“Nobody is going to plan for your retirement for you, you have to do it. If you don’t pay your mortgage, they take your house. If you don’t plan for your retirement, you don’t have one.” -Justin Shaw, Financial Advisor
In this episode, Jen talks with Financial Advisor, Justin Shaw. Justin is one of our Trusted Resources and he specializes in serving professionals in the healthcare industry. This episode focuses on shedding some light on IRA’s. The different kinds of IRA’s, how they work and why you might utilize one over the other. We hope this episode answers all of your questions, but if not, you can contact Justin directly. Find a short bio and his contact info below.
Office number- (913) 897-2726 Cell Phone- (785) 220-6781
Email- [email protected]
Justin’s bio in his own words:
The ability to impact lives and give back to my community has always been my motivation. I focus on serving professionals in the healthcare industry. By having a focus around serving healthcare industry professionals I help them build a strategy for their financial and retirement goals so they have more time to focus on saving lives and balancing a hectic work/life balance!
Justin Shaw has succeeded in:
- Helping multiple young Physicians work through student loan debt & save for retirement while they focus on building their practice.
- Saving Physicians as much as $26k a year on commissions and fees from advisors who target them for their high income.
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Please enjoy the full transcript below-
Justin: Nobody’s going to plan for your retirement for you. You have to do it. If you don’t pay your mortgage, they take your house. If you don’t plan for your retirement, you don’t have one.
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Jen: Welcome to DocWorking: The Whole Physician Podcast. I’m Dr. Jen Barna. We’re excited to bring on Justin Shaw, Certified Financial Planner. He’s one of our trusted resources at DocWorking, and he works nationwide specializing in working with doctors and health care workers. Justin is here today to talk with me about different types of IRAs we’re going to delve into, some specific types today and maybe some employer-based ones for another discussion later. Justin, welcome to DocWorking: The Whole Physician Podcast.
Justin: Hello, thanks for having me.
Jen: I know that you’re going to be able to make this topic interesting and entertaining. Something we all need to know, and it’s something that I think we have some questions about. So, where should we start?
Justin: One of the biggest things I get questions on are, IRAs, traditional IRAs, Roth IRAs, backdoor Roth, things like that, what questions do you have around those that I can answer for you?
Jen: Let’s start with just the basics. Can you just go through and give me a definition of traditional IRA versus a Roth IRA? And then, we will step into once we get that ironed out into what a backdoor Roth is, and when that is relevant, and when it should be used?
Justin: When investing when you think about even 401(k) or 403(b), those are the employer side of things for large corporations. Then traditional IRA, and Roth IRAs, they all fall into that traditional or Roth category. A traditional simply means pre-tax money. So, you put the money in, before you collect your check, it reduces your taxable income. You invest that money, and then when you retire, you take that money out, and then you pay taxes on it. A Roth is simply after-tax money. So, you pay taxes on that money, then you invest, it grows tax free, and then when you withdraw it, you never pay taxes again. That’s simply the idea of it. The major difference between traditional and a Roth is simply the tax benefit. If you want to compare it to your employer plans, IRAs generally have more investment options in them, where 401(k) plans generally have somewhere between 20 and 30 options. An IRA can have somewhere between 9000 plus.
Jen: My first question is, if you have a 401(k) or a 403(b) through your employer, are you eligible to contribute to an IRA?
Justin: Yeah. Employer sponsored plans and IRAs are completely separate. An IRA actually stands for Individual Retirement Account. Within employer sponsored plan, the 401(k), 403(b), you can contribute $19,500 a year. In an IRA, you can contribute $6,000 a year. If you’re under the age of 50, if you’re over the age of 50, you can contribute an additional 1000, so 7000 a year.
Jen: Okay. That’s the same for traditional and Roth IRAs?
Justin: Correct. However, the Roth IRA does have an income limitation.
Jen: What is the income limitation for individuals and couples?
Justin: If you are an individual, or you file your taxes individually, the maximum amount you can make your adjusted gross income is $125,000. If you’re married, filing jointly, it’s $198,000. There’s a new change year to year. But right now, for 2021, that’s what they are. But there is a loophole, if you want to call it that called a backdoor Roth, that we can dive into that might help a lot of physicians out.
Jen: Yeah, let’s talk about that. One of the things that we are interested in talking about on the podcast is financial independence. There are different routes that people take to that. I really advocate for people to get themselves into a safety zone of what I call financial independence. From there, people have a lot of options, and they can choose to work because they want to, or they may retire, they may move on to other things that they’re passionate about doing, or some combination of those. If someone reaches financial independence, or needs to, for some other reason, go part time or decrease their income, would that be a scenario when the backdoor Roth IRA would come into play and be a good tool?
Justin: I want to touch base on what you just said there, as far as financial independence, and that is simply that you have to be diligent about your retirement. Nobody’s going to plan for your retirement for you. You have to do it. If you don’t pay your mortgage, they take your house. If you don’t plan for your retirement, you don’t have one. So, I do encourage people to make sure, this is something you should put a focus on and it should be early in your career and it should be something forefront, and something you are paying attention to regularly.
As far as the backdoor Roth, so the backdoor Roth applies when you’re working full time. Once you exceed those income limitations, that’s when you would want to utilize the backdoor Roth. When the backdoor Roth, basically what that is, is just a slang term for saying, “Hey, we’re going to convert a traditional IRA over to a Roth IRA.” It’s really just a loophole in the governmental system that says, “Hey, high income earners can’t contribute directly to Roth. So, we have to basically take the scenic route to get there.” What happens is, as you take your money you’ve received from your paycheck, you put it into a traditional IRA, you pay taxes on that money, and then you move it over into the Roth. Then you never pay taxes again. If you make over $125,000 a year, individually or $198,000 jointly, then this is the only way for you to get tax free growth from an IRA.
Jen: In terms of when you would want to do that, if you have maximized your contribution to your traditional IRA for the year, then you would choose to do that simply because you don’t want to pay taxes on that money in the future, even though you may be in a higher tax bracket now than you would be later? Or would you only do that if you expect your tax bracket to go up?
Justin: Good question. That’s really independently person to person. If your idea of retirement is sitting on your front porch in a rocking chair watching the sunset, backdoor Roth probably wouldn’t be ideal for you. But if you wanting to continue the lifestyle you have, your tax brackets probably not going to go down. And taxes 20, 30 years from now probably aren’t going to be lower than they are now. Statistically speaking taxes only go up. You can’t utilize both a traditional and a backdoor. It’s one or the other.
The backdoor typically works best if you do not have a traditional or Roth to start out with. You come to someone like me, and you say, “Hey, I want to invest money, but my income is too high.” We say, “Okay. Well, what’s your opinion on taxes?” “Well, hey, I’d rather have tax-free income when I retire.” Okay, so then we go into the Roth, and we say, what we’re going to do is we’re going to open a traditional IRA, or an open up a Roth IRA, because of your income level, we’re going to put everything into your traditional IRA, whether it’s 500 bucks a month, $100 a month, one lump sum of $6,000 or $7000, depending on your age, and then we immediately just convert it over, and then everything’s good from there. And then it just grows tax-free forever until I guess any government regulations change or some unforeseen things that we don’t know.
Jen: Sure, and hopefully, that would be grandfathered in.
Justin: Right.
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Jen: What I’ve heard about and what I’m curious about is a scenario where someone’s income goes down, for whatever reason, perhaps they retire early, but they’re not yet at the age where they’re going to be withdrawing money from their retirement funds. What they want to do, is they want to take that opportunity when their income is lower, and convert funds from a traditional IRA to a Roth IRA.
Justin: Yeah, that can be done at any time. So, if your tax bracket is lower, you made less income, you went part time, then yeah, you could convert money over from a traditional to a Roth. Basically, what happens that just increases your taxable income, and then that money gets moved to the Roth and then grows tax-free from there. You would pay taxes on any money that you convert, that you converted $10,000. You’d have to pay your tax bracket percentage or income percentage at that particular time on that money move. But generally speaking, I’m not a big fan of it myself. If you lower your taxable income below the level that allows you to put directly into a Roth, it’s generally better to just put that money into a Roth there and leave the money that’s already in a tax deferred account there. I believe in something I call Levels of Liquidity, which is just basically having money in all your brackets, tax-free, tax deferred, savings account, inherited money, bond, CD, just having money diversified everywhere.
Jen: Can you tell me what is a spousal IRA? When might that be applicable?
Justin: Yeah. A spousal IRA is simply just an IRA in your spouse’s name that the income earner of the household contributes to. If I’m married, and my spouse doesn’t work, but I make more than $14,000 a year in my adjusted gross income, then I can put money into my IRA and my spouse’s IRA, so that we can maximize the growth on that. This only applies to married couples, partners who file their taxes jointly. If you are married and file separately, this would not apply to you. The same dollar amounts apply 6000 if you’re under the age of 50, 7,000 if you’re over and you can’t withdraw the money until you’re 59 and a half.
Jen: Justin, I know you specialize in working with physicians. You work with a lot of health care workers. I’m curious if you have any stories, or any experiences in working with physicians that maybe are either triumphs and stories that are good examples to follow, or maybe stories of someone who maybe didn’t prepare and our cautionary tales.
Justin: I’ve got plenty of those, we could do a whole show on those if you want. One of the most recent ones that I’ve had, this actually happened this year. When I’m reaching out to physicians and things like that, I get all the time that, “Hey, I already have somebody. I’ve been working with somebody for years, I like them.” Just because you like somebody doesn’t mean that they are good. I use the terminology, if you had a brain injury, would you go to a podiatrist? Probably not, you’re going to go to a specialist.
Recently, I was working with a physician, who same story said, “Hey, I got somebody, I’ve been with for years. I’m not interested in changing.” Well, I reached out to him a few more times, I finally said, “Fine, I’ll let you look at my stuff.” He was completely overcharged, undiversified. It was scary to say the least. And long story short, when it’s all said and done, I was able to save him over $26,000 a year on just commission and fees alone. He’s a few years from retirement now, but we’re on a track to get him to where he will be a multi-millionaire when he retires.
Jen: On that note, what should a physician look forward to know that their financial planner is really where they should be in terms of how they charge and what options they offer?
Justin: There is a theory out there or a rule of thumb that says, “Find somebody you know like and trust.” I don’t really like the know part because a lot of people don’t know financial advisors, but you got to find somebody that you like. Say, “Well, how do I know if I like them or not?” Well, find somebody that’s going to give you a free consultation. If they won’t offer you a free consultation, they won’t take a look at what you’re doing for free, then you don’t like them. [laughs] Because there’s no reason for them to have any skin in the game to pressure you to say, “Hey, well, you’ve already paid me X amount of dollars, you might as well just keep your money here.” And if they’re really looking out for your best interest, they don’t care about the money. Then somebody you trust, so you have that consultation with them. And you’re asking them questions, “Why do you want to work with physicians?” “Why do you do what you do?” “What do you know about working with physicians?” Because everybody’s different, I wouldn’t go work with a construction worker, because I don’t know a lot about construction. I don’t know what their lifestyles are like, that kind of stuff. So those are the first big things.
Then the last thing is just, you should always get a second opinion regularly. I tell people, even my own clients, go get a second opinion every five years, at least. It takes about 15 minutes of your time, and it can save you thousands of thousands of dollars. So, how do you know, you probably wouldn’t know if they know what they’re talking about. But you can get expert advice from others to see if it aligns with what they’re doing. I feel like I do the best service I can for my clients. So, I have no problem telling them, “If you can find somebody better than me, go.”
Jen: One thing that we look forward with trusted resources, we look for certified financial planners who charge a fiduciary, so they charge a fee, but they aren’t selling products in terms of investments. Is that appropriate?
Justin: Yeah. The term fiduciary is a relatively new term that has come about. Basically, what it means is a fiduciary will put your interest in front of their own. A fee-based account requires a financial advisor to do that because if I charge you 1%, 1% of a million is more than 1% of 100,000. So as your account grows, so does my commission. So, I do hate that term, personally, but I think a true fiduciary regardless of whether you’re paying a fee or it’s commission should always have your best interest. I just tell clients that the fee base is the way the world is going, but mission base accounts are still available. Just be cautious with them.
Jen: What about financial planners who just charge by the hour?
Justin: Those wouldn’t necessarily be a financial planner, they would be like a registered representative. Somebody who just basically gives you advice. Well, I can’t tell you to go with them or not to go with them again, I would be cautious, because if I’m giving you advice, regardless of the outcome, am I really giving you the best advice? Again, that’s where it comes down to find somebody who will talk to you for free. You have questions about finances, come talk to me. I will talk to anybody for free for hours. [laughs]
Jen: Fantastic. Maybe, depending on the individual, they’re going to have certain formats that they like to use. But I think that all sounds like very good advice. Great. How can they best reach you?
Justin: I give everybody my office line and my cell phone. My office number is 913-897-2726. My cell phone number is 785-220-6781. I’m on the Trusted Resource page. So, if you need my email address, all that kind of stuff, look me up there.
Jen: Yes. Go to docworking.com, and look under our Trusted Resource section, you’ll see Justin there under Financial Planners. I appreciate you taking the time to talk through some basics on IRAs with me. Obviously, that is a subject that comes up for all of us and question of what the differences are is always helpful. So, I look forward to talking with you again in the future on some topics, especially getting into, I think, our next conversation, some other types of employer-based IRAs, such as the SEP and simple IRA and non-deductible IRA, and what the difference is between that and the Roth. I’m really looking forward to having you come back and I really appreciate you taking the time to talk with me today.
Justin: Yeah, you’re welcome. Thanks for having me again. Like I said, if you or anybody listen to podcasts, have questions, give me a call, happy to talk to anybody, like I said, for free. Answer any questions you have, and hopefully you’ll bring me back and I’ll be able to continue to educate everybody.
Jen: This is Justin Shaw, and Jen Barna on DocWorking: The Whole Physician Podcast.
[music]
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