Chris Kimmet

Chris Kimmet is a CERTIFIED FINANCIAL PLANNER™ helping Physicians, Busy Professionals and Retirees achieve their financial goals so they can focus on the most important things in their life. Steady Climb Financial Planning is located in Upper Arlington, Ohio serving clients located locally in Columbus and throughout Ohio, as well as virtually across the U.S. Contact us today for your free initial consultation.

  • Increased Retirement Account Contribution Limits for 2024

    The IRS announced new contribution limits to employer retirement accounts (401(k)s, 403(b)s, most 457(b) plans, and the Thrift Savings Plan) and individual retirement accounts (IRAs, Roth IRAs). Along with increased contribution limits, the income limits to be able to contribute to a Roth IRA and to deduct contributions to a traditional IRA are receiving a bump for 2024 as well.

    Key Points

    • 401(k)/403(b) employee contribution limits increased to $23,000 for 2024.
    • IRA and Roth IRA contribution limits also increased and are up to $7,000.
    • The income limit to be able to directly contribute to a Roth IRA ranges from $146k – $161k for single filers and  $230,000 – $240,000 for married filing jointly.
    • The total contribution limit for employer retirement accounts also grew to $69,000. This is the limit for all employee, employer, and after-tax contributions.

    2024 Employer Retirement Account Contribution Limits

    The employee contribution limit for employer retirement accounts, think 401(k)s, 403(b)s, the Thrift Savings Plan and most 457(b) plans is increasing to $23,000. A $500 bump from 2023. The total limit which includes employee and employer contributions rises to $69,000, a $3,000 boost from last year.

    The catch-up contributions available to employees who are 50 or older remains unchanged for the new year at $7,500.

    After-tax 401(k) Contribution Limits

    Once you hit the limit to what you can contribute as an employee, $23,000 for 2024, you may be able to save more in your 401(k) through after-tax contributions. That’s where the combined limit of $69,000 comes into play. If your 401(k) plan allows you can make additional after-tax contributions up to the $69,000 limit.

    Consider an example where your employer makes a flat $5,000 401(k) match and your 401(k) plan allows after-tax contributions. Once you’ve made your $23,000 contribution you can contribute an additional $41,000 of after-tax contributions.

    $23k employee contribution + $5k employer match + $41k after-tax contribution = $69k

    Your after-tax contributions will continue to grow tax-free and you will owe taxes on their withdrawal in retirement similar to traditional 401(k) contributions.

    After-tax 401(k) -> Mega Backdoor Roth

    An even better option if your 401(k) plan allows it is to do an immediate Roth conversion on your after-tax contributions. Since the contribution is made with after-tax dollars there will be no tax owed on the Roth conversion, and your converted funds will grow tax-free and can be withdrawn tax-free in retirement. You can learn more about the Mega Backdoor Roth at this link.

    2024 IRA (Individual Retirement Account) Contribution Limits

    The contribution limit on IRAs is getting a $500 increase for 2024 as well. Individuals can contribute up to $7,000 to Roth and Traditional IRAs, up from $6,500 last year. The 50 and over catch-up contribution will remain at $1,000.

    The income limits to contribute to a Roth IRA or to make a tax-deductible traditional IRA contribution are increasing as well. These limits can be a little confusing because the amount you can contribute or deduct decreases once you earn above a certain amount, and if you are married the limits also vary based on whether you or your spouse have access to an employer retirement plan like a 401(k).

    2024 Roth IRA Income Limits

    The income limits for a Roth IRA are relatively straightforward compared to the rules around the traditional IRA. For a Roth IRA in 2024 single taxpayers can make the full contribution if your income is $146,000 or less. Above $146k as you make more income the amount you can contribute is reduced until you make $161,000 at which point you can no longer directly contribute to a Roth IRA.

    Although, if your income is too high to contribute to a Roth IRA directly you can still make a backdoor Roth IRA contribution.

    The phaseout limits for married couples filing jointly contributing to a Roth IRA go from $230,000 to $240,000. Both of these limits increased $12,000 from last year, so more folks should be eligible to contribute to a Roth IRA directly in 2024.

    2024 Traditional IRA Income Limits

    Income limits to deduct contributions to a traditional IRA follow a similar pattern. There’s a range of income where your ability to deduct contributions is phased out and the actual limit depends on your tax filing status and on whether you or your spouse have access to a workplace retirement plan.

    If you are a single filer and you don’t have a workplace retirement plan, or if you are married filing jointly and neither you nor your spouse have a workplace retirement plan then there aren’t any income limits and your traditional IRA contribution will be deductible.

    Single filers with a workplace retirement plan have an income limit phaseout range from $77,000 to $87,000.

    For married filers where the spouse making the contribution has a workplace retirement plan the income limit phaseout range is $123,000 to $143,000.

    For married filers where the spouse making the contribution does not have a workplace retirement plan, but the other spouse does, the income limit phaseout range is $230,000 to $240,000.

    These limits are also increases from last year.

    Qualified Charitable Contributions

    Along with increases to retirement contributions, the amount that you can contribute from your retirement account to charity also increased. A QCD (Qualified Charitable Distribution) allows you to roll funds directly from your IRA to a qualified charity. QCDs satisfy RMD rules and you can exclude the amount donated from your taxable income. The QCD increases by $5,000 for 2024 up to $105,000.

    Should you make any changes based on these increases?

    If you’re maxxing your 401(k) contribution you’ll want to review your planned contributions for 2024. For IRAs and Roth IRAs, compare your expected income for 2024 to the new limits and adjust any automatic contributions you already have set up.

    If you are unsure where your income will fall or if you’ll have the cash to contribute to your Roth or traditional IRA you can always wait until you file your taxes the next year to make your contributions. So, you could make 2023 IRA contributions up to tax-day 2024.

    Wrap Up

    While it doesn’t quite make up for the spike in inflation we’ve seen the past few years, it is nice to be able to stash away a few more dollars tax-free for retirement. Make sure to review your income and planned contributions for next year to take advantage of additional contribution limits especially if you’ve turned 50 and can start making catch-up contributions.

  • What is an Index Fund?

    Depending where you are on your financial journey the information in today’s post might seem obvious. But for every individual who knows the ins and outs of mutual funds and ETFs along with what the letters VTSAX stand for, there are just as many who are just getting started and are eager to learn. So, what is an index fund?

    Key Points

    • Mutual Funds and Exchange Traded Funds (ETFs) can be thought of as a basket that holds pieces of other assets like stocks, bonds, and even other mutual funds or ETFs.
    • Mutual Funds and ETFs make it much easier for investors to create a diversified portfolio.
    • The best stock pickers and mutual fund managers often fail to do better than the overall stock market, and that’s their job. If they can’t beat the market, why do so many individual investors think that they can?
    • Investing in Index Funds is a way of acknowledging that it’s extremely difficult to outperform the stock market and you are better off matching it’s performance instead.

    What Goes in Your 401k?

    When you got your first job with a 401k or 403b and made the choice to contribute a percentage of your paycheck you might have been confused when you next had to pick your investment allocation.

    We don’t do a great job with financial education in the U.S. so thinking you were done after choosing to put money in your 401k is understandable. But the 401k is the just the account that holds your investments. Contributing is great, but choosing what investments to hold in your 401k is extremely important.

    Nowadays some 401k/403b plans will auto invest individuals into a target date retirement fund, which is great. But what if this doesn’t apply to you? What types of investments should you hold in your 401k/403b or your IRA, Roth IRA or 457b for that matter? The answer to that varies based on your age and goals, but it should generally be a mix of stock and bond index funds. So what exactly are index funds?

    An index fund is simply a type of mutual fund or Exchange Traded Fund (ETF) that tracks the movement of a particular index. In plain English that means it’s like a stock whose price goes up and down the same as the index it follows. Most index funds follow a specific stock or bond index.

    So, if an index is just a basket of companies what makes an index fund so special and why should you choose to invest in them versus other funds, or individual stocks and bonds?

    The Stock Market Generally Trends Up

    Investing in stocks is one of the best ways to earn the higher returns needed for your portfolio to grow and provide for your future goals, such as retirement. Keeping your money in cash, which is attractive right now in October 2023 with savings accounts offering interest of 4% or more often fails to beat out inflation over the long haul.

    Money invested in bonds will grow slowly, generally in the range of 3% – 5%. While the returns on the US stock market have generally been around 8% annually, depending on the date range you look at.

    So, if we believe that the value of the stock market will continue to increase and investing in stocks is the best way to grow our wealth to prepare for the future, why are index funds the best way to do that? Shouldn’t we just find the next Amazon or Google and buy their stock instead?

    Picking the Hot Stock

    The problem with finding the next hot stock is finding the next hot stock. There are many very smart people who spend a ton of time and money trying to find the next Apple or guess when the next recession will hit.

    You’ve likely heard of famous investors like Warren Buffett. That’s because it is incredible hard to pick successful stocks, or “beat the market” year in and year out. The people that can do this are justifiable famous.

    If you have the skill to pick the best performing stocks and only buy those, that is definitely the way to go. The problem is that the vast majority of us are just as likely to pick the next pets.com as we are to find the next Amazon.

    The Benefits of Diversification

    If we acknowledge that we it’s hard to pick winners in the stock market what are our options? The solution is to purchase a variety of different stocks. Some stocks will do well and grow in value, and others will do poorly. By diversifying among a large number of stocks we decrease the chance that we’ll go bust and lose our entire investment. We choose to own the entire market, rather than trying to beat it.

    With a diversified portfolio we settle for the opportunity for decent return, rather than risk an all or nothing bet on one single stock.

    That’s where mutual funds and ETFs come in. These are single securities that act like a basket holding a slice of many different stocks. Instant diversification!

    How About Paying Someone to Pick the Best Stocks?

    Since there are smart people out there who know how to beat the market why don’t we pay them to pick the best stocks and beat the market for us? It turns out you can try to do this by buying “active” funds.

    Active funds are mutual funds or ETFs made up of stocks or bonds that the fund manager chooses because they think they will do well and outperform the market. The problem is that just as with picking a quality individual stock, it is very hard to pick a quality active fund.

    Maybe an active fund will outperform its benchmark for one year, but it’s very difficult for it to do better year after year. The S&P Dow Jones Indices releases their SPIVA® (S&P Indices Versus Active) reports each year. During the first half of 2023 59.7% of U.S. large-cap equity fund managers underperformed the S&P 500. If you look over a three-year period 79.8% underperformed.

    It is just as hard for someone to select which active funds will outperform in a certain year as it is to select which stocks will do the same. So, if we can’t really pick which of the active funds will do well, why do we choose index funds instead? Reason 1: an index fund won’t outperform the market but it shouldn’t underperform either. Reason 2: index funds cost much less than active funds.

    Index Funds are Cheaper Too

    We’ve learned that the majority of active funds don’t do any better than their index, so they must cost less than an index fund that “just” tracks the index right? Nope!

    The average expense ratio for an active equity fund in 2018 was 0.76% and the average for an index equity fund was 0.20%.

    That 0.56% difference in fees between an index fund and active fund may not seem like a lot. After all, 0.56% of a $10,000 is only $56 but it adds up over time. For a $500,000 portfolio growing at 6% per year, paying an extra 0.56% in fees would cost you $421,938 over a period of 30 years. That’s quite an impact!

    The Best, Most Cost-Effective Option

    All of these reasons: diversification, lower fees, the difficulty of picking winners are why index funds are the right choice for most investors. These benefits have led to a rise in popularity of index funds. Where before you could only find funds that tracked the largest stock markets, today you can find an index fund for almost anything.

    Wrap Up

    Index funds are the best investment options for most investors for their workplace retirement accounts, IRAs and Roth IRAs, and taxable brokerage accounts.  They provide a low cost way to track the stock market and diversify your portfolio versus trying to pick individual stocks or active mutual funds that you think will beat the market.

  • Supercharge Your Retirement Savings With The Mega Backdoor Roth

    Saving for retirement is a critical aspect of financial planning. While traditional retirement accounts like 401(k)s, 403(b)s and IRAs offer valuable tax advantages, they come with contribution limits that may not be sufficient for physicians with substantial incomes.

    This is where the “mega backdoor Roth contribution” comes to the rescue. In this post, we’ll explore how physicians, including self-employed and locum tenens doctors, can harness this strategy to supercharge their retirement savings.

    Key Points

    • With an attending physician salary, you can fill up your tax-advantaged retirement buckets pretty quickly. This can leave you searching for other types of accounts and investments to continue saving for your retirement needs.
    • The Mega Backdoor Roth can help you contribute up to an additional $43,500 to Roth retirement accounts. Since these are Roth funds they grow tax-free and withdrawals are also tax-free.
    • The Mega Backdoor Roth is also a great option for self-employed physicians, such as practice owners or locums physicians, to save more for retirement.

    What is a Mega Backdoor Roth?

    Most physicians have heard of the backdoor Roth IRA before, but what is the Mega Backdoor Roth? With the regular backdoor Roth strategy, you make after-tax contributions to your traditional IRA and then execute a Roth conversion to convert those funds to a Roth IRA.

    With this strategy you are limited to the annual IRA contribution limit, which is $6,500 for 2023. The mega backdoor Roth allows you to execute essentially the same strategy using your 401k in place of your IRA. Since 401(k)s have much higher contribution limits and no income limits this allows you to supercharge your retirement savings.

    How the Mega Backdoor Roth Works

    1. Max Out Your Pre-Tax 401(k) Contributions: Start by contributing the maximum allowed amount to your traditional 401(k). In 2023, the annual limit for employee contributions is $22,500, with an additional $7,500 catch-up contribution for those aged 50 and older.
    2. After-Tax 401(k) Contributions: Some 401(k) plans permit after-tax contributions beyond the pre-tax limit. This provision is required for the mega backdoor Roth to work, so check with your employer to make sure your 401k allows after-tax contributions.

    In 2023, the overall contribution limit for all contributions (including employee and employer contributions) is $66,000 or 100% of your income, whichever is less. This means you can potentially contribute a significant amount of money on an after-tax basis.

    For an example, if you contribute the maximum of $22,500 to your 401k and your employer contributes a flat match of $5,000 you could make additional after-tax contributions of $38,500.

    $22,500 employee contribution + $5,000 employer match contribution + $38,500 after-tax contribution = $66,000 contribution limit

    1. In-Plan Roth Conversion: Once you’ve made your after-tax contributions, your plan may allow you to convert these funds to a Roth 401(k) within the same plan. Since these were after-tax contributions there is no tax associated with the Roth conversion. This is the critical step that turns your after-tax contributions into tax-free Roth assets.

    Some plans may not allow in-plan Roth conversions and may instead allow in-service withdrawals. In this case you would roll your after-tax contributions into a Roth IRA outside of your retirement plan.

    In the case where your 401k allows you to make after-tax contributions but does not allow in-plan conversions or in-service withdrawals you should still consider making after-tax contributions. Even though it is not as advantageous as a plan that allows in-plan Roth conversions.

    When you retire or leave your employer you can roll your after-tax 401k into an IRA at that time. Your after-tax contributions will roll into a Roth IRA, but any growth will be treated as pre-tax dollars and rolled into a traditional IRA.

    Example: You contributed $20,000 to your after-tax 401k which grew to $25,000. You decided to leave your employer and do a rollover of your 401k into an IRA. Your $20,000 of contributions would roll into a Roth IRA. The $5,000 of gains would roll into a traditional IRA.

    Benefits of a Mega Backdoor Roth Contribution

    1. Tax-Free Growth: One of the primary benefits of the mega backdoor Roth is that once your contributions are converted to Roth, they grow tax-free. This can be especially advantageous for high-income individuals who anticipate being in a higher tax bracket in retirement.
    2. No Income Limits: Unlike traditional Roth IRA contributions, there are no income limits for the mega backdoor Roth strategy, making it accessible to high-earning physicians.
    3. Higher Contribution Limits: Compared to the regular backdoor Roth you can contribute over 6 times as much to your after-tax 401k, helping to supercharge your retirement savings.
    4. Estate Planning: Roth IRAs can offer excellent estate planning benefits, as they can be passed on to heirs tax-free.

    Utilizing the Mega Backdoor Roth for Practice Owners, Self-Employed, and Locum Physicians

    Being a self-employed physician can be an outstanding career choice for many doctors, but can have the unfortunate downside of losing access to employer retirement plans such as 401(k)/403(b)/457(b) plans.

    Self-employed physicians, whether they are practice owners, 1099 emergency docs or locum tenens physicians, have a unique opportunity to implement the mega backdoor Roth strategy using a Solo 401(k). Here’s how:

    1. Open a Solo 401(k): Self-employed individuals can set up a solo 401(k), also known as an individual 401(k) or one-participant 401(k). This plan allows for both employer and employee contributions, crucially including after-tax contributions.

    * You will want to make sure your solo 401(k) plan allows for both after-tax contributions and in-plan Roth conversions to maximize the benefits of the mega backdoor Roth. *

    1. Maximize Contributions: As both the employer and employee, you can contribute up to the annual limits mentioned earlier, including after-tax contributions.
    2. In-Plan Roth Conversion: Execute your in-plan Roth conversions to maximize the benefits of your after-tax contributions.

    Wrap Up

    The mega backdoor Roth contribution is a powerful tool for physicians looking to supercharge their retirement savings and enjoy tax-free growth on their investments. For self-employed physicians, such as practice owners, emergency doctors, and locum tenens physicians, the solo 401(k) offers an excellent platform to implement this strategy.

    It’s essential to consult with a financial advisor and/or tax professional to ensure that the mega backdoor Roth contribution aligns with your financial goals and retirement plan. By taking advantage of this strategy, you can supercharge your retirement savings and secure a more comfortable financial future.

  • 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.

  • 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.

  • 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.

  • 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 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!

  • 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.

  • 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.