Chris Kimmet

  • 401k, 403b, 529 Plans, Financial Planning, Investing, Retirement Planning, Saving, Spending, Taxes

    September Financial Resolutions

    As summer fades into the distance, September brings with it a sense of renewal and rejuvenation. For many, it’s a time to refocus on their goals, much like the beginning of the year in January. With the start of school families get back into routines which helps people get organized and set goals.

    While you may have set resolutions in January, the start of the year is a tough time to follow through on them because of post-holiday exhaustion, and the temptation make a big change all at once. September represents a clean slate and offers a unique opportunity to revisit and reevaluate your financial progress.

    Here are seven things you can do this September to give your finances a mid-year boost and set yourself up for success through the rest of the year.

    1. Review Your Financial Goals:

    Begin by revisiting the financial goals you set at the beginning of the year. Take a close look at your short-term and long-term objectives. Are they still relevant? Have your circumstances changed? Use this time to adjust and fine-tune your goals to align better with your current situation and aspirations.

    2. Assess Your Budget:

    A budget is your financial roadmap, and September is an ideal time to check if you’re staying on course. Review your income, expenses, and savings contributions. Are you overspending in certain areas? Are there areas where you can cut back? Make necessary adjustments to ensure you’re saving enough to meet your goals.

    3. Emergency Fund Check:

    One of the cornerstones of financial security is having an emergency fund. September is a great time to assess the state of your emergency fund. Aim to have at least three to six months’ worth of living expenses saved. If your fund falls short, prioritize saving to reach this critical milestone.

    Almost as important as having the right amount saved is the account you are saving in. If your emergency fund is in your checking account consider moving it to a high-yield savings account. Most big bank checking and savings accounts pay very little interest (close to zero percent). Today’s rates on HYSAs are close to 5% and you can transfer your emergency fund with just a few clicks.

    4. Investment Portfolio Review and Rebalance:

    Take a close look at your investment portfolio. How have your investments performed so far this year? Are they in line with your risk tolerance and long-term objectives? Index funds that track the overall stock market and bond market are the best long-term investments for most investors. Are your investments doing what they’re supposed to?

    Rebalance your portfolio if necessary to ensure it remains diversified and aligned with your financial goals. Rebalancing usually means selling some of your investments that have done well and buying more of those that have not. It’s best to rebalance on a set schedule. Choose to rebalance once per quarter, or once per year and set a reminder to stick to it.  

    5. Review Your Retirement Account Contributions:

    If you’re not maxing out your contributions to retirement accounts like a 401k or an IRA, September is a good time to increase your contributions. The maximum you can contribute to your 401k/403b for 2023 is $22,500, or $30,000 if you’re 50 or older. The max for your traditional or Roth IRA is $6,500, or $7,500 if you’re 50 or older.

    Increasing your contribution by just 1% each year can really add up. If you’ve received a bonus or a pay raise during the year and your paycheck has increased consider making an even bigger contribution.

    Along with your retirement accounts don’t forget about your HSA. These can also be used as stealth retirement accounts, and maxing out the contributions is a great idea. The contribution limits for HSAs in 2023 are $3,850 for singles and $7,750 for families.

    6. Backdoor Roth IRA Contribution

    If you make too much to contribute to a Roth IRA, consider making a backdoor Roth IRA contribution. The income phaseout for Roth contributions starts at $138k for single filers and $218k for MFJ. Most bonuses and raises are paid by September, so at this point you should have a good sense of your income for the year.

    Unlike the direct contribution to your Roth IRA, you only have until December 31st to make a backdoor Roth IRA contribution. Direct contributions to traditional or Roth IRAs are allowed all the way up to tax-day the next year.

    7. Tax Planning:

    It’s never too early to start thinking about taxes, and there are many decisions you can make in September to put yourself in a more favorable position.

    Now is a good time to review your federal income tax withholding. Withhold too little and you could have a hefty tax bill due next year as well as possible fines for underpayment. Withhold too much and you’re essentially providing Uncle Sam with an interest free loan. Don’t worry, it’s easy to adjust your withholding by filing a new W4 form with your HR department.

    Consider making additional 529 plan contributions. In most states contributions to a 529 plan have to be done before year end, while some states allow you to contribute until tax-day the next year. Many 529 plans offer state tax deductions and the investments grow tax-free.

    If your income for the year has been less than normal, perhaps due to switching jobs or taking time off consider making a Roth IRA conversion. Converting funds from a traditional IRA to a Roth IRA means paying taxes on the conversion now, but prevents you having to pay taxes on withdrawals later. A year with a lower income and lower tax rate is a good opportunity not to be wasted.

    Wrap Up

    September is indeed a month of fresh beginnings, and it’s a perfect time to revisit your financial resolutions, assess your progress, and make necessary adjustments. By taking these proactive steps, you can set yourself up for financial success in the months and years ahead. Remember that financial planning is an ongoing process, and staying proactive will help you achieve your goals and build a secure financial future.

  • Financial Planning, Home Buying, Loans, Saving, Student Loans

    7 Reasons Why Physicians Shouldn’t Buy a House During Residency

    Model House with keys on a desk. Title: 7 Reasons Why Physicians Shouldn’t Buy a House During Residency

    When you start working as a resident it’s tempting to take the next step and buy a home. After all you’ve graduated from med school, haven’t you also graduated from apartment living to a place of your own? Maybe, but below are 7 reasons why physicians shouldn’t buy a house during residency.

    Residency is a relatively short, busy, and intense period where you continue to learn and develop skills you will hone for the rest of your career. Buying a home during this time can add an additional layer of stress and financial headaches.

    Owning a home is often more costly and time consuming than renting. If you are thinking of buying a home during your residency, read on for 7 reasons you should re-consider your decision.

    1. Residency Only Lasts 3-5 Years, Maybe a Few More With a Fellowship in the Same Place

    The longer you own a home, the greater the chance it will be a good investment. Which is a good reason not to buy a home when you only expect to live in it for 3-5 years.

    When you purchase a home, you can expect to pay 5% of the home’s value in closing costs. Then you can expect to pay roughly 10% in realtor fees and other expenses when you decide to sell. You’re also not building up much equity in the home. During the first few years of your mortgage the vast majority of your payments go towards the interest on the loan, and a tiny amount goes towards the principal.

    U.S. home prices have grown an average of 4.4% per year since 1991. Based on the average growth it’s hard to do much more than break even on a house when you own it for three years. Is that really worth the extra time and effort that comes with owning a home versus renting?

    2. You Don’t Have a Down Payment

    This might not seem like an issue, after all aren’t there special loans specifically designed for young docs that don’t have a down payment saved up? Why yes there are, they are called Physician Mortgage Loans, and while they do exist that doesn’t mean they are the best option.

    Buying a house is a big proposition. Saving up a down payment, even if it is only a small percentage, provides an indication that you are ready for this next step in your financial journey.

    Having a down payment can also protect you on the other side of your home purchase. By putting money down, you already have some equity in your home which can help if the market turns when you need to sell. As discussed above it is hard to break even when you own a house for a short amount of time. Equity provides a cushion when it’s time to sell and your house is worth the same or less than it was when you bought it.

    With a down payment you can choose between more loan options and save on fees like Private Mortgage Insurance (PMI is a lender fee required when you put less than 20% down). You can decide if a lower rate conventional mortgage or if a Physician Mortgage Loan with a slightly higher rate is a better fit. Without cash available for a down payment your options are much more limited.

    3. You Already Have One Mortgage (Student Loan Debt)

    It’s common for med students to graduate with $200k or more of student loans. Managing these loans can already be a stressful situation, before adding an additional mortgage payment to your budget.

    If you have a hefty chunk of student loan debt your available mortgage options are reduced, leaving you with Physician Mortgage Loans as pretty much your only choice.

    4. You Don’t Have Enough Time

    Residency is an extremely important part of your career. During this time is when you are learning, developing, making mistakes and growing within your specialty. All to set you up for success after residency.

    You may enjoy spending your free time in a home that you own, but realistically, how much time will you really have? Rather than spending it on home maintenance tasks, your free time would be better spent resting, recharging, and getting ready for your next shift.

    5. People Underestimate the Time and Costs Associated with Owning a Home

    As a resident you don’t have a ton of free time or extra cash, let alone extra hours to spend mowing a lawn and cleaning out gutters. What about that air conditioner that looks 30 years old and sounds like a rusted jet engine when it starts up? That’s your project to fix or pay to have repaired when it breaks.

    Homeowners can expect to spend between 1% to 4% of their home’s value in maintenance costs each year. These are expenses that you don’t have to worry about when renting. If your toilet breaks and floods your apartment you get to call your landlord to fix it. In your house, you are the one doing the repairs or more likely paying someone else to do it since you don’t have the time as a busy resident.

    6. You Won’t Want Your Residency House as an Attending

    When you finish residency and start receiving your attending paychecks, you’ll probably be ready for a new house. It’s a great idea to “live like a resident” for as long as you can to build a solid financial foundation, and staying with the same home is only possible if you don’t have to move after residency anyway.

    Now that you’re making more as an Attending it can be hard to resist the temptation to keep up with the Joneses. Lifestyle creep can set in, you need extra garage space for your new Tesla, and suddenly your cozy 3-bedroom resident house just doesn’t cut it anymore.

    7. You Can Rent a House

    If you are tired of living in a dorm or apartment, or you absolutely need a house with a yard for your Golden Retriever, you can always rent a house instead. By renting a house you get the benefits of a home without the headaches. It’s easier to budget, there’s less worry about unexpected maintenance costs, and you can move on hassle-free after residency.

    Sometimes buying a house can be the right decision. If you plan to be in the same place for Residency, Fellowship, and as an Attending then it might be the right choice for you. But for most situations the 7 reasons above are why most residents should rent instead.

  • Financial Planning, Insurance, Taxes

    Life Insurance for Physicians

    Insurance can be a very complicated topic, and life insurance especially so. Along with estate planning, life insurance is one of those areas of planning that a lot of people put off until “later”. But getting the right amount of life insurance for physicians is very important and can usually be accomplished quickly and relatively painlessly.

    After you’ve protected your greatest asset by getting disability insurance, the next step in insurance coverage for a physician is to purchase the right life insurance policy. My hope is that after reading this article you’ll feel confident enough to choose a policy that fits your situation.

    Key Points

    • There are two main types of Life Insurance: Term and Permanent.
    • Term Life Insurance is usually the best option. If you are considering buying permanent life insurance (or more likely it’s being sold to you) do your homework and make absolutely sure you understand why it’s a better fit for your situation than a term policy.
    • Getting a term policy when you are younger and don’t yet have a family to help support can still be a smart financial decision. Life insurance gets more expensive as you get older, and you never know when a health issue that makes you uninsurable may occur.

    Two categories of life insurance: Term & Permanent

    There are two main categories of life insurance: Term and Permanent. A term policy lasts for a specified period of time (5, 20, 30 years, etc.), and a permanent policy lasts until the policy holder’s death as long as someone continues to pay the premiums on the policy.

    Term policies tend to be much less expensive, because they have an end date and may not have to pay out a death benefit. In fact, according to some studies 98% of term policies are never used.

    Permanent policies tend to be more expensive for a few reasons. They don’t expire like a term policy, so as long as someone continues to pay the premiums, they will have to pay out a death benefit someday. These policies can also include investment options and other complicated provisions and options that you can adjust later on.

    For Physicians, a Term Life Insurance policy is almost always the best option

    Before going any further, I want to say that there are probably some people for whom each of these types of policies is a fit, but many people are sold permanent life insurance policies (whole, universal, variable) when a term policy would be much better – and less expensive – for them.

    The insurers tend to make more money from permanent policies, so the commissions (what the insurance salesperson earns when selling a policy) tend to be much, much larger for permanent policies than term policies. Since the salesperson is incentivized to sell permanent policies, more permanent policies are sold. This is another place where getting guidance from a fiduciary advisor, who is legally bound to look out for your best interest, can help you analyze your insurance needs and options and make sure you don’t end up paying more for insurance coverage you don’t need.

    For a physician in their prime working years, life insurance is there to provide financial support for their spouse and/or children if they were to suddenly pass away. A term life insurance policy does this quite well.

    Term Coverage Example

    A 35-year-old can buy a 30-year term policy to help pay for their kids’ college education and provide for their spouse in the event they should pass away. By the age of 65, the need for this insurance coverage has passed and they should be fine letting the policy expire.

    A permanent policy will be more expensive and by the time you reach 65 you will be in the same boat and shouldn’t need the policy any more. At that point you face the difficult decision of continuing to pay the premiums for coverage you don’t really need or letting the policy lapse and losing any future benefit.

    A term policy is as simple as it gets in the life insurance space. Proponents of permanent policies will argue that you can use their policies to build cash value and invest as well, but these options are more complex and expensive. You are almost always better off buying a term policy and investing in your retirement accounts or a brokerage account.

    Different Types of Life Insurance

    Term Life Insurance: expires at the end of the term, set premium, set death benefit, easy to compare between providers, less complex

    Term life insurance policies last for a set term (length of time). Typical term lengths are 10, 20, or 30 years. Term life policies are typically much cheaper than permanent life policies for this reason.

    With a permanent plan the insurer knows that they will have to make a death benefit payment as long as the insured continues to make their premium payments. However, with a term policy once the term is up the insurer is off the hook for the death benefit.

    A possible downside to term insurance – though rare – is that you might outlive your policy. If your need for insurance still exists after the term has expired you will likely have to pay more in premiums for an additional term.

    Term insurance is by far the least complicated type of life insurance. There are only two components to decide on: the length of the term, and the value of the death benefit. Because of this it is much easier to compare between term plans from different insurers, and there are many places online where you can compare quotes for the same policies from different companies.

    For almost all physicians, a term life insurance policy is the best option.

    Whole Life Insurance: policy is permanent, premium is set, death benefit is set

    Whole life insurance, sometimes called “ordinary life” insurance is a type of life insurance which is guaranteed to remain in force for as long as the premium payments are made until death or until maturity if a maturity date is part of the contract (typically maturity dates can be 10, 20 years or to age 65).

    The premium for a whole life insurance policy is typically fixed (meaning the premiums will always be the same, also called a “level premium”) at the time the contract is purchased.

    Upon the insured’s death and payout of the policy, the payout is typically paid tax free. When discussing permanent insurance policies, you will often hear the term “cash value”. As the premiums are paid in a whole insurance policy, part of the premium pays for the death benefit and a portion goes into the cash value of the policy and builds over the whole life of the policy. In some cases, a policy can be cashed out prior to the insured’s death (policies differ, but usually the premiums paid must be more than the value of the life insurance), in this case the dollar amount paid over the value of the insurance will be taxed as ordinary income.

    Universal Life Insurance: policy is permanent, builds cash value you can use to offset premiums, option to adjust death benefit

    Universal life is similar to whole life in that it provides a death benefit and remains in force as long as the premium payments are made. A main difference is that later on in the policy you can use a portion of the cash value of the policy to pay your premiums, lowering your out of pocket costs for the policy.  The interest rate is typically tied to a market rate, so as rates change your ability to tap into the cash value to adjust your premium fluctuates as well.

    Within most universal life policies there are also options to adjust the death benefit. Raising the death benefit amount will probably require additional underwriting, while lowering it will probably not. In either way you can expect to pay some additional fees to make the change to the policy. The ability to tap into the cash value and adjust the policy are benefits of a universal life policy, but the added complexity comes with an added cost versus a whole life policy.

    Variable Life Insurance; policy is permanent, option to invest cash value in mutual funds, option to adjust death benefit (VUL)

    A variable life insurance policy, is similar to a universal life policy, but whereas with a universal policy the cash value grows within a savings account in the policy, with a variable life policy you can invest your cash value in mutual funds. But, rather than in a brokerage account where you have access to all manner of investment options, with a VUL you only have access to the fund options available with that insurer.

    With a variable life policy, the death benefit is typically fixed, as it is with a whole life policy. You can also find a sub version, a variable universal life (or VUL) policy which possesses the investment options of a variable policy along with the policy flexibility traits of a universal policy. As I stated above, along with the additional options and flexibility involved in a variable or VUL policy comes additional expense and complexity.

    Other Life Insurance Offerings

    The four types of insurance listed above are the main types of life insurance offered, but by no means are they the only kinds available.

    Declining benefit insurance: Where the value of the death benefit declines over the term of the policy. These are usually designed to match the mortgage amortization schedule on a home, so that if the insured dies prematurely the death benefit from the insurance policy will pay off any remaining mortgage balance.

    Joint life insurance policies: Where two people are covered with the same insurance. These can be designed to pay out when the first person dies or after the second person dies, depending on the underlying reason for the insurance.

    Final Expense Insurance: Often called burial insurance, is a policy designed for older individuals who want to make sure their final expenses are covered and their family do not have shoulder the costs after they pass.

    Wrap Up

    When evaluating insurance, you should ask yourself the question “what am I insuring against?” and keep this Einstein quote in mind.

    “Everything should be made as simple as possible and no simpler”

    For most physicians the simplest answer is a term policy that protects their family during their prime working years. If your situation requires something different or you were too intimidated to look into life insurance before, you now have a bit more information to help you with your search.

  • 401k, 403b, 457b, 529 Plans, Financial Planning, Investing, Retirement Planning, Saving, Taxes

    How to Lower Your Taxes as a Physician

    As a physician you spend so many years in training and fellowships that it feels like you’re never going to earn the “big bucks”. When you finally do start making that attending pay it can feel awesome until you realize you’re paying Uncle Sam in taxes about as much as you used to earn as a resident.

    Today’s article is about highlighting the steps you can take to minimize your tax bill and keep more of what you earn. And if you take these steps you’ll pay less in taxes today and for the rest of your career.

    Key Points

    • Maximize your retirement contributions – 401k/403b/457b etc. You’re probably already contributing to these accounts, but make sure you are making the maximum contribution to really juice their impact on reducing your tax bill.
    • Don’t forget about your other tax advantaged accounts. Utilize 529 plans, HSA accounts, and backdoor Roth IRA contributions for added savings.
    • Make smart decisions in your taxable brokerage account. Tax-loss harvesting, optimal asset location, and donating stock to a Donor Advised Fund can all help minimize your taxable income.
    • Investigate Real Estate investing and whether it’s a good fit for you. Investing in Real Estate can provide a way to build additional wealth while reducing your tax bill as long as you meet a few requirements.

    Max Out Your Retirement Contributions

    It can be hard to contribute to your retirement accounts while you’re still in training, but once you finish with Residency and Fellowships it’s time to boost those contributions into high gear.

    One great side effect of increasing your contributions and reducing your taxable income is that it will also lower your required monthly loan payments if you’re on an Income Driven Repayment plan. Great news for those pursuing PSLF!

    The maximum you can contribute to a 401k, 403b, or 457b plan for 2023 is $22,500.

    * One note for those of you over 50, you can also make what’s called a “catch-up contribution” of an additional $7,500 per year. This can be extremely helpful for physicians who got a late start on their retirement contributions due to working in a specialty with a long training timeline.*

    401k and 403b plans are basically interchangeable, and if you have access to both, the total contributions between the two can’t be more than your $22,500 limit. But 457b plans are counted in a different bucket. This means you can make the max contribution to both your 401k/403b and your 457b. That’s $45,000 you can sock away and reduce your taxable income.

    457b plans are also great accounts to use to turbocharge your efforts to achieve early retirement. If you want to learn more you can read this post all about 457b plans and how to maximize their effectiveness.

    Some employers, like Ohio State University, also offer physicians and staff access to a defined benefit plan (pension) in addition to the other retirement accounts. Your contribution to these plans is usually set at a percentage of salary that you can’t adjust, but is another chunk of money that you are contributing to reduce your taxes today.

    How Tax Brackets Work

    A quick diversion on how tax brackets work and why it’s so beneficial to reduce your taxable income, especially for those in the highest tax brackets.

    In the U.S. we have a progressive income tax system where the tax rate you pay gets progressively higher the more you make. A common mistake that people make is thinking that when they earn enough to get into the next tax bracket, let’s say moving from the 12% to the 22% bracket, that they pay 22% in tax on their entire income.

    That’s not the case, a single filer would pay 10% of their income up to $11,000, they would pay 12% on only the income between $11,001 and $44,725, and 22% on any income between $44,726 and $95,375.

    For example, here are the tax numbers for someone earning $80,000

    While someone earning $80,000 is in the 22% tax bracket their average tax rate over their entire income is only 16.%.

    The higher your income the more benefit you get from making contributions to retirement accounts. For someone in the 32% tax bracket, every dollar contributed to a pre-tax retirement account today saves 32 cents in taxes, grows tax free, and is withdrawn in retirement, likely at a much lower tax rate.

    If you are in the 32% tax bracket, maxing out your 403b and 457b will save you $14,400 in taxes ($45,000 x 32% = $14,400).

    Max out your HSA

    If you’re healthy and don’t expect too many healthcare expenses, then selecting a high-deductible health plan with an HSA is a great choice. HSAs are another account where you can contribute pre-tax dollars and reduce your taxable income. The contribution limits are $3,850 for an individual and $7,750 for a family.

    HSAs can also serve as a “stealth” retirement account. Most HSAs allow you to invest the money in your account similar to a 401k or brokerage account. If you don’t use or need your funds for health expenses when you reach age 65 you can withdraw them for any use without penalty. In essence they become another IRA, since contributions are pre-tax you will pay tax on your withdrawals if you don’t use the funds for healthcare expenses.

    To learn more about HSAs and how to maximize their triple tax advantage check out this blog post here!

    Maximize 529 Plan State Tax Deduction

    529 plan accounts are great tool for saving for your children’s college expenses, but some also come with some nice tax advantages as well. Most states that have a state income tax provide a state income tax deduction for contributing to a 529 plan.

    The tax benefits vary greatly from state to state. For example:

    • States without an income tax offer no state tax deductions
    • Ohio offers a $4,000 deduction per beneficiary, meaning if you have 4 children and contribute $4,000 to each child’s 529 in a given year you can deduct $16,000 from your income for state taxes
    • Idaho offers a $12k deduction for MFJ (Married Filing Jointly), $6k for single filers regardless of the number of beneficiaries
    • Indiana has one of the best perks – a 20% tax credit, instead of a tax deduction, up to a total of $1,500 for a married couple, $750 for a single filer

    Depending on your state and the size of your family you can make a decent dent in your state income taxes.

    Invest Smartly in Your Taxable Brokerage Account

    You may read the word “taxable” and think that you should stay away, but these are your standard brokerage investment account and the word taxable is mainly used to differentiate them from your pre-tax or Roth accounts.

    While you don’t get a tax deduction for contributing to your taxable account, there are many benefits from investing in a taxable account.

    • No contribution limits – unlike 401ks, IRAs, or HSAs you can contribute as much as you want.
    • No withdrawal penalties – you don’t have to wait until age 59 ½ to access your money, or use it for a specific purpose like an HSA or 529 plan.
    • Flexibility – along with the above points, you can invest in whatever you want within a taxable account. Not just the options that your 403b plan provider has available.
    • Capital gains tax rates – Rather than paying income tax on your withdrawals like in a retirement account, you only pay taxes on your gains, and at the much more favorable long-term capital gains rates (own your holdings for at least 1 year + 1 day).

    As long as you own your holdings for at least 1 year + 1 day before selling you will be taxed at the long-term capital gains rates rather than the federal income tax rates.

    Tax-Loss Harvesting

    For holdings that have lost value you can take advantage of tax-loss harvesting, where you use the losses in parts of your portfolio to offset gains in other parts of your portfolio. When using this strategy be mindful of the wash-sale rule. You can’t purchase the same thing you just sold within 30 days or else you face a penalty.

    But even if you don’t have any gains in your portfolio to offset this is still beneficial because you can use your loss to offset up to $3,000 per year in ordinary income, which is usually taxed at a much higher rate than the long-term capital gains rate.

    Optimize for Asset Location

    A way to improve the tax efficiency of your taxable brokerage account is to own assets that will appreciate, rather than provide dividends or interest payments. A share of stock that appreciates in value can later be sold and the gain can be taxed at capital gains rates. While a bond or dividend stock will produce interest or dividend payments that are taxed at income tax rates.

    Optimizing for asset location is more art than science, because there will be times when you don’t want your entire taxable account to consist of risky assets like stocks, but it’s a good thing to keep in mind when you start investing in a taxable account.

    A champagne problem to have in your taxable account is a stock or fund that’s experienced a massive gain, and will still incur a hefty tax bill, even at long-term capital gains rates. Think Apple stock that you bought in 2010 for $10 per share that’s now worth $200 per share.

    For cases like this a donor advised fund (DAF) can really come in handy.

    Donor Advised Fund

    This is a really handy account that can help you out tax-wise in a number of ways while also helping you meet your charitable giving goals. A DAF is an account that you can donate stocks to and then the DAF can sell the stocks and give the proceeds to the charities you designate.

    In the case of our Apple stock above, you receive the charitable tax deduction for the full value of the stock donated to the DAF, and neither you nor the DAF owe taxes on the gain, win-win!

    Why would you go through this process rather than donating the stock directly to the charity? One reason is that some charities can’t receive stocks, and in most cases would much rather just get cash. Another is you can make the donation to the DAF and dole out the proceeds over as much time and to as many different charities as you like.

    DAFs are also a great tool if you regularly give to charity but your total deductions aren’t enough for you to itemize (i.e. you still end up using the standard deduction when you file your taxes: $13,850 single, $27,700 MFJ).

    With a DAF you can make a larger contribution in one year, in order to itemize your deductions, and then make contributions to your chosen charities from the DAF for multiple years.

    Backdoor Roth IRA

    While it technically won’t save you taxes this year, contributing to a backdoor Roth IRA will save you from paying taxes on those contributions ever again. If you’re not familiar with it, a backdoor Roth IRA is a two-step process to contribute to your Roth IRA even if you make too much income to qualify. The income limits to contribute to a Roth IRA for 2023 are $153k for single filers and $228k for MFJ.

    To perform a backdoor Roth IRA, you contribute after-tax dollars (i.e., you don’t deduct them from your income) to a traditional IRA, and then do a Roth conversion on that contribution. Voila! Your after-tax traditional IRA contribution is now a Roth contribution. Since the funds are now in a Roth account they will grow tax-free, withdrawals will be tax-free, and you won’t have to worry about RMDs!

    You do need to make sure you don’t have an existing balance in your IRA before conducting a backdoor Roth or you’ll run afoul of the pro-rata rule, where you will end up owing taxes on part of your contributions, which is the opposite of what we want here.

    Real Estate

    The last item in this article is probably one that most physicians have heard about or thought about investigating. With good reason. Investing in Real Estate is a great way to diversify your investment portfolio while also potentially lowering your tax bill, but there are some hoops you’ll need to jump through.

    First off, real estate investing isn’t for everyone. For every story of a low-maintenance property and perfect tenants, you’ll hear one about midnight water heater leaks and busted pipes. This article is focused on ways to lower your tax bill and real estate investing is certainly an attractive option, but do your homework before jumping in to becoming a landlord.

    One of the biggest advantages for real estate from a tax perspective is that you can own a property that provides real world cash flow, while showing an on-paper loss due to depreciation and other factors. The challenge for physicians is capturing that on-paper loss and deducting it against your earned income. The IRS says you can’t deduct your passive real estate losses against your income if your earned income is above $150k. However, you can get around this rule in one of two ways.

    Real Estate Professional Status (REPS)

    The first way to be able to deduct your real estate losses is by obtaining Real Estate Professional Status. To do this you need to spend over 750 hours per year in real estate and not spend more than 750 hours per year doing another job, like being a doctor.

    The easiest way to accomplish this in a physician household is if one non-working spouse manages the real estate duties, so this is not a possibility for everyone. You need to be careful with this and take detailed records of your involvement in managing your properties. You don’t want to run afoul of the IRS on this one.

    Short-Term Rental Loophole

    With the Short-Term Rental (STR) Loophole, you don’t need to obtain REPS to be able to deduct your real estate losses. There are a few criteria you still need to meet, but they are much easier than obtaining REPS and don’t preclude you from also working a full-time job.

    There are several different criteria you can meet to qualify, but I’ll mention two here. If you own a short-term rental where renter stays are less than seven days, and your participation was greater than 100 hours and equal to that of any other individual, then you would potentially meet the STR loophole and be able to deduct your losses against your income!

    Wrap Up

    As you can see there are many strategies that you can use to reduce the amount of taxes you pay as a physician. And many of these tips only require you to maximize your use of accounts that you already contribute to.

    My hope is that after reading this article you can take few steps today to reduce your tax bill for this year and for the rest of your career going forward.

  • Estate Planning, Financial Planning

    Estate Planning for Physicians

    Estate planning is just as important as the other financial planning topics, but most people tend to procrastinate and put it off until “later”. This is understandable, no one likes to think about what would happen after they or their loved one dies. But it’s important planning that you shouldn’t put off for too long, especially if you have young children.

    The good news is that you’ve likely already done some estate planning without even realizing it. And once you see that you’ve already made some good first steps, we’re here to give you the nudge to complete the rest of your estate plan with the 4 critical estate planning documents that every physician should have.

    Key Points

    • You’ve probably already done some estate planning by designating beneficiaries for your retirement accounts and life insurance
    • If you die without a will it is up to the state and a probate judge to decide who will receive your assets
    • The four critical estate planning documents every physician should have are: Will, Financial Power of Attorney, Healthcare Power of Attorney, Living Will
    • Physicians with minor or young adult children should consider adding a trust to their estate plan as well

    Estate Planning Decisions You’ve Already Made

    When you fill out the paperwork for your employer 401k/403b and check the box designating your spouse or another loved one as your beneficiary you completed an estate planning task. Great job! See, I knew you could do it. Those assets will pass at death to whoever you designated without going through the probate process, even if you haven’t prepared a will.

    Retirement accounts and life insurance will ask you to designate a beneficiary, but you can also designate beneficiaries on many non-retirement/insurance accounts like your savings, checking and brokerage accounts by changing the registration to “TOD” transfer on death or “POD” payable on death. Just ask your bank, broker, or advisor.

    You’ve also likely made an estate planning decision with regard to your home. If you own your home with a spouse or partner and it’s titled as JTWROS (Joint Tenants with Rights of Survivorship) your share of the ownership passes to the other owner upon your death. No trip through probate required.

    It’s important to distinguish JTWROS from TIC (Tenants in Common). With TIC your portion of ownership remains a part of your estate and could be subject to probate instead of automatically passing to the other owner.

    What is Probate?

    I mentioned probate above, but what is it? Probate is the process where they state distributes your assets based on your instructions, if you have a will, or based on state laws if you don’t have a will.

    Probate is a public process presided over by a judge which airs your financial information to the public. This could lead your surviving family members and heirs to be targets of predators and scam artists.

    Many estate planning decisions are made to avoid probate which can be time consuming and expensive. It is also a new and seemingly complex process that your executor must manage during an already stressful time.

    Your 4 Critical Estate Planning Documents

    Now that you realize you’ve already started on your estate plan there are 3 critical documents you need to complete it.

    Disclosure: I am not a lawyer and you should seek advice from a legal professional for your situation and for the documents recommended below. I think having these documents as part of your estate plan is extremely important to your overall financial plan and you should work with an expert to ensure they are created properly.

    Critical Estate Document #1: Will

    This document outlines who will receive your assets after your death, except for the assets that already have a designated beneficiary as we discussed above.

    Inside your will you would designate an executor, whose job it is to see that your instructions are carried out. It is also where you would designate guardians for your minor children.

    Depending on your situation your will still may go through the probate process, but without one your assets will be distributed based on the laws of your state, which may or may not align with your wishes.

    Critical Estate Document #2: Durable Financial Power of Attorney

    A financial power of attorney grants another person the ability to act on your behalf regarding personal, financial, and business matters. This document allows someone to make financial decisions for you if you are incapacitated or otherwise unable.

    You want to ensure it is a “Durable” financial power of attorney, otherwise in most states the power of attorney will automatically end if you later become incapacitated.

    You want to put some thought into who you designate as your financial power of attorney as while they are legally required to act in your best interest, they also will have the ability to make decisions all the way from paying bills to buying and selling property in your name.

    Critical Estate Document #3: Healthcare Power of Attorney

    This document is basically a mirror image of the financial power of attorney but for your medical decisions while you are incapacitated.

    This is another extremely important document as the person you designate as your healthcare power of attorney can make decisions about your medical care when you are physically or mentally unable.

    Critical Estate Document #4: Living Will

    A living will is a document that is typically created along with a healthcare power of attorney. While the HCPOA grants authority for someone to make medical decisions on your behalf the living will lays out your instructions for care in the event that you are terminally ill and/or in a permanently unconscious state.

    By creating a living will you make your wishes known in writing beforehand of what should be done if you should end up in this situation, and remove the burden of a loved one having to make the decision for you.

    BONUS Critical Estate Document #5: Trust

    There are many types of trusts that can be used in estate planning. For families with minor or young adult children and substantial assets a revocable trust is an important document to consider in addition to the first four documents mentioned above.

    If you have minor children and just a will in place your assets that you intend for them to inherit will likely be managed by the guardians you designated. Once your children turn 18 though, the entire inheritance is theirs to do with as they wish. No strings attached. With life insurance and other assets involved, this could be quite a lot of money. Consider what you would have done if you received a few million dollars on your eighteenth birthday.

    With a trust in place, you can specify a trustee to manage your assets for the benefit of your children or other beneficiaries. You can specify that money from the trust should be used for education, a first car, or help with a house down payment and when the balance will ultimately become theirs. An often-used recommendation would be for a child to receive half of their inheritance at age 25 and the other half at 30.

    Wrap Up

    So that’s it, four or maybe five documents that every physician should have in place as part of their estate plan. Hopefully reading this article and learning what exactly goes into each document gives you the confidence to make an appointment and finish your estate planning today!

  • Financial Planning, Home Buying, Loans

    What is a Physician Mortgage Loan?

    Medical professionals, particularly those just starting their careers or with significant student loan debt, often find it challenging to qualify for a traditional mortgage. However, many lenders now offer a physician mortgage loan, which is specifically designed to meet the unique needs of doctors and other medical professionals.

    Physician mortgages offer lower down payment requirements, more flexible underwriting guidelines, and higher loan amount limits, making them an attractive option for many physicians. In this article, we’ll explore the details of physician mortgage loans, how they compare to traditional loans, who qualifies for them, and the pros and cons you should take into account when considering this type of mortgage.

    Key Points

    • A Physician Mortgage Loan can be a great option for medical professionals, especially those at the start of their career, with significant student loan debt, and future income growth.
    • Doctors, Dentists, and Veterinarians along with other medical professionals can qualify for a physician mortgage loan.
    • Physician mortgages don’t require 20% down payment to avoid PMI and have different underwriting requirements allowing borrowers with hefty student loan debt to qualify.

    Details of a Physician Mortgage

    A physician mortgage is a home loan specifically designed for doctors and other medical professionals. Unlike traditional mortgages, physician mortgages typically require little or no down payment, which is attractive for physicians who are just starting their careers and may not have a large amount of cash on hand for a down payment. Additionally, physician mortgages may offer more flexible underwriting guidelines, taking into account the significant student loan debt that many medical professionals carry.

    One of the most significant benefits of a physician mortgage is that it typically offers a fixed interest rate for the life of the loan. This means that borrowers don’t have to worry about fluctuations in interest rates over time, which can make budgeting and financial planning more comfortable and predictable. Additionally, physician mortgages often have fewer fees and closing costs than traditional mortgages, which can save borrowers a significant amount of money.

    Differences between a Physician Mortgage and a Conventional 30-Year Mortgage

    The primary difference between a physician mortgage and a conventional 30-year mortgage is the down payment requirement. While conventional mortgages typically require a down payment of 20% or more to avoid paying Private Mortgage Insurance (PMI), physician mortgages often require little or no down payment without a requirement for PMI.

    Avoiding PMI is an awesome benefit that can save borrowers hundreds of dollars a month. Banks see borrowers that can’t afford to put down 20% of the house purchase price as “riskier” and require PMI payments as an additional bit of insurance in case of default. Physician Mortgage Loans do away with PMI entirely, allowing you to purchase a house with as little as a $0 down payment.

    Another significant difference with physician mortgages is that they may have more flexible underwriting guidelines. One factor lenders consider is your debt to income ratio (DTI), how much your debt payments are as a percentage of your income. This includes car loans, credit card debt, other property loans, and your student loans. Most borrowers have a DTI limit around 40%, meaning that if your total debt payments with the new loan will be above 40% of your gross income you they won’t qualify you for the loan.

    This can be a huge hurdle for getting a conventional loan considering the significant student loan debt that many medical professionals carry. Lenders With a physician mortgage the lender may exclude student loans from your DTI ratio allowing you to qualify for a larger loan.

    Another feature of physician mortgage loans is they do not have the same limits as conventional loans. With a conforming conventional mortgage the most you can borrow is $726,200 or $1,089,300 in high-cost areas. Physician mortgage loans don’t have this same limit, potentially allowing you to borrow more money for your home purchase.

    Just because you can borrow more though doesn’t mean that you necessarily should, you should always take into account the effect on your cashflow when purchasing a home. Staying within or below your means can help you weather future financial emergencies, or take advantage of future opportunities that you might not be able to if you are spending as much as you earn each month.

    Differences between a Physician Mortgage and an Adjustable-Rate Mortgage

    An adjustable-rate mortgage (ARM) is a type of mortgage where the interest rate can change over time, based on market conditions. While ARMs can be attractive for some borrowers who want lower initial monthly payments – and they have seen a surge in popularity lately with the rise in interest rates – they can also be risky, as borrowers don’t know how much their monthly payments will be in the future.

    A typical adjustable-rate mortgage is a 5/1 ARM where the mortgage interest rate is set for the first five years of the loan and then changes every year thereafter based on changes in market rates. These can be a good option for a borrower that plans to refinance their mortgage at some point within the fixed portion of the loan, but no one can predict what rates will do in the future and you shouldn’t bank on being able to refinance at a lower rate.

    In contrast, physician mortgages offer a fixed interest rate for the life of the loan, providing borrowers with greater financial stability and predictability. Additionally, physician mortgages typically require little or no down payment without mandating the borrower pay PMI, while an ARM has similar requirements as a conventional mortgage when it comes to putting 20% down on the purchase upfront to avoid PMI.

    Who Qualifies for a Physician Mortgage?

    To qualify for a physician mortgage, borrowers typically need to be medical professionals, which includes doctors, dentists, veterinarians, and other medical professionals. Additionally, lenders will require proof of income, employment, and education, as well as a strong credit score.

    Should You Consider a Physician Mortgage?

    When considering a physician mortgage as an option, borrowers should consider several factors, including:

    1. Interest rates: While physician mortgages often offer a fixed interest rate for the life of the loan, they may have higher interest rates than traditional mortgages due to the lower down payment requirements and more flexible underwriting guidelines.
    1. Monthly payments: Because physician mortgages may offer a lower down payment and a higher interest rate, they may require higher monthly payments than a traditional mortgage. Borrowers should ensure that they can comfortably afford their monthly mortgage payments over the life of the loan.
    2. Closing costs: While physician mortgages may offer lower closing costs than traditional mortgages, borrowers should still factor in these costs when considering whether a physician mortgage is the right option for them.
    3. Future plans: Borrowers should consider their future plans when deciding whether to apply for a physician mortgage. For example, if they plan to move within a few years, a physician mortgage may not be the best option. Because of the low (up to $0) down payment required borrowers do not start out with much if any equity in their home and may not recoup their closing costs and other fees upon selling.
    4. Other responsibilities: As a young physician your primary focus will be on growing your career and being successful in your profession. Owning a home brings many additional responsibilities, expenses and distractions. Renting can be a good choice early on in your career, so it’s good to have a clear understanding of your goals when buying a home.

    Pros and Cons of a Physician Mortgage

    Pros:

    1. Lower down payment requirements: Physician mortgages typically require little or no down payment, which can be attractive for physicians who are just starting their careers and may not have a large amount of cash on hand for a down payment.
    2. More flexible underwriting guidelines: Physician mortgages may have more flexible underwriting guidelines, taking into account the significant student loan debt that many medical professionals carry.
    3. Larger loan limits: Physician mortgages don’t have the same limits as conventional conforming mortgages meaning that you could potentially borrow more than with a traditional mortgage.
    4. Fixed interest rates: Physician mortgages typically offer a fixed interest rate for the life of the loan, providing borrowers with greater financial stability and predictability.

    Cons:

    1. Higher interest rates: Physician mortgages may have higher interest rates than traditional mortgages due to the lower down payment requirements and more flexible underwriting guidelines.
    2. Limits on residency types: Some lenders won’t allow you to take out a mortgage loan on a condo or on a second residence, such as a vacation house or rental property.
    3. Limited lender options: Physician mortgages may only be available through certain lenders, limiting borrowers’ options.

    Wrap Up

    Overall, physician mortgages can be an attractive option for medical professionals who are just starting their careers or have significant student loan debt. They offer lower down payment requirements, more flexible underwriting guidelines, fixed interest rates for the life of the loan, and lower closing costs. However, physician mortgages may have higher interest rates than traditional mortgages, and eligibility requirements that limit borrowers’ options. Ultimately, borrowers should carefully consider their financial goals and future plans when deciding whether a physician mortgage is the right option for them.

  • 403b, 457b, Financial Planning, Investing, Retirement Planning

    What are the different OSU Retirement Plans?

    When starting a new job, you often have many new things to learn and get used to: new commutes, new coworkers, different policies and procedures. Being successful in your new position requires you to get up to speed as quickly as you can. An item that’s often pushed off until later, but one that’s crucially important to achieving your long-term goals is understanding and maximizing your new retirement plan benefits.

    The governmental, non-profits, contractors, and large health systems that make up the majority of employers in the healthcare world offer a wide array of benefits and retirement plans. The variety and seeming complexity can be overwhelming to anyone, whether you are a med school grad starting your first residency or an experienced PA making a move to a different hospital.

    Ohio State University, in Columbus Ohio, provides a good example of this complexity. As a state university they employee faculty, university and hospital staff, as well as student employees. The subsequent variety of retirement plans offered can confuse even veteran healthcare workers with years of experience.

    This variety can be confusing at first, but in the end provides a great opportunity for employees to contribute and save a ton for retirement in multiple different accounts. After reading this post you should have a better idea of what’s available when it comes to choosing an OSU retirement plan.

    Key Points

    • As an OSU employee you can fully contribute to three separate retirement buckets (and in some cases even a fourth!).
    • For your “primary” retirement account employees choose between a pension version, for most staff this is OPERS the Ohio Public Employees Retirement System, or a defined contribution version the ARP the Alternative Retirement Plan, similar to a 403b.
    • All employees can also contribute to a 403(b) plan and/or a 457(b) plan.
    • Ohio State Employees don’t pay into Social Security. Your primary retirement account (OPERS, STRS, or the ARP) are meant to replace your social security benefit.

    OSU classifies three types of employees: Faculty, Staff, Student

    OSU places employees into three buckets: Faculty, Staff, and Student employees. Which bucket you fall into affects which OSU retirement plan you have access to. There are also scenarios where you could fall into multiple buckets. A surgeon at the OSU medical center would be classified as a staff employee, but if they were also teaching a course outside of their normal duties they could be classified as faculty as well.

    Staff Employee Retirement Plans

    Staff Employees will be automatically enrolled in the Ohio Public Employees Retirement System (OPERS) for their primary retirement plan, or they can instead opt out of participating in OPERS and choose the Alternative Retirement Plan (ARP) for their primary OSU retirement plan.

    Staff can also contribute to a 403b and/or 457b. OSU calls these their Supplemental Retirement Accounts (SRA).

    Some staff, where their salary exceeds the IRS and Ohio retirement system limits may even be able to contribute to the Retirement Continuation Plan (RCP)/415(m).

    Faculty Employee Retirement Plans

    Faculty Employees will be automatically enrolled in the State Teachers Retirement System (STRS) for their primary retirement plan, or they can instead opt out of participating in STRS and choose the Alternative Retirement Plan (ARP) for their primary OSU retirement plan.

    Faculty can also contribute to a 403b and/or 457b. OSU calls these their Supplemental Retirement Accounts (SRA).

    Some faculty, where their salary exceeds the IRS and Ohio retirement system limits may even be able to contribute to the Retirement Continuation Plan (RCP)/415(m).

    Student Employee Plans

    We will focus mainly on the retirement plans available to OSU Faculty and Staff in this post. Student Employees have access to similar OSU retirement plans and can choose to enroll or opt out of OPERS as well as contribute to the Supplemental Retirement Accounts.

    Ohio Public Employees Retirement System (OPERS) Plan

    • Available to Staff employees
    • Can be like a pension or a 401k/403b depending on your choice
    • Employees can opt out and choose the ARP instead

    Staff employees can choose to participate in the OPERS plan. The base version of this plan is a defined benefit plan where employees receive retirement benefits calculated using their salary and years of service.

    Employees can also participate in a member-directed version of OPERS and choose their own investments. In this version the employee assumes all of the risk and their retirement benefit is based on the growth in their investments.

    In either plan employees contribute 10% of their eligible compensation to the plan and OSU contributes 14% of their eligible compensation. In the member-directed version, not all of the 14% employer contributions ends up in the employee’s account. 7.5% goes to their OPERS account, 4% goes into their OPERS Retiree Medical Account (RMA), 2.24% goes into the OPERS Traditional Pension Plan to fund past liabilities (required by law), and 0.26% goes towards administrative expenses.

    There are also different limits on the amount that can be contributed to each of these accounts. The member-directed limit is pretty straightforward. The maximum that can be contributed each year is $66,000 combined from employer and employee contributions.

    For the OPERS pension plan, the limit on contributions is based on your salary and when you were hired. Employees hired prior to 1994 get contributions based on up to $490k in earnings, and if you were hired after 1994 you make contributions based on up to $330k of your earnings.

    State Teachers Retirement System (STRS)

    • Available to Faculty employees
    • Can be like a pension or a 401k/403b depending on your choice
    • Employees can opt out and choose the ARP instead

    The STRS retirement plan is very similar to the OPERS plan offering a defined benefit pension version and a defined contribution version, but unlike OPERS an employee can choose a combined plan that has pension and self-directed accounts.

    OSU and the employee both contribute 14% of their eligible salary to the STRS plan. In the member-directed STRS plan 11.09% of employee contributions go to your STRS account and 2.91% goes to the STRS plan to fund past liabilities (required by law).

    The total contribution limits ($66,000) and the eligible compensation limits ($490k if hired before 1994, $330k if hired after) are the same as the OPERS plan as well.

    Alternative Retirement Plan (ARP)

    • Available to both Faculty and Staff employees
    • No pension option – only a defined contribution plan like a 401k/403b

    If an employee doesn’t want to enroll in the OPERS or STRS plans they can set up an account with the Alternative Retirement Plan instead. The ARP only offers one plan type – a defined contribution plan similar to a 401k/403b.

    Contributions to this plan are very similar to what an employee would contribute to their OPERS or STRS plan. Employees contribute 14% of their pay and OSU contributes 10% for staff or 14% for faculty. A portion of your employee contribution goes to OPERS or STRS as a mitigating rate to mitigate any negative impact on the state retirement system. The total employee/employer contribution limit is $66,000.

    Additional Retirement Plans employees have access to

    Along with an employee’s primary OSU retirement plan – whether that is OPERS, STRS, or the ARP – OSU employees also have access to a few supplemental retirement accounts. This is great news for employees looking to sock away even more money for retirement accounts as these supplemental accounts exist in their own retirement buckets and you can contribute to all of them at the same time.

    Supplemental Retirement Accounts (SRA) – Traditional and Roth

    • 403b plan (Traditional and Roth versions)
    • 457b deferred compensation plan (Traditional and Roth Versions)
    • Allows an additional $45,000 in retirement contributions ($22,500 in each account), $60k for those over 50 years old due to catch-up contributions

    Along with one of the State pension plans and the ARP, employees are able to contribute to both a 403b plan and a 457b deferred compensation plan.

    A 403b, similar to a 401k is a defined contribution plan where you (the employee) make contributions and select your investments. There are no employer matching contributions for either of these plans because OSU is already contributing to your primary retirement plan.

    A 457b deferred compensation plan is another plan where you contribute your own money on a pre-tax or Roth basis and make your own investment decisions within the plan. Your contributions are technically income that you haven’t been paid yet and it’s held within a trust managed by your employer. If you want to learn more about 457b plans you can read this explainer article I wrote here.

    The great thing about these plans is that they exist as 2 distinct retirement buckets and you can make the maximum contribution ($22,500 in 2023, plus an additional $7,500 if you’re over 50) for both of them. So that’s an additional $45,000 in retirement contributions you can make in these accounts, not counting what you are already saving in your primary OSU retirement plan.

    Executive Retirement Plan – Retirement Continuation Plan (RCP)/415(m)

    • Only available to select employees
    • RCP and/or 415(m)
    • A way or employees with salary greater than retirement plan limits to save more

    The Executive Retirement Plan is only open to employees with salary and retirement savings needs higher than the retirement plan limits.

    Wrap up and which retirement plan is right for you

    As I said in the beginning of this post there are a lot of options to choose from when it comes to selecting your OSU retirement plan. But it really boils down to whether you’d rather have a pension and allow the state of Ohio to manage your investments for you, or if you’d like a plan where you have more control over your investments and assume more of the risk. And depending on how much you can contribute you can have both options – selecting OPERS for your primary retirement plan while also contributing to a 403b and/or a 457b plan.

    For employees that plan to work at OSU for their entire career, and for 30 years or more, choosing the OPERS plan likely makes the most sense. But for individuals know they will be transferring to another employer or just aren’t sure, then choosing the ARP might make more sense since they will be able to bring their retirement contributions with them and roll them over into another plan.

    No matter your situation, with all of the OSU retirement plan options, you are sure to find one that works for you.

  • 457b, Financial Planning, Investing, Retirement Planning

    What is a 457b Plan & How Should Physicians Use It?

    What is a 457b Plan & How Should Physicians Use It?

    A 457b deferred compensation plan is a tax advantaged retirement plan similar to a 401k or a 403b plan. Just like those accounts a 457b allows you to save for retirement with pre-tax or after-tax (Roth) contributions. Although similar to the more widely known 401k and 403b, a 457b plan has a few differences you need to be aware of before incorporating it into your financial plan.

    Key Points

    • 457b plans are similar to 401k/403b plans. They allow you to make pre-tax contributions and invest those in a tax-advantaged plan.
    • There are two main types of 457b plans: governmental and non-governmental plans. It’s important to understand the type of 457b plan you have because non-governmental plans have additional restrictions, and can be riskier than governmental plans.
    • A 457b plan is an additional retirement account bucket you can fill up alongside your 401k/403b, providing you the opportunity to save an additional $22,500 in a tax-advantaged retirement account.
    • 457b plans can allow penalty-free early withdrawals before reaching 59 ½. There are additional tax consequences to prepare for though, so have a plan for early withdrawals.

    How is the 457b plan different from the 401k/403b

    Most people are familiar with what a 401k and 403b plan are. They are very similar plans allowing you to contribute up to $22,500 (this is the limit for 2023, this amount can increase each year based on inflation) to a tax-advantaged plan for retirement savings. The 401k is offered to employees of for-profit companies and the 403b is offered by non-profit/governmental employers.

    Within these plans you can make pre-tax or after-tax contributions, your earnings grow tax-free, and you can make withdrawals without penalty after you reach the age of 59 ½.

    A 457b plan is typically offered by an employer as an additional retirement savings account in addition to a 401k/403b. Which is great because the contributions to your 401k/403b don’t count against your 457b contributions, and vice versa. With access to a 457b plan you could contribute an additional $22,500 each year to your tax-advantaged retirement accounts.

    The key difference with a 457b plan

    One main difference between a 457b plan and a 401k/403b plan is included in its full name: The 457b Deferred Compensation Plan. The money that you contribute to your 457b plan is considered deferred compensation and belongs to your employer until you withdraw it after leaving or retiring from your employer.

    Another difference is that money can be withdrawn from a 457b plan much earlier without penalty than with 401k/403b plans. If you leave a job, and are younger than 59 ½, you have the option to begin withdrawing the funds from your 457b plan without the 10% penalty that you would face when taking an early withdrawal from a 401k/403b plan.

    You need to be aware of the tax consequences of withdrawing from a 457b plan, because the withdrawals are treated as income (hence the name deferred compensation), and plans vary in their withdrawal options. Some funds force you to take everything in a lump sum which depending on the size of your 457b could cause quite the tax headache.

    What are the two types of 457b plan?

    457b plans are offered in two flavors and there are key differences between the two: governmental and non-governmental plans.

    Governmental 457b plans

    Governmental 457b plans are typically offered to employees of state and local governments. These are seen as a “less risky” version of the 457b plan since they are backed by the government rather than an individual business.

    While you are an employee the money in your 457b is held in a trust. After leaving your employer, funds in these plans can be rolled over into an IRA or 401k, avoiding the possible tax headaches that come with distributions from a non-governmental 457b plan.

    Non-Governmental 457b plans

    Non-Governmental 457b plans are offered by non-profit employers such as hospitals, not state and local governments. These plans are considered riskier because the plans rely on your employer’s solvency, not the government.

    With a non-governmental 457b plan, rather than making contributions out of your paycheck, contributions are made by your employer and it is technically money that you haven’t earned yet, hence the name deferred compensation. Rather than sitting in a trust as with a governmental plan, the 457b in this case still belongs to your employer, not you, until you transfer or withdraw the funds.

    This can be helpful and protect you in the case of a personal bankruptcy, as your 457b funds belong to your employer and are not subject to your creditors (+ for asset protection). But the funds are also subject to your employer’s creditors in a situation where your employer goes under. This is not as big of a risk when it comes to an established hospital or company but is still something to consider.

    Another potential downside for non-governmental 457b plans has to do with their distribution or rollover options. These plans can only rollover into another non-governmental 457b plan, and only in limited situations. That means that rolling over into a 401k or IRA is not an option.

    When you leave an employer funds must be distributed within 10 years. Most 457b plans allow you to make distributions over 5-10 years, but some make you take a lump-sum distribution upon leaving your employer. A lump-sum, or even 5 years of distributions could create quite the tax headache if not planned for properly.

    457b plan is a great early retirement tool

    The 457b plan can be a great supplemental retirement savings account, but can be especially impactful for individuals pursuing early retirement. Having a 457b in addition to a 401k/403b doubles your annual contribution limit for retirement accounts, $22,500 => $45,000 in pre-tax or Roth contributions each year.

    Because of their status as deferred compensation and the lack of an early withdrawal penalty, 457b plans can build a great bridge between your early retirement years and when you turn 59 ½ and can withdraw from your 401k/403b penalty free.

    Should I contribute to my 457b, 401k, or 403b first?

    When considering which retirement plans to contribute to, and which one you should focus on first, the 457b tends to come in as an afterthought when compared to your 401k/403b and IRA/Roth IRA accounts. This makes sense, as most people haven’t even heard of a 457b before finding out they have access to one.

    The first account to fund should be whichever one is providing you an employer match. If your employer 100% matches the first 5% you put into your 401k, do that first. It’s hard to beat a 100% return on your money. After that it usually makes sense to max out your contributions to your 401k/403b before making additional contributions to your 457b.

    All of the above recommendations may vary based on the available cash flow that you can contribute to these accounts, as well as the other tax-advantaged accounts that you have access to and want to fund to meet your goals: your HSA, 529 education account, IRA/Roth IRA, etc.

    You will want to compare your available plans for any differences in investment options, fees, or vesting schedule (how long you need to remain at your company until the money is yours with no strings attached) before making your final decision.

    Another difference with 457b plans is that you have a total contribution limit of $22,500 which any employer contributions also count against. Where employer contributions to your 401k/403b count against your total $66,000 contribution limit, and you can still contribute your full $22,500. It’s a minor difference, but still one to keep in mind.

    In either case, the great thing with the 457b is that it resides in its own bucket and doesn’t impact how much you can contribute to your 401k/403b. Allowing you to contribute an additional $22,500 to a tax-advantaged retirement account.

    401k and 403b Catch-Up Contributions vs 457b Catch-Up Contributions

    401k and 403b plans allow individuals who are 50 or older to make additional catch-up contributions of $7,500 per year. The contribution limit for a 457b plan is doubled for the three years prior to the plan-specified retirement age. Based on current contribution limits you could make $45,000 in annual contributions in the three years before you retire.

    Pros and Cons of 457b plans

    Pros

    • Provides another tax-advantaged retirement account bucket for you to contribute to
    • Ability to make early withdrawals without penalty after you leave your employer
    • Can roll funds in governmental 457b plans into another retirement account (401k/IRA)
    • Allows larger catch-up contributions in the 3 years before the plan specified retirement age

    Cons

    • Riskier option compared to a 401k/403b if you are contributing to a non-governmental plan
    • Can’t rollover a non-governmental plan into another retirement account (401k/IRA)
    • Some plans have limited withdrawal options, such as requiring a lump sum withdrawal that could cause a major tax headache
    • Can (sometimes) have less investment options available for you to choose from

    Wrap up

    A 457b plan is a great retirement savings tool to have access to, providing an additional bucket of tax-advantaged savings to contribute to outside of your 401k/403b. But before you start using your 457b you need to understand the type you have: governmental or non-governmental, along with other details to make sure it fits in your financial plan correctly.

    Using a 457b plan correctly can help you turbocharge your retirement savings, and provide an income bridge for those pursuing early retirement. It’s hard to overstate the additional flexibility that a governmental 457b plan provides. With the option to early withdraw funds penalty-free or roll them over into another 401k/IRA, they are one of the best accounts out there.

  • Financial Planning, Student Loans

    The Physician’s Guide to Student Loans, Public Service Loan Forgiveness and More

    What You Need to Know About Student Loans

    Student loans, federal student loan forgiveness, and Public Service Loan Forgiveness are all hot topics these days, especially if you have as many loans as the typical resident. The average med school graduate owes $250,990 in total student loan debt. Yikes! That amount of debt is daunting no matter how much you expect your eventual salary to be.

    It hurts even more when you consider most docs will make around $65k during their years of residency. Understanding the different types of student loans you have and the payment/forgiveness programs you qualify for is crucial to managing your debt and building a solid plan to deal with it.

    Types of Student Loans

    There are two main types of student loans, Federal and private. Federal loans are made by the federal government and private loans are made by private banks or lenders. Federal loans can be consolidated into private loans. Private loans cannot be changed into federal loans so if you have federal loans and are considering consolidating them into a private loan you must be sure because there are no take-backs after you do.

    Federal Loans

    Federal student loans are loans made by the federal government to both undergraduate and graduate borrowers. There a couple different types of student loans: subsidized, unsubsidized, Perkins loans, FFEL loans. The type of federal student loans that you have can depend on your financial need, if you will use the loans for undergraduate or graduate schooling, or if you are a parent getting a loan for your child.

    The names of the types of loans don’t always make intuitive sense so be sure to do your homework on exactly what types of loans you have and which repayment plans those loans qualify for.

    Direct Loans

    The two broad types of federal direct loans are direct subsidized student loans, and direct unsubsidized student loans.

    Direct Subsidized Loans

    Direct subsidized student loans are offered to undergraduate students on the basis of need based on the information that you entered into your FAFSA. Subsidized loans are exactly that, they are subsidized by the federal government on your behalf. How this works is that the government pays the interest on these loans while you are in school (attending at least half-time), for the first six months after leaving school, and during a period of deferment where payments are postponed due to financial hardship.

    Direct Unsubsidized Loans

    Direct unsubsidized student loans are the other main type of direct student loan offered by the federal government, and they are available to both undergraduate and grad students. As unsubsidized loans they accrue interest as soon as you receive them.

    To determine whether or not you have direct loans you should visit the StudentAid.gov site and create an account using your Federal Student Aid ID. Using the site you will be able to see a summary of your federal loans and their type.

    Stafford Loans

    The term Stafford Loan may refer to a subsidized or unsubsidized Federal Stafford Loan that was made under the Federal Family Education Loan (FFEL) Program. This program has not operated since 2010, however some people and schools still use the term “Stafford Loans” when referring to direct subsidized or direct unsubsidized loans.

    Perkins Loans

    A Perkins loan is another type of subsidized federal loan that is made available to students that have demonstrated exceptional financial needs. The reason this isn’t considered a “Direct Loan” is that it is a loan made from the school and the borrower makes payments back to the school.

    Parent PLUS or Grad PLUS Loans

    PLUS loans are unsubsidized federal student loans made to parents of undergraduate dependent students which are known as Parent PLUS loans, or when made directly to graduate or professional students known as Grad PLUS loans.

    Direct Consolidation Loan

    With federal student loans you have the option to consolidate them into a Direct Consolidation Loan. There are pros and cons for making this decision. Certain federal loans don’t qualify for some of the federal repayment plans like REPAY or PSLF, while consolidated loans do.

    You may also lose some benefits and protections for certain loans with consolidation. After consolidation you have one loan with one interest rate that is the weighted average of your individual loans. Because you only have one loan now you lose out on the opportunity to pay off your loans individually with methods like:

    • Snowball method, where you focus on paying off your loan with the smallest balance first. Once that loan is gone you use the extra cashflow to pay off your next smallest loan, and repeat until they are all gone.
    • Avalanche method, where you pay off your loan with the highest interest rate first since it is costing you the most. Then when that loan is paid off you move to the next highest interest rate debt and repeat until finished.

    Private Loans

    Private loans are made by private banks or lenders and the details can vary widely. They generally cost much more than a federal loan, and are used when a borrower can’t access federal loans. The payments, interest, and terms and conditions on these loans can vary widely based on the borrower and institution. Interest also accrues on private loans while the student is still in school.

    *A note on refinancing*

    It’s important to remember that while you can refinance your federal student loans into a new private loan, you can’t reverse the process and change private loans into federal loans. You need to be mindful of this as you approach any sort of loan refinancing decision. You may have a good reason to refinance – such as getting a lower interest rate, or a lower payment – but you also lose out on the protections and repayment options that are available with federal student loans.

    Repayment Programs

    With Federal Student Loans there are many different payment programs, like IBR or PAYE, that you can use to manage your payments and repay your loans. Most of these plans forgive the remaining balance on your loan after 20 or 25 years of making payments, but the amount that is forgiven is treated as taxable income and you need to prepare for it.

    You can use one of these payment programs at the same time you are pursuing loan forgiveness under the Public Service Loan Forgiveness (PSLF) program, which exists in its own little category that we will explain more further down this article.

    Standard Repayment Plan, Graduated Repayment Plan, Extended Repayment Plan

    With these plans, monthly payments are calculated to pay off your entire loan balance over a period of 10 to 30 years. Payments are fixed under the standard plan, and can increase over time under the graduated and extended plans. These plans differ from the following plans we will discuss in that your income isn’t taken into account when calculating your monthly payment, and the plan is designed to pay off the entire loan balance by the end of the plan, i.e. there is no loan forgiveness as a part of these plans.

    Income Driven Repayment Plans

    There are several different Income Driven Repayment Plans. The plans vary on: eligibility depending on when you received and what types of loans you have, payback period length, payment amounts, and more. Your loan payment while in one of these plans is based on a percentage of your discretionary income, meaning it could change as your income and tax filing status changes.

    Each of these plans has a set repayment period and your loan balance at the end of the repayment period is forgiven, but remember that forgiven amount is taxable as income so you need to be prepared for the tax bill that comes with it.

    Income Contingent Repayment – ICR

    Payments are the lessor of 20% of your discretionary income or your payment under a 12-year fixed payment plan. The repayment period is 25 years. The ICR payment plan is rarely used.

    Income Driven Repayment – IBR

    There is an “old” IBR and a “new” IBR. There are slight differences and you can’t qualify for the new IBR if you had any loans prior to July 1, 2014.

    OLD: Payments are the lessor of 15% of your discretionary income or the 10-year standard repayment plan payment, and the repayment period is 25 years. You must demonstrate a financial hardship to qualify.

    NEW: Payments are the lessor of 10% of your discretionary income or the 10-year standard repayment plan payment, and the repayment period is 20 years.

    Pay As You Earn – PAYE

    Payments are the lessor of 10% of your discretionary income or the 10-year standard repayment plan payment, and the repayment period is 20 years. You must demonstrate a financial hardship to qualify.

    Revised Pay As You Earn – REPAYE

    REPAYE is similar to PAYE but you may have higher payments than with PAYE. Payments are 10% of your discretionary income, even if it’s higher than the 10-year standard repayment plan payment. The repayment period is 20 years for undergraduate loans and 25 years for graduate or professional loans.

    NEW REPAYE

    An updated REPAYE plan was proposed as part of the federal student loan forgiveness announcement in 2022. This plan has not been finalized or approved yet, but we are including the highlights below and will update this post if things change.

    • Borrowers will use 225% of the federal poverty limit when calculating discretionary income, up from 150% used for current REPAYE.
    • Undergraduate student loan borrowers will calculate their payments as 5% of their discretionary income. Graduate loans will still use 10% of their discretionary income to calculate payments. Borrowers that have a mix of graduate and undergraduate loans will calculate payments based on a weighted average of their loans.
    • Married borrowers will be able to exclude their spouse’s income from their loan payment calculation by filing taxes Married Filing Separately (MFS).
    • A big change is that interest will no longer accrue in excess of a borrower’s calculated payment. This means that your loan balance will not continue to grow even if your calculated payment does not cover the entire monthly interest due on the loan. This means that borrowers seeking loan forgiveness will have a lower amount forgiven, and a lower tax bill due, at the end of the loan.

    Public Service Loan Forgiveness

    PSLF isn’t exactly a payment program. You can enroll in REPAYE or IBR or any of the other payment programs while you are pursuing PSLF. But it is a very important program that you need to know about because it could save you hundreds of thousands of dollars if you qualify. If you work in the public sector or for a qualifying nonprofit you can have your entire loan balance forgiven after 10 years (120 qualifying payments).

    The requirement for PSLF include:

    • Must work “full time” for a qualifying entity – these include public health, nonprofits, public school teachers, etc.
    • Must have federal direct loans (if your loans aren’t direct you may be able to consolidate them into federal direct loans).
    • Must make 120 qualifying payments – note the language isn’t 10 years of payments, but 120 qualifying payments.

    If you are pursuing PSLF you should definitely enroll in an income-driven repayment plan to reduce your monthly payments as much as possible and increase the amount that will ultimately be forgiven.

    Summing Up

    There are many factors to take into account when considering student loans and your best strategy to deal with them. Refinancing, consolidation, seeking loan forgiveness, choosing a particular income-driven repayment. All of these decisions come with consequences that are helpful to understand so you can make the optimal decision for your situation.

    Making a plan to deal with as much student loan debt as the typical med school grad has can feel daunting. Not creating a good plan to manage it can lead to serious problems with your finances in the future.

    There is a lot of helpful information on the federal student aid website about repayment plans and consolidation faqs. If you feel overwhelmed talking to a financial advisor with experience dealing with student loans can be a big help.

  • Financial Planning, Insurance

    WHAT PHYSICIANS SHOULD KNOW ABOUT DISABILITY INSURANCE

    Why Disability Insurance is Important: Protecting Your Greatest Asset

    As a physician one of your greatest assets is your ability to earn a substantial income once you have completed your training and residency, and you should protect it with disability insurance. Most physicians will graduate with a healthy amount of student loan debt from years of schooling, likely totaling in the hundreds of thousands of dollars. And while this might be a daunting amount to have to pay back, the opportunity to earn a great income throughout your working career makes the investment worthwhile.

    If your ability to practice medicine in your chosen field and use the skills that you have gained during your years of school and training were to disappear, the ability to pay off your student loans, not to mention being able to achieve your goals and live a life that you enjoy would be drastically reduced. Insurance companies estimate that as many as one in seven doctors will be disabled at some point during their career. The importance of your future income and the high likelihood of needing to rely on disability insurance are the reasons why it is such an important topic for all physicians to understand.

    Short-Term vs Long-Term Disability Insurance

    There are different variations of disability insurance: short-term and long-term disability insurance policies. The benefit period – or how long you receive payments if you become disabled – can last up to two years for short-term policies. Long-term policies are designed to cover your working career, with most policies ending at the age of 65. For this article we will be focusing on the more important of the two, long-term disability insurance (LTD).

    The Benefits and Drawbacks of Employer-Provided/Sponsored Group Long-Term Disability Insurance

    Many employers offer a group long-term disability insurance to employees. This is a great first step in protecting your long-term earning potential, but relying solely on employer-provided coverage can come with some drawbacks.

    Some of the benefits of employer sponsored long-term disability insurance are:

    • Lower cost
    • Easier to qualify for (usually does not require medical screening)

    The list of potential drawbacks for employer-provided coverage is longer, but that doesn’t mean that employer-provided disability insurance is a bad thing it just means you have some extra homework to do when choosing an individual long-term disability insurance policy to make sure you are getting the correct coverage.

    Potential drawbacks are:

    • Any occupation definition of total disability
    • No portability if you leave your employer
    • Benefits are taxable (when employer paid)
    • Offsets with other benefits such as social security
    • Capped benefit amount

    An employer-provided group long-term disability policy is a great place to start when it comes to coverage, but you are almost certainly going to want to supplement that coverage with an individual policy that provides a full level of income replacement as well as the ability to maintain coverage if you switch employers in the future. Let’s look at an example of the benefits from a group policy and why you would want to supplement with an individual policy as well.

    Employer provided long-term disability coverage typically has a maximum monthly benefit cap along with only replacing a percentage of an employee’s. Also since this is usually a benefit provided by your employer on a pretax basis, the employee ends up paying income tax on the benefit they receive, so for example:

    Let’s say Doctor Doom earns $400,000 per year and is covered by a LTD plan that covers 60% of income up to a maximum of $15,000 per month. Under the plan they are insured as if they are making $300,000 (60% of $300,000 provides for $180,000 or $15,000 per month, the plans monthly benefit). Dr. Doom would also still owe income tax on the $180,000, lowering their benefit further.

    Important Contract Provisions and Riders

    There are different provisions and riders that are included in a disability insurance policy that may affect the cost and benefits that you are entitled to receive should you need to make a claim. The list below contains a few of the most important provisions and riders to understand when choosing a policy.

    Definition of Total Disability: Own-Occupation vs Any Occupation

    The definition of disability is an important distinction within the policy. Under an own-occupation definition, someone would be considered disabled if they could not perform the functions of their occupation, whereas with an any occupation definition as long as they could perform the functions of any occupation, they would not be considered disabled.

    A basic example would be if a surgeon who through illness or injury lost their fine motor control and could no longer perform surgery (their occupation), but could still work an office job, they would be considered disabled under an own-occupation definition but not an any occupation definition.

    Residual Disability

    This is a provision that allows a partial benefit to be paid if someone is not totally disabled but are in a situation where they cannot perform all the duties of their occupation or cannot work as many hours and suffer a reduction in income.

    Elimination Period

    This is the period of time before you are able to start taking benefits. You can think of this as being similar to the deductible in a health insurance plan. 90 days is a typical length for most long-term policies, but elimination periods of 0 days, 180 days, or longer can also be selected.

    Benefit Period

    The benefit period is the period of time that the policy will pay out disability benefits. This can range in time from two years all the way up to the insured’s lifetime. The most common benefit period is up to age 65

    Recovery and Transition Benefits

    Policies can offer a recovery or transition benefits to continue paying benefits to someone after the insured has fully recovered. For example, in the case of a solo-practitioner who has been disabled for a significant period of time and eventually recovers. They will likely have seen a number of their patients leave and find other physicians. Transition benefits could be used to supplement their income as they build back their patient base and income.

    Non-Cancellable and Guaranteed Renewable

    When a policy is both non-cancelable and guaranteed renewable it means that the insurer cannot change the policy terms or increase the premiums as long as the insured pays the scheduled premium. This offers the insured the greatest amount of protection. There are policies that are only guaranteed renewal (not non-cancellable) which allow the insurer to change premium rates in the future. This may provide the insured with savings on the initial premiums but leaves them open to rate increases in the future.

    Future Increase Option, Benefit Increase Rider, Benefit Purchase Rider, Benefit Update

    These options allow the insured to increase benefits or purchase more coverage in the future. Importantly the insured is able purchase additional benefits without undergoing additional medical underwriting. These are beneficial options for physicians early in their career as they can purchase increased benefits to keep up with their increases in salary without having to go through the medical underwriting process again.

    Catastrophic Coverage

    A catastrophic disability benefit rider allows you to receive an additional monthly benefit if you are unable to perform 2 or more functions of daily living (dressing, bathing yourself, etc), total and permanent loss of sight or hearing, or cognitive impairment. The reasoning behind this rider is that the additional benefits could be used to pay for someone to provide in-home care or medical expenses not covered under your traditional health insurance.

    Cost of Living Adjustments

    COLA is a rider that provides increased cost of living adjustments for claim payments to keep up with inflation. This is especially important the younger you are when purchasing your policy as inflation can take a toll on benefit payments over time.

    Long-Term Disability Insurance Cost

    Long-term disability insurance for physicians can be expensive. Premium costs tend to be in the range of 2-6% of income, and traditionally policies are much more expensive for women than men. This is primarily due to the higher risk of disability for women due to pregnancy and pregnancy related illnesses. According to the Journal of the American Society of Certified Life Underwriters a 35-year old woman is three times as likely as a man of the same age to become disabled for 90 days or more.

    Graded vs Level Premiums

    Graded premiums start out lower than level premiums and increase over time, whereas level premiums will remain the same for the life of the policy. If you are hell-bent on paying off your student loans, saving a ton and becoming financially independent early in your career then the graded premiums might make sense. But for most physicians, getting coverage early in their careers and choosing level premiums is the better bet.

    Premium Frequency

    Insurers offer a few different payment frequency options: annual, quarterly, monthly. With more frequent payments costing more than making one annual payment. This can usually be changed without affecting the policy so starting out with monthly payments early in your career and then switching to an annual payment once you can afford it is a good option.

    This article provides an overview on the basics of disability insurance and is by no means an exhaustive guide. When selecting a disability policy make sure to get multiple quotes and understand the specifics of your policy and what it covers. Your skills and your income, especially at the start of your career, are your most important asset. Make sure to protect it by including disability insurance in your financial plan.