Podcast Episode - Ask KT & Suze Anything: I Have More Questions About Roths

After the last episode (E566), Suze received so many questions and comments, that she and KT are focusing this edition of Ask KT and Suze Anything on Roth retirement accounts.

Listen to Podcast Episode:

Podcast Transcript:

Suze: April 25th, 2024. Welcome everybody to the Women and Money podcast. As well as everybody smart enough to listen.

KT: So I want to dedicate today's podcast to someone very, very special in our lives and was in our life. And that’s Suze’s mother. Today is Anne Orman’s birthday. Her 109th birthday. She would have been 109 years old. Can you imagine? But we had her—we loved her—up till she was 97. And I wanted to share with all of you that it's very befitting that today's podcast, which Suze promised would focus on the Roth, is dedicated to her. Anne Orman had a saying: "An Orman never gives up," and Suze never gives up on me or all of you when it comes to understanding why a Roth is the way to go. So this is for Mama O.

Suze: Oh, I miss you so much. Every year that goes by, I actually miss her more. I had a dream about her.

KT: Was it good?

Suze: It was interesting. But we’ll go on—we’ll do a finance podcast. So anyway, here we go.

Here’s the thing I want to say everybody—last Sunday’s podcast, April 21st, obviously hit a big chord because I have never, ever gotten so many emails and responses, especially on the Women’s Community App.

KT: And just so everyone knows, that’s where I actually took most of these questions—because they’re so current.

Suze: And what’s interesting, KT, I don’t know if you know this—but usually we get X amount of questions, and maybe two or three X that number say whether they like it or not—they just put a like. But this time, more people asked questions than just clicked whether they liked it or not.

KT: So you got thumbs up on all of these. Let’s do a rapid fire, Suze. Try to get through them. These are great.

Suze: No.

KT: OK.

Suze: No... go on. I’m just joking with you.

KT: Well, let’s tell everyone how they can send a question.

Suze: So there are two ways that you can send a question. One is through the Women and Money Community App that you can download absolutely for free on Google Play or Apple Apps. And by the way, if you go on there, you will see that I answered many, many of the questions that were asked about the Roth. So take advantage of that. Or you can go to asksuzepodcast@gmail.com. If you don’t know how to spell my name by now, I’m not going to tell you. But that’s where you go. Send it in there. If KT chooses it, it will be on the podcast.

KT: So here we go, everybody...

So Suze, before we fire away with these questions, for those that are new to the Women and Money podcast, give them a tiny itty bitty tutorial of why and what a Roth is.

Suze: I'm not gonna tell them why—you’re gonna have to listen to a past podcast on that. What I am going to tell you simply is: a Roth retirement account is a retirement account that you fund with after-tax dollars. Then it grows over all the years and it’s absolutely tax-free when you go to take it out. And no required minimum distributions are needed, and your beneficiaries get it tax-free.

A regular retirement account is funded with pre-tax contributions—contributions you have never paid taxes on—and you’re just thrilled not to have to pay taxes now, so you invest that way. It grows tax-deferred. When you go to take it out, you will pay ordinary income taxes on it. When you are of proper age, 73 or 75 depending on when you were born, you will be required to take out RMDs. And your beneficiaries—when they get it—they will have to pay ordinary income taxes on whatever they withdraw. And if they’re other than your spouse, they’re going to have to wipe it clean within 10 years.

KT: All right. So here we go, everyone. First question says: Suze, can you continue to convert funds from a traditional IRA to a Roth after you have started the RMDs? I never heard anyone say to continue.

Suze: Yeah, you absolutely can. But you cannot take your RMDs and put them in a Roth and think you have met the RMD requirement. You have got to take your RMDs first. After you have taken them, then if you want to invest that year and convert some money to a Roth, you absolutely can.

KT: I’m having a tough time finding an institution that offers a Roth SEP IRA. Do you know any? Also, in prior years, I funded both my Roth IRA and a SEP IRA. Will I be able to fund both a Roth IRA and a Roth SEP? I can’t find my answer anywhere.

Suze: Yes, you can—just like you are now. You can fund a Roth IRA and a Roth SEP IRA. Even though the SECURE Act 2.0 mandated that there should be Roth SEP IRAs, for some reason—and I don't know why—institutions just aren't creating them. So the best advice for you would be to simply do a SEP IRA just like you do, and then convert it to a Roth IRA. Then you have it all in one place.

KT: OK, this one made me smile, Suze: "The struggle is real with this IRA issue. I'm married to a tax accountant and debating this. My company does not match Roth contributions—only pre-tax. This just adds to our arguments. Help!"

Suze: Obviously, this person’s spouse is saying, "You should absolutely only do pre-tax—get the tax write-off right now." And probably doesn't quite take my word for it because I'm not a CPA, I'm not an accountant—I'm just the personal finance expert of the world—but that’s beside the point.

Here’s what I would suggest you tell your spouse. There is one person who is the expert—bar none—when it comes to retirement accounts. A CPA. He has every possible qualification you would want in someone. He actually does a newsletter and his name is Ed Slott.

There is nobody—nobody—not me, not anyone—better versed on these topics than him. He has a website called irahelp.com. You can subscribe to his newsletter if you want—I absolutely do. I’m sure if you were to Google him or look him up on YouTube, you’ll find him. You’ll hear him speaking all the time about why, if you do not do a Roth retirement account—no matter your situation—you are making the biggest mistake out there.

So if your spouse doesn’t want to take my word for it, go to one of the greatest tax people in the U.S. on this topic—Mr. Ed Slott. I should ask Ed to come on this podcast, even though I don’t have guests, and let him talk to everybody about this.

KT: Hi Suze. If I open a contributing Roth, can I make the same dollar amount of contribution as a traditional IRA and receive the tax credit on my income taxes?

Suze: I think you're asking me: can you do both a Roth and a traditional IRA? You can, but you cannot contribute more in combination than the $7,000 limit if you are under 50, or the $8,000 limit per year if you are 50 or older. So if you wanted to, you could put $4,000 in a Roth and $3,000—if you're under 50—into a traditional IRA. Please, can you all just get rid of these traditionals? I cannot find one circumstance where a traditional retirement account makes sense.

KT: Next question: Suze, in your example on last Sunday’s pod, doesn't that salary exceed the 2024 Roth single eligibility limit of $153,000? How can he or she contribute at all? That’s why many of us never opened a Roth while working. What am I missing?

Suze: What you're missing is that you didn’t listen closely. I wasn’t talking about an IRA. I was talking about a Roth 401(k) in this example where this person was making $300,000 a year. Therefore, there is no income limitation when it comes to a Roth 401(k), a Roth 403(b), or a Roth TSP.

Also, a correction: If you are single in 2024, the max MAGI—Modified Adjusted Gross Income—you can make for a full $7,000 contribution to a Roth IRA is $146,000, not $153,000.

KT: Thanks Suze for a great podcast. Is it better to convert my traditional IRA to a Roth when the markets are down? Or is it a wash because you don’t get to buy as much?

Suze: Absolutely a benefit to convert while the markets are down. Let’s say you convert from a traditional IRA to a Roth IRA. Let’s say the markets are high and you convert 100 shares of XYZ stock that’s worth $100 a share. You now owe income taxes on $10,000.

But what if that same stock is now worth $75 a share? You’re converting it while it’s down and only paying taxes on $7,500—not $10,000. When those stocks recover, all the growth is now tax-free inside your Roth IRA. You’re far better off to convert when stocks are down than when they are high—if you have that opportunity.

KT: Next question: If we only have a regular Roth as an option and a 401(k) unmatched at the employer, after maxing out $7,000 to the Roth, should we not do the 401(k) and invest in a regular after-tax account instead?

Suze: I did an entire podcast on this, and I have to tell you, I realized it because of a serious mistake I made. Back when I was younger and making a lot of money, I had what was called a defined benefit program. I could put in a lot, get a tax write-off, and it was based on a formula that gave me a defined benefit later in life.

But that would be taxable. I realized—am I crazy? I’m always going to be in a high tax bracket. Even if I’m not, the money is growing and compounding. So I stopped contributing and converted what I had into a traditional IRA.

However, I made a mistake—I didn’t convert it all to a Roth in 2010 when I could have. There was a special rule that year allowing conversion and spreading taxes over two years. That money has since grown dramatically. I should have converted it all to a Roth. Instead, it’s still in a traditional IRA, and now I’m stuck taking RMDs. I made a serious mistake.

I also realized that I’d be better off putting money in an investment account where I only pay capital gains when I sell—and I still own most of those stocks. So yeah, you’re far better off with an investment account than a pre-tax retirement account—as long as you are disciplined and invest regularly.

KT: Next question, Suze. I'm considering doing small conversions from my IRA rollover to my Roth now that the markets are lower. I'm almost 62. I don't need any of this money for eight years. I've held the Roth for 15 or more years. Here's the question: all my IRA money is invested—no cash to easily convert. Do I choose the two stocks that show small losses, sell them, then convert that cash to a Roth? I have not held either stock for at least a year, so they are short-term losses. I can't figure out how short-term losses affect this decision to convert—or if at all.

Suze: KT, what do I tell you to do when you say something that makes absolutely no sense?

KT: Shake my head—get the cobwebs out.

Suze: That’s exactly what I would tell this person to do. First of all, whether it’s an IRA, a Roth IRA, a 401(k) plan, whatever—it doesn’t matter. There are no long-term or short-term capital gains in a retirement account. That only applies to money invested outside of retirement accounts.

Number two: I already said earlier—you can convert in kind. You don’t have to sell your investments and convert the cash. You can convert shares of stocks or ETFs directly from your IRA to your Roth IRA. So don’t worry about how long you've held them—it doesn’t matter.

What does matter is what investments you want to keep. If you’re happy with what you own, then keep them and convert them. If not, then maybe sell and choose other investments—but do that first, regardless of the conversion. And remember—each time you convert, the five-year rule starts on that amount. So the more you convert at once—without affecting your tax bracket—the better.

KT: Four more questions, Suze. Here's one I like: I have $2 million in an IRA rollover. Why didn’t I listen to you in 1998 on that PBS special?

Suze: Wait—we have to pause. I’ll never forget: in 1997, Senator Roth proposed the Roth IRA and it passed. In 1998, nobody knew what a Roth IRA was. I did a PBS special called The 9 Steps to Financial Freedom. In that special, I told everyone to run—not walk—to do a Roth IRA. I explained how it works. That you can take out your original contributions anytime without tax or penalty, no matter your age. I thought I did a great job.

But thousands of CPAs wrote in to PBS saying I had it wrong. They pressured PBS, saying the info was incorrect. But I was right. The IRS later confirmed everything I said. And to this day, every single show I’ve done on PBS since has promoted Roth IRAs—and all of them have been pledge drive hits.

KT: This person says, “My CPA told me I’d be better off in a pre-tax account. I don’t need any money. I don’t have kids or anyone to leave it to. Can I use my RMDs to give to charity and not pay tax on it?”

Suze: Yes—and this is how you do it. It’s called a QCD—a Qualified Charitable Distribution. You have to be 70½ years of age or older. The QCD has to go directly from your IRA to the charity—not to you first. You won’t get a tax deduction, but that’s because you’re not taxed on it in the first place. And yes—it counts toward your RMD.

The charity must be a qualified 501(c)(3). For 2024, the max QCD is $105,000. So if your RMD is $80,000, you can do a QCD for the whole amount and owe no taxes. It's a great option for people who don’t need the money and want to give charitably without taking a tax hit.

KT: This next one says, “Great podcast, Suze.” But... “I was told the government might reverse the Roth. So that’s why I haven’t opened one. Do you disagree?”

Suze: I get this question all the time. Who is telling you this? No, I do not think the government will reverse the Roth. Why? Because in the SECURE Act 2.0, they expanded Roth options—not limited them. For the first time, you can do Roth SEP IRAs and Roth Simple IRAs. They removed RMDs from Roth 401(k)s. They even allow employer contributions into Roth 401(k)s now.

If they were going to get rid of Roths, they wouldn’t be adding so many ways to contribute. So no, I don’t think the government is going to reverse the Roth. If anything, they’re encouraging it more than ever. So please—stop listening to whoever is telling you that.

KT: Last question: Suze, I just turned 73, like you. Now I have to take RMDs. What balance do I use to calculate the RMD?

Suze: You base it on your December 31st balance of the previous year. So for 2024, it’s the December 31, 2023 balance in your IRA. And I'm happy about that, because the markets have gone up dramatically since then. So I’m paying taxes on a lower amount than if they used today’s balance. That’s the answer.

KT: All right, Suze, now it's time for the quizzy!

Suze: Of course KT has to have a quizzy. But the quizzy isn't just for KT anymore—it's for all of you. This is where I ask a question that was asked of me. KT, you'll wait a few seconds to answer it so that everybody else has a chance to answer it as well. Because all of you need to know how to answer these questions.

KT: You know what? We should start giving me a prize if I get it right.

Suze: Like what?

KT: I don’t know.

Suze: I thought my "ding ding ding" was enough.

KT: No—we need like a real prize.

Suze: Like what? You want me to do the dishes? What do you want?

KT: I have to think about the prize. Everyone should write in—what should be KT’s prize if she gets it right?

Suze: What is it possible that you could want? You don’t want anything.

KT: I need a prize. I need more incentive to study—to get it right!

Suze: Like a new fishing shirt?

KT: Maybe.

Suze: You have 50.

KT: OK. Ask me the question—what's the quizzy for all of us?

Suze: Thank you for the podcast. All of our 401(k) money will be donated to charity. Ours too, everybody. I have enough in taxable brokerage accounts to retire comfortably and take care of family also. I am currently in the highest tax bracket—oh, so are we.

In light of that, I contribute to a traditional 401(k) and max a backdoor Roth. I hope you would approve. However, I agree that 99% of employees should choose a Roth 401(k). So I want you to get this right.

This gentleman is saying he is in the highest tax bracket. Therefore, he is contributing to a pre-tax 401(k) rather than a Roth 401(k), and the reason being is because he is going to be giving it all to charity. Do you agree with what he is doing?

KT: No, I don’t think you would agree with that for sure.

Suze: Ding ding ding ding ding! Baby, baby. Did all of you get that right?

Let me tell you why you're not thinking correctly. You are about to make—or are making—the same mistake that I made all of these years. I do not know how much you have in your 401(k), but it doesn't matter what you're leaving to charity. Because you’re still going to have to take out required minimum distributions once you turn 73. And if you have a lot of money in there, it’s not like you’ll be able to give it all to charity while you’re still alive.

The maximum QCD is $105,000 for 2024. So what’s going to happen? You’re going to have to take RMDs and pay substantial ordinary income tax. If you already have enough money in brokerage accounts, you may find yourself in a seriously high tax bracket as you age—especially if tax rates go up.

You also don’t give yourself room for the "what-ifs" in life. What if something happens to a spouse or child and you change your mind? What if the markets tank and you need to dip into your retirement account? You lose flexibility. And your beneficiaries, if you leave it to them, will owe income tax.

So no, I do not agree with what you're doing. You enjoyed the tax write-off all these years, but that was just a loan to Uncle Sam. And if you live a long life—like my mama did to 97—we’ll see how that works out for you.

Suze: All right, KT. How was that?

KT: There you go. Ain’t gonna make that mistake again.

Suze: Well, he’s still making it. What can I tell you?

Suze: I want all of you to go to myalliant.com. Right there you’ll see a quiz—it’s the Stay Smart Quiz for 2024. I want you to take it. Then at the end, after you’ve done it—it’s only five questions—simply put in your email. On May 6th, I’ll be announcing why you should do that and what you have to gain.

It will only be available until my birthday on June 5th. You don’t have to open an account. Just take the quiz. Tell every friend you know. Blog it. TikTok it. Doesn’t matter. Just make sure you use a valid email. You can only take it once, by the way. But I promise—you’ll be happy you did.

KT: That’s a wrap.

Suze: What are we gonna do?

KT: I'm gonna swim.

Suze: All right, you go swim. I don’t know what I’m gonna do. But I do know this—there’s only one thing that matters when it comes to your money. And what is that, KT?

KT: People first, then money, then things.

Suze: And if you do that—and if you wish my mother happy birthday today—I promise you, just like she was, you will be unstoppable.