Nate Reineke (00:12)
Hello physician moms and dads. I'm Nate Renneke, Certified Financial Planner and Primary Advisor.
W. Ben Utley (00:18)
And I'm Ben Utley, certified financial planner and the service team leader here at Physician Family. Welcome to the show. Nate, it was a long, beautiful weekend. Anything cool or special happen to you?
Nate Reineke (00:32)
Well, a few weeks ago on the podcast, I was talking about taking my son fishing. Remember that? So that was a few weeks ago. ⁓ so I'll get to what happens, happened this weekend with their story. Okay, let me tell you about when we fishing. Because I've been waiting to tell our listeners about this because I knew they were probably hanging on the edge of their seats to know if we caught a fish. So we went out.
W. Ben Utley (00:58)
I can't hear someone say fishing without thinking about the joke that there's a fine line between ⁓ fishing and standing on the bank looking like an idiot.
Nate Reineke (01:06)
Yeah. Well,
there was a lot of people that day standing on the bank looking like an idiot. And I thought, great. Like everyone, no one's catching anything. And it's like a stocked pond. because it's right, you know, we're in the city and we drove eight minutes to get there. So it tells you like how rough it might be. And it was really hot. And we get out there and it within five minutes, my seven year old son is sitting shirtless on the bank. OK.
But there's a park nearby and my younger son, he's like bored immediately. So we all got our poles in the water and ⁓ my younger son, his pole, you know, his lure or line isn't very long. And so he kind of got bored and mom took him over to the park, which was like a minute away, a minute walk. And so I'm sitting there with my son, Mateo. And I have a good pole, so I'm like really far out there and he's about half as far from me. And he looks at me and he goes, Dad, are we going to catch one today?
right, because he's been waiting three years. I said, you just got to be patient. He goes, I know the answer to that. We're not. And I was like, well, I said, dude, we just have to be patient. We'll keep trying. We'll get one eventually. He's like, OK. So he sat there for probably an hour. And ⁓ the listeners don't know this, but you told me, you know, to use corn and night crawler. So that's what I got. I got one line with corn, one line with night crawlers.
W. Ben Utley (02:12)
sad.
Nate Reineke (02:35)
⁓ And we got one bite. Okay, and we pulled it in and the night crawler was ⁓ eaten in half. I was like, okay Mateo, I don't know much about fishing, but I'm pretty sure these are too big. So he cut the worm in half, put it on the line and we sat there for a little bit longer. And he's sitting there, sitting crisscross applesauce and there's a big ⁓ rail. So he can bear, he's looking through the holes in the rail.
And he sees ⁓ his bobber go, I keep telling him, you'll know when it goes, okay? If you think maybe it went, it didn't go, okay? And so he's like, dad, I got one. I said, my God, dropped every, I dropped my pole. don't know, could have went in the water, doesn't matter. I go, okay, slowly reel it in. He starts reeling it in way too slow. go, you're faster than that. And then he's halfway in, it's fighting him now. And then he said, ⁓ he screams, mom, all the way over to.
And you see my younger son, Kimo, and my wife, Brittany sprinting to the dock. OK, and he's reeling in and reeling in and reeling in. I go, OK, you got it, you got it, you got it. And then he sees it go above water just barely right as he's pulling it in. And he goes, I don't want to. I don't want to do it. don't because about a week before that, I said, if you catch one, you got to take it off the hook or at least you have to put it in the water. OK.
W. Ben Utley (03:50)
no.
⁓ yeah.
Nate Reineke (03:57)
I don't want to that. I don't want touch it. And then, you know, I caved immediately. I said, I'll do it all. I'll do it all. Breel it in. So he reels it all the way in. It was huge for him. Huge for that pond. And my friend that's really into fishing, sent him a picture. He said it was a carp. So he said those are hard to catch. So I got to tell him it's hard to catch. ⁓ We were stuck out there another two hours because there's no way he was leaving after catching his first fish. He was so excited. My hand stunk all day with that nasty fish.
And he caught another one. He caught a catfish. And then I was like, we got two fish in one and he's given tips to people around. He's like, you got to use worms. Those work. The corn doesn't work. They're using, you know, power bait or whatever they're using. And yeah, so this weekend, what happened this weekend and what's happened every weekend since he's wants to go fishing again.
W. Ben Utley (04:39)
Yeah.
the only thing that got caught that weekend was a sun. Nice, nice. That's sweet. Great, great. And I'm glad you caught us up, because I've been waiting this whole time to figure out how that went, right?
Nate Reineke (04:55)
Yeah, it was great. So yeah, he got his first fish.
Yep, I sent pictures to some people on our team. Like it looks bigger than it looks in the picture. I think it was bent over or something, but I was holding it, Matteo's smiling big.
W. Ben Utley (05:15)
Yeah.
Nice.
Nate Reineke (05:22)
Yeah, so that was fun. How about you?
W. Ben Utley (05:27)
Well, know, not a lot happened around here this last week. It's been kind of mellow, so just working. Yeah, yeah, my kids are out, so not a lot of kid action.
Nate Reineke (05:33)
Lots of action when your kids are young.
you ready for some questions then?
W. Ben Utley (05:40)
Bring on the dancing listener questions.
Nate Reineke (05:43)
All right, first one is from an orthopedic surgeon in Oregon. I am anticipating a cash call buy-in. Where should I get the money? My home equity line of credit? Should I liquidate I bonds or take it from a taxable account?
W. Ben Utley (06:02)
⁓ Cash call buy-in. Usually I hear about a buy-in and then you go from not being a equity stakeholder to being an equity stakeholder, whether that's an LLC member or ⁓ S-corp shareholder or whatever it is. And once you're an owner, then there are cash calls, which is to say, oops, we ran out of cash or we need to buy this thing. And then like they come back to you and they say, hey, ⁓
Nate Reineke (06:24)
Mm-hmm.
W. Ben Utley (06:28)
You you own 10 % of the company. need a million dollars pony up a hundred thousand dollars tomorrow. ⁓ okay. Good to have an emergency fund. So, three options. And I think my answer to this is going to depend a lot on the variables in play, but I can talk about this. So home equity line of credit would be appropriate for someone where this presents a short-term cash difficulty.
Nate Reineke (06:33)
Mm-hmm.
Right.
W. Ben Utley (06:58)
So home economic credit is kind of like a credit card, where if you don't pay it, you lose your house, right? And the interest rates on those tend to be variable. So I would guess that they're right now somewhere between 4 and 8%, depending on credit and the origination, all that good stuff. So if they have a home economic credit, that's good. So that can be a backup. ⁓ So I would use that for quick money, where ⁓ it's maybe $50,000, maybe $25,000.
Nate Reineke (07:04)
Mm-hmm.
W. Ben Utley (07:28)
and you think you could pay it off in just a couple of months maybe, then that'd be a good cause for a home equity line of credit. And depending on how things are set up, you might be able to pay it back quickly. guess some home equity lines of credit will let you lock down and extend these so it becomes an amortizing loan, which is a long subject. Anyway, so that's what I would think about that. So I guess it's like consideration is time.
Nate Reineke (07:50)
Mm-hmm.
W. Ben Utley (07:57)
And not so much rate, because if you only have it for a couple of months, it wouldn't even matter if it was 12 % as the rate, right? Because it'd cost you 2 % in interest. So next thing I look at is the I bonds. So first you have to think about how long you've owned them and whether or you can slash should cash them out. The nice thing about I bonds is they pay a state tax free income. So here in the state of Oregon, 9 or 10 % is what the bus physicians are paying.
And the interest from them is tax free. So ⁓ you still have to pay federal taxes on the federal debt though. It's kind of a pain in the butt to liquidate them. And ⁓ they're a little bit like an IRA contribution in that you can only buy so many of them in a year, right? But by the same token, if I was going to replace an I-bond position right now, it just so happens that ⁓ money market rates are right at about the same as I-bond yields. So ⁓ I think that's kind of an okay place to get money.
And then there's the taxable account. So looking at a taxable account as a source, you really have to look at the tax cost basis of what you have in there. So for example, if they've been investing for the last five or 10 years, then there's a good chance they have a low tax cost basis, therefore a larger gain. And if they sell, they're going to recognize capital gains tax. And you know, that's probably 23.8 % for this physician plus 10%.
For for the state of Oregon, so that's thirty three point eight percent and and it's regardless of whether or you put the money back You still pay that thirty three point eight percent Compare that to a home equity line of credit where you pay maybe one or two percentage points for the time that you have it Whereas with the you know, the taxable account that's a permanent decision. You're locking in a thirty three point eight percent loss So ouch, ⁓ however
Nate Reineke (09:35)
Mm-hmm.
Mm-hmm.
W. Ben Utley (09:52)
It is entirely possible that they put some money in there early in the year when the market was higher. And some of that may be at a loss. And so if they, if they can identify their, their lots, they can sell off the lots that were the higher cost basis and perhaps get a, take a loss and 3000 of that they can use it to offset ordinary income, which will save them a thousand dollars in taxes this year. So.
Nate Reineke (10:20)
Mm-hmm.
W. Ben Utley (10:21)
You know, I hate to say depends, but you know, this is not advice. This is for entertainment purposes only. So the entertaining part of this is ⁓ the taxable account is either really stupid or a slam dunk. The I bonds are kind of meh and the home economic credit is a good thing to have. So that's the best I can do.
Nate Reineke (10:26)
hehe
Yeah.
Yeah, and there's nothing stopping you from going looking those tax slots and doing part from a taxable account, part from a HELOC or part from your iBonds. So, yeah, I think is a good summary is essentially like look at your options in each account. If the iBonds are, if you're able to liquidate them without penalty, or I'm sorry, not penalty. If you can liquidate them, like they have to bake in there for a while, then. ⁓
that's an option too. okay. Yeah, like many things, it depends. Next question is from a urologist in Oregon. Oregon is hopping today. Yeah. Yeah. I am semi retired. I turned 70 in about six months.
W. Ben Utley (11:18)
And what is it with Oregon these days? People must have realized that some of us live here. Hi Chelsea, I know you're in Florida.
Happy birthday a long time from now.
Nate Reineke (11:36)
How early
can I apply for Social Security and can I do it while I'm still working? So ⁓ you certainly can do it while you're still working. I think that was really the reason for this question was, hey, 70 is coming. I know when you wait till 70, I'm assuming they knew this, but for our listeners who don't know, ⁓ that is the maximum delayed retirement credits you can earn. So when you're 70, take out Social Security.
because you're not going to get any more money. So you're leaving money on the table if you don't apply for it. But they're still working. So like, don't know if I could do this. The answer is yes, you can still get Social Security while you're working. ⁓ More technical than that, you can apply up to four months before you want to start getting benefits. So to do this just right, you're applying, you know, four months before you turn 70 to start getting Social Security at 70.
W. Ben Utley (12:10)
Yeah. Yep.
Thanks.
Yeah. So, ⁓ yeah, if you want, if you want a social security check for your birthday, wait a couple of months and then apply. And I would also say expect delays. You know that ⁓ the Department of Government Elimination reduces social security staff and now people are having trouble getting their benefits. There have been delays in application, delays in reaching customer service there and delays in getting checks. So I'm pretty certain this person is not depending on that check.
Nate Reineke (12:41)
That's right.
Mm-hmm. Yeah. Okay, next question. This is a listener question. They wrote in, so I'm going to read a somewhat abbreviated version, but it is from an emergency medicine doc in Illinois.
I wanted to ask a question regarding a recent change my 401k plan. I'm a partner in a large nationwide physician group that has had its 401k plan with one custodian for as long as I've been working about 16 years. I recently received words ⁓ that our plan options were changing from the ETFs that were offered to the now offered collective trust funds instead. It seems
W. Ben Utley (13:42)
All right.
Nate Reineke (13:53)
My previous holdings were automatically rolled over into what appeared to be the equivalent investment type of these collective trading funds. Also, my remaining ETFs have been converted into mutual fund equivalents. We'd love to hear
your thoughts about all this, especially any pros, cons you might ⁓ be able to mention in regards to these collective trust funds.
W. Ben Utley (14:18)
Mm.
Nate Reineke (14:19)
I don't see this very often, Ben, and you actually wrote the response to this listener, so I'm going let you take it from here.
W. Ben Utley (14:25)
And I'll apologize upfront because when I wrote the response, I said something about changing custodians, but ⁓ you made it clear in this email that ⁓ the ER doc has not changed custodians. ⁓ seeing these converted is, again, yeah, no, that's a rare instance. We don't see that very often. fact, I've never seen the actual conversion before. But owning collective trust funds is not uncommon. In fact, you
we have a large employer group that we use for our payroll and ⁓ You know our 401k is with a large organization and they use collective trust funds. So ⁓ Do I know what these are? Yes ⁓ actually invest in them. So ⁓ You know what I'll do is I'll kind of try to start where listeners are at so a mutual fund is basically just a big basket of stocks or bonds or both Okay, and you own a share of that basket. All right, well
Nate Reineke (15:03)
Mm-hmm.
W. Ben Utley (15:22)
Exchange Traded Funds are like mutual funds that trade like stocks. They're valued a little bit differently, but for the sake of our time together today, they're the same thing. right. Mutual funds versus ETFs in a non-taxable account like this 401k doesn't really make any difference. ⁓ There's outside this, the mutual funds versus ETFs, whether they're index funds or passively managed funds, there is a tax advantage to ETFs, right? ⁓
Nate Reineke (15:32)
Mm-hmm.
W. Ben Utley (15:52)
but we're in that nice, safe, cozy world of 401ks. So ⁓ we're safe from taxes. We don't have to think about that. ⁓ To see the ETFs exchanged for ⁓ collective trust funds or CTFs, which is similar there. Yeah, they seem very similar. So a collective trust fund is, another basket of securities. This time, rather than it being a corporation, it's a trust. And there are trustees for these trusts. ⁓
reading into more of the details that was in that letter, there is a very large bank behind this trust fund. And, you know, one of the trust funds mirrors the S &P 500. Okay. So the bank goes and buys everything in the S &P 500 and they hold that and they allow people to purchase into this collective trust fund in a way that's similar to exchange traded funds. But the difference is that when you buy in, you're not buying ETF shares from someone else off the market.
You're buying into this collective trust fund in much the same way that you would a regular mutual fund or what we call an open end or continuously offered fund. I know that's all technical, but essentially it's like the same thing. So like, if it's the same thing, a, why didn't we start with that? And B, why did we do it now? ⁓ I don't know why they didn't start with that. And I don't know why they did it now, but I think I do know why it was done. So if the, ⁓ if the custodian who's holding this 401k plan.
Nate Reineke (17:01)
Mm-hmm.
W. Ben Utley (17:19)
is holding ETS, they don't get any revenue from those exchange traded funds. Those companies don't pay anything out. But in a collective trust fund, that trust is managed by a bank and the bank can make money off of that collective trust fund in two ways. One, they can charge management fees and two, they can lend securities out of this trust, which is allowed by ERISA law. They can lend securities out of this trust and garner interest for doing so.
And that can be used to reduce the operating expense ratio of the collective trust. And some of that profit can flow to the bank. if let's say that this listener had an exchange traded fund that was costing them 0.05 % or five basis points annually, and let's say they swapped over to a collective trust fund where they paid 0.05 % or five basis points annually,
I imagine that they would be ⁓ in the exact same risk reward cost benefit ratio. However, if the bank is able to lend some of these securities and they get some profit from that such that they can lower that expense ratio by a couple basis points from maybe five basis points to three basis points, then this listener, the CR doc would be better off because they're paying less in terms of fees and ⁓ the bank is happier because they're making some profits on it.
And I don't really see a downside here. to me, is ⁓ a lot of technical stuff that's happening behind the scenes. I don't see anything to worry about here. And I think this is kind of in the overall scope of ⁓ one, which is not at all alarmed and 10 is totally alarmed. This is like a yawn, right? Nothing to see here, folks. Keep moving on.
Nate Reineke (19:05)
Yeah.
Yeah,
W. Ben Utley (19:09)
I appreciate
Nate Reineke (19:09)
so
W. Ben Utley (19:09)
the question because it gave me a chance to kind of really refresh my memory on these things and I don't get a ⁓ chance to teach at the technical level very often, but yeah, this is, this ain't no big deal.
Nate Reineke (19:22)
Yeah, so what I heard you say is there's going to save money on fees.
W. Ben Utley (19:27)
Probably so. They didn't tell me what the expense ratios were, but ⁓ if I were the fiduciary of that plan, I have an obligation to lead my people in good or better shape than when they began. And so the fiduciary argument would be lower fees because it'd be hard to make the better returns argument because it's like they said, it's mapped over into similar asset class or same exposure. Yeah.
Nate Reineke (19:51)
Yeah. And
you mentioned, I don't know why they didn't do this in the past. ⁓ I don't see these nearly as often as just regular ETFs or mutual funds inside of foreign. I imagine the people who are setting these up, a lot of them either just it's maybe it's more complicated or they just don't know how to do it.
W. Ben Utley (20:12)
You see them in big 401ks, know, 10,000 employee kind of 401ks. Evidently it takes a lot of money to run those trust funds. I mean, if you think about it, three basis points, two basis points, 0.02%. Correct me if I'm wrong, but two basis points on a million bucks is $200 a year. That's what, 16 bucks a month?
Nate Reineke (20:23)
Mm-hmm.
Mm-hmm.
W. Ben Utley (20:39)
I mean, that's really, really ⁓ thin revenues and then they have to take their expenses out of that as well. So it works if you do this in mass, but this would not be possible for a small employer. would, ⁓ I'm making air quotes here, be stuck with ETS, you know, that's like, that's like, ⁓ I don't know, being, being stuck with lollipops, you know, it's like, Hey, ACES, this is good.
Nate Reineke (20:48)
Yeah.
Yeah.
That's like being stuck with a catfish instead of a carp. You still gotta fish.
W. Ben Utley (21:06)
Yeah. You're still gonna,
and this time this one's actually good eating, right? Yeah.
Nate Reineke (21:10)
Yeah. All right.
Good. ⁓ Last question. It's from an internal medicine doc in Oregon. Again, I don't know. I have 1099 income this year and will be opening a solo 401k should I hire my wife so she can contribute to that solo 401k too.
W. Ben Utley (21:21)
What, what, what is it? It must be the weather. It's so beautiful up here these days.
Nate Reineke (21:41)
This is interesting, Ben, because ⁓ we actually discussed this before the episode started. Should and can or should and could are different here. So I'm going to take can. You're going to take should, OK? ⁓ You certainly can. I think the reason that if I got asked this question, think naturally I would think, are you allowed to? ⁓
W. Ben Utley (21:51)
Yeah, do you want to take can or should?
Okay. Okay. I'll take shed.
Nate Reineke (22:11)
And the reason I think that is it's unique to solo 401ks in that it's solo 401k. So technically you're supposed to be the only employee, the solo employee of your company. But there's a special rule for spouses. There's a special exception. So you can hire your spouse and they can contribute to the solo 401k. You can't have any other employees. And then they can contribute to a solo 401k. So you are allowed to do this.
W. Ben Utley (22:33)
Thanks.
Nate Reineke (22:39)
The question then
I think that is more relevant is should you do this?
W. Ben Utley (22:43)
Yeah, so I think there's a few things around the should. There's ⁓ costs, there's benefits, there's circumstances. ⁓ My guess on this is probably not because ⁓ in order for them to contribute to this 401k, you're to have to put that spouse on payroll. So first there's the cost of the payroll service.
Second is the cost of the FICA taxes, which is you're to get both sides of this equation. So you're going to get 7.65%, which is the employer portion. And you get 7.65 % as the employee portion. And so that's 15.3 % that you're going to pay for the privilege of having them as an employee. You're probably going to pay state unemployment tax, federal unemployment tax. So there's a whole raft of things that you're going to pay simply for the privilege of having them on, which is probably going to be about 20 % of every dollar that you pay them.
You pay them a dollar and you're going to pay 20 cents on top of that. So, um, that's going to reduce your benefit by about 16 % right off the bat. And that's irrecoverable. Uh, the tax break that you get for contributing to a solo 401k is a temporary tax break. You make a tax deferral this year, which reduces this year's tax bill. And when you take the money out in the future, it increases your tax bill. Right. And what you hope is that you're in a very high tax bracket now and that you're in a very low tax bracket later.
So that assumes a lot. There is a good chance that you're in kind of the middle tax bracket. You might be in the 22, 24 % tax bracket today. And all things being equal, might be in that same tax bracket in retirement, in which case your temporary benefit vanishes. You have no permanent benefit and you have a permanent cost. So at the same time, paying your spouse employee
and putting them as solo 401k reduces qualified business income. We do still have the QBI tax deduction and I think we're probably going to get to keep it under the ⁓ new bill, the bill that's coming through Congress right now. And QBI, you don't pay any FICO taxes on it, right? So ⁓ qualified business income is valuable. ⁓ However, if this person makes beyond a certain point, then the QBI would not be allowed.
I think the devil is really in the details and this is something that would require a very detailed tax analysis through a CPA. That'd be the first thing that I would think about it. But then there's the moral aspect of this. I see a lot of people dodging the tax code and basically ⁓ while they're obeying the rule of the law, they're not obeying the spirit of it and this is not good. I would say if you
Nate Reineke (25:18)
you
W. Ben Utley (25:37)
have a need in your business and the person who can fill that role, if your spouse happens to have the skills, knowledge, experience and training to fill that role, then yeah, go ahead and hire your spouse, especially if there's not anything else going on, right? But if they have an alternative use of their time, that'd be the first thing that I would consider. For example, maybe their parenting, you know, that may be something that they're doing.
Nate Reineke (25:57)
Mm-hmm.
W. Ben Utley (26:07)
Maybe they're caring for aging parents, you know, there's maybe they're volunteering the community, right? Like what is the best use of their time rather than looking at the tax break? You look at the person it's a matter of putting people Ahead of money. So that's where I would begin this conversation and unfortunately I think most these conversations began at the AGI line on the Form 1040, which is just bass-ackwards really, you know, ⁓ there's a tax break I should bend my life around it. No, your life is short
Nate Reineke (26:31)
Mm-hmm, yeah.
W. Ben Utley (26:37)
You're only going to earn so much money. You're only going to spend so much time with your kids. You can only tolerate so many arguments with your spouse who works in your business. Right. So think about people before you think about money.
Nate Reineke (26:46)
Mm-hmm.
Yes. Yeah. And all in the name of, you know, I think to put money in solo, like as you've described, like we're talking about, I did not do the math. I'm throwing a number out there. Let's say this would save you 10 % at the end of the day. 10 % on 70,000. So you're going to save seven grand so you can fight with your with your spouse about this. Yeah.
W. Ben Utley (27:07)
Mm-hmm.
Maybe 70,000. Maybe 70,000. Yeah,
maybe only 40,000.
Nate Reineke (27:18)
That's right. And that, you know, it just, it, but like you said, if they have the skills and experience and knowledge to do it and they want to work. Yeah, sure. Yeah. But I really enjoyed your answer. So I'm glad I let you take the should.
W. Ben Utley (27:28)
Nothing better to do.
Awesome.
Nate Reineke (27:38)
That's it for today.
W. Ben Utley (27:39)
Okay, good. So final call to action. If you're looking for a financial advisor, you're listening to two that would love to chat with you. So if you're interested, go to PhysicianFamily.com, click get started and apply for an interview. If you're not ready for that, send us another question. We really enjoyed the listener questions that we've gotten lately. So you can send it to podcast at PhysicianFamily.com. The last time I was on the show, I talked about the 529 spending plan guide.
that's well developed. had one listener who asked for that. Thanks, Maggie. Sent hers off. I had a friend who's starting to think about paying for college, and so I gave a copy of the friend. There's a few hilarious things in there. It's got the real Ben Utley flair in it. So if you'd like that, send your question to podcast at physicianfamily.com. And in the meantime, remember, you're not just making a living, you're making a life.
