Nate (00:00)
Hello, physician, moms and dads. I'm Nate Renneke, certified financial planner and primary advisor.
Chelsea Jones (00:07)
And I'm Chelsea Jones, also a certified financial planner and primary advisor here at Physician Family Financial Advisors.
Nate (00:15)
Okay, Chelsea, we have asking for a friend question today and some I think at least one maybe that was for next time. We have a lot of housing questions coming up. And they're different than maybe the
Chelsea Jones (00:30)
Yeah.
Nate (00:31)
last couple of years because of the housing environment and everything. So that and three other questions to get to. You ready?
Chelsea Jones (00:39)
Let's do it. So the asking for a friend question this week is what does vested mean? It's all over my HR packet and I've never actually asked. So this this is a great question. It's one of those things like you see that word all the time and there's like context clues. You kind of think you know what it means, but you've never actually looked it up. So let's clear the air today.
When it comes to benefits, specifically retirement benefits, vested means that you have a right to the money that it's referring to. so this is usually in the context of employer contributions. So say you have a 401k and you get a 3% match from your employer, but there's a vesting schedule that applies, and you get
20% vested per year over your first five years of employment. that means each year you work, you're entitled to receive twenty percent of the money that your employer puts in. So if you only worked for two years and you were 40% invested or 40% vested, if you were to, you know, switch jobs and transfer this 401k.
You wouldn't be able to take all of the employer contributions. You would only be able to take forty percent of them.
Nate (02:08)
Right. Yeah,
Chelsea Jones (02:09)
So
Nate (02:09)
I like that. The the right to the money. So, if you leave before you're fully vested, in that example after until five years, some of the money would go back to the employer. And
Chelsea Jones (02:21)
That's right.
Nate (02:22)
the way to think about this is it's simply a way, much like all of your benefits, simply
Chelsea Jones (02:27)
Mm-hmm.
Nate (02:27)
a way for your employer to encourage you to stay. So,
Chelsea Jones (02:30)
That's right.
Nate (02:32)
five years, sometimes there's a three year cliff, meaning you have to stay for three and then
You're vested sometimes there's a one year cliff, sometimes you're a hundred percent invested vested from day one. But
Chelsea Jones (02:41)
Mm.
Nate (02:43)
you have to be careful with that it and to look at that if you're considering changing jobs.
Chelsea Jones (02:48)
Okay, our first question I don't know what kind of doctor it came from, but it came from a doctor. They said we're considering upgrading our house f from a one million dollar home to a two million dollar home. being ten to fifteen years from retirement, is this a bad idea?
Nate (03:07)
This has been happening over and over recently.
Chelsea Jones (03:10)
Yeah. I actually got a question
similar to this too the other day.
Nate (03:14)
I've probably seen this like big jumps four times this year. which I haven't I hadn't seen it before that. So I don't know what's in the water, but something. and is this a bad idea? Is always a funny way to frame the question because
Chelsea Jones (03:34)
Mm.
Nate (03:35)
obviously it depends. But
There's something that most people who are in this situation, there's a couple things that they miss. most of the time what they think of is four 10 to 15 years away from retirement usually means late 40s. And when you're buying your first house, even your second house, you're not really all that concerned. At least physicians aren't all that concerned.
with when they're going to pay the house off. Because in
Chelsea Jones (04:10)
Right.
Nate (04:10)
your mind, if you're buying a house at 35 and you plan to retire in your mid sixties, you know that with a 30 year mortgage, you're going to be pretty close to paying it off without even trying. You're just going to make your normal payments. And what you and you go through life like that for maybe your first couple houses. And then you're forty five and you're like, hey, I want to do that again.
Wanna upgrade my house. I think it's time. Kids are getting bigger, older. I want some more space between them. Or, you know, I just I'm made great money for 15 years and it's time. I really want a a nicer house. And so first thing that I see is can we afford this payment? That's generally what physician families go run to. And while that is important.
The question is like which payment? A 30 year or a 15 year? And
Chelsea Jones (05:09)
Right.
Nate (05:10)
how much will this house pinch your budget in the years where you're finally making fantastic money? And maybe you funded college or most of college. And right when you're about to get like a big jump in excess income, you're trying to decide, like, is my is a new mortgage gonna soak it all up again?
Chelsea Jones (05:31)
Mm-hmm.
Nate (05:32)
And so,
Is it a bad idea? Depends to me entirely on one cash flow, but cash flow based on your plan. When are
Chelsea Jones (05:41)
Mm.
Nate (05:42)
you are you going to be able to pay this house off in 10 to 15 years? And if you even made a lot of progress, let's say you have $500,000 that you owe on your million dollar house right now. In this example, it's one to two million. If you owe $500,000 and you roll the equity into the next house, now you owe $1.5 million.
And
Chelsea Jones (06:04)
Mm.
Nate (06:04)
excluding interest, which is not even a reasonable thing to do 'cause interest is really high right now, you have to pay a hundred thousand dollars a year toward the property in order to pay it off in fifteen years, and a hundred and fifty thousand dollars a year toward just principal
Chelsea Jones (06:21)
Yeah.
Nate (06:21)
to pay it off in ten.
Chelsea Jones (06:24)
Yeah. And not to mention my retirement planner brain is like how much are their property taxes gonna increase their insurance?
Nate (06:29)
Yeah. All that's going on.
Chelsea Jones (06:31)
'Cause that carries into retirement too, which affects their whole plan.
Nate (06:34)
Yeah. I see this pretty
often with younger physicians. They will
Chelsea Jones (06:39)
Mm-hmm.
Nate (06:40)
come in and they'll be like, I'm gonna live on nothing so that I can, you know, have a whole bunch to save. and, you know, I I couldn't imagine spending fifteen thousand dollars a month in retirement. And so they start their plan off with eight. And you and I are sitting there like, Let's bump that up a little bit.
I've seen this movie too many times to think that you're actually going to spend eight. And so
Chelsea Jones (07:07)
Yeah.
Nate (07:07)
sometimes we can. But what you've effectively done is you've raised property taxes, let's say by almost double, and you've raised maintenance cost. So if a million dollars is being added to your mortgage, what's being added to your retirement spend is maintenance on an extra
million.
And taxes on an extra million. And the maintenance on an extra million on average, this isn't even like I'm not making this up. This it's one to two percent is the the maintenance on whatever your house is worth. So if it's now worth two million instead of one, and if we wrote the plan, we would have included the maintenance on the one the original one million dollar house. So it's increased by a million, then you're now spending an extra
$10,000, $15,000, $20,000
Chelsea Jones (07:59)
Centas Yeah.
Nate (08:00)
a year on maintenance. So your property taxes have gone up, your costs have gone up in retirement. Probably, let's say, $20,000 a year is being added to your retirement plan. And now you need to be able to spend that much extra in retirement. Is
Chelsea Jones (08:17)
Mm-hmm.
Nate (08:17)
this bad? I don't know. How much do you value having a $2 million home? I personally said this many times.
It's easy for me to say this when it comes to houses. I like a nice house. I love a
Chelsea Jones (08:33)
Mm.
Nate (08:33)
nice house. I love being in my house. I work from my house. My kids are growing up here. I want a nice house. It's worth it to me.
Chelsea Jones (08:41)
Mm.
Nate (08:42)
I don't care too much about cars. I don't care too much about a lot of things that other people care about and spend money on. So if all of the value that you're putting into your spending is in your house.
Maybe it is worth it. But a lot of physicians in this position, because if you're buying a two million dollar house, you're probably above average in earning as a physician. They're putting a lot of money into their kids. And it's like, well, you have to stop piano lessons to buy this house. Is that really worth it? We have to stop all the tutoring and you know, there there's there's so many things that go into this. So could you s pull it off? Maybe if you extended retirement. But the number one thing is to make sure this thing is paid off before you retire.
And that you've accounted for it in your sp monthly spending, not just your mortgage. The worst mistake you can make is just to say, well, the 30-year mortgage is gonna be this, and I think we can we can afford that. A good way to prep for this would be, you know, if we have to put an extra $10,000 a month toward this house, maybe spend six months seeing if you can save an extra $10,000 a month. You
Chelsea Jones (09:53)
Mm-hmm.
Nate (09:54)
know, this is like the classic example.
You might have gotten from your parents before getting an auto loan. Well, I don't know, Nate, can you save five hundred bucks a month?
Chelsea Jones (10:04)
Hm. Yeah.
Nate (10:06)
And try to do that. And then at the end of a year, when you do you have six thousand dollars in your savings account? Was that worth it for the car? Yes or no? And if it was, maybe you can. If it was painful, maybe you should save a little more.
Chelsea Jones (10:25)
Mm.
Nate (10:25)
You know, I just I just got off the phone with a family that's been doing this for years. and I just wrote our newsletter about this too, because I not even aside from this question, I got
questions about housing too, about about paying for or building a new build. And everybody that's doing this the right way is saving tens of thousands of dollars a month for this upgrade for years.
Chelsea Jones (10:51)
Yeah.
Yeah.
Nate (10:54)
The the tone on that during
Chelsea Jones (10:56)
Mm.
Nate (10:56)
that call was entirely different. It was, Wow, I've seen you save ten thousand dollars a month for this house for three years. I think you can afford it. Because I'm
Chelsea Jones (11:05)
Yeah.
Nate (11:06)
watching you afford it and I'm watching you continue to save. And you can watch yourself continue to save and see
if how it feels.
Chelsea Jones (11:13)
Okay. The next question comes from an internist in Minnesota. They said I've been doing a backdoor Roth for three years and just learned that I have an old rollover IRA sitting there. Did I mess this up?
Yeah, did I mess this up? Technically it's not squeaky clean, you know.
Nate (11:31)
Yeah, right.
Chelsea Jones (11:35)
how much it's messed up or how big the impact is kind of depends on how big the rollover IRA is because of this thing called the Pro Rata rule. So ProRadder rule says all pre tax IRA money is in one bucket. Doesn't matter if it's in multiple accounts, if it's in a pre tax IRA, it's considered
when you convert. and so you can't just cherry pick your non-deductible contributions to convert. It comes out pro rata in the big pot of IRA money. or the small pot if it's a small rollover IRA. how to fix it is you can follow form 8606 or see if you have your tax preparer has filed a 8606.
Nate (12:22)
Mm-hmm.
Chelsea Jones (12:23)
That's the tax form that tracks your IRA basis. So basis is gonna be your after-tax contributions that you make. And anything that's not that basis is pre-tax money that would be taxable when converted. You would owe taxes on that conversion. so the way to fix it moving forward is you just you move that rollover IRA into another pre-tax account.
Likely your 401k or 403B at work. you roll that money into there. once it's moved, your IRAs are empty until you make non-deductible contributions moving forward. and when it's empty, you just gotta contribute and then convert and no additional taxes are owed on that conversion because they're after tax or non-deductible contributions. So, and as long
Nate (13:16)
Mm-hmm.
Chelsea Jones (13:19)
as you do that.
that transfer of the old rollover IRA into your four one K before the end of the year, it it counts as being moved out for the whole year. Yeah. So
Nate (13:27)
For this year. Yeah. Yeah.
You kind of have a a bit of a mess to clean up from two years prior. And yeah, we can help with that too, by the way. we've seen this many times with brand new families that join us and we can track down your eighty six six and the basis and all that. But there's also a lot about written about this online. it's a common it's a very common problem.
That people run into.
Okay,
last question for the day.
Chelsea Jones (14:00)
All right.
Last question comes from a hospitalist in Texas. They asked, I picked up moonlighting shifts this year and nobody withheld anything, I assume in terms of taxes. I
Nate (14:12)
Mm-hmm.
Chelsea Jones (14:13)
have forty eight thousand sitting there and April is coming. What do I do now?
Nate (14:18)
Yeah, this is this is a bit complex or it sounds complex, but I actually
Chelsea Jones (14:24)
Mm-hmm.
Nate (14:25)
think that this specific person is close to safe, hopefully. So essentially this is how it works. You have to withhold I'll I'll speak in broader terms. You have to withhold close to enough money on your taxes to avoid paying penalties.
Chelsea Jones (14:48)
Mm-hmm.
Nate (14:49)
And that is pretty easy for W-2 employees if all you have is a W-2 income, because you're gonna be close to whatever you paid last year. And there is something called a safe harbor rule where you avoid penalties if you pay either ninety percent of what you owe this year or
110% of what you owed last year. Okay. And getting that just right doesn't, I mean, you still might owe taxes at the end of the year. You might have a tax bill, but if you're within that range, 90% of what you owe this year or 110% of what you owed last year, you won't owe penalties. You'll just have a bill. You might have a bill. So for this person,
They pro I mean forty-eight thousand for a hospitalist, I imagine you're probably close to ninety percent of what you owed last year. You had this new income, but it might only
Chelsea Jones (15:58)
Mm-hmm.
Nate (15:58)
be twenty percent of your overall income. I don't know for sure, but you know, that's generally how it works for physicians. Like you have this great W-2 income and you have some additional side income. but the way to get it just right is to get with a CPA.
Calculate your quarterly taxes and pay your taxes quarterly. Otherwise, that's when you're going to run into issues. Now, next year, this becomes harder to do because that whole hundred, 110% of what you owed last year, like last year, this $48,000 will be on your taxes. So you have to account for that. And you certainly need to do quarterlies by that point. but
At this point, you there it you should probably do the calculation, right, of how much you should owe, get with the CPA and figure out how much you should owe. And have a little workaround. Okay.
Chelsea Jones (16:57)
Mm-hmm.
Nate (16:57)
This is a a great workaround for people who haven't been doing quarterlies and they want it to be spread out across the year to avoid penalties. If you withhold money on your W-2 income, the g the federal
the IRS counts it as if it has been you have been withholding it throughout the year. Okay, so if you screw this up and let's say you make
$30,000 a month, right? Or $25,000 a month. You can go into your HR system at work, have them withhold the whole $25,000, and it will be show as being spread out with the IRS across the whole year. So you missed the quarterlies. You're gonna want to do the quarterlies so that you can not have no paycheck in December. But really you could.
Have no paycheck in December and spend out of this 48,000 that's sitting in a savings account. And so you
Chelsea Jones (17:59)
Mm-hmm.
Nate (17:59)
could be safe this year, even if you're behind, like you go with a CPA and they say you're behind, and you can't go back and make retroactively make your quarterly tax payments. You could just withhold extra on your final tax final paycheck. That makes sense.
Chelsea Jones (18:14)
Mm-hmm. Yeah.
Nate (18:16)
This is kind of complicated to say on a podcast. It's like better written down on paper, but did did you follow that, Chelsea?
Chelsea Jones (18:22)
I followed it. Yeah. I mean 'cause it's either you write a check to the IRS for quarterly
Nate (18:28)
Mm-hmm.
Chelsea Jones (18:28)
payments or you can have extra money withheld for your from your W two. There's two ways of of paying the bill. So if you're
Nate (18:33)
Yes. And the and the W two
is a great workaround. Most people should be doing quarterlies just to be like to keep kind of keep it separate. It's cleaner.
Chelsea Jones (18:42)
It's clean, yeah.
Nate (18:45)
but i if you're
Chelsea Jones (18:46)
If you're in a pinch.
Nate (18:47)
if you're in a pinch, yep. Yep. I've seen this I I I've actually helped people do this before. So y you're gonna be okay hospitalist in Texas, but you should get a CPA now. They're about to get busy and
If you have a great tax preparer, they're probably just about to or they'll be done by the time this pop podcast comes out. They'll be done with their October filings because people who file an extension
Chelsea Jones (19:15)
Mm-hmm.
Nate (19:15)
are done in October. So you if you're looking for a CPA, you can get them now and ask them to do some of those calculations with you and avoid any penalties. And then you'll have your CPA for twenty twenty-seven that can help you do quarterlies.
Chelsea Jones (19:30)
Mm-hmm.
Yeah.
Nate (19:33)
Okay, we had one more question, but I think we're gonna skip it this week. We'll keep it to a shorter episode. so that's it for today. Thank you everybody for listening. If you liked this episode, please be sure to subscribe. we release a new episode every week. You can leave us a rating wherever you're listening. and if you'd like to work with us, you can go to physicianfamily.com to schedule an interview. But if you're not ready for that, we always welcome questions for the podcast.
Podcast at physicianfamily.com. Until next time, remember, you're not just making a living, you're making a life.
