Nate Reineke (00:13)
Hello, physician moms and dads. I'm Nate Rennecke, 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 (00:27)
All right, Chelsea, we're gonna go back to our segment called Asking for a Friend. So in this segment, there are no dumb questions. And so we will come up with hopefully a question every week where it seems a little basic and that's okay. So the question for this week is explain how a backdoor Roth IRA works. It's not really a question, but it's a topic. So Chelsea, explain to me.
Chelsea Jones (00:44)
All right.
Nate Reineke (00:55)
If I didn't know anything about account structure and investing and all that, how does this work? you know, because I think most physicians have heard this. I spoke with a prospect last week that they know they should be doing it, but they aren't doing it. So to me, that clearly means either they're confused about how it works or they don't really understand the benefit. So today we're going to talk about how it works.
Chelsea Jones (01:05)
Mm-hmm.
Mm-hmm.
Okay. And I'm going to try to paint a picture. So, so bear with me. Hopefully this works. Hopefully it sticks and makes sense. But I'd like to kind of set the stage by just pretending that your Roth IRA is this big jug of water. Fresh, clean spring water, if you will.
Nate Reineke (01:24)
Okay.
Mm-hmm.
Yeah.
Chelsea Jones (01:44)
And this clean water, we love clean water. This is your post-tax dollars that grow tax-free while they're in the Roth. ⁓ But because you're a physician, you make too much money to put money into your Roth directly. think of that as like your Roth IRA jug is too big to fit under the faucet. It's too tall. So you have to find some other way to get the water into the Roth without putting it directly under the faucet.
Nate Reineke (01:51)
Mm-hmm.
Mm-hmm.
Chelsea Jones (02:12)
And how you could do that is you could take your traditional IRA measuring cup, stick it underneath the faucet, take your traditional IRA measuring cup, pour it into the Roth IRA.
Nate Reineke (02:29)
like it. The only thing that would make this better is if instead of the faucet, we somehow thought of like a filtered water system. But yes, so you have your big jug, you want that jug to be ⁓ to be full. But ⁓ your jug is too large to put it underneath the water source. So you use this measuring cup to transfer it. Okay, then what happened? Like, is there anything else?
Chelsea Jones (02:31)
Okay.
Yeah. Well, that assumes that you're, you're measuring cups empty that you're, which in this case measuring cups, traditional IRAs. So that assumes your traditional IRAs empty and all of your other pre-tax IRAs are empty. Cause the IRS just sees one measuring cup. It doesn't see multiple little measuring cups. They're all one. ⁓ and so some people already have water in there and their traditional IRA, but it's dirty water in this case, pre-tax dollars.
Nate Reineke (03:02)
Mm-hmm.
Mm-hmm.
Mm-hmm.
Chelsea Jones (03:26)
So.
Nate Reineke (03:26)
Okay, so pre-tax
dollars means dirty, like the water's dirty if there is pre-tax dollars in there.
Chelsea Jones (03:33)
Yeah, in this scenario, pretext dollars aren't bad, but when it comes to your backdoor Roth, it definitely muddies it a little bit. ⁓ so say you have your dirty water in your traditional IRA or rollover IRA, cause you had money in there from a previous 401k or 403b. There's a couple of ways that you can fix this. and it's basically going through that filtering process you were talking about. So you could move the contaminated water out of your measuring cup. AKA. ⁓
Nate Reineke (03:40)
Mm-hmm.
Chelsea Jones (04:03)
Roll it or transfer it to your 401k. ⁓ and then pour the clean water in your Roth jug, or you could just dump it all in your Roth and pay a cleaning fee to kind of get the water clean again. And the cleaning fee is taxes. You owe taxes on pre-tax dollars when you convert them or distribute them from your traditional IRA. So you could either kind of separate the dirty water from the clean water.
Nate Reineke (04:18)
Mm.
Chelsea Jones (04:31)
move the dirty water to your 401k or other pre-tax account and then the clean water to the Roth or if you don't want to mess with all of that because to filter out the water and separate contaminated from fresh or clean, takes some work to go through the history, find out what your basis is, if there's mixed basis or you know.
Nate Reineke (04:44)
Yes.
It's almost like
imagine once that dirty water goes in the clean water there is a way but in your mind like to make this really clear. ⁓ Imagine you can't clean it. I mean you can but it's difficult. So why not just get rid of the dirty water somewhere else and so that you don't contaminate your Roth IRA or the jug. You don't contaminate the jug. So you move that somewhere where it belongs.
Chelsea Jones (05:09)
Mm-hmm.
Nate Reineke (05:19)
and which is some other account. Like you said, pre-tax dollars aren't actually bad, but if your only goal is to have a clean Roth IRA, it's dirty.
I like that. So normally I think what we do is we move the contaminated water. Take it and clean out your measuring cup so that you can move clean water effectively every year from measuring cup to urethra or HX.
Chelsea Jones (05:48)
Yeah. And the cases where we would just dump it all in the Roth and pay a cleaning fee, that's if you have like a little bit of contaminated water in your measuring cup. And instead of, you know, dumping just a drop into your 401k and going through all of that hassle, you could just pay the cleaning fee, which is, which may be relatively small if it's a very small rollover balance and then move, move on with your life and
Nate Reineke (06:12)
Yeah.
Chelsea Jones (06:16)
The full rollover balance will grow tax-free moving forward. So there is a benefit and it'll eventually offset ideally. ⁓ So there's a case for both, but most of the time, yep, we just move the contaminated water to your 401k or 403b and then use the measuring cup to dump clean water into your Roth moving forward.
Nate Reineke (06:39)
Good. All right. Please, if you have any questions that you're asking for a friend, you can send them to us, ⁓ podcast at physicianvehicle.com.
Okay, let's get into our regularly scheduled questions.
Chelsea Jones (06:53)
Mm-hmm. Yeah, so the first one is from a vascular surgeon in Connecticut. They said, currently have another 60k of extra money. We will need most of it for maintenance and upgrades on our home in the next two to three years, but we don't need it immediately. With the market the way it is, should we put the 60,000 in as a lump sum to our taxable account?
Nate Reineke (07:14)
Yeah, I'm reading into this question a bit. when they say we have another, I got an answer for this, let me flush out the question. So when they say I have another, that to me signals that they regularly have extra money. Okay. And then when they say two to three years, sometimes that turns into a long time. Sometimes it happens really fast. But the point is two to three years,
⁓ I don't think they're asking this, but just to make sure, ⁓ you should not put money in the stock market if you need the money in the next couple of years. mean, usually at least five years. Give me at least five years. Otherwise, if you have some market turbulence like we're experiencing now, you might lose money. So ⁓ if $60,000 covers the bill for everything and you're going to spend it in a couple of years, ⁓
Chelsea Jones (07:56)
Right.
Mm-hmm.
Nate Reineke (08:11)
really you could put this money aside and just pay those bills. But there's two ways to kind of look at this. I think most often when someone constantly has extra money, I don't love the idea of setting all the money aside for years and years and years because they're going to have extra money again. So, you know, if you're looking to spend half this money in three years from now and you're constantly maybe once a year you have an extra 60 or 100,000.
just spend the next year's 60 or $100,000 of extra money on your project. So I think most of the time, hey, look, you got extra money, let's put it to work, let's put it in your plan, you have this stable job, high income, you'll have the money to pay for your little house projects. Little, maybe they're not so little, but in this case, when I got this question,
It was, you know, the bills were $20,000. We need to do this $20,000 project. Maybe the next year we'll do another $20,000 project. This is just cash flow management to me, where you're setting aside $1,500 a month for household items and then, you know, house maintenance, and then you spend it as you need it. But the part that made me pause was it said, with the market the way it is. So...
Chelsea Jones (09:12)
Mm-hmm.
Mm-hmm.
Nate Reineke (09:36)
We've I've said this many times on the podcast, probably a dozen times. You have, Kyle has. ⁓ Through if you look at the history of the stock market, ⁓ it will it will show you that putting your money in as a lump sum almost always beats out, you know, dripping the money in over time. And that's if you have a lump sum of money. I'm not talking about monthly investing. Monthly investing to me is I invested right when I got it.
Chelsea Jones (09:59)
Mm-hmm.
Nate Reineke (10:06)
I invested every month. But if you come up on a lump sum of money's building up, theoretically you'll do better, at least historically, you'll do better if you put all the money in. ⁓ I have a feeling that when it says with the market the way it is, what they are talking about is the market's going through some turmoil right now. And they're wondering, I think,
In theory, they'd like to invest the money, but what they're really asking is now the right time. ⁓ I believe if they did not need this money, I would have a ton of confidence saying, you'll be fine investing the money right now. That ⁓ is if you hold an investment philosophy of just buying and holding your investments, ⁓ what we're going through right now
Chelsea Jones (10:37)
Mm-hmm.
Mm-hmm.
Mm-hmm.
Nate Reineke (11:01)
in the world with shifting interest rates. ⁓ have volatile energy prices, global conflicts. there's hesitation from everybody. Even seasoned long-term investors hesitate in these moments. And ⁓ I understand that. But if you look at how resilient the market has been for over 200 years, we have seen all of this before.
Chelsea Jones (11:18)
Mm-hmm.
Nate Reineke (11:30)
We've seen political conflict, global conflicts, geopolitical conflicts. We've seen oil crisis, and we have ⁓ certainly seen interest rate changes. So the market's resilient. If you have a long time horizon, which many of the physicians we're speaking to now do, even if you are on the cusp of retirement, you still have a long time horizon with the stocks that you buy.
Chelsea Jones (11:42)
Mm-hmm.
Right.
Nate Reineke (11:59)
So you might not be buying all stocks. You might be buying 50 % stocks. But with those stocks that you're buying, you're not looking to spend the money next year. You're looking to spend the money maybe 10 years from now because you're going to spend the money off of your bonds. So you have a long time horizon. Markets do really well. ⁓
Chelsea Jones (11:59)
Mm-hmm.
Mm-hmm.
Nate Reineke (12:25)
set aside all of the noise that you're hearing, which it's true. mean, these are real things that are happening in our world, but you set aside kind of those news articles that we read and ⁓ throw our days off and throw our mindset off about investing. And you actually look at the fundamentals of what's going on in the market. ⁓ corporations are doing well. I mean, their earnings reports are doing well. So there is a lot of ⁓ ups and downs in the market right now.
Chelsea Jones (12:38)
Mm-hmm.
Nate Reineke (12:54)
I could easily see that continuing, but it doesn't mean that you should leave your money on the sideline forever and try to catch the bottom of the market. That's just not something that people can successfully do over a long period of time. We have seen some turbulence in the last even five years, and even someone like me who has confidence that over a long period of time, my investments will do well, it's still
you know, it's still a little nerve wracking to see the market go down. And ⁓ even in those times, the market has done well. So we don't know when the market will go up or down, but what we do know is that historically the market's done well if you are a buy and hold investor. Now I have a different way to go about this to answer the question directly. If you are nervous,
Chelsea Jones (13:32)
Mm-hmm.
Nate Reineke (13:49)
and you want to minimize regret. This isn't a strategy to make more money in your investments. This is a regret minimization exercise. You could set the $60,000 aside. You have all the money you need for your projects, right? Even if they are two to three years from now and simply increase your monthly saving. So let's imagine that this person has an extra $60,000 every year. You could increase your monthly saving by three, four.
Chelsea Jones (13:58)
Mm-hmm.
Mm-hmm.
Nate Reineke (14:17)
$5,000 a month. And that way, as the market's going down, as it's going up, you're just buying little bits of the market as it goes up and down, rather than watching it potentially go in and see a sharp decrease in value and regretting putting the money in at a new specific time. So this is
Chelsea Jones (14:34)
Yeah. And that's also putting
your money to work when you get it, like you said, and not putting your $5,000 a month into your checking account and then down when the year's over being like, Nate, I have this 60 K. What do do?
Nate Reineke (14:38)
Exactly.
and now you have 120K because you're waiting on the market to do something. Either way, one way the market goes, you regret it because you didn't put the money in. If it goes the other way, you regret it because you put the money in. We want to minimize regrets while continuing to stay with the fundamentals of investing when you have the money. But if there was no reason to have this money on the sidelines, and this person has a 20, 30, 40 year time horizon, I have no issues with investing in the market as it stands today.
Chelsea Jones (14:50)
Yeah.
Mm-hmm.
Mm-hmm.
Nate Reineke (15:15)
For this specific question, set the money aside that you need, invest more monthly, and move on. There's a couple of things you can actually control, and it's not what the market does, but you can control how much you save, and you have a little bit of control on how much taxes you pay as you're investing. So take control of those things.
Chelsea Jones (15:35)
Mm-hmm. Yeah.
And mean, in this case, they're taking control of the risk by setting aside what they know they're going to spend in cash and not, you know, putting that into the market.
Nate Reineke (15:43)
That's right. Yep. Hard to quantify
that too. It's hard to quantify that good decision of setting the cash aside that you need because you're only looking at your balance inside of your investment portfolio. So you're seeing them go up and down. You're not thinking, but I set aside the cash that I needed so I can be a long-term holder of my investments. So this is just ⁓ really good investment hygiene. Set aside the money you need, invest the rest.
Chelsea Jones (15:57)
Mm-hmm.
Yep.
Okay, our next question comes from a cardiologist in Oregon. They said, as I'm entering into retirement, I've been meeting with my insurance agent about my health insurance options. The agent told me that if my income stays under 125,000 this year, I'm eligible for open market subsidies. Is this possible? So, uh-huh.
Nate Reineke (16:31)
Hmm. have, so real quick,
you know much more about this than I do, but we have never gotten this question. So ⁓ it's a really ⁓ thoughtful and good question and I'm kind of excited to hear your answer.
Chelsea Jones (16:40)
Never. Yeah.
Yeah, there's a few things to consider because there's different pieces. So entering into retirement, he's going to need to take money out of his portfolio to live off of. it's like, can I keep my income under 125,000? So then the first thing you want to kind of understand whenever you're trying to understand this as a big picture is, you know, what counts towards the 125,000? Like what is income?
Nate Reineke (17:13)
Can I pause you real quick? Tell me, like, what is the agent talking about?
Chelsea Jones (17:20)
Yeah. So, with what this agent is talking about is the, I believe it's called the advanced premium credit or I don't know if that's the right a word, but it's a premium credit that basically says if you make 400 % of the poverty level or less, you get a subsidy for your health insurance premiums.
Nate Reineke (17:30)
Mm-hmm.
Okay.
Okay. And is it like big money? Can you save quite a bit?
Chelsea Jones (17:47)
Um, in this case, this is, this is a family of four. So this is the, doctor, his wife, and they still have two kids at home. Um, yeah. And so family of four, the insurance agent told them that if they're able to keep their income underneath the 125 K mark, they could say 1500 a month in premiums.
Nate Reineke (17:55)
wow.
Ooh.
Okay, so let me zoom out a little even more. So if a doctor, a cardiologist can somehow support their family of four off of $125,000 a year of income, then they get to save $1,500 a month. So I just...
Chelsea Jones (18:24)
Mm-hmm.
Mm-hmm.
Nate Reineke (18:37)
We're kind of giggling over here because I don't know if that's possible for a cardiologist with a family of four. I don't know if that's possible nowadays, possible for any family of four. But ⁓ what I'm hearing is this is a good amount of savings. Like we can't just ignore that $1,500 a month, that's real money. But the challenge is how in the heck am I going to?
Chelsea Jones (18:54)
Mm-hmm.
Nate Reineke (19:02)
Like am I really going to change my life in a way to where I reduce my income that much? And so you can, okay, so now you roll forward.
Chelsea Jones (19:12)
Yeah, then I mean, that's a good segue into, you know, what is counted as income. ⁓ So specifically what is looked at in terms of income is modified adjusted gross income or Madri, which for most people is just the same as is regular AGI. So. ⁓
Nate Reineke (19:29)
this pre-tax.
Chelsea Jones (19:31)
Yeah, this is pre-tax and it includes things like regular wages, which that's intuitive, but it also includes investment income. So that's dividends, interest, and capital gains. Most people don't realize that realized capital gains are included as part of your income for this. And social security benefits, if you're taking social security, is also included. ⁓ And it's important to know that there's a subsidy cliff that
Nate Reineke (19:31)
Yep.
Chelsea Jones (20:00)
is effective basically starting 2026 because last year as part of you know once when the Affordable Care Act was passed there these subsidies were put into place and there was there was a phase out similar to how you know for certain tax deductions or even Roth IRA contributions if you go over the income limit there's a phase out range
to where it's not just if you make above this dollar amount, you have zero, but if you make less than that, you get the full benefit. And so prior to this year, there was a phase out of those premium credits. And so instead of just 400 % of the poverty level and then nothing, if you make 401%, there was like, if you made 401%, you would get a proportional benefit.
Nate Reineke (20:51)
Mm-hmm.
Chelsea Jones (20:52)
⁓ but it, turned into a subsidy cliff this year. So if you make even $1 more, you lose the entire subsidy. ⁓ and so if you're wanting to pursue this strategy, if, if you're able to, you know, decrease your spending enough, ⁓ you have to be really careful not to even exceed the limit by a dollar. ⁓ but this, you know, whether or not it's possible depends on your portfolio structure. So like, are you taking from your brokerage account?
Nate Reineke (21:00)
Yeah.
Chelsea Jones (21:22)
Do you have RMDs that are coming out of your traditional IRA? Do you have social security? All of those things. like, where's your income coming from and how much of that income can you control?
Nate Reineke (21:29)
Yeah.
Yeah, yeah, a lot of this is out of your control is what you're saying. mean, there's some social security and RMDs, which are required minimum distributions, they be you're forced to take them. They might blow right past 125,000. This is just a whole bunch of stuff you don't really even get to consider. The other thing to consider ⁓ is, you know, there might be some benefits to converting some of your pre-tax dollars.
Chelsea Jones (21:47)
Mm-hmm.
Yeah.
Nate Reineke (22:02)
into Roth, which is going to create income. And so you kind of have to do some math. In this case, mean, $1,500 a month is a lot, but let's say that your subsidy was a few hundred dollars and you want to convert some of your traditional money. You can't do it. this is a lot of analysis and only is relevant if you think your family can live off of less than, you know, $125,000 a year. I don't think this... Yeah, go ahead.
Chelsea Jones (22:02)
Mm-hmm.
Mm-hmm.
Yeah.
Yeah, or I would say if
you're only relying on your taxable income, because if you take 125,000 out of your taxable account, not all of that is going to be capital gains. There's going to be a part of it that is a return of basis, which is not taxed. And so if you're relying solely on your taxable account, no other sources of income, then I could see it be possible. ⁓ But there's usually a pretty small window for that. ⁓
Nate Reineke (22:41)
Right.
Are they
retiring this year?
Chelsea Jones (22:58)
they are.
Nate Reineke (23:00)
This year, okay. It's interesting. We didn't prep for this part, Chelsea, but I'm gonna say it to you anyways. Maybe you can't do this for years and years and years, but I wonder with some careful planning, if one year you could blow past it and take out more than you would spend and get all that taxable income into one year and then the next year, spend off of some money.
Chelsea Jones (23:06)
Sure.
Mm-hmm.
Nate Reineke (23:26)
This gets super complicated because then you're taking money out of the market to try to save a few hundred dollars a month. It's just.
Chelsea Jones (23:32)
I know, or, you know, another way, another thing that I looked at are Roth conversions. Like if you want to give up your subsidy for one or two years to convert, ⁓ and save, save on taxes in the future, but also maybe be able to lower your income in those later years. So that way you're able to stay underneath this, this income level. then it might be worth giving up the benefit temporarily earlier on.
Nate Reineke (23:37)
Mm-hmm.
Yes.
Mm-hmm. Yes.
⁓
That's really good. Yeah. Okay.
So maybe if you structure everything correctly, there will be years where you get it and years that you don't. Because remember, I we just talked about the Roth, it grows tax free. So if there's a year that you can see in the near future where it would be spending off of your Roth accounts for some reason, that could be a year that you do get the subsidy. So it's not all or nothing. And I think this is important to think when you think about tax planning, everybody thinks about this year.
Chelsea Jones (24:11)
Mm-hmm.
Mm-hmm.
Nate Reineke (24:28)
That's not good tax planning. Good tax planning is we're thinking about your whole life. ⁓ People are oftentimes disappointed when some of our tax advice is to put money in a Roth IRA because it doesn't help them this year. It might help them 20 years from now. But 20 years from now, you're going to be thanking yourself for putting money in a Roth IRA, just like this person might when they can get their income down. So good stuff.
Chelsea Jones (24:32)
Mm-hmm.
Yeah.
Alright, and our last question comes from an anesthesiologist in New York. They said, just surrendered my whole life insurance policy and while I'm glad you were able to finally help me break free from the high monthly premiums, now I need to know what to do with the cash I recently got out of the policy. What should I do with the money?
Nate Reineke (25:11)
Yeah. A little backstory on this, just kind of a win. You sometimes whole life insurance policies seem really intimidating. And then other times it's a slam dunk to get out of them. So this anesthesiologist went and got some term insurance, made sure that they were all insuranced up and recovered. And then you looked at the policy and the amount that they put in was more, slightly more.
Chelsea Jones (25:22)
Mm-hmm.
Nate Reineke (25:40)
which is actually not a bad thing, slightly more than the cash value in the account. So in this case, they got the money out free and clear. You've heard us in the past in the podcast talk about gnawing your arm off to get to this money and to get, it really wasn't, I mean, it wasn't that bad. was, they took the money out, stopped paying the premiums, you lose your whole life insurance policy, which they're gonna scare you about. And sometimes maybe if you have it for a long, long time, you should keep, but most of the time it's like,
They're gonna scare you out of you're no longer insured But now you get to take this money and the premiums and go do something with it So this is the part that you can miss Okay, so in theory you're looking at these policies and you're saying like well, it's not just the premium costs It's the opportunity cost as well You know you look in a whole life policy by its nature is not going to be invested very aggressively So you're gonna get a poor rate of return and you're have to keep paying premiums
Chelsea Jones (26:16)
Mm-hmm.
Mm-hmm.
Nate Reineke (26:38)
So imagine you put it in a different asset class that got theoretically better returns, right? And this is all theory because obviously if you put it in stocks, the account could, you know, the value of your securities can go down. But in theory over a long period of time, you get a great rate of return and you're continuing to pour those premiums into a brokerage account, okay?
Chelsea Jones (26:42)
Mm-hmm.
Mm-hmm.
Mm-hmm.
Nate Reineke (27:05)
But the part that people miss is if you just take the money out and spend it, right, you're not going to get a better return. So you have this is really straightforward. Great question. But it's really straightforward. This in theory, I mean, this should go right into your retirement account. You should put it right into a brokerage account, assuming you're filling everything else up, all the tax advantage accounts up, throw it into a brokerage account and start investing for what the money is for. You know, a lot of times
Chelsea Jones (27:11)
Yeah.
Mm-hmm.
Yeah.
Nate Reineke (27:33)
the whole life insurance salesperson will tell you, and again, there's some 1 % of physicians out there that might need whole life insurance. I haven't met them yet, but they're out there. I'm supposed to say that. they'll talk about ⁓ the whole or the life insurance part of this. They're only talking about the benefits. They don't talk about the costs. The costs a lot of times,
not only the fees, but it is just that your account doesn't grow very well. So you move this money into a brokerage account. and the other piece is they'll talk about you can take loans against the policy so you don't have tax-free income. That's really just a loan that you pay yourself back, right? And so if you're taking a loan against the policy, though, then that triggers in my head and every other planner, CFP out there,
Chelsea Jones (28:18)
Yeah, tax free income.
Nate Reineke (28:32)
So are they doing ⁓ a tap dance in order to make it so you can have this money for retirement? Because if this money is for retirement, it shouldn't be invested in short term bonds or cash reserve accounts. It should be invested so that it can grow for retirement. Right? That's just simple. So you want to take this out, invest it like you would for retirement.
Chelsea Jones (28:46)
video.
Mm-hmm.
Nate Reineke (28:57)
and
let it grow and let it outperform that whole life policy. If you take it out and you stick it in a savings account, what was the point?
Chelsea Jones (29:04)
Yeah. Or what I
hear a lot with these policies too is I got it for a tax free inheritance for my children. Like they get this money tax free. But I'm like, yeah, they also, they also get a step up in basis for a taxable account.
Nate Reineke (29:11)
huh, ⁓ I love it. Go, keep going.
Yes, yes. Okay, I need you to preach on this for a second. Keep going, okay?
this is a lot of the value of what you and I have gotten is hearing from people about the, I don't want to say this word, but I'm going to, the tactics that are used to sell something. So let's demystify that tactic. So they're saying,
You know, you buy a $2 million whole life policy. When you die, your kids get it tax free. They get the $2 million. Why does that fail? Like, what's the missing piece of information there?
Chelsea Jones (29:52)
Mm-hmm.
Well, it's the fact that you're paying all of this money into the policy. ⁓ A lot of that money is going to the insurance agent of the insurance company. And if you would have invested that money instead, you could have more than $2 million at the end. Yeah.
Nate Reineke (30:11)
Okay, so let's imagine, just
let's just imagine your investments didn't do all that great. Okay, you got to retirement. It matched it. Okay, which is a really low bar to match that investment return. Okay. ⁓ And now you don't have the life insurance portion. So you need to go get life insurance, right? You need to go get some term life insurance, but
Chelsea Jones (30:19)
Mm-hmm.
Mm-hmm.
Nate Reineke (30:38)
But you have no life insurance. took away that benefit. But and so instead of buying the whole life policy, you invested, you got a poor rate of return and you have two million bucks. But now this is what the life insurance says. Now your kids have to pay taxes on that. Don't you want them to get a tax free inheritance, Chelsea?
Chelsea Jones (30:54)
Yeah, but they don't pay taxes. Well, because of that step up in basis. So basis for all of you listeners, if you don't already know, that is what you originally paid for whatever investment you bought. So if your parents paid or put into this taxable account, $200,000 and over their lifetime, it turned into 2 million. If they sold it when it was 2 million, they would owe taxes on
Nate Reineke (30:56)
Why?
Mm-hmm.
⁓ huh.
Chelsea Jones (31:24)
$1.8 million.
Nate Reineke (31:26)
Yeah. So if
you put in the physician that we're speaking to now, if you put in 200,000, it grew to 2 million and you sold it the day before you died, you would pay taxes on 1.8. Okay. Now assume they didn't sell and the children inherited it.
Chelsea Jones (31:42)
That's right. But if, yeah, let's say instead,
yep, instead your children inherited it, they receive a step up in basis. So instead of their, your children's basis being your 200,000, your children's basis is whatever the market value was the date of death. So 2 million bucks. So they get the 2 million bucks. Their basis is 2 million. They could sell it that day, no taxes and have 2 million bucks in cash.
Nate Reineke (32:01)
Two million bucks.
Mm-hmm.
Yep. And this is some planning toward the end, ⁓ kind of, you know, toward the end of your life. You can do some planning about like, what assets should I spend? Sometimes it's a tax decision. Sometimes it's an inheritance decision. You know, if you can spend out of the accounts that require you to spend ⁓ and leave and preserve some money that gets a step up in basis versus spending on assets that does not get a step up a basis like.
A taxable account is great. It gets a step up in basis and your kids really won't pay any taxes. So a lot of misunderstandings, a lot of tweaking of, ⁓ or I have yet to see a life insurance agent totally lie about this stuff. Like they have licenses they got to protect, but they're not giving you the full picture. And that is usually what makes people ultimately choose not to buy it if they get the full picture.
Chelsea Jones (32:45)
Mm-hmm.
Mm-hmm.
Nate Reineke (33:09)
You know, there are some people that still buy it either way because there are some benefits to these things. But generally for the average physician, you don't need to worry about, ⁓ you know, your taxable account or your extra money, your kids paying taxes on it. What you need to worry about is dying early and therefore you should buy life insurance until you are self insured. So buy life insurance until and have the term be until you retire.
Chelsea Jones (33:12)
Mm-hmm.
Mm-hmm.
Mm-hmm.
Mm-hmm.
Nate Reineke (33:37)
Okay, thank you everyone for listening. If you liked this episode, please be sure to subscribe and leave us a rating wherever you may be listening. ⁓ Spotify, Apple, anything. We're on all of them. If you'd like to work with us, you can visit physicianfamily.com to schedule an interview. And if you aren't ready for that, you can send us a question at podcast at physicianfamily.com. And until next time, remember, you're not just making a living, you're making a life.
