Podcast Episode - Avoiding Retirement Account Mistakes You Can't Afford To Make


Marriage, Retirement, Roth, Roth IRA, Taxes


August 15, 2021

Listen to Podcast Episode:

Today, we go to Suze School about the ramifications of what filing your income taxes, “Married - Filing Separately” can have on your ROTH IRA and traditional IRAs and how you can solve the problem.


Podcast Transcript:

August 15, 2021. I'm gonna make this podcast as fast and as brief as possible because I'm recording it between two tropical storms. Fred that's hitting right now, but I think I have a window here to get this podcast out over to Robert and then the next storm is Grace. That's coming Tuesday and Wednesday. So, we'll see what happens on Thursday. But we are hunkered down here safe and sound and ready to go. So, a few things I want to talk about before I do Suze school today. And the first one is about this sweepstakes. So, so many of you are so excited about it. And that's the sweepstakes being offered by Alliant Credit Union. But you have questions. So, I'm going to answer them right now. First of all, many of you are writing in and saying Suze, I want to open this up for my 15-year-old, my 17-year-old, you have to be 18 years or older to open up the ultimate opportunity savings account at Alliant Credit union. Again, for those of you who don't know how to do that, just go to myalliant.com. That is where you open up my ultimate opportunity savings account, that's number one. Number two, if you already have an ultimate opportunity savings account, you are automatically entered twice into the sweepstakes. So don't worry, it's not like you have to open up more accounts and everything again. You already are entered twice. You don't have to do anything else Because you've been enjoying the .55% interest rate as well as hopefully, you're putting in at least $100 a month for 12 consecutive months and then you get $100 which is a 16.7% return on your money. So, you're already doing that. So, you are just fine. The official start date, many of you want to know this. The official start date of the sweepstakes is September 13 and it runs through October 13, nobody else but the women and money podcast listeners know about this. And so that is why if you open up an account before September 13 by going to myalliant.com then you are automatically entered twice. After the sweepstakes officially starts for everybody, then if you open up an account you're only entered into the sweepstakes once. However, I will tell you starting September 13 because that's when it officially starts, so now I can then officially talk about other things. I will tell you a way how you can get entered five more times but you'll like it, so just stick with me but therefore can you just take advantage of it and open one up now if you haven't done so all ready. All right. I think that's everything that you wanted to know. Right now, let's go to Suze school. Today’s Suze school, I told you on Thursday was going to be about those of you who are married and for whatever reason you choose to file your income taxes as married filing separately. Now why would you do that when you get married? The truth of the matter is you have a choice. You can file your income taxes with your spouse as married filing jointly. Which means both of you put all of your information into one tax return and you jointly file and you both sign that tax return and you send it off. But there are many of you that may be making about the same amount of money as your new spouse or maybe one of you claims a whole lot of deductions and you have figured it out that if you file your taxes married filing separately it will save you money on your taxes and that is absolutely true. So, it might be an advantage to you financially speaking. However, when you file married finally separately there is a ramification of doing so, you not only just save money on your taxes, however you may be restricted from doing a Roth contributory IRA. Now many of you know that out of all the retirement accounts that are out there, every single one of them. My absolute favorite retirement account bar none is the contributory Roth IRA. The reason that I say contributory is because this is the Roth IRA that you choose to fund and contribute to every single year. So, every year, if you're eligible you put money into this retirement account. You can have a converted Roth IRA, you can have a Roth IRA rollover, you can have other types of Roth accounts but a contributory Roth IRA Is one where you contribute to it every single month and that Roth IRA, by far if you qualify is my absolute favorite bar none. Now, twice I just said if you qualify now, what allows you to qualify for a Roth IRA? Well really, it's three or four things you know in the past I've always said if you're married filing jointly and your adjusted gross income is blah blah blah blah then you know if you qualify. Well, it's a little bit more complicated than that so, listen to me closely to qualify for a contributory Roth IRA It is dependent number one on your just a gross income. Number two, your marital filing status, are you filing, married filing jointly or married filing separately? It's dependent on that and it's also dependent on your living arrangements. Got that. Now let me cover those in detail. So, let's start with the filing status. If you are single, let's just say you're not married. Well then you don't really have many problems because now you're just filing as a single person, so you would qualify for a contributory Roth IRA to make a full contribution which is $6,000 if you're under 50, $7,000 if you're 50 or older, if your adjusted gross income is under $125,000 a year. Once you make as a single person over 140,000 a year, you no longer qualify for a contributory Roth. But here is now where the problems start to come in. Listen to me closely if you are married filing jointly, however. Again, no problem because you're filing jointly, as long as you make under $198,000 a year of adjusted gross income, then you both can contribute the maximum into a contributory Roth IRA. Once you make over $208,000 of adjusted gross income, you no longer are eligible for a contributory Roth IRA. But if you are married filing separately, now, listen to me closely now and you are living, you are living together in the same house, you cannot make over $10,000 of adjusted gross income a year because if you do you no longer qualify for a contributory Roth IRA. However, if you are married filing separately and you do not live in the same house, maybe you're going through a divorce, maybe you're just separated, but you don't live in the same house, then you let's go back to it can open up a contributory Roth IRA. And now we go back to the income limitations of $125,000 to $140,000 of adjusted gross income. So, the real key there, besides the income everybody, is your living arrangements with your spouse. Now is there a way around that where you're both living together and you want to stay living together. But you file married filing separately because you want to save money on your taxes and therefore you want to know. But Suze you say you love the Roth IRA so much what can I do? So, here's what you can do. Remember. A traditional IRA Is different than a contributory Roth IRA. A traditional IRA, is where you make a contribution, again the limits are $6,000 and $7,000 depending on age per year and you're allowed to take that off of your income. Let's just say you are married filing separately, you live together and you are not covered by an employer sponsored plan. Let's just say that's true for now. You don't have a 401K. You don't have a 403B. Really? You don't have any other retirement accounts. You're just starting, here we are. You could open up each of you a traditional IRA. You could fund it to the max and if you wanted to, you could either take that off your taxes, make it deductible from your income or you could choose to make a nondeductible IRA contribution which means you contribute. But you just don't take it from your income, and then you could convert it to a Roth IRA. Did you just listen to what I said for those of you and there are many of you out there that have written me that are married filing separately. You are living with your spouse and you want to know how you can open up a Roth IRA, that is how you do it now. It's not going to be a contributory Roth IRA. It's going to be a converted Roth IRA. But really in the long run equally as good, especially if you're going to do this every year and the money gets to grow tax free and you get to withdraw a tax free. And the and fabulous that is absolutely a way around it. So, you need to listen to what I just said very, very carefully because these are little things that most people do not know. Now, what we also have to get very clear in the Suze school is that your marital filing status has absolutely nothing to do on any level with employer sponsored retirement accounts. So, if you are married finally separately and you're working for an employer you absolutely can contribute as much as you want as much as they allow you to do. So legally into your employer's 401K Roth, 403B Roth, TSP Roth. You absolutely can do that. So, please don't get the two mixed up. The real ramifications, a married finding separately comes to you being able to do a contributory Roth versus everything else. Okay, so just keep these rules and regulations separate. Don't go worrying your pretty little head about it that maybe you're not going to be able to contribute to your Roth 401K and everything. I'm just talking about individual retirement accounts right now. There are many of you out there. However, who are going to be filing married filing separately and you don't want a Roth IRA, you want a traditional IRA for whatever reasons, that's what you want. You want to take the tax deduction now, let the money grow tax deferred and take it out later on and pay taxes on it at that time because you're under the impression you're going to be in a smaller tax bracket at that point. All right. So, there are those of you that believe that. All right, you can do so. But you have to also understand that there are ramifications on a traditional IRA in the deductibility of it if you file married finally separately, especially if you are covered by a plan at work. So again, whether you can deduct your contribution to a traditional IRA depends on your filing status, your income level and if in fact you are covered by a work plan. So, if you and your spouse file as married filing separately and you're living together. The income limitations are the same for the Roth. You can only take a partial deduction on your traditional IRA if you make under $10,000 of adjusted gross income, after $10,000 guess what? You don't get to make any deduction whatsoever. So, you have to be very careful about that. Now listen closely again, you're married filing separately, and let's just say you and your spouse have entered into a divorce decree, but you are also covered by a plan at work. All right, even though you may not be living together right now and everything, the fact that you're still married filing separately, and you're covered by a plan at work. To take a full deduction, your modified adjusted gross income has to be less than $66,000, after $76,000 of adjusted income, it totally goes away. So, those are things that are important for you to know. If you are not covered by a plan at work, listen closely and you live apart. So, you're married filing separately, but you do not live together and you do not have a 401K, a TSP, or 403B. Then you can take the full deduction up to the annual contribution limit regardless of how much money you make. So, bottom line, how you file your taxes, your living situation, your income really is the decision factors on whether you get to have a contributory Roth IRA, you get to have a traditional IRA where you get to deduct your contributions or all of that has a lot to do with your situation. So, it's really, really important that if you don't know and you are married filing separately, you absolutely should contact a tax professional, a CPA, an enrolled agent, anybody I don't even know. Maybe you want to do one of those tax programs and check it out and see what it comes up with. Does it say to you, you can't do this, don't do this, you can't do that. But I would really, really seek advice. If you're opening up a retirement account at a discount brokerage firm for instance, because you want a Roth IRA and you open one up, make sure that you tell the person that you're opening and up with that you are married filing separately, make sure you tell them whether you're living with the person that you've married or not. You have to tell them those things because so many of you have been writing into me and you're telling me Suze, I opened up an account of XYZ, I put money in, nobody ever told me that I couldn't do that. You cannot assume that the person that you're talking to knows about all of these regulations and the rules, everybody, you might have to educate them. Which is why it is so seriously important that, you know these things because let's just say you're like many of the people that written in Suze, I opened up a Roth IRA I've been married finally and separately I've been contributing to all these years to it Now. What do I do? Do you understand that this person obviously should have been told they can't do it but they weren't told that but now they're the ones that are going to have to pay the penalties and the taxes on that money. Not the person who they opened up the account with. That is why I always say to all of you what happens to your money directly affects the quality of your life, not your financial advisor’s life, your banker's life, your life insurance agent’s life, but your life. So today Suze School, especially for those of you who are married filing separately, you're living together, you're not living together, you want to know how to get around the rules legally. That's why this Suze school is so seriously, seriously important. And if you're confused, listen to it again and again. If you're confused, write me an email sending your question about this topic at asksuzepodcast@gmail,com and I most likely will absolutely answer it. If it's about this topic or an easier way to do it, also is to go to the women and money app and download that on apple apps or google play and you can send your questions in there. So, that was the Suze school for now. So, there we go. The other thing is today is such a great day because Colo has left for, Colo for those of you who don't know is like our son who lives with us here on the island. He's 42 years of age and he's left the island for the first time in two years to go see his girlfriend back in Colombia. And I have a feeling he might ask her to marry him. And so, what was interesting about this, I'm just going to tell you this is that I love the fact that Colo has a Roth IRA that we contribute to every single year and it's been doing fabulous for him. So, before he left I said to him, Colo, I just have to ask you, are you going to get married? He loves his girlfriend Anne so much, I can't even tell you I'm so excited for him. However, he said I'm thinking about it Suze, yes. So, you know what I said to him, Colo, you better think about this because if you marry her, you are going to have to file married filing jointly. And this is what it's gonna do to your taxes and if you file married filing separately, you're not going to be able to have easily a Roth IRA. Although I then said to him, however we could have you married filing separately, you obviously don't live with her so you could open up a traditional IRA, and then convert it and still have a Roth but not a Roth contributory. So, we'll see what he does. But see can you imagine what it's like living with me? Can you imagine being so excited that you're going to go away on vacation for the first time in two years and it's two years because of Covid and everything and what was happening in Colombia and Annie's a nurse. So, it's not that he doesn't get vacation. He didn't want to take it. He wanted to keep all of a safe and sound. And what does Suze say to him? Just think about it. Colo think about what it's going to do to your taxes. Okay. Can you imagine living with me? Oh my God. Anyway, that's the podcast for it today. I am going to try to get this off before the storm comes in. Hopefully we'll have an Ask Suze anything on Thursday um because a different storm comes in by the name of Grace but hopefully graceful shine their grace upon us and it won't be bad at all. All right. So, until then make sure that you stay safe, strong and secure and do not forget about entering the sweepstakes with the Alliant Credit Union by simply opening up an account before September 13 and then you are entered twice. Alright. See you then. Bye bye.


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