Nate Reineke (00:13)
Hello physician moms and dads. I'm Nate Renike, Certified Financial Planner and Primary Advisor.
Chelsea Jones (00:19)
And I'm Chelsea Jones, also a certified financial planner and primary advisor here at Physician Family Financial Advisors.
Nate Reineke (00:25)
on Chelsea? Another episode.
Chelsea Jones (00:28)
Another one in the books.
Nate Reineke (00:30)
Another dollar saved on taxes for retirement. All right. Let's jump in this week. I was going to tell you this crazy story actually. It was I call it the symphony. Me and me and my wife Brittany we went to the symphony this weekend. But the symphony at our house is when my four year old pukes all over us in the middle of the night. And the symphony is me and my spouse doing a symphony together where it's like
Chelsea Jones (00:34)
Hurrah.
Nate Reineke (00:59)
You run in there, you hear the scream, you run in there. One person catches, the other person runs for a bowl. And then once the bowl arrives, the other person washes their hands towards the bath. And I realize after like eight years of parenting that you just don't ask questions anymore. But the first time that ever happened, it was like. It was just a disaster. Nobody knows what to do. Everyone's yelling at each other now without speaking. He is bathed, throw up is caught, sheets are changed.
and everyone's back to bed in about 20 minutes. So I call that the symphony.
Chelsea Jones (01:31)
nice. Did you ever,
did you ever, does Brittany ever seem like more in tune with the kids ever in terms of like recognizing them being sick? Because the reason I ask or a story that that reminded me of, β the first time that Anna got sick and threw up, it wasn't β obvious. Like I woke up for whatever reason. It was like,
Nate Reineke (01:44)
It's a.
yeah.
Chelsea Jones (01:59)
2 37 a.m. And I heard her make a noise and it didn't sound to me like a normal noise. I was like, I better go check on her. I went in there and β she I was like, Anna? She looked up at me. She had throw up all over her. Like she was laying in it. It was matted in her hair and I was like, aww sweetie.
Nate Reineke (02:01)
Mm-hmm.
Yeah.
β gosh. Yeah.
Yeah.
Yeah, no,
it is. It is. After a while, you officially get to know β each child's scream and how it's different. And I would say, yeah, both of us. So it was whatever. Same thing the whole night. And I heard that the exact thing that happens is my son's name is Kimo. Kimo will say, Dad. And if that happens, it's puke and you better run. So like.
in five seconds, I'm at the side of his bed, you know, ready to catch. But β I always get a kick out of it after it's during it. It's crazy. But afterwards, I'm like, man, that was like, Brittany and I are just like doing a little dance. Like, it's like, I mean, and I just thought, you know, I don't I don't know. After enough times, you just start dancing.
Chelsea Jones (02:57)
Mm.
Yeah.
Yeah.
I know, I just... I remember...
I know. You get the hang of it. After that first time, I remember Connor being like, how did you know she was throwing up? I was like, I don't know. I just heard something, it sounded different. Went and checked. Yeah.
Nate Reineke (03:19)
Yeah.
Yeah. I don't know.
It's always, it sounds different. But in the beginning,
of course, mom knows best. Mom just has that instinct. now it's like, and I'm pretty, β after the first couple of years, it's usually me at night. I'm better at night. β So I just popped right out of bed. anyways, I don't know why I wanted to tell you that on the podcast, but I saved it. Could have told you yesterday.
Chelsea Jones (03:42)
Mm-hmm.
Nate Reineke (03:56)
Alright. I wanted
Chelsea Jones (03:57)
Well, because you wanted to tell the listeners too, I guess.
Nate Reineke (04:00)
the listeners to know I'm in it with you guys. If you got young kids, you know, I'm with you.
Chelsea Jones (04:05)
And on that note, we've got a question from a cardiologist in Texas. They said, I'm a W-2 employee, but I have $100,000 of additional 1099 income. Should I open a SEP IRA or a solo 401k?
Nate Reineke (04:07)
Yeah.
Yeah, this question has Chelsea written all over it, but I want to include it. β There's something out there that makes this confusing. So I know what we always recommend. β It's pretty obvious to us. Maybe it's obvious because of that we serve doctors. But I wonder if there's a way in. Maybe you could speak to what the obvious choice is for doctors and then. β
Chelsea Jones (04:36)
Mm-hmm.
Nate Reineke (04:53)
and I could explain a little bit about why there's confusion.
Chelsea Jones (04:57)
Mm-hmm.
Nate Reineke (04:58)
So what do you think?
Chelsea Jones (04:59)
Yeah, so what I would recommend is the solo 401k and the reason I would recommend that is because if you open a sep IRA, it blocks your backdoor Roth and β the reason it blocks your backdoor Roth is because of the pro rata rule.
Nate Reineke (05:11)
Yeah.
Mm-hmm.
Chelsea Jones (05:18)
So
just kind of a refresher on what the backdoor Roth is. Most physicians make too much money to be able to deduct traditional IRA contributions and they make too much money to contribute directly to a Roth. So you essentially pass your money, pass the IRA contribution through the traditional IRA, move it to the Roth via Roth conversion. Once it's in there, it grows tax-free forever. β But what the pro rata rule says,
is that if you have any pre-tax IRA with deductible contributions, then you can't just cherry pick the non-deductible contributions to convert those. You would have to, you reach in and you take a little bit of everything.
Nate Reineke (05:58)
Mm-hmm. Yeah.
Chelsea Jones (06:03)
So if you have, just to make the math easy, $5,000 in a pre-tax IRA, SEP IRA for example, and you had $5,000 in a traditional IRA that you made with non-deductible contributions, if you were to convert a thousand bucks of it, 500 would be taxable because you're taking out from that SEP IRA.
500 would be not taxable because half of it comes from the non-deductible contributions out of the traditional IRA. So, IRS looks at all pre-tax IRAs as one big bucket. Even if you have a separate traditional IRA for your backdoor Roth, it's not truly separate.
Nate Reineke (06:34)
Mm-hmm.
Chelsea Jones (06:44)
So that's why we would recommend the solo 401k because the solo 401k is not an IRA. It doesn't qualify for this pro rata rule. β And it allows you to make self-employment contributions using your 1099 income while also continuing to max out your backdoor Roth β and not owe additional taxes on the conversion.
Nate Reineke (07:06)
Yeah. Okay. β I think that's pretty obvious for every situation I've ever seen with physicians. but yet I still get the question. So I'm wondering why I get the question. And I think it's just a lot simpler than you would think about why it's so obvious. And they are very similar other than that the negative side, which is that you can't, it blocks your bacterial wrath. This comes down to, I think seps are
SEP IRAs are just ever so slightly simpler. And when you look this up, it's like SEPs are simpler. And I'm like, well, you have to open up the account, you have to fund the account. What's the difference? I think they're, well, for SEP IRAs, there's no employee employer side. It's just one limit. So that's a little bit complicated to understand. You know, it's not complicated at the end of the day once you figure it out, but it's just a...
Chelsea Jones (07:41)
Mm-hmm.
Yeah.
Mm-hmm.
Nate Reineke (08:05)
the barrier to entry of like understanding these two counts. It's a little bit easier with SEPs. And then I think the calculation for contributing to a SEP is a little bit easier. It's like 20%. Yeah, go ahead.
Chelsea Jones (08:20)
It is just a yeah, flat. I think
it might be even just a flat 25 % of 20 either 20 or 25. Um, and the solo 401k is, uh, a little bit, there's a little bit more that goes into it. Yeah.
Nate Reineke (08:28)
I think it's 20.
the calculation is a little bit
more complex. it's again, β easy for generally easy for physicians because by the time you have a solo 401k and you're self-employed as a physician, you usually have a CPA. So you just ask CPA. And then there's one more little β wrinkle, which is the solo 401k requires a specific document you have to file if your account gets too large.
Chelsea Jones (08:52)
Yeah.
Mm-hmm.
Nate Reineke (09:03)
A lot of this just comes down to we know where to recommend people open these accounts so that someone will file that form for you. But at the end of the day, Solo 401k is for doctors. That's the idea.
Chelsea Jones (09:11)
Yeah.
Yep. And another benefit of the Solo
401k2 that a set by array doesn't have is the possibility for a mega backdoor Roth.
Nate Reineke (09:22)
True, yes. Because you're setting up your solo 401k, so you can kind of set it up any way that you want. So that's good.
Chelsea Jones (09:29)
Mm-hmm.
The next question comes from a dermatologist in Florida. They said, spouse makes $500,000 a year. Is it worth it for me to take a job that makes $80,000 a year while my children are preteens?
Nate Reineke (09:43)
Hmm.
Yeah, yeah, have a, feel like I used to be really matter of fact about this and more and more lately, I think I'm becoming less matter of fact about it. I just, I have always been of the thought that if you don't need to make the money, then you don't, you know, there's no shame in not.
Chelsea Jones (09:44)
I'd like to hear your take on this one.
Nate Reineke (10:10)
going to work and not going to a traditional job and staying home with your children. But the more I actually have dug into this over the years, the more I find that it's a lot more complicated than that. The stay at home spouse a lot of times has some of their identity wrapped up in work. And I have my identity wrapped up in work. So I'm just trying to imagine if my wife went out and she somehow became a physician,
Chelsea Jones (10:32)
Mm-hmm.
Nate Reineke (10:39)
and started making $500,000 a year. Would I just not want to work? I know I would want to work. And so before it was just a math problem in my head. Like, hey, you know, we wrote this retirement plan for you and turns out you don't have to work. I just don't think that's really the question. The question is, β does your lifestyle and identity, are you more fulfilled with or without work? β
Chelsea Jones (10:47)
Mm-hmm.
Mm-hmm.
Nate Reineke (11:08)
But there's another side to this and I think what happened early on in tackling this problem with physician families was β people would frame it as a money issue when it wasn't a money issue. So I would always say, hey, the money issue is solved. But the more I really listen to non-physicians, spouses of physicians talk about this, I think what it is is
I have some of my identity wrapped up in this. A lot of them feel like they are better parents if they work some, maybe not 50 hours a week, but some. And they feel like they have more patience when they come home. They're just a better parent in general. And maybe that means they're working 30 hours a week. Or maybe that means they're working 40 hours a week, but they've got their schedule worked out to where, you know,
Chelsea Jones (11:43)
Mm-hmm.
Mm-hmm.
Nate Reineke (12:03)
They don't need a ton of help at home or their children are a little bit older. And in those cases, I hear them say, is it even worth it? I make so little, they say things like that. And I think that is just patently false. I don't subscribe to the idea that just because someone in your family makes a great, terrific income at 500,000 doesn't mean your 80,000 isn't valuable, especially since when you make
$80,000 a year as a job, you have access to more retirement accounts. So you get your entire benefits package is much more than $80,000. And just because someone makes $500,000 doesn't mean that $80,000 isn't a ton of money in this world. So the real piece of this is, of course, $80,000 moves the needle. Of course, contributing to another 401k moves the needle in your family's retirement plan and in your life. $80,000 sends kids to college.
Chelsea Jones (12:35)
Mm-hmm.
Mm-hmm.
Mm-hmm.
Nate Reineke (13:00)
So
of course it's enough money to make a difference in your life. Do you have to do it? Once again, of course not, if you don't want to. It comes down to β if you don't need the money. β
How does it benefit you? And if you've determined that you feel better in life, you have a better lifestyle with your children working, then that's okay. I would encourage every listener that's going through this, this decision, to think rather than yes, no, think, if I could shape my job into being exactly what I want, how would it look? So maybe you go make $45,000 a year.
Chelsea Jones (13:43)
Mm-hmm.
Nate Reineke (13:48)
but you work only when you want to. And I promise you, there's someone out there that will give you that if you look hard enough. And my last piece of advice is to think of this as a season of life. You β don't have to work part-time, full-time, or not work at all. You don't have to make those decisions all at once. You can go back to work after just a few years if you want to.
Chelsea Jones (13:51)
Mm-hmm.
Yeah, because there's also
Yeah.
Mm-hmm. And you're also kind of revealing, I don't know how much you bring your preteen children into this conversation, but seeing your parents work teaches them something too. Seeing your parents, you know, be intentional about being present with them while also fulfilling themselves outside of work, I think is really important for kids to see. β Especially young girls, because...
Nate Reineke (14:20)
Mm-hmm.
Sure.
Yeah.
Mm-hmm.
Chelsea Jones (14:40)
You know, there's typically more pressure for the wife to be the stay at home parent generally. That of course varies too, but yeah, I think it's important for them to see the non-physician spouse have that fulfillment with work and see them find joy in work and take pride in their work and still be present at home.
Nate Reineke (14:45)
Mm-hmm.
Mm-hmm.
Yeah, I have β several people in my life that they've chosen to stay home. And to be honest, you know, some of them thrive staying at home. Their household is just, it's something to almost envy and how beautiful the life is that they've made at home. And others should probably go back to work. You know, like, yeah.
Chelsea Jones (15:15)
Mm-hmm.
Yeah, it just depends on what work gives you, right? What are the
benefits outside of just the money?
Nate Reineke (15:31)
Yeah,
it's really not a money question, which is why this is such a cool question, is that it's hard to find this answer when the money really isn't a problem. Most people don't even have to consider this. Everyone has to work in today's day and age, but for physician families, it's different.
Chelsea Jones (15:36)
Mm-hmm.
Mm-hmm.
The next question comes from a urologist in New York. They said, if I'm going to be in a high tax bracket in retirement and I'm in a high tax bracket now, should I put money into a Roth account or a taxable brokerage account instead of making pre-tax contributions?
Nate Reineke (16:05)
I don't know what is going on with this, Chelsea, but this question is on the rise. And I hadn't heard this question in years. I mean, I know people will say like Roth versus traditional, but not traditional versus taxable. I never get that question. And so I'm going to give you kind of the reasoning behind our advice. I'm sure everyone can guess we're going to say contribute pre-tax dollars and save the money on taxes. But β
Chelsea Jones (16:10)
We've gotten it a lot. Yeah.
Yeah.
Nate Reineke (16:34)
I'll let you go a little deeper into it after that. the deal with pre-tax and contributing pre-tax versus post-tax, whether or that's taxable or a Roth account, is that for most physician families, you're in a very high tax bracket right now. Many times, almost every time, you're at least in the 32 % tax bracket.
But oftentimes you're in the 35 and many times the 37. Couple that with your, if you live in like a high income tax state like Oregon where I am, you're really close to 50 % in taxes. And so to say that you're going to pay 50 % in taxes in retirement is kind of a ridiculous thing to say, okay, on the surface.
Chelsea Jones (17:14)
Mm-hmm.
Nate Reineke (17:32)
Because in order to be taxed at that rate, you would have to earn, I believe, $750,000 a year. $700,000 in retirement? And think about all the things you do in retirement. So you earn $750,000, you have to save a whole bunch of it, you have children, you're paying off a house, you're doing all these things. You don't need that much money in retirement.
Chelsea Jones (17:32)
Mm-hmm.
Earn being the keyword. Yeah.
Nate Reineke (17:59)
You don't need to earn $750, so generally you probably haven't saved enough money to earn $750. Most physician families, the vast majority of the plans that we write, physician families will land in the 24 % tax bracket, some of them in the 22%. And so it's just plain and simple. You need to defer your money, whatever money you can. It's not that much you get to defer. You get to save
Chelsea Jones (18:17)
Mm-hmm.
Right.
Nate Reineke (18:31)
$24,000, what a 24,500, I don't remember what the limit is for 2026, but 24,000 bucks. So you're telling me you're going to not take advantage of $24,000 a year, like you also have to save in a taxable account. But we've been asked so many times, we're like, all right, enough is enough, what's going on? And then you came across the one situation where, or really the
Chelsea Jones (18:33)
Mm-hmm.
Nate Reineke (18:59)
the obvious situation where this is actually a reasonable question. So tell me the plan you recently wrote.
Chelsea Jones (19:06)
Yeah. So the plan that I recently wrote was for a family in California and they're obviously high earners now. It's a double-doc family. β But in retirement, they had the same thing. They were like, we're going to be in a high tax bracket in retirement too. And my initial thought was to be like, well, not necessarily, you know, long-term capital gains are different than earned income. And so
It's not exactly, it's not apples to apples comparing income now versus income label later.
Nate Reineke (19:38)
Right. Meaning, if someone
has 10 million bucks and 7 million of it is in a taxable account. I just saw this the other day. 7 million, they saved a ton in their taxable account. β But you don't have to take any money out of your taxable account. And long-term capital gains rates are based on how much earned income you have. So if you don't have a lot of earned income, your long-term capital gains rate will be low.
Chelsea Jones (19:44)
Mm-hmm.
Mm-hmm.
Mm-hmm.
Nate Reineke (20:06)
And even if it's high, it's still only 20%. So, okay, so that's the general rule of thumb that we're working with. Long-term capital gains, don't think about it that way. You're thinking about earned income.
Chelsea Jones (20:06)
Mm-hmm.
Yeah.
Mm-hmm. Then we started, you know, getting further in the planning process. It came to light that they both have a federal pension. β One's six figures, one's five figures per year. β So that's two, probably over 200,000 a year in pension benefits, which is completely taxable.
Nate Reineke (20:28)
Hmm.
They're already in the 24
% tax bracket with their pension, which is forced. It's not like you're not choosing to take a pension out. It's automatically paid to you.
Chelsea Jones (20:42)
with their pension alone.
Mm-hmm.
Yep. They're
also going to continue working in a very small capacity, but still earn about $250,000 each a year. So we're at 700. Yeah. I know.
Nate Reineke (20:57)
Yeah. Yeah. Each? Oh, gosh. Yeah, so here's
the thing. If you're a physician who plans to work a little bit, we just talked about the identity of a physician. Lots of physicians want to work until their later years. I mean, you accidentally go to work and you make a couple hundred thousand. You know, like it's... And if you got two of those people in a household and two pensions, all of a sudden, my whole soliloquy a second ago, like just flies out the window.
Chelsea Jones (21:17)
Yeah.
I know they are in a high tax bracket now. They will be in a high tax bracket in retirement. So the question becomes a lot more reasonable and valid. Should I defer my income or should I? They specifically asked about taxable contributions because they're interested in flexibility for being able to use the money earlier if they need to. β
Nate Reineke (21:30)
Yeah.
Mm-hmm.
Hmm. Which, by the way, they won't need to. They won't need to. They're making so much money, they won't need to. But the real question is, there a bigger benefit to contribute to the taxable account versus contributing to a 401k? Right? So did you get into the answer?
Chelsea Jones (21:54)
you
Mm.
So, well, with the 401k, if they're not doing pre-tax, they're doing Roth contributions, that grows tax-free, still using β after-tax contributions. You put after-tax contributions into a taxable account also, but the growth is taxed at capital gains rates. And so if we're looking at it from a tax perspective, a Roth account would be more beneficial than the taxable account.
Nate Reineke (22:22)
Yep.
Yeah.
a 401k
Roth account that for many, many years now we have said, don't want to do that. Yeah. So, I mean, there's a unique situation for everybody, right? Every piece of advice we give has, there's, you know, it's like I talk about how physicians shouldn't own whole life insurance, but randomly you'll come across one out of a hundred that, β there's the one person that should be sold to, you know, for whatever reason.
Chelsea Jones (22:44)
Yeah.
Yeah, but what's
Mm-hmm.
Yeah, it's good they have it because
now they're not insurable or something like that. Yeah.
Nate Reineke (23:08)
Yeah, exactly.
So this is a situation that is super unique. If you have if you know you're going to have a really high income, by the way, we didn't even get into β required minimum distributions. This is what most people are asking about. They're saying my 401k is getting so big, it's going to force me to distribute all this money. My my income is going to be really high.
Chelsea Jones (23:24)
Mm-hmm.
Mm-hmm.
Nate Reineke (23:33)
You
have to have a pretty big 401k. I've seen this in the past year. I've maybe seen this one time where a self-employed physician who had been self-employed forever had several million dollars in the 401k. But most of the time, this is just not the case. It's like you're going to have a 401k even if you have a million dollars in it, you're not going to make $750,000 a year. But you're not exactly.
Chelsea Jones (23:45)
Mm-hmm.
Right.
you're not gonna be required to take that out either.
Nate Reineke (24:00)
Because the deal is just to back up for a minute with your 401k at a specific age, have to, they force you to take distributions. And so the question we always get is if I'm going to be forced into this high income tax, should I be contributing to Roth or taxable account instead? And it's like 95 % of the time, no, you should take the deferral. But you found one, you just spoke with one last week that seems like they should go Roth.
Chelsea Jones (24:20)
Mm-hmm.
I know, because again, there's
the window for them earning a high income. And when they hit RMD age, there's no window for Roth conversions for them either. Cause we've talked before about, you know, post retirement, pre RMD age, that's when you want to convert. They're still going to be high earners pre RMD post retirement. So yeah.
Nate Reineke (24:38)
Exactly.
That's the real problem. So
we've talked about that before, but there's usually this, like I said, most physicians, I keep saying most, and that is most of the time we're in this sweet spot. Well, most physicians retire at 60, 61, 62. You have a few years to convert some of this money, but if you keep working, you'll definitely have more money. Obviously, these people are going to have more money. don't really have money problems. They have tax problems. So the question isn't like,
Chelsea Jones (24:57)
Mm-hmm.
Mm-hmm.
Mm-hmm. Yep.
Nate Reineke (25:18)
you know, really this just becomes a tax game at a certain point. They have more money than they can probably end up spending. So flexibility all of sudden becomes important, which they're asking about, and tax preparing becomes more important. They can't, they're always going to be in a high tax bracket, which means they'll never have an opportunity to convert this pre-tax 401k money at a low tax bracket.
Chelsea Jones (25:43)
Right. Yeah. So we found the exception. All right. Last question. Yeah. Last question we have is from an anesthesiologist in Illinois. They said, can I give money to my aging parents without putting my retirement in jeopardy?
Nate Reineke (25:47)
I found the exception. Okay, one more question.
Yeah, I'm going to be really β straightforward with this one. β I get this question or questions like this, can I give money to my children? Can I give money to my aged parents? A lot with physicians. Physicians, there is, in the nicest way possible, there's a lot of hands in the cookie jar sometime with physician incomes. β So the...
Chelsea Jones (26:05)
Mm-hmm.
Mm-hmm.
Mm-hmm.
Nate Reineke (26:27)
You know, money questions like this are funny. They come across as money questions, but a lot of times they, there's just, it's not really a money question. It's like, can you give some money to your parents? Sure. Can your parents live the same life as you and you get a great retirement? Probably not. Probably not. It's expensive. β What you really need to do is include this in your financial plan. And
Chelsea Jones (26:40)
Mm-hmm.
Probably not.
Mm-hmm.
Nate Reineke (26:56)
What I normally see is there is some trade-off here. Because most of the time what these docs are really asking is, can I have this fabulous retirement, but also give my parents a fabulous retirement? So they're sort of saying, β do I have the ability to save for two retirements? Most of the time the answer is no.
If you include in your plan to, you know, maybe give your parents a thousand or two thousand dollars a month to help pay their bills, that's I see that be possible all the time. But it does not come without tradeoffs. You have to make tradeoffs with any goal in your plan. You have to make tradeoffs. Very few physicians. Make so much money and spend so little out of that money that there's just β plenty to go around.
Chelsea Jones (27:33)
Mm-hmm.
Right.
Nate Reineke (27:53)
where you can send five, six, $7,000 to your parents and spend $20,000 a month. That is just very uncommon. You have to save an enormous sum of money. But it's okay because your parents don't need that. the answer to your question really should be, or I'm sorry, the question you should really be asking is how much can I responsibly give my parents? And you should include it in your plan, a realistic timeframe for how long that happens.
Chelsea Jones (28:01)
Mm-hmm.
Yeah.
Mm-hmm.
Nate Reineke (28:23)
So by
the time you're actually retired, 60 years old maybe, your parents might be 80.
Chelsea Jones (28:31)
Mm-hmm.
Nate Reineke (28:32)
or very likely 90. So β you only have maybe 10 years of giving this. So you can give to your parents, you just need to be realistic about it and not close your eyes and hope you have enough money. You need a real plan where this is included.
Chelsea Jones (28:37)
Right.
Yeah, we don't want negative surprises. You don't want to set expectations with your parents that you'll do it and then have to walk it back. You also don't want to think that you would be able to enjoy your retirement at the level that you want while also giving them a great retirement. Setting expectations correctly and planning minimizes regret. You don't have those regretful feelings.
Nate Reineke (28:55)
That's true.
Yeah.
That's Agreed.
Okay, that is it for today. Thank you everyone for listening. If you liked this episode, be sure to subscribe so you don't miss when we release a new episode every Wednesday. You can leave us a rating wherever you're listening. If you'd like to work with us, you can visit PhysicianFamily.com to schedule an interview. If you aren't ready for that, you can always send us questions at podcast at PhysicianFamily.com. Until next time, remember, you're not just making a living.
You're making a life.
