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  • FMD
    • Mar 19, 2022
    • 28 min read

The FinancialMD Show – Ep 010 – When Its Not a Good Idea to Use a 401k


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Summary:

  1. What Is A 401(k)? When Was It Created? [0:03:00]

  2. What is a ROTH [0:10:27]

  3. Capital Gains Explained [0:13:44]

  4. Financial Advisors Can Help Maintain Your Accounts [0:16:16]

  5. When Is It Not A Good Idea To Do A 401(k) [0:25:44]

  6. Other Times To Not Use or Put Money In A 401(k) [0:33:27]

  7. What Can You Do With Your 401(k) [0:38:26]

Welcome to the Financial MD Show. This is the only podcast designed specifically for residents and young physicians to help you become educated on financial planning for physicians and avoid many of the common financial mistakes doctors make. Your hosts, Jon and Trevor, explore a different topic with each episode. Jon Solitro is a financial planner and certified financial education instructor. He’s been working with young physicians for the better part of the decade and lectures to graduate medical programs around the country. Dr. Trevor Smith is a board certified ophthalmologist with a full time practice and he has learned the ins and outs first-hand what it takes to make smart financial decisions as a young physician. And now here’s your hosts, Jon and Trevor.

Jon: Hey everybody and welcome to the tenth episode of the Financial MD Show. This is the number one stop for getting direct tips, education, and knowledge on how to make smart personal financial decisions as a resident, so thanks for joining us today. We’re excited because we’re going to give you a twist on a very commonly recommended topic – that being 401(k)s – and, specifically, when is it not a good idea to utilize your 401(k) at work. We’re going to talk a little bit about the history of 401(k)s, how they came about. Trevor is going to go a little bit into the ROTH concept when that makes sense versus a pre-tax contribution to a ROTH, and then we’re going to talk about some things to watch out for. What are the biggest drags on investment returns in a 401(k) or any other account for that matter? Make sure you’re taking notes, rewind if you have to. We’ll be sure to post plenty of resources in the show notes afterwards, but this is going to be a good one to give you some practical tips on when this makes sense and when it doesn’t.

Jon: Okay, so today, we are talking about when it’s not a good idea to use a 401(k) and we’ll make that a general statement so we can apply it to a lot of situations and it’s not so specific as we do in the advice world especially when we’re making a podcast. Full disclosure, I say it at the end, but this is not necessarily financial advice. You got a couple of financial nerds talking about different topics that pertain to doctors and that’s all we’re doing today. We’re going to keep it fairly general and this helps us to get a lot of traction out of this 45 to 50 minutes.

What Is A 401(k)? When Was It Created? [0:03:00]

So let’s talk about a 401(k) a little bit first because of two things. Most people don’t know what that is. They know it has something to do with employee benefits and/or they know it’s a retirement at an employer, but I get this question all the time – what’s the difference between a 401(k) and a 403(b)? And I was like, “Oh, nothing for all intents and purposes.” For our situation here – for you, as the investor – nothing. It’s a little different for what they call the plan sponsor which is a fancy name for the employer. In general, let’s talk about what a 401(k) is or a 403(b). It was created back in the 70s with the ERISA, the Employee Retirement Income Security Act. This created a lot of rules around employee benefits and especially rules around retirement. Back in the day, there were pensions. For years and years, you got a pension, which meant that the company would put away money for all their employees, typically into one big pool, and they had a record keeper that would kind of see how many credits different people had accumulated based on years of service and then how much they made, and then when they retired, typically, it was you put in so many years, you can retire, and you’ll have this much of your salary in retirement. It could be 50 percent, 60, whatever.

Trevor: Half of what you’re making before they’ll keep paying you even after you’re not working.

Jon: Exactly.

Trevor: The railroads were big on that, right. That was one of the big pensioners of the 20th century, and the 1900s are the railroads.

Jon: Oh, crazy.

Trevor: They’re known for having the craziest best pensions, really paying people out a lot similar to what they were making before or more after time and they invested your money for you within the company and if they lost money or they went out of business, you’re pretty screwed.

Jon: Right.

Trevor: That really hurt a lot of people. I think that’s kind of the one of the ways it originated, right, adding some other options.

Jon: Right, exactly. When there started to be some economic issues back then and people began to realize, “Okay, the market goes up and down. The economy goes up and down. I can’t necessarily count on the fact that when I want to retire that my company is going to be solvent or in business still,” because we begin to see some of that – the Great Depression and different things. Automakers were big on this, military was big on this, a lot of municipalities – all that kind of stuff – so it was much more common back in the day and you’d hear about people get in the military, get their 25 years and out so they could start at 25, retire at 50, and have a full pension. Then go out and get a job somewhere else and it’d be double dipping basically. Crazy.

Trevor: People were living until like 70.

Jon: Well, that’s why it worked.

Trevor: Sixty-five, 70, and that plan worked for a while.

Jon: Same with Social Security – and we’ll talk about this one episode, I’m sure – but when Social Security was created with the new deal in the late 40s, early 50s, FDR created this to, again, same kind of thinking so like, okay. These companies are going out of business during the Great Depression and during this and that and government needs to step in and take care of them so we’re going to create a sort of retirement supplement, and Social Security administration has said this from day one. It was never designed to be your main source of retirement income although a lot of people it is unfortunately, but when they started this whole process of how much Social Security taxes would be and what they would take out of your paycheck and the actuarial tables to say, okay, people are going to retire here typically. They’re going to live until this long. If that stays the case, then this formula should work. Well, what ended up happening between now and the 50s is people started living longer and no one predicted that, and why you hear about Social Security going bankrupt or just not in good financial standing is because Social Security had all these promises to pay the retirees and they didn’t have the money when people started living longer. People are still getting paid. Social Security is working for now but if you look at your Social Security statement, whatever age you’re at, you can go to ssa.gov and you can check it out and you can see the number, percentage-wise, that they assume, like they’ll tell you in the year 2035 or whatever it is, plan on these benefits being about 75 percent of what we state in the statement. I’m not joking so they already know it’s going to be. It’s underfunded and it’s going to have to be cut at some point.

Shortly after that, they said okay. It’s not going to Social Security. A lot of companies now in the 60s and 70s due to the economy were cutting their pension programs entirely, and so again, government says we need to step in and help out with this and they created the ERISA and 401(k)s. What it did was it created a rule around to enforce or mandate employers to provide one, although interesting fact, Australia does require all employers to have a 401(k) type of retirement plan. What happened with a 401(k) in the U.S. is it created a framework around that when an employer had one and they made it so that like a business owner wanted to get one because it allowed them to put away a lot of money pre-tax. But if they got one, there was what they called safe harbor rules and so they had to put certain matches and rules and eligibility and all these different investing things in there so that employers weren’t setting up these things to benefit themselves and kind of screwing over the employees or just not letting the employees contribute.

So that’s the rule. It was an IRS rule 401(k). It is where that rule is found, that’s why it’s called what it is, and it’s an investment account that your employer sets up that you have the ability to put money into. They may or may not put a match. They may or may not do a profit-sharing discretionary contribution, they call it, and there’s a lot of rules around it for compliance and just to make it fair but that’s what it is. It started out pre-tax because most people assumed if tax rates stay the same, “I’m going to make less in retirement so I’d rather pay the taxes on this money in retirement because I’ll be in a lower tax bracket than pay it now.” They started out in a traditional 401(k), it’d be pre-tax, and then somewhere in the mid to late 90s, they came out with a ROTH 401(k) and most of you guys if you’ve been listening for any period of time, you know what a ROTH is but, Trevor, why don’t you explain the pros and cons of a ROTH and give us your thoughts on just the ROTH concept.

What is a ROTH [0:10:27]

Trevor: Sure, yeah. The retirement funds that are sponsored by your employer usually oftentimes come with the perk of if you contribute a certain percentage, or in some cases, even if you don’t, the company will match that amount that you put in and that percentage is a percent of your salary. So if you make a hundred thousand dollars, they’ll put in four percent match. Then if you put in 4000 dollars, they’ll put in 4000 dollars. Magically, you have 8000 dollars and that match that they give you, you don’t get tax on as part of your salary. So it’s free money. If you put in the money and they match it, you have free money. If you don’t put it in, you get nothing, so you lose an opportunity at free money. That’s why people talk about matches at work being a huge perk. It’s free money. You don’t pay taxes on. You get to use in retirement. ROTHs are great. ROTH accounts are a way of contributing to any type of retirement account that has the name ROTH in front of it. You can kind of ROTH a lot of different things. It’s sort of like version 2.0 of whatever you’re talking about and the ROTH version is post-tax money. You pay your taxes on your income and that’s your withholding. Let’s say you make 10,000 dollars a month like many physicians easily make 10,000 a month and they’re taxed at 25 percent tax bracket. Usually, the withholding is the business will just pay that to the IRS as you go throughout the year so you don’t have to worry about it on tax day and have a huge bill and if you really waited too long, they can even give you a little fine for waiting and holding it throughout the year. Anyway, 10 grand a month, 25 percent tax bracket which I guess it would be 25 or 30, but they’ll take that out. So they took out 2500 for you take home 7500. If you put that money into a retirement account, you’ve already paid taxes on it, so that goes into a ROTH account. The cool parts about the ROTH are then later both of them – sorry – both of them grow without you having to pay taxes so you’re buying your Tesla stock and it skyrockets.

Jon: Tax-deferred.

Trevor: Yeah, tax-deferred. They’re both really tax-deferred, but really the ROTH is tax-free like you don’t have to pay taxes on the ROTH because you pay it upfront. You don’t have to pay it on the growth. You don’t have to pay when you take it out. With the non-ROTH accounts, it’s really truly the tax-deferred account so you’re able to put that money in straight from your paycheck – that 10,000 that before you take it home and the government takes a piece of it. You can take from that amount and put it straight in –those are the non-ROTH accounts. Those are the pre-tax accounts, and depending on if it’s the right kind of account then you don’t have to pay taxes on that now but you will have to pay on it later so it’ll grow and you don’t have to pay like you buy and sell Tesla a few times throughout the years and it goes 10 times its growth and when you sell it, you just hold a little bit in dollars in your retirement account and you buy some Tesla, and maybe it falls down again.

Capital Gains Explained [0:13:44]

Jon: Yeah, let’s explain capital gains briefly which we can hold for another episode, but in general, when you buy and sell stocks, if you’ve got a gain in that stock, which is the hope, the downside of having a gain is when you go to sell that stock, you have a capital gains tax, and wherever you’re holding that stock, if it’s E*TRADE or TD Ameritrade or whatever, they’ll you send a 1099 for whatever your capital gains was and then when you do your taxes, you have to mark that as income and capital gains have their own tax brackets. So the benefit – one of the other benefits of a 401(k) or an IRA either regular or ROTH – is that as you’re buying and selling, which maybe you are or maybe the fund that you’re invested in is buying and selling over the years, you don’t have to worry about capital gains or income taxes in that account until you go to take the money out in retirement. That’s what tax-deferred means that no matter what’s happening inside that account, you don’t have to worry about capital gains and 1099s and all that stuff.

Trevor: Yeah, so for anyone who hasn’t really done any investing which I don’t know how many people that will be listening but you make your money. You do your work. You work 9 to 5, let’s say. You get paid. You paid taxes on the money that you worked for. So let’s say it again, 10 grand a month, 25 percent tax bracket. They’ll take 2500 dollars every month just for the privilege of you working in the United States and then you take that money you already paid taxes on so now you have 7500 left. Now you put it in Tesla, and let’s say, great scenario. It goes up and it doubles or something. Well then you get to pay taxes on that too. You took all the risk and the government gets to take a chunk every time you make money.

When you first are learning about stocks, I think that kind of surprises some people. Maybe it doesn’t. Maybe they’re just like, “Oh, of course, yeah, I love paying 25 percent taxes on my money that I risked that could have gone to zero,” but most people don’t like that and so when you can avoid paying taxes, you’re already risking your hard-earned money. If you can avoid it, that’s everyone wants to do that, okay. The other thing is if you double your money and then you sell, well, now you lost a quarter of the extra that you made. Well, if you get to keep that quarter, now you’ve got an even bigger pile of money to put into the next stock or investment. That’s why people talk about compound interest when your growth is growing, the growth-growth becomes more.

Financial Advisors Can Help Maintain Your Accounts [0:16:16]

So anytime you can keep more of your money, it’s also why you should look for financial advisors to keep your accounts under management fees to a reasonable level because it’s the same principle. If you got little bits draining off as you go along then it can hurt your returns. I mean what’s a bigger dream than selling a stock that’s doing great and having to lose a quarter of what you made off of it. I mean when you’re talking about accounts under management at one percent so you want to like – I’ll go on a little rant here – but some people, they’re like, “I don’t want to have a financial advisor. I’m just going to trade on Robinhood.” That’s a horrible idea for a lot of reasons. You can do it. I mean, I’ve traded on there, but if you’re buying and selling stocks and you’re selling it within a year so you’re really almost like day trading, you’re paying at least 25 percent capital gains and if you have a higher tax bracket, more, and you’re erasing that much value every time you buy and sell something if you made a gain. So it can go down too and then you just lose money. But if you work with a financial advisor, they can help you frame your accounts and the money that you take home to figure out how you can pay less taxes on the money from your boss to your checking account within the trading account and then there’s IRS maximums of how much it can go and what throughout the year, and it changes from year to year. When you’re talking about someone who makes 10 grand a month and then – I’ve beaten this to death – but then the government takes 25 percent. That’s 2500 dollars every month, and a financial advisor’s typical fee, the national average is 2300, for an annual fee. Every single month you’re paying – if you’re making 10 grand – you’re paying the equivalent of an entire year’s financial advising fee to the U.S. government and then you’re trading in Robinhood and if you’re doing well, you’re giving them even more with the money that you got on the back end of that. Anyways, I’m just framing the thought of people who hesitate to get financial advisors and the medical community really puts a lot of skepticism in our mind about financial advisors but I think you could make a pretty strong argument that having one is better than not having one in almost every case.

Jon: Yeah, I think there’s a balance between just blindly hiring a financial advisor and having none because somebody online convinced you to do it yourself. I think it’s a balance of getting an advisor but doing your due diligence in educating yourself.

Trevor: Totally. Those resources that the White Coat Investors put together are pretty good for picking one. I would go with having a financial plan is number one and then how you do that would be number two. Having a plan beats not having a plan and having an advisor, if they’re reasonable fees and fairly knowledgeable and can present to you their value, then it’s better to have one than not to have one too. There’s just so much – for someone who’s an uneducated investor – you’re coming from the perspective of you know financial advising and you know nuance and all this stuff but like you know some people we’re talking about the difference between ROTH 401(k)s and 403(b)s and all that stuff, that’s the kind of thing that the earlier you paid like a one-time thing to just get the basics and put your money in the right places would be the better and I think that is pretty probably why Jim Dahle recommends the fee-based or fee-only guys – those are two different types – because at least then you’re kind of like maxing out your risk of getting somebody bad but you’re at least moving the needle in terms of getting your money to work right away. Anyways, I just like to put in perspective for how much doctors make how little a fee only or a fee-based advisor just to try one once would be so low a risk. It’s just a small percentage of what you make. It’s like one percent of your income or oftentimes it’s half or a third of a percent.

Jon: One percent at the most, yeah, I’ve seen as far as when you’re charging a retainer for your subscription-based.

Trevor: Yeah, ongoing.

Jon: Bottomline on that, taxes and fees are the biggest drain on investment performance so just be aware of what you’re paying in taxes and fees, I would say. All right, so we kind of went over what a 401(k) is and why it’s beneficial tax-wise. Okay, it’s typically pre-tax or tax deductible now and then it’s tax deferred over the years so you’re kind of kicking the can down the road and not paying any taxes until you go to retire which can be a good thing or a bad thing. I personally believe tax brackets are going to go up over the next 10, 20 years plus so if you’re going to retire any time after that and you’re a good saver, you face the potential that you’re going to be in a higher tax bracket in retirement maybe. So that’s where the ROTH comes into play. Take the tax hit now and then never pay taxes on that money or other growth again, but a lot of times we just do a balanced approach of some in the traditional pre-tax side, some of the ROTHs and kind of try to hedge our bets a little bit that way. So as Trevor said, there’s a match. A lot of times that employers, a match means they don’t put any money in unless you put money in. A defined contribution means they’ll put money in even if you don’t put money in which happens. At the end of the day, guys, if you have a 401(k) or 403(b), get your employee benefits handbook in summary and just see, be aware, educate yourself on what they offer and make sure you’re taking full advantage of it because if you’re not putting in the full amount to get the full match, a lot of times, for example, you’ve got to put in six percent and they’ll put in four percent or you put in 10, they put in 5 or whatever the case might be, if you’re not doing that full six percent to get the full four percent match, then you’re leaving money on the table. I think that’s generally good advice no matter who you’re talking to. But today, we just wanted to touch on now you know what a 401(k) is – oh and to add a little bit too – people ask what’s a 401(k) invested in. Well, the answer to that is whatever you want within reason. So in a 401(k), they give you a list of, let’s say, 40 or 50 different funds or investment options inside there and you can pick so it’s not like the employer invested for you. You still pick what it’s invested in.

Trevor: Yeah, oftentimes, if there’s a default, 401(k)s tend to be automatically invested in something. If you open your own accounts like a lot of people use Vanguard – it’s a brokerage so that just means they can open accounts for you and they have different types so you can do all sorts of retirement plans – those tend to not automatically, and actually if you open it yourself, it’s not automatically going to be invested in something. If you want to max out a ROTH IRA and you’re a resident, you can open one up for super cheap at Vanguard and then you put in your 6000 dollars and you just transferred over and then it sits in that account and if you are one of those people with a very sad story three, four, or five years later when you graduate from residency and you’ve done this every year, you look and see, hey, how come this isn’t making any money, it’s because you have to pick a fund in that account to invest in. So when you send your money over, it doesn’t just start being invested and making magical returns. You have to choose where you want to put it, and they have a walk-through. They will prompt you to try to choose some sort of – they like their target date fund, naturally changes from higher risk to lower risk as you approach retirement, but it is great like every investment book you read will have that funny story where they’re like, “Hey, please, please, please double check,” that when you do all this amazing hard work of investing or automatically sending money over to an investment account, make sure it gets invested and it doesn’t just sit in there like a checking account earning zero percent interest. That’s a bummer, and it does happen to people so I like to bring that up.

When Is It Not A Good Idea To Do A 401(k) [0:25:44]

Jon: Very good point. Hopefully, wherever you’re starting your IRA or whatever, it is a good app that kind of makes it dummy-proof a little bit and make sure that you can’t actually set up with account unless you pick an investment in there, and for most of you listening, good old S&P 500 Index Funds, always a safe bet for the most part. Well, let’s answer the question that we got you to clickbait this podcast episode and get to called, when is it not a good idea to do a 401(k)? I’ll give you a couple of things. Number one, if you have done your budget and you’ve getting through the cash flow step of our resident road map and you figured out now you’re in step 2, and during step one, you figured out you have no surplus or a negative surplus, you’re probably not ready to invest in a 401(k) yet. You need to cut some things, get your budget figured out. Either make more money or spend less and there’s lot of ways in previous episodes we’ve talked about how to do that, but if you’re good there, you’ve got a little surplus. Step two is safety net and you realize, “I don’t have an emergency fund or enough of an emergency fund.” I would say maybe not the right time to prioritize a 401(k). You go to, with gazelle-like intensity, as Dave Ramsey says, get that emergency fund saved up and then I think you can probably look at investing in the 401(k) especially if there’s a match, now’s the time to start thinking about that. I would even say I don’t usually recommend you wait until all your credit cards get paid off. I think you can potentially miss out a lot of growth in the stock market if you do that and just put a good plan together and pay off your credit cards but don’t necessarily skip the 401(k) especially if there’s a match in there. If I’m talking to residents, which a lot of you guys are, it’s not very common, right, Trevor, to see matches in a 401(k) in residency?

Trevor: It depends. I know University of Michigan had one when I was at Beaumont Health in Royal Oak. For a year, I was the president of the Resident Fellow Council and I really wanted to kind of move the needle on this but I was not able to do that. I guess I’ll just say it like that. We looked at competitive other fellowships in the area – not fellowships, sorry – residencies that had great benefits and we basically were just told the money is just not there and that’s not uncommon and I don’t know if there’s or not. I mean I’m not looking at the book. Probably isn’t. Hospitals, they have their ways of running things. But there’s a House Officers Association, if you have like, and then some hospitals actually have unions for the residents.

Jon: I know U of M does.

Trevor: Yeah, they call it, they have a way around because unions are kind of frowned up for residents but it’s called the House Officers Association or HOA.

Jon: Northwestern in Chicago has one.

Trevor: Yeah. Those places do tend to have better benefits and then some of them have matching. I know people that have graduated especially if they’re like general surgery for seven years decent-sized matches and retirement funds kind of already giving them some momentum. When you’re looking at residencies, definitely try to see if you can find one like that. It’s not inconsequential, but yeah, usually not. It’s fine. It sucks because it’s like literally free money your friends are getting. They’re making 5, 10 grand more than you doing the same thing, but you’d be fine.

Jon: No, it’s a perk. If you get it, great; if not, no big deal.

Trevor: For the credit card scenario, let’s say, you’re a resident. You’ve got four grand in credit card debt. It’s going to grow pretty fast because these are at 18 to 28 percent compounded. That’s an annual rate so it’s not like it goes up a third every month. That’s annual, but yeah. With the 401(k)s and with matching, you can have that money automatically taken out of your check ahead of time so you can’t touch it. That’s a great way to do it. I mean you could even just try that for a few months and be like, hey, am I starving now that I’m contributing an extra couple hundred even 200, 300 dollars per month. Your lifestyle will probably just adjust.

Jon: It does, yeah.

Trevor: You will get, let’s say, if it’s four, I guess, that’d be a hundred grand. Let’s say you’re making 50 grand and it’s a four percent match so then you’re going to put in two grand yourself and then the hospital’s going to put in 2000 dollars. It’s a free 2000 dollar bonus you wouldn’t have gotten. You can’t spend it. It’s in your retirement account but if your credit card debt is like two grand and you just automatically started saving two grand, you didn’t spend the credit card debt, well, you ended up making an extra two thousand dollars. Whatever the amount that you incurred in interest on your credit card, it’s going to be less than 2000 dollars over a year. I mean you have to have an enormous credit card debt to not have that be the smart move. It’s sort of like which one wins in the very short one-year race, and if you have matching, it’s pretty clear what you’re going to get so you can just simply calculate.

Jon: That’s like a hundred percent rate of return if you have a match, right. That’s a dollar for a dollar match.

Trevor: Yeah.

Jon: It’s like a hundred percent.

Trevor: You can’t take that money post-tax and put that in your checking account, transfer it to Robinhood, and you won’t be able to be at a 100 percent return. I mean that’s a hilarious effort in a year. You could get lucky. You could also go play roulette and if you win, you could buy large. But it’s definitely similar. It’s exceedingly unlikely and the other one is a literal guarantee. That’s why people talk about matches a lot because it’s one of the most no-brainer things you can possibly do. It’s just free money. And yet, smart people – doctors, residents, attendings even – they don’t do it.

Jon: Yup, so what do you think Trevor? Any times when it’s not a good idea to utilize a 401(k)?

Trevor: I think like you said – if you don’t have the money. Other times, if you think you have a better investment or you have a personal this-is-the-plan thing, and I’m again, not a financial advisor so this is not financial advice. The reason some people say that is what they mean is, this isn’t advice for you as an individual. That’s what financial advice is. I’m not even allowed to give financial advice because I’m not an advisor but when you hear people talking about things, it doesn’t mean you should do it because it’s an idea and a concept that doesn’t apply specifically unless a trained professional tells you. I got off track there – what was I saying?

Jon: When it’s not a good time to use a 401(k) or put money in 401(k); if you have better investment outside of the 401(k).

Other Times To Not Use or Put Money In A 401(k) [0:33:27]

Trevor: Oh yeah. I was just getting to the idea that like if you have a plan or you have like goals in your life and its part of your financial plan to like buy a home or something, you know you could say like, “Yeah, you know, the maximum for what I can put in my solo 401(k) is like 55,000 dollars plus this year, I know it’s a priority.” You could say like, “I’m going to put that as part of my downpayment on a house or something. You know we just had our third kid and we really want to make it happen.” I don’t know. It’s certainly a downside to not fund something because there’s a limit every year so if you don’t do it this year, you will have lost the chance to build, to stuff money in that account that the government lets you not have to pay taxes on until later. So I’d say like it’s going to be “better numbers-wise” to always try to do it but there are scenarios in which you could do it and just be like, “You know, I don’t feel bad about that because that doesn’t line up with what I wanted to do this year with my money,” and I think that’s fine. But if you said like what will make you the most money and help you grow your wealth from the dollars that you’ve earned, there’s not a lot of circumstances in which it’s not a good idea to max out any of your retirement accounts. I mean, not everybody is going to want to save 60 to 80 percent of their income. Some people only want to do 25 percent. Maybe that doesn’t equal maxing out your 401(k) so that will be another circumstance where people just that’s not their goal. It’s not how they want to live their financial plan. They want to work until they’re 70 and they don’t mind. There’s those people, too.

Jon: Yeah.

Trevor: I just want to know. I think like if you’re going to be a spendy kind of guy or gal, you want to at least just know like I’m being a spendy guy and this is what it costs me. At least then you’re just like, yeah, like I was going to have 50 million in retirement at 60 years old but now I’m going to have eight million and I have to work an extra decade. These are literal decisions people are making without making them. If you sit down with yourself and you just have that honest conversation for you and your partner and you’re like, “Yeah, our family doesn’t need 15 million dollars. I want to have eight million and even that I’m going to spend and my kids can make their own money.” It’s just everybody’s different. You can use that everybody’s different argument to whitewash a lot of terrible decisions so that’s a slippery slope. I don’t know. I’d say that’s the best argument for not doing it. It’s just like, “Hey, I know what I’m doing. I’m making an informed decision and I’m giving up this opportunity. It’s opportunity cost but I acknowledge it and I’m going to spend this money some different way.”

Financial Advisors Advise, You Make the Final Decision [0:36:36]

Jon: Yeah, that’s what we always say with our financial recommendations is that, hey, our job is just to educate and show you the numbers on what you do, what happens if you make this decision versus this one and then let you make the decision. I’m not going to tell you what you should do. I’m going to say, okay, if you buy this car, if you buy this house, if you pay off your loans in five years or 10 years or 15, here’s the different scenarios of what happens depending which path you go down and you may choose the path that I wouldn’t recommend but as long as you know what the consequences of that are, I’m okay with that, and that’s kind of funny how many parallels are with parenting but I tell my kids like, “Listen, buddy, what you do here.” You know, my 8-year-old like,” Do I have to do this?” “No, you don’t have to. It’s your choice but I just want to inform you what the consequences are of each decision and then the choice is up to you, buddy.” You know I think it makes better adults. I think it makes better investments. I think all the way around it’s a concept that we just can’t get away from, that we have the control, we have the choice and free will, and the consequences are ours, too. That’s the downside of free will, right, is that there’s consequences.

Trevor: Yeah, totally.

Jon: I’ll take it. I’ll take free will any day of the week still even though it means I have to be informed. We can talk about politics and voting of just being free versus taken care of and provided for. It’s like I’ll take freedom every time and I think any American will say that.

Trevor: Yeah, we definitely value that quite a bit.

Jon: Sure, back in 1776, we were willing to kill people for it.

What Can You Do With Your 401(k) [0:38:26]

Trevor: Yeah. I was going to say it too. I’m just thinking as we’re talking, I’m trying to think like what are the interesting things about a 401(k), like assuming you kind of already know how they work and what they are.

Jon: You can take a loan out against it, that’s helpful sometimes.

Trevor: Yeah.

Jon: So you can take out up to half of the balance up to 50,000 dollars typically from a 401(k) and then pay it back over five years. You can pay it back longer if you use that money for a downpayment on a house. All sorts of pros to that.

Trevor: Yeah, ROTH IRAs this last year COVID, I think they allowed you to take a one-time disaster withdrawal as well which is a similar duration. I don’t know if it was specific to ROTHs but I think it was.

Jon: No, regular IRAs.

Trevor: Was it not? It was regular. And you could take out and it was again a five-year loan to be repaid. Those are interesting things. These are chances for you to do both basically have a contribution into. Each year, there’s a limit of how much you could put in and you could put that in every year and really you could potentially max it out and then you could also when you wanted to buy that house, you could take it out of there. It hurts your growth but if you’re going to spend that money anyways, maybe it doesn’t. Those would have been maybe post-tax dollars or you wouldn’t have gotten a match. It is good. If you can make your priority getting more money that you control and can try to get it to grow as much as possible and then try to fit your lifestyle to that that’s better, but if you want to expand from that a little bit, a financial advisor and even accountants too can help you figure out what your flexibility might be to be a little more creative and do those things without missing the boat on getting more money into your protected retirement accounts.

Missing a year of retirement account contributions now is my biggest enemy. I don’t want to have a year where I didn’t really and I have never maximized myself because I’m still early attending and I’m paying off loans and stuff. I guess so that’s maybe an example is if you’re somebody who prioritizes not being in debt, you might not max it out. For me, I had 1099 income but it wasn’t above the maximum. The nice part about 1099 income is you can put away all of that into your own solo 401(k) which is just owner/operator, somebody who’s just their only employee like I’m my own employee. I can open up an account and I can contribute every dollar up to the annual maximum. Well, I didn’t make that much in consulting but I was able to have it all be a pre-tax contribution so I was able to not have to pay as much taxes. It doesn’t matter how much it is if you do a little side gig, you don’t have to pay really taxes on it. That’s one of those really underrated. I keep trying to tell my doctor friends that. I’m like, do some moonlighting like dollar for dollar where you can take that home versus 65 percent to 75 percent taking home what you earn. Anyways, I’m just trying to think of what are the kind of extra things about it that make it cool or make it helpful that people might not have heard before.

Jon: Yeah, usually they’re lower cost than doing an IRA or different things like that. You can get some just from scale because there are more people involved. They can typically negotiate some lower fees and things. Not always. Get educated on what the fees are but a lot of times if you’re a big employer, they can be pretty cheap. Well, I think that’s probably our time today.

Trevor: Excellent. Thanks Jon.

Jon: Once again, we went longer than we thought which I think is a good thing.

Trevor: Yeah, it’s fun.

Jon: I think it’s good and fun. Today, we had a lot of good information. I’m excited for getting this released and we’ll put some notes of whatever we can in the show notes. This is Jon Solitro and my buddy, Dr. Trevor Smith, just giving it to you straight being real, being 100.

Trevor: Awesome. I don’t say that. That’s proof that I’m older.

Jon: No, you are too. All right, cool.

Trevor: Thanks Jon.

Jon: Well, have a good night, sir. I will talk to you soon.

Trevor: All right, thank you.

Thanks for joining us for another Financial MD Show. Be sure to head over to financialmd.com to get more in-depth resources on financial tips for physicians and don’t forget to join the Financial MD community group on Facebook, where physicians at all stages of their career gather to share tips and get ideas on achieving true financial success. We’ll see you next time.

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