The Backdoor Roth IRA Made Easy – Podcast #194 | White Coat Investor

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

This is White Coat Investor podcast number 194 – The backdoor Roth IRA made easy.
Dr. Jim Dahle:
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Dr. Jim Dahle:
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Dr. Jim Dahle:
Thanks for what you do out there. I think I just read the news yesterday. We’re recording this on the 13th of January. It’s going to run in just a week on the 21st, but I just read in the news this morning that yesterday was the worst day for coronavirus deaths that we’ve had yet. So, it’s been a crazy, crazy winter.
Dr. Jim Dahle:
I know many of you are now immunized. I’m fully immunized, and I’m excited about that. My parents even got immunized last week in Alaska. And so, hopefully we can see the light at the end of the tunnel. Maybe some of us will be out of that tunnel soon and we can wrap up this pandemic in a few months, it’s my hope. But in the meantime, thanks for those of you who are working hard and taking those risks for you and your family out there on the front lines.
Dr. Jim Dahle:
So, you may notice, those of you who are watching this on YouTube, I got a White Coat Investor t-shirt on. This is pretty sweet, right? And hopefully we’ll soon have these available for people to purchase along with a bunch of other cool stuff in a WCI swag store that we’re going to have. But in the meantime, this is the t-shirt, that’s going to be sent out for those of you who registered for that conference and will be getting the swag bag for the conference coming up in March.
Dr. Jim Dahle:
Also, those of you who are going to be the champions for your classes, for the new book, this is a t-shirt you’ll be getting for that. So, if you want to check that out, be sure to watch this on YouTube, rather than just listening to it on the podcast.
Dr. Jim Dahle:
Speaking of the new book, I have a new book out. You may not be aware of this. It’s called The White Coat Investors Guide for Students. It’s subtitled how medical and dental students can secure their financial future. This is a completely new book that I’ve been working on really the whole last year or so. It’s got a lot of great material in it. It’s by far the best-looking book I’ve ever published. And that’s mostly due to the assistance of my staff that helped with that.
Dr. Jim Dahle:
But this is a great book that’s aimed at medical and dental students. All kinds of good stuff in it. It addresses all of the unique decisions that you make during medical and dental school and the financial ramifications of those decisions.
Dr. Jim Dahle:
And so, if you look into the table of contents, which you can see online on the Amazon site, you’ll see that the whole first section is called The Financially Savvy Student. And we talk about a couple of things. One that money shouldn’t necessarily be your primary motivation, but that you don’t get a pass on math. That you have to pay attention to it, even during school.
Dr. Jim Dahle:
We talk about choosing a medical or dental school. We talk about how to pay for it. All the different options, their pluses, or minuses, how some of them aren’t necessarily scholarships despite being called the scholarships. They are more like contracts. And the importance of being a thrifty student.
Dr. Jim Dahle:
But most importantly in this section, I free students from the guilt that comes from living on loans. And if you have a plan to take care of your loans, and it’s a reasonable plan once you get out of school, you don’t need to feel guilty about living on loans while you’re in school.
Dr. Jim Dahle:
I also talk about the advantages of being a non-traditional student, how to choose a specialty, both for physicians and dentists. We talk about avoiding financial catastrophes. I introduce you to the concepts of burnout and preventing it and treating it, and talk about choosing residency programs. As well as for dentists, I give a plug for opening your own practice once you get out. Especially if you have a large student loan burden.
Dr. Jim Dahle:
The second part of the book is shorter. It brings you into the beginning of residency and talks about important financial issues that need to be addressed early in residency. These include the rent versus buy decision, student loan management during residency, starting to invest during residency, and disability and life insurance.
Dr. Jim Dahle:
And then there’s a huge section at the back of the book. And this is the part that would probably be interesting for everybody, whether you are a student or not. It’s what I call the financial literacy chapters. And we divided those into financial literacy 101, 102, 103. There’s even a 201, 202, 203, 204. And then we realized the book was way too long. So, we took out 201, 202, 203, 204 and put them into a PDF. If you buy the book, you also get the PDF sent to you, but it keeps the book from being too long. Because as it is, it’s almost twice as thick as the original White Coat Investor book.
Dr. Jim Dahle:
But those financial literacy chapters cover things such as stocks, bonds, mutual funds, taxes and retirement accounts, financial history. This is material has never shown up on the podcast or on the blog. And we talk about numbers you need to know. We also talk about real estate investing and financial advisors and all kinds of other stuff in the PDF. Contracts and that sort of thing.
Dr. Jim Dahle:
So, it really takes you soup to nuts as far as your financial literacy goes, really a great opportunity. It’s got a list price of $29.99 for the paperback copy. Amazon will sell it for like $25 most of the time. The Kindle price is still just $9.99. We’ll get an audio book out in the next couple of months if you prefer that format.
Dr. Jim Dahle:
Some people wonder what’s the difference between this and the other book? Well, the first book, The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing. This is the one I published in 2014. It’s kind of a good overview for anybody at any stage of their career. I designed it to be short, it’s only 161 pages so that you could get through it.
Dr. Jim Dahle:
It’s about four hours of reading and it takes you through a broad overview of physician financial issues, as well as it kind of talks about our personal story, how Katie and I became millionaires just seven years out of residency, despite only having an average income over those seven years of $180,000 a year. It was actually a lot less than that, the first few of those seven years as I was a military doc.
Dr. Jim Dahle:
But the best part about that journey is that it’s totally reproducible by pretty much all of my listeners. So, a lot of people find that inspiring. This book’s really good for inspiring you to get started and get excited about finances.
Dr. Jim Dahle:
The second book came out in 2018. This is The White Coat Investor’s Financial Boot Camp: A 12-Step High-Yield Guide to Bring Your Finances Up to Speed. This book is much more prescriptive. It takes you step-by-step. At the end of each chapter, it gives you an assignment. If you do all these assignments, you will get up to speed with the rest of the people in the White Coat Investor community very, very quickly over a matter of just a few weeks. And so, it tells you exactly what you need to do and how to do it.
Dr. Jim Dahle:
The inspiration in this one comes from the community. It’s not so much my story, it’s all of their stories. We include lots of anecdotes from members of the community that we hope you will find inspiring and give you some people to model your financial lives afterwards.
Dr. Jim Dahle:
And then of course, this book published in 2021, The White Coat Investor’s Guide for Students it’s aimed at students, but honestly the financial literacy section probably makes it worth buying for anybody.
Dr. Jim Dahle:
One cool thing we’re doing with this book is we are literally giving away over a million dollars of it this spring. We are going to give a copy of this book to every first year MD student, DO student and dental student in the United States. But we’re not going to give it to them directly, nor are we going to mail it to their schools. And I hope their schools pass them out.
Dr. Jim Dahle:
In order to get this book for your class, your class needs a champion. A white coat investor champion for your class. And if you volunteer to be the champion and all you got to do is distribute the book to your class members. It’s pretty easy to put it in their boxes or pass it out to them at class or whatever. But if you’ll do that, we’ll give you a t-shirt. If you send us a picture of you and your classmates with the book, we’ll send you a mug, a WCI mug.

Dr. Jim Dahle:
It’s a great opportunity. We expect to give away 30,000 of these. So, it’s pretty awesome. It’s a great opportunity to really get the WCI message out there and get this information to students when it can be most useful to them. So, if you’re interested in that, you can sign up for it at whitecoatinvestor.com/champion.
Dr. Jim Dahle:
All right, we’re going to talk today a little bit about backdoor Roth IRA. It’s January, it’s backdoor Roth IRA season. You guys have found all kinds of new ways to screw up the backdoor Roth IRA. I actually find it pretty amazing how many ways this can be screwed up.
Dr. Jim Dahle:
Most of those screw ups are pretty easy to fix and not that big of a deal. A lot of people think they screwed it up and really didn’t. All they did is made their paperwork a little more complicated, which is not a big deal if you just follow the directions.
Dr. Jim Dahle:
But let’s talk about the backdoor Roth IRA for a minute. There are a few steps to the backdoor Roth IRA, but before we get into those, let’s talk about why we talk about the backdoor Roth IRA around here.
Dr. Jim Dahle:
High earners prior to 2010 could not contribute directly to a Roth IRA. They also, assuming they had a retirement plan at work, could not deduct their traditional IRA contributions. And finally, they could not convert a traditional IRA, prepaying the taxes and moving that money into a Roth IRA. You couldn’t do any of that stuff before 2010.
Dr. Jim Dahle:
In 2010, Congress changed the rules and allowed high earners to do Roth conversions. And what that allowed people to do was contribute money to a traditional IRA, which isn’t deductible, and then convert that money the same day or the next day, if they want, to a Roth IRA. Now, because they never got the deduction, there’s no tax cost to the conversion. And so, what you’re left with in the end is just like you contributed directly to a Roth IRA.
Dr. Jim Dahle:
Now, Roth IRAs are awesome because the earnings on that money is never taxed again. It also receives significant estate planning benefits. It can be stretched for 10 years after your death, by your heirs. You can just name beneficiaries so that money doesn’t go through probate. In most states it receives significant asset protection from your creditors in a bankruptcy situation. It’s just a great, great way to invest, especially if you’ve already maxed out all of your other retirement accounts.
Dr. Jim Dahle:
And so, Roth IRAs are great. If you can use one, use it, but most of us have to fund it through the back door or indirectly. Now, remember there’s two steps to that. Two main steps, right? The contribution to the traditional IRA and the conversion to the Roth IRA. And it’s important to realize it’s not just one thing. It’s really two things. And so, all the rules about contributions apply to the first step and all the rules about conversions apply to the second step. And so, you have to follow all those rules. There’s a bunch of little wonky rules that you have to understand there.
Dr. Jim Dahle:
So, step one, contribute to the traditional IRA. For 2021 that’s $6,000 if you’re under 50. It’s $7,000 if you’re over 50. You can do one for your spouse as well even if your spouse doesn’t have any income, as long as you have enough income to cover your spouse’s contribution. But remember, IRA stands for individual retirement arrangement. So, your situation has nothing to do with your spouse’s situation. When it comes down to the pro rata rule, that’ll be important. And when you file the tax forms, that’s important because you each have your own individual form, 8606 on your taxes that reports this.
Dr. Jim Dahle:
Step one, contribute to the traditional IRA. Step two. Just leave the money in cash. Your settlement fund, a money market fund, whatever. Don’t do anything with it inside that traditional IRA. Don’t go invest in it into a mutual fund or sort of stocks or anything like that because not only might you make money on it in the time it’s in the traditional IRA and have to pay more taxes on that but you might lose money, which starts making your tax forms really complicated. So just put it in cash.
Dr. Jim Dahle:
Then the next day, move that money from the traditional IRA to a Roth IRA. Now if that’s complicated to you, if any of that is complicated to you, I have a tutorial called The Backdoor Roth IRA tutorial. If you Google “Backdoor Roth IRA” it will pop up on the first page of Google. If you Google “Backdoor Roth IRA tutorial”, it’ll be the number one hit, which will walk you through those steps at Vanguard with screenshots of every step. It’s not that complicated. You can do it.
Dr. Jim Dahle:
Okay. So that is step one, right? Put it in a traditional IRA. Step two, just leave it in cash. Step three, move it to a Roth IRA. Then you invest the money into your preferred investment, whatever it is. A stock mutual fund, a bond mutual fund, whatever. That step four is to invest the money.
Dr. Jim Dahle:
Step five is where a lot of people get some screw ups. This is to avoid the pro rata rule. And this is one of the rules that has to do with Roth conversions. If you are going to do a Roth conversion, it is converted pro rata with all of your traditional IRAs. That includes rollover IRAs, as well as set by IRAs and simple IRAs.
Dr. Jim Dahle:
So, the way you avoid getting prorated on your conversion is by having no money in any of those accounts on December 31st of the year you do the conversion. It doesn’t matter when you do the contribution, it’s all about the conversion. So, if you got nothing in there at the end of the year, when you do the conversion, then there’s nothing to be prorated, right? So, the whole thing goes in there tax-free. The conversion is tax-free because you can get a deduction for the contribution.
Dr. Jim Dahle:
And then the final step is just reporting the transactions correctly on your taxes by filling out form 8606. That’s it. If you can do a cholecystectomy, you can do this. It’s not that complicated. But unfortunately, people screw it up all the time.
Dr. Jim Dahle:
For example, you can screw up the first step by contributing directly to a Roth IRA. That’s bad. You should not do that. Put it in a traditional IRA first. If you think your income might be anywhere near the income cutoff for a contribution, which is $137,000 if you’re single, it’s a modified adjusted gross income. And $193,000 if you’re married, filing jointly, don’t go directly into a Roth IRA, go through the backdoor. Even if you’re under that limit and you go through the backdoor, it’s no big deal. In fact, I think that’s what happened to us in 2010. I thought it was going to be over and we weren’t. No big deal. But if you’re over it, you have to go through the backdoor.
Dr. Jim Dahle:
The way you fix it if you screw that up is you recharacterize that contribution, that Roth contribution into a traditional contribution. And then you reconvert it. You can do that. You can’t recharacterize conversions, but you can recharacterize contributions to the wrong kind of account.
Dr. Jim Dahle:
All right, the second error. Remember the second thing you’re supposed to do is to leave the money in cash. If you screwed that up and put it into a traditional IRA and invested in something else and left it there for months or even left it there for just a few days and made money. Well, when you convert it, you should still convert everything in that account. It now may be more than $6,000, but convert it all and whatever extra that you made in there, you’ll just owe taxes on. So, if now you’re converting $6,200, your low taxes on $200, okay? Not a big deal.
Dr. Jim Dahle:
However, if you lose money in the account, it really makes your tax paperwork complicated because now you’ve got more basis than you actually had a conversion. Just a mess. If you follow the directions, you can still report it okay on your tax forms. But it’s easier to just leave your money in cash while it’s in the traditional IRA.
Dr. Jim Dahle:
Okay, step number three. You remember you’re supposed to then convert it to a Roth IRA. If you screw that up, you forget to do the conversion, you might end up with some huge gain. If it’s a year like 2019 or 2020 now all of a sudden, you’re paying taxes on an extra 30% earnings in that account that maybe you didn’t have to. So, how do you fix it? Well, you do the conversion late and you pay the taxes.
Dr. Jim Dahle:
Step number four now is to invest the money in the Roth IRA. Now, if you made the mistake of just leaving it all in cash, well, that’s unfortunate. You might’ve missed out on some opportunity costs there. You can call it stupid tax, call it whatever you want, but basically just get the money invested is the way you fix it.
Dr. Jim Dahle:
Step five is taking care of that pro rata issue. Lots of people screw this up, but basically you got to look around all those forgotten IRAs you might have from some old job and look at all your IRAs, simple IRAs, SEP IRAs, traditional IRAs, rollover IRAs. Inherited IRAs don’t count, Roth IRAs don’t count, but all those other IRAs, the balance needs to be zero at the end of the year you do the conversion step.
Dr. Jim Dahle:
So how do you get it to zero? Well, you got two options most of the time. One is to just convert it all to a Roth IRA. That might involve paying some taxes. But if you just have a $10,000 SEP IRA out there, you can probably afford the taxes on that. Just convert it. It’s really simple. You end up with a bigger Roth IRA, which is never taxed again, it gets all these great tax and estate planning and asset protection benefits. It’s a great solution if the tax cost is relatively low.
Dr. Jim Dahle:
But if you have some $600,000 rollover IRA, you probably don’t want to do that. And so, what you should do in that case is find a 401(k). If you have some self-employment income, you can open an individual 401(k) and roll the IRA in there. Remember Vanguard’s IRA and Vanguard’s solo 401(k) doesn’t allow IRA rollovers. So that’s the point of your solo 401(k). Open it somewhere else, like Fidelity or E-Trade.
Dr. Jim Dahle:
But if you have a 401(k) or 403(b) at work, they almost surely accept IRA rollovers. You can just roll the money in there. Don’t try to do this the last week of the year. You’re not going to be able to pull it off. It’s going to take a few weeks. So, don’t procrastinate. Get it started early. Roll that money into a 401(k) or 403(b) so you don’t get prorated.
Dr. Jim Dahle:
Okay. If you forgot to do that, you get prorated. That’s what happens. A lot of times that’s no big deal because you can clean it up the very next year, right? If you just forgot to finish the conversion step on a contribution and you had some money in a traditional IRA at the end of the year. Well, you can just roll it over the next year and what you lose in one year you get back the next year and no big deal.
Dr. Jim Dahle:
But if you have that and if you’re in that $600,000 IRA situation, it’s pretty hard to fix. You basically just end up being prorated and you end up paying a bunch of taxes early, and you have to keep track of that basis for the next 20 or 30 years until you pull the money out. And it just makes your life really complicated. So, don’t screw it up. Avoid the preparation issue.
Dr. Jim Dahle:
And then of course the last step is to make sure you fill out the tax forms correctly. I’ve got that all covered in this tutorial. And whether you do it on TurboTax, whether you have your accountant to fill it out, whether you do it yourself by hand, however you do it, you want to look at the 8606 and make sure that you didn’t screw up the most important lines on that, which are basically the ones that tell you how much tax you owe. The idea is that those lines should be zero or something very close to them, not something like $6,000. And so, make sure you don’t screw that up.
Dr. Jim Dahle:
We’ve got videos that’ll walk you through that. We’ve got screenshots that will walk you through that. If you’re confused about it, read the comments and questions below those posts and they will walk you through it. And of course, if you still can’t figure it out, shoot me an email and I’ll try to answer your question for you individually.
Dr. Jim Dahle:
Lots of options, lots of resources there on the website to help you do your backdoor Roth IRA. It is worth doing for most doctors. If your retirement plan at work is a simple IRA or a SEP IRA, or you’re in some situation where you have a huge traditional IRA and nowhere good to roll it into, maybe it doesn’t work for you, but for most docs, they ought to be doing a backdoor Roth IRA each year.

Dr. Jim Dahle:
Okay. Enough about that. Let’s get some of your questions. Let’s take a question off the Speak Pipe. This first one comes in from an anonymous listener. Let’s take a listen.
Speaker:
Hi, Dr. Dahle. I have a question about when to add new asset classes to your investment plan. So, on one end of the spectrum, you’ve got equities, bonds and broadly diversified index funds. On the other end of the spectrum, you’ve got Bitcoin and Tulips. And in the middle, there are some emerging asset classes that perhaps historically didn’t exist. So, at some point crowdsourced real estate, for example, came into being.
Speaker:
And there’s got to be some sort of litmus tests that can be applied to determine whether a new asset class that is not historically been part of your investment plan is a reasonable addition. So how do you assess something like that and determine whether it is too speculative or whether it really deserves to be in your written investment plan or not?
Dr. Jim Dahle:
Okay. This is a great question. Surprisingly sophisticated question, actually. This is an issue most people who put together written investment plan will run into at some point or other. For example, Katie and I put our written investment plan together in 2004, 2005, right? There were a lot of things that were not available, didn’t exist in 2004, 2005.
Dr. Jim Dahle:
And your investment plan, this written investment plan that I hope you all have is a living, breathing document. It’s like the constitution, right? It can be amended. And so, you want to be able to amend it, but not make it easy to amend it, right? What does it take to get a constitutional amendment? Well, basically you got to get it through these super majorities in the house and Senate and I think 75% of states have to approve it.
Dr. Jim Dahle:
So, it’s not an easy process and that’s the way it ought to be to amend your written investment plan. It shouldn’t be an easy process. For example, in ours, we said, we’re not going to make any changes until after a three-month waiting period. And the goal for that was to keep us from chasing some hot asset class or doing something stupid we would later regret.
Dr. Jim Dahle:
But we did make provisions that if something changed and we wanted to add another asset class, we could make those changes. And so, from time to time, over the last 16 years, we have occasionally made a little change in our asset allocation. For example, when Vanguard came out with a small international stock index fund, we wanted to add that to our portfolio. And so, we did. We added it as 5% of our portfolio. And we added that in. I took it from the total international stock allocation, carved it out of that and put it into this small international index fund. And so that was something that we saw going forward that we wanted to do. And so, we did it.
Dr. Jim Dahle:
So, what criteria should you use there? Well, asset classes you want to add to your portfolio generally should have some sort of positive real return, right? You want something that’s actually going to make money at a rate higher than inflation over the course of your lifetime, right? So that’s what I look for. I want it to have a positive return.
Dr. Jim Dahle:
I want it to have less than a hundred percent correlation with something else in my portfolio. The lower, the better, right? I mean, ideally everything’s completely uncorrelated, but that’s not always the case. Most stocks are at least somewhat correlated with each other. But low correlation is also good.
Dr. Jim Dahle:
You want to be able to diversify the investment. If there’s a great index fund out there for this asset class that makes it really easy to diversify that particular asset class. If there’s not, well, you got to think, is there some other way I can diversify it? And if there is, great, if there isn’t, maybe you should skip that asset class.
Dr. Jim Dahle:
But I also look for asset classes that are real investments. And when I say real investment, I generally mean that it’s either a productive asset, meaning something that produces something like earnings or rents. We’re talking about real estate, we’re talking about stocks, we’re talking about small business, that sort of stuff. Or it’s an interest-bearing instrument. It’s a CD, it’s a real estate backed loan, it’s those sorts of things. It’s a bond that will actually produce some interest.
Dr. Jim Dahle:
I tend to stay away from speculative investments, things like gold and silver, currencies, cryptocurrencies, oil, and other commodities. I generally don’t put those into my portfolio. That doesn’t mean you can’t do it. If you want to hedge your bets and put 5% of your portfolio into oil or gold or Bitcoin or something like that, it’s not crazy to do, right?
Dr. Jim Dahle:
Don’t put 50% of your portfolio into it. That would be not reasonable. But if you want to put a little bit of your portfolio into it, that’s okay. But I would encourage you to give it a waiting period and make sure that you can invest in it in a diversified, relatively low-cost way in a reasonably liquid way in order to do those sorts of investments.
Dr. Jim Dahle:
And then as these new asset classes come into being, you got to look at each one and say, “Does that have a place in my portfolio?” And really watch yourself because what often happens is people get this fear of missing out and they start performance chasing. And that’s usually a recipe for underperformance, especially in the long run. So, I hope that’s helpful.
Dr. Jim Dahle:
All right, let’s take a look at the quote of the day today. This comes from Sunny Sakar who said, “Do not mistake simple index fund portfolios as simplistic. They’re actually quite sophisticated, standing on the shoulders of decades of peer reviewed market research, a few Nobel prizes, and cold hard undeniable evidence of success”.
Dr. Jim Dahle:
And I think there’s a lot of truth to that. I’ve been accused by bloggers or whoever out there of not being sophisticated because I don’t have some complicated investment scheme. I don’t get involved in a bunch of this cash value life insurance, where you’re putting money into the policy and borrowing it out. I’m not sophisticated enough.
Dr. Jim Dahle:
Well, it’s certainly worked. What I did, work. It’s not complicated. It’s pretty simple. I funded it adequately. I stayed the course with it. I kept my costs down and you know what? Here I am in my mid-forties, I can do whatever I want with my life. I have all the money I’m ever going to need.
Dr. Jim Dahle:
So, it certainly works. And that is the case for the vast majority of physicians and dentists out there. If you will pick a reasonable, straightforward, simple investment plan that you can teach to your fourth grader and you can follow it and you’ve funded adequately, it’s going to get you to all of your reasonable financial goals.
Dr. Jim Dahle:
Now, is it going to get you to a hundred-million-dollar portfolio? Probably not. You’re going to need to own a successful business if you want to get there or get very lucky speculating, but it will certainly get you to a place where the vast, vast majority of people that have ever lived on this planet would love to have gotten to, which is being a multimillionaire, being financially independent by mid to two thirds of the way through your career, and being able to have a great financial life without worrying about money.

Dr. Jim Dahle:
All right, let’s take our next Speak Pipe. This one comes from Nicole.
Nicole:
Hi Jim. This is Nicole from Michigan. I have a question about inheritances. So, I inherited a little over a hundred thousand dollars from my dad when he died. And it was just out of a savings account. So, cash. I’m wondering if there’s any tax implications on that money.
Nicole:
Also, my step-mom inherited his 401(k), IRA, other savings accounts, and she’s not sure who to go to for advice. She’s in her fifties. So, she’s got a long life ahead of her, hopefully, and I’m not sure if I should send her to a financial advisor or an accountant or both. Do you have any advice for me on advising her what to do?
Dr. Jim Dahle:
Okay. Nicole from Michigan. Great question. I’m sorry to hear your loss. It’s wonderful that you’ve inherited some money, but I think for most of us, we would rather have the person we inherited it from than the money that we got from them. A hundred thousand dollars cash, not complicated at all. There’s no tax duty to you in most states. Now I’d have to look up Michigan and make sure there’s not an inheritance tax there. I don’t think there is. Most states only charge no estate tax at all, or just in a state tax.
Dr. Jim Dahle:
But Michigan doesn’t have an inheritance or an estate tax according to Google. And so, you’re fine there. As long as the person who died did not have an estate above the federal state exemption limits, which I don’t have in front of me right now, but for a married couple, it’s like $23 million something. If you’re single, it’s half that.
Dr. Jim Dahle:
As long as their estate wasn’t above that they don’t own any estate taxes either. And so, that basically a hundred thousand dollars for most people comes to you totally tax-free. So, congratulations on that. You can use it for whatever you want. You can pay off your student loans, you can use it for a house down payment. You can spend it on an incredible vacation around the world for three months, or you can put it in an investment account.
Dr. Jim Dahle:
It’s technically not earned income. So, you can’t put it into your retirement accounts, but you can live off of it and put the money you’re earning into your retirement account since money is fungible. So, there are all kinds of things that you can do with that hundred thousand dollars, it’s almost surely tax-free to you.
Dr. Jim Dahle:
Your mother-in-law of course has a little more complicated situation. She has essentially inherited 401(k)s and IRAs. And that 401(k) can likely be rolled over into an inherited IRA. And the rules for inherited IRAs are that you can only stretch them for 10 years. So, you can take the money out anytime you like, no matter what age you’re at and it comes out penalty free.
Dr. Jim Dahle:
Although if it’s tax deferred money, you’ll owe taxes on it at your marginal tax rate. But after 10 years, it has to come out of the account. That’s as long as you can stretch an account. And so, you may want to spread that out over a few years, so you don’t get a big, huge tax hit all at once.
Dr. Jim Dahle:
It really depends on your income, what your income is going to be in 10 years, how big the account is and how much has to come out. You didn’t give me any of that information so I can’t really say much there, but those are the considerations to look into.
Dr. Jim Dahle:
Of course, Roth money, whether it’s a Roth 401(k), Roth IRA, there’s no taxes due when that comes out of the account. So, it’s a great account to inherit. If you have a choice to leave a Roth IRA to heirs or a traditional IRA to heirs, and you’re also leaving money to charity, it’s far better to leave the tax deferred money to charity. Your heirs will really appreciate that. But it’s a little more complicated situation.
Dr. Jim Dahle:
So, what should she do as far as advice? Well, if she doesn’t have any sort of a written financial plan, she needed that before she inherited the money, right? She still needs it, even though she inherited the money. Maybe this is the event that triggers her to finally get a plan in place. If so, that’s a good thing.
Dr. Jim Dahle:
If she does not feel comfortable putting together a written plan, which it sounds like she doesn’t, and isn’t really interested in being a hobbyist and learning to do this step herself, then yes, she needs a good financial advisor. She wants somebody who gives good advice at a fair price.
Dr. Jim Dahle:
At the White Coat Investor, we have a recommended list to financial advisors. Now these are definitely people that geared toward high earners. They are people who have their practices, mostly full of people like physicians and dentists, but they give advice to other people as well. But there’s lots of other financial advisors out there. You want a good financial planner.
Dr. Jim Dahle:
If you just want a little bit of advice for a few hours, or you want a plan put together, you can usually get that for a flat rate or an hourly rate. Those hourly rates range anywhere from $150 an hour to $500 an hour, though, they’re not cheap. But if you don’t know what you’re doing, it’s almost surely going to be worthwhile. And hopefully you view them more as a teacher than as someone who’s just doing it for you.
Dr. Jim Dahle:
And so, I would recommend checking out our advisors, seeing what a good advisor looks like, what the price structure looks like. And you’re usually looking at paying something like mid four figures for a good financial plan and good advice each year. But that’s what I would do, if you don’t know what you’re doing. If you’re not interested in learning how to do this stuff yourself, then it’s time to go get good advice. Just make sure you’re getting good advice at a fair price.
Dr. Jim Dahle:
All right, let’s take our next question. This comes from Sundar.
Sundar:
Hello, Dr. Dahle. It seems to me that some of the financial decisions that we have to make in very different areas have similar math. Especially for things like finding the break-even point. For example, renting versus buying. Refinancing versus not refinancing. Cost of ownership between a Tesla and a gas car. Staying longer in college and working part-time to cashflow tuition fees versus studying full-time on loans and earning a higher income for longer.
Sundar:
Are there some general principles on how we begin to approach problems of this nature? So that we’ll know to figure these out in other circumstances, when presented to us in the future. It also seems like there is a math component and there is an emotional component to some of these problems. So, can you speak to that as well? Thank you.
Dr. Jim Dahle:
Yeah, there is definitely a behavioral component and a math component to a lot of things in personal finance. That’s why it’s called personal finance. It’s both personal and it’s finance, behavioral and math. This sort of thing comes up a lot in discussions of paying off debt versus investing, for example.

Dr. Jim Dahle:
You may have somebody who wants to invest money and says, “Shoot, I got money. I’m borrowing at 2% or 3%. Surely, I can out invest that”. And the math would agree with you that if you take on a reasonable amount of extra risk maybe, you’re likely to beat that return.
Dr. Jim Dahle:
The problem is what happens is a behavioral problem. People don’t invest the difference. Instead of borrowing money for their car or whatever, at 2%, and investing that money, they borrow money for the car at 2% and they spend the money on a vacation to Tahiti.
Dr. Jim Dahle:
And of course, you don’t come out ahead financially doing that. You might have a great time in Tahiti. You might have a really enjoyable ride, but you don’t come out ahead financially making decisions like that.
Dr. Jim Dahle:
So, you have to make sure that the behavioral component is right before the math even applies, right? For example, a hundred percent stock portfolio. In the past at least or over any reasonably long period of time, a portfolio that’s a hundred percent stocks has outperformed portfolio with any percentage of bonds in it. At least among US markets over the time periods that we have, et cetera, et cetera. All the usual caveats.
Dr. Jim Dahle:
However, that assumes that you stayed invested and continue to add new money to those accounts. And what often happens is a behavioral problem. You get into a pandemic. You lose a third of your money. All of a sudden you bail out and sell at the bottom. And you’re now underperforming a portfolio with a significant amount of bonds, or even a portfolio that’s a hundred percent bonds due to your bad behavior.
Dr. Jim Dahle:
So, with bad behavior it really doesn’t matter what the math shows. You have to get the behavior right first. And so, I guess that’s probably the only real general principle I could put out there that applies to all of those situations.
Dr. Jim Dahle:
But some of the things you brought up are just personal preference, kind of things. For example, let’s talk about buying versus renting. Lots of people are super interested in buying a home either when they get into residency or right when they come out of residency. Often for a place they’re only going to be in two, three, four years.

Dr. Jim Dahle:
The math would demonstrate that most of the time, you probably shouldn’t be buying a home in those circumstances. Most of the time you’ll lose money. Not every time. If it was every time, it wouldn’t be nearly as hard of a decision, but most of the time for those short time periods, you lose money. The house just doesn’t appreciate enough to make up for the pretty significant transaction cost of getting into and out of a house.
Dr. Jim Dahle:
However, some people are willing to pay a little bit of extra money for the feeling of owning their own house for the ability to paint their walls, without having to talk to the landlord, to redo the landscaping, that sort of stuff is worth a certain amount of money to them. And so that is just their preference. They’re essentially choosing to consume a little bit more housing than the otherwise might need to, and thus choose to buy rather than rent.
Dr. Jim Dahle:
Now, sometimes they get lucky and they come out ahead because of it. And so that’s wonderful, but bear in mind, that’s primarily a consumption decision and that’s something that comes down to your values. Again, it’s personal and finance. I hope that’s helpful and answers your question.
Dr. Jim Dahle:
Our next one comes in by email. “I’m a home care physical therapist in California. I’m very concerned about my privacy and safety in patients’ homes that have video cameras, Alexis, et cetera. I occasionally get into situations that family members are videotaping me with their cell phones and without my consent. Some families are agreeable to stop and to delete the video recording, but other family members are not.
Dr. Jim Dahle:
I have been harassed about it and I felt violated. I value my privacy more than ever now on Facebook or any social media accounts. I’d like to know what my privacy rights are in patients’ homes. I don’t feel safe. I hope you can assist me or direct me to someone who can help me with this concern”.
Dr. Jim Dahle:
Well, I got bad news for you. Everything I’ve read on this suggests that the vast majority of the time it is legal to record you without your permission. Now this varies by state like so many laws, it’s different in different states and you really need to know if you’re in one party or a two-party consent state. If it’s a one party, meaning that they can record you without you knowing about it, you better get used to it. There just isn’t much that you can do about it.

Dr. Jim Dahle:
Most video recordings are legal with or without consent. There are very few laws which prohibit video recording. That’s why you see all this stuff on social media that you do with people just getting recorded and there’s nothing they can do about it. There are laws that keep you from getting recorded in places where you should expect privacy without consent, right? They can’t just record you in the bathroom. You can’t sneak into a public bathroom and take pictures of people, right?
Dr. Jim Dahle:
But in most places, people are allowed to surreptitiously not only record video, but also audio. However, that’s audio is where there’s more laws and that’s where it really comes in these one-party consent states and two-party consent states. California, I believe is just a one-party consent state. Let me Google that really fast. California, well, at least their wiretapping law is a two-party consent.
Dr. Jim Dahle:
So, on a call, if you want to record a call in California, you got to have a two-party consent. And so, I would probably point that out to the people who are recording you, at least the audio portion, you can point out. They’ve got to have your consent to do it in California.
Dr. Jim Dahle:
But I think more practically speaking, especially in other states, really this is a business decision. What I would tell people is “You can record me and you can record me walking out the door or you can stop recording me and I’ll take care of your family member”. And that’s the way I would approach it.
Dr. Jim Dahle:
In the ER people want to record stuff all the time. I basically tell them the hospital lawyers don’t allow you to record this procedure I’m doing. And most of the time, they’re pretty good about putting it away.
Dr. Jim Dahle:
But honestly, most people are having an emergency. I can let them sit there for two hours until they decide they’re not going record me anymore and it won’t cause any sort of an abandonment issue or any sort of ethical violation.
Dr. Jim Dahle:
Now obviously if somebody is in extremis, I can’t abandon them just because I’m being recorded. But I think for most of the situations you’re in, you can have a pretty hard line on that and say, “I’m not coming. I’m not taking care of them if you are recording me”.

Dr. Jim Dahle:
Now, is that going to keep them from being sneaky and using Alexa or having a phone recording you in their purse or having the cameras that people have to record their babysitters on while you’re in the home? Probably not. And there’s not a lot you can do about that other than if you find out it happened you can then take legal action against them. But if this is something that really bothers you a lot, maybe it’s time to stop doing healthcare in people’s homes and to move into an office-based practice. Also, an option.
Dr. Jim Dahle:
Sorry. I’m not sure that’s exactly what you wanted to hear. It sounds like you have a little more protection in California than people have in most states. So maybe you can take advantage of that to address your situation.
Dr. Jim Dahle:
All right, let’s take the next question of the Speak Pipe.
Ben:
Hi, Dr. Dahle. This is Ben from California. I’m a second-year resident within the UC system and have some questions about the employer sponsored retirement plans at my institution. Unfortunately, the options for residents are not clearly spelled out and as I was planning my contributions for this year, it looked like the only accounts I had available were a 403(b) and 457(b) in addition to a DCP plan where an automatic 7% of our salary is contributed to this account and matched by the employer.
Ben:
Neither the 403(b) or the 457(b) have Roth options. Since it seemed that I had no other Roth opportunity besides my Roth IRA, I contributed about $16,000 during 2020 to the 457(b).
Ben:
Just recently however as I was looking through all the plan documents again, I realized that there’s an option on the DCP to contribute post-tax dollars above the mandatory 7% up to a total of $56,000. These contributions can be immediately converted to a Roth account. My understanding is that this is functionally mega backdoor Roth option.
Ben:
My question for you is this. Is there any way to rescind or recharacterize the contributions that I made to the 457(b) and instead pay taxes on them now and move them to the DCP plan so that I can convert them to Roth? Since I’m a resident and in my lower earning years, I want to maximize Roth as much as possible. Thanks for your help and for all that you do.

Dr. Jim Dahle:
All I can say is you’re going to be so rich. If you’re a resident and you already put in $16,000 a year toward retirement, you’re doing awesome. Whether that’s going in tax deferred accounts, tax-free accounts, taxable accounts, whatever, that’s pretty incredible.
Dr. Jim Dahle:
I’m also impressed that you know all about your retirement account options and that honestly, it sounds like you have pretty good retirement account options. And so pretty awesome. Congratulations on that. You’re doing a great job saving. You have great retirement accounts and you’re to have a great head start when you become an attending.
Dr. Jim Dahle:
Now, will they let you take money that you designated to go into a 403(b) and now have it go into the defined contribution plan they have? I don’t know. That’s really a plan specific question and HR specific question. I would go in there and ask them.
Dr. Jim Dahle:
But this is the sort of thing if you do it really quickly, a lot of times they will let you adjust that stuff. Once they’ve sent out W2’s and 1099s for the year and all that sort of stuff, and reported their stuff to the IRS for the plan, they won’t let you make changes. But if you do it right away especially during the same calendar year, a lot of times they’ll go, “Oh, no problem. We’ll just move that over from the 403(b) to the DCP or from the 403(b) to the 457 and the 457 to the 403(b), because it’s just numbers they’re changing in payroll and it’s just an internal number.
Dr. Jim Dahle:
And so, a lot of times they’ll let you do that, but it’s really up to them. It’s up to the plan. It’s up to the plan administrators. They don’t have to let you do it, but it’s not up to IRS rulings, right? And so, whatever the plan’s going to let you do and work with in their accounting.
Dr. Jim Dahle:
Now, the bigger the system, the less likely they are to be flexible. University of California is obviously a huge system. So maybe they won’t be flexible at all, but at least you’re learning your lesson for next year.
Dr. Jim Dahle:
As far as those tax deferred dollars, you can always convert those when you separate from the system the year you leave residency. And so, while half that year you’ll have an attending income and half that year you’ll have a resident income, it’s usually a better year to do that conversion than a year in which all of your income comes out as an attending.
Dr. Jim Dahle:
And honestly, from what you’re telling me, you’re going to be a super saver. You’re going to have all kinds of money. It sounds like making that conversion is probably going to be a good move for you.
Dr. Jim Dahle:
All right. As I said earlier on the podcast, right now SoFi has the lowest starting fixed interest rates they’ve had in years on student loan refinancing, which means you could save thousands on your student loans.
Dr. Jim Dahle:
If you’re a physician or dentist doing your residency, SoFi has new lower interest rates for you. If you refinance your student loans through sofi.com/whitecoatinvestor, you’ll get $500 in cash sent directly to your bank account. That’s sofi.com/whitecoatinvestor.

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Dr. Jim Dahle:
Be sure to check out our backdoor Roth IRA tutorial, if you have not yet. That is found at whitecoatinvestor.com/backdoor-roth-ira-tutorial. If you have not picked up the new book, The White Coat Investors Guide for Students, including the chapters on financial literacy, you can do so today it’s available on Amazon. It’s available on Kindle as well.
Dr. Jim Dahle:
If you are a first year, MD, DO or dental student, you can get one of these books free for you and everybody in your class if you’re willing to be the class champion. Again, that’s at whitecoatinvestor.com/champion. You can apply to do that if nobody else in your class is doing it already.
Dr. Jim Dahle:
Thanks for those of you who have left us five-star review for the podcast and told your friends about it. Those reviews really do help us to spread the word. Our most recent one came in from Jrober, who says “Jim Dahle has made me a money genius. Enough said”. Thanks for your kind words and thanks for the five-star review.
Dr. Jim Dahle:
Keep your head up, your shoulders back. You’ve got this and we can help. We’ll see you next time on the White Coat Investor podcast.

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