Speaker 2 (00:00.078)
Basically if you have chronic health issues then you should probably be on a low deductible health plan and that is typically silver or gold right and so gold is gives you kind of the best benefit it also has the highest cost and you have to compare that cost to the total out-of-pocket cost of your care right.
Welcome to the Physician Family Financial Advisors podcast, where physician moms and dads like you can turn today's worries about taxes and investing into all the money you need for retirement and college. Hello, physician moms and dads. I'm Nate Renneke, Certified Financial Planner and Primary Advisor here at Physician Family Financial Advisors.
and I'm Ben Utley, also a certified financial planner and the service team leader here at Physician Family. So to Nate and Nate, we have five more incredible listener questions, right? So let's roll with number one.
So first question is from a vascular surgeon in Wisconsin. And they asked, can I use 529 money to pay for a private preschool? So you cannot, Ben. You cannot use 529 money for preschool.
Hmm.
Speaker 2 (01:14.83)
I'm relieved because my kids are in college. I don't want to have another preschooler. Yeah
So you can use it for college. You can use some money for private K through 12 school, some apprenticeship programs, things like that. But I thought, rather than just say no, I get these questions quite often, mainly for private K through 12 school. And I thought it would be helpful to point something out. When you're asking yourself a financial question, I think it's important to ask yourself,
You kind of just start to frame it in your mind as what is the reason I'm doing this in the first place? So why are you saving 529 money into a 529 in the first place? Right? And the reason people do this is to save usually for college, but it's to save for college. It's preparing for the rapid rise to cost of college.
and doing so while you do it to save a bunch of taxes.
get to you get tax deferral and I think where you're going with this if I stop me if I'm wrong but it's like why would you spend the money when you worked hard to get it in there and you get all this tax-free growth because if you spend it you kind of extinguish that benefit right
Speaker 1 (02:30.414)
Right. Preschool is at like four years old. So if you were perfect, you'd have been contributing money for four years. Not a lot of tax-free growth. Same goes for K through 12 school. It's still not a ton of growth, but all that benefit of that growth is really had during college. the only time I've, maybe a few times, I think it has been advisable to spend it on K through 12. And that was when
Yeah.
Speaker 1 (02:58.574)
A couple lucky families got some 529 money from grandparents and they just had way too much money in it. Then it makes sense to get the money out. this money's for college and that's not because you can't put it toward private K through 12, that's just because it's not the best thing to do.
then it makes sense.
Speaker 2 (03:17.12)
Done and done. Number two.
Um, so we have an ICU doctor in Washington, DC. asked, converted my back door Roth IRA, which can contain only my 2024 after tax IRA contributions plus a $300 gain in their investments. So are there any issues with converting the $300 in gain?
So let me get at this. they, let's say they put in, what's the new limit? Seven grand, right? Or is it 7,500?
I don't believe IRAs are going up in 2020.
you're right about that. Absolutely. So seven, they put seven grand some point during the year, they made 300 bucks on it. So now they got 7,300 bucks and they want to convert it. Okay. So in this case, if this is the only IRA you have emphasis on the only, okay. So if you have an IRA someplace else and it's got basis in it, or you have a SEP IRA or you have a simple IRA, the following information does not apply. You're now in the deep end of the pool, but if this is your only IRA and you convert it,
Speaker 2 (04:24.886)
You're not going to owe taxes on the seven grand, but you are going to owe taxes on the three thousand and it's going to be ordinary income. No penalties, nothing to worry about there. So federal income tax is going to be doing that three hundred bucks. And if you're in a state that has state income tax, you're going to owe taxes on that three hundred dollars in your state. No penalties. So to my way of thinking about this is really no big deal, because if you put that seven thousand dollars in a taxable account.
and you'd earn $300 and you'd cash it out, you'd have $300 worth of ordinary income anyway. But doing it this way, you have a shot of tax-free growth forever through the back to a Roth conversion. Done and done.
Next question general surgeon in Wisconsin another Wisconsin
What is it with the cheese people these days? You know what it is? It's the organ docs laid them out and now it's revenge questions.
They got questions, they need answers.
Speaker 1 (05:23.502)
I had someone with Ohio State's background the other day and I was like, should I say
Also sorry, sorry guys. I promise our team will be worse in the future.
That's right. Okay, so they asked, they said my 403b through my new employer has voluntary and mandatory employee contracts. I've heard that between the two I can put in more than the max $23,000 2024. Is this true? So what they're saying is there's the elective deferral limit.
mandatory
Speaker 1 (06:03.736)
you have for 401k or 43b and beyond that if there's a contribution that is mandatory can you go beyond that limit and the answer is yes. that is yeah that's a Chelsea special. She points that out to me sometimes.
cool I did not know that until just now
Speaker 2 (06:24.75)
Hi, Chelsea. Thanks. You know, Chelsea listens to this podcast all the time. And I found out the other day that Jackie, our service coordinator, listens to it. And she says, yeah, sometimes I just need background noise. And I was like, you're kidding me. It was sweet, though. Yeah, I'll take it. Yeah.
So this is a great benefit. I mean, if they're making you put in more money, you want to put in more money. Good job doing that.
Yeah.
Speaker 1 (06:54.295)
Alright, next question. Pain management doc in New York. I am maxing out my 403B and HSA, but I still have some extra cash. Should I put my extra money in my traditional IRA that currently has a large balance? And that is pre-tax dollars in there. So it's a large balance that was all pre-tax dollars.
Hmm?
Speaker 1 (07:19.79)
I'm gonna let you take this Ben, but I think it should should make it known that this is sometimes situational much like
So, when we reviewed this question in the pre-show, you said something about low basis. Is that still in the question? Okay, so low basis in an IRA means that you have some pre-tax money and some post-tax money in there. Okay, the pre-tax money is the basis, which is to say, if you converted this whole account, then
interpreting on a low basis.
Speaker 2 (07:53.774)
you would pay taxes on the pre-tax portion. That's known as the basis. So if it's a low basis account, we don't know how low the basis is, but really what matters is the dollar amount of the basis. So let's say it's a million dollar IRA, and it's got $10,000 worth of basis in it. If you converted the whole thing, the taxes would be due on $10,000. So how low it is doesn't necessarily matter. It's really what the dollar amount is of that basis is what makes a difference.
In a situation like this, I would run an analysis and see like, what would it be like if we just bit the bullet and we converted the whole account? Right? How much tax would be due? If the million dollar account and $3,000 worth of taxes are due, honestly, I personally would convert the account and pay the taxes just to have this huge Roth IRA. But in this particular case, sounds like this listener has an active 403B plan at work.
So they could get into the position for a backdoor Roth by doing what we call parsing the basis. And what that is is you run the numbers on your Form 8606 and you figure out how much of that is basis, how much of that is tax free. You take the basis portion, the basis amount, and you do a reverse rollover into your 403B plan at work. And the rest of it you convert to a Roth IRA.
And then at the end result is you have an empty IRA, empty traditional IRA. It can go back to the fund and convert, fund and convert that goes to the backdoor raw sequence. Okay. Now will tell you and the listeners, mostly the listeners, you'll have a tiny bit that this is the deep end of the pool. Okay. So when I started teaching Kyle to do this, who he handles this all the time, it took me over a year to really kind of work through all the cases and show them all the details about this. And the first time I did it, it took me six months.
This is over a decade ago, right? But now we do this just lickety-split like that. So you have to be careful how you do it. I mentioned Form 8606. A lot of clients don't have a Form 8606 when they should have one because they didn't tell their CPA what the CPA needed to hear or they filed their TurboTax return and they didn't do their homework there. But if you have a dirty Form 8606, this will all get messed up, right? So don't do this without the help of somebody who understands taxes.
Speaker 2 (10:18.86)
All right. I would also say that, you know, this is something that we do regularly. believe Kyle told me it was last year we processed 141 backdoor Roth conversions and every one of those had to be set up. So, you know that we have experience doing this. Right. Yeah. Kyle does this in his sleep now. It's really cute because when I first hired him, he's like, I have some money in my 401k at work and his old job. He says, will you help me roll that over? I just chuckled because I was like,
Yeah, I'll help you roll it over and then we're do that about a thousand times for other people. So yeah, we do that.
That was coming up on a decade ago.
Yeah, that's right. Kyle's almost been with us 10 years. When he joined us, no kids. And now three daughters.
Yeah. Okay. So yeah, it's, can be complicated, but you're, you're sort of going through the analysis. Is it worth it to pay some taxes and get this money in a Roth? Right. A lot of times it is sometimes you gotta play the long game and slowly convert it.
Speaker 2 (11:20.246)
Yeah, I'd like to give a slam dunk answer, but we'd have to have slam dunk numbers and that takes time.
Okay, we have a listener question. And it's kind of long, Ben, but I thought I want to read the whole thing, give some background.
Well, know, it's a listener. usually we just say a kind of doctor from a state. This person has a first name. What's their first name?
I didn't bring in their first name, there was too many details. I didn't necessarily want to.
Yeah, because they're their first name and their specialty in their state. can kind of narrow the field.
Speaker 1 (11:52.91)
Yeah, so double doctor family too. So this is Albie Gine in South Carolina. I hope they know who they are when they hear this. Yeah, cool. But I'm going to just start reading and we can stop if you have some thoughts. It says, Hi, Physician Family Financial Advisors. I really appreciate the podcast and information you all provide. I'm a regular listener and I'm always excited to see a new episode be released each week.
My wife is a pediatrician and I, he's an OB-GYN. Both moved in September from Iowa to South Carolina, therefore had a life-changing event that allowed us to enroll in new benefits. We have discussed utilizing an HSA for a while now, and I decided to start one with a new job.
While in Iowa, had a lot less, I'm sorry, while in Iowa, it was a lot less expensive to be under my wife's insurance, so we didn't utilize a high deductible health plan under my work. Now that we are both working for the same employer, we've decided it's time to take advantage.
Okay, so what I hear so far is this family relocated, they changed states. That's right. Now, to my knowledge, that is not a qualifying event that you simply move between states. It might be. I just have never thought of that as qualifying event. But changing employers is certainly a qualifying event, right? So they get a chance to re-choose, and they're both working for the same employer.
They didn't use an HSA before because it was cheaper to put everybody on mom's insurance. But now they're they're looking at changing things up. So that's what we got so far. So we have a qualifying event.
Speaker 1 (13:33.928)
So we had a gap of about a month between insurance. We currently have her, his wife, up for the Hydroductual Health Plan and I have myself and two kids under a PPO with an FSA.
planning to max out her HSA contribution for the end of the year to get the benefit for 2024 and sign up for the high deductible health plan for next year and plan to max it out again. I wanted to make sure we weren't doing something incorrect by having FSA at our previous employer for the first part of the year and then HSA for the last part of the year when it comes to filing taxes.
There's a couple couple regimes here. So first they had she had a flexible spending account through work that they're using. Now she's talking about getting a health savings account through work and he's looking at having a flexible spending account through the through the same employer. Effect is the same employer doesn't have it doesn't make any difference right. It's whether or not you're all into the same the same plan like family coverage or husband and wife coverage right. That matters. But the fact that you both work for the same employer
could have totally different coverages, right? So just want to kind of clarify the fact pattern before we roll into this.
Okay, let's see. Also, was, sorry. Also, I was reading somewhere we need to keep the high deductible health plan for at least a year for tax purposes. So we plan to do this, but once you just speak to it, that is true. The second part of the question is regarding filing taxes. I keep myself and my kids on a PPO, and my wife keeps herself on the high deductible health plan to contribute to an HSA.
Speaker 1 (15:26.658)
we still be able to file our taxes jointly.
So two questions. One is, I file my taxes jointly because we have varying coverages? That's a slam dunk answer. The answer is yes. Right. Okay. But the other question they're asking is like, you know, I be on FSA and my wife be on an HSA here at the very end of the year and there's something about that that I got to remember. And that's a one-month rule. So let's tell them about the one-month rule.
Yeah, so you need to be covered in the last month of the year. eligible on December 1st through December 31st. And then you can contribute to an HSA for that year. And then I think potentially this rule is being blended. There's another rule that you need to be HSA eligible, which is to be under a high deductible health plan for the following 12 months.
So last month of the year and then the next 12 months and they call out the testing period.
Yeah. Otherwise, I guess you lose your tax benefit. You'd have to go back and amend or somehow pay a penalty for slipping in for one month of the prior year and then slipping out, right? So I guess there's a little risk here that if they move again somehow and they change employers and then they get into a non-high deductible health plan that it could foul up the deduction they made on their HSA for 2024.
Speaker 2 (17:00.014)
kind of rare, it's also possible.
Yeah. So, so far I'm not seeing any major missteps as far as taxes go. But he gives some reasons for why he's on a PPO. I think they're valid, some underlying health issues. I guess to kind of sum this up then.
Right, big deal.
Speaker 1 (17:22.22)
Given he has some health issues, have kids, they're splitting the plan, what do you think the best way would be for them to structure, like where these kids are and how they can get the contribution?
It's complicated, sometimes what we do is we...so she is...she's the only one who's in the HSA at this point. So she's getting to contribute at the individual level. So if we want her to double down on the amount that she can contribute to the HSA for 2024, which is like another four grand or so, right? You know, that's like a permanent tax savings of another thousand to fifteen hundred dollars.
So if we want to double down on that, then all she needs to do, I guess, after open enrollment, this is for next year, she needs to put either a child on her plan or she needs to put a spouse on her plan. Right. In this case, it's probably would be better to put at least one child on the plan than your kind of family. You might as well put both kids on the plan unless they have chronic issues. And then you could leave the spouse out and
because that spouse is alone, now they're an individual, you might amp them up to a gold plan. So I had an issue like this in my household. For a while, one of my kiddos was sick, and it was real expensive for us to get the kind of care she needed through the family plan at work, which, you know, I run the company, right? So it was my plan. But even even running the company, couldn't change the plan mid year, right? That's not allowed. But so we learned a lesson the next year, we carved her out and went through the open
open purchase plan market whatever you call it and bought a gold plan and I gotta say those insurance companies they must be looking at us going hey we lost this bet right because it was the right thing for our family to do and then we kept the rest of us in group coverage inside my organization inside physician family so that worked out really nicely was cheaper overall we got much better care
Speaker 1 (19:24.15)
Yeah, so I think this is what I heard you say was as many people as you could you got on the high deductible health plan. You can max out your HSA. Now what's important about that is the premiums are cheaper, should be, know, most of time they're much cheaper on a high deductible health plan than it would be on, let's say, a goal plan. Right. But it would also be cheaper for less people to be on the goal plan, assuming that you don't need another family member on there just for underlying health issues.
Right. Basically, if you have chronic health issues, then you should probably be on a low deductible health plan. And that is typically silver or gold. Right. And so gold is gives you kind of the best benefit. It also has the highest cost and you don't have to compare that cost to the total out of pocket cost of your care. Right. And so I think when we covered this question before, part of his question is like, when does it not make sense to have a health savings account?
And that's when the out-of-pocket cost of medical care outweighs the tax benefit. That's right. Yeah. And so in their case, it looks like it's going to make sense as long as it's her and a child or her and both kids, as long as it's her and not him on the HDHP. And keeping him in his own plan, that's probably going to be the slam dunk for them.
Yeah. My family's also done this for years.
yeah. Cool. Nice. Yeah. Yeah, there you can move these people around between plans and you can do that every year during open enrollment, which is basically now. all right. Ready to take us out? Yeah. Hey, thank you so much, Mr. Obi-Gon from South Carolina. Now, I appreciate your question. Hopefully answered it to your satisfaction. We love to answer questions, so feel free to shoot them to us. It's podcasts at physicianfamily.com.
Speaker 2 (21:19.214)
We are certified financial planners. We are fee only. We are a level fee firm, which means that you don't pay more when you invest more. We love to have clients. We only serve doctors with children. And so if you're interested in talking with us, visit us at PhysicianFamily.com. If you're not ready for that and you're kind of wondering how well you're doing, maybe you should go take our retirement wellness check and you can find that out at PhysicianFamily.com forward slash quiz. Until next time.
Remember, you're not just making a living, you're making a life.
Thank you for listening to the Physician Family Financial Advisors podcast. Are you getting all the tax breaks you really deserve? To find out, get your copy of the Overtax Doctors Retirement Investing Checklist available at physicianfamily.com forward slash go. Thank you for listening. Please read the show notes for disclosure.
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