PFFAP-PYP-24-0403-Ben and Nate Questions 3 EP 70-v1
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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.
Nate: Hello, Physician Moms and Dads. I am Nate Reneke. Certified Financial Planner and Primary Advisor here at Physician Family.
Ben: And I'm Ben Utley, Certified Financial Planner and Service Team Leader here at Physician Family.
Nate: Today, we are going to continue answering questions from our listeners. Ben, I have the first couple that are about college. So we got a lot of college questions this week. That's your bag. That's my bag. First one is, how do I use my 529 to pay for college?
Uh huh.
Ben: This question is like, it's [00:01:00] either totally obvious or it's just It's perplexing, right? I get this question occasionally myself and the, I think the listener is not asking about like, I mean, I think they mean like how,
Nate: like literally how do I get the money? Yeah. And it, it, and I think the question is usually pretty obvious when I, when I show.
People how to do it. Yeah. Like, Oh, but they just have never done it before. Cause they've been saving for 18 years and now it's time far away. Yep. So, uh, you can do this by making a withdrawal for qualified expenses. That's the kind of caveat qualified expenses for college. And you can, Get a check. So like reimburse yourself.
You can reimburse yourself by transferring the money to your bank account. You can also just send the school the money. So all of these things are possible through your 529, but the key here is you need to calculate how much you're spending on qualified expenses, right? So, [00:02:00] Um, and then you just put in a request online, but the important part, cause that's the part that everyone's asking about, but it's, it's rather simple.
So, um, you just call if you need help or
Ben: go online and usually I had a client asked me this the other day and because we're actually, you know, stroking those checks, um, one of the questions was how do I make it happen? I said, Oh, if you're, if your school is as right, you just log into your five, two, nine, 10, you choose your school.
Uh, you put your student in there and, and you just literally just zap off the money and it goes, it can go electronically. Um, but sometimes it goes by snail mail. Uh, I have a daughter who recently finished attending a junior college and everything was amazingly electronic. Like the money zapped out, uh, she dropped a class, the money zapped back in.
But my other daughter is at a STEM school. And you would think that, you know, you, you log in, you tap a button and then they send a carrier pigeon with a check attached to the pigeon's [00:03:00] leg. And you just hope that it makes it there because it's very manual. So it's not what happens with your 529 plan is what happens with the school that receives the money that really makes a difference.
So
Nate: that's exactly right. And if you're in that situation, you could consider just reimbursing yourself, but that means you have to have the cash too. Right. Right. It's a little bit tough, but here's a really important part. It is essential that you keep track of your expenses because if you go over and you accidentally withdraw too much, it's taxes and penalties.
Yeah. Yeah, that's right. So the key with 529 spending is to keep track of your receipts.
Ben: Keep your, keep receipts. Yeah, absolutely.
Nate: Okay. So the next one, it's kind of in the same vein. Um, the question is, should I make regular 529 withdrawals? Or can I leave the 529 money in the account growing tax free as long as possible before eventually reimbursing myself?
This [00:04:00] is a tricky one. It is. So, um, there is not a clear line in the sand. Hold up. There is. Well, hold on. Yeah. There isn't. Okay. So, uh, The, the IRS basically alludes to what you should do. So,
Ben: it's so unclear that both you and I are disagreeing about it publicly. Because I have,
Nate: I have scoured the, the IRS publications to try to find a clear.
Okay, well, you've done more homework than I have. Right? Yes. So, and it's, I'm, I'm going to get where you're going. But, uh, so there are even like articles out there encouraging this strategy. Oh, of leaving the money in a 529. So I'm going to do a little side tangent on this a little bit.
Ben: So, you know, I, that is a really valid strategy for a health savings account.
Right. One of those things that's done cold. Good idea. Right. But I don't know, even if it, I don't like the gray area, you know, I'm not a slippery slope guy. I [00:05:00] like to do the right thing. And, uh, you know, I've, I've told my clients and they ask this question, like, Yeah. You get that money out of there in the same year that it was spent, like if you have to write a check for a book and you know, it's December 1st, then, you know, make sure that that money comes out by December 31st of this year.
That's what
Nate: I thought. So, so I wanted to go a little bit further on this path of these blogs. Sure. So we, we hear it all the time. Physicians read a blog online, recommend something kind of controversial. And it's, you know, they want the, the blogger is trying to be clever and telling you how to maximize your investments, right?
And this is a problem. I mean, bloggers, I kind of call them the blogging provocateurs. Oh yeah. Okay. They, they make you feel like you're missing out on something, feel like you're doing something wrong with your money. And I believe these bloggers know just enough to sound. Right. Yeah. But really [00:06:00] what that means is their advice is
Ben: sometimes dangerous.
Right. Well, on the flip side of this, right. So, I mean, you leave the money in there for an extra year and we're talking about at most like 60, 70, 000 for another year. I mean, it. How does that compare to a potential tax penalty or the hassle of going through an IRS?
Nate: No kidding, right? I mean, all of the money's penalized and taxed versus you getting a little extra.
Ben: It's, it's, it's stuff like this that screws it up for everybody. This is why we don't have as many tax benefits as we could because they're going to be used. I mean, don't, don't be that guy, you
Nate: know? Right.
Ben: Yeah. I
Nate: get, I totally understand positions want to do the right thing, but avoiding this trap generally comes from taking advice from fiduciaries.
Yeah. That's true. Yeah. Keep your foot out of the trap. Yeah. Not some random blogger. So just like you said, the way it works, you need to make your 529 plan distributions in the same year that you spent the money. Yeah. That's how you stay out of hot water here. Okay. Another one of mine, a student [00:07:00] loan question.
All yours, baby. All yours. So should we file married filing jointly or married filing separately on our student loans? This one, I'm going to be. Very, uh, I'm going to humbly say that I have made a mistake in the past with this type of question. Wait, you're human? I'm human. Human Nate. So the reality is that most physicians, this is most, and this is the The trap I fell into most physicians, they only lose one to 3, 000 by filing separately.
And that is because if you have a double doctor family, you guys make so much money that you really lose a lot of tax breaks that, that you might get, or that might only be available to married filing jointly, but you lose them anyway, cause you're just priced out of them. All right. Okay. So when, when you're looking at your student loans, the way, the way that this calculation works is you look to see how much do I save on my student loans by filing [00:08:00] separately versus how much does it cost me in taxes to file separately.
Okay. And so generally it's that, that two to 3, 000 that you would lose. So if you're saving a thousand bucks a month on your student loans and you're going for, for public service loan forgiveness, it's a good deal. So spend 3, 000 in taxes to save 12, 000 in student loans.
Ben: This, this feels like the deep end of the pool, but I got to calculate my taxes two different ways.
And then I got to understand how that's going to impact my student loans. Yes. Yeah.
Nate: It's an extremely common strategy for physicians because at the very end, uh, after you're making good money, you're out of residency and you're No longer have tiny little student loan payments. Uh, the student loans can get the income driven payments can get pretty wild.
So give it to me, give it to me
Ben: straight though. Okay. So, right. So, I mean, what if the difference is like five bucks, right? So it's not worth, but if it's 50, 000, I mean, if it's like public service loan forgiveness, [00:09:00] where it's slam dunk, and it's gonna make a huge life difference, you really pay attention.
But so the question I have as, you know, for those physicians that are a little overwhelmed by this and that they're just. We just can't see straight to do this kind of stuff. Like, what's the best, the best delta, the best improvement in a person's taxes, uh, in overall, like, like overall, like extra money in my pocket.
What's the best improvement you've seen out of a, out of having the correct claiming strategy? So
Nate: I'll speak in terms of, of just a year at a time. Okay. So just yesterday I ran the numbers for somebody and they were going to save 24, 000 that year. Oh, wow. On student loan payments and their taxes by strategy.
Yeah. They're filing separate. They're going to be out 500 bucks. Wow. So huge, huge Delta. But the, the thing to watch out for, okay. and to [00:10:00] potentially get a CPA involved or get someone like me involved. If you have a big disparity in your income, let's imagine the physician has makes 400, 000 and spouse non physician makes 60,
Ben: 000
Nate: filing joint is hugely beneficial.
Okay. Got it. Okay. So that it's really, this is complicated, but the reality is if you're both making 300, 000. It's probably safe to file separate deep, deep end of the pool. Get help. That's what I'm doing. Right? Yeah. Okay. Next question. A client of ours received a large inheritance. I think it was like two and a half million.
Ben: That is a large inheritance. Yes. And I, and I also want to say I'm, I'm, if, if this person was close to you, I'm sorry for your loss. Yes.
Nate: Yep. Um, they asked the question, should I use the, my inheritance to pay off my house that has a 2. 5 percent uh, interest rate? Oh, boom. [00:11:00] Tough question for you and me, Ben. We don't, we just don't really like debt.
Uh, we like to see people get out of debt. Yeah. But, uh, when savings accounts are paying 5%.
Ben: Mm.
Nate: So it's a tough question.
Ben: Well, I can, I can rattle off the factors that would go into the decision that I would consider. Okay. So one consideration is the distance to retirement. So if they're in retirement, yeah, I think it, it makes sense to pay that house off because you don't want to have debts in retirement.
Okay. So that's if they're like right on the cusp of retirement, I think it makes sense too. There's not a lot of opportunity cost, but if we're talking about a 35, maybe 40 year old physician, who's got another 15 or 20 years, then the answer is probably no. However, um, if they've been diligent and they're on track for retirement, and let's say that of that two and a half million dollars, um, you know, it might take a million or a million and a half to finish [00:12:00] out your retirement and your college fund and basically achieve financial independence without retiring early.
Thank you. Um, Then, you know, you start to look around and go like, what's the money for? And I think it really gets down to the transformative power of money. Uh, if there's money left over and they can pay down the mortgage or they can pay off the mortgage that I know, cause I've done this, this transforms the way that you think about money and resources.
It rewires your brain. Uh, you'll be more relaxed and you, you just cannot imagine how good that feels until it's actually happened. I totally agree where I'm standing. I'm not direct advice, but these are the factors to consider.
Nate: Right. And that's why it's hard advice because I've seen people's lives be transformed by that.
I've seen your life be transformed by that. Just you're thinking about money. And so you like to play these little math games at the end of the day. It's more than the math. Oh yeah. It's definitely more than the math. Yeah. So, uh, you know, once again, it's unique to each person, uh, for this [00:13:00] person, they fall into that later camp, you know, maybe 20 years left till retirement.
They like, they like being a doctor. So I think they might do a little bit of both, but, um,
Ben: that's, that's seldom a bad idea. Yeah. How I, you know, split. And, and, you know, the other thing is, uh, unless you do something permanent with the money, this option is open to you all the time. And as you age and your kids age and you move down the pipe a little bit, your perspective on these things will change.
Nate: Okay. This kind of rolls into another question about cash. Okay. So the question is, should I let my one year CD rollover, this one happened to be at a lion credit union, so good interest rates, or should I move? And into my cash reserve account and we use betterment. So right now betterments. Paying a good rate.
Well, they just, they just announced
Ben: yesterday that they're paying 5%.
Nate: Yep.
Ben: Uh, and that's an FDIC insured rate. Uh, you don't have to invest with us to get this. I mean, you can go directly to Betterment and get their cash reserves product, but yeah, [00:14:00] 5 percent is that's, you know, probably in the top. Decile of, of safe returns, FDIC, you know, insured safe returns.
So, yeah, so that's what, that's the stakes are. Right. Did you happen to look up with the rates on the Alliance CDR right now?
Nate: Uh, I didn't look up this morning at the time. Um,
Ben: they were comparable. Yeah. You know, they're usually top tier rates at Alliance. Let's say they have high rates there, but not on, on everything.
You still have to look around. Right. Yeah. If you're looking for a place to just kind of. to bank you don't mind an online credit union. Yeah. These are the rates are pretty good.
Nate: So this brings us to this question of what do I do with my extra cash or what do I do with my emergency fund? And I talk about this with.
The same families every year. And the reason we keep talking about it is it's different every year. It's amazing how quickly the landscape and cash changes. Yeah, exactly. I mean, it's one of those things that you have to understand what's going into decision. So one would [00:15:00] be your rate, the rate you're getting two would be, what could the money be used for?
Right. If you know, you're going to use it in a couple of months, stick it in cash reserves and avoid penalties and CD. Right. But if you don't know if you're going to use it, then you're like, well, what's the difference if the rates are the same? Well, the difference is that buying a CD, the rate is locked in.
And so you kind of have to make a choice about flexibility versus locking in a rate. And you know, you and I can't read the tea leaves. We don't know if rates will go up or down and they might go down at betterment.
Ben: Okay. So you, yeah, I think we're falling into a pattern here today, Nate, it's like you're the.
You're the, uh, you know, the green eyeshade wearing, uh, type who's got like, get all the details and stuff. I'm like, Mr. High level feel good. Okay. So here's, here's my take on it. So I've, I've had an emergency fund for a couple of decades now. And as I look at it, I, the first thing I want is I want my wife to get to that money.
Right. I want her to be able to easily just go tap, tap and have [00:16:00] the money where she needs it. Right. Cause she's good. She's, she's all about emergencies. You're not going to tap it for any reason. Of an emergency. But if I'm not around, you know, we want to make sure that that's easy to get to. That's the first thing.
The second thing is you don't want to feel like your emergency fund might like get screwed up. Right. Because the benefit of having an emergency fund is the feeling of being Prefered for an emergency, a little bit bulletproof for a lot of the weird stuff that happens in life is what you're looking for.
Right? And and you won't feel that way if you put it all on the S and P 500 God help you. Or, you know, if you invested in a intermediate term treasuries or even short term mutinees, you know, things that fluctuate in value, they don't feel good for an emergency fund. Right. And the thing about an emergency fund is that's, that gives you permission to To go out and do things that don't feel good, right?
So rather than kind of a half ass emergency fund, you want, you know, a solid emergency fund. So you can go out there and [00:17:00] take a risk where it should be like in your retirement money, your longer term things. So you can really just put the hammer down and load up and just both of these decisions allow you to feel good.
Right. So I think that that is the key as you decide, like, well, where am I going to put it? You know, I mean, what's the value of your time? How much do you like to chase returns? You know, you might hop in from bank to bank. Is that something you like to do on your Saturdays or is that, is that time when you go to the gym?
Right, right. So I think it really depends on lifestyle because there's, you know, If we look at emergency fund, 50, 000, 100, 000, a half a percentage point from top to bottom is what we're talking about between, uh, good and great. A half a percentage point on 100, 000 a year is 500. It's 40 bucks a month. And in my world, that's just, that's not enough money to cause me to sit down and do paperwork.
Agreed. Yeah. Agreed. Yep.
Nate: Okay. So, um, next question here is, [00:18:00] should I count on merit based scholarships? So we know, uh, need based is not, not a possibility for most families who are physicians and not, not for the, not for the ones that should be listening to this show that should be assailed. Yes. So it's this question of merit based and once again, unique, but, uh, generally I would say no, no, probably not, not that, you know, your children aren't going to do well, but just what if they don't get it?
What if they choose a school that doesn't have a lot of, doesn't get out a lot of aid? Thank you.
Ben: Right.
Nate: Now
Ben: there is hold on, hold on. Jane Fonda said no is a complete sentence. And you had me at no, you said no again. And then you had, I think, yeah, don't, don't bank on things you can't control. Okay.
Nate: Okay.
Ben: Well,
Nate: all right. All right. Um, Let's see. So this was actually a call in question. Someone found our line that is still open. Uh, but if you, if you have more questions, you can send it to our email. Okay. But [00:19:00] the question was, how should we save up for the down payment on a 2 million home purchase? And it is our first Home.
Right. And before we get into the answer, I just want to say, I called this listener back, not a client. I called them back and we talked about this for almost an hour. And um, some of these questions, as you found. It's not yes or no. And sometimes we need to talk. And if that's the case, I'd be more than happy to call listeners and talk to them.
It's not as easy as the last question, which is just no. Yeah. Yeah. Yeah. Um, so when I called them, I found out a few things. It was first home. Okay. Uh, military, ENT and an ob gyn. Okay. Two kids, three in one. So, uh, the big thing here is it was their first home. Mm-Hmm. . And, you know, a double doctor family at some point in their career, if they can't afford kind of a, a $2 million home in [00:20:00] California.
I don't know who is affording 2 million homes in California. So at some point, it is possible they could buy this house. I think that it would be a mistake to just for it to be their first house. So hard to get that good down payment, get that good interest rate and to, uh, just not be house poor. Yeah.
Right. Right. House wrong
Ben: time.
Nate: Right. Right. House wrong time. And I've heard, um, You say this, I've read it, you know, the average family spends about seven years in their home. So, this, just, all the numbers say, all the, all the research says, this won't be your last house. You don't have to buy the dream home the first time.
Well, imagine
Ben: where they'll be in, where they'll be in seven years. I mean, they're gonna have an eight year old and a ten year old. Right. And what's going to happen between now and then is those kids are going to learn to read so they can get reading acquisition. They're going to polish out their speech, acquisition, mobility skills.
Uh, there's going to [00:21:00] be prefrontal cortex development. There's going to be all those things that happen to kids when they're getting ready to go to school. And if you lock into a 2 million home, uh, and your kids, you know, you find out that they're either, uh, Having difficulty in school, or maybe they're brilliant and they need to be, you're gonna move, right?
You're gonna, you know, you're gonna gnaw your arm off to do whatever it takes to take care of your kids and you're gonna move, mm-hmm, . And, uh, you don't wanna move within that seven years window. And potentially lose a bunch of money on a house. And I've seen this, I have seen this so many times. I've seen it too.
Yeah. It's like, it's like that. It's like, I love Lucy reruns, man. It's just over and over again.
Nate: You know, in physicians, they, they moved around so much, you know, military doctors, especially they moved around so much. They want to just grow some roots somewhere. Yeah. And a lot of times when they're buying their first house, they're just done.
They're done moving. Yeah. But the reality is, um, at least in what I've seen. They're so used to moving, they end up moving again. Yeah. [00:22:00] Right. You know, maybe not every one or two years, but five, six years, you know, they're going to move. So, you know, I would recommend first house don't buy the 2 million home and make it a long term goal.
Continue to save, you know, they had questions. Should I stop saving? No, continue to save. Don't pay too much in taxes. And eventually you can have this home. Good advice. Yeah. That was actually the last question.
Ben: Awesome. Okay. Well, so, um, if you have questions, you can send them to podcast at physician family.
com. Um, if you'd like to call and leave a voicemail for us that, uh, we can, we can call you back if you like, uh, or we won't, you know, whatever you choose, uh, you can call in it's five zero three three zero eight, eight, seven, three, three, again, five Oh three. 308 8733. Until next time, remember, you're not just making a living.
You are making a life.
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