Financial Planning for Children with Special Needs – Podcast #177

Podcast #177 Show Notes: Financial Planning for Children with Special Needs

Your financial planning after having a child with special needs will be different than you might have otherwise anticipated. In this episode, we talk about 6 aspects of financial planning that are important to understand when you are in this situation. Your investing horizon is no longer your lifetime. It is now your child’s lifetime. We discuss taking into account the government resources available to your child and how that will affect your financial planning. You will need to look at your life, disability, and health insurance differently as a parent of a child with special needs. We talk a lot about geographical arbitrage on our finances, but this also applies to benefits. The benefits of an individual educational program at school will help with the financial aspect of raising a child with special needs.  Some states provide better benefits to those living with disabilities, both while in school and as adults. This could play a part in the decisions you make about where to live with your child. ABLE accounts and irrevocable trusts are also discussed. There are many resources out there to help with financial planning in this situation. I hope this episode helps you identify your next step in this planning.

For those not in this situation, we also cover many listener questions in this episode. We talk about bitcoin, converting bonds to TIPS funds, true-ups and vesting in your work retirement plans, whether you should be financially planning for the future you want or the future that might end up happening, the problems with leaving your assets to multiple people, choosing a renter, whether to invest in a 529 for K-12 private school, what percentage of an asset allocation international stocks should comprise and where they should go, and how to handle the dividends that are received and appreciated shares if you don’t have them automatically reinvested. Something for everyone in this episode. Enjoy.

 

This podcast is sponsored by ERE Healthcare Real Estate Advisors. Collin Hart, CEO of ERE, has been a guest on my show and specializes in representing leading physician groups in structuring sale and leaseback transactions on their clinical and surgical center real estate. ERE is a real estate brokerage, but takes an advisory approach, expertly positioning their clients for a real estate sale as part of succession planning surrounding their practice real estate investment. With the continued challenges created by COVID-19 and given the lack of liquidity in the stock market, ERE wants to let you know that opportunities still exist in strategically monetizing your practice real estate, providing a more certain exit strategy in an uncertain environment. If you’re contemplating a partnership with a hospital, health system, or private equity, understanding certain real estate principles can help ensure that you maximize the value and security of your real estate.  You can learn more about ERE on their website or you can reach Collin directly at [email protected] or call him at (702) 839-8737.

Quote of the Day

Our quote of the day today comes from Robert Doroghazi. He’s a cardiologist and an author. He said,

“With whole life, you have insurance for your whole life. And there are clearly times that life insurance is not required.”

That is certainly the truth.

Special Deal

We are doing a special promotion between now and the 28th of September for the Medical Degree to Financially Free course. This is Jimmy at The Physician Philosopher‘s new course to help you with a step by step financial guide that makes money simple, eliminating financial stress and helping you get on the same financial page with your partner or spouse. It particularly focuses on your cash flow, allowing you to pay off your student loan debt sooner than you can imagine and finding the financial freedom to practice medicine because you want to, not because you have to. In a lot of ways, he describes it as the introduction course to our Fire Your Financial Advisor course. If you buy Jimmy’s course before September 28th, we will give you a coupon for $100 off the FYFA course plus we will give you our WCICON18 course FREE. Don’t miss out on this great deal!

Recommended Reading From the Blog:

Financial Planning for Children with Special Needs

Forum discussion on saving for special needs kids.

ABLE – A Tax Protected Investing Account for Your Child with Special Needs

Children with Disabilities are Not a Reason to Buy Whole Life Insurance

Financial Planning with Special Needs Children

Let’s talk about all the things that are different for a child with special needs.

1. Your Investing Horizon

You’re no longer planning just for your life, which might be a 20- to 50-year time period. In some ways, your investing horizon is now your child’s entire life. So perhaps it’s 80 more years instead of 40 more years. So that should suggest a more long-term approach to your investments. There is going to be more inflation that you need to keep up with, which would suggest perhaps you need a more aggressive asset allocation than you would otherwise have.

You still can’t be more volatile than what you can tolerate, but perhaps you stay at 60% to 90% of your portfolio in stocks or real estate or other risky assets for a decade or two longer than you otherwise would. Perhaps you also work a few years longer to buff up that nest egg to make sure it’s going to last through this longer retirement period.

2. Government Resources

You’re going to need to learn about all the programs and accounts that you may never need for yourself, but you will need to navigate for your child in order to have that child maximally benefit from these options. This includes Medicaid, Medicare, and social security disability.

For example, you may not know this, but you can get Medicare under age 65, if you’re disabled. There are some unique rules. For example, you can keep your Medicare coverage for as long as you’re medically disabled. If you return to work, you don’t actually have to pay your part A premium for the first eight and a half years. But after that, you do have to pay the part A premium. I can’t explain why it’s eight and a half years. That’s just the way the rule is.

But all of these ins and outs of government programs, they can be incredibly complex. If you’re going to help your special needs child, you have to learn how they work.

Another example, if you can’t afford that premium, a lot of states actually offer what they call the Medicare savings program or a qualified medical beneficiary program. That basically is a state program that helps pay the Medicare part A premium. So, the state program pays the premiums for the federal program. It pays part A premiums, part B premiums and other cost sharing like deductibles, coinsurance, copayments for those with limited income and resources. You really have to understand about these special government programs.

Unfortunately, because of their eligibility requirements, you may also have to do some special financial planning in order to make sure that your child qualifies for them. If you just leave your assets to your child, a $2 million nest egg, they may not be eligible for all the government resources that they would be eligible for otherwise.  It is a little bit like Medicaid planning for your parent’s nursing home. The idea is to qualify to get Medicaid, to pay for the nursing home, by taking the assets from someplace where they’re not exempt and put them in someplace where they are exempt from the Medicaid calculation as to how much your parents have. Same process, except now you’re doing it for your disabled child.

If you go see an attorney in your state that specializes in this, you’re probably going to end up with a special needs trust, and this is all governed by state law. It is really hard to get into specifics because every state is a little bit different.

But in general, a special needs trust is a legal arrangement and a fiduciary relationship that allows a physical or mentally disabled or chronically ill person to receive income without reducing their eligibility for public assistance like disability benefits from social security, Medicare, Medicaid, or supplemental security income.

Because it is a fiduciary relationship, it is a trust. There is a trustee with a fiduciary duty. That person has to manage those assets for the disabled person.

It basically covers the person’s financial needs that aren’t covered by public assistance payments. The idea is to have money that you can use for anything that the public programs don’t pay for.

These trusts are generally irrevocable. So, once you put the money in there, it’s just like you’ve given it to your child. That’s good for asset protection purposes. Your creditors can’t get it out anymore, but you also can’t take it out and then spend it.

Expect that if you have a significant amount of assets, like most of my listeners do, and you have a child with special needs, if you go in and see an attorney in your state that specializes in this, they are probably going to talk to you about a special needs trust, and that’s probably a good thing for you to do.

3. Health Insurance

What health insurance plan to use? Should you be using a high deductible health plan? Should you be using a regular low deductible PPO plan? The truth is kids with disabilities generally have more healthcare expenses. It probably isn’t going to make sense for you to have a high deductible health plan, even if it allows you to use an HSA.

You have to run the numbers, of course, but most of the time, I think you’re going to find yourself in a relatively low deductible plan. As always with this decision, first choose the plan that makes sense for your family. If that plan happens to be a high deductible health plan, then of course use the HSA for investing. But don’t let the presence of an HSA as an investing account, sway the decision for the health insurance account.

4. Benefits from an Individualized Education Program.

The state law says the state has to educate your kid. They have to provide special education until they’re 22 or until they receive a regular high school diploma. So, as part of that special education, your child may qualify for all kinds of therapy paid for by the school district that your health insurance wouldn’t pay for and government programs aren’t going to pay for. That might include physical therapy, occupational therapy, psychological therapy. Look into it and understand the details of that program.

5. Geographic arbitrage

You can move to a state that has a lower cost of living and a lower tax burden (that might not be a bad idea if you need to save more for a child with special needs), but that is not what I’m talking about. I’m talking about moving to a state where the benefits for people with disabilities are better. They’re better in some states than others. That is an opportunity for you to move and get a better education or more benefits for your child, or to have them in a better place in the event that something happens to you where they’re eligible for more programs.

6. Insurance

As a general rule, your nest egg plus your term life insurance added together needs to equal your financial independence number. With a child with disabilities your financial independence number is probably a little bit higher. You are probably going to need a higher benefit amount in your life insurance, a longer term for that life insurance, or both.

You don’t necessarily need whole life insurance, though, despite the fact that it’s often sold and oversold to the parents of children with disabilities. Whole life insurance is still not a bad thing to leave in an irrevocable trust, especially if you prefer the guarantee it provides.

When you die, they’re going to get a certain amount and it’s guaranteed. That’s the benefit of it. If you prefer that to likely leaving them more money by using standard investments, you can choose that option, but you can also cover that need with term life insurance.

Whole life insurance, like other permanent life insurances, can also provide a little bit of a permission to spend your other assets. So, if that’s hard for you to spend your other assets, because you’re worried you have to leave as much as you can behind for your child, maybe you should buy how much you’re planning to leave behind for your child in whole life insurance, and then spend everything else. Then you won’t feel guilty spending it. It’s a little bit of a psychological crutch, but lots of us need these behavioral crutches in our lives.

Disability insurance, of course, is also important. Again, you probably need a little more than usual to make sure you can still fund the now larger necessary nest egg from that disability insurance pay out in the event that you get disabled. But still, even if you have a child with special needs, disability insurance and term life insurance can still usually meet your insurance needs.

ABLE Accounts

39 States have ABLE accounts including my state of Utah. It is a great option.

They came about from legislation passed in 2014 by Congress. It was called the Achieving a Better Life Experience Act (ABLE), which basically provides a tax advantage to those saving for the needs of the disabled. So, think of an ABLE account as a 529 for kids with disabilities’ living expenses. That’s the best way to think about it.

There’s no age 59 and a half rule. They have the same $15,000 annual contribution limit. If they are mentally or physically disabled at a young age, that basically is a way to save in a tax advantaged way for their living expenses. The money goes in post-tax, but it comes out, as long as it’s used for their benefit, tax free. So, like a Roth IRA or a 529 in that way.

The rules are pretty straightforward. The beneficiary has to be disabled before age 26. Anyone can contribute to it, but it’s only a total of $15,000 per year per beneficiary. If you miss a year, there is no catch up.

The beneficiary can actually contribute from their own earnings a little bit over $12,000 in addition to that $15,000 total. The account has to be opened and maintained by a parent, guardian, or designated agent, someone that they say has signature authority. But withdrawals can be made by either the beneficiary or the signature authority.

You can change the beneficiary and do a rollover to a different account. If you have two kids with disabilities, for example, you could roll some into that other sibling’s account.

You can justify almost anything for their benefit. Education, housing, it now includes a mortgage or property taxes or utilities, transportation, employment, training and support, assistive technology, healthcare prevention, and wellness. I mean, what can’t be put into that category? You can buy golf clubs for that. Financial management, so you can pay their financial advisory fees out of it, legal fees, and expenses for the account itself. You can pay for their funeral and burial in the unfortunate case that they pass away, and you can pay their basic living expenses. So, you can use it for almost anything as long as you’re using it for their benefit.

There is a maximum on how much can go in there. It’s kind of similar to a 529 in that way. Once you get a certain amount in there, you have to stop contributing. That’s typically in the $350,000 range. You can also only have one ABLE account at a time, unlike a 529. You want to make sure you spend the money in this account, because if there’s anything left in it, that might actually go to the state to reimburse them for what they paid for your child. So, you don’t want to leave a bunch of money in there when your kid dies. You want to use it up at the end to pay for any burial expenses or anything like that.

There are lots of places to open one. I’d look at your state first. There are some states that offer a bit of a tax break for it. I know Iowa, Michigan, Nebraska, Ohio, Oregon, and Virginia do. There are probably more states now that do. The fees aren’t too bad in these accounts. Usually something like $40 or $50 a year and maybe an asset-based fee, something like 0.35% a year.

You can’t get all the benefits from it that you can from a trust, but there’s no reason that you can’t use both. Keep in mind that a 529 can also be converted to an ABLE account. If your child is not disabled before age 26, you can put money in a 529 for them and when they’re declared disabled, you can then roll that over into the ABLE account.

Reader and Listener Q&As

Bitcoin

People are always asking me to talk about bitcoin on the podcast.  I’m a big fan of education. I really think you ought to learn about all kinds of stuff, and cryptocurrency isn’t a bad thing to learn about. The main benefits of it, of course, are that there’s a fixed supply, or eventually it will be fixed. It is decentralized so the U.S. government can’t control it, although they seem to be becoming ever more effective at taxing it and exerting some control over it. It is useful for cross border payments. I don’t make very many, but if that’s a big need you have, that might be useful, especially if you need to get around that pesky rule about only carrying $10,000 in cash in your suitcase.

But I still can’t use it to buy anything I want to buy. My gas station isn’t taking it, my grocery store isn’t taking it. This is not a useful currency. It certainly is not a stable currency. It’s volatility dramatically exceeds that of the stock market.  I’m not putting grocery money in stocks until I spend it. So I think we can see there that it’s still an instrument of speculation, not a useful currency at this point.

There are going to be a number of these cryptocurrencies and these coins available out there that are not going to be great investments. In fact, there’s no guarantee that any of them, at least those existing today, are going to be great investments.

Will there eventually be some coalescence in this space? Yes. Will cryptocurrencies continue to be used and probably become more useful as time goes on? Yes. Will I still be able to exchange dollars at some future point for cryptocurrency? Absolutely yes. So, no reason you have to buy it now, just because it’s probably going to be used more frequently in the future.

There is a lot of hype. Very volatile prices. At the end of the day, what you’re investing in is at best a currency. So, if you’re not buying yen and if you’re not buying euros, you have to ask yourself, why am I buying cryptocurrencies? It’s the same thing. It’s an instrument of speculation. You’re buying it in hopes that down the road, someone else will pay you more for it. Make safe and educated decisions. As I’ve said over the years, there’s no Bitcoin in my portfolio, but if you’re a true believer in Bitcoin or some other cryptocurrency, and you think it’s a better hedge against future economic catastrophes than other commonly used assets like gold or commodities or farm land, and you’re convinced that of the hundreds of cryptocurrencies out there that Bitcoin will be one of the winners, then go buy some, but limit the percentage in your portfolio to a play money amount, something like less than 5%. Don’t assume that just because Blockchain technology is useful, that Bitcoin must grow to the sky.

Recommended Reading From the Blog:

Cryptocurrencies Like Bitcoin are not Investments

Converting Bonds to TIPS Funds

“I’m thinking about converting some of my bonds to TIPS funds. I notice when comparing Vanguard to what is at Schwab that Vanguard considers a short-term TIPS fund to be those with less than five years remaining, whereas Schwab considers short term less than one year remaining. What do you consider short term and how do you decide whether to go with short-term TIPS versus the longer-term TIPS?”

What do I consider short term TIPS?  Either one is a fine definition. Just decide which one you like. The important thing is to know what you’re buying. TIPS or Treasury Inflation Protected Securities, are treasury bonds that potentially provide a return in three different ways. Appreciation in the value of the bond, a periodic coupon payment or the yield of the bond. And all of those components are the same as a nominal or regular old bond.

But, in addition, there’s an inflation component to its return that helps protect you from unexpected inflation. Expected inflation is already built into the yield of any nominal bond. It’s the unexpected inflation that gets you. Because TIPS are also a treasury bond, it helps avoid equity risk. You may get a little bit of a boost in a flight to quality. It tends to be a go-to asset in that aspect, unlike a corporate bond, which contains a little bit of equity risk, really. It’s a little bit different. It’s a treasury bond.

As far as short term versus intermediate term, the important thing is simply to know what you’re buying. One-year TIPS are fine. Five-year TIPS, also fine. They’re both fine to have in your portfolio, but they’ll behave differently.

Your expected return on a five-year bond is going to be higher than that on a one-year bond. In a period of falling interest rates, a five-year bond will outperform one-year bonds, and vice versa in a period of rising rates. Obviously, a longer-term bond is going to be more volatile than a shorter-term bond.

My current holding is the Schwab regular TIPS ETF. SCHP is the ticker, but I’ve also owned the Vanguard TIPS fund in the past and I probably will again at some point in the future I’m sure. Both of those are fine holdings that will allow you to invest in TIPS with very little hassle, very little expense, and daily liquidity.

Now you can go buy TIPS directly from the Treasury. You can go to Treasury Direct and buy them directly and hold them for 30 years if you like. That is an option that obviously cuts out the expense ratio on these funds, but these funds’ expense ratios are so low they’re practically free to start with. So, you’re not saving a lot there.

I don’t actually hold short term TIPS. I guess I hold mostly intermediate term TIPS, but I don’t think there’s necessarily a right answer there. You want to hold short term TIPS? I think that’s reasonable too.

The important thing, as usual, is to get a portfolio that’s reasonable and stick with it through thick and thin. There’ll be periods of time when shorter term TIPS are better than longer term TIPS and periods of time where longer term TIPS are better than shorter term TIPS.

True Ups and Vesting in your Workplace Retirement Plans

Let’s talk about 401(k) and 403(b) vesting plans. This feature in some 401(k)s is basically a way to put golden handcuffs on employees to get them to stay at the company longer than they otherwise would.

For example, it might be phrased that your employer match does not vest until you’ve been at the company five years. So that means if you leave the company any time before you’ve been there five years, all of the match that you got on your contributions gets taken back by the company.

So that’s a bad thing, obviously. You thought you were getting all this money and you really weren’t because you didn’t stay there. You need to understand vesting rules, especially when it comes time to leave a company.

Now, if the company doesn’t give you a match anyway, who cares. For lots of high-income professionals, you are highly compensated employees, they don’t give you a match anyway. Or if you are in a partnership with a 401(k) profit sharing plan, it is probably all your money doing the match anyway. So, if the money goes back to the employer, it’s coming back to you. No big deal.

So those plans typically are not written with a vesting schedule. For my plan at my partnership we don’t have a vesting schedule. Whatever you put in there, you get to keep when you leave.

Vesting does not affect your contributions. The money you put in there from your paycheck, you get to keep no matter when you leave. That’s your money. The vesting refers to the match, and you need to understand the rules in your 401(k). Maybe it’s worth staying at the employer for another month, for example, to make sure you get what is vested.

What true ups are, are a way to fix a problem that some 401(k)s have. Some 401(k)s are set up such that they will only match a certain amount per month. So, if you don’t put the same exact contribution in each month of the year, you may get shafted, not receive some of the match. So, you need to ask how does the match work?

If your match is limited to a small amount, $200 a month or however it might be limited, then you need to make sure you contribute every month to get that $200 a month or whatever it is.

But if the plan has true ups, what that means is at the end of the year, they go back and they look at everything you contributed. And if you can contribute enough to get the entire match, then you get the entire match. They true it up at the end of the year and contribute anything that they should have but didn’t.

So, true ups are a good thing. You want to understand how your match works to make sure you get the entire match or you’ll be leaving part of your salary on the table. You need to track contributions to make sure you are getting your entire match. I like to keep track of every contribution I make to all my investment accounts. It’s on a spreadsheet. If you’re going to manage your own finances, you pretty much have to be spreadsheet proficient. You better write down each month, how much you’ve contributed, how much match you’ve gotten so far, how much more you need to contribute to get the rest of the match, etc. You’re going to have to be on top of those details if you want to get your maximum benefits.

Planning For Your Desired Future or Probable Future?

A listener asks whether they should financially plan for the future they want or the future that might end up happening. They want to get married, have a house, and a family. But are currently single. Should they keep investing everything even if in the future they will want that money for a wedding and house? I can empathize with this situation, not knowing your future. But I don’t think I want to know what the rest of my life entails.

I think the question basically boils down to, should you not max out retirement accounts in order to have money in a taxable account or in cash or whatever that’s available for shorter term purchases?

I think in this situation I would max out the retirement accounts, but the key, of course, is to maintain flexibility. You can always withdraw Roth IRA contributions. You can withdraw up to $10,000 in earnings for a house down payment. You can borrow $50,000 out of your 401(k). And when you get in a serious relationship where you’re starting to go, “Okay, I need money for a wedding and a honeymoon and a ring and a new house and all that sort of stuff” you can start saving up at that point. Lots of people are engaged for many months or even years. It gives you lots of time to save up for those expenses, especially if you’ve got a good savings habit.

The other thing to keep in mind is if you do get in a serious relationship, your partner may bring cash to that relationship. Maybe you’re bringing the retirement accounts to the relationship. So, you’d be perfectly fine in that situation. You’d really regret not having maxed out your retirement accounts, if that were the case.

But I’d be pretty hesitant to pass on the known tax and asset protection benefits of retirement accounts because you might at some future date need a little bit of cash. If you’re really worried about it, you keep a little bigger emergency fund, maybe six months instead of three months, as some sort of a compromise. But for the most part, operate under the way your life currently is under current tax law and usually that means maxing out your retirement accounts with your savings.

Leaving Assets to Multiple People

A listener shares how his father and five siblings inherited a lake cabin that has been in the family since 1899. It was left in a trust with some money for the upkeep. But now that the older generation is dying, there is absolutely no plan for this trust moving forward to the surviving siblings and 16 grandchildren. He wanted to know if I had suggestions on how to manage this.

This is the problem with leaving your assets to multiple people. In a lot of ways, it’s better to leave something else to one child and leave the cabin to another one. Just to keep things simple.

What should you do at this point? You need some sort of an agreement within the family. That agreement might be that it gets sold when the last of the siblings dies.  And if one of the grandchildren wants to buy it because it has a ton of sentimental value to them, well, they can buy out all the other grandchildren.

But that agreement needs to specify exactly how the shares in this thing are split up. Are they split up and divided by the number of people in the second generation, by the number of people in the third generation, or exactly how will that work out? The document needs to really specify that.

There is going to be some resistance just to drafting up this document. Because for some people it’s going to force them to make decisions that they’d rather put off for a long time. But the longer you put them off, the more painful they’re going to be, the more valuable this property is going to be, and the bigger headache it’s going to be.

In the end, the goal is to try to find some sort of consensus, a compromise situation where there’s an agreement, a document that dictates exactly how shares are inherited, how shares are bought out, when they’re bought out, etc.

To those of you thinking about leaving assets like this to your kids, really think about how this is going to happen. I love the idea that they left some money to pay its expenses so that they didn’t have to go around to the family and get that. But this was really a bad idea to just leave this to six different people. Bad estate planning.

Choosing a Renter

A listener asks about a family that would like to rent their home but has two prior bankruptcies.

No. I’m not going to rent to someone that has two bankruptcies. I mean, everyone deserves a little bit of forgiveness in their life, but two bankruptcies? No, I’m probably not going to rent to you. There are too many other good tenants out there.

If you’re not seeing good tenants applying to live in your property, maybe your rent is a little bit too high. Lower it down, or give it a little more time and you’ll likely get better tenants applying to come live in your property. Or fix the property, whatever the issue is with it, that the only people applying for it are people in this sort of a situation.

I’d definitely lower the rent first before I rented to someone with two bankruptcies. I’m sorry, I don’t know where people with two bankruptcies go to rent. Maybe they go to places where the rent is too high and no one else applies for it. I don’t know, but I’m not taking on that risk.

Using 529 for K-12 Private School

“Is there any benefit in putting the private school tuition into a 529 account first and then withdrawing it to pay the private school tuition?”

Probably not, but check your state. If there is a state tax benefit, there may be. But if you’re otherwise maxing out that 529 every year for college, then there’s not going to be some additional tax benefit to using it, to pay for K through 12 private education. You might as well not use up that annual contribution and just cash flow the thing.

But look into it. If you are not already contributing enough to the 529 to get your maximum state tax benefit, then sure. Run it through there and you’ll get a few hundred dollars back every year in exchange for doing that. But most of the time, you’re probably already putting in enough to maximize that.

Recommended Reading From the Blog:

The 529 Account – The Tax Break for the Rich

What % of International Stocks?

What percentage of an asset allocation do you think international stocks should comprise and where should they go?

There is no right answer here. I think the right answer is pick a percentage and stick with it. Because there are going to come times where international stocks outperform U.S. stocks and there are going to be times where the opposite is true.

What you don’t want to be doing is shifting back and forth all the time and mistiming it and ending up being in domestic stocks when international stocks are doing well and in international stocks when domestic stocks are doing well.

So, pick a percentage and stick with it. Some people would argue that you don’t need international stocks at all. Jack Bogle classically made this argument. And he said “Never more than 20%. And you can get by with 0% because U.S. companies do so much business overseas”.

I don’t know that I necessarily agree with him on that point. I think a little bit more than that is probably a good idea, but that 20% number he throws out there isn’t a bad percentage. That’s totally reasonable.

At a maximum I would put market weight into international stocks. So, if international stocks make up 50% of the world stocks, I think that probably ought to be your maximum – 50%. And the reason why is I’ve seen little benefit for taking on additional currency risk beyond that point of maximum diversification, as far as number of securities you have there.

But most people I think are somewhere in between those numbers. My own personal number, I have one third of my stocks in international stocks. So, I think anything from 20% of your stocks being international to 50% of the stocks being international is reasonable. I’d pick a number in there and stick with it.

Where should they go? Well, if you’re using something like what I use, which is the total international stock market fund, that is a very tax efficient investment. It’s a great holding for your taxable investing account. Assuming you have a taxable investing account.

Obviously if all your investments are in a Roth IRA, you’ll put international stocks in the Roth IRA. Don’t skip out on a Roth IRA or a 401(k) contribution in order to invest in international stocks in a taxable account. But if something has to go into taxable, a total international stock market fund is a pretty good choice. Even in emerging markets, an international stock index fund is a pretty good choice in a taxable account. Yes, you get that foreign tax credit, which you wouldn’t get if you were investing inside a Roth IRA or other investing account.

However, the benefits of being inside the retirement account outweigh that benefit. It’s important to understand that. You’re better off just being in a tax protected account than you are getting the foreign tax credit. It’s not that big of a credit, I assure you. But if you have to put something in taxable, well, that’s not a bad thing to put out there first. It’s not dramatically better than just putting a U.S. total stock market index fund, though. And the reason why is because an international total market fund has a higher yield than a U.S. total market fund due to current valuations.

So, if the yield is 3% on that international fund and 2% on the U.S. fund, well, that is probably the difference in that yield and the tax efficiency of the investment because the yield is going to make up for that foreign tax credit. So, it’s really sixes. I have both of them almost entirely in taxable now because my taxable to tax protected ratio has been growing the last few years, and I don’t lose any sleep about any of it. It’s almost all in taxable for me. So yes, it makes a fine taxable holding.

Other good taxable holdings are municipal bond funds and equity real estate, because then you can take advantage of the depreciation on that to shield some of the income from taxation.

Recommended Reading From the Blog:

Don’t Give up on International Stocks

Handling the Dividends or Appreciated Shares

“My question is in regards to paying taxes on your dividends and appreciated funds in a taxable account. I try to place the most tax efficient funds in my taxable account and keep the allocation in line with my investing plan. How do you suggest handling the dividends that are received and appreciated shares if I do not have them automatically reinvested? Would reinvesting these gains quarterly be a smart idea while keeping a portion in the sweep account to pay taxes later in the year? I just wanted to understand and get advice on different strategies or a good strategy.”

Let me tell you what I do with my taxable account. Nothing in taxable gets reinvested.  All my dividends, all my capital gains distributions, all the interest, all the rents, everything I get in my taxable account goes into my bank account or a sweep account or a money market fund.

Then once a month, when I go to invest whatever money I can invest that month, whether it came from my clinical job, whether it came from White Coat Investor profits, whether it came from bank account interest, whether it came from stock dividends, whatever it came from, I invest it all together. One day a month.

The benefit of doing that rather than reinvesting those dividends as they go along is you don’t have all these different tax lots to keep track of, which makes it a little easier when you go in to choose which lots to sell and when you’re trying to tax loss harvest. It keeps things a little simpler.

If you really want to reinvest your dividends in taxable, well, you can do that. The brokers will keep track of your basis. It’s not that big of a deal, but I find it cleaner to just pay everything into taxable and then invest that once a month from my bank account.

That’s what I’d recommend you do. I think it’s really simple to do it that way. There’s no reason to wait a quarter if you’re investing every month.  I usually try not to let my money sit in cash quite that long if I don’t need to. But those are probably the main ways that people look at that.

Ending

I hope you found those questions and answers helpful. Don’t forget to take advantage of the great deal with the Medical Degree to Financially Free course through September 28th. If you know someone with a child with special needs, please pass the podcast on to them. We can all work together to help our colleagues be financially prepared for the future.

Full Transcription

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

This is White Coat Investor podcast number 177 – Financial planning with special needs children. Let’s see, we’re recording this on September 10th. It’s going to go live on September 24th. Hope you’re having a great September. It’s one of my favorite months, now when I spend a lot of time in town on, thankfully. I like spending time in Southern Utah in September. It’s a wonderful time to be at Lake Powell. And so, I spent a lot of time there.
Dr. Jim Dahle:
I just came back from a five-day trip there for Labor Day with the kids. It was a wonderful trip, except for the last day when we had to come home through 40 miles of two- to three-foot chop. Not always fun in a boat, but it was worth it for the four other great days. I hope you are having a wonderful time at work at home with your family, doing your hobbies, whatever it is you do.
Dr. Jim Dahle:
But thank you for being a doc. Most of you are docs and listen to this podcast. It’s not easy work. I just came back from a shift late last night. You’re asked to do difficult things with limited resources and in difficult sometimes ethical and sometimes just difficult to see situations. And so, thank you for that.
Dr. Jim Dahle:
Also, thank you for those of you who filled out our podcast survey. We’re getting a lot of really useful information. A lot of you apparently want me to get Warren Buffet on the podcast. I’m not sure I’m going to be able to get Warren Buffet on the podcast, but I’ve directed Cindy to try. So, if Warren Buffet agrees to come on the WCI podcast, we’ll get him on.
Dr. Jim Dahle:
Also, thanks to those of you who watched this on YouTube. You may not know, but you can actually watch the making of this podcast on YouTube, the video, and everything of me is on there. We’ve got a camera in the room where I’m recording the podcast. And so, we figured, “Hey, we’ll just produce some YouTube content at the same time”.
Dr. Jim Dahle:
But it’s interesting, the comments you get on YouTube, right? It’s a different crowd on YouTube. So, I get lots of comments about my personal appearance. Apparently, I discovered this morning that I have pointy eyebrows. Nobody ever told me that before. So, thank you for all that great constructive criticism that we’re getting on YouTube.
Dr. Jim Dahle:
All right. Who else do I need to thank? I need to thank our scholarship judges, those of you who have been judging in September, all these scholarships How many did we get, Cindy? 800? 892 applications for the WCI scholarship. So, thank you to you guys for judging it. Thank you to those who donated to it. Thank you for the sponsors. You’ll be seeing a few sponsored posts on the blog in September and October from those sponsors. So, thank you for supporting those who support what we’re doing.
Dr. Jim Dahle:
Speaking of sponsors, this podcast is sponsored by ERE Healthcare Real Estate Advisors. Colin Hart, the CEO of ERE has been a guest on this show and specializes in representing leading physician groups and structuring sale and lease back transactions on their clinical and surgical center real estate.
Dr. Jim Dahle:
ERE is a real estate brokerage, but takes an advisory approach. Expertly positioning their clients for a real estate sale as part of succession planning surrounding the practice real estate investment. If you’re contemplating a partnership with a hospital, health system or private equity understanding certain real estate principles can help ensure that you maximize the value and security of your real estate.
Dr. Jim Dahle:
You can learn more about ERE on their website ereadv.com or you can reach Colin directly at [email protected] or call them at (702) 839-8737.

Dr. Jim Dahle:
All right, I’ve got a few more things to tell you about. We’ll talk about that later in the podcast though. Let’s start with our main topic and our main topic for this podcast is special needs kids. And so, it came from a suggestion by email I got just a few days ago.
Dr. Jim Dahle:
“I’d like to suggest a topic for a podcast. Financial planning for physician families with kids with special needs. I’ve been through most of your website I have not found that yet. About two years ago, our six-year-old son was diagnosed with neurofibromatosis and it has dramatically altered our financial planning. I think it’s applicable to many topics of interest to your audience, insurance, financial planning, estate planning, et cetera”.
Dr. Jim Dahle:
Okay, so let’s talk about all the things that are different with a special needs kid. Number one, your investing horizon. You’re no longer planning just for your life, which might be a 20- to 50-year time period.
Dr. Jim Dahle:
In some ways your investing horizon is now your child’s entire life. So perhaps it’s 80 more years instead of 40 more years. So that should suggest a more long-term approach to your investments. There is going to be more inflation that you need to keep up with, which would suggest perhaps you need a more aggressive asset allocation than you would otherwise have.
Dr. Jim Dahle:
You still can’t be more volatile than what you can tolerate, but perhaps you stay at 60% to 90% of your portfolio in stocks or real estate or other risky assets for a decade or two longer than you otherwise would. Perhaps you also work a few years longer to buff up that nest egg to make sure it’s going to last through this longer retirement period.
Dr. Jim Dahle:
Number two, government resources. You’re going to need to learn about all the programs and accounts that you may never need for yourself, but you will need to navigate for your child in order to have that child maximally benefit from these options. This includes Medicaid, Medicare, social security disability.
Dr. Jim Dahle:
For example, you may not know this. You can get Medicare under age 65, if you’re disabled, but there’s some unique rules. For example, here’s one of them. You can keep your Medicare coverage for as long as you’re medically disabled. If you return to work, you don’t actually have to pay your part A premium for the first eight and a half years. But after that, you do have to pay the part A premium. I can’t explain why it’s eight and a half years. That’s just the way the rule is.
Dr. Jim Dahle:
But all of these ins and outs of government programs, they can be incredibly complex. And if you’re going to help your special needs child, you got to learn how they work. And so, I would definitely get in on that stuff.
Dr. Jim Dahle:
Here’s another example. If you can’t afford that premium a lot of states actually offer what they call the Medicare savings program or a qualified medical beneficiary program. That basically is a state program that helps pay Medicare part A premium. So, state program pays the premiums for federal program. It pays part A premiums, part B premiums and other cost sharing like deductibles and coinsurance and copayments for those with limited income and resources. So, you really got to understand about those special government programs.
Dr. Jim Dahle:
And unfortunately, because of those and their eligibility requirements, you may also have to do some special financial planning in order to make sure that your child qualifies for them. If you just leave your assets to your child, you die with a $2 million nest egg and leave that to your child, they may not be eligible for all the government resources that they would be eligible for otherwise. It’s a little bit like FAFSA planning for college financial aid.
Dr. Jim Dahle:
Not something that most doctors have to do because their kids don’t qualify for financial aid anyway, but some families do that. They basically try to hide assets from the FAFSA or put it in assets that the FAFSA doesn’t ask about or care about or rank as highly. And that way their kid qualifies for more loans and maybe even some grants and scholarships.
Dr. Jim Dahle:
It’s a little bit like Medicaid planning for your parent’s nursing home, right? The idea is to qualify, to get Medicaid, to pay for the nursing home, by taking the assets from some place where they’re not exempt and put them in some place where they are exempt from the Medicaid calculation as to how much your parents have. Same process, except now you’re doing it for your disabled child.
Dr. Jim Dahle:
So, what you’re probably going to end up with, if you go to do that and you go see an attorney in your state that specializes in this is, you’re probably going to end up with a special needs trust, and this is all governed by state law. So, it’s really hard to get into specifics because every state’s a little bit different.
Dr. Jim Dahle:
But in general, a special needs trust is a legal arrangement and a fiduciary relationship that allows a physical or mentally disabled or chronically ill person to receive income without reducing their eligibility for public assistance disability benefits from social security or Medicare or Medicaid or supplemental security income or whatever.
Dr. Jim Dahle:
So, because it’s a fiduciary relationship, right? It’s a trust. There’s a trustee with a fiduciary duty. Then that person has to manage those assets for the disabled person.
Dr. Jim Dahle:
So, it basically covers the person’s financial needs that aren’t covered by public assistance payments. That’s the idea behind it. The idea is to have money that you can use for anything that the public programs don’t pay for.
Dr. Jim Dahle:
These trusts are generally irrevocable. They’re not revokable trust. So, once you put the money in there, it’s just like you’ve given it to your special needs kids. That’s good for asset protection purposes, right? Your creditors can’t get it out anymore, but you also can’t take it out and then spend it on a sailboat for yourself. Your creditors nor winners of a lawsuit can access those funds that are for your beneficiary.
Dr. Jim Dahle:
Expect that if you have a significant amount of assets, like most of my listeners do, and you have a special needs child that if you go in and see an attorney in your state that specializes in this, they are probably going to talk to you about a special needs trust, and that’s probably a good thing for you to do.
Dr. Jim Dahle:
Okay. Next decision. Number three, what health insurance plan to use? Should you be using a high deductible health plan? Should you be using a regular low deductible PPO plan? Well, the truth is disabled kids generally have more healthcare expenses. So, if you end up having a disabled kid, it probably isn’t going to make sense for you to have deductible health plan, even if it allows you to use an HSA.
Dr. Jim Dahle:
You got to run the numbers, of course, but most of the time, I think you’re going to find yourself in a relatively low deductible plan, Gold plan, et cetera, instead of the Bronze plan and that sort of a thing.
Dr. Jim Dahle:
As always with this decision, choose the plan first that makes sense for your family. And if that plan happens to be a high deductible health plan, then of course use the HSA for investing. But don’t let the presence of an HSA as an investing account, sway the decision for the health insurance account.
Dr. Jim Dahle:
All right, number four. You can get the benefits from an individualized education program. What these are, they basically come from the fact that there is state law says the state has to educate your kid. And if you get special needs, they have to provide special education until they’re 22 or until they receive a regular high school diploma.

Dr. Jim Dahle:
So as part of that special education, your child may qualify for all kinds of therapy paid for by the school district that your health insurance wouldn’t pay for and government programs aren’t going to pay for. So that might include physical therapy, occupational therapy, psychological therapy. Make sure you look into it and understand the details of that program.
Dr. Jim Dahle:
Okay. Geographic arbitrage, number five. Just like you can move to a state that has a lower cost of living and a lower tax burden, and that might not be a bad idea if you need to save more for a special needs child. That’s not what I’m talking about. I’m talking about moving to a state where the benefits for disabled people are better.
Dr. Jim Dahle:
They’re better in some states than others. And so that’s an opportunity for you to move and get a better education or more benefits for your child, or to have them in a better place in the event that something happens to you where they’re eligible for more programs.
Dr. Jim Dahle:
All right. Number six, insurance. As a general rule, your nest egg plus your term life insurance added together needs to equal your financial independence number. With a disabled kid your financial independence number is probably a little bit higher. So, you’re probably going to need a higher benefit amount in your life insurance, a longer term for that life insurance or both.
Dr. Jim Dahle:
You don’t necessarily need a whole life insurance though. Despite the fact that it’s often sold and oversold to the parents with disabled kids. Their whole life insurance is still not a bad thing to leave in an irrevocable trust, especially if you prefer the guarantee it provides, right?
Dr. Jim Dahle:
There’s a guarantee there. If you die early, if you die young, they’re going to get a certain amount and it’s guaranteed. That’s the benefit of it. If you prefer that to likely leaving them more money by using standard investments, you can choose that option, but you can also cover that need with term life insurance.
Dr. Jim Dahle:
Whole life insurance, like other permanent life insurances can also provide a little bit of a permission to spend your other assets. So, if that’s hard for you to spend your other assets, because you’re worried you’ve got to leave as much as you can behind for your disabled kid, maybe you should buy how much you’re planning to leave behind your disabled kid in whole life insurance, and then spend everything else. And then you won’t feel guilty spending it. It’s a little bit of a psychological crutch, but lots of us need these behavioral crutches in our lives.
Dr. Jim Dahle:
Disability insurance of course is also important. And again, you probably need a little more than usual to make sure you can still fund the now larger necessary nest egg from that disability insurance pay out, that benefit in the event that you get disabled. But still even if you have a special needs kid, disability insurance, and term life insurance can still usually meet your insurance needs.
Dr. Jim Dahle:
All right, let’s talk for a minute about able accounts. I’ve written about able accounts on the blog. It’s been a few years. I think my article was from 2018. So, a couple of years ago.
Dr. Jim Dahle:
Since then these have become even more popular. It used to be a couple of years ago when I wrote this article only 21 states had able accounts. Now 39 States have able accounts including my state of Utah. And so, it’s a great option here.
Dr. Jim Dahle:
It came about from a legislation passed in 2014 by Congress. It was called the Achieving a Better Life Act Experience (ABLE), which basically provides a tax advantage to those saving for the needs of the disabled. So, think of an able account as a 529 for disabled kids living expenses. That’s the best way to think about it.
Dr. Jim Dahle:
There’s no age 59 and a half rule. It’s got the same $15,000 annual contribution limit. And if you’re mentally or physically disabled at a young age, that basically is a way to save in a tax advantage way for their living expenses. The money goes in post-tax, but it comes out as long as it’s used for their benefit, it comes out tax free. So, like a Roth IRA or a 529 in that way.
Dr. Jim Dahle:
The rules are pretty straightforward. They’re not too bad. The beneficiary has to be disabled before age 26. That’s one of the rules. Anyone can contribute to it, but it’s only a total of $15,000 per beneficiary.
Dr. Jim Dahle:
So even if a grandpa opens an account and you open an account and uncle Bob opens an account and aunt Sally opens an account, $15,000 total. You don’t get $15,000 apiece. So that’s a little bit different from a 529. It’s $15,000 total per year per beneficiary. And if you miss yours, there’s no catch up.
Dr. Jim Dahle:
The beneficiary can actually contribute from their own earnings, little bit over $12,000 in addition to that $15,000 total. The account has to be opened and maintained by parent guardian or designated agent. Somebody that they say has signature authority. But withdrawals be made by either the beneficiary or the signature authority.
Dr. Jim Dahle:
You can change the beneficiary and do a rollover to a different account. If you have two disabled kids, for example, you could roll some into that other siblings account. But basically, you can use this thing for almost anything.
Dr. Jim Dahle:
You can justify almost anything for their benefit. Education, housing, it now includes a mortgage or property taxes or utilities, transportation, employment, training and support, assistive technology, healthcare prevention, and wellness. I mean, what can’t be put into that category, right? I mean, you can buy golf clubs for that. Financial management, so you can pay your financial advisory fees out of it.
Dr. Jim Dahle:
Well, their are financial advisory fees. Legal fees, expenses for the account itself. You can pay for their funeral and burial in the unfortunate case that they pass away and you can pay their basic living expenses. So, you can use it for almost anything as long as you’re using it for their benefit.
Dr. Jim Dahle:
There is a maximum on how much can go in there. It’s kind of similar to 529 in that way. Once you get a certain amount in there, you have to stop contributing. That’s typically in the $350,000 range. You can also only have one able account at a time, unlike 529, right? You can open 529 in Utah and California and New York, but you can’t do that with able accounts. One account at a time.
Dr. Jim Dahle:
Interestingly enough, you kind of want to make sure you spend the money in this account, because if there’s anything left in it that might actually go to the state to reimburse them for what they paid for your disabled child. So, you don’t want to leave a bunch of money in there when your kid dies. You want to use it up at the end to pay for any burial expenses or anything like that.

Dr. Jim Dahle:
So, lots of interesting stuff there about it. Lots of places to open one. I’d look at your state first. There are some states that offer a bit of a tax break for it. I know Iowa, Michigan, Nebraska, Ohio, Oregon, and Virginia do. There are probably more states now that do. These aren’t too bad in these accounts. Usually something like $40 or $50 a year and maybe an asset-based fee, something like 0.35% a year. So not too bad.
Dr. Jim Dahle:
You can’t get all the benefits from it that you can from a trust, but there’s no reason that you can’t use both. Keep in mind that 529 can be converted to able account. So, if your child’s not disabled before age 26, you can put money in a 529 for them and when they’re declared disabled, you can then roll that over into the able account.
Dr. Jim Dahle:
All right, enough about financial planning for special needs children. I hope that’s helpful to those you who have them or know them, or have a friend with special needs children.

Dr. Jim Dahle:
Let’s do our quote of the day. Our quote of the day today comes from Robert Doroghazi. He’s a cardiologist and an author. He said, “With whole life, you have insurance for your whole life. And there are clearly times that life insurance is not required”. That is certainly the truth.

Dr. Jim Dahle:
Okay, let’s talk about Bitcoin. Why not? You guys all want me to talk about Bitcoin. I’m always getting emails “You should talk about Bitcoin on the podcast”. I have all kinds of these aficionados, these fans of Bitcoin who want me to talk about it and other cryptocurrencies.
Dr. Jim Dahle:
For example, I got a comment the other day about it. “Thanks so much for your podcast. I’ve been enjoying it over the past few months. I’m a first-year med student”. Congratulations on getting into med school. “I’m minored in economics in college. So, I’ve been interested in many of the macro factors going on right now”.
Dr. Jim Dahle:
You’ll notice that people interested in cryptocurrency are always talking about macro factors, particularly, concerns about future inflation or concerns about confiscation by governments tend to be what they worry about and that’s what pushes them to put a significant chunk of money into cryptocurrencies and hopes that they can hide this from a confiscation event or that it would somehow be exempt from an hyperinflation event.

Dr. Jim Dahle:
He goes on to say, “I was wondering if you would consider having Preston Pysh on your podcast to chat about the global macro environment, government debt, inflation, and Bitcoin, as a story of value. Like I mentioned, I realized cryptocurrency can be wildfire and terribly risky. Isn’t that the truth? However, given the current environment, I almost believe it is irresponsible not to have any education about the asset class, given its properties”.
Dr. Jim Dahle:
I’m a big fan of education. I really think you ought to learn about all kinds of stuff and cryptocurrency isn’t a bad thing to learn about. The main benefits of it, of course, are that there’s a fixed supply, right? Supposedly you can’t just go make your own new Bitcoin now. It’s not necessarily the case. You can go spend a whole bunch of money in energy and apparently mine new Bitcoin.
Dr. Jim Dahle:
So, it’s not totally fixed, but eventually it will be fixed. It is decentralized so the U.S. government can’t control it. Although they seem to be becoming ever more effective at taxing it and exerting some control over it. And it’s useful for cross border payments.
Dr. Jim Dahle:
Well, I suppose some of us make cross border payments from time to time. I don’t make very many, but if that’s a big need you have, that might be useful, especially if you need to get around that pesky rule about only carrying $10,000 in cash in your suitcase.
Dr. Jim Dahle:
He goes on to say, “Institutions and investors are starting to realize this as fund managers like Paul Tudor Jones and publicly traded companies like MicroStrategy add Bitcoin to their balance sheets”. I don’t know what this argument is. People use this all the time. I should invest in Bitcoin because some hedge fund does or because some bank does or because some wealthy individual does.
Dr. Jim Dahle:
Their goals are not the same as mine. I wouldn’t invest in Bitcoin just because of that sort of a thing, especially since I still can’t use it to buy anything I want to buy, right? My gas station isn’t taking it, my grocery store isn’t taken it. This is not a useful currency. It certainly is not a stable currency. It’s volatility dramatically exceeds that of the stock market. And I’m not putting grocery money in stocks until I spend it. So I think we can see there that it’s still an instrument of speculation, not a useful currency at this point.

Dr. Jim Dahle:
All right. He goes on to say, “I think this is done safely. And if investors not over leveraged, I think this could protect value if inflation rises”. “Could” and “can” and “may” are such useful words, aren’t they? Anytime you use these words, you can follow it with pretty much anything you want, right? Because it puts his hedge on what you just said., Yes, it could potentially protect you in this sear in the event of hyperinflation. It might not too. And there might not be hyperinflation, but it could protect you.
Dr. Jim Dahle:
He goes on to say more broadly Blockchain in general, I believe will change the world. Entirely possible. Very useful technology. A quick search on cryptocurrencies, such as Algorand or Cardano has shown how the scientific peer review process has seeped into this space and use cases are unlimited.
Dr. Jim Dahle:
I agree. There’s lots of uses for blockchain. Just like there’s lots of uses for the internet, but that doesn’t mean that every company with dot-com at the end of its name in the late 1990s is going to be a great investment for your portfolio. Pets.com for instance, was not a great investment.
Dr. Jim Dahle:
Likewise, there are going to be a number of these cryptocurrencies available out there and these coins available out there that are not going to be great investments. In fact, there’s no guarantee that any of them, at least those existing today are going to be great investments.
Dr. Jim Dahle:
Will there eventually be some coalescence in this space? Yes. Will cryptocurrencies continue to be used in probably become more useful as time goes on? Yes. Will I still be able to exchange dollars at some future point for cryptocurrency? Absolutely yes. So, no reason you have to buy it now, just because it’s probably going to be used more frequently in the future.
Dr. Jim Dahle:
We’re still in the early stages he goes on to say, but the projects that do survive, I believe will change the world. Okay. Entirely possible. Although these assets are highly volatile. Absolutely true. And full of many scams. Also, absolutely true. I encourage people to have an open mind about it because there’s some amazing innovation going on mass by the hype and pain of volatile prices.

Dr. Jim Dahle:
I agree. There’s amazing innovation going on. I agree it doesn’t hurt to have an open mind, but you don’t want your mind so open that your brains fall out of it, right? Use your head people. There’s a lot of hype. There are very volatile prices. And at the end of the day, what you’re investing in is at best a currency.
Dr. Jim Dahle:
So, if you’re not buying yen and if you’re not buying euros, you’ve got to ask yourself, why am I buying cryptocurrencies? Okay? It’s the same thing. It’s an instrument of speculation. You’re buying it in hopes that down the road, someone else will pay you more for it.
Dr. Jim Dahle:
He finishes, “I’m interested to hear your thoughts on this”. I think you just heard him. “I also think having some education about this could benefit listeners”. I agree. There are way too many people who are running out there and put in way too much of their portfolio into Bitcoin, mostly out of fear of missing out and in hopes of getting rich quick. So, make safe and educated decisions.
Dr. Jim Dahle:
As I’ve said over the years, there’s no Bitcoin in my portfolio, but if you’re a true believer in Bitcoin or some other cryptocurrency, and you think it’s a better hedge against future economic catastrophes and other commonly used assets like gold or commodities or farm land. And you’re convinced that of the hundreds of cryptocurrencies out there that Bitcoin will be one of the winners, then go buy some.
Dr. Jim Dahle:
It really doesn’t bother me what you spend your money on, but limit its percentage in your portfolio to a play money amount, something like less than 5%. And don’t assume that just because Blockchain technology is useful, that Bitcoin must grow to the sky.
Dr. Jim Dahle:
I think there’s the Winklevoss twins that people that were apparently involved in Facebook early on, who predicted recently that Bitcoin was going to $500,000. Maybe it is. Maybe it isn’t. I honestly have no idea, but there are many future potential scenarios where the future investment return on Bitcoin will be terrible. And don’t discount the possibility of that. You are making a risky bet. Maybe it’ll pay off. Maybe it won’t. Don’t bet the farm on it.
Dr. Jim Dahle:
For those who aren’t aware through next Monday at midnight mountain time, we’re running a promotion on Medical Degree to Financially Free. This is Jimmy Turner, the Physician Philosophers course.
Dr. Jim Dahle:
You can get more details at whitecoatinvestor.com/mdff. There’s a free webinar, whitecoatinvestor.com/mdffwebinar. But this is a $647 course. It comes with a 14-day guarantee. There is no risk to you. And what the course is about is to take those who really are not managing their cash flow well and giving you the motivation and the tools to manage it.

Dr. Jim Dahle:
So, in the beginning of the course, they talk a lot about your “why”. Why you’re investing, why you want control of your finances, why this stuff matters. And then he shows you how to essentially budget your income, which for most of you is pretty significant income and use that to accomplish your financial goals.
Dr. Jim Dahle:
He shows you how to protect that income, not only from financial catastrophes that you might think about like disability or death, but also from less common things or more common things that you might not think about, like your own bad behavior. He teaches you all that.
Dr. Jim Dahle:
Then he shows you how to use that cash flow of yours to pay off your debts. And then of course, once those are gone to invest and to grow wealth and become financially free. So, a very useful course for those of you who have taken or taken a look at Fire Your Financial Advisor, the White Coat Investor course, and felt like it was too advanced and launched you into too much too soon and didn’t spend enough time on cash flow and budgeting. This is the course for you.
Dr. Jim Dahle:
The promotion we’re doing this week is a pretty sweet deal. What we’re doing is if you buy this course and obviously you don’t return it in the 14-day guarantee period, we’re going to give you WCI con park city. That’s 13 hours of additional content. That’s a $300 value, we’re just going to throw it in for free if you buy Medical Degree to Financial Free.
Dr. Jim Dahle:
Plus if you decide you want to upgrade later to Fire Your Financial Advisor and take that course that’ll walk you through portfolio design and some of these more complex topics, I guess, state planning and asset protection, those sorts of things that we cover in that course, we’ll give you $100 off that too.
Dr. Jim Dahle:
So, it’s pretty sweet deal you’re getting here. You get Medical Degree to Financially Free you get WCI con park city all for $647. Plus, if you want to buy Fire Your Financial Advisor later, you get $100 off that. A great deal for you. Take advantage of that at whitecoatinvestor.com/mdff. And that’s available through the 28th that’s Monday night at midnight.
Dr. Jim Dahle:
Okay. Let’s take some more of your questions here. All right, we’ll take this one off the Speak Pipe from Eric. Let’s take a look.

Eric:
Hi, dr. Dahle. I’m thinking about converting some of my bonds to TIPS funds. I notice when comparing to Vanguard to what’s at Schwab that Vanguard considers a short-term TIPS fund to be those less than five years remaining, whereas Schwab considers short term less than one year remaining. What do you consider short term and how do you decide whether to go with short-term TIPS versus the longer-term TIPS? Many thanks.

Dr. Jim Dahle:
All right. What do I consider short term TIPS? Well, I don’t know. Either one is a fine definition. Just decide which one you like. The important thing is to know what you’re buying.
Dr. Jim Dahle:
TIPS or Treasury Inflation Protected Securities, they are treasury bonds that potentially provide a return in three different ways. Appreciation in the value of the bond, a periodic coupon payment or the yield of the bond. And both of those components are as the same as a nominal or regular old bond.
Dr. Jim Dahle:
But in addition, there’s an inflation component to its return that helps protect you from unexpected inflation. Expected inflation is already built into the yield of a bond of any nominal bond. It’s the unexpected inflation that gets you because TIPS are also a treasury bond it helps avoid equity risk. You may get a little bit of a boost in a flight to quality. It tends to be a go-to asset in that aspect, unlike a corporate bond, which contains a little bit of equity risk, really. It’s a little bit different. It’s a treasury bond.
Dr. Jim Dahle:
As far as short term versus intermediate term, the important thing is simply to know what you’re buying. One-year TIPS are fine. Five-year TIPS, also fine. They’re both fine to have in your portfolio, but they’ll behave differently.
Dr. Jim Dahle:
Your expected return on a five-year bond is going to be higher than that on a one-year bond. In a period of falling interest rates of five-year bond will outperform one-year bonds and vice versa in a period of rising rates. Obviously, a longer-term bond is going to be more volatile than a shorter-term bond.
Dr. Jim Dahle:
My current holding is the Schwab regular TIPS ETF. SCHP is the ticker, but I’ve also owned the Vanguard TIPS fund in the past and I probably will again at some point in the future I’m sure. Both of those are fine holdings that will allow you to invest in TIPS with very little hassle, very little expense and daily liquidity.
Dr. Jim Dahle:
Now you can go buy TIPS directly from the treasury. You can go to treasury direct and buy them directly and hold them for 30 years if you like. That is an option that obviously cuts out the expense ratio on these funds, but these funds expense ratios are so low they’re practically free to start with. So, you’re not saving a lot there.
Dr. Jim Dahle:
I don’t actually hold short term TIPS. I guess I hold mostly intermediate term TIPS, but I don’t think there’s necessarily a right answer there. You want to hold short term TIPS? I think that’s reasonable too.
Dr. Jim Dahle:
The important thing as usual is to get a portfolio that’s reasonable and stick with it through thick and thin. There’ll be periods of time when shorter term TIPS are better than longer term TIPS and periods of time where longer term TIPS are better than shorter term TIPS.
Dr. Jim Dahle:
Okay, another question. A couple of questions that came in by email from one listener, let’s take them one at a time.
Dr. Jim Dahle:
“Would you consider talking a little bit more in depth about 401(k)s and 403(b)s or any similar retirement plans out a podcast episode in the future? I specifically wanted to hear more about things like true-ups investing, and if there’s any tips on keeping track of your contributions across multiple 401(k)s.
Dr. Jim Dahle:
I’ve listened to just about every podcast now, and you’ve only talked about contribution limits for multiple 401(k)s or a solo plus an employer 401(k), choosing investment options, traditional versus Roth versus mega back door. There’s nothing about the nuances themselves. I realize these can be planned by employer specific. I’d appreciated If you could take a minute or two to shed some light on these.
Dr. Jim Dahle:
As an example of a possible question, if you quit a job after one year, but employer contributions aren’t a hundred percent vested until three years, can you leave the money for two more years to get a hundred percent of the employer contribution? Or is that all end as soon as you quit? So, you’re stuck with just 33% of that contribution. My company’s retirement plan contacts is useless in answering questions like this. I think true ups are especially confusing. I would appreciate any help with those on the podcast”.
Dr. Jim Dahle:
Okay. So, let’s talk about 401(k)s and 403(b)s. All right. Vesting. A vesting plan. Why this feature that’s in some 401(k)s is basically a way to put golden handcuffs on employees to get them to stay at the company longer than they otherwise would.
Dr. Jim Dahle:
For example, it might be phrased that your employer match does not vest until you’ve been at the company five years. So that means if you leave the company any time before you’ve been there five years, all of the match that you got on your contributions get taken back by the company.
Dr. Jim Dahle:
So that’s a bad thing, obviously, right? You thought you were getting all this money and you really weren’t because you didn’t stay there. And so, you need to understand vesting rules, especially when it comes time to leave a company.
Dr. Jim Dahle:
Now, if the company doesn’t give you a match anyway, who cares? Right? And for lots of high-income professionals, you are highly compensated employees, they don’t give you a match anyway, right? Or if you are in a partnership with 401(k) profit sharing plan is probably all your money doing the match anyway. So, if the money goes back to the employer, it’s coming back to you. No big deal.
Dr. Jim Dahle:
So those plans typically are not written with a vesting schedule. And that’s like my plan at my partnership. We don’t have a vesting schedule. Whatever you put in there, you get to keep, when you leave.

Dr. Jim Dahle:
Vesting does not affect your contributions. The money you put in there from your paycheck, you get to keep no matter when you leave. That’s your money. The vesting refers to the match and you need to understand the rules in your 401(k). And maybe it’s worth staying at the employer for another month, for example, to make sure you get what is vested.
Dr. Jim Dahle:
So, your possible question. If you quit a job after one year of an employer contribution aren’t invested until three years, can you leave the money for two more years? No. They don’t want you to leave your money in the 401(k). They want you to stay in the job. That’s the point of it. And so, no, you can’t just leave your money there and try to get the match. They’re going to take the match back. At least whatever portion is not vested.
Dr. Jim Dahle:
Now, if it’s vested 33% a year, then you get to keep 33% after you leave a year. If it’s 0% vested until three years, then you don’t get any of the match if you leave after one year. That’s just the way it works.
Dr. Jim Dahle:
Okay, true ups. What true ups are, are a way to fix a problem that some 401(k)s have. Some 401(k)s are set up such that they will only match a certain amount per month. So, if you don’t put the same exact contribution in each month of the year, you may get shafted, not receive some of the match. So, you need to ask how does the match work? And it’s sad in this doc’s case that the HR can’t answer even basic questions like this, but you need to figure out how your match works.
Dr. Jim Dahle:
If your match is limited to a small amount, $200 a month, or however it might be limited, then you need to make sure you contribute every month to get that $200 a month or whatever it is.
Dr. Jim Dahle:
But if the plan has true ups, what that means is at the end of the year, they go back and they look at everything you contributed. And if you can contribute enough to get the entire match, then you get the entire match. They true it up at the end of the year and contributed anything that they should have but didn’t.
Dr. Jim Dahle:
So, true ups are a good thing. You want to understand how your match works. And if it’s kind of squirrely like that, and if you max it all out by April, they won’t give you your entire match, you want to ask about true ups. And if there are no true ups and you got some squirrely way, they do the match, then you better make sure your contributions just trickle in during the year to make sure you get the entire match or you’ll be leaving part of your salary on the table. All right. I think I got most of those answered.
Dr. Jim Dahle:
Any tips on keeping track of your contributions across multiple 401(k)s? I like to keep track of every contribution I make to all my investment accounts. It’s on a spreadsheet. If you’re going to manage your own finances, you pretty much have to be spreadsheet proficient.
Dr. Jim Dahle:
And if you can’t make a simple spreadsheet, keep track of the contribution to various accounts. You’re probably not going to keep track of them. That’s just all there is to it.
Dr. Jim Dahle:
Now, do you actually have to keep track of them? No. I mean, I guess in the end, all you care about is how much is in there, but the bottom line is you need to track it for your match to make sure you get your entire match.
Dr. Jim Dahle:
Well, you better be on top of it and write down each month, how much you’ve contributed, how much match you’ve gotten so far, how much more you need to contribute to get the rest of the match, et cetera. You’re going to have to be on top of those details if you want to get your maximum benefits. I hope that’s helpful.
Dr. Jim Dahle:
Okay, we’re going to take this doc second question. “This is probably a very simple and or silly question, but I still don’t completely understand deductions. My wife and I are W2 wage earners. We have no 1099 income. We take the standard deduction every year, rent our house. I took a hospital’s job now that involves a significant commute, 150 miles round trip, seven out of every 14. That sounds terrible.
Dr. Jim Dahle:
It’s interesting with commutes. Routinely surveys of the things that make people, the least happy, the most unhappy commuting is always at the top of the list. So, if you’re looking for someplace to spend money, to make your life more happy, moving closer to your job as highly likely to do that.
Dr. Jim Dahle:
So, do what you can to keep your commute short. I know it makes it difficult to listen to these long WCI podcasts, but it probably does make your life more happy overall. And I’m only putting one of these out a week. So, you only need a 10-minute commute to listen to the whole thing over the course of the week.

Dr. Jim Dahle:
“Since this is my normal commute, I cannot claim miles or gas as a deduction, correct?” That’s correct. You cannot deduct commuting mileage or commuting expenses in any way.
Dr. Jim Dahle:
“It sounds like based on your podcast, it’s only if I were to drive between this hospital and another hospital during my day that I could deduct miles only between the hospitals”.
Dr. Jim Dahle:
That’s correct. You can deduct work miles if you’re in business, but you’re a W2 earner. You’re not in business for yourself. So that’s not a business expense. It’s probably an unreimbursed employee expense, which you can’t even really deduct those anymore. And you will just be able to deduct them on schedule A, but they were subject to a floor that kept anybody from really getting much of a deduction for it.
Dr. Jim Dahle:
But as an employee, you don’t get that deduction anyway. So, if you are in that situation, try to get your employer to give you something for those mileage that you’re driving, because that’s the only way you’re getting any money for it.
Dr. Jim Dahle:
Last question is, “Is that an either or for standard deduction or itemizing deductions as a W2 earner?” It’s an either or for everybody. It doesn’t matter if you’re a business owner, if you’re an employee, what you are. You either get the standard deduction or you itemize your deductions on schedule A. One or the other.
Dr. Jim Dahle:
And with the new higher standard deduction, a lot more people are not itemizing. For a married couple I think in 2020, I think it’s $24,800. So, unless your itemized deductions are greater than $24,800, there’s no point in itemizing. You might as well just take the standard deduction, keep your life really simple, not have to save all these receipts, et cetera.
Dr. Jim Dahle:
But if you are giving more to charity, paying more in taxes and when I say taxes, I mean up to $10,000 a year in property taxes and state income taxes combined and charitable contributions. If all that doesn’t add up to more than $24,800, you might as well just take the standard deduction, but you can’t take both.
Dr. Jim Dahle:
That’s not entirely true. There’s a new provision this year. I can’t remember all the details of it offhand, I’d have to look it up. But I think you can give like $300 to charity and you can deduct that in addition to the standard deduction this year. So that’s a new thing there, but you can’t deduct $15,000 you gave to charity plus the $24,000 standard deduction. You got to weigh in and choose between one and the other.
Dr. Jim Dahle:
And his final question. “Since I’m W2 and not 1099, I can’t deduct my scrubs stethoscope, et cetera, correct?” That’s correct. They are unreimbursed employee expenses. The good news is your stethoscope and scrubs aren’t that big of a tax deduction. So, don’t beat yourself up about it.
Dr. Jim Dahle:
Truly the big tax deductions for doctors are your retirement accounts. You want a big tax deduction? Max out that 401(k), that’s probably your best deduction out there, particularly as an employee. If you’re self-employed and you can qualify for it, the 199A deduction, which is the pass-through business deduction may be bigger.
Dr. Jim Dahle:
All right, our next question off the Speak Pipe comes from an anonymous listener. Let’s take a listen.
Speaker:
Hey Jim. I’m not a physician. I’m a software engineer, but lurking around in the WCI YouTube channel has given me a lot of value. So, thank you very much for that. I hope you don’t mind me asking a question here.
Speaker:
My question essentially is should I financially plan for the future that I want or the future that might end up happening? The future that I want is to get married and buy a house and start a family and all that good stuff. The future that might be is that after my breakup last year, I’m feeling hopeless about my relationship future and the thought has crossed my mind that I might be single for the rest of my life.
Speaker:
I am 33 and I maximize my mega back door, regular backdoor on 401(k) contributions right now while living in my rent-controlled apartment. However, if I end up marrying and buying a house, starting a family and all the stuff that I want to do, then I feel like I might need all this cash to not be tied up in retirement accounts and be available so that I can make down payments and things like that. Would you suggest that I diversify my saving strategies? Thanks.
Dr. Jim Dahle:
I like the way you phrase this. “Should I plan for the future I want, or the future that may end up happening?” I empathize with your situation of not knowing the future. The downside, of course, if you knew what the whole rest of your life entailed, would you really want to know it right now?
Dr. Jim Dahle:
I mean, for example, if you knew how you were going to die, when and how would you really want that information? Probably not. That’s part of the fun of life is having that mystery hanging out there. Right?
Dr. Jim Dahle:
But in this case, your question basically boils down to, should you not max out retirement accounts in order to have money in a taxable account or in cash or whatever that’s available for shorter term purchases?
Dr. Jim Dahle:
I think in this situation where you’re not engaged to be married, and it doesn’t sound like you even have a partner right now. I don’t think I’d bother doing that. I think max out the retirement accounts.
Dr. Jim Dahle:
But the key of course is to maintain flexibility. You can always withdraw Roth IRA contributions. You can withdraw up to $10,000 in earnings for a house down payment. You can borrow $50,000 out of your 401(k).
Dr. Jim Dahle:
And when you get in a serious relationship where you’re starting to go, “Okay, I need money for a wedding and a honeymoon and a ring and a new house and all that sort of stuff” you can start saving up at that point. Lots of people are engaged for many months or even years. It gives you lots of time to save up for those expenses, especially if you’ve got a good savings habit.
Dr. Jim Dahle:
The other thing to keep in mind is if you do get in a serious relationship, you get married down the line, whatever, your partner may bring cash to that relationship. And maybe you’re bringing the retirement accounts to the relationship. So, you’d be perfectly fine in that situation. You’d really regret not having maxed out your retirement accounts, if that were the case.
Dr. Jim Dahle:
But I’d be pretty hesitant to pass on the known tax and asset protection benefits of retirement accounts, because you might at some future date need a little bit of cash. If you’re really worried about it, you keep a little bigger emergency fund, maybe six months instead of three months as some sort of a compromise. But for the most part, operate under the way your life currently is under current tax law and usually that means maxing out your retirement accounts with your savings.
Dr. Jim Dahle:
Okay. This question came in via email. Really great question. I really liked this one.

Dr. Jim Dahle:
“My dad and his five siblings have inherited a lake cabin from my great aunt about three years ago. It has been in the family since 1899, it is where my dad and siblings spend every summer growing up. It’s worth about half a million dollars based on comps. It was left in a trust of the family with about a $50,000 levy fund”. Thank goodness. That was a great move to leave a little extra cash to take care of this place.
Dr. Jim Dahle:
“It makes about $4,000 in profit from a government farm lease. That’s great. The costs of the cabin is just shy of the $4,000 a year for taxes, insurance, and utilities. With significant updates, there’s only about $10,000 left in the levy fund”.
Dr. Jim Dahle:
“I’m emailing you because unfortunately one of my uncles died in the last couple of months”. I’m sorry to hear that. “There’s now very clear as absolutely no plan for this trust moving forward to the five surviving siblings and 16 grandchildren.
Dr. Jim Dahle:
My dad and his siblings try to use it as much as they can. There’s a ton of sentimental value. I’m not sure how the grandchildren would use this. How often they’d use it without an invite from parents. Do you have any recommendations on how to manage this going forward?”
Dr. Jim Dahle:
Oh boy, I don’t think selling it with any living sibling is an option. Selling it when they are 16 grandchildren gets pretty messy. “How would a buyout work? Based on current tax assessment or unfair market value with a barely net positive cash flow until there’s a major renovation needed again anyway. Could we just keep sharing it within the family?”

Dr. Jim Dahle:
Oh boy, this thing’s a mess. This is the problem with leaving your assets to multiple people. In a lot of ways, it’s better to leave something else to one child and leave the cabin to another one. Just to keep things simple.
Dr. Jim Dahle:
The only easy question that I’ve been asked here is when doing a buyout, should we use the tax assessment or the fair market value. Well, use the fair market value. You know as well as I do the tax assessments aren’t anywhere close to fair market value. If it is, you’d be down there contesting it with the tax authority, right? And so, don’t use that.
Dr. Jim Dahle:
What should you do at this point? Well, you need some sort of an agreement within the family. And that agreement might be that it gets sold when the last of the siblings die. When the last of that second generation dies. And if one of the grandchildren wants to buy it because it has a ton of sentimental value to them, well, they can buy out all the other grandchildren.
Dr. Jim Dahle:
But that agreement needs to specify exactly how the shares in this thing are split up. Are they split up and divided by the number of people in the second generation, by the number of people in the third generation or exactly how will that work out? The document needs to really specify that.
Dr. Jim Dahle:
And there’s going to be some resistance just to drafting up this document, right? Because for some people it’s going to force them to make decisions that they’d rather put off for a long time. But the longer you put them off, the more painful they’re going to be, the more valuable this property is going to be and the bigger headache it’s going to be.
Dr. Jim Dahle:
So, what can you do? There are lots of things you can do but, in the end, the goal is to try to find some sort of consensus, compromise situation where there’s an agreement, a document that dictates exactly how shares are inherited, how shares are bought out, when they’re bought out, et cetera.
Dr. Jim Dahle:
Good luck. I don’t envy your situation. It’s cool to have a piece of the property, but you may want to just walk away from your piece of it, just because there’s so much hassle.
Once you divide half a million by 16, it’s not that much money anyway. And maybe not even worth the hassle and the family drama that it’s likely going to cause at some point.
Dr. Jim Dahle:
And to those you think about leaving assets like this to your kids, really think about how this is going to happen. I love the idea that they left some money to pay its expenses so that they didn’t have to go around to the family and get that out. But this was really a bad idea to just leave this to six different people. Not smart, bad estate planning.
Dr. Jim Dahle:
Okay. Next question, also from an anonymous caller. Let’s take a listen.
Speaker 2:
I have a question about rental properties. We have three of them and our most expensive rent is for $4,500 a month. We have a family that would like to rent the home. Net income about $12,500 per month, credit score of 620 with two prior bankruptcies, one dismissed and one disputed. And no bankruptcy is pending.
Speaker 2:
A rental agency suggested a conditional approval with a doubling of the security deposit, which would equal two months’ rent. I’m uncertain. Would you recommend approving them for this rental or is this a setup for a tenant that doesn’t pay? Thanks so much.
Dr. Jim Dahle:
Okay. Long question, easy answer. No. I’m not going to rent to somebody that has two bankruptcies. Hello? They’ve shown not only once that they can’t manage money and they don’t pay people money that they owe money to, but they’ve done it twice, right?
Dr. Jim Dahle:
I mean, everyone deserves a little bit of forgiveness in their life, but two bankruptcies? No, I’m probably not going to rent to you. There are too many other good tenants out there.
Dr. Jim Dahle:
If you’re not seeing good tenants applying to live in your property, maybe your rent is a little bit too high. Lower it down, or give it a little more time and you’ll likely get better tenants applying to come live in your property or fix the property, whatever the issue is with it, that the only people applying for it are people in this sort of a situation.

Dr. Jim Dahle:
I’d definitely lower the rent first before I rented to somebody with two bankruptcies. And I’m sorry, I don’t know where people with two bankruptcies go to rent. Maybe they go to places where the rent is too high and no one else applies for it. I don’t know, but I’m not taking on that risk. I’m sorry.
Dr. Jim Dahle:
Okay. Next question about the Speak Pipe, this one’s from Eric.
Eric:
Hi, Dr. Dahle. I have a question about 529 accounts. We use these accounts to save for our daughter’s college. She’s currently five and we have $70,000 saved, which suggests that we were almost done saving for four-year public school, but we need to add more for an average private school and certainly more for an expensive private school.
Eric:
This year we decided to send her to private kindergarten because we had a hard time believing that younger kids could learn virtually. Is there any benefit in putting the private school tuition into a 529 account first and then withdrawing it to pay the private school tuition? Thanks so much.

Dr. Jim Dahle:
All right, well, is there any benefit to running K through 12 private education through 529? Probably not, but check your state. If there’s a state tax benefit, there may be. But if you’re otherwise maxing out that 529 every year for college, then there’s not going to be some additional tax benefit to using it, to pay for K through 12 private education. You might as well not use up that annual contribution and just cash flow the stupid thing.
Dr. Jim Dahle:
But look into it. If you are not already contributing enough to the 529 to get your maximum state tax benefit, then sure. Run it through there and you’ll get a few hundred dollars back every year in exchange for doing that. But most of the time, you’re probably already putting in enough to maximize that.
Dr. Jim Dahle:
Okay. Next question on the Speak Pipe. By the way, if you want to leave us a question on the White Coat Investor, you can leave that at whitecoatinvestor.com/speakpipe and we’ll get your questions on the show.
Dr. Jim Dahle:
All right, Tom from Boston. Let’s take a listen.
Tom:
Hi, Dr. Dahle. This is Tom in Boston. No, not Tom Brady. Unfortunately, he now lives in Tampa. My question for you involves international stocks. What percentage of asset allocation do you think international stocks should comprise and where should they go?
Tom:
I’ve heard it discussed it international should go in taxable because you get a foreign tax credit. And that foreign tax credit is only available on accounts that pay taxes. So, your taxable account, it’s not available in your tax deferred accounts, your IRAs, and it’s not available in your tax-free Roth accounts.
Tom:
So those are my two questions. What percent of your asset allocation is ideal for international and where do they go?
Dr. Jim Dahle:
All right. What percentage of allocation should international stocks be and where should they go? Well, there’s no right answer here. I think the right answer is pick a percentage and stick with it. Because there are going to come times where international stocks outperform U.S. stocks and there are going to be times where the opposite is true.
Dr. Jim Dahle:
What you don’t want to be doing is shifting back and forth all the time and miss timing it and ended up being in domestic stocks when international stocks are doing well and in international stocks when domestic stocks are doing well.
Dr. Jim Dahle:
So, pick a percentage and stick with it. Some people would argue that you don’t need stocks, international stocks at all. Jack Bogle classically made this argument. And he said “Never more than 20%. And you can get by with 0% because U.S. companies do so much business overseas”.
Dr. Jim Dahle:
I don’t know that I necessarily agree with them on that point. I think a little bit more than that is probably a good idea, but that 20% number he throws out there isn’t a bad percentage. That’s totally reasonable.
Dr. Jim Dahle:
At a maximum, I would put market weight into international stocks. So, if international stocks make up 50% of the world stocks I think that probably ought to be your maximum 50%. And the reason why is I’ve seen a little benefit for taking on additional currency risk beyond that point of maximum diversification, as far as number of securities you have there.
Dr. Jim Dahle:
But most people I think are somewhere in between those numbers. My own personal number, I have one third of my stocks in international stocks. So, I think anything from 20% of your stocks being international to 50% of the stocks being international is reasonable. I’d pick a number in there and stick with it.
Dr. Jim Dahle:
Where should they go? Well, if you’re using something like what I use, which is the total international stock market fund, that is a very tax efficient investment. It’s a great holding for your taxable investing account. Assuming you have a taxable investing account.
Dr. Jim Dahle:
Obviously, if all your investments are in a Roth IRA, you’ll put international stocks in the Roth IRA. Don’t skip out on a Roth IRA or a 401(k) contribution in order to invest in international stocks in a taxable account. But if something has to go into taxable, a total international stock market fund is a pretty good choice.
Dr. Jim Dahle:
Even in emerging markets in next stock index fund is a pretty good choice in a taxable account. Yes, you get that foreign tax credit, which you wouldn’t get if you were investing inside a Roth IRA or other investing account.
Dr. Jim Dahle:
However, the benefits of being inside the retirement account outweigh that benefit. It’s important to understand that. You’re better off just being in a tax protected account than you are getting the foreign tax credit. It’s not that big of a credit I assure you. But if you have to put something in tax, well, that’s not a bad thing to put out there first.
Dr. Jim Dahle:
It’s not dramatically better than just putting a U.S. total stock market index fund though. And the reason why is because an international total market fund has a higher yield than a U.S. total market fund due to value current valuations.
Dr. Jim Dahle:
So, if the yield is 3% on that international fund and 2% on the U.S. fund, well, that is probably the difference in that yield and the tax efficiency of the investment because of the yield is going to make up for that foreign tax credit.

Dr. Jim Dahle:
So, it’s really sixes. I have both of them almost entirely in taxable now because my taxable to tax protected ratio has been growing the last few years and I don’t lose any sleep about any of it. It’s almost all in taxable for me. So yes, it makes a fine taxable holding.
Dr. Jim Dahle:
Other good taxable holdings. Municipal bond funds are good taxable holding. Very, very tax efficient. And of course, equity real estate, because then you can take advantage of the depreciation on that to shield some of the income from taxation. Also, a good taxable account holding.
Dr. Jim Dahle:
Okay, our next question comes in via email. “This may be appropriate for the podcast. I wasn’t sure how to submit it for that”. Again, whitecoatinvestor.com/speakpipe. “I read your most recent podcast this morning and the listener asked about including the defined benefit plan in their asset allocation.
Dr. Jim Dahle:
Our three-person practice is starting one for the first time this year. I’m the youngest partner at 48. So, we are each doing our maximum allowable contribution, which is around $120,000”. Cool. And in the podcasts you said, we keep closing it and rolling it over into 401(k)s. Our plan administrator and CPA recommended that we run it for five years minimum for fit testing. How often do you roll as yours over?”
Dr. Jim Dahle:
Well, the only one I have is the one I have with my physician partnership. And I’m on my third one. I’ve been with the group for 10 years. So, the first one I think went about 10 years. The second one went about five years and we’re on the third one now. So, five years seems like a reasonable amount.
Dr. Jim Dahle:
When I talk to TPAs and those who advise these plans, they generally recommend that you keep it open at least three years with those equal contributions each year. So, I think three is the bare minimum. Five is probably a good idea. I think you’re getting good advice from your plan administrator and CPA.
Dr. Jim Dahle:
Another one via email. “My question is in regards to paying taxes on your dividends and appreciated funds in a taxable account. I try to place the most tax efficient funds in my taxable account and keep the allocation in line with my investing plan”. That sounds smart.
Dr. Jim Dahle:
“How do you suggest handling the dividends that are received and appreciated shares if I do not have them automatically reinvested? Would reinvesting these gains quarterly be a smart idea while keeping a portion in the sweep account to pay taxes later in the year? I just wanted to understand and get advice on different strategies or a good strategy”.
Dr. Jim Dahle:
All right. Let me tell you what I do with my taxable account. Nothing in taxable gets reinvested. Okay? All my dividends, all my capital gains distributions, all the interest, all the rents, everything I get in my taxable account goes into my bank account or a sweep account or a money market fund or whatever.
Dr. Jim Dahle:
And then once a month, when I go to invest whatever money I can invest that month, whether it came from my clinical job, whether it came from White Coat Investor profits, whether it came from bank account interest, whether it came from stock dividends, whatever it came from, I invest it all together. One day a month.
Dr. Jim Dahle:
And the benefit of doing that rather than reinvesting those dividends as they go along is you don’t have all these different tax lots to keep track of, which makes it a little easier when you go in to choose which lots to sell and when you’re trying to tax loss harvest, it keeps things a little simpler.
Dr. Jim Dahle:
If you really want to reinvest your dividends and taxable, well, you can do that. The brokers will keep track of your basis. It’s not that big of a deal, but I find it cleaner to just pay everything into taxable and then invest that once a month from my bank account.
Dr. Jim Dahle:
That’s what I’d recommend you do. I think it’s really simple to do it that way. There’s no reason to wait a quarter if you’re investing every month. Why wait a quarter? I guess if you only invest once a quarter, then maybe I’d do it once a quarter. But I usually try not to let my money sit in cash quite that long if I don’t need to. But those are probably the main ways that people look at that. I hope that’s helpful and answers your question.
Dr. Jim Dahle:
All right, this podcast was sponsored by Collin Hart of ERE Healthcare Real Estate Advisors. ERE is a real estate brokerage, but it takes on an advisory approach. Expertly positioning their clients for a real estate sale as part of succession planning surrounding their practice real estate investment.
Dr. Jim Dahle:
With the continuing challenges created by Covid-19 and given the lack of liquidity in the stock market, ERE wants to let you know that opportunities still exist in strategically monetizing your practice real estate, providing a more certain exit strategy and uncertain environment. Contact Collin directly at [email protected] or call him at (702) 839-8737.

Dr. Jim Dahle:
Thanks to those of you who are leaving us a five-star review and telling your friends about the podcast. Those reviews really do help spread the word.
Dr. Jim Dahle:
A most recent one came in from a WM Beer, William Beer, maybe, who said “A great education across many levels. WCI has done so much for so many professionals. There are pointers for newer investors and those early in their career and more advanced topics mixed in for those that want to get into the weeds. I look forward to this podcast weekly, and I have a better understanding and vision of my financial future thanks to the WCI network. Forever grateful”. Five stars.
Dr. Jim Dahle:
Thanks so much for that. If you want to check out that course, I mentioned earlier, the link will be in the show notes. It’s whitecoat investor.com/mdff and that special deal where you get our other course for free and $100 off Fire Your Financial Advisor goes through Monday night, the 28th. So, check that out.
Dr. Jim Dahle:
Keep your head up, shoulders back. You’ve got this and we can help. Stay safe out there. We’ll see you next time on the White Coat Investor podcast.
Disclaimer:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney or financial advisor. So, this podcast is for your entertainment and information only and should not be considered official personalized financial advice.

 

 


Originally posted at https://www.whitecoatinvestor.com/special-needs-podcast-177/

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