Bonnie Koo
This is a guest post written by XRAYVSN, a practicing radiologist located in the southeast working for a large multispecialty outpatient clinic.
Ever experience a divorce or are in the process of one? You'll appreciate this post. Although physicians, fortunately, have a lower percentage of divorce than the general public, the stakes are much higher when one does occur.
The main reason is that opposing counsel often views a physician as having deep pockets with great earning potential. In fact, I would propose that even your own legal team will take advantage of your profession by charging you the maximum they can for every billable hour they can think of. I have heard of divorces in the general public that were settled for less than $500 in legal costs. That amount would be blown through with just a mere two hours of my lawyer’s time.
The Storm Is Best Endured With Your Eyes Open
If a physician’s spouse happens to be vindictive and finds the right unscrupulous lawyer, you have the makings for a perfect storm. I, unfortunately, had to endure one of the storms of the century.
No story can be fully appreciated with a little background, so I think this would be a good place to start. I am of Indian descent. Although I came to the United States when I was less than a year old, I was still immersed in the culture associated with the “old country.” My father, a physician himself, underwent an arranged marriage to my mother. In cultures that employ an arranged marriage system, it is predominantly a family decision and the betrothed have little say.
The marriage was treated almost like a business transaction and the main purpose was to solidify the two families involved. A dowry was given to the groom as a token of appreciation and the size of this dowry reflected the stature of the groom in question. My father received a small house as his dowry payment to my mother given his high standing in society as a physician. In this case, my father and mother seemed to be happily married for almost 20 years before he passed away at the age of 50 to pancreatic cancer (I was 14).
That left the rest of my childhood and young adulthood to be raised by my mother. My mother made it known very early on that she preferred for me to settle down with a “nice Indian girl.” Although I predominantly dated in college/medical school outside of my race, I never was opposed to this and thought if it worked out it would be acceptable.
Entering my final year of radiology residency is when I first noticed the pressure from my mother build up. Looking back I know she was afraid that I would start making the “big bucks” as an attending and fall into that presumed lifestyle. She believed that the likelihood of me marrying an Indian girl would, therefore, drop precipitously. She started a global search using her connections from Canada, the United States, England, India, etc. Eventually what everyone deemed a suitable girl was found.
My Match And My Future Wife
She had just finished medical school in England and her parents were looking for her to get married as well. Till this day I feel the only reason we were matched was that we were “both doctors.” Part of the arranged marriage custom was the family of the potential bride would send her birth horoscope to the family of the potential groom. This horoscope is not at all like the ones you find in the daily newspaper. It is supposedly a very detailed account created for each child the moment they are born, chronicling the stars and planet alignments, etc. An arranged marriage would only go through if the horoscopes between the two parties “matched.”
One thing that was unusual in this case was that the girl’s parents in England insisted that instead of them sending over the horoscope for us to match, that my mom would send my horoscope to them to match. A bit atypical, but we complied. Well according to the folks in England, we had a high match and were suitable to get married.
We then began communicating for a few months primarily by phone and email. The next step was her mother and her visiting the United States where we would be introduced at my home since I was currently in a radiology residency. It was supposed to be a simple meeting with no commitments but it was anything but. The pressure from both sides was intense as my family also descended into my home for the occasion.
The Divorce
Before I knew it I had agreed to be “registered” to her which was essentially a formal agreement of getting married and within two months of meeting her, we were indeed married. I have written extensively on my blog about how marriage was absolutely one of the worst things I have ever had to endure. Suffice it to say that I quickly realized that I had made a horrible mistake.
The reason I waited so long to file for divorce, which I eventually did after being married 7 years, was because of my daughter. However, after seeing how miserable I was becoming and after a friend told me that I was doing more harm to my daughter by staying in an unloving marriage than divorcing, I decided to take the plunge. It was then I seemed to have awakened a vindictive beast in my wife. She then hired an unscrupulous, small-town lawyer who encouraged my wife to create as much destruction and turmoil as possible.
Between the two of them, I was always on the defense, defending my name and reputation against the wild and unfounded accusations. This bled over into multiple court jurisdictions including chancery court, juvenile court, civil court, and even federal court. I lost track of the number of full-day hearings I had to sit through. All the while the meter was running full tilt from my legal team as well as hers.
The divorce took 13 months to finalize and just a couple of months shy of my birthday. I lost track of the number of full-day hearings I had to sit through. It was the lowest point emotionally and financially in my life as any savings I had were wiped out to feed the ongoing legal costs. Some of the accusations I had to defend made me sick to my stomach. Knowing I was completely innocent but still feeling like everyone viewed me as a monster in the courtroom because of the lies the opposition put out there was difficult to sit through. It was only years later that my wife’s mental state deteriorated to the point where it was noticeable to the casual observer and she was appropriately diagnosed. But by then the damage had already been done.
A Divorce Is a Costly Ordeal – Mine Was $4M
I estimated that I had to spend over $300k of legal costs just for my defense. The judge also made me contribute $100k to my ex’s legal fees. I wish I could say that I was free and clear of my ex-wife the day the judge signed the divorce decree but alas this was not the case. My ex-wife and her lawyer still wanted more money and their greed caused them to file a $4 million dollar civil lawsuit and requested a jury trial. I wrote about that ordeal in detail here.
The result of this fiasco of an arranged marriage was irreparable damage in the relationship between my mother and me. I have never forgiven her for putting me through this and felt I was an innocent victim who only got into this situation in the first place by trying to appease my mother and not putting me first. To this day my mother still has not taken full responsibility in her part of this. She tries to make excuses and still has faith in the horoscope matching system, going as far as to say that the people in England must have made up the fact that the horoscopes matched and that is why they did not want to send the paperwork to us in the more traditional way.
It took me a long time to recover from the divorce and subsequent lawsuit, both emotionally and financially. I didn't even want to date for two years after my divorce because of the huge mistrust I felt. I am happy to say that these scars, while still present, have been buried deep down with subsequent great experiences. I have been in a long term committed relationship with a woman whom I very much love (and yes she is outside of my race).
Although it took a little longer, I was also able to recover financially. At the age of 47 many would consider me to be financially independent. I still work, however, as I am very conservative and would like to have a larger buffer in my nest egg before I consider retirement. The one thing that I discovered was that I had a lot of support from friends and co-workers during my ordeal and I leaned on them heavily to get me through the process.
Want to Share Your Story of Divorce?
Years later, when I started my blog and included the details of my divorce, I received a second outpouring of love and support which was very much appreciated. I thought it was so helpful in the healing process that I opened up my platform to others to share their stories of divorce (my Divorce and FIRE series) which would not only help them heal but also give others hope. I am always looking for my volunteers to share my story and if any are indeed interested, the details can be found here.
Many thanks to XRAYVSN for sharing with our community. If you'd like to connect with him on social media, you can on Facebook and Twitter.
Editor's note: This is a guest post from a fellow Wealthy Mom MD, Dr. Saya Nagori. She is an ophthalmologist and the CMO/Co-Founder of the telemedicine companies SimpleContacts & SimpleHealth. She enjoys teaching women physicians about the power of choice when it comes to choosing how to practice medicine in the modern world. Both of her companies resemble her tenacity in sharing knowledge about healthcare and also taking care of the needs of women in general. Enjoy!
I love talking to female doctors about telemedicine. I love talking to anyone really about telemedicine, but especially women physicians. We have different needs and face challenges that sometimes men do not. I gave a talk at the Women in Ophthalmology National Conference last year about how telemedicine for women specifically is so powerful. I want to share a few highlights that I'm sure you'll benefit learning about.
1) Telemedicine Gives You Freedom
There are so many ways to practice telemedicine. Physicians do not necessarily need to practice it 100% of the time. You can work as a 1099 contractor for an outside company and use it to supplement your income outside your “day job.” You can obtain multiple licenses and start to practice telemedicine with limited services across the country. Or the most practical and lucrative way is to practice telemedicine on your own, and use it as an extension of your already existing practice. Imagine not having to take the day off of work when school is canceled because of a snow day. Think about the freedom you would have to continue to practice medicine virtually months after your scheduled maternity leave has ended, so you can spend more time with your new baby. What about being able to work from literally anywhere to give you the freedom to travel with your family or spend time with loved ones, and not have to sacrifice income doing it? Freedom is a great reason to practice telemedicine, isn't it?
2) You’re Probably Already Doing It
When doctors tell me they are wary of telemedicine, I remind them that when we take call or cover another physician’s patients, it is, in fact, telemedicine. Now, however, we have video in many cases so the visit can be more thorough and more accurate. The reality is, physicians are already taking patient phone calls and discussing patient problems over the phone. There are now codes in existence that allow for the billing of telemedicine. It does not have to be 100% of your practice, but perhaps changing one or two days a week from in person to telemedicine, would be very easy to integrate into your career.
3) Improved Quality of Life and Less Physician Burnout
There are so many factors surrounding telemedicine that contribute to an improved quality of life and, thus, will help in decreasing physician burnout. In addition to more freedom, you will also have more time. Think about the couple, or in some cases, several, extra hours in your day that you will have (if you don’t have to spend that time commuting to work). A female physician friend of mine used to have to strap on her breast pump during her commute (it was just over 1 hour each way) because she literally just could not find any other time to do it. She actually got pulled over by a cop once during this time, and it was quite an ordeal, to say the least. In addition to a stressful commute, the hospital and a busy clinic can be a tense environment to be in all day. Even if you are not directly engaging with all the noise in the background, it has an impact on you. The peace and quiet of your home or an environment that you can control can greatly help in sustaining your love of medicine for many years. If you could have all the positives and none of the negatives of being a physician, you may never burnout!
4) Growth Is Inevitable
Data shows that millennials (the population that we will be treating as they age for the next 40 years) want telehealth options. In fact, if their issue could be resolved with a telemedicine visit, they would actually prefer it. I think that as time progresses, and reimbursement becomes more widespread, physicians will prefer it as well. With technology improving, and more states adopting pro-telemedicine legislation, the time is ripe to get started in telemedicine. Set yourself up now so you are ahead of the game, and start enjoying the freedom of telemedicine. I agree with Bonnie when she says that “wealthy” is a state of mind. For me, practicing telemedicine has reduced my stress level and has been rewarding for me leaps and bounds beyond the paycheck I get from it. I saw myself on the path to burning out before I started practicing telemedicine, and now my quality of life has improved drastically. Not having to commute, making a healthy lunch every day, squeezing in a workout when a patient cancels, and being an overall happier person for my husband has added so much wealth to my Wealthy MD life. Now I just need to get the Mom part figured out. 🙂 Editor's note: Wow – great insight from one of the better-known women in telemedicine, don't you think? What's stopping you from following a similar path? I bet it's something like – “this sounds awesome, but how do I even get started?” Well, we got you :). Dr. Nagori has created a course for physicians on how to get started in telemedicine. Not only will she walk you through all the steps — you'll also get support from her through a private Facebook group. “How to Get Started in Telemedicine: Masterclass for US Physicians” is the only comprehensive introductory course on telemedicine and health technology in the United States. Join physicians from all over the country who are learning how to incorporate telemedicine into their practice. In addition to the basics, the course teaches the different types of telemedicine you can use in your practice, it teaches navigating reimbursement for telemedicine, it helps you to understand the regulatory environment in digital app development, and it helps you to understand the legality of telemedicine in different states. Upon completion, you will have the knowledge and framework to get started in telemedicine right away. Use code: WEALTHYMOMMD for $50 off the course! If you've taken the course, we'd love to hear your thoughts!
Here are the 5 things every stay at home spouse needs to do to protect themselves financially:
1. Save for Retirement
Most retirement accounts are tied to a job. The only tax-advantaged retirement account available to stay at home spouses is the spousal Roth IRA. This is simply the stay at home spouse opening up a Roth IRA without needing to prove earned income. For this to work, the working spouse needs to have enough income to fund both Roth IRAs. Of course, many stay at home spouses often have part-time jobs or a side hustles. This opens up other opportunities for them. Whether they make a significant income from it or not, this will give them the ability to open and fund a solo 401(k).
2. Get Life Insurance
You may have read that life insurance is only necessary for income replacement. Therefore, conventional wisdom sometimes states that someone who does not bring in an income does not need life insurance. This could not be farther from the truth for a stay at home spouse. The stay at home spouse may not get a paycheck to stay home, but they are performing a job. In fact, they are performing many jobs. Consider this: In the event of their death, the working spouse, now widowed, will need to pay for high-quality childcare, maintain the household responsibilities, and perform the additional mental load of maintaining all logistics. And let’s be honest. I doubt the working spouse will want to return to work immediately after a tragedy. The surviving family may also require support in the form of therapy as well. Obviously, when you consider this perspective, life insurance is a no brainer. The stay at home spouse needs enough term life insurance to cover the cost of the above situation. Additionally, life insurance can also give the surviving spouse more choice. For instance, the spouse who worked full time outside the home might want the ability to go part-time since now there is one less spouse to help with the family. A.L, a physician and mother, said:
My late husband got term life insurance early as a resident. We got an amount that was supposed to get me through the rest of med school and residency. Now, it will be college funds for my 3 kids. I feel SO lucky we had it in place when he was diagnosed (and ultimately passed) with his brain tumor.
3. Get It In Writing
The biggest financial risk of being a stay at home parent is divorce. As a result, the decision to have one partner become a stay at home parent must be a mutual decision. Often, couples are already married when they come to this decision. It is important for the stay at home spouse to have protection against divorce. Being out of the workforce for years poses a real financial risk. For some fields, leaving is career suicide. He or she is sacrificing peak earnings potential and forgoing career advancement. They are also giving up building up Social Security savings and retirement contributions. A postnuptial agreement is a must for couples who choose to have a stay at home spouse to protect that spouse. And yes, that will probably mean an alimony provision. To better understand what exactly a working partner is sacrificing by staying home, the Center for American Progress put together this calculator that can help these conversations focus on numbers, rather than emotions.
4. Understand Disability Insurance
Most people have disability insurance tied to their employer. Additionally, most doctors should have private own occupation disability insurance. Stay at home spouses cannot purchase disability insurance unless they have earned income such as a home business. (Note: A quick google search finds one company offering such a policy, but it seems rare otherwise). But, if they had a private policy before staying at home, they can keep it. Also, once a spouse is out of the workforce for 10 years, he or she may not be eligible for Social Security disability insurance. This is another reason why a postnuptial agreement is a must for stay at home spouses.
5. Hone Skills & Consider Part-Time Work
Another important thing to remember with the finances of stay at home spouses is that the situation can change over time. As the kids get older and spend more time in school and activities, the stay at home parent will have more time to pursue outside interests. Those interests might be a hobby, a part-time job, or a side hustle. This is a great way for the stay at home parent to flex their brain in new ways and maybe even bring home some income. Remember if your stay at home partner does decide to monetize their side hustle, they have the option of opening that solo 401(k).
Final Thoughts on Finances of Stay at Home Spouses
We often talk about financial protection in terms of paychecks. But what do you do when your job doesn't come with a paycheck? Stay at home spouses perform vital roles for their families, which is why it is so important to give special consideration to their finances. Making these five considerations will keep your stay at home spouse protected financially. Do you have tips to share about stay at home spouses?
Welcome to another installment of Interviews with Real Female Physicians. The goal of this series is to share their story so that you, the reader, may learn and be inspired from their experiences – good and bad. We all come from different backgrounds and have different situations. Some of you are married, some are not, some with kids, some with blended families. Let’s show other women that any of these can work financially!
So let's introduce our next woman physician rockstar – Jen!!
Tell us about yourself:
I’m Jen, a 31-year-old hospitalist in Tampa, FL. I’m married without kids. I have 2 corgis. I’m an avid reader and baker and a wannabe plant lady. I love internal medicine, it was definitely the right choice for me. When going through my third-year clinical rotations I started with internal medicine and loved it. After that, no other rotation compared so choosing a specialty was easy for me. For current medical students, my advice would be to listen to your gut and try to be aware of how you feel as you are rotating through the different specialties. Are you excited to go into work or are you counting the days until the rotation is over?
Are you a resident or attending?
I am an attending in my fourth year out of residency.
Did you graduate with student loans? How much & what are the interest rates?
Like many of us I paid very little attention to my student loans at the time I was taking them out. So, I actually don’t know the initial amount I borrowed. When I graduated residency the balance was at $180,000. I went to state schools for both undergrad and medical school. I had a full-tuition scholarship for undergrad plus some need-based grants. I had $5,800 in loans when I graduated from room and board costs. In medical school, I received some scholarship money (totaling about 30K) and the rest I paid for with loans. My interest rates ranged from 6-8.5%.
How fast (or not) are you paying them off?
When I graduated from medical school, I still didn’t pay much attention to my loans. Throughout my 3 year residency, I made the minimum income-based monthly payments (~$550/month) which didn’t even cover the interest that was accruing. During my first year as an attending, I continued to make minimum monthly payments and used my new salary to take a vacation every month for that first year.
During my second year as an attending is when I started to become more financially aware, mainly through blogs like this one, and realized I needed to get serious about paying off this debt. I started to make payments of $3,000 per month while I was figuring out my overall financial plan. In January 2018, I refinanced with SoFi. I had $119,000 left to pay off when I refinanced. This year I’ve averaged $8,000 per month in student loan payments and I currently have $49,000 left to pay off.
Looking for advice on what to do with your student loans? Talk to Travis Hornsby @ Student Loan Planner. 
Financial aspects of marriage
Are you married?
I am married. My husband works in higher education as an associate director of student advising at a local university.
Did you get a pre-nuptial or post-nuptial agreement?
We did not have a pre-nuptial or post-nuptial. We got married during medical school so neither of us had any assets to be concerned about at the time we were married.
Do you and your husband agree on finances?
We differ somewhat in our approach to finances. My husband is much more conservative and likes to plan for worst-case scenario, such as keeping a larger amount of cash savings as an emergency fund. I prefer to have a 3-month emergency fund, he prefers to have closer to 6 months. I am also more of a spender. What has worked for us is keeping our finances and accounts separate. We began doing this when we lived together before getting married. We divide the joint household expenses and each pay for our assigned expenses from our individual bank accounts. I pay the rent and utilities, he pays the cars and insurance. We each pay our own student loans. Whatever is left over after the necessary expenses are paid we are free to spend however we want.
Are you the breadwinner?
I am the breadwinner. My salary is about four times what my husband makes. I have not found that it affects our relationship. I think having separate finances and a system for each contributing to the joint expenses has mitigated any negative effects.
Have you experienced a financial catastrophe?
No, thankfully.
General Finances
What’s your FI (financial independence) number?
Our number is 3 million. We used 25x annual expenses plus some additional to account for increased health care costs and assisting our parents as they age.
Who handles the finances in your relationship? Are you DIY or do you have a financial advisor?
I handle the majority of the finances. I use a financial advisor only for my retirement accounts. She is affiliated with our university. Our pay structure and retirement options are complicated so it helps to have an advisor who knows the nuances of our system.
How are you saving for FI/retirement?
I have a 403b and 457b through my university which I am currently contributing minimally to, just $100 to each biweekly while I pay off my student loans. I also have a State University System of Florida ORP to which I contribute a mandatory 3% and my employer contributes 5%. I also have a 403b pension plan which my employer contributes 7.42% to. There is no option for employee contribution. This year I also started using the Roth IRA and put in the full $5,500.
Biggest budget failure/regret:
Not understanding my student loans sooner. I wish I had paid more during residency and had refinanced sooner.
Do you have insurance?
I have a small life insurance policy of $550,000 that my university covers the premiums for. My husband and I do not plan to have kids and we both work so I do not plan to get a larger policy. I also have disability insurance through my university which would pay 80% of my salary if I became disabled. I have an umbrella policy as well.
Do you give to charity? If so, where and why?
I give to Planned Parenthood $25 per month plus an additional $1,000-2,000 per year for special events or campaigns. I give $25 per month to JDRF, Humane Society of Tampa Bay, and Emily’s List as well. I give to various other causes throughout the year as well, whether for the university–a student-run free clinic or for disaster relief after last year’s hurricanes.
Tell readers a fun/random fact about you:
I refuse to eat anything pumpkin flavored because in kindergarten we made pumpkin bread and I ate the whole thing and threw up on the bus ride home. I was scarred for life.
Where can people connect with you?
I’m on Twitter and Instagram @jennifermcaputo or email jennifermcaputo at gmail.
And … that's a wrap! If you're interested in doing an interview, I'd love to hear from you!
I loved reading Jen's story and her no-nonsense approach to finances. I hope you did too!
Physician moms are often the higher earner in their relationships. As the breadwinner, it can sometimes be a challenge managing our money with our partner without feeding resentment. How does a breadwinning woman bring home the bacon and have a thriving family and personal life? How does she strike this balance when she makes more? Is that even possible?
“Female breadwinners are on the rise, society still expects men to take the financial lead as breadwinners in their households.”
Agree? Thankfully, Farnoosh Torabi was brave enough to start tackling this subject that needs to be talked about in her book When She Makes More. Women are now making lots of money, but traditional gender roles still permeate our culture. I am a firm believer in looking at all the money as our money vs. mine and yours. However, it’s clear that when one person contributes more than the other, this money disparity often brews resentment. When Matt and I first started merging our finances, we started working with a flat fee financial advisor. This is a great use of a financial advisor, who serves as a third party money expert. The advisor can help iron out any differences and make suggestions that the other party won’t take personally.
About the Author
Farnoosh is a leading expert on finance with roots in journalism. After her first book release in 2008, she also found herself coaching Americans through money issues on shows like REAL SIMPLE, REAL LIFE. As she created more career wins for herself, she also grew her family. By the time Farnoosh was in her 30s, she realized that she was the breadwinner…and so are so many other women. That's the impetus for this book. I first discovered Farnoosh through her acclaimed podcast So Money. I felt like “I made it” when she featured me on her podcast to discuss women physicians and personal finance. 
Summary of When She Makes More
Farnoosh conducted social research with Dr. Brad Klontz, a financial psychologist and certified financial planner. They developed a survey and interviewed over 1,000 heterosexual women in committed relationships. There was an even split between women who make more than their partners and women who make less. 80% of the women interviewed held a college degree or higher. In the book, she walks readers through the 10 rules breadwinning women need to live by to make relationships and life work based on her research.
A Culture That Isn't Ready for Breadwinning Women
Farnoosh initially tackles what we already know. She also says that ignoring the fact that there are cultural and societal “norms” can be at your peril. The social culture still favors traditional gender roles. Friends and family might not say it, but they will still question when the perceived finances of a couple buck those trends. Society at large just isn’t comfortable with a breadwinning woman. I can hear my Korean mother disapproving of my choices when I was dating. She would use her preconception of their earning power and make comparisons to that of her soon-to-be doctor daughter (me!). Farnoosh recommends working with your partner to “Rewrite the Fairytale.” This allows you to define your rules as a couple.
Managing Finances
When a woman makes more, that woman is more likely to be the primary decision-maker on all things money, like paying bills, budgeting, saving, and planning for retirement. Many of the surveyed women wished that their partner would participate more in handling the finances. Even if you earn less as a woman, Farnoosh says women need to stay involved in the finances and know where their money is going. Farnoosh recommends three buckets of money: his, hers and ours. In the book, she candidly discusses how she and her husband manage their finances.
Quality of Relationships
When She Makes More also reveals some tension in the relationships of female breadwinners. Couples often report less satisfaction in their relationship. Breadwinning women are more likely to get divorced as well. The reasons are multifaceted, but one of the reasons is due to an often lopsided division of the household chores and logistics. Can I get an AMEN? Us physician moms know all too well that we are often a physician, primary parent, cleaning lady, vacation planner, and at-home chef all at once. Farnoosh's tip? Hire a wife! I couldn't agree more. She also warns that the thought Am I better off without you? is a deadly missile and may begin the demise of your relationship.
Career Expectations
When a woman earns more, she often feels a lot more pressure about being the main breadwinner. She feels the stress of having to maintain her income. She might also feel guilty about not having more time with her family. Of course, my tip is to take charge of your finances and set yourself and your family up to work towards financial independence and true wealth.
What I Loved
My favorite tips and insights from Faroosh's book are: The concept of instituting yours, mine and ours accounts. This is how Matt and I handle our “pots” of money. Overall, we look at it as “one pot.” I also love her tip about allocating his money to specific tasks such as funding your children's education. I am a huge fan of the idea of buying yourself a wife. Outsource as many household tasks as possible to bring more peace and happiness to the relationship. She also discusses prenups, which are an essential part of any marriage. Of course, if you don't have a prenup, it's not too late. Post-nups can also be very helpful to keep couples on the same page. Lastly, she points out something I think many couples overlook when they decide to have one of them stay home: The numbers may work out to have a stay at home spouse in the short term, but it may not be the best financial decision long-term since a long break from work is essentially committing career suicide in certain fields.
Who This Book is for
This book isn't just for breadwinning ladies! It's actually an important read for families of any financial makeup. Why? Because you never know when the breadwinner status might shift. From temporary disabilities and career changes to reducing hours or taking a leave to help with family, you never know when your role might shift and when your partner's role might shift. That means you also can't always predict if and when you might take on the breadwinner role.
Plus, the more perspectives you hear about how couples share their money and deal with financial conflict, the stronger your relationship becomes. Whether you're the primary breadwinner or not, you can use When She Makes More to reflect on the money dynamics in your current relationship.
Is the grass greener on the other side? Who really wins when it comes to a 1099 vs W2?
This is a guest post by Dr. Barbara Hamilton who blogs at Tired Super Heroine. She is an interventional radiologist who writes about the challenges of being a physician and mother.
I was an employee and received a W2 during my first three years out of training. At the time, I was working in private practice as a diagnostic and interventional radiologist in California. Working for a national company, I was told that I did not fit the definition of independent contractor (IC), since I had little control over my schedule (sob!). The practice managers felt that IC status would not stand up to IRS scrutiny in my case. Eventually, the radiology company was bought out. As a result, I started working as an IC.
Here are some things I have learned in my first year of earning a 1099 and forming a professional S-corporation.
Different Employee Benefits
While salary is often the first thing people consider when it comes to employment, understanding the different benefits that come from 1099 vs. W2 work is key.
Stability in W2 Work
A co-worker of mine has chosen to remain a W2 employee for the sake of simplicity. He counts on a paycheck every 2 weeks. He does not have to keep track of separate corporate accounts or itemize business expenses. Consider whether you value the simplicity of being an employee over the increased responsibility that comes with self- employment.
Will your status change whether you must pay for your own malpractice coverage? My current group provides malpractice coverage for employees and contractors alike. This may not be the case for you. Liability coverage would be a large business deduction for a 1099 earner, but it would also be a significant expense to account for when negotiating increased 1099 wages.
Evaluating Benefits Packages
As an employee, you receive a benefits package, which has monetary value beyond the salary provided. Often, one of the most significant benefits is access to employer sponsored group health insurance. I was not thrilled with our plan options as an employee, and I still paid a significant amount of the premium. A group life insurance policy was provided free of charge, but it was inadequate on its own. Group disability insurance was provided, but the benefit would be limited to one year, so I still needed my own long term disability policy. Given these factors, the benefits offered were not compelling enough to keep me as a W2 employee.
As an IC, I now see that healthcare options can also be limited due to geographic constraints. Premiums run about $1000 per month for my family of three. We do not qualify for a government subsidy, so we have an off-exchange PPO. With an S-corp, I am able to deduct premiums from our personal return. A C-corp, on the other hand, can deduct these as a business expense. This deduction will be of questionable benefit for us. Previously, I paid half our premiums via payroll deduction. The healthcare equation may look different for you. For example, being employed at a large academic institution, you may receive truly excellent coverage or even free healthcare, as I did during fellowship. This is a valuable benefit for some employees.
Retirement Benefit Options
Some W2 earners will receive a match to their 401k contributions. I received Safe Harbor contributions as an employee, amounting up to $10,600 one year. However, 401k contribution limits were $18,000 in 2018. This limited my ability to decrease taxable income. As a 1099 earner and business owner, I can contribute to a solo 401k as both the employee and the employer, with a combined contribution limit of $55,000 this year. This larger contribution limit will allow me to significantly reduce my taxable income, and more than double my 401k savings rate, even accounting for the Safe Harbor contributions I will lose. This is one of the most compelling reasons I chose to switch to IC.
Professional Development and Continued Learning
As an employee, you may get a stipend to pay for continuing medical education, CME. This is a wonderful benefit because it is money on which you do not pay income tax. This makes it worth more than if you simply added it to your total compensation. I did not receive a CME stipend as an employee. As an IC, I can now easily deduct airfare, lodging, course fees, and other CME related expenses on schedule C.
Revised Tax Law Implications
Standard deductions for personal income taxes have risen with the new tax law. These are now $12,000 for individuals, and $24,000 for married couples filing jointly. This means that if you are paying for any unreimbursed business expenses as an employee, it will now be even harder for you to recoup any money in the form of a tax deduction.
As an IC, I plan to deduct many business expenses. Filing a corporate return this year will increase the cost of tax preparation by $700. That is deductible. Some of the other deductions I’m utilizing include a new cell phone, internet service, and a home office. The latter includes a portion of our homeowner’s insurance and utility bills. Some meals are deductible. A corporation can purchase or lease a business vehicle. A large vehicle with a gross weight of 6000 lb can be fully depreciated in one year, making the purchase price deductible in that tax year. Paying your kids to model for your website can be deducted as a business expense. One can even rent their own home to the corporation for work related events.
Understanding Cash Flow in 1099 vs. W2 Work
As an employee, cash fluctuations are minimal. Paychecks arrive every other week. The employee doesn't need to take direction action since payroll deductions are taken automatically.
My company pays independent contractors monthly. Therefore, there is a longer period between checks, and the checks are larger. Since 1099 earners do not have payroll deductions taken from their income, they must pay estimated quarterly taxes. For many, these payments are large. I have paid estimated quarterly installments ranging $7,000 to $20,000 each, between state and federal taxes. I contribute lump sums to my solo 401k.
These factors can result in wild fluctuations in the corporate account, with periods of depleted cash reserves. As an employee, taxes and expenses are relatively out of sight, out of mind. As an IC, on the other hand, you have both the control and responsibility to make these expenditures, and thus are fully aware of their cost and their effect on your cash flow.
Getting Going as an S-Corp
A new business entity must be registered with the state in which it is headquartered. The optimal business entity may vary based on where you live and work. I chose an S- corporation. The application was submitted by my accountant. In the case of an S-corporation, the company must be registered as a C- corp prior to electing S- corp status. I don't make the rules. Consult your CPA.
Creating an EIN
Your corporation has an Employer ID number, or EIN, which is used as the entity’s tax ID number. When money comes into the corporation, it must be associated with the EIN, not your social security number. Likewise, the EIN is needed to set up business accounts, which are separate from your personal accounts.
Any business account bears the name of, and is owned by the corporation. This structure is required to ensure the money earned receives appropriate tax treatment. Early in the year, I made the mistake of opening a personal account for the business, not associated with my EIN. I later spent a couple of hours at the bank correcting my mistake.
Payroll Decisions
In an S-corporation, a corporate payroll is required. This costs $35 per month with an online platform I use. But note that many payroll companies charge far more. My accountant, for example, charges $80 per month, or $960 per year for this service. Payroll is a deductible business expense, but it remains beneficial to minimize it.
You need to pay your employees a “reasonable” salary. Basically, a reasonable salary is the amount you could theoretically pay someone to replace you. Some estimate this should be 30- 50% of 1099 earnings for the primary employee, say a doctor in this scenario. Using a pass through entity such as an S- corporation, you will save FICA taxes on the remaining income, which becomes corporate profit. You will still pay state and federal income tax on all corporate profit.
Running the Tax Numbers
Run some numbers. As an IC, you will pay self- employment tax, additional accounting fees, and registration fees. The state of California taxes corporate profits at 1.5% with an $800 yearly minimum franchise tax. I wanted to be sure that forming a corporation would reduce my tax liability enough to be worth the trouble because of these additional expenses. My accountant charged $500 to run some theoretical numbers through his accounting software, generating reports of various scenarios. The most important variables are the salary one chooses, and the anticipated corporate profit. Employing a spouse or other family member is an option. This involves paying extra payroll tax for that employee, but it allows them to contribute to their own retirement plan.
I found that the estimated yearly tax savings projects in the five to ten thousand dollar range for my family. Five thousand dollars multiplied by many working years, compounded over time, can add up to a large sum. Therefore, the benefits of being self- employed, relative to the effort required to learn about it, may be greatest early in one’s career. I feel I’m getting the most “bang for my buck,” since this knowledge will benefit my family for years to come.
Final Thoughts On 1099 vs W2 Work
Philosophically, I feel that becoming a 1099 earner and corporation CEO (yes, you really can have that title) has started to change my way of thinking to that of a “business owner.” Learning about my business entity relatively early in my career will allow me to optimize this strategy over time. Additionally, I appreciate the ability to control factors like benefits and business deductions. In order to embark on the self- employment path, one needs a desire to learn about the mechanics involved, and to find a team of qualified professionals to assist. This is not a do it yourself project. Even with help, I will not do everything perfectly the first year. But I’m looking forward to seeing how we did in 2018.
Please note, if you are considering Public Service Loan Forgiveness (PSLF) you should not become an independent contractor. To qualify for PSLF, you must be an employee of a non-for-profit institution.
If you want to connect with Dr. Barbara Hamilton at Tired Super Heroine on social media, you can connect with her on Facebook, Twitter, and Instagram.
You crushed college, medical school, and residency. You're finally looking at the light at the end of the tunnel. All of your hard work is paying off, and you cannot wait for your first attending physician paycheck. And … you may not be aware of the 10 new attending physician taxes you’re about to pay.
#1 Income Taxes
To help you have a better handle on the income taxes you will owe as a new attending physician, it is important to understand the difference between federal marginal and effective taxes. Your marginal tax bracket is the % tax you pay on the last dollar you earn. This is not the bracket you pay every dollar on. We have a graduated tax system here in the U.S. Essentially, as your income rises, so does your marginal tax rate. Based on your income, you are slotted into a tax bracket. When your income crosses a certain threshold, the amount of money over that level is then taxed at a higher rate. It is also worth noting that these brackets and rates change from time to time, so how they look in 2019 isn't how they will look forever.
Conversely, effective tax rates are calculated based on the total amount of federal income tax you actually pay. To get that calculation, you look not only at taxes taken from your income, but other factors like deductions that you may receive. Generally, this effective tax rate is lower than your marginal tax rate, but both numbers are worth knowing, especially as your income increases.
As a resident, you were probably either in the 22% or 24% marginal tax rate (federal income tax, 2018 tax tables). Your income will surely rise now, and you may find yourself in the highest marginal tax bracket, currently 37%. And depending which state you live in, you may also be slapped with an additional income tax of up to 10%. You will also pay city or local taxes in cities such as New York City and Philadelphia.
Finally, you’ll still continue to pay the 1.45% Medicare payroll tax, and a Social Security tax of 6.2% on the first $132,900 for 2019 taxes. The government seems to periodically increase this.
#2 Medicare Taxes
The additional 0.9 percent Medicare tax on wages above $200,000 for individuals ($250,000 married filing jointly), which went into effect in 2013, remains in effect for 2018. Also, the Medicare tax of 3.8 percent on investment (unearned) income for single taxpayers with modified adjusted gross income (AGI) more than $200,000 ($250,000 joint filers) still exists. As your income and investments grow, these taxes are worth remembering.
#3 Board Certification
Most of us will become board certified by our specialty to show patients that we have achieved the highest level of medical training.
The initial fees are not only steep, but then you need to arrange getting there. I paid $2,500 just to sit for my dermatology boards in Tampa, Florida. Adding in the cost of flights, hotel nights, and food increases that amount considerably. Many people will also pay for courses to prepare for this as well.
Also, this is not a one-time thing. I will need to re-certify in <10 years, which brings me to the next tax.
#4 Maintenance of Certification (MOC)
Maintenance of certification (MOC) is a relatively new thing. In fact, some physicians found themselves caught off guard by the changes in 2014. I initially thought I would just have to sit for the boards and do the annual required CME requirements for my board and the state I’m licensed in. Now, with all the extra demands placed on physicians to maintain safe patient practices, MOC was born.
What is MOC? MOC is basically extra requirements aside from re-certifying exams and annual CME requirements to maintain board certification, and you get to do this for another annual fee. MOC proponents maintain that helps physicians be better physicians. Interestingly, if you were board certified before a certain date, MOC does not apply.
#5 Medical License and DEA
Medical licenses are state specific. If you move or decide to practice in a different state, you need to apply and pay for a new state medical license. This makes sense for, say, lawyers since state laws differ. But in my opinion, this does not make any sense for physicians, since medicine does not change across state lines.
Every state pretty much asks for the same information: proof that you finished all the requirements of medical school and residency, passed the United States Medical Licensing exams, and for board certification, if applicable. Of course, there's also a hefty fee that ranges from $100 to much higher.
Each state has different requirements to maintain licensure, including things like the number of CME credits you need per year. Now, many states will also require specific topics, such as pain management (even if you never prescribe pain medications), infection control, and child safety.
It’s hard to know if you’re going to need licenses in multiple states over your entire career. If you knew you were going to practice in multiple states over your career, then you will want to consider a service such as the Federation Credentials Verification Service or FCVS. This is an agency that takes all of the documents that are required into a safe repository. Of course, they require a fee for this as well. Additionally, there are fees for sending them out to the different state licensure agencies. However, this greatly simplifies the process for you when you need to apply for multiple states instead of reinventing the wheel each time. Hopefully, a national license will emerge as telemedicine becomes more commonplace.
#6 Malpractice Insurance, etc.
You’ve always had malpractice during your medical training, whether you paid for it directly or not. Most attending physicians will have this paid for by their employer. But many attending physicians choose to work as independent contractors, in which case you’ll need to purchase your own.
The annual premium for this depends on many factors, including your specialty. It can range from a few thousand dollars per year upwards to over $200,000! It’s also important to know the difference between occurrence-based and claims-based malpractice. If you have the latter, then you will need to purchase tail insurance (or have your next employer pick up the tab). And most importantly, never let your malpractice insurance expire.
Don't forget about the other insurances you will need to protect yourself and your family. These include disability insurance, life insurance, umbrella insurance, auto, and home.
#7 Continuing Medical Education (CME)
A commitment to lifetime learning is one of the cores of being a physician. A minimum amount is required to maintain your state medical license(s), board certification and MOC.
Thankfully, there are many ways to get CME, ranging from free to very expensive. Conferences are my favorite and allow me to combine CME and vacation. You may get a CME allowance with your job or you may not.
I personally love in-person conferences for many reasons. It’s an excuse for me to travel. I usually pay to attend conferences in tropical destinations such as Hawaii. Also, it’s a way for me to see colleagues and friends that don’t live near me, and I love being able to meet experts in the field and being able to ask them questions directly. I often combine a CME conference with vacation for my family as well, but it's a great excuse to go on vacation without them as well.
CME in Maui? Yes!
#8 Medical Societies
It’s not just the American Board of ____ that you need to pay your dues to. There will be many other societies–some national, some local–that will require dues. For example, the Philadelphia Dermatological Society is a local society, which is worth supporting because they organize monthly CME events and organize other ways for local colleagues to get together.
Then there are national societies such as the Women’s Dermatologic Society, the American Society for Dermatologic Surgery, the Society for Pediatric Dermatologists, and the American Contact Dermatitis Society. Obviously you will not join every society and stick with your niche(s).
#9 Organized Medicine
It may not be enough to be a hard-working and educated physician who practices good medicine. You may find yourself passionate about being an advocate for your specialty or medicine at large. One example of this is the American Medical Association, which is the largest national organized medical society. Many specialties also have their own PACs (political action committee), where you donate money to politicians. Most medical specialty groups will also host a national legislation day in Washington DC, where you can go lobby in person on behalf of your specialty and on half of your patients. My personal belief is that this is a necessary thing that we all need to do whether it’s through monetary donations or by giving our time to support causes that matter to us and our specialties.
Lobbying on behalf of the American Academy of Dermatology in 2017
#10 Patient Satisfaction
And finally, we have the patient satisfaction tax. We can all agree that not only do we need to be educated, well-informed physicians who practice evidence-based medicine. We also need to have impeccable bedside manner and “customer service”. In this day and age, whether you like it or not, patient satisfaction rules. Every patient now Googles their potential physicians and will read all of your online reviews.
Many of the large hospital employers are now tying your bonus to patient satisfaction, and some may even dock your pay if patient satisfaction dips below a certain percentile.
At this time, patient satisfaction has not been linked to better patient outcomes, but it looks like it’s here to stay.
Final Thoughts on Attending Physician Taxes
When you become an attending physician, there are many things you already know. You've been building your expertise for years. But as your salary grows and you look to continue to grow your knowledge, you will likely be hit by these attending physician taxes. They aren't all bad, but they can weigh on your budget. That's why it's important to expect them up front.
Did any of these “taxes” surprise you?
Welcome to another installment of Interviews with Real Female Physicians. The goal of this series is to share their story so that you, the reader, may learn and be inspired from their experiences – good and bad. We all come from different backgrounds and have different situations. Some of you are married, some are not, some with kids, some with blended families. Let’s show other women that any of these can work financially! So let's introduce our next woman physician rockstar – Melanie!
Tell us about yourself:
Tell us about yourself:I am a divorced mother of a special needs kid living in a HCOL area on the West Coast. I have been an attending obstetrician gynecologist for over a decade. Pretty much went straight through school with only a year off and I count my blessings that I didn’t take my sweet time. I think if I were to pick a specialty at this age it would be dermatology [Editor's note: It is THE best field]. But having picked my specialty in my 20’s, it was the right one for me at the time. I loved the subject matter: deliveries, surgeries, clinic, women’s health, birth control, abortions.
But the wear and tear on my body and my psyche have been immense over the last 14 years. A more peaceful practice with flexibility to raise my kiddo sounds amazing right now. I grew up on the East Coast and although I love the West Coast weather and all the wonderful hiking, skiing and climbing it affords me, I regret not staying closer to home so that my parents can watch my child grow up.
Did you graduate with student loans? How much & what are the interest rates?
I went to a private university and public medical school. I was lucky and my grandfather paid for college. I left medical school with about $35,000 in loans at an interest rate of about 2% that dropped to 1.75% after I paid it on time monthly for a year. I did receive scholarships and loans throughout although I cannot remember how much. I had worked throughout college and medical school in work study programs. I lived in student housing during residency and managed to save about $30,000 during residency.
How fast (or not) are you paying them off?
Because of the low interest rate on my loans I did not pay them off until about 8 years after residency. But enough was enough, I wanted something happy to celebrate that month and paid them off happily. It was also one less bill and account to keep track of on Mint.
If you’re not quite sure where to start or what to do, consider hiring Travis @ Student Loan Planner to help you with your student loans.
Financial aspects of kids
When did you have them?
I had my child when I was already an attending. I made sure I had been working at the job for at least a year to make sure I had full benefits and saved all my vacation so that I could take four months of mostly paid maternity leave.
What are your child care expenses?
He goes to public school with a one-on-one aide paid for by the school district. We pay a nanny about $19/hr to take care of him after school and during vacations, which runs anywhere from $200-$1000/week. The state helps fund a portion of my nanny expenses. I have about $55k in a 529 plan right now that I will likely convert due to the ABLE act for disabilities. We also have a Special Needs Trust.
Financial aspects of marriage
Are you married?
I am divorced.
Did you get a pre-nuptial or post-nuptial agreement?
I had gotten a prenuptial agreement beforehand due to vast differences in finances and the fact that he had been divorced prior to our marriage. I did not want to get married at all but he wanted to, so I acquiesced, and he suggested the prenup. Therefore, I might have ended up poorer due to the marriage to a certain amount but not as much as I would have if we had not had the prenup.
What have you learned financially from divorce, and what advice would you give to unmarried women planning to marry?
By the end of the marriage I made almost 3 times his salary. He got to write both the prenup and the marriage settlement agreement so no wool was pulled over his eyes. Although because he managed all my finances while we were married, I didn’t really understand my finances coming out of the marriage, which frightened me and caused me to become obsessed with making sure I learned everything I could. There is a suspicion that he might have been squirreling away money for himself a year before we separated but I am doing ok without that. I also ended up helping him pay off a large chunk of his student loans while we were married.
Have you experienced a financial catastrophe?
I have been lucky and have experienced no financial catastrophes thus far. I had resigned from a stable well benefited job with a pension over a year ago for the unknown. I currently am barely taking in house call (which I realize I hate), doing part time clinical work and part time contract non-clinical work.
And I absolutely love it!!! When you don’t do the same thing day in and day out burn out is prevented. You don’t get repetitive stress injury and you don’t have to deal with politics at your only place of employment. It is mind blowing and soul freeing! I also have 6 or 7 different streams of income and multiple employers have all asked me for more time so if one stream ever dries up, I will never be without employment. The best thing is that I have found remote non-clinical work that pays 6 figures a year. The downside of contract work is the lack of benefits but my part time clinical job provides the benefits. The part time clinical job is lower paying but unionized and extremely flexible. I love all my jobs now!!
General Finances
What’s your FI (financial independence) number?
Financial Independence is a tricky thing. I guess you can say I am there since I don’t practice as a traditional obgyn. Some of my friends joke that I am retired. I took my first 24 hour call in over a year and realize that is my idea of hell on earth. I wasn’t willing to do it unless my locums company paid 1.5x my normal rate. That is my idea of financial independence. No one can tell me what to do. If I don’t want to do it, I don’t. I have the money to say “No”.
Real financial independence will remain elusive for me because I am a single parent of a special needs child. My child may always need support throughout his life and beyond my life. My goal at this time is to somehow accumulate $30 million in order to fund a community for the disabled not just for my child but also for others.
Are you DIY or do you have a financial advisor?
I do not have a financial advisor but am thinking of getting a robo-advisor that will do tax loss harvesting for me.
What is your net worth?
I have a net worth of $1.8 million dollars.
How are you saving for FI/retirement?
I max out my retirement accounts annually. I have a 401(k), SEP IRA, 403(b) and traditional IRA and have not done a backdoor Roth IRA. I am conservative in my cash investments, mostly in a money market account and I also hold mutual funds/index/bond funds outside of my retirement accounts. I have paid off my home and have no mortgage. I do not know my asset allocation as of this moment as I am trying to figure that out.
Do you have insurance?
I have disability insurance from residency time but not at high amounts. I am in the process of buying life insurance.
What is your biggest financial regret?
My biggest financial regret was not putting excess cash in the stock market 2 years ago after a windfall because I thought the market was too high. After some more reading, it seems the stock market tends to go up a lot more than it comes down and I lost out on the 20% gains on a large chunk of cash that sat in a MMA for 1% interest rate. That is why I need a financial advisor since I am too chicken sh** to invest myself.
Do you give to charity? If so, where and why?
I give to charity: school, special needs groups, ovarian cancer and anyone who asks.
Any parting words of wisdom?
Live life with purpose and happiness now. Do not suffer today for possible better security tomorrow since that day may never come. I have no regrets. There is no room for regrets. Depression and anxiety can happen when you regret the past and worry about the future. Be present now.
There is a reason for everything that happens in your life. Always believe that you are in control of your life and you will be happier. Do not think “things happen to you.”
And … that's a wrap! If you're interested in doing this please follow the instructions here!
Melanie is one kick-ass single physician mom! I'd love to hear from more single moms!
This is a guest post by Dr. Cory S. Fawcett. He is a retired general surgeon and is now a personal finance coach for doctors. I love his book The Doctors Guide to Eliminating Debt.
Many doctors mistakenly think they can acquire more stuff if they use debt. That is a great deception put forth by those who want you to borrow money from them. They tell you that for an easy monthly payment, you could be driving that new car. They never talk about what you are giving up by borrowing the money.
There's No Such Thing as a Free Lunch
We all know there is no such thing as a free lunch. So why do we look at debt as a free lunch? We think it is easy to just sign on the dotted line and drive off with that new car, boat, motorhome, vacation house, or wedding. I can have it now and it will only cost me an easy monthly payment. Doesn’t that seem like you are getting a free lunch?
It reminds me of a story from the book, End of The Spear, by Steve Saint. Steve brought a man from the jungles of South America to the United States. This man had never been out of the South American jungle where he grew up. When he returned home he described what he saw on the trip to his friends. He recounted their grocery shopping trip as putting all you want from a big room full of food (grocery store) into a cart. Before taking the food to the car you just smile at the lady (check out clerk) and she lets you take it all home. Then Steve explained to him that he had to first give her his credit card before taking the food. The native said, yes but then she just gives it back to you.
The native got the impression that he was getting the food for free. He didn’t understand the concept of a credit card or borrowing money. Sometimes I think we don’t understand the concept of a credit card, or the consequences of going into debt.
Easy Monthly Payments Are a Myth
Borrowing to buy stuff doesn’t gain anything, it causes a net loss. You do get to have the item now in exchange for giving up some of next year’s income, plus interest for the life of the loan. So what happens next year? You will have less money to live on because part of your earnings are already spoken for to make the monthly payments on debt you acquired.
When we take this to an extreme, we go into debt for schooling, two cars, a house, a boat, a vacation, and several other things. Then next year comes along and demands we make those “easy” monthly payments. These payments can quickly add up to $6,000 a month of our take home pay. Depending on our tax bracket and which state we live in, we may need to earn a monthly gross income of $10,000 just to make the debt payments on our past purchases. That is $10,000 a month of earnings that will not be available to spend this year. Our lifestyle will be cut back because of this debt. A net loss.
The consequences of that debt are a loss of valuable options of how we will spend this year’s income.
The need to keep production up to meet this added burden can be taxing. We are tempted to work extra shifts in order to afford the other things we want this year. Those extra shifts add up to losing even more family time than the considerable amount of time our regular job keeps us from our family.
Debt Keeps Us Chained
We might be pressured into taking extra call to bring in more money. We might be tempted to work when we are sick and should be home, all because we need the extra money.
What about when a doctor gets pregnant and is having trouble in her third trimester? She needs to cut her hours so she can have more time off her feet, but she can’t afford to cut back as she needs to make those debt payments.
Then, she wants to spend more time at home with her newborn after delivery. But since maternity leave is unpaid, she can’t afford to take the time off she desires because those debt payments are hanging over her head.
When it is time to renew her contract and the hospital decides to cut her pay, she just signs the contract and grumbles. She really needs this job to make her payments and she doesn’t want to make waves that could risk losing her job.
Debt Robs Us of Time
When vacation time rolls around, we might stay home and work to cover the debt while our family vacations without us. Wouldn’t they rather have us there with them? Would they have traded whatever was bought on credit to have us with them on vacation? Will we still like the trade we made?
About now, the things that were bought in the past are not looking so enticing. The obligations and loss of freedom they are causing is worse than the small amount of joy we got by having those items a little bit sooner. We are now realizing that if we would have saved first, and purchased these items with cash, we would be much happier, less stressed, have more family time and in general be more fulfilled.
As a young surgeon I did not like doing vascular and thoracic surgery. I only did those operations because they paid well, not because I liked them. I was afraid that if I stopped doing them, my income would drop and I wouldn’t be able to make my debt payments. My debt was making me do things I didn’t want to do.
After I became debt free, that fear of not making the payments was removed. I decided to take the plunge and drop those cases I didn’t like. I was not afraid of losing my home anymore. The funny thing was, my income didn’t drop. Those cases were replaced by other cases I liked doing and my practice became more fun for me.
All those years of doing cases I didn’t like could have been avoided if I hadn’t stuck myself with all the debt. Debt robbed me of some of the joy of being a surgeon.
Getting Out of Debt
After I was debt free, I took a lot more time off. I didn’t feel the need to produce so much. I was able to become a soccer coach for my kids. We were able to go on a three week vacation every summer. I had a new sense of freedom.
So what is debt stealing from you? The ability to work on your terms? Time with your family? Vacations? Coming home for dinner every night? Peace of mind? Full use of maternity or paternity leave? Or a good night’s sleep?
Think long and hard about the items you bought on time. Are they truly worth the cost you are paying today? Are they worth the cost your family is paying?
For me, the answer was no. In 2001, we paid off our last personal loan, which was our home mortgage, and have never looked back. I do not intend to become a slave to debt again. The relief I got when I became debt free is hard to explain. It was much better than I anticipated. The thief was sent out of my life.
Stop managing your debt and start eliminating it. Pick up a copy of my book The Doctors Guide to Eliminating Debt and begin transforming your life. Without debt, many more options open up to you and your family. Debt is a thief and you don’t need to give him the keys to your home.
Dr. Cory S. Fawcett is a retired general surgeon who now teaches doctors the ins and outs of personal finance though his business Prescription for Financial Success. In addition to his blog, that can be found at DrCorySFawcett.com, he has written three award-winning and best-selling books including: The Doctors Guide to Starting Your Practice Right,The Doctors Guide to Eliminating Debt, and The Doctors Guide to Smart Career Alternatives and Retirement.
Are you a doctor trying to get out of debt?
William Roth did a great thing by creating the Roth IRA for Americans in 1997. The Roth IRA allows for tax free growth and tax free withdrawals. He also caused a lot of confusion ever since. Quite a few investment vehicles now carry the Roth name but mean different things. The unifying theme here is after tax dollars growing tax-free that remain income tax-free on withdrawal. So read on to learn all about Roths.
Roth IRA
The original OG Roth. This is a special IRA (individual retirement account) with a 2019 contribution limit of $6,000. This is preferable over a traditional IRA (pre or post tax) due to the signature Roth tax-free treatment.
In 2010 the income limit no longer posed a barrier for higher earners with the introduction of the “Backdoor Roth IRA”. This easily confused method involves a few steps: contribution to a non-deductible traditional IRA. Then converting this traditional IRA to a Roth IRA. This, like any IRA contribution, needs to be reported on form 8606 with your annual taxes.
The main caveat here is that in order to do a backdoor Roth IRA “cleanly” you must have no other IRA accounts with balances. Otherwise you are subject to the “pro rata” rule. Long story short – if you have non-zero balances in any other IRA account, you'll owe taxes on this otherwise non-taxable event.
So, what do you do if you have IRA accounts with money in it? You have two options: convert the entire amount to a Roth IRA (see below – this NOT doing a backdoor Roth IRA) or rollover the IRA into a 401(k) or 403(b) that accepts rollovers.
The good news is that many brokerage accounts make it very easy to do this “backdoor Roth IRA.“ I use Vanguard and they have an option to “Convert to Roth IRA.” Check out Physician on FIRE's step-by-step tutorial on how to do this at Vanguard.
If you’re 50 and older you can contribute an extra $1,000 into a Roth IRA. Roth IRAs require that you have enough earned income in the amount of the Roth IRA. So if you made $1,000 as a high school student babysitting you cannot contribute the full $6,000, you’re limited to $1,000. The exception to this earned income rule comes into play if you’re married. This is known as the spousal Roth IRA. As long as one spouse earns enough to fund both Roth IRAs, the non-working spouse may also open and fund his or her own Roth IRA.
Another beauty about the Roth IRA is there are no required minimum distributions or RMDs. This means that when you turn 70.5 you are not required to start taking distributions. Most other tax advantaged retirement accounts require a minimum distribution starting at age 70.5.
Roth 401(k)s
Most of us have access to a 401(k) and/or a 403(b). Most are “traditional” or pre-tax meaning that our contributions reduce our taxable account by the amount we contribute. These accounts grow tax-free and we pay taxes when we withdraw the money in retirement.
Many plans also have a Roth option. The Roth option means you can contribute after-tax dollars that grow tax-free and are tax-free on withdrawal. Doesn’t that sound awfully like a Roth IRA in disguise? It basically is except there are RMDs on Roth 401k(s) and 403(b). To get around this simply rollover the Roth 401(k) into a Roth IRA. There are no tax consequences for this rollover.
Many people ask if they should use the Roth option or the traditional option. It depends. I favor the traditional option for those folks in high marginal tax brackets and/or high income tax states such as NY and CA otherwise most folks should consider the Roth option.
The Mega Backdoor Roth IRA
It’s a bummer that the awesome Roth IRA is limited to an annual contribution of $6,000. But, some really lucky folks have access to a way to contribute even more to a Roth IRA.
First, you need access to either a 401(k) or 403(b) that allows non-Roth after-tax contributions or NRATs. These are contributions beyond your standard $19,000 employee contribution (that may be either pre-tax or traditional, or post-tax or Roth). This is also separate from what your employer may contribute. Remember the total limit of the 401(k) is $56,000 in 2019.
So, if your plan allows for NRATs – then you’re able to do the coveted Mega Backdoor Roth IRA.
Pearl: Log on to your work 401(k) and see if there is an option for after-tax contributions.
For example: Let’s say you max your $19,000 employee contribution and your employer contributes $5,000 as a match or contribution. You’re left with $56,000-24,000 or $32,000 of available NRAT contributions. Contribute this $32,000 (after-tax) to your 401(k). Then once a year or more (depending what your plan allows) you move this NRAT money into a Roth IRA! This is completely separate from the $6,000 Roth IRA.
$19,000 employee contribution
$5,000 employer contribution/match
$32,000 non-Roth after-tax contribution —> Roth IRA
—————————————–
Total: $56,000
With the ability to contribute NRATs and rollover to a Roth IRA, you’re contributing not just $6,000 but a total $38,000 (using the above illustration) into a Roth IRA. Money that will never be taxed ever again. This is way better than a traditional brokerage account. But alas not many plans allow NRATs and even the plans that do may not let you actually move the money out of the plan unless you leave the employer or limit you to annual withdrawals. It’s still worth it to use it in these cases but you will owe taxes on the growth of the NRAT money.
Roth Conversions
Finally, we have Roth conversions. The term itself is confusing since the backdoor Roth IRA involves a conversion. Roth conversions refer to converting pre-tax accounts such as rollover IRAs, 401(k)s, etc into a Roth IRA. You’re changing from a pre-tax account (where you saved taxes when you contributed) to a Roth IRA. You will owe taxes on the amount converted at your current marginal tax rate.
Current marginal tax rate is the key thing here. This is why Roth conversions are often done in low income years such as a year where job loss occurred or the first few years of retirement.
For example let’s say you were in the 35% married marginal tax bracket during your peak earning years. The year after you retire you’re in the 12% marginal tax bracket. The strategy is to convert some pre-tax dollars into a Roth IRA since you will only pay 12% on this conversion vs. 35% if you converted during your peak earning years (and any applicable state and local taxes).
Often retirees will plan to institute a “Roth Conversion Ladder” to migrate pre-tax assets into Roth IRAs so that the money will never be taxed again.
Note that the word rollover is usually used in the context of moving from like to like such as rolling over a traditional (pre-tax) 401(k) to an a pre-tax IRA.
Phew! That’s probably more than you wanted to know about all of Mr. Roth’s accounts.
Were you aware of all the possible Roth accounts besides the Roth IRA?
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