Speaker 2 (00:00.088)
So some of the pensions that are out there are kind of old timey and the rate at which they grow might be like inflation or inflation plus one. So for a young person, that would not be a great trade. I would think that a 403B invested mostly in stocks would probably be a better bet.
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 in college. Hello, physician moms and dads. I am Nate Renneke, Certified Financial Planner and Primary Advisor here at Physician Family Financial Advisors.
And I'm Ben Utley, certified financial planner and the service team leader here at Physician Family. So Nate, before we went on the air, you were telling me about a movie that you had watched and some music that was in that. I'd like our listeners to have a little flavor for who you are at times.
Yeah, well the the big it starts with it always starts with movies I used to watch a ton of movies as a kid. So and I still really like Maybe a handful of movies. I watch over and over again. One of them is the big short. I'm sure you've seen the big short Yeah, it's interesting because it's exciting and I love how the the director made this really complicated Financial crisis that nobody really understood into kind of this funny
Breakdown of it. So I my favorite part is when he says here's famous famous chef Anthony Bourdain to explain and he explains some complicated thing in the in the form of talking about fish stew So I really liked it. But dr. Burry the the famous short the big short guy Was always listening to this metal music and playing the drums. So in part of it He listens to Metallica and it brought me back to when I had a Metallica poster in my room in high school Nice, I've been listening to Metallica lately again
Speaker 2 (01:56.376)
Sweet. Well, I never had a poster of the founding fathers in my room growing up. But for some reason, I find myself about once a week listening to the entirety of Hamilton beginning to end, like the whole thing. And I don't know if I'm proud of this or ashamed of it, but like, I know almost all the words.
You know, I wanted to not like Hamilton. Impossible.
It's impossible. They're coming to our town like March or April and I'm waiting with bated breath. It'd be the second time for me. So speaking of shows, you should probably get on with this one. Well, I really scraped for that segue, I gotta tell you.
Nice.
Speaker 1 (02:32.002)
We got one right here.
Speaker 1 (02:36.846)
Okay, well, yes, we have some questions and a few of them you actually got. So, and I think...
What do you mean actually got? As if I don't work?
No, as in Normally, I get ones from the team. Yeah, and I like to hear your answer. So I choose those So maybe I don't choose yours as much but I some yours today Okay, so anesthesiologist from Ohio Says due to some changes at work. I'm going to be taking a 33 % pay cut I'm thinking about opening an e-commerce business with my family to supplement my income. What do you? Yeah
Double ooo.
You got this question, I don't know what you said but I'm interested.
Speaker 2 (03:20.878)
You know, it was from a prospective client and I gotta say that I kind of went along with it in the beginning and I kind of tried to direct them a different direction because I don't like to see docs get off track. But yeah, it it sounded like a diversion, know, a diversification. And in the end,
I felt like I had their trust in their ear. And you know, this is not a client. This is a person I've known for like 30, 45 minutes. And I'm like, look at every time I've seen a physician do this, it just does not work out. And I mean, the amount of money that they were hoping to make in the e-commerce business was like about three or 5 % of what they were making before. So it wasn't even going to fill the gap. It was more for like, to stave off boredom and that kind of thing. And I said, look, you
I said, you need to double down. I said, you need to go to war with a team that cut your pay. There's some politics involved. It wasn't pretty. said, you need to lawyer up and figure out what your rights are and fight for your rights. I said, you love being a doctor. And this is true. She said she loved being a doctor and she didn't really want to take the pay cut, but the administration where she worked is just being jerks. You know how it is. New administration, new rules. Everything's fine until they come in and they have to break everything, right? And I said, you need to figure out what your rights are in this situation.
game up and I said, take that top notch brain that you have, quoting Hamilton again, take that top notch brain and focus it on this problem rather than running from the problem. And by the time the call was over, I didn't have a client, which is fine, but I felt like I had made a little dent in the world of medicine and certainly for that family. So, as I say sometimes on calls where I'm talking with prospective clients, sometimes we make money and other times we just make a difference.
Yeah, that's good. Yeah. you know, honestly, I think another when I read this question, I was thinking it would still take a top notch brain to do well in any side business. I think that is really the big lie with side businesses or businesses in general.
Speaker 2 (05:28.878)
have to tell you that there is no side business. There is only business. And, you know, I'm looking at, like, a mom who's got two or three kids, you know, she has a husband who's in practice, you know, busy, and then busy and busy. I'm like, you want to start a business on the side of that? I mean, geez, I put in 50-60 hours a week, you know? That's not a side business.
No, no. And that's with any business.
Exactly. Business is always busy.
Exactly. Okay. Next question is from a neurologist from North Dakota. It says, I am 43 years old. Yeah, right. And I want to begin optimizing my income taxes for when I retire. What do I need to be thinking about today?
And I'm freezing my butt off.
Speaker 2 (06:18.35)
I would say knock it off. can't optimize your income taxes when you're 43 and you're retiring in your 60s because that's 20 years. And I mean, just think about the tax law changes we've had in the last two decades. Right. We've had at least two major changes in the tax code and a million minor changes in the tax code from like mandatory retirement distributions. Mardis have changed.
Contribution rates have changed, taxation has changed, taxation at the state level has changed in many states. So it's not gonna be possible to do retirement planning, income tax planning for when you're in retirement. yeah, mean, what you do is you optimize now, you pay the least taxes that you can now over the course of your life. So like an example of this would be with Ross.
pretty much nobody who's listening to this show should be making a Roth 401k contribution. Right? Pretty much everybody who's listening to this show should be making a traditional 401k contribution. And those that are out there making that Roth contribution are like, well, I don't want to have to pay taxes on it later. But by doing that, you're going to pay more taxes now than any other way.
The only exception is for people that for some reason are in a super low tax bracket now and plan to be in a super high tax bracket in retirement. That's not common with physicians. Most docs are going to be in the top marginal tax bracket during the peak of their career, know, thirties, and then they're going to be in the twenties when they retire. And here's the kicker, right? So let's say that you are living in a high tax state like I do, Oregon or New York or California, New Jersey. I could go on.
If you're living in one those high tech states and then let's say, for instance, you retire in another state that doesn't even have an income tax, Florida, Texas, Washington, believe Alaska. I mean, then you sidestep all of the income taxes. So you've really shot yourself in the foot by doing the Roth contribution to your 401k here. So more of the story is optimize your taxes today and don't worry about what it's going to be in retirement. Worry about having enough money on an after-tax basis, which drink in game.
Speaker 2 (08:37.644)
requires planning. Right.
That's what you said exactly. I had a cute way of saying this. I was going to say, thinking about optimizing your taxes and retirement isn't the optimal way to look at this.
Okay, let's hear it.
Speaker 2 (08:51.278)
that is so funny.
But I was thinking the same thing. mean, you basically you're looking at this as a lifetime tax bill and you're just trying to lower it. So optimizing your taxes and retirement doesn't logically make a lot of sense. You want to optimize your taxes every year, which requires some focus every year.
I got one for you. This is another cutesy way of thinking out. You have a one year old child and you want to optimize their life outcome. Now, anybody who's had kids for 20 years, like I have, realizes you don't optimize anything. You you think you're optimizing and sometimes you're screwing it up. Sometimes you're getting it right. And sometimes you're just way off base. That is what it's like to try to optimize your tax bill 20 years in advance. Right. You just don't know how it's going to turn out. So you do the best you can at the moment to cross your fingers.
and plan to have enough when you get to the finish line.
funny because you kind of answered this next question so I'll take a crack at it here from a different person. So oncologist in Wisconsin says I'm able to max put the maximum amount my 401k profit sharing plan so they are able to put $69,000 in 2024.
Speaker 2 (10:00.502)
Or 76.5 if you're an old fart. Yeah.
Yep. And that's that's pre-tax dollars. So their question was, they said, my spouse has the option to make 401k deferrals or make post-tax contributions to the Roth side of her 401k. Considering I'm contributing so much pre-tax money, should we start making Roth contributions for my spouse?
I'm enjoying this ice cream so much, maybe I should stick some kale in it.
That's right. So I wanted I wanted I sort of took a different approach. I actually did some math. And it's it's a hard calculation to do. And so without boring the listeners with the math, I think it's obvious to people, you know, Roth, you don't get taxed on the growth. Yeah. And so that's where the math stops for most people. But I actually think that that's wrong.
So you can get the tax deferral now in your highest tax bracket and then by doing pre-tax contributions. you save something like 8,000 bucks in taxes this year. And then the opposite, if you put it in the Roth, you pay the 8,000 upfront, you have some tax-free growth. Most people will do that math and they'd say, maybe you save a little bit more in retirement, assuming you know what you'll pay in retirement, which nobody does.
Speaker 1 (11:25.454)
But that's actually not the full story because that money that you saved by putting money in that tax, by deferring the money into your 401k, not paying taxes now, you apples to apples comparisons, which would be you take that $8,000 and you go invest it. Right. So you saved $8,000 in taxes. Now you have more money to invest. That's the full calculation.
Well, here's the here's the long and short of it. Okay. If you are in the 24 % bracket when you defer and you're in the 24 % bracket when you when you withdraw, it makes absolutely no difference whether you put in a Roth or traditional. It is the same. This Roth versus traditional thing is not a matter of whether to pay taxes. It's a matter of when to pay taxes. That's what you're choosing. You're choosing when to pay these taxes and
If you're asking me, I want to defer taxes when I'm in the top rate, and I want to pay taxes when I'm in a lower rate. And that's all this is. It is no more complicated than that. But unfortunately, that Senator from whatever state he was from, Mr. Roth, it's always a guy, unfortunately, you know, they laid his name on several different things from, you know, Roth IRA to mega backdoor Roth to Roth 401k. Some Roth is good, some Roth is bad. We have a whole episode on this.
Roth are right. Yeah. So it's not hard, but it's if you get wrapped around the Roth poll, you know, you're going to get all screwed up. It's a matter of like, really, you're just choosing when do I want to pay my taxes right now? My peak earning years. I don't want to pay taxes now. So you go traditional. Yeah.
Okay, two more questions then.
Speaker 2 (13:08.813)
Get that kale out of your ice cream, kids.
We're gonna do two more, okay? Okay, spouse of a cardiologist in Colorado. I was previously self-employed and have a solo 401k that I funded during that time. I am now a W-2 employee. What should I do with my old solo 401k?
You want this one? Or you want me?
I mean, we can, I'll start. Yeah, you have a couple options. I mean, you can leave it there. Absolutely. number one. And you know, if it was set up at a good custodian, you have good investment option with low fees. There's nothing really wrong with that. But you kind of want to consider whether or not you're ever going to go back to self-employment. Yeah. Right. If you're ever going back, you should leave it. Leave it. If you know for certain you're not going back.
Speed it up.
Speaker 2 (13:38.85)
Yeah.
Speaker 1 (14:00.91)
you can look at your 401k or 403b at your new job and kind of do some comparison about where you would like this money to be. And if it's better, or let's say it's the same, well, you might clean some things up and consolidate to one account. But it's no more complicated than that. There's no other tax considerations. It's just, you want this account to stay alive so you don't have to open it again in the future? And which account offers lower fees and better investment options?
Yeah, exactly. Exactly. I was took some CE the other day and they covered the ethical rules around this because the Department of Labor has some very important things to say, a bit of a middle finger to the insurance salesman who are doing the rollovers from the DOL, not for me, of course, because I love insurance agents. But basically, they said there's three things you can do. You can leave it there, you can cash it out, or you can roll it over. Leaving it there, not a bad option unless...
You're not coming. You're not going back to that self-employment. And if you have more than a quarter million dollars and you have to do the 5,500 filing every year, which is somewhere between 500 and $1,000 if you pay somebody to do it. you know, leaving it there could be a good option. Cashing it out, generally a terrible idea for everybody who's listening here. And roll it over. And if you roll it over, you've got two options. You can roll it over to an IRA or you can roll it over to an active retirement plan if they allow it. Right.
Now of those two, I like the one where you roll it over to an active retirement plan because rolling it over to an IRA means that you're going to block up your backdoor Roth contributions. That's right. So in my world, there's really only like two things to do with it. Leave it there or roll it over to the active plan.
Yep. Yeah. And I know these account questions, we get these a lot and I try to sprinkle them in. They're not huge tax savers or anything, but they stick in people's mind. They have these pesky accounts laying all over the place and they want to consolidate them.
Speaker 2 (16:02.894)
And sometimes that's not the right thing to do.
Yeah, exactly. Okay, we have sort of a benefits question. Immunologist in Texas. I work in academia and need to choose between a pension plan or a 403b plan. The choice is irrevocable, which is better. So which one should they choose? This is another plan question.
With the plan, this becomes a lot easier to choose from because in that plan, you sort of start to think like, what about your future, where you're going to work? But the main sticking point is here is the likelihood of staying with this employer. think, if you plan on leaving the pensions never, never really amount to much if you leave, you know, in five years. So, but if you plan on staying for a very long time, pensions can be.
turn into a very good income in retirement. Yeah. So if you're going to leave, the 403B is usually better, right? It requires some looking into these benefits. if you're never going to leave, the pension is usually better. things you should ask yourself, sometimes you give up some more benefits if you don't, if you choose one plan or the other. You know, I believe
If you choose the state sponsored plan, which is the pension, sometimes you can, or I'm sorry, if you give that up, then sometimes you can give up health benefits in retirement. Yeah. So you're not taking the state sponsored health benefits.
Speaker 2 (17:43.256)
There's another, there's at least two more considerations here that I can think of. So one of them is the crediting rate on the pension. So some of the pensions that are out there are kind of old timey and they, the rate at which they grow might be like inflation or inflation plus one. So for a young person, that would not be a great trade. I would think that a 403B invested, you know, mostly in stocks would probably be a better bet.
And the other side of this is, you know, we have a doc who's in Illinois. They have the SURS plan up there. Illinois is one of those states that at the time we looked at this was not in super great financial shape. We looked at the back end of this pension to see how funded or unfunded it was. And we realized, I think at that time there's like 60 or 70 cents on the dollar that was there. And so there's a chance that this underfunded pension will welch at some point.
So, you know, Texas has pretty strong finances. They're one of the number one holdings in national muni portfolios. But I would look at the credit standing of the pension provider and see what their ability to pay is and how funded that pension plan is before I jump down.
I wanted to add one more thing here. it's funny to me a little bit because pensions are looked at like this, like the golden goose. My dad had a pension. so he set for life, right? but annuities are looked at like this disgusting thing that nobody should buy, at least in our world. But the way that a pension acts and the way that an annuity acts to a physician is essentially the same. Yeah.
Right.
Speaker 1 (19:26.574)
So if you're on the fence, like let's say you did some calculation, you're like, think it's about the same. You should certainly take the 403 B because the pension goes away when you die. Right. Right. And that's annuities. It's a lifetime income, but your kids or your spouse, if you die, sometimes they're left with nothing or maybe your spouse is left with half. So pensions are great if they're rich.
but they aren't always the best option. you just have to take a close look at your own situation and this is where a good plan comes into play.
Do feel like we give that answer like it all depends so many times? I mean, I wonder if this is self-serving, these are necessarily glib questions, right? So it's like, you know, should I buy the red car or the yellow car? Well, it of depends on what the car is, right? In terms of getting the details. So yeah, but the factors to consider, right? That's what we can show up on the show is the credit quality of the pension, you know.
costs and benefits of the 401k, how far you are out from retirement, whether or you're going to stay at that employer. I can think of a couple other things that go on crediting rate, potential returns, rollover options, settlement options. I see this question on a pretty regular basis. It's complicated.
Yeah, I want to actually say something about that before you take us out. My goal of this show is to have a nuanced approach to all these questions. Yeah, right. But that really is when I think about these questions and I think most financial advisors wouldn't really have a nuanced approach. Most financial advisors would say choose a 401k so they can roll it over to an IRA someday. Yeah. And, you know, we have
Speaker 2 (20:55.64)
Thank God we have a goal.
Speaker 1 (21:15.022)
structured our situation so we don't have to do that. So while we don't have these big headline answers, one is better than the other and we're making a big statement that doesn't apply to everybody. I'm hoping that the listeners will hear this, a nuanced approach and they will think twice and basically just go back and some of my favorite answers are like, these are the things to go consider because you can't consider them for you without talking to
Go think deeply.
Yes. Go meditate on attention versus...
Crunch some kale and think about your pension. Nice. Okay. Well, we're financial advisors. We love our clients. We like new clients. if you'd like to chat with us, all you have to do is hit the website and click the get started button. So that's physicianfamily.com forward slash start. If you're not quite ready for that, you can send us a question to podcast at physicianfamily.com. We answer all the questions that we get. Only some of them we put on the air.
So until next time, folks, remember, you're not just making a living, you are making a life.
Speaker 1 (22:17.592)
Thank you for listening to the Physician Family Financial Advisors podcast. Are you getting all the tax breaks you deserve? To find out, get your copy of the O-Tax Doctor's Retirement Investing Checklist, available at physicianfamily.com forward slash go.
Over
Speaker 2 (22:36.728)
This show is for educational purposes only and is not personalized advice. All investments involve.
consult your tax advisor before taking action. Risk of loss, past performances, no guarantee of future results. Read show notes for full disclosure.
