His reasoning was that there is no benefit to being on both sides of debt instruments. I am not TLHing, and 3. the fees for my MFs are higher than ETFs would be (or perhaps higher than other MFs, beginners mistake). For one thing, anything above that 3k can be used against capital gains, as much as you have. I like your four part split though, even if it isnt right for you! Don't buy something right after it went up 1800% in the last year. Does anyone have anything good/bad to say about Betterment? Im interested in this idea of donating appreciated assets. I mapped out what the tax-deferred Betterment 70% stock portfolio consists of, and was able to map those ETFs 1:1 with Vanguards mutual funds: https://docs.google.com/spreadsheets/d/18BBMKMuAKJE6tP2raJjoUd611gweYOsGS7MlYlQ8BTY/edit?usp=sharing. So, a tax-deductible debt (like many mortgages) is less of a priority than one with an equal interest rate that is not deductible. I hope nobody is surprised to find this one at the bottom of the list. lAt some point 1 of the Robos will program holistic investment location in to their software -for now you are on your own but they get you most of the way there- from my viewpoint Betterment is better than Schwabs new free offering where the most important issue -asset class selection is compromised as they have a strategic cash allocation where they make more than the Betterment fee. For sure, losing that tax subsidy makes it more attractive to pay off debt. You do need to worry about violations between taxable and tax-deferred accounts, howevercant hold the exact same fund (but you could hold the ETF equivalent in one, as Betterment does, and the mutual fund equivalent in the other). Youve got a stock you buy at $10 a share. Its still a goal of mine, though, so extra money goes toward that goal. Whats been omitted from the discussion is the behavioral aspect Im much more motivated to reach a specific target (pay-off) over a certain timeframe, than I would be to just passively save the extra. I pretty much came to the same line of thinking as principle #4. So in 2014, over 2 months, Betterment's TLH+ was able to harvest the above. [Editor's Note: Toshi Clark, MD, is a radiologist with whom I have no financial relationship. I have recommended it to a couple of friends in this context. Your charity can help, or your company you invest though will also. Math challenged yesterday. Actually had a chance to sit down with their co-founder for a bit recently and was really impressed with their tax loss harvesting and rebalancing algorithms, and I'm now starting to move some of my taxable account over to them. I think there are a couple of other major considerations. We also have a mortgage in a high COLA. If you have to hire somebody to manage your 401(k), they should do your IRA and taxable account too. Of course, they had the challenge of shipping physical objects rather . Definitely! Some people just can't put it on auto-pilot; they can't resist timing the market. If you're not competent, you're not competent to do any of it. trugs | April 5, 2023 at 7:47 am MST. Congrats on finishing off your student loans. Your site provided us with the foundations to make key decisions that will set us up financially for the rest of our lives. Maybe it's time to invest. Written by a practicing emergency physician, The White Coat Investor is a high-yield manual that specifically deals with the financial issues facing medical students, residents, physicians, dentists, and similar high-income professionals. Comment below! Sure, the basis is now lower and future gains over that lower basis will be taxed upon withdrawal but they will be taxed at LTCG of 15% if youre still working, and likely 0% if youre in your relatively low-income retirement years. I hope this post is helpful to you as you weigh your own pay-off-debt-vs.-invest decisions. If you truly believe the performance would be the same then by all means switch. Best Ways to Use Debt to Your Advantage, Fire Your Financial Advisor! I couldnt wait to be debt-free. The 3rd sentence in your italicized preamble is wrong. I am still saving 20% of my income but putting an equal amount (or more) of my money towards debt because of not being able to get individual disability (have group) because of a mistake I made as a medical student. But I dont neglect my 401k/college/HSA to do it. Tax bill may change the equation. With regard to the Wash Sale Rule, no issues if the two accounts in questions are in different names. What todays graduates would give to only owe $29K. I still find a 5%8% guaranteed return to be a very attractive use for my dollars. Obviously nobody knows the future of the stock market particularly short-term performance however weve had quite a run. If you are truly a DIY, great. https://www.betterment.com/resources/inside-betterment/product-news/betterment-for-business-the-best-401k-for-employers-and-employees/. I dislike it enough that it was a major factor behind why I spent four years on active duty. For the cynics, these predicted gains are roughly an order of magnitude greater than their 0.15% fee. It is a fine option. The ETF price usually reflects the prices of the stocks it holds, whereas mutual funds shares tracking similar holdings may not have the same underlying value. For me, interest rate isnt so bad on school loans (4.5%) but the absolute dollar amount, combined with daycare, combined with primary care field of work has led us to meld #2 and 3 together: max a couple (but not all available) retirement accounts (still saving >15%) and focusing raises, bonuses, etc onto student loans. Plus add another $100K for residency since it typically compounds at 6%+ for 3-5 years. Update: Betterment enabled tax loss harvesting for accounts of all balances as of today! I figure theres a lesser probability of outsize returns with the stock market currently so I went ahead and paid down my mortgage. I suppose I could turn off auto-reinvestment in those accounts, just seems to get complicated. Sure. In that scenario, it would make sense NOT to liquidate the taxable assets to get the step up in basis at death. The new offer is 500K base with 8500 RVU, $60/RVU. Heck, if you're expecting 20%, it might make sense not to max out the retirement accounts first (or figure out a way to put the investment inside the retirement account). I think simply waiting for another recession, then tax loss harvesting could very well be enough to last you for a lifetime making the extra fee unnecessary. I have no taxable retirement accounts. The real bang for your buck with TLHing is if you can avoid paying the taxes at all by donating appreciated shares to charity or getting the step-up in basis at death. WCI is right though, harvesting is done towards the beginning, rather than after holding a fund for a long time. I believe the savings in fees on $100k for 6 mo would be closer to $75. Curious anyone try the Schwab version of their Intelligent Portfolio robo advisor? Yes, its very easy, depending on the charity. My wife and I are both MDs, max out all tax sheltered accounts, and put any extra $$ in Betterment. I have used Betterment for the past two years as a savings account where I park some of my reserve funds to get a better rate of return. Would you consider it for the TLH+ service? At higher effective rates, such as 9.5%, that percentage falls to 15%. Not really, just trying to explain why it doesn't work to do what you would like to see. Our free financial planning resource covers a variety of topics from doctor mortgage loans and refinancing medical school loans to physician disability insurance and malpractice insurance. An update on my experience with Betterment TLH+: Since December 2014 (when I started using Bettermentafter this original post was penned but before it was published by WCI) it has charged me $80.92 in fees. ..that debt alone forced chipping away at it aggressively.but even so we maxed out every retirement vehicle (and I pre-date for several years TSP so that was only an IRA back then) and put in double our mortgage into our brokerage account. . So its really only on recent (say last 2-8 years or so) contributions that you do all your tax loss harvesting. Therefor the breakeven point gets lower and lower. But most large charities have accounts at all the mutual fund companies. Copyright 2023 - The White Coat Investor, LLC. This calculation will tell you what that $40,000 tuition bill will be in 15 years. But keep in mind Betterment is pretty much brand new, right? The White Coat Investor's Post The White Coat Investor 595 followers 3d Report this post Do you have any publicly traded real estate in your investment portfolio? Helping those who wear the white coat get a fair shake on Wall Street since 2011. biggest thing I think people gloss over when they see that Betterment offers tax loss harvesting:you cant own any "substantially identical" funds in your 401k, or else its a wash sale when Betterment sells/buys some automatically for you. Not much arbitrage there. Our free financial planning resource covers a variety of topics from doctor mortgage loans and refinancing. Reducing investment costs is one of the most reliable ways to boost your return . I like my 401K and IRA accounts, but I only contribute to them once a year. The White Coat Investor - YouTube Products - The White Coat Investor Fire can keep you warm and heat your food. Im sure they say they add value in other ways, but I only bring it up since article is about tax loss harvesting. Do the opposite. Also, you can harvest over $3000 a year, and carry the rest forward. 17 Backdoor Roth IRA Mistakes to Avoid | White Coat Investor - I Most individuals' overall holding strategies will probably be reasonably close in composition to those in a target date fund, so minor discrepancies between the taxable and tax-deferred sides won't affect outcome that much. The Dahle family funds our tax-protected accounts (Roth IRAs, HSA, (401(k)s, and Defined Benefit/Cash Balance Plan) before investing in a taxable account (and in the past when we had debt, before paying off the debt.) Mix and match and you have a good quality portfolio in my opinion. In addition, there are different fees or other charges associated with mutual funds versus ETFs., http://www.forbes.com/2008/12/22/wash-sale-rule-pf-ii-in_jd_1222taxes_inl.html, Switching out of a mutual fund and into an ETF covering a similar swath of the market, or vice versa, is also something to consider. This is a testament both to them picking low-cost funds, and the efficiencies of robo-adviser setups in general. Heck, if you're expecting 20%, it might make sense not to max out the retirement accounts first (or figure out a way to put the investment inside the retirement account). See these posts for more details: https://www.whitecoatinvestor.com/capital-gains-and-losses-timing-is-everything/, https://www.whitecoatinvestor.com/tax-loss-harvesting/. Now that I achieved that, I will never go back if I can help it. We are in Seattle so the companion fare has been used many times. If we had a sweet tax deal being offered to us for investing, we usually took it instead of paying off debt. Its tough to do nothing I might as well rebalance with new contributions and feel like I am doing something. Student loans and mortgage are our only debt and all of it is 3.8-3.9% interest. Also, FYI, on the eMail version, there is no ability to comment below, as stated only by coming to the site itself can I do so which is quite cumbersome and I doubt many do so I certainly will not in the future. In addition to mutual funds, Optum Bank is now offering a new investment option: digitally managed investments with Betterment. If you dont need to harvest losses due to large paper losses from 2008 or other large events, then perhaps this isnt for you. I'm often amazed at how many people are willing to carry around debt like this. Both of course change significantly with the stages of life. Whether to use a service such as Betterment is an individual choice, but I think their introduction of TLH+ makes their 0.15% fee seem reasonable for management of taxable investment accounts. 1. Its logical, but I havent figured out a way to automate it. With this plan, I would be done with paying my student loans in 4 yrs. Vanguard doesn't let you buy fractional shares of ETFs? No, its over $200K now. Youll find your balance somewhere in the middle. Supersavers might benefit more from a Roth than someone who started saving late. Its where all my money goes after maxing out 401K and SEP and 529 accounts. Market just dropped 40%? In order to save $900 for 3 months, it would take an investment of $2,400,000 @ 0.15%, wouldnt it? Youre right. You cant simply blindly put all taxable into munis. If you're in a state where it isn't protected, perhaps it is less of a priority. I think it is hard to go wrong paying off debt because once it is gone those returns are locked in. After a decade or so, even a massive market decline isnt going to get your share price back below what you paid for it. The only debt I have remaining is sub 2% student loans which I go back and forth on whether to pay off or not. I agree that switching from ETF to mutual fund shares of a Vanguard index fund constitutes a wash sale. But I've avoided paying it off a couple of times in the past when the interest rate was really, really low. That is bad math. Learn to invest on your own and you will avoid these fees and come out way ahead When I completed my medical training, my strategy was to pay off my line of credit (at prime for interest) as slowly as possible and to use all my available money to invest. You'll need $54,000 in today's money to reach that goal. There is a significant behavioral aspect to this. My guess is it was similar to your point around level of wealth and risk tolerance. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); A Doctor's Guide To Personal Finance And Investing, 2023 - The White Coat Investor Investing & Personal Finance for Doctors. For the person wishing to avoid cross-account wash sale rule violations who holds the same funds long term in the tax-deferred account then the added expenses of a Fidelity-equivalent portfolio add up. But if you have a four-figure portfolio and you are decades away from financial independence, paying off your 2.5% mortgage early probably shouldn't be your priority. And its not that the balance tipped (we are taking as many trips as ever). There should be plenty of money in investment accounts to cover mortgage payments, but the security of knowing in a down market that the military pension will cover most if not all core expenses will both let me sleep better at night and allow me to keep most of the retirement accounts invested in equities. Excellent post just about as simple as it can be made while still retaining the necessary complexity to be useful. Financial Wellness and Burnout Prevention for Medical Professionals. Social Group - Whiten Coat Investors; Twitter; Facebook Page; WCI on Reddit! Your email address will not be published. High interest-rate debt should, in general, be paid off before low interest-rate debt and making investments. This motivation has kept me focused and enabled me to more easily bypass purchases/trips that otherwise may have been more of a weakness. But at some point, it has to become a wash and beyond that point a bad deal. In choosing between the two for a taxable account, I went with Betterment. Great post. Id call that a win. For us, paying off some smaller debts makes a lot of sense, as it frees up cash flow and gives more cush in the budget. IIRC, for that same mix that I spelled out in the spreadsheet link scattered in the comments, the ER differential was over 0.5%. The month out of residency we were -300k net worth. Much as I would like it to be gone faster, and I hate debt, I know the expected return on the payoff is low. Is it market timing? Our mortgage is quite large, and I think we are just going to sit on it and take the tax deduction. Sorry, I didnt refresh my browser prior to posting. V-E-R-Y far cry from $900! In general, it also builds your net worth. 150 Of The Best Investing Blogs On The Planet (2018) 529 and UTMA contributions may also be prioritized. 2. Doing so would violate the Wash Sale Rule. The "automatic" tax loss harvesting is cool though and hard to complain about the fees. Otherwise to the extent excess equities are held in your normal retirement account you are turning gold in to lead (converting long-term capital gains into eventual ordinary income). With the new tax law, I will no longer be able to deduct mortgage interest, moving the empty land to the top of the pay this debt as quickly as possible list. If you're giving up an employer match to pay off debt, you're making a mistake and basically leaving part of your salary on the table. This potential income deduction of up to $3,000 represents arbitrage between current marginal income rates and future long term capital gains rates rather than a permanent gain. It isnt really the account size but the contributions.. As I understand it, harvesting is not only at deposit events: https://www.betterment.com/resources/research/tax-loss-harvesting-white-paper/.
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