Nate Reineke (00:13)
Hello, physician moms and dads. I am Nate Renneke, certified financial planner and primary advisor here at Physician Family Financial Advisors. I know I promised you a guest today, but everyone is sick. It is sixth season, so I'm here again by myself, but not really, because I'm with you. So we're going to get into some questions today. There's no specific topic. These are questions from people just like you, physician moms and dads all around the country.
And I have several for you on all different topics. So we'll get started. First question comes from a surgeon in New York. He said, I plan to send my kids to an undergraduate and graduate school. They want to go to school in the Northeast, which I know is expensive, but I'm worried about overfunding my 529. Should I put everything I plan to save into the 529?
⁓ This is a very common concern. I don't know the last time I wrote a college plan where people weren't shocked by how much they needed to save for college, so I get it. And ⁓ nothing is more jarring than seeing what the predicted or the way things are going with how fast the cost of college is inflating. The predicted
kind of out go for all four or in this case eight years of college is going to be. But the deal is that if you want to save money on taxes with a tax free growth and a 529, you should be putting a lot of money in these accounts. And so I would say that it is reasonable to to at some point put money in a taxable account or brokerage account for college separate separate
from your 529 and also separate from your retirement money. But in the beginning, do yourself a favor and start with all 529 contributions. This will give you the best chance at tax-free growth if you put money in early and often. Because when you're early on in your college saving, theoretically, if you're investing the way I recommend, you'll be more aggressive with your investments upfront.
and reduce your risk as you get closer to college, which means that all that growth or the lion's share of that growth happens with early money. So you put money in early in a 529 and the closer and closer you actually get to your goal, if you're reducing your risk with your investments, then that money theoretically wouldn't grow as much as the money you put in when your child was just born. So you can squeeze as much
of the benefit of the 529s out of the savings with early money. Then as you move along and you actually get to see the cost of college going up and how fast it's going up, you can adjust. So if you are, you you have a few children, you know you're going to be spending a lot on college, ⁓ do not cut yourself off too early and start putting money in a taxable account, ⁓ you know.
while they're in grade school. You can do several things to avoid overfunding your 529, which I again said this many times on the podcast, I rarely see. So if you are one of the few that is just piling money into your 529s and you have a little bit too much, remember you can give it to grandkids. If you don't want to do that, you have options. You can move it to another child that spends more.
you can stop putting money in. Imagine you put so much money in that for all of high school, you never funded your 529 again. That is a perfectly reasonable option. You've gotten tons of benefits in your 529 from all the tax-free growth. And you can essentially plan this out just right so you're not overfunding the account. Another just takeaway from this is if you overfund it by a bit, which I...
I have yet to find all these doctors that are overfunding college to this point. But if you overfund it by a bit, you can take it out. You pay taxes, but you pay taxes in other accounts as well. And you pay a 10 % penalty on the growth. So if you overfund it by six figures and half of its growth, you're going to pay taxes on half of $100,000, it's 50 grand, and pay penalties on $50,000, which is five grand. So if the worst case scenario is
you accidentally saved way too much for college and you pay $5,000 in ⁓ penalties, it's really not the end of the world because you avoided paying taxes on a huge chunk by putting money in a brokerage account. But at a high level, you know, start early in the 529s, all money going to 529s and adjust. ⁓ Plans don't last forever. They shouldn't. Maybe a couple of years ⁓ goes by where
I leave a plan exactly the same for families I work with, but after some point something changes, your goals change, your child changes, and you just adjust how much you're saving for college.
Next question is another 529 question. It actually came from a Physician on Fire webinar attendee. So I told you on an episode ago that I did record a webinar with Physician on Fire group. And if you are a listener and you would like a copy of that webinar, we can send it to you. Just send us a request and we'll send over the video. They asked, how do I choose a 529 if I have no state
tax benefits where I live? I get this question a lot as well. And the cool thing is that it's pretty easy to choose a 529 if you don't have a state income tax benefits for contributing to yours. Usually that means you live in a state that doesn't have a state income tax or unfortunately you live in California where the taxes are high and you still don't get a state income tax break. But ⁓ if you don't get any breaks,
any deductions or credits for contributing to a state sponsored 529 plan, you're looking at two things, fees and investment options. That's it. And fees and 529s are a funny thing. It's like comparing cheap to even cheaper, as long as it is in a state sponsored plan. So if you're using an advisor sold plan, I recommend against that.
529s, once you find the right investment selection, there isn't a whole lot to do other than follow your plan. That's really the harder part. But getting the money in there, choosing an appropriate investment is usually pretty straightforward in 529s. And that is because the state isn't trying to wow you, they're just trying to give you a good option so that you can send your kids to college when it comes to investment selection.
So I like Vanguard 529. I really like Utah 529. Their fees are ridiculously low and you can go from there. So you can either compare all your options or you can take my word for it, stick it into Utah 529 or Vanguard 529.
Okay, next question is from an ophthalmologist in Chicago. We're building a house, we're being offered a lender's credit. Should we put that toward closing costs or use it to buy down our interest rate? So ⁓ a lender credit is essentially at closing, your lender gives you money, but you have two options on what you can do with it. You can either put it toward closing costs, which is usually pretty high and painful.
⁓ or you can buy down your interest rate. And ⁓ it wasn't too long ago when interest rates were really low and I was recommending everybody put their lender credit toward buying their rate down even more. And the reason for that is when rates are 3 % or in the twos during COVID, you're probably never going to refinance this long. It's never going to get any lower and you probably won't want to move.
because the rate is so low. So when you're buying down your rate, you're doing so because you think you're going to keep this mortgage for a long time. Everybody wants to use it to buy down the rate because they don't like seeing a high rate. But in reality, if you have a high rate, the likelihood that you could eventually refinance is reasonable. I'm not making any predictions because rates, I wouldn't consider them extraordinarily high right now. They're kind of average.
It just feels high because we saw those really, really low rates during COVID. But ⁓ there's another chance that you just move. So if you're buying your forever home and you know you're going to live there for a long time, this is like your third house, know exactly what you want. You lived in houses that you thought you loved, but turned out you didn't love them so much and you just know you're going to stay.
And let's say you're getting a 15 year mortgage so you know the rates pretty low. ⁓ That might be a good opportunity to buy down your rate. But if you're in your first or second home, the chances that you move in the next three to seven years are pretty high, at least statistically. So the reason you may choose not to buy down your rate is that you're going to move and you're not going to enjoy
that lower rate as long. Okay. And if you have, let's say you buy down your rate and you and then rates drop while you're refinancing and let's imagine kind of worst case scenario, you buy down your rate and the next day rates drop and then you talk to someone like me and I say, Hey, now's a good time to refinance. You basically just threw that credit away because you never enjoyed the lower rates that you use that money for.
So alternatively, the lenders know that that might be an option for you. might refinance or something. So they give you the option. Just put it toward your closing costs. And that's real savings in your pocket. You don't have to wait to get paid back the money you put toward your rate because you put that money toward your rate. And let's say it lowers your payment by two hundred dollars a month and they gave you two thousand dollar credit. It's going to take you 10 months to get your money back to actually see the savings.
Usually what happens is it saves you $100 on your rate and they give you a $7,000 credit and it takes you 70 months to get your money back. So if you're not going to stay there for 70 months or you're to refinance before 70 months, it'd be best to put it toward your closing costs. So it's a bit of a guessing game. We don't know what's going to happen with rates. We don't know exactly how long you're going to stay in the house with physicians. Sometimes they get a big bonus and they just clear their mortgage. But those are the things to consider.
And as of right now, I'm sort of on the fence. So I tend to lean toward taking the guaranteed thing, which is to put it toward your closing costs. Every situation is a bit different, but in today's environment, I don't know if rates will go up 1 % or down 1 % over the next, five to 10 years.
Okay, what you hear from your lender is, or what you could ask your lender is to run you sort of a break even analysis. And that will tell you how many months before you get your money back. And if that seems like a reasonable amount of time that you know you won't refinance or move, then you would put it toward your interest rate.
Okay. And then actually I have one more question today, but it was a bit long. So I I'm going to cut it off here. ⁓ A surgeon in Utah said, I'm a physician changing jobs and I need to decide, should I work as a W-2 employee or as a 1099 contractor to save money on taxes?
Yeah, so I hear this all the time. Should I be self-employed and save a bunch of money on taxes? And it's kind of funny because I know where this goes. I know that you can save money on taxes, but this question is flawed a little bit just in its nature because being a 1099 doctor doesn't magically save you any money on taxes. You still have to pay your taxes. It's what you do.
with that 1099 income or the actions you take after you have 1099 income that gives you the possibility of saving money on taxes. So, you know, obviously you can deduct the business expenses, but if you're a W-2 employee, you don't have business expenses because your employer is paying your expenses. Right. So you go to a training and your employer reimburses you for that.
That's it's not better for you to use your own money to pay for the training so that you can save money on taxes. You're just paying out of pocket for it. ⁓ Now, if for some reason your employer is not re reimbursing you for something like that, you really want to do it, then maybe that's a small benefit. But, ⁓ you know, the deductions aren't a big wow factor for me. It just seems like as employees, a lot of people ⁓
don't appreciate or don't really can't quantify the actual money that an employer is spending on you that you would have to spend on yourself if you were self-employed. ⁓ The other one is like you can deduct you know health insurance premiums. And again I know a ton of physicians that their health insurance is essentially paid for by their employer.
So the real decision here as far as deduction opportunities is not to save money on taxes. It is to actually think about the cost that an employer bears when they have you as an employee. It is to look at your entire benefits package and say, okay, so I am going to make an extra $100,000 a year if I go out and be self-employed. That's my prediction.
Is my employer giving me $100,000 a year worth of extra benefits? And if the answer is yes, then it's not helping you. If the answer is no, they're cheap and they only give me a small match at work and my 401k and I pretty much pay my whole health insurance premium, then maybe it is a better opportunity for you. Or maybe that's a good opportunity to go look for a new employer. For retirement,
There is a great option for being a 1099 employee, being self-employed, which is that when you have, let's just say 401k, so you have a 401k at work, you can defer $23,500 this year if you're under 50 years old and ⁓ you have a regular 401k, you're contributing the employee maximum. Well, if you are self-employed, you can set up a solo 401k.
and you can defer a lot more money than that. Okay, I'll just leave it at that. There's some ⁓ details inside of a 401k that, you know, some complicated details, I guess, and how you do this, or if the money's Roth or if the money's pre-tax, but you essentially act as your own employer. So you get to decide how much goes in as the employer, and you're going to decide that that number is as much as possible. So it's a lot. ⁓
And that is a big tax break. Okay, because you get to defer all that money until retirement. You get to defer that income while your income is the highest and your tax bracket is really high. Now, if you work for an employer that is putting a lot of money in your 401k, the question is, is it really beneficial for you to defer your own money rather than actually getting money from your employer? Maybe not. You know, I know of several
physicians that ⁓ they do get the maximum put into their solo 401k. I'm sorry, their employer sponsored 401k. So if your employer has figured out a way to put in a ton of money into your 401k, it's part of your employment package. And you just have to consider that as your total pay. What is all the money my employer's putting into me working here? And so yes, you get a tax break.
Is it beneficial? You have to run the numbers. Now, the next one is ⁓ the big one. It is payroll versus distributions of your pay. And the key here is that in order to do this, you can't just be a 1099 doc that operates as a sole proprietor. You have to set up an S-corp.
If you set up your business correctly, then you can do this. And this is the main reason that your tax professional, what your tax professional is talking about when they say you'll save money on taxes. All right. So ⁓ if you are a 1099 doc and you operate as a sole proprietor, all of your net earnings is subject to self-employment tax.
is 15.3 % up to the Social Security wage base, then 2.9 % Medicare and 0.9 % surtax above 200k. As a single 250k is joint. Okay, so 15%, you know, or 17, 18%, it can get up there, right? Now remember, this is getting paid if you are an employee.
rather than self-employed, but you're paying half and your employer is paying half of that social security wage base. So if you just pay yourself, you're essentially sending it through payroll just like it is at work, but your employer is paying part of the bill. Once again, it costs money to have employees. And that's why when you hear these success stories about making more as a 1099 employee, there's a reason for that.
the hospital that's paying you as a 1099 worker, they're probably paying a similar amount that they pay their regular employees. They're just not having to pay all the benefits and they're not having to pay some of the taxes. So you get the difference, but then you have to pay all those things. But if you set yourself up, ⁓ if you form an S-corp, which is this is very common, your 1099 worker, you ⁓ form an S-corp,
And then you have to pay yourself a salary. Okay. But anything that you don't pay as yourself as a salary comes out in distributions and you avoid paying that payroll tax. So this is the, the big benefit, but it is also where physicians get themselves in some trouble. Because if you're going to pay yourself a salary, essentially you to choose what that salary is.
And the problem is that if you're left to your own choice, you would choose to pay yourself a really low salary so that you can make all the other income set it up as distributions and save a bunch of taxes. But there is a rule that you must set yourself up with a reasonable salary. And that is ⁓ painfully
in the gray area, what is a reasonable salary? And this certainly belongs in the hands of a tax professional to determine what a reasonable salary is for you. But let's just, for example, say that you earn $400,000 as a sole prop, sole proprietor, and you're paying the self-employment tax on nearly all of it. Then, in the other scenario, you set up the S-corp.
400K earned as S-Corp with $200,000 reasonable salary, self-employment tax on only 200K, and you escape the extra 15.3 % on the other 200,000. If you don't get this number right, there is a higher than average chance that you will be audited. Okay, this is highly auditable.
and you want to make sure your tax professional is not being too aggressive with this. So I will just leave you with this. I haven't met a surgeon yet that makes minimum wage. Don't set up minimum wage as your reasonable salary.
Okay, I know it's painful to write those big checks to Uncle Sam, but just be really considerate of the big picture here. Look at your total benefits package. You certainly can save money being self-employed, but just be careful not to go too deep into this and only take a job because of tax reasons, because there's other really good reasons to be part of just to be a W-2 employee.
And that's it for today. ⁓ Thank you so much for listening. I know these last few episodes have been a bit different, but I hope they've been helpful. If you liked this episode, be sure to subscribe so you don't miss the when we release new episodes every Wednesday. Leave us a rating if you liked it, wherever you're listening, Apple, Spotify, or wherever else, or even on YouTube. And if you'd like to work with us, you can visit PhysicianFamily.com to schedule an interview.
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