Finances in the Great White North – Podcast #185

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Finances in the Great White North - Podcast #185


Podcast #185 Show Notes: Finances in the Great White North

The Canadian financial system is similar but not quite the same as the U.S. financial system. In this episode, we talk about the Canadian retirement system, the programs they have similar to the U.S. social security system. We discuss their versions of our Traditional and Roth IRA accounts. Considering our close proximity to each other, it is no surprise that a couple of listeners have questions about working in one country and living in another, as well as Americans married to Canadians and what to do about citizenship. We cover the pros and cons of those situations in this episode. For those with no connection to the Great White North, we also answer other questions about separately managed accounts, over-contributing to the 457(b), market timing in the de-cumulation phase, UTMA accounts, and the CARES Act tax-deductible student loan payment. 

This podcast is sponsored by Bob Bhayani at drdisabilityquotes.com. He is an independent provider of disability insurance planning solutions to the medical community in every state and a long-time White Coat Investor sponsor. He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. If you need to review your disability insurance coverage to make sure it meets your needs or if you just haven’t gotten around to getting this critical insurance in place, contact Bob at drdisabilityquotes.com today by email [email protected] or by calling (973) 771-9100.

Quote of the Day

Our quote of the day today comes from Henry David Thoreau, who said,

That man is richest whose pleasures are cheapest.

Isn’t that the truth? I had someone ask the other day if they needed $7 million to FIRE as a physician because apparently, that was the average of what people on the Bogleheads forum said that you needed to retire early as a physician. It’s not really about what the average Boglehead needs. It’s about what you need, which is about your spending. The less you spend, the wealthier you are.

Sign up for WCICon 2021

Registration is open for the 2021 Physician Wellness and Financial Literacy Conference, aka WCICON21, which will take place on March 4-6th 2021. Due to the severity of the ongoing COVID pandemic, it will be a live virtual experience that you can enjoy from anywhere in the world. Even though the event will not be in-person, we still hope to recreate as much of the feel of going to WCICON as we possibly can. Right now it is early bird pricing, through November 30th. If you buy in November, it is only $779, a $120 discount.

 

Finances in the Great White North

Growing up in Alaska, I was closer to Canada than any other U.S. State. Canada holds a special place in my heart.

One of my favorite trips I ever took was during residency. Katie, Whitney, and I drove up from Tucson all the way to Squamish, which is about an hour north of Vancouver, right on the coast in British Columbia. I was amazed. We picked up one of my med school classmates in Washington and we went up there for mostly a climbing trip.

But this place is considered the outdoor recreation capital of Canada and it is paradise. They have rivers running into the sea, so there is river kayaking and sea kayaking. The mountain biking is fantastic. The Chief is a huge piece of rock. It’s not quite as big as El Cap in Yosemite, but it’s a big piece of rock with tons of fantastic rock climbing. It rained on us the whole week, and we still went climbing every day because it was so good.

We were so excited about it we actually went to the hospital there in Squamish to see what it would take to work there as emergency physicians when we finished residency. We were a little turned off that it was going to take a couple of extra years of residency to go there, so we never ended up going.

Our heli-skiing trips have also been to BC, and it makes the mountains in Utah look puny. The runs we were doing in BC were 7,000 vertical feet, as opposed to the 3,000 you might get at the resorts close to my house. I’m a big fan of Canada.

I have a med school classmate in Southern Alberta who absolutely loves his practice. He’s a family practice doctor. He is able to do all kinds of interesting stuff. The amazing thing is he is paid more than any family practice doctor I know of in the United States. There’s this idea we have out there that these Canadian doctors are not able to give good care and that they’re not able to get paid very well. It’s interesting. I listened to a Planet Money episode, not that long ago, about a guy who was a lobbyist for the U.S. health insurance industry. Literally, his job was to make Canadian medicine look bad. Now he is making the rounds on podcasts as kind of an apology tour. He is feeling bad that he made it look as bad as he did.

I find it interesting, when I talk to people who are actually practicing medicine there and people who live there, how different their view is versus the perception a lot of us have as Americans.  I wonder a lot of days if we wouldn’t be a little bit better off with that system. But I’m not going to talk a whole lot about Canadian health care today. We are going to talk about Canadian financial stuff.

Canadian Retirement System

Canada has something similar to social security. It is called the Canadian Pension Plan along with Old Age Security. Canadians pay 10.5% of their income between $3,500 and $58,700. A split like our social security system between the employee and the employer. So that is a lower tax than we are paying. We pay 12.4%. They pay 10.5%. They pay it on income between $3,500 and almost $59,000. We pay it on an income between $0 and I think in 2021 it is going up to $142,000.

The Canadian pension plan starts paying out between age 60 and 70. On average, they get less than we do. They get $672 on average with a maximum of $1,175. So they are paying less tax than Americans are into the system, and they’re getting less benefit.

They do have the single-payer healthcare paid for with general taxation. It is not an old-age-specific healthcare program like our Medicare. They also have Old Age Security. You don’t actually have to pay into that. The amount that you get paid for 2020 for that is $613.53, but it’s actually phased out for high earners. So basically, for every dollar you make above $79,054 in 2020, you lose 15 cents of benefit. Basically, by the time you get to $83,000 or so, there is no benefit left.

You can actually minimize that phaseout. This is kind of a strategy for Canadians. You can minimize that phase-out by splitting your Canadian pension plan between you and your spouse. Just kind of an interesting strategy for any Canadians that might be listening to this podcast; it’s definitely worth looking into.

In addition to those government programs, they have registered retirement savings plans or RRSPs. Think of this as like a traditional IRA. It is tax-deferred until you pull the money out in retirement. You can put in up to 18% of your pay with a max contribution limit of $27,230 a year. That is a lot more than the $6,000 that we can put into a traditional IRA.

They also have tax-free savings accounts, TFSA. Think of this like a Roth IRA. The contribution limit is the same as ours, $6,000. I guess it’s less than ours because that’s Canadian dollars, not US dollars, but it has a cool feature. You can actually catch up for prior-year contributions that you didn’t make. So, you can go all the way back to 2009, look at what the limits were for contributions for each year. As long as you were working back then, you can contribute all that money in 2020 into this Roth IRA-like TFSA. Then, of course, once the money is in the account, you can invest it into stocks, bonds, mutual funds, CDs, etc.

Marrying a Canadian Citizen

If I were to marry a Canadian citizen, as soon as she becomes a stay at home parent, which of the following makes the most financial sense? 1. naturalized U.S.; 2. become a permanent resident of the U.S.; 3. remain a Canadian citizen and obtain a social security number. She plans to open U.S. bank accounts, credit cards, retirement accounts, and hopefully also get retirement/healthcare benefits from either government.

I’m not an immigration attorney but I found a great website called canadatousa.com. It has lots of great information, and you can even hire them to help you with all kinds of issues like these. I’m sure there are a lot of competitors, but that was the first one that came up when I googled it. I learned a lot on the website.

If you marry an American, you can apply for permanent residency and you can pretty much expect to get it. The U.S. citizen spouse files a form called a Petition for Alien Relative with the USCIS. That is basically petitioning for the Canadian spouse to become a U.S. permanent resident. As part of that petition, the U.S. citizen will also have to sign an affidavit of support declaring that he or she will be financially able to support the Canadian citizen so that they don’t become a public charge.

The Canadian citizen spouse then files a form called Application to Register Permanent Residence or Adjust Status, which basically seeks to change the Canadian’s current immigration status to that of a permanent resident. The Canadian citizen has to get fingerprinted and undergo a medical exam by a designated civil surgeon to ensure he or she is healthy. The idea is basically you don’t come in and become a public charge.

If you want to become a citizen, you have to be a permanent resident for three years first. Then, if you want to be a citizen, you have to be 18. You have to be living in a marital union with a U.S. citizen spouse who has been a U.S. citizen for all of that period. You have to have lived within the state with jurisdiction for at least three months prior to the date of filing the application.

You have to have continuous residence for three years preceding, and you have to be physically present in the U.S. for at least 18 months out of those three years. You have to be able to read, write, and speak English, and have a knowledge and understanding of U.S. history and government or civics. You have to be a person of good moral character attached to the principles of the Constitution of the United States and well disposed to the good order and happiness of the United States.

There are some barriers there. I think to become a citizen after growing up somewhere else, you actually have to know more about civics than you actually do to graduate from high school here. But to answer your question, if I was to live in the U.S. the rest of my life coming from Canada, I’d apply for permanent residence, I would get a social security number and work my way towards citizenship.

Dual Citizenship

The real question is whether you want to be a dual citizen. Dual citizens get certain benefits. You have the ability to work, live, and move freely between the two countries. You can own property in both countries. You can travel easily between the countries, but there are some downsides.

One of the downsides is you may be paying double taxes, which Canadian taxes are a little higher than the U.S. taxes. Given that most who listen to this podcast are already in a pretty tax high bracket in the U.S., that is not an insignificant cost to having dual citizenship. The process of getting it can be long and somewhat expensive. Of course, you then are bound by the laws of both nations.

Those benefits might not be as good as you think. For example, you want Canadian health care benefits? You have to go back to Canada and get them there, number one, but you have to stay there for three months before you get them.

You can get both the Canadian pension plan and social security, but social security will be reduced due to the WEP—The Windfall Elimination Provision. Your social security doesn’t affect your OAS, unless it puts you over the phase-out threshold, of course. But basically, instead of income, before that first bend point in social security, counting 90% toward your primary insurance amount, it only counts at 40%.

So, it doesn’t eliminate your social security benefit, but it reduces it pretty severely to have the Canadian pension plan. So, you’re not really, fully double-dipping. You’re losing quite a bit of what you would get from social security by the fact that you qualify for the CPP.

However, this is all pretty complicated, as you can tell. It’s complicated enough that I think it’s worth getting expert help on it. If your spouse is going to stay here for the rest of her life, I definitely would work towards citizenship. I probably wouldn’t expect much in the way of Canadian retirement or benefits or health benefits unless you go back to Canada at some point.

Working in U.S. and Living in Canada

I’ve heard that people work in the USA, Buffalo, or Detroit, and live in Canada as a dual citizen. We’re considering doing so for a family reason. Would you be aware of the tax consequences? I know that they pay taxes in both countries. How do they transfer money from the U.S. to Canada when they get a paycheck in the U.S.? What would be the best investment strategies? We could undoubtedly invest in the U.S. as usual. We could also invest in Canada, at least to the tax limit of CRA. Would you be aware of any financial advisors who know the answers to these questions?

I don’t know any advisors that specialize in U.S.-Canada relations, but they’re probably out there. There are certainly lots of accountants and attorneys specializing in this stuff that live in border towns. So, if you’re in Buffalo, Detroit, or another border town, there are probably people there who specialize in this because there are plenty of people doing it.

I would expect to pay taxes in both countries if you’re living in one and working in the other, but bear in mind that the U.S. and Canada have a tax treaty. You usually get a credit for taxes paid in the other country. I’d expect you to both pay for and be eligible for a CPP and social security. But, of course, the social security benefits would be reduced due to the windfall elimination provision.

The IRS does not give you a tax deduction for an RRSP contribution made in Canada and probably vice versa. So, keep that in mind. When you’re deferring taxes on income, it’s only deferred in one of the two countries.

Now, how do you transfer money to Canada? I don’t think this is as big a deal as you worry it is. I think you can just wire the money. As long as it’s below $10,000 at a time, you can put it in your pocket and drive across the border, and you just withdraw from your bank, deposit on your way home in Canada without declaring anything.

But, obviously, you’re going to be subject to exchange rates and fees. To be honest, I’m sure banks in Buffalo and other border cities do this stuff all the time. I would just walk in there and ask them, how do I send money to my Canadian bank account? And they’ll help you with the best way to do that.

You could use both U.S. and Canadian retirement accounts, I believe. I would probably keep most of my investments in the U.S. I think you have more options. I think costs are generally cheaper on investment funds. More options, lower costs. What’s not to like? Obviously, if you’re investing in a TFSA or an RRSP, that’s going to be in Canada. But I think I’d keep my taxable account and that sort of stuff in the U.S.

 

Reader and Listener Q&As

Separately Managed Account 

I recently ran into a friend who is in the investing and finance world. He suggested that, when I have enough money as an attending physician, to invest a minimum of $100,000 into a separately managed account (SMA). I had never heard of this before. And so, I looked it up and I kept speaking with my friend to decide whether this was the right option for me or not. From what I understood, it seems like a smaller type of indexing, where there are certain groups of financial individuals who select a type of high performing companies within the different ranges of small, mid, and large cap and value companies. Essentially what he described as a more efficient way of indexing, where you pay higher fees, but you get much higher returns to make it worth it. Could you define what you think an SMA is and how that might be beneficial to the investing community of high-income earners?

Separately managed accounts sound so awesome when they describe it like that. So, your friend wants you to invest at least $100,000. There is no minimum for that other than the minimum that the person managing the separately managed account sets. This is simply paying someone else to pick stocks for you. It’s a bunch of crap. You’re not getting higher returns. You’re just paying someone else to run your own personal mutual fund. It usually works out even worse than hiring a good, actively managed mutual fund manager.

My dad had one of these for years with someone who was picking stocks for him. When I became financially literate, I said, “Dad, what are you doing?” I compared what this advisor had been doing in the separately managed account to what he would have gotten if he just dumped it all in a reasonable mix of a total stock market fund and a total bond market fund.

Obviously, the index fund dramatically outperformed this guy. Basically, over six or seven years, my dad’s money hadn’t made any money at all because this guy was churning it and charging fees on it and trying to pick stocks. What did he know? Here he is managing these little, tiny, separately managed accounts. If this guy could actually pick stocks, he’d be running a pension fund, or be working for Yale, or he’d have his own mutual fund. This guy can’t pick stocks any better than anybody else. Of course, he wasn’t outperforming the market at all.

So, my advice to you is to stay away from these separately managed funds. Don’t do it. Just use index funds. I have millions of dollars invested in index funds. I don’t feel a need to have a separately managed account because I have more than $100,000. Index funds aren’t just for these tiny little accounts.

Now, is it possible to have more opportunities to tax loss harvest in a taxable account that’s filled with individual stocks? Yes, it’s entirely possible. You can also fill that account with stocks that don’t pay dividends at all. That would make it more tax efficient. Absolutely.

But I don’t think either one of those are worth the downsides of the additional costs and the uncompensated risk of picking your own stocks. I think you’re better off just picking index funds for your taxable account. They are very, very tax efficient. You can still do tax-loss harvesting, certainly in the big, nasty bear markets where you can get most of the benefit from that. I just don’t think it’s worth hiring someone else to do a separately managed account.

Over-Contributing to 457(b)

A listener over contributed to his 457(b) and then rolled over the entire 457(b) into a new individual 401(k) when he left his fellowship. After doing so, he saw that he had over contributed about $1700 due to an employer contribution that he wasn’t aware of.

The confusing part for me is that the funds are now contained in an individual 401(k). Whereas the over contribution occurred in a 457(b). Do I need to calculate the gains the $1,700 made, sell some ETFs in my E-Trade account, and transfer it back to the 457(b)-plan administrator to have them distribute that money back to me?

What I would do in this situation is contact both plan administrators and ask them how to fix this. Then I would do exactly what they said.  That is probably the best way to do it. General advice for over contributions. First, don’t panic. Just determine the amount you over contributed to your retirement plan. You can contact your payroll or benefits office and determine the best route to correct that excess amount. You want to always correct it before April 15th of the following plan year, which avoids your tax penalties.

You basically have two options. One, you can just complete a distribution request, which indicates a distributable event is a correction of excess contributions. Then the plan just sends you the money and gives you a 1099-R for that amount that they gave to you. No big deal. You get that in January, report it on your taxes. It’s all taken care of.

The other option is the funds can be recalled from the vendor by the plan. It is given back to you on your payroll to ensure that the taxes are deducted, and that way the funds are returned via payroll, the W2 is correct, and the 1099-R is not required. You can get that done during the same tax year. That’s a pretty slick way to do it, as well.

But if you’ve already rolled that money somewhere else, you have this additional complicating factor. I would just contact the administrators of both funds and ask them what to do about it.

What I would expect to happen here is to pull out the contribution, the over-contribution, and its earnings, and pay tax on it. I’ll leave it up to them to calculate the exact amount. Let them put it on the 1099-R, and you just pay taxes on it. Just put it into TurboTax or hand it to your tax preparer, and it’ll work out okay.

Market Timing in De-Cumulation Phase

What do you think about using market timing to decide whether to sell bonds or stocks during the decumulation phase of the investing life?

I would treat the decumulating phase the opposite of what I am doing during the accumulation phase. In the accumulation phase when I make contributions, I contribute to whatever asset class in my portfolio is lagging. If bonds have outperformed recently, I put it into stocks. If stocks have outperformed recently, I put it into bonds.

In the decumulation phase, the idea is still to maintain your desired static asset allocation, to maintain those percentages where you set them in your plan. So, if something’s outperformed, that’s where you take the money from. If stocks have done well, you pull the money out of your stock fund that year. If bonds have done well, and stocks had a bear market, pull it out of bonds that year. That makes sense to get your portfolio back to the percentages it’s supposed to be at. No big deal there.

Obviously, if you’re in some terrible, terrible bear market and you want to try to avoid selling low, while that makes sense, you’d want to be taking out of your bonds and your cash or something else that has not been whacked so hard in the recent bear market.

UTMA Account

Every Christmas my daughter is gifted $15,000 from her grandfather. My question is, am I prudent in having invested this money via a UTMA account for her in total market index funds, or should I have instead simply invested via a plain old taxable account in the same index fund investments, and then gift those appreciated shares to her under the annual federal gift tax exclusion limits when she is in her late 20s and early 30s? Are the tax savings via the UTMA account ultimately substantial enough to compensate for the loss of control at the age of majority?

Your daughter is getting $15,000 a year from grandpa. Awesome grandpa. How wonderful for her. So, should you leave it in a UTMA or should you put it in a taxable account? Well, unless the money’s coming to you, it’s your daughter’s money. So, you can’t take it. Certainly not ethically and probably not legally.

So, if you want to do something different than putting it in a UTMA account, I think you need to talk to grandpa about it. There are certainly downsides to you owning the money if you put it in your taxable account. Number one, it’s going to be subject to your creditors.

The second issue is it’s also subject to your tax rates. If that money is in a UTMA, at least up to the limits of the kiddie tax, basically it’s being taxed at your kiddie tax rates. So, the first, I think it’s $1,100 or so, it’s not taxed at all as unearned income. The next $1,100 is taxed at 10%. And then, after that, it gets taxed at your tax rates. But if it’s in your taxable account instead of their UTMA, it’s all taxed at your tax rates. So, there’s some pretty significant downsides to you owning the money.

The big concern that people have with the UTMA is it becomes the kid’s money at age 18 or age 21 or whatever it is. So, you’re worried they’re going to go out and blow it. If you’re really worried about that, instead of a UTMA, what you should do is have grandpa fund the trust, like a spendthrift trust, instead of just sending a check.

You might also want to put some of that money in a 529. If you know this money is going toward college or going toward professional school or something, put it into 529. But I don’t think putting it in your taxable account is really accomplishing what grandpa’s trying to do, which is give the money to your kiddo.

Cares Act Tax Deductible Student Loan Payment

My wife is a self-employed pediatric hospitalist, and, under the Cares Act, we understand that employers are allowed to make tax-free payments up to $5,250 for their employees for student loans. As her business type is a sole proprietorship, is she eligible to use this for her own student loans?

This is a cool new thing in the Cares Act that basically $5,000 towards your student loan, if it comes from your employer, is a deduction for the employer and it’s not taxable income to you.

All of us that own small businesses and have student loans start going, “Well, I’m the employer. Why can’t I take advantage of this?” They basically don’t want you to. They wrote the laws such that you pretty much can’t. Here is the issue. The self-employed individual has to operate a formerly recognized business. But this student loan repayment assistance program cannot discriminate in favor of highly compensated employees. That’s you. It turns out no more than 5% of the amount paid can be provided to shareholders or owners of the business or their spouses or dependents, including anyone who owns more than 5% of the business on any day of the year.

So that is pretty much going to eliminate all of you that are trying to do this. So, unless you have a whole lot of employees that you’re doing the same thing for, this is not a tax deduction that you’re going to be able to use.

Now, if you’re in some huge physician group, maybe you want to talk to the leaders of the group and see if this is a benefit program that could be put in place. But if you just own your own practice or you have two or three partners or whatever, this isn’t going to work out for you.

 

Ending

Hopefully when this pandemic is over all of us can make more trips to Canada to enjoy the Great White North. Until then, leave your questions you would like answered on the podcast at our speakpipe and we will be sure to get those answers on future podcasts.

 

Full Transcription

Transcription – WCI – 185

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:

Welcome to the White Coat Investor podcast number 185 – The Great White North. Can I take this mask off now, Cindy? We are under government mandate here in Utah to wear masks all the time when we’re around people who are outside of our family. Cindy is technically not in my immediate family. And so, we actually just finished a White Coat Investor staff meeting and all wore masks in. All six of us that were at in person there and a couple of people online as well.
Dr. Jim Dahle:
So, we’re doing our best to follow the directions of our beloved governor, that he has given us recently. It’s pretty locked down here in Utah. Again, the businesses are open, but the hospitals are full. I got a bunch of boarders in my ER with Covid, so I’m a fully supportive actually of our current mandates in Utah. And hopefully we can get through this. I will talk about that a little bit more in a second.
Dr. Jim Dahle:
Those of you are veterans out there, thank you for your service. I always like Veteran’s Day a little bit better than Memorial Day because we can celebrate you even if you didn’t die on Veterans Day. And so, it always feels a little bit happier than Memorial Day to me. So those of you who have served our country in the past, thank you very much for doing that.
Dr. Jim Dahle:
Well, I’m recording this on the 11th. It’s going to run on the 19th. It seems appropriate to say a few things about the recent election. I know everyone’s kind of heard a little bit more than they really want to hear about the election.
Dr. Jim Dahle:
It sounds like our next president is probably going to be Joe Biden. Nothing I suppose is ever final until all the legal ramifications have run their course and the electoral college does their voting thing. But for all intents and purposes, I think the presidential election is over and decided for Biden.

Dr. Jim Dahle:
The house is still controlled by the Democrats, but with less of a majority than they had before. And it sounds like the Senate is probably going to be Republican controlled, although that’s not even really over with either.
Dr. Jim Dahle:
And I want to tell those of you in Georgia, I’m really sorry. You got to deal with another couple of months of this. Because this has been one of the most polarizing, bitter, terrible elections I’ve ever been through in my life. And you guys got two more months of it. I mean, all the election money, all the political money, all the political characters, they’re all headed to Georgia the next couple of months to try to influence those Georgia Senate runoffs as much as possible.
Dr. Jim Dahle:
Obviously if the Democrats take both of those runoffs, then, Kamala Harris will be the deciding vote in the Senate. And if the Republicans take at least one of them, it looks like the Republicans will control the Senate. So, it sounds like most of the political commentators are saying that’s the more likely outcome that the Republicans will take one or both of those runoff elections.
Dr. Jim Dahle:
So, in short, we’re going to continue to have total gridlock in Washington. Now that sounds bad, but gridlock is actually really good for investors because there’s unlikely to be big changes. Particularly to the tax cuts and jobs act of 2018.
Dr. Jim Dahle:
Big changes tend to come when the same party controls the entire government. Think about the last time the Democrats were in charge, the first two years of Obama’s, I don’t want to say regime, administration I suppose is the less politically charged term. They ran Obamacare through with relatively little input from Republicans.
Dr. Jim Dahle:
The last time the Republicans were in charge of the first two years of the Trump regime or administration, depending on how you feel about it, the tax cuts and jobs act was run through essentially unilaterally on their party.
Dr. Jim Dahle:
And so, I wouldn’t expect big things with split government, and that’s not necessarily bad. People really have to agree on something getting done when you have a split control of the government. But it certainly makes for a lot more predictable outcomes as far as our political environment goes.
Dr. Jim Dahle:
By the way, as long as we’re talking about politics, the tax cuts and jobs act provisions expire in 2025 automatically because of the way they were passed through the Senate, to make them filibuster proof essentially, that’s the way they had to be set up. So, they will disappear unless they are extended at some point between now and then. That seems unlikely to happen in the next four years under a Biden presidency. So, assume that you’ve got five years to enjoy your 199A deduction, your higher estate tax exemption amount and your lower tax brackets.
Dr. Jim Dahle:
I wouldn’t expect any changes to the two Obamacare taxes. I don’t think they’re going to go away. They didn’t go away under the four years of a Trump administration. I don’t think they’re going away under four years of a Biden administration. But bear in mind that the lower corporate income tax rate, that C Corp rate of 21% instead of 28% does not expire in 2025 automatically. So, because of that, I suspect either the 199A deduction will be extended or that the corporate income tax will go back up at some point between now and then. Which way that goes, I have no idea.
Dr. Jim Dahle:
Most of us have a close family member, friend, coworker, colleague who feels differently about politics than we do. I want to encourage you to extend some grace to that person for the next few months, at least. And let’s see if we can help our country heal a little bit from this bitter partisan rain core, we’ve had for most of this year already.
Dr. Jim Dahle:
Remember that our political opponents are not our enemies, that we’re all Americans, we’re all in this together. Yes, we all think things will be better if everybody else thought like me. I’m mostly a moderate politically. And so, I get the hate from both sides actually. And I think our world would be a lot better if everybody was a moderate, but you know what? The people on the far left and the people on the far right, they feel the exact same way that the world would be better if everybody thought like them.
Dr. Jim Dahle:
So, let’s remember that we’re never going to agree with everybody about anything. And none of us got everything we wanted out of the election. And maybe we need to remember that people are more important sometimes than the politics. So, as you go to Thanksgiving dinner this year and spend some time with family and loved ones, remember that four years from now or eight years from now, there’ll be somebody different in the White House and you’ll still have those people as your family and friends.

Dr. Jim Dahle:
All right, let’s do a word from our sponsor. This podcast is sponsored by Bob Bhayani at drdisabilityquotes.com. He is an independent provider of disability insurance planning solutions to the medical community in every state and a long-time White Coat Investor sponsor.
Dr. Jim Dahle:
He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. If you need to review your disability insurance coverage to make sure it meets your needs or if you just haven’t gotten around to getting this critical insurance in place, contact Bob at drdisabilityquotes.com today. You can email him at [email protected] or you can just call him (973) 771-9100.
Dr. Jim Dahle:
Thanks for what you do. A lot of you are on the front lines, particularly hospitalists and intensivists these days. I know that I see in plenty of Covid patients in the ER. We’re boarding them in the ER now and I feel like, yes, I have to go in and see them. I have to take care of them, but the decision-making is usually pretty simple on my part. And then they go onto the ward and they’re there for a day, two days, three weeks. And so for those of you who are really spending a lot of time interacting with these sick folks, thank you.
Dr. Jim Dahle:
The national and the local news picked up a bunch of this stuff about Utah. Somehow the Salt Lake Tribune published an article and CNN ran with it. And so, all of a sudden, a week or two ago, I was getting all kinds of emails from people all over the country saying, “I’m so sorry you’re dealing with it”.
Dr. Jim Dahle:
And it sounded like Utah was the epicenter of the pandemic. And certainly, we’re as bad as it’s ever been here. I’m not sure we’re as bad as anybody gets. Yes, our hospitals and ICU’s are full and patients are backing up into the ER. But at the same time, we’re not taking care of people in the ambulance bay yet. So, we’re still hanging in there. I think our political leaders here are doing the right things. I think our health leaders here are doing the right things. And hopefully we can get through this.
Dr. Jim Dahle:
Pretty exciting news this week actually about Pfizer’s phase three trials on their vaccine. They’re saying is 90% effective, which is pretty darn good for a vaccine if you think about the fact that influenza is only about 50% effective. 90% effective is like the measles vaccine. It is very, very good.

Dr. Jim Dahle:
And they’re actually talking about having this in the freezers in five hospitals in Utah, by the first week of December. And as long as the remainder of the phase three trial goes well, they’re going to pull that out and start vaccinating healthcare workers. Now, unfortunately, my hospital was not one of those five, but hopefully by the end of December, they’ve distributed it to the rest of healthcare workers in the country.
Dr. Jim Dahle:
So maybe this vaccine isn’t as far out as we think it is, at least for those of us who are seeing patients with Covid regularly. And hopefully by spring or summer, we’re rolling it out to the whole country.
Dr. Jim Dahle:
So, light at the end of the tunnel, that stock market certainly liked that news. The overall market was up 3% or 4% that day, small cap value stocks were up 7% or 8% that day. Pfizer stock was up 11%. The other company that’s participating in it, I think was up 25% or something like that. So pretty exciting news there.
Dr. Jim Dahle:
Okay. If you haven’t heard yet, we have the physician wellness and financial literacy conference for 2021 coming up. This thing is going to be awesome. Unfortunately, due to the pandemic, we are not going to be able to have you all out and have a wonderful time, as far as that goes in person. I love to meet you guys in person, sharing meals with you, answering your questions face to face. This year the pandemic is going to keep us from doing it, unfortunately.
Dr. Jim Dahle:
But we have a super special conference plan for you that is going to be almost as good. It is not an online course. It is a live conference. We are going to have the keynote speakers and your favorite WCI network bloggers out to Salt Lake but there’s not going to be any more than about 10 or 15 of us in the room. But we’ll be having live events. We’ll be taking questions and answering your questions after the presentations, and we’re going to be having panels. And we have like 50% more content than we had last year. So, it’s going to be really, really good.
Dr. Jim Dahle:
Our keynote speakers are going to be Christine Benz. Mike Piper is coming back. I think he had 99% approval of his talks at WCI con Park City. I think the comments on him were, “Man, he’s clearly the smartest guy in the room”. So, I’m excited to have him coming back. We have Alan Roth coming out. He is probably most famous for his book – “How a Second Grader Beats Wall Street”.

Dr. Jim Dahle:
We’re going to have these sweet swag bags that as long as you sign up before January 5th, we’re going to send them out to you. And so, you’re going to be getting a t-shirt and books is the greatest swag bag of any conference I’ve ever been to. And it’s really a hallmark of the WCI con conferences that we’re going to send this out to you.
Dr. Jim Dahle:
But I think we’re planning on 40 or 50 hours of content coming to you in this conference. It’s going to be really, really good. You get CME for it so you can use your CME funds to pay for it. I think we’re looking at about 14 credit hours of CME give or take one or two, but you can sign for this today. This is at whitecoatinvestor.com/conference. You can sign up. It’s got a two week no questions asked money back guarantee. So, from the time you buy, you’ve got two weeks to return it. That period does start getting limited forty-five days before the conference, but for now there’s no risk in signing up. So, you might as well go ahead and do it.
Dr. Jim Dahle:
But this is going to be awesome. I mean, listen to some of these people that are coming out to speak to us. We’ve got Alexis Gallati. A lot of you met her at the last conference. She’s giving a talk on tax reduction. We’ve got Ben White coming back. He’s going to be talking about student loans. Brent Lacey you know from Scope of Practice. Catherine Wagner. Chad Chubb, you’ve seen his posts on the blog.
Dr. Jim Dahle:
Clinton Gossage is going to give a talk. Cory Fawcett. You may have read some of his books, right? The physician’s guide series. Daniel Keston is going to be back talking about estate planning. Dave Graham at FI Physician. Dawn Baker’s coming back. Dennis Hirsch is coming back. Disha Spath is going to be talking about frugal living and budgeting.
Dr. Jim Dahle:
We got lots of new people as well. Jay Adkisson, perhaps the nation’s most renowned expert on asset protection is going to be giving us a talk on that subject. Author Jeff Steiner is going to be talking. You may have read his book on physician finances. John Lim. Larry Keller is coming back. He spoke at the original WCI con.
Dr. Jim Dahle:
You may have seen Latifat Alli-Akintade’s guest post last week on the blog. She’s going to be coming out and speaking. Of course, you’re going to get The Physician on FIRE, Leif Dahleen and Passive Income MD, Peter Kim, as well as Jimmy Turner with the Physician Philosopher. They’re all going to be out there. The Letizia Alto with some retired MD is going to be speaking at the conference.
Dr. Jim Dahle:
This is just going to be really, really good and you don’t want to miss this. This is going to be the preeminent physician finance conference. Yes, it’s going to be virtual for you, but there’s good news to that. You are not going to get coronavirus at this conference. And so, that’s a wonderful benefit of being able to come to the conference.
Dr. Jim Dahle:
We’re going to make it as much as though you’re there in person with us as we possibly can. You’re going to be able to ask questions to these people giving talks and it’s really going to be good. So, sign up today whitecoatinvestor.com/conference. You get the early bird price from now until the end of November. It’s $779. But like I said, is eligible for CME. You can use CME funds to pay for it. If you are self-employed you can write the whole cost off, pay for it with pre-tax dollars. It’s going to be really good. So, make sure you sign up today.
Dr. Jim Dahle:
All right, today, we’re going to be talking about the Great White North, about Canada. I’ve got a few questions about Canada today. I love Canada. I grew up in Alaska, right? I mean, I was closer to Canada than I was to any other U.S. state. And so, Canada holds a special place in my heart.
Dr. Jim Dahle:
One of my favorite trips I ever took was during residency. Katie and Whitney and I drove up from Tucson all the way to Squamish, which is about an hour north of Vancouver, right on the coast in British Columbia. And I was amazed. We picked up one of my med school classmates in Washington and we went up there for mostly a climbing trip.
Dr. Jim Dahle:
But this place is considered the outdoor recreation capital of Canada and it is paradise. I mean, they have rivers running into the sea there. So, there’s river kayaking and sea kayaking. The mountain bike is fantastic. The Chief is as big, huge piece of rock. It’s not quite as big as El Cap is in Yosemite, but it’s a big, huge piece of rock with tons of fantastic rock climbing. It rained on us the whole week and we still went climbing every day because it was so good.
Dr. Jim Dahle:
We were so excited about it we actually went to the hospital there in Squamish to see what it would take to work there as emergency physicians when we finished residency. We were a little turned off that it was going to take a couple extra years of residency to go there. So, we never ended up going, but I’m a big fan of Canada.

Dr. Jim Dahle:
Our heli-skiing trips have also been to BC and it makes the mountains in Utah look puny. I mean, the runs we were doing in BC were 7,000 vertical feet, as opposed to the 3000, you might get a Snowbird at Alta here close to my house. And so, I really love Canada.
Dr. Jim Dahle:
I’ve got a med school classmate up there in Southern Alberta who absolutely loves his practice. He’s a family practice doc. He’s able to do all kinds of interesting stuff. I think he does sigmoidoscopies, maybe even colonoscopies. I think he was even doing an appendectomy every now and then, but just has an awesome practice that he loves. And the amazing thing is he got paid more than any other family practice docs I know of in the United States.
Dr. Jim Dahle:
And so, there’s this idea we have out there that these Canadian doctors are not able to give good care and that they’re not able to get paid very well. And so, we’re all opposed to this single payer or socialized medicine or whatever you want to call it. It was interesting. I listened to a Planet Money episode, not that long ago about this guy who was a lobbyist for the U.S. health insurance industry. And literally his job was to make Canadian medicine look bad.
Dr. Jim Dahle:
Now he’s making the rounds going around on podcasts or whatever on kind of an apology tour. He’s feeling bad that he made it look as bad as he did. I find it interesting when I talk to people who were actually practicing that and people who live there versus the perception a lot of us have as Americans. And I wonder a lot of days, if we wouldn’t be a little bit better off with that system.
Dr. Jim Dahle:
But I’m not going to talk a whole lot about Canadian health care today. We’re going to talk about Canadian financial stuff. So, let’s talk for just a minute about the Canadian retirement system. They have something similar to social security. It’s called the Canadian pension plan along with old age security.
Dr. Jim Dahle:
They pay 10.5% on their income between $3,500 and $58,700. A split like our social security system between the employee and the employer. So that’s a lower tax than we’re paying. We pay 12.4%. They pay 10.5%. They pay it on income between $3,500 and almost $59,000. We pay it on an income between 0 and I think 2021 it’s going up to $142,000 something, that you’re paying this social security tax on.

Dr. Jim Dahle:
So, this Canadian pension plan, it starts paying out between age 60 and 70. On average, they get less than we do actually. They get $672 on average with a maximum of $1,175. So, they’re paying less tax than Americans are into the system, and they’re getting less benefit.
Dr. Jim Dahle:
They do have the single payer healthcare paid for with general taxation. So, it’s not an old age specific healthcare program like our Medicare. They also have old age security. OAS, they call it. You don’t actually have to pay into that. The amount that you get paid for 2020 on that is $613.53, but it’s actually a phased out for high earners. So basically, for every dollar you make above $79,054 in 2020, you lose 15 cents of benefit. Basically, by the time you get to $83,000 or so there’s no benefit left.
Dr. Jim Dahle:
You can actually minimize that phase out. This is kind of a strategy for Canadians. You can minimize that phase out by splitting your Canadian pension plan between you and your spouse. Just kind of an interesting strategy for any Canadians that might be listening to this podcast, it’s definitely worth looking into.
Dr. Jim Dahle:
In addition to those government programs, they have registered retirement savings plans or RRSP’s. So, think of this as like a traditional IRA. It’s tax deferred until you pull the money out in retirement. You can put in up to 18% of your pay with a max contribution limit of $27,230 a year. So that’s cool, right? That’s a lot more than the $6,000 that we can put into a traditional IRA.
Dr. Jim Dahle:
They also have tax-free savings accounts, TFSA. Think of this like a Roth IRA. The contribution limit is the same as our $6,000. I guess it’s less than ours because that’s Canadian dollars, not US dollars, but it has a cool feature. You can actually catch up for prior year contributions that you didn’t make.
Dr. Jim Dahle:
So, you can go all the way back to 2009, look at what the limits were for contributions for each year. And as long as you were working back, then you can contribute all that money in 2020 into this Roth IRA like TFSA. And then of course, once the money’s in the account, you can invest it into stocks, bonds, mutual funds, CDs, et cetera.

Dr. Jim Dahle:
So, let’s take a few questions I’ve gotten about Canada. This is why I’m talking about Canada on this podcast. This one comes in off the Speak Pipe from interventional psych MD. Let’s take a listen.
Speaker:
Hi, Jim. If I were to marry a Canadian citizen, as soon as she becomes a stay at home parent, which of the following makes the most financial sense? Number one, naturalized U.S. Number two, become a permanent resident of the U.S. And number three, remain a Canadian citizen and obtain a social security number. She plans to open U.S. bank accounts, credit cards, retirement accounts, and hopefully also get retirement/healthcare benefits from either government. Thanks for everything that you do. And I hope you and your loved ones stay safe.
Dr. Jim Dahle:
Okay. So, this is interesting, right? I love that you guys think I know answers to questions like these. I had to do some serious research for this episode. But this is basically a Canadian citizen married to an American, who is then going to become a stay at home parent. So, should she naturalize, should she become a permanent resident? Should she remain a Canadian citizen and get a social security number here? she apparently wants to open accounts in the U.S. and wants to obviously get as many benefits from the government as possible.
Dr. Jim Dahle:
Now I’m not Canadian. I’m not an immigration attorney. And so, when it comes to questions like these, I’m just a guy that’s pretty good at using Google. So, I found a great website called canadatousa.com. It has lots of great info, and you can even hire them to help you with all kinds of issues like these. I’m sure there are a lot of competitors, but that was the first one that came up when I Googled it. But I learned a lot on the website.
Dr. Jim Dahle:
If you marry an American, you can apply for permanent residency and you can pretty much expect to get it. The U.S. citizen spouse files a form called a petition for alien relative with the USCIS. So that’s basically petitioning for the Canadian spouse to become a U.S. permanent resident. As part of that petition, the U.S. citizen will also have to sign an affidavit of support declaring that he or she will be financially able to support the Canadian citizen so that they don’t become a public charge. So basically, the U.S. citizen is saying I can support my spouse so they don’t become a burden on society. And I have to collect unemployment insurance and so on and so forth.

Dr. Jim Dahle:
The Canadian citizen spouse then files a form called application to register permanent residence or adjust status, which basically seeks to change the Canadians current immigration status to that of a permanent resident. Canadian citizen has to get fingerprinted and undergo a medical exam by a designated civil surgeon to ensure, he or she is healthy. The idea is basically you don’t come in and become a public charge.
Dr. Jim Dahle:
Then if you want to become a citizen, you have to be a permanent resident for three years first. And then if you want to be a citizen, you got to be 18. You got to be a permanent resident for these three years. You have to be living in marital union with a U.S. citizen spouse who’s been a U.S. citizen for all of that period. You have to have lived within the state with jurisdiction for at least three months prior to the date of filing the application.
Dr. Jim Dahle:
You have to have continuous residents for three years proceeding, and you have to be physically present in the U.S. for at least 18 months out of those three years. You have to be able to read, write, and speak English, have a knowledge and understanding of U.S. history and government or civics. And you have to be a person of good moral character attached to the principles of the constitution of the United States, and while disposed to the good order and happiness of the United States.
Dr. Jim Dahle:
So, there’s some barriers there. I think to become a citizen after growing up somewhere else, you actually have to know more about civics than you actually do to graduate from high school around here. But to answer your question, if I was live in the U.S. the rest of my life coming from Canada, I’d applied for permanent residence, I’d get a social security number and I worked my way towards citizenship.
Dr. Jim Dahle:
The real question is whether you want to be a dual citizen. Because of course, dual citizens get certain benefits. You have the ability to work and live and move freely between the two countries. You can own property in both countries, you can travel easily between the countries, but there’s some downsides.
Dr. Jim Dahle:
One of the downsides is you may be paying double taxes, which Canadian taxes is a little higher than the U.S. taxes. And given the most of us that listen to this podcast are already in a pretty high bracket in the U.S. that’s not an insignificant cost to having dual citizenship. The process of getting it can be long and somewhat expensive. And of course, you then are bound by the laws of both nations.
Dr. Jim Dahle:
And those benefits might not be as good as you think. For example, you want Canadian health care benefits? Yeah, you got to go back to Canada and get them number one, but you have to stay there for three months before you get them. You don’t get them for the first three months you move back.
Dr. Jim Dahle:
You can get both the Canadian pension plan and social security, but social security will be reduced due to the WEP – The Windfall Elimination Provision. Your social security doesn’t affect your OAS, unless it puts you over the phase-out threshold of course. But basically, instead of income, before that first bend point in social security, counting 90% toward your primary insurance amount, it only counts at 40%.
Dr. Jim Dahle:
So, it doesn’t eliminate your social security benefit, but it reduces pretty severely to have Canadian pension plan. So, you’re not really fully double-dipping. You’re losing quite a bit of what you would get from social security by the fact that you qualify for the CPP.
Dr. Jim Dahle:
However, this is all pretty complicated as you can tell. It’s complicated enough that I think it’s worth getting expert help on it. If your spouse is going to stay here the rest of her life, I definitely work towards citizenship. And I probably wouldn’t expect much in the way of Canadian retirement or benefits or health benefits unless you go back to Canada at some point.
Dr. Jim Dahle:
All right, the second question I got about Canada came in via email. It said, “I’ve heard that people work in the USA, Buffalo, or Detroit, and live in Canada as a dual citizen. We’re considering doing so for a family reason. Would you be aware of the tax consequences? I know that they pay taxes in both countries. How do they transfer money from the U.S. to Canada when they get a paycheck in the U.S.? Are you aware of any banks that provide these services automatically?
Dr. Jim Dahle:
What would be the best investment strategies? We could undoubtedly invest in the U.S. as usual. We could also invest in Canada, at least to the tax limit of CRA. Would you be aware of any financial advisors who know these questions?”
Dr. Jim Dahle:
Well, I don’t know any advisors that specialize in U.S. – Canada relations, but they’re probably out there. There are certainly lots of accountants and attorneys specializing in this stuff that live in border towns. So, if you’re in Buffalo, you’re in Detroit, whatever, there are people there who specialize in this because there’s plenty of people doing it.
Dr. Jim Dahle:
I would expect to pay taxes in both countries if you’re living in one and working in the other, but bear in mind that the U.S. and Canada have a tax treaty. So, what you usually get when that happens is you get a credit for taxes paid in the other country. I’d expect you to both pay for and be eligible for a CPP and social security. But of course, the social security benefits would be reduced due to the windfall elimination provision.
Dr. Jim Dahle:
The IRS does not give you a tax deduction for an RRSP contribution made in Canada and probably vice versa. So, keep that in mind. When you’re deferring taxes on income, it’s only deferred in one of the two countries.
Dr. Jim Dahle:
Now, how do you transfer money to Canada? I don’t think this is as big a deal as you worry it is. I think you can just wire the money. As long as it’s below $10,000 at a time, you can put in your pocket and drive across the border, and you just withdraw from your bank, deposit on your way home in Canada without declaring anything.
Dr. Jim Dahle:
But obviously you’re going to be subject to exchange rates and fees. You know what? To be honest, I’m sure banks in Buffalo and other border cities do this stuff all the time. I just walk in there and ask them, how do I send money to my Canadian bank account? And they’ll help you with the best way to do that.
Dr. Jim Dahle:
You could use both US and Canadian retirement accounts I believe. I probably keep most of my investments in the U.S. I think you have more options. I think costs are generally cheaper on investment funds. More options, lower costs. What’s not to like? Obviously, if you’re investing in a TFSA or an RRSP, that’s going to be in Canada. But I think I’d keep my taxable account and that sort of stuff probably in the U.S.
Dr. Jim Dahle:
All right. That’s enough about The Great White North. Let’s take another question off the Speak Pipe. This one’s from Bradley.
Bradley:
Hi, Dr. Dahle. Thank you for all that you do. I recently ran into a friend who is in the investing and finance world. He suggested that when I have enough money as an attending physician to invest a minimum of $100,000 into a separately managed account. I had never heard of this before. And so, I looked it up and I kept speaking with my friend to decide whether this was a right option for me or not.
Bradley:
From what I understood, it seems like a smaller type of indexing, where there are certain groups of financial individuals who select a type of high performing companies within the different ranges of small, mid, and large cap and value companies.
Bradley:
Essentially what he described as a more efficient way of indexing, where you pay higher fees, but you get much higher returns to make it worth it. Could you define what you think is an SMA and how that might be beneficial to the investing community of high-income earners? Thank you for all that you do.
Dr. Jim Dahle:
Okay. Separately managed accounts. It sounds so awesome when they describe it like that, doesn’t it? So, your friend wants you to invest at least $100,000. Well, you know what? There’s no minimum for that other than the minimum that the person managing the separately managed account sets.
Dr. Jim Dahle:
This is simply paying someone else to pick stocks for you. It’s a bunch of crap. You’re not getting higher returns. You’re just paying someone else to run your own personal mutual fund. And it usually works out even worse than hiring a good, actively managed mutual fund manager.
Dr. Jim Dahle:
So, my dad had one of these for years by some yayhoo who was picking stocks for him. And when I found out about it, when I became financial illiterate, I said, “Dad, what are you doing?” And I compared what this advisor had been doing in the separately managed account to what he would have gotten if he just dumped it all in a reasonable mix of a total stock market fund and a total bond market fund.
Dr. Jim Dahle:
And obviously the index fund dramatically outperformed this guy. Basically, over six or seven years, my dad’s money hadn’t made any money at all because this guy was churning it and charging fees on it and trying to pick stocks. And what did he know? And here he is managing these little tiny separately managed accounts.
Dr. Jim Dahle:
If this guy could actually pick stocks, he’d been running a pension fund, or he’d been working for Yale, or he’d have his own mutual fund. This guy can’t pick stocks any better than anybody else. And of course, he wasn’t outperforming the market at all.
Dr. Jim Dahle:
So, my advice to you is stay away from these separately managed funds. Don’t do it. Just use index funds. I have millions of dollars invested in index funds. I don’t feel a need to have a separately managed account because I have more than $100,000. Index funds aren’t just for these tiny little accounts.
Dr. Jim Dahle:
Now, is it possible to have more opportunities to tax loss harvest in a taxable account, that’s filled with individual stocks? Yes, it’s entirely possible. You can also fill that account with stocks that don’t pay dividends at all. That would make it more tax efficient. Absolutely.
Dr. Jim Dahle:
But I don’t think either one of those are worth the downsides of the additional costs and the uncompensated risk of picking your own stocks. I think you’re better off just picking index funds for your taxable account. They are very, very tax efficient. You can still do tax loss harvesting, certainly in the big nasty bear markets where you can get most of the benefit from that. I just don’t think it’s worth hiring somebody else to do a separately managed account.
Dr. Jim Dahle:
All right, our quote of the day today comes from Henry David Thoreau, who said, “That man is richest who’s pleasures are cheapest”. And isn’t that the truth? I had someone ask the other day if they needed $7 million to FIRE as a physician, because apparently that was the average of what people on the Bogleheads forum said that you needed to retire early as a physician. It’s not really about what the average Boglehead needs. It’s about what you need, which is about your spending. And the less you spend the wealthier you are.
Dr. Jim Dahle:
All right. Our next question comes from Peter off the Speak Pipe. Let’s take a listen.
Peter:
Hi, Jim. My name is Peter, and I’m an orthopedic surgeon four months out of fellowship. I’ve been following the blog and the podcast since I was a PGY-4, and it’s turned me into a personal finance hobbyist. So, I’m very grateful to you.
Peter:
My question is regarding re-characterization of an over the limit contribution to a qualified account. A little background in fellowship, we were allowed to contribute to a governmental 457(b) plan, which was nice. However, the only investment option available was a very conservative Invesco fund.
Peter:
So, I contributed a large majority of my last few paychecks to max it out before graduating, knowing I was about to have a bump in salary. And in order to take advantage of the tax benefits. Not wanting to keep it in that investment, I opened an individual 401(k) trade, enrolled it all over to there. I’m not eligible for my group’s 401(k) until I’ve been there for about a year and a half. And I have enough 1099 income through call money to max out the employee and hopefully employer contributions for 2020.
Peter:
But back to the story, after rolling over the entire 457(b) into my new individual 401(k), I saw that I over contributed about $1,700 for the 2020 tax year. This was due to an employer contribution that I wasn’t aware of. I spoke with E-Trade and the 457(b)-plan administrator regarding the best route to recharacterize this money.
Peter:
The confusing part for me is that the funds are now contained in an individual 401(k). Whereas the over contribution occurred in a 457(b). Do I need to calculate the gains at the $1,700 is made, sell some ETFs in my E-Trade account and transfer it back to the 457(b)-plan administrator to have them distribute that money back to me?
Dr. Jim Dahle:
All right, good question. I think all our questions today are from men. Come on, ladies, send us in some questions. If you want to get your question on the white coat investor podcast, whitecoatinvestor.com/speakpipe is where you can do that. And I don’t care if you’re a man or lady or whatever, send us your questions. We’ll get them answered. But I did notice today that all of our questions are from guys.
Dr. Jim Dahle:
Okay. So basically, this orthopedist has ruled his 457(b) into an individual 401(k). Remember, you can do that with governmental 457s, but non-governmental 457s you can’t roll into a 401(k). You’re basically stuck with it in the 457 until you withdraw. But this is a mess, right? Because you over contributed and then you went one more step and rolled it over. So, you basically have two things to reverse here.
Dr. Jim Dahle:
What I would do in this situation is I would contact both plan administrators and ask them how to fix this. And then I do exactly what they said. And that’s probably the best way to do it. General advice for over contributions. First, don’t panic. Just determine the amount you over contributed to your retirement plan. You can contract your payroll or benefits office and determine the best route to correct that excess amount. You want to always correct it before April 15th of the following plan year, that avoids your tax penalties.
Dr. Jim Dahle:
And you basically have two options. One, you can just complete a distribution request, which indicates a distributable event is a correction of excess contributions. So, then the plan just sends you the money and gives you a 1099-R for that amount that they gave it to you. No big deal. You get that in January report on your taxes. It’s all taken care of.
Dr. Jim Dahle:
The other option is the fund can be recalled from the vendor by the plan. And it’s given back to you on your payroll to ensure that the taxes are deducted and that way the funds returned via payroll, the W2 is correct, and the 1099-R is not required. And so, you can get that done during the same tax year. That’s pretty slick way to do it as well.
Dr. Jim Dahle:
But if you’ve already rolled that money somewhere else, you’ve got this additional complicating factor. So, I would just contact the administrators of both funds and ask them what to do about it.
Dr. Jim Dahle:
What I would expect to happen here is I’d expect that to pull out the contribution, the over contribution and its earnings and pay tax on it. I’ll leave it up to them to calculate the exact amount. Let them put it on the 1099-R and you just pay taxes on it. Just put it into TurboTax or hand it to your tax preparer and it’ll work out okay.
Dr. Jim Dahle:
All right. Our next question comes from a frequent contributor, Tim in San Francisco. Good to hear from you again, Tim. Let’s listen to your question.
Tim:
Hi Jim. This is Tim in San Francisco. What do you think about using market timing to decide whether to sell bonds or stocks during the decumulation phase of the investing life? For example, you could invent a systematic rule where if the stock market were down 5% or more from its most recent peak and you need money, you would sell bonds and otherwise you would sell stocks. What do you think of that? Thanks.
Dr. Jim Dahle:
Okay. Let’s talk about the decumulation phase. Do you want to try to time it when you pull the money out? In general, I do. Well, I can’t say I do. I’m not decumulating, but what I would do is I would treat it just the opposite of is during the accumulation phase. In the accumulation phase when I make contributions, I contribute to whatever asset class in my portfolio is lagging. If bonds have outperformed recently, I put it into stocks. If stocks have outperformed recently, I put it into bonds.
Dr. Jim Dahle:
In the decumulation phase, the idea is still to maintain your desired static asset allocation to maintain those percentages where you set them in your plan. So, if something’s outperformed, that’s where you take the money from. If stocks have done well, you pull the money out of your stock fund that year. If bonds have done well and stocks had a bear market, pull it out of bonds that year. That make sense to get your portfolio back to the percentages it’s supposed to be at. No big deal there.
Dr. Jim Dahle:
Obviously, if you’re in some terrible, terrible bear market and you want to try to avoid selling low while that makes sense, right? You’d want to be taken out of your bonds and your cash or something else that’s not been whacked so hard in the recent bear market.
Dr. Jim Dahle:
Our next question comes from Ed from Michigan. Let’s take a listen.
Ed:
Jim, this is Ed from Michigan. I have a question regarding UTMA accounts for my child. Every Christmas my daughter is gifted $15,000 from her grandfather. She is currently eight years old and has received this gift every year since she has been one. My question is, am I prudent in having invested this money via a UTMA account for her in total market index funds, or should I have instead simply invested via a plain old taxable account in the same index fund investments, and then gift those appreciated shares to her under the annual federal gift tax exclusion limits when she is in her late 20s and early 30s.
Ed:
So far at the age of eight, I don’t foresee her using the money on cocaine. But sometimes life happens. What are your thoughts? Are the tax savings via the UTMA account ultimately substantial enough to compensate for the loss of control at the age of majority? Thank you for all that you do.
Dr. Jim Dahle:
All right. UTMA accounts. Your daughter’s getting $15,000 a year from grandpa. Awesome grandpa, man. Isn’t that awesome? How wonderful for her. So, should you leave it in a UTMA or should you put it in a taxable account? Well, unless the money’s coming to you, it’s your daughter’s money. So, you can’t take it. Certainly not ethically and probably not legally.

Dr. Jim Dahle:
So, if you want to do something different than putting it in a UTMA account, I think you need to talk to grandpa about it. There are certainly downsides to you owning the money do you put it in your taxable account. Number one, it’s going to be subject to your creditors. A lot of docs are worried about asset protection being sued above policy limits. That’s a really rare event, but it’s not a zero event. And so why expose that money to that if you don’t have to?
Dr. Jim Dahle:
The second issue is it’s also subject to your tax rates. If that money is in a UTMA at least up to the limits of the kiddie tax, basically it’s come being taxed to your kiddie tax rates. So, the first, I think it’s $1,100 or so. It’s not taxed at all in unearned income. The next $1,100 is taxed at 10%. And then after that, it gets taxed to your tax rates. But it’s in your taxable account instead of their UTMA, it’s all taxed at your tax rates. So, there’s some pretty significant downsides, I think, to you owning the money.
Dr. Jim Dahle:
The big concern that people have with the UTMA is it becomes the kids’ money at age 18 or age 21 or whatever it is. So, you’re worried they’re going to go out and blow it on hookers and cocaine. So, if you’re really worried about that instead of a UTMA what you should do is have grandpa fund the trust, like a spendthrift trust, instead of just sending a check.
Dr. Jim Dahle:
You might also want to put some of that money in a 529. If you know this money is going toward college or going toward professional school or something, put it into 529. But I don’t think putting it in your taxable account is really accomplishing what grandpa’s trying to do, which is give the money to your kiddo. Maybe grandpa has an estate tax problem. I don’t know.
Dr. Jim Dahle:
Okay. Next question comes from Chad from Knoxville. Let’s take a listen.
Chad:
Hey, dr. Dahle. My name is Chad from Knoxville, Tennessee. My wife is a self-employed pediatric hospitalist. And under the cares act, we understand that employers are allowed to make tax-free payments up to $5,250 for their employees for student loans. As her business type is the sole proprietorship, is she eligible to use this for her own student loans? Thanks for your thoughts.

Dr. Jim Dahle:
Okay. A self-employed employed pediatrician with a sole proprietorship. Can she get the cares act $5,520 tax deductible student loan payment? I see this question out there a lot. This is a cool new thing in the cares act that basically $5,000 towards your student loan if it comes from your employer, it’s a deduction for the employer and it’s not taxable income to you. So that’s really awesome.
Dr. Jim Dahle:
So, all of us that own small businesses and have student loans start going, “Well, I’m the employer. Why can’t I take advantage of this?” Well, they basically don’t want you to. They wrote the laws such that you pretty much can’t. And here’s the issue. The self-employed individual has to operate a formerly recognized business. So, no big deal there, right? Sole proprietorship, partnership, corporation. That all counts.
Dr. Jim Dahle:
But this student loan repayment assistance program cannot discriminate in favor of highly compensated employees. That’s you. It turns out no more than 5% of the amounts paid can be provided to shareholders or owners of the business or their spouses or dependent, including anyone who owns more than 5% of the business on any day of the year.
Dr. Jim Dahle:
So that’s pretty much going to eliminate all of you that are trying to do this. So, unless you’ve got a whole lot of employees that you’re doing the same thing for this is not a tax deduction that you’re going to be able to use.
Dr. Jim Dahle:
Now, if you’re in some huge physician group, maybe you want to talk to the leaders of the group and see if this is a benefit program that could be put in place. But if you just own your own practice or your two or three partners or whatever, this isn’t going to work out for you.
Dr. Jim Dahle:
All right, I hope that was helpful. I hope you learned something today. I hope you’re surviving both the pandemic and our crazy election season.
Dr. Jim Dahle:
This podcast was sponsored by Bob Bhayani at drdisabilityquotes.com. He is an independent provider of disability insurance planning solutions to the medical community in every state and a long-time White Coat Investor sponsor.

Dr. Jim Dahle:
He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. If you need to review your disability insurance coverage to make sure it meets your needs or if you just haven’t gotten around to getting this critical insurance in place, contact Bob at drdisabilityquotes.com today or by emailing him at [email protected] or calling (973) 771-9100.
Dr. Jim Dahle:
All right, thanks to those of you who’ve been leaving us a five-star review and telling your friends about the podcast. Our latest review came from FIREed Surgeon who said, “Five stars for a reason. Not many podcasts are an average of 5 stars, but the WCI podcast is and well deserved. He clearly spells out lessons and happily helps all who ask. He says his target audience is high earners, but I would say all could benefit and those at $80k or more definitely will fit right in. If you want to be financially secure, Jim is one heck of a good way to get smart on how to do it”.

Dr. Jim Dahle:
If you are interested in WCI con, our conference, The Physician Wellness and Financial Literacy conference, this is going to be taking place the first week of March. And it is early bird registration time right now. Through the end of November, you get a discount on it. It’s only $779. You can find that whitecoatinvestor.com/conference.
Dr. Jim Dahle:
Keep your head up, your shoulders back. You’ve got this and we can help.
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.

 





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