Stop Over-Optimizing Your Finances: What Actually Moves the Needle with Tyler Scott

Transcription – WCI – 484

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:
Welcome to the White Coat Investor podcast.

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All right, thanks all of you out there in White Coat Investor land. We appreciate you. We appreciate what you’re doing. It’s important work. We’re here to support you. I had a couple of emails this morning from people who assumed I wasn’t going to email them back. If you email me, I will email you back, okay? Send me your questions. It’s fine. Where do you think all this great content comes from? We are here to support you. Yes, you’ll get an email response that says, I might not get back to you for a week. That’s in case I’m off canyoneering for a week.

If I’m here, I’m probably emailing you back today or tomorrow. All right, we’re still reachable here. Reach out and touch us. We’re okay talking to you. We want to talk to you. This is a community. We’re grateful for you and we’re grateful for the support we’ve had from you over the years. So thank you so much.

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I’ll walk you through how to become debt-free within five years of residency, set yourself firmly on the path to multimillionaire status. We’re going to cover what actually matters. What to do next with your money, how to invest with confidence, how to reduce your tax bill legally, how to protect your wealth through insurance, estate planning, asset protection, and most importantly, how to actually use your income to build a life you love. Again, register whitecoatinvestor.com/crashcourse. And even if you can’t make it live, we’ll send the replay to everyone who registers.

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Okay, those of you watching this on YouTube have noticed I am not alone in the room here. I am here with Tyler Scott, who you know from previous guest hosting on this podcast. You may not be aware that Tyler is the president of planning at White Coat Planning. Tyler, welcome back to the podcast.

Tyler Scott:
Thanks for having me. I love being here.

Dr. Jim Dahle:
Why don’t we start with an update on White Coat Planning. I know we kind of rolled this out slowly for the first few months, mostly because we sent out an email asking how many of you were interested, and we got 1800 replies. And so we’re like, “Okay, don’t market this. Don’t even put it on the financial advisor page. We got enough people to work with right now.” We’re still hiring and training planners and so forth. And so, we were kind of not telling people about it for a long time. I think that period’s passed. Are we allowed to tell people now that White Coat Planning is open for business?

Tyler Scott:
Yes, that’s exactly right. Yeah, we didn’t want to say to the world, like, “Hey, we’re here to help, and then have people ask for help and say, we can’t help you because we don’t have enough people.” But we have recently finished training on our most recent cohort of new planners. Now we’ve got nine full-time lead planners who are trained in the White Coat principles, familiar with it from before, and have been through a rigorous three-month training with me and Andrew. And they’re ready. They’re excited to talk to the White Coat community.

We offer a complimentary discovery call. That’s the way to get in touch with one of the planners, talk to them, give them a chance to understand you and your goals. They can tell you a little about White Coat Planning, how it works and what we do.

And if you’re interested in doing that, you can find us in the recommended page now on the White Coat Investor Financial Advice list. You can also go directly to whitecoatplanning.com. There’s a button on there that says Start Now, and you can set up a discovery call there. Or if you want, you can just email directly newclients@whitecoatplanning.com, and we’ll get you set up with one of our planners to have a discovery call.

Dr. Jim Dahle:
Good advice at a fair price. That’s the mantra for White Coat Planning. One of the funnest parts about it is, and you get the sense, listen to Tyler on the podcast. And as we interact today, he’s a financial planning nerd. He loves this stuff. He loves to talk about it. He loves to research it. He knows his stuff because he spends all day talking about it and learning about it.

Those are the kinds of people we’ve hired and we’ve trained at White Coat Planning. We haven’t hired a bunch of awesome salespeople out there that are great at prospecting for new clients. We hired people that don’t want to do that. They don’t want to sell things to you. They want to get into the nitty gritty of your financial plan, the details, and help you have an awesome financial plan and have an awesome life because you’re financial ducks in a row. That’s what they’re into. That’s what they spend all day doing.

We don’t send them out trying to find new clients. That’s what White Coat Investor does. That’s what this podcast does. That’s what the blog does. It sends new clients to them so they don’t have to spend all day looking for new clients. And that means you get a better financial planner, somebody who loves financial planning, who does it all day.

We’re pretty excited about that and hope you are too. We know lots of you are DIYers and that’s okay. Everything we offer at White Coat Investor isn’t for every person in the audience, but there’s plenty of you out there who would like to have a financial planner. You just don’t want to be ripped off with it.

And there’s plenty of you out there who are sure your spouse is not going to be able to take care of this when you’re gone and need a backup plan. Or maybe you need help for your parents or maybe you need help for your brother. Or maybe you just need somebody you can refer that doc in the lounge that’s trying to bounce around between NVIDIA and Bitcoin and long, short, direct indexing or whatever that needs somebody to keep them on the straight and narrow.

Whatever you need it for, White Coat Planner is here for you. It’s open for business. Nine planners so far. And as we need more, we will hire and train more. In fact, the teams are a financial planner and an associate planner and a client service representative. And the idea is we’re training our own. So, three years from now, those associate planners are now full planners. And so we’re going to have plenty of planners to serve the White Coat Investor community.

We’re grateful for you. We’re trying to help you. We’re like, “How would you build a financial planning firm from the ground up if you could build it the right way?” That’s what we’re doing here. So your feedback is always appreciated. We feel like we’re not doing that. But we think we’ve built the world’s best financial planning company. And we’re excited to share with those of you who need it.

If you’re a DIY or this hardcore financial planner, investment manager like I am, knock yourself out. We’re going to continue helping you here at White Coat Investor podcasts, emails, books, blog posts, whatever. We’re going to continue. We’re not stopping that. We’re just offering this additional service because you know not everybody is like you. I know it’s shocking to you to find out that there are people who actually want the financial planner. But there really are lots of White Coat Investors out there who really do want a financial planner. They just don’t want to be ripped off.

TRUMP ACCOUNTS, GIFT TAXES, AND KNOWING WHEN TO STOP OPTIMIZING

Dr. Jim Dahle:
Tyler is here to tell me I’m wrong. He is not the only one who has told me I’m wrong. I was very wrong. And it was really depressing because I knew I was wrong by the time the podcast ran. But I did not know when I recorded the podcast. When the podcast dropped, I got two or three or four emails and two or three blog comments about how I’m wrong. And I’m like, “Well, of course I know that.” And they’re like, “Well, you didn’t say that.” And I’m like, “Oh, I didn’t say that.” So I was wrong. Tyler, tell them what I got wrong and what the truth is.

Tyler Scott:
You’re being much too harsh. You did the best with the information you had at the time when it was recorded. And we’re talking about 530A accounts or Trump accounts. And there was a question a while back. I think it was episode 479, where a wonderful lady from our community, she runs her own business. And her question was around, “Hey, if I make the $2,500 contribution as the employer, how is the custodian going to track the basis?” And that was a really smart question. And you basically said, “Oh, yeah, the custodian will keep track of it. That’s their job. And yeah, you can do that. That is allowed.”

What you then learned after that was that there’s been clarification about this, that for employers to make a contribution, there is discrimination testing rules. And the long and short of it is, if there are only highly compensated employees in the business, you cannot make an employer contribution. And the rules follow the section 129 dependent care rules. That’s how it’s written into the law.

Those basically say that 55% of the benefit has to go to non-highly compensated employees. Therefore, if there are only highly compensated employees, you would automatically fail the discrimination testing.

In other words, all of you out there that are smart optimizers, that maybe you’re a 1099 locums doc and you’ve set up your own business and you say, I want to put $2,500 in for my kid. The IRS thought of that, and that’s not going to work out.

Dr. Jim Dahle:
Well, for the most part, it’s not going to work out. And this is a good moment to talk a little bit about optimizing too. A lot of you out there get excited about this personal finance stuff, and you embark down this course that I like to call hyper-optimizing. I spent a decade on this course. I was taking out a 0% credit card in order to max out my Roth IRA as a senior resident. And you’re just doing all this little stuff to try to eat every little benefit out of your finances that you can.

And then in retrospect, 10 or 20 years later, you’re like, “That was kind of dumb, because now I’m putting more money than that into my wake boat and just burning it making a big hole behind the boat so people can surf and it becomes kind of silly.”

And it’s shocking because the people who are doing this over-optimizing are the people who don’t have to do it. I got an email today, just this morning, or it wasn’t email, it was actually, it came out on social media, and they want to know, “Well I’m kind of late to the game. I want to retire in a couple of years. What can I do to be able to do that?” Well, that person needs to optimize. Optimizing is really important for you. If you’re 58 years old, you’ve kind of semi-neglected this stuff for the last 25 years, and you want to retire in two years, yes, you need to optimize everything.

But if you’re 40 years old, and you have $6 million you don’t have to optimize your Trump account contributions through your practice. It’s small potato stuff. And I think we’re keen to do that, especially those of us who listen to every one of these podcasts, and you’re 35 years old, and you add up your net worth every month, and those sorts of things.

You might be in danger of being an over-optimizer, and recognize that you can probably dial it back a bit. Future you would say this if they could write you a letter today. But obviously, there’s lots of people out there that would benefit from optimizing a little more than they are right now. It’s just hard to get that messaging right for you all out there, because the wrong person gets the wrong message.

A lot of you out there that aren’t paying much attention to your finances are like, “Oh, I don’t have to pay attention, I don’t have to optimize.” Well, you’re the ones who maybe need to optimize a little more. So it’s hard to get it just right.

All right, you got some other clarifications on Trump accounts you wanted to go over today.

Tyler Scott:
Yeah, I’ve got a little potpourri here of kind of FAQs that we’ve been getting from clients at White Coat Planning, asking good questions about these, and a lot of them we didn’t know. There’s been new information rolling out slowly.

One of the things that came up, I think you mentioned this in your blog post, the issue around maybe having to file a gift tax return for these. Because in order to qualify for the annual gift tax exclusion, which is $19,000 this year, it has to be a completed present interest gift, which means the receiver can use the money. But with these 530A accounts, by definition, you’re not allowed to touch them until the year that you turn 18.

There was this concern that, “Oh, my gosh, it’s not going to qualify for this annual gift tax exclusion.” But right before the Trump accounts rolled out on the 4th of July, the IRS issued publication 2026-25 that cleared this up and basically said, you don’t have to file a gift tax return if the annual sum of all gifts, including the Trump account gift, is less than the annual limit.

Dr. Jim Dahle:
Currently $19,000 a year for you and $19,000 from your spouse.

Tyler Scott:
Yeah.

Dr. Jim Dahle:
That means if you’re putting money in UTMAs, if you’re putting money in 529s, if you’re putting money in Trump accounts, the total is $19,000 that you can put in there before you have to file a gift tax return.

Now, there’s this five-year rule with the 529s, you can put more in there, but you have to use up your next four years of contributions. But other than that, it’s got to add up to no more than $19,000. $19,000 for you, $19,000 for your spouse. Mom and dad can both put in $19,000. And beyond that, you got to file a gift tax return. That’s not the end of the world. The gift tax return is not that hard.

If you want to give $100,000 to your kids, you can do that. You just got to use up some of your exemption. And most White Coat Investors are not going to have an estate tax problem, at least under current federal estate tax exemption laws. It’s fine to use up $100,000 of your $30 million exemption if you want. Just recognize you have to tell the IRS about it.

And that’s what the gift tax return is. I think it’s form 709. It’s not that hard to fill out. I filed one in my life when we funded our trust. They actually filled it out for me, but looking at it, I’m like, well, that was no big deal. I could have done that myself. So you just recognize if you give more you have to fill that out legally. Frankly, I don’t get the impression this is looked at very carefully.

Tyler Scott:
Just a lot of things that aren’t looked at very carefully. Yeah. But we want to abide by the letter of the law and do what’s right. And just let me put an extra bow on that. In cocktail party finance conversations, maybe one of the most commonly misunderstood things is this notion of gift tax. Oh, well, if I give them $20,000 this year, that means there’s going to be gift tax. Do I pay that as the giver? Did my kid pay that as the receiver?” There’s no gift tax. No one’s paying tax. There’s no tax.

Dr. Jim Dahle:
At least not for the first 30 million.

Tyler Scott:
Yeah. If you’re married, you have $30 million you can give away before any of these things start to apply. The IRS just wants to keep track of how many times you went over the limit and by how much during your life. So, when you die, and this same gift tax applies to the estate tax exemption, they want to know how much you’ve used of your 30 million as a couple.

In my example, if you give $20,000, $19,000 is excluded, you only have to include $1,000 on Form 709. It’s not the full $20,000. It’s just the amount over the limit. This is like not something to be anxious about. And I see people limiting their gifts to their kids, like kind of wealthier, older clients who are like, “Well we wish we could give them more.” But the gift tax and everything, I’m like, no, give them $400,000 if you want, if that’s what they need. And that’s what you guys have to do. “Yeah, do it, give. Oh, I didn’t I thought there was a tax.” So it’s just really common.

Dr. Jim Dahle:
It’s the same as the estate tax. Until you get $30 million, you don’t pay it at all, for a married couple. And that’s indexed to inflation. Theoretically, it goes up year after year beyond here. Congress can change that, but it is permanent. When they put it in 2018, it was going to expire last year, I think. And now it’s permanent. As part of the OBBBA Act, they made it permanent.

And so, until there’s an act of Congress, it won’t change. That doesn’t mean no White Coat Investors are going to have an estate tax problem. A lot of you are out there in states to have their own estate tax. 18-ish states, I think having 16, maybe it’s fewer.

Tyler Scott:
Washington, Oregon.

Dr. Jim Dahle:
Washington’s brutal. Oregon’s, they have lower exemptions than $30 million. I think Oregon is $1 million.

Tyler Scott:
Yeah.

Dr. Jim Dahle:
It’s $1 million in Oregon. That’s like your house in Portland. And beyond that, you’re paying the Oregon estate tax, even though you don’t owe any federal estate tax. So keep that in mind, those of you in those states, and leave them before you die. Nobody should ever die in Washington or Oregon ever again.

Tyler Scott:
Yeah. Find somewhere nice.

Dr. Jim Dahle:
Move to Utah, move to Nevada. You got to leave state before you die. As a resident, you can’t just die elsewhere. You have to change your residence.

Tyler Scott:
Yeah, you can’t just fall off the mountain in Wyoming. You have to move to Wyoming.

Dr. Jim Dahle:
That’s right. Exactly.

Tyler Scott:
Hypothetically.

Dr. Jim Dahle:
Purely hypothetical.

Tyler Scott:
Okay, the next update on these 530A accounts is that now that they’re out, there’s a customer service agreement, like everything, and that’s through Robinhood. They’re the custodian. And if you read that customer service agreement, you’ll find an interesting nugget in there that if you over contribute to your 530A account, the custodian will automatically open a UTMA and put the excess in the UTMA.

Dr. Jim Dahle:
Oh, really? That’s interesting.

Tyler Scott:
Yeah. There’s a lot of ways I think people could end up over contributing because we’re new in this process. It’s $5,000 this year. That’s going to go up with inflation. But I just thought that was an interesting little nugget in the Robinhood customer service agreement.

Any surplus funds, here, I got the language right here. If contributions exceed the annual limit, the excess funds will be automatically moved to a separate account. The supplemental account is a standard custodial account, like a UTMA or UGMA. Withdrawals from the account must be for the exclusive benefit of the account beneficiary and are otherwise generally not restricted. Any income or gains earned in the supplemental account are subject to standard taxation. So, if you overfund your 530A account, you’re going to end up with a UTMA.

Dr. Jim Dahle:
Yeah, they’re not going to send you a check back. They’re just going to open a UTMA. And if you don’t know about it, it might sit there for decades with nobody knowing about it.

Tyler Scott:
The other common question we’re getting is, “Can I just open it at Vanguard or Fidelity or Schwab? I don’t want to do it at Robinhood.” And first, I’ll say that there is some confusion also around the URLs on this and the Robinhood.

Dr. Jim Dahle:
Trumpaccounts.gov versus trumpaccounts.org.

Tyler Scott:
You noticed.

Dr. Jim Dahle:
Yes.

Tyler Scott:
Okay. So, it’s trumpaccount.com. That’s where the account gets open. And you wouldn’t know that it’s Robinhood looking at it, like you did the post with screenshots from your phone. There’s no Robinhood branding on it. But trumpaccount.com is where you open the account. Trumpaccounts.gov is where there’s information about the accounts. And that kind of nudges you to get the app.

Dr. Jim Dahle:
Yeah. Have you opened one of these yet?

Tyler Scott:
I did, but I did it on my browser.

Dr. Jim Dahle:
I did. Interesting. You should send me a guest post about it with some screenshots, which you probably didn’t take. But I did this on my phone. I went to trumpaccount.gov. And it said, download the app. So I downloaded the app. Trumpaccounts.gov. It’s trumpaccount.org.

Tyler Scott:
Nope. Trumpaccount.com is where you open.

Dr. Jim Dahle:
Trumpaccounts.gov.

Tyler Scott:
Yes.

Dr. Jim Dahle:
Okay. So, I went there, I went to the .gov site. I downloaded the app from the app store on my phone. And I did this on my phone. And it actually wasn’t too bad.

Tyler Scott:
It was great.

Dr. Jim Dahle:
There were several moments in there when it said, “Okay, we’ll get back to you in one to three days.” And it got back to me in like 20 minutes. There were a couple of steps in there that I had to do that. You had to file the federal form, form 4547. Get it? The 45th and 47th president, form 4547. It helps you fill that out and makes you take pictures of yourself from the side of your face and all that sort of stuff to verify your identity. But I did it all within an hour or two for my two kids that I can still open them for. It really wasn’t too bad.

I do get emails from people saying it’s hung up. It’s not working. It’s something’s wrong. I can’t troubleshoot the Trump account app. Don’t email me asking me to troubleshoot the app. I recognize that it didn’t work as smoothly for everybody as it seemed to work for me. Try again in a month. It’ll probably work.

It’s new. They’re working out the details, but it actually wasn’t too bad on my phone. I’m actually kind of happy to hear it can be done with the browser because I don’t know how financial advisors are helping people open these accounts.

Tyler Scott:
Yeah.

Dr. Jim Dahle:
Have you had to help a client open it yet?

Tyler Scott:
I’ve given them the URLs, the correct URL. That’s how I knew about it.

Dr. Jim Dahle:
But you haven’t actually done it for them.

Tyler Scott:
No. And we do, that’s part of what we do is, “Hey, share your screen. We’ll hop on, look over your shoulder and we’ll do it together.” But it was super smooth for me. I think I was able to do it on my browser because I already had an IRS login. I’d already been through the ID.me protocol.

Dr. Jim Dahle:
I do too. I should have done it on the browser.

Tyler Scott:
Yeah. And it was really easy. We did it for our three girls. Took me 20 minutes.

Dr. Jim Dahle:
That’s better than I had with the app. Do it on the browser. That’s my tip for you.

Tyler Scott:
It was quick.

Dr. Jim Dahle:
The interesting thing is I’m getting statements now from it.

Tyler Scott:
Yeah. I just got my first one a couple of days.

Dr. Jim Dahle:
How are you getting the statements?

Tyler Scott:
Emailed it to me.

Dr. Jim Dahle:
Yeah. Do it on the browser. Mine’s in the app.

Tyler Scott:
Yeah. Okay. That’s good to know.

Dr. Jim Dahle:
I wonder if I can change it over to the browser because I’d rather get emailed statements. Anyway, it all gets invested in a very low cost S&P 500 ETF. I think it’s from State Street. But Vanguard tells me you’re going to be able to roll these over to Vanguard.

I emailed my Vanguard dude. I got a dude assigned me a Vanguard. I guess I have enough money there that he emails me every now and then. “Can I help you?” I’m like, “No, I’ll let you know when I need something.” Then when I call him, of course, I have to talk to somebody else on the team. I never talk to him. But he tells me Vanguard is not yet taking those rollovers.

As of the day we’re recording this, probably by the time this podcast drops, they’ll be taken, I’ll be wrong and everyone will email me. But my plan is to roll my 17-year-olds over to Vanguard as soon as I can and convert it to a Roth IRA like next spring. If it has gains between now and then, we’re going to pay some with kiddie tax. He already owes kiddie tax due to his UTMA. But just for simplicity’s sake, we’re going to move that $5,000 I just put into it into his Roth IRA next spring when he turns 18.

Tyler Scott:
Which is the whole hack, which you and I covered last time I was here. So we won’t go into that again. But the whole point of this for our community is to give your kids a $200,000 Roth IRA when they’re 18. Now they have a $2.5 million Roth IRA when they retire.

On this point about rollovers, the clients are like, “I just want to move it to my favorite custodian.” That is going to be possible at some point. A couple of things about it. You are always going to have to open the account at Robinhood via trumpaccount.com. At trumpaccount.com, you’re always going to have to open…

Dr. Jim Dahle:
Or via the app.

Tyler Scott:
Yes. And so, you’re not going to have the option from the way the law is written to open an account at Fidelity or Schwab or Vanguard. You’re going to have to open it through this process, roll it over. And there is a provision in the law that says only one 530A account can be open for a beneficiary at a given time, which means in practice, you’re going to have to roll over the entire account, which is fine. That’s what most people are going to want to do anyway. But you’re not going to be able to leave a portion of it at Robinhood and a portion of it at Vanguard.

Dr. Jim Dahle:
What about next year’s contribution?

Tyler Scott:
For 2027?

Dr. Jim Dahle:
Yeah. I’ve now made a 2026 contribution and theoretically rolled it over to Vanguard and…

Tyler Scott:
Oh, you should be able to contribute.

Dr. Jim Dahle:
It’s not a 17-year-old. Can I then make the contribution at Vanguard or Fidelity, or does it have to? Because if you can’t have two, then what? You can never contribute again? That’s a good question. Once more, a question the government has not clarified.

Tyler Scott:
We don’t know. I should say we don’t know.

Dr. Jim Dahle:
Then we’ll be wrong and we’ll do a clarification in a month.

Tyler Scott:
My understanding from what I read is once it’s rolled over to the new custodian, you can do your contributions there. But to be fair, it didn’t say that explicitly.

Dr. Jim Dahle:
We don’t know for sure.

Tyler Scott:
So, TBD. Okay. Last Trump account update. This is small potatoes, but some people have asked about the Dell family’s contribution of Dell Computers. They pledged a whole bunch of money. They’re going to put $250 into the first 25 million Trump accounts open if the child is 10 years old or younger and lives in a zip code where the median income is $150,000 or less.

There is a place you can go to see if you qualify for that. It’s called investamerica.org/dell. I did that experiment with our three girls. The 14-year-old, they said, oh, she’s not eligible. The 12-year-old, she’s not eligible. But the 10-year-old said she’s eligible. Apparently, our zip code, I live a little west of Jim. I don’t know about Jim’s zip code. But the zip code I live in qualifies. And so, our youngest will get $250.

Dr. Jim Dahle:
Did you have to apply separately for that or does it happen automatically?

Tyler Scott:
It says it should happen automatically.

Dr. Jim Dahle:
Now, what if you already put $5,000 in? You get an extra $250 or you’re out of luck?

Tyler Scott:
Yes.

Dr. Jim Dahle:
Because the contribution total is supposed to be $5,000 no matter where it comes from.

Tyler Scott:
This is kind of like the $1,000 pilot money. It does not count towards the $5,000 limit.

Dr. Jim Dahle:
That includes for any future NGOs, charities, whatever they are making these contributions. That’s an addition.

Tyler Scott:
Yeah, that’s a carve out of the $5,000 limit.

Dr. Jim Dahle:
I didn’t know that.

Tyler Scott:
Yeah, this is kind of the first case study in that. I put $5,000 in my 10-year-old’s account on July 4th. And in theory, here in the next few months, I should see $250.

Dr. Jim Dahle:
But you haven’t yet.

Tyler Scott:
No.

Dr. Jim Dahle:
Michael Dell’s holding out.

Tyler Scott:
Yeah, we’ll see when it actually shows up.

Dr. Jim Dahle:
Good times. This is the fun thing about the podcast. We get to talk about this stuff that’s in the process of being built, in the process of happening, in the process of change. Forgive us when we get it wrong. I know not a lot of people are talking about this stuff because the details aren’t out there. They’d rather just talk about stuff we know for sure.

Well, we’re trying to bring you into the conversation while we’re still trying to sort things out. I hope you appreciate that, that we’re trying to stay as up-to-date as we can. It does mean we have to do a lot of clarifications and corrections. We’re okay doing that. Our pride is not so high that we can’t be wrong. I’m wrong a lot. As you can see, this stuff’s pretty complicated. It’s hard to get everything exactly right every time, especially when you’re doing it right off the top of your head.

Okay, for the over-optimizers out there, I got another email this week on this, which I think can be done. So, this is a dentist. His wife works for the practice. His three kids also work for the practice. They’re all minors. Three minor children work for the practice. He emails me and he’s got other employees in the practice. It’s not just the family. There’s other employees as well who are non-highly compensated employees. The hygienist, the front desk person, whatever they got there.

And he’s like, “Well, can I have the business put $2,500 into my kids’ Trump accounts for me, $2,500 for my wife, and $2,500 for each of the kids?” Well, when you give it to your employee, for their kid’s Trump account, you can do that, but we don’t think you can do it for the employee’s Trump account if you have a minor employee. That hasn’t really been clarified, but it seems like that’s not going to be okay.

Tyler Scott:
Yeah, because by definition, the Trump account’s only available to people who have not reached the year in which they turn 18. After that, it closes to contributions. And so, this notion of the employer providing it as a benefit, it implies then that it’s for the benefit of the employee’s children.

Dr. Jim Dahle:
But we think this doc could put $2,500 in for him and $2,500 in for his spouse that’s an employee of the practice, as long as that’s no more than 55% of the amount the practice passes out for Trump accounts. And that could be spread among the three kids. But not an extra $2,500 for each kid. That’s the way we think it is, and we’re probably wrong. We’ll have to do a correction in a month.

Tyler Scott:
And there’s something in the recesses of my brain, someone out there can email us, that I would want to look into. I think there’s a rule about if you are the child of the owner, you are presumed to be, like, you get rolled up in the highly compensated math. I’d have to look it up. It’s foggy from my CFP exam.

Dr. Jim Dahle:
Would that count like a 22-year-old that’s financially independent of their parents, though? Probably not.

Tyler Scott:
I would have to go into the weeds.

Dr. Jim Dahle:
Maybe it is.

Tyler Scott:
But if a client asks me that, and I tell our planners all the time, I’m like, it’s okay to say I don’t know. This is a very humbling job to have. Financial planning is a mile wide and inch deep, and sometimes you don’t know. So if someone asked me that, I’d say, there’s a little yellow alarm going off, like, let me go dig into that and get back to you.

Dr. Jim Dahle:
Yeah. Very interesting. So, if you do this sort of thing, send us a guest post about it. And we’ll run it out there for all the other hyper-optimizers to save themselves a thousand bucks in taxes by funding their Trump accounts through the practice instead of just doing it directly, like I did on the app, or Tyler did on the browser. Have we beat Trump accounts to death yet? Do we have to talk more? Have we got more?

Tyler Scott:
No, no.

Dr. Jim Dahle:
What else do you got?

Tyler Scott:
No, no. That’s it for 538s.

Dr. Jim Dahle:
538s.

Tyler Scott:
And we’re TAs.

Dr. Jim Dahle:
Is that what’s going to now? TAs.

Tyler Scott:
People say, let’s do a TA update. That’s kind of a lingo.

Dr. Jim Dahle:
Part of the issue of putting the president’s name on it, that’s fairly a polarizing president putting his name on it, it’s become like so many other things, had this political aspect to it. So if you’re talking to Democrats about this, call it a 538.

Tyler Scott:
Know your audience.

Dr. Jim Dahle:
If you’re talking to Republicans about it, especially hardcore MAGA people, call it a Trump account. And maybe everybody else call it a TA.

Tyler Scott:
TAs. That’s kind of what’s taken up.

Dr. Jim Dahle:
We did it.

Tyler Scott:
Okay. We did our correction. 25-minute correction.

Dr. Jim Dahle:
Okay. Yeah, I think we covered everything we wanted to. Let’s take the Speak Pipe question. Let’s get you guys on the podcast. You’ve heard enough from Tyler and me. Let’s hear from somebody else.

SINKING FUNDS AND A POWERFUL HSA STRATEGY FOR ADULT CHILDREN

Noah:
Hi, Jim. This is Noah from the East Coast. Thanks for all that you do for the White Coat community. A while back, Tyler Scott was on the podcast and mentioned he uses subaccounts at Ally Bank called Buckets, where he stashes cash for future infrequent large expenses. He mentioned home, travel, cars, holidays, as some examples. He transfers some amount of money into each of these categories each month. And then when one of these expenses comes up, say a vacation, he uses the money from that bucket to pay for it.

I’d like a little more detail about this method of saving and spending. Is this essentially his emergency fund? How does he decide how much to contribute to, say, the house category or the car category? Is it based on the size, cost, or age of his house and or cars? I understand there isn’t going to be a clear set of rules, but I’m looking for some guidance on how to start working on the math here. Thanks.

Dr. Jim Dahle:
Well, Tyler, he wants to hear from you. And you’re conveniently right here. Fun to answer the question.

Tyler Scott:
It’s strange. I wonder who your podcast producer is. That’s crazy that worked out that way. Yeah, thanks. Thanks for the question. Yeah, this is a really popular topic when we talk about this at the conference or when we talk to clients about this. A lot of people like this idea of sinking funds.

And so, again, the idea, as he alluded to, is we’re trying to plan for inevitable expenses that we know will happen. We just don’t know exactly when or how much they’ll be. So we call these episodic expenses. And these are things that don’t necessarily happen every year. Sometimes they don’t even happen every decade. These are things like major home repairs, buying new cars, big healthcare out-of-pocket expenses, things like that.

The philosophy is that you pay for those expenses on your credit card, if you like your miles or your points or whatever. And then you come home and you move money out of your sinking fund, move it back to your checking account, and then just pay off the credit card.

For example, one of our kids needed braces recently, paid the orthodontist $5,000 on the card. I came home, I moved $5,000 out of the healthcare bucket and paid off the credit card. The question is about how do we decide how much to set for our automatic monthly transfer to our high-yield savings account where the buckets are located? I use Ally Bank for this purpose. It’s really easy to use.

And so, for our category, travel, Megan and I pick a number that’s some combination of reasonably accurate and sort of aspirational. For us, that’s $20,000 a year. And that’s $1,667 a month that automatically gets pulled from my checking account and it goes into the travel bucket. And some years we spend less than that.

Dr. Jim Dahle:
And these are separate accounts at Ally? You got sub-accounts there? Or this is all one big account and you keep track of it on a spreadsheet?

Tyler Scott:
No, it’s even easier than that. It’s one account. So it’s one account number for Megan and I. And then within it, there are sub-accounts or buckets. And you can make 30 of them if you want. Yeah, and you get to label the buckets and then you can direct specific amounts to those buckets. $1,667 goes to the travel bucket every month. And then the idea, we’ve got the money there when we go to travel and some years we don’t use it all, but that’s okay. These sinking funds roll over. They never get full.

Dr. Jim Dahle:
It’s an HSA, not an FSA.

Tyler Scott:
Yeah, well said, yeah. And so we just keep feeding it every month. And that’s how we do travel. The one for healthcare, we just pick the individual deductible on our high deductible health plan. So, it’s usually $3,000 or $4,000 for the year. So that gets chopped up into a monthly amount. It goes into the bucket. Some years we use more than that. Like the $5,000 braces example. Some years our relatively healthy family uses less than that. But it just builds up a balance over time. For a home, what we recommend for home repairs, home upgrades is about 1 to 1.5% the value of your home.

Dr. Jim Dahle:
Does that include the property or just the dwelling?

Tyler Scott:
I just do the Zillow amount. Our house, Zillow thinks is worth about $800,000. So I send $700 a month to the home bucket and it just fills up. And when we had a major HVAC incident a few years ago and it was tens of thousands of dollars, we didn’t have to panic or stress about where that was going to come from. We didn’t have to stop funding the girls 529s or our backdoor.

Dr. Jim Dahle:
And this is separate from your emergency fund?

Tyler Scott:
Completely separate from the emergency fund. That’s an important point.

Dr. Jim Dahle:
Is that another one of these sub-accounts?

Tyler Scott:
Yeah.

Dr. Jim Dahle:
Just the emergency fund?

Tyler Scott:
I show clients, I actually put up a screenshot of my own buckets to show people and then it really helps to see the visual. Yeah, the emergency fund is completely separate. The sinking funds are for inevitable expenses. We know these will happen. We just don’t know when or how much. We’re proactively planning for these expenses so they don’t stress us out when they show up, so they don’t disrupt our otherwise smooth cashflow.

The emergency fund is the safety net that sits underneath the sinking funds because often an expense will show up sooner or bigger than the bucket was ready for. And so the emergency fund is there to catch us if we’re not ready in the bucket. And so, that’s what I recommend for home is 1 to 1.5% the value of your house. If you’ve got a really old rickety house that needs a lot of repairs, maybe do 2%.

Dr. Jim Dahle:
1 to 2% a year, not a month.

Tyler Scott:
Yeah, yeah. Again, it’s an $800,000 house. $8,000 a year is about $700 a month that goes into my bucket.

Dr. Jim Dahle:
We used to do something similar. We kept it all in one account, just kept track of it on a spreadsheet. But this seems a lot more convenient. This is why you’re the financial planner and I’m the stupid blogger.

Tyler Scott:
I like the buckets. A lot of clients like the buckets. I’m pretty organized. And so, that appeals to my nature. But I have clients all the time who are like, “Look, I don’t want to mess around. My high yield savings accounts already at Capital One. Capital One doesn’t allow sub accounts. I don’t want to open nine savings accounts and do this. So I’m just going to take the aggregate of all of this and on the backend, keep track of it.” We keep track of it for them if it’s a client.

But there’s a lot of people doing what you do. That’s fine. I just want people to be prepared for these episodic expenses. The mechanism is really up to you.

Dr. Jim Dahle:
Okay, how many times have you gone after those buckets to use them for something else over the years?

Tyler Scott:
Yeah, it happens and that’s okay. Money’s fungible. You know, you can rob Peter to pay Paul. You can rob the home bucket to help the healthcare bucket. That’s okay. Again, I would use the emergency fund if that happened. That’s sort of my written financial plan protocol is to go to the emergency fund, but it’s okay. It’s not a federal crime if you use yours.

Dr. Jim Dahle:
You just have to put more money in. If you’re raiding the life insurance premium bucket or you’re raiding the property tax bucket, if you’re not paying that with your mortgage every month and it’d be an escrow account, you might only have four months to get it rebuilt. So it’s going to require a budgeting change so you can get it rebuilt by the time it’s actually due.

Tyler Scott:
I think it’s just easiest not to raid the buckets for that reason. That’s what the emergency fund is for. It’s there to fill in as needed. And so, that’s what I do for travel, healthcare, home. For cars, you take the number of cars you have in the household that you intend to continue to replace. So sometimes people are like, “We have five cars because we’ve got all these teenagers.” Well, are you going to buy your kid their next car? They say no. And so normally it’s two. Normally it’s two cars in the household. Then you figure out how long you intend to own them and then how much you think it’ll be to replace them. And if you do those three variables, you’ll come up with a number for each year that you need to save for future cars.

Megan and I are kind of famously utilitarian about our cars. I’ve written a post about that. The math for me is two cars every 15 years, $25,000 to replace them. Yes, we don’t love cars. I know you guys spend more than that. That’s okay. But for us, that comes out to $278 a month that goes to the car bucket.

Dr. Jim Dahle:
Are you making that comment to the guy with the Civic that got rattle canes in the garage?

Tyler Scott:
You and I are on the same page on the drive a beater, but we famously get a lot of pushback when we write posts about that. We always get angry people. I did the math for the more average White Coater. So, if you have two cars that you keep for eight years and it’s going to be $60,000 to replace them, that would be $1,250 a month that would go to the car bucket.

Dr. Jim Dahle:
It’s a car payment.

Tyler Scott:
It’s a big car payment. Yeah, you’re just making it to yourself.

Dr. Jim Dahle:
Once you pay off your car, you keep making the payments into this car sinking fund so you can buy the next car.

Tyler Scott:
And then you earn interest, don’t pay interest. That’s the goal. You’re in a high yield savings account earning interest. For college, college is a type of sinking fund. We use 529s for those, not the high yield savings account. And Megan and I have elected to target to pay one third of the cost for the University of Utah, our local state school. So you can reverse engineer the math and figure out how much goes. And that’s what guides our 529 contributions.

Other buckets that are really popular. You’ve mentioned a couple already. If you’re not doing your own escrow, if your mortgage lender is not doing escrow for you, then you can do insurance premiums, property tax. Some of you out there can get a little discount on your own occupation long-term disability if you pay annually instead of monthly.

The other one I do is a backdoor Roth bucket. We put $1,250 a month into the backdoor Roth bucket. When we wake up on January 2nd, every year, there’s already $15,000 in the bucket. And we can do our backdoor Roths early in the year.

The new sinking fund that got started is for 538 accounts. I’ve got three kids. So, I need $15,000 more on January 2nd, every year. So as soon as it turns over, I can fund their TA accounts each year. So that’s a new one.

Dr. Jim Dahle:
Those are Trump accounts for you Republicans out there.

Tyler Scott:
There’s weddings. Hey, you had a big wedding that for some people is something they want to plan for. Big cultural events that are expensive. Bar mitzvahs, quinceañeras. The one that my former boss at Aptis, when I worked there, he taught me, for some people, the surprises and demises sinking fund can be a good idea. And so, that’s just for the unexpected or when people or pets get sick towards the end, it can be really expensive. The surprises and demises, and then you just pick a number that you feel good about setting aside each year.

Dr. Jim Dahle:
There’s some overlap with emergency funds.

Tyler Scott:
Yeah, yeah. It’s not for everybody. You don’t have to do this to meet your financial goals.

Dr. Jim Dahle:
What about as people get wealthier.

Tyler Scott:
It’s less important.

Dr. Jim Dahle:
Now they’re pretty close to financial end, but maybe they’re even retired.

Tyler Scott:
It’s a lot less important.

Dr. Jim Dahle:
Your whole portfolio is your sinking fund.

Tyler Scott:
Yeah, for retirees, we don’t really talk about this. Or people that are really wealthy, that they can absorb a $28,000 home repair. It’s not going to derail any of their goals. But if you’re a 33-year-old radiologist, just kind of getting your feet under you, a $30,000 home repair can really sting. So, yeah, thanks for the question. That’s how that works.

QUOTE OF THE DAY

Dr. Jim Dahle:
All right. Let’s do our quote of the day. Today, it comes from Robert Kiyosaki. Now, I don’t endorse everything Robert Kiyosaki has ever said, but I like this. “Money without financial intelligence is money soon gone.” It’s good, man. You need to be financially literate. And if you can combine financial literacy with financial discipline, the combination of the two is so rare in our society. It’s like having a superpower.

All right, we’re going to talk about HSAs. We got a Speak Pipe about this.

Speaker:
Hi, Jim. Recently, Tyler Scott was explaining HSAs. He did a fantastic job. I do want to correct or at least clarify one of the final points that he made, because there is significant confusion in this one area.

While it is true that if you have an adult child under the age of 26 on your high deductible health plan, they can open their own HSA and take full advantage of the annual family contribution limit.

However, the family contribution limit applies to the high deductible health plan and not each individual HSA. It can only be used one time or up to the $8,750 limit for 2026. If you and your child both have an HSA, you do not both get to contribute up to the $8,750 limit. You can, however, split that $8,750 limit between the two of you in any manner. But again, it is not an $8,750 limit for each of you.

My child and I made that mistake last year and it was caught by my accountant and my child was required to do a removal of excess contributions for the full amount of $8,550 they had put in 2025 because I had already used the full family contribution limit myself for my HSA. I hope that helps.

Dr. Jim Dahle:
Okay. We wanted to put this Speak Pipe on here because we’ve gotten several emails basically saying the same thing and they’re wrong. You’re all wrong. You just did a withdrawal from this account that you did not have to do, all right? And I know some accountants don’t understand this. Guess what? A whole bunch of accountants don’t understand the backdoor Roth IRA process either.

Tyler Scott:
Or multiple 401(k)s.

Dr. Jim Dahle:
Especially multiple 401(k)s. They do not understand the rules about multiple 401(k)s. So we are going to cite chapter and verse here so you understand that we are right and this particular caller, as grateful as we are, feedback, especially negative feedback, is gold in this business. And as sure about this as he sounds and as well as he explained it, we want you to understand that he is wrong and we are right on this point.

If you have a kid that’s still on your high deductible health plan up to age 26, who is no longer your financial dependent, they can make a full family HSA contribution. Like I’m doing for my kids as soon as they’re no longer financially dependent on me. And that means 50% or more, they’re providing 50% or more of their support. They are allowed to make I think it’s 87.50 this year. Don’t quote me on that. That might be wrong.

Tyler Scott:
That’s right.

Dr. Jim Dahle:
That’s right, good. Don’t send me a correction on that. It is right. And you can do that. And you can gift them that money as long as you stay within the $19,000 gift tax amount. And so, they can do that. All right, cite chapter and verse so people will believe us.

Tyler Scott:
Yeah, I genuinely appreciate the question because as we said earlier, it’s hard to keep track of all these. It’s a shifting world. So I totally appreciate the call. And yeah, first to be clear, who can do this? You must be covered by a family high deductible health plan and have no other insurance. You have to be exclusively covered by a high deductible health plan. No other coverage, no Medicare. You cannot be a dependent, which that is the part that is complicated where I think most of the White Coaters may go astray on this. I have a post coming out in a bit about the value of getting your kids to not be dependents on your tax return.

Dr. Jim Dahle:
And there’s this great question in there too. If they’re living on UTMA you gave them years ago, are they independent of you? If they’re living on 529 money, that’s still technically yours. Are they independent of you? Do you have to change them to be the owner of the 529 account? And I don’t think that part is clear.

Tyler Scott:
That is correct. I write about that in the post. We could spend a whole 40 minutes. So, I’m not going to go down that rabbit hole. But they’re exclusively covered by a high deductible health plan. They cannot be claimed as a dependent on your tax return and they open their HSA. Those are the rules.

And chapter and verse to your point. There’s a couple of things that you can point your account to. First is IRS publication 969. That came out a while ago. And it makes clear that the only aggregation rule is for spouses. And it is fair. I understand why accountants or benefit providers might take that rule and generalize it and say, “Oh, the plan has a limit of $8,750.” I can understand how you got there. But if you go into the and read publication 969, you will see that there is only an aggregation rule for spouses.

That’s kind of the main point. If you can also go read the original law, which is IRC 223. And in there, it outlines exactly who can do this. And it only talks about eligible individuals. It does not talk about eligible plans. It does not talk about eligible policies. It talks about the taxpayer, whether they are eligible or not.

And interestingly, Congress did anticipate that some children would not be eligible. And the only language they gave to that is the one about whether or not they can be claimed as a dependent.

Dr. Jim Dahle:
All right. Are we in over-optimizer land here? We kind of are. Does this sort of thing matter? Whether you give your kids a little bit of a head start with HSA money? No. But it’s part of my kids’ 20s funds. They get UTMAs. They get Roth IRAs for their earnings in high school or whatever. They get 529s. And they also get this HSA we fund between about age 19 and 26 is the plan so far. I don’t have any 26 year olds yet. But that’s their 20s fund. That’s the help they get with us until they get the real inheritance later in life. And if you want to do that as well, you are allowed to do it. And if your accountant doesn’t believe you, send them this podcast, I guess.

Tyler Scott:
And I found it. It took me a second to find it in the notes. It’s IRC 223 section B5. That is the special rule for married individuals.

Dr. Jim Dahle:
223 B5.

Tyler Scott:
It specifically carves out.

Dr. Jim Dahle:
Just whip that out when your accountant gives you a pushback. “What about 223 B5?” And they’ll be like, “Who is this client? Then they’ll fire you as a client.”

Tyler Scott:
That is the only place where Congress in their infinite wisdom put an aggregation rule. It is not for any other category. Now, interestingly, this also applies to domestic partners. This came up with a client. Because the original Affordable Care Act allows a domestic partner.

Dr. Jim Dahle:
This is another sort of marriage penalty, isn’t it?

Tyler Scott:
Yes. So, if you’re domestic partners and you are covered under the high deductible health plan…

Dr. Jim Dahle:
Lots of employers allow you to cover your domestic partner under the family high deductible health plan.

Tyler Scott:
Same rules, same algorithm.

Dr. Jim Dahle:
But not a spouse.

Tyler Scott:
They’re both putting in $8,750. Or if they’re over 55, they’re both putting in $9,750 this year. Same concept. Because it is only for married people where the aggregation rule applies. That is very clear in publication 969 and in IRC 220C.

Dr. Jim Dahle:
Which is where the publication is written from. The actual Internal Revenue Code.

Tyler Scott:
And one other piece I found from a census, this came up to them as well. And they said, though there is confusion about this amongst the public, an IRS official commented to a census that assuming the non-dependent child is otherwise HSA eligible, a separate family contribution limit of $8,750 in 2026 would apply to the child.

This would allow the married parents to share the annual family limit, as described above, and the adult child to contribute their own HSA up to the separate family contribution limit. That is a quote from the IRS, unnamed IRS official.

I just want to point out, this is not a loophole that was intentionally created. It’s like the backdoor Roth. This isn’t like a purposeful thing. It is a natural outcropping of the way the language was written. I don’t think anyone set out to do this, but as smart people go and read it all and think about how it applies, this just happened to be true.

And so, I get it. Anytime something sounds too good to be true in the tax world, you should really check yourself. Because people are like, “Oh, can I double dip? Can I take this deduction here and there? – No.” So, you’re right to be skeptical, but I’m very confident that what we’ve been telling people is correct.

The hard part is not this part. The hard part is the dependency question. Do they fail the support test if they’re using UTMA 529 money? That’s the part I think is challenging.

Dr. Jim Dahle:
And that part is a lot more interesting debate because I think it’s great. Does tuition count toward support? If they’re paying for the room and board and the 529 is paying tuition are they okay? If they’re paying for that with their summer job or 50% plus of that with their summer job, there’s a lot more debate there.

Tyler Scott:
Yes.

Dr. Jim Dahle:
But I don’t think there’s much debate on this.

Tyler Scott:
And from an audit risk point of view.

Dr. Jim Dahle:
Oh yeah. This is way below what anybody cares about in an audit. I mean, give me a break.

Tyler Scott:
How many people in America do you think did it this year?

Dr. Jim Dahle:
I can’t wait for an auditor to want to audit my 529 withdrawals. I’ve got 33 529s. I’ve won for all of my nieces and nephews and I’m probably withdrawing from six or eight of them this year. I can’t tell you how many receipts I have in my file for these 529 withdrawals. And I can’t wait for them to ask them, like, “Have fun. Here’s the receipt.”

Tyler Scott:
Here you go.

Dr. Jim Dahle:
Here you go.

Tyler Scott:
Have a good day.

Dr. Jim Dahle:
They just got better things to do than to audit your 529 receipts. There’s people out there just blatantly cheating on their taxes. They’re not here trying to go after you for.

Tyler Scott:
I’d be shocked if 5,000 people in America made a separate HSA family contribution for their non-dependent.

Dr. Jim Dahle:
And 3,000 are probably White Coat Investors.

Tyler Scott:
So it’s just not a thing that I think is.

Dr. Jim Dahle:
But I am doing this. Tyler is telling his clients they can do this. Helping them do it. It’s okay to make them. They got to be financially independent of you. They have to be on a family high deductible health plan. That’s it.

457 PLANS, SOLO 401(K)S, AND FOCUSING ON WHAT ACTUALLY MOVES THE NEEDLE

Dr. Jim Dahle:
All right. Next topic. Let’s talk about 457 plans.

Tyler Scott:
Hey, Dr. Dahle. This is Tyler in the Southeast. I have two questions regarding 457 plans. The first is, are there two different annual limits on contributions between a governmental and non-governmental 457? I’ve seen some conflicting answers on this.

Second, my current employer has a 457. They’re a large hospital system. So I have no concerns about their stability. Their distribution options are unfortunately one large lump sum. My question is that my wife and I are both very far into the 37% tax bracket. So the way that I look at it, even worst case scenario, when we withdraw this money, it would just be a tax arbitrage. Particularly if we were able to withdraw this at the beginning of a new year, then we would potentially get some tax savings. In this scenario, do you think that it is still worthwhile to contribute to the plan? Thank you so much for all you do.

Dr. Jim Dahle:
Well, this is just classic White Coat Investor hyper-optimizer questions.

Tyler Scott:
I love them, they’re great.

Dr. Jim Dahle:
Only a White Coat Investor could possibly have access to both a governmental and a non-governmental 457. They’re eligible to contribute to both. I don’t actually know the answer to this, but I know you got these questions in advance and I have a feeling you’ve already looked up the answer. So let’s have you answer whether you can actually contribute to both in the same year.

Tyler Scott:
My understanding is not. What’s nice about a 457 is that it’s not subject to the otherwise aggregated 415(c) limit, meaning you can max out your 401(k) for $24,500 and your 457, which is great. That’s one of the fun things about them.

His question, I don’t think it was specifically that he has access to both or wanting to contribute to both. I heard the question as, “Is there a different contribution limit for governmental plans compared to non-governmental plans?”

Dr. Jim Dahle:
I think there’s multiple questions. Maybe we need to listen to it again. I don’t know. But I thought that was one of his questions. It sounds like he actually had access to two. I don’t know. He’s got a side gig and they’re letting him contribute to the 457 as well. You can’t do that though. If you’re otherwise eligible, it’s one 457, $24,500.

Tyler Scott:
That’s my understanding. I’ve never seen an instance where someone could do both. But what I glommed on to is what I mentioned there before, which is, is there a different contribution limit for the governmental versus non-governmental plan? And the answer is kind of. It’s only the governmental plans that allow for catch-up contributions. So if you’re 50 and over, then you get the extra $8,000. Or now we have the new super catch-up contributions for people aged 60 to 63.

Dr. Jim Dahle:
It does apply to 457s as well.

Tyler Scott:
Yeah.

Dr. Jim Dahle:
They’ve always had their own little extra contribution limits.

Tyler Scott:
They also have a weird catch-up rule.

Dr. Jim Dahle:
They have different catch-up contribution rules.

Tyler Scott:
Yeah, which they’re very weird and try to say it as succinctly as possible. In your last three years before retirement, if you haven’t used the 457 space from the previous years, you can access that space. In most accounts, “Oh, I didn’t do my backdoor Roth last year. All about $7,500 is gone to you forever.”

Dr. Jim Dahle:
And maybe not in the 457.

Tyler Scott:
Yeah. And there’s this special catch-up contribution in the last three years before retirement. But where he may be getting conflicting information, as he said about, is the contribution limit different? That might be where that’s coming from. That if someone’s over 50, then yeah, there is a higher contribution limit in the governmental plan. And the non-governmental plan is going to be limited to $24,500.

Dr. Jim Dahle:
Interesting. I’m not sure I knew that the contribution catch-up was different under those two.

Tyler Scott:
Something else that’s kind of weird.

Dr. Jim Dahle:
I probably need to add that to my catch-up. I got to post about all the catch-up contributions on the blog, and I’ll bet I don’t have that in that because that sounds new to me. It’s entirely possible I forgot it when I hit my head falling off a mountain.

Tyler Scott:
Impossible. Not acceptable excuse. The other thing to know that’s kind of weird about 457s is that employer contributions count towards the $24,500 limit. It’s like an HSA in that way. The HSA limit is $8,750.

Dr. Jim Dahle:
But it’s different from a 401(k) or a 403(b).

Tyler Scott:
Yeah, 401(k), 403(b).

Dr. Jim Dahle:
Those employers are making 457 contributions. Technically they’re all employer contributions, aren’t they?

Tyler Scott:
It’s very rare, but I’ve seen it 10 times with clients through the years where you trace down, “Okay, where’s this match coming from?” And some people are getting part of their match goes to the 457. And if you get $10,000 from your employer to your 457, you are now limited to $14,500. It’s more like an HSA in that way.

Dr. Jim Dahle:
Probably because technically it’s all an employer contribution. That’s probably why.

Tyler Scott:
And then the other thing to consider with this is that finally the Secure 2.0 rule went into effect this year where catch-up contributions have to be Roth. If your income from last year, your FICA income, not your AGI, but your true taxable wages income, if that was more than $150,000 last year, then your catch-up contributions have to be Roth.

Dr. Jim Dahle:
Including in the 457s.

Tyler Scott:
Yeah, so keep that in mind.

Dr. Jim Dahle:
Okay, the other issue he had with this call is he was wondering whether he should bother using this governmental 457 because he’s got a lump sum distribution. It sounds like the lump sum has to be taken as soon as he retires. And he’s hoping, “Well, maybe if I retire in December, I take it in January.” And then it goes into January’s income pot. And maybe it’s not all taxed at 37%.

But I think what you’re forgetting is there is a benefit here beyond just the tax arbitrage between your tax-rated contribution and your tax-rated withdrawals. There’s also the benefit of being able to invest inside a tax-protected account. The money grows faster because it’s not being taxed as it kicks out dividends. And as you change investments and get capital gains or the funds give capital gains distributions, it’s not being taxed, so it grows faster.

But I’m a little skeptical about his options. This doesn’t make sense because normally a governmental 457 can be rolled into a 401(k), 403(b), a traditional IRA. I don’t believe that those are your only options. Typically, the limited options is somebody with a non-governmental 457 plan.

Tyler Scott:
Yeah, my assumption was that he had a non-governmental plan, given that he said my distribution options are limited. Because you’re exactly right. If you have a governmental 457, it’s just another 401(k).

Dr. Jim Dahle:
It’s another 401(k).

Tyler Scott:
Just use it. It’s a no-brainer.

Dr. Jim Dahle:
If the money’s held in trust, you can’t lose it if the employer goes bankrupt and you just roll over into an IRA or 401(k) whenever you’re done.

Tyler Scott:
Yeah, that’s so easy. But as we’ve talked about and written about before, there’s two major concerns with the non-governmental plans. One is if your employer goes bankrupt, you could lose the money because it’s not your money. It’s deferred compensation. They haven’t paid you yet.

Then the other is, what are your distribution options? Normally, what I see is lump sum is the default, but you have typically 90 days from the day you leave your employer to elect something else, and that something else is often distributed over five years, 10 years, 20 years, or you can defer the entire thing until you’re like 73 when RMDs would start.

Dr. Jim Dahle:
And then lump sum then.

Tyler Scott:
Yeah, yeah.

Dr. Jim Dahle:
Probably better lump sum at 73 than lump sum the year you’re retiring.

Tyler Scott:
Yeah, yeah, probably.

Dr. Jim Dahle:
But 457 money is FIRE money. This is money you can spend before age 59 and a half.

Tyler Scott:
I was going to say my favorite thing about 457s is that that’s the most intuitive money to spend in early retirement because you don’t want it subject to your employer’s creditors. You have this kind of looming, lingering anxiety, and it’s not subject to the 10% early withdrawal penalty. So if you’re 52 and retired and you have a big non-governmental 457, we don’t have to think very hard about where we’re going to get money to live on.

Now, his question about… He’s basically talking about tax arbitrage, and he’s saying he’s in the 37% bracket. And if he’s going to be in the 37% bracket again when he takes the lump sum…

Dr. Jim Dahle:
Number one, if you are in the 37% bracket in retirement, you win. You win. It takes a lot of money, a lot of retirement spending money to be in the 37% bracket. For a married couple, it’s less, obviously, once there’s a divorce or somebody dies. You’re now using the single brackets. But that’s the anti-marriage penalty.

But it’s a lot of money. It’s $700,000-something this year. You have to have in RMDs. It’s only 15% of your social security getting taxed. It’s ordinary income from your investments. Because capital gains, long-term capital gains, and qualified dividends stack on top. They don’t even count toward that $700,000-something. You crushed it if you were in the 37% bracket in retirement.

Tyler Scott:
And the standard deduction gets bigger when you’re older. Your 0% tax bracket’s pretty fat.

Dr. Jim Dahle:
You are a multi-decamillionaire, or you’re managing money very poorly if you are in the 37% bracket.

Tyler Scott:
What he might be saying is like, I’m going to leave this job.

Dr. Jim Dahle:
I think it’s just that year, yeah.

Tyler Scott:
Yeah. Like, hey, I’m going to leave this gig and go to another gig and keep working. And I see that all the time. I’ve got this non-gov 457.

Dr. Jim Dahle:
Or he retires in August and they make him take it out in October.

Tyler Scott:
Yeah, right.

Dr. Jim Dahle:
So, that’s a lot of income from the retirement year.

Tyler Scott:
And so, yeah, I think, is what he’s alluding to by taking it out in January. I just want to state the obvious. Taking it out as your first income doesn’t mean that you’re going to get taxed lower. Obviously, it looks at your entire year’s worth of income to determine your bracket. But he might be saying exactly that. Well, if I retire, if I work until December and then take it out in January, well, now in this retirement year, hopefully my bracket’s smaller, then there would be an arbitrage.

Dr. Jim Dahle:
But he’s got this issue too. His spouse is a doc. What are the odds you both retire on December 23rd and the first payment comes in January? I guess try to time it well. Try to time it well. But chances are one of you is going to quit before the other one…

Tyler Scott:
And there’s still taxable income.

Dr. Jim Dahle:
It’s going to be a little mushy.

Tyler Scott:
But you made a point about tax-free growth. And so that, I think, gets undervalued by the public. Even if you defer at 37% and withdraw at 37% 10 years later, there’s no arbitrage there. But you got tax-free growth. And it’s really difficult to quantify. And I’m sorry to put you on the spot, but do you think about how much it’s worth?

Dr. Jim Dahle:
I’ve tried to quantify it. But think about an investment.

Tyler Scott:
I have a thought experiment.

Dr. Jim Dahle:
Yeah, we’ll take something really tax efficient and we know it’s going to be bigger than this. Total stock market.

Tyler Scott:
VTI.

Dr. Jim Dahle:
Yeah. It’s yielding 1%. You’re in the 37… Well, no, you’re probably in the 23.8% bracket plus state. So maybe 30% bracket on that. And so, the cost there, if it’s yielding about 1%, is something like 0.3, 0.35% a year. Inside this account, minus any additional expenses you’re paying in the account, maybe your total stock market fund is not as good as VTI. Maybe you’re paying an extra 10 basis points or something for it. I don’t know. But minus that, that’s how much faster it’s growing. And if you run out that difference, even 30 basis points over decades, it’s a lot of money. It’s well worth using for that purpose.

Now, obviously you got to make sure the withdrawal aspects are okay, and the fees are okay, and the investments are okay. And that the employer for a non-governmental 457 plan is stable, but use tax protected accounts, not only for the faster growth from the tax protection, but from the asset protection perspective.

If heaven forbid, you’re one of those very rare docs that has an above policy limits judgment, not reduced on appeal, you get to keep that account in every state. So, that’s a good thing. It’s exposed to your creditors or your employer’s creditors, but not your creditors. And so, that’s a beautiful thing to have deferred compensation. You haven’t gotten it yet, so they can’t take it in your lawsuit. Those are the reasons why I would use those accounts if the other things about them are acceptable to you.

Tyler Scott:
And that’s exactly in the various thought experiments with a tax efficient investment. I tell people it’s probably worth a quarter to a half percent. And is that a ton? It’s not a ton, but people do wild stuff in their investment asset allocation and asset location to try to scratch out.

Dr. Jim Dahle:
More than that.

Tyler Scott:
Or less than that.

Dr. Jim Dahle:
Yeah.

Tyler Scott:
So it’s worth something. Tax free growth is worth something. Asset protection is worth something. Now that assumes, I just want to put it, before we move to the next one, that assumes that the account level fees at the 457 are acceptable and that the expense ratios in the 457 are acceptable because you can pretty quickly outstrip 30 basis points of value with crappy fees and crappy investments.

And you mentioned that earlier. I just want to shine a light on it. And one of the things I hear you say all the time, nothing wrong with a taxable account. If that doesn’t work for you, there’s nothing wrong with a taxable brokerage account.

Dr. Jim Dahle:
It’s my biggest retirement account. It’s my taxable account. It’s okay to use it for retirement.

Tyler Scott:
Talk about FIRE money. And talk about tax efficient FIRE money. You can basically, if you’re married, $100,000 of…

Dr. Jim Dahle:
Right, take out the money you put in there two years ago, $80,000 of it is basis. You pay no taxes on that and the rest you pay at long-term capital gains rate.

Tyler Scott:
$100,000 of that this year is in the 0% bracket if you’re married. So, if you’re taking out high basis, “I need $160,000.” No problem. Let’s get $60,000, find a set of lots that has $60,000 of basis and $100,000 of growth. And you were living on $160,000.

Dr. Jim Dahle:
Tax-free.

Tyler Scott:
Yeah.

Dr. Jim Dahle:
Retirement is very tax efficient. Highly recommend it. All you people that are trying to hire, and I see this in a Facebook group all the time. You’re like, “I need someone to help me lower my tax bill.” If you want to lower your tax bill, retire. There is very little that is going to make as big of a difference in lowering your tax bill as not working.

Your earned income as a high-income professional is very highly taxed. You’re paying a whole bunch of payroll taxes. You’re paying a whole bunch of income taxes. You’re paying state income tax. Maybe you retire in Florida or Nevada or Washington. You got to move there from there before you die, of course. Maybe you’re getting into these 0% states for retirement and you can really make a great arbitrage there for your tax-deferred accounts.

But anyway, retire. It’s very good for your taxes. If you’re really focused on paying less in taxes, and I would argue, maybe you shouldn’t be. But if you’re very focused on that, it’s maybe the best step you can do to pay less in taxes.

Okay, we got to talk about solo 401(k)s before we wrap up here. So, let’s take one more Speak Pipe here. This one’s from Chris.

Chris:
Hi, Dr. Dahle. Chris from Colorado. I’m a physician’s spouse and I have a small side hustle that allows me to contribute between $10,000 to $20,000 to a solo 401(k) each year. I try to be as aggressive as possible with my contributions, making them as I track my profits throughout the year.

My tax preparer just told me that I over-contributed last year by about $1,500, but I can recategorize the contribution for this year. How does that work? Are there any negative consequences for over-contribution? And could this be a good strategy for me going forward, allowing me to contribute early in the year based on my anticipated earnings? And if I don’t reach that number, I can carry the difference forward to the next year. Thank you for all you do and looking forward to your response.

Dr. Jim Dahle:
Okay, all our questions today are apparently coming from over-optimizers. If you were trying this technique to make these contributions before you’re supposed to make them and have them re-characterized to the next years, I think you’re looking beyond the mark, to use a scriptural phrase here. Can you do it? I guess you could, but boys, do you really have to do that to reach your goals? I assume in this situation, he’s probably got another job.

Tyler Scott:
Yeah, it’s a side hustle.

Dr. Jim Dahle:
Yeah, he’s got another job. He’s maxed out his 401(k) there. So the only contributions being made here are employer contributions. Now if he got a customized one, which he probably should, he could do make a backdoor Roth contributions. And I would argue that pretty much everybody with a solo 401(k) ought to have a customized one. They’re very cheap.

We got a recommended page on the website that’ll show you where to go to open those. It’s not just going in the front door at Fidelity and trying to open one at Fidelity. And then you can do make a backdoor Roth IRA contributions. He could probably put all $10,000 or $20,000 he’s making in as make a backdoor Roth IRA contribution.

But don’t try to do that as you go along throughout the year. I mean, come on, it’s a side hustle is making $10,000 or $20,000. You don’t know how many expenses you’re going to have for it. There’s no way you’re going to be able to max this thing out. So you don’t know what your contribution is until you know what you made.

So, don’t make your contribution until the end of the year when you do your books. And then in January or February or April 10th or whatever, you do your contribution. I do this every year for my partnership. My employer contribution, I’m allowed to self-match my employer contribution in my partnership 401(k). I make my 2025 contribution like April 3rd of 2026.

Yeah, I put the employee contribution in January of 2025, but the employer contribution goes in April 2026 after they tell me what I’ve made and I subtract out all my business deductions there. Otherwise you can’t max it out and you may end up having to do over contribution with withdrawal, which is a pain. It’s not the end of the world, it’s a pain. And yes, the best way to do it is probably just recharacterize it to a contribution for the next year.

But I don’t think I’d try to do that regularly as a loophole to try to get a few extra months of growth in a tax protected account out of that. I mean, come on, it’s 35 or 100 basis points of extra growth on that $3,000 or whatever you’re putting in there. Spend your money on a customized solo 401(k) plan and make the mega backdoor Roth IRA contributions instead of your $4,000 contribution you can put in there every year. Now you can put in $18,000 and that’s all on a Roth account. Spend your money and your time doing that. It’s a much bigger bang for your buck, I think. What did I miss?

Tyler Scott:
No, I totally agree. Chris, I think it’s a lovely question. I’m with you.

Dr. Jim Dahle:
We are optimizers at heart. You should be aware of this. I am a slowly reforming optimizer. I still skip meals to save money. That’s how bad I am.

Tyler Scott:
You’re amongst friends, Chris.

Dr. Jim Dahle:
And I’m putting on weight too a little bit. So I got to do it for that reason. But we get it. But boy, you can do it though. It’s not illegal. You can do it every year.

Tyler Scott:
I was just talking to our planners this week. I was telling them part of our job is to help people understand what matters and what doesn’t. So that we can free up, I think there’s four currencies in life. There is money. That’s the one this podcast talks about a lot. It’s an important one. There’s also time, energy, and attention. These are the four currencies.

Dr. Jim Dahle:
Can we put motivation in there too? Because I run out of that one.

Tyler Scott:
Yeah, this is something you spend. And you can hear it in our language. We talk about paying attention and giving energy. Our language reveals that we know these things are currencies, but we don’t always think about them in the same way. And part of the job, I think, of a financial planner is to help people understand what matters and what doesn’t. Spoiler alert, this is kind of what your and I co-branded talk at WCICON is going to be about. About things that move the needle.

Dr. Jim Dahle:
Does this drop before they can sign up for WCICON? It does, doesn’t it? Okay, I think September you can sign up though. Come to WCICON.

Tyler Scott:
Yeah.

Dr. Jim Dahle:
It’s in September, the early bird registration will open.

Tyler Scott:
Yeah, we’re going to talk about things that move the needle and things that don’t. We’re going to make quadrants of things and say, “Hey, this is high impact versus lower impact. This is something you can control and something you can’t. And this is an example of controllable, but low impact.”

So if Chris were my client, I would tell him, “Dude, this is so smart. The fact that you are intelligent enough to just ask the question.”

Dr. Jim Dahle:
And he thought of it. I’ve never even thought about doing this. Yeah, I probably would have done this at 35 if I had thought of it. I would have done it.

Tyler Scott:
Totally. I meet the question with profound empathy. And Chris, you’re going to win. Chris, you already know too much to not win. I will sort of humor clients on this. I’ll say, “Okay, let’s do that. I can model this in the software. Let’s put in the $3,200 contribution that makes its way in aggressively. And it gets this added growth. And now let’s put that into our long-term projections calculator. And now, instead of retiring when you are 57, you can retire when you are 56.98 years old.”

Did it have an impact? It did. You can retire 72 hours earlier than you would otherwise. Okay, in other words, you’re right that it has an impact. But is that impact worth your energy and attention and time? I would argue it is certainly not worth it. This is optimization without impact.

And it’s kind of like when my dental patients, I had some people who were like, “I brush three times a day. I floss morning and night. I use fluoride mouthwash. I never drink soda. Which kind of toothpaste do you recommend, Dr. Scott?” And I’m like, I refuse to answer the question because it is so irrelevant to you. You’ve already done it. You’ve already done the things that matter, Chris.

But to try to answer your question, yes, there is something the IRS calls an excess deferral. And there are penalties if you leave an excess deferral in there. It is best to take that money out as soon as you can, because if you leave it in there too long, it can end up getting double taxed if you take it out later after the deadline.

Dr. Jim Dahle:
You have until tax date, right?

Tyler Scott:
Yeah. I think the one sort of action item here or information is that what is the deadline? Well, it depends what kind of entity you are. For sole props, single member LLCs and C-Corps, it’s April 15th of the following year or October 15th if you file an extension. For S-Corps, partnerships and multi-member LLCs, it’s March 15th of the following year.

Dr. Jim Dahle:
Or September 15th.

Tyler Scott:
Or September 15th. Whatever entity you are, Chris, you have until that day to figure it out, as Jim talked about. Figure out, “Okay, what were my profits for the year? What are my expenses?” Sit down with your CPA, come up with the number that can go in as the employer contribution to the solo 401(k) and just make it then and give yourself back your time, energy, and attention during the year so you don’t have to deal with this.

Dr. Jim Dahle:
And you can’t do this with a quarter million dollars. Because you can’t roll that to the next year because you’re not going to be able to contribute that much the next year. There’s a certain size of what you can do this with, especially if you’re only putting in $4,000 or $5,000 a year into this account.

Tyler Scott:
And interestingly, though, so often, this is a great example of this optimization doesn’t matter, doesn’t move the needle. But you pointed out the optimization that would. Get a mega backdoor Roth provision in your solo 401(k) and put all $20,000 in there, Chris. And so, now you’re making whatever it is, a $4,000 employer pre-tax contribution, saving a little on taxes.

But instead of putting the other $16,000 in your brokerage account, put it in the Roth. And now you’ve got all that sizable contribution growing tax-free. Now that moves the needle when we run the numbers. Now you’re not retiring 72 hours earlier. Maybe it moves the needle six months, 18 months, two years. So, you’re optimizing in the wrong part of this question.

Dr. Jim Dahle:
Well said. I love that analogy about the dentist and what toothpaste to use.

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All right, don’t forget about the Financial Crash course. It’s in just a few days. If you’re listening to this as the podcast drops, August 16th, 06:00 P.M. Mountain. So that’s 05:00 o’clock on the West Coast. That is 08:00 o’clock on the East Coast. Hopefully that time works for you. If it does not, we will record it and send it to you anyway, if you sign up at whitecoatinvestor.com/crashcourse.

Yes, we kind of gear this to the professional in practice to attending physicians, but there’s plenty there. It’s going to be useful for residents and students and retirees and whatever. So feel free to come. We’d love to have you. It’s totally free.

Thank you for telling your friends about this podcast. It does help spread the word about it. We’re not always in the weeds. Sometimes we keep it simple, but hopefully we’ve pointed out the things that really matter today.

We appreciate those leaving five-star reviews as well. A recent one came in from JB from South Carolina, who said “Fantastic podcasts. Can’t say enough about WCI, except I wish I’d found them many years ago. Great content in their FYFA course. It enabled me to embark on a DIY path with the confidence I lacked previously. I went back and listened to every podcast from the very beginning over the past year, and I’m amazed at the knowledge I now possess. Thank you, Dr. Dahle and guests.” Five stars.

Thanks so much for that review. It’s true. If you go listen to 600 podcasts, we’ve covered a lot. We’ve been in the weeds. You know a lot. More than lots of people who consider themselves financial advisors, if you really internalize everything we’ve talked about. From the example today, their accountant didn’t know this. And that’s not uncommon for these things that are kind of specific to high-income professionals.

If you do want somebody to help you with your life that this is not uncommon to, check out White Coat Planning. You can go to whitecoatplanning.com and get more information there.

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

DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

Transcription – MtoM – 287

INTRODUCTION

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

Dr. Jim Dahle:
Welcome back to the Milestones to Millionaire podcast.

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All right, welcome back to the podcast, the podcast that features you and your successes and inspiring others to do the same. You can come on the podcast by applying at whitecoatinvestor.com/milestones.

The new thing this month is private medical school loans, and there are a lot of you out there who need to take them. I didn’t realize quite how many there were. All the M1s, of course, MS1s, OMS1s, dental first-year students are having to take these out because they need to borrow more than $50,000 a year.

But also, there are a fair number of people out there that were having to take private student loans before. Some people in new DO schools, et cetera. Some people in some types of Caribbean schools are having to use private student loans.

So, there have been some changes as a result of the OBA passed last year, it changed the landscape for medical student borrowing. So obviously, the federal student loans are now capped at $50,000 per year, $200,000 total. That means many of you are going to need private loans to cover a significant portion of the total education costs.

We’re doing all we can here at White Coat Investor to help you with this. We launched a new resource list this year to make this easier. You’ll find vetted private student loan companies, plus two bonuses you won’t get anywhere else. The first one is cash back from the lenders themselves. And the second one is free access to the Fire Your Financial Advisor student version of the course. Our best-selling course for medical students just starting their financial journey.

Check out two or three lenders on the list. Go with the one offering the lowest interest rate and the best terms and know that you can at least get the best deal out there that you can until such time as you can refinance these loans or pay them off as we’re going to discuss today in our interview. You can get more information about all of that at whitecoatinvestor.com/loans.

INTERVIEW

Dr. Jim Dahle:
Okay, let’s get our guests on the line. Our guests today on the Milestones to Millionaire podcast are Joe and Marybeth. Welcome to the podcast, guys.

Joe:
Thanks so much for having us, Jim.

Marybeth:
Thank you for having us.

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

Marybeth:
My name is Marybeth. I am one year out of dermatology residency training, trained in San Antonio, Texas, and am now a first year attending in the Southeast. I am active duty in the Air Force, just pinned on major this past May.

Dr. Jim Dahle:
Congratulations and thank you for your service.

Marybeth:
Thank you.

Dr. Jim Dahle:
All right, Joe.

Joe:
I am an anesthesiologist, finished training two years ago and obviously also in the South with Marybeth.

Dr. Jim Dahle:
Very cool. Okay, well, tell us what milestone you’ve accomplished recently.

Joe:
Big news, we paid off student loans, all of my student loans, Marybeth had none. And in total about right at $405,000 in less than two years.

Dr. Jim Dahle:
Wow, $405,000 in less than two years. And this is while at least one of you was still in residency for most of it, right?

Marybeth:
Correct.

Joe:
Yeah, Marybeth was in residency for a year of that and just tried to drop the anvil on it, like you say.

Dr. Jim Dahle:
And you did. How does it feel to have that gone?

Joe:
It’s been about three, four months and it’s just now starting to sink in. There’s a little bit more reserve at the end of each month that we previously really didn’t have or know what to do with.

Dr. Jim Dahle:
Okay, tell us why you decided to pay them off instead of going and looking for a PSLF qualifying job or something.

Joe:
Yeah, that was always something that I was back and forth about. And ultimately, I felt like I wasn’t fully done with medical school until this debt was gone. I feel like at any point in time, if something were to happen to me or if I didn’t want to work as much or if I got burnt out, then I would still have that debt. And I wouldn’t be really free until that debt was gone. And so, even though you can play the investment game and maybe make more money, I was really much more in the psychological debt arena where I just couldn’t have that looming over my head.

Dr. Jim Dahle:
All right, tell us a little bit about school. $405,000 is not a small amount. That’s well more than average for MD, DO, even dental schools. Tell us about how it ended up being that large.

Joe:
That’s a combination of both medical school and undergrad. And I went to a four-year university. I wasn’t lucky enough to have all that paid for. I had to take all loans out for that. And then same thing with medical school. I went to a DO school. DO schools tend to be a little more expensive. I took out all the money both for the tuition as well as living expenses. And then when it came time to interview for residency, I had to take a private loan out to go on interview trail pre-COVID. I was going around the country, flights, hotels, all that. And quite frankly, I wasn’t very good at managing money when I was in residency or in medical school.

Dr. Jim Dahle:
Okay. $405,000 is what it was when you came out of residency?

Joe:
Correct. Yeah. Basically, when I graduated in June of 2024, two years ago, that was all there. That was all sitting in my account ready for me to pay off.

Dr. Jim Dahle:
Okay. Tell us about the 20 months.

Joe:
Really a huge benefit was that Marybeth was active duty military, was making a little bit more as a resident than civilian. And I benefited from a very good anesthesia market where we were in Texas. And the fact that we don’t have kids yet, and the fact that Marybeth was in residency, and I picked up just about every shift you possibly could.

Dr. Jim Dahle:
You lived like a resident in both senses of the word?

Joe:
Exactly. Had the big shovel, but I mean, we did not inflate our lifestyle. We each drive paid off seven-year-old cars. We didn’t buy a multimillion dollar house. We did go on some vacations. We did enjoy our lives, but it was all gas, no brakes.

Dr. Jim Dahle:
But basically everything you earned that wasn’t going to the taxman, you sent to the lender.

Joe:
Yeah. It was pretty remarkable how at the end of each month, basically we would pay our expenses. We would put money into retirement. And then everything left over at the end of the month went into a little savings account that we had. Because I wasn’t accumulating any interest for a lot of that because of the COVID pause. And then that all that went to loans.

Dr. Jim Dahle:
Well, once that was over, you just wrote the check.

Joe:
Yeah, I think it was April that it was like a six-figure amount that I had to hit submit on. And it was like, there it goes.

Dr. Jim Dahle:
Which IDR program were you in?

Joe:
I did the SAVE program.

Dr. Jim Dahle:
Okay. You were sitting there in SAVE until they basically threw you out of it.

Joe:
Correct. Yes.

Dr. Jim Dahle:
Very cool. And then just whacked it all at once. That’s pretty fun.

Joe:
Yeah.

Dr. Jim Dahle:
All right. Well, the hard part, of course, of doing this is not inflating your lifestyle, right? Now you’re anesthesia attending. You’re making, I don’t know what you’re making, $600,000 or whatever. You can have a pretty awesome life financially on $600,000, but somehow you managed to not do that. What was the hardest thing not to buy during that two-year period?

Joe:
Man, that’s a good question. I think she’s going to probably have a better answer for that.

Marybeth:
We were mostly limited by the fact of my residency days. In terms of wanting to travel, I think that was where we really spent the bulk of our money. And we just couldn’t do the things we necessarily may have wanted to do or inflate just because I was still a resident and very limited time-wise, experience-wise by that. I truly think that helped.

Dr. Jim Dahle:
It’s hard to spend a lot while working 80 hours a week, isn’t it?

Joe:
Yeah, exactly. And I was going to say, I waited over a year to get my custom golf clubs.

Dr. Jim Dahle:
Okay. Okay. So, how much did they drop off your score is what I want to know.

Joe:
Not enough, Jim. Not enough.

Dr. Jim Dahle:
I should pause for a moment and tell my custom golf club story. I went and got custom golf clubs. And as you know, they’re not cheap. And it is probably the most expensive date Katie and I have ever been on. We both got custom golf clubs. And a month later, I fell off the Grand Teton and broke my wrist.

Joe:
Oh my gosh, that’s right.

Dr. Jim Dahle:
I have probably played two rounds with custom golf clubs. And I’m not even sure they’re like the right clubs for me now that my grip strength is worse in that hand. It might be one of my worst investments ever. But they do help me hit the ball straighter. No doubt about that.

Joe:
That’s what I told her. I was like, “It’s going to make me better.”

Dr. Jim Dahle:
Well, they probably cut a few strokes off and eliminated a little bit of frustration. So I played with some very cheap golf clubs before.

Joe:
We played with our dad this past weekend who has a three wood that, it’s a three wood, made of wood.

Dr. Jim Dahle:
Very nice. Okay, so now what? What’s next for you guys? I know Marybeth, you got a time debt. You’re going to be paying off some time here. So you can’t really speed that up any. You can’t pay off your time debt in 20 months. But tell us what you’re working on financially next.

Joe:
Yeah, Marybeth has a couple more years. We are looking forward to having, honestly, just extra money to do what we want. We want to continue to travel. We want to potentially build a house in the future, maybe upgrade our house. Really, it’s kind of loosening the straps. It’s at the end of the month saying, if she wants a piece of jewelry, if I maybe want to buy a new watch, just some of those little spending things we’re learning to spend.

And then honestly, stocking a lot away for future potential investment opportunities. I’d like to get into real estate and dip my toes in that. But I’m not quite ready yet. So, having a reserve for when I am ready is a goal of ours too.

Dr. Jim Dahle:
Was this process easier or harder than you thought it was going to be at the beginning?

Joe:
I think it becomes your norm. It’s so daunting at first. It was a huge monopoly number. And at the beginning, I thought that it was impossible. And then each month, it’s just that it just became automatic to the point where I wasn’t even really seeing that money. It didn’t feel like that money was even mine, that it was almost in the middle of it. It felt easy. I certainly know that we made sacrifices, but at the end of the day, the happiness that we feel now, it makes it feel all very much worth it.

Dr. Jim Dahle:
The feeling of being debt-free is pretty awesome. People say, “Oh, you could have invested it.” You alluded to this earlier, and maybe you would have come out ahead, not investing in a risk-free investment most of the time, if these were all federal loans. But you decided, “No, I want to have the debt gone. I want my cash flow improved, et cetera, et cetera.” Any regrets about that now, three or four months on? Do you wish you’d strung it out longer and invested the difference or anything like that?

Joe:
As of right now, it feels pretty darn good to not have any. Answering questions like, how much debt do you have? And just being able to say, our house mortgage, that’s it. Three words, our house mortgage. It’s hard to describe. It feels like a huge weight has been lifted off.

And so, yeah, we probably don’t come out ahead financially. Honestly, like investing the difference and stringing these out a little bit is probably, truly the financially optimized way to do this. But the psychological advantage that I feel like I have now with all this debt gone, I know 40-year-olds, 50-year-olds that are still paying off their student loans, and they seem happy as a clam. That just wasn’t going to be me. It wasn’t going to be us.

Dr. Jim Dahle:
And you can build wealth very quickly when you’re using the money you were sending to the lender to build wealth with. It’s pretty amazing how quickly it stacks up.

Joe:
Yeah. We now are able to really start loading money into taxable brokerage account now, maxing out all of our retirement accounts, of course, and seeing compound interest work its magic.

Dr. Jim Dahle:
Now, I’m getting emails a lot this month because of the changes with the OBA bill. But there are students out there, they send me emails every month that owe $520,000 or are thinking about not going to medical school because of the expense, and they’re going to have to borrow the entire cost, or they are worried about having to take some of their loans out now as private loans. What advice do you have for those people about the ease or the difficulty with which they’re going to have paying off their student loans after they finish?

Joe:
I certainly feel for them, first of all, because I was blessed with the political landscape that allowed me to take out essentially unlimited loans and the future interest rates of needing to take out private loans and all that is probably going to be very real. But at the end of the day, you just have to come up with a plan. You can’t bury your head in the sand and look at this giant number as something that’s unattainable. You have to just come up with a plan and work hard, spend money on what’s important to you, but it’s not impossible to do. And certainly in a relationship, it’s good to have a partner that’s on the same page as you as well.

Dr. Jim Dahle:
Now, before we started recording, Marybeth you guys told me that he’s really into this finance stuff. You’re maybe not as into it. How did you guys get onto the same page with what you were going to do with your finances?

Marybeth:
Yeah, it was something that was a shared goal from the very outset once Joe graduated residency. And essentially once he graduated, he very much said, “I want to pay these loans off as fast as I can.” I said, “If that’s truly what you want to do, I’m here to support you. No problem.” Again, we traveled. We went on several international trips over the past two years. Probably like five in total.

Dr. Jim Dahle:
And so, I don’t feel like I’ve been shorted at all by any means. I really just think it felt good to accomplish something together. And knowing that we can just move forward without the debt is really liberating. I do think the loans actually would have been paid off much earlier, but we bought a house last year.

All this to say is we accomplished all the loan pay off and simultaneously bought a house during that time period. There’s been huge purchases during this time frame. So, it is very much possible. I’m proud of us for accomplishing it together.

Yeah, for sure. Well, all right. What have we not talked about? What should people know when they’re thinking about paying off their debt? How can you inspire them to do what you’ve done?

Joe:
I would say, read the White Coat Investor, have a financial awakening, come up with a written financial plan, really understand when you have an influx of money that you’re going to get, especially when you’re a resident, attendinghood is coming.

Have a plan for when that income comes because if you don’t, I don’t know what I would have done if I didn’t have a plan. It would have just come into my checking account and it would have sat there and I would have looked at it and smiled. But that’s not doing anything for you.

Come up with a plan if you’re in a partnership, if you’re married, make sure that you include your spouse in that plan because it really takes two to tango and to tackle these kinds of financial goals.

Dr. Jim Dahle:
Well, thank you so much for being willing to come on the podcast and share your experience and inspire others to do the same.

Marybeth:
Yeah, thank you for having us.

Joe:
Thank you for having us. Appreciate it.

Dr. Jim Dahle:
Okay, that was a lot of fun. I learned before we started this recording that he didn’t know he was coming on the podcast today. He’s a super White Coat Investor fan. And so, this was a little bit of a present for him to be able to come on the podcast. That was a lot of fun to meet both of them and look at the success they’re having. One of them is paying off her student loans with service. Another one paid off his student loans by living like a resident and taking them in a corner and dropping the anvil of a high income on it.

Either way, the student loans go away and then you can start working toward your own financial freedom. It’s pretty awesome to see what people are doing with their financial freedom as they move toward it. It’s really exciting to see people traveling, see people cutting back to part-time, see people designing their practice the way they want their practice, see people retiring early. Whatever you do with it is pretty inspiring and we’re excited to be a part of the journey.

FINANCIAL BOOT CAMP

Dr. Jim Dahle:
You often hear the phrase “passive investing” or “passive management” as opposed to active management or active investing. And in reality, we’re talking about two different things here. Sometimes the phrase passive is used to refer to an index fund strategy. When you’re investing in stocks, for instance, you are just buying all the stocks via an index fund and trying to match the market rather than trying to beat the market.

However, the term also gets used, particularly in real estate strategies. You can be a passive investor or you can be an active investor. If you’re an active investor, you’re going down looking at a house down the street, evaluating it and making an offer on it, buying the thing, maybe you’re going in there and you’re renovating it. Now you’re finding the tenant, you’re interviewing the tenant, you’re putting together a contract for that tenant. Maybe you’re going out and trying to hire a property manager to assist you. And after a few years, maybe you got to replace the tenant or maybe you want to sell the property, so you got to go sell it.

That’s a very active way to invest in real estate as opposed to just hiring a passive manager to do that sort of thing for you. And there’s a whole spectrum of passive ways to invest, whether you’re just buying a turnkey property that already has a tenant in it and already has a manager set up, or whether you are buying a real estate syndication or a private real estate fund or just investing into a real estate index fund. There’s a whole continuum of ways to invest passively, which each step being a little bit more passive.

This term can apply in more than one way, but mostly what we’re talking about here is we’re talking about mutual funds, which is the easiest way to invest, probably the way that most people should invest and probably the way most of us should have most of our money invested.

Mutual funds give you a lot of advantages. They give you instant diversification. They give you daily liquidity. They give you professional management. They give you economies of scale because you’re banding together with thousands or millions of other people to invest in this investment.

But there are two kinds of mutual funds. There’s passive mutual funds, there’s active mutual funds. Passive ones are generally just trying to get the market return. Keep costs low, get you the market return for that particular type of investment, whether that’s stocks or bonds or real estate or whatever.

Whereas an active manager of a mutual fund is usually trying to beat the market, at least on some sort of a risk-adjusted basis. And so, they usually own fewer stocks in an actively managed stock mutual fund than a passively managed index mutual fund. The index fund, this passive manager, computer mostly, just buys all the stocks. It’s essentially easy to guarantee yourself the market return. You own all the winners. Yes, you own all the losers. But over the long run, you tend to have good returns that are going to help you reach your goals.

And in fact, when you compare these two approaches, particularly when it comes to stock mutual funds, you realize pretty quickly that the smart way to go is to invest passively because even before tax, in the long run, you’re beating 90, 95% of those active managers. And after taxes, it’s even higher. Plus you don’t have to worry about manager risk. You don’t have to monitor as much. There’s all these benefits to using these index funds and investing in a passive way.

So it’s very clear when you look at the data, particularly when it comes to investing in stocks. And I’m not talking about just US large cap stocks. I’m talking about all kinds of stocks, international stocks, US stocks. The data is even pretty good for bonds. It’s not quite as good for bonds as it is for stocks, but it’s very good when it comes to these frequently traded, commonly owned, highly analyzed asset classes like stocks and bonds that the approach to take is passive. It really does work better in the long run almost all the time. And it’s probably you’re in that almost all the time category.

Now, there are some funds that are kind of passive. The more passive they are, the cheaper they tend to be, the better they tend to outperform. But there’s always a continuum of passivity. You’ll see some index fund providers or passive fund providers such as Avantis or DFA.

Some people call them indexing light or something like that, because they have a passive strategy, but kind of an active way that they implement it. And so, there are some mixes where there’s a little bit of active going on along with passive, and that’s okay. The point is you got to recognize just how difficult it is to predict the future to pick stocks that are going to beat the market.

As you move away from these highly analyzed asset classes, index funds often aren’t available. There is no index fund for all of the duplexes in your hometown. If that’s the type of investment you want to invest in, you’re not going to be able to invest in an index fund to do that.

That doesn’t mean you can’t invest passively. If you find somebody else that’s building syndications or a fund of these things, or if you’re just hiring a turnkey company to run them for you, or hiring out as much of the management as you can, there are other ways to invest passively, even in an asset class that doesn’t have index funds.

But keep in mind, if you are in an asset class that does have index funds, that’s probably the way to go. That’s why 85% of our portfolio is in boring old, broadly diversified, low cost index mutual funds and ETFs, because it’s just such a smart way to invest.

When might active management make sense? Well, if you think you have some edge that is going to help you beat the market, I guess active management is how you implement that edge. But mostly the times to use it is just when you’re investing in something where an index fund is not available. And that usually means some sort of a private investment, whether that’s real estate or oil and gas or a small business or some other thing like that.

But if you’re a beginner building your first portfolio, the way to start is broad-based index funds. We’re talking total stock market index funds, total international stock market index funds, bond index funds. Those are the building blocks to build your portfolio in the beginning. And even now, 20 plus years later, those are still the biggest building blocks in our portfolio.

Just recognize that a lot of investors out there are making big mistakes when it comes to this question. The mistakes usually are just picking an active manager or worse, trying to pick the stocks themselves and being that active manager. If these professionals can’t do it with all their fancy computers and high paid assistants and all their expertise and degrees, what makes you think you’re going to be able to do it in between patients? You’re not going to be able to. And frankly, neither are they probably when you compare it to an index fund.

The first mistake is just actively investing when you should be passively investing. But other mistakes get made as well. Sometimes people don’t pick the right types of indexes to follow. I’m a big fan of broad-based indexes, the ones that buy all the stocks in the US for instance. But there are other indexes out there such as indexes that follow the NASDAQ index.

That’s not all the stocks in the US. It’s just the ones that trade on one stock index. It tends to be very tech company heavy. It’s not a broad-based index. So I’m not a big fan of that index nor of index funds that follow it.

The Dow Jones Industrial Average is well known. It’s been around a long time but it’s not a broad-based market index. It’s just like 30 big stocks is all it is. I wouldn’t encourage you to buy an index fund that follows that one nor some little niche index funds. If you’re just buying an index fund that invests in semiconductor companies from Taiwan, that’s very niche. And yes, if those companies do well, you’re going to do well but that’s a bit more of a gamble than just buying all the stocks when you’re using a total market kind of approach.

I hope that’s helpful in learning to understand the difference between active investing and passive investing and really the advantages of passive investing that not only help you beat active investing returns but free up your time and allow you to use your time actively because you’re investing your money passively.

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All right, it’s been great having you here. We appreciate what you’re doing out there in the world, both with your careers and with your families and your communities. We’re grateful for the hard work you’re doing and hope we can help you to find a little bit more success and a little bit more freedom.

Keep your head up and your shoulders back. We’ll see you next time on the Milestones to Millionaire podcast.

DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only. It should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

This is the White Coat Investor Podcast: Financial Bootcamp, your fast track to financial success.

Dr. Jim Dahle:
Whole life insurance is a type of permanent or lifelong life insurance, meaning it’s going to pay a benefit no matter when you die. So if you die at 35, it pays out the death benefit. If you die at 95, it pays out the death benefit.

The other main type of life insurance is called term life insurance, right? There’s permanent life insurance and there’s term life insurance. For term life insurance to pay out, you actually have to die during the term, right?

So if you buy a policy that basically matures or expires or whatever at age 60, and you die after 60 and you haven’t renewed it and/or gotten another policy, it’s not going to pay you. But if you die at 55, it’s going to pay your estate, your heirs, whatever you’ve listed as the beneficiary.

So that’s the difference between permanent life insurance and term life insurance. Because the permanent life insurance has to pay out to everybody that keeps it, it costs a lot more. A typical price difference, and it varies by age and health status and that sort of thing, but typically, it might cost you 10 times as much to buy a permanent life insurance policy as opposed to a term life insurance policy because it has to cover all those people that are going to die in their 60s and 80s and 90s, right?

But the issue is that’s an expected event for you to die at 90, right? That is not like a financial catastrophe. I hope so. Most people don’t actually need a lifelong or permanent life insurance policy. They need something that’s going to pay their heirs if they die before they become financially independent, before they retire. And term life insurance works very well for that.

And so that leaves this product out there, whole life insurance, with not a very big market, right? Because almost everybody needs term life insurance. They’ve got a kid, or they’ve got a spouse, or somebody they’re trying to take care of their needs if something happens to them at a young age. But not very many people have any sort of a need for a lifelong death benefit.

So that leaves all these agents who get paid commissions for selling permanent life insurance trying to come up with another use for permanent life insurance, another way to convince you to buy it, even though you don’t need a lifelong death benefit.

They’re trying to talk you into paying eight or 10 or 12 times as much for life insurance as you need to because then the commissions are eight or 10 or 12 times as large, and it can be a real tragedy if you end up being underinsured because of it, right?

If you buy a $100,000 whole life policy instead of the million-dollar term life policy that you should buy, you’re maybe spending about the same amount of money, but your heirs get a whole lot less money if you die in the next few years when you really have a huge need for life insurance. So that can be kind of tragic.

But the bigger problem, if they talk you into buying this policy for some other reason other than the death benefit, is you probably have a better use for your money, right? I run into people who are putting 40% or 50% of their savings into whole life insurance, right? And that’s just way too much for something like this.

I mean, the truth is 98%, 99% of doctors probably don’t need whole life insurance. It’s a very niche product and should only be bought by people in a specific niche where it makes sense to buy it.

So some of the ways that people try to talk you into buying these policies is they tell you, “Oh, well, this is another way you can save for retirement,” because a whole life policy actually acquires cash value.

Now, there’s not two pots of money. It’s one pot of money, right? The death benefit and the cash value that you can borrow out of the account, or that you get if you surrender the policy, is the same pot of money. There’s not two pots of money.

There’s not a million-dollar face value death benefit, and there’s not this $100,000 in cash value that you’ve accumulated inside the policy. It’s not $1.1 million. It’s just a million. And whatever you borrow against the policy has to come out of the death benefit before the remaining death benefit is paid to your heirs.

But because it’s acquiring this cash value, that does give you some other things you can do with this policy, like pay for retirement.

So, what can you do if you get to retirement and you have bought this whole life policy for some reason, and you actually want to use that money to spend in retirement, or you need to spend that money in retirement? How do you access that money?

Well, the first thing you can do is to just do a partial surrender of the policy. This is really the only unique tax benefit of whole life insurance, right? You basically can do a partial surrender up to your basis, meaning the total amount you paid in premiums over the years. You can take that money out tax-free, and you can take it out first, which is really cool.

You can’t do that with a typical investment. You can’t do that with an annuity. But with a life insurance policy, you take the basis out first.

So if you’ve got a policy that’s now worth $1.5 million, and you’ve paid maybe $400,000 in premiums over the years, I don’t know what you paid, that first $400,000 that comes out comes out tax-free, which is pretty cool. It’s tax-free and it’s interest-free.

But if you want more than that money out of the policy, you’ve got to do one of two things. You’ve got to either surrender it, in which case you now pay taxes on all the gains at ordinary income tax rates, not capital gains tax rates, or you borrow against it, just like you’d borrow against your house to spend money or you’d borrow against your investment portfolio to spend money. And that money comes out tax-free, like all loans, but not interest-free.

Now, there are some types of policies that can be designed so that it continues to pay dividends as though you hadn’t borrowed that money out. That’s called a non-direct recognition policy, and if you’re planning to borrow against the policy, that’s a good feature to have in your whole life insurance policy.

But the bottom line is, after partial surrenders of your basis, there’s some complications with getting the money out of there to spend.

The bigger problem with whole life insurance is that cash value just doesn’t grow very fast. It has a really low rate of return. And in fact, if you look at the entire premium you’re paying as making an investment, not paying for insurance, which obviously some of it is, but if you look at the whole thing as paying for an investment, it has a negative return for quite a while.

The very best-designed policies, where you’re doing all kinds of paid-up additions and it’s designed for you to do this, you’re still not going to break even for five or six years. Many policies don’t break even for 15 or 20 years.

I mean, that’s a terrible investment. You’re better off in CDs or bonds or even just a money market fund than something that’s going to take 20 years to break even. I mean, your money market fund, your money’s probably doubling in 20 years, and so it’s not a great investment from that perspective.

And that’s why there’s usually a better use for your money, right? If you are putting money into a whole life insurance policy and not even maxing out retirement accounts like Roth IRAs and 401(k)s and a second 401(k) for your side gig, and a 403(b) and a 457, everything that’s available to you, you’re probably making a mistake, right?

And you can even make a case, as long as you’re investing the money aggressively into a stock index fund or into rental property or something like that, that you can invest outside of retirement accounts and still be better off, even adjusting for risk, than you are putting money into a whole life insurance policy.

The only time it even comes close to starting to compare is in the long term when you’re buying very safe investments like CDs or bonds. Then it’s more of a comparable return, but not for 10 or 15 or 20 years because during that time period the money has a negative return. Plus, it’s hard to rebalance from a whole life insurance policy to your portfolio, etc., etc. It’s just not a great strategy.

So, what are the things where it makes sense to have a whole life insurance policy? Well, there are a few of them, and perhaps one of the most significant ones is when you have a business purpose or an estate planning purpose for the long-term death benefit. You’re still interested in the death benefit, but you’ve actually got a business purpose.

For example, let’s say there’s two partners. They’re already 65 years old, and they want a buy-sell agreement for the business, right? They want to have enough money that if one of them dies, the other one will own the entire business, and that person that died’s heirs will get cash from the life insurance policy.

But now term life insurance has become really expensive, so they decide, we’re going to buy a whole life insurance policy that way. Even if we die at 83, it’s going to pay out. Okay, very reasonable use.

Another reasonable use would be like a family where all their wealth is tied up in a farm, and maybe there’s four heirs, right? And they don’t want to have to split up the farm. They want one, say one son, to work the farm after they die, but they want everybody to get an equal amount.

So maybe they borrow against the farm and use the money to buy whole life insurance policies for the other three kids, and now everybody gets an equal amount of money, right? Estate planning purposes like that.

Some people really hate using banks for some reason and prefer to bank on themselves or do what’s called infinite banking. And this is basically a way, in the long term, you can make a little more on your cash in exchange for dealing with the hassles of a whole life insurance policy.

So they’re essentially borrowing frequently from the policy to buy things and then paying the policy back, and that can work out okay. It’s not nearly as magical as its proponents would have you believe, but it’s possible in the long term you can make a little bit more money on your cash.

So these are some of the reasonable uses of whole life insurance policies. But as you can see, they’re pretty niche. Most people do not need these things, and whole life insurance agents need to send their kids to college. They need to make some money, and so they try to really push these things you can do with whole life insurance. You know, a great tax-efficient way to invest, and all these wonderful things you can do with it, and try to get you to buy these policies.

But the truth is, about 80% of white coat investors who have bought a policy regret it. About 80% of policies purchased are surrendered prior to death, so you can tell that most people buying these end up regretting it.

Treat it like a marriage, right? It is a lifelong commitment when you buy a lifelong insurance policy. And if you want to get out of it early, just like a marriage, it’s going to cost you some hassle, and it’s probably going to cost you some money.

So, hope that’s helpful in making your decisions about what to do with whole life insurance.

Keep in mind, if you own a policy and you’ve already owned it for five or 10 or 15 years, maybe you’re past a lot of the poor return years on that cash value because they tend to be heavily front-loaded. It might make sense to keep a policy you never should have bought in the first place.

And there’s some other things you can do with cash value you already have, like exchanging it into another type of insurance, like a long-term care policy, or exchanging it into an annuity and using that for some retirement income. There’s some other things you can do with it. So, more complicated question once you already own it.

But before you buy it, make sure you really want it. You really understand how it’s going to work and that you don’t have a better use for your money, right? It might be paying down your mortgage. It might be investing in real estate. It might be buying index funds in your taxable account. It might be saving for your kids with a 529 or UTMA or something like that.

But if you truly don’t have a better use for your money, or you have one of these niche uses for a lifelong death benefit, go ahead and buy whole life insurance.

Hope that’s helped you in understanding how whole life insurance works.

The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.