Podcast Episode - Ask KT & Suze Anything: How Do I Avoid a Social Security Tax Torpedo?

On this edition of Ask KT and Suze Anything, Suze answers questions about RMDs, funding trusts and avoiding a “Social Security Tax Torpedo.” Plus, a quick reminder about why dollar cost averaging is so important and more.

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Podcast Transcript:

Suze: August 15th, 2024. Welcome everybody to the Women and Money podcast as well as everybody smart enough to listen.

I have the cutest little one right across from me giving me the biggest smile.

KT: Do you know why?

Suze: Why?

KT: Today, today is Saltwater Day.

Suze: I know. It's August 15th.

KT: It's August 15th. It's Saltwater Day.

Suze: Tell everybody what that is. Well, first of all, wait, KT, I know you're just so excited for today, but this is...

KT: It's been a big week.

Suze: It's been a big week, but this is the Ask KT and Suze Anything edition.

So, Suze here, KT over there...

KT: We missed you. Missed you. We missed you and Sunday too, right?

Suze: I did a podcast on Sunday.

KT: We missed you last—I missed you. That's right. Yeah, we had no power for like three days or something. So today, Saltwater Day is a very significant day from my childhood.

Suze: Tell everybody about it.

KT: Well, I didn't...

Suze: I've been having to do this every single year on August 15th, since the day—no matter where we were in the world, she's had to do this.

KT: So August 15th, Saltwater Day, traditionally is an old ancient Italian tradition—probably started by a bunch of fishermen. But it was the Feast of the Virgin Mary. And they believed on August 15th, you would go into the sea—the sea had healing waters, and especially on this day, which was, I suppose, blessed by the Virgin Mary long, long, long ago—and is still blessed. I think every day is blessed. But we go, and we traditionally had to put our feet in the water as children, little kids, and even as babies, they dunk you in the water and then you felt great. You felt like you were healed of anything and blessed.

I remember one year that I couldn’t go in the water—for whatever reason, I think I had a hip surgery or something—and my sister Lynn went and got saltwater and brought it up to the apartment and poured it on my feet. Remember?

So in any event, this whole week has been a very, very special week with Suze connecting with water.

Suze: All right. I mean, this is the KT podcast today.

KT: But I'm going to share a story with you. This all happened this week. It’s been a very blessed week.

So we live on an island, as you all know. And I've been wanting Suze to come with me onto the ocean side of our land, which is a little bit deeper and a little bit more challenging to soak with me in the saltwater versus the flats, which is the Bahama flats. It's very calm and very shallow.

Suze: Which I feel very safe.

KT: It's very safe. It's like a kiddie pool versus the real pool. I wanted her to come with me into...

Suze: It’s the shallow end versus the deep end.

KT: So for two years, Suze hasn't gone into the ocean side—the Atlantic Ocean—on our island because it's where she also, you know, unfortunately had a setback after her surgery from trying to go into deep water and getting out and it messed up her nerves and surgery for two years’ time.

Suze: So it’s a traumatic event for me. Very traumatic.

KT: So I go in and I turn around and I see this very svelte body coming towards me.

Suze: Wait, wait, wait. You think I’m svelte, do you?

KT: I do. She’s lost 25 pounds and looks fabulous in a bathing suit.

Suze: That took a long time to do, everybody.

KT: So she’s coming towards me and I’m in the ocean and I’m like, “Oh my God, she’s coming in.” She didn’t say anything, but she just walked straight in and she got in. I said, “You did it!” I was so excited. And we stayed in there—the two of us soaking and talking and bobbing around in the ocean—for at least an hour and a half.

Suze: Now this is where it gets interesting. Because now I’m sitting here listening to KT tell you all of this. I’m curious, KT, are you going to tell them what happened again as I was coming out?

KT: Yeah.

Suze: Are you going to tell them the whole story?

KT: So it’s time to exit. And I said, “Let me go out first and see how it feels.” I said, “We may have to crawl out—like doggy paddle out—because the sand is soft and it was high tide.” So I go out, I kind of struggle climbing up the beach to get to the hard sand. And behind me, I see Suze flailing around in the waves trying to get out. And finally she did. She held onto my shoulders. We came back and got her, walked her out. Soon as we got out, she beelines for the house to the pool and sits down and starts sobbing and crying like a baby. You wouldn't believe the tears and the crying. And it was very traumatic. All I could do was wrap her up in a towel and look at her and say, “It's all right. Let it out.”

Are you crying now a little bit? It was a very, very big deal for her to do this. A really big deal, people—if only you knew. And she did it, and she was releasing, I suppose, two years of fear and frustration and pain all at one go.

Suze: Can we go off of this topic now?

KT: She's a little teary right now.

Suze: Do you know why?

KT: I do, Suze.

Suze: Everybody, to tell you—I had PTSD about this event. “Is a traumatic understatement,” and it was almost as if I relived it when I was coming out.

KT: But how do you feel now?

Suze: I can't wait. Because when—today—when we're gonna put our little feet in saltwater, I'm going to put my feet in the ocean side again today.

KT: Maybe your body will follow.

So having said that, we wish you all a very happy August 15.

Suze: Aren’t you going to tell everyone about our meteors?

KT: So after the water event and connection with the sea, she decides we need to connect with the stars. She said, “KT, I’m gonna set the alarm for four o’clock in the morning.” This was a few days ago. I said, “Why?” She said, “Because tonight is supposed to be a big meteor shower.”

I said, “OK.” She said, “Are you OK with that?” I said, “Yeah, wake me up. We get up early anyway to go fishing, so wake me up a little bit earlier.” Alarm goes off. We wake up, throw on our bathrobes, go right outside in our backyard and lay down on lounge chairs looking up at the sky and we’re counting—bam, bam, bing, bing, boom, ba ba—all these stars streaking by and it was fun. And then she looked at me, she said, “Have you had enough?” I said, “Yeah, let's go back to bed.”

Suze: We didn’t get up till 8:30 after that. But anyway, let me start again. Welcome everybody to where KT tells you everything that's happened with Suze and KT this past week. You know, sometimes I think it’s great that you hear stories like that and that you get to know a little bit more about both of us.

The other day, I was listening to KT talk to her sister Lynn, and I—because she was on speaker phone, so I could hear her—and I love to eavesdrop, just so you know. But anyway, I always wonder, what are they talking about? However, I hear her tell Lynn the story about me breaking down and me crying. And then I hear Lynn say the following:

“That’s so good. It’s good for Suze to do that because she always seemed so strong and stoic and that she could do anything. And it’s good to show that other side of her as well.”

And was that partly why, KT, you decided to tell that?

KT: Yeah, I think it’s important for all of you. It’s interesting to hear our day-to-day life.

Suze: I hope it is for all of you. But anyway, so now what we can do is answer the emails many of you sent in. If you want to send in an email and if KT chooses it, we’ll ask it and answer it on this podcast. Do so to asksuzepodcast@gmail.com.

What do you have for me?

KT: The first question says: Suze, recently my friend told me she heard about an offer for 9.5% for a five-month CD with a max of $3,000. How can they do that?

Suze: So, are you asking me how they can do that, or is that the question?

KT: The listener's asking, “Suze, how do they do that?”

Suze: Here's what I would say. I don’t know if it’s a bank or a credit union. I don’t know where you heard this. Is it good for everywhere in the United States, or is it good for just a particular portion? Like, for instance, if this was a credit union, I’m sure it’s only good for where that credit union is located.

However, when financial institutions, in my opinion, do something like that, there’s also a reason why. Just let’s look at the math. You put in a maximum of $3,000 and they're gonna give you 9.5% interest—is that what they said, KT? Right? For five months. So that will be approximately $115 of interest.

Not that that’s bad, but OK. But there’s got to be something else with that offer. Either you have to open up an additional account where you fund it every month, you have to make so many transactions, you have to do something to make that worth their while to do such a thing. Normally they do such a thing because truthfully, $115 is a very little amount of money to pay to get a new client. Because chances are, once you are there with your money, you’ll stay there. You’re not gonna switch it every five months or whatever.

So look at the fine print. I think you will find that you have to do other things just besides this, and then you’ll have to decide if it’s worth it to you or not.

I personally don’t like commands like that. I like things that—you know, KT—that are very straightforward. This is what you’re gonna get for the year. This is what you’re gonna do. Also, I just have to say something: possibly five months from now, interest rates could be a whole lot lower than they are right now. So you go over there, you lock in 9.5% for five months plus whatever else you have to do, and maybe you gave up locking in maybe 5% for a year. In the long run, you may have made a big mistake. Up to you. I don’t know where they heard about it, but that’s what I think.

KT: OK, my next question: Suze, I'm confused. We inherited an IRA when my mom died this year. She was to take out $25,000 this year in RMDs but only took out $5,000 so far. So we have no idea how my brother and I, who are equal beneficiaries, split the remaining $20,000 this year.

Suze: A lot of people do that. Well, you know, when you inherit, KT, an IRA from somebody, then you each get your own portion. Since they’re equal, they would each—whatever, I don’t know what’s in there—but they each get the same amount. And sometimes they think they need to take out equal amounts in the year that mama died.

If they still need to take out $20,000 of RMD, they can divide it any way they want. If the brother, for instance, is in a lower tax bracket than the sister, then the brother could take all $20,000 out if he wanted. They can divide it any way they want in the year of death—what's remaining. Then obviously in the next years and all, it will be based on their own single life expectancies. All right.

KT: All right. Next question: can you explain the Social Security tax torpedo in simple terms so we can understand how to best strategize in retirement?

Suze: I’ll tell you how to best strategize in retirement—Roth IRAs, Roth 401(k)s, Roth 403(b)s, Roth TSPs. Why is that? The torpedo—which is why they refer to it, KT, as that—is that when you get older and now you are taking Social Security, depending on your income from all kinds of things—your pension, your wages, dividends, interest, even tax-free interest on municipal bonds—if they add that to half of your Social Security benefit, if that amount is over a certain threshold (it just depends—are you single, are you married?), but $30,000 to $40,000 in that area, around there, either 50% of your Social Security will be taxable, but above another threshold, 85% of your Social Security will be taxable.

The torpedo is: when people get older, now they have to take money out of their traditional retirement accounts—their RMDs. Those RMDs count toward income to calculate if their Social Security is going to be taxable or not. If they had a Roth retirement account, there are no RMDs, and any money you take out of a Roth doesn’t go toward the taxation of Social Security.

KT: So if you had a Roth, you don’t get a torpedo.

Suze: You don’t get a torpedo. So the best solution, since obviously it sounds like this person has a lot of time before they take something out because they say, “How do you prepare for the future?”—the best way to prepare for it is to only have Roth retirement accounts. Bar none. All right.

KT: OK, Suze. Next question. “Thank you for your time to answer this email.”

Suze: How did they know I was going to answer it?

KT: Well, it’s more the content—it’s why. You’ll hear it.

I have been a fan of yours for years, purchasing many of your books. I have a son who suffers from addiction and mental health issues. He is not receiving SSI disability. He refuses to apply. With that being said, I have had a living trust written that will provide him with monthly income distribution by my trustee upon my death.

Most of my assets are in an IRA, which I was told my living trust could not be the beneficiary of because of tax implications—which defeats the whole purpose of providing for my son after my death. My financial advisor showed my living trust to a lawyer, who said as it is written, this living trust qualifies as a pass-through trust because it’s there—and therefore, assets in my IRA could feed my living trust. I would most appreciate your knowledge on this matter before transferring my IRA account to this new financial advisor.

Suze: Yes, but I’m not sure—just because a financial advisor knew that you could have a trust as a beneficiary to an IRA—that that’s the reason you would transfer money to a financial advisor. You transfer money to a financial advisor when you feel comfortable with them, when they've given you a true plan of what they’re doing with your money within the IRA.

And the understanding, especially if your son doesn’t want to go on SSI and everything like that, he’s going to be a non-eligible beneficiary upon your death. And so within 10 years, whatever you have in your IRA is going to have to be distributed—if you haven’t already started RMDs. But either way, within 10 years, that money has to be distributed. So the question becomes: if it's a big lump sum at the end of those 10 years, will he be able to manage it?

You know, KT, so many people are getting this particular thing wrong. You hear a lot of people say, “Never make your trust a beneficiary” or do those things. And it's true—because you have to make sure that your trust is a see-through trust, which I’ll explain in a second. And if it’s not, it can become very complicated—different tax brackets, things like that.

But if you know that you have set it up correctly—and what does that mean? It means that your trust that you have created, first of all, is an irrevocable trust upon your death, just so you know that nothing can be changed after the account owner has died. That’s number one. Number two: that you can look at the trust documents and you can actually identify the beneficiaries. You can see right through it as to who is going to inherit the money.

Like, a lot of times they’ll say another trust is going to inherit it or this is going to—and they don’t want you to know for whatever reason who’s actually inheriting the money. And then it’s not a see-through trust. So just as the name implies, “see-through” means you can look at the trust documents and see right then and there who are going to be the beneficiaries of that trust. And they do that, KT, so that RMDs can be calculated and things like that. That’s basically a very simple explanation of what a see-through trust is.

KT: Can I ask you another question? Is it best to set it up so you have a see-through trust?

Suze: That’s the only trust—if you’re going to name a trust the beneficiary of any retirement account—the only way to do that is to make sure in the majority of cases that it is a see-through trust.

KT: That’s the advice you have to walk away with. Number one: your new advisor was right. You can do this, but make sure it’s a see-through.

Suze: And obviously it was. And it’s really easy to identify if it is by simply knowing that you’ve named individual beneficiaries. But there you go.

KT: All right, next question. Ready for this one? I love this one. Suze, years ago—against your advice...

Suze: Now what did they do? They bought an insurance policy? What did they do?

KT: No—property.

Suze: I never advised against buying property.

KT: ...within a traditional IRA.

Suze: Well, that I advised against. So advised against.

KT: Now I'm of age that I have to start taking out required minimum distributions. The property needs a lot of work. When I have to take the money out to fix the roof or any of those things from the IRA, do they count toward my required minimum?

Suze: They do not. They do not. They do not. So you're going to have to take money out of that IRA to fix whatever you need to fix for that property. And in addition to that, you are going to have to take out your required minimum distributions. So are you so sure that this was the smart thing for you to do? I don't think so. Go on.

KT: All right. Now I have one called “I’m so confused.”

I am 73.

Suze: I'm so confused too, because I'm 73.

KT: I have about $250,000 in my IRA that I have to start taking RMDs from. I know I should have listened and done a Roth. I have another IRA that is in an annuity with a value of about $50,000 that I get a monthly fixed income of $500 a month—or $6,000 a year. So how do I figure out my RMD?

Suze: So the SECURE Act 2.0 recently made this very, very simple. Before, it was very, very confusing. So here’s all you need to do in your particular situation:

If you have $250,000 in your retirement account—remember, it’s based on the last year’s ending balance. So you don’t base it on what it’s worth today. You base it on the December 31st balance and value of your annuity. So let’s just say at the end of last year, your IRA that you have stocks and everything in was worth $250,000. At the end of last year, your IRA that you said has a value of about $50,000 was $50,000 as well. You add the $250,000 plus the $50,000 and that’s $300,000.

At your age of 73, you would divide that $300,000 by 26.5, which is—if you looked up your life expectancy—that’s approximately what it is. And that would tell you you have to take RMDs out of about $11,321 a year. I had to do the math. There you are already taking out $6,000 a year from your annuity. So then you just would subtract the $6,000 from the $11,321 and you would find out that you have to take out an additional $5,321 from your account that has the $250,000 in it.

KT: I'm just saying—she just said, oh, the new laws made this very easy for you. That did not sound very easy to me. I don’t know about the rest of you listening, but that made my head spin. I'm lucky I have a Suze Orman to figure out my RMD.

Suze: We don't have an annuity, so you don't have to worry.

KT: Oh, but I still have to do it. I still have an RMD.

Suze: You start next year. My RMD is this year. So I have to take the amount that’s in my IRA—because I wasn’t smart enough to listen to my own advice years ago and realize there was a way for me to get money into a Roth via the backdoor. So now I have all this money in my IRA, KT, that I have to divide by—that’s how I knew it was 26.5. That’s what I have to do. And I have to take that money out. That’s why I was telling you we were doing QCDs. Do you remember what a QCD was?

KT: Charitable distribution. And you asked me—that’s when you were starting to ask me all my favorite charities.

Suze: And so you’re allowed $105,000 max—or I am this year—to count towards my RMDs to give it away to charity so it doesn’t count as our taxes and to help them.

KT: You have a big RMD.

Suze: Yeah. Well, I'm happy about that. Can't believe I was so stupid. So stupid. Don't be stupid like I was. OK.

KT: Ready? Next question. My dad died this year. He did not take out his RMD at all last year. I'm on the RMD theme because I knew you and I are of age to do this. I was told I will owe a 50% penalty on the amount he should have taken out but didn’t, Suze. Is this true? I could have sworn I heard in one of your podcasts that it’s no longer true. Is it, Suze?

Suze: Well, it's true that there is a penalty, but it's no longer 50%. It's 25% that can be reduced to 10% if you just do certain things. So it's not that big of a deal. However, for you—what you need to know is that the beneficiaries of an IRA, which you are, of somebody who didn't take out their RMDs last year—that the penalty has automatically been, like, abated (that’s the word I think they use) by taking the distribution by December 31st of the year after death. So you have till the end of this year to take out the amount that he should have taken out without paying any penalty on it whatsoever.

Hopefully you also know you have to take out the RMD based on your life expectancy now for the next nine years, in addition to what he should have taken out last year.

KT: OK. My final question is not about RMDs. Everybody ready?

Suze… this was funny. It was from Teresa. She said, “I’m so mad. I put money in SMH. What a loser.”

And I thought—so I looked up SMH. It's a semiconductor ETF.

Suze: By who, KT?

KT: Oh, I don’t know.

Suze: VanEck. Teresa, Teresa, Teresa, listen to me, girlfriend. There was a time not so long ago that everybody wanted to own semiconductor stocks. And what are semiconductor stocks? They were stocks like NVIDIA, Broadcom, Advanced Micro Devices, Taiwan Semiconductors—stocks that were going through the roof.

And if you did not have the money to buy those individual stocks or you just wanted a basket of semiconductor stocks, the way that you should have done it—and I would have wanted you to do it, and I possibly still want you to do it—is through an exchange-traded fund by the initials SMH. This ETF has 25 semiconductor stocks in it total. And it’s true that there was a time when everybody wanted semiconductors. Then what happened? Semiconductors started to go down and down and down, and all of you started to freak out.

Now, I don’t know when you bought it. However, what’s important for you to understand and remember is that SMH isn’t such a loser. And I say this with the utmost of respect—you became the loser in this situation because you invested a lump sum and you did not follow my instructions of every single ETF or stock you should buy in your lifetime—and that’s by dollar cost averaging. Listen to last Sunday’s podcast.

So let’s just say that you bought this when it was at its very high. And I think that was in July sometime, just about a month ago. It was around $281 a share. As we’re doing this podcast, it’s right now about $236, $237, somewhere around there. If you had simply bought it at $281, it’s now at around $236—yeah, you’re down 16% because you did not dollar cost average. But a month later, just a few days ago, it was down to like $211 a share. If you had dollar cost averaged in it, now your cost basis would be $246 versus $281, and you’d only be down 4% versus 16%.

So if it’s such a loser and that’s how you feel about it—sell it. Period. Because why are you investing in such a loser? However, do I think that SMH will eventually come back? I do. Do I think, however, that it could absolutely go down and down again over a considerable amount of time? It absolutely could.

So you do not invest in something to immediately make money in it. You invest in something when you have at least five years that you can stick with it, so that you can take advantage of the fluctuations. So would I say SMH is a loser? I don’t think so. So now you decide what you want to do.

Suze: Well, KT, I had a different quizzy for you.

KT: Not a required minimum distribution quizzy?

Suze: No. This quizzy, Teresa, is in honor of you, girlfriend. The quizzy is… KT—and a while ago I did a podcast on this with the explanation of what this is—so let’s see if you’ve listened to my Suze School. What is a semiconductor?

KT: It’s a conduit of electricity.

Suze: You didn’t even have to think about that, did you?

KT: No, I went to school.

Suze: And what did that have to do with it? You went to art school.

KT: Well, we were pretty electric. We were electrified in art school.

KT: So that’s what it is—a semiconductor. So I would assume that with all the digital technologies around, that things are changing up, Suze.

Suze: Yeah. So what it is, KT—a semiconductor is this little tiny piece that conducts the electricity. It’s typically made from materials that are the building blocks, really, of all the electronic devices out there, including computers, smartphones, and other gadgets. So it’s the ability to control the flow of electricity that makes semiconductors, KT, really crucial for processing and storing information in digital devices, which makes it incredibly important for artificial intelligence.

KT: Wait—I got a ding for that!

Suze: I was just about to say, there’s only one thing that I have to tell you now—and that’s a ding, ding, ding, ding, ding! So good.

All right, now what are we gonna do?

KT: Suze, look—I’m showing her my blue bathing suit. I already have it on because as soon as we’re done and we wrap this podcast, we are going in. The ocean is calm today. Pretty calm—calm before the storm.

Suze: That’s the other thing... can we wait for the lights to just come up a little bit more outside?

KT: We’ll just wait. But we’ll have a nice—we’ll have another cup of coffee and then go.

Suze: All right, sweetheart. So until Sunday, there’s only one thing that we want you all to remember when it comes to your money. And that is what, KT?

KT: People first, then money, then things—and add in a little saltwater in between.

Suze: And if you do that, stay safe and healthy—you will be unstoppable.