fall significantly in the next 18 months, I don't know why you do that. If you do expect them to fall, put it in the CD. If not, put it in the money market fund. As I'm looking today, the Vanguard Federal Money Market Fund is yielding 4.18%. And heck, you can get 3.6% tax-free. The municipal money market fund, if you're in the highest bracket like me, that's the equivalent of 5.7% if you were comparing pre-tax interest rates.
I don't know why you'd lock up your money for 4.25% when you can get 5.7%. It doesn't make any sense to me, but these things change and they change every few weeks. If you really want to chase yield around, you can. But as a general rule, just get your money into something high yield, whether it's a high yield savings account, whether it's a one- or two-year CD, whether it's a money market fund. The point is don't leave all your money sitting in a checking account. Don't put your money in the savings account at your local credit union that’s paying 0.2%. Get it into something high yield and maybe don't fuss with it too much more after that. But if you want to chase yield, check every three or four months to see if you should be moving it from your high yield savings account to your money market fund or vice versa.
More information here:
Top 16 Asset Protection Strategies for Doctors
Does Your Savings Account Yield Round to Zero?
Tax-Loss Harvesting
“I have a good spreadsheet for several factors to avoid wash sales, avoid unqualified dividends, and donate only shares held over a year. Unfortunately, I've learned through mistakes the importance of each. I think I just discovered the biggest problem of all, though. Missing a dividend completely is worse than just having a dividend be unqualified. The dividend date for the Vanguard Total Stock Market Fund is December 22. The dividend date for the Vanguard 500 Index Fund is December 20. So, I tax-loss harvested a large amount from total stock to 500 index on December 21. A few days later, I'm wondering why I didn't get a dividend. So, I looked up their dates. I think I sold right before the dividend for total stock market and about right after the 500 dividend. Please tell me I'm wrong. If this is another hard lesson for me to learn, I'd like to at least avoid doing it again.”
I had good news for this white coat investor. This shouldn't be an issue. It doesn't make any sense for this to be an issue. In fact, this particular investor probably came out ahead, fortuitously, for what he's done. The reason why is what happens with an equity mutual fund, a stock mutual fund on the X dividend date? Basically, let's say it's $100 a share and it's going to pay a $3 a share dividend. So, on the X dividend date, the $100 per share goes to $97 per share and a $3 dividend, and they send you the $3 dividend, or you reinvest the $3 dividend either way. That's how it works.
You're not hosed if you sold before the X dividend date because you sold at $100 a share and then invested into another mutual fund. There's no loss of money here. Instead of having to pay taxes on a dividend you didn't really want anyway, in this case, this investor avoided getting a dividend at all that year just because he took advantage by doing his tax-loss harvesting between the X dividend dates for the two funds. I wouldn't try to time this and try to be extra tax efficient by doing this every year or anything, but you weren't hurt and you actually pulled a fast one on Uncle Sam this year. Congratulations. You did not make a mistake.
Reporting Tax Loss Harvesting on Tax Returns
“Hi, Dr. Dahle. Thank you for everything that you do. I have a tax-loss harvesting question. Currently I have approximately $400,000 in a taxable brokerage account at Betterment. I am looking to move this investment into a simple single index fund, which is in line with my financial plan. This account lists approximately $138,000 in gains, including appreciation and dividends. All of these gains are long-term gains as I have made no contributions over the last two years. This account lists my tax-loss harvesting as $45,000. If I were to sell all the holdings, would I pay capital gains on $138,000 or would the capital gains be $93,000, which is equal to $138,000 minus the $45,000 of tax loss harvesting that Betterment is reporting? My other question is, how do I actually report the tax-loss harvesting on my tax return on the year that I sell my holdings?”
The answer to your question is $93,000. If you decide you want to liquidate everything at Betterment and reinvest into something else, that's going to cost you the taxes on $93,000 in gains. All the losses that you've accumulated will be applied to the gains and whatever's left you have to pay taxes on.Keep in mind that it sounds like you accumulated these losses, and when I say you, Betterment did it on your behalf in 2022. Those get reported on your 2022 taxes. It goes on Schedule D of your 1040, and you can use up to $3,000 of those capital losses against your ordinary income every year. The remainder gets carried forward indefinitely until you can use them. It's an unlimited amount against your capital gains, but it's only $3,000 a year against ordinary income. If you had $45,000, you used $3,000 in 2022, you've still got $42,000 you're carrying forward. So, if you have $138,000 in gains, you subtract that $42,000 from that and you'd pay taxes on the rest.
But what I would submit is you may not want to do this. You might not have to realize all of those gains. I would look at the holdings that you have in this Betterment account. If I were leaving a brokerage, I would roll everything over in-kind to whatever brokerage you're going to, whether you're going to Schwab or Fidelity or Vanguard or whatever. See if you can roll everything over in-kind, and then you can look at the basis on each of those holdings. Anything that's losing, that's under water, or is about the same as what you paid for it, you can sell those at no tax consequences. For the things that you have gains on, you may want to keep them. If you're talking about taking everything out of 10 funds at Betterment and investing it all into a total stock market index fund, well, chances are, Betterment, it's not like it's a bad place to invest. They use index funds. They use total stock market index funds. You may want to just hold onto whatever one you rolled over.
If you transfer to in-kind, just hold onto that, don't sell it. You don't want to sell it and then buy it back, anyway, and pay capital gains you don't have to pay. I would look into doing that, see if you can do that as you move the money out of Betterment, and maybe you can cut that tax bill way down. Maybe it'll just be a few thousand dollars that you actually have to pay taxes on to get everything invested the way you want to get it invested, where you want to get it invested. You have to be careful when you start selling stuff in taxable accounts. You can sell willy-nilly all the time in HSAs and 401(k)s and IRAs, but when you're in a taxable account, there are consequences. You want to be careful how you sell things, especially if it's got a significant gain.
More information here:
Is Tax-Loss Harvesting Worth It?
Using Your Losses from Tax Loss Harvesting
“Hi Dr. Dahle. Thank you very much for sharing all your knowledge and experience with us. I have another question regarding tax-loss harvesting. I remember you mentioning that you have more than $3,000 accumulated from tax-loss harvesting to save up one day if you were to sell your White Coat Investor company or any large capital gains in the future. My question is, are we able to utilize more than $3,000 in tax-loss harvesting in a given year? Let's say if I were to sell my home and have a large capital gain. Thank you for helping me understand this better.”
As I mentioned before, you can use $3,000 of capital losses against ordinary income each year. That's the only limitation. You are unlimited in how many capital losses you can use against or how much in capital losses you can use against capital gains. There are lots of reasons why you might want to have lots of capital losses. In retirement, let's say you want to start selling stuff and spending money that you've been saving for years and years. What do you sell first when you come to your taxable account? You sell the stuff with high basis. You might be able to get $100,000 that you can spend and only have $10,000 of that be gains, and you only pay taxes on $10,000, but you've got $100,000 to spend. So, you might only have to pay $1,500 in taxes to get that $100,000 out of the account. If you're only spending a little bit of your capital losses each year to offset a gain like that, they're going to last a long time. If you've got $100,000 or $200,000 in capital losses that you've accumulated over the years, that can cover a lot of retirement spending if it's high basis shares that you're selling.
But you can also use it in the event you sold something. Say you sold your house. You're like lots of white coat investors who live in high-cost-of-living areas. You might have a $1.5 million house. The rule right now is if you're single and you sell a house, $250,000 of gains can be excluded from your income. If you're married, it's $500,000. Why those haven't been indexed to inflation I have no idea, but that's the way the law is. If you bought it for $1.5 million and you're selling it for $3 million 20 years later and you're married, you can exclude half a million dollars and you're going to pay capital gains taxes on the other $1 million. A lot of people don't think about this, don't realize this. Where are you going to come up with the cash to pay capital gains taxes on that? If you turn around and use that to buy another $3 million house, you have to have all the money to pay those capital gains, $200,000-$250,000 to pay those capital gains, when you swap houses. It's a big deal. It keeps people from selling if they know what they're doing. But I suspect a lot of people just wander into it and all of a sudden they've got this huge capital gain they've got to pay.
But if you've saved up hundreds of thousands of dollars of capital losses, you can use it to offset gains like that. It's another reason why you should keep track of any big home renovations you do. If you're putting a bunch of money into your house, keep those receipts, keep those amounts because it adds to your basis. If you bought a house for half a million, you put a half million into it and you sold it for $1.5 million, you're married, you don't actually owe any taxes on those gains because half a million is what you paid for it, half a million is addition to basis from the renovation, half a million is the amount excluded from your income due to that exception for your personal residence. That's a pretty good trick, too.
If you have some side business, you own yourself a White Coat Investor or you own a dry cleaning business, let's say you have a $2 million dry cleaning business and you sell that. That's a big old capital gain. But if you have a few hundred thousand dollars in your taxable account, a few hundred thousand dollars of tax losses that you've accumulated over the years, well, that can offset that $2 million gain. You pay less taxes on that. There are lots of uses to having tax losses for those of us with taxable accounts. I do recommend you continue to tax-loss harvest when you have opportunities. It's not like you have to go out of your way to get these losses that it's such a huge deal to try to find them. When there's a bear market, look at all the stuff you bought in the last year or two, tax-loss harvest it, and grab some capital losses. You don't need to be doing this hour by hour like Betterment might be doing it. You can just check when the market goes down significantly, see what has a loss, and harvest it. I hope that answers your question.
More information here:
How to Tax Loss Harvest – Step-by-Step Guide
Interview with Bradley Clark of Clark Asset Management
We have a special guest on the podcast today. I am here with Bradley Clark, CFP, RICP who is one of our recommended financial advisors that you will find on the White Coat Investor recommended financial advisor page. Welcome to The White Coat Investor podcast, Bradley.
“Thanks so much for having me. I've been a fan for years. There was a discussion years ago. I think you may have declared that bonds now belong in taxable, and I loved that this notion, that interest rates fell so much that maybe we need to revisit asset location preferences. The fact that you are getting into that level of insight and what you're doing, not only for physicians but for all sorts of non-physicians that have found you guys, I've always been a fan and glad to support you and finally meet you.”
Awesome. Well, it's great to have you here and be partnering with you. Tell us a little bit about you. What made you decide you wanted to be a financial advisor?
“It's a great question. It all goes back to the spring of 1996. I was at Stanford Business School, and I was taking Modern Portfolio theory from Bill Sharpe himself. One of my favorite Sharpe articles is called The Arithmetic of Passive Investing. He pitched us on this in class and my jaw dropped at this premise that our society is shoveling hundreds of billions of dollars toward something that actually does not create value, which is stock picking and active management. I guess it was in that moment that my life was to be transformed, but it ended up taking me 15 or 18 years of business and entrepreneurial and marketing jobs and publishing jobs to then come full circle to actually put out my shingle and start my firm.”
The firm you started is Clark Asset Management. What would you say is particularly unique about Clark Asset Management and what do you do well?
“I have managed to end up in a small, valuable, and, I think, defensible niche. We hold ourselves out as one of the only truly fixed flat fee retirement income experts in the country. Most retirement income experts are slinging annuities with high commissions for the expert. Then, most wealth management shops are charging AUM. There are a few that have flat fees, but when you dig in, they tend to be more complex net worth driven or tiered or something else. We're out there with one price, wealth management, financial planning, and a few years ago, we kind of bet the firm on retirement income planning. Our sweet spot is people who will be retiring in the next, let's say, five years or maybe they recently retired or anything in between, typically $2 million-$8 million liquid. We have really become experts in the types of stuff you would expect: Social Security claiming, long-term care planning, Medicare planning. We do bond ladders; we do commission-free annuities. We see the same 12 or 14 plays all the time. We've gotten very good at running those plays.”
Tell us about the price and how you decided that was what it was going to be.
“The price is $9,500, and that's for financial planning and investment management ongoing. No other forms of compensation, full stop. We launched at $7,500 in 2016. Despite a career in business, I was a little naive about what it was going to take to stand up and operate a high-touch wealth management firm. At $7,500, there wasn't enough margin for me to hire or reinvest. At $9,500, it's still not a high-margin business, but there's enough room there to reinvest in technology and reinvest in people. I raised the price only once. I really don't want to again. If inflation stays 5, 6, 8, 9 points or something, obviously I'll have to eventually.
But what we're trying to do is just charge a fair and transparent price that's consistent. You probably have heard this term because you're a physician, but I really have a lot of respect for the helping professions. This is teachers and physicians, nurses, counselors, what have you. I look at where I work and I don't even work in a profession. I work in an industry and one of the reasons we priced the way we did is to try to do our part to help transform this shady industry into an actual profession, ideally a helping profession. I think that has to start with the comp model.”
Sounds like you've been reading some Jack Bogle lately, too. He very much saw that people managing money should basically have this fiduciary, true fiduciary, interest in people rather than looking at them as whales to be harpooned as, unfortunately, many in the financial services industry do. I appreciate you sharing that. Let's get into some questions from listeners.
Long-Term Care and Self-Insuring
“Hi Dr. Dahle. This is Tom from California. I have a question regarding long-term care. I've recently decided to go ahead and self-insure long-term care risk. My question is, would it make sense to set aside a portion of my investment portfolio specifically for long-term care and if so, where to locate that in a tax-deferred or tax-free vs. taxable account? And say I am age 60. If I do not anticipate using it for a certain period of time, hopefully 20 or 30 years, would it make sense to invest those assets in a more aggressive fashion than I am doing for the rest of my retirement portfolio—for instance, at 80% or 90% equities just for that specific part? That's the first question.
And the second is how much should one typically set aside if they're going to do a segmentation for per person for long-term care? I've heard anything from 3-5 years’ worth of expected expenses. Does that make sense, or would you recommend a different approach?”
I think that's a great question. Let's tackle the overarching question here. He has decided he is going to self-insure, which is probably the decision made I think by most of your clientele. If most of them are $2 million-$8 million portfolios, I'll bet most of them choose not to buy long-term care insurance. But what do you think? Should it be segmented out, or should it just be included in the general nest egg?
“I will not get into how to determine whether to self-insure because that's outside of the scope of his question. But I think the method that you follow for, that's critically important. What he's describing, if I translate what he's asking into our kind of geeky language, what he's talking about is creating an explicit buffer asset. Instead of saying, ‘OK, well, he’s got the home and he’s got all this money and the Monte Carlo says he's going to be fine,' he wants to take the next step, which is to ring or fence off or cordon off a buffer asset. I haven't seen this a lot, but we have seen it. I do have several clients who have done this. It's really a mental accounting exercise that he's doing. For years, I was railing against mental accounting, because often you can suboptimize the whole if you lean too heavily into mental accounting. But then I gave up on that, and I realized that we all are guilty of mental accounting and it's just part of the human condition. I don't resist mental accounting anymore. What he's trying to do, I think, is fine.
On the size, he mentioned 3-5 years. I would probably back off of that to 2-3 years per spouse. Two times two is four, three times two is six. Something in that 4-6 year range total for spending. A nuance here is that sometimes there's scare tactics here around how much it's really going to cost. Remember, if somebody ends up in long-term care, they're probably not traveling to Tuscany and doing some of the things that would've been in the spending plan anyway. The net impact on spending is significant but not as significant as you may think. Some of those other spending goals go away and it's important to do the arithmetic when you think through that.
On the asset allocation side, I agree with him, which is it's a longer time horizon. Crank up the equity exposure. But there's another reason, which is there's a very good chance this won't even be used and therefore could flow to an heir, a beneficiary, a charity. When you start investing for someone else's time horizon who's younger than you, it just strengthens or extends his own hypothesis. Instead of 20-30 years, there's a very decent chance that money is being invested for 40 or 50 years. It has another reason I think to crank up the equity exposure.
See AlsoGold Ira Review: Why Investing in Gold is the Future of Retirement - Best Crypto/Gold Roth IRA ReviewHow to Invest in Stocks | A Step By Step GuideIRAs and 401(k)s: Master the Basics of Retirement Accounts - Clo Bare Money Coach'Carry forward' method could help 'reduce tax bill' in retirementThe last thing he asked was about asset location. Where should this be done? I don't think we can generalize that point. I think that has to be client-specific. I've got a client with millions in taxable accounts. We just cordoned off their biggest gainers and stuck it in a flex brokerage account. Flex means it's a normal brokerage account, but flex in so much as that money is earmarked either for long-term care and/or for their son. It's going to be one or the other or both. By cordoning off the highest gainers, as long as the step up in basis at death is preserved, then we kind of like doing this on the taxable side. But if there's not a lot of taxable dollars there, then a pre-tax environment is fine for something like this.”
I think the most important point you made is there's a very good chance this money isn't going to be used. I think you've really got to think about that as you do this. I would argue that that's one of the reasons why you may not want to do this mental accounting at all. You may not use it at all, but there's a very good chance you're not going to use the whole thing. If you look at the average nursing home stay, they're nowhere near that five-year mark.
“If we built a plan without this, let's say we ran all the Monte Carlos and we agreed with the client, they can spend $40,000 a year on travel in retirement and they're happy with that. Then the husband or the wife say, ‘Hey, well, what about cordoning off a buffer asset?' We can do it and they can afford it, but then to achieve the same Monte Carlo, if all of a sudden those dollars are removed, then instead of $40,000 a year on travel, maybe it's $20,000. There's an opportunity cost here, which says they could be restricting their discretionary spend for 30 years unnecessarily. Now, I'm sure it makes them feel good. Mental accounting makes you feel good, but I think you need to understand the opportunity cost.”
A trip to Tuscany makes you feel good, too.Let's take our next question on retirement plans. And this one's I believe a bit of a convoluted question, but this comes from Matt. Let's take a listen to it and see what we can do in a short period of time to help Matt.
Retirement Plans
“Hi, Dr. Dahle. This is Matt from the Pacific Northwest. My question is about retirement plans. I'm a W2 employee but also have 1099 income. And my primary job, my employer contributes to a 401(a) and there is no ability for an employee contribution. We do, however, have a 403(b) and a governmental 457, which I max out. For my 1099 income, I've also been putting away 20% in a solo 401(k) as an employer contribution. My question is, do I have an ability to make an employee contribution somewhere in this scenario? Let's say I make approximately $50,000 of 1099 income. Can I put 20% of this? So, $10,000 into the solo 401(k) as an employer contribution, plus an additional $20,500 as an employee contribution in 2022. This would essentially mean a total contribution of $30,500 and decrease my taxable 1099 income from $50,000 down to $19,500. Is this plan legitimate? Do you see any better way to optimize my retirement accounts? I also have a Backdoor Roth IRA and an HSA.”
Brad, do you want to take a shot at this one to start with?
“He was using 2022 limits so we will talk about that. For somebody with this many moving parts, I think that the number to start with is the total that can go into these types of plans on the employee and employer side in total.The total number in 2022 was $61,000. That's employee contributions and employer from all types of plans added up together with one interesting exception, which is the 457. The 457 sits on its own island. There's another $20,500 from 2022 that is available in the 457, but let's just put that to the side for a moment before we add it back in.
Within the 457, this gentleman can do $20,500 as an employee and then the balance $40,500 from the employer. That's pretty simple. He mentions lots of different employer things like the 401(a). There may or may not be a match in the 403(b). He, as a solo 401(k) owner, gets to do an employer contribution. You can add up all these employer contributions. The totality of the employee contribution across all non 457 sources is the $20,500. As long as you honor the $20,500 and honor the $61,000, you should be fine. Where the 457 comes in is since it's on its own island, you get to do that, as well. My understanding is he could do up to $61,000 plus another $20,500 of the 457 money. That's the summary. What he's saying is right, which is the most he can do on the employer side of the solo 401(k) is approximately 20% of the 1099 gross income. He was saying $50,000. Twenty percent of that is $10,000 and that's one of the employer sources. Matches count. All these employer sources count against the $61,000.”
There are basically two rules to keep in mind here. The one is you're limited to $20,500, or $22,500 for 2023, for employee contributions. No matter how many employers you have, no matter how many 401(k)s you have, you get that employee contribution and that's it if you're under 50. Obviously, you get a catch-up if you're 50+. But for the total that can go into the plan, that amount, that $61,000 amount in 2022 and $66,000 amount in 2023 is not per everybody. It's per employer. At the academic job, you have a 401(a) and a 403(b) and you're going to be able to put $20,500 in that 403(b) as your employee contribution. Maybe there's a match, maybe there's not.
Some amount is going to go into the 401(a). That amount total between those two is going to be less than $61,000. Because you used your employee contribution up at your day job at the academic place, you're not going to be able to use it again in the solo 401(k). Because you only made $50,000, you're only going to be able to put about $10,000 in there as a tax-deferred contribution. The only workaround I know of for that is to make after-tax contributions. If you set up your solo 401(k) such that it is allowed to take after-tax contributions, you could contribute most of the rest of the $40,000 as an after-tax contribution and potentially do a Mega Backdoor Roth IRA contribution on that.
If your goal is really to get as much as you possibly can into retirement plans, that is an option. But I would say what most people do is they max out whatever's available at the university hospital and they put their $10,000 as tax-deferred money into the solo 401(k) and they spend the rest on a home renovation or use it for their Backdoor Roth, that sort of a thing.
“Right. Or into HSAs and 529s. What's interesting here to me is this is an order of operations problem. If you have $100,000 that you can put aside every year, let's say, and it's in a pitcher full of water that represents the $100,000. You line up all the potential cups, like how much do you pour in each cup in what order as to fully optimize what we sometimes call the savings waterfall. Putting those $100,000 to their highest and best use by being smart about how much to fill up each of those cups. I do want to repeat, everything you said is right. You did a good job simplifying it, but the 457 is an asterisk on everything that you said. It exists on its own island. There's double-dipping that you can do with the 457.”
Absolutely. I agree with that. Totally separate limit for 457s. Likewise, a totally separate limit for your IRAs. Just because you use the Roth 403(b) account doesn't mean you can't also get money into a Roth IRA, whether you can contribute directly or whether you can do it through the back door. What a lot of people run into is when you have all these accounts available to you, you may not be saving enough to max them all out. You have to choose the best ones to contribute to. Whereas other people are saving so much money that they not only go through all of the accounts and fill them all, but they also end up investing a bunch of money into taxable accounts each year. It's just a ratio of how much retirement space you have available to what you're actually saving. And that's going to be different for everybody.
“That's right. But even some of those dollars flying into taxable environments, maybe they should be flying into super funding a 529 plan. Instead of being trapped in the $500 or $1,000 of savings per month, keep shoving all those taxable dollars into the 529 environments to superfund and top those things off for kids, grandkids or what have you. Only once you've done that, then start to save in a taxable environment.”
Especially with the new option out with Secure 2.0, where there's going to be the potential to roll over leftover 529 money up to $35,000 into Roth IRAs for the beneficiary. That's a potential additional use for overfunded 529s. Let's get to our last question here.
Taxable Accounts
“Hey Jim, it's Steven from the southeast. I have a question about taxable accounts. I had to liquidate mine this past year, but I'm about to restart it. My plan is to use index funds and try to simplify it as much as possible, but do you think we should have dividends or have those automatically reinvested or should I reinvest those myself? For the sake of tax-loss harvesting, I just wanted to try to simplify this as much as possible. So, any recommendations about how to kind of go about setting up a simplified brokerage taxable account would be greatly appreciated for tax purposes and just for ease of the whole portfolio.”
Reinvest dividends in taxable or not, Brad? What's your opinion? What's your recommendation?
“In our firm, we actually like to pay dividends to cash and then rebalance the cash back into the portfolios. The rationale is pretty simple. It makes it easier to keep portfolios balanced within tolerance bans if you can choose what to buy into. With everything reinvested, you can't use the dividend season or the dividend payouts as an opportunity to keep the portfolio balanced.
What the gentleman said, though, is he referred to ‘simple' several times. In life, everything is a trade-off, and there are so many trade-offs in what he's asking. I won't take too much time on this, but one dimension he's asking about is tax-loss harvesting. Well, if that really is valuable to you, you don't want to own one or two ETFs, you want to own eight or 10 or 15 ETFs. There's some level of granularity where there's more opportunity to do tax-loss harvesting. But if he really wanted simple, he could have one target date fund or two ETFs, but there'd be less tax-loss harvesting opportunity. Hence, a trade-off. Dividend reinvestment, not reinvestment. Another trade-off of simplicity vs. keeping a portfolio balanced. Because who's going to go in there? If he's doing this himself, is he going to go in and do the analysis and rebuy in proportion once a month or twice a month? Or is he simply going to check the box on dividend reinvestment and rebalance annually?
There's another part of this that he talks about, whether he mentioned or not, that I was thinking of, which is householding. Does he manage this all in equities because it's taxable? Does he want to practice asset location? The question was about taxable, but if he wants to practice asset location, he's got to decide what to put in the taxable account, knowing the balance and components of the pre-tax account. Not simple, but he can squeeze extra blood from the stone. The fact that he kept saying ‘simple' over and over and over again says to me he's willing to make some of these trade-offs that give him less granularity, maybe less rebalancing juice, less householding, all under the mantra of simplicity. There's a quote that I like and it's attributed to Einstein, I'm not sure if he really said it, which is ‘You should make things as simple as possible, but no simpler.' Where you set that dial is going to be different for different types of investors.”
Very well said. Personally, I'm not a big fan of reinvesting dividends in taxable. I reinvest them in all my other accounts in my 401(k)s and Roth IRAs and HSAs. It's all reinvested for simplicity's sake. But in the taxable account, I don't for the same reason you mentioned. You can rebalance with that money. I reinvest it manually once a month with all my earned income from that month that's going into investments. The other benefit, of course, is you don't end up with all these little tiny tax lots that you start worrying about wash sales about when you are tax-loss harvesting.
I think, in general, it's pretty good practice not to reinvest dividends in a taxable account. But you're absolutely right about the trade-off, about simplicity. Like I tell a lot of people, automating all your investments does not play well with tax-loss harvesting. You kind of have to choose one or the other. It just comes down to what's your time worth? Are you an optimizer or a satisfier? You've got to make those sorts of decisions.
For those who are interested in learning more about Mr. Clark, bradleyclark.com is where you can learn about Clark Asset Management. He'd be more than willing to sit down and talk with you about whether his firm may be right for you. As he mentioned, it is a flat $9,500. For those of you with a decent size portfolio, that is a heck of a deal. If you've been out there paying 1% AUM on a $5 million portfolio, you're about to cut your investment costs or your advisory costs by 80%. You've got a couple other things you wanted to mention to people that they could learn more about you and learn more about investing at the same time. You want to tell us about the videos as well as the book you've got coming out?
“Yes, thanks so much. A lot of folks that schedule a call with me will watch a short video class first. It's only an hour of content, 12 five-minute videos. I do a pretty good job in there of keeping things approachable and educational. It doesn't take much time to get through, and almost everybody who books with me mentions the videos. They're totally free. You can consume them on the website, no problem. I also have a book coming out in Q1 of this year, 2023. The book name is “Be The Bird,” which I admit is not very explicit about what it's about. But it's a book about retirement income planning but also confidence and psychology. There's some stories from my life and lessons learned. I'm proud of the book. It's coming out this quarter. It will be available on Amazon. We also have an offer, and I can give the URL. The offer is if you think you may be a fit with us and if you are interested in speaking with me, when you book a free consult, we will send you a hard copy of the book, free, no credit card, no shipping costs, none of that nonsense. To go to that page, it's just bradleyclark.com/podcastoffer. Then, you would just book a call if you think that you're interested and enter in your name and address and we'll ship that to you. And that's it. Thank you for giving me the opportunity to mention both of those, Jim.”
You're welcome. Thank you so much for partnering with The White Coat Investor, and thank you so much for helping us to answer listener questions today.
“It was fun. Thank you.”
Sponsor
What’s changed in healthcare? The opportunities, the lifestyle, and you. Your needs, wants, and goals are probably different than they were five years ago. Now’s the perfect time to explore locum tenens opportunities. Start your research at loc*mstory.com, an unbiased, educational resource. You’ll hear true stories from physicians, learn about specialty trends, compare loc*ms agencies, and more. Loc*ms could be an essential part of a career that adapts to your needs. Visit loc*mstory.com.
Milestones to Millionaire Podcast
#103 — Anesthesiologist Pays Off $369,000 in Four Years
This anesthesiologist pays off a huge student loan debt in only four years! He shares how he felt when the government froze loan payments after he had been working so hard to pay his off. He talks about the benefit of refinancing and committing to getting rid of debt as quickly as possible.
Listen to Episode #103 here.
Sponsor: 37th Parallel
Full Transcript
Transcription – WCI – 300
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.
Dr. Jim Dahle:
This is White Coat Investor episode number 300 – Introduction to the Secure Act 2.0.
Dr. Jim Dahle:
Everyone has a story, different needs, wants and goals and how to attain them. Your story determines your solution. Whatever your situation and story, locum tenens should be part of the conversation.
Dr. Jim Dahle:
How do you find out if loc*ms is a good option for you? Go to an unbiased, informative source like loc*mstory.com. You'll learn all the ins and outs of loc*ms, details on travel and housing, assignment coordination, tax information and more. You'll also hear firsthand stories from loc*ms physicians from all walks of life, so you get a bigger picture of the diverse options. Get a comprehensive view of loc*ms and decide if it's right for you at loc*mstory.com.
Dr. Jim Dahle:
All right, welcome to episode 300. I can't believe we've made 300 episodes. If we make about 50 of them a year, I guess that means we've been doing this for about six years. Six years I've been sitting here once a week on average, recording a podcast for you. That's a big chunk of anybody's life and it's pretty interesting to sit back and ponder that for a minute.
Dr. Jim Dahle:
I hope it's been fun for you. I know the first 40 or 50 were pretty terrible. We went back and touched them up a little bit, made them a little bit better. I think there's a bunch of those that don't even have show notes. But we've tried to get better as we went along. We certainly have more professional equipment, more professional help now than we did in the beginning and I hope it's been a fun journey for you.
Dr. Jim Dahle:
I know some of you have been around since then. I know many of you have actually gone back and listened to all of the podcasts. I congratulate you on that feat. It is no small feat. I was always impressed when people did that with the blog and went back and read all the blog posts. With the blog, we've subsequently deleted a few and combined a few and added a few.
Dr. Jim Dahle:
And I haven't heard people that started at the beginning and read all the blog posts for some time, but there's still plenty of people that email me and tell me they've listened to all the podcasts. So, if you're one of those congratulations, you're one of the 300 Spartans I guess, that have truly listened to all of the WCI podcast episodes.
Dr. Jim Dahle:
Hey, it's tax season. You probably have that hanging over your head right now, starting to get all those forms in the mail. If you've been thinking about maybe doing some tax strategizing, getting some help with your taxes, you feel like you pay too much, you're probably right.
Dr. Jim Dahle:
You may want to check out our recommended tax strategists. If you go to the recommended tab at whitecoatinvestor.com, and you scroll down there a little bit, you will see tax strategists. And there are about a dozen firms there that help White Coat Investors to get lower tax bills.
Dr. Jim Dahle:
Some of them also do tax preparation, but for most of them, that's not the main thing they do. They're trying to strategize with you to do things that maybe you haven't thought of that are still legal tax avoidance techniques and help you to lower that tax bill. But I recommend you check that out if you've been feeling like you're paying too much in taxes or you need someone to help you with your taxes.
Dr. Jim Dahle:
All right, we've got a number of questions from readers to get to today. We're also going to speak with one of our recommended financial advisors today, who's going to help me to answer some of those questions later on.
Dr. Jim Dahle:
But before we get into that too much, I wanted to spend some time talking about something we haven't yet talked about on the podcast. Now, I did a big blog post about this. I actually worked on it on Christmas Eve and then on the plane again a little bit on Christmas Day.
Dr. Jim Dahle:
But this is Secure Act 2.0. And this was an act that was rushed through, I think it was signed by President Biden on December 23rd. And there was a lot in the omnibus bill that he signed. There's like $45 billion in aid for Ukraine and $40 billion for natural disasters and $773 billion for domestic programs and $858 billion for the military. And they overhauled the Electoral Account Act. They banned TikTok on government devices. They did some stuff for the Maine lobster industry.
Dr. Jim Dahle:
A whole bunch of stuff was in this bill, one of which is this retirement reform bill that's been bouncing around in Congress for the last year and it's named the Secure Act 2.0. Because as you recall from a few years ago, there was the Secure Act.
Dr. Jim Dahle:
This is the one that totally nerfed the stretch IRA from something you could stretch over your entire life to only being able to do it for 10 years. It also raised the RMD age to 72. It was 70 and a half before that. It made it so you could pay off $10,000 of your student loan with a 529 plan. But mostly it kind of encouraged employers to get better 401(k)s.
Dr. Jim Dahle:
I had no idea Secure Act 2.0 was as big as it is. It has made a ton of changes to saving for retirement and they all phase in in different years over the next even 15 years that this thing's going to be phasing in. But it affects all kinds of things. And at first when I realized how big it was, I was kind of disappointed because I'm like, “We're going to have to update a hundred pages on the White Coat Investor.” And obviously a whole bunch of stuff I've said on podcasts in the past is now out of date and you just can't keep that much stuff up to date when they make these big changes.
Dr. Jim Dahle:
So, I'm going to tell you about them. I'm not going to go into as much detail as I did in the blog post. If you want all the detail, go to whitecoatinvestor.com/secure-act-two-zero and that'll get you the full blog post. I've published it, I think, the week after Christmas. It ran December 27th.
Dr. Jim Dahle:
We're just going to go through the highlights today. The highlights that you really need to know. The big changes that are likely to affect White Coat Investors. The first one, well, there's six or seven sections in this. Let's see, they called them titles and there's six titles, one through six. And the first one's the longest one, I think. Maybe the third one. But in the first one they talk about basically retirement savings. And so, I'm just going to talk about some highlights in this section.
Dr. Jim Dahle:
The first one is that all new 401(k)s starting in 2025 are going to have to start automatically enrolling participants to contribute at least 3%, not more than 10%, but at least 3% and automatically increase those contributions 1% per year up to 10% to 15%, which is pretty awesome, I think.
Dr. Jim Dahle:
You can still opt out if you don't want to save for retirement, you don't have to, but now it's opt out instead of opt in. And I think that's going to get a lot more people saving for retirement.
Dr. Jim Dahle:
In sections 103 and 104, they change the retirement saver's credit to the saver's match. And I'm not sure exactly how this is going to work, but basically the government is going to give you a match and there may be a few residents and medical students that qualify for this. Most people make too much money. If you're listening to this podcast, you make too much money to qualify for the saver's credit or this saver's match.
Dr. Jim Dahle:
But basically, for those who don't have a high income, who save up to $2,000 for retirement and retirement account, the government's going to give them $1,000 as a match instead of just a tax credit. I guess that's a little better.
Dr. Jim Dahle:
The RMD age is going up. It's 72 since original Secure Act passed. Well, now it's going to be 73 starting in 2023. If this is your year that you were going to have to start doing RMDs, you get one more year reprieve and then it's going to go to 75 starting in 2033.
Dr. Jim Dahle:
So, for those of you in your 40s like me, you're not going to have to take RMDs until you're 75. Obviously you still can and you can take that money out at any time starting at 59 and a half, but you don't have to start taking any money out until 75. So, that's another 15 and a half years of tax protected compounding that you can enjoy beyond age 59 and a half.
Dr. Jim Dahle:
The IRA catch-up contributions used to be just $1,000. If the IRA contribution was $6,000, the catch-up was $1,000, the total was $7,000 for those who are 50 plus. Now that's going to be indexed to inflation. So, it'll theoretically go up as time goes on. That starts in 2024.
Dr. Jim Dahle:
You also get this new special catch-up, and this is section 109 of the law. If you are 60, 61, 62 or 63, your catch-up contribution into a 401(k) isn't just going to be $6,500 that those who are 50 plus can make. It's going to be the greater of $10,000 or 50% more than the current catch-up contribution.
Dr. Jim Dahle:
So, for four years there, you get to put an extra amount into your 401(k) to make sure you're ready to retire. I guess they think retirement age is 64, but that will also apply to simple IRAs. And so, you'll have in increased catch-up contributions in your 60s then. It doesn't start till 2025 by the way.
Dr. Jim Dahle:
Another important change. Employers are allowed to match your student loan payments. Now they don't have to, but they're allowed to. So, this is a possible benefit you might start seeing in employment contracts. The employer obviously has to put this program in place for all the employees. This is not just going to be you. But basically, they can allow you, if you're going to put a bunch of money and pay off your student loans, they can put money into your 401(k) for you for that.
Dr. Jim Dahle:
Just like they used to match employee contributions to the 401(k), they can match your student loan payments into the 401(k). So, that's pretty cool. 403(b), simple IRAs, even governmental 457(b)s are going to be able to do this. There is going to be a new non-discrimination test to make sure it's not just the highly paid employees that are getting this benefit, but you may start seeing those starting in 2024.
Dr. Jim Dahle:
Section 112. Small employers get a tax credit when they make military spouses immediately eligible for defined contribution plans. Most 401(k)s, you got to wait a year before you can use it. Well, if you're a military spouse, you're moving like every three years. That means like a third of the time you're not able to use a 401(k). You are kind of getting hosed Well, this allows employers to get a tax credit if they will make those military spouses immediately eligible for the 401(k) match and to use the 401(k). So that's pretty cool.
Dr. Jim Dahle:
Section 115. Emergency 401(k) and IRA withdrawals are now allowed without penalty. Actually, not now, but starting in 2024, they're allowed without penalty. Basically, you can take $1,000 out of your retirement account without paying the 10% penalty. You can put it back in if you want. And in fact, if you do that, if you put it back in later in the year, you can take another $1,000 out next year and do the same thing. So, this kind of function is a little bit of an emergency fund that way. If you don't repay it back in, you got to wait three years before you do it again.
Dr. Jim Dahle:
But I like this because it encourages low earners to put money into a retirement account, knowing that if it really gets bad and the excrement hits the ventilatory system, then you can get a little bit of money back out and that you shouldn't feel like you can't save for retirement because you might need that money.
Dr. Jim Dahle:
Section 116. Employers are allowed to put more into simple IRAs. Basically, the possible match goes from 2% to 10%. Again, it's up to the employer. It can't be more than $5,000 index to inflation. That starts in 2024. So, if for some reason you're using a simple IRA, your practice, maybe that's something you may want to look into doing.
Dr. Jim Dahle:
Simple IRA and 401(k) contribution limits are increasing. The contribution limits go up by 10% for the simple IRA and the simple 401(k). So, that's pretty cool.
Dr. Jim Dahle:
Section 118. If you have a nanny, you can now provide a SEP for them, a SEP IRA. So that's pretty cool. That starts this year.
Dr. Jim Dahle:
Starter 401(k) plans, this is a new account that's been created. And if you don't have a 401(k) or other employer plan, you can start one of these starter 401(k)s for your practice. It's a little weird though. The contribution limit for it is exactly the same as the IRA contribution limit.
Dr. Jim Dahle:
So, that's kind of a big downside because that's obviously dramatically less money than you can put in a real 401(k). But it default and enrolls employees and this thing starts in 2024. I don't really understand why an employer would choose this, but I assume it's going to be less costly to start. And so, that may encourage some people to get started with offering something for their employees. And it's not the same limit as the IRA. It's not the same contribution limit, but it's equal to it. The employees would be able to put $6,500 into their IRA and $6,500 into this starter 401(k).
Dr. Jim Dahle:
Section 124 talks about the ABLE account disability age. Now if you've got a disabled kid, you're probably paying attention to ABLE accounts. These are great. They're now available in almost all states. It used to be you had to be disabled before age 26 in order to have an ABLE account. Now as long as you get disabled before age 46, you can have an ABLE account. So, there's many physicians on disability that might qualify for an ABLE account. It’s something worth looking into.
Dr. Jim Dahle:
Section 125. Part-time employees are now eligible for the 401(k) after two years. It used to be three years. A little bit more eligibility for 401(k)s. Help people save for retirement.
Dr. Jim Dahle:
Section 126. This is one everybody's talking about. Everybody loves this benefit. We don't understand exactly how it's going to work, but everybody's excited about it. This is the 529 to Roth IRA rollover. Essentially, let's say you save a little too much in a 529 for junior. They go to a cheaper college, they work harder than expected, they get a scholarship, whatever. You got too much money in the 529, junior is now graduated from college.
Dr. Jim Dahle:
As long as that 529 has been established for at least 15 years, you can roll over up to $35,000 total out of that 529 into the beneficiary's Roth IRA. Now this takes the place of their own contribution for that year. If they're allowed to contribute $6,500 that year, this takes the place of that. $6,500 each year until that $35,000 is used up. So, it gives you another option of what you can do with an overfunded 529. It encourages people to maybe save a little more in their 529s and to save better for retirement. I think this is a pretty good policy. It starts in 2024. I still think my kids' excess 529 contributions are just going to have the beneficiary change to their kids. But this gives you another option.
Dr. Jim Dahle:
Okay, something else that's really exciting. Section 127. This is a pension linked emergency savings account. And this is cool. Employers don't have to but can establish tax-free accounts for their non highly compensated employees. These are called pension linked savings accounts.
Dr. Jim Dahle:
You can opt employees in automatically with 3% of their compensation. The first $2,500 a year that comes out of their compensation sits in there as an emergency fund that they can raid anytime they want for emergencies. For whatever purpose they want.
Dr. Jim Dahle:
Once that account has at least $2,500 in it, anything extra goes into the employee's Roth 401(k) and you can match their contributions as the employer one to one up to $2,500. You can withdraw from the account up to four times a year, totally penalty free.
And when you leave the employer, you can just take the money out as cash penalty free. You can roll it into a Roth IRA or you can roll it into a Roth 401(k). That starts in 2024.
Dr. Jim Dahle:
I think it's pretty awesome. I hope lots of employers adopt this. It's a little bit complicated for people to understand, but once they understand it, this thing is cool. It basically allows people to have an emergency fund but have it growing tax free and if they don't need it, it just goes into the 401(k). So, it really encourages people to save for retirement.
Dr. Jim Dahle:
All right, title two of the Secure Act 2.0 is all about annuities and retirement income. And I am not super excited about anything in title two. Basically, it makes it easier to put annuities into retirement plans and I don't know that's necessarily a good thing. There is sometimes a use for an annuity inside an IRA, SPIA or a delayed income annuity, those sorts of things. There can be a role for it.
Dr. Jim Dahle:
However, the vast majority of annuities, like the vast majority of mutual funds, are terrible and I don't want them in 401(k)s and I think this is going to provide a little door for them to slip into 401(k). So, I'm not thrilled about it.
Dr. Jim Dahle:
Section 201 makes it a little easier to put annuities into retirement plans. There are a few other sections there in that section that are basically kind of pro annuity sections.
Dr. Jim Dahle:
All right, title three is all about retirement plan rule changes. And there's a lot in this section, but we're only going to touch on a few points. The first one, section 302, the RMD penalty. If you didn't take out your required minimum distribution, the penalty on that is like the biggest penalty in the entire tax code. It’s 50% of the amount you should have taken out.
Dr. Jim Dahle:
So, if your RMD this year was $50,000 and you forgot to take it out, you literally have to write a check to the IRS for $25,000. That's the penalty. And this section starting in 2023 cuts that penalty in half. It's still a terrible penalty at 25%, but it's not as bad as it was.
Dr. Jim Dahle:
Section 307 changes qualified charitable distributions a little bit. This is like a great way for older retirees to give to charity. You're only allowed to put $100,000 of your RMD directly to charity, but that $100,000 is now indexed to inflation. So that's new with Secure Act 2.0 and you can also do a one-time $50,000 charitable distribution, be it a charitable trust or a charitable annuity. So, that's pretty cool I think for QCDs.
Dr. Jim Dahle:
Section 314. This is a new penalty free withdrawal, a new reason you can get to your retirement account money before age 59 and a half. It's an exception to that 10% penalty. Domestic abuse. If you have been the victim of domestic abuse, you can take out up to $10,000 or 50% of the balance, whichever is less, out of an IRA or a 401(k) without having to pay that 10% penalty. You can also repay the money, for a period of three years. That starts in 2024. I don't know when the abuse has to have occurred, but that's when the withdrawals can start is 2024.
Dr. Jim Dahle:
Section 317. Here's another cool one. A lot of people are like, “Oh, it's the end of the year. I don't have time to start a solo 401(k), so I'm going to do a SEP IRA this year and then I'm going to roll it into the solo 401(k).” Well, this makes it easier to not have to do that. Solo 401(k)s that are started after the calendar year can now get employee contributions and that starts this year. You were able to do employer contributions after the end of the calendar year, but now you can do the employee contributions too up until your Tax Day.
Dr. Jim Dahle:
So, that's pretty cool that you can establish a solo 401(k) for 2022 in March of 2023, still make employee and employer contributions, which takes away one of the reasons why people were using SEP IRAs instead of solo 401(k)s.
Dr. Jim Dahle:
Section 324. They're going to standardize rollover paperwork. And if you've ever done rollovers with their seven or eight or nine pages of paperwork, you will think this is a pretty cool thing to only have one piece of paper to deal with that's the same for every institution. So, I think that's a good thing. It doesn't start till 2025.
Dr. Jim Dahle:
Section 325 corrects what I see as an error that they've had. It used to be that Roth 401(k)s had required minimum distributions and Roth IRAs did not. No more. Neither one of them have required minimum distributions starting in 2024.
Dr. Jim Dahle:
Section 326. This is another exception to the 10% early withdrawal penalty. Terminal illness. If you get diagnosed with cancer at 55, you can now take everything out of your IRA without paying that 10% penalty.
Dr. Jim Dahle:
Section 331. If you prepare your own taxes, you're always seeing this stuff about disasters and being in a disaster area and how you get benefits for being in a disaster area. Well, here's another one of those. If you're in a disaster area, you can take money out of your retirement plan up to $22,000 penalty free in the event of a federal disaster, and then you can spread the taxes on that withdrawal over three years. You can also repay the money into your retirement account.
Dr. Jim Dahle:
In fact, if you bought a house and then it was in a disaster area, if you bought a house using $10,000 you pulled out of your IRA, you can repay that too once it's been in a disaster area. And employers are actually allowed to allow a larger amount to be borrowed out of the 401(k) in a disaster.
Dr. Jim Dahle:
So, this one's interesting. I think it's the only change in Secure Act 2.0 that's retroactive. It's actually retroactive to January 26th, 2021. And that made me curious, that it's this weird date, January 26th, 2021. I was trying to figure out what the disaster was on January 26th, 2021 and I couldn't figure out what it was. But anyway, any disaster you've had since then, you've now got the ability to withdraw from your retirement accounts.
Dr. Jim Dahle:
Section 334. Another exception to the 10% early withdrawal penalty. Long-term care premiums. You can use up to $2,500 per year pay long-term care premiums without paying the 10% early withdrawal penalty. That one doesn't start till 2026 though.
Dr. Jim Dahle:
Section 337. Special needs trust. You can have a charity as the remainder beneficiary. That's new. You didn't used to be able to do that. Basically, it can provide for your disabled kid or whatever for years and years and years. And when they die, whatever's left, it can go to your favorite charity.
Dr. Jim Dahle:
Section 348. If you have a hybrid cash balance plan, which lots of docs out there do, there's a technical adjustment made to it that basically prohibits the back loading of benefit accruals and allows plan sponsors to provide larger pay credits to older, longer service employees. So, if you've got a hybrid cash balance plan, this is a conversation you ought to have with your plan provider this year.
Dr. Jim Dahle:
Titles four and five, nothing very interesting in there, just some technical stuff. Title six though has got some really interesting stuff.
Dr. Jim Dahle:
In section 601, there are now going to be Roth Simple IRAs and Roth SEP IRAs. Those start this year in 2023. You're going to be able to able to have a Roth SEP IRA, which is one of the main reasons I've been telling people that they got to get a solo 401(k) instead of a SEP IRA is because that traditional tax-deferred SEP IRA balance screws up their backdoor Roth IRA pro rata calculation. Well, a Roth SEP IRA isn't going to screw that up because that is not going to show up on line eight of form 8606. So, this is an option that allows people to use a SEP IRA instead of a slightly more complicated solo 401(k) and still do their backdoor Roth IRA each year.
Dr. Jim Dahle:
Section 603. I call this the ratification of catch-up contributions for high earners. No longer will catch-up contributions for high earners, those making $145,000 plus this year and that's index to inflation is going to be allowed to be tax-deferred. The catch-up contributions are going to have to be Roth for you doctors and other high earners out there. And that starts in 2024.
Dr. Jim Dahle:
I don't know why they did that. Maybe they want to make more money. They don't want you to defer so much tax to later, but it's all going to be Roth starting in a year. All catch-up contributions are Roth.
Dr. Jim Dahle:
Section 604. The match can now be Roth too. Any matching dollars you get from your employer can be Roth. This is going to cause people to, of course, have lots of decisions to make about whether they want it to be Roth or tax-deferred. And as an employer, whether you want to offer Roth matching contributions is not required, but your employer can offer it. That includes those matches on any student loan payments that you made. I guess this one's retroactive too. Well, no it's not. It starts on the day the act was passed, which was in 2022. So, your employers can now do Roth matching contributions if they want.
Dr. Jim Dahle:
So, we've got a discussion here at the White Coat Investor. We've got to decide which of these features we're going to add to our 401(k). If it's going to be the world's best 401(k), we have to have all the features, right? So, that's one we're probably going to add.
Dr. Jim Dahle:
How that's going to work exactly is not entirely clear, but it sounds like anything that goes in there as a matching contribution is going to show up on your W2 as taxable income. The employer is not going to pay the tax on it. You're still going to pay the tax on that matching contribution.
Dr. Jim Dahle:
Section 605. Finally, finally, they're putting some teeth into these charitable conservation easem*nt deductions. They've been warning they're going to do this for years. Conservation easem*nts have been a special category that the IRS says “We're watching you if you're doing these.” Well, basically they've made it so you can't abuse them quite as much.
Dr. Jim Dahle:
And so, the limit here is that the deduction can only be 2.5 times each partner's relevant basis. And why is that significant? Well, because people were taking like a seven or eight or 10X deduction before. And of course, it makes sense to spend $100,000 to get a million-dollar deduction. But it does not make sense to spend $100,000 to get a $250,000 deduction. Because how much tax are you going to save on a $250,000 deduction? Oh, about $100,000 about what you spent. So, it's a little bit more fair and I think people are going to start using conservation easem*nts a lot less than they have in the past, which is probably a good thing because they were widely abused.
Dr. Jim Dahle:
Title seven is just about how the tax court judges get a little bit better retirement plan. And that's it. That's the Secure Act 2.0. There's a ton in there. Listen to all those changes. Think about how many things I've told you in the past on this podcast that are now out of date. And I'm sorry, I don't change the rules, I don't make the rules, I just tell you what they are. But there's going to be a lot of changes to rules that are going to affect the way you save for retirement.
Dr. Jim Dahle:
Let's take a question here. This one came in by email. “I know you get endless questions about the backdoor Roth IRA process. I'm going to try to spice it up and ask a new question for you, or at least I believe it is new. As I'm a faithful reader and listener I haven't read heard this address to my knowledge.
Dr. Jim Dahle:
I believe that I know the answer to this question. My research only answered it generally and not specifically. So, I figured I would get confirmation from you since you've probably read, looked into more of these details and almost anyone alive.” That might be true.
Dr. Jim Dahle:
“If you inherit a retirement account, tax deferred as a non-spouse, my understanding is that unless you want to withdraw the entire amount and pay taxes on it during the year, which isn’t ideal in many of our situations given our income level, the retirement account can be transferred to an inherited IRA.
Dr. Jim Dahle:
The amount in this inherited IRA needs to be withdrawn by the end of a 10-year period, but could be done over time pushing your income to just below the next tax bracket”. Okay, that's true.
Dr. Jim Dahle:
“My question is does this inherited IRA count in the pro rata calculations in the same way as simple or SEP IRA would or is it an exception since it came from another individual source? Obviously if it does, that would make doing a Roth IRA through the back door unlikely to be worth it.”
Dr. Jim Dahle:
Yeah. Well here, this isn't a new question to me. Maybe I never talked about it on the podcast, but no, it doesn't count. Roth IRAs don't count in the pro rata calculation. Inherited IRAs don't count in the pro rata calculation. 401(k)s, 403(b)s, 401(a)s, 457(b)s, none of those count. What counts? Traditional IRAs including rollover IRAs, simple IRAs, and SEP IRAs count. And now that we're going to have Roth SEP and simple IRAs, only the tax deferred versions are going to count, I'm sure toward that pro rata calculation done on line eight of form 8606.
Dr. Jim Dahle:
Okay, here's another question. “We are in a tenancy by entirety state and are looking at estate planning. Is it true that a joint trust with myself and my spouse as the trustees carries the same level of asset protection as a tendency by the entirety designation?”
Dr. Jim Dahle:
And then another question. “Since the Fed has raised interest rates, CD rates have improved dramatically, Ally is offering 4.25% interest on an 18 month CD with a two month interest penalty for an early withdrawal. Are there any other considerations I should be looking at?”
Dr. Jim Dahle:
All right, let's do the tenancy by entirety state. There is no such thing as levels of asset protection that I know of. It's not clear to me what kind of trust you're actually talking about. A revocable trust provides zero asset protection. An irrevocable trust where you're just the grantor provides a massive amount of asset protection at least after a few years.
Dr. Jim Dahle:
A domestic asset protection trust provides at least some asset protection but how much is only becoming clear in case law over the years. Tendency by the entirety provides zero asset protection if you're both sued such as a slip and a fall on your property. But massive asset protection if just one of you is sued since the other person also owns the entire property. So, I hope that clarifies your asset protection tenancy by the entirety question.
Dr. Jim Dahle:
About the CDs, I find it hard to get excited about locking up my money for 18 months in a CD when I can get the same rate with the Vanguard Federal Money Market fund. Unless you're expecting rates to fall significantly in the next 18 months, I don't know why you do that. If you do expect them to fall, put it in the CD. If not, put it in the Money Market fund.
Dr. Jim Dahle:
As I'm looking today, the Vanguard Federal Money Market fund is yielding 4.18%. And heck, you can get 3.6% tax free. And the municipal money market fund, if you're in the highest bracket like me, that's the equivalent of 5.7% if you were comparing pre-tax interest rates.
Dr. Jim Dahle:
So, I don't know why you'd lock up your money for 4.25% when you can get 5.7%? It doesn't make any sense to me, but these things change and they change every few weeks. So, if you really want to chase yield around, you can. But as a general rule, just get your money into something high yield, whether it's a high yield savings account, whether it's a one- or two-year CD, whether it's a money market fund.
Dr. Jim Dahle:
The point is don't leave all your money sitting in a checking account. Don't put your money in the savings account at your local credit union that’s paying 0.2%. Get it into something high yield and maybe don't fuss with it too much more after that. But if you want to chase yield, check every three or four months to see if you should be moving it from your high yield savings account to your money market fund or vice versa.
Dr. Jim Dahle:
We have a special guest on the podcast today. I am here with Bradley Clark, CFP, RICP who is one of our recommended financial advisors that you will find on the White Coat Investor recommended financial page. Welcome to the White Coat Investor podcast, Bradley.
Bradley Clark:
Thanks so much for having me. I've been a fan for years. There was a discussion years ago about, I think you may have declared that bonds now belong in taxable, and I loved that this notion, that interest rates fell so much that maybe we need to revisit asset location preferences. And the fact that you are getting into that level of insight and what you're doing, not only for physicians but for all sorts of non-physicians that have found you guys, I've always been a fan and glad to support you and finally meet you.
Dr. Jim Dahle:
Awesome. Well, it's great to have you here and be partnering with you. Tell us a little bit about you. What made you decide you wanted to be a financial advisor?
Bradley Clark:
It's a great question. It all goes back to the spring of 1996. I was at Stanford Business School and I was taking Modern Portfolio theory from Bill Sharp himself. One of my favorite sharp articles is called the Arithmetic of Passive Investing. And he pitched us on this in class and my jaw dropped at this premise that our society is shoveling hundreds of billions of dollars towards something that actually does not create value, which is stock picking and active management.
Bradley Clark:
So, I guess it was in that moment that my life was to be transformed, but it ended up taking me 15 or 18 years of business and entrepreneurial and marketing jobs and publishing jobs to then come full circle to actually put out my shingle and start my firm.
Dr. Jim Dahle:
And the firm you started is Clark Asset Management. What would you say is particularly unique about Clark Asset Management and what you do well?
Bradley Clark:
Yeah, it's a great question. I have managed to end up in a small valuable, and I think defensible niche. We hold ourselves out as one of the only truly fixed flat fee retirement income experts in the country. So, most retirement income experts are slinging annuities with high commissions for the expert. And then most wealth management shops are charging AUM. There's a few that have flat fees, but when you dig in, they tend to be more complex net worth driven or tiered or something else.
Bradley Clark:
And so, we're out there with one price, wealth management, financial planning, and a few years ago we kind of bet the firm on retirement income planning. So, our sweet spot is people who will be retiring in the next, let's say, five years or maybe they recently retired or anything in between, typically $2 to $8 million liquid. And we have really become experts in the types of stuff you would expect. Social security claiming, long-term care planning, Medicare planning, we do bond ladders, we do commission free annuities. We see the same 12 or 14 plays all the time. We've gotten very good at running those plays.
Dr. Jim Dahle:
Tell us about the price and how you decided that was what it was going to be.
Bradley Clark:
The price is $9,500 and that's for financial planning and investment management ongoing. No other forms of compensation, full stop. We launched at $7,500 in 2016. and despite a career in business, I was a little naive about what it was going to take to stand up and operate a high touch wealth management firm.
Bradley Clark:
At $7,500 there wasn't enough margin for me to hire or reinvest. At $9,500 it's still not a high margin business, but there's enough room there to reinvest in technology and reinvest in people. So, I raised the price only once. I really don't want to again. If inflation stays 5, 6, 8, 9 points or something, obviously I'll have to eventually.
Bradley Clark:
But what we're trying to do is just charge a fair and transparent price that's consistent. And you probably have heard this term because you're a physician, but I really have a lot of respect for the helping professions. And this is teachers and physicians, nurses, counselors, what have you. And I look at where I work and I don't even work in a profession. I work in an industry and one of the reasons we priced the way we did is to try to do our part of our part to help transform this shady industry into an actual profession, ideally a helping profession. And I think that has to start with the comp model.
Dr. Jim Dahle:
Sounds like you've been reading some Jack Bogle lately too. He very much saw that people managing money should basically have this fiduciary, true fiduciary interest in people rather than looking at them as whales to be harpooned as unfortunately many in the financial services industry do. So, I appreciate you sharing that.
Dr. Jim Dahle:
Well, let's get into some questions from listeners. Our first one comes from Tom. Let's take a listen to this.
Tom:
Hi Dr. Dahle. This is Tom from California. I have a question regarding long-term care. I've recently decided to go ahead and self-insure long-term care risk. My question is, would it make sense to set aside a portion of my investment portfolio specifically for long-term care and if so, where to locate that in a tax deferred or tax free versus taxable account?
Tom:
And say I am age 60. If I do not anticipate using it for a certain period of time, hopefully 20 or 30 years, would it make sense to invest those assets in a more aggressive fashion than I am doing for the rest of my retirement portfolio, for instance, at 80% or 90% equities just for that specific part? That's the first question.
Tom:
And the second is how much should one typically set aside if they're going to do a segmentation for per person for long-term care? I've heard anything from three to five years’ worth of expected expenses. Does that make sense or would you recommend a different approach? Thanks so much.
Dr. Jim Dahle:
All right. I think that's a great question. Let's tackle the overarching question here. He has decided he is going to self-insure, which is probably the decision made I think by most of your clientele. If most of them are $2 to $8 million portfolios, I'll bet most of them choose not to buy long-term care insurance. But what do you think? Should it be segmented out or should it just be included in the general nest egg?
Bradley Clark:
Yeah, it's a great question. I will not get into how to determine whether to self-insure because that's outside of the scope of his question. But I think the method that you follow for, that's critically important. What he's describing, if I translate what he's asking into our kind of geeky language, is what he's talking about is creating an explicit buffer asset. Instead of saying, “Okay, well, he’s got the home and he’s got all this money and the Monte Carlo says he's going to be fine.” He wants to take the next step, which is to ring fence off or cordon off a buffer asset.
Bradley Clark:
And I haven't seen this a lot, but we have seen it. I do have some several clients who have done this. It's really a mental accounting exercise that he's doing. And for years I was railing against mental accounting because often you can suboptimize the whole if you lean too heavily into mental accounting. But then I gave up on that and I realized that we all are guilty of mental accounting and it's just part of the human conditions. So, I don't resist mental accounting anymore. What he's trying to do I think is fine.
Bradley Clark:
On the size he mentioned three to five years. I would probably back off of that to two to three years per spouse. Two times two is four, three times two is six. So, something in that four-to-six-year range total for spending.
Bradley Clark:
A nuance here is that sometimes there's scare tactics here around how much it's really going to cost. Remember, if somebody ends up in long-term care, they're probably not traveling to Tuscany and doing some of the things that would've been in the spending plan anyway. So, the net impact on spending is significant but not as significant as you may think. Because some of those other spending goals go away and it's important to do the arithmetic when you think through that.
Bradley Clark:
On the asset allocation side, I agree with him, which is it's a longer time horizon. So, crank up the equity exposure, but there's another reason which there's a very good chance this won't even be used and therefore could flow to an heir, a beneficiary, a charity.
Bradley Clark:
And when you start investing for someone else's time horizon who's younger than you, it just strengthens or extends his own hypothesis. Instead of 20 to 30 years, there's a very decent chance that money is being invested for 40 or 50 years. And so, it has another reason I think to crank up the equity exposure.
Bradley Clark:
The last thing he asked was about asset location. Where should this be done? And I don't think we can generalize that point. I think that has to be client specific. I've got a client with millions in taxable accounts. We just cordoned off their biggest gainers and stuck it in a flex brokerage account. Flex means it's a normal brokerage account, but flex in so much as that money is earmarked either for long-term care and or for their son. It's going to be one or the other or both.
Bradley Clark:
And by coordinating off the highest gainers, as long as the step up in basis at death is preserved, then we kind of liked doing this on the taxable side. But if there's not a lot of taxable dollars there then a pre-tax environment is fine for something like this.
Dr. Jim Dahle:
Yeah. I think the most important point you made is there's a very good chance this money isn't going to be used. And I think you've really got to think about that as you do this. I would argue that that's one of the reasons why you may not want to do this mental accounting at all. You may not use it at all, but there's a very good chance you're not going to use the whole thing. If you look at the average nursing home stay, they're nowhere near that five-year mark.
Bradley Clark:
Right. So, if we built a plan without this, let's say we ran all the Monte Carlo's and we agreed with the client, they can spend $40,000 a year on travel in retirement and they're happy with that. And then the husband or the wife that they say, “Hey, well, what about cordoning off a buffer asset? Okay, we can do it and they can afford it, but then to achieve the same Monte Carlo, if all of a sudden, those dollars are removed, then instead of $40,000 a year on travel, maybe it's $20,000.
Bradley Clark:
There's an opportunity cost here, which says they could be restricting. They're discretionary spend for 30 years unnecessarily. Now I'm sure it makes them feel good. Mental accounting makes you feel good, but I think you need to understand the opportunity cost.
Dr. Jim Dahle:
Yeah. A trip to Tuscany makes you feel good too.
Bradley Clark:
Yeah, yeah.
Dr. Jim Dahle:
All right. Let's take our next question on retirement plans. And this one's I believe a bit of a convoluted question, but this comes from Matt. Let's take a listen to it and see what we can do in a short period of time to help Matt.
Matt:
Hi, Dr. Dahle. This is Matt from the Pacific Northwest. My question is about retirement plans. I'm a W2 employee, but also have 1099 income. And my primary job, my employer contributes to a 401(a) and there is no ability for an employee contribution. We do, however, have a 403(b) and a governmental 457, which I max out. For my 1099 income I've also been putting away 20% in a solo 401(k) as an employer contribution.
Matt:
My question is, do I have an ability to make an employee contribution somewhere in this scenario? Let's say I make approximately $50,000 of 1099 income. Can I put 20% of this? So, $10,000 into the solo 401(k) as an employer contribution, plus an additional $20,500 as an employee contribution in 2022.
Matt:
This would essentially mean a total contribution of $30,500 and decrease my taxable 1099 income from $50,000 down to $19,500. Is this plan legitimate? Do you see any better way to optimize my retirement accounts? I also have a backdoor Roth IRA and an HSA. Thank you again so much for everything.
Dr. Jim Dahle:
Brad, do you want to take a shot at this one to start with?
Bradley Clark:
Sure. I did listen ahead and I have kind of jotted down some notes. I'd like to use because he was using 2022 limits because that was the currency that he was using. For somebody with this many moving parts, I think that the number to start with is the total that can go into these types of plans on the employee and employer side in total.
Bradley Clark:
And the total number in 2022 was $61,000. Okay, so let's start with that. That's employee contributions and employer from all types of plans added up together with one interesting exception, which is the 457. The 457 sits on its own island. And so, there's another $20,500 from 2022 that is available in the 457, but let's just put that to the side for a moment before we add it back in.
Bradley Clark:
Within the 457, this gentleman can do $20,500 as an employee and then the balance $40,500 from the employer. So, that's pretty simple. He mentions lots of different employer things like the 401(a). There may or may not be a match in the 403(b). He as a solo 401(k) owner gets to do an employer contribution. So, you can add up all these employer contributions.
Bradley Clark:
The totality of the employer contribution across all non 457 sources is the $20,500. So as long as you honor the $20,500 and honor the $61,000, you should be fine. Where the 457 comes in is since it's on its own island, you get to do that as well. So, my understanding is he could do up to $61,000 plus another $20,500 of the 457 money. That's the summary.
Bradley Clark:
And what he's saying is right, which is the most he can do on the employer side of the solo 401(k) is approximately 20% of the 1099 gross income. So, he was saying $50,000. 20% of that is $10,000 and that's one of the employer sources. Matches count. All these employer sources count as against the $61,000.
Dr. Jim Dahle:
Yeah. There are basically two rules to keep in mind here. The one is your limited $20,500 or $22,500 for 2023 for employee contributions. No matter how many employers you have, no matter how many 401(k)s you have, you get that employee contribution and that's it if you're under 50. Obviously, you get a catch-up if you're 50 plus.
Dr. Jim Dahle:
But for the total that can go into the plan, that amount, that $61,000 amount in 2022 and $66,000 amount in 2023 is not per everybody, it's per employer. So, at the academic job you got a 401(a) and a 403(b) and you're going to be able to put $20,500 in that 403(b) as your employee contribution. Maybe there's a match, maybe there's not.
Dr. Jim Dahle:
Some amount is going to go into the 401(a). That amount total between those two is going to be less than $61,000. And because you used your employee contribution up at your day job at the academic place, you're not going to be able to use it again in the solo 401(k).
Dr. Jim Dahle:
And because you only made $50,000, you're only going to be able to put about $10,000 in there as a tax deferred contribution. And the only work around I know of for that is to make after tax contributions. If you set up your solo 401(k) such that it is allowed to take after tax contributions, you could contribute most of the rest of the $40,000 as an after-tax contribution and potentially do a mega backdoor Roth IRA contribution on that.
Dr. Jim Dahle:
If your goal is really to get as much as you possibly can into retirement plans, that is an option. But I would say what most people do is they max out whatever's available at the university hospital and they put their $10,000 as tax deferred money into the solo 401(k) and they spend the rest on a home renovation or use it for their backdoor Roth, that sort of a thing.
Bradley Clark:
Right. Or into HSAs and 529s. What's interesting here is to me this is an order of operations problem. So, if you have $100,000 that you can put aside every year, let's say, and it's in a pitcher full of water represents the $100,000. And you line up all the potential cups, like how much do you pour in each cup in what order as to fully optimize what we sometimes call the savings waterfall. Putting those $100,000 to their highest and best use by being smart about how much to fill up each of those cups.
Bradley Clark:
And I do want to repeat, everything you said is right. You did a good job simplifying it, but the 457 is an asterisk on everything that you said. It exists on its own island. So, there's double dipping that you can do with the 457.
Dr. Jim Dahle:
Absolutely, absolutely. I agree with that. Totally separate limit for 457 s. Likewise, a totally separate limit for your IRAs. Just because you use the Roth 403(b) account doesn't mean you can't also get money into a Roth IRA. Whether you can contribute directly or whether you can do it through the backdoor.
Dr. Jim Dahle:
And what a lot of people run into is when you have all these accounts available to you, you may not be saving enough to max them all out. So, you have to choose the best ones to contribute to. Whereas other people are saving so much money that they not only go through all of the accounts, fill them all, but also end up investing a bunch of money into taxable accounts each year. It's just a ratio of how much retirement space you have available to what you're actually saving. And that's going to be different for everybody.
Bradley Clark:
That's right. But even some of those dollars flying into taxable environments, maybe they should be flying into super funding a 529 plan. Instead of being trapped in the $500 or $1,000 of savings per month, keep shoving all those taxable dollars into the 529 environments to Superfund and top those things off for kids, grandkids or what have you. And only once you've done that, then start to save in a taxable environment.
Dr. Jim Dahle:
Yeah. Especially with the new option out with Secure 2.0, where there's going to be the potential to roll over leftover 529 money up to $35,000 into Roth IRAs for the beneficiary. So that's a potential additional use for overfunded 529s.
Dr. Jim Dahle:
All right, let's get to our last question here. This one is about taxable accounts. Speak of the devil. This one's from Steven. Let's take a listen to it.
Steven:
Hey Jim, it's Steven from the Southeast. I have a question about taxable accounts. I had to liquidate mine this past year, but I'm about to restart it. My plan is to use index funds and try to simplify it as much as possible, but do you think we should for dividends or have those automatically reinvested or should I reinvest those myself?
Steven:
For the sake of tax loss harvesting, I just wanted to try to simplify this as much as possible. So, any recommendations about how to kind of go about setting up a simplified brokerage taxable account would be greatly appreciated for tax purposes and just for ease of the whole portfolio. Thanks so much. Hope you have a great day and a good holiday season.
Dr. Jim Dahle:
All right, great question, Steven. Reinvest dividends and taxable or not, Brad? What's your opinion? What's your recommendation?
Bradley Clark:
In our firm, we actually like to pay dividends to cash and then rebalance the cash back into the portfolios. And the rationale is pretty simple. It makes it easier to keep portfolios balanced within tolerance bans if you can choose what to buy into. With everything reinvested, you can't use the dividend season or the dividend payouts as an opportunity to keep the portfolio balanced. So, that's our preference.
Bradley Clark:
Now, what the gentleman said though is he referred to simple several times. And in life, everything is a trade-off and there's so many trade-offs in what he's asking. I won't take too much time on this, but one dimension he's asking about is tax loss harvesting. Well, if that really is valuable to you, you don't want to own one or two ETFs, you want to own eight or 10 or 15 ETFs. There's some level of granularity where there's more opportunity to do tax loss harvesting. But if he really wanted simple, he could have one target date fund or two ETFs, but there'd be less tax loss harvesting opportunity, hence a trade-off.
Bradley Clark:
Dividend reinvestment, not reinvestment. Another trade-off of simplicity versus keeping a portfolio balance. Because who's going to go in there? If he's doing this himself, is he going to go in and do the analysis and rebuy in proportion once a month or twice a month? Or is he simply going to check the box on dividend reinvestment and rebalance annually?
Bradley Clark:
There's another part of this that he talks about whether he mentioned or not that I was thinking of, which is householding. Does he manage this all in equities because it's taxable? Does he want to practice asset location? The question was about taxable, but if he wants to practice asset location, he's got to decide what to put in the taxable account, knowing the balance and components of the pre-tax account. Not simple, but he can squeeze extra blood from the stone.
Bradley Clark:
So, the fact that he kept saying simple over and over and over again says to me he's willing to make some of these trade-offs that give him less granularity, maybe less rebalancing juice, less householding, all under the mantra of simplicity. There's a quote that I like and it's attributed to Einstein. I'm not sure if you really said it, which is “You should make things as simple as possible, but no simpler.” And where you set that dial is going to be different for different types of investors.
Dr. Jim Dahle:
Yeah, very well said. Personally, I'm not a big fan of reinvesting dividends in taxable. I reinvest them in all my other accounts in my 401(k)s and Roth IRAs and HSAs. It's all reinvested for simplicity's sake. But in the taxable account, I don't for the same reason you mentioned. You can rebalance with that money. I reinvest it manually once a month with all my earned income from that month that's going into investments. And the other benefit, of course, is you don't end up with all these little tiny tax lots that you start worrying about wash sales about when you are tax loss harvesting.
Dr. Jim Dahle:
I think in general it's pretty good practice not to reinvest dividends in a taxable account. But you're absolutely right about the trade-off, about simplicity. Like I tell a lot of people, automating all your investments does not play well with tax loss harvesting. You kind of have to choose one or the other. And it just comes down to what's your time worth? Are you an optimizer or a satisfier? And you've got to make those sorts of decisions.
Bradley Clark:
I agree.
Dr. Jim Dahle:
All right. Well, for those who are interested in learning more about Mr. Clark, bradleyclark.com is where you can learn about Clark Asset Management. He'd be more than willing to sit down and talk with you about whether his firm may be right for you.
Dr. Jim Dahle:
As he mentioned, it is a flat $9,500. So, for those of you with a decent size portfolio, that is a heck of a deal. If you've been out there paying 1% AUM on a $5 million portfolio, you're about to cut your investment costs or your advisory costs by 80%, which is a heck of a deal.
Dr. Jim Dahle:
But you've got a couple other things you wanted to mention to people that they could learn more about you with and learn more about investing at the same time. You want to tell us about the videos as well as the book you've got coming out?
Bradley Clark:
Oh, yeah. Thanks so much. A lot of folks that schedule a call with me will watch a short video class first. It's only an hour of content, 12 five-minute videos. I do a pretty good job in there of keeping things approachable and educational. It doesn't take much time to get through, and almost everybody who books with me mentions the videos. They're totally free. You can consume them on the website, no problem.
Bradley Clark:
I also have a book coming out in Q1 of this year, 2023. The book name is “Be The Bird”, which I admit is not very explicit about what it's about, but it's a book about retirement income planning, but also confidence and psychology. And there's some stories from my life and lessons learned.
Bradley Clark:
And so, I'm proud of the book. It's coming out this quarter. It will be available on Amazon. We also have an offer, and I can give the URL. The offer is if you think you may be a fit with us and if you are interested in speaking with me, when you book a free consult, we will send you a hard copy of the book, free, no credit card, no shipping costs, none of that nonsense.
Bradley Clark:
And to go to that page, it's just bradleyclark.com/podcastoffer. And then you would just book a call if you think that you're interested and enter in your name and address and we'll ship that to you. And that's it. Thank you for giving me the opportunity to mention both of those, Jim.
Dr. Jim Dahle:
You're welcome. And we'll have links to all of that in the show notes, both the Clark Asset Management as well as to the book if people just want to buy it on Amazon and to the introductory videos. So, thank you so much for partnering with the White Coat Investor, and thank you so much for helping us to answer listener questions today.
Bradley Clark:
Of course. It was fun. Thank you.
Dr. Jim Dahle:
All right, let me get to a few more reader questions that have come in in my email box. This one's about tax loss harvesting. “I have a good spreadsheet for several factors to avoid wash sales, avoid unqualified dividends and donate only shares held over a year. Unfortunately, I've learned through mistakes the importance of each.
Dr. Jim Dahle:
I think I just discovered the biggest problem of all though, missing a dividend completely is worse than just having a dividend be unqualified. The dividend date for Vanguard total stock market fund is December 22nd. The dividend date for Vanguard 500 index fund is December 20th.
Dr. Jim Dahle:
So, I tax loss harvested a large amount from total stock to 500 index on December 21st. A few days later, I'm wondering why I didn't get a dividend. So, I looked up their dates. I think I sold right before the dividend for total stock market and about right after the 500 dividend. Please tell me I'm wrong. If this is another hard lesson for me to learn, I'd like to at least avoid doing it again.”
Dr. Jim Dahle:
Well, I had good news for this White Coat Investor. This shouldn't be an issue. It doesn't make any sense for this to be an issue. And the good news is it's not an issue. In fact, this particular investor probably came out ahead fortuitously for what he's done.
Dr. Jim Dahle:
And the reason why is what happens with an equity mutual fund, a stock mutual fund on the X dividend date? Basically, let's say it's $100 a share and it's going to pay a $3 a share dividend. So, on the X dividend date, the $100 per share goes to $97 per share and a $3 dividend, and they send you the $3 dividend, or you reinvest the $3 dividend either way. That's how it works.
Dr. Jim Dahle:
And so, you're not hosed if you sold before the X dividend date because you sold at $100 a share and then invested into another mutual fund. There's no loss of money here. Instead of having to pay taxes on a dividend you didn't really want anyway, in this case, this investor avoided getting a dividend at all that year just because he took advantage by doing his tax loss harvesting between the X dividend dates for the two funds. I wouldn't try to time this and try to be extra tax efficient by doing this every year or anything, but you weren't hurt and you actually pulled a fast one on Uncle Sam this year. So, congratulations. You did not make a mistake. So that's good.
Dr. Jim Dahle:
All right, let's take some questions off the Speak Pipe. This first one, and I believe the next one are both about tax loss harvesting.
Speaker:
Hi, Dr. Dahle. Thank you for everything that you do. I have a tax loss harvesting question. Currently I have approximately $400,000 in a taxable brokerage account at Betterment. I am looking to move this investment into a simple single index fund, which is in line with my financial plan.
Speaker:
This account lists approximately $138,000 in gains, including appreciation and dividends. All of these gains are long-term gains as I have made no contributions over the last two years. This account lists my tax loss harvesting as $45,000.
Speaker:
If I were to sell all the holdings, would I pay capital gains on $138,000 or would the capital gains be $93,000, which is equal to $138,000 minus to $45,000 of tax loss harvesting that Betterment is reporting? My other question is, how do I actually report the tax loss harvesting on my tax return on the year that I sell my holdings? Thanks again.
Dr. Jim Dahle:
Okay. The answer to your question is $93,000. If you decide you want to liquidate everything at Betterment and reinvest into something else, that's going to cost you the taxes on $93,000 in gains. All the losses that you've accumulated will be applied to the gains and whatever's left you have to pay taxes on.
Dr. Jim Dahle:
Now, keep in mind that it sounds like you accumulated these losses, and when I say you, Betterment did it on your behalf in 2022. And so, those get reported on your 2022 taxes. It goes on Schedule D of your 1040, and you can use up to $3,000 of those capital losses against your ordinary income every year. And the remainder gets carried forward indefinitely until you can use them. It's an unlimited amount against your capital gains, but it's only $3,000 a year against ordinary income.
Dr. Jim Dahle:
If you had $45,000, you used $3,000 in 2022, you've still got $42,000 you're carrying forward. So, if you have $138,000 in gains, you subtract that $42,000 from that and you'd pay taxes on the rest.
Dr. Jim Dahle:
But what I would submit is you may not want to do this. You might not have to realize all of those gains. I would look at the holdings that you have in this Betterment account. And if I were leaving a brokerage, I would roll everything over in-kind to whatever brokerage you're going to, whether you're going to Schwab or Fidelity or Vanguard or whatever. See if you can roll everything over in-kind, and then you can look at the basis on each of those holdings. Anything that's losing that's underwater or is about the same as what you paid for it, you can sell those at no tax consequences.
Dr. Jim Dahle:
At the things that you have gains on, you may want to keep them. If you're talking about taking everything out of 10 funds at Betterment and investing it all into a total stock market index fund, well, chances are, Betterment, it's not like it's a bad place to invest. They use index funds, they use total stock market index funds. You may want to just hold onto whatever one you rolled over.
Dr. Jim Dahle:
If you transfer to in-kind, just hold onto that, don't sell it. You don't want to sell it and then buy it back anyway and pay capital gains you don't have to pay. I would look into doing that, see if you can do that as you move the money out of Betterment, and maybe you can cut that tax bill down way down. Maybe it'll just be a few thousand dollars that you actually have to pay taxes on to get everything invested the way you want to get it invested, where you want to get it invested.
Dr. Jim Dahle:
So, you got to be careful when you start selling stuff in taxable accounts. You can sell willy-nilly all the time and HSAs and 401(k)s and IRAs, but when you're in a taxable account, there are consequences. And so, you want to be careful how you sell things, especially if it's got a significant gain.
Dr. Jim Dahle:
All right, another tax loss harvesting question from Goku. Let's listen to this.
Goku:
Hi Dr. Dahle. Thank you very much for sharing all your knowledge and experience with us. I have another question regarding tax loss harvesting. I remember you mentioning that you have more than $3,000 accumulated from tax loss harvesting to save up one day if you were to sell your White Coat Investor company or any large capital gains in the future.
Goku:
My question is, are we able to utilize more than $3,000 in tax loss harvesting in a given year? Let's say if I were to sell my home, and have a large capital gain. Thank you for helping me understand this better.
Dr. Jim Dahle:
Okay. As I mentioned before, you can use $3,000 of capital losses against ordinary income each year. That's the only limitation. You are unlimited in how many capital losses you can use against, or how much in capital losses you can use against capital gains. There's lots of reasons why you might want to have lots of capital losses.
Dr. Jim Dahle:
In retirement, let's say you want to start selling stuff and spending money that you've been saving for years and years. Well, what do you sell first when you come to your taxable account? You sell the stuff with high basis. So, you might be able to get $100,000 that you can spend and only have $10,000 of that be gained, and you only pay taxes on $10,000, but you've got $100,000 to spend. So, you might only have to pay $1,500 in taxes to get that $100,000 out of the account.
Dr. Jim Dahle:
And so, if you're only spending a little bit of your capital losses each year to offset a gain like that, they're going to last a long time. If you've got $100,000 or $200,000 in capital losses that you've accumulated over the years, that can cover a lot of retirement spending if it's high basis shares that you're selling.
Dr. Jim Dahle:
But you can also use it in the event you sold something. Say you sold your house. You're like lots of White Coat Investors who live in high cost of living areas. You might have a $1.5 million house. The rule right now is if you're single and you sell a house, $250,000 of gains can be excluded from your income. If you're married, it's $500,000. Why those haven't been indexed to inflation I have no idea but that's the way the law is.
Dr. Jim Dahle:
So, if you bought it for $1.5 million and you're selling it for $3 million, 20 years later and you're married, you can exclude half a million dollars and you're going to pay capital gains taxes on the other million dollars. A lot of people don't think about this, don't realize this. Where are you going to come up with a cash to pay capital gains taxes on that? If you turn around and use that to buy another $3 million house, you got to have all the money to pay those capital gains $200,000 – $250,000 to pay those capital gains when you swap houses. So, it's a big deal. It keeps people from selling if they know what they're doing. But I suspect a lot of people just wander into it and all of a sudden they've got this huge capital gain they've got to pay.
Dr. Jim Dahle:
But if you've saved up hundreds of thousands of dollars of capital losses, you can use it to offset gains like that. Another reason why you should keep track of any big home renovations you do, because if you're putting a bunch of money into your house, keep those receipts, keep those amounts because it adds to your basis.
Dr. Jim Dahle:
If you bought a house for half a million, you put a half million into it and you sold it for $1.5 million, you're married, you don't actually owe any taxes on those gains because half a million is what you paid for it, half a million is addition to basis from the renovation, half a million is the amount excluded from your income due to that exception for your personal residence. And so, that's a pretty good trick too.
Dr. Jim Dahle:
If you have some side business, you own yourself a White Coat Investor or you own a dry cleaning business. Let's say you have a $2 million dry cleaning business and you sell that. Well, that's a big old capital gain. But if you have a few hundred thousand dollars in your taxable account, a few hundred thousand dollars of tax losses that you've accumulated over the years, well, that can offset that $2 million gain. And so, you pay less taxes on that.
Dr. Jim Dahle:
And so, there's lots of uses to having tax losses for those of us with taxable accounts. I do recommend you continue to tax loss harvest when you have opportunities. It's not like you got to go out of your way to get these losses that it's such a huge deal to try to find them. When there's a bear market, look at all the stuff you bought in the last year or two, tax loss harvest it and grab some capital losses. You don't need to be doing this hour by hour like Betterment might be doing it. You can just check when the market goes down significantly of all the stuff you bought recently, see what has a loss and harvest it. I hope that answers your question.
Dr. Jim Dahle:
All right. Our time is starting to get short here but I wanted to make sure I thanked you for what you do. It is not easy work. Maybe you're on your way home from a difficult shift or a difficult patient interaction or conversation. Maybe somebody died on you today. I don't know what happened today. But if you had a bad day, even if you had a good day, thanks for what you're doing.
Dr. Jim Dahle:
We do cool stuff in medicine. Those of you in law do cool stuff in law. You're doing important work. That's why you get paid so well because it takes a lot of expertise and knowledge and years of training and experience to do it. And many of us are people pleasers. We're working for the thank yous. And so, if nobody said thanks to you today, let me be the first.
Dr. Jim Dahle:
Maybe you're curious about locum tenens and how it might fit into your career story. But do you know all the different reasons physicians choose loc*ms and how it works for them? At loc*mstory.com, you can hear firsthand stories as diverse as physicians themselves. There's not one solution for everyone. The variety of opportunities might surprise you.
Dr. Jim Dahle:
Loc*mstory is an unbiased educational resource as tools that let you explore trends in your specialty and compare different loc*ms agencies. There's even a simple quiz to see if loc*ms is right for you. Do your own research at loc*mstory.com. It's easy.
Dr. Jim Dahle:
Make sure if you need some help with your taxes this year that you check out our resources. We keep a list of tax strategists. whitecoatinvestor.com under the recommended tab. They can help you prepare your taxes as well but what most of them do is specialize in helping you get your tax bill down and suggesting strategies to help you to do that. So, check that out at whitecoatinvestor.com.
Dr. Jim Dahle:
While I'm telling you thank you, I want to tell you thanks for telling your friends about the podcast and those of you who've left five-star reviews. Both of these things help us to grow the podcast. The podcast averaged last year… Well, the year before averaged 35,000 downloads per episode. This last year it averaged about 45,000 downloads per episode. And with your help, maybe we can get to 55,000 downloads per episode in 2023.
Dr. Jim Dahle:
When you tell friends about it, you not only help us and help the podcast, but you're helping them. Hopefully you find value in this podcast and the material we discuss here and the experiences and inspiration you find here. And I hope that that's worth sharing. It's worth listening to it, it's worth sharing. So, thanks for telling other people about it.
Dr. Jim Dahle:
You can also tell people that you don't know about it and that's where the reviews come in. And I'm probably not supposed to ask for five-star reviews, but I do thank those of you who leave us five-star reviews.
Dr. Jim Dahle:
Our most recent one came from someone I presume is an interventional cardiologist who goes by HeartAttackDoc who titled it St Jim and said “If St Jack spread the word among long term investors, St Jim brings the message to Physicians. Seriously, this is one of the podcasts that have changed my perspective on life and medicine in so many ways. Answers to questions I should have been asking years ago as well as pure entertainment with questions like when can you buy a Ferrari!” Maybe if you're an interventional cardiologist with your ducks in a row, you can afford a Ferrari. They're not that expensive.
Dr. Jim Dahle:
“Jim is a saint when you consider he could be using the time to max his investment in so many ways he outlines but he is true to the mission he states in every podcast – To stop physicians doing dumb things with their money. Thank you for everything that you do for us.” Five stars.
Dr. Jim Dahle:
Thanks for the kind review. We do appreciate it. We feel more dedicated to our mission after year that we do this. I was dedicated when I started. The first three years we really didn't make any money at all at the White Coat Investor, but I'm even more dedicated to it today than I am then.
Dr. Jim Dahle:
So, I hope that this is beneficial to you. I hope it is helpful to you. I want you to be successful not just in your finances and in your career, but in your life. And I hope this podcast in some small way can help you to do that.
Dr. Jim Dahle:
Keep your head up, your shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor podcast.
Disclaimer:
The hosts of the White Coat Investor podcast 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.
