Today, we cover a broad range of topics from employee stock purchase plans to how to move on after you make a financial mistake. We discuss the difference between a traditional workplace 401(k) and a solo 401(k). We talk about 457(b)s and the tax implications of a K-1 form upon partnership, and we answer if you can have a solo 401(k) for each 1099 contract you have. We start this episode off discussing whether it is a good idea to be public about how much money you make and what you do with your money. At the end of the day, we believe everyone should be able to do whatever they want with their career and their income—but it is unlikely there is any good reason to be public about that unless you are trying to make money online.
Is Talking About Money a Good Idea?
You saw the title of this episode. Is talking about money tacky? Obviously, I talk about money all the time, so I don’t think it’s particularly tacky. But I got this email in my inbox that said,
“There’s a recent New York Times article from September 24, 2022 titled ‘Millennials Want to Retire at 50. How to Afford It Is Another Matter.’ The reporter interviews a cardiothoracic anesthesiologist who then gets lambasted in the comments for wanting to retire at 50. Keeping in mind her side may not have been fairly represented, what advice do you have for physicians and high-income professionals regarding public or semi-public discussion in advertisement of finances? Many people, or at least New York Times readers, are unsympathetic to anything besides a lifetime of sacrificial servitude.”
It is an interesting article worth taking a look at. This article is about Dr. Devangi Patel. She’s 33. She’s a CT anesthesiologist outside of Atlanta, a couple years out of training it looks like, who wants to FIRE at 50. It doesn’t seem that unusual in our community. Lots of people would like to be financially independent by 50, and she says, “I want to get to a point where I don’t have to work for money anymore and I can work for pleasure.” What’s wrong with that? Nothing’s wrong with that, right? But as you know, lots of people think that nobody should retire early or the doctors owe something to society because their residency training was funded by Medicare dollars or something like that. Well, the truth of the matter is, I don’t really believe that and almost none of our audience believes that either.
What you want to do with your career, whether you want to quit after medical school, whether you want to quit after residency and go be a hedge fund manager, whether you want to go part-time, whether you want to go on the parent track, whether you want to retire at 43 or 47 or 52 or 58 or 78, that’s up to you. You shouldn’t have to account to anybody else how you want to have your career start, continue, and end. I would not feel any guilt whatsoever, no matter how you want to craft your career in that respect, even if the commenters on a New York Times article feel differently. They don’t have to walk in your shoes.
But the question here is not just about that, because I think most of us listening to the podcast agree about that. The question is, how public should you be when talking about your finances? Obviously, I’m pretty public about my finances. We decided to be public about our finances mostly because we thought we could make a lot of money doing it. People like transparency, people like hearing what other people do with their money.
I started a blog in 2011, and I had a decision to make when I started that blog. I could do it anonymously, or I could do it publicly. What I quickly realized is that if I did it publicly, I would have a lot more trust, No. 1. And No. 2, I could take it a lot further. Because guess what? Advertisers aren’t going to give you money if they don’t know who you are. People trust you less when they don’t know who you are. It turns out that you can do better as a physician financial blogger if you are public about your identity. I had to explain this to Leif Dahleen, The Physician on FIRE. You may or may not recall that he basically came out about who he was in 2018 at WCICON. The original WCICON in Park City is when people found out who the Physician on FIRE was. Up until that point, every picture he had on his blog had a big smiley face over his head. Nobody knew who he was. But indeed, it has been easier for him to make money online when people know who he is, than it was beforehand. That’s just kind of a reality for those of us who are trying to make money online.
For the rest of you, I have no idea why you would possibly put your private financial information into any sort of a public sphere. It is so easy to be anonymous. You can be anonymous on the WCI forum. You can be anonymous on the WCI subreddit. It doesn’t work so well on Facebook. But even on Facebook, I guess you can use a fake name. Obviously, if you have a really personal question, you can ask a moderator to post it for you. If you go to any other forum on the internet, Bogleheads, or whatever, you can be anonymous. I don’t see any real benefit to being less than anonymous in that sort of a setting.
However, there is a benefit to your peers if you actually talk about money with them. If you give presentations to medical students and residents and fellows and other attendings at your medical center, there’s a huge benefit to them for that. It helps if you share a little bit of information about your own finances, especially if you share some of the mistakes you’ve made. That really helps them to understand and to feel like they can do what you’ve done. I think there’s a lot of benefit to that. I’m all for whatever you want to call that semi-public discussion of finances. But whether I would let the New York Times write this article about me that talked about my finances, maybe if I was trying to make money online I would. Otherwise, I think I would probably take a pass on that invitation from a reporter.
More information here:
Are Physicians Who Retire Early Abusing the System That Made Them Rich?
Employee Stock Purchase Plans
“Hi, this is Corey in Arizona. I had a question about employee stock purchase plans. I am moving to an employer that offers an ESPP at a 10% discount on what their stock price is. And looking at some of the research on it, a strategy with this would be to actually buy the stock out of my paycheck, and then as soon as it’s an option for me, sell it immediately to lock in that 10% difference in the company’s price. That’s public in my 10% discount as a way of sort of a guaranteed gain. I know that there’s a $25,000 limit—or at least that’s what I found—per year of what I can purchase and that I’ll have to pay taxes on my gains. But it seems on the surface at least a pretty simple way to lock in a return on that money. My goal is not to own all single stock. I do index fund investing, but this seems like just a way to get a little bit more out of the benefit of my employer. I’m just curious if I’m missing something that could be totally messing up my plan.”
Well, Corey from Arizona, congratulations on living in such an awesome state. Arizona is one of my favorites. I’ve lived down there for five years of my life and visit frequently. At any rate, it sounds like you understand exactly how this works. If they’re going to give you a big, huge discount on it, sure, buy some employee stock, but get rid of it as soon as you can, usually at one year so you can make sure you get long-term capital gains treatment on it. But consider that part of your salary, that $2,500 difference between what it would cost you to buy that stock and what it wouldn’t.
Is there risk there? Yeah, there’s a risk that the company implodes. There’s a risk that the value of the stock goes down between the time you purchase it and when you sell it to diversify your portfolio. But for a year, for $25,000 a year, I think it’s a risk well worth running. The key anytime you have an employee stock purchase plan is that you don’t want to have all your eggs in one basket. You don’t want to have all your employment income, as well as your entire portfolio, all tied up with one company. This used to be much more common in 401(k)s that the only or one of the most important investing options in the 401(k) was the employer’s own stock. There were all kinds of people at Enron who had put all of their 401(k) money into Enron stock. When Enron went bankrupt, not only did they lose their job, they lost their entire 401(k). Bad idea. If you’re going to do this, you do need to divest out of the employer’s stock as soon as you can—or at least after one year so you get long-term capital gains treatment—and then diversify that into whatever your written investment plan may be.
More information here:
Dealing with Company Stock in Your 401(k)
How to Move On from Financial Mistakes
“Hi, Jim. My name is Sam, and I need your advice more from a mental health standpoint because I kind of know what you will say financially. But basically, I made the stupidest mistake possible, and I completely blew pretty much our whole nest egg, about $2 million. How did I do it? Probably not even important, but I just made a really, really stupid investment, and it’s basically down 80% now and continuing to go down and doesn’t look like it’s going to recover anytime soon. I understand, financially speaking, what’s the best thing to do. Obviously, I have a pretty good income, so just keep plugging away and saving and learn from my mistakes and avoid doing something stupid in the future. But I’m having a really hard time getting out of my depression of working so long and just completely, basically, gambling away our $2 million nest egg and starting from scratch again. Any advice would be really appreciated. Thanks so much.”
I’m so sorry, Sam. That is a terrible story. This might be the worst Speak Pipe I’ve ever gotten. What a tragedy. Obviously, you know you should have been diversified. Obviously, you know you shouldn’t have done what you did. Let this be an example for everybody else of how important it is to invest your money, to not gamble it, to be diversified, to not put all your eggs in one basket, and to realize that building wealth slowly is a far better option than trying to get rich quick. But for you, Sam, you’ve learned those lessons. You don’t need me to reiterate them.
How do you move forward? Well, let’s talk about what you mean by depression, first of all. I see lots of people who are really depressed, people that are suicidal every day. If that’s where you’re at, you need to get some help. There is help out there. One thing about feeling suicidal is that it typically passes relatively quickly. If we can keep people safe for a few days, most of the time they’re no longer feeling suicidal. If you are there now or if you find yourself going there in the future, please get some help. I know it’s not popular—in the medical community especially—to seek out help for mental health issues. It can even affect credentialing at times. But it’s a whole lot better to have your credentialing be affected than to suffer with mental health or, worse, an early death due to a mental health issue.
If your depression is not that bad, it does not hurt to talk to somebody about it. Therapy goes a long way and just getting stuff out in the open, in fact, just recording this Speak Pipe was probably therapeutic for you. It’s certainly helpful to those around you. Something good that comes out of your experience is you’ve taught 30,000 or 40,000 people the importance of diversification. And that’s valuable. I think the mindset here is key for you. The mindset needs to be that this is water under the bridge. Everybody makes mistakes. Everybody makes financial mistakes in their life. Look at the list of mistakes I’ve made. I’ve hired someone that I thought was a financial advisor that was really a commissioned salesman in disguise. I’ve bought a whole life insurance policy. Financially speaking, having the military pay for my medical school was a mistake. I ran the numbers once and figured out I came out about $180,000 behind. And obviously early in your career, once you multiply that out with compound interest for a few years, maybe that’s even a $2 million mistake.
Everybody has made mistakes, and the only way you can deal with them is to treat them as water under the bridge. You have to look forward and move forward with your finances and control what you can control. You can no longer control this mistake, whatever it was. I don’t know. Maybe you bought some crypto asset with all your money that went down, or you put it in options. I don’t know what you did to lose that much money, but whatever it was, it’s gone. Let it go. The good news, if you’re listening to this podcast, is you’re probably a high-income professional. You were able to build a $2 million nest egg. How much faster can you do that this time with what you know now? Probably a lot faster. I have no doubt in my mind that you are going to become financially independent. Not as fast as maybe would’ve occurred, but certainly with plenty of time to spare before the time you need to be financially independent when you hit retirement.
Focus on moving forward. Use your experience for good as much as you can. Make sure you take care of yourself first and foremost. Remember, the biggest threat to your finances is probably burnout. Make sure that you are optimizing everything for longevity. You can do this. You can do this. The WCI community will help. Someday, maybe we’ll even be able to meet in person and talk about it. Someday, you might even be able to laugh this off as a silly mistake that didn’t really affect the end result.
By the way, you mentioned “our.” So, I assume there’s a spouse or a partner or something else in the picture, and you two have really got to talk about this and get on the same page about money. What you may find is that each of you can keep the other one from making financial mistakes by working together. Whether that involves both of you working together with an advisor, both of you working together with a therapist, or just talking regularly about money, enlist the aid of both partners. A lot of times that can help you to do even better moving forward. I suspect you may not have been doing that as well as you should have, if you made this mistake. But if you both get on the same page, you can probably build wealth even faster the second time than you did the first time.
More information here:
How to Overcome Financial Mistakes
401(k)s and Solo 401(k)s
“Please forgive my voice. I’m recording this when I’m off work for a couple of days recovering from COVID, and it seemed like a good time to work on getting my financial affairs together. I have a 401(k) through my practice, and I have a separate individual 401(k) for some expert witness work that I do on the side. I don’t particularly like the practice 401(k) and I’ve attempted to change it, but I’ve met with some resistance. I have to pay 1% assets under management fee to the administrator of the 401(k) for the practice—whether I like it or not and whether I self-manage it or not—as part of the way the plan is set up.
Is there any reason not to roll all of those funds that are in the practice plan into my individual 401(k) so that I can continue to self-manage? I have this through Vanguard and have it diversified in a bunch of low-cost index funds. It seems to me that there’d be no reason not to make the change other than maybe some very minimal asset protection nuances that are offered by the practice’s 401(k) as opposed to the individual 401(k).”
I’m sorry you got COVID. Based on the fact that you don’t sound very short of breath when you talk about getting your financial affairs in order, I assume you’re talking about your financial plan rather than some sort of last-minute estate planning. I trust by the time you’re hearing this, you’re feeling fine. Your question, of course, is can you just roll money from your 401(k) into your solo 401(k)? And the answer to that is actually plan-dependent. Plans are allowed to allow that, but most in practice do not. You have to separate from the employer—either be fired or quit your job—in order to move money out of the 401(k). That’s the way most of them work until you get to be toward retirement age. You’re probably not allowed to do this. You can check with HR, but chances are you can’t. If they let you, sure, do it. Go for it. Lots of people do that with their 401(k)s if they’re allowed to, but they generally aren’t.
By the way, with this 401(k) charging 1% AUM fees, you might want to let them know that this is a serious liability for the company. The company has a fiduciary duty to the employees to offer them a good 401(k) plan, and one charging 1% AUM is not, by definition, a good 401(k) plan. There is a huge liability here. I just met an attorney. I was at the Bogleheads conference the other day. Actually, it’s not an attorney, it’s a CFA who consults with a bunch of legal firms or works for a legal firm or whatever. All this firm does is sue hospitals with bad 401(k)s. That’s what they do. Whoever’s in charge of your group, your practice, your hospital, and their 401(k), if you have a bad one, you should let them know that these sorts of firms are out there and they’re finding plenty of business and they’re winning their cases. These are generally no-brainer cases because so many people still have terrible 401(k)s. If your 401(k) hasn’t been changed in the last 15 or 20 years, chances are you have a terrible 401(k) that is ripe to get you sued. Whether you’re in a small practice or large, all it takes is one disgruntled employee, and you could end up with a very costly and time-consuming lawsuit on your hands. You may pass that along. Not threatening or anything, but pass that along, that if somebody ever gets upset with them, this could be a problem. Obviously, be careful. You don’t want to be fired for bringing that to their attention.
457 Plans
“Dr. Dahle, I’m a third-year PEM fellow, and I recently accepted my first job outside of training. I will have access to a 457 plan, and I’d like to use this to help with my 20% savings goal in a tax-efficient manner. However, thanks to you, I know that this plan is a deferred compensation plan and that the money is not technically mine until I retire. If I were to max out the account every year as a plan for the life of my career, there would likely be around $2 million in it at time of retirement. It makes me very nervous to think about this amount of money in someone else’s hands and subject to their creditors. What advice do you have for evaluating a company and its stability and whether or not the 457 plan is a good idea? For reference, in my situation, the employer that I will be working for is a large state children’s hospital network, has been very well respected, and has never had any issues in the past. It had a nine-figure operating budget last year and about 7% profit. It seems like if I knew how to effectively evaluate a corporation of that size, I wouldn’t need to be in medicine as I would basically be Warren Buffett.”
This is true what you’re saying. 457 plans are technically the assets of the employer and subject to the creditors of the employer. That’s good from an asset protection standpoint for you but not for the employer. If they go bankrupt, then you can lose your 457, aka deferred compensation money. When you’re deciding whether to use a 457, you want to decide are the investment options good? Are the fees reasonable? Are the distribution options reasonable? Are they going to work for you? And most importantly, is the employer reasonably stable? Now, this is a theoretical risk. I’m still not sure I’ve ever met a doctor who lost any of their 457 money. I’m not sure how real of a risk it really is.
Keep in mind there are two different types of 457(b)s. There are governmental 457(b)s, and these are pretty great because, when you’re done, you can roll them into an IRA. They’re generally a more stable employer. There are some other options with them. And there are non-governmental 457(b)s. You can’t roll these into an IRA when you’re done. They’re usually with an employer that’s not a big governmental entity. In your case, you said this is a state hospital system. That sounds to me like a governmental 457(b) that’s backed by the state’s taxpayers. That’s an awfully stable employer. I wouldn’t feel bad about using that 457(b) and considering it nearly the equivalent of a 401(k) or 403(b). I’d still max out the 401(k) or 403(b) first, but I would have no qualms about using a 457(b) in that sort of a situation.
If you’re still worried about it, though, you have more than two options. There’s not a false dichotomy. You don’t have to max it out every year for 30 years, and you don’t have to put nothing in it ever. You can put a couple thousand dollars in it every year. You could max it out for four or five years and then stop contributing to it. There are lots of things that you could do in between. If you’d be comfortable putting $100,000 or $200,000 or $300,000 at risk, maybe you just put a little bit of money in it each year rather than maxing it out and then you invest in a taxable account and pay a little bit extra in taxes on that money instead.
So, you’ve got to decide that. But from what you’re describing, this doesn’t sound like an unstable employer to me. On the other hand, if this is a non-governmental 457 and the employer has got all kinds of weird shady things going on with it—the board members keep turning over, you get a new CEO every six months, you notice they’re not giving any of the nurses raises and they’re not spending any money on capital improvements, maybe you talk to the CFO and he pulls you aside and says, “Who knows, man? We might be belly up in six months”—in those sorts of situations, you may not want to be maxing out that 457(b).
If you or anybody you know has ever lost 457(b) money, send me an email at [email protected]. I’d like to hear about it, because, so far, I have yet to find somebody that has lost 457(b) money.
More information here:
The 2023 Retirement Plan Contribution Limits
Tax Implications of Form K-1 upon Partnership
“Hi, Dr. Dahle. My name is Atul. I’m currently an orthopedic surgeon in my fellowship year. I’m looking at jobs right now, and one of the jobs has a Form K-1 upon partnership. I was wondering if you could speak upon the tax implications of this, if it’s treated as a 1099, things of that nature.”
Let’s break this down. There are basically three forms on which doctors get paid. They get paid on a W2, on a 1099, or on a K-1. If you’re paid on a W2, you are an employee, you’re an employee of the company. That means that the employer provides benefits, such as a 401(k), health insurance, maybe some disability and life insurance. They pay half of your payroll taxes or Medicare and Social Security. And you’re an employee. If you are paid on a 1099, you are an independent contractor. You are in business for yourself; you own a business. Now, you can make that a corporation, you can make that an LLC. If you do nothing, it is a sole proprietorship. That means you fill out a Schedule C on your tax form every year. You will also be filing a Schedule SE, which is for self-employment taxes. Self-employment taxes are your payroll taxes that would’ve been withheld by your employer if you’d been an employee. But as a 1099, they just pay you everything, and you have to pay the payroll taxes. The way you do that is via Schedule SE. They’re called self-employment taxes. That’s a 1099.
If you work at six different hospitals, they’re basically like six clients for your business. It’s one business, and your business is your name, probably, unless you come up with a business name or an LLC name or something like that—which I don’t think doctors really have to do if they’re just doing clinical work. That LLC does not protect you from medical malpractice in any way. Sole proprietorship is fine. If you have a bunch of employees or other business-related liability besides malpractice, maybe it’s worth forming an LLC or a corporation. But for most docs doing 1099 work, it is fine to just be a sole proprietorship.
If you are paid on a K-1, you are a partner. The business entity is a partnership, and you are one of the partners. When you do a partnership tax return, when the partnership does the tax return, that is Form 1065. Part of that return is Schedule K. From Schedule K, they take everything on Schedule K and divide it up by the partners according to their percentage of ownership and send each partner a K-1. That’s where the Form K-1 comes from. A partner is self-employed, but they are not in business by themselves. It’s not exactly the same as a 1099. In most partnerships, you will still have to buy all of your own benefits, but if you want to use a 401(k), you’ve got to use their 401(k). You can’t go start a solo 401(k), like you could if you’re an independent contractor.
Likewise, the partnership often offers a health insurance plan. If you want to use that partnership plan, that is an option. If you want to go buy it on the open market, you can also do that. There is a way that you can still manage to deduct that, by the way. But as far as the K-1 goes, you’re not only going to be paying your own benefits, you are also going to be paying your own self-employment taxes, your own Medicare and Social Security taxes. Again, that happens on Form SE of your tax return, but you don’t file a Schedule C when you are a partner paid on a K-1.
As a general rule, I’m a big fan of ownership. I like owning your job. I like when doctors have control over their jobs. I think it leads to less burnout. Although they have to work harder and take a little bit more risk, I think in the long run they generally come out ahead financially. I think this is a good thing, but it is more complex. You have to make sure that you’re sending in your quarterly estimated tax payments, just like a 1099 independent contractor would. Nobody’s withholding tax for you. And of course, you’re going to have to pay both halves of the Social Security tax. If someone offers you the same amount of money as a 1099 or K-1 as a W2 employee, you’re probably better off taking the W2 employee because your expenses will be lower. But generally, they’ll pay you more on a 1099 or a K-1 than they will on a W2. If they’re paying you, I don’t know, 10% or so more, you’re going to be equal or better using the 1099 or K-1 tax treatment.
Your tax implications? You have to pay both halves of Social Security taxes and Medicare taxes. You’ve got to withhold your own taxes by sending in quarterly estimated tax payments, and you can deduct any unreimbursed business expenses from the partnership against that partnership income. That’s about all the tax implications of being on Form K-1.
Can You Have a Solo 401(k) for Each 1099 Contract You Have?
“Hi, Dr. Dahle. This is Pete from California. I have a 1099 call contract with my hospital for which I opened a solo 401(k). I’m about to start a new call contract with a separate hospital and separate employer, but my understanding is that I cannot open a new solo 401(k) for that contract. Am I reading that correctly?”
Yeah, Pete, you have got that right. The reason why is because when you go work at another hospital as a 1099, you’re already working at one hospital as a 1099. You go to another one, you’re working there as a 1099 or an independent contractor, but you don’t have a new business. You still have one business. One business, one 401(k). That business just has two clients now. But that doesn’t entitle you to open a new solo 401(k). Otherwise, people with 25 clients would have 25 different solo 401(k)s. I mean, give me a break. Why would the IRS allow that? They’re not going to allow that. One solo 401(k).
Keep in mind the rules for that. There’s a blog post on the White Coat Investor website called “Multiple 401(k) Rules.” You can have more than one 401(k), but there are some rules. Each 401(k) for an unrelated business gets the same maximum total contribution level. In 2022 that’s $61,000. In 2023, it is going to be $66,000. You get one of those at every business that’s unrelated, every 401(k) you have, but you only get one employee contribution. That’s $20,500 in 2022 or $22,500 in 2023. You only get one of those no matter how many 401(k)s you have.
What the typical situation is, if you’re an employee and you have some 1099 work, you use your employee contribution at the W2 job and then get any employer match they might give you, maybe they give you $10,000 of a match. You get $20,000 of your contribution and $10,000 of a match in that one. Then, in your solo 401(k), it’s all employer contributions, which are basically 20% of your net profit from that business. Net of the employer half of the Social Security taxes. Say you made $40,000 there and you can put in 20% of that, so you can put $8,000 into your solo 401(k). That’d be a pretty typical situation for a doctor.
More information here:
Answering Your Questions About 401(k)s and How to Manage Them
Do Dividends from Stocks Count as Unlimited Capital Gains?
“Thanks for being awesome. I know when I tax-loss harvest, I can use the losses to offset $3,000 per year of income and unlimited capital gains. Do dividends from stocks count as the unlimited capital gains or only part of the $3,000 of ordinary income?”
Dividends are not capital gains. You cannot use capital losses to offset dividends. Technically, you could use them to offset up to $3,000 of dividends a year, but why would you want to do that? You wouldn’t want to offset qualified dividends if you have $3,000 of ordinary income because that’s taxed at a higher rate. You can use $3,000 of your losses from tax-loss harvesting against your ordinary income. You can use additional losses you may have against any capital gains you might have, and then you’re going to pay taxes on your dividends. Not the end of the world, but that’s the way it works. I know dividends are taxed at the same rate as long-term capital gains, but they are not the same thing.
This podcast is sponsored by Bob Bhayani at drdisabilityquotes.com. He is an independent provider of disability insurance planning solutions to the medical community in every state and a long-time white coat investor sponsor. He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. If you need to review your disability insurance coverage or to get this critical insurance in place, contact Bob at drdisabilityquotes.com today by email [email protected] or by calling (973) 771-9100.
No Hype Real Estate Master Class
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Quote of the Day
Benjamin Franklin said,
“An investment in knowledge pays the best interest.”
Milestone to Millionaire
#92 – This new attending figured out early the importance of having a plan and sticking to it. Now just one year out of residency he has gotten back to broke and is growing his networth fast. He shows us that with just a little research and effort you can set yourself up for success.
Sponsor: PearsonRavitz
Full Transcript
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 podcast number 289 – Is talking about money tacky?
Dr. Jim Dahle:
This podcast is sponsored by Bob Bhayani at drdisabilityquotes.com. He is an independent provider of disability insurance planning solutions to the medical community in every state and a long-time White Coat Investor sponsor.
Dr. Jim Dahle:
He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. If you need to review your disability insurance coverage, or to get this critical insurance in place, contact Bob at drdisabilityquotes.com today or by mail [email protected] or by calling (973) 771-9100.
Dr. Jim Dahle:
Welcome back to the podcast. It is October 25th. We’re recording this to run November 17th. Hopefully nothing crazy happens in the world between now and then. It makes this podcast sound totally out of date and out of touch to you. But if so, at least you know the reason why.
Dr. Jim Dahle:
All right. You saw the title of this episode. Is talking about money tacky? And obviously I talk about money all the time, so I don’t think it’s particularly tacky, but I got this email in my email box who said, “There’s a recent New York Times article from September 24th, 2022 titled ‘Millennials Want to Retire at 50. How to Afford It Is Another Matter.’
Dr. Jim Dahle:
The reporter interviews a cardiothoracic anesthesiologist who then gets lambasted in the comments for wanting to retire at 50. Keeping in mind her side may not have been fairly represented, what advice do you have for physicians and high-income professionals regarding public or semi-public discussion in advertisement of finances? Many people, or at least New York Times readers, are unsympathetic to anything besides a lifetime of sacrificial servitude. Thank you.”
Dr. Jim Dahle:
Good question. It is an interesting article worth taking a look at. I’m going to include it in my newsletter for this month. I guess you saw the newsletter a couple of weeks ago if you get that. If you don’t get it by the way, you should sign up for that. Go to whitecoatinvestor.com under the WCI Plus! tab, sign up for the newsletter. It’s totally free and it has lots of cool stuff including what are basically blog posts that never show up on the blog. It’s like the secret blog post. Also includes the best stuff I found on the internet about physician finance for the prior month, as well as lots of other specials and cool information about stuff going on in the WCI community. But sign up for that.
Dr. Jim Dahle:
At any rate, this article is about Dr. Devangi Patel. She’s 33. She’s a CT anesthesiologist outside of Atlanta, a couple years out of training it looks like, who wants to FIRE at 50. It doesn’t seem that unusual in our community. Lots of people would like to be financially independent by 50, and she says, “I want to get to a point where I don’t have to work for money anymore and I can work for pleasure.”
Dr. Jim Dahle:
What’s wrong with that? Nothing’s wrong with that, right? But as you know, lots of people think that nobody should retire early or the doctors owe something to society because their residency training was funded by Medicare dollars or something like that. Well, the truth of the matter is, I don’t really believe that. As you saw in a recent post that we had on the WCI blog, almost none of our audience believes that either.
Dr. Jim Dahle:
And so, what you want to do with your career, whether you want to quit after medical school, whether you want to quit after residency and go be a hedge fund manager, whether you want to go part-time, whether you want to go on the parent track, whether you want to retire at 43 or 47 or 52 or 58 or 78, that’s up to you and you shouldn’t have to account to anybody else how you want to have your career start, continue and end.
Dr. Jim Dahle:
I would not feel any guilt whatsoever, no matter how you want to craft your career in that respect, even if the commenters on a New York Times article feel differently. They don’t have to walk in your shoes.
Dr. Jim Dahle:
But the question here is not just about that, because I think most of us listening to the podcast agree about that. The question is, how public should you be when talking about your finances? Now, obviously, I’m pretty public about my finances. We decided to be public about our finances mostly because we thought we could make a lot of money doing it. People like transparency, people like hearing what other people do with their money.
Dr. Jim Dahle:
And so, I started a blog in 2011 and I had a decision to make when I started that blog. I could do it anonymously or I could do it publicly. And what I quickly realized is that if I did it publicly, I would have a lot more trust, number one. And number two, I could take it a lot further. Because guess what? Advertisers aren’t going to give you money if they don’t know who you are. And people trust you less when they don’t know who you are.
Dr. Jim Dahle:
And so, it turns out that you can do better as a physician financial blogger if you are public about your identity. And I had to explain this to Leif Dahleen, The Physician on FIRE. You may or may not recall that he basically came out about who he was in 2018 at WCICON. The original WCICON in Park City is when people found out who the physician on FIRE was. Up until that point every picture he had on his blog had a big smiley face over his head. Nobody knew who he was.
Dr. Jim Dahle:
But indeed, it has been easier for him to make money online when people know who he is, than it was beforehand. And so, that’s just kind of a reality for those of us who are trying to make money online.
Dr. Jim Dahle:
For the rest of you, I have no idea why you would possibly put your private financial information into any sort of a public sphere. It is so easy to be anonymous. You can be anonymous on the WCI forum. You can be anonymous on the WCI subreddit. It doesn’t work so well on Facebook. But even on Facebook, I guess you can use a fake name.
Dr. Jim Dahle:
And obviously, if you have a really personal question, you can ask a moderator to post it for you. You go to any other forum on the internet, Bogleheads or whatever, you can be anonymous. And I don’t see any real benefit to being less than anonymous in that sort of a setting.
Dr. Jim Dahle:
However, there is a benefit to your peers if you actually talk about money with them. If you give presentations to medical students and residents and fellows and other attendings at your medical center, there’s a huge benefit to them for that. And it helps if you share a little bit of information about your own finances, especially if you share some of the mistakes you’ve made. That really helps them to understand and to feel like they can do what you’ve done.
Dr. Jim Dahle:
And so, I think there’s a lot of benefit to that. I’m all for whatever you want to call that semi-public discussion of finances. But whether I would let the New York Times write this article about me that talked about my finances, maybe if I was trying to make money online, I would but otherwise I think I would probably take a pass on that invitation from a reporter.
Dr. Jim Dahle:
All right. Let’s talk about employee stock purchase plans. This question comes in off the Speak Pipe. By the way, if you want to leave us Speak Pipe messages, we love it when you do that. You can do that at whitecoatinvestor.com/speakpipe. Ask your questions then you’ll get to hear your voice on the podcast and you’ll get an answer to your question. So, thanks for those who leave questions. They really do drive the content of this show.
Corey:
Hi, this is Corey in Arizona. I had a question about employee stock purchase plans. I am moving to an employer that offers an ESPP at a 10% discount on what their stock price is. And looking at some of the research on a strategy with this would be to actually buy the stock out of my paycheck, and then as soon as it’s an option for me, sell it immediately to lock in that 10% difference in the company’s price. That’s public in my 10% discount as a way of sort of a guaranteed gain. I know that there’s a $25,000 limit, or at least that’s what I found per year of what I can purchase and that I’ll have to pay taxes on my gains.
Corey:
But it seems on the surface at least a pretty simple way to get locked in return on that money. My goal is not to own all single stock. I do index fund investing, but this seems like just a way to get a little bit more out of the benefit of my employer. I’m just curious if I’m missing something that could be totally messing up my plan. I really appreciate it. Thank you.
Dr. Jim Dahle:
Well, Corey from Arizona, congratulations on living in such an awesome state. Arizona is one of my favorites. I’ve lived down there for five years of my life and visit frequently. At any rate, yeah, it sounds like you understand exactly how this works. If they’re going to give you a big, huge discount on it, sure, buy some employee stock, but get rid of it as soon as you can, usually at one year so you can make sure you get in long term capital gains treatment on it. But consider that part of your salary, that $2,500 difference between what it would cost you to buy that stock and what it wouldn’t.
Dr. Jim Dahle:
Is there risk there? Yeah, there’s a risk that the company implodes. There’s a risk that the value of the stock goes down between the time you purchase it and when you sell it to diversify your portfolio. But for a year, for $25,000 a year, I think it’s a risk well worth running.
Dr. Jim Dahle:
Now, the key anytime you have an employee stock purchase plan is that you don’t want to have all your eggs in one basket. You don’t want to have all your employment income as well as your entire portfolio all tied up with one company. The classic example of this are those employees. And this used to be much more common in 401(k)s that the only or one of the most important investing options in the 401(k) was the employee’s own stock.
Dr. Jim Dahle:
But there are all kinds of people at Enron, who had put all of their 401(k) money into Enron stock. And so, when Enron went bankrupt, not only did they lose their job, they lost their entire 401(k). Bad idea. So, if you’re going to do this, you do need to divest out of the employee’s stock as soon as you can, or at least after one year so you get long-term capital gains treatment and then diversify that into whatever your written investment plan may be.
Dr. Jim Dahle:
By the way, we have now a real estate masterclass. Now, this is not the real estate course, the No Hype Real Estate course. The masterclass is totally free. It’s a three-session class that can help you accelerate your path to financial freedom. You can join us for that free three class series. We’ll be diving into some of the topics regarding real estate investing to include calculations you need to know and why. And you can sign up for that at whitecoatinvestor.com/remasterclass.
Dr. Jim Dahle:
And obviously, we’d love for you to buy the course that we charge lots of money for because it’s a very in-depth, excellent course. But this masterclass is totally free. Yes, at the end, you’re going to hear a pitch to buy the whole course, but this masterclass is not an advertisement. It’s really filled with a lot of great information about real estate investing that can help you get you started.
Dr. Jim Dahle:
And if you decide you want to learn more from me about the overall real estate course, the No Hype Real Estate investing course, you can sign up for that and potentially even at a special price after you take the masterclass.
Dr. Jim Dahle:
All right, let’s take another question off the Speak Pipe.
Sam:
Hi, Jim. My name is Sam, and I needed your advice more from a mental health standpoint because I kind of know what you will say financially. But basically, I made the stupidest mistake possible, and I completely blew pretty much our whole nest egg, about $2 million. How did I do it? Probably not even important, but I just made a really, really stupid investment, and it’s basically down 80% now and continuing to go down and doesn’t look like it’s going to recover anytime soon.
Sam:
I understand financially speaking, what’s the best thing to do? Obviously, I have a pretty good income, so just keep plugging away and saving and learn from my mistakes and avoid doing something stupid in the future.
Sam:
But I’m having a really hard time getting out of my depression of working so long and just completely, basically, gambling away our $2 million nest egg and starting from scratch again. Any advice would be really appreciated. Thanks so much.
Dr. Jim Dahle:
I’m so sorry, Sam. That is a terrible story. This might be the worst Speak Pipe I’ve ever gotten. What a tragedy. Obviously, you know should have been diversified. Obviously, you know shouldn’t have done what you did.
Dr. Jim Dahle:
Let this be an example for everybody else of how important it is to invest your money, not gamble it, to be diversified, to not put all your eggs in one basket and to realize that building wealth slowly is a far better option than trying to get rich quick. But for you, Sam, you’ve learned those lessons. You don’t need me to reiterate them.
Dr. Jim Dahle:
How do you move forward? Well, let’s talk about what you mean by depression first of all. I see lots of people who are really depressed, people that are suicidal every day. If that’s where you’re at, you need to get some help. And there is help out there. The nice thing about feeling suicidal is that it typically passes relatively quickly. If we can keep people safe for a few days, most of the time they’re no longer feeling suicidal. If you are there now, or if you find yourself going there in the future, please get some help.
Dr. Jim Dahle:
I know it’s not popular, in the medical community especially, to seek out help for mental health issues. It can even affect credentialing at times. But it’s a whole lot better to have your credentialing be affected than to suffer with mental health or worse, an early death due to a mental health issue.
Dr. Jim Dahle:
If your depression is not that bad, it does not hurt to talk to somebody about it. Therapy goes a long way and just getting stuff out in the open, in fact, just recording this Speak Pipe was probably therapeutic for you. It’s certainly helpful to those around you. Something good that comes out of your experience is you’ve taught 30,000 or 40,000 people the importance of diversification. And that’s valuable.
Dr. Jim Dahle:
Now, I think the mindset here is key for you. And the mindset needs to be that this is water under the bridge. Everybody makes mistakes. Everybody makes financial mistakes in their life. Look at the list of mistakes I’ve made. I’ve hired someone that I thought was a financial advisor that was really a commission salesman in disguise. I’ve bought a whole life insurance policy.
Dr. Jim Dahle:
Financially speaking, having the military pay for my medical school was a mistake. I ran the numbers once and figured out I came about $180,000 behind. And obviously early in your career, once you multiply that out with compound interest for a few years, maybe that’s even a $2 million mistake.
Dr. Jim Dahle:
Everybody has got mistakes, and the only way you can deal with them is to treat them as water under the bridge. And you got to look forward and move forward with your finances and control what you can control. You can no longer control this mistake, whatever it was. I don’t know. Maybe you bought some crypto asset with all your money that went down, or you put it in options. I don’t know what you did to lose that much money, but whatever it was it’s gone. Let it go. Let it go.
Dr. Jim Dahle:
The good news, if you’re listening to this podcast is you’re probably a high income professional. You were able to build a $2 million nest egg. How much faster can you do at this time with what you know now? Probably a lot faster. And so, I have no doubt in my mind that you are going to become financially independent. Not as fast as maybe would’ve occurred, but certainly with plenty of time to spare before the time you need to be financially independent when you hit retirement.
Dr. Jim Dahle:
So, focus on moving forward. Use your experience for good as much as you can. Make sure you take care of yourself first and foremost. Remember, the biggest threat to your finances is probably burnout. And so, make sure that you are optimizing everything for longevity.
Dr. Jim Dahle:
You can do this. You can do this. The WCI community will help. And someday maybe we’ll even be able to meet in person and talk about it. Someday you might even be able to laugh this off as a silly mistake that didn’t really affect the end result.
Dr. Jim Dahle:
By the way, you mentioned “our.” So, I assume there’s a spouse or a partner or something else in the picture, and you guys have really got to talk about this and get on the same page about money. What you may find is that each of you can keep the other one from making financial mistakes by working together. Whether that involves both of you working together with an advisor, both of you working together with a therapist, or just talking regularly about money, enlist the aid of both partners and a lot of times that can help you to do even better moving forward.
Dr. Jim Dahle:
I suspect you may not have been doing that as well as you should have, if you made this mistake. But if you both get on the same page, you can probably build wealth even faster the second time than you did the first time.
Dr. Jim Dahle:
All right, let’s take another question here. This one’s about 401(k)s and solo 401(k)s.
Speaker:
Please forgive my voice. I’m recording this when I’m off work for a couple of days recovering from COVID, and it seemed like a good time to work on getting my financial affairs together.
Speaker:
I have a 401(k) through my practice, and I have a separate individual 401(k) for some expert witness work that I do on the side. I don’t particularly like the practice 401(k) and I’ve attempted to change it, but I’ve met with some resistance. I have to pay 1% assets under management fee to the administrator of the 401(k) for the practice, whether I like it or not, and whether I self-manage it or not as part of the way the plan is set up.
Speaker:
Is there any reason not to roll all of those funds that are in the practice plan into my individual 401(k) so that I can continue to self-manage? I have this through Vanguard and have it diversified in a bunch of low-cost index funds. It seems to me that there’d be no reason not to make the change other than maybe some very minimal asset protection nuances that are offered by the practices 401(k) as opposed to the individual 401(k). Thanks.
Dr. Jim Dahle:
All right. Well, I’m sorry you got COVID. Based on the fact that you don’t sound very short of breath when you talk about getting your financial affairs in order, I assume you’re talking about your financial plan rather than some sort of last-minute estate planning. I trust by the time you’re hearing this or you’re feeling fine.
Dr. Jim Dahle:
Your question, of course, is can you just roll money from your 401(k) into your solo 401(k)? And the answer to that is actually plan dependent. Plans are allowed to allow that, but most in practice do not. You have to separate from the employer, either be fired or quit your job in order to move money out of the 401(k). That’s the way most of them work until you get to be toward retirement age.
Dr. Jim Dahle:
So, you’re probably not allowed to do this. You can check with HR, but chances are you can’t. They let you sure do it. Go for it. Lots of people do that with their 401(k)s if they’re allowed to, but they generally aren’t allowed to.
Dr. Jim Dahle:
By the way, with this 401(k) charging 1% AUM fees, you might want to let them know that this is a serious liability for the company. The company has a fiduciary duty to the employees to offer them a good 401(k) plan and one charging 1% AUM is not by definition a good 401(k) plan. There is a huge liability here.
Dr. Jim Dahle:
I just met an attorney. I was at the Bogleheads conference the other day. Actually, it’s not an attorney it’s a CFA who consults with a bunch of legal firms or works for a legal firm or whatever. And all this firm does is sues hospitals with bad 401(k)s. That’s what they do.
Dr. Jim Dahle:
And so, whoever’s in charge of your group, your practice, your hospital, whatever, and their 401(k), if you have a bad one, you should let them know that these sorts of firms are out there and they’re finding plenty of business and they’re winning their cases. These are generally no brainer cases because so many people still have terrible 401(k)s.
Dr. Jim Dahle:
So, if your 401(k) hasn’t been changed in the last 15 or 20 years, chances are you have a terrible 401(k) that is ripe to get you sued. So, whether you’re in a small practice or whatever, all it takes is one disgruntled employee and you could end up with a very costly and time-consuming lawsuit on your hands.
Dr. Jim Dahle:
You may pass that along. Not threatening or anything, but pass them along, that if somebody ever gets upset with them, this could be a problem. Obviously, be careful. You don’t want to be fired for bringing that to their attention.
Dr. Jim Dahle:
All right, let’s take our next question. This one from Blake about 457 plans.
Blake:
Dr. Dahle, I’m a third-year PEM fellow and I recently accepted my first job outside of training. I will have access to a 457 plan, and I’d like to use this to help my 20% savings goal on a tax efficient manner.
Blake:
However, thanks to you, I know that this plan is a deferred compensation plan and that the money is not technically mine until I retire. If I were to max out the account every year as a plan for the life of my career, there would likely be around $2 million in it at time of retirement.
Blake:
It makes me very nervous to think about this amount of money in someone else’s hands and subject to their creditors. What advice do you have for evaluating a company and its stability and whether or not the 457 plan is a good idea?
Blake:
For reference, in my situation, the employer that I will be working for is a large state children’s hospital network, has been very well respected and never had any issues in the past. It had a nine-figure operating budget last year and about 7% profit. It seems like if I knew how to effectively evaluate a corporation of that size, I wouldn’t need to be in medicine as I would basically be Warren Buffet. Thanks for any insight and help that you have with this.
Dr. Jim Dahle:
Great question. This is true what you’re saying. 457 plans are technically the assets of the employer and subject to the creditors of the employer. That’s good for an asset protection standpoint for you, but not for the employer. If they go bankrupt, then you can lose your 457 a.k.a deferred compensation money.
Dr. Jim Dahle:
When you’re deciding whether to use a 457, you want to decide are the investment options good? Are the fees reasonable? Are the distribution options reasonable? Are they going to work for you? And most importantly, is the employer reasonably stable? Now, this is a theoretical risk. I’m still not sure I’ve ever met a doctor who lost any of their 457 money. I’m not sure how real of a risk it really is.
Dr. Jim Dahle:
But keep in mind there are two different types of 457(b)s. There are governmental 457(b)s, and these are pretty great because when you’re done, you can roll them into an IRA, they’re generally a more stable employer. There are some other options with them and there are non-governmental 457(b)s. And these, you can’t roll into an IRA when you’re done. They’re usually with an employer that’s not a big governmental entity.
Dr. Jim Dahle:
In your case, you said this is a state hospital system. That sounds to me like a governmental 457(b) that’s backed by the state’s taxpayers. That’s an awfully stable employer. I wouldn’t feel bad about using that 457(b) and considering it nearly the equivalent of a 401(k) or 403(b). I’d still max out the 401(k) or 403(b) first but I would have no qualms about using 457(b) in that sort of a situation.
Dr. Jim Dahle:
If you’re still worried about it though, you have more than two options. There’s not a false dichotomy. You don’t have to max it out every year for 30 years and you don’t have to put nothing in it ever. You can put a couple thousand dollars in it every year, you could max it out for four or five years and then stop contributing to it. There are lots of things that you could do in between. If you’d be comfortable putting $100,000 or $200,000 or $300,000 at risk, maybe you just put a little bit of money in it each year rather than maxing it out and then you invest in a taxable account and pay a little bit extra in taxes on that money instead.
Dr. Jim Dahle:
So, you’ve got to decide that. But from what you’re describing, this doesn’t sound like an unstable employer to me. On the other hand, if this is a non-governmental 457, the employer has got all kinds of weird shady things going on with it. The board members keep turning over. You got a new CEO every six months, you notice they’re not giving any of the nurses raises and they’re not spending any money on capital improvements. You talk to the CFO and he pulls you aside and says, “Who knows, man? We might be belly up in six months.” Those sorts of situations you may not want to be maxing out that 457(b).
Dr. Jim Dahle:
If you or anybody you know has ever lost 457(b) money, send me an email [email protected] I’d like to hear about it. Because so far, I have yet to find somebody that lost 457(b) money.
Dr. Jim Dahle:
All right, next question. This one is about the tax implications of Form K-1 upon partnership from Atul.
Atul:
Hi, Dr. Dahle. My name is Atul. I’m currently an orthopedic surgeon in my fellowship year. I’m looking at jobs right now and one of the jobs has a form K-1 upon partnership. I was wondering if you could speak upon the tax implications of this, if it’s treated as a 1099, things of that nature. Thank you again for everything you do.
Dr. Jim Dahle:
Great question, Atul. All right, let’s get into this. Congratulations by the way. It sounds like you’re about done with fellowship. Sounds like you’re going to have a great job as a partner. This is all very exciting for you.
Dr. Jim Dahle:
But let’s break this down. There are basically three forms on which doctors get paid. They get paid on a W2, on a 1099 or on a K-1. If you’re paid on a W2, you are an employee, you’re an employee of the company. That means that the employer provides benefits such as a 401(k), health insurance, maybe some disability and life insurance. They pay half of your payroll taxes, payroll taxes or Medicare and social security. And you’re an employee.
Dr. Jim Dahle:
If you are paid on a 1099, you are an independent contractor. You are in business for yourself, you own a business. Now, you can make that a corporation, you can make that an LLC. If you do nothing, it is a sole proprietorship. That means you fill out a Schedule C on your tax form every year. You will also be filing a Schedule SE, which is for self-employment taxes.
Dr. Jim Dahle:
Self-employment taxes are your payroll taxes that would’ve been withheld by your employer, if you’d been an employee. But as a 1099, they just pay you everything and you have to pay the payroll taxes. And the way you do that is via Schedule SE. They’re called self-employment taxes. So, that’s a 1099.
Dr. Jim Dahle:
If you work at six different hospitals, they’re basically like six clients for your business. It’s one business and your business is your name probably, unless you come up with a business name or an LLC name or something like that, which I don’t think doctors really have to do if they’re just doing clinical work.
Dr. Jim Dahle:
That LLC does not protect you from medical malpractice in any way. So, sole proprietorship is fine. If you have a bunch of employees or other business-related liability besides malpractice, maybe it’s worth forming an LLC or a corporation. But for most docs doing 1099 work is fine to just be a sole proprietorship.
Dr. Jim Dahle:
If you are paid on a K-1, you are a partner. The business entity is a partnership, and you are one of the partners. So, when you do a partnership return, partnership tax return, when the partnership does the tax return, that is form 1065 and part of that return is Schedule K. And from Schedule K, they take everything on Schedule K and divide it up by the partners according to their percentage of ownership and send each partner a K-1. That’s where the form K-1 comes from.
Dr. Jim Dahle:
A partner is self-employed, but they are not in business by themselves. So, it’s not exactly the same as a 1099. In most partnerships, you will still have to buy all of your own benefits, but if you want to use a 401(k), you’ve got to use their 401(k). You can’t go start a solo 401(k) like you could if you’re an independent contractor.
Dr. Jim Dahle:
Likewise, the partnership often offers a health insurance plan. And so, if you want to use that partnership plan, that is an option. If you want to go buy it on the open market, you can also do that. There is a way that you can still manage to deduct that by the way.
Dr. Jim Dahle:
But as far as the K-1 goes, you’re not only going to be paying your own benefits, you are also going to be paying your own self-employment taxes. Your own Medicare and social security taxes, again, that happens on form SE of your tax return, but you don’t file a Schedule C when you are a partner paid on a K-1.
Dr. Jim Dahle:
As a general rule, I’m a big fan of ownership. I like owning your job. I like when doctors have control over their jobs. I think it leads to less burnout. Although they have to work harder and take a little bit more risk, I think in the long run they generally come out ahead financially. I think this is a good thing, but it is more complex. You got to make sure that you’re sending in your quarterly estimated tax payments, just like a 1099 independent contractor would. Nobody’s withholding tax for you. And of course, you’re going to have to pay both halves of the social security tax.
Dr. Jim Dahle:
So, if someone offers you the same amount of money as a 1099 or K-1 as a W2 employee, you’re probably better off taking the W2 employee because your expenses will be lower. But generally, they’ll pay you more on a 1099 or a K-1 than they will on a W2. And if they’re paying you, I don’t know, 10% or so more, you’re going to be equal or better using the 1099 or K-1 tax treatment.
Dr. Jim Dahle:
Your tax implications. You got to pay both halves of social security taxes and Medicare taxes. You’ve got to withhold your own taxes by sending in quarterly estimated tax payments and you can deduct any unreimbursed business expenses from the partnership against that partnership income. That’s about all the tax implications of being on form K-1.
Dr. Jim Dahle:
Our quote of the day is from Benjamin Franklin who said, “An investment in knowledge pays the best interest.” And that’s why you’re here. Thank you for being here. Without you, there is no White Coat Investor podcast.
Dr. Jim Dahle:
All right. Let’s take another question. This one from Pete.
Pete:
Hi, Dr. Dahle. This is Pete from California. I have a 1099 call contract with my hospital for which I opened a solo 401(k). I’m about to start a new call contract with a separate hospital and separate employer, but my understanding is that I cannot open a new solo 401(k) for that contract. Am I reading that correctly? Thank you.
Dr. Jim Dahle:
Yeah, Pete, you got that right. And the reason why is because when you go work at another hospital as a 1099, you’re already working at one hospital as a 1099. And you go to another one, you’re working there as a 1099 or an independent contractor, you don’t have a new business. You still have one business. One business, one 401(k). That business just has two clients now. But that doesn’t entitle you to open a new solo 401(k). Otherwise, people with 25 clients would’ve 25 different solo 401(k)s. I mean, give me a break. Why would the IRS allow that? They’re not going to allow that. So, one solo 401(k).
Dr. Jim Dahle:
And keep in mind the rules for that. There’s a blog post on the White Coat Investor website called “Multiple 401(k) Rules.” You can have more than one 401(k), but there are some rules.
Dr. Jim Dahle:
Each 401(k) for an unrelated business gets the same maximum total contribution level. In 2022 that’s $61,000. In 2023 is going to be $66,000. You get one of those at every business that’s unrelated, every 401(k) you have, but you only get one employee contribution. That’s $20,500 in 2022 or $22,500 in 2023. You only get one of those no matter how many 401(k)s you have.
Dr. Jim Dahle:
What the typical situation is, if you’re an employee and you have some 1099 work, you use your employee contribution at the W2 job and then get any employer match they might give you, maybe they give you $10,000 of a match. So, you get $20,000 of your contribution and $10,000 of a match in that one. And then in your solo 401(k), it’s all employer contributions, which are basically 20% of your net profit from that business. Net of the employer half of the social security taxes. And so, say you made $40,000 there and you can put in 20% of that, so you can put $8,000 into your solo 401(k). That’d be a pretty typical situation for a doctor.
Dr. Jim Dahle:
All right, our next question comes in via email. “Thanks for being awesome. I know when I tax loss harvest, I can use the losses to offset $3,000 per year of income and unlimited capital gains. Do dividends from stocks count as the unlimited capital gains are only part of the $3,000 of ordinary income?”
Dr. Jim Dahle:
Well, here’s the deal. Dividends are not capital gains. You cannot use capital losses to offset dividends. Technically, you could use them to offset up to $3,000 of dividends a year, but why would you want to do that? You wouldn’t want to offset qualified dividends if you have $3,000 of ordinary income because that’s taxed at a higher rate.
Dr. Jim Dahle:
So, you can use $3,000 of your losses from tax loss harvesting against your ordinary income. You can use additional losses you may have against any capital gains you might have, and then you’re going to pay taxes on your dividends. Not the end of the world, but that’s the way it works. I know dividends are taxed at the same rate as long term capital gains, but they are not the same thing.
Dr. Jim Dahle:
This podcast was sponsored by Bob Bhayani at drdisabilityquotes.com. One listener sent us this review. “Bob has been absolutely terrific to work with. Bob has always quickly and clearly communicated with me by both email and or telephone with responses to my inquiries usually coming the same day. I’m in somewhat of a unique situation and Bob has been able to help explain the implications and underwriting process in a clear and professional manner.”
Dr. Jim Dahle:
You can contact Bob at the website drdisabilityquotes.com. You can email [email protected] or you can just pick up the phone and call him (973) 771-9100. However you contact them, you need to get your disability insurance in place today.
Dr. Jim Dahle:
I heard of a doc this week that was an anesthesiologist, actually developed some vertiginous migraines and ended up going out on disability. Now lives on a really pretty good income because that doc bought plenty of great disability insurance that is paying out because of that disability until age 67. That could be you. Who knows what you’re going to develop. But disability insurance is pretty critical to get in place.
Dr. Jim Dahle:
All right, this is going to drop on November 17th. We got coming up our Continuing Financial Education week. So, watch for that. We often have some special deals available during that week. So, be sure to watch for that.
Dr. Jim Dahle:
Speaking of special deals, if you have some interest in real estate investing, maybe you’re not ready to buy the No Hype Real Estate course, check out our Real Estate masterclass. This is totally free. You can sign up at whitecoatinvestor.com/remasterclass and check that out.
Dr. Jim Dahle:
And we’ll talk to you about real estate investing. You’ll get to learn a few things and you can decide if you want to upgrade to the full course at the end of the class. And if you do, you’ll probably find there’s a special deal there just for you.
Dr. Jim Dahle:
Thanks for those of you leaving us five-star reviews and telling your friends about the podcast. Those reviews do help us. They help us to spread the word of financial literacy among doctors, their trainees, other high-income professionals, and really does make a difference.
Dr. Jim Dahle:
Keep your head up, shoulders back. You’ve got this, and we can help. We’ll see you next time on the White Coat Investor podcast.
Disclaimer:
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.