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Credit Card Travel Hacking with Physician on Fire – Podcast #209

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[Editor’s Note: DLP Capital Partners, a real estate investment group and a preferred partner of White Coat Investors, will be hosting a Q1 Performance & Virtual Dinner event this evening, Thursday, May 6 at 6PM EDT! To hear about Q1 performance results and the DLP market outlook, sign up here.]

For FIRE week on the White Coat Investor podcast, we have a guest host, Physician on Fire, discussing how to travel for free with his best travel hacking strategies and answering listener questions. You can earn free travel, and he shows you how with regular spending and credit card sign up bonuses. Now credit cards are for convenience, and you should only use them if you are disciplined enough to pay them off every month. Use autopay for all your cards and make sure you are getting at least 1.5% to 2% back on your everyday purchases. If you’re willing to pick up a new credit card a couple of times a year, and maybe cancel a card or two if you don’t think a card is worth the annual fee, you can get a LOT more bang for your buck by taking advantage of welcome bonuses. Let Physician on Fire show you how in this episode. 

He also answers many questions about bonds and their role in your portfolio, as well as maximizing the 199A deduction, turnover rates in index funds, and understanding your taxes on side income.

 

How to Travel for Free Using Credit Cards

In this episode we discuss how to earn free travel. We love to travel. We love free things. Why not combine them? An easy way to earn free travel is by using credit cards to pay for things you’re already buying, smartly and intelligently, so you get the most return from money you are already spending. You can do this by earning cashback or credit card points that can be converted to cash (or other things). You may earn airline miles or hotel points with your credit cards.

But let us remind you upfront that you should not do this if you can’t afford to pay the full balance on your credit card every month. Those interest charges will more than outdo the benefits you can get from earning points by spending on a credit card. So, first and foremost, be responsible with your credit card spending.

My wife and I have used a number of different cards to rack up points, in some cases quite quickly. That has covered the cost of flights for my family of four to go to Europe, Central America—where we did a medical mission in Honduras, Mexico, and back, all completely free of charge other than maybe some fees that come with crossing borders. We’ve had dozens of nights of complimentary hotel stays based on our points. If I had paid for all of these flights and hotels, it would have cost us tens of thousands of dollars.

 

Best Cash Back Credit Cards

There are really two main ways that you can earn these points in miles. One is the regular spending on whatever you’re going to spend money on, whether it’s gas, groceries, your regular bills, etc. The other is through welcome bonuses that you get when you open a new card.

The simplest way really to get something back from your credit card spending is just to get cash back. It’s not difficult to find a card with no annual fee that will give you easily 1% and sometimes 1.5% or even 2% back in cash for everything that you spend money on as long as it goes on the card.

There are some other cashback cards that will give you additional money back on rotating categories that tend to change each quarter. A good example right now is I’m getting 5% back on any gasoline purchases with my Chase Freedom card. Other months it would be Walmart groceries, for example.

I say 5% back, but actually Chase has a pretty cool system where they give you ultimate reward points, which are basically worth a penny a piece if you trade them in for cash, but if you trade them in for travel, they can be worth more. If you have the Chase Sapphire reserve card, you get 1.5 pennies per point. So, with a 5% back on gas using the Chase Freedom card, I can use those points with my Chase Sapphire reserve card and actually get 7.5% back when I use it for travel booked through that Chase portal, which is basically Expedia. So that’s a pretty cool way to get money back with your ongoing spending.

There is a double cash card from Citi. You get 1% back on the purchase and 1% back when you pay. Fidelity offers a 2% cashback card that you can just put the money right into a brokerage account or a 529, or maybe even an HSA.

 

Flexible Rewards Credit Cards

Now cashback is simple. Flexible points can give you more value. All of these can be redeemed for cash. So, there’s that option, but the redemptions are often more lucrative when you transfer those points to different travel partners.

For example, Chase has direct relationships with Southwest and United. You can transfer your points directly to them for miles on those airlines. There are dozens of others, including international airlines that are part of alliances with major airlines in the U.S. You may not be able to transfer your points directly, but you can transfer your Chase ultimate reward points to KLM Air France plan, and then book a Delta flight.

So, you can book all kinds of flights with those flexible rewards. You can also use them with hotel chains. Hyatt is a direct transfer partner of the Chase points, and it doesn’t take that many miles to book a nice hotel room with Hyatt. You can also get a card that is directly co-branded by your favorite airline or a hotel chain. I have a Hilton surpass card. It comes with some nice perks, automatic gold status, and you can get diamond status if you spend enough on the card. That gives you access to their lounges, where they have free food and drink throughout the day, which is pretty sweet. I also have a Delta card that gives us a free checked bag. So that’s kind of a quick lowdown on using your card to pay for things you would normally be paying for.

 

Credit Card Sign Up Bonus

Where the bigger benefit comes from is collecting a credit card sign-up bonus for opening a new card.

Does Opening a Credit Card Hurt Your Credit?

Now, some people are a little concerned about what that will do to their credit score. I found that opening a new card might drop my score by five points, some single-digit number, for a brief period. Within a few months, it’s back to where it was even if I do this two or three times a year.

I don’t do it as often now, but I have, over the last five to seven years since I started doing more of this travel hacking, probably opened 20 plus cards. If I find it’s worth the annual fee to keep the card based on the perks, I will. Oftentimes new cards have an annual fee that is waived in the first year, or it might be a no annual fee card. So, I still have about a dozen different cards that I can use. I only keep two or three in my wallet, but the welcome bonuses are where it’s at.

Best Credit Card Offers Now

Now, they’re often worth I would say $500 to $1,000 per card with a minimum spend requirement in the $3,000 to $4,000 range for most, with a few exceptions for some premium cards. When you do the math on that bonus you’re doing really, really well.  For example, right now the Chase Sapphire preferred card has an 80,000-point bonus when you spend $4,000 in three months which is worth $800 in straight cash or it’s worth $1,000 when you use it for travel through the Chase portal. So, you spend $4,000, you get $800 or $1,000 back. Now you’re getting like 30% cashback roughly, compared to the 1% or 2%.

A lot of the airline credit cards will have something similar where you might get 50,000 or 100,000 points. You want to watch for when those welcome bonuses are increased, especially for the airline cards. Delta will occasionally double their bonus offer from 30,000 to 60,000 miles. That can mean instead of getting $300 or $400 in value, now you’re getting maybe $600 or $800 in value for a card that has a $95 annual fee, which may be waived in that first year.

That is the way to go. If you really want to play the game, get two or three cards a year. I recommend if you’re married, don’t do the companion card for your spouse, but actually each get your own card, each put enough on there in the first few months to get that welcome bonus. Because if you don’t, you’re losing out on maybe $500 or more, which is the value of that welcome bonus.

Business Credit Card for Travel Perks

Business credit cards are another option. They tend to have higher minimum spins to get the lucrative welcome bonuses. For example, there’s a couple of Chase Ink business cards, the cash and the unlimited, but they both give you $750 back after you spend $7,500 for the first three months.

There is an Ink Business Preferred and another Chase card. They give you 100,000 ultimate reward points with a $15,000 minimum spend. So again, if you’re not spending $5,000 a month on a credit card, you probably don’t want to take that option, but it is there.

Capital One has their Spark cards. There’s a Spark Mile and a Spark Cash card. A couple of times a year, for a month or two, they have a deal where they’ll give you a total of $2,000 back on the first $50,000 spent if you spend it within six months. So again, if you have a business that has a lot of expenses and you’re spending six figures in a year, with the welcome bonus of $2,000 on the first $50,000 that you spend, plus you’re getting 2% back with those cards. That’s another $1,000. Now you’re at $3,000 back on $50,000 spent in six months. That’s a 6% back. That’s pretty killer.

Using Credit Cards to Automate Your Finances

There are some other benefits of credit cards. Again, if you can afford to always pay your balance in full every month and never incur any interest charges, I think it’s great for automating your finances. I like to automate my investments. I like to automate my payments as well. So, anytime I get a new card, the first thing I do is create that online login, if I haven’t gotten one already with that bank, and set up auto-pay so that the balance will be paid from my checking account automatically every month. I do the same thing with any monthly bills that I have and utility bills, they go to the credit card and they’re automatically paid every month.

So, the only place you have to make sure you have money is your checking account. I tend to keep as much as my highest monthly credit card bill might be in checking. Just to be extra safe, I have overdraft protection set up so that if I were to deplete my checking account, there would be an automatic transfer of cash from my savings account, where I keep my emergency fund and money that I’m saving up for any big purchase.

Other Credit Card Travel Perks

You get some pretty nice travel perks, especially with some of the higher-end cards. Many Chase cards will act as your primary car rental insurance. Most others will give you a secondary insurance when you rent a car. You can get medical evacuation coverage with the premium cards—Chase Sapphire Reserve and American Express Platinum. If you end up having a medical emergency that can’t be taken care of, they’ll pay for a six-figure medivac flight from anywhere in the world. That’s a pretty good feature when you travel as much as we like to do.

Those premium cards also give you access to airport lounges. They are loaded with free food and drinks and a nice place when you have a long layover to spend a few hours. You also get some fraud protection on those credit cards. If someone were to get your number and start charging things to it, the most you will be on the hook for is $50. Although, most cards seem to take care of all of that now.

You also have the ability to dispute charges. If, say, a subscription service kind of hoodwinked you, and automatically renewed something you didn’t want to renew, and you can’t work it out with them, you can dispute the charge on the credit card. If you don’t do this too often, the credit card company will generally side with you.

So, in summary, at the very least make sure you’re getting at least 1.5% to 2% back on your everyday purchases. Always use auto-pay so that you don’t incur any of those high-interest charges and do the same for your bills—automate your life as much as you can. Again, make it easy, keep it simple.

If you’re willing to make it a little more complicated and pick up a new card—maybe a couple of times a year, maybe cancel a card or two, if you don’t think the annual fee is worth the perks the card offers—you can get a lot more bang for your buck by taking advantage of those welcome bonuses to the tune of maybe thousands of dollars a year.

Recommended Reading

Cheap Flights
Credit Cards

 

Reader and Listener Q&As

Index Fund Turnover Rates

“I had a question about index fund turnover rates. My understanding is that funds with higher turnover rates are less tax efficient because the increased turnover shifts taxes from long-term capital gains rates to short-term capital gains rates. At what turnover rate does this become a significant concern? Also do these taxable events even apply if your investments are inside of tax-advantaged retirement accounts? For example, Fidelity small cap index fund has a turnover rate of 32% and their mid cap index fund has a turnover rate of 24%. Would it matter if you only held these funds in a retirement account, or would it make more sense to just invest in their extended market index fund, which covers a similar share of the market, but has a turnover rate of 11%?”

Yes, you are correct in that. Turnover is tax-inefficient in a taxable account. It does create both long- and short-term capital gains depending on how long that mutual fund has held the asset. The more turnover, the higher the tax that is passed on to you will be.

Now in a tax advantaged account, like a retirement account, it’s not going to matter so much. So, if you are going to invest in a tax-inefficient fund and an actively managed fund, the 401(k), 403(b), Roth IRA, etc, is the place to do that.

Now, I like to look at Morningstar. They’ve got great information on mutual funds; even without an account or with a free account you can see a lot of info there. So, I looked up VTSAX, which is the Vanguard total stock market fund. They give a tax cost ratio, which I believe to be basically an estimate of tax drag on your portfolio expressed as a percentage. For VTSAX it’s 0.46% per year. So that’s about right. It’s about a tax drag of a half percent, which is about what I ended up paying on money that I have in my taxable account.

Now Fidelity’s funds aren’t quite as tax efficient as Vanguards. I looked at the Fidelity funds, the total stock market fund FSKAX, according to Morningstar has a turnover of 11% and a 0.78% tax cost ratio. Now they say the small cap turnover is 17%, mid cap is 14% and extended is 15%. So, I don’t know why there’s such a discrepancy between what Morningstar is reporting and what Fidelity is reporting. It could be that it’s an average of several years that Morningstar is looking at and maybe Fidelity is looking at one year in particular. I really don’t know.

So, I guess it depends on where you get your data as to what is best, but Morningstar’s data indicates that the extended market actually has the highest tax cost ratio or tax drag at 1.13% with the mid-caps being 0.76% and the small cap fund FSSNX at 0.86%.

But you’re on the right track. You do want to look at turnover. You do want to look at that tax cost ratio that Morningstar uses that I think looks at more than just turnover. It also looks at length of holding, long-term versus short-term, because the turnover and tax cost ratios are not perfectly correlated. Their methodologies are explained well on the site, if you really want to dig into it.

So, if it’s an index fund, it’s going to be reasonably tax efficient. If it’s an actively managed fund, it won’t be. So, keep that in your tax advantaged accounts.

 

Muni Bond Funds

“My question is about purchasing muni bond funds, specifically to consider adding a muni bond fund to your portfolio. As my wife and I continue to save 20% to 25% of our gross income towards retirement, we will be required to invest in a taxable account to meet that goal. Over the years, I anticipate that a larger and larger percentage of our tax advantaged accounts will be taken up with the non-tax efficient bond fund. As that percentage grows, are we not missing out on the opportunity to have a sizable chunk of assets in the tax advantaged accounts dedicated to stocks which have a greater potential for growth? The question is, then, when is a reasonable time to start putting muni bonds in a taxable account? What percentage of the tax advantage accounts should be dedicated to bonds? Of course, we will be following our predetermined asset allocation.

On a related note, if I do decide to invest in muni bonds, specifically a New York state muni bond fund, if we do relocate to a different state, which is highly likely, would I have to pay taxes on selling a New York state muni bond fund, if the net asset value were to increase over the time I own the fund, or would it just be easier to invest in a non-state specific muni bond fund and call it a day?”

There are a few questions wrapped up in there. One is, are you missing out on owning stocks in your tax-advantaged accounts because you own bonds? We both know the answer is yes. I don’t think that’s problematic. If you are going to match your desired asset allocation across all accounts there, I don’t think there’s anything wrong with having mostly bonds or even entirely bonds in your 401(k) and having mostly, or all, stocks in a taxable account.

However, if you do get to the point where you feel that you would like to have a mix of both, yes, I think muni bonds make good sense in the taxable account.

Now, the state income tax due will be determined by the state you’re living in. In your case, it might make sense to buy a generic fund if you’re not going to be in New York for a long time, or maybe a fund specific to the state that you’ll be moving to, assuming that state does charge an income tax.

 

Taxes on a Side Income

“I had a question regarding taxes for side income. I’m a resident on a W2 salary basis. If I, for example, do a deposition and receive $1,000 from the law firm in compensation for my time, I understand I have to pay federal and state taxes on it, but do I have to pay social security and Medicare taxes on it as well? If so, I would be grateful to know how to do that.”

The answer is yes. If you earn more than $400 on any kind of side gig, you will have to pay taxes as a self-employed individual. Of course, you owe income tax, which should be fairly low with a resident salary, but you’ll also owe the FICA taxes, which are social security and Medicare taxes. You unfortunately will owe both as an employee and as an employer being self-employed. So, it’ll be twice as much as you’re used to seeing as a percentage from your normal paycheck.

How you pay that is on your 1040, it’s calculated on schedule SE. If you were just going to make a little bit of money here and there, you could just pay that at the end of the year. If you’re making tens of thousands of dollars with your side income, then you’ll want to pay quarterly taxes. There are forms to submit those and ways to calculate how much you should pay in each quarter to both the federal government and the state.

 

Role of Bonds in a Modern Portfolio

“My question is regarding the role of bonds in a modern portfolio. Warren Buffet was recently quoted as saying the income from a 10-year US treasury bond fell 94% from a 15.8% yield in September 1981 to 0.93% at the end of 2020. He goes on to say that bonds face a bleak future and advocates against them.

My question is in the modern portfolio, knowing what we know about interest rates and bond yields and the trajectory we’ve seen, is it time to rethink them? Is it time to rethink possibly having a dividend fund instead of bonds? Is it time to think of only keeping bonds in target date funds and avoiding them in a taxable account? I guess I just want to ask if you agree with the Oracle of Omaha and if so, what should we be doing to sort of rethink the role of bonds in a modern portfolio?”

This is a tricky state that we’re in. You have bonds paying very little and people are looking anywhere else for some decent return on fixed income.

One thing to keep in mind is that this current interest rate environment won’t likely be the state of affairs indefinitely, and we should expect at some point to see those interest rates rise. However, the unfortunate thing is that, of course, the bonds that we buy today will actually fall in value when the interest rates rise, assume that will happen at some point.

Personally, I do avoid bonds in taxable. It’s not that problematic now that they’re paying so little, they’re really not that tax-inefficient. However, I do try to stick with the optimal way of owning bonds, which is if I were to buy them in taxable, I would go ahead and use municipal bonds. If I lived in a state with a bond fund specific to my state that I can easily buy, I would probably do that.

Now I mentioned people are looking for alternatives, and the obvious ones are certificates of deposit, CDs. You can buy those at your local bank and credit union, and they might pay a bit more than any bond or bond fund that is yielding right now. There is also the “high yield” saving account, which is not exactly high yield right now, but basically there are a number of reputable online banks paying about half percent right now. Not great at all, but it is there and it is an alternative and it is quite safe.

Now, if you’re willing to take on a little bit more risk, and especially if you’re closer to retirement, you could consider a fixed annuity like a single premium immediate annuity that will pay out a percentage better than bonds are paying. Of course, you won’t get cash back, typically, once the annuity runs out when your life runs out.

Another option if you’re willing to take on more risk is to look at a real estate fund. I’ve invested in a couple of different funds and I know that Dr. Dahle has been doing the same, and he’s talked about some of those here on the podcast. They do pay a steady tax-efficient fixed income, but clearly there’s more risk there. Real estate doesn’t always maintain its value and developers don’t always do what they say they will. You’re going to take more risk if you want to make more money.

Personally, I’ve maintained a 10% stake in my bond allocation. That’s the bond and cash allocation. I’ve had that ever since I decided what my asset allocation was going to be nearly a decade ago. I don’t have any plans to change that, but I do recognize the difficulty of investing in bonds in this current environment.

 

Adding TIPS to Portfolios

“I have two questions related to bonds. The first is about TIPS. I would like to add some TIPS to my retirement portfolio inside tax protected accounts, like my Roth IRA, or 403(b) to add some inflation protection. What is the best way to do this? I don’t think I can buy them direct from Treasury Direct inside the retirement accounts, but there are low-cost TIPS mutual funds available at places like Fidelity and Vanguard. But I’ve read that these don’t provide the same kind of inflation protection as direct TIPS do. Is that correct? How can I add a measure of inflation protection to my tax protected retirement accounts?

The second question is about series I Savings Bonds from Treasury Direct. Their current interest rate is essentially a whole percentage point higher than high interest rates savings accounts like you can find at Ally. This seems like a great place to put some cash that is going to be spent in the next two to three years on a new car or a down payment on a house.

I recognize there’s a limit to how much you can buy per year, but for a married couple you can do $25,000 per year, which is not insignificant. What am I missing here? It seems like a no brainer.”

I can see where you would maybe prefer to buy those TIPS directly as opposed to buying a TIPS fund. However, it is pretty tricky to do within a retirement account, as you mentioned. You would have the option of setting up a self-directed IRA or self-directed 401(k), and then being available when the auction is online, which is not all the time but at certain dates on Treasury Direct.

Then there are fees of course, with setting up the self-directed accounts. And a fee to sell the TIPS directly when it is time to cash in. So, for all of those reasons, I prefer the TIPS fund. It is true that they can be volatile. They are priced on the expectation of future inflation, but I think you get most of the benefits of TIPS from a TIPS fund.

And if you want to learn more on that, our friend Mike Piper at the Oblivious Investor wrote an article “TIPS versus TIPS funds.”

Your second question was about I Bonds. And that is another alternative to a low-paying total bond fund or an alternative to your “high yield” savings. You can buy them from Treasury Direct and, as of mid-April, these I Bonds are paying 1.68%. And again, everyone is looking to eke out a little more from their cash, and you should get what you can.

Now, you do lose three months’ worth of interest if you sell your I Bond before you’ve held it for five years. So, I would plan to hold it for at least 6 to 12 months to take advantage of that interest rate arbitrage, or you won’t really gain anything.

 

Independent Contractor Work

“I have a question about independent contractor work. I’m currently a hospital employed doc and the hospital recently came to me and asked me to oversee some of the hospital PAs. The pay would be a few thousand extra dollars a year. It sounds like the work would just be me being available to the PAs if they have questions about lab work. And it sounds like it’d be really minimal.

At first, I said, ‘Sure, it sounds very simple. Why not for a few thousand extra bucks a year?’ And then I realized that it’s actually independent contractor work and I’m responsible for self-employment tax withholdings, etc. And I’m trying to make sure there’s no negative impact on my finances or taxes of doing this for only a few thousand extra dollars a year.

I use TurboTax to do my taxes, and I would think it would be pretty simple just to enter in some additional independent contractor work. I’m also going for public service loan forgiveness, and I want to make sure it won’t negatively impact me there. Also, would I be able to open up an additional retirement account because it is independent contractor work? Any insight or advice, anything I’m not thinking about that I should be, that you would know, would be greatly appreciated.”

One thing that you didn’t mention that I’m hoping and guessing you have thought about as far as how your finances can be impacted is the liability. Now, it sounds like it might be just being available in case they have questions about labs, but what’s in writing? What is your actual liability? What is your exposure from taking on this responsibility?

In my mind, I would say it may not be worth a few thousand dollars a year, even though it does give you the ability to open up an individual 401(k), it does give you a little more spending money. It shouldn’t impact your ability to qualify for PSLF because you do remain employed by a non-profit.

You do pay a little bit more in taxes. You pay the income tax on that money plus FICA taxes as a self-employed individual. But again, really ask that question—What is your liability? What is your exposure to anything that might go wrong with one of the PA’s patients? That would be by far, in a way, my biggest concern with this potential independent contractor work.

 

Bonds in Taxable

“I’d like your advice on what to do with the windfall we have coming in shortly from the sale of our house. Our target asset allocation is 60/40. And at this point we have used up all of our space within our traditional retirement accounts for our bonds. And we’re not putting bonds into our taxable accounts.

Ideally, this wouldn’t be the case, but that’s where we’re at. I know you’ve suggested looking into muni bond funds as a way of avoiding some of the tax consequences of bonds in a taxable account. I wonder if you have advice on how much of the taxable bond allocations should be muni bond funds versus something like a total bond or total international bond fund.”

Congratulations on selling your home. As far as your question about what percent of your bonds in taxable should be muni bonds, I would go with the traditional answer of a hundred percent, but again, with today’s yields pretty much any bond fund that’s not a junk bond fund is going to be reasonably tax efficient. If interest rates do rise in the future, those munis will hold the larger advantage over a total bond fund. So, plan accordingly there.

Congrats on selling the home and for sticking to your 60/40 plan. If your plan is to stay 60/40, I would stick with muni bonds in taxable.

Recommended Reading

6 Principles of Asset Location

 

457 Non-Governmental Plan and 199A Deductions

“I had a question for you about the financial order of operations. So, assuming that high-income earner is maxing out their 401(k) and their backdoor Roth, what is the next best place to put money? I don’t have an HSA available. I do have a 457 non-governmental plan with low-cost funds available and a reasonable distribution plan, and an employer that I feel pretty confident in.

However, I also have access to a solo 401(k). The challenge is, if I contribute to the solo 401(k), then it reduces the 199A deduction. So, I guess my question for you is, would you favor contributing to a 401(k) that’s all my money or work with the undesirable aspects of a 457 plan in order to maximize the 199A deduction?”

It sounds to me like the 457(b), even though it’s non-governmental, may be a decent option in your case if you have an employer with solid financials that you don’t think is on shaky ground and you think that will remain true for a while. You have good distribution options, which you mentioned. If you’re thinking at all about early retirement, well, then 457 is great because you can start collecting on it at any age, without any penalty as long as you have left your employer.

Now, the solo 401(k). You are correct. When you make tax-deferred contributions to a 401(k), that will reduce your qualified business income deduction, that section 199A deduction. That is assuming you are well within or below the phase-out range. That starts when you jump from that 24% tax bracket to a 32% tax bracket. That happens at an income of, I believe it’s about $326,000 now as a married couple or half of that as an individual filer.

Now it could be, if you have total taxable income that is approaching or exceeding the start of that phase-out range, that 401(k) contributions might be helpful in bringing you back down to a total taxable income beneath the phase-out range. So, it depends on your personal tax situation. It may actually help you get a full QBI deduction by making those 401(k) contributions.

Now, if you are well below that phase-out range with your taxable income, then you might also look into the possibility of Roth solo 401(k) contributions. Now it may require an individual plan, maybe a self-directed plan to do that, but see if that’s an option for you.

There is nothing wrong with a good old taxable account. That’s where the majority of my money is now. I’ve written about how the taxable account can be as good or better than a Roth IRA in some ways. So, people sometimes look for places to put money, and then they turn to things like whole life insurance, which you’ve heard on this podcast is rarely a good idea. And they’re not looking at a good old taxable account.

Just buy some mutual funds and index funds and hold them, and they can be very tax efficient. You’ve got tax loss harvesting ability. You can sell at 0% capital gains when you’re retired, as long as your taxable income remains reasonably low.

Both the White Coat Investor and I have written recently about how you can have six figures to spend and pay no income tax, including no capital gains taxes from selling from taxable.

Recommended Reading

Should I Invest in my 457?

How the 199A Deduction Impacts 401(k) Decisions

 

Sponsor

This podcast is sponsored by Bob Bhayani at drdisabilityquotes.com. He is an independent provider of disability insurance planning solutions to the medical community in every state and a long-time White Coat Investor sponsor. He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. If you need to review your disability insurance coverage or to get this critical insurance in place, contact Bob today at drdisabilityquotes.com, by email [email protected] or by calling (973) 771-9100. 

 

Quote of the Day

Our quote of the day comes from Bill Schultheis, the author of The Coffeehouse Investor. He says,

“Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea.”

That goes back to the whole past performance is not indicative of future results. It is true.

 

Milestones to Millionaire Podcast

#12 – Financially Independent by 31

Sponsored by Doctor Disability

The lower you keep your expenses, the less you need for financial independence, and the quicker you can reach that state. Matt was able to reach financial independence by the age of 31 with a high savings rate and managing his spending well. A classic FIRE guy, this interview will give you tips, motivation, and inspiration to reach financial independence as quickly as possible. A good place to start is the live on half challenge.

 

Full Transcription

Intro:
This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We’ve been helping doctors and other high-income professionals stop doing dumb things with their money since 2011. Here’s your host, Dr. Jim Dahle.
Dr. Leif Dahleen:
Welcome to FIRE week at the White Coat Investor. You were probably expecting the voice of Dr. Dahle, but instead you got the voice of me, Dr. Dahleen. And I apologize for that. This is Leif Dahleen from Physician on FIRE, filling in for the good doctor Dahle, as he floats down the Colorado river through the Grand Canyon for a few weeks.
Dr. Leif Dahleen:

This podcast is sponsored by Bob Bhayani at drdisabilityquotes.com. He is an independent provider of disability insurance planning solutions to the medical community in every state and a long-time White Coat Investor sponsor. He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies.
Dr. Leif Dahleen:
If you need to review your disability insurance coverage or to get this critical insurance in place, contact Bob today at drdisabilityquotes.com by email at [email protected] or by calling (973) 771-9100.
Dr. Leif Dahleen:
Our quote of the day comes from Bill Schultheis, the author of The Coffeehouse Investor. He says, “Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea”. That goes back to the whole past performance is not indicative of future results. And it’s true.
Dr. Leif Dahleen:
So, I want to take a quick minute to thank you for what you do just as Dr. Dahle likes to do. You may be a physician taking care of patients. You might be another health care worker, also taking care of patients, a dentist, taking care of patient’s teeth, and maybe a veterinarian taking care of our furry friends.
Dr. Leif Dahleen:
Even if you don’t work in the medical community in any way, you’re probably maybe a parent to a son or daughter. You are a son or daughter to someone maybe taking care of aging parents. Maybe you’re just a good neighbor, but in some way, shape or form, I’m sure you’re taking care of someone.
Dr. Leif Dahleen:
And during this lengthy pandemic, we’ve all had to take care of one another. We’re coming up on month 15, and I want to thank you for caring for COVID patients. If that’s what you’ve been doing, if you’ve gotten vaccinated, thank you for getting that shot. I’ve personally been giving hundreds of these shots now to grateful recipients up here in Northern Michigan, where we’re living, which is something I plan to keep on doing. So, thank you for whatever part you were doing to help us get past this nasty pandemic.
Dr. Leif Dahleen:
Now, the White Coat Investor has a big announcement coming up this month. So, watch for that, especially if you are someone who loves WCI swag. May 10th, there will be more details on the blog. So, keep a lookout for that.
Dr. Leif Dahleen:
Today’s article is all about how we earn free travel. I love to travel. I love free things. So, combining the two is right at my alley. It’s in my wheelhouse. So, one way I’ve done that is by responding to the overhead call from a nervous flight attendant stating that a passenger needs medical attention. Believe it or not that’s happened now four times in the last five. No, it goes back to my honeymoon. We were on the way to my honeymoon on the way to Alaska and a patient had fainted. I answered two calls right around the first WCI conference. I think one was on the way back and another one later that same week, and then more recently on another flight on Frontier.
Dr. Leif Dahleen:
Now, usually they give some decent perks if you actually answer those calls and provide some medical care. I’ve started two IVs at 36,000 feet, both in sinkable patients who were dehydrated and remaining lightheaded. And I’ve gotten as much as I think the first time this was back in 2006, I was rewarded nicely with a $600 travel voucher for my wife and me.
Dr. Leif Dahleen:
More recently, they’ve gotten a bit stingier. I know the one where I was coming back from the White Coat Investor conference, I believe Delta gave me $150 to spend on free travel and I didn’t fly Delta within the year and it expired. And then Frontier, well, all they gave me was a bottle of water, but hey, it’s something.
Dr. Leif Dahleen:
But actually, we’re not here to talk about that way. That’s the hard way to earn free travel, right? We’re going to talk about the much easier way, and that is by using credit cards to pay for things you’re already buying and using them smartly and intelligently to get the most for your return from money you’re spending.
Dr. Leif Dahleen:
So, you can do this by earning cash back by earning points that can be converted to cash or other things. Or you may just earn miles or hotel points with your credit cards. I want to state upfront that you should not do this if you can’t afford to pay the full balance on your credit card every month. Those interest charges will more than outdo the benefits you can get from earning points by spending on a credit card.
Dr. Leif Dahleen:
So, first and foremost, be responsible with your credit card spending. But my wife and I have used a number of different cards to rack up points, in some cases quite quickly. And that has covered the cost of flights for my family of four to go to Europe, to go to Central America, where we did a medical mission in Honduras. We’ve been to Mexico and back all completely free of charge other than maybe some fees that come with crossing borders. We’ve had dozens of nights of complimentary hotel stays based on our points. And so, if I had paid for all of these flights and airfares, it would have cost us tens of thousands of dollars.
Dr. Leif Dahleen:
There are really two main ways that you can earn these points in miles. One is the regular spending on whatever you’re going to spend money on, whether it’s gas, groceries, your regular bills, et cetera. And the other is through welcome bonuses that you get when you open a new card.
Dr. Leif Dahleen:
There is a third way that some people will talk about in deep in the reddits and that’s manufacturer’s spending. I don’t really talk about that. It’s generally against the rules that are frowned upon and it involves silliness like using credit cards to pay for money orders and buying gift certificates and reselling them. And it’s more effort than I care to put forth.
Dr. Leif Dahleen:
So, we’re going to keep it pretty simple, in the simplest way really to get something back from your credit card spending is just to get cash back. It’s not difficult to find a card with no annual fee that that’ll give you easily 1% and sometimes 1.5% or even 2% back in cash for everything that you spend money on as long as it goes on the card.
Dr. Leif Dahleen:
There are some other cash back cards that will give you additional money back on rotating categories that tend to change each quarter. A good example right now, as I’m getting 5% back on any gasoline purchases with my Chase Freedom card. Other months it would be Walmart groceries, for example. It might be a Costco or different categories.
Dr. Leif Dahleen:
I say 5% back, but actually Chase has a pretty cool system where they give you ultimate reward points, which are basically worth a penny a piece if you trade them in for cash, but if you trade them in for travel, they can be worth more. And if you have the Chase Sapphire reserve card, you get 1,5 pennies per point. So, with a 5% back on gas using the Chase Freedom card, I can use those points with my Chase Sapphire reserve card and actually get 7.5% back when I use it for travel booked through that Chase portal, which is basically Expedia. So that’s a pretty cool way to just kind of get money back with your ongoing spending.
Dr. Leif Dahleen:
Again, going back to simplicity, there’s a double cash card from Citi. You get 1% back on the purchase and 1% back when you pay. Fidelity offers a 2% cashback card that you can just put the money right into a brokerage account or a 529, or maybe even an HSA, they offer a pretty good HSA.
Dr. Leif Dahleen:
Now cash back is simple. Flexible points can give you more value. Chase, I’ve mentioned the ultimate rewards. Citi has their “thank you” points. American Express has membership rewards. All of these can be redeemed for cash. So, there’s that option, but the redemptions are often more lucrative when you transfer those points to different travel partners.
Dr. Leif Dahleen:
For example, Chase has direct relationships with Southwest and United. You can transfer your points directly to them for miles on those airlines. There are dozens of others, including international airlines that are part of alliances with major airlines in the U.S. like Delta and American Airlines for example. You may not be able to transfer your points directly, but you can transfer your Chase ultimate reward points to KLM Air France plan, and then book a Delta flight.
Dr. Leif Dahleen:
So, you can book all kinds of flights with those flexible rewards. You can also use them with hotel chains. Hyatt is a direct transfer partner of the Chase points, and it doesn’t take that many miles to book a nice hotel room with Hyatt. You can also get a card that is directly co-branded by your favorite airline or a hotel chain. So, I’ve got a Hilton surpass card, they call it. It comes with some nice perks, automatic gold status, and you can get diamond status if you’d spend enough on the card. And that gives you access to their lounges, where they have free food and drink throughout the day, which is pretty sweet.
Dr. Leif Dahleen:
I also have a Delta card that gives us a free checked bag. And so, if four of us are traveling on Delta and we check a bag, we’re saving, I don’t know, $150 each way, something like that. So that’s kind of a quick lowdown on using your card to pay for things you would normally be paying for.
Dr. Leif Dahleen:
Where the bigger benefit comes from, and I mentioned this earlier is collecting welcome bonuses for opening a new card. Now, some people are a little concerned about what that will do to their credit score. And I found that opening a new card, it might drop my score by five points, some single digit number for a brief period. And within a few months, it’s back to where it was even if I do this two or three, four times a year.
Dr. Leif Dahleen:
I don’t do it as often now, but I have over the last I would say five to seven years since I started doing more of this travel hacking, probably opened 20 plus cards. And if I find it’s worth the annual fee to keep the card based on the perks, I will. Oftentimes new cards have an annual fee that is waived in the first year, or it might be a no annual fee card. So, I still have about a dozen different cards that I can use. I only keep two or three in my wallet, but the welcome bonuses are where it’s at.
Dr. Leif Dahleen:
Now, they’re often worth I would say $500 to $1,000 per card with a minimum spend requirement in the $3,000 to $4,000 range for most, with a few exceptions for some premium cards. So, when you do the math on that, if you get $1,000 back, which right now the Chase Sapphire preferred card has an 80,000-point bonus. When you spend $4,000 in three months, that’s worth $800 in straight cash. It’s worth $1,000 when you use it for travel through the Chase portal. So, you spend $4,000, you get $800 or a $1,000 back. Now you’re getting like 30% cash back roughly, compared that to the 1% or 2% you’re doing really, really well.
Dr. Leif Dahleen:
A lot of the airline cards will have something similar where you might get 50,000 or 100,000 points. And you kind of want to watch for when those welcome bonuses are increased, especially for the airline cards like Delta will occasionally double their bonus offer from 30,000 to 60,000 miles. And that can mean instead of getting $300 or $400 in value, now you’re getting maybe $600 or $800 in value for a card that has a $95 annual fee, which may be waived in that first year.
Dr. Leif Dahleen:
That is the way to go. If you really want to play the game, get two or three cards a year. I recommend if you’re married, don’t do the companion card for your spouse, but actually each get your own card, each put enough on there in the first few months to get that welcome bonus. Because if you don’t, you’re losing out on maybe $500 or more, which is the value of that welcome bonus.
Dr. Leif Dahleen:
Business credit cards are another option. They tend to have higher minimum spins to get the lucrative welcome bonuses. For example, there’s a couple of Chase Ink business cards, the cash and the unlimited, but they both give you $750 back after you spend $7,500 for the first three months.
Dr. Leif Dahleen:
There is an Ink business preferred. That’s another Chase card. They give you a 100,000 ultimate reward points with a $15,000 minimum spend. So again, if you’re not spending $5,000 a month on a credit card, you probably don’t want to take that option, but it is there.
Dr. Leif Dahleen:
Capital One with their spark cards. There’s a spark mile and a spark cash card. A couple of times a year for a month or two, they have a deal where they’ll give you a total of $2,000 back on the first $50,000 spent if you spend it within six months. So again, if you have a business that has a lot of expenses and you’re spending six figures in a year, well with the welcome bonus of $2,000 on the first $50,000 that you spend, plus you’re getting 2% back with those cards. That’s another $1,000. Now you’re at $3,000 back on $50,000 spent in six months. That’s a 6% back. That’s pretty killer.
Dr. Leif Dahleen:
There are some other benefits of credit cards. Again, if you can afford to always pay your balance in full every month and never incur any interest charges, I think it’s great for automating your finances. I like to automate my investments. I like to automate my payments as well. So, anytime I get a new card, the first thing I do is create that online login, if I haven’t gotten one already with that bank and set up auto-pay so that the balance will be paid from my checking account automatically every month. And I do the same thing with any monthly bills that I have and utility bills, they go to the credit card and they’re automatically paid every month.
Dr. Leif Dahleen:
So, the only place you have to make sure we have money is your checking account. And I tend to keep as much as my highest monthly credit card bill might be in checking. And just to be extra safe, I have overdraft protection set up so that if I were to deplete my checking account, there would be an automatic transfer of cash from my savings account, where I keep my emergency fund and money that I’m saving up for any big purchase. Like a house that we just bought a few weeks ago. So that was exciting.
Dr. Leif Dahleen:
Other perks with credit cards. You get some pretty nice travel perks, especially with some of the higher end cards. Many Chase cards will act as your primary car rental insurance. Most others will give you a secondary insurance when you rent a car. You can get medical evacuation coverage with the premium cards, Chase Sapphire Reserve, and American Express Platinum. And if you end up having a medical emergency that can’t be taken care of, they’ll pay for even a six-figure flight out medivac from anywhere in the world. That’s a pretty good feature when you travel as much as we like to do.
Dr. Leif Dahleen:
Those premium cards also give you access to airport lounges, similar to like the Hilton lounges I was talking about. They’re loaded with free food and drinks and kind of a nice place when you have a long layover to spend a few hours. You also get some fraud protection on those credit cards. If someone were to get your number and start charging things to it, the most will be on the hook for is $50. Although most cards seem to take care of all of that now.
Dr. Leif Dahleen:
You also have the ability to dispute charges. If say a subscription service kind of hoodwinked to you, and automatically renewed something you didn’t want to renew, and you can’t work it out with them, you can dispute the charge on the credit card. And I think if you don’t do this too often, the credit card company will generally side with you.
Dr. Leif Dahleen:
And I’ve had to do that a few times. I don’t like to do it, but hey, if someone is not being fair and charging you charges for something you are not using, you can go ahead and dispute that charge, and there’s a good chance you won’t end up paying.
Dr. Leif Dahleen:
So, in summary at the very least make sure you’re getting at least 1,5% to 2% back on your everyday purchases. Always use auto pay so that you don’t incur any of those high interest charges and do the same for your bills, automate your life as much as you can. Again, make it easy, keep it simple.
Dr. Leif Dahleen:
And if you’re willing to make it a little more complicated and pick up a new card, maybe a couple of times a year, maybe cancel a card or two, if you don’t think the annual fee is worth the perks the card offers, you can get a lot more bang for your buck by taking advantage of those welcome bonuses to the tune of maybe thousands of dollars a year.
Dr. Leif Dahleen:
So, let’s go ahead now and move on to the listener questions. We’ve got quite a few to cover today.
Josh:
Hi, Dr. Dahle. This is Josh from Oklahoma. I had a question about index fund turnover rates. My understanding is that funds with higher turnover rates are less tax efficient because they increase turnover shifts taxes from long-term capital gains rates to short-term capital gains rates.
Josh:
At what turnover rate does this become a significant concern? Also do these taxable events even apply if your investments are inside of tax advantaged retirement accounts? For example, Fidelity small cap index fund has a turnover rate of 32% and their mid cap index fund has a turnover rate of 24%.
Josh:
Would it matter if you only held these funds in a retirement account, or would it make more sense to just invest in their extended market index fund, which covers a similar share of the market, but has a turnover rate of 11%? Thanks for your help and all that you do.

Dr. Leif Dahleen:
So, thanks for the question, Josh. Yes, you are correct in that. Turnover is tax inefficient in a taxable account. It does create both long- and short-term capital gains depending on how long that mutual fund has held the asset. And the more turnover, the higher the tax that is passed on to you will be.
Dr. Leif Dahleen:
I learned this the hard way myself by investing back in 2009, when I was just getting started with a taxable account and some T. Rowe Price funds of funds that were actively managed. And I got the tax bill and realize I was paying thousands of dollars in taxes on a five-figure account, and I didn’t even sell anything myself. It was the funds selling stocks within the funds that created that tax bill from the churn. So, you’re smart to be thinking about this.
Dr. Leif Dahleen:
Now in a tax advantage account, like a retirement account, it’s not going to matter so much. So, if you are going to invest in a tax inefficient fund and an actively managed fund, the 401(k), 403(b), Roth IRA, et cetera, is the place to do that.
Dr. Leif Dahleen:
Now I like to look at Morningstar. They’ve got great information on mutual funds, even without an account or with a free account you can see a lot of info there. So, I looked up VTSAX, which is the Vanguard total stock market fund. And they give a text cost ratio, which I believe to be basically an estimate of tax drag on your portfolio expressed as a percentage. For VTSAX it’s 0.46% per year. So that’s about right. It’s about a tax drag of a half percent, which is about what I ended up paying on money that I have in my taxable account.
Dr. Leif Dahleen:
Now Fidelity’s funds aren’t quite as tax efficient as Vanguards. And that’s because Vanguard has a patented set up where the ETF is a share class with a mutual fund, and they’re able to kind of pass through a lot of those taxes from the mutual fund in a way that they’re not passed on to you. So, their mutual funds are equally tax efficient to the ETFs. And no other brokerage can say that, at least not until the patent runs out. And I believe it’s 2023. It might be 2022.
Dr. Leif Dahleen:
Anyway, I looked at the Fidelity funds, the total stock market fund FSKAX, according to Morningstar has a turnover of 11% and a 0.78% tax cost ratio. Now they say the small cap turnover is 17%, mid cap is 14% and extended is 15%. So, I don’t know why there’s such a discrepancy between what Morningstar is reporting and what Fidelity is reporting. It could be that it’s an average of several years that Morningstar is looking at and maybe Fidelity is looking at one year in particular. I really don’t know.
Dr. Leif Dahleen:
So, I guess it depends on where you get your data as to what is best, but Morningstar’s data indicates that the extended market actually has the highest tax cost ratio or tax drag at 1.13% with the mid-caps being 0.76% and the small cap fund FSSNX at 0.86%.
Dr. Leif Dahleen:
But you’re on the right track. You do want to look at turnover. You do want to look at that tax cost ratio that Morningstar uses that I think looks at more than just turnover. It also looks at length of holding, long-term versus short-term because the turnover and tax cost ratios are not perfectly correlated and their methodologies are explained well on the site, if you really want to dig into it.
Dr. Leif Dahleen:
So, if it’s an index fund, it’s going to be reasonably tax efficient. If it’s an actively managed fund, it won’t be. So, keep that in your tax advantage accounts.
Dr. Leif Dahleen:
All right, let’s move on to the next question from Eric.
Eric:
Hi Jim. This is Eric from New York. My question is about purchasing muni bond funds, specifically at one point to consider adding a muni bond fund to your portfolio. As my wife and I continued to save 20% to 25% of our gross income towards retirement, we will be required to invest in a taxable account to meet that goal.
Eric:
Over the years, I anticipate that a larger and larger percentage of our tax advantaged accounts will be taken up with the non-tax efficient bond fund. As that percentage grows, are we not missing out on the opportunity to have a sizeable chunk of assets in the tax advantaged accounts you dedicated to stocks which have a greater potential for growth?
Eric:
The question is then when is a reasonable time to start putting muni bonds in a taxable account? What percentage of the tax advantage accounts should be dedicated to bonds? Of course, we will be following our predetermined asset allocation.
Eric:
On a related note, if I do decide to invest in muni bonds, specifically a New York state muni bond fund, if we do relocate to a different state, which is highly likely. Would I have to pay taxes on selling in New York state muni bond fund, if the net asset value were to increase over the time I own the fund, or would it just be easier to invest in a non-state specific muni bond fund and call it a day?

Dr. Leif Dahleen:
Thanks, Eric. Yeah, there are a few questions wrapped up in there. One is, are you missing out on owning stocks in your tax advantaged accounts because you own bonds? We both know the answer is yes. I don’t think that’s problematic. If you are going to match your desired asset allocation across all accounts there, I don’t think there’s anything wrong with having mostly bonds or even entirely bonds in your 401(k) and having mostly, or all stocks in a taxable account.
Dr. Leif Dahleen:
However, if you do get to the point where you feel that you would like to have a mix of both then yes, I think muni bonds make good sense in the taxable account. And you’ve heard that here before, I’m sure Dr. Dahle has mentioned that multiple times.
Dr. Leif Dahleen:
Now, the state income tax due will be determined by the state you’re living in. And so, in your case, it might make sense to buy a generic fund if you’re not going to be in New York for a long time, or maybe a fund specific to the state that you’ll be moving to, assuming that state does charge an income tax.
Ben:
Hi there, Dr. Dahle. I had a question regarding taxes for side income. I’m a resident on a W2 salary basis. If I, for example, do a deposition and receive $1,000 from the law firm in compensation for my time, I understand I have to pay federal and state taxes on it, but do I have to pay social security and Medicare taxes on it as well? If so, I would be grateful to know how to do that. Thank you so much for everything you do.

Dr. Leif Dahleen:
Hey, Ben, congrats on the side hustle. I think that’s pretty cool that you’re able to make that happen as a resident. And the answer is yes. If you earn more than $400 on any kind of side gig, you will have to pay taxes as a self-employed individual. Of course, you owe income tax, which should be fairly low with a resident salary, but you’ll also owe the FICA taxes, which are social security and Medicare taxes. And you unfortunately will owe both as an employee and as an employer being self-employed. So, it’ll be twice as much as you’re used to seeing as a percentage from your normal paycheck.
Dr. Leif Dahleen:
How you pay that is on your 1040, it’s calculated on schedule SE. And if you were just going to make a little bit of money here and there, you could just pay that at the end of the year. If you’re making tens of thousands of dollars with your side income, then you’ll want to pay quarterly taxes. And there are forms to submit those and ways to calculate how much you should pay in each quarter to both the federal government and the state.

Robert:
Hey, Dr. Dahle. This is Robert calling from South Carolina. I’m an attorney who has my own practice and my wife is a hospitalist who practices academic medicine. We are avid listeners to your podcast and appreciate all you do.
Robert:
My question is regarding the role of bonds in a modern portfolio. Warren Buffet was recently quoted as saying the income from a 10-year US treasury bond fell 94% from a 15.8% yield in September 1981 to 0.93% at the end of 2020. He goes on to say that bonds face a bleak future and advocates against them.
Robert:
My question is in the modern portfolio, knowing what we know about interest rates and bond yields and the trajectory we’ve seen, is it time to rethink them? Is it time to rethink possibly having a dividend fund instead of bonds? Is it time to think only keeping bonds and target date funds and avoiding them in a taxable account? I guess I just want to ask if you agree with the Oracle of Omaha and if so, what should we be doing to sort of rethink the role of bonds in a modern portfolio? Thank you.
Dr. Leif Dahleen:
Hello, Robert. We are glad that you enjoy the White Coat Investor, and I hope you enjoy listening to me, the Physician on FIRE as well. This is a tricky state that we’re in. It’s tricky place. You’ve got bonds paying very little and people are looking anywhere else for some decent return on fixed income.
Dr. Leif Dahleen:
One thing to keep in mind is that this current interest rate environment won’t likely be the state of affairs indefinitely, and we should expect at some point to see those interest rates rise. However, the unfortunate thing is that, of course, the bonds that we buy today will actually fall in value when the interest rates rise, assume that will happen at some point.
Dr. Leif Dahleen:
Personally, I do avoid bonds in taxable. It’s not that problematic now that they’re paying so little, they’re really not that tax inefficient. However, I do try to stick with the optimal way of owning bonds, which is if I were to buy them in taxable, I would go ahead and use municipal bonds. And if I lived in a state with a bond fund specific to my state that I can easily buy, well, I would probably do that.
Dr. Leif Dahleen:
Now I mentioned people are looking for alternatives and the obvious ones are certificates of deposit, CDs, right? You can buy those at your local bank and credit union, and they might pay a bit more than any bond or bond fund that is yielding right now. The “high yield” saving account, which is not exactly high yield right now, but basically there are a number of reputable online banks paying about half percent right now. Not great at all, but it is there and it is an alternative and it is quite safe.
Dr. Leif Dahleen:
Now, if you’re willing to take on a little bit more risk and especially if you’re closer to retirement, you could consider a fixed annuity like a single premium immediate annuity that will pay out a percentage better than bonds are paying. Of course, you won’t get cash back typically once the annuity runs out when your life runs out.
Dr. Leif Dahleen:
Another option if you’re willing to take on more risk is to look at like a real estate fund. I’ve invested in a couple of different funds and I know that Dr. Dahle has been doing the same, and he’s talked about some of those here on the podcast. They do pay a steady tax efficient fixed income, but clearly there’s more risk there, right? Real estate doesn’t always maintain its value and developers don’t always do what they say they will. And so, you’re going to take more risk if you want to make more money. And that’s kind of where we’re at.
Dr. Leif Dahleen:
Personally, I’ve maintained a 10% stake in my bond. That’s the bond and cash allocation. I’ve had that early ever since I decided what my asset allocation was going to be nearly a decade ago. I don’t make any plans to change that, but I do recognize the difficulty of investing in bonds in this current environment.
Noah:
Hi, Dr. Dahle. This is Noah from the East coast. Thanks for all the great content and helping me improve my family’s finances. I have two questions related to bonds. The first is about TIPS. I would like to add some TIPS to my retirement portfolio inside tax protected accounts, like my Roth IRA, or 403(b) to add some inflation protection.
Noah:
What is the best way to do this? I don’t think I can buy them direct from treasury direct inside the retirement accounts, but there are low-cost TIPS mutual funds available at places like Fidelity and Vanguard. But I’ve read that these don’t provide the same kind of inflation protection as direct TIPS do. Is that correct? How can I add a measure inflation protection to my tax protected retirement accounts?
Noah:
The second question is about series I savings bonds from treasury direct. Their current interest rate is essentially a whole percentage point higher than high interest rates savings accounts like you can find at Ally. This seems like a great place to put some cash that is going to be spent in the next two to three years on a new car or a down payment on a house.
Noah:
I recognize there’s a limit to how much you can buy per year, but for a married couple you can do $25,000 per year, which is not insignificant. What am I missing here? It seems like a no brainer. Thanks again for your help.

Dr. Leif Dahleen:
Those are good questions, Noah. And I can see where you would maybe prefer to buy those TIPS directly as opposed to buying a TIPS fund. However, it is pretty tricky to do within a retirement account as you mentioned. You would have the option of setting up a self-directed IRA or self-directed 401(k), and then being available when the auction is online which is not all the time, but at certain dates on treasury direct.
Dr. Leif Dahleen:
And then there are fees of course, with setting up the self-directed accounts. And then you’ve got a fee to sell the TIPS directly when it is time to cash in. So, for all of those reasons, I prefer the TIPS fund. It is true that they can be volatile. They are priced on the expectation of future inflation, but I think you get most of the benefits of TIPS from a TIPS fund.
Dr. Leif Dahleen:
And if you want to learn more on that, our friend Mike Piper, who was a speaker at the White Coat Investor conference, along with me and the good Dr. Dahle, he’s got a post on it at the Oblivious Investor. And we can link to that in the show notes. But if you Google “TIPS versus TIPS funds”, you’ll probably find it.
Dr. Leif Dahleen:
Your second question was about I bonds. And that is a great response to Robert as another alternative to a low paying total bond fund or an alternative to your “high yield” savings. I looked here and as of mid-April, these I bonds are paying 1.68%. You can buy them from treasury direct. And again, everybody’s looking to eke out a little more from their cash and you should get what you can.
Dr. Leif Dahleen:
Now, you do lose three months’ worth of interest if you sell your I bond before you’ve held it for five years. So, I would plan to hold for at least 6 to 12 months to take advantage of that interest rate arbitrage, or you won’t really gain anything.
Joe:
Hey, Dr. Dahle. This is Joe with a question about independent contractor work. I’m currently a hospital employed doc and the hospital recently came to me and asked me to oversee some of the hospital PAs. The pay would be a few thousand extra dollars a year. It sounds like the work would just be me being available to the PAs if they have questions about lab work. And it sounds like it’d be really minimal.

Joe:
At first, I said, “Sure, it sounds very simple. Why not for a few thousand extra bucks a year?” And then I realized that it’s actually independent contractor work and I’m responsible for self-employment tax withholdings, et cetera. And I’m trying to make sure there’s no negative impact on my finances or taxes of doing this for only a few thousand extra dollars a year.
Joe:
I use TurboTax to do my taxes, and I would think it would be pretty simple just to enter in some additional independent contractor work. I’m also going for public service loan forgiveness, and I want to make sure it won’t negatively impact me there. Also, would I be able to open up an additional retirement account because it’s independent contractor work? Any insight advice, anything I’m not thinking about that I should be, that you would know that would be greatly appreciated. And thanks for all that you do.

Dr. Leif Dahleen:
Hey, Joe, thanks for the question. Yeah, one thing that you didn’t mention that I’m hoping and guessing you have thought about as far as how your finances can be impacted is the liability. Now, it sounds like it might be just being available in case they have questions about labs, but what’s in writing? What is your actual liability? What is your exposure from taking on this responsibility?
Dr. Leif Dahleen:
In my mind, I would say it may not be worth a few thousand dollars a year, even though it does give you the ability to open up a solo 401(k), an individual 401(k), it does give you a little more spending money. It shouldn’t impact your ability to qualify for PSLF because you do remain employed by a non-profit.
Dr. Leif Dahleen:
And again, the taxes. Well, yeah, you do pay a little bit more. You pay the income tax on that money plus FICA taxes as a self-employed individual. But again, really ask that question – What is your liability? What is your exposure to anything that might go wrong with one of the PA’s patients? That would be by far, in a way, my biggest concern with this potential independent contract work.
Megan:
I’d like your advice on what to do with the windfall we have coming in shortly from the sale of our house. Our target asset allocation is 60/40. And at this point we have used up all of our space within our traditional retirement accounts for our bonds. And we’re not putting bonds into our taxable accounts.
Megan:
Ideally, this wouldn’t be the case, but that’s where we’re at. I know you’ve suggested looking into muni bond funds as a way of avoiding some of the tax consequences of bonds in a taxable account. And I wonder if you have advice on how much of the taxable bond allocations should be muni bond funds versus something like a total bond or total international bond fund. Thanks for your help.

Dr. Leif Dahleen:
Hello, Megan. Congratulations on selling your home. I hope to sell two of them this month and it is a sellers’ market. So, I think it’ll happen. As far as your question about what percent of your bonds and taxable should be muni bonds, I would go with kind of the traditional answer of a hundred percent, but again, with today’s yields pretty much any bond fund that’s not a junk bond fund is going to be reasonably tax efficient. If interest rates do rise in the future, those immunities will hold the larger advantage over a total bond fund. So, plan accordingly there.
Dr. Leif Dahleen:
Lots of questions about bonds today, which people weren’t talking about them much, but again, congrats on selling the home and for sticking to your 60/40 plan. You may look to some alternatives for bonds, like other folks like Robert today is doing, but if your plan is to stay stick 60/40, I would stick with muni bonds in taxable.
Joel:
Hey Jim, this is Joel from the Upper Midwest. I had a question for you about kind of the financial order of operations. So, assuming that high-income earner is maxing out their 401(k), their backdoor Roth coming into question of what the next best place to put money would be. I don’t have an HSA available. I do have a 457 non-governmental plan with low-cost funds available and a reasonable distribution plan, and an employer that I feel pretty confident in.
Joel:
However, I also have access to a solo 401(k). It challenges that if I contribute to the solo 401(k), then it reduces the 199A deduction. So, I guess my question for you is, would you favor contributing to a 401(k) that’s all my money or work with the undesirable aspects of a 457 plan in order to maximize the 199A deduction? Thanks.
Dr. Leif Dahleen:
Well, hello, Joel, from the Upper Midwest. This is Leif from the Upper Midwest. I know this isn’t Dr. Dahle and that’s who you were hoping would answer the question, but I’ll do my best. And I’ll start by congratulating you on maxing out that 401(k) and doing your annual backdoor Roth.
Dr. Leif Dahleen:
It sounds to me like the 457(b), even though it’s non-governmental, it may be a decent option in your case if you’ve got an employer with solid financials that you don’t think is on shaky ground and you think that will remain true for a while. And you have good distribution options, which you mentioned. And if you’re thinking at all about early retirement, well, then 457 is great because you can start collecting on it at any age, without any penalty as long as you have left your employer.
Dr. Leif Dahleen:
Now, the solo 401(k). You are correct. When you make tax deferred contributions to a 401(k) that will reduce your qualified business income deduction, that section 199A deduction. And that’s assuming you are well within or below the phase out range. That starts when you jumped from that 24% tax bracket to a 32% tax bracket. And that happens at an income of, I believe it’s about $326,000 now as a married couple or half of that as an individual filer.
Dr. Leif Dahleen:
Now it could be, if you have total taxable income that is approaching or exceeding the start of that phase out range, that 401(k) contributions might be helpful in bringing you back down to a total taxable income beneath the phase out range. So, it depends on your personal tax situation. It may actually help you get a full QBI deduction by making those 401(k) contributions.
Dr. Leif Dahleen:
Now, if you are well below that phase out range with your taxable income, then you might also look into the possibility of Roth solo 401(k) contributions. Now it may require an individual plan, maybe a self-directed plan to do that, but see if that’s an option for you.
Dr. Leif Dahleen:
And there’s nothing wrong with a good old taxable account. That’s where the majority of my money is now. I’ve written about how the taxable account can be as good or better than a Roth IRA in some ways. So, people sometimes look for places to put money, and then they turn to things like whole life insurance, which you’ve heard on this podcast is rarely a good idea. And they’re not looking at a good old taxable account.
Dr. Leif Dahleen:
Just buy some mutual funds and index funds and hold them and they can be very tax efficient. You’ve got tax loss harvesting ability. You can sell at 0% capital gains when you’re retired, as long as your taxable income remains reasonably low.
Dr. Leif Dahleen:
And both the White Coat Investor and I have written recently about how you can have six figures to spend and pay no income tax, including no capital gains taxes from selling from taxable. So that’s a good question. And I wish you luck.
Dr. Leif Dahleen:
This podcast was sponsored by Bob Bhayani at drdisabilityquotes.com. He has been a long-time sponsor of the White Coat Investor. One listener sent in this review, “Bob and his team were organized, patient unerringly professional and honest. I was completely disowned by his time and care. I am indebted to Bob’s advocacy on my behalf and on behalf of other physicians and to you for recommending him”.
Dr. Leif Dahleen:
Contact Bob at drdisabilityquotes.com today by email [email protected] or by calling (973) 771-9100 to get disability insurance in place today.
Dr. Leif Dahleen:
Remember to watch the blog on May 10th for another big announcement, if you’re someone who’s into WCI swag. And if you would, please take just a minute to leave the White Coat Investor a five-star review and tell your friends about the podcast. And while you’re at it, tell them about this Physician on FIRE guy. You can find me at pofire.com. I’m on Twitter and Facebook and all those places.
Dr. Leif Dahleen:
So, head up, shoulders back, you’ve got this and we can help.

Disclaimer:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney or financial advisor. So, this podcast is for your entertainment and information only and should not be considered official personalized financial advice.

 

The post Credit Card Travel Hacking with Physician on Fire – Podcast #209 appeared first on The White Coat Investor – Investing & Personal Finance for Doctors.

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