Exploring Taxes with a Friend of WCI

INTRODUCTION

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.

Dr. Jim Dahle:
This is White Coat Investor episode number 403 – Exploring Taxes with a Friend of WCI.

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All right, this is a Friends of WCI episode. Let's get our friend on here. Now, as I mentioned at the beginning, this is another one of our famed Friends of WCI episodes where I bring somebody else on and maybe we generate a little controversy, maybe we don't, but at least you get a couple of different opinions answering your questions. So our guest today is Alexis Gallati. Welcome to the podcast, Alexis.

Alexis Gallati:
Thank you so much, Jim. Thank you for having me here.

Dr. Jim Dahle:
Now, some of you might know Alexis, Cerebral Tax Advisors, her company has been advertising with us for a long time. She's been to the conference a number of times and so a lot of you have met her and worked with her and probably heard her on the podcast before, so hopefully it's not a totally new voice to you, but we think there's some benefit in having additional voices on the podcast answering your questions.

So, let's get into your questions. Our first one is one we get all the time. I'll bet Alexis gets this as often as I do. And I don't know where this idea comes from out there, but it is definitely out there. So, let's listen to the question first, then we'll talk about it.

IS IT A GOOD IDEA TO HIRE YOUR SPOUSE OR YOUR KIDS?

Speaker:
First of all, thank you for everything that you do. I've heard a few times on the podcast that you've mentioned that putting a spouse on payroll is not necessarily the smartest thing to do because of the social security and Medicare taxes that you'd have to pay.

But if I'm looking at this, I'm still a little confused about that. My wife is on payroll for the dental office that I own, and we put her on payroll for enough that she's able to put in the maximum of the $22,500 for the employee deduction for a 401(k) match. She consults on HR and she does stuff around the office that is a legitimate amount to pay her.

Now, I understand that we pay the $1.45 for Medicare and the $6.2 for social security. But since we're in the highest tax bracket, the 37% federal and 6% state tax, are we not just paying basically $2,000 so that she can shelter $22,500, where normally we would have to pay close to $10,000 or $11,000 in taxes on that? I feel like I must be missing something. Otherwise, I'm not sure why this wouldn't be a smart idea. Thank you very much again for everything that you do and I look forward to hearing your answer.

Dr. Jim Dahle:
All right, Alexis, everybody wants to hire their spouse in their practice. Let's talk about this and make sure we get them as much information as they need to make an informed decision. What's the first thing you would counsel somebody thinking about doing this?

Alexis Gallati:
Yeah, definitely. First thing I usually ask is, “Well, why do you want to hire your spouse?” Do you want retirement benefits? Are they working and they're complaining that they're not getting paid? I hear that all the time.

Dr. Jim Dahle:
That's maybe the best reason to pay them.

Alexis Gallati:
Exactly. Although I've had clients where they have a spouse and they're not getting paid, but they're happy to just do the job. And the person asking the question had a great point. It's like, “Well, why pay them if you're just paying Social Security and Medicare taxes on it?” And really, the benefits around it are that for one thing, their salary is a deduction for the business, which is great. But of course, you do have to then report that income on your tax return.

But there's also other benefits as well as I mentioned, retirement. That's usually the biggest benefit that I see. Not only are they getting an employee deferral, but there's also an employer contribution that can come into the mix depending upon the type of retirement plan. And they could also be eligible for health coverage as well and other benefits such as dental or vision, dependent care benefits.

But one of the main reasons why I like it, not just for obviously the retirement plan purposes, but you can also start writing off some of their personal expenses that as business deductions, such as any of their travel expenses, if they need a new computer or if they're writing off their cell phone, there's just things that you're able to take from being personal expenses to being legitimate business deductions as well.

Those are definitely the top reasons to do it, but you just have to make sure that you're obviously treating them like a legitimate employee as well. All of those benefits obviously add up to big deductions and will save you a lot more than what you're paying in that Social Security and Medicare.

But that's also good. You're making them eligible for Social Security benefits later. They're also providing a steadier flow of taxable income, which can help you qualify for loans and mortgages and all those other things. But I'm happy to talk more about what spouses can be doing, because that's actually one of the biggest questions I have is, “Hey, well, what can my spouse do in my business?”

Dr. Jim Dahle:
Here's the issue. Everyone's like, “I should hire my spouse.” The truth is, the person you should hire is your minor child. Your minor child is a way better deal. Not only are they probably not making enough that you're going to have to pay any income taxes on their earned income, if they're a minor child and the business isn't a corporation, they don't pay any payroll taxes on their earnings. It's earned income, so it can go into Roth IRA and never be taxed again. It is a fantastic deal to hire your child. Such a great deal that the big problem there is people want to pay their kids too much, more than the kids really deserve to be paid for whatever work they're doing.

It does have to be a legit job, as you mentioned. You got to treat them like every other employee. They got to have a W-2, a W-3, a W-4, an I-9. They've got to have an employment contract and all those things. But the real deal is hiring your kids, not hiring your spouse. The problem is your kids aren't nearly as good of a worker as your spouse usually is. Your spouse is usually a lot more beneficial to the business.

I think everybody thinks about these great deductions. And it's true. Paying your spouse a salary, that salary is a deduction to the business. But you just got more taxable income on the personal side. That's kind of a wash there. It's not a wash if it's an S Corp though. If it's an S Corp and you're just going to take that as a distribution instead of paying salary, there's payroll tax savings on doing that. Of course, you got to pay the payroll taxes, the Social Security tax and the Medicare tax.

Don't forget, it's not 1.45%. It's 2.9%. You're the employer. You own this business. You got to pay both halves of the Medicare tax. It's not 6.2%. It's 12.4% for Social Security. You got to pay both halves of it. Altogether, it's about 15% you're paying in taxes that you don't get back. You don't get that back. Yes, your spouse gets a little bit more Social Security benefit. And maybe for a few years, they're actually getting to where they qualify for their own benefit.

But for many doctors with non-working spouses, your spouse is going to get more of a benefit from 50% of your Social Security benefit than they are from having their own Social Security benefit. You might not be getting anything beneficial from paying those extra payroll taxes. They're likely going to qualify for Medicare anyway through your benefit. You might be very limited in the extra benefit you're getting for paying those payroll taxes. But that money's gone. That money's not coming back.

On the reverse side, when you're putting money in a retirement account, if it's a tax-deferred retirement account and you put $22,000 in there, then maybe you're saving what? Something like $8,000 that year in taxes. You're paying $15,000 in payroll, and you're saving $8,000. The truth is you're not even saving that $8,000. You're just deferring it. Some of it, you're going to be paying back later.

I just think it's dramatically overstated. Whoever's telling these people to do this, the benefits are way more overstated than they actually are for lots of people. You just got to sit down and run the numbers for your situation and make sure it's actually smart for you to do this because there's a good chance you'll actually come out ahead not paying your spouse to work in the business.

Alexis Gallati:
I 100% agree with you about kids. That's definitely one of my favorite strategies because I have all four of my kids on payroll. That's because you can do so much with saving on payroll taxes as well as that tax-free income to them.

But they're not able to do as much as your spouse. If you can be paying your spouse, getting those benefits, being able to write off a lot of the expenses that were normally going to be personal expenses that can be now business expenses, I find that, especially if you're just paying them a $30,000, $50,000 salary, the social security on that really isn't a ton when you also take off the amount of tax savings that you get for deducting their salaries, et cetera, and payroll taxes.

I still encourage it as long as the math works out, of course. Having a spouse being able to do a lot more complicated tasks for the business, you're essentially having to pay other benefits to other employees or having to hire a completely separate person to do that same job.

Dr. Jim Dahle:
I think you might be overstating the benefits part of it too. Yeah, you could give them health insurance, but you've already got a policy for yourself through the business and they're covered on that. It's a family policy. You've got an HSA, but you've already got a family HSA because your spouse is already on that plan. It's not like there's an additional HSA you can get there.

Dental and vision, again, it could be on the family plan. Life insurance that you can buy through a business is not a huge benefit. You can't buy that much life insurance typically. Dependent care stuff, you could get just with you working there.

The other thing is with converting personal expenses to business expenses. Technically, only the portion of whatever that is that you're using for business is deductible. Granted, there's a lot of gray here. A lot of people go pretty far into the gray. Technically, if you are writing off their cell phone use, it's only supposed to be the percentage of their cell phone use that is actually business related, which for most of us is not that much, let's be honest.

I think that part's not huge. I think the real benefit is the retirement plan. Being able to use the retirement plan, this is the big benefit. One way you can make that bigger, that I think this works better than it otherwise does, is if you've got a retirement plan that allows for mega backdoor Roth IRA contributions. Now, instead of only getting $23,500 in there, maybe you're getting $70,000 in there. It's Roth, it's never taxed again, etc. Obviously, you have to pay them more. You can't pay them $10,000 and put $70,000 into a mega backdoor Roth IRA contribution. You got to pay them $80,000 or $90,000 and the correspondingly higher payroll taxes that go along with that higher salary.

I think there's a lot of bang for your buck when you get as much as you can out of that retirement plan benefit, because that's really the benefit. That's what you're weighing everything else against. I just don't think the legitimate business expenses, the dental, vision, cell phone, computer, etc., I don't think that all adds up to much. The real benefit here is more money in a retirement plan. And it's not that you can't invest for retirement outside of a retirement plan. It's just that the money grows faster. It's the additional benefit of being able to put that money into a retirement plan.

That comes down to, “Well, what's the arbitrage you're going to get between your contribution now and your rate later?” It's how much does the money grow. It's really hard to calculate exactly how much that's going to be. Obviously, the more you can put in there, and the longer you can leave it in that retirement plan, the more benefit you're going to get for doing that.

A spouse can obviously do more. You can justify paying them more than you can pay your kids. If you have your kids do some filing for you or sweep up the office afterward or something, you can only pay them so much. What are some of the things you've seen, doctors' practices, physicians, dentists, whatever, that the spouse is actually doing without any particular professional training to do?

Alexis Gallati:
Yeah. Usually, they'll start out doing more administrative-type support. They can help with scheduling, checking in and checking out. As a child, I did this in my own father's neurological practice. They're helping with medical record management, filing away things. Everything is obviously electronic now, but they can learn that. They can be answering phones. If they are very creative types, they can be helping with marketing and your office's online presence, social media, the website, et cetera, or even just creating those marketing materials and patient outreach events even.

It could just be just overseeing the normal daily operations. Maybe you're like, “You know what? I don't want to deal with the staff right now. I don't want to handle the HR roles.” They can definitely be doing that or even helping with the bookkeeping. Maybe they're very proficient with the budgeting and the payroll and accounts receivable, accounts payable. Most spouses don't have experience when it comes to dealing with the insurance, but some of them, they may.

It's just really finding out what your spouse is willing to do, because I've definitely ran into instances where they're like, “I don't want to be doing X or Y or Z”, but it's safe to find something that they're interested in. Then obviously, pay them a reasonable salary for someone that you would be paying for those same skills off the street and treating them, again, as you mentioned earlier, an illegitimate employee with an employment agreement. They're on timesheets, and you've really defined that role for them.

Definitely, Chat GPT can be a friend when helping to help you define these roles or even when you're trying to figure out, “Hey, what can I do for my kids if you want them on payroll?” It's a very helpful resource to be like, hey, create a job description for my spouse with these responsibilities, and it can pop something else out nice that you then put aside in case the IRS were to ever ask for it.

Dr. Jim Dahle:
Yeah. The truth is, the key there when hiring family is legitimate job, legitimate business. I saw a company the other day that came across my desk where basically what they're trying to do is get you to pay your kids for doing their household chores, and then using that money to go into Roth IRA. I'm like, “Whoa, whoa, whoa, whoa, this isn't going to fly with the IRS.” It's got to be legitimate work.

And maybe the best reason to hire your spouse is because your spouse is the best person to do that job. For example, Katie works at the White Coat Investor, and guess who cares more about the success of the White Coat Investor than anybody else on the entire planet? Katie does. She's an incredibly dedicated employee with a whole different set of skills than I've got, and has been working with us for more than a decade now.

Some years, I don't know if we're coming out ahead on all the tax benefits and what we're paying her for payroll taxes and all that, but we're definitely coming out ahead on hiring her because she's the right person to be doing that job. That's the sorts of things I'd be thinking about when I hired my spouse. Your spouse might care so much about your business that they're going to be better at customer service. They're going to go the extra mile. They're going to work unpaid overtime. They might be the best employee you ever had.

And that's a great reason to hire your spouse when you're getting that sort of a work ethic and those sorts of attributes. There's a reason you married them. It's because you like being with them and because probably a hard worker and a great person to share that work with, and you might really enjoy working together. That's another reason to hire your spouse.

All right. What are the big red flags here? What should people watch out for? How do people screw this up when they hire their spouse?

Alexis Gallati:
By not treating them like a legitimate employee. That's probably the number one thing. As I discussed earlier, not putting them on payroll properly, not having a defined role, not having the agreements in place. That's really 90% of any fight with the IRS in the state is that documentation. If you treat them like a legitimate employee, they're legitimate. They're not going to argue with you about that deduction.

Making sure that they are just set up properly, even if you're going to be doing the retirement plan with them as well. Making sure you understand attribution rules with them too, so then that way, because they're not going to be in the same calculations as another employee would be. Understanding those rules as well is really important.

Dr. Jim Dahle:
For sure, you could assume that you're going to get this huge benefit from them having a retirement plan. Don't forget, if you've got other employees working for you, your 401(k) or whatever plans got to pass testing. Putting your spouse on that plan and making this big contribution for them may force you to make even larger contributions for your employees that you weren't planning to make. You could very easily come out behind if you don't run those numbers in advance before deciding how much to pay your spouse. You may end up having to pay them so little that you're definitely not coming out ahead paying all those extra payroll taxes for them.

The other thing I think is important to keep in mind is your spouse might have another job. They might be having social security taxes paid for them at that other job. When you take this new job, you're also going to have to pay the employer half of the social security taxes. Even if you can get the employee half back because they've already paid the maximum amount on wages, you're not getting the employer half back.

It's the same reason that a W-2 job and an S Corp often doesn't mix very well together because you end up paying more in payroll taxes for no additional benefit. You've got to be a little bit careful about that as well if they have another job.

TAX IMPLICATIONS OF HIRING A NANNY

All right, let's move on to our next question. We've talked about hiring your spouse, a little bit about hiring your kids, and let's talk about hiring a nanny. Here's the next Speak Pipe question.

Speaker 2:
Hello WCI team and Jim. I hope you're feeling good and making progress every day. My wife and I recently took on our first household employee, a nanny, to help watch our kids. We're paying her through a payroll platform that helps with tracking the payroll taxes and all the appropriate withholding. As part of the setup of that platform, they applied for on our behalf and received a new federal employer identification number, or EIN, which is in my name only. For context, we are married, we file jointly, and we are both employed with W-2 income.

My questions are broadly, what does this mean for our finances? More specifically, am I a business now? Should I add my wife to the EIN or the business? Do we file taxes for this business separately from our own annual income tax returns? Are there any new advantages or strategies that are newly available to us as a result of these changes?

Thank you for all that you do and everything that your team does. All of us out here are certainly rooting for you and wishing you a continued smooth and speedy recovery.

Dr. Jim Dahle:
All right. Well, thanks for your kind words to start with. I am having a smooth recovery. It's not as speedy as I would like, but I'm learning a lot about patience as I do physical therapy. All of you out there doing physical therapy or occupational therapy, thank you so much for what you do. It really is important work and it can be a long road for people coming back and regaining function. As I work 23 times a week on my wrist, I'm very much cognizant of that.

All right, let's talk about nannies. I think we're going to get into some Schedule H discussions here, but do you want to give an overview a little bit, Alexis, on this topic and what we ought to be thinking about as we move to hire a nanny? Because this is really common, especially in dual income professional households. Yes, you come out ahead with these two great big huge incomes, but you find your time is very limited and you got to start outsourcing stuff like crazy, clearing the driveway and doing the lawn and cleaning the house and somebody watching the kids at times. It can make a lot of sense to hire all these things out and you're still coming out ahead because of your two high incomes. But what should people think about as they move to hire a nanny?

Alexis Gallati:
Yeah, this is near and dear to my heart because as I'm sure you're aware and a lot of your listeners are aware, my husband is a physician. He's a neurosurgeon, so he's working and I'm working and so we have a family assistant. And you're 100% right. We needed that help in order to keep things going despite having the two salaries.

And so, having this family assistant, you do. You have to go out and get a separate EIN or employer identification number. I don't want to put this through my business or he doesn't want to put it through his practice. You have to have this separate and it doesn't mean that when you're doing this for a household employee, it doesn't mean that you have a separately formed entity. You're just following labor and tax laws, but you're not operating a formal business entity unless you take additional steps to actually do something like that.

But in this case basically the IRS is recognizing that you're an employer of a household employee. Doing this, essentially the IRS is just wanting to track your tax withholdings and your payments for your nanny's employment. And this is a way of just separating your personal finances from your now household employee finances. So, you can't write off any additional business expenses for it. You can't putting your spouse on, it's not going to have any beneficial effect on it as well. But your EIN is specifically for your household employment tax purposes. And like I said, doesn't typically open up to additional business deductions.

Now, when you are ready, assuming that you're probably using a payroll service that is helping you pay all the taxes, file all the 941s and all those payroll forms, at the end of the year, they'll usually create a packet for you that you can use on your taxes or give to your tax professional that will detail out all of your quarterly estimated payments that they're making on your behalf to the IRS, as well as the Schedule H, which you put onto your tax return that will report the wages that you've paid any Social Security and Medicare that you've paid, any federal taxes you've paid, unemployment tax as well, and then any state taxes too.

So, it's very nice. They basically do that Schedule H for you and you can just kind of copy and paste it into whatever software you're using. And so, then that way you're able to properly report everything.

Dr. Jim Dahle:
Yeah. The problem with a nanny is you really need a nanny, but if you pay them more than a certain amount, it starts getting very complicated very quickly. You mentioned actually hiring a payroll service. Would you recommend that? Do you think most people hiring a nanny, most of the audience we have out there, probably a dual income family or maybe a single parent or something, is it worth it to get the payroll service, do you think? Is it worth the additional fees to have those services done for you rather than trying to figure out how to do it all yourself?

Alexis Gallati:
It depends on how much time you want to put into it. It's all cost benefit, basically. And even for me, even though taxes are my full time, I go and have a payroll agency doing that for me just because first off, I hate payroll taxes. I hate it. I don't want to be dealing with it. And things change enough that it's just not worth my time. But yes, can you do it yourself? There are plenty out there that do it themselves but again, it's just all about that cost benefit.

Dr. Jim Dahle:
Yeah, I've done a lot of Form 941s in my life. They're not the worst tax form I ever tried to do myself. I've never actually done a Schedule H. It doesn't look terrible, it looks doable. But I can see how somebody putting that all together for you would be well worth paying for. Do you have any idea what you pay the firm you pay each year?

Alexis Gallati:
Yeah, I believe it's about like $50 a month. It's really not that bad.

Dr. Jim Dahle:
Yeah, that's pretty inexpensive. It doesn't take very many hours of physician time to make up for $50 a month. That's only $600 a year. And for lots of docs that's two or three hours of time. And you could easily blow more than that keeping track of all this stuff. And if you make a mistake, you got to refile it all. That doubles the time, of course.

So, not a not a bad investment to spend a little bit of time. And it's not like you hire them forever either. If after a year, you're like, “I am not getting my $600 a year of benefit out of this.” You've got all these examples of how they filled it out before. And so that should help you to, to DIY it moving forward from there.

All right, people want to deduct this. They're like, “Oh, it's an expense. Surely I can deduct this.” Well, I don't think that's really the case, is it?

Alexis Gallati:
I got this question, actually, last night was, “Hey, I have to send my kid to aftercare in order to work or I have a nanny, and so in order to work, this is a business deduction because I have to have them in order to work.” And unfortunately, no, I wish it was. I so wish it was. There's very, very rare instances where you can actually make it work, but typically you can't deduct your nanny and household employee expenses as deductions.

And so, it's considered a personal expense, but you can use it for the child independent care tax credit. And although that, especially physicians, they have usually a higher income and there's a lower threshold for getting the full benefit, you're still able to use your nanny's wages as qualified childcare expenses for that child independent care expense credit, that form 2441.

You can also go and use, if your employer provides it and they have a dependent care FSA, those nanny expenses qualify for that dependent care flexible spending account as well. So you can use it towards that. But unfortunately, if you own your own business unless you're in the daycare industry or you're somehow able to create maybe a separate entity that is like a daycare for your business that allows your other employees to bring day their kids into it, you're not able to write off your nanny's expenses through that.

Dr. Jim Dahle:
Now people start hearing this and they're like, “Oh crap, I hired a babysitter to go out to dinner and a movie last night. How is this different from having a nanny?” And what I think a lot of people don't understand is there's a threshold here. You have to actually pay one employee more than a certain amount before you got to do all this. And so, that amount for 2024 was $2,700. So, if you're paying them less than that, you don't have to do all this. What do you have to do if you've got a nanny and you only had them for a week or whatever and you paid them $1,500? What do you have to do, anything?

Alexis Gallati:
No, you don't unless you're trying to write it off as a business deduction, which again, you can't. You're helping them save for college or have some extra spending money, et cetera.

Dr. Jim Dahle:
I think there's a secondary rule that if you pay more than $1,000 in cash wages in a quarter, you have to file as well. But I think the main number people need to keep in mind is $2,700 for the year. If you're paying more than that, you got to do all this stuff. If you're paying less than that to the neighborhood kid to mow your lawn and you're paying less than that to some other neighborhood kid to watch your kids for a few nights, you don't have to do this, that's okay.

The fun thing about that though for them is that's earned income for them and they could use it to put it in a Roth IRA or whatever, even though you didn't actually have to fill out a bunch of paperwork to demonstrate that income. They just got to claim it as household employee income.

Alexis Gallati:
Correct, yes. In theory, they're supposed to be going and claiming that on their tax return. And that's why the IRS does have those thresholds. I would say probably though, but not coming from a tax advisor, this is probably a little taboo to say, but probably 99% of people don't do that. Most people don't even understand that this rule is out there. And it's not like the IRS is going to come beating down your door because you paid Susie down the street $2,000 for babysitting one year, but realize that if they do find out, they technically could.

Dr. Jim Dahle:
Now, the rules are a little bit different if it's like your spouse or your mom or something like that. If it's a family member, how do the rules change? Do you recall offhand or is this rare enough that it has to be looked up every time?

Alexis Gallati:
Yeah, it's rare enough that most of the time family members are just going in and helping out. Most of the time they're getting at some other sort of support, you're paying for their meals or some other sort of…

Dr. Jim Dahle:
You gift them some money.

Alexis Gallati:
Yeah, exactly, exactly. Keep it under the gift tax threshold and then you don't even have to worry about it.

Dr. Jim Dahle:
Okay, and I would bet there's a whole lot of people flying under the radar out there. What's your sense for how often this is audited?

Alexis Gallati:
I have been doing this for over 20 years. I think I'm in my, oh my gosh, how old am I now? 23, 24 years. I have never once heard anybody do it. None of my clients. When I was working for local regional CPA firms before going out on my own, I never once did I have anybody get picked up for this.

Dr. Jim Dahle:
Not that that is a tax technique we recommend.

Alexis Gallati:
Yes, exactly.

Dr. Jim Dahle:
But it ought to relieve your worry about this a little bit if you're super close to it or whatever.

All right. Well, I think the main message when it comes to nannies, I think some doctors feel guilty hiring people to help. They're like, “Oh, we can just figure out how to do this ourselves. We could save this expense.” I think the main message when it comes to nannies is this is okay to hire some help to help with your household stuff. And yes, it might involve a little bit more expense or a little more tax paperwork, but it's probably worth it to make your life better.

Remember the biggest financial risk in your life is burnout. And this is maybe a type of burnout insurance. Get a little bit of help with stuff on the side that allows you to not feel so burned out when you come home from a 12 hour day and find you have four more hours of work at home waiting for you.

Okay, anything else we need to talk about that we haven't talked about when it comes to hiring nannies, Alexis?

Alexis Gallati:
If you have other household employees, if you have a cleaning service that comes or just a person that comes to clean, there are ways to potentially write off a little bit of theirs, do the home office and et cetera. So, it's not all is lost basically.

Dr. Jim Dahle:
Yeah, that's a good point, but I assume it's based on square footage. You get a deductive portion if that's the home office?

Alexis Gallati:
Yeah, exactly. Or if you have somebody that comes in directly only just cleans your office, then you can write that off 100%, but hopefully you're having your kids do that and then that's how they're earning their money.

Dr. Jim Dahle:
Yeah, our problem is the office is not that big of a percentage of the house, number one. And number two, it's the easiest thing to clean. Practically doesn't need to be clean. So, if it was actually by the amount of time the cleaner spent in the office, it would really be a minimal deduction.

Alexis Gallati:
Well, I think for me it depends because I'm a little bit more of a pack rat. My kids get to have to organize a little bit more for me.

Dr. Jim Dahle:
Yeah, for sure. Okay, let's move on to a new subject. We're going to talk a little bit about the Vanguard Settlement Fund. Let's listen to this Speak Pipe.

HOW DO TAXES WORK WITH THE VANGUARD SETTLEMENT FUND

Speaker 3:
Hi, Dr. Dahle. I have a fair amount of money in the Vanguard Settlement Fund and while filing my taxes, I noticed that it's coming across as ordinary dividend. My understanding is the underlying assets are all short 30-day US treasuries, at least most of them are. So, typically those are exempt from state and local taxes, but because of the way the statement is reading out, it seems like I would have to pay ordinary dividend income tax for both federal, state, and local for this. Is there any way to not pay state and local taxes on this? Thank you.

Dr. Jim Dahle:
All right, this is a great question. There's a lot to talk about with this question though. What should we start with? Should we start with just answering this question?

Alexis Gallati:
Yeah, yeah, let's do that. First off, for those that are wondering, “Hey, well, what's a settlement fund?” I had to actually look up and see which Vanguard fund do they actually use for most of their accounts. It seems like most Vanguard brokerage accounts you use looks like the Vanguard Federal Money Market Fund or VMFXX as their settlement fund. That's usually where if you get some earnings from your investments, they'll pop that money into that settlement fund before it's reinvested.

So, it's a money market fund, but it's not a bank account. It's usually invested in mutual funds, like short-term high quality debt instruments like U.S. Treasury bills. And so they're treated as just ordinary taxable income, but a portion of those funds can be exempt from state and local taxes.

You'll probably be receiving soon in the mail a Form 1099 dividend from Vanguard that will not only show you your earnings, but it will also give you a breakdown of which states have a percentage that's portioned that are exempt from state taxes. They'll publish that percentage in their annual tax information, and you need to apply that percentage based on what states you live in against how much is earned and then have that reflected on your state tax return.

Dr. Jim Dahle:
Yeah, absolutely. The answer to your question is yes, that income is, part of it, exempt from state and local taxes. I'm looking up 2024's tax information here from Vanguard, and it's 49.3% of income from that Vanguard Federal Money Market Fund, the settlement fund, that is exempt from state and local taxes.

All you've got to do now is you or your tax preparer has to reflect that on your tax return. If you ignore it, then you're going to pay the state and local taxes on that. Now, obviously, in seven states, there is no state income tax, so those people don't have to worry about this. In lots of other states, it's not that high of a percentage. In my state, it's 4.75%, and if you don't have very much income, maybe it's not even worth the hassle to you. I don't know. But you can certainly claim that.

I think that's the bottom line answer to your question is yeah, you can. You just have to report it on your taxes rate. Is that particularly difficult in the tax preparation space if you know that 49% of your $8,000 of income from this fund is from U.S. securities? Is that hard to report on the tax return, Alexis?

Alexis Gallati:
No, it just depends on the state, and most softwares out there will ask you like, “Hey, is there any portion of this not taxable to the state?” And you just have to, again, look up how much it is based on the information. It's not just Vanguard that provides these annual reports with your tax statements.

And so, I've seen it with Merrill Lynch and Morton Stanley, et cetera. You just have to know where to find it. If you can't find it, then like Jim just did, you can go in and Google it, and usually it'll just pop up. You just have to find the funds that you've invested in. Usually the percentage will be different depending upon which fund that you're in.

Like you said, depending on how much you actually earn, you want to see if there's a good cost benefit to it, but each tax software is different. And then where it goes on your state return just depends on your particular state.

Dr. Jim Dahle:
Now, all I did to find this, and I found this while Alexis was talking and giving the answer to this question. I put in Vanguard Funds Percentage of Income from US Government Obligations. And the first hit is a Vanguard form, it's a PDF called US Government Obligations Income Information. That's it. And it's got every Vanguard fund listed on there and the percentages or income that comes from government obligations. And that's the information you need.

Alexis Gallati:
I'm sure if you swapped Vanguard for Fidelity or iShares or BlackRock or Schwab or whatever, you'd get a similar form from those companies. So you just got to be aware that it's out there. And if you pay attention to it, you can actually save some of your income taxes.

However, I think we got to have a little more of a discussion about this. The real question, if you're all worried about the taxes from your settlement fund, is why are you in the federal money market fund to start with? Why are you not in the municipal money market fund? Instead of just saving your state taxes, why not save the federal taxes on it and use a municipal money market fund?

Now, everybody's got to do the math on that. But typically, most of the time, most of the year, you will come out ahead if you're in a high tax bracket using the municipal money market fund for your cash rather than the federal money market fund. I would encourage you to at least run the numbers on that.

I don't think most states have a good money market fund that is both federal and state income tax free. But if you do, shoot, use that instead. And it'd be even better off. You'd save even more in taxes. But I think most of the time, that municipal money market fund is what high tax people will often consider using instead.

I haven't bothered. My cash is sitting in federal. I'm probably coming out a little bit behind. But what I noticed a few years ago, and I wrote a big long blog post about this, is that the rates change a lot more in the municipal money market fund than they do in the federal money market fund.

I was surprised. There were big changes around April 15th. I saw some changes later in the summer. And there were months of the year when I did not come out ahead using the municipal money market fund. And so, it actually required a little more attention to be paid to what the current yields were in the various accounts. And at times, in order to really maximize your benefit here, you actually had to be swapping back and forth a few times a year. What have you noticed, Alexis? Do you use a municipal money market fund when you're using a money market fund, or you did not bother with the hassle?

Right now, I don't bother with the hassle. Usually my funds aren't, I'm not trying to have them sit too much in cash, except for my emergency fund. And then usually with those, I'm trying to find more high yield funds to hopefully earn more interest on.

Dr. Jim Dahle:
I think the main message when it comes to cash management is if you're going to be having any significant amount of money sitting in cash for any significant amount of time, make sure it's in something paying interest. So many people are sitting and checking, making 0.01% a year, or it's in a savings account at your local credit union or bank and paying nothing.

Get that money into a high yield savings account, get that money into a money market fund of some kind. Vanguards tend to have the highest yields, but Fidelity and Schwab both have good ones. Get it into something that's paying something on cash so you're making 4% or 5% instead of making 0.05% or something like that. That's the main thing. Or as Alexis does, don't have a lot sitting in cash, get it invested relatively quickly so you don't have that cash drag on your money.

QUOTE OF THE DAY

All right, let's do our quote of the day today. This quote of the day comes from Thomas J. Stanley. For those who don't recognize that name, that's one of the authors of The Millionaire Next Door. He said, “Before you can become a millionaire, you must learn to think like one. You must learn how to motivate yourself to counter fear with courage.” I like that quote.

Okay, let's talk about a low earning year and what that means tax-wise. Here's our next Speak Pipe question.

TAXES IN A LOW-EARNING YEAR

Speaker 4:
Hello, Dr. Dahle. My question is about tax considerations during a relatively lower earning year. I'm taking a three-month unpaid paternity leave this year. My income will likely be hopefully the lowest of my career. And so, I was looking into things like doing Roth conversions.

But when I run the numbers, I'm normally in the 24% marginal tax bracket. And this year we'll probably just dip down to the 22%. That seems like a distinction without a difference. And I'm just wondering if I'm thinking about this correctly or if there's any other considerations I should be thinking about in this year. Incidentally, the only way I'm able to take this unpaid paternity leave is because of the help I've gotten from this community. Thank you to you and everybody else.

Dr. Jim Dahle:
My favorite part about this call is the baby sounds in the background.

Alexis Gallati:
I know, yeah, it's so sweet.

Dr. Jim Dahle:
Yeah, it's awesome. Paternity leave, bummer that it's unpaid. This has become a lot more generous in the last few years. There's a lot of people out there getting paid parental leave, whether they're male or female. And three months is not uncommon at all with a lot of employers. It's not France where you get a year or something of paid leave, but it's a lot different than it used to be.

When I started my career, we didn't even think about asking about paternity leave. I took a shift off for one of my kids, I think. That was about the extent of my paternity leave with four children. But it's a new world out there for sure. And it's probably a good thing.

The thing that strikes me the most about this question though, is it's only three months less earnings. You're not dropping your income that much. Yes, it's a lower income year, but it's not a low enough income year to really make a huge difference, I wouldn't say. What do you think? How much lower does your income really have to be for you to score some sweet tax benefits out of that year?

Alexis Gallati:
I had the same sentiments. For him, in this example, definitely not a huge drop. I would want to see it at least get down maybe to the 12% to be considered a huge drop. Maybe going down to the 20% would be a nice drop. But what I would really recommend for him in his instance with such a short drop is, “Okay, well, let's look at strategies to help lower the percentage even further.”

All the normal tax strategies that you'd be doing like make sure you're maxing out your retirement and you're doing your tax-loss harvesting, things like that. And so, then that way, okay, great. Now we have a little bit more to work with. Now if you truly have a lower year, or let's say you're going to take a full year off, or maybe you're going to have a big gap before going from residency into your attending job then consider Roth conversions or maybe you want to accelerate some income into the current year if you know you're going to have some other big deductions coming through.

You could even look at trying to sell some of your securities that maybe have some big capital gains that you want to use and take advantage of trying to get into that 0% capital gains rate if you can get your taxable income low enough. But what I would say for him is right now, like, I would kind of treat his current year as he's been currently treating it despite the fact that he's only losing three months of income.

Dr. Jim Dahle:
Yeah, I think you named the three things that can really be done in a low-income year. One is make Roth contributions instead of tax-deferred contributions. I don't know that dropping one bracket is really going to change the calculus. This is one of the most complicated decisions in personal finance, whether to make Roth contributions or tax-deferred contributions. There is so much that goes into that decision. Sometimes it's obvious what you should do. If you're a resident and you're not playing any games with trying to get your student loan payments lower or something, it's almost always going to be Roth. And if you're in your peak earnings years and you're not a super saver of some kind, it's usually going to be tax-deferred.

But most people don't fall into those careful categories and so it's a hard decision. Lower income is obviously one thing that you put on the side of the ledger that makes Roth a little bit better. There's so many other things on the ledger, I don't know that that's enough to really move the needle.

The second thing, of course, is Roth conversions. These are typically done in people between the year they retire and when they start taking Social Security is when people do big Roth conversions. But if you had a big drop in income, you could do them that year.

I've got a neighbor who took a one-year sabbatical from his job as a radiologist. I'm going to try to sucker him into coming on the podcast to tell us all about it. But his income dropped far more than a quarter percent that year, in fact, he saved up for this year for a while before it started so that he could do everything he wanted to do during that year with his family. He basically took an advance on his retirement in order to do that in his early 50s.

Roth contributions, Roth conversions, and you mentioned tax gain harvesting. If you got a really low income this year for some reason and you could harvest some of your gains, why not? You might as well. Top of that 0% capital gains tax bracket. That's under $100,000 though. It's like $94,000 or $96,000 even if you're married filing jointly. You got to get your income way down. Taking a three-month unpaid paternity leave is not going to get you there.

The big problem I think people run into when they have a drop in their income of 25% is now they don't have the money to make the contributions they were going to make to their retirement accounts. I think that's the bigger problem. If people are only saving 20 or 25% of their income, yes, your tax bill is going to be lower this year, but it's going to be hard for you to max out retirement accounts that you were maxing out before if you drop your income by 25% unless you drop your expenses dramatically. And in my experience, that doesn't happen when there's a new mouth to feed in the house.

Anything else? I can't think of anything else to do in a lower earning year. Just those Roth contributions, Roth conversions and tax gain harvesting.

Alexis Gallati:
Yeah, those are the main three.

Dr. Jim Dahle:
Awesome. Well, Alexis, thank you so much for your time, being willing to come on the podcast as a friend of WCI and help us to answer these questions for people. Thanks also for your work at Cerebral Tax Advisors and we'll look forward to seeing you at an upcoming conference.

Alexis Gallati:
Thank you so much, Jim.

Dr. Jim Dahle:
All right, I hope that was helpful to you. A lot of great topics. Who that owns a practice hasn't thought about hiring their kid or a spouse? Lots of docs out there using nannies and other household employees and maybe wondering what the financial ramifications of doing that are. We also talked a little bit about money market funds and other cash options and what to do in a year in which your income is lower.

Great topics. I hope you learned something today you didn't already know. If you already knew all this stuff, congratulations to you. You're probably very financially literate and I bet that's paid some great dividends in your life.

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Don't forget about Expert Witness Startup School. Enrollment is only open through the 27th. You can sign up whitecoatinvestor.com/expertwitness and we'll throw in a free WCI online course if you do so.

Thanks for those of you leaving us a five-star review and telling your friends about the podcast. Like it has been from beginning of time with White Coat Investor, the main way we grow is you telling your friends about us. Whether those are your trainees, students, residents, or whether it's students telling their attendings about it, this is how we grow. And it's important material we're passing out here that really does make for better doctors, better parents, better partners, et cetera.

Another way you can help though, is sharing five-star reviews. Any place you can review podcasts, we appreciate. Most recent one came in titled “Empowering Physicians. White Coat Investor podcast hosted by Dr. Dahle stands out as a beacon of financial education for physicians offering invaluable insights that has been as influential to my life as my actual medical education.

With effortlessly delivered content and a lineup of knowledgeable guest speakers, the podcasts are not only informative but remarkably easy to listen to and enjoyable on my commute. Since tuning in as a fellow in 2019, I've witnessed remarkable growth in our net worth, surpassing $2 million in less than five years a feat I attribute to the wisdom queen from WCI.

Despite having delved in Dr. Dahle's books, blog posts and earlier podcasts, the newly released material continues to provide fresh perspectives and actionable advice, making it an indispensable resource for physicians navigating the world of personal finance.” Five stars.

Wow, I'm not sure I could have written that better myself. Great review, thanks for sharing that. And I hope that helps others to find this information that has helped you to be so successful.

We appreciate you out there. This is not easy work you're doing. Please keep your head up and shoulders back. You've got this. We're here to help. We'll see you next time on the White Coat Investor podcast.

DISCLAIMER

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.

INTRODUCTION

This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 206 – Urologist becomes a millionaire.

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All right, welcome back to the Milestones podcast. This podcast is all about you. We want to celebrate your milestones, use them to inspire somebody else to do the same. The other thing we do to inspire White Coat Investors every year is we put on a conference you may not have heard of. It's called the Physician Wellness and Financial Literacy Conference or WCICON.

WCICON25 this year is going to be in San Antonio, February 26th through March 1st. However, you only got a week until the hotel block is going to close. So, if you want to get a discounted room at the conference hotel in San Antonio, it's actually outside of San Antonio in the Hill Country, then you only have until the 27th to book that. It's really a good time to book now if you want to come in person to the conference.

I'm going to bribe you to do it. $200 off using code SAVE200. You can come to the conference for $200 off. Now, if you just can't make it, you got clinical stuff or family stuff or whatever, but you want to take a sampling of the conference, you can attend virtually. We'll give you $100 off that. Use the code VIRTUAL100. Either way, you can use your CME dollars to pay for this. Or if you're self-employed, you can write it off as a business expense.

We think it's a great, great conference. We do this every year, not because it's dramatically profitable. It is not. In fact, it's the biggest business risk that we take here at the White Coat Investor, because I got assigned for like 1500 room nights every time we put the conference on. So far, I haven't had to buy very many of those rooms every year.

But we want you to come because we know this is the closest thing that exists to burnout insurance. You can't buy burnout insurance. It's not like disability insurance or life insurance. All you can do is you can learn the ways in which you can beat burnout.

This conference does two things, really. One is wellness, and it has a big focus on wellness. We knock off the academics about 04:00 o'clock and we go play together. And so, even if you don't go to a single academic session the entire time you're there, it's still a worthwhile conference to come to because you go home feeling better about your career and your life and with additional skills, et cetera, that can help you to be successful with that.

The other half is financial literacy kind of stuff. We teach you how to be financially successful. And the truth is, once you're financially successful, it's way easier to deal with burnout because that gives you the tools and the ability to do things like cut back at work, tell your boss to shove it, change jobs, change your career, whatever. Because you're financially stable. You don't have these huge debts hanging over your head. They don't have you right where they want you because you got to make the next mortgage payment and car payment and student loan payment.

Okay, the discount codes again, SAVE200, VIRTUAL100. You sign up wcievents.com. It's February 26th through March 1st. First night's a reception. And then three days we've got academics and fun other activities. We'd love to see you there, but the hotel block closes on the 27th. So, make sure you book your room by then. Those of you who are already planning to come, if you haven't gotten your hotel, it's time to get your hotel. So, make sure you get that.

All right, we have a great interview today, but I'm kind of excited about it. Not just because it's a urologist that became a millionaire, but because this doc has two physician parents. And I want to talk afterward a little bit about changing your family tree in the words of Dave Ramsey when it comes to financial literacy.

INTERVIEW

Our guest today on the Milestones podcast is Rich. Rich, welcome to the podcast.

Rich:
Thank you, Jim. Happy to be here.

Dr. Jim Dahle:
Tell us what you do for a living, how far you are out of training, what part of the country you're in.

Rich:
I'm a urologist. I am about four and a half years out of training now, and I live in New York City and work in a suburb outside New York City.

Dr. Jim Dahle:
All right, high cost of living area. Did everybody hear that? I think next week, actually, I just recorded an interview for next week with a rural doc. This is not a rural doc. We're in an expensive place to live.

Rich:
Oh, yeah.

Dr. Jim Dahle:
All right, despite that expense, you've accomplished an impressive milestone. Tell us what milestone you accomplished.

Rich:
I'm celebrating becoming a millionaire.

Dr. Jim Dahle:
You're a millionaire. Awesome.

Rich:
Yes. Thank you.

Dr. Jim Dahle:
And only four and a half years out. I was seven out. So you beat me by two and a half years. You're way ahead there. Very cool. All right, well, let's break it down. Tell us about your assets to start with.

Rich:
Sure. I have about, I would say $275,000 in a 401(k), about $50,000 in a Roth IRA, and the rest is basically intaxable. I have a very small solo 401(k) with about $5,000 in it from my medical survey money, but everything else is intaxable.

Dr. Jim Dahle:
So it's all investments?

Rich:
Yeah, yeah.

Dr. Jim Dahle:
Okay, and what about on the liability side? You got anything there?

Rich:
Nothing.

Dr. Jim Dahle:
Nothing? How'd you pay for school?

Rich:
I was very, very blessed to have my parents pay for school for me.

Dr. Jim Dahle:
Parents helped with school. They paid the whole thing, undergrad and graduate?

Rich:
Yeah, they paid it all.

Dr. Jim Dahle:
Very cool. Thank you, mom and dad. If you're listening to this, you're the best.

Rich:
Yeah, eternally thankful.

Dr. Jim Dahle:
Yeah. How did they pay for it? Did they cash flow? Did they save it up in a 529? How'd they do it?

Rich:
They had a 529, but they cash flowed a lot of it. My parents are both physicians, and I went to medical school where my mom was a faculty member, so we got a slight tuition break to go through.

Dr. Jim Dahle:
Yeah, yeah, take advantage of the advantages you have for sure. Now, tell us a little bit about your parents. Obviously, they saved something. Because they just helped you at school. Good with money, not good with money, okay with money. What do you think? Did you just get all kinds of awesome financial literacy from your physician parents?

Rich:
To be honest, at the time, I didn't know if they were good or bad with money. Clearly now, I know that they were good. But I would say they both grew up middle class, and I think one of their goals was to not have their kids have the financial worries that they might have experienced growing up, and they were very successful with that. Like I said, I lived a very blessed childhood and upbringing. The flip side of that is that I never really developed any financial literacy until I was a resident.

Dr. Jim Dahle:
Yeah, I got to explore more of this though. I don't get very many people on here whose parents are both docs. How'd they pay for their medical school? Was it back when it was cheap enough so that they had a side job and worked their way through, or how'd they pay for it?

Rich:
They came out with a small amount of debt, but back then, debt was not what it is now.

Dr. Jim Dahle:
Right, they just paid it off when they got out.

Rich:
Yeah, yeah.

Dr. Jim Dahle:
Very cool. Okay, so you still had to become financially literate yourself. How did you do that?

Rich:
I did most of it through you, to be honest. When I was a chief resident and the pandemic started, there was no urology cases to do, and so I had a lot of…

Dr. Jim Dahle:
For about two, three, four months in New York, I imagine.

Rich:
Yeah, and I trained in the Bronx, which was right in the center. We were doing a one week on, one week off the COVID unit schedule. I had weeks where I had nothing to do, basically. And at that time, I was having a growing amount of anxiety actually about my ex-wife's medical school debt. She had about $450,000 in debt, and I had no idea what I was going to do to, we had no plan, basically.

And so, I took that time during the pandemic. Your book had been on my to-do list probably for like most of my residency, and I never quite got around to it. And the time came, so I kind of dove in. And by the time the hospitals opened up for elective surgery again, I read the book and probably burned through like 80% of the podcasts that had been published to that time. I had a very quick catch-up.

Dr. Jim Dahle:
Now, you trained not in the pandemic, basically came out of training into the teeth of the pandemic. And you said, you're in New York to make things worse. It's not Italy, and it's not Eastern China or whatever it was, but it's about the next best thing. I guess it's not quite Seattle either, but they had you on the COVID unit as a urologist?

Rich:
Yeah.

Dr. Jim Dahle:
What was that like?

Rich:
Everyone, every single resident, every trainee, the whole hospital was a COVID unit. Everybody was doing it. I helped with intubation for the first time in my life. It was weird to go back. Obviously it was harrowing to see the rate of patients that were dying. And as a trainee, it was tough because we didn't really know what we were getting into. And we were just kind of going in there and doing our best.

Certainly for me, I was a chief resident a couple months from graduation, and then I basically became an intern on the teams that were run by the internal medicine docs. And so, yeah, I went back to being an intern, doing the floor work and stuff like that. It's actually funny. I just ran into, at my hospital I work at now, one of the guys who was a PGY-2 on my COVID team, who's now an attending at my hospital.

Dr. Jim Dahle:
Well, thanks for doing that. Obviously that's above and beyond. Most of us in most parts of the country did not have to do that. But I can remember going to work going, “Is today the day I bring something home that kills somebody in my family?” So it's very real. Thank you for doing that, particularly in that part of the country. By the time the virus got to Utah, it was not the same virus you were facing. I appreciate you being out there on the front lines.

Okay, let's talk finances here. Four years. Four years you're a millionaire, even without the debt to start, that's not unimpressive. That's a quarter million dollars a year increase in your net worth. What's your income been approximately on average over the last four years?

Rich:
It was around $300,000 for the first two years that I was in practice. And then has kind of steadily risen. In 2024, it was about $800,000.

Dr. Jim Dahle:
Yeah, that's quite a serious increase. Did you become a partner or something?

Rich:
I did, yeah. I'm in a private practice.

Dr. Jim Dahle:
Pre-partner years, then you made partner.

Rich:
Yeah, salaried for a couple of years and then became partner.

Dr. Jim Dahle:
Okay, but we're still talking like you made less than a million and a half bucks or so, and you still have a million dollars of it. That's really impressive. Tell us how you did that.

Rich:
It was kind of a slow and steady approach. I would say the biggest thing for me was I haven't really changed my lifestyle at all since I became a partner. I think whereas I was doing pretty well, I certainly gave myself a big raise when I became an attending. Certainly to live in New York City, you have to after you leave resident subsidized housing.

Dr. Jim Dahle:
Did your hospital actually provide you housing of some sort?

Rich:
Yeah, yeah. In medical school, I went to residency in the same place that I did medical school. In medical school, I lived next door to one of our hospitals. And in residency, I moved to the other campus to resident housing. I lived across the street from the main hospital. And I think the most I ever paid in rent was maybe $1,000 a month, which in New York City is wildly subsidized.

Dr. Jim Dahle:
Yeah, you don't even buy a fire hydrant to sleep next to for that.

Rich:
Definitely not. The biggest raise obviously I gave myself was…

Dr. Jim Dahle:
Getting out of resident housing, yeah.

Rich:
Exactly, exactly. I think I was doing pretty well when I was making $300,000. And then my comp got much, much larger and I haven't really changed all that much.

Dr. Jim Dahle:
What about going forward? Do you anticipate an end? Is this the equivalent of a “live like a resident” period that's going to end at four years or five years or something and you're planning on spending more money or are you kind of comfortable where you're at?

Rich:
Yeah, yeah. I would say in line with my next goal is saving for a down payment. I am getting remarried this year.

Dr. Jim Dahle:
Congratulations.

Rich:
Thank you, thank you. And so down payments in this part of the country are not cheap. It's a several hundred thousand dollar endeavor. I'll be probably funneling a lot more money towards that than I've been doing the past year or two.

Dr. Jim Dahle:
Now, we probably could have brought you on this podcast to talk about a surviving divorce milestone. You mentioned that you were married not that long ago and there's been a divorce or something here. I assume there hasn't been a death or anything.

Rich:
No, no.

Dr. Jim Dahle:
Financial implications of that, what you learned from that?

Rich:
Yeah, I would say thankfully for me, the financial implications were pretty minimal. We had both just finished training, didn't really have anything of note, didn't have property, didn't have much money, didn't have assets. Financially, it was probably as simple divorce as you can get.

And in the process of the divorce, my first couple of months, basically between starting as an attending and then separating, I paid quite a bit into my ex-wife's student loans. Learning from what I learned through you, got to get those loans paid off quickly. I certainly made that a priority, which obviously didn't work out in my favor, but certainly the finances of it were quite simple. So I'm thankful for that.

Dr. Jim Dahle:
Anything you learned in your first marriage financially that you're going to carry to your second marriage that you think you're going to improve on, financially speaking?

Rich:
Yeah, yeah, absolutely. Being on the same page is vitally important and having conversations about things before they happen. I think good communication, good planning. I think some of it, in my first marriage, we met when we were young in college. Talks of finance were kind of way in the future. And like I said, my financial literacy was just very minimal. It was not something top of mind as being important in a relationship, which obviously I don't feel is the case now and is a major lesson that I've taken into this new relationship and will into my new marriage.

Dr. Jim Dahle:
Yeah. Now, the other thing that's a little bit unique about you is you're in a high cost of living area. What hope, what advice can you give to other docs that are training in a high cost of living area, want to stay in a high cost of living area? How can they be financially successful too?

Rich:
The first piece of advice I would give people is you can do it. It can be done. There's definitely a pull for geographic arbitrage, reading your site and other sites and it's so real and it does make such a big difference. But if you have good reasons to be in New York City or LA or San Francisco or one of these high cost of living places, it can be done.

I think it's like everything else. It takes a little bit of additional planning. It takes a little bit of additional determination, but a physician income can cover a lot of ground. And so, I think that it's kind of takes the same things that we've displayed in all of the steps to becoming a doctor. We wouldn't study for a test in medical school or the boards without having a study plan. You can't complete this difficult task without having a plan. And I think the best advice I feel like I learned from you is before you get your paycheck, have a plan for it. And that has been supremely helpful.

Dr. Jim Dahle:
Very cool. What's next for you in your financial goals? Obviously on the personal side, you've got a marriage coming up, but what's next financially? What's your next milestone you're going for?

Rich:
First wedding and then house down payment. That'll probably take a couple of years, both before we're ready and before it's saved up.

Dr. Jim Dahle:
Have you decided yet how much you're going to spend on a wedding?

Rich:
Yes, because it's coming up in a couple months. That part has all been hammered out.

Dr. Jim Dahle:
That's the classic expense where you can spend as little $150 at the state courthouse, or you can get the Indian wedding and spend $500,000 on flowers. I'm curious what attendings in New York these days think is a reasonable amount.

Rich:
Well, as someone who I had a wedding in New York previously, but as I was a resident at the time, I wasn't really paying for much of that. This time around inflation aside, it's been astonishing what things cost and what you can spend if you want. I think probably in New York city, you can't really have much for less than $20,000 or $30,000. And a lot of times that's a family only small event.

Dr. Jim Dahle:
Now, I just asked somebody this question 45 minutes ago, and listeners aren't going to hear the answer to that for two more weeks, because it's a podcast in the future. And they came up with only the exact same number. Maybe that's what doctors are spending on weddings these days. I was very, very curious about it.

Rich:
I don't think that's what doctors, I think doctors are spending a lot more, depends if that's what you want to spend it on.

Dr. Jim Dahle:
Exactly. Okay, very cool. Well, what advice do you have for that person out there that wants to be like you. They're like, “Wow, four years out already a millionaire, a partner in a hardworking urology group, doing really great.” What advice do you have for that person?

Rich:
My advice would be not only pay attention to the details, both at work, working hard and increasing your income is doable in most practice settings. And I've been lucky enough to be in a position to do that. And then on the other side, keep track of the expenses.

The first thing I did when I became single was do a budget, daily budgeting, look every month and get those pieces in place. And then slowly but surely build on top of that.

Dr. Jim Dahle:
Very cool. All right, well, thank you so much, Rich, for coming on the podcast, sharing your experience, sharing your milestone, letting us celebrate it with you and using it to inspire somebody else to do the same.

Rich:
Thank you for having me. An honor to be here and thank you also for the major impact you've had on my financial life.

Dr. Jim Dahle:
It's our pleasure.

Okay, I hope you enjoyed that interview. It's a lot of success in a high cost of living area. That's not easy. I just did an interview a few minutes ago with somebody from a low cost of living area. And we're going to run that interview next week. But it's interesting to compare and contrast. Here's somebody living in resident housing. Next week, you're going to find out how many acres this dock bought for what essentially the New York docks are using for a down payment. It's impressive, the difference in geographic arbitrage.

FINANCE 101: CHANGING YOUR FAMILY TREE

I promised you at the top that we're going to talk a little bit about changing your family tree. And Megan was just commenting between episodes here as we record this morning, how fun it's going to be to have a second generation White Coat Investor come on this podcast and share their milestones with us. And this was about the closest thing we've had yet. The White Coat Investor has been around since 2011. It's now 2025. We're 14 years into this. This dock was the child of two docks. And they saved up enough to pay for med school, between saving in advance and cash flowing.

Imagine those of you out there who are like me who had some sort of contract with the military or contract with an MD, PhD or any health services or whatever, or those of you who borrowed $200,000, $300,000, $400,000, $500,000 to go to med school. Imagine your kids want to be docks, your kids want to be dentists, whatever they want to do. Imagine them being able to come out debt-free. How much different would their life start if not only they started a net worth of zero, but maybe they start with a 20s funds too. Maybe they start with an HSA that you funded for them for a few years there. Just imagine how that change is going forward.

Now, when their kids come along, they're financially literate because you taught them. Their kids come along, they're not starting out in debt, they're starting out with a few assets. You know how big of a difference a few assets can make in your 20s? When you really can use some money?

We're talking about changing family trees for two generations, three generations, four generations. It's not just about leaving legacy wealth, generational wealth. It's also what you're teaching them, not only through your example, but deliberately. I sit down with my kids all the time and we talk money.

This year during our giving meeting, we didn't get around to doing it until the first week of January. In fact, we barely got the money into the DAF still in December, but they sat on it for a week or two and so we couldn't distribute it. And then we got busy through the holidays. And so, we actually had a giving meeting the first week of January this year.

But as part of that, I did a couple of things. One, I read a letter, some information that one of my aunts put together about her upbringing, my mother's upbringing. They grew up on this little tiny farm, 12 kids and basically a two room house on a farm. The boys slept out in the barn year round, it was the way it worked out. And comparing and contrasting their lives with the life of my mother and my aunt was a pretty dramatic contrast.

And so, we read that before we talked about who we were going to give to this year, which charities we were going to support. I think that put them into the right mindset to realize that the advantages they have with their 20s funds, with their 529s saved up, with their Roth IRAs that are funded with every dollar they've ever made as teenagers.

The advantages they have, the advantages I had. My father was the first one in his family to ever go to college, became an engineer. And then most of their kids have advanced degrees. So, you're changing your family trees as the years go on.

The other thing we did is we read together the blog post that I ran on the first of the year. I think it was called “Investing: That Thing Rich People Do.” And it talks a lot about the basics and a bunch of comments on it said, “Oh, I'm going to share this with my kids.” And I'm like, “I'm going to share this with my kids.” So I thought I better share it with my kids.

The idea being that my kids are never going to be able to claim that they weren't financially literate when they left home. They've been taught about retirement accounts. They've been taught about index funds. They've been taught about how real estate investing works. They've been taught about the importance of budgeting and insurance and those sorts of things.

Do they know everything? No. Do they still have lots of questions? Yes. But it's something we talk about regularly in our house. Not only do we lead by example, but we actually try to sit down and teach them something about it from time to time.

My kids have done their own tax returns, for instance. There's no reason that your kids should be leaving home financially illiterate. Don't handicap them that way. Help them to be successful, even more successful than you were. Now, maybe they won't have your income. Maybe they're not a urologist making $800,000 a year. That's okay. With the start you give them in financial literacy, they're still going to be successful, unless they make deliberate decisions not to be. There's nothing you can do about that, but you can make sure they're financially literate when they leave. And I think you'll be glad you did.

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All right, this is the Milestones to Millionaire podcast. We'll see you next Monday. Check out the regular White Coat Investor podcast. It drops on Thursdays. Keep your head up and shoulder back. Shoulders back, not just one of them. I feel like I got one of them these days, but it's healing quickly. Keep them both back. You've got this. We'll see you next time on the podcast.

DISCLAIMER

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.