What Doctors Need to Know About 529 Plans

Transcription – WCI – 485
INTRODUCTION

Dr. Jim Dahle:
This is the White Coat Investor Podcast, where we help those who wear the white coat get a fair shake on Wall Street. We’ve been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.

Welcome to the White Coat Investor Podcast. We’re glad you’re here. Today’s episode is brought to us by SoFi, the folks who help you get your money right. Paying off student debt quickly and getting your finances back on track isn’t easy, but that’s where SoFi can help. They have exclusive low rates designed to help medical residents refinance student loans. That could end up saving you thousands of dollars, helping you get out of student debt sooner. SoFi also offers the ability to lower your payments to just $100 a month while you’re still in residency, and if you’re already out of residency, SoFi’s got you covered there too. For more information, go to sofi.com/whitecoatinvestor. SoFi student loans originated by SoFi Bank and a member FDIC. Additional terms and conditions apply. NMLS 696891.

All right, we appreciate you. We’re glad you’re here. Your kids are probably back in school. Summer’s kind of over. We hope you had an awesome summer. I had an awesome summer. July was particularly packed with trips. Did a bunch in June, and August was a little bit of catching up. It turned out my son was out of the country, doing, you know, kind of a service opportunity in Ecuador, which I hope he just has an awesome experience. By the time you’re hearing this, well, I’ve heard how awesome it is, but when I’m recording this earlier in the month, I haven’t actually heard from him in over a week, and that’s part of the experience. You’re not connected with home; they take your phone away when you get there, and you interact with the other members of the group. They’re all 16 to 18 years old, with obviously some adult supervision, and I think he’s helping build some classrooms in a school in Ecuador. So I hope it’s just a stupendous opportunity for him. It’s kept us from doing a little bit of playing together, you know, during August. But I’ll be coaching his hockey team again this year, so we’ll get plenty of time together.

At any rate, if you had an awesome summer, or whether you were in the hospital working your butt off, or in your clinic working your butt off, thanks for what you’re doing. We’re grateful to have you as a member of the White Coat Investor community. And just by listening to this, you are a member. You know, sometimes I have people ask how to join, and I’m like, you joined when you started medical school. You joined when you listened to a podcast. There is no membership fee. There is no membership application. We want you in the community. We’re grateful to have you here.

CORRECTION

Dr. Jim Dahle:
Let’s start with the correction, as more and more of these episodes seem to be starting out with. I don’t know if it’s because we’re tackling more complicated subjects, or whether it’s because I hit my head or something. I make more mistakes. I don’t know, but this one’s good, I think, for a little extra information. This is about our Milestones to Millionaire episode number 286. The caller had qualified to have student loans paid for by the Texas Physician Education Loan Repayment Program, and they said, this is good because it’s not my mistake; it’s somebody else’s mistake, that only primary care physicians qualify for that. That’s not the case. Emergency docs also qualify. If you otherwise meet the program’s eligibility requirements, that is one of the specialties that qualifies. So this is a doc who wrote in and currently works full time in an ED in a health professional shortage area in Texas in the third year of the Texas Physician Education Loan Repayment Program, and several of this doc’s colleagues have also qualified and are participating. There is a URL you can get more information on that. We’ll include that in the show notes. Take a look if you are in Texas and think you might qualify for this health professional shortage area loan repayment program. There is more out there than just PSLF.

UNDERSTANDING 529S

Dr. Jim Dahle:
Okay, speaking of paying for school, we’re going to be talking a lot about paying for school today. We’re going to be answering a lot of questions about 529s. So why don’t we start, before we get into your questions, just talking about the basics of 529s? Okay, a 529 is a type of education savings account.

Now, it used to be, before 529s were put into place, and they’re named after the section of the Internal Revenue Code, by the way, as most of these numbered plans are. That’s why we have this alphabet soup: 401(k), 403(b), 457(b), 529. Right? They’re all named after sections of the IRC code. But before this, there were accounts called the Coverdell Education Savings Accounts, or ESAs, and the downside of those accounts was that you couldn’t put a lot of money into them, number one, and number two, there was pretty much never a state tax break on contributions into them.

Well, the 529 program fixed that. Basically, the federal government came out with this, but the programs had to be run by the states, so there’s at least one 529 plan in each state, and they compete with each other for your dollars, right? So they’re continually lowering their fees. They’re continually getting better investments. They’re continually, you know, making things more clear on their website because they want you to send your dollars to them instead of, you know, using your state’s or some other state’s.

Now, a lot of times it makes sense to use your state’s, at least for the first few thousand dollars you put in there, because you’re also getting a state tax break, highly variable by state, by the way. There’s a blog post on the website. If you look up “Which 529 Should I Use?” on the website, it’ll help you choose. But the answer, a lot of times, is the one in your state because there’s a state tax break for using it.

But basically, if you want to save some money for private high school, private elementary school, or college, or a similar, you know, vocational school or grad school, med school, whatever, this is a great account to save it in. And the reason why is you might get a state tax break when you put the money in. It might be a credit in your state, might be a tax deduction, and then it grows tax protected, like we talked about a few weeks ago when Tyler Scott was on. It grows faster when it’s in a tax-protected account. You might get some extra asset protection on that money as well. I’m not sure I’ve actually ever heard of anybody losing 529 money in a lawsuit. If you know somebody that’s happened to, I’d be interested in hearing about it. But, you know, probably some asset protection, definitely some tax protection as it grows. So it grows faster because it’s tax protected.

And then when the money comes out, like a Roth IRA, like an HSA used for health care, it comes out tax-free. So all the gains on that money that you have are totally tax-free. So if you put money in there when the kid’s one year old and you take it out their senior year of college when they’re 23 years old, right? You got 22 years of tax-free growth. That has probably tripled since you put the money in. Right, you put $5,000 in when they’re one. That’s now $15,000, and you pay no taxes on that $15,000. Pretty awesome benefit.

So if you need to save for college, or, you know, you can use them for K through 12 as well for private K through 12, use a 529. Even if you’re going to take it out next month, you might want to run it through a 529 just to get that state tax break. But obviously, the longer you leave it in there, the better.

And if you have too much money saved, which is not an insignificant problem that a lot of white coat investors have, and in fact, our family is going to have because our kids so far have all chosen inexpensive college, if it’s overfunded, you can just change the beneficiary. You can change it to a sibling, but the really great hack here is you change it to a grandkid, to one of that kid’s kids. So when will my, you know, 24-year-old college graduate that didn’t use all their 529, when will their kid go to college? Well, maybe they have a kid at 30, maybe that kid starts college, you know, 18 years later. So what is that, 24 more years? The money is going to triple again.

So that $5,000 you put in when they were one, that’s $15,000 when they, you know, graduate from college, now becomes, what, $150,000 by the time their kid starts college, right? So you’ve now got $145,000 of gain that nobody pays any taxes on. Right? This is the benefit of 529s.

Now, I wouldn’t go too crazy overfunding 529s. Some people have hundreds and hundreds and hundreds of thousands of dollars in 529s, and I think they’re best used for education. If they’re not going to be used for education, you know, the money comes out and you pay ordinary income tax rates on it, not even long-term capital gains rates, plus a penalty. So I don’t think it’s a great place to save non-education money, but it’s a great place for education money.

Okay, so those are the basics of 529s. Right when you get to college, you start pulling money out. It’s a great trial run for your retirement. You get used to using the money you saved for a purpose to actually pay for that purpose. We’ve started these for all of our nieces and nephews, so I’m pulling money out of like eight 529s right now, and it’s pretty easy. The kid texts me and says, “Hey, send me $4,328.” I Venmo them $4,328. Then I log into the 529. I pull $4,328 into my checking account, and then, you know, obviously, that’s where Venmo pulled the money from, was my checking account, and then they send me a receipt for some expense, rent or tuition or whatever, for $4,328, and I save that in a file on my computer in case the IRS ever asks for it.

That’s how you use a 529. It really is that easy. You do need to have the receipts in case you get audited. I’m not sure I’ve actually heard of anybody getting audited, but it could theoretically happen. They do tell you to save the receipts, so make sure you do. But it’s not that hard to use. They’re great accounts. If you’re using one in a good state, which lots of them are, and more are becoming every year, you know, the expenses are very low. You’re only paying, you know, 15 basis points or so to get that tax-protected growth. It’s totally worth it. Use 529s. They’re awesome.

USING APPRECIATED INVESTMENTS TO PAY FOR COLLEGE

Dr. Jim Dahle:
Okay, let’s answer your all’s questions about 529s. This one by email.

Listener Email:
I have a question about tax-efficient college funding that I would love to hear answered on the podcast. I emailed rather than use the SpeakPipe to get all the context in here.

Dr. Jim Dahle:
I guess that’s what happens if you’ve got more than a 90-second question.

Listener Email:
Okay, so for context, I have 529s, so about 20% of the funds I have for my kids for college.

Dr. Jim Dahle:
That’s interesting. That seems like a relatively low percentage.

Listener Email:
The other 80% I have in a brokerage account. I originally planned to set up UTMAs for this, but slacked off and didn’t do it.

Dr. Jim Dahle:
So it sounds like it’s in, you know, the parents’ brokerage account.

Listener Email:
I was given a lump sum of cash for college and was encouraged to live cheaply, get scholarships, and work while in school, so I could keep what was left over. I stretched this money through college into medical school and purchased an engagement ring with the somewhat modest funds I was given through my frugality and hard work. My problem with 529s was the push to use it on qualified expenses or get penalized nature of the account, as it encourages liberal spending on education expenses over frugality.

Dr. Jim Dahle:
Well, maybe. I guess if the kid doesn’t value the opportunity to already have their college savings done for their kids, obviously now it may be able to get rolled into Roth accounts. It’s less of an issue. Again, that’s only $35,000 total that can go to Roth accounts. It’s not an escape hatch for somebody with a $200,000 overfunded 529.

Listener Email:
I wanted to give my kids money in the same way to judge how they manage money, though maybe yearly lump sums rather than the total upfront. If they spend the first year’s allotment, I’m not allowed to say this phrase on the podcast anymore. If they spend it on things they shouldn’t spend it on, I’ll know to cut them off. I heard you talking about gifting legacy investments to people in lower capital gains brackets on the podcast the other day, and it triggered me to think about ways to flush out capital gains from my brokerage account to my kids to pay for college. Here’s my question: For high-income parents holding appreciated index fund shares, what’s the best way to flush capital gains to children in the 0% long-term capital gains bracket to help pay for college expenses while staying within gift tax limits and avoiding the kiddie tax? In other words, how can parents structure gifts with timing, ownership, failing dependent status support tests, so that kids can sell appreciated assets and use the proceeds for tuition at minimal tax cost? I was thinking this might be possible by gifting the most appreciated shares in my brokerage in the year before college, letting the child sell and use the funds later for their own expenses, so that in those years they provide over half of their own support and therefore aren’t claimed as dependents and subject to kiddie taxes. Thanks for all you do. I’d love to hear your take on this strategy on the podcast.

Dr. Jim Dahle:
Okay, well, this is what happens if you didn’t use a 529. You got to do things like this. Okay, you should put more money in the 529, and then you don’t have to do this gifting shares thing. You know, even if they got to pull the money out and pay, you know, income tax on it and pay a penalty on it, they might still come out ahead.

But anyway, okay. The bottom line is there is no 0% long-term capital gains bracket for the kid if they’re still your dependent, meaning you’re providing 50% or more of their support. Now, we talked a few weeks ago that there’s some gray area about this as to whether the 529 is their money or your money. You know, for state tax purposes, it’s already their money. For income tax purposes, it’s still your money. It’s gray, right? So nobody knows if that counts. You could also certainly argue that only the money that’s going towards their living expenses is really the support, and the tuition money is separate from that.

But the bottom line is, if you’re gifting them huge sums each year during college, they may still be your dependent, and so they’re going to be paying kiddie tax on that, and that’s going to look like you’re supporting them with these huge gifts every year. So, yeah, I think you’re barking up the right tree that you want to transfer this money to them earlier.

Frankly, if it’s money you’re planning to give them earlier, you should have given it to them earlier, right? You slacked off and you didn’t start the UTMAs. You should have started. So now, by giving them any more than $19,000 a year, you got to file gift taxes. That’s your penalty for not doing the UTMAs, slacking off. You got to do a 709 form every year. It’s probably fine. You probably won’t have an estate tax problem, so it’s okay to use up some of your exemption. But now you got to fill this tax form out, which is kind of a pain. And if you’re too big of a slacker to start a UTMA account, maybe you’re too big of a slacker to fill this out, right? So I don’t know, that could be an issue.

But you’ve recognized the issues you’re dealing with. They’ve got to be financially independent of you, or they’re still paying kiddie tax at your tax rates, and you’ve also got to deal with the support issue, right? The support issue and the dependent issue and the kiddie tax issue. You’re just a lot better off. Whatever you think you’re going to spend for college, put it in a 529. You don’t have this issue, okay?

But that’s about as complicated as it is, right? Consider the gift tax implications. Be aware of the kiddie tax. And then, in general, if you’re trying to flush shares out of your account, give them the lowest-basis shares. That’s usually the stuff you’ve owned the longest, right? But you can go into your brokerage account and take the view that allows you to look at, you know, unrealized gains and make sure you’ve owned it for at least a year. And if it’s got the lowest basis possible, those are the ones you give to them to have them use their 0% tax bracket on.

Be a little bit careful about this. I got burned on this. You know, we rail against over-optimizing on this podcast all the time. But I did some over-optimizing at the end of last year with my daughter’s UTMA account. I’m like, you’re in the 0% bracket. Let’s update your basis on a bunch of this. And so we did. We sold a whole bunch of shares, bought some other shares. We basically tax-gain harvested.

What happened, though, is yes, we updated her basis for federal tax purposes, but not for state tax purposes. So she actually owed state taxes on all those gains, and I didn’t think about that before I did it. And so I felt a little bad, and I actually paid taxes for it, so she didn’t lose any money on it. And maybe that’s economic outpatient care. I don’t know, but I did it anyway because it seemed like the right thing to do.

And now maybe she ends up selling those shares in the 0% long-term capital gains bracket anyway, and that ends up being taxes that never needed to be paid. So be careful with stuff like that, and recognize that there’s also some state taxes due, and they do not have a 0% long-term capital gains bracket in many states, including the great state of Utah. Hope that’s helpful to you.

QUOTE OF THE DAY

Dr. Jim Dahle:
Okay, our quote of the day today comes from Peter Lynch, who said, “Know what you own and know why you own it.” That’ll make it a lot easier to stay the course with your investing plan long term.

529 TO ROTH IRA ROLLOVER RULES AND LIMITS

Dr. Jim Dahle:
Okay, next question. Also a 529 question, comes in via email.

Listener Email:
I have only one child so far. I’ve been contributing to the 529 for the past couple of years since the birth of the child.

Dr. Jim Dahle:
Boy, you white coat investors start early. I don’t think we started a 529 until my oldest was at least four, and we didn’t put much in there at all until she was probably getting close to high school. Anyway, he goes on.

Listener Email:
I know you can transfer up to $35,000 from a 529 that’s been open for at least 15 years to the Roth IRA. My question is: After 15 years, can you transfer $35,000 to one child’s Roth IRA, change the beneficiary to someone else, another child, niece, nephew, or even self, spouse, and make another transfer of $35,000 to the Roth IRA, or is the Roth IRA transfer limited to once per account, regardless of beneficiary change? If it is limited to once only, is it possible to roll over the remaining funds to another account to be transferred to the grandkids, so they can also have an option to transfer to the Roth IRA in the future? What are the other details to consider regarding this $35,000 Roth IRA transfer limit?

Dr. Jim Dahle:
Oh, you stumped me! I don’t know the answer. I mean, I know most of the answers to your questions here, but I don’t know for sure if you have an account open for 15 years, and then you put $35,000 into one kid’s Roth IRA, and then you change the beneficiary, if you can immediately, if you’ve got another kid that’s no longer in school, transfer $35,000 into their Roth IRA. I don’t know that, or if you’ve got to wait another 15 years. I’m not sure the IRS has actually said that.

But boy, if you care about the answer to this question, you’re really over-optimizing and maybe doing this a little bit wrong. I don’t know why people want to have one 529 account. I have 33 529 accounts. Right, one for each of my kids, one for each of my nieces and nephews. As they graduate, as they withdraw it all paying for college, I close the accounts. And if they graduate college and still own it, I make them the owner, right? And then it’s not my account anymore, and I don’t have to worry about it. I don’t want to have 33 accounts forever.

But my point is, if you’ve got two or three or four kids or whatever, why are you trying to do this in one account? It is not hard to open another account for each of these kids. Trust me, it is not going to add dramatic complexity to your life. Just open one account for each kid, and if you need to transfer money from one to another, you can do that. That’s fine. That’s totally allowed. But then the account’s been open for 15 years for each of them, and you don’t have this issue, right?

And of course, for the, you know, grandkids, when your kid graduates from college and they know they’re not going to spend any more on education, and maybe now they’ve had a kid, that’s the time to change the beneficiary of the account to the grandkid, right? Because there are some, you know, gift tax implications of changing those beneficiaries to the next generation. So you want to do it sooner rather than later before it grows anymore. But plus, you start that 15-year clock because, like I said, I don’t know if the clock’s already been run, but I don’t think it has. I think when you open a new account, the 15-year clock starts over, is my best guess. And so you want to start it as soon as possible, just in case they want to use this Roth IRA exit possibility from the account.

And the truth is, I bet nobody’s watching. Right, the IRS has better things to do than to go look at how long has this account been open? They’re probably going to ask you on the tax form, has it been open for 15 years? And you check yes, and nobody’s going to come back and say, “Well, that account was open for 15 years, but this account wasn’t open for 15 years.” As a general rule, the IRS doesn’t care about stuff like that. Okay, you’re doing your best, and they’re not going to, you know, break your kneecaps over this sort of thing.

Okay, don’t forget, those of you who are students who are interested in having some free money, we’re giving away some free money. Okay, you have to be enrolled full time in a brick-and-mortar professional school. Okay, but you can apply at whitecoatinvestor.com/scholarship. You have until August 31 to submit your application. Okay, if you’re an hour over, maybe we won’t notice. But if you’re a day over, we’re going to close the applications. So get them in there if you want to apply for the scholarship. Again, whitecoatinvestor.com/scholarship.

We need judges for this scholarship contest. Email scholarship@whitecoatinvestor.com if you’re willing to help out. All you have to do is read some essays and tell us who you think deserves to get the cash. That’s all you have to do as a judge. We really appreciate it, but we think it’s a little bit better if it’s not the WCI staff. It’s not us choosing who gets the money, so we have you choose who gets the money. It gives you a chance to get involved in the community, and frankly, it’s gonna, you know, give you great faith in humanity. There’s some incredible people applying for this scholarship, and we love to support them. And I know you’ll feel good for having read what they’ve written in an attempt to receive the scholarship.

SPENDING FROM A 529 WHILE CONTINUING TO CONTRIBUTE

Dr. Jim Dahle:
Okay, next question is also via email. This is another college question. Kevin from North Carolina writes:

Kevin:
Our older child is entering as a freshman at an out-of-state four-year institution next month. Time has come to make the first payment on tuition. We’ve been saving in the 529 since she was born. Unfortunately, our diligence in the stock market has paid off. We have enough money to cover the cost of her attendance for all four years of the institution that she’s chosen. At this point, we will likely overshoot by about $25,000.

Dr. Jim Dahle:
That’s great. You nailed it exactly. Basically, you totally scored.

Kevin:
But who knows what additional expense may arise between now and May 2030? Additionally, she has an inkling for a graduate professional school, potentially the all-expensive dental school. While she’d try to come back to North Carolina for such, there’s no telling where four years in the dental admissions process will have her land. We have the cash flow now to continue putting the same amount of money into our 529 for this next four years that we have for some time now, $15,000 per year. I’ve read that there are some pitfalls when it comes to spending the 529. There’s mention of not using a December withdrawal to pay a January tuition bill.

Dr. Jim Dahle:
Apparently, that is okay. Now, I think somebody clarified in the last year that you can do that, but in general, do try to match them up to the year. I think it just makes your paperwork easier.

Kevin:
I’m curious if you’ve come across any nuggets regarding spending it while continuing to contribute. You’ve done a great job of educating many on the best way to save in a 529, but I’ve had a hard time finding WCI blog posts, forum topics, or podcasts with information on those that are in my position.

Dr. Jim Dahle:
Okay, well, you can continue to make contributions while spending from it, right? All these K through 12 people and their kids in private schools are doing this all the time, right? They’re putting money in every year and they’re taking money out every year. It’s okay. You can make contributions, and in fact, I’ve done that for my nieces and nephews while they’ve been in college. I’ve made some additional contributions.

Now, there’s some rules, I think mostly on whether you get the tax credit or deduction for your state on 529 contributions, but I don’t think there’s any problem making contributions after they’re 18. I think most of the time you can still do that because you can open a 529 for you and make contributions into your own 529. So there’s not an age limit on when you can make contributions, and those accounts stay open indefinitely.

But look at your state tax rules. I think my state stops allowing me to take a tax credit for it starting when they turn 19. Let me look that up really quick. Here’s what it says for Utah, and this is directly from my529. AI has pulled it from the my529 site, which is Utah’s 529 plan. Seems like a credible source, and they’re saying Utah stops allowing the state tax credit only if the 529 account was established and the beneficiary was designated after they turned 19. So even in Utah, if the beneficiary was under 19 when they’re first named on the account, you can still claim the credit for the life of the account. So it looks like you can still even get the tax credit for putting money in there.

So yes, you can do this. Your danger, of course, is that you’re overfunding the 529. Then you’ve got to start thinking, well, how can I get the money out? And you can get $35,000 out into a Roth IRA via the 529-to-Roth-IRA rollover. You can change the beneficiary to a sibling. You can change it to a grandkid. You can change it to yourself. That’s probably the best exit most of the time. Frankly, you can always just pull the money out and pay the taxes and penalty on it if you want, right? You don’t have to pay the taxes on the original contribution, right? The tax and penalty is only on the gains, so you can do that.

So if you want to keep contributing, you can. But here’s another option to consider, especially since it’s not going to be in there that many years benefiting from the tax-free growth. You can just give your kid the money, right? If they’re under 18, that’s a UTMA account. If they’re over 18, it just goes in their regular brokerage account or their savings account, right? You can just give them the money.

You can also put it in your brokerage account and invest it, and that way, if she goes to college, you can use your money, or if she goes to dental school, you can use your money to pay for dental school. Yes, you’ll have to pay some capital gains taxes on it. You have to pay dividend taxes as it grows. And if she doesn’t, well, you’ve got more for your retirement, or more that you can give her for an inheritance later, or maybe you can use that money for a down payment. You know, so it’s your option. If you want to control it, like you have in a 529, you keep it in your brokerage account. If you want lower taxes overall, you give it to her, and it can be in her brokerage account or her, you know, high-yield savings account or whatever. Those are your options.

The fun thing about a 529 is you get the tax-free growth, and of course, you get, you know, you still have control over it. Technically, it’s your money. You have control, even though it’s already a gift to them for estate planning, estate tax purposes. So those are your options. You’ve got to choose one of them.

But this thing about having to have the money, you know, withdrawn from the account in the same year, I think there’s more leniency on that than maybe I’ve led some to believe on this podcast in the past. But I still tell my nieces and nephews, as I’m withdrawing, I want, you know, you tell me when, I want you to spend the money you take out in the same calendar year you take it out. But that’s always tricky because they’re always paying that January tuition bill around the end of December, and so it gets a little bit complicated. But it turns out I don’t think that really actually matters.

Okay, and the truth is, nobody’s getting their 529 receipts audited. It’s just not happening. I can’t wait for the IRS to audit mine. I’m going to dump like a gazillion receipts on them and, like, have fun. But I think for the most part, it’s really not that much of an issue.

Okay, you also kind of asked a little bit about how I do this, and I’ve mentioned this before, but the easiest way I’ve found to do it is to have the student Venmo me, or not Venmo. It can be a Venmo request, or just text me how much they want, and then I Venmo them the money, which works really well up to about $5,000. Above $5,000, you might need a different way to send them the money. Works really well up to $5,000. Then I pull the money out of their 529 account into my checking account, right? And then they send me the receipt, and I keep the receipt. That’s the whole process for 529 withdrawals.

And I probably do one of those on average once a week right now because I’m withdrawing from like eight of these right now. I’ve got a bunch of nieces and nephews in college, and some of my kids in college right now too. So it’s pretty simple. It’s not that bad to use these.

When it’s completely empty, you can basically just close the account and move on with life. If they get done with college and they still have some money in there and it doesn’t look like they’re going to graduate school, you can just make them the owner of it, right? And I don’t think that has any estate tax implications. I think it’s only when you change the beneficiary to another generation that there’s some estate tax implications. But I think making them the owner as soon as they’re done with their schooling, and then when they change the beneficiary, it’s all about their estate taxes, not your estate taxes. Right? There’s no generation-skipping tax going on there because you’re, you know, giving it to every generation.

All right, I hope that’s helpful. I think we’ve answered a bunch of your 529 questions. They’re great accounts to use. Don’t, you know, go too crazy about college. Lots of people can do college a whole lot cheaper than the most expensive college in the country, followed by the most expensive dental school in the country, and a whole bunch of you white coat investors out there are saving for college like your kid is going to go to a school that’s $100,000 a year for eight years, and it’s just overkill.

Okay, so maybe don’t put too much in there. Save something for college. Don’t put too much in there. Know you can make up the difference using your brokerage account or your cash flow because you’re probably still working while the kids are in college, and it’s going to work out fine. But if you know the money is going to be spent on college, or you’re pretty sure the money is going to be spent on college, get it in a 529. Take advantage of that tax-free growth.

SPONSOR

Dr. Jim Dahle:
As I mentioned at the beginning of the podcast, SoFi could help medical residents like you save thousands of dollars with exclusive rates and flexible terms for refinancing your student loans. Visit sofi.com/whitecoatinvestor. See all the promotions and offers they’ve got waiting for you. One more time, that’s sofi.com/whitecoatinvestor. SoFi student loans originated by SoFi Bank and a member FDIC. Additional terms and conditions apply. NMLS 696891.

Don’t forget about the scholarship. You apply at whitecoatinvestor.com/scholarship. It’s also the last day to volunteer to be a judge. Or the 31st is the last day to volunteer to be a judge. Email scholarship@whitecoatinvestor.com if you want to help out with judging.

Thanks for leaving us five-star reviews on the podcast. A recent one came in titled “Weekly Joy.” I’m not a doctor, but this is one of the few podcasts that talks about the order to invest every dollar. I love the encouragement for individuals to strive, not just to make more, but to handle money in good ways and then spend without guilt. I especially appreciate Dr. Dahle weaves together W-2, 1099 income, small business, real estate, or investing in other ways to generate income. This podcast is truly just truly in that it gives a roadmap for how to deal with the increasing income instead of focusing on cutting expenses. Thank you for maintaining this product.

All right, your reviews don’t have to be perfect. You don’t have to have perfect grammar, right? The five-star review helps somebody else find this podcast, and that’s the important thing. So thanks. If you’ve never left one, please leave us one. You know, with tens of thousands of people listening to this podcast, if we have tens of thousands of reviews, it will help the podcast to grow.

And while I’m thrilled about that because it helps WCI as a company, more importantly, it helps the WCI mission, which is really important. That’s why I’m still sitting here, you know, eight years after financial independence, recording these podcasts because I believe in that mission. I want to help you get a fair shake on Wall Street. I want to help you get your financial ducks in a row so you can be a better partner, a better parent, a better physician.

When your finances are taken care of, you can quit worrying about money and you can concentrate on what really matters in life: your family, your practice, your patients, your own wellness. I don’t want you worrying about money. Okay, and the way to do that is to take care of money as early in your career as you can, and then it just becomes a tool in your toolbox rather than a stressor in your life.

Keep your head up and your shoulders back. You’ve got this. We’ll see you next time on the White Coat Investor Podcast.

DISCLAIMER

The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

Transcription – MtoM – 289
INTRODUCTION

This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
Welcome to the Milestones to Millionaire podcast.

Resolve is the number one rated physician contract team, reviewing a thousand plus physician contracts every year. They empower physicians with location-specific compensation data, which leads to unparalleled leverage during the physician contract negotiation process.

A physician contract lawyer is included and can negotiate on your behalf, alleviating the stress that can go along with reviewing complex legal terms. Flat rate pricing and flexible schedules are designed for a physician schedule.

One thing I want to make sure you all know about is that we have partners who will review your contract, and all of you should use them. I can’t think of a reason not to have an employment contract or a partnership contract reviewed, not just your first one.

This is obviously pretty critical coming out of residency or fellowship, but if you change jobs, get it reviewed again. It only costs a few hundred dollars. So you’re having somebody look over the legal terms in it, explain them to you so you know what you’re signing, to make sure you’re not signing something that’s terribly unfair to you, to make sure your contract is comparable to other contracts out there.

They’ve got the information on what people are being paid. They do hundreds of these every year, so they know about what people make in your specialty, in your area of the country, and can give you that information. Most of them will even negotiate for you if you want them to. It’s just a no-brainer. You should get your contracts reviewed, and you can find that resource at whitecoatinvestor.com/contractreview. You can just go under our recommended tab. There are several firms there.

We think the world of all of them, and I think this is a no-brainer. This is a great use of a few hundred dollars. It might be the best return on investment out there for any service we recommend to people. It’s just making one little change in your contract can make just a difference of tens of thousands, hundreds of thousands of dollars, millions of dollars over the course of your career, especially that first contract.

And I think this is more the case in the business world than it is in the medical world, but it does apply in the medical world as well. If you start being underpaid, you tend to stay underpaid. Because they ask you, “Well, how much were you making in your last job?” And they give you a little raise, but it’s all based on that first one. So you want to make sure the first one you’re getting paid fairly. But again, you can find that at whitecoatinvestor.com/contractreview.

All right, we’ve got someone who’s been very successful in her career, and perhaps more importantly, in her investing over the years. Let’s get her on the line and talk about what she’s accomplished.

INTERVIEW

Dr. Jim Dahle:
Our guest today on the Milestones to Millionaire podcast is Kay. Kay, welcome to the podcast.

Kay:
Thank you. Thank you for having me. I appreciate this opportunity, and I really applaud what you do.

Dr. Jim Dahle:
Well, let’s introduce you a little bit to the audience. And before we get into your very impressive milestone you’ve accomplished, tell us a little bit about what you’ve done for a career, what part of the country you live in, et cetera.

Kay:
I live in Southern California, and I’m a retired pharmacist. Most of my career, I specialized in geriatrics, and I did drug regimen reviews for skilled nursing facilities.

Dr. Jim Dahle:
Okay, and we’re here interviewing you now at the tail end of your career. You’re done working, correct?

Kay:
I am. I officially did not renew my pharmacy license last year in November. But I worked for 40 years, and I was financially independent at about 52. I continued to work full time. And then as things changed throughout the industry and stuff, and when the time was right, I cut way, way back, probably at about 57, spent years taking care of my parents and family stuff. And then the time was just right to call it all a day and just look back on great memories.

Dr. Jim Dahle:
Well, congratulations on that. The milestone we’re celebrating today is a net worth milestone. Share your net worth with us.

Kay:
Well, with the recent rise of the market, and then the unfortunate passing of my parents, and then I remarried about five years ago. And so, with all those three factors, a decamillionaire.

Dr. Jim Dahle:
Decamillionaire. $10 million. It’s pretty wild to think that, isn’t it?

Kay:
It is, it is.

Dr. Jim Dahle:
Just say it out loud. I’m a decamillionaire.

Kay:
I know, I know.

Dr. Jim Dahle:
It’s a lot of money.

Kay:
It is, it is. I guess one of the reasons I wanted to come on and share my story was really just that it’s the miracle of compounding. I don’t know who said it, that it’s the eighth wonder of the world or whatever, but it really is magic, the compounding. And I know you promote live like a resident. I remember being in college and just thinking, “If I can just live like I live in college, because I paid for most of my college expenses, it might be something that works out for me.”

Dr. Jim Dahle:
And clearly it has. Although I suspect you didn’t live like a college student the whole time, I hope.

Kay:
No, no. I had trouble doing that. I had trouble. I tried to put myself through college by working. But I would always end up around May, calling my mom and being like, “Mom, can you just help me out for a month until I get working during the summer and stuff.” I always had trouble paying my way through college. It was so much different then. What kids go through nowadays is not even comparable.

Dr. Jim Dahle:
Take us through some of the big, I don’t know, milestones is the right word, the big decisions, the big turning points in your career, in your financial life since college until now that you think made the biggest difference.

Kay:
Well, I think simplistically just always living below your means is so important. But then also looking for opportunities. I lived through the 2008 financial crisis, which because my first husband and I, we were always living below our means and had acquired a fair amount, we saw everything just get chopped in half.

And then 2006 to 2008, we were going through our divorce and seeing that get chopped in half too. We saw a lot of decreases, so to speak, like sometimes when you read about history and stuff and you hear about the Great Depression and the market’s going way up and way down that kind of changes you forever.

But with that, I was still only in my 40s. I still had my education and my ability to work. And then you just saw real estate here in Southern California, like on fire sale. It was all over the country, of course. That really changed me. I house hacked, started buying rental properties, and then the rest of the money just went right into the market. And then you just live your life and it just is magic. It really is.

Dr. Jim Dahle:
You had a pretty balanced approach. You had some money in real estate, some money in stocks. It doesn’t sound like there was any big, huge gamble you made or anything, just slowly and surely over time, you put money into reasonable investments and got a little bit of a tailwind the last few years in both housing prices and in market returns.

Kay:
Yeah, that’s absolutely it, pretty much.

Dr. Jim Dahle:
Now, what advice do you have out there for somebody that’s maybe looking at a divorce and worried about their income and their assets being cut in half? Obviously, you recovered from one divorce and maybe even benefited from a second marriage. Tell us a little bit about what advice you’d have for somebody who’s staring in the face of losing half their assets and half their income.

Kay:
It’s just money. It’s just money. And you think about what you can do and what you have to do.

Dr. Jim Dahle:
Now, unfortunately, you’ve lost your parents. And like many people that get around retirement age, the most common age to inherit money is actually around age 60, which, of course, is when parents die at 80 or 85 or 90 or whatever. What percentage of this $10 million came from them?

Kay:
About 10%.

Dr. Jim Dahle:
About 10%. Obviously, you’re going to do well with or without them, but it’s a nice little kicker on top, isn’t it?

Kay:
Yeah, yeah. It put me from seven figures to eight figures.

Dr. Jim Dahle:
Any advice for how they did their estate planning, maybe mistakes they made that you wouldn’t do or some things they did well that you were glad they did?

Kay:
Yeah, they were with a high fee bank. It was hard. My dad got ill first so I stepped in. I was working very, very part time, like two days a month. And this was during COVID. And I basically just moved in. They were three states away. I basically just moved in and started asking questions and feeling kind of like, “Sorry, I’m digging into your private life here, mom and dad.” And he was just kind of like, “Well, you’re going to find out anyway and where it all is.” I said, “I just want to have this be as good as possible and be able to take care of mom and stuff.”

Between my brother and I, we dug through everything. But they just didn’t talk about money much. I have a son and I was a single mom for about 10 plus years. He saw me go through everything. So we talked all the time. He’s very financially literate. But I didn’t have that relationship with my parents. I knew they were frugal and I had a disabled sister. And so, they bought her houses and they bought my niece a house. And I knew they had gotten an inheritance from my grandparents.

I knew a lot of things, but I didn’t know everything. And I just wanted it to go however they wanted it to go, if that makes any sense. I didn’t need the money, but I needed to know what they wanted. I wanted to honor their mission, honor their wishes.

After my dad passed, my mom couldn’t live alone anymore. And so, we ended up moving her into an assisted living and sold the house. And as soon as we sold the house between my brother and my niece and I, and my mom, of course, we agreed I would take all that and put it in Vanguard. I’m a big Vanguard fan. And that worked out really well.

Dr. Jim Dahle:
Now, you had this experience in 2008 of losing half your assets. Later in your investing career, you hit the COVID market where the market dropped 30% plus whatever it was in March of 2020. And then the 2022 bear market, when interest rates went up 4%. How did your experience in 2008 affect how you acted in 2020 and 2022?

Kay:
It did not bother me at all. I was very nervous. I guess as a gender bias, women always want to have security. Because I had my six rental properties, I had that security of that rent. So when the market would go up and down, it never bothered me. I’m a big Boglehead. I follow what goes on. I remember looking at when it bottomed out, was it March of 2021?

Dr. Jim Dahle:
2020. Yeah, that’s when it dropped pretty severe.

Kay:
2020, it did. So it went down. And it didn’t bother me at all. And then I want to say like a year later, that was a million dollar swing for me. I was just like, wow. I think I invested like in my niece’s Roth IRA. I think I did some stuff then because I was like, okay, here’s a big drop. Buy the dips. But I just kept on living my life. And you mentioned one other dip. Those little dips, they don’t bother me. I feel like there’s going to be another dip sometime. I hope there’s another dip for me because that means I’m living long enough. There’s going to be another dip.

Dr. Jim Dahle:
Yeah, if you live long enough there will be another one for sure.

Kay:
Yeah, exactly. How severe it is, how long it lasts. I don’t know anything about that. But I feel pretty darn secure right now because my husband and I, we live on my rental income. And that’s all we need. The rest we give away and we just let it sit there and grow, which is a blessed place to be.

Dr. Jim Dahle:
Yeah. A lot of people out there they’re not an orthopedic surgeon. You’ve built this wealth on not orthopedic surgeon kind of income, I assume. Your income was never $600,000, $800,000, a million dollars a year. You built this off much more typical upper middle class kind of income. What hope can you give people who want to do what you’ve done?

Kay:
Be scrappy. Yeah, just live below your means. The one great thing about not making so much is you don’t have to pay as much in taxes.

Dr. Jim Dahle:
It makes a big difference in Southern California.

Kay:
It sure is. It sure is. But even so, I’ve paid plenty of taxes and continue to do so. But you need the heavy lifting of the market to really achieve it. And you do that by having long time horizons. This is over 40 years. You just get started. All the things that you promote on White Coat Investor of living below your means, maxing out those 401(k)s, when your income’s high, do pre-tax. When your income’s low, do Roth and just take advantage of all the things that are out there to take advantage of. So, take advantage where you can.

Dr. Jim Dahle:
Turns out time in the market matters a lot more than timing the market.

Kay:
Absolutely.

Dr. Jim Dahle:
Good advice. Well, congratulations on your success. You deserve it. You have been scrappy. You’ve been a good saver. And you left your money in the market so it could recover when it took a dip. Well done. You should be very proud of yourself. And thank you so much for being willing to come on the podcast and share your story with others.

Kay:
Thank you.

Dr. Jim Dahle:
I hope you enjoyed that interview. It’s always fun to talk to a decamillionaire. It’s very funny. We get people on here who’ve gotten back to broke or who paid off their student loans, and they’re fine using their name and face and broadcasting it to the world.

But as people become millionaires and pentamillionaires and decamillionaires, they want a little more privacy, it turns out. I don’t know what we’re afraid of. What I was afraid of was my kids being kidnapped. And so, I stopped publishing network updates. I stopped publishing what WCI was making, etc.

And so, there is a need for a little more privacy. But we do like bringing on a decamillionaire every now and then and just telling their story so you can realize, “Hey, this is possible. This is what can happen if you put these principles to work early on and give it some time.” And it can be pretty amazing what your money will grow to over the decades.

FINANCIAL BOOT CAMP: RENT OR BUY YOUR HOUSE

Dr. Jim Dahle:
Many high-income professionals wonder if they should rent their home or buy their home. And there’s a lot of factors that go into this question. But the main one is how long you’re going to be in the home. As a rule of thumb, if you’re going to be there five or more years, it generally makes sense to buy. And if you’re going to be there less than that length of time, it generally makes sense to rent. And the reason for that is that there are a lot of costs associated with buying and selling a home. And the longer that you’re in the home, the longer the period of time over which you can spread those costs out.

Those transaction costs are a lot higher than most people who have never owned a home think. It’s pretty typical that you spend something like 5% of the value of the home buying it. I’m not talking about the down payment. I’m talking about expenses. That might be paying a realtor, paying an attorney, closing costs for the loan, fees, and those sorts of things, flying out to look at the home.

You recognize as soon as you move in that you’ve got to do some renovations just to get it up to speed. Maybe you’ve got to buy a lawnmower to take care of it because you’ve never done that before. And you’ve got to buy snow shovels and a bunch of fertilizer. Those sorts of things, right when you move into a home, add up. It’s not insignificant. Many people who’ve never done it are just shocked that it’s a really expensive thing to do.

It’s even worse on the back end. It’s not unusual to pay 6% to the realtors that sell the home. Plus, it might sit vacant for a few months and you might have to fix it up just to get it sold. Of course, you’ve got some other closing costs when you come to the table to actually get rid of the home.

Altogether, it’s probably 15% of the value of the home. So, if it’s a $500,000 home, we’re talking about $75,000 round trip to buy it and to sell. And so, you need that home, for the most part, to appreciate more than that 15%, more than that $75,000 while you’re in it in order to come out ahead.

When I was a medical student, we bought a condo for $80,000. We sold it four years later for $83,000 and you would think we made money. We didn’t make money because we didn’t make more than the transaction cost us over that time period of owning that home for four years.

Of course, there are periods of time when homes appreciate very rapidly and you can come out ahead owning a home for only a year and a half. And there are other times when homes are not appreciating at all. I have another house that I bought in 2006 that we sold for a loss in 2015, nine years later. There’s not any sort of guarantee that you can even make money even if you hold it for five years. You’re just more likely to.

I figure you’re probably going to make money about 50% of the time when you own it for five years, probably a third of the time when you own it for three years. The odds are against you for buying a house for most medical residencies. There are all kinds of other reasons why it’s probably not a great idea for residents to buy a home. Certainly far more residents than do should consider renting during residency.

The nice thing about rent is it tells you the maximum you’re going to pay for housing, whereas a mortgage payment only tells you the minimum you’re going to pay for housing because there’s all kinds of other expenses associated with owning a home.

It is not as simple as saying, “Oh, the mortgage is less than the rent would be, so I’ll just buy it.” That’s not how it works. There’s just far more that goes into homeownership than just paying a mortgage. Not only are you paying the principal and interest on the mortgage, but you got to pay property taxes. You have to insure the property. You have to maintain the property. Somebody’s got to mow the lawn. Maybe you have to pay somebody else to do that or buy the equipment yourself. Somebody’s got to take care of the driveway if you live someplace where it snows.

There’s just a lot of things that happen in homeownership. Water heaters only last so long. Ovens only last so long. Microwaves only last so long. Carpet only lasts so long. Shingles and paint, they only last so long. Those are significant expenses. So, it’s not just about the mortgage payment versus the rent payment. If you think that simplistically, you’re going to make a lot of mistakes when it comes to housing.

In general, I’m a big fan of ownership. I want doctors to own their homes. I want them to own investments where they’re equity owners, stocks and real estate. I want them to own their practices and their jobs because they have more control over them. They’re less likely to be burned out when they control their work environment.

I think ownership is a good thing. But there are times when it just doesn’t make sense to own your home. And typically, those times are when you’re not going to be in the home very long. Usually, when you expect to be there long term, it makes sense to buy.

Now, you might not want to buy immediately when you move to a new town. You don’t know the new town. You don’t know that you’re going to like the job. You don’t know the job is going to like you. You’re not exactly sure which areas you want to live in. You don’t know where schools are better than the other ones and which neighborhoods are better than the other ones. It can make sense when you move to a new town to rent for six or 12 months before you buy.

We did that when we moved to Utah and have no regrets about it whatsoever. We were able to be very opportunistic buyers because we had no timeline in which we had to buy a home. We could make offers that were lowball offers and wait and see how desperate the sellers were to sell their home. And we ended up getting a very good deal on the home we’ve been in for the last decade, almost two decades.

It can make sense to not buy immediately. Just be aware of that. Now, of course, that means you got to move twice. You got to move now and you got to move again in a year when you actually buy the home. But it’s probably worth it despite the additional hassle and additional expense.

The home may appreciate in that time period, but you’re also probably going to become significantly wealthier. If you’re like most docs that are becoming wealthier every year as they go throughout their lives. And you may not buy the same home a year later that you would have bought immediately upon arriving in that city because you may realize, “Oh, I can afford a bigger, nicer home that I want more than the one I would have bought a year ago.” Lots of benefits to doing that.

There are also places in this country where the cost in renting versus owning is just so far out of whack that you may still want to rent. I think about the percentage of the value of the home that it costs to rent it in a place like San Francisco. And I can understand why people might choose to be long-term renters there. Even people who own real estate. They might buy rental real estate in Massachusetts or Missouri or Oklahoma and actually rent their place in San Francisco. And that can make sense.

Just keep in mind that there are some times and some places where the prices of homes have been bid up so high. There really aren’t great investments. The people who are buying them or holding them as investments are counting on appreciation rates that might not be all that realistic going forward.

So, this can be a complicated question, but most of the time it boils down to just how long you’re going to be in the home. And if you’re going to be in there five plus years, you probably want to be buying. If you’re going to be there for a year, you probably don’t want to be buying. You can take a gamble if you think you’re going to be there three, four, five years, but recognize the majority of the time you’re going to lose money in those situations.

SPONSOR

Dr. Jim Dahle:
Our sponsor for this episode was Resolve. They’re the number one rated physician contract team. They have reviewed a thousand plus physician contracts every year. They empower physicians with location specific compensation data, which leads to unparalleled leverage during the physician contract negotiation process.

Physician contract lawyers included and can negotiate on your behalf, alleviating the stress that can go along with reviewing complex legal terms. Flat rate pricing and flexible schedules are designed for a physician’s schedule.

This has been the Milestones to Millionaire podcast. If you’d like to apply to come on this podcast, you can. You go to whitecoatinvestor.com/milestones, and we’ll see how many of you we can get on this podcast. We want to celebrate your milestones with you. Most importantly, not just to congratulate you, but to inspire other people to accomplish their own financial goals along the way.

Keep your head up, your shoulders back. We’ll see you next time on the Milestones to Millionaire podcast.

DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only. It should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

This is the White Coat Investor Podcast: Financial Bootcamp, your fast track to financial success.

Dr. Jim Dahle:
Sometimes people wonder whether their group disability insurance policy is good enough, especially when they find out that individual disability insurance generally costs quite a bit more than group disability insurance, but there are some downsides that come with that lower price. The main one is a weaker definition of disability. The most important thing about a disability insurance policy is that it actually pays you if you get disabled, and sometimes it’s very obvious you’re disabled. Right? You’ve lost an eye, or you’ve lost the ability to hear, or, you know, your arm was chopped up in a farming accident. You know, it’s very obvious you’re disabled.

But there are plenty of causes of disability that are a little bit more gray, like chronic back pain, like anxiety or depression, or, you know, a head injury or something like that, where maybe there’s not a radiological finding that can definitely say this is the disability. And so it might be a little harder to claim disability if you have a weak definition of disability. And as a general rule, you will have a weaker definition with a group insurance policy.

You know, it’s interesting. Some of them also offset benefits. Okay, so if you’re getting workers’ comp disability benefits or you’re getting Social Security disability benefits, this group policy will reduce how much it’s paying you to offset those. It might even offset your individual policies that you bought, and so keep that in mind. If you’re not actually going to get what you think you’re going to get, it’s not nearly as valuable and maybe not worth even paying for.

Another huge downside of a group disability policy is it’s not portable, right? If you change jobs, you can’t take it with you. And maybe you’re going from a job that offers group disability to one that does not offer group disability, and now you find yourself at age 45 having to buy an individual disability policy that costs way more than the one you could have bought at 30. And also, maybe now it excludes some of the medical conditions you’ve discovered in the meantime, or they won’t sell you a policy because you’ve developed some medical conditions or you’ve taken up some, you know, particularly dangerous hobbies. And so not having portability on that policy really matters.

Group disability policies can also be cancellable, right? There are non-cancelable policies, there are cancellable policies, and you’re much more likely to not have a non-cancelable policy when you buy a group policy.

Most group policies also don’t offer any sort of a cost-of-living adjustment. If you get disabled at a young age of 40, that amount of money it’s paying you at 60, after inflation has wreaked havoc for 20 years on the economy, is not going to be nearly as valuable at 60 as it was at 40. It’s much easier to buy a cost-of-living adjustment rider on an individual policy than it is to get that added to a group disability policy.

Disability policies also will often exclude what they call mental and nervous disorders. We’re talking about things like anxiety, depression, schizophrenia, bipolar, those sorts of things. If you think you can’t develop one of those, you know, that is not the case. Many, many people have developed those that they did not have at 25 or 30 or 35, well before retirement age.

If your disability falls into that gray area and the company doesn’t want to pay, you stand a better chance of making them pay with an individual policy than a group policy. You basically have fewer legal rights with the group policy because you’re not the one who bought it; the employer is.

Also, note that the premiums on that employer policy were probably a tax deduction to the employer, their business expense, and so the benefits, when they’re paid out to you, are taxable benefits. Whereas if you pay for your individual disability policy with after-tax money, the benefits are generally after-tax as well, and you don’t have to pay tax on the benefits.

So, does that mean you should never buy a group policy? No, absolutely not. In fact, for a good chunk of my career, I owned a group policy. The main reason I bought it was not only because it was cheaper than my individual policy, but because it did not have a rider that excluded rock climbing on it.

They didn’t ask me any of those questions when they issued the policy, and so if you have a dangerous hobby or if you have a medical condition that’s giving you problems getting a good individual policy, you might still qualify for the group policy through your employer or some other professional association. So that’s less expensive. And, of course, if you’re the employer, the fact that you can take a tax deduction on it might be valuable to you as well when you’re buying those premiums, so that might be a reason why you might want to get an employer policy as well.

You may also be in a long-term job, and the portability doesn’t matter to you because you don’t think you’re leaving this job until you’re 65, in which case that’s not as much of a benefit. It is also convenient. To get it through the employer, you often have no medical underwriting, and the premiums get taken out of your paycheck automatically. You don’t have to write any checks, so sometimes it can be a really convenient place to buy insurance.

You might also find that you want to mix and match. You want to have an individual policy for the portability and the stronger definition of disability, and maybe you want a group policy for the lower cost and because it doesn’t exclude some of the things you might already have. And so lots of doctors have more than one policy, and maybe one of them is a group policy and two of them are individual policies, or whatever. That’s fine to mix and match them, but understand that there are benefits of an individual policy over a group policy. There’s a reason it generally costs a little bit more to get an individual policy.

And anytime you want more information about this, we have agents standing by that we’ve vetted for years, the White Coat Investor community has vetted for years. If you go to whitecoatinvestor.com and go to the recommended insurance agent tab, you’ll be able to find that information and find somebody who’s helped many other White Coat Investors to get this critical insurance in place.

The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.