Saving

  • 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

    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.

  • 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.

  • WHAT SHOULD I DO WITH EXTRA SAVINGS?

    Covid-19 has impacted society and how we go about our day to day lives in many ways, and we will discover more changes as long as it remains a threat without a successful treatment or vaccine. Quarantines, reopening, subsequent outbreak related shutdowns, and looming waves of infection all have the capacity to change our behavior in ways we can’t predict. We have already seen the largest spike in unemployment in the history of the U.S. and some of the largest bailout/stimulus/aid packages passed in record time.

    One somewhat surprising financial effect has been the increased personal savings rate. The rate jumped from 8% in February up to 13.1% in March and according to the U.S. Bureau of Economic Analysis it hit a record 33% in April. I guess an increase shouldn’t be too surprising given that due to stay at home orders people weren’t able to spend at many of the places they usually do like restaurants and bars, and people with small kids didn’t have to pay for childcare (but still had to find a way to care for kids and get work done, if this is you, I’m in the same boat and I feel for you). Still, the magnitude of the increase is a bit shocking.

    If you are part of the lucky group with stable employment and you’ve seen your savings balance go up, what should you do now? Blowing it on stuff you don’t need from Amazon might seem appealing, but there are probably better uses for your excess cash.

    Create an emergency fund

    Step number one in all of personal finance is earn more than you spend, and step two is to set some cash aside in case of future emergencies. If you are someone that’s been operating right on the edge between income and spending, take this time to build up a cash cushion. The old statistic that 40% of people can’t afford a $400 emergency is said to be false, but that doesn’t mean that everyone is sitting pretty with plenty of savings, or wouldn’t be in a bad spot if they had to replace the transmission in their car tomorrow.

    The recommended emergency fund amount is between 3-6 months of expenses depending on your personal comfort level and situation. Chances are that the increased savings you may be experiencing is not enough to fully fund 3-6 months of expenses and that’s ok. Start by making a deposit to this fund and continue adding to it over time.

    If you already have an emergency fund that you felt comfortable with heading into 2020, right now when the world is so uncertain is the perfect time to re-evaluate. Make sure your risk tolerance and comfort level aligns with the amount you have in savings. I think it’s helpful to think back to how you felt when the shutdowns started and everything was so uncertain when considering the correct emergency fund amount for you. I am not advocating for people to pull all of their money out of the stock market and keep it in cash, but having a decent emergency savings account, might come in handy and help you sleep much better in the coming months. Especially when it seems extremely likely that we will continue to deal with more uncertainty going forward.

    Review your spending habits

    It’s rare in life that someone or something mandates that you stop doing anything inessential. But that’s exactly what happened when the coronavirus shut downs occurred. Most of us had between 1 to 3 months of time where we were not allowed to do much outside of the basic functions of eating, sleeping, working, and caring for our children.

    It was definitely frustrating in the moment when you couldn’t go out and grab a meal at your favorite restaurants or get coffee in the morning before heading to work the way you would normally do. But it also offers an opportunity to take a look at your spending pre-shut down and more mindfully consider what actions you want to continue or change now that life is moving back in the direction of normal, or at least our new normal.

    Maybe during quarantine you discovered how much you like cooking for you and your family at home during the week. Or maybe you discovering how much you were spending on snacks and coffee and other things throughout the throughout the week. Or maybe you’re surprised that the extra money you have in your bank account because you were not able to head to happy hour for drinks 2 to 3 times a week like you previously were. On the flip-side you might realize just how much you relied on your weekly yoga session to destress after your work week, or how much your weekly date nights out helped you and your partner connect.

    The quarantine has provided a great chance to review how you spent your money and time before and consider if there are any changes worth noticing. It’s perfectly fine not to make any changes after life gets back to normal, the important part of this process is taking a mindful look at how you were spending in both situations and making sure that you’re aligning your money with your goals to live your best life.

    Give to those that need it the most

    If you’re fortunate enough to be in just as secure a financial position today as you were in February 2020 that’s great, but the effects of coronavirus and the shutdowns have impacted some people much more than others. The economic effects have impacted people unequally based on race, income and education. Those with higher income and higher education levels have seen minimal effects to their financial well-being. They have been able to continue working and in many cases working from home. The shutdown has more severely impacted communities of color and less educated workers who have seen a much higher rate of unemployment since the start of the shutdowns.

    If you are in a position to donate, now is a great time to give to charities that are helping those hit hardest during this time. There are many organizations that could use your help supporting the work they do. World Central Kitchen has been working to feed people during the coronavirus crisis, you can also support Feeding America or use their site to find local food banks that would gladly accept your help as well.

    Along with the increased economic impact that they have to deal with, minority communities have been disproportionately hit with the health impact of coronavirus as well. Blacks and Latinos are more likely than Whites to be infected by the coronavirus and are more likely to die as a result as well. The protests around the murder of George Floyd have helped shine a light on the systemic racism and injustice that these communities must deal with everyday. One small way you can help is by donating to Black Lives Matter, the NAACP Legal Defense and Education Fund, and the Loveland Foundation or another charity working to promote racial equity in the U.S.

    There are many causes and people that can use your help even more these days than in the past. I strongly recommend finding a way to support organizations like these or others that are important to you if you are able.

    Plan for future goals

    One of the most impactful things that you can do with any unanticipated cash is to you give yourself a head start on achieving your future goals. Putting a healthy chunk into savings account for a future house down payment, or maxing out your Roth IRA contributions for the year as well as getting a start on next years are great uses of excess funds.

    As they say compound interest is one of the most powerful forces in the universe, and it’s made even more powerful the earlier you put it to work. Giving yourself a head start on savings allows compound interest to work for you for longer and potentially reach your goal much more quickly.

    Don’t Look Back With Regret

    However you choose to spend your coronavirus savings windfall please do it wisely. There are still plenty of ways to spend and as the U.S. opens up it will be tempting to go wild or fall back into default spending patterns without realizing it. The worst outcome financially would be to look back at this time with regret that you wasted this opportunity to build up your savings, help others or set your future self up for success.

  • 4 NEW YEARS RESOLUTIONS THAT FAIL AND HOW TO FIX THEM

    We are 3 weeks into 2019 and if you set any resolutions for the new year you’ve probably given up or forgotten all about them by now. Don’t feel bad, you’re in the same boat as everyone else. We humans are bad at making and sticking to resolutions, especially if they are non-specific and tied to an arbitrary date like when the Earth completes full revolution around the sun.

    The secret to crafting resolutions that stick is to make them SMART: Specific, Measurable, Action oriented, Realistic, Timely. Most resolutions that fail do in part because they don’t have enough of these attributes. They’re too broad, “what does lose weight or get in shape mean?”. Or they aren’t realistic, “are you really going to run a marathon this year if you haven’t run more than one mile in 2018?”.

    Here I’m going to go through 4 typical failure prone resolutions and how you can structure them SMART-ly to ensure success!

    1. Embark on a no spend January

    This is a popular resolution because we just finished with the holiday season and all of the orgiastic consumer spending that entails. Most of us start January looking at our bank balances and credit card bills thinking that somethings got to change. Going cold turkey by only spending money on the essentials seems like the best bet.

    This resolution is specific and measurable, but it’s not very realistic, one of the hallmark problems of a New Year’s resolution.

    The problem is the binary nature of the resolution. Once you commit to buy nothing other than the essentials, one of two things start to happen. You start to backslide on what you categorize as essential – “Well I really need that double mocha frappe latte because I need the caffeine kick if I’m going to get anything done today” – until you’re back to your old spending patterns. Or the first time you fall off the wagon and buy something you don’t really need, you say “screw it” and give up on the rest of the resolution.

    What you should do instead

    Resolve to use the 48-hour for non-essential purchases and track your subsequent spending. This resolution is still specific and measurable, while also being more realistic and achievable.

    How does it work

    When you think you need to buy something, set a 48-hour timer. After two days, consider the item again and whether you still need it. Often, you’ll find the initial desire to purchase has passed and you find you don’t actually need it. But if you do need it, then you can make your purchase guilt free.

    The second part is to track your spending on these items, especially on things that you purchase while bypassing the 48-hour rule. By tracking what you spend and buy, you can build that into your budget, or set limits to help yourself in the future. Like, no browsing amazon.com after 11pm at night.

    2. Start exercising

    Another all-time favorite resolution. If you do an online search for popular resolutions this one appears on almost every list. After the extra eating and drinking during the holidays, all of us could do with a bit more exercise.

    We start with the best of intentions. The first visit to the gym is great, we feel awesome after spending a half hour on the treadmill and moving some weights around. The next few trips don’t give us quite the same rush, and by the second or third week of January it just feels like too much effort to go to the gym after work.

    This one is action oriented, but not very measurable, or realistic if you don’t happen to enjoy going to the gym or running during the cold winter months.  

    What you should do instead

    Find an active hobby you enjoy and sign up for classes or schedule events at specific times.

    How does it work

    Everyone knows they should get more exercise, but for most people the initial good feelings you get of going to the gym wears off after the first few visits. Rather than spending money on a gym membership that you won’t use, the better bet is to find an active hobby that you enjoy doing instead.

    Even if you spend a bit more money signing up for a weekly tennis or soccer league, you will get more in value than the gym membership you paid for but didn’t use. By signing up for a group class, team event, or scheduling another weekly hobby like a snowshoe outing you add specificity and timeliness to your resolution as well.

    3. Stop eating out as much

    It seems a lot of these resolutions deal with the aftereffects of all the overspending and overeating during the holidays. Or maybe that’s just me?

    On the face of it this is a great resolution for your health and your wallet. Spending less on meals at restaurants leads to a better budget and eating healthier food at home as well. But this also lacks in measurability and realistic aspects. Similar to vowing to “work out more” it’s easy to backslide after a few days or weeks and especially after a long day at work when you’re fridge is out of groceries.

    What you should do instead

    Meal plan at the beginning of each week, but allow yourself two makeup days for when life gets in the way.

    How does it work

    It’s better to allow and budget for one or two meals out per week if you know that by Thursday you get swamped at work and won’t have the energy to make dinner at the end of the day. Resolving to make a plan at the beginning of each week improves the action orientation and giving yourself the option to have a cheat day or two during the week makes it much more realistic that you will stick with it and achieve your goal of reducing the amount of times you go out to eat.

    4. Build up your emergency fund

    Ok, I lied, this is one resolution you should definitely put on your list, but there are ways we can SMARTify it to ensure that we achieve our goal.

    A good emergency fund target to shoot for is having 3-6 months of living expenses on-hand. If you currently have $2,000 and you need to build up another $4,500 to feel comfortable, a good way to structure your resolution is by resolving to put $375 every month into your emergency savings account. An even better way is to do this automatically by setting up a monthly auto deposit into your account. This resolution is specific, measurable, action oriented, realistic and timely. Boom! Nailed it.

    If you’re looking at your finances and thinking you should have structured some 2019 resolutions around making a budget, paying off debt or organizing your bank accounts give us a shout. We’re happy to talk and the first meeting is always free!

    Here’s to a year of growth, health and adventure!

  • MARKET CORRECTIONS ARE HEALTHY AND NECESSARY

    Looks like we’re in bear territory now!

    With the stock market’s historic growth that began after the recession in early 2009, many experts believe a 10% pullback would be a healthy sign for the markets going forward. This sort of drop is not horribly painful, especially by historical standards, and in order for the stock market to keep advancing there must be at least a risk of decline.

    Why is a market correction healthy and beneficial? After all, most people are counting on continued gains to be able to meet their goals. The main reason is that it prevents a stock bubble from forming. Bubbles occur when stock prices rise so far that they are clearly out of line with the earnings potential, and value, of the underlying companies. We saw the consequence of that in the awful 2000-02 and 2008-09 market wipeouts, when some people lost half their wealth or more.

    Certainly, market corrections never feel healthy when they occur. It seems people only think it’s a healthy correction when it is other investor’s holdings that are affected. People get fearful as the market declines, the media fan the flames by giving investors reason after reason to be afraid, and worries that this is the beginning of the next crash begin to develop.

    While many investors admit that a 5% pullback is manageably unpleasant, concerns expand when the market decline hits 10%. That’s what customarily constitutes a correction. In the most recent sell-off, at the beginning of this year from January 26th to February 8th of 2018, the S&P 500 index fell 10.2%. The market barley crept into correction territory, but then rebounded and went on to have several days of all-time highs later in the year.

    In a great post at awealthofcommonsense.com, Ben Carlson looked at the S&P data going back to 1950, and found 28 time periods when stocks fell by 10% or more. So, on average, the market has experienced an official correction every 2.25 years.

    S&P Losses of 10% or More Since 1950

    • Total Occurrences: 28 Times
    • Average Loss: -21.6%
    • Median Loss: -16.5%
    • Average Length: 7.8 Months
    • Greater Than 20% Loss: 9 Times
    • Greater Than 30% Loss: 5 Times

    As you can see, the average post-1950 market correction lasted just under eight months and the median total loss was 16.5%. But what about steeper declines?

    Out of the 28 times the S&P 500 decreased by 10%, the market went on to decline by 20% – the standard definition of a bear market – only nine times (32% of the time), and a loss greater than 30% only five times (18%). The data confirm that, although these types of large losses do occur, they really are the exception.

    Here are the past 12 corrections in the S&P 500 Index, according to Standard & Poor’s:

    Can you Stomach a Correction?

    Are you thinking: “I don’t think I can stomach a drop of 16.5%.” Then that’s where the wisdom of diversification and having a financial plan becomes apparent. Remember that the data above represents the historical performance of the S&P 500, an index composed of 100% stocks.

    Working with a capable financial advisor can help ensure you have an asset allocation mix of stocks, bonds and cash that reflects your tolerance for risk. A riskier portfolio tilted more heavily towards stocks will perform worse than a conservatively balanced one if you panic and sell when the market declines.

    Even for a younger investor, your portfolio likely shouldn’t consist of 100% stocks. The appropriate allocation for an average investor in their 30s or 40s might be closer to 80% stocks. This means that your portfolio should suffer a drop of around 13.2% during the median market downturn. If that number still makes you queasy, consider having a conversation with your advisor about the amount of volatility you are comfortable enduring within your portfolio.

    By making adjustments to your plan: boosting savings, changing goals, or altering time horizons; you should be able to construct an asset allocation that allows you to rest easier during these periods of market turbulence.

    Although the recent market pullback might create anxiety, media headlines and possibly fear, remember this: we’ve been here before.-source for market data included in this article: “When Stocks Fell 10%…” Ben Carlson. https://awealthofcommonsense.com/2018/10/when-stocks-fell-10/

  • 9 SMART USES FOR YOUR TAX REFUND

    If you have a refund check coming your way, consider using it to bolster your personal balance sheet. The average refund is usually around $3,000, and most people receive the money within three weeks of filing their returns (I filed our taxes a few days before the April 17 deadline and received ours in a little over a week, woo!).

    So, chances are you have a nice chunk of change in your bank account right now, do you know what you want to do with it? If you don’t have a plan in place, you might end up making a few flashy purchases, spend a bit more money than usual for a few weeks, then regret not putting it towards something more meaningful once that surplus is gone. Here are nine good things you could do with the money.

    If your refund was substantial, consider giving yourself an immediate raise by adjusting your tax withholding to increase your take-home pay. You’ll see more dollars show up in your paycheck and lessen the amount of that interest free loan you give to Uncle Sam.

    PAY OFF CREDIT-CARD DEBT

    Using your refund to pay off a balance with an 18% interest rate is like earning an 18% return on your investments. I’ll take that all day, every day.

    REBUILD YOUR EMERGENCY FUND

    It’s a good idea to keep three to six months’ worth of expenses in an emergency fund, so you don’t end up in debt or have to raid your retirement funds if you have unexpected expenses. If you’ve had to tap the fund over the past few years, you can use your refund to help build the account back up. Keep the money easily accessible in a savings account or money-market account that earns some interest.

    BOOST RETIREMENT SAVINGS

    You can contribute up to $5,500 to a Roth IRA for 2018 (or $6,500 if 50 or older) — and withdraw the money tax-free in retirement. You can contribute the full $5,500 as long as your income falls below $118,000 if you’re single, and $186,000 if married filing a joint tax return. You can make a partial contribution if you earn less than $133,000 if single or $196,000 if married filing jointly. If you work and your spouse does not, you can also contribute to a Roth IRA in his or her name if your joint income is within those limits. Even if you earn too much for a Roth, you can contribute to a nondeductible traditional IRA, then convert it to a Roth.

    BUILD YOUR COLLEGE SAVINGS

    It’s always hard to juggle saving for college and retirement. Here’s an opportunity to use your extra money to contribute to a 529 account. You’ll be able to use the money tax-free for college bills, and you could get a state income-tax deduction for your contribution.

    HELP YOUR KID SAVE

    You can use the extra money to contribute to a Roth IRA for your child. Your kid is eligible as long as he or she has earned income — from mowing yards or babysitting, for example. Your child can contribute up to $5,500 or the amount of his or her earned income for the year, whichever is lower, and you can give him the cash to do it.

    MAKE HOME IMPROVEMENTS

    Your refund won’t be enough to redo your kitchen or bathroom, but it can pay for some smaller home improvements. Use the extra cash to add a backsplash, paint a room or cabinets, replace your bathroom sink, swap out your faucets, organize a closet, install a programmable thermostat or spruce up your yard.

    SAVE FOR SOMETHING SPECIAL

    Set aside some money for vacation rather than using your credit card and paying interest long after you have returned. Or you can use some of your refund to start saving for holiday gift-giving or help with other short-term goals, such as for a down payment on a new car.

    MAKE AN EXTRA PAYMENT TOWARDS YOUR HOME LOAN

    If you are on track with your other savings and investing goals for the year, consider making an extra payment towards your mortgage principal. Making an additional principal payment on your mortgage earns you an instant return the same way paying off your credit card balance does. Your personal balance sheet consists of all your assets and liabilities, it’s important to grow your assets (investments) for use in retirement, but don’t neglect the other side of the ledger either.

    GIVE TO CHARITY

    If you have your financial bases covered, consider using your refund to make a charitable contribution to help others in need. You’ll feel good — and you’ll be rewarded for your good deed when you file your tax return next year (charitable contributions are deductible if you itemize).

    You also can use your refund to help accumulate enough money to open up a donor-advised fund. Most funds require a minimum of $5,000 to $10,000. You can claim a tax deduction in the year you make a contribution to the fund, but you have an almost unlimited amount of time to decide which charities to support.