Forum Mailbag: No 401(k), Where To Park Emergency Fund, Moving From Saving To Spending, And More!

There is so much great information on personal finance forums. I regularly participate on several message boards, including Bogleheads, White Coat Investor, and Rockstar Finance. This is a roundup of my favorite discussions happening around the internet.

1. White Coat Investor: No 401(k)

Question: Bobkat just finished residency and is working at a place which doesn’t give him access to a 401(k) for one year after he starts his job. He is looking to aggressively save and wanted to know the best vehicles (after a Roth IRA) to put his money.

WSP’s Take: In terms of tax-deferred options, an HSA is an excellent place to put money, if he is healthy and doesn’t have a lot of recurring medical expenses or prescriptions. His contributions are tax-deductible (including Social Security / Medicare taxes), his money grows tax-free, and withdrawals are tax-free for eligible healthcare expenses. It may be too late for him to be enrolled in a high-deductible health plan for this year, which is required to be eligible to contribute to an HSA. He can switch to a high-deductible health plan during open enrollment in the fall, so that he can contribute to an HSA next year.

Another great place to put extra savings is towards any student loans he might have. Many physicians who aren’t trying for public service loan forgiveness try to pay off their student loans as rapidly as possible following residency.

Finally, a taxable account isn’t the end of the world either. He can minimize the tax consequences from a taxable account by avoiding trading in the account.

2. Bogleheads: Where To Park Emergency Fund

Question: Fiverus has built a $1,700 emergency fund and would like to know where to put the money. Currently, he is earning 0.85% through a money-market account with Ally. He was wondering whether there were any other good options for his emergency fund.

WSP’s Take: I’ve previously written that I don’t think that many attending physicians should have an emergency fund, but medical students and residents would do well to have an emergency fund.

I don’t recommend putting emergency fund money in any stock or bond investment, nor do I recommend putting it in a CD. Emergency fund money should be very liquid. This should be money that you can withdraw quickly if it is needed to pay off unexpected expenses.

I think that a money market account is a reasonable location for the emergency fund. An alternative would be a high-yield savings account. At Ally, where the OP currently has his money, he can currently get 1.15% interest on his savings account. That being said, the difference between a savings account and money market account is $5 a year in interest, so he’s probably just fine with where he is.

3. Bogleheads: Moving from Saving to Spending Mindset

Question: Restingonmylaurels has been a lifelong saver, and now that he knows he will have more than enough to retire on, he was wondering how to loosen the purse strings. He isn’t a natural spender, and would like to know how to switch from a savings mindset to a spending mindset. He doesn’t want to necessarily just give all his money to his children or grandchildren.

WSP’s Take: It’s very common for lifelong savers to have difficulty flipping the switch and going from a saving mode into a spending mode.

For some people, the thought of seeing their net worth decline bothers them, even though they are at very low risk of running out of money. If you have trouble spending the money on yourself, consider being generous to others. Feel free to be generous to strangers, charities you care about, or relatives. While you may not gain much satisfaction or happiness by spending on yourself, you may feel good about helping others, through direct gifts or through a charity.

4. Reddit: Tax Strategies for Gap Year With Low Income

Question: Hackneycoach will have a lower income this year (30k instead of the usual 120k) in order to take care of his mother. He wanted to know whether he should take advantage of any strategies for this single year of low salary. He plans to retire in 20 years and to be in the 15% tax bracket in retirement. His current accounts are as follows:

• Traditional 401(k) $27k
• Traditional IRA $267k
• Roth IRA $11k
• Taxable brokerage $270k (Long-term unrealized gains $38k)

WSP’s Take: While the original poster is not a physician, this is not an uncommon scenario for physicians, who might have a year of low income because of a job change or planned sabbatical.

One way to take advantage of this year of low income is to “generate” taxable income by realizing long-term capital gains. While he is planning to be in the 15% tax bracket during retirement, he may be able to take advantage of tax gain harvesting opportunities and realize long-term capital gains at a 0% tax rate.

If he will be in the 15% tax bracket in retirement, then he will likely not benefit much (if at all) by converting traditional retirement money into Roth money, since he would have to pay approximately 15% in taxes on the traditional to Roth conversion.

If he is eligible, he should continue to max out his traditional 401(k) contributions. Presumably, that would mean selling shares from his taxable portfolio, but only buying back the portion of money he doesn’t need for household expenses and 401(k) contributions. Any long-term capital gains he does incur because of these sales should be taxed at 0% if he remains in the 15% tax bracket.

Wall Street Shares: 5 Articles I Enjoyed Reading This Week

1. Budgets Are Sexy and 1500 Days: The Paradox of Money — Mr. 1500 reminds us that wealth is not the ultimate goal, but we should aim to use our wealth wisely to improve the well-being of others and ourselves.
2. My Curiosity Lab: Dr. C’s Outsourcing Calculator — I’m a big fan of trading your money for time, and Dr. Curious discusses how he decides whether to DIY something or outsource it to someone else.
3. Physician Couple: How We Improved Our Net Worth By $730,000 In Less Than Three Years — when you have a dual-physician income, you can grow your net worth rapidly. Physician Couple shares his family’s experience.
4. Physician On FIRE: Our Latest Real Estate Investment: 7 Acres of Lakefront — PoF plunked down $168,000 cash for a large, mostly undeveloped lakefront property. I’m looking forward to reading how PoF develops this property and uses it as a home / rental property.
5. The Boss MD: The Good, Bad and Ugly of My First Rental Property — Managing a rental property is not easy, and The Boss MD shares his experiences with his first rental property.

What do you think? Do you agree or disagree with any of my responses? What’s your take on the topics in this week’s forum mailbag?