Roth, Mega Backdoor Roth, Solo 401(k)s, and IRAs

INTRODUCTION

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We’ve been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.

Dr. Jim Dahle:
This is White Coat Investor podcast.

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

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

Welcome back to the podcast. Today’s a really special day here at WCI. This is what we call the swag bag deadline today. And what am I talking about swag bags? I’m talking about WCICON, the Physician Wellness and Financial Literacy Conference. Part of this conference for the whole time we’ve been running, ever since 2018 in Park City, we tried to give out these sweet swag bags. We give books in them, financial books and cool swag and stuff that you actually take home, not just a bunch of garbage.

And so, the swag bag actually has some real value at WCICON, but it takes a little bit of time to order all the books and put it all together. If you want to get a swag bag, when you come to WCICON, you actually have to register by today. The day this podcast is dropping, December 12th is the swag bag deadline.

Now, obviously that’s a relatively small part of the conference. It’s still worth registering early so you can get it, but it’s a small part of the conference. Even if you’re listening to this after the 12th, it’s still worth coming to WCICON.

The fun thing about this conference for me is getting to meet you. I like meeting you and talking to you about your challenges, your successes. For many of us, there’s no one else in our financial life we can talk about money with. And you can actually openly discuss it. Money and investing and estate planning and asset protection with people at this conference. It’s normal to just have these random financial conversations and volunteer all this information about yourself to someone you just met and you’re eating lunch with at WCICON. These are your people that you can be comfortable with. And so that’s one of the coolest parts about the conference.

Now, obviously it’s a conference. It’s got a bunch of content. The content’s great. We’ve got top notch speakers. We always have a mix of people that have spoken before and people that have never spoken at the conference. And so, there’s always new stuff. There is always great stuff, both on wellness and on personal finance and investing.

When I first started the conference, I thought, “Well, we’ll throw the wellness stuff in so we can get some CME credit for this. And so people can use their CME funds to come.” I had no idea how important that was going to be to people, especially over the coming years, over the last six or seven years since 2018. Burnout rates in medicine in particular have gone through the roof. And the wellness part is actually really important now and probably even more popular at the conference than the finance stuff.

And so, we’ve got top notch wellness folks. We’ve got top notch finance folks. It’s just really great stuff, but it’s a lot of fun too. We knock off all this serious crap at about 4 o’clock. And then we go have fun. It’s a wellness conference. You’re supposed to go home more well than when you left for the conference. And so, we go do lots of cool stuff. Golf and pickleball and whatever, all these activities we have planned. We usually even have a 5k one morning. There’s wine tastings and there’s all these sponsored events and stuff. And so, the evening is making friends, networking, and just relaxing, relaxing. And that’s what doctors need to do a lot of times is just relax a little bit.

So, come to WCICON. You can learn from those that are ahead of you. You can collaborate with those that are in a similar stage, and you can pay it forward by sharing your knowledge with those who are just starting out. The White Coat Investor community members are your people. Come meet some more of them in person rather than online. You can sign up at wcievents.com. And if you sign up today, you get the swag bag. You still come even if you don’t get the swag bag, of course. But hey today’s the day. Sign up.

Did I mention it’s in San Antonio, by the way? It’s going to be sunny and warmer than wherever you’re living, most likely. I guess some people might be coming from Puerto Rico or something. But for most of you, it’s a nice break in the middle of the winter. It’s February 26th through March 1st in San Antonio. Sign up again, wcievents.com.

MEGA BACKDOOR ROTH PROBLEMS WITH PAYROLL PROVIDERS

Okay, let’s get into some of your questions. Let’s talk about Mega Backdoor Roth. That’s what Keith wants to talk about.

Keith:
Hello, Dr. Dahle. I’m Keith from California. Thank you for all you do. I have a question about the Mega Backdoor Roth 401(k). My employer is a small business of around 20 employees. My issue is that while my boss was able to negotiate and implement a Mega Backdoor Roth 401(k) with our 401(k) administrator, this wasn’t well communicated to the decision makers that selected our new payroll provider.

I’ve had multiple conversations with this provider. And while they’re happy to support the processing of pre or post-tax withholding, they won’t do it over the traditional $23,000 limit. Thus, I’m kind of stuck. Have you heard of any payroll providers refusing to do this sort of account or withholding? I have to imagine there are others in the business that do support it, but I’m not sure where to start. Thank you again.

Dr. Jim Dahle:
Wow, what a dilemma. I’ve not heard of anybody having this problem before. Obviously, you can get a new payroll provider that can do this. My payroll provider, who happens to be not our payroll provider, our payroll provider supports it just fine. But the person who actually makes these transfers is our COO here at WCI. Our business is about the same size as yours, it sounds like. There’s 18 of us working here. And we’re very deliberate about setting up our 401(k), so this was an option. I think Katie and I are the only ones using it, is my recollection. Everybody else wanted to do something else, which is fine. But the Mega Backdoor Roth is a great option.

For those who have no idea what we’re talking about, we’re talking about making after-tax employee contributions to a 401(k). This is not Roth contributions. This is not tax-deferred contributions. They are a third type of contributions called after-tax employee contributions. If the plan allows you to contribute those to it, you can do so.

Typically, a plan that will allow that will also allow you to do an in-plan Roth conversion of those dollars. That’s the Mega Backdoor Roth IRA. You put maybe $40,000 in there as an after-tax employee contribution, and then you convert it the next day to a Roth 401(k) or 403(b), whatever. It’s like you made a big, huge Roth contribution in the end, kind of like the Backdoor Roth IRA process. It’s the Mega Backdoor Roth IRA process. It doesn’t happen in an IRA. It happens in a 401(k).

Keith, I bet you’ve got a workaround though. Talk to the 401(k) plan provider. I bet you can just send them a check. I bet you can just send them a check. Now, you’re going to pay payroll taxes on that money either way, so it’s not like it has to come out of payroll to somehow save you those like an HSA contribution. But you can just send them a check. That’s all I do for my partnership plan. When I send them my money at the beginning of the year, my $23,000 in 2024 contribution, I just wrote a check for $23,000 and sent it to them at the beginning of the year. They deposit it, and it’s in the account. You can do the same thing with after-tax employee contributions.

First thing you ought to try is just skip the payroll person and see if you can just send the money into the 401(k). I bet you can, and that’ll be a great workaround. If that’s not the case, you got to keep kicking the door on these guys. This is ridiculous for the plan to support it, but payroll not to support it. Talk with the boss. It’s not a big company. There’s only 20 of you. If they can’t make them start doing it, then maybe start talking about a new company. But boy, I guess it’s possible. If they’re not willing to change that, and your 401(k) won’t take your check, which seems crazy to me, maybe you’re stuck not being able to use it, and you’re just like everybody else that doesn’t have this option in their 401(k).

QUOTE OF THE DAY

Our quote of the day today comes from Eckhart Tolle, who said, “Acknowledging the good that you already have in your life is the foundation for all abundance.” There’s a lot of truth to the mindset school of thought. Whether you think you’re rich or think you’re not, you’re right. There’s some truth to that.

All right. Let’s do another Mega Backdoor Roth issue here. This one’s from Ben.

HOW TO CONVINCE YOUR EMPLOYER TO OFFER A 401(K) PLAN THAT ALLOWS MEGA BACKDOOR ROTH

Ben:

Hi, Dr. Dahle. How should I go about convincing my employer to offer a Mega Backdoor Roth 401(k) plan? Currently, we have a safe harbor 401(k) with a 4% match. Is there groundwork I can do first to verify that we can add after-tax contributions while keeping the 401(k) plan compliant? Thanks for all that you do.

Dr. Jim Dahle:

Okay. Now, this is a much bigger issue than the last one when it comes to the Mega Backdoor Roth IRA, that your employer just doesn’t want to put it in place. They might be right to stop you. This is an issue for the employer. This isn’t just totally free to them. The reason why is that 401(k)s have to pass non-discrimination testing.

What does that mean? That means that they can’t just give all their benefits to the owners and the highly compensated employees of the business. They’ve got to spread it out with all the employees of the business. Otherwise, the IRS says, no, we’re not going to let you have this great tax benefit, this great asset protection benefit just for the owners. That’s not the way it works.

There are actually two different non-discrimination tests, one of which is applied to the regular contributions, the other of which is applied specifically to these after-tax employee contributions. The plan’s got to pass them. If not enough people are saving a bunch of money in this plan, it’s entirely possible that you making these after-tax employee contributions is going to hose the employer, that they are going to have to make penalty payments for all the employees in the company because they gave you too many benefits in this plan. Even though they didn’t give you anything, they just let you contribute your own money to it. It still counts against them.

They may end up, there’s 50 people working at this company, and you’re the only one using this make a backdoor Roth IRA option. It’s possible they got to turn around and put $1,000 each into those other 49 people’s employee accounts. It’s a legitimate concern for the employer, and that might be why your employer does not want to offer it.

Now, a lot of times, the other people that are going to benefit from this is the owner of the company. Talk to them about it because if they want to save more money too, this might work out very well for them. Bear in mind, they might run the numbers. They might talk to the 401(k) provider and decide, even though it really doesn’t cost a lot more to implement this feature, they might decide not to do it just because of the non-discrimination testing issue. That’s the reason why lots of people don’t have these in their plans. Even if the employer knows about it and knows it could be added, and the 401(k) provider is willing to add it to the plan, they may decide not to just because it costs too much.

Now, here at WCI, we tried to put the world’s best 401(k) in place, and we have to go through non-discrimination testing every year. And guess what? We fail it every year because too many benefits are going to the owners of the company and the highly compensated employees of the company.

And so, what do we have to do? We have to pay the penalty. What’s the penalty? Money into our employees’ retirement accounts. Does that bother us here at WCI? It does not. But I get that it bothers lots of employers out there. Most of the time, when somebody that owns a dental practice or a medical practice or whatever goes to get a 401(k) in place, they’re not thinking about their employees. Their employees might not even care that much about saving for retirement, and they end up having to pay all these penalties that are even more than the benefits they’re getting from investing in a 401(k) anyway.

I get it. Sometimes the right answer for those folks is just to invest in taxable, and that’s okay. You can save for retirement primarily in taxable accounts. Our largest investing accounts are taxable accounts. It’s okay. You don’t have to save for retirement in the retirement account. There are other places you can save for retirement, primarily non-qualified, brokerage, taxable, whatever you want to call it, account at Schwab or Fidelity or Vanguard or whatever. I hope that gives you some insight into why you may not have this at your business. Some things to keep in mind as you talk to your employer to try to talk them into offering it.

I’m on the 401(k) committee at my physician partnership. Right now, it’s like 400 docs over two states. It’s a big partnership now, even though my division of it is still a relatively small democratic group. But I talked to them about this. In the end, we decided I might be the only person in that group of 400 docs that would actually make those contributions. There just were not that many people out there interested in it. And we can see how much people are contributing to their 401(k)s.

It’s sobering sometimes to realize that there are lots of docs out there that are not even saving $23,000 a year, much less $69,000 a year in their 401(k). We also have a pretty generous defined benefit cash balance plan available in our partnership. And I think fewer than 10 docs put their maximum contribution to it every year out of those hundreds and hundreds of docs.

Most docs are not saving that much money. So you got to recognize, Ben, that you’re actually pretty rare among your peers to be looking for these ways to get more money saved for retirement in a tax advantaged way. Most people are not doing this. We’re trying to spread the word here at WCI, but it takes time to get it out there, number one. And number two, sometimes people just have other priorities.

Okay, let’s talk now about an issue Dan is having, not with a Mega Backdoor Roth IRA, but with a regular backdoor Roth IRA. The one you do in an IRA, not a 401(k). So let’s listen to what Dan’s issue is.

WHEN YOUR FUNDS GET HELD ON YOUR ROTH CONVERSION

Dan:
Good morning, Jim. Thank you for doing what you do, and hopefully you’re feeling better. I had a question about our backdoor Roth conversion. Normally we do this every year. It’s not a big deal. It’s pretty easy and straightforward. But we recently moved to Fidelity. I’m not sure if that’s the issue, but we tried to do the conversion.

I’m in the process of transferring the money from the traditional IRA to the Roth IRA, but it wouldn’t let me do it. And it basically said the funds are on hold for another three weeks. I logged on and chatted with one of the representatives, and they basically said this is due to, and I quote, “High volume of fraudulent activity.” We’ve been forced to take drastic measures on certain transactions. Hold days are a security precaution that protect people in response to an industry trend of increased fraud, etc, etc.

My question is specifically the $7,000 that I put in the traditional IRA is going to now accrue some interest, and I wasn’t entirely sure how to handle that when I fill out 8606. Do I transfer only $7,000 to the Roth, or do I do the $7,000 and a couple bucks to the Roth? And then I just wasn’t sure what to do about that. Thank you.

Dr. Jim Dahle:
Okay, Dan, good question. People run into this all the time. I’ve had to deal with this at Vanguard from time to time. I don’t think I’ve ever had a three-week hold, but I’ve had a one-week hold before. Sometimes they tell you it’s a week or maybe three weeks, and then it’s only four days. That does happen.

Financial institutions have to worry about fraud. There’s always people trying to scam them for money, and so they try to put things in place that keep that from happening, banks, brokerage firms, whatever. One way you can minimize this happening when you do your backdoor Roth IRA process is have the money already there. Have the money already at Vanguard or Fidelity or Schwab or whatever.

Now they’re not having to worry that you’re transferring it in from a bank, and you’re like, “Oh, is this real money? Is this not real money?” If it’s already at Vanguard, if it’s already sitting there in your money market account, they’re going to be much less likely to feel like it’s fraudulent. That’s the first thing to do. If this super annoys you, then do that.

It shouldn’t annoy you that much though. This isn’t that big a deal. Ideally, you could do your backdoor Roth IRA all in 10 minutes. For most of us, we got to log in twice to do it. If we’re lucky, it’s only twice. You put your money in your traditional IRA, you wait a day, you go back, you convert it to a Roth IRA. Not a huge deal. I would say more often than not, I can’t do it the next day. I’ve got to wait a few more days to do it, for whatever reason, because of the brokerage. And that’s fine. It’s not the end of the world.

What happens? Well, when you put it in the traditional IRA, hopefully you just left it in cash. It’s in a money market account or a sweep account of some kind. It’s not going down in value because that really makes a mess on your 8606, but it’ll go up a little bit.

When interest rates were Zippo, it used to be that people would make a few pennies, and they’d send me an email and say, “What do I do about this 8 cents in my traditional IRA now?” I actually wrote a blog post a decade ago or whatever, called Pennies in the Backdoor Roth IRA. You can go to whitecoatinvestor.com and Google this or search this on the search bar on the upper right, and Pennies in the Backdoor Roth IRA will come up. You can probably just put that in your browser and it’ll come to our blog post on it. There’s, I don’t know, a thousand questions from people in comments on this post asking how they deal with their 8 cents or their $1.20 or their $29 now that interest rates are higher that their traditional IRA made in between the time of contribution and the time of conversion to a Roth IRA.

Here’s the easiest way to deal with this. Convert it all. Empty out that traditional IRA, and you might have to actually make two conversions. You might have to make one of $7,016. Then you may have to go back a month later and do another one for $1.20, but empty it out is the easiest way to deal with it. Then for sure, when you got to answer line six on form 8606, the answer is zero money was in your traditional IRA at the end of the year on December 31st of that year. That eliminates any pro rata issue with the conversion step of the backdoor Roth IRA. Just convert it all.

Yes, that money your money made while it sat in the traditional IRA is going to be taxable. You’ll owe taxes on 8 cents, which rounds to zero, or $1.75, which rounds to $2, or $29, which is $29 you got to pay tax on. That’s okay. It’s no big deal. So what? You got to pay $6 in tax. Who cares? But that cleans it up nicely. If you do all that during the calendar year, it makes your 8606 very clean and nice.

My 8606 these days has always got a few dollars there because I made a little bit of money in the two days before Vanguard let me convert it or whatever. It’s fine. No big deal. Just recognize that that happens and don’t let it confuse you. It’s not a bad thing to make money you don’t have to pay tax on it. It’s just a little bit confusing because you got to jump through these hoops just to make a Roth IRA contribution for the year because you’re such a high earner. Congratulations. You have to do a backdoor Roth IRA. That’s a good thing, not a bad thing.

All right. Let’s take our next question from Ricardo.

ROLLING PREVIOUS EMPLOYER 401(K) INTO AN IRA

Ricardo:
Hey, Jim. Good morning. I was calling you regarding a question for an individual 401(k). I have an old 401(k) from a previous job. I want to roll that over to an IRA for two reasons. First, because it’s located at Schwab. And since the majority of my accounts are at Vanguard, I want to simplify my portfolio, keep most of my accounts at Vanguard.

Second, I like the investment options better at Vanguard. However, since I plan on doing the backdoor Roth IRA conversion, my question is, can I transfer that individual 401(k) at Schwab to a Vanguard traditional IRA, which I understand this would be pre-tax to pre-tax, then convert this traditional IRA contribution to a Roth IRA.

Just for information, I already made my traditional IRA contribution of $8,000 earlier this year, since I turned 50 this year, and already converted that to a Roth earlier this year. Also for information, the amount in the individual 401(k) is in the neighborhood of about $30,000. Thanks and I appreciate your help in this matter.

Dr. Jim Dahle:
All right. We got to be careful with our terms. When you use the wrong terms, it confuses people. Finance has a very specific terminology, just like medicine does. You need to be precise when you use these words. An individual 401(k), for instance, is not your 401(k) account from a prior employer. An individual 401(k) is a separate 401(k) for self-employed people, also called a solo 401(k) sometimes. So when you’re self-employed, you can start an individual 401(k).

I don’t think that’s what you have, although you use that word. I think you have a 401(k) from another employer that’s sitting there at Schwab, and you’re asking if you can move that to a Roth IRA at Vanguard. Yes, you can. That is called a Roth conversion. Anytime you go from pre-tax money to Roth money, and you have to pay taxes on the amount you convert.

So, if there’s $30,000 in there, and you convert it to a Roth IRA, no matter where the Roth IRA is, whether it’s at Schwab or Vanguard or whatever, no matter how many steps you go through to get to that Roth IRA, whether you stop in an individual IRA or not, it’s a Roth conversion, and you’re going to pay taxes on those pre-tax dollars.

So if you’re like most docs, you convert $30,000, you’re going to pay like $10,000 in tax. Not a big deal if you have $10,000. If you don’t have the $10,000 sitting around to pay that tax bill, I’m not sure I’d do that conversion this year. But sure, that’s fine to do. Whether that’s the right thing to do or not, I don’t know, without knowing more about your situation. You may be rolling it into your current 401(k) or 403(b) as a smarter move for you, I don’t know.

But I can tell you this, what you don’t want to do, if you’re doing a backdoor Roth IRA each year, you don’t want to take this money out of the 401(k) at Schwab and put it into a traditional IRA at Vanguard and leave it there. Because if you do that, you will cause your backdoor Roth IRA conversion step to be prorated. Because what they do is they add up at the end of the year all the value you have in traditional IRAs, rollover IRAs, SEP IRAs, SIMPLE IRAs, and they prorate the amount that you converted from that. And you don’t want that proration to happen. You want that balance to be zero at the end of the year. 401(k)s don’t count toward that. IRAs do.

So whatever you do, don’t move the money into an IRA and leave it there. But if you want to stop an IRA on your way to a conversion, as long as you get the conversion completed before the end of the year, that’s fine to do. I hope that’s helpful. You’re like asking if a Roth conversion is allowed. A Roth conversion is allowed. It costs you tax money, but then that money is never taxed again. That’s a different question as to whether it’s smart for you to do that. I don’t have enough information to know if that’s smart for you to do. If you have another way to get rid of that 401(k), like rolling it into a 401(k), that might be a smarter move for you.

As a general rule, when the balance is small, when it’s $10,000 or $4,000, or maybe even $30,000, and you can afford the tax on the conversion, that’s often a good way to clean up that prorate issue that you have with your backdoor Roth IRA process. If you got $600,000 sitting there in an IRA, that’s probably not a great way to clean it up. Most people don’t have the cash sitting around to pay that tax bill, and so you’d choose to roll it into a 403(b) or your current 401(k) or a solo 401(k) from some self-employment work or something like that.

But this sounds like it would work just fine for you. You would have fewer accounts. You’d have more Roth money, but whether it’s actually right for you to do, I’d have to know a lot more information about you. But you can certainly do it, it’s allowed.

All right. All of you out there that are doing hard jobs, thanks for doing them. You’re on your way into work. It’s 05:30 in the morning or whatever when you’re listening to this. I have no idea what time it is, and you’re going in to do something hard, and you drug yourself out of bed. It’s not an easy job, but it is an important job. Having had lots of interaction with the medical establishment this year and benefited from your hard work and from your dedication, your years of training, your years of practice, your patients do appreciate it. They forget to tell you thank you sometimes, so thanks for what you do.

All right. More IRA questions. We’ve talked about the Mega Backdoor Roth IRA. We have talked about Roth conversions. We’ve talked about the backdoor Roth IRA process. Now, let’s talk about an inherited IRA.

MANAGING AN INHERITED IRA

Speaker:
Dr. Dahle, thank you for all that you do, and I hope that you’re recovering well from your injury. I have a question about an inherited IRA. My girlfriend’s father passed away and left her as one of several beneficiaries in his inherited IRA. This is a multiple six-figure amount and is currently sitting in her father’s IRA brokerage account.

From my reading, it seems that she needs to have this account liquidated by 10 years. Her father was already taking RMDs at the time of his death, and now she needs to take these annually as well. My girlfriend’s considering getting a financial advisor to help figure out how to manage this money. She’s a public school teacher, and we have not combined finances yet.

How would you recommend she manage her inherited IRA over the next 10 years? Should she invest more aggressively in the first five years and then more conservatively in the last five years before she has to have it all liquidated? Also, how would you suggest she do direct versus backdoor Roth IRAs? I work as a physician, so I’ve always done backdoor Roth IRAs.

From what I’m reading, the income limit for her to do direct Roth IRAs is $161,000. Anything over that, and she would have to do the backdoor Roth. If she’s not sure at the beginning of the year if her income is going to be under or over this limit, what should she do? Should she try as hard as she can to control the income and the RMDs to keep her below the limit to do direct Roth IRAs, or should she just do a backdoor Roth IRA if she’s not sure if she’s going to be under or over the limit? Any help you can give would be much appreciated. Thanks a lot. Bye.

Dr. Jim Dahle:
Well, that was impressive. That recording was one minute and 15 seconds. I don’t know how many questions you got in there, but it was an impressively large number. First of all, thank you for your kind wishes for me and my recovery. By the time people hear this, it’s going to be mid-December. I fell off a mountain in mid-August, and although people just heard last month the podcast episodes we recorded telling this story, as I record this, I’m over 11 weeks out from my fall. I’m still in a splint. Those of you watching this on YouTube can see the splint on my wrist, but that comes off next week and I’ll be doing rehab.

Now, I might not be playing ice hockey games by the time you hear this podcast, but I’m certainly back on the ice with the teams I’m coaching. Hopefully, I’m skiing by the time you hear this. My recovery has gone well. Thank you so much to everybody who sent us emails and well wishes and all that kind of stuff. I feel lucky to be alive. I’m a little bit humbled and wondering in some ways why I’m still alive and not brain damaged, but maybe part of that reason is so I can record this podcast and help some of you out.

Thank you for your kind words. I’m doing good, by the way, in case you’re wondering, all of you out there in podcast land. If you look really closely on YouTube, you might be able to see some new scars on my face, but otherwise, doing good.

Okay. First of all, a few comments about girlfriends. It’s not about girlfriends. It’s about boyfriends, about anybody you’re not married to. As a general rule, the right thing to do when you’re not married to somebody is to keep your finances separate. That doesn’t mean you can’t talk about them. It doesn’t mean you can’t coordinate, but paying off your girlfriend’s $400,000 in student loans might not be the best move if she dumps you afterwards. So, keep that in mind as you manage money with partners that you’re not married to.

As a general rule, I think it’s wisest to keep your finances separate until you get married, and then I think it’s wisest to combine them, but obviously there are exceptions to every general rule out there.

Okay, let’s talk about RMD rules for inherited IRAs, and they’re complicated. It matters when you inherited them, it matters whether that person was taking their RMDs already. There’s all these things that matter. And one of the better resources that I found out there is a page put out by Fidelity, and they call it Inherited IRA Withdrawals Beneficiary RMD Rules and Options. That’s the SEO title that you see when you search on Google, and they go through all the terms, and you can find your category.

In this case, the category for this questioner is, I am a non-spouse family member or friend whose name is as beneficiary of the original IRA owner. Okay, that’s the one we want to go to. So you go in there, and you find out, well, was the person taking their RMDs already? In this case, they were. So, what do you have to do? What does the girlfriend have to do in this situation?

She has to transfer the money to an inherited IRA and take required minimum distributions based on the longer of the decedent’s life expectancy or the beneficiary’s life expectancy. The 10-year rule doesn’t actually apply to you because they’re already taking RMDs. So, that’s kind of cool.

Of course, Fidelity puts two superscript numbers on that, and the person who says multiple beneficiaries may require the calculation in some cases to be based on the oldest beneficiary’s options for distribution unless an inherited IRA is established by December 31st of the year following the original IRA owner’s death. Over that day, all other beneficiaries had either taken their share from the IRA or had discarded their interest in the IRA. That’s a big caveat.

The other one is Roth IRAs do not require original owners to take RMDs. As such, original depositor Roth IRA owners always pass away pre-required beginning date. A non-spouse beneficiary would take required minimum distributions under the five-year rule or based on single life expectancy.

One other superscript that applies in this situation is post-required beginning date when the original owner passed away on or after April 1st of the year following the year they reached age 73 or age 72 prior to January 1st, 2023. Just to give you a sense of how complicated those are, I read all of those.

This is complicated rules, and I’m sorry it’s so complicated. I did not make this rule. Please do not blame me. Blame Congress. Blame the IRS. This is a mess. And it’s hard to sort out, but that is the best page I know of to help you sort it out. I know of no better resource on the internet about inherited IRAs. In fact, I think this page is even more useful than the blog post I did on inherited IRAs, but I do recommend that as well. Just search inherited IRAs on the WCI blog, and it’ll come right up.

But this page from Fidelity, which we’ll put in the show notes. Let me send it to Megan right now before I forget. We’ll make sure it’s in the show notes, and you can check that out. It’s great, and when I have a question about inherited IRAs for somebody, that’s where I go to answer it.

Okay, so get that sorted out. Now, do you need a financial advisor to read that page to you? I don’t know. Go read the page first and find out, because a financial advisor can be really expensive. Now, it’s possible to get a financial advisor that serves validators, people that just have a couple of questions and really want to do this on their own.

We have some of them on our list, our recommended list at White Coat Investor, but that’s a question to ask them. Is this what you do? Can I come in and pay you for a couple of hours of work while you answer some inherited IRA questions for me? Because a lot of advisors, that’s not what they do. They might say, “Come on in”, but they’re trying to hire you or trying to get you to hire them to manage your assets, all of your assets for the rest of your life, and maybe you need that. Maybe you’re a delegator, and that’s a good thing for you, and that’s okay for you to hire a financial advisor to do that.

But bear in mind that what most financial advisors do is serve delegators. They don’t serve people that come in with a question or two. We call those people validators, and most advisors are not set up to do that. So, keep that in mind as you try to hire an advisor to get this sorted out.

You can also ask the question for free in some of our communities. We’ve got a White Coat Investor subreddit, we’ve got a White Coat Investor forum, we’ve got a White Coat Investor Facebook group. There are other good forums out there like the Bogleheads forum. You can ask these sorts of questions there, and if you give all the relevant answers, the right answer is probably in there somewhere.

There’s no guarantee. Anybody can answer a forum question. They might answer them wrong, but you can try that. At least the price is right on that. I hope that helps you decide if you need a financial advisor for this question or not. Maybe you need an advisor anyway, I don’t know. But if you do, maybe get the advisor.

Okay, your girlfriend is a teacher. That typically means she doesn’t get paid that much. That usually means you can contribute directly to a Roth IRA. Now there’s some situations where low earners get burned on this. One is they make more money than they thought they were going to make. If you make more than the limit, the Roth IRA contribution limit for direct contributions, which for 2024 and 2025, let’s look at what those are.

For single people for 2024, it’s less than $146,000. Between $146,000 and $161,000, you can make a partial direct contribution. And above $161,000, in modified adjusted gross income, you cannot make a direct Roth IRA contribution. You got to go through the backdoor Roth IRA. If you’re married filing joint returns, that’s $230,000, and it phases out between $230,000 and $240,000. Above $240,000, you can’t make any contribution at all. But if you’re doing married filing separately, it’s like $10,000. And the phase out is less than that.

And so, if you are married filing separately, or you think you’re going to cross that limit this year, or you’re getting married to a high earner this year, just do it through the backdoor Roth IRA process. I promise you won’t regret it. Anybody can contribute to a Roth IRA via the backdoor Roth IRA process, as long as you don’t have some IRA out there that’s going to make you get prorated. And in that year that you think you might have to, you better do it or you’re going to regret it.

I contributed to a backdoor Roth IRA, or contributed to my Roth IRA indirectly in 2010. That was the first year it was allowed. It turned out we didn’t make enough money that year to have to do it. This year I was coming out of the military, and I was a pre-partner of my group for the second half of the year. We just didn’t make enough. We didn’t have to. Nobody cares. Low earners can do backdoor Roth IRAs. High earners have to do it. So, I hope that’s helpful in answering that question.

The other question you had was how to invest the money. Well, here’s the deal. You don’t invest differently really. You don’t invest differently based on where the money is. For example, my parents. My parents are of RMD age. They’re elderly. No surprise. I turn 50 next year. So, no surprise my parents are elderly. And they have to take RMDs out of their IRAs every year. They don’t tend to spend them. Try to get them to spend more every year, but they’re kind of in their slow go years.

And so, they don’t spend that much money. And most of the time what we’re doing with those RMDs is we’re taking them out. We have Vanguard withhold a little bit of money from it to pay the taxes on them. And we reinvest the money in taxable.

Your investing plan doesn’t need to change based on where the money is. Their asset allocation is the same, whether it’s in the IRA or in the taxable account. Yes, there’s tax considerations. You try to keep the most tax efficient assets in your taxable account and the least tax efficient assets in your tax protected accounts. But your asset allocation overall is the same. And for your girlfriend, it should be the same. Your time horizon for that money in the inherited IRA isn’t one year or five years or 10 years or whatever. That’s not the time horizon for it. The time horizon is when she’s going to spend the money.

Just because at some point you got to take the money out of the inherited IRA and invest it in a taxable account shouldn’t change the way you invest it. You’re investing this money for 30 years from now. So you don’t put it in cash until you take it out of the inherited IRA and then invest it in stocks in six years or whatever. That doesn’t make any sense at all. Just invest in what you want to be invested into.

Now, the nice thing about an IRA is if your investment does terribly, everything tanks, there’s a terrible bear market and everything goes down 45%, guess what? It costs you less in tax to take that money out and reinvest in taxable. That’s not necessarily a bad thing. If it goes up, well, yeah, you’ll end up having to pay more tax on that money when it comes out of the inherited IRA, but you also have more money. That’s not a bad thing either.

So, just invest the money in the inherited IRA like it’s long-term money. Don’t leave it in cash because there’s a withdrawal coming up shortly. It sounds like she’s going to be able to withdraw this money over a relatively long period of time though. So yeah, you definitely want to be getting this money invested and probably relatively aggressive.

I hope that’s helpful. I hope we answered all of the questions in that one minute 15 second recording. If I didn’t, call back and leave me one question and maybe I’ll get it answered better.

All right, here’s a question about Robinhood. People love Robinhood and I think Robinhood has given out money to convince people to move money to Robinhood, but it makes me laugh. Robinhood. Really? You’re going to put your life savings in a company that decided to call itself Robinhood? I don’t know. It makes me laugh. Let’s listen to this question though.

TRYING TO MAKE THE ROBINHOOD 3% MATCH WORTH THE SWITCH

Charles:
Hello, Dr. Dahle. Charles from Texas here. Earlier this year, I took advantage of the Robinhood 3% IRA match and got tens of thousands of dollars to transfer money over. Almost everything was a Roth IRA, but I did happen to have an old 401(k) that I hadn’t moved to my current employer or my TSP.

I moved this over knowing that it would prevent me from being able to do the backdoor Roth in the five years that I must remain at Robinhood without forfeiting the bonus. My plan was to simply do non-deductible IRAs at Fidelity for the next five years and then cover all of it at once after clearing out the traditional IRA at Robinhood.
Charles:
To come out ahead, the gains over the five years of investing in the non-deductible accounts and the taxes I pay on those would have to be less than the amount of money that I got for Robinhood bonus. I could increase the odds of this happening if I invest in something low yielding like bonds in the non-deductible IRA and adjust the rest of my portfolio to compensate. This would actually make the plan the same as simply using a taxable account for those same low yielding bonds since they get the same tax treatment either way.

Does this sound right? Am I missing something? My primary alternatives would be simply investing in taxable or sending even more money into my 529 and to be able to wind down those investments earlier than currently planned. Either way, both of these alternatives come at the cost of less money in the Roth IRA over time. What do you think?

Dr. Jim Dahle:
What do I think? Well, investing doesn’t have to be this complicated, folks. You don’t have to do this stuff and run these numbers to be successful. Make a bunch of money, carve a big chunk of it out, invest it in some reasonable way, and you’re going to be financially successful. It really is that simple. You don’t have to figure out who’s offering the biggest transfer bonuses and play this transfer bonus game, going to Robinhood this year and going to Wells Fargo next year and going to whatever new brokerage has been invented the year after that. You don’t have to do this crap to be successful.

It took me a while to learn that. I’m not criticizing you. I went through this phase in my life where I played these stupid little games to try to make a little bit more money. I remember PGY3, we were a little short on cash. We wanted to make sure we got our Roth IRA contributions in for that year. We actually took out a 0% credit card, whatever it was, for a few months so that we could make sure we maxed out our Roth IRAs that year. Not a big deal. Does it really move the needle in our lives now? Absolutely not. So what if I didn’t get all whatever it was, $3,000 or whatever we were allowed to contribute to a Roth IRA way back then, and I only got $2,000? And who cares? It doesn’t matter.

You don’t have to play these games to be successful. When you do play the games, you want to make sure you’re actually coming out ahead. First of all, you got to deal with Robinhood. And I’ve had a few people that invest in Robinhood and tell me they really like it. Maybe it’s fine as a brokerage. And it’s cool. You get balloons and confetti when you put a trade in. Maybe that makes you feel better about what you’re doing. I have no idea. But if you like Robinhood and you think it’s awesome, use Robinhood. I really don’t care.

For most people, I think you probably feel better when you’re using a company that is called something like Charles Schwab, which is a person who really looked out for the individual investor. Or Fidelity. Doesn’t that make you feel good to have a company that’s called Fidelity or a company called Vanguard? It’s an important naval ship in England’s history.

But at any rate, if you want to use Robinhood, go ahead. You do not have to play these games. If you want to play these games, make sure you’re at least not coming out behind for playing them. You got some interesting ideas on how you can come out even further ahead on this. Yes, if you decide to do this, which sounds like you already have, you’re mostly coming out ahead. They’re going to give you whatever, a bunch of money. You said it’s $10,000 or $20,000 or whatever that you’re going to get for moving all this money over to Robinhood.

The problem is to get that, you’re messing up your backdoor Roth IRA process. They’re not going to just let you roll a 401(k) in there and have it be a 401(k). When you roll it over, it’s going to be an IRA. And it sounds like it’s too big that you can’t afford to convert it to a Roth IRA. Now you’re getting prorated for the next five years on your backdoor Roth IRA process. It’s not the end of the world. You can keep doing it and just get prorated. But I think the way you’re thinking about it is probably the right way in that you just keep it in a separate IRA. This non-deductible contributions, you’re making it Fidelity or whatever. And you put your $7,000 a year in there. After five years, you got, I don’t know, $35,000 or $40,000 worth of contributions. And maybe you have another $20,000 worth of gains in there. And that’s cool.

And then at that point, you do a Roth conversion. Now you’re going to have to pay the taxes on the conversion there. So let’s say you got $20,000 worth of gains. Your taxes on that are probably $8,000. You’re now eating up most of that bonus you got for putting your money at Robinhood. If you got $10,000 for moving your money in there, and it’s going to cost you $8,000 extra in taxes down the line, okay, you came out $2,000 ahead. Is it worth this hassle for the next five years?

I don’t think it is. I don’t think it’s worth it. I suspect you are doing pretty well financially when you’re worrying about things like this. And I think you’re making your life more complicated than it has to be. But it sounds like you’ve already done it. The money’s already at Robinhood. What do you do now? Well, yeah, I would keep that money separate. I wouldn’t contribute to that IRA at Robinhood. That’s definitely going to be mixing the coffee and the cream in your backdoor Roth IRA pro rata issue.

So, leave it there for five years at Robinhood. Invest it like you normally would invest it. Don’t do this craziness you were talking about. The craziness was, I guess, at Fidelity. It wasn’t at Robinhood. It was deliberately trying to get low returns on that money so you wouldn’t have to pay as much in tax on that money. Well, you’re going to own bonds somewhere. You might as well own them there. No big deal. I guess that’s reasonable. Own your stocks in the Roth IRA and own your bonds in this $7,000 to $35,000, $60,000 IRA you’re creating over the next five years at Fidelity. That’s fine to do that. Maybe you come out a little bit ahead doing that, and that’s great.

But keep in mind, when we do this, when we put bonds in tax-deferred accounts, when we put stocks in Roth accounts, we’re mostly just fooling ourselves. Yes, the expected return is higher, but the expected return is higher because you have a more aggressive asset allocation on an after-tax basis. After-tax, there’s more money in the Roth IRA than there is in the traditional IRA, so you just took on more risk is all. So of course, you expect a higher return. It’s fine to do that. Most of us do that, and we don’t tax-adjust our retirement accounts when we’re setting our asset allocation. Just recognize that’s what’s going on here, and that’s kind of the game you’re playing here.

But I think it’s smart. Fine, put your bonds in that account, but you rolled over hundreds of thousands of dollars to Robinhood in order to get this $10,000-plus bonus. This is probably not going to be all of your bond allocation. If you don’t want bonds anyway, would I put this money in bonds? No, I would invest it along with your otherwise prudently thought-out written investing plan and asset allocation. But if bonds are part of that, sure, put the bonds in here. That’s no big deal. It seems reasonably intelligent.

But I don’t want anybody out there in WCI podcast land to think you got to play these games to be successful. The $10,000 you get from Robinhood for leaving your money there for five years is not what is going to make you retire as a multimillionaire at 53 years old and have financial freedom in your life. Every little bit helps, I guess, but don’t complicate your life too much. For all this hassle, you could probably just go work an extra shift, and that’s probably going to compound to that $2,000 over time anyway.

SPONSOR

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

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

All right. Thanks for those of you out there who share these episodes. I think it’s particularly powerful if you send a link to the episode, and you can just send a YouTube link or whatever to friends when we’re talking about some situation they’re dealing with. If you’ve got a friend out there chasing Robinhood bonuses, maybe you send them this episode. Or you got somebody trying to convince their employer to put a Mega Backdoor Roth IRA, maybe you send them this episode. Thank you for those of you who are doing that.

White Coat Investor, this community has grown over the last 13 years, primarily from White Coat Investors doing that for one another. And I thank you for the assistance you’ve given. Some of you are out there giving talks at your medical schools, at your residencies, to your partners in your medical groups. Thank you for those of you out there doing that. If you’ve got a podcast or a blog, or you’ve written a book to help your peers to be financially literate, thank you for doing that. It is important work. And altogether, we’re going to help doctors to be smarter about their money in this century than doctors were in the last century.

Quit being taken care of and taken advantage of by the financial services industry. Let’s get good advice at a fair price for our colleagues. Let’s make sure people aren’t doing stupid stuff with their money. Because doctors that have their financial ducks in a row are better physicians, they’re better parents, they’re better partners. I truly believe that. And so, let’s help our peers as best we can. Thanks for those of you doing that by sharing this podcast. It also helps if you leave five-star reviews.

We had one of these come in from GRTSHO recently, who said, “Excellent and thorough. This podcast is an example of a motivated physician gaining substantial knowledge on a non-medical topic and sharing it with everyone. He’s altruistic and thoroughly engaged in this material. I find when he lacks information on a topic, he’s not afraid to admit it and research it thoroughly to provide an accurate and actionable answer. His staff should be given significant credit for the success of this podcast as it clearly must take more effort than just one man can muster.” Isn’t that the truth?

“A great combination for a podcast, knowledgeable, altruistic host who surrounds himself with intelligent guests and hardworking staff all keep up the great work, five stars.” Wow. Great review. That’s very kind. We should definitely share that with the staff.

Okay. Keep your head up, shoulders back. You’ve got this. We’re here to help. We’ll see you next time on the White Coat Investor podcast.

DISCLAIMER

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

INTRODUCTION

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

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 200 – Military family physician takes the fast lane to wealth.

One of the most underrated financial moves in medicine is working locum tenants. It pays significantly more on average and you can work locums full-time or on the side of your full-time. And when you work with CompHealth, the number one staffing agency, they cover your housing and travel costs, which on top of higher pay really adds up.

Locums also gives you more control of your career, allowing you to go where you want, when you want, with a schedule that works for you. It’s the perfect way to get ahead financially while getting focused on what you love. Whether it’s locum tenants or a regular permanent position, build your career your way with the power of CompHealth. Learn more at comphealth.com.

All right, guess what is coming up? The WCICON is coming up. We’re in San Antonio this year, just outside San Antonio, in Hill Country at a beautiful resort. Because it’s a wellness conference. It’s the Physician Wellness and Financial Literacy Conference. We want you to go home more well than you were when you came. And so, we set it up at a really nice place to stay. We have all kinds of fun activities. We knock off all the learning stuff at 04:00 o’clock and go relax and have fun and have all these great activities planned. That’s what WCICON is all about.

But don’t worry, the stuff before 04:00 o’clock is very good too, and it’s worth your time to come to. Not only if you’re interested in just wellness, or if you’re interested in financial stuff, financial literacy, whether that’s anything from insurance to real estate investing to asset protection, whatever. We got all that stuff in the conference too, don’t worry.

But you’re almost out of time if you want to get a swag bag when you come to the conference. Our swag bag deadline is December 12th, and I think this podcast drops December 9th. So, if you want a swag bag when you come to the conference, and the swag bags are good, you’re getting books and stuff in this swag bag, make sure you sign up by the 12th. It’s a great conference. We can’t wait to have you there. I want to meet you personally, hear about your successes, hear about your challenges. You can sign up at wcievents.com.

All right, we got a pretty interesting interview here today. As I record this, we did four milestones interviews today. You haven’t heard a bunch of them. I think this one will run the earliest of those four, even though it’s the fourth one we’re recording. But they kind of went in progression. We had somebody that was an intern. It’s a relatively early milestone. Somebody that got back to broke, somebody that got rid of their student loans, and now someone who’s building substantial wealth. So, it’s kind of a fun progression of what we’ve been recording today. Now, I know you’re not going to listen to them in that order, but it is fun to talk with all of you about your successes and your challenges in real life.

And that’s what this podcast is all about. It’s about you. It’s driven by you. So let us know what you like, let us know what you don’t like, and we’ll make the changes. Because the whole point of us being here and sitting here in this studio today, Megan and I recording this, and Wendel, our AV guy spending even more hours than we’re spending with it to get it all pretty for you, is to help you. That’s what we’re here for.

But we do need guests. Without guests on this podcast, it doesn’t really work in this format. So, if you want to sign up, go to whitecoatinvestor.com/milestones, and you can apply to come on this podcast. I don’t care what milestone we’re celebrating. I don’t care if you bought a new tire for your car, we’ll celebrate it with you and use it to inspire others to do the same. Or if you got $50 million or whatever, I don’t care. We’ll celebrate it with you. We’ll talk with you about your finances, and we’ll try to help others to do well with theirs.

I want you to stick around after this interview today. We’re going to talk a little bit about a book that came out a while back called The Millionaire Fastlane by a fellow by the name of M.J. DeMarco. And I think in connection with this interview, you’ll find it useful.

INTERVIEW

My guest today on the Milestones podcast is Alex. Alex, welcome to the podcast.

Alex:
Awesome. Hey, Jim, I’m so happy to be here. Thanks for having me on the podcast today.

Dr. Jim Dahle:
Tell us what you do for a living, how far you are out of training, and what part of the country you live in.

Alex:
Awesome, I would love to. I’m a family medicine physician in the United States Air Force. I’m stationed over in Colorado Springs. I’ve been out of residency for almost four years now, and I absolutely love it.

Dr. Jim Dahle:
Very cool. Four years is all, and you’re working for the Air Force. Well, now I’m really impressed with the milestone we’re celebrating today. Tell us what milestone we’re celebrating.

Alex:
Absolutely, milestone to millionaire. Super excited, hit the million dollar net worth right before I turned 31. I’m 32 now, so I was still 30. I’m super excited about that and grateful for the opportunity and just the investments that came along the way.

Dr. Jim Dahle:
Well, thank you for your service, number one.

Alex:
Yeah, you as well.

Dr. Jim Dahle:
Number two, tell us about your family. Are you married, have a partner, kids?

Alex:
Yeah, absolutely. I’m married, have two kids. My wife, Stephanie, she’s a wedding photographer, travels all over the country, but largely in Virginia where we grew up and does a lot of weddings there, a lot of photography sessions there and owns her own small business. It’s been really cool to see her grow her business, scale her business and run that remotely as we’ve lived in different duty stations. We were at Eglin Air Force Base in Florida and then now here in Colorado Springs.

I have two amazing boys. One is almost four years old. His name’s Jack. He’s the best. And then Owen who has just turned five months old yesterday. And time is flying there. So super grateful.

Dr. Jim Dahle:
Is she just absolutely crushing it with this wedding photography business? She’s making more money than you are as a doc?

Alex:
I wish. She could if she was doing it full time when we lived in Virginia. When we first got married, she was my sugar mama for sure. I was in residency. And she was making doctor money with her business and doing a bunch of weddings and just kind of traveling back and forth from Florida to Virginia. And then we moved to Colorado and she decided, “Hey, I want to spend some more time with my kids.” So she’s cut back her weddings in half. She makes about $80,000 to $100,000 per year doing that. And then we’re planning on potentially moving back this coming summer once my time in the Air Force is up. And then she’ll take that on more full time. She absolutely loves her work and wants to build that back up again. And she’s so amazing at what she does. She has so much demand for weddings that she could just do it all the time. So, it’s been really cool to see.

Dr. Jim Dahle:
You understand why I’m asking though, right? Because the math doesn’t add up. I know what a military family physician gets paid. And you haven’t earned a million dollars since you became an attendee.

Alex:
Yeah, that’s exactly right. A few ways that I’ve done that, Jim, one was when I got into residency, I bought a house with $58 out of my pocket using the physician loan. And that $58 was terrifying. I was like, “Oh my gosh, this is a terrifying experience.”

I grew up with really humble beginnings. My family did not make much money. My dad worked incredibly hard to support our family. My parents got divorced, but I really saw the importance of hard work. And obviously that led well for med school and beyond. And so, I saw that and I realized I was never going to take the chance or never going to put my family in that same position financially. I was always really interested in money and how to save and how to set up myself well financially.

And so, I went to college, then of course got the HPSP scholarship, the Health Promotion Scholarship Program through the Air Force to pay for med school. And then as you know as well, they give you that little stipend. I was able to keep living expenses really low while I was in medical school. I had a roommate. I was paying, I think like $700 a month, maybe for rent.

And I tell you what, I was making, I think $28,000 and I felt like the richest man in the world. I was able to graduate med school debt-free because I used that stipend to pay off the little bit of undergrad debt that I had. I was fortunate to get some scholarships for undergrad. And then I bought that house, $58 out of my pocket. We did like a live-in flip light while we were in residency.

We wanted to buy a duplex or a quadplex and house hack that, but there was just not a lot of them available where I was in residency. So, we did a live-in flip. Luckily, Florida’s real estate prices have gone through the roof. That house has more than doubled. We turned that into a rental. It cash flows $1,000 a month on that.

And then I met some partners, and I would say to anyone listening, if you’re getting started or you’re trying to figure out what your next steps are, the partnerships and being in the right room with the right people, of course, after you educate yourself, which is why this podcast is so amazing and White Coat Investor and all your content is so incredible. But once you educate yourself, you have to take action. And I think that’s what set me apart, why we’ve been able to hit that millionaire milestone so early.

We’re fortunate that my wife’s income’s pretty good. My income’s relatively good, pretty poor for a family med doc in terms of salary, but the Air Force offers a lot of good benefits. And so, we rented that house out and then we moved to Colorado Springs. We bought our house that we live in now. Currently, we house hack that. We rent out our basement. That covers our mortgage and almost all of our expenses. We almost live for free in Colorado Springs, which is amazing. Then we’re able to take that $2,500 a month and put that towards other investments. And that snowball has just continued to grow from that and our other investments.

But the partnership and the network piece, as I mentioned briefly before, has been so important. I’m in a military mastermind called From Military to Millionaire. The mastermind’s called The War Room. And through that, I found amazing partners, Charlie and Luke.

We bought some short-term rentals initially. We had a couple of short-term rentals. Sold one, kept one. And that cash flows incredibly well. My wife and I joke all the time. It’s a geodesic dome in the mountains of Colorado, a really cool stick build home right near Eldora Ski Resort, if you’re familiar. And that thing grossed $110,000 in its first year. It’s been grossing $100,000 every year. We’ve been netting about $60,000. We have some partners on that. And we’re like, “Man, if we just bought two of these and we owned them outright, that’d be it. That’d be the end. We wouldn’t need to work anymore.” And so, we’ve been very fortunate.

Dr. Jim Dahle:
It’s interesting you mentioned that because I’ve said this many times, particularly in a lot of our real estate content, that I think the fastest way to financial independence is building a short-term rental empire.

Alex:
Yeah. Yeah, it is. The tricky part is the regulations piece. I think Airbnbs, as more and more people got into that during the pandemic, it just became more saturated of a market. You really have to invest in places that are tourist-specific. Regulations have already been figured out and understanding that, “Hey, these may change and you need to have a backup plan.” But that’s been great.

We sold another short-term rental. That added to our net worth significantly there from that perspective. And then now we just focus largely on residential assisted living homes. My partner, Charlie and Luke, we own five that we lease to operators. And then we own three more through a fund that we started. And that’s where a large portion of our net worth has come from, has been partnership.

And then we own a couple of small businesses. I host a podcast called Physicians and Properties. And then through that, I have a few little businesses. And then we have a mastermind for residential assisted living as well. And so, that cash flows quite well.

I’ve been really fortunate and incredibly grateful for how things worked out. But if it wasn’t for partners, most specifically my wife and then my business partners, I would not have been a millionaire at 30. I would not be a millionaire now at age 32. And so, I’m just really grateful for where I am.

Dr. Jim Dahle:
Yeah, very cool. If we had to break it down, when you applied for this, I think you said your net worth was $1.3 million. I assume it’s a little higher now since it takes us a while to get you on the podcast.

Alex:
Yeah.

Dr. Jim Dahle:
But let’s break it down. How much you got in retirement accounts? How much you got in cash? How much you got in non-real estate investments? How much you got in real estate investments? How much do you have in your residence, et cetera?

Alex:
Yeah, absolutely. Retirement accounts between me and my wife, we probably have about $400,000. I haven’t checked in a while. And of course the market’s been on quite the bull run lately. So maybe more. And that’s just in TSP, Roth IRA, a SEP IRA for my wife. It’s probably about $400,000, $450,000 there. We got $200,000 in our Florida house in terms of equity. We have probably $150,000-ish thousand in equity in our home here in Colorado Springs.

Between the five residential assisted living homes, equity, of course, that’s in a partnership, split three ways, but equity in that would probably be close to $400,000 or $500,000 if we were to pull that out. And then the funds, that’s a little bit tricky because we own such a small percentage of that, but probably another $100,000 or so in that regard.

Also I have a few investments. I helped raise some capital for a boutique hotel in the Smoky Mountains called Tremont Lodge. And that we’re renovating right now. I helped raise some capital for that. I have a small equity position in that. And then I’ve also invested in a mobile home park syndication, just $50,000 there.

That kind of makes up the majority of our net worth. And then we have some traditional stock investing accounts, $40,000 or $50,000 in those. And then a few other just little accounts here and there to make up the total. We’re largely real estate heavy, but then our retirement accounts between TSP, Roth IRA, SEP IRA make up a significant portion of our net worth as well.

Dr. Jim Dahle:
Yeah, a bit of a balanced approach there.

Alex:
Exactly, yeah. And I think that’s important. I love real estate. I think that that is the best way to build wealth. And I’m biased in that regard. But I think having a balanced approach is really appropriate, especially given market dynamics and so forth, as we’ve seen with the pandemic and elections and whatnot.

Dr. Jim Dahle:
Yeah, nobody’s complaining this year if they own US stocks.

Alex:
No, not at all. And I think a little bit of a surprise, but certainly grateful.

Dr. Jim Dahle:
Yeah. Now, like most real estate investors, you’re not terribly debt averse. I think a lot of people that take the HPSP scholarships sometimes are. Tell us about your attitude toward debt and using it to help you along the way to build wealth.

Alex:
Yeah. Well, I think debt used properly is such an important tool, especially in real estate. What other place can you leverage a loan 10% down for short-term rentals, no money down for the physician loan or VA loan, which is a huge benefit, or some DSCR loans or commercial loans that are 20% to 30%. It’s just huge. I look at it more from the leverage perspective is enormous.

And I agree from a debt perspective, certainly I’m adverse. I have zero debt at all on credit cards or anything else. We have no debt other than our mortgages on these properties. But I think that is safe, more safe than traditional debt, largely from the fact of it’s a tangible asset that I can see and touch and feel and cash flows every month and it’s protected. And if we look back at market dynamics over time, real estate has always gone up with inflation. And frankly, I don’t see inflation ever stopping anytime soon with all the cash that’s been pumped into the system lately. I think it’s a really safe bet. I think it’s healthy debt, I would say. And I think the folks that really get themselves into trouble are with that consumer debt.

Dr. Jim Dahle:
The phrase you use, I think is very important. “It cash flows.” Because putting enough down to make sure you have a cash flow positive property is very important. You can have an infinite number of cash flow positive properties. But even a physician income can only carry so many cash flow negative properties. Now you’ve gotten away, it sounds like, with some relatively small down payments and still been positive cash flow, which is very fortunate. But a lot of people find the only way to be cash flow positive is to make bigger down payments, 25, 30, 33%, things like that sometimes to be cash flow positive.

What have you found with your most recent properties and that you bought through the fund or whatever? Have you been having to put down more than you used to?

Alex:
Yeah, that’s a great question. The fund is a bit different. We partnered with an operator and he’s renovating the assisted living homes and then we’re getting more private pay residents. And so, we’re adding equity in the renovations perspective, also adding equity in terms of the business and able to charge more. And of course, those are commercial properties and probably a bit more advanced for folks that are listening to this in terms of how they’re valued. But as much as we increase the net operating income based off the cap rate, we’re adding value. That’s a bit different there from that perspective.

For ours that we own and we lease out to operators, for example, the last deal that we did was in Arizona. We sent out some direct mail. I was able to find a list of all the assisted living homes in Arizona. And we were able to use that to find the addresses for all of those using our VA. Then we were able to send out direct mail, 648 letters that we sent out. We had about 40 folks who reached back out to us that were interested in selling their home and their business. And that’s largely because of the silver tsunami of businesses. We see these mom and pop owners who want to retire. And we also see the silver tsunami in terms of residential assisted living as more and more folks are needing these homes.

But we sent out these mailers. We had about 40 people reach back out. And then we were talking seriously with five. We got 400 contracts. One was the one that ultimately worked out. It really was just a conversation with them to figure out, “Hey, what did they want?” And they were open to seller financing because they had a lot of real estate experience. We figured out, they said, “Hey, we just want $45,000 so we can pay off this loan that we have for the down payment. And then we just want the cash flow. We want to retire. And so, we want the cash flow.”

We settled on paying them $750,000 for the house and the business. It was a fully licensed residential assisted living home. At the time, they had six residents in it. It’s licensed for 10. We settled at $750,000, 6% down, which was the $45,000 that they were looking for. And then they seller financed. And so, we were able to get a 30-year amortization loan that is a 6% interest rate, which at the time, we were looking at about 8, 8,5% for commercial financing. That was incredible. We were able to get into that home for 6% down, which was fantastic.

Now, the beauty of that is we have two investors that covered the down payment and some reserves, $25,000 each. We’re paying them 10% simple interest. We essentially got into that for our business for about $10,000 to $12,000, covering some renovation costs and closing costs. And that house cash flow is almost $3,000 a month. And that’s with 6% down. Residential assisted living is an amazing opportunity now and into the future. But that was a little kind of quick deep dive of our latest deal that we’ve done.

Dr. Jim Dahle:
Yeah, very cool. So, still finding a step where you’re not putting a lot down. But clearly you have an entrepreneurial bent to you.

Alex:
Yeah, absolutely, absolutely.

Dr. Jim Dahle:
You are not content to just work your shifts and carve out some money and put it into a VTI kind of investment and go spend your time on your hobbies. You’re spending some time and some effort learning and doing some more interesting stuff. Any regrets whatsoever about that?

Alex:
No, no regrets whatsoever. I think you just have to figure it out. I think we’re all struggling with balance in some capacity. And a few things that helped me is, one, my family is most important to me. I’m lucky to have a really supportive wife who understands right now, we’re in that hustle mode.

But for me, I’ve always made it a priority. I get home from work around 05:00 o’clock, I take my cell phone, I put it on top of the kitchen counter. I don’t touch it until my kids go to bed. Because that time is way more important than any business or any real estate transaction. The only people who are going to remember I worked late or I wasn’t there is going to be my family. It’s going to be my wife and my kids. Not going to be the patients. It’s not going to be clinic leadership. It’s not going to be anybody else. That’s it. Those are the only people who are going to remember. And that’s what’s most important.

And so, I’ve really taken that to heart that work is at work and home is at home. And then real estate and business comes in between. And so, that does require waking up early or staying up late, but it’s worth it, and it’s been absolutely worth it. I would not be where I was if it wasn’t for that.

But to answer your question, no regrets. I mean, I’d say my biggest hobby probably is business. It was real estate entrepreneurship. I just absolutely love it. I love the opportunity like you to educate physicians. And so, it’s just been a blast to be able to have that opportunity and to do that.

And then the residential assisted living space is such an incredible space to not only invest, but also get that fulfillment and know that, hey, we’re changing the face of senior care through our mastermind and through our homes that we own. That’s just been so fulfilling to me. I think that that has been something I’ve enjoyed so much. And I find time for hobbies. As we mentioned before the podcast, I just got back from an elk hunting trip last night, pretty late. I just find time for those hobbies to work. I love to ski. I love to be in the mountains as you do as well.

And so, I’m super grateful for that. But it’s just finding that time and being willing to take that time to recharge your batteries if you are working full time and doing the entrepreneurship side gig as well.

Dr. Jim Dahle:
Well, congratulations to you on your success. Thank you so much for being willing to come on the podcast and share with others and hopefully inspire them to do the same.

Alex:
Absolutely. Thank you, Jim. I really appreciate it.

Dr. Jim Dahle:
Okay. I hope you enjoyed that interview. That is not our typical interview, as you’ll notice. Alex is a hustler. There’s no doubt about it. He’s willing to go out there and put in some extra work, build some wealth, take some risk. Take some business risks, start some new businesses, learn some new stuff, take on some risk. He’s got some significant leverage risk in his life. When you’re getting into properties for nothing and 6% and 10% down, there’s some significant leverage risk. And of course, leverage works both ways.

So you got to be careful when you live your financial life this way. Things can blow up. But in general, when you put this much work into it and this much attention into it, yes, you’re going to have some things that don’t go perfectly for you. But you’re going to have enough successes to make up for it.

FINANCE 101: THE MIILLIONAIRE FAST LANE

Now I mentioned at the beginning of the podcast, this book by M.J. DeMarco. I’ve read the whole book, but I’m familiar with the concepts in it. It’s called The Millionaire Fast Lane. And he talks about there being three lanes in life that people choose with their finances. The first one is the sidewalk. That’s basically most people. They never build any wealth. And that’s because they’re not doing the things that build wealth. And so, they’re on the sidewalk. They’re literally watching the rest of us go by and wondering “Why can’t I be like that?” or just not willing to do those things.

And then he talks about the slow lane and the fast lane. The fast lane I think is pretty well demonstrated by this interview with Alex. He’s only four years out of residency. He’s been in a military family doc job and we can all look up what military family docs make. It’s substantially less than the average family physician paycheck, I can assure you. And of course, his wife is working hard and hustling as well and they’ve had a number of successes in their life. But four years out and millionaires. When I was in the military, it took us seven years. And three of those were not in the military before we were millionaires. And he’s gotten there faster because he’s on the fast lane with all this hustling and entrepreneurship that he’s doing.

So, what does the slow lane look like? Well, the slow lane, I don’t want to call it the guaranteed pathway to wealth. It sounds kind of boring actually when you put it that way. But that’s basically what it is for a doc. Here’s what it looks like. You get good training. You go get a decent job. You carve out maybe 20% of what you’re making. You put it toward building wealth. You can invest it in low cost broadly diversified portfolio, static asset allocation of index funds.

And so, you put your money into a handful of index funds. And after 15, 20, 25 years, you are a multimillionaire who can retire very comfortably, maintain your lifestyle even after retirement, never have to worry about money again, leave lots of money to your heirs and to charities.

It’s not guaranteed, but it’s pretty close to guaranteed. If you carve out 20% of your income throughout your career and invest it just in that boring way, a few minutes a year is all you got to spend on your finances really. And you’re going to get there.

This is what this author M.J. DeMarco would call the slow lane. And maybe it is kind of slow if you’re a typical earner. If you’re in a family that only makes $80,000 a year, maybe it is kind of a slow lane. For a physician, if you’re willing to live on only $80,000 a year, this is a very fast lane. You can get to financial independence in five or 10 years out of training. If you’re earning like a doc and spending like regular Joe. I tell people to live like a resident for two to five years and that’ll certainly give you a big jumpstart on your financial life. But if you just keep doing that, you get to FI very quickly, maybe a decade.

The third lane of course is this entrepreneurial lane. There are no guarantees in the entrepreneurial lane. It’s been fun for me in my life to have one foot kind of in this steady slow lane and one foot in this not so steady fast lane. And we’ve had successes in the fast lane. We’ve obviously had successes in the slow lane as well.

Would we have gotten to our goals in the slow lane if that’s all there ever was? Absolutely. We wrote a plan up in residency that would have had us financially independent and me able to work whatever I wanted to work by 51. Well, 51 is only like a year away, year and a half away. I don’t feel like I’m quite that old yet. Maybe I am. You guys look at me and see some gray hair when you’re watching this on YouTube, but it went pretty fast. That’s the slow lane pathway and it would have worked just fine for us even if WCI had never made any money.

Starting in 2011, I started hustling a little bit like Alex did and working hard, trying to do some good things in the world, but also trying to make some money. And obviously WCI became successful. There’s 18 of us working here now. We’ve got to make payroll every month, but we are obviously able to do that so far. That helped us build wealth faster. And because of that, we became financially independent about eight years faster than we expected to.

I don’t want to tell you that the fast lane doesn’t work. Clearly it does work. We went down the fast lane. Now, I don’t know that I was hustling quite as much as Alex was while I was in the military. That was a little different ops tempo back then. If I wasn’t deployed, a couple of my partners were and we were working an awful lot of shifts back then. Thankfully, deployments are not quite so frequent now as they were back then when I was in the military. And it gives people a little bit more time at home to maybe work on some other things.

But the truth is these both work. You’ve got to figure out what’s right for you. What you don’t want to do is say, “Oh, I’m mostly just going to be in the slow lane, but I’m just going to gamble on this other thing on the side.” That’s a bad idea. That doesn’t work out very well for anybody to put a big chunk of their net worth into something they did not learn much about. They’re not paying much attention to. That’s a bad idea. Don’t do that. If you want to be in this fast lane, get all the way into it. Yes, you can still work on the slow way, just like we did, but put both feet in, put the time in, learn what you need to do and put the effort in.

And yes, there are costs. For some portion of your life, you’re probably going to feel like you got a couple of jobs. Hopefully that pays off very well for you. There’s no guarantee, obviously, it’s going to, but the entrepreneurial pathway can be very effective. It’s just a much less guaranteed pathway.

So, figure out what’s right for you. Don’t feel guilty that you’re not in the other pathway, whatever you choose. Don’t choose the sidewalk. The slow lane is fine. The fast lane is fine too. I’m not here to judge you no matter which one you’re in, but figure out what works for you, write down a financial plan, follow the financial plan. And make sure you’re adequately educated for the pathway that you choose. I hope that’s helpful to you.

SPONSOR

One of the most underrated financial moves in medicine is working locum tenants. It pays significantly more on average and you can work locums full-time or on the side of your full-time. When you work with CompHealth, the number one staffing agency, they cover your housing and travel costs, which on top of higher pay really adds up.

Locums also gives you more control of your career, allowing you to go where you want, when you want, with a schedule that works for you. It’s the perfect way to get ahead financially while getting focused on what you love. Whether it’s locum tenants or a regular permanent position, build your career your way with the power of CompHealth. Learn more at comphealth.com.

All right, don’t forget WCICON. The swag bag deadline is the 12th. You can still register to come after the 12th. We’d still love to have you. In fact, I don’t think we’re going to be totally sold out of this conference. I guess that’s always possible, but you can probably walk up the day of the conference and register if you want, but you won’t get this swag bag and it is a sweet swag bag. So, register by the 12th, come see us in San Antonio. It’s going to be a great conference. Sign up at wcievents.com.

That deadline is December 12th, 2024. More information is wcievents.com. You can go there, you can see pictures of the resort. You can see who the speakers are going to be, what the topics are going to be. The conference is running February 26th through March 1st, 2025. It’s a great time of year to be down there in San Antonio. And I’m looking forward to meeting as many of you as I can there.

Thanks for listening to the podcast. We appreciate you being here and I hope it’s helpful to you. Give us feedback, send us emails, [email protected]. We will improve it as much as we can and make it as useful as we can for you. We really truly are here to serve you. Thanks so much for what you’re doing and we’ll see you next time on the Milestones to Millionaire podcast.

DISCLAIMER

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